Type: Definition Essays
Sample donated: Oscar Goodwin
Last updated: September 3, 2019
CORPORATELAW FINAL EXAMINATION Allquestions are about the investments of a London-based management firm in alisted Dutch company, namely HeenKrijp N.V. To make questions clearer, first, Ishould very briefly describe the background in a legal context. The former firmhas acquired 7% of the stock in the latter company. The board of directors ofHeenKrijp N.
V. is going to sell the shares in a wholly-owned subsidiary, namelyAlkmaarWarehouses b.v. to a US company. Sincethe London-based investment firm, considers that the Dutch company as one thatwill benefit soon, it does not want the Dutch company to be sold, and theformer is currently asking for an opinion with regards to arising issues that Iam going to describe and answer in sequence. 1) Thefirst question is concerning whether the board of director of HeenKrijip N.
V.has the right to sell all the shares of AlkmaarWarehouse b.v. or whether itneeds to ask permission first the shareholders of HeenKrijip N.V. Weshould give brief background information about corporations to make it easierto understand the rest of the answer. As it is known, a corporation is a legalentity, and stands in the nexus of contracts of which there are 5 main features. To start, we should mention shareholders whoserights and obligations are put down in the Articles of Association (AoA) whichis the foundational document of the corporation.
There is no corporationwithout shareholders. The second feature is the board of directors thatoversees the corporate affairs as the top organ. Their obligations are putforwarded in the AoA. The next feature is creditors who are connected to thecorporation by a contract. The penultimate attribution of the nexus isemployees of the corporation who are connected to the company through anemployment contract. And final feature are senior managers of the company whoexecute the day-to-day tasks of the corporation.
Now,we can start to describe the on-going legal transaction here. Here there is asubsidiary company that is wholly-owned by another company. We should take intoconsideration that the parent and subsidiary are two distinct entities andindependent of one another. In our case, the parent company is the only shareholderof the shares of the subsidiary. As a rule of thumb, if the parent comminglesfunds with the subsidiary and markets both the two company as a single entity,then both will be seen as a single entity which may bring about liabilities forthe management of the parent entity where the management uses the subsidiaryfor its own behalf. Corporationscan sell its assets to another corporation. We are under the heading of sharepurchase agreement since one company wishes to purchase of all of the shares inanother company. This procedure is similar to mergers but the distinction isthat in acquisitions, the target company remains as a distinct legal entitywhereas in mergers the target entity disappears from the legal world and thereis only the surviving entity remaining in place.
Through a share purchaseagreement (SPA) the target company remains in existence but it will belong tothe acquiring company. Acomparison would be useful to see whether the transaction in question needs tobe approved by the shareholders of the seller corporation. Pursuant to Section271 of the Delaware General Corporation Law (DGCL), parent-level shareholdersneed approval for a corporation to sell all of it assets. So, in the US this isthe situation. When it comes to the EU, it is not obvious. But from atheoretical point of view, we think that since the board of directors is theagent of the shareholders, they will have to consider the benefits ofshareholders in certain aspects.
Since there is future benefit that can beacquired by keeping the shares of the subsidiary, selling the subsidiary can causethe liability of the board of directors.Inlight of this information, in terms of whether there is any need to ask to theshareholders of the parent company, we can also make an analysis concerningwhether the sale of the subsidiary will undermine the shareholder protection. Weshould recall that the board of directors retains the oversight function of thecompany.
Moreover, directors and managers of the company have fiduciary dutiesto shareholders. Shareholders retain residual control rights with regards tofundamental transactions. Yet the important thing is that if there is arequirement of Dutch law which states this requirement or, in the lack of this,if there is a requirement for this permission from shareholders created throughbylaws of the Dutch parent company, then permission is needed to make thistransaction.Inlack of this information in our case, here, what we need to take into accountis then, however, first of all, whose interest the management should cater to.It is not obvious which one prevails: either the corporation’s (a.k.a.maximization of corporate welfare), the shareholders’ interests (a.
k.a.maximization of shareholder value) or the stakeholders’ interests (a.k.a.maximization of stakeholder value).
This is the fundamental debate in corporatelaw. Most jurisdictions opt to for corporation’s interest, meaning allstakeholders’ interest. Depending on which one is chosen, the level of theprotection of the shareholder will change. Furthermore, in the EU CorporateGovernance Action Plan, it was stated as one of the key policy objectives thatensuring effective and proportionate protection of shareholders and thirdparties must be at the core of any company law policy.
Similarly, according tothe Green Paper – The EU Corporate Governance Framework, a lack of appropriateshareholder interest in holding financial institutions’ management accountablemay have facilitated excessive risk taking in financial institutions. Therefore,given the fact that the board of directors should be flexible and do businessefficiently, they do not necessarily ask for the opinion of the shareholders inthis transaction.Likewise,in case of ambiguity, what we think is that if the sale of shares in questionfundamentally change the corporation’s core business and the transaction willsubstantially affect the company’s purpose and existence, then it needs to beapproved by the shareholders. The parent company is active in logistics sector.
The subsidiary is also in active in a similar field. However, what I consideris that it does not change the corporation’s core business fundamentally andmay not change the existence of the parent company in the future. Thus, eventhough it may end up with the board of directors’ liability due to the factthat the value of shares of the parent company’s shareholders will reduce,still the board of directors does not have to ask for permission in the first place. 2) Here,the question is vis-à-vis whether the management of the subsidiary has todiscuss the transaction of selling the shares of the subsidiary with thesubsidiary’s employees.Asit has been aforementioned, the subsidiary has a separate legal entity and is distinctfrom the parent company. The fact that the parent company can elect and removethe subsidiary’s board of directors does not necessary change the fact that itis the duty of the subsidiary’s directors to manage the subsidiary’s affairs.Similarly, since it is a separate entity, the directors of the subsidiary arealso obliged to act in the best interest of the subsidiary rather than theparent company’s. Secondly,it needs to be recalled that the role of corporate law is to regulate theconflict that arises between various stakeholders in a corporation.
One of themis concerning employees who may lose their job after a merger or businesscombination. They might also confront the amendment of the employment contractsor a cut in their salaries.Becauseof its special importance, thus, we need to mention the Acquired RightsDirective (2001/23/EC) as well. This is the law that all member statestransposed into their domestic systems which governs the rights that labors havein the framework of statutory mergers. The scope of this directive is limitedto the transfer of businesses. In case of a statutory merger, there needs to bea discussion with the representative of the employees both of the transferorand the transferee before the merger takes place. There is also a set ofregulations which flow from this directive called Transfer of UndertakingsRegulations (TUPE) which exists all over the EU.
It is criticized sincewhenever a company acquires the employment contracts of employees through amerger, the TUPE is triggered and increases the cost.However,with regards to our case, it is very crucial to define what constitutes atransfer in the meaning of the regulation. It is described as a change in theidentity of the employee. A statutory merger is a transfer yet a change incontrol and shareholdership. And thus, in our case, since there is a sharepurchase agreement which is an agreement that finalizes terms and conditions asregard the purchase and sale of the shares of a company, there is no change inthe employer.
This is so, because it is still the same legal entity. This doesnot trigger the TUPE. Transfer per se cannot be ground for dismissal ofemployees. And therefore, there is no requirement to engage consultation toemployees in our case. So, the management of the subsidiary does not have todiscuss the transaction with the subsidiary’s employees. 3) 31%of the stock of the US company which is the contractor of the planned saleowned by a Dutch company called Panamactor b.
v is owned by the one of the boardmembers of parent company. According to the information received, the soleowner of Panamactor b.v. is one of the directors of HeenKrijp N.V. The questionis whether this relationship would affect the validity of the board ofdirectors’ resolution and what challenges could be brought against thisresolution. Corporationsare business actors and, as a rule, freely enter into contracts with othercorporations. The other contractor party can either be someone who does not haveany influence on the company or relationship with the company or vice versa.
Thus, in this case, the transaction might be assessed under the discussion ofthe trades with insiders. Indeed, there can be certain situations in whichcorporates wish to do business with insiders in order to make most out of it. Asa rule of thumb, transactions with insiders are not prohibited. However, if itinfringes the duty of loyalty, then this is prohibited. A director or officermust act in good faith which is a result of the duty of loyalty. This duty is breachedwhen the director acts in a way in which he benefits on behalf of himself andagainst the corporate which he works for. Those who control and operate thecorporate governance machinery owe fiduciary duties to the corporation.
This isembedded to statutory laws. Thus, interested directors’ transactions give riseto an action by shareholders against the director who violated his fiduciaryduty of loyalty by usurping the corporate opportunity. If directors andofficers do not respect these duties, then they have to pay damages to thecompany.Inour case, the interested director who has the information about the futureinvestment will be realized the transaction. He not only has influence in theparent company being that as a member of the directors of the board, but alsohas a controlling power in the contracting party since he has a significantpercentage (31%) of the shares in the latter company which can easily affectthe direction of the latter. He breached the duty of loyalty since he did notdisclose his interest in the transaction, what is more, he was involved thetransaction.
The transaction is unfair to the corporation due to the fact thatthe subsidiary will bring benefit to the parent company. Thus, in both ways, heobtained in an arm’s length negotiation. To this extent, the board ofdirectors’ resolution is not valid.
Challengesfor shareholders mainly come from vis-à-vis activist rights of shareholders. Toprevent this transaction from happening, an activist shareholder can have aprivate discussion with the company. Secondly, he has a right to place thisissue as an item on the agenda of the general meeting. Since the London-basedfirm has 7% of the stock of the parent company, it fulfills the conditionregulated in article 6 of the Shareholder Rights Directive (SRD) which statesthat initiating this right cannot be required from more than 5 per cent of theshareholders.1The London firm, by constituting 10 per cent of the company’s shares jointly, mayrequest the company’s board to call a general meeting to discuss the consideredtransaction with other shareholders the. And finally, which is a universalright of shareholders, the London-based firm can initiate litigation eitherbecause of the refusal of its wishes to add this issue to the agenda and/or dueto the board member breached his duty of loyalty. The result of the invalidationof failing to comply the duty of loyalty can also be an issue for theinvalidation of the transaction and causes penalties. 4) Herethe question is about what options that the shareholders of the Company have incase of the board of directors decide to increase the share capital.
Sharecapital increases can either be a private placement or a seasoned equityoffering on the stock exchange. When the Company issues new shares, this willreduce the existing investor’s ownership in the Company. The value of the previouslyowned shares will be diluted. What is more, the dilution can change votingcontrols, ownership percentages, and so on. Because of its importance, pursuantto the Second Company Law Directive/Capital Directive (Directive 2012/30/EU), itis a matter to be resolved by the shareholders’ meeting (Art.
29 par. 1). So,the approach in the EU is that this is something so fundamental that theshareholders should decide on this issue. This is also because a share capitalincrease constitutes at the same time a change in the AoA that requires thecapital of the company to be included therein and be published (Art. 2(1)(a)2009/101/EC). Since by definition the AoA is amended, this is such afundamental thing that it is why many of the jurisdictions require asuper-majority of the votes.
Toavoid dilution, the existing shareholders are provided with so-calledpre-emptive rights. Unless it is not decided to waive the pre-emptive rights inthe shareholders’ meeting, (Art. 33(4) and Art.
44 of the Directive 2012/30/EU),it is a right which gives shareholders first offering on the basis of theirexisting percentage of holdings in the share capital when new shares are issued(Art. 33 par. 1., Directive 2012/30/EU).
The existing shareholders are providedwith a timeframe, however, which cannot be less than 14 days from thepublication of the offer. This is so because it is necessary to decide whether existingshareholders want to acquire the shares which are about to be issued. If any ofthose shareholders decide not to acquire newly issued shares, then the Companyshould offer his percentage in the newly-issued shares to his other fellowshareholders.
If such fellow shareholders do not want to acquire extra shares whichwere left behind by their fellow(s), then the Company is free to offer them tothird parties. Again pursuant to article 33 of the Directive, if thecontribution considered by existing shareholders are not in cash but in kind,then pre-emptive rights can be bypassed and the company can go directly to athird-party investor. Infringement of this procedure causes a substantiveillegality, and thus leads to nullification. 5) Becauseof consequences of on-going procedures and transactions, the shareholder of theparent company wishes to observe on-going investments meticulously. Thus, itwonders whether there is any way of doing so and whether they have sufficientshares to conduct this procedure, and if not, whether other shareholders’ helpis required. Oneof the five core characteristics of business corporations and of corporate lawis delegated management.
As we mentioned above, shareholders do not have to runthe affair of the company by themselves. The board of directors is periodicallyelected, exclusively or primarily by the firm’s shareholders. Thereare mainly two types of management systems: one-tier and two-tier. In theone-tier system, shareholders elect the board of directors.
Shareholdersappoint directors and the directors appoint senior managers. In two-tiersystem, however, is a distinctively different system of corporate governance.There is no board of directors; there is no senior management. There is asupervisory board of directors retaining the oversight function and managingboard of directors. In the latter system, the board of directors is appointedby the supervisory board of directors.
But the supervisory board of directorsis not entirely elected by the shareholders. They only get to vote for the halfof the seats in Germany, and it is the 2/3 of the seats for the Netherlands.So, if the London-based company gains the support of the other shareholders andhas 2/3 of the seats during the voting, then it can realize this appointment. Secondly,as we mentioned in the third answer, the SRD gives certain statutory rights toshareholders. One of those rights is to add items to the agenda of the generalmeeting. Furthermore, one of the powers of the general meeting is to appoint ordismiss of directors. So, since the London-based firm have more than 5% of theshares, it is possible for the firm to add an item to the agenda to appoint oneperson as a director.Finally,to affect the other shareholders in the company, the firm can also apply forthe method so-called proxy solicitation.
One of the things that activist shareholdersdo is that they can try to collect proxies from the other shareholders. This isso because if they receive the mandate to vote on others behalf they can moreeasily pass a resolution which they themselves added to the agenda, i.e. in ourcase this is the appointment of directors. This can be used jointly with othershareholders. So, proxy solicitation is something that activist shareholdersget to do but the cost of the proxy solicitation can be an obstacle.
1 Under Dutch law, shareholders holdingindividually or jointly 3 per cent of the company’s share have a right tosubmit items for the agenda of the general meeting.