Company migration (freedom of establishment for companies

within and outside of the EU)

1. Difference between a partnership and public/private limited liability company
The type of company will depend of the interest of Anna and the domestic law of the MS that
the company will be registered. There are conditions that each country can stablish for the
registration of a company. It all depends on the situation, what you are able to do as well as
the advantages and disadvantages of each of the option.
Partnership:
 Partnership / limited liability company
 Partnership – two parties set up a company/ legal foundation is a contract
 Two or more partners
 It is up to you to choose the type of the partnership
 Silent and active partners
 Partnership is based on contract
For a partnership, she would need a partner. Additionally, such type of company has a
broader responsibility comparing with limited company. Partnership are normally fully liable,
however some countries allow general partners or limited (different kinds of responsibility,
but the limited partner does not work at the partnership. Also, there is the possibility of tax
related problems as different countries see the partnership differently (opaque vs.
transparent). The treatment of the partnership will depend on domestic law of the country.
There is no harmonization in the EU Law.
Another problem would be the guarantee of free establishment, the partnership would only be
granted if it is has legal personality recognized by the domestic law (this aspect has not been
decided by the CJEU). In the Cartesio case, the partnership had a legal personality.

Limited liability company:

 Articles of association to arrange the rules for your company
 When you incorporate: registration:
o What is the legal basis of LLC – incorporation of legal person
o Within it is articles of association
o You need to fulfil lots of requirements to become an LLC
 Liability is a factor to look at while choosing a company
 Providing services – you do not have a lot of debt, just have some funds.
 Who does what and who owns what responsibility
 Capital requirement
 Setting up a company – it is easier to do so in partnership
 Law puts on you extra obligations
 Depending on the nature of activities or amount of obligations – partnership is easier
 Why LLC is better? Extra burden, but LLC is more straightforward. You caught up a
liability – the company itself is bearing the liability
 Partners are liable under their obligations, while LLC is liable under its
obligations on itself
Public and private limited liability company:
o In private LLC the paper says that this is the share of company X belonging to
certain individual
 o Changing ownership is very slow
o We do not expect those shares owner to change
o In public LLC the name of shareholder is not mentioned
o The data in register does not change
o Next step – public companies have their shares on Stock Exchange – they can
be sold. Registering at the system, buying them at the right time and right
place
o You can change if you want to attract more capital (from private to public)
o You can attract more investments if your shares are listed. If you look for
decent investment – you might want to have your shares listed
o What are the consequences of listing shares on Stock Exchange Market?
 Competitors and situation on the marker
 Regulatory requirements
 Recording requirements
 Transparency
 - (first Directive of the Reader) – The Directive compile several Directives. So,
chapters can have different scopes.
 This Directive states that public limited company needs to have a minimum capital.
 The private limited company is not subjected to this provision (it is not part of the
scope of this part of the Directive). That is the reason why European countries are
allowed to reduce the minimum capital of private limited company, but not the public.
These measures of reducing the minimum capital of private company (normally 1
euro) aim to facilitate the setup of companies, increasing the business.
 Public: shares normally are freely tradable. But also there are more requirements to be
met to set up a public liability company. The interest and rights of minority
shareholders are protected more.
 The public liability has to be listed in the Stock Exchange? It also depends on the
domestic law. Some countries allow public liability company not to be listed, but it
has access to some regulations of public liability, such as free trade of shares.
 Anti-money laundry: all the shares have to be registered, both public and private
liability companies(?)
Branch and subsidiary:
 Branch is a physical extension of the company. The company is liable for all the
activity.
 Subsidiary is another company related to the principal company. Separated legal
entities, so separated liabilities.
In a private company: Shares are closed, they can be transferred only to few people.
In a public company: It concerns most the listed companies, what means companies
on a stock exchange. Shares are usually freely transferable. Don't refer to company own by
the state.

Type Partnership Limited Liability Company

Classification Limited General Public Private
Description liable only to each partner Only (1) Legal personality
the extent of can incur public  Priority rule
‘money put in obligations company  Liquidation protection
the partnership on behalf of can be (2) Limited liability
pot’, unless the listed  Not personally liable at all.
 they operate in partnership, (however  Whom does it concern?
name and on and each not an  Company shareholders: not
behalf of the assumes obligation reaching beyond the amount of
limited unlimited + can be money they ‘put in the corporation
partnership liability for de-listed) pot’ (i.e. shares), unless ‘piercing
(punitive legal the the veil’.
effect). partnership' (3) Transferable shares
s debts.  Fully transferable shares vs freely
tradable shares
 Closely held corporations/open
corporations
 Listed companies/non-listed
companies
(4) Delegated management under a
board structure
(5) Investor ownership
Advantages  Easy organization  Enhances risk-taking
 Easy formation  Diversification of portfolio's
 Flexibility -  Capital markets
Contractual basis  Minimizes monitoring costs for shareholders
Disadvantages  Limited financial  Externalization of costs:
resources  Risk transferred to others
 No limited liability for  Monitoring costs for creditors
all partners  Excessive risk taking
 Continuity?  Involuntary creditors
 Partnership falls under
the freedom of
establishment

2. Legality of the refusal to register foreign company in EU Member State

 From legal perspective within the EU she is free to establish her company wherever
she wants
 Incorporation requirements:
o Articles of association
o Capital requirements
o Registration as a requirement for incorporation
It is illegal to refuse the registration of foreign company in Belgium. It would constitute an
infringement upon the freedom of establishment.
Freedom of establishment in the EU: Crossing European Borders
• Freedom to go from one country to another
• Possible to have company in the country other than where your main activities are
• The place where the company is registered
• What happens if you move company from one jurisdiction to other?
Freedom of establishment includes:
• Freedom of establishment throughout Europe:
- Natural persons
- Legal persons (companies and firms) to move in EU.
• Goal of the EU: single market and freedom to choose
Free movement of persons
 • Art. 49 TFEU: restrictions on freedom of establishment of nationals of MS is
prohibited; including the right to set up a company
• Freedom of establishment art. 54 TFEU: Companies = nationals

• Art. 54 TFEU:
Companies or firms formed in accordance with the law of a Member State and having their
registered office, central administration or principal place of business within the Union
shall, for the purposes of this Chapter, be treated in the same way as natural persons who
are nationals of Member States:
 Thing that connects you to a certain country
 Every MS decides for themselves what is the connecting factor
 Connection that the law needs to connect it to a specific MS
Freedom of establishment for companies includes:
• Freedom of establishment throughout Europe by a legal person duly established
– New business set up
• Freedom of migration of legal person after incorporation from Member State A 
Member State B
– Existing companies moving abroad

3. Possibility to open a branch or subsidiary in another MS of a company in EU

 Subsidiary to something else – you have a parent company. Subsidiaries are
connected to other company by the company. Control is established by shares
 Parent company is having 100% in subsidiary
 It has separate personality, assumes risks
 Branch - > parent company decides to locate the shares elsewhere
 Parent company is liable for the obligations of the branch
 Branch is economic activity in the other location. Subsidiary – the same legal
personality
According to Article 49 of the TFEU, the prohibition to establish restrictions on the freedom
of establishment of nationals of a MS in the territory of another MS shall apply to
restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any
MS established in territory of any MS.
Case Centros.

4. Possibility to move the company to another MS

 CEO – chief executive officer
 He is part of the Board of Director
 CEO is mostly the chairman of BoD
 In Tesla it is possible to separate: different BoD and CEO
 CEO is responsible for operational part of the company
 Usually represent legally and factually
Freedom of migration of legal person after incorporation from Member State A 
Member State B
o Existing companies moving abroad

This question shall be analysed from emmigrating and immigrating countries’ perspective.
Outbound migration: The migration from the perspective of the country which the company
is leaving. MS may pose restrictions on companies leaving their country and allow a MS to
preclude a company from transferring its registered office whilst retaining its status as a
company governed by the law of that MS according to Cartesio. The real seat theory may
still be used for outbound migration (Cartesio).
Inbound migration: The migration from the perspective of the company's new country. Is
mainly about the FoE pursuant article 49 TFEU (Überseering/Centros) and non-
discrimination (Inspire art, Vale and Sevic). The incorporation theory applies for inbound
migration (Inspire). National laws which restrict FoE must be: 1) non-discriminatory, 2)
necessary in order to protect a public interest objective, 3) appropriate for securing the
attainment of the objective and 4) proportionate (Inspire Art). If a MS allows
mergers/division between national companies, they must also allow it between a national and
a foreign company (Vale/Sevic).

5. Registration of company’s shares at the Stock Exchange

It would be necessary in case Anna decides to establish a public limited liability company.
This does not apply to partnerships.
6. The difference between the real seat and incorporation theory - Where to set up the
company?
 Real seat: Company matters are governed by the law of the country where the
"administration office", i.e. center of management and control is situated. Thus, ‘any
time you enter our country with the intention to conduct business while making use of
limited liability companies or other legal persons, you should make use of a legal
person provided for under our national law.’
 Advantages
+ ‘reasonableness’: law of the country the company is most closely
connected to applies
+ abuse of foreign law hardly possible
+ ‘fairness’: equal company law market conditions for all players on market
 Disadvantages
- a company’s ‘real seat’ may well turn out be hard to determine
- cross-border cooperation and transfer of company seats are frustrated

 Incorporation: Company matters are governed by the law under which the company
has been duly incorporated. Thus, ‘any time you enter our country with the intention
to conduct business while making use of limited liability companies or other legal
persons, you are free to choose the company form of any foreign country you like.’
 Advantages
+ flexible/lenient: freedom to choose the applicable law
+ legal certainty and predictability
+ attractive to (foreign) investors
+ reciprocity: mutual recognition of companies and mobility
+ seat transfers (i.e. of headquarters) allowed for
 Disadvantages
- ‘race for the bottom’/’rat race’; ‘Delaware’ effect; ‘beauty contest’
- unequal competition conditions at the domestic markets for home/foreign investors?
- evasion
5. Content of the concepts of registered office and head office
HO (Head Office)
 Place where the administration is done.
 The real seat theory looks to the law of the place of the HO of the business.
 Majority of the MS (Belgium, France, Germany, Greece, Portugal, Spain, Austria)
adhered to real seat conflict rule which takes the place of a company’s central
 management and control / its HQ as a connecting factor for the applicability of
national company law
RO (Registered Office)
 Home address of the company = only a place where my posts are delivered.
 The incorporation theory looks to the law of the place of the firm’s incorporation,
which will usually correspond to its RO.
 Other MS (The Netherlands, the UK, Ireland, Scandinavian countries) –even before
CJEU’s Inspire Art LTD case– already adhered to the incorporation theory. The
connecting factor is -not the law of the company’s HQ resided- where it has its RO /
its place of incorporation.

CIEU Daily Mail: art. 49 and 54 (ex art. 43 & 48) do not confer on companies incorporated
under the law of a MS a right to transfer their central management and control to another
MS while retaining their status as companies incorporated under the legislation of the first
MS.
CJEU Centros (1999): Any overall refusal to register a branch (i.e. secondary
establishment) of a company duly established in another EC Member State is contrary to art.
49 and 54 (ex artt. 43 and 48); however, other measures to fight or prevent fraud are allowed,
provided that they are:
(i) non-discriminating,
(ii) justified in general interest,
(iii) suitable for securing the objective and
(iv) they do not go beyond what is necessary.
CJEU Überseering (2002): If a company formed in accordance with the law of Member
State ‘A’ also having its registered office there, is deemed, under the law of another Member
State (‘B’) to have moved its actual center of administration to Member State B, art. 43
and 48 ECT (49 and 54 TFEU) preclude Member State B from denying the company legal
capacity and,…, the capacity to bring legal proceedings before its national courts.
Comments:
- Note that ECJ likely ruled on narrow notion of ‘recognition’ (capacity and ius standi);
- How about, however, widened notion? (i.e. also accepting that the company is
governed by its ‘foreign’ lex sociatatis)
CJEU Inspire Art Ltd: a foreign company is not only to be respected as a legal entity having
the right to be a party to legal proceedings, but rather has to be respected as such, that is, as a
foreign company that is subject to the company law of its state of incorporation. Any
adjustment to the company law of the host state is, hence, not compatible with European law.
CJEU Sevic Systems AG (2005): Articles 49 and 54 (ex. 43 EC and 48 EC) preclude the
refusal to register a merger in general in a Member State where one of the two companies is
established in another Member State, whereas such registration is possible, on compliance
with certain conditions, where the two companies participating in the merger are both
established in the territory of the first Member State.
CJEU Cartesio: “Art. 49 and 54 (ex art. 43 & 48) do not preclude legislation of a MS under
which a company incorporated under the law of that MS may not transfer its seat to another
MS whilst retaining its status as a company governed by the law of the MS of
incorporation”.
CJEU VALE Építési Kft - Judgement :
1 Articles 49 and 54: (Host) MS allowing for domestic conversions may not refuse
cross-border conversions ‘in general manner’
2 Host MS may apply national law to cross-border conversion operations by
companies from MS of origin on the incorporation and functioning of such companies (e.g.
requirements relating to the drawing-up of lists of assets and liabilities and property
inventories).
However,
• Principle of equivalence
• Principle of effectivenesss
CJEU Polbud: The transfer of the registered office of a company (with a change of
applicable company law) falls within the scope of the freedom of establishment protected,
even when there is no change in the location of its real head office. Member States may not
impose mandatory liquidation on companies that wish to transfer their registered office to
another Member State.
CJEU Kornhaas v. Dithmar 2015: Even though a company maybe established under the
law of a certain Member State, the laws of another Member State may still be applicable in
case of insolvency.

Case study 2

After long deliberations Anna has decided to set up her company called Maison d`Anvers as
a public limited liability company in Member State X of the European Union. However, a
few years after the initial set up of her business Anna`s initial fear is now materialising: due
to an increase in market demand for her products and a cheaper production process which is
available in neighbouring country Y, the main activities of her company are gradually
moving to this EU Member State. Given these developments, Anna, as a member of the board
of directors of Maison d`Anvers, is contemplating the possibility of a migration. She suggests
that the company should actually move in its entirety to Member State Y and she therefore
wants to convert Maison d`Anvers into a public limited liability company under the law of
Member State Y. She would like some advice as to whether or not such a transfer is possible
and what it would entail. She wonders what it is that she should transfer. Her friend who
studied company law told her that there is a difference between the transfer of a head office
and the transfer of a registered office. Anna wonders about the content of these concepts and
whether it would make a difference if they decide to transfer the company’s head office and
its registered office simultaneously or only its registered office? She is also wondering what
would be the easiest way to establish a company`s migration.

Again, Anna comes to you for legal advice. Please advise Anna with regard to the
abovementioned questions.

1. The difference between the transfer the head office and the registered office
 Head office:
CIEU Daily Mail: art. 49 and 54 (ex art. 43 & 48) do not confer on companies incorporated
under the law of a MS a right to transfer their central management and control to another
MS while retaining their status as companies incorporated under the legislation of the first
MS.
CJEU Überseering (2002): If a company formed in accordance with the law of Member
State ‘A’ also having its registered office there, is deemed, under the law of another Member
State (‘B’) to have moved its actual center of administration to Member State B, art. 43
and 48 ECT (49 and 54 TFEU) preclude Member State B from denying the company legal
capacity and,…, the capacity to bring legal proceedings before its national courts.
CJEU Inspire Art Ltd: a foreign company is not only to be respected as a legal entity having
the right to be a party to legal proceedings, but rather has to be respected as such, that is, as a
foreign company that is subject to the company law of its state of incorporation. Any
adjustment to the company law of the host state is, hence, not compatible with European law.
CJEU Cartesio: “Art. 49 and 54 (ex art. 43 & 48) do not preclude legislation of a MS under
which a company incorporated under the law of that MS may not transfer its seat to another
MS whilst retaining its status as a company governed by the law of the MS of
incorporation”.
– The European Court of Justice has, in a series of decisions (Centros, Überseering,
Inspire Art established the possibility for companies to transfer their head office to
the member state of their choice (inbound migration). The state to which the
company moves its head office is not allowed to limit this transfer and cannot
impose extra requirements (Inspire Art case with capital requirement).
– On the other hand, where the companies emigrate (outbound situation), the state
in which the company was founded still has the power to lay down certain
conditions (Daily Mail doctrine “Companies are the creature of the national law”,
Cartersio case : required winding up procedure, however national law must
respect the Gebhard test, proportionality, and non-discriminatory among other
things).

 Registered office
CJEU Polbud: The transfer of the registered office of a company (with a change of
applicable company law) falls within the scope of the freedom of establishment protected,
even when there is no change in the location of its real head office. Member States may not
impose mandatory liquidation on companies that wish to transfer their registered office to
another Member State.
– As of now, it seems to be possible only by setting up a subsidiary within a
potential host Member State and merging into that subsidiary (SEVIC case, in
accordance with the cross-border mergers directive of 2005 not applicable at the
time). Other methods are still question marks, and are even limited by Cadbury
Schweppes test, where national provisions may limit freedom of establishment if
the provisions are aimed at preventing fraudulent behaviour seeking to circumvent
applicable law.
Based on EU law it is possible but the national law should be taken into account
Double-connecting factor. If moving to another company – double connecting factor
 If only registered office – look for case law
2) The cross-border conversion of the company from the Member State X to Y
Applicable case law on company conversion -> Vale: “Articles 49 and 54: (Host) MS
allowing for domestic conversions may not refuse cross-border conversions ‘in general
manner’. Host MS may apply national law to cross-border conversion operations by
companies from MS of origin on the incorporation and functioning of such companies (e.g.
requirements relating to the drawing-up of lists of assets and liabilities and property
inventories)”. If you allow domestic conversions, you cannot deny foreign conversion
Ramifications: Possibility of application of exit tax -> tax unrealised capital gains.
Exit taxes is the restriction on the freedom of establishment. You cannot avoid exit taxed
while company migration ((i) Compulsory and immediate payment, (ii) of a corporation tax
charge, (iii) on accrued but unrealised capital gains, (iv) upon the transfer of effective
management to another MS, (v) is contrary to FoE (but justified to preserve tax competence).
Applicable case law on exit taxes: National Grid Indus.
Proportionality of exit taxes: The Member States have to allow the options of:
 • Deferred payment of exit taxes until the moment of actual realization of
the capital gains (National Grid Indus).
– Compliance costs could be very high (asset tracing)
– Cash-flow advantage (interest savings)
• Voluntary immediate payment upon transfer (National Grid Indus)
• Spread payment over several (eg 5) years (C-164/12 DMC)
• Bank guarantee allowed if demonstrable and actual risk of non-recovery in
case at issue (C-164/12 DMC)

2. Conversion of a public limited liability company established under laws of State X

into public limited liability company under the law of Member State Y
This is the question of whether a company willing to move to the host state retain its
legal personality under home state. In Cartesio the CJEU stated that in case a company
leaving from the home MS to host MS still want to be regulated by home MS, home MS
decides. However, if the same company leaving from the home MS to the host MS wants to
be regulated by the host MS, host MS decide (home MS doesn’t have a say).
Moreover, a host state can possibly deny the rights of a company to establish itself
within its boundaries. From a host state perspective, always recognized whatever comes from
the home state if it is duly formed/operating in the home state (Uberseering/Inspire art
cases)

3. What shall be transferred in course of a transfer

4. Difference between transfer of a head office and the transfer of the registered office
Moving Headquaters: the European Court of Justice has, in a series of decisions
(Centros, Überseering, Inspire Art established the possibility for companies to transfer their
head office to the member state of their choice (inbound migration). The state to which the
company moves its head office is not allowed to limit this transfer and cannot impose extra
requirements (Inspire Art case with capital requirement).
On the other hand, where the companies emigrate (outbound situation), the state in
which the company was founded still has the power to lay down certain conditions (Daily
Mail doctrine “Companies are the creature of the national law”, Cartersio case : required
winding up procedure, however national law must respect the Gebhard test, proportionality,
and non discriminatory among other things).
Moving Registered Office: As of now, it seems to be possible only by setting up a
subsidi ary within a potential host Member State and merging into that subsidiary (SEVIC
case, in accordance with the cross-border mergers directive of 2005 not applicable at the
time). Other methods are still question marks, and are even limited by Cadbury Schweppes
test, where national provisions may limit freedom of establishment if the provisions are
aimed at preventing fraudulent behaviour seeking to circumvent applicable law.

6. Possibility to transfer head office and registered office simultaneously

Moving both registered Office and Headquarters: In the Vale case, mirroring the
Cartesio case, the ECJ confirms the possibility to cross-border conversion (moving both the
headquarters and registered office) when the host member states allows it (the home member
state cannot deny the conversion since there are no longer a connecting factor and the host
member cannot deny the conversion if it allows domestic conversions. The principle of
equivalence and effectiveness preclude the host Member State from: Refusing to record the
company applying for cross-border conversion, and refusing to take due account of a
company’s application for registration.
7. The easiest way to establish a company’s migration
We can follow the method used in Sevic case: Anna could first establish a company in MS Y
and then merge with the company she has in MS X in MS Y. However, she will have to deal
with rules protecting creditors and shareholders. Or as in the Centros case, she can establish

Introduction to the US system and the Board

German law:
Private liability - No mandatory supervisor board if there are less than 500 employees. There
are rules regarding employee representation.
Public liability – It is mandatory to have a supervisor board.
Shareholders appoint the supervisory board. The supervisory board appoint the board of
directors.
See the Article of Appointment and remove directors.
Case Study 1: Apocalypso
Apocalypso PLC is a pharmaceutical company in desperate need of a board of directors. You
are the advisor of Apocalyso PLC`s incorporators and they would like to hear your views on
the best board structure.
After a start-up period of five years Apocalypso is ready to expand its business. The board of
the company by now consists of three board members: Emma, Allen and Spock. All three
have different ideas about the business strategy. Emma has many ideas about the inventions
that she would like the R&D department to invest in. One of these ideas is the development
of a new type of tape to prevent muscle injuries such as so called tennislegs. Emma`s interest
has various reasons; together with her sister she recently started a company called Sportaid
LTD that develops and distributes all kind of appliances for sports injuries. Their company is
however too small to provide for the R&D budget necessary to develop this product. Emma
feels that, since it is her idea and the other two directors hardly contributed to it in her
opinion, she might as well have it further developed by Apocalypso and then put it in the
market via Sportaid.
Please advise Emma with regard to the risks in terms of personal liability potentially
resulting from her behavior.
Ten years later, things become even more problematic. The board has led Apocalypso into an
organizational and financial disaster following the acquisition of the Galactic Group. The
general meeting is highly displeased by the effect this has had on the company results. Allen
fears further repercussions. He is afraid the general meeting will find out that the company
overpaid for the acquisition of the Galactic Group and that the board as a whole will be held
liable.
Please advise Allen with regard to the risks in terms of personal liability potentially
resulting from the acquisition. (mua lại)
Discuss the events surrounding Apocalypso according to German law, UK law and
US/Delaware law.
 There is no solution to that case, but just to explore the rules
Personal liability potentially resulting from being both the board members and founder
of another company with the conflicts of interests
 German perspective:
o We do not really mean what means carry on the trade:
 It is not necessarily a trade – it is up to the national law
  If she is doing something in the personal interest – the violated her
obligations
o Article 88 -> shall not act without the consent of the other members of the
board
o The company may request compensation -> 88(2)
o Article 93 of German Code -> responsibility to act in due case -> Article 93(2)
compensation:
 Act in the best interest of the company
 Do they have the duty of loyalty
 duty of loyalty – more of a commitment. You are invested in
the company being better. An element in section 93
 duty of care – more of how you conduct the tasks in relation to
the company
 Conflict of interest - Article 88
Normally regarding a transaction.
General standards – Article 93
Use of a corporation of its own benefit.
 UK perspective:
o 171-177 of the companies act
o 177, 175
o List of duties
o 177 – duty to declare interest in proposed transaction or arrangement:
 It is difficult to define what is that
 That is here using what is belong to the company
 Depends on how EU law explains transaction or arrangement
o 175 – to avoid the conflict of interest:
 It belongs to the company
o 173 – duty to exercise independent judgement
 The decision on whether they shall invest into the research and
development
 First step in defining the company interest is the interest of shareholder
o 172 – duty to promote the success of the company:
 Directors have an obligation to take into account the interest of other
shareholders
 A line shareholder model
 Conflict of interest - §175: use of corporate opportunity
If there is a transaction - §177

 US perspective:
o Interests of shareholders prevails over the interests of Emma
o Business judgement rule
o Duty of loyalty -> it is easier to prove
 They are not codified in the law
 The only one we have is the business judgement rule
 Shareholders have to prove that BoD
 It offers the presumption that directors acted in the interest of
company
  You have to prove in court that the BoD acted in contrary to the
business judjement rule
o Duty or care and duty of loyalty
o You need to prove that you acted in contrary to the
interest to the company
 There are no specific rules but general duties of loyalty.

Liability of the board members before the shareholders in the general meeting
 German perspective: (section 84)
o He might be removed as the director
o Liability:
 Given that he overpaid and it may have been a misjudgment of him
 BoD as a whole is responsible and liable
 Different levels of liability -> depends on how national law is designed
 General standards – Article 93
In Germany there is no presumption of care. The board has to prove. It is different
from US.

 UK perspective:
o 172 -> duty to promote the success of the company
o 174 -> duty to exercise independent judgement:
 He was not properly informed by himself about the transaction
 How would the average director acted
 Excercised by a reasonable
 US perspective: (section 141)
o Business judgement rule:
 The business judgment rule (developed to insulate ordinary
commercial decisions from judicial scrutiny in order to allow for risk-
taking) is a presumption that defendant directors acted in compliance
with their fiduciary duties. The rule presumes:
 (i) Director independence (acting in the interest of the
company);
 (ii) disinterestedness on the part of the directors; (not in conflict
of interest)
 (iii) good faith; and
 (iv) due care (they were acting on an informed basis).
o US:
 for Delaware, directors have a fiduciary duty towards the company and
the shareholders, they need to act in good faith; contract with the
directors have to be approved by a majority of disinterested
(independent; could be both executive and non-executive) directors or
by a majority of the shareholders;
o Liability:
o US law (Delaware):
 Business judgment rule: presumption that in making a business
decision the directors of a corporation acted on an informed basis, in
good faith and in the honest belief that the action taken was in the best
interest of the company. However, this can be rebutted and then the
 directors have to justify itself. If then the presumption stands, the
decision will not be actionable unless grossly negligent.
 The directors have fiduciary duties:
 duty of loyalty – more of a commitment. You are invested in
the company being better
 duty of care – more of how you conduct the tasks in relation to
the company
 challenge the breach of the duty or care or duty of loyalty
 it is not an element of the business judgement rule
 Walt Disney case -> gives more in-depth discussion what
means the gross negligence and duty of care
o Business judgment rule -> director acted in the best interest of the company
o You rebut the presumption by made by the new argument

Walt Disney Co. Derivative Litig. - 907 A.2d 693 (Del. Ch. 2005) case

FACTS: Plaintiff stockholders alleged that defendant directors breached their fiduciary
duties in connection with the 1995 hiring and 1996 termination of a corporation's president.
The president was hired in large part due to the efforts of the company's chief executive
officer (CEO). 

ISSUE: Did the directors comply with their fiduciary duties in connection with the
president's hiring and termination?

ANSWER: Yes.

CONCLUSION: The court found that the president did not commit gross negligence or
malfeasance while serving as president. As a result, terminating him and paying a no-fault
termination payment (NFT) did not constitute waste because he could not be terminated for
cause. The directors did not act in bad faith, and were at most ordinarily negligent, in
connection with his hiring and the approval of the employment agreement. The CEO
stretched the outer boundaries of his authority by acting without specific board direction or
involvement, but did not act in a grossly negligent manner, and his actions were taken in
good faith. None of the other directors breached their fiduciary duties or acted in anything
other than good faith in connection with the hiring, the approval of the employment
agreement, or the president's election. Therefore, the fact that no formal board action was
taken with respect to his termination was of no import.

Disney case:
Problems:
- The director received more for leaving than from working
- The way the hiring happened.

Court: Even though the payment was high, and things could have been done in a more
diligent way, the board executed a process to hire the director, with the best interest of the
company in mind.

Presumption: the board acted in good faith, in the best interest of the company.
So the claimant should have proven the opposite, that the board did act in good faith.
If the presumption is not break, the court will not interfere in the business. The board has
space to make business.

The board was not grossly negligent in the hiring and in the firing, so there was no bad faith.

The director was dismissed without cause. It is allowed by the §141 (k) in Delaware, that the
holders of a majority of the shares can dismiss any director without cause.
UK and Germany, it is also possible to dismiss the director with or without cause.

The shareholders argued that the payment in the dismiss was a corporate waste.
However, there was a report of a 3th party that stated that there was not a cause of the
dismiss, even though there were testimonies attesting that he was not doing his best job.

In the Disney, the CEO has the power to dismiss other directors. So, he acted inside his
power when his dismissed the director. Additionally, he made an informed decision and acted
in what he believed was the best interest of the company, without a personal

In the end, the Court decided that the act was negligence, but not grossly negligent. So the
presumption of good faith remained.

Delaware:
- It is possible to appoint director for a period. It is exemptional
- A classified board cannot be dismissed at once. In between the terms, it is not possible
to dismiss the board, unless there is a cause or if the act of association allows. That
gives more power the board of directors, as it is very difficult to dismiss them as the
act of association normally does not give the possibility of dismissing without cause.
§141(k)(1). This provision gives more continuity of the work of the board of
directors, but takes some power of the shareholders.

1. What is the best board structure?

- the size is important: in some countries it will depend on the size of the company if
there is a supervisory board or not e.g. Netherlands
- Most state corporation
In the US, laws are indifferent to the maximum and minimum board size. However, the
Model Act and Delaware’s corporation laws require a minimum of one director.
- Board composition and board independence: Generally, US boards comprises a mix
of independent directors (known as non-executive directors or outsiders) and insiders
(executive directors). It is required that a majority of a listed company’s directors be
independent.
- There are also other factors that should be taken into account such as the leadership
structure (the CEO duality or separate board structure) and the gender diversity, etc.
Best board structure
It is hard to choose between two-tier board structure or one-tier board structure because they
both have advantages and disadvantages.
  One-tier board : there are executive and non-executive board members like the US;
the UK; closer cooperation with executives and non-executives; can stay that way
even after being listed in those jurisdictions
 Two-tier board : where there are management board and supervisory board such as
in Germany; distance is greater between the BoD and the supervisory board
 for a young company, I would recommend choosing a one-tier board, where
executives and non-executives can be closer
Directors:
• Day to day business
• Representation
Supervisors:
• Appointment and removal of directors
• Supervision
• Approval of certain transactions
Why supervisors?
• Shareholder absenteeism
• Conflict of interest situations
• Providing a possibility for employees to be involved?
Shareholder’s rights:
• Exit and voice rights
• Pecuniary rights and voting power
Employee involvement:
• Information rights
• Consultation rights
• Participation/co-determination rights: employee board level representation

2. Appointment of the three directors

 German law: (section 84) directors must meet certain requirements (no criminal record,
max of companies on which they may sit); have to have a two-tier board; for listed
companies subject to co-determination, 30% have to be men/women
 UK law: (section 160) non-listed companies -> shareholders are free to structure in the
company’s articles the manner in which directors are appointed; model articles:
appointment by an ordinary resolution; listed companies -> requirement of mix of
executive and nonexecutive directors; formal, rigorous procedure; establishment of a
number of committees, including an audit committee.
 US law: (section 141) annual election of directors by a majority of the votes unless the
constitutional documents specify otherwise; screening: independence of certain members
(“supervisors”) -> no financial or family connection to the company.

3. Can Emma do what she wants?

 German law:
o in Germany, duties of care and loyalty run directly to the company -> directors
must serve the interest of the company; Emma can do whatever is in the
interest of the company
o There is no presumption that a director acts in the interests of the
shareholders/company, unless director proves he had no self-interest and that
he was sufficiently informed (then presumption like business judgment rule);
before investing, Emma should make sure there are no conflicts of interests
and that she is sufficiently informed on the different investments
  UK law:
o directors owe their fiduciary duties to the company, but they must consider
other interests, in good faith, before making their decisions (section 172)
 US law:
o broad discretion of the board of directors;
o fiduciary duties of care and loyalty to the shareholders and the company – in
practice, directors serve the interests of the shareholders;
o if investments are in the interests of the shareholders and the company – OK;
o if not, she can be held liable to the shareholders and/or the company by the
judge BUT business judgment rule = presumption that she acted in the best
interests of the company/shareholders;
o that presumption has to be rebutted (conflict of interest, poor information, …)
Legal approach: No, there are rules and standards that Emma needs to follow.
Standards: There is still a grey area that rules don't cover anything and that's where the rules
step in. They give guidance on behavior.
Rules: they are very clear cut, it gives the director a manual of what they are supposed to do.
We don't want to establish all the rules of what a director should do, we want them to take
risks also.
Economic approach: From an economic point of view it is not true neither because she has
to serve the interests of the shareholders too. The shareholders give their interests in the hand
of the directors, there is an agency relationship. Agency costs are the costs to align the
interests, we can do that for example by giving the directors bonus's. Monitoring costs would
be the reporting costs for example.
4. Liability of the directors
- German law:
o Standard:
 Duty of loyalty: duty in all matters connected with the interest of the
company…
 Duty of care: directors have to exercise the care of a diligent manner.
There is a minimum standard of care.
 §93(1) Aktiengesetz: Sorgfaltspflicht und Verantwortlichkeit der
Vorstandsmitglieder This does not form a presumption in favor of the
directors, the protection afforded to the management is much lower
than in the US. Before they can enjoy the protection of the business
judgment rule, they will have to show that they were disinterested and
took their decision based on reasonably thorough information.
This would mean that the CFO would need to prove that he was disinterested and took their
decision based on reasonably thorough information.
The articles on national alw that are in the reader we will have to apply them at the exam so
read them beforehand!
- UK law:
o Standard:
 Duty of care and duty of loyalty.
 Companies Act 2006 defines the duty of care: Section 172 duty to
promote the success of the company and the member of the company
but in real there is an enlightened element.
 Section 174 of the Companies Act 2006 The Court wants to know
whether we deal with a case of mismanagement or bad call.
Does the UK has a business judgment rule? No not as such, but in case law the Court looks at
what actually happened. If it was the case of a mismanagement then the director would need
to prove that there was no mismanagement. In the end the business judgment rule will be
applied as in Germany then.
- US law (Delaware):
o Business judgment rule: presumption that in making a business decision the
directors of a corporation acted on an informed basis, in good faith and in the
honest belief that the action taken was in the best interest of the company.
However this can be rebutted and then the directors has to justify itself. If then
the presumption stands, the decision will not be actionable unless grossly
negligent.
o The directors have fiduciary duties:
 duty of loyalty
 duty of care

5. Acquisition of the Galactic group

 German law: if a shareholder or the company challenges a director’s decision, and
proves that the company has suffered damage because of it, the director will then have
the burden of proving that he acted with the requisite diligence in order to escape
liability
 UK law: see sections 172, 172, 173 and 175 of the Companies Act 2006 = UK
fiduciary duty -> duty to act in the way he considers, in good faith, would be the
most likely to promote the success of the company + not accept benefit from a third
party + declare any interests in a proposed transaction; duty to exercise reasonable
care, skill and diligence (section 174); rules on a breach may be found in the
Companies Act 2006; if there was a material benefit, or a conflict of interest, the
board may be held liable; legal consequences: see sections 178, 183, 189, 195, 213
and 222 CA 2006 -> “considers” means there is discretion given to directors; that
freedom is reduced if there is self-interest of the directors involved; if self-interest,
rebutted presumption and the court assesses the action in light of the company’s
interests;
 US law: business judgment rule

6. Duties owed by the directors to the company/shareholders

- Germany: duty of care towards the company; have to behave as proper and prudent
managers; duty to act in the best interest of the company, not their own or a third
party’s; the Aktiengesellschaft has full conflict of interest rules:
o (1) duty not to disclose inside information (confidentiality),
o (2) board may not compete with the company itself (by establishing a
privately-owned company that competes with the AG’s business),
o (3) any loans need to be approved by the supervisory board,
o (4) anyemployment or service contracts with members of the board are
negotiated by the supervisory board (not the fellow directors who usually
represent the company),
o (5) if a member of the SB enters into an agreement for services outside its SB
task, the entire SB has to approve.
- UK:
o the directors owe a fiduciary duty to the company;
 o they have the duty to act in good faith and in the interests of the company and
exercise their power for proper purpose and never accept personal benefits;
o shareholder model (S. 172 CA 2006).
- US:
o for Delaware, directors have a fiduciary duty towards the company and the
shareholders, they need to act in good faith; contract with the directors have to
be approved by a majority of disinterested (independent; could be both
executive and non-executive) directors or by a majority of the shareholders;

Shareholders
Division Board - Shareholders in the UK:
• Shareholder body empowers the board
• Instruction rights of shareholders
• Easy access to agenda of GM
• Easy to call GM
• Dismissal of board at will
• Significant transaction: sale of 25% of company value in case of premium listing
Division Board-SH Delaware
• Companies act empowers the board directly
• Board mainly decides on calling GM and agenda
• Dismissal of board may be difficult
• Significant transaction: sale of all or substantially all assets (50%?) Katz v. Bregman
• Shareholder model but managerialist
Division Board-SH Germany:
• Companies act empowers the board
• Direct dismissal of board by general meeting in case of no supervisory board
• Instruction rights in private limited liability company
• In case of SB removal directors by supervisory board
• Significant transactions requiring GM vote (Holzmuller): interfering “so
substantially with the rights of the members and their financial interest that the board
cannot reasonably assume that it may take the decision in its own right and without
participation of the General Meeting.”

Possibility to call the general meeting by the minority shareholders

Whether the sale of division requires the approval of GM
Fiduciary duties of founders (dominant shareholders) in their capacity as shareholders
in GM
German law:
Private liability - No mandatory supervisor board if there are less than 500 employees. There
are rules regarding employee representation.
Public liability – It is mandatory to have a supervisor board.
Shareholders appoint the supervisory board. The supervisory board appoint the board of
directors.
See the Article of Appointment and remove directors.

1. Possibility to call the general meeting by the minority shareholders

Section 122(1) -1/20 of share capital (5%, the same as in the Directive), writing and
reason. Address to the management board -Article 6(2) of the Directive
a. By-laws it can be lower, not higher -> 122(1)
b. What is normally 121 – simple majority of the vote cast is the general rule
2. Sale of division requires approval of GM?
a. 121(1) -> law or by-law have to require that
b. Articles of association shall define that
c. If you sale a division -> it changed the structural integrity of the company ->
changing the core business, changing the core of the company, what the
company of association stays about that the company is doing
d. If it is a large part of business activities of the company or not
e. 179 – it is about the structural integrity
f. Substantial change to the company -
3. Fiduciary duties of founders in their capacity as shareholders
a. No explicit mentioning
b. Case-law
c. Reasonableness and fairness

UK Law:
1. Possibility to call:
a. Para. 303 – 5% requirement to call the meeting
b. Is it possible to reject the request -> yes, 303(5), if ineffective, defamatory,
frivolous or vexation.
2. Sale of division requires approval of GM?
a. FCA rule -> attach to 25% of the sale of division. 25% of Value of transition
gross capital
b. Article 922 corresponds to the Company’s Act– para. 907
3. Fiduciary duties of founders in their capacity as shareholders
a. 994 of the companies Act – defined by law
b. Why there are fiduciary duties?
i. Member of the company are the shareholders
ii. The court will assess the fairness and reasonableness
iii. Unfair prejudice (unfairly disadvantaging)
iv. It is an action that you can bring following certain events
v. Consequences that may be in the future – 994(1)(b)

U Law:
1. Possibility to call
 a. 211(1) of the Delaware Corporation Law
b. In any case BoD is supposed to serve the interest of the SH
c. This can be changed by the by-laws
2. Sale of division requires approval of GM?
a. Para. 271(a) – all or substantially all of the compan’s assets
b. Katz vs Brehman – 50%+1 – all or substantially all of its property or assets
c. All shareholders have to be present -> 271 - majority
3. Fiduciary duties of founders in their capacity as shareholders
a. No provision in the Delaware act
b. Kahn v Lynch case:
i. The claimant made it clear that although there was not more than 50%,
but 43%, they said that there was a majority control
In order to conduct the merger they needed actual control. It was up to
the controlling shareholder to prove that they did not breach fiduciary
duties:
1. Fair dealing -> you did not push directors to enter into an
agreement
2. Fair price -> arm’s length
3. Actual control: large shareholder, not reaching 50%, has to
have control. Burden of proof shifts to claimant, and then it
shifts to defendent
i. If they did not accept 15.5$ per share, in the end it will be bad for
everyone
The Supreme Court of Delaware affirmed the judgment in favor of the acquired corporation,
its directors, the controlling shareholder, and its parent corporation. The Court found that the
trial court properly considered how the directors discharged their fiduciary duties with regard
to each aspect of the non-bifurcated components of entire fairness: fair dealing and fair price.
Mere initiation by the acquirer was not reprehensible because the controlling shareholder did
not gain a financial advantage at the minority's expense. Unanimity regarding fair price was
not required. The controlling shareholder made a sufficient showing of fair value, but the
minority shareholders failed to establish sufficient credible evidence to persuade the finder of
fact of the merit of a greater figure. There was proper disclosure such that a reasonable
minority shareholder was under no illusions concerning the leverage available.

Other mechanisms that protect minority shareholders:

 Independent valuation
 Committee or independent supervisory board that will act within the interest if
the minority shareholder
 Disclosure requirements
 Supermajority rather than small majority. Their votes become more relevant

Discuss the concept of shareholder democracy

 Shareholders have individual rights comparable to citizens in a democracy and
voting rights serve as a channel of control to keep management accountable to
those rights.
 As in economic theory, voting rights are instrumental, not essential, but they serve not
to attain a preconceived goal, but rather to reign in the power of management, to make
it accountable to the shareholders who – as in the rights –based theory – have inherent
rights as owners and members.
 According to the political theory, everyone should have a say.
  In a way – overlap with the second theory.
 Furthermore, it could be said that the political theory reconciles the two other
theories.
Please make a convocation for the general meeting based on German law, UK law and
US law and decide what you place on the agenda.
Shareholder’s Directive:
 Applies to public LLC (listed ones)
 Concerns procedural rules and minimum standard

a. The period the meeting was convened in accordance with EU law.

 It is not an annual meeting
 Assuming that it is not an annual meeting, 14 days applicable
 Day of the convocation is the first day for the calculation
 In our case it was 13 days, not 14.
 14 days before the day of the meeting. 14.11 and 02.11 are taken into account for the
calculation
 He was late
Article 5(1) requires a minimum period of 21 days between the convocation and the meeting,
as general rule. However, it allows an exception of 14 days if the company provides facilities
for the shareholder to vote electronic and the general meeting is not the annual general
meeting.
Since the period between the call and the meeting is less than 14 days, even if electronic
methods to vote are provided, the call do not meet the legal requirement.

Less than 21 days = okay: 14 days after General Meeting -> article 5 Shareholders directive
Shareholder Rights Directive:
• Scope: Annex I- (not only public but public and) listed companies: registered
office in MS and trading shares on regulated market in MS- YES, PUBLIC
LIMITED LIABILITY COMPANY REGISTERED IN THE NL AND LISTED, SO
FULFILLS THE SCOPE
• Convocation of GM (art. 5(1)), (call a GM) no later than 21 days before
AGM- NO, FROM 2 NOVEMBER AND 14 NOVEMBER THERE ARE 12 DAYS
WHICH IS LESS THAN 21 DAYS
! Exception is in the 2nds intended of the 1st paragraph- but even that allows for the 14
day meeting- our case again does not fall within it!
 The meeting was not convened in accordance with EU law

b. Vote at the general meeting by means of a proxy and who is eligible for such a proxy.
 Proxy holders -> to ease the work of the shareholders. Making it easier to control the
activities by the shareholders
 Conflict of interest is the restriction Article 10(3):
o It is about the disclosing
o It is up to the MS to regulate how to establish whether there is the conflict of
interest
o Authoritarians -> Article 10(4) of the Shareholders Directive
• Can also mention Article 8- but if not allowed by the MS then move to Article 10
– Proxy (art. 10 (4))
– But-> restrictions regarding COI (conflict of interest) under which you cannot
appoint member of the board as your proxy
– Article 9 (2)
– Voting in absentia (art. 12)

 Yes, he can give a proxy. Article 10 of Shareholders Directive

  Any restrictions to the proxy: only if conflict of interest. Where do we find that:
article 10(3). There it is restricted, only if there if there is a conflict of interest
- Always check whether it is up to the MS to decide.
- So cannot give proxy if there is a conflict of interest between the shareholder
and the proxy. Say the proxy also has an interest in the vote that is being made
then he cant vote because maybe he is not partial.
 Lecturer: Directive wants to make proxies possible as much as possible, enhance and
simulate them.
 Why, general apathy problem: no one going to general meeting, only those that want
to vote
 So want to give shareholders more possibilities to vote = why proxy And voting by
electronic means. So MS must allow proxies 10(1) and 10(2). Reasons to limit proxy
=> 10(3). Very closely defined in directive. So only e..g 10(3)(a): discloses certain
specified facts that may be relevant to … interests other than shareholder…
 Specific definition of conflict of interest, 10(3). After (c), controlling
shareholder something…. So it is very much restricted.
- Next part comes later

c. Whether the board can decide on the increase of share capital on their own without
provision in Articles of Association
Directive on certain aspects of company law
 Article 68(1) – increase of capital shall be decided by the General Meeting
 Article 68(2) -> shareholders can deviate

(Second) Company Law Directive 2012/30: Shareholder Protection

Art. 29 Capital increase- “shareholder should decide on issuing new shares unless the power
is delegated to the BoD for a max of 5 years;”
Art 29 (2)- if they make a cap of amount up to which the board can decide without
sharehodlers decision then they can make a decision;

d. What the shareholder will do to propose a shareholder resolution regarding how the
company could be restructured and refinanced in the UK, Germany or Delaware
UK:
Similar to Article 6 of the Shareholder’s Directive, that is:
“1. Member States shall ensure that shareholders, acting individually or collectively:
(a) have the right to put items on the agenda of the general meeting, provided that each such
item is accompanied by a justification or a draft resolution to be adopted in the general
meeting; and
(b) have the right to table draft resolutions for items included or to be included on the
agenda of a general meeting.
Member States may provide that the right referred to in point (a) may be exercised only in
relation to the annual general meeting, provided that shareholders, acting individually or
collectively, have the right to call, or to require the company to call, a general meeting which
is not an annual general meeting with an agenda including at least all the items requested by
those shareholders.
2. Where any of the rights specified in paragraph 1 is subject to the condition that the
relevant shareholder or shareholders hold a minimum stake in the company, such minimum
stake shall not exceed 5 % of the share capital.
3. Each Member State shall set a single deadline, with reference to a specified number of
days prior to the general meeting or the convocation, by which shareholders may exercise
the right referred to in paragraph 1, point (a). In the same manner each Member State may
set a deadline for the exercise of the right referred to in paragraph 1, point (b).”
 Art. 4 - Equal treatment
 Article 7 - Record date
 Article 5 - Minimum notice
 Article 8 – electronic participation
 Art. 9 - Right to ask questions
 Article 6 – Right to put things in the agenda
Germany:
 122(2)
 Additional requirement, but it is OR: stake of 500.000 EUR
 Follows from EU law
 Right to put items on agenda -> Article 6 of the Shareholders Directive
Delaware:
 According to the by-laws
 Autonomy of the board
 If there is any option for the shareholder – it would be in the Articles of Association

Mergers, divisions and conversions

Katz v. Bregman case: The court concluded that the proposed sale would constitute a sale of
substantially all of defendant corporation's assets. Thus, the court issued an injunction to
prevent consummation of the sale at least until it had been approved by a majority of the
outstanding stockholders of defendant corporation entitled to vote at a meeting duly called on
at least twenty days' notice.

Acquisition: A CO buys the shares of B CO

Merger: A CO buys all assets and liabilities from B CO via universal transfer of assets
Division: A CO splits its assets into A CO and B CO
Cross-border conversion: Directive 2017/1132 applies to – “mergers of limited liability
companies formed in accordance with the law of a Member State and having their registered
office, central administration, or principal place of business within the EEA provided at least
two of them are governed by the laws of different Member States”
A. What do you think would be the best way to structure the transaction taking into
account the fact that MG is only interested in a specific part of the operational activities
of Sun Fun?
B. In case parties opt for a cross-border merger between MG and Sun Fun, can Mr Sun
prevent the transaction or demand to be bought out should the merger take place?
C. Explain what a “Stalking horse” is and what MG can do to safeguard its interests.
A. In case Co A would like to buy a division/part of Co B but the shareholder is not
willing to sell his shares, what would be the best option?

1. Only buy assets because they want to buy only energy panels not the whole company;
 Asset transaction may be the most interesting
 De-merger (division) and than share-purchase agreement of division, but it
will require the shareholder approval

B. In case parties opt for a cross-border merger between Co A and Co B, can the
shareholders prevent the transaction or demand to be bought out should the merger
take place?
• We do not know the percentage of shares hold. If it is high percentage -> influence on
the outcome -> Article 126 Directive on certain aspects of the company law ->
general meeting of each of the merging companies shall decide on the approval of the
common draft terms of cross-border merger
• Buy out -> new directive on cross-border merger, division or conversion (or art.16
Directive on takeover bid)
2. What could a shareholder minority do in case of:
- Merger-> shareholders may object (whether it will be successful or not depends)
- Asset transaction- if the amount is too big shareholder approval is necessary;
- Share transaction- depending on the articles of association of the company; or they
can simply retain the shares;
3. Depends on how many shares he has. The CBMD itself does not give right to be
bought-out so it depends on national law (it is not a general principle; it is not
forbidden but the EU does not provide such right; Article of Association can provide
such right but not on EU level)
- Purchase of assets (allows selected items such as business division to be carved out of
the overall going concern and sold separately-> to buy only parts of a company will
follow.
- The ideal solution in this case would be to purchase the assets to circumvent the Mr.
Sun issue.
- OR buy out/squeeze out

C. Explain what a “Stalking horse” is and what the acquiring company can do to
safeguard its interests.
- company is on sale, so they wait till this company is investigated by the other
company
- never 100% similar information on what the potential buyer is
researching/investigating
- you do not want to spend costs on investigation, dues diligence, you just wait for the
work to be done
- confidentiality agreement to protect your work -> keep everything in secret. No-
shop no-talk agreement. Seller is not supposed to talk, buyer is not supposed to sell it
to no one.
- letter of intent -> preliminary document setting up the terms. Depends on the
national legislation as to whether it is binding. Assurance for the parties that you
intent to make the deal and that you trust that if the positive due diligence is made you
will proceed to the deal.
- Duty of good faith negotiations -> duty of good faith -> contract law provides for
the safeguards. You trust each other in your intentions.
 - Termination fee -> if you walk away under certain instances you will have to pay the
termination fee.
- Company that investigates a transaction opportunity to lose it to a more aggressive
competitor, who takes over the negotiations and thus saves on transaction costs.
- Deal protection tools:
 Confidentiality agreements prohibiting discussion of the
negotiations.
 Duty of good faith negotiations preventing that a party simply
walks away.
 No-talk and no-shop agreements.
 Termination fee.
Stalking horse?- the person who wants to make an actual bit is not spending money on
due diligence and etc. but just waiting and relying on the research made by someone else
 Situation where terrain has been prepared by a company including high costs and a
third company steps in to conclude the deal; defense mechanisms: confidentiality
agreement can protect the deal (between buyer and seller), termination fees (if you
walk away from the deal then you have to compensate the other party; some
jurisdictions offer this already but others still not); fiduciary duties: duty of board to
work in best possible interest of SH; no-talk clause (someone comes to you and makes
you better offer and then you breach the no-talk clause);
 IT IS IMPORTANT TO PROTECT THE DEAL.
Fiduciary out clauses:
• Way to get out of no-talk no-shop agreement
• Who has the interest in that? Directors act on behalf of the company, being
approached by the third company wanting to buy the company at a higher price, it
would be again the company’s interest and his fiduciary duties -> he than can breach
no-talk no-shop agreement. Only if it is more favorable to the company you can
breach that agreement. We only see it in the US
• Everything has to be based on the agreement under the EU law
Case Study 2: Rapid Train and Fast Coach
If you can’t beat them… join them! RapidTrain, a public limited company registered and
having headquarters in EU Member State X, enters into negotiation with one of its
competitors, FastCoach, a private limited company registered and having headquarters in
Member State Y, with a view to cross-border ‘amalgamation’ of their business operations.
Opinions differ in respect of the question whether, after the whole operation has been
accomplished, either of both companies should remain, or whether the amalgamation of the
two companies should result in a ‘brand-new’ company. Furthermore, RapidTrain public
limited company has majority stock in a steelwork producing public company, SteelWorks
Europe, duly established and incorporated in EU Member State X, the headquarters and
production plants, however, residing in Russia (i.e. a non-EU country). The parties are
wondering if it would be possible to set up an SE. Their legal advisors have warned them
about the SE. They say that the SE has been given less freedom of establishment than
companies duly established under national company laws of EU Member States.
a. In what way could an SE be set up in order to meet the desired results in this case?
b. Can Steel Works Europe also participate in/form part of the SE?
c. Please comment on the advice given by the legal advisors.

a. In what way could an SE be set up in order to meet the desired results in this case?
• Article 2(2) -> formation of holding SE or subsidiary SE because here we have public
and private company
 They can step up an SE by merger but it depends on what they want.
 (If the only remain company would be an SE) it means that companies will have to
merge -> public and private company and thus a conversion has to been done and then
merge.
 Other option is that public and private company a subsidiary first
SE- 2(1) + 2(2)
1. In our case we have public limited liability company and private liability company-
that is why we cannot have SE by merger. The Regulation says only public limited
liability companies can be formed. They cannot do the merger.

SE Regulation:
1) Art. 2(1)- 2 public limited liability companies form an SE by merger
2) Private and public form a holding – holding Article 2 (2)
3) Article 2 (3) subsidiaries- companies and firms – we can also have partnerships here;
4) Public LLC may transfer itself alone into an SE but if for 2 years it has…
5) Article 3 (2)- MNC itself may set up one or more SE

SE assumes an element of a cross-border picture;

Advantage of an SE:
 you can have your seat transferred without moving your company actually;
 (SE adopt the real seat theory which is not the case for national companies that is why
here it is only about cross-border companies; SE is about community law)

b. Can the company the head office of which is not in the EU also participate in/form
part of the SE?
Article 2 (5)- it depends whether MS allows that.
• If the conditions are fulfilled
• Provided that Article 2(5) is transposed into national legislation
c. The SE has been given less freedom of establishment than companies duly established
under national company laws of EU Member States
 Article 7 allows to transfer the registered office. In order to transfer the office you
have to undergo procedure. It is more restricted. You need to have registered office
and head office in the same state.
 It is also the restriction on the freedom of establishment
 Kornhaas dithmar – registered office and head office in the same state
 Yes. From Inspire Art. Ltd -> there is more freedom of establishment.
 Art. 8 of the Regulation: an SE may move from MS A to B.
 Art. 7: the SE Regulation was developed way back in time already. The court rules in
Inspire Art. Ltd: it might change on the base of consultation.

 Not true- because you can transfer you register to another MS so this has no impact of
the FoE;
 VALE- before Vale, SE provided something very important- to move your HQ and
RO if the national conversion is allowed so on the basis of that one can argue that SE
lost a little of its charm but on the other hand we will have some certainty while with
Vale we can never be sure.
- The SE’s RO must be in the Member State where the HO is located. This reduces the
flexibility of the SE, which ought to be its primary raison d’être.
- National companies incorporated under the laws of MSs that do not impose the same
requirement can move their HO freely within the Union; an option that is not open to
the SE.
Katz v. Bregman case: The corporation planned to sell certain assets, which constituted over
51 percent of total assets and which generated approximately 45 percent of the corporation's
1980 net sales. If the sale is of assets quantitatively vital to the operation of the corporation
and is out of the ordinary and substantially affects the existence and purpose of the
corporation then it is beyond the power of the Board of Directors.

Takeovers
Board neutrality rule (art. 9 (2)) neutralizes the power of the board of the offeree company
during takeover bids by prohibiting such board from taking any action that would result in
the frustration of the takeover bid.

Case study: Energize

Energize is a public limited liability company with head office and registered office in
Member State X of the EU. It is also listed at the stock exchange of that same EU Member
State. Energize is a car manufacturing company with a long standing tradition in the
manufacturing and development of car engines. The growing interest of the market in
renewable energy has led the company to expand its core business to the production of
electric cars.
Morsche and BWM, two large luxury car manufacturers, are interested to take over Energize.
They combine their efforts and would like to announce a bid on the shares of Energize. They
want to offer the shareholders of Energize two shares in one of their joint subsidiaries in
exchange for one share in Energize. The total value of those (two) shares is, according to
Morsche and BWM, equivalent to 16 euro.
Both Morsche and BWM have already been shareholders of Energize for a long time. Two
months prior to the announcement of the bid Morsche bought an additional 12% of the shares
in Energize from one of the shareholders who he had met previously at a general meeting of
Energize. For these shares Morsche paid 15 euro per share in cash. After this acquisition
Morsche now has a total of 20% of the voting rights, while BWM has a total of 15% of the
shares carrying voting rights in Energize.
Morsche and BWM are especially interested in the division of Energize that develops the
electric cars since they believe this will be the future for the car industry.
a. Under which circumstances are the shareholders obliged to make a mandatory offer
on the shares in a company?
 A mandatory bid needs to be done when:
1) SHs coming together and acting in concert (art 2(d) TBD)
2) SHs hold securities carrying voting rights which go over the threshold of ‘control (art
5(1) TBD)

 Applicability of the Directive: MStates -> Directive applies

 Article 5 -> starting point. When there is an obligation to make mandatory bid -> 30%
threshold. Individually maybe not reaching the threshold, but acting in concert
(Article 2(d) -> they reach the threshold -> together they will have 35% -> triggers
the obligation to make the mandatory bid
But the control premium’s threshold is 30%
Threshold is 30% Why?  Workable majority in the GM  Other SHs don’t show  SHs
vote in different manners o Left to the MSs to decide, but all opt for the 30% threshold 
Why?  It is a consequences of economic science
How to avoid this, as it is not fair? o Mandatory bid + fair/equitable price  Means that if
you want to buy the company, you have to offer to pay all SHs for their shares (mandatory
bid) o Radar (buyer) might think that if he crosses the line, he should come up with a
mandatory bid  What will he do?  Will do a voluntary bid o Article 5 TBD  but also to all
SHs (you must be able to pay and meet your obligations to all SHs) o Price might be lower
that in case of a voluntary bid o Still have to acquire ALL SHARES  If you don’t, you
might risk to go to jail o Difference with mandatory bid: no fair/equitable price o Pitfall in the
TBD

 Article 5(1) and Article 2(1)(d) of TBD

 Article 1 -> need to make mandatory bid; act in concert since want to aquire company
 A mandatory bid needs to be done when:
o SHs coming together and acting in concert (art 2(d) TBD)
o SHs hold securities carrying voting rights which go over the threshold of
‘control (art 5(1) TBD)
o On the basis of article 5 para 1 they may be considered as acting in concert; so
they can have 30% voting rights -> so they may have to make a mandatory
bid; consideration shall be in cash (it is not an option, they have to do it);
b. Morsche and BWM turn to you for advice with regard their proposed bid. Please
advise them with regard to the content of their offer and proposed bid on the basis of
EU law.
 When it concerns the content of the offer -> Article 6
 Pay attention to price -> Article 5(4) -> equitable price:
o In our case Morshe bought 2 months before the bid ->they intent to buy shares
in subsidiaries
o Article 5(5) -> in securities, cash or in combination
o Initially yes, but here we see Article 5(5) paragraph 3
  It has to be limited to price and consideration:
o Price: Article 5(4) of TBD: highest price you pay in period 6-12 month before
-> 15 EUR
o Consideration: Article 5(5) of TBD (3rd sentence): both but must provide cash
alternatives
 35% passed the threshold of 30%, which is set by the MSs, so it depends on MS laws
(Article 5(1))
 but even though its up to them, they often decide for a 30% threshold
 mandatory bid should be addressed to all SHs at an equitable price
 consideration: can be in securities, cash or a combination
 mention all elements of Article 5
The board of directors of Energize is not in favour of the proposed takeover. In order to
deter the bidders the board of directors of Energize has decided to sell the electric car
division, since Morsche and BWM are especially interested in that division.
c. One of the minority shareholders who supports the bid made by Morsche and BWM,
Mrs. Tolhuisen, objects to this decision by the board of directors and turns to you for
advice with regard to the prospects of legal actions that she is planning to bring against
the board of directors/Energize.
 Is the BoD allowed to undertake defensive measures?
 Start by Article 12
 Please answer according to EU law -> Article 9 and Article 12.
 Why 9? Board neutrality rule -> cannot take defensive measures except white knight
without the SHs approval. For other measures they will need the SHs approval
 Defensive measures are allowed if the SHs approve them
 After the bid is made, and to deter the bidders, they decide to sell the electric car
division
 Which EU law principle could she try to invoke?
o They harmed the board neutrality rule (if the company commits itself to EU
law) -> Article 9 TBD
o The board would need SHs approval whether or not this is allowed
 If allowed, you might well ask whether the amount of assets they sell is
a substantial amount, and whether for this specific amount, the
approval of SHs is required
o Whether Mrs Tolhuisen has sufficient shares to block the board’s plans
 Look at AoA to know it
o The board is trying to sell this part in order to frustrate the bid; from EU point
of view this is selling the crown jewel- this is a defense mechanism which
cannot go through without SH approval; so as minority SHs they can vote NO
to prevent this (It depends on the applicable law of the MS)
o What to do:
 Crown jewel defense
 Depends on national law: do the adhere to board-neutrality rule?
One of the board members of Energize suggested that the board of directors approach
Sesla, a luxury car manufacturer specialized in electric cars, as a potential (third party)
acquirer in order to fight off Morsche and BWM. The other members wonder whether
they can legally do this and are especially afraid that Mrs. Tolhuisen might start legal
actions if they do approach Selsa.
d. Is the board of directors allowed to approach Sesla in order to see whether it would
be interested in making a competing offer on the shares in Energize?
  According to Article 9(2) it is the only exception allowed to take by the BoD based on
the board neutrality rule
 Article 9(2) TBD
o Search for an alternative offer (white knight)
 If their actions (joint cooperation) fall under the collective action-> if yes, then Article
5 result in the frustration of the bid. You need to have an actual cooperation;
generally, acting in concert could be risky; and then the risk is to make mandatory bid
(but you may not want it or have the money to do it);
NB 1: TBD Directive prohibits post-bid defences but doesn’t touch pre-bid defences
NB 2: how far is the breakthrough rule effective?
 Most MSs don’t adhere to such rule but mostly board neutrality
NB 3: Golden shares are called ‘golden’ because special rights are attached to them
ESMA - The European Securities and Markets Authority (ESMA)
Takeovers
o KPN Poison Pill
o Dutch defense measure:
 What is the relation between foundation and the company?
 Foundation does not have shareholders
 The foundation was set up to safeguard key national
infrastructure, when the former state monopoly was being
privatized
 First hint to set up the company ->the company itself has the
interest to set up the company
 Shareholders do not want to set up any foundation to be used as
a defensive measure
 At some point danger occurs -> there is someone planning to
take over the company -> how do we activate the foundation?
They want to acquire new shares to delute the value of shares to
prevent the acquisition of control over the company
 Issues of new shares has to be approved by GM -> SHs need to
approve issuing shares
 Preemptive right – SHs have the right to be first in line to buy
the shares that are being sold
 You do not have the delusion of shareholding
 Preference shares are issued in NL, they do not have the
preemptive right
 More SH in GM; the bidder will be scared to takeover, because
he will have to buy more shares
 It was important to protect the company from takeover
 Other parties does not have the call option that is why they
cannot call for the preference shares
o Market for corporate control:
 There is an assumption that there is a share p
 If there is inefficiency in the government -> you ca
 When you are not doing well -> you put yourself on the market to be
bought; and when you do well -> put on the market to get more
investment
  Way to incentivize the BoD to pay more attention to what they are
doing; they may fear their position in the company -> it is good about
market for corporate control
 What is bad? depends on what BoD’s perspective is. Company can
have other perspectives in mind, which contradicts the BoDs
perspective. There can be more reasons than the bad management for
bad results of the company. This affects the identity of the company. It
is important for national system to have some kind of status
B. Who decides on a takeover?
o Shareholders at the end of the day because they are the ones who sell their shares ->
whether to sell shares or not
o They are the parties to the takeover
o Bidder
o Shareholders
o Company itself through the BoD
o But often it is also about negotiations with the board, who decides what to do -> to
negotiate and inform SHs
o Normally you negotiate about the bid -> if you approach the BoD you can do
the research and collect information on how the company is doing
o Friendly approach -> BoD sees whether there are any kids of options to buy
stock
o Sometimes BoD does not want to negotiate with SHs -> hostile takeover ->
bidder goes directly to the SHs directly with the offer
o BoD is not always willing to cooperate
o It is also hard to find who is the main SHs is, so it is easier to approach BoD
o In hostile takeover -> BoD is more involved
o The shareholders -> those who decides to sell their shares
o The board also usually decides -> to use the defensive measures to stop the takeover
o They can interfere and try to prevent
o Financial supervisory authorities
Competition authorities -> can veto large transactions

o Article 2 -> definitions -> important to have a close look

o Takeover bid
o Offeror or bidder
o Persons acting in concert:
 Act together with other parties -> you need to make a mandatory bid
 You want to avoid the fact that cooperation is going on
 Agreement: in writing or tacit
 How do we know what concert mean?
 Definitions are vague
 Is there guidance as to what means Article 2?
 It is difficult to come up with definition
 White list by ESMA of what means not acting in concert
o Shareholders working together -> it is a borderline for mandatory bid
o Acting in concert may trigger the obligation to act in concert
o Frustrating the successful outcome of a bid
Article Key provisions
Article 3 Equal treatment of SHs; -> to enhance transparency
Article 4 Establishment of supervisory authority; rules on which authority is
competent to supervise.
One of the target company where the registered office has the office
Article 5 Protection of minority SHs through bid with certain price.
Para. 1 -> preconditions t make mandatory bid:
o THRESHOLD:
o Depends on national law
o Specified percentage -> Article 5(1)->Article 5(3)
o 30% is a threshold
o ACQUISITION BY THE PARTY OR ACTING IN CONCERT:
One party individually or with another party want to acquire shares ->
above 30% -> must made mandatory bid at an equitable price -> Equitable
price -> Article 5(4)
Equitable price -> in order not to be forced to agree on 10 EUR ->
Article 5(5) -> securities, cash or a combination of both
Article 6 Requirements regarding information to be given in case of bid; offer
document which is made public and contains certain information
Read in conjuction with Article 14
Article 7 Timeframe for acceptance of bid; no less than 2 weeks and no more than
10 weeks from date of publication of offer document;
Article 8 MSs have the obligation to ensure that a bid is properly made public
Article 9 Board neutrality rule; restricts defensive measures; requires board of
target company to obtain authorization of the SHs given for this purpose
before taking any action, other than seeking competing bids, which may
result in frustration of the bid.
o Defensive measures that the BoD may be taking in the course of
takeover
o They don’t need shareholder’s approval for white knight
o Prior authorization
o Para. 5 -> BoD should communicate their opinion on the offer that
is made
o Article 9(2) is not similar for all states. Deviates as to national
law -> Article 12 is important to understand meaning of Article
9 in practice -> you can opt in our opt out of certain rule: opt
out->opt-in->opt-out (depends on a situation)
o Equality of arms -> you shall be equal in situations
Article 10 MS shall ensure that companies with securities admitted to regulated
market publish information on structure of their capital and CG.
Article 11 Breakthrough rule; restricts defensive measures; provides for a set of pre-
bid, bid and post-bid rules that MSs must lay down in their legislation and
which make inoperative defensive mechanisms and structure in the target
company so as to allow the bidder to obtain control of the target company;
not applicable to Golden Shares.
o Any arrangements that have been made prior to the bidding
procedure
o To neutralize the situation
o Relates to the period of time -> Article 11(2)
o Article 11(3) -> relates to event
 Article 12 Opt-out from board neutrality and breakthrough rule; opt-in for companies;
exemption of companies.
Article 13 Requires MSs to lay down rules on bids covering certain issues; no
minimum standards or guidelines.
Article 14 Reference to information and consultation and co-determination rules.
Article 15 Squeeze-out; 90% but no more than 95%.
Article 16 Sell-out; 90% but no more than 95%.

What is a Saturday night special?

A Saturday Night Special is now an obsolete takeover strategy where
one company attempted a takeover of another company by making a sudden public tender
offer, usually over the weekend.

DEFENSIVE MEASURES
Pre- bid:
 Issuance of preference shares: Preference shares, more commonly referred to as preferred
stock, are shares of a company’s stock with dividends that are paid out to shareholders before
common stock dividends are issued. If the company enters bankruptcy, preferred
stockholders are entitled to be paid from company assets before common stockholders. Most
preference shares have a fixed dividend, while common stocks generally do not. Preferred
stock shareholders also typically do not hold any voting rights, but common shareholders
usually do.

 Priority shares: These are shares to which certain extra rights are allocated, according to
the articles of association. The purpose is to create a certain difference between the powers of
shareholders within the company, providing the shareholders of these shares with certain
controlling rights

 Voting caps: A limit on the percentage of the total vote that voters of a

particular classification can make. For example, if you have 50% of the shares, your voting
rights are stopping at some point o Waterproof device against aggressive SH?  No, but it
can have a certain concern
 Co-optation  check for NL
 Poison pills: A poison pill is a type of defense tactic utilized by a target company to prevent
or discourage attempts of a hostile takeover by an acquirer. As the name "poison pill"
indicates, this tactic is analogous to something that is difficult to swallow or accept. A
company targeted for such a takeover uses the poison pill strategy to make its shares
unfavorable to the acquiring firm or individual. Poison pills significantly raise the cost of
acquisitions and create big disincentives to deter such attempts completely.
Defensive measures
• Pre-bid
- Issuance of (preference registered) shares
- Shares with multiple votes
- Golden shares
- Certificates
- Non-voting shares for investors
- Restriction on voting rights
- Cross-shareholdings
- A pyramid holding structure
 - Staggered boards (A staggered board is an effective defense against a hostile
takeover due to the staggered style of the elections)
- Two tier boards
- Poison pills
Post bid

- Crown jewel: Sell the most profitable assets of the firm o Company itself
might bleed to death
- Golden parachute: A golden parachute consists of substantial benefits given to
top executives if the company is taken over by another firm, and the
executives are terminated as a result of the merger or takeover. Golden
parachutes are contracts with key executives and can be used as a type of anti-
takeover measure, often collectively referred to as poison pills, taken by a firm
to discourage an unwanted takeover attempt. Benefits may include stock
options, cash bonuses, and generous severance pay so it becomes way more
expensive for the bidder.
- Issuance of new shares: Gucci case  Last resort  Want to circumvent the
pre-emptive right  Introduce employee stock ownership plan  Main interest
wasn’t actually the employees, but the fact that they had to fight off the radar 
Had to defend itself, but the AoA didn’t provide for the issuance of the classes
of shares  therefore, 2nd Company Law Directive: issuance of shares to
employees or employee representatives

• Classes of shares

• Employees

- White Knight: If a board feels like it cannot reasonably prevent a hostile

takeover, it might seek a friendlier firm to swoop in and buy a controlling
interest before the hostile bidder. This is the white knight defense. If
desperate, the threatened board may sell off key assets and reduce operations,
hoping to make the company less attractive to the bidder.

- Issuance of (preference registered) shares

 White squire: A white squire is an investor or friendly company that buys a stake in a
target company to prevent a hostile takeover. This is similar to a white knight defense,
except the target firm does not have to give up its independence as it does with the
white knight, because the white squire only buys a partial share in the company.
 Call option of a foundation:

The Market for Corporate Control II: Judicial Review of Board

Decisions
1.What standard of review do courts in Delaware use to judge director’s decisions?
The business judgement rule is used to review a director’s decision. This rule entails a
presumption that in making a business decision the directors of a corporation acted on an
informed basis, in good faith and in the honest belief that the action taken was in the best
interests of the company.
2.Who has the burden of proof? What is the relation between the business judgement
rule and the entire fairness test?
The burden of proof normally lays with the plaintiff, who has to establish that the action was
in breach with the duty of loyalty and duty of good faith. If the plaintiff proves this the
burden of proof shifts towards the director to prove that the action was in line with the entire
fairness test. This test entails proving fair dealing and fair price.

3.What standard of review is used in takeover situations?

Unocal standard and Revlon standard.

Revlon standard:
Trigger: When receiving a bid, the directors have to achieve the highest price
reasonably available for the shareholders in a sale-of-control transaction.
(Sale-of-control transaction: majority of a corporations voting shares to be sold to an entity
(single person or acting in concert))
Rule: The plaintiff must demonstrate, and the trial court must find, that the target's
directors “treated one or more of the respective bidders on unequal terms.

Unocal standard:

The case concerns a self-tender offer (also known as a share repurchase) made by the board
of directors that was higher than the competing offer by the hostile bidder. The court
acknowledged for the first time that in the face of a hostile takeover the board of directors
may be acting in its own best interests rather than for the corporation and its shareholders,
and it therefore reasoned that a heightened standard was necessary.

Facts. Plaintiff was a corporation led by a well-known corporate raider. Plaintiff offered a

two-tier tender offer wherein the first tier would allow for shareholders to sell at $54 per
share and the second tier would be subsidized by securities that the court equated with “junk
bonds”. The threat therefore was that shareholders would rush to sell their shares for the first
tier because they did not want to be subject to the reduced value of the back-end value of the
junk securities. Defendant directors met to discuss their options and came up with an
alternative that would have Defendant corporation repurchase their own shares at $72 each.
The Directors decided to exclude Plaintiffs from the tender offer because it was
counterintuitive to include the shareholder who initiated the conflict. The lower court held
that Defendant could not exclude a shareholder from a tender offer.

Trigger: When directors unilaterally adopt defensive measurers in reaction to a

perceived threat
 Rule: First part of test:
two-fold rule: 1. Reasonable grounds for believing that a danger to corporate policy
and effectiveness existed. (reasonable)
2. The measures were reasonable to the threats imposed. (proportionate)

Second part of test: then enhanced level of scrutiny under Unitrin, were defensive
measures is deemed reasonable and proportional when:
1. Check whether the test is non-coercive and non-preclusive
a. If yes then business judgement rule
b. If no than the board must show the action had a rational business purpose.

Entire fairness
Trigger: the presumption of the business judgement rule is rebutted. Ex. Plaintiff
proves there was a breach of a fiduciary duty like fraud etc.
Rule: The board has to show fair dealings and fair price.

4. How does that differ from the normal standard and why?
It is much more elusive and gives the board a little less freedom in their choice of action. It
gives them the first burden of proof, adding a layer before applying the normal stand of the
presumption of the business judgement rule. It is to prevent takeover defense abuses. The
board has potential conflicting incentives between keeping his job and maximizing
shareholder value. Therefore, extra scrutiny is required.

5. What was the problem in the Revlon case?

Facts: Pantry Pride approached Revlon to buy with either negotiated transaction of hostile
tender offer. Revlon rejected and undertook defensive action. It incentivized a white knight
bid from Forstmann, little & company. The board then engaged in several defense strategies
even though Pantry Pride offered a higher bid. Forstmann would get a 25$ million
cancellation fee and no-shop provisions

Problem? When a takeover is inevitable, can the board uses these kind of defense measures or
should it maximize the shareprice?

6. When does the Unocal rule apply and when does Revlon apply?

When a company wishes to preserve its independence, the Delaware courts use the Unocal
standard. Where a company responds to a hostile bid and it becomes inevitable that the
company will sell itself or commit to a change of control transaction, the Revlon standard is
used.

7. What was the question brought before the court in the Dutch ABN AMRO case?
Could ABN AMRO sell LaSalle without prior approval of the shareholders?

ABN AMRO sold its La Salle division in the US (Crown jewel defense) in order to deters
RBS’s bid by selling a key asset. ABN did this without approval from the shareholders.
8. How did the Enterprise Chamber rule and what was the Supreme Court’s decision?
Enterprise Chamber: It prohibited the sale of LaSalle without prior approval of the
shareholders. The board has the sole discretion to sell an asset. However, decisions making
on shares and rights attached to them is the exclusive right of the shareholder. The enterprise
chamber viewed the sale of LaSalle in the larger context of selling the shares of ABN.
Therefore, it linked the sale to the Barclays bid.
And when a corporation is up for sale, the board’s role is to maximize shareholder profit

Supreme court: Rebutted the enterprise chamber. The Dutch CC and CGC does not require
approval of the shareholders with regard to a transaction that falls within the authority of the
managing board. It does require approval when there is a sale of assets that is so drastic that
the nature of shareholder ship is changed; change in identity/character of the company. The
mere sale did not constitute to this.

9. When comparing the Supreme Court’s ABN AMRO ruling to the standard of reviews
used in the US in takeover situations, what are the differences and similarities?
Dutch law; valid takeover: Temporary nature, proportional to the threat and reversible.

The outcome would be the same: Unocal: There was a threat and sold only one division of its
subsidiary: Reasonable and proportional. Then also not coercive or preclusive.
Approval of shareholders: Only when all or substantial.

10. Is the Business Judgement rule also used in Europe?

Yes, not everywere, no harmonization and thus in different forms. In Germany for example it
is not a presumption and the director has to prove. This presumption exists in Sweden/
Denmark / Finland.

Case study 1.

a. Please advise the management board of Maison d`Anvers on the issue of shareholder
approval for the proposed transaction if Dutch law would be applicable and under the
law of Delaware.
a. Dutch Law:
The Netherlands did not opt-in to the board neutrality rule of article 9 thus
takeover defences are allowed. ABN AMRO case: Article 2:107a BW applies.
The board needs approval when is transfers the enterprise or practically the
entire enterprise to a third party. It needs approval when there is a major
change in identity of the company. With the sale of the entire handbag’s
division, the identity of the company would change, as they will now operate
in the women’s clothes branch instead of handbags. This is a separate market
and thus identity change. They will need shareholder approval

b. Delaware: Shareholders have a vote on all or substantially all of the property

and assets. It depends on how large the handbag division is of Maison
 d’anvers for the company in order to assess whether shareholder approval
would be needed.

b. What standard of judicial review do you think a Delaware judge would use in this
case with regard to the proposed board actions?
This is a takeover defence, where the takeover is not inevitable. Therefore Revlon
does not apply, but the standard of judicial review would be Unocal. There is a
perceived threat, and management imposes defensive measures.
Company groups
Study questions

1. What are company groups?

There is not a uniform definition but a group can be characterized by separate legal entities
which form one economic enterprise together. These enterprises are organized in the form of
a dominant parent corporation holding the subsidiaries (‘Dean blumbergs description’).
Company groups can be managed by a holding/mother company.

2. What forms can company groups take and what are the advantages and disadvantages
of group structures?
Company group forms: - Mother daughters structure
- A holding company holding separate subsidiaries.

Advantages: - Separate liability for the subsidiaries

- Management of the holding can focus on the long-term strategy
- Faster decision making because of shallow hierarchies
- Easier integration of acquired companies
- Use of value of the firm names
- Access to foreign markets
- Opportunity to allow control of large enterprises with relatively little capital
(Pyramid structures)

Disadvantages: - Can be difficult to manage

- Conflicting interests within the group
- Subsidiaries will most likely reinvest their own earnings instead of
returning those the center company.
- Liability issues for the creditors.

3. What specific problems can arise and who`s interests can be specifically at stake in
group structures?
- The interests of the whole group can differ from the individual interests of the subsidiaries.

- The interests of shareholders/creditors of a subsidiary can be at stake when f.e. the company
transfer assets to another subsidiary.

4. Is there any group law at EU level or EU legislation that takes the group structure into
account?
- Article 22 of 7th Company law Directive takes the parent-subsidiary structure into account.

- No real EU legislation on group structures

5. What was the issue at stake in the Impactozul case and how did the CJEU deal with
this?
Facts: Impacto Azul concluded a contract with BPSA to sell a new building to BPSA.
BPSA allegedly did not fulfill its obligation under the contract. BPSA 100% owned
subsidiary of SGPS, which was seated in Portugal. SGPS was wholly owned by Bouygues
Immobilier. Bouygues decided to withdraw from the project, therefore Impacto Azul suffered
losses.
Impacto Azul sued SGPS and Bouygues, as parent companies, under Portugese law
where joint and several liability of parent companies for the obligations of their subsidiaries
is enshrined1. Defendants argued that because their seat was not in Portugal, they could not be
held liable.
Impacto Azul argued that this was an infringement of article 49 TFEU as there was
now a different treatment for companies not having their seat in Portugal and for those who
do.

Question to CJEU: Does national legislation which precludes the application of the principle
of the joint and several liability of parent companies vis-à-vis the creditors of their
subsidiaries to parent companies having their seat in the territory of another MS complies
with the freedom of establishment? (Is the Portugese piece of legislation a restriction to the
Freedom of establishment?)

CJEU Judgment:
35. No rules harmonizing corporate groups at EU level, MS competence.
36.
37. Parent companies can adopt, through contractual means, this system of joint and
several liability
Conclusion. Article 49 does not preclude this kind of legislation, where the parent company is
not liable of the subsidiaries creditors because their seat is in another member state’s
territory.

6. Why does the EU commission propose the recognition of the group interest?
It acted upon a Report issued by the Reflection Group of the Future of EU Company Law.
Different national approached to what a group of companies is might be an obstacle to the
proper management of cross-border groups. It creates uncertainty to the duties of board
members of both the parent and subsidiary.

7. What is meant with the enabling/facilitating approach to company groups?

There is the protective view and the enabling/facilitating approach. The protective view aims
to protect the minority shareholders and creditors against abuse of the majority in a corporate
group.

The Protective view helps the directors within the group to efficiently organize and manage
the cross-border group. This could be done f.e. by recognizing the group interest.

8. How does German law deal with company groups?

1
Portugese company law provides for that a parent company is fully liable for the debts of a
wholly-owned subsidiary. Only for parent companies incorporated in Portugal. But with this
liability comes also the right of instruction to the subsidiary in the interest of the group.
German law recognizes company groups. A parent company can conclude enterprise
agreements with its subsidiary. Another way is by means of de facto groups. Enterprise
agreements (291- 318 AG) can be concluded in two forms:
1. domination agreement (Beherrschungsvertrag). The subsidiary is subjected to
instructions from the parent. These instructions are open-ended and are mentioned
in the contract.
In case of a supremacy contract: complete direction of the ruling company.
Several procedural requirements and shareholders acquire right to
compensation and indemnities. Duty to adjust the balance of the subservient
company.

2. Profit transfer agreement: (gewinnabführungsvertrag): requires the transferring

corporation to divert all or parts of its profits to the recipient corporation (No right
to demand the transfer of funds, but override the capital maintenance rules of the
transferring AG)

De facto groups: It creates a mandatory group (16- 18 AG). primary evidence of such a
relationship is the ability to exercise dominant influence. A majority holding creates a
presumption of influence. It is the possibility or exercising influence, not the actual exercise
that determines whether there is a de facto concern

Above mentioned provides only for company groups with AG’s. (public LLC).

For liability of a parent of GmbH  liability for conduct (tort) + It has been developed in
case law that parents company has instruction rights if they want the subsidiary to do
something specific. When the instruction of the parent made the subsidiary to enter into
financial difficulties then there is a potential liability of the parent company on a basis of a
tort.

9. What does the French Rozenblum doctrine entail?

Directors of group entities are allowed to follow a group policy, even where it conflicts
with the interests of that entity. But on the condition that the group is well structured
based on a balanced policy and only if the directors of that entity may reasonably assume
that the disadvantages will be offset within a reasonable time span.

In case of a liability claim, director can use the group interest defense:
1. Economic; social or financial common interest to support the financial assistance from
one company to another.

2. Sound group policy, benefiting the whole group; company group must be clearly
structured.

3. financial support from one company to another member of the group must have an
economic reciprocity.

4. The support from the company must not create risk of bankruptcy.

+ Law on duty of care of the parent company:

- Due diligence obligation
 - Presumption of liability.

10. How does UK law deal with company groups?

There is no real UK company group law but the companies act provide for parent-
subsidiary control contracts (like domination agreement). An undertaking is a parent
undertaking when falling within section 1162 Companies act.

Salomon vs. Salomon:

- It is the policy of the companies act to enable business people to incorporate
their business to avoid personal liability.

Then sometimes Veil piercing is used in order for liability of the parent. The parent
can have a duty of care to third parties affected by the operations of its subsidiary; f.e.
when having substantial control over the subsidiary.

11. What is the difference between the UK system of parental liability and the German
system?
The German system provides for in law that when the subsidiary suffers a loss, the
parent has to cover the claim. (liability for the subsidiaries behavior). The UK system
does this only in case of a breach of the duty of care. The German system therefore
provides for more protection of the creditors.

Case study
Case study 1: The taxicab

Should the defendant Carlton be held liable in your opinion for the damage that was
caused by the Seon Cab Corporation?

No he should not be held liable. Although it is clear that Carlton used this
construction to limit his liability in case something would happen, he did this not in a
fraudulent manner. A shareholder should not be held easily liable for damages caused
by the company, as this would severely go into the concept of a limited liability
company. Although it is not ethical what Carlton did, he did nothing against the law.

Case study 2: White Christmas

a. Can the parent company give such an instruction?

White Christmas is an Italian Public LLC, not owning 100% of the shares
of both the subsidiaries.
Eclat SA is a French Public LLC. French law applies to whether or not an
instruction right exists. (Rozenblum doctrine)

b. On which grounds can the parent company’s request be justified?

By applying the Rozenblaum principle: The directors of the subsidiary
should prove that the group is well structured, based on a balanced policy
and that they may reasonably assume that the disadvantages will be offset
within a reasonable time span.

c. What are the potential problems faced by the directors of Eclat SA?
 Becoming liable, as they are not acting in the interest of Éclat SA but in
the groups interests. (Breach of duty due to subsidiary)

d. Can you think of any mechanisms that can provide a solution?

Providing on an EU level for group interests, so that the Eclat SA can act
on this group interest.
Recognition on EU level of group interests.