Required reading

1. EU: Transparency Directive, arts. 9–13

2. D: WpHG, §§ 21, 22; AktG, §§ 20, 21

3. UK: CA 2006, secs. 791–797; FSA Disclosure and Transparency Rules, Rule 5

4. US: Exchange Act, §§ 13(d), 16(a); Exchange Act Rule 13d-1, 13d-3, 16a-2, 3, 6

The fiduciary and reporting duties of shareholders

In the preceding three chapters, we discussed shareholder rights and how they are exercised. Shareholders have the right to vote on important decisions affecting the company and to receive information on which to base their voting decisions. Voting takes place primarily in general meetings, which must be called and held in certain ways to ensure transparency and fairness. In this chapter, we examine shareholder duties. Here, we will look at the duty to disclose large shareholdings and to exercise voting power with a certain degree of loyalty vis-à-vis the shareholders affected by this power. In the next chapter, we will discuss how minority shareholders can have recourse to court to defend rights that they are not able to protect in the general meeting because of the insufficiency of their voting power.

The duties discussed in this chapter fall into two quite different categories. On the one hand, courts have developed duties that apply to limit the power which shareholders have under the law. These duties resemble the duty of loyalty that applies to corporate directors.

Required reading

1. EU: First Company Law Directive, arts. 11, 12

2. D: AktG, §§ 23–41; GmbHG, §§ 1–11

3. UK: CA 2006, secs. 7–20

4. US: DGCL, §§ 101–108, 124; Model Act, § 2.04

Incorporation procedures and liability for transactions

The procedures for setting up a corporation and the liability incurred by persons purporting to represent it before the incorporation process is complete are substantially similar in the UK, Germany and the US, but do still display interesting differences. Differences arise from the types of documents that must be filed and the contents of such documents. Where, as in the UK, the composition of the board and the mode of appointing directors are determined solely by the constitutional documents, the drafting of these documents takes on more importance than in Germany, where such important matters are determined without exception by the Aktiengesetz. Differences also arise where one jurisdiction has mandatory prerequisites not found in the law of the other. Where, as in the EU, strict procedures are prescribed for the constitution of a mandatory amount of minimum capital, the process of incorporation can become much more formal and time-consuming. These aspects can in turn affect the court's determination of fairness when incorporators enter into contracts before the body corporate has come into existence. Incorporation procedures thus exemplify the workings of corporate law models ranging from the most formalistic to the most informal, as well as how courts may react differently to problems thrown out by different statutory configurations.

Required reading

1. D: AktG, §§ 11, 23(2), 139–141, 179(3), 182(2), 202(2), 221 sentence 4, 222(2)

2. UK: CA 2006, secs. 629–640

3. US: DGCL, §§ 102(b)(3), 151, 221; Model Act, §§ 1.40(13A), (22), 6.01, 6.02, 6.30

The types of rights embodied in shares

Investor ownership is an essential characteristic of the stock corporation. The investing members own the corporation through securities called “shares” (Aktien). As we see from the topics covered in this text, much of company law has to do with the exercise of rights embodied in these “shares.” In this chapter, we will take a closer look at shares and the rights they embody, but, instead of focusing on the exercise and protection of these rights under company law, we will look at their origin in the share of stock and how the rights can be arranged differently in different classes of shares. The type of interest embodied in shares is a property interest, so we will begin with the basic nature of this interest in relation to the company and its assets.

Shareholders own the corporation, not its assets

Nobel laureate Milton Friedman was once chided for referring to shareholders as the “owners” of corporations, and his critic explained: “A lawyer would know that the shareholders do not, in fact, own the corporation. Rather, they own a type of corporate security commonly called ‘stock.’ As owners of stock, shareholders' rights are quite limited. For example, stockholders do not have the right to exercise control over the corporation's assets.”

Required reading

1. EU: Takeover Directive, arts. 1–8 and 13–16

2. D: Securities Acquisitions and Takeovers Act (WpÜG), §§ 1–3, 10–26, 29–32, 34–39c

3. UK: CA 2006, secs. 942–943, 974–991; City Code, General Principles 1–6, Rules 9, 19, 20

4. US: Exchange Act, §§ 14(d)–(f); Rules 14d-2, 14d-3(a), 14d-5(a)–(c), 14d-6(d) (scan Regulation M-A, Items 1–10)

Regulating disclosure, timing and price of bids

Introduction

What is a “takeover”?

In Chapter 21, we discussed various techniques for acquiring a company. One of those is a purchase of the company's stock from its shareholders. Because the ownership interests of shareholders in the corporation are represented by transferable securities, a company can be acquired through transfer of these securities directly from the current owner to a new owner. Not all stock purchases are takeovers (or, in US terminology, “tender offers”). If a buyer were to approach an entrepreneur and ask whether she was interested in selling five of the 10 million shares of her wholly owned company, this offer would not be considered a “takeover bid” (or “tender offer”) in our jurisdictions. In US law, the term “tender offer” is not specifically defined, as you can see by how much time the court spends discerning the boundaries of this term in Hanson Trust, reprinted in part in this chapter. What, then, are the characteristics the court decides are determinative for a tender offer?

Required reading

1. D: AktG, §§ 15–19, 291–293, 302–318; HGB, §§ 266, 290, 291

2. UK: CA 2006, secs. 1159, 1162, Schedules 6 and 7

3. US: DGCL, § 220(b)(2); Exchange Act, § 20; Securities Act, § 15

Corporate groups: governance by statutory rules and judicial standards

What are “corporate groups” and why are they formed?

The corporate group

We all know the names of some corporate groups. They produce everything from common consumer items like coffee and chocolate (e.g. Nestlé) to sophisticated products like pharmaceuticals (e.g. Bayer) and aircraft (e.g. Boeing). Aside from producing and selling products under a common name, what are corporate groups? Dean Phillip Blumberg, who has written as much as anyone about corporate groups, describes them as “enterprises organized in the form of a dominant parent corporation with scores or hundreds of subservient sub-holding, subsidiary, and affiliated companies. These typically conduct a single integrated enterprise under common control and often under a common public persona.” The words “dominant” and “subservient” in Dean Blumberg's description reveal what is unusual, problematic and interesting about corporate groups. When a corporation's central management gives instructions to its branch management and the latter transfers its profits at the close of an accounting period to the central account, we do not think of the central office as “dominating” a “subservient” branch office.

Required reading

1. EU: First Company Law Directive, art. 1

2. D: AktG, § 1

3. UK: CA 2006, secs. 1, 3, 4

4. US: DGCL, § 101(b); Model Act, §§ 1.40(4), 3.01(a)

Approaching comparative company law

The approach coordinates

The disciplines of “comparative law” in general and “comparative company law” in particular are natural companions to the globalization of social, political and economic activity. The course of economic and political developments in recent decades has thus increased the amount of comparative law taking place at every level, whether it be that of fact-oriented practitioners, result-seeking legislators and development agencies, or theory-focused academics. Each of these activities has its own interests, priorities and goals. Nevertheless, there are certain “approach coordinates” that mark the path for all their comparative studies. This introductory chapter will outline some important approach coordinates for the comparison of the laws that govern public companies in the United States, the United Kingdom and Germany.

Just as the merchants who engaged in the earliest forms of international trade developed a commercial law that was trans-jurisdictional,so today merchants and their counsel are often at the forefront of comparative legal activity. When a transaction spans international borders, the persons responsible for structuring it must of necessity become corporatists. As Professor Klaus Hopt has observed, lawyers and legal counsel “are the real experts in both conflict of company laws and of foreign company laws … Working out the best company and tax law structures for international mergers, and forming and doing legal work for groups and tax haven operations, is a high, creative art.”

Required reading

1. EU: Cross Border Merger Directive, art. 2(2)

2. D: UmwG, § 2

3. UK: CA 2006, sec. 904

4. US: DGCL, §§ 251(a), (d), 103(d)

Tools and structures for corporate acquisitions

Transaction structures and protective tools

The essential characteristics of all stock corporations in each of our jurisdictions – a separate legal person owned by shareholders and managed by a central management – lead to like structures for transferring all or part of a company to a new owner. Because the legal person itself owns the corporate assets, and is in turn controlled by votes attaching to its shares, one can gain control of its assets by (a) directly purchasing those assets or (b) purchasing enough stock to control their owner, the company. A third way is also made possible by the laws of each of our three jurisdictions: have one entity “merge” (disappear, be absorbed) into the other or have both entities “merge” into a third entity, in each case by operation of law through a filing with the state, not unlike the way a new corporation is established. This is why we speak of “mergers” and “acquisitions” in the same context – because they are different roads to transferring assets to new control.

Required reading

1. EU: Second Company Law Directive, arts. 18–22, 24, 24a, 39; Buy-back Regulation, arts. 2–6

2. D: AktG, §§ 16, 17, 56, 57(1) no. 2, 71, 71b–71e, 291(3); GmbHG, § 33; HGB, § 272(1) nos. 4–6, (4)

3. UK: CA 2006, secs. 690–732; FSA Listing Rules, Rule 12

4. US: DGCL, § 160; Exchange Act § 9(a)(2); SEC Rule 10b-18

Rules on share repurchases

Introduction

This chapter builds on many of the issues discussed in our analysis of dividends and capital maintenance. When a company repurchases its shares, it transfers company assets (the purchase price) to the members from whom the shares are purchased. Thus, from a capital maintenance perspective, share repurchases are merely an alternative to the payment of dividends and should be subject to the same limitations. Creditor protection and capital maintenance are not, however, the only issues involved in share repurchases. Because shares, when accumulated in sufficient quantities, lend the capacity to control the company, the ability to purchase them is also the power to deal in corporate control. Also, because one of the ways that shares can be repurchased is “redemption,” i.e. the repurchase of securities at the option of the holder or the issuer, as contractually agreed in advance between these parties, repurchase can sometimes be achieved without the voluntary consent of the seller. Thus, if the law did not regulate the repurchase of shares, a company's management could under some circumstances use share repurchases to usurp power for itself.

Required reading

1. D: AktG, §§ 147, 148, 241–248

2. UK: CA 2006, Part 11

3. US: DGCL, §§ 325–327; New York Business Corporations Law, § 627; ALI Principles §§ 7.01–7.12

Judicial remedies and the stock corporation

The goals and the difficulties of shareholder suits

Many of the preceding chapters have discussed various types of shareholder rights. We have examined the rights of shareholders to receive a portion of the company's income in the form of dividends, the manner in which shares can be separated into various classes with attendant rights, and the right of all shareholders to have their management act loyally and manage the company with due care. Minority shareholders also have a right that majority shareholders act loyally and not use their voting power to damage the company or unfairly prejudice the minority. Chapters 16 and 18 explained the types of matters on which shareholders can vote and the way voting rights are exercised. Chapter 17 briefly delved into the rights to information that allow shareholders to make informed decisions in exercising their other rights. As these rights all coexist in the hybrid property interest constituted by a share of stock, they are designed to work in a complementary fashion that is tailored to the needs of a shareholder as co-owner of the company. For example, if through a legally required regular disclosure shareholders were to receive information indicating that management could have acted improperly, and they confirmed this through a specific request for more information, the shareholders could then use their voting rights to remove the director from office.

Required reading

1. EU: Transparency Directive, arts. 1–7

2. D: AktG, §§ 124, 125, 131, 132, 142(1), 145, 243(4), 258(1) and (2), 259(1)

3. UK: CA 2006, secs. 238(1), 355, 423(1), 430(1), 431, 441, 444–447, 463, 1112, 1136; FSA Disclosure and Transparency Rules, Rules 1.1.1, 1.3.4, 2.2.1, 2.3.2, 2.5, 3.1, 4.1.1, 4.1.5, 4.2.1, 4.2.2, 4.3.1, 4.3.2, 4.3.6, 6.1.2, 6.1.9; FSA Listing Rules, Rule 9.2.6, 9.6, 9.7A.1, 9.8.4, 9.8.6, 9.8.8, 10.3.1, 11.1.7

4. US: DGCL, §§ 219, 220; Exchange Act Rules 14a-3(a) and 14a-7(a); scan each item of Schedule 14A

The information rights of shareholders

In the previous chapter, we looked at the voting rights of shareholders. Before a shareholder can exercise a voting right, he must be able to make a decision about the matter up for vote, and this presupposes access to information. The information rights of shareholders come in three basic forms: (i) inspection upon request; (ii) routine, regular disclosure; and (iii) ad hoc disclosure of significant events. When a company is small and the shareholders are in close contact with the management, inspection upon request is a good way to obtain information because it is flexible and provides only what the shareholder needs. This type of inspection is provided for in different forms in the company law statutes of our three jurisdictions. When a company lists its securities on the capital market, however, the number of shareholders can dramatically increase and the geographical proximity of shareholders to management usually decreases.