What are the duties of the directors and controlling shareholders of a target company?
Mergers & Acquisitions
The managing directors of limited liability companies have to manage the company with the due care of a diligent manager, have to represent the company and are under the duty to act in the best interest of the company. The shareholders are entitled to issue instructions to the managing directors.
In joint stock corporations the board of directors has to manage the company, is responsible for officially representing the company and managing the company’s business with the due care of a diligent manager, while the board of directors is not obliged to follow instructions issued by the shareholders. The board of directors needs to treat all shareholders equally and has to carry out the company’s business to the benefit of the company while taking the interests of the shareholders and of the company’s employees as well as the public interest into consideration.
To protect creditors, shareholders and also other affiliated companies are not allowed to conclude contracts with the company that are not at arm's length. Contracts that are not in compliance with the strict Austrian capital maintenance rules would be null and void.
If a controlling shareholding in a joint stock corporation that is listed at the Vienna Stock Exchange is to be acquired, the obligation to provide a mandatory offer that is subject to minimum pricing rules and cannot be made conditional (except for legal conditions like regulatory approvals) is triggered. A shareholding of voting stock that exceeds 30% is considered as a controlling shareholding pursuant to the Takeover Act (unless the articles of association provide for a lower threshold).
Shareholders of a target company have no duties in the context of a merger or amalgamation.
Directors of companies in Bermuda are subject to statutory and common law duties. Under Bermuda law, duties are owed to the Company and not owed to shareholders individually but directors can be required to have a heightened awareness of the shareholder body as a whole in certain situations.
On a cash acquisition offer, there is authority to suggest that the directors should act so as ensure that shareholders are able to receive and accept an offer at the “best” price. Attention is often focused upon any deal protection mechanisms that may be implemented as part of or in the lead up to the negotiation process (whether such mechanisms are included within transaction documentation or constitutional arrangements), particular where there is a realistic possibility of an alternative takeover offer being which made which would, if allowed to proceed, represent a better deal for the shareholders.
Generally, a court will only interfere with the directors’ decisions in an acquisition context where (i) there is evidence of bad faith, (2) having taken all of the available courses of action into account, no sensible board could reasonably have come to the decision that the directors reached; or (3) the directors were negligent in the performance of their duties.
Absent such factors, the Bermuda courts will not look to retrospectively judge the merits of director decisions or act in a supervisory capacity as the board exercises its powers.
Directors are responsible for the company implementing its business purposes and exercising its powers. Unlike other jurisdictions, in Brazil the directors' responsibility is primarily to the company (as opposed to responsibility before the shareholder who appointed him/her), but responsibility may also be owed to co-directors, employees and creditors of the company. Directors' duties broadly comprise the general duties of directors set out in the Brazilian Corporation Law, fiduciary duties, and other statutory duties. Any or all of these may be relevant to a particular situation, but the most important are the duty of care, duty of loyalty, duty of abstention in the event of a conflict of interest and duties of confidentiality and information, as applicable. The most important are, of course, the duty of care and the duty of loyalty. In a nutshell, the duty of care requires that directors, prior to making a business decision, get informed of all reasonably available material information and consider alternatives (business judgment rule). Directors are also required to perform their duties diligently, keep themselves informed about the company's affairs and, with their co-directors, supervise and control such affairs. Overall, this responsibility cannot be delegated to any party. However, this does not prevent directors from relying on the experience and expertise of their colleagues. Directors must perform their duties in the best interests of the company and keep its affairs confidential (duty of confidentiality) - section 155 of the Brazilian Corporations Law. The duty of loyalty requires that directors act to protect the interests of the company and refrain from activities that would harm or disadvantage the company and its shareholders. This duty also imposes a duty of disclosure where failure to disclose could put the corporation or its shareholders in disadvantage. The duty of loyalty is implicated when a conflict arises between a director’s duty and his self-interest.
Regarding the duties of controlling shareholders, these are simply to comply with the Brazilian Laws and regulations (in particular the Brazilian Corporations' Law and CVM's rules and regulations) and, most importantly, to refrain from conducting the company against its corporate purposes and/or in a manner detrimental to minority shareholder rights, for the exclusive benefit of a certain party.
British Virgin Islands
BVI directors’ duties have two main sources; (i) the fiduciary duties under common law, which are generally described as being those of loyalty, honesty and good faith to the company; and (ii) the Act with Section 120 of the Act codifying the requirements for a director to exercise his duties honestly, in good faith and in the best interests of the company and section 121 of the Act requiring directors to exercise their powers for a proper purpose and not act in a manner that contravenes the Act or the company’s memorandum and articles of association.
As with most jurisdictions it is common practice for directors of BVI companies to be indemnified for breaches of duty and any ensuing fees, costs, claims, judgements and fines but the Act limits the instances in which such an indemnity can be provided. Section 132 of the Act requires the directors of BVI companies relying on an indemnity to have acted in the best interests of the company, honestly and in good faith. Where criminal proceedings have been brought against the director they will need to show that they had no reasonable cause to believe that their actions were dishonest.
Section 122 of the Act sets out the duty of care under the Act to be that of the reasonable director in the same circumstances taking into account, without limitation, the nature of the company, the nature of the decision and the positions of the director and the responsibilities undertaken by them.
Pursuant to common law rules, the directors of a company owe fiduciary duties (generally described as being those of loyalty, honesty and good faith) to such company. While it is common for directors of a company to be indemnified for certain breach of this duty, as a matter of public policy, it is not possible for directors to be indemnified for conduct amounting to wilful default, wilful neglect, actual fraud or dishonesty.
As discussed in question 8, the default position under the LLC Law is that, subject to any express provisions in the LLC agreement, the manager(s)/managing member(s) of an LLC will not owe any duty (fiduciary or otherwise) to the LLC other than the duty to act in good faith.
To the extent that consent to a merger or acquisition is procured via an information memorandum or proxy statement, civil liability in tort may arise for negligent misstatement or fraudulent misrepresentation. In addition, the Contracts Law (1996 Revision) gives certain statutory rights to damages in respect of negligent misstatements. There are certain criminal sanctions under the Penal Code (2013 Revision) for deceptive actions, including for any officer of a company (or person purporting to act as such) with intent to deceive members or creditors of the company about its affairs, who publishes or concurs in publishing a written statement or account which to their knowledge is or may be misleading, false or deceptive in a material particular.
Any disposition of property made at an undervalue by or on behalf of a company and with the intent to defraud its creditors, will be voidable: (i) under the Companies Law or LLC Law at the instance of the company’s official liquidator; or (ii) under the Fraudulent Dispositions Law (1996 Revision) at the instance of a creditor thereby prejudiced.
If the consideration is to be shares in a company, the Companies Law and the LLC Law prohibits an exempted company or LLC (as applicable) that is not listed on the CSX from making any invitation to the public in the Cayman Islands to subscribe for any of its securities.
ZL: According to Company Law, the board of directors is responsible to the board of shareholders or general meeting of shareholders, and is in charge of executing resolutions of the board of shareholders or general meeting of the shareholders, determining the company's operational plans and investment plans, formulating the company's plans on the combination, division, dissolution, or transformation of the company. The board of directors participate in the target company's management and decision making mainly through resolutions of the meetings of the board of directors.
Company Law does not confer any special responsibilities to the controlling shareholders, who like the other shareholders, decide on the company's operational guidelines and investment plans, and important matters of the company such as combination, division, dissolution, liquidation and transformation also mainly through resolutions of the board of shareholders or general meeting. Because controlling shareholders has advantage in shareholding ratio, they can usually determine the result of the decision-making over concrete issues pending resolutions of the general meeting, determine the composition of the board of directors through its control of the general meeting, and through its control of the board of directors, further determine the composition of the senior officers of the target company, and thus exercise overall control of the target company.
In a transaction concerning a private company, the role of the Board of Directors is usually quite limited. If a publicly listed target company is approached with a potential offer for the company’s shares, the Board of Directors has a duty to evaluate the seriousness of the approach. Depending on the offer, the Board of Directors may resolve to allow a potential acquirer to conduct due diligence investigations on the target, and potentially recommend the shareholders to either reject or approve the offer.
The managing directors have to apply the duty of care of a prudent business man and have to act in the interest of the company. The controlling shareholders have certain fiduciary duties towards the target company.
The executive board and the supervisory board of a stock corporation are far more independent of the shareholders’ meeting than their counterparts in a limited liability company. In particular, they are not subject to a shareholders’ authority to issue directives unless the company has entered into a domination agreement.
In the context of a public takeover, the boards of a listed stock corporation or SE must refrain from any actions that might frustrate the success of the tender offer. The Takeover Act does, however not prevent the executive board or the supervisory board from taking actions that would also have been taken by a diligent manager of a company not subject to a takeover bid. Moreover, the executive board is allowed to take actions either authorised by the supervisory board or the shareholders’ meeting. Finally, the executive board is free to explore and identify other bidders prepared to launch an alternative and better offer (white knight).
Furthermore, as a general principle, the members of both the executive board and the supervisory board always have to act in the best interest of the company, taking into account the interest of the shareholders and the other stakeholders. Therefore, the boards have to duly evaluate the merits of an offer as well as the chances and risks associated with the strategy pursued by the bidder and its consequences for the current strategy of the company. In particular, both boards have to assess whether or not (i) the offer properly values the target and its prospects and (ii) if it includes a sufficient premium for the transfer of control, taking into account the synergies raised in the event of a business combination. Based on this analysis, the boards have to decide whether or not they support or reject the offer. If a takeover bid is launched, the boards have to issue a response statement within a certain period of time.
Greek Law 2190/1920 stipulates that the members of the board of directors of a Greek company limited by shares have a general duty of care for and a duty of loyalty directly towards the company and indirectly to its shareholders for the loss of value of their shares. In a recent change in the trend of Greek jurisprudence, there have been some decisions which have recognised the business judgment rule and thus alleviated the burden of the company directors, insofar as they have acted in good faith, with loyalty and due care for the company’s interests.
With respect to mergers in specific, according to Law 2190/1920 each member of the board of Directors of the company to be absorbed is responsible towards the shareholders of these companies and every other third party for any negligence during the preparation and completion of the merger. Moreover, directors must not have competing interests with the interests of the company and if they do, there is a duty of disclosure.
No special provisions exist in relation to majority shareholders. However, directors, managers and majority shareholders in listed companies, are obliged to refrain from market abuse or market manipulation by spreading privileged information, pursuant to Law 3340/2005.
The directors should always have regard to their fiduciary duties as directors of a Guernsey company; directors must act in the best interest of the company at all times. Additionally, where applicable the directors must act in accordance with the provisions of the Takeover Code and the rules of any stock exchanges upon which the shares are listed.
The directors and shareholders of a Guernsey target company must also ensure that they do not commit an offence of market abuse or insider dealing or, for example, if the company is a GFSC regulated collective investment scheme, breach any relevant regulatory rules or fund documents.
The board of directors of a Norwegian target company have a fiduciary duty to act in the best interest of the company. In general, such fiduciary duty is interpreted to mean that directors shall act in the joint interest of all stakeholders and ensure that shareholders are treated equally. Furthermore, the fiduciary duty may be interpreted to include both a duty of care and a duty of loyalty.
The duty of care entails that the directors shall ensure to be informed with all material information that is reasonably available before making a business decision. Consequently, the directors must evaluate a proposed business combination in the light of risks and benefits of the proposed transaction, compared to other alternatives available. It is however not clear under Norwegian law to what extent the duty of care implies that the directors must inform themselves of other potential offerors or actively seeks alternative bidders.
The duty of loyalty requires that any decision by the board must be made on a "disinterested" basis. The directors may not take into consideration any personal benefit from a potential business combination. It is also assumed that the duty of loyalty requires that the best interest of the company and its shareholders take precedence over the interest of any director or any particular group of the company's shareholders that is not shared by the shareholders in general.
It is further assumed that the fiduciary duty of the directors implies an obligation to consider the interest of other stakeholders, for example employees and creditors of the company. Also, the board may have to take into consideration the joint interest of all stakeholders. With that being said, there are often specific legislation protection such other stakeholders that the directors have a general obligation to observe. The directors are further under an explicit duty set out in the company legislation not to undertake an act or measure that is likely to cause unjust enrichment to a shareholder or a third person at the cost of the company.
If a Norwegian listed company becomes the subject of a public takeover offer, the board of directors is obliged to evaluate the terms of the offer and issue a statement to its shareholders describing the board’s view on the advantages and disadvantages of the offer. Should the board consider itself unable to make a recommendation to the shareholders on whether they should or should not accept the bid, the board shall therefore account for the reasons.
In some situations, the directors may have increased duties when it comes to decisions on business combinations. The Code of Practice for Corporate Governance requires that in cases where the members of a target company's board or management have been in contact with the bidder in advance of an offer, the directors must exercise particular care to comply with the requirement of equal treatment of shareholders. Moreover, the board must ensure that it achieves the best possible bid terms for the shareholders. As a point of basis, the Code is only applicable to Norwegian companies listed on a regulated market, however, private company's may decide to comply with the Code, most often seen in companies with a dispersed group of shareholders and where shares are regularly traded.
As for controlling shareholders of a target company, there are no specific duties towards neither the minority shareholders nor the company just by the virtue of being controlling shareholders. Such shareholder will therefore in general be fee to act in his, her or its own best interest. However, shareholders may not use their controlling influence in a manner that is suited to cause unjust enrichment to a shareholder or a third party at the cost of the company or another shareholder. The protection against such abuse is applicable for both private and public companies and will limit the decision making authority of all shareholders, not only those in control.
Pursuant to Russian law, there are no specific duties of directors and/or controlling shareholders applicable to shares (interest) sales (unless they act as a party to the deal). In the event of corporate reorganisation (merger), like in connection with other affairs involving management of the company in question, directors are required, as a general rule, to act reasonably and in good faith in the interests of the relevant company.
Article 165 of the NCL makes it clear that managers of an LLC will be jointly liable to a company and its shareholders for damages resulting from the managers' violation of the NCL, the LLC's articles of association, or other mistakes committed by them in the supposed performance of their duties. Otherwise, the NCL is generally silent on the fiduciary duties of managers, but this is not to say that a manager has no obligations to the company or its shareholders. Indeed, commentators point to the fact that "mistakes" (and, prior to the NCL coming into effect, the phrase "wrongful acts" before that) can be construed widely, and that general principles of Sharia such as fairness and avoiding unjust enrichment and speculation, all contribute to a regime that, in practice, is in many ways analogous to the common law duties of directors in the UK.
For JSCs, the equivalent provision to Article 165 is Article 78 of the NCL, which notes that directors will be jointly liable to a company and its shareholders for damages resulting from their mismanagement of the company's affairs, as well as their violation of the NCL or the JSC articles. It remains to be seen whether this difference in language is intended to impose a different standard on JSC directors, assessing the impact of the decisions through the lens of "mismanagement" rather than merely "mistakes". At a minimum, it would be prudent to assume that the fiduciary duties of LLC directors also apply to JSC directors.
With regard to JSCs, the NCL also provides that directors must not:
• have any interest in the JSC's business or contracts, unless authorised annually by the shareholders;
• Receive loans from the JSC without annual approval from the shareholders;
• be involved in any competing business, unless authorised annually by the shareholders; and
• disclose confidential information to third parties or to shareholders, other than in connection with a general meeting.
PJSCs must also comply with the CMA's corporate governance regulations, which require directors to carry out their duties in a responsible manner, in good faith and with due diligence in an informed way. The listing rules of the CMA also provide that directors and senior executives of PJSCs must conduct themselves in such a way as to serve the interests of the company.
Isle of Man
The directors and controlling shareholders must continue to act in the best interests of the target.
Directors of a target company owe what is known as a duty of care of a prudent manager (zenkanchui gimu) and duty of loyalty (chujitsu gimu) to the company under the Companies Act. These general principles guide the process of determining the duties of directors, but courts tend to afford directors a great degree of discretion in relation to business judgment decisions, tending to find that directors have breached these duties only when the decision making process and the decision itself are substantially irrational.
A common example of a duty in relation to an M&A transaction involves directors of a company who are personally involved in a management buy-out (MBO) being required to pursue transfer of the company from the shareholders at a fair purchase price which reflects the fair value of the company. There are no clear rules, however, requiring directors of a target company to pursue the best value reasonably available for the shareholders to the extent of the Revlon Rule, for example.
Under Japanese laws, there are no clear statutes or legal precedents regarding the duties of controlling shareholders of a target company.
There are generally no statutory duties imposed on the controlling shareholders of a target company in the event of a potential acquisition.
The directors of a listed target company must give their opinion on a tender offer and appoint a financial adviser to give an opinion, which must be circulated to shareholders together with the directors’ opinion- see also paragraph 23. The directors have a duty of loyalty but this is owed to the company, not to the shareholders individually.
There are statutory duties imposed on the listed target company in the event of a potential acquisition. During the period from a formal announcement of a tender offer until completion of the tender offer, the target company is generally restricted from undertaking the following activities unless approval is obtained from its shareholders meeting by the specified majority (which varies according to the transaction): -
- offering new shares or convertible securities;
- acquiring or disposing of assets which are of material size or necessary for the operation of the business of the target company (including IP rights) having a value of more than 10 per cent compared with the criteria specified in the SET’s class transaction notification;
- incurring debts or entering into, amending or terminating a material agreement other than in the ordinary course of the business of the target company;
- conducting a share buy-back (treasury stock) or supporting or influencing its subsidiary or affiliate company in the purchase of its own shares; and
- declaring and paying interim dividends to the shareholders other than in the ordinary course of business.
In addition to their obligations to act at all times, in the interest of the company and its shareholders as a whole and ensure equality of treatment for all shareholders of the same class, in a takeover scenario, the target’s board is specifically required to publish an opinion on the bid. The opinion has to set out the board’s views on the effects of the implementation of the bid on the company’s interests and on the offeror’s plans for the target company and their likely repercussions on employment and the locations of the company’s places of business.
Holders of substantial shareholdings seeking to dispose of their shares (which may not necessarily be controlling shareholders) are obliged to endeavour to prevent the creation of a false market and are bound to take care that statements which may mislead remaining shareholders or the market are not made. Furthermore, the disposal of shares to which voting rights are attached triggers an obligation on the shareholders to inform the company and the Listing Authority of the proportion of voting rights held following such disposal where that proportion reaches, exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% and 90%.
The fiduciary duty that directors owe shareholders has two primary elements—the duty of loyalty and the duty of care. To fulfil their duty of loyalty, directors must act in what they believe to be the best interests of the corporation, and not in their own personal interest. The duty of care requires directors to act on an informed basis after considering relevant information and with adequate deliberation. When reviewing whether directors have fulfilled their duties, courts will presume under the business judgement rule that they made their decisions on an informed basis, in good faith and with the belief that they were acting in the best interests of the company as long as a majority of the directors are independent and disinterested. This presumption may be rebutted in litigation challenging the action.
When a target company’s board of directors determines to pursue a sale of control, or adopts defensive measures intended to fend off a takeover attempt or intentionally interferes with the shareholders’ franchise, the business judgement rule presumption generally ceases to apply in Delaware. Rather, a reviewing court will apply enhanced scrutiny to the substance of a board’s actions. In this type of review, a court’s inquiry goes beyond whether the board’s actions were rational and examines them to determine if they met certain criteria, such as whether a defensive measure was taken in response to a threat to a legitimate corporate objective and was reasonable in relation to the threat (i.e., not preclusive or coercive). A number of states have chosen not to apply this type of enhanced scrutiny to board decisions relating to M&A activity, with the choice reflected either in a statutory provision or in case law.
In certain other circumstances, such as if a majority of a company’s board is not independent or disinterested with respect to a transaction, a reviewing court will review the actions of the target company’s board under the “entire fairness” standard. This is the most onerous standard of review, and requires the directors to prove that they used a fair process and obtained a fair price. However, the presumption of the business judgement rule can be restored if the transaction was approved by a majority of both the disinterested directors and the disinterested shareholders.
Controlling shareholders generally owe duties to minority shareholders. While these duties do not require them to vote in a particular manner with respect to deals with third parties, they do restrict their ability to engage in self-dealing transactions with the controlled company. If a controlling shareholder engages in a self-dealing transaction with the corporation it controls, such as a merger with another company it controls or a freeze-out in which it buys out minority shareholders, courts will examine its conduct under the entire fairness standard. As with self-dealing transactions with directors, approval of a transaction with a controlling shareholder by disinterested directors and a fully informed vote of a majority of the minority shareholders can restore the presumptions of the business judgment rule.
The directors must act in accordance with the provisions of the Companies Act 2001 and other relevant legislations and should always (i) have regard to their fiduciary duties as directors of a Mauritius company without regard to any personal or family interests, (ii) act in the interests of shareholders, employees and creditors and (iii) act in good faith.
The directors and shareholders of the target company must also ensure that they do not commit an offence of market abuse, insider dealing or breach of confidentiality, if the company is a regulated collective investment scheme, breach any relevant regulatory rules or fund documents.
The target directors have their general duties under Jersey law as directors to act honestly and in good faith with a view to the best interests of the company and exercise due care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Directors of the target company are required, as a general rule, to act reasonably, and in good faith in the interests of their company.
Romania has rules which forbid financial assistance, or misuse of corporate assets, therefore controlling shareholders should take into account such limitations when structuring the deal.
In the event of a merger, pursuant to Romanian Law, the directors of the target company, alongside with the ones of the buyer must draft a merger project which will be submitted with the relevant authorities.
Also in case of mergers, the merger must be approved by the general meeting of shareholders of both companies, target and buyer.
Under the Companies Act, directors have a duty to act in good faith and in the best interests of a company, and to act for a proper purpose.
Directors of a code company that is the subject of a takeover offer have various procedural obligations under the Takeovers Code, including preparing a Target Company Statement and commission an independent advisor report.
There are no specific duties imposed on controlling shareholders.
The Companies Act sets out the general duties owed by directors to their companies.
These duties are based on principles established through case law. The duties which are most relevant in the context of M&A activity are to:
- promote the success of the company for the benefit of its members as a whole;
- act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred; and
- exercise independent judgment.
In discharging the above duties in the context of a proposed merger, directors are required to have regard to a number of factors, including the long term implications of the proposed transaction, its impact on employees and other stakeholders and the effect on the company's longer term business prospects.
These duties can raise some challenging conflicts for directors when considering proposed bids, particularly those of a hostile nature, as these can give rise to situations where short and longer term interest may not be wholly aligned. A director might conclude, in good faith, for example, that the benefit of a bid at a premium to the company's existing share price is outweighed by the potential longer term impact on the target's business of the bid in question.
These duties are owed to the target company directly, and can only be enforced by the target company.
The Code also imposes a duty on target directors to ensure, so far as they are reasonably able, compliance with its provisions. The Code, furthermore, requires directors of a target to take responsibility for every document which is published by or on behalf of that company in connection with an offer. The directors must accept responsibility for the information contained in any document or advertisement relating to the offer and ensure that, to the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case), the information contained in that document is in accordance with the facts and does not omit anything likely to affect the import of such information.
Controlling shareholders are not subject to the same duties as those owed by a director and are generally free to act in their own self-interest, subject to a general duty to not act in a manner which is oppressive to minority shareholders.
The same broad principles will be applicable in the context of private mergers, although it will generally also be advisable to carefully consider the articles of the target company and any related shareholder agreements, as these will often contain additional approval or consent rights which could be or relevance.
The managing body of the target company may direct and provide the potential acquirer with the information in a duly and a confidential way. In this regard, as the process may move forward, the managing body could inform the shareholders regarding the interest of a third potential acquirer and the eventual conditions of the proposed transaction. Moreover, the provision of information depends on the due diligence and tender process, as it changes whether there is only one potential acquirer or there are several.
In relation to the directors´ duties, there are several obligations which must be fulfilled by the management body. In this regard, they must act diligently (they will carry out their tasks with the diligence of a prudent business person and be loyal to the interests of the company, act in the best interest of the company and comply with the duties established in the by-laws and the applicable laws and regulation).
Moreover, these obligations imply:
- the duty to notify an eventual conflict of interest: any direct or indirect conflict of interest that might arise and be in any way damaging to the company’s interest;
- the prohibition to compete against the company (unless previously authorized by the company, the directors may not carry out, whether in their own name or on behalf of a third party, activities that are identical or similar to those of the company’s corporate purpose);
- the prohibition to take advantage of business opportunities regarding investments or activities affecting the company’s assets when that investment was known by the member of the company as a consequence of their condition as directors, or in the event that the company had an interest in it; and
- the obligation of keeping a duty of secrecy in relation to confidential information known due to their position, unless its disclosure is allowed by law.