What are the duties of the directors and controlling shareholders of a target company?
Mergers & Acquisitions (2nd edition)
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.
Directors owe fiduciary duties to the company, as well as statutory directors’ duties under the MCL, such as to act with due care and diligence and in good faith in the company’s best interests. Although not specifically referred to, this would apply in the context of business combinations.
Minority shareholders also have rights under the MCL in respect of controlling shareholders to take action against conduct that is oppressive.
Directors must manage the affairs of the company lawfully and in line with their duty of care, without abusing any of their rights. They must also refrain from any action that could impinge upon the interests of the company and cannot engage in activities that relate to the company’s goals for their own interests, nor acquire stakes at competing partnerships.
Directors of listed companies are required to pursue the long-term value and the general interest of the company, and they must allow shareholders to evaluate the public bid. They are prohibited to pursue their own interests, if such are not aligned with the company’s interests. More specifically, the BoD of a target listed company is only entitled to seek alternative bids. It is prohibited to act in any way that could result in the public bid being withdrawn or cancelled, if the consensus of the GA has not been obtained first.
Directors and Shareholders of a listed company must neither use qualified information related to the company, in order to acquire or dispose of shares, if the value of the illegal tradings exceeds a certain limit, nor recommend the acquisition or disposal of shares or the amendment or cancellation of an order relating to shares or publish qualified information.
As a general rule, in a takeover situation, the management board and the supervisory board of the target company have to act in the best interest of the target company. The management board of the target company is subject to a so-called “neutrality obligation” pursuant to which the management board must generally not take any actions that may prevent the success of the offer from the time of publication of a decision to make a takeover offer or the acquisition of control until the publication of the takeover result. It is irrelevant whether the action has indeed prevented the offer or whether it is merely intended as a frustration mechanism.
Such prohibition on frustration does, however, not apply to:
- any actions that a diligent and conscientious manager would perform in the absence of a tender offer;
- the search for a competing offer (“white knight”);
- any actions that have been approved by the supervisory board of the target; and
- any actions that are based on an authorization by a shareholders’ resolution passed by the shareholders prior to the announcement of the acquisition of control, subject to approval of such particular defensive action by the supervisory board. Such authorization can only be granted for a maximum term of 18 months.
Moreover, pursuant to a fundamental principle of the German Stock Corporation Act, the directors of a German stock corporation must treat all shareholders equally.
Also, during the offer period the management is obviously bound to comply with capital markets regulation, particularly regarding ad-hoc-announcements.
Immediately following receipt of the offer document, the management board and the supervisory board of the target have to issue a reasoned statement on the offer. In such statement, they must set out their views on (i) the kind and amount of the offered consideration, (ii) the expected consequences for the target, its employees and their representatives, (iii) the goals pursued by the bidder and (iv) whether the board members intend to tender any shares held by them in the offer. Furthermore, the management board is obliged to forward the offer document and the statement to the works council, or to the employees if no works council exists.
During the entire takeover, the management board of the target shall seek the cooperation of its own supervisory board and ensure that the process will be as smooth as possible.
There are no transaction-related duties of the controlling shareholders in an M&A transaction. However, shareholders are subject to general fiduciary duties, such as to be loyal to the company, to actively promote its objectives and to keep it from harm. Fiduciary duties can comprise duties to act, (for example to vote in a specific way), as well as duties to forebear from acting. The violation of fiduciary duties can give rise to damage claims and also claims for performance.
A board of directors has the duty to exercise its powers in the interest of the company.
The board of directors of a target company may further have certain specific duties in relation to M&A transactions in application of procedures laid down in the Belgian Companies’ Code. For example, the board of directors of companies intending to merge are required to establish a merger proposal, which needs to be made public and approved by the shareholders. Further, the board of each company involved in the merger should in principle issue a special report setting out the state of the assets and liabilities of the companies to be merged and explaining and justifying the desirability of the merger, the conditions and arrangements for it and its effects, the methods used to determine the share exchange ratio, and the relative importance attached to these evaluation methods.
Belgian regulation on public offers imposes certain duties upon the board of directors of a target company. These include certain information obligations towards employees (see below – question 10) and providing its opinion on the offer in a response memorandum, covering amongst others (i) the consequences of the bid, taking into account the interests of the company, the shareholders, the employees and creditors, and (ii) the bidder’s strategic plans for the target and related estimated impact on the target’s result and employment. If the board’s opinion is not unanimous, the dissenting opinions should be included in the response memorandum.
If a voluntary public offer is launched by a bidder that is already in control over the target, the independent directors of the target have the specific duty to appoint an independent expert to issue a report in relation to the securities that are the object of the offer. The bidder must cover the cost of the independent expert.
Notwithstanding the foregoing, Belgian law does not impose specific duties upon a controlling shareholder in connection with M&A transactions.
9.1 Vietnam law imposes upon governance and managerial officers of Vietnam-domiciled companies certain duties being broadly similar to the duties imposed upon directors and officers in many jurisdictions worldwide.
9.2 Officers’ duties vary, depending upon factors such as the corporate form of the relevant company, whether the relevant company is public or private, and the specific office(s) held by each respective officer.
9.3 As a general proposition, however, all governance officers (such as (in the case of JSCs) Board of Management members or (in the case of LLCs) Members’ Council Representatives) and executive or senior managerial officers (such as General Directors, Deputy General Directors, Directors, or Deputy Directors – which in Vietnam are executive managerial offices, as opposed to governance offices) are subject to the following broad duties:
- to exercise their delegated powers and perform their delegated obligations in accordance with Vietnamese law, the charter of the relevant company, and any resolutions of any superior decision-making bodies or offices within the relevant company;
- to exercise their delegated powers and perform their delegated obligations in a manner which is honest, prudent, to the best of their ability, and with a view to furthering the best and lawful interests of the relevant company to the maximum possible extent;
- to act in a manner which is loyal to the interests of the relevant company and the interests of the shareholders or member(s);
- not to use for their own personal benefit, or the benefit of any person or entity not being the relevant company, any assets, information, know-how, or business opportunities of the relevant company;
- not to abuse their position within the relevant company for their own personal benefit or the benefit of any person or entity not being the relevant company;
- to declare to the relevant company all equity interests held by them and/or their related persons in any other Vietnam-domiciled companies (limited, in the case of any other JSC, to controlling shareholding stakes);
- to declare to the relevant company any interests which they or their related persons have which may conflict with their duties as officers of the relevant company; and
- to abstain from voting on any proposed resolutions in respect of which they have any conflict of interest.
9.4 In the case of public companies (whether listed or unlisted), governance or managerial officers who are also shareholders are subject to certain public disclosure obligations in relation to various matters such as acquisitions or divestments of shares in the relevant company.
9.5 As a general proposition, controlling shareholders or members are not subject to any particular duties under Vietnam law, as compared with any other shareholders or members.
9.6 It is, however, important to note that in the case of public companies (whether listed or unlisted);
- “major shareholders” of public companies (that is, shareholders holding ≥5% of issued and paid-up voting share capital, aggregated with their related persons or entities) (Major Shareholders), Vietnam law imposes certain public disclosure obligations (in relation to matters such as acquisitions or divestments of shares in the relevant company) to which shareholders with smaller holdings are not subject; and
- shareholders holding or proposing to hold (together with their related persons or entities on an aggregated basis) ≥25% of issued and paid-up voting share capital are subject to Mandatory Public Offer obligations in relation to certain types of proposed share acquisitions.
Directors of a Swiss company must safeguard the company's interests. Directors are subject to a duty of care and loyalty vis-à-vis the company. In addition, directors must treat shareholders equally in like circumstances. In the context of a public offer, the board of the target company will have to review the proposed offer and determine within its fiduciary duties whether it is in the best interest of the company. If the board concludes, that a potential offer is not in the company's best interest, the board will terminate discussions with the potential bidder. Once an offer has been formally made, Swiss takeover law imposes certain specific obligations on the board of the target. Particularly, the board will have to prepare a report which must include, among others, the board's recommendation (or at least a summary of the pros and cons of the offer), the reasons underlying the board's position, potential conflicts of interests and the measures taken to address such conflicts, and the financial consequences of the offer for the members of the board and the executive management. Upon the announcement of a public offer, the board may longer take defense measures (e.g., sale of substantial assets, repurchase of shares).
Controlling shareholders are not subject to any duty of care or of loyalty vis-à-vis the company or other (minority) shareholders. However, during a public takeover, shareholders holding 3% or more of the voting rights in the target a required to notify the TOB and SIX of any dealings in securities of the target company.
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 a 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. The same obligation to act reasonably and in good faith applied to shareholders and other parties directly or indirectly controlling the company in question.
The main duties of the directors and controlling shareholders are: (i) acting in the best interest of the company and (ii) acting in good faith (i.e. also observing the interests of the minority shareholders).
Other duties of the directors include complying with the decisions of the shareholders meeting; and complying with the duties imposed by law and the articles of association.
Under the QFMA Mergers & Acquisitions Rules, the directors of the company should not act in a way that could harm the company or make the deal more complex. Shareholders’ spouses and children are not allowed to trade shares before a decision has been made on whether or not to implement an acquisition or merger. Shareholders and directors may not exploit any information for trading purposes (Article 10).
Furthermore, board of directors’ spouses and children cannot trade their shares from the time the merger and acquisition has been announced until a general assembly has been held and decision has been taken on whether to implement, or not, the acquisition or merger (Article 11).