What are the duties of the directors and controlling shareholders of a target company?
Mergers & Acquisitions (2nd edition)
The board of directors of an Offshore Listing Vehicle will remain subject to the Listing Rules and must fulfil their fiduciary duties and duties of skill, care and diligence to a standard in accordance with the standard established by Hong Kong law. This means that every director must, in the performance of his duties as a director, amongst other things, act honestly and in good faith and in the interests of the company as a whole, and act for a proper purpose.
Please refer to the relevant Offshore Chapter for more detail on the duties of the directors and controlling shareholders of a target company incorporated in an offshore jurisdiction.
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 interests of the company. The shareholders are entitled to issue instructions to the managing directors (see above question 8).
In stock corporations the board of directors has to manage the company, is responsible for officially representing the companies 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 (see above question 8). 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 are null and void.
If a controlling shareholding in a 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 such as 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).
The duties of directors of a UK target company are set out in the Companies Act 2006, which replaced the common law rules relating to directors’ duties. Regard to the common law rules still needs to be had however.
There are seven general directors’ duties and, in the context of an M&A transaction, the following duties are likely to be the most relevant:
- Duty to act within powers (section 171): a director must act in accordance with the company’s constitution and must only exercise his or her powers for their proper purpose;
- Duty to promote the success of the company (section 172);
- Duty to exercise independent judgment (section 173);
- Duty to avoid conflicts (section 175); and
- Duty to exercise reasonable care, skill and diligence.
The duties are owed to the company and not the shareholders and only the company can enforce the duties. There is case law, however, that supports the proposition that in the context of a takeover, some duties are owed directly to shareholders, particularly with respect to the supplying of information to shareholders regarding a takeover offer and in expressing a view whether to accept the offer or not.
In the context of a public M&A transaction, and as highlighted in question 8 above, the Code sets out a number of requirements in relation to the target directors’ responsibilities. These include responsibility for the documentation published by the target company, obligations to obtain competent independent advice and the obligations set out in the General Principles of the Code relating to ensuring equal treatment of all shareholders.
Shareholders do not owe fiduciary duties to other shareholders whether majority or controlling shareholders or otherwise. Whilst minority shareholders do not, per se, have any right to challenge the majority, there are exceptions to this general rule which are limited in nature. These include a claim for unfair prejudice where the affairs of the company have been, or are being or will be conducted in a way that is unfairly prejudicial to some of its shareholders (including the shareholder bringing the unfair prejudice action).
These, again, vary, based on the type of company:
- limited liability company – shareholders are required to pay the price of the quota they hold, participate in the management of the company, assist in facilitating the company’s business and carry out the decisions of the general shareholders’ meeting. Limited liability companies are managed by their manager(s). The manager has the duty to organize and manage the business of the company in accordance with the law and the decisions of the general shareholders’ meeting. The manager also has the right and the duty to represent the company. The manager is liable for damages, caused to the company.
- joint-stock company – the law does not impose imperative duties on shareholders beyond payment of the full price of the acquired shares. Directors are obligated to carry out their functions with the duty of a prudent businessman and must operate in the interest of the company and its shareholders. They cannot disclose information, which they acquired in the capacity of director, if such information would impact the business and the development of the company. Prior to their election to the board, a director must disclose to the shareholders their participation in companies when such participation constitutes (i) ownership of over 25% of the capital, (ii) being an unlimited shareholder, (iii) having management functions (i.e. director, procurator, etc.). Such participations must also be disclosed if they arise after election to the board. Directors cannot carry out commercial activity, which is in competition to the activity of the company, unless this is explicitly allowed under the company’s articles of association or by the respective company’s body, responsible with appointment of the director. Additionally, they cannot participate in companies, which carry out such commercial activities. When assuming the position, a director must provide a guarantee for their mandate in an amount, determined by the general shareholders’ meeting (but not less than three times their gross remuneration). Directors are also under obligation and are liable to file for administration if the company becomes insolvent.
Pursuant to Colombian law, the directors of a company must act in good faith, with loyalty and with the diligence of a “good businessman”. Their actions must be carried out in the best interest of the company and considering the interests of the shareholders. This means that directors must (i) make their reasonable efforts seeking the proper development of the company’s corporate activities and (ii) ensure the strict compliance with legal and statutory provisions.
In the same line, the controlling shareholders (and all shareholders in general) of a target company cannot exercise their vote abusively. If the vote is exercised seeking to cause harm to the company or to other shareholders or to obtain an unjustified advantage, such vote would be deemed to be an abusive vote and may be declared void by a judge or arbitration panel.
Both directors and shareholders are liable before the company, other shareholders and third parties for their negligent or fraudulent actions. Directors may also be liable before third parties due to the breach of their fiduciary duties.
The obligations of the directors towards the shareholders are focused on a fundamental duty of loyalty imposed by the judges. This duty derives from the very mission of the officer who, as a corporate officer, must exercise his powers in the interest of the company. It follows that he cannot take advantage of his privileged position to exercise his powers in another interest, either his own or that of a competing company. This is first of all true when he acquires, directly or through an intermediary company, shares or property to the detriment of shareholders. This translates into the obligation not to compete in a wrongful manner with the company he manages.
Controlling shareholders must respect the rights of minority shareholders. In particular, they must not commit majority abuse: any vote contrary to the social interest and issued with the sole intention of favouring the majority to the detriment of other shareholders will be sanctioned.
The Companies Act imposes a range of duties on directors including, a duty to act in good faith and in the best interests of a company, a duty to act for a proper purpose and a duty not to allow a company to trade in a reckless manner.
In the context of a listed company, the Takeovers Code imposes further obligations on the directors and board of a target company that are largely procedural in nature, with the primary obligation being the preparation of a target company statement and provision of an independent advisor report which provide the directors’ view on the merits of the takeover.
Controlling shareholders of a target company do not have specific duties imposed on them.
As a matter of principle, a board member is deemed as an agent of the shareholders. The board owes a “fiduciary duty” to the target company and its shareholders to act in the company’s best interest and can be held liable for breach of such fiduciary duty.
As an illustration of the fiduciary duty, the Companies Law has obliged board members to advise the board regarding any transaction in which a member may have interest- with no right to vote. Moreover, a director may not trade in his favor or in favor of a third party in activities similar to the activities of the company.
The main obligations for controlling shareholders is not to prejudice the rights of the other –minority – shareholders. In this respect, the Companies Law has provided that it is not permissible to increase the obligations of the shareholders by the Extra Ordinary General Assembly; and any resolution issued by the General Assembly affecting the core and basic rights of shareholders will be deemed null and void; and decisions issued by the General Assembly in favor of or against a shareholder or a group of shareholders may be annulled.
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 the 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, willful neglect, actual fraud or dishonesty.
As discussed in question 8 above, 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.
No specific duties are imposed on directors of privately held companies in relation to acquisitions, save for a general duty to be impartial regarding the choices of the shareholders and to act in the company’s interests.
Conversely, with regard to publicly held companies, Art. 104 of the Consolidated Financial Act, in furtherance of EU Directive 2004/25/CE, introduced the “passivity rule”, which aims to balance the powers of directors with the interest of the shareholders in evaluating an offer from a third party. To this extent, directors must refrain from taking any action that could conflict with the goals of the offer, unless the action is first approved by resolution of an extraordinary shareholders’ meeting. Merely seeking other offers is not considered to conflict with the goals of the offer.
In the case of a public deal, the first responsibility of target directors in any offer is to obtain competent independent advice from a financial adviser. Directors must ensure that they observe their fiduciary duties to the company and act honestly and in good faith in the best interests of the company. These duties and other obligations will apply to the target’s directors in deciding whether to engage with a potential bidder, and ultimately in deciding whether to recommend, or not recommend, an offer or transaction to the shareholders. Controlling shareholders are not subject to any specific duties.
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.
The duties of the directors of companies in Cyprus are not fully codified under Cyprus Companies Law. Directors duties in Cyprus are an amalgam of statutory duties, common law principles and the duties contained in the articles of association of a specific company.
In particular, the duties of the directors of the target company include the following:
a) To act in good faith, in the best interest of the company and to use their powers to benefit the company;
b) To perform their duties with a reasonable degree of skill and diligence;
c) To avoid conflicts of interest; and
d) To act in a manner that is commercial justifiable for the benefit of the company.
The above duties may, in the context of a proposed merger, give rise to several considerations for the directors of the merging companies, including short vs long term implications of the proposed transaction as well as the impact on employees and other stakeholders.
In addition to the above, the Cyprus Public Takeover Law sets out several directors duties applicable in the case of a public takeover. Those are as follows:
a) When directors and their close relatives sell shares or enter into transactions with a third person, as a result of which that third person is required to make a bid under the Public Takeover Law, the said directors and the persons closely related to them must ensure that as a condition of the sale or other relevant transaction, the third person undertakes to fulfil his obligations under the Public Takeover Law;
b) The offeror, nominees of the offeror and persons acting in concert with it may not be appointed to the board of the target company, nor may they exercise, or procure the exercise of, the votes attaching to any shares they hold in the target company, until the expiration of the time allowed for acceptance of the bid;
c) Following the announcement of the decision to make a bid, the board of the target company is obliged to provide quick and accurate information to its shareholders and the representatives of its employees or, where there are no such representatives, to the employees themselves regarding the content of the bid, as well as about (a) any information about any material change in information previously announced or published; (b) any revision or revocation of the bid; (c) any competing takeover bids submitted; (d) the result of the takeover bid; (e) the views of the board as well as those of special experts on the takeover bid or the revised or the competing bid; and (f) anything else on the takeover bid and for every document or information made public according to the present Law.
d) The board of the target company shall draw up and make publicly available, a document setting out, inter alia, its opinion of the bid or the revised or competing bid as well as the reasons on which it is based.
e) With the exception of seeking alternative bids, as soon as the board of the target company becomes aware that a bid is imminent and until the expiration of the time allowed for acceptance or the revocation or cancellation of the bid, it may not, without prior authorization of the general meeting of shareholders, take any action which may result in the frustration of the bid.
f) In addition to the generality of the preceding paragraph (e), the board of the target company shall obtain the prior authorization of the general meeting of shareholders before deciding, inter alia, (i) the issuing of shares of the company; (ii) any lawful acts entailing the substantial differentiation of the assets or the obligations of the company and (iii) the buy-back of own shares, unless with the approval of the Commission, which is granted when the Commission is satisfied that it does not result in the frustration of the bid.
As regards the duties of the controlling shareholders of the target company, those are stemming either from the articles of association of the company (e.g. pre-emption rights of the shareholders and/or any other restrictions as to the transfer of shares and/or exercise of their voting rights) or from any shareholders’ agreement that may be in place.
Finally, controlling shareholders are under a duty not to act in an oppressive manner to the minority shareholders.
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).
The fiduciary duty that directors owe shareholders has two primary elements—the duty of loyalty and the duty of care. To fulfill 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 judgment 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 judgment 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 judgment 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 role of the Board of Directors of the target company is usually quite limited in a private share transfer transaction. With respect to publicly listed companies, the Board of Directors has a duty to evaluate the seriousness of an approach for a potential offer. The Board of Directors may, depending on the merits of the offer, resolve to allow a potential offeror to conduct a due diligence on the target. Further, the Board of Directors is to announce its opinion regarding the offer and the reasons for this opinion no later than two weeks prior to the expiry of the acceptance period. Controlling shareholders of a target company do not have any duties.
In the Philippines, the fiduciary duties of the members of the board of directors translate to a three-fold duty: duty of obedience, duty of diligence, and duty of loyalty.
Duty of obedience. The directors elected are mandated to perform the duties enjoined on them by law and the by-laws of the corporation. They have the duty to act within the scope of their authority. In this regard, the directors are required to direct the affairs of the corporation only in accordance with the purposes for which it was organized.
Duty of diligence. The directors are required to exercise due care in the performance of their functions. Consequently, they shall be held liable if they willfully and knowingly vote or assent to patently unlawful acts of the corporation, or if they are guilty of gross negligence or bad faith in directing the affairs of the corporation.
Duty of loyalty. Directors owe fiduciary duty to the corporation and to the shareholders. Hence, the directors cannot serve themselves first and their cestuis, second. Because of this duty, the Corporation Code provides for different rules on self-dealing directors (Section 32), contracts between corporations with interlocking directors (Section 30), usurpation of corporate business opportunity (Section 34), and conflict of interest.
In this jurisdiction, controlling shareholders have statutory no duty towards the target corporation.
The directors should always have regard to their fiduciary duties as directors of a Guernsey company and as such directors must act in the best interest of the company at all times. Director duties have not been codified in Guernsey, however the recent case of Carlyle Capital Corporation Limited v Conway & Others decided in the Royal Court of Guernsey has provided greater certainty over what these duties are, essentially mirroring the fiduciary duties and duty of care that directors have in the UK. 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.
A director owes his or her company a duty of care and a duty of loyalty. Generally speaking, under the business judgement rule in Japan, directors have broad discretion in making business decisions. However, if there is a potential conflict of interest between the interests of a director and his or her company or its shareholders, such as in the case of a management buy-out, an acquisition of a minority stake by a parent company or a hostile takeover, it is generally understood that the business judgement rule does not apply in such situations. Having said so, there are only a few reported court cases in Japan that have dealt with decisions made by directors in the context of M&A transactions, and the courts have not yet established a clear standard to be applied to the decisions of directors under such circumstances.
For controlling shareholders, however, the Companies Act does not explicitly impose any general duties on controlling shareholders to their company or their fellow shareholders. In addition, there are no court decisions on the issue of a controlling shareholder’s duties. But, some scholars have suggested that controlling shareholders should owe fiduciary duties to their companies and their fellow shareholders; however, this view is not the prevailing one.
Isle of Man
The directors must continue to act in the best interests of the target.
In the Isle of Man, the duties of a director of an Isle of Man company are governed by both statute and common law. Directors have a duty at common law to act in the best interest of the company and to act in the best interest of the company at all times.
Directors should also act in accordance with the Takeover Code, if this is applicable, and the rules of any stock exchanges upon which the company’s shares are listed.
A controlling shareholder will not be subject to the same duties as those owed by a director. However, it should be borne in mind by both the directors and shareholders that a minority shareholder could bring a claim against the company if they believe that the actions of the company are unfairly prejudicial or oppressive to any minority shareholders.
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.
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 to 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 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.
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.
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 the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Directors owe a duty of care and a duty of loyalty to their company under the TCC. The duty of loyalty requires directors to refrain from concluding transactions with the company or competing with the company and the duty of care requires directors to protect the company’s interests in compliance with the principles of good faith.
The duty of care standard introduced by the TCC echoes the business judgment rule that is common in a number of jurisdictions. The TCC requires board members to act as prudent executives and protect the interests of the company while performing their duties in good faith. Accordingly, any decision that is made in good faith, is based on reasonable cause, and that falls within the board member’s scope of authority designated by the articles of association does not give rise to liability.
In groups of companies, controlling shareholders are expected to refrain from taking any action that would cause detriment to the company under their control. For instance, if a controlling shareholder leads its subsidiary to enter into transactions where the subsidiary has to transfer assets, funds, employees, or receivables, or reduce the subsidiary’s profits or create security interests on its assets, then the controlling shareholder may be subject to liability for losses suffered within the same financial year.
Directors owe a fiduciary duty to the company and the shareholders and must act in good faith and in the best interest of the company at all times. Subject to the transaction structure, the directors must ensure that the terms of the transaction are not inimical to the interest of the Company. Furthermore, members of the board are also required to disclose any interest they may have in any potential transaction involving the target. In that instance, the affected director will not be allowed to vote.
Where the acquisition is being structured pursuant to the mandatory take-over rules, the directors will issue a Directors’ circular stating the recommendations (approval or disagreement) of the directors to the take-over bid.
The controlling shareholders of a target company have no specific legal role in a merger or acquisition transaction. However, a minority shareholder can bring a claim if they believe that the actions of the company are unfairly prejudicial or oppressive to the minority shareholders. Furthermore, where the controlling shareholder has an interest in the acquirer and the transaction is structured as a Scheme of Arrangement, the controlling shareholder will be precluded from voting at the meeting to consider the scheme (i) if the target is a publicly listed company; or (ii) in any other case, at the direction of the SEC.
The core provisions on the duties and liability of directors and controlling shareholders of a Hungarian company are set out in the Civil Code and in Act XLIX of 1991 on the Bankruptcy Procedure and the Liquidation Procedure (the Insolvency Act).
As a general rule, the directors of a Hungarian company must manage the company in accordance with the laws, the articles of association and the decisions of the shareholders’ meeting while prioritizing the interests of the company. This duty becomes more diversified in case of a threatening insolvency of the company when the management must also take into account the interests of the company’s creditors. As a general rule, directors are liable towards the company for the breach of their above legal obligations. However, in case of the company’s insolvency, directors may also be held liable towards the company’s creditors if the company is liquidated and creditors’ claims remain unsatisfied.
Similarly, controlling shareholders may bear liability towards the company’s creditors for their decisions made regarding the controlled company. Under the Civil Code, controlling shareholders may be held liable towards the company’s creditors if the company is liquidated due to the controlling shareholder’s detrimental business policy conducted with respect to the company. Pursuant to the relevant provisions of the Insolvency Act, a controlling shareholder may be held liable towards creditors for wrongful trading in case it acted as shadow director of the company and did not take into consideration the interests of the company’s creditors.