What are the duties of the directors and controlling shareholders of a target company?
Mergers & Acquisitions (3rd edition)
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 boards 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 (from both a legal and economic perspective) 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.
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.
The directors are subject to certain fiduciary duties under Colombian law, including acting without conflict of interest, in good faith, with diligence and in the best interests of the target company, including fostering compliance with the law and the by-laws of the target company, granting equitable treatment to all shareholders and abstaining from using privileged information.
9.1 As a general principle, in a takeover procedure, the management board and the supervisory board of the target company must act in the best interest of the target company. The managing directors must apply the duty of care of a prudent business man (fiduciary duty). The management and the supervisory board of a joint-stock company are more independent of the shareholders than the management board and the supervisory board in a limited liability company.
9.2 As of the moment the obligation to publish the takeover bid has arisen, and once a takeover bid has been announced, and until it has been concluded:
- The bidder may not acquire or sell target shares, other than through the takeover bid. This prohibition also applies to all persons acting in concert with the bidder;
- Target management or the supervisory board may not, without prior approval of the general assembly, inter alia:
- increase or decrease the share capital;
- enter into extraordinary business operations;
- act or enter into operations that could significantly jeopardize future business of the target;
- decide on the target’s acquisition or sale of treasury shares; or
- take any actions that would frustrate the bid.
The decision of the target’s general assembly approving the above listed decisions of the management board and/or the supervisory board will be effective only if passed by a three quarters majority of the share capital represented at the general assembly. However, the decision of the target company’s management board or supervisory board to search for another bidder (that is, a “white knight”) would not be prohibited and would not require shareholder approval.
9.3 Within 10 days after publication of the bid, the management board of the target must issue an advisory opinion setting forth the following:
- the management board’s view of the type and amount of the offered price for the shares;
- the management board’s view of the bidder’s future intentions and goals in relation to the target;
- the management board’s view of the bidder’s strategic plans in relation to the target company and potential consequences arising out of these plans with respect to the target’s employment policy, the employees’ status, and the potential change of the location in which the target performs its business activities;
- statements of the management board members on their intention to accept or refuse the offer; and
- statements of the management board members on whether there is an agreement between them and the bidder, and if there is, its terms and conditions.
The management board is obliged to submit its opinion on the offer to the Agency, the stock exchange or the regulated public market no later than the day on which the publication of the opinion is ordered.
Other than publishing this opinion, the members of the management and supervisory boards are forbidden from undertaking any activity that could influence the bid.
It will always depend on what the company's bylaws establish, regarding the responsibility and duties of the directors. Normally they have the duty of diligence, not competition, confidentiality and dedication.
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 executive bodies are always obliged to represent the company´s interest with due professional care. In respect of M&A transactions, their duties of care vary depending on the structure and type of the transaction.
If the transaction is structured as a transformation (in line with the Transformations Act), the directors are responsible for the whole transformation and have a wide scope of obligations. The directors are obliged to, among others, prepare the merger/spin-off project, draft the report explaining the transaction in detail or procure the publication of documents; they will usually engage legal, tax and financial advisors in this respect.
In case of transactions which require the approval of the general meeting/sole shareholder, the directors are obliged to send an invitation to the general meeting with additional information about the contemplated transaction, its rationale, information on shareholders’ voting rights and required majorities, and provide the option to participate in the general meeting. As mentioned above, the consent of general meeting is required for major transactions which impact the company’s business activity, the business enterprise or its part, the registered capital and in other cases specified in the Business Corporations Act or articles of association.
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 the company. While it is common for directors of a company to be indemnified for certain breaches 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 (2018 Revision), as amended, for deceptive actions, including for any officer of a company (or person purporting to act as such) who with intent to deceive members or creditors of the company about its affairs, 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 or an LLC 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 or LLC’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 or interests in an LLC, 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.
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.
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.
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 other than with the company’s permission.
Directors of listed companies are subject to specialized corporate governance rules and are required to pursue the long-term value and the general interest of the company. In the event of a public bid, they must allow shareholders to evaluate its merits and are at the same time prohibited from pursuing their own interests, if these are not aligned with those of the company. 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 listed companies are also subject to the EU harmonized market abuse rules.
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.
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.
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.
Directors owe 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. These duties would apply to a directors’ conduct in the context of overseeing business combinations, although this is not expressly stated in the MCL.
Minority shareholders also have rights under the MCL in respect of controlling shareholders to take action against conduct that is oppressive.
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 free 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.
The Board of Directors have a fiduciary duty with the company and their shareholders, they must act with diligence and loyalty, without favoring any shareholder or bidder. They can incur in civil responsibility if the board approves an agreement that causes any damage to the company and they cannot put their own interests or of third persons before the interests of the company. In consequence, the directors must always seek the benefit of the company during an M&A transaction.
Directors of a corporation have a fiduciary duty imposed by law to the stockholders. This includes the duty to exercise utmost good faith in all transactions relating to their functions as directors, the duty to act for the benefit of the corporation and not for their own benefit.
In light of this fiduciary duty, directors of a target company have also the duty not to engage in insider trading as penalized under the SRC. Directors have broad access to non-public and undisclosed information regarding M&As and other material corporate transactions. Their fiduciary duty mandates that they should not take advantage of such information to the detriment of the corporation or to unjustly enrich themselves at the expense of stockholders.
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.
In general, directors of Portuguese private limited liability companies are subject to general and specific duties.
There are two general legal duties that steer the directors’ conduct during their term in the office: the duties of care and loyalty.
The duty of care demands directors to exercise their management powers in a diligent manner and with a degree of care that may be expected from a wise and organized manager.
The duty of loyalty requires that directors exercise their management powers exclusively in accordance with the best interest of the company taking into consideration the long term interests of stakeholders.
Portuguese law also sets forth a comprehensive list of specific duties which must be complied with by directors. There are core specific duties applicable to all directors regardless of the company and activity undertaken by it. There are also certain duties that are exclusively applicable to companies of certain sectors of activity, certain type or minimum size.
Specific duties establish that the directors shall act or refrain from acting in a predefined manner in certain situations, narrowing or even restricting their discretionary powers.
In the context of PTOs, the directors of the target company have two additional sets of duties.
On the one hand, they are required to issue a report appraising the PTO. On the other hand, they are subject to a “no-frustration rule” pursuant to which the board shall refrain from taking any action, other than seeking alternative bids, which may result in the frustration of the bid. This prohibition does not apply neither to the execution / implementation of obligations assumed prior to the board becoming aware of the PTO nor to the implementation of resolutions approved by the shareholders in a meeting specifically called for such purpose.
As for shareholders, they are limited to the obligation to fully pay up the subscribed shares/quotas in the company and the obligation to share the company’s losses, which – in the case of limited liability companies and as a general rule – corresponds to each shareholder not recovering the amount of subscribed and paid-up capital at the time of liquidation of the company. The by-laws may additionally impose other obligations on the shareholders, such as the obligations to grant loans or make other contributions.
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.
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.
If a potential offeror and the directors of a target company are negotiating on a consensual basis, an offer in good faith must be regarded as being imminent. If the offer is imminent or is reasonably expected, the board of directors of the target company is bound by the restrictions on frustrating actions, namely the board must not, without the approval of the TRP and shareholders (unless in terms of a pre-existing obligation or an agreement entered into beforehand), take any action in relation to the affairs of the company that could effectively result in:
9.1. A bona fide offer being frustrated.
9.2. The holders of relevant securities being denied an opportunity to decide on the merits of the general offer.
9.3. The issue of any authorised but unissued securities.
9.4. The issue or granting of options in respect of any unissued securities.
9.5. Authorising or issuing, or permitting the authorisation or issue of, any securities carrying rights of conversion into or subscribing for other securities.
9.6. The sale, disposal or acquisition of assets of a material amount except in the ordinary course of business.
9.7. Entering into of contracts otherwise than in the ordinary course of business.
9.8. The making of a distributions that are abnormal considering the timing and amount.
Shareholders of a target company do not have any express duties in the context of a merger or amalgamation.
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 company. 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.
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 no 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.
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 opinion, which must be circulated to shareholders together with the directors’ opinion (see also paragraph 24). 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 the formal announcement of a tender offer until the 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 percent compared to 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 business of the target company;
- conducting a share buyback (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.
Directors have broad authorities to manage the operations of the company, in line with the powers and authorities set forth in the company’s constitutional documents.
The specific duties of directors of a target company in a M&A context will be dictated by the authorities granted to them by the shareholders. Overall, directors are responsible for protecting the target company and acting in its best interests.
As for the duties of controlling shareholders in a M&A transaction, this will be as per the constitutional documents of the company or the shareholders agreement. Duties include signing off the transactional documents (which could be delegated to the directors) and passing the requisite shareholder resolutions.
Duties of directors are prescribed under the Companies Act, and are as follows:
(i) To act in accordance with the articles of the company.
(ii) To act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(iii) To exercise their duties with due and reasonable care, skill and diligence and exercise independent judgment.
(iv) To not be involved in situations in which they may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(v) To restrain themselves from achieving or attempting to achieve any undue gain or advantage either to themselves or to their relatives, partners, or associates.
As far as controlling shareholders are concerned, there are no duties imposed on them by statue. However, under the Companies Act, an eligible shareholder including an eligible minority shareholder may petition the NCLT that the affairs of a company are being conducted in a manner prejudicial or oppressive to him or in a manner prejudicial to the interests of the company. Thus, to this extent it may be implied that it would be the duty of a majority shareholder not to oppress a minority shareholder.
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:
(i) 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;
(ii) 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;
(iii) to act in a manner which is loyal to the interests of the relevant company and the interests of the shareholders or member(s);
(iv) 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;
(v) 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;
(vi) 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);
(vii) 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
(viii) 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);
(i) “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
(ii) 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.
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.
Under the PRC Company Law, a director owes duties of loyalty and diligence to a target company. In a private transaction, the directors are generally required to execute the decisions of the shareholder meeting. In an EJV, however, the directors would normally act under instructions of the shareholders who nominate them. While a controlling shareholder does not owe specific legal duties to an investor, some investors attach contractual obligations to the controlling shareholders (e.g., maintain control of the company, ensure minority shareholders receive adequate compensation) or grant other rights to protect minority shareholders (e.g., co-sale rights).
In the acquisition of a public company, the target company’s directors must make decisions and take actions in the best interest of the target company and its shareholders, and treat all competing acquirors equally and fairly in accordance with their duties of loyalty and diligence. Directors cannot set unreasonable prerequisites to the acquisition, provide financial assistance to the acquiror using resources of the target company or harm the lawful interests of the target company or its shareholders. Likewise, the controlling shareholders cannot harm the lawful interests of the target company or its other shareholders.
In general, directors must act in the company’s best interest and in good faith. In this regard, they have a duty to declare any conflict of interest they may have and accordingly must abstain from voting on any such matters.
Following the publication of FRA’s approval of an MTO, directors of the board are prohibited from taking any action that might have a material adverse effect on the Publicly Traded Company including but not limited to passing a resolution to increase its capital or issue convertible bonds.
Furthermore, pursuant to CML, the directors of the board of a Publicly Traded Company that are not related to the potential acquirer are required to issue their opinion in relation to the viability of the offer, its consequences and importance for the Publicly Traded Company, its shareholders and employees. Such opinion is to be disclosed by the Publicly Traded Company within the applicable period reflected under CML. Furthermore, when issuing their opinion, the directors of the board are under an obligation to act as a prudent person and in the best interest of the Publicly Traded Company, and issue their opinion without regard to any relationship that may exist with the potential acquirer or its related persons. The directors are also prohibited from taking any action that could impede the shareholders’ ability to reach a valuation of the shares subject of the tender offer pursuant to appropriate valuation principles.
As for duties of controlling shareholders of a target company, they must generally act in the best interest of the company and in compliance with its statutes and the provisions of the law. For example, both the Companies Law and the CML, provide for mechanisms for the suspension and nullification of general assembly resolutions taken in favor of or to the detriment of a specific group of shareholders.
Furthermore, related party transactions must be at arm’s length and must be authorized by the ordinary general assembly prior to entry into such transactions. Shareholders in Publicly Traded Company that are conflicted may not vote on such resolutions.
Principal shareholders of a Publicly Traded Company, holding more than one third of the shares, must notify the FRA immediately following receipt of notifications from a potential acquirer of its intention to launch an MTO, in cases where agreements exist between the principal shareholders and the potential acquirer that were not notified to the Publicly Traded Company. Furthermore, such principal shareholders are prohibited from selling their shares during the period from the date of announcing the MTO and until its execution except in response to the MTO.
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.
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 duties of directors of a UK target company were codified in the Companies Act 2006, however, regard must still be paid to the common law rules relating to directors’ duties.
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 and for the target directors to take responsibility for statements made in any documentation published in connection with an offer.
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).
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 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.
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).
In line with Article 263 of the Companies Act (ZGD-1) applicable to both private and public limited companies members of the management and supervisory bodies must in the performance of their duties act with the diligence of a conscientious and fair manager and safeguard the company’s trade secrets. They are jointly and severally liable to the company for damage arising from violation of their duties unless they can show that they fulfilled their duties fairly and conscientiously or that their action was based on a lawful resolution of the general meeting. The liability of the members of the management shall not be excluded even though the act has been approved by the supervisory board or the board of directors.
In accordance with Article 264 of ZGD-1 which also applies to both private and public limited companies persons who use their influence (for example controlling shareholders) to induce the members of the management or supervisory bodies, the procurator or proxy to act to the detriment of the company or its shareholders are liable for the resulting damage.
In case of a public takeover the company’s management or supervisory bodies must according to Article 47 of the Takeovers Act (ZPre-1) refrain from certain actions from the date of receipt of the notice of the intended takeover, such as increasing the company's share capital, acquiring own shares and extraordinary transactions that could impede the company's future operations or might impede the bid.
As regards the controlling shareholders of a target company Article 547 of ZGD-1 sets forth that if a controlling company induces a controlled company to carry out a legal transaction that is detrimental to it, or to perform or omit performing an act to its own detriment without actually compensating for the loss by the end of the financial year, or without providing the right to benefits determined as compensation, the controlling company shall compensate the controlled company for damage. In addition to the controlling company, representatives of the controlling company shall also be jointly and severally liable in such case.