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European Company Law (ECL) Aim To
European Company Law (ECL) Aim To
European Company Law (ECL) Aim To
Corporate Law
Five core legal structural characteristic of the business corporation are:
1. Legal Personality:
Firm = “Nexus for contracts” (with other counterparts and individuals) Separate patrimony
Pool of company asset distinct from the firm’s owners Why? Entity Shielding:
A. Priority rule Firm Creditors claim first the firm asset, while these are
unavailable for personal creditors
B. Liquidation protection rule Prevent firm’s destruction by shareholder or
creditor.
NOTE: Both rules Strong form entity shielding // Only one rule Weak form entity
shielding
2. Limited Liability:
Creditors are limited to claim firm’s assets and not the shareholders’ one Owner Shielding
Limitation in proportion of the participation Defensive asset partitioning Transfer risk
from investors to creditors.
3. Transferable Shares:
Distingue corporation from partnership Continuity of business also if owner changes
Flexibility
NOTE: Transferable Tradable Free tradability in public of some action is not always
guaranteed Restricted tradability
4. Delegated Management under a Board Structure:
Board is separate from operational managers
o CEO is entrusted by the board
Board is elected by firm’s shareholder Maintain their interest
Board is distinct from firm’s shareholder
Board has multiple members
5. Investor Ownership:
Two key elements:
Right to control the firm
Right to receive the firm’s net earnings
These are proportional to amount of capital contributed
ATTENTION: There are other forms of ownership: equity investors, shareholders, stockholders,
stakeholders.
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NOTE: Large-scale Business (in Market Economy) Possess all 5.
Small Firms (Jointly-owned) Adopt these 5 forms, with some deviations Fit its needs
Possible by: taking advantage of statute’s flexibility or of special close corporate
statutes (like Société à Responsabilité limitée [France], British Private Corporation
[UK]…).
FOCUS: Private Company Public Company (IPO Going public // Take over Returning
private)
To solve:
Regulatory Strategies Prescriptive Approach
- Agent Constraints
Limit freedom of movement of agent
Ex-ante: Rules Protection of company’s creditors and public investors
Limit the ability to do activities
Ex-post: Standards Regulation of company’s internal affairs
In case of violation of duty accorded in negotiation
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- Affiliation Terms:
Principle of entrance/exit from a company
Ex-ante: Entry Terms Transparency of disclosed information
Ex-post: Exit Terms
Right to withdraw
Right to transfer
NOTE: Determine how principal affiliate with agents.
Governance Strategies
OBJ: Control the enterprise
- Appointment Rights:
Power to select/remove directors
Ex-ante: Selection (of directors or managers)
Ex-post: Removal (of directors or managers)
NOTE: Majority decide (51%) For balance sake: necessity or minority’s
representatives.
NOTE: Court and Commission have removal power Not only shareholders
- Decision Rights:
Power to intervene in the firm’s management
Ex-ante: Initiation (of managerial decision and strategy)
Right to trigger the decision making process
Ex-post: Ratification (or Veto) (of managerial decision and strategy)
Right to block other decision ( Necessity of 51%)
- Agent Incentives:
Power to alter the incentives of agents
Ex-ante: Trusteeship ( Fiduciary duties Principal trust you = Act loyal)
Ex-post: Rewards (agent’s reward for undertaking principal’s interest)
FOCUS:
Default rules Govern situation if the parties do not explicitly provide something different
Mandatory rules Govern situation and there is no option about that
- Corporate law Default rules Standard form contract Serve as standard to simplify
- Corporate law Mandatory rules Serve to preserve third-party interest
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European Company Law (ECL)
Comparison with US
[ Each state has its own corporate law State Regulation]
US: Voluntary adoption of Model Business Corporation Act (MBCA)
Not a law Reference to support the application of similar solutions in
different states.
Regulatory Competition
Attract investors to build companies for Incorporation
Advantages (i.e. Tax, …) to provide the best
solution More efficient Balanced
Two main country as Pioneering Role:
Delaware Corporation Law
NOTE: Best state for incorporation, reason:
Free regulatory competition
No need of HQ
Corporate process reliable and trustworthy
Nevada Corporation Law
ECL
Rules and principles that define source of law of EU Harmonization Convergent to a
common solution The most efficient
Freedom of establishment
Allow companies to carry activities in a stable and continuous way in EU member
state Freedom of operation in other country (with no subsidiaries incorporation
necessity) Consequences:
Competition between local and foreign
Competitive as a form of growth
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Treaty of Rome: Creation of one market Single EU Market
Facilitation of foreign investment = More capital
Founded on 4 freedom: > Goods
> Services
> Labor
> Capital
NOTE: According of same treatment (Firmed by member state) For domestic investors and
other member state investors Avoid barriers or restriction
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Mergers & Acquisition
NOTE: Only transaction that involves strategic financial evaluation
OBJ: Allow the Transferability of Business Through transfer of shares:
Public: Available on Stock exchange for investors
Private: Owner decide the transfer
Advantages of transfer:
1) Synergies Reduce fixed costs
2) Value of Business Increase the value of investment
3) Horizontal Acquisition Target is a competitor
4) Vertical Acquisition [Vertical integration Complete each other] Target is a
component of supply chain
By Shares (SPA)
Vendor (of shares) --> Former shareholder
Purchaser --> New shareholder
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Different types of M/A:
Private M&A
o No deal with public shareholders
o Private negotiation
o Competitive bids
o Two type:
Minority No interest in taking control of the company
Majority Interest in entering as decision-maker
Public M&A
NOTE: Presence of Public Shareholders Necessity of approval
ATTENTION: Before disclosing to public Confidential negotiation
o Tender Offer vs Exchange Offer
Tender Public takeover of a company
Exchange Special tender, in which securities are offered
o Friendly vs Hostile
Friendly Negotiation with an agreement of the majority
Hostile Nobody has the absolute majority
ATTENTION: Private Buyer may ask for Indemnification (Compensation from former
shareholder for a period of time) and for Reps & Warranties.
Public No of the others.
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Private M&A
NOTE: Different Time frame (= The more the process last, the more resources are used)
Different Disclose In competitive bid, you will attire non-interested in the transaction
but only in the company information
Comprehend:
Internal distribution “Need to Know Basis” Purchaser group who receive the seller’s
confidential information
Non-use restriction Information for restricted usage permission Limited purposes
Obligation for both parties
Non-solicitation of employee Avoid buyer to induce people to leave work and work for him
No communication with member of the Supply Chain
No obligation to continue the deal Freedom to leave the business
For any reason = More freedom of choice
More buyer will take part of the negotiation
For particular reason = Less freedom
Less buyer will take part
No obligation to access (Letter of Intent Stage) Seller wants to control the flow of information
Limiting the access to the company
Letter of intent stage: Buyer require access
No representation as to accuracy of information Buyer and seller rely only on the text of the
definitive agreement
Not on the information disclosed
during the negotiation
Specific performance Seller may stop the disclosure Buyer can legally proceed asking
damage, in case of breach
Sunset date Maximum duration of the C.A. last
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Exclusivity Agreement (EA)
Security for bidders
Restriction for the target (= Seller):
1. Can’t negotiate with company bidders
2. Can’t provide non-public info to competing bidders
NOTE: Seller may be required to disclose to potential purchasers any competing bids received
ATTENTION: in case of breach Expense reimbursement, specific performance, damages
Attached: Term sheet Good faith obligation (discuss in good faith what come out from it)
ATTENTION: Negotiation strategy The more you settle now, the less in future
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Due Diligence (DD)
After signing of the LOI To benefit both purchaser and seller
2 type of document:
Business Financial
Legal documentary
NOTE: Preliminary & preparatory status Review of all the pubic documents
Vendors Due Diligence Show the real status of the business:
Purchaser wants to know before entering the negotiation
Adjust price
Seller wants to let know so disclosing to not be liable
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E. Corporate record books
REMEMBER: Important source of information of the company Mainly for lawyers
> Charter and bylaws in effect
> Audit letter
> Commitment report
F. Customer and supply contracts
> Pricing
A company subject to binding agreement with suppliers for X years
These info are only available at the DD process.
> Contingent liabilities
> Expiration and early terms rights
> Additional commitment
Solution to DD Problems
Difficulties to obtain 3 party consensus/amendments agreement to be done
Before the signing of the agreement 2 reason:
Confidentiality
Bargain power
Make purchaser aware of all issue Transparency
Avoid complain later
Deal with impediments
Revise the structure and reflect in financial models
“Take out” from the deal or amend agreement with parties whose right are
triggered
Maintain flexibility to postpone closing in order to well integrate the target
NOTE: In compliance with:
o SEC (Securities and exchange commission)
o Stock exchange
ATTENTION: Seller aware of impediment not solvable Seller bargain power becomes weaker
Contingent obligation
Price adjustment
Strengthen negotiating position
The more information = Higher bargain power
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Sellers Reps & Warranties
Purposes:
1) Check Identify issue looking through the list of seller’s reps
2) Closing condition (= Bring down)
Subject matter:
A. General reps on Financial statements
i. Fair representation of the company
ii. Prepared in good faith
NOTE: Not triggering indemnity In case of breach
B. General reps on Compliance with law and regulations
Covenants
Pre-closing covenants:
I. Ordinary course
a. General standard
b. Specific items (Such as paying dividend)
c. Issuing additional stock
II. Efforts to obtain consents and approval
a. Allocation of cost and risk
b. Antitrust clearance
III. Access and confidentiality
a. Pre-sign
b. Antitrust gun-jumping
c. Access to customers, suppliers and employee
d. Confirmatory diligence and closing conditions
NOTE: Closing conditions can be:
Regulatory
Third party consensus
Litigation
Covenant compliance
Ancillary agreement
Financing
IV. Notices
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Post-closing covenants:
I. Non-competition
II. Insurance
III. IP rights
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Public Merger & Acquisition
Bidders find the target on the base of public document More detailed than private one
Public standard
Disclosure documents filled of
Securities Regulator
NOTE: Rule: Go beyond the stock price Incomplete info
ATTENTION: No procedure of Due Diligence (DD)
2 type of takeover:
NOTE: Takeover Bid bidder’s offer to the holder of target’s share to buy them at fixed price
Friendly Hostile
Start a Negotiate Transaction with Direct appeal to the shareholders with a
management Tender Offer
Obtain additional information on the Surprising
target Most likely to succeed
More accurate estimation of their business
- Alert the target Can adopt Defensive - Totally rely on public information
Tactics - No possibility of negotiation
Tender Offer
Offer by the bidder To the shareholders
To buy share at a fixed price
After this, transaction is completed Announce to media
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ATTENTION: Tender offer terms are described in the prospectus
Between the publishing of the offer and the delivery of the share is
needed the authorization approval of antitrust
2 type of TO:
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Defensive Tactics
Adopt in Hostile Takeover
One way: White Knight Strategy
Find another bidder more suitable for you firm and your firm strategy
2 different type of tactics: Before Tender Offer and Post Tender Offer
1. Pre-Offer Defensive
“Shark Repellants” or “Porcupine Provision”
Make difficult to obtain working control Even if bidder obtain
majority
Staggered Board: Replacement of the BoD in its entirely is
more difficult
Additional cost on the corporation (in case of successful
takeover)
- Golden parachutes to employee
- Distribution of excess cash to shareholders
- Recapitalization of the business
ATTENTION: Aim is to scare the market Less attractive
for a hostile takeover
2. Post-Offer Defensive
Tactics when TO has been launched:
Acquire another company Antitrust problem for the bidder
Attack the funding of the offer
Drive up the price of the target offer
Crown jewels Dispose desirable asset to friendly entities
Pac-man defense Making a competing TO for the bidder stock
Funding from financial institution
Find a White Knight
Adopt Poison Pills or control share acquisition provision
NOTE: Poison pills = Special type of stocks or debts To difficult a hostile takeover
Additional rights are granted to shareholders:
Increase voting rights
Additional financial rights Flip-in Plan
Post-bid defense
EU Passivity Rule (Art. 9)
Board of a company should remain passive after the launching of a TO
Not interfere between bidders and shareholders
Publicity (Art. 10)
In public context: Provide the market of documents with details
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Cross Boarder Merging Directive
Regulates mergers transactions, regarding:
I. Stock deals
II. Public acquisition of shares
Objective:
a) Make easier cross boarding merging
b) Easier to identify applicable law to each party company of the merger
a. Any company part should be governed by its national law applicable during a
merger
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