Appraisal Statutes as an Embodiment of Self-Enforcement in Corporate Law
Arkadiusz Radwan
7th CECL Conference: Corporate Law and Dispute Resolution: What role for ADRco-organised by LUISS and Assonime, Rome, Oct. 27th, 2017
"self-enforcing" model of company law- by Reinier Kraakman & Bernard S. Black
the need to control conflicted transactions reliance on procedural protections rather than on
flat prohibitions of suspect categories of transactions enforcement through actions by direct participants
(shareholders, directors, managers), rather than indirect (judges, regulators)
reliance on clear-cut, bright-line rules, rather than on standards to define proper and improper behavior
strong legal remedies on paper, to compensate for the low probability that the sanctions will be applied in fact
"self-enforcing" model of company law- by Reinier Kraakman & Bernard S. Black
• Formal rules such as, e.g.:– procedures on approving significant or
related-party transactions– supermajorities– minority & independent directors– pre-emptive rights– exit rights: statutory clauses designed to
enable shareholder withdrawal from herinvestment in the company against adequatecash compensation instead of remaining in the company and having a dispute
Classification of exit rights / mechanisms
• Winding-up remedy
• Withdrawal for a valid reason (extraordinaryexit right)– through a notice served to the company– through a judicial order
• Withdrawal at will (ad nutum) (ordinary exit right)
• Appraisal right (dissenters’ right)• Sell-out right • Mandatory takeover bid
doctrinal underpinning• Withdrawal rights
– ad nutum: terminability of long-term obligationssteming from individual’s autonomy under private law: it would be incompatibile with the freedom of contracts to accept an eternal legal bound
– for valid reason: same as above ((prisoner of the company), but also hardship (Unzumutbarkeit), unfair prejudice
• Sell-out: remedy available in property law, if properuse of property adversely affected by a third party
• Appraisal rights: reconciling unanimity (that wouldotherwise be required to approve fundamental changes) with the operability of the company
• Bayless Manning: „appraisal statutes may be viewed as […] a lubricant to speed the spread of majoritarianism”
• Melvin. A. Eisenberg: „appraisal right is a mechanism admirably suited to reconcile the need to give the majority members of a normally perpetual organization the right to make drastic changes in the enterprise to meet new conditions as they arise with the need in such an organization to prevent the minority from being involuntarily dragged along into a drastically changed enterprisein which it has no confidence”
appraisal is the new unanimity
Fundamental corporate change
Unanimity Appraisal right (quasi-unanimity)
Instrodiction of arbitration clause into company’s articles
Germany Poland
(disputable)
Italy
Change of company’s object(ive)
France Germany
(disputable)
Italy Spain Romania Poland (disputable) US
Change in transferability of shares
France Germany Poland
(disputable)
Denmark Italy Spain Czech Republic Japan Germany (if resulting from a
merger)Adoption of new shareholder duties or obligations towards the company
Poland Germany Austria Denmark France
Spain
Changes with regard to contractual exit rights
Spain Italy
Law&Economic explaination of dissenters’ rights
• Minority protection perspective:– wealth appropriation theory: since the dissenters
receive pre-transaction value of the company’s shares, appraisal rights protect against minority oppression and rent-seeking by the controlling shareholders
– agency conflict theory: risk of capital drainage if the terms of the transaction are unfair
– risk-altering protection theory (preference reconciliation theory)
• Majority protection:– Ex ante theory explaining lowering of financing cost– Facilitation of majority rule elimination of the
opportunity (hold-out) problems
Appraisal rights (dissenters’ rights) in a comparative perspective
Italy (diritto di recesso) – triggering events:
• società per azzioni: (art. 2437 CC). Mandatoryappraisal rights:– the change of company‘s purpose (clausola
dell'oggetto sociale);– amendment of company‘s form (trasformazione);– moving the company‘s seat abroad;– reversal of the company’s dissolution;– removal of one or more contractual exit rights i.e.
rights laid down in the company’s articles of association;
– change of the criteria of shares valuation in case of shareholders withdrawal;
– changes of articles of association affectingshareholders’ voting rights or rights to profits.
Italy (diritto di recesso) – triggering events:
• società per azzioni: (art. 2437 CC). Default appraisal rights (opt-out) possible:– prolongation of the company– changes in the transferability of shares (introduction
or elimination of restrictions)
Italy (diritto di recesso) – triggering events:
• società a responsabilità limitata: (art. 2473 CC)– the change of company‘s purpose (clausola dell'oggetto
sociale);– amendment of company‘s form (trasformazione);
– merger or division (!);– reversal of the company’s dissolution;– cross-border seat transfer; – removal of one or more contractual exit rights;– undertaking of actions that are likely to affect company’s
purpose or affect individual shareholder’s rights.
• Special exit right from s.r.l. (art. 34 sec. 6 DecretoLegislativo 17.01.2003, n.5):– Incorporation of the arbitration clause.
Italy (diritto di recesso) – triggering events:
• Exit right in group context (art. 2497-quater CC):A shareholder of a company, which is subject to an activity of direction and co-ordination, may withdraw:
a) when the company or the entity, which exercise the activity of direction and co-ordination, has resolved a transformation which implies the modification of its company purpose, or has resolved a modification of the company object, consenting to the exercise of activities which alter sensibly and directly the economic assets conditions of the company, subject to the activity of direction and co-ordination;
b) when in favour of the shareholder an executive decision has been pronounced, which condemns those who exercises the activity of direction and coordination according to Art. 2497 CC; in this case the withdrawal right may be exercised only for the whole participation of the shareholder;
c) at the beginning and the end of the activity of direction and co-ordination, when it is not a company listed on regulated markets, an alteration of the risk condition of the investment has occurred and a takeover-bid has not been started. As far as they are compatible, the rules on the right of withdrawal of the share- and quota-holder in public companies and limited companies find application.
Spain (separación de socios) – triggering events:
• replacement or significant change in company’s object (sustitución o modificación sustancial del objeto social – art. 346 sec. 1(a) LSC );
• prolongation of the company (prórroga de la sociedad – art. 346 sec. 1(b) LSC );
• reversal of the company’s dissolution (reactivación de la sociedaddisuelta – art. 346 sec. 1(c) LSC );
• introduction, elimination or change in shareholders specialobligations towards the company (additional services –prestacionesaccesorias – art. 346 sec. 1(d) LSC ), (opt-out possible);
• change in the transferability of shares (for sociedad de responsabilidad limitada – SRL only);
• transformation of the company (change of legal form);
• cross-border seat transfer (art. 99 LME i.c.w. art. 346 sec. 3 LSC);
• cross-border outbound merger (art. 62 LME);
• witholding of dividends – applies five years after establishment of the company, applies if the company pays out less than 1/3 of the annual profit (art. 348bis LSC).
Denmark (Sec. 107(2), sec.110 of the DCA2010)• reduction of shareholder rights to receive dividends or distribution
of the company’s assets, including subscriptions for shares at a favourable price, to the benefit of parties other than the shareholders and the employees of the company or its subsidiary;
• restrictions on the transferability of the shares or increase ofexisting restrictions, including the adoption of provisions that make share transfers subject to the consent of the company or prevent any shareholder from holding shares that exceed a specific amount of the share capital (ownership ceiling);
• introduction of mandatory share redeemption;
• introduction of voting caps;• change of the official working language for GM in a language other
than Danish, Swedish, Norwegian or English without providing for simultaneous interpretation to and from Danish for all participants;
• adoption of a language other than Danish, Swedish, Norwegian or English for internal documents in connection with the GM.
Germany (Abfindungsrecht) – triggering events:
• Establishment of a contractual corporate groupVertragskonzern – § 305 AktG)
• Conversion (change of the legal form of the company)– Direct (Formwechlel – § 207 UmwG)– Be means of a merger (formwechselnde Verschmelzung
– § 29 UmwG)– By means of division or spinn-off (formwechselnde
Spaltung – § 125 UmwG)
• Cross-border outbound merger (§ 122i UmwG)• Delisting (going private, going dark)
– „Cold” delisting – as a consequence of a merger (§ 29 UmwG)
– Regular delisting (the U-turn in German case-law)
Poland
• Significant change of company’s object (art. 416-417 KSH) (for S.A. only);
• Short-form merger (art. 516 § 3 KSH);• Division resulting in less favourable position of
shareholders (art. 541 § 5 KSH);• Change of legal form (przekształcenie – art. 565 §
1, art. 564 KSH);• Cross-border outbound merger (art. 51611 § 1
KSH);• Delisting (going private) mandatory takeover
bid (art. 91 Law on Public Offerings).
Countries with limited role of dissenters’ rights
• Switzerland• The Netherlands• France• UK
Ukraine
• for any shareholder of a JSC (art. 68 sec. 2 JSCL):– the merger, the affiliation, the division, the conversion
(transformation), the spin off
– the engagement of the company into a substantial transaction;
– modification of the share capital (capital increase or decrease)
• for holders of preference shares in a JSC (art. 68 sec. 3 JSCL) – the introduction of changes into the company charter that
provide for the placement of a new class of preference shares, whose owners will have preference in terms of the priority of the receipt of dividends or disbursements in case of the joint stock company liquidation;
– the increase in the extent of rights of shareholders that own the placed preference shares that have preference in terms of the priority of the receipt of dividends or disbursements in case of the joint stock company liquidation.
Japan (kabushiki kaitori seikyu-ken)
• Changes in the corporate position and rights of shareholders (Art. 116 ust. 1 Kh)– Changes in the transferability of shares;
– Introduction of mandatory buy-out of shares by the company;
– Unification or split of shares resulting in infringement of shareholders rights;
– Issuance of free shares or warrants allocated in a manner other than pro rata;
– Introduction of specific voting restrictions;
– Change in rules governing pre-emption rights to newly issued shares;
• Reorganisations (but some exceptions of small scale reorganisations):– Sale or other disposal of the enterprise i.e. substantially all assets of the
company (art. 469 ust. 1 Kh);
– Merger (art. 785, art. 797, 806 Kh)
– Division, (art. 782 ust. 1 Kh)
– Transformation (change of legal form) – here unanimity principle, but appraisal right for warrant holders (art. 777-778 Kh).
US
• Merger– the only trigger to be found in all state
corporate statutes– the only trigger in Delaware – exceptions: short-form merger, small-
scale merger, stock market exception• RMBCA – several triggering transactions (e.g.
asset sale, equity swap, domestication, alteration or abolishment of any preferential right
Recent developments
Appraisal arbitrage• Appraisal activism in the starting from 2011 and increasing. • US phenomenon but getting toehold in Europe as well, e.g.
Germany• Modus operandi (US):
– Once a public tender offer or a merger has been announced, the activist funds acquire shares in the target, usually between 5% and 10%
– Then the funds initiate court proceedings challenging the fairness of the consideration in an effort to achieve a higher price for their shares
– Success ratios high, premiums high– Most sucesfull in case of conflicted transactions
• Germany: if following u- a sucesfull takeover the target isintegrated with the bidder via contractual arrangement soas to create a corporate group (Beherschungsvertrag), appraisal right is triggered
Intrerpretations & conclusions
Making sense of the triggering events
• Structural changes: corporate amalgamations and reorganisations
• Corporate „reorientation” (change of objects)• Change of lex societatis, forum and similar issues
(language)• Change in the duration of the company• Actual or potential infringement of rights or
interests of the shareholders• Meta-category (changes in rights that themselves
pertain to the exit)
Questions beyond the list of triggering events
• Who should be eligible?– those, who voted against only?– those, who did not vote in favour? (including absent
shareholders?)
• Should a partial buy-out be possible?• Price of shares (valuation)
– valuation methods– relevant point in time (pre- or post-transaction
value?)• Exclusivity of the remedy?• Effect of the judicial order on price adjustment:
– upon everyone (e.g. Germany - § 13 SpruchG– upon the plaintiff only (draft CBMD)
Explaining the comparative findings
• No clear pattern that could explain the proliferation of appraisal statutes
• No correlation with legal origin (UK vs US, Switzerland vs Germany, France vs Italy or Spain)
• No correlation with the role of capital market• Some negative correlation with triumphing in
race for incorporations (UK in EU, Delaware in the US)
• Some negative correlation with the quality of judiciary (Delaware, UK, the Netherlands, Switzerland)
Conclusions
• Appraisal rights are distinct by their very nature from any other exit rights
• Appraisal rights reduce the risk of litigation on the operation, they shift the focus on compensation. They are just a working, though imperfect, exemplification of SEMCL
• Old toys finding new gameplays – even without changes in the law, innovation of market participants and changing landscape may revigorate a dusty legal institution
Thank you for your attention!
Grazie mille per l'attenzione!
ArkadiuszRadwan.plAllerhand.pl
