Management buy-outs
What are the rules on management buy-outs?

Belgium
Van Bael & Bellis

There are no specific rules concerning management buy-outs under Belgian law. However, the Company Code provides exemptions to the requirements imposed on the company when financial support is offered to support a leveraged management buy-out. In order for the exception to apply, the company must offer financial assistance to staff members of the company or affiliated companies or companies where at least 50% of the voting rights are held by the employees in order to acquire shares of the company or certificates representing rights with regard to the shares. When the assistance is offered to companies, an additional requirement must be met and the acquired shares of the company (or certificates) will have to represent minimum 50% of the voting rights.

In any event, the general corporate principles (eg, the equal treatment of shareholders and the rules regarding conflicts of interest) remain applicable to management buy-outs.

In case of a public takeover, the relevant clauses of an agreement to which the bidder or its connected persons are party and that could have a substantial effect on the valuation of the bid must be discussed in the prospectus. Thus, the relevant clauses of the agreement between the bidder and the target’s management may have to be disclosed.

Bolivia
Guevara & Gutiérrez SC

No restrictions and rules exist in this regard. 

Canada
Gowling WLG

The rules pertaining to management buy-outs are different for public companies and private companies. Generally speaking, individuals must refrain from voting to approve a particular transaction if they are also on the board of directors of the company, due to a potential conflict of interest. The importance of strong corporate governance practices has recently become a significant factor. Securities regulations also provide prescribed requirements pertaining to transactions where insiders and control persons are involved.

China
Baker & McKenzie

The Administrative Measures for the Takeover of Listed Companies contains provisions in respect of management buy-outs. In addition, the State-Owned Assets Supervision and Administration Commission and the Ministry of Finance issued the Interim Provisions on the Transfer of Enterprises’ State-Owned Property Rights to the Management Stratum in 2005.

Denmark
Danders & More

No specific rules for management buy-outs apply.

Germany
Skadden Arps Slate Meagher & Flom LLP

Under general corporate law, the company’s management may not disclose confidential information about the company. In addition, the management must act in the best interest of the company. By preparing a management buy-out without the prior consent of the company, the management risks violating these obligations, which could lead to civil or even criminal liability. On its part, the purchaser runs the risk of being sued for inducing a breach of contract which can also cause criminal liability. To minimise these risks, the target’s management should involve all shareholders of the company in their plans as soon as practicably possible.

Greece
Karatzas & Partners Law Firm

There is no specific legislation on management buy-outs.

Guernsey
Carey Olsen

No specific rules apply.

Hong Kong
Baker & McKenzie

In the event that the target is a Hong Kong public company, if an offer to acquire the company is a proposed management buy-out, a director will normally be regarded as having a conflict of interest where it is intended that he or she should have any continuing role (whether in an executive or non-executive capacity) in either the offeror or the target in the event of the offer being successful. In addition, the information given to competing offerors in the context of a management buy-out of a Hong Kong public company must be at least the same information generated by the target (including its management team) which is passed to providers of finance (whether equity or debt).

India
Trilegal

Management buy-outs are permitted in India. In the event that a management buy-out involves a foreign person, the exchange control regulations must be followed – including compliance with sectoral limits and payment of a consideration which is equal to or more than the fair market value of the shares.

Japan
Nishimura & Asahi

In Japanese management buy-outs the management of the target commonly cooperates with a private equity fund to purchase all shares of a listed company. In such a transaction, the directors who participate in the transaction with the private equity fund will face a conflict of interest. In such case the directors of the target are at least subject to a duty to take appropriate measures to protect the interests of public shareholders. Under the Companies Act, directors with special interests in a transaction that is subject to a board resolution are prohibited from participating in the discussion and resolution at the board of directors’ meeting. Since the scope of the term ‘special interest’ in the statute is unclear, in practice directors without special interests but with personal economic interests in the acquirer often abstain from voting at the meeting.

In addition, to protect the interests of public shareholders and ensure the fairness of the process, a special independent committee is commonly formed to verify, among other things, whether the negotiations were properly conducted and whether the agreed price is fair and reasonable. However, in Japan, the members of these special independent committees are not necessarily independent directors of the company, because many listed companies do not have enough independent directors to compose a special committee. Therefore, it is common practice to create an independent special committee that also includes one or more independent statutory auditors or independent experts (eg, attorneys, accountants or academics). The role of the special committee in management buy-outs varies from transaction to transaction. Most committees serve only as examiners and check, among other things, whether the price and other terms and negotiations by the management are appropriate.

Jersey
Carey Olsen

No specific Jersey law regulates M&A transactions in Jersey which proceed as management buy-outs. Many transactions in the local fiduciary and corporate services sector (especially private equity backed ones) are structured as management buy-outs.

Malaysia
Tay & Partners

Directors who have or may have a conflict of interest must abstain from voting or making recommendations with regard to a takeover offer.

Where the offeror’s board of directors is faced with a conflict of interest, it must appoint an independent adviser to provide comments, opinions, information and recommendation on the takeover offer or conflict of interest in an independent advice circular.

Peru
Rodrigo Elías & Medrano Abogados

There are no specific regulations on management buy-outs other than the general duties that management owes to the company and its shareholders. Management buy-outs are still in their infancy and only a handful have succeeded.

Switzerland
FRORIEP

Directors' and senior officers' involvement in management buy-outs may pose issues under Swiss law if the management buy-out is being carried out without the company's consent. This is because the purpose of the management buy-out may conflict with the directors' fiduciary duties towards the company or with the senior officers' duties under the respective employment agreement (eg, confidentiality and fiduciary duties). In addition, conflicts of interest may arise if the transaction agreement is to be entered into between the acquiring vehicle and the target with the director or manager acting on behalf of both entities. In such case, the respective transaction agreement may be void unless approved by the shareholders. 

Turkey
Moroğlu Arseven

There are no specific rules on management buy-outs. The general rules under the Commercial Code apply to the purchase of the company shares by employees. Stock option plans are used as a common means of ensuring that the management or key employees dedicate themselves to the development of the business for a pre-determined period of time.

The company sets out the conditions which the employee must fulfil to acquire the stock option right. Common stock option plan mechanisms include the following:

  • Phantom stock option – a share transfer is not actually realised but it is deemed that the employer acquired the relevant number of shares during an exit where the employee deserves a premium equivalent to the value of the vested shares granted to them in the option agreement. Therefore, this is the most preferred mechanism by the companies.
  • Stock option through conditional capital increase method – employees may benefit from the conditional capital increase method which enables them to obtain new shares of the company under their employee stock option plans. As stock option plans through capital increases lead to dilution of shares, such plans are subject to the general assembly’s approval. Therefore, this mechanism is not preferred by companies.
  • Stock option through share transfer – redemption of the shares after a share transfer is difficult and there are usually many restrictions on share transfers in the agreements executed between shareholders. Therefore, this mechanism is not preferred by companies either.

USA
Dechert LLP

The rules on management buy-outs are generally governed by:

  • the management’s fiduciary duties (if any) under state law; and
  • the disclosure obligations (in the public company context – ie, a going-private transaction) under federal securities law.

State law fiduciary duties
Officers may have fiduciary duties, but such duties vary widely by jurisdiction and entity form (eg, corporate law as opposed to laws governing other business entities – such as LLCs and partnerships – typically provide for a more limited ability to disclaim fiduciary duties).

Notwithstanding wide variations in applicable rules across the country, this summary focuses on Delaware corporate law, given Delaware’s popularity as a common jurisdiction of incorporation for public companies.

Under Delaware corporate law, officers must act in the best interests of the corporation and its shareholders. Accordingly, officers owe both:

  • a duty of care (to act on an informed basis); and
  • a duty of loyalty (to act in good faith and be both disinterested and independent when considering a transaction).

In a management buyout, officers generally have economic interests that conflict with those of the shareholders. As such, officers may be required to demonstrate that the transaction is “entirely fair” to the corporation and its shareholders, both in terms of process and price. This is a higher standard than the business judgment rule, which presumes that the officers acted on an informed basis and were motivated to act in the best interest of the corporation.

Federal securities law disclosure requirements

Federal securities laws generally address conflict of interest concerns relating to management buyouts in a going-private context by imposing disclosure requirements. For example, Section 13(e)-3 of the Securities Exchange Act 1934 may require certain information to be filed with the Securities and Exchange Commission relating to (among other things):

  • the transaction’s purpose;
  • the basis on which management has drawn its conclusions on whether the transaction is fair to the target’s unaffiliated shareholders; and
  • any fairness opinion received from the target’s financial adviser.

Directors’ duties
What duties do directors have in relation to M&A?


Belgium
Van Bael & Bellis

Merger or demerger
Pursuant to the Company Code, the board of directors of a company that is involved in a merger or demerger must prepare a merger or demerger proposal, which must at least discuss a number of important aspects of the proposed transaction. Further, the board of directors must prepare a special report in which it clarifies the proposed transaction from a legal and economic point of view. In addition, the statutory auditor must prepare a report on the proposed share exchange ratio.

The merger or demerger proposal and both reports will be presented to the shareholders in a general shareholders’ meeting, during which the shareholders vote on the approval of the proposed transaction.

Share or asset deal
In case of a share deal, the target’s shareholders will in principle negotiate the sale of its shares in the company directly with a candidate buyer. The involvement of the board of directors of the target will thus be rather limited. However, it is the board of directors that will eventually decide whether due diligence will be organised and what information will be disclosed during that due diligence process.

In contrast, the decision to sell the company’s assets is made by the board of directors or, depending on the value of the deal, the managing director, of that company. However, when the transfer concerns a universality of goods, the approval of the shareholders will be required.

Public takeover
While the prospectus itself is prepared by the bidder, the board of directors of the target has the opportunity to intervene in the drafting process. On receipt of the draft prospectus from the Financial Services and Markets Authority (FSMA), the board has five business days to inform the FSMA whether it considers the prospectus to be complete or to indicate any gaps or misleading information.

Further, the board of directors of the target must submit a memorandum in reply with the FSMA. This memorandum in reply must discusses the board’s position with regard to the bid and its possible consequences on employment, taking into account the overall interests of the target, the shareholders, creditors and employees.

In case of a voluntary takeover by a bidder that already has control over the target, specific rules on price assessment must be applied. The independent directors of the target must appoint one (or more) independent expert(s) who must prepare a report in which they analyse the valuation of the securities concerned.

General
The board of directors must also ensure that the information and consultation rights of the employees of the company are respected.

Bolivia
Guevara & Gutiérrez SC

Directors have a fiduciary duty towards the company and must consider the company’s interests when resolving any actions. 

Canada
Gowling WLG

Directors have a fiduciary duty to act in the best interests of the shareholders and other stakeholders of the company. These fiduciary obligations require directors to make informed decisions and act in good faith when making decisions on behalf of the company. The concept of the ‘business judgment rule’ is an important consideration in Canada. This is based on the common law presumption that the directors of a corporation must act on an informed basis and in good faith when making business decisions, thereby ensuring that actions are in the best interest of the corporation. Courts have provided significant deference to directors under this set of presumptions.

China
Baker & McKenzie

The Administrative Measures for the Takeover of Listed Companies requires that the directors, supervisors and senior management personnel of a listed target are loyal and diligent towards the company and treat all acquirers that take over the company fairly. The decision made by the board of directors of the target in respect of a takeover shall be beneficial to the safeguarding of the interests of the company and its shareholders. The board shall not:

  • abuse its official powers to create inappropriate obstacles for a takeover;
  • use company resources to provide any form of financial assistance to the acquirer; and
  • undermine the legitimate rights and interests of the company and its shareholders.

Denmark
Danders & More

The directors should stay loyal to the sellers, but must first and foremost tend to the interest of the company and its business.

The board of directors must prepare a statement to the shareholders under the Danish takeover rules.

Germany
Skadden Arps Slate Meagher & Flom LLP

The target’s directors must act in the best interest of the company. This does not mean that they are prohibited from negotiating with potential purchasers. Depending on the circumstances, a change of ownership can be in the best interest of the company. If so, the directors must take all necessary efforts to ensure a successful transaction. A difficult question will always be to what extent confidential information can be shared with a potential purchaser. This must be considered carefully in each case.

Greece
Karatzas & Partners Law Firm

In principle, directors have a duty of care towards the company as a legal entity. This also applies to M&A transactions. In particular, for listed companies, Law 3016/2002 on corporate governance provides that directors have a duty to promote the long-term value of the company. In view of this, arguably, in the case of a tender offer, directors should accept the highest offer.

According to Article 15 of Law 3461/2006 on takeover bids, the target’s directors must draw up and publicise their justified opinion on the takeover bid, as well as any amended or competitive bids. This document must be accompanied by a report from the company’s financial adviser and be submitted both to the Hellenic Capital Market Commission and the bidder. It must also include the directors’ views on:

  • the effects of implementation of the bid on all of the company’s interests and specifically on employment; and
  • the offeror’s strategic plans for the target and the likely repercussions on employment and the locations of the company’s places of business.

In addition, Article 14 of Law 3461/2006 prohibits the target’s directors from engaging in actions that exceed the scope of the company’s ordinary business from the date on which the takeover bid is announced until the publication of its outcome or revocation.

Guernsey
Carey Olsen

Directors of the target must continue to comply with their fiduciary duties to the company, including their duty to act in the best interests of the company. Directors must pay particular attention to these duties if there is more than one potential bidder or if the directors are involved with the purchaser (eg, with a management buyout).

While the decisions of English (and other) courts are not binding on the Guernsey courts – and are only of persuasive effect – it is suggested that the position of directors of Guernsey companies in receipt of a bid are in line with those of the directors of English companies in a similar situation. In this regard, the English Court of Appeal decision in Arbuthnott v Bonnyman ([2015] ALL ER (D) 218) is helpful. This decision reaffirms the commonly accepted view that directors of an English company in receipt of a bid are generally not subject to Revlon-type duties of the kind recognised by Delaware courts to take active steps to maximise value for shareholders. In other words, the primary role of the target directors is therefore not to frustrate a good-faith offer so that the offer (and any relevant competing offer) can be put to the shareholders.

Hong Kong
Baker & McKenzie

Directors owe fiduciary duties to the company. In the context of a proposed M&A transaction, directors of the buyer and seller should:

  • consider whether the entry into the proposed transaction is in the best interests of the company;
  • exercise reasonable care, skill and diligence relating to all matters in connection with the transaction;
  • instruct any appropriate advisers, if necessary, such as accountants, financial advisers, legal counsel or any other specialist consultants;
  • comply with all applicable laws and the company's constitutional documents; and
  • maintain appropriate records and documentation of the decision-making process at each stage of the transaction.

India
Trilegal

In general, directors must act in good faith in order to:

  • promote the objectives of the company for the benefit of its members as a whole; and
  • act in the best interest of the company.

Therefore, if the directors have proposed an acquisition, they must ensure that it is in the best interest of the company and its stakeholders, including its employees.

For listed companies, the Takeover Code also requires directors to constitute a committee of independent directors in order to provide reasoned recommendations to the shareholders on an open offer. Further, they are expected to:

  • facilitate the acquirer in verification of shares tendered in acceptance of the open offer;
  • make any relevant information available to all acquirers making competing offers; and
  • cooperate with any acquirer that has made a competing offer.

Japan
Nishimura & Asahi

Under the Companies Act, directors have a duty to conduct the business of the company with the care of good managers. In addition, directors are required to perform their duties faithfully on behalf of the company. More than 40 years ago, the Supreme Court indicated that the directors’ duty of loyalty complements and clarifies the duty of care, and that these duties cannot be perceived as separate duties of corporate directors. In addition, it is generally understood that directors assume these obligations not to shareholders, but to the company.

Recently, the lower courts have applied a Japanese version of the business judgement rule to directors by limiting their inquiries to whether the directors exercised reasonable business judgement in light of the circumstances at the time of the decision. Essentially, the Japanese business judgement rule holds that directors should not be held liable for any damages resulting from their decision, provided that they can show that:

  • there was no negligence in their assessment of the material facts; and
  • there was no material unreasonableness in the content and process of the decision, judged against the standards of an ordinary manager.

Some court precedents exist with respect to the duties of directors in the context of M&A transactions, but the above rule also applies to these cases.

Jersey
Carey Olsen

The usual directors’ duties apply to the directors of a target which is the subject of a proposed M&A transaction in Jersey – that is, to act honestly and in good faith with a view to the best interests of the company and also exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

While the decisions of English (and other) courts are not binding on the Jersey courts – and are only of persuasive effect – it is suggested that the position of directors of Jersey companies in receipt of a bid are in line with those of the directors of English companies in a similar situation. In this regard, the English Court of Appeal decision in Arbuthnott v Bonnyman([2015] ALL ER (D) 218) is helpful. This decision reaffirms the commonly accepted view that directors of an English company in receipt of a bid are generally not subject to Revlon-type duties of the kind recognised by the Delaware courts to take active steps to maximise value for shareholders. In other words, the primary role of the target directors is not to frustrate a good-faith offer so that the offer (and any relevant competing offer) can be put to the shareholders.

Malaysia
Tay & Partners

Directors owe a fiduciary duty to the company under common law and statute (the Companies Act 1965), including a duty to:

  • act in good faith and for proper purpose;
  • exercise reasonable care and skill when discharging their duty; and
  • seek shareholders’ approval at a general meeting of the company before carrying out any arrangement or transaction of substantial value (25% of the company’s total assets, net profit or issued share capital).

It is imperative that directors ensure that any merger or acquisition is for the benefit of the company.

Peru
Rodrigo Elías & Medrano Abogados

The law sets out for mandatory duties of directors which are enshrined in the principle that directors must behave as “good and orderly businessmen and loyal representatives” – that is, they should follow the criteria and practice that sound businesspeople would adopt in the same circumstances. In addition, they are compelled to keep all company matters confidential. Moreover, according to the General Companies Act, directors may be held jointly responsible without limitation before the corporation, shareholders and third parties for all damages and losses that may be caused due to agreements and acts performed by them that are illegal, are contrary to the bylaws or constitute wilful misconduct, abuse of faculties or gross negligence. Directors will also be held liable if they act beyond their powers or participate in any transaction involving a conflict of interest.

Switzerland
FRORIEP

The directors must carry out their duties with due care to preserve the interests of the company in good faith and comply with the principle of equal treatment of shareholders. Further, in a public takeover offer, the directors must also treat shareholders and bidders equally.

Turkey
Moroğlu Arseven

For joint stock companies, members of the board of directors and all other third parties responsible for company management must perform their duties diligently, protecting the company’s interests. They are prohibited from competing or dealing with the company for their own benefit (Articles 395 and 396 of the Commercial Code). Directors are prohibited from discussing matters concerning their own interests (or their relatives’ interests) which conflict with the company’s interests (Article 393 of the Commercial Code).

For limited companies, managers and other persons responsible for company management must perform their duties with utmost diligence in order to protect the company’s interests (Article 626 of the Commercial Code).

Additional diligent management obligations are determined for publicly held companies. A board of directors must balance the corporation’s risk at the most appropriate level through strategic decisions, as well as manage and represent the corporation by primarily protecting the long-term benefits through prudent risk management (the Communiqué on Corporate Governance Principles). A publicly held company’s board of directors must keep inside information confidential and not disclose or use the information until it is publicly disclosed.

Accordingly, if a conflict of interest arises when making decisions, the company’s management must put the company’s interests before the personal interests of themselves, the shareholders, their relatives, other members of the board of directors or any third parties.

Further, certain restrictions might apply if a controlling shareholder is also the parent company of a corporate group (Articles 195 and following of the Commercial Code). A parent company must not exercise its control in a way which would cause an affiliate to incur loss (Article 202(1) of the code).

If the parent company abuses its dominance over an affiliate, minority shareholders of this affiliate are entitled to request the purchase of their shares from the controlling shareholder (Article 202(2) of the code).

USA
Dechert LLP

The duties of directors of US companies with respect to M&A (and otherwise) will vary widely based on the specific facts and circumstances of each deal and the nature of the entities involved. While directors in the corporate context generally owe fiduciary duties to the corporation and its shareholders, in other contexts, such as in the case of a limited liability company or partnership, fiduciary duties may be disclaimable. Such fiduciary duties are primarily regulated by:

  • the statutory law of the state in which the company is incorporated;
  • common law (ie, case law established by court opinions); and
  • a company’s incorporation and governance documents.

The following summary of director duties in the M&A context focuses primarily on the duties of directors of corporations incorporated in Delaware (a significant state in the M&A context for several reasons):

If directors authorise the sale of control of the corporation, they must seek the highest value reasonably available.
When taking action in response to a perceived threat of takeover of the corporation, directors generally must:

show reasonable grounds for believing there is a danger to corporate policy and effectiveness;
launch a reasonable investigation to determine a takeover threat; and
show that the action taken was reasonable in relation to the threat posed.

If directors have economic interests that are in material conflict with those of the shareholders, they may be required to demonstrate that the transaction is entirely fair to the corporation and its shareholders.
An action taken without shareholder approval, with the sole or primary purpose of thwarting a shareholder vote or disenfranchising shareholders, generally will be upheld only if the directors can show a compelling justification.

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