Management and directors

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

Austria bpv Hügel Rechtsanwälte GmbH

No specific rules on management buy-outs exist in Austria. However, members of the management board must act loyally towards the target. In the case of listed companies, management must also take due care of, and act in compliance with, the insider dealing provisions.

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.

Bermuda BeesMont Group

Generally speaking, directors should comply with conflict of interest rules and corporate governance policies. The Bermuda Stock Exchange Listing Regulations govern transactions where insiders and persons of control are involved.

Bulgaria Kambourov & Partners, Attorneys at Law

Bulgarian law does not specifically regulate management buy-outs. Therefore, the acquisition of a Bulgarian company by its own management is generally considered a contractual matter between the shareholders and the management. However, as a basic principle of Bulgarian commercial law, the managers of a company owe loyalty to the shareholders as first priority. In this regard, any leveraged buy-out would need be approved by the shareholders. Bulgarian financial assistance rules prohibit the use of loans and provision of securities by the target for the purposes of acquiring the same company. 

Finland Waselius & Wist

No specific rules apply to management buy-outs in relation to private limited liability companies. However, the Companies Act requires that the management act with due care and promote the interests of the company and its shareholders (the principle of duty of care and loyalty).

In case of a public takeover bid, the equal treatment requirement should be interpreted to include an obligation to offer the same type of consideration to all target shareholders, including management shareholders. Further, the Helsinki Takeover Code states that the management should be free from secondary influences. If the management has material connections to the bidder or interests relating to the bid, or if a member of the board is (directly or indirectly) personally involved in the launching of the bid, the board must ascertain whether such person is in all respects able to act independently and impartially in the interests of the company and its shareholders. The board must, in relation to its statement regarding the bid, inform the shareholders of all disqualifications of the members of the board and their material connections to the bidder or to the completion of the bid as well as how these disqualifications have been taken into account when evaluating the bid. Aspects of insider trading and disclosure of acquisitions of shares in the bidder may also need to be considered.

Greece Karatzas & Partners Law Firm

There is no specific legislation on management buy-outs.

India Chandhiok & Associates

There are no separate rules concerning management buy-outs and general laws applicable to another acquirer also apply in this case. However, there are regulations restraining voting by interested directors due to a conflict of interest. Further, the Securities and Exchange Board of India (SEBI) (Prohibition of Insider Trading) Regulations 2015 restrict insiders from trading while in possession of unpublished sensitive information (UPSI) in the case of publicly traded companies.

Israel Barnea & Co

There are no rules for management buy-outs.

Italy Nctm Studio Legale

No specific rule directly relate to management buy-outs. However, Article 2501-bis of the Civil Code provides a set of rules for broader leverage buy-out transactions, which applies to mergers between companies in which one of the companies has contracted debts in order to acquire control of the other company and where, as a result of the merger, the equity of the latter is used as general collateral or as a source of repayment for these debts.

Luxembourg Collin Maréchal

There are no specific legal rules on management buy-outs.

Netherlands Stek

There are no specific statutory rules on management buyouts. However, conflict of interest rules and corporate interest and benefit principles should be even more carefully considered in the context of a management buyout.

Nigeria Fred-Young & Evans

The Securities and Exchange Rules and Regulations provide that an application for the approval of a management buyout must be filed by the management making the acquisition, accompanied by the following:

  • the resolution of the shareholders of the company approving the management buyout;
  • the resolution of the management team undertaking the management buyout;
  • a copy of the certificate of incorporation of the company;
  • a copy of the memorandum and articles of association of the company;
  • two copies of the prospectus, which must contain the following:
    • a profile of the company;
    • a profile of the management team undertaking the management buyout;
    • objectives of the management buyout;
    • a five-year audited financial statement of the company; and
    • claims and litigation; and
  • the sale agreement between the company and the management team, which must contain the following:
    • terms and conditions of sale;
    • indemnity against contingent liabilities by the seller to third parties and pay tax not provided for in the account;
    • a clause on the continuation of the scheme if the employees of the target operate a pension scheme;
    • sale and purchase of assets;
    • contracts and creditors;
    • regarding employees ‒ the liabilities and obligations under the existing employment contract will pass to the buyer with accrued contractual and statutory rights unaffected; and
    • regarding debtors ‒ the agreement should reflect that monies owed to the seller by debtors should be paid to the seller unless assigned to the buyer. The purchase price must reflect the fact that the debts are assigned.

Norway Gram Hambro & Garman As

There are no specific rules on management buy-outs. Shareholders are entitled to sell to any other shareholder. However, as members of the board of directors or management, they must act loyally towards the target. In the case of publicly listed companies, management must also take due care of, and act in compliance with, the Securities Trading Act’s inside information rules. 

Romania Volciuc-Ionescu SCA

There are no specific rules on management buy-outs under Romanian legislation, but directors must comply with their duties to:

  • act in the best interest of the company;
  • abstain from decision making in case of conflict of interest; and
  • observe the principle of equal treatment of shareholders.

Relevant approvals from the shareholders should be obtained before preparing a management buy-out transaction.

In the case of public companies, the management must observe the rules on inside information.

Russia Dechert LLP

There are no specific rules regulating management buy-outs. If a manager acquires or holds a participatory interest in a Russian limited liability company or shares in a Russian joint stock company, the acquisition or shareholding falls under the general rules applicable to all participants or shareholders of the company. In practice, in the event of a buy-out, the managers often establish a new company which acts as the purchaser. Management buy-outs are still relatively rare in large Russian companies. Stock option plans for employees are not common or widespread.

United Arab Emirates Winston & Strawn LLP

No specific rules or typical structures for management buy-outs exist in the United Arab Emirates and the transaction will be determined by the relevant parties. 

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?  

Austria bpv Hügel Rechtsanwälte GmbH

There are no specific rules on directors’ duties in relation to M&A transactions. Managing directors and supervisory board members must perform their duties with the diligence of a prudent and conscientious manager and act in the company’s best interest.

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.

Bermuda BeesMont Group

The typical directors’ duties apply in relation to M&A – that is, directors have a duty to act honestly and in good faith, with a view to the best interests of the company, while exercising the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. These fiduciary obligations require directors to make informed decisions and act in good faith when making decisions on the company’s behalf.

Bulgaria Kambourov & Partners, Attorneys at Law

Directors have duties to the shareholders. In an M&A project, the directors should act on instructions and for the benefit of the shareholders. 

Finland Waselius & Wist

In general, directors have a duty of care and loyalty towards the company (as referenced above) and must comply with the principle of equal treatment of shareholders.

If a public company receives a takeover bid, its board is generally required to take active steps to ensure that the best possible outcome is achieved for the shareholders. The interests of shareholders require that the board of directors evaluate the bid and its consequences, and also compare the bid to other alternatives, which might include:

  • continuing the company’s operations as an independent company in accordance with a predetermined strategy; or
  • implementing some kind of structural re-organisation.

The target’s board may also seek competing bids. However, there is no obligation to seek a competing bid. If a potential alternative purchaser is known to the board, it would be justified for the board to consider whether it would be in the interests of the shareholders to approach such other party.

The target’s board must draft and make public a statement regarding the bid after the board has evaluated the bid as set out above. The board must recommend that the shareholders either accept or refuse the bid. The statement must also include the board’s assessment of the strategic plans set out by the bidder in the tender document and their impact on the target’s operations and employment. The statement must be issued as soon as possible, but no later than five business days before the bid expires.

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 detailed report from the company’s financial adviser and be submitted both to the Hellenic Capital Market Commission and the bidder. It must include, among other things, 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 (except for seeking alternative proposals) that exceed the scope of the company’s ordinary business and may cause the takeover bid to be cancelled without a prior authorisation by the general meeting of the shareholders, from the date on which the person that has decided to launch a takeover bid or is obliged to submit a takeover bid informs the target’s board of directors on that takeover bid and until the publication of the bid’s outcome or the bid’s revocation.

India Chandhiok & Associates

Directors’ duties have been statutorily recognised in the Companies Act 2013 which applies to all types of director, including independent directors. These duties include the requirement to:

  • act in good faith in order to promote the company for the benefit of its members as a whole and in the best interest of all stakeholders;
  • exercise duties with due and reasonable care, skill and diligence and independent judgment; and
  • avoid a situation in which a director may have direct or indirect interest that conflicts, or possibly may conflict, with the company's interest.

Therefore, if an M&A proposal is presented to a company board, the directors should ensure that it is in the best interest of the company and its stakeholders, including its employees.

In the case of an M&A transaction involving a publicly traded company, its directors have certain additional obligations. Under the SEBI (Prohibition of Insider Trading) Regulations 2015, UPSI can be communicated by the listed company to potential acquirers in pursuance of a potential transaction only if the target’s board is of the opinion that the transaction is in the company’s best interest. Further, in the case of an open offer under the SEBI Substantial Acquisition of Shares and Takeovers Regulations 2011, the directors (especially independent directors) of a listed company have certain additional duties, including providing a reasoned recommendation to the target’s shareholders on the open offer. 

Israel Barnea & Co

Duty of care A director must act with a level of care with which a reasonable director in the same position would have acted under the same circumstances. He or she must be proactive and use reasonable means to obtain pertinent information when making decisions regarding the transaction. Moreover, the recent trend in Israeli case law is to adopt a position similar to Delaware's business judgement rule.

Fiduciary duty A director must refrain from any conflict of interest with the company, including competing with or exploiting any business opportunity of the company for personal gain. He or she must act in the best interests of the company and all its shareholders – not merely his or her own interests as a shareholder. He or she must use his or her independent discretion when voting on the board and cannot be party to a voting agreement. Nevertheless, the board can approve certain conflicts if the director:

  • acted in good faith and the best interests of the company were not compromised; and
  • disclosed the nature of his or her personal interest (including all material information) in advance.

Duty of disclosure A director must disclose to the board any personal interest that he or she may have and all related material information in connection with any existing or proposed transaction of the company. A ‘personal interest’ includes that of any entity in which he or she:

  • holds at least a 5% shareholding;
  • serves as a director or chief executive officer; or
  • has the right to appoint at least one director or the chief executive officer.

Moreover, if the transaction is an ‘extraordinary transaction’ (ie, one that is not in the ordinary course of business, not on market terms or likely to have a material impact on the company's profitability, assets or liabilities), a director must also disclose any personal interest of his or her family members. Directors are also required to disclose whether they have been convicted of certain offences. 

Italy Nctm Studio Legale

Directors must act in the best interest of the managed company and in compliance with the obligations set out by applicable law and the company’s bylaws.

The Civil Code provides for certain specific obligations (eg, drafting of the annual financial statements and keeping of the corporate books) and other general duties, such as:

  • the duty of care;
  • the duty to inform the other directors;
  • the duty to act advisedly; and
  • the duty to monitor the other directors.

With regard to listed companies, pursuant to a 2010 Italian Stock Exchange Commission (CONSOB) regulation, related party transactions must be resolved by the board of directors with the prior opinion (binding or non-binding) of a special committee, comprised of independent directors, on the company’s interest in entering into the transaction and its substantial fairness.

In addition, the regulation provides that should the independent directors give a negative opinion on a material related party transaction – meaning those deals exceeding certain thresholds as determined by CONSOB – the transaction can be implemented only subject to the approval of the majority of unrelated shareholders (the so-called ‘whitewash mechanism’).

Further, in the case of a tender offer launched by a controlling shareholder, a member of a shareholders’ agreement, a director or any person acting in concert with them (so-called ‘insider bid’), under the Financial Act, the target’s directors must to rely on independent directors’ evaluation; moreover, they usually appoint, on a voluntary basis, a financial adviser in order to assess whether the consideration complies with the relevant legal criteria.

With respect to conflicts of interest between directors and controlling shareholders, the judicial review on business decisions does not scrutinise the merits of the case, nor does it question the terms of the transaction; instead, it focuses on the formal and procedural requirements as a proxy of the performance of the directors’ duties. 

Luxembourg Collin Maréchal

The board of directors must always act in the best corporate interest of the relevant company. The directors must ensure that they have no personal conflicts of interest when deliberating and voting on the relevant board resolutions.

Netherlands Stek

As a general rule, directors should act in the best interest of the company and its stakeholders. These stakeholders include the shareholders, but there is no obligation as such for directors to obtain the best price for the shareholders.

In case of an acquisition of a listed company, the acquisition agreement typically contains a fiduciary out allowing the directors to negotiate with third parties and terminate the acquisition agreement in case a superior offer is made. Further, non-financial covenants addressing matters relevant for other non-shareholder stakeholders (eg, location of headquarters and employee-related matters) are generally agreed.

Nigeria Fred-Young & Evans

Directors owe a duty to the company to act in its best interests to preserve its assets, further its business and promote the purposes for which it was formed. In general, this duty to the company extends to its members and its employees. However, there are no specific statutory provisions on the duties of directors in relation to M&A.

Where a takeover bid has been sent to the directors of the offeree company, the directors must send a directors’ circular to all of the shareholders and the Securities and Exchange Commission before the date for the takeover bid terminates. Any disagreement or dissenting opinion that portrays the takeover bid as disadvantageous to the shareholders should be included in the circular.

Norway Gram Hambro & Garman As

Directors must act loyally towards and in the best interest of their company. Further, they must ensure that all shareholders are treated equally. In the case of publicly listed companies, management must also take due care of, and act in compliance with, the Securities Trading Act’s inside information rules, including ensuring confidentiality for any information disclosed.

In the case of publicly listed companies, directors must prepare a statement for shareholders in accordance with Section 6(16) of the Securities Trading Act. Further, directors must ensure that the company takes no steps that are not in the ordinary course of business during the period in which the shares are subject to a formal offer, in accordance with Section 6(17) of the act. 

Romania Volciuc-Ionescu SCA

The duties of directors of the target in relation to M&A vary based on the type and circumstances of the transaction, as well as on whether the target is a private or a public company. As a general principle, directors:

  • owe a duty of care;
  • owe a duty of loyalty towards the company;
  • have confidentiality obligations; and
  • must act in the best interest of the company.

In case of mergers or demergers, the directors of the companies involved in the transaction must prepare a merger or demerger plan and a special report covering the major steps of the process. These documents are made available to the shareholders, who decide whether to approve the transaction.

In case of share deals, the target’s shareholders will generally negotiate the sale of their shares directly with the prospective buyers. The directors’ involvement is typically limited to setting up the data room for the due diligence exercise, and to decide on what information should be disclosed.

In case of asset deals, the directors decide on the sale of assets by the company (usually with the consent of the shareholders, especially if major assets are affected) and may be involved in identifying prospective buyers and negotiating the transaction documents on behalf of the seller.

In case of public takeovers, the board of the target must issue an opinion on the takeover, for the use of the Financial Services Authority, the bidder and the stock exchange where the shares of the target are listed. The board may also convene the shareholder meeting to present to the shareholders its opinion on the takeover.

Russia Dechert LLP

Generally, Russian company directors (ie, members of the board of directors, members of the management board and the general director (chief executive officer)) have no specific duties in connection with M&A activity.

Directors are generally not liable to third parties. A director must act reasonably in the interests of the company and in good faith. If a director breaches any such duties, he or she may be held liable for damages (real damage and lost profit) caused at the request of the company itself or, in certain cases, of its shareholder/participant, provided that they will need to prove that a director violated his or her duties.

An M&A transaction involving a public company requires that any insider (including the directors of the target) comply with the Federal Law on Combating the Unlawful Use of Insider Information. Such persons cannot use or transfer insider information to any third parties and a breach may result in the imposition of administrative and criminal liability. If there is a voluntary or mandatory tender offer in a public joint stock company, the board of directors is obliged to adopt and communicate to the shareholders its recommendations with respect to the tender offer; if the board members fail to so, they may be liable for any resulting damages. Otherwise, the role of directors in the tender offer process is limited. Moreover, during voluntary and mandatory tender offers, the board of directors’ authority to adopt certain key decisions (eg, an increase of a joint stock company’s charter capital through the issuance of additional shares) is suspended and temporarily transferred to the general shareholders’ meeting.

United Arab Emirates Winston & Strawn LLP

In accordance with the Federal Law concerning Commercial Companies (2/2015), a director must act in accordance with the company’s objectives and the powers granted to him or her by the shareholders. Therefore, a director must ensure that he or she has obtained the necessary internal approvals before entering into any arrangement to bind the company.

Each director is liable towards the company and third party for any fraudulent actions that he or she carries out and will be required to compensate the company for any losses or expenses incurred due to his or her:

  • abuse of power;
  • violation of the provisions of any law in force, the company’s memorandum of association or his or her contract of appointment; or
  • gross error.

Any provision in the memorandum of association or the contract of appointment contradicting this provision is null and void.

A director must not undertake any activities competing with the company’s line of business unless he or she obtains approval from the company’s shareholders. In addition, a director may not vote on any resolution in which he or she has a direct or indirect interest and is required to report in writing to the other directors with full details of such matter.

A director is prohibited from utilising or disclosing company secrets or attempting to damage the company’s business. If the director violates this prohibition, he or she may be imprisoned for up to six months and fined no less than Dh50,000 (approximately $14,000).

In addition, the code for listed joint stock companies provides that a director shall, when exercising his or her powers and duties:

  • act honestly and faithfully, taking into consideration the interests of the company and its shareholders;
  • make the utmost effort; and
  • adhere to applicable laws, regulations and resolutions, as well as the company’s articles of association and internal regulations.

The Securities and Commodities Authority may enforce such provisions with a range of administrative penalties, including a warning, delisting and fines.

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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