Who calls the tune in corporate restructurings – managers or shareholders?

Overview

Overcoming so-called “agency problems” occupies centre stage in corporate law. Generally speaking, whenever an agent acts on behalf of a principal, the problem arises that the agent does not necessarily share the principal’s interests or act accordingly. With regard to corporate law, conflicts of interest must be addressed between (i) managers and shareholders, (ii) controlling and minority shareholders, and (iii) shareholders and non-shareholder constituencies. This is especially true for corporate restructurings (eg, mergers, demergers, etc.). Corporate law around the world attempts to mitigate the opportunism related to corporate restructurings.

With that said, this articles shows how the Austrian law on stock corporations (Aktiengesellschaften) and limited liability companies (Gesellschaften mit beschränkter Haftung) assigns the roles between managers and shareholders in the context of corporate restructurings.

Managerial power

Austrian stock corporations and limited liability companies are governed by their management. However, the law reserves certain fundamental decisions to the shareholders. Shareholders have more say in limited liability companies than in stock corporations.

For fundamental decisions that require the involvement of shareholders, management has the duty to prepare shareholder decisions and implement shareholder resolutions.

Further, the management power (Geschäftsführer) of an Austrian limited liability company can be restricted by shareholders’ directives (compare section 20 para 1 of the Austrian Limited Liability Companies Act [GmbH-Gesetz]). In contrast, the management board (Vorstand) of an Austrian stock corporation cannot, in general, be bound by shareholders’ directives.

Shareholders’ resolutions approving corporate restructurings

Usually, corporate restructurings must be approved by the company’s shareholders (compare section 221 of the Austrian Stock Corporation Act [Aktiengesetz], section 8 of the Austrian Law on Demergers [Spaltungsgesetz]). The management is typically obliged to inform the shareholders about the envisaged restructuring and prepare the shareholders’ meeting approving the restructuring. Certain intragroup restructurings do not, however, require shareholder approval.

Once the restructuring is approved by the company’s shareholders the management no longer has the discretion to decide whether it will proceed with the restructuring or not but is obliged to implement the shareholders’ resolution and complete the restructuring. If the management does not comply with the shareholders’ resolution it risks facing indemnity claims and being ousted.

Shareholders’ directives

Must shareholders wait until management decides to undertake a corporate restructuring?

The answer is straightforward for an Austrian limited liability company. As mentioned, the managers of an Austrian limited liability company are bound by shareholders’ directives. Shareholders can thus take the initiative by adopting a resolution directing the company’s management to carry out restructuring measures.

The issue is more complicated with Austrian stock corporations. Contrary to shareholders of limited liability companies, shareholders of stock corporations cannot, in principle, exert their influence on the company’s management by way of directives. However, as shown above, the management board’s managerial power does not encompass fundamental decisions, including most corporate restructurings. As a consequence, the above remarks concerning limited liability companies generally hold true for stock corporations as well. Shareholders of stock corporations can therefore issue directives demanding corporate restructurings. In this case the management board must comply with the share-holders’ directive and conduct the restructuring.

Exclusion of liability

The fact that the management has acted in compliance with a shareholders’ resolutions usually leads to the exclusion of liability vis-à-vis the company (section 25 para 5 of the Austrian Limited Liability Companies Act, section 84 para 4 of the Austrian Stock Corporation Act).

Supervisory board

Finally, supervisory boards (Aufsichtsräte), if established, play a crucial rule in most corporate restructurings. They usually have two duties: (i) examine the corporate restructuring and report about their findings, and (ii) participate in the appointment of an expert auditing the restructuring.

Conclusion

Austrian stock corporations and Austrian limited liability companies are governed by their management. However, in the context of corporate restructurings, the management’s managerial power is restricted by shareholders’ resolutions.

In most cases corporate restructurings must be approved by the company’s shareholders. Further, shareholders of Austrian stock corporations or limited liability companies can generally seize the initiative and adopt a resolution directing the company’s management to carry out a corporate restructuring.

Austrian stock corporations and Austrian limited liability companies are governed by their management. However, in the context of corporate restructurings, the management’s managerial power is restricted by shareholders’ resolutions.