Groups of Companies: A Comparative Law Overview (Ius Comparatum - Global Studies in Comparative Law, 43) 3030366960, 9783030366964

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Ius Comparatum – Global Studies in Comparative Law

Rafael Mariano Manóvil  Editor

Groups of Companies A Comparative Law Overview

Ius Comparatum – Global Studies in Comparative Law Volume 43

Series Editors Katharina Boele-Woelki, Bucerius Law School, Hamburg, Germany Diego P. Fernández Arroyo, Institut d’Études Politiques de Paris (Sciences Po), Paris, France Founding Editors Jürgen Basedow, Max Planck Institute for Comparative and International Private Law, Hamburg, Germany George A. Bermann, Columbia University, New York, USA Editorial Board Members Joost Blom, University of British Columbia, Vancouver, Canada Vivian Curran, University of Pittsburgh, USA Giuseppe Franco Ferrari, Università Bocconi, Milan, Italy Makane Moïse Mbengue, Université de Genève, Switzerland Marilda Rosado de Sá Ribeiro, Universidade do Estado do Rio de Janeiro, Brazil Ulrich Sieber, Max Planck Institute for Foreign and International Criminal Law, Freiburg, Germany Dan Wei, University of Macau, China

As globalization proceeds, the significance of the comparative approach in legal scholarship increases. The IACL / AIDC with almost 800 members is the major universal organization promoting comparative research in law and organizing congresses with hundreds of participants in all parts of the world. The results of those congresses should be disseminated and be available for legal scholars in a single book series which would make both the Academy and its contribution to comparative law more visible. The series aims to publish the scholarship emerging from the congresses of IACL / AIDC, including: 1. of the General Congresses of Comparative Law, which take place every 4 years (Brisbane 2002; Utrecht 2006, Washington 2010, Vienna 2014, Fukuoka 2018 etc.) and which generate (a) one volume of General Reports edited by the local organizers of the Congress; (b) up to 30 volumes of selected thematic reports dealing with the topics of the single sections of the congress and containing the General Report as well as the National Reports of that section; these volumes would be edited by the General Reporters of the respective sections; 2. the volumes containing selected contributions to the smaller (2-3 days) thematic congresses which take place between the International Congresses (Mexico 2008; Taipei 2012; Montevideo 2016 etc.); these congresses have a general theme such as “Codification” or “The Enforcement of Law” and will be edited by the local organizers of the respective Congress. All publications may contain contributions in English and French, the official languages of the Academy.

More information about this series at http://www.springer.com/series/11943

Académie Internationale de Droit Comparé International Academy of Comparative Law

Rafael Mariano Manóvil Editor

Groups of Companies A Comparative Law Overview

Editor Rafael Mariano Manóvil University of Buenos Aires Buenos Aires, Argentina

ISSN 2214-689X (electronic) ISSN 2214-6881 Ius Comparatum – Global Studies in Comparative Law ISBN 978-3-030-36696-4 ISBN 978-3-030-36697-1 (eBook) https://doi.org/10.1007/978-3-030-36697-1 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Groups of Companies: Les groupes de sociétés . . . . . . . . . . . . . . . . . . . . Rafael M. Manóvil

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National Report on Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . José Engrácia Antunes

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National Report on France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pierre-Henri Conac

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National Report on Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Diego Corapi and Domenico Benincasa National Report on Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Rolf Dotevall National Report on Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Mónica Fuentes Naharro National Report on Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Tomotaka Fujita National Report on the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Franklin A. Gevurtz National Report on Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Florian Heindler National Report on Brazil, 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Fernando Kuyven National Report on Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 Mariola Lemonnier National Report on Brazil, 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 André Mendes Moreira and Marina Machado Marques v

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National Report on Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 Sebastian Mock National Report on Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 Gül Okutan Nilsson National Report on the Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 Mieke Olaerts National Report on Cyprus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457 Thomas Papadopoulos National Report on Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 Ville Pönkä National Report on Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509 Samantha S. Tang National Report on Croatia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537 Nina Tepeš, Hrvoje Markovinović, and Petar Miladin National Report on Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569 Vassilios D. Tountopoulos National Report on Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591 María Elsa Uzal National Report on the United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . 627 Remus Valsan National Report on Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659 Eddy Wymeersch National Report on Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681 Renata Zagradišnik

Groups of Companies: Les groupes de sociétés General Report Rafael M. Manóvil

Abstract This General Report provides a comparative law analysis of the phenomenon of groups of companies, through an overview and summary of the information contained in the more than twenty National Reports presented to the International Congress on Comparative Law held in Fukuoka, Japan, in 2018, which make up this book. The General Report begins by surveying the manner in which the different legislations define and describe groups of companies, then goes on to study the varied approaches and solutions found in and offered by the legal systems analysed in the book, mainly for the protection of minority shareholders and that of creditors and other third parties, also mentioning some regulations pertaining to different areas of the law (such as labour, tax and competition law). As such, it provides an overall, but altogether detailed view of the phenomenon in legislations from various parts of the world, organized around the most relevant topics surrounding groups of companies.

1 Introduction 1.1

General Remarks

‘Groups of companies’ have been a fact of economic life and business organisations for many decades. The Belgian report, for instance, refers to discussions on the topic that go back to the beginning of the twentieth century and the first known court resolution on the subject was the 1881 German Rumanian railroads Reichgericht’s decision.1

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19.12.1881, published in RGZ, 3-123. The court declared that a management agreement by which the company assigned the right to appoint its directors to a Rumanian government agency was null and void, on the basis that legal entities cannot give away their legal capacity. R. M. Manóvil (*) University of Buenos Aires, Buenos Aires, Argentina e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_1

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When we talk about ‘groups of companies’ we are referring to the legal instruments used to address two opposite economic realities. On the one hand, groups of companies result from the phenomenon of enterprise concentration. This explains why governments so often change their policies to ease such concentration or to make it more burdensome, be it through incentives or direct intervention. On the other hand, groups of companies are the result of enterprise growth, expansion and decentralisation, driven by activity specialisation, geographical diversity and sometimes regulatory factors. While this report concentrates primarily on company law issues, groups of companies affect various different areas of Law. Indeed, the concept of ‘groups of companies’ is not only defined differently by different local and international pieces of company law legislation, but it is also common for the concept to be defined in accordance with the purpose of other specific rules attached to it (competition law, tax law, capital markets law, labour law, insolvency law, private international law, public law regulation on banking, financial and insurance institutions, environmental law, etc.). We must also keep in mind that groups of companies not only concern the private sector: in many countries state owned or state-controlled enterprises,2 or companies that are mixed ventures between public and private entities, are active participants in the economy. In any case, the essence of what matters with regard to groups of companies lies in the decision-making power over one or more underlying companies, rather than on the question of whether a company has property rights over others.3 Thus, the means to acquire and to be able to make use of such power may include a wide range of instruments, such as shares with multi-voting rights, shareholder agreements, special provisions in articles of association and pyramid structures of several layers of holding companies.4 As stated in one of the national reports, the influence that is provided by that power must be such that the controlling company can enforce it upon the controlled by means of the replacement of the latter’s own will making power by the former’s. The exercise of this power may entail risks for the subordinated, controlled or dependent company, as well as for the interests attached to it: those of the shareholders, the creditors, third parties and other stakeholders. The alluded power and influence on the dependent company matters the most in relation to business decisions that are generally taken by the board of directors. This is true for all areas of law notwithstanding that, as an exception, the interests at stake may be affected by a shareholders’ meeting resolution: minority shareholders’ rights are mostly in danger by day to day business decisions; insolvency and the risks creditors are exposed to are a consequence of the company’s business; the relevant In Italy the first group of companies, established in 1931, was the IRI (Istituto per la Reconstruzione Industriale), which was a state holding. 3 The Greek report informs that authors define a group as the situation between several companies which allows the use of the powers of some or all organs of a company for the interest of another company. 4 The Belgium national report informs that pyramidal structures are still frequent in that country. The same is true for other European countries, like Germany or Italy. 2

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taxes are imposed on business transactions; labour law deals with relationships which are in the hands of the management; the issues related to the protection of competition are in the frame of the board’s decisions, and so on. Therefore the definition of control is directly or indirectly linked to the exercise of power over the organ responsible for the management of the company, as emerges clearly, for instance, from Germany’s regulation on domination agreements: when these agreements are made it is the board of directors of the dependent corporation that is bound by the controlling enterprise’s instructions. The same is true in countries that followed the German model. This general report, like the national reports it is based on, deals only with the so-called subordinated groups, thereby excluding the different forms of joint venture, coordination or cooperation groups. In other words, the report is intended to offer a comparative study of groups which include a dominant or controlling party (not excluding joint control by more than one entity) and one or more subordinated or controlled companies. It therefore focuses on the conflicts—both internal and vis-à-vis third parties—arising out of the lack of independence of companies that are part of a group. It also addresses a similar kind of conflicts at the level of the parent company. The first objective of group regulation has historically been, and still is, the protection of minority shareholders and creditors of the subsidiaries,5 i.e. duties and liabilities of directors and controlling shareholders. But in some countries the objective is also business minded and focuses on the need to have a proper and orderly group management,6 whilst at the same time dealing with the organisation and power distribution within the whole group. From this perspective it is also reasonable to seek to protect members of the boards of both subsidiaries and parent companies against unreasonable burdens that may be placed upon them: what are their duties within the whole picture of the group; what are the limits of their reasonable autonomy when receiving or issuing instructions? The reality of groups varies in the light of many different factors. In some countries large corporate groups have widely spread out shareholders while in some others control is in the hands of families. Large and small groups coexist everywhere and it does not come as a surprise that case law very often refers to smaller groups rather than to the largest ones. Most countries do not have specific legislation on groups of companies’ desired or allowed operations. They instead tend to rely on general company law rules and to define control primarily, albeit not always only, for disclosure and accounting purposes. There are some countries which have special provisions for certain types of companies and different ones for others, as opposed to countries where, whatever rules are applicable, the legal form of the dependent or controlled company is irrelevant. Not much attention has been paid to the possibility to issue tracking shares, targeted stock or Spartenaktien, which is a way of looking at the problem from the

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What has been called the bottom-up model. The so called top-down perspective.

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reverse side: rather than independent entities bound within a group, in this case the assets of one entity are divided for investment and revenue purposes into different parts or divisions, each carrying out a certain line of business activities. Besides the normal shares, the company issues special shares linked to such specific business activities. A clear separation between the divisions and the general business of the company must exist: no subvention from one division to the rest is admissible, as is not the possibility to shift assets within any of the group’s companies (Fuchs 2003, p. 177). Arts. 2350 and 2447 bis of the Italian civil code, as reformed in 2003, foresee this kind of shares and asset separation. This topic merits deeper thoughts in the context of the subject of this report.

1.2

The Main Problems

Most countries have no general rules on groups of companies or on relationships within a group. The most common approach is therefore not a holistic one, but rather a relatively separate analysis of the various issues at stake. In Anglo-Saxon legal systems the conflicts and problems within a group of companies are very frequently defined as agency problems, essentially because managers are considered agents of the shareholders. Traditionally the basic conflicts that have been dealt with are those between minority or external shareholders and the controlling shareholder and those between creditors and the controlling shareholder, both with a particular focus on to the role of managers and board members of subsidiary as well as parent companies. But these are not the only problems that need to be addressed when discussing the law relating to groups of companies. The more than twenty pieces of national or supranational legislations which are compared in this report provide different approaches with regard to where our topic starts and where it finds its limits. A significant number of questions need to be answered in the light of each national legislation. For example: are the rules structured only around the idea and consequences of control or domination? Or do they (also) deal with a legal definition of groups, thus including a more intense exercise of power over the controlled companies by means of a unified direction of the group, or einheitliche Leitung, direzione unitaria, dirección unificada, or whichever way this element may be referred to in different languages and countries? Most importantly, is a so-called group management permitted or would it lead to undesired consequences? How far is it acceptable for the dependent companies’ will power to be affected by the head of the group? Are there concessions made to a group interest which would permit business decisions to take into account the synergies between the different group entities? If so, which are the conditions under which it is legitimate to impose on a subordinated company the sacrifice of its own interest? Which are the conditions and the limits for self-dealing and related party transactions within a group? Who deserves legal protection, the subsidiary, its minority shareholders and creditors, or should the focus be on facilitating group management? Is a reasonable compromise possible?

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One if not the most central issue is if, when and how liability can be extended to a parent company. It is extremely rare to find legislation that provides for strict liability in this regard. But there are significant differences when it comes to determining when the parent’s conduct, including its mere interference, may lead to liability. In relation to this issue, the much wider question arises as to how the lifting or piercing the corporate veil or the disregard of legal entity doctrine is accepted and applied in each country. In most of them, if at all addressed, the doctrine has been introduced by the courts. But in some jurisdictions there are specific statutory rules that admit some form of it. Its relevance can be very significant, because it may go beyond simply extending the liability of a subsidiary to a parent or to another member of the group and include the possibility of requesting specific in natura performance of contractual obligations by an entity or entities different to that which was a party to the agreement. As the US report puts it, the central challenges faced by corporate groups are, first, to prevent one of the companies from misappropriating the other company’s assets or earnings (a practice known as tunnelling), or to take advantage of the minority shareholders by any other means, and second to prevent the abuse of limited liability through the excessive externalisation of risks. Interestingly, in addition to the protection of the subsidiary company, its shareholders and creditors, other reports also stress the need to protect directors of both the subsidiary and the parent companies, as well as the parent company itself, against liability claims from third parties and minority shareholders. The nature of the concept of domination or control that the rules and case law of different jurisdictions and areas of law attach consequences to is also relevant for discussion and comparative purposes. What are the limits set to the concept of domination or control? In other words, does the law admit special rules to be applied only where domination is exercised by means of organic control (where the dominating entity exercises its control over the internal decision-making process of the subordinated company), or does it also include the so-called external economic control by means of a dominant or prevailing influence based on a contract, or even another kind of relationship? In Germany the clear answer is only organic control,7 whereas in Italy, Argentina and Uruguay all sorts of control are included, at least in theory.8

7 “A controlling influence based on an economic dependency or imbalance is insufficient and does not constitute a controlling influence in the meaning of section 17 AktG” (see in this volume Mock, “National Report on Germany”, Nr. 47, citing case law from 1983 and 2011). “Consequently, contractual arrangements dealing with rights and obligations of the entity in their regular scope of business . . . do not constitute a controlling influence”. 8 The author of this report, notwithstanding his Argentine origin, is strongly against this approach: the problem of groups in company law is the influence on the organic decision-making process in the controlled or dependent company. Bilateral relationships, even as stringent as franchise or project-finance agreements can be, are of a different nature: all the problems arising out of the abuse of one party’s superior power in a contract can be solved applying the rules of common private law, as if the parties, especially the weaker one, were individuals and not companies.

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This report will address the numerous questions and problems posed above, to the extent possible given the current stage of development of the relevant issues around the world.

1.3

National Reports

In preparation for the 20th Congress of the International Academy of Comparative Law, to be held in Fukuoka, Japan, in 2018, National Reports were submitted by scholars from 22 countries: Argentina, Austria, Belgium, Brazil, Cyprus, Finland, France, Germany, Greece, Italy, Japan, Netherlands, Poland, Portugal, Singapore, Slovenia, Spain, Sweden, Taiwan, Turkey, United Kingdom and United States of America. What follows is an analysis of these reports, each of which can be found in later chapters of this book. For the avoidance of doubt, the citation of any specific rule as an example of a certain legal solution does not exclude the possibility of other countries providing similar solutions.

2 Elements That Define a Group of Companies 2.1

Control and the Different Purposes of Its Definitions

It is generally accepted that the definition of a group of companies includes two elements: control or domination, which is a legal element, and unified direction or common management, which is a factual enterprise organisational characteristic. Definitions of control vary from country to country and between different fields of law. In general the definition is attached to the real or potential power to exercise over a company a dominant or prevailing influence by means of a majority shareholding or by majority voting rights (adding direct and indirect shareholdings and other means, such as multiple voting rights in countries where it is permitted), or a less than majority shareholding that de facto (because of regular shareholder’s absence) allows to permanently prevail at ordinary shareholders meetings, or to appoint or remove the majority of the members of the board. Company and capital market laws of the various jurisdictions compared in this report show differences, but there is a substantial coincidence with regard to the concept of organic control or domination: as mentioned above, all the jurisdictions refer to a direct or indirect influence on the internal decision-making process, by various means. To that end, some national laws set definitions, both in general and for specific purposes, not only of control and domination but also of concepts like subsidiary, parent, affiliated companies, linked, related companies or the like. National reports detail some more differences and similarities, which are of lesser importance for the overall picture.

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The most relevant differences concern three different aspects of the discussion. The first is the legal admission of domination agreements, the object of which is to grant a party a contractual right to impose mandatory instructions on the board of the other. Germany’s 1965 Aktiengesetz (AktG) is the forefather of this approach, which includes some other enterprise agreements, like profit transfer agreements and others. The same idea was followed with some variations by, among a few others, Brazil, Portugal, Slovenia, Croatia, Poland, Taiwan and Turkey. In contrast, where these agreements are not expressly contemplated, they will be inadmissible because of their inconsistency with the applicable legal principles. The second relevant issue in relation to which national laws adopt divergent approaches refers to the scope of the concept of control or domination. In some jurisdictions the definition of control or domination for company law purposes is limited to the so called internal or organic control (i.e. the one exercised on the subordinated company’s internal decision-making process). In contrast, other national company laws include in the definition or description of control the exercise of a dominant influence by means of so-called special links, which may only be contractual links (Italy), or any other link (Argentina and Uruguay). The first group of legal systems tackle these cases with the instruments of general private law because the conflicts that can arise are not regarded as company law problems. A third set of differences relates to the persons or entities that may be parties to domination or control relationships. Control only over companies or also over other types of entities? If only companies, all types or only certain types? Which type of entity or person is to be considered the head of a group of companies, or the dominant or controlling party in the relationship? These questions are obviously relevant to the identification of who might face the risk of being exposed to certain liabilities. Having a precise definition of control matters the most in those cases where a certain effect or a specific duty are attached to it. This happens when it becomes mandatory to produce consolidated financial statements or to produce and disclose certain information about the business relation between dominant and dependent companies. That is why the origin of many of the definitions of control is found in national and supranational accounting rules, as will become evident from the examples that follow. In fact, many European countries define control in accordance with the Seventh Company Law Directive. Sweden is an example of this. The Austrian Commercial Code, also following European directives, defines the relationship of control for accounting purposes on the basis of a parent company and a subsidiary. To that end the Code refers to scenarios under which the existence of a common direction is to be presumed. These scenarios include the holding of a majority of the voting rights and the entitlement to appoint and remove the majority of the board members (even not being a majority shareholder). In contrast, for a completely different purpose, merger control is triggered in Austria if more than half of the members of the Board or of the Supervisory Board coincide in two different companies. The same criteria are included in the Polish definition of domination for competition protection purposes. On the other hand, the Polish Commercial Companies

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Code defines dominant and dependent companies using the usual standards of majority voting at shareholders meetings and right to appoint or remove the majority of the board members of the dependent entity. However, it also qualifies as dominant that company which carries out a dominant influence on the activities of another company or of a cooperative on the basis of a management or profit transfer agreement, both of which are foreseen by Article 7 of the Polish Code. Dutch law, in turn, defines the concept of subsidiary rather than that of control, but the definition is still in line with the one provided by most other European jurisdictions, in the sense that in all cases a controlling relationship must exist, either by means of a majority shareholding (alone or with the support of others who are bound to vote together), or by the power to appoint or remove the majority of the members of the management board. Dutch law also defines the concept of “participating interest” as that which arises when the legal entity has provided capital to another “in support of its own activities”. There is a presumption that this is the case when one fifth of the capital is held. The law of the Netherlands introduces differences when defining the concepts of group, subsidiary and dependent company. Under Dutch law, a legal entity is dependent, amongst others, if another company has provided at least one half of the issued share capital. The definition plays a role in the so-called structure regime. If that regime is applicable to the company, it entails certain changes to the governance structure, amongst others, the appointment of the board of directors. The definition of a dependent company serves the purpose of ensuring a central management in a group structure in cases where this regime could apply. If this regime would be applicable, different rules can apply depending on whether all or part of the companies that are involved are national or foreign entities. In the UK the definition of group of undertakings includes not only companies but also unincorporated entities, and arguably also natural persons. The concept of group of companies, which excludes the exercise of a dominant influence from its scope, is defined separately. For the purpose of establishing restrictions regarding loans, quasi-loans and credit transactions between them, associated companies are defined, broadly speaking, as any members of the group. The primary purpose of Spain’s definition of control, which is laid down in Article 42 of the Commercial Code, is also to adapt the definitions of the European directives that deal with the duty to produce consolidated financial statements. This definition applies to all types of companies, but although it is considered as the main general definition of control, for tax consolidation purposes a specific legislation provides a different one. It is also for accounting purposes that Greek law 4308/2014 defines control as “the ability of an entity to determine the financial and operational policies of another entity in order to collect profits arising out of the latter company’s activities”. The notion of control is based on the concept of dominant influence, which is in turn derived from the power of determination referred to in the above definition, “without taking into account other parties’ rights or influences”. Significant influence is the influence on financial and operational decisions “without exercising control or at least joint control on this other entity”, which is presumed if someone has 20% of the

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voting rights of the company invested in. The obligation to produce consolidated financial statements, which applies to all kinds of control, is infrequent when the right to exercise a dominant influence is based on a minority shareholding, exclusively on a contract or on the articles of association. The Belgian Companies Code of 1999 provides definitions of both exclusive and joint control. Control under the Belgian Code is the power, in law or in fact, to exercise a decisive influence on the appointment of the majority of the members of the board or of the managers, or on the orientation of their management. Control is presumed juris et de jure under certain circumstances (majority of voting rights, right to appoint or to remove the majority of the administrators, a clause in the company’s articles of association or an agreement with the company, etc.) and the presumption is juris tantum if the shareholder exercised the majority vote at the two last shareholder meetings. Strictly for accounting purposes, the United Kingdom’s Companies Act 2006 provides a definition of ‘group of undertakings’ which is in line with the EU requirements on consolidated accounts. The Act defines ‘group of undertakings” as the parent undertaking and its subsidiaries, where the parent undertaking is one which has the majority of the voting rights in a subsidiary or otherwise the ability to direct its overall policy, or the right to appoint or remove a majority of the board of directors, or exercises a dominant influence by provision of its articles of association or by virtue of a contract,9 or has the legal or factual power to exercise dominant influence,10 or is managed together with a subsidiary on a unified basis. Nevertheless, the United Kingdom has a somehow peculiar rule in Section 4 of Schedule 7 of the Act, which refers to the exercise of a dominant influence stemming from a contract “permitted by the law under which the subsidiary undertaking is established”. This type of contract is not permitted in the UK, but in those countries where the law allows subsidiaries to be bound by them, foreign companies are generally prevented from being the dominant party. Cyprus’ company law is based on the British 1948 Companies Act and contains definitions of holding or parent and subsidiary companies which are similar to those of other European jurisdictions. But the law of Cyprus establishes a presumption that a company’s board of directors is controlled by another company when the latter has the power by itself, without the consent or concurrence of any other person, to appoint or remove all or a majority of the directors. It is debatable whether providing such a detailed definition has any advantage, or if a general principle simply referring, for instance, to the power by any means of imposing decisions and instructions on a subsidiary, serves the legal purpose better. This, of course, depends on what we seek. If it is legal certainty and the protection of those who are or may be

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Dominant influence is described in the UK as the right to give directions on the operating and financial policies of the subsidiary which are binding on its directors whether or not they are for the benefit of the subsidiary. 10 This includes the power of a shareholder who in practice prevails or may veto decisions because of the rest of shareholders’ regular absence.

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involved in group businesses, a precise description of what is control and what is not, seems appropriate. But if what is mainly envisaged is the protection of the interests that may be affected by the exercise of controlling power, broader, more flexible principles which allow for a case by case assessment of what is reasonable may provide for a fairer system. The situation outside Europe is not very different. Singapore’s Companies Act also defines the holding-subsidiary relationship with reference to whether the former holds more than half of the voting rights of the latter and to the alternative power to control the composition of the board of directors. As a special note, however, the Singapore definition seems to include a presumption of control also by the mere presence of a veto right. This would be rejected in most countries, where the domination power has to be a power to positively act and decide, whilst the passive obstructionist veto right is not defined as control. In Japan the accent is also on the controlling power over the management which can affect the subsidiary’s decisions with regard to its financial and business policies. The law foresees different ways of achieving this power, including by means of an agreement. The Companies Act defines subsidiary and parent companies, the former being a company “the management of which is controlled by a Company” and the latter “any entity . . . who controls the management of a Stock Company”. As in other countries, for different legal purposes the definitions are subject to variations. The Japanese report points out that, in general, it is more likely for administrative regulations than for private law rules to take into account not only control, but indeed the mere existence of a group. This is the case of the Antimonopoly Act, which defines a group of combined companies as a parent-subsidiaries relationship; the Corporation Tax Law, which allows for a consolidated tax system if a corporation has full controlling interest in other companies; and the Banking and Insurance laws, which establish financial regulations applicable throughout the whole group in the presence of subsidiary companies. Brazil offers a particularly diverse variety of definitions of control and groups, for instance under competition, social security and labour law, for the purpose of establishing in each case the joint and several liability of different entities which are members of the same group.11 In Taiwan, besides the usual standards of majority shareholding and voting rights, the definition of control also encompasses the direct or indirect control over the management of the personnel, or the financial or the business operations of another company. In the light of the different definitions of control, the question of what happens when more than one person or entity exercises control over another arises. To be clear, the question does not concern cases of joint control by more than one person, but of control by two different persons or entities on a different basis. This is addressed by the Finnish report, which rightly points out that, under some

11 The same is the case in respect of consumer law, were the parents’ liability is in subsidy of the controlled company’s liability.

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circumstances, a company may be under the control of two or more independent entities. The example provided is that where one shareholder holds the majority of the voting rights but another has the right to appoint or remove the majority of the members of the board. This can happen in those jurisdictions where it is admissible for board members to be appointed by third parties who are not shareholders, but also under those where the articles of association may allow different classes of shares to grant the shareholders of each class the right to appoint a certain number of management or supervisory board members.12 This may lead to a situation where a minority shareholder has the right to appoint and remove the majority of such board members, while another shareholder holds the majority of the voting power for all other purposes. No known legal system provides that in such a case one controlling party prevails over the other. From a purely logical point of view the conclusion would seem to be that only the majority shareholder should be bound to produce consolidated financial statements, while liabilities would fall on the party that in fact exercises the controlling power on the controlled company’s business decision making process in a damaging way.

2.2

Organic Control Only or Also Other Sources

It has already been stressed that the essence of the topic discussed in this report lies in the power to exercise influence over or to determine the decision-making process of a company, which only formally remains an independent entity. The generally accepted source of this power is of organic nature, meaning that the power and influence is such that members of its internal bodies would not be able to decide differently. It has also been mentioned before that the organic influence that matters the most is the organic influence over the management board. This raises the need to consider the manner in which the internal organisation of companies is structured in each jurisdiction. The way in which a specific legal system organises the structure of the company’s organs and their respective powers and competences may provide tools for the exercise of domination power. In this respect it is relevant to establish whether the shareholders meeting (or equivalent governing organ of a company) may give binding instructions to the company’s management board or administrators, and also whether the fact that such instructions were given by the shareholders assembly protects the board against liabilities when the instructions caused damages or a disadvantage to the company. Germany provides an example of this. Its Konzernrecht deals with the case where a stock corporation is the dependent company, because the powers and competences of the shareholders meeting are limited and the board of directors has all the residual powers. These rules do not

12

This is the case of the 1972 Argentine Company Law (Art. 262), and the 1989 Uruguayan Company Law (Art. 377).

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include the limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) because in this type of company it is foreseen that the shareholders may provide mandatory instructions to the managers. There are a variety of different solutions in comparative law on this subject. The Argentine General Company Law establishes for corporations that shareholder meeting resolutions which are in accordance with the law and the articles of association are binding for all shareholders and for the board. On the other hand, the law provides that the board of directors is in charge of the management of the corporation’s business, and directors have to fulfil their duties with loyalty and the diligence of a good businessman, under penalty of being responsible for damages if they fail to do so. Shareholders have no such professional duties or liabilities. Therefore the prevailing view in Argentina is that shareholder meeting resolutions that do not meet the standard of a diligent businessman’s decision or are not compliant with the law, do not bind the directors and, if executed by them, their liability is not waived. The same applies to limited liability companies. Similar questions are raised in other jurisdictions. Just to compare: whereas in Sweden the Companies Act establishes a hierarchic order -the board must comply with instructions from the shareholders meeting provided they are not illegal-, the Dutch Supreme Court ruled already in 1955 that the shareholders meeting does not have a higher power than the board, that each organ has powers of its own and that the other organ has to respect their limits. Therefore, in the Netherlands shareholder meetings do not have a general authority to issue binding instructions to the board on matters which are within the latter’s competence. In relation to private limited companies this rule has changed in more recent years: shareholders may now instruct the managers, who must follow the instructions except in the cases where these are against the interest of the company. In contrast, the Greek report informs that, if the board of a corporation acts in compliance with a decision of the general assembly, board members are not liable. As the Greek report further informs, this is the way to hold directors harmless and shift liability, if any, to the controlling shareholder. As will be discussed later on, these sorts of issues may become relevant for directors’ liabilities when following, or not, instructions from a controlling shareholder. There is, nevertheless, a common frame which contains all these differences: the means of control are organic, meaning that the control is set on the internal decisionmaking power mechanics and does not include the power that may be exercised from outside the company’s organization as a company law problem. This must be carefully borne in mind because some jurisdictions include in their definition of control not only the organic control referred to above, but also the exercise of a dominant or prevailing influence via special links, typically contractual. This is the case of Italy, Argentina and Uruguay, which include the notion of external economic control in the definition of control provided by their respective company law legislations. This broader definition does not refer to the German sort of domination agreements, which are not allowed except in a handful of countries, because these so-called enterprise agreements give one party the power to issue mandatory instructions to the board of the dependent company, thus establishing a

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clear domination on an organ of the latter. The Polish Commercial Companies Code also contemplates this type of enterprise agreements when, besides the usual standards of majority of votes at shareholders meetings and the right to appoint or remove the majority of the board members of the dependent entity, it also includes in the definition of dominant and dependent companies the case where a dominant influence on the activities of a company is carried out on the basis of a management or profit transfer agreement (Art. 7). Art. 2359 of the Italian Civil Code, in addition to defining control as the situation under which a company has the majority of the voting rights at an ordinary shareholders’ meeting or enough voting rights to exercise a dominant influence at such meetings (organic internal control), also includes in the definition of control the cases where companies are under a dominant influence of another company as a consequence of a specific contractual relationship with the latter (economic external control). Again, the contracts comprised in this definition do not include the German type domination agreements, which are not permitted except in those countries which expressly foresee them. The reference in the Italian Code is to ordinary bilateral contracts where one party has a strong power over the other. Some examples provided by the Italian literature of cases that could be (but not necessarily are) meant to be included, are franchise agreements, project financing agreements and the like. This model has been followed by the Argentine company law, as amended in 1983, and later by the 1989 Uruguayan company law. The wording of these two pieces of legislation is even broader than the Italian provision, in so far as it includes not only contractual links, but any other special links among the concerned entities.13 In France the definition of control for consolidation purposes includes the cases where “a dominant interest is exerted over the company by virtue of a contract or the terms and conditions of its memorandum and articles of association, when the applicable law allows this”. This formulation is unclear, and not sufficient information is available to allow us to determine whether the intention is to include the so called economic external control, as Italy, Argentina and Uruguay do. In any event, save for accounting consolidation purposes, in France the presence of control alone has no consequences. From the company law perspective it does not make much sense to give the same treatment to the situation where what is at stake is the interference of an external power in the decision making process and the consequent loss of independence of the dependent company and of its own willpower (with its inherent risks for the company and the interests attached to it) and the very different situation where pressure is exercised by means of a bilateral contract under which one party has the stronger and the other the weaker position. This is an ordinary private contract law problem and the disputes and abuses that may arise under this type of relationship need not and cannot be resolved with the tools of company law; the general contract law remedies suffice. Indeed, in the cases of organic control a reaction by the

13

Art. 33, par. 2, of the Argentine Company Law and Art. 49 of the Uruguayan Company Law.

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dependent company against the abuses of the dominant party is unthinkable, for the simple reason that the will power of the dependent company is no longer its own. In contrast, under a bilateral contractual relationship the weaker party can make use of its independent will to defend itself and exercise its right not to be abused. This is the reason why German case law has for a long time decided that this sort of external control is not a matter of company law, but of general contract law.14 Notwithstanding the above, and despite the fact that there is no specific provision to back it, the Greek literature tends to include long term contractual relationships such as franchise agreements in the concept of control. The Turkish Commercial Code, in turn, includes in its definition the broad idea that there is control if a company is able to keep another company under its control in any other way. Such a broad definition is criticised by Turkish scholars on the basis that it opens the door for uncertainty as to whether external control is included, for instance, in cases where a bank provides substantial financing to a company. In some cases the definition of control allows a combination of more than one factor. Such is the case of Japan, where, besides a majority shareholding, control may be achieved by combining a minimum of 40% of the voting rights with other factual influences (like overlapping board members) over the company’s financial and business decisions. But de facto power alone is insufficient. I repeat that my criticisms to any broad definition of control are made from the perspective of company law, where duties such as those related with consolidated financial statements and disclosure cannot be imposed on the basis of imprecisely defined relationships, which also depend on facts like the exercise of a dominant influence, a circumstance that needs to be proven. And it is also company law that in cases of control needs to protect minority shareholders and creditors with instruments aimed at establishing an equilibrium to compensate the domination power. But when the perspective is a completely different one, like the protection of competition in the market or some tax issues, a much broader definition of control is acceptable. Just to take an example, whereas the 1976 Brazilian Corporation Law does not include such an extended notion of control, in the field of competition law a resolution by the relevant administrative authority stated that the means to exercise a relevant influence include loans, guarantees, supply agreements, etc. Polish definitions of domination also vary from one area of law to another. For competition protection purposes, for instance, Polish law adds to the traditional majority shareholding and right to appoint or remove the majority of the board members the case where more than half of the board members are also board members of another company.

14

BGH, Beton und Monierbau AG, BGHZ, 90-381. Case law in Italy, Argentina or Uruguay, as far as we know it, hardly ever needed to make use of the external contractual control concept to decide cases, for instance in the very frequent car dealer or franchise contractual disputes.

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Parties to the Control Relationship

There are differences with respect to what kind of persons may be defined as controlling or dominant persons or entities, and for the purpose of which laws, as well as with regard to what entities may be qualified as controlled or dependent. The issue of who may be considered a dominant person is also dependent on the specific purpose of the definition of control in each field of law. For consolidation of financial statements and accounting purposes only a legal entity can be bound to produce such statements. For capital market or competition law purposes, or for the application of rules on related party transactions, it does not matter which kind of person is the controlling subject. As far as liability is concerned it is an issue of legislative policy to decide how far up the ladder one should go.

2.3.1

Controlling or Dominating Party. Ultimate Controlling Person

With regard to who may be considered the controlling shareholder the differences are larger than the ones concerning the dependent party, which is always a company. Some legislations stick to companies only, others exclude natural persons,15 some others, like Germany, accept that any person, whether a private company, association or foundation, a natural person and even the state or any of its entities may be the subject of group regulations and liabilities. German law sets only one condition: the controlling party must qualify as an enterprise. An enterprise is of course not a person or an entity, but § 15 of the AktG uses the expression to encompass any person, regardless of its type, whether a natural person or a legal entity, who for his own account develops a business enterprise activity or who has a relevant interest in an enterprise other than the controlled company. Any such person qualifies as a dominant party and is therefore subject to regulations on related enterprises and groups. As some German authors have explained, the difference between a private shareholder, even a majority shareholder, and a controlling party, is that the former’s main interest is aligned with that of the company, whereas if that shareholder is an “enterprise” the risk of a massive conflict of interests16 arises because the controlling party may give preference to its entrepreneurial interest outside the controlled company rather than to the interest of the latter. With the exception of consolidated financial statements, this comprehensive German type definition of controlling person has also been accepted by the case law and legal literature of other countries as the correct interpretation of their respective national laws. Such is the case of Argentina. The wider notion of controlling person is also generally adopted by national legislations dealing with other fields of law, such as Competition and Environmental Law. Different legal systems also offer different views and solutions with regard to the issue of joint control or domination. 15 16

Like the Netherlands, where only a legal entity, and not a natural person, can qualify as parent. The Swedish report refers to an implicit conflict of interest.

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As in Germany, the 2012 Turkish Commercial Code applies to the enterprise which is on the top and controls the group, regardless of whether it is a natural person or groups of them, any type of legal entity, including public entities, or any combination of the above. But in other countries, like in Belgium and also at the European law level,17 the ultimate shareholder, meaning a natural person, is normally not subject to group law rules, with the exception of the field of banks. The Swedish Companies Law requests the parent company to be properly formed and registered for financial statement consolidation purposes, but the subsidiaries may or may not be registered, and they may be local or foreign. Singapore law defines the ultimate holding company as the one which is not itself a subsidiary of a holding company, thus seemingly excluding natural persons from the definition of controlling party. In Italy the definitions of control refer exclusively to controlling companies and the regime introduced in 2003 only refers to direction and coordination activities carried out by companies or entities, but not natural persons. Natural persons may be held liable, nevertheless, in pathological cases which are not the ones considered in this part of the amended Civil Code. The 2003 regime addresses the situation where an organised and coherent group activity pursues a unitary objective. The main liability is that of the company or entity carrying out the direction and coordination activity, but the second paragraph of Art. 2497 extends such liability jointly and severally to any person who took part in the damaging event and knowingly obtained a benefit from it. This personal liability is limited by the extent of the obtained benefit. Different Courts and commentators adopt different views when it comes to determining whether such liability is contractual, in tort or both, depending on the identity of the protected person (contractual if shareholders, in tort if creditors), with different consequences in so far as the burden of proof is concerned. This will not be discussed here. The French Commercial Code provides two slightly different definitions of control, respectively in Arts. L233-3 and L233-16. To impose the consolidation of financial statements, the latter requires the controlling party to be a company, whereas for other purposes the former accepts that any person, whether legal or natural, can be deemed to control a company when the legal requirements are met. Both definitions include the direct or indirect holding of a majority of the voting rights (which is presumed if more than 40% of those rights are held and no other shareholder holds a larger fraction), the situation where that majority is held by means of an agreement with other shareholders, and that where one has the power to appoint or to remove the majority of the directors, if this effectively determines the decisions taken at that company’s general meeting. It is interesting to mention the case of Austria, where regulations refer to particular types of companies, or even to other entities like private foundations, cooperatives or associations. The most elaborate rules are those provided for stock corporations and the differences have been further developed by the Courts. For

17

At least according to the High Level Group of Company Law Experts.

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instance, whereas common direction in all spheres of the subsidiary’s business is the key element to define control by companies, for private foundations it is enough if it provides guidance on key parts of the subsidiary’s business. Other countries’ laws allow for a broader range of persons who may be qualified as controlling parties. Such are the cases of Brazil, Argentina and Uruguay.

2.3.2

The Dependent Entity

Subordinated groups are generally regarded as entrepreneurial concentration combinations in which a dominating person has the power to exercise a relevant degree of influence on the organic decision-making process of the subordinated, dependent, or controlled entity. It is therefore common ground that this phenomenon only arises when a company is in the position of the controlled or dependent entity. Indeed, it is impossible to influence a natural person’s will from the inside of its body or psyche. Legal entities other than companies are seldom mentioned in a subordinate position, although under Dutch law any legal entity, save for a foundation, may qualify as a subsidiary.18 It has been pointed out that not any type of company can be, in fact, organically controlled. This phenomenon has been described as that of control resistant types of companies. Cooperatives fall under this category in most jurisdictions, where the “one member–one vote” principle is the rule. In Finland and Poland, however, a cooperative may be a subsidiary company. Sociétés en comandite are also typically control resistant companies.

2.4

Cross Shareholding

In countries where share capital plays a role for creditors, cross shareholding entails the risk of capital dilution in both companies. This is mentioned here because it may be the instrument to create a group or at least to establish some organic links between two entities. Besides the patrimonial issues, it may also give rise to risks of management perpetuation and lack of proper shareholders’ control. In the absence of limits, both companies might become the controlling shareholder of the other, thus allowing the management board to control both shareholder meetings. That is why in the US subsidiaries are generally not allowed to vote the shares they own in their parent corporations, thus avoiding the risk of directors’ circular voting. It is therefore surprising how flexible the German legislation and practice has been in this respect, and the fact that this phenomenon still remains frequent in the areas of banking and insurance, where the capital requirements are of the essence of such

18 Besides legal persons foreseen in its national Law, the Dutch report provides further examples: a foreign company and a Dutch Societas Europaea.

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activities. The AktG only takes a note of cross-shareholding when it exceeds 25% of the share capital, in which case it bars the vote of the shares in excess of that percentage. In a listed company the vote may not be used to elect members of the supervisory board. Croatia has adopted the same flexibility. In Italy cross-shareholding between parent and subsidiary is strictly limited (Cod. Civ., Art. 2359 bis) and setting up companies or increasing their capital through cross underwritings is completely forbidden (Cod. Civ. Arts. 2359 quinquies, and 2360). In any case, the controlled company is bared from voting its shares in the controlling company. Argentine law follows a similar system.19 In other national legislations, such as the United Kingdom,20 Brazil and Uruguay,21 crossshareholding is completely forbidden. In Singapore a subsidiary cannot hold or vote shares in its parent company. Taiwan defines cross-shareholding differently: if two companies have one third or more of the total voting rights in each other, they are considered mutual investment companies. Their respective voting rights are restricted to one third, except if one controls the other. If two mutual companies own more than half of the voting rights in each other, they are considered part of a control relationship. A later amendment of the law barred the subsidiary from buying or accepting the pledge of shares of its controlling parent, but it is not retroactively applied.

2.5

The Dynamic Element

As stated before, besides the legal position of control or domination, in order to define a group of companies a second factual entrepreneurial element, a unified or common direction or a common management, or another similar dynamic factor, is required. Few national laws refer to this dynamic element: unlike the concept of control or domination, which is a legal concept, this element is economic in nature. It resides in the field of business administration and is linked to the group’s organigram. Such is the approach of the German AktG of 1965 (§§ 15/18), § 18 of which introduces the notion of einheitliche Leitung (unified direction) to state that, when it is added to a control structure, we are in the presence of a Konzern (group). How much or what fields of the business direction, in other words, what degree of unified direction is needed to meet the legal standard, is a matter that has been discussed by German as well as foreign scholars, but the details of such discussions are not relevant to the purposes of this report. The Croatian report points out, on the other hand, that the unified direction has to be of a continuous nature, that it has to encompass all the group companies and that it must be rather comprehensive.

19

Art. 32, General Companies Law. 2006 Company Act, Section 136. 21 Art. 52, Commercial Companies Law. 20

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In Austria the legal definitions of group are similar to the German ones: the key factors are that the group companies are subject to a common direction (einheitliche Leitung) or that by virtue of participations or otherwise an enterprise exerts a controlling influence (beherrschender Einfluss) over a company. Common direction by a parent company is a factual issue which, according to Austrian commentators, can be achieved by any means, including contractual relationships. Controlling influence, or the possibility to exert controlling influence, may be based on participation, personal ties, contractual arrangements, or any other way. Definitions are only relevant when consequences are attached to them. Conversely, it would not be a good law-making technique to rely on a concept such as group of companies with the aim of attaching legal consequences to it, without providing the tools needed to know what is exactly meant by it. There may perhaps be some difficulties in countries which, like Turkey, devote a considerable set of rules to groups, but do not mention the element of unified direction at all. In contrast, Argentine Insolvency Law mentions the concept of submission to a unified direction of a bankrupt company in the interest of the controlling entity or to another one under the same control, as one factor, besides an undue deviation from the company’s interest, to allow the extension of the bankruptcy to the controlling person. Dutch law provides a definition when it describes a group as an economic unit in which legal persons and partnerships are organisationally interconnected.22 A centralized management is not mentioned but it transpires that the definition does not refer to the static power to control another company, but rather to the actual exercise of such power. Not even majority shareholding is thus required in this context. As already mentioned, the Italian amendment of the Civil Code in 2003 introduced a very sophisticated system for the protection of shareholders and creditors of group companies. Unlike the classical German concept, it neither uses the word group nor the expression unified direction. Instead, both for disclosure and for duties and liability issues, the central regulation is based on the entity which carries out “companies’ direction and coordination activities” (Art. 2497), thus establishing a new definition of the activity the company law is interested in. It is also worth mentioning here that especially in Germany much attention has been paid to the question of which organs of what company have or should have the power to decide about different relevant matters throughout the various levels of the group entities. This was the main subject of the famous Holzmüller decision, to which we will come back later.

22 This description was introduced at the time of the implementation of the Seventh European Directive.

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Some Further General Comments on Groups

Despite the existence of some academic proposals to modify the legal approach, the first of which was made over a century ago, it is important to recall that the group is not recognised as a unified business organisation, nor is it a legal entity, nor does it have its own standing before the courts of any country. This is so without prejudice to the fact that some jurisdictions recognise the existence, to some larger or more restricted degree, of a group interest. The French 1985 Rozenblum decision, to which we will come back later, is an example of this. Therefore, as stated in several national reports, there is no group liability. In principle, each individual entity is liable for its own debts and obligations: only under very specific circumstances liability may be imposed upon another group company, and in a few countries a bankruptcy declaration extended to it. There are however some situations where, for certain limited purposes, the law looks into the full group picture. An example is the German law on employees’ codetermination, which foresees that for the purpose of workers’ representation, if the established thresholds of employees are met taking into account the whole group, such representation will take place only at the supervisory board of the parent company. Similarly, in some countries (Germany, Italy, Argentina, etc.) group insolvency procedures have rules that deal with all of the group companies’ insolvency together. Also in areas such as competition law and compliance, at the European level sanctions may be imposed on the group as a whole, and not necessarily be restricted to the individual company. In Greece, while a group is not a legal entity, there is literature that refers to a “form of financial entity between affiliated businesses” and therefore underlines a divergence between the unity of the group and the multiplicity of its members.23 At a different level, in some countries there are commentators and case law that point to the attribution of knowledge (Wissenszurechnung) of facts or of juridical acts to group members other than the one who was a party to them, at least under certain circumstances of unified direction or collaboration between the different members of the group. This may be approached as a specific application of some form of piercing the corporate veil, which should not only be regarded as a tool to extend liability but also, as will be explained further below, other relationships. In principle there is no legal recognition of the group as a unity, but in some aspects, especially but not only in relation to mandatory public law regulations, groups of companies are treated as if they were a single unit. This is why most national laws have no special regulations dealing with specific group of companies’ issues but instead rely on the general principles of company and insolvency law. Such is the case of Spain, Finland and most of the other countries considered in this report. This includes jurisdictions like the Netherlands where, despite referring to groups as economic units in which legal persons and partnerships are 23 In this sense, a Supreme Court decision declared that a group was a consortium that, despite not being a legal entity, could have rights and obligations and be an employer.

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organisationally interconnected,24 for most of the issues the law relies on general company law. A specific advantage in Dutch law is that a so-called triangular merger may be arranged, allowing shareholders of a company that is merged into another to receive shares and become shareholders, not of the absorbing company, but directly of another company within the group. Finally, it is worth mentioning again that, whereas the laws of some countries differentiate the rules concerning groups according to the type of company, most countries apply the same general rules for all types of companies.

3 Legal Models and Approaches to Groups of Companies It has already been stated, and it is common knowledge, that the peculiarities of groups of companies can be approached either by means of a special corporate group law or through the application of general company and civil law rules and principles. Both approaches are consistent with the universal existence of mandatory accounting and disclosure regulations.

3.1

Jurisdictions with Special Corporate Law Regulations on Company Groups

As expressed above, the first legislation which provided for a specific regulation on groups was the German AktG, which was meant only for Stock Corporations under the control of an enterprise. Since then, the application of these provisions by analogy to other types of companies, mainly the GmbH, or limited liability companies, has been the object of discussion both among commentators and by the judiciary. The AktG rules also apply to a Societas Europaea registered in Germany. The main characteristic of the German approach is the admission of different forms of so-called enterprise agreements, which include a strait domination agreement and a profit transfer agreement as well as profit pool and enterprise lease agreements. The last one allows the business to be run under the company’s name but on the other party’s behalf. Under such agreements, which need to satisfy some formalities and foresee a protection for so called external minority shareholders and creditors, the board of directors—but no other organ—is bound to follow the instructions of the dominant party to the agreement. The instructions are to be followed even when they

24

The Dutch report points to the organisational interconnectedness being also structured through a combination of a minority shareholding and special voting rights in the articles of association. A contractual basis is also mentioned, albeit without specifying which types of contracts would be a part of it. It is unclear, for instance, whether joint venture or cooperation agreements between two or more entities are included or left aside.

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are harmful or detrimental to the dependent stock corporation,25 with some limitations,26 and provided that what has been imposed upon the dependent company against its own interest serves the interest of the dominant enterprise or that of another company under the control of the latter. This last condition or limit may be seen as the basis of the concept of group interest further developed and discussed in later years. But since entering into such enterprise agreements has not become as frequent as the legislator may have envisioned, the AktG also has set rules for the case of domination in the absence of enterprise agreements, the so-called de facto groups, which in practice outnumber the contractual groups. While the general definitions of control and groups (Konzern) apply generally to all types of companies, the rules for contractual and de facto groups apply specifically and exclusively to the cases where a stock corporation is the dependent or controlled company. Another instrument provided by the German AktG, as well as by the Croatian Commercial Companies Law, to establish the right to dominate a corporation, is the Eingliederung or incorporation (§§ 317 and ff), which allows a stock corporation which owns 95 % or more of the shares of another stock corporation to squeeze out the minority shareholders in order to become the only shareholder, thus integrating that company into it and its operation. Decades ago, some commentators referred to this as a quasi-merger. It is of course not a merger because the dependent company survives as a separate legal entity and the incorporation may be reversed. Brazil followed the German example. Its 1976 Corporation Law legalised a conventional or de jure group. The agreement, which is not a domination but a subordination agreement, must foresee a combination of resources and efforts to carry out the companies’ purpose and must be filed with the Register of Commerce (Arts. 265 and 271). Unlike the German model, however, it does not provide rules for de facto groups, other than when it defines control (which the new Civil Code also defines, alongside its definition of affiliated company). In practice, contractual groups are nearly inexistent. There seems to be more than one reason for this. One is that dissident shareholders have a withdrawal right for which the dominant entity may not want to pay. Another is that in order to conclude such an agreement it is mandatory for the dominant company to be the majority shareholder of the controlled company or companies, which alone give it sufficient domination power. A general group interest is recognised under Brazilian law, but there are no clear boundaries vis-á-vis the interest of the individual subordinated companies. This leads to uncertainty with regard to minority shareholders’ rights and protection. Instructions may be given to the dependent company’s board and have to be followed even if disadvantageous, but always limited by the frame of the subordination agreement. The companies have to carry the designation as a group. The group is not a legal entity but, curiously enough, in the Corporation Law’s Motives

25

It is important to note that under no legislation contemplating these agreements can the dominant enterprise act directly on behalf of the dependent company. 26 If the instructions are in conflict with the purpose defined in the articles of association of the dependent company and if they endanger such company’s existence.

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the group is referred to as an unincorporated company. Both Brazilian and foreign commentators have criticised this statement and the regulation as a whole. Portugal was the third country to have a comprehensive regulation of groups in its 1986 Commercial Companies Code, under a Title on Affiliate Companies. The system was basically built on the ideas of the German model with relevant improvements, some of them inspired on the French Cousté drafts of the seventies. Its structure is based on the definitions of a single shareholding relationship (10% or more shareholding of one company in another), a cross-shareholding (at least 10% of each company in the other), a domination relationship (one company is able to directly or indirectly exercise a dominating influence over another, something which is presumed if it holds the majority of the capital, or of the voting rights, or of the right to appoint the majority of the management or supervisory board), a group relationship (total domination and horizontal groups, the latter not dealt with in this report) and subordination contract. Case law has recognised different examples which qualify as dominating influence mechanisms, both organisational and factual. These include contracts, personal ties, strategic market positions, etc. In a context where the exercise of the power of control and the primacy of the overall interest of the group are recognized, the protection of the subsidiary, its minority shareholders and its creditors is the outspoken specific purpose of the legal group system. As the Portuguese report states, this system serves the purpose of institutionalizing the “power of direction of the parent corporations and of the corresponding protection for subsidiary corporations, their minority shareholders and creditors”. Nevertheless, the Portuguese reporter criticises the imbalance that results from the fact that, whereas the law provides rules on de jure groups, it does not provide any protection for factual groups. The general company law rules apply to these and, at least in theory, the autonomous interest of the dependent company has to be respected. The rules on subordination contracts are at the core of the group system in Portugal. This system provides the parent with a legal power of direction over the management of the subsidiary. But subordination contracts are hardly ever used in practice. The most frequent group structure is, instead, the total domination, based on a hundred percent ownership by the parent, similar to the German Eingliederung regulation. Total domination may exist from the outset, or it may arise at a later stage through the exercise of a squeeze out right when the parent owns 90% or more of the equity capital of another company. When entering into a domination (or subordination) agreement, the parent company has to cover the annual losses of the subsidiary, it is directly liable for the latter’s debts, and it has the duty to acquire the minority shareholders’ shares. The agreement gives the parent company the right to issue instructions only in relation to the management of the subsidiary. Instructions to the shareholder’s meetings are not allowed. Some special statutes, or the articles of association of the subsidiary, may bar certain kinds of instructions, the contents of which cannot consist of an asset transfer without appropriate compensation. The provisions of the Portuguese Commercial Companies Code apply to stock corporations, limited liability companies and limited partnerships by shares, as long as they have their seat in Portugal. It therefore does not apply to multinational groups. This is criticised especially where the parent entities are foreign companies,

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which are thus not subject to the Code’s mandatory rules.27 This is different in the case of a total domination group, where the rules also apply to a foreign parent company which forms a group by initial total domination with its wholly owned Portuguese subsidiary. There are no reports from Hungary and the Czech Republic,28 countries which, as Croatia and Slovenia, also followed this model. They did so, about 30 years after the German AktG was enacted, by legalising domination agreements and the other so-called enterprise agreements. But while the German AktG is applicable to dependent corporations only, the Slovenian Company Act covers all types of companies. Polish law also has rules inspired in the German system. Taiwan also adopted the German approach in its 1997 Company Act, which provides no rules on domination contracts but does allow the controlling company to impose unprofitable business transactions on dependent companies for the benefit of the group. Turkey’s new Commercial Code of 2012, also following the German AktG model, devotes a subsection to groups of companies. Its goals are twofold: (1) to protect the subsidiaries’ shareholders and creditors’ interests; and (2) to facilitate the management of the group by granting the parent certain rights to give instructions to the dependent companies. To qualify as a group in Turkey there must be a controlling company and at least two controlled ones. There is also a specific regulation on domination agreements, which have to be registered with the Public Register of Commerce and disclosed to the public. Such agreements allow the dominant company to give instructions to the dependent company. The Turkish report informs that these agreements have not yet been embraced in practice. As mentioned before, a different specific group regulation was introduced in Italy by legislative decree Nr. 6 of January 17 2003 (Arts. 2497/2497 septies), which amended its Civil Code. This reform departed from the German model29 and legalised group activities in a sophisticated way, under certain conditions defined in the Italian report: a firmly established group, positive action taken in the interest of the group in conformity with the group’s coherent policy and preservation of the financial balance within the group, by means of compensation of the negative consequences imposed upon subsidiaries. This interesting system was enacted

27

In this respect it is worth mentioning the 2013 European Court ruling in the Impacto Azul case (June 20th, 2013, proc. C-186/12, Impacto Azul Lda. c. BPSA 9) where it was decided that a rule like Art. 501 of the Portuguese Commercial Companies Code which foresees the liability of a Portuguese but not of a foreign parent company for its subsidiary’s debts (an inverse discrimination) does not conflict with European freedom of establishment and non-discrimination rules. 28 Nor from Albania, who did so in 2008. 29 Nevertheless, Art. 2497 septies offers some doubts, since it foresees the case of an activity of direction or coordination carried out by a company which does not fall under the definition of control of Art. 2359 but is entitled to carry out such activity on the basis of an agreement or a clause in the company’s articles of association. The question of what sort of agreement is envisioned arises. Does it include domination agreements of the German type?

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without any reference whatsoever to the word group.30 It was rather built around the activity of direction and coordination of companies (Direzione e coordinamento di società), in order to establish a specific liability system applicable in the absence of payment of compensatory damages. We shall address this later on. This activity of direction and coordination of companies is not defined by the Italian legislation and is therefore dealt with as a factual concept. According to a relevant scholar cited in the Italian report, the matter of related companies is treated as a power-subjection relationship and the new rules rely on the dynamic notion of direction and coordination and not on control, which is a legally defined static situation.31 Notwithstanding the fact that the core of the regulation lies on a factual situation, besides improvements in some other aspects previously not provided for, the new regulation has improved transparency by imposing the need for decisions to be motivated by the interest of the group.

3.2

Reliance on General Company Law Rules

In many countries, in the absence of a specific legal regulation, domination agreements are considered illegal because of their inconsistency with different company law principles. This is mentioned in the Swedish report: no agreement or provision in the articles of association may deprive the board of its legal powers and competence to make decisions on the company’s business affairs. Domination agreements are also at odds with the basic company law principles which derive from the fact that, all shareholders being exposed to a common risk, they must also share a common interest. In addition, the protection of the company’s patrimony and the consequent protection of creditors and third parties must be provided for (i.e. a company must act according to its own interest, which in many jurisdictions is called social interest). Unless otherwise permitted by the law, management board members must fulfil their duties with loyalty vis-á-vis the company and its shareholders and act in accordance with the standard of a diligent businessman. The prohibition to assign their organic duties and responsibilities to anybody else is also almost universal. These principles would all be breached if the board were bound to follow detrimental instructions imposed from outside the company. This would be only

30

This probably resulted from the fact that, according to some Italian scholars who most likely had some influence in the law-making process, group only defines a technique to organise a single economic unity and has no legal meaning. 31 Art. 2497 sexies of the Civil Code establishes as a rebuttable presumption that there is direction or coordination activity in case of control as defined in Art. 2359. Given that the presumption is rebuttable, there may be control without direction or coordination activity.

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possible if provided for by the law, alongside an adequate protection of the interests at risk.32 UK law is commonly mentioned as the prototype of legal system that when dealing with company law conflicts, does not make any distinction between independent companies and companies within a group: the same principles and remedies apply to all companies. With minor variations, most countries follow this approach. Of course, groups of companies would not exist if companies were not allowed to participate as shareholders in other companies. It is nowadays generally accepted that groups may be formed by creating or acquiring or participating in an indefinite number of legal entities. But in the US, during most of the nineteenth century, this was generally not allowed. In the United Kingdom early examples of a company holding shares of another were challenged as being ultra vires, but this was dismissed as early as 1867. In countries which allow contractual or de jure control or domination, the also existing de facto groups are subject to general company law principles, unless of course special rules are provided, as is the case in Germany with regard to corporations (§§ 311/318, AktG). France has no special rules for groups, but its courts developed the Rozenblum doctrine to mitigate, under some specific conditions, the impact of general company law principles by admitting a more flexible balance between the interests of the single company and that of the group. This is why some legal literature classifies France and some other countries which partially followed that path as a third approach between the two traditional ones. We will come back to this doctrine because there is a trend, especially in Europe33 but also elsewhere, to follow it. In its own way, the new Italian 2003 rules also follow this approach.

3.3

Disclosure, Accounting and Consolidated Financial Statements

The rules developed at the national and supranational levels concerning disclosure, accounting and financial statements are of utmost importance to the protection of all the interested parties which might be at risk as a result of the power inherent to a dominant or controlling position. These risks concern both the dominant and the dependent entity and it therefore does not matter which sort of group of companies is at stake, nor if control has been established by means of a domination agreement or

32

It is therefore somehow surprising that in Greece there are doubts around the possibility of concluding domination agreements of the German type, without a legal rule allowing that type of agreement. 33 Forum Europaeum Corporate Group Law, High Level Group of Company Law Experts, Reflection Group, the Action Plan on European Company Law and Corporate Governance, and more recently The Informal Company Law Expert Group.

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de facto by holding sufficient votes to prevail over the dependent company. That is why the regulations concerning disclosure, accounting and consolidated financial statements apply to all kinds of group and domination structures. In other words, transparency about group relationships of all kinds is essential for the protection of shareholders and creditors, as well as for stakeholders in general. Disclosure rules and clear information in financial statements and ancillary documents are important not only because they allow third parties to be aware of the potential risks resulting from the existence of control or of a group, but also because they enable a distinction between those profits or losses of a company resulting from its market activity and those which were positively or negatively conditioned by the company being a group member. The variety of detailed rules provided for this purpose at the national and supranational levels is quite vast34 and goes beyond the scope of this report. The different national reports highlight the importance of these rules, and the fact that accounting and financial statements were the subject matter of the first company law European Directives is the best evidence of its relevance. It has been reported, for instance, that in Finland the most significant legal obligation of a parent company concerns accounting and financial statements. This is also true for all other countries, most probably with no exceptions and notwithstanding the existence of other issues, like minority shareholders’ protection or liabilities within a group, which are more visible and give rise to more interesting discussions. Importantly, where consolidated financial statements are required at the level of the parent company or the head of the whole group, a duty must be imposed on the subsidiaries to timely provide the necessary information.35 This is not always expressly provided by the laws of the different jurisdictions and, whether it is or not, raises the question about the minority shareholders’ right to be provided with the same information. The answer to this question in some of the national laws is that there is no obligation to provide the same information to other shareholders. In others the situation is not so clear because the refusal to provide that information is said to breach the principle of equality among shareholders. Not only is it relevant to disclose controlling shareholding: a substantial participation which may eventually lead to gaining control over a company is equally important. This is why under most jurisdictions the duty of information applies to the existence of links between companies, including minority participations over a certain level. For transparency purposes the 2006 Companies Act of the United Kingdom establishes the duty to disclose the interest in a company’s shares as well as the obligation of the company to keep a public record of people (only individuals) with significant control over it. Similar considerations apply to accounting rules, where consolidated financial statements are mandatory for a parent corporation, which must include the results of

34

Just as an example: Greek accounting standards provide that transactions with affiliated entities are to be disclosed in the addenda of financial statements. 35 Finland and Italy have such provisions in their national laws.

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its subsidiaries. European countries have implemented Accounting Laws or rules in harmony with Directive 2013/34/EU, applicable to unlisted companies. The obligation to provide consolidated financial statements is imposed upon a parent company that qualifies as such according to eight different criteria, such as majority of voting rights—including rights acquired through shareholders’ agreements-, the right—as a shareholder—to appoint or revoke the majority of the members of the management or supervisory board, the right to exercise a dominant or prevailing influence or the exercise of a unified direction on the basis of the articles of association or a contract. For listed companies, the International Financial Reporting Standards apply for the purpose of consolidating accounts. Another similar example is Dutch law, where there is a duty to consolidate the financial statements and ancillary information not only from subsidiaries but also from other legal entities which are deemed to be part of the group. A few jurisdictions, like Cyprus and Spain, impose the duty to consolidate financial statements but exempt small sized groups from that duty. This is quite exceptional: most countries do not make distinctions on the basis of the size of the group. In some jurisdictions, like Japan, consolidating financial statements is not mandatory but optional. There are a large variety of details to be disclosed in the different jurisdictions, some of which also provide for some sort of shareholder’s inspection rights. The most common duty refers to the disclosure of a certain level of shareholding in public corporations. The capital market laws in nearly all jurisdictions impose a reporting duty whenever there are changes at different levels of share or vote participation. Additionally, in most jurisdictions directors are subject to the duty to disclose their own individual shareholdings in the company. The German AktG establishes the obligation of a shareholder who reaches a 25% participation to report it to the company under penalty of being barred to vote its shares. The Italian 2003 amendment to the Civil Code imposes a duty on the company to mention in its acts and correspondence the entity under whose direction and coordination activity it stands, and its directors have to file the data with the Enterprise Register and provide specific information in the Annual Report (Art. 2497 bis). Shareholders’ information rights are critical to their ability to exercise other rights. In some jurisdictions shareholders have individual and direct rights to request the information, which in some cases includes information on the business of other group companies, or at least on subsidiaries. In some other jurisdictions, like the Netherlands, the right to request information is vested on the general shareholders’ meeting. As many other legal systems, the Austrian AktG imposes on the management board the duty to provide reports not only about the shareholdings but also about the business relationship of the company with its subsidiaries. What is not so common about the Austrian approach is that, whereas the parent company must produce consolidated financial statements, shareholders are entitled to request at the ordinary shareholder’s meeting information about other group entities or about the whole group (Austrian AktG, § 118). Austrian law also establishes the duty to provide additional information and reports on, for instance, future business policies of the

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group as a whole, and not only of the parent company. Another example is the United Kingdom, where companies are bound to produce a directors’ report, and in larger companies also a strategic report. For companies that have to provide consolidated financial statements, a consolidated group director’s report is also mandatory in the UK. Japanese law, in turn, prescribes that the annual Business Report must disclose related party transactions, including whether the subsidiary took measures to prevent harm to its interests. Singaporean law provides for information rights, including each shareholder’s access to inspect some registers, as a means to protect minority shareholders. Finally, Dutch law allows dissatisfied minority shareholders to request an investigation of the affairs of the company, which may include other entities in which the company is a direct shareholder.

3.4

Other Areas of Law

From a different viewpoint, groups are also regulated or at least taken into account for specific purposes in various areas of law other than those which directly involve the company, its structure, it will making process, its internal conflicts and external liability or the protection of the interests that are at risk. These are the core problems addressed in this report, but in the following sections of this chapter we shall briefly address such other special regulations, as approached in different countries.

3.5

Labour Law

Many national laws include some form of protection for employees who are successively employed by different group companies. In Brazil, for example, joint and several liability is imposed on the parent as well as on the subsidiaries if the employee of an entity is subject to the direction, control or administration of another entity, as part of an industrial commercial or other economic group activity. In Greece the law provides that consecutive employment agreements with companies of the same group are to be treated as one labour relationship with one and the same employer. Taiwan’s labour legislation foresees that within a group the service years of an employee are to be added up for the purposes of calculating compensations at the end of the employment relationship. Finland has a Law on Cooperation that recognises groups at the national and European levels as a frame for its labour law rules. Portugal, in turn, treats the group as a unity in order to allow a parent company to transfer employees among its subsidiaries, and also to hold it liable for labour debts, including salaries, of the subsidiaries. In Poland there is no such thing as a group employee: employment contracts are only with the company who is the formal employer. But a 2016 Supreme Court

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decision made an exception in a case where the employee was sent to work for a subsidiary.

3.6

Tax Law

There are a large variety of tax regulations that approach groups of companies, and especially business transactions between related companies, in different ways. The variety of approaches is particularly present in relation to cross border groups and transactions. This renders the systematisation of this topic impossible. Accordingly, only a few examples of some interesting approaches will be provided here. Several countries admit some sort of income tax consolidation for group companies. This has the advantage that it allows to carry losses from one company to another and thus compensate profits and losses. The choice of a subsidiary’s type of company may be relevant to benefit from this tax transparency. Indeed, the main purpose of using some sort of domination agreement in Germany is to be able to carry out such a consolidation: this benefit is not available for de facto groups. In Austria a so-called tax group is admitted where the parent company has more than a 50% share in the subsidiaries. United States’ federal income tax law allows affiliate corporations to file consolidated tax returns, which, as anywhere else, has no bearing on the liability of one corporation for any other’s tax debts. Poland foresees the possibility of setting a so-called tax capital group, but this has disadvantages such as the inability to profit from tax exemptions that one of the companies might otherwise have been entitled to. In the Netherlands groups receive special tax treatment with regard to VAT and corporation taxes. For VAT purposes members of a group may be treated as one single subject, and where there is a 95% shareholding by the parent in the subsidiary a tax consolidation is permitted. Brazil imposes joint and several liability for taxes to all those persons which have a common interest in the taxable event. The Supreme Court ruled that common interest exists if members of a group perform the same activity that generates the taxable event.36 Croatian law defines affiliated companies and affiliated persons on the basis of what it calls a single risk from the tax law perspective, especially in relation to transfer pricing issues. Slovenia takes the existence of a group of companies into account for the correct calculation of several taxes, and especially in so far as intra group transfer prices are concerned. This is also mentioned as the main goal in the Finnish report, where the legislation also foresees a tax-deductible group contribution under certain conditions. In Greece a group is not a subject of taxation but there are special conditions for the taxation of transactions between affiliated companies. In Portugal groups are

36

Of all countries that made contributions to this general report, only in the case of Brazil a separate detailed report on the Tax obligations of enterprises within corporate groups was submitted.

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increasingly regarded as a legal unity, and not only as an economic one, because they are treated as the single tax subject responsible for paying a group consolidated income tax. Tax Law is also a field where the disregard of legal entity doctrine may play a role. For example, in a 1998 Cyprus case37 it was decided that transactions between two sister companies with the same shareholders where fictitious for tax purposes. In Argentina the classic Supreme Court decisions in Mellor Goodwin and Parke Davies of 1973,38 disregarded the legal entity of nearly wholly owned subsidiaries in order to prevent royalties which were paid to their parent companies from being treated as expenses for the purpose of deducting them from the subsidiaries’ income tax.

3.7

Competition and Antitrust Law

As is stated in the Italian report, unlike other areas of law, competition law is interested in the enterprise as a unified organisation acting under the same decision-making power, regardless of the structure of each entity. The sole focus is on the protection of correct and fair competition. This is why, when there is a group of companies, all regulations at the European and national levels address them as a whole. The logical consequence of this approach is that the relationship between legally independent companies that are part of the same group is irrelevant to the antitrust, merger control and competition protection rules. An Italian law of 1990 reflected this when it provided that groups of enterprises are to be considered as one unity for competition law purposes. The specific purpose of competition and antitrust law also influences the definitions that are provided in this area of law. For instance, for competition law purposes Polish law defines a group with reference to the case where all the enterprises (entrepreneurs) are under the direct or indirect control of one impresario, including a single businessman or a group of them. For competition law purposes the case where more than half of the board members are also board members of another company is also part of the relevant definition. As a matter of fact, however, no specific form of control or domination matters to the application of these rules. Some countries, like Greece, foresee that transactions between businesses of the same group are not to be considered as restricting competition. But European antitrust law in general and Germany’s law in particular do not provide a specific privilege for groups, although the group may be considered as an economic unit if the member companies have lost their autonomy for the benefit of the dominant enterprise. In such a tight relationship, sanctions for breach of competition or antitrust rules may also be imposed not only on the company that committed the wrongdoing but also on other members of the group, typically the parent company.

37 38

Stereo Development Co. Ltd. v. Commissioner of Taxation. Parke Davis y Cía. de Argentina SA (Fallos 286: 97); Mellor Goodwin SA (Fallos 287: 79).

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Portugal qualifies a group as a single enterprise for competition law purposes and defines it as “a cluster of companies that, while being legally independent, form an economic unity or are connected between each other by links of interdependency or subordination”, Control, in turn, is defined as “the power of an enterprise to exert a determining influence over the activity of another enterprise”. Competition, Antitrust and Public Procurement Laws also provide cases of disregard of the legal entity. In Cyprus, for example, a 1990 ruling lifted the corporate veil of two companies in a case where they both submitted an offer at a public bid for an airport duty free shop license. In some other precedents in this field the Supreme Court of Cyprus applied the economic entity doctrine.

3.8

Financial Institutions and Insurance Companies

Companies that are in the financial business or, in general, that deal with the public’s savings, including insurance companies, give raise to a special regulatory problem when they are parents to or subsidiaries of other such entities: the risks inherent to these activities that affect one company may have an impact on all the others. The problem is dramatically increased if a national regulatory authority has no jurisdiction over the parent or subsidiary because of the different national seats of each company. In most countries there are specific rules for groups in these fields, and there are also some efforts at the regional level to address the alluded cross border problems. As in relation to labour, tax and competition law, the reference in this report to financial institutions and insurance companies will be brief and quite superficial, as the matter exceeds the report’s core purpose. That said, it is important to understand that the main issues at stake in relation to this topic are not only the identification of the final owners of the companies and the existing links between them, but also the scope of the rules on credit diversification and risk management, or of any other rules imposed by the financial authorities to generally protect the public and the economy. As an example, in Austria the law on financial institutions refers to the credit institute group (Kreditinstitutgruppe), which includes not only one bank or financial entity participating in another, but also financial holding companies which control more than one of those entities. Cases where one entity exerts a controlling influence on another with the help of a shareholder’s agreement are also foreseen by the regulations. In Croatia, affiliation is defined as any person or persons acting in concert that want to acquire 10% or more of the capital of a financial institution, an acquisition which requires the approval of the National Bank. Further requirements must be met when the 10% threshold is exceeded. The example of Italy reveals the type of objectives behind these regulations: a 1993 legislative decree provided parent financial institutions with the right to issue binding instructions to their subsidiaries in order to implement directives from the Bank of Italy. This was followed in 1998 by the same rule with respect to financial markets in relation to directives from the Stock Exchange Commission.

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At the European level, the French report refers to the EU Banking Recovery and Resolution Directive of 15th May 2014, which deals in some way with the concept of group interest when it establishes rules for the cross-border financial support of financial entities. These must have the objective of preserving or restoring the financial stability of the group as a whole, or that of any of the entities of the group if doing so is in the interest of the group entity providing the support. Financial service groups of companies are treated as a unified business under the Greek regulations. The same is true for Portugal with regard to the consolidated supervision of groups controlled by credit institutions and financial companies. In Poland the banking law includes special definitions on financial holding companies. Cyprus adopted the text of the European Directive 2013/36/EU to establish a consolidated regulatory supervision on banking and financial groups.

3.9

Foreign Investment Law and Investment Protection Treaties

Both areas of law may need to provide special rules in order to establish who is really behind for the purpose of meeting the applicable legal requirements where investments in certain activities are restricted to foreign investors, as well as to concede or deny standing to investors who seek protection under a specific investment protection treaty. In both cases it may be necessary to look at the whole group, and some of the criteria that are relevant for these specific purposes may differ from those applicable under company law. An example is Austria, where the Foreign Trade Law (Außenwirtschaftsgesetz) restricts foreign investment in certain activities when such investment involves 25% or more of the voting rights, alone or collectively. Therefore, controlling influence in this field has a wider scope than in other areas of law. Another example in a field where many issues have been solved by arbitration awards, from the perspective of a single country: for investment protection treaties, Slovenia provides protection depending on the place of incorporation of the relevant legal entities. But in some treaties the place of the principal seat of business is taken into account, sometimes as the only criteria and sometimes in addition to the place of incorporation. In Slovenia some commentators maintain that a holding company should have no standing to claim treaty protection.

3.10

Environmental Liabilities

Who is responsible for ensuring compliance with environmental regulations and, consequently, who is liable for their breach and resulting damages? Following several principles of law (rarely a specific legal rule) environmental liability may

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be imposed on the parent company if it has provided the instructions, procedures or technical guidance leading to the environmental damage. According to EU Directive 2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage, the Greek and Cypriot reports, for instance, mention that a parent company can be considered to be the operator for the allocation of environmental liability. But there seems to be a trend in some jurisdictions to go further and establish a duty on parent companies to actively ensure group wide compliance by means of appropriate preventive measures and guidelines. In France a substantive new regulation came into force on March 2017 with law 2017-399, which establishes a duty of vigilance of a parent and outsourcing companies in the fields of human rights, fundamental freedoms, personal health and safety, as well as the environment. This is clearly a matter in relation to which groups are especially addressed, and since the duty is imposed from the top to the bottom, it reaches direct or indirect subsidiaries worldwide. The French report makes very interesting remarks on the extended material, subjective and territorial scope of these rules and the conflicts it may cause.

3.11

Arbitration

Different national jurisdictions approach the issue of arbitration to solve disputes within a company or corporation in very divergent ways. Just to provide examples in the opposite extremes of the spectrum, it seems that German stock corporations are not allowed to include arbitration clauses in the by-laws while, in contrast, the Argentine Capital Markets Law provides that any corporation that publicly trades its shares or bonds at a stock exchange accepts the jurisdiction of the institutional arbitration established by the stock markets for all disputes that may arise, including those involving company law matters. Only the shareholder or the investor has the choice of filing claims before the ordinary courts of justice. The articles of association may also include arbitration clauses which are mandatory for all shareholders. The question of jurisdiction, including the possible applicability of rules on arbitration, is of course relevant to the decision of where to resolve disputes within a group of companies (i.e. minority shareholders’ claims, directors’ and shareholders’ liability claims). In some cases, contractual arbitration clauses may be abusive if imposed by the dominant shareholder or the head of a group of companies and the choice of arbitrators may not guarantee the required levels of independence. The most frequently discussed issue, nonetheless, concerns the possibility to extend an arbitration clause to a member of a group of companies other than the one who signed and is the formal party to it. There are no statutory rules in any of the laws that are compared in this report that would allow this. But arbitration panels and courts have decided such issues both in cases where the non- signatory group company tried to file a claim invoking the arbitration clause and in cases where a group company that did not sign the arbitration clause is addressed as defendant or third party in the arbitration proceedings. A leading case (Trellborg) from the State

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Court of Justice of Sao Paulo adopted a commonly accepted approach: a group company that did not sign the arbitration agreement is only bound by it if it actively participated in the negotiation, execution or termination of a contract containing the arbitral clause. These are also the criteria followed in the famous French Dow Chemical cases, where the non-signatory group companies were the claimants.

3.12

Private International Law

Attention is seldom paid to private international law problems in the case of cross border groups of companies. But there may be several problems and perspectives. The first one concerns the determination of each company’s lex societatis. In establishing the national law applicable to a company the world is essentially divided between those countries which apply the real seat theory (mostly in continental Europe) and those which apply the place of incorporation theory (mostly AngloSaxon jurisdictions, but also some South American and European countries, such as Slovenia, Cyprus and the Netherlands). Based on the principle of freedom of establishment within the European Union, the European Court of Justice has decided that the incorporation theory applies to European companies even if the real seat is in another European country. These issues are important to determine what happens in the case of transnational groups. The principle is that the applicable national law shall govern each of the individual companies, notwithstanding that they are part of a group. Therefore, any rules protecting the controlled company or its shareholders and creditors shall be those applicable to the controlled company. This is generally accepted and specifically pointed out in some national reports, such as the Greek. The same is true for the domination agreements foreseen by a few national laws (Germany in the first place). Because rules on domination agreements are of mandatory nature, there is no possible choice of law in relation to them. Thus, for these contracts to be valid they must be acceptable under the legislation applicable to the dependent company. In Austria the Private International Law (IPR-Gesetz) refers to the law of the place of the company’s central administration. The lex societatis refers to the law of the place of the company’s central administration for each company separately. This reference includes rules protecting shareholders and creditors and the question of whether the corporate veil of one of the companies within the group is lifted. In situations such as the one addressed in the famous German Holzmüller case (i.e. a transfer of decisional power from the parent company to a subsidiary with the effect that the shareholders’ meeting of the latter affects rights and entitlements of the former’s shareholders and creditors), the applicable law would be the parent’s lex societatis. Dutch law offers a peculiarity: in the case of insolvency of a public company the rules on directors’ liabilities are extended to the directors of foreign subsidiaries that are subject to corporate tax in the Netherlands.

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As to Italy’s sophisticated damages compensation rules, the national report states that they apply not only to an Italian parent with regard to its foreign subsidiaries, but also to a foreign parent with respect to its Italian subsidiaries.39 Similarly, under US law, the court will apply the law of the subsidiary’s jurisdiction of incorporation to claims that the parent breached its fiduciary duty to the subsidiary, as was illustrated in the Southern Peru Copper case, where Delaware law was applied to the Mexican controlling shareholder’s sale of another subsidiary to its controlled Delaware company. But there seems to be disagreement in the US around the question of whether piercing the corporate veil is an internal matter to which the lex societatis applies, or whether it is governed by the law of the place where the underlying substantive claims arose.

4 The Role of Group Interest and the Balance Between Advantages and Disadvantages There is no question that being a member of a group influences the life of a company to a significant extent, as a start because it shares the group’s image. A subsidiary may benefit from its group membership in many different ways, including the access to technology, industrial and intellectual property, markets, credit, know how, the use of prestigious trademarks, etc. Admittedly, in some rather rare cases the opposite may be true: the group’s image may be negative or the subsidiary’s dependence on the group may prevent it from seizing opportunities that could improve some aspect of its business. Leaving these exceptional cases aside, the central question is to what extent, if any, can the parent company, or another company within the same group, take advantage of its power and impose charges, disadvantages or damages on the dependent subsidiary, or simply shift assets from one company to another or to itself. There are different ways of doing this, including cash pooling, but their common feature is that they are all inconsistent with the subsidiary’s own interest and may endanger the company, its shareholders and its creditors. In countries where there are no specific rules allowing such practices they are in principle considered forbidden. The US report mentions the Sea-Land Services Inc. v. Pepper Source case, where the controlling shareholder shuttled funds at will among the controlled companies and the court decided to pierce the corporate veil to hold all of them liable for the controlled company’s debts. May there be a compensation for some of these practices to be allowed? If so, when and what should be compensated? The search for an appropriate balance between burdens and benefits has not yet led to universally accepted conclusions. Three different approaches are summarised in the Belgian report. The first is the British, which only foresees the possibility to request compensation in the cases

39

With the exception of the rules on subordination, which depend on the law applicable to the insolvent company.

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where the parent’s actions are unfairly prejudicial to the interests of the subsidiary. The second is the German and Austrian,40 which sets a compensation for any and all prejudices and disadvantages imposed by the group on the subsidiary. The third and last approach is described as the French-Belgian one, which follows the Rozenblum doctrine to which we will come back below. If, when considering the business relationship within a group and especially between a dominant entity and a dependent company, some sort of compensation is admitted at all, the criteria to balance the damages or disadvantages with the required compensation needs to be defined. This may be analysed on a business by business basis, or in view of the relationship as a whole, at least within some reasonable timeframe. Legal approaches to these questions differ dramatically. As will be explained, in France, following the Rozenblum doctrine, there is an overall evaluation of disadvantages or detriments against the compensatory advantages or benefits. The same is true for Japan where, when courts examine if there have been disadvantages imposed upon a subsidiary, the overall relationship is considered, including the general benefit enjoyed by the subsidiary for the mere fact of belonging to the group.41 While the principle in Austria seems to be that the analysis has to be done on a case by case basis, an overall evaluation of group transactions is not excluded. Argentine law holds shareholders and controlling parties (even if not shareholders) liable for damages imposed upon the company and expressly prevents them from setting-off those damages with profits that their activity may have generated in other transactions.42 In short: is there room for a group interest to be taken into account in the decisionmaking process of a company? If so, what does it mean and which are the limits and conditions for it? Apart from the provisions in paragraphs 311 and ff of the German AktG for de facto groups, the most relevant answer to these questions was provided by the French Criminal Cour de Cassation in its 1985 Rozenblum decision,43 which established an internationally known doctrine that bears its name. The Cour de Cassation held that a director of a solvent subsidiary may take the interest of the group into account when making a decision that causes an immediate disadvantage to the subsidiary provided that “the financial aid consented by the managers of the company which is part of a group in which they are directly or indirectly interested should be motivated by the common economic interest in relation with the global policy of the group, should not be devoid of counterpart and should not provoke imbalance of the mutual obligations, nor exceed the financial capacity of the solicited company”. In the case the Court considered that these conditions were not met. The French report makes detailed reference to the consequences and

In Austria, in the first place, such decisions may be declared void. This sort of compensation had been denied by the Federal Court in Germany in the 1975 ITT case (BGHZ, 65, p.15). 42 General Company Law, Art. 54. 43 Cass. Crim., February 4th, 1985, JPC et G II, 1985, p. 20585. 40 41

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significance of this famous case. It states that in the first 20 years after the decision this defence was accepted only in 9 out of 75 cases. The total number of reported cases has been very small, and it therefore seems that only very critical cases go to court anyway. In view of these data the French report comes to the conclusion that in fact the concept of group interest has evolved into a concept of normality of the group, which the author sees as a positive development provided that the group is a properly structured one. Four conditions were set by the Court in the Rozenblum decision to justify the directors’ conduct in an abuse of company’s assets situation: (1) the group must be firmly established; (2) there must be a group based business policy established in view of group wide objectives; (3) within this group policy a compensation of advantages and disadvantages must be foreseen; and (4) the financial capacity of the burden supporting company must not be exceeded. The Belgian approach is a soft version of the Rozenblum decision: the parent cannot impose a transaction that is totally contrary to the subsidiary’s interest, or impose charges that are out of proportion with the subsidiary’s capacity. The interest to be taken into account is the group interest, but not the sole interest of the parent. Some critics say that this approach lacks a business justification requirement, or that of an agreed framework, and is also too lax with regard to the time at which the compensation will be provided. Another open question raised in the Belgian report concerns the extent to which the parent has a duty to support its subsidiary, and also whether the parent can reasonably expect support from its subsidiaries. It seems reasonable to state, as Prof. Wymeersch does, that if the business activity of the subsidiary is deeply integrated into the group, there is a reasonable expectation that the reciprocal support will continue, and therefore a sudden disruption would entail the parent’s liability. But these lines of thoughts seem to address the external situation, i.e. the protection of creditors and third parties, rather than that of minority or external shareholders of both subsidiary and parent company. The reporter further notes that the principles of this doctrine are applied in a very flexible manner, allowing directors of the subsidiary to follow the instructions given by the parent up to the limits of the subsidiary’s solvency, and ensuring that it obtains a reasonable compensation, which may consist of a mere advantage. The Rozenblum doctrine has made its way to several national and supranational projects, as well as some case law, in countries other than France. The recommendations of the Forum Europaeum on Groups of Companies (1998) represented a turning point for the doctrine’s international acceptance. Later, other reports and recommendations followed the same line. Even more explicit was the October 2016 Report on the recognition of the interest of the group, issued by “The Informal Company Law Expert Group” which was appointed by the European Commission in 2014. This very relevant paper, which was attached to the French report, was drafted on behalf of the Group by Pierre-Henri Conac, our French reporter. It advocates for the recognition of the group interest from what could be called a practical business perspective, focused on solving problems such as the uncertainty which the directors of parent and subsidiary companies are exposed to when purporting to favour the interest of the group in cross-border situations, and the facilitation of intra-group

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financing to reduce the dependency on, and the costs of bank funding. The 2016 report ends up providing recommendations for the Commission to consult on different issues, including the possibility of allowing an EU wide regime of cashpooling, the recognition of the group interest for 100% owned subsidiaries along the Rozenblum doctrine, and eventually if this could even be possible for non- wholly owned subsidiaries under a good group governance system. Also, the Italian 2003 amendment of its Civil Code, to which we shall once more come back below, sets a structure based on liability when disadvantages have not been duly compensated. Unlike the Rozenblum court ruling and its followers, however, the main addressees of the Italian regulation are not the directors of the parent or subsidiary but the entity which is in charge of the direction and coordination activity. The core of the new Italian system is that the company or entity that carries out the direction and coordination “acting in its own entrepreneurial interest or in the interest of others”, but does not do it in accordance with the “principles of correct corporate and entrepreneurial management of the companies themselves”, is liable to the shareholders of the companies that are subject to such activity “for the prejudice caused to the profitability and the value of the shareholding”. The same liability is imposed vis-à-vis the company’s creditors for the integrity of the corporate assets. But there is no liability when, “in light of the total result of the direction and coordination activity”, there is no damage, or if it has been comprehensively eliminated following specific transactions carried out for this purpose. In Argentina a 2005 project to amend the Commercial Companies Law44 also focused its approach on the head of the group. The project proposed the introduction of a new paragraph, entitled “Group policy”, to one of the articles of the Law. The proposed new paragraph stated that “when executing an enterprise policy in the interest of the group, it is admissible to set-off damages with benefits that have resulted or are foreseen to result from the application of a group policy within a reasonable timeframe, provided that the damages do not put at risk the solvency or the viability of the company. . .”.45 The paragraph goes on to require a wellsupported explanatory resolution to justify the preference of the group interest. When it comes to directors’ duties and liabilities, the project refers to the abovementioned criteria and adds that the group policy must ensure a reasonable balance among the group’s companies. The Taiwanese report informs that the core interest of Affiliated Enterprises is the interest of the group. It is therefore admitted that some transactions may eventually be harmful to a subsidiary, which is a way of recognising a group interest. This approach is quite exceptional: in most other countries the idea of a group interest has not been adopted and each group company is treated as an independent entity. Directors’ duties and liabilities towards their company are accordingly not excepted because of the company’s membership to a group. The United States Courts, for

44 It was again proposed, but later dismissed, in 2012 in the context of the project of the new Civil and Commercial Code that came into force on August 1st. 2015. 45 Art. 54, draft of a new third paragraph.

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example, do not take into account the overall group benefit when deciding upon the fairness of parent-subsidiary dealings. This is also the case in Finland, Sweden, Argentina, Uruguay, etc. Dutch case law has recognised that a group interest may have some influence on the company’s interest, but it does not go as far as stating that the former prevails over the latter. Nonetheless, in 2003 the Court of Amsterdam decided that a company that is part of a group has to take the group interest into account and, under some circumstances, has to accept the subordination of its own interest.46 It is difficult to establish what this exactly means in practice. Something similar is reported with regard to Singapore: in determining if a decision is in the company’s best interest, a director of a company within a group may consider the interest of the group as a whole, but in doing so is not permitted to sacrifice the interests of its own company. This approach is contradictory in any situation where there is a conflict between the interests of a company and those of another company within the group, including the parent. This type of conflict cannot be solved using this sort of principles. Spanish Case law in recent years has also accepted a limited deviation from the company’s interest by giving some relevance to the group interest in line with the Rozenblum doctrine and the Italian compensatory advantages approach. The Greek report refers to a traditional opposition in its literature to the recognition of a group interest, but also to more recent commentators who take the view that a company’s transaction should not be examined in isolation but instead integrated into the group’s financial medium- and long-term strategy. Some of these Greek commentators refer to the Rozenblum doctrine, but no Greek case law does. The Brazilian practice shows a relaxation of the legal principles protecting the single company’s interest when it is a member of a non-contractual or factual group. The Brazilian report points out that this relaxation is necessary because otherwise a strict attachment to the prohibition to vote in cases of conflict of interests (Art. 115 of the Corporation Law) would make the operation of groups impossible. The limit to this relaxation is the absence of a compensation for imposed damages or losses of chances. In conclusion, it seems desirable to introduce flexibility in the rules protecting the interests of the single company and of those who are related to it, such as minority shareholders, creditors and other stakeholders. However, the German, Brazilian or Portuguese contractual type approach has proven unsuccessful. The need for protection of the interests at risk must be balanced with the need to have clear rules for those who have to make decisions at the level of both the subsidiary and the parent companies. These decision makers need certainty and should not be charged with unexpected liabilities. Developments based on the Rozenblum doctrine like the Italian 2003 reform and the rules designed by the 2005 Argentine project, which

46

In Argentina a 1983 obiter dictum of the Buenos Aires Commercial Chamber of Appeals, included a very similar statement, which was completely irrelevant to solve the case (Carabassa c. Canale, Cám. Com., Sala B, LL, 1983-B-353.).

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provide for broader transparency, rules and liabilities addressed not only to directors of parent and subsidiary companies but also to the entity that exercises the power over the whole group, and limits and requirements of reasonableness in the decisions where the group interest is the prevailing driver, may give rise to new dynamics in the life of groups of companies.

5 Protection of Minority Shareholders It goes without saying that the protection of minority shareholders, as well as that of creditors and third parties in general, is dependent on the protection of the controlled company as such. To that end some laws provide specific rules. Others, as already mentioned and as transpires from many of the national reports, rely on general company and civil law rules. What follows is a brief overview of the different approaches.

5.1

Specific Rules

Germany’s AktG, as well as the Croatian and Slovenian Commercial Company Laws, provide for a protection of external shareholders (minority shareholders that do not have a relevant interest in the dominant corporation) when enterprise agreements are concluded. Not only is it necessary for these agreements to be approved by a shareholders’ meeting resolution, which must include comprehensive written information and be registered, but the dominant enterprise has to offer a compensation to the external shareholders. This compensation can take the form of a guaranteed dividend for the duration of the agreement, of an exchange of shares enabling the external shareholders to receive shares of the controlling company, or of a straightforward offer by the latter to buy the external shareholders’ shares at an adequate price. For the cases of domination on corporations without the existence of an agreement, German law requires the management board to issue a complicated and inefficient report on the relations with affiliated companies (Abhängikteitsbericht), which has to be audited and provide information about how disadvantages imposed on the company have been compensated. The same rules were adopted in Croatia and Slovenia. But in the case of control of a corporation without a domination or equivalent agreement, the German AktG, as well as the Croatian and Slovenian Company Laws, provide that an external shareholder may file a direct claim against the dominant enterprise for damages suffered directly by himself. In Portugal, where somehow the German model has been followed, when entering into a domination agreement the parent has the duty to offer an adequate compensation to the external minority shareholders, either by offering to purchase their shares in cash or by guaranteeing a dividend while the agreement is in force.

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More interesting than minority shareholders’ protection at the time of entry into a group are the specific protection rules in the dynamic of groups of companies, which are quite infrequent. Italy is a good model to look at. Traditionally, for the protection of the subsidiary and its minority shareholders Italian law relied on the directors’ duties and liabilities. Only in rare and exceptional cases did the courts consider a parent company’s and/or its directors’ liability, or eventually ruled that a holding company could be held liable in tort to creditors of their subsidiaries. The Rozenblum doctrine never made its way in Italy, where a significant change in the groups’ legislation was passed by legislative decree Nr. 6 of 17th January 2003. This reform legitimated group activities under the conditions already mentioned above, one of which matters here: the preservation of the financial balance within the group by means of a compensation of the negative consequences imposed upon the subsidiary. Legislative decree 6/2013 also enhanced transparency by imposing the need for decisions to be motivated by the group’s interest, an approach that also protects shareholders and creditors. It has already been mentioned that this sophisticated protection system was enacted without using the word group anywhere. I have also pointed out that the system was built on the dynamic notion of direction and coordination of companies’ activities (direzione e coordinamento di società), an undefined factual concept that, according to Art. 2497 septies, may not only result from a situation of control as defined in Art. 2359, but instead be based on an agreement or a clause in the company’s articles of association. Shareholders are protected by the liability of the directing or coordinating entities, which arises when their power has been exercised “in their own entrepreneurial interest or in the interest of others” and not in accordance with the “principles of correct corporate and entrepreneurial management of the companies themselves”. The liable company or entity has to indemnify the subsidiary’s shareholders “for the prejudice caused to the profitability and the value of the shareholding”, except if, “in light of the total result of the direction and coordination activity”, there is no damage, or if it has been comprehensively eliminated following specific transactions carried out for that purpose. The Italian report further highlights that the profitability and market value of the shares must be determined taking the influence of the global group’s results into account. This is a concrete application of the idea of group interest, but some commentators still identify it with the parent’s own interest. Further, whenever a decision is influenced by the direction and coordination activity, it has to be analytically motivated and the reasons and interests that influenced such decision must be expressly stated (Art. 2497 ter). Directors not fulfilling such duties would be liable for damages. In conclusion, Germany, Croatia, Slovenia, France and Italy, as well as some other jurisdictions like Taiwan have, in one way or another, specific rules which rely on the parent company’s liability for detriments and damages imposed upon the dependent company, unless a proper compensation has been provided.

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Reliance on Civil Law and General Company Law Rules and Principles

General company law principles, and even more general principles of law, contemplate the protection of the subsidiary company and its shareholders. The causa of a company is clearly defined in many jurisdictions. For example, the Belgian Companies Code states that a company is created “with the purpose to achieve for its shareholders a direct or indirect financial benefit”. The Argentine and the Uruguayan company laws define “company” as that entity whose shareholders all participate in the benefits and bear any losses. Some commentators take the view, which I subscribe, that this is part of the essence and nature of a company: there is a common risk to which all shareholders are bound and therefore there is an objectively recognisable common interest shared by all of them, regardless of the percentage of their participation. This is also confirmed by Art. 1833 of the French Civil Code: a company is established in the common interest of shareholders. From these legal definitions emerges the principle of equality among shareholders, which in turn gives shape to the concept of company (or social) interest, understood as the common denominator of the objective interest of all shareholders in the company. In practice this means that the majority (for our purpose, the parent) may decide what it considers to be in the company’s interest, but it may not use its power to decide in its own or somebody else’s interest, against the interest of the company and the rest of its shareholders. We have already discussed whether, in the presence of a group, it is possible to depart from these principles and, if so, under what conditions. In the absence of express provisions ruling out the applicability of the essential principles referred to above, or in the cases where the conditions for this to occur are not met, the generally recognised remedies for shareholders’ protection are the liability of the responsible persons and, to a certain extent, the right to challenge shareholder meetings’ resolutions or, more restrictively, board of directors’ decisions. Importantly, these rules are the same as the rules that apply to independent companies. It is therefore correct to state that, with regard to the protection of minority shareholders of a dependent company, the law in most countries relies on the general rules of company law. Such is for instance the case of Japan, where there is no systematic regulation on the protection of minority shareholders. It is reported that, in spite of academic claims that special protection rules should be enacted, legislators have refused to do so. The same happens in Poland, where general rules may be efficiently used to protect minority shareholders. Examples of these general rules are the right to request a general shareholders’ meeting, the appointment of supervisory board members by groups of shareholders or classes of shares (Art. 385 of the Commercial Companies Code), a withdrawal right if there is a significant change in the company’s activity or if an international merger is decided, a tag along right and an inverse squeeze out (Art. 419 of the same code). In France, minority shareholders are protected by the concept of abuse of majority, which may apply to resolutions passed by both the shareholder meetings

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and the board of directors. The concept was developed by the Cour de Cassation, which held that there is such abuse if the majority shareholder’s vote is contrary to the social (the company’s) interest and is solely based on the intent to favour the majority shareholder’s interest to the detriment of the rest of the shareholders. This, however, was not written in the Commercial Companies Law of 1966. In later years the French courts have adopted a more institutional approach and included in the general notion of social interest that of the stakeholders. Some of the other national reports give examples of case law related inter alia to the failure to distribute dividends, unjustified capital increases, the abuse of corporate assets and the appropriation of business opportunities. The French reporter proposes a sell-out right of minority shareholders in the event of a majority abuse, which could of course be a better remedy than the right to challenge resolutions and be compensated for damages. In some countries Corporate Governance Codes deal with minority protection remedies, especially in relation to large public corporations. This is the case of Germany, where taking advantage of the company’s business opportunities for personal purposes, and more generally pursuing personal interests, is straightforwardly forbidden.

5.3

Directors’ Duties as Shareholders Protection

Under any legal system Board members of both the parent and the subsidiary are bound by a duty of loyalty and must employ the care of a diligent and conscientious manager. This is so even in the few countries where imposing disadvantageous instructions to the dependent company under a domination agreement is permitted. There are some differences among legislations, as well as different approaches within some legal systems, as to the acceptance of the business judgment rule, its requirements and the extent to which it may be invoked by members of the board of management. German law provides for some cases under which members of the Board of both the controlled company and the dominant enterprise may be held jointly and severally liable if they did not act in accordance with their duties. In general, the duties of due care and loyalty, or similar standards, are universally accepted (for example Austria, § 84 AktG). But there are differences between Anglo Saxon and Continental jurisdictions. The UK, US and other common law jurisdictions base their approach on the concept of fiduciary duties, the origins of which can be traced back to the old English trust law. In Continental law jurisdictions, in turn, a professional duty of care is as important, if not more important, than the duty of loyalty. There are also differences among national laws with regard to whom these duties are owed to. In some jurisdictions it is only the company, in others also the shareholders and in some others even the creditors, at least when there is a risk of insolvency. In the US the standard duties include entire fairness, which is equivalent to the continental notions of utmost good faith and loyalty. Minority protection is based not

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only on substantive rules, which refer to the terms of the dealing, but also on procedural rules, which point to the decision-making process of the transaction. Some courts take the view that both issues are to be scrutinised together: a better process provides more slack on the substance of the transaction and the clear proof of a fair price can offset a failing process. All these rules are based on the judicial scrutiny of dealings within a group to which are subject to the fairness test. This test is different from the business judgment rule, which applies to decisions in which neither directors nor parties controlling directors have a conflict of interest. It must be demonstrated that the transaction was as good a deal as it would have been had it been concluded with a third independent party. The US report explains the standard in depth with reference to the Sinclair Oil v. Levien precedent, where a clear distinction was made between decisions that exclude or are taken to the detriment of the minority shareholders and decisions in which all shareholders receive the same benefits per share, in other words, where equal treatment was granted. A challenge to a dividend distribution which did not allow the company to expand was rejected on this basis. Further thoughts may be given to the universal fairness of such a distinction from a comparative law perspective: an abusive dividend distribution made in the interest of the controlling entity may be as detrimental to the company as permanently refusing to distribute dividends can be detrimental to minority shareholders. In the Sinclair case the large dividend distribution to allow the parent company to do some further business was not meant to take a business opportunity from the subsidiary, and this influenced the court’s decision. But in the US these rules apply to director’s decisions, not to shareholders’ votes. The US national report makes it clear that shareholders may cast their votes guided by their own personal interest. It is therefore when directors act as mere agents of controlling shareholders that the latter’s fiduciary duties arise and the challenged action involves a subsidiary’s board decision. In Sinclair the parent company dominated the subsidiary’s directors and, because the parent dictated what the board did, the court held that the parent owed fiduciary duties to the subsidiary and all its shareholders. There is a presumption that ownership of a majority of the voting stock establishes domination over the board, whereas otherwise it will depend upon the particular circumstances. US courts have found in exceptional cases that even majority shareholders lack control over most of the directors. In Delaware, the approval of the transaction with a controlling shareholder by independent directors, or by a majority of the minority shareholders vote, can result in shifting of proof on the transaction’s fairness from the controlling to the challenging shareholder, but will still subject the transaction to the fairness test instead of the business judgment rule.47 In order to be viewed as independent, board members must not only lack compromising ties with the corporation or controlling shareholder, but also, when

47

In a recent decision, however, the Delaware Supreme Court held that the combination of approval by a committee of independent directors plus a majority of the minority shareholders returns scrutiny to the deference of the business judgment rule.

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negotiating a proposed deal with the controlling shareholder must do so aggressively and avoid generous compromises.48 In many countries director’s duties are only vis-à-vis the company they manage, and not towards shareholders, parent or subsidiary companies. Such is the case of Sweden. Similarly, in Belgium board members do not owe fiduciary duties to shareholders: they are subject, as in most continental countries, to the general duty of care expected from a diligent and responsible businessman, but the duty is owed to the company. The same is true in Singapore, where directors owe duties of loyalty and care to the company but not to its shareholders or creditors. The duty of loyalty results from the directors’ position as a fiduciary of the company and includes the duty to act in the company’s best interest, as well as the duties not to profit from their position and to act for proper purposes. Duty of care means that directors have to act with skill, care and diligence. As a common law principle, while the company is solvent the breach of any of these duties may be waived by the shareholder meeting. The Singapore courts are reluctant to substitute the directors’ opinion by their own if they are satisfied that the business judgment was an honest and reasonable one, an approach described as a weak form of business judgment rule. Japanese directors owe fiduciary duties to the company and are personally liable in the event of a breach. It is no defence for them to show that they followed instructions from the parent or that they acted in the interest of the group. In the Nissan cash pooling case the Tokyo High Court made it clear that a decision benefiting the parent directors and causing damages to the subsidiary makes the directors liable for breaching their duties of care and loyalty, although on the facts of the case such liability was denied. In Brazil there are no exceptions to the rule that board members cannot act in favour of other group companies. In the UK all directors of a company are bound by the same duties, but as the British report points out, the exercise of these duties is more challenging in corporate group scenarios because of the split loyalties that may exist between some directors and different group entities. Duties are owed by directors to their company, not to shareholders or to any other person. It is therefore only the company itself who can file claims for breach of its directors’ duties. Subsidiary directors are not allowed to act in the interest of the group or the parent company that proposed their appointment. An independent agreement between the director and the appointing parent company for the former to vote in accordance with the latter’s instructions would be invalid because it would entail an abdication of the director’s duty to exercise his independent judgement. The rule is that directors are bound by the duty to promote the success of their company for the benefit of the shareholders (Section 172 of the UK Companies Act). The British report states that, without prejudice to this rule, directors may act in ways that benefit the group or the parent at the expense of the subsidiary if such action can be shown to have long run positive consequences for the subsidiary and if the parent’s interests coincide with those of the minority shareholders. It is difficult from the outside to assess whether

48

The Southern Peru Copper case cited in the US report.

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these criteria are in line with the continental Rozenblum doctrine. Whatever the case may be, Section 175 establishes a director’s objective duty to avoid conflicts of interest, thus protecting the subsidiary’s business opportunities, property and information.49 In those jurisdictions where duties are owed to the company and not to shareholders, the parent company is not entitled to bring any action against directors for breach of those duties. The Singapore Court of Appeal recently (2017) decided that a parent company had no standing to claim for losses suffered by a subsidiary as a result of a breach by one of the parents’ directors. From an outsider’s perspective this decision seems at odds with the duty of the director of the parent company to exercise an overall control on the subsidiaries. One efficient way of avoiding conflicts of interest is to prohibit the vote of those, whether directors or shareholders, who have an interest contrary to, or even merely different from, that of the company. Surprisingly, many jurisdictions lack this sort of rules. It does not seem sufficient for the law to establish a duty to avoid conflicts of interest if, as is the case in Singapore, an informed approval by the shareholders’ meetings of the companies involved is all that is required to avoid the risk of such conflict. The laws of several countries only bar directors from voting when their personal interest is in conflict with that of the company. Such is the case of Spain, Sweden, Greece and many others. But in Sweden the restrictions on a director to vote in relation to decisions where he has a direct or indirect conflict of interest do not apply where they are most needed, namely, “where the party contracting with the company is an undertaking in the same group or in a group of undertakings of a corresponding nature”. In many countries there are no similar rules limiting voting rights at shareholder meetings in conflict of interest situations. Belgian law, for example, requires board members who have a conflict of interest to abstain from voting but does not extend that duty to shareholders who are not board members. Further, this restriction does not apply to decisions concerning a company in which a parent holds 95% of the shares nor between subsidiaries of the same parent. French law only bars the vote in cases of related party transactions, the definition of which is a transaction with a shareholder holding more than 10% of the voting rights. U.S. law provides a sort of halfway house on this approach. While U.S. law does not prohibit votes by conflicted directors or controlling shareholders, it will reduce the level of judicial scrutiny for transactions with controlling shareholders approved by independent directors or a majority of the minority shareholders. There are two further relevant aspects of directors’ duties which are worth mentioning. One is that board members may not compete with the company, whether directly or indirectly. Whereas this principle is universal, the rules resulting from it differ from country to country. Some jurisdictions, like Austria (§79, AktG), provide for an explicit exception if the board member participates in a competing

49

The British report mentions that approval by independent directors or by the shareholders supersedes this duty. But the parent or controlling shareholder should be barred to vote when in conflict of interests.

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activity through another group company. This exception leaves minority shareholders unprotected in the cases where such protection may be most needed. Conflicts may also arise from the duty of confidentiality. Indeed, board members who sit on both the dominant and the dependent companies’ organs may face serious conflicts. The law in some countries gives priority to the entitlement to receive information over any confidentiality duties (Austria, § 95 (2) AktG).

5.4

Shareholders’ Rights and Duties

While directors’ duties are quite similar in all jurisdictions, the duties of shareholders, if any, are approached differently by different legal systems. Especially for corporations, the general principle is that the shareholders’ main obligation is to pay in their contribution. Once that central duty is performed, shareholders essentially have rights. It is only under certain circumstances that they may also be bound by some duties. In a group structure the controlling party is generally also a shareholder of the dependent company, whether directly or indirectly. Therefore the same basic statutory rules apply to majority and minority shareholders, one being the party that needs protection, the other being the party from whom the former needs to be protected. It is worth mentioning three South American jurisdictions that have some specific rules on shareholders’ duties. Art. 54, par. I, of the Argentine Company Law establishes that “the damages suffered by the company by wilful misconduct or negligence of shareholders or non-shareholders that control the company makes them jointly and severally liable for those damages, which they cannot set-off with the profits that their activity may have generated in other transactions”. In addition, the second paragraph of Art. 54 provides that “a shareholder or controlling party that uses the company’s funds or belongings for his own or a third party’s business is obliged to bring the resulting profits to the company, with any losses being for his exclusive accounts” Whilst both these rules are of utmost importance, the second is particularly relevant in view of the fact that the local literature understands the word belongings (efectos) as including not only material or intangible property, but also the company’s business opportunities. Indeed, within a group of companies it is very frequent for such opportunities to be redirected by a parent company to itself or to another subsidiary. The 1989 Uruguayan Commercial Companies Law contains equivalent provisions in its Art. 74. But it also provides for a special duty in Art. 51: “The controlling company shall use its influence so that the subsidiary fulfils its objects and must respect the rights and interests of shareholders. It will be liable for damages caused in breach of these duties and for exercising its rights abusively. The managing board members of the controlling company shall be jointly and severally liable for the breach of this rule. Any shareholder has standing to file a claim for the damages suffered by himself or for those suffered by the company”. Brazil also offers some very interesting rules in this respect. Art. 116 of its Corporation Law of 1976 states that the controlling shareholder must use its power

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in order to make the company carry out its objects and social function, and Art. 117 provides with a list of actions that are considered abusive and may give rise to the controlling shareholder’s liability. Some of the most interesting included in this provision are to lead the company to favour another one damaging minority shareholders, to appoint a director knowing that he is morally or technically unfit, to decide a merger, spin off or liquidation of the company for his own advantage, etc. The circle is completed with Art. 246, which establishes the parent’s obligation to pay for any damages it may cause to the dependent company by violating such duties or abusing its power. Sweden provides another example of shareholder liability in Chapter 29, sec. 1, of its Companies Law, according to which “a shareholder shall compensate damage which he or she causes to the company, a shareholder or another person as a consequence of participating, intentionally or through gross negligence, in any violation of this Act, the applicable annual reports legislation or the company's articles of association”. The Anglo-Saxon concept of fiduciary duties is frequently relied on to try to impose duties and liabilities on controlling shareholders. In continental law jurisdictions very often legal literature, as well as court decisions, rely on this concept without carefully studying its meaning, its boundaries, its effects and, crucially, whether their national law provides the elements for its application. In this respect Austria’s report informs that the judiciary is very hesitant to impose such fiduciary duties on shareholders. The Supreme Court has indeed ruled that a shareholder may use its vote to pursue its own interests as long as he acts in good faith. However, other court rulings have established that, when voting, majority shareholders shall take into account the interests of other shareholders. For instance, it has been decided that the distribution of the entire company’s profits and reserves is not unlawful as long as the existence of the company is not threatened. The German report informs that, even if not explicitly stated in the law, any shareholder (whether controlling or not) is bound by a duty of loyalty (Treupflicht), which is similar but not the same as the Anglo-Saxon fiduciary duty. Such duty is described as the duty not to exercise one’s rights without considering the interest of the company and that of the other shareholders. In closed corporations this duty of loyalty is stricter than in the case of other corporations. Indeed, the intensity of the duty of loyalty of majority shareholders towards the company and minority shareholders is higher in the GmbH (closed corporation or limited liability partnership) than in an AG (corporation). The test is whether a manager of an independent GmbH would have taken the same actions. The standing for an action based on a breach of this duty of loyalty lies with the company, but a minority shareholder may enforce the claim by an actio pro socio, which is equivalent to a derivate action. Dutch law also relies on a general duty of behaviour according to standards of reasonableness and fairness in order to protect minority shareholders, for instance in relation to the company’s dividend policy. Some Supreme Court decisions have gone as far as recognising a company’s and its majority shareholder’s duty of care towards its minority shareholders.

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In Austria the protection of minority shareholders relies on the prohibition to effect any payment or other services (e.g. guarantees provided to the parent company) to the parent company without proper consideration other than by distributing the subsidiaries’ profit that prior to that had been recorded on the financial statements. Based on corporate legislation, criminal courts have found an infringement of the Austrian rules on capital preservation illegal under criminal law based on a breach of trust (Libro case, of 2014). For shareholder protection Turkish law foresees three causes of parent company’s liability: unlawful exercise of control over the management of the dependent company, unjustified subsidiary’s shareholder meeting resolutions, and breach of third parties’ trust. But if domination is based on a contract, or in cases of directly or indirectly wholly owned subsidiaries, the law allows the parent to give mandatory instructions to the subsidiary. As is the case under German law, a 90% shareholder may squeeze out the remaining minority shareholders in order to achieve full ownership of the subsidiary. In the absence of these two types of control, any damage or disadvantage imposed upon the subsidiary has to be compensated. The principle of equality among shareholders is a relevant tool for their protection. The 2006 Finish Company Act endorses this principle by establishing that no organ of a company shall make decisions or take other measures that might confer an undue benefit to a shareholder or another person at the expense of the company or another shareholder (Ch. 1, Sec. 7 of the FCA). As the Finnish report underlines, this is a protection within both the subsidiary and the parent company (for instance against transferring a business to a subsidiary). But this protection can be left aside with the consent of the minority shareholders (Ch. 5, Sec 29, FCA), unless such waiver affects creditors’ rights. This is a logical solution, but the fact that it is not always understood by practitioners and courts reaffirms the importance of expressing it in a statute. The equal treatment principle is also explicit in Swedish law: neither the board nor the shareholders’ meeting may pass any resolution or perform acts or take measures which may provide an undue advantage to a shareholder or to a third party to the detriment of the company or any shareholder This leads to the conclusion that a resolution that is oppressive or unfairly prejudicial to minority shareholders will be set aside by a court if challenged. In connection with this, the Swedish report mentions that a controlling shareholder has a stronger fiduciary duty vis-à-vis the other shareholders. The principle of equal treatment of shareholders is also provided for in § 53 a. of the German AktG. As mentioned before, it is somehow surprising that in several legislations there are no restrictions for a majority or controlling shareholder to vote a resolution where he has a personal interest or even an open conflict of interest. The laws of Italy, Argentina, Uruguay and other do establish restrictions in this regard, but for instance in Germany there are no such restrictions: the vote is not even barred in cases where the shareholders’ meeting vote concerns the approval of a domination agreement for the voter’s own benefit. Admittedly, a shareholders’ resolution can be challenged if the majority holding shareholder exercised its vote to attain special benefits for itself and no sufficient compensation has been provided to the challenging shareholder (§

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243 -2-1 AktG), but this ex post facto remedy may come too late to prevent damages. For the GmbH, the law establishes that the majority shareholder is barred from voting only when the resolution deals with a discharge of his liability. The same happens in the Netherlands, where a conflict of interest will only be held to exist under very specific circumstances. Brazilian law bars the exercise of voting rights in conflict of interest situations (Art. 153), but the practical reality shows that, if the company is a group member, there will be tolerance as long as damages or losses of opportunities are compensated by the controlling company. Finnish law forbids subsidiaries that have shares of the parent company to vote or even participate at the general shareholder meetings of such company. This follows the same logic as that which gives substance to the rule preventing a company from voting with its own shares. In Japan a subsidiary has no voting rights in the controlling company. But neither Finland nor Japan limit the vote of the parent in its subsidiaries when there is a conflict of interest. It could be argued that barring a shareholders’ vote on the basis that it has conflicting interests with those of the company could provide a tool for minority shareholders to abuse their own voting rights by blocking resolutions that cause no damage, i.e., imposing a minority’s opinion and displacing that of the majority. The answer is, in the first place, that in almost all continental jurisdictions the majority shareholder may rely on the abuse of rights principle to challenge an unfair minority vote. Secondly, a relevant distinction must be made between cases of converging interests between controlling shareholder and company and cases where these interests are in conflict, which is the case where the shareholder should not be allowed to vote. In some jurisdictions where shareholder voting is barred in cases of conflict of interest, the legal literature and case law have given prevalence to the principle that no challenge to a shareholders’ meeting resolution is admissible if there has been no damage. Singapore courts, following Commonwealth doctrine, have rejected the idea of imposing duties and liabilities between shareholders. This is a very interesting line of thought, based on the idea that the structure of a company only creates links between each shareholder and the company, but this is not the place to develop it any further. It should also be mentioned that the French reporter, Prof. Conac, proposes a sellout right of minority shareholders in case of a majority abuse. This could of course be a better remedy than the right to challenge resolutions or than a compensation for damages.

5.5

Squeeze Out, Inverse Squeeze Out and Withdrawal Rights

The problems and conflicts within a company that is under the control of another, in circumstances where the decision-making process is in the hands of the latter and the risk of potential massive conflicts of interest is always present, disappears when the dominant entity is, directly or indirectly, the only shareholder. In this case no objections can arise from the use of a dominant position to maximise synergies or

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otherwise use the subsidiary’s resources in the interest of the group or of its head. Only external issues, i.e. the protection of creditors and other third parties, require attention. That is why the legal instruments to achieve a hundred per cent domination in the hands of the controlling party are regarded as means to favour entrepreneurial efficiency and, conversely, minority shareholders’ rights to leave the company in order to avoid the risks inherent to a situation of control and group membership are also a tool for their protection. Still, minority or external shareholders may need protection at the time the group is formed or when a company enters a pre-existing group, or in cases of change of control. National laws vary in this respect. In most countries the rules on public corporations foresee mandatory public acquisition offers, but the general company law of some jurisdictions also allows dissident shareholders to leave the company by granting them withdrawal and appraisal rights. The exclusion of minority shareholders by means of a squeeze out -now contemplated by many capital market laws- was first foreseen in Germany as a means to allow the Eingliederung (incorporation) when a controlling party reaches 95% of the dependent company’s share capital. The same percentage allows a squeeze out under the German Wertpapiererwerbs und Übernahmegesetz (Takeover Law) of 2001 for listed corporations. The Belgian Companies’ Code also allows shareholders of an unlisted company to force other shareholders to sell their shares if there are “serious grounds” (Art. 636). Serious grounds may include an abusive or obstructive conduct by minority shareholders. It also foresees the right of minority shareholders to force majority shareholders to buy their shares under certain circumstances, such as an abuse of the majority power. For listed companies, a 95% shareholding allows the majority shareholder to squeeze out the remaining minority shareholders. While not considered a group specific instrument, since it may be used by a natural person with no qualification, squeeze out rights are also foreseen in Finnish law for a shareholding of over 90% of all shares and voting rights. In France it is only foreseen for listed companies at a threshold of 95% of the voting rights, but it is also valid to provide for it in the articles of association of other companies. Dutch law’s threshold to force the remaining minority shareholders out is 95% of the share capital for public companies and the same percentage, including voting rights, if it is a private company. There are many other examples of similar approaches. Austria has specific rules to squeeze out minority shareholders of non-listed companies (§§ 1 and 7, Austrian Shareholder Exclusion Law) if the group (the parent and its subsidiaries) owns 90% or more of the subsidiary’s nominal capital. In Japan, the 2005 Companies Law introduced a squeeze out right for the 90% shareholder majority. It also allows cashout mergers if approved by two thirds of the votes at a shareholders meeting. Section 215 of the Singapore Companies Act allows a shareholder holding 90% of the shares to compulsorily acquire the rest after a public offering or a private acquisition. US law does not provide for the direct squeeze out of minority shareholders. But the same result is achieved through the so-called freeze-out mergers, which allow a merger of the subsidiary into the parent company, or into another parent-controlled company. This may be achieved by paying minority shareholders in cash. The courts in the relevant State of Delaware do not require proof of the merger’s business

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purpose, something that might give rise to valid criticisms. Some other state courts do require that proof.50 Some national laws provide for both the exclusion and the withdrawal rights (squeeze out and inverse squeeze out) at the same threshold. This is the case of Sweden, where the Companies Law allows a shareholder holding 90% or more of the shares to buy-out the remaining shares and, conversely, allows the minority shareholders to compel the majority to buy them out. The 1986 Portuguese Commercial Companies Code also gives a squeeze out right to the majority shareholder holding 90% or more of the subsidiary’s equity capital and a right to the minority shareholder to force the dominant shareholder to buy out his shares. Portuguese rules are in some way unique, not only because all corporations, whether listed or not, and limited liability companies are included, but especially because they provide for an effective mechanism to achieve their goals: the unilateral declaration by the majority shareholder, the effect of which is the immediate transfer of the remaining shares. This leaves discussions around the shares’ valuation as an independent issue that does not interfere with the immediate effects of a squeeze out. In the Netherlands minority shareholders are protected by the rules on mandatory bids in public corporations. As a counterpart to the freeze out rules, minority shareholders can request to be bought out by the shareholder (or more acting in concert) who holds 95% or more of the share capital and voting rights, both of a public and private companies. For some limited decisions, like a merger, Japanese law also foresees an appraisal right: the company has to purchase the shares at a fair price. The Italian Civil Code foresees a withdrawal right for shareholders of a company subject to another entity’s direction and coordination activity. It does so under certain circumstances such as a change of the company’s objects, but mainly at the beginning and end of such activity if the company is not listed to trade its shares at a stock market, or if the risk conditions of the investment have been altered, or a public acquisition offer has not been launched (Art. 2497 quater). Adopting an approach that is quite infrequent in comparative law, the Swedish Companies Act provides that “where a shareholder, through abuse of his or her influence over the company, has intentionally participated in a violation of this Act, the applicable annual reports legislation or the company's articles of association, a court of general jurisdiction may, on petition by the holders of one-tenth of all shares, order that the company go into liquidation, provided that special cause exists therefor as a consequence of the long duration of the abuse or some other reason”. But the company may avoid liquidation by asking the court to issue an order “to buy-out the petitioner's shares within a prescribed period of time”. As an independent matter, the law also provides that, in case of “continued fraud on the minority and the circumstances in general, a shareholder as referred in section 3, shall also be obliged to buy-out the shares of shareholders suffering damage” (Chapter 29, section 4).

50

For details, see the US report.

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Mandatory public acquisition offers are also an instrument for the protection of the minority shareholders of listed companies, as they allow them to leave the company in case of a change of control, whether such change has already occurred or is imminent. The European Takeover Directive (2004/25/EC), followed by national laws, foresees a mandatory bid for the acquirer of a controlling interest in a company, who must offer to buy all the outstanding shares. Just to quote a few examples, in Belgium and the Netherlands the bid is mandatory at a 30% threshold and in Croatia at 25% of the voting shares owned by one person or several acting in concert. In Japan the mail purpose of the law on mandatory tender offers is not to allow minority shareholders to exit the company, but rather to stand in the way of the private purchase of a controlling block of shares, because of its lack of transparency. The threshold is also 30%, but some practical differences are pointed out in the Japanese report.

5.6

Rules on Intragroup Loans and Related Party Transactions

The issue of appropriation of company’s assets by means of business relations between members of a group, sometimes referred to as hidden distributions, needs to be addressed, perhaps with the same intensity with which tax law addresses the issue of transfer pricing within related companies. Finnish law provides an interesting principle in this respect: transactions that reduce the assets of the company or increase its liabilities without a sound business reason are unlawful. Regulations on related party transactions generally refer to directors and officers but seldom to shareholders or controlling parties. In groups of companies such transactions may be part of the normal business among its members, as a result of which they often remain invisible to minority shareholders and out of their control. Capital market laws, but not general company law, establish some rules on the topic. For example, § 84 of the Austrian Stock Exchange Law establishes the duty to disclose any transactions with closely related subjects which may have had a material adverse influence on the company’s business. EU Directive (2017/828/ EU) deals with the same matter, as does Belgian law. All the examples show that it is only when the related party transactions are of certain significance, for example because they exceed a certain amount and/or a percentage of the value of the company’s assets, that capital market laws establish mandatory procedures (audit committee’s or independent appraisers’ opinion) to ensure that transactions are made at market value and in arms’ length conditions. General company laws, in contrast, rarely provide special rules on related party transactions. However, the general principles of company law and on managers’ and directors’ duties, as well as the rules on shareholders’ duties, restrictions and liabilities—in those jurisdictions that foresee them-, offer sufficient protection against transactions imposed by the parent entity for its own benefit, when harmful

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for the subsidiary. Chapter 17 of the Swedish Companies Act defines the concept of value transfer, which includes dividends, acquisition of its own shares and any other transaction by which the company’s assets are diminished. Some of these value transfers are allowed. When not allowed, “the recipient shall return what he or she has received, where the company proves that he or she knew or should have realised that the value transfer was in violation of this Act”. Nevertheless, the Swedish report informs that for transactions between parent and subsidiary a small difference with third party transactions is generally accepted. Loans and other financial business transactions are types of related party transactions. They receive particular attention but, again, it is more frequent that the issue is mentioned for loans to be made to board members than to shareholders or parent companies. The matter is addressed by various different national legislations, many of them confined to very specific purposes. For Instance, § 80 of the Austrian Stock Corporation Act, which deals with loans and credits to members of the executive body, establishes that the supervisory board’s approval is required even if such loans or credits are granted to members of subsidiaries. In Finland, loans, guarantees, etc. are subject to the already mentioned principle that transactions which reduce the assets of the company or increase its liabilities without a sound business reason are unlawful, if without proper consideration. As a general rule, Singapore law restricts loans and similar arrangements to directors and companies or other entities connected to them, unless a shareholders’ meeting gives its informed consent, the interested parties having abstained from voting. In some other jurisdictions, like Cyprus (Company Law, Ch. 113), it is forbidden for the company to grant loans to its directors. Greek law Nr. 2190/1920 protects minority shareholders by prohibiting the acquisition by the company of its own shares and the granting of loans to facilitate such acquisition by third parties. The same Greek law also sets restrictions to the conclusion of transactions with connected enterprises. Cyprus has similar rules forbidding companies from providing financial assistance to third parties for the acquisition or subscription of the company’s own shares, or of the parent’s shares in the company. A leveraged buyout seems practically impossible under such rules. Rules with regard to restrictions as to financial assistance in public limited liability companies are applicable in other EU member states as well, as they originate from the so called second company law directive.51 The mentioned rules on loans and other financial business transactions invite us to pay attention to further issues that may damage the company’s assets and the minority shareholders’ interest. A controlling party imposing the acquisition of the subsidiary’s own shares may do so to cover its own cash needs. Imposing limitations

51

Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent now integrated in Directive (EU) 2017/ 1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law.

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on a company’s attempt to buy its own shares, to accept them as a pledge to guarantee its credits or to buy shares of its parent company are necessary, as they avoid different ways of diluting the company’s assets and putting it, its creditors and other shareholders in danger. As is the case in other jurisdictions, Austrian law extends the rules on acquisition or pledge of its own shares to the parent or subsidiary company (§§ 66 and 51, AktG). Which distributions are made to shareholders, and when, is also dependent on the decision of a controlling party. In those jurisdictions where the prohibition to exercise rights abusively has been extended to voting rights, this tool can be used to prevent an oppressive failure to distribute dividends, or an insufficient dividend distribution, as well as an excess driven by the parent’s needs and interests, disregarding the stability and finances of the subsidiary. Minority shareholders must also be protected in the context of other forms of tunnelling assets or financial resources to the controlling entity or to other members of the group. Some jurisdictions have therefore established limits to board members’ fees.

5.7

Remedies and Standing

What is it that minority shareholders can do when their rights have been affected and they have suffered damages? In theory a shareholder could be given the right to challenge shareholder meetings’ resolutions and board of directors’ decisions, or to address claims to directors, the parent company or the ultimate controlling party seeking an indemnification for damages caused to the company or to himself. To that end a shareholder may need to have proper information, and in order to obtain it he may require some inspection rights or the possibility that some qualified person provides it to him. Of course, the shareholder will also need to have standing so as to file the appropriate claims and enforce his rights. Singapore law, which provides several means of minority shareholders protection, grants them information rights, including each shareholder’s right to inspect some registers, as well as the right to challenge shareholder meeting resolutions52 and require certain special investigations. The law also deals specifically with the case of change of corporate control. In Belgium, in the cases where there is a gross deviation from the company’s objectives, resolutions can be challenged under the general doctrine of abuse of rights, i.e. the abuse of the majority power. Japanese law only allows the challenge of shareholder meeting resolutions if a shareholder with a special interest used his vote to pass a resolution that is extremely unfair, a standard which the courts apply restrictively. But in most jurisdictions there are special rules to challenge unlawful shareholder meeting resolutions.53 The different approaches in this regard are

52 53

The Singapore report informs that such challenges are nevertheless rarely successful. Germany, France, Italy, Argentina and many other jurisdictions provide rules for this purpose.

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essentially dependent on what is deemed unlawful by each legal system. In some jurisdictions only breaches of company law justify a challenge, while in others it is the breach of the law in general, meaning any law, that gives rise to the right to a challenge. Challenging board of directors’ resolutions is very seldom admitted in comparative law. While discussed in some jurisdictions in the absence of specific rules, its practical scope is extremely limited. That leaves a minority shareholder facing unlawful, improper or abusive business decisions with the only tool of bringing forward a claim for damages. In this context it is worth mentioning that in France a right to appoint a special expert is granted if there is a conflict of interest within the board, and the company is obliged to appoint an independent expert to appraise the company if the transaction is likely to cause conflicts of interest. Easy access to the courts is essential for minority shareholders to be able to enforce their rights. However, while there is no question about shareholders having standing to challenge shareholder meeting resolutions, the standing to claim damages varies from country to country. As a general principle of law, the standing to file a claim for damages lies with the subject that has suffered them. Therefore, if a controlling party damages the controlled company it is the latter that will have the right to claim an indemnification. But since the dominant company may use its power to avoid the filing of any claim, some laws allow minority shareholders to file such claims on behalf and for the benefit of the subsidiary. Just as an example, this is the case of Brazil, where, if successful, the claimant is rewarded with a percentage of what is awarded to the company. The US is particularly shareholder friendly in this respect. For instance, any minority shareholder has a standing to bring a derivative suit for the benefit of the subsidiary. Other countries are not so generous with minority shareholders. Japanese law, for example, does not allow a minority shareholder of a subsidiary to sue the parent company for damages. This action, which is an action in tort, is only open to the subsidiary itself, with no possible derivative action by a shareholder. But directors’ liability for damages caused to the subsidiary for the benefit of the parent company may be enforced by means of a derivate action by a shareholder if the company does not file the claim. It also allows a so called multiple-derivative action whereby a 1% shareholder of a parent may bring a derivative action to enforce the liability of directors of wholly-owned subsidiaries that represent 20% of the parent’s assets, should neither the parent nor the subsidiary file the liability claim by themselves. Singapore law provides that the company is the primary plaintiff to file claims for breach of directors’ duties. However, shareholders may file derivative actions on the company’s behalf, and exceptionally also multiple derivative actions. If the shareholder suffered a direct loss –as opposed to a reflect loss caused by its share in the company- he may claim a compensation for it. A shareholder may also file an action for oppression (section 216 of the Companies Act) seeking pro rata compensation. This is a remedy based on the notion of unfairness which is valued as a powerful protection for shareholders in corporate groups. Interestingly, shareholders in Singapore may rely on the acts and business affairs of related companies to support

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allegations of oppressive or unfair behaviour by the controlling shareholder. The courts have a rather wide discretion to grant the most appropriate remedy, including winding up and ordering share buy-outs. These last remedies are somehow similar to those provided by Swedish law. In Taiwan, if the controlling entity does not compensate the damages or disadvantages imposed on a subsidiary, shareholders holding 1% or more of the outstanding voting shares of the subsidiary may file a claim for the subsidiary to be indemnified, and a settlement they do not participate in cannot be held against them. In some other countries, like France, Argentina and Uruguay, individual shareholders are not only given standing to file claims to challenge a shareholders’ meeting resolution in order to have it declared null and void, but also to seek compensation for damages on behalf of the company (action sociale ut singuli). The same is true in Italy, where a derivative suit may be filed by shareholders representing at least 20% of the company’s capital. However, when liability of the entity which carries out the direction and coordination activity over a subsidiary is at stake, Italian law provides the most original approach: instead of giving standing to the dependent company, it is the minority shareholders, the creditors and, in insolvency cases, the receiver, who have standing to file claims for uncompensated damages caused by the entity which exercises the direction and coordination activity (Art. 2497 of the Civil Code) In the UK, since the directors’ duties are only owed to their company, it is solely the company that can initiate actions for breach of such duties. Only exceptionally can a shareholder sue derivatively on behalf of the subsidiary. Indeed, section 994 of the Companies Act authorises shareholder claims, both in the subsidiary and in the parent, for unfair prejudice in conducting the company’s affairs. The courts may provide the most efficient order, including instructing the company or other shareholders to buy out the petitioning shareholders.

6 The Upside-Down Perspective. Company Law Issues at the Level of the Controlling Company Company law problems at the level of the controlling parties that are companies have received less attention than the risks and challenges that groups create in relation to subsidiary or controlled companies and their shareholders and creditors. It is worth remembering, to begin with, that in Anglo Saxon jurisdictions the possibility of a company holding shares of another was restricted well into the nineteenth century. Some laws, for different reasons, still impose restrictions on the participation of one company in another. For example, in order to protect the shareholders’ consent, Art. 2361 of the Italian Civil Code does not allow a company to take a stake in another if by doing so the purpose set in the company’s articles of association would be substantially modified. In addition, the acquisition of a participation in a partnership which would entail unlimited liability must be approved by a shareholders’ meeting

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resolution. Something similar is provided for in Taiwan, where Art. 13 of the Company Act does not allow a company to participate in a partnership as partner with unlimited liability. Argentine and Uruguayan laws54 provide for quantitative limits to protect the shareholders’ right to immediate contact with the activities they consented to invest in. But apart from these types of limitations, group dynamics may also endanger the parent’s assets, its shareholders and creditors. As we shall see, the decision-making process of the parent company may also be at stake. In Germany, like in any other country, shareholders of the parent company are protected by the general rules of company law. Specifically, there is a special three quarters majority required to approve a domination agreement. The right to receive information and to challenge shareholder meeting resolutions is granted at the level of the dominant company in the same way as in relation to the dependent one. Especially in Germany, but also in some other countries, attention has been given to the powers and competences vested in the different organs or bodies (shareholder meeting, board of management and supervisory board) of the various group member companies in relation to the decision-making process. Which are the limits to the power vested in the board of directors was the matter decided in the very notorious Holzmüller ruling of the German Federal Court of February 25th, 1982. The board had decided on its own, which was formally correct, to transfer the company’s core business to a subsidiary. The Federal Court ruled that such a resolution needed a shareholders’ meeting approval because it impaired the shareholder’s position as if the transaction had been a de facto change of the articles of association. This approach has been followed by the German courts for decades in the cases where the transaction involved a relevant part of the company’s assets, as well as in those where the transaction involved a very substantial part of the company’s liquid means. The issue requires the acknowledgment not only of the traditional interest protection aspect of corporate group law, but also of what could be referred to as the constitutional and organizational structure of groups of companies, which requires some deep investigation and elaboration. No national report points to statutory rules on this, but in some countries there have been court decisions which have set aside the formal organic powers and competences in view of a company’s membership to a group. The Swedish report points out that, when business is carried out in the subsidiary, parent minority shareholders with a blocking right are not able to exercise it, nor do they have any tools to decide on the retention of profits in the subsidiary, as these do not flow into the parent and are therefore not even the object of discussion at the parent’s level. In other words, groups also seriously affect the parent company’s governance. The problems considered in the Holzmüller case are also recognised by the Japanese literature under the concept of a reduction of shareholders’ rights in holding companies. The 2014 amendment to the Japanese Companies Act provided

54

Argentine General Companies Law, Art. 31, and Uruguayan Commercial Companies Law, Art. 47.

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some solutions to these problems. It imposed a duty on the parent company’s directors to monitor the operation of its subsidiaries and to implement a proper inclusive control system. The Japanese Commercial Code amendment of 1999 already contemplated the possibility of a parent company’s shareholder seeking authorisation from the courts to inspect the minutes of the board meetings and accounting books of the subsidiaries. The 2014 amendment further established that a shareholder meeting’s approval is necessary to transfer wholly owned subsidiaries’ shares representing more than one fifth of the parent’s assets. Similarly, the courts in the Netherlands have accepted requests from shareholders of a parent company to investigate the affairs of a subsidiary. A rule comparable to the Holzmüller doctrine, allowing shareholders of the parent company to have an influence on the sale of a participatory interest in another company, has been legally adopted for public companies. The Austrian report mentions that the prohibition of board members, or any entity with whom they have an economic identity, to vote on their own liability (§ 130 AktG) protects the shareholders of the parent company. But these are general rules that apply whether there is a group of companies or not. Whereas Austria does not have a general prohibition to vote in the event of a conflict of interest, it does have a rule—which applies to any person, and not only to members of the management or supervisory boards—according to which no person may vote a resolution regarding its liability, release, or the filing of a claim against it (§ 125 AktG). Again, these useful rules are general and not group specific. In Taiwan some scholars have proposed to adopt so called pass-through voting power rules, which would allow parent company shareholders to subrogate to the rights of the dependent company and file a claim against those who have caused damages to it.

7 The Protection of Creditors and Other Third Parties 7.1

General

Protection mechanisms are always based on somebody’s duties and liabilities. Creditor protection, for instance, is immediately associated with eventual parent company liabilities. In this context, the first thing that needs to be highlighted is that, notwithstanding several projects to the contrary, under no jurisdiction’s company or insolvency laws does the existence of a control relationship make the controlling person or entity, parent company or head of a group of companies strictly liable for the debts or other obligations of subsidiaries or dependent companies. Some national laws state this expressly, like Croatia, Argentina55 and Finland, in this last case in connection with parent companies and cooperatives. Liability may only arise from

55

Art. 172 of the Argentine insolvency law.

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the dominant entity’s conduct, i.e. from the way the controlling power has been exercised or for the breach of its duties. It is also important to remember that, as a matter of logic, if a company is protected its creditors and third parties are also protected. There is no difference in this respect between independent, subsidiary and parent companies. This is why much of what has been said above, especially in relation to the duties and liabilities of directors and shareholders, is also relevant to the protection of third parties. But some additional rules and legal doctrines, specific to outside relationships of members of a group of companies, are also required. Particularly relevant are the disregard of legal entity doctrine and the insolvency rules, which will be referred to below. In Germany the protection offered by the AktG to creditors in case of enterprise agreements, including domination agreements, notwithstanding its complexity, is considered insufficient. The law essentially imposes upon the dominant entity the obligation to compensate yearly losses while the agreement is in force. Therefore, only the nominal value of the dependent company’s net assets is protected, not the company’s potential as an on-going concern. The same is true under Croatian and Slovenian law. Except for the case of integration (Eingliederung), where only debts originated prior to the integration are covered, no general liability by the dominant party of enterprise agreements is foreseen in the German AktG. In Germany, Croatia, Slovenia and Taiwan, if there is a factual group the parent company will be liable for detriments and damages imposed upon the dependent company if it has not provided a proper compensation. In the presence of a subordination agreement, the Companies Code of Portugal imposes on the parent the duty to cover the subsidiary’s annual losses and provides that the parent shall be directly liable for the subsidiary’s debts if a creditor does not obtain satisfaction from the latter within 30 days after a written demand for payment. In Austria the supervisory board of the parent company has the duty to oversee the whole group. This also serves as protection for creditors: the breach of such duty may entail liabilities if damages are caused to third parties. The Dutch Supreme Court ruled in 1990 that the parent company has a group management duty,56 which at least comprises an oversight over the subsidiaries, especially in the presence of a tight group structure and strong financial links. Failure to comply with this group management duty could entail a breach by the parent of its general duty of care and of the fundamental principles of reasonable entrepreneurship. The Dutch Corporate Governance Code, as well as that of other countries, further emphasises the existence of these duties. A Dutch Supreme Court decision also ruled that the parent can be held liable to subsidiaries’ creditors if at the time of entering into a contract it knew, or ought to have known, that the subsidiary company would not be able to fulfil its obligations.

This terminology seems to have been used in the first place by Hommelhof, a German author, who wrote a book with this title.

56

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Quite unique in comparative law is the Dutch law provision contemplating the voluntary liability of the parent company by means of a so called 403 declaration. Such declaration can be provided by the parent company in cases where the parent consolidates financial statements at the group level and requests for an exemption from the duty to publish detailed financial statements of the controlled entities. The 403 declaration entails a declaration of joint and several liability by the parent for the controlled companies’ contractual obligations, which is understood as a compensation for the lack of financial information from the subsidiaries. This voluntary liability does not apply to other obligations, such as tax duties. In Belgium the general negligence of the parent, for instance by abruptly stopping the subsidiary’s activity or refusing to deliver what it needs to continue its production, is deemed to be sufficient cause for the parent’s liability. The same applies if there is a lack of diligence in following up the activities of the subsidiary. But this is a standard to be applied with care because, in fact, no shareholder has a duty to exercise his controlling power. The Belgian report’s conclusion is therefore that only if such power is exercised does a duty of doing so with care and diligence arise. The Dutch report points to case law where a duty of care of the parent company towards the creditors of the subsidiary has been imposed, but rightly points out that the mere fact that a company qualifies as the head of a group is insufficient for that purpose. This should be the general private law rule, but modern regulations on enterprise liability for offenses in certain fields impose preventive compliance duties on the head of group entities, which could be held liable for not implementing proper group wide rules, or for not reasonably ensuring that such rules are complied with throughout the group. Another way in which third parties can by protected by means of the imposition of liabilities on the parent or head of a group relates to the qualification of the latter as a shadow or de facto director of the subsidiary. Case law in the UK includes de facto or shadow directors as subject to duties and liabilities if they exercise a dominant influence over the subsidiary. The difference is that a de facto director is a person who acts as if he were a director despite not having been formally appointed as such, whereas a shadow director is, according to Section 251 of the Companies Act 2006, a person under whose instructions the directors are accustomed to act. This may be the case when the parent company retains control over all or most of the decisions and actions of the subsidiary, like taking full control of the finances or controlling the appointment of the senior management of the subsidiary. But this is not presumed. The UK courts have also imposed liability upon a parent on the basis of the existence of an agency relation in cases of insufficient capitalisation of the subsidiary, overlapping of directors and senior manager positions, or when a business that is carried out by the subsidiary is in fact run by the parent. This was also the object of analysis in Labour law cases, like Thompson v. Renwick Group Plc, where it was denied that the parent had knowledge in health matters regarding asbestos. Curiously enough, in Germany a parent company cannot qualify as a shadow director because the law does not allow legal entities to be directors. This seems, at least from an outsider’s perspective, an unnecessarily formalistic interpretation of the law which leads to an undesirable outcome. Dutch law, in contrast, allows legal

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entities to be appointed as board members. If a parent uses this possibility, it may be liable in bankruptcy cases. The same is applicable if the parent acts as a de facto or a shadow director. To be qualified as such in the Netherlands, a direct interference and the setting aside of the formal board is required. Both standards show that the tool must be used restrictively. The Singaporean definition of director “includes a person in accordance with whose directions or instructions the directors or the majority of the directors of a corporation are accustomed to act”. Therefore, if a shareholder or a parent company, or one of its own directors, in fact act in that way, they will qualify as directors even if not appointed as such and will therefore be bound by all director’s duties and liabilities. The Singapore report refers to court decisions from which the rule emerges that in order to apply the above definition there must be a “discernible pattern of compliance with the shadow director’s instructions or directions”. With regard to publicly traded companies, Art. 8, par. 3, of the Taiwanese Companies Act defines de facto directors and imposes liabilities on, if they impose the way to conduct the company’s business on de jure directors, except if it is the government instructing a director appointed by it. In France a controlling shareholder can be considered a de facto director if it manages or participates in the management of a subsidiary, but a very high standard must be met in this regard. The Finnish report points out that the directors of a parent company should be held liable towards the creditors of the subsidiary if they pressed the directors of such subsidiary to act against the law. In the Netherlands a liability vis-à-vis the creditors of the subsidiary is contemplated for the cases of discontinuing financial aid which was provided to it. This can for example be the case if it was clear from the outset that the subsidiary would not be able to survive without the parent company’s financial assistance and the parent company has created towards third parties the illusion that the subsidiary was viable on its own. This may mean that the board members of the parent may eventually be forced to act contrary to their duties towards the company they are in charge of. While liability for a created appearance may result from the application of general principles, such as the principles of good faith, abuse of rights or even, under certain circumstances, the lifting of the corporate veil, most national laws are reluctant to impose this sort of liability, unless it can be proven that there was in fact an apparent mandate. But in Belgium the liability for appearance is accepted in cases where a parent and a subsidiary, or two different subsidiaries, act together giving the impression that an entity other than the contracting one is also bound by a certain agreement. The Spanish report refers to one isolated Supreme Court decision which points in the same direction.

7.2

Disregard of Legal Entity: Piercing the Corporate Veil

A company is a legal entity that enjoys all the attributes of a person. Its patrimony, name, legal capacity, rights and obligations, as well as its qualifications, are

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independent from those of the shareholders and any other person. All of the company’s assets belong to the company and not to its shareholders. The debts, obligations and liabilities of the company are not the debts, obligations and liabilities of its shareholders. This is true regardless of whether the specific type of company provides limited liability to its shareholders, or not. In the cases where the applicable law makes the shareholders liable towards third parties for the company’s liabilities, the position of the shareholders is akin to that of a guarantor. Indeed, a shareholder who pays for a company’s debt has recourse against the company to recover what it has paid. Modern enterprise activity would not exist as we know it if the overwhelming majority of companies around the world were not of the type that strictly separates the rights and liabilities of the company from those of its shareholders, i.e. the principle of shareholders’ limited liability. A company that is part of a group where a dominant shareholder imposes its decision-making power, with the inherent risk of this power being exercised in the interest of another member of the group, may be in danger of not being able to meet its obligations, thus putting its creditors’ rights at risk. These risks are increased by the fact that, in principle, there is no limit to the creation of companies, thus allowing the split of any person’s or legal entity’s patrimony. This can obviously lead to an abusive use of company structures and therefore to the liability of those responsible for it. In some critical cases it may even be necessary to leave aside the general legal principle of strict separation between company and shareholder by piercing the corporate veil, disregarding the legal entity, or whichever other expression may be used to describe the phenomenon. Importantly, this is an extremely exceptional remedy, the use of which differs substantially from one jurisdiction to another. The US courts have a long history in the field of piercing the corporate veil in order to impose liability upon a shareholder for a company’s debts. The US national report refers to some grounds commonly accepted by the courts. The first one is fraud, with respect to which there is abundant case law defining its scope. The second is misappropriation of corporate assets by controlling shareholders: in order to pierce the corporate veil such misappropriation must result from a standard pattern of conduct; individual transactions are subject to the fairness test. An action for misappropriation leads to a return of the misappropriated assets, whereas piercing the corporate veil makes the parent liable for all of the subsidiary’s debts. The third ground is undercapitalization. Besides the difficulties in establishing a clear quantitative pattern, the case law in different states adopts divergent views when it comes to piercing the corporate veil on these grounds. The fourth ground for piercing the corporate veil is based on the enterprise theory: what is in fact one business should not be allowed to be artificially divided. But this has led to a horizontal disregard of legal entities rather than to the imposition of liability on the controlling shareholder.57 As the US reporter puts it, “the question is whether to punish the wrongdoer or unwind the wrongdoing, or both”. Liability resulting from the piercing of the corporate veil must fall on a shareholder that has complete dominion over the

57

The famous Walkovsky v. Carlton decision of the New York Court of Appeals.

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controlled company and therefore cannot affect the passive minority shareholders of the parent. The US report seems to suggest that there are too many uncertainties around the application of this remedy. The UK’s approach to this remedy is far more restrictive than that of the US. Limited liability has been the default rule in the UK since 1855 and the courts have always been slow to depart from it if all registration formalities have been fulfilled. Only exceptionally has the House of Lords taken into account the single economic unity of a corporate group,58 but subsequently it turned back to the traditional negative rule.59 The other rare exception, a 2011 case where the corporate veil was pierced to allow the controllers of the company to be sued under the company’s contracts,60 was very much criticised and soon left aside. This occurred in 2013 with the Supreme Court decision in Prest v Petrodel Resources Ltd, where a distinction was made between concealment and evasion. According to this judgment, the first allows a court to look behind the façade in order to discover the corporate structure with no need to disregard its separate personality, whereas evasion refers to the cases where a person is under an existing duty, a liability or legal restriction which he deliberately evades, or whose enforcement he deliberately frustrates by interposing the controlled company. Only in this second scenario, because there is an abuse of the corporate legal personality, the traditional doctrine may be set aside and the corporate veil be pierced by a court as a last resource. This 2013 decision was also criticised as insufficient and because of the doubts that remain as to whether it could operate without the help of other principles, such as tort or unjustified enrichment.61 Notwithstanding the criticisms, the Supreme Court’s approach in Prest seems worth following. The national reports from most countries explain that courts only lift or pierce the corporate veil in rare occasions. Such is the case of Spain, the Netherlands62 or Finland, where there have been some relevant cases decided by the courts but the use of this instrument remains uncommon. A 2015 ruling by the Finnish Supreme Court decided that, in order to lift the corporate veil, the company form must have been intentionally misused. 58

DHN Food Distributors Ltd v. Tower Hamlets LBC (1976), where the wholly owned subsidiaries were “bound hand and foot to the parent company and must do just what the parent company says”. 59 The Albazero (1977), Woolfson v. Strathclyde Regional Council (1978), Southard & Co Ltd (1979), where the language was particularly remarkable: “If one of the subsidiary companies . . . turns to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary”. In the same line were the decisions in Adams v. Cape Industries Plc (1990), Re Polly Peck Plc (1996), Newton-Sealey v. Armor Group Services Ltd (2008) and VTB Capital Plc v. Nutritek International Corp (2013). 60 Antonio Gramsci Shipping Corp v. Stepanovs. 61 As a curiosity, it is worth mentioning that the courts in the UK have admitted a so-called reverse veil piercing, which has also been criticised. But within a group of companies this remedy should be as effective and necessary. 62 Case law mentions that abuses in the use of different legal entities is unacceptable, but the report states that this sort of claims hardly ever succeed.

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In Germany there has been intense academic debate and significant case law on the topic for quite some time, but it is reported that such debate has evolved into major changes in the last 20 years. For instance, the courts had developed the concept of a qualified de facto group and liabilities attached to it when damages were so intense that they could only have been imposed if a domination agreement had been in place. This was seen at the time as a way of lifting the corporate veil in order to impose liability on a parent company. A similar construction is still used in Croatia. But in more recent years (after 2002) a new doctrine has been developed in Germany, namely the liability for causing damages which endanger the existence of the dependent company (Existenzvernichtungshaftung). Standing to file a claim on this basis is only granted to the company itself and not to its creditors individually. Of course, the receiver of the company’s insolvency may advance a claim on these grounds. Another concept that had been developed in Germany, but left aside in more recent years, is that of substantive undercapitalization. In Austria the courts have accepted to lift the corporate veil of a subsidiary against a parent company or a shadow owner under certain circumstances on a case by case basis. The principle is that nobody shall use the form of a legal entity to circumvent the law or cause harm to others. This doctrine has been applied to cases of thin capitalisation, de facto management of the subsidiary by the dominant enterprise, or actions inconsistent with the duty of care. This seems to be restricted, however, to protect the company itself and not its creditors directly. In Taiwan the liability of a member of the controlling company who caused damage without compensation to a subsidiary is regarded as the first materialization of the principle of piercing the corporate veil. Some outsider commentators would say that this is not at all a case of disregarding the legal entity but a straightforward application of the principle that whoever causes damages is liable to repair them. But Article 154-2 of the Taiwanese Companies Act, after introducing what until then was a common law principle, states that if a shareholder abuses the company’s status as a legal entity, and prevents the company from paying its debts, such shareholder may be held liable for those debts. This is also described as an application of the piercing the corporate veil doctrine but, again, it actually seems to be a consequence of the general rule referred to above. Greece seems to be comparatively more open to lift the corporate veil in cases of abuse of the legal entity, especially in tort cases. The Cypriot report informs that, in so far as groups of companies are concerned, case law on lifting the corporate veil is generally based on the single entity concept.63 The basic approach remains, nevertheless, that of the English Salomon & Co v. Salomon rule, strongly reaffirmed in 1980 in the Michaelides v. Gavrielides decision. But in a 1987 case, where there was a clear misuse of the subsidiary to obtain what the parent could not, the Cyprus Supreme Court lifted the veil.64

63 64

For references, see the Cyprus report. Republic v. KEM Taxi Ltd.

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The Swedish report mentions that sometimes, in cases where the company is used for purposes other than those it was conceived for—for example if the subsidiary does not carry out its own business but that of the parent-, the courts are prepared to lift the corporate veil in order to hold the parent liable for the subsidiary’s debts. In Poland a shareholder may only be held liable for the company’s debts in case of abuse of the corporate form, which is foreseen in Art. 5 of its Civil Code. Undercapitalization and asset comingling cases are included, as well as cases where the company has been used to cause damage to creditors, even if not deliberately. In Italy the corporate veil is lifted by the courts in cases where the activity of the subsidiary is a mere instrument of the shareholders’ own activity. In practice this generally only occurs in cases of fraud. In some countries, like France, the disregard of legal entity is considered only in the context of insolvency and not as an autonomous tool. The Japanese Supreme Court decided in 1969 that the corporate veil can be pierced when a legal entity has no substance at all or is misused to avoid the application of the law. Another Supreme Court decision of 1993 ruled that the prohibition for a corporation to buy its own shares was to be extended to the subsidiary’s purchase of its parent’s shares, which is now specifically regulated by the Companies Law. However, as in most countries, this is not regarded in Japan as a case of piercing the corporate veil. Croatia has a rule according to which the exclusion of shareholder liability must be set aside in cases of abuse. It provides examples such as the use of the company for a forbidden purpose or to damage creditors, the management of the company’s assets by the shareholder as if they were its own, and the shareholder’s actions to diminish the assets of the company knowing or if he ought to have known that the company would be unable to meet its obligations (Art. 10-3). Croatian court decisions have applied these solutions restrictively. Something similar is provided for in the Slovenian Commercial Companies Act (Art. 8), but is hardly ever applied in practice. In the Netherlands, notwithstanding the reluctance of its courts to disregard the legal entity, parent companies are liable to the subsidiary’s creditors for wrongdoings, whether materialised by acts or omissions. This liability depends on the level of insight and interference of the parent in the subsidiary, as well as on whether there has been a benefit for the parent or another group company. In disregarding the corporate personality of a company, Singaporean courts have evolved from concepts such as sham or façade entity to the notion of abuse of the corporate form. This applies to the cases where a company was used to evade liabilities or to conceal the real parties to a transaction. The courts also rely on the alter ego concept, which refers to the situation where a company carries out the business of its controlling party and the latter does not make any distinction between parent and subsidiary. But the Singaporean courts have denied the single economic entity doctrine for the purpose of lifting the veil. Argentina was the first country that, after some relevant court decisions which disregarded different companies’ legal personalities for different purposes, introduced a specific rule in its Company Law dealing with the disregard of the legal

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entity doctrine. This happened and 1983, and was shortly and similarly followed by Uruguay in 1989.65 Both laws state that the company’s personality cannot be invoked, and can hence be disregarded, if the company is being used as a mere instrument to breach the law, public order, good faith or to frustrate third parties’ rights, or if its activity conceals non corporate purposes. In such cases, the activity is imputable to the shareholders or controlling parties that made it possible, and those responsible are jointly and severally liable for the resulting damages. These Argentine and Uruguayan rules are particularly relevant in so far as they not only contemplate the extension of liabilities beyond the limits of the company’s personality, but also the extension of other legal relationships, including for example contractual obligations to be fulfilled in kind. Brazil provides for a similar rule in Art. 50 of its new Civil Code, but it is narrower in scope because it is limited to the extension of liability and does not serve other purposes, as its Argentine and Uruguayan counterparts do. In cases of abuse of the legal personality, a party, but also the public prosecutor, may request that an obligation be extended to the assets of administrators or shareholders of a legal entity. There must be evidence that the company was used as an instrument of fraud against third parties, or for the abuse of rights. Other areas of law, such as tax, consumer protection and labour law, have a similar provision.

8 Insolvency The insolvency laws of not too many countries deal with group-insolvency. Germany, for instance, only introduced such rules in 2017. But it has been pointed out in the German report that nowadays the European Insolvency Regulation, which does deal with group insolvency, is of higher practical importance than national rules. The definition of a group in the new German insolvency law departs somehow from that of the AktG (“possibility to exercise a dominant or prevailing influence or under unified direction”) and, for the purpose of this law, excludes as members of the group to which it applies the natural persons and the companies in which, directly or indirectly, a natural person would be liable. The law is only aimed at organising and facilitating the procedure if so required by the party who petitions the opening of the insolvency procedure. It does not provide rules on management, other group companies’ or any other persons’ liability. Portugal’s insolvency law does not recognise a group as a subject of insolvency procedures. But in case of insolvency of a subsidiary the parent company, considered its de jure or de facto director, may be held liable to the subsidiary’s creditors in case of a “culpable” insolvency. This may also entail the subordination of the parent’s credits in the subsidiary’s bankruptcy.

65 Argentine General Company Law, Art. 54, 3rd. paragraph, and Uruguayan Commercial Companies Law, Arts. 189/191.

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In Austria, where there are no procedural rules to handle a group in the event of a financial crisis, and each group member is treated separately, in the event of insolvency shareholder loans are transformed into equity if they were granted by controlling persons or holders of more than 25 % of the capital, or by persons exercising a controlling influence (§ 5, Austrian Substitute Capital Law). A few reports mention that some forbidden transactions, like asset shifting or cash pooling, may fall under the insolvency rules that allow the challenge of transactions executed within a certain time frame before the insolvency filing. That is the case of Sweden for undervalued transactions with the parent company. Singapore law foresees the right to challenge undervalued transactions within 5 years prior to the date of the winding up application, provided the company was already insolvent or became insolvent at the time of the transaction. This is a relatively extensive period of time, if compared with other national laws. In Taiwan a parent’s credit may not be offset against its liability for not having compensated damages, and such credit shall stand subordinated to all other credits against the subsidiary. As a consequence of the turmoil caused by a case which was relevant to the national economy, Slovenia passed a law to allow the government to appoint an associate administrator if a company in financial difficulties is of systemic relevance to the country’s economy. Transactions between dominant and dependent companies may be challenged if they caused damage to the insolvent entity. Belgium is an example of a jurisdiction where sanctions for wrongful trading are imposed on directors who continue to trade when they knew or ought to have known that insolvency was inevitable. The same liability may be extended to a controlling shareholder who in fact acted as if he were a director (de facto or shadow director), and in extreme cases bankruptcy may also be extended to the “business’ master”. But the court may limit these liabilities to only a part of the bankruptcy losses. In Singapore, like in some other jurisdictions, directors have to act in the interest of creditors when the company is on the brink of insolvency and not doing so is considered a breach of their duty to act in good faith, which may result in a claim being brought against them by the receiver, albeit not by any individual creditor. In Spain there are some (scattered) special rules that address or are applicable to groups. The parent company or the controlling shareholder may be deemed to be a de facto director under certain circumstances and as such be held liable for damages caused to the company. A special insolvency liability may also apply in some cases.66 Intragroup guarantees used to be declared null and void in Spanish insolvency procedures, but more recently they were accepted under certain conditions, mainly if a balance between burden and advantages can be proven. As some other national laws, Spain establishes the subordination of credits of a company in the same group as the insolvent company. Arts. 92 and 93 of the Spanish insolvency law provide for an automatic subordination of all such credits. It also foresees a substantive consolidation of assets if the confusion of assets and liabilities is such that it is no longer possible to separate those which belong to each company.

66

Art. 236, Ley de Sociedades de Capital, and art. 172 bis, Ley Concursal.

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In the Netherlands, there are also no specific rules with regard to liability in case of company groups. A parent company may however also be deemed a shadow director and therefore be liable against the creditors of the subsidiary in case of the latter’s bankruptcy. Under specific circumstances a parent company can be held liable on the basis of a tort by the creditors of the subsidiary if it can be established that the parent company had a duty of care towards the creditors of that subsidiary and it can be established that this duty has been violated. The existence of a group furthermore has an influence on the question of who bears the burden of proof when the receiver of a bankrupt group company files an actio pauliana based on the presumption of knowledge of the insolvency. In the UK a director responsible for damages suffered by an insolvent company may be disqualified and barred from serving as board member if, for instance, he did not give priority to the interests of the company. A shadow director may also be subject to such disqualification and to the duty to compensate the insolvent company. The same qualification can also be extended to directors of a parent company who instructed the insolvent company’s directors. Since the interests of the creditors of the insolvent company replace those of its shareholders, liability for wrongful trading and for related party undervalued transactions may arise. When it does, a duty to personally compensate those damages may be imposed upon directors and shadow directors alike. But these actions are rather unusual. The preparatory works for the 1986 UK insolvency reform, whilst acknowledging the risk of undervalue asset transfers, gratuitous guarantees, dividend payments harmful to the company, and other possible abuses of a parent company, did not want to alter the limited liability principle without a comprehensive review of group enterprise liability. Already in 1979 Italy passed insolvency law Nr. 95 “on the extraordinary administration of large enterprises in crisis”, which included some special rules for groups. It provided that, if a parent or subsidiary falls under its regulation, the proceedings will be extended to all the group member companies. But that did not have the effect of pooling all the assets together. This law was amended in 1999 and there were also some general reforms in 2005/6, which enhanced what the Italian report refers to as the rescue culture, as opposed to the bankruptcy approach. The Italian insolvency law permits preventive solutions at the group level, by means of asset transfers, allocation of shares or bonds to creditors, transfer of company’s assets, etc. Following the 2003 amendment to the Italian Civil Code, the reference in Art. 2497 quinquies to Art. 2467 means that loans made by the entity exercising the direction and coordination activity are subordinated. But nothing seems to have been as important as law 155 of 19th October 2017, which delegates on the government the task of issuing legislative decrees to reform the insolvency and pre-insolvency procedures. In so far as groups are concerned, the guidelines, which do not seem to change the prevailing conception of group insolvency, include a reference to the fact that a group must be defined on the basis of the Civil Code notion of direction and coordination activities and the related presumptions. The delegation guidelines include the obligation to file special consolidated group financial statements, the request of group related information, the subordination of credits among same group

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companies and specific procedural rules for both preventive insolvency and liquidation procedures: same court and same receiver for all the companies; group wide range of agreements with creditors; empowerment of the receiver to adopt measures even with respect to group companies that are not insolvent. If a partnership is part of a group, meaning that its partners are companies,67 the partnership’s bankruptcy is extended to the partners. This rule is group specific, since natural persons are exempted from bankruptcy extensions. The law further unifies the bankruptcy procedures before one single court for all the companies involved, but keeps each company’s patrimony separated. The US report informs about a Delaware Supreme Court decision allowing creditors to file a derivative suit for tunnelling—which is not granted to creditors in general—if the company is unable to pay its debts. Another case law remedy is the subordination of credits of the parent company in the insolvency procedures of its subsidiary, but only in the presence of “questionable dealings”. Also substantive consolidation, a species of lifting the corporate veil, is a judicial doctrine under which, in the event of insolvency, affiliated companies are put together as one. It is a remedy to be applied with caution, because it can damage legitimate interests of creditors of any of the individual companies, which might not be insolvent on their own. The Finnish case law on groups of companies is primarily related with insolvency situations, and is rather casuistic. In addition, there are some jurisdictional rules to unify the insolvency procedures of all the group companies in one court. The same applies to the appointment of insolvency administrators. The new European insolvency proceedings’ regulation is deemed directly applicable without any local legislative action being required. In France the corporate veil is lifted in the presence of asset mingling (confusion de patrimoine) among companies, but this only applies to cases of abnormal financial relationships, such as those involving systematic transfers without a proper compensation. But, as the French report informs, the approach of the Cour de cassation is restrictive and pragmatic: it considers that the group is the normal way of organising and doing business, and that therefore the existence of relationships within the groups according to management principles is not abnormal. Whether de jure or de facto, directors may be held liable for managerial mistakes which caused, or contributed to cause the insolvency of the company. This action is called action en responsabilité pour insuffisance d’actif, which in 2005 replaced the former action en comblement de passif. The difference is subtle and probably linked to the personal involvement of the director.

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This may be a way to be entitled to direct the partnership’s business.

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9 Conclusion There are unfortunately no enlightening conclusions to be drawn from this report, which I shall finalise with a question: has any progress been made in the last decades to solve the many problems arising from the existence of groups of companies? Notwithstanding some new valuable approaches and many propositions at the national and international levels, there is still no general consensus on how to reasonably solve many of the issues raised by the existence of groups of companies. However, in circumstances where corporate groups are more often than not a crossborder phenomenon, discussions amongst experts from different jurisdictions allow us to deepen our knowledge and ideas in order to at least understand the different approaches that have been developed, or are in the process of being developed, on a global level. That alone is a progress which makes the effort worthwhile.

Reference Fuchs A (2003) Tracking Stock - Spartenaktien als Finanzierungsinstrument für deutsche Aktiengesellschaften. ZGR:177

National Report on Portugal José Engrácia Antunes

Abstract After the pioneering German “Aktiengesetz”, Portugal has become the third country in the world to enact a specific regulation on groups of companies. The present paper is aimed to describe the structure of the Portuguese company law regime, as well as regulation in other branches of the law.

1 Introduction After the pioneering German “Aktiengesetz” of 1965 and the Brazilian “Lei das Sociedades Anónimas” of 1976, Portugal has become the third country in the world to enact a specific regulation on groups of companies. The Code of Commercial Companies of 1986 (“Código das Sociedades Comerciais”, abbreviated hereinafter CSC) contains a unitary set of rules regulating the relationships between companies, in general, and the groups of companies, in particular: this set of rules, entitled “Affiliated Companies”, is provided by Title VI of the CSC (articles 481 to 508-E).1 Groups of companies are a major economic phenomenon. Since the middle of the last century, enterprises have increasingly chosen to organize and to conduct their business activities in the form of a network of individual separate companies rather than as a single corporate entity: therefore, the group of companies—and not the single company—is the prevailing form of the modern enterprise. This trend, which is now observable in the largest economies in the world, holds also true for small countries such as Portugal. With this set of legal rules, the Portuguese legislator has recognized and accommodated this evolution of economic reality, providing also a global regulatory framework for groups as a legal phenomenon. The regulatory approach, consisting of a global and comprehensive legal regime on groups of companies, was subsequently adopted also in some other countries,

1

On Portuguese group law, see Antunes (2002). As to literature on the topic in other languages, see also Antunes (2009), Gause (2000) and Lutter and Overrath (1991). J. E. Antunes (*) Universidade Católica Portuguesa, Porto, Portugal © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_2

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such as, for instance, Hungary (1988), Czech Republic (1991), Slovenia (1993), Taiwan (1997) and Albania (2008).2

2 Groups of Companies and the Law The regulation of groups of companies is becoming more and more an interdisciplinary law. As being a major form of enterprise organization, groups are also a very well-known and established topic in several branches of the Portuguese law. Surprisingly, the major recent innovations and driven forces concerning the regulation of this economic phenomenon are not originating from Company Law but from other legal branches.

2.1

Company Law

As above mentioned, the “sedes materiae” of the legal regulation of groups of companies in Portugal is to be found in Title VI of the CSC (articles 481 to 508-E) on the so-called “Affiliated Companies”. The notion and content of this legal regime shall be analysed further on Chap. 3.

2.2

Tax and Accounting Law

Both in tax law and in accounting law, groups are being increasingly seen as a legal, and not merely an economic, unity. For tax purposes, the group is treated as a single tax subject by the special regime on the taxation of group consolidated profits (articles 69 and ff. of “Code on Taxation of the Income of Legal Persons”).3 For accounting purposes, the groups have a duty to elaborate and present consolidated accounts (Law 158/2009, of 13 June).4

2.3

Labour Law

In labour law, the group is also treated as a unity both regarding the regulation of key aspects of the individual labour relations—for instance, allowing parent corporations

2

See, for instance, Brus (1999); Kaló (1994), p. 452ff; Yeh (2000), p. 287 ff. Antunes (2011a), p. 5ff. 4 Antunes (2011b), p. 185 ff. 3

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to transfer workers among their subsidiaries (articles 6, 101 and 289 of “Labour Code”) and imposing on them an unlimited liability for the payment of salaries of subsidiary workers (article 334 of “Labour Code”)—and in collective labour relations—namely, the constitution of group labour committees (article 415/4 of “Labour Code”).5

2.4

Banking Law

In banking law, the so-called financial groups (controlled by credit institutions or financial companies) are subjected to a special regime of consolidated supervision by the national and European supervisory authorities, meaning essentially that the parent corporation and subsidiaries must comply to a set of common prudential ratios (articles 130 and ff. of the “Law of Credit Institutions and Financial Companies”).6

2.5

Capital Market Law

In capital market law, groups are bound to important information and transparency duties related with the disclosure of qualified shareholdings owned in subsidiary listed companies (articles 16 and ff.) and with the governance of the group itself (article 245-A). Likewise, as it happens in other Civil Law and Common law countries, Portuguese law also provides for the compulsory squeeze-out of minority shareholders of listed companies (articles 194 and ff. of the “Code of Securities”).7

2.6

Competition Law

In competition law, the group has also been expressly qualified as a single enterprise: according to article 3/2 of the “General Law of Competition”, “it is considered as a single enterprise the cluster of companies that, while being legally independent, form a economic unity or are connected between each other by links of interdependency or subordination”. Moreover, the legislator provided for legal rules which are relevant for the creation and expansion of groups of companies (namely, the so-called antitrust rules of articles 36 and ff.) as well as for the functioning of groups

5

Antunes (2012), p. 49ff. Antunes (2000). 7 Castro (2000), p. 163ff. 6

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(namely, by exempting them from the application of the rules on the anticompetitive restrictive practices of articles 9 and ff.).8

2.7

Insolvency Law

In insolvency law, while the group is not recognized as an entity subjected as such to insolvency and bankruptcy procedures, there are nevertheless some legal rules which are relevant for the sake of protection of the creditors of insolvent corporations. Among them, one should mention that, in the event of insolvency of a subsidiary corporation which has been qualified as culpable, the parent corporation, as being its “de iure” or “de facto” director, may be held jointly liable before the subsidiary creditors and lose any credits it may have over that subsidiary (articles 186 and 189/2/e of the “Insolvency Code”). Moreover, in any case, the credits of parent corporations are treated as subordinated credits in the event of the subsidiary bankruptcy (articles 48/a and 49/2/b of the “Insolvency Code”).9

3 The Regulatory Framework of Groups of Companies 3.1

General Overview

The regulation of groups of companies is provided for in Title VI of the Portuguese CSC (articles 481 to 508-E), under the general concept of “affiliated companies” (“sociedades coligadas”). The entire legal regulation is based on a central concept: the concept of “affiliated company” (“sociedade coligada”), which thus operates as a sort of “summum genus” for this set of legal rules. The law does not provide for a general definition of what is an affiliated company but it merely describes the concrete types of affiliation relationships between companies. These types of relationships are four: relationship of simple participation, relationship of mutual participation, relationship of domination, and relationship of group (article 482 of the CSC). A relationship of simple shareholding (“relação de simples participação”: articles 483 and 484 of the CSC) exists whenever a company holds at least 10% of the equity capital of another: in such a case, the former company must thereafter inform by writing the latter of this fact, as well as of any further acquisitions or sales of its capital. A relationship of cross-shareholding (“relação de participações recíprocas”: article 485 of the CSC) exists when two companies hold each at least 10% of the

8 9

Antunes (2013), p. 379ff. Antunes (2017), p. 77ff.

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capital of the other: in such an event, the company which performed its duty of information in the last place is prohibited to acquire new shares or parts of the other company. A relationship of domination (“relação de domínio”: articles 486 and 487 of the CSC) exists when one company is able to exercise directly or indirectly a dominating influence over another: this dominating influence is presumed to exist when the former company holds the majority of the capital, the majority of the voting rights, or the right to nominate the majority of the members of management or supervisory organs of the latter. Finally, there is the relationship of group (“relação de grupo”: articles 488 to 508 of the CSC). Contrary to German law, Portuguese law does not contain a general and abstract notion of what is a group of companies, but it merely provides three types of specific instruments for its creation and organisation. Thus, it does not say “what” is a group but it merely says “which” types of group exist. Those legal instruments are the total domination (articles 488 to 491 of the CSC), the contract of horizontal group (articles 492 of the CSC), and the contract of subordination (articles 493 to 508 of the CSC).

3.2

Purpose of the Law

The general goal of the Portuguese law on affiliated companies is basically the one of a law aiming to protect the subsidiary company, its minority shareholders and its creditors. In fact, the Portuguese legislator is mainly concerned with the problems raised by integration and treatment of phenomena of inter-company control and groups of companies within the fold of classical company law, as the law of the individual corporation. This integration was worked out basically along two major legal policy guidelines. On the one hand, the law provided for an express legitimation of the exercise of the power of control of a parent company over the management of its subsidiary, as well as the primacy of the group global interest over the individual interests of the various subsidiaries. On the other hand, the law provided for corresponding protective mechanisms for the subsidiary company, their minority associates and creditors, ensuring that no power of direction for parent companies would be allowed without establishing at the same time special legal provisions intended to protect it. This regulatory synallagm or linkage expresses the ultimate conception of the Portuguese law of 1986 on affiliated companies: institutionalization of a power of direction of parent corporations and of the corresponding protection for subsidiary corporations, their minority shareholders and creditors. However, while being essentially a law of the subsidiary company, this does not mean that the Portuguese law did not take also into account the parent company or even the group as such, although in rather secondary level: among others examples, one could mention the legal norms on the prohibition of acquisition by the dependent company of shareholdings on its dominating company (articles 325-A, 325-B, and 487 of the

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CSC), concerning the relationships of domination, and the ruling of powers, duties and liabilities of the parent company, concerning the group relationships (articles 503 and 504 of the CSC).

3.3

Scope of Application

The legal provisions on affiliated companies are not indistinctly applicable to all types or forms of relationships between enterprises, but instead their application is dependent on three types of conditions, regarding the legal form of the companies involved (formal scope of application), the nationality of those companies (spatial scope of application) as well as the nature of the affiliation relationship itself (substantive scope of application). The first condition regards to the legal form of the subjects of the affiliation relationship. According to article 481/1 of the CSC, the law is only applicable when the enterprises involved in those relationships are a stock corporation (“sociedade anónima”), a limited liability company (“sociedade por quotas”), or a limited partnership by shares (“sociedade em comandita por acções”). Excluded from the scope of the law are therefore other commercial companies (e.g., general partnerships), civil companies, cooperatives, foundations, associations, individual businessman, and so on. A second condition concerns the nationality of the companies involved. According to article 481/2 of the CSC, the law only applies to those relationships established between companies whose “seat” or head office (“sede”) is located in Portugal. Therefore, with minor exceptions, the Portuguese law on affiliated companies is not applicable to international affiliation relationships as well as multinational groups, creating a sort of paradoxical privilege of foreign groups in front of national groups: how odd and paradoxical it might appear, the fact remains that foreign parent companies may establish and run Portuguese subsidiaries without being forced to comply with the same legal constraints to which are submitted domestic parent companies. Finally, a third condition concerns the nature of the affiliation relationship itself. As already mentioned above, according to article 482 of the CSC, the only relevant types of company relationships are the relationships of simple participation, of mutual participation, of domination, and of group. This means that all those economic forms of affiliation between enterprises which do not fit into the concrete legal definition of one of these four types are excluded from the scope of the law.

3.4

Notion of Control

Portuguese company law addressed the question of control of companies within the framework of the so-called relationship of domination (“relação de domínio”): this

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relationship exists whenever one company, said the dominating company, can exercise directly or indirectly a dominating influence (“influência dominante”) upon the other, said the dependent company (article 486/1 of the CSC). Similarly to other legal systems, the law did not provide for an express notion of “dominating influence”, but instead it merely established a set of more or less formal legal presumptions of its existence: a “dominating influence” is presumed to exist if a company owns the majority of the capital of another, holds the majority of its voting rights, or has the right to nominate the majority of the members of its management or supervisory organs (article 486/2 of the CSC). Those legal presumptions, however, are rebuttable and, as mentioned further on, do not prevent the possibility of the dominating influence to be based on other instruments (which, however, do not enjoy of the benefit of a proof reversal). The issue of corporate control is also addressed by other branches of the law, sometimes by using different terminologies and with different meanings. For instance, competition law defines control (“controlo”) as “the power of an enterprise to exert a determining influence over the activity of another enterprise” (article 36/3 of the “General Law of Competition”). The concept of control—or, in Portuguese company law, of dominating influence—is an elusive one, as elusive as the reality it describes. In fact, notwithstanding the set of presumptions established by the law, Portuguese jurisprudence and doctrine usually recognizes that the dominating influence can be created and exerted through a variety of mechanisms, including juridical mechanisms (e.g., majority voting power), contractual mechanisms (e.g., contract of domination, management contracts), organizational mechanisms (e.g., articles of association) or even, in certain circumstances, factual mechanisms (e.g., personal linkages, strategic market positions). Moreover, a dominating influence can assume a wide variety of forms and of degrees of intensity in its exercise: it can be exercised directly by the holder of the controlling position or indirectly through an intermediate person, be either a natural or legal one; it can correspond to an influence falling upon the entire range of the controlled company affairs or exercised only over a strategic specific business sector or decision-making area; and so on. Ultimately, whenever the dominating company exerts its control via mechanisms other than those who benefit from a legal presumption, control (or dominating influence) is to be decided in a case to case basis. Finally, how odd this may seem, the legal effects associated by Portuguese company law to the situations of relationships of domination and dependency between companies are extremely scarce, consisting merely in a general duty of disclosure of this relationship in the annual accounts of both companies (article 486/3 of the CSC) and a general prohibition upon the dependent company to acquire any parts/shares of the dominating company (articles 325-A, 325-B and 487 of the CSC). In particular, there are no specific provisions concerning the protection of the dependent or controlled company, nor of its minority shareholders and creditors. This lack is thus responsible for creating a dangerous imbalance within the whole regulatory model of Portuguese law on affiliated companies, as it permits “factual groups” to operate in the loopholes of the traditional company law and as it devaluates significantly the practical relevance of “legal groups”.

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Notion of Group

As previously mentioned, Portuguese company law does not say what “is” a group of companies but it merely indicates which “are” those groups: in other words, the law does not provide for a general and abstract notion of “group of companies”, but simply points out three specific types of legal mechanisms for its formation and organization. There are three mechanisms for creating and organizing a group of companies: the contract of subordination (“contrato de subordinação”), the contract of horizontal group (“contrato de grupo paritário”), and the total domination (“domínio total”). The relationship of group created by the so-called contract of subordination— which is similar to the German “Beherrschungsvertrag” and to the Brazilian “convenção de grupo”—constitutes the core of the entire system of Portuguese law on affiliated companies (articles 493 to 508 of the CSC). This contract represents a sort of organizational charter for the group relationship emerging therefrom and it is basically characterized by placing parent-subsidiary relationships into a special twofold regulatory framework: recognition to the parent company of a legal power of direction over the management of its subsidiary company (articles 493/1, 503 and 504 of the CSC) and recognition of protection mechanisms for the subsidiary company, their minority members and creditors (articles 494 to 502 of the CSC).10 The relationship of group created and organised on the basis of a contract of horizontal group—which is equivalent to the German “vertraglicher Gleichordnungskonzern” and to the Brazilian “consórcio”—is still terra incognita in Portuguese law and practice. Not only because groups of companies in Portugal are, by definition, groups of subordination but also because the law completely omitted any specific rules on the organization, management and functioning of horizontal groups (article 492 of the CSC). A final and most important form of creation of a relationship of group—which has some similarity with the German “Eingliederung” and the Brazilian “subsidiária integral”—is the so-called total domination (“domínio total”): this shall be the case whenever a company, said totally dominating company, holds 100% of the equity capital of another company, said totally dependent. The law distinguishes between two types of total domination: the initial total domination (“domínio total inicial”), where a stock corporation or a private limited company is formed “ab initio” by another company which is its sole shareholder (articles 488 and 270-A of the CSC), and the subsequent total domination (“domínio total superveniente”), where a company acquires the entire capital of another already existing company (article 489 of the CSC). In Portugal, the overwhelming majority of groups are indeed groups formed and organized via total domination, which legal regime also present some original aspects in a comparative perspective. One concerns the broader spatial scope of its application: as a matter of fact, contrary to what would result from article 481/2 of 10

On this legal regime, see details below on Sects. 3.7–3.9.

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the CSC, a foreign company may also form a group by initial total domination with a Portuguese wholly-owned subsidiary (article 481/2/d) of the CSC).11 Another concerns the compulsory squeeze-out of minority shareholders (“aquisição tendente ao domínio total”): according to article 490 of the CSC, whenever a company owns 90% or more of the equity capital of another company, the former has the right (and, in certain cases, the duty) of purchasing the remaining shares/parts on the dependent company, against a settlement in cash or other values. This later provision is probably one of the most relevant of the entire group Portuguese group law, both from a practical and theoretical point of view, giving rise to a large controversy in doctrine and jurisprudence.

3.6

Types of Groups

Taking a global perspective, one may consider that Portuguese company law provided a global regulatory model for groups of companies which may be described on the basis of a distinction between “legal groups” and “factual groups”. The regulation of legal or “de iure” groups (“grupos de direito”) is to be found in articles 488 to 508 of the CSC, concerning the so-called “relationship of group”. These legal rules constitutes the core of the Portuguese law on groups, where the original statutory conception has found its clearest implementation and where companies may benefit from an open deviation to some of the canons of classical company law: on the one side, the law recognizes to the parent company a legal power of direction over the management of the business affairs of the subsidiary, to which, however, some contractual and legal limits have been set (articles 493 and 503 of the CSC); on the other side, the law contains a system of protection for subsidiary companies, their outside shareholders and creditors, by imposing on the parent company a duty to cover the annual losses of its subsidiary (article 502 of the CSC), a direct joint liability for the settlement of subsidiary debts (article 501 of the CSC), and a duty of acquisition of the parts/shares of the subsidiary’s minority shareholders (articles 494 to 500 of the CSC). The regulation of factual or “de facto” groups (“grupos de facto”) is to be found mainly in articles 483 to 487 of the CSC, concerning the so-called “relationship of simple shareholdings”, “relationship of cross-shareholdings”, and, in particular, “relationship of domination”. Contrary to legal groups, factual groups have not been regulated as such by the Portuguese law, or even its very notion or existence has been recognized by it. Since the legislator overlooked any substantial or significant juridical consequences for this sector of the reality of groups of companies, the general tenets of classical company law—namely, the rule according to which a dominant shareholder is only admitted to exercising its controlling power within the strict respect of the autonomous business interest of the dependent company (article

11

On the spatial scope of application of the law, see Sect. 2.3.

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64 of the CSC)—are here fully applicable as a matter of principle. However, given the well-known inability of those traditional rules to cope with the phenomenon of inter-company control and to offer a real protection to dependent companies, the entire system of Portuguese law seems to be built upon a regulatory imbalance which threatens its theoretical coherence and practical efficiency. As a matter of fact, since the legal regime applicable to situations of control or domination between companies (which correspond “grosso modo” to the reality of factual groups when dominant companies use its control or dominating influence over dependent companies in order to submit them a common unified management) is not sufficiently dissuasive in order to prevent the emergence of groups outside a legal basis, the figure of legal groups is highly devaluated and “factual” subsidiaries are thus offered no real protection.

3.7

Group Unified Management

In the case of legal groups, unified management and the power of direction of the parent corporation is legitimized by the conclusion a special contract of domination (“contrato de subordinação”: article 493 of the CSC) or by the acquisition of total domination (“domínio total”: articles 488 and 489 of the CSC) with the subsidiary corporations. In open deviation from the traditional canons of company law, the parent corporation is then given a broad legal power of direction over the business affairs of the subsidiary, including the right to issue instructions disadvantageous or contrary to the interests of the latter as long as such instructions may serve the interest of the parent corporation or other group affiliate, which is matched by a duty of compliance of subsidiary management to those instructions (article 503 of the CSC). This legal power of direction is not unlimited, however: the parent company may issue instructions only in matters related to the management of the subsidiary (being prohibited to invade the sphere of competences of any other subsidiary organ, e.g. the general meeting); it may not issue instructions which are forbidden from the viewpoint of other branches of the law, v.g., labour law, tax law (article 503/2 of the CSC) or of the articles of association of the subsidiary company; and it may not issue instructions on intragroup transfers of assets without an appropriate compensation (article 503/4 of the CSC). The governance of legal groups is thus likely to be centralized, with strong parental control and lower levels of subsidiary autonomy. This results directly from the circumstance that domination contracts or acquisitions of 100% shareholdings provide the only possible entrance ticket to the creation of a legally feasible and stable framework for the exercise of highly centralized unified management (by granting to parent corporations a unique unrestricted legal right of intrusion in subsidiary affairs matched by a general duty of compliance of subsidiary managers). But it also results, indirectly, from the centralization pressures originated by the heavier financial burdens to which the parent is subordinated in consequence of such contracts or shareholdings: since the default risk of the subsidiary corporation is

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totally shifted to the parent thanks to the duty of the latter to assume all net annual losses of the former or even to its exposure to a joint liability for its debts, it is likely that group top-management will exert a strict control and monitoring over all subsidiary affairs, granting local managers with little or no autonomy, in order to prevent unexpected financial burdens. By contrast, in the case of factual groups, unified management and the power of direction of the parent corporation exist, at best, as a pure matter of fact, and not as a legal power. Outside the celebration of a special contract of domination or 100% shareholding, both parent and subsidiary directors are bounded by the traditional canons of company law, namely the respect of the business autonomy and interests of each individual corporation: therefore, the parent corporation was not granted any legal right of instruction, being permitted to use its dominating influence only in the best interests of the subsidiary (article 64 of the CSC). At least theoretically, factual groups portray, at best, a model for very decentralized groups where uniform management can only be exercised at arms’ length with a low central control and higher levels of local autonomy. This results not only from the circumstance that the parent does not enjoy of any legal power of direction over the subsidiary so as to afford it a stable intrusion in the latter’s affairs (no duty of subsidiary managers to follow or to comply with instructions), but especially because its “de facto” power can be only exercised within the limits set down by the preservation of the integrity of the subsidiary’s own interests and patrimonial autonomy.

3.8

Protection of Minority Shareholders

In the case of legal groups, the law contains a specific system of protection for the minority or outside shareholders of subsidiaries. Whenever a company concludes a contract of subordination with another company, thereby forming a group of subordination, the parent company has a duty to offer an adequate compensation to the minority members of the subsidiary company (named as “outside shareholders”). Such a compensation may consist in two alternative compensatory schemes: one is the duty of acquisition of the shares/parts of minority shareholders/members who want to leave the subsidiary company, against a consideration in cash or in parent’s own shares/parts as stipulated in the contract of subordination (article 494/1 of the CSC); the other is the duty to guarantee a specific annual dividend for those minority shareholders/members who decided to remain in the subsidiary (articles 494/2 and 500 of the CSC). Obviously, those compensatory schemes are exclusive of groups of contractual nature, being not applicable to the case of groups based on acquisition of a 100% shareholding. In the case of factual groups, the law has not provided any specific type of protection for minority shareholders of dependent companies. In particular, under Portuguese law, there are no legal rules similar to those of German law on “faktischer Konzerne” which could provide an indirect protection of the interests

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of such shareholders, namely the duty of the dominating company to elaborate an annual dependence report (describing and quantifying all existing transactions between dominating and dependent companies) and to compensate any detrimental use of its dominant influence over the affairs of the dependent company (§§ 311 and ff. of the “Aktiengesetz”). This also means that the protection of minority shareholders of dependent companies and of subsidiary companies in factual groups has been abandoned to the general rules of company law.

3.9

Protection of Subsidiary Creditors

In the case of legal groups, proceeding from the assumption that the broad powers now enjoyed by the parent company can virtually void the economic and patrimonial substance of each subsidiary of the group, Portuguese company law also contains a system of protection to the subsidiary creditors by imposing on the parent company a duty to cover all annual losses of the subsidiary company (article 502 of the CSC) and a liability for the subsidiary debts (article 501 of the CSC). The first of these norms (duty to cover subsidiary annual losses) provides a system of indirect protection for subsidiary creditors, by ensuring that group subsidiaries may not show any net loss at the end of each fiscal year (that is to say, since every loss has to be compensated, the subsidiary company benefits from a sort of solvency insurance as long as the parent company remains solvent). This mechanism of protection faces, however, some practical shortcomings which may impair its efficiency. Given the numerous avenues for manipulation of the financial statements of subsidiaries opened up to parent corporations both by its general power of direction and by the large valuation freedom permitted by existing accounting law, the integrity of assets of the subsidiary company can in fact be seriously affected in spite of the said legal rule. More importantly, given that the protective scope of this legal provision is limited to stated subsidiary losses, the law indirectly permits the emptying of its real patrimonial substance as long as its formal book value has not been changed, through a variety of legitimate stratagems, such as profit manipulation and syphoning, transfer pricing, use of subsidiary facilities without retribution, and the like. Those shortcomings make rather plain the importance of the second norm above mentioned (liability for the subsidiary debts), which provides for a system of direct and automatic protection to creditors of subsidiaries. As the full partner of a limited partnership, the parent company is thus made unlimitedly liable for the debts of the subsidiary, irrespective of the amounts of those debts, of their origin (being also accountable for those debts which arose before the beginning of the group relationship: article 501/1 of the CSC) or of their legal nature (including not only contractual liability but also tort, tax, labour or any other type of liability). In practical terms, this means that the guarantee of recovery of the creditors of each subsidiary company, traditionally limited to the assets and the capital of the single company debtor, potentially extends itself to the assets of the group as a whole. However, proceedings

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may be brought against the parent company only when the creditor has first made a written demand for payment from the subsidiary company and failed to obtain satisfaction after a period of 30 days (article 501/2 of the CSC). The parent’s liability is thus neither a pure joint and several liability (“gesamtschuldnerisch Haftung”, “responsabilité solidaire”)—in the sense that subsidiary creditors may freely chose between the assets of the subsidiary and of the parent in order to settle their claims— nor a residual liability (“Ausfallhaftung”, “responsabilité résiduelle”)—in the sense that parent companies should be made exclusively liable for the settlement of the remaining unpaid debts of insolvent or bankrupted subsidiaries. The liability of parent companies represents a sort of “subsidiary liability”, somewhere in between those two extremes: that is, parent assets are not placed side-by-side with the subsidiary assets at the free disposal of subsidiary creditors (joint liability) but creditors are not forced to wait until the insolvency of the subsidiary before proceeding against the parent (residual liability), being sufficient that they have made a written request to the corporate debtor which failed to obtain satisfaction.

References Antunes J (2000) A Supervisão Consolidada dos Grupos Financeiros. Editora UCP, Porto Antunes J (2002) Os Grupos de Sociedades – Estrutura e Organização Jurídica da Empresa Plurissocietária, 2nd edn. Almedina, Coimbra Antunes J (2009) The Portuguese Law of Corporate Groups, Institute for Law and Finance Working Paper, Frankfurt Antunes J (2011a) A Tributação dos Grupos de Sociedades. Fiscalidade – Revista de Direito e Gestão Fiscal 45:5–26 Antunes J (2011b) A Consolidação das Contas. Revista de Ciências Empresariais e Jurídicas 19:185–199 Antunes J (2012) Os Grupos de Sociedades no Direito do Trabalho. Questões Laborais XIX:49–78 Antunes J (2013) Os Grupos de Sociedades no Direito da Concorrência. In: Estudos em Homenagem ao Prof. Doutor Alberto Xavier, vol III. Almedina, Coimbra, pp 379–410 Antunes J (2017) O Âmbito Subjetivo do Incidente de Qualificação da Insolvência. Revista de Direito da Insolvência I:77–105 Brus M (1999) Das slowenische Konzernrecht in seiner Herkunft aus dem deutschen Recht der verbundenen Unternehmen. Berlin Verlag, Berlin Castro C (2000) A Imputação dos Direitos de Voto no Código dos Valores Mobiliários. Cadernos do Mercado de Valores Mobiliários 7:163–192 Gause B (2000) Europäisches Konzernrecht im Vergleich – Eine Untersuchung auf der Grundlage des portugiesischen Rechts. Berlin Verlag/Nomos, Berlin Kaló A (1994) Das Recht der verbundenen Unternehmen in Ungarn. Wirtschaft und Recht in Östeuropa:452–459 Lutter M, Overrath H-P (1991) Portugiesische Konzernrecht von 1986. Zeitschrift für Gesellschafts- und Unternehmensrecht 20:394–411 Yeh H (2000) Das taiwanesiche Konzernrecht von 1997. Zeitschrift für Gesellschafts- und Unternehmensrecht 29:287–310

National Report on France Pierre-Henri Conac

Abstract France has been a leading jurisdiction in Europe in the regulation of groups thanks to the recognition of the concept of the interest of the group by the French Supreme Court (Cour de cassation) recognized the interest of the group in the famous Rozenblum case in 1985. This dynamic approach is also recognized in France in the area of insolvency law. The French approach is different from the German Konzernrecht although the latter only applies to public limited liability companies. Contrary to some other Member States of the European Union (EU), which also recognize the interest of the group, France has not adopted a comprehensive legislation on groups, although there are specific provisions to take into account the reality of the group. This means that the protection of minority shareholders is dealt with by general company law rules and cases. Recently, the French legislator has turned its attention to international corporate social responsibility and imposing duties on French parent companies.

Groups of companies present special challenges due to conflicts of interest. There is a need to balance the management of the group as a single economic entity with the existence of separate legal entities with minority shareholders, creditors, employees. . . Groups of companies suffer from a tension between reality and legal appearance. France did not regulate groups of companies in the 1960s when major company law reforms where enacted in and outside Europe. The great 1966 French Commercial Companies Act included some provision on groups but mostly related to transparency of participations and related party transactions (conventions réglementées).1 One reason for this lack of legislative action was that the French

“Regards sur l’évolution du droit des sociétés depuis la loi du 24 juillet 1966.” (The Evolution of French Company Law since the July 24 1966 Act), I. Urbain-Parleani & Pierre-Henri Conac (eds.), 354 pp., Dalloz, March 2018. 1

P.-H. Conac (*) University of Luxembourg, Luxembourg, Luxembourg e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_3

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legislator was considering to adopt the German Konzernrecht which had been adopted in 1965 and applied to public limited liability companies. Therefore, the issue was left for another piece of legislation. However, it appeared quickly that the German model was too rigid and could not serve as a model for the regulation of groups in France. Therefore, no specific legislation was adopted in the 1970s and it was mostly left to Courts to deal with issues related to groups on a case by case basis, in addition to some regulations for listed companies developed or promoted by the French Securities supervisor, the Commission des Opérations de Bourse (COB), established in 1967. In 1985, the French Supreme Court (Cour de cassation) recognized the interest of the group in the famous Rozenblum case. This criminal case, which also applies in a civil context, confirmed a long series of decisions in lower courts which originated in the 1970s during the economic crisis.2 This implies that the parent company can inflict some damages or sacrifices to the subsidiary without having to compensate immediately or even, in practice, later. A recent case from the French Supreme Court, Commercial Division, held that directors of a parent company have a duty of loyalty to vote towards the latter to vote in the same way in the board of directors of the subsidiary, provided it does not go against the social interest of the subsidiary.3 This a recognition of the consequence of an hierarchical relationship within the group which affects the board of directors of the subsidiary. As to the fact that the director of the subsidiary cannot vote against the social interest of the subsidiary, this is logical since each subsidiary is a separate legal entity. This is mitigated by the fact that the interest of the subsidiary cannot be considered in isolation and should take into account that it is part of a group. The Rozenblum case never said that the subsidiary or the parent had no social interest but that this latter must be understood in a different manner in a group situation. Many Member States of the European Union (EU) follow this approach and recognize the interest of the group, sometimes through case law, and sometimes through legislation. Another group of Member States does not recognize the interest of the group, at least for certain types of companies. This is the case for instance of Germany. The French approach has been very successful and many Member States have recognised the interest of the group in the last 10 years. Because, the recognition of the interest of the group has been done by case law and the system is considered to be very satisfactory, there has been no request for the adoption of a legislative regime. Therefore, the protection of minority shareholders relies on general company law provisions applicable to all companies.

2 See Trib. Corr. Paris, 16 May 1974, Soc. Saint-Frères, D. 1975, p. 37, Rev. soc. 1975, p. 657, n. B. Oppetit, JCP éd. E. 1075, II-11816, p; 381. 3 Cass. Com. 22-5-2019 n○ 17-13.565 FS-PBR, S. c/ Sté française des chaux et ciments de St-Astier.

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As to the EU legislator, it has not adopted any directive or legislation on groups of companies, apart to define the group from a company law and accounting perspective, despite several private4 and official reports5 arguing for such intervention and for the recognition of the interest of the group. However, EU legislation has an indirect but strong impact on the regulation on groups in France, through for instance the regulation of related party transactions (RPTs) in companies whose shares are listed on a regulated market (stock exchange). The French regime on groups has evolved in the last years, especially on the issue of RPTs due to international (foreign investors, OECD) and national pressures (minority shareholders, public opinion). Especially, the national securities authority, the Autorité des marchés financiers (AMF), which replaced the Commission des Opérations de Bourse (COB) in 2003, has been active to promote some reforms. The AMF has been active for listed companies. However, those changes in the regulation of listed groups have also benefited non listed companies because of the principle of unity of company law. While the protection of minority shareholders has been strengthened in France, due to national and EU legislation, the 2008 financial crisis has led in France to a strengthening of duties linked to the corporate social responsibility of companies, and especially large and/or listed groups of companies. This trend, which started in 2001 has become more and more important. Parent companies are subject to duties in the management of their subsidiaries in order to prevent corruption or violation environmental or human rights and other social duties. The latest and most significant example is the law of 27 March 2017 on the duty of vigilance of parent and outsourcing companies. In France, large parent companies are more and more subject to duties which even span across borders. Therefore, the French legislator is now adopting an economic approach to the regulation of groups in order to apply cross-border duties to parent companies. The definition of the group is traditional (Sect. 1) and France recognizes the interest of the group (Sect. 2). Because this recognition has been done through case law, the protection of minority shareholders and creditors is done mostly by general company law provisions or case law (Sect. 3). This situation is favourable for the management of groups, but this is changing since the French legislator has recently passed laws designed to apply liability to parent companies for violation of corporate social responsibility rules, including in a cross-border context (Sect. 4).

4 “Proposal to Facilitate the Management of Cross-Border company Groups in Europe”, as a member of the Forum Europaeum on Company Groups (FECG), (ECFR), 2015, n○ 2, p. 299-306; “Towards Recognition of the Group Interest in the European Union ?”, Club des Juristes, Committe on Europe, Member of the working group, June 2015, 60 pp. 5 Informal Company Law Expert Group (ICLEG), Report on the recognition of the interest of the group, October 2016, 47 pp; “Report of the Reflection Group on the future of European company law”, 5 April 2011. Both reports are available on SSRN.

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1 The Definition of the Group The rules on groups are part of general company law, which is included in the Commercial code and have been influenced by EU directives. Corporate groups are defined in France according to the accounting and transparency directives. Two definitions are used, one in listed companies for crossing of threshold and takeover regulation (Sect. 1.1) and one for the establishment of the accounts (Sect. 1.2).

1.1

The Definition of the Group in Listed Companies

Article L. 233-3 of the Commercial code holds that: I. - For the purposes of sections 2 (crossing of thresholds) and 4 (cross shareholdings) of the present chapter (Subsidiaries, share holdings by other companies and controlled companies), any person, legal or natural, is deemed to control another company: 1. When it directly or indirectly holds a fraction of the capital that gives it a majority of the voting rights at that company's general meetings; 2. When it alone holds a majority of the voting rights in that company by virtue of an agreement entered into with other partners or shareholders and this is not contrary to the company’s interests; 3. When it effectively determines the decisions taken at that company’s general meetings through the voting rights it holds; 4. When it is a partner in, or shareholder of, that company and has the power to appoint or dismiss the majority of the members of that company’s board of directors or member of the management board or of the supervisory board. II. - It is presumed to exercise such control when it directly or indirectly holds a fraction of the voting rights above 40% and no other partner or shareholder directly or indirectly holds a fraction larger than its own. III. - For the purposes of the same sections of the present chapter, two or more companies acting jointly are deemed to jointly control another company when they effectively determine the decisions taken at its general meetings.

Article L. 233-3 of the Commercial code deals with different types of control, de jure control or de facto control, exclusive or with other partners.

1.2

The Definition of the Group in All Companies

There is also a definition of control applicable to accounting matters. This definition is similar Article L. 233-16 of the Commercial code holds that: I. - Each year, the board of directors, the management board or the general manager (gérant) of commercial companies, as applicable, draws up and publish consolidated accounts and a group management report in respect of any companies which they control, either solely or jointly, as defined hereunder.

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II. - Sole control of a company exists: 1. When a majority of its voting rights are held by another company; 2. When a majority of the members of its board of directors, management board or supervisory board are designated by another company for two successive financial years. The consolidating company is deemed to have effected such designations if, during that financial year, it held a fraction of the voting rights greater than 40%, and if no other partner or shareholder directly or indirectly held a fraction greater than its own; 3. When a dominant interest is exerted over the company by virtue of a contract or the terms and conditions of its memorandum and articles of association, when the applicable law allows this. III. - Joint control exists when control of a company operated jointly by a limited number of partners or shareholders is shared and decisions are made on the basis of agreement between them.

2 The Recognition of the Interest of the Group French courts recognizes the interest of the group (Sect. 2.1) and this defense is in practice quite effective (Sect. 2.2). There is also a special regime for banks (Sect. 2.3).

2.1

The Conditions of the Recognition of the Interest of the Group

In France, the group is not recognized as a unified business legal entity. There are no specific rules regarding group management such as unified direction, einheitliche Leitung, direzione unitaria, dirección unificada, etc. . . Also, there is no recognition of a right to give instructions to the subsidiaries, whether a public limited liability company or a private limited liability company. However, France recognizes the interest of the group with the French Supreme Court (Cour de cassation) 1985 Rozenblum decision.6 This case dealt with the criminal concept of abuse of corporate assets (abus de biens sociaux).7 It punishes, among others, board chairmen, directors or managing directors of a public limited company or a limited liability company (Société à responsabilité limitée or SARL) who: use the company’s property or credit, in bad faith, in a way which they know is contrary to the interests of the company, for personal purposes or to favor another company or undertaking in which they have a direct or indirect interest.8

6 Court of cassation, Criminal Chamber, 4 February 1985, Rozenblum and Allouche, D. 1985, p. 478, n. D. Ohl, I-639, JCP 1986, II-20585, n. W. Jeandidier, Rev. soc. 1985, p. 648, n. B. Bouloc. 7 Art. L. 242-6 of the Commercial code. 8 Id.

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The French Supreme court established in this case that the director of a solvent subsidiary may take into consideration the interest of the group when making a decision that causes an immediate disadvantage to the subsidiary, provided all of the following conditions are satisfied: the financial aid consented by the managers of the company which is part of a group in which they are directly or indirectly interested, should be motivated by the common economic interest in relation with the global policy of the group, should not be devoid of counterpart and should not provoke imbalance of the mutual obligations, nor exceed the financial capacity of the solicited company.

These conditions are restrictive and rather vague, reflecting the procedural context of the Rozenblum case as concerning the potential application of criminal liability for “abuse of corporate assets” (abus de biens sociaux). However, the Rozenblum test also applies to directors’ civil liability for breach of duty. Meeting these conditions provides directors with a defence to, or “safe harbour” from, liability for breach of duty. The Rozenblum doctrine applies without a need for a declaration. The conditions for the subsidiary may be expressed as follows: (i) the company is a member of a group; (ii) the company’s directors act in accordance with what they believe to be the common, or shared, interests of the company and other group members; (iii) the transaction should not be for a grossly inadequate consideration, from the company’s point of view (that is, it should not be ‘devoid of counterpart’ or ‘provoke imbalance of the mutual obligations’); (iv) the transaction should not bring into question the company’s ability to pay its debts (it should not ‘exceed the financial capacity’ of the company). Of these four criteria, (iv) protects especially the interests of creditors of the subsidiary, and (iii) protects especially the interests of minority shareholders. The first criteria is that there must be a group of companies with a controlling parent company. This means that a natural person cannot, controlling companies, cannot be considered a parent company. The second criteria is that there must be a coherent group policy. This criteria is rather general and does not imply that the group should be centrally managed. There is a common group interest even if the various subsidiaries are active in different economic fields. However, case law excludes parent companies if they are part of a Leverage Buy Out (LBO) probably because it is considered to be an artificial creation. Also, the splitting of business and real estate in two companies to reduce taxes is not considered to be a group. The third criteria is that financial support should not be without counterpart or break the balance between the respective commitments of the companies. In practice, French courts assume that there will be a counterpart based on the previous or supposed behaviour of the group towards its subsidiaries. Finally, the financial support should not exceed the financial possibilities of the company supporting it. The transaction should not pose a risk to the existence of the subsidiary. This is the most difficult condition to satisfy because courts tend to judge in hindsight that there was a risk if the subsidiary went insolvent.

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The Application of the Interest of the Group

In practice, the group interest defense is rarely invoked in courts and often rejected. On a 20 years study (1985–2005), it appeared number of the cases where the defence of the “interest of group” of companies has been accepted by the Courts is limited.9 If fact, only 9 judgements over 75 accepted the defence. This study showed that only the most unbalanced transactions are punished, and the element relating to the balance of mutual commitments between the concerned companies is applied flexibly.10 Also, the requirement that the support requested from the company should not exceed its possibilities is satisfied except in critical situations which would damage definitively the social interest of the subsidiary. The fact that only 75 cases went to courts in 20 years means that the defense is quite effective and useful for group in providing them with flexibility to manage their internal transactions. The number of cases going to court would have been certainly much higher in case of lack of Rozenblum doctrine. Only egregious cases go to court, which could explain why the defense was then refused in most cases. In practice also, almost all cases which go to courts take place in insolvency situations. Therefore, in practice, intra-group transactions are shielded unless financial conditions are excessive, are part of a financial engineering (LBO like transactions) or are very risky, and lead to an insolvency situation.

2.3

The Recognition of the Interest of the Group in the Banking Sector

The interest of the group has also been recognized by the EU Banking Recovery and Resolution Directive (BRRD) of 15 May 2014.11 The directive, which has been amended in 2019 on other points, allows the provision of “intra group financial support” in a cross-border situation (in another Member State or third country) in the case where one of the parties to the agreement would meet the condition for an early intervention, that is, it would face a rapidly deteriorating financial condition.12 Recital 38 of the BRRD explains why an EU intervention was necessary in this field:

9

Boursier (2005), p. 273. Cf. the alternative nature of the requirement of balance of the mutual obligations. 11 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending (...), of the European Parliament and of the Council (BRRD), OJ [2014] L173/190. 12 Early intervention implies that the financial institution is ‘likely in the near future to infringe the requirements of Regulation (EU) No 575/2013, Directive 2013/36/EU, Title II of Directive 2014/ 65/EU or any of Articles 3 to 7, 14 to 17, and 24, 25 and 26 of Regulation (EU) No 600/2014’ (BRRD, Art 27(1)). 10

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Those provisions which needed to be superseded are national company law provisions which either only take into account the interest of the subsidiary or are not always clear as to the extent to which the interest of the group can be taken into account. Given the various interests at stake, the EU legislator decided to provide clarity for the directors of the subsidiary in order to facilitate cross-border intragroup support and ultimately financial stability in the EU. According to the BRRD, a group financial support agreement shall, amongst other things, specify the principles for the calculation of the consideration for the provision of financial support.13 Among these principles, Article 19(7)(b) states that: each party must be acting in its own best interests which may take account of any direct or any indirect benefit that may accrue to a party as a result of provision of the financial support.14

This makes it clear that a subsidiary may take into account its interest in avoiding the insolvency of the parent and implicitly recognizes that both interests may be aligned in the interest of the group remaining solvent as a whole.15 Article 19(7) also requires that any party agreeing to provide financial support must have been ‘acting freely’ in entering into the agreement, on the basis of ‘full disclosure of relevant information’ from the recipient of financial support. The agreement must be approved by a joint decision of the consolidating supervisor and the competent authorities of the subsidiaries, and in case of disagreement, the European Banking Authority (EBA) can take a binding decision if a competent authority has referred the matter to it.16 The shareholders of each concerned company, including whollyowned subsidiaries, must have authorised the management body to decide whether to provide or receive financial support and can revoke that authority.17 The management body must report to shareholders each year on the performance of the agreement.18

The consideration for the provision of financial support must be set at the time such support is given. 14 BRRD, Art 19(7)(b). 15 Moreover, it is expressly contemplated that such consideration may take into account non-public information known to the subsidiary by virtue of its being part of the group: BRRD, Art 19(7)(d). 16 BRRD, Art 20. 17 BRRD, Art 21. 18 BRRD, Art 21(3). 13

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The BRRD also imposes conditions which must be satisfied for a group entity to provide group financial support, pursuant to the principles set out in the agreement. Those conditions include a requirement that: the provision of financial support has the objective of preserving or restoring the financial stability of the group as a whole or any of the entities of the group and is in the interests of the group entity providing the support.19

This means that (if the other conditions are also satisfied) the subsidiary can act in the interest of the group if it is also its own interest. Since an insolvency of the parent company is likely to affect the subsidiary adversely, the stabilisation of the group can be an indirect benefit to the subsidiary providing support. Other conditions include a requirement that there is a reasonable prospect that the consideration for the financial support will be paid to the subsidiary and that, if support is given in the form of a loan the loan will be reimbursed.20 Another condition is that the provision of the financial support would not jeopardise the liquidity or solvency of the group entity providing the support.21 These requirements are being fleshed-out by regulatory and implementing technical standards as well as by EBA Guidelines.22 Because of the interests of the local stakeholders, there is an ex-ante right of opposition (veto right) and right to restrict the support by the competent supervisory authority of the group entity that intends to provide financial support, if it deems that the conditions for group financial support have not been met.23 In such case, the consolidating supervisor or the competent authority responsible for the group entity receiving support can request the assistance of EBA which will play a coordination role.24 The BRRD has been implemented into the French Monetary and Financial Code in 2015.25

3 The Protection of Minority Shareholders and Creditors General company law provisions protect minority shareholders in groups and there are sometimes specific rules for groups (Sect. 3.1). As to creditors, they are protected by general insolvency provisions (Sect. 3.2). However, courts have developed a case law which takes into account the existence of a group.

19

BRRD, Art 23(1)(b). BRRD Art. 23(1)(d). 21 BRRD, Art 23(1)(e). 22 EBA Guidelines, specifying the conditions for group financial support under Article 23 of Directive 2014/59/EU, EBA/RTS/2015/08, 9 July 2015. 23 BRDD, Art 25(2). 24 BRRD, Art 25(4). 25 Ordonnance n○ 2015-1024 du 20 août 2015 portant diverses dispositions d'adaptation de la législation au droit de l'Union européenne en matière financière, JORF n○ 0192 du 21 août 2015 p. 14652. 20

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The Protection of Minority Shareholders

The protection of minority shareholders results from general company law provisions.

3.1.1

The Regime of Related Party Transactions (RPTs)

The regime of related party transactions (RPTs) is old but has been updated from times to times, sometimes under the influence of the EU legislator. The latest major reform dates back to the Act n○ 2019-486 of the 22nd May 2019 (Loi PACTE) regarding growth and transformation of entreprises (croissance et la transformation des entreprises) implementing the 2017 amendments to the EU 2017 amendments to the Shareholders’ Rights Directive (SRD II). The SRD II did not have a large impact on the French regime of RPTs. According to Article L. 225-38 of the Commercial code, the case of public limited liability companies (sociétés anomynes), any transaction with a shareholder holding more than 10% of the voting rights (or any person controlling the shareholder owning 10% of the voting rights) is subject to the related party transaction (RPT) procedure.26 The RPT has to be approved ex ante by the board of directors (or the supervisory board). If not, the RPT can be voided by a judge if it was detrimental to the company. However, there is no obligation for the judge to void the RPT and the shareholders can decide to authorize it ex-post. The conflicted shareholder, including the indirectly interested party, must inform the board of directors upon becoming aware of an agreement to which Article L. 225-38 of the Commercial code applies. He may not participate in the vote on the requested prior authorization of the board. Since 2014, the board of directors must justify the interest for the company to enter into this transaction and disclose to the shareholder the financial conditions attached. This information must be disclosed to the auditors. After the vote, the RPT can be concluded. The RPT is subject to a vote of the general ordinary shareholders’ meeting. A report is prepared by the statutory auditors (Commisaires aux comptes). The conflicted shareholder cannot vote in the general ordinary shareholders’ meeting. Whatever the result of the vote (positive or negative), the liability of the conflicted shareholder can be engaged in case of damages to the company. In listed companies, there are no special rules as to when the RPT is subject to approval, but there are several provisions to reinforce the protection of minority shareholders. An internal charter has to be adopted, except for listed small and medium enterprises (SMEs), in order to precise when a transaction should be qualified as RPT. The charter has to be published on the company website.27

26 27

Art. L. 223-19 of the Commercial code et seq. AMF Recommendation 2012-05, n○ 20.

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Also, some informations (as requested by the directive) regarding the RPTs to be disclosed on the website of the company at the latest at the time of conclusion of the agreement.28 The publication can be ordered by court at the request or any interested person. In listed companies also, the Corporate Governance Report must include not only a list of RPTs concluded with de jure subsidiaries (50% of voting rights) but also de facto subsidiaries. RPT concluded by a subsidiary have to be presented in the report submitted to the general shareholders’ meeting.29 Any director appointed on proposal of a controlling shareholder cannot vote on a RPT with this shareholder.30 If the RPT can have a significant impact on the assets of the company, an independent expert has to be appointed.31 However, because of opposing views among stakeholders, the law does not clarify what constitutes a “significant impact”. In practice, it can be said that a transaction affecting more than 25% of the assets will be considered to have “significant impact”. The report has to be made public. The auditors’ report must include indications relating to the interest of the RPT for the company.32 In the case of non-listed companies, any transaction with a shareholder is subject to the RPT procedure.33 The RPT is concluded and then subject to approval by the shareholders’ general meeting. A report is prepared by the manager of the company or the statutory auditor if there is one. The conflicted shareholder cannot vote. Whatever the result of the vote (positive or negative), the liability of the conflicted shareholder can be engaged in case of damages to the company. In the case of a simplified public limited liability companies (sociétés par actions simplifiées or SAS). The regime is similar to the one in public companies, but there is no ex-ante authorization by the board of directors or equivalent body, and the quorum and majority are decided by the articles of association.34 For all companies there is an exception for ordinary RPTs concluded at normal market conditions and for intra-group transactions. Some Courts adopt an in abstracto approach and hold that the exemption also applies to contracts which, although infrequently concluded by the specific company, are often concluded in groups, such as cash pooling. The 2019 PACTE Act requires that those exempted transactions must be disclosed and the exemption regularly evaluated by the board in companies whose shares are listed. In the case of groups there are some exceptions too. There is a prohibition on loans to directors, except if the loan is within a group or the company is a bank. Also, since 2014, RPTs concluded with a 100% owned subsidiary are not subject to the approval procedure.

28

Art. L. 225-40-2 of the Commercial Code. AMF Recommendation 2012-05 n○ 22. 30 AMF Recommendation 2012-05, n○ 22bis. 31 Recommendation 2012-05, n○ 25. 32 AMF Recommendation 2012-05, n○ 28. 33 Art. L. 223-19 of the Commercial code. 34 Art. L. 227-10 of the Commercial code. 29

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There are special disclosure requirement in listed companies. For companies whose shares are listed on a regulated market, the Transparency Directive (TD) requires that interim management report shall include at least an indication of important events that have occurred during the first 6 months of the financial year, and their impact on the condensed set of financial statements, together with a description of the principal risks and uncertainties for the remaining 6 months of the financial year. The interim management report shall also include “major related parties transactions”.35 This is not requested by IAS 34.

3.1.2

Abuse of Majority

Minority shareholders are also protected through the concept of “abuse of majority”. This concept applies to any decision taken by the general meeting or by the board of directors. The French Supreme Court introduced the concept of abus de majorité (i.e., abuse by the majority) in 1961. It held that there is an abuse by the majority if the majority shareholder’s vote is contrary to the ‘social interest’ of the company and is based solely on an intent to favour the majority shareholder’s interest to the detriment of all the shareholders. Therefore, two conditions must be fulfilled, which is a consequence of the institutional approach that French law adopts regarding company law: the decision must harm both the company and its shareholders. The ‘social interest’ is understood in France as the interest of the company and not only of its shareholders. Courts adopt a stakeholder approach to the company’s social interest. The concept of abuse by the majority originates from the concept of abuse of rights, which is recognized by France’s courts in civil law since the early twentieth century. In civil law, for an action to be an abuse of rights it is enough for the owner of the particular right to use it in a way that is designed to harm another person. In company law, however, the French Supreme Court added a requirement that the exercise of the right to vote also harm the company’s social interest. The legal bases for the court’s additional requirement are the general principle of equality among shareholders and the concept that the company is established for the common interest of the shareholders.36 The definition has just been changed by the 2019 PACTE Act in order to take into account other interests. However, this reform should have probably no impact on cases of abuse of majority. Since 1961, the concept of abuse of majority has been regularly applied. The French legislature did not incorporate the concept into the 1966 Companies Act,

35 Art. 5.4 of the “Transparency directive”, as amended. Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market. The Directive has been amended in 2013. 36 Art. 1833 of the Civil code.

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thereby leaving its development to the courts without a rigid statutory or regulatory framework. The typical case in which French courts find an abus de majorité arises when an individual who is both the majority shareholder and a salaried company director or manager, continually votes against paying a dividend in an attempt to force the minority shareholders to sell their shares at a large discount. In such a case of abus de majorité, the court will void the decision of the general shareholders’ meeting and award civil damages to be allocated to the minority shareholders. However, in practice, it is all too difficult for the minority shareholder plaintiffs to establish an abus de majorité because, first, the decision must not only harm them, but also be contrary to the interests of the company. Proving that can be difficult; a decision not to distribute a dividend, for example, increases the equity of the company and most would agree that an increase in equity is not contrary to the company’s interests. In addition, the fact that the decision must be based solely on the majority shareholders’ intent to favour themselves to the detriment of all shareholders is also very difficult to establish. Finally, French judges seem to be reluctant to second guess business decisions, like refusing to distribute a dividend, unless there is a clear case of abuse. Therefore, in practice, there are not many claims of abus de majorité accepted by the French Supreme Court.

3.1.3

Investigations Rights

Minority shareholder have also rights to investigate the activities of the company and documents related to this change and to any relevant procedure. In public and private limited liability companies, one or several shareholders representing at least 5% of the shares, or in the case of listed companies a shareholders’ associations,37 can request, if they ask a written question and the answer is not satisfactory, in court the appointment of an expert to investigate management decisions.38 This implies that only decisions of the general manager, excluding decisions of the (ordinary and extraordinary) general shareholders’ meetings can be challenged. The court can ask the company to pay the cost. The report is provided to the shareholders at the next general meeting. The investigation cannot be done upstream but only downstream. Also, in public and private limited liability companies and simplified public limited liability company (SAS), any shareholder can request in court the appointment of an expert to investigate any operation.39

37

Art. L. 225-120 of the Commercial code. Art.L. 225-231 of the Commercial code. 39 Art. 145 of the Code of civil procedure. 38

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3.1.4

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Abuse of Corporate Assets

However, as mentioned above, the main tool against abusive self-dealing is the criminal provision against abuse of corporate assets (abus de biens sociaux).40 The sanction for individuals is currently up to 5 years in jail and a fine of 375,000 euros. This criminal provision was introduced in 1935 at a time where groups of companies were not legally regulated as such in the Companies Act. This created a serious issue since related party transactions are common within groups and can be unbalanced for legitimate reasons such as the interest of the group as a whole. Since the provision of abuse of corporate assets did not distinguish between independent companies and subsidiaries, the directors and managers of companies being part of a group were at a strong risk of a suit for abuse of corporate assets in the special context of groups. The risk is all the higher that a minority shareholder, acting derivatively in the name of the company (action sociale ut singuli), can initiate a criminal prosecution by filing a criminal complaint (plainte avec constitution de partie civile) with the Dean of the Examining magistrates of the Civil first degree court (Tribunal correctionnel). This rule was created by case law as soon as 1906 and did not change since.41 This remedy is very attractive for minority shareholder since the examining judge holds the ability to access documents, and at no or very little cost for the minority shareholder. However, in the case of groups, the Rozenblum doctrine allows considerable flexibility.

3.2

The Protection of Creditors

The protection of creditors within groups is achieved through parent company liability (Sect. 3.2.1) or through piercing the corporate veil (Sect. 3.2.2). In both cases, courts have adapted the applicable texts and case law to the reality of groups.

3.2.1

Parent Company Liability Within Groups

The Commercial Code allows a judge to hold a director or manager (dirigeant de droit) personally liable for part or the whole of the debts of a company when a managerial error ( faute de gestion) or errors contributed to the existence of irretrievable debts (action en responsabilité pour insuffisance d’actif.42 It replaced in 2005 the action en comblement de passif but, in practice, the rule is similar. The burden of proof is on the plaintiff. This liability is also applicable to a de facto director. A de facto director is not defined in the Commercial code but by courts. A

40

Art. L. 242-6 of the Commercial code. Cass. Crim. 8 december 1906, Laurent Atthalin, S. 1907.1.377 n. Demogue, D. 1907.1.207. 42 Art. L. 651-2 of the Commercial code. 41

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controlling shareholder and/or a parent company can be held to be a de facto director if they directly manage or take part in the management of the company. The threshold is rather high. In order to reduce this risk, parent companies are sometimes represented in the board of the subsidiary by employees not representing the parent but acting on a “personal basis”. However, several decisions tend to consider these persons almost automatically as de facto directors. French court have also the power to apply a civil sanction of individual insolvency ( faillite personnelle)43 and a criminal sanction of individual bankruptcy (banqueroute)44 against a director who has abusively continued a business which is losing money when the situation could only realistically lead to insolvency. In the case of individual insolvency, a director may be disqualified from acting as a director or manager of a company and is subject to a number of potential sanctions. In the case of individual bankruptcy, a director is liable to receive a custodial sentence and a fine. Finally, a court can also apply a civil sanction of individual insolvency ( faillite personnelle)45 and a criminal sanction of bankruptcy (banqueroute)46 to the director who has used ruinous means in order to gain funds and tried to avoid or delay the filing of a bankruptcy petition.

3.2.2

Piercing the Corporate Veil

Piercing the Corporate Veil (confusion de patrimoine) leads to the extension of the insolvency to the parent company and is regulated in the Commercial code in a general way.47 Several cases show a strong reluctance by lower courts and by the Cour de cassation to pierce the corporate veil in cases of relationships within a group. The French Supreme Court adopted a new concept (2002, 2005) for Piercing the Corporate Veil. It requires the existence of “Abnormal financial relationships”. This concept is more flexible than the previous one of “abnormal financial flows”. It is a very restrictive approach of what constitutes abnormal relationships within a group: abnormality begins when “systematic” transfers occur without any counterparty. For instance, the Supreme Court refused to pierce the corporate viel in a case where the links were: cash-pooling, exchange of employees, long term loans with payment extension (Metaleurop, 2005).48 In another case, the French Supreme Court also refused to lift the corporate veil in a case where there had been: foregiving by the

43

Art. L. 653-3 of the Commercial code. Art. L. 626-2 of the Commercial code. 45 Art. L. 653-5 of the Commercial code. 46 Art L 654-2 of the Commercial code. 47 Art. L. 621-2 of the Commercial code. 48 Cass. Com., 19 avr. 2005, n○ 05-10.094, Bull. civ. V, n○ 92; D. 2005. 1225, obs. A. Lienhard; Rev. sociétés 2005. 897, note D. Robine et J. Marotte. 44

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parent company of a loan with a claw-back in case of return to profitability, non billing by the parent company of bills due . . . (Air Lib, 2006).49 Therefore, the French Cour de cassation takes a pragmatic approach. It considers that the group is the normal form of doing business. Therefore, usual organisation and relationship within groups, according to management principles are not abnormal.

4 The Liability of the Parent Company for Environmental and Other Serious Violations France passed the Law n○ 2017-399 of 27 March 2017 on the duty of vigilance of parent and outsourcing companies.50 This law is part of a general trend in France and in some countries to hold parent companies accountable for damages created by the subsidiary. For instance, the “Sapin II” Act of 2016 requires companies above a certain size (500 employees and 100 Million euros turnover) to develop and implement a compliance program to prevent and detect corruption in France and abroad.51 However, the 2017 on the duty of vigilance of parent and outsourcing companies is the most emblematic legislation in this field. According to article L. 225-102-4–I of the Commercial code, French companies above a certain threshold, whether listed or not listed, must establish a group-wide vigilance plan to “prevent serious violations of human rights and fundamental freedoms, personal health and safety and the environment”. The law affects the notion of groups. It implies a duty of parent companies to manage the group, monitor and send instructions to the subsidiaries in order to reduce liability risks. In addition, it assumes that the group is not just established through capital links but implies an economic approach to the group based on economic power over contractors and suppliers. This is revolutionary in company law.

49

Cour de cassation (com.) 10 janvier 2006, M. Gilles Pellegrini, mandataire judiciaire c/ Société Holco, B. Grelon et C. Dessus-Larrivé, La confusion des patrimoines au sein d'un groupe, Rev. Sociétés 2006, p. 281; Ph. Roussel-Galle, Rev. Sociétés 2006, p. 629. 50 Law n○ 2017-399 of 27 March 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre, JORF 28 March 2017. Conac and Urbain-Parléani (2017), p. 90; M. Lancri, Le devoir de vigilance à la Française, Journal des sociétés, n○ 151, April 2017, p. 71; S. Schiller, Exégèse de la loi relative au devoir de vigilance des sociétés mères et entreprises donneuses d’ordre, JCP E, n○ 15, April 2017, p. 19. 51 Law n○ 2016-1691 of 9 December 2016 regarding transparency, fight against corruption and the modernisation of the economic life, JORF 10 December 2016. F. Barrière, Les lanceurs d'alerte, Revue des socié tés 2017 p.191; M. Lancri, Anti-corruption issues: New French Sapin II Law on transparency, Compliance & Ethics Professional, April 2017, p. 85.

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The Scope and Content of the Vigilance Plan The Scope of the Vigilance Plan

The 2017 Act covers French companies who have employees above a certain threshold. However, in practice many more companies, including foreign companies, are covered. The new article L. 225-102-4 –I of the Commercial code requires companies having their legal seat in France and which have at group level at least 5000 employees in France or 10,000 worldwide for 2 fiscal years to establish a vigilance plan. French subsidiaries which exceed those thresholds are exempt if their parent company, according to the definition of control in article L. 233-3 of the Commercial code, is subject to the duty to have a vigilance plan. The definition of control is the one used for company law (e.g. crossing of thresholds) and not for accounting. The threshold is the same as the one used by the French legislator in 2013 when it introduced a codetermination regime for employees on the German “Mitbestimmung” model.52 According to the government, only 150 companies should be covered. Nevertheless, the scope is still very wide since one employee in the private sector out of four is covered. The geographical reach of the Act is much larger than just French companies above a certain threshold. It actually covers, many more companies, through contractual extension of the duty of vigilance and includes also parent foreign companies. The Act affects large parts of the French economy and not just the largest companies. The reason is that companies subject to the duty to establish a vigilance plan will have to reach out to their national contractors and force these duties on them through contract. For instance, a distributor buying products from small and medium size enterprises in France will require them to implement safeguards in line with the company’s vigilance plan. Therefore, the statutory reach will be expended through contract. The effect will be also felt upstream as the Act will affect foreign parent companies of French companies subject to the duty to establish a vigilance plan. If a parent company, located in Germany or the United States, has a large French subsidiary subject to the Act, the subsidiary will be required to adopt and implement a vigilance plan. The exemption for subsidiaries whose parent are subject to a duty to establish a vigilance plan does not apply here since the foreign parent company is not subject to French law. The scope of the plan has been made much larger by the fact that the law covers contractors and suppliers with whom exist “established business relationships”. Those companies, wherever located in the world, are also included in the vigilance plan. The difference between contractors and suppliers is not clear but the goal is clearly to close any potential loophole. Therefore, the concept of “established business relationships” is key to define the scope of the Act. This concept has been borrowed from French competition law and more specially articles L. 420-2

52 Art. L. 225-97-2 of the Commercial code. Law of June 14, 2013 on the securement of employment (Loi relative à la sécurisation de l’emploi du 14 juin 2013), JORF 14 June 2013.

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(Abuse of dominant position) and L. 442-6 (Abuse of dominant position towards another company) of the Commercial code. The French Supreme Court law has already fleshed out the meaning of an established business relationship.53 To qualify as “established”, the relationship has to be regular, be significant and stable. Courts have been rather restrictive to recognize such an established business relationship. According to the Government pleadings in the Constitutional court, contractors and suppliers are subject to the plan only as to the part of their activity which relates to their relationship with the French company.54 However, this limitation is deceiving since a foreign industrial contractor, will not and probably cannot implement a vigilance plan for only part of its plant. It will be all or nothing.

4.1.2

The Content of the Vigilance Plan

The content of the vigilance plan is established by article L. 225-102-4, I al. 2 of the Commercial code. The plan must include “reasonable diligence measures” designed to “identify risks and prevent serious violations” to human rights, fundamental freedoms, personal health, safety of persons and the environment which result from the activities of the group and contractors and suppliers with an established business relationship when those activities are linked to this relationship. The Commercial code calls for the plan to be developed in collaboration with stakeholders from civil society, possibly within the framework of multi-stakeholder initiatives along business lines or at the geographical level. There is no duty to elaborate the plan this way but at least the legislative reference implies that applying such self-regulatory plans, developed as part of a multi-stakeholder initiative, would be acceptable. This is certainly the way forward as enforcing industry wide standards should imply that the company is in compliance with the best practices accepted by human rights and environmental associations. For instance, in the garment industry area, which gave raise to the rana Plaza case in 2013, a French company could refer to self-regulatory agreements such as the 2013 “Accord on Fire and Building Safety in Bangladesh”. In order to ensure enforcement of the plan, the French legislator included a requirement for the management to establish a report on the plan and to disclose it and its implementation measures to the public.55 The report on the vigilance plan has to be included in the management report required by Company law.

Cass. com., 15 sept. 2009, n○ 08-19.200, Bull. civ. IV, n○ 110, RJDA 1/10 n○ 81. Government pleading before the Constitutional Court, n○ 2017-750 DC. 55 Art. L. 225-102-4 of the Commercial code. 53 54

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The Liability and Sanctions The Liability

Article L. 225-102-5 of the Commercial code provides that ”Subject to the conditions provided in articles 1240 (tort liability for fault) and 1241 (tort liability for negligence) of the Civil code, failure to comply with the requirements defined in article L. 225-102-4 of the present code triggers the liability of his author and obliges him to repair the damage that the fulfilment of his obligations would have allowed to avoid. The liability suit is filed with the competent jurisdiction by any person who justifies an interest to act”. The failure in the design could be the lack of the plan, an insufficient mapping of the risks or insufficient or unreasonable measures. Such failures are actually the least likely since companies will probably use industry wide standards. The second type of mistake could be related to the implementation of the vigilance plan. This type of failure is more likely to happen. There can be different compliance failures. The first type would be the lack of enforcement of the vigilance measures. Another type of failure could be the insufficient human and financial resources provided to enforce the vigilance plan. The enforcement of the plan, especially in foreign countries, will imply human resources, for instance an inspector, and could be very costly. Therefore, parent companies might be reluctant to allocate resources to the implementation of the vigilance plan. In anti-money laundering cases, most administrative sanctions are handed out not for money laundering as such, but for failure to allocate enough funds and human resources to enforcement. Another possible failure could be the lack of reaction of the parent company or its subsidiary in case of red flags or incidents. The most serious risk facing the parent company is the oversight of contractors and suppliers. They are the weak part of the chain as they have little economic interest to support the plan. Since they are only contractors, it will always be difficult for the parent company or its foreign subsidiary to check that they are really enforcing their contractual commitments. The French legislator assumes that the parent company will be able to force the implementation of the plan and control its implementation thanks to its economic bargaining power. This is true but only to a certain extent and the French company will probably not have a representative in the offices and plants of the contractor.

4.2.2

The Sanctions

In the case of a damage occurring in a foreign country, the employees of the subsidiary, or of the contractor, or of the supplier will be inclined to sue the parent company rather than the local company since the former is more likely to have deep pockets. The first issue to solve is whether foreign plaintiffs could sue the French parent company in French courts? Article 33 on Regulation n○ 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of

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judgements in civil and commercial matters (“Brussels I Bis Regulation”) on international litispendence prevents suit in France if “proceedings are pending before a court of a third State at the time when a court in (France) is seized of an action involving the same cause of action and between the same parties as the proceedings in the court of the third State . . .“. However, international litispendence would not apply in this case since proceedings would take place in a foreign jurisdiction and deal with a different cause of action (e.g. fault by the parent company consisting of not implementing the vigilance plan strongly enough v. fault which directly caused the damage) and the defendant would be another party than the French parent company (subsidiary and/or contractor and/or supplier). Therefore, French courts would probably entertain a claim filed by foreign victims for violation of the vigilance plan. The second issue relates to whether French law would be applicable in this case to an action against the parent company by the victims located in another country. The determination of the applicable law is dealt with in France by regulation n○ 864/2007 of 11 July 2017 on the law applicable to non-contractual obligations (Regulation “Rome II”). In case of an environmental damage, article 7 of the Regulation holds that the law of the country in which the damage occurred should apply but that plaintiffs can choose the law of the country in which the event giving rise to the damage occurred. In this case, the plaintiffs would argue the oversight failure by the parent company located in France. Therefore, French law could be applicable. As for other damages, such as poor implementation of the vigilance plan which led to violations of safety regulations or labour rights, article 4 of the Rome II regulation holds, in a very classic fashion, that the law of the country where the damage occurred should be applied (lex loci delicti). This clearly implies that foreign law, rather than French law, should be applicable. The Regulation includes a public order exception for mandatory laws (Art. 16). Preliminary parliamentary works makes it clear that the drafters considered the Act to be mandatory law. However, they did not include the provision in the Act itself. The Constitutional court held that the 2017 Act is of “general interest” but did not define the concept. Therefore, this does not mean the Act should be considered mandatory law under article 16th of the Rome II Regulation. From a purely legal perspective, it is clear that French law should not be applicable to a case filed in France for violation or poor implementation of the vigilance plan, except for environmental damages. However, NGOs will certainly apply media pressure and argue that the Act is a “mandatory law” since the law deals with human rights violations or the respect of basic labour rights. Therefore, it cannot be excluded that French courts would accept to entertain claims filed in France by foreign victims. The financial consequences could then be very serious for the parent company. In such cases, it could be forced to pay damages, in principle for loss of chance to avoid the damage, to the foreign victims which could be in the hundreds.

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Finally, the Commercial code holds that the Court can order the publication, distribution and posting of its decision, or an extract, with cost borne by the company. This possibility is clearly a way to “name and shame” the company in case of failure. This type of sanction might be very effective although in major cases, the press will usually provide widespread coverage.

5 Conclusions The phenomenon of the group is very well accepted by French courts. There has been a limited number of case law applying the Rozenblum test, and rarely for large groups. This seems to indicate strong acceptance of the “structured” group phenomenon. Actually, the “Rozenblum” concept of “interest of the group” approach might have evolved towards a concept of “normality of the group” at least for “structured groups”. This is a very positive development. The drawback of having a case law regime is that the level of protection is not sufficient. France should introduce a sell-out right in case of abuse of majority and its definition should be changed.56 This approach has been adopted in the chapter of the European Model Company Act (EMCA) on groups.57 Also, another weakness of the French system is that access to information is legally difficult. As to the regime on RPTs, the problem is access to information and whether the RPT is really attractive to the company or is rather a form of tunnelling. Transparency on the content of the RPT is weak. The 2014 reform forces the board of directors to justify the approval of the RPT, so this is a major improvement. However, in listed companies, the intervention of an independent expert is the best protection. Also, a weakness of the system is that if the RPT is not favourable, it cannot be nullified. Only damages can be granted and then only to the company. Therefore, only large shareholders will bother to file a suit in case they think there is an abuse. The 2017 amendments to the EU Shareholders rights directive, for listed companies, do not change substantially the situation. Therefore, minority shareholders’ protection in groups could still be significantly improved in France. However, the major issue is that the French legislator is taking a rigid view of groups with the 2017 duty of vigilance Act considers the group like a single entity and extends its definition beyond the traditional company law approach. This is potentially revolutionary and could create serious risks for parent companies.

56

P.-H. Conac, La loi du 24 juillet 1966 sur les sociétés commerciales et le juge : la cour de cassation prisonnière d’un fantôme ? (The July 24 1966 Act on commercial companies and the judge: the French Supreme Court prisoner of a ghost), Revue des sociétés n○ 2018-12, p. 691-700. 57 https://papers.ssrn.com/sol3/papers.cfm?abstract_id¼2929348.

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References Boursier M-E (2005) Le fait justificatif de groupe de sociétés dans l’abus de biens sociaux: entre efficacité et clandestinité. Analyse de vingt ans de jurisprudence criminelle. Revue des sociétés:273 Conac P-H, Urbain-Parléani I (2017) The 2017 Act on the duty of vigilance of parent and outsourcing companies. Revue Trimestrielle de Droit Financier (RTDF) (3):90

National Report on Italy Diego Corapi and Domenico Benincasa

Abstract The lack of a unitary notion of group marks out Italian law within the main legal regimes involving economic aspects: company, insolvency and competition law. This essay will enquire the current position and perspective developments of groups of companies’ regime within these areas. The consistent reference to scholarship and case law contribution in this framework shows that the efforts of the legislator are not per se sufficient in defining and regulating the prevailing economic issues of the group.

1 Introduction This report will first examine the evolution of Italian law from the definition of “control” of a subject over a company and its regulation merely for a correct organization of the company’s capital up to the first judicial and legislative interventions in specific areas on the management of groups of companies operating as single economic unity through legally separated parent companies and subsidiaries (Sect. 2). The subsequent rules on direction and coordination of subsidiaries by a parent company, enacted by the reform of company law of 2003, which presently constitute the fundamental approach of Italian law on regulation of groups, but without providing a definition of “group” or of “interest of the group”, will be examined in Sect. 3. The issues arising when companies belonging to a group are in a situation of insolvency or, more in general, in a period of crisis will be examined in Sect. 4.

D. Corapi (*) University of Rome-Sapienza, Faculty of Law, Rome, Italy e-mail: [email protected] D. Benincasa LUISS Guido Carli, Faculty of Law, Rome, Italy © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_4

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Finally, the definition of groups not of companies but more generally of enterprises and the regulation of the impact of their activity on competition in the markets will be examined in Sect. 5.

2 Italian Law of Groups Before the 2003 Reform of Company Law Italian law, like all other systems that have taken to the extreme the metaphoric notion of companies and other legal entities as subjects entitled to rights and obligations like any natural person, has accepted the theorem that also companies may become shareholders or members of another company or of another legal entity. The acceptance of this line of thought has allowed that, also in Italy, the activities of an enterprise may be conducted by a complex organization of a number of structures qualified as separate legal entities but directed and coordinated as a single economic unit. Also under Italian law companies are frequently organized and work as a “group”. The weapon to obtain this result is the “control” that a company (parent) may have over another company (subsidiary) by virtue of a participation in its capital or by virtue of specific contractual obligations which allow a dominant influence. The legal way to obtain such result was, also in Italy, the legitimation of the participation of a company as a shareholder of another company and the qualification of the situation of “control” on the participated company that thus may be obtained.1 The legality of a participation of a company as a shareholder of another company, provided that the object of the company is not substantially modified because of the measure and the object of such participation, was expressly confirmed by the Italian Civil Code enacted in 1942 (hereinafter c.c.) in its art. 2361.2 Art. 2359 c.c. (reformed by law n. 216/1974 and again by art. 1 of the legislative decree n. 127/1991 in implementation of the European directives n. 78/660 and n. 83/349) defines “control” as a situation in which a company detains a participation in the capital of another company in a measure conferring the majority of the voting rights exercisable in the shareholders’ ordinary meeting or at least a quantity of voting rights sufficient to exercise a leading influence in the shareholders’ ordinary meeting or, finally, by virtue of specific contractual obligations which allow a dominant influence on that company.

1 The first important acknowledgement by the Italian legislator of the use of the mechanism of the group was the creation of a State holding, I.R.I.—Istituto per la Ricostruzione Industriale, with the Royal decree of 13 November 1931 n. 1934. Its object was to restructure by economic enterprises and save the banks which were their man shareholders. Galgano (2013), p. 225. 2 After the reform of company law enacted in 2003 a second paragraph has been added to art. 2361 c.c. to allow the participation of companies in partnerships or other enterprises with unlimited liability partners.

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The provision of art. 2359 c.c., which defines not only legal but also de facto control, is functional to the regulation of certain aspects of the participation of one company in another company and was introduced also in implementation of some European directives in the following arts. 2359-bis, 2359-ter, 2359-quarter, 2359quinquies, 2360 c.c., which substantially include: the prohibition of “watering” the capital via cross participation between two companies and the obligation (mandatory pursuant law n. 216/1974) to draw up and publish consolidated accounts. Legislative decree n. 58 of 1998 (testo unico per l’intermediazione finanziaria) has also established for shareholders a duty to observe transparency and publicity of relevant participations held in a company (a participation in a listed company higher than 3% of its capital (i.e. of the aggregate amount of the voting rights) must be disclosed). These rules however consider a group of companies only for the legal aspects of its static economic organization. No consideration is given to the dynamics of the direction and coordination of the activity of the companies forming the group. These rules do not touch any of the issues which arise when the control over other companies is for the parent company instrumental to direct and coordinate their activity in view of a unitary interest (the so called “interest of the group”). The relevance of such situation and the need to regulate its consequences has become in course of time more and more evident. The legislator acknowledged it, especially after that, also in implementation of European law, legislation on financial markets and other provisions of law were enacted to deal with issues determined by specific situations or contexts. Law 7 June 1974, n. 216, made consolidated accounts mandatory for listed or public companies. This provision was extended to all kind of parent companies by the legislative decree n. 127/1991, introduced in implementation of the 7th EU directive on harmonization of company law. The decree also imposed to subsidiaries the obligation to communicate to their parent all information necessary for the consolidation of accounts. Law n. 95 of 1979 on the extraordinary administration of large enterprises in crisis, amended by legislative decree n. 207/1999, provided that when there is a unitary direction of subsidiaries the directors of the parent company who have exercised such direction are, jointly and severally with the directors of the subsidiaries in extraordinary administration, responsible for damages caused to such subsidiaries. Art. 23 and arts. 59–64 of legislative decree n. 385/1993, which governs banks, and arts. 11 and 12 of legislative decree n. 58/1998, which govern financial markets, expressly allowed the parent company of a group to issue binding directives to its subsidiaries in order to implement instructions of the supervisory authorities (respectively the Bank of Italy and the Stock Exchange Commission—Consob) aiming at ensuring the stability and transparency of their activity. Also in the legislation on publishing companies (art. 3, law n. 67/1987) and on television networks (art. 37, law n. 223/1990) made reference to control and direction of subsidiaries. Art. 114, 2○ paragraph of legislative decree n. 58/1998 established the duty of the subsidiaries to provide their parent with all data necessary for a correct information of the market.

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Finally an important reference to groups not of companies, but more generally of enterprises, was made by the law n. 287/1990 on protection of competition and the market (antitrust law). Such law considers the group of enterprises as a unitary entity for competition purposes (“unità concorrenziale”). The above legislative developments (about which see Sects. 4 and 5 infra) did not modify the trend of the judicial decisions and doctrinal studies which were directed to the exam and solution of the issue of liability arising from the activity of a group in terms of traditional private law, i.e. on the basis of the traditional criteria with which liability arising from relationships between separate entities is defined and assessed. The protection of minority shareholders of a subsidiary against damages caused to their company as a consequence of the implementation of directives of its parent was considered to be ensured by a right of action of the subsidiary against its directors that was the same right of action provided by law against the directors for violation of their duty to manage a company in a legal and correct way (art. 2393 – 2394 – 2394 bis art. 2395 c.c., where also a derivative suit of shareholders representing at least 20% of company’s capital is provided). Only in some extreme cases it was exceptionally acknowledged a right to invoke the liability also of the parent company and of its directors. In some cases it was also affirmed that a parent could be responsible in tort to the creditors of its subsidiaries. In any event, there was no clear and undisputed regulation of the issue of the power of a parent to direct and coordinate its subsidiaries, its legitimacy and limits and the responsibility following its exercise. In a word, there was no legal discipline of the group as legal organization on its own interest and of the set of rights, obligations and responsibilities of all subjects taking part in its activity (the German solution). On the other hand, a less structured and factual definition of the group activity, like the one developed in France following the dictum of the Rozenblum case,3 was still uncertain and accepted with difficulty by the courts.

3 The Law of Groups After the 2003 Reform of Company Law The consideration of groups of companies and the regulation of their activity in Italian law has changed dramatically with the reform of company law enacted with law n. 366 of 30 October 2001 and legislative decree n. 6 of 17 January 2003, which implemented it. In synthesis the reform introduced a regulation that ensured the legitimacy of group activities based on the same three conditions affirmed in the above mentioned French leading case: (1) the existence of a firmly established group; (2) an action taken in the interest of the group (positive actions, not simply static controlling 3

Cour de Cassation, Ch. Crim., 4 Février 1985, Rozenblum et Allouche, D. 1985, p. 478.

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shareholding) and in conformity with the group’s coherent policy; and (3) preservation of the financial equilibrium within the group, i.e. compensation of the subsidiary suffering the negative consequences of the action in question. In transferring such principles in our jurisdiction, art. 10 of law n. 366/2001, in the context of the reform of company law, established a more detailed set of lines of action for the discipline of groups to be implemented by the following governmental legislative decree n. 6/2003. The lines of action were: (a) to provide transparency of the group and to ensure that the direction and coordination of the subsidiaries adequately reconciled the interest of the group, of the subsidiaries and of the minority shareholders of those latter; (b) to provide that decision based on the evaluation of the interest of the group be motivated; (c) to provide publicity of the participation of a company in a group; (d) to determine the cases in which an adequate protection is granted to the shareholders when entering or leaving a subsidiary and possibly a right of withdrawal when a take-over bid is not compulsory. These lines of action were subsequently implemented by the legislative decree n. 6/2013 which detailed the provisions of the reform of company law. The technique employed was to modify the part of the Civil Code which regulates companies (arts. 2325-2554 c.c.: provisions concerning società per azioni, società a responsabilità limitata, società cooperative), amending existing articles or introducing new ones (which, in order to maintain the original numbering of the Code, are indicated as “bis”—“ter” and so on). The rules on the activity of groups of companies were introduced as a new Capo Nono (Ninth Heading) entitled Direzione e coordinamento di società (Direction and coordination of companies) which includes seven articles, from art. 2497 up to art. 2497-sexies. It is manifest that the discipline introduced with the reform does not intend to give a definition of the group of companies as a subject on its own from a legal point of view. It considers the group a factual phenomenon and only regulates some relevant aspects of its functioning. The idea of the “group” as a new different entity as regards the companies which participate in it is completely ignored. The term “group” is not defining a legal entity but only a technique for the organization of a single economic unity.4 The choice of our law is for an “atomistic” not for a “molecular” notion of a groups and may be qualified as an Enabling law. The situation between the parent company and the subsidiaries is, therefore, qualified not a relationship right—obligation, but rather as a relationship of power—subjection (Angelici 2013).5 In fact, the provisions of the Civil Code scrupulously avoid to employ the word “group”, even if such word was used in the lines of action stated in art. 10 of law n. 366/2001, and concentrate on the regulation of the consequences of a direction

4

See Pavone La Rosa (2003), p. 766; Montalenti (2011), p. 234; Tombari (2015), p. 77. With these remarks, see also Scognamiglio (2009), p. 757. Opinions are divided on whether the parent company’s power to direct and coordinate its subsidiaries is legal or merely factual.

5

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and coordination by the parent company of the legally autonomous activities pursued by its subsidiaries. The discipline introduced with the reform does not have the purpose to be an exhaustive regulation of groups. The expression “direction and coordination”, which, as said before, was already employed but not defined by the law on banks, is also here not defined and appears to have been considered as a factual situation to be ascertained on a case by case basis. Art. 2497-sexies c.c. establishes only a rebuttable presumption that an activity of direction and coordination of companies is exercised by the company or entity which is obliged to the consolidation of their accounts or which, in any case, controls its subsidiaries according to art. 2359 c.c. The circumstance that such presumption is rebuttable confirms that control over companies and unitary direction and coordination of groups are two distinct situations. In fact art. 2497-septies c.c. immediately defines a case in which an activity of direction and coordination of companies is exercised by a subject which does not have an obligation to consolidate its accounts nor is in control of the capital of other companies on the basis of a contract with the same companies or of specific provisions of their by-laws. Some scholars have observed that the situation created in such cases is similar to the situation created by Beherrschungsverträge in German law. The opposite situation is more difficult to be ascertained. However, although in fact it appears rather hypothetical, it cannot be excluded that in some cases a company or an entity, although having control over other companies, does neither direct nor coordinate their activities. The rules concerning direction and coordination of companies are applicable to any type of parent company or entity. Natural persons were not expressly included by the legislator for reasons of a political character, although judicial precedents previous to the 2003 reform of company law had affirmed a liability of natural persons for the activity of companies of which they were the main (sometimes sole) shareholder. Such precedents may continue to be relied upon in cases in which the controlled company is a mere curtain or veil and in fact the activity of the person or company who owns its shares is not distinguishable from the activity of the company under control. The provisions of the law on groups concern a different situation. The activity of direction and coordination of companies that such provisions consider, reflects an organized and coherent situation of a group of not only legally but also technically and economically separate structures which are all coherently guided in the pursuance of a unitary objective. The discipline in force in Italy since 2003 establishes on which conditions the activity of a group of companies as a single economic unity is legal and what are the consequences when the conditions are not met. To this purpose art. 2497 c.c. establishes the following rule: “the companies or entities which, in exercising the direction and coordination of companies, acting in

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their own entrepreneurial interest or in the interest of other, violate the principles of correct corporate management are directly responsible vis-à-vis the shareholders of the directed and coordinated companies, for the prejudice caused to the profitability and the value of their shares, as well as vis-à-vis the creditors of the company for the damage caused to the integrity of the corporate assets”. It may be immediately remarked that art. 2497 c.c. not only avoids—as already said—the use of the word “group”, but it also does not give a positive definition of when direction and coordination of subsidiaries are legal. Art. 2497 only determines what happens when the contrary situation arises, establishing that the parent company is responsible when such direction and coordination are not meeting the conditions fixed by law. The conditions fixed for the legitimacy of the activity of a group are: (1) direction and control over subsidiaries must observe principles of correct management; (2) no damage must be caused neither to the profitability and value of the shareholders’ investment in subsidiaries nor to the integrity of their assets as guarantee for their creditors. Profitability and (market) value of the shares of the subsidiary are evaluated in light of the influence that the global result of the group activities has on the subsidiary. Therefore, the provision of the law affirms that there is no liability when in light of the global result of the direction and coordination no damage exists or when the damage is eliminated also as a consequence of specific transactions carried out to this purpose. Such rules make evident that, although no express reference to “groups” is made, the interest of the group is the criteria to evaluate the result of the direction and coordination and the purpose of compensating specific damages caused to a subsidiary. The law acknowledges and imposes that it is the interest of the group that the parent company be careful not to damage the profitability and value of the shares nor the integrity of the assets of the subsidiaries. In fact, the law provides that, should a subsidiary suffer damages not compensated by benefits granted by the global result of the group, specific benefits to eliminate the damage must be granted by the parent. It may be assumed, however, that also in granting such specific benefits the action of the parent has to be conducted so that the cost to eliminate the damage inflicted to the single subsidiary be inferior to the profit for the group. On the other hand, the provisions under exam also clearly establish that the parent may evaluate at its discretion the interest of the group as a guidance for the direction and coordination of the subsidiaries. For this reason, some scholars believe that in fact what is defined “interest of the group” coincides with a correct interest of the parent. The discretionary power of the holding in evaluating the interest of the group that motivates its direction and coordination of the subsidiaries meets only two important limits fixed by the law. First, a formal limit: as already seen, in the direction and coordination of subsidiaries the parent company must observe the principles of correct corporate

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management. It is discussed what those principles imply with reference to groups. It appears that this rather vague expression has to be interpreted in the sense that direction and coordination of subsidiaries must also consider that they have to be in conformity with the legal rules that govern the activity not only of the parent but also of the subsidiaries. This remark is confirmed by the circumstance that the 2003 reform of company law introduced also a new art. 2403-bis c.c. on the powers of the auditors, which in its second paragraph provides that auditors of a company may also exchange information with auditors of the subsidiaries with respect to their management and supervising systems and the general course of their activity. A second substantial limit is imposed by art. 2497-ter c.c. which provides: (1) that the decisions of the subsidiaries, when influenced by the direction and coordination of their parent, shall be analytically motivated and shall punctually indicate the reasons and the interests which have influenced their decisions and (2) that the directors’ annual report shall give adequate consideration to such decisions. The directors of the subsidiary not observing this provision would become responsible vis-à-vis shareholders and creditors of their company in the same way as the parent company is when it violates the rules concerning a correct activity of direction and coordination. It appears, therefore, that the direction and coordination of the parent, although exercised in full discretion, must adequately take into account whether and how the interest of the group is compatible with the specific interest of the subsidiaries to which its directives are addressed. The directors of the subsidiaries, on their turn, have the duty to consider if and how the directives of the parent are compatible with the interest of the subsidiary that they manage. As seen above, the rule applicable in case of damages caused by the violation of the limits in the direction and coordination of subsidiaries is original: not the subsidiary, but directly the minority or outside shareholders and creditors (and, according to the last para. of art. 2497 c.c., in case of bankruptcy the trustee or administrator) have a right of action against the parent company for their respective damages. Judicial decisions and scholars have reached different solutions on the nature of such responsibility and the ensuing action. A first issue is whether the responsibility of the parent company is for a debt incurred because of the breach of a duty (imposed by law) or for damages caused by a factual behavior (contrary to law). Art. 2497 c.c. formulation makes clear that the latter solution, which confirms the separate entity approach and rejects the single enterprise approach, has been chosen by the Italian legislator. A second (consequent) issue concerns the kind of remedy that the law provides for damages caused by the parent company’s illegal behavior. Courts are inclined to define it an action in tort, some scholars prefer to distinguish the two situations in which the action may be invoked and consider the action of the shareholders a contractual one and the action of creditors an action in tort. The different solutions entail of course, different results in the determination of which party bears the burden of proof (shareholders and creditors as claimants in an

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action in tort, parent company as a defendant in a contractual action). The statute of limitation, on the contrary, will be the same in both cases: 5 years from the date in which the damaging event has been known. Another important rule which acknowledges the special character of the relationship between a parent company and its subsidiaries is established by art. 2497quinquies c.c., which establishes that loans made by a parent to its subsidiaries are considered deferred loans. This provision is formulated by reference to the rule established by art. 2467 c.c. in case of loans made to a private company (società a responsabilità limitata) by its members. Finally two other articles of this section of the Civil Code contain provisions which consider the relevance that among the general public of investors and other interested people has the relationship among companies that is qualified as “group of companies”. Art. 2497-bis c.c. establishes that a subsidiary must indicate in all its deeds and correspondence the parent company whose direction and coordination it is subject and must be registered as a subsidiary of a group in a special section of the Companies Registry. Art. 2497-quater c.c. establishes a right of withdrawal in favour of a shareholder of a subsidiary in three cases: (a) when the parent has resolved upon a transformation that implies a change of its corporate purpose, or a modification of its object which allows activities altering in a relevant and direct way the economic and financial conditions of the subsidiary; (b) when the parent has been condemned for damages in favour of the shareholder of the subsidiary pursuant to the rule of art. 2497 c.c. on responsibility for non-correct direction and coordination; (c) when the activity of direction and coordination is started or ended, provided that the subsidiary is not a listed company, that a takeover bid is not promoted, and that the situation does not cause an alteration of the risk of the investment. Finally, it must be noticed that the above Italian regulation, as it concerns the rights, obligations and responsibilities arising from the direction and coordination of the activity of a group, is applicable not only to an Italian parent company as regards its foreign subsidiaries but also to a foreign parent company as regards its Italian subsidiaries. This conclusion is confirmed by the rule of art. 62 of law n. 218/1995 on international private law, which establishes that responsibility in tort is regulated by the law of the State in which the damaging event has happened and by the rule of art. 25 of the same law which provides that companies and other entities are subject to the law of the State in which they are incorporated or in which their administration is seated. This latter principle on the lex societatis is confirmed for what concern groups of companies by the Whereas n. 15 of Reg. n. 2157/2001 on the E.C. Statute which expressly provides that under the rules and general principles of private international law, where an enterprise controls another governed by a different legal system, its ensuing rights and obligations as regards the protection of minority shareholders and third parties are governed by the law governing the controlled enterprise, without prejudice to the obligations imposed on the controlled enterprise by its own law, for example the requirement to prepare consolidated accounts.

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A minority opinion was expressed throwing some doubts about the application of the lex societatis with reference to the loans of a parent company to a subsidiary, which—it is argued—should remain subject to the private international rules on contracts or on insolvency proceedings (if such is the case). In conclusion, as we have exposed above, Italian law on groups of companies not only avoids the definition and the use of the term “groups”, but also goes very clearly against the conception of an “interest of the group” as opposed to the interest of the single companies belonging to it. This approach emerges from the circumstance that direction and coordination of the group activities by a parent company is conceived and regulated only as a way to enable that the operation of a single economic units be pursued through legally separated entities.

4 Groups and Insolvency Law As mentioned above, apart from provisions concerning specific sectorial areas, Italian law did not contain general dispositions on insolvency of groups of companies since the recent approval of delegated law n. 155 of 19 October 2017, issuing general principles to be complied by the launched reform of insolvency law, and of the law decree n. 14/2019, reforming the bankruptcy system. An indirect consideration of the issues posed by groups, however, emerged from some provisions of the 2005/2006 Italian Bankruptcy Law (IBL) reform and of the 2003 company law reform. With the 2005/2006 reform, the first paragraph of art. 147 of IBL, which provided that the bankruptcy of a partnership would be extended to unlimited liability partners was amended to include: (a) any type of partnership or also of company with unlimited liability partners (i.e società in nome collettivo, società in accomandita semplice, società in accomandita per azioni) and (b) any kind of unlimited liability partners “even if not physical persons (“pur se non persone fisiche illimitatamente responsabili”). The fifth paragraph of art. 147 also clarified that if, after the adjudication in bankruptcy of a partnership or company, other unlimited liability partners are discovered, the Court adjudicates in bankruptcy also them. The same solution is adopted where after the adjudication in bankruptcy of an individual entrepreneur it is discovered that the enterprise is referable to a partnership of which the individual entrepreneur in bankruptcy is a partner with unlimited liability. The factual situations envisaged by these norms, especially the second one providing the extension of bankruptcy from an individual enterprise to a hidden partnership (società occulta), which had been the object of endless doctrinal discussions and of controversial judicial applications, were defined in a way that touches also issues posed by groups, because these norms must be applied also in light of the circumstance that pursuant the company reform of 2003 it has been definitely

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admitted that also companies by shares and other kind of business entities may become partners with unlimited liabilities in a partnership. In fact, art. 2361 c.c. in its second paragraph, as amended pursuant the 2003 company law reform, provides that the acquisition of a participation in other partnerships or companies involving an unlimited liability of the partners for their obligations must be approved by the shareholders meeting and that the directors shall disclose this type of participation in the integrative note to the company’s financial statements. Moreover art. 111-duodecies of the rules for the implementation of the civil code (Disposizioni per l’attuazione del codice civile) (also as amended pursuant the 2003 reforms) provides that when all the unlimited liability partners, as per art. 2361 c.c., are companies limited by shares, the partnership of which they are members must draw up financial statements according to the rules provided for companies by shares and must present consolidate accounts in the form mandatory for these latter. Some remarks seem appropriate on this matter. In the first place it has to be noticed that since art. 147, para. 1 IBL sets out expressly which are the types of partnerships or companies whose bankruptcy may be extended to their unlimited liability partners, a negative answer must be given to the question long time debated whether the sole shareholder of a company (defined tyrant or sovereign of the company) is subject to bankruptcy “in extension”. Another theory brilliantly proposed that the situation of a company completely governed by one person, which might also not formally appear as a partner, could be construed as if a “de facto supercompany” existing between them and therefore the insolvency of the company could be qualified as insolvency of such “de facto supercompany” and lead to the bankruptcy of all the entities and persons involved. This theory was envisaged to find a way to overcome the hostility to the “lift of corporate veil” doctrine, but found scarce or no acceptance by the courts. In fact the “lift the corporate veil” doctrine is accepted in Italy only in cases of manifest fraud. A second remark is that companies which participate in a partnership or other kind of entity which provides that their partners assume unlimited liability, not only become unlimited liable but they also become entitled to direct the partnership or other entity in which they participate. This situation may happen when the unlimited liability partners are all companies by shares and, according to art. 111-duodecies of the provisions for implementation of the civil code, the partner which has the direction of the partnership must draw up accounts consolidated with the accounts of the partnership which it directs. Finally it is important to note that in all cases in which one or more unlimited liability partners have been adjudicated in bankruptcy in extension, the same court in which the bankruptcy proceedings first started is confirmed as being competent also for the bankruptcy in extension of partners and only one receiver is appointed for all the proceedings. However, such proceedings remain distinct and the estates of each of the insolvent subjects are separately regulated. In conclusion, according to the above provisions of law the assumption by a company of a participation of control over another company, determines a situation of direction and coordination of the latter only when the assumption of the

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participation of control entails also the assumption of unlimited liability for the debts of the controlled entity. In such a case the bankruptcy of the controlled entity can be extended to the controlling one. This situation is not comparable to the situation of a “group” of companies, which is based on the opposite principle that all the companies participating to the group maintain their distinct legal personality and that an unlimited liability of the holding for the debts of its subsidiaries and its consequent possible bankruptcy is only exceptionally affirmed when the basic principle is misused or worse willingly abused.

4.1

Insolvency Law Reform and the New General Provisions on Groups of Companies

The issues posed by insolvent companies within a group relationship received consideration with the development of proceedings aimed not to the liquidation but to the rescue of the activities and assets of insolvent companies. As aforesaid, the notion of group was for the first time considered as a basis for the regulation of the crisis of large enterprises is the law n. 95 of 1979 (amended by the legislative decree n. 270/1999) entitled “amministrazione straordinaria delle grandi imprese in crisi”. This law introduces a new kind of administrative (non-judicial) proceedings aimed to the rescue of the going concern of an enterprise. The amministrazione straordinaria relates only to companies with over 500 employees and having debts for an amount not lower than 2/3 of the assets and turnover of the last fiscal year. The aim of this proceedings is to preserve the going concern of large enterprise in crisis, through the continuation or conversion of its business into a more suitable form of activity. The proceedings are partly judicial partly administrative. The insolvency of the company can be declared by the court of the place where the company has its legal seat or on request by the company itself, its creditors or the public prosecutor. The court fixes the hearing of the company which shall also be attended by a delegate of the Ministry of Industry. The Court appoints a delegated judge and one or three commissioners. On the basis of a report of the judicial commissioner on the insolvency of the company, the Ministry of Industry issues an opinion in the eligibility of the company to the extraordinary administrative proceedings. If the Court upholds the Ministry’s opinion, the extraordinary administration is opened and the Court decides how to regulate the continuation of the company’s activity. An extraordinary commissioner and a supervisory committee are appointed to this purpose. The immediate effect of the amministrazione straordinaria is that creditors are barred form starting or continuing enforcement actions, while the extraordinary commissioner may start claw-back actions and terminate existing contracts.

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Liabilities and assets are ascertained by the extraordinary commissioner and a distribution plan is periodically implemented until the rescue of the enterprise or the conversion of the proceedings into judicial liquidation is reached. The situation envisaged by the amministrazione straordinaria of large enterprises typically involves groups of companies, as obviously the organization of a group is the mechanism normally used by large enterprises to structure themselves. The law on amministrazione straordinaria, therefore, could not avoid to regulate the situation of companies belonging to a group in which one or more of them are insolvent. Due to the nexus of their relationships, the insolvency of one of them has, in fact, inevitable reflections on the situation of the others. For this reason, a section of the law on amministrazione straordinaria provides that when a parent company and/or some of its subsidiaries are in a situation of crisis, the judge who has jurisdiction for all the companies of the group is the court of the place where the parent has its seat and the proceedings is extended to all its subsidiaries with the appointment of only one commissioner for all the companies involved. This concentration in one proceedings, however, does not have the effect of pooling the assets and liabilities of the different companies involved. Also with regard to these issues, the Italian regulation remains based on the fundamental principle that the single economic units of the group are legally separated entities and that the law only provides a coordination of the proceedings in which they are separately involved. The law only introduces some effects of procedural character, aimed to prevent abuse of control by the parent company or the prevalence of its interest in circumstances of potential conflict among the creditors (e.g. the parent is barred from voting in decisions of the creditors on different steps of the proceedings). The regulation of group insolvency in amministrazione straordinaria proceedings for the large enterprises was extended to groups of enterprises in specific sectors of economic and financial activity (as mentioned before, banks and financial institutions). On the other hand, the reform of IBL in 2006 and the decrees that subsequently modified it did not touch group insolvency regulation of “concordato preventivo” of “accordi di ristruttuazione” (debt restructuring agreements) and of “piani attestati di risanamento” (certified recovery plans). These proceedings permit the reorganization of business and satisfaction of creditors through various means: (1) by any form, including transfer of assets, assumption of debt, allocation of shares or bonds to creditors or to companies held by creditors; (2) by transfer of company’s assets to a third-party assigner (thus permitting the restructuring by way of “good” and “bad” company mechanism) and (3) by division of creditors into different classes. This new course of law has not changed the basic principle of maintaining the companies of a group as separate legal entities, but has stressed the coordination of the proceedings in which they are involved and helped the development of proposals to obtain the rescue of the “group”, that is to say of the unitary enterprise formed by the companies.

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In some cases, courts decided that separate proceedings filed for different companies of the same group had to be brought in front of the same court and one single commissioner was appointed. In order to locate territorial competence of the proceedings the idea was favored that the seat of the parent company is considered to be the “real seat” also of its subsidiaries. In other cases the courts considered that the votes cast by creditors in different proceedings about the rescue plans of companies of the same group, had to be calculated jointly as if the plans were common, so that their functional connection for the restructuring of the unitary enterprises could be opportunely evaluated. For instance, in the so called “Risanamento” case6 the court approved a global restructuring plan providing inter alia the undertaking of some subsidiaries of a group to reschedule their credits in favor of the other subsidiaries, and the sale of immovable belonging to sister subsidiaries not in financial distress (and therefore not directly participating in the proceedings). In the so called “Ventaglio” case7 it was decided that the parent company of the group would assume its subsidiaries’ debts upon confirmation of their plans. These examples show how the rescue culture of insolvency law is applied in practice in the reorganization proceedings. In the absence of a legislative framework, however, these case by case judicial solutions may not be satisfactory and certainly not able to provide a uniform and consistent protection to minority shareholders and third creditors of the companies forming a group. With the aim of resolving this issue, some provisions have been introduced in the recent legislation reforming Italian insolvency system (legge delega n. 155 of 19 October 2017). This law entrusted the government to adopt within 12 months legislative decrees providing a complete reform of the insolvency and pre-insolvency procedures together with the related provisions on security rights and privileges, as actually happened with the recently issued law decree n. 14/2015.8 Law n. 155/2017 embraced the rescue culture of the insolvency system, going so far as to avoid the use of the word fallimento (bankruptcy) because such word recalls the idea contrary to the rescue culture that the aim of the law is the total dissolution of the insolvent enterprise. One of the 16 articles of law n. 155/2017 was devoted to insolvency procedures involving companies belonging to the same group. The delegated law provided the following criteria and principles to be adopted by the government when issuing the implementing decrees: (a) definition of group of companies will be designed on the basis of the notion of direction and control (“direzione e coordinamento”) pursuant article 2497 et seqq. of c.c.; (b) companies of a group will have to file a group consolidated balance sheet, in order to make public their relation for the possible case of future insolvency/crisis; (c) the body in charge for the insolvency/preinsolvency procedure will be entitled to request to CONSOB (Commissione

6

Trib. Milano 10 November 2009, in Dir.Fall. 2010, II, p. 205 ff. Trib. Milano 16 July 2010, in www.ilcaso.it. 8 Published in G.U.R.I n. 38 of February 14th 2019. 7

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Nazionale per le Società e la Borsa) the Authority for supervision of listed companies or to any other authority/body in charge any useful information for ascertaining the existence of group links, or to request to fiduciary shareholders the disclosure of the real owners of the rights over their shares/quotas; (d) companies insolvent or facing crisis will be entitled to file a single application for the debt restructuring agreements, the composition with creditors or judicial liquidation procedures (although the respective assets/liabilities will be treated separately); (e) reciprocal streams of information and cooperation will be compulsory for the authorities in charge for the various procedures, shall the companies be subject to different procedures, in Italy or abroad; (f) credits of companies belonging to the same group will be subordinated, save for specific provisions aiming at facilitating the disbursement of loans functional to, or in performance of, a composition with creditors or a debt restructuring procedures. For the best management of a single concordato preventivo procedure for the whole group of companies, the following provisions will apply: (a) only one delegated judge and one judicial commissioner will be appointed; (b) creditors of each company will vote for the approval of a proposal for a concordato, but at the same time separate; (c) the effects of a possible annulment or termination of the proposal for concordato preventivo shall be determined in advance; (d) companies of the group having credits vis-à-vis other companies which are subject to judicial liquidation/pre-insolvency procedures will not be entitled to vote; (e) criteria shall be defined in advance for the filing of the single plan for restructuring of the group, possibly comprising criteria for an infra-group reorganization aiming at the business continuity. Such provisions are generally to be applied also to a judicial liquidation, in the course of which the receiver shall be vested also with the power to start claw-back actions against any transaction prior to the insolvency and finalized to transfer assets of a company to another company of the group. The aim of the law is clearly to establish a well-organized set of rules to comply with the various interests of the parties involved, on one side for the companies of the group and, on the other, minority shareholders and creditors of the subsidiaries. Moreover, a joint proceedings allows a wider disclosure of any kind of acts with detrimental effects for the companies or the stakeholders. The government committee charged to draft the decree implementing the criteria fixed by the law n. 155/2017, as aforementioned, accomplished his task with law decree n. 14/2019, whose provisions—with few exceptions—will come into force after the expiration of 18 months after its publication. The provisions of the new “Code of Enterprise Crisis and Insolvency” related to groups of companies (secc. 282-292) follow the ratio and guidances of the delegated law, thus reproducing in the above referred boundaries the procedural consolidation mechanism, both in reorganization and in liquidation proceedings. In particular, the new law encompasses detailed criteria – in case of composition with creditors (concordato preventivo)—for the single coordinated plan of reorganization, that may entail infra-group transfers of assets, provided that such operations are functional to the goal of rescuing firms.

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Such operation may be challenged only through the opposition of classes or specific percentage of creditors having voting rights, and may be rebutted if such plan meets anyway the best creditors’ test. The shareholders’ opposition, on the basis of a potential prejudice and harm caused by the above operation to one or more group companies may be rejected where a compensatory advantage can be envisaged. Moreover, in case of liquidation proceedings, the law awards the trustee of new powers, as (1) filing for the winding up of other group companies or starting a judicial action to ascertain liabilities of their management, and (2) availing a new form of claw back petition, specifically strengthened for infra group operation preceding their winding up. The reform of insolvency law, providing mechanisms designated to facilitate the coordinated restructuring of group of companies, shows a renewed attention to the economic phenomenon of enterprise group. Nevertheless, from a formal point of view, it may be concluded that the new Insolvency Code has not embraced a different conception of the group insolvency. The atomistic principle of separate personality of each company of a group remains applicable and the provisions for the insolvency of the group as a unitary enterprise maintain the consideration of the group as a factual situation in the framework of a diversity and independence of the companies involved. Finally, this report, being limited to Italian law, does not deal with insolvency law of groups formed by an Italian parent and subsidiaries located in other States members of the European Union, which is the object of European Reg. n. 848/ 2016 (reforming European Reg. n. 1346/2000). With these regards, it is worth to be pointed out that the new insolvency law expressly provides, as a generalized criteria of international jurisdiction ascertainment, also with reference to groups of companies, a notion of “center of main interests” (COMI), borrowed from the European Insolvency Regulation, thus enhancing the relevance of the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties.

5 Groups and Competition Law Competition law concerns the impact on the market of an organized economic activity: the action of an “enterprise”, i.e. of “an entity founded on a joint organization of personal, material and incorporeal elements aimed at pursuing an economic result”. In the Italian system, like the systems of all other countries, competition law, differently from the other areas of law, regulates such entity only from such global point of view. The internal legal structure of the enterprise is not relevant per se but only for its repercussion on the market. What matters is whether the activity of an enterprise is in compliance with the rules for the protection of the correct and fair competition.

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Therefore, normally the circumstance that an enterprise is structured as a single company or as a group of companies is irrelevant with respect to the consequences of its action on the market. For instance, merger and acquisition (M&A) operations by an enterprise are subject to the conditions and limitations of antitrust law only if they have an influence on the competition with other enterprises in the market. So called anti-trust rules governing the correct way of the activity of enterprises in order to avoid abusive distortion of the competition in the market have been enacted also in Italy in connection to and strictly linked with the anti-trust rules provided by the European Treaties and subsequent European regulations and by the European Court of Justice decisions. In particular, the basic provisions of the Treaty on the Functioning of European Union (“TFUE”, secc. 101 and 102), aimed at ruling and preventing (with specific exceptions) agreements between two or more independent market operators which restrict competition,9 or at prohibiting enterprises that abuse of a dominant position (for example charging unfair prices), together with other pillar sources of competition law (as EC Reg. 1/2003 on concentration and merger control), find corresponding provisions in the Italian legal system (where more than 30 years after the EC treaty a law 10 October 1998, n. 287 Tutela della concorrenza e del mercato has been enacted).10 The two different sources of competition law (European and national) are both applicable in Italy: the European provisions with reference to enterprises’ activities relevant at European level, the Italian provisions with reference to enterprises’ activities relevant only within the Italian market. The rules of two systems are almost identical and, in any event, the Italian ones must be interpreted and implemented in a way consistent with the interpretation and implementation of the European ones in all member States of the EU. There are, however, some important differences between the two systems. First, the aim of European competition law is, like for all European law, to reduce cross-border barriers within the European countries, while Italian law is referring to a single national and already integrated market. Second, a legal definition of enterprise (or firm) is lacking at European level, while the Italian system provides it: art. 2082 c.c. defines the entrepreneur (“imprenditore”) as a subject conducting an economic activity in a professional and organized way in order to produce or exchange goods or services. This definition provides a clearer but less flexible basis for the application of the rules on competition (Mangini-Olivieri 2012).11 9 The said provisions cover both horizontal agreements (between actual or potential competitors operating at the same level of the supply chain) and vertical agreements (between enterprises operating at different levels, i.e. agreement between a manufacturer and its distributor) Mangini and Olivieri (2012). 10 De Sanctis (2013), p. 211. 11 On the lack of enterprise concept in European competition law, see ex multis Ghezzi and Maggiolino (2014), p. 1060; Corapi and De Donno (2006), for a survey of current position and definition of “enterprise” in European legislation and ECJ decisions.

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The consequence of the consideration also of groups of companies as a unitary enterprise is that relations between different companies being legally independent parties of the same “enterprise” are nor relevant for the implementation of the competition law provisions, because their effects remain internal to the “enterprise” in which they participate. This conclusion is reached on the basis of a definition of group of companies not marking reference to the formal presence of direction and coordination of the parent but rather to the factual situation of lack of independence of the single subsidiaries in their activity on the market. The notion of “enterprise” as unitary subject and the consideration of the activities of the companies, single units of a group, as part of the activities of the “enterprise”, leads to the consequence that the responsibility in case of infringement of the competition law rules by one or more of such units is imputed to them and to the parent company not on the basis of strictly legal criteria but on the basis of factual criteria. The penalties, therefore, may and in fact have been inflicted by the Authority for the protection of Competition and Market (AGCM), not only to the subsidiary to which the action is legally referred to, but also to the parent company and to other subsidiaries indirectly taking part to such action.12

References Angelici C (2013) Noterelle (quasi) metodologiche in materia di gruppi di società. Riv.dir.comm II:377 Corapi D, De Donno B (2006) L’impresa. In: Bessone M (ed) Trattato di diritto privato, vol. XXVI, tomo II. Giappichelli, Torino, p 1214 De Sanctis L (2013) L’imputabilità della responsabilità delle violazioni antitrust e i gruppi di società. In: Pace LF (ed) Dizionario sistematico della concorrenza. Jovene, Napoli, p 211 Galgano F (2013) Le partecipazioni azionarie e i gruppi di società. Diritto commerciale II, Bologna Ghezzi F, Maggiolino M (2014) L’imputazione delle sanzioni antitrust nei gruppi di imprese, tra responsabilità personale e finalità dissuasive. Riv.soc:2 Leupold B (2013) Effective enforcement of EU Competition law gone too far? Recent case law on the presumption of parental liability. Eur Compet Law Rev 34:579 Mangini V, Olivieri G (2012) Diritto antitrust. G Giappichelli Editore, Torino

12

See AGCM 13 March 2003, Variazioni prezzo di alcune marche di tabacchi, in Boll. N. 11/2003, where Philip Morris Companies holding has not been sanctioned. Later, in Enel Trade/Clienti idonei, 27 November 2003, in Boll. n. 48/2003, AGCM assumed a different position, and after underlying the 100% ownership of Enel holding in Enel Energia, applied also to the former the pecuniary fine. Italian law seems to be on the same path of EU case law which was from its first decisions reluctant in recognize liability only of the company that materially acted in an anticompetition way. See ex multis E.C.C.J. 23 April 1991, Hofner v. Elser, case C-41/90. Within these terms, also the Opinion of Advocate General Kokott of 23 April 2009, Akzo Nobel NV and Others v Commission of the European Communities, where the joint liability of the holding company in cases of infringement of competition law by other members of a group is not a violation or exception of personal responsibility. For further consideration, Leupold (2013), p. 579.

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Montalenti P (2011) Direzione e coordinamento nei gruppi societari: i principi e problemi. In: Società per azioni, corporate governance e gruppi finanziari. Giuffrè Editore, Milano Pavone La Rosa P (2003) Nuovi profili della disciplina dei gruppi di società. Riv.soc. I:766 Scognamiglio G (2009) Riv.dir.civ. I:757 Tombari U (2015) Il “diritto dei gruppi”: Primi bilanci e prospettive per il legislatore comunitario. Riv.dir.comm. I:77

National Report on Sweden Rolf Dotevall

Abstract Third parties often get the impression that a company group is not only a commercial entity but also a legal personality. According to Swedish law each subsidiary is an independent legal person. Swedish law does not recognize a group interest. This characteristic could lead to tensions when the subsidiary is a mere unit within the structure of a corporate group. There is an implicit conflict of interest in a group which is created by the group as a business entity and the fact that each company is an independent legal person. When the board of directors in the parent company gives directives to the subsidiaries for example to transfer its profits each year to a central account it is difficult to see this transfer as nothing else as a transfer within the same business entity. The group stands completely separate from the entity’s own liability and incur no risk beyond the amount of their own contribution. In Swedish law the directors in the parent company owe traditionally no duties to its subsidiaries. And vice versa the board in a subsidiary owes no duties to the parent company. Groups of companies are in Swedish law regulated by the companies act and a number of special laws focused on particular areas such as accounting and the preparation of consolidated group accounts, taxation and for example the possibility of group contribution.

1 Introduction Corporate groups are often well-known and are producing and selling products of different kinds under a common public persona. Third party often got the impression that it is one commercial unity. In Swedish law, and in most other jurisdictions, a R. Dotevall (*) Department of Law, School of Business, Economics and Law, University of Gothenburg, Gothenburg, Sweden Department of Business Law, Lund University, Lund, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_5

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corporate group is an integrated enterprise which consists of, in a formal sense, independent legal persons. Major Swedish companies may have several subsidiaries in Sweden and at least one subsidiary in many other countries in the world where they have activities and can be very large. If the subsidiaries are limited companies each of them has a legal personality, limited liability, transferable shares and a separate management. Each of this characteristic can lead to tensions when the company is a mere unit within the structure of a corporate group. The insertion of a company into a group can call into question the very characteristics that makes it a corporation. In some situation when legal disputes should be solved it a question of balancing the “legal form” and “economic reality”. There is an implicit conflict of interest in a group which is created by the group as a business entity and the fact that each company is an independent legal person. In Swedish law a group interest is not recognized. Under Swedish law, it is not possible to sacrifice the interest of a single company for the well-being of the entire group. However, this standpoint has been modified in the recent discussion in the legal doctrine.1 When the board of directors in the parent company gives directives to the subsidiaries for example to transfer its profits each year to a central account it is difficult to see this transfer as nothing else as a transfer within the same business entity. The group stands completely separate from the entity’s own liability and incur no risk beyond the amount of their own contribution. When a separate entity is tied into an integrated enterprise under a common control and often regarded as a common public persona some various tensions between independence and interdependence could arise. In Swedish law the directors in the parent company owe traditionally no duties to its subsidiaries. And vice versa the board in a subsidiary owes no duties to the parent company.2 Transfer of value from the subsidiary to its parent or other related corporations by way of pricing arrangements for goods or services, or the taking of the subsidiary’s corporate opportunities, may be harder to detect than in a single corporation where conveyances to dominant shareholder will usually be more obvious. For these reasons, corporate groups can present significant dangers for minority shareholders and creditors of a subsidiary. The purpose with this article is to discuss how the implicit tension in a group of companies are treated in Swedish law.

1 2

See Dotevall (2015), p. 106. See Dotevall (2015), p. 106.

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2 Some Distinctive Features of the Swedish Companies Act According to the Swedish Companies Act there are two forms of companies, private and public. Both types of companies are regulated in the same statute, “aktiebolagslagen” which was promulgated 2015. This statute embraces both company forms with just minor differences. For private companies the required minimum share capital is 50,000 Swedish kronor and for public companies the share capital must be at least 500,000 Swedish kronor. A public company must have at least three board members, but in a private company it is enough with one member. Concerning the regulation of groups there are no differences between private and public companies in Swedish law. The relation between the board of directors and the general meeting is hierarchic. The general meeting is superior to the board. According to Ch, 8 Sec. 41 Companies Act the board, the managing director and other representatives of the company must comply with instructions from the general meeting or any other company organ where such instructions is not void as being in violation with the companies act, the applicable annual reports legislation or the articles of association. According to Swedish company law the directors are elected by no more than a simple majority of the votes, a majority shareholder will usually control the board. Thus, by virtue of its influence over the parent’s management, a dominant shareholder of the parent company can control decisions on matters in subsidiary corporations that could have been vetoed by the parent’s minority had the assets remained at the parent level. Under Swedish law shareholders decide on the distribution of profits. This right is in effect exercised by the parent’s management if the business is conducted and the profits earned by a subsidiary, rather by the parent itself. Retention of profits in the subsidiary can be used to starve out the parent’s minority shareholders; absent a dominant shareholder, the parent’s management could also use it to control the group’s internal financing. Therefore, the decision to structure an enterprise as a corporate group rather than as a single corporation not only is a matter of expediency, but can have major effects on the governance of shareholder’s investment. Groups of companies are in Swedish law regulated by the companies act and a number of special laws focused on particular areas such as accounting and the preparation of consolidated group accounts, taxation and for example the possibility of group contribution. Another area is antitrust law and the concept of conglomerate mergers. Also, in insolvency law and EU insolvency regulation there are provisions which take into account group aspects. In this article, I will have the main focus on the regulation in company law. The provisions concerning groups of companies is characterized of its preventive function and have as its purpose to protect minority shareholders and creditors. A provision in the articles of association concerning the voting rights of each share or limits in the number of shares a person can own does not affect the definition of a group in Ch. 1 Sec. 11 Companies Act.

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Each of this law provisions addresses the fact that, although the units are legally separate entities, they operate in a unified group that is guided by a central management.

3 The Concepts of Parent Company, Subsidiary and Group in the Swedish Companies Act The definition of a parent company in Ch. 1 Sec. 11 Companies Act is a result of the implementation of art. 1 in the seventh company law directive.3 This directive requires any undertaking governed by its national law to draws up consolidated accounts and a consolidated annual report if that undertaking is a parent company according to what is defined in the directive. According to Ch. 1 Sec. 11 (1) Companies Act as the main rule a company is a parent company and other legal person is a subsidiary when the company holds more than one-half of the voting rights of all shares or interests in the legal person. Even if a Swedish company doesn’t have enough voting rights but own shares or interests in the legal person, and as a consequence of an agreement with other owners of such legal person, control more than one-half of the voting rights of all shares or interests in the legal person the company is a parent company. The same will occur if Swedish company owns shares or interests in the legal person and is entitled to appoint or remove more than one-half of the of the members of its board of directors or equivalent management body or owns shares or interests in the legal person and is entitled to exercise a sole controlling influence there over as a consequence of provisions of the legal person’s constitution. It must be emphasized that it is a right to remove or appoint the members of the board.4 Ch. 1 Sec. 11 (4) Companies Act prescribes that a company is a parent company if own shares or interests in the legal person and is entitled to exercise a sole controlling influence there over as a consequence of an agreement with the legal person or as a consequence of provision of the legal person’s articles of association, partnership agreement or comparable statutes. The kind of agreements which are mentioned in Ch. 1 Sec. 11 (4) Companies Act cannot be applied on Swedish Companies. It is not allowed in an agreement with the company or in a provision in the articles of association to deprive the board or the managing director the competence to make decisions in the company’s affairs.5 An agreement with this purpose is only possible in partnerships. I the legal person is a subsidiary following the provision in Ch. 1 Sec. 11 (4) Companies Act is only possible in a jurisdiction which accepts agreements and provisions

3 Council Directive 83/349/EEC of the 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts. 4 See Dotevall (2015), p. 106. 5 See proposition 1995/96:10 p. 111 and p. 177.

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in the articles of association of this kind. According to sec. 291 and 308 Aktiengesetz law it is possible to conclude a Beherrschungsvertrag which gives a controlling influence over the German Aktiengesellschaft. The expression “sole controlling influence” means that the parent company just not have control in specific matters in the company’s affairs but a more general influence.6 Foreign legal entities can be subsidiaries in a group according to the Swedish Companies Act. Ch. 1 Sec. 11 § (3) Companies Act prescribes that it should be a company body with the same function as a board in a Swedish company. An English or an American company is organized according to the one-tier system and has a board of directors. For a German company with a two-tier organization with a supervisory and a management body it could be more complicated. The board should be equivalent with the managing body, Vorstand in a public company AG and the Geschäftsführer in a private GmbH.7 Relevant for the concept of groups is also indirect ownership of shares or interests. According to 1 Ch. Sec 11 (2) Companies Act a legal person is a subsidiary of a parent company where another subsidiary of the parent company or the parent company together with one or several other subsidiaries jointly possess more than one-half of the voting rights of all shares or interests in the legal person, owns shares or interests and have a voting agreement with other owners and as a consequence thereof control more than one-half of the voting rights or owns shares or interests in the company and is entitled to appoint or remove members of the board. The agreement must give control over more than 50% of all votes in the company. It is not enough if the agreement just gives a shareholder a right of veto.8 A parent company presupposes an agreement which really gives the company a majority of votes on a general meeting.9 It is necessary according to the Swedish Companies Act that the parent company must be formed according to the statute and registered at the Swedish Companies Registrar. But the subsidiary could be a domestic or foreign legal person of any kind. This means that only a Swedish Company has the obligation to draw a group annual account. If that is not the situation, there is no duty for the board or the managing director to provide information about the financial situation for the whole group of companies for the shareholders on a general meeting.

6

See Dotevall (2015), p. 106. See Dotevall (2015), p. 106. 8 See Nerep and Samuelsson (2009), p. 77. 9 See Andersson et al. (2015), avsnitt 1:28. 7

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4 Provisions Protecting Minority Shareholder One of the principal problems the minority shareholders in a group of company experience is lack of information about the management. In Swedish law in companies with not more than ten shareholders or lesser it is according to Ch. 7 Sec. 36 Companies Act possible for each shareholder shall be afforded an opportunity to review accounts and other documents which relate to the company’s operations, to the extent necessary for the shareholder to be able to assess the company’s financial position and results or a particular matter which is to be addressed at the general meeting. The board of directors and the managing director shall also, upon request, assist the shareholder with any investigation necessary for the above-stated purpose and provide and provide necessary copies, where such can be done without unreasonable cost or inconvenience. This possibility for a minority shareholder has its limitation. A disclosure to the shareholder can be denied if the information regarding the company’s operations would result in a tangible risk of serious harm to the company. In a company with more than ten shareholders the right to provide information for an individual shareholder is much more limited. According to Ch. 7 Sec. 32 Companies Act upon request by any shareholder and were the board of directors believes that such may take place without significant harm to the company, the board and managing director shall provide information at the general meeting. Of importance in the discussion about groups is the provision in Ch. 7 Sec. 33 Companies Act which prescribes that if the information which has been requested the duty to disclose shall apply also to the company’s relation to other group companies. Where the company is a parent company, the duty to provide information shall also apply to the group accounts and such circumstance regarding subsidiaries. Where the board determines that information which has been requested cannot be disclosed to the shareholders without significant harm to the company, the shareholder who requested such information should be notified immediately. The auditor shall within two weeks submit a written statement to the board whether, in the auditor opinion, the information should have resulted in any change to the auditor’s report for the group, or otherwise gives rise to criticism. Shareholders in Swedish private and public companies are entitled to submit a proposal for an examination through a special examiner. Such an examination may relate to the company’s management and accounts during a specific period of time in the past or certain measures or circumstances within the company. This proposal shall be submitted at a general meeting. Ch. 10 sec. 22 Companies Act prescribes that where the proposal is supported by owners of at least one-tenth of all shares in the company or at least one-third of all shares represented at the general meeting, The County Administration Board, appoint one or more special examiners. A special investigation, which is quite common in Sweden, has the purpose to provide shareholders information and may form the basis for a court claim, and sometimes prove an efficient way to detecting if there has been any misconduct.

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Minority shareholder in a subsidiary company may receive protection under certain principles of law. In Swedish law is the most important principle in these circumstances the principle of equal treatment which is legislated in Ch. 4 Sec. 1 Companies Act. A complement to this principle is the general clause in Ch. 7 Sec. 47 and Ch. 8. Sec. 41 Companies Act. Swedish law does not recognise that a controlling shareholder has a stronger fiduciary duty towards other shareholders or their company. The general clause in Ch. 7 Sec. 47 Companies Act provides that if a shareholder who the votes which may be exercised at a general meeting procure the passing of a resolution which is oppressive or unfairly prejudicial to minority shareholders, the court will set it aside. The right to buy-out a residual minority exists also in Swedish Law. According to Ch. 22 Sec. 1 Companies Act a shareholder who holds more than nine-tenths of the shares in a company shall be entitled to buy-out the remaining shares of the other shareholders of the company. Any persons whose shares may be bought out shall be entitled to compel the majority shareholder to purchase his shares. The right to buy shares belonging to a minority, or minority’s right to be bought, must be distinguished from the rights to expel shareholders for serious violation of the duties according to the Companies Act and the articles of association. Ch. 25 Sec. 21 Companies Act gives the holder of one-tenth of all shares, if a majority shareholder has intentionally participated in a violation of the companies act, the applicable annual reports legislation or the company’s articles of association, order that the company go into liquidation. This claim can be successful if it is a long duration of abuse. Less obviously, group structures may also affect the interests of minority shareholders of a parent corporation. Veto rights that such shareholders have with respect to corporate actions requiring supermajority approval can effectively be undermined by setting up a holding structure where the assets are owned and the business activities are conducted by subsidiaries while the parent corporation merely acts as a holding company. The parent’s voting rights in the subsidiaries are exercised by, or under the directions of, the parent’s management. In Swedish law is, as I already mentioned, each company in a group a separate entity and traditionally no group interest exists. This legal stance gives results in a contradiction in between the situation when a group is regarded as a business entity but still in a legal sense every legal person in the group is viewed upon as a single company. This contradiction can result in a conflict of interest in the relation between the parent company and a shareholder minority in the subsidiary. An important provision for the protection of a minority shareholder is the so-called general clause in Ch. 7 Sec. 47 and Ch. 8 Sec. 41 Companies Act. The board of directors or the shareholder meeting may not adopt any resolution or perform legal acts or any other measures which are likely to provide an undue advantage to a shareholder or another person to the disadvantage of the company or any other shareholder. Of importance to protect a minority shareholder is also the provisions in Ch. 8 sec. 23 and 34 Companies Act which prohibit a director or managing director to participate in a matter regarding an agreement between them and the company. This

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prohibition is extended to cover also an agreement between the company and a legal person which the director or managing director is entitled to represent. This provision is not applicable where the party contracting with the company is an undertaking in the same group or in a group of undertakings of a corresponding nature. This could be the case when a foreign company owns a majority of the shares in a Swedish company. A director or a managing director is also, according to the provisions which I just mentioned, prohibited to participate in an agreement between the company and third party if there is a material interest which may conflict with the interest of the company. The general clause and the regulation of conflict of interests could be applied on fair transactions between companies in the same group. However, the provisions seem to have had little effect on the abuse of power from a majority shareholder. The case law is sparse. A crucial question in the jurisdiction without a developed regulation for groups is in which situations a group interest should be superior for a legal entity belonging to the group. In which extend could a paternal company have influence on a subsidiary? To solve the conflict between the interest of a specific company in the group and the interest of the whole group have been advocated that the French Rozenblumdoctrine could be a model for solving conflicts of this kind.10 The Rozenblum-doctrine has been in focus for several years and is probably quite well-known among company lawyers. A disadvantage for a minority shareholder or creditor in a subsidiary could be a breach of duty of a director in a subsidiary or a paternal company. The doctrine states that the whole group should have a balanced and firmly established structure. The disadvantages for a minority shareholder should follow a general group policy. This policy should in a longer perspective the advantages and disadvantages should be balanced out. It is said that the Rozenblum-doctrine contains principles for a legal recognition of a group management and gives the board in the paternal company enough discretion to fulfil the policy for the group and allocate to each individual entity to accomplish its individual role in the group. There are no specific rules in Swedish law concerning transactions between companies in the same group. This means that a transaction of this kind can deviate from the market value. However, this difference could not be so extensive and doesn’t have a purely commercial nature for the company. Such transaction could be regarded as an unlawful value transfer and the recipient could be obliged to return what he or she has received. A transaction which is not in accordance with the market price could be regarded as am undue advantage for the parent company and a disadvantage for the subsidiary. If that is the case a director, managing director or an auditor who has caused a damage to the company could be liable if he or she has been negligent according to ch. 29 sec. 1 Companies Act. A shareholder shall according to ch. 29 sec. 3 Companies Act compensate a damage as a consequence

10

See Kraakman (2017), p. 125.

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of participating through gross negligence a violation of the Companies Act, applicable annual reports or company’s articles.

5 Provisions Protecting Creditors Another problem which arise in a corporate group is the protection of the creditors in a subsidiary. A company’s debts are its own, so how may a parent company be held liable for the debts of an undercapitalized subsidiary that it has used as a mere instrumentality? This is a conflict which is obvious in the protection of the creditors to a subsidiary. If the group could be regarded as a seamless economic entity should the liability of its separate entity be compartmentalized and separate or collapse to match the economic reality? It is possible that group liability to be voluntarily assumed. It could take place on the base of a revocable declaration. The voluntary assumption of group liability through a system of cross-guarantees is familiar in Sweden. Under such a system, the parent and all the subsidiaries in the group may assume liability for each other’s and the whole group indebtedness. Such cross guarantees may have a prejudicial effect on the subsidiaries themselves, and on their minority shareholders. The same factors that make a group structure so attractive for a parent company can cause concern to other stakeholders. While activities for a subsidiary is conducted in the interest of the whole group or the paternal company. For the creditors of a subsidiary it is particular risky if the company is involved in speculative activities and the subsidiary is poorly capitalized. In Swedish law the company law contains provisions which may be of relevance to creditors of subsidiaries. Also, some provisions in the Swedish insolvency Act may be used for impugning certain transactions between a subsidiary and a parent company. Where a subsidiary company is insolvent s creditor or an official receiver is empowered to make an application to the court to set aside a transaction as undervalued or in another way gives the parent company a favour. In the case in which the transaction at an undervalue is with person connected with the company, as a parent company, at a time in the period of, as a main rule, three months from the bankruptcy decision shall according to Ch. 4 Insolvency Act be revoked. A cornerstone in Swedish law in the protection of the creditors to the parent and subsidiary company is the requirement to draw up a consolidated account statement for the whole group of companies. Of importance is also the provisions in Ch. 29 Companies Act prescribing that a director, managing director, auditor and shareholder shall compensate a creditor who has been negligently caused damage as a consequence of a violation of the Companies Act, the applicable annual reports legislation or the articles of association. Of importance for the protection of creditors and, of course, also minority shareholders are also protected by Ch, 17 Sec. 1 Companies Act restitution

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obligation in the event of an unlawful value transfer from the subsidiary to the parent company. A value transfer from a subsidiary to the paternal company is illegal according to Ch. 17 Sec. 3 Companies Act where, after the transfer, there is insufficient coverage for the company’s restricted equity. The calculation shall be based on the most recently adopted balance sheet taking into consideration changes in restricted shareholders’ equity which have occurred subsequent to the balance sheet. A value transfer is also illegal according to Ch. 17 Sec 1 (4) Companies Act if the company’s assets are reduced as a consequence of a business event which is not of a purely commercial nature for the company. In Swedish Company law Ch. 17 Sec. 6 Companies Act prescribes that the recipient of an unlawful value transfer what he or she has received. The company must prove that he or she knew or should have realised that the value was in violation of the Companies Act. Where any deficiency arisen in conjunction with such restitution any persons who participated in the decision regarding the value transfer shall be according to Ch. 17 Sec. 7 Companies Act liable therefore. This shall also apply to persons who participated in the execution of the decision or in the preparation or adoption of an incorrect balance sheet which constituted the basis for the decision regarding value transfer. If a board member, managing director and auditor has participated the requirement is negligence. If a shareholder, for example a paternal company, has participated the requirement is gross negligence. In Swedish case law, there are some examples where the supreme court has disregarded the separate legal of a legal entity, piercing the corporate veil, and have made the parent company liable for the debts of a subsidiary. In Sweden, the courts will sometimes lift the corporate veil with the consequence that a parent undertaking will be responsible for the subsidiary’s debts. In Swedish case law the veil will be lifted where the assets and affairs of the parent and subsidiary have been commingled. And for the reasons, for example because the subsidiary is being used to perpetrate a fraud. The concept of shadow director is not completely unfamiliar in Swedish law.

6 Transfer of Assets to the Paternal Company If a subsidiary company transfer assets to the paternal company the creditors are, as I have mentioned, protected by Ch. 17 Sec. 1 (4) Companies Act. This provision prescribes that a business event can be regarded as an unlawful value transfer if the company’s assets are reduced as a consequence and the transaction is not of a purely commercial nature for the company. The reduce of the company’s assets should be factual and not only related to the book value.11

11

See Nerep and Samuelsson (2009), Del 2, s. 193.

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The assessment if the transaction has a purely commercial purpose should be done in an objective manner.12 This means that the intention with the transaction is not a determining factor. With an objective approach, the value difference is a factor which take the centre stage. But an extensive value difference is not the only decisive factor if a transaction is an unlawful value transfer. An important factor is the relation between the parties in the transaction. If it is a transaction between a subsidiary and a paternal company a smaller value difference is accepted then if it is a transaction with a third party. It is not possible to indicate in general terms how large value difference could be. In all circumstances, the value difference must be apparent. The interpretation of the notion “a purely commercial nature” should be done extensive. A transaction within the objects clause in the articles of association is regarded to be of a commercial nature.13 As I have mentioned the general clause in Ch. 7 Sec. 47 and Ch. 8 Sec. 41 Companies Act as important provisions in the protection of a minority shareholder. In the case NJA 2000 s. 404 the Swedish Supreme court conclude that a transaction between one subsidiary to another subsidiary which gives the majority shareholder an advantage could be a breach of duty. All the assets in on subsidiary was transferred to another subsidiary for the book value. The transfer caused the minority shareholder a damage because the share lost its value. The Supreme Court concluded that the transfer gave the majority shareholder an undue advantage. The main reason was that the transaction was not in accordance with the object clause in the articles of that reason that the company after the transfer of the assets could not continue its business activities. The directors in the parent company was liable for the damage.14

7 Piercing the Corporate Veil An important principle in company law is that a shareholder is only liable for what he or she has contributed as share capital. But this principle has some important exceptions. One reason is that a limited company can be used to minimize the risk for the shareholders to be liable for the company’s debts. The piercing of the corporate veil has its background in a theory of abuse of the limited company and the limited liability for the company’s debts. I other word a limited company is used deliberately for other purposes than it was intended for.15

12

Se proposition 2004/05:85 s. 371 f. See Dotevall (2009), p. 106. 14 See NJA 1924 p. 186, NJA 1967 p. 313 och NJA 2000 p. 404. 15 See Dotevall (2009), p. 108. 13

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There are several rules according to which shareholders could be responsible for the company’s debts and for the damage they have caused the company or third party. As I already mentioned Ch. 17 Sec. 6 Companies Act prescribes an obligation to restitute in the event of an unlawful value transfer. In the case a deficiency arises any persons who participated in the decision shall according to Ch. 17 Sec. 7 Companies Act shall be liable therefor. If a shareholder has the function of a shadow director he or she shall compensate damage, according to Ch, 28 Sec. 3 Companies Act, which is caused as a consequence of participation, intentionally or through gross negligence, in any violation of the Companies Act, the applicable annual reports legislation or the company’s articles of association. In Swedish case law, there are examples where the judiciary has decided that the separation of personality of the company and the members is not to be maintained. While some of the examples of veil lifting in the case law involve straightforward shareholder limitation of liability issue few examples involve corporate group structures.16 The veil has been lifted when the company has been in reality not carrying on its own business but the parent’s business. In other words, the group have acted as it was one economic unit and the façade have concealed the true facts. It is clear that the corporate form to avoid liability or obligation. The discussion has now been focused on the environmental liability. The EU directive on environmental liability with regard to the prevention and remedying of environmental damage.17 In art. 2.6 of the directive that an “operator’ means any natural or legal, private or public person who operates or controls the occupational activity or, where this is provided for in national legislation, to whom decisive economic power over the technical functioning of such an activity has been delegated, including the holder of a permit or authorisation for such an activity or person registering or notifying such an activity”. In Swedish law has concluded that there is a more obvious risk that the veil will be lifted in when it is a question of environmental liability than in other liability cases.

8 Summary In Swedish law, and in most other jurisdictions, a corporate group is an integrated enterprise which consists of, in a formal sense, independent legal persons. In Swedish law the directors in the parent company owe traditionally no duties to its

16

See NJA 1947 s. 147 and NJA 2014 s. 877. See also Dotevall (2009), p. 108. Directive 2004/36/CE of the European Parliament and the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage. 17

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subsidiaries. And vice versa the board in a subsidiary owes no duties to the parent company. In the Swedish Companies Act there are several provisions giving minority shareholder a right to be informed. There is also a possibility to submit a proposal for a special examiner. The general clause in Ch. 7 Sec. 47 and Ch. 8 Sec. 41 Companies Act is of importance in the protection of a minority shareholder. According to these provisions, which have the same formulation, the shareholders in the general meeting or the directors may not adopt any resolution or perform legal acts or any other measures which are likely to provide an undue advantage to a shareholder or another person to the disadvantage of the company or any other shareholder. This is the most obvious expression of the duty of loyalty in Swedish company law. There are few cases where the general clause is applied. A cornerstone of the protection of the creditors is the restriction of value transfer to the shareholders n Ch. 17 Companies Act. In the event of an unlawful value transfer there is a restitution obligation in Ch. 17 Sec. 6 Companies Act. This provision is supplemented with deficient coverage liability in the event of unlawful value transfer. In Swedish law the piercing of the corporate veil is recognised according to the principles developed in, for example English and German company law. However, the Swedish case law is sparse.

References Andersson S, Johansson S, Skog R (2015) Aktiebolagslagen. En kommentar. Del I Directive 2004/36/CE of the European Parliament and the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage Directive 83/349/EEC of the 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts Dotevall R (2009) Bolagsledningens skadeståndsansvar, 2nd edn Dotevall R (2015) Aktiebolagsrätt: fördjupning och komparativ belysning Kraakman R (2017) The anatomy of corporate law: a comparative and functional approach, 3rd edn Nerep E, Samuelsson P (2009) Aktiebolagslagen – en kommentar. Kapitel 1-10, 2nd edn NJA 1924 p. 186 NJA 1947 s. 147 NJA 1967 p. 313 NJA 2000 p. 404 NJA 2014 s. 877 Proposition 2004/05:85

National Report on Spain Mónica Fuentes Naharro

Abstract This report tries to explain, briefly, the key issues of the scattered regulation of groups of companies in Spain, as well as the main problems that the scientific doctrine and jurisprudence have tried to solve during the last 30 years.

1 Are Groups of Companies or Controlled Companies in Any Way Taken into Account in Any Area of Law? The Following Areas Should Be Considered, Mentioning the Main Purpose of Rules or Case Law Several sectors of the Spanish law take into account the groups of companies (labor law, tax law, antitrust law, etc.) However, company and insolvency law are the two main disciplines from which the groups of companies have been addressed, either by the legislator or by case law.

2 In Regards to Company Law, Are the Regulations Part of General Corporate Law? Are the Rules Part of General Private Civil or Commercial Law? The legal provisions addressing corporate groups are, mainly, part of general corporate and insolvency law. Part of those provisions are set in the Commercial Code (C. com), others are set in the Companies Act (LSC) and in the Insolvency Act (LCon). There are a few—minor, not very relevant- mentions to corporate groups in Antitrust Law (LDC), where article 61.2 LDC establishes liability on the controlling

M. Fuentes Naharro (*) Universidad Complutense de Madrid, Madrid, Spain e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_6

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company for law infringements; and in tax law, in order apply the consolidated tax payment, according to article 58 LIS (Ley 27/2014, del Impuesto de Sociedades).

3 How, If at All, Are Corporate Groups or Groups of Companies Defined? The LSC provides in art. 18 a notion of group of companies which is valid in general “for the purposes of this Act” and defines the group by remission to some elements or “cases” established in art. 42 of the Commercial Code (hereinafter, “C. com.”). Article 18 LSC also defines the dominant company as the one “which holds or may hold, directly or indirectly, the control of others”. Therefore, the notion contained in art. 18 LSC is not specific for corporate law but refers to that traditionally considered as the “general concept” of group under Spanish law: the “consolidated” group of companies contained in art. 42 C.com. which is the result of the transposition to Spain of the Seventh Directive 83/349/EEC on consolidated annual accounts. However, for purposes of tax law, another concept is considered (see below, question Sect. 4). Article 42 C. com. establishes: “1. Any parent company of a group of companies shall be obliged to draw up consolidated annual accounts and management reports as provided for in this section. There is a group where a company holds or can directly or indirectly hold control of another. In particular, it will be presumed that control exists when a company, which is classified as dominant, is in relation to another company, which will be classified as a dependent, in any of the following situations: A) Possesses the majority of the voting rights. B) It has the power to appoint or remove the majority of the members of the administrative body. C) May have, under agreements with third parties, a majority of the voting rights. D) The majority of the members of the administrative body have been appointed by their votes, who hold office at the time when the consolidated accounts are to be drawn up and during the two immediately preceding years. In particular, this circumstance shall be presumed when the majority of the members of the management body of the controlled company are members of the management body or senior managers of the parent company or of another company dominated by it. This assumption will not give rise to consolidation if the company whose directors have been appointed is linked to another in one of the cases provided for in the first two letters of this section. For the purposes of this section, the voting rights of the dominant entity shall be added to those held by other subsidiaries or by persons acting on their own behalf but on behalf of the dominant entity or other dependents or those which it has in concert with any other person.” First paragraph of article 42.1 C.com. defines the group on the basis of the existence of control or domain (both terms are used indistinctly by the legislator) between two or more companies (“There is a group when a company has or may have, directly or indirectly, the control of other/s”). However, proving the existence

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of control between two or more companies is a very complex task. In order to facilitate it, the paragraph 1 of art. 42 includes a list of presumptions (the “cases” referred to in art. 18 LSC) of the existence of control. The proof of the existence of control by one company over the other/s –or the possibility to exercise that controlautomatically convert them all into a group of companies. The presumptive elements of the existence of the control, although described in four sub-sections of article 42.1 C.com., that are, in essence, these two: (1) to hold “the majority of the voting rights” of the controlled company, whether it derives from the ownership of the share capital, from the existence of agreements entered into with other shareholders, or from agreements entered into with third parties [letters a) and c) of art. 42.1 C.com.]; (2) to have the power “to appoint or dismiss the majority of the members of the management body” of the controlled company or “having designated the majority of those members” [letters b) and d) of the art. 42.1 C. com].1 That designation must be temporarily referred, as the precept indicates, to members who “hold office at the time the consolidated accounts are to be formulated and during the two immediately preceding fiscal years”.2 The wording of paragraph c) of article 42.1 C.com. referred to the “majority of the voting rights by means of agreements concluded with third parties” allows, in the opinion of our doctrine, the constitution of groups of companies with basis in a domain contract.3 The full identification of the concept of group of companies with that of the corporate control is due to the latest wording of article 42 C.com. by Act 16/2007 of reform and adaptation of the accounting legislation to the European Union. However, it is important to note out that the corporate control has not always been the defining element of the group of companies for our statutory law. In fact, between the original version of article 42 C.com. and the current one, there has been some sort of parenthesis resulting from the reform introduced by Act 62/2003, where the group was defined upon the so-called “unified management” (or, literally, “unified decision”), which is considered by our scholars and majority jurisprudence4 as the essential element defining the group (“there is a group when several companies constitute a unified decision” said the former wording of article. 42 C.com). From this—now repealed- legal definition of group of companies, the corporate control was not considered as the defining essence of the phenomenon but—more correctly—as a mere instrument or vehicle for the exercising of the unified management of the group. This is the element that converts the group into a “poli-corporate enterprise” formed on the basis of several legal independent persons.

1

Fuentes (2011), p. 298 et seq. Temporary reference coming from art. 1 of the Seventh Directive, that imposes the obligation of consolidation when the relation of domination is solid, that is, prolonged in time. 3 The legitimacy of the so-called “group contracts” -not regulated in our positive law- is unanimously accepted by the scholars ex art. 1255 of the Civil Code. For all, see Embid (2000), p. 74. 4 Among others the Judgements of the Supreme Court (hereinafter, “STS”) October 16th, 1989; December 13th, 1996; July 30th, 1999; April 12th, 2007. 2

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However, as already mentioned, the current wording of article 42.1 C. com. has left aside that notion and defines the group as the control of “one company over others”. That specific wording causes two important deficiencies to be highlighted. On the one hand, it excludes the so-called “horizontal or coordination groups” (where there is no corporate control of one company over other/s) that have been traditionally admitted by scholars, jurisprudence [v.gr. STS of July 29th, 2005] and, even, by other norms of our statutory law (see art. 78 on Act 27/1999 on cooperative entities).5 On the other hand, it prevents any subject that is not a company from being characterized as the controlling entity or “head” of the group. Thus, the wording of art. 42.1 C.com. excludes from the concept to all those entities without a corporate form (foundations, for example) and, of course, it excludes to natural persons [v. among many others: SSTS of November 24th, 2011; December 13th, 2012; March 4th, 2016; although, the most recent of March 15th, 2017 has made an extensive interpretation of the concept including the natural person as “dominant” within the “conceptual perimeter” of the group]. Therefore, it is correct to assert that the notion of group of companies is—despite the legal concept- currently under discussion in Spanish company law.

4 How If at All, Is Control of a Company Defined? What Are the Differences in the Legal Definitions Provided for in the Various Areas of Law? Article 42.1 C. com. defines control by presumptions. See answer to Sect. 3 above. Article 58.2 LIS observes another definition for tax consolidation purposes. It is a very large and complex provision, but, briefly, it considers parent company when it has a participation of 75% of the capital stock in another company (or 70% if it is a listed company).

5 What Are the Effects Attached to the Existence of Control or Domination? The effects attached to the existence of control or domination is the existence of a corporate group and all the legal consequences linked to that fact (see below).

5

Sacristán (1982), p. 375 et seq.; Girgado (2001), p. 139 et seq.; De Arriba (2004), p. 97 et seq, 329 et seq.

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6 Rules on Disclosure and Accounting Article 42.1 C. com. requires the parent company to draft consolidated annual accounts of the corporate group. These consolidated annual accounts must be approved by the annual general meeting, together with its individual annual accounts.

7 Are the Regulations, If Any, on Groups and Control of a General Kind or Are There Differences According to the Company’s Form (Corporations, Limited Liability Companies, Partnerships, etc.) Not really, but the fact is that groups and control are legal concepts designed to be applied to corporations (sociedad anónima, sociedad limitada and sociedad comanditaria por acciones). Partnerships are not mentioned expressly, but, of course, they are considered—if the case- part of the group. In fact, article 42. 3 C. com. says: “The company required to prepare the consolidated annual accounts must include the companies in the group in the terms set out in paragraph 1 of this article, as well as any company dominated by them, whatever their legal form and regardless of its registered office”.

8 Is the Group Recognized as a Unified Business Organization? As a Legal Entity? Yes, it is considered as a business organization yes (by doctrine and jurisprudence). Not as a legal entity. It is considered that the corporate group has NO legal personality, and thus, it is not a legal entity.

9 Rules Regarding Group Management (Unified Direction, einheitliche Leitung, direzione unitaria, dirección unificada, etc.) There are no rules, but doctrine and jurisprudence recognize that “unified direction” is the core element of the group concept (despite the legal provisions do not mention it). See answer Sect. 3 above.

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Organic Competences Through the Different Entities Which Are Members of a Group

The idea that the unified management is a legitimate phenomenon that it is competence of the parent’s management body is accepted by both scientific and jurisprudential doctrine.6 Besides, this assertion is supported by the article 42 C.com. when imposing on the parent the duty to draft the annual accounts and the “consolidated management report”: both tasks correspond to the parent’s management body.

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Minority Shareholders’ Protection in a Subsidiary. Conflicts of Interests and Related Party Transactions: Voting Restrictions? Majority and Minority Abuse. Tolerance to Deviations from the Company’s Interest (intérêt social, Gesellschaftsinteresse, interés social)

This is a very complex issue. There are no relevant rules on minority shareholders’ protection in a subsidiary, and no specific rules on related party transactions (except for those specifically provided in art. 529 ter LSC for listed companies). The jurisprudence (STS 30.04.2014; STS 11.12.2015) has recently accepted the concept of the “interest of the group” and some sort of—very limited- deviation for the individual company’s interest according to scientific works, in line with the compensatory advantages doctrine (“teoría de las ventajas compensatorias”, inspirited in the Italian Law and in the French Rozenblum doctrine). The dogmatic solution of this doctrine introduces a margin of flexibility to the realization of the group’s interest to the detriment—if the case- of the respective particular interests of the member companies. In a very synthetic way, it proposes to incorporate in the assessment of the eventual director’s liability for the exercise and compliance of the unified management, a different interpretation of “damage” and “corporate interest”; this would lead to take into account, not the company by itself (aisolated), but in the overall relations where it is involved (i.e., the group policy), introducing in that assessment a sort of “balance” or “compensation” between the sacrifices (disadvantages) and benefits (advantages) that being part of the group implies for that company. However, for this “legitimizing effect” to take place, the compensation must be “adequate”. This is a very indeterminate concept that each legal system, as mentioned before, has interpreted more or less strictly when facing this issue (more “cualitative/broad” or more “cuantitative/strict”).7 Finally, in any case, the compensation must come with other additional elements: (1) the instruction must obey a group policy, (2) it must be leaded to get the interest of the group, never a third 6 7

In extenso see Fuentes (2007a), p. 97 et seq. In extenso, Fuentes (2007a), p. 164 et seq.

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party’s interest, and (3) it may never lead—nor even in a provisional way—into an “economic annihilation” of the subsidiary that prevents it from keeping its obligations towards third parties; in other words, no instruction can attempt the economic “survival” of the subsidiary. This doctrine allows to implicitly legitimize the group’s interest primacy (within the limits already mentioned) even in the absence of a legal framework ad hoc, as currently happens in Spain. That is why the Spanish scholars have devoted special attention to it for a few years now and have built a dogmatic ground for it to be applied within the Spanish company law.8 The enabling law approach that provides the compensatory advantages test—a “strict” conception of it- has been recently assumed by the Spanish Supreme Court (after many decisions from lower courts had already advocated for it). Firstly, it was accepted in the context of an insolvency proceeding in relation to the so-called “contextual” (intra-group) guarantees; see STS of March, 30th, 2014, where the rescission of the guarantee was confirmed due to the lack of an appropriate or adequate patrimonial attribution to compensate the harm caused by the guarantee: In the intra-group contextual guarantees, the existence of patrimonial damage can be considered excluded if there is a patrimonial attribution, even indirect, in favor of the guarantor company, of an entity sufficient to justify the provision of the guarantee. But the mere existence of a group of companies is not in itself justifying the existence of that attribution or patrimonial benefit that excludes the damage in the constitution of the guarantee. It is not enough, then, the invocation in the abstract of the “group interest” to exclude the existence of damage in the constitution of an intragroup guarantee, it is necessary to specify and justify the economic benefit obtained by the guarantor. Moreover, sometimes, some profitable results for the “interest of the group” can be achieved at the cost of sacrificing the objective interests of one or several of the member companies, which the creditors of these are not obliged to support. (... )Therefore, the appellant’s assertion that there is no damage to the assets cannot be accepted (....) the previous judgments of the lower courts have considered proven that the insolvent company did not receive any consideration, since such loans did not even serve for the borrower to pay off the debt that she had with the guarantor, the later declared in insolvency. Consequently, the constitution of a mortgage by the insolvent company over the industrial building of its property, in which it developed its industrial activity, within two years prior to the declaration of insolvency, without receiving any consideration, directly or indirectly, it constitutes an onerous dispositive act that has caused a patrimonial damage to the insolvent company and therefore susceptible of rescission.

Soon after (STS of December, 11th, 2015)9 this doctrine was applied in the company law context, when assessing on a subsidiary director’s eventual breach of his loyalty duty. The Supreme Court expressly recognized that the interest of the subsidiary must be conceived as necessarily “coordinated” with the global interest of the group within the framework (of protection) that grants the compensatory advantages test:

8 9

Ibidem. Embid (2016), p. 301 et seq.

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“The integration of a company into a corporate group, even as subsidiary or dominated company, does not mean the total loss of identity and autonomy. The subsidiary not only retains its own legal personality, but also its specific objectives and its own specific corporate interest, nuanced by the interest of the group, and coordinated with it, (...). Indeed, the existence of a group of companies means that, when there are conflicts between the interest of the group and the particular interest of one of the companies, a reasonable balance must be sought between one interest and another, that is, between the interest of the group and the particular corporate interest of each subsidiary, which makes possible the efficient and flexible operation of the business unit that the group of companies represents, but prevents in turn the plundering of the subsidiary companies and the unnecessary postponement of their corporate interest, so as to protect external shareholders and creditors of any kind, public, commercial or labor. This balance can be sought in the existence of compensatory advantages that justify that some action, considered in isolation, could be a detriment to company. (...) In this case, the Court of appeal has established that there have been no such compensatory advantages of the group to the subsidiary, prior or subsequent; therefore the director has infringed the duty of loyalty to the company he manages, by participating in the action that has caused direct damage, the loss of the substantial part of its clientele with the loss of benefits that this has brought with it”.

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Case by Case Evaluation of Group Transactions vs. Overall Evaluation. Compensation of Disadvantages

See answer to Sect. 11 question, above.

13

Minority Shareholder’s Protection in the Parent Company. Conflicts of Interest: Voting Restrictions?

No voting restrictions for shareholders (due to the corporate group existence itself). Our corporate law observes related parties transactions and conflicts of interests rules for board members (arts. 229 and 230 LSC), in general, for all kind of companies (despite if they belong to a group or not). However, for listed companies, our law observes voting restrictions (due to the corporate group existence) for board members of listed companies: article 529 ter LSC establishes that the board of directors must approve (and cannot delegate): “... upon report by the audit committee, on the operations carried out by the company or companies of its group with directors, under the terms of articles 229 and 230, or with individual shareholders, individually or in concert with others, including shareholders represented on the board of directors of the company or other companies that are part of the same group or with persons related to them. The directors affected or who represent or are related to the affected shareholders should refrain from participating in the deliberation and voting of the agreement. Only operations

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that simultaneously meet the following three characteristics will be exempt from this approval: 1. that are carried out under contracts whose conditions are standardized and are applied en masse to a large number of customers, 2. that are made at prices or tariffs generally established by who acts as the supplier of the good or service in question, and 3. that their amount does not exceed one percent of the company’s annual income”. This is a very controversial issue. The need for a special solution to the conflicts of interests within the groups also arises, at least under Spanish company law, when assesing intra-group transactions -since they are “related parties transactions”—and the duties imposed on directors thereof. Once again, the rules on conflicts envisaged by the LSC on related party transactions have not been designed according to the specific reality of the groups. This is a quite widespread thought—although not unanimous—among the Spanish scholars.10

14

Creditors’ and Third Parties’ Protection in the Subsidiary

The Insolvency law regime (L. Con.) provides several rules focused on the protection of creditors and third parties (those who not belong to the corporate group) within the insolvency proceeding of any company member of a corporate group. See below. Both scientific doctrine and jurisprudence have made some important efforts. Jurisprudence has used—not always in a fortunate ways—the lifting of the corporate veil (see below), but currently, due to the legal provisions set out in our L. Con., this doctrine is rarely used.

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Creditors’ and Third Parties’ Protection in the Parent Company

There is no specific legal provisions on this issue. Some scholars have paid attention to this (as regards parent’s minority shareholders).11 10

Vicent Chuliá (2011), pp. 19–43, highlights the inadequacy of the literal application of the legal regime of conflicts of interest and the paralysis of the group that this would entail. Already before, in relation to the regime included in the (now repealed) LSA: V. Fuentes (2007a, b), p. 151 et seq. on the proper interpretation of the directors’ duty of loyalty within the group, the resolution of conflicts of interests therein and their liability regime. More recently, Juste (2015), p. 364, “It is missing, (...), a minimum express attention to the problematic functioning of the subsidiary companies of the group”; Fernández del Pozo (2018), p. 11 et seq. 11 Fuentes (2008), p. 1009 et seq.

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The protection at the parent company level has recently been addressed by the jurisprudence with regard—only—to the information rights of the minority shareholder in the parent company. Indeed, the Spanish Supreme Court—and, to some extent, the LSC after its last reform- has recognized a broader right to information in favor of the parent’s minority shareholders as regards the economic situation of the subsidiaries, since that situation—it is said—might affect their economic rights in their parent company. A brief reference to this important jurisprudential doctrine will be provided in the following lines. Under Spanish law, the shareholder right to information involves two modalities: On the one hand, the right to obtain documentary information (art. 272 LSC and concordant), on the other hand, the right to ask questions before and during the general meeting (art. 197 LSC). It is controversial until what extent the parent shareholders can invoke those rights regarding the subsidiaries (since they are not shareholders of those, but of the parent company only). As regards the right of the parent shareholder’s to obtain documentary information (regarding the subsidiaries), there are numerous references to relationships with subsidiary companies in the documentation prescribed for the approval of certain agreements and, specifically, of the resolutions of the ordinary general meeting. Indeed, it is the responsibility of the general meeting of the parent company to approve the consolidated accounts with the management report and the auditor’s report (art. 42.5 C. com.), whose report informs of the identity of the companies included in the consolidation (and therefore, belonging to the group, in the terms of art. 42.1 C.com.), as well as of the shares and votes held by the subsidiary companies among themselves (art. 48.1 C.com.). However, as established by Judgment of the Supreme Court of May 21th, 2012, the right of the parent’s (minority) shareholders to obtain documentary information does not include the (individual) annual accounts of each of the subsidiary companies part of the group or the documents that accompany it, because the parent company is not competent to approve said subsidiaries’ accounts; although the resolution of the Supreme Court did not allowed for that right for the parent’s shareholders, obiter dicta pointed out the imperfection of our statutory law to properly address this issue within the groups of companies. “The lack of specific rules (...) and the attribution to the “external” shareholders of the poly-corporative structure (. . .) of the same political rights and identical instruments for its exercise as those provided for in the so-called “island” or “isolated” companies (...) it raises numerous problems derived from the inadequacy of balances and tools in companies that in fact modify the system of distribution of competencies among corporate bodies, where there is an increase in the power of the management body and a correlative decrease of that power for shareholders outside the control circle”. It is up to the legislator to design the balance between the rights of minorities and the corporate government in order to avoid, on the one hand, the paralysis of the social organs and, on the other, the abuses of power and the lack of transparency. In keeping with the application of the norm in its own terms, it is necessary to conclude that the right of information in the groups of companies does not attribute to the shareholders that of obtaining the documentation of each one of the member

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companies of the group. The latter are not subject to approval, but those of the whole group, in accordance with the provisions of article 42.5 of the Commercial Code, “the documents submitted for approval by the general meeting, as well as the group management report and the report of the auditors”. As regards the right to ask questions, it has been said that it is difficult to determine a priori what parent’s shareholders can “ask” (or better, about what shareholders are entitled to an answer) in relation to the subsidiaries. Notwithstanding, there is a principle to part from: the issues with/and of the subsidiaries can be “matters included in the agenda” (articles 196.1 and 197.1 LSC) of the parent company’s general meeting, if they offer sufficient relief how to determine significantly the outcome/results of the parent company. This statement is supported by the LSC, after the last reform of 2014,12 when it warns that the shareholder with a participation of less than 25% of the share capital may be denied the information that is harmful “to related companies” (art. 197.3 LSC). And this equals to assert that the information not harmful to the “related companies” must be provided to those shareholders that demand it, as long as it is related to the agenda content, the information is necessary for the participation rights of the shareholder (ex art. 197.3 LSC) and there are no objective reasons to suspect an abusive use thereof.13 Apart from this statutory reform, recently the jurisprudence has proved a progression regarding the options that the parent’s shareholders have in order to “expand” their information rights over the subsidiary companies’ issues on the occasion of the parent’s general meetings. However, it must be underlined that this jurisprudence does not refer so much to the scope of the shareholder’s right to information (before or during the meeting), as well as to the informative function of the rights that allow minorities to influence the agenda’s contents: the right to request the calling of an extraordinary general meeting (art. 168 LSC), or the right to complement/add issues to the agenda (arts. 172 and 519 LSC).14 Especially relevant is the Judgement of the Supreme Court of July 15th, 2015, on information rights of the parent’s minority shareholders about resolutions taken at the level of a (wholly owned) subsidiary. The Supreme Court understood that the management of a wholly owned subsidiary is, also, the management of the parent company itself, and those partners with a high participation (qualified minority) in the parent have the right to know and discuss important measures on the wholly owned subsidiary: In the present case, a qualified minority of 48,79% ... cannot be denied the requested information under the pretext that it is not within the competence of the general meeting. In the case of the company for which information is requested ... from a company wholly owned by the defendant [the parent], there are no objective reasons to consider that it could be used for extra-social or abusive purposes, or contrary to the parent’s corporate interest, especially when . . .the parent holds the status of a sole proprietorship and its decisions are

12 By means of Ley 31/2014, de 3 de diciembre, por la que se modifica la Ley de Sociedades de capital para la mejora del gobierno corporativo. 13 In extenso, for all: Martínez (2017). 14 Ibídem, p. 578 et seq.

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the sole shareholder exercising the powers of the general meeting, which can be executed and formalized by the sole shareholder or by the directors of the company. If the thesis of the contested judgment were supported, the wholly owned company, whose corporate purpose is complementary to that of the defendant [parent]company, might adopt decisions through its directors, subtracting relevant information from shareholders of the defendant [parent] company that hold 48,79% of the share capital, keeping hidden some decisions that suppose, among other questions: (1) to discharge as directors of the aforementioned subsidiary to some of those who hold a significant stake in the parent company; and (2ª) to modify the corporate purpose, expanding it, in activities that corresponded to the parent company or to another company ... destined to the second generation shareholders.

Other judgments have also dealt with the extent of the parent’s shareholders right to information about subsidiaries. In the case resolved by the Audiencia Provincial de Madrid (Sec. 28) of July 15th, 2016, another minority shareholder with 19.46% of the capital stock in the parent company, claimed the nullity of the general meeting (and all its resolutions). The ground was the refusal to publish the “agenda supplement” to the convened general meeting adding some information points regarding the subsidiaries. The Audiencia confirmed the ruling of the lower court granting that the parent’s shareholder was entitled to receive some specific accounting information regarding two subsidiaries (specifically, on the evolution of the equity or fondos propios and the deposit of the annual accounts), since there was no reason to infer any abusive use of that information by that minority shareholder. Following this line, a recent judgment of the same Audiencia (March 23th, 2017) refers the jurisprudential doctrine of the Supreme Court mentioned above and has pointed out that although the parent’s shareholder right to information has some limits (“the request for information in relation to the agreement of approval of accounts cannot become a file to try to scrutinize the accounts of third parties”), the information had to be provided because the knowledge of the accounting status of the subsidiary “is essential” for the parent’s shareholder (who held a 33% of the capital stock in the parent) given the relevant value for the parent of its participation (95,45%) in the subsidiary.

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Parent and Subsidiary Board Members’ Duties and Liabilities: Loyalty, Fiduciary Duties, Utmost Good Faith and Fairness. Confidentiality, Self Dealing, Duty of Non Competing, Conflict of Interests. Other Duties Within a Group

No specific rules but the general ones for directors conflicts of interests (art. 228 to 230 LSC), except for the provision set out -for listed companies- in article 529 ter LSC (as specified before in question Sect. 13).

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Shareholders Duties and Liabilities. Specific Rules. Controlling Shareholders Fiduciary Duty? Controlling Shareholders Liability. The Controlling Shareholder as Shadow Director

No specific rules imposing fiduciary duties or liabilities on controlling shareholders (only on directors). However, fiduciary duties (on shareholders) are implicitly recognized in articles 7 and 1258 Código Civil. The controlling shareholder could be considered a shadow director if the requisites of the jurisprudence concur, but they are not specifically focused on groups. This is (partially, due to the scholars work) the jurisprudence has moved to consider that the group existence, per se, does not imply that the parent company (controlling shareholder) is a shadow or a de facto director of the subsidiaries. See Judgement of the Audiencia Provincial of Madrid (sec.28ª), April, 8th, 2013: “Especially delicate is the question within the group of companies where there is no basis to attribute to the parent entity or its directors, by the mere fact of being so, the status of de facto director of the subsidiary...”.(. . .) “Likewise, the unified direction within a group of companies cannot be confused with the direct management of the dominated by the dominant one...To that purpose it should be required, at least, that the dominant exercise directly the management of the dominated giving imperative instructions to the administrators of the dominated or, where appropriate, in the course of the management of the dominant decides on matters of the dominated, imposing such decisions on the administrators of the dominated company”.

18

Auditors and Internal Organic Supervisory Bodies’ Rights and Duties in Relation to Subsidiaries and Other Group Companies. Scope of Investigation Procedures and Shareholders’ Rights to Request Them

Article 42. 4○ and 5○ paragraphs C. de com. establish: 4. The general meeting of the company required to prepare the consolidated annual accounts shall designate the auditors of accounts who are to control the annual accounts and the management report of the group. The auditors will verify the consistency of the management report with the consolidated annual accounts. 5. The consolidated accounts and the management report of the group shall be submitted to the approval of the general meeting of the company required to consolidate simultaneously with the annual accounts of this company. Shareholders of the companies belonging to the group may obtain from the company required to prepare the consolidated annual accounts the documents submitted to the approval of the general meeting, as well as the management report of the group and the report of the auditors. The deposit of the consolidated accounts, the management report of the group and the report of the auditors in the Mercantile Registry and the publication of the same shall be made in accordance with what is established for the annual accounts of public limited companies.

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Related Party Transactions: Disclosure and Specific Mechanisms

General rules for related party transactions are observed for all companies (regardless of whether or not they belong to a group). Only article 529 ter LSC observes a specific rule (for listed companies). See answers above (especially Sect. 13).

20

Separate Legal Personality of Each Group Company. Guarantees Within a Group. Each Company’s Purpose as a Limit for Guarantees for Another Entity’s Debts. Lettre de patronage

The jurisprudence has developed this issue in relation with article 71 LC (acción rescisoria). Although a few years ago, all the intragroup guarantees were rescinded in the insolvency proceeding (because they were considered harmful and gratuitous), now, the jurisprudence considers that these guarantees are not gratuitous because they are given in the intragroup management context, and, when some circumstances are given (mostly, “teoría de las ventajas compensatorias” requisites), then, the guarantee is not rescinded (see STS 30.04.2014 already mentioned).

21

Disregarding of the Corporate Legal Entity (Lifting the Corporate Veil, Durchgriff, inoponibilidad de la personalidad juridica) as Regards Creditors and Third Parties (Also Shareholders?) Protection

As regards the direct protection of creditors, the lifting the veil doctrine has traditionally been the instrument used by our courts along the last century. The “excessive” use of this doctrine—that led into a liability of the parent for their subsidiaries’ debts—was hardly criticized by scholars because its application implied a “pathologic” conception of the group ex se (whose mere existence and characteristic functioning was associated on many occasions with fraud or abuse that gave rise to the lifting of the veil (see, among others, the Judgements of the Supreme Court, October 16th, 1989; December 13th, 1996; October 15th, 1997; November 19th, 2003 and June 22th, 2003).15 The most recent jurisprudence has abandoned the “pathological” conception of the phenomenon of the group. The current prevailing jurisprudential doctrine sees

15

Embid (1998), p. 363 et seq; Fuentes (2007b), p. 351 et seq.

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the group as a legitimate reality that, as such, does not deserve to be sanctioned with the lifting of the veil unless those exceptional circumstances that justify its application -fraud or abuse of law to the detriment of creditors- concur. The Supreme Court Judgements of July 29th, 2005 and December 12th, 2012, are good examples of the current position of the highest court on this issue, stating that the lifting the veil doctrine is an “exceptional” remedy that cannot be invoked without a solid justification, given the legitimacy of the groups of companies and the fact that these, per se, are not fraudulent.

22

Insolvency: When Is Liability Imposed on Controlling Parties and What Is Its Scope?

No liability is imposed specifically in insolvency within groups. Only if it can be proved that the parent company has acted as a de facto or a shadow director. Then, the parent can be liable according to article 178 bis LC (up to the debts unpaid to creditors when the company’s assets cannot cover them).

23 23.1

Subordination and Substantive Consolidation Subordination

Articles 92 and 93.2.3 L. Con. incorporate the automatic subordination of all the credits of the companies of the same group. Pursuant to arts. 92.5 and 93.2.3○ LC, those credits belonging to “the companies part of the same group as the company declared insolvent and its common shareholders, provided that they meet the same conditions provided in number 1 of this section” will be classified as subordinated. This latter reference to the paragraph 1○ of art. 93.2 LC, affects to those shareholders personally responsible for the debts, or to (“significant”) shareholders holding 5% or 10% of the capital, depending on whether or not it is a listed company. Thus, the subordination of credits affects, automatically,16 to all the companies of the same group as the insolvent one and also to those shareholders that can be qualifed as “common”.17 However, not all credits granted by those common shareholders will be subordinated by the application of articles 92.5○ and 93.2.3○ LC. The provision exempts the “credits different from the loans or acts with analogous

16

This has been critized by many scholars. For all, see: Alonso (2004), p. 924, 929 et seq. This last reference—“common partners”—has caused doubts among the doctrine. It is prevalent to understand that “common shareholders” are those who hold significant participations both in the insolvent company and in some other company of the same group. 17

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purpose of which the partners to whom article 93.2.1○ and 3○ who meet the conditions of participation are holders in the capital that is indicated there”. Therefore, only the credits of the shareholders mentioned in article 93.2.1○ and 3○ that consist of a “loan” or that have “analogous purpose” will be subordinated, but not the rest of the credits that such creditors have against the insolvent debtor [v. Judgement of the Court of Appeal of Madrid (secc. 28ª), October, 28th, 2016], excluding from the subordination a credit derived from a judicial sentence, and not from a loan or similar act]. It has been said that this restriction has represented an attempt to overcome the “automatism” of the institution of subordination so criticized by the doctrine, by means of distinguishing the origin of the credit.18 Bear in mind, however, that the regulatory exception does not affect loans granted between companies in the same group, which will continue to be automatically postponed, regardless of their nature. Another core issue that arises when studying this institution is the definition of the temporal scope of the subordination rule provided for in article 93.2.3○ LC. After various legislative reforms and doctrinal and jurisprudential pronouncements, it should be noted the following: Firstly, the moment in which the subjective condition -common shareholder or company member of the group- must concur for those credits to be subordinated is “the moment of the birth of the credit”. Certainly, this mention is only foreseen in paragraph 1 of article 93.2 LC (when it refers to the subordination of credits of significant shareholders), but it must also be understood applicable to the condition of a group company. Secondly, although the LC is imprecise about the time-period of application of the rule, our doctrine and majority jurisprudence understands that the term “two years prior to the declaration of insolvency” provided by articles 71, 93.2.2○ and 93.3 LC the norms are applicable analogously to the subjects referred to in 93.2.3○ , i.e., the group companies—and their common shareholders—[see Judgement of the Supreme Court of March, 4th, 2016].

23.2

Consolidation

The LC contains a specific chapter on “related insolvency proceedings”,19 where it is observed that those proceedings of several companies belonging to the same group can be run by the same judge in a coordinated manner, either jointly declared ab initio (art. 25 LC) or accumulated subsequently (art. 25 bis LC). Despite this regime is initially intended only to achieve a coordinated process of several separate insolvencies, the judge may exceptionally consolidate “inventories and lists of

18

Introduced by a reform of the LC by 38/2011 Act of amendment of the Insolvency Act. The provisions included in a “third chapter” are also applied to other “related parties”; however, the reform was intended to, mainly, address the insolvency proceedings of companies belonging to the same group (as the explanatory memorandum states). 19

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creditors” in cases of confusion of assets and impossibility to define assets and liabilities of the different insolvent group companies without incurring in an unjustified expense or delay (art. 25 ter LC). Article 25 ter (parr. 2○ ) L. Con. observes substantive consolidation only when exceptional requisites concur: “2. Exceptionally, inventories (i.e. assets) and lists of creditors (i.e. debts) may be consolidated for the purpose of preparing the report of the insolvency administration when there is confusion of assets and it is not possible to separate the ownership of assets and liabilities without incurring an unjustified expense or delay”. The true scope and transcendence of this precept is not clear and its application in practice could lead to a real “substantial” consolidation,20 a purpose that—perhaps—was not initially in the legislator’s aim, as it will be later explained.

23.2.1

Declaration of Joint Insolvency Proceedings Against Several Group Companies

The application for the joint declaration of insolvency against several companies which are part of the same group is regulated in article 25 LC. It is important to point out that the provision does not observe the insolvency of the whole group members neither of the “group” as such, but the insolvency of several entities (two or more) members of the same group. Pursuant to this provision the petition can be lodged by the insolvent companies (concurso voluntario) or by a—common—creditor (concurso necesario). In order to determine the competent court to declare the opening of the joint insolvency proceedings, the legislator has set out two rules: (1) the judge of the seat where the parent company has his “center of the main interests” (COMI), in the understanding that the center of its main interests is in the place of its registered office21 (art. 10.1. 2○ LC); (2) if the insolvency is requested for two companies belonging to the same group without being able to attribute the status of parent/dominant company to any of them, it will be the liabilities—i.e., the company with the greatest liabilities—that determines the competent court (art. 25.4○ LC).

23.2.2

Accumulation of Insolvency Proceedings

Article 25 bis LC sets out the possibility to accumulate the insolvency proceedings (already opened) of several group companies. Those who can lodge the petition are, as established in Sect. 2, either any of the insolvent companies, or the insolvency receivers. Should the petition not be filed by the any of them, any of the creditors may request the judge for the accumulation by reasoned writing.

20

In extenso, see Flores (2014). Criteria that must be weighed in light of articles 9 and 10 of the LSC regarding the determination of the registered office. 21

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The accumulation of insolvency proceedings always raises problems as to which should be the court that, among those who were aware of the several proceedings, should finally be the competent for the accumulated one. There are two criteria for groups of companies (see art. 25.3 bis LC). In the first place, the competent judge will be the one processing the insolvency of the parent company. Secondly, should the parent company had not been declared insolvent, the competent judge will be the one in charge of the first declared insolvent (group) company. Therefore, the criterion of the largest liabilities as the key element for the court competence disappears and yields in favor of the priority criterion, according to which, the most modern processes must be accumulated to the oldest one. This latter solution is coherent with the general criterion regarding proceedings accumulation established in article 79.2○ of the Ley de Enjuiciamiento Civil, while the other criteria for “joint declared insolvencies”—the greatest liabilities—seems to be an special solution. As it has been pointed out, the criteria of the—largest liabilities—has provoked some mistrust in situations where, as it is the case of the groups, the transfer of debts in the pre-insolvency phase are not unusual in order to “direct” the process before any hypothetical accumulation.22

23.2.3

Procedural Legal Nature of the Related Insolvency Proceedings: The Formal Coordination of Insolvencies as the General Rule

Related insolvency proceedings, regardless of whether they were jointly declared ab initio (ex art. 25 LC) or subject to a subsequent accumulation (ex art. 25 bis LC), must be processed “in a coordinated way”, such as noted in paragraph 1 of the— somehow confusing—wording of the article 25 ter LC. The coordination operates in a strict procedural field [v. SAP de Guipúzcoa (secc.2ª) of 03.02.2015]. Indeed, the most relevant statement of paragraph 1 of article 25 ter LC is the explanation that offers on the strictly procedural legal nature of the “related insolvency proceedings” (some sort of “formal consolidation”), i.e., excluding the so-called “substantive consolidation” (“Insolvency proceedings declared jointly and accumulated shall be processed in a coordinated manner, without consolidation of the joint assets”). Thus, although occasionally accepted prior to the 2011 insolvency law reform [see Judgement of Appeal Court of Barcelona (sec.15ª) June, 28th, 201123], the LC expressly discards in the first paragraph of article 25 ter LC that the related proceedings have a “substantive” or “material” nature that may result in any consolidation of the assets and liabilities of the different companies insolvent.

22 23

Sánchez-Calero (2005), p. 7 et seq.; Sánchez-Calero and Fuentes (2011), p. 9 et seq. Against this possibility: the Judgement of the Supreme Court of December, 13th, 2012.

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The (Excepcional) Susbstantive Nature of Related Insolvency Proceedings: The Consolidation of Assets and Liabilities

The general rule on the procedural meaning of the related insolvency proceedings is mitigated by the cryptic content of paragraph 2 of article 25 ter LC when saying: “Exceptionally, it will be possible to consolidate inventories and lists of creditors for the purpose of preparing the receivers’ report when there are mingled assets as to make impossible distinguishing the ownership of assets and liabilities without incurring in an unjustified expense or delay”. This statement is equivocal and could lead to an “open door” to the application of substantial consolidation within the groups, joining assets and liabilities of the different insolvent companies as if they were one debtor (i.e., one legal person). Indeed, different approaches have been made in relation to the meaning and extent of this provision. Some of them have understood that the expression “for the purpose of preparing the receivers’ report” is intended to facilitate the work of the receiver during a temporal and objective purpose: preparing the report. Some others, however, have noted out that if this consolidation were purely formal, it would require in practice that, once the receiver’s report is drawn up with the inventories and lists of creditors already consolidated, the same receiver will have to proceed to “separate” mingled assets, identifying and allocating every asset and liability that, a priori, had been considered as too expensive or time-consuming. The fact is that this task, in certain cases would simply be impossible to meet, and in other cases will be excessive in terms of time and costs for the poor assets of the debtor. This is why some court decision has understood that the consolidation of paragraph 2 of article 25 ter LC is of a substantial nature, and that when the receiver’s report has been drafted in a consolidated way, it leads creditors of each insolvent company to extend their expectations to the overall—consolidated—assets of the several companies involved [v. Auto of the Juzgado de lo Mercantil de Madrid (num. 8) of Januray, 30th, 2014; Judgment of the Juzgado de lo Mercantil (num.1) of Palma de Mallorca, of November, 6th, 2013].24 In any case, consolidation pursuant article 25.2○ ter LC is not the same as the “substantive consolidation doctrine” elaborated by the American jurisprudence. The requites to apply this exceptional measure under Spanish insolvency law are: (1) the comingling of assets refers only to those group companies already declared insolvent (not of any other in bonis); (2) the comingling must be so severe that it would make it impossible for the receiver to discern their ownership without incurring in an unjustified expense or delay. Therefore, the provision contains purely objective criteria, dispensing of any subjective element related to the fraudulent o abusive intention on the debtor/s regarding the rights of third parties (creditors). Finally, it is important to underline that the application of this sui generis “substantive consolidation” in Spain is meant to be absolutely exceptional. This institution that does not always lead to a better protection for creditors of the several

24

In extenso, Fuentes (2015), p. 107 et seq.

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companies affected: it involves a radical change in their expectations of satisfaction, improving those of debtors in worse economic situation but also worsening those of the creditors with better situation. Besides, the application of the institution breaches the “relativity principle” (of contracts) set out in article 1257 of the Spanish Civil Code. This line of thought has been taken up by the Judgement of the Court of Appeal (Audiencia) Guipúzcoa (secc.2ª), February 3th, 2015, which points out that the consolidation of art. 25. 2○ ter LC is exceptional because of the need to “preserve the legitimate rights of creditors who decided to contract with a certain company of the group in the frame of the confidence on the concrete patrimony of each one of them”.25 Therefore, it can be concluded that from the exceptionality and strict requisites for the rule to be applied (only in cases of severe comingling of assets and liabilities), and from the absence of any subjective or intentional element, it can be inferred that the “consolidation of inventories and lists of creditors” has not been designed to reach some sort of material justice attracting responsibilities of other subjects, nor to provide a more equitable distribution of the debtor’s assets among its creditors. It seems more correct to understand that the consolidation ex art. 25.2 ter LC has been conceived as an “enabling tool” for the judge and the receiver to get a solution for an insolvency proceeding that affects several debtors (in this case, companies of the same group) with severe comingled patrimonies that, otherwise, would be almost impossible to get.

24

Liability for Factual Appearance and for Breach of a Created Confidence

There has been one relevant Supreme Court decision, commented by our scholars, but this is not a relevant issue in Spain, nor repeated of followed by more Supreme Court decisions.

25

This line of thought was already pointed out by the STS of 13.12.2012 which -before the entry into force of this provision- refused the consolidation requested by the appellant creditor, among other reasons, because it had not accredited the “circumstances exceptional that justify converting into debtors of their contractual credits to third parties, for which the contracts that originated them constitute, as a rule, “res inter alios” (thing among others)”.

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Transactions Regarding the Taking of Control. Takeovers. Mandatory Bids. Exclusion and Withdrawal Rights, Squeeze Out Regulations: Only for Listed Public Corporations or Also for Private Companies?

Only for listed public corporations. Article 136.1 Ley Mercado de Valores (“LMV”) establishes: “When, as a result of a public tender offer for all securities, under the terms of articles 128 to 133 and 137, the offeror holds securities representing at least 90% of the capital that confers voting rights and the Offer has been accepted by holders of securities representing at least 90% of voting rights, other than those already held by the offeror: a) The offeror may require the remaining holders of securities to sell such securities at a fair price. B) The holders of securities of the affected company may demand from the offeror the purchase of their securities at a fair price”.

26

Rules on Group Information to Be Provided to the Market

Information on consolidated annual accounts (see above, art. 42 C.Com et seq.). Information required, for listed companies, by the (yearly) Corporate Governance Report (art. 540 LSC and (yearly) Report on remuneration of directors (art. 541 LSC).

27

Group Information and Rules in Competition Law

No specific rules apart from article 61.2 LDC, already mentioned, establishing liability on the controlling company for law infringements.

28

Workers Protection and Social Security Regulations vis-à-vis National or International Migration Within a Group

No specific legal provision (applicability of general labour law). However, labor jurisprudence is always very protective with workers and imposes liability—very often—on parent companies for debts of their subsidiaries (towards workers).

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Special Rules on Environmental Responsibilities Within a Group

No specific legal provision (nor case law).

30

How Are Groups Treated for Tax Law Purposes? Differences According to Different Taxes? Transfer Pricing Within a Group. Special Tax Rules for Enterprise Reorganizations (Merger, Spin Off, etc.)

There are some specific rules for tax law purposes: “Consolidación fiscal”, already answered.

31

Liability of Parent Company in Consumer Protection and Product Liability Law

No specific legal provision (nor case law).

32

Relevance of Being Part of a Group in Foreign Investment Law, Investment Protection Treaties and Registration of a Foreign Company in the Country

No specific legal provision (nor case law).

33

Do Private International Law Rules on Companies Change in the Presence of a Corporate Group or of Control Over a Local Company. What National Law Is Applicable to Group Companies in So Far as Concerns Shareholder and Creditor Protection?

The rules concerning shareholder and creditor protection are the lex societatis rules. No relevance of the corporate group as such in this context.

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Are There Special Rules on Groups or Control Applicable to Financial Institutions or Insurance Companies? To Other Activities?

Yes, (as far as I know), there are special rules, but not special from the Spanish legislator, but from the European Law Regulations and Directives (on banking and insurance activities).

35

Are There Special Rules on the Participation of Other Group Companies in an Arbitration Procedure?

No, there are not.

36

Any Special Procedural Rules Applicable to Groups or Companies Under the Control of Another Entity? Service of Notice of a Claim?

No, there are not.

References Alonso C (2004) “Comentario al artículo 92: Créditos subordinados”, y “Comentario al artículo 93: Personas especialmente relacionadas con el concursado”. In: Comentarios a la Legislación Concursal. Dykinson, Madrid, p 924, 929 et seq De Arriba ML (2004) Derecho de grupos de sociedades. Civitas, Madrid, p 97 et seq, 329 et seq Embid JM (1998) Protección de acreedores, grupo de sociedades y levantamiento del velo de la personalidad jurídica. Revista de Derecho de Sociedades 11:363 et seq Embid JM (2000) The contract of constitution of the group in Spanish law. Revista de Derecho de Sociedades 57:74 Embid JM (2016) Interés del grupo y ventajas compensatorias. Comentario de la sentencia del Tribunal Supremo (1ª) de 11 de diciembre de 2015. RDM 300:301 et seq Fernández del Pozo L (2018) Las operaciones vinculadas intragrupo. Estado de la cuestión en derecho español y necesidad de su reforma. Revista de Derecho Bancario y Bursátil 149:11 et seq Flores M (2014) Los concursos conexos. Thomson-Reuters, Cizur Menor Fuentes M (2007a) Grupos de sociedades y protección de acreedores. Civitas, Cizur Menor, p 97 et seq Fuentes M (2007b) El levantamiento del velo en los grupos de sociedades como instrumento tuitivo de los acreedores. Revista de Derecho de Sociedades 8:351 et seq

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Fuentes M (2008) Accionistas externos Accionistas externos de grupos de sociedades: una primera aproximación a la necesidad de extender la perspectiva tuitiva a la sociedad matriz. Revista de Derecho mercantil 269:1009 et seq Fuentes M (2011) Artículo 18 LSC. In: Rojo A, Beltrán E (eds) Comentario de la Ley de Sociedades de Capital, I. Thomson-Aranzadi, Cizur Menor, p 298 et seq Fuentes M (2015) Consolidación de inventarios y listas de acreedores y grupos de sociedades. Revista de Derecho Concursal y Paraconcursal 23:107 et seq Girgado P (2001) La empresa de grupo y el Derecho de sociedades. Comares, Granada, p 139 et seq Juste J (2015) Art. 227. In: Comentario de la reforma del régimen de las sociedades de capital en materia de gobierno corporativo (Ley 31/2014). Thomson-Aranzadi, Cizur Menor, p 364 Martínez M (2017) La ampliación de la información que reciben los socios de la sociedad dominante sobre la filial, mediante la propuesta de puntos informativos en el orden del día. In: Libro Homenaje a Carmen Alonso Ledesma. Iustel, p 563 et seq Sacristán M (1982) El grupo de estructura paritaria: caracterización y problemas. Revista de Derecho Mercantil (165–166):375 et seq Sánchez-Calero J (2005) Algunas cuestiones concursales relativas a los grupos de sociedades. ADCo (6):7 et seq Sánchez-Calero J, Fuentes M (2011) La insolvencia de los grupos: los trabajos de la CNUDMI y el Derecho concursal español. ADCo (22):9 et seq Vicent Chuliá F (2011) Groups of companies and conflicts of interest. RDM 280:19–43

National Report on Japan Tomotaka Fujita

Abstract Corporate groups, consisting of a parent and its subsidiaries, are the most essential elements of the Japanese economy. This report explains the treatment of corporate groups under Japanese corporate law. Japanese law does not see a corporate group as a legal entity to which rights and obligations are attributable, nor does it contain systematic regulations on corporate groups. However, there are a number of corporate law rules that refer to “parents,” “subsidiaries,” or “corporate groups.” Rules on accounting and disclosure incorporate regulations based on a consolidated basis, which requires the information on member companies of the groups. There are no specific regulations that address the protection of the minority shareholders and creditors of subsidiaries; instead, these are left to general rules on the duties and liabilities of corporate directors. While Japanese corporate law does not recognize the Rozenblum Doctrine or similar theories, which recognize the interests of corporate groups, the directors of the subsidiaries may still justify their decision on a specific transaction with their parent that is disadvantageous for the subsidiary because they have a wide range of discretion concerning how to maximize the subsidiary’s long-term corporate value. The law for the protection of a parent firm’s shareholders has been developed by recent case law and the revision of the Companies Act, such as the parent firm’s directors’ duty to monitor the subsidiary, the regulation on internal control systems to govern corporate groups, and the introduction of multiple derivative actions. Finally, we can see the development of the regulations to protect investors’ interests when a corporate group is formed. More specifically, the rules applicable to the cases of “squeeze-out” and changes in corporate control transactions are examined.

T. Fujita (*) Graduate Schools for Law and Politics, University of Tokyo, Tokyo, Japan e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_7

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1 Introduction Corporate groups consisting of a parent and its subsidiaries are the most essential elements in the Japanese economy. Among the 3594 listed companies on the Tokyo Stock Exchange, 64.1% have less than 10 consolidated subsidiaries,1 27.9% 10–49 consolidated subsidiaries, 4.5% 50–99 consolidated subsidiaries, 2.6% 100–299 consolidated subsidiaries, and 0.9% more than 300 consolidated subsidiaries.2 The largest corporate groups have more than 1000 subsidiaries.3 The subsidiaries have different attributes. Some are wholly owned, and others are not. Some are listed, and others are not. Some are domestic corporations, and others foreign. Given the prevalence of corporate groups in business activities, Japanese legislations often refer to “corporate group,” “controlled companies,” or similar concepts, although the definition is often different depending on the purpose of each statute. For example, the Companies Act,4 as is explained in detail below, contains provisions based on the concepts: “parent company,” “subsidiary,” and “corporate group.” The Financial Instruments and Exchange Act,5 the basic regulation on capital markets, defines “a corporate group” as a “group consisting of the relevant company and persons . . .. . . satisfying the requirements that Cabinet Office Ordinance specifies, as other companies in which the relevant company holds majority voting rights or as persons that are otherwise closely related to the relevant company.” (Art. 5(1)(ii)) It also has many provisions that refer to a “parent” or “subsidiaries.” The Bankruptcy Act6 provides that a bankruptcy trustee, when necessary to perform his/her duties, may request a subsidiary company of the bankrupt to give an explanation on the status of its business and property, or may inspect its books, documents and any other objects. (Art.83(2)) The Act on Prohibition of Private Monopolization and Maintenance of Fair Trade Law (“Antimonopoly Act”)7 uses the concept of “the group of combined companies,” which means “a group consisting of the relevant company, its subsidiary companies, its parent company

A “consolidated subsidiary” means a subsidiary which are reported on the parent’s consolidated financial statements. (See Sect. 4.1 below). 2 Tokyo Stock Exchange, Inc., TSE-Listed Companies White Paper on Corporate Governance 2019 (English version), p. 6. 3 Based on their business report 2018, Sony Corporation has 1556 consolidated subsidiaries and Nomura Holdings 1366. 4 Act No. 86 of 2005. Corporate law was a part of the Commercial Code (Act No. 48 of 1899) until 2005. The 2005 Revision of the Commercial Code compiled the provisions on corporate law into an independent legislation “the Companies Act”. The translation of Japanese legislation in this article is mostly based on “Japanese Law Translation Database System” on the Ministry of Justice website although sometimes slightly modified. See http://www.japaneselawtranslation.go.jp/. 5 Act No. 25 of 1948. 6 Act No. 75 of 2004. 7 Act No. 54 of 1947. 1

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which is not a subsidiary company of another company, and subsidiary companies of the relevant parent company.” (Art. 10(2)) The Corporation Tax Act8 adopts a consolidated tax system when a domestic corporation has a full controlling interest in other companies. (Art. 4(2)) The Banking Act9 and Insurance Business Act10 takes into account corporate groups or controlled companies to implement effective financial regulations. Although there are a few exceptions, legislations for administrative regulations are more likely to introduce the rules applicable on a corporate group basis than legislations in the private law area. For example, the Consumer Contract Act,11 which regulates the unfair contractual terms, does not refer to corporate groups, subsidiaries, or similar concepts. Neither does the Product Liability Act.12 The Act on Sales, etc. of Financial Instruments,13 which provides the civil liability of financial instrument providers, unlike the Financial Instruments and Exchange Act, has no reference to corporate groups or subsidiaries. The remainder of this article mainly focuses on the corporate law rules regarding corporate groups and the relationship between parents and subsidiaries. There is no statute that specifically applies to corporate groups or parent–subsidiary relationships in Japan. The interests of relevant parties are, in principle, governed by the Companies Act and case laws interpreting the Act.

2 A Corporate Group as a Legal Entity Japanese law does not recognize a corporate group as a unified business organization or a legal entity. It is a well-established principle that parents and subsidiaries (even wholly owned ones) have a different legal personality and a creditor of a parent, for example, cannot automatically claim against its subsidiaries and vice versa. However, there is an exception to this principle. Although there is no specific provision in the Companies Act, the doctrine of piercing the corporate veil has been developed in case law. In the Supreme Court Decision Feb. 27, 1969,14 the doctrine was formalized as follows: the corporate veil can be pierced when “a legal personality has no substance at all or is misused to avoid an application of law.” Therefore, in theory, it is possible that a parent and subsidiaries are treated as one legal entity based on this doctrine under the circumstances of the case.

8

Act No. 34 of 1965. Act No. 59 of 1981. 10 Act No. 105 of 1995. 11 Act No. 61 of 2000. 12 Act No. 85 of 1994. 13 Act No. 101 of 2000. 14 Saiko Saibansho Minji Hanreishū (Minshū) [Supreme Court Reporter], v. 23, p. 511. 9

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One should also note that sometimes courts extend the regulation on a company to its parent or subsidiaries even without relying on veil piercing. For example, Supreme Court Decision Sept. 9, 199315 prohibited a wholly-owned subsidiary to purchase its parent shares despite the fact that the Commercial Code16 applicable to the case only regulated the company’s repurchase of its own stock. In this case, the Court regarded the action of a wholly-owned subsidiary as that of the company itself and applied the regulation of share repurchase.

3 Basic Concepts Under the Companies Act 3.1

“Parent Company” and “Subsidiary”

The concepts of a “parent company” and a “subsidiary” appear throughout the Companies Act. These terms are defined as follows. “‘Subsidiary’ means any entity which is prescribed by the applicable Ordinance of the Ministry of Justice as the juridical person the management of which is controlled by a Company, including, but not limited to, a Stock Company a majority of all votes in which are owned by the Company.” (Art.2(iii)) “‘Parent Company’ means any entity which is prescribed by the applicable Ordinance of the Ministry of Justice as a juridical person who controls the management of a Stock Company, including, but not limited to, a Company which has a Stock Company as its Subsidiary.” (Art.2(iv))

Under the above definition, the control over the management of another company is the essential element for the parent–subsidiary relationship. First, if a company owns the majority of voting shares,17 it has “control over the management.” Second, it is possible to have “control over the management” even without the majority of the voting shares. Ordinance for Enforcement of the Companies Act18 provides the detailed conditions for the “control over the management” being established when a company has 40% or more voting rights of other companies. The conditions are highly complicated in which various elements that would affect a company’s decisions on the financial and business policies, including the members of the board, contracts for controlling the management, and the amount of equity and debt provided, are taken into account.19 One should also note that when a parent and its subsidiary jointly have “control over the management” of another company,

15

Saiko Saibansho Minji Hanreishū (Minshū) [Supreme Court Reporter], v. 47, p. 4814. Prior to the enactment of Companies Act in 2005, corporate law constituted a part of the Commercial Code in Japan. 17 More precisely, the majority of shares which has the voting right regarding the decision to choose directors at the shareholders meeting. 18 Ordinance of the Ministry of Justice No. 12 of 2006. 19 Article 3(3)(ii) provides that the “control over the management” exists. 16

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such company is also a subsidiary of the parent company. For example, let us assume Company A has 51% of the voting share of Company B, and Company A has 30% and Company B has 21% of Company C. In this case, Company C is a subsidiary of Company A. In short, the parent–subsidiary relationship under the Companies Act can be established either (1) by the holding the majority voting rights or (2) combining 40% or more voting rights and other de facto influences over company’s decisions on the financial and business policies through various elements such as the overlap of the directors or the amount lending. Although the parent–subsidiary relationship under the Companies Act is not completely formalistic (i.e., one which is based on

where the voting rights in a second Company, etc., of the number of that a first Company, etc. holds on its own account is 40 percent or greater of the total number of voting rights in the second Company, etc. (excluding the cases listed in the preceding item), and where any one of the following requirements is satisfied: (a) the rate of the first Company’s Own and Equivalent Voting Rights (meaning the total number of the following voting rights; the same applies in the following item) in the second Company, etc. exceed 50 percent of the total number of voting rights in the second Company, etc.: 1. voting rights held on the first Company’s own account; 2. voting rights held by persons who are found to exercise their voting rights in accordance with the wishes of the first Company, etc. due to a close relationship therewith in terms of investment, personnel, funds, technology, transactions, or other matters; and 3. voting rights held by persons who have agreed to exercise their voting rights in accordance with the wishes of the first Company, etc.; (b) that the rate of the number of the following persons of the first Company, etc. (limited to those capable of exercising influence in connection with decisions on the financial and business policies of the second Company, etc.) exceeds 50 percent of the total number of members on the board of directors or other equivalent body of the second Company, etc. of: 1. 2. 3. 4.

Officers of the first Company, etc.; members who execute business at the first Company, etc.; employees of the first Company, etc.; and a person who was a person listed in 1. through 3;

(c) that an agreement, etc. exists under which the first Company controls decisions on the important financial and business policies of the second Company, etc.; (d) that the amount of financing (including the amount of financing carried out by a party that has a close relationship with the first Company, etc. in terms of investment, personnel, funds, technology, transactions, etc.) (including guarantees on obligations and provision of collateral; the same applies in (d)) that the first Company, etc. carries out in the second Company, etc. exceeds 50 percent of the total amount of procured funds of the second Company, etc. (limited to funds recorded in the section on liabilities in the balance sheet); (e) that other facts exist suggesting that the first Company, etc. controls decisions on the financial and business policies of the second Company, etc.

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the percentage of the total voting rights), the de facto power over the management alone, however strong, is not sufficient to establish the relationship. The parent-subsidiary relationship leads to several legal consequences under the Companies Act, which are explained in Sects. 4–7.

3.2

“Corporate Group”

Some provisions20 in the Companies Act use the concept of a “corporate group,” which means a group consisting of a parent and its subsidiaries. The concept is used in the context of financial statements and the business report (See Sect. 4) and the internal control systems (See Sect. 6.2). It should be noted, however, this does not mean that the Act treats a corporate group as one entity or recognizes the “interest of corporate group” as justifying a certain act or behavior of the management of a parent or subsidiaries.

4 Accounting and Disclosure The Companies Act requires a company to provide relevant information on a corporate group to which it belongs to as well as the information on the company itself. The Financial Instruments and Exchange Act also require a similar disclosure to the investors.

4.1

Consolidated Financial Statements

A listed company of a certain size21 is required to produce consolidated financial statements. (Art. 444(3)) A company with financial auditor(s) that does not meet the

20

Article 345(3)(iv), 362(4)(vi), 399-13(1)(i)(c), 416(1)(i)(e), and 444(1). The formal requirement under Article 444(3) is a “large Company as at the last day of a business year which should submit a securities report to the Prime Minister pursuant to the provisions of Article 24(1) of the Financial Instruments and Exchange Act.” A “Large Company” means any Stock Company that satisfies either of the following conditions: (a)that the amount of the stated capital in the balance sheet as of the end of its Most Recent Business Year is 500,000,000 yen or more; or (b)that the total sum of the amounts in the liabilities section of the balance sheet as of the end of its Most Recent Business Year is 20,000,000,000 yen or more. (Art. 2(vi)). Companies that should submit a securities report to the Prime Minister under the Financial Instruments and Exchange Act are primarily listed companies.

21

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requirement under Art. 444(3) may also voluntarily produce consolidated financial statements. (Art. 444(1)). Consolidated financial statements are defined as “statements which are necessary and appropriate to indicate the status of the assets and profits and losses of a group of enterprises comprised of a company and its subsidiaries.”22 (Art. 444(1)) In short, they are statements that report the accounting data as if all companies belonging to a certain corporate group (a parent and its “consolidated subsidiaries”) are one entity. The consolidated financial statements were introduced in the 2002 Revision of the Commercial Code, although they had been required under the Securities Exchange Act.23 Consolidated financial statements are prepared primarily for the purpose of disclosure to a company’s shareholders and creditors. The financial restriction for dividends and other distribution to shareholders of a company is based on each company’s own financial statements rather than consolidated financial statements. However, a company may reduce the limitation of distribution based on consolidated financial statements if the distributable amount of each company is larger than the distributable amount calculated on a consolidated basis. Consolidated financial statements affect the substantive aspects only to this extent under the current law.

4.2 4.2.1

Business Report Information on Related Party Transactions

A company should produce a business report for each financial year. A business report should include information on related party transactions. Article 118(v) of the Ordinance for Enforcement of the Companies Act, which was added to implement the 2014 Revision of the Companies Act, requires that the business report of a subsidiary should include the information on relevant transactions with its parent or other related parties. Specifically, the report should include (1) if the subsidiary took any measures to prevent the harm to its interest (if there is none, the subsidiary should state the fact) and (2) the director’s judgment as to whether the transaction does not harm the interest of the subsidiary and the reason for the judgment, and (3) the opinion of the outside director(s), if any, when his/her (their) opinion is different from director’s judgment in (2). Although it failed to introduce a substantive regulation on related party transactions (See Sect. 4), the 2014 Revision of the Companies Act strengthened the disclosure on the related party transactions to protect the interest of minority shareholders and creditors of the subsidiaries. 22

Details of the statements are prescribed in Article 61 of the Ordinance for Enforcement of the Companies Act. 23 The title of the Securities Exchange Act was changed to Financial Instruments and Exchange Act in in 2006.

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Information on the Corporate Group in a Public Company’s Business Report

A business report of a public company24 should contain “matters related to the current status” of the company. (Art.119 of the Ordinance for Enforcement of the Companies Act) “Matters related to the current status” include “the status of the parent company and significant subsidiaries.” (Art. 120(1)(vii)) When a company prepares consolidated financial statements, “matters related to the current status” may be replaced by “matters related to the current status of the group of enterprises comprised of the company and subsidiaries,” and information contained in the consolidated financial statements can be omitted in the business report. Most public companies choose to report “matters related to the current status of the group of enterprises” in their business report and leave relevant financial information of the group to their consolidated financial statements.

5 Protection of the Shareholders and Creditors of Subsidiaries Corporate law scholarship has recognized that the protection of minority shareholders and creditors of subsidiaries as one of the most important issues in corporate law for many years. In contrast, despite the academic attention given to the problem, the Japanese legislator has been very reluctant to address the issue, and courts seldom have provided a remedy to minority shareholders and creditors. See Sect. 5.1.2 below.

5.1

Protection of Minority Shareholders

Apart from the disclosure explained in Sect. 3, there is no systematic statutory regulation on the protection of minority shareholders in controlled companies in Japan. Although there are fragmentary regulations applicable to the transactions between related companies, the issues are mostly left to the general duty of a company’s directors.

“Public Company” means any Stock Company the articles of incorporation of which do not require, as a feature of all or part of its shares, the approval of the Stock Company for the acquisition of such shares by transfer. (Art. 2(v) of the Companies Act). 24

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Liability of a Subsidiary’s Directors General Duty of Care and Duty of Loyalty

The directors of a company owe fiduciary duty to a company.25 If the directors breach their duty, they are held liable to the subsidiary for the damage caused to the subsidiary. (Art. 423(1))26 The liability can be enforced by a derivative action by a shareholder if the company (subsidiary) does not enforce it. (Art. 847)27 The directors of a subsidiary are no exception, and if they cause damage to the subsidiary, they may be held liable to the subsidiary. The directors of a subsidiary cannot make an excuse, as they followed the instruction of the parent company (the controlling shareholder) or they maximized the interest of the corporate group. A recent Tokyo High Court case28 clearly states, “The interest of minority may be unreasonably damaged for the benefit of its parent in the transaction between a parent and its subsidiary and the protection of such interest is highly required when the subsidiary is a listed company with a large number of shareholders. If directors of a subsidiary cause the damage to the subsidiary for the benefit of its parent and the interest of minority shareholders in the subsidiary is harmed, they can be liable for breaching their duty of care and duty of loyalty.” There is no established theory along the lines of Rozenblum Doctrine29 which allows the subsidiary’s director to harm subsidiary’s interest for the benefit of the parent or the corporate group as a whole under the current Japanese law. However, the mere fact that a certain transaction between a parent and a subsidiary caused the loss to the subsidiary is not sufficient for holding the subsidiary’s directors liable. The above case denied the liability of a subsidiary’s directors in connection with a “cash management system” within a corporate group.30 When

Article 355 provides “Article 355 Directors shall perform their duties for the Stock Company in a loyal manner in compliance with laws and regulations, the articles of incorporation, and resolutions of shareholders meetings.” Despite its wordings (“a loyal manner”), director’s duty under Article 355 is interpreted as including the duty of care and duty of loyalty. Supreme Court Decision Jun. 24, 1970, Saiko Saibansho Minji Hanreishū (Minshū) [Supreme Court Reporter], v.24, p. 625. It is also noteworthy that a director owes his/her duty to the company and not to shareholders under Japanese law. 26 Article 423(1) of the Companies Act provides “If a director, accounting advisor, company auditor, executive officer or financial auditor (hereinafter in this Section referred to as “Officers, Etc.”) neglects his/her duties, he/she shall be liable to such Stock Company for damages arising as a result thereof.” 27 A shareholder with one share of a company can bring a derivative action to sue the directors on behalf of a company under Japanese law. 28 Tokyo High Court Decision Feb. 13, 2013 [unreported]. 29 Cass. crim., 4.2.1985, J.C.P., ed. E, 1985, II, 14614. 30 Nissan Group introduced the following “cash management system” for the finance inside the Nissan Group. Nissan Finance, 100% subsidiary of Nissan accepts deposits from companies within Nissan Group and lends its money to other group companies. If a company within Nissan Group participated in the scheme, it can deposit to and borrow from Nissan Finance. The rate for deposit 25

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courts examine the damage (disadvantage) to the subsidiary on over all basis as opposed to the transaction by transaction basis and general benefit which the subsidiaries enjoy for being a member of the group may be taken into account. For example, if there is a continuing relationship among the members of a corporate group and a member company is better off during certain period of time, court will unlikely find that such member company incurred the loss even if a specific transaction is disadvantageous for it. Even without Rozenblum Doctrine or similar theory, a subsidiary’s director can often justify their decisions asserting that the cooperation with the parent or member companies of the group will maximize the long-term corporate value of the subsidiary.

5.1.1.2

Special Regulation on Self-dealing

The regulation on directors’ self-dealing may be applicable to the transaction between a parent company and its subsidiary. Article 356(1)(ii) and 361(1) requires the board’s approval31 when a director of a company enters into a transaction with the company for himself/herself or on behalf of a third party. The provision applies not only to a simple self-dealing between a director and a company, but also to a transaction between a parent and its subsidiary or between subsidiaries when interlocking directorship exists. Example Let us assume that a Parent Company A enters into a transaction with its subsidiary Company B. Company A’s President X serves as the director of Company B. The transaction between Company A and Company B caused damage to Company B. A minority shareholder of Company B brings a derivative action against X for the damage which Company B suffers. In this situation, Article 356(1)(ii) applies because X (Company B’s director) is considered to act on behalf of a third party [Company A] because she is a president of Company A. When a director engages in a transaction to which Article 356(1) applies and the transaction caused damage to a company, the breach of her duty is presumed. (Art. 423(3)) Therefore, X in the above example is liable for the damage

and borrowing is the same and relatively low. Nissan Body, a member of Nissan Group and a subsidiary of Nissan, made a deposit of substantial amount. Nissan Body’s shareholder brought an injunction action against its directors to make a deposit to Nissan Finance. They argued that the deposit rate was too low and Nissan Body would suffer a loss. Tokyo High Court dismissed the claim, stating that the decision to participate in the “cash management system” is within the reasonable discretion of Nissan Body’s directors and does not constitute the breach of their duty to the company. 31 If a company does not have a board, the transaction should be approved by the shareholder’s meeting.

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caused to Company B unless she proves that she has not breached her duty or is not negligent in breaching her duty.32

5.1.2

Liability of a Parent Company

Is there any possibility that the shareholder of the subsidiary can sue the parent company if the subsidiary suffered damage by the action of its parent or by the transaction between parent and the subsidiary? The Companies Act has no specific provision giving the basis for the claim and the subsidiary may claim for the damage against its parent based on torts. (Art.709 of the Civil Code33) Although there have been legislative proposals34 for a possible claim against the parent company, the legislators have been reluctant to adopt them. Most recently, the issue was intensively discussed during the discussion in Legislative Council of Ministry of Justice that resulted in the 2014 Revision of Companies Act. There was a proposal to introduce a provision that regulates the transaction between a parent and its subsidiaries. It imposes liability on a parent if the interest of subsidiary is damaged compared with the case when the parent and the subsidiary had not entered into the transaction.35 Under the proposed provision, the parent company is not liable simply because the contract terms are not unfair. It is liable if and only if the economic interest of the subsidiary is worse off before the transaction. This is a much more modest standard than the “arm’s length test,” which academics have proposed for years.36 Nevertheless, the proposal was not finally adopted by the Legislative Council of Ministry of Justice. There was another proposal discussed during the legislative process of the 2014 Revision of Companies Act which allows the subsidiary’s shareholders to enforce the subsidiary’s tort claims against its parents through a derivative action.37 The proposal was also rejected during the discussion in the Legislative Council of Ministry of Justice.

32 Although the wording of Article 423 is not explicit, both negligence and breach of duty are required for the directors being liable under Article 423. The director bears the burden of proving the lack of negligence. 33 Article 709 of the Civil Code provides: “A person who has intentionally or negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence.” 34 The most famous proposal is contained in Kenjiro Egashira, Ketsugo Kigyo-ho no Rippo to Kaishaku [The Legislation and Interpretation of Consolidated Companies Law], 1995. 35 Ministry of Justice Civil Affairs Bureau Counselor, The Interim Draft Guidelines for the Revision (2011). 36 See Egashira, supra note 34. 37 Ministry of Justice Civil Affairs Bureau Counselor, The Interim Draft Guidelines for the Revision (2011).

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Decision by the Shareholders Meeting of the Subsidiary

The interest of the minority shareholders of a subsidiary may be harmed by the decision by the shareholders meeting controlled by its parent when a corporate fundamental change, such as a merger or a corporate split, is involved. Example Let us assume that a Parent Company A enters into a merger contract with its subsidiary Company B in which Company A absorbs Company B and Company B dissolves. Under the terms of the merger contract, Company A issues shares to Company B’s shareholders. The merger ratio (the ratio of the shares allotted to Company B) is unfairly advantageous to Company A. The merger contract was approved38 by the shareholders meeting of Company A and Company B. In this example, the interest of the minority shareholder of Company B (subsidiary) is harmed by the approval of the merger contract by its shareholders meeting controlled by Company A (parent). Shareholders of Company B may seek the remedy in the following way.

5.1.3.1

Making the Resolution at the Shareholders Meeting Void

A resolution of a shareholders’ meeting is voidable if a shareholder with a special interest with the resolution exercised his/her voting right and the substance of resolution is extremely unfair. (Art. 831(1)(iii)39) In the above example, Company A is a “shareholder with a special interest” because it has an incentive to approve the merger contract that is advantageous to Company A and has a conflicting interest with Company B. The resolution to approve the merger contract at Company B’s shareholders meeting is, therefore, voidable if the merger ratio is considered “extremely unfair.” It should be noted, however, that courts are very cautious to find that the resolution is “extremely unfair” and thereby making the shareholders meeting and consequently the merger void because it would affect the interest of many parties who are involved in the transactions with both companies.

5.1.3.2

Appraisal Remedy

Company B’s shareholders may also rely on their right for appraisal remedy. Shareholders who dissented to approve the merger contract at the shareholders

38 Companies Act requires that a merger contract should be approved by the shareholders’ meeting of both companies. (Arts. 783(1) and 795(1)). 39 Article 831(1)(iii) provides that a resolution of shareholders meeting is voidable “when an extremely unfair resolution is made as a result of a person with a special interest in the resolution of the Shareholders Meeting, etc. exercising a voting right.”

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meeting can ask the company to purchase their shares at a fair price.40 The “fair price” means either (1) the price the share would have if the shareholders meeting had not approved the merger contract or (2) the price the share would have if the substance of the merger contract had been fair.41

5.1.3.3

Liability of the Subsidiary’s Directors

It is possible for the shareholders of Company B to sue its directors for damage caused by the merger in the above example. The directors of Company B have a duty to negotiate with Company A with respect to the terms of the merger contract for the benefit of Company B, and failing to do so would constitute the breach of their duty. One should note that the minority shareholders in the above example cannot rely on derivative action.42 Instead, Company B’s former shareholder would claim for the reduction of their shares caused by the merger to the Company B’s former directors based on Article 429(1).43

5.1.4

Summary

In sum, the protection of minority shareholders is left to the application of general rules of the director’s duty and liability and other remedies, such as appraisal rights. The subsidiary’s minority shareholder may successfully claim against the directors of the subsidiary if the subsidiary is damaged by its parent through a transaction between the parent and the subsidiary or for any other reason. The subsidiary’s minority shareholders are less likely to make claims against the parent company.

40

Articles 785(1) and 797(1). Supreme Court Decision Apr. 19, 2011, Saiko Saibansho Minji Hanreishū (Minshū) [Supreme Court Reporter], v.65, p. 1311, Supreme Court Decision Feb. 29, 2012, Saiko Saibansho Minji Hanreishū (Minshū) [Supreme Court Reporter], v.66, p. 1784. 42 Even if Company B had a claim against its directors, the claim disappears when Company B merged into Company A. The damage suffered by Company B is offset by the benefit of Company A and Company A as the surviving company has no longer a claim against Company B’s former directors. Osaka District Court Decision May 31, 2000, Hanrei-jiho, vol. 1742, p. 141. 43 Article 429(1) provides that “If Officers, Etc. are in bad faith or with gross negligence in performing their duties, such Officers, Etc. shall be liable to a third party for damages arising as a result thereof.” Tokyo District Court Decision Sept.29, 2011, Hanrei-jiho, vol. 2138, p. 134 [Company A and Company B agreed the “share transfer,” in which all shareholders of both companies become shareholder of a new company (Company C) while Company A and Company B remain as Company C’s wholly owned subsidiary. A shareholder of Company A sued its director on Article 429(1) alleging that the share transfer ratio is unfairly disadvantageous for Company A. The court dismissed the claim finding that the directors did not breach their fiduciary duty in deciding the share transfer ratio.] A director is “Officers, Etc.” in Article 429. See spura note 27. The “third party” includes shareholders if they suffer damage directly through the officer’s action. 41

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When the interest of a subsidiary is damaged by the merger or other corporate fundamental changes approved by the subsidiary’s shareholders meeting, the minority shareholders can rely on the appraisal remedy, while other claims are less promising. Despite the continuing claim from academics for the legislation for the protection of minority shareholders in subsidiaries, Japanese legislators are reluctant to introduce new regulations. Although one reason is a strong and consistent opposition from the industries, it is not completely convincing because new regulations are often introduced in the area of corporate governance in the recent revisions of the Companies Act despite the opposition of the industry. The more fundamental reason might be that there has been little convincing evidence proving that the interest of minority shareholders is really harmed by the parent companies in Japan, and there is no consensus as to the compelling needs for introducing a new regulation.

5.2

Protection of Creditors

The interest of creditors of the subsidiary can be adversely affected by the instruction or the influence of the parent company. Under limited liability, a parent company has an incentive to allow its subsidiaries to accept excessive risk to enjoy a high return. Example Company A, a parent company, engaged in a high-risk business through its wholly owned subsidiary Company B. Although Company B achieved high performance for years, Company B finally caused a serious incident involving a large number of victims and went bankrupt. The creditors of Company B including the victims with their claims in torts are not fully paid during the bankruptcy process. There is no specific provision in the Companies Act or Bankruptcy Act that addresses the issue of protecting the subsidiary’s creditors. Although there are several possible remedies for the creditors, they are, as is explained below, not sufficiently effective.

5.2.1

Liability of the Subsidiary’s Director

The creditors of Company B in the above example can sue its directors based on Article 429(1).44 There are numerous litigations by the aggrieved creditors of the insolvent company based on the provision. If the directors of the subsidiary acted in bad faith or with gross negligence and blindly took excessive risk for Company B blindly following the instruction of Company A, they may be held liable against the creditors.

44

See supra note 43.

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Liability of the Parent’s Director

The creditors of Company B in the above example may also claim against Company A’s directors based on Article 429(1) or Article 709 of the Civil Code (torts).45 However, it is not likely that Company A’s directors are held liable unless they have given specific instructions to or exercised control over Company B. To the best of the author’s knowledge, there has been no case in which the parent’s director was held liable to the subsidiary’s creditors.

5.2.3

Liability of the Parent Company

As noted earlier, the doctrine of veil piercing is recognized in Japanese courts (See Sect. 2). Therefore, in theory, one cannot completely preclude the possibility that a parent may be held liable for a subsidiary’s debt based on this doctrine. In the above example, the creditors of Company B might sue Company A, arguing that Company B’s corporate veil is pierced under the specific circumstances of the case. In reality, however, there have been few cases in which Japanese courts have denied the shareholder’s limited liability based on the doctrine.46 The creditors of Company B may also sue Company A based on Article 709 of the Civil Code (torts).47 However, it is not likely that Company A’s directors are held liable unless it has given specific instructions to or exercised control over Company B. To the best of the author’s knowledge, there has been no case in which the parent’s director was held liable to the subsidiary’s creditors.

5.2.4

Summary

To sum up, the subsidiary’s creditors may successfully make claims against the directors of the subsidiary if their management is sufficiently unreasonable. Claims to other parties such as a parent company or its directors are much less promising.

6 Protection of the Shareholders in a Parent Company Japanese lawyers have not paid much attention to the protection of the parent company’s shareholders. However, the 1997 Revision of the Antimonopoly Act, which allowed the establishment of a holding company, changed the situation. A

45

See supra note 33. Although there have been a number of cases in which the court “pierced the corporate veil,” most of them have very little to do with a shareholder’s limited liability. 47 See supra note 33. 46

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holding company, by definition, has no business other than controlling its subsidiaries. Therefore, the shareholders of a holding company have legitimate interest in how its subsidiaries are properly managed. It is also recognized that shareholders would substantially lose control over the business when a company conducts the same business through its subsidiaries. The commentators called the phenomenon the “reduction of shareholder’s rights” in holding companies.48 With the rapid development of corporate groups that are governed by a holding company, the protection of the parent company’s shareholders became one of the most important agendas for the recent corporate law. Japanese courts have gradually been recognizing that the parent’s director owes a duty to properly manage the subsidiary’s business (See Sect. 6.1 below). While the Companies Act provided relatively small rights to the parent’s shareholders, the 2014 Revision of the Companies Act added substantial changes to protect the interests of a parent company’s shareholders (See Sects. 6.2–6.4 below).

6.1

Obligation of a Parent Company’s Directors to Monitor the Operation of Subsidiaries

For many years, Japanese courts have adopted the principle that a parent and its subsidiaries have a different legal personality and the directors of parent company has, in principle, no obligation to monitor the management of subsidiaries. Tokyo District Court Decision Jan. 25, 200149 is a typical example. The court decided that the directors of a parent company are not liable to the parent company for the improper management of its subsidiary unless when they actually controlled the decision-making of the subsidiary by, for example, giving instructions. However, the recent courts seem to be changing. Fukuoka High Court Decision Apr. 13, 201250 decided that a director of a parent company breached the duty to monitor the proper management of the subsidiary in connection with the improper transactions and inventory control occurring in a subsidiary.51 The recent amendment to the Companies Act (See Sect. 6.2 below) is considered to be based on the assumption that directors of a parent company have a duty to manage the subsidiary to the extent it is possible and desirable.

48

The term derives from the academic discussion in Germany. Hanrei-jiho, vol. 1760, p. 144. 50 Kinyu-shoji-hanrei, vol. 1399, p. 24. 51 The court of the first instance of the case (Fukuoka District Court Decision Jan. 26, 2011, Kinyushoji-hanrei, vol. 1367, p. 41) also found that the director is in breach of his obligation. 49

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Internal Control System to Govern Corporate Groups

The Companies Act refers to the internal control system in several places. Article 362(4) (vi) demands the board decision if a company wishes to introduce an internal control system,52 and Article 362(5) requires that a large company53 shall decide on the internal control system. The provision refers to the internal control system as “the systems necessary to ensure that the execution of duties by directors complies with laws and regulations and the articles of incorporation, and other systems prescribed by the applicable Ordinance of the Ministry of Justice as systems necessary to ensure the properness of operations of a Stock Company and the corporate group which consists of the stock company and its subsidiaries”(emphasis added).54 One should note that these provisions are not the basis of for obligation to establish an internal control system that covers the whole corporate group.55 Nevertheless, given the increasing role of an internal control system in modern corporate governance, a company of a certain size, in effect, should establish an effective internal control system which covers the proper management of the corporate group as a whole otherwise the directors of such a company would be held liable as breaching its fiduciary duty.

6.3 6.3.1

Rights of the Parent’s Shareholders Rights to Acquire the Information on the Subsidiaries

A shareholder of a parent company can, with the permission of the court, inspect or copy (1) the register of shareholders (Art. 124(4)), (2) the minutes of the board meeting (Art. 371(5)), and (3) account books of the subsidiaries (Art. 433(3)56). These rights are exceptional in that they are exercised against a subsidiary, a

52

This means that the decision on the internal control system cannot be left to executive directors. See supra note 21. 54 Although the reference provision to the corporate group is added in 2016 Revision of the Companies Act, the similar reference had already existed in Article 100 of the Ordinance for Enforcement of the Companies Act. 55 Although Article 362(5) provides that a large company should “decide” on an internal control system, it does not require a large company to establish such a system. The provision does not exclude the possibility of a large company’s decision not to introduce an internal control system. However, it may be possible that it would constitute the breach obligation of the directors to agree to such a decision. 56 Article 433(3) provides as follows: 53

If it is necessary for the purpose of exercising the rights of a Member of the Parent Company of a Stock Company, he/she may, with the permission of the court, make the request listed in each item of paragraph (1) with respect to the account books or materials relating thereto. In such cases, the reasons for such request shall be disclosed.

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company of a different legal personality. They were introduced by the 1999 Revision of the Commercial Code57 to meet the concern of a “reduction of shareholder’s rights.”

6.3.2

Multiple Derivative Action

Japanese corporate law introduced “derivative action” under the influence of the U.S. law in the 1950 Revision of the Commercial Code. A shareholder of a company can bring an action to enforce liability of directors on its behalf when a company does not enforce it. When the directors of a subsidiary have breached their obligation and caused damage to the subsidiary, a parent, as a shareholder of the subsidiary, can rely on the derivative action when the subsidiary does not enforce their liability. However, the shareholders of a parent company are not entitled to bring a derivative action to enforce the liability of the subsidiary’s directors.58 However, it is not plausible that the board of a parent company sufficiently enforce the liability of its subsidiary’s liability, which was regarded as a typical “reduction of shareholder’s rights” in holding companies.59 To meet the concern of the 2014 Revision of the Companies Act, although in a substantially limited manner, a “multiple derivative action” was introduced, which allows the shareholders of a parent who has shares equal to or more than one percent (1%) of its voting rights can bring a derivative action to enforce the liability of its significant wholly-owned subsidiaries when either a parent company or its subsidiary does not enforce it. (Art. 847-360) The application of a “multiple derivative 57

Articles 260-4(6), 263(7) and 282(3) of the Commercial Code prior to the 2005 amendment. The 1999 Revision of the Commercial Code introduced “share transfer” and “share exchange,” which are used to establish a wholly-owning parent company. Since the 1997 Revision of the Antimonopoly Act allowed holding companies, it was thought necessary to facilitate to create wholly owning parent company. At the same time, the concern of a “reduction of shareholder’s rights” was discussed in the revision process. 58 Although there were academic arguments to support such an action, Japanese courts have not accepted such an action. 59 See supra note 48. 60 Article 847-3(1) provides as follows: A shareholder who holds votes of one-hundredths (1/100) (or, in cases where a lesser proportion is prescribed in the articles of incorporation, said proportion) or more of the votes of all shareholders (excluding shareholders who cannot exercise voting rights for all of matters that can be voted in the shareholders meeting) of the Ultimate, Wholly Owning Parent Company, etc. of a Stock Company (meaning the Wholly Owning Parent Company, etc. of the Stock Company which itself has no Wholly Owning Parent Company, etc.; the same shall apply hereinafter in this Part) continuously over six months (or, in cases where a shorter period is prescribed in the articles of incorporation, said period or more) or a shareholder who holds shares at or more than one-hundredths (1/100) (or, in cases where a shorter period is prescribed in the articles of incorporation, said period or more) of Issued Shares (excluding treasury shares) of said Ultimate, Wholly Owning Parent Company, etc. may demand said Stock Company to file an Action to Enforce Specific Liability (hereinafter

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action” is limited to the following cases: (a) the subsidiaries are a wholly owned61 and (b) the value of the subsidiary’s shares exceeds 20% of the parent’s the total asset value.62 It should also be noted that the parent’s shareholder should have more than 1% of its shares to rely on the multiple derivative action while any shareholder can bring an ordinary derivative action.

6.3.3

Transfer of the Subsidiary’s Shares

Japanese law requires the approval of a shareholders meeting when a company assigns all or a significant part63 of its business to another. (Art. 467) Although a transfer of the shares of wholly-owned subsidiaries has economically similar effects on the assignment of a part of the business, the approval of a shareholders meeting had not been required for the former. This was also regarded as a typical “reduction of shareholder’s rights” in holding companies.64 Article 467(1)(ii-2), which was added by the 2014 Revision of the Companies Act, requires approval of the parent’s shareholders meeting when it transfers all or part of the shares of its subsidiaries if (1) the book value of the transferred shares exceeds 20% of the parent’s the total asset value, and (2) the parent company loses its control of the subsidiary as the result of such transfer.

referred to as “Action to Enforce Specific Liability” hereinafter in this Part); provided, however, that this shall not apply to cases corresponding to any of the following: (i) In cases where the Action to Enforce Specific Liability is to seek unlawful benefits of said shareholder or a third party or to inflict damages on said Stock Company or said Ultimate, Wholly Owning Parent Company, etc.; and (ii) In cases where said Ultimate, Wholly Owning Parent Company, etc. does not suffer damages by the fact of causing said Specific Liability. 61 It should be noted that “wholly-owned” relationship extends to the multiple ownership structure. If Company A is a wholly-owned subsidiary of Company B and Company B is a wholly-owned subsidiary of Company C, Company A is treated as a wholly-owned subsidiary of Company C. The same applies to Company C when Company B has all voting shares of Company A; A is treated as a wholly-owned subsidiary of Company C. 62 Article 847-3(4) provides as follows: “Specific Liability” as prescribed in paragraph (1) means the liability of the Incorporator, etc. of a Stock Company, in cases where the book value of the Stock Company’s shares at the Ultimate, Wholly Owning Parent Company, etc. and its Wholly Owned Subsidiary Companies, etc. (including anything deemed to be the Wholly Owned Subsidiary Company, etc. thereof pursuant to the provisions of the preceding paragraph; the same shall apply in the following paragraph and Article 849(3)) exceeds one-fifth (1/5) (or, in cases where a lesser proportion is prescribed in the articles of incorporation, such proportion) of the value calculated by the method prescribed by the applicable Ordinance of the Ministry of Justice as the total assets of said Ultimate, Wholly Owning Parent Company, etc. on the day when the fact giving rise to the liability of said Incorporator, etc. occurred (the same shall apply in paragraph (10) and paragraph (7) of said Article). 63 Article 467(1)(ii) excludes the assignment in which the book value of the assets to be assigned to others by such assignment does not exceed one fifth (1/5) from the scope of the regulation. 64 See supra note 48.

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A Company Auditor’s Right to Acquire the Information on the Subsidiaries

Ar5. 381(3) of the Companies Act provides that a company auditor of a parent company, in necessary, can obtain relevant information of the subsidiaries.65 Unlike the right of a parent’s shareholders to acquire information on the subsidiaries, a company auditor can exercise this right without the permission of the court.

7 Other Legal Consequences Attached to Parent-Subsidiary Relationships or Corporate Groups 7.1

The Prohibition of Acquiring Parent Company’s Share by Its Subsidiaries

Article 135(1) of the Companies Act prohibits subsidiaries to acquire their parent’s shares except for the limited cases specified in Article 135(2).66 The subsidiary’s acquisition of parent’s shares has economically a similar effect of the acquisition by the parent itself. It is partly explained as the protection of the parent’s creditors (regulation of the distribution of the company’s assets to its shareholders) and partly 65

Article 381(3) and (4) provide as follows: (3) Company auditors may, if it is necessary for the purpose of performing duties of the company auditors, request reports on the business from a Subsidiary of the Company with Company Auditor(s), or investigate the status of the operations and financial status of its Subsidiary. (4) The Subsidiary under the preceding paragraph may refuse the report or investigation under that paragraph if there are justifiable grounds.

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Article 135 (1) A Subsidiary may not acquire the shares of a Stock Company that is its Parent Company (hereinafter in this Article referred to as “Parent Company’s Shares”). (2) The provisions of the preceding paragraph shall not apply to the following cases:

(i) Cases where the Subsidiary accepts the transfer of the Parent Company’s Shares held by another Company in cases where the Subsidiary accepts the transfer of the entire business of such other Company (including Foreign Companies); (ii) Cases where the Subsidiary succeeds to the Parent Company’s Shares from a Company disappearing due to merger; (iii) Cases where the Subsidiary succeeds to the Parent Company’s Shares from another Company by Absorption-type Company Split; (iv) Cases where the Subsidiary succeeds to the Parent Company’s Shares from another Company by Incorporation-type Company Split; or (v) In addition to the cases provided for in the preceding items, cases prescribed by the applicable Ordinance of the Ministry of Justice. (3) The Subsidiary shall dispose of the Parent Company’s Shares held by the same at an appropriate time.

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as the protection of the parent’s shareholders (equal treatment of the parent’s shareholders). The regulation of Article 135 might seem excessive in that the subsidiary’s acquisition of parent’s shares is more restricted than repurchases of the shares by the company itself. Under the Companies Act, a company’s share repurchase is not completely prohibited if (1) a company has “distributable amount” which can be distributed to the shareholders and (2) it observes the procedure to guarantee the equal treatment of its shareholders while Article 135 prohibits the subsidiary’s acquisition of parent’s shares with very limited exceptions. The reason for this anomaly is explained that it is very difficult to provide a sensible regulation of the “distributable amount” when the parent-subsidiary is complex.67

7.2

The Restriction of the Subsidiary’s Voting Rights at Its Parent’s Shareholders Meeting

A subsidiary has no voting right at the parent company’s shareholders meeting. Strictly speaking, this is not a consequence of the parent-subsidiary relationship. If it is “substantially controlled” by other company, a company does not have the voting rights at the controlling company. (Art. 308(1)) “Substantial control” for the purpose of Article 308(1) is much lower than the control required for parent-subsidiary relationship.68 If a company owns one-fourth (1/4) of the voting share of another company, such company is regarded as having a “substantial control.” (Art.308 (1)).69 The purpose of the regulation is to prevent the board or its executive members of a “substantially controlling” company (including a parent) controls its shareholders meeting.

67

For example, if Company A owns 51% of Company B’s share and Company B has 51% of Company C’s share. When Company A, Company B and Company C jointly owns 51% of Company D, Company D is a Company A’s subsidiary. It would be a very complex to calculate the “distributable amount” of Company A which applies to the case when Company D purchases Company A’s share. 68 For “the control over the management” required for parent-subsidiary relationship, See Sect. 3.1 above. 69 Article 67 of the Ordinance for Enforcement of the Companies Act provides the details on how to calculate the voting rights in this context.

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Qualification of “Outside Directors” and “Company Auditors”

Outside directors and company auditors who monitor the management are expected to be independent of the executive members (executive directors and officers) of the company. Since the directors and the employees of a subsidiary are controlled by the parent and its executive members, they cannot be an outside director or a company auditor of the parent. (Arts. 2(15) and 335(2)) The directors and the employees of a parent has a special interest with the parent and its executive members, they cannot be an outside director or a company outside auditor70 of the subsidiary. (Arts. 2(15) and 2(16)).

8 Squeeze Out of the Minority Shareholders 8.1

Methods for the Squeeze Out

Squeeze out transaction became possible since 2005 when the Companies Act was enacted. The Act allowed to “cash out” the minority shareholders in several methods including a “cash-out merger”. A squeeze out of the minority shareholders is possible if it is approved by super majority (two-third (2/3)) at the shareholders meeting. The ordinary method currently used for squeeze out is as follows. (a) When the majority shareholders acquire equal to or more than two-third (2/3) of the voting shares, they can consolidate the company’s shares by the resolution of at the shareholders meeting. (Art. 180 and 309(2)(iv)) The majority shareholders consolidate the shares at substantially large ratio so that all minority shareholders own less than one share. These fractions of shares can be purchased by a company. (b) When the majority shareholders acquire more than ninety percent (90%) of the voting shares (a “special controlling shareholders”), they can rely on a simplified procedure. A “a special controlling shareholders” may demand the minority shareholder to sell their shares at the price they specify. (Art. 179(1)) Although the purchase of minority’s shares in this procedure requires the board’s consent (Art.179-3(3)), the shareholders meeting is not necessary.

70 One should note director and the employees of a parent company can serve as a statutory auditor of its subsidiaries although it cannot be “outside” auditors. (Art.2(16)) Only the independence from the executive members is required for being a company auditor and a parent’s directors and employees satisfy this requirement.

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Although a different method had been used in the past, all squeeze out are conducted either of these methods since the 2014 Revision of the Companies Act depending on the portion of shares which the majority could obtain at the first stage.

8.2 8.2.1

Protection of the Minority Shareholders Appraisal Remedy for the Shareholders

Whichever method is used for a squeeze out, minority shareholders who are not satisfied with the amount for they receive can demand the court to decide the “fair value” of their shares.71 There have been a number of recent disputes regarding “fair value” for squeeze out, Supreme Court Decision July 1, 201672 decided that the price offered at the preceding takeover bids (TOB) was “fair value” (i) if a proper procedure, such as the hearing of the opinion of an independent committee or experts, is taken in order to avoid the decision making being distorted by the conflict of interests between majority and minority shareholders and (ii) the sufficient number of shareholders sold their shares in the TOB procedure in which it is explicitly announced that the bidder would purchase the remaining shares at the same price offered at the TOB even if shareholders did not accept the offer at the TOB. The latter requirement ((ii)) intends to avoid the pressure to tender and exclude the “coerciveness” of the TOB. On June 28, 2019, Ministry of Economy, Trade and Industry published “The Guideline for Fair M&As: Enhancing Corporate Value and Securing Shareholders’ Interest” which proposes the best practice for Management Buyout (MBOs) and other transactions between interested parties. Although the it is not binding for the courts, the price determined by the parties observing the procedure specified by the Guideline will likely be respected by the courts.

8.2.2

The Liability of the Directors

Recent lower court cases have recognized the liability of the directors of the company who themselves squeeze out its shareholders (such as in the case of “management buyout”) or who approved the price offered by the majority shareholders. Tokyo High Court Decision Apr. 17, 201373 stated that the directors of a company owed an obligation to its shareholders to ensure the reasonable price when a squeeze out is conducted and the breach of the obligation would trigger their

71

Article 182-4 provides the shareholder’s appraisal remedy for the share consolidation. Saiko Saibansho Minji Hanreishū (Minshū) [Supreme Court Reporter], v. 70, p. 1445. 73 Hanrei-jiho, vol. 2190, p. 96. 72

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liability under Article 429(1)74 although the court did not find the price offered at the squeeze out in question was not unreasonable.

8.2.3

Sell Out Rights of the Shareholders

Unlike some countries, the right of minority shareholders’ “sell out” of their share.

9 Mandatory TOB for Obtaining Controlling Shares75 9.1

Mandatory TOB for Acquiring the Controlling Shares

The Financial Instruments and Exchange Act requires, except for several exempted cases, the acquirer of the controlling shares, i.e., the shares with the one third (1/3) of the voting rights of a company, to launch a TOB (“mandatory TOB”). (Article 27-2 (1)) The requirement was introduced by the 1990 Revision of Securities Exchange Act.76 Therefore, if an acquirer wishes to obtain more than one third of the issuer’s voting shares outside of the market, a TOB is required for such purchase since the 1990 Revision (“mandatory offer rule”). It should be noted that the “mandatory TOB” under Japanese law is completely different nature from the European regulations.77 While the essence of the European regulation is to guarantee the shareholders of a target company an opportunity to “exit” instead of remaining as minority shareholders. In contrast, the purpose of Japanese mandatory TOB, according to the legislator of the 1990 Revision, is to make corporate control transactions transparent and prohibit a private purchase of a controlling block. The purpose of Japanese regulation which is different from European one reflects in the differences. (1) The mandatory TOB is required for the acquisition of the controlling shares.78 If an acquirer obtains, as a result of a certain purchase, more than one third of company’s total voting shares, such purchase is subject to mandatory offer

74

See supra note 43. For the detailed explanation for this topic, see Fujita (2011), p. 24. 76 The Law Amending a Part of Securities Exchange Act (Law No.43, 1990). The new rule came into force since December 12, 1990. 77 TOB regulations in EU states are based on Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids [“Directive”]. 78 For instance, if the acquirer has 25% of the target’s shares and wish to acquire 10% more, such a purchase must be achieved through a TOB (or other exempted method). 75

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regulation while a TOB is required after the acquirer’s shareholding reaches the threshold (e.g., 30%79) under European regulations.80 (2) Under European regulation, when a mandatory offer applies, the acquirer, in principle, must purchase all shares that are tendered81 while the acquirer does not necessarily have to purchase all shares in Japan. Japanese regulation does not intend to guarantee the shareholder of the target company to exit unless the acquirer obtains two-thirds (2/3) of the voting rights. (3) European regulation requires the mandatory TOB when the acquirer obtains controlling shares, no matter the form of the acquisition of controlling shares. Japanese regulation does not apply when the acquirer purchases a target’s share from the stock market. It also does not apply when the acquirer obtains the controlling shares from the primary market such as the issuance of new stocks.82 The legislator thought the acquisition of control through the purchase in the stock market or the issuance of the shares are “transparent” and it is not necessary to replace them by a TOB.

9.2

Obligation to Acquire All Shares

The 2006 Revision83 of the Securities Exchange Act added the acquirer’s obligation to purchase all shares of the target company. Until the 2006 Revision, the acquirer was free to place the limitation of shares that it wished to purchase regardless of whether the offer was mandatory or voluntary. The revision imposed the acquirer to purchase all shares that are tendered if it obtain more than two thirds (2/3) of the total voting shares of the target company.84

10

Conclusion

This chapter describes how Japanese law, especially the Companies Act, treats parent–subsidiary relationships and corporate groups.

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The threshold differs among EU member states. EU Directive Article 5(1). 81 EU Directive Article 5(1). 82 When a company issues new stocks to a certain person and it acquires more than one third (1/3) of the total voting shares, no mandatory offer is required. 83 The Law Amending a Part of Securities Exchange Act (Law No.65, 2006). The title of the Act was changed to “Financial Instruments and Exchange Act” since the 2006 Revision. The revision of TOB rules came into force since December 13, 2006 prior to other part of new Financial Instruments and Exchange Act. 84 Act Article 27-14(4), Order Article 14-2(2). 80

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A parent company and its subsidiaries have different legal personalities and are not automatically treated as a unified entity unless otherwise provided by a specific legislation. Although the concept of a “corporate group” appears in the Companies Act, the interest of corporate groups plays a minor role in regulating the act or behavior of the directors. The accounting and disclosure under the Companies Act has taken the corporate groups into account. The financial statements and the business report of a parent company should provide relevant information on the corporate group and its member companies. In contrast, the substantive regulation of the parent–subsidiary relationships and corporate groups is less developed. There are no systematic provisions for the protection of shareholders and creditors of the subsidiaries in the Companies Act, and the issue is left to the possible application of general rules on directors’ duty and liability or other rules, such as appraisal remedy. Given the lack of consensus as to the extent of the actual problems in the real economy and of the need for law reform, one cannot expect the situation to dramatically change in the near future. On the other hand, Japanese legislators and courts have recently begun pay more attention to the protection of the parent’s shareholders and the case law and the business practice is developing. Although it is a relatively new phenomenon in Japan, the number of a “squeeze out” is increasing and there are number of disputes regarding the “fair price” that needs to be paid to the minority shareholders. Courts are likely to respect the price set by the controlling shareholders if a proper procedure is taken in deciding the amount. Finally, Japanese law has a “mandatory TOB” for obtaining controlling shares although the purpose and the nature of the regulation is quite different from that of European regulation.

Reference Fujita T (2011) The takeover regulation in Japan: peculiar developments in the mandatory offer rule. UT Soft Law Rev 3:24

National Report on the United States United States’ Laws Addressing the Two Central Challenges Created by Groups of Companies: Protection of Minority Shareholders and of Creditors Franklin A. Gevurtz

Abstract Affiliation of corporations through parent-subsidiary relationships or common control creates numerous issues under diverse laws in the United States. This chapter focuses, however, on the two central legal challenges created by such corporate groups: (i) Protecting minority shareholders of subsidiaries and controlled corporations from misappropriation and unfair freeze-outs by parent companies and controlling shareholders, and (ii) protecting creditors of subsidiaries and controlled corporations from misappropriation, fraud, and externalization of risk in undercapitalized subsidiaries by parent companies and controlling shareholders.

1 Introduction Relationships of parent and subsidiary (one corporation owns all or a controlling amount of stock in another) and common ownership (the same individual, entity or cohesive group owns a controlling interest in a number of corporations) create what are commonly referred to as corporate groups or affiliated corporations. Laws in numerous fields, including, of course, corporate law, as well as bankruptcy, civil procedure, tax, financial reporting, antitrust, employment, bank regulation, and the like, confront issues raised by corporate groups. An attempt to present the law governing corporate groups in the United States covering all these fields is hampered by the fact that there is no cohesive law of corporate groups in the United States. Each area of law has its own definition for the ties between corporations necessary to trigger various rules. In some instances, as for example with the corporate laws protecting minority shareholders or creditors, triggering rules relevant to parent or controlling shareholder status involves a fact intense, case-by-case evaluation of actual control over the board or company. In other instances, as for example under the Internal Revenue Code provisions entitling

F. A. Gevurtz (*) University of the Pacific, McGeorge School of Law, Sacramento, CA, USA e-mail: fgevurtz@pacific.edu © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_8

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affiliated corporations to file consolidated federal income tax returns,1 statutes set bright line numerical tests based upon ownership of a set percentage of voting power and value of stock by one corporation in another.2 Moreover, the impact of triggering rules applicable to groups of companies in any given area of law depends upon the particular rule and area of law involved. Hence, allowing affiliated corporations to file consolidated income tax returns does not mean the corporations are liable for each other’s debts. Nor, given the disparate concerns and policies raised by corporate groups in these different areas of law, should the same criteria or impacts necessarily apply. The lack of any cohesive law of corporate groups in the United States means that attempting to cover the treatment of corporate groups under all of the various potentially relevant laws in the United States would entail either writing a treatise3 or settling for an unhelpful exercise in superficiality. Accordingly, this chapter takes a narrower approach, which focuses on two central challenges presented by corporate groups. A minimum goal for corporate law is to prevent parties controlling a corporation from misappropriating the company’s earnings and assets (“tunneling”4) or otherwise taking advantage of minority shareholders. The often-abused power of parents and controlling shareholders to exploit subsidiaries and controlled corporations in corporate groups and the minority shareholders in such companies create particular hazards in this regard. A second minimum goal for corporate law is to prevent the abuse of limited liability through tunneling, deception of creditors, and excessive externalization of risk. Again, corporate groups, with their prospect for isolating liabilities in some companies in the group and assets in others, create particular hazards in this regard. These two concerns provide the focus for this chapter. Unlike the law in some nations, corporate laws in the United States—which are largely state, not federal, law, and consist of corporation statutes and judicially-developed (common law) doctrines—generally do not have statutory provisions or judicial doctrines designed especially for corporate groups. In terms of corporate governance, this means that parent corporations and controlling shareholders have no specific authority to act on behalf of, or direct governance powers over, their subsidiaries or controlled corporations. Instead, their power arises simply as a practical consequence of their voting control over the membership on the subsidiary or controlled corporation’s board of directors, which has the statutory power to govern the corporation.5 Following this same lack of specific provisions for corporate groups, corporate laws6 in the United

I.R.C. §§ 1501 et seq. Id at § 1504(a). 3 For a treatise dealing with corporate groups in the United States, see Blumberg et al. (2018). 4 Johnson et al. (2000). 5 E.g. Del. Code Ann., tit. 8, § 141(a). 6 The reference to corporate laws reflects the fact that groups of companies in the United States traditionally have been made up of corporations. In instances (which may increase more in the 1 2

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States protect minority shareholders and creditors from the dangers created by corporate groups through the application of broader doctrines. One narrow exception exists to protect shareholders in parent corporations from director entrenchment through circular voting. Corporation statutes in the United States bar subsidiaries from voting stock they own in their parent corporation.7

2 Protection of Minority Shareholders Parent companies and other controlling shareholders in corporate groups can gain a disproportionate share of corporate earnings and assets to the prejudice of minority shareholders through favorable transactions with the corporation or by buying the stock of minority shareholders at unfairly low prices.8

2.1

Ongoing Transactions

Nations vary in their ability to prevent parent corporations and other controlling shareholders from misappropriating income or assets through favorable transactions with their subsidiaries or controlled corporations. The United States comes out well on this scale.9 This is a function of both substantive and procedural rules.

2.1.1

Triggering Fairness Review

Critical to the protection of minority shareholders in the United States is the careful judicial scrutiny of parent-subsidiary and other controlling shareholder dealings by applying the fairness test. Normally, courts in the United States apply the business judgment rule when addressing challenges by disgruntled shareholders to decisions by corporate boards.10 While disagreement and doubt exists as to what exact standard the business judgment rule entails, there is general agreement that the standard calls for greater deference to directors than to persons in other contexts.11 future) in which non-corporate forms of business, such as limited partnerships or limited liability companies, are members of groups of companies, courts in the United States tend to apply principles of corporate law; although occasionally noting that there might be differences. See, e.g., Corwin v. KKR Financial Holdings LLC, 125 A.3d 304, 306 n.3 (Del. 2015). 7 E.g. Del. Code Ann., tit. 8, § 160(c). 8 For a more elaborate typology of means by which controlling shareholders extract value at the expense of minority shareholders, see Atanasov et al. (2014). 9 See, e.g., Gilson (2006). 10 E.g., Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000). 11 E.g., Joy v. North, 692 F.2d 880, 885 (2d Cir. 1982).

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Delaware courts have equated the standard under the business judgment rule with gross negligence.12 The principal exception to application of the business judgment rule occurs when the board’s decision involves a conflict of interest for some or all board members or parties controlling board members. In this event, unless shareholders or directors without a conflict vote to approve the transaction after full disclosure, courts in the United States apply the fairness (called in Delaware the intrinsic fairness) test.13 Under this test, proponents of the transaction must prove to a skeptical court that the corporation received as good a deal as it would have from a stranger. This approach reflects a policy that the degree of judicial scrutiny over board decisions should depend upon the extent that one can trust the directors to act for the right motives (even if not always with the best results). Determining whether various parent-subsidiary or other affiliated company dealings constitute conflict of interest transactions triggering the fairness test rather than the business judgment rule can raise a series of questions. Is There a Conflict Between the Interest of the Parent or Controlling Shareholder and the Interest of the Minority Shareholders? Not all parent-subsidiary or controlling shareholder dealings involve a conflict between the interest of the parent or controlling shareholder and the interest of the minority shareholders. The classic case in the United States addressing whether such a conflict exists is Sinclair Oil Corp. v. Levien.14 Sinclair Oil Corp. owned 97% of the outstanding stock in Sinclair Venezuelan Oil Company (“Sinven”). A minority shareholder in Sinven sued Sinclair. He complained that Sinven’s directors declared dividends so large that Sinven was unable to expand, and also failed to enforce a contract requiring another Sinclair subsidiary to buy a minimum quantity of oil from Sinven. The trial court treated both decisions as involving a conflict of interest and applied the fairness test. The Delaware Supreme Court agreed that refusing to enforce the contract constituted a conflict of interest, but found no conflict with respect to declaring dividends. The Delaware Supreme Court explained that whether there is a conflict of interest (or “self-dealing”) depends on whether the parent corporation received something “to the exclusion of, and detriment to, the minority stockholders.”15 Unfortunately, this may not have been the best choice of words to express what the court had in mind. Some authorities read too much into the word “detriment,” treating it as if finding a conflict of interest almost demands showing the transaction was unfair.16 This cannot be correct. The purpose of assessing whether there was self-dealing is to set the standard for the court’s review of the merits of the transaction. It would be

12

E.g., Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985). E.g. Del. Code Ann., tit. 8, § 144. 14 280 A.2d 717 (Del. 1971). 15 Id at 720. 16 See, e.g., Chasin v. Gluck, 282 A.2d 188 (Del. Ch. 1971). 13

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circular to require the court first to decide the merits of a transaction in order to determine what standard the court will use in reviewing the merits of the transaction. So what did the court mean? The answer lies in how the court applied the test to the two challenged decisions. The dividend decision did not entail self-dealing because Sinclair received nothing to the exclusion of Sinven’s minority shareholders. Rather, all of the shareholders received the same dividend per share. Hence, all of the shareholders faced roughly the same tradeoff inherent in every decision to declare dividends: have the money now, or reinvest earnings in the corporation with hope of receiving even more money in the future. True, different shareholders may have differing needs for money today versus tomorrow—indeed, the minority shareholder in Sinclair claimed that Sinven’s directors declared large dividends because Sinclair needed money now. Yet, if courts treat such potentially differing needs as a conflict of interest, then almost every dividend decision would require fairness review, since sometimes a parent corporation would have a greater need for immediate dividends than other shareholders, sometimes the parent would have less need for money now than other shareholders, and many times the parent would have more need for money now than some other shareholders and less need than other shareholders. Hence, the test essentially is whether the parent or controlling shareholder’s interest is, for the most part even if not precisely, the same as the other shareholders’ interest. By contrast, failing to enforce the oil supply contract allowed Sinclair to receive something—avoiding liability on the part of another of its subsidiary corporations— which the other Sinven shareholders did not obtain. Since Sinven did not gain the benefit of selling the minimum quantity of oil demanded by the contract, failing to enforce the contract potentially was detrimental to Sinven’s minority shareholders. At this point, however, the court did not know if, in fact, this was a bad deal for Sinven and its minority shareholders. Indeed, Sinclair argued that Sinven could not supply the quantity of oil called for by the contract. The reason for asking if this was a conflict of interest was to decide how carefully the court would scrutinize whether Sinven should have enforced the contract. Because all of the shareholders were not, more or less, in the same position on this decision—Sinclair obtained something the other shareholders did not—the court applied the fairness test to carefully evaluate whether Sinven should have enforced the contract. Is the Decision One in Which the Parent or Controlling Shareholder Can Exercise Selfish Ownership? Some actions by parent corporations or other controlling shareholders do not trigger the fairness test, or even the business judgment rule, because the parent or controlling shareholder has no duty at all to the corporation or its minority shareholders with respect to the action—in other words, the parent or controlling shareholder is entitled to act with selfish ownership. As a noted court opinion states, “there is a radical difference when a stockholder is voting strictly as a stockholder and when voting as a director.”17 Specifically,

17

Zahn v. Transamerica Corp., 162 F.2d 36, 44 (3d Cir. 1947).

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when voting as a shareholder, one may vote with a view to one’s own benefits; but when voting as a director, one represents all the shareholders and cannot use the office for personal benefit. This result follows whether the shareholder is him- or herself a director, or, as relevant to corporate groups, the directors do not exercise independent judgment, but, instead, the directors act as mere agents or puppets of the parent or controlling shareholder. In other words, courts in the United States for the most part speak of controlling shareholders or parent corporations having a fiduciary duty, and apply the fairness test to their dealings with controlled corporations or subsidiaries, when the challenged action involves a decision by the controlled corporation’s or subsidiary’s board, not simply a vote the controlling shareholder or parent casts as a shareholder.18 Is the Parent’s or Controlling Shareholder’s Conflict the Board’s Conflict? Focusing on a decision by a subsidiary’s or controlled corporation’s board of directors, in turn, suggests the need for further analysis in assessing when transactions with a parent corporation or other controlling shareholder creates a conflict of interest for the directors sufficient to trigger the fairness test. Specifically, where is the conflict for the directors? Sinclair illustrates a couple of ways in which courts in the United States will find a conflict for the directors when dealing with a parent company or other controlling shareholder. For one thing, the directors of Sinven were also officers, directors or employees of Sinclair or other subsidiaries of Sinclair. Any Sinven directors who worked for Sinclair have a conflict of interest because of their personal financial interest (through their salaries from Sinclair), as well as concurrent fiduciary obligation, to look out for Sinclair’s interest in any dealings with Sinven. The court in Sinclair, however, took a different tack, which turns out to be even more common among court decisions in the United States and also has greater reach. The trial court found as a fact, and, indeed, Sinclair conceded, that the members of Sinven’s board were not independent, but, rather, Sinclair dominated these individuals. Based upon this domination, the court in Sinclair held that the parent had a fiduciary duty in its dealings with the subsidiary. In other words, a parent corporation or other controlling shareholder picks up the directors’ duty of loyalty to the corporation and to all the shareholders when the parent or controlling shareholder dictates what the board does. Put differently, courts will not trust directors, who are controlled by the party the corporation is dealing with, to look out for the corporation and all of its shareholders, and so courts subject board decisions involving such dealings to careful scrutiny under the fairness test. This approach, however, creates a factual question as to whether the parent corporation or other shareholder dominates or controls the board of directors. Most courts in the United States presume that ownership of a majority of the voting stock

18

E.g., Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996) (controlling shareholder would not have breached any fiduciary duty in voting as a shareholder against a sale of corporate assets in order to force a better deal for the controlling shareholder at the expense of minority shareholders).

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establishes domination or control over the board.19 At least in some contexts, however, the occasional court in the United States will treat directors as independent even when dealing with a majority shareholder.20 Cases in which the shareholder dealing with the corporation owns a large percentage, but not an outright majority, of the voting stock are more difficult. These cases defy generalization and depend upon their specific facts.21 Courts in the United States having been willing in some instances to presume that directors will act independently when dealing with shareholders holding near majority voting power, even though these shareholders had selected the individuals who sat on the board.22 Courts in other cases, however, have found control even with less than 20% of the voting power.23 Adding to this contextdriven determination of control is the tendency of some courts in the United States to engage in a bit of a bootstrap when assessing the independence of directors dealing with parent corporations and large shareholders: specifically, finding independence when the court does not think much of the plaintiff’s complaint and finding control when the court is suspicious of the merits of the transaction. The Southern Peru Copper decision24 provides an example of this sort of highly contextual evaluation of the independence of directors dealing with controlling shareholders. Southern Peru Copper is a Delaware corporation with stock listed on the New York Stock Exchange. A Mexican holding company, Grupo Mexico (which, itself, a wealthy Mexican family controlled), had acquired stock possessing a majority of the votes in Southern Peru Copper. In 2004, Grupo Mexico decided to sell its almost wholly-owned Mexican copper mining subsidiary, Minero Mexico, to Southern Peru Copper, thereby bringing both the Mexican and Peruvian copper mining operations together in one subsidiary. This transaction triggered a costly lesson for Grupo Mexico on Delaware corporate law. Under the choice of corporate law rule dominant in the United States (the so-called internal affairs rule), because the case involved fiduciary duties owed to a Delaware corporation and its minority shareholders, Delaware corporate law governed. In other words, it is the law of the subsidiary or controlled corporation’s jurisdiction of incorporation, not the parent’s, which governs claims for breach of fiduciary duty owed to the subsidiary and the subsidiary’s shareholders under corporate law in the United States.

19

See, e.g., Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987). See, e.g., Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004). 21 Compare In re Zhongpin, Inc. S’holders Litig., 2014 WL 6735457 (Del. Ch. 2014) (plaintiff pled sufficient facts to suggest founder and CEO was a controlling shareholder even though he only owned 17% of the stock), with In re Crimson Exploration, Inc. Stockholder Litig., 2014 WL 5449419 (Del. Ch. 2014) (a 34% shareholder was probably not a controlling shareholder even though three of seven directors were its employees). 22 E.g., Puma v. Marriott, 283 A.2d 693 (Del. Ch. 1971). 23 E.g., Zhongpin. 24 In re Southern Peru Copper Corp. Deriv. Litig., 52 A.3d 761 (Del. Ch. 2011), aff’d sub nom. Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012). 20

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We shall discuss later the court’s analysis of the fairness of Grupo Mexico’s sale of Minero Mexico to Southern Peru Copper. For now, the Southern Peru Copper decision is illuminating because of the court’s analysis of the motivations and actions of the committee of so-called independent Southern Peru Copper directors who approved the deal. Grupo Mexico did not seriously contest that, as the shareholder holding the majority of votes, it controlled Southern Peru Copper’s overall board and hence the Minero Mexico deal was subject to the fairness test. Nevertheless, it sought to invoke Delaware court decisions that shift the burden of proof on whether the transaction is fair from defendant to plaintiff if a committee of independent directors approved the deal. Despite Southern Peru Copper’s board delegating approval of the deal to a committee of nominally independent directors, who were aided by financial advisors, the court refused to shift the burden of proof—albeit, the court concluded that who had the burden of proof did not really matter in the end. One problem with the Southern Peru Copper committee lay in the fact that a key member faced conflicting pressures because of his employment by one of the founding shareholders in Southern Peru Copper. This shareholder wanted to sell out its considerable block of unregistered Southern Peru Copper stock and required Grupo Mexico’s cooperation in obtaining the necessary filings under U.S. securities law in order to do so. The court refused to go so far as to treat the simultaneous negotiation of registration rights and the Minero Mexico sale as a breach of the duty of loyalty sufficient to establish personal liability for this director. Nevertheless, the simultaneous negotiation undermined the court’s confidence in the committee. This illustrates a Delaware court’s willingness to examine, director-by-director, possible conflicting individual motivations in parent-subsidiary dealings. More broadly, the court in Southern Peru Copper viewed the committee members, despite their independence and good faith, as having fallen into what the court characterized as a mindset too easily resulting from dealing with a controlling shareholder. Instead of an aggressive negotiation with Grupo Mexico backed by an exploration of all options and a willingness to just say no, the court found that the committee had, in effect, negotiated against itself and looked for ways to rationalize the deal proposed by Grupo Mexico. This shows that in order to gain the court’s deference for parent-subsidiary dealings based upon the approval of independent directors, the directors must not only be independent in the sense of not working (other than as directors) for the subsidiary or having any ties to the parent, but they must act independent by showing zeal in looking out for the subsidiary. What Is the Impact of Minority Shareholder Approval? Corporation statutes25 and long-standing judicial doctrine in the United States26 establish that approval by a vote of the shareholders can return review of a transaction in which directors have a conflict of interest to the business judgment rule (or to a related standard referred to

25 26

E.g. Del. Code Ann., tit. 8, § 144. See, e.g., Gottlieb v. Hayden Chemical Corp., 91 A.2d 57 (Del. 1952).

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as waste27). Despite unfortunate drafting in some older corporation statutes, such as Delaware’s, both court opinions28 and newer statutes29 have clarified that achieving this impact requires an affirmative vote by shareholders who do not have a conflicting interest in the transaction, rather than a vote pushed across by the shareholders who do. This, in turn, raises the question of what is the impact when disinterested shareholders lack the votes to approve a transaction between the corporation and its parent company or controlling shareholder without counting the parent’s or controlling shareholder’s votes, but nevertheless most of the disinterested shareholders vote in favor of the transaction—a so-called majority of the minority vote. Traditionally, courts in the United States have held that a majority of the minority vote is not sufficient for a transaction with a parent corporation or controlling shareholder to escape fairness review. Instead, some Delaware court opinions have created a sort of halfway house for the impact of such a vote by holding that it shifts the burden to the plaintiff to prove that the transaction is unfair.30 More specifically, the court will continue to carefully scrutinize the transaction rather than simply defer to the board, but, in undertaking this careful scrutiny, the court will look to the plaintiff to show the deal is unfair rather than to the defendants to show the deal is fair. Shifting the burden of proof without reducing the level of scrutiny, however, probably only matters in very close cases. The rationale sometimes articulated for not giving greater weight to a majority of the minority approval is that minority shareholders might vote for a transaction with a parent corporation or controlling shareholder despite not thinking well of the transaction, because minority shareholders fear retaliatory mistreatment if they oppose the deal. In a recent decision involving freeze-out mergers, however, the Delaware Supreme Court modified its approach to majority of the minority approval. In Kahn v. M & F Worldwide Corp.,31 the court held that the combination of negotiation and approval of the transaction by a committee of independent directors plus approval by a majority of the minority shareholders will move the standard of review for a freeze-out merger from fairness to the business judgment rule. For approval by a majority of the minority shareholders to have a favorable impact on the level of scrutiny or the burden of proof, several things must occur: First, the directors or the parent or controlling shareholder must fully and accurately inform the minority shareholders regarding all material facts concerning the

27

Courts often refer to waste—actions in which no reasonable person would think the corporation received the equivalent to what it gave up—rather than the business judgment rule, as the standard of review for actions approved by disinterested shareholders (perhaps based on the notion that the business judgment rule requires some degree of care and shareholders have no duty of care). See, e.g., Michelson v. Duncan, 407 A.2d 211, 217 (Del. 1979). 28 E.g., Fliegler v. Lawrence, 361 A.2d 218 (Del. 1976). 29 E.g., Cal. Corp. Code § 310(a)(1). 30 E.g., In re Wheelabrator Technologies, Inc. Shareholders Litig., 663 A.2d 1194 (Del. Ch. 1995). 31 88 A.3d 635, 642 (Del. 2014).

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transaction.32 This follows from the concept that the fiduciary relationship, being one of trust, is inconsistent with an approach of caveat emptor. In addition to full disclosure, the minority shareholders must be assured (at least under Delaware court opinions) that the transaction will not take place if it does not receive most of their votes. As the court explained in Southern Peru Copper, if minority shareholders believe that the majority shareholder will push through the transaction no matter how they vote, they may be disinclined to take the matter seriously. Finally, the minority shareholders must not be coerced to vote in favor of the transaction.33 Delaware cases have defined coercion as some pressure upon the shareholders to vote for a transaction based upon concerns other than its merits.34 While sounding sensible, application of this definition is problematic due to the difficulty of deciding what constitutes the merits of the transaction and what constitutes an extraneous consideration. For example, the court opinion establishing this standard held that the minority shareholders were not coerced when voting for an amendment to the certificate of incorporation by the fact that stock exchange rules required delisting their stock if the amendment only passed by the vote of the controlling group (who held majority voting power) and so minority shareholders may have voted for the amendment, which they knew was going to pass anyway, just to avoid delisting.35

2.1.2

The Impact of Fairness Review

The significance of applying the fairness test to parent-subsidiary or other controlling shareholder dealings lies in its often outcome-determinative impact on individual litigation, and, in turn, on the deterrence this impact creates to parent companies or other controlling shareholders expropriating corporate assets. Starting with some general doctrine, leading court opinions from Delaware describe fairness as entailing fair dealing—including disclosure of all facts material to the transaction, but also looking at factors such as the timing of the deal and the extent of negotiation—and fair price.36 Fair price, in turn, equates to an arms-length deal and often encompasses a range of values.37 While the concept of an arms-length deal presumably subsumes the notion that it is normal for there to be some benefit in the deal for the parent or controlling shareholder, just as there is normally something for both sides in any contract, nothing in the law in the United States (unlike some

32

Id at 645. (The same is also true for approval by independent directors.) Id. 34 E.g., Williams v. Geier, 671 A.2d 1368, 1382-83 (Del. 1996). 35 Id. 36 E.g., Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). 37 E.g., Fliegler, 361 A.2d at 225; In re Orchard Enter., Inc. Stockholder Litig., 88 A.3d 1, 30 (Del. Ch. 2014). 33

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other nations) calls for courts to take into account overall group benefit in deciding whether parent-subsidiary dealings are fair. In any event, some states in the United States treat fair dealing (particularly disclosure) and fair price as a conjunctive test.38 Delaware courts, however, lump them together into a holistic review,39 in which better process provides more slack on the substance of the price40 and clear proof of a fair price can offset failing in process,41 or, viewed from the other side, weakness in process can lead to greater skepticism about the price42 and weakness in price can lead to greater doubts about the process.43 Such generalities, however, fail to capture the essence of the fairness test and how it differs from the deferential approach of the business judgment rule. The Delaware Supreme Court’s opinion in Sinclair, because the same court in the same case applied both tests, captures the contrast and illustrates the fairness test in action. As explained earlier, the court applied the business judgment rule to Sinven’s declaration of large dividends. As a result, the court rejected the plaintiff’s claim with no examination of the rationale for, or reasonableness of, the amount of dividends, so long as they did not exceed the legal limits for protection of creditors. Moreover, so long as the plaintiff could not point to any corporate opportunities coming from Sinven, which Sinclair took for itself, the court refused to second-guess the decision not to expand Sinven’s operations beyond Venezuela. By contrast, under the fairness test, the court demanded Sinclair show it was in Sinven’s best interest not to enforce to the letter the minimum purchase requirement of Sinven’s contract with another Sinclair subsidiary. Sinclair argued that Sinven could not have supplied the minimum anyway. In rejecting this argument, the court stated that Sinclair “failed to prove that Sinven could not possibly have produced or someway have obtained the contract minimums.”44 In other words, under the fairness test, which resolves doubts against those in a conflict of interest, mere possibilities that the contract is unfair doom the transaction. Complementing this greater scrutiny under the fairness test is the business sophistication of judges, at least in Delaware, who can see through flim-flam in reviewing parent-subsidiary dealings. Southern Peru Copper provides a good illustration. The fundamental problem was that Grupo Mexico demanded Southern Peru Copper stock with a market valuation over $3 billion in exchange for Grupo 38

See, e.g., State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co., 391 P.2d 979 (Wash. 1964). E.g., Weinberger, 457 A.2d at 711. 40 Id. at 709 n.7 (suggesting that a showing of fairness is strengthened if boards use an independent negotiating committee to deal with the majority shareholder). 41 See, e.g., In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013) (finding a deal in which the common stock received nothing to be fair, despite unfair process, because of proof that the common stock had no value). 42 E.g., William Penn P’ship v. Saliba, 13 A.3d 749, 757-78 (Del. 2011) (non-disclosure negatively impacted the court’s view of the fairness of the price). 43 See, e.g., S. Peru Copper Corp., 52 A.3d at 801-02 (poor price led the court to believe that the independent committee was just rationalizing the deal rather than seriously considering options). 44 280 A.2d at 723 (emphasis added). 39

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Mexico’s privately held subsidiary, Minero Mexico, whose value the investment bankers found to be only around $2 billion. Rather than telling Grupo Mexico (in the colorful language of the court’s opinion) “to go mine himself,”45 the independent directors committee tried to justify the deal. They did so, not by finding some hidden value in Minero Mexico missed by their financial advisor, but rather by assuming that the market was overvaluing Southern Peru Copper’s stock. The judge not only found such self-doubt unconventional, to say the least, but also, displaying a significant degree of sophistication about mergers and acquisitions, discussed alternatives by which truly independent directors could have exploited the opportunity presented by a market overvaluation of their company. Beyond this, the judge was underwhelmed by Grupo Mexico’s argument that the committee’s valuation approach made an “apples to apples” comparison, but instead dived into the financial details to note that the committee was only able to bridge the gap between even the internal valuations of the Southern Peru Copper stock and Minero Mexico by making the most optimistic assumptions about Minero Mexico, which the committee did not make for Southern Peru Copper.

2.1.3

Plaintiff Friendly Procedures

Nations often nullify the effect of favorable substantive rules for minority shareholders with procedural impediments to shareholders asserting claims that would invoke those rules. Procedures in the United States are much more friendly (some argue too friendly) to private litigation by minority shareholders. When dealing with transactions in which parents or other controlling shareholders expropriate from their subsidiaries or controlled corporations, protection in the United States comes from allowing any minority shareholder, no matter how small the shareholder’s stake in the company, to bring a derivative suit seeking recovery for the subsidiary or controlled corporation.46 Derivative suits in the United States face various procedural barriers, the most critical of which is the requirement that the plaintiff plead in detail facts showing why the directors should not be allowed to decide whether or not the corporation should bring the lawsuit. This is referred to as the demand rule, because it requires the plaintiff to set forth in the complaint either that the plaintiff made a demand upon the board to take action itself and that the court should ignore the board’s refusal to do so, or that it would be futile to ask the board to take action because the court should ignore the board’s refusal to do so.47 When the proposed lawsuit is against 45

52 A.3d at 763. See, e.g., Gevurtz (2010). While a minority shareholder of the subsidiary is the typical plaintiff, occasionally a minority shareholder in a parent corporation will bring a derivative suit based upon mistreatment of the subsidiary. This is known as a double derivative suit, since the theory is that the parent’s board breached its fiduciary duty to the parent company by not bringing a derivative suit on behalf of the subsidiary. E.g., Brown v. Tenney, 532 N.E.2d 230 (Ill. 1988). 47 E.g., Gevurtz (2010). 46

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the directors for a disinterested decision, pleading in detail that a majority of the directors have breached their duty of care and so should not decide whether the company should sue themselves is difficult because of the need to overcome the business judgment rule. Pleading, however, that directors should not decide if the corporation should sue the parent or majority shareholder who elected the directors and who is accused of engaging in an unfair transaction with the subsidiary or controlled corporation normally is pretty straightforward.48 Equally important to allowing a shareholder to overcome procedural barriers to the suit, is enticing a minority shareholder to bring an action. Here, the rule in the United States empowering the court to award the successful plaintiff in a derivative suit attorneys’ fees out of the corporation’s recovery is critical. For example, in Southern Peru Copper, the court awarded the plaintiffs’ attorneys a staggering $300 million in fees out of the $2 billion judgment against Grupo Mexico; all the better to encourage vigilance by prospective plaintiffs’ attorneys of such transactions in the future.

2.2

Terminal Transactions

While following the same overall approach emphasizing judicial review for fairness, limitations on this review when parent corporations and controlling shareholders force minority shareholders to sell out make corporate law in the United States somewhat less adept at protecting minority shareholders in this context.

2.2.1

Freeze-Out Mergers

Parent companies and other controlling shareholders have several means for compelling minority shareholders to sell their stock, the most common of which in the United States is a freeze-out merger either with the parent company itself or with another corporation wholly owned by the parent or controlling shareholder.49 Provisions in corporation statutes in the United States, which authorize mergers that 48

See, e.g., Marx v. Akers, 666 N.E.2d 1034 (1996) (demand excused if plaintiff pleads that directors were under the control of a party interested in the challenged transaction). Courts sometimes demand an unrealistic level of pleading to show controlling shareholders are controlling shareholders in order to get rid of cases whose underlying claims strike the court as weak. See, e.g., Beam, 845 A.2d at 1054 (the court held that 94% ownership of the corporation by the defendant was insufficient to show control in a case in which the plaintiff alleged that the controlling shareholder breached her duty to the corporation by hurting the company’s image when she committed a crime unrelated to the corporation). 49 Freeze-out mergers can involve subsidiaries or controlled corporations that are longstanding members of corporate groups or can occur as the planned second stage following a successful tender offer in which the buyer gains a controlling interest in a previously unrelated corporation. Since the nominal corporate group in the latter event is simply a transitory way station to a complete

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cash out the shareholders of one of the combining companies,50 create the basis for freeze-out mergers. If frozen out shareholders lack the votes to block the merger, they are left with essentially two protections. Fiduciary Duty Claims In a freeze-out merger, the parent or controlling shareholder gains something (ownership of the entire corporation) to the exclusion and possible detriment of the booted out minority shareholders. A freeze-out merger normally requires approval by the subsidiary or controlled corporation’s board, thereby invoking fiduciary responsibility to the minority shareholders. Hence, a freeze-out merger with a parent company or other shareholder with a majority or otherwise sufficient voting power to exercise control over the board triggers the fairness test in the United States. As mentioned earlier, however, the Delaware Supreme Court recently modified this rule to return matters to the business judgment rule if both a committee of independent directors empowered to negotiate the merger, and a fully informed and non-coerced vote by a majority of the minority shareholders, approved the merger. As mentioned above, fairness in corporate law in United States requires fair dealing and fair price. In fact, this articulation of the fairness test comes from a case, Weinberger v. UOP, Inc.,51 which dealt with a freeze-out merger. Weinberger involved a merger between Signal Oil Company and Signal’s subsidiary, UOP, Inc, which cashed out UOP’s minority shareholders at $21 per share. Not satisfied with this price, a minority shareholder sued to challenge the freeze-out merger. The Delaware Supreme Court found that Signal had not dealt fairly with UOP’s minority shareholders in several particulars. The most critical was Signal’s failure to disclose either to UOP’s outside directors, or to UOP’s minority shareholders, a study prepared by Signal officers, which concluded that cashing out the minority UOP shareholders at a price up to $24 per share would be a good investment for Signal—thereby showing that Signal was prepared to pay more than $21 per share. Yet, it is important not to overstate the court’s holding on this issue. The court did not create a general obligation for majority shareholders to disclose the highest price it would be worthwhile for the majority to pay the frozen out minority shareholders. The problem in Weinberger was that the non-disclosed conclusions came from two persons who were directors of UOP (as well as officers of Signal), and stemmed from the use of data obtained from UOP. Other complaints about the process in Weinberger involved the lack of any significant effort by UOP’s president (a long-time Signal employee, who Signal installed as president of UOP a couple years earlier) to negotiate for a better price than Signal offered, and Signal forcing the investment banking firm advising UOP’s board to prepare a rushed fairness opinion on the deal.

acquisition, special laws governing freeze-outs following successful tender offers are beyond the scope of this report. 50 E.g. Del. Code Ann., tit. 8, § 251(b)(5). 51 457 A.2d 701 (Del. 1983).

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The Delaware Supreme Court remanded the matter to determine fair price. In doing so, the Supreme Court instructed the lower court to use any valuation techniques generally considered acceptable in the financial community, including valuation based upon discounted cash flow. This marked a significant liberalization from the rather outdated approach courts in the United States had taken previously in determining the fair value of stock. One deliberate omission from Weinberger’s test for fairness is the existence of a business purpose for the freeze-out. Six years before Weinberger, the Delaware Supreme Court had announced a business purpose requirement for freeze-out mergers in Singer v. Magnavox, Co.,52 only to subsequently render the requirement meaningless by deciding that the majority shareholder’s own business purpose (which, if taken literally, would include profiting by forcing the minority to sell out cheaply) could suffice,53 and finally got rid of the whole thing in Weinberger. Even after Weinberger, however, courts in a number of other states, including the highest court in New York,54 have insisted on retaining the business purpose requirement. Removing the business purpose requirement creates a discontinuity between the fairness test applied to freeze-out mergers and the fairness test applied to other parent-subsidiary or controlling shareholder dealings, which requires the transaction to serve some purpose for the subsidiary or controlled corporation (for example, that the company actually could use property the parent or controlling shareholder sells to it as opposed to simply being a convenient buyer for a piece of property that the parent or controlling shareholder wants to unload).55 More pragmatically, the lack any showing by the parent or controlling shareholder of some corporate purpose for freezing out the minority would seem to suggest that the real purpose for the freezeout is for the parent or controlling shareholder to profit by forcing the minority out cheaply. Appraisal Rights A second protection for minority shareholders in a freeze-out merger comes from provisions in corporation statutes in the United States allowing shareholders who dissent from a merger to demand that the corporation cash them out at a “fair price” set by a judicially supervised appraisal.56 These provisions began as a compromise when, in the late Nineteenth Century, state corporation statutes replaced provisions requiring unanimous shareholder approval for mergers with provisions allowing a supermajority and eventually a simple majority vote of shareholders to approve a merger. In lieu of a veto, the dissenting shareholders received the right to cash out.

52

380 A.2d 969 (Del. 1977). Tanzer v. Int’l. Gen. Indus., Inc., 379 A.2d 1121 (Del. 1977). 54 E.g., Albert v. 28 Williams St. Corp., 473 N.E.2d 19 (N.Y. 1984). 55 E.g., Gevurtz (2010). 56 E.g. Del. Code Ann., tit. 8, § 262. 53

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Historically, one problem with appraisal resulted from the use of a methodology, the so-called Delaware block method, which systematically undervalues the dissenters’ stock.57 With Delaware’s abandonment of its namesake methodology in Weinberger, some now complain that appraisals might overvalue the dissenters’ stock.58 In any event, space limitations preclude an exploration of the arcane issues involved in stock valuation, including the problem with the Delaware block method (which is still used in some states other than Delaware), technical issues in valuing future cash flow, as well as the impact of the negotiated merger price,59 minority or marketability discounts,60 and merger gains,61 on the appraised value. Procedural aspects of appraisal rights raise other concerns. Appraisal provisions commonly contain exacting requirements, such as giving notice several times of the shareholder’s intent to pursue appraisal,62 the inadvertent non-compliance with which can prevent a shareholder from being able to assert the rights. Of practical significance, shareholders pursuing appraisal face the need to cover their attorneys’ fees and litigation expenses spread only among the potentially small group of shareholders pursuing appraisal. By contrast, shareholders might pursue claims challenging the merger as a breach of fiduciary duty through an action brought on behalf of a class consisting of all cashed out minority shareholders, with the prospect of attorneys’ fees and other litigation expenses covered by an award based upon the overall class recovery. Fiduciary duty claims also can produce relief beyond simply cash equal to the appraised value of the dissenting shareholder’s stock, including enjoining the merger or awarding rescissory damages that encompass any subsequent increase in the value of the corporation that the minority shareholders would have enjoyed as shareholders if the challenged merger had not occurred.63 These potential advantages of fiduciary duty litigation over pursuing appraisal rights raise the issue of whether appraisal rights, when available, provide an exclusive remedy for the shareholders. The answer varies among the states, depending both on the language of the statutes and the inclinations of the courts.64 Delaware courts, with no particularly relevant language in Delaware’s corporation statute, have adopted an approach consisting of a large dollop of judicial discretion. Specifically, in Weinberger, the Delaware Supreme Court stated that any monetary remedy in an action challenging a merger should ordinarily come from an appraisal action, but also expressed the caveat that an appraisal action might not be adequate in cases

57

E.g., Schaefer (1982). E.g., Booth (2016). 59 E.g., DFC Global Corp. v. Muirfield Value Partners, L.P., 2017 WL 3261190 (Del. 2017). 60 E.g., In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997 (Me. 1989). 61 E.g. Del. Code Ann., tit. 8, § 262(h). 62 Id at (d). 63 E.g., Lynch v. Vickers Energy Corp., 420 A.2d 497 (Del. 1981). 64 Compare Yanow v. Teal Indus., Inc., 422 A.2d 311 (Conn. 1979) (broad view of appraisal’s exclusivity), with Walter J. Schloss Associates v. Arkwin Indus., 460 N.E.2d 1090 (N.Y. 1984) (exclusivity of appraisal depends upon remedy sought). 58

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of “fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching.”65 Given the breadth and vagueness of this caveat, Delaware’s approach is that appraisal rights are the exclusive remedy for those seeking damages from a merger, unless, under the specific facts of a case, the court decides appraisal rights should not be exclusive.66

2.2.2

Tender Offers by Controlling Shareholders

Instead of forcing minority shareholders to sell, parent companies and controlling shareholders might make a tender offer to buy the stock held by minority shareholders who are willing to sell. For example, in Solomon v. Pathe,67 a Netherlands bank, which held a controlling interest in Pathe Communications Corporation, made a tender offer for the 10% of Pathe shares held by the public. In response, a Pathe shareholder sued the Netherlands bank as well as Pathe’s directors, alleging that the bank breached its fiduciary duty as a controlling shareholder by making an unfair and coercive offer and that the Pathe directors breached their fiduciary duty in not opposing the offer. The trial court dismissed the complaint and the Delaware Supreme Court affirmed. The court held that it would not review the fairness of the price in a tender offer, even by a controlling shareholder, unless there is a false or misleading disclosure (which the plaintiff did not allege) or else coercion by the controlling shareholder in making the offer (which the plaintiff only alleged in conclusory terms without explaining what was coercive about the offer). There are both doctrinal and policy explanations for the apparent discontinuity created by carefully scrutinizing the fairness of the price paid in freeze-out mergers, while not doing the same in a tender offer by parents or controlling shareholders. The policy argument is that, unlike a freeze-out merger, if the minority shareholders do not like the price in a tender offer, they can simply say no and keep their stock. Doctrinally, the distinction flows from the fact that, unlike most freeze-out mergers, a tender offer by a parent or controlling shareholder does not require approval by the subsidiary or controlled corporation’s board, and hence triggers no fiduciary duty. These policy and doctrinal arguments also explain the two caveats imposed by the court in Solomon. Misrepresentation and coercion interfere with the minority shareholders protecting themselves by declining offers with poor prices. Misrepresentation creates liability without regard to fiduciary duty, while the failure of the board to protect shareholders against coercion by a parent or controlling shareholder raises

65

457 A.2d at 714. One caveat to this highly discretionary approach to appraisal’s exclusivity in Delaware occurs when the majority has enough shares (90%) for a short-form merger. In this situation, the Delaware Supreme Court has held that allowing any remedy other than appraisal rights would be inconsistent with the intent behind the statutory short-form merger provision. Glassman v. Unocal Exploration Corp., 777 A.2d 242 (Del. 2001). 67 672 A.2d 35 (Del. 1996). 66

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the question as to whether the directors breached their fiduciary duty and the controlling shareholder ordered or participated in that breach. Things become more complicated if the parent or controlling shareholder announces its intention to freeze out shareholders who do not accept the tender offer. Threatening to pay the holdouts less than offered to those accepting the tender offer seems pretty clearly to be coercive.68 On the other hand, if the price of the follow-on freeze-out merger is the same as the tender offer, then not only might one argue that there no coercion—since shareholders are no worse off by rejecting the offer even if enough other shareholders accept it to trigger the follow-on merger— but one might further assert that the acceptance by most of the minority shareholders of the tender offer shows the fairness of the follow-on merger. Once one starts down this road, however, questions arise as to the impact of a vote by a majority of the minority shareholders in favor of a freeze-out merger, since either a vote by a majority of the minority shareholders in favor of a freeze out merger or acceptance by most of the minority shareholders of a tender offer at the same price as promised to hold outs seemingly shows the fairness of the deal. Yet, for a while, Delaware courts were applying different levels of review to the two transactions. Recognition of this discontinuity was part of the lead up to the Delaware Supreme Court’s decision to accord greater impact to majority of the minority shareholder approval of freeze-out mergers in M&F Worldwide.69

3 Protection of Creditors Limited liability is subject to three types of abuse, each of which corporate groups potentially magnify. First, the same misappropriation of corporate assets (tunneling) that can prejudice minority shareholders of subsidiaries and controlled corporations also can endanger payment to creditors of such corporations. Second, the proliferation of companies operating related businesses with similar names and overlapping personnel and offices creates the potential to mislead creditors regarding the company with which they are contracting. Third, corporate groups create prospects for isolating risky activities in undercapitalized companies, thereby externalizing accident costs. Protection against these abuses in the United States comes both from application of the doctrine of piercing the corporate veil as well as a variety of more narrowly focused laws.

68 69

See, e.g., In re Pure Resources, Inc. Shareholders Litigation, 808 A.2d 421 (Del. Ch. 2002). For a more complete discussion, see Gevurtz and Sautter (2019).

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Piercing the Corporate Veil

A primary protection in the United States for creditors endangered by the limited liability ordinarily accorded to shareholders is the power that courts have created for themselves to disregard the existence of the corporation and impose liability upon the company’s controlling shareholder(s)—a result commonly referred to as piecing the corporate veil. Determining when a court in the United States will order this remedy is often difficult because of the tendency of court opinions to speak in conclusory labels (such as “alter ego”), which do not mean much, and to recite multifactor lists containing redundant or seemingly irrelevant items with little indication of the significance of each item on the list.70 Still, by focusing on what is relevant in light of underlying policy, it is possible to make sense of what courts in the United States, at least in better decisions, are doing.

3.1.1

Grounds for Piercing

Court opinions in the United States often recite a two or three element test for piercing the corporate veil, the second element in each of which refers to fraud, wrong, injustice or the like.71 Moving from such general language into something more concrete, there are three or arguably four grounds for courts in the United States to pierce the corporate veil and impose liability upon a shareholder for a corporation’s debts. The first is fraud—in other words, communication or conduct that misleads creditors into doing business with a corporation that ends up unable to pay the debt. Indeed, since fraud is a tort, shareholders defrauding creditors could be liable even without courts invoking the doctrine of piercing the corporate veil. A comprehensive empirical study of reported court decisions in the United States indicates that fraud is a common ground for piercing.72 Misrepresentation regarding the corporation’s finances is an easy example of fraud. More subtly, incurring debt on behalf of a corporation while knowing that the corporation will be unable to pay the debt is also fraud.73 Corporate groups create additional prospects for fraud through actions that confuse the creditor as to which company is the debtor—as can occur when member 70

E.g., Secon Service System, Inc. v St. Joseph Bank & Trust Co., 855 F.2d 406, 414 (7th Cir. 1988). 71 E.g., Sea-land Services, Inc. v. Pepper Source, 941 F.2d 519, 521-2 (7th Cir. 1991); Consumer’s Co-op. v. Olsen, 419 N.W.2d 211, 217-8 (1988). The first element, variously labelled control or, more opaquely, unity of interest, will be discussed later. The added element in the three-part test is an explicit acknowledgement that the fraud or wrong must be the proximate cause of injury to the creditor seeking piercing—something presumably that is implicit in the two-part test. 72 Thompson (1991). 73 E.g., Blue Star Corp. v. CKF Properties, LLC, No. CV-07-448 (Super. Ct. Maine Oct. 31, 2007) (quoting Gevurtz 1997).

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companies in the group have common names, officers and office, and operate related businesses—so that the creditor thought it was dealing with a more financially secure firm but the contract is actually with a nearly insolvent one.74 Such fraud might also exist for tort victims, who, for example, thought they were buying a product from a well-known parent corporation, but actually were purchasing the product from a less known subsidiary.75 Misappropriation of corporate assets by controlling shareholders is a second major ground for courts to pierce, as recognized at least since an article by Robert Clark of Harvard pointed out the overlap between piercing and fraudulent transfer (or conveyance) laws.76 Piercing, however, differs from application of fraudulent transfer statutes, remedies for dividends in violation of corporation statutes, and actions (discussed above) for breach of fiduciary duty through unfair conflict of interest transactions. One difference lies in the gestalt approach under which a pattern of suspicious transactions without the formalities one would expect in arms-length dealings leads courts in the United States to pierce,77 whereas recovery for fraudulent transfers, illegal dividends and breach of fiduciary duty require proof on a transaction-by-transaction basis. In addition, whereas these other actions typically lead to return of the misappropriated assets, piercing makes the shareholder liable for the entire unpaid debt even if greater than the amount misappropriated by the shareholder.78 Deterrence and preventing controlling shareholders from benefitting from the proof problems created by poor corporate recordkeeping justify these differences. As with fraud, corporate groups create prospects for misappropriation beyond that found when dealing with a single corporation. For example, it is common for controlling shareholders not only to withdraw funds from a debtor corporation for their own direct use, but also to transfer funds between various controlled corporations either to prop up weaker members of the group or, when things turn bad enough, to limit the amount lost upon the failure of weaker members in the group. In many instances, the transfer of value between parent and subsidiary or among commonly owned corporations, which leads courts in the United States to pierce, is subtler. For example, in Zaist v. Olson,79 the plaintiff contracted with one of the controlling shareholder’s corporations to clear and grade some land. It turned out, however, that another of the defendant’s corporations actually owned the land the plaintiff cleared and graded, while the debtor corporation lacked the funds to pay for the work (from which it obviously did not benefit).

74

E.g., OTR Associates v. IBC Services, Inc, 801 A.2d 407 (N.J. App. Div. 2002). E.g., In re Silicone Gel Breast Implants Products Liability Litigation, 887 F.Supp. 1447 (N.D. Ala.1995). 76 Clark (1977). 77 E.g., DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir. 1976). 78 Id. 79 227 A.2d 552 (Conn. 1967). 75

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Undercapitalization is a contentious ground for piercing in the United States. A leading case from California80 holds it can be grounds to pierce; while a leading case from New York81 might be read to hold the opposite—albeit, the New York court might simply have been addressing the situation in which the corporation had the minimum liability insurance required by statute to undertake its activity (driving). Most courts in the United States hedge their bets by stating that inadequate capitalization is a factor leading toward piercing, but might not be enough on its own82— leaving one to wonder what else is necessary. The result has been to produce an amount of academic commentary disproportionate to the relatively small percentage of cases in the United States (at least compared with fraud and misappropriation) in which inadequate capitalization is a significant factor leading toward piercing.83 Also uncertain is what constitutes inadequate capitalization. The traditional equating of capital with money invested by the shareholders in exchange for their stock, coupled with the view that it is inequitable and creates dangerous moral hazard for shareholders not to risk some of their own money in the venture, often makes shareholder investment in stock (to which some courts add retained earnings and shareholder loans84) a focus of cases in the United States.85 The problem is that the sort of creditor for whom shareholder investment matters (long-term lenders) could have checked this before dealing with the corporation. By contrast, protection of tort victims comes from liability insurance—a fact recognized by some courts dealing with piercing for inadequate capitalization.86 Yet a third measure of inadequate capital as being a complete lack of assets at the time the corporation incurred the debt might be relevant to showing the lack of intent to pay the debt when incurred and thus fraud. To the three grounds for piercing discussed so far, which correspond to the three principal abuses of limited liability, there is a possible fourth ground of particular relevance to corporate groups. This is the argument that courts should disregard separate corporate entities in corporate groups when the separate entities simply attempt to artificially divide what in reality is one business. This is sometimes referred to as the enterprise theory. The leading case seemingly accepting the enterprise theory in the United States is the opinion of the New York Court of Appeals (the highest court in New York) in Walkovszky v. Carlton.87 A taxicab operated by a corporation struck Walkovszky. The corporation’s assets consisted of a couple of cabs, its non-transferable license to operate cabs in New York, and a liability insurance policy in the minimum amount

80

Minton v. Cavaney, 364 P.2d 473 (Cal. 1961). Walkovszky v. Carlton, 223 N.E.2d 6 (N.Y. 1966). 82 E.g., Harris v. Curtis, 87 Cal. Rptr. 614 (Cal. App. 1970). 83 Thompson (1991). 84 E.g., Arnold v. Browne, 103 Cal. Rptr. 775, 783 (Cal. App. 1972). 85 E.g., Baatz v. Arrow Bar, 452 N.W. 2d 138 (S.D. 1990). 86 E.g., Radaszewski v. Telecom Corp., 981 F.2d 305 (8th Cir. 1992). 87 223 N.E.2d 6 (N.Y. 1966). 81

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required to drive a vehicle in New York. The sole shareholder of this corporation, Carlton, following what one might characterize as a Titanic strategy,88 had broken up his taxicab business into ten corporations, each of which owned one or two cabs, and all of which operated out of a common garage. When the one corporation’s assets proved insufficient to cover Walkovszky’s damages, Walkovszky sought to pierce the corporate veil and hold both Carlton, and the nine other cab companies owned by Carlton, liable. Carlton moved to dismiss the complaint against him, but, in what was probably a tactical decision to create a more sympathetic situation for Carlton, the other nine cab corporations did not move to dismiss the actions against them. The Court of Appeals cited a leading article advocating enterprise liability89 to suggest that breaking up the venture in this manner provided grounds for piercing to make Carlton’s other cab corporations liable, but held that this did not state a claim against Carlton himself. Since the other cab companies did not move to dismiss the actions against them, this language in Walkovszky was just dicta and, indeed, it is difficult to find a case in the United States adopting enterprise liability in a situation in which there were not also elements of fraud, shifting of assets, or inadequate capitalization.90 Moreover, the theory creates a challenge in deciding how a court should determine when there is an artificial division of one business. Before leaving grounds for piercing, it is useful to address three other factors: the nature of the plaintiff, the nature of the defendant, and the role of so-called corporate formalities. Starting with the nature of the plaintiff, it has become common to state that courts are more likely to pierce in favor of a tort victim than a contract creditor, based upon the notion that the contract creditor had a choice not to accept limited liability.91 In fact, however, an empirical study by Professor Robert Thompson of reported court decisions dealing with piercing in the United States92 found that courts actually pierced in a higher percentage of cases brought by contract, rather than tort, creditors. One explanation is that fraud, which provides common grounds for piercing in the United States, is relevant to contract creditors but is generally not relevant for tort victims, whereas inadequate capitalization, regarding which tort victims should receive greater sympathy, is a less common grounds for piercing in the United States.93 More directly relevant to corporate groups, some writers have asserted that courts should be more willing to pierce in order to hold a corporation, as opposed to an

88

After the ship that was supposedly unsinkable due to its division into eight watertight compartments. 89 Berle (1947). 90 See, e.g., SSP Partners v. Gladstrong Investments (USA) Corp., 275 S.W.3d 444 (Tex. 2008) (rejecting enterprise theory in the absence of some fraud or abuse). 91 E.g., Secon, 855 F.2d at 416. 92 Thompson (1991). 93 See, e.g., Oh (2010) (studying the incidence of piercing for fraud, misappropriation of assets and inadequate capitalization in the context of tort and contract creditors).

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individual, who is the controlling shareholder liable.94 The argument is that no real people face the risk of unlimited liability when the defendant shareholder is another corporation. Yet, the Thompson study found that courts in the United States actually pierced in a somewhat higher percentage of cases against individuals, as opposed to corporations, who were controlling shareholders. Moreover, courts in piercing cases in the United States tend to cite and apply prior opinions interchangeably regardless of whether the cases were against individuals or corporations who were controlling shareholders. Finally, confusion arises from frequent mention of so-called corporate formalities in discussion of piercing in the United States. In fact, the notion that corporate formalities are a major determinant in piercing cases may be the legal equivalent of an “old wives’ tale.” Professor Thompson’s study of piercing decisions found that courts mentioned the failure to follow formalities in only a small fraction of the cases in which the courts pierced. The problem is that reference to corporate formalities in discussions in the United States often mix together actions that have no logical relevance to creditors’ claims (formalities of corporate governance such as annual meetings of shareholders to elect directors and periodic meetings of directors) and actions whose relevance goes to other grounds for piercing (failure to keep corporate and shareholder dealings and finances at arms-length).95

3.1.2

The Role of Control

In addition to requiring the creditor to show fraud, wrong, injustice or the like, court opinions in the United States also require, under one version of the test for piercing, that the defendant have “not merely majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporation had at the time no separate mind, will or existence of its own;”96 or, under another version of the test, that there is such “unity of interest and ownership [between the corporation and the defendant] that the separate personalities of the corporation and the individual no longer exist.”97 Taken literally, this sort of language just creates confusion. No corporation in the world has a mind of its own. They are fictitious entities controlled by people. In a large corporation there will be a number of people involved in control, while in a smaller corporation with a majority or sole owner, normally that party will decide what the corporation is to do. If control by one person provides grounds to pierce, many, if not most, closely held corporations would fail to provide limited liability. If such control must be combined with fraud, wrong or the like, then what does control add? Nor does it help matters to refer to a corporation having a separate personality

94

Easterbrook and Fischel (1985). E.g., DeWitt, 540 F.2d at 688. 96 Consumer’s Co-op., 419 N.W.2d at 218-9. 97 E.g., Sea-land, 941 F.2d at 522. 95

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(cheerful? introvert?) from its controlling shareholder—unless perhaps one means keeping money separate and dealings at arms-length, in which case we are back to misappropriation of corporate assets. Nevertheless, properly understood, this element serves a purpose. It tells the court whom to hold liable if the court decides to pierce. In other words, the fraud, wrong or injustice element tells the court when and why to pierce, the control or unity of interest element tells the court against whom. Specifically, the court should hold liable the party who used control over the corporation to commit fraud, misappropriate corporate assets, or operate without adequate capital, and not hold liable passive shareholders who were not at fault. While this control, or who should be liable, element, should produce a straightforward factual inquiry when dealing with shareholders who are individuals, it creates much greater conceptual difficulty when dealing with corporate groups. When an individual owns all or a majority of a corporation’s voting stock, it is pretty straightforward to determine whether this individual actively controls the corporation or, instead, is (as would be unusual) content to be a passive owner and let professional managers run the company. Hence, tracing decisions to engage in fraud, misappropriate assets, or operate without adequate capital, to this individual should normally be a purely factual inquiry not requiring conceptual hairsplitting. By contrast, a parent corporation can only act through its personnel. If officers, directors or other employees of the parent corporation also are officers, directors or employees of the subsidiary, is the parent exercising control and responsible for any fraud, misappropriation or decision to operate without adequate capital undertaken by such duel capacity personnel? More broadly, since the parent corporation’s voting control makes the subsidiary’s directors, and, in turn, all the subsidiary’s officers and employees, serve at the pleasure of, and ultimately be answerable to, the parent, is it reasonable for the parent to be able to disclaim piercing based upon fraud, misappropriation or decision to operate without sufficient capital, based upon the fiction that the subsidiary’s officers, directors or other personnel, rather than the parent, are responsible for the misconduct? A leading case addressing these questions in a context of multinational corporate groups is Craig v. Lake Asbestos.98 Craig involved an attempt to hold an English investment corporation (Charter) liable for default judgments against another English corporation (Cape) in which the investment company held two-thirds of the stock. In an action in a United States federal court because of diversity jurisdiction,99 the lower court found fraud or injustice based upon the activities of Cape to avoid paying asbestos claims that arose out of the activities of Cape’s wholly owned subsidiary in the United States. Specifically, Cape dissolved the subsidiary and allowed courts in the United States to enter default judgments against Cape in lawsuits arising out of the subsidiary’s asbestos sales, which judgments Cape did not pay. Cape attempted to continue asbestos sales in the United States through another corporation, which was ostensibly not its subsidiary, but was founded with

98 99

843 F.2d 145 (3d Cir. 1988). Parties from different states.

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money that came from Cape. Cape had no assets in the United States and the plaintiffs were unable to get the English courts to enforce their judgments against Cape in England, where it had assets. Evidently, Charter had assets in the United States, which led to the attempt to pierce Cape to reach Charter. On appeal, the United States Court of Appeals questioned, but left alone, the lower federal court’s finding of fraud or injustice. Instead, it reversed due to the failure to show that Charter had the requisite control over Cape. The facts of the opinion provide limited detail regarding who made the decisions treated by the lower court as fraud or injustice. What little detail the opinion mentions does not show Charter’s personnel hatched the plan, although some may have been aware of it. The Court of Appeals, however, avoided even trying to parse out this question. Instead, the court held that Charter’ control over Cape did not reach the level of “domination.” In part, this was because “Charter” (ignoring the problem that Charter cannot do anything itself) did not intrude into the day-to-day management of Cape, and that the two corporations maintained separate records, offices and staffs. In part, this was because the amount of control Charter exercised over Cape was less than the amount of control that the New Jersey Supreme Court had held in an earlier case was insufficient to pierce.100 On its face, Craig is difficult to defend, except perhaps to blame the New Jersey Supreme Court for its earlier decision dealing with parent-subsidiary piercing in this manner, coupled with the choice of law rules governing diversity jurisdiction cases in federal courts—which forced Craig to apply either New Jersey or English law, rather than decide how to determine the necessary control on its own. The reason it was unclear whether English or New Jersey law applied is because courts in the United States disagree over whether piercing claims come within the internal affairs rule (in which case English law should have governed whether to pierce Cape, since Cape was an English company) or the law of the jurisdiction in which the underlying claims by the unpaid creditors arose (which apparently was New Jersey).101 The court in Craig avoided resolving the issue, since both parties seemed content to apply New Jersey law. Craig’s cramped and formalistic approach to control or domination creates a discontinuity with the more expansive and realistic determination of control or domination in the minority shareholder protection cases discussed earlier in this report. From a policy standpoint, it appears to suggest that parent corporations can engage in abuse of limited liability and yet avoid piercing by a wasteful redundancy of personnel between parent and subsidiary. On further reflection, however, Craig— as also true in the New Jersey decision upon which Craig relied—may be a situation in which careful analysis would have established that there was no fraud or wrong justifying piercing. Specifically, Charter did not misappropriate Cape’s assets to the prejudice of Cape’s creditors; confuse Cape’s creditors into doing business with

100

State Dept. of Environmental Protection v. Ventron Corp., 468 A.2d 150 (N.J. 1983). Compare Realmark Invest. Co. v. Am. Fin. Corp., 171 Bankr. Rptr. 692 (Bankr. N.D. Ga. 1994), with Abu-Nasser v. Elders Futures, Inc. 1991 WL 45062 (S.D.N.Y. 1991).

101

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Cape rather than Charter; or run Cape with inadequate capital to cover asbestos liabilities. Rather, Cape (not Charter) may have abused the limited liability of Cape’s U.S. subsidiary. A second problem created by corporate groups when addressing this control or who should be liable element arises with corporations under common control (so-called brother-sister corporations). Walkovszky illustrates the problem. The court concluded that the only ground for piercing sufficiently pled in Walkovszky’s complaint was artificially dividing one taxicab business into ten separate corporations. This, in turn, raised the question of whether the appropriate party against whom to pierce in this event was the controlling shareholder, Carlton, who decided to break up his taxicab business in this manner, or the other nine cab companies, or perhaps both. The same issue arises in the numerous cases in which controlling shareholders shuttle assets between different corporations under common control or confuse creditors regarding which of the corporations under common control is the actual debtor. In Walkovszky, the court refused to hold Carlton liable, seemingly reasoning that if the wrong involved dividing one business into multiple corporations, the logical remedy was to put the venture back under one roof by making the other corporations, not the controlling shareholder, liable. By contrast, in Sea-Land Services, Inc. v. Pepper Source,102 the court pierced in order to hold both the controlling shareholder and the brother-sister corporations liable for the debt of one of the corporations under common control in a situation in which the controlling shareholder had shuttled funds at will among the commonly controlled corporations (albeit, the shareholder had also taken funds for personal use). These divergent results reflect several divergent policy and doctrinal concerns. From an abstract doctrinal standpoint, placing liability upon the common controlling shareholder follows the traditional notion of piercing as disregarding the existence of the corporation, in which case the owner becomes liable for the business’ debts. On the other hand, the enterprise theory suggests a different abstract logic, which is to disregard artificial divisions in one business, in which case the other corporations that are part of this business should be liable. From a more pragmatic or policy standpoint, the question is whether to punish the wrongdoer, compensate for the wrongdoing, or both. Punishing the wrongdoer generally means holding liable the controlling shareholder, who shuttled assets between commonly owned corporations, confused the creditors as to which corporation was liable, or artificially divided one venture into multiple corporations. By contrast, piercing to hold liable the commonly owned corporations that received shuttled assets, whom the creditor thought it was dealing with, or which carry on the one artificially divided venture, compensates for the wrong. One other policy concern arises when the brother-sister corporations have other shareholders or creditors. Piercing to make these corporations liable to the creditor of another commonly controlled corporation prejudices the other shareholders, and

102

941 F.2d 519, 521-2 (7th Cir. 1991).

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potentially even creditors, of the corporations liable for a debt that was not their own. Sea-Land provides an illustration. Among the commonly controlled corporations held liable for the creditor’s claim was one in which the controlling shareholder owned only half the stock; the other half being owned by a party who was either not paying attention or was not very assertive. While this half-owned corporation was involved in the shuttling of funds between the various commonly controlled corporations, there was no evidence it had come out ahead in the back and forth. Moreover, in piercing, this other corporation became liable for the entire debt, rather than just whatever net amount it might have received over what it sent out in the various intra-corporate transfers. The court’s rationale was to point to the controlling shareholder’s abuse of this other corporation, from which the controlling shareholder had misappropriated assets just as the controlling shareholder had from the companies he entirely owned. In other words, the fact that the controlling shareholder had already victimized the other shareholder justified the further injury to this apparently innocent shareholder that would result from another corporation’s creditor collecting from the corporation in which this shareholder owned half.

3.2 3.2.1

Other Protections Generally

A variety of other laws also can protect creditors from abuse of limited liability by parent corporations and controlling shareholders in corporate groups. One is the same fiduciary duty discussed above that protects minority shareholders from tunneling in corporate groups. While creditors normally lack standing to bring a derivative suit on behalf of the subsidiary or controlled corporation, the Delaware Supreme Court has found standing if the corporation is insolvent (unable to pay its debts).103 Beyond this, as mentioned by way of comparison earlier, statutes dealing with fraudulent transfers (or conveyances) and limits on dividends and other distributions to shareholders found in corporation statutes can force parents and controlling shareholders to return money or property received from their subsidiaries or controlled companies. Statutes dealing with fraudulent (under more recent lingo “voidable”) transfers allow creditors to set aside transfers of property from their debtors when the debtor either makes the transfer for the purpose of hindering collection by the creditor or makes the transfer without receiving fair consideration at a time when the debtor is insolvent.104 Corporation statutes commonly prohibit dividends or other distributions to shareholders if the corporation will have fewer

103

North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007). 104 E.g., Unif. Fraudulent Transfer Act § 4.

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assets than debts after the distribution or will be unable to pay its debts as due.105 As a milder remedy to the liabilities discussed so far, courts may subordinate debts owed by an insolvent subsidiary or controlled corporation to its parent or controlling shareholder, allowing their payment only after the debts owed to outside creditors. Like piercing, this is a judicially created remedy invoked when the equities of the situation demand, as, for example, when the debt claimed by parent arose out of questionable dealings between the parent and subsidiary.106 Finally, various statutes may impose particular types of liabilities on parent corporations based upon the parent’s relationship to the activities that created liability107 or even just the parent’s ownership of the subsidiary.108

3.2.2

Substantive Consolidation

Substantive consolidation is a judicially created doctrine under which bankruptcy courts will disregard the separate entity status of affiliated corporations in bankruptcy.109 The result is that, instead of treating each bankrupt corporation as a separate debtor with its own assets and debts, the court will treat all the affiliated bankrupt corporations as one big company owning all of the assets and subject to all of the debts of the affiliated corporations, which the court will either liquidate or reorganize depending upon the nature of the bankruptcy proceeding. This goes beyond procedural consolidation or joint administration in which the court combines for administrative convenience the bankruptcy proceedings involving affiliated corporations, but nevertheless treats each corporation as a separate bankrupt with separate assets and separate debts. Because it disregards the separate status of individual corporations in corporate groups, substantive consolidation overlaps with piercing. Nevertheless, there are differences. One difference lies in the normally global nature of substantive consolidation, which, barring limited special treatment, sweeps in all debts of all the corporations consolidated, whereas piercing is a remedy granted individual creditors based upon the particular equities of that creditor. On a more fundamental policy level, the multiple corporation bankruptcy context of substantive consolidation

Model Bus. Corp. Act § 6.40(c). E.g., Taylor v. Standard Gas & Electric Co., 306 U.S. 307 (1939). 107 E.g., United States v. Bestfoods, 524 U.S. 51 (1998) (a parent corporation can be directly liable as an “operator” under the Environmental Response, Compensation and Liability Act for pollution on property owned by its subsidiary if the parent managed operations related to the pollution on the site). 108 E.g., Pension Benefit Guaranty Corp. v. Ouimet Corp., 630 F.2d 4 (1st Cir. 1980) (the Employment Retirement Income Security Act imposes liability upon members of a controlled group, defined as corporations linked by 80% ownership of one corporation in another, for other members’ pension obligations). 109 E.g., In re Auto-Train Corp., 810 F.2d 270 (D.C. Cir. 1987). 105 106

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makes obvious that the underlying conflict is not between shareholder and creditors, but between creditors. Earlier judicial opinions ordered substantive consolidation based upon multiple factor lists displaying all of the same indeterminacy as found in the multi-factor approach to piercing.110 More recent opinions have focused on the practicalities of the situation and the competing equities of the creditors. The practicality rationale for substantive consolidation arises from the difficulty of attempting to unwind each individual inappropriate intra-group transaction. In the worst case, a lack of accurate records might render this impossible. Even if adequate records exist, the cost of litigating the merits of claims to unwind individual intra-group transactions might chew up much of the recovery. The competing equities largely arise from conflicting reliance by creditors, some of whom might have relied on the assets of the corporation with which they contracted, while others, because of misleading actions or otherwise, relied on assets held by other members of the corporate group. Protecting the interests of the creditors relying on assets beyond those of the particular corporation with which they technically contracted can harm the interests of the creditors who did not expect to share the assets of the corporation with which they contracted with creditors of other corporations. Turning these two concerns into a single, highly demanding, test, the United States Court of Appeals for the Second Circuit in In re Augie/Restivo Baking Co.,111 held that courts should only order substantive consolidation when either (1) all creditors had dealt with the affiliated corporations as a single economic entity and did not rely on their separate entity status or (2) the affairs of the affiliated corporations are so entangled that substantive consolidation will benefit all creditors (by avoiding dissipation of assets in litigating claims or untangling the mess).

4 Conclusion Law in the United States deals with the hazards corporate groups can present to minority shareholders and creditors largely through judicially established and applied doctrines involving fiduciary duty, piercing the corporate veil and substantive consolidation. The success of this approach depends upon the sophistication with which judges apply these doctrines.

110 111

E.g., Fish v. East, 114 F.2d 177, 191 (10th Cir. 1940). 860 F.2d 515 (2d Cir. 1988).

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References Journal Articles Atanasov V et al (2014) Unbundling and measuring tunneling. Univ Ill Law Rev 2014:1697–1738 Berle A (1947) The theory of enterprise liability. Colum Law Rev 47:343–358 Clark R (1977) Duties of the corporate debtor to its creditors. Harv Law Rev 90:505–562 Easterbrook F, Fischel D (1985) Limited liability and the corporation. Univ Chic Law Rev 52:89–117 Gevurtz F (1997) Piercing piercing: an attempt to lift the veil of confusion surrounding the doctrine of piercing the corporate veil. Or Law Rev 76:853–907 Gilson R (2006) Controlling shareholders and corporate governance: complicating the comparative taxonomy. Harv Law Rev 119:1641–1679 Johnson S et al (2000) Tunneling. Am Econ Rev 90:22–27 Oh P (2010) Veil-Piercing. Tex Law Rev 89:81–145 Schaefer E (1982) The fallacy of weighing asset value and earnings value in the appraisal of corporate stock. South Calif Law Rev 55:1031–1096 Thompson R (1991) Piercing the corporate veil: an empirical study. Cornell Law Rev 76:1036–1074

Books Blumberg P et al (2018) The law of corporate groups, 2nd edn. Walters Kluwer, Alphen aan den Rijn Gevurtz F (2010) Corporation law, 2nd edn. West, St Paul Gevurtz F, Sautter C (2019) Mergers and acquisitions law. West Academic, St. Paul

Online Publications Booth R (2016) The fallacy of adjusting valuation for growth and inflation. Available at https://ssrn. com/abstract¼2755523. Accessed 1 June 2019

National Report on Austria Florian Heindler

Abstract Austrian corporate law defines a group of companies (Konzern) as legally separate enterprises which are subject to the common direction (einheitliche Leitung) to pursue economic aims, or as a situation in which a legally separate enterprise by virtue of participation or otherwise directly or indirectly another enterprise exerts a controlling influence (beherrschender Einfluss). The notion in corporate law applies to almost all types of legal entities which under Austrian law can become subject to group provision. Due to the implementation of EU directives, the Austrian group regulation has grown in the past years. However, instead of a codification of group regulation, Austrian law has relevant provisions in different statutes. In principle, each subsidiary is treated as a separate legal entity, and the group is accordingly is not regarded as a legal entity and cannot enter into transactions, or act as a claimant or defendant in court.

1 Sources of Law Austrian legislation lacks a coherent regulation of groups of companies (Konzerne). Instead, groups of companies (Konzerne) and controlled companies (beherrschte Gesellschaften) are regulated by different provisions in diverse areas of law, as e.g. in company law, capital markets law, takeover law, insolvency law, competition law, labour law, tax law, banking and insurance regulation and procurement law. In the area of company law, provisions on groups of companies are in diverse laws on different legal entities. Austrian legislation lacks a general part of company law (see below Sect. 1.1). However, the rules applicable to joint-stock companies (Aktiengesellschaften) serve as model for different legal entities. Especially due to a high degree of parallel norms on joint-stock and limited liability companies, as well as the model function of the comprehensive Austrian Stock Corporation Act

F. Heindler (*) Sigmund Freud University, Vienna, Austria e-mail: fl[email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_9

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(Aktiengesetz), Austrian regulation of groups of companies in company law can be explained with a focus on the Austrian Stock Corporation Act. Austrian law awards legal capacity to a range of types of legal entities. Almost any legal entity can practically become a member of a group of companies as a parent company or subsidiary.1 The group of companies as a whole, however, is not regarded as a legal entity and cannot enter into transactions, or act as a claimant or defendant in court. Each group company remains a separate legal entity.

1.1

Private Law and Company Law

The Austrian Civil Code (Allgemeines bürgerliches Gesetzbuch) was enacted in 1812 in the development of statehood and drafted during the era of enlightened absolutism. Its structure follows the Institutes of Gaius and lacks a general part on legal entities. The only legal norms on entities can be found in § 26 of the Austrian Civil Code, which defines legally permitted associations based on membership with a further reference to special legislation of so-called moral persons (moralische Personen). Furthermore, Section 27 of the Austrian Civil Code (§§ 1175 to 1216e as amended in 20142) contains rules for simple partnerships (Gesellschaft bürgerlichen Rechts). Simple partnerships are similar to contractual arrangements and do not enjoy legal capacity.3 The Austrian Commercial Code (Unternehmensgesetzbuch) contains a coherent regulation of limited and unlimited partnerships (Personengesellschaften). Both types of legal entities since a reform of the Code in 2006 shall be regarded as legal entities.4 The Austrian Commercial Code originally was the German Trade Code of 1897 (Handelsgesetzbuch) which has been enacted in Austria under German rule in 1939. However, the Austrian Commercial Code meanwhile significantly differs from the German Trade Code. Any other type of legal entity is regulated by a special legislative act applying exclusively to this particular type of legal entity, like the Austrian Stock Corporation Act (Aktiengesetz) and the Austrian Limited Liability Company Act (GmbH-Gesetz).

1.2

Groups of Companies: Notions and Definitions

Both the Austrian Stock Corporation Act (§ 15) and the Austrian Limited Liability Company Act (§ 115) define groups of companies as follows: 1

See on partnerships, Torggler (2016), p. 105; see details below Sect. 2.1. Federal Law Gazette I 2014/283. 3 Schurr (2017) recital 3. 4 § 105 Austrian Commercial Code: The unlimited partnership has legal capacity (“Die offene Gesellschaft ist rechtsfähig”). 2

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(1) If legally separate enterprises are subject to the common direction (einheitliche Leitung) to pursue economic aims, such enterprises form a group (Konzern); and the individual enterprises shall constitute members of such group (Konzernunternehmen). (2) If over a legally separate enterprise by virtue of participation or otherwise directly or indirectly another enterprise exerts a controlling influence (beherrschender Einfluss), such controlling enterprise and such controlled enterprise shall constitute a group (Konzern) and, individually, members of such group (Konzernunternehmen). Thus, the basic definitions in § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Company Act refer to the notion of common direction (einheitliche Leitung) and controlling influence (beherrschender Einfluss). The Austrian Stock Corporation Act and its § 15 originate from the German Stock Corporation Act of 1937 which has been enacted in Austria under German rule in 1938 and slightly amended in 1965.5 Common Direction The common direction of several companies is more than mere control or supervision over the subsidiary’s activities. It requires that companies are factually managed by one management.6 According to Austrian doctrine, both, groups of equal subsidiaries (Gleichordnungskonzern) and groups of subsidiaries and parent companies (Unterordnungskonzern) can have a common direction in the meaning of § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Company Act.7 Common direction can be achieved by any means, be it participation, personal ties, and dependencies, or contractual relations. It is merely required that the management factually exerts its common direction entitlement in a major part of the company’s business. Consequently, Austrian law has a broad notion of group of companies. Controlling Influence The term controlling influence used in company legislation is not defined and is thus subject to discussion in doctrine. The possibility to exert a controlling influence can be created through participation, personal ties, and dependencies, or contractual arrangements. It is furthermore sufficient to be able to exert controlling influence indirectly via intermediate legal entities.8 Although § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Company Act do not refer to a particular threshold, some authors assume that majority participation indicates controlling influence, whereas other authors suggest referring to the situations described in § 244 Austrian Commercial Code.9

5

See Artmann (2018), pp. 1–2; Durstberger (2019), pp. 3–4. Jabornegg (2011) recital 15; Fröhlich and Haberer (2016) recital 23. 7 Milchrahm (2017) recital 82–83; Arlt and Schima (2016), p. 286. 8 Austrian Supreme Court of Justice (OGH) 14.9.2011, 6 Ob 139/11a. 9 For an overview see Torggler (2014) recital 4; Milchrahm (2017) recital 62. 6

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Accounting Law Different from the definition in § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Company Act, the Austrian Commercial Code defines parent enterprises (Mutterunternehmen) and subsidiaries (Tochterunternehmen) for accounting purposes stating in its § 189a that a parent enterprise controls one or several subsidiaries and a subsidiary is directly or indirectly controlled by a parent enterprise. For both parent enterprises and subsidiaries, reference is made to § 244 Austrian Commercial Code defining control. In this regard, § 244 Austrian Commercial Code refers to the notion of common direction (einheitliche Leitung), but adds several situations in which controlling influence is presumed existing per se. These are (1) the holding of the majority of the voting rights, (2) the entitlement to appoint and remove the majority of the members of the management (Vorstand), executive body (Geschäftsführung), or supervisory body (Aufsichtsrat) being a shareholder of the company (direct control), (3) the entitlement to exert controlling influence (beherrschender Einfluss), or (4) the entitlement based on agreements with order shareholders to determine the exercise of voting rights thus reaching a majority for the appointment and removal of the majority of the members of the executive, or supervisory body. Insolvency In the event of insolvency of a company, the Austrian Substitute Capital Act (Eigenkapitalersatz-Gesetz) applies. Its major prescription provides for the transformation of certain loans granted by shareholders into equity of the company. In this regard—being applicable to controlling (kontrollierend) shareholders and similarly controlling non-shareholders—§ 5(2) of the Austrian Substitute Capital Act uses a slightly different notion of the term controlling share (kontrollierende Beteiligung). Thus for the purposes of the Austrian Substitute Capital Act controlling share means (1) a majority share in the voting rights of the company, (2) the entitlement to appoint and remove the majority of the members of the executive or supervisory body, (3) the enjoyment of a special entitlement to be a member of the executive body, (4) the entitlement based on agreements with order shareholders to determine the exercise of voting rights thus reaching a majority for the appointment and removal of the majority of the members of the executive, or supervisory body, or (5) a share that entitles the exercise of controlling influence, which is refutably presumed for the purposes of the Austrian Substitute Capital Act if a person holds a share of at least 25% of the company’s voting rights and no other person has a similarly high influence on the exercise of voting rights either directly, indirectly, or via contractual entitlements. Takeover Law In the area of takeover law, the acquisition of a controlling participatory share (kontrollierende Beteiligung) triggers takeover proceedings. In this regard, § 22 Austrian Takeover Act defines that a direct controlling participatory share requires holding more than 30% of the company’s voting shares. Indirect controlling participation means that the participatory share exceeds 30% of the company’s voting shares and is held through (1) a publicly listed company in relation to which the acquirer holds more than 30% of the voting shares, or (2) a non-publicly listed company or entity with the entitlement to exert controlling influence (beherrschender Einfluss) by means of participation in this company or

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entity, or by any other rights. Apart from controlling shareholding, the Austrian Takeover Act (§ 23) also considers entitlements to control companies without shareholding including through (1) shares held by third persons for the account of the acquirer, (2) shares transferred to a creditor as collateral, (3) right of usufruct with regards to shares, (4) exercise of voting rights without being the owner of the voting shares, or (5) shares that could be acquired by an act of unilateral declaration of intent. Cartel Law In cartel law, the notion of merger (Zusammenschluss) refers to economic concentration and thus deals with control over the economic conduct of a company. Accordingly, the Austrian Cartel Act—among other pieces of legislation—refers to all connections between enterprises leading to a direct or indirect controlling influence (beherrschender Einfluss) of one enterprise over the other (§ 7 (1)(5) Austrian Cartel Act), and more specifically states that merger control is triggered if more than 50% of the members of the executive or supervisory boards of two or more enterprises become identical (§ 7(1)(4) Austrian Cartel Act). Mergers of legal entities that form part of a group of companies in the meaning of § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Company Act are exempted from merger control in accordance with § 7(4) Austrian Cartel Act. Other Statutes Further definitions that deviate only subtly can be found in § 88a and § 110(6) Austrian Labour Constitution Act (Arbeitsverfassungsgesetz) focusing on the participation of employees in the company’s supervisory body. In other areas of law, reference is made either to the definition in the Austrian Stock Corporation Act (for instance in § 1(6) Austrian Wage Protection and Anti-Social Dumping Act) or to the definition in the Austrian Commercial Code (for instance partly in § 30 (1) Austrian Banking Act).

2 Corporate Regulation of Groups of Companies Austrian company law lacks a coherent group regime. However, a range of legal provisions refer to the definition of control and attach effects to the establishment of control. In consideration of company law provisions, it is first noteworthy to underline that parent companies are principally not liable for the obligations of their subsidiaries and vice versa. Nevertheless, in case of common direction (einheitliche Leitung) Austrian courts under particular circumstances may award damages claimed against parent companies, and moreover, also lift the corporate veil (see below Sect. 3). A reference to control in joint-stock company legislation can be found in § 80 Austrian Stock Corporation Act dealing with loans and credits granted to members of the executive body and the company’s senior employees. Since a loan or credit granted by the company to members of the executive body and senior employees requires consent from the supervisory board, the supervisory board of the controlling enterprise (herrschendes Unternehmen) also approves credits or loans

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awarded to members of the executive body and senior employees of dependent enterprises (abhängiges Unternehmen). Another rule referring to board members of controlling and dependent enterprises concerns the persons eligible to be special auditors of a company. Since members of the executive or supervisory board, as well as employees of the company, may not act as special auditors, § 131(2) Austrian Stock Corporation Act likewise excludes members of the executive or supervisory board as well as employees of a dependent or controlling company, in addition to persons who exert a relevant influence (maßgeblicher Einfluss) on the management of the company. Similarly, the same category of individuals is excluded from acting as formation auditors during the establishment of the company, if the company or the founders exert a relevant influence on their management (§ 25(5) Austrian Stock Corporation Act). Several other provisions of the Austrian Stock Corporation Act refer to the notion of parent and subsidiary companies (Mutter- und Tochterunternehmen) as the Austrian Commercial Code provides for in its accounting rules. This particularly applies to the rules on the acquisition or pledge of shares of the parent company by a subsidiary (§ 66 and § 51 Austrian Stock Corporation Act), or the (non-)exercise of voting rights connected with shares in parent companies (§ 65(5) Austrian Stock Corporation Act). § 95(2) Austrian Stock Corporation Act sets information rights of the supervisory board including the right to request management reports about the relations of the company with its subsidiaries. Similarly, the information entitlements of shareholders in the general meeting include information about the group of companies and the group members. In insolvency, the existence of control or domination can lead to the transformation of shareholder loans into equity of the company, which provides for a reduction in the amount of outstanding debt. Thus, in accordance with § 5 Austrian Substitute Capital Act, loans would be recognised as (non-repayable) equity if they are granted to the subsidiary by (1) controlling persons, (2) holders of a share of at least 25% in the company, (3) persons exercising a controlling influence (beherrschender Einfluss) even without holding shares except for information rights and rights of influence typical for credit agreements or in connection with collateral.

2.1

General and Special Rules on Certain Types of Legal Entities

The rules on groups and control are referring to particular types of entities and are only partly applicable to all legal entities. The differences are mainly formally due to the lack of comprehensive legislation applicable to all legal entities. Thus, for example, the definitions in § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Act use an identical language. The most developed and comprehensive corporate legislation in Austria is the Austrian Stock Corporation Act, which therefore

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regularly serves as a model rule and give interpretative guidance for other types of legal entities if problems in comparable situations arise. It is, however, noteworthy that the most important other types of Austrian legal entities, namely open partnerships (Offene Gesellschaft), limited partnerships (Kommanditgesellschaft), private foundations (Privatstiftung), cooperatives (Genossenschaft) and—to a limited extent—associations (Verein) may also be group members. Their distinctive legislative acts also refer to groups of companies on behalf of consolidated annual accounts. In case of private foundations, § 22(1)(2) Austrian Private Foundation Act refers to § 15 Austrian Stock Corporation Act in connection with the duty to establish a supervisory board. Thus, private foundations shall have a supervisory board if they (1) exert common direction (einheitliche Leitung) of companies or cooperatives within the meaning of § 15 Austrian Stock Corporation Act, or (2) control companies or cooperatives based on majority participation. The establishment is furthermore only mandatory if the directed or controlled companies or cooperatives have in total more than three hundred employees, and if the private foundation is factually managing the companies or cooperatives.10 Interestingly, the Austrian court practice employs different notions of control in case of private foundations. Whereas common direction in case of a company being the parent enterprise requires that the parent company should govern all spheres of the subsidiary’s business, the Austrian Supreme Court has ruled that in case of a private foundation acting as a parent enterprise, it is sufficient to guide the key parts of the subsidiary’s business. As an example, the court has referred to the financial status of the subsidiary.11 This assumption is based on a reference to the telos of § 22 Austrian Private Foundation Act, which is concerned with the mandatory establishment of a supervisory board.

2.2

Transparency and Accounting

Rules on disclosure primarily aim to safeguard the provision of information to shareholders and the supervisory board. Thus, § 95(2) Austrian Stock Corporation Act requires group information to be provided to the supervisory board, while § 118(1) of the same Act stipulates that group information must be availed during the general meeting of shareholders. More specifically, § 118(1) Austrian Stock Corporation Act entitles shareholders to request information about group members and the entire group of companies if there is an obligation to draw up consolidated annual accounts (Konzernabschluss). Group information can be requested by shareholders only during the course of an ordinary general meeting.12

10

OGH RIS-Justiz RS0120356. OGH 1 December 2015, 6 Ob 217/05p. 12 Bydlinski and Potyka (2011) recital 13. 11

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Every member of the supervisory board is entitled to request a report about the relation of the company with its subsidiaries. Such request made by the entire supervisory board is binding, whereas if only single members request a report, the management may refuse to provide information unless at least a second member of the supervisory board supports the request. In contrast, requests received from the head of the supervisory board must be complied with by the management even without support from other members of the supervisory board. The supervisory board or its members may request reports about the group at any time without providing a specific reason or justification. Even without an explicit request, § 81 Austrian Stock Corporation Act stipulates a duty of the management to report annually on fundamental issues of the enterprise’s future business policy, alongside the outlook on behalf of the enterprise’s assets, financial situation and profits. In addition, the management shall report at least quarterly on the enterprise’s businesses. It is unanimously understood that this obligation includes the duty to report on the entire group situation and in particular the subsidiaries’ businesses.13 The public and particularly creditors and business partners of the company are dependent on the information shared through the publication of the company’s annual accounts. The Austrian accounting standards outlined in the Austrian Commercial Code are different to the International Financial Regulation Standards, as they are mainly concerned with the interests of creditors, investors, and business partners and have important functions in respect of informing shareholders and creditors. Austrian accounting standards also require companies to inform in the annual accounts about the number of outstanding receivables and payables relating to group members. In addition, disclosure requirements apply to the annual accounts and to the websites of publicly listed companies. However, the definition that Austrian accounting standards use for groups of companies is different from the definition provided in § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Act (see above Sect. 1.2). Hence, § 244(1) Austrian Commercial Code also refers to the common direction (einheitliche Leitung) but defines the term parent entity (Mutterunternehmen) and subsidiary (Tochterunternehmen), which is then also used in company legislation (see above Sect. 1.2).

2.3

Group Management

Austrian company law uses the term common direction (einheitliche Leitung) and stipulates a range of legal consequences for the legal entity, whereas it offers neither a separate legal regime to legal entities under common direction nor a comprehensive set of rules for the legal entities which are under common direction.

13

See Kalss (2010a), p. 139.

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Lacking comprehensive group regulation, the competences of corporate bodies in Austrian law largely depend on the type of connection between the members of the group. If consolidation is achieved via direct participation, the competences are those awarded to shareholders with a view—in particular—to the entitlement to appoint and remove members of the supervisory body of joint-stock companies, and—unless a supervisory board has been established—to the entitlement to appoint and remove members of the managing body. One of the consequences when falling under the group definition is an exemption from the restriction to become a member of a supervisory board of another company, if the other company is affiliated (konzernmäßig verbunden) in the meaning of § 189a(2) Austrian Commercial Code (§ 79(1) Austrian Stock Corporation Act). § 90 and § 86(2)(2) Austrian Stock Corporation Act prevents members of the supervisory board in a parent company to become managers of subsidiaries in the meaning of § 189a(7) Austrian Commercial Code. § 86(2)(3) Austrian Stock Corporation Act prevents multilateral cross-interlocking directorates, i.e. representatives of a company cannot become members of the supervisory board of a company if the directors of this company are supervisory board members of the other company. Nevertheless, the Austrian Stock Corporation Act allows cross-interlocking directorates in case of affiliation in the meaning of § 15 Austrian Stock Corporation Act or participation in the meaning of § 228(1) Austrian Commercial Code (meanwhile § 189a(2) Austrian Commercial Code).14

2.4

Minority Shareholders’ and Creditors’ Protection: Subsidiary

Capital Maintenance The Stock Corporation Act and the Limited Liability Company Act explicitly outlaw the repayment of contributions (§ 52 Austrian Stock Corporation Act; § 82(2) Austrian Limited Liability Company Act). An open or hidden illegal repayment of contributions is any payment or other service rendered to a parent company that is either furnished without adequate consideration in return or otherwise to the detriment of the subsidiary in such that it would not have been pursued in relation to a third party under the given conditions. Capital maintenance law aims at the protection of creditors who shall get a clear impression about the company’s assets from its annual accounts. Furthermore, capital maintenance is understood to protect the subsidiary company and its assets also in the benefit of other stakeholders of the legal entity. Due to the strict application of capital maintenance rules in Austria, the only way to legally transfer assets from a subsidiary to a parent company is by distributing the subsidiaries’ profit recorded in the financial statements after having adopted a

14

Rüffler (2006), p. 14.

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respective decision in the general meeting. Transactions between the subsidiary and its parent company must be entered into at market terms. It is not only outlawed to transfer contributions made by the shareholders, for instance, the amount of the nominal capital, but also to transfer any assets be it via payments or rendering services without adequate consideration apart from the official distribution of profits or free reserves.15 Thus, it is legally impossible for a majority shareholder to withdraw the funds of a company apart from promoting decisions to distribute profits or free reserves or to reduce the chartered capital. As a result, subsidiaries may claim for compensation or return against shareholders profiting from assets received through payments or services without adequate consideration. In addition, Austrian courts declare transactions void if they infringe the capital maintenance rules and thus, guarantees or other collateral that subsidiaries award to third parties for the benefit of the parent company may be declared null and void if the third party based on the doctrine of collusion if the third party has knowingly accepted the collateral. If, for example, banks—being obliged to review the risks associated with business decisions—get a clear impression that the guarantee constitutes an illegal repayment of contributions, collusion could be established by an Austrian court.16 Criminal Law Austrian criminal law may become applicable as well if payments from subsidiaries to parent companies are regarded as a repayment of contributions. It is noteworthy that even in criminal cases Austrian courts did not consider whether the payment remains within the same group of companies, or whether minority shareholders are participating in the subsidiary. In the heavily criticised decision in the case of Libro by the Austrian Supreme Court (Oberster Gerichtshof) in 2014,17 applying § 153 Austrian Criminal Code on breach of trust (Untreue), the court sentenced several former managers and advisors of the company Libro to prison for adopting a decision on the payment of funds of a wholly owned subsidiary to its parent company. Its focus, although admitting that the transfer of the funds was not to the detriment of the shareholders, was on the broader range of interests associated with the existence of the subsidiary, naming, in particular, its employees and creditors. In 2015, § 153 Austrian Criminal Code was slightly amended in order to avoid criminal sentences if no damage actually was incurred, and a reference to a business judgement rule was included.18 Asset Shifting In conclusion, it can be said that Austrian courts in the context of capital maintenance interpreting both, company law as well as criminal law are hesitant to regard groups of companies as a consolidated entity but moreover stress the independence of the individual group members. The possibilities to shift assets within a group of companies, for instance in order to promote cash pooling, as well

15

Hügel (2014), p. 26; Torggler (2013), pp. 12–13. OGH 14 September 2011, 6 Ob 29/11z. 17 OGH 30 January 2014, 12 Os 117/12s. 18 Austrian Federal Act Amending the Criminal Code 2015 (Federal Law Gazette I 112/2015). 16

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as to accept guarantees granted by a subsidiary are thus very limited. This means that on the other hand, the subsidiary’s capital basis is strongly protected, which is also safeguarding the interests of the subsidiary’s creditors and minority shareholders. Related-Party Transactions Related-party transactions are addressed by a range of company law rules. According to § 70 Austrian Stock Corporation Act, the executive body must conduct the company’s business for the benefit of the company. On behalf of subsidiaries in a group of companies, no exemption clause applies. Thus, business decisions adopted by the managers of the subsidiary must be for the benefit of the subsidiary company and it cannot be argued that a decision adopted for the benefit of the parent company mutatis mutandis is for the benefit of the subsidiary. In addition, § 84(1) Austrian Stock Corporation Act stipulates that members of the executive body must exercise their duties in due care. Managers may be found liable to pay compensation to the company if they run contrary to the standards of their duty of care. In addition, organs may be subject to voting restrictions if conflicts of interest are at stake (see below Sect. 2.6). Disclosure requirements with regards to related-party transactions can be found in accounting provisions (see above Sect. 2.2) and in capital markets regulation applicable to publicly listed companies. In accordance with § 87(4)(1) Austrian Stock Exchange Act, transactions with related enterprises or persons (nahe stehende Unternehmen oder Personen) subsequently have to be published in the (semi-)annual report if they had a material and adverse influence on the financial situation or business result of the company. In 2017, the EU Directive amending the long-term shareholder engagement has been enacted including new rules on related-party transactions.19 The Directive requires transposition by the national legislator by 10 June 2019. The Austrian parliament with a short delay enacted a national transposing act which amends the Austrian Stock Corporation Act. In accordance with the most current draft,20 § 95a Austrian Stock Corporation Act will be introduced addressing related-party transactions (Geschäfte mit nahestehenden Personen). § 95a exclusively applies to listed companies. Its paragraph (2) defines related parties in according with international accounting standards, i.e. IAS 24.9.21 According to § 95a (1)(4), the supervisory board shall approve related-party transactions. If the transaction involves a member of the supervisory board, the member must not take part in the voting on the approval. Transactions are subject to approval only if the transaction value exceeds 5% of the company’s balance sheet total. In the case of consolidated accounting, the total assets relevant for group accounting shall be taken instead of the company’s

19

Directive 2017/828/EU of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC with regards the encouragement of long-term shareholder engagement [2017] OJ L132/1. Comments from an Austrian perspective are provided by Reich-Rohrwig and Zimmermann (2017), p. 327. 20 See Austrian Federal Act Amending the Stock Corporation Act 2019 (Federal Law Gazette I 63/2019). 21 See draft of the Austrian Ministry of Justice, Document 130/ME 26th Legislative Session, p. 6.

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balance sheet total (§ 95a (3)). Transactions concluded with the same related party in a certain period shall be aggregated. The company shall publicly announce transactions with a value of more than 10% on its website (§ 95a(1) and (5)). According to § 95a (6), transactions although exceeding the 5% and 10% limit are excluded from publication and approval, if they are concluded at market terms and in the ordinary course of the company’s business (gewöhnlicher Geschäftsbetrieb). Moreover, transactions are excluded if they are entered into between the company and its Austrian or any wholly owned foreign subsidiary, unless otherwise provided for by the articles of the company (§ 95a (7/1)). The same applies to a foreign subsidiary if it is not wholly owned, or any subsidiary if applicable national law provides for adequate protection of interests of the company, its subsidiary and the subsidiary’s shareholders. Given the moderate level of implementation, most probably the Austrian provisions on capital maintenance will remain the relevant benchmark for related-party transactions on a day-by-day basis (see below Sect. 2.5). In particular situations, however, the definition of related parties, introduced by § 95a can be relevant to control inter alia transactions with certain family members of shareholders of listed companies.

2.5

Intra-group Transactions

Intra-group transactions under Austrian law are most typically assessed in the context of capital maintenance requirements (see above Sect. 2.4). Principally, each transaction is evaluated separately. In this instance, courts presume that the relationship between what is provided and what is received in consideration thereof by the subsidiary must be appropriate. However, appropriateness is not a dogma but a refutable presumption for applying an at arm’s length principle. If it can be proven that third parties would have entered into the transaction under the same conditions, it cannot be challenged under capital maintenance rules.22 Thus, courts may take into account that a transaction may be at arm’s length evaluating it within a bunch of transactions or the general business relationships between two entities. This flexible at arm’s lengths approach does not exclude an overall evaluation of group transactions. Transactions found to be in violation of Austrian capital maintenance rules are null and void.23 In accordance with § 879 Austrian Civil Code, transactions may be partially void if the hypothetical interest of the parties is directed to partial invalidity only. Thus, what is provided and/or what is received in consideration thereof shall be returned. Under the regime of the EU Directive amending the long-term shareholder engagement, Member States shall provide reasonable and effective sanctions. It is, however, not necessary to declare a transaction void because of the mere

22 23

OGH 29 September 2010, 7 Ob 35/10. OGH 15 December 2014 (6 Ob 14/14y).

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infringement of the Directive’s requirements on transparency and consent.24 § 95a Austrian Stock Corporation Act does not explicitly address the legal consequences if there is no compliance with its rules. Consent of the supervisory board, however, has to be regarded as an internal requirement of the company and does not lead to invalidity of the transactions. These principles applied to § 95 Austrian Stock Corporation Act25 shall be relevant for § 95a too. Bonds or guarantees for the performance of members of a group which are issued in relation to third persons (for instance banks) are generally feasible. If those guarantees, however, are given by a subsidiary they may be found in violation of capital maintenance rules as side-stream or up-stream collateral. On the contrary, down-stream collateral, for example, comfort letters (Patronatserklärung) provided by a parent company are admissible and cannot be challenged referring to capital maintenance rules or any situation particularly related to the connection of the parent company and the subsidiary. § 97 Austrian Stock Corporation Act prevents the management from representing the company when the company enters into transactions with the management. According the § 97(1) the board of directors represents the company in relation to any transactions which the company enters into with a member of the management.

2.6

Minority Shareholders’ and Creditors’ Protection: Parent Company

Voting restrictions are set particularly in connection with the voting on special audits. It is the competence of the general meeting to decide about a special audit and to appoint the auditors. In accordance with § 130(1) Austrian Stock Corporation Act, shareholders who are members of the management or supervisory board are not entitled to vote if the special audit concerns the discharge of supervisory board members or the initiation of proceedings against board members and the company. The voting restriction also applies to legal entities that are exclusively controlled (ausschließlich beherrscht) by a board member.26 According to judicial practice, exclusive control shall be established on the basis of economic identity between the person to which the voting restriction would apply and the person being a respective board member (wirtschaftliche Identität).27 In a judgment from 2015, the Austrian Supreme Court confirmed a less restrictive interpretation of § 130(1) Austrian Stock Corporation Act. Identity between the shareholding entity and the board member is thus not required, but moreover, voting restrictions apply if the board member is in a conflict of interest due to its controlling influence in the shareholding entity.28 24

Reich-Rohrwig and Zimmermann (2017), p. 332. See Kalss (2016), p. 410. 26 OGH 25 February 1953, 2 Ob 789/52. 27 OGH 8 May 2008, 6 Ob 28/08y. 28 OGH 31 July 2015, 6 Ob 196/14p; OGH 23 June 2017, 6 Ob 221/16t. 25

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In addition to the aforesaid restriction, the courts apply a wide notion of representation on behalf of the shareholder. Thus, the shareholder controlled by a board member is not entitled to transfer his vote to a trustee, representative, or nominee shareholder. He is furthermore banned from voting as representative of other shareholders.29 The general rule on voting restrictions in the Austrian Stock Corporation Act is found in § 125. What has been said on the particular voting restriction in connection with special audits applies to any voting rights restricted in accordance with § 125 Austrian Stock Corporation Act, in case of self-discharge from liability or obligations, or a decision about starting proceedings, filing claims in the name of the company against oneself or the legal entity under one’s control. Creditors of Austrian parent companies have to bear in mind that groups of companies only form an economic and organisational but not a legal unit. Accordingly, subsidiaries are not liable for the obligations of the parent company, which is referred to as the principle of separation of legal entities in company law (gesellschaftsrechtliches Trennungsprinzip). The capital maintenance rules (see above Sect. 2.4), however, address only up- and side-stream asset shifting and thus offers no protection for the creditors of the parent company. In addition, the substitute capital rules (see above Sect. 1.2) further reduce the parent company’s funds in case of insolvency, which becomes especially important if cash pooling is applied in a group. Nevertheless, creditors of a parent company may benefit from the rules of the Austrian insolvency statute (Insolvenzordnung). Asset shifting, which falls under one of the tests for contesting transactions in insolvency situations ought to be rescinded for the benefit of the parent company.30 Certain modes of asset shifting including (1) free-of-charge transfer of assets to subsidiaries (§ 29 Austrian Insolvency Statute), (2) more favourable treatment within the time frame set in § 30 Austrian Insolvency Statute, and (3) transfer of assets although knowing about bankruptcy can be asserted for transactions between the parent company and the subsidiary as well.

2.7

Parent and Subsidiary Board Members’ Duties and Liabilities

The management and the supervisory board of the controlling shareholder when exercising their duties are required to oversee the entire group of companies. Thereto, the board members of the parent entity shall install a unified internal control system, although a general duty to install a unified direction is not explicitly stipulated in the law. Thus, it is subject to a wide margin of discretion of the parent

29 30

OGH 8 May 2008, 6 Ob 28/08y; OGH 18 September 2009, 6 Ob 49/09p. OGH 22 November 2011, 8 Ob 104/11v; OGH 22 November 2011, 8 Ob 105/11s.

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board members in relation to the delegation of representative and managing powers in the subsidiary companies. Confidentiality requirements addressed to the board members of each separate legal entity individually and the duty to report and control the entire group is conflicting. With regards to company law, the entitlements to receive information in accordance with § 118(1) and § 95(2) Austrian Stock Corporation Act have priority over confidentiality rules directed to the board members of the subsidiary.31 Thus, supervisory board members of subsidiaries being members of the managing board of the parent company are required to forward information to the supervisory board and the general meeting of the parent company to the extent required by the law. Board members should exercise their duties in due care according to the level of diligence expected of a prudent and conscientious manager. Their actions shall be found diligent if a board member acts for the benefit of the company based on sufficient information and without being influenced by extraneous interests (§ 84 (1a) Austrian Stock Corporation Act). The norms on self-dealing—for example awarding credits to members of the managing board (§ 80 Austrian Stock Corporation Act)—and non-competing (§ 79 Austrian Stock Corporation Act) explicitly refer to parent or subsidiary companies. Regarding the award of credits, reference is only made to members of the managing board of the parent company, whereas non-competing rules concern parent companies as well as subsidiaries.

2.8

Shareholders’ Duties and Liabilities

In general, the Austrian courts are hesitant to impose a fiduciary duty on shareholders of a joint-stock company. In this respect, the Austrian Supreme Court has argued that a majority shareholder of a joint-stock company is not required to exercise its voting rights in the best interest of the company, but may pursue its own interests although being bound by the general principle of good faith.32 This particularly implies that a (majority) shareholder (1) is entitled to appoint a person acceptable to him or to appoint himself as a board member, (2) refuses to accept further losses, or (3) steadily files appeals against decisions adopted by the company’s bodies. The application of the principle of good faith can be evaluated only on a case by case basis. Thus, it was regarded as unfaithful and subsequently forbidden for a shareholder to announce that he would withdraw from filing appeals if he would receive additional benefits from the company.33

31

Kalss (2010a), p. 139. OGH 25 June 2003, 9 Ob 64/03g. 33 Obiter dictum: OGH 24 October 2016, 6 Ob 169/16w. 32

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On the contrary, the Austrian courts, in general, affirm the existence of fiduciary duty of a shareholder in limited liability companies in relation to the company and in relation to the other (minority) shareholders. Thus, it has been ruled that the majority shareholder of a limited liability company shall take into account the legitimate interests of other shareholders when exercising his voting rights in the general meeting and giving instructions to the management.34 In this context, judiciary and doctrine require a limited liability (majority) shareholder to vote against the distribution of profit if reinvestment of profits is inevitable for the further existence of the company.35 Shareholders are, however, not required to vote for the decision that would be most favourable for the company. Thus, the distribution of the company’s entire profits and reserves is feasible unless the company’s further existence is under threat.36 The distinction made between joint-stock and limited liability companies can be explained by the more personalised structure of limited liability companies in comparison to joint-stock companies.37 Accordingly, fiduciary duties are even more eminent in partnerships.38 Controlling persons and shadow directors may be held liable under general provisions of Austrian tort law if they have actually caused damages to the company and its shareholders.39 In addition, Austrian courts on a case by case basis lift the corporate veil if companies are controlled by shadow shareholders or under other dominating influence.

2.9

Audit and Entitlements of Supervisory Bodies

The supervisory board is entitled to request reports from the management including information about the situation of the company’s subsidiaries (see above Sect. 2.2). In addition, the regular reports delivered by the management to the supervisory board shall take into account the situation of the entire group as well as the situation of the subsidiaries in particular. In accordance with § 244 Austrian Commercial Code, groups of companies are required to prepare consolidated financial statements. Thus, the financial statements of the group are an essential source of information open to the shareholders and to the public. Auditors thus must be availed with all reports, financial statements, notices, and other documents of the subsidiaries which they deem necessary in

34

OGH 22 November 1988, 5 Ob 626/88. OGH 31 January 2013, 6 Ob 100/12t. 36 OGH 24 October 2016, 6 Ob 169/16w; OGH 31 January 2013, 6 Ob 100/12t. 37 OGH 22 November 1988, 5 Ob 626/88. 38 For the application of fiduciary duties in partnerships, see OGH 9 July 1996, 4 Ob 2147/96f. 39 For the liability of shadow directors, see OGH 23 February 2009, 8 Ob 108/08b. 35

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order to prepare the annual consolidated financial statements (§ 247(3) Austrian Commercial Code). In the course of the general meeting, shareholders of a parent company are entitled to request information about the company’s subsidiaries (see above Sect. 2.2).

3 Lifting the Corporate Veil In general, Austrian law adheres to the principle of separation of legal entities in company law (gesellschaftsrechtliches Trennungsprinzip). Thus, groups are assumed to consist of separate legal entities which are not liable for the obligations of the other members of the group (see above Sect. 2.6). Nevertheless, Austrian courts on a case-by-case basis under particular circumstances lift the corporate veil of an entity and allow companies and—under more specific circumstances—creditors to assert claims arising out of an obligation of a subsidiary against the parent company or the and/or (shadow) owner or controlling person.40 Court practice is founded on the principle that nobody shall use a form of a legal entity in order to circumvent the law or cause harm to other persons.41 Consequently, the lifting of the corporate veil adds to the liability of the subsidiary the liability of the parent company or (shadow) owner or controlling person.42 The liability of the parent company can be triggered in cases of thin capitalisation, and control or de-facto management of the subsidiary and is always driven by the aim to avoid that group members and their creditors suffer damages from directed activities of parent companies.43 However, the exercise of control and rights to issue instructions can only lead to the liability of the parent company if these entitlements are pursued in a fashion that contrasts the duty of care applicable to the administration of other’s property.44 No other provisions are in place that would provide for a more severe liability in case of environmental damages, consumer harm or product liability. Principally, only shareholders factually controlling legal entities may be found liable and only with regards to the company itself.45

40

Cf. Torggler (2013), pp. 17–19. OGH 12 April 2001, 8 ObA 98/00w; OGH 19 December 2002, 2 Ob 308/02m; OGH 30 September 2009, 9 ObA 125/08k. 42 OGH 30 September 2009, 9 ObA 125/08k. 43 OGH 22 November 2011, 8 Ob 104/11v. 44 OGH 19 December 2002, 2 Ob 308/02m. 45 OGH 12 April 2001, 8 ObA 98/00w; OGH 10 March 2003, 16 Ok 20/02. 41

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4 Insolvency Austrian insolvency law and Austrian enterprise restructuring law (Unternehmensreorganisationsrecht) strictly applies the principle of separation of legal entities in company law (gesellschaftsrechtliches Trennungsprinzip). Contrary to the national approach, the amended EU insolvency regulation provides for rules on insolvency proceedings of members of a group of companies in cross border situations.46 § 180b Austrian Insolvency Statute (Insolvenzordnung) extents the EU concept to national cases. § 180b refers to the definition of groups of companies used in the regulation (Unternehmensgruppe) instead of using the Austrian notion. The rules constitute no coherent insolvency regime for groups of companies but facilitate coordination between the different pending cases if insolvency proceedings in relation to several group members are pending. Therefore, a group of companies still cannot be declared insolvent in one proceeding but for each group member, insolvency filings have to be started and the preconditions to insolvency have to be reviewed separately by the competent court of law (§ 225(1) Austrian Commercial Code).47 Subsequently, subsidiaries relying on funds awarded to them by their parent company in principal may continue business operations without the need to open insolvency proceedings, whereas the parent company must be liquidated under the insolvency regime. The rules on substitute capital and capital maintenance may also become significantly burdensome for parent companies during insolvency situations. In this case, all capital transfers between two companies must be thoroughly reviewed. Particularly, cashpooling is hardened due to the lack of special rules on groups of companies. Liquidity granted by the leader of the cash-pool is subject to the general rules of the Austrian Capital Restitution Act.48 Especially in the case of insolvency, controlling parties may be found liable under general provisions of Austrian tort law. Thus, (shadow) directors are obliged to file for insolvency if they are aware of over-indebtedness. The late filing for insolvency (Insolvenzverschleppung) can lead to criminal liability. In terms of tort law, late filing is regarded as infringing a norm aiming to protect creditors interests and thus provides sufficient grounds for creditors to claim damages. However, damages based on late filing for insolvency amount to the losses incurred in connection with late filing that must be calculated from the difference between the situation which arose from late filing and the situation which would have arisen if the manager(s) would have filed for insolvency in due time. According to the publicity requirements applicable to Austrian companies and due to the principle of separation of legal entities (gesellschaftsrechtliches Trennungsprinzip) Austrian courts tend to be hesitant to award damages to persons 46 Chapter V of Regulation 2015/848/EC of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (2015) OJ L141/19. 47 OGH 22 November 2011, 8 Ob 104/11v; Schopper (2016), p. 619. 48 Schopper (2016), pp. 630–631.

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relying on the liability of a different group member. In one case decided by the Austrian Supreme Court, the director of the insolvent subsidiary company was regarded to have acted on behalf of the parent company and thus binding the parent company, which was explained on the analysis of the theory of the apparent mandate.49 The claimant argued that he is supposed to have contractual relationships with the parent company since the director was using the letterhead and the stamping of the parent company.

5 Other Areas of Law 5.1

Takeover

Austrian takeover law is based on the requirements set by the EU Takeover Directive.50 The application of Austrian takeover law is limited to companies admitted to a regulated market on an Austrian stock exchange (§ 2 Austrian Takeover Act). In case of obtaining a controlling interest in a publicly listed company, the acquirer shall announce a mandatory bid for all the equities of the acquired company (§ 22 (1) Austrian Takeover Act). The squeeze-out of minority shareholders is feasible in accordance with the norms of the Austrian Shareholder Exclusion Act. The said act applies to non-listed companies (§ 1 Austrian Shareholder Exclusion Act) as well as to companies being subject to bids under the Austrian takeover act (§ 7 Austrian Shareholder Exclusion Act). The threshold for squeeze-outs of minority shareholders is defined as a share in an amount of 90% of the nominal capital. In relation to groups of companies, § 1(3) Austrian Shareholder Exclusion Act stipulates that the share held by affiliated enterprises (verbundene Unternehmen) in the meaning of Austrian accounting legislation (Austrian Commercial Code) shall be considered as long as the affiliation has existed during the last year.

5.2

Securities

Issuers of securities are principally required to publish a prospectus. The prospectus shall contain all information that is outlined in the prospectus Regulation51 and the 49

OGH 22 October 2001, 1 Ob 49/01i. Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (2004) OJ L142/12. 51 Regulation 2017/1129/EU of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (2017) OJ L168/12, see also Austrian Capital Market Act 2019 (Federal Law Gazette I 62/2019). 50

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Austrian Capital Markets Act. A prospectus must contain in accordance with Chap. 3 of Annex A of the Austrian Capital Markets Act among the information about the issuer information about the shareholders that have or may have, directly or indirectly, a controlling influence (beherrschende Rolle) on the management of the issuer.

5.3

Banking, Insurance

Special rules on groups and control are applied to financial institutions. For the purpose of prudential regulation, § 30(1) Austrian Banking Act provides for a definition of a credit institute group (Kreditinstitutsgruppe). The Austrian Banking Act definition refers to parent credit institutes or financial holdings which have one or more credit or financial institute subsidiaries. This is assumed if (1) the legal entities fall under the definition of § 244 Austrian Commercial Code relevant for the obligation to provide consolidated financial statements, (2) the parent institute holds the majority of the voting rights, (3) the parent institute is entitled to appoint and remove the majority of the members of the management, executive, or supervisory bodies of the company being a shareholder (direct control), (4) the parent institute is entitled to exert or actually exerts controlling influence (beherrschender Einfluss), (5) the parent institute is, based on agreements with order shareholders, entitled to determine the exercise of voting rights thus reaching a majority of votes for the appointment and removal of the majority of the members of the executive, or supervisory body, or (6) the parent company has ‘rights in the capital of other undertakings . . . which, by creating a durable link with those undertakings, are intended to contribute to the company’s activities’.52 Being complimented by several exceptions and rules on transnational groups, the presence of a group triggers prudential regulatory consequences. In particular, parent institutes are responsible for that fact that group members comply with the norms of prudential regulation (§ 30(6) Austrian Banking Act). On the other side, parent institutes have information rights executable towards its subsidiary institutes. They shall be availed with all the necessary documents for consolidation and receive all the necessary information from the group members and shall safeguard that the group members comply with their duties to provide reports and the requested information to the prudential authorities. It shall install internal control systems,

52

The Austrian Banking Act herein refers to Art 4(1)(35) of the Regulation 2013/575/EU of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation 2012/648/EU [2013] OJ L176/1 which on its part refers to Art 17 of the Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies. The said Directive thus additionally states that the ‘holding of part of the capital of another company shall be presumed to constitute a participating interest where it exceeds a percentage fixed by the Member States which may not exceed 20%’.

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and shall supervise the conduct of the group member’s business activities, particularly with respect to credit risk. In addition, rules are established for insurance companies and financial institutions with regards to further complex prudential regulative issues, particularly concerning the calculation of capital adequacy requirements, solvency, thresholds for identifying conglomerates, or reports about significant intra-group transactions.53

5.4

Competition

The rules concerning unfair competition do not specifically address groups of companies. It has, however, been observed that the use of company symbols and its protection raised issues in connection with the acceptance of groups of companies. Thus, the Austrian supreme court has confirmed in several decisions that a legal entity continuing to use the company symbol of a member of the same group of companies shall have priority over conflicting claims of non-group members to use the company symbol.54 The priority acquired by one group member can later be used by any other group member if the latter continues the business operations in this area.55

5.5

Labour Law

The social security of posted workers in Austria is regulated through the EU Regulation on the Coordination of Social Security Systems.56 The said Regulation does not explicitly tackle groups of companies. The labour law regime is fundamentally structured by the EU Directive on the Posting of Workers57 and the EU Enforcement Directive.58 A revision of the current

53

See on these issues Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council [2003] OJ L35/1. 54 OGH 17 December 2002, 4 Ob 221/02g; OGH 20 April 1993, 4 Ob 35/93; OGH 12 July 1994, 4 Ob 70/94. 55 Schmid (2017) § 9 para 130. 56 Regulation 2004/883/EC of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems [2004] OJ L166/1. 57 Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996 concerning the posting of workers in the framework of the provision of services [1997] OJ L18/1. 58 Directive 2014/67/EU of the European Parliament and of the Council of 15 May 2014 on the enforcement of Directive 96/71/EC concerning the posting of workers in the framework of the

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set of rules is in the pipeline, however, an agreement has not been achieved yet (2017). The Directives are in Austria transposed inter alia by the Austrian Wage Protection and Anti-Social Dumping Act (Lohn- und SozialdumpingBekämpfungsgesetz). The said act uses the notion of groups of companies by referring to § 15 Austrian Stock Corporation Act and § 115 Austrian Limited Liability Company Act in order to exempt the temporary posting of workers within an international group of companies (§ 1(6) Austrian Act to Prevent Wage and Social Dumping). The act was recently subject to a decision of the Court of Justice of the European Union (CJEU, 12 September 2019, C‑64/18, C‑140/18, C‑146/18 und C‑148/18 Maksimovic).

5.6

Taxes

Austrian parent corporations may establish a tax group including national and international subsidiaries. Under certain conditions, non-resident companies may form a tax group in accordance with Austrian law as well. In general, the tax group regime allows the group members to attribute all profits and losses to the parent company. However, with regards to foreign group members, only losses may be deducted from the taxable income. Consolidation is principally required at a level of a share exceeding 50%. The Austrian transfer pricing regime has recently been amended in accordance with the OECD recommendations on base erosion and profit shifting (BEPS).59 Austria has special tax rules for the reorganisation of legal entities. In accordance with the Austrian Reorganisation Tax Act (Umgründungssteuergesetz), mergers (Verschmelzung) can be tax neutral. If certain requirements are met, losses carried forwards may remain in the accounts of the acquiring company. The Austrian Reorganisation Tax act also recognises a transformation (Umwandlung), a spin-off (Spaltung), a separation of a partnership (Realteilung), and a fusion to form a partnership (Zusammenschluss).

5.7

Investment

In principle, foreign companies are entitled to open a representative office in Austria and register the office with the Austrian commercial register (Firmenbuch) without needing to change their legal status or the applicable law. Foreign companies furthermore do not face restrictions when establishing subsidiaries in Austria or

provision of services and amending Regulation 2012/1024/EU on administrative cooperation through the Internal Market Information System [2014] OJ L159/11. 59 OECD/G20 Base Erosion and Profit Shifting Project. Explanatory Statement.

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buying shares in Austrian companies. There is, however, a restriction with regards to sectors that affect public security and order such as the defence industry and security services having an effect on international and external security in accordance with the Austrian Foreign Trade Act (Außenwirtschaftsgesetz). In addition, energy supply, water supply, telecommunication, transport as well as infrastructure in the area of education and continuing education and health care affect public security and order, including services of general interest and crisis preparedness. Thus, the acquisition of shares in companies in the abovementioned sectors would require state authorisation if the foreign person acquires (1) the entire enterprise, (2) shares in the enterprise, or (3) a controlling influence (beherrschender Einfluss) in it (§ 25a (1) Austrian Foreign Trade Act). Share purchases leading to the holding of less than 25% of the voting rights after the acquisition are generally exempted from the authorisation requirement (§ 25a(4) Austrian Foreign Trade Act). Controlling influence in terms of foreign trade law is easier to achieve than in other areas of law and is to be answered affirmatively if one or more persons exercise the controlling position alone, or if the dominant position is exercised collectively taking together at least 25% of voting rights.

6 Private International Law The Austrian Private International Law Act (IPR-Gesetz) refers to the law at the place of the central administration of the company. This reference is widely overruled by the law at the place of establishment for companies established within the European Economic Community (EEC) in accordance with the rulings of the Court of Justice of the European Union on the freedom of establishment principle of the Treaty on the Functioning of the European Union. Distinct references applicable to parent and subsidiary companies do not exist. They are subject to the general rule on lex societatis. Consequently, subsidiaries can be subject to Austrian law notwithstanding whether their parent company is established or administered in another country.60 Accordingly, relationships in a group of companies—from an Austrian perspective—such as domination agreements may be subject to more than one jurisdictions.61 Rules protecting shareholders and creditors most often fall under the lex societatis. This applies particularly to the question of lifting the corporate veil, which is referred to as the lex societatis of the controlled legal entity.62 If—in contrast—the rights and entitlements of shareholders and creditors of the parent

60

OGH 17 June 198, 1 Ob 541/81; Straube (2001), p. 2101. Haberl (2005), pp. 549–550. 62 OGH 17 June 1981, 1 Ob 541/81. A claim to the CJEU stating that the inapplicability of the said doctrine would hamper comparability and thus infringe the TFEU stipulations has been dismissed by the CJEU in C-186/12 Impacto Azul [39]. 61

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companies are undermined by transferring the decisional power to the general meeting of the subsidiary, protective measures at the level of the parent company are subject to the lex societatis of the parent company.63 There are no special rules on the participation of other group companies in an arbitration proceeding.

7 Summary and Conclusions Austrian legislation lacks a central statute on groups of companies. Problems arising with the factual occurrence of groups of companies are addressed in the various areas of law separately. In corporate law, provisions on groups of companies are codified in the specific statutes which are in place for the diverse legal entities. This is notwithstanding that almost any type of legal entity can become a parent or subsidiary. The number of provisions addressing group related aspects has grown in the last decades. A significant number of provisions derive from implementation of European Union law. Currently, the notion of group of companies most widely used refers to common direction or controlling influence. It is derived from a definition in § 15 Austrian Stock Corporation Act. It is supplemented by a definition in the Austrian Commercial Code. Despite various efforts to codify the law on groups of companies on the national level,64 Austria has entered the European Communities without having a national law on groups of companies. Some authors welcome the absence of a central codification of the law on group of group of companies.65 In the meantime, the implementation and frequent discussion of amendments of European Union company law seem to paralyze resources for drafting a coherent national codification of the law on groups of companies. Most recently the EU Directive amending the longterm shareholder engagement amends the Austrian legal regime on groups. Accordingly the rules addressing group issues become increasingly fragmented. The outlook, therefore, has to focus on whether a coherent legislative attempt will occur on the level of the European Union. However, such attempt would be significant change in relation to the way in which EU directives in the area of corporations war currently discussed and drafted.

63

Heindler (2020) recital 103. Doralt (1988), p. 32; Doralt (1994), p. 192; see Kalss (2010b), pp. 200–203. 65 Torggler (2013), p. 11. 64

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References Arlt A, Schima G (2016) Leitung und Überwachung – Corporate Governance im Konzern. In: Krejci H, Haberer T (eds) Konzernrecht. Manz, Wien, pp 279–332 Artmann E (2018) Einleitung I: Zur Entwicklung der Aktienrechtsgesetzgebung in Österreich. In: Artmann E, Karollus M (eds) Kommentar zum Aktiengesetz – 1. Band §§ 1-69 AktG, 6th edn. Manz, Vienna, pp 1–7 Bydlinski S, Potyka M (2011) § 118 AktG. In: Jabornegg P, Strasser R (eds) Kommentar zum Aktiengesetz – 2. Band: §§ 70-273, 5th edn. Manz, Vienna Doralt P (1988) Referat 10. Österreichischer Juristentag II/1. Manz, Wien Doralt P (1994) Zur Entwicklung eines österreichischen Konzernrechts. In: Lutter M (ed) Konzernrecht im Ausland - ZGR-Sonderheft 11. De Gruyter, Berlin, pp 192–225 Durstberger G (2019) Vorstandsorganisation in der AG. Linde, Wien Fröhlich C, Haberer T (2016) § 244 UGB. In: Torggler U (ed) UGB Unternehmensgesetzbuch Kommentar, 2nd edn. Linde, Wien Haberl A (2005) Grenzüberschreitende Ergebnisabführungsverträge und Gruppenbildungen aus kollisionsrechtlicher Sicht. wirtschaftsrechtliche blätter 12:545–554 Heindler F (2020) §10 IPRG. In: Lukas M, Rummel P (eds) ABGB, 4th edn. Manz, Wien (in press) Hügel H (2014) Verdeckte Gewinnausschüttung und Drittvergleich im Gesellschafts- und Steuerrecht. In: Kalss S, Torggler U (eds) Einlagenrückgewähr – Beiträge zum 2. Wiener Unternehmensrechtstag 2013. Manz, Wien, pp 19–58 Jabornegg P (2011) § 15 AktG. In: Jabornegg P, Strasser R (eds) Kommentar zum Aktiengesetz – 1. Band: §§ 1-69, 5th edn. Manz, Vienna Kalss S (2010a) Auskunftsrechte und -pflichten für Vorstand und Aufsichtsrat im Konzern. Der Gesellschafter - GesRZ 3:137–145 Kalss S (2010b) Peter Doralt (1939). In: Grundmann S, Riesenhuber K (eds) Deutschsprachige Zivilrechtslehrer des 20. Jahrhunderts in Berichten ihrer Schüler Band 2. De Gruyter, Berlin, pp 185–220 Kalss S (2016) Beratungsverträge und sonstige Organgeschäfte von Aufsichtsratsmitgliedern mit der Gesellschaft. In: Kalss S, Kunz P (eds) Handbuch für den Aufsichtsrat, 2nd edn. facultas, Wien, pp 391–412 Milchrahm W (2017) § 115 GmbHG. In: Straube M, Ratka T, Rauter R (eds) Wiener Kommentar zum GmbHG. Manz, Wien Reich-Rohrwig J, Zimmermann A (2017) EU: Einigung auf die Reform der AktionärsrechteRichtlinie (Teil I) Say on Pay and Related Party Transactions. ecolex 4:327–332 Rüffler F (2006) Zwei Ungereimtheiten des GesRÄG 2005. wirtschaftsrechtliche blätter 1:14–15 Schmid K (2017) § 9 UWG. In: Wiebe A, Kodek G (eds) UWG online, 2nd edn. Manz, Wien Schopper A (2016) Der Konzern in Krise und Insolvenz. In: Krejci H, Haberer T (eds) Konzernrecht. Manz, Wien, pp 615–662 Schurr F (2017) § 1175 ABGB. In: Schwimann M, Neumayr M (eds) ABGB Taschenkommentar, 4th edn. lexisnexis, Wien Straube M (2001) Gesellschaftskollisionsrecht im Wandel? Zu den Vorlagebeschlüssen deutscher Gerichte und zur Nichtvorlage durch den österreichischen OGH im Lichte der ‘Centros’-Entscheidung des EuGH. In: Bernat E, Böhler E, Weilinger A (eds) Festschrift für Heinz Krejci. Verlag Österreich, Wien, pp 2095–2125 Torggler U (2013) Zur Konzernhaftung nach österreichischem Recht. Der Gesellschafter - GesRZ 1:11–19 Torggler U (ed) (2014) GmbH-Gesetz. Manz, Wien Torggler U (2016) Die Personengesellschaft als Konzernbaustein. In: Krejci H, Haberer T (eds) Konzernrecht. Manz, Wien, pp 105–129

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Florian Heindler is assistant professor at Sigmund Freud University in Vienna. He holds a PhD degree in law which he obtained from the University of Vienna as well as master degrees in philology and law. Apart from his work in academia, Florian is counselling for an Austrian bank and works as of counsel for an international law firm. Florian is an associate member of the International Academy of Comparative Law and a fellow of the European Law Institute. In 2017, he became president of the Interdisciplinary Association of Comparative and Private International Law.

National Report on Brazil, 1 Fernando Kuyven

Abstract The present study aims to clarify several notions related to group of companies in Brazilian Law, analyzing the peculiarities of different legal sectors dealing with this matter such as tax, consumer, labor and environmental law. This report also notes how general rules on groups and corporate control are taken into account effects some issues such as corporate legal entity, conflicts of interests, creditors and third parties protection, parent and subsidiaries duties and liabilities, insolvency, and disregard of legal entity. The main objective is to enlighten students, lawyers, and all other law operators from different jurisdictions how the concept of Group of Companies works under the Brazilian legal system.

1 Areas of Law That Take into Account Groups of Companies or Controlled Companies In Brazilian Law there are several conceptions of group of companies and different kinds of liability to its members, according to the legislation applicable to each branch of law. There are express provisions on the liability of grouped companies in labor, consumer, social security, competition, tax and company law. It is important to note that “economic group” is used as a synonym for group of companies by Brazilian jurisprudence. In competition law, social security and labor law, for example, there are express provisions for the existence of solidarity between the members of a group of companies for contractual obligations and for acts practiced individually by its participants. In the consumer sector there is subsidiary liability of those companies. And in Company Law, the imposition of solidarity as a general rule does not exist, but can occur, exceptionally, through the application of the theory of the disregard of legal entity. F. Kuyven (*) Mackenzie University, São Paulo, Brazil e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_10

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The application of the doctrine of groups of companies, in order to hold other company in the group jointly and severally liable is broader in labor law, in which judges almost automatically hold other members of the group liable when the contracting company is not able to pay the indemnity amounts.

2 Legal Definitions Provided for in the Various Areas of Law and Specially Regarding Company Law Brazilian Corporate Law expressly regulates only the conventional or de jure group of companies, also called de jure group, formally constituted between the controlling and the controlled companies, by means of a convention duly filed before the trade register, by which the convenients are obliged to combine resources and/or efforts to carry out their respective corporate objects or to participate in a common enterprise (articles 265 and 271 of Brazilian Corporate Law “BCL”). Existing corporate legislation does not regulate the de facto group of companies that exists in reality, which are not formalized through a convention signed between the participating companies. The aforementioned legislation only spells out what is understood by controlling, controlled and affiliated companies, in addition to prohibiting the reciprocal shareholding participation between these companies and providing for the liability of the administrators of those companies for non-compliance with the obligation legally or contractually imposed on them (articles 1097 to 1101 of Brazilian Civil Code and articles 243 to 246 of BCL). Brazilian courts, however, have been acknowledging the existence not only of conventional groups of companies but also de facto groups for purposes of delimitation of the liability of their companies and administrators.

2.1

De jure Groups

De jure or conventional group is a legal institute of very rare application in the Brazilian reality, due to the prevision of right of withdrawal for minority shareholders at the time of signature of the group agreement, and to the difficulties of managing the conflicts of interest between companies with different shareholders which should work together towards broader goals. Article 265 of the BCL, as said, expressly authorizes the formal constitution of a group of companies between the parent company and its subsidiaries, by means of a convention. The controlling or command company of a de jure group must, necessarily, be Brazilian. It must also exercise permanently, directly or indirectly, the control of the other companies participating in the group, in the condition of holder of the majority of ordinary shares or through a control quotaholder/shareholders’ agreement.

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A de jure group of companies and the companies that integrate it will have a designation that will include the words “group of companies” or simply “group”, in order to facilitate their identification (article 267 of BCL). The agreement by which a de jure group of companies is constituted and regulated must be approved by its member companies, in accordance with the norms in force for the promotion of alterations to its bylaws/articles of incorporation (article 270 BCL). The shareholder dissenting with the resolution that approved the creation of the group has the right to withdraw, by means of the respective reimbursement of its shares or quotas (article 270 BCL). Nevertheless, this group does not have its own legal personality, recognizing the Statement of Motives of the BCL that it is an “unincorporated company” that does not affect the legal personality of the group companies. Article 266 BCL states that the companies forming a conventional group will maintain legal personality and distinct equity from each other. The representation of each participating company before third parties, unless expressly provided otherwise in the group agreement, shall be the sole responsibility of the administrator of each of those companies and shall be exercised in accordance with the respective agreements and bylaws (article 272 BCL). The administrators of companies belonging to a de jure group, without prejudice to their attributions, powers and responsibilities, shall observe the guidance and instructions presented by the group administrators, provided that they do not matter in violation of the law or the agreement of said group of companies (article 273 BCL). Because the economic group has its own object (promotion of the general interest of the group), it will overlap with the individual interests of the companies that compose it, by virtue of the contract (agreement) signed between them. For this reason, a de jure group will have its own administration and the administrators of the companies that compose it will have to follow the guidelines emanated by the group administration. Finally, it is important to mention that the combination of resources and efforts, the subordination of interests of one society to those of another or of the group itself, as well as their participation in costs, revenues and results of activities or ventures can only be opposed to the minority shareholders of the member companies if it is clearly and precisely provided for in the agreement constituting the group of companies (article 276 BCL).

2.2

De facto Groups

De facto groups of companies exist among companies that are related as a result of the shareholding participation that one has in the capital of the other companies, without, however, having an agreement on its formal, administrative and obligatory organization. As there is no regulation regarding the formal organization of the de

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facto group, its member companies must be granted independent legal treatment, as if acting singly. The companies that are part of the economic group will, therefore, maintain their legal personality and continue to have their own equity and administrative autonomy. Conventional groups move away from the de facto groups, since in the first one can exist operational or equity submissions between the parent companies and their subsidiaries or affiliates. The provisions of §2 of article 243 of BCL and article 1098 of the Brazilian Civil Code are perfectly consonant, in the sense that controlling companies are those that hold, directly or indirectly, a stake in another company, in sufficient proportions to assure, on a permanent basis, the majority of votes in general meetings and the power to elect the majority of the administrators of the controlled companies. The concept of affiliated companies, in turn, is defined in article 1099 of the Civil Code which provides: “A subsidiary or affiliated is the company in whose capital another company participates with ten percent or more, without controlling it”. In accordance with the provisions of article 1099 of the Civil Code, is the understanding of the Brazilian Securities and Exchange Commission (CVM), as provided in article 2 of its Normative Instruction No. 247 of March 27, 1996: Article 2 - Companies are considered to be affiliated when one participates with 10% (ten percent) or more of the capital of the other, without controlling it. Sole paragraph. For the purpose of this Instruction, are assimilated to affiliated companies: a) the companies when one indirectly participates with 10% (ten percent) or more of the voting capital of the other, without controlling it; b) the companies where one directly participates with 10% (ten percent) or more of the voting capital of the other, without controlling it, independently of the percentage of the participation in the total capital.

The BCL considers that the related companies are those in which the investor has significant influence (article 243). It defines that there will be significant influence when (i) the investor effectively exercises significant influence, through participation in the financial or operating policy decisions of the investee, without controlling it; Or (ii) when the investor holds 20% (twenty percent) or more of the voting capital of the investee, without controlling it. In the last hypothesis there is a presumption that it has significant influence, since in principle no one would acquire such an expressive amount of shareholding only as a passive investor. A de facto group of companies is therefore an economic entity of legal relevance, which requires compliance with various legal procedures, such as disclosure in explanatory notes in the annual financial statements and the preparation of consolidated annual balance sheets using the equity method, for the knowledge of third parties, the market, the tax and the administrative authorities. It is a form of business concentration, which does not require the reorganization of the companies involved (articles 223 to 234 of the BCL). The companies of a de facto group keep the individuality of their operational objectives intact. The parent company has no direct interference with the

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subsidiaries’ priority policy. The administrators of each of the companies must strictly observe the provision in article 154 of the BCL. This law assumes that the controlling holding company is in a position to receive equity results from the operating companies it controls, without imposing on its directors any corporate policy or even dividend distribution. There is no compulsory link between the companies of the de facto group, imposing on legal business among them the strict observance of the principle of isonomy. Also, the regime of commutativity in the business relations between them must be strictly maintained. The same is true of the tax regime. Also, are not allowed operations that aim to absorb profits among them (milking), through gambling and artificial transfer of operating expenses.

3 Effects Attached to the Existence of Control or Domination The Brazilian Corporate Law of 1976 (BCL), to encourage the competitiveness of national companies in the international context, sought to merge the structure of the Zaibatsu and the Konzerne. In the absence of any normative regulation of Zaibatsu, the Brazilian legislator in 1976 sought to rely on the regulation of the Konzerne by the reform of German corporate law of 1965. But in doing so, the Brazilian legislator was against history, since this oligarchical and monopolistic practice was treated in the German law of 1965 in order to establish sanctioning norms for the de facto Konzerne, by creating rules to regulate disclosure and relationship between the companies grouped and between them and third parties. The Brazilian law started from the law to the fact, establishing rules applicable only to the conventional group of companies. This position represents an exception at the international level. In fact, most national legislations have never accepted the institutionalization of concentration practices under company law, recognizing them solely for the purpose of repressing the abuse of economic power and for consolidating the financial statements. Contrary to the German law that inspired it, the BCL states that a single administrator may be in charge of the management of the group, separate and autonomously with relation to the management of the parent company. Moreover, in our Law there is no “domination agreement”, but only subordination agreement. When the BCL provides for a “command company,” it refers to the controlling shareholder/quotaholder rather than to the command of the group, in the sense that it lends in German law when dealing with the contract of domination. When referring to the controlling company, the BCL is only intended to ensure the Brazilian nationality of the shareholding control of the companies belonging to the group, ex vi of paragraph 1 of article 265 and subsection VII of article 269 of the BCL.

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The subordination relationship operates between the autonomous direction of the group and all its members, including the controlling company. Since there is no domination agreement, the management of the group cannot be included in the ordinary administration of the participating companies. It will be up to the autonomous leadership of the group to only edit norms of procedure and general guidelines, within the strict limits of the convention.

4 Rules on Disclosure and Accounting It is only required to consolidate financial statements, by law, the publicly-held company. This fact is understandable, but technically pitiable. Perhaps the non-expansion of the consolidation requirement to closed companies is due to the fact that they are obliged to apply the equity equivalence, which is an extremely simplified form of consolidation (one-line consolidation). In fact, equivalence has a restricted concern, namely to consolidate the proportional part of the profit earned by the invested company. Thus, it does not have the overarching concern of consolidation, which is to show the total assets, liabilities, revenues and expenses under the control of the investing company. The equity method is mandatory whenever the investor holds, directly or indirectly, 20% or more of the voting capital, and not of the total capital stock, of the investee, or in the cases in which it exercises significant influence over the investee’s administration, in the wake of IAS 28, published by the International Accounting Standards Board, which defines significant influence as the power to participate in the decisions of the investee’s financial and operating policies, without the investor exercising control, alone or in combination, on such policies. This rule also establishes that the participation in 20% or more of the voting capital allows the investor to assume the exercise of significant influence over the administration of the investee. In order to reach the 20% participation mentioned above, it is permitted to add direct to indirect shareholding participation.

5 General Regulations on Groups and Control and Differences According to the Company’s Form Companies of any kind can be member of the de facto group of companies. The control may be exercised by a company with its head office in Brazil or abroad, in a manner different from the de jure group in which the controlling company must be national. In this case, the Brazilian subsidiary or affiliate company must express in its report the participation of the foreign company. When one or more of them is a limited liability company, the notice of participation must be given by the group corporations.

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6 Conflicts of Interests and Related Party Transactions. Tolerance to Deviations from the Company’s Interest Both in de jure and de facto groups there is an interest of the group that does not merge with the interest of each company. There is, in the group, an emptying of the powers of the General Assembly of the controlled companies. There is a transfer of powers to the administrators of the parent company that establishes the interest of the group and interferes, directly or indirectly, in the management of the controlled companies. It is undeniable that in the group of companies there is a denaturation of the system of duties and responsibility attributed to the controller and administrators. By imposing the interest of the group, the controlling company begin to interfere in the activities of the subsidiaries without, however, being directly imposed the duties inherent to the control of each of these legal entities. The interest of the group does not replace, but it overlaps or adds the social interest of each company member of the group. It is the interest of all companies to cooperate to optimize the results of each of them, in achieving its object and participating in the benefits created by the activity in common. The achievement of group interest should be the point of balance between the interest of the parent company and the interest of its subsidiaries. Group interest is not necessarily contrary to the interests of grouped companies, but for this not to occur it must be an effective or potential compensation for the individually disadvantaged company. At this point, the BCL provides great flexibility for the parties to envisage how the commutation will be broadly and generally ensured within the scope and all operations of the group, given the reality of the business activities of each group. What cannot occur is the performance in conflict of interests of the control company, with the improper favoring of itself to the detriment of the subsidiary, without it being properly compensated. Faced with the interest of the group that joins the specific social interest of each company, the rules of article 115 of BCL on prohibition and annullability of voting by conflict of interests need to be adapted. These norms were built to discipline isolated companies, and their literal application to group of companies would prevent the formation and operation of these groups. Unlike the isolated company in which the situations of conflict of interest between the shareholder and the company are sporadic and their effects are not offset by other businesses among the contractors, in the group all the companies benefit from the group policy and participate in the benefits earned in the long term by the group’s interest. The operation of the group would be impracticable if the votes cast by the controlling company in the meetings of the subsidiaries, according to the instructions of the parent company, were subject to the conflict of interest regime defined in article 115 of BCL.

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That is, conflict of interest is tolerated, but as long as it does not cause losses to the subsidiary—in the broad sense of effective losses, loss of profits and loss of chance—that are not properly compensated in the development of the group’s activities.

7 Creditors’ and Third Parties’ Protection in the Subsidiary and Creditors’ and Third Parties’ Protection in the Parent Company The creditors do not receive any specific protection by the BCL. It remains for them to refer to the doctrine of disregarding legal personality in order to assign responsibilities to other group companies.

8 Parent and Subsidiary Board Members’ Duties and Liabilities: Loyalty, Fiduciary Duties, Utmost Good Faith and Fairness Any act of liberality by the administrators of a company of the group—in the sense given by article 154, § 2, of BCL—or act of favoring other companies of that group will in fact characterize a breach of fiduciary duties. This rule is directed not only to the administrators of the controlling company but also to those of the controlled company. Indeed, in corporate groups there cannot be any form of subjection of one company to another. It is forbidden for the director of a company belonging to a de facto group to restrict the conduct of the administrators of other companies and, even less be himself subject to such coercion. As a consequence, if the subsidiary’s administrators omit to defend its interests, allowing the parent company to favor its own interests, they may be civilly and administratively liable for not having exercised the care and diligence required by article 153 of BCL, as well as for not having exercised their attributions, in order to achieve the purposes and interest of their company.

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9 Shareholders Duties and Liabilities and Controlling Shareholders Liability. The Controlling Shareholder as Shadow Director As a result of the provisions of article 266 (preservation of the legal personality and autonomy of the members of a de jure group of companies) and article 272 of the BCL (the representation of the member companies before third parties will be the exclusive responsibility of their respective administrators), in principle, only the company that contracts directly with third parties will be liable for the obligations it have contracted. In this sense, the Brazilian legal system does not provide for a principle of solidary liability among the companies forming a group. As a rule of law, each society is only liable for its own obligations. In de jure groups of companies, it is possible, under the provisions of article 273 of BCL, that the administrators of a member company are subject to compliance with the guidelines and instructions issued by the administrators of the group, if so determined in the respective group convention. In this case, the administrators of the member companies may legitimately perform acts in the group’s interests and to the detriment of the interests of its own company and/or of its minority shareholders/quotaholders. However, if the act practiced by them violates the law or the group convention, they will respond personally for their conduct, due to the abuse of power. In de facto groups, such prerogative does not exist. Accordingly, the administrators of a member company that practice acts contrary to the interests of the companies they manage and of their minority shareholders, will be acting with abuse of power and, for this reason, will be subject to personal liability, under the terms of article 158 of BCL. The same rule applies to the controlling shareholder, pursuant to the provisions of article 117 of BCL. Finally, it is important to note that in exceptional cases the controlling company and other companies that are part of a group of companies may be liable for the obligations contracted by other participants of the group. This will occur as a result of the application of the disregard of legal personality, therefore it is necessary to be aware of the requirements of the use of this measure under article 50 of the Civil Code.

10

Auditors and Internal Organic Supervisory Bodies’ Rights and Duties in Relation to Subsidiaries and Other Group Companies

The BCL prohibits administrators of a company or of other companies of the same group from being members of the supervisory board of that company.

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Related Party Transactions: Disclosure and Specific Mechanisms

The Civil Code (article 1101) and the BCL (article 244) prohibit, as a general rule, the existence of reciprocal shareholdings between parent companies, controlled companies and affiliated companies. The reasons for the prohibition of reciprocal participation lie in the search for the preservation of the integrality of company’s capital and its function of guarantee to creditors, as well as in the attempt to avoid the occurrence of problems of a political nature (nullification of the influence of a company on another). The prohibition of reciprocal participation is also based on the preservation of the legal personality of companies and their consequent autonomy and independence of assets. Article 244 of the BCL determines the suspension of the voting rights of all the shares issued by the controlling company or investor, listed in the equity of the controlled company or investee. Allowing the exercise of their voting right would be the same as allowing the company itself to vote at general meetings held by its shareholders.

12

Separate Legal Personality of Each Group Company and Each Company’s Purpose as a Limit for Guarantees for Another Entity’s Debts

Article 246 of BCL reaffirms the fence to the confusion of assets between parent and controlled companies. And that cannot consist, above all, in manipulation of the patrimony of this one in favor of that one. The BCL requires, in order to avoid patrimonial promiscuity, the disclosure through explanatory notes and consolidated balance sheet, by equity equivalence. The autonomy of legal personality cannot be merely formal between controlling and controlled companies. It must import absolute independence of business policies, management and use of the assets of the controlled company. This autonomy will be measured by the minority interest in this segregation. It is thus the interests of minority shareholders in the subsidiary that can measure the strict observance, or not, by the parent company of the full independence of the controlled company. It would not be the controller himself who would measure or confer the degree of this segregation. The main reason and cause for requesting the controller’s liability is the conflict of interest. In the configuration of this conflict of interests, the Law includes the conduct of the parent company’s abandonment of its investment duties with the affiliate, or the cessation of the provision of technical, administrative and financing resources, or even simple disinvestment without cause.

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In this sense, article 116 of BCL, in the sole paragraph, establishes that the controlling shareholder must use its power in order to make the company carry out its purpose and fulfill its social function. Likewise, article 246 of BCL provides that the parent company must repair the damages it causes to the company controlled by acts in which abuse of power is manifested and committed in violation of the provisions of articles 116 and 117, all of the BCL. In this regard, the doctrine proposes two criteria for assessing the legitimacy of the exercise of corporate control, especially when the operation may generate some type of conflict of interest between companies that are members of the same group. The first one is the comparison of the intended operation with a hypothetical situation known as “arms-length bargain comparison”, and the second is the comparison of the operation with another similar performed in the market. Using the first test, the decision of the controller or administrator will be “unfair” if the result of the operation for the controlled company is less advantageous than it would be if the decision had to be made by an independent person not involved in any conflict of interest. According to the second test, the operation would be considered legitimate or illegitimate, in view of its comparison with similar operations carried out in the market. Only the minority shareholders are able to bring a claim against the controller. As an organ of the controlled company, there is no doubt that the minority shareholders have legitimacy to propose an action on liability of the controlling company. It is a social action, based on the damage caused by the parent company to its subsidiary and, indirectly, to its minority shareholders. For the specific purpose of joining the controlling shareholder, minority shareholders become a special organ of society, and therefore the law suit is uti universi. This organic representation of society does not depend on the authorization of any other organ.

13

Disregarding of the Corporate Legal Entity as Regards Creditors and Third Parties’ Protection

Finally, it is important to note that in exceptional cases the controlling company and other companies that are part of a group of companies may be liable for the obligations contracted by other participants of the group. This will occur as a result of the application of the disregard of legal personality, therefore it is necessary to be aware of the requirements of the use of this measure under the new articles 49-A and 50 of the Civil Code recently incorporated to the Brazilian Civil Code by the Economic Freedom Act (Law No. 13.874/2019). This law established rules for the protection of free enterprise and the free exercise of economic activity, substantially altering the institute of disregard of legal entity. The principles that guide the new

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Economic Freedom Act are (i) freedom as a guarantee in the exercise of economic activities; (ii) the good faith of the individual before the public power; (iii) the subsidiary and exceptional State intervention in the exercise of economic activities; and (iv) recognition of the vulnerability of the individual before the Government. The new article 49-A of the Brazilian Civil Code reinforces the principle of the patrimonial autonomy of the legal entity, expressing that “the legal entity is not confused with its partners, associates, founders and administrators”. The sole paragraph of article 49-A makes it clear that equity autonomy is a lawful means of allocating and segregating risks between the partner’s and the company’s assets. In the same sense, the new wording given to article 50 of the Civil Code, brought by the Economic Freedom Act, has stiffened the hypotheses of disregard of legal entity. It provides that it is only possible to disregard the legal personality to reach assets of a partner or executive who has benefited, even indirectly, from the abuse of the corporate personality. Paragraphs were also inserted in article 50 that regulate the alternative requirements to be fulfilled in order to allow disregard of legal entity. The requirement of misuse of purpose will be fulfilled when the legal entity is used for the purpose of harming creditors and for the commission of unlawful acts of any kind. Also in relation to the requirement of equity confusion, Paragraph 5 states that “the mere expansion or alteration of the original purpose of economic activity” does not constitute a deviation of purpose in order to disregard a legal personality. The Economic Freedom Act clarifies that the equity confusion is the absence of de facto separation between the assets which is characterized by: “I - repetitive execution by the company of obligations of the partner or manager or vice versa; II - transfer of assets or liabilities without effective consideration, except for those of proportionally insignificant value; and III - other acts of non-compliance with patrimonial autonomy”. Based on the wording of paragraph 3 of article 50, it can be stated that the requirements of deviation of purpose and equity confusion also apply to the extension of obligations of the partners or executives to the legal entity. In particular, article 50 expressly states that the mere existence of an economic group does not authorize the disregard of legal entity in order to attain the assets of controlling or affiliated companies. The article in question formalizes the understanding that, even in the hypotheses involving economic group, it is necessary to demonstrate the requirements, either of misuse of purpose or of equity confusion between companies. Thus, the changes brought by the new law regarding the disregard of legal entity, while privileging the corporate autonomy of the companies, make the hypothesis of application of that incident more restricted, which is positive, since the disregard of personality must be exceptional. Provisions of the same kind are also found in tax law (article 135, III of the National Tax Code—NTC), consumer protection law (article 28 of the Consumer Protection Code—CPC), environmental protection law (article 4 of Law No. 9,065/98) and labor law (article 2, Paragraph 2 of the Brazilian Consolidation of Labor Law—BCLL). In the case of the anticorruption law (article 19, Paragraph 1), the sanction applicable in case the partners or executives use the company to perform unlawful acts and against the interest of the Government goes beyond the mere disregard of legal entity and reaches even the dissolution of the company. These laws also describe, in addition to the abuse of corporate entity, other

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positive facts leading to the disregard of company’s legal personality, like using the company consistently to make easier or promote the practice of unlawful acts or organizing the company to conceal or dissimulate unlawful interests or the identity of the beneficiaries of the performed acts, in addition to practices such as abuse of rights, performance through excess of power and violation of legal provisions. The disregard of corporate entity depends, as set forth in Brazilian law, on an act of a judge with jurisdiction, and can be entered only upon request; the judge cannot act on its own initiative. It is important to point out that the legal entity is not terminated through such decision, but rather, it is stayed temporarily and specifically, with the purpose that certain obligational relations and specific equity duties contracted on the company’s behalf (although not necessarily for its best interests) and under its responsibility are also extended to shareholder’s assets. Under the new civil procedure code, the incident of disregard may take place in any and all stages of the process, as well as during the decision enforcement and during the execution process of an extrajudicially enforceable instrument. Such incident halts the procedure until solving the reasons on the incident. As the final outcome of the incident proceedings, with the acknowledgement of the disregard, the private assets of the shareholders or administrators, as the case may be, shall be exposed to the effects of the obligation debt sought in the case. In fact, the Superior Court of Justice (STJ) has admitted that it is possible to apply the disregard of legal entity to achieve the equity of the controlling company and/or other companies participating in the same group. In other words, it must be demonstrated that the company was used as an instrument to carry out fraud or abuse of rights, taking advantage of the autonomy of the legal entity to the detriment of creditors of the company. It is not enough, for example, mere default or insufficient assets to guarantee the execution or even the insolvency of the debtor, insofar as the failure of the business is part of the risk of the activity, and the creditor who wishes to disregard must prove the abuse of legal entity, by fraud or assets confusion.

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Insolvency: When Is Liability Imposed on Controlling Parties and What Is Its Scope

The Law on Judicial Recovery and Bankruptcy, Law No. 11,101/05, did not provide for the recovery of groups, but only that of the individual entrepreneur and the company (article 1). In view of the subsidiary application of the Code of Civil Procedure (CCP) to Law No. 11,101/05, there is no doubt that a joinder of parties is appropriate in this context, provided that the requirements of the CCP are met: (i) communion of obligations, (ii) affinity of issues by common point of fact or (iii) origin of the rights and obligations on the same ground. The decision on the inclusion or not of more than one company in the active pole of the process is of

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the debtor companies under the supervision of the judge, in the form of the procedural legislation.

15

Group Information and Rules in Competition Law. Liability for Factual Appearance and for Breach of a Created Confidence

There is also the provision of solidarity in Competition Law, as provided by article 17 of the Law No. 8,884 of 1994: Article 17. Companies or entities belonging to an economic group, whether de jure or de facto, shall be held jointly and severally liable to commit violations to the economic order.

In §1, article 4, of Resolution No. 02/2012 of the Administrative Council for Economic Defense (CADE) defines a group of companies as the set of companies that operate under internal or external common control, having among them a relevant influence. In the Laureate and Anhanguera leading case (process # 08700.011105/2012-51), the CADE defined that there is a relevant influence when there is a “united decisionmaking center in strategic areas that lead to coordinated or cooperative behavior, even when one of the shareholders has a minority stake”. It determines that the relevant influence may occur in a number of ways, such as the possibility of electing officers or members of the board of directors; the minority control in companies with shareholding dispersion; the exercise of influence in shareholders’ general meetings; the existence of a contractual link capable of interfering with business strategy, etc. It explains that this relevant influence may occur through equity participation, but also through loan, guarantee, lease or supply agreements, etc.

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Workers Protection and Social Security Regulations Vis-à-Vis National or International Migration Within a Group

The Brazilian Consolidation of Labor Laws, in its article 2, paragraph 2, provides, in verbis: Article 2 (. . .) Paragraph 2 - Whenever one or more companies, although each of them have their own legal personality, are under the direction, control or administration of another company, constituting an industrial, commercial or other economic activity group, shall be deemed, for the purposes of the employment relationship, jointly and severally liable both the main company and each subordinate company.

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This mechanism, besides providing for the joint responsibility of the member companies, provides for the elements that characterize the group of companies in labor law. There are two existing labor theories related to this matter: the Exclusively Passive Solidarity Theory and the Active and Passive Solidarity Theory. The Exclusively Passive Solidarity understands that the employer is the company that hired the employee, not the group of companies. However, the other companies in the group are jointly and severally liable for the labor debts of the company that hired the employee. But the predominant doctrine is represented by the Active and Passive Solidarity Theory, which understands that in addition to passive solidarity, in terms of the above, there is also active solidarity among the group of companies. This means that this group is the sole employer, acting all the companies of the group actively in the employment contract. The current Superior Labor Court (TST) Docket No. 129 seems to confirm the idea of this theory: The provision of services to more than one company of the same economic group during the same working day does not characterize the coexistence of more than one employment contract, unless otherwise agreed.

In relation to social security debts we have the forecast contained in article 30, IX, of Law 8212 of 91: Article 30. The collection of contributions or other amounts due to Social Security shall comply with the following rules: IX - Companies that are part of an economic group of any nature are jointly and severally liable for the obligations arising from this Law.

It allows the accountability of companies that belong to a group of companies where there is control relationship, not just direction, participation or coalition. The hypothesis is of direct responsibility, solidarity, that is the companies of the group have joint responsibility ex lege for social security debts.

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Special Rules on Environmental Responsibilities Within a Group

Article 4 of Law 9.605/98: The legal entity may be disregarded whenever its personality is an obstacle to the reimbursement of damages caused to the quality of the environment.

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Groups Treated for Tax Law Purposes

In Tax Law (excluding social security credits), article 124, I, of the National Tax Code has the following wording:

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Article 124. The following shall be jointly and severally liable: I - persons having a common interest in the situation constituting the event giving rise to the main obligation (. . .).

According to the Superior Court of Justice (STJ) the “common interest” is only characterized when the companies participating of the group perform the same activity that generates the tax debt. It is necessary that the group companies jointly carry out the situation that configures the generator event. It is not sufficient to make them solidary liable the fact that they are linked to the same decision-making center.

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Liability of Parent Company in Consumer Protection and Product Liability Law

In case of consumerism, the companies belonging to the group of companies have subsidiary liability towards consumers: Consumer Protection Code. Article 28. (. . .) Paragraph 2. The companies of a corporate group and its subsidiaries are subsidiarily liable for the obligations arising from this code.

Therefore, the law grants the benefit of order to the offenders and, consequently, prevents the consumer from filing a suit immediately against the other companies that are members of the group of companies.

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Special Rules on the Participation of Other Group Companies in an Arbitration Procedure

There is a relaxation of the limitation of the extension of the arbitration clause concluded by companies belonging to the same group of companies. In the leading case Trelleborg (State Court of Justice of São Paulo, 7th Chamber of Private Law, AC 267450 4/6 00, 24/05/2006) it was decided that the arbitration clause binds companies of the group that did not sign it only in the event that they had had an active participation in the conclusion, execution or termination of contracts containing such clauses, appearing to have been true parties to the contracts. In Brazilian law it is considered that the disregard of legal entity serves only for the purpose of extension of liability, but not to extend the application of the arbitration clause to companies of a group that were not bound by such clause.

National Report on Poland Mariola Lemonnier

Abstract Le droit polonais applicable aux groupes de sociétés, en particulier dans les politiques fiscales, ont fait l’objet de modifications importantes pendant dernières années. En outre, de nouvelles lois sur le fonctionnement des entrepreneurs ont été introduites, qui mettent l’accent sur la transparence des politiques et la concurrence sur le marché. En dépit de la grande diversité des concepts du droit des groupes de sociétés en droit polonais, il était nécessaire d’inclure les aspects d’information divulgués en dehors du groupe dans la politique des sociétés. La Pologne a adopté de nombreuses réglementations concernant le projet BEPS et dans le cadre des groupes des sociétés a très rapidement modifié l’approche de l’information, en particulier sur le plan fiscal.

Abstract The work indicates the development of group companies law primarily through the inter-national and European influence, as well as through public law, in particular tax law. The concept of a capital group or linked entities is present in Polish law, while the expression “group of companies”—the translation of the French term is almost absent in Polish legislation. The doctrine of commercial law primarily uses the concept of a capital group, because a capital group is a binding structure of capital organisation. The term “capital group” has a number of legal definitions in Polish law. The concept of linked enterprises (entities) is increasingly used, especially due to the rapidly changing tax law. On the other hand, some laws define the group as a dominant and dependent society, which means that the legislator must explain the elements of such a definition. The first part of the article refers to the concept of a capital group in the law of protection of fair competition on the market and application of this concept in various branches of law. The author draws attention to the sectoral diversification of definitions and the lack of it in the general concept. On the other hand, the M. Lemonnier (*) University of Warmia and Mazury, Olsztyn, Poland Association Henri Capitant des Amis de la Culture Juridique Française, Section Polonaise, Łódź, Poland © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_11

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diversity of approaches is emphasized by the introduction of European regulations into the Polish legal order that also modify the outline of group concepts. In particular, transfer pricing regulations and the BEPS project have significantly influenced recent changes in the tax law of capital groups. A question is it also a possibility resulting from the lack of one concept of general capital groups and its timid unification under the pressure of tax law? The last part of the article concerns a private law relationship between a shareholder and company in relation to the parent company or a method of approaching the law towards the minority shareholders group (Cf. M. Lemonnier, Poland: Investor Protection in the Polish Capital Market, Selected Issues, pp. 517–537, (dans) Global Securities Litigation and Enforcement, red. P-H. Conac, M. Gelter, Cambridge University Press 2019.). Polish law does not contain any specific provisions protecting minority shareholders of the subsidiaries that form part of corporate groups. Indirectly, such protection might be afforded under the provisions of the Commercial Companies Code that refer to minority rights and some provisions of the Act on Public Offering. The article points to some special regulations in Polish law—especially the small role played by contractual liability and tort liability as the basis for the shareholders’ claim.

1 La diversité des définitions des groupes des capitaux En droit polonais est présente la conception de “groupe des capitaux”, par conséquent l’expression “le groupe des compagnies” - la traduction du terme français “le groupes des sociétés”, est presque absente dans la législation polonaise. La doctrine du droit des affaires utilise avant tout la notion du groupe des capitaux car le groupe des capitaux est une structure qui lie les entreprises par les capitaux. Le terme « le groupe des capitaux » a un certain nombre de définitions juridiques dans la législation polonaise. En outre la notion des sociétés (entités) liées est de plus en plus la notion utilisée. D’autre part, certaines lois définissent un groupe comme la société dominante et dépendante, ce qui implique la nécessité du législateur d’expliquer des éléments d’une telle définition. Le législateur polonais dans certaines lois a formulé des définitions dans la partie générale du texte, applicable à la totalité du contenu. Sont aussi définies les sousgroupes des entités, comme par exemple le groupe fiscal de capitaux soit un groupe d’assurance. Lorsque le législateur polonais décide d’utiliser la notion de groupe des capitaux, en même temps décide, si ce terme aura un sens autonome, ou il faut l’envoyer au sens adopté dans une autre loi. Ainsi la notion du groupe des capitaux au sens large de l’art. 4 al. 14 de la loi sur protection de la concurrence et des consommateurs1 est

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Loi du 16. 02.2007, J. des L. 2017.229.

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utilisée par exemple dans la loi pharmaceutique2, la loi sur les télécommunications3, la loi sur les marchés publics4 . Sur la base de cette dernière de l’attribution des contrats publics sont exclus, lorsque les entrepreneurs appartiennent au même groupe de capitaux, au sens de la loi sur la protection de la concurrence, lorsqu’ils ont présenté des offres séparées ou des demandes de participation à la même procédure d’attribution, à moins qu’ils démontrent que les liens existants entre eux ne font pas éroder la concurrence loyale entre entrepreneurs. Les références aux structures de capital sont situées dans le Code des sociétés commerciales5 comme également dans le droit bancaire polonais6. Un grand nombre de ces règlements ont été introduits dans la législation polonaise à la suite des solutions de l’UE, que ce soit par la mise en œuvre des directives européennes (souvent sous la forme ajoutée à la réglementation polonaise traduisant les dispositions des directives) ou par une loi ou un règlement interne7. La loi sur le marché règlementé8 définit la dominance sur le marché par la société laquelle : (i) a) dispose directement ou indirectement par l’intermédiaire d’autres entités de la majorité des droits de vote d’une autre entité, également en vertu d’accords avec d’autres personnes, soit (ii) b) a le droit de nommer ou de révoquer la majorité des membres de la direction ou du conseil de surveillance d’une autre personne morale soit (iii) c) plus de la moitié des membres du directoire de l’autre entité est également membre du directoire soit de personnes occupant le poste de la direction dans l’entité de la première entreprise. Selon l’art. 4 al. 14 de la loi sur protection de la concurrence et des consommateurs du 16 février 2007 mentionné, le groupe de capitaux signifie que tous les entrepreneurs qui sont contrôlés directement ou indirectement par un seul entrepreneur, y compris le commerçant. Cette définition très large n’indique pas les formes de contrôle entre les membres du groupe. Elle s’applique à « toutes les entreprises », ce qui signifie le cercle très large des entités c.à.d. d. les entrepreneurs au sens des dispositions relatives à la loi sur la liberté de l’activité économique, notamment – les personnes physiques, les personnes morales et les unités organisationnelles lesquelles ne sont pas des personnes morales, auxquelles la loi reconnaît la capacité juridique lorsqu’elles exécutent en propre nom une activité économique. La loi sur la protection de la

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Loi du 6.09.2008, J. des L. 2008.271. Loi du 16.07.2004, J. des L. 2016.1489. 4 Loi du 29.01.2004, J. des L. 2015.2164. 5 Loi du 15.09.2000, J. des L. 2017.1577. 6 Loi du 29.08.1997, J. des L. 2017.1876,2361. 7 Cf. W.J. Katner, U. Promińska (réd.), Prawo handlowe po przystąpieniu Polski do Unii Europejskiej, (Droit commercial après l’accès à L’Union Européenne), Warszawa 2010. 8 Loi sur le marché des instruments financiers, du 29.07.2005, J. des L. 2016.1636. 3

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concurrence et des consommateurs ajoute au groupe les personnes physiques, les unités organisationnelles sans personnalité juridique, pour lesquelles la loi reconnaît la capacité juridique. La loi ajoute aussi les services d’utilité publique qui n’ont pas d’activités économiques au sens des dispositions relatives à la liberté de l’activité économique, ainsi parmi d’autres les personnes physiques exerçant une profession libérale en son nom propre et pour son propre compte ou exerçant une activité dans l’exercice de cette profession. L’absence d’une loi uniforme dans les codes tout en maintenant une définition générale des groupes des capitaux sectorielle n’empêchent pas que la plupart des règles ne contient pas de référence à ce concept, en se concentrant sur la description des relations entre les participants des systèmes. L’exception constitue l’article. 4 points 10 et 11 de la loi bancaire où le législateur a tenté de définir le holding financier et mixte. Les définitions de ces derniers, d’ailleurs, à la directive bancaire, qui utilisent les concepts de la société financière holding et société holding mixte, traite la structure à travers le prisme de la définition de la société par la loi sur le marché financier. Une autre définition introduit le règlement de la Commission UE 651/2014 du 17/06/2014 déclarant certaines formes d’aide compatibles avec le marché intérieur en application de l’article 107 et 108 du Traité sur le Fonctionnement de l’Union Européenne. Il comporte une définition des entreprises liées auxquelles sont applicable par la suite les solutions de la loi sur la protection de la concurrence. L’article 3, paragraphe 3 du règlement concerne les entreprises liées, elles sont des entreprises qui entretiennent entre elles l’une des relations suivantes : l’entreprise détient la majorité des droits de vote des actionnaires ou associés dans une autre entreprise, une entreprise peut nommer ou révoquer la majorité des membres de l’organe d’administration, de direction ou de contrôle d’une autre entreprise. En plus une telle entreprise a le droit d’exercer une influence dominante sur une autre entreprise en vertu d’un accord conclu avec cette entreprise ou de dispositions de l’accord de fondation ou de partenariat. Une présomption d’absence d’influence dominante sur une autre entreprise est présumée si les investisseurs ne participent pas directement ou indirectement à la gestion de l’entreprise, sans préjudice de leurs droits en tant qu’actionnaires. Toutefois, s’ils sont membres du directoire ou du conseil de surveillance, quel que soit le nombre de droits de vote, peuvent exercer une influence dominante. Même s’il existe une participation minoritaire, il peut exister un contrôle exclusif sur une base légale si la propriété de ces actions implique des droits spéciaux (c’est-à-dire des actions privilégiées donnant lieu à un droit de vote majoritaire ou à d’autres droits permettant à l’actionnaire minoritaire de déterminer le comportement commercial stratégique de l’entreprise acquise). Par exemple le pouvoir dominant est celui autorisant la nomination de plus de la moitié des membres du conseil de surveillance ou du conseil d’administration. Une entreprise est indépendante sur la base du règlement si: elle est totalement indépendante, c’est-à-dire qu’elle n’a aucune participation dans d’autres entreprises et qu’aucune entreprise n’a une part sociale ni ne détient moins de 25% du capital ou des droits de vote (selon le montant le plus élevé) au moins une autre entreprise ou

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des entités externes ne possèdent pas plus de 25% du capital ou des droits de vote (la plus grande des deux valeurs) dans l’entreprise ou n’est pas liée à une autre entreprise par une personne physique au sens de l’art. 3 paragraphe 3 mentionné plus haut. Loi sur la faillite9 à son tour, ne contient pas un règlement distinct sur la faillite des sociétés du groupe des capitaux (avec minoritaires exceptions). La déclaration de faillite d’une société du groupe n’est pas automatique pour la faillite d’autres sociétés du groupe. La faillite doit satisfaire aux mêmes conditions pour chaque entité individuellement. La société du groupe lorsqu’elle est insolvable, dépose une demande pour sa mise en faillite. Bien sûr, dans la pratique, il arrive souvent qu’une entreprise qui a fait faillite est liée à un réseau de transactions avec d’autres entités du groupe. Souvent la société en faillite cesse de régler leur paiement en raison des dettes à d’autres sociétés du groupe, qui, dans l’absence de mesures elles-mêmes tombent dans un état d’insolvabilité et faillite. Il arrive que les cautionnaires d’une des sociétés du groupe sont les cautions d’autres sociétés ou alors plusieurs sociétés devenant les débiteurs solidaires. Plusieurs entreprises peuvent également protéger simultanément les droits réels sur les mêmes actifs pour payer les dettes d’une des sociétés du groupe, ce qui est le cas lorsque à une des sociétés est accordé un prêt important. Dans ce cas, les motifs de la faillite n’est pas la position de la société dans le groupe, soit une référence à une autre société du groupe, qui a fait faillite, mais le calcul si l’entreprise respecte ses engagements de trésorerie en raison du temps ou si le montant total de la dette ne dépasse pas la valeur totale de ses actifs. Pour les procédures d’insolvabilité avec les sociétés étrangères c’est le règlement européen qui s’applique. En général selon le droit du travail 10 le groupe ne peut être considéré comme l’employeur au sens de la loi. Toutefois la Cour Suprême de Pologne, le 16 Juin 201611 a décidé que l’emploi sur la base du contrat de mandat par une entreprise dans une autre société du même groupe ne signifie pas automatiquement que le travail est effectué pour l’employeur mais pour la société dominante dans le groupe. La Cour Suprême a réglé la question juridique, sur l’appel de l’employeur - la société X pour le paiement des charges de la sécurité sociale. Les sociétés X et Y ont été les sociétés -filles de la société Z. La Cour a conclu que la société X est tenue de verser des cotisations de sécurité sociale sur les salaires, que l’employé a reçu sur la base de l’accord de mandat conclu par lui avec la société Y. Le concept de groupe est bien élaboré dans la loi sur la comptabilité, le groupe des capitaux a les caractéristiques précises et les obligations spécifiques conformément aux dispositions de la loi. L’article 3. 1 point 44 de la loi sur la comptabilité12

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Loi du 28.02.2003, J. des L. 2016.217. Code du travail du 15.09.2000, J. des L. 2016.1666. 11 Sygn. Dossier, III UZP 6/16. 12 Du 29.06.1994, J. des L. 2016.1047. 10

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détermine le groupe, en utilisant une condition prédéfinie de la société dominante et dépendante. Toutes les sociétés ne seront pas inclues au groupe, les sont seulement concernées les sociétés commerciales et les coopératives. La composition et la structure du groupe est déterminé par la société mère sur la base d’un inventaire de tous les niveaux du groupe13. Règlement du Ministre des Finances du 25 Septembre 2009 sur les modalités d’élaboration par des entités autres que les banques, les entreprises d’assurance et de réassurance sur le rapport financier consolidé des groupes de sociétés14 est applicable en Pologne comme d’ailleurs le IAS 24 et 27. L’article 3. al.1 point 45 sur la comptabilité définit l’acte de consolidation, conduisant à la préparation des rapports financiers consolidé. Le principe de base de la préparation des rapports financiers consolidés du groupe est de présenter le groupe comme s’il constituait une seule unité économique. Les déclarations fiscales séparées des sociétés du groupe sont prévues dans la loi mais ne doivent pas être la seule base pour évaluer la situation financière de la société dominante dans le groupe. Également la déclaration individuelle ne devrait pas être la seule base de l’évaluation des risques et des opportunités pour la société mère. Du point de vue du propriétaire, des investisseurs potentiels, des institutions financières ou d’autres institutions le rapport consolidé doit apparaître l’ensemble des activités du groupe. Par conséquent, dans le processus de consolidation il faut prendre en compte toutes les exemptions et les ajustements nécessaires résultant des transactions commerciales conclues entre les sociétés du groupe. Le droit international privé polonais15 n’a pas des dispositions spéciales sur les groupes des sociétés lesquelles ne sont pas reconnus systématiquement en tant que personne morale séparé en droit privé. Leur reconnaissance en certaines branches de droit est présente dans le paysage juridique polonais mais il est vrai qu’il est loin d’être conséquent et pragmatique.

Cf. M. Gmytrasiewicz, A. Karmańska, Rachunkowość finansowa (La comptabilité financière), Difin, Warszawa 2006; Remlein, M., 2006, Uwarunkowania polityki rachunkowości grup kapitałowych (Les conditions de la politique comptable des groupes des sociétés), dans W. Gabrusewicz, (réd.), Prace Katedry Rachunkowości z okazji jubileuszu 75-lecia (Travaux les l’Unité de la Comptabilité, Mélanges de 75ème anniversaire de l’Unité), Zeszyty Naukowe Akademii Ekonomicznej w Poznaniu nr 82, Poznań; M. Weber, J. Kufel, Wprowadzenie do rachunkowości spółek (L’introduction à la comptabilité des sociétés), Wydawnictwo Park, Bielsko-Biała 1993. 14 J. des L. 2009, poz.169. 15 Loi du 04.02.20011, J. des L. 2015. 1792. 13

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Les lois fiscales et les accords internationaux

Le groupe fiscal des capitaux une construction bien spéciale de la loi sur CIT16 mais avec des defaults insurmontables jusqu’à lors. Le groupe fiscal est créé à partir du moment de la signature, par tous les participants au groupe de l’accord fiscal. L’accord doit remplir les conditions suivantes- conclu sous la forme d’un acte notarié. Il contient une liste des sociétés formant le groupement fiscal et le montant des capitaux. Il contient aussi une liste de la participation des associés minoritaires disposant d’au moins 5%, avec la hauteur de leur participation de la société mère et de ses filiales. L’accord détermine la durée du groupe, précise la société représentante étant la responsable le groupe dans la fiscalité. Dans l’accord on indique de responsabilité fiscale (en général la société mère). L’exigence pour la création du groupe fiscal, est le rapport aux services fiscaux sur l’accord conclu. La notification du groupe arrive aux offices fiscaux selon le siège du représentant du groupe. La notification doit être faite les 3 mois avant le début de l’exercice, par le groupe. Après avoir vérifié si les entreprises ont respecté les conditions légales, l’office enregistre le contrat. Ceci est publié dans le Moniteur Juridique et Commercial. Le groupe fiscal des capitaux est une construction juridique particulière. Le contribuable n’est pas une entreprise, mais un groupe de sociétés, le revenu assujetti à l’impôt sur le revenu est la somme de revenus de toutes les sociétés constituant le groupe, supérieures à la somme de leurs pertes. Les transactions entre les sociétés du groupe sont neutres de point de vue fiscal. Les désavantages pour les groupes fiscaux sont entre autres : l’impossibilité de tirer profit de l’exonération de l’impôt sur le revenu sur la base des autres lois, l’incapacité à établir des liens (visés à l’article. 11 de la loi sur CIT) avec d’autres contribuables de l’impôt sur le revenu non -parties dans le groupe fiscal 3. L’exigence de la réalisation dans chaque exercice fiscal du P/E ratio d’au moins 3%. La loi sur PIT17 traite aussi les sociétés liées. Cette situation a lieu lorsqu’un sujet national polonais participe directement ou indirectement dans la gestion ou le contrôle d’une société étrangère soit possède une participation dans ladite société. De même, lorsqu’il s’agit des entités étrangères et nationales. Le lien a existé lorsqu’une entité nationale utilise une connexion avec une autre entité nationale procédant à un allégement fiscal lorsqu’entre les entités ou personnes s’occupant de gestion, de surveillance ou de contrôle de l’unité. Il y a des liens familiaux, soit par le capital, la propriété ou les relations de travail. Le lien réside quand il y a une relation qui intègrent la gestion, de surveillance, le contrôle par le biais des entités ou personnes dans les entités. Le sujet lié par les capitaux avec une autre entité nationale -lorsqu’ une personne détient des droits de vote de la manière directe ou indirecte à la hauteur d’au moins 5% des droits de vote. Si les conditions entre les parties diffèrent de celles applicables aux entités qui ne restent pas liées, soit celles qui accordent 16 17

Loi du 15.02.1992, J. des L. 2016.1888. Loi du 26.07.1991, J. des L. 2016.218-PIT- Personal Income Tax.

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entre elles les entités indépendantes, en particulier si entre les parties a été conclu un contrat de société, société en nom collectif, société en commandite, une co-entreprise, le usus des choses soit un accord de coopération. Selon les lois de l’impôt sur le revenu si les autorités fiscales ou l’inspection fiscale précise, en utilisant l’une des méthodes de calculation, que le revenu du contribuable a une hauteur plus grande (ou perte de hauteur inférieure) que celle déclarée par le contribuable dans le cadre de la transaction avec une entité liée et en même temps le contribuable ne fournit pas à l’autorité de la documentation fiscale nécessaire - la différence entre le revenu déclaré par le contribuable et celui défini par les autorités est sanctionnée par le taux de 50%. Il convient de rappeler que, à partir du 1er Janvier 2017 les amendements aux lois PIT sur les coûts ou les revenus pour les sociétés s’élève à plus de 10 millions d’euros, on devra préparer une analyse comparative, qui devra justifier le niveau du prix du et des prix dans les transactions avec entités liées. En outre, l’art. 11 al. 1 de la loi sur l’impôt sur le revenu stipule que si à la suite aux liens entre les entités seront établis et des conditions qui diffèrent de celles qui seraient conclues entre des entités indépendantes, par conséquent le contribuable n’a pas de revenu ou que le baisse comme si ces liens n’existeraient pas - le revenu du contribuable et l’impôt à payer est déterminé sans tenir compte des conditions résultant de cette relation. Depuis un an dans les lois PIT et CIT, la définition des entités liées a été modifiée, indiquant directement les entités pouvant être considérées comme liées au sens de la réglementation des prix de transfert. Une définition des relations en tant que relations entre entités apparentées a également été introduite - au sens de la définition des entités liées. Les dispositions modifiées ne prennent pas en compte toutes les connexions existantes à ce jour, telles que : contrats d’une société sans personnalité juridique (sauf paradis fiscal), accords de joint-venture (sauf paradis fiscal), connexions d’actifs, liens résultant de la relation de travail. Ainsi, actuellement, ces contribuables sont exemptés de l’obligation d’identifier les liens. En même temps, le catalogue a été développé pour inclure des liens qui n’ont pas encore été définis. De son côté l’art. 15 de la loi sur la TVA18 mentionne au paragraphe. 1 qui est le contribuable de la TVA – les personnes morales, entités organisationnelles sans personnalité juridique et les personnes physiques exerçant des activités économiques indépendantes visées au paragraphe 2, quel que soit le but ou le résultat de cette activité. Cette question est présentée dans la partie suivante. La loi du 9 mars 2017 relative à l’échange d’informations fiscales avec d’autres pays19 concerne les règles et la procédure d’échange de données fiscales avec d’autres pays; la compétence des autorités pour échanger des informations fiscales avec d’autres pays; l’obligation pour les institutions financières d’échanger des informations fiscales à la demande d’une autorité compétente, l’obligation pour les institutions financières d’échanger automatiquement les informations fiscales relatives aux comptes déclarés et les

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Loi du 11.03.2004, J. des L. 2017.1221. Loi du 9.03.2017, J. des L. 2017.648.

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règles de contrôle de leur performance, l’obligation pour les sociétés du groupe d’échanger automatiquement des informations fiscales sur les parts. Une attention particulière devrait être accordée à l’art. 24 de cette loi - en particulier des entités liées et désigne une entité de contrôlée par une autre, des entités sous contrôle commun ou des entités qui investissent au sens du point 29 lit. b (dont les revenus bruts reposent principalement sur l’investissement ou le réinvestissement d’actifs financiers ou sur la négociation d’actifs financiers s’il est géré par une autre entité qui est un établissement de dépôt, une institution de fiducie, une société d’assurance ou une entité d’investissement cogérées). Afin de déterminer l’entité contrôlée par une autre entité ou une entité sous contrôle commun, il est supposé que le contrôle couvre plus de 50% de la participation directe ou indirecte au droit de vote à l’assemblée des actionnaires, à l’assemblée générale ou dans le capital de cette entité. L’article 82 de ladite loi fait référence à la notion de “groupe d’entités” - il s’agit du groupe des capitaux au sens des dispositions comptables pour lesquelles des états financiers consolidés sont préparés, comprenant au moins deux entités ayant leur siège ou leur direction dans des pays ou des territoires différents ou une unité qui: elle a son siège ou sa direction dans un pays ou un territoire, mais opère par l’intermédiaire d’un établissement étranger situé dans un autre pays ou territoire. En outre, dans lequel le chiffre d’affaires consolidé a dépassé le seuil de 750 000 000 euro de l’exercice précédent. Information sur un groupe signifie des informations sur des entités qui font partie du groupe. Selon la loi sur l’information fiscale, la société mère est comprise comme une entité faisant partie d’un groupe d’entités qui détient, directement ou indirectement, une partie des actions d’au moins une entité dans un groupe, qui, selon les principes comptables adoptés dans le pays ou le territoire, dans lequel il a un siège ou un conseil d’administration. L’entité est tenue d’établir des états financiers consolidés ou serait obligée de le faire si ses participations étaient négociées sur un marché réglementé dans ce pays ou territoire et qu’aucune autre entité faisant partie de ce groupe ne détiendrait directement ou indirectement des actions de cette société. Entités comprises dans un groupe de capitaux - il s’agit d’une société mère, de filiales et d’autres entités subordonnées qui sont couvertes par les états financiers consolidés ou qui le seraient si les actions de ces entités étaient négociées sur le marché réglementé. Il s’agit également d’entités couvertes par les états financiers consolidés uniquement en raison du critère de taille ou d’importance relative, ainsi que de l’usine étrangère de l’entité indiquée ci-dessus, à condition que l’entité établisse un rapport financier indépendant à des fins financières, fiscales, ou contrôle de gestion. L’article 83, paragraphe 1, de la loi indique qu’une société mère constituée d’un groupe d’entités ayant son siège statutaire en Pologne ou ayant des sièges sur le territoire polonais, communique au chef de l’administration fiscale nationale les informations relatives à un groupe d’entités sur la base de la formule document électronique publié dans le Bulletin d’information sur le site web du bureau du ministre compétent en matière de finances publiques, dans un délai de 12 mois à

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compter de la date d’achèvement de l’exercice clos. Les informations relatives à un groupe d’entités peuvent être utilisées pour analyser le risque de sous-estimation du revenu imposable dans le domaine des prix de transaction et d’autres analyses économiques ou statistiques.

1.1.1

Prix de transfert

À compter du 1er janvier 2019, de nouvelles réglementations dans le domaine des prix de transfert s’appliquent. L’un des principaux changements est la redéfinition des entités liées, en vertu de laquelle la structure des entités considérées comme liées a été étendue. Selon les nouvelles lois, les entités sont divisées en quatre critères (caractéristiques): a) relier en ayant un impact significatif, b) une société sans personnalité juridique et ses partenaires, c) l’entité et son établissement stable (établissement stable), d) connexions au sein du soi-disant structures de propriété artificielle. La détermination de l’impact significatif, conformément à la justification de la loi modificative (loi du 23 octobre 2018), indique une situation dans laquelle deux entités ou plus peuvent être considérées comme des entités liées. La définition a été formulée en faisant référence à “un large éventail d’instruments pouvant créer des liens”, qui doivent être compris comme une participation au capital, des droits de vote dans des organes de contrôle ou de représentation, des parts, des certificats ou d’autres droits liés à la participation à des bénéfices ou à des actifs. A été défini comme un élément clé dans la définition des entités apparentées et comme l’une des conditions de la relation entre deux entités ou plus. L’exercice d’une influence notable recouvre trois domaines : les liens de capitaux, la capacité réelle d’un individu d’influencer les décisions économiques et les relations familiales. Les contrôles fiscaux dans le domaine des prix de transfert étaient principalement axés sur la vérification de l’obligation de préparer une documentation sur les prix de transfert. La documentation standard est actuellement soumise à un contrôle minutieux. Cette vérification a lieu dans trois domaines : documentaire, enregistrement et personnel. En règle générale, les sociétés -mères basées en Pologne sont tenues de soumettre un rapport CbC depuis la fin de 2018. Le rapport “CbC” (pays par pays) est une documentation contenant des informations sur les entités d’un groupe d’entités (un groupe de capital), qui comprend, entre autres, les données d’identification des entités incluses dans le groupe, des informations sur le montant des revenus réalisés, réalisées bénéfice (perte) avant impôt, impôt sur le revenu payé, impôt sur le revenu dû, capital social, bénéfice non distribué des années précédentes, nombre d’employés, les actifs (fixes et courants) autres que trésorerie et équivalents de trésorerie, type d’activité des entités comprises dans le groupe , divisées par pays ou les territoires.

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À l’origine, les dispositions sur “CbC” étaient incluses dans la loi sur l’impôt sur les sociétés, à l’heure actuelle, mais également dans la loi sur l’échange des informations fiscales avec d’autres pays mentionné précédemment. Le rapport “CbC” est essentiellement constitué de la société mère du groupe. La réglementation polonaise concerne la soumission de rapports “CbC” par les sociétés mères ayant leur siège statutaire en Pologne. Une entreprise polonaise doit donc préparer et soumettre un rapport “CbC” si : – elle est l’entité dominante dans le groupe d’entités liées, – le chiffre d’affaires consolidé du groupe dépassait lors de l’exercice précédent l’équivalent de 750 millions d’euros, – possède une usine ou des filiales en dehors de la Pologne, – a l’obligation de consolider les états financiers du groupe (articles 82 et 83 de la loi sur l’échange d’informations fiscales avec d’autres pays). Dans certains cas, les sociétés polonaises qui ne sont pas des entités mères doivent également soumettre le rapport “CbC” en Pologne dans le cas où : – la société mère n’est pas obligée de soumettre le rapport “CbC” dans le pays dans lequel elle a son siège statutaire ou sa direction, – bien que la société mère d’un autre pays soit tenue de soumettre le rapport “CbC”, mais que les autorités fiscales polonaises ne puissent pas recevoir ce rapport “CbC” car l’État dans lequel se trouve le conseil d’administration de la société mère ne s’est pas acquitté de l’obligation d’échanger des informations fiscales résultant de l’accord international. La documentation fiscale est la preuve de base contenant des informations permettant d’analyser les activités d’entreprises liées et d’évaluer si le prix de la transaction entre entités apparentées a été déterminé au niveau du marché. L’obligation de documentation s’applique aux transactions avec des entités liées ayant un impact significatif sur le montant du résultat de ces entités. L’obligation s’applique à la comptabilisation dans les livres d’événements dans lesquels les conditions ont été définies ou imposées avec des entités liées ayant un impact significatif sur le résultat.

1.1.2

Les schémas fiscaux

Conformément à la nouvelle réglementation, à compter du 1er janvier 2019, certaines entités sont tenues de fournir au Chef de l’Administration Fiscale Nationale polonaise des informations sur les régimes fiscaux (MDR - Règles de divulgation obligatoire). L’institution de présentation des schémas fiscaux du groupe des sociétés n’étant pas présente avant dans le système juridique polonais et en raison des nombreux commentaires recueillis lors des consultations publiques. Il a été souligné, entre autres, que tout retard dans la mise en œuvre des obligations d’information en vertu du règlement MDR n’aura pas de conséquences négatives pour les entités assujetties,

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à condition que ces obligations soient correctement mises en œuvre. Les lettres d’information concernant les MDR indiquent clairement que l’obligation d’information prévue par la réglementation MDR ne sera pas remplie si le critère de bénéficiaire qualifié n’est pas rempli. Le schéma est un concept large - plus large que l’avantage fiscal mentionné dans les dispositions relatives à la clause d’évitement fiscal – il y a l’obligation de déclarer le régime fiscal qui peut s’appliquer aux situations dans lesquelles aucun avantage fiscal ne se produit Le plus souvent, il s’agira d’une solution fiscale dans laquelle il existe un avantage fiscal, mais également d’autres situations énumérées dans la loi, notamment celles liées aux transferts d’actifs, à une structure de propriété non transparente, soit à l’évitement des déclarations FATCA / CRS. Il ne s’agit pas de contourner le droit fiscal ou d’optimiser les impôts. Le régime fiscal est un concept beaucoup plus large et s’applique à toutes les taxes, y compris la TVA. Les nouvelles régulations pour les schémas s’appliquent également aux régimes fiscaux mis en place en 2018, c’est-à-dire : • régime transfrontalier, pour laquelle la première activité liée à leur mise en œuvre a été réalisée après le 25 juin 2018, • domestique, pour lequel la première activité liée à leur mise en œuvre a été réalisée après le 1er novembre 2018. L’obligation de présenter certains schémas a été reportée au 30 juin 2019. Les régimes transfrontaliers seront soumis à la déclaration, lorsque le bénéficiaire soit une société qualifiée ou non - dans une situation où l’un des principaux avantages que la société s’attend à obtenir dans le cadre de ce régime est l’avantage fiscal (compris de la même manière que dans les schémas nationaux), auquel s’ajoute au moins une autre condition (le catalogue de ces conditions est légèrement plus étroit que dans les schémas nationaux), ou indépendamment du principal avantage du régime - s’il remplit au moins l’une des nombreuses conditions énumérées dans la loi. Par exemple sont inclus dans les paiements transfrontaliers du type « Buy « pour les entités affiliées situées dans des paradis fiscaux, soit ayant les mêmes revenus ou avoirs et utilisant des méthodes visant à éviter la double imposition dans plusieurs pays. D’autre part il existe une structure de propriété légale opaque ou il est difficile de déterminer le bénéficiaire réel soit les droits sur des actifs incorporels difficiles à mesurer sont transférés. Indépendamment de l’obligation de déclaration (qui incombe généralement au promoteur), dans chaque situation où l’utilisateur applique le régime, il sera obligé de fournir au Chef de l’Administration Fiscale Polonaise des informations sur l’application du régime fiscal dans le délai relatif à la période de règlement au cours de laquelle il a exercé toute activité faisant partie du régime fiscal ou obtenu l’avantage fiscal. L’information contiendra, entre autres numéros de l’activité enregistrée et le montant de tout avantage fiscal résultant du régime fiscal obtenu au cours de la période de règlement-livraison. Ainsi, toute application du schéma fiscal sera obligatoirement divulguée pour l’administration fiscale par le bénéficiaire. Les informations ci-dessus seront classées sous peine des sanctions pénales et seront signées par un contribuable -personne physique et, dans le cas d’un contribuable personne morale, par tous les membres de l’organe de direction.

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Le droit fiscal prévoit un certain nombre de sanctions propres- nullité d’une action en justice contraire à l’ordre juridique, re-estimation de l’assiette fiscale, re-estimation du revenu, imposition supplémentaire. Cependant, parallèlement aux sanctions prévues par les lois fiscales des sanctions pénales fiscales sont prévues par le code pénal fiscal polonais. Le fichier principal est l’un des éléments de la documentation sur les prix de transfert. Il est obligatoire pour les sociétés dont les revenus ou les coûts ont dépassé l’équivalent de 20 millions d’EUR au cours de l’année d’imposition précédente (article 9a, paragraphe 2d de la loi relative au transport de fonds). En pratique, il s’agit généralement d’un document distinct, souvent très volumineux, préparé par le siège dans les groupes de la capitale. Le fichier principal contient des informations sur l’ensemble des entités liées, y compris le contribuable. Selon art. 9a paragraphe 2d du fichier CIT devrait fournir les informations suivantes : D’indiquer l’entité qui a établi le fichier maître et la date à laquelle elle soumet la déclaration fiscale, décrire la structure (y compris juridique, géographique et de propriété) d’entités liées, décrire la méthode d’établissement des prix de transfert par les entités liées (politique de prix de transfert), décrire le sujet et l’étendue des activités menées par un groupe d’entités liées (y compris les principales transactions, les marchés de vente et les groupes de produits), décrire les actifs incorporels existants, utilisés, créés et développés (y compris les contrats de licence), décrire les actifs incorporels existants, utilisés, créés et développés (y compris les contrats de licence), décrire le sujet et l’étendue des activités exercées par un groupe d’entités liées (y compris les principales transactions, les marchés de vente et les groupes de produits). Le contribuable doit préparer la documentation du fichier maître aussi bien que possible.

2 Le droit de vote dans les corps Selon la réglementation en vigueur jusqu’au 31 décembre 2018, les relations de fonds propres ne pourraient résulter que de la participation au capital d’une autre entité. L’élargissement du catalogue d’instruments créant des liens capitalistiques a pour but de les rendre compatibles avec les réalités économiques et de montrer la présence de divers types de structures dans les groupes de capital. En ce qui concerne la propriété, selon les dispositions modifiées, un impact significatif de la participation de l’entité aux droits de vote des organes de direction ou de contrôle d’une autre entité ou entités tient également compte des relations de gestion et de contrôle existantes. Les liens par les capitaux sont le type de liens le plus souvent identifié. Parmi ceux-ci, on peut distinguer les connexions directes et indirectes en capital. Pour pouvoir parler de telles connexions, il doit exister une connexion d’au moins 25%

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entre les deux entités. Actions. Le seuil indiqué s’applique aux connexions directes et indirectes. Les liens directs peuvent être à la fois transfrontaliers et domestiques. Les relations directes concernent deux entités, dont l’une au moins 25% participation au capital de la seconde. Une entité domestique est considérée comme liée si au moins 25% de son capital est dans son capital. Les actions ont une entité étrangère ou une autre entité nationale ou si l’entité polonaise en détient au moins 25% des actions d’une entité située en dehors de la République de Pologne ou d’une autre entité. Les liens indirects, comme les connexions directes, peuvent être à la fois internationaux et nationaux. Nous traitons avec un lien indirect lorsqu’une entité a une part ou un droit dans une autre entité par le biais d’une autre entité ou d’un plus grand nombre d’entités. La taille de la quote-part indirecte est calculée quel que soit le nombre d’entités existant entre le contribuable et l’entité liée. Dans ce cas, la taille de la part indirecte doit être déterminée comme le montant de la part ou du droit combinant deux entités quelconques parmi toutes les entités prises en compte - dans une situation où toutes les actions ou tous les droits combinant ces entités sont égaux. Toutefois, si ces valeurs sont différentes, la plus petite des valeurs doit être prise en compte. Dans le cas où des entités combinent plusieurs actions ou droits indirectement détenus, une action indirecte doit être définie comme la somme de la taille de toutes les actions ou droits indirectement détenus dans cette entité. En cas d’apparition simultanée des deux types de connexion, la limite est fixée à 25%. Il convient de faire référence aux liens directs et indirects.

2.1

L’entreprise et ses partenaires

Une entité liée est également une société sans personnalité juridique (par exemple, une société en nom collectif, une société en commandite, une société en commandite par actions) et ses partenaires. Dans ce cas, l’entité liée est une unité organisationnelle sans personnalité juridique, qui est propriétaire ou dans laquelle le contribuable, une personne physique, une personne morale ou une autre unité organisationnelle sans personnalité juridique a au moins 25% actions en capital ou au moins 25% droits de vote dans les organes de surveillance ou de direction, ou au moins 25% droit de participer aux bénéfices. La société et son usine à l’étranger appartiennent également au catalogue des entités liées. Si les seuils documentaires sont dépassés pour une transaction contrôlée de nature homogène, l’événement entre la société mère et l’usine est soumis à l’obligation documentaire. Les règlements entre la société mère et l’usine doivent se faire comme si l’usine était un partenaire commercial indépendant.

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Les groupes des capitaux en droit civil et commercial

Le code des sociétés commerciales en Pologne introduit le concept de la société dominante et la société dépendante20. La définition se situe dans la partie générale du Code. De l’autre part, le Code civil polonais 21 n’utilise pas de la notion d’un groupe des sociétés ni de la société dominante. Il faut ajouter que le Code des sociétés constitue la lex specialis par rapport au Code civil. La société dominante conforme à l’article. 4 du Code des sociétés commerciales est lorsqu’elle détient directement ou indirectement la majorité des voix à l’assemblée générale des actionnaires, même en tant que gagiste ou l’usufruitier et/ou elle participe dans la gestion d’une autre société (dépendante), ceci aussi sur la base des accords avec d’autres personnes. La société dominante est aussi celle qui a droit de nommer ou de révoquer la majorité des membres du directoire d’une autre société ou coopérative dépendante, également selon l’engagement contractuel. Un autre cas énuméré dans le code est la société dominante laquelle a droit de nommer ou de révoquer la majorité des membres du conseil de surveillance d’une autre société également en vertu des accords, soit ses membres du directoire représentent plus que la moitié des membres du directoire d’une autre société de capital, soit dispose directement ou indirectement de la majorité des voix dans la société ou dans l’assemblée générale de la société dépendante. La définition de la domination la plus large dans le code de commerce polonais fonctionne lorsque la société exerce une influence décisive sur les activités d’une société ou d’une coopérative, notamment sur la base des accords visés à l’article. 7 du code lorsqu’il s’agit de l’accord sur la gestion de la société par la société dominante ou le transfert du bénéfice par la société dépendante. Selon le code des sociétés commerciales à la suite de la conclusion du contrat entre la société dominante et dépendante concernant la gestion de cette dernière par la société dominante soit de transfert de bénéfices à la société dominante, seront déposées sur le registre de la société dépendante, également des mentions qui définissent la portée de la responsabilité de la société mère pour les dommages causés à sa société dominante pour inexécution ou la mauvaise exécution du contrat et les responsabilités d’une société mère de la filiale à ses créanciers. Est exigée également l’information que l’accord exclue ou ne réglemente pas la responsabilité de la société dominante.

20 Cf. W. J. Katner, Prawo cywilne-część ogólna (Droit civil -partie générale) dans M. Safjan (réd.), System Prawa Prywatnego (Système de Droit Privé), p. 1174; M. Michalski, Kontrola kapitałowa nad spółką akcyjną, (Le contrôle par les capitaux de la Société par Actions) Zakamycze 2004, p. 40; S. Sołtysiński, Kodeks spółek handlowych Komentarz, (Code des sociétés commerciales. Commentaire) t.1 Warszawa 2006 s.78; A. Szajkowski, M. Tarska, Prawo spółek handlowych (Droit des sociétés commerciales), Warszawa 2005, p. 70. 21 Du 23.04.1964, J. des L. 2017, poz.459.

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Code des sociétés commerciales fait référence aux groupes de capitaux, ainsi les sociétés de capitaux sont concernées par cette loi. Celles-ci sont dans le code polonais- les sociétés à responsabilité limitée et la société anonyme. Le code évoque également les coopératives comme des entités qui peuvent être les sociétés dépendantes. Les sociétés de personnes ne sont pas évoquées par le code dans la question de groupes des sociétés. Dans le système juridique polonais, il n’y a pas des dispositions pour expressément tenir l’actionnaire d’une société pour responsable des obligations de la société. Les dispositions du Code des sociétés commerciales prévoient que les associés d’une société à responsabilité limitée et les actionnaires ne répondent que par actions soit une part. Toutefois la responsabilité restreinte relevant de l’art. 299 du Code des sociétés commerciales, prévoit que, dans certaines circonstances très étroitement définies, les membres du directoire peuvent être tenus responsables des obligations de la société. Cette disposition vaut pour une société à responsabilité limitée et ne s’applique pas dans le cas d’une société anonyme, ainsi que les membres du directoire peuvent s’exempter de leur responsabilité. Cette disposition est applicable uniquement lorsque l’action exécutoire n’a pas eu de succès contre la société, ainsi que les membres du directoire ne sont pas responsables des obligations de la société. De l’autre part nous pouvons appliquer les principes généraux du droit de la responsabilité civile (l’art. 415 et suiv. du Code civil). Il convient de souligner que l”actionnaire d’une société ne serait pas responsable pour des dettes de la société, seulement va répondre pour les dommages causés au créancier par le fait de « l‘abus de la forme de la société ». Pour la responsabilité de l’actionnaire sur la base de la responsabilité délictuelle, il faut établir l’existence de la responsabilité délictuelle – le dommage, la faute et le lien de causalité entre les deux22. Le principe de l’absence de responsabilité de l’associé ou l’actionnaire n’est pas absolu, dans des cas spécifiques. Il est acceptable comme une exception à assumer la responsabilité de la société dominante et ceci dépend de l’utilisation des articles. 5 du Code civil, (l’abus de la forme juridique de l’entreprise). Les dispositions du Code des sociétés commerciales relatives aux groupes des capitaux sont rudimentaires et il n’y a aucune disposition concernant la responsabilité des sociétés du groupe ou des membres du groupe, par exemple, responsabilité d’ une société mère devant les créanciers de la société dépendante.23Motifs possibles de la responsabilité civile de la société dominante seraient par exemple une sous-capitalisation de la société dépendante, la confusion du patrimoine de la société avec le patrimoine d’ un actionnaire, continuation à fonctionner dans les conditions indiquant que la faillite de la société dépendante est inévitable, l’abus du droit de création des entreprises. Il semble que de lege lata, la

22

Cf. J. M. Kondek, Bezprawność jako przesłanka odpowiedzialności odszkodowawczej (Illicéité en tant que condition de la responsabilité pour dommages), Warszawa 2013. 23 W. Popiołek, La responsabilité de la société mère pour la faute de la filiale, dans Z. Hajn, D. Skupień, La responsabilité civile en France et en Pologne, Łódź 2016, p. 97 et s.

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responsabilité d’un actionnaire (ainsi de la société actionnaire) reste seulement la référence à une clause d’abus du droit positif, tel qu’il est exprimé dans l’article. 5 du Code civil. Cette mesure est utilisée, mais seulement à titre exceptionnel. La conception classique de la responsabilité de perçage24 réside dans la considération que l’obligations de la société existe en tant que l’obligation de l’actionnaire. Il est présumé qu’une entreprise n’existe pas et l’engagement a été pris par l’actionnaire. Cela s’applique à des situations où l’actionnaire a utilisé la société pour l’endommager des créanciers. Cela peut être lié au fait que la capitalisation de la société a été inadéquate, une séparation insuffisante des actifs de la société de celui des actionnaires et des cas de domination excessive de l’actionnaire de la société. L’utilisation de la responsabilité de perçage varie d’un pays à l’autre. Cependant, elle attire l’attention sur le fait que ses conditions sont semblables. Elle peut être généralement définie comme l’utilisation de la société pour causer le préjudice aux créanciers. L’action de la société ne doit pas être intentionnelle. Ce type de la responsabilité est utilisé dans le contexte plus large par la question de l’abus de l’entreprise. Il s’agit d’utiliser une personnalité juridique distincte dans les objectives contraires à l’ordre juridique. Les actionnaires minoritaires sont considérés comme actionnaires, lesquels par le fait du faible apport dans la société ne disposent pas de beaucoup d’impact sur le fonctionnement de l’entreprise25. La typologie des minorités peut accentuer une personne ou un groupe de personnes, le chemin de la création des minorités - par préférence et la protection des minorités dans le capital social. Il faut également distinguer la minorité de blocage ou la minorité nécessaire pour arrêter l’activité de l’entreprise. Les modifications statutaires peuvent modifier la position de l’actionnaire et sa capacité à influencer la société. Parmi les critères permettant de distinguer les participations, nous trouvons le nombre des voix, la participation au capital ou la négociabilité des actions. Les définitions doctrinales des minorités indiquent que l’actionnaire minoritaire est celui dont le capital social ne lui permet pas d’exercer une influence notable sur les affaires menées par la société, la position de ces actionnaires ne permet pas la réalisation des propres intérêts des actionnaires à travers le vote lors de l’assemblée générale. L’actionnaire minoritaire en tant qu’investisseur ne peut pas agir contre la société sur la base de la responsabilité contractuelle parce que la société est un tiers par rapport aux parties sur le marché secondaire. En raison de l’anonymat sur le marché et de l’action pour le compte de l’intermédiaire sur le marché réglementé, l’investisseur n’est pas en mesure d’identifier l’autre partie au moment de la conclusion. Le moindre rôle de la responsabilité contractuelle aussi dans les relations avec les actionnaires-investisseurs versus la société cotée, relève de la nature publique de

24

W. Popiołek. ibidem p. 101. M. Lemonnier, La responsabilité de la société envers les actionnaires minoritaires, dans Z. Hajn, D. Skupień (réd.), ibidem, p. 113 et s. 25

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l’obligation d’information dans les relations juridiques. Entre l’émetteur et l’investisseur, il n’y a pas de relations juridiques privées sur la base de l’obligation de publication des informations. En revanche, une autre violation des droits subjectifs par la société envers l’actionnaire exige un examen de l’existence de la relation contractuelle entre celui-ci et la société. À ce stade, on peut se demander si les informations contenues dans le prospectus impliquent également, en plus des connaissances, les actes de volonté et si le prospectus peut être considéré comme un accord-cadre. Mais il ne fait aucun doute que le prospectus ne crée pas d’obligations mutuelles jusqu’à la souscription des actions, après la publication du prospectus au public. En droit polonais, il n’y a pas de réglementation spécifique sur la protection des actionnaires minoritaires des sociétés du groupe. Cette fonction peuvent effectuer les dispositions du code des sociétés commerciales, sur les droits des minorités, et certaines règles de loi sur l’offre publique (pour les sociétés cotées). Ceci compose : le partenaire a droit d’intenter une action en annulation ou annuler la résolution de la réunion de la société, le droit de priorité de souscription d’actions ou d’actions de la société, ainsi que le soi-disant droits collectifs - pour la convocation et la tenue de réunions des entreprises et sur le rachat obligatoire des actions. Les instruments de couverture potentiels intérêts minoritaires dans les filiales réside dans le vote à la majorité qualifiée en adoptant des résolutions lors des réunions. Le rôle protecteur des entreprises publiques aux actionnaires minoritaires de plénitude alors qu’une obligation d’information particulières imposées aux organismes des entreprises, un appel obligatoire et le droit d’un actionnaire de demander la mise en place d’un vérificateur pour des questions particulières. Les instruments juridiques en général protègent suffisamment les intérêts des minorités dans les sociétés indépendantes, les structures du groupe doivent être toutefois complétées. Ce besoin est justifié lorsque l’exécution des commandes par la filiale résulte par des pertes. Le résultat financier négatif a aussi l’impact négatif sur la valeur des actifs, par conséquent, elle possède faible valorisation des parts ou actions et/ou des capitaux. Dans la littérature, cet effet est un problème principalement des actionnaires minoritaires, parce que la société dominante, qui est un partenaire stratégique de la filiale peut par ailleurs fournir un remboursement de la valeur de sa contribution en en apports. Un problème important pour les actionnaires minoritaires de la filiale est l’accès à l’information sur les relations de leur société avec la société mère. Les exigences de notification et d’information en ce qui concerne la tenue s’appliquent uniquement à la création d’une relation de dépendance - domination (art. 6 du code des sociétés commerciales) et les rapports financiers consolidés des groupes sont établis que par les sociétés mères et contiennent principalement de l’information comptable (Art. 55- 63d de la loi sur la comptabilité). Un autre plan les relations dans le groupe des entreprises contre lesquelles le degré de protection des actionnaires minoritaires de la filiale est faible c’est le domaine du contrôle des activités du groupe. Les règlements polonais n’ont pas d’instruments juridiques efficaces pour permettre aux actionnaires minoritaires de détecter des irrégularités dans la gestion de la filiale, qui ont été causées par des

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influences de la société mère. Cela comprend dans les pratiques de la société dominante, de la sortie des actifs d’une filiale, appelée l’effet de tunnel (tunneling). Caractère obligatoire d’un rapport d’un commisseur aux comptes pour les états financiers consolidés (l’art. 64, al. 1 loi sur la comptabilité) concerne que l’évaluation des états financiers des sociétés individuellement. Un inconvénient important de l’art. 223 du Code des sociétés commerciales et l’art. 84 de la loi sur l’offre publique est, la possibilité de son application uniquement pour déterminer l’activité ou la comptabilité des sociétés au sein du groupe, et de ne pas enquêter sur les activités du groupe. Le problème d’équilibre des principes du gouvernement de la majorité et la nécessité de protéger les actionnaires minoritaires est particulièrement marquée dans les relations du groupe. Bien que le concept d’un groupe de sociétés ne soit pas en Pologne, l’objet d’une réglementation légale directe, bien que la tenue de l’art. 7 du code des sociétés commerciales ne concerne que les sociétés - dominante et dépendante sur la base du contrat, mais cette structure est phénomène assez commun dans la pratique polonaise. Le concept d’un groupe d’entreprises est une réponse aux besoins du marché et dans les pays modernes est un fait économique. D’autre part, les activités de groupes provoquent de nombreuses incertitudes juridiques, inconnus dans la loi des sociétés commerciales. Bien que les participants aux groupes de sociétés soient des sociétés commerciales ipso iure individuelles, de fait, elles sont gérées par des gestionnaires de la société mère et participent dans le groupe, au lieu des sociétés juridiquement indépendantes, elles sont transformées en un satellite de la société mère.

National Report on Brazil, 2 Tax Liabilities Within Groups of Companies: Case Study of Brazil André Mendes Moreira and Marina Machado Marques

Abstract The objective of this paper is to identify the limitations for the selection of companies within the same corporate group to bear the unpaid taxes due by their co-companies at the Brazilian legal framework. Initially, we analyze the limitations to the selection of the taxpayer and the concept of corporate groups in Brazilian law. After, we demonstrate the specific restrictions to the transfer of tax obligations to third parties imposed by the National Tax Code and, in the end, we analyze a specific Brazilian legal provision that allocate joint and several liability due to mere belonging to a corporate group. Given this effort, we concluded that simply belonging to a corporate group is not a reason for transferring tax responsibility as per the National Tax Code and, therefore, this cannot be adopted by the Tax Authorities and by the Court System as justification for allocating tax responsibility onto a different company.

1 Introduction The Brazilian experience of collecting unpaid taxes has sometimes proven to be inefficient and, therefore, compelled the administrative authorities to search for new mechanisms in order to ensure the tax collection. One of the main reasons for the lack of success in collecting due taxes not paid in time is the inability to pay of the legal entity, whose assets are often worth less than the amount of taxes evaded (especially considering the fines and interests charged). Henceforth, it has become common practice to make other companies liable for taxes unpaid by third parties simply because they belong to the same economic group—de facto or de jure. A. Mendes Moreira (*) Federal University of Minas Gerais, Belo Horizonte, Brazil University of São Paulo, São Paulo, Brazil e-mail: [email protected] M. Machado Marques (*) Federal University of Minas Gerais, Belo Horizonte, Brazil e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_12

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However, the Brazilian legal framework provides for numerous limitations to the expansion of tax obligations, hence making all group members liable should be carefully considered. It is relevant to note that Brazil is a Civil Law country, where legislation is the primary legal source of regulations. Particularly in the tax field, the rule of law—or “principle of legality”—stands out as a conditio sine qua non for making the taxpayer liable. The Brazilian Constitution is extremely analytical and regulatory. The National Tax System comprises more than 20 articles, each having tens of items and paragraphs—making this sole part of the Brazilian Constitution as lengthy as the entire United States Constitution. The allocation of responsibility to companies of the same group certainly increases the effectiveness of tax collection. Nevertheless, how is it possible to conciliate such increase with the fact that the National Tax Code establishes various restrictions to the transfer of tax obligations to third parties? The levying of taxes in Brazil is strictly limited by the legislation, which does not allow for any convenience or opportunistic approaches by the tax authorities. The National Tax Code brings regulations related to the definition of the taxpayer that forbid the transference of the tax burden to another legal entity simply because they are under the same control. The objective of this paper is to identify the limitations for the selection of companies within the same corporate group to bear the unpaid taxes due by their co-companies. Consequently, we’ll be able to verify if the method used nowadays by the Brazilian tax authorities is valid. This paper adopts the thesis that the mere fact that a legal entity belongs to a corporate group is not a legitimate cause to make that entity liable for taxes of other entities, and, therefore, this cannot be used by the tax authorities or the Courts as the reason for that.

2 The Rule of Law—“Principle of Legality”—As Constitutional Guarantee for Brazilian Taxpayers In Chapter I of its Section VI—“On the Taxation and on the Budget”—the Brazilian Constitution sets forth many provisions related to the National Tax System, defining the events that can be subject to taxation; granting the power to levy taxes to each of the members of the federation; and setting limitations and conditions for the tax collection’s activities. In granting the power to levy taxes, the Constitution outlines the details related to the exercise of such power, defining a series of guarantees to the taxpayers. Among these, the rule of law—“principle of legality”—stands out, which is worded as follows in the Brazilian Constitutional Law: Art. 150. Notwithstanding the other guarantees assured to the taxpayer, it is forbidden to the Federal, State, Federal District and Municipal governments to: I – impose or raise taxes without a legal statute providing for it;

In addition to the Constitution, the National Tax Code points out precisely the subjects that only the legal statute, which creates the tax, has power over:

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Art. 97. Only a legal statute can establish: I – the creation of taxes or their extinction; II – the increase in taxes, or their reduction (. . .); III – the definition of the taxable event of the principal tax obligation (. . .) and of the party liable for that tax; IV – the definition of the tax rate and its taxable amount (. . .); V – the imposition of penalties due the acts or omissions that breach the provisions of such statute, or due to other offences defined therein; VI – the conditions for exclusion, suspension and extinction of tax credits or dismissal or reduction of penalties.

Hence, in Brazil, the tax statute cannot be generic. The essential elements of the tax shall be entirely set forth in the parliamentary act: taxable event, taxable amount, taxpayers and liable third parties. The requirement imposed on the lawmaker to define precisely and in detail the taxable events leads to the idea of pre-defined concepts in Tax Law, thus keeping the Government or Court System officers from interfering with the original tax legislation. Therefore, it is clear from the provisions of the Constitution, interpreted in conjunction with the National Tax Code, that it is not possible for the taxpayer to be selected by the Court System or by the Government. Such task is an exclusive power of the Legislative Bodies, which shall do it in accordance with the general regulations defined in the National Tax Code.

3 Limitations to the Selection of the Taxpayer in Brazilian Legislation The Brazilian Constitution, by granting the powers and limiting the events that are taxable, defines the party that must bear the tax burden as a consequence of the constitutional structure of each type of tax. When dealing with taxes, the burden must be put on the party who has demonstrated economic ability to bear it at the time the taxable event took place. Thus, from the enforcement of the provisions set forth in the Constitution, the legal-tax relation is created and from that stems the obligation to pay the due taxes. At this moment, it is necessary to identify the party liable for the obligation, that is, the one who will be responsible for making the payment. When considering the liable party, the immediate thought is to allocate the responsibility for paying on the party who carried out the taxable event, for that party was who originated the tax obligation. This thought leads us to a very relevant consideration: the identification of the taxpayer within the legal-tax relation requires that party to be somehow related to the taxable event. To levy taxes on the party who carried out the taxable event is the safest way to ensure the taxation will be imposed where the wealth generation indeed occurred, therefore putting the burden on the individual who showed the ability to pay for the governmental expenses. Article 121 of the National Tax Code indicates two types of parties on which the taxes can be levied, the “taxpayer” and the “responsible”:

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Art. 121. The taxpayer bearing the tax obligation is the party required to pay taxes or monetary penalty. Sole paragraph. The party responsible for bearing the tax obligation is: I – taxpayer, if it has a personal and direct relation with the situation that created the taxable event; II – responsible, if, not being a taxpayer, its obligation is expressly provided for in a statute.

According to the Brazilian Tax Code, taxpayer is the one that has a personal and direct relation with the taxable event. Responsible is the one who does not meet the taxpayer criteria, but is obliged to pay as a consequence of a specific legal provision. By mentioning personal relation, the National Tax Code determines that the taxpayer must take part personally in the factual event that triggers the tax obligation. The taxpayer may or may not be expressly described in the statute that created the tax. Usually, the sole analysis of the taxable event is enough to enable the identification of the taxpayer. Note, for instance, that the tax on services intuitively leads to the provider of those services. On the other hand, item II of the same article 121 allows for the legislation to select another entity, which is different from the direct taxpayer, to comply with the obligation. That is why the responsible—despite not having carried out the taxable event, and not having made or earned an economic benefit—might, in many cases, be the tax-liable party. The selection of a responsible to replace the taxpayer must be expressly established by a legal provision, in order to ensure the legal certainty and to forbid discretionary taxation. This is what one can extract from item I, article 150 of the Brazilian Constitution and from item III, article 97 of the National Tax Code, which follow below again: Art. 150. Notwithstanding the other guarantees assured to the taxpayer, it is prohibited to the Federal, State, Federal District and Municipal governments to: I – impose or raise taxes without a statute providing for it; Art. 97. Only the legislation can set forth: [. . .] III – the definition of the taxable event of the principal tax obligation (. . .) and of the party liable for that tax;

Nevertheless, not even the lawmaker is entirely free to determine who the tax responsible will be. Article 128 of the National Tax Code requires a link between the third party liable for the tax—responsible—and the taxable event that created such obligation: Art. 128. Notwithstanding the provisions of this chapter, the legislation may expressly allocate the responsibility for the tax onto a third party, connected to the taxable event of the corresponding obligation, thus exempting the taxpayer from that responsibility or putting on the latter a secondary liability to fully or partially meet the said obligation.

The connection required by Article 128 must therefore be analyzed. If the taxpayer is the one with personal and direct relation with the taxable event, one can infer the existence of connections that are not personal or direct. That is why if there were a direct connection with the third party, the taxable event would have

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been generated jointly and consequently, there would be a relationship between the taxpayers. Thus, for the purpose of allocating tax responsibility, it suffices to have an indirect connection with the taxable event or with the party that carried it out, which allows the party liable for the tax—through withholding or reimbursement—to get a refund for the tax paid and the restoration of its assets. Therefore, the transfer of liability cannot be broad and unrestricted, at the risk of illegally overburdening the third parties who are held responsible for paying taxes that were unpaid by the “original” taxpayer. If the party liable for the tax is not related to the taxable event, or if the reimbursement of the expenditures by that party is not ensured, the governmental entity will be earning an amount that is undue, thus exceeding its jurisdiction. Moreover, the tax-liable party would have its wealth illegally subtracted, harming its property right. In this sense, the link to the taxable event required by the provisions of Article 128 of the National Tax Code must allow for the responsible the right to seek economic compensation from the taxpayer. It is necessary for the responsible to have control over the event, in order to avoid receiving the burden based on the existence of a legal link and not a moral or economic one, so that it is possible to demand monetary compensation from the party who undertook the taxable event— the “original” taxpayer. One can conclude that the allocation of tax responsibility on third parties requires a relationship in accordance with the legal regulations and which is somehow associated with the taxable event. Simultaneously, the existence of the tax liability cannot keep the responsible from recouping the burden it has borne in place of the taxpayer.

4 The Concept of Corporate Groups in Brazilian Law In spite of the technical excellence of its provisions, the existence of corporate groups was not addressed by the National Tax Code, especially because, at the time it was enacted—1966—that concept was not present. The absence of a clear regulation over the matter results in the use of various pieces of legislation to allocate the responsibility onto all the companies within a corporate group, once the Government seeks efficacy in tax collection at all costs. The definition of corporate group may be found in numerous fields of Brazilian law, such as corporate, labor, consumer and business law, and it changes according to the legislation applicable to the situation at hand. As to the allocation of responsibility to the members of a corporate group, the matter is also handled differently according to each field of law. In antitrust law, there is express legal provision for the joint liability of the group members with respect to obligations incurred and acts taken individually by its members. On the other hand, in corporate law, there is no general provision for the joint liability, except if the corporate veil is lifted. Since corporate groups are a reality in a globalized world, a brief presentation of the definitions of such concept consolidated in the main fields of Brazilian Law and

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their implications to allocation of tax responsibility is necessary, along with an analysis of how Brazilian Courts have dealt with the matter. In corporate law, the joining of enterprises based on control relations through capital participation takes form as corporate groups de jure, which are regulated by Statute N. 6.404/76, Corporations Act (LSA, in Portuguese). Regulated in Chapter XXI of LSA, the corporate groups de jure—practically inexistent in the Brazilian business reality1— are formally set up by means of the execution of an agreement, called corporate group convention, while the corporate groups de facto, addressed in Chapter XX of the said statute, are present when one or more companies, individually or jointly, can decide the fate of the companies situated beneath them in the chain of command— control or affiliation relation—with no formal agreement. Corporate groups are essentially formed by one or more companies, each one with its own legal personality and among which there is a link through board of directors, control, management or coordination for the conducting business. This way, some characteristics of corporate groups are the distinction among the legal personality of their members and the unity of board of directors, allowing, simultaneously, for the reduction in risk and for the growth of the business. For the very fact that their individual legal personalities are kept, the companies within corporate groups normally seek to accomplish their individual business purpose. Nonetheless, given there is an economic and strategic interest that overarches, at least in theory, the individual interests of the various companies involved—the corporate group interest—the need for a unified direction emerges, in order to coordinate the participants in the carrying out of their business activities. Thus, the unified strategy consists of delegating powers to one entity or company within the group to centralize the decision making process for the members of the corporate group. This is a broad concept, which involves many forms of coordination of the corporate group. Therefore, corporate group may be defined as a group of companies that, though with individual legal personalities, is subject to a unified strategy, which aims at accomplishing the interests that overarch each of the legal entities considered individually. It seeks, in summary, to coordinate the group’s activities in order to reach an optimal result for all its members. In corporate groups de facto, the unified decision-making lies on the hands of the controlling company. In corporate groups de jure, the decision-making process is established in the corporate group convention. As mentioned above, in corporate law, there is no provision for the transfer to the whole group of obligations that are from a single group member. The same is true for tax law, in which regulations the term “corporate group” is not even quoted. Labor legislation, on the other hand, refers to the term in article 2nd, paragraph 2 of DecreeLaw N. 5.452/43, requiring companies to be under common management, control or administration:

The various fields of Brazilian law commonly expressly define joint and several liability for the obligations of the companies within a corporate group. Moreover, there numerous bureaucratic formalities to create corporate groups of right. 1

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Art. 2○ - It is considered an employer the company, individual or collective, which, taking on the risks of the business activities, employ, remunerate and guides the personal rendering of service. [. . .] § 2○ - Whenever one or more companies, though each with an individual legal personality, are under the management, control or administration of another, thus forming a corporate group of entities in the primary, secondary of any other sector of the economy, the main company and each of the controlled ones shall have joint and several liability with respect to labor issues.

It can be noted that the main Brazilian Labor Code expands the concept used by corporate law (Yamashita and Yamashita 2015), especially because in labor law the employer’s liability is strict (not dependent on guilt, therefore, regardless of whether there was direct intervention or fault). However, the Brazilian Superior Labor Court has already issued rulings as to restrict the application of the concept of economic groups to allocate responsibility (Brazil, TST 2008). Hence, the provision that handles the labor liability, which is a result of labor relations, doesn’t come even close to the relations generated by tax law, making it impossible to use that provision in this latter field of law. Furthermore, since the principle of the rule of law in taxation—legality—requires express legal provision when dealing with the transfer of tax liability, it can be argued that the use of legal provisions from other fields of law is not legitimate and as such they are not valid tax law provisions. Thus, considering there is no specific concept in tax law and that there is also not a set of concrete rules that allow for the precise definition of when a set of companies configures a corporate group, it is necessary to assess the main criteria used in tax case law in order to characterize a corporate group. The proof of the existence of a corporate group is complex and requires extensive evidence, so that both of the following must be proven: the elements, based on which the tax authority concluded a corporate group exists; and the aspects that show the effective characterization of one of the hypothesis of tax responsibility allocation as set forth in the National Tax Code. From case precedents a series of factual circumstances were selected to allow for the characterization of corporate groups in real situations. In the Special Appeal N. 1.144.884/SC (Brazil, STJ 2010a), the following were considered enough to ascertain the existence of a corporate group: (i) sharing of facilities, employees and vehicles; (ii) conducting of transactions among the companies without consideration, such as loans without interest and free assignment of assets; (iii) existence of a power of attorney in favor of the managing partner of one of the companies, granting him management powers over the other companies; (iv) shared use of branches of the individual companies in the same address; (v) the fact that one company’s revenue was almost entirely from rent of property and vehicles to companies considered to be in the same group; (vi) factual finding that the three companies involved were run by the same person during some of the periods assessed by the tax authority. In the administrative realm, on the other hand, it is commonly required for the tax authority to show the evidence gathered, among which are: (i) existence of companies under a single command, where the main one controls the others (Brazil, CARF

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2014a); (ii) companies run by the partners as if they were a single company, sharing the corresponding economic results (Brazil, CARF 2016a); and (iii) two or more companies with the same business purpose and under a single control (Brazil, CARF 2014b). Other circumstantial evidence usually used are: (i) sharing of address, telephone (Brazil, CARF 2014a) and facilities (Brazil, CARF 2014b); (ii) similar ownership structure (Brazil, CARF 2014a); (iii) identity of the accounting department (Brazil, CARF 2014c) and exchange of employees for provision of services (Brazil, CARF 2013); as well as (iv) loans among the companies (Brazil, CARF 2014b). Now that the understanding of corporate group in the Brazilian law has been presented in general terms, the main objective of this paper will be addressed next, that is, determining in which situations there could be allocation of tax responsibility to companies within the same corporate group.

5 The Concept of Joint Liability Set Forth in Article 124 of the National Tax Code and Its Use for Allocating Tax Responsibility onto Companies Within the Same Corporate Group There are various decisions from administrative and legal courts that confirmed the joint liability for tax purposes among companies within the same corporate group, based on the provisions of Article 124 of the National Tax Code. This piece of legislation lists, generically, situations where joint liability can be enforced on different companies for tax purposes: Art. 124. The following are jointly liable: I – the parties that have a common interest in the situation that constitutes the taxable event of the principal obligation; II – the parties expressly defined by law.

The instrument, which enables enforcing the tax obligation on many entities, is a measure welcome by the tax authorities for it eases the task of tax collection, given that the possibility of imposing the tax liability on various debtors, each one with different assets, increases the chances of success in the collection of taxes. The joint liability provided for in item I takes place from a fact, which is when two parties— legal entities or natural persons—carry out the taxable event together. Actually, it wouldn’t even be necessary for a statute to establish the joint liability in this case, once it is based on the fact that both—or all—companies or individuals will personally and directly carry out the taxable event. Therefore, this is a typical case of one taxable event with more than one taxpayer. On the other hand, item II addresses the legal joint liability, which, under no circumstance, allows for the transfer of tax responsibility without the link to the taxable event (Brazil, STF 2010), since the principle of legality—rule of law—renders illegitimate the

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establishment of joint liability that breaches the limits set in the National Tax Code aforementioned. It is important to highlight that joint liability due to the existence of more than one taxpayer—e.g., more than one person carrying out the taxable event—and tax responsibility due to legal provision are distinct institutes. While the former regulates the relationship among parties liable for the payment, the latter identifies, in a general sense, who shall bear the tax burden. That is: the liability of the codebtors may be joint and several or secondary (Brazil, STJ 2008a).2 In the same way, the Administrative Counsel for Tax Appeals (CARF, in Portuguese) has already issued an opinion through Appellate Decision N. 13021302-000490 on 22.Jan.2011 (Brazil, CARF 2011), stating that: “the joint liability set forth in art. 124 of the National Tax Code is not equivalent to the responsibility hypothesis and it requires the correct legal grounds for the transfer of tax responsibility, which must be presented by the tax authority”. Considering that, once the joint liability is identified, the Tax Authority may select, at its own discretion, which party to impose taxes on, a more in-depth analysis of the instruments is imperative in order to find out if the use of such prerogative to allocate tax responsibility to companies within the same corporate group is legitimate.

5.1

On the Joint Liability as a Consequence of the Common Interest in the Taxable Event, as Set Forth in Article 124, Item I of National Tax Code

Item I of article 124 of the National Tax Code is a piece of legislation normally referred to when dealing with allocation of tax responsibility on companies within a corporate group and it has gotten more importance due to the numerous cases that reach the Judiciary, notably the Superior Court of Justice (STJ, in Portuguese). The statute determines that once the common interest is identified, the joint and several liability among the parties involved is an immediate consequence. Nevertheless, how does one define “parties with common interest in the situation that constitutes the taxable event of the principal obligation”, given the lawmaker did not present a definition? Infinite are the definitions created by the legal doctrine, case precedents and tax authorities, some of which tend to overly expand the original purpose of the legal provision and include entities that should never be treated as tax-liable party for the tax obligation. It is not any given interest that suffices to trigger the joint liability,

This is the understanding of the Superior Court of Justice, according to which: “The provisions of art. 124, item II, stating that the ‘entities defined by law’ are jointly and severally liable, do not authorize the lawmaker to create new cases of tax responsibility without abiding to the requirements of art. 128 of the National Tax Code.” 2

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because the legal provision is clear in stating that the common interest must be originated from the situation that constitutes the taxable event. The common interest is only present when the parties involved are in the same position in the situation that constitutes the juridical tax act, in other words, when these parties have shared rights and duties, which come from the same legal purpose. For instance, in the case of coownership of a property, when the parties involved jointly execute the taxable event that triggers the property tax—urban building and land tax (IPTU, in Portuguese)—and, as a consequence, are taxpayers jointly and severally liable for the payment of the tax. This notion is, however, difficult to be transferred to other taxes, such as social contribution on revenues (COFINS, in Portuguese) and corporate income tax, given their material aspects—revenue, income and profit, respectively—do not allow, obviously, for the joint acts of different legal entities, which are independent from a legal perspective. Because of that, the application of item I, article 124 of the National Tax Code to some taxes is controversial. In any case, parties that have opposing interests in a given juridical act may not simultaneously have common interests with respect to the same juridical situation. Therefore, buyer and seller do not have common interests in the sale and purchase of a good, but rather opposing interests and thus the determination of joint liability is not legitimate, with respect to the tax on goods due when the merchandise is shipped (Schoueri 2013). Even if the default is beneficial to the parties—resulting in a price reduction for the buyer, for instance—it is not a case of common interest for the purposes of allocating tax responsibility. That is because social, moral or economic interests cannot enable the allocation of joint liability. Thus, the concept of common interest must be obtained from the National Tax Code, which repeals the economic interpretation as hermeneutic method. In this sense, the mere fact that the parties belong to the same corporate group does not imply any common interest beyond that of eventual economic ones, and this does not award the allocation of tax responsibility to such companies, as ruled by the Superior Court of Justice (Brazil, STJ 2008b). Moreover, even if the existence of a simple economic interest was considered to be enough, it is pivotal to mention that not always the companies part of the corporate group have, in fact, common interests, as they are usually subject to independent professional management, which have their own—and not always coinciding— challenges and targets (de Oliveira et al. 2015). In this context, it is important to interpret the nature of the joint liability mentioned in item I, article 124 of the National Tax Code, as being liability between taxpayers, for they have personal and direct relationship with the taxable event, and consequently, common interest in the situation. In spite of this, tax authorities usually apply such legal provision as a means to justify the allocation of responsibility to companies within the same corporate group, without verifying if the companies supposedly involved have in fact carried out the taxable event jointly. Such allocation is based exclusively on the existence of an alleged common economic interest. Nevertheless, the prevailing legal precedents consider that there is only common legal interest in the event that triggered the taxation when the taxable act was carried

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out jointly by the companies acting together. And this is not due to the fact that they belong to the same corporate group, but rather for being together in the same position from a tax law perspective. In this sense, the special appeal N. 859.616/RS3 consolidated the understanding that common interest is not the same as economic interest, with the former requiring the companies to act together in the situation the constitutes the taxable event. The same understanding is found in many other precedents from the Superior Court of Justice (Brazil, STJ 2011; Brazil, STJ 2010b; Brazil, STJ 2016) and from CARF (Brazil, CARF 2016b; Brazil, CARF 2014d; Brazil, CARF 2014e), in which there are rulings that even require the tax authority to provide evidence of the joint acting of the parties. Therefore, it can be stated that, in accordance with the prevailing Brazilian case precedents, economic interest does not mean common interest, but rather legal interest, so that the mere participation in a corporate group is not enough evidence to allocate tax liability to companies that did not carry out the same taxable event (Brazil, STJ 2015). Hence, the participation in a corporate group does not automatically mean there is common interest, which would result in the application of item I, article 124 of the National Tax Code. This, however, is not to say there will never be “common interest” within corporate groups, but rather that it must be effectively proven by the tax authorities in their claims that use this regulation as basis for issuing tax-deficiency notices. For instance, take the case of an employee that works for two companies within the same corporate group, but who has only signed one employment agreement. In this case, the taxable event that triggers social security contribution is carried out together and, consequently, both companies shall be jointly liable. Finally, it is important to also highlight that illegal acts or intermingling of asset are not grounds for applying the legal provision, given the fraudulent behavior of members of a corporate group is subject to regulations that aim at avoiding tax evasion, which are not the subject of this work, except if the purpose of the offense was to conceal a fact that reveals effective common legal interest.

5.2

Joint Liability According to Article 124, Item II of National Tax Code

As explained above, item II of article 124 of the National Tax Code determines that are jointly liable the parties expressly defined by law. This wording, at first glance, leads to the belief there is broad and unrestricted powers to such designation. 3

The case involves the inclusion of Banco Alfa S/A as a tax-liable party in a tax execution proceeding, in which the claim was for the payment of service tax (ISSQN, in Portuguese) due by Alfa Arrendamento Mercantil S/A. The former was considered liable through an interlocutory order issued by a trial court and based on the fact that the companies belonged to the same corporate group. The ruling was that Banco Alfa S/A should not be liable to the taxes in that execution proceeding. STJ, Recurso Especial n○ 859.616/RS, Primeira Turma, Relator Ministro Luiz Fux, ruled on 18.Sep.2007.

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Nevertheless, it is imperative to abide by the limits established by the Constitution and the National Tax Code—designed to confer unity and coherence to the Brazilian tax system—for allocating tax responsibility. For this reason, the aforementioned item II may not be interpreted as a “blank check” to the lawmaker to act discretionarily. On the contrary, the lawmaker can only allocate liability onto the party that has a relationship with the event that triggered the tax obligation. However, the tax authorities interpret the above mentioned regulation in isolation, as they mistakenly consider the only limit to allocating joint liability is the necessity for express legal provision and this implies requirements that are clearly contrary to the National Tax System. One of these requirements is the allocation of tax responsibility to companies of the same corporate group simply because they have such relationship, but with no link whatsoever between these companies and the generation of the tax obligation, based on the provision set forth in article 30, item IX of Statute N. 8212/91, which will be studied below.

6 On the Liability on Corporate Groups with Respect to Payroll Taxes Defined in Article 30, Item IX of Statute N. 8212/91 The most straightforward case of tax responsibility allocation as a consequence of belonging to the same corporate group is in Statute N. 8212/91. Such statute expressly allocated joint and several liability to companies within any type of corporate group, with respect to paying payroll taxes provided for therein. Given the importance of the social security system—for which payroll taxes are enacted— the lawmaker tried to protect as well as to ensure the effectiveness of the collection by means of defining tax responsibility rules, among which is item IX, article 30, transcribed below: Art. 30. The collection and payment of payroll taxes or other sums due to Social Security are subject to the following rules: [. . .] IX – companies within any type of corporate group are all jointly liable for the obligations created by this Statute;

Note that the only criterion taken in consideration by this legal provision to allocate joint liability is the mere belonging to a corporate group, without any criterion that requires the link between the companies and the taxable event. According to this regulation, companies within a corporate group are automatically responsible for the payroll taxes due by the others. As to the concept of corporate group, Normative Instruction—Brazilian Federal Revenue (RFB, in Portuguese) N. 971/09 incorporated the definition from article 494 of the Brazilian Labor Code, stating that:

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Art. 494. A corporate group exists when 2 (two) or more companies are under the management, control or administration of one of them, forming an industrial, commercial or other group in any business sector.

As mentioned above, the allocation of responsibility for the tax obligation onto a third party must strictly abide by the principle of legality in taxation. Thus, it is crucial for the regulation to elect a party that is linked to the taxable event in order for it not to require an express legal provision to transfer tax responsibility or in order to be reimbursed for the amounts paid. Article 124, item II of the National Tax Code, which allows for the transfer or extension of liability by law, does not, thus, allow for the allocation of responsibility without a link to the taxable event, so that the joint liability mentioned in the statute must be interpreted within the limits of the National Tax Code. Consequently, it must be deemed illegal to allocate the responsibility for paying payroll taxes onto companies of the same corporate group only because they belong to the corporate group. It is argued that, besides belonging to a corporate group, in order for a company to be made responsible for tax obligations of other taxpayers, it is necessary that the former is connected to the taxable event. In other words, the tax authorities may only transfer responsibility to a company that has concrete decisionmaking power over the events associated with the creation of the tax obligation of the other company, hence participating in the unified decision-making process. Therefore, the tax authorities must justify and provide evidence of the existence of these requirements when the tax-deficiency notice is issued. It is believed that this method links the companies that make up the decisionmaking subgroup to the taxable event, thus making it possible both to prevent the burdening and to get reimbursed for the amounts paid, in case it is found liable in the future. This way, the requirement established in Article 128 of the National Tax Code will be complied with. It is worth noting that the other companies of the group, which are not part of the decision-making subgroup, are not associated with the situation that constitutes the taxable event, as per the requirements defined by the National Tax Code for allocating tax responsibility. To have shares in another company, to control or coordinate corporate groups does not characterize events that trigger a tax obligation, rather it normally just shows simply a possible economic interest. Thus, the mere existence of decision-making power, without any connection to the taxable event, is not a legitimate ground for the transfer of responsibility. Regardless of that, the legal and administrative case precedents have ruled differently by applying the provision indiscriminately without verifying the existence of any relationship with the taxable event, as states the following CARF decision (Brazil, CARF 2014b): It is observed that the joint and several liability for social payroll taxes is legal, meeting the requirements set forth in item II, art, 124 of the National Tax Code. The regulation is clear when it establishes that, once the existence of a corporate group is proven, be it in a legal sense or in fact, the joint and several liability among the corporate group members is automatic with respect to Social Security obligations.

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Unless proven otherwise, this understanding is incorrect both with respect to the use of article 30, item IX of Statute 8212/91—for the fact that the companies involved belong to a corporate group—and because it presumes common interest based on this fact, thus mistaking legal interest for economic interest. There are many other similar appellate decisions (Brazil, CARF 2016c). Nevertheless, still within CARF, it is worth highlighting appellate decision N. 2301-004.795 (Brazil, CARF 2016d). In this case, simulations and fraudulent practices were proven to exist with the purpose of evading payroll taxes. When assessing item IX of article 30 of Statute 8212/91, it was stated at the time that: Such provision clearly creates mechanisms to ensure tax collection, expanding the liability for such to companies that have certain proximity with the taxpayer and with the realization of the taxable event. Its wording is broad and, at least literally, is capable of encompassing tax responsibility both in a case of simple default and in a situation involving fraudulent behavior, intention or simulations by the parties involved – which can be controversial. However, there is no doubt that the drafting of the regulation and its application to the case at hand is not restricted to the literal interpretation, rather it must result from the use of other hermeneutic approaches (systematic, teleological, historic, etc.) Despite the fact that the expansion of art. 30, item IX of Statute 8212/91 may be disputed, we believe it presents an undisputed nucleus, with a minimal regulatory content, which may not be dismissed and must be sought by every interpreter and it corresponds to the role of the regulation to fight tax evasion. In other words, whenever it is proven that two or more companies have acted fraudulently, intentionally or through simulation and have carried out an act or deal that constitutes a taxable event of a principal tax obligation, with the purpose of inappropriately avoiding, reducing or deferring the payment of taxes, the mechanism of joint and several liability may be used by the tax authorities.

Note that the sentence mentions the need for the taxable event to be carried out by the companies, upon which the tax responsibility will be imposed. This represents significant progress, given the judges normally tend to apply the provision automatically, with the existence of a corporate group being the only criteria they verify. In the Superior Court of Justice, the Special Appeal N. 1.144.884/SC, ruled on 07. Dec.2010 and mentioned above, demonstrates the following understanding “in light of art. 124, item II, of National Tax Code and of art. 30, item IX, of Statute N. 8212/ 91, it suffices to verify if, based on the facts and evidences in the record, there are enough elements to characterize the existence of ‘companies that belong to any sort of corporate group’, in order to, in case there are, conclude there is joint and several liability”. This case involved a situation, in which, based on the evidence presented, the companies involved were a single entity, without any separation in fact. It can be extracted from the grounds for the appellate decision that it aimed at proving the existence of a corporate group among the companies involved and not the existence of a connection to the taxable event, which would be in accordance with the provision contained in article 128 of the National Tax Code. However, in the cases where the companies that make up a corporate group only appear to be independent—that is, independence is simply formal, and in reality there is only one company—it would be possible to allege the existence of common

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interest, which would then trigger the use of item II, article 124 of the National Tax Code, once there is no intention—which would fall under article 116, sole paragraph of the National Tax Code,4 since all companies involved would be connected to the taxable event. What is seen in the case precedents is the absence of impediments to the automatic use of article 30, item IX of Statute 8212/91, even though there are no rulings of the Federal Supreme Court about the constitutionality of the provision. Nevertheless, based on all that was presented herein, it is considered illegitimate to allocate the responsibility for collecting payroll taxes onto companies, simply and exclusively because they belong to the same corporate group (de jure or de facto).

7 Conclusion The formation of corporate groups is a legitimate business strategy according to the Brazilian legal framework and it is based on this strategy that companies come together for shared economic or business interests, but keep the corresponding legal personalities. The National Tax Code did not address the formation of corporate groups, neither did it handle the issue of allocating responsibility for paying taxes onto the different members of corporate groups. In an attempt to adapt that code to the current reality and aiming at making the tax collection more effective, the tax authorities have used the provisions of article 124—and regulations, whose validity foundations are based on this article—for allocating joint and several tax liability to companies belonging to the same corporate group. It happens that the expression “common interest”, mentioned in the first item of the said article, is not present simply because there is common economic interest, thus it requires the joint execution of the taxable event in order to legitimize the allocation of responsibility. On the other hand, the joint liability mentioned in the second item is limited by article 128 of the same Code, requiring a connection to the taxable event. In this sense, it is argued that only when a company has concrete decision-making power over the acts related to the taxable event of another company within the same corporate group it is possible to allocate responsibility on the former for obligations originally belonging to the latter, in accordance with article 124, item II of the National Tax Code. In this case, both the connection to the taxable event and the possibility of the tax burden being borne by the constitutionally defined taxpayer are present. On the other hand, the allocation of responsibility based on article 124, item I of the National Tax Code is only legitimate if there is joint action that triggers taxes.

4 Art. 116. Sole paragraph. The administrative authority may disregard juridical acts or deals carried out with the objective of omitting the occurrence of the taxable event or the nature of the elements that constitute the tax obligation, in accordance with procedures to be established in an ordinary statute.

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Furthermore, it can be cited situations involving transfer of tax responsibility for illegal acts or intermingling of assets, where the legal personality of the parties involved should not have been disregarded and transfer of liability because the companies belonged to a corporate group should also not have taken place, but rather consideration should have been given to the legal situations that have tax evasion as the goal—article 116, sole paragraph of National Tax Code. Initially, it is arbitrary and not in accordance with the general rules set forth in the National Tax Code to automatically use article 30, item IX of Statute 8212/91, if it is not proven that the allegedly liable company effectively had a connection to the taxable event. However, unfortunately, this is not what has been seen in reality, with the ever more frequent indiscriminate use of the provisions of article 124 of the National Tax Code—and of regulations that are based on it, such as article 30, item IX of Statute 8212/91—in order to ensure the timely payment of the tax obligation. Finally, it is important to emphasize that simply belonging to a corporate group is not a reason for transferring tax responsibility as per the National Tax Code and, therefore, this cannot be adopted by the tax authorities and by the Court System as justification for allocating tax responsibility onto a different company.

References Brazil. Administrative Council of Tax Appeals (CARF) (2011) Appellate decision N. 1302-00490, Rapporteur Eduardo Andrade, ruled on 22. Feb. 2011 Brazil. Administrative Council of Tax Appeals (CARF) (2013) Appellate decision N. 2301003.524, Rapporteur Adriano Gonzales Silverio, ruled on 09. Oct. 2013 Brazil. Administrative Council of Tax Appeals (CARF) (2014a) Appellate decision N. 2803003.637, Rapporteur Natanael Vieira dos Santos, ruled on 10. Sep. 2014 Brazil. Administrative Council of Tax Appeals (CARF) (2014b) Appellate decision N. 2401003.434, Rapporteur Kleber Ferreira de Araújo, ruled on 18. Mar. 2014 Brazil. Administrative Council of Tax Appeals (CARF) (2014c) Appellate decision N. 2302003.320, Rapporteur Juliana Campos de Carvalho Cruz, ruled on 26. Aug. 2014 Brazil. Administrative Council of Tax Appeals (CARF) (2014d) Appellate decision N. 1101001.117, Rapporteur Benedicto Celso Benício Júnior, ruled on 05. Sep. 2014 Brazil. Administrative Council of Tax Appeals (CARF) (2014e) Appellate decision N. 1401001.181, Rapporteur Fernando Luiz Gomes de Mattos, ruled on 09. Apr. 2014 Brazil. Administrative Council of Tax Appeals (CARF) (2016a) Appellate decision N. 2401004.025, Rapporteur Maria Cleci Coti Martins, ruled on 26. Jan. 2016 Brazil. Administrative Council of Tax Appeals (CARF) (2016b) Appellate decision N. 1201001.453, Rapporteur Roberto Caparroz de Almeida, ruled on 05. Jul. 2016 Brazil. Administrative Council of Tax Appeals (CARF) (2016c) Appellate decision N. 2201003.285, Rapporteur Carlos Henrique de Oliveira, ruled on 16. Aug. 2016 Brazil. Administrative Council of Tax Appeals (CARF) (2016d) Appellate decision N. 2301004.795, Rapporteur Fabio Piovesan Bozza, ruled on 17. Aug. 2016 Brazil. Federal Supreme Court (STF) (2010) Extraordinary Appeal N. 562.276/PR, En Banc Court, Judge-Rapporteur Ellen Gracie, ruled on 03. Nov. 2010 Brazil. Superior Court of Justice (STJ) (2008a) Special Appeal n○ 446.955/SC, First Panel, JudgeRapporteur Luiz Fux, ruled on 09. Apr. 2008

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Brazil. Superior Court of Justice (STJ) (2008b) Special Appeal n○ 834.044/RS, First Panel, JudgeRapporteur Denise Arruda, ruled on 11. Nov. 2008 Brazil. Superior Court of Justice (STJ) (2010a) Special Appeal N. 1.144.884/SC, Second Panel, Judge-Rapporteur Mauro Campbell Marques, ruled on 07. Dec. 2010. Brazil. Superior Court of Justice (STJ) (2010b) Special Appeal 1.102.894/RS, Second Panel, JudgeRapporteur Castro Meira, ruled on 21. Oct. 2010 Brazil. Superior Court of Justice (STJ) (2011) Special Appeal 1.392.703/RS, Second Panel, JudgeRapporteur Mauro Campbell, ruled on 07. Jun. 2011 Brazil. Superior Court of Justice (STJ) (2015) Special Appeal 1.153.048/PR, First Panel, JudgeRapporteur Napoleão Nunes Maia Filho, ruled on 08. Sep. 2015 Brazil. Superior Court of Justice (STJ) (2016) Special Appeal 1.511.682/PE, Second Panel, JudgeRapporteur Herman Benjamin, ruled on 08. Nov. 2016 Brazil. Superior Labor Court (TST) (2008) Appeal n○ 785822-27.2001.5.09.5555, Third Panel, Judge-Rapporteur Rosa Weber, ruled on 22. Oct. 2008 de Oliveira RM et al (2015) XL Simpósio Nacional de Direito Tributário do CEU-Escola de Direito “Grupos Econômicos”. Paper presented at the 40rd Simpósio Nacional de Direito Tributário, Magister, Porto Alegre, 06 Nov. 2015 Schoueri LE (2013) Direito Tributário (Tax Law). Saraiva, São Paulo Yamashita D, Yamashita BR (2015) Grupos Econômicos. Paper presented at the 40rd Simpósio Nacional de Direito Tributário, Magister, Porto Alegre, 06 Nov. 2015

National Report on Germany Sebastian Mock

Abstract One of the unique features of German company law is the existence of an explicit regulation for groups of companies which was finally created in 1965. However, due to its limited scope of application and some of its questionable foundations the actual law of group of companies reflects only partially the original concept of the German legislator. In fact, especially in the law of the closed corporation and partnership law the judiciary and legal scholars developed an almost independent legal system for groups of companies. This paper analyzes the legal framework of groups of companies in Germany law and discusses some recent developments in specific areas of law dealing with groups of companies.

The law of the groups of company is an import issue in German company law. This is because, in 1965, the German legislature tried to solve the problem of the growing influence of groups of companies in Germany by creating explicit provisions in the German Stock Corporation Law (Aktiengesetz [from now on GSCL]) (sections 15 ff., 291 ff. GSCL). However, this legislative approach was limited to stock corporations (Aktiengesellschaft) and to rather formal requirements especially regarding the management of a group.1 Since similar provisions do not generally2 exist in the German Law on the Closed Corporation (Gesetz betreffend die Gesellschaften mit beschränkter Haftung [GmbHG—from now on GLCC]), in the law of the commercial partnerships in the German Commercial Code (Handelsgesetzbuch [from now on GCommC]) or in the law of the civil partnerships in the German Civil Code (Bürgerliches Gesetzbuch [from now on GCC]) the application of these provisions

1

See Sect. 9 for further details. It has to be noted that single aspects of the law of groups of companies are addressed in other laws. However, a coherent and comprehensive regulation addressing all aspects of the law of groups of companies does not exist in this context. See also Sect. 1 for further details. See e.g. Beck (2017), p. 726 ff. for a detailed overview. 2

S. Mock (*) Vienna University of Economics and Business, Vienna, Austria e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_13

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analogously to other forms of companies has become an essential discussion for the German law of company groups. This development was also supported by the fact that the German legislature refused to reform or expand this rather limited set of provisions through the legislative process, leaving way then for expansion by the judiciary and recommendations by Germany’s community of legal academics.

1 Are Groups of Companies or Controlled Companies in Any Way Taken into Account in Any Area of Law? 2

From a historical point of view, groups of companies are a problem of company or general commercial law (see Sect. 1.2) since this was the area of law where the explicit provisions regarding groups of companies were created. Later, other areas such as capital markets law (see Sect. 1.3), bankruptcy law (see Sect. 1.4), accounting law (see Sect. 1.5), competition law (see Sect. 1.6), labor law (see Sect. 1.7), tax law (see Sect. 1.9) and the law governing financial or insurance institutions (see Sect. 1.13) followed. Also, the law of groups of companies is essentially influenced by European law (see Sect. 1.1). In contrast, other areas of law still do not address groups of companies. This is especially the case for environmental law (see Sect. 1.8), foreign investment law (see Sect. 1.11) or private international law (see Sect. 1.12).

1.1 3

European Law

German company law is extensively influenced by European law. More specifically, the law of the stock corporations and general commercial law were both subjected to numerous harmonization projects of the European legislature.3 However, in the law of groups of companies the respective harmonization projects were hardly successful. In 1974 the Commission issued a draft4 for a 9th Directive on Groups of Companies which was ultimately not adopted. Later, in 1984, another draft5 was published which was never sincerely considered for adoption.6 In 2003, the Commission abandoned its plan for a (complete) harmonization of the law of groups of

See e.g. Grundmann (2012), § 4. European Commission, Preliminary Draft of a Directive Based on article 54, 3 (g) on Harmonization of the Law of Groups of Companies (Part I—EEC Doc. XI/328/74-E, Part II—EEC Doc. XV/593/75-E). A German version of the draft can be found in Lutter (1984), pp. 187–225. 5 European Commission, Preliminary Draft of a Directive Based on article 54, 3 (g) on Harmonization of the Law of Groups of Companies (Doc. III/1639/84). A German version of the draft can be found in ZGR (1985), 446 ff. For a discussion of this draft, see Böhlhoff and Budde (1984). 6 See Grundmann (2012), § 4 II.1.c).; Lutter et al. (2012), p. 143 f. 3 4

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companies, deciding instead to harmonize only single aspects.7 One major aspect in that regard is the harmonization of the law on related party transactions8 by the European Shareholder Rights Directive (EU/2017/828).9 Therefore, a coherent European law on groups of companies does not exist, but is nonetheless a topic that is the subject of intense academic debate.10 Nevertheless, there are other areas of European law where a harmonized law on groups of companies exist. This is especially the case in accounting law (see Sect. 1.5), takeover law (see Sect. 1.2.4), capital markets law (in general) (see Sect. 1.3) and law governing financial or insurance institutions (see Sect. 1.13). Also, European regulation of the European Company (Societas Europaea [SE])11 partly addresses aspects of the law on groups of companies.

1.2

Company Law

Although the legal field had already become aware of the problems of group of companies as early as the 1920s, it was only in 1965 when the German legislature reacted and created a (specific) law addressing group of companies for stock corporations (Aktiengesellschaften) in sections 15 ff., 291 ff. GSCL.12

1.2.1

5

(General) Part of the Law on Groups of Companies

These provisions are separated into two major complexes. sections 15 ff. The first GSCL book contains mostly definitions.13 These provisions are not limited in their scope of application to stock corporations and apply to enterprises in general.14

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4

European Commission, Communication from the Commission to the Council and the European Parliament, Modernising Company Law and Enhancing Corporate Governance in the European Union—a Plan to Move Forward, COM(2003) 284 final. 8 See Sect. 19 for further details. 9 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, OJ L 132 of 20.5.2017, p. 1 ff. 10 See e.g. European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1 (2017); Forum Europaeum on Groups of Companies, Corporate Group Law for Europe, 1 EBOR 165 (2000). 11 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294 of 10.11.2001, p. 1 ff.; see Grundmann (2012), § 33 for further details. 12 See for a historical overview Emmerich and Habersack (2013), § 1 II. 13 See Sect. 3. for further details. 14 See Sect. 3.1.1.1 for further details.

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Substantive Rules for Groups of Stock Corporations

In contrast, sections 291 ff. GSCL (third book of the GSCL) includes substantive provisions on the law of groups of companies. These provisions follow basically a four-tier approach on how a group of companies can be organized or appears in legal practice. However, the main flaw in these provisions is their limited scope of application, which raises numerous questions, especially for the closed corporation.15

1.2.2.1 8

The first option to form a group of companies is the conclusion of an enterprise agreement (Unternehmensvertrag). Such an enterprise agreement can—pursuant to section 291 GSCL—mainly16 be formed as a control agreement (Beherrschungsvertrag) or as a profit transfer agreement (Gewinnabführungsvertrag). The idea of these enterprise agreements is that the relations of the companies of a group are basically explicitly arranged within a contract. 1.2.2.1.1

9

Concluding an Enterprise Agreement (Unternehmensvertrag)

Rationale for Concluding an Enterprise Agreement

However, it is important to point out that concluding an enterprise agreement is not mandatory. Nevertheless, the control agreement is often necessary since the management board of a stock corporation is not bound by the resolutions of the shareholder meeting of by the instructions of a (majority) shareholders.17 Consequently, the management board of a stock corporation being the controlled enterprise is basically independent from the controlling enterprise if no control agreement is concluded. Moreover, the profit transfer agreement is usually necessary to transfer capital from the controlled stock corporation to the controlling enterprise because, pursuant to section 291 subs. 3 GSCL, these transfers do not constitute a violation of the system of stated capital. Also, tax law privileges companies with an enterprise agreement since they constitute a so-called Organschaft, according to which the tax

15

See Sect. 1.2.2.5. However, other forms of enterprise agreements exist but are generally of less importance. These include a profit pool agreement (Gewinngemeinschaft—sec. 292 subs. 1 no. 1 GSCL), an agreement to transfer a share of profits (Teilgewinnabführungsvertrag—sec. 292 subs. 1 no. 2 GSCL), an agreement to lease operations (Betriebspachtvertrag—sec. 292 subs. 1 no. 3 alt. 1 GSCL) and an agreement to surrender operations (Betriebsüberlassungsvertrag—sec. 292 subs. 1 no. 3 alt. 2 GSCL). 17 This principle deviates from § 76 subs. 1 GSCL, which states that the management board has direct responsibility for the management (see e.g. Fleischer, in: Spindler and Stilz (2015), § 76 note 57 f.; Kort, in: Großkommentar zum AktG (Hirte 2015), § 76 note 5; Spindler, in: Münchener Kommentar zum AktG (Goette and Habersack 2008), § 76 note 22 ff.). 16

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base for the companies that are parties to the agreement is not determined individually but is determined collectively for all of the companies together, usually resulting in a lower tax rate.18 However, the conclusion of an enterprise agreement with a stock corporation as a controlled enterprise is rather rare, since a stock corporation always requires a two board system, thus increasing the costs for the management. In practice, the controlled enterprise of an enterprise agreement is usually a closed corporation owned by the controlling enterprise.19 1.2.2.1.2

Requirements for the Conclusion of an Enterprise Agreement

Although enterprise agreements are (simple) contracts they have a significant impact on the controlled company by de facto changing its articles of association since the purpose of the controlled enterprise is no longer to run an independent business but is instead to run its business under the control of the controlling enterprise. Therefore, the conclusion of an enterprise agreement requires the approval of the shareholders meeting of both enterprises with a ¾-majority (section 293 GSCL). In addition, the enterprise agreement must be reviewed by an independent accountant (section 293b ff. GSCL) and must be registered in the commercial register to be valid and enforceable (section 294 GSCL). See Sect. 11.1.1.1 for further details on the approval by the shareholders meeting. Under German law, the “shareholder meeting” is itself essentially a governing body separate to a certain extent from the shareholders themselves. 1.2.2.1.3

Consequences of Concluding an Enterprise Agreement

Concluding an enterprise agreement has various consequences for the controlled company, its management,20 its shareholders21 and its creditors.22

1.2.2.2

See Sect. 30 for further details. See Sect. 7.1.3 for further details. 20 See Sects. 9 and 10 for further details. 21 See Sect. 11 for further details. 22 See Sect. 14 for further details. 19

11

Integration of a Stock Corporation (Eingliederung)

The second option for the formation of a group of companies is the so-called integration of a stock corporation (Eingliederung). This integration requires that at least 95% of the shares of the stock corporation are owned by another stock corporation. In such a case, the shareholder meeting must decide to integrate the stock corporation into another stock corporation (section 319 f. GSCL). The rationale for an integration is basically the same as for concluding an enterprise

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agreement23 since the result of either is that the management board of the integrated stock corporation must comply with the directions of the controlling stock corporation. However, it must be noted that integrations of stock corporations (Eingliederung) are rather rare in legal practice since it is not privileged under tax law.24

1.2.2.3 13

14

De facto Group of Enterprises ( faktischer Konzern)

The third option—and probably the most important one—is the so-called de facto group of enterprises ( faktischer Konzern) in which an enterprise directly or indirectly (section 17 subs. 1 GSCL)25 controls a stock corporation (section 311 ff. GSCL) which is usually the case if the enterprise is the majority shareholder of the stock corporation (section 17 subs. 2 GSCL).26 The idea behind this concept is basically that the companies being involved in the group do not—in contrast to the situation under an enterprise agreement27—explicitly design their relations. Therefore, the de facto group of enterprises ( faktischer Konzern) can also be considered as a wild or an unregulated group of companies. The formation of a de facto group of enterprises ( faktischer Konzern) involves several (rather negative) legal consequences28 that—in the eye of the German legislature of 196529—are so severe that companies prefer to conclude enterprise agreements.30 However, this effect was and is still today not reflected by legal practice. The major flaw of this concept is its limited scope of application since it applies only to stock corporations.31

23

See Sect. 1.2.2.1.1. Grunewald, in: Münchener Kommentar zum AktG (Goette et al. 2015), Vorbemerkungen zu §§ 319 ff. note 9; Schmolke, in: Großkommentar zum AktG (Hirte 2013), Vorbemerkungen zu §§ 319 ff. note 8. 25 See Sect. 3.1.4.1 for further details. 26 See Sect. 3.1.4.2 for further details. 27 See Sect. 1.2.2.1. 28 These consequences include: specific reporting requirements (§§ 312 ff. GSCL—see Sect. 11.3.1.1), the option for minority shareholder to apply for a special audit (§ 315 GSCL—see Sect. 18.3.1.2.2), liability for the controlling enterprise (§ 317 subs. 1 GSCL—see Sect. 11.3.1.2) and personal liability for the member of the management board of the controlled enterprise (§ 318 subs. 1 GSCL—Sect. 16.3.2.2). 29 Official Statement of the German parliament on the Aktiengesetz 1965, BT-Drucks. IV/171, p. 228. 30 See Sect. 1.2.2.1. 31 See Sects. 7.1.3 and 7.1.4 regarding the non-application to closed corporations and partnerships. 24

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Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

The fourth and last option is cross-shareholdings (wechselseitig beteiligte Unternehmen). These cross-shareholdings were a typical phenomenon of postWWII Germany (so-called Deutschland AG32). By addressing this phenomenon in the reform of the stock corporation law in 1965, the German legislature wanted to make sure that, especially, the legal capital requirements were respected and that the managements of these corporations were still under a certain control. However, since the end of Deutschland AG in the late 1990s, the relative importance of crossshareholdings decreased. Today, these cross-shareholdings can still be found in financial or insurance companies, but outside of these limited examples, the structure is only of minor importance in legal practice.33

1.2.2.5

(General) Limitation of the Scope Application to Stock Corporations

Since sections 291 ff. GSCL are part of the third book of the GSCL these sections generally apply only to stock corporations. In creating these provisions in 1965, the German legislature assumed that groups of companies are only relevant for large enterprises that are usually organized as stock corporations.34 Therefore, for all other forms of companies, a (specific) law for group of companies does not exist in German company law. However, soon after the 1965 reform it became obvious that especially closed corporation but also partnerships could become a part of a group of companies. This thus raised the question of whether the provisions of the GSCL can or have to be applied (analogously) to other legal forms.35

1.2.3

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Merger Law (Umwandlungsrecht)

The German law on mergers (Umwandlungsrecht)36 also refers to groups of companies since mergers often, but not necessarily, result in the creation of a group of companies. Therefore, the German law on mergers provide similar instruments for the protection of minority shareholders and creditors. Nevertheless, these instruments are limited to a protection in the moment when the group is created or changed 32 This term refers to the metaphor that all German companies are basically linked to one another and form—in a metaphorical sense—a single stock corporation (AG) called “Germany Stock Corporation” (Deutschland AG). 33 Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 19 note 7. 34 Official Statement of the German parliament on the Aktiengesetz 1965, BT-Drucks. IV/171, p. 213 f. 35 See in the context of closed corporations Sect. 7.1.3 and in the context of partnerships Sect. 7.1.4. 36 It has to be noted that this law is not limited to mergers, but it also addresses divisions (Spaltung), the transfer of all assets of a company (Vermögensübertragung) and the change of the form of a company (Formwechsel).

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(so-called Gruppenbildungskontrolle) and, therefore, do not apply to the management of the group (so-called Gruppenleitungskontrolle).

1.2.4 18

Finally, takeover law also addresses groups of companies since its main purpose is to protect shareholders in a takeover which usually results in the creation of a group of companies.37 However, the German takeover law (Wertpapiererwerbs- und Übernahmegesetz [WpÜG—German Securities Acquisition and Takeover Act]) applies only to listed stock corporations.38 Therefore, shareholders of non-listed stock corporation are only protected by the (regular) law of groups of companies.

1.3 19

Capital Markets Law

Capital markets law is a rather new area of law in Germany, mainly introduced only since the 1990s and strongly connected to European law.39 As a modern regulation, capital markets law fully acknowledges the existence of group of companies and provides several provisions dealing with group of companies.40 Further, German capital markets law provides a specific protection for shareholders in the creation of a group of companies in the Wertpapiererwerbs- und Übernahmegesetz (WpÜG— German Securities Acquisition and Takeover Act).41

1.4 20

Takeover Law

Bankruptcy Law

Bankruptcy law is another rather new area of law where the German legislature dealt with the phenomenon of group of companies. Only in 2017,42 the German legislature introduced a specific set of rules in the German Insolvency Law (Insolvenzordnung—from now on GIL) that deal with the bankruptcy of companies that are a part of a group of companies. However, these rules have a rather limited

37 For Germany see Emmerich and Habersack (2013), § 9a; Hirte, in: Kölner Kommentar zum WpÜG (Hirte and Bülow 2010), Einleitung note 79 ff. with further references. 38 See Sect. 25 for further details. 39 For the influence of European law on German capital markets law see e.g. Moloney (2014), I.3.; Veil, in: Veil, European Capital Markets Law (2017), § 1. 40 See e.g. Sect. 26 for the disclosure on group information. 41 See Sect. 25 for further details. 42 Gesetz zur Erleichterung der Bewältigung von Konzerninsolvenzen as of 13.4.2017, BGBl. I, S. 866.

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scope of application since, in the case of cross-border insolvencies, the European Insolvency Regulation (EU/2015/848)43 applies, and which provides essentially the same rules. As a matter of fact, the German legislature basically copied the provisions of the European Insolvency Regulation. Consequently, the same set of rules applies in both cross-border and purely national bankruptcies.

1.5

Accounting Law

Accounting law is probably the oldest area of law in Germany where aspects of the groups of companies are addressed. Due to the limited significance of the financial statements of companies that are part of a larger group of companies, in 1931 the German legislature introduced the duty to create and publish a consolidated financial statement (Konzernabschluss).44 Nowadays, this duty is laid down in sections 290 ff. GCommC which is substantially influenced by the European Accounting Directive (2013/34/EU).45 See also Sect. 6 for further details.

1.6

Competition Law (Especially Antitrust Law)

European and German competition laws do not expressly address groups of companies. However, groups of companies are of utmost importance, especially in antitrust law. See Sect. 27 for further details.

1.7

22

Labor Law and the Law on Worker Co-determination (Mitbestimmung)

German law traditionally distinguishes between individual labor law (Individualarbeitsrecht), which addresses the relation between employees and employers and collective labor law (kollektives Arbeitsrecht), which basically addresses the involvement of employees in the organization and management of the employer.

43

21

Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings, OJ L 141 as of 5.6.2015, p. 19 ff. 44 See Kindler, in: Großkommentar zum HGB (Staub 2011), Vor § 290 note 8 ff. 45 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182 as of 29.6.2013, p. 19 ff.

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Groups of companies are addressed in both areas of labor law. See Sect. 28 for further details.

1.8 24

Groups of companies are not specifically addressed in environmental law. However, the provisions on environmental liability (Umwelthaftungsgesetz) do not specifically refer to any particular corporate form, focusing instead on the actions of the actual persons operating a facility when deciding whether a facility can be operated by a group of companies.46

1.9 25

Consumer Protection and Product Liability Law

The German law on consumer protection and product liability does not address aspects of the law on groups of companies. So far, also The relevant case law also, to date, has not found liability for the other companies that are part of a group that are not directly involved in the covered subject matter.47

1.11 27

Tax Law

German tax law provides detailed regulations for groups of companies in the context of the major taxes. The major principle is the so-called Organschaft (tax consolidation) according to which basically the profits and losses of all companies are consolidated. See Sect. 30 for further details.

1.10 26

Environmental Law

Foreign Investments Law

The German Foreign Trade Law (Außenwirtschaftsgesetz) does not explicitly deal with groups of companies but does address branches and permanent establishments.48

46

See Sect. 29 for further details. See Sect. 31 for further details. 48 See Sect. 32 for further details. 47

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313

Private International Law

The provisions on private international law barely address groups of companies. This was already the case in the (old) German private international law and is still the case in the (current) European international private law. Neither the existing European regulations on the determination of the applicable law (the so-called Rome-Regulations) nor the European regulations dealing with international jurisdictions (the so-called Brussels-Regulations) address groups of companies. Even international company law—which in Germany is still provided only by case law—does not specifically deal with groups of companies. Nevertheless, there is a growing body of both case law and publications of legal scholars that addresses cross-border groups of companies.49 Keep in mind, of course, that German courts are not, however, bound by stare decisis.

1.13

The Law Governing Financial or Insurance Institutions

The German Banking Act (Kreditwesengesetz) and the German Insurance Supervision Act (Versicherungsaufsichtsgesetz) both explicitly address groups of companies and basically develop a parallel law for groups of financial and insurance companies).50

1.14

50

29

Other Areas of Law (Regulatory Bodies, Procedural Law, etc.)

Groups of companies are also addressed in other areas of law. In these cases, the respective regulations usually refer to the terminology of the GSCL.

49

28

See Sect. 33 for further details. See Sect. 34 for further details.

30

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2 In Regard to Company Law, Are the Regulations Part of General Corporate Law? Are the Rules Part of General Private Civil or Commercial Law? 31

In company law, only the Law of Stock Corporations (Aktiengesetz) provides a coherent and comprehensive set of provisions on groups of companies, provisions which were introduced in the reform of the stock corporation law in 1965.51

2.1 32

General Part of the German Law of Groups of Companies

The first book of the Law of Stock Corporations contains several provisions (sections 15 ff. GSCL) dealing with the general and more specific definitions of groups of company. In that regard, German law distinguishes between the general term of group of companies52 (verbundene Unternehmen—section 15 GSCL53), enterprises with a majority shareholder and enterprises having a majority holding of another enterprise54 (in Mehrheitsbesitz stehende Unternehmen und mit Mehrheit beteiligte Unternehmen—section 16 GSCL55), controlled and controlling enterprises (abhängige und herrschende Unternehmen—section 17 GSCL56), groups and member of groups (Konzern und Konzernunternehmen—section 18 GSCL57) and enterprises with cross-shareholdings (wechselseitig beteiligte Unternehmen—section 19 GSCL58). Although sections 15 ff. GSCL are part of the Law of Stock Corporations, their scope of application is not limited to stock corporations. In fact, these provisions apply to all form of companies or corporations (Unternehmen) since they merely refer to enterprises.59 Therefore, these provisions basically constitute the general part of the German law of the groups of companies.60

51

See Sects. 1.2 and 34 for further details. Also translated as affiliated enterprises. 53 See Sect. 3.1.2 for further details. 54 Also translated as subsidiaries and parent enterprises. 55 See Sect. 3.1.3 for further details. 56 See Sect. 3.1.4 for further details. 57 See Sect. 3.1.5 for further details. 58 See Sect. 3.1.6 for further details. 59 See Sect. 3.1.1.1 for further details. 60 Emmerich and Habersack (2013), § 2; Schall, in: Spindler and Stilz (2015), Vor § 15 note 8; Windbichler, in: Großkommentar zum AktG (Hirte 2017), Vor §§ 15 ff. note 50 ff. 52

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315

Additional (Specific) Regulations of the German Law of Groups of Companies

Moreover, the third book of the GSCL deals with specific aspects of the law of corporate groups, such as enterprise agreements (Unternehmensverträge—sections 291 ff. GSCL61), the so-called de facto group of companies ( faktischer Konzern— sections 311 ff. GSCL62), so-called integrated companies (eingegliederte Gesellschaften—sections 319 ff. GSCL63), the exclusion of minority shareholders (or squeeze-out) (Ausschluss von Minderheitsaktionären—sections 327a ff. GSCL64) and enterprises with cross-shareholdings (wechselseitig beteiligte Unternehmen—section 328 GSCL65). The scope of application of these provision is not generally limited to stock corporations.66 However, some of the provision can only be applied to stock corporations.67

33

3 How, If at All, Are Corporate Groups or Groups of Companies Defined? Corporate groups or groups of companies are basically defined in (general) stock corporation law (see Sect. 3.1) with a larger impact on company law in general. In addition, some areas of law state separate definitions (see Sects. 3.2–3.4).

3.1

General (Stock) Corporate Law

As already pointed out, sections 15 ff. GSCL state rather detailed definitions of groups of companies which are however not limited to only one definition. In fact, sections 15 ff. to GSCL contain five definitions (see Sects. 3.1.2–3.1.6) which are all based on the fact that a legally independent enterprise is (fully or partly) controlled by another person (see Sect. 3.1.1).

61

See Sect. 1.2.2.1 for further details. See Sect. 1.2.2.3 for further details. 63 See Sect. 1.2.2.2 for further details. 64 See Sect. 25 for further details. 65 See Sects. 1.2.2.4 and 3.1.3 for further details. 66 See Sect. 7.1.3 for the application on closed corporations and Sect. 7.1.4 for the application on partnerships. 67 See Sect. 7 for further details. 62

34

35

316

3.1.1

36

Enterprises as Subject of the Definitions

Although being part of the first book of the GSCL, sections 15 ff. GSCL are not based on the assumption that only stock corporations are involved in a group of companies. In fact, sections 15 ff. GSCL use the term enterprise (Unternehmen), which itself is neither defined in the German law of groups of companies nor in German company law in general. However, the term Unternehmen covers only entities that are legally independent, have legal capacity and pursue an own business interest without being limited to a certain type of company.68

3.1.1.2 38

Group of Companies or Companies Controlled by Another Person?

The definitions in sections 15 ff. GSCL are based on enterprises and not on stock corporations (see Sect. 3.1.1.1). While this is generally unproblematic in the context of companies or corporations controlling other entities, it is still unsettled in German law whether private persons (see Sect. 3.1.1.2) and the state (see Sect. 3.1.1.3) can be considered as enterprise (Unternehmen) in the meaning of sections 15 ff. GSCL.

3.1.1.1 37

S. Mock

Private Persons as Controlling Entity?

Since the term enterprise (Unternehmen) is not clearly defined in sections 15 ff. GSCL, it remains unclear whether only companies and persons pursuing a business interest or also private persons—limiting themselves to an execution of their rights as shareholders—are also covered by this definition. Since the term enterprise (Unternehmen) indicates that a person with no interest in the business itself but only in the position of a shareholder is not be covered by this term, it is accepted nowadays that these persons are not enterprises (Unternehmen) in the meaning of sections 15 ff. GSCL.69 This is the case since the law of groups of companies in Germany mainly focuses on the protection of the controlled companies, its minority shareholders and its creditors. From their perspective, it does make a difference

68

Federal Court of Justice as of 13.10.1977 II ZR 123/76 (VEBA/Gelsenberg), BGHZ 69, 334, 335 ¼ NJW 1978, 104; Federal Court of Justice as of 16.2.1981—II ZR 168/79 (Süssen) BGHZ 80, 69, 72; Federal Court of Justice as of 16.9.1985—II ZR 275/84 (Autokran), BGHZ 95, 330, 340 ¼ NJW 1986, 188; Federal Court of Justice as of 17.3.1997 – II ZB 3/96 (VW), BGHZ 135, 107 ¼ NJW 1997, 1855; see also Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 15 note 12 ff.; Emmerich and Habersack (2013), § 2 II 1; Schall in: Spindler and Stilz (2015), § 15 note 10; Windbichler in: Großkommentar zum AktG (Hirte 2017), § 15 note 10 ff. all with further references. 69 Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 15 note 14; Windbichler, in: Großkommentar zum AktG (Hirte 2017), § 15 note 31; see also Schall, in: Spindler and Stilz (2015), § 15 note 46 discussing an application of single rules on groups of companies.

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whether a business entity or a private person (without further business interests) has the control.

3.1.1.3

State as Controlling Entity?

Also, the acquisition of shares of companies and corporations by the state— represented by the federal government or state governments—raises the question whether the state itself falls within the scope of application of sections 15 ff. GSCL. In that regard, the state would constitute some kind of super holding covering all positions it holds in companies or corporations. In this regard, it is generally accepted that the state can also constitute an enterprise in the meaning of sections 15 ff. GSCL since also in this case protection of the controlled companies, its minority shareholders and its creditors is necessary.70 Consequently, a privilege or Sonderstatus for the state as (controlling) shareholder does not exist. Although especially since the 1990s, major corporations German formally owned by the state were privatized limiting this problem this issue came up again during the 2008 financial crisis, especially in the banking sector since the German government rescued several banks by acquiring substantial holdings of these banks. In this context, the German legislature enacted some special provisions stating that certain provisions71 of the German law on groups of companies do not apply to these shareholdings. Since the legislature did not exclude the application of the sections 15 ff. GSCL but instead only excluded certain more detailed provisions, then it can be argued that the German legislature recognized the application of the sections 15 ff. GSCL on the state-owned shareholdings.

3.1.2

40

Groups of Companies (verbundene Unternehmen: Section 15 GSCL)

Section 15 GSCL defines the general term group of companies72 as legally separated enterprises that are,

70

39

Federal Court of Justice as of 13.10.1977 II ZR 123/76 (VEBA/Gelsenberg), BGHZ 69, 334, 335 ¼ NJW 1978, 104; Federal Court of Justice as of 17.3.1997 – II ZB 3/96 (VW), BGHZ 135, 107 ¼ NJW 1997, 1855; Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 15 note 38 ff. Emmerich and Habersack (2013), § 2 III 3 all with further references. 71 E.g. § 15 FMS-Beschleunigungsgesetz stating that contracts on contributions of the state to banks are not to be considered enterprise agreements of the state with the bank, therefore, explicitly excluding the application of all provisions on enterprise agreements. 72 Also translated as affiliated enterprises.

41

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S. Mock

• enterprises with a majority shareholder and enterprises having a majority holding of another enterprise (in Mehrheitsbesitz stehende Unternehmen und mit Mehrheit beteiligte Unternehmen—section 16 GSCL73), • controlled and controlling enterprises (abhängige und herrschende Unternehmen—section 17 GSCL74), • groups and member of groups (Konzern und Konzernunternehmen—section 18 GSCL75) and • enterprises with cross-shareholdings (wechselseitig beteiligte Unternehmen— section 19 GSCL76). 42

In that regard, section 15 GSCL does not provide a specific regulation but instead only generally defines the term group of companies which is important for the scope of application of sections 15 ff. GSCL.77 However, it must be noted that this definition is not exclusive to all areas of law, but is instead only for company law. Therefore, especially in the context of other areas of law,78 additional definitions and concepts apply.

3.1.3

43

Enterprises with a Majority Shareholder and Enterprises Having a Majority Holding of Another Enterprise79 (in Mehrheitsbesitz stehende Unternehmen und mit Mehrheit beteiligte Unternehmen: Section 16 GSCL)

Section 16 GSCL differentiates between enterprises with a majority shareholder and enterprises having a majority holding of another enterprise (in Mehrheitsbesitz stehende Unternehmen und mit Mehrheit beteiligte Unternehmen). A majority holding requires that a person holds either the majority of the shares (see Sect. 3.1.3.1) or the majority of the voting rights (see Sect. 3.1.3.2). In that case, the enterprise holding the majority is considered to be the majority shareholder (mit Mehrheit beteiligtes Unternehmen) and the (other) enterprise to be an enterprise with a majority shareholder (in Mehrheitsbesitz stehende Unternehmen). See Sect. 5.1.1 for the application of this definition.

73

See Sect. 3.1.3 for further details. See Sect. 3.1.4 for further details. 75 See Sect. 3.1.5 for further details. 76 See Sect. 3.1.6 for further details. 77 Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 15 note 7; Emmerich and Habersack (2013), § 2 I. 78 See Sects. 3.2–3.4. 79 Also translated as subsidiaries and parent enterprises. 74

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319

Majority of Shares

A majority holding exists if an enterprise holds the majority of the aggregate par value of shares held to the nominal capital (section 16 subs. 2 GSCL). The number of shares owned by the enterprise itself and by another person on behalf of the enterprise must be deducted from the total number of shares (section 16 subs. 2 sent. 2 and 3 GSCL). Moreover, shares held by another controlled enterprise or by another person on behalf of the enterprise or by an enterprise controlled by it must also be deducted (section 16 subs. 4 GSCL).

3.1.3.2

44

Majority of Voting Rights

Moreover, a majority holding also exists if another enterprise holds the majority of the voting rights of another enterprise. The majority is determined by the ratio of the number of voting rights exercisable in respect to the shares held by such enterprise to the aggregate number of all voting rights (section 16 subs. 3 GSCL). If the voting right of the shareholder is excluded—for whatever reason80—these voting rights must be deducted.81 Also, in this context, shares owned by the enterprise itself and by another person on behalf of the enterprise must be deducted from the total number of voting rights (section 16 subs. 3 sent. 2 GSCL). Moreover, shares held by another controlled enterprise or by another person on behalf of the enterprise or by an enterprise controlled by it must be included (section 16 subs. 4 GSCL). Shareholders’ agreements generally have no influence on the determination of the majority of voting rights, even if they provide one shareholder with a larger influence on the enterprise.82

80 This is, for example, the case if the shareholder violated his duty to notify the corporation and the German Federal Financial Supervisory Authority when he acquires 3, 5, 10, 15, 20, 25, 30, 50 or 75% of the voting rights of a listed corporation (§§ 21, 28 German Securities Trading Act). 81 Emmerich and Habersack (2013), § 2 II 1; Hüffer and Koch (2016), § 16 note 11; Schall, in: Spindler and Stilz (2015), § 16 note 35; Windbichler, in: Großkommentar zum AktG (Hirte 2017), § 16 note 35; dissenting Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 16 note 40; Koppensteiner, in: Kölner Kommentar zum AktG (Zöllner and Noack 2004), § 16 note 46 claiming that the shareholder can usually simply avoid the application of the exclusion of the voting rights by complying with the respective duties. 82 Hüffer and Koch (2016), § 16 note 11; Koppensteiner, in: Kölner Kommentar zum AktG (Zöllner and Noack 2004), § 16 note 43; dissenting Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 16 note 41; Emmerich, in: Emmerich and Habersack (2016), § 16 AktG note 25.

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3.1.4

46

Controlled and Controlling Enterprises (abhängige und herrschende Unternehmen: Section 17 GSCL)

Section 17 GSCL defines the terms controlled enterprise (abhängige Gesellschaft) and controlling enterprises (herrschende Gesellschaft), with the later requiring a controlling influence of one another (see Sect. 3.1.4.1), which is assumed in the case of a majority holding (see Sect. 3.1.4.2). The difference between the definitions in Section 16 GSCL and section 17 GSCL is basically the existence of a controlling influence. Whereas section 16 GSCL refers to the formal majority (in capital or in voting rights),83 section 17 GSCL goes further by requiring a (real) controlling influence which, however, is presumed in the case of a majority holding (see Sect. 3.1.4.2). Consequently, the definitions of section 16 and section 17 GSCL overlap to some extent. See Sect. 5.1.2 for the application of this definition of section 17 GSCL.

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Controlling Influence as Requirement for Control

The terms controlled enterprise and controlling enterprise require that the controlling enterprise is able to exert a direct or indirect controlling influence over the controlled enterprise. However, section 17 GSCL does not define the necessary extent of the controlling influence. Nevertheless, it is generally accepted that the controlling influence must be based on a legal basis requiring that the controlling enterprise can enforce its influence.84 Therefore, a controlling influence based on an economic dependency or imbalance is insufficient and does not constitute a controlling influence in the meaning of section 17 GSCL.85 Consequently, contractual arrangements dealing with rights and obligations of the entity in their regular scope of business (e.g. franchise contracts or just-in-time-contracts) do not constitute a controlling influence. Moreover, the controlling influence must enable the controlling enterprise to influence the management of the controlled enterprise. This is the case if the controlling enterprise has the right (in the articles of association) to appoint the members of corporate bodies of the controlled enterprise (Entsenderecht) or the articles of association grant an influence on the controlled enterprise. Also, shareholders’ agreements on voting rights can constitute a majority holding if they

83

See Sect. 3.1.3. Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 16 note 28; Emmerich and Habersack (2013), § 2 II 5. 85 Federal Court of Justice as of 15.12.2011—I ZR 129/10, NZG 2012, 1033 recital 16; Federal Court of Justice as of 26.3.1984—II ZR 171/83, BGHZ 90, 381, 395 f. ¼ NJW 1984, 1893; Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 17 note 29; Hüffer and Koch (2016), § 17 note 8; Windbichler, in: Großkommentar zum AktG (Hirte 2017), § 17 note 40 ff.; see also for a broader interpretation Schall, in: Spindler and Stilz (2015), § 17 note 20 ff. 84

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entitle the controlling enterprise to execute the majority of the voting rights at the general meeting of the controlled enterprise.86

3.1.4.2

Presumption of Control in the Case of a Majority Holding

In the case of a majority shareholding, the controlling influence is presumed pursuant to section 17 subs. 2 GSCL. However, it is important to note that pursuant to section 17 subs. 2 GSCL, the controlling influence is only presumed but is not actually stated in the case of a majority shareholding. Therefore, the assumption in the case of a majority shareholding can also be rebutted. Shareholders’ agreements especially can be used to rebut the presumption of section 17 subs. 2 GSCL.87 This requires that the shareholders’ agreement (partly) shifts the control one party has due to its majority holding to another party or to all parties together (so-called Entherrschungsverträge).

3.1.5

Group and Member of a Group (Konzern und Konzernunternehmen: Section 18 GSCL)

Section 18 GSCL defines the rather broad terms group (Konzern) and member of a group (Konzernunternehmen), the later which now has a rather limited relevance. The definition in section 18 GSCL distinguishes between the so-called group of subordinated enterprises (Unterordnungskonzern—see Sect. 3.1.5.1) and the so-called group of equal enterprises (Gleichordnungskonzern—see Sect. 3.1.5.2). See Sect. 5.1.3 for the application of this definition.

3.1.5.1

49

Group of Subordinated Enterprises (Unterordnungskonzern: Section 18 Subs. 1 GSCL)

The group of subordinated enterprises (Unterordnungskonzern) requires that the controlling enterprise and one or more controlled enterprises are subject to the common direction (einheitliche Leitung) of the controlling enterprise (section 18 subs. 1 GSCL). When such common direction exists, these companies form a group of companies and all (individual) enterprises are members of this group. Such a common direction of the controlling enterprise requires a common financial

Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 17 note 73; Emmerich, in: Emmerich and Habersack (2016), § 17 note 26; Hüffer and Koch (2016), § 17 note 6; see also Mock, in: Mock et al. (2018), p. 311. 87 Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 17 note 99; Emmerich, in: Emmerich and Habersack (2016), § 17 note 40; Hüffer and Koch (2016), § 17 note 2; Mock, in: Mock et al. (2018), p. 311. 86

48

50

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S. Mock

planning or a coordination of the management for the complete group.88 However, pursuant to section 18 subs. 1 sent. 2 GSCL, enterprises that are parties to a control agreement (section 291 GSCL)89 and enterprises that are integrated into one another (section 319 GSCL)90 are deemed to be a corporate group. Moreover, a group of companies is—pursuant to section 18 subs. 1 sent. 3 GSCL—presumed to exist in the case of a controlling and a controlled enterprise.

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51

In addition, section 18 subs. 2 GSCL states that also legally separated enterprises that are subject to common direction (from another enterprise) constitute a group and the individual enterprises are members of this group. The distinctive feature of this kind of group is that none of its members controls one or all other members.

3.1.6

52

Enterprises with Cross-Shareholdings (wechselseitig beteiligte Unternehmen: Section 19 GSCL)

Finally, section 19 GSCL states the definition of cross-shareholdings (wechselseitig beteiligte Unternehmen). A cross-shareholdings requires that at least two German corporations own more than 25% of the shares of one another. The relevance of this definition is rather limited since it is basically only relevant for section 328 GSCL, which includes additional reporting requirement regarding the number of shares held and limits the voting rights in the respective general meetings.91 If the crossshareholdings constitute a majority holding or one corporation has a controlling influence on the other these corporations, this can also constitute controlled and controlling enterprises.

3.2 53

Group of Equal Enterprises (Gleichordnungskonzern: Section 18 Subs. 2 GSCL)

Accounting Law

However, it is must be noted that especially accounting law applies a partially different definition. Pursuant to section 290 GCL the parent corporation (Mutterunternehmen) must draw up a consolidated financial statement if it has a controlling influence (beherrschender Einfluss) on another subsidiary undertaking

88 Bayer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 18 note 28 ff.; Emmerich and Habersack (2013), § 4 III.1.; Hüffer and Koch (2016), § 18 note 8 ff. 89 See Sect. 1.2.2.1. 90 See Sect. 1.2.2.2. 91 See Sect. 11.4 for further details.

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(Tochterunternehmen).92 Although section 290 GCL does not include an explicit definition of a group of companies, the section is based on the (same) idea that several companies can constitute a group of companies for which an additional consolidated financial statement must be drawn up and being published.

3.3

Bankruptcy Law

In German bankruptcy law, a group of enterprises (Unternehmensgruppe) is defined in section 3e subs. 1 GIL as legally separated enterprises (Unternehmen) that have their center of main interest in Germany and are directly or indirectly linked with each other. This is especially the case if one of the enterprises can exercise a controlling influence (Möglichkeit der Ausübung eines beherrschenden Einflusses—section 3e subs. 1 No. 1 GIL) or all enterprises are subject to the common direction of a controlling enterprise (Zusammenfassung unter einheitlicher Leitung—section 3e subs. 1 No. 2 GIL). In that regard, German bankruptcy law applies the definitions of sections 17 and 18 GSCL93 for a group of companies. In addition, pursuant to section 3e subs. 2 GIL, a company with a personally liable member being a corporation (with limited liability)—typically a GmbH & Co. KG—is considered to be a group of enterprises (Unternehmensgruppe) which deviates from the understanding of group of companies in section 18 GSCL. This extension of the definition of group of enterprises—compared to the definitions in sections 15 ff. GSCL—is based on the idea to concentrate the insolvency proceedings for both companies (the company with a personally liable member being a corporation and this corporation).

3.4

See Sect. 4.2 for further details. See Sects. 3.1.4 and 3.1.5. 94 See Sect. 3.2. 95 See Sect. 3.3. 96 See Sect. 34 for further details. 93

55

Other Definitions

The definitions in sections 15-19 GSCL94 and in accounting law95 are not the only definitions for groups of companies in German law but in a sense, they are the most import ones since several other regulations refer to these definitions. This is especially the case in the law of financial and insurance institutions.96

92

54

56

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4 How If at All, Is Control of a Company Defined? What Are the Differences in the Legal Definitions Provided for in the Various Areas of Law? 4.1 57

The term control is relevant in the context of defining a controlled enterprise and a controlling enterprise (section 17 GSCL) where a controlling influence is required.97 Also, the definition of a group and members of a group (section 18 GSCL) is based on the term common direction, which is essentially the same as control.98

4.2 58

General (Stock) Corporate Law

Accounting Law

In accounting law, a controlling influence (beherrschender Einfluss) over another subsidiary undertaking (Tochterunternehmen) by the parent corporation (Mutterunternehmen) is required for the provisions on consolidated accounts to be applicable. A controlling influence exists if the parent corporation (Mutterunternehmen): • has a majority of the shareholders’ or members’ voting rights in another undertaking (¼ subsidiary undertaking) (section 290 subs. 2 No. 1 GCommC); • has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or member of that undertaking (section 290 subs. 2 No. 2 GCommC); • has the right to determine the financial and general business affairs due to a control agreement or due to a provision in its memorandum or articles of association (section 290 subs. 2 No. 3 GCommC) or • bears, in an economic sense, most of the risks and opportunities of an enterprise serving a detailed purpose of the parent corporation (special purpose vehicle) (section 290 subs. 2 No. 4 GCommC).

4.3 59

Bankruptcy Law

Since the definition of section 3e GIL requires a controlling influence (beherrschender Einfluss) or common direction (Zusammenfassung unter einheitlicher Leitung), and since these terms are defined in sections 17 and 97 98

See Sect. 3.1.4 for further details. See Sect. 3.1.5 for further details.

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18 GSCL, the same principles as for these provisions99 seem to apply.100 However, it remains unclear as to whether bankruptcy law will develop its own understanding of these terms, or whether it will rely on other interpretations, for example, as found in the interpretations of stock corporation law101 or accounting law.102

5 What Are the Effects Attached to the Existence of Control or Domination? 5.1 5.1.1

General (Stock) Corporate Law Enterprises with a Majority Shareholder and Enterprises Having a Majority Holding of Another Enterprise (in Mehrheitsbesitz stehende Unternehmen und mit Mehrheit beteiligte Unternehmen)

The definition in section 16 GSCL103 is especially relevant for the regulation of certain disclosure obligations. Also, the enterprise with a majority shareholder cannot acquire shares (as a founder or subscriber) of the majority shareholder (section 56 subs. 2 GSCL). Finally, the enterprise with a majority shareholder can only acquire shares of the majority shareholder on the market (section 71d sent. 2 GSCL). Consequently, the relevance of that definition is—especially compared to the definition in section 18 GSCL (see Sect. 3.1.4. for further details)—rather limited.

5.1.2

Controlled and Controlling Enterprises (abhängige und herrschende Unternehmen: Section 17 GSCL)

The definitions of the controlled enterprise and the controlling enterprises in section 17 GSCL104 form the basis for the required application of the rules on the de facto groups of companies ( faktischer Konzern) in sections 311 ff. GSCL and, therefore, these definitions are probably together the most important definitions in the German law of the groups of companies.

99

See Sects. 3.1.4 and 3.1.5. Baumert, in: Braun (2017), § 3e note 5. 101 See Sects. 3.1.4 and 3.1.5. 102 This is implied by the official statement of the German parliament, BT-Drucks. 18/407, p. 28 f. 103 See Sect. 3.1.3. 104 See Sect. 1.2.2.3. 100

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62

Accounting Law

If the requirements of a controlling influence are met,110 then the parent corporation (Mutterunternehmen) must draw up and publish a consolidated financial statement (section 290 GCL).111

5.3 64

Group and Member of a Group (Konzern und Konzernunternehmen: Section 18 GSCL)

The definitions of group and member of a group in section 18 GSCL105 have rather limited relevance in stock corporation law since these definitions are only used in the context of voting rights (section 134 subs. 1 sent. 4 GSCL) and to determine the rights of a special auditor (section 145 subs. 3 GSCL). However, these definitions are of utmost importance for several other areas of law (e.g. the law on workers co-determination106), since they usually refer to section 18 GSCL. Groups of equal enterprises (Gleichordnungskonzern) are especially relevant in anti-trust law.107 Moreover, it must be noted that section 18 subs. 1 sent. 2 GSCL refers to enterprise agreements108 and the integration of a stock corporation,109 both of which have severe consequences.

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Bankruptcy Law

If an enterprise is part of group of enterprises under section 3e GIL,112 then the debtor can apply for the determination of a so-called group place of jurisdiction (Gruppengerichtsstand), which is the place where the insolvency proceedings for all enterprises for the group of enterprises under section 3e GIL must be commenced (section 3a GIL). In addition, the insolvency court in the group place of jurisdictions—and other places where someone may file for insolvency related to the group of enterprises—must consider appointing only one person as an insolvency trustee for all of the covered enterprises (section 56b GIL). Also, the insolvency courts, the appointed insolvency trustees and the committees of creditors of all enterprises of

105

See Sect. 3.1.5. See Sect. 28 for further details. 107 See Sect. 27 for further details. 108 See Sect. 1.2.2.1. 109 See Sect. 1.2.2.2. 110 See Sect. 4.2. 111 See Sect. 6 for further details. 112 See Sect. 4.3. 106

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such a group of enterprises under section 3e GIL have the duty to coordinate the proceedings (sections 269a ff. GIL). For that purpose, a separate coordination insolvency trustee (Verfahrenskoordinator) can be appointed (sections 269e ff. GIL). However, it must be noted that German bankruptcy law does not automatically adhere liability to the management or to the other member enterprises merely because insolvency proceedings were commenced.113

6 What Are the Rules on Disclosure and Accounting? In German accounting law, the parent corporation (Mutterunternehmen) must draw up a consolidated financial statement that covers both itself and all subsidiary undertakings (Tochterunternehmen) over which the parent corporation has a controlling influence114 (section 290 GCL).115 Therefore, the consolidated financial statement represents, in a way, the financial statement for the entire group of companies. This consolidated financial statement must contain a consolidation of the assets, the liabilities and the equity of all of the companies belonging to that group (sections 300 ff. GCL), and the consolidated financial statement must be drawn up in accordance with German accounting law. However, a notable exception being that parent corporations listed on a stock exchange must apply the International Financial Reporting Standards (IFRS) (section 315e GCL) and not German accounting standards. Once the consolidated financial statement has been drawn up by the management board (Vorstand), it must then be reviewed and approved by the supervisory board (Aufsichtsrat) (section 171 GSCL). If the supervisory board does not approve the consolidated financial statement, then the general shareholder meeting must approve it (section 173 subs. 1 sent. 2 GSCL). The consolidated financial statement must also be reviewed by an auditor (section 316 subs. 2 GCL). Afterwards, the parent corporation (Mutterunternehmen) must publish the consolidated financial statement (section 325 subs. 3 GCL) in the national enterprise register (Unternehmensregister) where everybody has free access via the internet (www.unternehmensregister.de). However, the scope of the consolidated financial statement is limited to providing information to all interested parties. Therefore, for example and perhaps most notably, shareholders cannot make claims for profit distributions based only the presence of profits in the consolidated financial statement.

113

See Sect. 22 for further details. See Sect. 4.2 for further details. 115 See for further details Wöhe and Mock (2010), p. 179 ff. 114

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7 Are the Regulations, If Any, on Groups and Control of a General Kind or Are There Differences According to the Company’s Form (Corporations, Limited Liability Companies, Partnerships, etc.)? 7.1 7.1.1 68

Stock Corporations (Aktiengesellschaft) and European Company (Societas Europaea)

The rules for groups of companies in sections 15 ff., 291 ff. GSCL118 apply first to the stock corporation (Aktiengesellschaft or AG) since these rules are part of the German Stock Corporation Law. The rules, however, also apply to a European Company (Societas Europaea) if it is founded in Germany since the SE-Regulation does not state a separate law for corporate groups and, in that case, German stock corporation law would apply (Article 9 subs. 1 lit. c) SE-Regulation).

7.1.3 70

General Part of the Law on Corporate Groups

The de facto general part of the law on corporate groups in sections 15 ff. GSCL applies to all forms of companies or corporations although these provisions are stated in the first book of the GSCL.116 However, since these provisions only include several definitions, their larger impact is rather limited.117

7.1.2

69

Corporate and Company Law

Closed Corporation (Gesellschaft mit beschränkter Haftung)

In contrast, the GLCC does not provide a separate set of rules for groups of companies, although in legal practice the closed corporation (the GmbH) is by far the most common form of company that is found as a part of a group of companies. Due to the similarities between the GmbH and the AG, the general analogous application of the rules on stock corporation to the closed corporation is heavily debated in Germany.119 So far, it is only generally accepted that the (majority of the)120 provisions on enterprise agreements (sections 291 to 310 GSCL) can be 116

See Sect. 1.2.1. See Sect. 5.1 for the effects attached to these definitions. 118 See Sects. 1.2.1 and 1.2.2. 119 For an overview on the discussion see Emmerich and Habersack (2013), § 29 with further references. 120 This is especially the case for sections 308-310 GSCL (see Sects. 10.1.2 and 16.1.2). So far unsettled aspects are, most notably, the majority requirements for the approving shareholders resolution (see Sect. 13.1.2) and the protection of minority shareholders (see Sect. 13.1.2). See 117

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applied analogously to the closed corporation.121 Enterprise agreements with closed corporation as controlled entities are quite common since they grant tax advantages.122 However, especially the rules on the de facto group of companies ( faktischer Konzern—sections 311 ff. GSCL)123 cannot be applied to closed corporations since the regular law on closed corporations and the general principles of company law provide a sufficient set of rules for the protection of the closed corporation itself, of its creditors and its minority shareholders.124 Also, the provisions on the integration of enterprises (section 319 ff. GSCL)125 cannot be applied directly or indirectly to closed corporations.126 The same applies to the provisions on cross-shareholdings (sections 19, 328 GSCL).127,128

7.1.4

71

72

Civil, Commercial and Limited Liability Partnerships (Gesellschaft bürgerlichen Rechts, offene Handelsgesellschaft and Kommanditgesellschaft)

Finally, none of the laws on civil partnerships (Gesellschaft bürgerlichen Rechts), commercial partnerships (offene Handelsgesellschaft) and limited liability partnerships (Kommanditgesellschaft) provide a specific regulation if one of these companies is a member of a group. In contrast to the GmbH law, it is rather unsettled and disputed as to whether the provisions on control and profit transfer agreements (sections 291 to 310 GSCL)129 can be applied analogously since they interfere with general principles of the law applied to these forms of companies.130 However, also Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 94 ff.; Emmerich and Habersack (2013), § 32; Servatius, in: Michalski et al. (2017), Konzernrecht note 34 ff. for a detailed analysis. 121 Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 94 ff.; Emmerich and Habersack (2013), § 32; Servatius, in: Michalski et al. (2017), Konzernrecht note 34 ff. 122 See Sect. 30 for further details. 123 See Sect. 1.2.2.3 for further details. 124 Federal Court of Justice as of 5.6.1975—II ZR 23/74 (ITT), BGHZ 65, 15, 18 ¼ NJW 1976, 191; Federal Court of Justice as of 16.9.1985—II ZR 275/84 (Autokran), BGHZ 95, 330, 340 ¼ NJW 1986, 188; Federal Court of Justice as of 17.9.2001—II ZR 178/99 (Bremer Vulkan), BGHZ 149, 10, 16 ¼ NJW 2001, 3622; see also Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 29 ff.; Emmerich and Habersack (2013), § 30; Servatius, in: Michalski et al. (2017), note 392 ff. 125 See Sect. 1.2.2.2. 126 Grunewald, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 319 note 8 ff.; Schmolke, in: Großkommentar zum AktG (Hirte 2013), § 319 note 3 ff. 127 See Sect. 1.2.2.4. 128 Grunewald, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 328 note 3 f. 129 Section 1.2.2.1. 130 For an overview on the discussion Emmerich and Habersack (2013), § 34 IV; Mülbert, in: Münchener Kommentar zum HGB (Schmidt 2012), KonzernR note 30 ff.

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it must also be noted that some legal scholars claim that partnerships generally cannot conclude enterprise agreements as this would be contrary to public policy (section 138 GCC).131 Also, the rules on the de facto group of companies ( faktischer Konzern—sections 311 ff. GSCL)132 cannot be applied to these company forms since also, in this context, general concepts of company law already apply making it not necessary to apply analogously sections 311 ff. GSCL.133 In contrast, the provisions on the integration of enterprises (section 319 ff. GSCL)134 cannot be applied directly or indirectly to partnerships.135 The same applies to the provisions on cross-shareholdings (sections 19, 328 GSCL).136,137

7.2 76

Accounting Law

In German accounting law, the provisions governing consolidated financial statements apply generally only if the parent undertaking (Mutterunternehmen) is a corporation (section 290 subs. 1 GCL). Therefore, these provisions are, in general, limited to the stock corporation (AG), the closed corporation (GmbH) and the European Company (Societas Europaea). However, these provisions can also apply to hybrid forms. For example, take the GmbH & Co. KG, a special form of a limited partnership (KG) whereby the general partner is not a natural person but is instead a limited liability corporation (GmbH). Although the GmbH & Co. KG does not explicitly fall into one of the three categories above, a special limited partnership will nonetheless be required to draw up consolidated financial statements if it has a controlling influence (beherrschender Einfluss) over another subsidiary undertaking (sections 264a, 290 GCL). All other forms of companies are not covered by these provisions.

7.3 77

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Bankruptcy Law

The provisions in German bankruptcy law for groups of companies apply to all enterprises (Unternehmen) and are, therefore, not limited to certain company forms.

131

Haar (2006), S. 268 ff.; Schmidt (1981), p. 477 f.; Schneider (1975), p. 265 ff. Section 1.2.2.3. 133 Emmerich and Habersack (2013), § 34 III; Mülbert, supra note 130, KonzernR note 30 ff. 134 See Sect. 1.2.2.2. 135 Grunewald, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 319 note 8 ff.; Schmolke, in: Großkommentar zum AktG (Hirte 2013), § 319 note 3 ff. 136 See Sect. 1.2.2.4. 137 Grunewald, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 328 note 3 f. 132

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8 Is the Group Recognized as a Unified Business Organization? As a Legal Entity? 8.1

No Recognition as Legal Entity

A group of enterprises is not recognized as a legal entity under German law. It can neither establish its own rights nor does it have the capacity to take legal actions.

8.2

Recognition as Unified Business Organization

However, the question as to whether a group of enterprises is recognized as a unified business organization is rather difficult to answer because in some areas of law the group of enterprises is indeed treated to some extent as a single business organization. This is especially the case in the law of workers co-determination since the calculation of the thresholds is based on the workers in all entities belonging to the group and the workers—if the thresholds are met—are represented only in the supervisory board of the controlling entity.138 Similarly, in bankruptcy law, the group is considered to be a unified business organization since the existence of a group is the basis for the appointment of the same insolvency trustee and the duty of cooperation.139 Also in accounting law, the parent corporation must prepare a single consolidated financial statement for the whole group that reflects the financial information of the group in general.140 Further still, in general company law, there are some tendencies to recognize the group of enterprises as a unified business organization. One major development in this context is the attribution of knowledge within a group of enterprises (Wissenszurechnung).141 As a general principle, the mere fact that several entities constitute a group of companies is an insufficient basis to attribute knowledge in one entity to another or all entities. Therefore, if a certain fact is known only to a representative of one entity of the group, then the other entities can still claim that they had no knowledge.142 In fact, an attribution of knowledge can only be assumed

138

See Sect. 28 for further details. See Sect. 5.3 for further details. 140 See Sects. 5.2 and 6. 141 For a detailed discussion see Schürnbrand (2017), p. 357 ff. 142 Higher Regional Court Hamm as of 19.2.2001—5 U 217/00, BKR 2002, 958 stating that knowledge of the seller cannot be simply imputed to the bank financing the purchase when the seller and the bank are members of the same group of companies; see also Schubert, in: Münchener Kommentar zum BGB (2015a), § 166 note 61 with further references. 139

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if several entities of the group collaborate, which is usually the case if the group is under a common direction.143

9 What Are the Rules Regarding Group Management (Unified Direction, einheitliche Leitung, direzione unitaria, dirección unificada, etc.)? 81

The substantive German law on corporate groups generally distinguishes between four different scenarios in which the management of the group can be based.144 These are the conclusion of a control agreement (see Sect. 9.1), the integration of an enterprise (see Sect. 9.2), the de facto group of enterprises (see Sect. 9.3) and the cross-shareholdings (see Sect. 9.4). In this context, it is of utmost importance to note that the respective provisions do not apply to all forms of companies.

9.1 82

Control Agreements

The conclusion of a control agreement145 enables the management board of the controlling enterprise to give directions to the controlled enterprises’ management board and the same management board is then obligated to comply with these directions (section 308 GSCL). This, however, is only relevant for the stock corporation because its management board is usually independent and not bound by any directions. In the case of closed corporations—to which section 308 GSCL applies analogously146—such a power to give directions is basically not necessary since the management of a closed corporation is already bound by resolutions at the shareholders meeting where, in the case of a group of companies, the controlling shareholder has the majority. The same applies to other forms of companies, especially partnerships.147 See also Sects. 10.1 and 16.1 for the competences, duties and liabilities of the board members.

143 Schubert, in: Münchener Kommentar zum BGB (2015a), § 166 note 62; Schürnbrand (2017), 357 ff. 144 See also Sect. 1.2.2 for a general overview of these concepts. 145 See Sect. 1.2.2.1. 146 Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 308 note 5; Beurskens, in: Baumbach and Hueck (2017), note 94; Emmerich, in: Emmerich and Habersack (2016), § 308 note 9. 147 Mülbert, in: Münchener Kommentar zum HGB (Schmidt 2012), KonzernR note 237.

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333

Integration of Enterprises

In the case of an integrated stock corporation, section 323 GSCL basically states the same as section 308 GSCL for the control agreement148 since it enables the controlling enterprise to give directions to the management board of the controlled enterprise. See Sects. 7.1.3 and 7.1.4 for the limitation of the integration of enterprises to stock corporations.

9.3

De facto Group of Enterprises ( faktischer Konzern)

In a de facto group of enterprises ( faktischer Konzern),149 the power of the controlling enterprise is limited. Pursuant to section 311 subs. 1, the controlling enterprise can only exercise its influence to cause the controlled enterprise to undertake or refrain from an undertaking a disadvantageous transaction or act, unless this disadvantage is compensated.150 However, it must be noted that section 311 GSCL applies only to the stock corporation and it notably does not apply to the closed corporation where, however, similar rules derived from general principles apply.151 See also Sects. 10.3 and 16.3 for the competences, duties and liabilities of the board members.

9.4

See Sect. 9.1. See Sect. 1.2.2.3 for an overview of this concept. 150 See Sect. 10.3 for further details. 151 See Sect. 16.3 for further details. 152 See Sect. 1.2.2.4 for an overview of this concept. 149

84

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

Section 328 GSCL on cross-shareholdings152 does not state any specific rules on group management.

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10

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What Are the Organic Competences Through the Different Entities Which Are Members of a Group?

Also, in this context, the substantive German law on corporate groups generally distinguishes between four different scenarios on which the management of the group can be based. These are the conclusion of a control agreement (see Sect. 10.1), the integration of an enterprise (see Sect. 10.2), the de facto group of enterprises (see Sect. 10.3) and the cross-shareholdings (see Sect. 10.4). In this context, it is of utmost importance to note that the respective provisions do not apply to all forms of companies.

10.1

Control Agreements

10.1.1

Stock Corporation

10.1.1.1 87

88

All members of a company’s management board have typical duties. Moreover, they have the (additional) power to give instructions to the management board of the controlled enterprise (section 308 subs. 1 GSCL). If the control agreement does not state otherwise the management board can also give instructions that are disadvantageous to the controlled enterprise (section 308 subs. 1 sentence 2 GSCL [Konzerninteresse]). See Sect. 10.1.1.2.1 for the limitations regarding the instructions. See Sect. 16.1.1.1 for the management board members’ duties and liabilities. The supervisory board of the controlling enterprise has the typical duties. However, its duties to supervise the management board also applies to the instructions given by the management board of the controlling enterprise to the management board of the controlled enterprise. See Sect. 16.1.1.1 for the supervisory board members’ duties and liabilities.

10.1.1.2 10.1.1.2.1 89

Controlling Enterprise

Controlled Enterprise Management Board

The management board of a controlled stock corporations has the typical duties. However, the board must comply with the directions of the management board of the controlling enterprise (section 308 subs. 2 GSCL) even if such instructions do not, in the board’s opinion, serve the interests of the controlled enterprise or of affiliated enterprises that are members of the same group, provided with the caveat that such instructions must not manifestly such interests (section 308 subs. 2 sentence 2 GSCL). If the management board of the controlled enterprise has been instructed to undertake a transaction which requires the consent from the controlled enterprise’s

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supervisory board, and such consent has not been granted within a reasonable period of time, then the management board of the controlled company shall inform the controlling enterprise thereof. If the management board of the controlling enterprise repeats the instruction, then in this case consent from the controlled enterprise’s supervisory board is not necessary (section 308 subs. 3 GSCL). However, this instruction must then be approved by—if one exists—the supervisory board of the controlling enterprise (section 308 subs. 3 GSCL). See Sect. 16.1.1.2. for the management board members’ duties and liabilities. Although section 308 subs. 2 GSCL states that the controlled enterprise’s management board must comply with the instructions of the controlling enterprise, this duty to follow instructions is subject to several limitations. The first limitation is set out by the objects clause in the articles of association. Therefore, the controlling enterprise cannot give instructions that would constitute a violation of the objects clause of the controlled enterprise.153 Furthermore, the instruction may not violate a statutory prohibition (section 134 GCC) or be contrary to public policy (section 138 GCC).154 However, in this context it is important to note that section 291 subs. 3 GSCL exempts from the limitations of the system of capital maintenance transfers of capital between the two enterprises. Therefore, hidden distributions are also admissible.155 Finally, the controlled enterprises’ management board does not have to comply with instructions that could endanger the very existence of the controlled enterprise.156 Examples of this include excessive distribution of liquidity,157 stopping production that is essential for the survival of the controlled enterprise,158 transfer or spin-off of the enterprise’s most profitable branches or divisions and the granting of loans to other enterprises of the group without proper

153 Higher Regional Court of Düsseldorf as of 7.6.1990—19 W 13/86 (DAB/Hansa), AG 1990, 490, 492; Higher Regional Court of Nuremburg as of 9.6.1999—12 U 4408/98, NZG 2000, 154, 155; Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 308 note 134 f.; Emmerich and Habersack (2013), § 23 IV 1; Hirte, in: Großkommentar zum AktG (Hirte 2013), § 308 note 40. 154 Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 308 note 101; Emmerich and Habersack (2013), § 23 IV 2; Hirte, in: Großkommentar zum AktG (Hirte 2013), § 308 note 37 ff.; Hüffer and Koch (2016), § 308 note 14. 155 See Sect. 19 for further details on related party transactions. 156 Higher Regional Court of Düsseldorf as of 7.6.1990—19 W 13/86 (DAB/Hansa), AG 1990, 490, 492; Regional Court of Munich as of 5.4.2012—5 HK O 20488/11, NZG 2012, 1152; Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 308 note 119 ff.; Emmerich and Habersack (2013), § 23 IV 3; Hirte, in: Großkommentar zum AktG (Hirte 2013), § 308 note 42 ff.; dissenting Koppensteiner (1995), p. 96; Wellkamp (1993), p. 2156 f. 157 Emmerich and Habersack (2013), § 23 IV 3; Hirte, in: Großkommentar zum AktG (Hirte 2013), § 308 note 43; Hommelhoff (1984), p. 1112 ff.; see also Federal Court of Justice as of 17.9.2001— II ZR 178/99 (Bremer Vulkan), BGHZ 149, 10 ¼ NJW 2001, 3622 (decided for a closed corporation). 158 Higher Regional Court of Düsseldorf as of 7.6.1990—19 W 13/86 (DAB/Hansa), AG 1990, 490, 492; Emmerich and Habersack (2013), § 23 IV 3.

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collateralization.159 This limitation to the power to give instructions is derived from the fact that the provisions on enterprise agreements basically assume that the enterprise agreement will end some day and will leave behind an independent stock corporation. The power, however, that the controlling enterprise has to end the stock corporation through insolvency or liquidation would seem to be contrary to this perception. This also means, on the other hand, that the power to give instructions is not limited by the fact that the controlled enterprise might not be able to survive in the long run after the termination of the enterprise agreement.160 The management board is also still bound by the general duties set out by section 93 GSCL.161 10.1.1.2.2

92

The supervisory board of the controlled enterprise is not directly affected by the control agreement. Therefore, it still has the typical duties. However, if its approval of decisions of the management board is necessary, then the supervisory board can be overruled (section 308 subs. 3 GSCL). See Sect. 16.1.1.2 for the supervisory board members’ duties and liabilities.

10.1.2 93

Supervisory Board

Closed Corporation

In the case of a closed corporation (GmbH), the duties of the manager (Geschäftsführer) of the controlled closed corporation and the management board of the controlling enterprise are the same as for the stock corporations since especially section 308 GSCL162 and its limitations163 are applied analogously. However, since the shareholder meeting of a closed corporation can also give instructions to the manager (section 37 subs. 1 alt. 2 GLCC), a conflict can arise between the instructions of the management board of the controlling enterprise and the shareholder meeting (of the controlled closed corporation). In such a conflict, it is

159 Higher Regional Court of Munich as of 11.7.1979 -15 U 1532/78 (Kolb Wohnungsbau AG), AG 1980, 272; Higher Regional Court of Düsseldorf as of 7.6.1990—19 W 13/86 (DAB/Hansa), AG 1990, 490, 492; Emmerich and Habersack (2013), § 23 IV 3. 160 Emmerich and Habersack (2013), § 23 IV 3; Hirte, in: Großkommentar zum AktG (Hirte 2013), § 308 note 42. 161 See Sect. 16 for further details. 162 Beurskens, in: Baumbach and Hueck (2017), note 119 f.; Emmerich and Habersack (2013), § 32 II 8; Servatius, in: Michalski et al. (2017), note 121 ff.; see also Federal Court of Justice as of 24.10.1988—II ZB 7/88 (Supermarkt), BGHZ 105, 324, 332 ¼ NJW 1989, 295 stating that the management board of the controlling enterprise has the power to give instructions to the manager of the closed corporation in the case of a control agreement without explicitly referring to section 308 GSCL. 163 Beurskens, in: Baumbach and Hueck (2017), note 120; Emmerich and Habersack (2013), § 32 II 8; Servatius, in: Michalski et al. (2017), note 129.

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generally assumed—but not yet confirmed by case law—that the instructions by the management board of the controlling enterprise take precedence over those of the shareholders meeting.164 However, the shareholder meeting remains in control of fundamental changes, which, as is also the case for a control agreement, still require the approval of the shareholders meeting.165

10.1.3

Partnerships

These principles set out in paragraph 93 also apply to partnerships.166 However, the limitations of the power to give instructions apply, to a larger extent, since the members of a partnership are usually personally liable to the creditors.167 In this context, it has to be noted that these principles, are so far, not definitively confirmed by case law.

10.2

Integration of Enterprises

The integration of an enterprise results basically in the same consequences as the conclusion of a control agreement168 because section 323 GSCL refers to section 308 GSCL. However, the management board of the integrated enterprise has no right to refuse the exercise of the instructions even if the instructions are disadvantageous or manifestly do not serve the interests of the integrated enterprise since section 323 GSCL does not refer to section 308 sub. 2 sentence 2 GSCL. Nevertheless, the general limitations apply in this context.169

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Beurskens, in: Baumbach and Hueck (2017), note 119; Servatius, in: Michalski et al. (2017), note 125. 165 Emmerich and Habersack (2013), § 32 II 8; dissenting Servatius, in: Michalski et al. (2017), note 124. 166 Emmerich and Habersack (2013), § 34 IV 2; Mülbert, in: Münchener Kommentar zum HGB (Schmidt 2012), KonzernR note 149. 167 Emmerich and Habersack (2013), § 34 IV 2. 168 See Sect. 10.1. 169 Grunewald, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 323 note 5 f.; Schmolke, in: Großkommentar zum AktG (Hirte 2013), § 323 note 2 ff.

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10.3

De facto Group of Enterprises

10.3.1

Stock Corporation

The competences of the management board and the supervisory board remain untouched in the case of a de facto group of enterprises. The management board of the controlling enterprise does not have the power to give instructions to the management board of the controlled enterprise without compensating the controlled enterprise (section 311 GSCL).170 Therefore, as long as there is no compensation, then the controlled enterprise’s management board does not have to comply with any instructions received from the management board of the controlling enterprise.

10.3.2 97

Partnerships

These principles set out in paragraph 97 also apply to partnerships.172

10.4

99

Closed Corporation

Since the provisions on the de facto group of enterprises (sections 311 ff. GSCL) do not apply to closed corporations, the competences of the management of a closed corporation remain untouched. However, since the controlling corporation in its role as a major shareholder of the closed corporation is nonetheless bound by the duty of loyalty (Treuepflicht), similar restriction as imposed by section 311 GSCL apply.171 See Sect. 16 for the supervisory board members’ duties and liabilities.

10.3.3 98

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Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

Finally, in the case of cross-shareholdings, no additional competences are created. See Sect. 16.4 for the supervisory board members’ duties and liabilities.

170

See Sect. 12.1.1 for further details. See Sect. 11.3.2.1 for further details. 172 Emmerich and Habersack (2013), § 34 III; Mülbert, in: Münchener Kommentar zum HGB (Schmidt 2012), KonzernR note 142 f. 171

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How Are Minority Shareholders Protected in a Subsidiary (Conflicts of Interests, Related Party Transactions, Voting Restrictions, Majority and Minority Abuse, Tolerance to Deviations from the Company’s Interest (intérêt social, Gesellschaftsinteresse, interés social)?

Again, as mentioned already above, in this context the substantive German law on corporate groups generally distinguishes between four different scenarios on which the management of the group can be based. These are the conclusion of a control agreement (see Sect. 11.1), the integration of an enterprise (see Sect. 11.2), the de facto group of enterprises (see Sect. 11.3) and the cross-shareholdings (see Sect. 11.4). Also, it is of utmost importance to note that the respective provisions do not apply to all forms of companies.

11.1

Enterprise Agreements

11.1.1

Stock Corporation

11.1.1.1

Providing of Information and the Requirement That the Shareholders Meeting Approve the Enterprise Agreement

The first basic approach for the protection of the minority shareholder is the disclose of the conclusion of the enterprise agreement to the shareholders. To guarantee that the shareholders have complete and sufficient information, the management boards of both enterprises must prepare a comprehensive written report on the enterprise agreement covering prior to the execution of the agreement, inter alia, the background of how the enterprise agreement came about and, especially, the compensation173 and the acquisition of shares against adequate settlement (appraisal right)174 offered (section 293a GSCL). Moreover, the enterprise agreement must be reviewed by two accountants unless all shares of the controlled enterprise are owned by the controlling enterprise (section 293b GSCL). These accountants, which are appointed by a court based on a selection by both management boards (section 293c GSCL), must also review the compensation175 and the acquisition of shares against adequate settlement176 offered by the controlling enterprise but are in that regard are not

173

See Sect. 11.1.1.2.1 for further details. See Sect. 11.1.1.2.2 for further details. 175 See Sect. 11.1.1.2.1 for further details. 176 See Sect. 11.1.1.2.2 for further details. 174

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obliged to prepare a (new) valuation of the controlled enterprise.177 Their audit report (section 293e GSCL) must be distributed to the shareholders at the shareholder meeting during which the conclusion of the enterprise agreement (sections 293f f. GSCL) will be approved. The accountant can be held personally liable be the shareholders (section 293d GSCL). The shareholder meetings of both enterprises must approve the conclusion of the enterprise agreement with a three-quarter supermajority (section 293 subs. 1 GSCL). Despite their complexity, these provisions provide only a rather limited protection to the minority shareholders since it is usually the controlling enterprise that owns a majority of the shares of the controlled entity.178

11.1.1.2 103

Compensation/Acquisition of Shares Against Adequate Settlement

The conclusion of an enterprise agreement does not directly limit the rights of the minority shareholders of the controlled enterprise. However, since the conclusion of the enterprise agreement constitutes a de facto change of the articles of association,179 section 304 f. GSCL essentially offers the minority shareholders the choice to either keep their shares and receiving compensation for the time of the control or profit transfer agreement (Ausgleich—section 304 GSCL) or to force the controlling enterprise to acquire the shares for an adequate price (Abfindung—section 305 GSCL). This freedom of shareholder choice cannot be limited by the articles of association or in the enterprise agreement. 11.1.1.2.1

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Compensation (Ausgleich: Section 304 GSCL)

If the minority shareholder (of the controlled enterprise—the so-called außenstehende Atkionäre) remains in his position as shareholder, then he can claim from the controlling shareholder adequate compensation in the case of a control or profit transfer agreement (section 304 subs. 1 GCL). The controlling shareholder must offer such compensation in the control or profit transfer agreement because otherwise the control or profit transfer agreement is considered null and void (section 304 subs. 3 GSCL). The compensation must be not less than the amount which the shareholder could have been expected to receive as the average dividend for each share in view of the past profitability of the company and its prospective profits, considering adequate depreciation and reserves for declines in value but exclusive of other profit reserves (section 304 subs. 2 GSCL). By referring to the future (hypothetical) dividends, section 304 subs. 2 GSCL basically adopts the discounted cash-flow method (Ertragswertmethode) to determine the

Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 293b note 8; Mülbert, in: Großkommentar zum AktG (Hirte 2013), § 293b note 17 ff. 178 See Sect. 1.2.2.1.2. 179 See Sect. 1.2.2.1. 177

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compensation.180 In this context, the standards used by the auditor engaged providing details on the calculation of the compensation181 are, however, not binding since they were only developed and published by a private organization (of auditors) (e.g., XXX).182 If the controlling enterprise does not offer adequate compensation, the remedy is not that the minority shareholder can challenge the shareholders resolution approving the conclusion of the enterprise agreement, but is instead the right to initiate a special court proceedings (so called Spruchverfahren), which only deals with the compensation offered. (section 304 subs. 3 GSCL). The award rendered in these proceedings is binding as to all shareholders (inter omnes), even if only one minority shareholder initiated these proceedings. Also, in these proceedings the principle of reformation in peius does not apply,183 thus creating an important incentive for minority shareholders to initiate these proceedings since the worst outcome is a confirmation of the compensation offered in the enterprise agreement. 11.1.1.2.2

105

Acquisition of Shares Against Adequate Settlement (Appraisal Right [Abfindung]: Section 305 GSCL)

Alternatively, the minority shareholders (of the controlled enterprise—so-called außenstehende Aktionäre) can—in the case of a conclusion of a control or profit transfer agreement—also sell their shares to the controlling enterprise against an adequate settlement (section 305 GSCL). Such an obligation of the controlling enterprise must be included in the control or profit transfer agreement (section 305 subs. 1 GSCL). However, this compensation does not necessarily have to be offered in cash. In fact, if the controlling enterprise itself is not controlled by another enterprise, shares of the controlling enterprise can be also be offered (section 305 subs. 2 No. 1 GSCL). But even if the controlling enterprise itself is controlled by another enterprise, either shares (of the controlling enterprise of the controlling enterprise) or cash can also be offered (section 305 subs. 2 No. 2 GSCL). In all other cases, the compensation must be offered in cash (section 305 subs. 2 No. 3 GSCL). In this context, the law does not provide for a specific method to calculate the compensation, stating only that the compensation must be fair (angemessene Abfindung). According to the case law of the German Constitutional Court, this means that the shareholder must receive a full compensation as guaranteed by Article

180 Federal Court of Justice as of 21.7.2003 – II ZB 17/01, BGHZ 156, 57 ¼ NJW 2003, 3272; Hirte, in: Großkommentar zum AktG (Hirte 2013), § 304 note 69 ff.; Paulsen, in: Münchener Kommentar zum Aktiengesetz (2015), § 304 note 75 ff.; see also European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1, 16 (2017). 181 Institut der Wirtschaftsprüfer (IDW), Grundsätze zur Durchführung von Unternehmensbewertungen (IDW S1); available under https://www.idw.de/idw/verlautbarungen/ idw-s-1%2D%2Dversion-2008-/43030 (also in English). 182 Emmerich and Habersack (2013), § 21 IV 1. 183 Emmerich and Habersack (2013), § 22a V 1.

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14 German Constitution providing the guarantee of property.184 To comply with these specifications courts usually apply the discounted cash-flow method (Ertragswertmethode) in combination with the stock price (in the case of a listed corporation).185 In this context, the stock price provides the lower limit for the compensation making it usually necessary to determine both parameters. However, it must be noted that the case law does not require the application of the discounted cash-flow method (Ertragswertmethode) since—according to relevant case law— the valuation of the controlled enterprise is indeed not a question of law but a question of fact that must be determined in accordance with economic valuation theories.186 This missing regulation of the valuation method creates a profound legal uncertainty in legal practice.

11.1.1.3 108

Related party transactions are not specifically addressed in German stock corporation law. In this context, general principles apply.187

11.1.1.4 109

No Voting Restrictions for the Majority Shareholder

The majority shareholder is not limited to exercise his voting rights regarding the shareholder resolution approving the conclusion of the enterprise agreement.188 This problem was recognized by the German legislature in 1965, but the standard was nevertheless accepted.189 Consequently, the shareholder resolution is usually a mere formality since an enterprise agreement is not concluded without majority shareholder approval.

11.1.1.5 110

Related Party Transactions

Majority and Minority Abuse

The absent voting restrictions for the majority shareholder (and future controlling enterprise) raises the question as to whether the shareholder resolution can be subject

184

Constitutional Court as of 27.4.1999—1 BvR 1613/94 (DAT/Altana I), BVerfGE 100, 289, 305 ff. ¼ NJW 1999, 3769. 185 Federal Court of Justice as of 29.9.2015—II ZB 23/14, NZG 2016, 139, 142; see also Hüttemann, in: Fleischer and Hüttemann (2015), § 1 for further details. 186 Federal Court of Justice as of 29.9.2015—II ZB 23/14, NZG 2016, 139, 140; see also Constitutional Court of Justice as of 26.4.2011—1 BvR 2658/10, NZG 2011, 869; Mock (2016), p. 1261. 187 See Sect. 19 for further details. 188 Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 293 note 41; Emmerich and Habersack (2013), § 16 III 3; Mülbert, in: Großkommentar zum AktG (Hirte 2013), § 293 note 60. 189 Official Statement of the German parliament on the Aktiengesetz 1965, BT-Drucks. IV/171, p. 229.

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to a review by the courts. Although some several legal scholars do argue in favor of such a review,190 it is generally accepted that the shareholder resolution approving the conclusion of the enterprise agreement cannot be challenged by shareholders on the mere fact that it is the basis for future control of the enterprise.191 This is especially the case ever since the German legislature introduced the requirement that an independent auditor perform a special review of the enterprise agreement,192 thereby providing a minimum protection for minority shareholders.

11.1.2 11.1.2.1

Closed Corporation Protection by Information and the Requirement of an Approval of the Enterprise Agreement by the Shareholders Meetings

The shareholder meetings of both enterprises must approve the enterprise agreement. However, it remains still unclear whether the respective majority requirements of stock corporation law (¼ ¾ majority pursuant to section 293 subs. 2 GSCL) can be applied analogously or whether a unanimous vote of all shareholders is necessary. Regarding the controlling enterprise, the case law clearly states that a qualified majority (¼ ¾ supermajority pursuant to section 293 subs. 2 GSCL) is sufficient, which even applies if there are no minority shareholders in the controlling enterprise.193 However, regarding the controlled enterprise, the requirements remain unclear. While according to the case law194 and some legal scholarship195 a ¾ supermajority by an analogous application of section 53 subs. 2 GLCC is sufficient to protect especially minority shareholders, others claim196 that the approval must be unanimous since the shareholders of a closed corporations have a more personal relationship and their interest are not exclusively limited to financial interest in the

190

Emmerich (1991), p. 307; Martens (1979), p. 446; Timm (1987), p. 426 ff. Regional Court Frankfurt/Main as of 21.2.2006—3/5 O 71/05, AG 2007, 48, 51 f.; Regional Court München I as of 4.6.2009—5 HK 591/09, AG 2009, 918, 920; see also Emmerich and Habersack (2013), § 16 III 3. 192 See Sect. 11.1.1.1. 193 Federal Court of Justice as of 24.10.1988—II ZB 7/88 (Supermarkt), BGHZ 105, 324, 332 ¼ NJW 1989, 295; Federal Court of Justice as of 30.1.1992—II ZB 15/91 (Siemens), NJW 1992, 1452; Servatius, in: Michalski et al. (2017), Konzernrecht note 67 with further references. 194 Federal Court of Justice as of 31.5.2011—II ZR 109/10, BGHZ 190, 45 ¼ NZG 2011, 902; however, it must be noted that the court did not state explicitly that an approval of the majority is sufficient. Consequently, the majority requirement still remains unclear to a certain extent (Servatius, in: Michalski et al. (2017), Konzernrecht note 74 ff.). 195 Lutter/Hommelhoff, in: Lutter and Hommelhoff (2017), Anh. § 13 note 65 f.; Servatius, in: Michalski et al. (2017), Konzernrecht note 77 both with further references. 196 Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 106; Liebscher, in: Münchener Kommentar zum GmbHG (2015), Anh. § 13 note 716 all with further references. See also Emmerich and Habersack (2013), § 32 II. 3. 191

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corporation. This discussion is especially relevant in the context of the application of other instruments for the protection of minority shareholders.197 In the case of a closed corporation, it also remains unclear whether the requirements in sections 293a ff. GSCL that adequate information be provided to the shareholders and that there is a review of the enterprise agreements by an auditor198 can be applied analogously. This basically depends on the majority requirements for the approval of the enterprise agreement by the shareholders meeting of the controlled enterprise. By requiring a unanimous vote for the approval, further protection of the minority shareholders is not necessary since they can protect themselves by not approving the enterprise agreement.199

11.1.2.2 114

S. Mock

Compensation/Acquisition of Shares Against Adequate Settlement

In addition, the minority shareholders are—due to an analogous application of sections 304 f. GSCL—entitled either to compensation200 or to sell the shares to the controlling enterprise.201 However, the analogous application of sections 304 f. GSCL and the corresponding rights of minority shareholders depends on the majority requirements for the approval of the enterprise agreement. Since some scholar claim that a unanimous approval by the shareholder meeting is necessary,202 any further protection of a minority shareholder is not necessary since the enterprise agreement then cannot be concluded without their approval.203 In contrast, the application of section 293 subs. 1 GSCL indicates an analogous application.204

197

See Sect. 11.1.2.2. See Sect. 11.1.1.1. 199 Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 293a note 13 ff.; Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 104; Hüffer and Koch (2016), § 293a note 5. 200 See Sect. 11.1.1.2.1. 201 See Sect. 11.1.1.2.2. 202 See Sect. 11.1.2.1. 203 Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 118; Servatius, in: Michalski et al. (2017), Konzernrecht note 108, 118; see also Federal Court of Justice as of 5.11.2001—II ZR 119/00, NJW 2002, 822; Federal Court of Justice as of 31.5.2011—II ZR 109/10, BGHZ 190, 45 ¼ NZG 2011, 902 leaving this issue undecided. 204 Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 118; Emmerich and Habersack (2013), § 32 II. 6.; Servatius, in: Michalski et al. (2017), Konzernrecht note 118 all with further references. See also European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1, 17 (2017). 198

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345

Related Party Transactions

Related party transactions are not specifically addressed in the GLCC. However, in this context, general principles apply.205

11.1.2.4

Voting Restrictions

The application of any voting restrictions for the majority shareholders depends first on the discussion of the majority requirements for the conclusion of an enterprise agreement.206 If the shareholders resolution must be unanimous, then further voting restrictions for the majority shareholder are not necessary since the minority can protect itself. However, if a ¾ supermajority is required, then the application of voting restrictions becomes relevant. In this context, some legal scholar claim that section 47 subs. 4 sent. 2 GLCC should be applied, thereby establishing a prohibition on shareholder votes on resolutions dealing with contracts between the shareholder and the closed corporation.207 However, it is generally assumed and partially confirmed by case law that also in the case of a closed corporation voting restrictions for the majority shareholder do not apply.208

11.1.2.5

See Sect. 19 for further details. See Sect. 11.1.2.1. 207 Altmeppen, in: Roth and Altmeppen (2015), Anh. § 13 note 39. 208 Higher Regional Court Stuttgart as of 29.10.1997—20 U 8/97 (Dornier), NZG 1998, 601, 603; unclear Federal Court of Justice as of 24.10.1988—II ZB 7/88 (Supermarkt), BGHZ 105, 324, 332 ¼ NJW 1989, 295; Federal Court of Justice as of 31.5.2011—II ZR 109/10, BGHZ 190, 45 ¼ NZG 2011, 902 stating that voting restrictions do not apply in the case of a termination of an enterprise agreement.; see also Emmerich and Habersack (2013), § 32 II. 3.; Servatius, in: Michalski et al. (2017), Konzernrecht note 76 both with further references. 209 See Sect. 11.1.1.5. 210 See Sect. 11.1.2. 206

117

Partnerships

In the context of partnerships, essentially the same principles as stated for the closed corporation210 apply to partnerships since, especially in the law of partnerships, unanimous votes are usually necessary. 205

116

Majority and Minority Abuse

As in stock corporation law,209 in this context shareholders also cannot challenge the shareholders resolution that approved the conclusion of the enterprise agreement on the mere fact that it is the basis for a future control of the enterprise.

11.1.3

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11.2 119

120

122

Integration of Enterprises

In the case of an integration of enterprise, similar instruments for the protection of minority shareholders apply.211 This is especially the case regarding the appraisal rights for minority shareholders as provided in section 320b GSCL.

11.3

De facto Group of Enterprises ( faktischer Konzern)

11.3.1

Stock Corporation

The protection of minority shareholders in a controlled stock corporation being part of a de facto group of enterprises ( faktischer Konzern) is rather limited. The provisions of the de facto group of enterprises focus more on the protection of the controlled enterprise and not on the minority shareholder. However, the protection of the controlled enterprise also implies a protection of the minority shareholders. In addition to the following instruments and concepts (see Sects. 11.3.1.1–11.3.1.5), the rules on the compensation of disadvantageous instructions212 and the possibility to initiate a special audit (Konzernsonderprüfung)213 must be also considered.

11.3.1.1

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Report of the Management Board on the Relations with Affiliated Enterprises (Abhängigkeitsbericht)

The major concept for the protection of (minority) shareholders is—except the enterprises concluded a profit transfer agreement (section 316 GSCL)—the obligation for the management board of the controlled enterprise to render a report on the relations with affiliated enterprises (Abhängigkeitsbericht) (section 312 GSCL). The idea of this report is a documentation of all single transactions between the controlling and the controlled enterprises especially of those that have a disadvantageous effect on the controlled enterprise. This documentation should then also be the basis for a settlement between both enterprises dealing with the compensation for the disadvantages of the controlled enterprise (section 311 subs. 2 GSCL).214 However, this concept hardly provides sufficient protection for either the controlled enterprise or for its (minority) shareholders.215 Although this report has to be

For an overview see Emmerich and Habersack (2013), § 10 III. See Sect. 12.3.1.1. 213 See Sect. 18.3.1.2.2. 214 See Sect. 12.3.1.1. 215 For a general critique see Emmerich and Habersack (2013), § 26 with further references. See also European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1, 23 (2017). 211 212

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audited by an independent auditor (section 313 GSCL) and by the supervisory board (section 314 GSCL) it is not completely published.216 Instead, only the confirmation note is published (section 313 subs. 5 GSCL). Notably, the shareholders do not receive the report. Consequently, the reports are usually rather short, hardly covering any of the disadvantages for the controlled enterprise. In fact, the reports are mostly limited to the conclusion that the controlling enterprise did not use its influence to cause disadvantages for the controlled enterprise.

11.3.1.2

Liability of the Controlling Enterprise

Moreover, the minority shareholders are entitled to damages against the controlling enterprise if they suffered damages in addition to any loss incurred as a result of the damage to the company (section 317 subs. 1 sent. 2 GSCL). This claim for damages constitutes a major exemption in German company law since the loss of a company caused by third parties results only in a claim of the company and not of the shareholder against that person (so-called Reflexschaden).217 This principle is based on the idea that compensation of the company by the persons that caused the damage also compensates the damage of the shareholder since the compensation of the company also increases the value of the share of the shareholder. Although section 317 subs. 1 sent. 2 GSCL provides an exemption to that principle, the significance of this liability is rather small. Usually transactions caused by the controlling enterprise do not inflict specific damages for the shareholders but only for the controlled enterprise.218

11.3.1.3

Related Party Transactions

Related party transactions are not specifically addressed in German stock corporation law. However, in this context, general principles apply.219

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Higher Regional Court Frankfurt/Main as of 6.1.2003—20 W 449/93, NZG 2003, 224, 225 stating that also the content of the report cannot be requested by the shareholders in the shareholders meeting. 217 See generally Mock (2015), note 56. 218 See e.g. regarding a decrease of the stock price Federal Court of Justice as of 4.3.1985—II ZR 271/83, BGHZ 94, 55, 56 ¼ NJW 1985, 1777; Federal Court of Justice as of 11.07.1988—II ZR 243/87, BGHZ 105, 121, 130 f. ¼ NJW 1988, 2794; Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 317 note 81 ff. 219 See Sect. 19 for further details.

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11.3.1.4 125

126

128

Voting Restrictions

The exercise of influence of the controlling enterprise on the controlled enterprise can also be based on a shareholder resolution at the shareholder meeting of the controlled enterprise. Such a shareholder resolution can be challenged by any shareholder because the major shareholder (of the controlling enterprise) exercised its voting rights to attain special benefits for itself or another person (legal or natural) to the detriment of either or both of the company or other shareholders and that the resolution is apt to serve such purpose (section 243 subs. 2 sent. 1 GSCL). However, if the other shareholders are sufficiently compensated, then the shareholder resolution cannot be challenged (section 243 subs. 2 sent. 2 GSCL). Although section 243 subs. 2 GSCL and section 311 GSCL seem to both serve the same purpose, it is generally accepted that the right to challenge the shareholder resolution based on section 243 subs. 2 GSCL is not suppressed by section 311 GSCL.220 Moreover, the voting rights of the major shareholder (of the controlling enterprise) can be limited by the duty of loyalty and the violation of the principle of equal treatment of shareholders (section 53a GSCL), both of which may result in the right of the other shareholders to challenge the shareholders resolutions.221

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No Compensation/Acquisition of Shares Against Adequate Settlement

In contrast to the situation of an enterprise agreement,222 the minority shareholders are not entitled to compensation or to sell their shares to the major shareholder for an adequate settlement. However, some legal scholars claim that, as is also the case with de facto group of companies ( faktischer Konzern), minority shareholders are entitled either to compensation or to sell their shares to the major shareholder for an adequate settlement since sections 304 f. GSCL must be applied analogously.223 However, sections 304 f. GSCL should only be applied in the case of a qualified disadvantageous infliction (qualifizierte Nachteilszufügung).224 So far, this was not confirmed by case law.

220

Federal Court of Justice as of 26.2.2012—II ZR 30/11 (HVB/Unicredit), NZG 2012, 1030; Emmerich and Habersack (2013), § 24 VI. 3; Hüffer and Koch (2016), § 243 note 40; Hüffer/ Schäfer, in: Münchener Kommentar zum AktG (Goette et al. 2016), § 243 note 105. 221 Emmerich and Habersack (2013), § 24 VI. 3; see also European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1, 31 (2017). 222 See Sect. 11.1.1.2. 223 Emmerich and Habersack (2013), § 28 IV.3.b); Müller, in: Spindler and Stilz (2015), vor § 311 note 35; Säcker (1987), p. 64. 224 See Sect. 12.3.4.

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349

Closed Corporation

The situation in the closed corporation being in a de facto group of companies is mainly determined by the fact that sections 311 ff. GSCL cannot be applied analogously.225 Therefore, there is no duty for the managers of the controlled enterprise to prepare a report on the relations with affiliated enterprises (Abhängigkeitsbericht).226 Also, the minority shareholders are not entitled to damages against the controlling enterprise if they suffered damage, including any loss incurred as a result of the damage to the company.227 In fact, the minority shareholders are only protected by the general principles of the law on closed corporations which are, however, adopted to the fact that the closed corporation is part of a group of companies.

11.3.2.1

(Increased) Duty of Loyalty (gesteigerte Treuepflicht)

The major instrument for the protection of minority shareholders is the duty of loyalty. Although applied to all shareholders of a closed corporation, the duty of loyalty (Treuepflicht) is materially stricter for the major shareholder (¼ controlling enterprise) since this shareholder can exercise a stronger influence over the closed corporation (so-called gesteigerte Treuepflicht [increased duty of loyalty]).228 Therefore, the majority shareholder has to consider the purpose and the interest of the controlled enterprise. Consequently, the majority shareholder must refrain from using his influence in a harmful way. In that respect, basically the same principles as under section 311 GSCL229 apply. The applicable test in that respect is whether a manager of an independent closed corporation would have taken the same actions.230 Typical cases include disputes over overhead costs imposed on every company of the group for the administration of the group (Konzernumlagen),231 inadequate transfer prices (Konzernverrechnungspreise),232 unconditioned cash

225

See supra note 124 with further references. See Sect. 11.3.1.1. 227 See Sect. 11.3.1.2. 228 See especially the landmark decision Federal Court of Justice as of 5.6.1975—II ZR 23/74 (ITT), BGHZ 65, 15, 18 ¼ NJW 1976, 191; see also Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 42; Emmerich and Habersack (2013), § 30 III. 1. 229 See Sect. 9.3. 230 Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 42; Emmerich and Habersack (2013), § 30 III. 2. 231 Liebscher, in: Münchener Kommentar zum GmbHG (2015), GmbH-Konzernrecht note 250 with further references. 232 Federal Court of Justice as of 5.6.1975—II ZR 23/74 (ITT), BGHZ 65, 15, 18 ¼ NJW 1976, 191; Federal Court of Justice as of 1.3.1999—II ZR 312/97; BGHZ 141, 80, 84 ff. ¼ NJW 1999, 1706; Emmerich and Habersack (2013), § 30 III. 4. 226

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management233 and the withholding of business opportunities or loans without interest or with interest that is not at the market rate.234 The violation of the (increased) duty of loyalty results in major shareholder liability for the damages suffered by the closed corporation. This claim can be enforced by the manager of the closed corporation. However, this pursuant to section 46 No. 8 GLCC, such enforcement nonetheless requires a shareholder’s resolution. The major shareholder is exempted from voting on that resolution (section 47 subs. 4 sent. 2 GLCC).235 Also, the (minority) shareholder can enforce this claim in an actio pro socio, which, however results only in a payment to the closed corporation. Finally, the creditors can also enforce this claim since, in this respect, section 317 subs. 4, 309 subs. 4 sent. 3 GSCL is applied analogously.236

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(No) Liability for the Majority Shareholder

Minority shareholders cannot generally—in contrast to the situation in the stock corporation237—hold the majority shareholder liable. Although such liability could theoretically be based on a violation of the duty of loyalty that the majority shareholder has towards the minority shareholders, if the controlled enterprise is harmed due to exercise of the influence of the majority shareholder, it is generally assumed that the duty of loyalty the majority shareholder has towards the closed corporation takes precedence over the duty of loyalty of the majority shareholder has towards the other (minority) shareholders.238 However, if the majority shareholders harms the interest of the minority shareholders and this harm is equal to the harm the closed corporation suffers, then the majority shareholder can be held liable by the minority shareholder. In that regard, the situation is basically the same as in section 317 subs. 1 sent. 2 GSCL.239

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Voting Restrictions

The minority shareholders are also protected by voting restrictions for the majority shareholders. Pursuant to section 47 subs. 4 sent. 1 GLCC, the majority shareholder

233

Federal Court of Justice as of 10.2.1977—II ZR 79/75, BB 1977, 465; Federal Court of Justice as of 30.11.1978—II ZR 204/76, NJW 1979, 2104; Emmerich and Habersack (2013), § 30 III. 4. 234 Emmerich and Habersack (2013), § 30 III. 4. 235 See Sect. 11.3.2.3 for further details. 236 Federal Court of Justice as of 16.9.1985 – II ZR 275/84 (Autokran), BGHZ 95, 330, 340 ¼ NJW 1986, 188; Emmerich and Habersack (2013), § 30 III.1; Servatius, in: Michalski et al. (2017), Konzernrecht note 440. 237 See Sect. 11.3.1.2. 238 Emmerich and Habersack (2013), § 30 III. 1. 239 See Sect. 11.3.1.2.

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is excluded from voting on a shareholder resolution dealing with a discharge or an exemption from an obligation for the majority shareholder. The same also applies to any resolution concerning the performance of a legal transaction or the initiation or termination of a lawsuit against a majority shareholder (section 47 subs. 4 sent. 2 GLCC). These restrictions apply not only to the majority shareholder itself but also to any (other) shareholder being controlled by the majority shareholder.

11.3.2.4

Related Party Transactions

Related party transactions are not specifically addressed in the GLCC. However, in this context, general principles apply.240

11.3.2.5

No Compensation/Acquisition of Shares Against Adequate Settlement

Finally, the minority shareholders are not entitled to compensation or to sell their shares to the major shareholder against an adequate settlement.

11.3.3

See Sect. 19 for further details. See Sect. 11.1.2. 242 See Emmerich and Habersack (2013), § 34 II.1. for further details. 243 See also European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1, 32 (2017). 241

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Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

The basic feature for the protection of minority shareholders in stock corporations with cross-shareholders is the limitation of the rights of these stock corporations. Pursuant to section 328 subs. 1 sent. 1 GSCL, rights arising from shares which are held by any such enterprise in the other enterprise may not be exercised with respect to more than one-fourth of all shares of such other enterprise. However, this does not

240

135

Partnerships

In the context of partnerships, basically the principles as stated for the closed corporation241 apply.242 In addition, members of a partnership may petition a court to exclude another partner if there are serious reasons relating to that person (section 140 GCommC).243

11.4

134

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apply to the right to new shares in the case of an increase of the capital (section 328 subs. 1 sent. 2 GSCL). In addition, these stock corporations cannot exercise their voting rights to elect members of the supervisory board of a listed corporation (section 328 subs. 3 GSCL).

12

138

Is There a Case by Case Evaluation of Group Transactions or an Overall Evaluation? Are Disadvantages Compensated?

12.1

Enterprise Agreements

12.1.1

Stock Corporation

The conclusion of a control agreement enables the management board of the controlled enterprise to instruct the management board of the controlled enterprise even if—unless stated otherwise in the agreement—these instructions are disadvantageous for the controlled enterprise (section 308 subs. 1 GSCL244). The management board of the controlled enterprise can only refuse to comply with these instructions if these instructions manifestly do not serve the interests of the controlled enterprise (section 308 subs. 2 GSCL245). Besides these limitations, there is no further review of the instructions or of the transactions between the both enterprises. Also, compensation of disadvantageous instructions or disadvantageous transactions is not necessary. However, in the case of control or profit transfer agreement the annual net loss must be compensated (section 302 GSCL246).

12.1.2 139

These principles also apply to a closed corporation since the respective provisions are applied analogously.

12.1.3 140

Closed Corporation

Partnerships

Also in the case of partnerships, the respective provisions of the GSCL apply analogously.247

244

See Sect. 10.1.1.1. See Sect. 10.1.1.2.1. 246 See Sect. 14.1.1.1.3. 247 See Sect. 7.1.4. 245

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353

Integration of Enterprises

In the case of an integrated stock corporation section 323 GSCL basically states the same requirements as section 308 GSCL with respect to the control agreement248 since it enables the controlling enterprise to give directions to the management board of the controlled enterprise.

12.3

De facto Group of Enterprises (faktischer Konzern)

The law of the de facto group of enterprises ( faktischer Konzern) regarding the compensation of disadvantages between the controlling and the controlled enterprise remains, in large part, rather unsettled and the topic was subject to major conceptual changes in the case law in the last decades. The starting point are sections 311, 317 GSCL which, however, only apply to stock corporations (see Sect. 12.3.1). Since these provisions do not apply to closed corporations249 and partnerships,250 specific principles were developed within the case law (see Sect. 12.3.2). In addition, the principles of a qualified disadvantageous infliction (qualifizierte Nachteilszufügung) apply to the stock and the closed corporations (see Sect. 12.3.4).

12.3.1 12.3.1.1

No (Disadvantageous) Influence Without Compensation (Section 311 GSCL)

See Sect. 9.1. See the references in supra note 124. 250 See the references in supra note 133. 251 See supra note 232. 252 See supra note 234. 249

142

Stock Corporation

If the group of companies only constitutes a de facto group of enterprises, then section 311 subs. 1 GSCL explicitly prohibits the controlling [shareholder/enterprise] from exercising its controlling influence over the controlling enterprise unless any disadvantages are compensated. Consequently, the controlling enterprise can generally exercise its influence as long as the controlled enterprise receives compensation for the disadvantages suffered from this influence. A disadvantage is every impairment or exposure of the property of the controlled enterprise which is e.g. inadequate transfer prices (Konzernverrechnungspreise),251 granting of loans without interest, with interest that is not at the market rate or payments for overhead costs without exact consideration.252 If such compensation is not made within a fiscal year in which the disadvantage was caused, then the controlling enterprise and 248

141

143

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the controlled enterprise are supposed to determine the amount for this compensation within a year (section 311 subs. 2 GSCL). However, the major flaw of this concept is that section 311 GSCL does not grant an enforceable right to the controlled enterprise.253 In fact, section 311 GSCL is based on the idea that both enterprises come to an understanding on good terms. So far, legal practice shows that this often does not happen and that the controlling enterprises do not grant any compensation at all.254

12.3.1.2 144

145

In addition, the controlled enterprise is liable to the controlling enterprise if the controlling enterprise causes the controlled enterprise to enter into a transaction or to undertake (or refrain from undertaking) any act which was disadvantageous for the controlled enterprise without either (a) compensating for such disadvantage by the end of the fiscal year or (b) granting to the controlled company an entitlement to any measures serving as compensation for the results of the act; such controlling enterprise shall be liable for any resulting damage to such controlled enterprise (section 317 subs. 1 GSCL). This claim can be enforced by any shareholder and, subject to certain limitations, by the creditors (section 317 subs. 4 GSCL).255

12.3.2 146

Liability of the Controlling Enterprise (Section 317 GSCL)

Closed Corporation

Section 311 GSCL applies only to stock corporations and not to closed corporations.256 The rationale for this rather limited scope the application of section 311 GSCL is that general company law already provides some concepts for the protection of the controlled enterprise making it not necessary to apply section 311 GSCL. In this context, the (increased) duty of loyalty (gesteigerte Treuepflicht) is of utmost importance according to which the controlling enterprise must carefully consider the interests of the controlled enterprise before exercising its influence.257 To that extent, the regime established by section 311 GSCL for the stock corporation is basically imitated. Therefore, the differences between section 311 GSCL and the application of the (increased) duty of loyalty (gesteigerte Treuepflicht) are rather small. See also the principles for the piercing of the corporate veil (see Sect. 21).

Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 308 note 358 ff.; Emmerich and Habersack (2013), § 25 IV. 1.; Hüffer and Koch (2016), § 311 note 38. 254 For a critique see Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 308 note 27; Emmerich and Habersack (2013), § 25 II. 255 See Sect. 16.1.1.1.2. 256 See Sect. 7.1.3 and especially the references in note 124. 257 See Sect. 11.3.2.1. 253

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355

Partnerships

The principles for closed corporations258 also influence the law on partnerships since the provisions on the de facto group of companies do not apply to partnerships.259

12.3.4

General Principles of a Qualified Disadvantageous Infliction (qualifizierte Nachteilszufügung)

In searching for the proper approach for piercing the corporate veil, the German courts also developed a general analogy to the provisions of the law on groups of companies (so-called qualified de facto group of companies [qualifiziert faktischer Konzern]), which was later abandoned (see Sect. 21.1 for further details). Ever since, whether or not these principles in the German law on groups of companies can still be applied remains unclear. So far, some legal scholars have argued that the so-called principles of a qualified disadvantageous infliction (qualifizierte Nachteilszufügung) still apply.260 According to these principles, the controlling enterprise must assume any losses incurred at the controlled enterprise level if the controlling enterprise exercised its influence on the controlled enterprise in a disadvantageous way which cannot be settled by an application of sections 311, 317 GSCL. This is especially the case if the controlling enterprise permanently used its influence to an extent that single acts—which needed to be compensated (section 311 GSCL)—cannot be determined.261 Since these principles are based on an analogous application of sections 302 f. GSCL,262 the controlling enterprise must provide collateral to the creditors.263 In addition, the controlling enterprise can also be held directly liable by the creditors if their claims occur before the controlling shareholder exercised its influence.264 However, it must be noted that these principles were so far not confirmed by the Federal Court of Justice since the development of the

258

See Sect. 12.3.2. Emmerich and Habersack (2013), § 30 III. 2. 260 Higher Regional Court Cologne as of 15.1.2009—18 U 205/07, AG 2009, 416, 419 ff.; Emmerich and Habersack (2013), § 28 II. and III.; Müller, in: Spindler and Stilz (2015), vor § 311 note 25 ff.; dissenting Altmeppen, in: Münchener Kommentar zum AktG (Goette et al. 2015), § 317 Anh. note 14 ff.; Hüffer and Koch (2016), § 1 note 29; Koppensteiner, in: Kölner Kommentar zum AktG (Zöllner and Noack 2004), § 318 Anh. note 63 ff. 261 Higher Regional Court Cologne as of 15.1.2009—18 U 205/07, AG 2009, 416, 419; see also Emmerich and Habersack (2013), § 28 III.2.; Hommelhoff (1992), 312 f.; Kropff (1993), p. 488. 262 See Sect. 21.1. 263 See the references in supra note 260. 264 Federal Court of Justice as of 16.9.1985—II ZR 275/84 (Autokran), BGHZ 95, 330, 347 ¼ NJW 1986, 188; Federal Court of Justice as of 19.9.1988—II ZR 255/87 (HSW), BGHZ 105, 168, 183 ¼ NJW 1988, 3143; Federal Court of Justice as of 23.9.1991—II ZR 135/90 (Video), BGHZ 115, 187, 200 ¼ NJW 1991, 3142; see also Emmerich and Habersack (2013), § 28 III.2. 259

147

148

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Existenzvernichtungshaftung as the new concept for the piercing of the corporate veil,265 raising considerable doubts as to whether these principles are still good law.

12.4

149

Transactions between stock corporations with cross-shareholders are generally not limited or reviewed. In this regard, the general principles of the GSCL apply.

13

150

151

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

Is There a Minority Shareholder’s Protection in the Parent Company Regarding Conflicts of Interest or Voting Restrictions?

13.1

Enterprise Agreements

13.1.1

Stock Corporation

In the German law on groups of companies there is no specific protection of minority shareholders of a stock corporation that concludes an enterprise agreement. Notably, the shareholder resolution approving the conclusion of the enterprise agreement cannot be challenged by the shareholders on the mere fact that the stock corporations becomes a controlling enterprise.266 However, the instruments for the protection of the minority shareholders of the controlled enterprise also provide some protection. This is especially the case regarding the protection of shareholders by providing them information and the requirement of an approval of the enterprise agreement by the shareholders meetings with a ¾ supermajority.267 In addition, the general instruments and principles of stock corporation law apply (e.g. initiation of a special audit [Sonderprüfung]) also providing some protection. Also, the right of shareholders to information during the shareholder meetings (section 131 GSCL) includes information about controlled enterprises.

265

See Sect. 21.2. Dissenting Emmerich and Habersack (2013), § 16 IV., claiming that such protection is necessary without stating the concrete criteria in which such a shareholder resolution should be considered void. 267 See Sect. 11.1.1.1. 266

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357

Closed Corporation and Partnerships

These principles also apply to closed corporations and partnerships. For the (analogous) application of the provision on enterprise agreements, see Sect. 7.1.3.

13.2

Integration of Enterprises

In the case of an integrated stock corporation, the principles for enterprise agreements apply.268

13.3

De facto Group of Enterprises

13.3.1

Stock Corporation

The law on stock corporations does not specifically address the establishment of a de facto group of enterprises. Since the management board has the responsibility for the management of the stock corporations (section 76 GSCL), it is generally the management board decides to acquire shares of other corporations and therefore to establish a de facto group of enterprises. Whether this decision requires approval of the shareholders meeting is still not expressly addressed in the GSCL. However, it is established in the case law of the Federal Court of Justice that transactions severely impairing the position of the shareholders have to be approved by the shareholder meetings.269 the same court subsequently held that the approval of the shareholders meeting is necessary if the transaction equals a de facto change of the articles of association.270 Although these cases mainly dealt with selling major parts of the stock corporation’s business, it is nowadays generally accepted that these principles also apply in the case of acquiring shareholdings since the stock corporation usually reduces liquidity for the acquisition.271 However, this only applies if for this acquisition major parts of the assets of the stock corporation are spent. This is— although heavily debated in German stock corporation law—usually the case if

268

See Sect. 13.1. Federal Court of Justice as of 25.2.1982—II ZR 174/80 (Holzmüller), BGHZ 83, 122 ¼ NJW 1982, 1703; see also Hirte (2016), note 3.224; Kubis, in: Münchener Kommentar zum AktG (Goette and Habersack 2013), § 119 note 31 ff. with further references. 270 Federal Court of Justice as of 26.4.2004—II ZR 155/02 (Gelatine I), BGHZ 159, 30 ¼ NJW 2004, 1860; Federal Court of Justice as of 26.4.2004—II ZR 154/02, NZG 2004, 575 (Gelatine II); see also Hirte (2016), note 3.224; Kubis, in: Münchener Kommentar zum AktG (Goette and Habersack 2013), note 31 ff. with further references. 271 Regional Court Frankfurt/Main as of 15.12.2009—3-5 O 208/09 (Commerzbank/Dresdner Bank), NZG 2010, 391; Emmerich and Habersack (2013), § 9 IV.1.d). 269

152

153

154

358

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about 80% of the assets of the corporation are affected. If these conditions are met, then approval of the shareholder meeting with ¾ supermajority is necessary.

13.3.2 155

The law of the closed corporation also requires approval of the shareholder meetings if the acquisition involves major parts of the corporate assets.272

13.3.3 156

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

The minority shareholders are protected in the same way as the minority shareholders of the other stock corporation since, in both cases, the restrictions of section 328 GSCL apply.274

14

158

Partnerships

In law of partnerships, the minority shareholders are protected by the right to object to extraordinary business transaction (section 116 GCommC).273

13.4

157

Closed Corporation

Is There Any Protection of Creditors’ and Third Parties’ in the Subsidiary?

Again, in this context, the substantive German law on corporate groups generally distinguishes between four different scenarios on which the management of the group can be based. These are the conclusion of a control agreement (see Sect. 16.1), the integration of an enterprise (see Sect. 14.2), the de facto group of enterprises (see Sect. 16.3) and the cross-shareholdings (see Sect. 14.4). Also in this context, it is of utmost importance to note that the respective provisions do not apply to all forms of companies.

272 Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 55 ff. with further references. 273 Mülbert, in: Münchener Kommentar zum HGB (Schmidt 2012), KonzernR note 78. 274 See Sect. 11.4 for further details.

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359

Enterprise Agreements

The protection of creditors of the subsidiary is one of the major aspects of the law of enterprise agreements. However, the approach taken by the German legislature in 1965 is rather limited and nowadays the approach is considered insufficient since it mainly addresses the capital at the moment of the conclusion of the enterprise agreement.275 In this context, it is also important to note that the provisions on the protection of creditors apply both to control agreements276 as well as to profit sharing agreements,277 although some provisions apply only to certain kinds of enterprise agreements.

14.1.1

159

Stock Corporation

In the case of an enterprise agreement, the (separate) personal liability of the controlled or controlling enterprise remains untouched. Therefore, the enterprise agreement does not impose a general liability of the controlling enterprise for the debts of the controlled enterprise or the other way around. In contrast, the protection of creditors of the controlled enterprise is based on various balance sheet based instruments (see Sect. 14.1.1.1), security rights (see Sect. 14.1.1.2), the right to enforce the liability of board members to the controlled enterprise (see Sect. 14.1.1.3) and other (general) instruments (see Sect. 14.1.1.4).

14.1.1.1 14.1.1.1.1

160

Balance Sheet Based Instruments of Creditor Protection Additional Transfers to the Legal Reserve (Section 300 GSCL)

First, the controlled corporation has to transfer larger amounts to the legal reserve (Kapitalrücklage). In the case of a profit sharing agreement (Gewinnabführungsvertrag), the controlled corporation has to transfer the amount it would have transferred without the profit sharing agreement if a profit would have existed (section 300 No. 1 GSCL). The same applies—with minor modification—in the case of a partial profit sharing agreement (Teilgewinnabführungsvertrag—section 300 No. 2 GSCL). Finally, if the controlled corporation concluded a control agreement, then it has to transfer the amount it would have transferred without the control agreement (Beherrschungsvertrag—section 300 No. 3 GSCL).

275 For a general critique see Emmerich and Habersack (2013), § 20 I.1 with further references. See also Sect. 14.1.1.1.4. 276 See Sect. 1.2.2.1. 277 See Sect. 1.2.2.1.

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14.1.1.1.2 162

Shortcomings

The concepts the German legislature provided for a protection of the creditors have several shortcomings mainly based on the balance sheet of the controlled enterprise. Therefore, these concepts are limited by the applicable accounting law. Since the German law is mainly based on conservative accounting rules, the controlling enterprise is not detained from “looting” the controlled enterprise (perhaps to create hidden reserves) as long as this looting is not reflected in its balance sheet. Also, the provisions for the protection of creditors do not address the drawing up of the balance sheet of the controlled enterprise and the way profits or losses are created. Especially in the case of a control agreement, the controlling enterprise can instruct the management board of the controlled enterprise to draw up the balance sheet in a way that limits (or excludes entirely) the appearance of a profit. In addition, contracts between the controlling and the controlled enterprise being disadvantageous for the controlled enterprise are not addressed in section 300 ff. GSCL and are, therefore, often used to avoid profits. These shortcomings were also the main reasons for the German courts to expand piercing the corporate veil.278

14.1.1.2 165

Assumption of Losses (Section 302 GSCL)

Moreover, the controlling enterprise is obligated to compensate any annual net loss occurring during the term of the enterprise agreement (section 302 GSCL). In order to protect this claim of the controlled enterprise, section 302 subs. 3 GSCL limits the possibility to waive this claim by allowing such a waiver only 3 years after the termination or cancellation of the enterprise agreement. Also, the statute of limitation for this claim is 10 years (section 302 subs. 4 GSCL), which is significantly longer than the regular statute of limitations of about 3 years. 14.1.1.1.4

164

Limitation on the Transferable Profit (Section 301 GSCL)

Also, the controlled enterprise can—regardless with kind of enterprise agreement was concluded—only transfer the annual net profit reduced by the amount required to be transferred to the capital reserve (section 301 GSCL). 14.1.1.1.3

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Security Rights (Section 303 GSCL)

Moreover, the controlling enterprise must provide collateral to a creditor if both the creditor’s claim arose prior to the termination of the enterprise agreement and the creditor applied for such a security within 6 months after the termination of the enterprise agreement (section 303 subs. 1 GSCL). If a creditor could claim a preferential satisfaction in insolvency proceedings, then it cannot demand security

278

See Sect. 21 for further details.

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(section 303 subs. 2 GSCL). Instead of granting a security, the controlling enterprise can also guarantee the claim (section 303 subs. 3 GSCL).

14.1.1.3

Enforcement of the Liability of Board Members to the Controlled Enterprise

The creditors can also enforce the claims against the members of the management board of the controlling and the controlled enterprise for the violation of specific duties279 if they cannot obtain satisfaction from the controlled enterprise (sections 309 subs. 4 sent. 2, 310 subs. 4 GSCL). However, this right is hardly used in practice since the risk of an enforcement is usually too high. In addition, in the case that they cannot obtain satisfaction, the insolvency proceeding for the controlled enterprise are usually opened entitling only the insolvency trustee with the enforcement of these claims.

14.1.1.4

Other Instruments

Finally, the creditors of the controlled enterprise are not protected in their confidence that the controlling enterprise sufficiently provided the controlling enterprise with financial resources.280 In addition, the case law on the piercing the corporate veil must be considered.281 Of course, guarantees by the controlling enterprise for the debts of the controlled enterprise are also possible.282

14.1.2

See Sect. 16.1.1.1.2. See Sect. 24. 281 See Sect. 21. 282 See Sect. 20. 283 See Sect. 14.1.1.1.3. 284 See Sect. 14.1.1.2. 285 Federal Court of Justice as of 5.2.1979—II ZR 210/76 (Gervais), NJW 1980, 231; Federal Court of Justice as of 16.9.1985—II ZR 275/84 (Autokran), BGHZ 95, 330, 340 ¼ NJW 1986, 188; Federal Court of Justice as of 24.10.1988—II ZB 7/88 (Supermarkt), BGHZ 105, 324, 332 ¼ NJW 1989, 295; Federal Court of Justice as of 11.11.1991—II ZR 287/90 (Stromlieferung), BGHZ 116, 37, 39 ¼ NJW 1992, 505; see also Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 121 ff.; Emmerich and Habersack (2013), § 32 II.9; Servatius, in: Michalski et al. (2017), Konzernrecht note 175 ff. 280

167

Closed Corporation

The provisions on the protection of creditors of the controlled corporation on the assumption of losses by the controlling enterprise283 and on security rights284 also apply (analogously) to the closed corporation.285 However, section 300 GSCL

279

166

168

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(additional transfers to the legal reserve)286 and section 301 GSCL (limitation on the transferable profit)287 do not apply (analogously) since the closed corporation is not already obligated to create a legal reserve. Consequently, the protections available for creditors of a controlled closed corporation are generally lower compared to a controlled stock corporation.

14.1.3 169

Finally, the protection of creditors of the controlled corporation by the assumption of losses by the controlling enterprise288 and on security rights289 apply (analogously) to partnerships.290

14.2 170

Integration of Enterprises

In the case of an integration of enterprises, the principal enterprise must provide securities to the creditors of the integrated enterprise if their claim arose prior to the integration and the creditors applied for such a security within 6 months after the integration (section 321 subs. 1 GSCL). If the creditors could claim a preferential satisfaction in insolvency proceedings, then they cannot demand security (section 322 subs. 2 GSCL). In addition, the principal enterprise and the integrated enterprise are joint and several debtors for all claims that have been incurred prior to the integration (section 322 GSCL). Finally, the integrated enterprise does not have to create a legal reserve (section 324 subs. 1 GSCL). However, the principal enterprise is obligated to subsidize any annual net loss of the integrated enterprise (section 324 subs. 3 GSCL).

14.3 171

Partnerships

De facto Group of Enterprises

The protection of creditors in a de facto group of enterprises ( faktischer Konzern) is rather low. First, it is important to point out that the creation of de facto group of enterprises does not change the (separate) personal liability of each company belonging to this groups. Consequently, neither the controlling enterprise nor the other controlled enterprises are generally liable for any debts incurred by a controlled

286

See Sect. 14.1.1.1.1. See Sect. 14.1.1.1.2. 288 See Sect. 14.1.1.1.3. 289 See Sect. 14.1.1.2. 290 Emmerich and Habersack (2013), § 34 V.3. 287

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enterprise. Such a liability only exists in the case of a piercing of the corporate veil.291 However, in this context, the provisions on the compensation for disadvantageous directions (section 311 subs. 2 GSCL)292 and the principles on the so-called qualified disadvantageous infliction (qualifizierte Nachteilszufügung—see Sect. 12.3.4) must be considered since they also establish an indirect protection of creditors. By not explicitly addressing the protection of creditors of a controlled enterprise in a de facto group of enterprises in section 311 ff. GSCL, there are basically no differences between the various forms of companies in German law.

14.4

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

Finally, the provisions on cross-shareholdings do not address the protection of creditors.

15

292

173

How Are Creditors’ and Third Parties of the Parent Company Protected?

German company law does not provide specific provisions for the protection of creditors and third parties of the parent company. In this context only the general provisions apply. The conclusion of an enterprise agreement, the integration of an enterprise, or the creation of a de facto group of companies or of cross-shareholdings has, therefore, no impact on the protection of creditors.

291

172

See Sect. 21. See Sect. 13.3.1.

174

364

16

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What Are the Parent and Subsidiary Board Members’ Duties and Liabilities (Loyalty, Fiduciary Duties, Utmost Good Faith and Fairness, Confidentiality, Self-dealing, Duty of Non-competing, Conflict of Interests. Other Duties Within a Group)?

16.1

Control Agreements

16.1.1

Stock Corporation

16.1.1.1 16.1.1.1.1 175

177

Specific Duties

By issuing instructions to the controlled enterprise, the member of the management board of the controlling enterprise making the instruction must employ the care of a diligent and conscientious manager (section 309 GSCL). This basically means— although not explicitly stated293—that the members of the management board are protected by the business judgement rule if the rule’s requirements are met.294 16.1.1.1.2

176

Controlling Enterprise

Liability

If the members of the management board violate their duties, then they can be jointly and severally liable to the controlled enterprise (section 309 subs. 2 GSCL). In such cases, the board member has the burden of proof that he or she applied the care of a diligent and conscientious manager (section 309 subs. 2 sent. 2 GSCL). This claim of the controlled enterprise cannot be waived or compromised prior to 3 years from the date on which such a claim has arisen. In addition, both the approval of the minority shareholders (außenstehenden Aktionäre) and the failure of a minority whose holding in aggregate equals or exceeds one-tenth of the share capital to object are necessary (section 309 subs. 3 sent. 3 GSCL). This claim can also be asserted by any shareholder in an actio pro socio (section 309 subs. 4 sent. 1 GSCL). Consequently, the shareholder can only demand that the compensation is paid to the controlled enterprise (section 309 subs. 4 sent. 2 GSCL). The same applies to the creditors if they cannot obtain satisfaction from the controlled enterprise (section 309 subs. 4 sent. 2 GSCL). In practice, these claims are often not enforced. The member of the management board of the controlled enterprise usually has no interest in an enforcement since this would cause a direct

293

The business judgment rule was only explicitly introduced by the German legislature in 2005. However, it was already before accepted in the case law (Federal Court of Justice as of 21.4.1997— II ZR 175/95 (ARAG/Garmenbek), BGHZ 135, 244 ¼ NJW 1997, 1926). For a detailed analysis of the development see Hopt/Roth, in: Großkommentar zum AktG (Hirte 2015), § 93 note 18 ff. 294 Emmerich and Habersack (2013), § 23 VIII.6.

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confrontation with the members of the management board of the controlling enterprise. Also, the shareholders usually have no interest in a confrontation since a successful enforcement of the claim would only result in a payment to the controlled enterprise itself and not to the shareholder therefore only increasing the value of his shareholding. Finally, the creditors do not enforce this claim.295

16.1.1.2

Controlled Enterprise

Each member of the management board and the supervisory board must employ the care of a diligent and conscientious manager which generally applies to them (section 93 GSCL). However, they are together with the member of the management board of the controlling enterprise jointly and severally liable if they violate that duty (section 310 subs. 1 GSCL). They bear the burden of proof that they applied the care of a diligent and conscientious manager (section 310 subs. 1 sent. 2 GSCL). This liability also applies if the supervisory board approved these acts or transactions (section 310 subs. 2 GSCL). However, they cannot be held liable if the act or transaction causing the damage for the controlled enterprise was based on an instruction of the management board of the controlling enterprise (section 310 subs. 3 GSCL). These claims can be enforced by any shareholder and, under certain conditions, by the creditors (section 310 subs. 4 GSCL); however, this usually does not happen.296

16.1.2

Closed Corporation

The duties and liability imposed by sections 309, 310 GSCL also apply (analogously) to the closed corporation.297

16.1.3

See Sect. 14.1.1.3. See Sect. 16.1.1.1.2. 297 Emmerich and Habersack (2013), § 32 II.9; Servatius, in: Michalski et al. (2017), Konzernrecht note 152 ff.; partly dissenting Beurskens, in: Baumbach and Hueck (2017), Anhang Konzernrecht note 94. 298 For an overview see e.g. Emmerich and Habersack (2013), § 35 III. 296

179

Partnerships

In the case of a partnership, the extent of the parent and subsidiary board members’ duties and liabilities remains unsettled. In this context, some legal scholars have developed so-called principles of the management of a group (Grundsätze ordnungsgemäßer Konzernleitung), which have not, however, advanced much.298

295

178

180

366

16.2 181

183

16.3

De facto Group of Enterprises

16.3.1

Stock Corporation

185

Controlling Enterprise

The members of the management board of the controlling enterprise generally have to employ the care of a diligent and conscientious manager (section 93 GSCL). In the context of the de facto group of enterprises ( faktischer Konzern) no further or specific duties are stated. However, they are limited by section 311 GSCL, which states that the controlling enterprise can only use its influence over the controlled enterprise if this influence does not cause any disadvantages or these disadvantages are compensated.299 If a board member violates the duty to not use the influence on the controlled enterprise without compensating disadvantages, then the board member can be held personally—together with the controlling enterprise jointly and severally300—liable to the controlled enterprise (section 317 subs. 3 GSCL). This claim can be enforced by any shareholder and, under certain conditions, by the creditors (section 317 subs. 4 GSCL); however, this usually does not happen.301

16.3.1.2 184

Integration of Enterprises

Sections 309, 310 GSCL also apply in the case of an integration of enterprises (section 323 subs. 1 sent. 2 GSCL).

16.3.1.1 182

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Controlled Enterprise

Similarly, the members of the controlled enterprise must generally employ the care of a diligent and conscientious manager (section 93 GSCL). However, specific duties for a de facto group of enterprises ( faktischer Konzern) are not imposed by the GSCL. However, they are—together with the persons liable pursuant to section 318 GSCL—jointly and severally liable, if, in violation of their duties, they have failed to include any disadvantageous transaction or act in their report on relations of the company with affiliated enterprises or to state that the company has suffered a disadvantage because of such transaction or act and that such disadvantage has not

299

See Sect. 12.3.1.1. See Sect. 11.3.1.2. 301 See Sect. 16.1.1.1.2. 300

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been compensated.302 This claim can be enforced by any shareholder and, under certain conditions, by the creditors (section 318 subs. 4 GSCL); however, this usually does not happen.303

16.3.2 16.3.2.1

Closed Corporation Controlling Enterprise

The members of the management board of the controlling enterprise also have to employ the care of a diligent and conscientious manager (section 93 GSCL, section 43 GLCC). Since the controlling enterprise must apply an increased duty of care (gesteigerte Treuepflicht)304 the members of the management board of the controlling enterprise must consider this special duty in employing the care of a diligent and conscientious manager.

16.3.2.2

Controlled Enterprise

The manager of a closed corporation must employ the care of a diligent and conscientious manager (section 43 GLCC). The fact that the closed corporation is controlled by the controlling enterprise does not lighten or change this duty.

16.3.3

See Sect. 12.3.1.1. See Sect. 16.1.1.1.2. 304 See Sect. 11.3.2.1. 305 See Sect. 16.3.2. 303

188

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

Cross-shareholdings do not impose a stricter liability or advanced duties for the members of the managements or supervisory boards.

302

187

Partnerships

In partnership law, basically, the principles as stated for the closed corporation305 apply.

16.4

186

189

368

17

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What Are the Shareholders Duties and Liabilities? Are There Specific Rules? Are There Controlling Shareholders Fiduciary Duties? Is There a Controlling Shareholders Liability? Does the Controlling Shareholder Constitute a Shadow Director?

17.1 190

Generally, German company law imposes numerous duties on shareholders. Besides the principal duty of shareholders to make an initial contribution, shareholders are also bound by the duty of loyalty (Treuepflicht). This duty—which is not explicitly stated in any law governing companies—basically states that shareholders cannot exercise their rights without considering the interest of the corporation and the other shareholders. Although this duty seems to be far reaching, it is important to point out that it is mainly based on case law and, therefore, usually only applies if it can be based on one of these cases. In the law of the groups of companies the duty of loyalty (Treuepflicht) also generally applies, but is also limited by the provisions basically addressing similar problems.

17.1.1 191

Enterprise Agreements

In the case of an enterprise agreement the duty of loyalty (Treuepflicht) is not of general interest. By the conclusion of the enterprise agreement the controlling enterprise has the power to instruct the management board of the controlled enterprise (section 308 GSCL).306 This power is not limited by the duty of loyalty (Treuepflicht) since section 308 GSCL already points out that disadvantageous instructions must be carried out.307 A limitation on this power by the duty of loyalty (Treuepflicht) would undermine this competence.

17.1.2 192

Duty of Loyalty

Integration of Enterprises

Since section 308 subs. 2 GSCL also applies in the case of an integration of an enterprise (section 323 subs. 1 sent. 2 GSCL), the same principles as for enterprise agreements308 apply.

306

See Sect. 10.1. See Sect. 10.1.1.2.1. 308 See Sect. 17.1.1. 307

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369

De facto Group of Enterprises Stock Corporation

By limiting the influence of the controlling enterprise on the controlled enterprise in section 311 GSCL, the German legislature already dealt with the problem of the exercise of the power by the majority shareholder also being addressed by the duty of loyalty (Treuepflicht). Consequently, the duty of loyalty (Treuepflicht) does not apply to the majority shareholder in a de facto group of enterprises.

17.1.3.2

Closed Corporation

In the case of a closed corporation, the situation is different since section 311 GSCL cannot already be applied (analogously).309 In fact, the increased duty of loyalty (gesteigerte Treuepflicht) is the major instrument for the protection of minority shareholders.310

17.1.3.3

17.2

Liability of the Controlling Shareholder

17.2.1

Enterprise Agreements

The conclusion of an enterprise agreement does not establish liability for the controlling shareholder for the debts of the controlled enterprise. In fact, the controlling shareholder is only obligated to subsidize the annual net loss of the controlled enterprise (section 302 GSCL).312 The application of the principles of piercing the corporate veil313 in this context remains rather unclear but is not generally excluded. These principles apply to the stock corporation, the closed corporation and partnerships.

See references in supra note 124. See Sect. 11.3.2.1. 311 See Sect. 11.3.3. 312 See Sect. 14.1.1.1.3. 313 See Sect. 21. 310

194

Partnerships

In the law of partnerships, the duty of loyalty (Treuepflicht) is also the major grouplaw specific duty of shareholders.311

309

193

195

196

197

370

17.2.2 198

Closed Corporation

In the case of closed corporations, the controlling shareholder can be held liable according to the principles of piercing the corporate veil.315

17.3 201

Stock Corporation

However, the controlling shareholder can be held liable pursuant to section 317 GSCL if he or she made a disadvantageous influence on the controlled enterprise that was not compensated.314

17.2.2.2 200

De facto Group of Enterprises ( faktischer Konzern)

In the case of an de facto group of enterprises ( faktischer Konzern), the (separate) personal liability of the controlled or controlling enterprise remains untouched.

17.2.2.1 199

S. Mock

Controlling Shareholder as Shadow Director

The liability of a manager or a member of the management board does not depend on his or her formal appointment. In fact, it is generally accepted that a person acting as a manager or a member of the management board can also be held liable in the same way as a formally appointed manager or a member of the management board (so-called fakisches Organ [shadow director]).316 In the context of groups of companies this liability is basically irrelevant since the German company law does not generally allow legal persons to serve as directors. Therefore, a legal person can also not be considered to be a shadow director.317 It is even generally accepted that (natural) persons acting on the behalf of a controlling enterprise cannot be considered shadow directors.318 The application of the liabilities of a shadow director in the context of groups of companies is also not necessary since the provisions on the de facto group of companies already provide the basis for a liability of the controlling shareholder see Sect. 12.3.1.2. 314

See Sect. 12.3.1.2. See Sect. 21. 316 See e.g. Spindler, in: Münchener Kommentar zum AktG (Goette and Habersack 2008), § 93 note 18 ff. with further references. 317 Federal Court of Justice as of 25.5.2002 – II ZR 196/00, BGHZ 150, 61, 68 ¼ NJW 2002, 1803; see also Spindler, in: Münchener Kommentar zum AktG (Goette and Habersack 2008), § 93 note 20 with further references. 318 Fleischer, in: Spindler and Stilz (2015), § 93 note 116 ff.; Spindler, in: Münchener Kommentar zum AktG (Goette and Habersack 2008), § 93 note 20. 315

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371

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

In the case of cross-shareholdings, no additional duties are imposed on the shareholders. In that regard, only the general principles of stock corporation law apply.

18

202

What Are the Auditors and Internal Organic Supervisory Bodies’ Rights and Duties in Relation to Subsidiaries and Other Group Companies? What Is the Scope of Investigation Procedures and Shareholders’ Rights to Request Them?

18.1

Control Agreements

18.1.1

Stock Corporation

18.1.1.1 18.1.1.1.1

Controlling Enterprise Supervisory Board (Aufsichtsrat)

The supervisory board (Aufsichtsrat) of the controlling enterprise must supervise the management board (section 111 subs. 1 GSCL). Since the management board of the controlling enterprise has the power to give instructions to the management board of the controlled enterprise this supervision also applies to these specific powers. In contrast, the supervisory board of the controlling enterprise has no power to supervise the management board or other organs of the controlled enterprise. It is even generally accepted that the members of the supervisory board cannot approach members of the management or employees of the controlled enterprise. 18.1.1.1.2

203

Special Audit (Allgemeine Sonderprüfung)

The shareholder meeting of the controlling enterprise has the power to appoint a special auditor (Sonderprüfer) to examine matters relating to the management of the company’s business (section 142 GSCL). This also includes the relations of the controlling enterprise with the controlled enterprise. The special auditor has the right not only to require information from the members of the boards (of the controlling enterprise) but also from any member of the boards of any controlled enterprise (section 145 subs. 3 GSCL).

204

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S. Mock

18.1.1.2

Controlled Enterprise

18.1.1.2.1 205

The supervisory board (Aufsichtsrat) of the controlled enterprise also has to supervise the management board (section 111 subs. 1 GSCL), which includes the relation of the controlled enterprise with the controlling enterprise. In that regard, the supervisory board must, as a special responsibility, supervise whether the management board does or does not comply with the instructions of the management board of the controlling enterprise, where necessary. 18.1.1.2.2

206

208

Closed Corporation

The organizational structure of the closed corporation is rather simple since it must only have one manager (Geschäftsführer). However, the shareholders are free to install a supervisory board to which the provisions of the GSCL apply (section 52 GLCC). If the law on worker co-determination319 are applicable, then the closed corporation must install a supervisory board to which the relevant provisions of the GSCL would then apply (section 52 GLCC). The law on closed corporations does not provide a specific investigation procedure. However, it is generally accepted that the shareholders can appoint a special auditor to investigate certain aspect of the management, which then also includes the relations with other enterprises.320

18.1.3 209

General Audit (Allgemeine Sonderprüfung)

Also, the shareholder meeting of the controlling enterprise has the power to appoint a special auditor (Sonderprüfer) to examine matters relating to the management of the company’s business (section 142 GSCL) including the relations with the controlling enterprise. The special auditor also has the right to require information from any member of the boards of the controlling enterprises and the other controlled enterprises (section 145 subs. 3 GSCL).

18.1.2 207

Supervisory Board (Aufsichtsrat)

Partnerships

The articles of association of partnerships often explicitly state the right for a minority to initiate a specific investigation procedure. In contrast, the law on partnerships does not provide such a procedure.

319 320

See Sect. 28. Zöllner/Noack, in: Baumbach and Hueck (2017), § 46 note 50 with further references.

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373

Integration of Enterprises

In the case of an integration of enterprises, the same principles as for enterprise agreements321 apply.

18.3

De facto Group of Enterprises

18.3.1

Stock Corporation

18.3.1.1 18.3.1.1.1

Controlling Enterprise Supervisory Board (Aufsichtsrat)

The supervisory board of the controlling enterprise must supervise the management board. However, the GSCL provides only a single provision (section 111 GSCL) for the general supervision of the management board not specifically considering the control of another enterprise in a de facto group of enterprises. Nevertheless, it is generally accepted that the supervision must also include the influence of the management board on other enterprises, especially within a de facto group of enterprises. However, the supervisory board does not have to supervise the management of the controlled enterprise.322 18.3.1.1.2

18.3.1.2.1

322

212

Controlled Enterprise Supervisory Board (Aufsichtsrat)

Also, the supervisory board (Aufsichtsrat) of the controlled enterprise must supervise the management of the controlled—and not of the controlling—enterprise. However, since section 311 GSCL permits an influence of the management board 321

211

General Audit (Allgemeine Sonderprüfung)

The shareholder meeting of the controlling enterprise has the power to appoint a special auditor (Sonderprüfer) to examine matters relating to the management of the company’s business (section 142 GSCL). This also includes the relations of the controlling enterprise with the controlled enterprise. The special auditor has the right not only to require information from the members of the boards (of the controlling enterprise), but also from any member of the boards of any controlled enterprise (section 145 subs. 3 GSCL).

18.3.1.2

210

See Sect. 18.1. Federal Court of Justice as of 1.12.2008—II ZR 102/07 (MPS), BGHZ 179, 71 recital 21.

213

374

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of the controlling enterprise, the scope of this supervision is limited to the boundaries set by section 311 GSCL.323 Also, the supervisory board has an unlimited duty to supervise the management board if it acts without being instructed by the management board of the controlling enterprise. 18.3.1.2.2 214

The shareholders of the controlled enterprise can initiate a special audit of the business relations of the enterprises by filing a motion with the court (section 315 GSCL). However, this motion is only admissible if (1) the external auditor has restricted or refused to provide a confirmation note on the report on relations with affiliated enterprises (section 315 sent. 1 No. 1 GSCL), (2) the supervisory board has stated that objections are to be made to the comments of the management board at the end of the report on relations with affiliated enterprises (section 315 sent. 1 No. 2 GSCL), (3) the management board has stated that the company has suffered a disadvantage because of certain transactions or acts, and such disadvantages have not been compensated or (4) other facts support a reasonable suspicion that the controlled enterprise has suffered an undue disadvantage (section 315 sent. 2 GSCL). Since it is basically necessary that the auditor or the board members admit that the controlled enterprise has suffered disadvantages, these special audits are rather rare also because the shareholders usually do not have the information necessary to meet the conditions of section 315 sent. 2 GSCL. 18.3.1.2.3

215

Special Audit (Allgemeine Sonderprüfung)

Other than the audit pursuant to section 315 GSCL (Konzernsonderprüfung), a special audit (Sonderprüfung) targeting the relations of the controlling enterprise with the controlled enterprise can also be conducted. This requires a resolution of the shareholders meeting or a court appointment as a result of an application of a shareholder (section 142 subs. 1 GSCL). In the case of a court appointment, the special auditor (Sonderprüfer) has the right to require information from the members of the boards of the controlling enterprise and of all controlled enterprises (section 145 subs. 3 GSCL).

18.3.2 216

Special Audit (Konzernsonderprüfung)

Closed Corporation

If the closed corporation has a supervisory board, then this supervisory board is obligated to supervise whether the manager of the closed corporation respects the boundaries set by the increased duty of loyalty for the majority shareholder.324

323 324

See Sect. 9.3. See Sect. 11.3.2.1.

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The shareholders cannot initiate a special audit of the business relations between the two enterprises unless the articles of association provide for such a special audit. Section 315 GSCL does not apply analogously.

18.3.3

Partnerships

In the law of partnerships, the same basic principles as for the closed corporation apply.

18.4

219

Are There Specific Rules on Related Party Transactions (Disclosure and Specific Mechanisms)?

German company law does not specifically address related party transactions. In this context only the general provisions of corporate law set the boundaries for these transactions.325 Also, the non-binding German Corporate Governance Code326 addresses related party transactions by forbidding the pursuit of personal interest or the use of business opportunities (No. 4.3.1 German Corporate Governance Code). However, due to the new European Shareholder Rights Directive (EU/2017/ 828),327 specific provisions will probably be introduced in German company law within the next few years.328 This report is based on the current law, where related party transactions are (indirectly) addressed.

325

218

Cross-Shareholdings (wechselseitig beteiligte Unternehmen)

In the case of cross-shareholdings, only the general principles of stock corporation law apply.

19

217

European Company Law Experts (ECLE), A proposal for the Reform of Group Law in Europe, 18 EBOR 1, 23 (2017). 326 Available under www.dcgk.de. 327 Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, OJ L 132 as of 20.5.2017, p. 1 ff. 328 For the presumably necessary changes of German company law see Habersack (2016), p. 691 ff.; Fleischer (2014), p. 835 ff.

220

221

376

19.1 222

System of Capital Maintenance

Related party transactions can constitute a violation of the provisions of the system of capital maintenance which—despite some major reforms in the last decade—still apply to corporations. It is generally accepted that transactions with shareholder can be characterized as hidden distributions (verdeckte Gewinnausschüttung) if they were not concluded at arms lengths.329 However, this concept—which mainly applies in tax law—is rather broad and hardly sets up concrete limitations. In this context, it is also important to keep in mind that the boundaries on contributions to shareholders by the system of capital maintenance are stricter for the stock corporation than for the closed corporation. Whereas in the stock corporation only the profit as stated in the balance sheet can be distributed to the shareholders (sections 57 subs. 3, 58 subs. 4 GSCL), a distribution by a closed corporation is permissible if its share capital remains untouched (section 30 subs. 1 GLCC). Therefore, in the case of closed corporations, these hidden distributions do not often violate the system of capital maintenance. Nevertheless, they usually constitute a violation of the competences of the managers resulting in his liability.330

19.2 223

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(No Mandatory) Fairness Opinion

German company law does not deal with fairness opinions, although fairness opinions are nowadays more and more common in legal practice and are increasingly used, especially in takeover law.331 Therefore, there is no duty for the management of an enterprise to obtain a fairness opinion from a neutral third party. However, it is generally accepted that a fairness opinion may support a safe harbor for management vis-a-vis manager liability. This requires that the fairness opinion is prepared by an expert, neutral third party and that the opinion is not obviously inconsistent.332

For an overview see Mock, in: Michalski et al. (2017), § 29 note 237 ff. with further references. See Sect. 19.4. 331 Hirte, in: Kölner Kommentar zum WpÜG (Hirte and Bülow 2010), § 27 note 27; Wackerbarth, in: Münchener Kommentar zum AktG (Goette et al. 2017), § 27 WpÜG note 13. 332 Spindler, in: Münchener Kommentar zum AktG (Goette and Habersack 2008), § 93 note 48 ff., 79 ff. with further references on the impact of (external) legal opinions on the duty of care of the members of the management board. 329 330

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377

Approval by the Shareholders Meeting

Also, some related party transactions must be approved by the shareholder meeting. Unfortunately, the existing case law on this topic are rather vague. According to that case law, transactions severely impairing the position of the shareholders must be approved by the shareholder meeting with a ¾ supermajority.333 This is specially the case if the transaction de facto equals a change of the articles of association.334 Generally, only transactions dealing with about 70–80% of the assets of the corporation fulfill these requirements. Finally, a shareholder resolution approving a related party transaction that violates the provisions on the system of capital maintenance is void (section 241 No. 3 GSCL).

19.4

225

Liability of Managers

Managers undertaking related party transactions can be held liable if these transactions violate the provisions of the system of capital maintenance335 or would have required the approval by the shareholder meeting.336

20

224

226

Is There a Separate Legal Personality of Each Group Company? How Are Lettre de patronage Treated?

In the German law of groups of companies, the general principle that every company is only liable for its own debts remains untouched. Therefore, there is generally no liability of a controlling enterprise for the debts of the controlled enterprise or the other way around. However, liability for the debts of another group member can still be based on general instruments of civil law. In that regard, especially the Patronatserklärung (lettre de patronage) is of utmost importance in German law. However, liability for a lettre de patronage is neither explicitly stated in contract law nor in company law but was developed by

333 Federal Court of Justice as of 25.2.1982 – II ZR 174/80 (Holzmüller), BGHZ 83, 122 ¼ NJW 1982, 1703; see also Hirte (2016), note 3.224; Kubis, in: Münchener Kommentar zum AktG (Goette and Habersack 2013), § 119 note 31 ff. with further references. 334 Federal Court of Justice as of 26.4.2004—II ZR 155/02 (Gelatine I), BGHZ 159, 30 ¼ NJW 2004, 1860; Federal Court of Justice as of 26.4.2004—II ZR 154/02 (Gelatine II), NZG 2004, 575; see also Hirte (2016), note 3.224; Kubis, in: Münchener Kommentar zum AktG (Goette and Habersack 2013), note 31 ff. with further references. 335 See Sect. 19.1. 336 See Sect. 19.3.

227

228

378

S. Mock

case law. This case law distinguishes between so-called soft lettre de patronage (weiche Patronatserklärung—Sect. 20.1) and hard lettre de patronage (harte Patronatserklärung—Sect. 20.2).

20.1 229

A soft lettre de patronage is usually a general statement of the controlling enterprise that it will use its influence over the controlled enterprise, forcing or at least influencing that controlled enterprise to fulfill a certain liability or claim. The main feature of this soft lettre de patronage is that the controlling enterprise shows no intention to be held liable for the debts of the controlled enterprise or for soft lettre de patronage itself. Therefore, a soft lettre de patronage does not create any liability for the controlling enterprise.337 Nevertheless, the soft lettre de patronage is of importance for the financing of groups of companies since it creates some confidence, especially for banks and other contract partners of the controlled enterprise. One of the advantages of the soft lettre de patronage is the fact that it is not relevant for accounting, leaving the balance sheets of both enterprises untouched. Whether the soft lettre de patronage is really a soft and not a hard lettre de patronage338 must be determined by its interpretation, which especially must take into account whether the controlling enterprise had the intention of being held liable or not. Since this is usually extremely hard to determine in practice, practitioners will often work exclusively with the exact wording of lettre de patronage that were already approved by the courts.

20.2 230

Soft lettre de patronage (weiche Patronatserklärung)

Hard lettre de patronage (harte Patronatserklärung)

In contrast, a hard lettre de patronage states that the controlling enterprise will not only use its influence but will also be personally be liable for the fulfillment of (all or some) debts of the controlled enterprise. If the controlled enterprise does not or cannot pay its debts, the creditor which received the hard lettre de patronage from the controlling enterprise can claim damages pursuant to section 280 GCC from the controlling enterprise.339 This is the case since the hard lettre de patronage creates the duty of the controlling enterprise that the debts of the controlled enterprise will be paid. If the controlled enterprise fails to do so, then the controlling enterprise

Emmerich and Habersack (2013), § 20 IV. with further references. See Sect. 20.2. 339 Federal Court of Justice as of 8.5.2003—IX ZR 334/01, NZG 2003, 725, 726; Federal Court of Justice as of 8.5.2006—II ZR 94/05, NZG 2006, 543; see also Emmerich and Habersack (2013), § 20 IV. with further references. 337 338

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breaches that duty. Also in this context, the extent of the lettre de patronage must be determined by interpretation.

21

Disregarding of the Corporate Legal Entity (Lifting the Corporate Veil, Durchgriff, inoponibilidad de la personalidad juridica) as Regards Creditors and Third Parties (Also Shareholders?) Protection

The principles of piercing the corporate veil (Durchgriffshaftung) in corporate law have some troublesome history in Germany and were subject to major changes in the last two decades.340 The major problem in that context is that the German legislature never created an explicit provision for the piercing the corporate veil, instead leaving this concept (and the surrounding problems) completely to the judiciary.

21.1

Abandoned Concepts

Originally, several concepts existed partially created in the case law and partially created by legal scholars. According to the concept of materielle Unterkapitalisierung (substantive undercapitalization), the shareholders of a corporation may be held liable if they founded a corporation without the necessary capital it needs to run the business successfully. However, this approach soon turned out to be problematic since in most of the cases the amount needed for a sufficient funding for a corporation remained unclear. Another concept was the Vermögensvermischung (mixture of corporate and private assets), which was based on the idea that a shareholder who does not sufficiently separate its personal assets from the assets of the corporation cannot rely on the limited liability of a corporation. Also, in this approach, it remained unclear to what extent the boundaries must be ignored or discarded. Finally, the provisions on the law of the de facto group of companies ( faktischer Konzern) were used to develop principles for the lifting the corporate veil. This concept which was called qualifiziert faktischer Konzern (qualified de facto group of companies) was partially based on sections 302 f. GSCL341 and basically states that the controlling enterprise can be held liable for the debts of the controlled enterprise if the controlled enterprise is not able to fulfill its debts because its main purpose was not to run its own business but to support the interest of the group. Since this was usually a hard concept to prove, it was later explicitly abandoned by the judiciary in

340 341

231

For an overview see e.g. Emmerich and Habersack (2013), § 31. See Sect. 14.1.1.1.3.

232

233

234

380

S. Mock

the cases of a closed corporation with a single shareholder.342 However, it remains unsettled under German law as to whether these principles still apply in the case of a closed corporation with several shareholders and which is being controlled by another entity (without an enterprise agreement) or whether they were transformed to the so-called qualified disadvantageous infliction (qualifizierte Nachteilszufügung). See Sect. 12.3.4 for further details.

21.2

235

236

Existenzvernichtungshaftung (Destruction of the Corporation) as the Current Concept

In 2002, the Federal Court of Justice developed a new concept called Existenzvernichtungshaftung (destruction of the corporation) for piercing the corporate veil, a concept which still applies today.343 According to this principle, a shareholder can be held liable if he undertakes transactions without sufficiently respecting the own interest of the corporation that eventually result in an insolvency of the corporation if this insolvency is not related to the general risk of its business. In these cases, the shareholder is liable for damages only to the corporation (!) and not to other shareholders or creditors. Therefore, the enforcement of this claim normally requires the opening of insolvency proceedings since the manager of the corporation usually does not enforce this claim against the (majority) shareholder. A typical case in which this principle applies is the so-called Aschenputtelgesellschaft (Cinderella corporations) or kalte Liquidation (cold liquidation) in which all valuable assets are transferred from the (old) corporation to a (new) corporation and the debts and other assets of no value remain in the (old) corporation which usually afterwards must file for insolvency. Originally this concept was developed without any reference to the provisions of corporate law.344 In 2007, the Federal Court of Justice345 held that this principle is based in section 826 GCC (intentional damage contrary to public policy),346 which however, does not have a significant impact on its application since the court also upheld the principle that the shareholder is only liable for damages to the 342 Federal Court of Justice as of 17.9.2001—II ZR 178/99 (Bremer Vulkan), BGHZ 149, 10, 16 ¼ NJW 2001, 3622; and later Federal Court of Justice as of 16.7.2007—II ZR 3/04 (Trihotel), BGHZ 173, 246 ¼ NJW 2007, 2689. 343 For an overview see e.g. Emmerich and Habersack (2013), § 31; Fastrich, in: Baumbach and Hueck (2017), § 13 note 57 ff.; Lieder, in: Michalski et al. (2017), § 13 note 331 ff. 344 Federal Court of Justice as of 17.9.2001—II ZR 178/99 (Bremer Vulkan), BGHZ 149, 10, 16 ¼ NJW 2001, 3622. 345 Federal Court of Justice as of 16.7.2007—II ZR 3/04 (Trihotel), BGHZ 173, 246 ¼ NJW 2007, 2689. 346 § 826 German Civil Code states:

A person who, in a manner contrary to public policy, intentionally inflicts damage on another person is liable to the other person to make compensation for the damage.

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corporation. Although not being specifically developed for groups of company, this principle is of significant importance in this context since it basically states the boundaries of the liability of the controlling enterprise for the debts of the controlled enterprise.

22

Insolvency: When Is Liability Imposed on Controlling Parties and What Is Its Scope?

Also in the case of an insolvency of a controlling or controlled enterprise, the general principle of German company law that every company is only liable for its own debts remains untouched. Therefore, there is generally no liability of a controlling enterprise for the debts of the controlled enterprise or the other way around. However, some liability can be imposed on the controlling enterprise or its management board although this liability is not especially related to the insolvency of the controlled enterprise (see Sect. 16 for a detailed analysis of the various claims). Nevertheless, this liability is especially relevant in an insolvency because then only the insolvency trustee can enforce these claims as part of the insolvency estate (section 80 German Insolvency Act). Since the insolvency trustee is neutral— and not part of the group of companies—these claims are usually effectively enforced. However, this only applies if the statute of limitation does not apply to these claims. Also, the insolvency often does not only occur in the controlling or in the controlled enterprise, but also in both enterprise at the same time resulting in no liability for either enterprises.

23

238

Is There a Subordination and/or Substantive Consolidation?

The German law of groups of companies does not provide explicit provision on the subordination (see Sect. 23.1) or substantive consolidation (Sect. 23.2).

23.1

237

239

Subordination

However, loans of shareholders can be subordinated. This requires that the shareholder explicitly state that its claim for the repayment of the loan should be subordinated in insolvency proceedings (section 19 subs. 2 sent. 2 German Insolvency Act). If such a subordination was not expressly declared, then all claims between the controlling and the controlled enterprise are equal with all other claims of the creditors or third parties. However, in practice, these declarations for a

240

382

S. Mock

subordination are quite common since they avoid an over indebtedness of the corporation and as a consequence the duty for the manager to file for insolvency (section 15a German Insolvency Act).

23.2 241

A substantive consolidation does not exist in the German law on the groups of companies. But the introduction of this concept was discussed during the reform of the insolvency law of groups of companies.347 However, in the end, the German legislature refused to introduce this concept due to the so far unclear consequences for almost all areas of law.

24

242

Substantive Consolidation

Is There a Liability for Factual Appearance and for Breach of a Created Confidence?

German company law is rather strict regarding the liability for a factual appearance and the breach of a created confidence. Although the German law of obligations imposes liability of third parties if they lay claim to being given a particularly high degree of trust (culpa in contrahendo [section 311 subs. 3 GCC]), it is generally accepted in the case law that such a trust cannot be established regarding the capital or the financial resources of a corporation.348 Therefore, a creditor of a controlled corporation cannot claim that he expected the corporation to be better financially equipped since it was controlled by another enterprise. In this context, it is also important to consider the case law on the lettre de patronage349 where such a confidence can basically be created resulting in a liability of the controlling enterprise.

347

Hirte (2008), p. 213 ff. discussing an introduction of a general substantive consolidation in corporate groups’ insolvencies. See also Sester (2005), p. 2099 ff. arguing against the introduction of a substantive consolidation. 348 Federal Court of Justice as of 6.6.1994—II ZR 292/91, BGHZ 126, 181 ¼ NJW 1994, 2220 denying liability of a manager of a closed corporation despite the fact that the manager personally provided collateral for a loan of the closed corporation. 349 See Sect. 20.

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25.1

383

What Are the Rules on Transactions Regarding the Taking of Control (Takeovers, Mandatory Bids, Exclusion and Withdrawal Rights, Squeeze Out Regulations). Do These Rules Apply Only to Listed Public Corporations or Also for Private Companies? Non-listed Stock Corporations

Besides the rules on the conclusion of an enterprise agreement,350 German law on the groups of companies does not provide specific provisions for taking control of non-listed stock corporation. There is especially no regulation for a mandatory bid. The principal shareholder of a non-listed stock corporation can initiate a squeeze out (sections 327a ff. GSCL). If the principal shareholder holds more than 95% of the shares, a decision to transfer the remaining shares of the minority shareholders to the principal shareholders against the payment of adequate cash compensation can be taken at a shareholder meeting. In the last decade, the squeeze out of the minority shareholders became an increasingly popular instrument to avoid the enforcement of the liability of the majority shareholder towards the controlled enterprise. This was especially the case if the shareholder meeting—without the vote of the majority shareholder—appointed a so-called besonderer Vertreter (special representative— section 147 subs. 1 GSCL) that was in charge of the enforcement of claims against the majority shareholder. After the squeeze out, the majority shareholder usually removes the besondere Vertreter (special representative) with a shareholder resolution, thereby stopping the enforcement of his liability. However, it is generally doubted whether the majority (or sole) shareholder has an unlimited voting right to remove the besonderer Vertreter (special representative) after the squeeze out.351

25.2

See Sect. 1.2.2.1. Federal Court of Justice as of 12.7.2011—II ZR 58/10 (HVB), NZG 2011, 950 denying a voting restriction for the sole shareholder in this case. See also Mock, in: Spindler and Stilz (2015), § 147 note 120 for a detailed discussion.

351

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Listed Corporations (Takeover Law)

In 2001, the German legislature introduced a takeover law (Wertpapiererwerbs- und Übernahmegesetz (WpÜG)) for the first time. Besides regulating public offers for the acquisitions of shares of listed stock corporations (sections 10 ff. German Takeover Law), the takeover law also provides rules on takeover offers (sections 29 ff. German Takeover Law) and mandatory bids (sections 35 ff. German Takeover Law). Pursuant to section 35 German Takeover Law, any person who gains control of a target company directly or indirectly must, without undue delay and within

350

243

245

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7 calendar days at the latest, publish that fact, including a statement as to the extent of its voting rights percentage. In addition, the offeror must publish any offer within 4 weeks of publication of the attainment of control of a target company (section 35 subs. 2 German Takeover Law). However, the sanctions imposed on a violation of the duty are rather limited. There is especially no liability of the controlling shareholder to the other shareholders.352 After a takeover or mandatory bid, the shareholder holding not less than 95% of the capital carrying voting rights can initiate a squeeze out of the remaining shareholders (sections 39a ff. German Takeover Law).

25.3 247

249

What Are the Rules on Group Information to Be Provided to the Market?

By creating the German law on groups of companies in 1965, the German legislature did create some disclosure obligations for groups of companies which nowadays only apply to non-listed corporations (see Sect. 26.1). The same concept was later adopted by the European and the German legislatures for listed corporations (see Sect. 26.2). In contrast, such obligations do not exist in either the law of the closed corporations (see Sect. 26.3) or the law of partnerships (see Sect. 26.4). In addition to these specific obligations, the general disclosure obligation relating to the commercial register have to be considered. Enterprise agreements especially have to be filed with the commercial register (section 294 GSCL). Also, the consolidated financial statements of corporations have to be filed with the national enterprise register (Unternehmensregister) (section 325 GCL).

26.1 250

Closed Corporations and Partnerships

Finally, the law on closed corporations and on partnerships does not provide any regulation for transactions regarding the taking of control. Also, a squeeze out is not admissible for these forms of companies.

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Non-listed Stock Corporations

Pursuant to section 20 GSCL, every enterprise holding more than 25% of the shares of a stock corporation must immediately inform the stock corporation, but there is no

352 Federal Court of Justice as of 11.6.2013—II ZR 80/12 (BKN), NZG 2013, 939; for an English translation of this case see Ventoruzzo et al. (2015), p. 534 ff.

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obligation to inform the other shareholders (!). Moreover, the enterprise has to inform the stock corporation if it holds a majority holding (section 16 subs. 1 GSCL353) or if its holdings fall below the levels requiring disclosure (section 20 subs. 4 and 5 GSCL). The idea of these disclosure obligations is to inform the non-listed stock corporation about the fact that one shareholder is able to block every decision requiring a ¾ supermajority. For the determination of the threshold of 25% not only are the shares held by the enterprise itself include, but also any shares indirectly hold by this enterprise. This is especially the case regarding shares whose transfer may be required by such enterprise or it is obligated to acquire (section 21 subs. 2 GSCL) or shares owned by another enterprise being controlled by this enterprise (section 21 subs. 1 sent. 2 GSCL). The legal consequences for a violation of this reporting requirement are rather severe. In fact, the enterprise cannot exercise the rights from these shares if it does not fulfil the reporting requirement (section 20 subs. 7 GSCL). A shareholder resolution passed with the votes of such an enterprise in violation of that reporting requirement can generally be challenged by the management board and, separately, by any shareholder. Also, any distributions received by this enterprise must be repaid to the stock corporation, unless the shareholder did not violate the reporting requirement intentionally (section 21 subs. 7 sent. 2 GSCL). In addition, the stock corporation itself must immediately inform other corporations if it holds more than 25% of the shares or a majority holding (section 16 subs. 1 GSCL354) of the (German) corporation (section 21 GSCL). A violation of this disclosure requirement also results in the prohibition of the exercise of the rights of these shares (section 22 subs. 4 GSCL). If the stock corporation is listed on a stock exchange, these rules do not apply (section 22 subs. 5 GSCL). The practical impact of these disclosure requirements is usually rather low since they do not apply if the stock corporation is listed on a stock exchange (section 20 subs. 8 GSCL)355 and shares of non-listed corporations are traded to a much lesser extent amount. However, immediately after a delisting, these disclosure requirements usually have some relevance.

26.2

See Sect. 3.1.3. See Sect. 3.1.3. 355 See Sect. 26.2. 354

252

Listed Stock Corporations

German capital markets law provides a rather complex regime for a disclosure of group information. Pursuant to section 21 ff. German Securities Exchange Act, any legal or natural person whose shareholding in an issuer reaches, exceeds or falls below 3, 5, 10, 15, 20, 30, 50 or 75% of the voting rights by purchase, sale or by any other means shall, without undue delay, and within 4 trading days at the latest, must

353

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253

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notify the issuer and the Federal Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) simultaneously. In this context, not only are the direct voting rights of the shareholder relevant, but also voting rights attributed to this person (sections 22 ff. German Securities Exchange Act). Although these provisions mainly address transparency aspects of capital markets they also have an effect on the disclosure of group information since this information is—in contrast to the similar reporting requirements for non-listed corporations356—public. If these reporting requirements are violated, then the voting rights are not valid (section 28 German Securities Exchange Act).

26.3 254

The disclosure requirements for non-listed stock corporations357 do not apply (analogously) to closed corporations. Also, the GLCC does not include a similar obligation. However, it is important to keep in mind that in the commercial register a list of all shareholders of the closed corporation (Gesellschafterliste) exist. However, this list is far simpler than the disclosure obligation for non-listed stock corporations since it simply shows the names of the shareholders without showing the shareholders behind the shareholders.

26.4 255

Closed Corporation

Partnerships

Finally, we also find that, in the law of partnerships, the disclosure requirements for non-listed stock corporations358 does not apply and similar obligations do not exist. However, the members of a commercial partnership (offene Handelsgesellschaft) and of a limited partnership (Kommanditgesellschaft) are registered in the commercial register with their names. In contrast, this is not the case for the civil partnership since it already is not registered at all.

356

See Sect. 26.1. See Sect. 26.1. 358 See Sect. 26.1. 357

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387

What Are the Rules on Groups of Companies in Competition Law (Especially Antitrust Law)?

European and German antitrust laws also apply in the context of groups of companies and does not, therefore, provide a privilege for groups of companies (Konzernprivileg).359 Therefore, contracts and agreements within a group of companies are also relevant for antitrust law. However, European antitrust law does not apply this principle if the group of companies must be considered as an economic unit (wirtschaftliche Einheit).360 This is the case if the controlled enterprise must comply with the instructions of the controlling enterprise leaving (almost) no autonomy for the controlled enterprise. In this context, the criteria set out by Art. 3 subs. 2, 5 subs. 4 EC Merger Regulation (EC/139/2004)361 are especially relevant.362 Consequently, in the case of the conclusion of an enterprise agreement or a 100%-shareholding, antitrust law does not apply to contracts and agreements within the group of companies.363 Another issue in antitrust law is the attribution of a behavior of one company to another company in a group. If the group of companies constitutes an economic unit (wirtschaftliche Einheit), especially in European antitrust law, not only does the company committing the wrongdoing but also other companies being a member of the group face sanctions.364 In this case, the companies of the group are joint and several debtors of the penalty.365 Consequently, antitrust law does—in this context—set aside the major principle of the German law on groups of companies366 that no company can be held liable for the debts of other companies in the group.367

359

See Beck (2017), p. 726 ff. for a detailed discussion. See only ECJ as of 15.9.2005 T-325/01 (DaimlerChrysler AG. vs. Commission) [2005] ECR II-3319; Emmerich (2014), § 3 V.7 with further references. 361 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24 as of 29.1.2004, p. 1 ff. 362 Emmerich (2014), § 3 V.7. 363 Emmerich (2014), § 3 V.7.; Fleischer (1997), p. 498 ff. 364 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, OJ L 1 as of 4.1.2003, p. 1 ff. 365 Emmerich (2014), § 3 V.7 b) with further references. 366 See Sect. 22 for further details. 367 For a critique see e.g. Bosch (2013), p. 454; Emmerich (2014), § 3 V.7.; Kellerbauer and Weber (2011), p. 214. 360

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Is There a Specific Employee Protection Within a Group? Individual Labor Law

In German labor law, employment contracts can only be concluded between an employee and a (single) company but not with a group of company since the group is not considered as legal entity.368 Also, the law on the protection against unfair dismissal (Kündigungsschutzgesetz) which applies if there are more than five employees (section 23 Law on the Protection against Unfair Dismissal) does not refer to the group but to each single company.369 Nevertheless, there are numerous regulations in labor law addressing the group instead of the single company.

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Collective Labor Law

In addition, German labor law provides a rather substantial set of rules in the area of collective labor law. In that regard, German law distinguishes between operative co-determination (betriebliche Mitbestimmung) and managerial co-determination (unternehmerische Mitbestimmung). While the provisions on the operative co-determination (betriebliche Mitbestimmung) deal with the participation of the employees in the decision making regarding the working place itself, the provisions on managerial co-determination (unternehmerische Mitbestimmung) address a representation of the employees in the supervisory board of the company. Both areas of law are not based on the single corporation but on the group since, otherwise, both instruments would not provide a sufficient participation of the employees and could easily be avoided. In that regard, the regulations are based on the terminology of section 18 GSCL370 (sections 54 ff. Works Council Constitution Act [Betriebsverfassungsgesetz], section 5 Workers Co-Determination Act [Mitbestimmungsgesetz], section 2 Drittelbeteiligungsgesetz) and, therefore, hardly develop a specific definition for a group of companies.371

368

See Sect. 8.1. Federal Labor Court as of 13.6.2002—2 AZR 327/01, BAGE 101, 321 ¼ NZA 2002, 1147; Federal Labor Court as of 5.11.2009—2 AZR 383/08, NZA-RR 2010, 325. 370 See Sect. 3.1.5. 371 Emmerich and Habersack (2013), § 3 V. for a detailed analysis of the provisions on the managerial co-determination (unternehmerische Mitbestimmung). 369

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389

Are There Special Rules on Environmental Responsibilities Within a Group?

Pursuant to section 1 Environmental Liability Act (Umwelthaftungsgesetz), every person operating a facility causing environmental damage that results in the injury of life, health or property must compensate the damaged party for that damage. If a facility is operated by several companies that are members of a group of companies, it is assumed—but not yet confirmed by case law—that besides the controlled enterprise operating the facility also the controlling enterprise can be considered as operator.372 This should be—according to some legal scholars373—the case if the controlling enterprise determines the procedures and technical operations of the facility or has an indirect influence (e.g. by not providing sufficient funds for the appropriate equipment).

30

How Are Groups Treated for Tax Law Purposes? Are There Differences According to Different Taxes (Transfer Pricing Within a Group, Special Tax Rules for Enterprise Reorganizations (Merger, Spin Off, etc.)?

The German law provides the concept of the so-called Organschaft (tax consolidation) in the context of various taxes.374

30.1

261

Corporate Tax (Körperschaftssteuer)

In corporate tax law, an Organschaft (tax consolidation) requires the conclusion of a profit transfer agreement (section 14 German Corporate Tax Act). In that case, the profits of the controlled enterprise are considered to be the profits of the controlling enterprise. Consequently, there is basically no taxation of the profits earned in the controlled enterprise. Only the consolidated tax basis of the controlling enterprise is the basis for the taxation. Although section 14 German Corporate Tax Act requires a profit transfer agreement for the Organschaft (tax consolidation), additional requirements also exist (e.g. minimum duration of the profit transfer agreement of 5 years etc.). To other forms of a groups of companies—especially a de facto group of

Kohler, in: von Staudinger (2010), § 1 UmweltHG note 89; Nitsch, in: BeckOGK (Gsell et al. 2017), § 1 UmweltHG note 85. 373 Kohler, in: von Staudinger (2010), § 1 UmweltHG note 89; Nitsch, in: BeckOGK (Gsell et al. 2017), § 1 UmweltHG note 85. 374 Emmerich and Habersack (2013), § 1 IV. for a detailed discussion. 372

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companies ( faktischer Konzern)375– the Organschaft (tax consolidation) does not apply which raises the question whether this (limited) scope of application should be extended to all groups of companies.376 This is especially the case since an application of the Organschaft solely to German corporations constitutes a violation of the Freedom of Establishment (Art. 49 ff. TFEU).377

30.2 263

The concept of Organschaft (tax consolidation) also applies in local business tax law (Gewerbesteuerrecht) which refers to the provisions of the corporate tax law.378

30.3 264

265

Local Business Tax (Gewerbesteuer)

Value Added Tax (Umsatzsteuer)

Also, the value added tax law applies the concept of Organschaft (tax consolidation) but sets out different rules. An Organschaft (tax consolidation) requires that a corporation is, according to all relevant circumstances, financially, economically and organizationally integrated in another enterprise (section 2 subs. 2 No. 2 Value Added Tax Act). This is the case if the other enterprise holds more than 50% of the voting rights of the corporation (¼ financial integration) and the both enterprises are engaged in major exchange of goods or services (¼ economic integration). Finally, the other enterprise (Organträger) must be able to exercise its influence over the management of the corporation which in the case of a stock corporation requires a control agreement. If these requirements are met, then only one enterprise exists for value added tax law. One major consequence is that transactions within the group are exempted from the value added tax.

375

See Sect. 1.2.2.3. For a critique see Rödder (2007), p. 380 ff.; Schön (2004), p. 629 ff.; Schön (2007), p. 409 ff.; see also Emmerich and Habersack (2013), § 1 IV.1. 377 ECJ as of 6.9.2012 - C-18/11 (The Commissioners for Her Majesty’s Revenue & Customs vs. Philips Electronics UK Ltd) [2012] ECR I-532. 378 See Sect. 30.1. 376

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391

Is There a Liability of Parent Company in Consumer Protection and Product Liability Law?

The German law on consumer protection and on product liability does not include specific provisions addressing groups of companies. Therefore, in consumer protection law the consumer is generally limited to enforce his rights against the company with which he has a contractual relationship. In the German product liability law, the producer is defined as a person who has produced the final product, a raw material or a component part (section 4 subs. 1 sent. 1 Act on Liability for Defective Products). A producer is also anyone who by putting his name, trademark or other distinguishing feature on the product presents himself as its producer (section 4 subs. 1 sent. 2 Act on Liability for Defective Products). Moreover, a supplier is generally deemed as a producer if the producer of the product cannot be identified (section 4 subs. 3 Act on Liability for Defective Products). If these conditions are met, members of a group of companies other than the producing enterprise itself can also be considered a producer.379 Finally, it is generally accepted—but not confirmed by case law—that a controlling enterprise is considered to be a producer if the controlling enterprise controls or mainly influences the production process taken place in controlled enterprises.380

32

32.1

267

268

What Is the Relevance of Being Part of a Group in Foreign Investment Law, Investment Protection Treaties and Registration of a Foreign Company in the Country? Foreign Investment Law

The German Foreign Trade Act (Außenwirtschaftsgesetz) considers domestic branches and permanent establishments of foreigners and foreign branches and permanent establishments of residents to be regarded as legally independent (section 3 subs. 1 German Foreign Trade Act). Consequently, actions taken by or towards branches or permanent establishments are regarded as legal transactions to the extent that such actions would be legal transactions in relations between natural or legal persons or partnerships (section 3 subs. 2 German Foreign Trade Act). Therefore, the German Foreign Trade Act basically applies an approach separating not only groups of companies but also (legally not independent) branches. The consequence of that

Higher Regional Court Düsseldorf as of 14.3.2012 – I-15 U 122/10, PharmR 2012, 354; dissenting Rieckers (2004), p. 706. 380 Spickhoff, in: Beck (2017), § 4 ProdHaftG note 20. 379

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approach is that every transaction within a group of companies—and between a company and its branches—can be restricted (section 6 German Foreign Trade Act).

32.2 270

Foreign companies (or merchants) can register a branch in Germany at the court where the branch office exists (section 13d GCL). In the case of a corporation, additional requirements (e.g. prove of the existence of the corporation, power of representation etc.) for the registration must be met (sections 13e ff. GCL). A registration of the incorporation or statutory seat in the German register is so far not possible.

33

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272

Registration of a Foreign Company in the Country

Do Private International Law Rules on Companies Change in the Presence of a Corporate Group or of Control Over a Local Company? What National Law Is Applicable to Group Companies in So Far as Concerns Shareholder and Creditor Protection?

German company law does not provide any specific rules for private international law. In fact, the major principles are governed by case law. According to this case law, the incorporation theory generally applies to all companies being founded in a member state of the European Union.381 The same applies if a company was founded in a country which concluded an international treaty with Germany guaranteeing companies from that country.382 To all other companies, the real seat theory applies.383 Regarding groups of companies, the case law is rather limited. So far it is accepted—and supported by some case law—that the law the admissibility of being a controlled enterprise is generally governed by the company applicable to

Federal Court of Justice as of 13.3.2003—VII ZR 370/98 (Überseering), BGHZ 154, 185 ¼ NJW 2003, 1461; Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 427 ff. with numerous further references. 382 Federal Court of Justice as of 13.10.2004—I ZR 245/01 (Gedios), NZG 2005, 44; Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 426. 383 Federal Court of Justice as of 27.10.2008—II ZR 158/06 (Trabrennbahn), BGHZ 178, 192 ¼ NJW 2009, 289 stating that the real seat theory still applies to Swiss corporations. For an English translation of this case see Ventoruzzo et al. (2015), p. 92 ff. 381

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the controlled enterprise since the scope of the German provisions in this context is on the protection of shareholders and creditors.384

33.1

Enterprise Agreements

The applicable law for an enterprise agreement must be determined by the applicable law of the controlled enterprise. Although nonetheless being a contract,385 the enterprises cannot choose the applicable law since enterprise agreements are not simple contracts but are, in fact, organizational contracts.386 An enterprise agreement can also be concluded by a foreign enterprise as the controlling enterprise and a German enterprise as the controlled enterprise.387 Whether an enterprise agreement can also be concluded between a German (controlling) enterprise and a foreign (controlled) enterprise is determined by the foreign law applicable to the foreign (controlled) enterprise.388

33.2

De facto Group of Companies

Also, the applicable law for the de facto group of companies ( faktischer Konzern) is determined by the law applicable to the controlled enterprise.389 Consequently, sections 311 ff. GSCL apply only if a German stock corporation is controlled by another (foreign) enterprise.

384

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Federal Court of Justice as of 13.12.2004—II ZR 256/02, NZG 2005, 214, 215 (applicable law for the piercing of the corporate veil [see Sect. 21]); Federal Court of Justice as of 5.6.1975—II ZR 23/74, BGHZ 65, 15 ¼ NJW 1976, 191 (implicit); Federal Court of Justice as of 15.6.1992—II ZR 18/91, BGHZ 119, 1 ¼ NJW 1992, 2760 (implicit); Federal Court of Justice as of 4.3.1998—II ZB 5/97, BGHZ 138, 136 ¼ NJW 1998, 1866 (implicit); Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 681 ff. 385 See Sect. 1.2.2.1. 386 Regional Court Munich I, ZIP 2011, 511; see also Federal Court of Justice as of 5.10.1981—II ZR 203/80, NJW 1982, 1817; Federal Court of Justice as of 15.6.1992—II ZR 18/91, BGHZ 119, 1 ¼ NJW 1992, 2760 (implicit); Federal Court of Justice as of 4.3.1998—II ZB 5/97, BGHZ 138, 136 ¼ NJW 1998, 1866 (implicit) all implying the application of that principle; Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 699 ff. 387 Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 701 ff.; Schall, in: Spindler and Stilz (2015), vor § 15 note 35 ff. with further references. 388 Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 712; Schall, in: Spindler and Stilz (2015), vor § 15 note 37 with further references. 389 Federal Court of Justice as of 13.12.2004—II ZR 256/02, NZG 2005, 214, 215; Higher Regional Court Stuttgart as of 30.5.2007—20 U 12/06, ZIP 2007, 1210, 1213; see also Kindler, in: Münchener Kommentar zum BGB (2015b), Internationales Gesellschaftsrecht note 713 ff.; Schall, in: Spindler and Stilz (2015), vor § 15 note 38 with further references.

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275

Are There Special Rules on Groups or Control Applicable to Financial Institutions or Insurance Companies?

The German law on financial institutions and on insurance companies does not— with one exemption390—provide a separate company law. Therefore, all domestic financial institutions and insurance companies are organized in a (general) form of company. However, the law on financial institutions and on insurance companies sets out a detailed regulation, especially regarding the duties of the managers of these institutions.

34.1 276

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Financial Institutions

The German Banking Act (Kreditwesengesetz) addresses (1) (single) financial institutions (financial institution (Kreditinstitut), (2) financial service institution (Finanzdienstleistungsinstitut) and financial undertakings (Finanzunternehmen)) and (3) financial institutions being members of groups of companies. These are financial holding company (Finanzholding-Gesellschaften), mixed financial holding company (gemischte Finanzholding-Gesellschaften), groups of institutions (Institutsgruppen) and mixed-activity holding companies (gemischte Holdinggesellschaften). However, these forms of groups of companies are not defined by German banking law but by European banking law. These terms are defined in the European Regulation on prudential requirements for credit institutions and investment firms (Regulation EU/575/2013).391 • financial holding company (Article 4 subs. 1 No. 20 Regulation EU/575/2013) • mixed financial holding company (Article 4 subs. 1 No. 21 Regulation EU/575/ 2013) • mixed-activity holding companies (Article 4 subs. 1 No. 22 Regulation EU/575/ 2013) Consequently, the German company law on groups of companies does not apply in this context. In fact, this area of law is dominated by a European understanding of groups of companies. However, the European legislator abstained from developing new or separated definitions but referred especially for the terms parent company

390

Insurance law provides the mutual insurance company (Versicherungsverein auf Gegenseitigkeit) which, however, is mainly based on the general law of associations and other legal forms. Nevertheless, it constitutes a separate legal form. 391 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176 of 27.6.2013, p. 1 ff.

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and subsidiary to the Consolidated Accounts Directive392 (Article 4 subs. 1 No. 15 and 16 Regulation EU/575/2013). See 6. for further details on the terminology in accounting law. Since (single) financial institutions not being a member of a group of companies are rather rare, the German Banking Act bases almost all its provisions on groups of companies. This is especially the case for the capital requirements (sections 10 ff. German Banking Act), special duties for managers of financial institutions (sections 24 ff. German Banking Act), etc.

34.2

Insurance Companies

The German Insurance Supervision Act (Versicherungsaufsichtsgesetz) explicitly addresses groups of insurance companies (sections 245 ff. German Insurance Supervision Act). In that context, the German Insurance Supervision Act distinguishes— similar to the law on financial institutions393—between the insurance holding company (Versicherungs-Holdinggesellschaft—defined in section 7 No. 31 German Insurance Supervision Act), the mixed financial holding company (gemischte Finanzholding-Gesellschaft—defined in section 7 No. 10 German Insurance Supervision Act) and the mixed insurance holding company (gemischte VersicherungsHoldinggesellschaft- defined in section 7 No. 11 German Insurance Supervision Act). These definitions are based on the definition of the terms parent company, subsidiary and controlling influence as defined in German accounting law.394 These definitions are the basis for an extension of the supervision competences to groups of insurance companies (sections 245 ff. German Insurance Supervision Act) and for the minimum solvency requirements (sections 250 ff. German Insurance Supervision Act).

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Are There Special Rules on the Participation of Other Group Companies in an Arbitration Procedure?

The German arbitration law (10th book (1025 ff.) of the German Code of Civil Procedure) is based on the UNCITRAL Model Law on International Commercial Arbitration and does not state specific rules on the participation of other group companies in an arbitration procedure. Therefore, participation in an arbitration

392

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Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts, OJ L 193 of 18.7.1983, p. 1 ff. 393 See Sect. 34.1. 394 See Sect. 6.

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procedure requires to approval of the company itself, whether it belongs to a group of companies or not. Apart from that no other limitations generally apply. It is also important to note that German stock corporation law arbitration clauses cannot be included in the articles of association. Pursuant to section 23 subs. 5 GSCL, the articles of association can only deviate from the provisions of the GSCL if it explicitly permits it. Since arbitration clauses and arbitration tribunals are not mentioned in the GSCL, then it remains unclear whether arbitration clauses can be included in the articles of association of stock corporations.395 In contrast, the law on closed corporations396 and on partnerships397 generally admits such clauses.

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Any Special Procedural Rules Applicable to Groups or Companies Under the Control of Another Entity (e.g. Service of Notice of a Claim)?

The German law of civil procedure does not state specific rules for group companies. Therefore, the general rules apply.

References Baumbach A, Hueck A (2017) GmbHG, 21st edn. C.H.Beck, München Beck L (2017) Konzernrecht für die Konzernwirklichkeit. AG:726–740 Böhlhoff K, Budde J (1984) Company groups - The EEC proposal for a Ninth Directive in the light of the legal situation in the Federal Republic of Germany. J Comp Bus Capital Market Law:163–197 Born M, Ghassemi-Tabar N, Gehle B (eds) (2016) Münchener Handbuch des Gesellschaftsrechts Band 7, 5th edn. C.H.Beck, München Bosch W (2013) Verantwortung der Konzernobergesellschaft im Kartellrecht. ZHR 177:454–474 Braun E (2017) InsO, 7th edn. C.H.Beck, München Emmerich V (1991) Konzernbildungskontrolle. AG:303–312 Emmerich V (2014) Kartellrecht, 13th edn. C.H.Beck, München Emmerich V, Habersack M (2013) Konzernrecht, 10th edn. C.H.Beck, München Emmerich V, Habersack M (2016) Aktien- und GmbH-Konzernrecht, 8th edn. C.H.Beck, München Fleischer H (1997) Konzerninterne Wettbewerbsbeschränkungen und Kartellverbot. AG:491–502 Fleischer H (2014) “Geheime Kommandosache”: Ist die Vertraulichkeit des Abhängigkeitsberichts (§ 312 AktG) noch zeitgemäß? BB:835–841

395

For a detailed analysis see Benedict/Gehle/Schmidt, in: Münchener Handbuch des Gesellschaftsrecht – Band 7 (Born et al. 2016), § 146 note 7 ff. 396 Benedict/Gehle/Schmidt, in: Münchener Handbuch des Gesellschaftsrecht – Band 7 (Born et al. 2016), note 19 ff.; see also Federal Court of Justice as of 29.3.1996—II ZR 124/95 (Schiedsfähigkeit II), BGHZ 132, 278 ¼ NJW 1996, 1753. 397 Federal Court of Justice as of 6.4.2017—I ZB 23/16 (Schiedsfähigkeit III), NZG 2017, 657.

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Fleischer H, Hüttemann R (2015) Rechtshandbuch Unternehmensbewertung. Dr. Otto Schmidt, Köln Goette W, Habersack M (eds) (2008–2013) Münchener Kommentar zum AktG, 3rd edn. C.H.Beck, München Goette W, Habersack M, Kalss S (eds) (2015–2017) Münchener Kommentar zum AktG, 4th edn. C. H.Beck, München Grundmann S (2012) European company law, 2nd edn. Intersentia, Cambridge Gsell B, Krüger W, Lorenz S et al (eds) (2017) BeckOGK. C.H.Beck, München Haar B (2006) Die Personengesellschaften im Konzern. Mohr Siebeck, Tübingen Habersack M (2016) Aktienkonzernrecht – Bestandsaufnahme und Perspektiven. AG:691–697 Hirte H (2008) Towards a framework for the regulation of corporate groups’ insolvencies. ECFR:213–236 Hirte H (ed) (2013) Großkommentar zum AktG, 4th edn. De Gruyter, Berlin Hirte H (ed) (2013–2017) Großkommentar zum AktG, 5th edn. De Gruyter, Berlin Hirte H (2016) Kapitalgesellschaftsrecht, 8th edn. RWS Verlag, Köln Hirte H, Bülow C (eds) (2010) Kölner Kommentar zum WpÜG, 2nd edn. Carl Heymanns Verlag, Köln Hommelhoff P (1984) Eigenkapital-Ersatz im Konzern und in Beteiligungsverhältnissen. WM:1105–1118 Hommelhoff P (1992) Praktische Erfahrungen mit dem Abhängigkeitsbericht. ZHR 156:295–313 Hüffer U, Koch J (2016) AktG, 12th edn. C.H.Beck, München Kellerbauer M, Weber O (2011) Die gesamtschuldnerische Haftung für Kartellgeldbußen und ihre Grenzen: Das Urteil Siemens VA Tech. EuZW:666–669 Koppensteiner H-G (1995) Konzernrecht. AG:95–96 Kropff B (1993) Das TBB-Urteil und das Aktienkonzernrecht. AG:485–495 Lutter M (1984) Europäisches Gesellschaftsrecht, 2nd edn. De Gruyter, Berlin Lutter M, Hommelhoff P (2017) GmbHG, 19th edn. Dr. Otto Schmidt, Köln Lutter M, Bayer W, Schmidt J (2012) Europäisches Unternehmens- und Kapitalmarktrecht, 5th edn. De Gruyter, Berlin Martens K-P (1979) Der Auschluss des Bezugsrechts: BGHZ 33, S. 175. liber amicorum Fischer 437 Michalski L, Heidinger A, Leible S, Schmidt J (2017) GmbHG, 3rd edn. C.H.Beck, München Mock S (2015) Gesellschaftsrecht. C.H.Beck, München Mock S (2016) Die rückwirkende Anwendung von Bewertungsstandards. WM:1261–1269 Mock S, Csach K, Havel B (2018) Handbook on shareholders’ agreements. De Gruyter, Berlin Moloney N (2014) EU securities and financial markets regulation, 3rd edn. Oxford University Press, Oxford Münchener Kommentar zum BGB (2015a) 7th edn. C.H.Beck, München Münchener Kommentar zum BGB (2015b) 6th edn. C.H.Beck, München Münchener Kommentar zum GmbHG (2015) 2nd edn. C.H.Beck, München Rieckers O (2004) Die Konzernmutter als Quasihersteller - Haftung für enttäuschtes Konzernvertrauen? VersR:706–713 Rödder T (2007) Perspektiven der Konzernbesteuerung. ZHR 171:380–408 Roth G, Altmeppen H (2015) GmbHG, 8th edn. C.H.Beck, München Säcker FJ (1987) Zur Problematik von Mehrfachfunktionen im Konzern. ZHR 151:59–71 Schmidt K (1981) Abhängigkeit, faktischer Konzern, Nichtaktienkonzern und Divisionalisierung im Bericht der Unternehmensrechtskommission. ZGR:455–486 Schmidt K (2012) Münchener Kommentar zum HGB, 3rd edn. C.H.Beck, München Schneider U (1975) Die Personengesellschaft als verbundenes Unternehmen — Prolegomena zu einem Konzernrecht für Personengesellschaften. ZGR:253–293 Schön W (2004) Abschied vom Vertragskonzern? ZHR 168:629–636 Schön W (2007) Perspektiven der Konzernbesteuerung. ZHR 171:409–445

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Schürnbrand J (2017) Wissenszurechnung im Konzern - unter besonderer Berücksichtigung von Doppelmandaten. ZHR 181:357–380 Sester P (2005) Plädoyer gegen ein materielles Konzerninsolvenzrecht. ZIP:2099–2101 Spindler G, Stilz E (2015) AktG, 3rd edn. C.H.Beck, München Staub H (ed) (2011) Großkommentar zum HGB, 5th edn. De Gruyter, Berlin Timm W (1987) Zur Sachkontrolle von Mehrheitsentscheidungen im Kapitalgesellschaftsrecht. ZGR:403–442 Veil R (2017) European capital markets law, 2nd edn. Bloomsbury Publishing, London Ventoruzzo M, Conac P-H, Goto G et al (2015) Comparative corporate law. West Academic, St. Paul von Staudinger J (2010) UmweltHG. De Gruyter, Berlin Wellkamp L (1993) Die Haftung von Geschäftsleitern im Konzern. WM:2155–2159 Wöhe G, Mock S (2010) Die Handels- und Steuerbilanz, 6th edn. Vahlen, München Zöllner W, Noack U (eds) (2004) Kölner Kommentar zum AktG, 3rd edn. Carl Heymanns Verlag, Köln

National Report on Turkey Gül Okutan Nilsson

Abstract Turkish company law is regulated by the Turkish Commercial Code No. 6102, which contains a subsection on the law of groups of companies. One of the main goals of Turkish corporate group law is to protect the interests of shareholders and creditors of subsidiaries. With regard to this point, there are three separate ways in which liability of the mother company may come into play: (1) Liability for unlawful exercise of control over the management of the subsidiaries, (2) Liability for unjustified resolutions of the general assembly of the subsidiaries and (3) Liability due to breach of trust. Another goal of Turkish corporate group law is to facilitate the management of the corporate group, by granting the mother company certain rights of instruction and information over subsidiaries, as well as squeeze out rights against certain minorities. The mother company has binding instruction rights in case of wholly owned companies or control by way of a domination contract.

1 Introduction 1.1

General Background on Turkish Company Law and Group Law Provisions

Turkish company law is regulated by the Turkish Commercial Code (TCC) No. 6102, which went into force in July 2012.1 The TCC’s book2 on company law consists of a general section on provisions applicable to all types of companies followed by individual sections on specific types of companies. The TCC regulates

1

The TCC repealed and replaced the old Turkish Commercial Code No. 6762 from 1957. The TCC is made up of six books on the following topics: The Business Enterprise, Companies, Negotiable Instruments, Transport, Maritime Trade and Insurance Law. 2

G. Okutan Nilsson (*) Istanbul Bilgi University Faculty of Law, Istanbul, Turkey e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_14

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“commercial companies”,3 while the Turkish Code of Obligations provides for a civil law company (simple company). The most common form of commercial companies are the joint stock company and the company with limited liability, which offer their shareholders protection against the company’s creditors. Joint stock companies have two compulsory organs, which are the general assembly (shareholders’ meeting) and the board of directors (one-tier board). Limited liability companies also have two compulsory organs, which are the general assembly and managers.4 A joint stock company may be a closed company or a public company. Public companies are additionally subject to the Capital Market Law (CML) No. 6362 that went into force in December 2012.5 The Capital Market Board (CMB), which is an autonomous regulatory body, issues secondary legislation in the form of communiqués which also apply to public companies. Groups of companies are regulated by a subsection6 within the general section of the TCC’s book on companies, thus being relevant for all commercial companies regardless of company type, including public companies. This national report will mainly explain the group law provisions under the TCC. Other laws that are relevant for company groups, such as the Capital Market Law, Banking Law and Corporate Tax Law will also be briefly mentioned.

1.2

The Main Goals of Turkish Corporate Group Law

One of the main goals of Turkish corporate group law is to protect the interests of shareholders and creditors of the daughter companies.7 The justification of the TCC explains that the fiction of “independence” of companies underlying company law theory is detached from reality with regard to company groups.8 According to the 3 The commercial companies regulated by the Turkish Commercial Code are; the joint-stock company (“Anonim Şirket”), company with limited liability (“Limited Şirket”), general partnership (“Kollektif Şirket”), limited partnership (“Komandit Şirket”) and partnership limited by shares. The joint stock company, the limited liability company and the partnership limited by shares are classified as “capital companies” while the general and limited partnerships are classified as “personal companies” under article 124/2 of the TCC. All of these companies, including the personal companies, have legal personality. The cooperative is also mentioned as a commercial company in the TCC, however, it is regulated by a special act. 4 In this chapter, the term “director” is used to also cover the managers of limited liability companies. 5 This law repealed and replaced the old Capital Market Law No. 2499 from 1981. 6 TCC articles 195 to 209. 7 In this chapter, the terms daughter company, controlled company or subsidiary shall be used interchangeably, as well as the terms mother company, controlling company or parent company. 8 Justification of the Turkish Commercial Code, articles 195-209 at 465. (The “justification” is a text accompanying a draft law when it is submitted to the Parliament. It explains the reasoning behind the law and is often used as a source of interpretation of the law.)

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presumption on which the law is based, the existence of a company group creates the risk that interests of daughter companies may be compromised for the sake of the group, which would in turn harm the interests of creditors and “outside” shareholders who do not hold a stake in other group companies.9 The TCC attempts to resolve this principal-agent problem by imposing a liability on the mother company and granting certain rights of action to shareholders and creditors of the daughter companies. Another goal of Turkish corporate group law is to facilitate the management of the corporate group,10 by granting the mother company certain rights of instruction and information over subsidiaries, as well as squeeze out rights against certain minorities.

1.3

The General Outline of Turkish Corporate Group Law System

The system introduced by the TCC may be outlined as follows: The central concept is that of “control”. Firstly, the law describes the legal tools through which control may be attained. According to secondary legislation, at least one controlling company and two controlled companies are necessary for the existence of a company group.11 The most important provisions of the subsection on corporate groups concern the liability of the mother company. There are three separate ways in which such liability may ensue: (1) Liability for unlawful exercise of control over the management of the subsidiaries, (2) Liability for unjustified resolutions of the general assembly of the subsidiaries and (3) Liability due to breach of trust. These are briefly explained below: (1) Regardless of how control is attained, the mother company is essentially under the duty to use the control in the interests of the daughter companies. Control may not be exercised in a way which will direct the daughter company to carry out transactions or to take measures that may be detrimental to it. However, if control is used in a detrimental way, such use will not lead to the liability of the mother company, provided that any detriment caused to the daughter company is compensated in the manner permitted by the law. In case of failure to do so, the shareholders and creditors of the daughter company may sue the mother company and its management body for their liability.

9

Okutan Nilsson (2009), pp. 13–14. Tekinalp (2007), p. 850; Okutan Nilsson (2009), p. 14. 11 Commercial Registry Regulation Article 105. This provision of the Commercial Registry Regulation is criticised in the literature, as TCC art. 195, which defines corporate groups and criteria of control, does not prescribe a clear threshold of minimum three companies. See, Göktürk (2015), p. 13. 10

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(2) The mother company may be liable to dissenting shareholders for certain resolutions adopted at the general assembly of the subsidiary, if such resolutions lack any justification in terms of the interests of the subsidiary. (3) The mother company may be held liable due to the breach of trust raised in third parties. The liability provisions are supported by disclosure, reporting and special audit procedures. In relation to group management, the law strengthens the position of the mother company by granting it the right to give instructions to the management of the daughter company in cases of contractual control and whole control. The latter exists when the mother company directly or indirectly owns all the shares and voting rights of the daughter company. In other types of control, the mother company is not granted an explicit right of instruction, but it will still be able to direct the subsidiaries thanks to the compensation system mentioned above. Another important tool in group management is the mother company’s right to information about subsidiaries. Furthermore, provided there are just grounds, the mother company has a right to squeeze out minority shareholders of daughter companies that own 10% or less of the daughter company’s shares.

1.4

Entities Covered by the Group Law Provisions

The TCC takes commercial companies as the building blocks of company groups. The group law provisions of the TCC apply to all commercial companies regardless of their type,12 although company groups are mostly formed by joint-stock companies in practice. Whilst the TCC states that a company group may be formed by controlling and controlled companies, a special provision concerns persons or entities other than commercial companies that may be at the peak of the whole group. In Turkey, the ultimate majority owners of many big companies are families13 or single individuals. Even public companies listed on the stock exchange may have low flotation ratios and remain under the ultimate control of families. Bearing this fact in mind, the TCC subjects the ultimate controlling person or entity to the group law provisions. According to TCC art. 195/5, group law provisions shall apply to the “enterprise” which controls the whole group. “Enterprise” is not defined in the law. However, it is clear from the justification of the TCC that this concept should be interpreted in a broad way. Natural persons, any type of legal entities or groups of persons or other

12 In the draft TCC, initially only capital companies were regulated under group law. However, in order to avoid legal gaps or backdoors which may serve to evade responsibility, the final version of the Code extended the application of the group provisions to all types of companies including personal companies. 13 Selekler-Gökşen, Yıldırım Öktem (2009), p. 193 et seq.

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bodies including public entities14 may be covered by this concept.15 The “enterprise” at the peak of the group is deemed by law to be a “merchant” (Art.195/5). Therefore, it will be subject to the rules and obligations applying to merchants, such as bankruptcy.

2 Control The existence of a company group is based on the key concept of “control”. The controlling company and the companies under its control together form the group. Justification of the TCC describes control as the power to exert an influence on a company.16 The TCC itself does not contain a definition of control, but simply sets out certain criteria which may be used to establish its existence. According to TCC art. 195, control may be attained in three ways: (1) By way of an organic tie between two companies, i.e. through certain rights obtained by ownership of shares, (2) by way of contract (3) by any other means.

2.1

Control by Way of Share Ownership

The TCC stipulates that if a company, directly or indirectly; a) Owns the majority of voting rights in another company, or b) Is able to constitute a voting majority in the other company either on its own or together with other partners by way of a contract, or c) Has, due to the rights granted by the articles of association of the company, the power to provide the election of a number of directors who will constitute a decision-making majority in the management organ of the other company, then that company is a controlling company (TCC Art. 195/1/a). In all of these cases, one company has a clear ability to control the other. In the first case, owning the majority of voting rights in another company means that the holder of the voting majority can take decisions at the shareholder’s meeting. Although certain important decisions may require a qualified majority by law, ownership of simple majority of the votes provides a means to control the company and is deemed sufficient by the TCC to establish control. Ownership of the voting

14

Okutan Nilsson (2009), p. 76; Gündoğdu (2014), p. 185. In the earlier versions of the TCC, “legal or natural persons or commercial enterprises” at the peak of the group were qualified as ultimate owners. The last version broadened the scope by using the concept of the “enterprise”. 16 Justification of the TCC, articles 195-209. 15

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majority may also be provided by voting privileges granted by the articles of association. In the second case, a voting majority is formed together with other shareholders, by way of a contract. The type of contract mentioned here are voting agreements which contain clauses committing the shareholders to vote in unison for certain decisions.17 In the final case, the element underlying control is the ability to nominate and to provide the election of a majority of the directors who will be able to take decisions at the management organ. Normally, a shareholder or shareholders who have the voting majority in the general assembly would also have the power to elect the directors. However sometimes, the articles of association may grant a class of shareholders—who may or may not have the voting majority—a special right to nominate a certain number of directors (TCC Art. 360). If this so-called “group privilege” is granted, then the general assembly has to elect the persons nominated by the right holders, provided that just grounds do not exist to avoid electing such nominees. General assembly resolutions that do not respect this right may be annulled for breaching the articles of association (TCC Art. 445). Since this right effectively guarantees the election of desired directors, it is commonly used in practice. If such a “group privilege” is anchored in the articles of association of the company, the requirement of the TCC under this subparagraph would be met. The existence of any one of these cases will establish control, regardless of whether such control is actually exercised. In other words, these criteria set out cases of irrebuttable presumption of control.18 The TCC also stipulates rebuttable presumptions of control (Art. 195/2). These are, a) owning a majority of the shares or, b) owning a sufficient number of shares which make it possible to adopt resolutions. In these cases, despite the initial existence of a presumption of control, it may be proven that actual control over another company does not exist.19 For example, owning a majority of the shares would, under normal circumstances also give a voting majority. Likewise, owning less than 50% of the shares in a dispersed shareholder setting may have the effect of owning a majority of shares. However, if multiple voting rights are granted in favour of a minority, having a majority of the shares may not be sufficient in itself to exert control on the company’s decision making. Therefore, owning a majority of the shares would be a rebuttable presumption of control.

17

Tekinalp (2013), p. 554, N. 23-44; Okutan Nilsson (2009), p. 129; Gündoğdu (2014), p. 205. Justification of the TCC, Art. 195 par. 1; Tekinalp (2013), p. 552 et seq.; Okutan Nilsson (2009), p. 102; Uygun (2015), p. 50. 19 Tekinalp (2013), p. 555 N. 23–47; Okutan Nilsson (2009), p. 131 et seq.; Uygun (2015), p. 91 et seq.; Gündoğdu (2014), p. 214. 18

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Contractual Control

The TCC permits control to be attained by way of a domination agreement, which is defined in the Commercial Registry Regulation as an agreement that grants the unconditional right to give instructions to the management body of another company.20 Domination agreements must be registered with the Commercial Registry and must be disclosed to the public (TCC Art. 198). Other than the above, the TCC does contain any special regulations on domination agreements. No special rules on liability or consequences of breach of contract are stipulated. Domination agreements are a new concept introduced by the TCC and they have yet to be embraced in practice.

2.3

Control by Other Means

The criteria of control explained above can be tested almost with mathematical precision. However, it may also be possible for a company to exert an influence over another company by other means. The TCC states that if a company is able to keep another company under its control “in any other way”, then it shall be deemed to be a controlling company (Art. 195/1/b). This last criterion opens the floodgates for innumerable ways of establishing control. For example, it may be questioned whether the sole customer of a manufacturing company is in a position to exert influence on that company; or a bank that has given a substantial loan to a company may have a controlling influence on the company. So far, no such cases have been witnessed in case law.

2.4

No Requirement of “Unified Management”

Once control is established through one of these criteria, a further examination of “unified management” is not necessary for the existence of a group.21

20

Commercial Registry Regulation Art. 106. While the initial draft of the TCC contained a reference to the requirement of unified management for the existence of a company group, this condition was later removed from the law, as it was assessed that the control principle provides more legal certainty. Tekinalp (2009a), p. 1549.

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3 Liability of the Mother Company The mother company may be subject to three types of liability: (1) Liability for unlawful exercise of control over the management of the subsidiaries, (2) Liability for unjustified resolutions of the general assembly of the subsidiaries and (3) Liability for breach of trust. The liability system does not differ depending on how control is obtained. In other words, regardless of whether control is obtained through share ownership, domination contract or by any other means, the same liability provisions apply. Only in the case of whole ownership of a company, there are certain differences regarding the first type of liability, i.e. liability for unlawful exercise of control over the management of the subsidiaries.

3.1

Liability for Unlawful Exercise of Control Over the Management of the Subsidiaries

The liability for unlawful exercise of control over the management of the subsidiaries is regulated by article 202/1 of the TCC. In the case of wholly owned subsidiaries, articles 203 to 206 contain certain special provisions.

3.1.1

In General

This system of liability is substantially modeled on the regulation of de facto groups in German law.22 According to article 202/1 of the TCC, the mother company may not use its control in a way which may cause a detriment to the daughter company. According to the examples given in this provision, unlawful use of control may include causing the daughter company to transfer its business, assets or profit, to create encumbrances on its assets, to let it act as surety or to cause it to give guarantees or not to maintain or renew its facilities. The exercise of control will not be deemed unlawful if any detriment caused to the daughter company is compensated as permitted by the law. According to this system, if the mother company directs the daughter company to carry out transactions or take measures that will be detrimental to it, then the mother company must compensate the detriment caused to the daughter company within the same financial year, or must grant a claim to the daughter company for its compensation. In case of failure to compensate, each individual shareholder or creditor of the daughter company may sue the mother company and its directors for the company’s damages. If the court case succeeds, damages will be paid to the daughter company

22

German Stock Corporation Law §311-318.

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and not to the claimant shareholder or creditor (TCC Art. 202/1/b). In other words, the action for damages is a derivative action where the damages will be paid to the company. However, if the circumstances so justify, the judge may also decide on alternative solutions, including ordering the mother company to buy the shares held by the claimant shareholders. (TCC Art. 202/1/b). This latter option provides for a more practical and satisfying solution from the perspective of claimant shareholders, especially in cases where the damages are so big that they can not be properly quantified.23 No liability for damages shall exist if it can be proven that, under the same or similar circumstances, the directors of an independent company acting with diligence and in good faith in order to protect the interests of the company would also have made or taken or omitted the transaction or measure causing the detriment. In other words, if the action can be justified under the duty of care and loyalty, the mother company or its managers will not be held liable (TCC Art. 202/1/d). Liability for unlawful exercise of control over the management of the subsidiary is based on the same principles as director’s liability in joint-stock companies. It can be said that the mother company and those of its directors that exert control over the management of the subsidiary are placed on the same footing as the directors of the subsidiary. Any control thus exerted on the management of the subsidiary which would be deemed to breach the director’s duty of care and loyalty would lead to liability of the mother company and its directors, provided that any detriment so caused to the subsidiary is not compensated in time. Art. 202/1 regulates the liability of the mother company and its directors, but does not contain any provisions as to whether the directors of the subsidiary may also be held liable for actions which were carried out due to control exerted by the mother company. The lack of specific provisions on the liability of directors of the subsidiary in this section, however, does not rule out their general liability arising from their duty to protect the interests of the company.24 Subsidiary’s directors may still face claims under the general director’s liability clauses of the TCC (Art 553 et seq). In view of this risk, the TCC provides an outlet for the directors of the subsidiary: They can ask the mother company to assume, by contract, all the legal consequences that may ensue from their liability against shareholders and creditors due to the application of group liability provisions (TCC Art. 202/5). In other words, the mother company may agree by contract, to hold the subsidiary’s directors harmless against the claims of its shareholders and creditors.

3.1.2

Special Case of Wholly Owned Companies

One of the novelties of the TCC is the possibility to set up single member joint stock or limited liability companies. According to article 203 of the TCC, if the mother

23 24

Tekinalp (2013), p. 583 N. 23–110; Okutan Nilsson (2009), p. 383. Okutan Nilsson (2009), p. 370 et seq.; Gündoğdu (2014), p. 386; Göktürk (2015), p. 310.

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company, directly or indirectly, owns all of the shares and voting rights of the daughter company, it has whole control over the daughter company. In this case, the mother company obtains the freedom to give instructions to the daughter company, even if such instructions may cause a loss to the daughter company. However, the freedom to give instructions has certain boundaries: Instructions are not permitted if they exceed the payment capacity of the company or put the company’s existence at risk or create the risk of loss of its important assets (TCC Art. 204). In addition, permitted instructions must be necessitated by established and concrete policies of the group, which requirement is said to be inspired by the Rosenblum doctrine25 (TCC Art. 203). According to Article 205 TCC, the directors of the daughter company must comply with these instructions and they can not be held liable by the daughter company itself or its single shareholder, for any losses that may be caused to the company through that instruction. While the single shareholder obtains the freedom to give instructions and manage the daughter company according to its own discretion, the duty to compensate any detriments caused to the daughter company still exists. If such compensation is not provided by the mother company, creditors of the daughter company may sue the mother company or its directors for damages (TCC Art. 206). There are two exceptions to the liability of the mother company in the case of whole control: One of them is the one that has already been explained above, regarding the admissibility of the relevant action in case it is justified by the duty of care and loyalty (TCC Art. 202/1/d). The other exception concerns the relationship between the creditors and the daughter company. If the mother company can prove that a creditor entered into a credit transaction with the company knowing that any detriment caused due to the exercise of control by the mother company had not been compensated or if the creditor should have known this under the circumstances, then the mother company shall be exempted from liability. To summarise, in the case of wholly owned subsidiaries there are no minority shareholders. Therefore, the law makes group management more flexible by granting a broad right of instruction to the sole owner. The only concern in the case of wholly owned companies is the protection of creditors, who are entitled to sue the mother company for damages as explained above.

3.2

Liability for Unjustified Resolutions of the General Assembly of the Subsidiaries

Under certain circumstances, the mother company may be held liable for certain decisions taken at the general assembly of the daughter company. This liability is only imposed on the mother company and not on its directors, since it relates to 25

Justification of the TCC, Art. 203.

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possible losses caused by a shareholders’ decision rather than a decision of directors. Furthermore, it only gives rights of action to shareholders and not to creditors. According to TCC art. 202/2, shareholders of the daughter company have a right to claim compensation for the damages they may suffer or to exit the company by selling their shares to the mother company; if: a. The daughter company adopts structural resolutions such as merger, division, issuing securities or important amendments to the articles of association, b. Such resolutions are adopted by way of exercise of control, c. Such resolutions lack a clear justifiable ground for the daughter company, and d. The shareholder(s) oppose(s) the relevant general assembly decision.26 If the abovementioned conditions are met, the dissenting shareholders may sue the mother company before the court and claim to be compensated for any damages they may personally suffer through such general assembly resolution.27 They may alternatively claim for their shares to be bought by the mother company, which provides them a sell-out right. (TCC Art. 202/2). In case of a sell out claim, the law states that shares should be purchased at market value, and if no market value can be determined, based on the real value, or based on a value that will be determined by the court according to a generally accepted method.28 Upon application of dissenting shareholders to the court, the court shall decide on a guarantee in the amount of possible compensation or price of shares (TCC Art. 202/3). No transaction may be carried out based on the company’s decision until such guarantee is given by the defendant (i.e. the mother company).29 This gives the claimant shareholders a strong weapon against the controlling shareholder. In cases where a high amount of guarantee is necessary and the defendant is reluctant to provide such guarantee, the claimant shareholders may effectively be able to block the company from carrying out the decision. It must also be pointed out that this type of lawsuit does not challenge the decision of the general assembly. General assembly resolutions can be annulled or declared

26

The provision relates mainly to general assembly decisions. However, in certain special cases, the general assembly may defer its decision-making authority to the board, such as in the case of authorised capital increase or simplified mergers. In this case, this provision will apply to such board decision. 27 Okutan Nilsson (2009), p. 404; Tekinalp (2009b), pp. 172–173; Gündoğdu (2014), p. 341; Göktürk (2015), p. 413. 28 The same provision (TCC Art. 202/2) also states that the court shall base its decision on the value of the shares at the date closest to the judgement of the court. However, this provision is criticized at it may lead to unfair results, due to the changes in the value of the shares that may take place during the duration of the court procedure. Similarly, if the opposed company decision has already been carried out, this may also bring down the price of the shares, which is precisely the incident against which shareholders may be seeking protection. Therefore, it is argued in the literature that the court should strive to decide on a fair price taking all factors of the case into consideration. [Okutan Nilsson (2009), p. 411; Göktürk (2015), p. 419]. 29 This rule would only be helpful if the shareholder is able to act before the relevant transaction is carried out.

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null and void under certain conditions according to other mechanisms regulated by the law. The case regulated by Art. 202/2 of the TCC is not one for challenging the validity of general assembly resolutions, but rather alleviating the possible negative consequences of unjustifiable decisions taken in the company. The sell-out claim in case of unjustifiable company resolutions taken within the group context is a method of minority protection that may be frequented in practice, as it provides a clear cut, practicable solution in favour of the minority against abuses by mother companies. It gives shareholders a right to exit and provides an easy alternative to the difficult problem of proving damage in compensation claims. Nevertheless, it may not be easy for dissenting shareholders to prove that general assembly decisions do not have a clear justifiable ground for the company. Finally, it must be added that the sell-out claim is not a mechanism for controlling the formation of a company group or entry into a company group, since the application of this provision requires an already existing relationship of control and an unjustifiable shareholder resolution. Under the TCC, shareholders do not have a right to exit before the relationship of control is formed, but they may exit afterwards if control is used in a way that is not justifiable for the company. One method which may serve as a mechanism of control for entry into a group is the mandatory bid regulated by capital market legislation.30 According to the mandatory bid rules, any person who acquires the management control of the company (which is defined as owning more than 50% of the voting rights or being able to appoint a majority of the directors) must make a public offer to purchase the rest of the shares of the company at the price paid for acquiring the controlling shares. This gives a right for the minority to exit the company when the control of the company changes hands. The mandatory bid requirement applies only for public companies that are subject to Capital Market Law.

3.3

Liability Due to Breach of Trust

The TCC contains a special clause on the liability of the mother company due to breach of trust. Art. 209 of the TCC states that, Where the reputation of the group has reached such a level that it creates trust in the public or consumers, the mother company is liable for the trust raised by the use of such reputation.

According to this, two conditions must be met for the liability of the mother company to exist: The first condition is that the reputation of the group must have reached a level creating trust in the eyes of the public or consumers. In other words, only those groups that are deemed credible and trustworthy in public opinion will come under the application of this clause. The second condition is that this reputation must be used to raise trust. This means that the reputation of the group must be used

30

CML art. 26 and CMB Communique No. II-26.1 on Tender Offers.

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in a way that will raise further trust in the consumers, customers or other business partners to affect their behaviour, especially to induce them into entering into a contract with the daughter company. The wording of this provision is open to interpretation in a very broad manner. The justification of the law also supports a broad interpretation, as explained below. However, such a broad interpretation is not supported in the academic literature,31 as also elaborated below. So far, no court judgements have been given based on this provision. The Justification of the TCC states that the purpose of the provision is to make the mother company bear the consequences of using the trust that it has raised in the public. The Swissair judgement32 of the Swiss Federal Court is given as an example for protection of this trust. It is added in the Justification that, “daughter companies announce the name of their mother companies on company papers and in advertisements and by such use, they find new customers or obtain a commercial interest. Where the group has a high reputation, this can translate into high gains. (. . .) The underlying reason why the public or consumers turn to the daughter company and an increase is provided in the market share of the daughter company is the belief that a daughter company which is a member of that group shall act in an honest way, that the information it discloses and financial statements it announces to the public are true, that it has high technology, good quality, and that everything is as it should be. (. . .) If the information, statements, quality etc. do not conform to the trust, then the mother company that does not object to the use of its name must bear the consequences”.33 The Justification also states that, “The use of reputation should be assessed according to the facts of the case. It is not necessary for the name of the mother company to be mentioned or the group logo to be used. (. . .) The pivotal concept is the ‘use of reputation’. If there is no use, mere ‘membership to the group’ will not lead to liability”.34 Based on these explanations, it would, at first sight, be possible to interpret the provision as meaning that the mere use of a publicly reputable company group’s name to market the products and services of a daughter company may lead to the mother company’s liability. However, such an interpretation would be extremely broad. Interpreted in this way, “use of reputation” would have such a wide scope that any kind of promotion done with the group name for the purpose of marketing the daughter company’s products, services, or even its shares, would be sufficient to trigger the liability of the mother company. The mother company would almost have a liability for guaranteeing the proper performance of any and all the obligations of the daughter company. This, however, would be a far-reaching result.

31

See, Yılmaz (2010); Okutan Nilsson (2013), pp. 35–54. BGE 120 II 331. 33 Justification to the TCC, Art. 209. 34 Ibid. 32

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From an economical point of view, such a broad interpretation of the provision, linking liability to the use of reputation would be undesirable, as it would eliminate the protection provided by the limited liability principle and create a strong disincentive for group of companies, which are the driving forces of the economy. Mother companies could be faced with hundreds of claims arising from contracts made by their subsidiaries, of which the mother company may not even be aware. Such an unlimited performance guarantee based on a general trust in the group name would create an unforeseeable and incalculable risk for the mother company, which can not be reasonably expected even in largest groups. This would also create a wrong incentive structure by punishing successful companies who have reached a credible position in the eyes of the public, since the provision, while trying to limit its scope of application, imposes the liability only on highly reputable, hence successful groups.35 It is suggested in academic literature, that this provision should be interpreted as sanctioning not a general trust which the public may have in the group name, but the abuse of a special trust relationship36 which is created between the mother company and business partners of a daughter company. In other words, the mother company’s statements, actions or even omissions may raise a legitimate concrete expectancy in a third party with regard to the mother company’s future conduct in relation to a contractual relationship between such third party and a daughter company. This legitimate expectancy may influence such third party’s actions and decisions with regard to its contractual relationship with the daughter company. In such a case, if the mother company does not honour this expectancy, then such trust can be deemed to be abused.37 “Use of reputation” in this manner must exclude the use of the group name for general marketing purposes aiming at public masses and must be limited to use through a special conduct and with regard to a specific person.38 Comfort letters (patronage declarations) would come within the ambit of this provision provided that each letter should be individually assessed with regard to its wording.39 Article 209 does not contain any specifics with regard to the conditions of the liability for breach of trust. It is not regulated whether the fault of the mother is a requirement for liability or how damages should be calculated or what the applicable time prescription is. Differing opinions appear in academic literature on all these issues and there are no guiding rulings of the Court of Cassation as of yet.

35

For further critism of the provision see, Okutan Nilsson (2007). Yılmaz (2010), pp. 307–309; Okutan Nilsson (2007), p. 22 et seq; Gündoğdu (2014), p. 372 et seq; comp. Tekinalp (2013), p. 601 N. 23–160. 37 Yılmaz (2010), pp. 307–309; Okutan Nilsson (2007), p. 22 et seq; Gündoğdu (2014), p. 372 et seq. 38 Yılmaz (2010), pp. 307–309; Okutan Nilsson (2007), p. 22 et seq; Gündoğdu (2014), p. 372. 39 Tekinalp (2013), p. 602, N. 23-161 et seq; Yılmaz (2010), p. 309; Okutan Nilsson (2009), p. 510; Gündoğdu (2014), pp. 374–375. 36

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4 Disclosure, Reporting, Accounting and Audit 4.1

Disclosure of Share Ownership

With the aim of informing the public about those persons who may be in a position to gain control over the company, the TCC requires the disclosure of the acquisition or disposal of certain percentages of shares in a “capital company”.40 These percentages are determined according to various thresholds that are deemed important in defining the share percentages constituting a minority or cross-shareholding or meeting quorums.41 The duty to disclose exists in case the party acquiring or disposing of shares belongs to a company group.42 The duty to disclose rests on the “enterprise”.43 Therefore, not only companies, but also individuals who acquire shares must make this disclosure. Furthermore, directors of the enterprise, or of the company, their first-degree relatives and companies in which they own a minimum of 20% of shares, must also disclose their share ownership in that company. Disclosure must be done by way of registration in the Commercial Registry and an announcement in the Commercial Gazette. Failure to complete the registration and announcement requirements leads to the freezing of voting rights and all other rights related to the shares acquired (TCC Art. 198/2).

4.2

Reporting at the Daughter Company

The TCC contains a reporting requirement for daughter companies, which should be a tool helping shareholders and creditors with liability claims. It mandates the preparation of a report by the management organ of the daughter company detailing all transactions made with, under the direction of, or for the benefit of the mother company or sister companies. The consideration agreed for each transaction must be stated. In addition, all measures taken or omitted for the benefit of the mother company or a sister company must also be disclosed, together with the results of such measures. If any detriment was caused to the company as a result of such measures, this must also be disclosed, together with details on how such detriment was or shall be set off or compensated by the mother company.

For the meaning of “capital company”, see above fn. 3. These thresholds are 5, 10, 20, 25, 33, 50, 67 and 100%. Disclosure must be made when shares are acquired or disposed of, if the resulting share ownership reaches or falls below these thresholds. TCC Art. 198/1. 42 Commercial Registry Regulation, Art. 107/2. 43 See in this Chapter under Sect. 1.4. 40 41

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At the end of the report, the management organ must make a summary analysis of the relevant transactions or measures, stating whether an appropriate compensation was received for each transaction or whether a detriment was caused to the company by such measures, and if so, whether they were compensated or a claim was provided. The summary analysis of the management organ must be included in the annual report and disclosed to the shareholders. The weakness of this reporting system lies in the fact that the report, which contains sensitive commercial information about the company, is not fully disclosed but that only the summary analysis of the board is made public as part of the board’s annual report. While the annual report may be subject to independent audit,44 in practice auditors claim that they can only check the compatibility of the statements in the report with the financial statements of the company but that they do not have the expertise to carry out an audit relating to whether transactions were made at arm’s length or whether the company suffered any loss. Therefore, in practice this report may not be a sufficient tool to support legal claims by shareholders or creditors.

4.3

Reporting at the Mother Company

The TCC contains a special provision on the right of information of directors of the mother company. According to Art. 199/4 of the TCC, each director of the mother company may request the preparation of a report containing information on the financial state and assets of daughter companies and the relationships between (1) the mother and daughter companies, (2) among daughter companies, and (3) between mother and daughter companies and their shareholders and persons affiliated to the shareholders. Daughter companies have to give such information unless there are just grounds for refusal. The final part of this report must also be included in the annual report. While the report to be prepared by the daughter companies will only present the situation from the perspective of each daughter company, the report to be prepared by the mother company’s board can give the full picture of the group. This report provides an important tool for the management of the group and is important for the directors of the mother company who are also ultimately liable for the damages caused by the mother company to daughter companies. The right to demand the preparation of such a report has not been granted to the shareholders of the mother company. Nevertheless, the shareholders of the mother company have a right to demand information on the same issues at the general assembly as part of the shareholder’s right of information (TCC Arts. 200, 437/2).

44 Only companies such as listed corporations, banks, insurance companies or companies whose size exceeds certain thresholds are subject to independent audit.

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Accounting and Independent Audit

Independent audit is compulsory for companies that are determined by the Cabinet of Ministers.45 These are mainly public interest entities46 such as listed companies, pension funds, insurance companies, banks or other designated financial institutions, as well as companies and enterprises that exceed a certain size due to the value of their assets, turnover or number of employees. Companies subject to independent audit are required to apply the relevant reporting standards that are announced by the Turkish Public Oversight, Accounting and Auditing Standards Authority (Public Oversight Authority), which is empowered to set different standards for different companies depending on their size or line of business. The Public Oversight Authority has issued two sets of standards for this purpose: a. The Turkish Accounting and Financial Reporting Standards, which are in full compliance with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.47 These must be applied by public interest entities such as listed companies, pension funds, insurance companies, banks or other designated financial institutions. b. Financial Reporting Standards for Large and Medium Sized Enterprises,48 which must be applied by companies and enterprises that exceed a certain size due to the value of their assets, turnover or number of employees. Corporate groups are required to present consolidated accounts as per the Turkish Financial Reporting Standard No. 10, which is in compliance with IFRS 10.

4.5

Special Audit

Special audit is a mechanism that shareholders can use to gather information about company affairs in support for their liability claims. Special audit is conducted for an investigation of allegations of fraud or cases of uncompensated loss caused by the 45 Decree No. 2018/11597 of the Cabinet of Ministers, Official Gazette 26.05.2018, No. 30432. Independent audit is carried out according to Turkish independent audit standards, which are issued by reference to standards set by the International Federation of Accountants. Turkish public oversight, quality assurance, investigation and penalty systems for auditors and audit entities have been declared equivalent to those of the EU Member States by Commission Decision (EU) 2016/1223, OJ 27.7.2016, L. 201/23. 46 Full definition of public interest entitites can be found in the Statutory Decree No. 660 (Official Gazette 2.11.2011 No. 28103) art. 2/ğ. 47 http://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/turkey/. 48 The Financial Reporting Standards for Large and Medium Sized Enterprises were published in the Turkish Official Gazette for the first time on 29 July 2017 and apply as of 1.1.2018.

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mother company. Three separate and complementing provisions deal with special audit in the TCC. Firstly, if any previous report prepared by a company’s auditors, special auditors or risk determination and management committee contains an opinion indicating the existence of fraud in the relationship between the daughter company and its mother company or sister companies, each shareholder of the daughter company may demand the court to appoint a special auditor to investigate such matter (TCC Art. 207). Secondly, a special provision on joint stock companies states that the shareholders of daughter companies have the right to demand a special audit for examining intra-group relations, if the board declares that the company has suffered an uncompensated loss due to the use of control by the mother company or if auditors give a negative opinion about intra-group relations (TCC Art. 406). Finally, there is also a general right of special audit in all joint-stock companies regardless of the existence of a group. (TCC Art. 438 et seq).

5 Squeeze Out Within Groups One advantage given to the mother company within the group is the right to squeeze out the minority on just grounds (TCC Art. 208). There are two conditions for exercising this right. One of them is that the mother company must own, directly or indirectly, at least 90% of the capital and voting rights of the daughter company. The other condition is that the minority shareholders must be impeding the company’s activities or acting in bad faith or creating obvious problems for the company. If the mother company believes that these conditions are met, it can apply to the court to buy the shares of the minority at their market value, or, lacking that, at real value or at a value to be determined according to generally accepted valuation principles (TCC Art. 208 by reference to Art. 202/2). The right to buy out the minority shareholders can be a useful mechanism to set up wholly owned subsidiaries and to benefit from the freedom of instruction granted to the single shareholder. However, since the minority can only be bought out based on just grounds, it is not an automatic right of the mother company.

6 International Company Groups The TCC contains certain provisions bringing international company groups under the scope of its group regulation. It is stated that the provisions of the TCC on company groups shall apply, if at least one of the group companies has its principal office in Turkey (TCC Art. 195/1). The enterprise at the ultimate peak of the group shall also be subject to these provisions even if its principal office is abroad (TCC 195/5). This means that in cases of Turkish subsidiaries with foreign mother companies, Turkish creditors or shareholders of the subsidiary will be able rely on the group provisions of the TCC against the mother company.

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The second question that comes up in this context is whether the shareholders or creditors can sue the mother company before a court in Turkey or if they have to apply to the courts where the mother company is located. The TCC grants special jurisdiction to Turkish courts. It is stated in TCC Art. 202/1/e that if the mother company or enterprise has its principal office abroad, action for liability may be initiated at the commercial court where the principal office of the daughter company is located. However, this provision does not eliminate the need to have the Turkish judgement enforced abroad where the mother company may be located or may have assets.

7 Other Legislation or Legal Concepts Relevant to Groups While company groups are specially defined and regulated by the TCC, there are other laws relevant to company groups, such as the Capital Market Law, Corporate Tax Law or Banking Law. Furthermore, the legal literature and jurisprudence recognize the theory of lifting the corporate veil as another mechanism which may lead to the liability of the controlling shareholder.

7.1

Lifting the Corporate Veil

The provisions of the TCC on company groups respect the limited liability principle and the separate legal entity of each member company within the group. There are no provisions establishing joint liability of the mother company with its daughter companies or provisions aiming at lifting the veil. However, the doctrine of lifting the corporate veil is accepted in the Turkish literature and jurisprudence of the Turkish Court of Cassation as an exception to the principle of separation of legal entities and limited liability.49 Having control over a company is not deemed to be a sufficient ground to disregard the principle of separation of legal entities or to establish joint liability. The general view is that for the legal entity to be disregarded, additional circumstances must exist in which relying on the separation of legal entities should amount to an abuse of rights under Art. 2 of the Turkish Civil Code.50 Furthermore, under Turkish law, the separation of legal entities is regarded as the rule, while lifting the veil and reaching out to shareholders is treated as the exception. It is not possible to 49

Tekinalp and Tekinalp (1995), p. 387 et seq.; Tekinalp (2013), p. 757 et seq.; Yanlı (2000), p. 13 et seq.; Sağlam (2008), p. 141 et seq., Dural (1998), p. 97 et seq, Kervankıran (2007), p. 453 et seq. 50 Tekinalp and Tekinalp (1995), p. 396; Yanlı (2000), pp. 252–253; Sağlam (2008), p. 143; Kervankıran (2007), p. 469; Dural (1998), p. 100 et seq.; Serozan (1994), p. 18 et seq. Also see for the requirement of abuse of rights under Art. 2 of the Turkish Civil Code in order to lift the corporate veil: Court of Appeals, 19th Chamber, 24.3.2015, E. 2014/7187, K. 2015/4144.

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lift the corporate veil as long as the company itself is able to meet its own liabilities or there are other means of protecting the interests of the creditor through the law or by contract.51

7.2

Related Party Transactions Under Capital Market Law

The CML is a special law that regulates capital markets in Turkey and contains provisions applicable to public companies. The CML does not regulate groups as such, but contains provisions regarding related party transactions, which are likely to arise in a group setting. The approach of the CML is to adopt preventive mechanisms that may help to mitigate the risk of exploitation of a company’s assets before any transaction is carried out, such as requiring independent valuation or approval of independent directors or shareholders. According to the CMB Communiqué on Corporate Governance52 (Art. 9), before a company or one of its subsidiaries carries out a transaction with a related party concerning the purchase or sale of assets or services or transfer of obligations, an independent valuation must be obtained from a firm approved by the CMB, in case the value of the transaction is predicted to exceed 5% of the value of the company’s total assets or revenue according to the most recent financial statements or the company’s market value. If it is predicted that such value may exceed 10%, then the approval of the majority of the independent directors shall be sought in addition. If such approval is not given, then this shall be announced to the public and the matter shall be submitted to shareholder vote, where voting rights of parties to such transaction and persons related to them will be restricted. Board or shareholder decisions that are not adopted in compliance with this procedure shall be void. The requirements of independent valuation and vote of independent directors mitigate the risk of value transfers out of the company or its subsidiaries. The granting of collaterals by the company also poses risks of expropriation. The CMB Communiqué on Corporate Governance (Art. 12) restricts a listed company’s ability to create encumbrances on its assets for the benefit of third parties. According to this rule, a listed company or its subsidiaries may grant collaterals on their assets or give surety only in the interests of the company itself or its fully consolidated subsidiaries, provided that this is done within the course of ordinary trade. If any encumbrances are to be created on the company assets in favour of third parties, the approval of the majority of independent directors is required. However, the absence of such approval does not necessitate the matter to be taken to a shareholder vote. A public disclosure of the reasons for denial of such approval is deemed sufficient (Art. 12.3). Furthermore, shareholders must be informed at the general assembly if any such collateral is given in favour of third parties.

51 52

Yanlı (2000), p. 85; Kervankıran (2007), pp. 471–472. Communiqué No. II-17.1, Official Gazette 3.1.2014 No. 28871.

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In addition to these preventive mechanisms, the CML also prohibits transfer pricing and other disguised value transfers (CML Art. 21). According to the law, a public company or its subsidiaries may not decrease or prevent any increase in profit or assets by conducting disguised transactions with other enterprises or persons with whom they are directly or indirectly related in terms of management, supervision or capital, where the price, fee or value of the transaction is considerably different than comparable transactions. If such a transfer is detected by the CMB, parties that have received such value transfer have to return it with interest within the time provided by the CMB. Disguised value transfers also constitute a crime that is punishable by 3 years of imprisonment (CML Art. 110).

7.3

Related Party Transactions Under Tax Law

Turkish Corporate Tax Law No. 5520 of 2006 contains rules prohibiting the disguised distribution of profit by transfer pricing to related parties (Corporate Tax Law Art. 13). Related party under this law can roughly be described as those natural or legal persons who are directly or indirectly related to the company in terms of management, supervision, or capital or who are under the influence of that company. The shareholders and their family relations up to the third degree are also among related parties. Transfer pricing can be broadly described as the manufacturing, sale, purchase or rental of goods or services or loans at a price that would not have been charged in comparable transactions done with independent parties. Profits distributed by transfer pricing will be added to the corporate gains and be subject to tax.

7.4

Financial Groups and Controlling Shareholders of Banks Under Banking Law

Turkish Banking Law No. 5411 from 2005 and relevant regulations contain special provisions regarding the liability of controlling shareholders of banks and the supervision of financial groups. Turkey has witnessed several crises in the banking sector which were partly caused by insufficient corporate governance, surveillance and transparency. In the late 1990s, for example, more than 20 Turkish banks were transferred to the Savings Deposit Insurance Fund for restructuring, sale or liquidation. One of the contributing factors to this crisis was seen as the exploitation of bank assets or weakening of banks’ financial structures by controlling shareholders through transactions such as back-to-back credits to affiliates, subsidiaries or other groups, group loans exceeding legal limits or illegal use of bank funds.53 To deter 53

Banking Regulation and Supervision Agency (2010), pp. 14–15, 43.

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such occurrences and to facilitate the compensation of damages,54 banking legislation contains special rules on the liability of controlling shareholders, directors and auditors of banks. In broad terms, Banking Law No. 5411 Art. 110 allows the personal bankruptcy of controlling shareholders of banks, if (1) managers and auditors of the bank, through illegal decisions and actions, cause the bank’s operation licence to be revoked or the bank to be transferred to the Savings Deposit Insurance Fund and (2) such decisions and actions are carried out with the aim of providing benefits to the controlling shareholder and that such benefit is received by the shareholder.55 The controlling shareholder will be personally liable to the extent of the benefits it so received.56 The Banking Law defines control as “the power to appoint or dismiss the decision-taking majority of members of board of directors”, which can be attained by way of owning, directly or indirectly, the majority of the shares or controlling, personally or through contracts with others, the majority of voting rights, or by way of privileged shares or in any other way.57 Controlling shareholder is defined as a natural or legal person, who, individually or jointly, directly or indirectly controls a company.58 Financial groups form a special type of corporate group subject to special regulations with regard to their corporate governance, risk management, internal control, audit systems and their supervision. Turkish Law does not define the financial group, but for the first time in 2005, Banking Law No. 5411 defined the “financial holding company”.59 A financial holding is a company that has at least one subsidiary which is a credit institution and all or a majority of whose subsidiaries are financial institutions60 or credit institutions.61 The Banking Regulation and Supervision Agency is authorized to stipulate special rules on the capital adequacy, internal systems, consolidated audit and supervision of financial holding companies.62 In the literature, it is stated that the Banking Law views the financial holding company as a “quasi bank”, since many provisions of the Banking Law on the governance, capital adequacy and supervision of banks also apply to the financial holding company.63

54

Doğrusöz (2010), p. 15. Tekinalp (2009c), p. 295. 56 Banking Law No. 5411, Art. 110. Doğrusöz (2010), p. 89. 57 Banking Law No. 5411, Art. 3. 58 Banking Law No. 5411, Art. 3. 59 Akın Sunay (2012), p. 13. 60 Financial institutions are institutions other than credit institutions that engage in insurance, private pension fund or capital market activities or at least one activity set out in the Banking Law, including development and investment banks. Banking Law No. 5411, Art. 3. 61 Banking Law No. 5411, Art. 3. 62 Banking Law No. 5411, Art. 78. 63 Tekinalp (2009c), p. 125. 55

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8 Conclusion The Turkish Commercial Code regulates company groups with the purpose of shareholder and creditor protection on the one side and facilitating group management on the other. The group regulation lays down the definition of group and criteria of control, as well as principles according to which control may be exercised by one company over another. Unlawful use of control can lead to the liability of the mother company, which may be ordered by courts to pay damages or to purchase the shares of the claimant shareholders. Invoking liability for damages may be difficult in practice due to the difficulty of proving damages. Shareholders may also find that sufficient incentives are lacking for action for damages, since compensation should be paid to the company. Under certain circumstances, shareholders may be entitled to exit the company by selling their shares to the mother company. The action for selling the shares to the mother company may prove to be a simpler and more effective method. The liability of the mother company for trust raised in third parties by the use of group reputation is another novelty of the TCC. With regard to group management, the mother company has a right to give binding instructions to its subsidiaries only in cases of whole control and contractual control (through a domination agreement). The mother company also has a right of information regarding the subsidiaries. Besides the TCC, Capital Market Law, Corporate Tax Law and Banking Law have provisions relevant for company groups, focusing on different issues relevant to each law, such as investor protection, taxation or protection of bank assets.

References Akın Sunay N (2012) Türk Hukukunda, Avrupa Birliği Hukukunda ve Amerikan Hukukunda Finansal Grupların/Finansal Holding Şirketlerinin Düzenlenmesi ve Denetimi [The regulation and supervision of financial groups/financial holding companies under Turkish, EU and US laws]. Legal, Istanbul Banking Regulation and Supervision Agency (2010) From crisis to financial stability (Turkey Experience), Working Paper. https://www.bddk.org.tr/WebSitesi/english/Reports/Working_ Papers/8675from_crisis_to_financial_stability_turkey_experience_3rd_ed.pdf. Accessed 1 June 2018 Doğrusöz H (2010) Banka Yöneticilerinin ve Hâkim Ortaklarının Şahsi Sorumluluğu, [Personal liability of bank directors and controlling shareholders]. Vedat, Istanbul Dural M (1998) Tüzel Kişilik Perdesinin Aralanması [Piercing the corporate veil]. In: SPK 15. Yıl Sempozyumu. SPK, Ankara, pp 97–107 Göktürk K (2015) Şirketler Topluluğunda Sorumluluk Esasları [Principles of liability in company groups]. Adalet, Ankara Gündoğdu G (2014) Das Türkische Konzernrecht im Lichte des schweizerischen und deutschen Rechts. PL Academic Research, Frankfurt am Main Kervankıran E (2007) Sermaye Ortaklıklarında Sınırlı Sorumluluk İlkesine Karşı Önemli Bir İstisna: Tüzel Kişilik Perdesi’nin Kaldırılması [An important exception to the principle of

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limited liability in capital companies: lifting the corporate veil]. Erzincan Üniversitesi Hukuk Fakültesi Dergisi 11:453–472 Okutan Nilsson G (2007) The law of group of companies under the draft Turkish commercial code. In: von Büren R, Emmenegger S, Koller T (eds) Rezeption und Autonomie: 80 Jahre Turkisches ZGB – Journees Turco Suisse 2006. Staempfli, Bern, pp 179–207 Okutan Nilsson G (2009) Türk Ticaret Kanunu Tasarısı’na Göre Şirketler Topluluğu Hukuku [The law of groups of companies under the draft Turkish commercial code]. Oniki Levha, Istanbul Okutan Nilsson G (2013) Şirketler Topluluğunda Güvenden Doğan Sorumluluk [Liability based on trust in company groups]. Galatasaray Üniversitesi Hukuk Fakültesi Dergisi 2:35–54 Sağlam İ (2008) An overview of the concept of “Lifting the Corporate Veil.”. In: Ulusoy E (ed) Piercing the corporate veil, 1st international commercial law symposium, February 2, 2008. Marmara University, Istanbul, pp 153–172 Selekler-Gökşen N, Yıldırım Öktem Ö (2009) Countervailing institutional forces: corporate governance in Turkish family business groups. J Manag Gov 13:193–213 Serozan R (1994) Tüzel Kişiler, Özellikle: Dernekler ve Vakıflar. Filiz, Istanbul Tekinalp Ü (2007) Turkish concepts and approaches in corporate group law. In: Heldrich A, Prölss J, Koller I (eds) Festschrift für Claus-Wilhelm Canaris zum 70. Geburtstag. Beck, München, pp 849–880 Tekinalp Ü (2009a) Türk Ticaret Kanunu Tasarısının Şirketler Topluluğuna İlişkin Düzenlemesinde Kontrol İlkesi [The principle of control in the group law regulation of the draft TCC]. In: Hüseyin Hatemi’ye Armağan. Vedat, Istanbul, pp 1543–1556 Tekinalp Ü (2009b) Rights of action under the draft turkish corporate group law. In: Kunz PV, Herren D, Cottier T, Matteotti R (eds) Wirtschaftsrecht in Theorie und Praxis - Festschrift für Roland von Büren. Helbing Lichtenhahn, Basel, pp 153–184 Tekinalp Ü (2009c) Ünal Tekinalp’in Banka Hukukunun Esasları [Unal Tekinalp’s principles of banking law]. Vedat, Istanbul Tekinalp Ü (2013) Sermaye Ortaklıklarının Yeni Hukuku [The new law of capital companies]. Vedat, İstanbul Tekinalp Ü, Tekinalp G (1995) Perdeyi Kaldırma Teorisi [The theory of lifting the veil]. In: Prof. Dr. Reha Poroy’a Armağan. İstanbul Üniversitesi Hukuk Fakültesi, Istanbul, pp 387–404 Uygun D (2015) Şirketler Topluluğu Hukukunda Paysahipliği Haklarına Dayalı Hakimiyet [Control based on shareholders’ rights in corporate group law]. Oniki Levha, Istanbul Yanlı V (2000) Anonim Ortaklıklarda Tüzel Kişilik Perdesinin Kaldırılması ve Pay Sahiplerinin Ortaklık Alacaklılarına Karşı Sorumlu Kılınması [Lifting the corporate veil in joint stock companies and holding shareholders liable towards company creditors]. Beta, Istanbul Yılmaz A (2010) Türk, İsviçre ve Alman Hukuklarında Şirketler Topluluğuna Güvenden Doğan Sorumluluk, [Liability based on trust in company groups under Turkish, Swiss and German laws]. Oniki Levha, Istanbul

National Report on the Netherlands Mieke Olaerts

Abstract This national report deals with the regulation of company groups in the Netherlands primarily from a company law perspective. After providing a general introduction into Dutch company law and the regulation of company groups in the Netherlands, the chapter provides an introduction into the various definitions of company groups and subsidiaries. The point of departure is company law but definitions in other areas of the law are also briefly mentioned. Next to that, issues of group management as well as liability issues in company groups are discussed. The chapter furthermore touches upon the issue of minority shareholder protection as well as a number of other miscellaneous issues relevant in relation to company groups such as bankruptcy and private international law. The chapter concludes with a brief overview of the most important aspects of the regulation of company groups.

1 General Introduction: The Basic Characteristics of Company Law in the Netherlands1 There is no overall regulation of group relations in the Netherlands nor is the group recognized as a separate legal entity. Despite this initial point of departure, Dutch company law does take the group relation into account with regard to various company law aspects. Not only company law but also other areas of the law contain definitions related to the group concept such as subsidiary companies, parent companies, definitions of control, affiliated companies etc. Company groups pose

1 This chapter was previously published as Olaerts (2018), pp. 107–134. See for another contribution by M. Olaerts on Dutch company groups that is based on this report: the contribution in the upcoming book to be published in 2020 by Beck on Company Laws of the EU. This chapter was written in 2018 developments and literature after 2018 have not been taken into account.

M. Olaerts (*) Department of Private Law, Maastricht University, Maastricht, The Netherlands e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_15

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specific problems. Employees and works councils may for example be confronted with decisions taken at a higher level within the group which have an impact on the position of employees at subsidiary level. Creditors at subsidiary level may also be disadvantaged by decisions or policies imposed by the parent company. Dutch law recognizes the group concept to a certain extent but it often depends on the rights and legal issues at stake. In principle each company within a group has its own interest and the board of the company has to fulfill its duties taking into account the company interest. Nevertheless, it is also recognized at the same time that the group interest will have an influence on the company interest. This recognition of the group interest however does not go as far as to recognize that the group interest per definition prevails. In some instances the rules applicable to single companies are extended to companies operating in a group relation in order to avoid that the group structure is used to circumvent company law rules. In other situations legislative provisions provide for exceptions for companies belong to a group in order to, for example, facilitate group management. Over the years, the rules applicable to the group relation have also been shaped by case law. Developments in case law have led to a further recognition of the dependency relationship amongst company groups with regard to various legal issues. An example of this is the right for shareholders of the parent company to request an investigation into the affairs of the subsidiary in a so called inquiry procedure. Case law has also led to the recognition of the group interest, as referred to above, and the recognition of a so called duty of care of the parent company towards the creditors of a subsidiary which is applicable under specific circumstances. These issues will be further elaborated on below. Before turning to the group concept under Dutch law, a few words will be dedicated to Dutch company law in order to provide the necessary legal background for the remainder of this report. Dutch company law is regulated in Book 2 of the Dutch Civil Code (hereinafter: DCC) and takes the single entity as point of departure. Book 2 DCC provides provisions for all so called ‘legal persons’ such as the foundation, the cooperation, the association etc. as well as the public and the private limited liability company. Partnerships lack legal personality under Dutch law and are regulated in Book 7A DCC (general partnership, maatschap). The specific partnership forms (vennootschap onder firma and the commanditaire vennootschap: the latter is a form of limited partnership) are regulated in the commercial code (wetboek van koophandel). Listed companies are subjected to the, in 2016 revised, Dutch corporate governance code on a comply or explain basis. This code can also have an influence on the governance of company groups as will be explained further in this report. Dutch companies have two main decision making bodies: the board of directors and the general meeting. Next to that, companies can opt for a supervisory board. A specific regime, the so called ‘structuur regime’ is applicable to larger public and private limited liability companies provided they meet certain thresholds related to,

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amongst others, the number of employees, capital structure etc.2 The term is difficult to translate as this regime is a typically Dutch phenomenon. Therefore, it will be referred to in the remainder of this report as the structure regime. Characteristic for this regime is that certain rights of the shareholders shift, traditionally to a supervisory board or to non-executives in case of a one tier board structure. Furthermore, the regime grants the works council the possibility to influence the composition of the supervisory board by giving it a special recommendation right with regard to one third of the supervisors to be appointed or the non-executives in case of a one tier board structure.3 Originally, a company which was subjected to the structure regime had to (mandatorily) put in place a supervisory board. Dutch law however nowadays also recognizes the right to opt for a one tier board structure instead of having a mandatory supervisory board for companies that qualify under the structure regime. The option was introduced by an amendment of the law made in 2011.4 In case of a one tier board structure the board of directors will consist of executives and non-executives.5 The structure regime is relevant in relation to company groups in the sense that if it is applicable to a Dutch subsidiary for example, the parent company as a shareholder will have less direct control rights. Under the structure regime, the board of directors is appointed by the supervisory board instead of the general meeting. Therefore, if this regime is applicable to the subsidiary, the parent company will not be able to appoint the board of directors of the subsidiary. The shareholders do have the right to appoint the supervisory board while special nomination rights with regard to the appointment of supervisors are awarded to the works council. Moreover, the supervisory board is awarded a strong position under this regime as it is granted the power to approve certain important decisions of the board of directors.6 In case of a one tier board under the structure regime, the non-executives have the power to appoint the executive members of the board and the majority of non-executives will have to approve a number of board decisions.7 This chapter deals with the regulation of company groups in the Netherlands primarily from a company law perspective. Other laws that are relevant for company groups such as capital market law, tax law and rules on employee involvement and works councils will be briefly touched upon.

2

Art. 2:153/263 DCC. Art. 2:158/268-6 DCC. 4 Stb. 2011, 275. 5 Art. 2:129a/239a DCC and art. 2:164a/274 a DCC. 6 Art. 2:164/274 DCC. 7 Art. 2:164a/274a DCC. 3

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2 Control, Definitions and the Group Concept in Various Types of Regulation 2.1

Control and Definitions

2.1.1

Definitions in Company Law

As mentioned above, even though the single entity is the point of departure from a Dutch company law perspective and Dutch law does not have a specific overarching regime for company groups, Dutch company law does, to a certain extent, take company groups into account. There are specific rules for example with regard to public and private limited liability companies which do take in particular the group relation into account in the sense that specific duties are imposed or exemptions are granted to subsidiary companies or group relations. In this section an introduction will be provided into the various definitions of company groups and subsidiaries. The point of departure is company law but definitions in other areas of the law are also briefly mentioned in the next section without having the aim of providing an exhaustive list of all differences and similarities in approaches.

2.1.1.1

Group

Despite the absence of a coherent group regime, Dutch company law does contain a general definition of the group relation in article 2:24b DCC. This definition was introduced with the implementation of the seventh European company law directive.8 According to this provision a group is an economic unit in which legal persons and partnerships are organizationally interconnected. Group companies are therefore legal persons and partnerships interconnected in one group. The group definition is applicable to all kinds of legal persons and contractual partnerships which can all form part of a group. Foreign company types can also form part of a company group.9 An important characteristic of a group which is not taken up in the definition provided by article 2:24b DCC, but which is presumed in the literature to be an important element for establishing the economic unit in which there is an organizational interconnection between the legal persons within the group, is central management.10 Central management is a concept which can be difficult to pinpoint as it depends on the factual circumstances. Central management will generally be present

8 Directive 2013/34/EU of the European Parliament and the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. 9 Bartman et al. (2016), p. 31. 10 Bier and Quist (2016), p. 207; Van Solinge and Nieuwe Weme (2009), nr. 816.

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when there is a joint strategy that forms the basis for the dissemination of plans and coordination of a strategy at lower levels within the group.11 In short, a group requires: an economic unit, organizational interconnection and central management. A majority shareholding is not required in order to qualify as a group. Central management and organizational interconnectedness can for example also be achieved on a contractual basis or by means of a minority shareholding combined with special voting or approval rights in the articles of association.12 In this respect one can for example think of the right to approve certain board decisions or the statutory right to give instructions. Article 2:24 b DCC is referred to as the so called economic definition of the group concept in Dutch law as it does not refer to the power to control but to the actual control and economic unity within the group.13 This in contrast to the definition of a subsidiary that does refer to the power to control and therefore provides a more legal definition.

2.1.1.2

Subsidiary

The definition of a subsidiary company (dochtermaatschappij) can be found in article 2:24a DCC. In short: a company qualifies as a subsidiary of another legal person when the latter is able to, either alone or in cooperation with others, exercise more than half of the voting rights at the general meeting or is able to appoint or dismiss more than half of the members of the management or supervisory board. This definition is referred to in the literature as the so called legal definition of the group as it focuses on the formal requirements that have to be fulfilled in order to qualify as a subsidiary.14 Article 24a -1 DCC contains the following definitions of a subsidiary which illustrate the required level of control: A subsidiary company is a legal person in which another legal person or one or more of its subsidiaries, whether or not on the basis of a contract with others entitled to vote, is able to exercise, solely or jointly, more than one half of the voting rights at the General Meeting. A legal person also qualifies as a subsidiary with regard to which another legal person or one or more of its subsidiaries is a member or a shareholder and is able to, whether or not on the basis of a contract with other persons entitled to vote, appoint or dismiss, solely or jointly, more than half of the members of the board of directors or the supervisory board, even if all persons entitled to vote would cast their vote.15 Moreover, a partnership acting in its own name in which the legal person or one or more of its subsidiaries participate as a partner who is fully liable towards the

11

Van Solinge and Nieuwe Weme (2009), nr. 816. Bier and Quist (2016), p. 207. 13 See Zaal (2014), p. 136. 14 See Zaal (2014), p. 136. 15 Translations of legal provisions in English in this chapter are (partly) based on the unofficial translation that can be found on the following website http://www.dutchcivillaw.com/ civilcodebook022.htm. 12

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creditors of that commercial partnership for all debts also qualifies as a subsidiary company.16 All legal persons mentioned in Book 2 DCC, with the exception of a foundation, can qualify as a subsidiary within the ambit of article 2:24a DCC. The foundation cannot qualify as a subsidiary because of the fact that it is prohibited for a foundation to have members.17 Even though it is possible that a company has the right to appoint or dismiss the members of the board of a foundation due to a provision in this sense in the articles of association of the foundation, in order to qualify as a subsidiary in the sense of article 2:24a-1 sub b the company or legal person has to be a member or a shareholder. It is for this reason that a foundation does not meet the criteria of a subsidiary. Also other legal persons can qualify as a subsidiary. In this respect one can think of European business forms such as for example a Societas Europea with its registered office in the Netherlands since these companies have to be treated as national public limited liability companies.18 Foreign companies can also qualify as subsidiaries.19

2.1.1.3

Control

The definition of the term subsidiary is based on the so called ‘power to control’ rather than the actual control being exercised.20 On the contrary, to determine whether various legal persons form part of a group, one would have to look into the factual circumstances to define whether there is an economic unity and organizational interconnection between the companies. Therefore, the latter may be more difficult to determine. A group relation does not require a capital investment, it can also be constituted by means of a contractual relationship for example on the basis of a contract establishing personal unions between two legal persons.21 It is generally accepted that in most cases in which there is a subsidiary, there will also be a group relation.22

16

Art. 2:24a-2 DCC. Dorresteijn (2017b), art. 2:24a BW, aant. 7. 18 Dorresteijn (2017b), art. 2:24a BW, aant. 7. 19 Dorresteijn (2017b), art. 2:24a BW, aant. 7. 20 Dorresteijn (2017a), art. 2:24a BW, aant. 6. 21 Bier and Quist (2016), p. 207; Van Solinge and Nieuwe Weme (2009), nr. 816. 22 Dorresteijn (2017a), art. 2:24a BW, aant. 6 with reference to the parliamentary history Kamerstukken II, NvW 19813, nr. 9, p. 4. 17

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Participating Interest (deelneming)

Book 2 DCC also provides a definition of a so called participating interest. According to article 2:24c DCC a legal person or a commercial partnership can have a participating interest in another legal person or a commercial partnership. One can speak of “a participating interest in a legal person (. . .) when another legal person or a commercial partnership or one or more of its subsidiaries for their own account, either solely or jointly, have provided or have caused the provision of capital (. . .) in order to be interconnected with that legal person for a long-lasting period of time in support of their own activities.”23 A participating interest is presumed when at least one fifth of the issued capital is held. According to the second paragraph of article 2:24c DCC, a participating interest in a commercial partnership is present if a legal person or its subsidiary: a. is fully liable as partner towards the creditors of the commercial partnership for all debts, or; b. is otherwise a partner in that commercial partnership in order to be interconnected with that commercial partnership for a long-lasting period of time in support of its own activities.24

2.1.1.5

Dependent Company (Afhankelijke maatschapij)

Next to the abovementioned definitions, Book 2 DCC also distinguishes the so called dependent company (afhankelijke maatschappij). According to article 2:152/262 DCC a ‘dependent company’ is: a. a legal person to which the (public or private limited liability company; MO) or one of its dependent companies has provided, for its own account, either solely or jointly, at least one-half of the issued share capital. b. a commercial partnership of which an enterprise is registered in the commercial register and in which the (public or private limited liability company; MO) or its dependent company participates as a partner who is fully liable towards the creditors of that commercial partnership for all debts.25

This definition is different from the definition of a group in the sense that in order to have a dependent company, a participation in share capital is required which is not a distinguishing factor for a group relationship. It is also different from the definition

23

See for this unofficial translation of these provisions the following website: http://www. dutchcivillaw.com/civilcodebook022.htm. 24 See for this unofficial translation of these provisions the following website: http://www. dutchcivillaw.com/civilcodebook022.htm which has also been used as source of inspiration for the remainder of this chapter. 25 See for the albeit unofficial translation of these provisions the following website: http://www. dutchcivillaw.com/civilcodebook022.htm.

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of a subsidiary. In order for there to be a subsidiary relationship, it is necessary to have strong voting rights and in case of share capital investment, it is necessary to hold more than half of the voting rights for the underlying company to qualify as a subsidiary. In order to qualify as a dependent company, providing half of the issued capital is sufficient.26 The term dependent company serves a very specific purpose. It is used as part of the structure regime as referred to in the introduction. In order to ensure central management in a group structure, this structure is taken into account when determining whether a company meets the requirements of the structure regime. This is done by looking at a company together with all its affiliated companies. If they jointly fall within the ambit of the structure regime, this regime can be applied at the highest level to ensure that a parent company still has the power to appoint the directors/non-executives at the lower levels within the group.27 Companies situated at lower levels within the group that meet the requirements for the so called structure regime, can be exempted from its application either in full or to a certain extent. The term dependent company is used in this respect in order to determine whether such an exemption is applicable. This can for example be the case if the subsidiary is a dependent company of another company that applies the structure regime itself in full. The reason for such an exemption is that it is deemed undesirable to have an independent supervisory board operating at a lower level within the group since it will generally be the parent company that sets out the group structure.28 International company group structures are also taken into account in the sense that purely Dutch holding companies29 in an international group are exempted from applying the regime while there is a mitigated regime30 for regular companies (that are not only holding companies) which qualify as a structure company and form part of an international group. These exemptions are to ensure the unity within an international group and to make sure the parent company has a stronger influence on its subsidiary.31 If the Dutch subsidiary of an international group is submitted to the mitigated structure regime, the power to appoint the board will remain with the parent company.

26

Bier and Quist (2016), pp. 211–212. Art. 2:152/262 DCC. See in this respect Bartman et al. (2016), p. 102. 28 Van Schilfgaarde et al. (2017), nr. 146. 29 Art. 2:153/263 DCC. 30 Art. 2:155/265 DCC. 31 See Van Schilfgaarde et al. (2017), nr. 146 and 147. 27

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2.1.2.1

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Definitions in the Act on European Works Councils and the Act on Financial Supervision Act on (European) Works Councils

A definition of the term parent company is lacking in Dutch company law. This term does however surface for example in the act with regard to European works councils (Wet op de Europese ondernemingsraden). Article 2 of that act provides a definition of a parent company. An important criteria in order to qualify as such is that the company has the ability to exercise a controlling influence over another enterprise. This is presumed to be the case where the enterprise which is considered to be the parent company can appoint more than half of the members of the board or the supervisory body of the other enterprise, where it can exercise more than half of the voting rights in the general meeting or where it provides more than half of the issued capital of the other enterprise. Other definitions related to company groups furthermore surface in the Works Council Act (Wet op de Ondernemingsraden, in short WOR). Article 33 WOR for example refers to entrepreneurs that are jointly connected in a group without providing a definition. References to group relations are also made in other provisions of the WOR, see for example article 31-2 sub d WOR and 31a-3 WOR without providing for a clear definition.32 Art. 31-2 sub d WOR is related to the provision of information concerning the group structure. It requires the entrepreneur to provide the works council with information concerning the power to control which establishes the group structure and the name and domicile of the person who has the factual power over the entrepreneur. It is not possible to go into all of these varying definitions and their application in practice within the ambit of the present chapter.33

2.1.2.2

Act on Financial Supervision

Apart from company law, there are also other laws which contain terminology related to group relations such as a subsidiary enterprise (dochteronderneming), parent company and a parent enterprise (moederonderneming), a Dutch parent Bank (Nederlandse moederbank), a Dutch EU parent investment firm etc. These definitions can be found for example in the Act on Financial Supervision (Wet financieel toezicht) which contains 19 variations of the terms parent, subsidiary and group company. It is unfortunately not possible to discuss all of these definitions, similarities and distinctions within the scope of the present chapter.34

32

See Zaal (2014), p. 139. See for an overview Zaal (2014), Chapter 4 on employee participation in company groups. 34 See in this respect Bartman et al. (2016), p. 32. 33

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Tax Law

Furthermore, groups are recognized as such and receive special tax treatment in Dutch tax law. Both in value added tax law and in corporation tax law, multiple corporate entities may elect and register to be treated as one consolidated entity. However, the required level of control between the group entities differs between both taxes.

2.1.3.1

VAT

On the basis of article 7, paragraph 4 of the Dutch VAT Act, multiple taxable persons (entrepreneurs) who are established in the Netherlands can be regarded as a single taxable person for VAT purposes (“VAT group”) on the condition that they are bound by organizational, financial and economic ties. The level of control that is required is reflected primarily by the requirements of organizational and financial ties. As regards the organizational ties, the requirement is that the various taxable persons forming part of the VAT group (i.e. the members) operate under an overarching unified management. The leadership of each of the members must be subordinate to this overarching unified management. As regards the financial ties, the requirement is that at least the majority of the shares in each of the VAT group members (including the associated voting right or control) is directly or indirectly in the same hands.

2.1.3.2

Corporation Tax

For Dutch Corporation tax, article 15 of the Corporation Tax Act provides a minimum 95% direct or indirect shareholding requirement for the formation of a consolidated entity (this 95% shareholding should also correspond to a 95% share in voting rights, profits and capital). If a parent company holds less than 95% of the shares in the subsidiary company, it cannot form a tax consolidated group for corporation tax purposes (“fiscal unity”), but it is exempted (“participation exemption”) from corporation tax on dividends received from the subsidiary and capital gains upon the alienation of shares in the subsidiary, if it holds at least 5% of the capital in the subsidiary according to article 13 of the Corporation Tax Act. The current tax consolidation regime is under consideration for fundamental reform due to CJEU rulings of 2018.35 A public consultation has proposed several alternative group regimes to replace the current consolidation regime but a final decision on a new regime was not made at the time of writing.

35 Joined Cases C-398/16 and C-399/16 ‘X BV and X NV v Staatssecretaris van Financiën, ECLI: EU:C:2018:110.

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Some special rules, mainly with an anti-tax avoidance purpose, apply if companies are associated in terms of article 10a(4) of the Corporation Tax Act, which means in short that one company has an interest in another company, or associates two other companies through an interest in each company, that corresponds to at least a third of the capital or voting rights. Transfer prices for transactions between associated companies (in this context: when one company directly or indirectly participates in the management, control or capital of another company or associates two other companies through such participation in those other companies) should be valued at arm’s length for tax purposes.36 The Netherlands applies the OECD rules and standards on transfer pricing. Mergers and reorganizations, also in domestic situations, are regulated in corporation tax law along the lines of Directive 2009/133/ EC on the common system of taxation applicable to mergers, etc.37

2.2

Consequences of the Qualification as Group or Subsidiary Within the Area of Company Law

As was mentioned in the introduction to this chapter, the group relation is taken into account in various provisions of Dutch company law. The group definition has various functions.38 One of the functions is to facilitate in the sense that it is used to provide exceptions to certain rules or obligations in order to facilitate the group relation and to avoid unnecessary costs within groups. An example of a provision which takes into account the group relation is the triangular merger.39 This type of merger makes it possible for shareholders of the disappearing company to become shareholders of a group company of the acquiring company instead of becoming shareholders of the acquiring company itself. This is only possible in case the group company, solely or jointly with another group company, provides for the entire issued share capital of the acquiring company. Another example of this function of the group definition can be found in the procedure for the buyout right. According to article 2:92a-1/201a-1 DCC a shareholder who provides at least 95% of the issued capital of a public limited liability company, (in case of a private limited liability company the shareholder also has to be able to exercise 95% of the voting rights) can demand from the other shareholders a transfer of their shares to him. This also applies if two or more group companies together have provided this part of the issued share capital (with voting rights in a private limited liability company) and they jointly file a legal claim to demand a transfer of the shares to one of them. A comparable rule is applicable to the sell out and buy out right after a public bid.40

36

Art. 8b Corporation Tax Act. Art. 14 to 14ba of the Corporation Tax Act. 38 See in this respect with examples which are also mentioned in this chapter Bartman et al. (2016), pp. 36–39 and pp. 50–55. 39 Art. 2:333a-2 DCC. 40 Article 2:359c and 359d DCC. 37

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An important example is furthermore the possibility to draw up consolidated accounts for companies belonging to the same group. This will release the subordinated group members from having to draw up their financial accounts according to the rules as prescribed by Titel 9 of Book 2 DCC provided amongst others that the financial information has been taken up in the consolidated accounts and a so called 403-declaration has been submitted on the basis of which the parent company, or rather the company which consolidates, will be jointly and severally liable for the debts resulting from legal acts entered into by the group member. Looking at these consolidated accounts from the opposite perspective, reveals another function of the group definition namely its obligatory function in the sense that being a group leads to certain legal obligations.41 In this respect once can think of the fact that the group definition sets out the boundaries with regard to the companies to be taken up in the consolidated accounts. It should be mentioned that outside of the area of company law, the group definition also plays an important role with regard to the operations of the works council. The group concept is relevant for example in order to decide whether or not a works council should be established at group level.42 It should also be mentioned here that the fact that a company belongs to a group of companies, can have an influence on for example its duty of care towards the creditors of its subsidiaries. These legal consequences have their origin in case law which will be further discussed below. The amount of ‘control’ or influence which is required to establish such a duty of care, depends on the circumstances of the case. The mere fact that a company qualifies as a group member or a subsidiary is generally insufficient to establish such a duty of care on behalf of the parent company.

2.3

Information to Be Provided to the Market

The consolidated accounts form the main source of information for third parties with regard to the group structure. A legal person standing at the head of a group is required to draw up consolidated accounts in which it includes its own financial information together with the financial information related to its subsidiaries within the group, other group entities and legal persons with regard to whom it can exercise a dominant influence or which are submitted to its central management.43 The consolidation should in other words entail all companies or legal persons belonging to the group. This means that companies or other legal persons that do not qualify as a subsidiary but nevertheless form part of the group, have to be taken up in the consolidation.44 In addition to that, also legal entities which in principle do not form

41

See for these and other examples Bartman et al. (2016), pp. 36–39. See art. 33 Works Counsel Act (Wet op de ondernemingsraden). 43 Art. 2:406-1 DCC. 44 IJsselmuiden Th (2005), art. 2:406 BW, aant. 2.1. 42

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part of the group but over which a dominant influence can be exercised, have to be taken up in the consolidation.45 A dominant influence can be present without the need for an equity stake in the dominated entity. The ability to exercise dominant influence is sufficient. An actual domination is not required. The consolidated accounts provide information with regard to the connection between the various companies or legal entities involved. In this respect the consolidated accounts have to contain, amongst others, information concerning the reasons why each company is completely included in the consolidation, the reasons why other legal persons or firms were taken up in the consolidation, the amount of issued capital which is provided.46 If a subsidiary is not taken up in the consolidation, the reasons for this will also have to be disclosed.47 The annual report by the board in a listed company will have to contain a corporate governance statement.48 The corporate governance code itself also contains best practices which are related to the information that has to be provided to the market in company groups.49 According to principle 1.2 the company should have adequate internal risk management and control systems in place for which the management is responsible. According to best practice 1.2.1: “The management board should identify and analyse the risks associated with the strategy and activities of the company and its affiliated enterprise.” This reaches down to subsidiaries in company groups. Information on this can be found in the management report in which the management has to render account of amongst other things the functioning of the internal risk management and control systems over the past year.50 Book 2 of the Dutch Civil Code furthermore contains additional requirements with regard to the annual and consolidated accounts of banks. Furthermore, there are provisions requiring disclosure of the group structure not so much towards the market but rather internally towards the stakeholders within the group. Under Sect. 2.1.2.1 of this chapter reference was for example already made to disclosure requirements with regard to the group structure of the entrepreneur towards their employees under the Works Council Act (see article 31-2 sub d WOR).

3 Group Management As was already mentioned in this chapter, the group is in general terms not recognized as a unified business organization or a separate legal entity from a company law perspective. The single entity approach prevails. Each company

45

Van Schilfgaarde et al. (2017), nr. 105. Art. 2:414-2 DCC sub a, b and d. 47 Art. 2:414-2 DCC sub c. 48 Art. 2:391-5 DCC. 49 See for the Dutch Corporate Governance Code 2016 http://www.mccg.nl/de-code. 50 See Dutch Corporate Governance Code 2016, best practice 1.4.2. 46

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belonging to a group has to live up to the rules established in company law with regard to the division of power between the various governing bodies of the company: the board of directors, the supervisory board (if in place) and the general meeting. A landmark case in this respect is the so called Forumbank case in which the Supreme Court decided that the general meeting does not have the highest power within the company. Instead, the general meeting and the board of directors stand alongside each other. They each are given their own powers and should mutually respect the boundaries of those powers. The Court emphasized the autonomy of the board by ruling that the general meeting in principle does not have the authority to issues binding instructions with regard to issues which fall under the competence of the board of directors.51 Nowadays, there is however a difference between public and private limited liability companies with regard to instruction rights. The articles of association of a private limited liability company can provide for specific instruction rights which entails that specific instructions can be given to the board of directors by a corporate body which, in case of company groups, will often be the general meeting.52 The board of directors has to follow these instructions unless they are regarded as being against the interest of the company and its related undertaking. The latter emphasizes that the principle of board autonomy remains: also in case of binding instruction rights the board will have to make its own decisions and safeguard the interest of the company and its related undertaking/enterprise.53 Within a public limited liability company the articles of association can also contain an instruction right. However, the instructions can only concern the general policy with regard to specific areas which are defined in the articles of association.54 In practice it will be difficult to distinguish between general and specific instructions and the distinction seems to have lost its importance to a certain extent.55 It has been pointed out in case law that despite the potential absence of a formal (specific) instruction ‘right’, a parent company nevertheless has an instruction ‘power’ due to the fact that it can dismiss the board of directors at subsidiary level.56 The fact that the parent company has this instruction power, can lead to the obligation for the parent company under specific circumstances to take preventive measures for example when it is obvious that creditors at subsidiary level will be disadvantaged. This will be further discussed in Sect. 4.2 below. Rules of ‘group management’ have gradually developed in case law and although they do not yet form a fully-fledged system of group governance, they do show signs of a legal recognition of the fact that companies can be interconnected and that this

51

Supreme Court (Hoge Raad, hereinafter: HR) 21 January 1955, NJ 1959/43 (Forumbank). Art. 2:239-4 DCC. See about instruction rights amongst others Dahmen (2014), p. 66. 53 See with regard to the autonomy of the board Verdam e.a. (2015). 54 Art. 2:129-4 DCC. See Huizink (2017a) art. 2:129 BW, aant. 11.10. 55 Van Schilfgaarde et al. (2017), nr. 62. 56 See Supreme Court (HR), 21 December 2001, ECLI:NL:HR:2001:AD4499, JOR 2002/38, m.nt. N.E.D. Faber en S.M. Bartman (Hurks). 52

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interconnection can have an influence on the way in which the board of directors and the supervisory board can fulfill their duties. Several landmark decisions in this respect will be discussed here. It has been established in case law that there is a so called group management duty (concernleidingsplicht). This concept was established in the case law of the Supreme Court (Hoge Raad) in the Ogem case which dates back to 1990.57 The Court decided in that case that even though the parent company may not have a binding instruction right, the factual situation is often that the parent company has the possibility to force the board of the subsidiary to follow the general policy and instructions set out by the parent company. This is due to the fact that the parent company has the possibility to suspend or dismiss the board of directors at subsidiary level.58 The Ogem case has led to the acceptance in the literature of a so called group management duty resting upon the parent company.59 It has not yet been clearly established in case law what this duty entails or how broad it is.60 It is established however, that the role of the board of the parent company also entails having oversight over the subsidiaries.61 The parent company may have to interfere at subsidiary level if it sees that the group policy is not upheld or if the board of the subsidiary is unwilling to provide sufficient information to the parent company concerning its financial situation for example. Neglecting this group management duty may be a reason for the Enterprise Chamber to find that the company has acted against what is called fundamental principles of reasonable entrepreneurship (elementaire beginselen van verantwoord ondernemerschap).62 It is also possible that a parent company is held liable towards the creditors of its subsidiary. This will however require more than only disregarding its group management duties. Liability will only arise if it can be established that a specific duty of care rests upon the parent company. These liability issues will be discussed in the next section (Sect. 4). The abovementioned group management duty entails that the duty of the board of directors and the supervisors of the company at the top of the group also stretches out over the lower levels within the group. Management of the group forms part of the duty of the directors at top level and the task of the supervisory board at that level is to also supervise the group management and policy set out by the board at the top level.63 This is furthermore emphasized by the corporate governance code which is applicable in case of listed companies. As was already pointed out in Sect. 2.3 above,

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Supreme Court (HR) 10 January 1990, ECLI:NL:HR:1990:AC1234, NJ 1990/466, m.nt. J.M.M. Maeijer (OGEM). 58 See later in a similar vein Supreme Court (HR), 21 December 2001, ECLI:NL:HR:2001:AD4499, JOR 2002/38, m.nt. N.E.D. Faber en S.M. Bartman (Hurks). 59 See amongst others Van Solinge and Nieuwe Weme (2009) nr. 828; Bartman et al. (2016), p. 79; Bartman (2016/77). 60 Bartman (2016/77). 61 See amongst others Van der Sangen (2009), pp. 147–148. 62 Van Solinge and Nieuwe Weme (2009), nr. 828. 63 Van Solinge and Nieuwe Weme (2009), nr. 828.

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the corporate governance code requires the company to have internal risk management and control systems in place. These systems have to be integrated into the work processes within the company and its affiliated enterprise which can entail also an implementation at lower levels within the group.64 With regard to the board of directors at subsidiary level, the general rule remains applicable namely that the board of directors (and the supervisory board) will have to perform its duties in the interest of the company and the enterprise connected to it. The primary responsibility of the board is therefore to look after the interest of the company and board members owe their duties primarily to the company.65 This general rule is also the point of departure for companies belonging to a group. It is however generally recognized in the literature that the group interest can influence the interest of the companies which form part of the group.66 An important ruling regarding the relation between the group interest and the company interest was the decision of the Enterprise Chamber of the Court of Amsterdam in the Corus case.67 In short in that case the supervisory board turned against an instruction of the parent company to sell off parts of the subsidiary. The Enterprise Chamber ruled, in short, that a company which forms part of a group has to take the group interest into account and will in specific circumstances have to accept that its own company interest will be subordinated to the interest of the group as a whole. On the other hand, the group management is not allowed to, or at least not without motivating its decision, subordinate the interest of the subsidiary to the group interest. In other words, the group interest and the interest of the individual companies have to be carefully balanced. Nevertheless, it can be difficult for directors in practice to decide the actual way in which these interests can be balanced. This is partly due to the fact that the case law is indecisive with regard to the extent to which the group interest can influence the company interest and can therefore prevail. In a few landmark cases the Supreme Court emphasized the autonomy of the board of directors at subsidiary level or in a joint-venture construction emphasizing the duty of the directors to safeguard the interest of their company.68 An example of this is the Juno properties 64

Best practice 1.2.2. See about the consequences of these corporate governance developments in relation to the management of company groups Bartman (2004). 65 Art. 2:129/239-5 DCC. 66 Huizink (2017b), art. 2:129 BW, aant. 11.7; Van Solinge and Nieuwe Weme (2009) nr. 827 and 829; Boschma (2015), p. 112. According to Bartman, Dorresteijn & Olaerts the company interest is to a large extent derived from the group interest as defined by the group policy; Bartman et al. (2016), pp. 22–25; See in this respect Bartman (2016/77). See also case law Enterprise Chamber, Court of Amsterdam (Ondernemingskamer hereinafter: OK) 9 July 2013, ECLI:NL: GHAMS:2013:2336, JAR 2013/223, m.nt. Zaal (Watts). 67 Enterprise Chamber, Court of Amsterdam (OK) 13 March 2003, ECLI:NL:GHAMS:2003: AF5761, JOR 2003/85. 68 See for a rather recent case concerning the autonomy of the board in case of a joint venture which has been broadly discussed in the literature Supreme Court (HR) 4 April 2014, ECLI:NL: HR:2014:799 JOR 2014/290 m.nt. De Haan (Cancun). See for literature amongst others Raaijmakers (2015-1), pp. 2–12; Verdam e.a. (2015).

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case.69 This case concerned liability of the director of a subsidiary who had too easily participated in a restructuring because of the fact that this restructuring was mainly in the interest of the group as a whole. The Supreme Court decided that the question whether the company has been improperly managed, has to be decided on a company level and not on a group level. Even though the group interest can have an influence on the interest of the subsidiary, it cannot be accepted that the group interest prevails by definition over the interest related to the individual companies. In other words, the group interest can have an influence but it cannot be the decisive factor from the outset. The interconnection between group companies is also recognized with regard to the application of the rules concerning conflicts of interest. A successful application of the conflict of interest rule will be less likely in a group structure. In case a director/large shareholder is a director/large shareholder of various companies within a group and the director/large shareholder represents several of these companies in a transaction, there will only be a conflict of interest in very specific circumstances. A conflict of interest can arise if it can be established that the director/large shareholder had a personal interest which conflicted with the interest of the companies involved.70 Another area in which the law takes into account the group structure and provides for exemptions to legal (governance) rules otherwise applicable is the special structure regime that is applicable to large public and private limited liability companies (structuurvennootschappen) and which was already referred to above. In relation to group management, important stakeholders are the employees of the group. Dutch law provides employees with information and consultation rights by means of the (in groups central) works councils. When it comes to the exercise of these rights employees may be disadvantaged if a decision is taken at parent company level that influences the position of employees at subsidiary level. In this case employees at subsidiary level may risk losing their right to provide advice with regard to certain important decisions.71 In order to avoid this, the case law has developed various techniques to ensure that works councils at lower levels within the group can still exercise their consultation rights. These techniques vary from disregarding the separate legal personality between parent and subsidiary (vereenzelviging) to attributing the decision of the parent to the subsidiary (toerekening) or by qualifying the parent and subsidiary as joint entrepreneurs (medeondernemerschap).72

69 Supreme Court (HR) 26 October 2001, ECLI:NL:HR:2001:AD4804, NJ 2002/94, m.nt. J.M.M. Maeijer, JOR 2002/2, m.nt. Bartman (Juno). 70 Supreme Court (HR) 29 June 2007, ECLI:NL:HR:2007:BA0033, NJ 2007/420 (Bruil Kombex); Supreme Court (HR) 21 March 2008, ECLI:NL:HR:2008:BC1849, NJ 2008/297 (Nieuw Steen Investments). 71 See for the right to give advice art. 25 Works Council Act (Wet op de ondernemingsraden). 72 See for an overview Bartman et al. (2016), p. 151 and further; Zaal (2014), p.163 and further.

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In this respect courts are more easily prepared to recognize the economic reality of the group in order to safeguard the rights of the works councils.

4 Liability Issues The interconnection between companies in company groups can lead to liability issues. Even though every company within the group in principle has its own legal personality and shareholders can hide behind the shield of limited liability, parent companies may, under specific circumstances, be held liable by creditors of the subsidiaries. There are several grounds for liability of parent companies. Two main categories have to be distinguished in this respect. On the one hand there is the possibility that the parent company has willfully accepted the fact that it can be held liable for the obligations entered into by its subsidiary. This type of situation is categorized in Dutch literature as so called voluntary liability because of the fact that the liability risk has been willfully and voluntarily accepted by the parent company ex ante.73 On the other hand, there is the so called non-voluntary parental liability which refers to liability of the parent company ex post. This type of liability has emerged on the basis of case law and can be based on various legal grounds. Both categories of liability will be discussed further below.

4.1

Voluntary Liability of the Parent Company

Companies within the group can be liable for each other’s debts on a voluntary basis. In this respect one can think of liability arising out of a contractual agreement with the bank on behalf of which the companies will be jointly and severally liable for credit extended to the group as a whole. Next to these contractual arrangements, voluntary liability of the parent company may also arise on the basis of a so called 403-declaration. As was already mentioned above, the annual accounts of company groups can be consolidated. Once a group company has been taken up in the consolidation, it can be exempted from publishing its annual accounts in accordance with the existing rules74 and can suffice with a simplified publication of its balance sheet and a profit and loss-account.75 Such and

Bartman et al. (2016), p. 241; Assink and Slagter (2013) § 115.3, p. 2254. The basis for these consolidated accounts can be found at the EU level in directive 2013/34/EU of the European Parliament and the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. 75 This means that it will not, amongst others, require an accountant or a management report and the annual account does not have to be published with the commercial registry along the lines provided for regular companies. See Van Schilfgaarde et al. (2017), nr. 106. 73 74

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exemption is only allowed if the company that draws up the consolidated accounts has provided for a so called 403-declaration. The term refers to the article in which this declaration is set out, namely article 403 of Book 2 of the DCC.76 The company which stands at the head of the group will have to draw up consolidated accounts for all underlying entities over which it has ‘control’. In this respect a group company is expected to have ‘control’ if it has a dominant influence over another legal person or if that other legal person falls under its central management.77 In other words, it is the power to control that is decisive, not the actual control that is being exercised.78 By making use of the element of control, the law deviates from the definitions of a group company or a subsidiary company as set out in article 2:24a and 24b DCC. Both group companies as well as subsidiaries have to be taken up in the consolidation.79 Therefore it is not necessary that the head of the group provides capital or is a shareholder in the underlying company. Central management and control can also be exercised on a contractual basis. The 403-declaration entails that the company in charge of the consolidation declares itself jointly and severally liable for the legal acts entered into by the legal person taken up in the consolidation. The provision serves to protect the creditors of the companies which have been taken up in the consolidation as a compensation for the lack of financial information caused by the consolidation.80 The liability only concerns a liability for debts arising out of legal acts. It does not concern joint and several liability for debts of the subsidiary which arise on the basis of the law such as for example tax liabilities, fines etc.81 The liability results from the 403-declaration itself and it is a self-standing obligation of the parent company.82 The group concept is not extended in such a way that a privilege of a claim of the creditor towards the subsidiary is also applicable to the claim on the basis of the 403-declaration towards the parent company.83 The same applies if the claim of the creditor towards the group company is subordinated. This subordination will not have an effect on the claim of the creditor on the parent company arising out of the 403-declaration.84

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Article 2:403-1 sub f DCC. Article 2:406-1 DCC. 78 Dorresteijn (2017a), art. 2:24a BW, aant. 6. 79 Kiersch (2017), art. 2:406 BW. 80 Bartman et al. (2016), p. 194. 81 Van Schilfgaarde et al. (2017), nr. 106. 82 It does not arise already on the basis of art. 2:403 DCC, a declaration is required and is regarded as a unilateral legal act which is not directed towards a specific party. Supreme Court (HR) 28 June 2002, ECLI:NL:HR:2002:AE4663, JOR 2002/136, m.nt. S.M. Bartman (Akzo Nobel/ING). 83 Supreme Court (HR) 11 April 2014, ECLI:NL:HR:2014:898, JOR 2014/198. See also Bier and Quist (2016), pp. 216–217. 84 Supreme Court (HR) 20 March 2015, ECLI:NL:HR:2015:661, JOR 2015/140, m.nt. M.W.J. Jitta (SNS). See also Bier and Quist (2016), pp. 216–217. 77

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Non-voluntary Liability of the Parent Company

As mentioned above, every company within the group has separate legal personality and is therefore responsible for its own obligations. Nevertheless, there may be specific circumstances in which the legal personality of a group member can either be set aside or where another group member may be held liable for the debts of its subsidiary/other group members. In this respect various methods for achieving such liability can be distinguished. For the purpose of this chapter three different types of liability will be further discussed: 1. disregarding the separate legal personality (vereenzelviging); 2. liability of the parent company on the basis of a wrongful act (onrechtmatige daad); 3. liability of the parent company as shadow director at subsidiary level.

4.2.1

Disregarding the Separate Legal Personality (vereenzelviging)

One of the ways in which a company can be held liable for obligations of its group members is if the court is prepared to disregard the separate legal personality of the company involved. This is called in Dutch law vereenzelviging. This method can be compared to veil piercing. Plaintiffs can try to make use of this technique when the economic activities of one company are for example transferred to another legal person to defraud creditors and leaving behind the first company as an empty shell. Cases based on this technique often involve two or more companies which have the same activities, a comparable name and are managed by the same director who is at the same time shareholder in both companies. When this technique is applied, the court will equate one legal person with the other and the obligations of the first legal person will have to be fulfilled by the latter due to the fact that the separate legal personality is set aside. Case law however testifies that the successful application of this technique is very rare. The ground work for these type of claims was laid in the Citco-case in which the Supreme Court ruled that a person who controls two legal persons can “abuse the difference in identity between these two persons and that such abuse should not be honoured in the eye of the law”.85 However, as mentioned above, claims based on this method hardly ever succeed.86 One of the reasons why courts

This is a translation of the courts ruling: “(. . .) van het identiteitsverschil tussen twee door dezelfde persoon beheerste rechtspersonen misbruik kan worden gemaakt, en op de eveneens juiste gedachte dat hetgeen met zodanig misbruik werd beoogd — naar 's Hofs oordeel in dit geval: het ten nadele van de beslaglegger frustreren van een beslag — in rechte niet behoeft te worden gehonoreerd.” Supreme Court (HR) 9 June 1995, ECLI:NL:HR:1995:ZC1752, NJ 1996/213 (Citco). 86 See for a recent case in which the Supreme Court rejected this technique: HR 7 October 2016, ECLI:NL:HR:2016:2285, NJ 2017/124 m.nt. Van Schilfgaarde (Resort of the World); Supreme 85

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prefer not to apply this technique is because in case of disregarding the corporate veil, the damage will be equated to the amount of the claim of the plaintiff against its debtor.87 In other words, the second legal person (for example the parent company) is fully liable for the debts of the first legal person.88 Whereas when a claim would be based on a wrongful act committed by for example a parent company towards the creditors of the subsidiary, there are more ways to deviate. The claim of the plaintiff against the parent company will in that case not be the same as his/her original claim but can be set at the amount to which the parent company has contributed to the losses of the creditor by means of its wrongful act.

4.2.2

Liability on the Basis of a Wrongful Act (Tort/onrechtmatige daad)

Another potential way to hold a parent company liable, which was already mentioned above, is on the basis of a wrongful act/tort (onrechtmatige daad). If the claim succeeds, it will be established that the parent company has committed a wrongful act (tort) against, for example the creditors of its subsidiary, for which it has to pay damages. In these situations, the separate corporate entity is not set aside but instead the parent company is held liable on account of its own acts or omissions.89 A successful claim requires a wrongful act that is attributable to the parent company and a causal link between the wrongful act and the damage suffered. A wrongful act is constituted by either a violation of someone’s right, an act or omission in violation of a duty imposed by law or acting against what, according to unwritten law, has to be regarded as proper social conduct.90 In terms of acts one can think of for example the fact that the parent company has caused the creditor of the subsidiary to believe that the outstanding debts would be paid. In terms of omission, one can for example think of liability of the parent company because it did not take measures to prevent a disadvantage to the creditors at subsidiary level where it ought to have done so. This ground for liability has formed an important basis in case law for the development of responsibilities in company groups and this road is mostly used when it comes to parental liability towards creditors at subsidiary level. The case law concerning parental liability on the basis of a wrongful act is extensive. The main characteristics of the system will be discussed here in order to provide a comprehensive overview. It should be noted from the outset that a lot will depend on the specific circumstances of the case and that it is difficult to draw general lines without going into the details of the cases.

Court (HR) 13 October 2000, ECLI:NL:HR:2000:AA7480, NJ 2000/698 m.nt. Ma (Rainbow). See also Bartman et al. (2016), pp. 247–254. 87 Van Solinge and Nieuwe Weme (2009), nr. 835. 88 Assink and Slagter (2013), § 115.3, p. 2258. 89 See in this respect Assink and Slagter (2013), § 115.3, p. 2255. 90 Art. 6:162-2 DCC.

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A parent company can be held liable by the creditors of its subsidiary if it can be established that the parent company failed to take into account the interest of the creditors at subsidiary level where there was a duty to do so. The existence of such a duty depends on the circumstances of the case. The mere fact that the parent company is a shareholder in the subsidiary and makes use of its shareholder rights is insufficient to establish liability.91 Various circumstances can however lead to parental liability. Important aspects for parental liability are the level of insight in and (potential) interference of the parent company at subsidiary level, the foreseeability of the disadvantage to creditors at subsidiary level as well as the fact that the parent company or other companies in the group have benefitted from the wrongful act.92 It is the insight into and control over the policy at subsidiary level which creates a duty for the parent company to take into account the interest of the creditors at subsidiary level.93 Parent companies can for example be held liable if they have (1) created the appearance of creditworthiness of the subsidiary,94 (2) extracted funds from the subsidiary for example by means of dividend payments or caused the subsidiary to pay only certain creditors to the disadvantage of others,95 (3) discontinued the existing financial aid provided to the subsidiary.96 One of the landmark cases concerning the liability of the parent company is for example the Osby-case. In this case the parent company was 100% shareholder of the subsidiary. In exchange for a line of credit extended to its subsidiary, the parent company had received securities on all assets of its subsidiary. The Supreme Court ruled that the parent company could be held liable for breaching its duty of care towards the creditors at subsidiary level. This would be the case if it could be established that the parent company had such an insight into and a control over its subsidiary that it knew or ought to have known that creditors would be disadvantaged.97 The structure of the group and factual influence of the parent company constitutes an important contributing factor to parental liability. If it can be established that the parent company has intensively interfered at subsidiary level, the knowledge that the creditors at subsidiary level will be disadvantaged can be attributed to the parent company.98 This can entail that the parent company is obliged to take action if it is foreseeable that the creditors at subsidiary level will be disadvantaged. Typical Assink and Slagter (2013), § 115.3, p. 2261. See with regard to these issues Assink and Slagter (2013), § 115.3, p. 2263. 93 Bartman et al. (2016), p. 259. 94 Supreme Court (HR) 18 November 1994, ECLI:NL:HR:1994:ZC1544, NJ 1995/170 (NBM/ Securicor). In this case a representative of the parent company raised the expectation that the parent company would pay for the debts of its subsidiary. 95 Supreme Court (HR) 12 June 1998, ECLI:NL:HR:1998:ZC2669, NJ 1998/727 (Coral/Stalt); Supreme Court (HR) 8 November 1991, ECLI:NL:HR:1991:ZC0401, NJ 1992/174 (Nimox). 96 See for various categories Assink and Slagter (2013), § 115.3, p. 2263. 97 Supreme Court (HR) 25 September 1981, ECLI:NL:HR:1981:AG4232, NJ 1982/443 (Osby). 98 Supreme Court (HR) 12 June 1998, ECLI:NL:HR:1998:ZC2669, NJ 1998/727 (Coral/Stalt). See Bartman et al. (2016), p. 262. 91 92

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directors’ liability risks can also be transferred to the parent company. According to Dutch case law directors can be held liable on the basis of a tort by third parties such as creditors if they, at the time of entering into the contract, knew or ought to have known that the company would not within reasonable time be able to fulfill its obligations or would not be able to provide relief for potential damages resulting from non-performance (the so called Beklamel-rule).99 This rule can also be applicable to the parent company in case of company groups.100 Not every parent company will be obliged to take steps when its subsidiary enters into financial difficulties. This will be the case though if it can be established that there was a firm group structure due to for example strong financial ties, approval rights of the parent company with regard to important decisions at subsidiary level, strong interconnections between the group companies from an operational perspective etc.101 The way in which the group structure has been set up can form an important contributing factor to parental liability. For example, in the Comsys case the Supreme Court ruled that the parent company was liable towards the creditors of its subsidiaries for several reasons: the parent company had breached its duty of care towards the creditors of its subsidiary. The existence of such a duty of care was based on the fact that the group structure was set up in such a way that all companies belonging to the group conducted one and the same enterprise while all benefits were awarded to one subsidiary, leaving the other subsidiary behind with all costs of the entrepreneurial activities. Moreover, there was a pledge on all assets of the subsidiary for the benefit of the group financing. The court ruled that in those circumstances it should have been clear to the parent company that the subsidiary would not be able to survive without the continuous financial support from the parent company.102 The parent company therefore had a duty of care towards the creditors of its subsidiary and should not have ceased the financing of the subsidiary without taking measures to protect the creditors at subsidiary level. In short, a parent company can be held liable by the creditors of a subsidiary for breach of its duty of care. The existence of such a duty of care depends on the circumstances of the case and requires more than merely the exercise of shareholder rights by the parent company or the exercise of central management. Generally, this will be the case if the parent company has intensively interfered with the policy at subsidiary level.103

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Supreme Court (HR) 6 October 1989, ECLI:NL:HR:1989:AB9521, NJ 1990/286, m.nt. J.M.M. Maeijer (Beklamel). 100 Supreme Court (HR) 21 December 2001, ECLI:NL:HR:2001:AD4499, NJ 2005/96, m.nt. J.M.M. Maeijer (Hurks II). 101 Supreme Court (HR) 21 December 2001, ECLI:NL:HR:2001:AD4499, NJ 2005/96, m.nt. J.M.M. Maeijer (Hurks II). 102 Supreme Court (HR) 11 September 2009, ECLI:NL:HR:2009:BH4033, NJ 2009/565 (Comsys). 103 Van Schilfgaarde et al. (2017), nr. 49.

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Liability on the Basis of Shadow Directorship

Before going into the issue of shadow directorship, it is important to refer to a provision of directors liability which is specifically drafted with a view to company groups. Dutch law allows legal persons to be appointed as directors. This means that in company groups the parent company can for example at the same time form the board of the subsidiary. In such cases the parent company can be held liable directly in its capacity as a director of a subsidiary. In order to avoid abuse of this system, Dutch law has a specific provision on the basis of which the liability of the director being a legal person will transfer automatically to the (natural) person who is the director of said legal person.104 Another ground for parental liability can be found in article 2:138/248-7 DCC. This article provides for directors liability in case of bankruptcy. Directors of the company can be held liable by the receiver in bankruptcy if the company has been mismanaged and this mismanagement has been an important cause of the bankruptcy. The mismanagement should have taken place in the 3 years prior to the bankruptcy. This rule is also applicable to so called de facto or shadow directors.105 Therefore, it can constitute a ground for parental liability in company groups if it can be established that the parent company has acted as a de facto director. Again, it depends on the circumstances of the case whether the parent company has acted as a de facto director. A parent company will not easily qualify as a de facto director as it is presumed to give directions in the sense of exercising central management and setting out a group policy.106 In order to qualify as a de facto director, a further reaching influence and interference at subsidiary level is required. Being a de facto director traditionally requires two elements to be present: (1) a direct interference with the policy at subsidiary level and (2) the setting aside of the formal board of directors.107 There is discussion in the literature with regard to the question when a parent company qualifies as a de facto director.108 Merely being a 100% shareholder or having an effective central management will not be sufficient.109 The parent company will have to have acted as if it were a director of the subsidiary, taking decisions that are traditionally allocated to the board of directors. A parent may have acted as a de facto director if it has for example forced the board at subsidiary level to take certain decisions threatening them with dismissal if the instructions of the parent are not executed.110 In that case there is a direct interference with the policy at subsidiary level and the formal board at subsidiary level is practically set aside.

104

Art. 2:11 DCC. Dutch law does not distinguish between de facto and shadow directorship. These terms are used here interchangeably. 106 Dortmond (2013), nr. 399.2. 107 MvA 16631, pp. 23–24. See also Bartman et al. (2016), p. 273. 108 See for an overview Huizink (2017c), art. 2:138 BW, aant. 28.3. 109 Bartman et al. (2016), p. 274; Huizink (2017d), art. 2:138 BW, aant. 30. 110 Bartman et al. (2016), p. 275. 105

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There is a tendency in the literature as well as case law to place less emphasis on the second requirement mentioned above, the requirement of a factual setting aside of the formal directors.111 The reasoning behind this is that also when the formal board takes up its role as a board of directors, it is not excluded that someone behind the scenes also exercises powers as if he/she were a director.112 The fact that the board of the subsidiary allows the parent company to have such a substantial influence, can also be an important contributing factor in determining whether the parent company has acted as a de facto director.113 De facto directorship may be accepted when the parent company for example decides on important parts of the subsidiaries policy and the board of the subsidiary allows this without making its own assessment.114

5 Minority Shareholder Protection The interests of minority shareholders can be at risk within company groups. Minority shareholders at subsidiary level may be disadvantaged by decisions taken by the parent company on which they have little influence such as for example the decision not to pay dividends. Intragroup transactions which do not take place at arm’s length may also be disadvantageous to minority shareholders.115 General company law provides various ways to protect minority shareholder in as well as outside of the group. Minority shareholders can for example be protected by information rights, qualified majority requirements for decisions taken by the general meeting, by means of exit rights etc. In this section the emphasis will be on minority shareholder protection specifically within company groups. One way to protect minority shareholders is by means of a mandatory bid. The mandatory bid rule stems from the European take over directive and is applicable to public listed limited liability companies.116 A controlling shareholder will have to do a mandatory bid on all outstanding shares according to article 5:70 the Act on Financial Supervision (Wet financieel toezicht). A controlling shareholder for the purpose of the mandatory bid is a shareholder who is able to exercise individually, or

111

See conclusion of A-G Timmerman in Supreme Court (HR) 17 November 2006, ECLI:NL: PHR:2006:AY9710, ECLI:NL:HR:2006:AY9710, JOR 2007/7 (Bonbosch). See with regard to a decision of a lower court ruling that the setting aside of the formal directors is not a requirement. Rechtbank Noord-Holland 25 March 2015, ECLI:NL:RBNHO:2015:2480, JOR 2015/136. According to the court, it is sufficient if the de facto director has decided on certain specific policy issues. 112 Huizink (2017d), art. 2:138 BW, aant. 28.3.2. 113 Bartman et al. (2016), p. 275. 114 Bartman et al. (2016), p. 275. 115 Bartman et al. (2016), p. 86. 116 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.

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jointly with others with whom he acts in concert, 30% of the voting rights at the general meeting.117 Article 2:359 DCC furthermore provides minority shareholders of public listed companies with a buy out right. According to this provision, a minority shareholder can request to be bought out by a shareholder who, after a public bid holds 95% of the issued capital and 95% of the voting rights. This is also the case if 95% of the shares with voting rights are held by two or more companies belonging to the same group. This exit right is not available to minority shareholders in non-listed companies and there are no specific rules protecting minority shareholders who are threatened to get stuck at subsidiary level within the group.118 Those shareholders can however make use of a buy out on the basis of article 2:343DCC which is applicable to all private and public limited liability companies. However, its application is limited to very specific circumstances. On the basis of this article a shareholder can request to be bought out if this shareholder is harmed in such a way in his interests or rights that a continuation of his shareholdership cannot reasonably be expected of him and if this harm is the result of the conduct of either one or more of his co-shareholders or the company itself.119 An important provision in Dutch law which can form a basis for minority shareholder protection is article 2:8 DCC. Article 2:8 DCC is applicable in as well as outside of group structures. The provision requires the company and all those who are, on the basis of the law or its articles of association involved in its organization, to behave towards each other according to the standards of reasonableness and fairness. This provision has in the past been used by minority shareholders to for example challenge the company’s dividend policy.120 Conducting a triangular merger for example with the only aim to squeeze out minority shareholders is not prohibited but may be against reasonableness and fairness.121 Reasonableness and fairness as required by article 2:8 DCC can serve as a basis for the annulment of decisions of the general meeting for example.122 Acting against reasonableness and fairness and in that way unfairly prejudicing the interest of the minority shareholders can be a ground for the finding of mismanagement (wanbeleid) by the Enterprise Chamber in an inquiry procedure. It has been established in case law that the company123 as well as its majority shareholder124 can have a duty of care towards its minority shareholders requiring them to take their interests into account.

Art. 1:1 Act on Financial Supervision (Wet financieel toezicht). Bartman et al. (2016), p. 87. 119 Art. 2:343 DCC. 120 Supreme Court (HR) 12 July 2013, ECLI:NL:HR:2013:BZ9145, NJ 2013/461 (Veb/KLM). 121 Supreme Court (HR) 14 September 2007, ECLI:NL:HR:2007:BA4117, JOR 2007/237, m.nt. Assink (Versatel); Bartman et al. (2016), p. 86. 122 Art. 2:15-1 sub b DCC. 123 Supreme Court (HR) 1 March 2002, ECLI:NL:HR:2002:AD9857, NJ 2002/296 (Zwagerman). 124 Supreme Court (HR) 12 July 2013, ECLI:NL:HR:2013:BZ9145, NJ 2013/461 (Veb/KLM). See about this amongst others Abma et al. (2017), p. 154. 117 118

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Another way of protecting minority shareholders can be found in information rights as well as access to court proceedings. Shareholders have the right to information and this should be provided to them by the board of directors and the supervisory board unless to do so would be against the substantial interest of the company.125 Shareholders have the right to ask questions at the general meeting. The right to information is a right of the general meeting as such, not of the individual shareholders.126 With regard to access to court proceedings, specific mention should be made of the fact that discontent minority shareholders can turn to the Enterprise Chamber of the Court of Amsterdam to request an investigation into the affairs of the company.127 As will be discussed later on in this chapter, this investigation can also include other companies within the group apart from the company in which the shareholder is a direct shareholder (see Sect. 6.3 below). Not only minority shareholders at subsidiary level but also minority shareholders of a parent company may find themselves in an undesirable position. Their direct influence on the activities of the company may for example be watered down by a transfer of a part of these activities to a lower level within the group. Dutch law in principle does not provide for specific protection of minority shareholders in this respect. However, if the minority shareholders are shareholders in a public company, then article 2:107a DCC is applicable and may provide for some protection.128 This article requires the general meetings approval for a number of important board decisions which change the identity or character of the company or the enterprise and this may reach into the lower levels of the group. Shareholder approval is for example required if the enterprise or nearly the entire enterprise is transferred, this includes a transfer within the group.129 Shareholder approval is for example also needed for the entering into or cancellation of a long-lasting cooperation of the company or its subsidiary with another legal person if this cooperation is of significant influence for the company. A comparable rule requiring approval of board decisions can be found for large public and private companies in article 2:164/274 DCC. These articles, which are only applicable to large public and private companies that qualify as so called structure companies, however do not require approval of board decisions by the general meeting but by the supervisory board.130

125

Art. 2:107/217/2 DCC. Supreme Court (HR) 9 July 2010, ECLI:NL:HR:2010:BM0976, JOR 2010/228 (ASMI). 127 Art. 2:346DCC. 128 There is no comparable provision applicable to private limited liability companies. 129 Bartman et al. (2016), p. 89. 130 Or non-executives in case of a one tier board. 126

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6 Other Relevant Issues Relating to Company Groups 6.1

Bankruptcy

Dutch law does not contain specific rules on the consolidation of insolvent estates in case of bankruptcy.131 In practice, the same receiver or liquidator is often appointed when several companies within the group are bankrupt in order to secure a coordinated liquidation.132 However, each bankruptcy is in principle treated separately and assets and liabilities are generally not pooled. Even though there is no legal procedure for asset and debt pooling or a consolidated insolvency procedure for company groups, there may be circumstances in which the assets and liabilities are pooled. Such a consolidation has emerged out of practice and has been endorsed in case law. In very specific situations the examining magistrate may give permission for consolidation.133 In terms of bankruptcy law the fact that companies are interconnected can have an influence on the burden of proof imposed on the liquidator in case the latter wants to make use of a so called actio pauliana or an action on the basis of fraudulent conveyance.134 The actio pauliana or fraudulent conveyance gives the liquidator the possibility to avoid a legal transaction if the bankrupt debtor, prior to the declaration of bankruptcy, has performed a juridical act which he was not obliged to perform, while he knew or should have known that this would disadvantage creditors. The bankruptcy code attempts to help the liquidator with regard to the burden of proof in the sense that the knowledge is presumed to be present if the juridical act took place in the year before bankruptcy and the transaction has taken place with another company within the group.135 It should also be mentioned that the EU Insolvency Regulation Recast136 contains a procedure encouraging greater co-operation and communication in case of insolvency in company groups with group members throughout Europe. The Regulation also provides for so called group coordination procedures. In 2017 the Dutch Insolvency Act was amended in order to comply with these changes to the

131

See about consolidation of insolvent estates Reumers (2007). Bartman (2015), pp. 806–812 with reference to Reumers (2007). 133 See for example Court of Appeal of the Hague 31 May 2011, JOR 2012/269. See also Hoge Raad (Supreme Court) 25 September 1987, NJ 1998/136. See for further reflections on this Bartman et al. (2016), p. 348. 134 Bartman et al. (2016), p. 38. 135 See art. 42 and 43-1, 6e of the Bankruptcy Act (Faillissementswet) and art. 3:45 and 46-1,6e DCC for the action Pauliana outside of bankruptcy. 136 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast). 132

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Insolvency regulation. These measures are therefore now also available in company groups in the Netherlands.137

6.2

Related Party Transactions

Another way to protect minority shareholders as well as creditors in company groups is by means of rules applicable to related party transactions. The annual accounts provide disclosure with regard to certain transactions. Important transactions with affiliated or ‘linked’ parties that have not been entered into under normal market conditions have to be disclosed. The disclosure concerns the extent of the transactions, the nature of the relationship with the affiliated party and other information about those transactions necessary for providing insight into the financial position of the legal person.138 Disclosure of transactions between two or more members of a group is not required if the subsidiary that is involved in the transaction is 100% subsidiary of one or more members of the group. Debts to other group members and legal persons that have a participating interest in the company have to be taken up in the balance sheet, the same goes for liability which the legal person has entered into for the debts of others.139 The assets and liabilities stemming from the group relationship also have to be mentioned.140 It should be mentioned that at the moment of writing this chapter there is a bill pending with regard to the implementation of the revised shareholder rights directive. This bill also contains further specifications with regard to the rules on related party transactions.141 Specific rules are also applicable in case a private or public limited liability company enters into a transaction with its 100% shareholder if the company is represented in the transaction by its 100% shareholder. These transactions have to be laid down in writing, to avoid self-dealing, unless they belong to the normal activities of the company.142 Related party transactions which are not concluded at arm’s length can trigger legal actions by relevant stakeholders. In this respect one can for example think of a minority shareholder who initiates inquiry proceedings with the Enterprise Chamber

137

Law of 13 December 2017, concerning the execution of Regulation (EU) 2015/848 of The European Parliament and the Council of 20 May 2015 concerning insolvency proceedings (PbEU 2015, L 141) (Uitvoeringswet EU-insolventieverordening), Staatsblad 2017/497. 138 Art. 2:381-3 DCC see for an unofficial translation http://www.dutchcivillaw.com/ civilcodebook022.htm. 139 Art. 2:375 and 2:376 DCC. 140 Art. 2:377-5 DCC. 141 Kamerstukken II 2018/2019, 35058, nr. 2 on the implementation of Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. 142 Art. 2:137/247 DCC.

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of the Amsterdam Court of Appeals.143 Related party transactions may also be a ground for directors’ liability or parental liability under specific circumstances or they can form the basis for a fraudulent conveyance action.144

6.3

Private International Law and Other Procedural Issues

When it comes to private international law, Dutch company law uses the incorporation theory in order to determine the law applicable to internal company law issues.145 Therefore, shareholder and creditor protection is in principle regulated by the law where the company is incorporated. Rules regarding directors’ liability for example and the internal structure of the company are determined by the law of incorporation.146 There is an exception with regard to the Dutch rules concerning liability of directors and supervisors in case of insolvency of a public limited liability company. These rules are extended to foreign companies which are subjected to corporate tax in the Netherlands in case the corporation is declared bankrupt in the Netherlands.147 However, the applicable law with regard to shareholder and creditor protection may further depend on the nature of the rule which is used for shareholder or creditor protection. As was mentioned above, creditors cannot only make use of company law remedies but could for example also start an action on the basis of a tort against the directors or a parent company. The presence of company groups in principle does not change this point of departure. Various grounds for parental liability were mentioned in the previous sections of this chapter. If the basis for liability of the parent company is a tort (wrongful act), then this action will in principle be governed by the law applicable to the tort.148 Other areas in which the group relation is taken into account to a certain extent concern the inquiry procedure and in the area of employee consultation rights (the latter were already discussed above in Sect. 3). The reason why the interconnection is taken into account to a certain extent in these areas is to ensure that relevant stakeholders such as equity providers and employees are not deprived of their rights due to the group structure. In these areas the interconnectedness between group companies is taken into account in the sense that in specific circumstances the 143

See for an inquiry procedure in which related party transactions played a role Enterprise Chamber, Court of Amsterdam (OK) 7 January 1988, ECLI:NL:GHAMS:1988:AB9641, TVVS 1988, p. 311 (Bredero I).; Enterprise Chamber, Court of Amsterdam (OK) 17 April 1997, ECLI:NL: GHAMS:1997:AD2721, JOR 1997/81, m.nt. Van den Ingh (Bobel); Hof Amsterdam (OK) 24 April 2017, ECLI:NL:GHAMS:2017:1626 (Fortuna). 144 See in this respect Bartman et al. (2016), pp. 19–22. 145 Art. 10:118 DCC. 146 Art. 10:119 DCC. 147 Art. 10:121 DCC. 148 Kramer and Verhagen (2015), nr. 79. However, depending on the circumstances of the case it is not excluded that these issues would fall under the rules of incorporation.

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economic reality prevails over the distinct legal personality of the individual companies involved. In this respect one can think of for example the application of inquiry proceedings by the Enterprise Chamber of the Amsterdam Court of Appeals. Article 2:346 DCC provides a number of stakeholders connected to the company such as the works council, shareholders exceeding a certain threshold, and the company itself, by means of amongst others its supervisory board or board of directors, with the possibility to ask the Enterprise Chamber to start an investigation into the policy and affairs of the company. The Enterprise Chamber can order this investigation if there are reasons to doubt the correct policy or affairs of the company. Inquiry proceedings take the legal entity as the connecting factor and the investigation will therefore be focussed on this legal entity. Nevertheless, interconnections between companies are taken into account both in the legal provisions themselves as well as in the application of these provisions in case law. With regard to the legal provisions reference can be made to article 2:245-1 DCC, which provides that the policy of a legal person also includes the policy and affairs of a limited partnership or a general partnership of which the legal person is a full partner.149 Moreover, Article 2:351-2 DCC provides for the possibility to extend the powers of the investigator(s) to other closely connected legal persons, which could include other companies in the group. Next to that, the boundaries of the inquiry procedure have been broadened in case law. For example, eventhough the legal provisions only provide the aforementioned stakeholders with the possibility to file for an inquiry procedure with the legal entity in which they are a direct stakeholder, case law shows the possibility to include other group companies in the inquiry proceedings to form a so-called group inquiry (concernenquete).150 This can be the case if the economic reality gives rise to such an inquiry due to the economic and organizational unity and joint policy.151 An important contributing factor will be whether the conduct of affairs at subsidiary level has an equal influence on the interest of the shareholders of the parent company as the policy and conduct of affairs of the parent company itself.152 The fact that the directors at parent and subsidiary level are the same, can be a contributing factor. It is also possible that the shareholders of the parent company cannot or do not want to request an inquiry into the affairs of the parent, but solely desire inquiry proceedings at subsidiary level. This could for example be the case if the parent company is a foreign company, to which the rules for inquiry proceedings (under Dutch law) do not apply. Also in these cases Dutch case law has taken into account the economic reality by allowing such inquiry procedures under specific

149

See for an unofficial translation of the Dutch legislation which has been used as a source of inspiration throughout this chapter http://www.dutchcivillaw.com/civilcodebook022.htm. 150 Supreme Court (HR) 4 February 2005, NJ 2005/127, m.nt. J.M.M. Maijer (Landis). 151 See in this respect Bartman (2016/77); Kemp and Olaerts (2017), p. 156; Bartman et al. (2016), p. 291. 152 Supreme Court (HR) 4 February 2005, NJ 2005/127, m.nt. J.M.M. Maijer (Landis). See in this respect Bartman et al. (2016), p. 292.

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circumstances. This can be the case if the indirect shareholder has an economic interest in the subsidiary which is comparable to the interest of a shareholder in that subsidiary.153 Even though case law does not provide a very clear set of rules on when a shareholder of the parent company could initiate inquiry proceedings at subsidiary level, case law does show that the function of the parent is an important factor. If the parent company only functions as a holding company with no other assets than shares in the relevant subsidiary, it is more like that the indirect shareholder has an economic interest that is comparable with the interest of a shareholder in the subsidiary.154

7 Concluding Remarks Dutch company law does not provide for a coherent codified legal system applicable to company groups. The basic rule that each company in itself is a separate legal entity with its own duties and responsibilities, is in principle also applicable to company groups. Therefore, the directors of a company forming part of a group in principle have to perform their duties in the interest of that specific company while shareholders are protected by the principle of limited liability. The group as such is not recognized as a separate legal entity. Nevertheless, the group phenomenon is taken into account in various areas of the law. In some situations this can mean that certain exceptions to legal rules are provided to companies belonging to a group for example in order to make group management possible or less cumbersome. The latter reflects the more ‘enabling’ approach in which group management is made possible. In other situations specific rules are put in place aimed at avoiding abuse or circumvention of existing legal rules by making use of group structures. The concepts and definitions of control, parent and subsidiary company, dependent company etc vary and depend on the aims of the rules within the ambit of which the group concept is recognized. There is an abundance of definitions around which have various meanings. Important concepts related to group management and the relation between the group interest and the company interest as well as issues of parental liability in company groups have developed in case law over the years. This means that their application in practice very much depends on the circumstances of the case. It is generally accepted that a group requires a central management and that a parent company has a duty to manage the group. The boundaries of that group management duty are however not always entirely clear. It has been established in case law that a parent company will have to take, to a certain extent, the interest of stakeholders at subsidiary level into account while at the same time the directors at subsidiary level will have to

153

Supreme Court (HR) 23 March 2013, NJ 2013/304, m.nt. Van Schilfgaarde (Chinese Workers). Supreme Court (Hoge Raad) 23 March 2013, NJ 2013/304, m.nt. Van Schilfgaarde (Chinese Workers). 154

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operate within the confinements of the group policy. Specific instruction rights are possible in private limited liability companies provided they are integrated in the articles of association. In a public limited liability company only general instructions can be given. Nevertheless, it is largely recognized that there is also in the absence of a specific instruction right an instruction power which the parent company may have to use if it wants to fulfill its duty of care in specific circumstances. In any case the board of directors of the subsidiary will have to weigh the interest involved and will have to deny the instruction if it would be against the interest of the subsidiary and the enterprise connected to it. It is recognized that the group interest will have an important influence on the company interest. A strong group policy and an interference of the parent company at subsidiary level can lead to parental liability either on the basis of a breach of a duty of care of the parent company towards the creditors at subsidiary level or on the basis of de facto directorship by the parent company. International groups are taken into account in the sense that they are exempted from the (full) application of the so called structure regime. In some areas of the law courts are more willing to recognize the group interest and the economic reality of company groups.155 With regard to the recognition of the group interest, this is for example the case with regard to conflicts of interest and group financing. When it comes to directors liability issues, the picture is less straightforward. An area in which the interconnection between companies within the group is also more easily recognized is with a view to safeguarding works council consultation rights.

References Abma R, Van Kleef DP, Lemmers N, Olaerts M (2017) De algemene vergadering van Nederlandse beursvennootschappen. Wolters Kluwer, Deventer Assink BF, Slagter WJ (2013) Compendium Ondernemingsrecht (Deel 2). Wolters Kluwer, Deventer Bartman SM (2004) Voorbij NV en BV; Over corporate governance en het tekort van ons vennootschapsrecht. Wolters Kluwer, Deventer Bartman SM (2015) De 403-verklaring: hoofdelijkheid of borgtocht? Een napleitexercitie. Ars Aequi:806–812 Bartman SM (2016) Hoge Raad weet zich niet goed raad met het concern. Ondernemingsrecht 2016 (77):365–370 Bartman SM, Dorresteijn AFM, Olaerts M (2016) Van het concern. Wolters Kluwer, Deventer Bier B, Quist PHN (2016) (Groeps)structuur. In: Bier B, Van Olffen M, Snijder-Kuipers B (eds) Handboek notarieel ondernemingsrecht. Wolters Kluwer, Deventer Boschma HE (2015) De (aansprakelijkheids)positie van de bestuurder van een concerndochter. Risico’s, valkuilen en vangnetten. NTBR 2015(17):112–121 Dahmen RGM (2014) De aanwijzingsbevoegdheid van het gewijzigde artikel 2:239-4 BW: toepassing, toetsing, afdwingbaarheid en aspecten van aansprakelijkheid in concernperspectief. TvOB 2014(2):61–71

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Dorresteijn AFM (2017a) Art. 2:24a BW, aant. 6. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer Dorresteijn AFM (2017b) Art. 2:24a BW, aant. 7. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer Dortmond P (e.o) (2013) Handboek voor de naamloze en de besloten vennootschap. Wolters Kluwer, Deventer Huizink JB (2017a) Art. 2:129 BW, aant. 11.10. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer Huizink JB (2017b) Art. 2:129 BW, aant. 11.7. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer Huizink JB (2017c) Art. 2:138 BW, aant. 28.3. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer Huizink JB (2017d) Art. 2:138 BW, aant. 30. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer IJsselmuiden Th S (2005) art. 2:406 BW, aant. 2.1. In: Huizink JB (ed) Groene Serie Rechtspersonen. Wolters Kluwer, Deventer Kemp B, Olaerts M (2017) Substance over form in various aspects of cross-border company groups. In: Koster H e.o. (ed) Essays on private & business law. Eleven International Publishing, The Hague, pp 154–163 Kiersch EDG (2017) Art. 2:406 BW. In: Krans HB, Stolker CJJM, Valk WL (eds) Tekst & Commentaar Burgerlijk Wetboek. Wolters Kluwer, Deventer Kramer XE, Verhagen HLE (m.m.v. S. van Dongen, A.P.M.J. Vonken) (2015) Mr. C. Assers Handleiding tot de beoefening van het Nederlands Burgerlijk recht. 10. Internationaal privaatrecht. Deel III. Internationaal vermogensrecht. Wolters Kluwer, Deventer Olaerts M (2018) Dutch National Report on company groups for the international academy of comparative law. In: Van Vliet PW (ed) The Netherlands Reports to the twentieth international congress of comparative law, Fukuoka 2018. Wolf Legal Publishing, Oisterwijk, pp 107–134 Raaijmakers MJGC (2015) Bestuursautonomie in een (gezamenlijke) dochter-BV: een novum in concernverhoudingen? TvOB 2015(1):2–12 Reumers MLH (2007) Samengevoegde afwikkeling van faillissementen (diss. Rotterdam), deel 61 IVO-reeks. Wolters Kluwer, Deventer Van der Sangen GJH (2009) Concernleiding en aansprakelijkheid: het delicate evenwicht tussen unitaire leiding en juridische zelfstandigheid. TvOB 2009(6):146–153 Van Schilfgaarde P, Winter J, Wezeman JB, Schoonbroood J (2017) Van de BV en de NV. Wolters Kluwer, Deventer Van Solinge G, Nieuwe Weme MP (m.m.v. R.G.J. Nowak) (2009) Mr. C. Assers Handleiding tot de beoefening van het Nederlands Burgerlijk Recht. 2. Rechtspersonenrecht. Deel II. De naamloze en de besloten vennootschap. Wolters Kluwer, Deventer Verdam AF e.o. (2015) Autonomie van het bestuur en haar grenzen voor en na de Cancunuitspraak. Wolters Kluwer, Deventer Zaal I (2014) De Reikwijdte van medezeggenschap (diss. Amsterdam UvA). Wolters Kluwer, Deventer

National Report on Cyprus Thomas Papadopoulos

Abstract This chapter examines groups of companies in Cyprus law. It derives from a country report submitted to the 2018 International Congress on Comparative Law. After an introduction, statutory provisions of company law on group of companies, holding and subsidiary companies are discussed. The issue of lifting the corporate veil in Cyprus company law is scrutinized. In this context, the doctrine of separate legal personality in Cyprus company law, as it was approached by the courts, is examined. Moreover, the case law on the possibility of lifting the corporate veil in group of companies and the case law on the possibility of lifting the corporate veil in parent and subsidiary companies are discussed. Reference is made to lifting the corporate veil in the context of tax law and public procurement, as well as to legislative provisions allowing lifting the corporate veil. With regard to capital markets law/securities regulation, groups of companies are examined in the light of takeover law and transparency law. The position and regulation of groups of companies in various other areas of law are explained: competition law, banking and financial law, insolvency law, private international law and environmental law. A few concluding remarks are inferred.

1 Introduction Cyprus does not have a special law on group of companies. The Cyprus legislature has not adopted a consolidated law on group of companies. However, there are fragmentary regulations for corporate groups in various statutes. There are also cases examining some aspects of groups of companies. Groups of companies fall within the scope of various areas of law. This report will focus on the regulation of groups of companies in company law, capital markets law/securities regulation (takeover law and transparency law), competition law, banking and financial law, insolvency law, private international law and environmental law. Special emphasis will be given T. Papadopoulos (*) Department of Law, University of Cyprus, Nicosia, Cyprus e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_16

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on case law and statutory provisions about the doctrine of separate legal personality of companies and about lifting the corporate veil. Some of these provisions of Cyprus law concerning group of companies are quite detailed, but there is not a single set of rules concerning groups of companies. The notion of group of companies is recognised by Cyprus law, but groups of companies do not constitute legal persons and are not the subjects of rights and obligations. Obviously, the members of the group, parent (holding) company and subsidiaries, are legal persons having rights and obligations.

2 Statutory Provisions of Company Law on Group of Companies, Holding and Subsidiary Companies Cyprus is a mixed legal system,1 where company law is based on common law. The Companies Law (Cap. 113) of Cyprus is based on English Companies Act of 1948. Regarding classification of companies, Cyprus has companies limited by shares and companies limited by guarantee, which could be either public or private companies. The classification of companies in Cyprus company law is similar with the classification of companies in English company law.2 Cyprus company law does not have a special law on group of companies. There are certain provisions in the Companies Law (Cap. 113), but there is no consolidated set of rules dedicated to group of companies. Groups of companies fall within the scope of regular company law. The provisions of Companies Law (Cap. 113) refer to “holding companies” (i.e. parent companies) and “subsidiaries”. Some of these provisions were provisions adopted by the Cyprus legislature, while others derive from EU Company Law Directives, which Cyprus, as an EU Member, had to implement into its national law. Case law on groups of companies is quite poor. No special issues regarding groups of companies had arisen before Cyprus Courts. There were only cases concerning lifting of the corporate veil. There is case law on the possibility of lifting the corporate veil in a group of companies on the basis of the single economic entity concept. Cyprus company law follows common law. Hence, in various cases brought before them, Cyprus courts could refer to English cases dealing with matters of group of companies, e.g. English case law on lifting the corporate veil.3 English case law is particularly useful for Cyprus Courts, as many difficult matters, which had not appeared previously before Cyprus Courts, could have already been interpreted and solved by English courts. We are going to provide an overview of the most important legal provisions of the Companies Law (Cap. 113).

1

Hatzimihail (2013), pp. 37–96; Symeonides (2003), p. 441. Worthington (2016), pp. 21–22. 3 Dine (2000), pp. 43–55. 2

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Regarding the definition of group of companies, Art 2 of Companies Law (Cap. 113) provides a long list of definitions of various company law terms in order to facilitate interpretation of these terms. According to Art. 2, ““Group of companies” means the group of companies comprising of the holding and subsidiary company or companies; ”.4 The same article also mentions the terms of holding (i.e. parent) and subsidiary companies. According to Art. 2, ““holding company” means a holding company as defined by section 148;” and ““subsidiary” means a subsidiary as defined in section 148;”. Hence, the definitions of holding and subsidiary companies are provided by Art. 148 of Companies Law (Cap. 113). Art. 148 of Companies Law (Cap. 113) provides the meaning of “holding company” (i.e. parent company) and “subsidiary”. The notion of corporate control in this definition exercised by the holding company over the subsidiary is founded on the control of the composition of the board of directors and of the majority of the voting rights in the company. Art. 148 of Companies Law (Cap. 113) states: “(1) For the purposes of this Law, a company shall, subject to the provisions of subsection (3), be deemed to be a subsidiary of another if, but only if(a) that other either(i) is a member of it and controls the composition of its board of directors; or (ii) holds the majority of the voting rights in the company; or (iii) is a member of it and controls the majority of voting rights of its members by virtue of an agreement which has been entered into with its other members; (b) the first-mentioned company is a subsidiary of any company which is that other’s subsidiary. (2) For the purposes of subsection (1), the composition of a company’s board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it without the consent or concurrence of any other person can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say:(a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid; or (b) that a person’s appointment thereto follows necessarily from his appointment as director of that other company; or (c) that the directorship is held by that other company itself or by a subsidiary of it. (3) In determining whether one company is a subsidiary of another(a) any shares held or power exercisable by that other in a fiduciary capacity shall be treated as not held or exercisable by it; (b) subject to the two following paragraphs, any shares held or power exercisable(i) by any person as a nominee for that other (except where that other is concerned only in a fiduciary capacity); or

4 There is also a definition of “group accounts”: ““group accounts” means the consolidated financial statements provided for in paragraph (b) of subsection (1) of section 142”.

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T. Papadopoulos (ii) by, or by a nominee for, a subsidiary of that other, not being a subsidiary which is concerned only in a fiduciary capacity, shall be treated as held or exercisable by that other;

(c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issue of such debentures shall be disregarded; (d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary, not being held or exercisable as mentioned in paragraph (c) of this subsection, shall be treated as not held or exercisable by that other if the ordinary business of that other or its subsidiary, as the case may be, includes the lending of money and the shares are held or power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business. (4) For the purposes of this Law, a company shall be deemed to be another’s holding company if, but only if, that other is its subsidiary. (5) In this section the expression “company” includes any body corporate, and the expression “equity share capital” means, in relation to a company, its issued share capital excluding any part thereof which, neither as respects dividends nor as respects capital, carries any right to participate beyond a specified amount in a distribution.” [emphasis added].

This definition is considered quite detailed. However, Cyprus Courts did not have the chance to examine it in a case brought before them. The definition of Cyprus law is quite similar with the relevant provision of English company law: CA 2006 s 1159.5 Art 28 of Companies Law (Cap. 113) stipulates the basic rule for membership of holding company: “(1) Except in the cases hereafter in this section mentioned and subject to the provisions of sections 57A to 57F, a body corporate cannot be a member of a company which is its holding company, and any allotment or transfer of shares in a company to its subsidiary shall be void. (2) Nothing in this section shall apply where the subsidiary is concerned as personal representative, or where it is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money. (3) This section shall not prevent a subsidiary which is, at the commencement of this Law, a member of its holding company, from continuing to be a member but, subject to subsection (2), the subsidiary shall have no right to vote at meetings of the holding company or any class of members thereof. (4) Subject to subsection (2), subsections (1) and (3) shall apply in relation to a nominee for a body corporate which is a subsidiary, as if references in the said subsections (1) and (3) to such a body corporate included references to a nominee for it. (5) In relation to a company limited by guarantee which is a holding company, the reference in this section to shares, whether or not it has a share capital, shall be 5

The Supreme Court of the United Kingdom discussed these rules in operation in Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16, Worthington (2016), p. 24.

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construed as including a reference to the interest of its members as such, whatever the form of that interest.” This provision is without prejudice to Art 57A to 57F, which regulate the right of a company to purchase or acquire its own shares, the obligation of company to transfer shares acquired in contravention of this Law, the conditions to be met for the company to hold its own shares, the right of a company to pledge its own shares and the subscription, acquisition or holding of shares through subsidiary. It is worth mentioning one part of these exceptions concerning holding companies and subsidiaries. With regard to subscription, acquisition or holding of shares through subsidiary, Art. 57F of Companies Law (Cap. 113) states: (1) The subscription, acquisition or holding of shares of a public company (in this section called the “first company”) by another limited liability company, local or overseas (in this section called the “other company”), which other company is a subsidiary of the first, shall, for the purposes of sections 57A to 57E, be considered to have been carried out by the first company. (2) When the subscription, acquisition or holding of the shares through the other company has been carried out under the circumstances mentioned in subsection (1) of section 57B, the provisions of subsections (2) and (3) of section 57B and section 57C shall not apply, but the following will apply: (a) The voting rights attached to the shares of the first company, which are held by the other company shall be suspended, and (b) the directors of the first company are obliged to acquire from the other company the shares mentioned in subsections (2) and (3) of section 57B and section 57C at the price at which this other company had acquired them, unless the said directors prove that the first company had no involvement in the subscription or acquisition of the said shares. (3) This section shall not apply where the said subscription, acquisition or holding is made(a) On behalf of a person other than the person subscribing, acquiring or holding the shares and provided this person is neither the first company nor the other company, (b) by the other company acting as a professional dealer in securities and in its capacity as such, provided that it is a member of a stock exchange situated or operating in the Republic or in a member state of the European Union, or that has obtained a licence to operate or is under the supervision of an authority of the Republic or a member state of the European Union, being the competent authority for the supervision of professionals dealing in securities.

With regard to the prohibition of provision of financial assistance by company for purchase of or subscription for its own, or its holding company’s shares, Art. 53 of Companies Law (Cap. 113) states that: “(1) Subject as provided in this section and subject to the provisions of sections 57A to 57 F, it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company: Provided that nothing in this section shall be taken to prohibit(a) where the lending of money is part of the ordinary business of a company, the lending of money by the company in the ordinary course of its business;

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(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company; (c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership. (2) If a company acts in contravention of this section, the company and every officer of the company who is in default shall be liable to a fine not exceeding eight hundred fifty-four euros. (3) In the case of a private company, the prohibition in subsection (1) shall not apply if(a) the private company is not a subsidiary of any company which is a public company, and (b) the relevant action has been approved at any time, with a resolution of the general meeting which has been passed by a majority exceeding ninety per cent of all issued shares of the company: Provided that, the exception of this subsection shall not affect the obligation to comply with any other section of this Law or with any other law.”6 There are also provisions about Investigation of company’s affairs on application of members (Art. 158 of Companies Law (Cap. 113)) and in other cases (Art. 159 of Companies Law (Cap. 113)). More specifically, Art. 158 states that: “the Council of Ministers may appoint one or more competent inspectors to investigate the affairs of a company and to report thereon in such manner as the Council of Ministers directs. . .”.7 Art. 159 states that:

According to para. 10 of the “First Schedule (Tables A, B, C and D - Sections 2 and 13), Table A, PART I. Regulations for management of a company limited by shares, not being a private company” annexed to Companies Law (Cap. 113): “The company shall not give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company nor shall the company make a loan for any purpose whatsoever on the security of its shares or those of its holding company, but nothing in this regulation shall prohibit transactions mentioned in the proviso to section 53 (1) of the Law.” 7 Art. 150 also provides the requirements of the application of the relevant companies to the Council of Ministers: “(a) in the case of a company having a share capital, on the application either of not less than two hundred members or of members holding not less than one-tenth of the shares issued; (b) in the case of a company not having a share capital, on the application of not less than one-fifth in number of the persons on the company’s register of members. (2) The application shall be supported by such evidence as the Council of Ministers may require for the purpose of showing that the applicants have good reason for requiring the investigation, and the Council of Ministers may, before appointing an inspector, require the applicants to give security, 6

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the Council of Ministers- (a) shall appoint one or more competent inspectors to investigate the affairs of a company and to report thereon in such manner as the Council of Ministers directs, if(i) the company by special resolution; or (ii) the Court by order, declares that its affairs ought to be investigated by an inspector appointed by the Council of Ministers; and (b) may do so if it appears to the Council of Ministers that there are circumstances suggesting(i) that its business is being conducted with intent to defraud its creditors or the creditors of any other person or otherwise for a fraudulent or unlawful purpose or in a manner oppressive of any part of its members or that it was formed for any fraudulent or unlawful purpose; or (ii) that persons concerned with its formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards it or towards its members; or (iii) that its members have not been given all the information with respect to its affairs which they might reasonably expect.

This power of inspectors to carry investigations is expanded also into holding companies and subsidiaries, as it covers also the affairs of related companies. Art. 160 states that: “If an inspector appointed under section 158 or 159 to investigate the affairs of a company thinks it necessary for the purposes of his investigation to investigate also the affairs of any other body corporate which is or has at any relevant time been the company’s subsidiary or holding company or a subsidiary of its holding company or a holding company of its subsidiary, he shall have power so to do, and shall report on the affairs of the other body corporate so far as he thinks the results of his investigation thereof are relevant to the investigation of the affairs of the first mentioned company.” Art. 182 of Companies Law (Cap. 113) also prohibits loans to directors: “(1) It shall not be lawful for a company to make a loan to any person who is its director or a director of its holding company, or to enter into any guarantee or provide any security in connection with a loan made to such a person as aforesaid by any other person: Provided that nothing in this section shall apply either- 5 of 131(I) of 2007. (a) to anything done by a company which is for the time being a private company; or (b) to anything done by a subsidiary, where the director is its holding company; or (c) subject to subsection (2), to anything done to provide any such person as aforesaid with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company; or (d) in the case of a company whose ordinary business includes the lending of money or the giving of guarantees in connection with loans made by other persons, to anything done by the company in the ordinary course of that business.

for such amount as the Council of Ministers may determine, for payment of the costs of the investigation.”

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(2) Proviso (c) to subsection (1) shall not authorize the making of any loan, or the entering into any guarantee, or the provision of any security, except either(a) with the prior approval of the company given at a general meeting at which the purposes of the expenditure and the amount of the loan or the extent of the guarantee or security, as the case may be, are disclosed; or (b) on condition that, if the approval of the company is not given as aforesaid at or before the next following annual general meeting, the loan shall be repaid or the liability under the guarantee or security shall be discharged, as the case may be, within six months from the conclusion of that meeting. (3) Where the approval of the company is not given as required by any such condition, the directors authorizing the making of the loan, or the entering into the guarantee, or the provision of the security, shall be jointly and severally liable to indemnify the company against any loss arising therefrom.” Holding companies and subsidiaries also fall within the scope of the duty of director to disclose payment for loss of office, etc., made in connection with transfer of shares in company. Art. 185 of Companies Law (Cap. 113) states that: Where, in connection with the transfer to any persons of all or any of the shares in a company, being a transfer resulting from-. . . (b) an offer made by or on behalf of some other body corporate with a view to the company becoming its subsidiary or a subsidiary of its holding company;. . . . a payment is to be made to a director of the company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, it shall be the duty of that director to take all reasonable steps to secure that particulars with respect to the proposed payment, including the amount thereof, shall be included in or sent with any notice of the offer made for their shares which is given to any shareholders. . .

With regard to register of directors’ shareholdings, Art. 187 of Companies Law (Cap. 113) states that: “(1) Every company shall keep a register showing as respects each director of the company, not being its holding company, the number, description and amount of any shares in or debentures of the company or any other body corporate, being the company’s subsidiary or holding company, or a subsidiary of the company’s holding company, which are held by or in trust for him or of which he has any right to become the holder, whether on payment or not: Provided that the register need not include shares in any body corporate which is the wholly-owned subsidiary of another body corporate, and for this purpose a body corporate shall be deemed to be the wholly-owned subsidiary of another if it has no members but that other and that other’s wholly-owned subsidiaries and its or their nominees.” Additionally, there are references to subsidiaries in the following provisions of Companies Law (Cap. 113): annual and consolidated financial statements (Art. 142), exemptions relating to the keeping of consolidated financial statements (Art. 142A), directors’ report (Art. 151), particulars in accounts of directors’ salaries, pensions, etc. (Art. 188), particulars in accounts of loans to officers, etc. (Art. 189), register of directors and secretaries (Art. 192), power to acquire shares of shareholders dissenting from scheme or contract approved by majority (Art. 201).

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Moreover, Cyprus company law allows overseas companies incorporated outside Cyprus to establish a place of business in Cyprus, without having to register a subsidiary company under Cyprus law. All overseas companies (companies incorporated outside Cyprus) are allowed, in compliance with certain conditions prescribed under Arts 346-354 of Companies Law (Cap. 113), to establish a place of business within Cyprus. Hence, it is not necessary for overseas companies to establish a subsidiary company in Cyprus. Overseas companies can conduct business though a “place of business”. According to Art. 354 of Companies Law (Cap. 113) “place of business” includes a share transfer or share registration office. There are not many references to the term “group of companies” in the Companies Law (Cap. 113). In Art. 142 of Companies Law (Cap. 113) concerning annual and consolidated financial statements, there is a reference to group of companies, as well as to “small sized groups”: “(1) (a) The directors shall cause to be made, for every company, a complete set of financial statements, as this set is prescribed by the International Accounting Standards. (b) Without prejudice to the provisions of section 142A, each company which has subsidiaries, shall consolidate its financial statements with the financial statements of its subsidiaries as prescribed by the International Accounting Standards, and the said consolidated financial statements shall be presented before the general meeting of the parent company. [. . .] (d) Small sized groups shall be exempt from the obligation to prepare consolidated financial statements, referred to in paragraph (b) of this subsection. (e) For the purposes of this subsection, the term ‘small sized group’ means a group of companies, of which the companies subject to consolidation– (i) are not public; (ii) the preparation of their consolidated financial statements is not governed by any other legislation; and (iii) they satisfy, in their entirety, at the date of closing of the balance sheet of the parent company, two of the following three criteria: (aa) The total of the assets appearing in the balance sheet (and without deducting the liabilities) does not exceed the amount of 17.500.000 (seventeen million five hundred thousand) Euros; (bb) The net level of the turnover does not exceed the amount of 35.000.000 (thirty-five million) Euros, and (cc) The average number of employees at the relevant period does not exceed two hundred fifty. (f) Groups of companies of which the ultimate subsidiary or parent companies publish consolidated financial statements on the basis of Generally Recognized Accounting Principles shall be exempt from the obligation to prepare consolidated financial statements. [. . .]” [emphasis added].

Additionally, Art. 151 of Companies Law (Cap. 113) adopts certain requirements for directors’ report: “(1)(a) There shall be attached to the financial statements a report by the directors in relation to the status and the foreseeable development of the affairs of the company or the group. (b) The directors’ report shall provide information in relation to, at least, the following: -(i) any change during the financial year in the nature of the business of the company or in its subsidiaries or in the classes of business in which the company has an interest, whether

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as a member of another company or otherwise, and especially in any takeover or merger which has been realized or intended, whether active or passive; [. . .] (vii) the existence of branches of the company;” [emphasis added].

Another reference to “group of companies” in Companies Law (Cap. 113) is about the imposition of an annual fee to companies registered to Cyprus. According to Art. 391 of Companies Law (Cap. 113): “(1) Notwithstanding the provisions of this Law or any other Law or Regulations made thereunder, all registered companies shall be obliged to pay an annual fee of three hundred and fifty euros (€350.00), which shall be paid in accordance with the following procedure: (a) Existing registered companies, which in accordance with the provisions of this section are subject to an obligation of payment of a fee, shall be obliged with respect to the year 2011 to pay such fee, not later than the 31December 2011. (b) Existing registered companies, with respect to each year following the year 2011, shall be obliged to pay such fee, not later than the 30 June of each year: Provided that, a company shall not be obliged to pay a fee, in accordance with the provisions of this section, on the year of its registration and with respect to such year: Provided further that, in case of companies which belong to a group of companies, the total amount of the fees which need to be paid by the said companies should not exceed the amount of twenty thousand euros (€20,000), such amount to be divided amongst such companies equally.[. . .] (3) Notwithstanding the provisions of subsection (2), in case a company does not comply with the payment of the said annual fee, within the time limits set out above and in accordance with the procedures provided for in this section, the Registrar shall proceed with its removal from the register, applying mutatis mutandis, the provisions of section 327 of this Law: [. . .] (4) At the Registrar’s discretion, the provisions of this section shall not apply in the case of a dormant company or companies or group of companies that do not possess any assets or in the case of a company that possesses assets which are located in areas which are not under the control of the Republic.” [emphasis added].

Moreover, mergers between subsidiaries (sister companies) and mergers between a parent company and a subsidiary could take place at domestic and cross-border level. Arts. 201A-201H of Companies Law (Cap. 113) regulate domestic mergers and divisions of public companies. These provisions implement the Third and Sixth EU Company Law Directives into Cyprus law. Arts. 201I-201X of Companies Law (Cap. 113) regulate cross-border mergers at EU level. These provisions incorporate the Tenth EU Company Law Directive into Cyprus law. The possibility to conduct a domestic or cross-border merger is very important for the corporate restructuring of a group of companies. Group of companies could proceed to a corporate restructuring through a domestic or cross-border merger. Domestic divisions are also available under Arts. 201A-201H of Companies Law (Cap. 113). Additionally, European Economic Interest Grouping (EEIG) is also available in Cyprus under Council Regulation 2137/85 on the European Economic Interest Grouping (EEIG).8

8 Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG) [1985] OJ L 199/1–9.

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3 Lifting the Corporate Veil in Cyprus Company Law Lifting the corporate veil is possible in Cyprus company law. On the one hand, case law adopted the possibility of lifting the corporate veil. On the other hand, there are certain provisions of legislation allowing the lifting of the corporate veil.

3.1

The Doctrine of Separate Legal Personality in Cyprus Company Law: The Approach of the Courts

Cyprus Courts accepted the doctrine of separate legal personality, as it was stated in Salomon & Co. v. Salomon.9 Nevertheless, the doctrine of separate legal personality is not absolute. Cyprus Courts accepted the possibility of lifting the corporate veil. The influence of English case law is very important. The approach of Cyprus Courts on the doctrine of separate legal personality and on lifting of the corporate veil is based on English case law on this subject matter. More specifically, in Michaelides v. Gavrielides, the Supreme Court of Cyprus held that: “[. . .]We think that it is necessary to state that since the decision in Salomon & Co. v. Salomon [1897] A.C. 22, it has been said time and again that a company and the individual or individuals forming a company were separate legal entities, however complete the control might be by one or more of those individuals over the company. That is the whole principle of the formation of a limited liability company, and it would be contrary to the scheme of the Company Acts to depart from that principle. The learned President, dealing with the corporate veil of a company, referred to a number of cases, indicating readiness on the part of the Court to pierce the corporate veil, if that was deemed necessary in the interests of justice. It is true that in some instances modern company law disregarded the principle that the company is an independent legal entity, and generally speaking the Courts are more inclined, in appropriate circumstances, to lift the veil of the corporateness where question of control is in issue than when a question of ownership arises. The veil of corporateness is lifted in the cases in Palmer’s Company Law, Volume 1, 22nd Edition at pp. 160, 162. [. . .] It has been argued in the course of this case that there have been a number of departures from the principle of Salomon v. Salomon & Co. in order that the Courts may give effect to what has been described as the reality of the situation, and it is submitted in these circumstances that the Court should look at the realities of the situation. [. . .]

9

Salomon & Co. v. Salomon [1897] A.C. 22.

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There is no escape from the fact that a company is a legal entity entirely separate from its corporators—sees Salomon v. Salomon & Co Here the landlord and her companies are entirely separate entities. This is no matter of form; it is a matter of substance and reality. Each can sue and be sued in its own right; indeed, there is nothing to prevent the one from suing the other. Even the holder of one hundred per cent of the shares in a company does not by such holding become so identified with the company that he or she can be said to carry on the business of the company. This clearly appears from Gramophone & Typewriter Ltd. v. Stanley, a decision of this Court which seems to me, on due consideration, to be destructive of the argument for the landlord. As was pointed out by Fletcher Moulton, L. J., control of a company by a corporator is wholly different in fact and law from carrying on the business himself: ‘...the individual corporator does not carry on the business of the corporation.”10 In Republic v KEM Taxi, the Supreme Court of Cyprus discussed the doctrine of legal personality, as well as the lifting of corporate veil: Dealing with judicial interpretation of the same subject Palmer’s Company Law (supra) lists down briefly instances in which modern company law disregards the principle that the company is an independent legal entity. At page 162 under serial No. 9 the following are stated inter alia: «The Courts have further shown themselves willing to, lift the veil where the device of incorporation is used for some illegal or improper purpose. So, where a transport company sought to obtain licences for its vehicles, which it was unlikely to obtain if it made application on, its own behalf, by causing the application to be made by a subsidiary company to which the vehicles were to be transferred, the court refused to treat parent and subsidiary as independent bodies, and decided the application on the basis that they were one commercial unit (Merchandise Transport Ltd., .v. British Transport Commission [196212 Q.B. 173). It was stressed in the aforesaid case of Merchandise Transport Ltd., v. British Transport Commission (Supra) at pp 206 and 207 of the report, that «where the character of a company, or the nature of the persons who, control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance.» The above dicta were cited verbatim with approval in the case of DHN v. London Borough of Tower Hamlets [1976] 3 All E.R. 462 at p. 469 where it was held that «the Court was entitled to look at the realities of the situation and to pierce the corporate veil». The position in Cyprus as regards the lifting of the veil of corporation may be summed up as follows: The separateness of the company from its shareholders was emphasized by our Supreme Court in the case of Michaelides v. Gavrielides (1980) 1 C.L.R. 244 (Rent Control Case), whereby it was stressed that a limited company is a legal entity separate and, distinct from its shareholders affirming thus the principle laid down in Salomon’s case (Supra). In the recent case of Bank of Cyprus (Holdings) v. The Republic (1985)3 C.L.R. 1883, decided by the Full Bench of this Court, the following are stated at page 1889: «The case of Michaelides v. Gavrielides (1980) 1 C.L.R. 244, a rent control case, left no room for lifting the veil of corporation under any circumstances. We are of the view that notwithstanding what was stated in Michaelides case, in a proper case there may be exceptions to the rule in Salomon case.

10

Michaelides ν. Gavrielides (1980) 1 CLR 244.

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In Strata Tours Limited v. The Republic (1985)3 C.L.R. 2560, an identical case to the one under present appeal, I had the opportunity to state the following: «It is abundantly clear from the wording of sub-section 8, set out above, that when the applicant for a licence to own and manage car hired without a driver» is a legal entity - and the applicant in the present recourse being a Company Ltd., is a legal entity «τα 'εχoντα την ευθύνη των επιχειρήσεων τoύτoυ πρóσωπα» (the persons having the responsibility of the enterprise of such legal entity) must satisfy the Licensing Authority that they are of good character on the basis of a certificate issued by the Chief of Police wherein it will be certified that they were not convicted for the last two years for anyone of the offences referred to in sub-section (8) of s. 5 of Law 9/82. Having given to this sub-section my best consideration, I hold the view that its wording is tantamount to substantially lifting the veil of the company at least for the purpose of ascertaining the good character of the persons having the responsibility of the enterprise of such legal entity.’» But once the veil is being lifted for the above purpose, there, is nothing to, prevent the appropriate Authority from examining whether the applicant company and KEM TAXI LTD were in substance and in fact tone commercial unit, and whether the device of incorporation was being used for the improper purpose to say the least - of acquiring more licences for selfdriven cars in view of the fact the KEM TAXI Ltd had already 95 such licences. (Merchandise Transport Ltd. v. British Transport Commission [1962] 2 Q.B. 173 at p. 206 and 207). The wording of s. 5(8) coupled with the special facts pertaining to this case, render, in my view, the case under consideration, a proper case to be treated as an exception to the rule in Salomon’s case (supra).11

3.2

Case Law on the Possibility of Lifting the Corporate Veil in Group of Companies

The Supreme Court of the Republic of Cyprus examined the possibility of lifting the corporate veil in a group of companies consisting of holding (parent) and subsidiary companies. The single economic entity concept was discussed. In Michalis Hatzigavriel v Ellinas Finance Public Company Limited, the Supreme Court of the Republic of Cyprus held that the existence of a group of companies does not necessarily gives the right to lift the corporate veil and, as a result, actions of one company of the group do not bind the whole group or the holding company. The Supreme Court of the Republic of Cyprus cites an extract from the book of Brenda Hannigan (Brenda Hannigan: Company Law, OUP, 2003, pages 74–82): English Courts accept with difficulty lifting of corporate veil on the basis of the single economic entity concept. Beyond the theory of separate legal entity introduced by Salomon v. Salomon & Co Ltd12, Adams v. Cape Industries plc13 recognized that, subsidiaries are considered to be separate legal entities in general company law, although they were established by their holding/parent companies. The principle of Salomon is not weakened

Republic ν. KEM Taxi Ltd (1987)3 SCC 1057. Salomon v. Salomon & Co Ltd [1897] A.C. 22. 13 Adams v. Cape Industries plc [1990] BCLC 479. 11 12

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by the fact that companies are organizing their business «in group structures», (see, Ord v. Belhaven Pubs Ltd14). In Case Re: Southard Ltd15, the Court held that the main legal aim for the use of group of companies is further restriction of group’s liabilities, as the Court of First Instance correctly mentioned by referring to the book of Pennington (Pennington, The Principles of Company Law p. 27 και 32); law is not interested in the economic organization of a group of companies. In the eyes of company law, the parent or the holding company is just a major shareholder of its subsidiary.16

Regarding group of companies and the single economic entity concept, the above case constitutes precedence and was referred by subsequent case law. These specific findings of the Court in Michalis Hatzigavriel v Ellinas Finance Public Company Limited were cited by Bank of Cyprus Public Company Ltd v. Daniel H’Tofi17 and by Bank of Cyprus Public Company Ltd v. Panagioti Zervou and Theodora Zervou.18

3.3

Case Law on the Possibility of Lifting the Corporate Veil in Parent and Subsidiary Companies

The Supreme Court of Cyprus scrutinized lifting the corporate veil with regard to parent and subsidiary companies. In Bank of Cyprus (Holdings) Ltd v. The Republic of Cyprus, through the Commissioner of Income Tax, the Supreme Court of Cyprus held that: “The protagonist for limiting the absoluteness of the rule in Salomon and grafting exceptions to it, has been Lord Denning. As in many other areas of the law, he advocated that no principle is so sacrosanct as to be above justice. Whenever the justice of the case so requires, the corporate veil should be lifted in the interests of justice. In Littlewoods supra, at p. 1254, he said: The Courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind.

He proceeded to point out that the legislature itself was active in piercing the corporate veil. Indeed they were. Numerous examples of this are given in Gower’s Principles of Modern Company Law, 4th ed., at p. 121, under the heading “Miscellaneous Statutory Examples”. Legislation has been mainly directed towards invalidating the use of incorporation as a device to bypass the law, mainly revenue laws.

14

Ord v. Belhaven Pubs Ltd [1998] 2 BCLC 447. Re: Southard Ltd [1979] 3 All E.R. 556. 16 Michalis Hatzigavriel v Ellinas Finance Public Company Limited, Case-Civil Appeal 209/2009 (2013) 1 SCC 668. 17 Bank of Cyprus Public Company Ltd v. Daniel H’Tofi Case 9037/2005-Court of First Instance (Source: Cyprus Legal Portal—http://www.leginet.eu). 18 Bank of Cyprus Public Company Ltd v. Panagioti Zervou and Theodora Zervou, Case 2173/ 2005- Court of First Instance (Source: Cyprus Legal Portal—http://www.leginet.eu). 15

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The brethren of Lord Denning on the Court of Appeal have not shown the same enthusiasm for disregarding the principles in Salomon whenever it appears just to do so. However, they have, on a number of occasions, concurred or agreed to the lifting of the veil for reasons associated with the intrinsic merits of the case while proclaiming the validity of the rule in Salomon. So Courts, like the legislature, have refused to treat the principle of separateness of a corporate body from its shareholders as absolute. Exceptions have been recognised. But going through the authorities, it is difficult, if not impossible, to group them as referable to any distinct exceptional rule. The approach of the Courts is empirical to the point of making it impossible at present to distil therefrom a general rule of exception. Now, we shall look at the cases relevant to the subject, in somewhat greater detail. 1. The Case of Littlewoods: Unlike Lord Denning, his fellow Judges on the Bench, Sachs and Karminski, L.Js., refused to acknowledge a general rule of exception to the principle in Salomon whenever it appeared just to do so. They distinctly distanced themselves from the adoption of such a principle. Far from it they pointed out that any attempt to erode the principle in Salomon was disclaimed by the successful appellants. In their opinion, the nature of the transaction was such as to make inconsequential the interposition of a corporate legal entity, solely designed to secure tax advantages for the Holding Company, to the extent of disregarding it. On a study of the facts it appears that a series of transactions between the parent company and its wholly owned subsidiary were exclusively designed to secure tax advantages for the parent company and, as such, they were disregarded. It is important to notice that both Sachs and Karminski, L.JJ., confined this decision to the facts of the case subscribing to the validity of the principle that for tax purposes the tax-payer company and its wholly owned subsidiary are separate legal entities. The facts in Littlewoods bear no relationship to the facts of the present case and, in my view, lend little support to the submission of the applicants unless, of course, we accept the views of Lord Denning, not shared by his brethren, that the principle in Salomon is invariably subject to the justice of a situation. The applicants in the present case were incorporated and took over the subsidiaries in the financial interest of all concerned as a long-term project. It was evidently judged necessary to keep the identity of the applicants separate and distinct from the subsidiaries, presumably because it was deemed advantageous to all concerned. Unlike Littlewoods, incorporation was not used as a device to secure tax advantages or any other temporary advantage to anyone concerned. The affirmation of the separateness of the tax-payer company from a wholly owned subsidiary for tax purposes by the majority of the Court, far from supporting weakens the case for the applicants. 2. The D.H.N. Case: This is the case upon which applicants relied most and sought to derive substantial support. Lord Denning showed equal readiness to lift the corporate veil in the interests of justice but, as in Littlewoods, his brethren on the Bench showed equal disinclination to do so. However, the Court was unanimous in its view that the fact of ownership by the subsidiary of premises in the possession of the parent company, should not be allowed to defeat the claim of

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the parent company for disturbance compensation upon the acquisition of the property. The relationship between the Holding and the subsidiary company was such as to entitle the parent company to be treated as having an irrevocable contractual licence to carry on their business on the premises. This licence entitled them to compensation for their stay was, in the circumstances, more in the nature of permanent possession. The relationship between the Holding and the subsidiary was more in the nature of a partnership and should be heeded as such. Goff and Shaw, L.Js., also rested their judgment in part on the coming into being of a resulting trust in favour of the parent company upon repayment of a loan of the subsidiary. 3. Smith’s Case: The plotting of the way to the recognition of exceptions to the rule in Salomon had been earmarked by Atkinson, J., in Smith’s case, supra. The case concerned, like D.H.N. supra, a claim for disturbance compensation for the acquisition of property. The ratio of the case is that registration of the property in a corporate legal entity, does not conclusively defeat a claim for disturbance compensation by the parent company. And inasmuch as the subsidiary company was not operating on its behalf but on behalf of the parent company, the claim was sustained. The learned Judge identified six rules of assistance to deciding whether the subsidiary could be ignored. These are, in the words of the Judge Firstly, were the profits treated as the profits of the company? - when I say ‘the company’ I mean the parent company - secondly, were the persons conducting the business appointed by the parent company? Thirdly, was the company the head and the brain of the trading venture? Fourthly, did the company govern the adventure, decide what should be done and what capital should be embarked on the venture? Fifthly, did the company make the profits by its skill and direction? Sixthly, was the company in effectual and constant control?.......

A comparison of the facts of the case in Smith with those of the present case is sufficient to demonstrate the differences between the two cases. In my judgment, the six principles postulated by Atkinson, J., are not satisfied on a review of the facts of the present case. To start with, the profits in question were not treated as the profits of the company, so the facts of the present case fail the first test. Nor were the persons conducting the business of the subsidiaries appointed by the parent company. The applicants fail, in my view, the second test as well and, at least two more of the six postulated criteria—the fifth and the sixth. The parent company did not make the profits by its skill and direction but by that of the Board and team of management of the subsidiaries. Nor is there any suggestion, which is the essence of the sixth test, that the applicants were in effectual and constant control of the activities of the subsidiaries. On the whole, the evidence points to the contrary. I shall refrain from embarking on detailed examination of other cases cited and, concentrate instead, on the analysis made by Gower of the trends emerging from the authorities and their underlying theme. If any consistent principle of exception to the rule in Salomon emerges at all, it is, as the learned authors very rightly notice, this: Courts may refuse to apply the principle in Salomon if too flagrantly opposed to justice, convenience or the interests of the revenue. I subscribe to this view on a

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study of the case law, as well as that advanced later in the concluding part of the same chapter that “in general, the Courts regard themselves as precluded by Salomon’s case from treating a company as the ‘alias, agent, trustee or nominee’ of its members and this is so, whether they are interpreting a statute or dealing with judge-made law.” Courts have shown readiness to lift the veil whenever incorporation is used as a device to secure financial advantages or whenever the interposition of a subsidiary is inconsequential to the nature of the transaction. Departure from the rule in Salomon is rare and mostly confined to cases where the interposition of a subsidiary has no real bearing on the nature of transaction. The broad principle upon which Lord Denning advocated the lifting of the corporate veil has not been espoused by the Courts and does not represent the law, either in England or in Cyprus. There is no liberty to depart from the rule in Salomon whenever it is just to do so. The matter came up for consideration in Michaelides v. Gavrielides (1980) 1 C.L.R. 244, on appeal from the District Court of Larnaca. (I had given the judgment as President of the District Court of Larnaca); The trial Court found that because a family company was solely owned by the son of the landlord and his wife, the landlord could recover possession of premises, in the possession of a tenant, under the provisions of s. 16(1)(g) of the Rent Control Law 1975, for making them available for use by his son, treating the family company as nothing other than the agent of the son for the transaction of his business. The Supreme Court reversed the decision and held there was no warrant for treating the shareholders of the private company as identical with the company, an entity separate and distinct in law. They proclaimed the efficacy of the rule in Salomon in terms certain, making reference with approval to numerous English decisions, affirming the principle as all important in the field of Company Law (see, inter alia, Tunstall v. Steigmann [1962] 2 All E.R. 417). The Supreme Court concluded, at p.258, “There is no escape from the fact that a company is a legal entity entirely separate from its corporation.” Further down they stress, “even the holder of 100% of the shares in a company does not by that holding become so identified with the company that it can be said to carry on the business of the company” - See judgment of Hadjianastassiou, J. at p.258. The judgment of Michaelicles, supra, cogently affirms the validity of the principle in Salomon, leaving little room for the acknowledgment of exceptions to it. Conclusions From the analysis made, it becomes abundantly clear that the facts of this case do not fit into any of the exceptions to the rule in Salomon as formulated in the above cases. The applicants had a different identity from its subsidiaries. More important still, it had different purposes and objectives. It was not a banking corporation like the Bank of Cyprus Limited, or a finance corporation like the Bank of Cyprus Finance Corporation Limited. Their activities were different; nor were their Boards identical. Moreover, although the applicants had the amenity to control the policy of the

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subsidiaries, the implementation of that policy was a matter for the subsidiaries and their team of management. All the aforesaid factors serve to stress the separateness of the three companies. The formation of the Holding Company and subsequent takeovers were undertaken as part of a long-term project, presumably advantageous to all concerned. They have to live with the disadvantages as well. There is no room whatever for holding that the reserve fund in question of the subsidiaries was held on trust for the applicants. It was very much in law the property of the subsidiaries. Their amenity to dispose of it by way of dividend was dependent on their financial commitments. If these commitments made it impossible to declare a dividend, so to do would be an abuse of their powers. The Holding Company had no specific claim by way of dividend or otherwise on the specific funds or on any other fund of the subsidiaries. Its powers were those of a shareholder. Even if we were to accept which is not the case - the wider principle formulated by Lord Denning, it would again be impossible to lift the veil of incorporation in this case unless we did away with the principle in Salomon. I discern no intrinsic in justice in sustaining the separateness of the companies as the law requires.”19 [emphasis added] There was an appeal against the previous case. In The Bank of Cyprus (Holdings) Ltd ν. The Republic of Cyprus, through the Commissioner of Income Tax, the Supreme Court of Cyprus examined the possibility of lifting the corporate veil in parent and subsidiary companies: “The principle of separateness of corporation is well rooted in the Companies Law ever since Salomon v. Salomon, [1897] A. C. 22, as a company has a personality separate and independent from that of its shareholders. A company is neither agent, trustee or nominee of its members. The inroads to the corporate principle are very few. The case of Michaelides v. Gavrielides, (1980) 1 C.L.R. 244, a rent control case, left no room for lifting the veil of corporation under any circumstances. We are of the view that notwithstanding what was said in Michaelides case, in a proper case there may be exceptions to the rule in Salomon case. We went through the English case law on the subject, including Littlewoods Mail Order Stores v. I.R.C., [1969] 1 W.L.R. 1241 (C.A.); D.H.N. Food, Distributors Ltd. v. Borough of Tower Hamlets, [1976] 3 All E.R. 462 (C.A.); Lonrho Ltd. v. Shell Petroleum, [19801 2 W.L.R. 367; Re Sharpe (a bankrupt) ex-parte the trustee of the bankrupt v. Sharpe and another, [1980] 1 All E.R. 198; and the older case of Smith, Stone and Knight Ltd. v. Lord Mayor, [19391 4 All E.R. 116. In none of these cases the exception to the rule in Salomon was applied or used by the Courts for, tax avoidance. In Littlewoods case the majority of the Court-Judges Sachs and Karminski, L. JJ.- reiterated the principle that for tax purposes the taxpayer company and its wholly owned subsidiary are separate legal entities. In the Smith case, which is a case on compensation upon compulsory purchase, Atkinson; J., after citing from the judgment of Lord Sterndale in Inland Revenue Commissioners v. Sansom, [1921] 2 K. B. 492, held that possession by a separate legal entity was not conclusive on the question of the right to claim, and as the subsidiary company was not operating on its own behalf but on behalf of the parent company, the parent company was the party to claim compensation. It is a question of fact in each case and the cases indicate that the question to be answered is whether a subsidiary is carrying on the business as the company’s business or as its own. On p. 121 it was said:

19

Bank of Cyprus (Holdings) Ltd v. The Republic of Cyprus, through the Commissioner of Income Tax, (1983) 3 SCC 636.

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“I have looked at a number of cases-They are all revenue cases-to see what the courts regarded as of importance for determining that question. There is San Paulo Brazilian Ry. Co. v. Carter, [1896] A.C. 31, Apthorpe v. Peter Schoenhofen Brewery Co. Ltd., 4 Tax Cas. 41, p. 41; Frank Jones Brewing o. v. Apthorpe, [1898] 4 Tax Cas. 6, St. Louis Breweries v. Apthorpe, 4 Tax Cas. 111, and I find six points which were deemed relevant for the determination of the question: who was really carrying on the business? In all the cases, the question was whether the company an English company here, could be taxed in respect of all the profits made by some other company, a subsidiary company being carried on elsewhere. The first point was: Were the profits treated as the profits of the company? -When I say the company I mean the parent company-secondly, were the persons conducting the business appointed by the parent company? Thirdly, was the company the head and the brain of the trading venture? Fourthly, did the company govern the adventure, decide what should be done and what capital should be embarked on the venture? Fifthly, did the company make the profits by its skill and direction? Sixthly, was the company in effectual and constant control? Now if the judgment in those cases are analysed, it will be found that all those matters were deemed relevant for consideration in determining the main question, and it seems to me that every one of those questions must be answered in favour of the claimants”. The facts of the present case do not satisfy the requirements for the exception to the rule in Salomon. The profits of the subsidiary companies were never treated as profits of the appellant; they were kept by the subsidiaries and were declared and paid by them as dividend in 1978. A company declares and pays dividend out of its own assets and not from the assets of a holding company.”20 [emphasis added]

3.4

Lifting the Corporate Veil in the Context of Tax Law and Public Procurement

The Supreme Court of the Republic of Cyprus had the chance to examine the possibility of lifting the corporate veil in the context of tax law and public procurement. In two cases, the Court accepted the lifting of the corporate veil. In Stereo Development Co. Ltd v. Commissioner of Taxation and Director of Inland Revenue Department, the Court considered transactions of two sister companies, whose shareholders were the same persons (same members of a specific family). The transactions between these two sister companies were considered as fictitious from a tax law point of view, because these two sister companies were owned by the same persons.21

20 The Bank of Cyprus (Holdings) Ltd ν. The Republic of Cyprus, through the Commissioner of Income Tax, (1985) 3 SCC 1883. 21 Stereo Development Co. Ltd v. Commissioner of Taxation and Director of Inland Revenue Department, Case 846/87 (1998) 4 SCC 651. Regarding taxation of fictitious transactions, in Anna Andrea Lagou v. the Republic of Cyprus, the Court discussed the position of group of companies and referred to English case law: “However, I find it useful to refer by way of appendix to that judgment to a decision of the House of Lords that has come to my notice and illuminates, I

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The Court had also the chance to examine lifting the corporate veil, in the context of public procurement. In Othon Galanos Tax Free Shops Ltd, Othon Galanos & Sons Ltd v Republic of Cyprus,22 the Court lifted the corporate veil of two different companies, which had submitted offers to a public competition for a license to operate a duty-free shop at the airport. The directors and major shareholders of one company were directors and major shareholders of the other company. The Court lifted the corporate veil and found that the confidentiality and secrecy of the tendering process were violated, as both competing companies were aware of the conditions of the offer of one another.

3.5

Legislative Provisions Allowing Lifting the Corporate Veil

There are statutory provisions of company law, which allow lifting the corporate veil. The first possibility to lift the corporate veil is when the number of members of a public company is reduced below legal minimum. As a result, members are severally liable for debts where business of a public company is carried on with fewer than seven members. Art. 32 of Companies Law (Cap. 113) states: “If at any time the number of members of a company is reduced, in the case of a public company, below seven, and it carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with fewer than seven members, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefore.” There is also responsibility for fraudulent trading of persons concerned. Art. 311 of Companies Law (Cap. 113) states: “(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court, on the application of the official receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any

believe, the breadth of the power of the tax Authorities to go behind the apparent effect of a transaction and treat it for purposes of taxation according to its true effect. The case is that of Coates v. Arndale Properties Ltd.([1985] 1 All E.R. 15) It was decided that the transfer of a lease of immovable property from a member of a group of companies to another, recorded as a trading transaction, leaving the member of a group with a loss accounted for as a revenue loss, could be disregarded as the item was never, in point of fact, treated by the Group as anything other than a capital asset that did not change real hands as a result of the transfer.” Anna Andrea Lagou v. The Republic of Cyprus, trough 1. The Minister of Finance and/or 2. The Director of Inland Revenue, Case 100/86 (1986) 3C C.L.R. 2317. 22 Othon Galanos Tax Free Shops Ltd, Othon Galanos & Sons Ltd v Republic of Cyprus, Joined Cases 424/87, 425/87 (1990) 3 SCC 2234.

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limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct. On the hearing of an application under this subsection the official receiver or the liquidator, as the case may be, may himself give evidence or call witnesses. (2) Where the Court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that declaration, and in particular may make provision for making the liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him, or any company or person on his behalf, or any person claiming as assignee from or through the person liable or any company or person acting on his behalf, and may from time to time make such further order as may be necessary for the purpose of enforcing any charge imposed under this subsection. For the purposes of this subsection, the expression “assignee” includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest created, but does not include an assignee for valuable consideration (not including consideration by way of marriage) given in good faith and without notice of any of the matters on the ground of which the declaration is made. (3) Where any business of a company is carried on with such intent or for such purpose as is mentioned in subsection (1) of this section, every person who was knowingly a party to the carrying on of the business in manner aforesaid, shall be liable on conviction to imprisonment not exceeding three years or to a fine not exceeding two thousand, five hundred and sixty-two euros or to both such imprisonment and fine. (4) The provisions of this section shall have effect notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the declaration is to be made.” [Emphasis added]

Moreover, Art. 312 of Companies Law (Cap. 113) refers to the power of Court to assess damages against delinquent directors. Art. 313 of Companies Law (Cap. 113) concerns the prosecution of delinquent officers and members of company. Art. 312 of Companies Law (Cap. 113) states: “(1) If in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present director, manager or liquidator, or any officer of the company, has misapplied or retained or become liable or accountable, for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of the official receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct of the promoter, director, manager, liquidator or officer, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the Court thinks just. (2) The provisions of this section shall have effect notwithstanding that the offence is one for which the offender may be criminally liable. (3) Where an order for payment of money is made under this section, the order shall be deemed to be a final judgment within the meaning of paragraph (g) of subsection (1) of section 3 of the Bankruptcy Law.”

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4 Capital Markets Law/Securities Regulation In the area of Capital Markets Law, there are certain provisions on group of companies. Capital markets law is harmonized to a significant extent at EU level. Cyprus as a Member State of the EU implemented the relevant harmonizing instruments.

4.1

Takeover Law

In Cyprus, takeovers bids are regulated by Law 41(I)/2007 “Law to make provision for public takeover bids for the acquisition of securities of companies and related matters”. This law implements EU Directive 2004/25/EC on takeover bids.23 Various issues of groups of companies also fall within the scope of this law. Law 41(I)/ 2007 provides a definition of “controlled undertaking”: ““controlled undertaking” shall mean an undertaking where a person- (a) has the majority of voting rights of shareholders or members or (b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body and is at the same time a shareholder in, or member of, the undertaking in question or (c) is a shareholder or member and alone controls a majority of the shareholders’ or members’ voting rights pursuant to an agreement entered into with other shareholders or members of the undertaking. For the purposes of the present interpretation, a parent undertaking’s rights as regards voting, appointment and removal shall include the rights of any other controlled undertaking and those of any nominee person or entity of the parent undertaking or of any other controlled undertaking.” Moreover, Law 41(I)/2007 defines “persons acting in concert”: ““persons acting in concert” shall mean persons cooperating with the offeror or the offeree company on the basis of a concerted practice or an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid and includes, as rebuttable evidence, the following categories of persons: (i) the wife/husband and blood relatives of first degree of the offeror; (ii) companies, in which the offeror holds either himself or together with persons acting in concert with it, twenty per cent of the voting rights; (iii) members of the board of a company of the offeror and undertakings controlled by them; (iv) provident funds of a company of the offeror; and (v) partners of the offeror. Controlled undertakings shall be deemed to be persons acting in concert with that other person controlling them and with each other.”

23 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids [2004] OJ L 142/12.

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There are also definitions of concerted practice, subsidiary company and parent company: – ““concerted practice” shall mean any positive action which, even though lacking in agreement, never the less aims to coordinate the activities of two persons;” – ““subsidiary company” has the meaning provided for under section 148 of the Companies Law;” – ““parent company” has the meaning provided for under section 148 of the Companies Law.” Art. 13 of Law 41(I)/2007 imposes the obligation on the offeror (bidder) to launch a mandatory bid, when it holds at least thirty per cent (30%) of the voting rights of a company. Paras 4 and 5 of Art. 13 stipulate that the percentages of controlled undertakings and of persons acting in concert with the offeror shall be taken into account for the calculation of the 30% mandatory bid threshold: 13.[. . .](4) To calculate the percentages referred to in subsection (3), the following are counted together with the voting rights held by the offeror: (a) voting rights held by other persons on behalf of the offeror; (b) voting rights held by a controlled undertaking of the offeror; (c) voting rights held by any person acting in concert with the offeror; (d) voting rights attached to securities held by the offeror, where they have been pledged. (5) To calculate the percentages referred to in subsection (3), the following voting rights are counted together with the voting rights held by the offeror or other persons referred to in subsection (4) [. . .]

Among exceptions from the obligation to submit a takeover bid, which are enumerated by Art. 15 of Law 41(I)/2007, there are controlled undertakings: 15. -(1) The Commission may, at its absolute discretion grant an exception from the mandatory bid obligation of section 13 or 14, following a relevant application by the acquirer, in cases inter alia where: [. . .] (k) the company in which the securities belong to is already a controlled undertaking of the acquirer;

Persons acting in concert are included in various provisions of Law 41(I)/ 2007: Art. 9 (Limitations following the announcement of a takeover bid), Art. 12 (Partial takeover bid), Art. 13 (Mandatory takeover bid), Art. 16 (Proposed consideration), Art. 18 (Determination of equitable consideration), Art. 25 (Prohibition from trading and other actions), Art. 26 (Publication of trading and other arrangements), Art. 29 (Automatic revision of the takeover bid), Art. 30 (Competing takeover bid), Art. 33 (Obligation of the board of the offeree company), Art. 38 (Announcement of the result of the takeover bid), Art. 41 (Prohibitions following the takeover bid), Art. 43 (Prohibitions following a partial takeover bid), Art. 44 (Prohibition from acquiring securities above the takeover bid value), Art. 45 (Restrictions on dealings by a competing offeror).

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Transparency Law

Law 190(I)/2007 “Law providing for transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market” implements into Cyprus Law the EU Transparency Directive, which obliges security issuers to ensure appropriate transparency for investors through a regular flow of information.24 Various issues of groups of companies also fall within the scope of this law. Law 190(I)/2007 provides a definition for parent company: ““parent company” in the case of the Republic shall have the meaning as given to it in section 148 of the Companies Law and, in the case of another member state, it shall mean the company which satisfies the requirements of the legislation of that member state harmonising directive 83/349/EEC” Art 3 of Law 190(I)/2007 provides a definition of “controlled undertaking”: 3.(1) For the purposes of the present Law, “controlled undertaking” shall mean any undertaking in which a person - (a) has a majority of the voting rights, or (b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body and is at the same time a shareholder in or member of, the undertaking in question, or (c) is a shareholder or member and alone controls a majority of the shareholders’ or members’ voting rights, respectively, pursuant to an agreement entered into with other shareholders or members of the undertaking in question, or (d) has the power to exercise, or actually exercises, dominant influence or control. (2) For the purposes of paragraph (b) of subsection (1), the right of a person to appoint or remove shall include – (a) the right of any other undertaking controlled by that person, and (b) the rights of any other person acting, albeit in its own name, but on behalf of that person or of any other undertaking controlled by that person.

5 Competition Law Cyprus competition law is founded on EU competition law (Arts 101-109 TFEU), as Cyprus is a Member of the EU since 2004. The Protection of Competition Laws of 2008 and 2014 (Law 13(I) of 2008) constitutes the basic national law for the protection of competition in Cyprus. Regarding groups of companies, Art. 101 (1) TFEU25 and Art 3 of Law 13(I) of 2008 (Prohibition of practices which 24 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC [2004] OJ L 390/38. 25 Article 101 TFEU (ex Article 81 TEC) 1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions;

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restrict trade and voidness thereof)26 do not apply to single economic entities. In Centrafarm, the CJEU held that: Article 101 TFEU, “however, is not concerned with agreements or concerted practices between undertakings belonging to the same concern and having the status of parent company and subsidiary, if the undertakings form an economic unit within which the subsidiary has no real freedom to determine its course of action on the market, and if the agreements or practices are concerned merely with the internal allocation of tasks as between the undertakings”.27 Moreover, in Viho, the CJEU held that: “When a parent company and its subsidiaries form a single economic unit within which the subsidiaries do not enjoy real autonomy in determining their course of action in the market, but carry out the instructions issued to them by the parent company which wholly controls them, the fact that the parent company’s policy, which consists essentially in dividing various national markets between its subsidiaries, might produce effects outside the ambit of the group which are capable of affecting the competitive position of third parties cannot make Article 85(1) applicable, even when it is read in conjunction with Article 2 and Article 3(c) and (g) of the Treaty. On the other hand, such unilateral conduct could fall under Article 86 of the Treaty if the conditions for its application were fulfilled.”28 According to Établissements Consten, Article 101 leaves untouched the internal organization of an undertaking.29

(b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 26

27

Art 3 of Law 13(I) of 2008 (1) Subject to the provisions of sections 4 and 5, all agreements between undertakings, all decisions by associations of undertakings and any concerted practices which have as their object or effect the prevention, restriction or distortion of competition within the Republic, shall be prohibited, and in particular those which– (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development or investments; (c) Share markets, geographically or otherwise, or sources of supply; (d) apply dissimilar conditions to equivalent transactions thereby placing certain undertakings at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. (2) Subject to the provisions of sections 4 and 5, agreements, decisions and concerted practices mentioned in the provisions of subsection (1) of this section, shall be void ab initio, with no prior relevant decision by the Commission being required.

Case 15/74 Centrafarm BV et Adriaan de Peijper v Sterling Drug Inc. [1974] ECR 1147, para. 41. Dine (2000), p. 56. 28 Case C-73/95 P Viho Europe BV v Commission of the European Communities [1996] ECR I-05457. See, also Agisilaou et al. (2011), pp. 99–100. 29 Joined cases 56 and 58/64 Établissements Consten S.à.R.L. and Grundig-Verkaufs-GmbH v Commission of the European Economic Community [1966] English special edition 299, p. 340.

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One disadvantage of the single economic entity doctrine is related with its boundaries. The key question is whether the entities to an agreement are independent on their decision-making or whether one has sufficient control over the other without the other enjoying real autonomy as market participant.30 The issue of influence is a question of degree and is related closely with control and depends on a number of factors, such as whether the parent could exercise control over the board of directors, the amount of profit taken by the parent, etc.31 One important consequence of the Single Economic Entity Doctrine is that an arrangement between undertakings, which constitutes part of their internal organization and management, cannot result in an agreement or concerted practice between undertakings, according to Art. 101(1) TFEU and Art 3 of Law 13(I) of 2008. Another important consequence of the Single Economic Entity Doctrine is that responsibility could be attributed to companies for the acts of entities, within the same economic unit, e.g. subsidiaries would be responsible for the infringement of Treaty articles even if they have not played a role in this infringement. Additionally, the Single Economic Entity Doctrine has important consequences on the determination of the appropriate level of the fine by the European Commission.32 Furthermore, it is not necessary for two or more entities to be part of the same group of companies in order to exercise collective dominance. Two or more completely independent entities, without being members to the same group of companies, could participate in a collective dominance.33

6 Banking and Financial Law Banking groups are regulated by Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.34 This Directive introduces the supervision on a consolidated basis (Arts. 111-127 of Directive 2013/36/EU). Cyprus transposed this Directive into national law through the business of credit institutions laws of 1997 to 2017 (Law 66(I)/1997). Art. 39 of Law 66(I)/1997 states:

30

Whish (2003), pp. 88–89. Jones and Sufrin (2008), pp. 143–144. 32 Jones and Sufrin (2008), pp. 144–146. 33 Case 85/76 Hoffmann-La Roche & Co. AG v Commission of the European Communities [1979] ECR 461, Joined cases T-68/89, T-77/89 and T-78/89 Società Italiana Vetro SpA, Fabbrica Pisana SpA and PPG Vernante Pennitalia SpA v Commission of the European Communities [1992] ECR II-01403. Agisilaou et al. (2011), pp. 243–244. 34 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC [2013] OJ L 176/338. 31

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(5)(a) Without prejudice to the provisions of Part Four of Regulation (EU) No 575/2013, where the parent undertaking of one or more ACIs is a mixed-activity holding company, the Central Bank shall exercise general supervision over transactions between the ACI [“authorised credit institution” or “ACI”] and the mixed-activity holding company and its subsidiaries. (b)(i) ACIs must have in place adequate risk management processes and internal control mechanisms, including sound reporting and accounting procedures in order to identify, measure, monitor and control transactions with their parent mixed-activity holding company and its subsidiaries appropriately. (ii) ACIs shall report to the Central Bank any significant transaction carried out with those entities, other than the one referred to in Article 394 of Regulation (EU) No 575/2013, within one (month) from the performance of the transaction. (iii) Those procedures and significant transactions provided in this paragraph shall be subject to overview by the Central Bank. It is provided that ACIs are required to report any significant transaction with these entities to the Central Bank within one month following the date of the transaction. (7)(a) (i) Where a parent undertaking is an ACI incorporated in the Republic, supervision on a consolidated basis shall be exercised by the Central Bank. (ii) Where the parent undertaking of an ACI incorporated in the Republic is a parent credit institution established in another member state or parent credit institution established in the European Union, supervision on a consolidated basis shall be exercised by the competent authority that granted authorization to that parent undertaking. (b) Where the parent undertaking of an ACI incorporated in the Republic is a parent financial holding company or parent mixed financial holding company in a member state or a parent financial holding company or a parent mixed financial holding company established in the European Union, supervision on a consolidated basis shall be exercised by the Central Bank. (c) (i) Where an ACI incorporated in the Republic and a credit institution authorised in another member state have as their parent undertaking the same parent financial holding company or the same parent mixed financial holding company, supervision on a consolidated basis shall be exercised by the Central Bank, if the financial holding company or the mixed financial holding company was incorporated in the Republic. (ii) Where the financial holding company or the mixed financial holding company was incorporated in the member state in which the credit institution was authorized, then the ACI shall be subject to a consolidated supervision by the competent authority of the member state that granted authorization to the credit institution. (d) Where the parent undertakings of credit institutions authorised in two or more member states, comprise of more than one financial holding companies or mixed financial holding companies with head offices in different member states and there is a credit institution in each of those states, supervision on a consolidated basis shall be exercised by the Central Bank, where it is the competent authority of the credit institution with the largest balance sheet total. (e) Where more than one credit institutions authorised in the European Union have as their parent the same financial holding company or mixed financial holding company and none of those credit institutions has been authorised in the member state in which the financial holding company or mixed financial holding company was set up, supervision on a consolidated basis shall be exercised by the Central Bank that authorised the credit institution with the largest balance sheet total, which shall be considered, for the purposes of this Law, as the credit institution controlled by a parent financial holding company or a parent mixed financial holding company established in the European Union. (f) In particular cases, the Central Bank may, by common agreement with the other competent authorities, waive the criteria referred to in paragraphs (c), (d) and (e) if their application would be inappropriate, taking into account the credit institutions and the relative

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importance of their activities in different countries, and appoint a different competent authority to exercise supervision on a consolidated basis. In such cases, before taking its decision, the Central Bank shall give the parent credit institution, the parent financial holding company, the parent mixed financial holding company, established in the European Union or the credit institution with the largest balance sheet total, as appropriate, an opportunity to state its opinion on that decision. The Central Bank shall notify the Commission and EBA of any agreements falling within the provisions of this paragraph.

7 Insolvency Law Cyprus does not have special rules for insolvency of groups of companies. Each company of the group is subjected to different insolvency proceedings due to its separate legal personality. Regarding insolvencies with an EU dimension, EU Regulation 2015/848 on insolvency proceedings35 applies to Cyprus. Chapter V of Regulation 2015/848 harmonises rules for insolvency proceedings of members of a group of companies (Arts 56-77).

8 Private International Law Cyprus does not have special private international law rules for group of companies. The law applicable to holding (i.e. parent) and subsidiary companies is the law of domicile (the law of the place of incorporation). Hence, groups of companies are not regulated by a single applicable law. Each company of the group has its own applicable law, in accordance with its place of incorporation. Cyprus adopts the incorporation theory. Cyprus is a mixed legal system,36 where company law and private international are based on common law. In Cyprus private international law, the law of domicile (the law of the place of incorporation) is the law applicable to companies. The lex domicilii of the company is the law of the place of incorporation of the company and determines the legal capacity of a company.37 According to Cyprus case law, the legal status of a company, as a substantive issue, is governed by the law of country of incorporation, i.e. the law of the country where the company is registered (lex domicilii).38 Moreover, according to Cyprus case law, the existence or dissolution of a company are governed by the law of country of incorporation and, in case of a foreign company,

35 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings [2015] OJ L 141/19. 36 Hatzimihail (2013), pp. 37–96; Symeonides (2003), p. 441. 37 Emilianides et al. (2015), p. 55. 38 Ceska Konsolidanci Agentura ν. Sampratrans Shipping Ltd. (2009) 1 Supreme Court of Cyprus 615, Fredericou Schools Co Ltd K.Α. Ν. Acuac Inc, Civil Appeal No. 8266 (2000), Emilianides et al. (2015), p. 55.

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are recognised by Cyprus law.39 Hence, the domicile of a company is found in the country where its law was followed for the incorporation of this company. According to the incorporation theory, the domicile of a company is independent and not connected with the domicile of its shareholders or its directors.40 Hence, the domiciles of holding and subsidiary companies are different notions.

9 Environmental Law Cyprus does not have specific rules on environmental liability for groups of companies. EU adopted Directive 2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage.41 Cyprus transposed this Directive into national legal order with Law 189(I)/2007 “Law on environmental liability with regard to prevention and remedying of environmental damage”. This Directive and the implementing national law introduce the “polluter pays’” principle.42 This principle is relevant for groups of companies. Environmental liability could be attributed to the parent company. More specifically, Art. 2 (6) of Directive 2004/35/EC, which was implemented into Cyprus law by Art. 2 of Law 189(I)/2007, states that: “‘operator’ means any natural or legal, private or public person who operates or controls the occupational activity or, where this is provided for in national legislation, to whom decisive economic power over the technical functioning of such an activity has been delegated, including the holder of a permit or authorisation for such an activity or the person registering or notifying such an activity;”. According to this definition, a parent company could be

Letco Co Ltd ν. Eliades and others, (1991) 1, SCC 435. Neocleous A and others (2000), 895. Cyprus case law also cites Dicey & Morris for the definition of domicile as the place of incorporation of the legal person: ““...a corporation incorporated in a single country may only have one domicile, which will be in that country” and ““a corporation duly created in a foreign country is to be recognised as a corporation in England, and accordingly foreign corporations can both sue and be sued in their corporate capacity in the courts.””. China Wandao Engin. Corporation ν. The Republic of Cyprus, (1997) 4 SCC 2084. Collins et al. (1993), p. 1103. 40 Neocleous et al. (2000), p. 895. 41 Directive 2004/35/EC of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage [2004] OJ L 143/56. 42 According to Recital 2 of the Directive’s Preamble: “[t]he prevention and remedying of environmental damage should be implemented through the furtherance of the ‘polluter pays’ principle, as indicated in the Treaty and in line with the principle of sustainable development. The fundamental principle of this Directive should therefore be that an operator whose activity has caused the environmental damage or the imminent threat of such damage is to be held financially liable, in order to induce operators to adopt measures and develop practices to minimise the risks of environmental damage so that their exposure to financial liabilities is reduced.” Directive 2004/ 35/EC of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage [2004] OJ L 143/56. 39

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considered an “operator” and could be found liable for environmental damage caused by one of its subsidiaries.

10

Concluding Remarks

Cyprus does not have a special law on groups of companies. Groups of companies are regulated by some fragmentary statutory provisions in various areas of law. Some of these provisions are quite detailed. Case law also examines and elaborates various characteristics of groups of companies, in the area of company law. Case law sheds light on the doctrine of separate legal personality of companies and focuses on lifting the corporate veil. The approach of the Cyprus legislature and of the Cyprus Courts is fragmentary, due to the lack of a consolidated set of rules. However, this fragmentary approach does not create any significant problems to the operation of groups of companies based in Cyprus. Cyprus is an international financial centre and constitutes a popular destination for the establishment of companies. Many groups of companies are based in Cyprus. Foreign parent companies establish subsidiaries incorporated and registered to Cyprus. Cyprus parent companies establish subsidiaries incorporated and registered to other countries (EU and non-EU States). Nevertheless, a consolidated set of rules for group of companies would contribute to legal certainty and would attract even more reincorporations of parent companies and subsidiaries in Cyprus. Hence, a bold proposal to the Cyprus legislature would be to adopt a consolidated set of rules for groups of companies. A consolidated set of rules would also encourage companies already established in Cyprus to form groups of companies and would favour corporate restructuring.

References Agisilaou P et al (2011) Competition policy in Cyprus, 1989-2009. Nomiki Vivliothiki, Athens. (in Greek) Collins L et al (1993) Dicey & Morris the conflict of laws, 12th edn. Sweet & Maxwell, London Dine J (2000) The governance of corporate groups. Cambridge studies in corporate law. Cambridge University Press, Cambridge Emilianides A et al (2015) Private international law in Cyprus, International encyclopedia for private international law. Kluwer, AH Alphen aan den Rijn Hatzimihail N (2013) Cyprus as a mixed legal system. J Civil Law Stud 6:37–96 Jones A, Sufrin B (2008) EC competition law, 3rd edn. Oxford University Press, Oxford Neocleous A et al (2000) Private international law. In: Neocleous A (ed) Introduction to Cyprus law. Yorkhill Law Publishing, New York, p 895 Symeonides S (2003) The mixed legal system of the Republic of Cyprus. Tulane Law Rev 78:441–455 Whish R (2003) Competition law, 5th edn. Butterworths, London Worthington S (2016) Sealy and Worthington’s text, cases and materials in company law, 11th edn. Oxford University Press, Oxford

National Report on Finland Ville Pönkä

Abstract The purpose of this article is to give a comprehensive overview of the law regarding Finnish groups of companies. The research has been conducted so that the initial focus is on company law and cooperative law-related issues, as well as accounting. After the main analysis, there is a brief overview of other group-specific rules. Here the focus is on tax law, insolvency law and labor law matters. Finally, the research findings are summarized in a brief conclusions section.

1 Introduction Finnish legislation recognizes the concept of group of companies (Fi. konserni): a group is an economical and functional entity, which consists of a parent company (Fi. emoyhtiö) and one or more subsidiaries (Fi. tytäryhtiö), over which the parent company exercises control. Groups of companies have been defined in specific laws on business forms, but the most important definition is included in the Finnish Accounting Act 1336/1997 (Fi. kirjanpitolaki, FAA).1 Regulation on groups of companies focuses mainly on the definition of a group and on the accounting information, which the parent company must provide for the public in form of a consolidated financial statement (Fi. konsernitilinpäätös). Otherwise, group-related matters are mostly unregulated and there is, e.g., no general

1

See Sect. 2.2.

V. Pönkä (*) Faculty of Law, University of Helsinki, Helsinki, Finland International Business Law Master’s Degree Program, University of Helsinki, Helsinki, Finland European Corporate Governance Institute, Brussels, Belgium European Consortium for Political Research, Colchester, UK Nordic Company Law Network and Finnish Arbitration Institute, Helsinki, Finland e-mail: ville.ponka@helsinki.fi © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_17

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law on groups of companies.2 The reason for this is that Finnish law treats parent companies and subsidiaries as separate legal entities; hence, from the perspective of the legal order, a group is not conceived as a unified business organization. There are, in fact, many fields of law that have no group-specific rules. Such fields include consumer law, environmental law, procedural law (both litigation and arbitration), securities markets law and even competition law.3 In civil law jurisdictions, such as Finland, groups of companies are primarily regulated by provisions of written law. As mentioned, in Finland group-specific provisions are very scarce and there is also relatively little published case law on the topic. In fact, most Finnish Supreme Court (FSC) precedents relating to groups of companies concern insolvency-related issues—and most of them are either outdated or focused on rather casuistic matters.4 As for jurisprudence, groups of companies have received some attention amongst legal scholars, but unfortunately there is no comprehensive modern research on the topic.5 Thus, in company law and cooperative law literature for example, group-related issues are mostly discussed in handbooks. The purpose of this article is to give a comprehensive overview of the law regarding Finnish groups of companies. The research has been conducted so that the initial focus is on company law and cooperative law-related issues, as well as accounting (Sect. 2). This is the most extensive section of the article, since most areas of the questionnaire are covered here. After the main analysis, there is a brief overview of other group-specific rules. Here the focus is on tax law, insolvency law and labor law matters (Sect. 3). Finally, the research findings are summarized in a brief conclusions section (Sect. 4). The analysis focuses solely on legal matters; thus such topics as, why do groups of companies exist? (i.e., what are their benefits) and when and how should firms utilize group structures? are not addressed later. These questions are mostly universal and non-legal in nature and therefore they fall outside the scope of the article.

2

Koulu (2013), p. 47. As for competition law, see Kuoppamäki (2014), pp. 112 and 300, who demonstrates that transactions between companies of the same group usually have no significant impact on competition. 4 Koulu (2013), pp. 50–53. 5 There are two doctoral thesis’ on group of companies law: Koski (1977) and Nikkilä (2006). Both of these monographs concern Finnish group of companies legislation in general, however, in the latter the main emphasis is on minority shareholder protection. 3

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2 Groups of Companies in Company Law, Cooperative Law and Accounting Law 2.1

General Information Regarding Finnish Business Forms6

The number of business forms recognized by Finnish law is very small. The most important business form is the limited liability company (Fi. osakeyhtiö, company) governed by the Companies Act 624/2006 (Fi. osakeyhtiölaki, FCA). The statistics of the Finnish Trade Register Official (Finnish Patent and Registration Office) indicate that the number of registrations of companies is constantly increasing, while the registrations of other business entities are either diminishing or remaining the same.7 The FCA is a general law and it governs all limited liability companies registered under Finnish law, i.e. the FCA governs both private and public companies as well as non-listed and listed companies.8 Finnish law also recognizes partnerships, both general partnerships (Fi. avoin yhtiö) and limited partnerships (Fi. kommandiittiyhtiö), which are governed by the same law, the General Partnership and Limited Partnership Act 389/1988 (Fi. laki avoimesta yhtiöstä ja kommandiittiyhtiöstä). Finnish partnership legislation includes no group-specific provisions and therefore the partnership form is not further discussed here. It is, however, important to point out that a partnership can be a parent company, as well as a subsidiary in a group. Cooperatives (Fi. osuuskunta) play a significant role in Finnish society and it has been even argued that Finland is the most “cooperative” country in the world.9 Cooperatives are governed by the Cooperatives Act 421/2013 (Fi. osuuskuntalaki, FCoopA). The FCoopA is a very modern law and it shares many similarities with the FCA. In fact, it has been stated explicitly in the preparatory works of the FCoopA that cooperative legislation should resemble company legislation (and especially the FCA) as much as possible.10 Because of the similarities of the FCA and the FCoopA, the focus of this article is primarily on companies, and cooperative law is introduced only when needed. Furthermore, Finnish law recognizes special types of companies and cooperatives. Usually, these business entities are not governed by an independent body of

6

There is hardly any information published in English on Finnish business forms. For a general overview see Mähönen (2013), Pönkä (2012a) and Toiviainen (2008). 7 See www.prh.fi/en/kaupparekisteri/tilastot/lkm.html [accessed September 2018]. 8 According to Ch. 5, Sec. 1a of the FCA a public company (Fi. julkinen osakeyhtiö) is not necessarily a listed company (Fi. pörssiyhtiö) and there are, in fact, several public companies operating in Finland that have not listed their shares. 9 Jussila et al. (2008), p. 4. 10 HE 185/2012 vp Eduskunnalle osuuskuntalaiksi ja eräiksi siihen liittyviksi laeiksi (governmental bill concerning the FCoopA), 19. In Finnish jurisprudence, sources of company law have even been used to interpret cooperative legislation. See, e.g., Mähönen and Villa (2014), p. 4; Pönkä (2019).

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law and, e.g., the European Company (Fi. eurooppayhtiö) is established on the provisions of the FCA and the European Cooperative Society (Fi. eurooppaosuuskunta) on the provisions of the FCoopA.11 On the other hand, there are some business entities that resemble companies but which have been regulated under a separate law. The most important example is the limited liability housing company (Fi. asunto-osakeyhtiö), which is governed by the Housing Companies Act 1588/2009 (Fi. asunto-osakeyhtiölaki, FHCA). There are nearly 90,000 housing companies registered under Finnish law, which makes them, in practice, the second most common business entities in Finland. That said, it is important to point out that housing companies cannot engage into actual business activities as their sole purpose is to own and control residential apartments (Chap. 1, Sec. 2(2) of the FHCA).

2.2 2.2.1

Regulatory Framework Regarding Groups of Companies Normative Background

The concept of groups of companies has been defined in the FCA and the FCoopA in a similar fashion.12 These definitions are not, however, company- or cooperativespecific since they both refer to Ch. 1, Sec. 5 of the FAA. E.g., according to Ch. 8, Sec. 12 of the FCA [i]f a limited liability company exercises control over another domestic or foreign corporation or foundation, as referred to in chapter 1, section 5, of the FAA, the limited liability company shall be the parent company and the other corporation or foundation a subsidiary. The parent company and its subsidiaries form a group. A limited liability company exercises control over another corporation or foundation also in the event that the limited liability company, together with one or several of its subsidiaries, or a subsidiary or several subsidiaries together exercise control over that corporation or foundation, as referred to in chapter 1, section 5, of the FAA. The provisions in chapter 1, section 5, of the FAA on the party responsible to keep accounts apply to the limited liability company referred to above, and the provisions in the said chapter on an object undertaking apply to the other domestic or foreign corporation or foundation referred to above.13

There are also some companies and cooperatives operating in the finance and insurance sectors, which are governed by separate laws. See, e.g., Act on Commercial Banks and Other Credit Institutions in the Form of a Limited Liability Company 1502/2001 (Fi. laki liikepankeista ja muista osakeyhtiömuotoisista luottolaitoksista), Savings Bank Act 1502/2001 (Fi. säästöpankkilaki) and Insurance Companies Act 1062/1979 (Fi. vakuutusyhtiölaki). These laws include some group-specific provisions, which are not introduced in this article. 12 See Ch. 8, Sec. 12 of the FCA, Ch. 8, Sec. 12 of the FCoopA and Ch. 10, Sec. 10 of the FHCA. 13 In this article, citations regarding Finnish legislation are unofficial translations provided by the Ministry of Justice, Finland.

11

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The citation shows that the FCA defines the concepts of parent company and subsidiary but otherwise refers to the FAA.14 Hence, to understand what a group of companies is, one must explore accounting legislation. According to Ch. 1, Sec. 5 of the FAA [a] reporting entity is considered to have control over another reporting entity or a comparable foreign undertaking (referred to as an object undertaking), where: (1) the reporting entity controls the majority of the shareholders’ or members’ voting rights in the object undertaking and where this majority is based on ownership, membership, articles of association, deed of partnership or similar rules or other agreement; (2) the reporting entity has the right to appoint or remove the majority of the members of the Board of Directors of an object undertaking or of a similar body or of a body with the same rights and where the right is based on the same circumstances as the majority of voting rights referred to in paragraph 1; or (3) the reporting entity has actual control over the object undertaking in another way. Restriction of voting rights based on law or articles of association or the deed of partnership of the object undertaking or on comparable rules, does not affect the calculation of voting rights referred to in subsection 1. For the purpose of calculating the total voting rights of an object undertaking, such total must be reduced by the voting rights attaching to shares or similar rights of ownership held by the object undertaking or a subsidiary thereof referred to in section 6. The voting rights of a person acting in his own name but on behalf of a third party must be added to the voting rights of this third party. A reporting entity’s voting rights and rights referred to in subsection 1 do not include those votes which are or that right which is attached to: (1) the object undertaking’s shares or similar rights of ownership which are controlled by the reporting entity on behalf some other persons than itself or an entity other than the object undertaking under the control of the reporting entity. (2) the object undertaking’s shares or similar rights of ownership which are received as security by a reporting entity, if a reporting entity has to use the rights attached to them in accordance with instructions given by a party providing the security; or (3) the object undertaking’s shares or similar rights of ownership which a reporting entity controls as a result of lending in ordinary course of business if a reporting entity has to use the voting rights of the shares or similar rights of ownership in accordance with the benefit of a party providing the security.15

14

In Finnish jurisprudence, the subsidiaries of the same parent company are called sister companies (“sisaryhtiö”). Rules regarding groups of companies do not apply to sister companies and therefore this concept is not recognized by the FCA or the FAA. Kyläkallio et al. (2015), pp. 315–316. 15 The Finnish Securities Markets Act 746/2012 (Fi. arvopaperimarkkinalaki, FSMA) includes a similar definition of control. According to Ch. 2, Sec. 4 of the FSMA a “controlled entity” is an entity where a shareholder, a member or another person exercises control referred to in the section. The major difference between the control definitions of the FAA and FSMA is that, according to the FSMA, the controlling party can be a legal person, as well as a natural person, while the FAA concerns only relations in which the controlling party is a legal person. Furthermore, the purpose of Ch. 2, Sec. 4 of the FSMA is not to define a group of companies, but to point out situations in which someone has such significant control over a listed entity that the party in control has to follow

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Furthermore, in Ch. 1, Sec. 6 of the FAA it is stated that when a “reporting entity” (Fi. kirjanpitovelvollinen) has control over an “object undertaking” (Fi. kohdeyritys) as stipulated in Sec. 5, the former is a “parent undertaking” and the latter is a subsidiary. The parent undertaking and its subsidiaries constitute a “group”. Groups (of companies) are divided into “small groups” and “large groups”. According to Ch. 1, Sec. 6a of the FAA a small group refers to a group exceeding not more than one of the thresholds provided in Ch. 1, Sec. 4a of the FAA. Consequently a large group refers to a group exceeding at least two of the thresholds in Ch. 1, Sec. 4c of the FAA. In both cases the thresholds are determined on the basis of the aggregated figures of the group companies on the balance sheet date of the parent undertaking. According to Sec. 4a the thresholds are (1) total assets 6,000,000 euros, (2) net turnover 12,000,000 euros and (3) average number of employees during the financial year 50. According to Sec. 4c the thresholds are (1) total assets 20,000,000 euros, (2) net turnover 40,000,000 euros and (3) average number of employees during the financial year 250. In addition to groups of companies, the FAA recognizes “participating interest undertakings” (Fi., omistusyhteysyritys) and “associates” (Fi. osakkuusyritys). According to Ch. 1, Sec. 7 of the FAA [a] participating interest undertaking is a domestic or foreign undertaking not belonging to the same group as the reporting entity, where the ownership interest by the reporting entity creates a durable link between the reporting entity and the undertaking and is intended to contribute to the activities of the reporting entity or an undertaking of the same group. Unless shown otherwise by the reporting entity, an undertaking is considered a participating interest undertaking where the ownership interest by the reporting entity equals or exceeds one fifth of the subscribed capital or similar capital of that undertaking.

Furthermore, according to Ch. 1, Sec. 8 of the FAA [an] associate refers to a participating interest undertaking in which the reporting entity has one fifth or more but less than half of the voting rights arising from the shares in or similar right of ownership of the participating interest undertaking. Where the reporting entity has one fifth or less of the voting rights and significant influence over the operating and financial policies, the participant interest undertaking is considered an associate unless shown otherwise by the reporting entity.

Before moving on to observations regarding the regulatory framework of groups of companies, it is important to point out that Finland, as an EU member state, has to follow EU regulations and directives when drafting national laws. As for public companies, legal provisions on groups of companies are based, more or less, on EU law. Since the conscious choice of the Finnish legislator has been to apply the same rules to both public and private companies,16 private companies in Finland also have

certain obligations stipulated later in the FSMA. See HE 32/2012 vp eduskunnalle arvopaperimarkkinaoikeutta koskevaksi lainsäädännöksi (governmental bill concerning the FSMA), p. 103. 16 See Airaksinen (2006), p. 261, who explains why Finnish company law treats private and public companies in a similar fashion.

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to follow implemented EU law, which, as mentioned, focuses mainly on public companies.

2.2.2

Observations

In light of the normative background described above, a group of company exists if (1) A controls the majority (i.e., over 50%) of voting rights in B,17 (2) A has the right to appoint or remove the majority (i.e., over 50%) of the members of the board of directors or of a similar body or of a body with the same rights in B,18 or (3) A has actual control over B in another way.19 Companies in a group can be different kinds of business entities, even foundations (Fi. säätiö). The business form of the parent company, however, determines the applicable law. If, for example, the parent undertaking is a company and the subsidiary is a cooperative, then the rules of the FCA apply to the group. Furthermore, Finnish law governs groups of companies in which the parent company is a Finnish company and the subsidiary is a foreign company. If, on the other hand, the subsidiary is registered according to Finnish law and the parent company according to a foreign law, Finnish group-specific legislation does not apply.20 Ch. 1, Sec. 5(2–4) of the FAA explains in detail how the votes, which constitute the group relationship, are calculated. These rules are not explained further here; however, it is important to emphasize that voting restrictions of any kind do not affect the calculation of voting rights. Thus, if company A and its subsidiary B both own 30% of the shares of company X (each share in this example giving its holder one vote at the general meeting) and agree that B should not exercise its voting rights in X, the voting restriction between A and B is not taken into account when determining whether is A the parent company of X. On the other hand, multiple voting shares (i.e., shares which give their holder more than one vote at the general meeting) are taken fully into account in the calculation of voting rights.21 E.g., if company A owns only 20% of the shares of X, but these shares are multiple voting

17

If A controls exactly 50% of the voting rights in B, A is not considered a parent company of B. If A has the right to appoint or remove exactly half of the directors of B, A is not considered a parent company of B. 19 In practice, these rules can result in a situation where a subsidiary seems to have two parent companies. It is, e.g., possible that company A controls the majority of voting rights in company X, but simultaneously company B has the right to appoint or remove the majority of the members of the board of directors of X. In such a situation B is considered the parent company of X, since in light of the FAA, a company cannot be simultaneously a member of two different groups. Airaksinen et al. (2010a), p. 628. Furthermore, companies cannot be simultaneously parents and subsidiaries of one another. Kyläkallio et al. (2015), p. 317. 20 See, e.g., Airaksinen et al. (2010a), pp. 620–621; Immonen (2002), p. 441; Kyläkallio et al. (2015), p. 316; Savela (2003), pp. 245–280. 21 Immonen (2002), p. 442. 18

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shares and represent the majority of the voting rights in X, A is considered the parent company of X. The concept of “actual control” (Fi. tosiasiallinen määräysvalta) has not been defined in the FAA and therefore it is open to interpretation. Actual control refers to a situation where, e.g., two independent companies, A and B, own both 30% of the shares of company X (each share in this example gives its holder one vote at the general meeting) and agree that A may decide how B has to exercise its voting rights in X. In this example A’s control over X is not based on actual share ownership, but on a voting agreement, hence A has actual control over X. Furthermore, according to decision 1646/2001 of the Finnish Accounting Board (Fi. kirjanpitolautakunta),22 A had actual control over X when, according to a shareholders’ agreement, the CEO of A was appointed the chairperson of the two-member board of X. Actual control may also exist without any contractual arrangements. E.g., according to general instructions given by the Finnish Accounting Board, if company X has a dispersed ownership structure and there is only one shareholder (A) who controls a significant proportion of the voting rights in the company, A can be perceived as the parent company of X, even though A does not control the majority of the votes.23 There are, of course, many other situations where actual control can exist, but additional examples are not provided here.24

2.3

Legal Obligations of Parent Companies and Subsidiaries

As mentioned above in Sect. 1, Finnish law does not conceive of a group of companies as a unified business organization. Also, the concepts of group interest and corporate benefit (Fi. konserni-intressi) are not recognized by Finnish law and there are no rules on, e.g., group management. I.e., parent companies and subsidiaries of the same group are separate and independent legal persons, which aim to promote the interests of their shareholders,25 not the interests of the group.26

22 The Finnish Accounting Board operates under the auspices of the Ministry of Economic Affairs and Employment, Finland (Fi. työ- ja elinkeinoministeriö). Provisions on the Accounting Board are contained in Ch. 8, Sec. 2–3 of the FAA and the Decree on the Accounting Board 784/1973 (Fi. asetus kirjanpitolautakunnasta). The Board, amongst other tasks, issues instructions and opinions on the application of the FAA. For more information see http://tem.fi/en/accountingboard [accessed September 2018]. 23 See General instruction on preparing consolidated financial statements (28.3.2017) Sec. 1.2.11. 24 For more information on actual control see Kaisanlahti et al. (2009), pp. 22–24; Leppiniemi (2014), pp. 36–37; Pönkä (2008), pp. 737–758. 25 According to Ch. 1, Sec. 5 of the FCA “[t]he purpose of a company is to generate profits for the shareholders, unless otherwise provided in the Articles of Association”. 26 See, e.g., Airaksinen et al. (2010a), pp. 483 and 619; Immonen and Villa (2015), p. 93; Kyläkallio et al. (2015), p. 315; Lindholm and Storå (2010), pp. 405–421; Pönkä (2012b), pp. 327–329; Rasinaho (2013), pp. 550–565; Savela (2015), p. 369.

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The fact that Finnish law treats companies of a group as separate and independent legal entities means that the directors of parent companies and subsidiaries owe fiduciary duties to their own companies (i.e., the shareholders of the parent company or the subsidiary) and not to the group.27 In practice, this requirement is quite challenging for the directors of a subsidiary, since the prohibition from taking the interests of the group into account is not in harmony with the functional reality within which groups operate. Therefore some Finnish scholars have quite rigorously criticized the current doctrine by comparing it to, e.g., the German and French (Rozenblum) doctrines, which recognize (at least to some extent) the existence of group interest.28 Furthermore, it must be noted that in group relations the directors of the parent company are often also the directors of the subsidiary. Such arrangements are not forbidden by Finnish law,29 but the directors have to be very careful in decision-making situations in which the interests of the different companies of the same group are not identical.30 In practice, a group relationship has limited effects on the rights and duties of the companies of a group. Even the concept of group of companies is mentioned only a few times in the FCA (and the FCoopA).31 There are, however, some specific legal obligations for both parent companies and subsidiaries that are briefly addressed next. The most significant legal obligation of a parent company concerns accounting. According to Ch. 6, Sec. 1 of the FAA, a parent undertaking has to prepare consolidated financial statements and to include them in its financial statements if the parent is a company, partnership or a cooperative. Also, a parent undertaking of any other type has an obligation to prepare consolidated financial statements and to include them in the financial statements if it carries on a business. The obligation does not, however, apply to a natural person carrying on a profession or business. Furthermore, there are several other exceptions to the obligation to prepare consolidated financial statements, e.g., it is not necessary to prepare one in a small group in Ch. 1, Sec. 8 of the FCA: “The management of the company shall act with due care and promote the interests of the company.” Ch. 1, Sec. 8 of the FCoopA: “The management of the cooperative shall act with due care and promote the interests of the cooperative.” 28 Airaksinen et al. (2010a), p. 620; Savela (2015), pp. 369–370. There are, however, no signs that the concept of group interest would be included in the FCA. See OM 32/41/2015. Osakeyhtiölain muutostarve. Arviomuistio (memorandum prepared by the Ministry of Justice, Finland regarding the need to update the FCA). 29 E.g., the rules on disqualification do not prohibit a person from acting as a board member of the parent company and a subsidiary of the same group. See Ch. 6, Sec. 4 of the FCA: “A Member of the Board of Directors shall be disqualified from the consideration of a matter pertaining to a contract between the Member and the company. A Member shall likewise be disqualified from the consideration of a matter pertaining to a contract between the company and a third party, if the Member is to derive an essential benefit in the matter and that benefit may be contrary to the interests of the company. The provisions in this section on a contract apply correspondingly to other transactions and court proceedings.” 30 Pönkä (2013), pp. 123–153. See also Mähönen and Villa (2015), p. 246. 31 Airaksinen et al. (2010a), pp. 618–619. 27

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which none of the group companies is a so-called public-interest entity. Detailed rules on the contents of the consolidated financial statement are laid down in Ch. 6 of the FAA, entitled “Consolidated financial statements”.32 According to Ch. 2, Sec. 6(1) of the Finnish Auditing Act 1141/2015 (Fi. tilintarkastuslaki, FAudA) an auditor must be appointed for a parent company and an audit must be carried out as provided in the Act, if conditions laid down in Ch. 2, Sec. 2–5 of the Act are met. At least one of the auditors appointed for a subsidiary must be an auditor of the parent company and this rule may be departed from only where there are proper grounds for doing so (Ch. 2, Sec. 6(2) of the FAudA). Furthermore, according to Ch. 3, Sec. 2 of the FAudA the auditor of the parent company must also audit the consolidated financial statements, while ensuring that the auditors of the subsidiaries have conducted their audits appropriately.

The purpose of the consolidated financial statement is to provide information regarding the group to outsiders such as potential investors and tax authorities.33 There are also specific information obligations included in the FCA (and FCoopA), which focus solely on parent companies and subsidiaries. According to Ch. 6, Sec. 15 of the FCA [i]f the company has become a parent company or if it no longer is a parent company, the Board of Directors shall without delay notify the same to the Board of Directors or the other corresponding organ of the subsidiary. The Board of Directors or the other corresponding organ of the subsidiary shall supply the Board of Directors of the parent company with the information necessary for the evaluation of the state of the group and the calculation of its financial results.

The subsidiary’s duty to provide the parent company with financial information is related to the parent company’s obligation to prepare consolidated financial statements. Although this requirement seems technical, it is particularly important, since the subsidiary has no right or obligation to provide such information to its other shareholders. This is also the only provision in the FCA that recognizes the group as an economic and functional entity.34 The other legal obligations concerning parent companies and subsidiaries aim to ensure that the ability to establish and control subsidiaries is not misused.35 E.g., according to Ch. 5, Sec. 9(1) of the FCA, shares held by the company or its subsidiary shall not entitle them to participate in the general meeting. Likewise, these shares shall not be taken into account in cases where the making of a valid decision or the exercise of a given right requires the consent of all shareholders or the consent of shareholders holding a specified proportion of the shares in the

32 It is also stated in Ch. 8, Sec. 9(2) of the FCA that “[a] parent company shall always draw up the consolidated financial statements, if it distributes assets to the shareholders or if it is a public company. However, consolidated annual accounts need not be drawn up if a company is exempt from such a duty under according to Ch. 6, Sec. 1 of the FAA.” 33 See, e.g., Mäkelä et al. (2016), pp. 20–21. 34 Airaksinen et al. (2010a), pp. 482–483. 35 Ibid.

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company.36 Furthermore, legal restrictions concerning acquisitions and subscriptions of own shares cannot be circumvented by using a subsidiary as a decoy (See Ch. 11, Sec. 20(2), Ch. 15, Sec. 11(1) and Ch. 15, Sec. 14 of the FCA). Since Finnish law does not conceive a group of companies as a unified business organization, group transactions are evaluated from the perspectives of the participating companies, not from the perspective of the group as a whole. The FCA (or the FCoopA) does not include provisions on related party transactions, hence transactions between related parties are governed by the general provisions on asset distribution, which are laid down in Ch. 13 of the FCA.37 According to Ch. 13, Sec. 1(1) of the FCA, the assets of the company may be distributed to the shareholders only as provided in the FCA on (1) the distribution of profits (dividends) and the distribution of assets from reserves of unrestricted equity, (2) the reduction of the share capital, as referred to in Ch. 14 of the FCA, (3) the acquisition and redemption of own shares, as referred to in Ch. 3 and 15 of the FCA and (4) the dissolution and deregistration of the company, as referred to in Ch. 20 of the FCA. All other transactions that reduce the assets of the company or increase its liabilities without a “sound business reason” shall constitute unlawful distribution of assets (Ch. 13, Sec. 1(3) of the FCA). In light of these rules, subsidiaries may contribute to group accounts (Fi. konsernikassa) and lend assets to their parent companies, give guarantees for their debts and otherwise support them financially, as long as there are sound business reasons for such transactions. The assessment is made from the perspective of the providing subsidiary and the important question is whether e.g., asset lending benefits the subsidiary in the long term. If the answer is no, the transaction is considered unlawful.38 This interpretation is supported by rulings of the Supreme Court of Finland. E.g., in case FSC 2006:90 the Supreme Court found a guarantee for a parent company’s debt null and void, since already at the time the guarantee was given, it was evident that the financial position of the parent company was very weak and that the guarantee would most probably be lost.39 Furthermore, a subsidiary may not provide loans, assets or security for the purpose of a third party acquiring shares in the company itself or its parent company 36

If the company could participate in its own decision-making with its own shares, this would mean that the directors of the company would de facto use authority at the general meeting, which belongs to the shareholders, not to, e.g., board members. Therefore the exceptionless restriction expressed in Ch. 5, Sec. 9(1) of the FCA is highly necessary. Airaksinen et al. (2010a), p. 619. 37 See HE 109/2005 vp Eduskunnalle uudeksi osakeyhtiölainsäädännöksi (governmental bill concerning the FCA, HE 109/2005), pp. 25–26. 38 See, e.g., HE 109/2005, p. 26; Immonen and Villa (2015), pp. 93–97; Mähönen and Villa (2015), p. 423; Pönkä (2012b), p. 328; Äimä (2009), pp. 146–148. E.g. asset lending without a sound business reason cannot be justified by arguing that the parent company will compensate for the imminent losses to the subsidiary in other ways in the future. See, e.g., FSC 2004:115, Pulkkinen (1993), p. 1173; Savela (2015), p. 370. 39 In practice, the people (usually the board members) who are found liable for unlawful distribution of assets in group relations face severe punishments. See, e.g., FSC 1999:86 and FSC 16.6.2000/ 1266.

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(Ch. 13, Sec. 10(1) of the FCA). The purpose of this financial assistance restriction is to protect minority shareholders and creditors of the subsidiary.40 The parent company may, on the other hand, provide financial assistance for a third party to acquire shares in its subsidiary.41

2.4

Legal Rights of Parent Companies and Subsidiaries

As mentioned above in Sect. 1, the benefits of organizing into groups of companies are not assessed in this article. Companies of a group have, however, some specific legal rights that require some attention. First, the FCA recognizes a so-called subsidiary merger (Fi. tytäryhtiösulautuminen), which is an absorption merger in which the companies involved in the merger own all of the shares, option rights and other special rights entitling them to shares of the merging company (Ch. 16, Sec. 2 of the FCA). In practice, a subsidiary merger is a simplified version of the absorption merger, since in the merging company there are no such shareholders, who could oppose the restructuring of the group or whose rights the process might endanger.42 Second, according to Ch. 18, Sec. 1(1) a shareholder with more than nine-tenths of all shares and votes in the company (redeemer) has the right to redeem the shares of the other shareholders “at the fair price” (right of squeeze-out). Likewise, a shareholder whose shares may be redeemed (minority shareholder) has the right to demand that their shares be redeemed (right of sell-out). The redeemer is usually a company or another type of business entity, hence the redeemer and the target company form a group. The redeemer can, however, also be a natural person and therefore Finnish squeeze-out legislation is not group-specific.43 Finally, so-called group contributions (Fi. konserniavustus) are permitted by Finnish tax laws. This instrument is introduced later in Sect. 3.2.

40

See, e.g., Airaksinen et al. (2010b), pp. 88–89; Immonen and Villa (2015), p. 116. HE 109/2005, p. 130. 42 HE 109/2005, p. 147. 43 Likewise, Finnish legislation on mandatory takeover bids is not group-specific. According to Ch. 11, Sec. 19 of the FSMA “[a] shareholder, whose proportion of voting rights increases to over 30 percent or to over 50 percent of the votes attaching to the shares of the offeree company (bid threshold) after the share of the offeree company has been admitted to trading on a regulated market (party obliged to launch a bid), shall launch a takeover bid for all other shares issued by the offeree company and for securities entitling thereto issued by the offeree company.” 41

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499

Liability General Observations

Liability issues are regulated in Ch. 22 of the FCA (and Ch. 25 of the FCoopA). These rules concern the directors of the company as well as shareholders and auditors. The rules on liability provide protection for the company itself, the shareholders and third parties (such as creditors). Since the rules are not groupspecific44 they are not dealt with further here. It is, however, necessary to point out that if a loss has been caused by an act to the benefit of a related party (such as a parent company), it shall be deemed to be caused negligently, unless the person liable (i.e., a director or a shareholder) can prove that she or he had acted with due care (Ch. 22, Sec. 1(3) and Ch. 22, Sec. 2(2) of the FCA and Ch. 25, Sec. 1(3) and Ch. 22, Sec. 2(2) of the FcoopA). E.g., if a subsidiary has given its parent company financial assistance without a sound business reason, the directors or shareholders responsible for the unlawful distribution of the subsidiary’s assets are presumed to have acted negligently.

2.5.2

Lifting the Corporate Veil

According to Ch. 1, Sec. 2(2) of the FCA, a shareholder has no personal liability for the obligations of the company. Likewise, members and shareholders of a cooperative are not liable for the undertakings of a cooperative (Ch. 1, Sec. 2(2) of the FCoopA). Hence, it is expressed explicitly in the law that a parent company/ cooperative is not responsible for the actions of its subsidiary. Finnish written law does not recognize the so-called lifting (or piercing) the corporate veil doctrine. It was, in fact, for decades unclear to what extent the rule of limited liability protects the shareholders of a company (or the members and shareholders of a cooperative). Finally, in 2015 the Supreme Court of Finland decided that the veil must be lifted if the company form (i.e., the protection provided by the rule of limited liability) has been intentionally misused. In case FSC 2015:17 a Finnish listed company had run some business operations through its fully owned subsidiary registered under Estonian law. The sole purpose of this arrangement was to avoid certain compensations based on the provisions of the Finnish Copyright Act 404/1961 (Fi. tekijänoikeuslaki). The Supreme Court argued that even though Ch. 1, Sec. 2(2) of the FCA provides the shareholders (here the parent company) a strong shield against the obligations of the company (here the subsidiary), this protection

44

Savela (2015), pp. 368–369.

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must be set aside if the company form is intentionally misused to circumvent a legal obligation or to harm creditors.45 Although situations in which the precedent established in FSC 2015:17 can be utilized are quite uncommon,46 it is likely that the ruling effectively discourages entrepreneurs from testing the threshold for lifting the corporate veil. After FSC 2015:17 the Supreme Court has made a similar ruling in FSC 2017:94, however, most probably these cases will not lead to any legislative action.47 Besides the possibility of lifting the corporate veil, some Finnish authors have argued that the directors of a parent company should be found liable for the actions of a subsidiary if they have, e.g., pressured or persuaded the board of directors of the subsidiary to make an unlawful decision.48 There is, however, no Finnish case law on the so-called shadow (or de facto) director doctrine and its existence is not supported by the wording of the FCA (or the FCoopA).49

2.6

Minority Shareholder’s and Creditor’s Protection

The rules introduced above in Sect. 2.3 aim to ensure that the ability to establish and control subsidiaries is not misused. These rules protect minority shareholders and creditors against abuses of authority by the majority shareholders and the directors. The FCA or FCoopA include no other group-specific rules on the protection of minority shareholders or creditors, hence these complicated provisions are not explained here. As for protection of minority shareholders, the so-called principle of equality (“Yhdenvertaisuusperiaate”) plays an important role in group relations. According to Ch. 1, Sec. 7 of the FCA [a]ll shares shall carry the same rights in the company, unless it is otherwise provided in the Articles of Association. The General Meeting, the Board of Directors, the Managing Director or the Supervisory Board shall not make decisions or take other measures that are conducive to conferring an undue benefit to a shareholder or another person at the expense of the company or another shareholder.

This provision, and especially the prohibition against abusing authority, supplements the numerous casuistic provisions on protection of minority shareholders 45 The ruling in FSC 2015:17 has received much attention in Finnish jurisprudence and it has been analyzed thoroughly by several scholars. See, e.g., Kärki (2016), Pihlajarinne et al. (2015) and Villa (2015). 46 Villa (2015), p. 542. 47 See OM 32/41/2015, p. 34. 48 Airaksinen (2013), p. 456; Mähönen and Villa (2010), pp. 468–469; Savela (2015), p. 372. 49 If, however, the directors of the subsidiary have engaged in criminal activities and the directors of the parent company have been involved in these acts of crime, the directors of the parent company can be found liable for damages according to the Finnish Tort Liability Act 412/1974 (Fi. vahingonkorvauslaki). Savela (2015), p. 373.

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included in the FCA. In a group relationship it means that a subsidiary may not make decisions or take other actions that unduly benefit the parent company at the expense of the other shareholders (i.e., the minority shareholders) of the subsidiary. On the other hand, Ch. 1, Sec. 7 of the FCA also protects the interests of the shareholders of the parent company. It can, e.g., limit the parent company’s ability to transfer its business operations to a subsidiary.50 There has been much research conducted on the principle of equality.51 Also, disputes concerning it are relatively common. Furthermore, it is important to point out that the minority shareholders of the subsidiary may give their consent on a decision that unduly benefits the parent company (Ch. 5, Sec. 29(3) of the FCA) at the cost of the subsidiary and its other shareholders. Such decisions are, however, unlawful, if they simultaneously violate the rights of the creditors of the company. Thus, unanimous shareholders may decide to breach only those provisions of the FCA that aim to protect minority shareholder’s interests.52

3 Groups of Companies in Other Fields of Law 3.1

General Observations

Legal provisions concerning groups of companies are relatively scarce. As mentioned above in Sect. 1, there are many fields of law where no group-specific rules exist. Besides company law, cooperative law and accounting law, groups of companies are only regulated in tax law, insolvency law and labor law contexts. Next, in Sects. 3.2–3.4, the group-specific provisions in these fields of law are introduced briefly.

3.2

Groups of Companies in Tax Law

There are at least three different taxation systems regarding groups of companies: (1) no rules at all (the “classic”) system, (2) the group contribution system and (3) the consolidated system.53 In light of this categorization, the Finnish taxation model is an adaptation of the first two systems. The starting point is that companies of a group

50

Nikkilä (2006), pp. 284–288. According to the FCA, the directors of the parent company can even transfer all business operations to a subsidiary, if there is a sound business reason for such an arrangement. Mähönen and Villa (2011). 51 See Pönkä (2012b, 2016). 52 Pönkä (2012b), pp. 306–309; Savela (2015), p. 377. 53 Wiman (2000).

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are treated in taxation as separate entities.54 Finnish tax legislation, however, also provides for the group contribution mechanism, where profits and losses are leveled through a system of contribution from one group member to another. In general, Finnish tax legislation on groups of companies has two main objectives. First, tax laws aim to prevent the disadvantages in taxation that would otherwise result from running a business in the form of a group. The second goal is to prevent groups from gaining unjust tax advantages, i.e., advantages that are not available to other business entities. Finnish tax legislation includes several provisions that support the latter goal.55 E.g., according to Sec. 31 of the Finnish Tax Assessment Procedure Act 1559/1995 (Fi. laki verotusmenettelystä), the so-called arm’s-length principle (Fi. markkinaehtoperiaate) is required in intra group transactions, hence a hidden group contribution will be approved only under exceptional circumstances.56 E.g., in case 2010:73 the Supreme Administrative Court of Finland ruled that the interest rate on an intragroup loan could not be determined based on the average interest rate on the group’s external lending, since taking into account the debtor company’s creditworthiness and other circumstances, it would have been possible for the debtor company to receive external debt financing at a lower interest rate. Group contributions are regulated in the Act on Group Contributions in Taxation 825/1986 (Fi. laki konserniavustuksesta verotuksessa, GCA).57 According to Sec. 1 of the GCA, a group contribution is tax-deductible under specific circumstances listed in the Act. The main rule is that group contributions (other than capital contributions, which are non-deductible) can be credited between domestic companies/cooperatives from business income where the contribution is not otherwise deductible from business income (Sec. 2 of the GCA). According to Sec. 3 of the GCA, both parties taking part in the transaction (i.e., the contributing company and the receiving company) must be registered under Finnish law and there must be at least 90% ownership, direct or indirect, from the beginning of the tax year.58 Group contributions can be credited from a parent company to a subsidiary and vice versa, as well as horizontally between sister companies.59 The granted group contributions may not exceed the taxable income of the contributing company in the tax year (Sec. 6 of the GCA). Finally, the group contribution is tax-deductible only when the

54

Äimä (2009), p. 93. Penttilä (2003), pp. 292–293. 56 The guidance provided by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations is adopted as a significant source of interpretation in the application of the arm’s-length principle. See www.vero.fi/en/businesses-and-corporations/about-corporate-taxes/ transfer_pricing/ [accessed September 2018]. 57 This act concerns both companies and cooperatives. 58 According to Sec. 7, such a group relationship must have prevailed throughout the entire fiscal year, and the financial years of the participating companies must end on the same day. Furthermore, the contributing entity may not be a savings bank, nor a credit-, insurance- or pension institution as stipulated in the Business Income Tax Act 360/1968 (Fi. laki elinkeinotulon verottamisesta). 59 See fn. 14. 55

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corresponding deduction is made in the books of the contributing company and when the receiving company books the contribution as (taxable) income during the (tax) year in which it is deducted by the contributing company (Sec. 5 of the GCA). As for group contributions, there seems to be some friction between Finnish tax laws and the FCA.60 The Supreme Court has assessed these problems in case FSC 2015:105, in which group contributions had been credited from a listed parent company (X) to its fully owned subsidiary (A) and to two fully owned subsidiaries (B and C) of A. The minority shareholders of X had later required that X distribute at least half of the profits of the financial period as a so-called minority dividend (Fi. vähemmistöosinko). This requirement was based on Ch. 13, Sec. 7 of the FCA, according to which [a]t least one half of the profits of the financial period, less the amounts not to be distributed under the Articles of Association, shall be distributed as dividend, if a demand to this effect is made at the Ordinary General Meeting by shareholders with at least one tenth (1/10) of all shares before the decision on the use of the profits has been made. However, a shareholder shall not demand the distribution of profits in excess of the amount that can be distributed under this chapter in the absence of consent by the creditors, nor in excess of eight per cent (8%) of the equity of the company. The possible distributions of profits during the financial period and before the Ordinary General Meeting shall be subtracted from the amount to be distributed.

Since the requirement was based on an explicit rule of law, X had no option but to distribute profits to its shareholders. The distributed minority dividend (180,216.39 euros) was, however, much less than the minority shareholders had expected (17,181,000 euros). The question that the Supreme Court had to decide was, how should the credited group contributions affect the calculation of the minority dividend? The minority shareholders of X, naturally, argued that group contributions should not reduce the amount of distributed profits, since the right expressed in Ch. 13, Sec. 7 of the FCA has to be given priority in relation to the provisions of the GCA. X, on the other hand, insisted that since there was a sound business reason for the intra-group arrangement, there was no valid reason why the credited contributions should be included in the calculation. The Supreme Court eventually decided in favor of X, but emphasized that the relation between the right to give group contributions and the right to require minority dividends has to be decided on a case-by-case basis. I.e., the Supreme Court concluded that, in general, Ch. 13, Sec. 7 of the FCA cannot be used to prevent group contributions, if there is a sound business reason for such arrangements, but on the other hand, the intra-group transactions cannot be misused to violate the rights of the minority shareholders of the providing company.61

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Äimä (2009), p. 99. In Finnish jurisprudence the ruling in FSC 2015:105 has raised much debate. See, e.g., Nyström (2016); Pönkä (2012b), pp. 391–395; Vahtera (2015, 2016); Villa (2016). 61

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V. Pönkä

Groups of Companies in Insolvency Law

In insolvency law, Koulu has done extensive research work on group-related issues.62 His findings show that in insolvency law, provisions regarding groups of companies are scarce and they are scattered among different pieces of legislation. Furthermore, group-specific provisions seem to concern relatively trivial matters and Koulu has even argued that many of these rules are more or less unnecessary.63 Finnish law does not recognize the concept of group bankruptcy (Fi. konsernikonkurssi); hence, in insolvency law, the companies of a group are treated as separate entities. There are, however, some exceptions to this rule and according to Ch. 7, Sec. 2(2) of the Finnish Bankruptcy Act 120/2004 (Fi. konkurssilaki, FBA) if the debtor is a part in a group of companies, a matter pertaining to an order of bankruptcy may be heard by another court with jurisdiction over a bankruptcy matter of another debtor in the same group of companies, if it is expedient to hear the matter in this latter court.64

Furthermore, according to Ch. 8, Sec. 3 of the FBA [a] person who has been appointed or nominated as an estate administrator may be appointed as the estate administrator also for another debtor in bankruptcy belonging to the same group of companies or otherwise to the same economic entirety, if this can be deemed expedient for the administration of the bankruptcy estates and if there is reason to believe that the functions can be performed without conflicts of interest that would cause an essential disturbance therein.

A new EU regulation on insolvency proceedings came into force in May 2015.65 One of the main objectives of the Regulation is to ensure the efficient administration of insolvency proceedings relating to different companies forming part of a group of companies. Articles relating to this objective are included in Chapter V, which is titled “Insolvency Proceedings of Members of a Group of Companies”. The Ministry of Justice, Finland has concluded that these articles are directly applicable in Finland and thus require no legislative action.66

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Koulu (2013). Koulu (2013), p. 47. 64 A similar rule is included in the Sec. 67(2) of the Finnish Restructuring of Enterprises Act 47/1993 (Fi. laki yrityksen saneerauksesta) according to which “[m]atters concerning the restructuring of a subsidiary company in a group of companies shall . . . be considered by the court in which restructuring proceedings concerning the parent company are pending. If a matter concerning the restructuring of the parent company is filed later, the court considering the restructuring of the subsidiary company may transfer the matter to the court in which the matter concerning the parent company is pending.” 65 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings. 66 See OM 25/41/2015. Uudelleenlaaditun maksukyvyttömyysasetuksen edellyttämät lainsäädäntömuutokset (memorandum prepared by the Ministry of Justice, Finland regarding the need to update Finnish insolvency legislation due to the Insolvency Regulation), pp. 38–39. 63

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Groups of Companies in Labor Law

In Finnish labor law, groups of companies have been recognized in the Act on Co-operation within Finnish and Community-wide Groups of Undertakings 335/2007 (Fi. laki yhteistoiminnasta suomalaisissa ja yhteisönlaajuisissa yritysryhmissä, Co-operationA). The Act lays down provisions on the co-operation procedures between the group management and personnel of both Finnish and community-wide groups of companies.67 According to Sec. 1(2) of the Co-operationA, the purpose of the Act is to improve the rights of employees to obtain information and to be consulted with regard to operation of undertakings and groups of undertakings and their future prospects and in particular on matters the decisions of which affect the position of the employees and their employment within the group of undertakings or the undertaking. The purpose of the Act is also to promote joint interaction between the employees of the undertakings and the groups of undertakings.

The provisions of the Co-operationA apply to any Finnish group of companies that has a minimum of 500 employees in total in Finland; furthermore, the provisions apply only to those companies of such a group that have at least 20 employees (Sec. 7(1) of the Co-operationA). Since companies of this size are quite few in number, it has been argued that, in practice, the effects of the Co-operationA are not particularly significant.68 In labor law, group-specific rules can be also found in other laws. E.g., according to Ch. 7, Sec. 4 of the Finnish Employment Contracts Act (55/2001, “työsopimuslaki”, later the “FECA”) if the work of the employee has diminished substantially and permanently for financial or production-related reasons or for reasons arising from reorganization of the employer’s operations, the employee must be offered work that is equivalent to that defined in her/his employment contract. If no such work is available, she/he must be offered other work equivalent to her/his training, professional skill or experience. If the employer company has subsidiaries, it must find out if it is possible to provide work and training in another business under its control. A similar rule has been established in older case law (i.e., in Supreme Court precedents set before the FECA came into force), which cannot be discussed further here.69

67 It is important to point out that Sec. 4 of the Co-operationA includes a definition of a group of companies, hence the general definition of a group (see Sect. 2.2) does not apply in labor law. 68 Koulu (2013), p. 49. 69 See, e.g., FSC 1995:93 and FSC 1998:77.

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4 Conclusions The findings of this article show that groups of companies have not been systematically regulated in Finland. There is, e.g., no general law concerning group relationships. Groups of companies have been defined in laws specific to business form and, most importantly, in the FAA. This conception of a group is utilized in company law, cooperative law and accounting law, but in other fields of law alternative definitions of a group exist. I.e., in Finland, there is a general understanding of what a group of companies is, but group definitions are somewhat different in different fields of law. Finnish law treats companies of a group (i.e., parent companies, subsidiaries and sister companies) as separate legal entities and as mentioned in Sect. 1, from the perspective of the legal order, a group is not conceived as a unified business organization. Regulation on groups of companies focuses mainly on the definition of a group and on the accounting information, which the parent company must provide for the public in form of a consolidated financial statement. Otherwise, group-related matters are mostly unregulated and there are many fields of law that include no group-specific provisions. Besides the FCA, the FCoopA and the FAA, provisions concerning groups of companies can be found in Finnish tax laws, insolvency laws and labor laws. Group-specific provisions are, however, relatively scarce. Currently there are no laws under preparation concerning group-related matters. In general, Finnish group of companies legislation seems to work well, although there is some friction, e.g., between the GCA and the FCA. This friction is caused by the unfortunate fact that it is very hard to find a reasonable balance between the group’s interests and the interests of the minority shareholders of the contributing company. Also, the doctrine on lifting the corporate veil is currently in a state of development, since the Supreme Court of Finland made the first ruling in this matter as late as 2015. Therefore, it is not yet possible to say what is the threshold for lifting the veil in Finland.

References Äimä K (2009) Sisäiset korot lähiyhtiöiden kansainvälisessä verotuksessa. WSOYpro Oy, Juva Airaksinen M (2006) Conflicts between shareholders and how to solve them in legislation. In: Krüger Andersen P, Jul Clausen N, Skog R (eds) Shareholder conflicts. Forlaget Thomson A/S, Copenhagen, pp 249–264 Airaksinen M (2013) Onnistuiko vuoden 2006 osakeyhtiölakiuudistus? Defensor Legis 4:443–460 Airaksinen M, Pulkkinen P, Rasinaho V (2010a) Osakeyhtiölaki I. Talentum Media Oy, Hämeenlinna Airaksinen M, Pulkkinen P, Rasinaho V (2010b) Osakeyhtiölaki II. Talentum Media Oy, Hämeenlinna Immonen R (2002) Yritysmuodot ja liiketoiminta. Kauppakaari Oyj, Jyväskylä Immonen R, Villa S (2015) Osakeyhtiön varojen käyttö. Talentum Media Oy, Lithuania

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Jussila I, Kalmi P, Troberg E (2008) Selvitys osuustoimintatutkimuksesta maailmalla ja Suomessa. Painorauma Oy, Rauma Kaisanlahti T, Jänkälä M, Björklund M (2009) Kirjanpito-oikeus. Edita Publishing Oy, Helsinki Kärki A (2016) Samastaminen osakeyhtiössä – oppitunteja Yhdysvalloista. Lakimies 5:741–764 Koski P (1977) Konserni. Suomalaisen Lakimiesyhdistyksen julkaisuja A-sarja N:o 114, Vammala Koulu R (2013) Konserniyhtiön maksukyvyttömyys ja konkurssi. University of Helsinki Conflict Management Institute, Saarijärvi Kuoppamäki P (2014) Uusi kilpailuoikeus. Alma Talent Oy, Lithuania Kyläkallio J, Iirola O, Kyläkallio K (2015) Osakeyhtiö II. Edita Publishing Oy, Porvoo Leppiniemi J (2014) Kirjanpitolaki – kommentaari, 3rd edn. Alma Talent Oy, Lithuania Lindholm T, Storå J (2010) Begreppet corporate benefit i Finsk aktiebolags- och insolvensrätt. Tidskrift utgiven av Juridiska Föreningen i Finland 4:405–421 Mähönen J (2013) Finland – corporate governance: Nordic tradition with American spices. In: Fleckner AM, Hopt KJ (eds) Comparative corporate governance. An functional and international analysis. Cambridge University Press, New York, pp 393–443 Mähönen J, Villa S (2010) Osakeyhtiö III – Corporate Governance, 2nd edn. WSOYpro Oy, Juva Mähönen J, Villa S (2011) Tärkeät päätökset ja toimivalta osakeyhtiössä. Lakimies 1:3–18 Mähönen J, Villa S (2014) Osuuskunta, 2nd edn. Alma Talent, Lithuania Mähönen J, Villa S (2015) Osakeyhtiö I – Yleiset opit, 3rd edn. Talentum Media Oy, Lithuania Mäkelä L, Reponen M, Pohjonen S, Honkamäki T (2016) Konsernitilinpäätöksen laadinta, 3rd edn. Alma Talent Oy, Helsinki Nikkilä J (2006) Konsernirakenne ja osakkeenomistajan oikeussuoja. Lapin yliopistokustannus, Rovaniemi Nyström P (2016) Konserniavustus, vähemmistöosinko ja konserni-intressi. Oikeustieto 1:4–7 Penttilä S (2003) Tax aspects of groups of companies – Finnish experiences. Scand Stud Law 44:289–302 Pihlajarinne T, Havu K, Vesala J (2015) KKO 2015:17, Osakeyhtiö – Samastaminen. Defensor Legis 3:591–602 Pönkä V (2008) Määräysvallasta osakeyhtiössä. Defensor Legis 5:737–758 Pönkä V (2012a) Forms of Finnish companies and the main principles of company law. In: HuomoKettunen M, Melander S, Nuotio K (eds) Introduction to Finnish law and legal culture. Forum Iuris, Helsinki, pp 143–151 Pönkä V (2012b) Yhdenvertaisuus osakeyhtiössä. Sanoma Pro Oy, Helsinki Pönkä V (2013) Osakeyhtiön hallituksen jäsenen esteellisyydestä. In: Pönkä V, KozlowskaRautiainen D (eds) Business Law Forum 2013. Lakimiesliiton kustannus, Helsinki, pp 123–153 Pönkä V (2016) The principle of equality of shares and shareholders. Nordisk Tidsskrift for Selskabsret 1:38–49 Pönkä V (2019) Are cooperative societies transforming into cooperative companies? Reflections on the Finnish Cooperatives Act. EBLR 30(1) Pulkkinen P (1993) Konsernin vakuusjärjestelyistä konkurssioikeudellisen takaisinsaannin kannalta. Lakimies 8:1173–1204 Rasinaho V (2013) Yhtiön etu ja sen sivuuttaminen kokonaan omistetussa tytäryhtiössä. Defensor Legis 4:550–565 Savela A (2003) Suomen kansainvälinen yhtiöoikeus. Talentum Media Oy, Jyväskylä Savela A (2015) Vahingonkorvaus osakeyhtiössä, 3rd edn. Talentum Media Oy, Lithuania Toiviainen H (2008) An introduction to Finnish business law. A comprehensive survey of the foundations and main rules of Finnish corporate law. Edita, Helsinki Vahtera V (2015) Konserniavustuksen antamiseen oli liiketaloudellinen peruste eikä sen katsottu loukkaavan vähemmistöosinko-oikeutta (KKO 2015:105). Edilex 23.2.2016:1–4 Vahtera V (2016) Konserniavustuksen ja vähemmistöosinko-oikeuden suhde ratkaisujen KKO 2015:104 ja KKO 2015:105 valossa. Defensor Legis 2:137–157 Villa S (2015) Samastaminen: 2015:17. Lakimies 3–4:533–542 Villa S (2016) Konserniavustus ja oikeus vähemmistöosinkoon. Lakimies 2:321–335 Wiman B (2000) Equalizing the income tax burden in a group of companies. Intertax 28 (10):352–359

National Report on Singapore Samantha S. Tang

Abstract As in many other advanced economies, corporate groups are an important part of Singapore’s business landscape. This Chapter provides a general overview of Singapore’s regulatory regime relating to corporate groups; while this regime arguably lacks a clear awareness of corporate groups as a distinct phenomenon that calls for specific and tailored regulation, it does contain features that may in some circumstances perform the function of corporate group regulation; examples include the regimes on related party transactions, director duties, and shareholder remedies.

1 Introduction As in many other advanced economies, corporate groups are an important part of Singapore’s business landscape. In enterprises ranging from government-linked conglomerates to family-controlled businesses, complex corporate group structures are often adopted, driven at least in part by the demands of cross-border business activities across the Southeast Asian region—and beyond. Generally, corporate groups composed of ‘corporations’—a term of art that comprises both Singapore-incorporated ‘companies’ and foreign companies with a registered place of business in Singapore1—are regulated by the Singapore Companies Act. Other business entities such as partnerships,2 limited liability partnerships,3

Singapore Companies Act, s 4(1) (defining ‘corporation’ as ‘any body corporate formed or incorporated or existing in Singapore or outside Singapore and includes any foreign company’). 2 Partnership Act (Cap 391, Rev Ed 1994). 3 Limited Liability Partnership Act (Cap 163A, Rev Ed 2006), but see Sect. 3.1 below (regulating transactions with entities, including limited liability partnerships, connected to the company’s director). 1

S. S. Tang (*) Faculty of Law, National University of Singapore, Singapore, Singapore Asian Journal of Comparative Law (Cambridge University Press), Cambridge, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_18

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and societies4 are generally governed by their respective legislative regimes. Further, a corporate group is rarely, if ever, recognised as a single entity for legal (as opposed to accounting5) purposes, and each individual corporation in the group is generally recognised as a separate legal entity. This Chapter proceeds as follows. Section 2 defines and explains key terms used in Singapore’s corporate groups regime. Section 3 discusses the prohibitions and regulations applicable to related party transactions. Section 4 explains the duties owed by directors in the corporate group context, and their enforcement (and lack thereof). Section 5 addresses the protection of minority shareholders in corporate groups, and Sect. 6 offers a general overview of the creditor protection regime. Section 7 offers a brief description of corporate liability and veil piercing, and Sect. 8 ends with an overview of financial reporting, accounting and audit requirements for corporate groups.

2 Definitions I begin by defining key terms used in Singapore’s regulations on corporate groups.

2.1

Definition of ‘Holding Company’ and ‘Subsidiary’

The Companies Act (Cap 50, Rev Ed 2006) (‘Singapore Companies Act’) deems a corporation (including a Singapore-incorporated ‘company’)6 to be the ‘subsidiary’ of any corporation (the ‘holding company’) that controls more than half of the voting power of the subsidiary, or the composition of the subsidiary’s board of directors.7 A corporation is able to control the composition of the board of directors where it can appoint or remove all or a majority of the subsidiary’s directors.8 A corporation is deemed to have the power to do so where a person’s appointment as a director of the subsidiary either (1) cannot occur unless the corporation exercises this power in their

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Societies Act (Cap 311, Rev Ed 2014). Companies within a corporate group must prepare consolidated accounts to be presented before the general meeting based on the financial position and performance of the group as a whole: Singapore Companies Act, s 201(5). 6 As defined in the Act, ‘corporation’ does not include any corporation sole, co-operative society, registered trade union, or limited liability partnership: Singapore Companies Act, s 4(1). A ‘corporation sole’ is an entity that may be established by deed poll for a religious purpose: see e.g. Salvation Army Ordinance (Cap 377, Rev Ed 1985) (‘An Ordinance to incorporate the General of the Salvation Army as a Corporation sole having perpetual succession and to vest the property of the Salvation Army in the Straits Settlements in such Corporation.’) 7 Singapore Companies Act, s 5(1)(a). 8 Singapore Companies Act, s 5(2). 5

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favour, or (2) follows necessarily from their appointment as director of the said corporation.9 The definition of ‘holding company’ does not extend to any person (e.g. banks, trustees) who holds shares or exercises powers in a fiduciary capacity or as a nominee for another corporation. Such shares and powers will be treated as being held or exercisable not by the fiduciary or nominee, but by that other corporation on whose behalf the fiduciary or nominee holds shares or exercises powers.10 Further, the Singapore Exchange Central Depository (‘SGX CDP’) is not deemed to be a holding company of any corporation only by reason of the shares it holds.11 Generally, any corporation that is deemed to be the subsidiary of a subsidiary is also considered a subsidiary of the holding company.12 As such, a holding company is considered an ‘ultimate holding company’ where is itself is not a subsidiary of any corporation.13 A subsidiary is considered to be a ‘wholly owned company’ where none of its members are persons other than (1) its holding company; (2) a nominee of the holding company; (3) a subsidiary of the holding company where none of its members are persons other than the holding company or its nominee(s); or (4) a nominee of such a subsidiary.14 A subsidiary is generally not permitted to hold or vote any shares in its holding company, and any allotment or transfer of shares from a company to its subsidiary will be considered void.15

2.2

Definition of ‘Related Companies’

Turning to the definition of ‘related companies’, under the Singapore Companies Act, a corporation is deemed to be related to another corporation where either corporation is the (1) holding company, (2) subsidiary, or (3) subsidiary of the holding company (‘fellow subsidiary’16) of the other.17 This definition of ‘related corporation’ has been adopted by the Code of Corporate Governance 2012.18

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Singapore Companies Act, s 5(2)(a)–(b). Singapore Companies Act, s 5(3). 11 Singapore Companies Act, s 5(5) 12 Singapore Companies Act, s 5(1)(b). 13 Singapore Companies Act, s 5A. 14 Singapore Companies Act, s 5B. 15 Singapore Companies Act, s 21. 16 Although ‘fellow subsidiary’ is not a term of art defined in the Singapore Companies Act, it is used in the Code of Corporate Governance. 17 Singapore Companies Act, s 6. 18 Code of Corporate Governance, footnote 4 (‘The term “related corporation”, in relation to the company, shall have the same meaning as currently defined in the Companies Act, i.e. a corporation that is the company’s holding company, subsidiary or fellow subsidiary.’). 10

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Definitions in the SGX Listing Rules

Singapore’s primary securities exchange, the Singapore Exchange (‘SGX’), has included in its Listing Rules (SGX Listing Rules) provisions that apply to corporate groups. Specifically, an ‘associated company’ in the SGX Listing Rules is defined as a company in which at least 20% but not more than 50% of its shares are held by a company or group19 listed on the SGX).20

3 Related Party Transactions Related party transactions (‘RPTs’) include transactions entered into by the company with (1) the company’s controllers, including directors and shareholders (Armour et al. 2017, p. 145); (2) parties related to the company’s controllers through familial or other personal connections; and (3) related corporations such as its holding company, subsidiary, or fellow subsidiary. RPT regulation under the Singapore Companies Act intersects with other provisions on director liability (discussed at Sect. 4 below) and shareholder protection (Sect. 5), and may require directors and shareholders to compensate the holding company or subsidiary for any losses caused. Beyond such regulations, the Singapore Companies Act generally restricts loans and similar arrangements by Singapore-incorporated companies to their directors, directors’ immediate family members, or companies connected to such directors, subject to narrow exceptions. By contrast, the SGX Listing Rules contain more expansive restrictions on RPTs for foreign21 and Singapore-incorporated companies listed on the SGX. As a general note, an ordinary resolution passed by a simple majority of the shareholders in a general meeting would usually suffice where the company or the shareholders as a body must approve a transaction or a decision, unless otherwise provided for by law22 or the company’s constitution.

19 SGX Listing Rules, ‘Definitions and Interpretation’ (defining a ‘group’ as the ‘issuer and its subsidiaries, if any (and the guarantor company, if any)’). 20 SGX Listing Rules, ‘Definitions and Interpretation’. 21 SGX Listing Rules, ‘Definitions and Interpretation’ (defining ‘foreign issuer’ as an issuer incorporated or otherwise established outside Singapore). 22 For example, where a shareholder is prohibited from voting on a related party transaction under the SGX Listing Rules: see Sect. 3.2 below.

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Prohibition on Loans to Directors and Connected Parties

The Singapore Companies Act generally prohibits23 a Singapore-incorporated company24 from entering into a loan, quasi-loan25 or credit transaction,26 or providing any guarantee or security for any such transaction27 for the benefit of a director of the company or a related company (‘relevant director’).28 This prohibition extends to transactions made for the benefit of (1) immediate family members of relevant directors29; or (2) a ‘connected entity’, being a limited liability partnership or company established in Singapore or abroad30 that is not the company’s holding company, subsidiary, or fellow subsidiary31 and where one or more of the directors are interested32 in 20% or more of the entity’s total voting power.33 The company may not circumvent this prohibition by taking part in an arrangement where (1) a person enters into a transaction and obtains a benefit from the company or a related company; or where (2) another company assumes any rights, obligations or liabilities under a transaction, and the transaction would have been prohibited had the company entered into it.34 Any director who authorises a prohibited transaction will be criminally liable to fine (not exceeding SGD20,000) or imprisonment (not exceeding 2 years).35 The exceptions to this prohibition are relatively narrow,36 and include transactions (1) made by an exempt private company37; (2) for the benefit of a relevant

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Singapore Companies Act, s 162(2). Singapore Companies Act, s 162(1) read with s 4 (definition of ‘company’). 25 Singapore Companies Act, s 162(1)(a). 26 Singapore Companies Act, s 162(1)(c). A credit transaction includes the supply of goods or services, or disposal of immovable property on the understanding that payment is to be deferred: Singapore Companies Act, s 162(11)(c). 27 Singapore Companies Act, ss 162(1)(b), (d). 28 Singapore Companies Act, s 162(1) read with s 4 (definition of ‘related’ company). 29 This includes the director’s spouse, son, adopted son, step-son, daughter, adopted daughter and stepdaughter: Singapore Companies Act s 162(8). 30 Singapore Companies Act, ss 163(1), (2). 31 Singapore Companies Act, s 163(4)(a). 32 A transaction will not be prohibited if the directors have an interest in the connected entity only by reason that the company has an interest in the connected entity and the directors have an interest in the company: Singapore Companies Act, s 163(3D)(a). 33 Singapore Companies Act, ss 163(1). 34 Singapore Companies Act, ss 162(1)(e), (f), s 163(3A). 35 Singapore Companies Act, ss 162(6), 163(7). 36 Further exceptions are provided at Singapore Companies Act, s 162(3)(b)–(d). 37 Singapore Companies Act, s 162(2) read with s 4 (defining an exempt private company as ‘(a) a private company in the shares of which no beneficial interest is held directly or indirectly by any corporation and which has not more than 20 members; or (b) any private company, being a private company that is wholly owned by the Government, which the Minister, in the national interest, declares by notification in the Gazette to be an exempt private company’). 24

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director to meet expenditure incurred by them in the performance of his duties or for the company’s purposes,38 and where the shareholders in a general meeting have given their informed consent39 to the transaction40; and (3) for the benefit of a connected entity where there is prior approval by the shareholders in a general meeting at which the interested director(s) and their family members have abstained from voting,41 or the shareholders have given their unanimous consent.42

3.2

Regulation Under the SGX Listing Rules

To protect the interests of a listed company and its shareholders from ‘interested persons’ who might influence the company, its subsidiaries, or its associated companies43 to enter into abusive RPTs,44 the SGX Listing Rules regulate transactions between such entities and ‘interested persons’.45 ‘Interested persons’ are defined as (1) a director, chief executive officer (‘CEO’) or controlling shareholder of a listed company; and (2) an associate of any such person,46 including their immediate family, the trustees of any trust of which their immediate family members are beneficiaries, and any company in which they and their immediate family members together hold an interest of 30% and more.47 The SGX Listing Rules provides a comprehensive list of interested person transactions which fall within the ambit of its regulations; such transactions include the acquisition, disposal or leasing of assets, the provision or receipt of services, and the issuance or subscription of securities.48 Any interested person transaction, either singly or in the aggregate, amounting to 3% of the company’s latest audited net tangible assets (‘NTA’) must be disclosed to shareholders by way of an

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Singapore Companies Act, s 162(3)(a). The purposes and amount of the required expenditure by the company must be disclosed: Singapore Companies Act, s 162(2)(a). 40 Singapore Companies Act, s 162(4). If the company does not obtain the shareholders’ prior approval for the transaction, it may only enter into such a transaction on the condition that if no such approval is subsequently obtained at or before the next general meeting, the company will repay the amount expended under the transaction within 6 months of the meeting, and the directors authorizing the expenditure will be jointly and severally liable to indemnify the company for any resulting losses: Singapore Companies Act, ss 162(4)(b), 165. 41 Singapore Companies Act, ss 163(1), (3A). 42 Singapore Companies Act, s 163(3C). 43 See Sect. 2.3 above (definition of ‘associated company’). 44 SGX Listing Rules, Rule 901. 45 SGX Listing Rules, Rule 904(5). 46 SGX Listing Rules, Rule 904(4)(a). 47 SGX Listing Rules, ‘Definitions and Interpretation’ (definition of ‘associate’). 48 SGX Listing Rules, Rule 904(6). 39

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announcement to SGX.49 Where the transaction(s) amount to 5% of the company’s NTA, shareholder approval is also required,50 and the interested person(s) and their associates must abstain from voting.51 The company must state the aggregate value of all interested person transactions in its annual report.52 None of these requirements apply to any transaction below SGD100,000.53 A listed company may obtain a general mandate for recurring interested person transactions necessary for its day-to-day operations, or of a revenue or trading nature.54 Once obtained, transactions conducted under the mandate are exempt from disclosure and shareholder approval requirements,55 but the aggregate value of all such transactions must be stated in the annual report. This mandate must be renewed annually,56 and is subject to disclosure to,57 and approval by the shareholders. The interested person(s) and their associates must abstain from voting on the general mandate.58

4 Director Duties and Liability 4.1

General Approach to Management of Corporate Groups

Singapore law does not regulate the management of corporate groups through any corporate group-specific set of rules; instead, all regulation is part of the general law on directors’ duties. As a common law jurisdiction, the law on director duties in Singapore has been primarily developed through case law by the courts (Koh 2018) and supplemented by statute through specific provisions in the Singapore Companies Act.59 As a general rule, directors owe duties to the company, and not to shareholders or creditors either individually or as a class,60 save in exceptional 49

SGX Listing Rules, Rule 905. SGX Listing Rules, Rules 906, 918. 51 SGX Listing Rules, Rule 919. 52 SGX Listing Rules, Rule 907. 53 SGX Listing Rules, Rules 905–907. 54 SGX Listing Rules, Rule 920(1). 55 SGX Listing Rules, Rule 920(d). 56 SGX Listing Rules, Rule 920(1). 57 SGX Listing Rule 920(b) (information that must be disclosed in circular to shareholders). 58 SGX Listing Rule 920(b)(viii). 59 See e.g. Singapore Companies Act, ss 156, 157. 60 Raffles Town Club v Lim Eng Hock Peter [2012] SGCA 62, [2013] 1 SLR 374 [28], citing Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services [1983] 1 Ch 258 (Eng CA) 288 (‘A company, as it seems to me, likewise owes no duty of care to future creditors. The directors indeed stand in a fiduciary relationship to the company, as they are appointed to manage the affairs of the company and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders.’). 50

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circumstances.61 It is thus the company—and the company alone—that is prima facie the proper plaintiff to litigate any breaches of duty by directors. However, shareholders may avail themselves of various remedies to enforce such breaches on the company’s behalf, or otherwise seek judicial relief where the director’s wrongful acts have caused them personal harm; these remedies are discussed at Sect. 5 below. The duties owed by directors to their company largely fall into the two broad categories commonly employed in comparative corporate law analysis: duties of loyalty and duties of care (Armour et al. 2017, p. 68). In Singapore (and in other common law jurisdictions), duties of loyalty generally correspond to the duties owed by the director as a fiduciary of the company,62 and include the duty to act bona fide in the best interests of the company, the duty to avoid conflicts of interest, the duty to not profit from their position as a director, and the duty to act for proper purposes. By contrast, a director’s duties of care are generally derived from the law of negligence,63 and are presently referred to as the duty to act with skill, care, and diligence. Director duties relating to insolvency and fraudulent trading as provided under the Singapore Companies Act are also discussed below. At common law, all breaches of director duties in a solvent company may generally be ratified by the shareholders in a general meeting, subject to any restrictions by law or the corporate constitution64; the position on shareholder ratification has traditionally been contested at common law in Singapore as in many Commonwealth jurisdictions. However, even if breaches were to be ratified, shareholders may still use various remedies to obtain relief in exceptional situations, as discussed in Sect. 5 below.

4.2

Duty to Act Bona Fide in the Best Interests of the Company

The classic judicial exposition on this duty under Singapore law is found in Raffles Town Club Pte Ltd v Lim Eng Hock Peter: [T]he test for whether a director had acted bona fide was whether an honest and intelligent man in the position of the directors, taking an objective view, could have reasonably concluded that the transactions were in the interests of the company.65

For example, directors may owe fiduciary duties to shareholders by virtue of a “special factual relationship”, as might be the case in a corporate takeover: Peskin v Anderson [2001] 1 BCLC 372, [2001] BCC 874 (Eng CA) 880. 62 Tjio et al. (2015): [09.002]. 63 Lim Weng Kee v Public Prosecutor [2002] SGHC 193, [2002] 2 SLR(R) 848 [28]. 64 Raffles Town Club Pte Ltd v Lim Eng Hock Peter [2012] SGCA 62, [2013] 1 SLR 374 [45]–[46], but note the traditional English position: Cook v Deeks [1916] 1 AC 554 (PC) (no ratification of misappropriation). 65 [2010] SGHC 163 [98] (affirmed on appeal), citing Intraco Ltd v Multi-Pak Singapore Pte Ltd [1994] 3 SLR(R) 1064 [29]. 61

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Singapore courts have been reluctant to substitute their opinions for those of management, or to review the merits of business judgments that were honestly and reasonably made by the directors.66 This has been regarded as an ‘an informal or weak form business judgment rule’ by Singapore commentators (Tjio 2005, p. 64). In complying with this duty in the corporate group context, a director of any company within the group may, in determining if their decision is in the company’s best interest, consider the interests of the group as a whole. However, the director is not permitted to sacrifice the interests of their own company in favour of the group’s, or any of its constituent companies, given that each company is regarded in law as a separate legal entity.67 Remedies for a breach of this duty include damages to compensate the company for any resulting losses. This duty at common law is supplemented by section 157(1) of the Singapore Companies Act, which provides that A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. (emphasis added)

This provision is considered to be the ‘statutory equivalent’ of the common law duty,68 but a director who breaches section 157(1) may be subject to criminal liability, ranging from fine (not exceeding SGD5000) or imprisonment (not exceeding 12 months) upon conviction, in addition to civil liability.69

4.3

No-Conflict Rule

A director owes a fiduciary duty of undivided loyalty to the company, and must avoid placing themselves in a situation where there is a conflict between their duty to the company, and their personal interest, unless they have obtained the company’s informed consent.70 This creates difficulties where individuals hold directorships in multiple companies within a corporate group; while the interests of the member companies may generally converge, individual companies may also have diverging or competing interests. Where an individual is a director of two or more companies 66

Vita Health Laboratories Pte Ltd v Pang Seng Meng [2004] SGHC 158, [2004] 4 SLR (R) 162 [16]. 67 Golden Village Multiplex Pte Ltd v Phoon Chiong Kit [2006] SGHC 38, [2006] 2 SLR (R) 307 [36]. 68 Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR (R) 597 [59]. 69 Civil liability for section 157(1) of the Singapore Companies Act is distinct and in addition to any remedies available to the company at common law: Singapore Companies Act, ss 157(3) (a) (director to disgorge any profits made and personally compensate company for any losses suffered); 157(4) (civil liability under statute is in addition to any other liability or duty for directors). 70 Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR (R) 597 [64]–[65].

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in the group with opposing interests, the individual would be placed in a potential position of conflict, and therefore risks breaching the duty to avoid a conflict of interests.71 While breaches of this duty might seem inevitable in the corporate group context, the risk of legal liability for the director is substantially mitigated by the availability of relatively straightforward ex ante measures. An individual holding a directorship in one company in a group should, before assuming an appointment as director at a second company within the group, first obtain the informed consent of both companies.72 In the performance of their duties, the director must not be inhibited by their other directorships from serving the interests of each company as ‘faithfully and effectively as if [it] was his only employer’73; the director is prohibited from preferring the interests of any company over another. Where the director cannot fulfil their duties to any one company without breaching their duties to another, the best solution would be for the director to cease to act for at least one, but preferably every, company so implicated.74 A wide range of equitable remedies may be invoked against directors who breach their fiduciary duties, including damages, a constructive trust, and an account of profits.75 Section 156 of the Singapore Companies Act imposes further obligations on directors in specific situations involving a conflict of interests. Where a director (or their immediate family members)76 has (1) a direct or indirect interest in a proposed or actual transaction involving the company,77 or (2) holds any office or possesses any property that might directly or indirectly create a conflicting interest or duty,78 the director must, as soon as it is practicable, disclose the interest to the company’s board of directors, and give written notice to the company as to the nature, character and extent of the interest. This obligation does not apply where the company’s transaction is with a related company, and the director’s interest only arises by virtue of his position as a director or chief executive officer of the related company.79 A director who breaches section 156 may be subject to criminal liability, ranging from fine (not exceeding SGD5000) or imprisonment (not exceeding 12 months) upon conviction, in addition to civil liability.80 71

Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR (R) 597 [60]. 72 This is obtained through the shareholders’ approval at a general meeting, although approval by the board of directors may be sufficient if provision for this is made in the company’s constitution. 73 Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR (R) 597 [64]. 74 Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR (R) 597 [64]–[66]. 75 Tjio et al. (2015): [09.103]–[09.113]. 76 Singapore Companies Act, s 156(13). 77 Singapore Companies Act, s 156(1). 78 Singapore Companies Act, s 156(5). 79 Singapore Companies Act, s 156(4). 80 Singapore Companies Act, s 156(14)–(15).

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Director compensation, either in the form of salary or may trigger a conflict of interests if directors are permitted to determine the amount of remuneration payable by the company to themselves. The Companies Act therefore prohibits companies from compensating a director for loss of office or retirement unless it has obtained the informed consent by the shareholders at a general meeting,81 and companies seeking to increase (‘improve’82) a director’s ‘emoluments’83 must also obtain approval to do so by a shareholders’ resolution.84

4.4

No-Profit Rule

As a fiduciary of the company, a director is prohibited from receiving any unauthorised profits obtained by virtue of his position as a director. This prohibition extends to profits made from the unauthorised exploitation of corporate information, property or opportunity to the exclusion of the company (Tjio et al. 2015: [09.069]– [09.078]).85 A director must first seek the informed consent of the shareholders in a general meeting before proceeding to take advantage of the information, property, or opportunity in question; there is considerable controversy as to whether such breaches can be cured by shareholder ratification after the fact.86 Section 157(2) of the Singapore Companies Act prohibits a director from improper use of his position as director, or any information obtained by virtue of their position to gain an advantage from themselves or any other person, or to cause detriment to the company. In addition to civil liability, a director who breaches this section may be subject to criminal liability, ranging from fine (not exceeding SGD5000) to imprisonment (not exceeding 12 months) upon conviction.87

81

Singapore Companies Act, s 168. Singapore Companies Act, s 169. 83 As defined in Singapore Companies Act, s 4(1) (‘. . . includes any fees, percentages and other payments made (including the money value of any allowances or perquisites) or consideration given, directly or indirectly, to the director . . . by that company or by a holding company or a subsidiary of that company, whether made or given to him in his capacity as a director . . . or otherwise in connection with the affairs of that company or of the holding company or the subsidiary’) and s 169(2) (for the purposes of section 169 only). 84 Singapore Companies Act, s 169. 85 See also Swiss Butchery Pte Ltd v Huber Ernst [2010] SGHC 129, [2010] 3 SLR 813. 86 Cook v Deeks [1916] 1 AC 554 (PC) (no ratification of misappropriation); but see Raffles Town Club Pte Ltd v Lim Eng Hock Peter [2012] SGCA 62, [2013] 1 SLR 374 [28] (ratification of excessive director remuneration permitted). 87 Singapore Companies Act, s 156(14)–(15). 82

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Duty to Act for Proper Purposes

Directors have a fiduciary duty to exercise their powers for the purposes that they are conferred. Generally, breaches of this duty tend to arise in the context of share issuances and other defensive measures undertaken by the directors when faced with a takeover (Langford and Ramsay 2017, p. 111) and are therefore not directly relevant to issues unique to corporate groups. A breach of this duty may be remedied by damages and other equitable remedies.

4.6

Duty to Act with Skill, Care and Diligence

Directors must satisfy a minimum objective standard of skill, care and diligence in the performance of their functions, and are expected to exercise the same degree of care as a reasonable director in their positions. The applicable standard ‘is not fixed but a continuum depending on various factors such as the individual’s role in the company, the type of decision being made, the size and the business of the company’, but will not be ‘lowered to accommodate any inadequacies in the individual director’s knowledge or experience’. This standard may, however, be raised if the director possessed, or claimed to possess, some special knowledge or skill.88 Damages are the usual remedy for breaches of this duty. Insofar as this duty applies to all companies, it does not engage issues unique to corporate groups. This duty is supplemented by sections 157 and 157C of the Singapore Companies Act. A director who breaches his common law duty to act with skill, care and diligence will also breach his duty under section 157(1) of the Singapore Companies Act, which provides that A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office. (emphasis added)

A director who breaches section 157(1) may be subject to criminal liability,89 ranging from fine (not exceeding SGD5000) or imprisonment (not exceeding 12 months) upon conviction, in addition to civil liability.90 Section 157C of the Singapore Companies Act further provides that a director may rely on professional advice and information in exercising powers or performing

88

Lim Weng Kee v PP [2002] 2 SLR(R) 848 [28]–[29]. The standard for ‘reasonable diligence’ is identical for criminal liability and civil liability: Lim Weng Kee v PP [2002] 2 SLR(R) 848 [30], [34]–[35]. 90 Civil liability for section 157(1) of the Singapore Companies Act is distinct and in addition to any remedies available to the company at common law: Singapore Companies Act, ss 157(3) (a) (director to disgorge any profits made and personally compensate company for any losses suffered); 157(4) (civil liability under statute is in addition to any other liability or duty for directors). 89

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duties, provided that the director acts in good faith, makes proper inquiries when necessary, and has no knowledge that such reliance is unwarranted.91

4.7

Director Duties for Fraudulent Trading

Where a company is insolvent or on the brink of insolvency, the interests of the company become tantamount to the interests of the present and future creditors, and not the shareholders as a general body. Where the directors fail to act in the interests of creditors in such a situation, they may breach their duty to act bona fide in the company’s best interest.92 However, directors do not owe a duty to creditors93; only the liquidator may bring claims against the directors for breach of duty on behalf of the company in liquidation. Sections 339(3) and 340 of the Singapore Companies Act prohibit directors from permitting the company to incur debts where the company has no reasonable prospect of repaying such debts. As such, any director who knowingly causes a company to enter into debts which they have no reasonable expectation the company will be able to repay, will be personally liable for the company’s debts,94 and may be subject to criminal liability ranging from fine (not exceeding SGD2000) to imprisonment (not exceeding 3 months) upon conviction, in addition to civil liability.95 Further, any person (and not only directors), who was knowingly party to the company’s carrying on business with intent to defraud the company’s creditors may be held personally liable for the company’s debts. In addition to civil liability, the person may also be subject to criminal liability ranging from fine (not exceeding SGD15,000) to imprisonment (not exceeding 7 years) upon conviction, or both.96

4.8

Shadow Directors and De Facto Directors

A shadow director is a person who is not formally appointed as a director, but otherwise satisfies the statutory definition of a director under the Singapore Companies Act, that is, ‘a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act’.97 There must be a ‘discernable [sic]

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Singapore Companies Act, s 157C. Chip Thye Enterprises Pte Ltd (in liq) v Phay Gi Mo [2003] SGHC 307, [2004] 1 SLR(R) 434. 93 Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] SGCA 31, [2010] 4 SLR 1089 [48]. 94 Singapore Companies Act, ss 339(3) and 340(1). 95 Singapore Companies Act, s 339(3). 96 Singapore Companies Act, s 340(5). 97 Singapore Companies Act, s 4(1). 92

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pattern of compliance [by the company’s directors] with the shadow director’s instructions or directions’,98 and the alleged shadow director cannot rely on occasional instances where the directors exercised independent judgment to escape liability. Where a person, such as a controlling shareholder, is found to be a shadow director, the person would be imposed with the ‘ordinary duties of a director’.99 A de facto director is a person who acts as a director despite not being formally or properly appointed as a director, and is deemed to satisfy the statutory definition of a director under the Singapore Companies Act, that is, ‘any person occupying the position of director of a corporation by whatever name called’.100 A de facto director is ostensibly subject to the same duties owed by de jure directors.101 Determining if a person is a de facto director is a question of fact, and the 6 guiding factors set out by the High Court in Raffles Town Club v Lim Eng Hock Peter are as follows102: From those cases I derive the following propositions material to the facts of this case: (1) To establish that a person was a de facto director of a company, it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director (per Millett J. in Re Hydrodam (Corby) Ltd (in liq.) [1994] BCC 161 at 163). (2) It is not a necessary characteristic of a de facto director that he is held out as a director; such “holding out” may, however, be important evidence in support of the conclusion that a person acted as a director in fact (per Etherton J. in Secretary of State for Trade and Industry v Hollier [2006] EWHC 1804 (Ch); [2007] BCC 11 at [66]). (3) Holding out is not a sufficient condition either. What matters is not what he called himself but what he did (per Lewison J. in Re Mea Corp Ltd [2006] EWHC 1846 (Ch); [2007] BCC 288). (4) It is necessary for the person alleged to be a de facto director to have participated in directing the affairs of the company (Hollier (above) at [68]) on an equal footing with the other director(s) and not in a subordinate role (above at [68] and [69] explaining dicta of Timothy Lloyd Q.C. in Re Richborough Furniture Ltd [1996] BCC 155 at 169–170). (5) The person in question must be shown to have assumed the status and functions of a company director and to have exercised “real influence” in the corporate governance of the company (per Robert Walker L.J. in Re Kaytech International Plc [1999] BCC 390). (6) If it is unclear whether the acts of the person in question are referable to an assumed directorship or to some other capacity, the person in question is entitled to the benefit of the doubt (per Timothy Lloyd Q.C. in Re Richborough Furniture Ltd (above)), but the court must be careful not to strain the facts in deference to this observation (per Robert Walker L.J. in Kaytech at 401).

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Raffles Town Club Pte Ltd v Lim Eng Hock Peter [2010] SGHC 163 [45]. Raffles Town Club Pte Ltd v Lim Eng Hock Peter [2010] SGHC 163 [49]. However, a shadow director would not be subject to the formal requirements relating to directors in the corporate constitution simply because he is adjudged to be one: Heap Huat Rubber Company v Kong Choot Sian [2004] SGCA 12. 100 Singapore Companies Act, s 4(1). 101 Implicit in Raffles Town Club Pte Ltd v Lim Eng Hock Peter [2010] SGHC 163 [57], but contested in literature; see Tjio et al. (2015); [09.011]–[09.012]. 102 Raffles Town Club Pte Ltd v Lim Eng Hock Peter [2010] SGHC 163 [58]. 99

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The shadow director and de facto director doctrines enable companies and their shareholders to subject persons who exercise the powers and functions of directors in practice, but who are not formally appointed as such. For example, it would be possible for a controlling shareholder of the parent company to be adjudged as a ‘shadow director’ or ‘de facto director’ of its subsidiary, and thereby be subject to the relevant director duties on that basis.

4.9

Enforcement of Director Duties in Corporate Groups

Difficulties may arise where a company in a corporate group seeks to enforce duties against a director; a classic conundrum is where the director owes their duties to one company, but causes loss to another in the group. Singapore’s apex court, the Court of Appeal, held in the 2017 case of Goh Chan Peng v Beyonics Technology Ltd103 that notwithstanding a director’s breach of duty to the ultimate parent company, the parent company could not claim for the substantial losses suffered by its subsidiary104 arising from the director’s wrongful acts.105 The court held that each entity within the corporate group had a separate legal personality, such that ‘between a parent or holding company and its subsidiary, the rights and assets of the related companies are treated as belonging to each discrete company, distinct from those of the other company’.106 This development arguably curtails the enforcement of director duties within a corporate group setting (see generally Koh 2018). A second difficulty may arise where a parent company, as the shareholder of its subsidiary, suffers losses arising from a breach of duty by the subsidiary’s director (s). Where the loss suffered by the parent company (qua shareholder of the subsidiary) arises from the decrease in the value of its shares, this loss is known as ‘reflective loss’. As a starting point, the company is the proper plaintiff to litigate any breach of duty by its directors, and a shareholder thus cannot bring a claim for reflective loss against the same directors.107 There are three ways around this rule. First, the shareholder is able to bring itself under any of the three exceptions to the ‘reflective loss’ rule stated in Johnson v Gore Wood.108 Second, the shareholder brings a derivative action to seek recovery on the company’s behalf either as a 103

[2017] SGCA 40, [2017] 2 SLR 592. The subsidiary was incorporated in Mauritius, and a substantial portion of the corporate group’s business revenue was recognised in its accounts, presumably for tax planning purposes. The plaintiff parent company was not permitted to claim for losses to the subsidiary’s revenue, which were as a practical matter, losses effectively suffered by the entire corporate group. 105 The defendant director was apparently not a director of the subsidiary: Koh (2018), p. 675. 106 Goh Chan Peng v Beyonics Technology Ltd [2017] SGCA 40, [2017] 2 SLR 592 [71]. 107 Johnson v Gore Wood [2002] 2 AC 1 (HL) 35–36; Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR(R) 597 [68]. 108 [2002] 2 AC 1 (HL) 35–36, followed in Townsing Henry George v Jenton Overseas Investment Pte Ltd [2007] SGCA 13, [2007] 2 SLR(R) 597 [68]–[89]. 104

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common law derivative action,109 or a statutory derivative action.110 Third, the shareholder brings a claim for shareholder oppression under section 216 of the Singapore Companies Act, seeking pro rata compensation for the losses caused by the director. The derivative action and shareholder oppression remedy are discussed in further detail at Sect. 5.3 below.

4.10

Defences

A director may be excused from liability for breaches of director duty at common law and statute under section 391 of the Singapore Companies Act, which provides relief where111: the director acted honestly, has acted honestly and reasonably and that, having regard to all the circumstances of the case . . ., he ought fairly to be excused . . . either wholly or partly from his liability on such terms as the court thinks fit.

5 Shareholder Rights and Remedies The protection offered to minority shareholders in corporate groups is relatively limited. Individual shareholders are generally free to vote, transfer, or deal in their own shares as they think fit. Commonwealth courts, including Singapore’s, have persistently refused to impose duties between shareholders inter se, because the idea that shareholders own their own shares for their own benefit, and not for the benefit of others is unchallengeable doctrine in Commonwealth corporate law (MacIntosh et al. 1991, pp. 99–100). However, given the risk of opportunistic behaviour by the company’s controllers (i.e. the directors and majority shareholders) against minority shareholders, minority shareholder protection in Singapore corporate law112 include (1) shareholder information rights; (2) restrictions associated with alterations of the corporate constitution and invalidation of shareholder resolutions; (3) shareholder remedies for corporate and/or personal wrongs; (4) government investigations; and (5) regulation of changes in corporate control. An added difficulty in corporate groups is that a shareholder of a company may suffer indirect harm from actions undertaken in

109

Shareholders have been permitted to bring common law derivative actions on behalf of foreign companies, which do not fall within the ambit of Singapore’s statutory derivative action: Ting Sing Ning v Ting Chek Swee [2007] SGCA 49, [2008] 1 SLR(R) 197. 110 Singapore Companies Act, s 216A. 111 Singapore Companies Act, s 391(1). 112 In the interests of brevity, I do not consider shareholder protection offered by securities law or under the SGX Listing Rules in this Part.

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relation to a related company; for example, the controllers (i.e. the directors or majority shareholders) of the parent company may make decisions that are prejudicial to the interests of its subsidiaries, and by extension the subsidiary’s shareholders. The rights, restrictions, and remedies surveyed in these five categories confer varying degrees of protection for shareholders in corporate groups, with the oppression remedy discussed at Sect. 5.3.2 below arguably providing the most effective protection for minority shareholders.

5.1

Shareholder Information Rights

The Singapore Companies Act provides that every shareholder of a company has the right to inspect the following registers and documents: • • • • • • • •

The register of shareholders113; The register of directors, shareholders, managers and auditors114; The register of directors’ shareholdings115; The register of substantial shareholders, being every person who has an interest in not less than 5% of the company’s voting rights116; The register of debenture holders117; The register of charges118; A copy of the company’s last audited profits and loss balance sheet, the company’s consolidated accounts, together with the auditors’ report on the accounts and the corresponding directors’ report119; and Minutes of the company’s general meetings.120

However, shareholders do not have full access to all the company’s accounting records121 or the minutes of the directors’ meetings. In the corporate group context, it is crucial to note that the Singapore Companies Act does not specifically grant shareholders the right to inspect the registers, records, or documents of the

113

Singapore Companies Act, ss 12(2D) (private companies), 190–196 (private and public companies). 114 Singapore Companies Act, ss 12 (2C), 173–173H. 115 Singapore Companies Act, ss 12(2C), 164–165. 116 Singapore Companies Act, ss 79–91. 117 Singapore Companies Act, s 93. 118 Singapore Companies Act, ss 131–134. 119 Singapore Companies Act, ss 203–203A. 120 Singapore Companies Act, ss 188–189. 121 Singapore Companies Act, ss 201, 203; Ezion Holdings Ltd v Teras Cargo Transport Pte Ltd [2016] SGHC 175, [2016] 5 SLR 226 [12]–[13].

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company’s related companies (i.e. parent, subsidiary, or fellow subsidiaries), save for those records which must be made available to the public.122

5.2

Invalidation of Alterations to the Company’s Constitution and Shareholder Resolutions

Generally, the company’s constitution may be altered through a special resolution passed by a supermajority (75% or more) of the shareholders present and voting.123 Majority shareholders thus have both the ability and incentive to alter the company’s articles for their own benefit, rather than the company’s. While minority shareholders have a right to vote for or against the resolution, they will naturally be at disadvantage since they can be overruled by the majority. What can a minority shareholder do to challenge a powerful majority that exercises its powers against the minority’s interests? One possible (and costly) option is to mount a court challenge against the validity of shareholder resolutions or alterations to the corporate constitution passed by the majority shareholders. Commonwealth courts have held that alterations to the corporate constitution can be invalidated if they are not in the interests of the company as a commercial entity,124 but successful cases are exceptionally rare (Hollington 2017: [5-50]). Section 392 of the Singapore Companies Act provides that the court may invalidate a shareholder resolution by reason of a procedural irregularity that has caused or may cause substantial injustice to an interested party, and which cannot be remedied by a court order.125 However, even if the resolution is invalidated by the court, the majority shareholders may simply proceed to ‘redo’ the resolution in full compliance with the necessary procedural requirements, rendering the minority shareholder’s efforts entirely moot.126

122 See e.g. Singapore Companies Act, ss 12(2) (register of directors, chief executive officers, secretaries and auditors for all companies, and register of shareholders for private companies), 88 (register of substantial shareholdings), 131 (register of charges). 123 Singapore Companies Act, ss 26, 26A, 184. 124 See e.g. Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 65 (Eng CA); Shuttleworth v Cox Bros & Co (Mainhead) Ltd [1927] 2 KB 9 (Eng CA); Peters American Delicacy Co Ltd v Heath (1939) 61 CLR 457 (HC Aust). 125 Singapore Companies Act, s 392; Thio Keng Poon v Thio Syn Pyn [2010] SGCA 16, [2010] 3 SLR 143. 126 See Thio Syn Kym Wendy v Thio Syn Pyn [2017] SGHC 169 [22].

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Shareholder Remedies

The two most practical remedies for a shareholder in a corporate group are the derivative action and the oppression remedy. The oppression remedy—also known as the ‘unfair prejudice’ remedy in other Commonwealth jurisdictions—is arguably the most popular shareholder remedy in Singapore, and the most useful where corporate groups are concerned.

5.3.1

Derivative Action: Common Law and Statutory

The derivative action permits ‘shareholders to commence or intervene in litigation on the company’s behalf in order to remedy wrongs done to the company’ (Tang 2016, p. 471). Derivative actions in Singapore may take two forms: either as a statutory derivative action under section 216A of the Singapore Companies Act,127 or through the common law derivative action.128 The statutory derivative action is only available to Singapore-incorporated companies,129 while the common law derivative action is apparently available to all companies, including foreign companies not incorporated in Singapore.130 The statutory derivative action is generally more popular than the ‘common law’ derivative action; the latter has been criticised for being complex and restrictive, and is rarely invoked (Tjio et al. 2015: [10.036]). A ‘multiple’ derivative action refers to a derivative action brought by a shareholder with an indirect interest in a company, as would be the case where the shareholder of a parent company seeks to commence proceedings on behalf of a related company. While Commonwealth jurisdictions have permitted multiple derivative actions to be brought under the statutory and common law variants of the derivative action, multiple derivative actions are not as yet expressly permitted in Singapore,131 although the weight of Commonwealth precedent suggests that there is room for the Singapore courts to follow likewise (Tjio et al. 2015: [10.043]– [10.047]).

127

Singapore Companies Act, ss 216A–216B. The common law derivative action created as an equitable exception to the proper plaintiff rule: Ting Sing Ning v Ting Chek Swee [2007] SGCA 49, [2008] 1 SLR(R) 197 [12]–[13]. 129 Singapore Companies Act, s 216A read with s 4(1). 130 ‘Common law’ derivative actions have been commenced on behalf of Hong Kong-incorporated companies in Singapore; see Ting Sing Ning v Ting Chek Swee [2007] SGCA 49, [2008] 1 SLR (R) 197. 131 One difficulty with permitting multiple derivative actions under Singapore’s statutory derivative action is that, unlike Canada, New Zealand, and other Commonwealth jurisdictions, section 216A of the Singapore Companies Act does not expressly provide that shareholders with an indirect interest in a company may bring a derivative action on the company’s behalf. However, it is possible that such actions might be permitted under the provision permitting ‘any other person who, in the discretion of the Court, is a proper person to make an application under this section’: Singapore Companies Act, s 216A(1)(c). 128

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Oppression Remedy

The oppression remedy (section 216 of the Singapore Companies Act) offers relief for shareholders unfairly treated by the company’s controllers.132 The Singapore approach is founded on the notion of ‘unfairness’ and may be characterised as a quasi-contractual one: a shareholder’s complaint is deserving of relief where the defendant’s conduct of the company’s affairs has prejudiced133 the petitioner’s interests in their capacity as a shareholder, in breach or contravention of either a right, expectation, or obligation. Such rights, expectations, or obligations stem from two sources, namely (1) legal rights and obligations encapsulated in the corporate constitution, shareholders’ agreements, or other instruments legally binding on the company’s participants134; and (2) informal understandings between the parties modifying or limiting the exercise of strict legal rights or powers135 that might not in and of themselves amount to independently enforceable contracts, but where equitable considerations demand that such understandings be respected. In the corporate group context, a shareholder may rely on the acts and affairs of related companies to support allegations of oppressive or unfairly behaviour by the company’s controllers.136 The oppression remedy thus affords powerful protection for shareholders in corporate groups, which is supported by the court’s wide discretion to grant any remedy it sees fit with a view to ‘bringing to an end or remedying the matters complained of’,137 including but not limited to share buyouts (with or without a claim for pro rata compensation of any losses caused by the corporate controllers) (Koh 2016, pp. 387–389), and winding up.

5.3.3

Just and Equitable Winding Up

As a passing note, amendments to the Singapore Companies Act in 2014 have made it possible for a just and equitable winding up commenced under section 254(1)(i) to be resolved via a court-ordered buyout of the party applying for the winding up.138 However, given that the buyout is within the court’s discretion, there remains

132

The following discussion on the oppression remedy is adapted from Tang (2018). The English and Singapore positions on “prejudice” to the shareholder differ due to differences in the statutory language. Unlike the UK, Singapore’s statutory regime does not expressly require the petitioner to prove that she has suffered ‘prejudice’ to obtain relief: cf Companies Act 2006 (UK), s 994 with Companies Act (Sing.), s 216. The Singapore position is that ‘prejudice’ to the shareholder is an important factor in granting relief, but is not an “essential requirement”: Over & Over Ltd v Bonvests Holdings Ltd [2010] SGCA 7, [2010] 2 SLR 776 [72]. 134 This would include director (fiduciary) duties as provided at common law and in statute: Ng Kek Wee v Sim City Technology Ltd [2014] SGCA 47, [2014] 4 SLR 723 [63]. 135 Such understandings must relate to the company’s affairs: Singapore Companies Act, s 216. 136 Lim Chee Twang v Chan Shuk Kuen Helina [2009] SGHC 282, [2010] 2 SLR 209. 137 Singapore Companies Act, s 216. 138 Singapore Companies Act, s 254(2A). 133

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uncertainty as to when and on what terms would a court order a buyout instead of ordering a winding up.139

5.4 5.4.1

Regulation of Change of Control Takeovers

The takeover regulation system in Singapore essentially tracks the UK model. At its core is a voluntary code—the Singapore Code on Take-overs and Mergers (‘Singapore Takeover Code’)—rather than legislation. The Singapore Takeover Code prescribes conditions for voluntary and mandatory offers that provide some protection for minority shareholders. For voluntary offers, a minimum acceptance condition must be provided if the bidder and its concert parties do not hold more than 50% of the voting rights of the target, and if the bidder makes a voluntary offer.140 The offer can only succeed if the offeror has acquired (either in the offer or otherwise) more than 50% of voting rights in the target. The offeror is permitted to prescribe a higher threshold for the acceptance condition (i.e. 90% of acceptances). This applies to ‘voting rights’ and not simply shares or mere interests in shares. By contrast, a mandatory offer can carry only one condition, that is, that the offer can only succeed if the offeror has acquired (either in the offer or otherwise) more than 50% of voting rights in the target. There cannot be a higher threshold for the acceptance condition.141 A mandatory offer must be made when (1) the acquirer obtains 30% of voting rights; or (2) the acquirer and its concert parties hold not less than 30% but not more than 50% of the voting rights, and the acquirer and its concert parties acquires in any period of 6 months additional shares carrying more than 1% of the voting rights.142 Acquisitions by persons acting in concert will be aggregated with that of the acquirer. The Singapore Takeover Code provides that ‘persons acting in concert comprise individuals or companies who, pursuant to an agreement or understanding (whether formal or informal), cooperate, through the acquisition by any of them of shares in a company, to obtain or consolidate effective control of that company’. This general definition is accompanied by presumptions for (1) parent and subsidiary; (2) a company and its directors; and (3) fund manager and investment company.143

139 For the leading case, see Ting Shwu Ping v Scanone Pte Ltd [2016] SGCA 65, [2017] 1 SLR 95. See also Koh and Tang (2017). 140 Singapore Takeover Code, rule 15.1. 141 Singapore Takeover Code, rule 14.2. 142 Singapore Takeover Code, rule 14.1. 143 Singapore Takeover Code, ‘Definitions’.

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Compulsory Acquisition of Shares

Changes in corporate control may also be effected by compulsory acquisitions of shares: under section 215 of the Singapore Companies Act, a shareholder who holds 90% of the company’s shares may compulsorily acquire the remaining 10% of shares in two situations. First, where a bidder makes an offer that is accepted within 4 months by shareholders holding at least 90% in value of the shares for which the offer has been made, then the bidder may within 2 months after the offer has been accepted, proceed to issue notice to the remaining shareholders (who have not accepted the offer) to compulsorily acquire their shares. The shares of the non-accepting shareholders must be acquired on the same terms that were offered to the accepting shareholders.144 Second, where a controlling shareholder acquires shares in the target under a scheme or contract such that its total shareholdings comprise 90% of the target’s total shares, then the controlling shareholder must notify the minority shareholders of the acquisition, and the minority shareholders can require the controlling shareholder to acquire their shares.145 Dissenting shareholders may seek judicial relief, in which case the court will be required to determine the fairness of the acquisition process. A dissenting shareholder may challenge the compulsory acquisition within one month from the date that notice for the compulsory acquisition is issued.146 Commonwealth courts have generally been reluctant to interfere when the statutory requirements are met, given that the 90% threshold is onerous (Wan and Varottil 2013, p. 633).

5.4.3

Scheme of Arrangement

A scheme of arrangement can either be between a company and its members or a class of them; or a company and its creditors or a class of them.147 A scheme of arrangement is particularly useful where the initiating parties wish to bind all shareholders or creditors of the company to the arrangement. The procedure for a scheme of arrangement generally involves three stages. First, the target company will apply to the court for scheme meetings to be held. The court can give guidance at this stage as to the conduct of the scheme meetings. Second, in order for the scheme meetings to be held, the company will have to classify the creditors or shareholders into various classes according to their interests. It is crucial for the classification to be performed correctly so that the statutory voting requirement can be complied with. Scheme meetings will then be held, and approval must be obtained from a majority in number representing at least 75% in value of members or class of members present and voting. Finally, once the requisite resolutions are

144

Singapore Companies Act, s 215(1). Singapore Companies Act, s 215(3). 146 Singapore Companies Act, s 215(4). 147 Singapore Companies Act, s 210(1). 145

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obtained, a second application is made to the court for sanction. The scheme of arrangement will take effect upon registration of the court order granting approval. All shareholders or creditors, including those who voted against the scheme, will be bound once the court order is registered.148 Generally, the court may refuse to sanction a scheme where there are serious procedural irregularities such as non-disclosures or misleading statements in the scheme documents.149 Substantial unfairness—as may be the case where shareholders of the target company allegedly receive inadequate compensation under the scheme—may also be a ground on which the court may decline to sanction a scheme, but successful claims have been rare in the Commonwealth (Wan and Varottil 2013, pp. 583–584).

5.4.4

Statutory Amalgamation

Provision for statutory amalgamations is made in sections 215A to 215J of the Singapore Companies Act. This amalgamation procedure allows the bidder and the target to amalgamate and continue as one company, which may be the bidder, the target, or even a new company. Shareholders of an amalgamating company will receive either cash or securities as consideration for the amalgamation. Affected shareholders and creditors may apply to court to challenge the amalgamation or modify the terms through an unfair prejudice application under section 215H. On the assumption that the relevant procedural requirements of section 215A to 215J have been complied with, such that the amalgamation cannot be challenged for procedural defects, the court may find that there is unfair prejudice in two situations. First, where shareholder approval has been obtained for the amalgamation through a special resolution, but there are complaints of procedural unfairness, such as where inadequate information or advice has been provided to shareholders, or when approval is obtained by non-independent shareholders, namely shareholders that will obtain a collateral benefit from the transaction. Second, where the consideration paid to shareholders is inadequate, and thus substantively unfair (Wan and Varottil 2013, pp. 596–607). The court has the power under s 215H to make any order as it thinks fit in relation to the amalgamation proposal, including directions to not give effect to the amalgamation proposal, or modifying the amalgamation proposal.

148

Singapore Companies Act, s 210. The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) v TT International Ltd [2012] SGCA 53, [2012] 4 SLR 1182 (upholding scheme of arrangement notwithstanding scheme manager’s failure to disclose its substantial success-based fee to creditors).

149

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6 Creditor Protection and Insolvency Beyond the director duties relating to insolvency discussed at Sect. 4.7 above, the Singapore Companies Act (and Singapore Bankruptcy Act150) contain avoidance provisions that allow for the unravelling of pre-liquidation and post-liquidation transactions that would have remained binding on the company but for the winding-up. If successfully invoked, they mandate the return of property transferred by the transactions, or a reversal of the effects of the transaction. Avoidance provisions relating to (1) transactions at an undervalue and (2) unfair preference are generally relevant to creditor protection in corporate groups, and are discussed here.

6.1

Transactions at an Undervalue

A transaction at an undervalue may be rendered invalid where the transaction is made within a 5 year period ending on the date of the winding up application.151 The company must have been insolvent at the time of the transaction, or had become insolvent due to the transaction152; this requirement is deemed to be satisfied if the transaction is with an associate other than an employee.153 A transaction with a person will be deemed to be at an undervalue where it is (1) a gift or a transaction for no consideration; (2) a transaction in consideration of marriage (not applicable to companies); or (3) a transaction for a consideration, in money or money’s worth, that is significantly less than the value of the consideration provided by the company.154 The definition of ‘associate’ would implicate corporate groups, as it includes a company controlled by the individual or by individual and his associates155; an individual is deemed to control the company if the directors of the company or the company’s controlling company ‘are accustomed to act in accordance with the [individual’s] directions or instructions’, or are entitled to exercise or control the exercise of at least one-third of the voting power of the company or the company controlling the company.156 Where the individual is a company, company X is associate of company Y if (1) X and Y are controlled by same person, or X is controlled by one person and Y is controlled by that person’s associates or by that person and their associates; or (2) X and Y are controlled by groups of more than

150

Specific provisions of the Singapore Bankruptcy Act (Cap 20, Rev Ed 2009) are deemed to apply to corporate insolvency: Singapore Companies Act, s 329. 151 Singapore Bankruptcy Act, s 100(1)(a). 152 Singapore Bankruptcy Act, s 100(2). 153 Singapore Bankruptcy Act, s 100(3). 154 Singapore Bankruptcy Act, s 98(3). 155 Singapore Bankruptcy Act, s 101(6). 156 Singapore Bankruptcy Act, s 101(9).

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1 person, with the 2 groups either being the same persons, the same persons’ associates, or a mix thereof.157 A transaction will not be rendered invalid if the company which entered into the transaction did so in good faith and for purposes of carrying on its business, and at the time it did so, there were reasonable grounds for believing that the transaction would benefit the company.158

6.2

Unfair Preference

A transaction at an undervalue may be rendered invalid where the transaction is made (1) 6 months from date of the bankruptcy or winding up application for parties which are unrelated to the insolvent party; or (2) 2 years from date of the bankruptcy or winding up application for ‘associates’ or ‘persons connected to’159 the insolvent party other than employees of the insolvent party.160 The company must have been insolvent at the time of the transaction, or had become insolvent due to the transaction.161 The definition of ‘associate’ is the same as for transactions at an undervalue. The transaction must have been influenced by a desire to prefer the recipient. With respect to corporate groups, it should be noted that when an unfair preference is given to an associate or a ‘person connected to the company’, there is a presumption he was influenced by a desire to prefer.162 The onus is on recipient/procurer to rebut that statutory presumption and prove on a balance of probabilities that the transactions ‘were not influenced at all by any desire’ of company to prefer the associate,163 such as by showing that only proper commercial considerations applied (e.g. obtaining new value to keep the business going).164 Generally, a bona fide purchaser for involved in the transaction who did not have notice of the circumstances and relevant proceedings may be able to resist the unwinding of the transaction; however, if the purchaser is an associate or person

157

Singapore Bankruptcy Act, s 102(7)(a)–(b) read with Companies (Application of Bankruptcy Act Provisions) Regulations, reg 5. 158 Companies (Application of Bankruptcy Act Provisions) Regulations, reg 6. 159 The ‘persons connected with a company’ include the (1) associates of the company; (2) company’s directors; (3) associates of directors or shadow directors: Singapore Companies Act, ss 329, 227T read with Singapore Bankruptcy Act, ss 102(8)–(9). This definition would also include another company with whom the company shares directors: Shaw Theatres Pte Ltd (in Liquidation) v Shaw Theatres Pte Ltd [2002] SGCA 42, [2002] 2 SLR(R) 1143. 160 Singapore Bankruptcy Act, s 100(1)(b)–(c). 161 Singapore Bankruptcy Act, s 100(2). 162 Singapore Bankruptcy Act, s 99(5). 163 Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd [2010] SGCA 31, [2010] 4 SLR 1089 [36]. 164 Living the Link Pte Ltd v Tan Tina [2016] SGHC 67, [2016] 3 SLR 621.

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connected with the company, the purchaser is presumed to have received a benefit otherwise than in good faith.165

7 Corporate Liability and Veil Piercing The Singapore courts have gradually departed from vague metaphors—such as ‘sham’ or ‘façade’—that were hitherto invoked to justify piercing the corporate veil, and presently taken the position that it is the ‘abuse’ of the corporate form that is the basis for such veil piercing cases.166 Singapore courts have thus endorsed veil piercing in ‘evasion’ cases, where a company has been interposed to frustrate the enforcement of a pre-existing independent legal right by a plaintiff against the controller of the company. By contrast, cases where the corporate form is merely used to ‘conceal’ the real parties to the transaction or act in question do not require the court’s intervention to pierce the corporate veil because the court may simply examine the corporate structure to determine the identity of the parties.167 The Singapore courts have also justified lifting the corporate veil based on the ‘alter ego’ ground, namely where the company was carrying on the business of its controller and the controller made no distinction between themself and the company.168 Finally, the ‘single economic entity’ justification for veil piercing—that the companies and/or its controllers should be regarded as a single economic entity and held collectively liable in respect of the plaintiff’s claim—has been emphatically rejected by Singapore’s apex court. While this might provide some comfort to some participants in corporate groups, it can also create enormous difficulties for the enforcement of director duties, as discussed at Sect. 4.9 above.

8 Financial Reports, Accounting and Audit Requirements The Singapore Companies Act requires directors of Singapore-incorporated companies to prepare financial statements. Directors of parent companies of corporate groups must prepare consolidated financial statements including information on the financial position and performance of the group, and a balance-sheet dealing

165

Singapore Bankruptcy Act, ss 102(3)–(3A). Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd [2014] SGHC 181, [2014] 4 SLR 832 [95]–[96]. 167 ibid; Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 [28]–[30]. Tan (2016), pp. 211–212. 168 Alwie Handoyo v Tjong Very Sumito [2013] SGCA 44, [2013] 4 SLR 308. 166

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the parent company’s state of affairs at the end of its financial year.169 The financial statements must comply with the stipulated Accounting Standards,170 commonly known as the Financial Reporting Standards, issued by the Accounting Standards Council. Companies may be exempted from financial statement requirements under the exceptions provided under the Singapore Companies Act.171 Otherwise, failure to comply with the statutory requirements is a punishable offence for directors by fine (not exceeding SGD50,000),172 and where non-compliance is egregious, by fine (not exceeding SGD10,000) or imprisonment (not exceeding 2 years).173

9 Conclusion As of 2018, Singapore’s legal regime on corporate groups has not been developed either legislatively or judicially through case law with any clear awareness of corporate groups as a distinct phenomenon that calls for specific and tailored regulation, as might be the case in some European civil law jurisdictions such as Germany. However, Singapore corporate law in general does contain features that may in some circumstances perform the function of corporate group regulation; examples include the regimes on related party transactions, director duties, and shareholder remedies. Given the relative lack of awareness of corporate groups as a clearly identifiable corporate law subfield in the scholarly literature to date, it may be some time before the necessary preconditions for the development of targeted legal regulation are satisfied in Singapore. Acknowledgements I thank Dan W Puchniak and Alan K Koh for their comments and advice on earlier drafts. I have endeavoured to state the legal position as of 30 June 2018. Funding support from the Centre for Asian Legal Studies, Faculty of Law, National University of Singapore is gratefully acknowledged.

References Armour J, Enriques L et al (2017) The anatomy of corporate law, 3rd edn. Oxford University Press Hollington R (2017) Hollington on shareholders’ rights, 8th edn. Sweet and Maxwell Koh AK (2016) Reconstructing the reflective loss principle. J Corp Law Stud 16:371 Koh AK (2018) (Non-)enforcement of directors’ duties in corporate groups. Mod Law Rev 81:673

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Singapore Companies Act, s 201(5). Singapore Companies Act, ss 4(1), 201(12); Accounting Standards Act (Cap 2B, Rev Ed 2008). 171 See e.g. Singapore Companies Act, ss 201(12), 201A, 202. 172 Singapore Companies Act, s 204(1). 173 Singapore Companies Act, s 204(1A). 170

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Koh AK, Tang SS (2017) Towards a “just and equitable remedy” for companies. Law Q Rev 133:372 Langford RT, Ramsay IM (2017) The proper purpose rule as a constraint on directors’ autonomy – Eclairs Group Limited v JKX Oil & Gas plc. Mod Law Rev 80:110, 111 MacIntosh JG et al (1991) The puzzle of shareholder fiduciary duties. Can Bus Law J 19:86 Tan ZX (2016) The new era of corporate veil-piercing: concealed cracks and evaded issues? Singap Acad Law J 28:209 Tang SS (2016) Corporate avengers need not be angels: rethinking good faith in the derivative action. J Corp Law Stud 16:471 Tang SS (2018) Corporate divorce in family companies. Lloyd’s Marit Commer Law Q:19 Tjio H (2005) The rationalization of directors’ duties in Singapore. Singap Acad Law J 17:52 Tjio H et al (2015) Corporate law. Academy Publishing Wan WY, Varottil U (2013) Mergers and acquisitions in Singapore: law and practice. LexisNexis

National Report on Croatia Nina Tepeš, Hrvoje Markovinović, and Petar Miladin

Abstract Croatian Commercial Companies Act contains no legal definition of what constitutes control and its exercise within the group of companies. Rather, controlled company is defined as being a legally independent company over which another company (controlling company) may, directly or indirectly, exert a prevailing influence. Legal definition of the group of companies presupposes that the controlling and (either one or more) controlled companies are subject to the uniform management on behalf of the controlling company. Group of companies does not have a specific legal form nor is it considered to be a separate legal entity. Legally independent companies are forming a group because they are affiliated in accordance with relevant provisions of CCA. On account of such an affiliation, companies within a group are considered to form an economic unity. Commercial Companies Act provides for a rebuttable presumption that the controlling and (either one or more) controlled companies form a factual group of companies. However, prevailing influence may also be established when companies conclude certain types of entrepreneurial contracts, most notably the contract on the management of company’s business. Conclusion of such a contract leads to an irrebuttable presumption that those companies are subject to the uniform management and are forming the so-called contractual group of companies which consists of the controlling and controlled company.

1 Affiliated Companies: General Overview Rules regarding affiliated companies form a part of Croatian corporate law, and are contained in Commercial Companies Act (hereinafter: CCA). CCA came into force on 1 January 1995 and is largely modeled upon its German counterpart.1

1

For historical background of Croatian corporate law, see Barbić et al. (2016), p. 27 et seq.

N. Tepeš (*) · H. Markovinović · P. Miladin Faculty of Law, University of Zagreb, Zagreb, Croatia e-mail: [email protected]; [email protected]; [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_19

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Consequently, provisions on affiliated companies [Croatian: povezana društva], contained in Arts. 473 – 511 CCA, substantially correspond to the German regulation [German: verbundene Unternehmen] contained in the Third Book of the German Aktiengesetz (hereinafter: AktG). Affiliated companies are defined as legally independent companies which, depending upon the degree of affiliation, may be connected: 1. 2. 3. 4. 5.

by means of majority participation2; as a controlled and controlling company3; as a group of companies4; as companies with cross-shareholdings; and as companies affiliated by entrepreneurial contracts.5

Above enumerated five types of affiliation constitute a closed list. Consequently, CCA’s provisions relating to the affiliated companies in general (and to the group of companies in particular) do not apply when affiliation is based upon either pure economic control or some other contractual relation lacking specific corporate basis.6 Each of the specific five types of affiliation is succinctly defined in the following text. Affiliation by majority participation exists when a company has either majority shareholding or majority voting rights in another legally independent company.7 CCA further on provides for a rebuttable presumption that a company is deemed to be controlled by a company which has the majority participation in it.8 As soon as one company acquires majority participation in another company, it must thereof notify that company in writing and without delay.9 Controlled company is defined as being a legally independent company over which another company (controlling company) may, directly or indirectly, exert a prevailing influence.10

2

We opted to translate Croatian legal term većinsko sudjelovanje as majority participation. It should however be noted that legal theory interchangeably translates the term as majority holding. See Petrović (2001), p. 288. 3 Regarding legal terminology, it should be noted that terms controlled and controlling company [Croatian: ovisno i vladajuće društvo; German: abhängige und herrschende Unternehmen] are sometimes interchangeably used with terms parent and subsidiary company. See Barbić et al. (2016), p. 102. This report uses terminology which is encountered in the specific legal text which is being analysed. In other words, terms controlled and controlling company will be used in reference to CCA, and terms parent and subsidiary company in reference to Accounting Act (see Sect. 4.1) and Act on Credit Institutions (see Sect. 4.5). 4 Croatian: koncern; German: der Konzern. 5 Art. 473 CCA. 6 See also Barbić (2008), p. 638. 7 Art. 474, para. 1 CCA. 8 Art. 475, para 2 CCA. 9 Art. 478, para. 3 CCA. 10 Art. 475, para. 1 CCA.

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Further on, when a controlling company and one or more controlled companies are subject to the uniform management by a controlling company, they constitute a group of companies and individual companies are companies within a group.11 The legal concept of the controlling company (and its relation to the controlled company), as well as the concept of the group of companies, is further elaborated upon under the separate headings below.12 Companies with cross-shareholdings are capital companies13 with their seat in the Republic of Croatia which are affiliated in such a way that each company holds more than one quarter of shares in another company.14 If one of the companies has a majority shareholding in another company or if one of the companies may, directly or indirectly, exert a prevailing influence over another company, then such a company is considered to be the controlling company and other company is considered to be a controlled company.15

11

Art. 476, para. 1 CCA. See Sects. 2 and 3. 13 In Croatian law, companies are categorized as being either personal or capital companies. Personal companies are simple partnership [Croatian: ortaštvo], silent partnership [Croatian: tajno društvo], general partnership [Croatian: javno trgovačko društvo], limited partnership [Croatian: komanditno društvo], economic interest grouping (EIG) [Croatian: gospodarsko interesno udruženje], cooperative partnership [Croatian: zadruga], cooperative partnership union [Croatian: zadružni savez] and association [Croatian: udruga]. Capital companies are public limited company [Croatian: dioničko društvo], limited liability company [Croatian: društvo s ograničenom odgovornošću], mutual insurance company [Croatian: društvo za uzajamno osiguranje] and credit union [Croatian: kreditna unija]. For different forms of corporations and partnerships in Croatian law and various criteria for their categorization, see Barbić et al. (2016), p. 31 et seq. See also Barbić (2008), pp. 153–159. 14 Art. 477, para. 1 CCA. As per Art. 478, para. 1 CCA, as soon as one company acquires more than one quarter of shares in another company with its seat in Croatia, it must thereof notify that company in writing and without delay. Further on, Art. 511, para. 1 CCA provides that companies with cross-shareholdings may exercise their rights arising out of shares, but only up to one quarter of shares held in the other company. However, such an exercise of rights will be possible only if companies are aware of the existing cross-shareholdings or were notified about it in accordance with Art. 478 CCA. If a company fails to notify about acquisition which exceeds one quarter of shares, it will not be able to exercise its rights arising out of its shares in other company. See Art. 478, para. 6 CCA. 15 Art. 477, para. 2 CCA. Art. 477, para. 3 CCA further on provides that if each of the companies affiliated by means of cross-shareholdings have a majority of shares in another company or if each of these companies may, directly or indirectly, exert a prevailing influence on the other company, then both companies are considered to be controlling and controlled company. Although an obligation regarding notification of affiliation from Art. 478 CCA also applies in situations in which controlled and controlling companies are affiliated by means of cross-shareholdings, the existence of such a control has an additional important consequence. Namely, the controlled company will not be able to exercise its rights in the controlling company because of the presumption that the shares it holds in the controlling company are company’s own shares (treasury shares). 12

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Finally, CCA expressly provides for six types of entrepreneurial contracts16: 1. 2. 3. 4. 5. 6.

contract on management of company’s business17; contract on transfer of profits; contract on profit pool; contract on partial transfer of profits; lease of operations contract; and conveyance of operations contract.

Contract on management of company’s business is a contract by which a capital company submits its management to another company.18 Being of particular importance in situations involving groups of companies, this contract will be further analyzed in the following text.19 Contract on transfer of profits is a contract by which a capital company undertakes an obligation to transfer its entire profits to another company. Such a contract also includes a contract by which a capital company agrees to perform its business operations20 on behalf of (i.e. for the account of) another company.21 Contract on transfer of profits creates a rebuttable presumption that companies are affiliated as the controlling and controlled companies and is usually entered into parallel with the contract on management of company’s business.22 Contract on profit pool is a contract by which a capital company undertakes an obligation to pool its profits or the profits from parts of its business operations23 in whole or in part with the profits of other companies or certain business operations of other companies, with the goal of sharing joint profit.24 Contract on partial transfer of profits is a contract by which a capital company undertakes an obligation to transfer part of its profits or the profits from parts of its business operations25 in whole or in part, to another person.26

16

CCA contains special provisions relating to conclusion, amendment and termination of entrepreneurial contracts (Arts. 481–486). See also Barbić et al. (2016), p. 105. 17 Contract of management of company’s business [Croatian: ugovor o vođenju poslova društva; German: der Beherrschungsvertrag] is often also translated as a control contract. See Petrović (2001), p. 292. Terms contract on management of company’s business and control contract will thus be used interchangeably. 18 Art. 479, para. 1 CCA. 19 See Sect. 3.1. 20 Croatian: poduzeće; German: die Unternehmen. 21 Art. 479, para. 1 CCA. 22 See Barbić et al. (2016), p. 106. If the contract on transfer of profits is entered into without the contract on management of company’s business, controlling company will not have an authority to issue binding instructions to the controlled company. To that effect, see Barbić (2008), p. 722. 23 Croatian: pogon; German: der Betrieb. 24 Art. 480, para. 1 (1) CCA. 25 Croatian: pogon; German: der Betrieb. 26 Art. 480, para. 1 (2) CCA.

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Lease of operations contract is a contract by which a capital company leases the operation of its business to another person,27 to run it in its own name and on its own behalf. Conveyance of operations contract is a contract by which a capital company conveys the operation of its business to another person,28 to run it in the name of the company but on its own behalf. Finally, although not expressly governed by the CCA, Croatian law recognizes an additional, seventh, type of entrepreneurial contract—contract to manage operations.29 It is a contract by which one contracting party undertakes an obligation to manage operations of another company on behalf of (i.e. in the name of and for the account of) that company.

2 Definition of Control When it comes to the definition of control (and its exercise within the group of companies), one must be careful to distinguish between two relevant legal concepts: prevailing influence and uniform management. This is particularly important in terms of comparative analysis as the CCA does not contain an express definition of what constitutes such a control, but rather opts to define the group of companies simply as the companies which are subject to uniform management. However, although CCA takes the legal concept of uniform management from the German AktG,30 it should be stressed that the legal definition of the group of companies is (in)directly linked with the concept of prevailing influence, being the central concept used to define what constitutes controlled companies.31 Namely, as was already mentioned, Art. 475, para. 1 CCA provides for a statutory definition of the controlled company by stating that it is a legally independent company over which another (controlling) company may (directly or indirectly) 27

Art. 480, para. 1 (3) CCA. Art. 480, para. 1 (3) CCA. 29 See Barbić (2008), p. 731 et seq. 30 As will be shown further on in the text, Croatian law follows the German concept of uniform management (§ 18 AktG), providing for a statutory definition of a group of companies [Croatian: koncern; German: der Konzern] as a group where a controlling company [Croatian: vladajuće društvo; German: das herrschende Unternehmen] and one or more controlled companies [Croatian: ovisno društvo; German: das abhängige Unternehmen] are subject to the uniform management [Croatian: jedinstveno vođenje; German: die einheitliche Leitung] on behalf of the controlling company. See Sect. 3. 31 For the purpose of clarity, it should be stressed out that the concept of control (as used in the Croatian law and this report) does not necessarily correspond to the meaning of that term as used in Section 4 et seq. of Chapter 16 of the 2013 European Model Company Act (EMCA), inasmuch as the concept of the prevailing influence [Croatian: prevladavajući utjecaj] is taken over from § 17 AktG [German: der Beherrschender Einfluss]. Likewise, neither does the concept of the group of companies necessarily correspond to the one used in Section 1 of the 2013 EMCA. 28

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exert a prevailing influence. It thus follows that the concept of control presupposes the existence of the prevailing influence. The controlling company does not need to effectuate such an influence in practice, as the mere prospect that it may do so is considered enough.32 In addition, the assessment of whether the controlling company exerts prevailing influence must be analyzed from the perspective of the controlled (rather than controlling) company.33 Art. 475, para. 2 CCA provides for a rebuttable presumption that a company is deemed to be controlled by a company which has the majority participation in it. Article 475, para. 3 CCA further on sets out (again, by means of a rebuttable presumptions) that a company may have prevailing influence over another company if: (i) as a shareholder, it has the right to elect and/or appoint, to revoke the appointment and/or recall the majority of the members of the management board or the majority of the members of the supervisory board; or (ii) based upon the agreement with other shareholders, it has control over the majority of the voting rights in the company. As can be observed, the prevailing influence will be considered to exist when the controlling company is in a position to substantially affect important (albeit not necessarily all) areas of business activities of the controlled company.34 Such an influence may be either direct (with the controlling company exercising direct influence) or indirect (with the controlling company exercising its influence indirectly through some other, also controlled, company).35 Prevailing influence must have corporate (i.e. organizational) rather than mere contractual background. Consequently, contractual dependence of an economic nature will in itself not be enough to establish prevailing influence.36 In turn, the legal definition of the group of companies (provided by Art. 476, para. 1 CCA) presupposes that the controlling and (either one or more) controlled companies are subject to the uniform management on behalf of the controlling company. In addition, same provision further on provides for a rebuttable presumption that the controlling and (either one or more) controlled companies form a factual group of companies.37 However, prevailing influence may also be established when companies conclude certain types of entrepreneurial contracts,38 most notably the contract 32

See also Barbić (2008), p. 643. See also Barbić (2008), p. 644. 34 See also Barbić (2008), p. 644. 35 See Barbić (2008), p. 645. See also Petrović (2001), p. 289. 36 See Barbić (2008), p. 644. See also Petrović (2001), p. 289. 37 In such a scenario, CCA provides for a specific set of rules (Art. 496–Art. 502) which regulate the liability and relations between the controlling and controlled companies. See Sect. 3.3. 38 See Barbić (2008), p. 645. The author states that the prevailing influence may be realized based upon the conclusion of contract on management of company’s business (control contract), contract on transfer of profits and conveyance of operations contract (in part in which conveyance relates to the entire enterprise), while conclusion of contract on profit pool, contract on partial transfer of 33

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on the management of company’s business. Conclusion of such a contract leads to an irrebuttable presumption that those companies are subject to the uniform management and are forming the so-called contractual group of companies which consists of the controlling and controlled company.39 The above shows that legal analysis of separate legal concepts of prevailing influence and uniform management must take into account the interdependency of three types of affiliation: (1) affiliation by majority participation, (2) controlled and the controlling companies and (3) the group of companies. Namely, affiliation by majority participation triggers the presumption relating to the control (rebuttable presumption that a company is controlled by a company which has the majority participation in it),40 which then triggers the presumption relating to the group of companies (either a rebuttable presumption that the controlling and the controlled company constitute a group of companies or an irrebuttable presumption that companies which concluded a contract on the management of company’s business are in fact affiliated—controlled and controlling—companies).41 CCA’s provisions relating to these three types of affiliations apply irrespective of company’s form (i.e. they apply to affiliations of both personal and capital companies).42 Apart from the specific rules applying to contractual and factual group of companies (which are elaborated upon further on in the text),43 the existence of control also creates a number of separate corporate law consequences. Thus, as far as public limited company is concerned, CCA rules provide that, e.g., controlled company may not acquire shares of the controlling company and the company in which there is a majority shareholding must not acquire shares of the company which has such a shareholding as its founder, either during subscription of shares upon formation or during the increase and conditional increase of the share capital of the company44; member of the management board of the controlled company must

profits and lease of operations and conveyance of operations contracts (when they relate to part of the enterprise) may result in the existence of the prevailing influence provided that other relevant circumstances are met. 39 Art. 476, para. 1 CCA. It therefore also follows that companies which concluded a contract on the management of company’s business (control contract) are, also by means of an irrebuttable presumption, considered to be affiliated (controlled and controlling) companies. 40 Art. 475, para. 2 CCA. 41 Art. 476, para. 1 CCA. 42 The third and fourth type of affiliation (companies with cross-shareholdings and companies affiliated by entrepreneurial contracts) must be differentiated according to the specific form of the companies that are being affiliated. Namely, companies with cross-shareholdings must always be capital companies with their seat in the Republic of Croatia. When it comes to entrepreneurial contracts, the party performing characteristic performance under the contract (e.g. party submitting management of its business, wholly or partially transferring its profits, leasing its operations etc.) must be a capital company with its seat in the Republic of Croatia. The other contracting party may be a company of any legal form (either a personal or capital). See Petrović (2001), p. 292. 43 See Sects. 3.1 and 3.3. 44 Art. 219, para. 2 CCA.

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not be a member of the supervisory board of the controlling company45; company may acquire its own (treasury) shares even without an authorization by the general assembly if shares are acquired in order to serve as a severance fee for either shareholders or minority shareholders of the controlled companies.46

3 Definition of Group of Companies Statutory definition of group of companies is contained in Art. 476, para. 1 CCA. It provides that if a controlling company and one or more controlled companies are subject to the uniform management47 on behalf of the controlling company, then those companies constitute a group of companies with individual companies being companies within a group. As per Art. 476, para. 2 CCA, if two legally independent companies, neither of which is controlled by the other, are subject to uniform management, they shall also constitute a group of companies and the individual companies shall be companies within a group.48 It follows that legal concept of group of companies differentiates between two situations: (1) group of companies consisting of the controlling and (either one or more) controlled companies, and (2) group of companies where neither one of the independent companies is controlled by the other company within a group. In the first situation, controlling and controlled companies (being companies within a group) are affiliated by both prevailing (i.e. controlling) influence and uniform management.49 In the second situation, companies within a group are affiliated only by uniform management.50

45

Art. 255, para. 2 (3) CCA. Art. 233, para. 3 (3) CCA. 47 As will be shown further in the text, Croatian law does not recognize the concept of the interest of the group (comparable to the Rozenblum doctrine), but rather solves the relevant issues relating to the management of the controlled company within the statutory framework of CCA (modelled upon German AktG). 48 Group of companies where neither of the legally independent companies is controlled by the other company within a group is by its legal nature a simple partnership. As this particular type of group of companies consists of companies which are affiliated by means of uniform management without one of them being subordinated to the other—provisions on compensation of damages and liability to company’s creditors designed to be applied in relations between controlled and controlling company (Art. 496–Art. 502 CCA) cannot be applied. See also Barbić (2008), p. 655; Barbić et al. (2016), pp. 103, 104. 49 Art. 476, para. 1 CCA in connection with Art. 475, para. 1 CCA. 50 Art. 476, para. 1 CCA. For such a conclusion, see also Barbić (2008), p. 649. 46

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Group of companies does not have a specific legal form nor is it considered to be a separate legal entity. Legally independent companies are forming a group because they are affiliated in accordance with relevant provisions of CCA. On account of such an affiliation, companies within a group are considered to form an economic unity.51 Uniform management, being an indispensable element of every group, must encompass all companies forming a group in their entirety and must be of a continuous nature.52 As CCA does not prescribe what constitutes uniform management, its existence will have to be determined according to the circumstances. Analysis will thus take into account various modalities of the system of uniform management implemented on behalf of the controlling company. To that extent, uniform management and consequent consolidation of companies within a group can be actualized by means of various instructions, guidelines, either prior or subsequent approvals required for undertaking actions, internal coordination procedures etc.53 In the following text, analysis focuses on the group of companies consisting of the controlling and (either one or more) controlled companies. Art. 476, para. 1 CCA provides for an irrebuttable presumption that companies are subject to uniform management (and are thus forming a group of companies) if they either concluded a contract on the management of company’s business (control contract) or if one company is being integrated into another company. As already mentioned, the same provision further on provides for a rebuttable presumption that controlling and controlled company constitute group of companies. It follows that, according to the way in which they are formed, there are three types of group of companies consisting of one controlling and (one or more) controlled companies: (1) contractual group of companies formed by means of a contract on the management of company’s business (control contract); (2) group of companies formed by integration and (3) factual group of companies encompassing all groups which consist of the controlling and controlled companies, but which are based neither on contract on the management of company’s business nor on integration. Each of those three types, together with the specific rules concerning authorities and liabilities of the members of the group, is elaborated upon in the following text.

3.1

Contractual Group of Companies

Art. 479, para. 1 CCA defines a contract on the management of company’s business (control contract) as a contract by which one capital company submits the

51

See also Barbić (2008), p. 649. See also Barbić (2008), p. 649. 53 See also Barbić (2008), pp. 649, 650. 52

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management of its business to another company. Unless such a contract is concluded on behalf of the companies which are already in relation to each other as a controlled and a controlling company, its conclusion will effectively establish existence of such a control.54 It thus follows that main characteristic of the contract on management of company’s business is the control, i.e. such an affiliation in which legally independent companies are connected as controlled and controlling company.55 As already mentioned, conclusion of the control contract creates an irrebuttable presumption that companies which concluded it are subject to uniform management and are thus forming contractual group of companies consisting of a controlling and controlled company.56 When it comes to the authorities within the contractual group of companies, CCA provides that the controlling company has the authority to give binding instructions to the management board of the controlled company.57 It thus logically follows that the controlling company (in order to be able to give such instructions) also has the authority to ask the controlled company to provide it with all relevant information.58 It should however be stressed that the controlling company (although it may give binding instructions), cannot create any obligations on behalf of the controlled company.59 Unless the control contract provides otherwise,60 instructions given by the controlling company may even be detrimental for the controlled company’s interests, as long as they serve the interests of either the controlling company or of the companies affiliated in the same group with the controlling and the controlled company.61 The management board of the controlled company must follow instructions and may refuse them only if it becomes evident (i.e. without the need for conducting an

54 Art. 479, para. 2 CCA further on provides that the contract which subjects companies (neither of which is controlled by the other) to the uniform management is not a contract on the management of company’s business (control contract) if neither of the companies becomes controlled company as a result of its conclusion. 55 See also Barbić (2008), p. 694. 56 Art. 476, para. 1 CCA. It therefore also follows that companies which concluded a control contract are, also by means of an irrebuttable presumption, considered to be affiliated (controlled and controlling) companies. To that effect, see also Gorenc (2001), p. 9. 57 Art. 493, para. 1 and 2 CCA. See also Jurić (2002), p. 518 et seq. 58 See also Barbić (2008), p. 714. 59 As confirmed by the Supreme Court of the Republic of Croatia, in its decision Revt 60/04-2 of 6 October 2004. The Supreme Court noted that the controlled company maintains its legal independence, which means that the controlling company cannot create obligations on behalf of it, irrespective of the fact that these companies concluded a contract on the management of company’s business (control contract). 60 Parties to the control contract could provide that instructions may not be given in regard to e.g. certain issues. However, it is important to recognize that the controlling company’s right to give instructions (including the detrimental ones) could not be excluded in its entirety by means of a control contract. To that effect, see Barbić (2008), p. 714. 61 Art. 493, para. 1 CCA.

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additional special investigation to that effect)62 that they do not serve the interests of the controlling company or companies affiliated in the same group with the controlling and the controlled company.63 However, the damages that may arise from such instructions may not be disproportionally harmful to the controlled company when compared to potential benefits that may occur on behalf of the entire group. In addition, controlling company’s authority to issue binding instructions must be analyzed by taking into account the principle of creditors’ protection. In other words, instructions which could endanger the existence of the controlled company (e.g. leading to its bankruptcy) would not be allowed and the controlled company would not be obliged to follow them.64 Likewise, controlled company must refuse to follow instructions contrary to either the law or provisions of control contract, duly informing the controlling company thereof. If controlling company gives no instructions, management board of the controlled company must make its managerial decisions in the best interest of the entire group.65 Controlling company has the authority to give binding instructions only to the management board of the controlled company (and not other organs, namely the supervisory board and/or general assembly of the controlled company).66 To that extent, Art. 493, para. 3 CCA provides for a special rule in situations when the management board of the controlled company is instructed to carry out operation which requires prior approval of supervisory board. If the supervisory board of the controlled company fails to give the required approval within the appropriate time, management board shall notify the controlling company thereof. If (after receiving such a notification) controlling company repeats its instruction, the approval of the supervisory board is no longer required. When controlling company has a supervisory board, instructions may be repeated only upon the approval of such a board.67 When it comes to the liability of the legal representatives of the controlling company, CCA provides that, in the process of giving instructions to the controlled company, they must apply the standard of care of a diligent and conscientious businessman. Otherwise, they shall be jointly and severally liable to the controlled company for any damages caused. In case of a dispute, legal representatives of the controlling company bear the burden of proving that they applied the foreseen standard of care.68 The controlling company can also be held liable for damages on account of the breach of the control contract.69 Every member of the company

62

The controlled company will carry the burden of proof. See also Barbić (2008), p. 716. Art. 493, para. 2 CCA. 64 See also Barbić (2008), p. 713. 65 See also Barbić (2008), p. 716. 66 See also Gorenc (2001), p. 10. 67 Art. 493, para. 3 CCA. 68 Art. 494, para. 1 CCA. 69 Controlling company’s liability would be based upon Art. 1062 of the Civil Obligations Act (Official Gazette No. 35/05, 41/08, 125/11, 78/15), which provides that a legal person is liable for damages caused by its organ (in this case, its management board) to third persons while performing 63

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may bring an action for damages, but only for the benefit of the controlled company (actio pro socio). Such an action can be brought even on behalf of the company’s creditors, if their claims cannot be settled by the controlled company.70 In addition to the legal representative of the controlling company, members of both the management and the supervisory board of the controlled company must also act with the care of a diligent and conscientious businessman, and shall be jointly and severally liable if they infringe upon their obligations.71 They bear the burden of proving that they acted in accordance with the required standard of care.72 The members of the management board of the controlled company will not be liable if they acted in accordance with the instruction they were obliged to follow.73 In addition, the controlling company must compensate the controlled company for any annual loss while the control contract is in force, unless such a loss is compensated from other reserves to which the profit was allocated during such time period.74 The fundamental rationale behind this provision is that the controlling company, on account of the wide scope of authorities it has—must bear the risks relating to the business endeavors of the controlled company. To that extent, an obligation to compensate for the controlled company’s annual loss exists irrespective of whether the influence exerted on behalf of the controlling company actually contributed to the loss.75 CCA also protects the creditors of the controlled company. It provides that, should the contract cease to exist, controlling company must provide security to the creditors whose claims existed before publication of an entry of contract termination into the court register, if those creditors contacted it within the six months following the publication of such an entry. The publication of an entry of contract termination must thus include a clause reminding the creditors of that particular right.76 Taking into account that controlling company can financially exhaust the controlled company, and that the shareholders could consequently be damaged (either because they may receive no dividend or because the value of their shares may be

its functions. See also Barbić (2008), p. 718. The author further on states that the controlling company will also be liable in situations when organs of the controlling and the controlled companies are intertwined, e.g. when the member of the management board of the controlling company is also the member of either the management or the supervisory board of the controlling company. See also Barbić (2008), p. 720. 70 Art. 494, para. 4 CCA. 71 Art. 495, para. 1 CCA. Although the provision does not state so expressly, the obligation relates to the instructions given by the controlling company. 72 Art. 495, para. 1 CCA. Art. 495, para 2. CCA further on provides that the obligation to compensate damages stands irrespective of whether the supervisory board gave prior approval to a specific action. 73 Art. 495, para. 3 CCA which also provides for application of Art. 494, para. 4 CCA. 74 Art. 489, para. 1 CCA. 75 See also Barbić (2008), p. 700. 76 Art. 490, para. 1 CCA. Art. 490, para. 2 CCA further on provides that creditors having the right of priority of reimbursement from the bankruptcy estate shall not be entitled to claim such security.

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diminished),77 CCA provides for special rules relating to the protection of the so-called external shareholders. All shareholders of the controlled company are considered to be external shareholders, except those who, based upon legal or economically founded ties with the controlling company, have either direct or indirect benefits from the control contract in the manner similar to that of controlling company.78 At the same time, controlling company itself is not considered to be an external shareholder.79 Position of external shareholders is secured in a twofold manner. Firstly, the control contract must, under the sanction of nullity,80 provide for an appropriate compensation to the external shareholders of the company submitting the management of its business to other company.81 Such compensation is determined in the amount no less than the yearly amounts which could be a foreseeable average dividend payout for a share, taking into account the current and future position of the company as well as relevant circumstances.82 The obvious rationale behind the appropriate compensation is to secure that the external shareholders receive the dividend in the amount they would receive had the control contract not been concluded.83 Secondly, and in addition to the obligation to pay compensation, the control contract must also provide for an obligation of the controlling company to take over the shares from the external shareholders, on their demand and for an appropriate severance as defined by the control contract.84 Consequently, the external shareholders will have an option to either stay in the controlled company and take advantage of an appropriate compensation or sell their shares in exchange for an appropriate severance.85 Finally, it must be stressed that situation in which a controlling company gave a detrimental instruction to the controlled company does not trigger the application of the doctrine of lifting of the corporate veil. Criteria for application of the legal doctrine of lifting of the corporate veil are provided by statutory rules. Namely, Art. 10, para. 2 CCA expressly provides that members of the company86 are not liable for obligations of the company unless provided otherwise by the CCA. Further on, Art. 77

See also Barbić (2008), p. 702. Art. 478.a, para. 1 CCA. 79 Art. 478.a, para. 2 CCA. 80 Art. 491, para. 3 CCA. 81 Art. 491, para. 1 CCA. The provision on appropriate compensation shall not be required if, at the moment of the conclusion of the control contract, there are no external shareholders. 82 Art. 491, para. 2 CCA. 83 See also Barbić (2008), p. 704 et seq. 84 Art. 492, para. 1 CCA. 85 See also Barbić (2008), p. 707 et seq. On topics of appropriate compensation and appropriate severance, see also Gorenc (2001), p. 9. 86 The statutory rule applies to members of the public limited company, members of the limited liability company and limited partners in limited partnerships. In the following text we will focus on lifting of corporate veil in capital companies (public limited companies and limited liability companies). 78

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10, para. 3 CCA sets out that a member (shareholder) of the company abusing such a privilege may not invoke an exemption from liability provided by Art. 10, para. 2 CCA. By means of an open list, Art. 10, para. 4 CCA provides examples of such an abuse, especially when shareholder: (1) uses the company to achieve an otherwise forbidden goal; (2) uses the company in order to damage the creditors; (3) illegally manages company assets as if they were his own and (4) diminishes the company assets although he knew or ought have known that the company will not be able to meet its obligations. The list is not exhaustive, meaning that potential abuse (and consequential lifting of the corporate veil) may occur under other circumstances, which will have to be separately assessed and proven.87 As can be observed, CCA neither expressly mention situations involving groups of companies nor does it give an indication regarding the influence that a shareholder (controlling company) must exercise in order to trigger the application of Art. 10, para 3 CCA. Nevertheless, there should be no doubt that in order to be able to actually abuse its privilege (according to which it is not liable for the company’s obligations), a shareholder must have an influence on the decision making processes within a company which effectively prevails over the influence of other shareholders.88 When it comes to the group of companies, it was previously mentioned that Art. 475, para. 3 CCA provides for two rebuttable presumptions according to which a company has a prevailing influence over another company: (i) if, as a shareholder, it has the right to elect and/or appoint, to revoke the appointment and/or recall the majority of the members of the management board or the majority of the members of the supervisory board; or (ii) if based upon the agreement with other shareholders, it has control over the majority of the voting rights in the company. Croatian jurisprudence correctly took the stand that the mere fact that controlling company has a prevailing influence over the controlled company does not per se trigger the application of Art. 10, para. 3 CCA.89 The key element which must be proven is that the controlling company abuses its position of control. Turning back to the situation of contractual group of companies analyzed above, piercing of corporate veil is particularly interesting in situations when the controlling company gives detrimental instructions to the controlled company within the group. However, as it clearly follows from Art. 493, para 1 CCA, those situations will not trigger application of Art. 10, para 3 CCA, as long as detrimental instructions serve the interests of either the controlling company or the companies affiliated in the same group with the controlling and the controlled company.90

87

See Barbić (2008), p. 299 et seq. See also Braut Filipović (2011), p. 817. See also Braut Filipović (2011), pp. 818, 819. 89 High Commercial Court of the Republic of Croatia, Pž-1760/02, 15.4.2003., citation taken over from: Braut Filipović (2011), p. 820. See also Jurić (2002), p. 526. 90 See Braut Filipović (2011), p. 821. 88

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Group of Companies Formed by Integration

Although integrated companies are not envisaged as a special type of affiliation,91 CCA’s provision relating to integration are nevertheless contained under the separate heading within the part VI dealing with affiliated companies.92 Both companies involved in the integration (principal and integrated company) must be either public limited company or limited liability company with their seat in the Republic of Croatia. Process of companies’ integration assumes that the principal company is (or will become) the only shareholder of the integrated company, while the integrated company retains its independent and separate legal personality. In terms of economic reality, this means that the integrated company essentially becomes an (operational) part of the principal company’s enterprise.93 CCA recognizes two main types of integration. First type presupposes that principal company holds all the shares of the integrated company. Resolution on integration (made by the general assembly of the company wanting to be integrated) will be valid if the general assembly of the principal company (i.e. company to which the former one integrates to) gives its consent with the three-fourths of the share capital represented at the general assembly. Such integration will be effective from the moment of its registration into the court register.94 The second type of integration presupposes that principal company holds at least 95% of the shares of the integrated company.95 In order to be valid, the resolution on integration has to contain the declaration of the future principal company in which it offers the minority shareholders its own shares in exchange for their exclusion.96 If the principle company is itself a controlled company, it has to offer minority shareholders the right to choose between its own shares and the adequate compensation in cash. If shareholders consider that their compensation is not adequate, they are authorized to seek that it be determined by the court.97 At the moment of registration of integration into the court register, all the shares (not held by it) are transferred to the principal company.98 As already mentioned, Art. 476, para. 1 CCA provides for an irrebuttable presumption that principal and integrated company are forming the group of companies.99 This equally applies to both types of integration.

91

See Sect. 1. Heading 4, Arts. 503–511 CCA. Such a legislative framework is justified since integration of companies itself presupposes a high level of affiliation between the controlling and the controlled company. See also Petrović (2001), p. 293. 93 See also Barbić (2008), pp. 734, 743. 94 Art. 503 CCA. 95 Art. 504 CCA. 96 Art. 504 CCA. 97 Art. 504.a CCA. 98 Art. 504.a CCA. 99 It is also possible that the group of companies existed even prior to integration. In that scenario, the group of companies following the integration will be of the strongest type possible. If the 92

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The issues relating to the authority of the principal company and liability of the members of its management board are expressly dealt with by CCA. When it comes to the management of company’s business, the principal company is authorized to give binding instructions to the management board of the integrated company.100 To that extent, Art. 507 CCA provides for an adequate application of Art. 493, paras 2 and 3 CCA (obligation of the integrated company to follow the instructions of the principal company), Art. 494 CCA (liability of the legal representatives of the controlling company) and Art. 495 CCA (liability of the members of both the management and the supervisory board of the controlled company). At the same time, the application of provisions relating to factual group of companies is expressly excluded.101 Specific legal position of the integrated company (being obliged to follow the instructions of the principle company) might lead to the insecurity that its creditors, once the integration takes place, will not be able to collect on their claims. To that extent, Art. 505 CCA sets a rule according to which the integrated company must grant a security to creditors whose claims originated before the integration was registered,102 provided they apply for it within the six months following an entry of integration into the court register and if their claims cannot otherwise be satisfied.103 However, the right to demand such a security shall not be granted to the creditors which have the right of priority in bankruptcy proceedings.104 Finally, although integrated company retains its separate legal personality, principle company takes over a complete control over it and economically runs it as a part of its own enterprise. Consequently, as of the date the integration take place, the principal company is jointly and severally liable to the integrated company’s creditors, irrespective of whether the integrated company assumed obligations before or after the integration.105 Any agreement to the contrary is ineffective towards third parties.106 The principal company may refuse to satisfy a creditor's claim during the period in which the integrated company is in the position to challenge the legal

contract on management of company’s business (control contract) was concluded prior to integration, it will cease to exist once the company is integrated. To that effect, see Barbić (2008), pp. 733, 734. 100 Art. 507, para. 1 CCA. 101 See Art. 507, para. 1 CCA, excluding the application of Art. 496–Art. 502 CCA. 102 It is however important to stress that the principle company could not act as a surety because it is already liable for the obligations of the integrated company. 103 The publication of registration shall include the clause reminding creditors of such a right. See Art. 505, para. 1 CCA. 104 Art. 505, para. 2 CCA. 105 Art. 506, para. 1 CCA. 106 Art. 506, para. 1 CCA. See also Art. 506, para. 2 CCA which provides that if the principal company is to perform an obligation which the integrated company assumed before integration took place, it may (on top of its own personal defenses) raise only those defenses that can be raised by the integrated company.

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transaction which is the basis of that obligation.107 Principle company retains the same right for as long as the creditor is able to satisfy its claims by set off against the integrated company's claim which is due.108 On account of the fact that integration of companies represents the strongest type of group of companies, and keeping in mind the fact that the principal company is jointly and severally liable to the integrated company’s creditors (both in respect to the obligations assumed before and after the integration), one can conclude that integration represents the only situation in which CCA expressly recognizes that the principal (controlling) company will be liable to the creditors of the integrated (controlled) company.109 Turning back to the application of the doctrine of piercing of the corporate veil,110 this effectively means that creditors of the integrated company will not have to prove that principal company abused its position of control. Rather, and in order to satisfy their claims directly against the principal company, they will only have to prove that integration took place.111 An integration is terminated: (1) by the decision of the general meeting of the integrated company, (2) when either the principal or the integrated company cease to be a joint stock company or a limited liability company with its seat in the Republic of Croatia, (3) when the principal company no longer holds all the shares of the integrated company,112 or (4) by the dissolution of the principal company.113 The formerly integrated company must promptly file the application for entry of the dissolution of integration with the court register, indicating the grounds and date of the dissolution.114 The principle company must make a financial report with the date of the dissolution of integration and has an obligation to compensate the integrated company for the loss indicated thereof.115 Claims against the formerly principal company relating to the obligations of the former integrated company may be brought within the five years after the date of entry of the dissolution of integration into the court register, unless the statute of limitation for the claim against the formerly integrated company is shorter.116

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Art. 506, para. 2 CCA. Art. 506, para. 2 CCA. See also Art. 506, para. 4 CCA which provides that an enforcement title against the integrated company shall not be considered the basis of enforcement against the principal company. 109 To that effect also Braut Filipović (2011), pp. 822, 823. 110 See more Sect. 3.1. 111 To that effect also: Braut Filipović (2011), p. 823. 112 As per Art. 510, para. 2 CCA, if all shares of the integrated company are no longer held by the principal company, the principal company must notify the integrated company thereof without delay and in writing. 113 Art. 510, para. 1 CCA. 114 Art. 510, para. 3 CCA. 115 See Barbić (2008), p. 750. 116 Art. 510, para. 4 CCA. The provision further on provides that if the creditor’s claim becomes due after the date of entry of the dissolution of integration into the court register, the period of limitation commences to run on the date of its maturity. 108

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Factual Group of Companies

If the controlling and the controlled company did not conclude a contract on the management of company’s business (control contract), the controlling company must not use its influence to direct the controlled company to enter into detrimental transactions or to undertake (or omit to undertake) actions to its own detriment unless it undertakes an obligation to compensate the controlled company for damages thus incurred.117 To that extent, if the damages incurred by the controlled company are not compensated within the business year, both the timing and the manner of compensation must be determined no later than at the end of the business year in which the controlled company incurred the damage.118 Further on, Art. 501, para. 1 CCA provides for liability of both the controlling company and its legal representatives in situations where controlling company, although it encouraged controlled company to undertake or omit to undertake legal transactions to its own detriment, failed to compensate the damages to the controlled company before the end of the business year. In such a scenario, the controlling company must compensate the controlled company for the total damage thus incurred.119 As can be observed, unlike the situation relating to contractual group of companies, controlled company in factual group of companies does not have an obligation to follow the detrimental influence of the controlling company. At the same time, the controlling company may use its influence to the detriment of the controlled company, but only if it undertakes an obligation to compensate the controlled company for the damages incurred. CCA thus duly recognizes both the reality that such an influence may be exerted on behalf of the controlling company and the potential that it could indeed be detrimental for the controlled company. Rather than expressly forbidding it, CCA permits such an influence if the controlled company is duly compensated. Rationale behind such a solution is primarily the need to protect the creditors and the minority shareholders of the controlled company.120 Whether the controlling company used its influence to direct the controlled company to enter in detrimental transactions or to (omit to) undertake actions to its own detriment—is a factual question and the assessment must take into account various circumstances relating to the corporate structure and decision-making processes within the factual group of companies. Analysis is not limited to the members of the management board of the controlled company inasmuch as the influence may be exerted upon other employees as well.121 It is generally held that any mode of

117

Art. 496, para. 1 CCA. Art. 496, para. 2 CCA. An appropriate legal claim towards the controlling company must be guaranteed to the controlled company. 119 Art. 501, para. 1 further on provides that such a claim for compensation may individually be asserted by shareholders, regardless of the damage incurred to them by the damage incurred to the company. 120 See also Barbić (2008), p. 656. 121 See also Barbić (2008), p. 658. 118

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influence (recommendations, encouragement, giving instructions of either general or specific nature) will suffice for the purposes of establishing the liability on behalf of the controlling company.122 In line with the argumentation outlined above,123 it follows that situations where a controlling company (in factual group of companies) uses its influence to the detriment of the controlled company do not trigger application of the doctrine of piercing the corporate veil as envisaged by Art. 10 CCA, as long as the controlling company at the same time undertakes an obligation to compensate the controlled company for the damages thus incurred.124 When it comes to obligations and liabilities of the controlled company, CCA provides that the management board of the controlled company must, within first three months of the business year, draw up a report on relations between controlled company and affiliated companies.125 As such an obligation primarily serves the purpose of establishing whether or not controlling company exerted detrimental influence on the controlled company, the report must specify: (i) all legal transactions entered into by the controlled company during the previous year with the controlling company or any company affiliated with the controlling company or in accordance with the instructions in the interest of such companies, as well as, (ii) all other acts that the controlled company has undertaken or refrained from undertaking in the previous year at the instruction of these companies. Further, the report must specify any consideration given or received for legal transactions, state reasons for undertaking other acts and specify advantages and disadvantages for the controlled company as a result of those acts. It must individually specify whether and how the loss incurred in the business year was compensated or whether and how was the company allowed to assert a legal claim,126 and it must be drawn up in compliance with the principles of conscientious and accurate accounting.127 Finally, management board of the controlled company must at the end of the report declare whether the company (according to the circumstances known at the time when transaction was undertaken or omitted) received adequate consideration and whether any of the acts that company has undertaken or refrained from undertaking incurred damages to the company.128 The report on relations with affiliated companies must also be

122

See also Barbić (2008), p. 657. See Sect. 3.1. 124 See also Braut Filipović (2011), pp. 821, 822. 125 Art. 497, para. 1 CCA. 126 Art. 497, para. 1 CCA. 127 Art. 497, para. 2 CCA. 128 Art. 497, para. 3 CCA. If damages were incurred, the management board must declare whether or not they were compensated. Such declaration shall be included in the report on the standing of the company. 123

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examined by both an auditor129 and supervisory board130 (which in turn must inform the general assembly about its findings). Members of the management board of the controlled company who violate their obligation to provide for a report on relations between the controlled company and affiliated companies as prescribed by CCA are jointly and severally liable together with the controlling company and its representatives.131 Joint and several liability also extends to the members of the supervisory board of the controlled company who violate their obligation to either examine the report on relations between controlled and affiliated companies or to inform general assembly thereof.132 However, there is no liability to compensate damages incurred if the transaction was founded upon a lawful decision of the general assembly.133 Although CCA does not expressly regulate it, the legal theory recognizes the existence of the qualified factual group of companies, as a special type of the factual group of companies.134 Namely, when the influence of the controlling company within the factual group is so intense that it prevents the possibility of isolating individual actions taken (or omitted to be taken) by the controlled company, this prevents the above described effective compensation scheme for individual detrimental transactions. In other words, the influence of the controlling company is so all-encompassing that it impacts the corporate structure of the controlled company.135 In order to protect the creditors of the controlled company and its shareholders, it is appropriate that these situations, although they relate to factual (and not contractual) group of companies, are treated as if a contract on the management of company’s business (control contract) was entered into. This opens the possibility for implementation of protective measures which CCA prescribes for contractual group of companies, i.e. an obligation to compensate the controlled company for any annual loss, provisions relating to creditors’ protection, an obligation to provide for both an appropriate compensation and appropriate severance, as well as the provisions relating to the liability and compensation of damages from the legal

129

Art. 498 CCA. Art. 499 CCA. In addition, each shareholder may petition the court to order special examination of business relations with the controlling company or some of the affiliated companies, providing that specific requirements are met, relating to objections and/or limitations made on behalf of either the auditor or the supervisory board, or if the management board declared that damage was incurred by the company and not compensated. In addition, if there is a reasonable doubt that damages were incurred to the company through the conduct contrary to the obligation of proper business management, the shareholders whose shares account for at least 20% of the share capital may petition the court for such a request, providing that they can show that they were shareholders at least three months prior to making the request. See Art. 500 CCA. 131 Art. 502, para. 1 CCA. 132 Art. 502, para. 2 CCA. 133 Art. 502, para. 3 CCA. 134 Croatian: kvalificirani faktični koncern; German: Qualifizierte faktische Konzerne. 135 See also Barbić (2008), p. 651; Jurić (2002), p. 525. 130

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representatives of the controlling company and members of the management and supervisory board of the controlled company.136

4 Groups of Companies in Other Areas of Law As Croatia is a member state of the European Union, its law is harmonized with the sources of secondary European law. In the following text, analysis takes into consideration the relevant provisions of accounting law, tax law, capital markets law, takeover law and law on credit institutions.

4.1

Accounting Act

Accounting Act (hereinafter: AA) is harmonized with the Directive 2013/34/EU of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings137 and provides for consolidation of annual financial reports. Annual consolidated financial reports are financial reports of the group of entrepreneurs138 in which an entrepreneur (parent company) has a controlling influence (control) over financial and business policies of either one or more entrepreneurs (daughter companies), representing the group as a unity. Parent company is an entrepreneur controlling one or more subsidiary companies,139 and subsidiary (daughter) company is an entrepreneur controlled by the parent company, including

136

For protective measures see Sect. 3.1. See also Barbić (2008), p. 651, where the author outlines three requirements that have to be fulfilled for an ordinary group of companies to become a qualified group of companies: (1) companies must form a group of companies; (2) controlling company does not duly care about the importance of the controlled company and (3) there is no (legal) possibility for the controlled company to obtain compensation for each specific action it undertakes. In addition, it should be borne in mind that (parallel to the above outlined provisions relating to the contractual group of companies) other provisions (otherwise relating to an ordinary group of companies) will apply to the qualified group of companies as well. 137 OJ L 182, 29.6.2013, p. 19. 138 As per Art. 4 AA, addressees of the AA are entrepreneurs, the term encompassing: (1) a company and a sole trader as defined by CCA, (2) business unit of the entrepreneur as referred to above under (1) with its seat in other member state or third state if, according to that state’s legislation, there is no obligation to keep business books and draw up financial statements, as well as a business unit of an entrepreneur from a member state or a third state which is a profit tax payer pursuant to the legislation governing taxation, and (3) branch of a foreign entrepreneur in the Republic of Croatia, if it is not a business unit as prescribed by CCA. 139 Art. 3, para. 1 (2) AA.

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any company which controls the end parent company.140 Parent company and its subsidiaries form a group.141 As an obligation to draw up annual consolidated financial reports rests with the entrepreneur from the Republic of Croatia which (within a group) represents a parent company,142 Art. 23, para. 3 AA provides for a definition of the parent company. It states that an entrepreneur will be considered parent company if it meets at least one of the following eight requirements: (1) either directly or indirectly has a majority voting rights in other entrepreneur, or (2) is entitled to appoint or revoke majority of the members of the management or supervisory board of other entrepreneur while at the same time being its shareholder, or (3) has a right to exercise the prevailing influence over another entrepreneur of which it is also a shareholder or member pursuant to the contract entered into with that entrepreneur or based on the provisions of its memorandum or articles of association, or (4) if the majority of the members of the management board or supervisory board of the subsidiary, who performed that duty in the current or the prior financial year and are still performing it until the time of preparation of annual financial statements, were appointed exclusively by the exercise of the voting right of the parent company which is a shareholder or member of that entrepreneur, or (5) has a control over the majority of the voting rights of shareholders or members of the subsidiary based on the agreement with other shareholders or members of entrepreneur while at the same time being a shareholder or a member of that entrepreneur, or (6) if it may effectuate or effectuates a controlling influence or control over other entrepreneur, or (7) if, based upon the contract, memorandum or articles of association, the parent company and subsidiary are subject to the uniform management, or (8) if it has an obligation to apply International financial reporting standards either individually or as a group and accordingly has an obligation to draw up consolidated financial statements.

4.2

General Tax Act and Profit Tax Act

Both the General Tax Act (hereinafter: GTA) and Profit Tax Act (hereinafter: PTA) contain specific provisions applicable to group of companies. However, as both acts provide for distinct definitions of affiliations, one must be careful to apply them appropriately. GTA regulates the relationship between taxpayers and tax authorities which apply the regulations on taxation and other public dues, if not regulated otherwise by special acts on certain types of taxes and other public charges, and it represents the joint tax system basis.143 PTA recognizes GTA’s general scope of application and

140

Art. 3, para. 1 (3) AA. Art. 3, para. 1 (4) AA. 142 Art. 23, para. 2 AA. 143 Art. 1 GTA. 141

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expressly provides for an appropriate application of GTA to the issues of determining, payment and return of tax, appeals, limitation periods, misdemeanor proceedings and other measures in relation to the profit tax.144 GTA distinguishes between affiliated companies and affiliated persons. While definition of affiliated companies generally follows the one outlined by CCA,145 affiliated persons are defined as persons who meet at least one of the following conditions: (1) two or more natural or legal persons who, for the purpose of fulfilling obligations from a tax creditor-debtor relationship, constitute a single risk because one of them has, directly or indirectly, control over the other or others, (2) two or more natural or legal persons who, for the purpose of fulfilling obligations from a tax creditor-debtor relationship, constitute a single risk because one of them has, directly or indirectly, significant influence over the other or others, (3) two or more natural or legal persons between whom there is no relationship of control as referred to under (1) or significant influence as referred to under (2), but they do represent a single risk in fulfilling the obligations ensuing from the tax creditor-debtor relationship as they are affiliated to each other, thus there is a high probability that the deterioration or improvement of the economic and financial situation of one person can cause the deterioration or improvement of the economic and financial condition of one or more other persons, because a transfer, or the possibility to transfer losses, profits or ability to pay is applicable among them.146 Lastly, GTA also provides for a definition of control, prescribing it to be the relationship between the controlling and the controlled company, or a relationship between a natural and a legal person that exerts the same or similar impact as the relationship between the controlling and the controlled company. By means of a presumption, GTA further on provides that control shall be considered to exist when the controlling company in a controlled undertaking meets at least one of the following conditions: (1) it has a direct or indirect majority share or direct or indirect majority of decision-making rights, (2) it has the right to elect, i.e. to appoint and/or recall the majority of the members of management, the majority of the executive directors or the majority of the supervisory or management boards, (3) it has the right to enforce or enforces its prevailing influence, (4) it has the right to manage the business and financial policies of the company based on the authority ensuing from the statute or social contract or some other contract or agreement, (5) it has control over more than 50% of voting rights established under an agreement with

144

Art. 36 PTA. Art. 46 GTA (Affiliated companies) corresponds to Art. 473 CCA. Art. 47, paras 1–3 GTA (Controlled and controlling company) corresponds to Art. 475, paras 1–2 CCA. See Sect. 2. Art. 47, para. 4 GTA provides that the controlling company and all of its controlled companies constitute a group of affiliated companies. Although the definition of the group thus clearly differs from the one prescribed by Art. 476 CCA, Art. 47, para. 4 GTA expressly states that its definition applies for the purpose of GTA. Art. 47, para 5. GTA further on provides that legal persons between which there is a relation based on control, in which it is not possible to unambiguously determine which is the controlled and which is the controlling company, shall also be deemed to form a group of affiliated companies. 146 Art. 49, para. 1 GTA. 145

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other holders of voting rights or (6) has the power to direct the majority of votes at the meetings of the management board, executive directors, supervisory board, management board or other relevant management body of the company.147 PTA provides for a less elaborate but substantially comparable definition of term affiliated persons by prescribing that it relates to persons wherein one of them participates directly or indirectly in management, supervision, or capital of the other, or the same persons participate directly or indirectly in the management, supervision or capital of the company.148 It seems that PTA (modelling its terminology upon OECD’s Model Tax Convention on Income and on Capital and OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations) thus encompasses personal, voting and capital affiliations.149 Definition is of particular importance in terms of transfer prices, as PDA provides that if agreed prices or other conditions between affiliated persons in their business dealings are different than prices or other conditions that would be agreed between non-affiliated persons, all profit in the amount in which it would be realized if it was a relationship of non-affiliated persons shall be included in the tax base of associated persons.150

4.3

Capital Market Act

Regarding the companies whose securities are traded on a regulated market, Capital Market Act (hereinafter: CMA) provides for a special heading on information relating to changes in the percentages of the voting rights.151 Relevant provisions are harmonized with the Directive 2004/109/EC of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC.152 As per Art. 413, when a natural person or a legal entity directly or indirectly reaches, exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of the voting rights in an issuer of the shares, it has an obligation to notify both the issuer and the Croatian Financial Services Supervisory Agency of such a reaching, exceeding or falling below the threshold. Addresses of the obligation to notify are all shareholders (either natural person or legal entity) when it— 147

Art. 48 GTA. Art. 13, para. 2 PTA. 149 As previously stated, GTA provisions can also be appropriately applied. Such an application is especially to be expected in situations involving controlling and controlled companies forming a group. 150 Art. 13, para. 1 PTA. 151 Part 3 (Offer of the securities to the public and publication of prescribed information), heading II (Publication of information about the issuers of the securities), subheading 3 (Information relating to changes in percentages of the voting rights), Art. 413–Art. 427 CMA. 152 OJ L 390, 31.12.2004, p. 38. 148

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either directly or indirectly, in its own name and for its own account or in its own name but on behalf of (i.e. for the account of) another natural person and/or legal entity—holds voting shares of the issuer and/or receipts of the issuer’s deposited shares.153 In addition, Art. 417, para. 1 CMA provides that an obligation also relates to situations involving either acquisition or disposal of major proportions of voting rights. Consequently, an obligation to notify from Art. 413 CMA also applies to every natural person or legal entity to the extent it is entitled to acquire, dispose of, exercise or transfer voting rights in any of the following cases or a combination of them: (1) voting rights held by a third party with whom natural person or legal entity concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question, (2) voting rights held by a third party under an agreement concluded with natural person or legal entity providing for the temporary transfer for consideration of the voting rights in question, (3) voting rights attaching to shares which are lodged as collateral with that natural person or legal entity, provided the person or entity controls the voting rights and declares its intention of exercising them, (4) voting rights attaching to shares in which that natural person or legal entity has usufruct, (5) voting rights which are held, or may be exercised within the meaning of points (1) to (4), by a company controlled by that natural person or legal entity, (6) voting rights attaching to shares deposited with that natural person or legal entity which the natural person or legal entity can exercise independently, at its discretion, in the absence of specific instructions from the shareholders, (7) voting rights held by a third party in its own name but on behalf (i.e. for the account of) of natural person or legal entity, (8) voting rights which natural person or legal entity may exercise as a proxy, independently and at its discretion, in the absence of specific instructions from the shareholders.154 Finally, particular importance must be attached to the above-mentioned provision of Art. 417, para. 1(5) CMA, according to which an obligation to notify from Art. 413 CMA also applies to natural person or legal entity to the extent that it is entitled to acquire, dispose of, exercise or transfer voting rights which are held, or may be exercised within the meaning of points (1) to (4), by a company controlled by that natural person or legal entity. To that extent, Art. 418, para. 1 CMA provides for a definition of the controlled company, which encompasses legal entity: (1) in which a natural person or other legal entity has a majority of the voting rights, or (2) of which a natural person or legal entity has the right to appoint or revoke a majority of the members of the management and/or supervisory bodies and is at the same time a shareholder in, or member of, the legal entity in question, or (3) of which a natural person or legal entity is a shareholder or member and alone controls a majority of the shareholders' or members' voting rights, respectively, pursuant to an agreement entered into with other shareholders or members of the legal entity in question, or (4) over which a natural person or legal entity may exercise, or actually exercises,

153 154

Art. 415 CMA. Art. 417, para. 1 CMA.

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prevailing influence or control. Natural person or legal entity that meets the above requirements is considered to be a controlling company.155

4.4

Act on the Takeover of Joint-Stock Companies

Act on the Takeover of Join-Stock Companies (hereinafter: ATJSC) also contains special provisions relating to the attainment of the control and group of companies. More specifically, special provision on mandatory takeover bid provides that a natural or legal persons shall be obliged to announce a takeover bid, where it has, directly or indirectly, independently or acting in concert, acquired voting shares of the target company, which, together with the shares it already possess, exceed the threshold of 25% of voting shares of the target company (control threshold).156 Legal term acting in concert encompasses natural and/or legal persons who cooperate with each other based upon an agreement (either express or tacit, oral or written) which is aimed at acquiring voting shares, coordinating the exercise of the voting rights or preventing another person to conduct the takeover process.157 In addition, acting in concert also encompasses natural and/or legal persons who cooperate with the target company based upon an agreement (either express or tacit, oral or written) which is aimed at preventing the other person to conduct the takeover process.158 As can be observed, determination of whether natural or legal persons acted in concert is of paramount importance for proper application of ATJSC. Analysis of relevant legal provisions concerning concerted action clearly shows that the legislator took into account the importance of corporate affiliations. To that extent, ATJSC expressly provides that legal persons, as well as natural and/or legal persons, act in concert where one of them exercises direct or indirect control over another or other legal persons.159 By means of a rebuttable presumption, ATJSC further on provides that natural and/or legal persons shall be deemed to exercise control over a legal person in the following cases: (1) if they hold, directly or indirectly, more than 25% of share in equity capital of a legal person, (2) if they hold, directly or indirectly, more than 25% of voting rights at the general meeting of a legal person, (3) if they have a right to manage business and financial policies of a legal person on the basis of powers granted under the articles of association or an agreement, or (4) if they exert, directly or indirectly, prevailing influence on conducting business and decision-making process.160 Finally, Art. 5, para. 5 ATJSC expressly provides that

155

Art. 418, para. 2 CMA. Art. 9, para. 1 ATJSC. 157 Art. 5, para. 1 ATJSC. 158 Art. 5, para. 1 ATJSC. 159 Art. 5, para. 3 ATJSC. 160 Art. 5, para. 4 ATJSC. 156

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companies shall act in concert if they are mutually affiliated within the meaning of CCA.161

4.5

Act on Credit Institutions

Act on Credit Institutions (hereinafter: ACI) governs, among other things, the conditions for the establishment, operation and dissolution of credit institutions with their seat in the Republic of Croatia, as well as their supervision.162 Credit institution is defined as to mean an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account.163 ACI provides for a definition of control, by expressly referencing provisions of Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms.164 Consequently, control is defined as to mean the relationship between a parent undertaking and a subsidiary.165 Further on, parent undertaking is defined as an undertaking which (a) has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking), or (b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or a member of that undertaking, or (c) has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits it being subject to such contracts or provisions, or (d) is a shareholder in or a member of an undertaking, and (aa) a majority of the members of the administrative,

161

See Sect. 1 et seq. Art. 1, para. 1(1) ACI. ACI also governs the conditions under which legal persons with their seat outside the Republic of Croatia may provide banking and/or financial services in the Republic of Croatia and publication requirements for the Croatian National Bank in the field of prudential regulation and supervision of credit institutions. 163 Art. 3, para. 1(28) ACI which provides that the term credit institution shall have the meaning as defined in Art. 4, para. 1(1) of Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation 648/2012. OJ L 176, 27.6.2013, p. 1. 164 Art. 3, para. 1(27) ACI. 165 Art. 4, para 1(37) of Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation 648/2012. OJ L 176, 27.6.2013, p. 1. The provision in full provides for the following definition: ‘control’ means the relationship between a parent undertaking and a subsidiary, as defined in Article 1 of Directive 83/349/EEC, or the accounting standards to which an institution is subject under Regulation (EC) No 1606/2002, or a similar relationship between any natural or legal person and an undertaking. For the use of legal terminology in this report, see Sect. 1. 162

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management or supervisory bodies of that undertaking (a subsidiary undertaking) who have held office during the financial year, during the preceding financial year and up to the time when the consolidated accounts are drawn up, have been appointed solely as a result of the exercise of its voting rights; or (bb) controls alone, pursuant to an agreement with other shareholders in or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking.166 The importance of affiliations is, among other, recognized in relation to the credit institution’s shareholders. ACI provides that an acquisition of a qualified holding of a credit institution requires prior approval of Croatian National Bank. Qualifying holding means a direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking.167 To that extent, a legal or a natural person and persons acting in concert must submit to the Croatian National Bank an application for prior approval for the acquisition of shares of a credit institution on the basis of which they, individually or jointly, directly or indirectly, acquire a qualifying holding in the credit institution.168 Further on, holders of a qualifying holding must obtain prior approval from the Croatian National Bank for each further direct or indirect acquisition of shares of a credit institution on the basis of which their holding would reach or exceed 20%, 30% or 50% of the capital or of the voting rights of a credit institution.169 Much like in the previously mentioned provisions of ATJSC, ACI provides for a definition of what constitutes concerted action. It provides that the term persons acting in concert means: (1) natural or legal persons who cooperate with each other or with the credit institution on the basis of an agreement, either express or tacit, either oral or written, aimed at acquiring shares with voting rights or coordinated exercising of voting rights, or (2) legal persons mutually affiliated within the meaning of CCA.170 Further on, ACI provides that the following shall be deemed to constitute concerted action: (1) persons linked only by the circumstances which indicate coordination in the acquisition of shares or joint intent of the persons to acquire shares, (2) members of management or supervisory boards of undertakings acting in concert; (3) members of management or supervisory boards and the undertakings in which they are members of these bodies, or (4) a management company and all investment funds managed by that company.171 Any natural 166

Art. 1 of Seventh Council Directive 83/349/EEC of 13 June 1983 based on Art. 54 (3) (g) of the Treaty on consolidated accounts. OJ L 193, 18.7.83., p. 1. 167 Art. 3, para. 1(29) ACI which provides that the term qualified holding shall have the meaning as defined in Art. 4, para. 1(36) of Regulation 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation 648/2012. OJ L 176, 27.6.2013, p. 1. 168 Art. 24, para. 1 ACI. 169 Art. 24, para. 2 ACI. 170 Art. 16, para. 1 ACI. 171 Art. 16, para. 2 ACI.

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and/or legal persons are deemed to act in concert with a particular legal person when one of them directly or indirectly controls the other legal person or legal persons.172 Finally, persons are deemed to act in concert when they are mutually affiliated within the meaning of the provisions of the ATJSC. Where a person acquires a qualifying holding in a credit institution or the holding referred to in Art. 24 ACI without approval of the Croatian National Bank, the Croatian National Bank shall issue a decision ordering the person to sell the shares acquired without the necessary approval, to submit evidence on the sale and, if known, data on the buyer.173 In addition, as of the date of enforceability of such a decision, the acquirer may not exercise any rights arising from any share ordered to be sold, and the quorum for taking valid decisions and the necessary majority for taking decisions at the general assembly shall be determined in relation to the initial capital reduced by the amount of shares on the basis of which the acquirer cannot exercise any voting rights.174

5 Summary The fundamental concept of the group of companies is give in Croatian CCA. Modelled upon German law, it introduces the concept of affiliated companies, legally independent companies which (depending upon the degree of affiliation) may be connected as a group of companies. CCA gives a set of comprehensive rules, firmly placing the concept of group of companies within the realm of general corporate law. Following the legislative approach characteristic in civil law traditions, CCA recognizes that legally independent companies are forming a group because they are affiliated in accordance with relevant provisions of CCA. Consequently, and by means of an express statutory rule, the existence of a group of companies presupposes that controlling and (either one or more) controlled companies are subject to uniform management on behalf of the controlling company. Such a group does not have a legal form and separate legal entity, with the companies within a group forming an economic unity. At the same time, the CCA clearly recognizes the potential detrimental influence that the controlling company may exert upon the controlled ones. To that extent, it provides for statutory rules which serve to countereffect the (economic) reality that the controlling company is an independent legal entity authorized to exercise its full autonomy while conducting its business. By focusing on the need to protect both the shareholders and creditors of the controlled company, CCA aims to reconcile specific corporate law effects which would otherwise occur in the context of a group. The comprehensive regulation thus fully recognizes the reality of a group, while at the same time providing for set of

172

Art. 16, para. 3 ACI. Art. 30, para. 1 ACI. 174 Art. 30, para. 7 ACI. 173

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rules which define special rights and liabilities the controlling company assumes as a result of a pre-defined affiliation setting. When it comes to other specific areas of law, Croatian law is harmonized with the European law. Although European law does not define the concept of a group in a comprehensive or uniform manner, it does provide for distinct definitions applicable in various areas of law (e.g. accounting law, tax law, capital markets law, takeover law, banking law). By means of harmonization, Croatian legislator followed a fragmentary approach and as a result introduced various definitions of both control and group of companies. However, they have legal effect only within the realm of specific legal acts which are envisaging them and for the purpose of their application. Although one can clearly detect that individual legal definitions generally follow the legal concept of affiliation and group of companies conceptualized by the CCA as a systemic piece legislation, whether or not the existing disparity will lead to inconsistencies of a more fundamental nature still remains to be observed (and addressed by jurisprudence).

References Accounting Act [Zakon o računovodstvu] Official Gazette No. 78/15, 134/15, 120/16 Act on Credit Institutions [Zakon o kreditnim institucijama] Official Gazette No. 159/13, 19/15, 102/15 Barbić J (2008) Pravo društava, Knjiga prva, Opći dio [Companies law, First book, General part]. Organizator, Zagreb Barbić J, Markovinović H, Petrović S, Tepeš N (2016) IEL corporations and partnerships – Croatia. Wolters Kluwer, Suppl. 89 Braut Filipović M (2011) Odgovornost društva majke za obveze društva kćeri [Liability of mother company for obligations of daughter company]. Zbornik Pravnog fakulteta u Rijeci (2):795–828 Capital Market Act [Zakon o tržištu kapitala] Official Gazette No. 88/08, 146/08, 74/09, 54/13, 159/13, 18/15, 110/15, 123/16, 131/17 Civil Obligations Act [Zakon o obveznim odnosima], Official Gazette No. 35/05, 41/08, 125/11, 78/15 Commercial Companies Act [Zakon o trgovačkim društvima], Official Gazette No. 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08, 137/09, 152/11, 111/12, 68/13, 110/15 Decision of the High Commercial Court of the Republic of Croatia No. Pž-1760/02 of 15 April 2003 Decision of the Supreme Court of the Republic of Croatia No. Revt 60/04-2 of 6 October 2004 European Model Company Act General Tax Act [Opći porezni zakon] Official Gazette No. 115/16 German Stock Corporation Act [Aktiengesetz] of 6 September 1965, BGBl. I S. 1089; as last amendment by Art. 9 of Law on Transposition of Second Directive on payment services, of 17 July 2017, BGBl. I S. 2446 Gorenc V (2001) Ugovor o vođenju poslova društva i prijenosu dobiti [Contract on management of company’s business and transfer of profits]. Pravo i porezi (10):6–11 Jurić D (2002) Odgovornost vladajućeg društva za obveze ovisnog društva u hrvatskom i usporednom pravu [Liability of the controlling company for obligations of the controlled company in Croatian and comparative law]. Zbornik Pravnog fakulteta Sveučilišta u Rijeci (2):507–541

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Petrović S (2001) The legal regulation of company groups in Croatia. Eur Bus Organ Law Rev:281–299 Profit Tax Act [Zakon o porezu na dobit] Official Gazette No. 177/04, 90/05, 57/06, 80/10, 22/12, 146/13, 143/14, 50/16, 115/16 Takeover of Join-Stock Companies [Zakon o preuzimanju dioničkih društava] Official Gazette No. 109/07, 36/09, 108/12, 90/13, 99/13, 148/13

National Report on Greece Vassilios D. Tountopoulos

Abstract The article offers a short analysis of the phenomenon of ‘groups of companies’ according to Greek law. The Greek legal framework does not provide a single and generally accepted definition of ‘group of companies’. Nonetheless, the broader concept of ‘group of companies’ is based on the separate legal personality and the affiliation between the companies of the group. Based on these characteristics, the article attempts to analyze the basic principles of ‘group of companies’ both under corporate law and outside corporate law. Special emphasis is placed on the interest of the group, the instructions to the subsidiary companies, the rules on transparency, the rules on protection of minority shareholders and creditors as well as the internal and external relationships in groups of companies. The article concludes with final remarks.

1 Introduction The Greek legal framework does not provide a single and generally accepted definition of ‘group of companies’.1 Hence, the notion of a ‘group of companies’ varies considerably and is limited both to the context of each legislative document and to the aim of each provision. Different approaches are used even in common speech. Occasionally, the term ‘group of companies’ is used instead of the term ‘affiliated companies’, ‘connected companies’ or ‘controlled companies’. Despite

The present Report is based on Law 2190/1920 on sociétés anonymes. Nonetheless, Law 2190/ 1920 was abolished as of 1.1.2019 by Law 4548/2018 entitled “Reform of the law of Sociétés Anonymes” (SAs). The new Law introduced provisions that significantly change the operation of SAs. References to basic provisions of Law 4548/2018 are made in the footnotes of the Report. 1

See Rokas (2004), p. 439; Sotiropoulos (2006), pp. 127, 129.

V. D. Tountopoulos (*) University of the Aegean, Chios, Greece e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_20

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different and specific definitions, the broader concept of a group of companies has some basic characteristics. Based on these characteristics, a group of companies is generally considered to be a set/grid of enterprises in which each participating enterprise (a) maintains a separate legal personality, but (b) is affiliated (connected) with other enterprises. In the Greek literature, the connection of companies in a broader sense is described as the situation between several companies which allows the use of the powers of some or all organs of a company for the interest of another or all other companies.2

In this respect, connection means control, i.e., the power to appoint the management and/or determine the policies of a company.3 The control may be achieved through several means (de jure or de facto). The most common means to achieve control are: (a) the acquisition of shares and/or voting rights, (b) the acquisition of the powers to appoint members of the Board of Directors (BoD) and (c) the acquisition of control by virtue of an agreement. Acquisition of control may be apparent on the level of: (a) financial and administrative interrelation, (b) common external appearance and (c) common means of employee management. The intensity/level of affiliation/control between two companies may differ. Thus, affiliation/control may be full or loose. Full control may exist when a company is the sole shareholder of another company (a fully owned subsidiary). On the other hand, affiliation may be looser when it is based on a singular contractual relationship among connected companies. In fact, some commentators attempt to establish an affiliated relationship, with its subsequent consequences, for long-term contractual relations in which companies’ features are absent (e.g., franchise contracts). Currently, in Greek legislation, as was already mentioned above, the grade, extent and intensity of the necessary control differ depending on each legislation’s scope and aim. Specific legislative provisions also determine whether: (a) the duration of control is a necessary element for the formation of a group of companies and the occurrence of its legal consequences4 or (b) the possibility of control is sufficient or the true exercise of it is expected. Lastly, in specific cases, the possession of a concrete number of voting rights creates a presumption for the implementation of specific rules of law and the occurrence of legal consequences.5 Moreover, affiliated companies may operate at the same level of production, have the same activity or be at a different level of production and have different activities. Furthermore, affiliated companies may be registered in the same or different jurisdictions (multinational enterprise groups) and include legal persons of the same or different legal form.

2

Georgakopoulos (1996), p. 360. See, also, Davrados (2010), no. 4. 4 See generally Rokas (2004–2005), pp. 705, 706. 5 See e.g. on competition law C-508/11, ΕΝI, para. 47. See, also, C-97/08 P, AKZO, para. 60. 3

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2 Groups of Companies as a Unified Business Organization and as a Legal Entity? The connection between independent legal entities, regardless of their nature, creates a form of financial entity between affiliated businesses. Greek law does not recognize in principle this financial entity as an independent subject of rights and obligations (a legal person). Hence, there is a difference between the economic and legal realities, where the financial dependence of group members conflicts with their legal independence. This divergence between the unity of the group and the multiplicity of the members is the underlying cause of the majority of legal issues created between affiliated companies. However, this divergence between financial and legal reality is not absolute. In the service of the public interest and/or for reasons of leniency, Greek law will recognize, in specific cases, a group of companies as a unit (single enterprise) or will connect the forming of a group with essential legal consequences. The most essential consequence is the recognition of rights and obligations arising out of the acts and omissions of one company in a group of companies to another company of the same group (usually the controlling company).6 Indeed, in a recent ruling of the Supreme Court, which was particularly criticized in the literature,7 it was accepted that a group of companies could be considered a consortium because of the concerted action of its members.8 Of course, the consortium, so far as it does not formally acquire a corporate form, does not have legal personality. Nevertheless, it acquires the ability to be the subject of rights and obligations9 and therefore can also be an employer.10 It can also be a litigant and be represented in the Courts by persons who are appointed to manage its cases (Code of Civil Procedure art. 62 and 64 para. 3).11 However, where appropriate, litigants could also be the members of the consortium.12 Based on the abovementioned case law, the issue in question is which of the connected companies, in each case, could be the subject of rights and obligations. Another important issue is the relationship between connected companies, their bodies and creditors. This issue is principally addressed as a specific issue of corporate law.

6

See also below under Sect. 3.6. See Perakis (2015), p. 619. 8 Supreme Civil Court 1245/2014, (2015) ΔΕΕ 618. 9 See Supreme Civil Court (Plenum) 14/2007, (2007) ΔΕΕ 932. See also art. 293 of Law 4072/2012. 10 Supreme Civil Court 1245/2014, (2015) ΔΕΕ 618. 11 Supreme Civil Court 1245/2014, (2015) ΔΕΕ 618. 12 Supreme Civil Court 1245/2014, (2015) ΔΕΕ 618. 7

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3 Groups of Companies in Corporate Law Greek legislation traditionally acknowledged a société anonyme as an independent legal person, without substantial connections to or dependencies on other legal persons/companies. Consequently, the interests of the shareholders, creditors and managers of the company operate in parallel. Of course, even in independent companies, there is always a possibility that majority shareholders will use their powers to conduct transactions in their own interests.13 However, as indicated below, the problem is more intense when a company is controlled by another company.14 This control, especially for sociétés anonymes, creates a change of paradigm in the internal and external relations of a company. Before analyzing the abovementioned relationships, it is to be noted that in Greek law, there are no codified provisions on groups of companies. Nonetheless, individual provisions are scattered throughout corporate law, referring mainly to sociétés anonymes. Indeed, even in corporate law the concept of control, of a parent over a subsidiary company, references provisions on accounting standards. According to the latter, the control is defined as the ability of an entity to determine the financial and operational policies of another entity in order to collect profits arising out of the latter company’s activities.15

Correspondingly, the parent company is described as ‘the entity, which controls one or more subsidiaries’16 and (conversely), a subsidiary company is considered to be the entity, which ‘is controlled by a parent entity’.17 Moreover, a group of companies is ‘a parent company and all its subsidiaries’,18 whereas law 4308/2014 in its Definition Annex distinguishes between ‘dominant’ and ‘significant’ influence. Dominant influence is referred to as ‘the ability of an entity (investor) to determine the financial and operational decisions of another entity, without taking into consideration other parties’ rights or influences’.19 Dominant influence is the main version of ‘control’. In contrast to dominant influence, significant influence is referred to as the ability of an entity to influence financial and operational decisions of another entity, without exercising control or at least joint control on this other entity.20

13

See, also, Triantaffylakis (2003), p. 281 et seq. with illustrative examples. Rokas (2012), p. 614. 15 See Annex Α of Law 4308/2014. 16 See Annex Α of Law 4308/2014. 17 See Annex Α of Law 4308/2014. 18 See Annex Α of Law 4308/2014. 19 See Annex Α of Law 4308/2014. 20 See Annex Α of Law 4308/2014. 14

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It is presumed that significant influence exists when the entity owns directly or indirectly at least the 20% of voting rights of another entity, unless the opposite may be proved.21

The entity ‘in which another entity participates and exercises significant influence over the former entity’s operational and financial policies’ is said to be ‘associated’ with the entity on which it exercises significant influence’.22 Nevertheless, as provided in art. 32 para. 2 of Law 4308/2014: a parent entity shall draw up consolidated financial statements of itself and any other entity, if the parent entity: a) has a majority of the shareholders’ or members’ voting rights in another entity (a subsidiary entity). b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another entity (a subsidiary entity) and is at the same time a shareholder in or member of that entity. c) has the right to exercise a dominant influence over another entity (a subsidiary entity) of which it is a shareholder or member, pursuant to a contract entered into with that entity or to a provision in its memorandum or articles of association. d) is a shareholder in or member of another entity, and either: d1) controls alone, pursuant to an agreement with other shareholders in or members of that entity (a subsidiary entity), a majority of shareholders’ or members’ voting rights in that entity, or d2) the following three conditions cumulatively apply: d2i) a majority of the members of the administrative, management or supervisory bodies of that entity (a subsidiary entity) have held office during the preceding financial year and up to the time when the consolidated financial statements are drawn up, as a result of the exercise of its voting rights, and d2ii) the voting rights held by that parent entity represent at least 20% of the total voting rights in the subsidiary entity, and d2iii) no third party has the rights referred to in points a), b) and c) of this paragraph with regard to that entity (a subsidiary entity). e) has the power to exercise, or actually exercises, dominant influence or control over another entity (the subsidiary entity).

In addition, connection between enterprises affects, directly or indirectly: (a) the relationships between the connected enterprises and (b) the relationships between connected enterprises and third parties. Before analyzing these matters, we should refer to the concept of the interest of the group and to the provision of instructions from the parent to subsidiary companies.

21 22

See Annex Α of Law 4308/2014. See Annex Α of Law 4308/2014.

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Interest of the Group

The Greek literature used to be opposed to recognizing the interest of the group.23 Currently, many scholars, taking into consideration the financial importance of groups at the European level and the fact that groups constitute a financial unit, recognize the interest of the group.24 The rationale for this is to enable groups of companies (especially multinationals) to operate effectively in a competitive environment. Hence, a company’s transactions should not be examined in isolation but rather integrated into a wider financial strategy, which may not necessarily have short-term results. From this point of view, connection can be the source of both obligations (e.g., sanctions) and rights of the parent company (e.g. to give instructions to the subsidiary in the name of the group of which it is a part). The influence of French case law on this point is apparent (Rozenblum Doctrine). According to the latter, a subsidiary company is lawfully taking short-term harmful decisions, provided that: (a) it does not harm its own existence, (b) it is to the benefit of the wider interests of the group and (c) it is to the benefit of its own medium and long-term interests.25 In addition, the trend to recognize the interest of the group is currently recorded in the European Union’s documents, such as communications of the Commission from 200326 and 201227 but also in special legislative texts, such as art. 19 of Directive

23 See Georgakopoulos (1996), p. 362: ‘affiliated businesses preserve not only their own legal personality, but also the independence of their own creditors’ and shareholders’ interests; the bodies of each affiliated company have the obligation to pursue its their goals and satisfy their own creditors, namely these bodies might breach this obligation, if they put the interests and goals of the group above the affiliated company’s own interests’. In this direction also Katsas (2013) Art. 23a, no. 49. 24 See, with differentiations, Varela (2007), p. 171 et seq.; Davrados (2010), no. 70, 71. See also Perakis (2010), Introduction, no. 42 and Rokas (2012), p. 614, which seem to be positive on the recognition of interest of the group. 25 Cass. crim. 4. 2. 1985, Rev. soc. 1985, 648. See generally Βoursier (2005), p. 273. 26 Communication from the Commission to the Council and the European Parliament – Modernizing Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward COM 2003/0284 (final): ‘Member States should be required to provide for a framework rule for groups that allows those concerned with the management of a company belonging to a group to adopt and implement a co-ordinated group policy, provided that the interests of that company’s creditors are effectively protected and that there is a fair balance of burdens and advantages over time for that company’s shareholders. The Commission sees the introduction of such a rule as an important step towards improved business efficiency and competitiveness, but stresses that appropriate safeguards have to be carefully designed. A proposal for a framework Directive to this effect will therefore be presented in the medium term’. 27 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee of the Regions COM(2012) 740, no. 4.6.: “Simplified communication of a group’s structure to investors and an EU-wide move towards recognition of the concept of ‘group interest’ would be welcomed by stakeholders. . . . The Commission will, in 2014, come up with an initiative to improve both the information available on groups and recognition of the concept of ‘group interest’”.

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2014/59 on intra-group financial support.28 Nevertheless, and in spite of these specific provisions and the apparent trend to recognize the interest of the group, there is no settled case law on this issue. Consequently, in Greek law it remains unclear whether the interest of the group is recognized and if so, what its exact content is.

3.2

Instructions to the Subsidiary Companies

The interest of the group is tightly connected to the possibility of a parent company giving instructions to and defining the policy of its subsidiary companies. This possibility is indirectly recognized in Greek law. More specifically, the law on sociétés anonymes provides for the absence of BoD members’ responsibility in cases of compliance with a legitimate decision of the General Assembly (G.A.).29 This provision is often used as a tool to restrict the responsibility of BoD members for decisions made by a majority of the shareholders. The dogmatic background for this is the supremacy of the General Assembly, which has the authority to decide any corporate issue.30 Moreover, its decisions are considered mandatory, even in cases where shareholders are absent or disagree.31 On the other hand, the provision on the absence of BoD members’ responsibility should not result in reducing the BoD members’ authority to administer the day-today operations of the société anonyme. At the level of the European Union, as well, the current trend as recorded in the draft Directive for the single-member limited liability company32 and in the study of the future of European law33 is the recognition of the authority to provide instructions, especially when this does not result in endangering creditors’ interests and bankrupting the controlled company. Nonetheless, the recognition of the authority is connected to the issue of the parent company’s responsibility towards a subsidiary, as well as towards its creditors, through the provision of specific instructions. We will also address this issue further under Sects. 3.4, 3.5 and 3.6.

28 Directive 2014/59/ΕU of the European Parliament and the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms. 29 See art. 22a para. 2 of Law 2190/1920, which corresponds to art. 102 para. 4 of Law 4548/2018. 30 See generally Tziva (2013) Art. 33, no. 16.; Athanasiou (2010) Art. 33, no. 11 et seq. 31 See art. 33 of Law 2190/1920, which corresponds to art. 116 of Law 4548/2018. 32 Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies COM/2014/0212 final, art. 23 para. 1: ‘The single-member shall have the right to give instructions to the management body’. 33 Report of the reflection group on the future of EU company law, 2011, 59: ‘Any EU legislation should . . . seek to maintain and enhance the flexibility of the management of groups in its international business activities’.

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Rules on Transparency

An important issue of law for connected companies is transparency. Transparency may refer to: (a) formation, (b) structure and (c) operation of the group. In Greek law, there are specific provisions regarding transparency in the formation of a group having registered its shares to a stock exchange. The means to achieve transparency is the obligation to announce the acquisition or disposal of major shareholdings.34 In addition, regarding the structure of a group, transparency is secured through the drafting of consolidated financial statements, in the notes of which information for all affiliated entities in the group is contained.35 To achieve transparency on the operation of a group, Greek accounting standards provide that a specific reference is made in the addendum of financial statements regarding transactions with affiliated entities, as well as other necessary data for the understanding of its financial position.36 A relevant provision is also laid down in IAS 27 and 24. Of course, these provisions are quite complex and do not describe the organization and operations of a group in a way that is easy for investors to understand.37 Finally, provisions for the obligation of BoD members to disclose to other BoD members any conflicts of interest, which might occur during the performance of their duties, are of special importance.38

3.4

Rules on Protection of Minority Shareholders and Creditors

Provisions regarding the protection of minority shareholders and creditors have either preventive or repressive nature. In the first category, there are rules for the protection of share capital (restrictions in the acquisition of shares,39 provision of credit for the acquisition of shares,40 acquisition of shares through third parties,41 etc.), as well as provisions for

34

See analytically Tountopoulos (2015), p. 297 et seq. Art. 36 of Law 4308/2014. 36 Art. 29 para. 31 of Law 4308/2014. 37 Report of the reflection group on the future of EU company law, 2011, 75: ‘. . .Although there are numerous and detailed rules on group information, there is no rule requiring an annual report, corporate governance statement or company website to describe the main features of a company’s group structure in a clear and investor – friendly manner. . .’. See, also, ICLEG, Report on information on groups, 2016. 38 See art. 22a para. 3, 3a, 3b of Law 2190/1920, which corresponds to art. 97 para.1 of Law 4548/ 2018. 39 See art. 16 of Law 2190/1920 corresponding to art. 49 of Law 4548/2018. 40 See art. 16α of Law 2190/1920 corresponding to art. 51 of Law 4548/2018. 41 See art. 17 of Law 2190/1920 corresponding to art. 52 of Law 4548/2018. 35

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concluding transactions with related parties. From this point of view, art. 23a of Law 2190/1920 is of special importance,42 since it provides that: 1. a) Without prejudice to the provisions that from time to time regulate the transactions of credit and financial institutions with persons that have a special relationship with them, as well as to article 16a of the present law, loans must not be granted by the company to the persons of para. 5 of the present article and, if granted, they shall be absolutely null and void. The prohibition of the previous section also applies to the granting of credit to these persons in any manner whatsoever or the granting of guarantees or securities to third parties in favour of these persons. b) Exceptionally, the granting of a guarantee or other security in favour of persons of para. 5 is permitted only in cases where: aa) the guarantee or security serves the company’s interest, bb) the company has legal recourse against the principal debtor or the person in favour of whom the security is granted, cc) it is stipulated that the guarantee or security grantees will be satisfied only after the full payment or the consent of all the creditors with claims that had already been established at the time of publication according to the next section c and dd) a permission by the General Meeting has been previously granted. This permission is not granted if shareholders representing at least one tenth (1/10) of the share capital represented at the meeting or one twentieth (1/20) in case the company that has shares listed on the Stock Exchange, oppose the decision. The Board of Directors submits to the General Meeting a report on the fulfilment of the conditions of the present subparagraph. c) The decision of the General Meeting taken according to the previous subsection dd and containing the basic elements of the guarantee or security and, particularly, their amount and duration, as well as the report of the Board of Directors, is subject to the publication of article 7b. The validity of the guarantee or security begins only upon publication. 2. Any other contracts concluded by the company with the persons of para. 5 are forbidden and, if concluded, they shall be null and void unless special permission is given by the General Meeting. This prohibition is not applicable in case of acts that do not exceed the limits of current transactions of the company with third parties. This prohibition, when referring to a company with listed shares on the Stock Exchange, applies: a) to its affiliated companies, as provided under IAS 24 and b) to acts concerning at least 10% of its assets, even in cases where those acts fall under the limits of current transactions of the company with third parties. 3. The permission of the General Meeting according to the preceding paragraph 2 is not granted if shareholders representing at least one third (1/3) of the share capital represented in the meeting have opposed the decision. 4. The permission of para. 2 may also be granted after the conclusion of the contract, unless shareholders, representing at least one twentieth (1/20) of the share capital represented in the meeting, have opposed the decision. 5. The prohibitions of paras. 1 and 2 apply to the members of the Board of Directors, the persons who exercise control over the company, their spouses and relatives by blood or by marriage up to the third degree, as well as the legal entities which are controlled by the above. A natural or legal entity is considered to exercise control over the company if one of the sections of para. 5 of article 42e applies. The Articles of Association may extend the application of the present article to other persons, particularly to general managers of the company.

42 See on the goal of art. 23a of Law 2190/1920 Court of Appeal of Piraeus 1046/2006, (2008) ΔΕΕ 54.

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Contracts of para. 1 are allowed, if concluded between or granted in favour of legal entities, under consolidation between them, according to articles 90 to 109, under the conditions of paras. 2, 3 and 4. 6. The prohibitions of paras. 1 and 2 also apply to contracts concluded by the persons of para . 5 with legal entities controlled by the company within the meaning of para. 5 of article 42e or with general or limited partnerships, in which the company is a general partner, as well as to contracts on guarantees or securities granted by these persons. 7. Contracts of para. 2 that are concluded between the sole shareholder and the company he/she represents are filed in the minutes of the General Meeting or the Board of Directors or are executed in writing under the penalty of nullity. The provision of the previous section does not apply in the case of current transactions of the company.43

Moreover, provisions regarding the rights of minority shareholders in controlling, as well as in controlled companies, are of special interest; these are mainly the right to be informed44 and the right to request an audit of the company.45 Special reference to the right of minority shareholders to be informed and to conflicts of interest is made below under Sect. 3.5.2. In the second category, there are provisions for the responsibility of a controlled business’s managers and for the responsibility of the controlling business towards the controlled business and third parties. References regarding the legal basis of the controlling business’s liability towards third parties are given below under Sect. 3.6.

3.5

Internal Relationships in Groups of Companies

Internal relationships in a group of companies are defined, specifically, as the relationships between: (a) a parent company and the management bodies of a subsidiary, (b) a parent company and the minority shareholders of a subsidiary and (c) the majority shareholders and minority shareholders of a parent company.

43 Translation based on Lambadarios Law Firm, Law 2190/1920 on Companies Limited by Shares (Sociétés Anonymes), 2011. Nonetheless, art. 23a of Law 2190/1920 has been widely amended by art. 99 et seq. of Law 4548/2018, which enacted art. 9c of the SRD II. As a general rule transactions between the SA and related parties are not valid without previous consent of the BoD or the General Assembly of the SA what the case may be. The same applies to the granting of security or guarantee to any third party for the benefit of the related party. The prohibition shall not apply to specific transactions laid down in Law 4548/2018. Moreover, Law 4548/2018 lays down the procedure for the provision of the required consent by the BoD or the General Assembly of the SA. 44 See art 39 of Law 2190/1920, which corresponds to art. 141 et seq of Law 4548/2018. See also below under Sect. 3.5.2. 45 It is doubtful whether such a right exists referring to transactions not included to the financial statements. See also Alexandridou (2016), p. 663.

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Parent Company and BoD of Subsidiary

From a practical point of view, relationships between a parent company and the management bodies of controlled businesses do not often present particular issues. This is because in a group of companies, the majority shareholders control the management bodies of subsidiaries by appointing or revoking them directly or indirectly.46 Generally, in Greek law, revocation of BoD members in sociétés anonymes does not need any justification. This fact obliges BoD members to comply with instructions coming from majority shareholders. A divergence of opinions may occur in cases where a controlling business requests that the controlled business concludes a dangerous or harmful transaction. In this case, the BoD members of a subsidiary who are responsible to this subsidiary on the basis of general rules of law for sociétés anonymes,47 face the following dilemma: either to comply with the instructions of the controlling business, while undertaking relevant legal risks, or not doing so and being recalled by the management of the controlling business.

3.5.2

Parent Company and Minority Shareholders of the Subsidiary

Conflicts between a controlling business and the minority shareholders of controlled businesses might occur very often. These cases have many common characteristics with the problem which occurs in independent companies with respect to relationships between majority and minority shareholders,48 with the exception that in a group of companies, as already mentioned, the intensity and extent of the matter is completely different. This is because more companies of the same group might have the same business activities. This fact could be the cause of constant conflicts of interest in groups, especially where the interest of a subsidiary is not identical to the interest of its parent company, or vice versa. A parent company, in the framework of its business strategy, is particularly often required to make choices about: (a) distributing dividends, (b) developing new activities or (c) cutting costs from the companies of the group. This fact may lead to conflicts of interest inside a group of companies,49 which may appear not only in relationships between minority shareholders of a controlled business and the controlling business but also in relationships between minority shareholders and their BoD members. 46

According to art. 19 para. 2 of Law 2190/1920, which is of mandatory nature, BoD members may be reelected and freely revoked. Art. 19 para. 2 of Law 2190/1920 corresponds to art. 77 para. 2 of Law 4548/2018. 47 See, specifically, art. 22a of Law 2190/1920, which correspond to art. 102 et seq. of Law 4548/ 2018. 48 Rokas (2012), p. 616: ‘. . . the establishment [of responsibility] should basically be searched for in the very same provisions on responsibility, which are implemented in case a company is dominated by a shareholder who does not exercises entrepreneurship. . .’. 49 Mikroulea (2017), pp. 14, 17.

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It is clear that conflicts of interest are more intense when (a) BoD members of controlling and controlled businesses are the same (Vorstandsdoppelmandate)50 and (b) a group has a pyramid structure, where controlling shareholders of a parent company are able to control a large number of subsidiaries at different levels. This structure allows possible financial damage for the controlling shareholder to be restricted in an absolute ratio to the distance between the parent and subsidiary companies. In other words, the distance of a subsidiary from the parent is proportional to the diminishment of the potential damage for the controlling shareholder. In contrast, conflicts of interest are diminished when a controlled business is fully owned (100%) by the controlling business. This is so because in that case, the controlling business fully manages its own assets. Problems may occur, even in cases where absolute control is exercised, when actions taken by managers of a controlled business may endanger the very existence of the same controlled business. The abovementioned conflicts of interest are handled by Greek legislation mainly on the basis of provisions on related party transactions, whereas art. 22a para. 3b provides that BoD members and any third party assigned with BoD authorities should reveal to other BoD members their own interests on time, which might arise out of company’s transactions during the exercise of their duties and any other conflict of their own interests towards those of the company or their affiliated companies according to para. 5 of art. 42e of the same law, during the exercise of their duties.51

Furthermore, as provided in art. 22a para. 3c of law 2190/1920 If there is a conflict of interest or such a case is declared according to the above, provisions of art. 66 of the Civil Code apply52

In addition, as provided in art. 66 of the Civil Code, a BoD member is not entitled to vote if the decision concerns a transaction, a filing or withdrawal of a lawsuit of the legal entity towards the same BoD member, his/her spouse and/or his/her family member up to the 3rd degree, whereas as provided in art. 69 of the Civil Code, if the interests of BoD members are contrary to the interests of the legal entity, the president of the First Instance Court appoints a provisional management, following

50

See analytically Mikroulea and Vervessos (2016), pp. 573, 585. Art. 22a para. 3b of Law 4548/2018 corresponds to art. 97 para. 1b of Law 4548/2018. See also art. 65 para. 1b of law 4072/2012 regarding the obligation of IKE manager to disclose on time to company’s participants his/her own interests which might arise out of company’s transactions, the said transactions falling under his/her duties, as well as any other conflict of his/her own interests with company’s interests or its affiliated businesses’ interests according to para. 5 of art. 42 of law 2190/1920, which might arise during his/her responsibilities. 52 Art. 22a para. 3b of Law 4548/2018 corresponds to art. 97 para. 3 of Law 4548/2018. According to the latter provision, Members of the BoD are not entitled to vote if there is a conflict of interest. Nonetheless, where a quorum is not present, the decision has to be taken by the General Assembly of the SA. Art. 69 of the Civil Code does not apply. 51

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a relevant petition by whoever has a legal interest.53 The settled case law accepts that art. 69 of the Civil Code is general and auxiliary to the special provisions of law 2190/1920.54 Thus, conflicts of interest between the same legal entity and its BoD members do not justify the appointment of a provisional management if special provisions referring to and solving this matter are set out. This might be the case especially for art. 23a of Law 2190/1920, which provides for transactions between the société anonyme and its affiliated entities.55 However, specific decisions of Greek Courts accept that art. 69 of the Civil Code applies even when the G.A. is aware of competing actions of BoD members and has provided its consent for said actions, as set out in the law for sociétés anonymes.56 It is to be noted that in contrast to the law for Ltd.’s, where it is provided that voting rights may not be exercised by participants in cases referring to their discharge from their liabilities or filing of a lawsuit against them,57 the law of sociétés anonymes does not provide for restrictions on the shareholders’ voting rights; also the exercise of voting rights during a General Assembly is always possible by shareholders—members of BoD, even if it concerns the discharge of BoD members from their responsibilities, the filing or withdrawal of a lawsuit by the société anonyme against them or the conclusion of transactions between them and the société anonyme.58 For the rest, protection of minority shareholders is achieved by the specific provisions of Company law providing for the right to information of minority shareholders, as follows: (a) shareholders owning 1/5 of the paid share capital have the right to request information regarding the general course of corporate business,59 (b) shareholders owning 1/20 of the paid share capital have the right to request during a G.A. information regarding paid amounts to BoD members and managers of the société anonyme during the last to 2 years60 and (c) each shareholder has the right to request that the BoD provide the G.A. with specific information to the extent it is necessary for the evaluation of the G.A.’s subjects.61

Supreme Civil Court 765/2005, (2005) ΔΕΕ 819, Court of First Instance of Syros 490/1997, (1999) ΕΕμπΔ 514, Alexandridou (2016), p. 663. 54 Supreme Civil Court 1313/1997, (1997) ΔΕΕ 1173; Court of Appeal of Piraeus 29/2010, (2010) ΔΕΕ 1183; Court of Appeal of Patras 226/1997, (1997) ΔΕΕ 591; Magistrates’ Court of Vassilika 14/2014, (2013) ΕπισκΕΔ 1025. 55 Dellios (2010), Art. 66, no 3. 56 Court of Appeal of Larissa 375/2009, (2010) Αρμ. 1176. 57 See art. 12 para. 2 of Law 3190/1955. 58 See art. 35 para. 2 of Law 2190/1920 corresponding to art. 108 para. 2 of Law 4548/2018. See however art. 100 para. 5 and 124 para. 8 of Law 4548/2018. See generally Tountopoulos (2019), p. 244. 59 See art. 39 para. 5 of Law 2190/1920 corresponding to art. 141 para. 7 of Law 4548/2018 (requiring 1/10 of the paid capital). 60 See art. 39 para. 4 of Law 2190/1920 corresponding to art. 141 para. 6 of Law 4548/2018. 61 See art. 39 para. 4 of Law 2190/1920 corresponding to art. 141 para. 6 of Law 4548/2018. 53

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Relationship Between Majority and Minority Shareholders in the Parent Company

It is apparent that conflicts of interests do not arise only inside a controlled business but also inside a controlling business, especially when the main shareholder in agreement with the management of the parent company may undertake risky decisions through its subsidiaries or transfer the subsidiaries’ assets without prior information or the consent of minority shareholders.

3.6

External Relationships in Groups of Companies

As external relationships are considered the relationships of a group of companies with persons not owned by the group, such as a company’s creditors and employees. An important issue is the responsibility of a parent company towards the creditors and employees of its subsidiaries. The analysis mentioned above regarding internal relationships of companies within a group applies in this case too.62 Nonetheless, creditors are not always in the position to recognize the financial situation of a subsidiary. In this light, beyond transparency provisions, emphasis is given in provisions referring to the payment and maintenance of share capital and the establishment of (internal and external) liability of the parent company for acts and omissions of its subsidiaries. In Greek law, the (non-contractual)63 liability of a parent company may be established based on:64 (a) rules referring to the lifting of the corporate veil65 and/or abuse of the legal entity66 and (b) tort law. In the case of tort law, the vicarious liability of the parent company could also be established. Moreover, recent literature and case law also refers to the principles of breach of confidence (Vertrauenshaftung) or estoppel (Rechtsscheinhaftung).67 The liability of a parent company could also be established in corporate law provisions (e.g., the non-legal distribution of dividends or return of capital) and principles, especially in a major shareholder’s duty of loyalty.68 In the literature, 62

See above under Sect. 3.5. See on comfort letters Vervessos (2006), p. 19; Tzouganatos (2006), p. 863. 64 Mikroulea (2017), pp. 14, 24. 65 See in this direction Court of Appeal of Athens 5367/2003, (2005) ΕΕμπΔ 542. 66 Supreme Civil Court 2/2013 (Plenum), (2013) ΠειρΝoμ 48; Supreme Civil Court 905/2010, (2011) ΕΕμπΔ 86; Supreme Civil Court 9/2009, (2009) ΕλλΔνη 767; Alexandridou (2016), p. 662. 67 See in this direction Court of Appeal of Piraeus 940/2003, (2004) ΕπισκΕΔ 931; Court of First Instance of Thessaloniki 7941/2013, (2013) ΕλλΔνη 1426. See also the facts in Civil Supreme Court 37/2005 (Plenum), (2005) ΕλλΔνη 1040. 68 See on this issue analytically Alexandridou (2016), p. 380; Antonopoulos (2009), p. 227 et seq.; Georgakopoulos (2002), p. 79; Markou (2002), p. 1 et seq.; Rokas (2012), p. 374; Tellis (2002), p. 907; Triantafyllakis (2003), p. 673. 63

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reference is also made to the liability of the shadow director. A shadow director is the one who exercises de facto control of a subsidiary. Nevertheless, the grouping of companies and the provision of instructions do not necessarily establish the capacity of a shadow director. Moreover, the theory of the shadow director has not been widely recognized in the case law. Special liability provisions also apply in the case of insolvency.

4 Groups of Companies Outside Corporate Law Despite the fact that connected businesses are considered to be a specific issue of corporate law in the Greek literature, grouping is familiar to other areas of the law as well. Focusing on the basic characteristic of groups, namely, the (inter)connection, as it is defined in the relevant provisions, the legislation (often at the level of the European Union) sets out specific rules for connected businesses. The rationale of these provisions can vary considerably (e.g., the protection of the market, the environment, the public interest, etc.). From this point of view, it is clear that every effort to codify the provisions of the law of connected businesses for the entire spectrum of law and all company types would be both incorrect as a matter of doctrine, due to the different purposes pursued, and practically impossible due to the plurality of relevant provisions. The analysis of these provisions, which might be in the nature of either public or private law, goes far beyond the purpose of the present article. At this point, however, it would be appropriate to refer to the following: (a) tax law. As a matter of principle, a group is not acknowledged as an independent subject of taxation.69 However, in order to safeguard the taxable base, there are provisions regarding conditions for concluding transactions between affiliated businesses.70 Hence, profits that were not realized, because the conditions of the transactions were divergent from the arm’s length principle, are included in the profits of a legal entity.71 In that regard, legislation sets out procedural obligations for companies realizing intra-group transactions, such as the obligation of maintenance of documentation files.72 (b) labour law. A group of companies is generally not considered to be an employer.73 This is the legal entity that employs the employees.74 Specific

69

See generally Sotiropoulos (2006), pp. 127, 135. See Tsourouflis (2010), p. 16 et seq. 71 Art. 50 of Law 4172/2013. 72 Art. 21 of Law 4174/2013. See generally on the new tax legal framework Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 73 See however above fn 11. 74 See generally Douka (1998), p. 819. 70

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provisions, however, are set out for the protection of employees’ rights to information and consultation.75 In parallel, the protection of the intra-group transfer of employees is of special importance for labour law (borrowing employees),76 whereas in cases of consecutive labour agreements the companies of the same group are considered to be the same employer.77 For more details regarding a parent company’s responsibility towards a subsidiary’s employees, see above under Sect. 3.6. (c) competition law. Grouping is of particular importance for competition law, which requires prior notification of a merger (if specific conditions are met during the establishment of affiliation between the businesses). The rationale for this is the protection of the market structure.78 For the rest, competition law focuses on the concept of undertaking, which might include more independent legal entities.79 Transactions between businesses of the same group are not considered to restrict competition, since subsidiaries are not considered to be independent undertakings.80 Nevertheless, the persistence of the concept of legal personality would allow affiliated businesses to easily overcome the relevant provisions and possible payment of fines by an insolvent legal entity.81 Therefore, subsidiaries’ acts are imputed (under certain conditions) to parent companies,82 whereas fines to be imposed are calculated on the annual turnover of the group.83 (d) law on public procurement. Legislation on public procurement focuses in certain cases in the business and not on the legal entity, allowing businesses to use the techniques and business capacity of their affiliated enterprises (borrowed experience)84 in order to participate in public tenders, whereas the

75

See art. 49 et seq. of Law 4052/2012. See generally Lixouriotis (1998), p. 1056. See Lixouriotis (1995), p. 382. 77 See Presidential Decret 180/2004. 78 See recital 5 of Regulation 139/2004: ‘However, it should be ensured that the process of reorganization does not result in lasting damage to competition; Community law must therefore include provisions governing those concentrations which may significantly impede effective competition in the common market or in a substantial part of it’. See also Kokkoris and Loucas (2013), p. 752 et seq. 79 Case C-501/11, P Schindler Holding, para. 103: ‘The concept of an undertaking has been defined by the European Union judicature and designates an economic unit even if in law that economic unit consists of several natural or legal persons’. 80 Case C-73/95 P, Viho, para. 16. See also Roussis (2006), pp. 745, 753. 81 Case C-480/09, P AceaElectrabel Produzione SpA, para. 47. 82 Case C-97/08 P, Akzo Nobel NV, para. 77 et seq. See also Athanasiou and Mastromanolis (2009), p. 1301; Pitsos (2013), p. 1019. 83 See art. 25 para. 2 of Law 3959/2011 as well as art. 23 para. 4 of Regulation 1/2003. 84 Case C-5/97, Ballast Nedam Groep NV, para. 14: ‘. . .the authority competent to decide on an application for registration submitted by a dominant legal person of a group is under an obligation, where it is established that that person actually has available to it the resources of the companies belonging to the group that are necessary to carry out the contracts, to take account of the references 76

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majority of offers coming from the same group of companies may be met with reservation.85 (e) accounting law. This focuses on the entire picture of the group and thus requires the drafting of consolidated financial statements by the parent company.86 The purpose of this is to ensure transparency regarding the financial situation of a group and to subsequently protect any person concluding transactions with it.87 At the level of the European Union, this requirement is founded on Directive 2013/34,88 whereas in Greek law, consolidated financial statements are set out under Law 4308/2014. (f) capital markets law. Grouping plays an important role in capital markets law mainly in (a) accounting disclosure requirements89 and (b) the calculation of shares for voting rights owned directly/indirectly by a person. The latter affects the transparency obligations (announcement of acquisition or disposal of major shareholdings90) and mandatory bids.91 Specific provisions also exist regarding exceptions from mandatory bids for intra-group mergers,92 however, interpretative issues arise in the implementation of provisions regarding market abuse and ad hoc disclosure to the extent that the facts concern the affiliated businesses of a listed company.93 Finally, corresponding to the analysis on competition law, sanctions are also calculated based on the annual turnover of the group.94 (g) supervisory law. A group of companies that provides financial services is considered to be a unified business, which requires consolidated supervision.95

of those companies in assessing the suitability of the legal person concerned’. In this direction also Supreme Administrative Court 2827/2014. See also art. 78 of Law 4412/2016. 85 Case C-538/07, Assitur Srl, para. 28: ‘. . .it would run counter to the effective application of Community law to exclude systematically undertakings affiliated to one another from participating in the same procedure for the award of a public contract. Such a solution would considerably reduce competition at the Community level. . .’ and 32: ‘the question of whether the relationship of control at issue influenced the respective content of the tenders submitted by the undertakings concerned in the same public procurement procedure requires an examination and assessment of the facts which it is for the contracting authorities to carry out. A finding of such influence, in any form, is sufficient for those undertakings to be excluded from the procedure in question. However, a mere finding of a relationship of control between the undertakings concerned, by reason of ownership or the number of voting rights exercisable at ordinary shareholders’ meetings is not sufficient’. See., also, art. 91 of Law 4412/2016. See, further, Supreme Administrative Court 1086/2015, where a subsidiary was considered independent in relation to its parent company. 86 See also above under Sect. 3. 87 See Sotiropoulos (2006), pp. 127, 131. 88 See Kalss and Klampfl (2015), no. 278. 89 See above under Sect. 4 (e). 90 Art. 9 of Law 3556/2007. See analytically Tountopoulos (2015), p. 298 et seq. 91 Art. 7 of Law 3461/2006. See analytically Tountopoulos (2015), p. 234. 92 Art. 8 στ) of Law 3461/2006. 93 See on this direction Administrative Court of Appeal of Athens 1318/2016. 94 Art. 37 of Law 4443/2016 as well as art. 30 para. 2 Regulation 596/2014 (MAR). 95 Hopt (2007), pp. 199, 206.

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Consolidated supervision focuses on risk monitoring and the capital adequacy of supervised institutions on the basis of their international activities.96 The principle97 of consolidated supervision is laid down in art. 104 of Law 4261/2014. According to the latter, when a parent company is seated in Greece or the E.U., then consolidated supervision is exercised by the Bank of Greece or the European Central Bank, if the latter had granted the relevant operation license. (h) insolvency law. At the level of substantive law, a different legal personality for each member of a group prevents, in principle, the dissolution or insolvency of other members of the same group.98 Nonetheless, a member’s insolvency may affect contractual relationships with other members of the same group.99 At the level of the European Union there are special provisions referring to insolvency procedures for companies of the same group that have their registered seats in different member-states.100 Thus, if insolvency procedures start for more companies of the same group, institutions participating in these procedures have to duly collaborate. Regulation 2015/848 provides for analytical procedures on the collaboration between different institutions, which ought to facilitate insolvency procedures and have a positive result for creditors.101 Special provisions are also provided at the level of the European Union for the liquidation of credit institutions.102 (i) private international law. Without prejudice to European Union law, the applicable law for companies (legal entities) is the law of their actual (real) seat.103 However, in multinational groups it is not possible to implement only one lex societatis to relationships between affiliated businesses in a unified way.104 Moreover, Greek law does not have any specific rule regulating the law applicable to a group of companies. According to the prevailing view in the legal theory, the internal relationship of control is governed by the lex societatis of the controlled company.105 For the rest, applicable law must be determined individually on the basis of each case’s facts.106

BCBS, Principles of the Supervision of Bank’s Foreign Establishments (May 1983): ‛the principle of consolidated supervision is that parent banks and parent supervisory authorities monitor risk exposure . . . of the banks or banking groups for which they are responsible, as well as the adequacy of their capital, on the basis of the totality of their business wherever conducted’. 97 Art 111 of Directive 2013/36/ΕΕ. 98 Perakis (2017), p. 395 et seq. See on exceptional expansion of bankruptcy of a group member to others members of the group Varela (2009), p. 401 et seq. 99 See generally Emmerich and Habersack (2016), p. 372. 100 Art. 56 to 77 Regulation 2015/848. 101 Recital 57 of Regulation 2015/848. See also Parzinger (2016), p. 63; Kindler and Sakka (2015), p. 460; Bechri-Kechagioglou (2013), p. 929. 102 Hadjiemmanuil (2014), p. 209; Hadjiemmanuil (2015). 103 Art. 10 Greek Civil Code. See also Court of Appeal of Piraeus 151/2016 (ΝΟMΟΣ); Court of Appeal of Piraeus 267/2016 (ΝΟMΟΣ); Court of Appeal of Piraeus 269/2016 (ΝΟMΟΣ). 104 Pamboukis (2004), no. 190; Katsas (2013) Art. 23a, no. 105. 105 Davrados (2010), no. 133; Katsas (2013) Art. 23a, no. 106. 106 Davrados (2010), no. 133; Katsas (2013) Art. 23a, no. 106. 96

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(j) environmental law. The relevant provisions referring to environmental liability are established in presidential decree 148/2009. There are no special rules on environmental responsibilities within a group. However, a parent company can be considered to be an operator according to art. 3 no 6 of presidential decree 148/2009. According to the latter, ‘operator’ means any natural or legal, private or public person who operates or controls the occupational activity or to whom decisive economic power over the technical functioning of such an activity has been delegated, including the holder of a permit or authorization for such an activity or its legal representative or the person registering or notifying such an activity. Theoretically, the environmental liability of the parent company could also be based on general principles of civil law referring to the piercing of the corporate veil or the misuse of the legal personality. However, we are not aware of such case law. (k) Arbitration. As a matter of principle, the Groups of Companies Doctrine does not apply in Greek law. It is only under very specific exceptions that this doctrine can be applied in Greek law, mainly in cases involving the abusive use of the corporate structure.107 The case law on this matter found in Sect. 3.6 applies accordingly.

5 Final Remarks In Greece, we are far from having an established and integrated legal framework for affiliated businesses. Greek legislation tries to regulate individual cases of affiliated business in a fragmented way.108 Moreover, provisions preventing the delisting of groups by setting exaggerated restrictions are also a characteristic example of the fragmented approach of Greek legislation; these restrictions apply even if shareholders of a delisted company are to receive listed shares in European Capital Markets.109 In the same vein, Greek supervisory authorities broadly endorse interpretative approaches for mandatory bids that impose on affiliated businesses on the process of merging with a parent company the obligation to launch mandatory bids to the shareholders of other affiliated businesses.110

See ad hoc Court of Appeal of Athens 6815/1994, (1995) Δίκη 903. A characteristic example is art. 23a para. 5 of Law. 2190/1920 referring to the conclusion of loan contracts and the provision of guarantees from controlled to controlling businesses. This practice was explicitly recognized in Law 2190/1920 under the condition that concluding businesses are under consolidation. The provision was a response to the major financing and liquidity problems of Greek businesses in the financial crisis era. Art. 23a of Law 2190/1920 is abolished by Law 4548/ 2018. Nonetheless, an exceptional provision for fully owned and affiliated companies applies also according to Law 4548/2018. 109 See art. 17 para. 1 of Law 3371/2005. See analytically Tountopoulos (2015), p. 190. 110 HCMC Decision 683/30.5.2014. 107 108

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Beyond the above special regulations, in Greek law (a) it is unclear whether group interest is acknowledged and if so, what is its exact content,111 (b) the possibility and conditions for concluding contracts of control112 or management and transfer of profit113 between sociétés anonymes is being questioned, (c) there is a controversy about whether minority shareholders of the controlling company have the right to receive information in detail about the controlled businesses114 and (d) transparency in groups of businesses is limited.115 In light of the above, the major shortcoming of the Greek law on affiliated companies is the absence of rules on the limits of legitimate action by the businesses of a group, and in particular by the parent company managers. It is no exaggeration that even lawyers find it difficult to predict and predetermine the limits of safe conduct of the parent company management with regard to its transactions with affiliates. From this point of view, it is obvious that the issue in question for Greek law is to establish a legal framework referring to the safe operation of groups of companies, thus favouring the concentration of companies in groups, without however allowing it to disproportionately damage minority shareholders and corporate creditors’ interests.

References Alexandridou E (2016) Law of commercial companies. NB, Athens (in Greek) Antonopoulos V (2009) Law of public and limited companies. Sakkoulas, Athens (in Greek) Athanasiou L (2010) Art. 33. In: Perakis E (ed) Law of Société Anonyme I. NB, Athens (in Greek) Athanasiou L, Mastromanolis M (2009) Imposition of fines in parent company for violation of competition law provisions of its subsidiary. ΔΕΕ:1301–1315 (in Greek) Bechri-Kechagioglou G (2013) The insolvency of groups of companies under the Amendment Proposal of Regulation 1346/2000. ΔΕΕ:929–936 (in Greek) Βoursier M (2005) Le fait justificatif de groupe de sociétés dans l’abus de biens sociaux: entre efficacité et clandestinité. Analyse de vingt ans de jurisprudence criminelle. Revue des sociétés:273–314 Davrados N (2010) Affiliated businesses and company law. In: Perakis E (ed) Law of Société Anonyme I. NB, Athens (in Greek) Dellios G (2010). Art. 66. In: Georgiadis A (ed) ΣΕΑK I, Sakkoulas, Athens (in Greek) Douka V (1998) The transfer of businesses and the multinational group of companies. ΔΕΕ:819–823 (in Greek) Emmerich V, Habersack M (2016) Aktien- und GmbH- Konzernrecht. Beck, München Georgakopoulos L (1996) Companies and affiliated businesses. Sakkoulas, Athens (in Greek)

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See above under Sect. 3.1. See on different approaches Varela (2007), p. 27. See also Rokas (2012), p. 613, referring to unanimous decision of shareholders. 113 See Pamboukis (1989), pp. 102, 103, considering that such a contract is under specific circumstances null and void. In this direction also Antonopoulos (2009), p. 640. 114 See on this issue Alexandridou (2016), p. 663. 115 See above under Sect. 3.3. 112

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Georgakopoulos N (2002) The nature of the duty of loyalty. In: 11th ΠΣΕΕ. Sakkoulas, Athens, pp 79–88 (in Greek) Hadjiemmanuil C (2014) Special resolution regimes for banking institutions: objectives and limitations. In: Ringe W, Huber P (eds) Legal challenges in the global financial crisis: bailouts, the Euro and regulation, pp 209–235 Hadjiemmanuil C (2015) Bank resolution financing in the Banking Union (March 25, 2015), LSE Legal Studies Working Paper No. 6/2015. Published in SSRN: http://ssrn.com/ abstract¼2575372 Hopt K (2007) Konzernrecht: Die europäische Perspektive. ΖHR:199–240 Kalss S, Klampfl C (2015) Europäisches Gesellschaftsrecht. Beck, München Katsas T (2013) Art. 23a. In: Antonopoulos V, Mouzoulas S (eds) Sociétés Anonymes II. Sakkoulas, Athens (in Greek) Kindler P, Sakka S (2015) Die Neufassung der Europäischen Insolvenzverordnung. EuZW:460–466 Kokkoris I, Loucas D (2013) Mergers. In: Tzouganatos D (ed) Law of competition. NB, Athens, pp 749–877 (in Greek) Lixouriotis I (1995) Contract of borrowing of employees – group of companies – directors. ΔΕΕ:382–388 (in Greek) Lixouriotis I (1998) Businesses or European group of companies: information and dialogue between the social partners (Implementation of the Greek Legislation to Directive 94/45/ΕK). ΔΕΕ:1056–1067 (in Greek) Markou I (2002) The duty of loyalty of the shareholder in the public company. In: 11th ΠΣΕΕ. Sakkkoulas, Athens, pp 199–250 (in Greek) Mikroulea A (2017) Relationship between parent and subsidiary – instructions and liability. ΧρηΔικ:14–42 (in Greek) Mikroulea A, Vervessos N (2016) Issues of competence and conflicts of interests by restructuring of groups of companies. In: Commomerative Volume for L. Georgakopoulos, pp 573–588 (in Greek) Pamboukis K (1989) Integration of a company to an international group of companies. Sakkoulas, Athens (in Greek) Pamboukis C (2004) Legal entities in conflicts of law. Sakkoulas, Athens (in Greek) Parzinger J (2016) Der neue EuInsVO auf einen Blick. NZI:63–68 Perakis E (2010) Introduction. In: Perakis E (ed) Law of Société Anonyme I. NB, Athens (in Greek) Perakis E (2015) Is there a consortium between the members of a business group? ΔΕΕ:619–621 (in Greek) Perakis E (2017) Bankruptcy law. NB, Athens (in Greek) Pitsos N (2013) Liability of parent company for entrepreneurial decisions of subsidiary in groups of companies. ΔΕΕ:1019–1028 (in Greek) Rokas I (2004) Transactions in a group of companies under the light of material and tax law. In: 13th ΠΣΕΕ. ΝΒ, Athens, pp 439–461 (in Greek) Rokas I (2004–2005) Issues in transactions within groups of companies: a Greek and European law perspective. Chic J Int Law:705–713 Rokas N (2012) Commercial companies. NB, Athens (in Greek) Roussis D (2006) Application of art. 81 of TEU (art. 1 of Law no 703/1977) in intragroup transactions. ΔΕΕ:745–757 (in Greek) Sotiropoulos G (2006) Consolidated financial statements according to codified law 2190/1920 and IAS. In: 15th ΠΣΕΕ. NB, Athens, pp 127–178 (in Greek) Tellis Ν (2002) Duty of loyalty of the shareholder; especially the minority shareholder. ΕπισκΕΔ:907–937 (in Greek) Tountopoulos V (2015) Capital markets law. Sakkoulas, Athens (in Greek) Tountopoulos V (2019) Voting rights restrictions in new company law. NoB:244–257 (in Greek) Triantaffylakis G (2003) Liability of dominant shareholder. In: 12th ΠΣΕΕ. ΝΒ, Athens, pp 281–324 (in Greek)

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Triantafyllakis G (2003) Liability of a shareholder with a influence in the management of the company. ΧρIΔ:673–702 (in Greek) Tsourouflis A (2010) The intragroup transaction. NB, Athens (in Greek) Tziva E (2013) Art. 33. In: Antonopoulos V, Mouzoulas S (eds) Sociétés Anonymes II. Sakkoulas, Athens (in Greek) Tzouganatos D (2006) Comfort letter ad incertas personas as means to protect creditors of subsidiary. ΕΕμπΔ:863–895 (in Greek) Varela M (2007) Internal liability in group of companies. NB, Athens (in Greek) Varela M (2009) Bankruptcy issues in groups of public companies. ΔΕΕ:401–413 (in Greek) Vervessos N (2006) Legal issues from comfort letters. ΕπισκΕΔ:19–52 (in Greek)

National Report on Argentina María Elsa Uzal

Abstract This chapter addresses the various manifestations and features of the company group phenomenon in Argentina, through the analysis of different legal scenarios, including that of subordination. Bankruptcy-related issues are also addressed, as are other laws—issued in the tax, investment, labour, and other fields—that contain provisions with regard to groups.

1 Domestic Issues in Subordinated Groups of Companies Regulation of enterprise groups may be treated under different approaches. In Argentine Commercial Law, the General Companies Law (GCL) does not regulate groups of companies specifically, which is why their problems will have to find solutions in the current law. A traditional position dominates over other trends of ideas and it prevails over other solutions to the question. On the one hand, that is based on the idea of the separate legal personality of the corporation (article [art.] 2 GCL) and generally, it means to respect the criteria which state that each of the group members has its own rights and duties, irrespective of who controls or owns it (i.e., whether it is wholly or partly owned by another company) or of its participation in the activities of the enterprise group. Then the debts in which it incurs are its debts and the assets of the group generally cannot be pooled to pay for these debts. Contracts entered into with external persons do not automatically involve the parent company or other group members. A parent company cannot take into account the undistributed profits of other group companies in determining its own profits because there are no rules that foresee all the consequences that were mentioned. Limited liability of a corporation means that potential losses cannot exceed the amount contributed to the group

M. E. Uzal (*) Commercial Court of Appeals, Buenos Aires, Argentina Private International Law, School of Law, University of Buenos Aires, Buenos Aires, Argentina © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_21

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member by purchasing shares; unlike in a general partnership, partnership or sole proprietorship, enterprise group members generally have no liability for the group debts and obligations with the business result. On the other hand, the single enterprise approach, in comparison, relies upon the economic integration of enterprise group members, treating the group as a single economic unit that operates to further the interests of the group as a whole, or of the dominant member of the group, rather than that of individual members. That is not a legal figure used in Argentine Commercial Law, but it is used in Tax Law and in Labour Law (see infra Sects. 3.2 and 3.4).

1.1

Enterprise Group Concept: Different Legal Possibilities

Argentine legislation avoids defining the term enterprise group, but several concepts are common to determining the relationships between companies that will be sufficient to constitute them as an enterprise group for certain specific purposes, such as for extending liability, accounting purposes, taxation and so on. These concepts are found both in legislation and in numerous court decisions concerning groups throughout the country and reflect categories consistent with those described, for example, in the UNCITRAL Insolvency Guide, Part Three. It also contemplates, and generally includes, aspects of ownership and ability to control or influence, both directly and indirectly, although in some examples only direct ownership or ability to control or influence is considered (for example, the formal relationship between parent-subsidiary companies). This concept may be determined by reference to a formal standard, such as the holding of a percentage of capital or votes which is able to create decision making, whether directly or indirectly. There are different legal possibilities: a) Corporations. Stock companies Art. 30 of the General Company Law (GCL) N○ 19550 establishes that stock companies and limited partnerships with shares may only be part of stock companies. But they may be part of any partnership contract. b) Shares in another company About shares in another company, art. 31 GCL contemplates some limitations. No company other than those whose object is exclusively financial or of investment may take or maintain equity shares in one or more companies for an amount higher than its free reserves and half of its capital and statutory reserves. The exception is the case in which the excess in the participation results from the payment of dividends in shares or by the capitalization of reserves. Excluded from these limitations are the financial entities regulated by Law N○ 18061 where the National Executive Power may authorize in specific cases the departure from the limits.

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The participations whether in shares of interest, quotas or stocks that exceed that amount must be disposed of within six (6) months following the date of approval of the balance sheet from which it appears that the limit has been exceeded. This finding must be communicated to the investee company within ten (10) days of the approval of said balance sheet Failure to comply with the sale of the surplus results in the loss of the voting rights and the profits that correspond to those excess shares until the sale of said surplus is fulfilled. This rule tries to correct or avoid anti-functional conducts, although the liability of directors and trustees is obvious, since this excess implies an act contrary to the law (art. 274-298 GCL). c) Reciprocal participations Art. 32 GCL establishes the nullity of reciprocal participations This rule says that the organization of companies or the increase of their capital by means of reciprocal shares, even by intermediaries or agents, is null and the violation of this prohibition will unlimitedly and jointly and severally bind the founders, administrators, directors and trustees. Within the term of three (3) months, the capital unduly paid in must be reduced, leaving the company otherwise, dissolved by law. Neither can a controlled company participate in the controlling company nor in a company controlled by it for an amount higher than that of its reserves, according to balance sheet excluding the statutory one. The parts of interest, quotas or stocks that exceed the limits established must be disposed of within six (6) months following the date of approval of the balance sheet that shows the infraction. The breach shall be punished in accordance with article 31, that is, with the loss of the voting rights and the profits that correspond to those participations in excess shares, until the sale of the surplus is fulfilled. d) Controlled companies Other examples of what constitutes an enterprise group adopt a more functional approach and focus on aspects of control, or controlling or decisive influence. The key elements of control include actual control or capacity to control financial and operating policy and decision-making, either directly or indirectly. Where the definition includes capacity to control, it generally envisages a potential passive for control, rather than focusing upon control that is actively exercised. Art. 33 GCL focuses on controlled companies. This norm contemplates not only the so-called direct control of law, but also the indirect control, under different legal possibilities. Thus, controlled companies are those in which another company, directly or through another company in turn controlled: 1. Possesses participation, due to any special legal link, that grants the necessary votes to manage the company will in the company meetings or ordinary shareholders’ meetings.

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This norm enshrines the so-called internal control of law and also the de facto internal control. Internal control of law: this dominant situation could be a consequence of the possession of shares or social quotas that provide legal control per se or through the existence of links of participation between companies that provide the predominance of votes that are needed for making the company decisions; included here are the pacts of syndication of shares, shares received with power of representation, and block pacts among shareholders’ agreements. This situation of control, easily verified, imposes the obligation to prepare a consolidated financial statement, subject to the generally accepted accounting principles and the standards established by the controlling authority. It is not necessary for it to be approved by the governing bodies, neither the controlling company’s nor the subsidiary’s, since it only pursues a complementary information purpose (art. 62 GCL). The de facto internal control: a dominant situation also exists when the controller does not maintain most of the capital or votes, but de facto enjoys sufficient participation to prevail over decisions. This may arise from the dispersal of shares, absenteeism, agreements with third parties, etc. 2. Exerts a dominant influence as a consequence of shares, quotas or shares of interest possessed, or by the special bonds existing between companies. The last provision establishes the so-called external control, which emanates from the ownership of corporate holdings, but it should be established in the facts whether or not such participation grants dominant influence. This dominant influence is exerted outside the company without links with its internal organization, although it may arise from a monopolistic activity, from situations formed by personal links between the people who occupy relevant positions in the companies involved (interlocking directorates or cross-linked directories) which secured the implementation of a common policy. This situation has the potential for antitrust violations (where e.g. the corporations or banks are competitors) and as such is controlled by Law 25156 about Defense of Competition (arts. 3, 5c) and 6 d)). Sometimes the State as a subject of private law can be classified as a controller, although the exercise of a public power could be established as a source of domain reached by the law, e.g. this occurred with the role played by reinsurers, in conditioning specific aspects of the activities vis-à-vis insurance companies. e) Related or associated companies A company which participates in more than ten per cent (10%) of the capital of another company is considered a related or associated company. The company that participates in more than twenty-five per cent (25%) of the capital of another company must notify the latter, so that its next ordinary meeting becomes aware of the fact. This rule also tries to correct or avoid anti-functional conducts.

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f) Apparent partner. The hidden partner The GCL characterised the roles of apparent partner and of hidden partner but these two categories were recently suppressed by Decree No 27/18. Enouncing objectives of transparency and publicity, and picking up the recommendation of different international organizations to prevent money laundering, this Decree has modified arts. 34 and 35 of the GCL linked to the notion of apparent partner and hidden partner. With the new regulations, the prohibition of the apparent partner (straw or front man) and of the hidden partner is expressly enforced, implying for the person acting in such capacity a joint and unlimited liability. Consequently, the change of paradigm is clear: the activity by means of lending names or straw men, now becomes forbidden, generating the consequent nullity of the act, and making whoever acts in such character liable in a subsidiary, solidary and unlimited way with the hidden partner by all the acts carried out. g) Mergers. Split-off. Split-up Lastly, it is interesting to point out that the mergers, split-offs and split- ups are tools for creating groups of companies or for operating around them. According to GCL (art. 82) there is a merger when two or more companies are dissolved without being liquidated, to create a new one, or when an existing one incorporates one or more, which, without being liquidated, are dissolved. The effects are that the new company or the incorporating company acquires ownership of the rights and obligations of the dissolved companies, resulting in the total transfer of their respective assets by registering in the Public Registry of Commerce the definitive agreement of the merger and the contract or bylaws of the new company, or the capital increase that the incorporating company had to make. On the other hand, there is a split-off, as set forth in art. 88 GCL, when: i) A non-dissolving company allocates part of its company capital to merging with existing corporations or to participating with them in the creation of a new company; or, ii) A non-dissolving company allocates part of its assets to constitute one or more new companies; or, Lastly, there is a split- up (art. 88 par. 3) when a company dissolves itself without being liquidated, to constitute new companies with all its patrimony. The split-off and the split-up –like the merger–are part of the reorganization of company processes, but emphasize that these instruments are not merely a resource to operate a concentration phenomenon, because when the assets of a company are split up, they are destined to create one or more new companies–that is the phenomenon of de-concentration of companies. Thus, it is said that there is a split-off - concentration as a useful mechanism to achieve administrative decentralization when: a) A company allocates part of its assets to the creation of a new entity, with another existing company, which also allocates part of its patrimony in a merger-split- off;

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b) A company resolves the incorporation of its assets to an existing company–basis for the so-called split-off, which falls within the merger by incorporation. Whereas, from another angle, there is a split-deconcentration when a new company—or several—is created with the patrimony of the company that is divided—such is the assumption of the division itself or split-up-division. In these cases, it is a procedure to separate groups of partners with different interests.

1.2

Contractual Possibilities

The Argentine National Civil and Commercial Code (CCCN) in force since 2015 includes a regulation about association agreements (contratos asociativos) which lack juridical personality, but allow enterprise group activities through them. These agreements were formerly governed by GCL N○ 19550 but are now included in the CCCN. They are contractual structures of concentration that establish coordination links, which include cooperation and collaboration between companies. These contracts are not subject to corporate regulations. They lack legal capacity and no juridical persons arise from them. Therefore, rights and obligations assumed fall directly on one or more of the parties to the related agreement. These agreements are not subject to formal requirements (they should be drafted in writing and be notarized in the last three cases mentioned infra). In addition to opting for the type of agreements included in the Civil and Commercial Code, the parties are free to draw up the agreements with other contents. Moreover, although the registration of these agreements is set forth in the Code (in the last three cases mentioned infra), agreements that are not registered have effects among the parties. They are: * Joint venture (negocio en participación) The purpose of the joint venture is to carry out one or more operations determined to be fulfilled through common contributions and in the personal name of the agent. It has no name, is not subject to formal requirements and is not registered in the Public Registry (art. 1448 CCCN). * Collaboration groups (agrupaciones de colaboración) There is a collaboration agreement when the parties establish a common organization with the purpose of facilitating or developing certain phases of the activity of its members or of improving or increasing the result of such activities (art. 1453 CCCN). It shall not engage in profit-seeking ventures or manage its members’ activities, and any financial advantage it may obtain will form part of the members’ assets. Parties’ contributions and assets acquired with such money make up the group’s

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common operating fund. Members are unlimitedly, jointly and severally liable before third parties for the obligations that their representatives assume in the group’s name. * Temporary associations of business enterprises (uniones transitorias) There is a temporary union agreement when the parties meet for the development or execution of concrete works, services or supplies, inside or outside the Argentine Republic. They can develop or execute works and services that are complementary and accessory to the main object (art. 1463 CCCN). It makes up a contractual joint venture with a specific purpose. * Cooperating consortium agreement (consorcios de cooperación) There is a consortium agreement of cooperation when the parties establish a common organization to facilitate, develop, increase or realize operations related to the economic activity of its members in order to improve or increase their results (article 1470 CCCN). They are similar to cooperating groups, but its members may agree not to be jointly and severally liable.

1.3

Subordinated Groups

Since 1972, Argentine legislation has advanced in the construction of an important systematization of groups, although focused on the notion of control more than on the groups themselves. Also, there is consensus among scholars that the notion of a group of companies involves two elements. A legal one is the control or dependence and another, related to the economic or business organization, is the unified direction. The former can exist without the latter, but the latter cannot exist without the former. The legal provisions reflect an economic-entrepreneurial conception of the group, which is considered as a unit super-ordered or superimposed on the whole and endowed with organizational charts that do not coincide with the simple visible corporate structure. The Argentine legal formulas convey the particular complexity derived from the use of the structure of the society for a different business and economic reality, by which the legal subject continues to appear as an isolated entity but its will is not its own, it is that of an external subject who has business interests that are distinct from the subject it dominates. They also reflect that there are decisions predisposed from the outside, caused and determined by the interest of those who have the power to impose their own will. The rules convey, although in a general way, that this reality requires unified group management effectively exercised in a higher instance, which is an expression of the exercise of power that derives from a domain-dependency link and that transcends the mere legal notion of control as potential power. Today scholars

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emphasize relevance in the exercise of power as an activity, rather than in the single control situation. It is clear then that with the emergence of groups, to the traditional difficulty of distinguishing between company interest and the interest of the company, the distinction with group interest is added. The notion of the interest of the group, so controversial among scholars, has not been included in the positive Argentine law, which today is more in line with the idea that, since the group is not a subject of law, it does not have the capacity to be the holder of an interest. This does not mean to ignore its existence and its undeniable link with the interest of the controlling or dominant company and the difficult compromise between the interest of the group and the company interest of those who compose it.1 Nothing is found in Argentine company law on the group as a legal organization– either on the organic competences through the companies that make up the group or about the protection of the interests linked to the parent company or the controlled companies. However, as soon as the 1972 reform came into force, Professor Halperin already pointed out that it should be understood that the acquisition of control requires authorization from the shareholders’ meeting, due to its nature and the responsibilities it entails, as it is an abnormal form of expansion of social activity, with the assumption of non-current commercial risks and eventual liabilities, on the backs of the shareholders.2 It was thus observed, correctly, that these decisions on control are not mere administrative acts and therefore, exceed the exclusive function of the administration body. These ideas are in line with the so-called doctrine of the implicit faculties of the partners’ meetings to decide on this kind of particular question, even with the need to respect the special majorities that the nature of the decision would have required.3 From another angle, the transfer of activities of the dominant company to a dependent company or the involvement of a part of the assets to undertake new activities must also be analyzed under the generic prohibition that managers or directors delegate their powers to third parties (see article 266 GCL according to which, the position of director is personal and non-delegable).

Argentine jurisprudence has collected that distinction in re “De Carabassa c/Canale S.A.”, Vote of Dr. Williams, C.N.Com. Sala B 2-12-82 LL, 1983-B-394. See also Anaya (1992), p. 211; Anaya (2004); Manóvil (2005), pp. 11–18. 2 Halperin (1974), p. 669. 3 Manóvil (2005), pp. 18–30, with references to the Holzmüller and Gelatine II cases. 1

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Liability of the Controller in Argentine Law. Dolus or Fault of the Partner or the Parent Partner

Article 54 GCL, located in the general part of the General Company Law, contains solutions applicable to all types of companies without exception and presents some rules specifically referring to the responsibility of the dominant person. This norm has regulated for the first time in comparative law, the ineffectiveness of the legal entity of the company and finds its correlate in Art. 161 Insolvency Law (LCQ), which provides for the extension of bankruptcy in the case of controllers who unduly divert the company interest of a controlled company; both provisions tend to protect third parties and legitimize them, to be invoked and they contain the foundation of a system of responsibility on the scope of the groups and the corporate domain. Article 54 GCL establishes that the damage to the company caused by fraud or fault of partners or by those who not being partners control, makes its authors liable for the joint and several obligations to indemnify, without being able to claim the offsetting against the profit that their action has provided in other businesses. And also, it contemplates that the partner or controlling company that applies the funds or effects of the company to a use or business on his own behalf or on a third party’s, is compelled to bring to the company the resulting gains, the losses being its exclusive responsibility. It has been said that this solution equates the controller with the managing partner and that it establishes a particular liability and reparation regime: for the partner, regardless of the entity of its participation and, for the controlling party, even if it is not a partner, without distinguishing what means have been used to exercise sufficient power to perform the incriminating acts. This comparison, however, does not seem to demand, for qualifying the controller as a de facto administrator, the requirement of continuous or permanent activities, because it suffices that he has acted to the detriment of the company interest in a sporadic or isolated way.4 As a result, the concept of responsible parties embraces non-member controllers, natural or legal persons, trusts, mutual funds, etc. All control cases are included, even indirect or interposita persona control: the organic or internal control and the so-called external control, which is usually a consequence of the dominant influence through the existence of special links between companies. The rule is not applicable to those administrators who are not partners or controllers. This provision therefore provides for a prohibition to offset the damages against benefits obtained in other businesses and on the other hand obliges to bring to the company the profits obtained by application of its funds or effects to foreign businesses. The rule refers to damages caused to the company by fraud or fault, generally encompassing any damage caused by formal or informal actions, by omissions, by consequences of specific acts or businesses or by general policies,

4

Manóvil (1998), p. 683 ff.; Otaegui (1984), pp. 445–446.

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which may affect its assets, its intangible values, chances, reasonable expectations and so on. These are damages for which the parent or partner has obtained a benefit or advantage correlative to the detriment of the controlled company. Pursuant to our civil law system, the duty to indemnify is joint and several among the partners or controllers that caused damages always within the framework of the causal link or legal causation of the damage. In the case of fraud there exists liability for the immediate and indirect consequences of the damaging acts as well as for the causal consequences, if they were foreseen. The compensation of damages follows the principle of full and integral reparation. The criterion is that the value of the damages caused in the potency and the aptitude for the controlled company to function in the market must be restored. Legal scholars maintain that the loss of the greatest growth potential that the company would have had if it had not suffered the detriment must also be compensated. In other words, the indemnification must include the lowest current value of the company as a company on going concern, including damage to the image, but this does not include moral damages. Then, the last part of the norm contains an important rule for intergroup relations when it provides that those who are obliged to compensate may not be able to claim offsetting against the profit that their activities have produced in other businesses to the group. This implies, for the cases of illegitimately unbalanced bilateral relations, that the damage caused can be offset against the profit or concrete benefit that the controlled company has obtained in the same business. It has been said that the same ratio of appropriate causality required between the fact and the damage must exist between the fact and the benefit in order to effect the offsetting,5 and also that this implies the incorporation of economic rules in the legal valuation of objective relationships between controlling and controlled companies (Aguinis6).

1.3.2

The Application of Funds or Effects to Other Uses or Businesses Outside the Controlled Company

The GCL has wanted to be more severe in the cases in which there is a deviation of the businesses of society, because if those assets serve the partner or controlling entity to obtain a profit, the law wants that profit to be brought to the company. And as an additional penalty, it causes the business risk to weigh on the shoulders of the person responsible, for which reason it must bring to the company the profits obtained with these assets, the losses being its exclusive expense. The legal text uses the terms funds or effects to broadly reach articles of commerce, mercantile documents, movable property, equipment, intangible assets, chances or business opportunities, industrial property rights, patents, industrial designs, software and, in sum, any class of intangibles, including the prestige of

5 6

Stiglitz, Echevesti in Manóvil (1998), pp. 690–691. Aguinis (1996), p. 129.

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the commercial image. The norm establishes that those funds or effects be applied to a business owned by the partner or controllers or by a third party. Legal scholars have emphasized that the sanction consisting of the obligation to bring the profits to the company refers to all the profits and not only the portion that would have corresponded to the responsible partner or controller (Rivarola7). In the group reality, it has been said that this issue is crucial, since the head of the group that was in a position to divert funds from the controlled company could have allocated them to businesses of another company controlled or participated by it or in which it has equity, and it is reasonable that as punishment it delivers all that profit to the controlled one that has suffered the damage. This solution, however, presents difficulties for its application. As a parameter to that effect, it has been postulated that the obligation to bring the profits resulting from those other businesses to the controlled company comes when the funds or effects applied to them constituted a substantial or principal part of the elements necessary for its realization.8 It is interesting to note that in Argentina, in a relatively recent draft of reforms to the Companies Law, a third paragraph was included in art. 54 that we are commenting, a formula similar to the French doctrine of the Rozenblum case,9 also accepted in some Scandinavian countries, as it was translated on its recommendations by the Forum Europaeum on Groups of Companies. There, without defining what a group of societies is, nor mentioning any of its elements, it was proposed to complement the rules of the first two paragraphs of art. 54 with a provision that established that in the execution of a corporate policy in the interest of the group, it is permissible to compensate for the damages with the benefits received or foreseeable from the application of a group policy within a certain period, provided that the disadvantages to be compensated do not jeopardize the solvency or viability of the affected company.

It was a temporary admission, subject to the restoration of the equilibrium that will be restored within a reasonable period of time and, on the other hand, that the solvency or viability of the affected company was not put at risk. In those two aspects it was clear that the controlling entity or head of the group should assume the responsibility of a guarantor in the event that the compensatory advantage was not provided to the controlled company. This projected provision did not obtain legal approval.

7

Rivarola (1938), p. 180. Manóvil (1998), pp. 696–697. 9 Criminal Chamber of the French Court of Cassation (4-2-1985, D, 1985, jurisp., p. 478). 8

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Responsibility of Administrators

Argentine law lacks rules on the liability of managers of groups of companies, whether the parent or the controlled one. The legal regime starts from the generic duty of conduct of the managers established in art. 59 GCL that provides that administrators and representatives of companies must act with the loyalty and diligence of a good businessman; those who fail to perform their duties are liable, unlimitedly and severally, for the damages resulting from their action or omission,

while art. 274 establishes that directors respond unlimitedly and jointly towards the company, shareholders and third parties, for the poor performance of their duties, according to the criterion of article 59, as well as for the violation of the law, the bylaws or regulations and for any other damage caused by fraud, abuse of powers or gross negligence. Thus, the administrators of a controlling company must be responsible for the abusive exercise of control. This determines the responsibility of the administrator, in relation with any third party that suffers damage, including the controlled company and its third-party creditors, bankruptcy being the responsibility of the company administrators established in article 173 LCQ in the terms of art. 274 GCL. This is also applicable to those who have acted as de facto administrators, either the dominant person or its administrators who fulfilled those functions. Regarding the administrators of the dependent company, one may distinguish the assumptions of organic exercise and informal exercise of domination over the company business of the dependent entity. The answers to these questions can be found in the norms and principles that govern the liability related to the company individually considered, because these answers do not vary if the company is incorporated into a group or is subjected to dependency. The majority of scholars understand that the administrators of the dependent company have the duty to challenge the instructions, mandates or meeting resolutions contrary to the law, the bylaws and legal regulations, harmful to the company. There is a duty of positive activity in protection of company interests. If the dominant influence or unified management are exercised by informal lanes, the responsibility of the administrators is also unavoidable because it is indifferent if they only occupy formal positions in the company board, that is, they are mere silent “seat-occupying directors”. This does not take away their responsibility for what occurs in the company business, for the abuse of dominant position or for the use of the controlled corporation for the purposes and interests of the parent company. The responsibility comes from the functional quality and not from the greater or lesser freedom of choice to perform their activity. The aforementioned preliminary draft of reforms to the Companies Law also contained a provision on conduct guidelines for group administrators and provided that in corporate groups the affectation of company interest on the part of the directors of each component company for the purposes of attribution of responsibility should be judged by taking into consideration the general policy of the group with the criterion of the third

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paragraph of Article 54 –that was already mentioned–, which should ensure a reasonable equilibrium between the companies that make it up.

All the administrators of the group were reached there. This projected provision did not obtain legal approval.

1.3.4

Legitimation for the Exercise of the Actions of Art. 54 GCL

In principle, these actions correspond to the damaged controlled company itself, which therefore is the passive subject of the damage to be repaired. However, it is clear that in cases of internal control, unless it has ceased, it is almost impossible for the controlled company to take action for damages. The law says nothing about legitimation in this particular case, but in the GCL system the company actions of responsibility, to repair the damage caused by company administrators, require a decision of the governing body and Art. 276 GCL establishes that the social action of responsibility corresponds to the society and requires a “prior resolution of the shareholders’ meeting”; in this panorama it is not to be expected that the body responsible for the wrongful acts will decide to file actions against its own members. Then, beyond the administrative body, it is clear that the shareholders’ meeting is competent to adopt decisions regarding these actions and that it may order the board to file them, because the meeting may decide about the conduct of persons whose appointment, stay and removal is its responsibility. On the other hand, in these cases of liability actions against the controlling partner is to be remembered that Argentine law, recognizes to the meeting all those residual competences not specifically attributed to another corporate body and that the resolutions of the meeting, in accordance with the law and the bylaws, are binding on all shareholders and must be complied with by the board of directors (art. 233 GCL). Also, external shareholders representing at least 5% of the share capital may apply before the shareholders’ meeting in that regard, and it should be noted that the controlling company and those controlled by it eventually involved—since it is a liability action–, must abstain from voting it (Art. 248 LGS). Besides, it should be pointed out that a decision may be adopted in this sense, although it was not included in the agenda, if it is a direct consequence of the resolution of matters included in this one (Art. 276 GCL).

1.3.5

Extinction of Responsibility?

Article 275 GCL establishes that the responsibility of the directors and managers, with respect to the company, is extinguished by approval of its management or by express resignation or settlement, resolved by the meeting, if that responsibility is not for violation of the law, the bylaws or regulations or if it does not mediate

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opposition of five percent (5%) of the social capital, at least. That extinction is ineffective in case of coercive liquidation or insolvency. It is clear that any exercise of the power of domination of a manager, partner or controller that leads to damage will always be a violation of the law, therefore, there is no extinction of responsibility of the controlling party by application of art. 275 GCL. Art. 275 GCL provides about the directors’ responsibility that the extension of liability cannot be approved by the shareholders’ meeting, not only in cases of violation of the law, bylaws or regulations, but also when there is opposition from 5% of the share capital and in that case, art. 276 GCL anticipates that the company claim may also be exercised by shareholders who have carried out the opposition provided for in article 275 GCL. In an extensive interpretation of art 276 GCL, it has been said that social action is authorized for the shareholder in cases in which the resolution of the shareholders’ meeting rejected its exercise. Being cases of violation of the law, for the filing of actions derived from art. 54, the holding of a minimum of social capital is not required, since no one, however minor, is obliged to tolerate violation of the law or bylaws. However, the majority opinion among legal scholars holds that when the shareholders’ meeting rejects the filing of a company action, the shareholder must challenge the shareholders’ meeting resolution (art. 251 GCL) before or at least simultaneously with the filing of its company claim in an individual capacity (Halperín, Zaldívar, Manóvil, Ragazzi, Rovira).

1.3.6

The Partners or Shareholders. The Third Parties

Art. 277 GCL establishes that the shareholder may also exercise the company’s action against those who have deviated from the corporate interest when the shareholders’ meeting has approved its exercise and the administrators have not initiated it. It has already been pointed out above that the applicability of the regime of liability actions of the directors of limited companies allows the action of liability to be exercised also ut singuli by the shareholders or partners. And, on the other hand, the creditors of the company always have the possibility to exercise the subrogation or oblique action of civil law under the conditions required for it. These are always company actions, in the interest of the company patrimony, and not actions in the individual interest of the shareholder for personal and direct damages to their assets, which are another kind of action and are here excluded. If the acts of a partner or controlling party cause direct damage to a partner or third parties in their own assets, they are entitled to file civil law claims against those responsible for the damage, regardless of the rights of the company, already pointed out.

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The Group in Case of Bankruptcy. Role of the Liquidator and the Creditors in Bankruptcy

In cases of controllers, patrimonial confusion or action in personal interest, art. 161 LCQ establishes that the bankruptcy is extended to: 1) Any person who, in the guise of the bankrupt’s actions, has carried out acts in its personal interest and disposed of the assets as if they were its own, committing fraud against its creditors; 2) Any controlling person of the failed company, when it has unduly diverted the controlled company’s company interest, subjecting it to a unified direction in the interest of the controlling party or the economic group of which it is part. By controlling person, the Insolvency Law understands: a) Any person who, directly or through a controlled company, has participation by any title, which grants the necessary votes to form the company will; b) Each of the persons who, acting jointly, have a share in the proportion indicated in paragraph a) supra and are responsible for the conduct described above. 3) Any person with respect to which there is patrimonial confusion impossible to distinguish (undividable), which prevents the clear delimitation of its assets and liabilities or of most of them. But, when two or more people form economic groups, including those manifested by control relationships without the characteristics provided for in Art. 161 LCQ above mentioned, the bankruptcy of one of them does not extend to the rest (art. 172 LCQ). Art. 278 GCL establishes that, in the event of bankruptcy of the company, the action of liability may be exercised by the representative of the bankruptcy and, failing that, shall be exercised by the creditors individually, understanding that these last will act in benefit of the mass of creditors. This rule is applicable also to the actions of art. 54 GCL. Article 175 LCQ provides that the exercise of liability actions against limited liability partners, administrators, trustees and liquidators corresponds to the syndic or trustee. If there are liability actions initiated before, they continue before the Court of the bankruptcy process. The trustee can choose between being a co-adjuvant in the proceedings in the state in which they are or staying out of them and filing the actions that correspond to the bankruptcy separately. These actions of corporate responsibility require the authorization of the creditors holding the majority of the unsecured credits of the process (article 119 LCQ). Art. 120 LCQ, in relation to the claims filed by creditors, provides that, without prejudice to the liability of the liquidator, any interested creditor may deduct this action at its own expense, after the expiration of thirty (30) days since it has judicially required the former to initiate it (see: arts 278 GCL and 176 LCQ).

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Specific Responsibilities Due to Conflict of Interests (Article 248 GCL) and for Shareholders’ Meeting Resolutions Declared Null and Void (Article 254 GCL)

The shareholder or its representative who, in a given transaction, has an interest contrary to that of the company on its own or on behalf of another, has the obligation to abstain from voting on the agreements related to it. If this provision is contravened, the obligor will be liable for the damages and losses when, without his vote, the majority required for a valid decision would not have been achieved (art. 248 GCL). This rule is a specific application of the principle of company interest and is an essential counterpart of the majority principle in capital companies, in particular, if it is a shareholder who alone has a majority to form the social will. Anyone who contravenes this provision shall be liable for the damages and losses when, without its vote, the majority required for a valid decision would not have been formed (art. 248 GCL). This conflict does not necessarily have to refer to a contraposition of interests; it is enough that the interest or the legal position be different, in the specific case, from that of the company. The duty to abstain from the vote in case of conflict of interest also extends to those companies that are subject to the influence or execution of instructions of the person who has opposition of interests. This is the case, for example, of a dependent company that must vote in a third company on the celebration of a contract or on the realization of a business of which the parent company of the former is a party, because this is the same interest of the dominant company, although indirect, in the business in question. In a similar line of ideas, art. 254 GCL provides that shareholders who vote favourably on resolutions that are declared void, are unlimited and jointly and severally liable for the consequences thereof, without prejudice to the responsibility that corresponds to the directors, trustees and members of the supervisory board, even if there is a revocation of the contested agreement; this decision paralyzes the challenge, but the responsibility for the effects produced or that are its direct consequence will subsist. Legal scholars have pointed out that when the shareholders’ meeting resolution is clearly abusive, in violation of the individual rights of the shareholders, or has a notoriously unlawful object, the attribution of responsibility must operate fully, if the concurrence of all the elements of civil liability (damage, dolus or fault, and sufficient causal nexus) is given. In those cases, the shareholders are fully liable to the company itself (articles 54, 248, 254, 278 GCL and 175 LCQ), but also to the shareholders who suffered direct damage to their assets (beyond the indirect damage suffered by the company portion of their company equity) and to the injured third parties. The latter have individual claims.10

10

Manóvil (1998), pp. 713–717.

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About Squeeze-Out Regulations. Decree N○ 677/01

The Forum Europaeum has included, as an important point in its recommendations to facilitate the functioning of the groups, the admission of the right of the controller to the unilateral exclusion of minority—squeeze-out—within a dialectic between the preservation of company interest, as a principle of protection of interests of minority or external shareholders, and the limits beyond which such preservation ceases to be reasonable. In Argentine law, the same dialectic is reflected in Decree N○ 677/01 on Transparency Regime of the Public Offer, limited to companies that make public offer of their shares. This tension exists between the consecration of the principle of company interest, in order to implement preventive mechanisms to reduce the risk of conflict of interests (art. 8), and the forced discontinuation of minority shareholders provided for in arts. 25 to 30 of Decree N○ 677/01. The reasoning is that while the company is trading its shares and there are minority shareholders, these have the right to company resolutions according to the principle of company interest but, when the intensity of control is quantitatively so high (95%) that it puts at risk the validity of the company interest, the minority has the right to force its equity to be bought, while the controlling one has the right to force the other’s exit. The massive conflict of interests can be overcome in the quoting companies through the exit to the capital market in the Stock Exchange. Decree 677/01 establishes special rules applicable to the case. The systematic location of the rules is between those related to the public acquisition offer (OPA) and the compulsory takeover bid in case of voluntary withdrawal of the public offer.

1.4

Ineffectiveness of Legal Entity

In Argentine law, all companies, both civil and commercial, are legal entities (Art. 2 GCL) and have legal capacity to acquire rights and obligations, although they do not require authorization to operate. Thus, the company or partnership is a subject of law that has a patrimony separate from that of its partners and all the other attributes of the person: denomination, address, differentiated qualities according to their capacity (insurer bank, merchant, etc.), and its own legal and active procedural legitimation. This means that it has a differentiated accountability from that of its partners, in relation with its rights and obligations. It is necessary to establish, then, how this notion of legal person is interrelated with the regime of responsibility of the partners, because the use of the corporate figure and its separation from the partners must be adjusted to the purposes for which it was created, with all its effects. However, while the concept of legal person as

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instrument is neutral, underneath the corporate persons there are always human interests and men who shape and direct their will.11 If there is a misuse of the entity or deviation from the purpose for which it was created—the final causa of the company–, the law must consider that underlying reality and give it an adequate legal framework. Legal scholars (Serick, Reinhardt, Drobnig) have considered that the precedent mentioned situations forced the law to establish certain limits to the recognition of the social personality and to enter in its overcoming or relativization. In the Argentine law, Art. 54 par.3 GCL establishes, for the first time in the comparative law, the ineffectiveness of legal personality and is explicit in the reasons that motivate its content. The rule establishes that the company action that conceals the achievement of extra-corporate purposes, or constitutes a mere means to violate the law, public policy or good faith or to frustrate rights of third parties, will be directly attributed to the partners or the controllers that made it possible, who will be jointly and severally liable for the damages caused.

The norm was envisioned for functioning against an anti-functional or devalued use of the technical resource of legal entity, when it is used for pursuing ends that imply a violation of law, public order, good faith, or thwarting rights of third parties. The consequences are that this liability shall be borne directly by the partners or controlling shareholders. In the interpretation of the legal wording, the term to conceal does not mean to hide, for it is the same whether the penalized action is public or hidden; the expression mere means, which the rule refers to, is not a synonym of a fictitious or straw company and it does not matter if the penalized conduct is the only conduct displayed by the company, and the infringement of public policy must be understood as any conduct incompatible with the first fundamental principles of public policy that inspire the Argentine legal system (art. 2600 CCCN). The norm establishes that the ineffectiveness of the corporation implies a partial deprivation of certain legal effects against third parties, in particular, against the third party that concerns the application of the rule in the case. It is not a nullity. Neither the company nor its performance are deprived of effects. The deprivation of effects refers to the imputation of the action, which is not only allocated to the corporate subject but is extended or transferred directly to other subjects responsible for that action which made it possible: the partners or controllers, although they are not partners, including the cases of external control. Just as indirect control is presented in a phased manner, ineffectiveness can also be given with respect to various steps or stages of indirect control.12 Art. 54, third paragraph, embraces diverse cases of imputations: duties and rights of the company to the partner or controlling party and claims and duties of the controlling party or partner towards the company. It was also said that the “friendly” 11 12

Suárez Anzorena (1973), pp. 156–157. Manóvil (1998), pp. 1033–1034.

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disregard of the legal personality is included in favor of the company, the partners or the controlling companies, due to the application of analogy.13 This does not mean that the company can free itself from its status as such, nor from the obligations that may be attached to it. Overall, what is discussed is not the existence of the company but its performance. Legal scholars, not without debate, have indicated that the extension of responsibility set forth in this paragraph of article 54 does not require demonstration of any kind of subjective or personal requirement with respect to the generation of damages. It suffices with the objective verification that one of the legally foreseen cases has been configured, that is to say, it is enough that there has been a deviation from the purpose for which the law granted the company the status of legal person. It should be noted that the responsibility is imposed on the partners or controllers who determined the improper performance of the company and who by their action or omission made the incriminated conduct possible. However, the imputation is limited to the damages caused, which any third party that has suffered prejudice may claim. The rule frames the legal entity to its fair limits, surpassing the theory of the penetration of the veil of the legal person (disregard of legal entity) in seeking to avoid the negative facets of the excess in the theory of the penetration into a company. In this line of ideas, legal protection must be granted to third parties in good faith, for consideration, who have acquired specific rights, over assets involved in the ineffectiveness process.

1.5

Private International Law Rules (Pr.IL)

The General Company Law (GCL) does not contain a regulation concerning international groups, but only provides rules of Pr.IL applicable to a company member of the group individually considered. The main characteristics of these regulations are:

1.5.1

Applicable Law

Article 118 provides that the company incorporated abroad is governed in its existence and forms by the laws of the place of incorporation (defined as registered legal address). This company is fully empowered to carry out isolated acts in Argentina and to go on trial, without restrictions. For the habitual exercise of acts included in its corporate purpose, to establish a branch office or any other kind of permanent representation, it must:

13

Manóvil (1998), pp. 1015–1016.

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a) Accredit the existence of the company according to the laws of the country of incorporation. b) Establish an address in Argentina, complying with the publication and registration required by the local law for companies that are incorporated in the Republic; c) Justify the decision to create such representation and designate the person in charge of it. If it is a branch, it shall also determine the capital allocated to it when applicable by special laws. Art. 123 sets forth, in order to establish a company in the Republic, that it must first be proved to the Registry that such companies have been constituted in accordance with the laws of their respective countries and that they shall register their social contract, amendments and other enabling documentation, as well as that relating to their legal representatives, in the Public Registry of Commerce and in the National Registry of Stock Companies, as applicable. The company incorporated abroad whose headquarters are located, or whose main purpose is destined to be complied with in the Republic shall be considered as a local company for the purpose of the fulfilment of the constitution formalities, its amendment and operating controller (article 124). The representative of a company incorporated abroad, for its activities included in the corporate purpose contracts, incurs in the same responsibilities established by local law for company administrators, and, in the cases of unregulated types of company, those of directors of corporations. Pursuant to these rules about Private International Law on reciprocal holdings, contrary to the general opinion, Argentine law is permissive enough. The legal capacity to share depends on the law of place of constitution of the company. But, the interest to preserve the validity of the operation may advise, as a principle, taking into account the cumulative application of the laws of all the states involved in it, even though it is not an issue of international public order. The qualification as a subsidiary corporation also corresponds to the law of place of constitution and thus, in principle, the correlative qualification of the controlling company. Yet this rule would admit some exceptions when the issue at stake is the protection of the controlled or the controlling company.

1.5.2

Other Local Regulations

The local Inspection of Legal Persons (IGJ), through General Resolution N○ 7/2015, establishes, for the Capital City of Buenos Aires, Argentina, important additional requirements concerning companies organized abroad, for those requesting registration to business, and for those already existing which provide evidence that they are still doing business abroad:

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a) Companies requiring registration They are required to report legal prohibitions or restrictions in their country of origin to engage in all or their core activities, identify their owners (when they hold equity interests not subject to listings and public offerings) and to prove that they actually do business abroad. b) Registered companies Branches, agencies or representations (art. 118, paragraph 3, GCL N○ 19550) are required to file with the IGJ on an annual basis (within 120 calendar days subsequent to financial statements closing day), together with their financial statements, a certification signed by a corporate officer, whose powers to such end must be certified by a public notary or government official, or other appropriate documentation that: i) States the changes experienced in its accounts, with regards to breakdown and values as of the company’s financial statements at closing date; the IGJ may grant an exemption from having to meet those requirements or allow the accounting certification of owners’ equity as arising from the group of companies’ consolidated financial statements. ii) Provide proof of the capital stock structure and ownership as of the date indicated in the paragraph above, individually identifying the partners, and iii) File a sworn statement of the final beneficiary (a natural person that holds at least 20% of the capital or the voting rights of a juridical person or that exerts final, direct or indirect control over a legal entity through other means). For Argentine companies whose shareholders are companies organized abroad, the IGJ will not register legal documentation of partners’ meetings in which shareholders that were foreign companies not registered under art. 123 GCL took part in the voting. Also, for companies required to present financial statements, the approval thereof and of other company decisions taken in the respective meeting and under the abovementioned conditions, will be deemed to contain irregularities and be ineffective for administrative purposes. In addition, companies organized abroad that only hold permanent equity interests in an Argentine company (art. 123, Law N○ 19550) are required to file the same information required of branches and must report the value of equity interests in Argentine companies and percentage on capital and equity. c) Foreign companies acting as a “vehicle” Under IGJ General Resolution 7/2015, foreign companies applying for their registration, or those already organized and having to make the above-mentioned presentations that belong to groups of foreign companies, shall be exempt from having to meet the requirements of General Resolution 7/2015, under the following conditions: i) Provide evidence that exemption requirements are met by the direct or indirect parent company.

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ii) File an express presentation from management that the foreign company is exclusively an investment “vehicle”. iii) File a sworn statement through the representative including: a) An organization chart of the group of companies, indicating the equity interest percentages held that show direct or indirect control, either by one or more companies, and b) The identification of the partners owning the equity interests mentioned in a) above. d) Foreign companies from countries, domains, jurisdictions, territories, associate states and special tax systems considered non-cooperative for fiscal transparency purposes or non-cooperative in combating money laundering and cross-border crimes Under General Resolution N○ 7/2015, for these types of companies, the IGJ will assess whether the requirements set forth in such resolution have been met, applying a strict evaluation method, although the laws in force in that company’s incorporation jurisdiction do not prohibit or restrict the performance of such companies in their own territory. Particularly, foreign branches (art. 33, third paragraph of Law N○ 19550) should prove that they effectively do financially significant business in the place of their organization, registration or incorporation, and/or in other countries, in which case the IGJ may request: i) The filing of the last financial statements approved; ii) A detailed description of the main transaction conducted in such place during the period covered by the abovementioned financial statements or during the prior year if the period covered therein is shorter, providing dates, parties, purpose and financial volumes involved; iii) Ownership titles of noncurrent fixed assets or agreements that grant rights to commercially use assets of that nature. The main requirements set forth in IGJ General Resolution N○ 7/2015 shall not apply to foreign companies acting as “vehicles” that have already been registered or that are registered under such resolution. e) Off-shore companies (14) The IGJ shall not register offshore companies from jurisdictions of that nature. To engage in activities in furtherance of their corporate purpose or to hold an equity interest in other companies, they must first comply fully with Argentine legislation.

14

Those companies organized abroad that, under laws of the jurisdiction in which they were organized, incorporated or registered, are forbidden or restricted from performing all of their activities, or their main business activity or activities.

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2 Domestic Issues on Bankruptcy Proceedings 2.1

Economic Groups: Bankruptcy Cases

The field of Insolvency Law shows specific provisions about groups of companies. The separate entity approach is the general rule legally assumed concerning bankruptcy cases of economic groups. Article 172, Argentine Insolvency Law N○ 24.522 (LCQ), reads as follows: When two or more persons form economic groups, even those expressed by relations of control . . . the bankruptcy of one of them does not extend to the rest.

There are only some exceptions to this principle, in art. 161 of the same law, in case of performance in personal interest, controlling persons, or confusion of property or estates. In those cases, the bankruptcy extends to: 1) Any person who, under the guise of the bankrupt’s actions, carried out the acts in their individual interest and disposed of the property as their own, to defraud their creditors; 2) Any controlling person of the bankrupt company, when improperly diverting controlled corporate interests, subjecting it to a unified leadership in the interest of the parent or economic group to which it belongs. For the purposes of this section, the term controlling person designates: a) Those that directly or through a company which is in turn controlled hold an interest in any capacity, to grant the necessary votes to form the company will; b) Each of those who, acting jointly, are involved in the proportion indicated in paragraph a) above and are responsible for the conduct described in the first paragraph of this subsection. 3) Any person regarding whom there exists an indivisible asset confusion, preventing a clear delimitation of its assets and liabilities or most of them. Then, on the basis of the principle of separate legal identity, it is proposed that the insolvency law should respect the separate legal identity of each enterprise group member. The exceptions to that general principle should be limited and the insolvency law specifies the circumstances in which substantive consolidation of assets and liabilities may be available at the request of a person permitted to make an application about it (syndic or any creditor). It is foreseen that the court may order substantive consolidation of assets of bankruptcy disregarding the veil of legal entities, with respect to two or more enterprise group members only in the following limited circumstances: a) Where the court is satisfied that the assets or liabilities of the enterprise group members are intermingled to such an extent that the ownership of assets and

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responsibility for liabilities cannot be identified without disproportionate expense or delay; or b) Where the court is satisfied that enterprise group members are engaged in a fraudulent scheme or activity with no legitimate business purpose and that substantive consolidation is essential to rectify that scheme or activity.

2.2

Reorganizations

As a general rule, not only in bankruptcy but also in reorganization proceedings, Argentine insolvency law respects the separate legal status of each enterprise group member and a separate application for commencement of insolvency proceedings is required to be made with respect to each of those members. Moreover, each of those members must be covered by the insolvency law if they satisfy the standard for commencement of insolvency proceedings. But in parallel, Argentine Insolvency Law N○ 24522 (LCQ) (Chapter VI, arts. 65 to 68) also focuses on the treatment of enterprise groups’ reorganizations making provision for limited exceptions that allow a single application to embrace all group members without exclusions. That occurs for example, when the insolvency of one group member has the potential to affect other group members; or when the parties to the application are closely integrated from an economic point of view, such as by intermingling of assets or a specified degree of control or ownership; or when consideration of the group as a single entity has special legal relevance in the context of reorganization plans.

2.3

Application and Commencement of Insolvency Reorganization Proceedings

Those rules concerning application for and commencement of insolvency proceedings apply to debtors that are company group members in the same manner as they apply to debtors that are individual commercial companies. Art. 65 of the Argentine Insolvency Law also regulates that when two or more natural or legal persons permanently form an economic company group, they may jointly request insolvency proceedings, exposing the facts underlying the existence of the grouping and its externalization.

As it was mentioned before, it is clear that in this formula the legislation specifically avoids defining the term “company group”, and then the concepts referred to above are common to determining the relationships between companies that will be sufficient to build the concept. It may be an integrated group based upon a vote, by a specified proportion of shareholders of the parent company, which in turn owns a specified proportion of the shares of the subsidiary. It may also be a contract group, that can be formed by a

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specified proportion of shareholders of each of two companies entering into a contract that grants one company (the parent) the right to direct the other company, provided the directions are consistent with the interests of the parent company or the group as a whole. On the other hand, it may be a de facto group where one company exercises, either directly or indirectly, a dominant influence over another company. Although not created by any formal arrangement, there must nevertheless be a systematic involvement by the parent company in the affairs of the controlled company. Under the legal formula, the joint application shall include all members of the grouping without exclusions. The judge may dismiss the request if he considers that the existence of the grouping has not been credited. The resolution is appealable.

Company group structures may be simple or highly complex, involving numbers of wholly or partly owned subsidiaries, operating subsidiaries, branches, sub-subsidiaries, sub-holding companies, service companies, dormant companies, cross directorships, equity ownership and so forth. Enterprise groups may have a hierarchical or vertical structure, with succeeding layers of parent and controlled companies, which may be subsidiaries or other types of affiliated or related companies, operating at different points in a production or distribution process, and all of them should be included in the application. a) Persons permitted to make a joint application The insolvency law permits a joint application to be made by two or more company group members that satisfy the commencement standard of the insolvency law. A bankruptcy application might also be made by a creditor with respect to any of the group members of which it is a creditor (permitting a creditor to make an application with respect to group members of which it is not a creditor would be inconsistent with the commencement requisites of failure to prove the debtor’s suspension of payments). For the opening of proceedings, it will be sufficient that one of the members of the grouping be in situation of suspension of payments, on the condition that its insolvency may affect other members of the economic group (art. 66 LCQ).

Where a group is closely integrated, Argentine Insolvency Law permits an application for commencement to include solvent group members that do not satisfy the commencement standard, on the basis that it is desirable, in the interests of the group as a whole, that those members be included in the proceedings. Factors relevant to determining whether the necessary degree of integration exists might include: the relationship between the group members that is variously described, but involves, for example, a significant degree of interdependence or control; intermingling of assets; unity of identity; reliance on management and financial support or other similar factors that need not necessarily arise from the legal relationship (such as parent-subsidiary) between the group members.

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b) Competent Court in a grouping reorganization proceeding A separate application for commencement with respect to two or more company group members may raise issues of jurisdiction, even in the domestic context, especially if those group members are located in different places and different courts have potential jurisdiction over those individual group members and therefore competence to consider the application. But Argentine judicial practice, for connectedness reasons, permits proceedings in different courts to be transferred to or consolidated in a single court. In those cases, in particular faced to a joint application for commencement, the legal criterion is to establish the prevailing competence of the court of the member of the group with the most important asset value arising from the last balance sheet (see art. 67 par. 1 LCQ). The court with competence to handle a joint application for insolvency grouping proceedings will be competent to administer the insolvency process of the person with the most important asset value arising from the last balance sheet or the last consolidated financial statements seeking to assess the appropriate procedural coordination of those insolvency proceedings.

2.4

Insolvency Representative

The law establishes the appointment of a single or the same insolvency representative (síndico, in Argentina) for every grouping, notwithstanding, it is established that the judge may appoint a plural receivership under the terms of article 253, last paragraph (see art. 67 par. 2 LCQ). This rule determines that the judge may appoint more than one (1) insolvent representative or syndic, when so required by the volume and complexity of the process, through a reasoned decision which shall also contain the rules on coordination of receivership. It may also establish a plural integration of a receivership that was originally individual, incorporating syndics of the same or another category, when further knowledge of the complexity or magnitude of the process advised that it should be classified in another category of greater complexity.

When more than one insolvency representative is appointed to administer insolvency proceedings with respect to two or more enterprise group members, those insolvency representatives should cooperate with each other to the maximum extent possible. But if they are appointed to administer insolvency proceedings that are subject to procedural coordination, the Court should implement and coordinate the allocation of liabilities between the representatives. This legislative scheme is consistent with Recommendations 232 to 236 UNCITRAL Legislative Guide on Insolvency (Part III).

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Procedural Coordination

a) Bankruptcy proceedings: Coordination of procedures. Receivership As stated above, when two or more people form economic groups, including those expressed by relations of control, the bankruptcy of one of them does not extend to the rest, but in the case of performance in personal interest, controlling or confusion of property or estates, the failure may be extended (art. 161 LCQ). The judge involved in the bankruptcy jurisdiction may determine its extent or substantive consolidation. Once the consolidation or extension of bankruptcy is declared, the judge who will have under his jurisdiction all insolvency proceedings shall be the judge of the proceedings that, prima facie, hold the most important asset. In case of doubt, the competence belongs to the judge first heard the proceedings. The same rules apply to the case of an extension for persons whose bankruptcy or reorganization proceedings are open, with the intervention of the judge competent in such processes. The law establishes coexistence with other insolvency proceedings, because appeals against the judgment of bankruptcy do not oppose the extension process, but the corresponding adjudication can only be issued when remedies are dismissed (article 165 LCQ). On enacting the extension or consolidation, the judge, at the request of the insolvency representatives or the bankrupt, may order procedural coordination for all bankruptcies. The insolvency representative already appointed continues acting in the processes involved in the extension. i) Single insolvency estate In the adjudication of the bankruptcy extension, the judge shall provide for the formation of a single bankruptcy estate in case of confusion of property. The credits owed by more than one of the insolvent persons are admitted once, by the highest amount verified. ii) Separate insolvency estates. Remainders In cases not provided above, credits and assets belonging to each insolvency estate may be considered separately and the court may order procedural coordination with respect to two or more enterprise group members specifying the rules to facilitate the administration of those insolvency proceedings. The remainders of each separate insolvency estate constitute a common fund for distribution among creditors who are not satisfied by the liquidation of the estate in which they hold equity, without regard to priorities. However, the credits of those who have acted in their personal interest or the controlling persons do not participate in the distribution of that pool.

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b) Reorganization proceedings When reorganization proceedings commence with respect to two or more company group members with a joint application, there will be a process for every individual person or legal entity. It will be possible to reorganize the debtors through a single reorganization plan covering several members or through coordinated substantially similar plans for each member (that is, a unified proposal where the group members can achieve an appropriate balance between the rights of different categories of creditors by offering proposals dealing with their liabilities in a unified manner). Such plans have the potential to deliver savings across the group’s insolvency proceedings, to ensure a coordinated approach to the resolution of the group’s financial difficulties and to maximize value for creditors. Although the insolvency laws permit the negotiation of a single reorganization plan, this approach is possible where the proceedings are procedurally coordinated or substantively consolidated, while on the other hand, it would generally be possible where the proceedings could be coordinated on a voluntary basis. There will be a single General Report and it will be complemented by a consolidated statement of assets and liabilities of the grouping. The creditors of each member of the group may pose challenges and observations to verification requests by creditors in the other proceedings (art. 67 par.3 LCQ). The adoption of these single plans requires the majorities of art. 45 LCQ, that is, the absolute majority of creditors within all and every category that represent two-thirds of the computable capital within each category.

However, they shall also be considered approved if they had been voted by no less than the seventy-five percent (75%) of the total of capital with the right to vote computed on all proceedings and no less than fifty percent (50%) of the capital within each of the categories. When majorities are not obtained, declaration in bankruptcy of all insolvents is established. The same effect is produced by the judgement of bankruptcy of one of them, during the stage of implementation of the reorganization process (art. 67 LCQ). If there are single proposals referred to each group member individually considered, the plan approval requires the majority of art. 45 LCQ for each proceeding. This does not apply in case of lack of majorities in unified proposals. c) Credits between debtors under insolvency proceedings. Subordinated credits Appropriations of credits between members of the grouping or its assignees within the two (2) years prior to the application are not entitled to vote. The agreement may provide for partial or total extinction of these credits, their subordination or other forms of special treatment. In the general treatment of creditors, the Argentine insolvency law also excludes from voting the claims of related persons and their assignees, partners, administrators and their related persons, and controlling member (art. 45 LCQ). Subordination is established when referred to a rearranging of creditor priorities in insolvency and does not relate to the validity or legality of the claim.

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d) Guarantees Those who, through legal act, guarantee the obligations of a debtor, whether or not the grouping exists, may request their joint reorganization process with their guaranteed party. The request must be made within thirty (30) days counted from the latest publication of edicts, before the same Court. Other provisions of the grouping insolvency section are applied to this case. This is the special rule about financial creditors’ group treatment in Argentine law. e) Post-application financing Argentine law has no legal provisions about these topics that are open to free negotiations between parties and out of the insolvency process, but the possibility could exist of provisions accepted in the reorganization plans, with the creditors’ approval and submitted to the Court, where the central point of analysis should be the priority protection of pre-commencement creditors.

2.6

International Issues on Insolvency Company Groups. Possibilities in Argentina15

In Argentina we have a law with a territorial insolvency system with few possibilities for an international opening to recognition of foreign insolvency proceedings. There is a clear desirability and necessity of adopting the means to make an approach to solving the problem of multinational insolvency as an affordable coordinated unit, and to examine the instruments most suited to achieve this, setting the guidelines deemed to be more appropriate to this end. The UNCITRAL Legislative Guide on Insolvency Law (Part III) view and its proposals for addressing the international issues on insolvency company groups would be very useful for it.

3 Other Aspects of Groups of Companies Various special laws contain provisions applicable to the performance of groups of companies in Argentina, and others contain rules which are applicable to the actions of foreign company members, subsidiaries or affiliates of a multinational group when they come to act in the country. Without making any claims to comprehensiveness, some cases may be mentioned:

15

Uzal (2008).

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Foreign Investment Law N○ 21382. (Consolidated Text, Decree N ○ 1853/1993)

The Foreign Investment Law stipulates that foreign investors are those who invest capital in Argentina in any of the ways established by that law, for the promotion of economic activities, or the extension or improvement of existing ones. They will have the same rights and obligations that the Constitution and laws grant to national investors, subject to the provisions of that law and those contemplated in special regimes or promotions (art. 1). The law defines the local foreign capital company as any company domiciled in the territory of the Republic, in which individual persons or legal entities domiciled outside it directly or indirectly own more than 49% of the capital or have direct or indirect control with the number of votes necessary to prevail at shareholders’ meetings or meetings of members (art. 2.3). Foreign investors may transfer the net abroad and realize profits from their investments, as well as repatriate their investment (art. 5). It is also provided that legal acts entered into between a local company with foreign capital and the company directly or indirectly controlled by it or another subsidiary of the latter shall be considered, for all purposes, as being acts between independent parties when their services and conditions conform to normal market practices between independent entities (art. 9).

3.2

Tax Law. Income Tax Law N○ 20628 (Consolidated Text, Decree 649/1997)

The Income Tax Law establishes that all profits obtained by individual persons or legal entities are subject to the emergency tax established by this law. The persons referred to in the previous paragraph, resident in Argentina, are taxed on the totality of their profits obtained in the country or abroad, and are allowed to calculate, as payment on account of the tax of this law, the sums actually paid for analogous taxes, over their activities abroad, up to the limit of the increase of the fiscal obligation originated by the incorporation of the gain obtained abroad. Non-residents are taxed exclusively on their Argentine source income (art. 1). Branches, subsidiaries or establishments from foreign companies must register their accounting entries separately from their parent companies and other branches and other subsidiaries of those, making the necessary corrections to determine their tax result from Argentine source. In the absence of sufficient accounting or when it does not accurately reflect net profits from Argentinean source, the Federal Public Revenue Administration (AFIP), an autarchic entity within the scope of the Ministry of Economy and Public Works and Services, may consider that the Argentine entities and the parent company

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abroad form an economic unit and provide the respective net gain subject to assessment (art. 14). This law states that company dividends are exempt from taxes and that the corporations and partnerships registered in Argentina and those incorporated abroad are subject to a statutory income tax of 33% over their net gains subject to assessment (art. 69). In relation to foreign beneficiaries, when net profits of any category are paid to companies or any other beneficiary abroad, it is the paying party’s duty to withhold and pay to the AFIP a single and definitive payment of thirty-five percent (35%) of such benefits (art. 91).

3.3

Financial Institutions Law N○ 21526

The Financial Entities of the Nation, of the Provinces and of the Municipalities shall be organized in the form that was established in their organic charters. The remaining entities must do so in the form of a stock company, except: Branches of foreign entities, which must have a representation in the country with sufficient powers pursuant to Argentine law (art. 9 par. a); The branches of foreign entities established and new ones that were authorized must effectively and permanently settle in the country and have the capitals established pursuant to that law, and shall be subject to Argentine laws and courts. The creditors in Argentina will have priority over the assets that these entities possess within the national territory (art. 13). The activity in the country of representatives of foreign financial entities shall be conditioned to the prior authorization of the Central Bank of Argentina and the regulations established by it (art. 13). The Central Bank of Argentina shall authorize the opening of subsidiaries and be able to dismiss applications, in all cases, based on reasons of opportunity and convenience (art. 16). For the opening of subsidiaries or any type of representation abroad, prior authorization must be obtained from the Central Bank of Argentina, which shall evaluate the initiative within the rules that it issues in this respect and determine the information regime regarding operations and their development (art. 17).

3.4 3.4.1

Labour Contracts Law N○ 20744 Applicable Law

This law shall govern all matters relating to the validity, rights and obligations of the parties, whether the employment contract has been entered into in this country or abroad; as soon as it is executed in its territory (art. 3).

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Related or Subordinate Companies. Joint and Several Liability

Provided that one or more companies, even if each of them have their own legal personality, were under the direction, control or administration of others, or related in such a way that they constitute a permanent economic group, they shall be, for the purposes of the obligations assumed for each of them vis-à-vis their workers and with social security organizations, jointly and severally liable, when they have engaged in fraudulent maneuvers or reckless management (art. 31).

3.4.3

Acts of Legal Entities

For the purposes of entering into the employment contract, acts of legal persons shall be deemed to be those of their legal representatives or of those who are not, but appear as entitled to act as such (art. 36).

3.4.4

Work Provided by Members of a Company. Equalization Terms

The contract by which a company, association, community or group of persons, with or without legal personality, is obliged to provide services, works or acts specific to a work relationship by its members, in favor of a third party, permanently and exclusively, will be considered a team work contract, and each of its members, a worker dependent on the third party to whom those renderings or provisions have actually been provided (art. 102).

3.5

Defense of Competition Law N○ 25156

This law establishes the prohibited agreements and practices which damage the competition in the market. In accordance with its norms those are the acts or conduct, whatever the way in which they manifest themselves, related to the production and exchange of goods or services, whose purpose or effect is to limit, restrict, falsify or distort competition or market access or which constitute an abuse of a dominant position in a market so as to be detrimental to the general economic interest (art. 1). The law also describes situations of dominant position. For these purposes it is understood that one or more persons enjoy a dominant position when, for a particular type of product or service, they are the sole offeror or demander within the national market or in one or more parts of the world or, when not being the sole ones, they are not subject to substantial competition or when, through the degree of vertical or horizontal integration, they are capable of determining the economic viability of a competitor participating in the market, to the detriment of those competitors (art. 4).

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There is also an analysis of concentrations and mergers. For the purposes of this law, economic concentration means the takeover of one or more companies, through the following acts: a) The merger between companies; b) The transfer of commercial establishments; c) Acquisition of property or any rights in shares or equity or debt securities that give any type of right to be converted into shares or equity or have any influence on the decisions of the person issuing them when such acquisition gives the acquirer the control of, or substantial influence over it; d) Any other agreement or act that transfers in a factual or juridical form, to a person or economic group, the assets of an enterprise or gives it decisive influence in the adoption of decisions of ordinary or extraordinary administration of a company (art. 6) Economic concentrations whose object or effect were or may be to restrict or distort competition, in such a way that they may be detrimental to the general economic interest, are prohibited (art. 7). When the economic concentration involves companies or persons whose economic activity is regulated by the national State through a regulatory control body, the National Antitrust Tribunal, prior to the issuance of its resolution, shall require from said state entity a report based on the proposal of economic concentration in terms of the impact on competition in the respective market or in compliance with the respective regulatory framework. The state entity must rule on the request within a maximum term of ninety (90) days; after that term it shall be understood that the entity does not object to operation (art. 16). Lastly, the law establishes prohibited activities and penalties.

3.6

Consumer Protection Law N○ 24240

The law establishes liability for damages. Although the activity of business groups is not expressly contemplated, the members of a group of companies can be held liable if horizontal or vertical integrations produce damages to the consumers resulting from flaws or risks in the things or the provision of the services. In such a case, the producer, manufacturer, importer, distributor, supplier, seller, and whoever has affixed its mark to the thing or service shall be held liable. The carrier shall be liable for damages caused to the item by cause or on the occasion of the service. The liability is assumed jointly and severally, without prejudice to the corresponding reimbursement claims. Only those who prove that the cause of the damage has been caused by somebody else shall be totally or partially released (art. 40).

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Transfer of Technology Law N○ 22426

This law includes the legal acts, performed for pecuniary interest, whose the principal or accessory purpose is the transfer, assignment or licensing of technology or trademarks by persons domiciled abroad, in favor of individual persons or legal entities, public or private, domiciled in this country, whether or not such acts have any effect in the Argentine Republic. When the legal acts referred to above are concluded between a local company with foreign capital and the company that directly or indirectly controls it, or another subsidiary of the latter, those shall be submitted to the approval by the Enforcement Authority (arts 1 and 2).

For the purposes of this law, technology means: (a) patents, (b) industrial designs, (c) any technical knowledge for the manufacture of a product or for the provision of a service (Decree N○ 580 of March 25, 1981). Resolution N○ P-328/2005, issued by the National Institute of Industrial Property (INPI), establishes, among other things, the new requirements for registration of technology transfer agreements and limits the scope of the agreements, which can be registered as “technology transfer agreements”. According to Article 1 of Annex I of the Resolution, the following benefits shall not be understood as technology: • Product acquisitions. – Technical assistance or consulting services, know-how licenses for preparatory purposes (marketing, commercial, sales, etc.), as well as any other service that does not incorporate technical knowledge directly applied to the production activity of the local contractor. – Licenses to use software or software updates. – The services offered for repairs, supervision of repairs, maintenance, commissioning of plants or machinery, which do not include the training of personnel of the local firm. – In general, all the activities inherent to the current operation of the local firm. We thus conclude this brief review on the legislative treatment that business groups receive in Argentina, with the warning that it makes no claim to comprehensiveness.

References Aguinis AM (1996) Control societario. Abeledo Perrot, Buenos Aires Anaya JL (1992) Consistencia del interés social. In: Anomalías societarias. Ed. Advocatus, Córdoba Anaya JL (2004) Lineamientos del anteproyecto de reformas a la ley de sociedades comerciales. Dig La Ley, 2004-A-1183 Halperin I (1974) Sociedades anónimas. Depalma, Buenos Aires Manóvil RM (1998) Grupos de sociedades en el derecho comparado. Abeledo Perrot, Buenos Aires

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Manóvil RM (2005) Evolución del derecho de los grupos de sociedades. Biblioteca de la Academia de Derecho y Ciencias Sociales. La Ley, Buenos Aires Otaegui JC (1984) Concentración societaria. Abaco, Buenos Aires Rivarola M (1938) Tratado de Derecho Comercial Argentino, vol 2. Cía. Arg. de Ed, Buenos Aires Suárez Anzorena C (1973) Personalidad de las sociedades. In: Zaldívar E et al (eds) Cuadernos de Derecho Societario, vol 2. Abeledo Perrot, Buenos Aires Uzal ME (2008) Procesos de insolvencia en el Derecho Internacional Privado. La Ley, Buenos Aires

National Report on the United Kingdom Remus Valsan

Abstract UK company law does not have a specialised body of rules dedicated to groups of companies. Liability within a group and toward third parties may arise based on other legal doctrines, such as piercing the corporate veil, liability of the parent company as de facto or shadow director of the subsidiary for various fiduciary, accounting and reporting duties, as well as duties to creditors in the vicinity of insolvency. Liability may also arise when a special relation is established between the companies in a group, such as agency, or between the parent company and a third party affected by the subsidiary’s activity, such as a duty of care in negligence.

1 Introduction This report is set out to answer a number of questions regarding the law surrounding groups of companies in the UK. It focuses on the following main aspects: the legal terminology relating to corporate groups (parent, subsidiary, control, dominant influence); liability within a group resulting from piercing the corporate veil, directors’ duties (fiduciary duties, reporting duties, duties in the vicinity of insolvency) and the establishment of a special relation between group companies (agency, partnership, assumption of a duty of care). In answering these questions, the report relies largely on the Companies Act 2006 (CA 2006), Insolvency Act 1986 (IA 1986) and the relevant case law. The report covers the law relevant to the UK as a whole. Although there are certain specific company and insolvency law provisions applicable to each of the UK jurisdictions, they are not essential for the purposes of this report, and due to limitations of space, will not be discussed separately. For the same reasons, the report will not discuss aspects relating to tax law. UK company law does not have a specialised body of rules dedicated to groups of companies, akin to the German Konzernrecht or the Portuguese sociedades R. Valsan (*) School of Law, University of Edinburgh, Edinburgh, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_22

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coligadas. Historically, some of the earliest examples of a company holding the shares of another company were disputed in courts as being ultra vires. It was argued that a company, being an artificial person, lacked a natural person’s legal capacity to hold shares. These claims were swiftly dismissed.1 Currently UK law does not distinguish between the liability of a parent company, qua shareholder, for the debts of its subsidiary, and that of an individual member.2 In a limited liability company, both types of shareholder are liable for the nominal value of their shares, plus any share premium, if applicable. The absence of detailed provisions on corporate groups from the current UK company law does not mean that this matter has not been considered by the legislator. The debates surrounding the reform of insolvency law in the 1980s acknowledged that corporate group structures could present serious problems for creditors, particularly intra-group transactions such as transfers of assets at undervalue, lending on other than commercial terms, gratuitous guarantees, or dividends paid without consideration of the cash needs of the paying company.3 The Cork Committee, which was tasked to review the insolvency law and practice, noted that “some of the basic principles of company and insolvency law fit uneasily with the modern commercial realities of group enterprise.”4 Despite acknowledging that the law was defective,5 the committee refrained from recommending legal reforms regarding corporate groups, for several reasons. Frist, it reasoned that altering the limited liability principle in regard to certain corporate shareholders could stifle entrepreneurship and might deter companies from embarking on new projects.6 Second, the Committee highlighted the difficulties related to identifying the relationships within a group that would trigger financial responsibility and the extent of such responsibility among group entities and towards creditors. The Committee concluded that such extensive reforms could not be introduced by means of changes to insolvency law, and proposed a wide review of group enterprise liability in the near future.7 Such a broad review did now happen for two reasons. First, several of the concerns raised by the Cork committee were addressed by subsequent legislation strengthening the regime of director disqualification and liability for wrongful trading.8 Second, the Company Law Review Steering Group, which was in charge of drafting the 2006 Companies Act, considered this issue and saw no merit in 1

See e.g. Re Barned’s Banking Company (1867-68) LR 3 Ch App 105 at 112-114, per Lord Cairns LJ (noting that neither the common law nor the statutes prohibited one trading corporation from taking or accepting shares in another trading corporation); Re Asiatic Banking Corporation (186869) LR 4 Ch App 252 at 257, per Sir CJ Selwyn LJ (stating that there is nothing to prevent a corporation from being a shareholder in another trading corporation). 2 In this report the terms shareholder and member of the company are used interchangeably. 3 Ferran and Ho (2014), p. 35. 4 The Cork Committee (1982), [1923]. 5 The Cork Committee (1982), [1926]. 6 The Cork Committee (1982), [1934]. 7 The Cork Committee (1982), [1952]. 8 The relevant provisions of the CDDA 1986 and IA 1986 are discussed in Sects. 4.3 and 5 below.

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imposing a more integrated corporate groups regime, lest it would take away from the companies’ flexibility to structure their business and erode the fundamental principle of shareholder limited liability.9 Following the global financial crisis of 2007–2008, the corporate governance of financial institutions was brought into sharp focus. The Walker Review recommended measures to improve the corporate governance of UK banks and other financial institutions, particularly with regard to risk management.10 It did not focus specifically on corporate groups, but included a series of principles aimed at strengthening the corporate governance responsibility of institutional investors towards their investee companies, with some relevance to corporate groups. These recommendations, drafted as a Code on the Responsibilities of Institutional Investors, highlighted the need for more meaningful engagement and stewardship, and included a recommendation to adopt robust policies for managing conflicts of interest, especially those arising between parent and subsidiary.11 These principles were subsequently incorporated into the UK Stewardship Code, but no further provisions on corporate groups were added. Similarly, the UK Corporate Governance Code has no such provisions. The rest of this report is structured as follow. Section 2 discusses the definitions of groups of undertakings and groups of companies, as well as other groupings relevant to the CA 2006. Section 3 covers the doctrine of piercing the corporate veil, with a focus on the single economic unit argument. Section 4 covers the main duties of directors relevant to the group context. Section 5 covers the liability for wrongful trading, fraudulent trading and undervalue transactions. Section 6 discusses the application of the unfair prejudice provisions to the relations between parent company and minority shareholders. Section 7 addresses briefly two other instances where liability of the parent to third parties dealing with the subsidiary may arise, namely agency and negligence. Section 8 concludes.

2 Definition of Corporate Groups and Related Concepts Although it has no separate branch on corporate groups, UK company law does not completely ignore intra-group relations. The current law recognises two main types of corporate groups: (1) the parent undertaking and its subsidiaries, relevant mainly for the purposes of the accounting provisions of the Companies Acts; and (2) the holding (parent) company and its subsidiaries, relevant to other specific statutory contexts.12

9

The Company Law Review Steering Group (2000), [10.58]- [10.59]. The Walker Review (2009). 11 The Walker Review (2009), p. 155, Principle 2. 12 Ferran and Ho (2014), p. 22. 10

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For the purposes of Part 15 of CA 2006 (“Accounts and Reports”), a group of undertakings means the parent undertaking and its subsidiaries.13 The CA 2006 defines the concept of undertaking in broad terms, to ensure that the consolidation of group accounts covers substantially all entities controlled by the parent company. Thus, ‘undertaking’ includes a body corporate or partnership, as well as any unincorporated association carrying on a trade or business.14 A parent undertaking is one which: 1. holds or controls the majority of voting rights in a subsidiary, either directly or through agreements among shareholders.15 Voting rights refers to shareholder voting rights or otherwise the ability to exercise voting power at general meetings, or to direct the overall policy of the undertaking or alter its constitution16; 2. has the right to appoint or remove a majority of the subsidiary’s board of directors.17 This provision refers to the power to appoint or remove directors who together have a majority of voting rights at board meetings on substantially all matters18; 3. exercises a dominant influence over the subsidiary, whether by provisions in its articles or by virtue of a control contract.19 Dominant influence is defined as the right to give directions on the operating and financial policies of the subsidiary undertaking, which are binding on its directors whether or not they are for the benefit of the subsidiary.20 The parent undertaking’s contractual right of control must stem either from a written contract permitted by the articles of the subsidiary, or from the law under which the subsidiary undertaking is established21; 4. has the legal or factual power to exercise dominant influence or control over the subsidiary.22 The factual control scenario is broader and harder to circumvent than the legal (contractual) control. Factual control arises when the operating and financial policies of the subsidiary undertakings are established in accordance with the express or implicit wishes and interests of the parent.23 Such factual dominance may arise, for instance, when the majority of the subsidiary’s

13 CA 2006, s 474 (1). The definitions of parent and subsidiary undertakings derive from the Seventh Company Law Directive 83/349/EEC and the subsequent directives relevant to corporate accounts and reports. 14 CA 2006, s 1161 (a)-(b). For the exceptions from the need to consolidate subsidiary undertakings see CA 2006, s 405 CA 2006. 15 CA 2006, s 1162(2)(a) and (d). 16 CA 2006, Schedule 7 s 2. 17 CA 2006, s 1162(2)(b). 18 CA 2006, Schedule 7 s 3. 19 CA 2006, s 1162(2)(c). 20 CA 2006 Schedule 7 s 4(1). 21 CA 2006 Schedule 7 s 4(2). 22 CA 2006 s 1162 (4) (a). 23 Ferran and Ho (2014), p. 25.

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shareholders are diversified passive investors, and another shareholder (the parent) has a de facto power to control shareholder meetings or to veto decisions.24 5. is managed together with a subsidiary undertaking on a unified basis.25 The UK company law provisions relevant to groups of undertakings are in line with the EU requirements on annual accounts and consolidated accounts. Most parent companies incorporated in the UK must produce annual consolidated group accounts, giving a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the consolidation as a whole.26 In addition to the groups of undertakings, CA 2006 recognises the corporate group formed by a holding (parent) and one or more subsidiaries.27 A subsidiary company is defined as a company which has a holding company.28 A holding company, in turn, is defined as a company which holds or controls, either directly or by virtue of agreements with other members, a majority of the voting rights in the subsidiary, or has the right to appoint and remove a majority of its board.29 A subsidiary is prohibited from holding shares in its parent (holding) company.30 A subsidiary of another subsidiary is also a subsidiary of the original parent company.31 It should be noted that the tests for the existence of a legal or factual control mentioned above (applicable to groups of undertakings) do not apply outside the accounting context.32 Nevertheless, as discussed in the following sections, a shareholder having significant factual influence over the company and its directors may be bound by directors’ duties, as a de facto or shadow director. A comparison of the two types of groups recognised under CA 2006 reveals that the concept of group of undertakings is broader than that of a group of companies, in two respects. First, it includes both companies and unincorporated entities. Second, in the group of undertakings context, control includes the right to exercise a dominant influence over the subsidiary, whether by provisions in its articles or by virtue of a control contract. In addition to the provisions on groups of companies and groups of undertakings, CA 2006 recognises exceptionally other groupings. First, the act comprises a series of provisions applicable to associated companies. A parent company is associated with all its subsidiaries, and a subsidiary is associated with its holding company and all the other subsidiaries of its holding company.33 The relevant provisions cover 24

Ferran and Ho (2014), pp. 24–25. CA 2006 s 1162 (4)(b). 26 The duty to provide group accounts is discussed in more detail in Sect. 4.2 below. 27 The main statutory contexts in which this concept is relevant are discussed in the following sections. 28 CA 2006 s 1159 (1). 29 CA 2006 s 1159(1) (a)-(c). 30 CA 2006 s 136. 31 CA 2006 s 1159 and Schedule 6. 32 Ferran and Ho (2014), p. 26. 33 CA 2006 s 256. 25

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restrictions regarding loans, quasi-loans and credit transactions between associated companies,34 and indemnification or provision of insurance against liability for breach of directors’ duties.35 Second, CA 2006 has special provisions regarding the control of a company for the purpose of disclosure of interests in its shares. A person is regarded as having an interest in shares if he has a contractual right to acquire them, or, if he is not the registered holder, is entitled to exercise any right conferred by the shares, or to control the exercise of any such right.36 Furthermore, a person is considered interested in the shares of a company if a body corporate is interested in them and the body or its directors are accustomed to act in accordance with his directions or instructions; or he is entitled to exercise or control the exercise of one-third or more of the voting power at general meetings of the body corporate.37 The concept of person interested in the company’s shares is relevant mainly for transparency purposes. A public company has the power to request any person whom the company knows, or has reasonably cause to believe, to be interested in the company’s shares, to confirm or deny such interest and provide any relevant further information.38 For similar reasons of disclosure and transparency, new provisions have been recently introduced in CA 2006, imposing an obligation39 to keep a public record of people with significant control over the company (PSC).40 A company subject to this duty must take reasonable steps to determine if there is anyone who is a registrable person or a registrable relevant legal entity in relation to that company and, if so, identify them in the PSC register. Only individuals can be people with significant control.41 An individual has significant control if he meets one or more of the following conditions: holds, directly or indirectly, more than 25% of the shares; holds, directly or indirectly, more than 25% of the voting rights; holds the right, 34

CA 2006 ss 197-214. CA 2006 ss 232-237. 36 CA 2006 s 820 (4). 37 CA 2006 s 823 (1). 38 CA 2006 s 793. 39 Certain companies are exempt from this obligation: companies with voting shares admitted to trading on an EEA regulated market, and in other markets specified by regulations; any other companies as specified by the Secretary of State by regulations (CA 2006 s 790B). 40 This duty was introduced by the Small Business, Enterprise and Employment Act 2015, s 81, Schedule 3, Pt 1, para 1. Relevant regulations include: Information about People with Significant Control (Amendment) Regulations 2017, (SI 2017/693); the Companies Act 2006 (Amendment of Part 21A) Regulations (2016 (SI 2016/136)); Register of People with Significant Control Regulations 2016 (SI 2016/339); BEIS (2016). 41 For the purposes of the PSC regime, CA 2006 s 790C(12) deems the following entities to be individuals: a corporation sole (an office held by a single person that has a separate legal existence from the person occupying the office, such as ministers of the Crown, the Treasury Solicitor or the holders of various ecclesiastical offices); a government or government department of a country or territory; an international organisation whose members include two or more countries tor territories (or their governments); a local authority or local government body in the United Kingdom. 35

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directly or indirectly, to appoint or remove a majority of directors; has the right to exercise, or actually exercises, significant influence or control; has the right to exercise, or actually exercises, significant control or influence over the activities of a trust or firm that does not have legal personality under its governing law, where the trustees or members of that trust or firm meet any of the conditions mentioned above.42 For the purpose of applying these conditions, an individual holds a direct interest if the share is held in the individual’s own name. An individual holds an indirect right where he has a majority stake in a legal entity that holds the right in question or is part of a chain of legal entities, each of which (other than the last) has a majority stake in the entity immediately below it in the chain and where the last legal entity in the chain holds the share in question.43 Majority stake means: the person holds a majority of the voting rights in a legal entity; or the person is a member of the legal entity and has the right to appoint or remove a majority of the board of its directors; the person is a member and controls alone, pursuant to an agreement with other members, a majority of the voting rights of the legal entity; the person has the right to exercise, or actually exercises, dominant influence or control over the legal entity.44 The breadth of these provisions is designed to ensure that every method of holding significant control over a company is potentially registrable.45 The provisions of the CA 2006 regarding groups of companies and other forms of groupings apply to rather narrow scenarios or transactions, and do not constitute a coherent corporate groups law. Therefore, the remaining sections of this report will focus on general doctrines and provisions of CA 2006 that are relevant to the issue of liability within a group of companies.

3 Separate Personality, Limited Liability and Piercing the Corporate Veil This section considers the impact of the corporate personality and limited liability doctrines on the relations between companies in a group. Particular attention will be paid to the doctrine of piercing the corporate veil. Under UK law, companies have their own legal identity, separate from those of its shareholders, directors, parent or subsidiary companies. In companies limited by shares, which form the vast majority of companies in the UK, members are liable to contribute, upon winding up of the company, where the company’s assets are insufficient to pay its debts and liabilities, an amount equal to the aggregate nominal

42

CA 2006, Schedule 1A, paragraphs 1-6. CA 2006, Schedule 1A, paragraph 18 (1). See also Practical Law Company (2017). 44 CA 2006, Schedule 1A, paragraph 18 (3). 45 For further details on the meaning and application of these provisions see Practical Law Company (2017). 43

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value of their shares plus any share premium, if applicable.46 In limited circumstances, courts have ‘pierced the corporate veil’ and ignored the separate personalities of the company and one or more of its shareholders. As discussed below, piercing the corporate veil is a doctrine of limited and exceptional application under UK law, due to the centrality of the separate legal personality and shareholder limited liability doctrines. Incorporation of a business by way of registration has been available in the UK since the Joint Stock Companies Act 1844.47 Limited shareholder liability has been the default in Britain since the Limited Liability Act 1855.48 The two principles have been firmly cemented by the seminal decision in Salomon v Salomon & Co Ltd,49 where the House of Lords ruled that, as long as all registration formalities are complied with, a company is a completely separate legal entity from its owners, irrespective of the degree of influence and control that one shareholder exercises over the company or the other shareholders. Following from this, the assets and liabilities of the shareholders are separate from those of the company, so that former’s assets cannot be applied to cover the latter’s debts.50 The company can exercise rights and powers, and is subject to obligations and liabilities, similar to natural persons. It may own in property, contract on its own behalf, and sue and be sued in its own name. These principles have been the foundation of British company law for over a century.51 Nevertheless, instances arise when the separate personality and limited liability principles operate harshly and seem to unfairly shift the risk of failure from shareholder to creditors. As one author noted, “the formal legal rules provide a device for limited liability to be manipulated, avoiding the spirit of the legislation to the detriment of creditors.”52 The downside consequences of limited liability often appear more severe when they arise in a corporate group context. Consequently, a line of argument emerged holding that the principle of limited liability should be relaxed in corporate groups, which should be treated as a single economic unit. It holds that when a company owns majority or in whole another company, and the two essentially operate as one enterprise, they should be treated as one entity and their separate personalities disregarded. This argument does not have authoritative judicial support. Only one notable instance of a court’s recognition of the single economic unit argument exists. This view was espoused by Lord Denning in DHN Food Distributors Ltd v Tower Hamlets LBC.53 He noted that in company

46

IA 1986 s 74(2)(d). 7 & 8 Vict. c.110. 48 18 & 19 Vict. c.133. 49 [1897] AC 22. 50 JH Ratner (Mincing Lane) Ltd v Department of Tradeand Industry and Others [1989] Ch 72 at 176, per LJ Rodger, citing Gower (1979), p. 100: “It follows from the fact that a corporation is a separate legal person that its members are not liable for its debts.” 51 Petrodel Resources Ltd v Prest [2013] UKSC 34, [2013] 3 WLR 1 at 9, per Lord Sumption. 52 Kershaw (2012), p. 39. 53 [1976] 1 WLR 852. 47

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law “there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group.”54 Lord Goff concurred with this reasoning though warned that he was relying on the facts of this particular case and would not be willing to extend it to every case involving a group of companies.55 The case involved a parent company, DHN, and several wholly owned and controlled subsidiaries, who were “bound hand and foot to the parent company and must do just what the parent company say”.56 The court noted that the subsidiary clearly lacked control over its business.57 This warranted piercing the corporate veil and treating the group as a single economic unit.58 Subsequent cases distinguished DHN as applicable to a unique set of facts, and even doubted its correctness. In The Albazero,59 the House of Lords unanimously reiterated the principle in Salomon and stated that: [e]ach company in a group of companies. . . is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate benefit of the exercise of those rights would enure beneficially to the same person or corporate body irrespective of the person or body in whom those rights were vested in law.60

In Woolfson v Strathclyde Regional Council,61 the House of Lords refused to follow DHN. The court relied heavily on the fact that the case did not involve a wholly-owned subsidiary to distinguish DHN on the facts, to reject the single economic entity argument, and also to question the cases upon which the veil lifting argument was based in DHN. Similarly, in Re Southard & Co Ltd,62 Lord Templeman noted that: A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies, to change the metaphor, turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.63

The single economic unit case for piercing the veil was again rejected in Adams v Cape Industries Plc,64 a decision that remains one of the strongest authorities in British law as regards veil piercing. The central issue in Cape was whether the UK 54

Ibid. at 860. Ibid. at 861. 56 Ibid at 860, per Lord Denning. 57 Ibid. 58 Ibid. 59 [1977] AC 774, [1976] 3 WLR 419. 60 Ibid. at 807. 61 1978 SC (HL) 90, 1978 SLT 159. 62 [1979] 1 WLR 1198. 63 Ibid. at 1208. 64 [1990] Ch 433, [1990] BCLC 479. 55

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parent of an international mining group was present in the US for the purpose of making a default judgment of a US court enforceable against it in the UK. The contention was that the group was managed as a single economic unit and the UK company was present in US via a wholly-owned subsidiary. Lord Justice Slade of the Court of Appeal observed that the law recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.65

The group enterprise argument resurfaced in Re Polly Peck Plc.66 The court regarded as “persuasive”67 the argument that the parent and subsidiary should be regarded as a single entity for the purpose of a debt issue, but decided that it was precluded from this approach by Cape, a decision of a higher court. Cape remained good authority after the adoption of the CA 2006. In Newton-Sealey v ArmorGroup Services Ltd,68 for instance, the court was asked to consider, for the purpose of a summary judgment, whether an employee of a Jersey-based subsidiary would be able to hold the UK-based parent liable for negligence, given that the employee had dealt entirely with the parent, except for having an employment contract with the subsidiary. Here, the ruling of Cape was restated, though the judge refused to dismiss the claim, ceding that there was a real prospect of success for the tort victim’s argument that a duty of care should be established. The case was subsequently settled out of court. More recently, the issue of veil piercing in a group setting was discussed in the controversial decision in Antonio Gramsci Shipping Corp v Stepanovs,69 where the court pierced the corporate veil to allow the controllers of a company to be sued under the company’s contracts, as if they were themselves a contracting party. This decision was criticised and doubted, and overruled in the recent Supreme Court decision in VTB Capital Plc v Nutritek International Corpn and others.70 The Supreme Court noted that, short of fraud, the Salomon principle should not be derogated from when a company is controlled by another entity: [a] properly incorporated company is a legal person separate from its corporators and controllers...; the principle of separate corporate personality is a privilege intended to encourage investment in business by presenting a shield, protecting shareholders and

65

Ibid. at 513. [1996] BCC 486. 67 Ibid. at 498. 68 [2008] EWHC 233 (QB), 2008 WL 371042. 69 [2011] EWHC 333 (Comm), [2012] BCC 182. 70 [2013] UKSC 5, [2013] 2 AC 337. 66

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those controlling the company from the potential open-ended liabilities it incurred in carrying on business.71

The ultimate authority on piercing the veil in UK company law is Prest v Petrodel Resources Ltd and others.72 Lord Sumption and Lord Neuberger engaged in a substantive analysis of the preceding case law and academic commentary on this matter. Lord Sumption noted the confusing and contradictory nature of the veil piercing doctrine, describing its application as “characterised by incautious dicta and inadequate reasoning”.73 Lord Sumption distinguished between two principles: concealment and evasion. Concealment, often referred to in caselaw with terms such as façade, device, sham, cloak, is a “legally banal” arrangement that does not involve piercing the corporate veil.74 When one or more companies are interposed, so as to hide the real actor in a transaction, the court can simply look behind the “façade” to discover the corporate structure; there is no need to disregard the separate corporate personality of the “façade”. Evasion, in contrast, is a true case of veil piercing. It arises when a person is under an existing duty, liability or legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.75 Evasion is abuse of corporate legal personality, and thus justifies an exception from Salomon. The court may pierce the corporate veil solely for the purpose of depriving the company or its controller of the advantage which he would not otherwise have obtained. The Supreme Court further clarified that, when a company has a controller, the latter does not abuse the legal personality merely by causing the company to incur liability: “It is not an abuse to cause a legal liability to be incurred by the company in the first place. It is not an abuse to rely on the fact (if it is a fact) that a liability is not the controller’s because it is the company’s. On the contrary, that is what incorporation is all about.”76 Even when evasion occurs, the veil should only be pierced only as a last resort, where no other suitable remedies are available.77 Although largely regarded as the current leading authority on veil piercing, Prest is not without criticism. The other Justices disputed the clear-cut distinction between concealment and evasion introduced by Lord Sumption. Baroness Hale, Lord Wilson and Lord Mance doubted that the two principles could be neatly separated and would adequately cover all cases where the veil should be pierced. Lord Walker thought that piercing the corporate veil is a metaphor rather than a coherent doctrine, and doubted that it operates independently of other doctrines, such as tort or

71

Ibid. at 345. The court makes a similar point at p 387, when it states that, in a contract between B and C, A should not be held responsible for B’s liabilities simply because A controls B and induced C to contract with B. 72 [2013] UKSC 34, [2013] 3 WLR 1. 73 Ibid at [19]. 74 Ibid. at [28]. 75 Ibid. 76 Ibid. at [34]. 77 Ibid. at [35]. See also Lord Neuberger at [62].

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unjustified enrichment.78 Nevertheless, the court was widely in agreement that the principle should be limited and that it will be very difficult to establish further exceptions, other than the evasion principle. Moreover, Lord Sumption’s analysis of veil piercing is technically obiter since the case was decided based on a resulting trust of corporate property, rather than veil piercing.79 Other authors have argued that, under Lord Sumption’s test, instances of wrongdoing on the part of a company’s controller could either be regarded as concealment or fail to be captured by the evasion principle.80 Finally, the situation of outsider reverse veil piercing should be mentioned. This form of veil piercing refers to situations where personal or business creditors of the shareholders or directors of a company attempted, and in a few instances succeeded, to gain access to, or seize the assets of the company in priority to the company’s own creditors, where such shareholders or directors were not insolvent.81 This uncommon form of veil piercing has been criticised as destructive to the entity shielding function of registered companies, which allows businesses to keep the corporate assets and creditors separate from those of shareholders or directors.82

4 Directors’ Duties Company directors are subject to the general duties listed in Chapter 2 of Part 10 of CA 2006. The codified duties replace the corresponding common law rules and equitable principles, but the latter remain relevant when interpreting and applying the statutory duties. Further relevant duties are set out elsewhere in CA 2006 (such the duty to deliver reports and accounts), while others remain uncodified (such as the duty of confidentiality). These duties are binding on “any person occupying the position of director, by whatever name called”.83 This includes persons properly appointed as directors (de jure directors), persons who act as part of the corporate governing structure or have assumed the status and functions of a company director without being formally and dully appointed as such (de facto directors),84 and 78

Ibid at [106]. Ibid. at [55]-[56]. 80 Lee (2015), p. 30; Han (2015), p. 27; Hannigan (2013), p. 31. 81 See e.g. Lonrho Ltd v Shell Petroleum Co Ltd (No 1) [1980] 1 WLR 627; Kensington International Ltd v Congo [2005] EWHC 2684 (Comm), [2006] 2 BCLC 296; Raja v Van Hoogstraten [2006] EWHC 2564 (Ch), [2006] 8 WLUK 253. 82 See Cabrelli (2010), p. 343. 83 CA 2006 s 250. CA 2006 ss 156A–156B, introduced by the Small Business, Enterprise and Employment Act 2015 s 87, require all directors to be natural persons and prohibit the appointment of corporate bodies as directors (subject to certain exceptions). These provisions have not yet come into force. 84 See Secretary of State for Trade and Industry v Tjolle [1998] BCC 282 at 290; Re Kaytech International Plc [1999] BCC 390 at 402. 79

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persons who are not formally appointed but in accordance with whose direction or instructions the directors of a company are accustomed to act (shadow directors).85 For the ‘accustomed to act’ condition to be met, the directions and instructions must be given repeatedly over a period of time and as a regular course of conduct,86 and must be followed by at least a consistent majority of directors.87 In the context of corporate groups, shadow directorships are particularly likely to arise when the parent company expects to retain control over the decisions and actions of the subsidiary. It is important to highlight that the ‘accustomed to act’ condition is necessary but not sufficient for labelling a parent company as shadow director. CA 2006 s 251(3) expressly states that a body corporate is not regarded as a shadow director of any of its subsidiaries, and thus will not be bound by the provisions on general duties of directors, transactions requiring members’ approval, and contracts with the sole member who is also a director, simply because the directors of the subsidiary are accustomed to act in accordance with the directions or instructions of the parent.88 This means that a parent company can impose a common policy on all group companies without the risk of becoming a shadow director. However, it may be possible for a court to find that a shadow directorship exists, if the parent goes beyond merely instructing the subsidiary board by, for instance, taking full control of the financial affairs of the subsidiary, negotiating with third parties on behalf of the subsidiary, or controlling the appointment of senior management.89 This exception expressly protects the parent and holding companies, but not their individual directors. Nevertheless, when a parent company is found to be shadow director of its subsidiary, the individual directors the parent will not automatically be considered shadow directors of the subsidiary. Such directors must separately, and by their own actions, control the subsidiary by, for instance, managing its trading or taking control of its financial affairs other than as a representative of the parent company.90 It should also be noted that the exclusion of parent-subsidiary relation from the definition of shadow director applies for the purpose of CA 2006 only. It does not apply to the definition of shadow director in the Company Director Disqualification Act 1986 (CDDA 1986) and Insolvency Act 1986 (IA 1986).91

85

CA 2006, s 251(1). See also Palmer and Morse (1992), pp. 8.217–8.224. Re Unisoft Group Ltd (No 3) [1994] BCC 766; Secretary of State for Trade and Industry v Becker [2003] 1 BCLC 565; Secretary of State for Trade and Industry v Deverell [2000] 2 BCLC 133 (CA). 87 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2005] 7 WLUK 862. 88 See also Clydebank Football Club Ltd v Steedman 2002 SLT 109 (OH) (holding that the parentsubsidiary relations was not enough to make the parent a shadow director of its subsidiary). 89 Kemp and Handforth (2011) (online). 90 Secretary of State for Trade and Industry v Laing [1996] 2 BCLC 324 (Ch), [1997] 1 WLR 104; Re Hydrodan (Corby) Ltd (In Liquidation) [1994] BCC 161 (holding that individual and personal instructions from a director of the parent to the directors of the subsidiary could bring the former within the definition of a shadow director). 91 These provisions are discussed in Sects. 4.3 and 5 below. 86

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Prior to CA 2006, there was some confusion regarding the extent of the duties owed by shadow directors. In Ultraframe v Fielding Lewison J explained that a relationship of trust and confidence of a shadow director to the company must be shown in order to apply fiduciary duties, indeed casting doubt on the fact that shadow directors may owe similar duties.92 CA 2006 2006 did little to further clarify which duties applied, stating simply that “the general duties apply to shadow directors where, and to the extent that, the corresponding common law rules of equitable principles so apply.”93 In Secretary of State for Trade and Industry v Deverell94 Morritt LJ stressed that the interpretation of this notion depends on the statutory context (a stricter construction may be more appropriate in a criminal context); that the purpose of the legislation is to identify those with “real influence” in the corporate affairs of the company, or part of them; that advice (other than professional advice) is capable of coming within the phrase “directions or instructions”; and that it is not necessary that the board should be reduced to a subservient role or surrender its discretion. The more recent case of Vivendi v Richards shed light on this topic in explaining that the fiduciary duties owed by a shadow director stem from undertaking or the assumption of responsibility.95 There is no requirement of secrecy for the shadow director duties to apply. A majority shareholder who openly gives instructions to the directors cannot escape liability as a shadow director simply on the grounds that the instructions were known to all.96 De jure directors of a company, whether subsidiary, parent or otherwise, are bound by essentially the same duties. In a corporate group context, however, the application of these duties is more challenging, as directors’ loyalties are often split between their company, the appointing parent or the group as a whole. It is a wellestablished principle that directors owe their duties to their company,97 and not to its shareholders, creditors, other directors or other stakeholders.98 Consequently, only the company itself, via its board, an administrator or liquidator can initiate actions against the directors. Exceptionally, the parent or any other shareholder may sue the directors derivatively, on behalf of the subsidiary.99

92

Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2005] 7 WLUK 862. CA 2006, s 170(5). 94 [2001] Ch 340, [2000] 2 BCLC 133. 95 [2013] EWHC 3006 (Ch), [2013] BCC 771. 96 Secretary of State for Trade and Industry v Deverell [2001] Ch 340, [2000] 2 BCLC 133. 97 CA 2006 S 170(1). 98 Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258, [1983] 3 WLR 492; See also Palmer and Morse (1992), p. 8.2402. 99 See also Palmer and Morse (1992), p. 8.3701 ff. 93

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Fiduciary Duties

As mentioned before, in a corporate group, each company is a separate legal entity and its directors are not allowed to sacrifice its interests for the benefit of another group entity or the group as a whole.100 From a practical perspective, however, given a parent’s control over the appointment and revocation of subsidiary directors, difficulties may arise when the interests of the two companies are in conflict. When such tensions arise, the subsidiary directors cannot be compelled to act in the interests of the nominating parent company,101 or in the interest of the group as a whole,102 particularly when the subsidiary has separate creditors. When the interests of the two companies are aligned, directors are allowed to take into account the interests of the parent and the group as a whole,103 but careful reasoning and justifications are needed to prevent a potential claim for breach of duty. Under CA 2006 s 172, directors are bound by an overarching duty to promote the success of their company for the benefit of the shareholders as a whole, having regard to, inter alia, the interests of various corporate stakeholders and the long-term consequences of their decision.104 What constitutes the success of the company is a matter left to the directors’ good faith judgment, and courts will generally refrain from reviewing such judgment. Read in its entirety, s 172 gives directors the possibility (without establishing an enforceable obligation) to act in a way that benefits the parent or the group at the expense of the subsidiary, if such action can be justified through positive long-run consequences on the subsidiary,105 and the interests of the parent company coincide with those of the minority shareholders.106 Where there are different groups of shareholders with different interests, the directors must act fairly as between these different groups.107

100

Charterbridge Corporation v Lloyds Bank Limited [1970] Ch 62 (Ch), [1969] 3 WLR 122. Boulting v ACTT [1963] 2 QB 606, [1963] 2 WLR 529; Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, [1990] BCC 567; Hawkes v Cuddy [2009] 2 BCLC 427. See also Palmer and Morse (1992), supra note 85 at 8.2704–8.2706. 102 Pergamon Press Ltd v Maxwell [1970] 1 WLR 1167. 103 Charterbridge Corporation v Lloyds Bank Ltd [1970] Ch 62 (Ch), [1969] 3 WLR 122. 104 At common law, this overarching duty was known as the duty to act in good faith in what the director considers to be in the best interests of the company of which he is a director, and not for any collateral purpose (Re Smith & Fawcett Limited [1942] Ch 304, [1942] 1 All ER 542). The interests of the company were equated with the interests of the shareholders generally (Greenhalgh v Arderne Cinemas [1951] Ch 286, [1950] 2 All ER 1120). Despite the change in terminology, the courts’ interpretation of this core fiduciary duty remains largely unchanged (see West Coast Capital (Lios) Limited [2008] CSOH 72). 105 Thompson v The Renwick Group plc [2014] EWCA Civ 635, [2015] BCC 855. 106 Commissioner of Taxpayer Audit and Assessment v Cigarette Company of Jamaica Ltd [2012] STC 1045, PC, at [14] per Lord Walker. 107 CA 2006 s 172(1)(f). See also Mutual Life & Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11; Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155. 101

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Directors are also bound by a general duty exercise their powers independently, without subordinating their judgment to the will of others, whether by delegation or otherwise.108 By way of exception, CA 2006 s 173 (2) allows directors to fetter their discretion pursuant to an agreement entered into by the company, or as provided under the company’s constitution. Previous common law principles regarding the extent to which it is proper for directors to fetter their discretion remain relevant in relation to this codified duty. In a group context, this duty means that a subsidiary director cannot agree with the appointing parent company to vote at board meetings in the interests of the parent or of the groups as a whole, unless an agreement is duly concluded between the subsidiary and parent, or such a fetter is allowed by the subsidiary’s constitution. When the latter conditions apply, practical difficulties are likely to arise, since, on the one hand, a director cannot abdicate in toto his duty to exercise independent judgment, and, on the other hand, he remains bound by the overarching duty to promote the success of his company as well as by the duty to avoid conflicts of interest. The later duty is codified in CA 2006 s 175, which provides that a director of a company must avoid a situation in which he has a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.109 The language of this section follows the common law formulation of the no-conflict duty.110 It has a broad scope, covering any actual or potential conflict between a director’s duty to his company and his personal interests or duty to another company.111 The section applies in particular to the exploitation of opportunities, information or property.112 The duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest,113 or if the matter is authorised by disinterested directors114 or shareholders115 having full knowledge of all relevant facts.116 The no-conflict duty has traditionally been strictly construed and applied by courts. Breach of it does not depend on bad faith or the state of mind of the fiduciary, or on whether the company suffered a loss or benefited from the conflicted transaction.117 Consequently, the test of whether there is a breach of the

108

CA 2006 s 173. CA 2006 s 175(1). 110 See Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 at 471; Boardman v Phipps [1967] 2 AC 46 at 124B-C; see also Bhullar v Bhullar [2003] 2 BCLC 241 at [27]-[31]; Eastford Ltd v Gillespie [2010] CSOH 132 at [17]-[18]. 111 The duty-duty conflict is mentioned in CA 2006 s 175 (7). 112 CA 2005 s 175(2). 113 CA 2006 s 175(4)(a). 114 CA 2006 s 175(4)(b). 115 CA 2006 s 180(4). 116 Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73. 117 Keech v Sandford (1726) 25 ER 223; Regal (Hastings) Ltd. v Gulliver [1967] 2 AC 134; Boardman v Phipps [1967] 2 AC 46. 109

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s 175 duty is objective, and does not depend on whether the director is aware that what he is doing is a breach of his duty.118 Due to its broad scope and strict interpretation, the no-conflict duty is likely to cause significant practical difficulties for persons holding multiple directorships, as it is often the case in a corporate group. A subsidiary director who has a duty or a personal interest in promoting the interests of the parent company, must not allow his relation with the parent to come into an actual or potential conflict with his duty to advance the subsidiary’s interests.119 To avoid such practical difficulties, parent and subsidiary companies could include in their articles of association provisions on managing conflicts of interests and prioritising conflicting duties. Although there is no prima facie prohibition of serving on boards of competing companies,120 when the parent and subsidiary share the same line of business, the practical difficulties of joint directorships may be insurmountable. Inaction, in the form of failure to take action to protect the interests of the subsidiary may also amount to a breach of duty. Nominee directors appointed by the parent are in breach of their duties to the subsidiary when they are aware of the parent’s policy to deprive the subsidiary of business opportunities, and acquiesce to it.121 CA 2006 s 175 does not apply to transactions or arrangements between director and his company, which are covered separately by s 177 and s 182. Any director who has a direct or indirect interest in a proposed transaction or arrangement with his company must declare the nature and extent of this interest to the other directors.122 No declaration is required when the interest cannot reasonably be regarded as giving rise to a conflict, when the other directors are or ought to be aware of such interest, when the director himself is not, and ought not to be, aware of his interest, or when the interest concerns the terms of a director’s service contract.123 S 182 imposes a similar duty of disclosure, but it refers to a transaction already entered into by the company. The requirement to disclose an indirect interest in future or existing transactions means that the director himself does not need to be a party to the transaction for the duty to apply. This scenario may arise when a subsidiary contracts with the parent company or another group company, and the subsidiary director has an interest in the co-contracting company (as a shareholder, director or other capacity). At the same time, in small corporate groups, it is likely that an interested director be exonerated from declaring their interest, given the high probability that the other directors are, or ought reasonably to be, aware of it.

118

Richmond Pharmacology Ltd v Chester Overseas Ltd & Ors [2014] EWHC 2692 (Ch), [2014] 8 WLUK 33 at [72]. 119 Pergamon Press Limited v Maxwell [1970] 1 WLR 1167. 120 London and Mashonaland Exploration Co v New Mashonaland Exploration Co [1891] WN 165; In Plus Group Ltd and others v John Albert Pyke [2002] EWCA Civ 370, [2003] BCC 332. 121 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, [1958] 3 WLR 404. 122 CA 2006 s 177(1). 123 CA 2006 s 177(5) and (6). Service contract are covered separately in CA 2006 ss 188-189.

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It is worth underlining that s 177 imposes only an obligation of board disclosure, as opposed to the common law position of shareholder approval of self-dealing transactions. The main aim of the disclosure duty is to put the other directors on notice of the existing interest, thus enabling them to safeguard the interests of the company when deciding, on behalf of the company, whether to enter the proposed transaction or not. In certain instances, however, the law maintains the common law position of shareholder approval. One such instance is disclosing the interest in an existing transaction or arrangement, discussed above. Another instance is substantial property transactions entered into by the director and his company. Any arrangement between the director and the company involving a substantial non-cash asset worth at least £100,000 or 10% of the company’s net assets must be accompanied by full disclosure and shareholder approval by ordinary resolution in order to be binding on the company.124 The shareholder approval requirement applies also when the contracting party is a director of the parent company, or a person connected with the director of the company or parent company.125 In this case, the transaction binds the company if it is approved by the shareholders of the parent company as well as the shareholders of the contracting (subsidiary) company. The latter approval is not required when the contracting company is a wholly-owned subsidiary.126 The policy reason behind the express requirement of shareholder approval of substantial property transactions between the subsidiary and a director of the parent company is that the latter usually has significant powers to influence the activity of the subsidiary, which creates a risk of unfairly dealing with the subsidiary’s property. Transactions between parent companies and directors of subsidiaries, or between directors of sister companies do not seem to present the same level of risk, which is why they are not covered expressly by s 190.127 Parallel full disclosure and prior shareholder approval requirements exist as regards loans, analogous financial transactions (quasi-loans), guarantees and other credit transactions entered into between the company, on the one hand and directors, directors of holding companies, or persons connected with them, on the other hand.128 The same requirements apply to a further set of “arrangements” entered into by a third party with, or for the benefit of, a director or connected person, if such arrangements (a) would have required shareholder approval if entered into by the company, or (b) the third party acquires a benefit from the company or a body

124

CA 2006 s 190 and s 191. Persons ‘connected with’ a director are defined under CA 2006 s 252, and include a body corporate connected with a director (s 252(2)(b)). This is further defined in s 254(2) as controlling a 20% share of the share capital or being entitled to exercise or control more than 20% of the voting power in a general meeting. 126 CA 2006 s 190 (2) and 4(b). 127 Davies et al. (2016), p. 528. 128 CA 2006 ss 197-202. 125

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corporate associated with it.129 The overarching policy reason behind these requirements of full disclosure and shareholder approval is to prevent assets being siphoned out of a company by shareholders, directors or connected parties, to the detriment of the company’s creditors and other relevant stakeholders. In addition to the no-conflict and no self-dealing duties, directors are bound by the traditional no-profit fiduciary duty, codified in CA 2006 s 176. This section prohibits a director from accepting a benefit from a third party conferred by reason of him being a director or his doing (or not doing) anything as a director. The duty does not apply if the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.130 This section expressly provides that third party comprises an associated corporation or a person acting for an associated corporation,131 which means corporations being in a parent-subsidiary relation or having the same parent company.132 Similarly to the no-conflict duty, the no-profit duty has been interpreted and enforced strictly by courts. Obtaining an unauthorised benefit will give rise to a duty to account which does not depend on fraud or lack of good faith, or on the company suffering any loss.133

4.2

Accounting and Reporting Duties

CA 2006 comprises a series of accounting and reporting obligations which are relevant for corporate groups. As mentioned in Sect. 2 above, for the purposes of preparing and filing of accounts, group means a parent company and its subsidiary undertakings, as defined by CA 2006. Directors of parent companies have a duty to prepare and file group accounts (also known as consolidated accounts),134 in addition to a duty to prepare and filing individual annual accounts.135 The group accounts comprise a consolidated balance sheet and a consolidated profit and loss account,

129

CA 2006 s 203. CA 2006 s 176 (4). 131 CA 2006 s 176 (2). 132 CA 2006 s 256. 133 Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573. 134 CA 2006 s 399. One exception arises when the parent company qualifies as small. A parent company will qualify as a small company in relation to a financial year if the group headed by it qualifies as small (CA 2006 s 383(1)). The requirements that a parent company or a group must meet to qualify for the small companies’ regime are provided under CA 2006 s 383. Another exception arises when the parent company is itself a subsidiary of another company established under the law of an EEA state, in which case the parent company above the intermediate parent will have the duty to prepare the group accounts (CA 2006 s 400(1) and s 401(1)). 135 CA 2006 s 394. 130

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which must give a true and fair view of the state of affairs of the parent and its subsidiary undertakings at the end of the financial year.136 Regarding the form and content of the accounts, CA 2006 distinguished between Companies Act groups accounts137 (prepared in accordance with the UK Generally Accepted Accounting Practice—GAAP) and IAS accounts (prepared in accordance with the International Accounting Standards—IAS). With certain exceptions,138 groups have a choice between the two accounting frameworks. Directors of a parent company must ensure that the individual accounts and those of all its subsidiary undertakings use the same financial reporting framework, unless, in their opinion, there are good reasons for not doing so.139 In addition to the annual accounts, directors are required to produce a directors’ report140 and, in the case of all companies that do not follow the small companies regime, a strategic report.141 The directors’ report imposes relatively straightforward disclosure duties. It must comprise as a list of directors throughout the year,142 the recommended dividend to be paid,143 any important event that has affected the company since the end of the financial year, and the expected future development of the business.144 In corporate groups that fall under the duty to prepare group accounts, the parent company must prepare a consolidated group directors’ report, relating to the undertakings included in the consolidation.145 The strategic report has more wide-reaching requirements. The purpose of this report is to inform members of the company and help them assess whether the directors have fulfilled their duty to promote the success of the company for the benefit of the members as a whole. For a financial year in which the company is a parent company and the directors prepare group accounts, the strategic report must be a consolidated group strategic report, covering all undertakings included in the consolidation and explaining the group’s strategy, business model and financial

136

CA 2006 s 404 (1) and (2) and s 405 (1). Exceptionally, some undertakings may be excluded from consolidation (see CA 2006 s 405 (2)-(4)). 137 The form and content of these accounts must also comply with Part 1 of Schedule 6 of the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (when a small company chooses to prepare group accounts) or Part 1 of Schedule 6 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as applicable. 138 For example, UK GAAP is mandatory where the parent is a charity (CA 2006 s 403(3)); the IAS is mandatory, inter alia, when a company in the group has securities admitted to trading on a regulated market of an EEA state (CA 2006, s 403(1)). 139 CA 2006 s 407(1). 140 CA 2006 s 415. 141 CA 2006 s 414A. 142 CA 2006 s 416(1). 143 CA 2006 s 416(3). 144 Large Companies Regulations Schedule 7 para 7. These Regulations impose on large companies additional disclosure obligations, concerning, inter alia, practices on employee information and consultation, greenhouse gas emissions, or political donations. 145 CA 2006 s 415.

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position at the end of the financial year.146 Where appropriate, a group strategic report may give greater emphasis to the matters that are significant to the undertakings included in the consolidation, taken as a whole.147 Certain large public interest entities148 are required to produce a non-financial information statement as part of their strategic report.149 A parent company that produces a consolidated group strategic report must include in this report a group non-financial information statement relating to the undertakings included in the consolidation.150 The consolidated non-financial information statement must include, inter alia, information regarding the consolidated undertakings’ business model, the policies, outcomes and risks related to these policies that the consolidated undertakings have as regards environmental matters, employees, social matters, respect for human rights, anti-corruption and anti-bribery matters.151

4.3

Director Disqualification

Under the CDDA 1986, the court may disqualify a person from being a director of a company or being concerned or take part, directly or indirectly, in the promotion, formation or management of a company for a specified period.152 The remedy of director disqualification aims to raise the standards of conduct and responsibility for directors, and to prevent the abuse of separate corporate personality and limited liability.153 When a company is insolvent (i.e. has entered liquidation, is put into administration or has an administrative receiver appointed) and the court determines that a director is unfit to be concerned in the management of a company, the court must make a disqualification order against such director for a period ranging between 2 years and 15 years.154 When determining unfitness, the court must take into account factors including the extent to which the person was responsible for the causes of a company or overseas company becoming insolvent, or the nature and extent of any loss or harm which was or could have been caused by the person’s 146

CA 2006 s 414A(3) and ss 414C(8)-(10). CA 2006 s 414A(4). 148 The non-financial information statement must be produced by companies with at least 500 employees, who are: a traded company; a banking company; an authorised insurance company; or company carrying on insurance market activity, as defined under CA 2006 s 1164 and s 1165. 149 CA 2006 s 414CA. This requirement was introduced in 2006, as part of the UK implementation of the Non-financial Reporting Directive 2014/95/EU. 150 CA 2006 s 414CA(2). 151 CA 2006 s 414CB(1) and (2) and s 414CB(8). 152 CDDA 1986, s1. 153 Re Westmid Packing Services Ltd (No. 3) [1998] BCC 836 at 841; Re Swift 736 Ltd [1993] BCC 312 at 315. 154 CDDA 1986, ss. 1, 6 and 12C and Schedule 1, as amended by the Small Business, Enterprise and Employment Act 2015, s 106(1), (6). 147

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conduct in relation to a company or overseas company; any misfeasance or breach of any fiduciary duty by the director in relation to a company or overseas company.155 An example of breach of fiduciary duty that attracted disqualification arose in a group context, where the court found that directors had not prioritised the interests of their own company over those of the parent company.156 When the conduct of the disqualified director has caused loss to one or more of the company’s creditors, the Secretary of State can make an application to the court for a compensation order to be made against the director.157 When making a compensation order, the court will instruct the disqualified director to pay a specified amount to the Secretary of State for the benefit of one or more creditors or classes of creditors specified in the order, or as a contribution to the assets of a company.158 A shadow director may also be subject to disqualification and compensation orders if the court is satisfied that the person’s conduct as a shadow director renders him unfit to be involved in the management of a company. A shadow director is defined as a person in accordance with whose directions or instructions the directors of the company are accustomed to act, excluding guidance or advice given in a professional capacity or given in the exercise of a function conferred by or under an enactment, or given as a Minister of the Crown.159 It should be noted that under this definition there is no exception made for parent-subsidiary companies (as is the case under CA 2006 s 251(3)), which means that the directors of a parent company who give directions to the directors of one or other of its subsidiaries can be held personally liable as shadow directors of the subsidiary. What amounts to ‘directions or instructions’ is a matter to be determined objectively, in light of all available evidence. The instruction or advice does not have to be followed in order for this provision to apply. In other words, a person could be liable as shadow director even if the board had not adopted a subservient role or had not surrendered its discretion.160 Moreover, following the 2015 amendments to the CDDA 1986, the court has the power to make a disqualification order against any person who exercised the “requisite amount of influence” over the disqualified director.161 Such an influence exists when the director’s conduct in relation to which he was disqualified is the result of the person’s directions or instructions, excluding advice given in a professional capacity.162 155

CDDA 1986 Schedule 1, Part I, paras 1-7. Re Genosysis Technology Management Ltd, Wallach v Secretary of State for Trade and Industry [2006] All E R 434. See also Charterbridge Corporation v Lloyds Bank Limited [1970] Ch 62 (Ch), [1969] 3 WLR 122. 157 CDDA 1986 s 15A. 158 CDDA 1986 s 15B. The compensation order provisions were introduced by the Small Business, Enterprise and Employment Act 2015. 159 CDDA 1986 s 22(5). 160 Secretary of State for Trade and Industry v Deverell & Another [2001] Ch 340, [2000] 2 All ER 365. 161 CDDA 1986 s 8ZA(1). 162 Ibid. s 8ZA(2) and (3). 156

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5 Liability for Wrongful Trading, Fraudulent Trading and Undervalue Transactions When a company is solvent, the directors have a duty to promote the success of the company, having particular regard to the interests of the members as a whole.163 When a company approaches insolvency is actually insolvent, the interests of the general body of the company’s creditors become paramount.164 Directors continue to owe their duties to the company, rather than directly to creditors,165 but the interests of creditors replace those of members as the overriding consideration.166 Where a company is, or may be, in financial difficulty, a director shadow director may have additional concerns under the insolvency legislation. Significant concerns for parent companies may arise in the context of liability for wrongful trading. Under IA 1986 s 214, a director or shadow director will be personally liable to contribute to a company’s assets such amount as the court thinks proper, if, at some time before the commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. If the director causes the company to continue to trade under these circumstances, and fails to take measures to minimise the potential loss to creditors,167 liability for wrongful trading may arise. In order for liability to arise, it must be shown that the company was, at the date of liquidation, in a worse position than it would have been had trading ceased earlier.168 The defence of showing that every step has been taken to minimise potential losses to creditors is a high hurdle for avoiding liability. However, every step does not mean every reasonable step,169 and steps that are taken, must be done with the view to minimising loss for the body of creditors as opposed to individuals.170

163

CA 2006 s 172(1). CA 2006 s 172(3). The same rule existed at common law—see Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), [2014] BCC 337; West Mercia Safetywear Ltd v Dodd [1988] BCLC 250; GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] 2 BCLC 369; In the Matter of Capitol Films Ltd [2010] EWHC 3223 (Ch), [2011] 2 BCLC 359. 165 Yukong Lines Ltd v Rendsburg Investments Corporation and others, TLR 30 October 1997. 166 Macpherson and another v European Strategic Bureau Limited [2000] 2 BCLC 683 (holding that in the vicinity of insolvency directors may not make distributions to shareholders or repay shareholders’ debt if this amounts to an informal winding up or a distribution of the company’s assets without proper provision for all the creditors); Capitol Films Ltd (In Administration) [2010] EWHC 2240 (Ch), [2010] 9 WLUK 57 (holding that near insolvency, directors cannot settle a claim against a third party without taking into account the interests of the general body of the company’s creditors). 167 IA 1986 s 214(2)(b); Kudos Business Solutions Ltd (in Liquidation) [2011] EWHC 1436 (Ch), [2012] 2 BCLC 65. 168 Re Marini Limited (The liquidator of Marini Limited v Dickenson & ors) [2003] EWHC 334 (Ch). 169 Brooks v Armstrong [2015] EWHC 2289 (Ch), [2004] BCC 172 at [8]. 170 Ibid. at [276]. 164

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Shareholders who participate in the running of the company’s affairs may be held to constitute de facto or shadow directors, and thus be caught within the ambit of s 214. In contrast with the CA 2006 definition of a shadow director, the IA 1986 definition does not exclude parent companies in accordance with whose directions or instructions the directors of the subsidiary are accustomed to act.171 The degree of control exercised by the parent in order to become a shadow director for the purposes of IA 1986 is a matter of some uncertainty. It seems that the mere establishment of business guidelines for the subsidiary is insufficient to make the parent a shadow director.172 Conversely, it is not necessary for the subsidiary’s board expressly to undertake a subservient role or surrender its discretion for an interfering parent company to be found shadow director.173 Consequently, it seems that so long as the subsidiary is solvent, the parent may impose a common policy on its subsidiaries without being in danger of becoming (without more) a shadow director, and thus being bound by the general duties of directors. When the subsidiary’s solvency becomes doubtful, the broader definition of shadow director comes into play and an interfering parent may be found liable for wrongful trading under IA 1986 s 214. It should be noted that the impact of s 214 has been rather modest.174 One of the causes is that, until recently, the claims under this section were restricted to liquidators, who have proven reluctant to bring them. This was due, among other things, to the fact that the liquidator bears the costs of an unsuccessful action,175 expenses ranking after the floating charge.176 The outcome of this has meant the likelihood of claims being brought has been restricted to those situations where the liquidator is confident of success.177 Some of these issues have been addressed by the recent amendments to IA 1986, which allow administrators to bring wrongful trading claims, and allow administrators or liquidators to assign such claims to third parties.178 In addition to wrongful trading, shareholders are susceptible to liability for fraudulent trading. IA 1986 s 213 provides that if, in the event of insolvent administration or liquidation, the administrator or liquidator concludes that a company’s business has been carried on with the intent of defrauding its creditors or for any fraudulent purpose, any person who was knowingly a party to the carrying on of such business may be liable to contribute to the assets of the company. In contrast to wrongful trading, which entails only civil liability, the fraudulent trading provisions

171

IA 1986, s 251. Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180; Gower and Davies, supra note 127 at 214. 173 Secretary of State for Trade and Industry v Deverell [2000] 2 BCLC 133 (CA). 174 Keay (2014), p. 63. 175 Re M.C. Bacon Ltd [1991] Ch 127, [1990] BCLC 607 at 132. 176 Buchler v Talbot [2004] UKHL 9, [2004] 1 BCLC 281. 177 Didcote (2008), p. 374; Williams (2015), p. 55. 178 IA 1986, ss 246ZA—246ZC (introduced by the Small Business, Enterprise and Employment Act 2015). 172

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impose both criminal179 and civil liability.180 It should also be noted that liability may be imposed on any person who was knowingly a party to the fraudulent business, which obviously includes a parent company and its directors. The conflation of the civil and criminal types of liability has led the judiciary to assume a strict approach to fraudulent trading,181 refusing to allow a claim in the absence of “actual dishonesty, involving real moral blame”.182 As the case law illustrates, this is a high burden.183 For this reason, the fraudulent trading provision has rarely been used successfully. Further concerns arise in the context of related party transactions at undervalue, prohibited by IA 1986 ss 238 and 423.184 An intra group transfer at undervalue may be set aside by the court, on the application of the administrator or liquidator.185 Directors responsible for causing the seller to make an undervalue transfer risk personal liability for breach of duty. For the transaction to be set aside, it must take place within 2 years from the onset of insolvency and the company must have been insolvent at the time of the transaction or become insolvent as a result.186 A transaction will be at undervalue for these purposes if it is a gift or the company receives significantly less than the consideration provided by it.187 The value of the consideration is assessed at the date of the transaction, by reference to what a reasonably informed purchaser in an arms’ length transaction would be prepared to pay. A transaction will be found to be at undervalue if the court is satisfied that, whatever the precise values may be, the incoming value is significantly less than the outgoing value.188 If an undervalue transaction is entered into with the deliberate aim of putting assets beyond the reach of creditors, or which otherwise prejudices the interests of creditors, the court, at the application of the liquidator or any other person prejudiced, can set the transaction aside irrespective of when it took place.189 When a proposed intra-group transaction appears to be disadvantageous to the subsidiary but beneficial for the group as a whole, the subsidiary’s board could minimise liability for transactions at undervalue by securing prior approval from the parent, confirming that the transfer is in the best interests of the parent and the group. However, when the subsidiary faces a real possibility of insolvency, the interests of the subsidiary’s creditors become paramount, and approval or ratification by the parent will not

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CA 2006 s 993. IA 1986 s 213. 181 The Cork Committee (1982), p. 398. 182 Re Patrick and Lyon Ltd [1933] 1 Ch 786. 183 Re Gerald Cooper Chemicals Ltd (In Liquidation) [1978] Ch 262, [1978] 2 WLR 866. 184 Known as gratuitous alienations in Scotland. 185 IA 1986 s 238. 186 IA 1986 s 240. 187 IA 1986 s 238(4). 188 Reid v Ramlort [2004] EWCA Civ 800, [2005] 1 BCLC 331. 189 IA 1986 s 423. 180

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prevent liability.190 Evidently, shareholder approval will be ineffective when the transaction constitutes an unlawful distribution of capital or a fraud on creditors.191 Another provision of the IA 1986 that may have relevance for company groups is s 2012, which introduces a summary procedure for the litigation of certain claims against directors and other office holders. When the company is in liquidation, a claim under IA 1986 s 212 can be brought against former directors of the company, anyone involved in the promotion, formation or management of the company, or anyone who has acted as liquidator or administrative receiver of the company.192 For the purpose of this claim, the concept of misfeasance is broad, and includes the misapplication or retention of money or other property of the company, becoming accountable for money or other property of the company, or breaching a fiduciary or other duty in relation to the company.193 It should be noted that the notion of director used in this section includes a de facto director, but it appears that it excludes a shadow director.194 If, on examination of his conduct by the court, a person is found liable for misfeasance the court may order him to repay, restore or account for any misappropriated money or property to the company; or compensate the company for any misfeasance or breach of fiduciary or other duty by way of contribution to the company’s assets.195

6 Liability of the Parent Company to the Subsidiary’s Minority Shareholders for Unfair Prejudice CA 2006 s 994 of allows a shareholder of a company to seek relief for unfair prejudice if the affairs of the company are conducted in a manner that is unfairly prejudicial to the shareholders’ interests as a whole, or to the interests of that particular shareholder, or for an actual or proposed act or omission of the company that is or would be so prejudicial. If the court is satisfied that the unfair prejudice petition is well founded, it may make an appropriate order. Often, the order instructs the company or the other shareholders to buy out the petitioning shareholders. Unfair prejudice claims may arise in a group context. Minority shareholders can complain that the affairs of a subsidiary are carried on in a manner unfairly prejudicial to them. Parent companies are not, in theory, precluded from bringing such a petition, but they are unlikely to be successful, since prejudice is not considered unfair when the petitioner can easily rectify the prejudicial state of

190

West Mercia Safetywear Ltd. v Dodds [1988] BCLC 250. Aveling Barford Limited v Perion Limited [1989] BCLC 626. 192 IA 1986 Schedule B1 para 75 provides for a similar claim against the administrator of a company put in administration. 193 IA 1986 s 212(1). 194 Holland v Revenue and Customs and another [2010] UKSC 51, [2011] 1 BCLC 141. 195 IA 1986 s 212(3). 191

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affairs.196 Conversely, shareholders in the parent company may complain that the actions of the subsidiary are unfairly prejudicial to them. In such cases, courts may find that the conduct of a parent company or of its directors, towards a subsidiary, constitutes conduct of the affairs of that subsidiary,197 and the conduct of a subsidiary, or of its directors, represents conduct of the affairs of the parent company.198 These findings are especially likely to arise where the parent and subsidiary share the same directors.199 For instance, the failure of a parent company to pay a debt due to a subsidiary company represented the affairs of the subsidiary, and could have justified an unfair prejudice petition had the withholding of payment not been necessary for the survival of the group (including the subsidiary).200

7 Liability Arising from the Relation Between Companies in a Group: Agency and Assumption of a Duty of Care Liability within a group may arise if an agency relation is found between parent and subsidiary. It is important to note that there is no presumption that a subsidiary will act as the parent’s agent simply because the parent controls the subsidiary, or the subsidiary acted as an intermediary between the parent and a third party, or the controlling shareholders are also directors, or because the company was created for the sole objective of benefiting the members.201 Similarly, the law of undisclosed principal cannot be invoked against the controller of a company to support a claim of veil piercing, based on control alone.202 In Ebbw Vale Urban District Council v South Wales Traffic Area Licencing Authority, Cohen LJ emphasised that “under the ordinary rules of law, a parent company and a subsidiary company, even a 100 per cent subsidiary company, are distinct legal entities and in the absence of an agency contract between the two companies, one cannot be said to be an agent of the other.”203 The agency relation must be established taking into account all relevant

196

Re Baltic Real Estate Ltd (No 2) [1993] BCLC 503. Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, [1958] 3 WLR 404; Nicholas v Soundcraft Electronics Lts [1993] BCLC 3 (CA); Re Grandactual Ltd [2005] EWHC 1415 (Ch), [2006] BCC 73. 198 Ferran and Ho (2014), p. 27; Re Citybranch Group Ltd, Gross v Rackind [2004] EWCA Civ 815, [2005] BCC 11. 199 Gross v Rackind [2004] EWCA Civ 815, [2005] BCC 11; Hawkes v Cuddy [2009] EWCA Civ 291, [2009] 2 BCLC 427. 200 Re Soundcraft Magnetics [1993] BCLC 360. 201 Gas Lightning Improvement Co Ltd v Commissioners of Inland Revenue [1923] AC 723, [1923] 5 WLUK 56; British Thomson Houston Co Ltd v Sterling Accessories Ltd [1924] 2 Ch 33 at 38. 202 VTB Capital Plc v Nutritek International Corp [2013] UKSC 5, [2013] 1 BCLC 179, at [141], per Lord Neuberger. 203 [1951] 2 KB 366, [1951] 1 All ER 806, at 370. 197

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considerations, which may include insufficient capitalisation of the subsidiary,204 overlapping directors and senior manager positions,205 or when a business nominally carried out by the subsidiary is in fact run by the parent.206 When the agency relation is established, liability will attach to the parent as principal on ordinary agency principles.207 Assumption of a duty of care is another avenue for transferring liability from the subsidiary to the parent. A parent company will not be liable for the acts of a subsidiary by reason only of its shareholding, but it may owe a direct duty of care to employees of the subsidiary. In Chandler v Cape plc208 the Court of Appeal held that a subsidiary and its parent company are distinct entities and there is no assumption of responsibility by reason solely that a company is the parent of another company. However, in special circumstances a holding company could assume liability towards the subsidiary’s employees. The court applied the three-part test established in Caparo Industries PLC v Dickman209 to the parent and subsidiary relationship,210 to assess whether “what the parent company did amounted to taking on a direct duty to the subsidiary’s employees”.211 Under the Caparo test, a duty of care will arise if the requirements of foreseeability, proximity and reasonableness are met under the particular facts of the case. The court noted that the parent company had expert knowledge in the health and safety of the operation, which it ought to have advised its subsidiary about.212 Evidence demonstrated that the parent company had assumed responsibility for the health and safety measures for the entire group, the parent company knew or ought to have known that the subsidiary’s work system was unsafe, and it knew or should have foreseen that employees would rely on the parent’s superior knowledge for their protection.213 The court therefore found that the parent company owed a duty of care to the employee of the subsidiary and imposed liability without having to resort to piercing the corporate veil. In Thompson v Renwick Group Plc,214 a case with similar facts, the court reaffirmed the ruling in Chandler, but found that the parent did not have extensive knowledge in health and safety regarding asbestos. Since the parent’s expertise was not superior to that of

204

Re FG Films [1953] 1 All ER 615. Re Polly Peck plc [1996] 2 All ER 433 at 445-446. 206 Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER116. 207 Ferran and Ho (2014), p. 32; Smith Stone and Knight Ltd v Birmingham [1939] 4 All ER 116; Canada Rice Mills Ltd v R [1939] 3 All ER 991, PC; Firestone Tyre and Rubber Co Lts v Lewellyn (Inspector of Taxes) [1957] 1 All ER 561 (HL). 208 [2012] EWCA Civ 525, [2012] 3 All ER 640. 209 [1990] 2 AC 605, [1990] 2 WLR 358. 210 [2012] EWCA Civ 525 [2012] 3 All ER 640 at [63]. 211 Ibid at [70]. 212 Ibid at [80]. 213 Ibid at [73]-[80]. 214 [2014] EWCA Civ 635, [2014] 2 BCLC 97. 205

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its subsidiary, no relationship of proximity existed and thus no duty of care was established. More recently, in AAA v Unilever Plc,215 the Court of Appeal clarified that Chandler did not lay down a separate test for liability of parent companies, but only provided guidance on relevant considerations to be taken into account.216 Circumstances where the relevant test is capable of being met usually fall into two categories: (1) where the parent has in substance taken over the management of the relevant activity of the subsidiary, individually or jointly with the subsidiary’s own management; or (2) where the parent has given relevant advice to the subsidiary about how it should manage a particular risk.217 The Court found that neither of these two categories arose on the facts of Unilever, and therefore the proximity between the parent and subsidiary required under the Caparo test was not met. The Court of Appeal reinforced this approach in Okpabi & Ors v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd.218 Following the Caparo test, the court held that the frequency, scale and location of the oil spills from pipelines operated by the subsidiary made the harm inflicted to the appellants foreseeable by the parent company. The element of proximity, however, was not met, given the insufficient degree of control by the parent of its subsidiary’s operations in Nigeria.219 Furthermore, in Lungowe v Vedanta Resources Plc,220 the Court of Appeal analysed the existing authorities on whether a parent company (Vedanta Resources) owes a duty of care to the employees of its subsidiary (KCM), or to those affected by its subsidiary’s operations, and made the following observations. First, the starting point in evaluating a duty of care claim is the three-part test of foreseeability, proximity and reasonableness established in Caparo. In determining whether the test is met, the court should investigate whether the parent company (a) has undertaken direct responsibility for devising a material health and safety policy of the subsidiary, which is relevant to the claim, or (b) the parent controls the operations of the subsidiary which give rise to the claim.221 Following Chandler, the court underlined that a relevant circumstance in applying the Caparo test is the whether the parent has special knowledge and expertise that places it in a position to protect the employees of the subsidiary or the persons affected by its operations. If both parent and subsidiary have similar knowledge and expertise and they take the relevant decisions jointly, both companies may owe a duty of care.222 Vedanta Resources appealed, but the UK Supreme Court dismissed the appeal.223 In a

215

[2018] EWCA Civ 1532; [2018] BCC 959. Ibid. at 966. 217 Ibid. at 967. 218 [2018] EWCA Civ 191; [2018] B.C.C. 668. 219 The claimants Unilever and Okpabi applied for permission to appeal to the UK Supreme Court, but as at the time of writing this report no decision has been made. 220 [2017] EWCA Civ 1528, [2018] 1 WLR 3575 (under appeal with the UK Supreme Court). 221 Ibid. at 3529. 222 [2017] EWCA Civ 1528, [2018] 1 WLR 3575 at 3529. 223 Vedanta Resources Plc v Lungowe, [2019] UKSC 20; [2019] 2 WLR 1051. 216

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unanimous judgment, the court ruled that English courts have jurisdiction over these proceedings.224 In determining the issue of jurisdiction, the Supreme Court investigated whether the claimants had a good arguable case that Vedanta Resources had sufficiently intervened in KMC’s operations so as to warrant a duty of care to the claimants. The court was reluctant to limit a parent’s liability to the two scenarios mentioned by Unilever. Instead, it underlined that the issue of parent liability is highly fact-sensitive and should be determined on a case-by-case basis. Lord Briggs stated that the facts in Vedanta show that it is well arguable that Vedanta Resources exercised a sufficient degree of involvement and control over the conduct of the relevant operations of KCM to give rise to a duty of care.225 He based this view on the sustainability reports and other documents published by Vedanta Resources, which may support the conclusion that the parent company (1) asserted its own assumption of responsibility for the maintenance of proper standards of environmental control by its subsidiaries, and (2) undertook responsibility to establish and implement these standards through training, monitoring and enforcement.226 As these cases show, the question of liability of a parent company is firmly rooted in the principle that parent and subsidiary companies are separate legal persons, each responsible for its own separate activities. In certain circumstances, a parent company may be subject to a duty of care in relation to its subsidiary’s activities if the general principles of tort regarding the imposition of such a duty are satisfied. The assessment of whether the duty of care exists will follow the normal private law test, but is nonetheless highly fact-sensitive. As the UK Supreme Court decision in Vedanta held, elements that are directly relevant to this assessment include evidence of active steps by the parent to establish, implement and enforce group-wide policies across its subsidiaries, and public statements by the parent asserting its supervision and control over the relevant operations of its subsidiaries.

8 Conclusion Although the UK company law does not have a unitary body of provisions dedicated to corporate groups, liability within a group and to third parties may arise based on other legal doctrines. These include piercing the corporate veil, liability of de facto or shadow directors for various fiduciary, accounting and reporting duties, as well as duties to creditors in the vicinity of insolvency. Liability may also arise when a special relation is established between the companies in a group, such as agency, or between the parent and a third party affected by the subsidiary’s activity, such as a duty of care in negligence. Some of these grounds of liability can be avoided or mitigated by certain practical steps, such as avoiding common directorships between

224

Ibid. at [102]. Ibid. at [61]. 226 Ibid. 225

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parent and subsidiary, appointing external non-executive directors, adopting clear group policies on matters such as keeping clear records of the justifications for board decisions, policies on conflicts of interest, related party transactions, intra-group lending or guarantees. Moreover, the recent litigation around a parent’s responsibility in tort for the effects of its subsidiary’s activities emphasise the importance of carefully drafting the parent’s public statements regarding group-wide policies and standards, so as to avoid being interpreted as evidence of an assumption of responsibility.

References Journal Articles Cabrelli D (2010) The case against ‘Outsider Reverse’ veil piercing. J Corp Law Stud 10:343–366 Didcote F (2008) Controlling the abuse of limited liability: the effectiveness of the wrongful trading provision. Int Company Commer Law Rev 19:373–378 Han TC (2015) Veil piercing- a fresh start. J Bus Law 1:20–36 Hannigan B (2013) Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company. Irish Jurist 50:11–39 Keay A (2014) Wrongful trading: problems and proposals. Northern Ireland Legal Q 65:63–79 Lee PW (2015) The enigma of veil-piercing. Int Company Commer Law Rev 26:28–34 Williams R (2015) What can we expect to gain from reforming the insolvent trading remedy? Modern Law Rev 78:55–84

Books Davies PL et al (2016) Gower and Davies principles of modern company law, 10th edn. Sweet & Maxwell, London Ferran E, Ho LC (2014) Principles of corporate finance law, 2nd edn. Oxford University Press, Oxford Gower LCB (1979) Principles of modern company law, 4th edn. Stevens, London Kershaw D (2012) Company law in context: text and materials, 2nd edn. Oxford University Press, Oxford Palmer F, Morse G (1992) Palmers company law, 25th edn. Sweet & Maxwell, London

Online Publications Kemp M, Handforth Z (2011) Shadow directors: keeping on the sidelines. Practical Law Company. https://tinyurl.com/y4yf9w9b Practical Law Corporate (2017) PSC register: identifying people with significant control. Practical Law Company. https://tinyurl.com/y3tsludl

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Other The Company Law Review Steering Group (2000) Modern law for a competitive economy completing the structure. DTI, London The Cork Committee (1982) Report on insolvency law and practice The Department for Business, Energy and Industrial Strategy (BEIS) (2016) Statutory Guidance on the meaning of ‘significant influence or control’ over companies in the context of the Register of People with Significant Control The Walker Review (2009) A review of Corporate Governance in UK banks and other financial industry entities: final recommendations

National Report on Belgium Eddy Wymeersch

Abstract The Belgian law on groups of companies is the result of several legal sources: the companies acts, accounting regulation, financial regulation and case law have developed elements of group law without leading to an overall definition of group law. The group reality, composed of separate legal entities, controlled by the leading company is widely recognised. Each of these entities will individually be subject to its own legal regime, subject to control of the group or parent leadership. The control is essentially defined as the power to appoint the majority of the board of the subsidiary or to determine its activity. Control allows the parent to require the subsidiary to adopt decisions in the parent’s or the group’s interest, potentially creating a conflict of interest. Different legal instruments have been developed to balance the interests of the group and those of the subsidiary, to protect the subsidiary and its creditors.

1 A Short Historical Introduction Groups of companies have been dominant players in the Belgian economy, especially before the first World War, when many groups of entrepreneurs developed a thriving economy. These groups were often composed of several important families, or leading shareholders, engaging in a specific sector, such as coal and steel. Due to the financial crisis, a law of 1935 decided that the previous conglomerates composed of industrial companies and banks should be split in two different entities or business lines: the banks would be managed independently,1 while the industrial holdings

This was the so-called “autonomie de la fonction bancaire”, reducing the presence of the holding company in the bank to one director. It is related to the idea that the bank should be run exclusively in its own interest. The rule was abandoned in 1994. 1

E. Wymeersch (*) University of Ghent, Ghent, Belgium Public Interest Oversight Board, Madrid, Spain © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_23

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would continue to function as a listed diversified company, some of which are still in existence. After the Second world war, the industrial structure changed partly into industrial groups, with one or a few shareholders, often a foreign shareholder, while individual shareholders acted in diversified business groups of the conglomerate type, or as monoline industrial firms with a large number of subsidiaries. This explains that Belgian group law often presents the characteristics of a vertical structure, while at the same time dealing with the relations between shareholders in groups. There probably are no listed companies without a network of subsidiaries and other minority owned related entities, but also many midsize, privately held enterprises are structured in a group format.

2 Sources of Group Law The role of Belgian group law is largely concentrated on company law issues, and therefore the basic concepts of group law were laid down in the 1999 Companies Act.2 Belgium has recently adopted a new companies act, where several changes relating to groups of companies have been introduced.3 The notion of group of companies is frequently referred to, but not defined as such. Its content therefore has to be derived from the definitions of the group components, such as “parent” and “subsidiary” company, or the definition of “control” and of the types of control.4 Strikingly Belgian company law defines the “group” indirectly by referring to the control exercised by one company over another, respectively the “Parent” and the “Subsidiary company” by “empowering one company to exercise, at law or in fact, decisive influence on the appointment of the majority of its directors, or on the orientation of its policy”. There is individual control, joint control and legal v. factual control. The law further defines the cases in which control will be presumed. In the practice of the larger Belgian groups, securities market regulations play an important role. Most stock exchange listed companies are organized as groups in which the parent company is listed, but sometimes also some of the subsidiaries. Requirements applicable to these entities are mainly governed by the regulation of financial markets, especially by the disclosure duties, and are supervised and enforced by the market supervisor, in the Belgian case the FSMA or Financial Securities and Markets Authority. This observation means that for listed entities, group action is largely dominated by financial regulation, within the limits of company law.

2

See articles 5 to 11 of the Companies Code of 7 May 1999. See L. 23 March 2019, Off Journal, 4 April 2019. Here referred to as Comp.L. 4 Article 1.14 and 1.16, Comp.L. 3

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Belgian law is partly composed of acts of the Belgian Parliament (mainly the Companies law 2019 and its implementing decree5) and partly of European law, especially the EU directives on company law, which have been transposed in Belgian law, and the European Regulations which are directly applicable in the Belgian legal order without transposition in domestic law.6 Among the latter one should mention the regulations dealing with the International Accounting Standards (ISAs).7 European law provisions will also affect companies’ action in the fields of financial regulation, mostly addressing stock exchange listed companies, such as the implementing regulations on take-over bids, on financial disclosures or on market abuse. These—elaborate—regulations however will not be analysed in this overview. As most listed companies are structured groupwise, one should also mention the non-legally-binding provisions of the corporate governance code which mainly addresses the functioning of the solo company and the relations with its directors and its shareholders.8 European law plays a significant role in the organization and structure of company groups. Notwithstanding some interesting proposals, the European legislator has never succeeded in agreeing on a full directive on groups of companies, due to the opposition of several Member States.9 Partial elements of group law are found in different other directives such as the rules on accounting, and auditing or the rules on mergers. Special EU rooted company forms have been created such as the Societas Europea (SE) the European Cooperative Society (ESC) or the European Economic Interest Grouping (EEIG). Specific issues dealing with groups of companies are encountered in the characterization of different formats of company groups, and in the relating accounting provisions. As to the first, the Belgian law knows several group formats, such as the consortium, and the “related” and “associate” companies. The new Belgian law has introduced a regime which will impose more proportional requirements to “small companies” or to “micro companies”, extending the approach to “small groups”.10 As to the accounting provisions, Belgian law imposes the obligation to draw up consolidated accounts and a consolidated annual report for listed and most other

5

See Royal decree of 29 April 2019, implementing the Comp.L. See for an overview: European parliament, Company law, http://www.europarl.europa.eu/ factsheets/en/sheet/35/company-law. 7 Applicable in Belgium on listed companies and on consolidated accounts. Other companies follow Belgian GAAP. 8 A new corporate governance code has been published, applicable from 2020 on: https://www. corporategovernancecommittee.be/sites/default/files/generated/files/page/2020_belgian_code_on_ corporate_governance.pdf. Listed companies have to state that they apply the Corporate governance as indicated by Royal decree: Article 3.6. 9 See the Proposal for an Eighth Council directive of 10 April 1984, OJ, L.126 of 12 May 1984. 10 Article 1-26 Comp.L.described the small group on the basis of employees (250), turnover (35 m euro) and balance sheet total (17m euro). They are exempted from publication of consolidated accounts: article 3-25. 6

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groups, and this at the top parent company level.11 The consolidation methods are mentioned in the law: full consolidation, proportional or partial, and equity method.12 In financial regulation, on numerous occasions concepts and techniques of group law are mentioned and even regulated. Banking supervisors will scrutiny the banking group as a whole. In case of insolvency, the recovery and resolution measures will extend to the companies, part of the banking group, including subsidiaries, or upstream companies.13 The basic rules on groups are laid down in the Belgian Companies Law where the definitions of the group components can be found. The main provisions on groups apply to all company types,14 although in practice they are mainly applicable to limited liability companies, such as the public company limited by shares (société anonyme- naamloze vennootschap), to the private company (societé a responsabilité limitée, besloten vennootschap) and to the cooperative society (société cooperative, cooperative vennootschap).15 The applicable rules, especially the rules on annual accounts and annual reports, the provisions on accounting and on auditing, and those on consolidated accounts are applicable to all companies organized as legal persons.16 Belgian law prescribes the rules for the disclosures,17 where applicable in a consolidated format. Auditors have to report on these companies’ accounts, applying the international standards on auditing. Several of these provisions are directly applicable in accordance with European regulations. The definitions on groups may also play a role for other company types, such as partnerships, which are sometimes used for coordinating control, the transfer of their shares being strictly limited. In a number of specific company law rules, the group dimension is taken into account: by way of example, this is the case for the prohibition for a subsidiary to subscribe to the shares of its parent company18; shares held by a direct subsidiary are assimilated to shares directly held by the parent, except for the dividend rights.19

11

See article 3:22; 3.25 and 3.26 Comp.L. exonerate small groups from the obligation to publish consolidated accounts. Listed companies are excluded from this exception. 12 See 3.22 Comp.L. 13 See the royal decree of 29 April 2019. 14 This would be the case for the obligation to establish consolidated accounts, article 13:22 Companies Law. 15 Or “Besloten vennootschap” “societe à responsabilité limitée” Book 5 Comp.L., according to the new terminology. 16 Article 3.1 e.s. Comp.L. Listed companies have to include a compliance statement with the corporate governance code, a statement on their diversity policy and a report on the remuneration practice, article 3.6 3. These requirements have been formulated as applicable to the parent company only. 17 Royal Decree of 29April 2019 implementing the Comp.L. 18 Article 5.6; 7.5 Comp.L.; extended to shares subscribed by a subsidiary. 19 Article 7.221 Comp.L.

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Belgian literature on groups of companies is quite rich20; there is also useful case law. Important comparative studies have been published which served as a source of inspiration for legislatures and academic research.21

3 Control and Related Subjects There are several legal techniques to establish a control which may lead to group relationships. Control is a core concept in the definition of a group: it is defined in the law as “the legal or factual power to exercise a decisive influence on the appointment of the majority of directors, or the orientation of its policy”.22 Control is exclusive when it is exercised by one party, including that party’s subsidiaries. Control is joint, when a limited group of shareholders have agreed that the decisions on policy issues will not be adopted except with their common consent.23 Control is usually based on share ownership, whether directly or through a subsidiary. It may also be based on an agreement with other shareholders, allowing one shareholder to cast the majority of the votes, or may be a de facto situation, e.g. due to the absence of the other shareholders. The law defines as a “consortium”, the case in which several independent companies are subject to integrated leadership.24 The latter may be based on intercompany agreements, on the identical composition of their boards, or on the common ownership of the shares by the same parties, e.g. in the family context. These conceptual definitions are used in other regulations as well, or are considered applicable in different fields: special provisions are applicable to the consolidation of accounts in a “consortium” or horizontal group.25 The notion of mere “domination” as a separate category would come whether under the general definition of de facto control, or under the notion of “orientation of policy”, but is not a separate legal criterion.

20

See the annex for the main sources on Belgian group law. See: EBOR; Forum Europaeum Corporate Group Law (2002), High Level Group of Company Law Experts (2002), Reflection Group (2011). 22 Article 1.14 Comp.L.. The European accounting directive art 22(2) EU Directive 2013/34 defines the group for consolidation purposes in wide terms referring to “that undertaking (a parent undertaking) has the power to exercise, or actually exercises, dominant influence or control over another undertaking (the subsidiary undertaking); or that undertaking (a parent undertaking) and another under taking (the subsidiary undertaking) are managed on a unified basis by the parent undertaking.” 23 Article 1.18,Comp.L. 24 Article 1.19, Comp.L. 25 Article 3.24, Comp.L. stating that each of the participating companies are considered to be consolidating company. 21

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Legal control exists where the controlling party is “entitled” to exercise the majority of the voting rights in the general meeting, or when it is entitled to appoint the majority of the board members in the controlled entity.26 In these cases, control will be presumed even if it is not effectively exercised, which in some cases however, might lead to responsibilities for not exercising it, e.g. for not urging the subsidiary to adopt measures to protect the creditors.27 Factual control is defined as being based on other elements, such as the ability of a non-majority shareholder to cast the majority of the votes in two subsequent general meetings.28 In other parts of the law, other more complex criteria are used e.g. in competition law based on the common action of several legally unrelated parties.29 The control criterion forms the basis for defining group companies, referred to in the Belgian law as “interconnected companies”,30 where the control criterium is the core of the definition. These companies can be parent companies or subsidiaries, and are included in the group notion.31 A separate category are the “associated companies” being companies in which another company hold shares which allows it to exercise a significant influence on the orientation of its policies. This influence is presumed when the holding company hold 20% of the shares of the other company. A third category refers to the holding of a minority participation allowing the owner of the shares to establish a specific and stable relationship with another company allowing it to influence the latter’s policies. This relation is presumed to exist when 10% of the shares are owned, or when specific circumstances or contractual covenants apply.32 Belgium law traditionally limits voting rights in SAs to one vote per share. In the 2019 reform, Belgium has now introduced shares with double voting rights, sometimes referred to as “loyalty shares”. The privilege can only be granted to a shareholder who has held the shares for 2 years, and after a shareholder vote with a 2/3 majority. The privilege continues to benefit transferees, but only in case of transfer between individuals or companies belonging to or controlled by the same 26

Article 1.14. Comp.L.See the definition of de facto control Companies Law Article 1.14 referring to the factual situation where a shareholder has exercised the majority of the voting rights in two subsequent general meeting. by the parent and its subsidiaries. 27 In case of bank, a duty to avert systemic risks may be accepted as a duty of even the passive shareholder. In practice, the prudential supervisor will normally prod the passive shareholder into action. For a duty for the parent to support a subsidiary: Malherbe a.a, o.c. 1625. See differently in general company law: Dieux (2017), p. 7, referring to Van Ommeslaghe (2005). 28 Article 1.14 Comp.L. 29 The existence of a single undertaking or single economic entity can be derived from the action of several entities without links as shareholders: see e.g. ECJ, Goldman Sachs Case T-419/14, 12 july 2018; ECJ, C-440/11P, 11 July 2013 Portielje. 30 See article 1.20 Comp.L. “ verbonden of geassocieerde vennootschappen”- “sociétés liées et associées”, defined as “ controlled companies, controlling companies, companies part of a consortium or companies which are controlled by any of the foregoing.” 31 “Société mère ou filiale”, “moedervennootschap, dochtervennootschap”. 32 Article 1.22, Comp.L, such as shares owned by other subsidiaries, or shares subject to agreements relating to their disposal or the exercise of rights attached.

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families or related groups.33 The importance of this legal change on group control and structuring is not to be underestimated, whether as a device against certain investors, or bidders, but also increasing the value of the shares for the controlling shareholders. Moreover, the law authorizes the issuance of non-voting shares.34 Special mention deserves the pyramids whereby one shareholder can determine the way the controlling shares are voted, as a consequence of his control over a pyramid of separate companies, the ultimate one allowing him to exercise control over the investee group even with a small financial stake at the top company. The phenomenon is still met in some Belgian industrial structures.35 Control in a legal sense will be established at the lowest level of companies, but will normally not include the ultimate shareholder, who might not be subject to group law rules.36 Depending on the relative level of shareholding, the rules on conflicts of interest may be applicable. Voting agreements are permissible but have to be limited in time and should not be contrary to the “interest of the company”. A shareholder can give a proxy but for a certain meeting only to one person.37 De facto control refers to the case in which one shareholder holds or controls the voting rights for less than 50% of these rights, but is able to determine the decisions at the general meeting, holding the majority of the shares that have cast their vote.38 A significant number of Belgian listed companies are controlled on a “de facto” basis.39 The notion is also used in tax law.40 The Belgian corporate governance code contains a certain number of duties of the board members who have been proposed by controlling or significant shareholders: they should inform the board of the interests and intentions of these shareholders in sufficiently clear terms and in a timely manner and express their strategic objectives.

See article 7:53, § 2. Comp.L. Article 7.57 Comp.L. 35 See: Shermann & Sterling, ISS, ECGI, Proportionality between Ownership and Control in EU listed companies, 2006, http://ec.europa.eu/internal_market/company/docs/shareholders/study/ final_report_en.pdf. 36 On the subject: High Level Group of Company Law Experts (2002), Ch. V: Groups and Pyramids, at pp. 94–100. This will be different for the assessment of that shareholder under the fit an proper test in banking: here reality will prevail. 37 Article 7.143 Comp.L. 38 See FSMA, https://mcc-info.fsma.be/fr/quest-ce-quun-actionnaire-détenant-le-contrôle-de-lasociété, adding that the requirement should apply in the last and the penultimate general meeting. 39 See Vander Elst,Chr., Shareholders as Stewards: Evidence from Belgian General Meetings (January 1, 2013). SSRN 2270938. 40 See Gent, 3 January 2017, TFR 2017, afl. 521, 392 and http://tfrnet.larcier.be/ (23 May 2017), nt. WOUTERS, P., where the owner of one share was held to be controlling as he determined the policy, was the only person knowledgeable of the activity, while control was stable and continuous. 33 34

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4 Types of Groups and Their Formation By way of presentation, it is useful to distinguish the different ways groups are constituted. The simplest one is the setting up of a subsidiary by the parent, sometimes with one or several outside parties. This process is important from the angle of access to the European markets, esp. in financial services: an EU registered parent has the right to create subsidiaries and branches all over the Union, without further authorisations, or—as far as branches are concerned—major formalities. This right of free establishment is a core concept in the creation of an internal market. For UK companies, this privilege will lapse after the UK Brexit, the UK becoming a third country. From the angle of group law, the creditors and minority shareholders of the subsidiary will enjoy the protection of general company law in the jurisdiction of its establishment. The group may be formed from the acquisition of an important shareholding in different unlisted companies: these transactions are governed by common contract and company law, e.g. with respect to protections of shareholders, creditors, or employees. Family owned groups of companies are often created this way. When the holding is acquired through a public bid—most of the time on a stock exchange listed entity—the rules on takeover bids will apply. If the company shares are traded on the regulated market, the bidder who has or is seeking acquisition of control, may be obliged to launch a bid on all outstanding shares. Belgian law, pursuant to the Europe directive provides for a mandatory bid upon crossing the 30% threshold: the bid will view the acquisition of all outstanding shares and at the same price as any pre-bid acquisition.41 The rule also applies on mere crossing of the threshold, with exceptions. This rule often prevents important shareholders to increase their holding position, while maintaining their factual control. External supervision is exercised by the FSMA on the shareholders’ behaviour, and once the bid is launched, on the regularity of the procedures and the information to be made available to the investors.

5 A Group of Companies Is Not Considered a Legal Entity Belgian company law does not consider a group of companies a legal entity: this would mean that each component entity is considered on its own, both with respect to its decisions, its organization, its liabilities. Therefore, there is no group liability,42

41

See Law of 1 April 2007. See ECJ, C-186/12,20 June 2013 Impacto Azul Lda, but national legislation can declare parent companies liable for the debt of their subsidiaries, as example from Portuguese law. 42

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but only individual liability for specific decisions, acts or omissions. Legally, the position of group management is in principle defined on a one by one basis, and not in terms of overall group actions. Belgian law also abstains from recognising the group as a “business organisation”, addressing the issues specifically entity by entity. This unitary approach has been corrected by different instruments: consolidated accounts serve to give a view on the overall position and value of the group, including its parent holding entity, although not expressing the concept that the different group entities are one single addressee of the law. In management terms, most groups are directed on an—variable—integrated basis, with group objectives, group management instructions, accounting procedures and staff policies applied on a group wide basis. Usually the parent actively coordinates the business decisions of the component entities, most of the time by having its representatives on the board of the subsidiary. But more indirect ways of including a subsidiary in the overall group actions often are achieved by commercial means—common products, sales policy, e.g.—but also by management instruments such as common budgets, integrated accounting, single HR policy, delegation of parent’s staff, integrated IT, etc. A group wide approach is found in some parts of the EU law, e.g. in competition cases, where sanctions are imposed on the group as a whole.43 A comparable consolidated or integrated approach is found in financial regulation, e.g. in the Directive of Recovery and Resolution,44 for sanctioning violations of the money laundering rules, or of other market conduct rules. These would be considered EU law-based specific applications. Finally, the effect of liability rules may be extended to other group entities e.g. in case of bankruptcy, liability for debts being extended to the parent. In practice, fully controlled subsidiaries often act as the extended local arms of the parent, and are almost identical to branches. This raises of course a number of issues, e.g. in terms of decision making by the subsidiary board, or in terms of group liability. In case the parent dominates decision making of the subsidiary, there is a risk that it will be held liable as a de facto director on the basis of its negligence, or for acting with a conflict of interest without abiding by the conflicts rules.45 When the parent’s representatives appear to third parties to be the effective directors, the liability for their acts may be extended to the parent.46 The existence of a control relationship does however not eliminate the need for regular functioning of the corporate bodies of the subsidiary, such as the general 43

See ECJ (European Court of Justice), C-440/11 P, 11 July 2013 (Commission v. Stichting Administratiekantoor Portielje and Gosselin Group NV); ECJ, General Court, T-543/08, 11 July 2014 (RWE and RWE Dea v. Commission), attributing to a parent activities of a subsidiary that carries out, in all material respects, the instructions of the parent. See: ECJ, 10 April 2014, Joined Cases C-247/11 P and C-253/11 P. 44 See European DIRECTIVE 2014/59/EU of 15 May 2014, e.g. article 7 on the group recovery plans of 15 May 2014. 45 See article 7:96, 7:102 of 7:115, Comp.L. 46 See e.g. Brussel, 19 June1978, J.T., 1978, 494.

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meeting and the board of directors. Legally, these bodies adopt decisions pursuing the interest of the subsidiary although taking into account the group interest. If the parent would substitute itself to the subsidiary, it might incur direct liability for the subsidiary’s failures.

6 Intragroup Relations In legal terms, the controlling shareholders exercise their legal privileges as members of the general meeting. In that capacity, as a shareholder in the AGM, the parent appoints the members of the board of the controlled entities. These board members are entitled to decide on the actions and policies to be developed by these entities. Legally, the parent’s directors are not entitled to give binding instructions, but can outline the overall framework and objectives within which the group is expected to function in a coordinated way. The group delegates in the subsidiary boards are expected to pursue these policies and objectives adopted at group level, but without putting in danger the position of the subsidiary and its stakeholders, its investors—if any—and its creditors. Non-compliance with group decisions may lead to put an end to the mandate of the delegates, or even their employment in the group. This functional duality is addressed in Belgian law in different ways.

6.1

Taking into Account the Group Interest

A first topic is dealing with the inclusion of the group interest in the decision making of a single entity even when the decisions are unfavorable to the interests of the subsidiary. To what extent are subsidiary directors bound to implement group decisions? Can group management impose decisions that are legally binding, thereby risking to shift the liability for detrimental decisions to the parent? And are subsidiaries entitled to support from the group management? The basic approach which is largely shared in legal writing consists of accepting that the membership of a subsidiary in a group may bring significant benefits to the subsidiary but also results is corresponding charges. Therefore, a balance has to be struck between burdens and benefits to the subsidiary. On the other hand, the powerful position of the parent exposes the subsidiary to its abusive conduct, to the detriment of the subsidiary’s investors, its creditors and other stakeholders. The way this balance is struck has extensively been analysed in legal writing: in the EU, mainly three systems can be distinguished. A first one, followed in the UK considers a subsidiary as any other independent company, and except if the parent’s actions are “unfairly prejudicial” to its interests, the law will not intervene. At the opposite end of the spectrum, according to the German and Austrian law the subsidiary will have to be compensated for the prejudice the group has caused it, based on an annual

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assessment of benefits and charges.47 In addition, in the system of contractual groups, the German companies act allows the parent to give binding instructions under the obligation to offer the minority shareholders whether a recurrent compensation or to propose to purchase their shares. The Belgian- French solution—often referred to as the “Rozenblum” technique, referring to the name of the party involved in the French Cour de Cassation case—accepts that the subsidiary may be exposed to charges, but these should not exceed the subsidiary’s financial capacity nor be without a corresponding advantage to it. Implicitly, it decides that a subsidiary, as a separate legal entity, may take into account the group interest in pursuing its own statutory objectives, but only within limits, essentially aimed at defending its own interests. The four conditions of the Rozenblum approach can be summarised as follows: • the existence of group relations between the companies concerned should be based on a common interest, formulated against the background of groupwide objectives • group internal relations should have a reciprocal consideration (“quid pro quo”) • which should not distort the balance of the respective liabilities of the companies concerned • nor exceed the financial capacity of the group entity supporting the burden. The three systems compared present quite some commonalities: each allows the parent to direct quite substantially the decisions and activities of the subsidiary, allowing to develop a common, possibly groupwide policy. The limits to this freedom consist of the prejudice caused to the subsidiary, for which the criteria seem to be different. Where in the German system annual effective compensation should be offered, in the other systems a risk exposure for the parent, or a liability risk due to the parent’s interventions may be created. This analysis may seem theoretical in many groups, where the functioning of the subsidiary is fully incorporated in the parent’s overall action: in the 100% subsidiaries, the room for independent decision making by the subsidiary is often quite limited, but this would not eliminate the application of the Rozenblum doctrine, as other parties— such as the creditors—may have to be protected. The Rozenblum technique traces its outer limits above the level of insolvency of the subsidiary: it suffices that there would be a significant threat to the financial capacity of the subsidiary, even if its survival is not immediately endangered. If the balance of the respective rights and duties of both parties would have been distorted, especially due to the heavy burdens the parent has been imposing on the subsidiary, liability may arise if this distortion has endangered the financial capacity of the subsidiary, even if its survival is not directly at stake. This criterion can be used for assessing several aspects of group behaviour, such as defining the limits for group instructions or interventions, for determining the parent company’s liability or the personal liability of the directors of the subsidiary or even of the parent directors for

47

This regime applies to the “de facto groups” (Faktische Konzerne).

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not sufficiently respecting the proper interests of the subsidiary, but it has also been used for assessing, in contract law, the validity of certain contracts or, in criminal law, for declaring the shareholders liable for organising transfers between related companies48 or in favour of themselves.49 The practical applications of the Rozenblum doctrine are manifold. With respect to the independence of judgment of directors of the subsidiary, which although defended as a matter of principle, in practice is usually applied in a very flexible sense, “Rozenblum” allows the directors to follow the indications given by the parent, but up to the limits of the ultimate interest of the subsidiary in terms of solvency, and on an ongoing basis, to ensure that it obtains in exchange a reasonable “consideration”. The latter may consist of any advantage to the subsidiary, such as the right to distribute the products of the parent on an exclusive basis, or to be able to use the parent’s name, or its trade marks, etc. There does not have to be an agreed framework for this exchange, nor any minimal benchmarks, such as a price; an overall assessment of the balance will suffice. The Belgian system comes the closest to the French reading, allowing the group interest50 to be taken into account but with restrictions. The case law contains some examples of these restrictions51: • the parent cannot impose a transaction that is totally contrary to the interest of the subsidiary; or that leads to charges that are disproportional to the subsidiary’s effective capacity; support should be based on the interest of the group; but it should not be in the sole interest of the parent; • the parent should not oblige the subsidiary to constitute a guarantee in the sole interest of the parent. The Rozenblum technique can be criticised as being quite lax allowing the parent to impose decisions on the subsidiary, without any clear business justification, and

48

The original Rozenblum case related to a transfer of assets between companies owned by the same shareholders, but without economic justification, a violation of French criminal law: Rozenblum Cass. crim. 4 February 1985, JCP ed G II, 1986, p. 20585, note J. Didier. Among the other French cases see; (Cass. Crim. fr 14 February 1993, Bull Joly, 1993, 225, note Jeantin; (Cass. crim. 2 December 1991, n○ 90-87563). In other cases, reference was made to at least ‘un lien logique minimal’: CA Paris 14 February 1984, Juris-Data N○ 021620; see also Cass. crim. 9 December 1991, Rev Sociétés 1992, 358. For Belgium: Brussels, 15 September 1994, 275, J. Tribunaux, 1993, 312, TRV, 1994, 275, nte A. Francois (Wiskemann case). 49 Article 492bis Criminal Code, declares criminally liable, directors, including de facto directors who have used in a fraudulent way and for their personal interest, the assets or the reputation of the company, although they knew that this would be significantly detrimental to the company, its shareholders or its creditors. 50 What this reference to the group interest implies deserves further analyses: is it the parent’s interest, or that of the entire group of companies, or even that of one single other subordinated entity? Technically, several legal provisions only take into account the interest of the other party involved in a transaction or decision. 51 See for an overview, Dieux (2017), in: In het vennootschapsbelang, Liber Amicorum H. Braeckmans, p. 91.

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for which no equivalent consideration has been agreed. There is no specific time period for meeting these conditions, while the compensation—a “just quid pro quo”—may be postponed almost indefinitely. The insolvency criterion is the outer limit: it traces the outer border of the parent’s duty of care at the level of the financial capacity of the subsidiary. The Rozenblum approach has been considered a useful criterion in several other EU jurisdictions52 and was welcomed by the European Commission. However, the Commission has not yet taken an official position on this matter. The Rozenblum approach does not answer the reverse question, i.e. to what extent the parent has some duty to support its subsidiary and vice-versa, whether the latter can reasonably expect support from the group. For economically integrated groups, where the functioning of the subsidiary is deeply integrated in the overall group, there is a reasonable expectation that this support will continue: a sudden disruption would render the parent liable.53 At the same time, there is no overall duty to unconditionally support the existence of the group entities. Diligently applying the duty of care, timely notice of possible discontinuation to avoid liability are comparable to the requirements applicable to any other outsourcing agreement.

6.2

Legal Safeguards for Minority Interests

A second aspect of this question relates to the solutions the legal system can offer to avoid or sanction breaches of the directors’ duty of care. There is a wide array of tools to avoid the minority—or third parties in general—in a subsidiary being abused. Some of these are general civil or company law tools, others are relying on the financial market’s disclosure approach, finally the question can be analysed from the angle of the conflicts of interest and the related party transactions. A first series of protective techniques is based on general principles of law, including company law. The companies law defines the objective of the company as “procuring a direct or indirect material benefit to its shareholders or members”.54 Therefore, shareholders—especially controlling shareholders—can only use their powers and privileges in the interest of that perspective. However, it is up to these shareholders to assess to what extent their actions will be conducive to this objective: they will only be sanctioned in case the decisions manifestly or grossly diverge from that objective. These are the cases of “abus de majorité”, “abuse of majority power”, a subcategory of abuse of right. If someone uses his legal or factual position to adopt decisions or undertake actions with a view of inflicting damage, or if a parent

52

Conac (2013), p. 194. Comp. article 442-6-I-5 of the French Code de Commerce. 54 Article 1 Companies Law 2017; comp. the previous definition in the Civil code, still applicable in France (article 1833 Cc), according to which the company should act in the common interest of its members. The Corporate governance code clarifies that is the “Long term interest” of the company. 53

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imposes decisions or concludes transactions that are likely to be manifestly or grossly detrimental to the subsidiary or to the minority shareholders, the court may conclude to abuse and whether set aside the decision or transaction, or allocate damages. In cases of repeated abuse, this may qualify as “serious grounds” allowing the shareholder to withdraw from the company.55 It is generally not recognized in Belgian law that boards are held to fiduciary duties towards the shareholders, as their duties are considered to be based on the companies law and the companies articles, expressing their general duty of care as can be expected from a normally diligent and responsible directors.56 The Belgian Corporate Governance Code contains a certain number of duties of controlling shareholders and their representatives on the board: first, shareholders should clearly express their strategic objectives. They should make a considered use of their position and should avoid conflicts of interest and respect the rights of minority shareholders. The board members who have been proposed by controlling or significant shareholders should inform the board of the interests and intentions of these shareholders in sufficiently clear terms and in a timely manner. In case of a conflict of interest, the chair should decide on the procedure to be followed to best protect the interest of the company and of all its shareholders. Group issues are dealt with under the heading of conflicts of interest, the provisions of which would be applicable in complement to the Company Law requirements. The protection of minority shareholders of the subsidiary of a group is ensured by several instruments. Changes in the articles of incorporation are subject to a qualified majority vote, with a 50% quorum in a first meeting and a 3/4th majority. According to general company law, minority shareholders holding at least 1% of the shares,57 or shares standing for 1,250,000 euro may sue the directors in liability in a derivative capacity. The plaintiffs have to unanimously designate a representative but will support the expenses of the case if it is unsuccessful. The remedy has been used in some notable cases. However, shareholders or third parties may also sue in civil liability, on the basis of the provision in company law according to which directors are jointly and directly liable to prejudiced parties if they have breached the companies act, or the articles of the company.58 In additional, liability may also be founded on the general rules on negligence, usually in the context of a criminal case. This liability is subject to a business judgment criterion.59 In rare cases, general company law has accepted that

See about this remedy, see the articles 2.63 e.s. 2.68e.s Companies law (“de l’exclusion” and “du retrait”). 56 See article 2.51. Comp.L., declaring that each member of the board or of the management is held to the “proper execution” of his mandate. “In case the continuity of the enterprise is being endangered, the board is due to deliberate on measures to safeguard the continuity for at least 12 months”, article 2.52. Comp.L. 57 Article 7.157 Comp L. 58 Article 2.56 Comp.L. 59 Article 2.56 Com.L. The liability would limited to decisions, or actions “which manifestly are outside the margin on which normally careful and prudent directors in the same circumstances could have different opinions.” 55

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“abuse of majority” can be the basis of remedies, such as liability or nullity of the transaction. This remedy could be applied to the controlling shareholder, and protect creditors as well. The Bankruptcy section of the Economics Code contains a far-reaching provision declaring the directors jointly and severally liable for the their serious and characterized negligence which has contributed to the company’s insolvency.60 This liability is unlimited, i.e. can amount to part or all of the loss, as fixed by the tribunal.61 The liability applies without the strict rules on causation. The action can be brought by the bankruptcy receiver, or by the creditors. The companies law has limited these different forms of liability to a maximum amount of between 125,000 and 12 m. euro, depending on the companies’ size.62 This liability would not apply to the liability of group companies based on the grounds for directors’ liability, not to liability in case of bankruptcy.63 Disclosure is an important instrument for the protection of shareholders, and minorities in particular, but of creditors as well. For companies traded on the markets, an extensive information system will allow investors to decide with full knowledge and detailed information on the most important aspects of group relations in the parent’s financial statements—consolidated but equally important, solo—, while reports on the position of the subsidiaries will be published in the parent’s annual reports.64 Belgian law, pursuant to EU directives has introduced an extensive disclosure regime dealing not only with annual and consolidated accounts, but also with a developed regime of continuous disclosures. This information is available in electronic format at the FSMA website.65 The annual reports of these companies contain specific information on related party transactions as mandated by the Companies Act, which is particularly relevant from the point of view of group law.66 The annual report of listed companies should also mention the “substantial limitations or charges which were imposed by its parent company or which the listed

60

Article XX.225 and 226, Code on Economic Law, also applicable to AML fraud. The liability ceiling would not be applicable; see article 2.58 Comp. L. for other cases where there would be full liability. 61 See e.g. Comm Mons, 12 November 1979 JT 1980,265. 62 Article 2.57, applicable both to liability towards the company, as towards third parties. Measured on the basis of turnover and balance sheet total. 63 Article 2.57 § 3Comp.L. for the different cases of exclusion from the limitation on liability. 64 See article 3.32 Comp. L.. Disclosure about subsidiaries may raise questions of confidentiality, see: Dieux, une obligation de discrétion”, §14 Liber Amicorum Herman Braeckmans, November 2017. 65 See FSMA, Stori, or Storage of Regulated Information https://www.fsma.be/nl/business-link/ stori. 66 Article 7.116 (6) Comp. L.; adde: article 3.33; 3.34; 3.38; 3.40, Comp. L on the consolidated reporting on the payments to government for the protection of the original forest, on the basis of article EU directive 2013/34.

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company has requested to be maintained”.67 In case of market operations, extensive prospectus disclosures will inform investors. In addition, Belgian legislation contain a specific regime allowing the mandatory transfer of shares especially in cases in which “serious grounds” justify that the relationship with a shareholder be discontinued. Both in the SA and in the BV company format, a 95% shareholder is allowed to acquire the shares of the remaining 5% shareholders in a public bid, according to a procedure and conditions to be specified later in a Royal decree. The rules on public takeover bids will not apply.68 Rules on exclusion and resignation of shareholders are applicable to both SA and BV, provided that they are unlisted69: • Shareholders holding 30% of the shares of an unlisted company may request an individual shareholder to transfer his shares to them, on the basis of “serious grounds”, in practice for reason of conflicts with that shareholder. The transfer takes place according to a judicial procedure, the judge deciding on the transfer price and other conditions relating to the transfer.70 • The opposite remedy also applies: any shareholder in an unlisted company may request his shares to be taken over by the shareholders to which the serious grounds apply. Here too a judicial procedure will be followed. In this case, there is no quantitative limit. The judge will determine the price, applying the clauses related to this type of withdrawal which will be binding, unless these would lead to a manifestly unreasonable price.71 • Both instruments could substantially contribute to the better functioning of the company also in a group context. With respect to companies the shares which have been issued to the public— normally are traded on a regulated market—the regulation contains a comparable remedy allowing the 95% shareholder to take over the remaining shares.72 But the minority shareholder has no right to have his shares taken over. This normally is part of a going private resolution.

67

Article 7.116 Comp. L. Article 7.82 Companies Act for the SA, 5.69 for the BV, Comp. L. 69 See Article 2,63 e.s and 2,68 Comp. L., which are part of the section on dispute resolution. See further 5.154 for withdrawal from the company itself under the BV regime. 70 See article 2.63 to 2.65 Comp. L.; the judge could impose non-competition conditions, or require the acquiring party to terminate guarantees the defendant has given to the companies. 71 Article 2.69, Comp. L. 72 See Royal decree 27 April 2007 (Squeeze out). The Constitutional Court, in its decision of 14 May 2003, held that this is not a breach of the principle of equal treatment; Rechtskundig Weekblad, RW 2003-04, 808; TRV 2003, 471, nt. Wauters, M. 68

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Conflicts of Interest and Related Party Transactions

The third strand relates to the conflict of interest subject. The Companies law pays ample attention to the issue of conflicts of interest in companies with limited liability.73 First, in the context of the conflicts between a board member and the company, the usual rules apply: notification of the conflict to the board, indication of the reasons for the conflict, information to the auditors and report from them on the financial consequences and obligation for the conflicted party to withdraw from the board discussions. The report of the board is published.74 Similar requirements apply to conflicted members of the management board. This provision is not applicable to decisions relating to a company and its 95% subsidiary, or between 95% subsidiaries of the same parent, allowing for flexible management decisions in integrated groups without leading to an overall definition of group law.75 It does not apply to usual transactions at regular market conditions, or secured by usual market conditions. Transactions entered into without respecting these conditions may be declared null and void at the behest of the company if the related party was aware of the conflict. Decisions or implementing transactions between a listed company and related individuals or group companies other than its subsidiaries are subject to an elaborate procedure. Unlisted Belgian subsidiaries of the listed parent need the consent of the parent’s board for matters relating to group companies, other than a subsidiary of the listed entity. This regime will also be applicable to transactions with subsidiaries of the listed company in which a controlling shareholder of the listed company holds a significant percentage of the shares (25% at least). The scope is extended to capital transactions with related parties, or mergers, divisions or contributions in kind by or with a company which relates to the listed company. The procedure for dealing with these intragroup transactions is based on four elements: an expert opinion, delivered by a committee of three independent directors, seconded by one or more independent experts; on the basis of the expert opinion, the committee will prepare its reasoned opinion discussing the elements mentioned in the law, including the advantages or disadvantages for the company and its shareholder and the relation of the proposed decision to the company’s strategy; and if the decision or transaction would be prejudicial, whether and how the prejudice might be compensated, or would be manifestly prejudicial.76 The decision will be adopted by the board of directors, directors with a personal interest abstaining.77 73

See article 5.76 for the BV, 6.64 Coop.V and 7.96 for the NV. Comp. L. For details see article 7.115 Comp. L. 75 This regime is not applicable to relations with 95% subsidiaries: article 7.96 §3 Comp. L..; see article 7.97; for other exceptions in the group context; less than 1% of asset value, usual conditions clause; also article 7.115 Com.L. 76 Article 7.97,Comp. L. 77 On the basis of 7.96 and 7.97; comp for the BV 5.76, Comp. L. 74

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Breaches of these rules expose the company to nullity of the decision or transaction, but only if the other party knew or had reasons to know of the breach.78 Directors will be exposed to joint and several liability for the prejudice suffered by the company or by third parties, even if the decision was undertaken in compliance with the above procedure, but has procured an “abusive financial advantage to the detriment of the company”.79 The Companies law contains a general requirement that listed companies should mention in their annual report the significant limitations or charges which the controlling shareholder has imposed or has maintained during the accounting year.80 Corporate opportunities are not expressly viewed in the Belgian law.81

7 Legal Safeguards for Creditors Creditors of the subsidiaries are protected by a number of general legal or company law tools. In 100% owned subsidiaries, the possibility to have the parent and possibly other group entities liable, may be the main concern for group management. The creditors of a subsidiary are protected by the instruments generally available to them, as in any company. The difference consists in their possibility to declare the parent liable, and to also involve the directors of the parent, or of other group entities. General own negligence of the parent may be the cause of its liability: creating a company with manifest insufficient means, or making distributions which the directors ought to have known to lead to insolvency will be jointly and severally liable to the company.82 The parent’s negligent conduct may also be a cause of liability: deciding to abruptly stop the activity, or to refuse delivering essential parts for the subsidiary’s production process would commit negligence and would be a sufficient basis for its liability.83 The continuous activity of the subsidiary was the basis on which the creditors’ relied to assess the parent’s solvency. As a shareholder, the parent has the right to stop the activity of the subsidiary, but should avoid or minimize additional damage to the creditors of the subsidiary and even to its own creditors, but do so in a diligent way, respecting the rights of creditors and employees. “Wrongful trading” is closely related to the previous case: it may lead 78

Article 5.77, Comp. L. Article 5.78; 7.97 Comp. L. 80 Art. 7.97 § 3 Comp. L.: this provision can be considered as including the corporate opportunities. See De Wulf (2002), p. 705 et seq. 81 Art. 7.97 § 3 Comp. L: This provision is considered to include corporate opportunities. See De Wulf (2002), p. 705 et seq. 82 Article 5.16, 5.144. 7.18, Comp. L. 83 Article 2.56, Companies Law, n.61, and this notwithstanding the joint and several liability of the directors. Comm Brussels, 3 February 1988, JT, 1988, 516.See for the French law: article 442-6-I-5 of the French Code de Commerce. Brussels 3 February 1988, Journal de Tribunaux, 1988, 516. See; on the legal effects of legitimate anticipation of someone’s behaviour: Dieux (1995). 79

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to liability if the directors have continued to trade, although they knew or should have known that insolvency was inevitable. Both types of liability can be based on the general regime applicable in case of negligence. This remedy has been frequently applied in case law, and is recognized in the new Belgian law.84 These liabilities can be extended to the parent company, which has acted as “de facto” or “shadow” director, in which case the legal consequences will be directly attributed to the parent and the “shadow” directors will be held in the same terms as the “de iure” directors.85 This risk of parent liability explains the reluctance of the parents to give formal instructions to the subsidiary, and the differences in composition of the boards of parent and subsidiary. In case law, there was an important development allowing the “extend the bankruptcy” to the “master of the business” i.e..,. the person behind the company who decides about all company matters, often implying far going commingling of assets. Although the supreme court limited the scope of this technique, it is considered still to be applicable on the basis of general negligence or on abuse of law,86 or contrary to the principle of the unity of the patrimony.87 The directors of the subsidiary are normally only liable to the subsidiary. They may be liable to the company and to its creditors according to general company law principles for breaches of the companies law or the articles of the company.88 They may be discharged if they have notified the violation to the board or all its members. Whether the circumstances that they acted on the instruction of the parent is relevant in this context could be determined by applying the Rozenblum principle, according to which they may take into account the interest of the parent and of the group, provided the Rozenblum conditions are fulfilled. Group liability may also be based on the same remedies.89 The liability is extended to any person who has had the “effective power to manage the company”, what might include the parent company held as a de facto director in the subsidiary. The amount of the liability will be determined by the judge, and could run up to the total bankruptcy losses. The rule is applicable in cases of money laundering and terrorist financing, and in case of a repeated bankruptcy resulting in non-payment of social security contributions.90 Joint trading may be another source of liability: this refers to the case where parent and subsidiary, or two subsidiaries act together in such a way that third parties See e.g. article 2.71 § 2; article 2. 84 Comp. L., as to the appointment of the liquidator. Shadow director: See Braeckmans and Houben (2012), Vennootschapsrecht, Chapter 4. 86 See “abus de droit” : Dieux, Les groupes de sociétés, nt 56, Braeckmans and Houben, Vennootschapsrecht nr 62, p.46 See Comm Mons, 12 November 1979, Journal des Tribunaux, 1980, 265. 87 As laid down in article 7-8 Loi sur les Hypothèques, part of the Civil Code. This famous principle goes back to the writings of Aubry and Rau. 88 Article 2.56, Comp.L. see n.61. 89 Similarly, XX.227 Code Economic Law, applicable to anyone who had had effective decision making power in the insolvent company, what might include the parent company. 90 See: Constitutional court, nr. 139/2009, 17 September 2009. 84 85

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had the justifiable impression that they were joint business partners, or acted in an unnamed joint venture.91 They will be treated according to the appearance that was created and be held jointly and indefinitely. In the same vein, joint liability will be decided if the assets of two business firms are so commingled that it would be impossible to identify what belonged to whom.92 Another theory consists of holding the legal personality of a company for fictitious, and hence attributing all the consequences and liabilities to the person trading under the cloak of the company. Piercing the corporate veil is a technique used in some EU countries but has not been recognized in Belgian law.

8 Conclusion Belgian law on groups of companies is partly based on statutory provisions, partly on general principles of law, including company law. The statutory part mainly deals with the relations with or between shareholders, and the position of the directors of the subsidiary and of the parent. The practical application of these provisions has to be analysed on the background of the corporate governance rules, of the financial regulation—especially in the field of accounting, auditing and disclosures—and its implementation by the financial supervisory commission. In the group context, the provisions on conflicts of interest—and their specific variety of the related party transactions—constitute a useful complement. The non-statutory part of group law mainly concerns the relationship of the parent and the subsidiary. Although the latter is considered an independent legal entity, the relations with its parent take into account the organic dependency of the subsidiary. This results in an approach under Belgian law that comes close to the French view, referred to as the “Rozenblum” view, which, without allowing formal and binding instructions, allows the subsidiary to take into account the group interest. The outcome is a rather accommodating relationship between parent and subsidiary.

Annex Collective Publications Centre d’Etudes des groupes d’entreprises: – La reconnaissance des groupes de sociétés en droit fiscal, (1987) – Droits et devoirs des sociétés mères et de leurs filiales, (1985)

91 92

Fr Cassation 24 March 1997, Revues des Sociétés, 1997 554, ann P. Didier. Often referred to as: “confusion des patrimoines”.

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– Discontinuité des entreprises (1983) – Aspects juridiques des comptes consolidés (1980) – Aspects des groupes d’entreprises (1989) Commission droit et vie des affaires, Faculté de droit de l’Université de Liège, Les groupes de sociétés, U. Liège, 1973. Forum Europaeum ‘Proposal to Facilitate the Management of Cross-Border Company Groups in Europe’ ECFR (2015), pp. 299–306. Groups of companies in the EEC, Berlin (Ed. Wymeersch), 1993. High Level Group of Company Law Experts (2002), Ch. V: Groups and Pyramids, at pp. 94–100. ECLE European Company Law Experts, A Proposal for the Reform of Group Law in Europe, EBOR, 2017, 1-49. ICLEG, The EU Commission “Informal Company Law Expert Group” (ICLEG), March 2016. – Report on information on groups, March 2016 (P.H.Conac, reporter) – Report on the recognition of the interest of the group, October 2016 (M. Winner, reporter) Intragroepsrelaties: Tendensen in het bedrijfsrecht’, nr. 15 (15e Dag van de Bedrijfsjurist van 18 november 2004). In het vennootschapsbelang, Liber Amicorum Herman Braeckmans, 2017.

References Braeckmans H, Houben R (2012) Handboek Vennootschapsrecht, Antwerp Conac PH (2013) Directors’ duties in groups of companies—legalizing the interest of the group at the European level. Eur Company Financ Law Rev 10:194 De Wulf H (2002) Taak en loyauteitsplicht van het bestuur in de naamloze vennootschap. Antwerp Dieux X (1995) Le respect dû aux anticipations légitimes d’autrui, Essai sur la genèse d’un principe général de droit. Bruxelles, Bruylant Dieux X (November 2017) Les groupes de sociétés: Un Etat des lieux. In: Liber Amicorum professor Herman Braeckmans Van Ommeslaghe P (2005) Les financements de groupe. In: La banque dans la vie de l'entreprise. Editions du Jeune Barreau de Bruxelles, Bruxelles

Other Sources Conac P-H (2016) Proposal to facilitate the management of cross-border company groups in Europe. Eur Company Financ Law Rev 2015:299. https://ssrn.com/abstract=2886365 De Cordt Y (2009) Les enjeux de l’affaire ‘Fortis’. Revue Pratique des Sociétés (7006):351 De Wulf H (1991) Concernaansprakelijkheid. Bestendig Handboek. Jura.be

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Dévêler C (21 April 2015) Les conditions d’application de la procédure en conflits d’intérêts et la mise en cause de la responsabilité des administrateurs en cas de non-respect de l’article 523 du Codes de Sociétés, Note Comm Liège Foriers PA (2004) Notion de contrôle et droit des groupes in: L’organisation du pouvoir dans la société anonyme, Colloque en Hommage à Mme Benoit Moury Foriers PA (2009) Egalité des actionnaires: droit des sociétés, corporate governance. In: Gelijke behandeling in de bedrijfswereld, Tendensen in het bedrijfsrecht, pp 117–151 Geens K, Wyckaert M, Clottens C, Parrein F, De Dier S, Cools S, Jenne F, Steeno A (2012) Overzicht van rechtspraak. Tijdschrift voor privaatrecht Hallemeesch N (2018) Loyaliteitsplicht van meerderheidsaandeelhouders. Aard en misbruik van stemrecht herbekeken. TPR, afl. 1–2:323–391 Malherbe J, Lambrecht P, Malherbe P (2004) Droit des sociétés. Précis, Brussels, p 1625 Tilquin T (2009) La gouvernance d’entreprise et le droit des groupes. In: Contrôle, stabilité et structure de l’actionnariat Van Crombrugge S (1984) Juridische en Fiscale eenheidsbehandeling van vennootschapsgroepen Van Ommeslaghe P (1982) Les groupes de sociétés et l’expérience du droit belge. In: Hopt KJ (ed) Groups of companies in European Laws, vol 2 Van Ommeslaghe P (1985) Droits et devoirs des sociétés mère et de leurs filiales, Rapport général. In: Droits et devoirs des sociétés mères et de leurs filiales Van Ommeslaghe P (1987) P Het begrip « vennootschapsgroep « in het vennootschapsrecht en in het fiscaal recht. In: La reconnaissance des groupes de sociétés en droit fiscal Wymeersch E (1980) Aspects juridiques des comptes consolidés, Rapport général, 1980. In: Aspects juridiques des comptes consolides Wymeersch E (1983) Discontinuiteit in groepsperspectief, Juridische en boekhoudkundige aspecten. In: Discontinuité des entreprises Wymeersch E (1985) De houding van de Bankcommissie tegenover het groepsverschijnsel, Droits et devoirs des sociétés mères et de leurs filiales Wymeersch E (1994) Institutional investors and financial groups in Belgium in Institutional Investors and Corporate Governance, (Ed. Baums, Buxbaum, Hopt) Wymeersch E (1998) Le droit belge des groupes de sociétés, Liber Amicorum Commission Droit et Vie des Affaires Wymeersch E (2000) Comment le pouvoir pourrait aborder certains groupes de sociétés, Liber Amicorum P. Van Ommeslaghe Wymeersch E (2002) Company groups in the face of financial supervision, Festschrift fuer J.N. Druey Wymeersch E (2003) Do we need a law on groups of companies? In: Hopt K, Wymeersch E (eds) Capital markets and company law. Oxford University Press, Oxford Wymeersch E (2004) L’organisation du pouvoir dans les groupes de sociétés, in L’organisation du pouvoir dans la société anonyme, Colloque en Hommage à Mme Benoit Moury

National Report on Slovenia Renata Zagradišnik

Abstract The report describes groups of companies in Slovenian law. General company law systematically governs groups of companies, whereas in other legal areas of Slovenian law the groups are governed very scarcely or not at all. The rules of company law are focused on the protection of minority shareholders and creditors of the dependent companies rather than on organisational aspects of groups.

1 Introductory Remark The Report is primarily focused on the company law aspects of groups of companies. Other aspects, raised in the Questionnaire, such as insolvency law or conflict of laws are only briefly addressed. In Slovenian law only the company law contains comprehensive regulation on groups of companies. In other law areas the groups of companies are either briefly regulated or not regulated at all.

2 Groups of Companies in Slovenian Law In Slovenian law groups of companies are taken into account in many different areas of law. However, the extensity of regulation varies across the legal system. The Company Act (hereinafter CA)1 is the main legal act governing groups of companies. It contains a special and comprehensive chapter on groups of companies, and follows the German model of Konzernsrecht. However, there is one major difference between German and Slovenian approach, as the latter applies to all companies,

1

Zakon o gospodarskih družbah. Official Gazette of the Republic of Slovenia, no. 42/06, 60/06, 10/08, 42/09, 91/11, 32/12, 57/12, 82/13, 55/15 and 15/17.

R. Zagradišnik (*) Constitutional Court of the Republic of Slovenia, Ljubljana, Slovenia © Springer Nature Switzerland AG 2020 R. M. Manóvil (ed.), Groups of Companies, Ius Comparatum – Global Studies in Comparative Law 43, https://doi.org/10.1007/978-3-030-36697-1_24

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whereas the former only applies to public limited companies.2 The CA is an act that governs general corporate law. But groups of companies are also subject to various other legal acts in different legal areas. For instance, in tax law groups of companies are governed for the purpose of corporate income tax.3 Corporate Income Tax Act contains its own definition of groups of companies for the tax purposes and governs the rules of prices between affiliated enterprise-residents. The Financial Instruments Market Act4 that governs securities market, rules of trading, initial public offering etc. contains a definition of the so-called investment group,5 whereas the Banking Act6 contains a definition of a bank group,7 and the Insurance act8 the definition of an insurance group. The Financial Conglomerate Act9 also contains provisions on groups of companies and furthermore defines related party transactions. In insolvency law10 groups of companies are also taken into account under various provisions, for instance it is prohibited that the court names a company from a groups to manage day-to-day operations of an insolvent company. Groups of companies are also taken into account in takeover and competition law.

3 Groups of Companies in Company Law As already mentioned, the CA is the main legal act governing groups of companies. The CA does not define the group of companies. It merely lists five types of affiliated companies, namely majority-owned company and a company with majority share,11

2

Rozman (2014), p. 196. Zakon o davku od dohodkov pravnih oseb. Official Gazette of the Republic of Slovenia, no. 117/06, 56/08, 76/08, 5/09, 96/09, 43/10, 59/11, 24/12, 30/12, 94/12, 81/13, 50/14, 23/15, 82/15 and 68/16. 4 Zakon o trgu finančnih instrumentov. Official Gazette of the Republic of Slovenia, no. 67/07, 100/07, 69/08, 40/09, 88/10, 108/10, 78/11, 55/12, 105, 12, 30/16 and 9/17. 5 Art. 22 of the Financial Instruments Market Act. 6 Zakon o bančništvu. Official Gazette of the Republic of Slovenia, no. 25/12. 7 Act. 7(1)(1) of the Banking Act. 8 Zakon o zavarovalništvu. Official Gazette of the Republic of Slovenia, no. 93/15. 9 Zakon o finančnih konglomeratih. Official Gazette of the Republic of Slovenia, no. 43/06, 87/11 and 56/13. 10 Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju. Official Gazette of the Republic of Slovenia, no. 126/07, 40/09, 59/09, 52/10, 26/11, 87/11, 47/13, 100/13, 10/15 and 27/16 (hereinafter Insolvency Act). 11 Pursuant to Art. 528(1) of the CA a company has to be considered a majority-owned company if a majority of its shares or voting rights are held by another company, i.e. a company with a majority share. 3

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dependent and dominant company,12 companies that are part of concern,13 companies that have mutual capital participation14 and companies that are affiliated by undertaking contract.15,16 The CA presumes that a dependent company and a dominant company comprise a concern. However, this presumption is rebuttable. The listing of different types of groups of companies aims merely at determining companies that are deemed to be groups of companies and not to define groups of companies as such.17 The CA does not define control of a company. Slovenian scholars point out that control means any relevant form of control of a dominant company over the controlled company, for instance influencing management (by giving orders), influence by means of general assembly (by nominating or replacing management) or supervisory board or membership in decision making bodies of both dominant and controlled company.18 In the latter case the influence or control does not come from the outside of the controlled company but rather from its inside.19 In other law areas there is also no definition of control. The most significant effect of control is that the controlled one is not free (de iure or de facto) in decision-making.20 If it can freely make its decision, then there is no control of a dominant company. According to the CA the members of the management of the controlled company are under the obligation of compiling a report21 on relations with the dominant

12 Pursuant to Art. 529 of the CA a dependent company is a legally independent company which is directly or indirectly controlled by another company, i.e. the dominant company. There is a presumption that a majority-owned company is controlled by the company that holds a majority share of it. However, this presumption is rebuttable. 13 The CA lists three types of concerns, namely actual concern, contractual concern and a concern with a relationship of equality. The latter differs from the former two since it is comprised of legally independent companies linked by unified management without being mutually dependent. However, the CA contains only rules on actual and contractual concern. Therefore, it is unclear which rules and to what extent could apply. 14 Pursuant to Art. 531 of the CA are companies with mutual participation companies that hold more than one quarter of shares in one another and have a registered office in Slovenia. However, if one of the companies has a majority share in the other company or if it controls the other company directly or indirectly, the first company shall be the controlling company and the other one the controlled company. If each of the companies has a majority share in the other company, or if the companies can exercise direct or indirect control of each other, the two companies shall both be deemed to be the controlling and the controlled companies. 15 The CA defines six types of undertaking contracts: controlling contract, profit transfer contract, profit association contract, contract on the partial transfer of profit, contract on the lease of an establishment and contract on the relinquishing of an establishment. 16 Art. 527 of the CA. 17 Pivka and Ivanjko (2007), p. 235. 18 Pivka and Ivanjko (2007), pp. 301–303. 19 Podgorelec (2010), p. 197. 20 Rozman (2012), str. 8. 21 Kocbek named this report “a dependence report”. Kocbek (2010), p. 989.

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company within the first three months of the financial year.22 The report has to state if the controlled company has suffered any loss as a result of transactions with the dominant company. Furthermore, all actions which a controlled company carried out or omitted in the interest of the dominant company in the past financial year and which resulted in a loss for the controlled company have to be reported. The CA requires the report to clarify, whether the dominant company was compensated for each transaction resulting in a loss.23 The report has to be submitted to the auditor together with the financial statement and business report.24 It has to be stressed that if there were no transactions between dominant and controlled company that resulted in a loss for the controlled company this has to be clearly stated in the report too.25 However, the informational value of the report is questionable.26 There are no rules in the CA that the report should be made public or disclosed to the shareholders. It only has to be submitted to the auditor. Informational value of the report for the shareholders is therefore limited, because only so-called final observation on whether the controlled company received appropriate compensation for each transaction carried out, and whether it suffered any loss are given to the shareholders.27 The rules on groups and control are of a general kind and there are no differences for different company’s form. Furthermore, groups of companies are not recognized as unified business organizations, nor are they considered to be a legal entity.28 The subjects in a group of companies are legally independent companies that are merely affiliated on the ground of corporate law instruments. In Slovenian corporate law a distinction is drawn between actual concern of companies and contractual concern of companies. The latter comprises of companies connected by a controlling contract. A controlling contract is a type of undertaking contract under which a company subordinates the management of the company to another company.29 If mutually independent companies conclude a contract establishing a unified direction without one of them becoming controlled company, such contract is not a controlling contract and does not establish a contractual concern.30 In a factual concern dominant company can control the controlling company only by means of rights deriving from shares, e.g. by voting on a shareholders meetings, and does not have a right to give instructions to the controlled company. In a contractual concern the dominant company has a right to give instructions on conduct of business to the controlled company if such instructions

22

Art. 545(3) of the CA. In addition Art. 545(5) of the CA requires that the clarification shall be included in the business report. 24 Art. 546 of the CA. 25 Rozman (2014), str. 199. 26 Critically Podgorelec (2010), p. 202. 27 Art. 545(5) of the CA. 28 Kocbek (2010), p. 989. 29 Art. 533 of the CA. 30 Rozman (2014), p. 201. 23

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benefit the dominant company or any other company that is part of the concern.31 The controlling contract represents a legal basis for unified direction.32 The management of the controlled company does not have a right to judge whether the given instructions are in the dominant company’s interest. It has to fulfill the instructions and it may do so even if there are no benefits for the dominant company’s interests.33 In the event that fulfillment of a given instructions requires the approval of the supervisory board of the controlled company and such approval is not given within appropriate time period, the management of the controlled company has to inform the dominant company about it. If the dominant company has a supervisory board, it may repeat its instruction to the controlled company only with supervisory board approval. If the dominant company repeats the instruction, the approval of the supervisory board of the controlled company is no longer needed.34 In both types of concern, actual or contractual, minority shareholders rights can be violated, because the dominant company has influenced the controlled company. Therefore, the CA provides for minority shareholders of the controlled company in a contractual concern two remedies. Firstly, it regulates a right for appropriate compensation (Art. 552). In addition, it regulates an obligation of the dominant company to acquire shares from other shareholders for contractually determined consideration (Art. 553). The consideration represents a form of shareholder’s withdrawal from the controlled company for adequate compensation, whereas the right for appropriate compensation represents compensation for staying a shareholder of the controlled company and to receive in such way the dividend.35 The minority shareholder’s protection in actual concern is more complicated, because the CA allows the so-called concern privilege. On the one hand the CA prohibits instructions of the dominant company to the controlled company, on the other hand it allows even detrimental instruction if the dominant company compensates the loss suffered by the controlled company (Art. 545). This is so-called compensation. The compensation can be either actual or in form of a compensatory claim. In legal theory the term concern privilege is firmly established for the latter.36 If the loss is not compensated by the end of the financial year, the dominant company is liable for damages occurred to the controlled company (subordinated damages claim). Some legal scholars stress that these rules define the scope of the legal control of the dominant company over controlled company: in interest of a group only individual and isolated losses that can be evaluated are allowed. Only under these criterions can the losses be stated in dependence report and compensated. If these criterions are not met, the actual concern is illegal.37

31

Art. 541 of the CA. Kocbek (2010), p. 988. 33 Art. 541(2) of the CA. 34 Art. 541(3) of the CA. 35 Kocbek (2010), p. 989. 36 Podgorelec (2015), p. 1123. 37 Podgorelec (2014), pp. 86–89. 32

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The minority shareholders of the controlled company do not have special rights like in the case of contractual concern. By compensating the controlled company, the CA deems that minority shareholders are adequately protected.38 The claim against the dominant company can be either brought by the management of the controlled company or by any shareholder of the controlled company. The CA allows the so-called actio pro socio.39 But the action is brought for the controlled company’s account not for the shareholder’s account. The CA allows the shareholders to also bring other actions against the dominant company but only for loss they have suffered and not for the loss the controlled company has suffered. The cumulative claim is not allowed.40 Creditors and third parties of the controlled company are in case of contractual concern protected by the obligation of the dominant company to cover any loss the controlled company has suffered, after the controlling contract had been concluded.41 The dominant company has to ensure that the net value of the controlled company stays intact.42 In the factual concern creditors and third parties are protected only by means of compensatory claim and subordinated damages claim given to the dominant company.43 There are no special provisions in the CA on minority shareholder’s protection in the dominant company, nor are there rules on protection of creditors and third parties. If they have suffered any loss, the general civil law rules on liability shall apply. Articles 545 and 546 of the CA regulate specific duties of the dominant company and its statutory representatives as well as duties of the controlled company and its members of decision-making bodies in a factual concern. Failure to fulfill these duties results in liability, which is governed in Articles 547 and 548 of the CA. These rules on liability are more stringent than general civil law rules on liability.44 The main duty of the controlled company’s board is to prepare before mentioned dependence report. The report has to reflect good faith and credibility. The board has to submit the report to its supervisory board. If the members of the management of a controlled company breach their duties, i.e. they do not prepare the report and compile a false report on relations with the dominant company or they do not state that the controlled company has suffered a loss as a result of transactions made under the dominant company’s influence, they are jointly and severally liable. The burden of proof that they have acted accordingly lies on them. Furthermore, the liability of the members of the supervisory board of the controlled company might also be established, if they breach their duty to examine the dependence report and fail to

38

Kocbek (2010), p. 989. This action is generally regulated in Art. 328 of the CA. 40 Podgorelec (2008), p. 16; Pivka and Ivanjko (2007), p. 310. 41 Art. 542 of the CA. 42 Kocbek (2010), str. 990. 43 Kocbek (2010), str. 990. 44 Podgorelec (2010), p. 203. 39

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present their findings to the general meeting, then the members of the supervisory board of a controlled company are jointly and severally liable. Claims against members of the decision-making bodies are time barred after five years. The liability of the dominant company steams from its detrimental influence on the controlled company and failure to compensate the loss by the end of the financial year or failure to provide the right to benefit from compensation. The dominant company must pay the controlled company for the damage the latter sustained. In addition to the dominant company, its representatives, who induced the dependent company to carry out the transactions, shall be jointly and severally liable. Pursuant to mutatis mutandis application of Article 543 of the CA the representatives of the dominant company should give instructions correctly and carefully. If they breach their duty of care, they are liable to the controlled company for damages occurred. The burden of proof rests on the representatives of the dominant company. In the contractual concern the dominant company has the right to manage the contractual concern by giving (detrimental) instructions. Article 543 of the CA sets a strict rule on the liability of the dominant company. It has to settle any annual loss of the controlled company steaming from the period the contract was concluded for if the loss is not settled by means of other profit reserves to which the profit had been transferred during the period of the contract. Furthermore, the representatives of the dominant company are liable for any damages caused to the controlled company. Article 543 of the CA demands that the dominant company’s representatives act in good faith and fairness. If they do not, they breach their duties and are jointly and severally liable to the controlled company for the damages. The burden of proof is on the representatives. In addition to the representatives of the dominant company, the CA also provides for the liability of the management and supervisory board of the controlled company. Pursuant to Article 544 of the CA are members of management and supervisory board of the controlled company jointly and severally liable for the breach of their duties. If in doubt whether they have acted in good faith and fairness, they have the burden of proof. Furthermore, Article 544(2) of the CA expressly states that the liability of the management of the controlled company for damages shall not be excluded even if the supervisory board has approved their actions. The CA does not contain any specific rule with regard to the controlling shareholders. As already mentioned above the dependence report has to be submitted to the auditor.45 The auditor has to check whether the facts stated in the dependence report are correct, if any circumstances existed that could change the opinion of the management on related party transactions and if the controlled party had made any actions that were disproportionate. The auditor has to give a written statement on the dependence report. He can give a positive or negative opinion or a reservation. Both reports (auditor’s and dependence report) have to be submitted to the supervisory

45

Article 546 of the CA.

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board of the controlled company.46 The supervisory board has to check both reports and later report to the general meeting. Each shareholder has a right to petition to the court for a special revision of the related party transactions if the auditor issued negative opinion or a reservation, or if the supervisory board made statements regarding management’s statement at the end of the dependence report on company’s losses or if the management made statement that controlled company’s loss has not been compensated.47 In the event that other circumstances show that the controlled company might have suffered losses qualified minority shareholders (1/10 of initial capital and under the condition there were shareholders three months before rising a petition) may petition to the court for a special revision. This special revision varies from the general revision under Article 318 of the CA. Firstly, no serious breach has to be established and a single shareholder may petition to the court. Furthermore, under Article 318 of the CA the revision has to be rejected by the general assembly in order to petition to the court. For the special revision no such rejection by the general assembly is necessary.48 The focus of the Slovenian company law is not so much on the organizational aspects of the group of companies, but rather on the protection of (outside) minority shareholders and creditors of the controlled companies. Nevertheless, each company in a group of companies is a separate legal entity with its own legal personality and with limited guarantees for its debts only. It has to be stressed that the CA also regulates the principle of piercing the corporate veil and therefore provides additional protection for minority shareholders in a group of companies. Pursuant to Article 8 of the CA members of the company are, in addition to the company, liable if they abuse the company49 in any of the form specified in cited article. The prerequisite, established in the jurisprudence is, that the company has denied settling the debt.50 Therefore, it is possible to disregard the separate legal personality of the company. However, it has to be stressed that piercing of the corporate veil has not found its place in Slovenian jurisprudence.51 The main reason stated in legal literature is harsh burden of proof and informational asymmetry.52

46

Article 546a of the CA. Article 546b of the CA. 48 Podgorelec (2015), p. 1123. 49 The main element that has to be proved is abuse. See judgments of the Supreme Court No. III Ips 315/2000 from 10. 1. 2001 and No. III Ips 615/2001 from 4. 7. 2002. 50 See judgment of the Supreme Court No. III Ips 315/2000. 51 See Mayr (2014), p. 79 who states that only in 8 cases the parties invoking the piercing of the corporate veil were successful. 52 Mayr (2014), p. 79. 47

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4 Groups of Companies in Tax Law As already mentioned in the introduction the Corporate Income Tax Act has its own definition of the group of companies. Pursuant to Article 17 are residents deemed to be associated enterprises if they are associated in capital, management or control in such a way that one resident directly or indirectly holds at least 25% of the value or number of shares or equity holdings, shares in managing or control and/or voting rights of other residents or controls the other residents on the basis of a contract in a manner that differs from relations between non-associated enterprises; or if the same legal entities hold in two residents directly or indirectly at least 25% of the value or number of shares or equity holdings, shares in managing or control and/or voting rights and control the two residents on the basis of a contract in a manner that differs from relations between non associated enterprises. In establishing a taxpayer’s revenue, it shall be taken into account transfer prices with associated enterprises as regards assets, including intangible assets and services, however at least the amount established by taking into account comparable market prices, established in accordance with the conditions and methods referred to in Article 16 of this Act. In establishing a taxpayer’s expenses, it shall be taken into account the transfer prices with associated enterprises as regards assets, including intangible assets and services, however up to the amount established by taking into account comparable market prices, established in accordance with the conditions and methods referred to in Article 16 of this Act.53 Without prejudice to these stipulations in establishing the revenue and expenses of a resident relating to transactions conducted between two residents associated enterprises under this Article, the tax base shall not be increased or decreased, unless one of the residents: 1. in the tax period for which revenue and expenses are established discloses an uncovered tax loss carried forward from previous tax periods; or 2. pays tax at a 0% rate or at a special rate, lower than the general tax rate pursuant to Article 60 of this Act; or 3. is exempt from paying tax under this Act. Other Tax Regulation such as VAT are not defining groups of companies, but rather making a renvoi to the Corporate Income Tax Act. The Corporate Income Tax Act also contains special tax rules for enterprise reorganization, i.e. transfer of assets, which is defined as an operation whereby a company transfers, without being dissolved, all or one or more branches of activity to another existing company or to a newly established company in exchange for either the issuance or transfer of securities representing the capital of the acquiring company to the transferring company. The branch of activity shall mean all the assets and liabilities of a division of a company, which from an organisational point of view constitute an independent business and is an entity capable of functioning by its own means. The transferring company shall be exempt from the tax relating to

53 These methods are: 1. Comparable uncontrolled price method; 2. Resale price method; 3. Cost plus method; 4. Profit split method and/or 5. Transactional net margin method.

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profits or losses generated in transferring the assets and liabilities belonging to the transferred branch or branches of activity.54

5 Groups of Companies in Insolvency Law In case of insolvency the dominant company is usually not liable for the debt of the insolvent controlled company. This is direct consequence of their separate legal personalities. However, insolvency law provides the creditors with a possibility to challenge transactions concluded between dominant and controlled companies.55 For the challenge several conditions have to be met: the transaction had to be concluded in the period of five years before the insolvency proceedings of the controlled company have been initiated and the transaction had to cause a decrease of controlled company assets resulting in creditors not being fully paid. The scope of dominant company’s liability is limited to the value of the challenged transactions only and the dominant company has to return all benefits it gained from such transaction. The transaction itself is deemed void. Other provisions in the insolvency law are more of organizational nature, like prohibiting affiliated company to be a member of creditors board—important insolvency proceedings’ decision-making body56 or to be an insolvency manager.57 In Slovenian law nor the substantive consolidation, nor the liability for factual appearance and for breach of a created confidence are regulated.

6 Groups of Companies in Other Law Areas Under Slovenian Takeover regulations58 a group of companies is deemed to act in concert for the purpose of reaching takeover threshold. It is deemed beyond any doubt that the controlled and the controlling person and companies controlled by the same controlling person are to be persons acting in concert.59 The Takeover Act has its own definition of the controlled and controlling persons.60 However, the 54

Art. 40 of the Corporate Income Tax Act. Art. 271 of the Insolvency Act. 56 Art. 78 of the Insolvency Act. 57 Art. 115 of the Insolvency Act. 58 The Takeovers Act. Zakon o prevzemih, Official Gazette of the Republic of Slovenia, no. 79/06, 1/08, 68/08, 10/12, 38/12, 56/13, 25/14 and 75/14. 59 Art. 8(3) of the Takeovers Act. 60 For the purposes of this Act, a controlled company shall be a company: 1. in which another person has the majority of voting rights; 2. in which another person has the right to appoint or revoke a majority of management or supervisory bodies’ members and is, at the same time, a shareholder or company member of such company; 3. in which another person is a shareholder or company 55

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Takeover Act applies only if a transferee company is a listed company, and its shares with voting rights are admitted to trading on a regulated market and if the transferee company is a public limited company, the shares of which are not admitted to trading on a regulated market (nonpublicly traded company), if such company has either at least 250 shareholders on the last day prior to the year relevant for the assessment of application of this Act; or more than four million euros of the total equity as shown in its most recent annual, report published in compliance with the CA.61 The general rule is that if one achieves the takeover threshold (one third of voting rights62), he is required to make a takeover bid (mandatory bid).63 There are two exceptions for a group of companies not to make a takeover bid. Firstly, following a transfer of securities after the bid had been made from the offeror to persons who had or are deemed to have acted in concert with such person, or to companies affiliated with such person and secondly, if the share of voting rights of other shareholder or shareholders who together constitute an affiliated group under the act governing companies in the offeree company is higher than the share of person that has achieved the threshold.64 For exclusion and withdrawal rights and for the squeeze out of minority shareholders the Takeover Act stipulates that rules of the CA shall apply.65 Since the Takeover Act applies only for public listed companies (and for nonpublicly traded company under certain conditions stated above) the same is true for the squeeze out rules. The Financial Instruments Market Act stipulates that the Interim management report of the public company that issued shares must also contain a short description of significant transactions with related persons, drawn up in accordance with the appropriate accounting standard.66 For the purpose of competition law, the Prevention of the Restrictions of Competition Act67 defines groups of companies, although the term undertaking is used. Undertakings in the group shall mean undertakings that are either involved in an agreement or concentration; their dependant undertakings; their controlling undertakings; dependent undertakings of controlling undertakings; or undertakings in which one or more undertakings jointly or in collaboration with one or more undertakings has or have the rights or powers to appoint or remove a majority of the members of the management or supervisory board of another undertaking; or to

member and controls alone the majority of voting rights, in compliance with the agreement concluded with other shareholders or company members; and 4. in which another person has the right to exercise dominant influence or control. 61 Art. 4 of the Takeover Act. 62 Art. 7 of the Takeover Act. 63 Art. 12 of the Takeover Act. 64 Art. 22 of the Takeover Act. 65 Art. 68 and 69 of the Takeover Act. 66 Art. 113(6) of the Financial Instruments Market Act. 67 Zakon o preprečevanju omejevanja konkurence, Official Gazette of the Republic of Slovenia no. 36/08, 40/09, 26/11, 87/11, 57/12, 33/14, 76/15 and 23/17.

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manage the affairs of another undertaking on the basis of a business contract or other legal arrangement or hold(s) a majority of interests in capital or business shares in another undertaking; or a majority of voting rights in another undertaking.68 Private International Law rules on companies do not change in the presence of a corporate group or of control over local company. Each member of the group of companies has its own legal personality; therefore, for each one the applicable law has to be identified. This is firmly established in jurisprudence.69 Under Article 17 of the Private International Law and Procedure Act70 for legal persons (including companies) the applicable law is the law of incorporation. However, if a legal person has its real seat in another state, not in a state of its incorporation and under the law of this state could be considered to belong to this state then it is deemed that the law of the state of the real seat applies. Slovenia has concluded a number of bilateral investment treaties (BITs) and an investment incentive agreement with the US.71 Majority of BITs has same structure and content, but the level of protection of foreign investment depends on dispute resolution, the scope of application and content of protection.72 Law of incorporation usually defines protected legal persons; additionally or sometimes alternatively the seat or doing business in contracting party is required.73 Some BITs prescribe ownership or control as an additional criterion for protection. In cases where the seat or doing business in contracting state is required, the protection of a holding company is questionable.74 In Slovenian law there are no special rules on workers protection and social security regulation vis-à-vis national or international migration within a group, on environmental responsibilities within a group, on liability of parent company in consumer protection and product liability law, on the participation of other group companies in an arbitration procedure or on procedural rules applicable to groups or companies under the control of another entity. This is a direct consequence of a separate legal personality of each group member.

68

Art. 3 of the Prevention of Restriction of Competition Act. See for instance Judgment of the High Court no. I Cpg 563/2010 of 20. 5. 2010. 70 Zakon o mednarodnem zasebnem pravu in postopku, Official Gazette of the Republic of Slovenia no. 56/99. 71 For a comprehensive review of concluded BITs see Sancin et al. (2012), p. 619. 72 Božičko and Menard (2013), p. 5. 73 Božičko and Menard (2013), p. 5. 74 Božičko and Menard (2013), p. 5. 69

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7 Lex Mercator as a lex specialis to the Companies Act The turmoil within the Croatian retail company Agrokor, which owns Mercator, the largest Slovenian retailer, caused a significant stir in the Slovenian public, with the suppliers and especially in politics. The response of the Slovenian Government was the adoption of the Act on Conditions of Appointment of Associate Member of the Management Board in the Companies of Systemic Importance for the Republic of Slovenia.75 The Act was adopted by the Parliament in April 2017. The goal of the Act, commonly referred to as Lex Mercator, is to define companies of systemic importance for the Republic of Slovenia and to enable the appointment of a temporary associate member of the management board, if the majority shareholder of such company is in insolvency or other substantially similar procedures intended for the elimination of reasons for insolvency.76 In case such procedures exist, the Slovenian Government has the ability to use a state interventionist measure—the appointment of an associate member. The Act also presents a major exception to the rules on instructions to the subsidiary in contractual and actual corporate groups known to corporate law. The Act defines a company of systemic importance as a company, which employs at least 6000 people in the territory of the Republic of Slovenia; and, its sales revenue exceeds EUR 1 billion.77 The majority shareholder is defined by the Act as a person/ entity, which holds, together with its related companies, a shareholding exceeding 50% or the majority of voting rights.78 Credit institutions and insurance companies are excluded from the applicability of the Act.79 The Government has an explicit right, but not an obligation, to propose to the District court in Ljubljana, to appoint an associate member of the management board of the company of systemic importance.80 The court must appoint the associate member within three days from receiving such request. The associate member has limited authority, since it only represents the company jointly with other board members in matters related to the majority shareholder.81 In case the associate member does not provide its consent for an individual transaction between the company and the majority shareholder, such transaction is null and void. The associate member does not have the authority to decide on the matters of day-to-

75 Zakon o pogojih imenovanja izrednega člana uprave v družbah sistemskega pomena za Republiko Slovenijo. Official Gazette of the Republic of Slovenia, no. 23/17. 76 Art. 1 of the Lex Mercator. 77 Art. 2(1) of the Lex Mercator. 78 Art. 2(2) of the Lex Mercator. 79 The analysis of the above-mentioned conditions and Slovenian business environment show that Mercator is the only company for which the newly adopted Act will be applicable. Hence, the term Lex Mercator. 80 Art. 3(2) of the Lex Mercator. 81 Art. 5 of the Lex Mercator.

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day business operations, which remain in the sphere of the “regular” board members. The associate member is liable for damages for its actions in relation to its authority. The Act explicitly provides that, after the appointment of the associate member, general corporate regulation of corporate groups concerning the instructions by the mother company is not applicable for the company of systemic importance.82 Consequently, the management board can refuse the fulfilment of harmful instructions by the mother company. The Act does not provide for any specific consequences for creditors and suppliers. Day-to-day business transactions, which are not related to the majority shareholder, will be normally conducted and managed by “regular” board members. Consent of the associate member is not needed in such cases. Even though the intention of the Slovenian Government is to prevent any depletion of the company of systemic importance (i.e. Mercator)—which is generally favourable for the creditors, it is doubtful whether the Government had to regulate this with a new legal act. Namely, the existing corporate law as already mentioned regulates the question of harmful instructions and compensations. It remains to be seen whether the Act will actually provide an additional safeguard against potential depletion. Furthermore, the Act raises valid questions on its constitutionality, namely it might be in breach of fundamental right of private property and of free economic initiatives.83

8 Conclusion The Slovenian law on group of companies provides comprehensive regulation and protection for (outside) minority shareholders. The focus of the Slovenian company law is on the protection of minority shareholders and creditors of the dependent company rather than on organisational aspects of the group of companies. However, the CA regulates at least two important organisational aspects. Firstly, the right of a dominant company to manage the dependent company and give detrimental instructions to the later in a contractual concern; and secondly, a deferred compensation of the loss in an actual concern.84

82

Art. 6(1) of the Lex Mercator. Articles 33 ad 74 of the Slovenian Constitution respectively. 84 Podgorelec (2014), str. 26. 83

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References Božičko P, Menard M (2013) Zaščita tujih naložb v Sloveniji in slovenskih naložb v tujini na podlagi meddržavnih bilateralnih investicijskih sporazumov. Slovenska arbitražna praksa 2 (1):4–13 Kocbek M (2010) Odškodninski in drugi zahtevki znotraj povezanih družb v dejanskem ter pogodbenem koncernu. Podjetje in delo 36(6–7):987–999 Mayr V (2014) Spregled pravne osebnosti v slovenski sodni praksi. Pravni letopis 7:77–84 Pivka HM, Ivanjko Š (2007) In: Kocbek M (ed) Veliki komentar Zakona o gospodarskih družbah. GV Založba, Ljubljana Podgorelec P (2008) Ureditev pravnega varstva upnikov in manjšinskih družbenikov koncernsko povezanih družb z omejeno odgovornostjo v Republiki Sloveniji. Doctoral thesis, University of Ljubljana, Faculty of Law, Ljubljana Podgorelec P (2010) Škodljiva navodila obvladujoče družbe v dejanskem koncernu – koncernski privilegij. Pravni letopis 3:195–208 Podgorelec P (2014) In: Podgorelec P, Hauptman L (eds) Koncerni. GV Založba, Ljubljana Podgorelec P (2015) Podrobnejša pravila varstva upnikov in manjšinskih delničarjev v koncernskem pravu (povezane družbe in podjetniška pogodba). Podjetje in delo 41 (6–7):1120–1132 Rozman T (2012) Vpliv obvladujoče družbe v dejanskem koncernu. Pravna praksa 31(44):8–9 Rozman T (2014) Minority shareholders protection in groups of companies and its effect on the economic growth: the case of Slovenia. LeXonomica – J Law Econ 6(20):187–206 Sancin V, Neudauer M, Kastelic T (2012) Slovenia. In: Shaw W (ed) The legal protection of foreign investment, a comparative study. Hart Publishing, Oxford/Portland, pp 617–647