BUSINESS LAW

European Company Law

European Company Law (ECL)  aim to:
 Foster freedom of establishment
 Enhancing transparency, legal certainty, harmonization and competition

Source of Law: EU Directives, EU Regulations, National Laws, Statutes…

Corporate Law
Five core legal structural characteristic of the business corporation are:
1. Legal Personality:
Firm = “Nexus for contracts” (with other counterparts and individuals)  Separate patrimony
 Pool of company asset distinct from the firm’s owners  Why?  Entity Shielding:
A. Priority rule  Firm Creditors claim first the firm asset, while these are
unavailable for personal creditors
B. Liquidation protection rule  Prevent firm’s destruction by shareholder or
creditor.
NOTE: Both rules  Strong form entity shielding // Only one rule  Weak form entity
shielding
2. Limited Liability:
Creditors are limited to claim firm’s assets and not the shareholders’ one  Owner Shielding
 Limitation in proportion of the participation  Defensive asset partitioning  Transfer risk
from investors to creditors.
3. Transferable Shares:
Distingue corporation from partnership  Continuity of business also if owner changes 
Flexibility
NOTE: Transferable  Tradable  Free tradability in public of some action is not always
guaranteed  Restricted tradability
4. Delegated Management under a Board Structure:
 Board is separate from operational managers
o CEO is entrusted by the board
 Board is elected by firm’s shareholder  Maintain their interest
 Board is distinct from firm’s shareholder
 Board has multiple members
5. Investor Ownership:
Two key elements:
 Right to control the firm
 Right to receive the firm’s net earnings
 These are proportional to amount of capital contributed
ATTENTION: There are other forms of ownership: equity investors, shareholders, stockholders,
stakeholders.

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NOTE: Large-scale Business (in Market Economy)  Possess all 5.
Small Firms (Jointly-owned)  Adopt these 5 forms, with some deviations  Fit its needs
 Possible by: taking advantage of statute’s flexibility or of special close corporate
statutes (like Société à Responsabilité limitée [France], British Private Corporation
[UK]…).

Main purposes of Corporate Law:

1. Establish a set of rules  Regulate creation and functioning
2. Allocate responsibilities between internal and external.
3. Address and solve the Agency Problem

Source of Corporate Law

A. Primary Statutes  Corporate Form comprehend all the 5 characteristics.
B. Secondary Statutes  Separate statutes for:
- Foreign firms
- Governmentally owned enterprise
C. Partial Statutes  For separately defined statutory entities  (May) not have all the 5
(i.e.: limited partnership, limited liability companies, statutory business trust)

Goal of Corporate Law

 Interest of companies  Welfare of Firms’ shareholders, employees, suppliers and customers,
guaranteeing third parties safety  Corporate Law = pecuniary interest in making transaction
beneficial  Reduce agency costs

FOCUS: Private Company  Public Company (IPO  Going public // Take over  Returning
private)

Three Agency Problems [or Principal Agent Problem]

 When welfare of a party “Principal” depends on the action of another “Agent”
 Arise anytime an agent promise a performance to the principal
 Intention is avoiding the agent’s incentive to act opportunistically
 Depend on Agency Cost: Cost, undertake by the principal, to monitor the agent activity

3 types (SX = Principal // DX = Agent):

1. Shareholders – Managers
2. Majority (Controlling shareholders) – Minority (Non-controlling shareholders)
3. Firm – Other parties (i.e.: creditors, employee, …)
4. Among Board (executive and non-executive)
NOTE: Protection of principal  Feel secure  Invest more

 To solve:
 Regulatory Strategies  Prescriptive Approach
- Agent Constraints
Limit freedom of movement of agent
 Ex-ante: Rules  Protection of company’s creditors and public investors
 Limit the ability to do activities
 Ex-post: Standards  Regulation of company’s internal affairs
 In case of violation of duty accorded in negotiation

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 - Affiliation Terms:
Principle of entrance/exit from a company
 Ex-ante: Entry Terms  Transparency of disclosed information
 Ex-post: Exit Terms 
 Right to withdraw
 Right to transfer
NOTE: Determine how principal affiliate with agents.

 Governance Strategies
OBJ: Control the enterprise
- Appointment Rights:
Power to select/remove directors
 Ex-ante: Selection (of directors or managers)
 Ex-post: Removal (of directors or managers)
NOTE: Majority decide (51%)  For balance sake: necessity or minority’s
representatives.
NOTE: Court and Commission have removal power  Not only shareholders
- Decision Rights:
Power to intervene in the firm’s management
 Ex-ante: Initiation (of managerial decision and strategy)
 Right to trigger the decision making process
 Ex-post: Ratification (or Veto) (of managerial decision and strategy)
 Right to block other decision ( Necessity of 51%)
- Agent Incentives:
Power to alter the incentives of agents
 Ex-ante: Trusteeship ( Fiduciary duties  Principal trust you = Act loyal)
 Ex-post: Rewards (agent’s reward for undertaking principal’s interest)

FOCUS:
 Default rules  Govern situation if the parties do not explicitly provide something different
 Mandatory rules  Govern situation and there is no option about that

- Corporate law  Default rules  Standard form contract  Serve as standard to simplify
- Corporate law  Mandatory rules  Serve to preserve third-party interest

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European Company Law (ECL)
Comparison with US
[ Each state has its own corporate law  State Regulation]
US: Voluntary adoption of Model Business Corporation Act (MBCA)
 Not a law  Reference to support the application of similar solutions in
different states.
 Regulatory Competition
 Attract investors to build companies for Incorporation
 Advantages (i.e. Tax, …) to provide the best
solution  More efficient  Balanced
Two main country as Pioneering Role:
 Delaware Corporation Law
NOTE: Best state for incorporation, reason:
 Free regulatory competition
 No need of HQ
 Corporate process reliable and trustworthy
 Nevada Corporation Law

EU: Adoption of European Regulations  Harmonization between the different laws

 Same Regulatory Competition
 Copy of the most efficient  Convergent Process

Under EU  Obligation to implement

I. Directives = Implemented
II. Regulations = Directly implemented
[This rules and principles constitute the body of ECL]

NOTE: EU  Companies are regulated by states regulation, harmonized by ECL

NOTE: EU  No Federal Corporate Law (FCL is above state law and applicable in any of them)
In US:
 Corporate Law  State Regulation
 Financial Market and Securities  Federal Regulation

ECL
 Rules and principles that define source of law of EU  Harmonization  Convergent to a
common solution  The most efficient

Freedom of establishment
 Allow companies to carry activities in a stable and continuous way in EU member
state  Freedom of operation in other country (with no subsidiaries incorporation
necessity)  Consequences:
 Competition between local and foreign
 Competitive as a form of growth

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 Treaty of Rome: Creation of one market  Single EU Market
 Facilitation of foreign investment = More capital
 Founded on 4 freedom: > Goods
> Services
> Labor
> Capital

Treaty of Functioning (TFEU): Clarification of Freedom of establishment  Right to Set up and

manage company
NOTE: For Companies and Firms // NO: NGO and no-profit.

Economic Activities  Enjoy being in a single market  Boost

 Determination of belonging to a state of a company:

Incorporation Doctrine (US) Real Seat Doctrine

 Relevance of Place of Incorporation
o A state, under its corporate law
o Possibility to operate services in others
 Relevance of Place of Management &
Control
o Where you want to apply certain laws
o Where you are running the business
o Centre of main interest

NOTE: According of same treatment (Firmed by member state)  For domestic investors and
other member state investors  Avoid barriers or restriction

EU Harmonization of legal system  Incentives to establish Common Framework  Through

common set of rules directly applicable:
a) Accounting system (IAS/IFRS)
b) Mergers
c) Cross-border insolvency proceedings
d) Type of companies (Form entirely regulated at EU level)
i. European Economic Interest Grouping
ii. Societas Europaea
iii. Societas Cooperativa Europaea

FOCUS: Societas Unius Personae

 Single shareholder having 99,9% of shares
 Sole Entrepreneur with Limited Liability

FOCUS: Adoptions under discussion:

o Mutua Europaea (ME)
o Fundatio Europaea (FE)

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Mergers & Acquisition
NOTE: Only transaction that involves strategic financial evaluation
OBJ: Allow the Transferability of Business  Through transfer of shares:
Public: Available on Stock exchange for investors
Private: Owner decide the transfer

Advantages of transfer:
1) Synergies  Reduce fixed costs
2) Value of Business  Increase the value of investment
3) Horizontal Acquisition  Target is a competitor
4) Vertical Acquisition  [Vertical integration  Complete each other] Target is a
component of supply chain

ATTENTION: Main goal is to acquire new market and grow

2 Companies become 1, which Shareholder of the company

Vanilla
acquire all the assets
Mergers

that cease to exist:

A) Stock-for-stock
 Receive stock
B) Cash mergers
Creation of a new company, which  Receive cash
Consolidation
acquire all the assets

Necessity of: Merger Agreement

 Negotiation of the Governance
(How board will be composed)

NOTE: Opposite of the merging  Demerging

Shares are transfered to the purchaser

Sale and purchase agreement

Entity remain unchanged (Asset & liabilities)

Acquisition

By Shares (SPA)
Vendor (of shares) --> Former shareholder
Purchaser --> New shareholder

Asset & liabilities are transfered to the

By Assets (APA) purchaser
Vendor --> Corporation

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 Different types of M/A:
 Private M&A
o No deal with public shareholders
o Private negotiation
o Competitive bids
o Two type:
 Minority  No interest in taking control of the company
 Majority  Interest in entering as decision-maker
 Public M&A
NOTE: Presence of Public Shareholders  Necessity of approval
ATTENTION: Before disclosing to public  Confidential negotiation
o Tender Offer vs Exchange Offer
 Tender  Public takeover of a company
 Exchange  Special tender, in which securities are offered
o Friendly vs Hostile
 Friendly  Negotiation with an agreement of the majority
 Hostile  Nobody has the absolute majority

ATTENTION: Private  Buyer may ask for Indemnification (Compensation from former
shareholder for a period of time) and for Reps & Warranties.
Public  No of the others.

FOCUS: Mergers Demergers

Necessary a shares approval  Majority

with extraordinary resolution

FOCUS: SPA  Selling shares of the company to another  Structure unchange

APA  Selling assets of one company to another  Structure change

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Private M&A

 Competitive Bid and Private negotiations comparison:

Competitive Bid Private Negotiations

 Many bidders  One bidder
 Less info to disclose  Lower exposure  Fully disclose
 Higher payment possible  Lower payment possible
 Higher time requested  Lower time requested

NOTE: Different Time frame (= The more the process last, the more resources are used)
Different Disclose  In competitive bid, you will attire non-interested in the transaction
but only in the company information

Confidentially Agreements (CA)

 1 Document prepared before disclosure  Non-Disclosure Agreement  To third parties
 Obligation for both parties  Buyer and Seller
 In both Competitive Bid and Private Negotiations
 Protect the seller
 Deal should be confidential

 Comprehend:
Internal distribution “Need to Know Basis”  Purchaser group who receive the seller’s
confidential information
Non-use restriction  Information for restricted usage permission  Limited purposes
 Obligation for both parties
Non-solicitation of employee  Avoid buyer to induce people to leave work and work for him
No communication with member of the Supply Chain
No obligation to continue the deal  Freedom to leave the business
 For any reason = More freedom of choice
 More buyer will take part of the negotiation
 For particular reason = Less freedom
 Less buyer will take part
No obligation to access (Letter of Intent Stage)  Seller wants to control the flow of information
 Limiting the access to the company
 Letter of intent stage: Buyer require access
No representation as to accuracy of information  Buyer and seller rely only on the text of the
definitive agreement
 Not on the information disclosed
during the negotiation

NOTE: Seller guarantee info in the Definitive Final Agreement

 “Buyer has only to rely on information in Reps & Warranties”

Specific performance  Seller may stop the disclosure  Buyer can legally proceed asking
damage, in case of breach
Sunset date  Maximum duration of the C.A. last

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Exclusivity Agreement (EA)
 Security for bidders
 Restriction for the target (= Seller):
1. Can’t negotiate with company bidders
2. Can’t provide non-public info to competing bidders
NOTE: Seller may be required to disclose to potential purchasers any competing bids received
ATTENTION: in case of breach  Expense reimbursement, specific performance, damages

 Maximize the effort and close the deal

NOTE: Reciprocally exclusivity commitment  If firmed by both parties
 Short in time  Expire in a couple of months

REMEMBER: Section of Exclusivity and CA are binding.

Standstill Agreement (SA)

 Security for seller
 Limitation for the bidder (= Buyer):
1. Trading seller’s company securities
2. Consent solicitation
3. Acquire material assets
4. Making unsolicited proposal to target’s board
5. Disclosing facts/contents

 Allow seller to control the process

 Prevent potential bidders to “go hostile” after receiving information
 Longer time than the exclusivity agreement

Letter of Intent (LOI)

 Signed by both the parties
 Captures both parties’ intention (without commitment) and describe their general
principle for transaction
 Enough detailed  To provide data to authority and antitrust to start
 Not binding
 Termination date: from this, parties are free to not continue negotiations
 Only private
NOTE: Public companies have to disclose
 Starting process to access to the due diligence

NOTE: IT may include also exclusivity to restrict target from:

 Contractual Law  If included, it is binding

NOTE: Ordinary course restriction on target (= Seller)

 During this time, the company should be managed in ordinary course
 No extraordinary transactions

Attached: Term sheet  Good faith obligation (discuss in good faith what come out from it)
ATTENTION: Negotiation strategy  The more you settle now, the less in future

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Due Diligence (DD)
 After signing of the LOI  To benefit both purchaser and seller
 2 type of document:
 Business Financial
 Legal documentary
NOTE: Preliminary & preparatory status  Review of all the pubic documents
 Vendors Due Diligence  Show the real status of the business:
 Purchaser wants to know before entering the negotiation
 Adjust price
 Seller wants to let know so disclosing to not be liable

Different due diligence to check:

A. Public acquisition
> Target = Listed company
> Since public  Information already public  DD is more limited
> Compliance with law and regulations
> Obtain the price-sensitive information
> Standstill Provision is signed
> Confidentiality is important
> No recourse of target or its shareholder after closing
 Only counterpart: Majority shareholder, in case of negotiation
 In case of hostile takeover  No recourse at all
B. Impediment to transaction
 Know Deal = Know in what consist the deal
> Change of control (bank, supplier, …)  By 3 party which could get control if is
reliable as the party you are negotiating with
> Tag along and minority investor rights  In case of shares buying process, a
majority shareholder has to ensure to minority to participate the deal
NOTE: If you are the buyer  take into consideration the possibility of buying also
minority.
> Covenants and limitations  Consummation of transaction  Transaction treated
as event of default
> Effect on purchaser’s own financing  Understand the financial situation of the
seller company
> Ability of the purchaser to integrate  Integration of the target into its own
financial and internal control
C. Contingent liabilities
> Money that the target may have to pay in the future
> Pending litigation  Benefits triggered by the transaction  Regulatory
> Future commitments
> Indemnification
NOTE: During this, seller can put a Price Tag and decide the level of indemnification
D. Joint ventures and shareholder agreements
> Contingent Obligations
 Capital calls and puts option
> Non-Compete Agreement
 Geographical constraints of the target on doing business

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 E. Corporate record books
REMEMBER: Important source of information of the company  Mainly for lawyers
> Charter and bylaws in effect
> Audit letter
> Commitment report
F. Customer and supply contracts
> Pricing
 A company subject to binding agreement with suppliers for X years
 These info are only available at the DD process.
> Contingent liabilities
> Expiration and early terms rights
> Additional commitment

Solution to DD Problems
 Difficulties to obtain 3 party consensus/amendments agreement to be done
 Before the signing of the agreement  2 reason:
 Confidentiality
 Bargain power
 Make purchaser aware of all issue  Transparency
 Avoid complain later
 Deal with impediments
 Revise the structure and reflect in financial models
 “Take out” from the deal or amend agreement with parties whose right are
triggered
 Maintain flexibility to postpone closing in order to well integrate the target
NOTE: In compliance with:
o SEC (Securities and exchange commission)
o Stock exchange

ATTENTION: Seller aware of impediment not solvable  Seller bargain power becomes weaker

 Contingent obligation
 Price adjustment
 Strengthen negotiating position
 The more information = Higher bargain power

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Sellers Reps & Warranties
Purposes:
1) Check  Identify issue looking through the list of seller’s reps
2) Closing condition (= Bring down)

The reps made at signing time

 Gap moment between signing and closing
 Purchaser is committed to buy what declared at time of signing
 Must be:
> True in all aspects
> True is material aspects
> True is all respects except MAC (Material Adverse Change)
NOTE: Organized in decreasing level of accuracy
ATTENTION: As a seller  Exclusion  No risk after a certain date
3) Giving Post-closing remedies
 Define the survival period  How long the remedies last
 Amount for which the seller is liable

Subject matter:
A. General reps on Financial statements
i. Fair representation of the company
ii. Prepared in good faith
NOTE: Not triggering indemnity  In case of breach
B. General reps on Compliance with law and regulations

Covenants
 Pre-closing covenants:
I. Ordinary course
a. General standard
b. Specific items (Such as paying dividend)
c. Issuing additional stock
II. Efforts to obtain consents and approval
a. Allocation of cost and risk
b. Antitrust clearance
III. Access and confidentiality
a. Pre-sign
b. Antitrust gun-jumping
c. Access to customers, suppliers and employee
d. Confirmatory diligence and closing conditions
NOTE: Closing conditions can be:
 Regulatory
 Third party consensus
 Litigation
 Covenant compliance
 Ancillary agreement
 Financing
IV. Notices

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 Post-closing covenants:
I. Non-competition
II. Insurance
III. IP rights

Final Agreement (FA)

 It is the conclusion agreement
 Different names  Depend on the M&A transaction  Different structure:
1) SPA (Stock Purchase Agreement)
a. Introduction and Definitions:
i. Determination of Capitalized Terms
ii. Definition of parties
iii. Definition of what is transferred
b. Purchase and Sale:
i. Determination of closing date
NOTE: Difference between Closing and Signing
[closing = moment when transactions are carried out
// signing = execution of FA – totally committed]
ii. Price adjustment
c. Representation and Warranties:
i. Declaration (of the seller) on the business quality
 Purchaser rely on these
d. Covenants:
i. Obligation to do or not something in the future
e. Closing Condition
i. Between signing and closing
f. Termination
i. Break-up conditions for both parties
g. Indemnification
i. Remedies for breaches (typically for purchaser)
h. Miscellaneous closes
i. Scenario  Choice of law, jurisdiction
NOTE: Not really important, but could hide unfair negotiation

2) APA (Asset Purchase Agreement)

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Public Merger & Acquisition
 Bidders find the target on the base of public document  More detailed than private one
 Public standard
 Disclosure documents filled of
Securities Regulator
NOTE: Rule: Go beyond the stock price  Incomplete info
ATTENTION: No procedure of Due Diligence (DD)

 2 type of takeover:
NOTE: Takeover Bid  bidder’s offer to the holder of target’s share to buy them at fixed price

Friendly Hostile
Start a Negotiate Transaction with Direct appeal to the shareholders with a
management Tender Offer
 Obtain additional information on the  Surprising
target  Most likely to succeed
 More accurate estimation of their business
- Alert the target  Can adopt Defensive - Totally rely on public information
Tactics - No possibility of negotiation

Possible only if:

No majority shareholder (owns >50%)

Tender Offer
Offer by the bidder  To the shareholders
 To buy share at a fixed price
 After this, transaction is completed  Announce to media

NOTE: 2 type of offer:

 Cash Tender offer: offer of Cash
 Exchange offer: offer of Securities
NOTE: Both are subject to extensive regulations

 Tender offer = 1 step of the “Two-step” Acquisition

 Acceptance of shareholders in this phase is voluntary  Difficult to reach 100%
 2 step: Squeeze-out  Second offer to acquire all the company
ATTENTION: The Squeeze out is a right for the offeror  IF has 90%

NOTE: Sell out  Minority right

 Minority can force to buy their share

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ATTENTION: Tender offer terms are described in the prospectus
 Between the publishing of the offer and the delivery of the share is
needed the authorization approval of antitrust

 The tender offer must remain open for a minimum period

 During this  Bidder have limitation on purchasing shares outside the offer

2 type of TO:

Voluntary Tender Offer (VTO)

 Not subject to any obligation
 You make the offer, the market decide

Mandatory Tender Offer (MTO)

 IF I reach agreement with majority shareholder  I have control
 HOWEVER I have obligation toward minority
 I have to offer the same price  Highest paid in the last 12 month (Art. 5)
 Equitable price or best price

[ NO: Contract, SPA, Reps, Closing condition  ONLY: Unilateral Offer]

Mandatory bid  Control threshold

High degree of optionality (Art. 4)

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Defensive Tactics
 Adopt in Hostile Takeover
 One way: White Knight Strategy
 Find another bidder more suitable for you firm and your firm strategy

NOTE: In EU: 1 tactic is Pre-TO, 2 tactic is Post-TO

In US: 1 tactic is Post-TO, 2 tactic is Pre-TO
 in US  Possibility of the board to react  In the interest of the company
 Piecemeal Liquidation

 2 different type of tactics: Before Tender Offer and Post Tender Offer

1. Pre-Offer Defensive
 “Shark Repellants” or “Porcupine Provision”
 Make difficult to obtain working control  Even if bidder obtain
majority
 Staggered Board: Replacement of the BoD in its entirely is
more difficult
 Additional cost on the corporation (in case of successful
takeover)
- Golden parachutes to employee
- Distribution of excess cash to shareholders
- Recapitalization of the business
ATTENTION: Aim is to scare the market  Less attractive
for a hostile takeover

2. Post-Offer Defensive
 Tactics when TO has been launched:
 Acquire another company  Antitrust problem for the bidder
 Attack the funding of the offer
 Drive up the price of the target offer
 Crown jewels  Dispose desirable asset to friendly entities
 Pac-man defense  Making a competing TO for the bidder stock
 Funding from financial institution
 Find a White Knight
 Adopt Poison Pills or control share acquisition provision

NOTE: Poison pills = Special type of stocks or debts  To difficult a hostile takeover
 Additional rights are granted to shareholders:
 Increase voting rights
 Additional financial rights  Flip-in Plan

Post-bid defense
 EU Passivity Rule (Art. 9)
 Board of a company should remain passive after the launching of a TO
 Not interfere between bidders and shareholders
 Publicity (Art. 10)
 In public context: Provide the market of documents with details

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Cross Boarder Merging Directive
 Regulates mergers transactions, regarding:
I. Stock deals
II. Public acquisition of shares

 Objective:
a) Make easier cross boarding merging
b) Easier to identify applicable law to each party company of the merger
a. Any company part should be governed by its national law applicable during a
merger

NOTE: Plain Vanilla: two or more company become one

 Surviving corporation acquire all the asset and liabilities
 The corporations cease to exist
Consolidation: As the previous but
 The new corporation acquire all the asset and liabilities
 The corporation are constituent of the new one

 Requires implementation in different member states

 To facilitate combinations among companies from different states

ATTENTION: Growth of local domestic companies belonging to the same state

 No good for EU perspective
 Single market

 Limited Voidability  IF merger is completed but something went wrong

 Minority shareholder get indemnification
 No possibility to cancel the transaction
 No retroactivity

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