Diritto commerciale II Paola Lucantoni Professore associato di Diritto dei mercati finanziari Università degli Studi di Roma “Tor Vergata”

Fundamental changes The key rationale for regulating fundamental changes by law is to protect certain constituencies such a minority shareholders against the threat of opportunistic midstream changes in the life of a corporation. Which changes are so fundamental that they should trigger legal interference?

Fundamental changes 1. Charter amendments 2. Share issuance 3. Control transactions

1. Charter amendments Corporate charters establish a basic governance structure and allow the entrenchment of terms, typically through a special amendment process. Unlike ordinary contracts, corporate charters can be amended with less the unanimous approval by the parties to the charter, must be filed un a public register and are generally available to anyone who asks. Charters bind all the shareholders, including new ones, without the need to obtain their contractual consent.

1. Charter amendments: Under Delaware law Under Delaware law: a charter amendment must be proposed by board and ratified by a majority of the outstanding stock. The US rule creates a bilateral veto: that is neither the board nor the shareholders can amend the charter alone. For example: dispersed shareholders who approve an antitakeover provision in the charter – such as a classified board – strengthen the bargaing role of the board in an attempeted takeover by reducing the likelihood that they would accept, or that an acquirer would make a takeover without the approval of the board. A staggered board of directors or classified board is a prominent practice in US corporate law governing the board of directors of a company, corporation, or other organization, in which only a fraction (often one third) of the members of the board of directors is elected each time instead of en masse (where all directors have one-year terms).

1. Charter amendments: European jurisdictions and Japan European jurisdictions and Japan: the charter can normally be amended by a supermajority shareholder vote and without board initiative. Requiring only supermajority shareholder approval allows large minority shareholders to veto proposed charter amendments, but gives management no formal say in the matter. Under the supermajority shareholder approval mechanism, shareholders bond themselves to consider (large) minority interests.

2. Share issuance: USA USA: an increase in the amount of authorized capital in an organic change that must be approved by a qualified vote of the shareholders. By contrast, a new issue of shares that leaves the number of issued shares below the authorization limit lies within the discretion of the board. USA listing requirements require a shareholder vote when a new issue of shares is large enough to shift voting control over a listed company, unless the new issue takes the form of an offering to dispersed public shareholders.

2. Share issuance: EU EU jurisdictions have a stronger tradition of putting new issues to the vote of shareholders, although the company’s charter or the shareholders in general meeting may delegate that decision to the board, for a period of up to five years.

3. Control transactions The core control transaction is one between a third party – the acquirer or the bidder – and the company’s shareholders. Control transaction may be structured in a variety of ways: Private contracts with a single or a small number of important shareholders – sales of control Purchase of shares on the market General or public offer to all shareholders of the target company The public offer may be: Friendly, i.e. supported by the management of the target company; Hostile, i.e. made over the heads of the target management to the shareholders of the target.

3. Control transactions USA and UK have the most active takeover market while takeovers are rarer in continental Europe, emerging markets and Japan.

3. Control transactions Agency and coordination issues: between the board and the shareholders as a class When there are no controlling shareholders in the target company, the main focus is on the first agency relationship between the board and the shareholders as a class. Defensive measures: they may seek to make the target less attractive to a potential bidder or to prevent the offer being put to the shareholders. 1. placing a block of the target’s shares in the hands of persons not likely to accept a hostile bid; 2. structuring the rights of the shareholders and creditors for examples through poison pills; 3. placing strategic assets outside the reach of a successful bidder.

3. Control transactions Agency and coordination issues: between the acquirer and the non- shareholders, especially employees. Some have argued that a substantial proportion of the gains to acquirers from takeovers are the result of wealth transfers from non-shareholder groups, esplecially the employees of the target. Three responses of takeover regulation: 1. disclosure of information 2. board 3. giving non shareholders decision rights (Germany)