Cases in business law

MTO.

A acquire the 100% stake of B: in case of merger by incorporation in company

B in corporate A the stakes of B goes under A. There isn’t an MTO because

there isn’t a change of control because the stakes is already control by A.

The general rule does not apply when there is a de iure control and in all the

situations in which even if formally I get a relevant stake of a listed company,

on a substantial perspective, there is no change of control.

Why it is a protection of minority shareholders? Protection because they have

the exit right depending on the changing control.

(In the withdrawal right there were 2 kind of protection: exit right and fair

value.)

In this case there is an economic protection based on the best price rule (it is a

rule: the new controlling shareholders has to buy shares for a price which is

the highest price paid by the buyer in the last 12 months). It is unfair for the

shareholder/buyer because it’s too high. It depends on the control premium:

extra value that you paid to buy the control of a company. In this case, this

premium (advantage) is divided with all the other minority shareholders (it’s

like the rule consider the price that he accepted to pay to get the control of the

company).

Lesson 11 (21/10) 2 part of the exam!!!!

nd



Related party transaction (also on the book)

It is referred to rules applicable only to public companies (listed companies),

banks and insurance companies in Italy and Europe. Why are applicable only to

those corporations? Because such corporations manage public savings (so,

when companies manage public savings there are strict rules about their

governance to safe the public savings). More precisely, it protects minority

shareholders because, in public companies, public savings are those coming

from minority shareholders (because they invest money into the share capital).

If there are minority shareholder, it exists also controlling shareholders. The

latter aim at taking the private benefit of control: taking financial sources more

than proportional.

How to protect minority shareholders from private benefit? With the rules

governing the related party transaction.

It is introduced in 2005, as a consequence of Parmalat and Cirio bankrupt. Both

of them were listed company and criminal liable (because they tried to extract

private benefit of control affecting the value of minority shareholders). In order

to avoid such kind of behaviour, Italian legislator provide this strong regulation

about related parties transaction.

Then this regulation had been acted in Europe in a “Shareholders rights

directive 2” (the corresponding related party transaction in Europe).

In general, a good way to deal the related parties transaction from a law and

an economic perspective (a rule that achieve the goal to which has been acted

and allows corporation to do business).

Which rules protect minorities and allow the business? External evaluating,

external check (independent expert, external auditor)

Who can protect minorities in business decisions? 1) attracting to the

shareholders meeting approval any of the related parties transaction (if you

want to do a related parties transaction you have to call the shareholders

meeting: all the shareholders are called to approve the transaction; only if the

minority approve the transaction you can do the related parties transaction) 

it is a way considered by scholars, but for our legislator it is not efficient

because it’s costly and sometimes minorities have not the skills to understand

the business decisions; 2) our legislator decide to mirror a tool in place in the

USA: empower the independent directors (are not in business to the

shareholders) they are banker, professors.



All the directors should act independent, but some of them are also

independent from a personal and professional point of view.

If a controlling entity own the 51% of the shares of a listed company, the

former can appoint all the directors of the target, except for one that it

appointed by minorities. In addition to the minority director, there are at least

2 additional directors that are independent (who are selected by the controlling

entity).

In the Board of a listed company, there is a mix of directors: the majority are



not independent and are appointed by the controlling entity, while at least 2 of

them are independent and are appointed by minorities.

Since the related parties transaction are always potentially dangerous

(because they are affected by controlling shareholders or executive

shareholders), our legislator in 2005 introduced independent directors

(directors who does not have any personal, familiar or business relationship

with any of the related parties of a company).

The legislator states that the company, before doing the related party

transaction, needs the favourable opinion of the independent directors. So, at

least the 2 independent directors should consider the transaction and they are

required to issue an independent opinion. In doing that job, they can decide to

appoint an external expert. And then, the final result of their job are both

publish and disclose to the market. If their opinion is a grey light (if they

approve the transaction), the Board can take the decision (can do the related

party transaction).

If the opinion of the independent directors is negative, there could be 2

different ways to do the transaction:

- the Board can decide to stop any process and don’t go forward transaction



is rejected because they disclose to the market a transaction that has not

sense, so directors do not want to take liability responsibility to go forward in a

transaction that is in conflict of interest;

- the directors go forward, they shall call an extraordinary shareholder

meeting. In that case, only the minorities should decide to do or not the

transaction (WHITEWASH MECHANISM: the vote of the controlling entities don’t

care). if the majority of the minorities approve the transaction it means that



the minorities want the related parties transaction and it is enough to protect

their interest (because minorities know that the transaction is potentially

dangerous and independent directors rejected it, but they decide to approve

the transaction and want to take the risk).

In case of related parties transaction there are 2 issues:

st

1 issue: One of the most relevant issue is to find independent expert

(generally corporation tries to appoint the same expert usually they appoint).

So, independent directors do not want to take any responsibility, so they said

the same think that their advisor suggest.

Consob look at the real independent advisor: if it’s the usual advisor, it will

follow the instruction of related party (because it’s not really independent).

The problem is that always all the important advisor had been worked in the

past with the company. So it disclose the conflict of interest. The legal issue is

to understand if the previous appointment affected their independence of

judgment.

nd

2 issue: independent director should be able to demonstrate the fairness of

the economic price and why this transaction is so important for the company

(and not the others). Sometimes it requires some public procedure.

rd

3 issue: information document (all the evaluation you did and all the

meetings you have should be publish in detail in the web site) this is



another way to guarantee the transparency of the market.

Difference between business judgment rule and the entire fairness test:

Business judgment rule is a rule according to which directors are not

 liable if they approved a business decision that was reasonable when

they took it and then thinks went in a bad way (different from what you

expected). The reason of this rule is because managing a company is a

risky job, so it’s easy to be guilty (but it is his job!);

Entire fairness test is a rule that is applicable in case of related party

 transaction and in case of conflict of interest: if a director approve a

transaction in these 2 cases the business judgment rule does not apply

because entire fairness test is going to be apply. According to the entire

fairness test the directors shell prove they did all the reasonable action

before doing the transaction. Directors must give the evidence to the

judge that they complies all the rules (burden of proof). While in

business judgment rule, plaintiff (minorities who run an action against

the directors) has the burden of proof (they shell prove to the judge that

directors did not take the reasonable decision). If the plaintiffs are not

able to give evidence about that, they lose the action.

Lesson 12 (4/11)

Related parties’ transaction (Parmalat case)

Golden power

Is an issue.

Foreign direct investments (also called golden powers): the Italian regulation of

this is “law decree n. 21 of 2012”

Strategic sectors

Art 1 Art 2

Defence (national security) Energy, telecommunication, cyber

security, transport, water, financial

infrastructure and others

In the 90s the most important strategic sector were totally run by state:

private owner were not in the capital of the companies operating in the

strategic sector because the historical reason is that when you want to run a

strategic business, this business is generally run by State (because it’s

strategic). So, if you want to do it as a private you have to be authorized by

the State (and in 90’s nobody is authorized).

Two kind of privatization:

Formal the first that appeared. It is the legal privatization. The state

 

holder companies were transformed into SBA. Shareholders became the

State, but the legal form of the main strategic companies was converted

into a private form of company.

Substantial shareholders went public (they try to find private

 

investors offering them shares and allow them to become shareholders

of strategic companies).

As a consequence of the privatization Italian stake and European stake decide

to save special power over the strategic companies (because they lost their

corporate rights to run the business) with a golden share mechanism.

Then the European Court of Justice did not agree with the Italian golden share

because, according to the European law, all the European investors should be

treated in the same way (European freedom).

At the beginning of this century (2004,2005), the Italian golden share were

reduced compared with the past (because Italian State was less powerful than

at the beginning).

Few years later (2008,2010), because of the financial crises many huge

strategic companies became appealed (prices went down and many non-EU

investors started to look at the European strategic companies). In order to

protect the State, in 2012 the new regulation became again powerful and now

it was a trend that increase day by day. So, now this law is more powerful

agains