Summary Company Law and Restructuring
1) Introduction
What is European Company Law? Harmonization of company law on European level.
Where can we find European Company Law? Mainly regulations and directives. Regulation have a direct effect in Member States of the European Union while directive have to be implemented in the national law of the Member States (article 288 TFEU).
Listed Companies – Corporate Governance – Comply or Explain – Not everything harmonized
Company law – No comply or explain but option for countries to implement or not (opt-in/opt-out).
Listed companies – Listed on public stock exchange, shares are freely tradeable.
Private companies – Shares are not freely tradeable on the stock market. Most of the time, the shares of a private company are in hands of close relations to the company.
Consultation on the future of European Company Law – Q5: What should be the objectives of EU company law?
High Level Group of Company Law Expert 🡪 Mandate given to the group was to provide recommendations for a modern regulatory European company law framework designed to be sufficiently flexible and up-to-date to meet companies’ needs. The mandate denotes a distinct shift in the approach the EU could take on company law.
Main approach: to coordinate the safeguard that are required by Member States for the protection of the interests of members and others. Make these safeguards equivalent throughout the EU.
Meeting companies needs has not been a prominent feature of this harmonisation exercise.
High Level Group answer to Q5:
NOT MAINLY: To establish a proper level of protection for, in particular, shareholders and creditors with a view to prevent a ‘race to the bottom’ by Member States. (See article 50 TFEU).
BUT FIRST: To provide a legal framework for those who wish to undertake business activities efficiently, in a way they consider to be best suited to attain success.
Company law should:
1 – Facilitate the running of efficient and competitive business enterprises.
2- Protect shareholders and creditors.
3 – Eliminate obstacles for cross-border activities of business in Europe.
Consultation on the Future of European Company Law
A modern legal framework for more engages shareholders and sustainable companies (Action Plan 2012).
2) Freedom of Establishment
- Incorporation Theory vs Real Seat Theory
Both theories determine the applicable company law.
Incorporation theory: Determines the applicable company law by reference to the country in which the company was incorporated (and registered). The connecting factor being the country of incorporation.
Reat Seat Theory: Determines the applicable company law by reference to the country in which the company has its Real Seat. In most cases this will be interpreted as the head office. The connecting factor being the Real Seat.
Definition by Wymeersch (CMLR 2003, 40, P. 661).
Incorporation theory: Connects a company to the jurisdiction in which it has been incorporated, so that the company may develop whatever activities it exercises it other Member States without losing its original status. The incorporation theory recognizes all foreign legal entities according to the rules applicable in the State of Origin.
Real Seat Theory: Based on social and economic reality and applies its legal order to all entities that are effectively directed from within its territory. The Real Seat Theory refuses to recognize companies that claim to belong to a jurisdiction which is not the one in which their Real Seat is established.
Three systems distinguished by Wymeersch: - States that do not allow any seat transfer (Germany and Austria).
- States that explicitly allow seat transfer (France and Italy).
- Jurisdiction in which no explicit provision exist (Belgium and Luxembourg).
Result:
When a company wants to transfer its seat from an incorporation doctrine country to a real seat doctrine country:
- For the incorporation doctrine country no legal meaning; company remains subject to the jurisdiction of the State in which it was incorporated.
- The real seat doctrine country will apply its law but this country will not recognize the company since the company has not been set up by the rules of this country.
When a company wants to transfer its seat from a real seat doctrine country to a incorporation doctrine country:
- The law of the real seat doctrine country will cease to be applicable and therefore the company will be dissolved.
- The law of the incorporation doctrine country will not apply since it would refer to the law of the home State as the country where the company has been incorporated.
Article 49 TFEU: Restrictions on the freedom of establishment shall be prohibited.
Includes the right to set up and manage undertakings.
Article 54 TFEU 🡪 companies or firms shall be treated in the same way as natural persons.
1) Daily Mail Case (81/87 of 27 September 1988).
Who? Daily Mail + General Trust PLC vs. HM Treasury
What? Daily Mail plc wanted to move its de facto head office (i.e Tax Residence) to the Netherlands because of the more favourable tax regime there, while at the same time it planned to remain a company subject to UK company law. The UK Treasury Department refused permission for the transfer of seat, which is necessary under UK law.
Referal to ECJ? Daily Mail referred the question to the ECJ, whether articles 43 and 48 EC Treaty (Freedom of establishment) preclude a MS from obstructing the transfer of the de facto head office from a MS.
Court decision? ECJ concluded that this issue falls outside the scope of the Treaty provisions on Freedom of Establishment. This problem must be dealt with by future legislation or conventions (p. 23). Court decided that in the present state of Community law the EC confers no right to transfer the central management and control of a company to another MS.
2) Centros Case (C-212/97 of 9 March 1999).
Who? Centros Ltd vs. Trade and Companies Board of Denmark.
What? Centros Ltd. was established under UK company law by two Danes. The company was trade only in Denmark. The incorporates clearly stated that they had established the entity under UK company law solely to avoid the minimum capitalisation requirement dor Danish LLC companies. The Danish commercial registry considered this to be an unlawful circumvention of the Danish minimum capitalisation rules and refused to register the company’s branch office in Denmark.
Referal to ECJ? Question of compatibility with Freedom of Establishment articles. In particular the question was referred to the ECJ whether it is compatible with freedom of establishment to refuse registration of a branch of a lawfully founded company that has its registered office in another member state, but in which the company does not itself carry on any business
Court decision? ECJ ruled that where a company exercised its freedom of establishment, the MS are prohibited from discriminating against this company on the ground that it was formed in accordance with the law of another MS in which it has its registered office but does not carry out any business + that a state is not authorized to restrict freedom of establishment on the ground of protecting creditors or preventing fraud if there are others ways of countering fraud to protect creditors.
(par 34) Four conditions for national measures to hinder or make less attractive the exercise of fundamental freedoms: - Non-discriminatory – Justified by imperative requirements in the general interest – Suitable for securing the attainment of the objective which they pursue – Not go beyond what is necessary in order to obtain it.
So: it is contrary the freedom of establishment to refuse to register a branch of a company, formed in accordance with the law of another MS in which it has its registered office but in which it conducts no business where the branch is intented to enable the company in question to carry on its entire business in the State in which that branch is to be created while avoiding the need to form a company there, thus evading application of the rules governing the formation of companies which, in that MS, are more restrictive as regards the paying of a minimum capital share.
But, this does not prevent authorities of the MS from adopting measures for preventing or penalising fraud, where it is established that the company in fact attempts to evade their obligations towards private or public creditors (but! This cannot be used as an exemption ground for applying freedom of establishment but mainly as another measure).
3) Inspire Art Case (C-167/01 of 30 September 2003)
Who? Kamer van Koophandel + Fabrieken voor Amsterdam vs. Inspire Art Ltd.
What? Inspire Art ltd was established by a Dutchman under the laws of England and Wales. He requested registration of the company’s Dutch branch office at the commercial registry in NL. The registry rook position that specific Dutch rules for foreign entities registered in NL were to apply to the company. As a consequence, Inspore Art would have been required to use a company name indicating its foreign origin and comply with the minimum capitalisation rules for Ditch LLC companies. NL states that extra requirements are applicable because Inspire Art qualifies as a formally foreign company: a company that is registered in another MS but has no connection with the country it is established in. Same objective as Centros; avoid minimum capital requirements.
Referred to ECJ? Question whether or not these extra requirements are against the freedom of establishment.
Court decision? Rules submitting pseudo-foreign companies to the company law of the host state were to the company law of the host state were inadmissible. The ECJ laid down that a foreign company is not only to be respected as a legal entity having the right to be a party to legal proceedings, but rather has to be respected as such, this is, as a foreign company that is subject to the company law of its state of incorporation. Any adjustment to the company law of the host state is, hence, not compatible with European Law.
4) Überseering case (C-208/00 from 5 November 2002)
Who? Überseering BV vs. Nordic Construction Company Baumanagement BmbH.
What? All the directors of Überseering BV, a LLC organized under Dutch Law, were resident in Germany. As a consequence, in accordance with the current thinking on company seats, the German courts decided that, owing to the location of the company’s principal office, German corporate laws apply to the company. The Dutch corporate entity was therefore dismissed from court proceedings in Germany.
ECJ reference? Is the dismissal of the Dutch corporate entity from German court proceedings against the freedom of establishment.
Court decision? It is incompatible with the freedom of establishment to deny legal capacity to a company formed in a MS which moves its central place of administration to another MS. The ECJ held that where a company incorporated in another MS exercices its freedom of establishment in another MS, that other MS is required to recognize the company’s legal capacity which it enjoys under the laws of its state of incorporation.
5) Sevic case (C-411/03 of 13 December 2005)
Who? Sevic Systems AG vs. Amtsgerich Neuwied.
What? A German company was prevented from merging with a Luxembourg company because of the fact that German legislation provided only for the inscription in the company register of mergers between German firms.
ECJ reference? German company asked ECJ whether or not the prevention of the merger was against freedom of establishment.
Court decision? Freedom of establishment precludes registration in the national commercial register of the merger from being refused in general in a MS where one of the two companies is established in another MS, whereas such registration is possible where the two companies participating in the merger are both established in the territory of the first MS.
The Court notes that imperative reasons in the public interest could, in certain circumstances, justify a measure dealing with special problems caused by cross-border mergers. A general refusal of registration as at issue in this case, however, goes further than what is necesarry to protect these legitimate interests.
6) Cartesio case (C-210/06 of 16 December 2008)
Who? Cartesio vs. Hungarian Court of Registration
What? Cartesio is a Hungarian limited partnership whose application for registration of the transfer of its seat to Italy was rejected by the Hungarian Court of Registration. Cartesio intended only to transfer its de facto head office to Italy while continuing to operate under Hungarian company law.
ECJ reference? ECJ has to determine whether freedom of establishment preclude a MS from imposing an outright ban on a company incorporated under its legislation transgferring its de facto head office to another MS without having to be wound up in Hungary first, and to have the seat transfer entered in the Hungarian Company Register (similar to Daily Mail case).
ECJ decision? Absence of a uniform Community law definition of the companies which may enjoy the right of establishment on the basis of a single connecting factor determining the national law applicable to the company, the question whether article 43 EC applies to a company can only be resolved by the applicable national law.
Thus, a MS has the power to define both the connecting factor required of a company if it is to be regarded as incorporated under the law of that MS and that required if the company is to be able subsequently to maintain that status. That power includes the possibility not to permit a company governed by its law to retain that status if the company intends to reorganise itself in another MS by moving its seat to the territory of the latter, thereby breaking the connecting factor required under the national law of the MS of incorporation (p. 11)>
Nevetheless, the situation falls to be distinguished from the situation where a company governed by the law of one MS moves to another MS with an attendant chafe as regards the national law applicable. In that case, the power cannot justify the MS of incorporation, by requiring the winding-up or liquidation of the company, in preventing that company from converting itself into a company governed by the law of the other MS, to the extent that it is permitted under that law to do so.
7) Vale case (C-378/10 of 12 July 2012)
Who? VALE Építési Kft.
What? The Italian company Vale Costruzioni Srl was incorporated and added to the commercial register in Rome in 2000. In 2006, that company applied to be deleted from that register as it wished to transfer its seat and business to Hungary and to discontinue business in Italy. The company was removed from the Italian commercial register, in which it was noted that the company had moved. Once the company had been removed from the register, the director and another natural person incorporated Vale Epitesi Kft. The representative of this company requested a Hungarian commercial court to register the company in the Hungarian commercial register, together with an entry stating that Vale Costruzioni was the predecessor in law of Vale Epitesi kft. However, that application was rejected by the commercial court on the ground that a company which was incorporated and registeren in Italy could not transfer its seat to Hungary and could not be registered in the Hungarian commercial register as the predecessor in law of a Hungarian Companty.
ECJ reference? The supreme court of Hungary asks the ECJ whether Hungarian legislation which enables Hungarian companies to convert but prohibits companies established in other MS from converting into Hungarian companies is compatible with freedom of establishment.
ECJ decision? Freedom of establishment bust be interpreted as precluding national legislation which enables companies established under national law to convert, but does not allow, in a general manner, companies governed by the law of another MS to convert to companies governed by national law by incorporating such a company.
In the context of cross-border company conversion, the host MS is entitled to determine the national law applicable to such operations and this to apply the provisions of its national law on the conversion of national companies governing the incorporation and functioning of companies.
However, the principles of equivalence and effectiveness preclude the host MS from refusing to record the company which has applied to convert as the predecessor in law and refusing to take due account of documents obtained from the authorities of the MS of origin.
Results of these decisions:
Real seat regime is not applicable to ‘foreign’ companies (Überseering) but, it is still applicable to its own companies (Cartesio).
3) Representation and the First EC-Directive
First directive = on co-ordination of safeguards which, for the protection of the interests of members and others, are required by MS with a view to making such safeguards equivalent.
Article 2: Ensure compulsory disclosure by companies for at least the following documents: - appointment & termination of persons authorised to represent the company – Must appear from disclosure if person may do this alone or jointly – c
Article 3: In each MS shall be opened a central register – all documents which must be disclosed shall be kept in the file in the register.
First directive has been amended several times. In the interests of clarity and rationality that Directive should be codified. This happened in 2009.
Directive from 2009 amended again in 2012 to improve cross-border access to business information, to ensure that up-to-date information is stored in the register of braches and to establish clear channels of communication between registers in cross-border registration procedures.
Before the first directive entered into force, there were two incompatible theories of corporate acts in Europe:
- Organ theory 🡪 the believe that a company has capacity to do any act whatsoever. Acts done by its organs are regarded as acts done by the company itself. The organs represent the company (management board or directors).
- Mandate theory 🡪 Powers of the company are restricted to matters covered by its stated objects. Any act outside those objects is a nullity, having no effect whatsoever. Even if an act is within the capacity of the company, it may be outside the powers of the individuals who were involved in the transaction. On the other hand, persons outside the company are entitled to assume that internal procedures have been complied with.
First directive in short:
Acts done by the organs of the company shall be binding even if those acts are not within the object of the company, unless such acts exceed the powers that the law confers or allows to be conffered on those organs.
However – MS may provide that the company shall not be bound of it proves that the third party knew or could not have been unaware of these objects. Disclosure is not sufficient prove.
Limits on powers of organs may, in principle, not be relied on as against third parties even if they have been disclosed.
However – if the national law provides authority to represent a company may be conferred by the statutes on a single person or on several persons acting jointly, that law may provide that such a provision in the statutes may be relied on as against third parties on condition that it relates to the general power of representation.
8) Mediasafe case (C-104/96 of 16 December 1997)
Who? Coöperatieve Rabobank ‘Vecht en Plassengebied’ BA vs. Erik Aarnoud Minderhoud (receiver in bankruptcy of Mediasafe BV)
What? The Holland Data Group comes to an agreement with Rabobank. HDG is a holding group, and holds shares in its subsidiairys. HDG agrees that he and all its subsidiairies are liable against Rabobank. When this agreement was established, HDG acted as principle and not a special committee of commissioners. Mediasafe, one if the subsidiary’s, files for bankruptcy and then this issue becomes important, because Rabobank comes to get his money on the ground of the agreement with HDG.
ECJ reference? Is it consistent with the first Directive for a company to be allowed to rely, as against a third party with whom a director has entered into a transaction on its behalf, on the fact that the director lacked authority on the ground that the transaction involved a conflict of interests between him and the company?
ECJ decision? Rules governing enforceability as against third parties of acts done by members in circumstances where there is a conflict of interests with the company fall outside the scope of the first directive.
Applicable law
The Netherlands – Management represents company; vest in every director possible; but statutes may provide that it shall vest only in one or more directors concurrently with the management; director may represent alone or in cooperation with one or more others.
Conclusion: only when national law provides for measures that can be taken with regard to the representation of the company it can have external effect.
If the law does not provide such a thing, and the third party could not have been aware of the fact that these provisions existed, the company will be bound and the provisions about representation only have an internal effect.
France – CEO has all the powers, articles which limit executives powers are not binding on third parties. More CEO’s = more people with all powers.
Germany – Director can represent company alone or together with others.
4) Societas Europaea + Societas Privata Europaea/SUP
Regulation and directive about the European company (SE) entered into force on 8 October 2004.
Main provisions:
Article 1 : An SE has to form of a European public limited-liability company. Capital shall be divded into shares. SE has legal personality.
Article 4 (2): Minimum capital requirements
Article 38: Choice of structure (one tier or two tier), GM mandatory.
Article 7: Registered office and head office in same MS. Obligation can be imposed by MS.
Article 9: SE is governed by this regulation, statutes also governed by this regulation.
As can be seen, important role for national law. Result can be: regulatory competition (race to the top or race to the bottom?).
Article 2: Formation – at least two MS involved.
Article 8: Transfer of registered office possible. This shall not result in the winding up of the SE or in the creation of a new legal person.
Advantages SE:
- European/international reputation of the company as an SE
- Neutral company type (not one nationality)
- Provisions for transfer of registered office (not up to national law)
- Choice between one tier and two tier board
Disadvantages SE:
- Company type less known to public and professionals
- (some) uncertainty in applicable rules due to reference to national laws
- Complicated procedure, mainly with resprect to the directive on employee participation.
- Minimum capital requirements
- Art 7 = real seat doctrine
European Private Company (EPC). Objective to comply to specific needs of SMEs, to enhance competitiveness of SMEs, provide potential benefit to larger companies, harmonization, aims to reduce compliance costs due to disparities between MS.
Special features: - No cross border element required – central administration and registered office can be in different MS (3 years in 1 MS), minimal capital of 1 euro (max 8000).
5) Mergers and acquisitions
M&A have a multidisciplinary character. Legal aspects (company law, labor law, securities law and competition law) as well as economical aspects, managements aspects and tax aspects are involved.
Acquiring firm – bidder
Acquiring firm – target
Selling firm – seller
Merger = negotiated deal, mostly friendly and equal companies of size.
Acquisition/takeover = negotiated deal, mostly friendly and one company is bigger than the other (most of the time bigger company takes over a smaller one)
Tender = Public offer (stock exchange), might be friendly or hostile and takeover premium (bonus on top of market rate).
Takeover of assets and liabilities – shareholders might keep their shares in own company but assets and liabilities transfer.
Takeover of shares – Shareholders B are left with either money or shares in A.
Legal merger – A new company is formed and shareholders from A and B both get shares in the new company.
Merger waves:
- Horizontal mergers
Same industry, influence on level of competition and market share.
- Vertical mergers
Between firms in different stages of production operation for securing supply or avoidance of transportation costs.
- Conglomerate mergers
Cocentric – product extensions, related business activities
Geographic – Bigger market
Pure – Non related business activities
- ‘Decade of big deals’
- Strategic merger
New supply chains or diversity of product
Larger market share or larger geographic market
Target integrated in firm and eliminating of double activities
- Financial mergers
Only financial aims
No integrating in firm (private equity house shall sell after some years).
Takeover process
- Meeting of possibly takeover parties
Possible initiated by investment bankers. High deliberations. Forming of takeover teams.
- Confidentiality agreement and standstill agreement
Confidentiality agreement = all provided information and the upcoming merger itself are confidential information.
Stand-still agreement = The bidder is prohibited to buy or sell shares in the target during the takeover process.
- Letter of intent
- Due diligence investigation
Investigation of the books of the target by the takeover team of the bidder. Look for unpleasant surprises such as high depths or an history of severe pollution.
- Negotiating the SPA
Price, calculated in cash or shares, conditions, etc.
Representations = facts ; seller is liable if not correct
Warranties = seller take responsibility for certain known facts and will pay if court proceedings are started.
- Closing
Scientific research conclusion: M&A have often harmful side effects (they fail). Profitability and market share growth decrease especially with regard to bidder (winners curse).
So, why would you do it?
- Hubris theory: Managers overestimate themselves and are too optimistic. Does not matter that merger failed, theirs will be a success!
- Agency theory (Jensen and Meckling) – Seperation of capital and leadership. Shareholders, the owners of the company, cannot decide in the day to day management. They only provide capital. Therefore, managers will act according their own interests. They want status and luxury and think that the larger the company, the higher the salary. M&A is not in interest of the owners of the company (shareholders) but in personal interest of managers.
- Game theory (gambling) – Managers do not know motives of previous companies to merge, so they either choose to follow and maybe fail or choose to not follow at all. Better follow or else you might be out of the game. Next company thinks exactly the same.
Shareholder rights:
- Selling decision
- Approval by shareholders
- Information
- Announcement
- Expert opinions
- Board opinions
- Appraisal right – Shareholder is entitled to exit and cash his shares
- Oppression remedies – Access to courts to have a potential wrong judged.
- Exit rights at will
- Nullification
- Inquiry proceedings
- Tort law
Takeover defenses
To provide the management board in case of a (hostile) takeover with the opportunity to carefully consider the interests of the company and its business and those of its stakeholders.
Why? To get a better price for the company ; the management believes the company will perform better on its own ; absence during general meetings ; preservation of position of directors.
- Prebid takeover defense – to prevent a sudden unexpected (hostile) bid before management hast ime to assess their options
- Postbid takeover defense – if prebid defense works, gives even more time to delay the bid.
Preference shares = Give preference to profits and payment of dividend.
Priority shares = Give certain additional rights not related to profit, mostly more voting power.
Depository receipts for shares = A type of negatiable financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. This receipt allows investors to hold shares in equity of other countries. – Power of attorney by foundation – CGC – new legislation.
Oligarchic (contractual) provisions:
- Binding nomination directors = supervisory board nominates the board members that are up for re-election.
- Non-voting stock = no rights for shareholders, only in it for economic gain.
- Staggered board = elections only for some board members each year. Partially appointed.
- Enhanced majorities = minimum of 80% of the votes.
- Exclusion of certain shareholder rights (pre-emtion rights)
Pandora – constructions:
Poison pills = Make company less attractive. Issue extra shares and sell them to someone who does not want to take over your company (already existing shareholders but better new shareholders). Dilutes shares held by acquirer.
Golden parachute = Contracts given to key executives that give substantial benefits when these members are exterminated.
Crown jewel constructions = Company sells of its most attractive part of the company to a friendly third party before a closing of the takeover.
Other constructions
Holding constructions – Heineken
White knights = Company looks for a third party to takeover the company, a white knight, he is the alternative bidder and especially in case of a hostile takeover it is better to find a friendly third party where you can negotiate better takeover terms with.
Employee stock ownership plan = Give employees shares in the company so they will perform better and the value of the company will go up.
Joint venture = An agreement between two parties that agree to develop a new entity and new assets by contributing equity.
Recapitalisation = Substantial change in a company’s capital structure.
Restructuring =
Pac Man defence = Companies turns tables in an attempt to acquire the company that wants to buy him.
Greenmail + standstill agreement = When a company already has a big part of the shares, the target offers a deal for more money per share.
In principle, defenses allowed, unless: - Violation of the law (LVMH/Gucci case)
- Proportional and adequate (Westfield/Rodamco)
- Reasonable and fair (Stork)
But, board has power to sell subsidiairy within approval shareholders (ABN AMRO/La Salle) and board decides about strategy (ASMI/Hermes).
Takeover directive:
- Mandatory Bid (article 5)
- Obligations of the board and breakthrough (articles 9 + 11)
- Optional arrangements (article 12)
- Squeeze out and sell out (article 15/16).
Includes: contents of offer document-period of acceptance-disclosure.
Not included: lapse and revision of bid – competing bids
Protection of minority shareholders
- Mandatory bid ; abuse of power, decrease of tradability – loss of value.
- Information on bid
- Publicity
- Sell-out right ; remaining shareholders after successful bid (90/95%) my require offeror to buy them out at a fair price. Offerer has sqeeze out right.
MS may say that article 9 & 3 or not mandatory. Therefore, companies can opt-in or opt-out. If the offer company does not apply the same rules, articles may be exempt.
Choices company:
- Unprotected and breakthrough (opt in 9 & 11)
- Protected and no breakthrough (opt out 9 and 11)
- Unprotected and no breakthrough (opt in 9 and opt out 11)
- Protected and breakthrough (opt out 9 and opt in 11).
Comparison between a merger via national law, SE, Sevic case or Cross border mergers directive.
SE regulation has disadvantages regarding employees participation rules and regarding tax law.
Merger directive gives specific law to cross-border mergers which prevents a clash of national laws. But, does only apply to LLC companies.
Sevic also applies freedom of establishment to not listed companies.
6) Valuation and Capital Structure
Most important formulas!
Net present value in general
Two options, you can either put your money on the bank and receive interest or you can invest your money in a specific project and gain value. You calculate the net present value to see if your investment pays of or if it’s a better idea to put your money on the bank.
NPV = Investment (I) + Value at year 1 (V) / interest (r) .
For example: r = 10 I = -100 V = 121
When you put your money on the bank – after one year you will have 110. (x 1.1)
When you invest, you get 121. So what is the NPV of your company today?
NPV = -100 + 121/1.1 = 10
NPV of a multiple year cashflow: - investment + (Earnings a year / rent – growth)
Valuation of a firm
Suppose we live in a perfect capital market. Company X is 50% debt financed (D/E = 1).
The cost of equity is 14% (RE). The cost of debt is 6%. Company X looks - because of the
assets in place - forward to a permanent annual stream of EBITs of € 100.-.
a. Calculate the WACC: WACC = (D/V)x Rd + (E/V)xRe = (50%/100)x6% +(50%/100)x14% = 10%.
b. Calculate the value of the firm: V = (EBIT/WACC) = 100/0.1 = 1000.
c. Determine the market value of debt (D) and equity (E): D = D x V = 0.5 x 1000 = 500. Same for equity.
d. Calculate the equity cash flow (ECF): ECF = EBIT – Rd x D = 100 – 6% x 500 = 70.
e. Determine again the market value of equity (E) by discounting the expected
ECFs with the required return on equity : E = ECF / Re = 70/0.14 = 500.
WACC = (D/V)XRd + (E/V)xRe
V = EBIT/WACC
Market value D = D x V
Market value E = E x V
ECF = EBIT – Rd x D
Market value E after discount expected ECF = ECF/ Re
NPV of a merger
Gain = PVAB – (PVA + PVB) When firms are worth more together than apart – synergie.
Cost = cash – PVB
NPV = Gain – cost
By an increase of market value target firm:
NPV = Gain – ((cash-MVb) + (MVb-PVb))
Merger financed by stock:
NPVa = Shares A/Shares AB x Vab –Va
NPVb = Shares B / Shares AB x Vab = Vb
Cost = xPVab – PVb
NR of shares to issue if you want to pay a certain price:
x/Shares A + x. Vab = y
7) Labour Law
Directive 2001/23 on employee protection, especially in the event of a change of employer their rights need to be safeguarded.
ECJ C-287/86, Ny Mølle Kro 🡪 ensure that the contract of employment or employment relationship continues unchanged with the transferee, in order to prevent the workers concerned from being placed in a less favorable position.
- Object of the directive: ECJ, C-101/87, Bork 🡪 Purpose directive is to ensure that the rights of employees are safeguarded in the event of a change by employer by enabling them to remain in employment with the new employer on the terms and condition agreed with the transferor.
- Applicability of the directive: ECJ, C-51/00, Temco 🡪 It is clear from the wording of article 1 of the directive that its applicability is subject to three conditions: the transfer must result in a change of employer; it must concern an undertaking or business or part of a business; and it must be the result of a contract.
- Definition of a stable undertaking: ECJ, C-48/98, Rygaard 🡪 A transfer must relate to a stable economic entity whose activity is not limited to performing one specific works contract, a transfer could come within the terms of the directive only if it included the transfer of a body of assets enabling the activities of the transferor undertaking to be carrier on in a stable way.
- Economic activity not only subject to the activity itself, other factors need to be examined: ECJ, C-13/95, Süzen 🡪 The mere fact that the service provided by the old and the new awardees of a contract is similar does not support the conclusion that an economic entity has been transferred. An entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, such as its workforce, its management staff, the way in which its work is organized, its operating methods or indeed, where appropriate, the operational resources available to it.
- The entity must keep its identity after being taken over by the new employer: ECJ, C-24/85, Spijkers 🡪 A transfer of undertaking does not occur merely because its assets are disposed of. It should instead be considered whether the business was disposed of as a going concern; was the operation actually continued or resumed by the employer.
Legal transfer subject to the convention, mergers not defined in directive and probably subject to merger directive.
- Transfer of an undertaking: ECJ, C-466/-07, Klarenberg/Ferrotron
Klarenberg headed a unit at ET, the unit consists of three goups; one is sold to Ferrotron and products and employees transfer. Ferrotron integrated the employees and products into its own organisation. ET becomes bankrupt, Klarenberg claims to have been transferred to Ferrotron. Ferrotron states that the entity cannot have retained its identity as it has lost its organisational autonomy.
ECJ 🡪 The identity of an economic entity does not entirely depend on the single factor relating to ‘organisational autonomy’. Economic entity means ‘organised grouping of resources which has the objective of pursuing an economic activity, this emphasising not only the organisation element, but also the element of pursuing an economic activity. These two elements together constitute the identity of an economic entity.
This condition should not be interpreted as requiring the retention of the specific organisation imposed by the undertaking on the various elements of the production which are transferred, but as requiring the retention of the functional link of interpendence, and complementarity, between those elements.
The retention of such a functional link between the various elements transferred allows the transferee to use them, even if they are integrated, after the transfer, in a new and different organisational structure, to pursue an identical or analogous economic activity ,
Labour intensive vs capital intensive.
ECJ, C-13/95, Süzen: In a labour intensive undertaking (i) a group of workers engaged in a joint activity on a permanent basis may constitute an undertaking (“economic entity”). That undertaking transfers (it maintains its identity) (ii) where the new employer does not merely pursue the activity in question performed by the transferor, but also takes over a major part, in terms of their numbers and skills, of the employees specially assigned by his predecessor Therefore, the definition of “economic entity” and “transfer” are somewhat different in a labour intensive undertaking.
ECJ, C-172/99, Oy Liikenne: In a capital intensive undertaking, where the tangible assets contribute significantly to the performance of the activity, the absence of a transfer to a significant extent from the old to the new company of such assets, which are necessary for the proper functioning of the undertaking (entity), must lead to the conclusion that the entity does not retain its identity. This bears relevance for the definition of “transfer”.
In summary, in a labour intensive undertaking the “undertaking” and the transfer is approached differently when compared to the capital-intensive undertaking.
Who transfers?
Employees 🡪 as defined by national law
Employed by the transferor 🡪 ECJ, C-362/89, d’Urso
all contracts of employment existing on the date of the transfer of an undertaking between the transferor and the workers employed in the undertaking transferred are automatically transferred to the transferee by the mere fact of the transfer.
Assigned to the part of the business concerned 🡪 ECJ, C-186/83, Botzen
An employment relationship is characterized by the link existing between the employee and the part of the undertaking to which he is assigned to carry out his duties. In order to decide whether the rights and obligations under an employment relationship are transferred within the meaning of the Directive, it is sufficient to establish to which part of the undertaking the employee was assigned.
Employed at the moment of transfer 🡪 ECJ, C-19/83, Wendelboe + ECJ, C-478/03, Celtec.
Unless employee refuses 🡪 ECJ, C-132, 138, 139/ 91, Katsikas + ECJ, C-51/00, Temco
Scattolon case 🡪 Seniority = in calculating rights of financial nature, transferee must take into account the entire length of service of the employees.
It is lawful for the transferee to apply, from the date of the transfer, the working conditions laid down by the CLA in force with him, including those concerning remuneration
However, that CLA cannot have the aim or effect of imposing on those workers conditions which are, overall, less favourable than those applicable before the transfer.
Daddy’s Dance Hall case – no contractual variation, only if national law allows it but the transfer may not constitute the reason.
8) Tax law
The EU has no power to impose taxes on individuals or companies in the EU. But, it has an enormous influence on the taxation of a MS.
Article 26 TFEU 🡪 Internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured.
Europe strives to become a single market where there can be no discriminations and no restrictions. In tax law discriminations and restrictions are common.
Positive integration of markets
Directive and regulations, new rules are made to reacht he goal of the internal or single market.
Negative integration
Case law from the ECJ. MS are forced to comply with EU law by ECJ, causes break down of legal measures that are not single market proof.
Discrimination – national tax law applies a different tax rate for foreign income. Restriction: exit tax for companies upon emigration to another MS because this is seen as a restriction on the freedom of establishment (Inspire Art case).
ECJ developed ‘rule of reason’ test. Disparities can only be solved by harmonization.
Cross border dividend distributions
EC Parent Subsidiary Directive
Transfers of shares and enterprises
EC Merger directive
General tax laws
Company taxed in either MS of incorporation or MS of residence (Think of Royal Dutch v. Shell Transport merger).
Tax treaty in order to avoid juridical double taxation (taxing income two times at level of same taxpayer). Tax treaties determine which country is allowed to tax while national determines if income is actually taxed.
But, different situation in case of a parent and subsidiairy company when the parent company transfers profits after dividend to subsidiairy company and that company pays tax again. In this case, same profit gets taxed twice but at different level.
The more tiers, the more CIT 🡪 economics double taxation (EDT). EDT = taxing the xame income two times at different levels. Tax treaties cannot solve this problem, they only solve juridical double taxation (same level).
Therefore, the parent/subsidiary directive is established, to prevent EDT in cross-border EU situations. Due to this directive there is no withholding of dividend taxes + no double EDT.
Directive applies to companies when two or more MS or involved + limited to companies listed in the Annex (AG + GmbH, SA and Sarl, NV and BV, SE and SCE).
- Parent company needs to hold at least 10% in the capital of a company of another MS
- Subsidary company must be held by at least 10% by the parent.
A minimum holding period of 2 years can be used to prevent abuse. With this measure, dividend stripping is not possible (selling of share by a non P/S directive qualifying holding company to another company that does qualify, just before the dividend is declared. When the dividend is received by the qualifying company the shares will be sold back to the non qualifying company. Without such a measure dividend tax can be stripped of the dividend).
Effect PS directive 🡪 no withholding taxes on dividend.
Exemption method – CIN – investment neutrality Cii on the foreign market – recognize the fiscal sovereignity of the state in which the subsidiary is located.
Credit method – CEN – investment neutrality CII on the home market – investments abroad are taxed the same way as investments on the home market.
P/S-directive does not make a choice.
Judgment ECJ in Denkavit France-Case (December 14, 2006) 🡪 The Dutch-French tax treaty did not solve the economic double taxation. Tax treaties mostly do not solve EDT. Tax treaties solve juridical double taxation. In this case The Netherlands were only prepared to credit French withholding tax. Because The NL exempted the received dividend, the was no real reason to credit the French tax. No tax no credit.
The treaty ADT gave France the right to tax the dividend received by Denkavit NL.
Freedom of establishment – negative integration – redisdent and non-resident companies should be treated the same for tax purposes – context of a measure laid down by a MS – result: no withholding tax on the cross-border dividend – why need PS directive?
Merger directive – common system of taxation in all MS with regard to :
- Mergers – demergers – transfers of assets – exchanges of shares – transfer of statutory seat from one MS to another by a SE/SCE/
Concerning companies of different MS – just tax issues, no legal issues.
When a merger or a division takes place we have to look at two different levels. First there’s the level of the shareholder. When there’s a merger or a division, the shareholder will exchange his shares into new shares. Upon that exchange the shareholder will realize a capital gain (if any) on his shares
The second level is the level of the company. The company will contribute (a part of) her assets to another company. Upon that contribution the company will also realize a capital gain. Special fiscal reserves that are kept by the company will also have to be winded up.
Wattel calls these problems short term tax problems ‘ They only occur upon the merger.
Long term tax problems , such as arising dividend taxation problems or other problems are not covered by this directive .
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