California Corporation Code § 1800 provides several grounds for involuntary dissolution. A court may grant involuntary dissolution where (1) “[t]hose in control of the corporation have been guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers.” §1800(b(4), and (2) “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders.” §1800(b(5). See also Bauer v. Bauer, 46 Cal.App.4th 1113, 54 Cal.Rptr.2d 377, Stuparich v. Harbor Furniture Mfg., Inc. 83 Cal.App.4th 1268, 100 Cal.Rptr.2d 313, 2000 Daily Journal D.A.R. 10,657.
Involuntary corporate dissolution under subdivision (b)(4) requires a showing that those in control of the corporation have been guilty of, or have knowingly countenanced, “persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders,” or that the corporation's property “is being misapplied or wasted by its directors or officers.”
Bauer described the course of conduct that satisfies the definition of the improper “squeezing out” of a minority shareholder, thus entitling a minority shareholder to dissolution of the corporation to protect his or her interests. The court took its definition of a from Marsh’s California Corporation Law, the portion quoted by the Bauer court is below:
“The term ‘squeeze-out’ is . . . generally intended to describe a situation where the majority controlling shareholders, who are also the principal officers of a corporation, engage in a course of conduct which is designed to exclude a minority shareholder or shareholders both from participation in the conduct of the corporate business and from the economic benefits derived therefrom . . . The conduct most typically takes the form of refusing to pay any dividends on the corporate stock, refusing to permit the minority shareholder to have any corporate office or position on the board of directors . . . , and the payment of large salaries to the controlling shareholders who are the principal officers of the corporation . . . Obviously it makes a great deal of difference whether dividends had once been paid on a regular basis, but were stopped; whether the minority shareholder had a job with the corporation from which he was fired; and whether the controlling majority shareholders increased their own officers’ salaries, after the rift appeared and the dividends were terminated.” 2 Marsh’s California Corporation Law (3d ed. 1995) §11.46, 958-960
Adishian Law Group, P.C. represents and advises entrepreneurs, company co-founders, and C-Suite executives on a wide range of legal and strategic issues, including maximizing the value of their ownership interest.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about the MINORITY SHAREHOLDERS, OPPRESSIVE CONDUCT, CORPORATE LAW and/or other areas of CORPORATE law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG 2009.
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Monday, January 12, 2009
Breach of Fiduciary Duty: Majority Shareholders
Majority shareholders may be held liable for damages for breach of a fiduciary obligation to minority shareholders, Jones v. H. F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 460 P.2d 464; Brown v. Halbert, 271 A.C.A. 307, 316, 76 Cal.Rptr. 781; and 3 Witkin, Summary of Calif. Law (1960) Corporations, s 99, p. 2390 (1967 Supp. p. 998). A majority shareholder breaches his fiduciary duties to the minority when he uses his control to distribute a disproportionate share of corporate profits (whether in the form of a dividend of excessive executive compensation), depriving the minority of its fair share of corporate profits. See Jara v. Suprema Meats (2004) 121 C.A.4th 1238, 18 C.R.3d 187; Witkin Summary of California Law, Tenth Edition 2. [§ 181].
In Jara, the court found that a minority shareholder had the right to bring an individual action against the corporation for excessive compensation paid to the two other shareholders, who were also executives and directors of the corporation. The court stated, “The objective of encouraging intracorporate resolution of disputes and protecting managerial freedom becomes meaningless where defendants constitute the entire complement of the board of directors and all the corporate officers.” See Jara, supra, at 1259.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about the MINORITY SHAREHOLDERS, BREACH FIDUCIARY DUTY and/or other areas of CORPORATE LAW, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG 2007.
In Jara, the court found that a minority shareholder had the right to bring an individual action against the corporation for excessive compensation paid to the two other shareholders, who were also executives and directors of the corporation. The court stated, “The objective of encouraging intracorporate resolution of disputes and protecting managerial freedom becomes meaningless where defendants constitute the entire complement of the board of directors and all the corporate officers.” See Jara, supra, at 1259.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about the MINORITY SHAREHOLDERS, BREACH FIDUCIARY DUTY and/or other areas of CORPORATE LAW, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG 2007.
Exchange Funds: A Good Idea For Entrepreneurs and Co-Founders
What is an Exchange Fund?
An exchange fund allows company founders and other large shareholders to contribute a portion of their own company stock in exchange for an ownership percentage (i.e. limited partnership interest) in a new entity that holds a diversified portfolio of private company shares. As the portfolio companies realize liquidity events (IPO, acquisition, etc.), the limited partners in the new entity all share in the cash or stock distributions.
The Benefits
Conceptually, as a company co-founder, you are "going long" on your single idea. In the meantime, your venture backers (and maybe your lawyers) have literally dozens of other company co-founders just like you "going long for them". The exchange fund allows you to shift part of your portfolio to mirror the "higher-quality risk profile" of your venture capital backers. Yet, you still retain a significant percentage of your company shares.
Exchange funds offer diversification, venture capital scale returns, higher likelihood of a liquidity event, possible tax advantages versus a comparable cash investment in a venture fund and no out of pocket costs for participants.
Adishian Law Group, P.C. represents and advises entrepreneurs, company co-founders, and C-Suite executives on a wide range of legal and strategic issues, including utilizing exchange funds as a long-term wealth building tool. If the above sounds like you, call us and we will be happy to discuss how we can be of service to you.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about the EXCHANGE FUNDS, START-UPS, VENTURE CAPITAL, PRIVATE COMPANIES and/or other areas of CORPORATE law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG 2009.
An exchange fund allows company founders and other large shareholders to contribute a portion of their own company stock in exchange for an ownership percentage (i.e. limited partnership interest) in a new entity that holds a diversified portfolio of private company shares. As the portfolio companies realize liquidity events (IPO, acquisition, etc.), the limited partners in the new entity all share in the cash or stock distributions.
The Benefits
Conceptually, as a company co-founder, you are "going long" on your single idea. In the meantime, your venture backers (and maybe your lawyers) have literally dozens of other company co-founders just like you "going long for them". The exchange fund allows you to shift part of your portfolio to mirror the "higher-quality risk profile" of your venture capital backers. Yet, you still retain a significant percentage of your company shares.
Exchange funds offer diversification, venture capital scale returns, higher likelihood of a liquidity event, possible tax advantages versus a comparable cash investment in a venture fund and no out of pocket costs for participants.
Adishian Law Group, P.C. represents and advises entrepreneurs, company co-founders, and C-Suite executives on a wide range of legal and strategic issues, including utilizing exchange funds as a long-term wealth building tool. If the above sounds like you, call us and we will be happy to discuss how we can be of service to you.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about the EXCHANGE FUNDS, START-UPS, VENTURE CAPITAL, PRIVATE COMPANIES and/or other areas of CORPORATE law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG 2009.
Tuesday, March 6, 2007
The "Alter-Ego" Theory aka "Piercing the Corporate Veil"
Are you considering filing a complaint against a California Corporation for money owed to you or your clients? Who can be held liable? Can only the corporate entity be named as a defendant? Can individual shareholders, directors or officers also be named as defendants? Can the alter-ego doctrine be applied to non-profit corporations?
Generally, California corporate law encourages business ventures, risk-taking, and entrepreneurial activity by limiting liability exposure to the assets of the corporation.
But this is not an absolute protection. Courts will disregard the corporate entity, allowing for individual shareholders, directors or officers (i.e. the “alter-egos”) to be held liable in certain circumstances. This is also known as “piercing the corporate veil.”
It is well settled that California courts can pierce the corporate veil when both of the following two requirements are met:
(1) Unity of Interests – The shareholders in question have treated the corporation as their “alter ego,” rather than as a separate entity; and
(2) Inequitable Result – Upholding the corporate entity and allowing for the shareholders to dodge personal liability for its debts would “sanction a fraud or promote an injustice.” Automotriz del Golfo de California v. Resnick (1957)
In California, courts apply a factor-by-factor test to determine whether “alter-ego” liability is appropriate. These factors are laid out in the case of Associated Vendors Inc. v. Oakland Meat Packing, Co. (1962).
1) Did the individual Defendant(s) act in bad faith?
2) Did the individuals contract with another with the intent to avoid performance by using a corporate entity as a shield against personal liability?
3) Did the individuals divert assets from a corporation by or to a stockholder or other person or entity to the detriment of creditors?
4) Domination of the corporation by a few key individuals?
5) Did the individuals and corporation use the same office or business location?
6) Did the individuals and the corporation employ the same attorney?
7) Did the individuals use the entity to procure labor, services and merchandise for another person or entity?
8) Did the individuals fail to adequately capitalize the corporation?
9) Did the individuals fail to maintain minutes or adequate corporate records?
10) Will there be an inequitable result if the court fails to pierce?
The burden of establishing alter-ego liability is on the plaintiff. Absent factors supporting individual liability, courts are reluctant to pierce the corporate veil because “alter-ego liability is fundamentally at odds with the general rule that de jure (ie. as a matter of law) corporation is a legal entity separate from its founders and owners; and the law specifically permits owners to incorporate a business for the very purpose of shielding them from its liabilities.” Las Palmas Associates v. Las Palmas Center Associates; Rutter Guide.
However, California courts have “followed a liberal policy of applying the alter-ego doctrine where the equities and justice of the situation appear to call for it.” First Western Bank & Trust Co. v. Bookasta (1968). In practice, the alter-ego doctrine is usually applied “where there are only a few shareholders and they have not respected their corporation’s separate identity.” When evaluating alter-ego liability, courts do not make a distinction between forms of corporations, and the doctrine applies equally to non-profit corporations and for-profit corporations.
Case References: Associated Vendors, Inc. v. Oakland Meat Packing Co.; Automotiz del Golfo de California v. Resnick; Las Palmas Associates v. Las Palmas Center Associates; First Western Bank & Trust Co. v. Bookasta
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about ALTER-EGO LIABILITY or PIERCING THE CORPORATE VEIL other areas of CORPORATE law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG 2005.
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Generally, California corporate law encourages business ventures, risk-taking, and entrepreneurial activity by limiting liability exposure to the assets of the corporation.
But this is not an absolute protection. Courts will disregard the corporate entity, allowing for individual shareholders, directors or officers (i.e. the “alter-egos”) to be held liable in certain circumstances. This is also known as “piercing the corporate veil.”
It is well settled that California courts can pierce the corporate veil when both of the following two requirements are met:
(1) Unity of Interests – The shareholders in question have treated the corporation as their “alter ego,” rather than as a separate entity; and
(2) Inequitable Result – Upholding the corporate entity and allowing for the shareholders to dodge personal liability for its debts would “sanction a fraud or promote an injustice.” Automotriz del Golfo de California v. Resnick (1957)
In California, courts apply a factor-by-factor test to determine whether “alter-ego” liability is appropriate. These factors are laid out in the case of Associated Vendors Inc. v. Oakland Meat Packing, Co. (1962).
1) Did the individual Defendant(s) act in bad faith?
2) Did the individuals contract with another with the intent to avoid performance by using a corporate entity as a shield against personal liability?
3) Did the individuals divert assets from a corporation by or to a stockholder or other person or entity to the detriment of creditors?
4) Domination of the corporation by a few key individuals?
5) Did the individuals and corporation use the same office or business location?
6) Did the individuals and the corporation employ the same attorney?
7) Did the individuals use the entity to procure labor, services and merchandise for another person or entity?
8) Did the individuals fail to adequately capitalize the corporation?
9) Did the individuals fail to maintain minutes or adequate corporate records?
10) Will there be an inequitable result if the court fails to pierce?
The burden of establishing alter-ego liability is on the plaintiff. Absent factors supporting individual liability, courts are reluctant to pierce the corporate veil because “alter-ego liability is fundamentally at odds with the general rule that de jure (ie. as a matter of law) corporation is a legal entity separate from its founders and owners; and the law specifically permits owners to incorporate a business for the very purpose of shielding them from its liabilities.” Las Palmas Associates v. Las Palmas Center Associates; Rutter Guide.
However, California courts have “followed a liberal policy of applying the alter-ego doctrine where the equities and justice of the situation appear to call for it.” First Western Bank & Trust Co. v. Bookasta (1968). In practice, the alter-ego doctrine is usually applied “where there are only a few shareholders and they have not respected their corporation’s separate identity.” When evaluating alter-ego liability, courts do not make a distinction between forms of corporations, and the doctrine applies equally to non-profit corporations and for-profit corporations.
Case References: Associated Vendors, Inc. v. Oakland Meat Packing Co.; Automotiz del Golfo de California v. Resnick; Las Palmas Associates v. Las Palmas Center Associates; First Western Bank & Trust Co. v. Bookasta
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about ALTER-EGO LIABILITY or PIERCING THE CORPORATE VEIL other areas of CORPORATE law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG 2005.
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Raising Capital: Federal and State Securities Laws
Exemptions From Federal and State Securities Laws:
Are you a small business owner in California looking for a legal way to raise capital without being a licensed broker-dealer? What federal and state securities laws matter? Do you have to file any documents with the federal or state government? Does your company qualify for an exemption?
Federal Laws:
In light of the Great Depression, President Franklin D. Roosevelt created the Securities Exchange Commission as a means to promote investor confidence. Two of the safeguards that were included in the New Deal were the Securities Act and the Exchange Act.
Generally, the Securities Act requires companies raising capital to file a registration statement with the SEC. This is to provide investors with information that can assist them in making their investment decisions. The Exchange Act requires companies to file reports with the SEC. These reports include information about business operations, financial conditions, and management.
It is important to keep in mind that your company must be in compliance with both federal and state securities laws. This is because a particular offering may be exempt from a federal law but not exempt from a state law.
Exemptions:
Your company may qualify for an exemption provided within these laws. This would mean that you do NOT have to satisfy the SEC’s registration and reporting requirements. Below is an exemption from California State Law that may be applicable to your company. (Please note that for any sort of securities law exemption, it is necessary that you meet ALL of the requirements of the exemption.)
SEC Rule 1001 – California Limited Offering Exemption
Under this rule, California companies are not required to satisfy the SEC’s registration requirements for offers and sales of securities if and only if they meet the following requirements:
(a) The securities are in amounts of up to $5 million.
(b) The offering is made to a “qualified purchaser.”
Web reference. Please visit http://www.sec.gov/ for source materials on this topic.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about RAISING CAPITAL and other areas of CORPORATE SECURITIES law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG, P.C. 2004.
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Are you a small business owner in California looking for a legal way to raise capital without being a licensed broker-dealer? What federal and state securities laws matter? Do you have to file any documents with the federal or state government? Does your company qualify for an exemption?
Federal Laws:
In light of the Great Depression, President Franklin D. Roosevelt created the Securities Exchange Commission as a means to promote investor confidence. Two of the safeguards that were included in the New Deal were the Securities Act and the Exchange Act.
Generally, the Securities Act requires companies raising capital to file a registration statement with the SEC. This is to provide investors with information that can assist them in making their investment decisions. The Exchange Act requires companies to file reports with the SEC. These reports include information about business operations, financial conditions, and management.
It is important to keep in mind that your company must be in compliance with both federal and state securities laws. This is because a particular offering may be exempt from a federal law but not exempt from a state law.
Exemptions:
Your company may qualify for an exemption provided within these laws. This would mean that you do NOT have to satisfy the SEC’s registration and reporting requirements. Below is an exemption from California State Law that may be applicable to your company. (Please note that for any sort of securities law exemption, it is necessary that you meet ALL of the requirements of the exemption.)
SEC Rule 1001 – California Limited Offering Exemption
Under this rule, California companies are not required to satisfy the SEC’s registration requirements for offers and sales of securities if and only if they meet the following requirements:
(a) The securities are in amounts of up to $5 million.
(b) The offering is made to a “qualified purchaser.”
Web reference. Please visit http://www.sec.gov/ for source materials on this topic.
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about RAISING CAPITAL and other areas of CORPORATE SECURITIES law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG, P.C. 2004.
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Minority Shareholder Rights in California
Are you thinking about investing as a minority shareholder in a company? Perhaps you are thinking about taking on outside investors for your current company? What are your rights as an investor? What should you be concerned about as a majority shareholder?
The Minority Shareholder
Understandably, minority shareholders often are concerned that their rights and interests will be trampled by those of the majority shareholders. It seems that corporations appear to have a greater incentive to cater to the needs of their more substantial investors. However, in California, minority shareholders possess certain crucial rights that cannot be compromised by corporate bylaws or majority shareholders actions. One of the most valuable rights for shareholders is the right to access information about the corporation. In particular, shareholders of California corporations have rights to inspect two different sets of records: (I) record of shareholders; and (II) accounting books, records, and minuts of proceedings.
Inspection of the record of shareholders
Minority shareholders have the right to inspect a corporation’s record of shareholders. Those who hold either: (a) 5% of the shares; or (b) 1% of the shares and have filed a federal Schedule 14B relating to the election of directors, have an absolute right, on 5 business days’ notice, to both: (1) to inspect and copy the record of shareholders; and (2) to obtain a current list of the names, addressses and share holdings of the voting shareholders (Corp. C. 1600(a)(b)). Furthermore, any shareholder who does not qualify under either (a) or (b) above, with a written demand, has a right to access a corporation's record of shareholders. BUT if and only if the acquisition of such records is directed towards an end deemed reasonably related to the holder’s interest (Corp. C. 1600 (c)).
Inspection of the books and records
Minority shareholders also have the valuable right to inspect accounting books, records, and minutes of proceedings. Inspection of said information is provided if and only if the acquisition of such information is directed towards an end deemed reasonably related to the holder’s interest (Corp. C. 1601 (a)).
These are important rights for all shareholders to keep in mind. Indeed, these rights may not be limited by either the bylaws or articles. If a lawful demand for inspection is refused without justification, the superior court can intervene and compel the corporation to forfeit the requested information. In some cases, the courts have exercised their power to award complaining shareholders with reasonable expenses, including attorneys’ fees. (Corp. C. 1600 (b)).
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about MINORITY SHAREHOLDERS' RIGHTS, CORPORATE LAW and other areas of law, please visit http://www.AdishianLaw.com, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG, P.C. 2004.
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The Minority Shareholder
Understandably, minority shareholders often are concerned that their rights and interests will be trampled by those of the majority shareholders. It seems that corporations appear to have a greater incentive to cater to the needs of their more substantial investors. However, in California, minority shareholders possess certain crucial rights that cannot be compromised by corporate bylaws or majority shareholders actions. One of the most valuable rights for shareholders is the right to access information about the corporation. In particular, shareholders of California corporations have rights to inspect two different sets of records: (I) record of shareholders; and (II) accounting books, records, and minuts of proceedings.
Inspection of the record of shareholders
Minority shareholders have the right to inspect a corporation’s record of shareholders. Those who hold either: (a) 5% of the shares; or (b) 1% of the shares and have filed a federal Schedule 14B relating to the election of directors, have an absolute right, on 5 business days’ notice, to both: (1) to inspect and copy the record of shareholders; and (2) to obtain a current list of the names, addressses and share holdings of the voting shareholders (Corp. C. 1600(a)(b)). Furthermore, any shareholder who does not qualify under either (a) or (b) above, with a written demand, has a right to access a corporation's record of shareholders. BUT if and only if the acquisition of such records is directed towards an end deemed reasonably related to the holder’s interest (Corp. C. 1600 (c)).
Inspection of the books and records
Minority shareholders also have the valuable right to inspect accounting books, records, and minutes of proceedings. Inspection of said information is provided if and only if the acquisition of such information is directed towards an end deemed reasonably related to the holder’s interest (Corp. C. 1601 (a)).
These are important rights for all shareholders to keep in mind. Indeed, these rights may not be limited by either the bylaws or articles. If a lawful demand for inspection is refused without justification, the superior court can intervene and compel the corporation to forfeit the requested information. In some cases, the courts have exercised their power to award complaining shareholders with reasonable expenses, including attorneys’ fees. (Corp. C. 1600 (b)).
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about MINORITY SHAREHOLDERS' RIGHTS, CORPORATE LAW and other areas of law, please visit http://www.AdishianLaw.com, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. ALG intern Jonathan Tam contributed to this article. Copyright ALG, P.C. 2004.
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European M&A: Financial Assistance Overview
The leveraged buy out (LBO) and management buy out (MBO) are common tools of American businesses whereby an acquiring entity will purchase its target through a combination of debt and equity. No brilliance there right? The clever part, however, comes in where the target company (i.e. its assets) are given as collateral for the debt. In essence the target helps facilitate its own acquisition. This is accepted as normal in the U.S., presumably under the belief that it leads to the most efficient allocation of capital and assets.
Across the pond though, the UK market takes a dim view of such financial moves -- it is in fact unlawful for a company to assist in the acquisition of its own shares. This is commonly referred to as the "no financial assistance" rule. Assistance is defined generally as a guarantee, indemnity, gift or security provided to the acquiror. Aside from apparent common sense foundation that if you can't afford it on your own, you shouldn't buy it, this rule is primarily designed to protect creditors and the capital inside the target corporation. It is not a blanket prohibition however, and the UK provides for a "whitewash" test (what we would call a "safe harbor"). The "whitewash" rules will not be covered in this posting.
France and Germany similarly have rules against financial assistance for much the same policy reasons as the UK. France allows no whitewash, whereas German transactions can be structured generally to comply with the legal tests.
There remain open issues as to whether and how the emergence of the EU will standardize national corporate legal policies. For now, transactions within a country are controlled by that country's corporate legal structure. As shown here, Europe can be quite a different playing field that the U.S.
[Many thanks to Focus Europe Summit 2004, and Gibson, Dunn and Crutcher LLP for source materials on this topic.]
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about this topic and other areas of law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG, P.C. 2004.
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Across the pond though, the UK market takes a dim view of such financial moves -- it is in fact unlawful for a company to assist in the acquisition of its own shares. This is commonly referred to as the "no financial assistance" rule. Assistance is defined generally as a guarantee, indemnity, gift or security provided to the acquiror. Aside from apparent common sense foundation that if you can't afford it on your own, you shouldn't buy it, this rule is primarily designed to protect creditors and the capital inside the target corporation. It is not a blanket prohibition however, and the UK provides for a "whitewash" test (what we would call a "safe harbor"). The "whitewash" rules will not be covered in this posting.
France and Germany similarly have rules against financial assistance for much the same policy reasons as the UK. France allows no whitewash, whereas German transactions can be structured generally to comply with the legal tests.
There remain open issues as to whether and how the emergence of the EU will standardize national corporate legal policies. For now, transactions within a country are controlled by that country's corporate legal structure. As shown here, Europe can be quite a different playing field that the U.S.
[Many thanks to Focus Europe Summit 2004, and Gibson, Dunn and Crutcher LLP for source materials on this topic.]
Note: The information contained is not legal advice and does not establish an attorney-client relationship. Our contact information is included and we always offer a free consultation. For more information about this topic and other areas of law, please visit http://www.AdishianLaw.com/, contact us via email to askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888. Copyright ALG, P.C. 2004.
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