Legal Challenges of Companies Part 2 2023/2024 PDF

Legal challenges of companies Part 2 2023/2024 Sequence description 01 Capital raise 02 Duties of directors 02 Shareholders agreements 04 Classes of shares CAPITAL RAISE Legal Challenges of Companies 2023/2024 Capital raise Definition Capital raise is an operation consisting in increasing the amount...

Legal challenges of companies Part 2 2023/2024 Sequence description 01 Capital raise 02 Duties of directors 02 Shareholders agreements 04 Classes of shares CAPITAL RAISE Legal Challenges of Companies 2023/2024 Capital raise Definition Capital raise is an operation consisting in increasing the amount of share capital. Aims :  Welcoming new shareholders  Financing future investments  Gaining credibility with customers, suppliers, etc. Capital raising may also allow a company to avoid dissolution when equity becomes less than half of the share capital. Legal Challenges of Companies 2023/2024 Capital raise How Companies can raise capital by either 1. Issuing new actions 2. Increasing the nominal value of existing shares Legal Challenges of Companies 2023/2024 Capital raise 1. Issuing new shares The number of shares increase. Newly issued shares may be subscribed either by existing shareholders or by third parties (new members). Example : A company has a share capital of €500,000 divided into 5,000 actions of €100 each. The company issues 1,000 new shares of €100 each. The share capital will increase to €600,000 now divided into 6,000 shares. Legal Challenges of Companies 2023/2024 Capital raise 1. Issuing new shares If the articles of association so provide, the new shareholders may be subject to the approval of existing shareholders. The integration of new shareholders alters the distribution of capital and leads to the dilution of the existing shareholders. Example : The initial capital of the company is €1000 / 100 shares (i.e €10 for each share). A shareholder has 25% (25 shares) of the capital, i.e. 25% of voting rights and dividends. If the company issues 100 additional shares and the shareholder does not subscribe to any of them, it has only 12.5% of the voting rights and dividends. Thus, its stake has been diluted. Legal Challenges of Companies 2023/2024 Capital raise 1. Issuing new shares To avoid dilution Pre-emptive rights (see shareholders’ agreements) It allows existing shareholders to be given priority for the purchase of new shares and thus to keep the same percentage of participation (and therefore rights) in the share capital. Legal Challenges of Companies 2023/2024 Capital raise 2. Increasing the nominal value of existing shares The number of shareholders and shares remains unchanged, but the value of each share increases. Example : A company has a share capital of €500,000 divided into 5,000 shares of €100 each. Increasing the value of each share to €130 will increase the share capital to €650,000. Legal Challenges of Companies 2023/2024 Capital raise Shareholders have 3 ways to increase the capital of the company  Cash contribution : partners provide liquidity (sums of money)  Contribution in kind : shareholders provide tangible goods (e.g. machinery, computers, etc.) and intangible goods (patents, trademarks, etc.).  Incorporation of reserves : the company incorporates its own capital reserves Legal Challenges of Companies 2023/2024 Capital raise A. Contributions in cash Funds paid as a contribution shall be subject to a deposit, within 8 days of their receipt, at a notary or at a dedicated bank account. When the company issues new shares, they may be subscribed by third parties who obtain the status of shareholder. A capital increase made without taking into account pre-emptive rights of shareholders is not valid. Shareholders are not obliged to subscribe the new shares to which they are entitled. Legal Challenges of Companies 2023/2024 Capital raise B. Contributions in kind A capital increase may be constituted in whole or in part of contributions in kind. The goods brought in must be subject to an assessment by a contributions’ auditor. The contribution auditor is appointed unanimously by the shareholders or, otherwise, by the president of the commercial court, ruling at the request of any interested party. If no valuation of a contributions’ auditor joint and several liability of shareholders for 5 years (as of the completion of the operation), for the value attributed to the contributions, in relation to third parties who may turn against them. Legal Challenges of Companies 2023/2024 Capital raise C. Incorporation of reserves It consists of using available reserves such as the share premium, the legal reserve and the undistributed earnings allocated to reserves. It's a capital increase without contribution of funds. Legal Challenges of Companies 2023/2024 Capital raising Formalities 1. Special resolution (extraordinary general meeting) The basic procedure normally requires the existing shareholders (according to the majority provided for by the articles of association) to pass a special resolution to decide on the capital raising. This generally requires a majority of 75% or more of the votes cast in favour of the resolution at a general meeting of shareholders. When it consists in increasing the nominal value of the shares, the capital increase requires a unanimous decision. Legal Challenges of Companies 2023/2024 Capital raising Formalities The special resolution states:  the overall amount of the capital increase  the number of newly issued shares or the increased value of shares  any preferential right granted to the shareholders  the deadline for subscribing the shares (5 days minimum) Before a capital increase in cash, the initial share capital must be fully paid up. Legal Challenges of Companies 2023/2024 Capital raising Formalities 2. Publishing a legal announcement 3. Amendment of the articles of association (new capital amount and redistribution of shares) 4. The capital increase must be filed with the company formalities office (CFE) Legal Challenges of Companies 2023/2024 Capital raising Exercise See Brightspace / Course Content / Sessions 2 and 3 /“Capital raising” exercise EXERCISE DUTIES OF DIRECTORS AND OFFICERS Legal Challenges 2022/2023 A corporation is managed by directors and officers. Director: “a person elected by the shareholders to serve on a board that overseas the management of a corporation” Officer: “a person named by the board of directors to operate the corporate business” ”Business Law”, glossary – Robert W. Emerson, J.D., Sixth Edition Company Law Company Law Legal Challenges 2022/2023 Officers Directors (BOD) Shareholders Legal Challenges 2022/2023 Company Law Directors act as a group known as a board of directors. The BOD manages the corporation’s business and affairs and has the authority to exercise all of the corporation’s powers. Officers are appointed by and receive their powers from the BOD. Generally, the BOD is responsible for making major business and policy decisions and the officers are responsible for carrying out the board’s policies and for making the day-to-day decisions. Company Law Legal Challenges 2022/2023 Directors and officers must govern its affairs with reasonably good judgement (attend meetings, not engage in selfdealing or conflicts of interest, etc.) Standard of care compliance with Business Judgment Rule (BJR) Legal Challenges 2022/2023 Company Law To determine compliance with the Business Judgment Rule 3 standards are applied to directors / officers : 1. Exercise of due care: informed decision / duty to monitor 2. Action in good faith: inaction by directors is protected by the BJR only if conscious decision to refrain from acting 3. Reasonable belief that the action is in the corporate interest Smith v. Van Gorkom Delaware Supreme Court The court found the director grossly negligent because he rapidly approved the corporation’s being bought out and merged into an acquiring company, without substantial inquiry. The Board's decision to approve the proposed cash-out merger was not the product of an informed business judgment and breached the duty of care. No compliance with the Business Judgment Rule. Legal Challenges 2022/2023 Company Law Directors - limitations on their powers  Directors may not act outside the corporation’s articles of incorporation or purposes.  They may not take any action that is in violation of the law.  There are also actions that directors cannot take—such as amending the articles — without first obtaining the shareholders’ approval.  Bylaw provisions may further limit the powers of directors. Thank you for your attention! Any questions?