Sell-Side M&A: Shareholder Information Rights

Sell­ing share­hold­ers have an inter­est in max­i­miz­ing sales pro­ceeds. This requires pro­vid­ing the poten­tial pur­chaser with as much (price-relevant) infor­ma­tion as pos­si­ble – infor­ma­tion the sell­ing share­hold­ers need to obtain from the tar­get company.

The impor­tance of information

If con­fir­ma­tion was ever needed of the impor­tance of infor­ma­tion for deal-making, the (joint) award of the 2013 Nobel Prize in Eco­nomic Sci­ences to Eugene F. Fama drove home the point. Fama is most renowned for his work on the effi­cient mar­ket hypoth­e­sis, which, in essence, argues that asset prices reflect avail­able information.

Pur­suant to Sec 22 para 2 of the Aus­trian Act on Lim­ited Lia­bil­ity Com­pa­nies (GmbHG), share­hold­ers are enti­tled to inspect the books and records of their com­pany dur­ing a period of 14 days prior to the annual gen­eral meet­ing con­vened to resolve on the company's finan­cial state­ments. This con­trol right is awarded to each share­holder, irre­spec­tive of the size of the shareholder's par­tic­i­pa­tion in the com­pany. The idea behind this is to give share­hold­ers enough infor­ma­tion to be able to mean­ing­fully exer­cise their other share­holder rights, pri­mar­ily their vot­ing rights.

Far-reaching share­holder rights

Over sev­eral years, the Aus­trian Supreme Court has con­sid­er­ably expanded this statu­tory infor­ma­tion right. Pur­suant to its case law, each share­holder has the right, exer­cis­able at any time (and not only in prepa­ra­tion of the annual or an extra­or­di­nary gen­eral meet­ing) to request infor­ma­tion on all of the company's legal, com­mer­cial, and oper­a­tional affairs. There is thus in par­tic­u­lar no restric­tion to infor­ma­tion or data rel­e­vant for under­stand­ing the finan­cial state­ments. The infor­ma­tion right also extends to affil­i­ates (where the right to inspect account­ing records is, how­ever, lim­ited to 100% sub­sidiaries) and includes the right to make copies. The only rec­og­niz­able con­straint put in place by the court is that the infor­ma­tion obtained may not be used to the detri­ment of the com­pany (e.g. if the share­holder wanted to use infor­ma­tion to fos­ter a com­pet­ing business).

Enter the sell-side M&A process

What impact does this have on a (sell-side) M&A deal? The typ­i­cal set up requires the sell­ing share­holder to pro­vide inter­ested par­ties with an oppor­tu­nity to con­duct due dili­gence. For this, the sell­ing share­holder will rejoice: sanc­tioned by the Supreme Court, he has a pow­er­ful tool in hand to obtain far-reaching infor­ma­tion on the (busi­ness of the) com­pany. This is even more so if there are argu­ments that a trans­ac­tion is in the inter­est of the com­pany, e.g. because the investor would pro­vide fresh capital.

A seller will, how­ever, be well-advised to be pru­dent: if eg the sale is run as an auc­tion and (poten­tial) com­peti­tors are among inter­ested par­ties, access to sen­si­tive infor­ma­tion needs to be severely restricted. In gen­eral, a seller should be care­ful to clearly doc­u­ment that only as the sales process moves along and a suc­cess­ful deal becomes more and more cer­tain, a small group of/the poten­tial acquirer(s) gained access to sen­si­tive infor­ma­tion. It may even be nec­es­sary (includ­ing from a com­pe­ti­tion law point of view) to aggre­gate data and restrict access to eg exter­nal advis­ers sub­ject to pro­fes­sional secrecy oblig­a­tions, impos­ing report­ing restric­tions also towards their own client.

Draw­ing the line is dif­fi­cult, both for the seller and the man­age­ment. For the lat­ter, an infor­ma­tion request that forms the basis for a due dili­gence will be cum­ber­some and time-consuming to deal with. How­ever, to turn "hos­tile" even to a minor­ity shareholder's request may not be an option. While there may come a point where the man­age­ment have to say "no", this will expose them to pres­sure and may even trig­ger litigation.

In a case that at the time of writ­ing is mak­ing its way through the appeals process, the Vienna Court of Appeals found an infor­ma­tion request "abu­sive". It requested that the review be con­ducted by an exter­nal adviser sub­ject to pro­fes­sional secrecy who was pro­hib­ited from report­ing on "infor­ma­tion and data rel­e­vant from a com­pe­ti­tion point of view" – but it upheld the infor­ma­tion request in principle.

The sit­u­a­tion in listed companies

The gen­eral prin­ci­ple is quite dif­fer­ent for stock cor­po­ra­tions (AG) and even more so for listed com­pa­nies, even though indi­vid­ual authors argue for a "right to due dili­gence". In gen­eral, share­hold­ers must sub­mit ques­tions dur­ing the annual gen­eral meet­ing. The man­age­ment may refuse to respond for a num­ber of rea­sons, includ­ing that the infor­ma­tion requested is not required to be able to mean­ing­fully assess the spe­cific agenda item. In listed com­pa­nies, man­age­ment must deter­mine whether a dis­clo­sure is in the company's best inter­ests – which may or may not be aligned with the inter­ests of a share­holder – and com­ply with insider rules.

Quote: Under Austrian case law, shareholders of a GmbH have far-reaching information rights. While they may not use information to support a competing business to the detriment of their company, otherwise there are virtually no limits. This is good for a selling shareholder, but may put management in a difficult spot. Dealing with information request may also be burdensome, costly, and time-consuming.

This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.