Contributed By CHSH Cerha Hempel Spiegelfeld Hlawati
Austrian stock corporations are governed by a two-tier board system. The members of both boards – the management board and supervisory board – are required to comply with the duty of care of a prudent businessman (Sorgfalt eines ordentlichen Geschäftsleiters) and act foremost in the best interest of the company. Additionally (but only ranking second) shareholders', employees' and public interests may be taken into consideration. Besides that, the Austrian Stock Corporation Act, Section 47a, lays down a general principle of equal treatment of all shareholders. Subject to the principles of the so-called business judgement rule, failure to comply with these duties may result in personal liability. For the managing directors of limited liability companies, similar duties of care and loyalty towards the company apply.
In connection with M&A activities, the directors' duties of care and loyalty do not differ from those in other business situations. Directors’ influence on a target, particularly in a share deal, is limited, since typically negotiations are conducted and decisions are made at shareholder level. In some cases target companies' managing directors are not even involved at an early stage. However, in order to provide information, their involvement is usually required in the due diligence process and in connection with closing.
The Austrian Takeover Act additionally requires managing directors as well as members of the supervisory board to act in the interest of all shareholders as well as in the interest of the employees, creditors and the general public, and to remain objective during the takeover procedure. As soon as the intention to launch a bid has been announced, but also when the members of the boards have been approached by a bidder or have knowledge of the intention to launch a bid, the boards must not prevent the public bid (Verhinderungsverbot), must stay objective (Objektivitätsgebot) and, in addition, have to respond to the bid by way of a statement. Nevertheless, searching for a 'white knight' to make a competing offer is permitted.
In Austria, it is not common for managing boards to establish special or ad-hoc committees in business combinations or in the case of a conflict of interest. Usually, conflicted members would:
Depending on the corporate governance, conflicts of interest of directors may also be addressed to an existing supervisory board that has, among other things, some intermediary role between the managing board and the shareholders, and represents the company in dealings with directors. Note that on the level of supervisory boards, specific committees, eg, audit committees, may have to be established, depending, however, on the size of the company rather than being driven by a transaction situation.
In Austria, courts defer to the judgement of managing directors according to the business judgement rule, which applies to any business decisions of board members regardless of the business situation. In 2016, the business judgement rule was expressly incorporated into Austrian statutory law, although Austrian courts had applied similar principles before. The business judgement rule, as it is understood in Austria, establishes a 'safe harbour' with regard to decisions of board members, provided that:
A board member acting within the scope of the business judgement rule will generally not be liable to the company, its shareholders or other stakeholders.
However, the business judgement rule will not help if the law explicitly sets up a more specific rule in certain situations. Violations of law, even if they were believed to be in the best interest of the company, cannot be justified under the business judgement rule. Under the Takeover Act, there exist such more specific rules that take precedence, eg, directors need to act in the interest of all shareholders as well as in the interest of the employees, creditors and the general public and generally need to stay objective.
Directors of Austrian target companies sometimes turn to lawyers and other consultants seeking outside advice on business combination matters, particularly if they perceive a risk that they could lose their job following transaction closing or that their job terms may become subject to change. Therefore advice given to directors is often limited in scope and typically concerns aspects of employment law (eg, regarding employment contract issues) but also the conduct of a due diligence process (eg, regarding confidentiality/disclosure matters) or, more generally, the scope and limitations of the business judgment rule and related aspects of careful management of a prudent businessperson.
In regulated industries managing directors may request advice regarding statutory duties, for example ad-hoc reporting obligations.
Public takeovers require appointing independent experts (normally auditors) to assess launched offers and provide opinions. Additionally, an expert appointed by the target company has to assess the obligatory statements of the target company's managing board and supervisory board in which they recommend whether or not to accept the offer.
Directors’ conflicts of interest may be addressed to a supervisory board that has, among other things, the role of intermediary between the managing board and the shareholders. It generally supervises the managing board and represents the company in dealings with directors. In addition, shareholders may initiate special audits to review (potentially conflicted) business activities. However, conflicts between shareholders and the managing board that find their way to court are rather seldom in Austria.
By and large, conflicts among shareholders – which may arise from time to time – also do not often end up in court. Conflicts, if any, between majority and minority shareholders sometimes result in the legal challenge of majority resolutions (eg, concerning the appointment or dismissal of directors) filed by minority shareholders.