Legal prerequisites and boundaries of a substantive judicial abuse control of shareholders´ resolutions approving cross-border structural operations on companies: the cross-border merger of Mediaset España S.A. on the Dutch Mediaset Investment N.V. as a showcase for the delimitation of the leges societates of both involved companies and their successive application.

In order to integrate the media group MFE-MEDIAFOREUROPE NV („MFE“), the respective general meetings of the Spanish Mediaset España S.A. („Mediaset España“) as well as the Italian Mediaset S.p.A. („Mediaset Italia“) approved to merge latter companies as companies being acquired on the Dutch MFE acting as acquiring company. At the level of the acquiring company MFE, in addition to the consent to the cross-border merger simultaneously an amendment of its articles of association was approved. The new articles of association contained various provisions that created customised instruments in favour of the majority shareholder of the future MFE (latter being controlled by Silvio Berlusconi), in order to undermine at long-term the participation rights of the rivalling minority shareholder, the French Vivendi S.A..

This was achieved by provding a regime that provided for the granting of loyalty-shares in a manner that would have led to a disproportionate increase of voting rights of the Italian majority shareholder, procuring him the majority of voting rights within a very brief period. In addition, via a provision in the articles of association pursuing to which proposals on the appointment of new board members can only be rejected by a qualified mayority of 2/3, de facto it would have lead to a statutory right of this majority shareholder to appoint board members exclusivily by its own. A further statutory provisions provided for an obligation to make a public offer on the sale of shares as soon as a shareholder obtains the control of voting rights within a range of 25- 30%, an obligation which due to the current ownership structure would affect exclusively the minority shareholder Vivendi S.A., however not the Italian majority shareholder.

Vivendi S.A. seeked to challenge the shareholders´ resolutions approving the mergers, filing lawsuits against both Mediaset España as well as Mediaset Italia, and aplied for interim measures seeking to prevent the registration of the respective mergers (the Spanish and Italian law applicable to both companies being acquired do not provide for an automatic suspension of the registration as German las does pursuant to § 16 para. 2 of the German Transformation Act (UmwG)). Both courts actions were succesful; the present article however treats only the resolutions of the Spanish Courts (Juzgado de lo Mercantil of Madrid of 10.10.2019 and Audiencia Provincial of Madrid of 14.02.2020).

Both resolutions are still based on the legal situation prior to the entry into force of the Directive (EU) 2019/2121 as regards cross-border conversions, mergers and divisions, which had not yet entered into force at the moment the resolutions were adopted. Nevertheless, they are of great doctrinal and especially practical relevance. Because they do not only include extraordinarily detailed explanations of the applicable Spanish substantive law, but also on the legal background of the primary law of the European Union developed by the ECJ by interpreting freedom of establishment. Furthermore, in order to give supplementary reasons for the judgements, they refer to some provisions of the Directive (EU) 2019/2121 which entered into force on 12.12.2019, allowing to transfer the corresponding reasoning to the current legal situation. The core statements of the Spanish Courts can be summarised as follows:

  • Because a cross-border merger may not be declared null and void once it has become effective due to its registration with the commercial register (Art. 134 Company Law Directive) respectively due to the practical obstacles which would arise during the intent to undo a cross-border merger, the urgency (periculum in mora) for the interim measures must be held to be established, and the registration of the shareholders´ resolution with the commercial register must be temporarily suspended.
  • After a summary examination of the merits of the case, the Court holds that prima facie the avoidance action against the shareholders´ resolution approving the cross-border merger is likely to be estimated on the legal grounds of an abuse of its voting rights by the majority (Art. 204.1.II LSC). The concrete terms of the acquiring company´s new articles of association show that there is a great likelihood that its provisions are tailor-made in order to exclusively undermine the rights of the acquiring company´s future minority shareholder.
  • This does not enter into conflict with the fact that pursuant to the legal doctrine established by the ECJ, the arrangements under the articles of association at the level of the acquiring company as well as the legal question of the validity of its individual provisions are solely governed by Dutch law being the acquiring company´s lex societatis and Dutch Courts hold exclusive jurisdiction in order to resolve this question. Because the application for interim measures does not relate to the approving shareholders´ resolution at the level of the acquiring company but is exclusively affecting the one taken at the level of the company being acquired, which is still subject to the Spanish lex societatis of this company.
  • However, due to the legal requirements deriving from liberty of establishment for cross-border structural operations, domestic legal orders are however barred from interpreting the mere performance of a cross-border merger as an abuse by the majority, even though the rules on protection of the minority under the laws applying to the acquiring company may defer considerably from those of the company being acquired. The shareholders´ resolution that approves the merger at the level of the company being acquired may not require any substantive justification; even more its Courts must refrain from questioning the economic reasons of the structural measure. Consequently, a substantive judicial review of the shareholders´ resolution can be applied only under very exceptional circumstances, if the concrete terms of the envisaged merger, particularly the terms of or amendments to the acquiring company´s articles of association justify the avoidance action pursuant to the criteria of the lex societatis of the company respectively concerned.

Form a dogmatic point of view, as a starting point of the Spanish Courts assume correctly that in accordance with the ECJ´s case law (Sevic, Vale, Polbud), with regard to all kinds of cross-border structural operations the leges societates of all involved companies must be applied subsequently. Contrarily to a fallacy particularly widely shared by German- speaking legal scholars relying on the so-called combination doctrine (Kombinationslehre) established during the sixties of the past 20th century, under no circumstances the legal prerequisites derived from primary law allow to apply the legal criteria on the abuse control of shareholders´ resolutions of both legal orders involved. To the contrary both must be applied subsequently, refer partially to different scopes of the subject matters to be reviewed and safeguard different groups of stakeholders: indeed, the substantive legal review at the level of the company being acquired protects exclusively the shareholders of this company, whereas the substantive legal review at the level of the acquiring company aims exclusively to protect latter´s shareholders. Basically, due to the primary law requirements a delicate dépeçage must be performed in such a way that at each company, exclusively the legal aspects of the shareholders´ resolution concerning their respective members may be examined, avoiding any kind of double review or the cumulative application of protective instruments of both laws applicable.

If – as it occurred in the present case – on the occasion of the merger new articles of association are approved at the level of the acquiring company, in principle these articles only affect the subject matter of the shareholders´ resolution taken at this company, even though the shareholders of the company being acquired gain knowledge of its provisions, being an integral part of the merger´s draft terms. Pursuant to the unharmonized legal regime of avoidance actions, the legal possibility to challenge this shareholders´ resolution, latter being characterised by its dual nature covering both the approval of the merger and the new articles of association, in most cases will be reserved to the acquiring company´s shareholders. Bbecause in most jurisdictions, the legal capacity to sue is limited to the shareholders of a company, and the shareholders of the company being acquired lack this condition until the merger becomes effective upon registration with the commercial register, and once the operation has finally been entered into the register, avoidance actions use to be time-barred.

The present case shows the striking peril of negative conflicts between jurisdictions, that are likely to occur when (as apperently intended by the cavaliere and his legal advisors), the new articles of association are not subject to potential judicial control in any of the jurisditions involved, because the shareholders negatively affected by their terms are not legally enabled to challenge them, neither during the period of their affiliation to the company being acquired, nor during the subsequent period the have become members of the acquiring company, and for obviuos reasons latter´s shareholders let elapse the time period during which an avoidance action can be filed, because the design of the new articles of association favours exclusively their own interests. To this regard, the Spanish courts decided acurrately by taking recourse to the protective instrument of the avoidance action based on the abuse of the majority´s voting power existing under their laws pursuant to Art. 204.1.II LSC, in order to enable a protection ex ante against the terms of the articles of association which revealed to be evidently unfair instead of relegating the minority shareholders to a mere remedy compensatory in nature such as the exit rights in exchange of compensation in cash.

If the company being acquired would have been one governed by German laws, the avoidance action would have been successful too, despite the fact that shareholders´ resolutions on the approval of structural measures are only subject to a very limited anti-abuse control. Because the merger was intended to serve as a mere façade in order to impose the new articles of association under avoidance of any possibility for the minority shareholders to make it subject to judicial review (BGH, NJW 1983, 1056 (Freudenberg), BGH NZG 2005, 722 (Feldmühle)). Nevertheless it is worth stating that on the occasion of cross-border structural operations, the strict limitation of a substantive judicial to extreme circumstances established by German case law for domestic transformations under the Transformations Act, is even imposed by the primary law of the UE, because it is excluded that the mere performance of a cross-border structural operation may be qualified per se as abusive. It rather constitutes the standard case desired by the legal order, whose prohibition based on an abuse is admitted only under exceptional circumstances and must be based on concrete and tangible grounds to be proven in each individual case. With regard to the intensity or degree of control, other Member States are not allowed to exceed the framework of a mere residual substantive judicial review of shareholders´ resolutions imposed by primary law.

Despite the entry into force of the Directive (EU) 2019/2121, the current legal situation remains unchanged, even though the Directive establishes a minimum standard of secondary law concerning the protection of shareholders, consisting in the granting of an exit-right to the shareholders as well as the possibility of a judicial review of the adequacy of the share­ exchange ratio, expressly allowing the Member States to introduce or maintain additional rules on protection for members in their domestic law (vid. recital 17 of the Directive (EU) 2019/2121). Because pursuant to the established case law of the ECJ, the mere reference to the possibility to proceed to a stricter transposition exceeding the Directive´s requirements does not grant the Member States a free leeway to infringe the legal limits imposed by primary Union law. Latter rather constitute the outmost boundaries of both the discretional power held by domestic legislators, and also the application and interpretation of legal concepts by the Courts. Recital 17 of the Directive (EU) 2019/2121 clarifies this with declaratory effect by stressing out that in the event Member States decide to transpose the Directive in a way exceeding its requirements respectively to maintain previously existing protection instruments, these measures must be compatible with the liberty of establishment.

Neither does the new preventive anti-abuse control introduced by the Directive (EU) 2019/2121 that must be performed by the competent authorities of the Member State of Origin prior to the issuance of the pre-merger certificate (vid. Art. 127 para. 8 Company Law Directive for mergers, Art. 86m para. 8 Company Law Directive for transformations and Article 160m para. 8 Company Law Directive for divisions) change the legal panorama. Notwithstanding the fact that the mere control of legality of the legal requirements of the operation pursuant to the laws of the Member State of Origin has now been enriched by a mandatory control of an eventual abuse. Nevertheless, as concerns the intensity of the legal review of such anti- abuse control, the legislator of the Union identically as the domestic legislator is bound by the limits imposed by the liberty of establishment, latter reducing considerably the scope of such anti abuse control: as stated correctly by the Spanish Courts, pursuant to the ECJ´s case law, the performance of a cross-border structural operation cannot be qualified as such as an abuse; also the change of the company´s lex societatis as well as its general level of shareholders´ protection must be assumed by the shareholders of the company being acquired.

Because also measures destined to the creation of a cross-border corporate group constitute particularly important methods of exercise of the freedom of establishment (vid. this expression of the ECJ in Sevic, Vale), the corresponding requirements established by the ECJ must be particularly also transferred to the substantive judicial control of such shareholders´ resolutions that lead to the creation of a cross-border corporate group. At least in such cross-border constellations, the criteria on the requirements for a need of substantive justification of shareholders´ resolutions which lead to the loss of independence of a German corporation, extracted by the dominant view of legal scholars under German law from the BGH´s ruling in the judgement Süßen, cannot be maintained anymore. Because they have the effect of establishing a general presumption of abuse with regard to the formation and integration of corporate groups in an unjustifiable way, and consequently pervert the relationship between rule and exception established by the case-law of the ECJ, pursuant to which cross-border structural operations constitute the general rule desired by the legal order, whereas its prohibition constitutes the exception which requires a solid justification.

Despite the Spanish Courts´ encouraging judicial pronouncements with regard to a wide freedom to design cross-border structural operations, taking also into account the due protection of minority shareholders on a case-by-case basis pursuant to domestic law, the judgements also lead to a certain unease concerning the procedural requirements to be observed when delimitating the leges societates of both jurisdictions involved as well as unanswered questions which hopefully will be elaborated by the Spanish Courts in the course of the main proceedings or via a petition for a preliminary ruling before the ECJ: on the occasion of the legal control of the abuse of the shareholders´ resolution approving the cross-border operation, latter question being governed by the laws of the Member State of Origin of the respective company, are the Courts of that State obliged to treat the legal issue if the provisions of the new articles of association can be agreed validly pursuant to the laws of the acquiring company respectively if the articles of association as such have been adopted validly or are void, as a preliminary question governed by the lex societatis of the acquiring company, or are they allowed to reduce their judicial review to a general anti abuse control pursuant to the lex societatis of that company being acquired, taking the validity of the provisions of the new articles of association for granted, establishing a corresponding legal presumption, and entrusting the control of an eventual voidness exclusively to the Courts located in the Member State of the acquiring company? Considering the limited scope and intensity of the judicial review performed under the laws of the company being acquired, would it eventually make sense to entrust the anti-abuse control of both the new articles of association as well as the structural measure as such completely to the Courts and consequently also to the laws of the acquiring company? In order to safeguard their right to an effective remedy (Art. 47 Charter of Fundamental Rights of the EU) as well as the effet utile of the instruments that provide the protection of the minority established pursuant to the domestic laws of the acquiring company, is it necessary to grant the shareholders of the company being acquired a legal capacity to file avoidance actions also at the level of the acquiring company in order to enable them to challenge the shareholders´ resolution and consequently also the articles of association pursuant to the laws of that company?

In the end, some of the questions can only be answered via preliminary rulings before the ECJ. Due to the lack of harmonisation of the legal regimes on avoidance actions as well as the protection of minority shareholders, for many others however no general answer can be granted on the basis of primary law, and the solution of the concrete legal issue will depend on the interaction and the domestic leges societates respectively involved as well as their coordination made on a case-by-case basis. Because even though the shareholders´ resolutions at the level of both participating companies are governed exclusively pursuant to the laws of the respective company affected, and their corresponding protective instruments must be applied subsequently and not cumulatively, indirectly they provoke mutual repercussions to the respectively other legal order involved and behave like communicating vessels, whose legal solutions must be coordinated and be made compatible one with the other. Consequently, it is unavoidable to obtain a detailed legal advice covering all jurisdictions involved prior to the performance of the structural operation. In any event it is worth the effort because it constitutes the only way to avoid that the whole operation may fail.

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