Sell-Side M&A: Shareholder Information Rights
→ Florian Kusznier
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.