Investors who wish to control a company usually do so by exerting their authority over the directors whom the general meeting (GM) appointed upon the investors’ proposal. A PE firm could not be interested to take upon a board mandate because of potential directors' liability. In this Strelia M&A Series, we’ll share our insight with you into other ways that an investor can control decision-making of the board.
Shifting Powers
Investors can influence the board’s decision-making over certain matters by implementing the below mechanisms which should all be stipulated in the company’s bylaws.
Investors can have the board’s decision-making power on certain key matters transferred to the GM, but there are limits to this. Powers that are designated specifically by law to the board cannot be transferred (such as drawing up the annual financial statements, representing the company externally, appointing a managing director), and the board should always maintain a minimum of independent authority. If the decision-making power is transferred to the GM, then the GM has the power to initiate the decision on the matter concerned and can force the board to execute the decision.
The bylaws could also grant the GM the right to veto certain decisions that will be made by the board provided that they do not relate to the above powers of the board which cannot be transferred. This implies that the decision-making power is 'split' between the board and the GM since one makes the decision but the other has the power to veto it, and neither of them can adopt the decision on its own. In this veto mechanism, the initial decision-making therefore remains with the board.
Furthermore, the bylaws could grant the GM the right to instruct the board to decide on certain matters provided that the subject matter does not fall under the scope of mandatory powers conferred to the board by law. If the GM is granted such right, both the GM and the board have the power to initiate decision-making over the matter concerned. If the GM has initiated the decision-making, then, in principle, the board will have to execute the decision.
Finally, the GM could impose on the Board the obligation to seek non-binding advice from the GM on certain matters before the board can decide on them. Such obligation is valid, but it cannot be imposed on the board if it relates to any of the matters that fall under the board’s scope of mandatory powers.
When allocating or shifting powers between the board and the GM, there are practical aspects that should be borne in mind: involving the GM could increase the cost of the decision-making process, and the GM is not always the most appropriate corporate body to take decisions. Furthermore, any deviation from the allocation of powers by virtue of law between the board and the GM will not bind third parties who act in good faith.
All these mechanisms can be combined with voting agreements in a shareholders' agreement. They can also be backed by a shareholder’s commitment to vouch (porte fort) for a director’s (or the board's) compliance with the principles on decision-making that are set out in a shareholders' agreement. This method is particularly useful since it remains debated under Belgian law whether directors can contract about their voting right. Furthermore, as opposed to the above forms of the sharing of powers, the guarantee can apply to the board’s decision-making concerning those matters that fall under the mandatory powers of the board.
Top-Down Chain of Command
Investors might want to gain the same level of control throughout the corporate chain of subsidiaries. Transferring certain powers of the subsidiary’s board directly to the GM of HoldCo is impossible because an allocation of powers can be made only at company level. It is possible though to stipulate in the bylaws of HoldCo that the GM of HoldCo- instead of the board- will decide on a number of key decisions regarding the subsidiary. On top of that certain powers of the board of the subsidiaries could be transferred to the general meeting of the subsidiaries. For these to be effective, the clauses concerning them should be included in the bylaws of HoldCo and the relevant subsidiaries. The combination of both shifts of power enables the GM of HoldCo to control much of the decision-making down-the-chain. The effectiveness of these clauses in the bylaws can be tightened even more by reaching voting agreements between HoldCo and an investor on the exercise of the voting right at the general meetings of the subsidiaries.
No U-Turn
Irrevocable mandates, which must be restricted in scope and in time, can be attached to the above mechanisms, if appropriate. Such mandates are useful if a (majority) investor wants to ensure that it can take a certain decision later on without the board’s intervention because, for example, the directors would be conflicted.
Hitting the Breaks
When implementing the above mechanisms, one must always consider the structure of the group and the transaction costs involved. Lastly, one should also bear in mind the (potential) liabilities involved as powers and accountability (read: liability) could go hand in hand.
