Download Limited liability companies

Limited liability companies
 Nature of limited liability company
 Fundamental
features
 Comparison Europe-US
 Protection of members
 Capital
structure
 Voting rights
 Liquidity rights
 Compare substance and procedure
Limited liability companies
What is a limited liability company – in
the US and Mexico?
What are the issues?
Limited liability companies
Mexico
 Formation: 2-50
members, notary
 Financial: minimum
capitalization, limits on
distributions
 Governance: voting
based on capital
 Liquidity: non-bearer
shares, unanimous
approval (¾ in charter
provision or inheritance)
United States
 Formation: 1 or more
members, simple filing
 Financial: no minimum
capitalization, limits on
distributions, PCV
 Governance: voting per
member (unless …) /
choice btn member- or
manager-managed
 Liquidity: transferable
(unless …)
Limited liability companies
What is convergence?
Have LLCs converged?
Limited liability companies
Neuerfasthof GmbH v. K
(German Reichsgericht 1928)
Limited liability companies
By notarized act, K
A. No. K’s transfer for
agrees to transfer her
registered shares is a
land to GmbH, and she
public act and binding,
receives registered
whether or not creditors
shares. M, a coactually relied.
shareholder, arranges
B. Yes. A jural act is void if
for the land to be
mortgaged (and likely
another uses it to gain an
lost). K wants to void her
“obvious disproportionate
investment and get the
advantage.”
land back.
Can she?
Limited liability companies
By notarized act, K
A. No. K’s transfer for
agrees to transfer her
registered shares is a
land to GmbH, and she
public act and binding,
receives registered
whether or not creditors
shares. M, a coactually relied.
shareholder, arranges
B. Yes. A jural act is void if
for the land to be
mortgaged (and likely
another uses it to gain an
lost). K wants to void her
“obvious disproportionate
investment and get the
advantage.”
land back.
Can she?
Limited liability companies
Is anybody liable to poor K,
who was swindled by M?
What about in the US?
Limited liability companies
What is “shareholder oppression”?
Limited liability companies
SS v. ME Corp
(Reichsgericht 1935)
Limited liability companies
AG (corporation) is owned A. Yes. MW’s shares are
as follows: MW - 52%, SS
registered and it is
- 40%, Bank - 8%. At a
public knowledge that
shareholders’ meeting,
MW has voting control.
MW (also the company
B. No. MW is disqualified
manager) proposes a
from voting, since a
shareholder resolution to
ratify all management acts
shareholder cannot
during the previous year.
vote on the substance
of his own acts.
Can MW’s interested vote
count?
Limited liability companies
AG (corporation) is owned A. Yes. MW’s shares are
as follows: MW - 52%, SS
registered and it is
- 40%, Bank - 8%. At a
public knowledge that
shareholders’ meeting,
MW has voting control.
MW (also the company
B. No. MW is disqualified
manager) proposes a
from voting, since a
shareholder resolution to
ratify all management acts
shareholder cannot
during the previous year.
vote on the substance
of his own acts.
Can MW’s interested vote
count?
Limited liability companies
Slight change in the facts. A. Yes. Unlike
partnership whose
MW transfers his AG
assets are owned
shares to GmbH (that he
jointly, GmbH is
owns with son JW). Then
separate entity.
GmbH resubmits the
B. No. The resolution is
same resolution, now to
void as against good
ratify all management
morals.
acts during the previous
C. No. Since managertwo years.
shareholders cannot
vote, managercontrolled company
Can GmbH’s vote count?
shareholder cannot.
Limited liability companies
Slight change in the facts. A. Yes. Unlike
partnership whose
MW transfers his AG
assets are owned
shares to GmbH (that he
jointly, GmbH is
owns with son JW). Then
separate entity.
GmbH resubmits the
B. No. The resolution is
same resolution, now to
void as against good
ratify all management
morals.
acts during the previous
C. No. Since managertwo years.
shareholders cannot
vote, managercontrolled company
Can GmbH’s vote count?
shareholder cannot.
Limited liability companies
The saga continues.
MW claims that SS is an
“opportunist” trying to
obstruct the business so
that MW will sell to him
cheap.
Can MW, nonetheless,
enforce his rights to set
aside the attempted
ratification?
A. Yes. The provisions
allowing shareholder
to set aside unlawful
corporate action is
not conditioned on
good morals.
B. No. A lawsuit seeking
to enforce rights out
of spite, for selfish
and extortionate
purposes is faithless
and will not stand (if
so proved).
Limited liability companies
The saga continues.
MW claims that SS is an
“opportunist” trying to
obstruct the business so
that MW will sell to him
cheap.
Can MW, nonetheless,
enforce his rights to set
aside the attempted
ratification?
A. Yes. The provisions
allowing shareholder to
set aside unlawful
corporate action is not
conditioned on good
morals.
B. No. A lawsuit seeking
to enforce rights out
of spite, for selfish
and extortionate
purposes is faithless
and will not stand (if
so proved).
Limited liability companies
What are the substantive protections for
minority shareholders?
 Per se prohibitions
 Vested rights
 Managers’ duty of loyalty and care
 Shareholder duty of faithfulness
Limited liability companies
How protective are these rights and
duties?
Limited liability companies
Shareholder v.
Corporation
(Commercial Court –
Zurich 1947)
Limited liability companies
A charter amendment
would convert bearer
shares to registered ones.
A shareholder sues to
annul, claiming that the
free transferability of
bearer shares is a vested
right.
Is the shareholder
protected against majority
abuse?
A. Yes. Vested rights
have a long history in
civilian company law.
Like debt, bearer
shares, are personal.
B. No. Conversion does
not affect right of
alienability. And there
is no vested right to
anonymity. Majority
rules!
Limited liability companies
A charter amendment
would convert bearer
shares to registered ones.
A shareholder sues to
annul, claiming that the
free transferability of
bearer shares is a vested
right.
Is the shareholder
protected against majority
abuse?
A. Yes. Vested rights
have a long history in
civilian company law.
Like debt, bearer
shares, are personal.
B. No. Conversion does
not affect right of
alienability. And
there is no vested
right to anonymity.
Majority rules!
Limited liability companies
Are corporate minority rights
enforceable?
Compare a minority shareholder
bringing an “oppression” claim in the
US and Europe.
Limited liability companies
Europe
United States
 Minority (specified %) can
 Any shareholder can bring




bring derivative suit
Limited claims against
shareholder action
(ratification / decharge)
No procedural “general
powers” (limited remedies)
“Loser pays” rule and no
contingent fees discourage
litigation
Focus on “power” violations
of board and shareholders




“oppression” claim
Claim brought directly or
derivatively, including
against majority shareholder
Procedure malleable: broad
remedial powers, including
forced buyout
Fee-shifting rare / recovery
of attorney’s fees in
derivative suit
Focus on “fiduciary
breaches” of board and
shareholders
Limited liability companies
Stock price?
Limited liability companies
Why zero?
Limited liability companies
Who is Calisto Tanzi and why is he so happy?
Limited liability companies
During th 1990s, billions of euros disappeared
from the balance sheet of Parmalat SpA. But nobody
had a clue. Then in late 2003 the world learned of
"one of the largest and most brazen corporate
financial frauds in history“ (SEC).
The company was forced to file for bankruptcy
when a Bank of America account said to hold $4.9
billion held nothing. Accusations flew. Top Parmalat
management has now admitted to having siphoned
more than $1 billion from the company over 7-8
years, at least $600 million to CEO Calisto Tanzi's
sports teams and tourism business.
Limited liability companies
What has happened to
Parmalat’s founder and
former CEO Calisto
Tanzi?
A. He (and a host of financial
institutions) have been sued
in class actions by Parmalat
shareholders (in the US).
B. He has been sued by the
Italian SEC (Consob) for
securities fraud.
C. He has been criminally
prosecuted and is under
house arrest; victimized
parties have joined the
criminal proceeding.
Limited liability companies
What has happened to
Parmalat’s founder and
former CEO Calisto
Tanzi?
A. He (and a host of financial
institutions) have been sued
in class actions by Parmalat
shareholders (in the US).
B. He has been sued by the
Italian SEC (Consob) for
securities fraud.
C. He has been criminally
prosecuted and is under
house arrest; victimized
parties have joined the
criminal proceeding.
Limited liability companies
Insurance Day (April 14, 2004)
"I AM one of the many shareholders swindled by the false communications of Parmalat. I
invested approximately e41,000 ($49,000) for 18,000 stock shares. I believed in the
company, and now I find myself with nothing. Having seen the collapse of the stock shares, I
do not know what to do. Are you able to help me? I would like to join myself with other
swindled shareholders, but I do not know who I can speak to Claudio C."
The above letter, addressed to the Italian court magistrates in Milan investigating Parmalat,
was published in the January 7 issue of Corriere della Sera. The newspaper also reported on
the very same page that a class action had just been filed in New York by US lawyers on
behalf of US stock and bond investors who placed over $1.5bn in Parmalat, seeking recovery
of their investments.
The two newspaper reports dramatically illustrate the big differences between the two legal
systems: the Italian investor does not know and is still trying to determine to whom to turn
for recovery, and the US investors already have their recovery mechanism in progress.
Parmalat, a diary product giant and Italy's eighth-largest company, filed for bankruptcy
protection just before Christmas, after it was revealed an alleged Bank of America account
held by a Cayman Islands subsidiary called Bonlat did not contain the $5bn it had claimed.
The Parmalat debacle, Europe's biggest accounting scandal, and described as "Europe's
Enron," has been growing day by day in Italy ever since that revelation, with the loss now
estimated to be $18bn.
Limited liability companies
ITALIAN CHARGES
Italian prosecutors have indicted 29 former Parmalat directors, officers, auditors, bankers
and a lawyer, as well as auditing institutions and the Bank of America, on criminal charges
relating to Parmalat's collapse. The charges include misleading the investors' market to
artificially boost the company's share price, and falsifying accounts.
Like US energy trader Enron, Parmalat had a complex network of around 250 related entities
that helped inflate published earnings. Italian prosecutors say the fraud was perpetrated by
the use of forged bank documents, inflated invoices for goods and services, and shell holding
companies in tax havens.
Parmalat officers and directors succeeded in "cooking the books" for at least a decade,
because it was family controlled. For example, Calisto Tanzi, Parmalat's indicted founder
and former chief executive, has admitted draining $620m into separate tourism businesses
run by his daughter. Mr Tanzi "treated a public company as if it were his own cash",
according to Umberto Mosetti, a corporate law professor at Siena University.
In Italy an estimated 99% of companies are family controlled. Thus, truly independent
directors are a rarity, even at Italian companies publicly listed on the Milan stock exchange,
and directors' and officers' conflicts of interest involving corporate "insider" transactions are
common.
Limited liability companies
Milan's investigative magistrates and Enrico Bondi, the court-appointed
administrator for Parmalat, have expressed little hope that much, if any, of the
missing billions of euros is recoverable. Mr Bondi has announced a restructuring
plan that hopes to rid Parmalat of the $18bn in debt by swapping it for stock.
Most of the billions of euros appear to have been swallowed by operating losses
of Parmalat's subsidiaries, which Parmalat's directors and officers fraudulently
hid for at least a decade.
But the US investors' class action alleges Parmalat's global web of deceit could
not have been constructed without the additional involvement of its banks Bank
of America, Deutsche Bank, Citigroup, JP Morgan Chase and of its auditors
Grant Thornton and Deloitte. All of these entities had directors' and officers'
liability insurance, with million or billion-dollar policy limits.
Although all of these banks and the two auditors have denied any wrongdoing,
and claim themselves to also be victims of Parmalat's fraudulent activities, their
failures to discover the fraud seem strikingly similar to the failures for which
such institutions were heavily fined in the US after the Enron collapse.
Limited liability companies
CLASS ACTION
It is extremely difficult for the more than 100,000 Italian investors who held
Parmalat's bonds to file a complaint with the magistrates investigating Parmalat
at the Palazzo di Giustizia in Milan. The civil procedure system in Italy does not
yet provide for a US-style "class action" type of proceeding, brought on behalf
of a collective group of investor shareholders or bondholders.
And in Italy contingent fee contracts between lawyer and client are forbidden by
law, and lawyers traditionally will not advance the costs of a case until
completion, as is common in the US for class-action lawsuits. So Italian lawyers
insist on their clients paying for their work and paying for the costs throughout
the entire proceedings. Another roadblock to investor recovery is the average
length of civil proceedings in Italy of at least three to four years, just to proceed
through the court of first instance, while eight to 10 years in complicated cases
is not uncommon. The appeal process only further lengthens the time within
which Italian clients must finance their case by paying all attorneys' fees and
case costs.