Limited liability companies
This presentation is the property of its rightful owner.
Sponsored Links
1 / 33

Limited liability companies PowerPoint PPT Presentation


  • 141 Views
  • Uploaded on
  • Presentation posted in: General

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.

Download Presentation

Limited liability companies

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


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 companies1

Limited liability companies

What is a limited liability company – in the US and Mexico?

What are the issues?


Limited liability companies2

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


Limited liability companies3

Limited liability companies

What is convergence?

Have LLCs converged?


Limited liability companies4

Limited liability companies

Neuerfasthof GmbH v. K

(German Reichsgericht 1928)


Limited liability companies5

By notarized act, K agrees to transfer her land to GmbH, and she receives registered shares. M, a co-shareholder, arranges for the land to be mortgaged (and likely lost). K wants to void her investment and get the land back.

Can she?

A.No. K’s transfer for registered shares is a public act and binding, whether or not creditors actually relied.

B.Yes. A jural act is void if another uses it to gain an “obvious disproportionate advantage.”

Limited liability companies


Limited liability companies6

By notarized act, K agrees to transfer her land to GmbH, and she receives registered shares. M, a co-shareholder, arranges for the land to be mortgaged (and likely lost). K wants to void her investment and get the land back.

Can she?

A.No. K’s transfer for registered shares is a public act and binding, whether or not creditors actually relied.

B.Yes. A jural act is void if another uses it to gain an “obvious disproportionate advantage.”

Limited liability companies


Limited liability companies7

Limited liability companies

Is anybody liable to poor K,

who was swindled by M?

What about in the US?


Limited liability companies8

Limited liability companies

What is “shareholder oppression”?


Limited liability companies9

Limited liability companies

SS v. ME Corp

(Reichsgericht 1935)


Limited liability companies10

AG (corporation) is owned as follows: MW - 52%, SS - 40%, Bank - 8%. At a shareholders’ meeting, MW (also the company manager) proposes a shareholder resolution to ratify all management acts during the previous year.

Can MW’s interested vote count?

A.Yes. MW’s shares are registered and it is public knowledge that MW has voting control.

B.No. MW is disqualified from voting, since a shareholder cannot vote on the substance of his own acts.

Limited liability companies


Limited liability companies11

AG (corporation) is owned as follows: MW - 52%, SS - 40%, Bank - 8%. At a shareholders’ meeting, MW (also the company manager) proposes a shareholder resolution to ratify all management acts during the previous year.

Can MW’s interested vote count?

A.Yes. MW’s shares are registered and it is public knowledge that MW has voting control.

B.No. MW is disqualified from voting, since a shareholder cannot vote on the substance of his own acts.

Limited liability companies


Limited liability companies12

Slight change in the facts. MW transfers his AG shares to GmbH (that he owns with son JW). Then GmbH resubmits the same resolution, now to ratify all management acts during the previous two years.

Can GmbH’s vote count?

A.Yes. Unlike partnership whose assets are owned jointly, GmbH is separate entity.

B.No. The resolution is void as against good morals.

C.No. Since manager- shareholders cannot vote, manager- controlled company shareholder cannot.

Limited liability companies


Limited liability companies13

Slight change in the facts. MW transfers his AG shares to GmbH (that he owns with son JW). Then GmbH resubmits the same resolution, now to ratify all management acts during the previous two years.

Can GmbH’s vote count?

A.Yes. Unlike partnership whose assets are owned jointly, GmbH is separate entity.

B.No. The resolution is void as against good morals.

C.No. Since manager- shareholders cannot vote, manager- controlled company shareholder cannot.

Limited liability companies


Limited liability companies14

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


Limited liability companies15

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


Limited liability companies16

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 companies17

Limited liability companies

How protective are these rights and duties?


Limited liability companies18

Limited liability companies

Shareholder v.

Corporation

(Commercial Court –

Zurich 1947)


Limited liability companies19

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


Limited liability companies20

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


Limited liability companies21

Limited liability companies

Are corporate minority rights enforceable?

Compare a minority shareholder bringing an “oppression” claim in the US and Europe.


Limited liability companies22

Europe

Minority (specified %) can 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

United States

Any shareholder can bring “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


Limited liability companies23

Limited liability companies

Stock price?


Limited liability companies24

Limited liability companies

Why zero?


Limited liability companies25

Limited liability companies

Who is Calisto Tanzi and why is he so happy?


Limited liability companies26

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 companies27

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


Limited liability companies28

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


Limited liability companies29

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 companies30

Limited liability companies

ITALIAN CHARGESItalian 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 companies31

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 companies32

Limited liability companies

CLASS ACTIONIt 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.


  • Login