- Posted by jbehrendt on April 27, 2009
After having completed nearly all workstreams in order to be in time for the April (now rather beginning of May) board decision, one of the most relevant tasks remain open - the creation of the new articles of association, and the the carve-out contracts for the parent companies. Since both carve-outs are in effect splitting each of the two companies into two parts, these contracts need not only very careful consideration but a lot of attachments, the carve-out documentation: Carve-out balance sheets, carve-out lists of employees, a complete list of all assets and liabilities being transferred, a list of all contracts with third parties being moved to the new company, etc.
One special area of interest in these contracts is the reflection of the rights of both parent companies, and of their shareholders, in the new company, So far, shareholders of both companies were able to directly control operations in the retail business in their respective company more or less directly, by using their legal and statutory rights in the supervisory board, and ultimately through the general assembly. Most influence they could exercise through special statutory rights assigned to the supervisory board, which allowed them to directly vote on the yearly budget, certain investment decisions, and all measures that were intended to change major elements of the legal structure, or of the business model employed.
In the new structure, most of these rights would disappear if no counter-measures are installed in the new articles of association. Instead of deciding about measures related to operations, the supervisory boards are now only controlling a participation in a joint venture but not its operations. Moreover, one of them will even have a show below 50%. Therefore, the shareholders of the two parent companies have much less to say about the businesses carved out then before, making this issue a hot topic when it comes to voting for the carve-outs in the general assembly meetings of the two parent companies.
In order to properly consider possible concerns of the shareholders, the following issues need to be handled when preparing the carve-out contracts, and the articles of association for the new company:
- Will the new company (which will be a limited company) have a supervisory board as well?
- Will either the supervisory board of the new company, or its general assembly, have similar rights to the current rights of the supervisory boards in the parent companies?
- Who will represent the parent companies (and its shareholders) in the general assembly of the new company? In case these are members of the executive board of the parent companies, how can it be ensured they vote according to the interests of the shareholders of the parent companies in individual issues up for voting in the new company?
- How can the minority interests of the shareholders of the parent company getting a share below 50% in the new company be maintained - and which interests should be maintained at all?
- Are there any other instruments or committees that could be established for allowing shareholders of the parent companies a more direct access to information regarding daily operations?
A second problem area is related to dividends. In the "old" structure, shareholders had direct access to profits and cash from the retail business, and they could within the legal framework decide about the share of profits to be paid out as dividends to them. Again, two questions related to a less direct control in the new structure are to be addressed:
- Who decides about profit distribution in the new company, and how can the - sometimes different - interests of the shareholders of the two parent companies be reflected in these decisions?
- How will the dividends paid out by the new company to their parent companies be considered in their financial statements, considering that different accounting treatments are possible? If, for example, the company with the smaller share will record the participation in the new company at equity (and not consolidate it), will there be a one-year delay until a dividend for a certain business year of the new company appears as income in their own financial statements?
Not all these questions can - or should - be solved by adjustments of the articles of association, and the carve-out contracts. Therefore, once the carve-outs are finally approved by the board, the most risky phase of the project starts - the "decision phase" in which the support of the shareholders, or at least most relevant shareholder groups, of the parent companies have to be convinced that the carve-outs are not only increasing operational efficiency and competitiveness but that they are well-balanced considering the rights and direct interests of both parent compaines.