Limited liability companies

1. 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

2. Limited liability companies What is a limited liability company – in the US and Mexico? What are the issues?

3. 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

4. Limited liability companies What is convergence? Have LLCs converged?

5. Limited liability companies Neuerfasthof GmbH v. K (German Reichsgericht 1928)

6. 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

7. 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

8. Limited liability companies Is anybody liable to poor K, who was swindled by M? What about in the US?

9. Limited liability companies What is “shareholder oppression”?

10. Limited liability companies SS v. ME Corp (Reichsgericht 1935)

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Limited liability companies How protective are these rights and duties?

19. Limited liability companies Shareholder v. Corporation (Commercial Court – Zurich 1947)

20. 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

21. 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

22. Limited liability companies Are corporate minority rights enforceable? Compare a minority shareholder bringing an “oppression” claim in the US and Europe.

23. 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

24. Limited liability companies Stock price?

25. Limited liability companies Why zero?

26. Limited liability companies Who is Calisto Tanzi and why is he so happy?

27. 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.

28. 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

29. 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

30. 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.

31. 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.

32. 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.

33. 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.