1. Group Interest in Austria Thomas Bachner, Vienna, Austria

2. An ambiguous question to start with © Thomas Bachner 2015Slide 2 May management of sub take measures which are in the interest of the group (but not in those of the subsidiary)?  “not in the interest of the subsidiary” may be read as including the situation where the subsidiary is merely indifferent  example of a recent cash pooling agreement in Austria  cash-rich subsidiary - gets the same interest rate as for term deposit with a bank - has a direct claim for repayment against the group parent - receives sufficient information on liquidity within group  No problem!

3. Let’s be clear: the actual question is… © Thomas Bachner 2015Slide 3 May management of sub take measures which are in the interest of the group but detrimental to the subsidiary?  group interest (if recognised) = licence to harm the subsidiary = sacrifice for the “greater good”  ultimately, who stands to benefit?  technically: residual claimants in control of the economic surplus generated within the group  to put it plainly: the beneficial owners of the shares in the parent company  Beware of anthropomorphic idealisations of legal entities, let alone “the group” – only humans have genuine interests!

4. On this basis the answer for Austria is … © Thomas Bachner 2015Slide 4 No! The management of a subsidiary may not take measures that are detrimental to the subsidiary, even though such measures might be called “in the interest of the group”.

5. The central argument © Thomas Bachner 2015Slide 5 In the absence of specific exemptions provided by the legislator, any recognition of a “group interest” would violate general principles of company law:  equal treatment of shareholders  duty of loyalty  of the majority shareholder vis-à-vis the company!  capital maintenance  catches even wholly-owned subsidiaries

6. Many of the questions fall by the wayside © Thomas Bachner 2015Slide 6  NO differentiation between private and public companies  identical capital maintenance rules in Austria  NO differentiation between wholly-owned subsidiaries and subsidiaries with minority shareholders  capital maintenance is the ultimate obstacle  NO duty for the management of the subsidiary to obey harmful (i.e. unlawful) instructions from the parent  Generally, Austrian law distinguishes between private companies (where the management must follow lawful instructions given by the general meeting) and public companies (where the management leads the company under its own responsibility and the general meeting has no power to issue instructions on its own initiative).

7. Another unhelpful problem definition © Thomas Bachner 2015Slide 7 Is recognition of the group interest mandatory or may it be introduced in the articles?  why “mandatory”?  not a pertinent terminology in this context ►slide 8  why “articles”?  incomplete, as there may be a relevant alternative ►slide 9  misses the most important aspect: minority protection ►slide 10

8. A group is based on domination/control © Thomas Bachner 2015Slide 8  No doctrine of group interest can be “mandatory” in the sense that the parent company is forced to apply it.  Every decision to invoke a group interest is a business decision by the parent company within the boundaries set by the law.  The “mandatory”  “default” dichotomy relates to the context of private/party autonomy.  The nature of a group excludes any independent free will on the part of a subsidiary controlled by a parent company.  Reliance on the group interest is best understood as  an option on the part of the parent company  a defence on the part of the management of the subsidiary to escape liability vis-à-vis its own company

9. The better way to ask is … © Thomas Bachner 2015Slide 9 Does the (unilateral) activation of the group interest by the parent company presuppose any particular ex-ante formality on the part of the subsidiary?  incorporation of the “status of dependence” in the constitution (~ “articles”) of the subsidiary OR  conclusion of a formal “domination agreement” (Beherrschungsvertrag) between parent & subsidiary  common element: sanction (approval) given by the general meeting of the subsidiary

10. “Quasi-party autonomy” of the subsidiary? © Thomas Bachner 2015Slide 10  at first sight: shareholder resolution as expression of an autonomous will on the part of the subsidiary  However, the outcome of the general meeting is a foregone conclusion, if the parent company controls the requisite (qualified) majority of the shares/votes.  real purpose: shareholder resolution as vehicle for specific instruments of minority protection  pre-meeting information  (possibly) involvement of independent experts  (possibly) judicial remedies for dissenting shareholders

11. Agreement-based groups in Austria © Thomas Bachner 2015Slide 11  no explicit basis in company legislation  previously recognised in tax legislation  now obsolete, group taxation privilege no longer requires it  implicit recognition in company law  based on historic understanding of the legislator  majority opinion, but disputed by some academic writers  in any case: NO authorisation of harm to the subsidiary  thus the majority opinion: capital maintenance prevails  minority critique: What’s the point of having a domination agreement, if it cannot achieve a more profound integration of the group than is permitted under the general law anyway?

12. The devil is in the detail © Thomas Bachner 2015Slide 12  absence of protective measures in the legislation: reasoning by way of analogy from other areas (e.g. mergers) – fraught with uncertainty!  protection of minority shareholders  dividend guarantee by the parent company to minority shareholders of the subsidiary as necessary part of the domination agreement (?)  exit right for minority shareholders of the subsidiary (?)  protection of creditors  duty of the parent company to absorb losses of the subsidiary as necessary part of the domination agreement (?)