Merger: Liability of Management Members and Experts (Article 19 of Law 4601/2019)
In a previous article, we examined the effects arising upon completion of a merger. Here, we focus on civil liability arising from acts or omissions during its preparation and implementation. A company merger is a complex process, involving increased requirements of diligence, information and documentation. The members of the management of the participating companies and the experts play a decisive role. Their decisions, omissions and reports affect the course of the transformation and the interests of shareholders or partners. For this reason, the law establishes a specific framework of civil liability. This framework is activated where duties assigned by law to the persons involved are breached.
Purpose
The provision is connected with the need for effective protection of shareholders and partners during the merger procedure. In preparing and completing the merger, the persons involved perform duties of substantial economic significance. Defective performance of those duties may affect the value of a participation or the terms of the transformation. For this reason, the law recognises a right to compensation against the persons at fault in favour of those adversely affected.
This need becomes more pronounced after completion of the merger. The absorbed company ceases to exist as an independent legal entity, without entering into liquidation. Accordingly, the pursuit of liability for breaches of the procedure cannot depend on its continued existence. The claim for compensation is brought directly against the persons who acted improperly or failed to take critical action.
At the same time, the provision serves the stability of corporate transformations and transactional security. Instead of overturning a completed merger, compensation is preferred as the means of protecting those adversely affected. This approach limits transactional risk, without weakening the liability of management members and experts. On the contrary, it makes the preventive documentation of every material choice critical.
Conditions
Liability may be established against management members and experts. It concerns persons who participate substantively in the preparation, assessment or implementation of the merger. The liability is tortious in nature. An unlawful act or omission, fault, damage and a causal link are required.
As regards the act or omission, it is examined whether a specific duty of care, information or control was breached. As regards the damage, it is examined whether the shareholders or partners suffered direct financial loss.
Culpable Act or Omission
As regards management members, the breach may concern any critical stage of the merger. Indicatively, it covers negotiations, due diligence, the preparation of documents and the provision of information to partners. It also covers the proper completion of procedural acts and compliance with the required publicity formalities.
Particular attention must be paid to the documentation of decisions. The absence of an adequate file makes it more difficult for members of management to defend themselves, particularly where the exchange ratio or the information provided is challenged.
As regards experts, liability is connected with the defective performance of their assignment. In particular, it concerns the examination of the draft, the preparation of the report and the valuation of assets. The assessment of whether the exchange ratio is fair and reasonable is also critical. Departure from professional standards, inadequate review of data or unsupported conclusions may establish liability.
Fault
Liability may arise even from slight negligence. Fault is assessed on the basis of the information available to each person at the relevant time. Account is taken of the diligence exercised, their specific capacity and the circumstances under which the merger was implemented.
For management and advisers, it is critical that there be a clear decision-making trail. Without such a trail, any subsequent challenge may acquire increased evidentiary weight.
Because the liability is tortious in nature, the burden of proof lies, in principle, with the claimant shareholders or partners. They must prove the breach, fault, damage and causal link.
The General Meeting or meeting of partners may have approved the merger. Such approval does not release management members or experts from liability. The prior knowledge, consent or participation in management of the person adversely affected is taken into account on a case-by-case basis.
Damage and Causal Link
The establishment of liability requires actual financial loss. A formal deviation from the statutory procedure is not sufficient where it has not caused proven damage. The damage must be causally connected with the unlawful and culpable conduct. The shareholders or partners must demonstrate that their loss is a direct consequence of the specific breach.
As a general rule, compensation may be claimed only for direct loss suffered by the shareholders or partners themselves. Damage merely reflected in the company’s assets is not sufficient.
In a merger, such direct loss may arise in relation to the participation they acquire in the resulting company. A typical example is the incorrect determination of the exchange ratio. In that case, the persons adversely affected may receive participation rights of a lower value than those to which they were entitled.
Compensation is intended to cover the difference in value. It nevertheless presupposes proof that the defect attributable to the persons responsible led to the specific financial loss.
The liability is mandatory in nature. It therefore cannot be restricted in advance through exemption agreements. It also operates in addition to other liability regimes provided for by the legal order.
Procedural Issues
Jurisdiction
As regards jurisdiction, the relevant provision differs from the general rule governing disputes under the law. Subject-matter jurisdiction is determined according to the general procedural provisions.
At the same time, recourse to arbitration or mediation is not excluded where the relevant conditions are satisfied.
For territorial jurisdiction, the registered office of any company that participated in the merger is taken into account. The choice has practical significance in terms of cost, time and evidentiary strategy. For advisers and management, the issue should be assessed before litigation begins.
Active and Passive Standing
Shareholders or partners who suffered damage as a result of the merger have the right to bring an action.
The shareholders or partners of the absorbed company may bring an action against its management members or the expert appointed for it. A prerequisite is that they held that status at the time the merger was completed.
Correspondingly, the shareholders or partners of the absorbing company may bring an action against its own management members or experts.
Defendants may include those who held the capacity of management member during the preparation and implementation of the merger. The experts who participated in the procedure may also be defendants.
Where several persons contributed to the harmful conduct, their liability may be joint and several. The practical consequence is significant: each jointly liable person may be required to cover the entirety of the loss.
The Institution of the Special Representative
The institution of the special representative is of particular interest. Through this mechanism, claims for compensation may be pursued through a person appointed by the court.
An application by the interested shareholders or partners and a prima facie showing of the claim are required. The appointment is made under the procedure of voluntary jurisdiction.
The institution facilitates the consolidation of similar claims and limits the fragmentation of litigation.
Following the appointment, the beneficiaries cease to have standing to pursue the relevant claims individually. The appointment decision is published in a manner that allows the other shareholders or partners to be informed.
The special representative invites them to declare whether they wish to be represented by them. The period for making such a declaration is six months. During this period, the limitation period for the claims of the interested persons is suspended.
The special representative brings the claims in their own name but on behalf of those represented. They are required to manage the case with due care and are liable for any fault.
Following completion of the proceedings, they are required to account to those represented. Compensation is distributed in proportion to each beneficiary’s participation percentage. Their remuneration is determined in advance and is borne proportionately by those represented.
Liability in a merger is not a theoretical possibility. It operates as a mechanism for controlling the quality of decisions, valuations and information.
For management members, the timely organisation of the file, the documentation of choices and strict compliance with the procedure are critical. For experts, independence, methodological adequacy and clarity of the report are critical.
Departure from statutory obligations may lead to claims for compensation, either individually or through a special representative. It may also create costs, delays and serious challenges to the transformation.
The preparation of a merger must therefore be approached as a process involving responsibility and not as a formal sequence of documents.
In the next article of this series, we will examine the issue of the invalidity of a merger and its limits.
Managing Partner
Koumentakis and Associates Law Firm
Note: This article forms part of a broader series published by our Law Firm on corporate transformations. In this series, we attempt an article-by-article analysis—always from a business-oriented perspective—of the principal relevant legislation, Law 4601/2019.