What Are the Most Important Legal Protections for Shareholders and Creditors

Common shareholders are always shareholders of the company, and if the company can make a profit, common shareholders benefit. The liquidation preference described above makes sense. Shareholders take more risk because they receive almost nothing if the company goes bankrupt, but they also have greater reward potential by engaging in stock price appreciation if the company succeeds. In contrast, preferred shares are generally subject to fewer price fluctuations. Two recent bankruptcy cases serve as examples of the different approaches a company can take against activists. In PG&E Chapter 11 cases, where a proxy dispute was threatened over the board`s refreshment process, the company reached an agreement with certain shareholders that eliminated the need for proxy competition or judicial intervention. See In re PG&E, Case No. 19-30088-DM, (Bankr. N.D. Cal.

29 Jan. 2019). This maneuver is sometimes referred to as a “flip-in poison pill.” By being able to buy more shares at a lower price, investors get instant profits and, more importantly, dilute the shares of the competitor, whose redemption attempt is now more difficult and costly. There are many techniques like these that companies can use to defend themselves against a hostile takeover. This indicates limits to what creditors could achieve in practice by working with sovereign borrowers or other public sector borrowers. Exposure that could challenge a sovereign issuer`s public policy is problematic and the likelihood of success may not be high. However, particularly given the increasing emphasis on integrating ESG factors into investment decisions, sovereigns are also being screened for environmental and social risk factors that may pose long-term risks to credit quality and debt servicing. This can put pressure on credit ratings and borrowing costs, and sovereign investors should find ways to communicate their ESG and other financial concerns to the sovereign and its intermediaries. In most cases, these plans are intended to give the corporation`s board of directors the power to protect the interests of shareholders in the event of an attempt to acquire the corporation by an outside person. A corporation will have a shareholder rights regime that can be exercised if another person or corporation acquires a certain percentage of the outstanding shares to prevent a hostile takeover. 4These barriers and the different preferences of creditors and shareholders are examined in an empirical study by Keswani, Tran and Volpin of Cass Business School, University of London: Institutional Debt Holdings and Governance, European Corporate Governance Institute Working Paper Series, June 2019.

ecgi.global/sites/default/files/working_papers/documents/finalkeswanitranvolpin_0.pdf (back) companies are a form of business organization created in accordance with state law. Legal ownership of the company belongs to its shareholders, which is evidenced by the shares. In general, each shareholder has the right to elect a board of directors which is responsible for the overall management of the company. The Board of Directors elects the officers (President, Secretary and Treasurer) who are authorized to manage the day-to-day affairs of the corporation. Many states allow a single person to act as a sole director and occupy all offices of the corporation. The answer is almost always a resounding “no.” As a co-shareholder, you are responsible for all company debts and partners` actions, regardless of your involvement or knowledge. Membership in a partnership significantly increases the exposure of your personal assets to claims arising from your business relationship. This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Over the years, many different strategies have been developed to protect assets. Some of these plans use long-standing legal entities to carry out their intentions, while others are infamous or even illegal, encouraging a lucrative scam on the innocent and uneducated. Some of the most commonly used legal vehicles for asset protection are corporations, partnerships, and trusts.

Companies should also have plans for shareholder rights (“poison pills”) ready for adoption immediately. Rights plans set a cap on the number of shares shareholders can buy (often as low as 4.95% for distressed companies to protect valuable tax attributes). Shareholders who trigger a rights plan face significant financial consequences, as rights plans allow non-triggering shareholders to dilute triggering shareholders, sometimes by up to 90%. When the share prices of troubled companies fall, an “emergency” rights plan is often the only way to prevent opportunistic shareholders from buying controlling or quasi-controlling shares, which can destabilize companies and reduce a board`s margin of negotiation.