Tightening Corporate Governance in Austria and its impact on M&A

Chambers Client Report
2005, June 1

Two new regulations will soon hit the Austrian M&A market. The transposition of the European Directive on Takeovers (2004/25/EC) is on this year´s government agenda and promises to stimulate M&A in Austria. Moreover, corporate governance is now of central importance in the M&A world. The spectacular collapse of huge international corporations such as Enron, Parmalat and Worldcom has made it imperative for the international financial community to (re)establish confidence in listed corporations. In the US, the Sarbanes-Oxley Act was adopted as a reaction to these economic failures. The Austrian legislator is also eager to enhance credibility of the Austrian capital market. A bill has been presented that amends the Austrian Stock Corporation Act (Aktiengesetz). The goal is to strengthen confidence in the Austrian economy and thus achieve a competitive advantage for the Austrian capital market.

In line with international developments, the Austrian legislator is tightening up the responsibilities of the supervisory board (Aufsichtsrat) and of the annual auditor of the Austrian (two-tier structured) stock corporation (Aktiengesellschaft). In addition, the statutory liability of members of the managing board (Vorstand) and the supervisory board is to be increased to cover situations where inaccurate financial information is conveyed. This article briefly highlights some of the important changes.

Supervisory board

An individual person shall not serve on more than 10 boards. The position of a chairman of the board shall count twice.

Since the responsibility of a supervisory board member of a listed corporation is deemed higher, the bill proposes to apply such seats twice and the position as a chairman threefold against the maximum number (10). As such, a person may chair only three supervisory boards of listed corporations.

On the other hand, to allow the efficient management of affiliated companies, up to 10 seats on supervisory boards of such affiliated companies shall not be deducted from the maximum number (10). However, a person shall never act on more than eight boards of listed corporations (no more than four in the role of a chairman).

A member of the managing board may serve on the supervisory boards of any other corporation only with the approval of "his" own supervisory board so that potential conflicts, work overload, etc can be pre-empted.

Presently, the supervisory board of a stock corporation must have an audit committee only if it is composed of more than five members. In the future, all listed corporations will also have to have an audit committee. As well as preparing the resolution on the annual financial statement and the distribution of profits, the audit committee shall assist the supervisory board when submitting its proposal to the general meeting on the appointment of the annual auditor.

Within three years following the termination of his service (the cooling down period), no former member of the management board or other executive of the company shall be the chairman of the audit committee; thereby preventing him from being in a position to examine his prior business operations.

All (significant) contracts entered into between an individual member of the supervisory board and the corporation shall require the prior approval of the whole supervisory board.

Annual auditor

The grounds for disqualification of an annual auditor shall be extended. In particular, the (direct or indirect) ownership of even a small fraction of shares of the audited company shall disqualify the auditor. He shall be excluded if he became involved in management tasks of the corporation or in the selection of legal representatives or financial officers of the corporation, or if he rendered certain financial services to the corporation that have a bearing on the annual statement of accounts.

Currently the law provides for "external rotation" after six years for the auditor (accounting firm) of any corporation subject to an annual audit. The bill, however, will subject only "large" corporations (in the meaning of Austrian accounting law) and listed corporations to rotation and, in line with the US Sarbanes-Oxley, modify rotation to "internal" rotation (so that only the personnel involved in the audit must change, not the audit firm itself).

Stepping up board members´ personal liability

By way of amending the Austrian Stock Exchange Act (BörseG), a listed corporation issuing securities shall be liable for damages caused by inaccurate financial information given to (potential) investors who, in reliance upon such statement, have engaged, or refrained from engaging, in a transaction on securities. If the wrong information is caused by gross negligence of a member of the managing board or the supervisory board, he shall be personally liable for such misrepresentation. It has yet to be decided whether such personal liability shall be limited to a specific amount.

To conclude, the pending bill will further enhance the position of Austrian corporations in the context of takeovers, private-equity projects and similar transactions. Moreover, by May 20, 2006, the European Directive on Takeovers must be implemented into national law. This too will foster the goal of a deep and liquid capital market in Austria.
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