In an M&A dispute, can you stop the target's subsidiaries from taking measures that threaten to dissipate their assets, thus de-evaluating the parent company?
The underlying dispute arose after a Brazilian investment company contracted to acquire 100% of the shares in one of the largest pulp producers in that country. After 49,41% of the shares had been transferred to the buyer, the seller stalled ("torpedoed") the transfer of the second tranche of the shares to the buyer, prompting the buyer to initiate ICC arbitration proceedings in Brazil against the seller and the target company.
Despite the ongoing dispute and contractual requirements to refrain from undertaking any measures outside of the ordinary course of business, the seller – as, then, majority shareholder – pushed a resolution through, instructing the Austrian subsidiaries of the Brazilian pulp producer to issue bonds in the range of USD 300 to 500 million.
The buyer had already initiated injunctive proceedings in Brazil and Singapore (the bonds were initially to have been issued in Singapore). Upon application of the buyer, the Austrian court of first instance issued an interim injunction against the Austrian subsidiaries and their managing directors, in essence prohibiting them from issuing the bonds and from taking preparatory measures.
Upon appeal, the court of second instance quashed the first instance decision and dismissed the application. It – somewhat surprisingly – held that the Austrian courts did not have international jurisdiction to provide injunctive relief to secure the outcome of proceedings that would not be enforceable in Austria. The Supreme Court corrected the court of second instance's judgment, pointing out that the award in the ICC arbitration proceedings against the seller and the target is enforceable in Austria pursuant to the New York Convention, to which Austria is a signatory.
Of significant note, the Austrian Supreme Court took the opportunity to issue ground-breaking case law on whether preliminary injunctive measures can be issued against third parties who are parties to neither the underlying disputes nor the disputed contracts, but have a corporate connection to those parties.
The New Case Law
In the case at hand, the Austrian subsidiaries and their managing directors could not be joined in the arbitration proceedings in Brazil because they were not parties to the Share Purchase Agreement, and consequently not subject to the agreement's arbitration clause. Correspondingly, no interim injunctions issued by the ICC arbitral panel could be enforced against these Austrian entities and directors.
The central question here was, therefore, whether the Austrian courts would protect the buyer from measures undertaken by these Austrian subsidiaries and directors – at the seller's behest – that threatened to devalue the target.
Under settled case law of the Austrian Supreme Court, interim injunctions may not, in general, be issued against third parties who are not parties to the underlying dispute or the disputed contracts. In the case at hand, the subsidiaries and their managing directors were such third parties.
This longstanding, general principle serves to protect third parties from being embroiled in someone else's dispute and to prevent their rights being impaired by way of interim injunctions that are intended to secure claims existing against someone else. Correspondingly, the only cases in which interim injunctions may be issued against parties not involved in the underlying dispute are where such third party only has obligations to (and not rights against) the defendant in the dispute. In such cases, the third party can be enjoined to stop its contractual obligations to the defendant.
However, in a 2018 decision (6 Ob 38/18h), previously reported by KNOETZL the Austrian Supreme Court established that interim injunctions may be issued against the managing director of a company to secure a plaintiff's claims against the company, if such injunction is necessary to strengthen the effect of the injunction against the company and to effectively secure the enforceability of a judgment in the main proceedings against the company.
In this new, groundbreaking decision of 29 August 2019, the Supreme Court extends the boundaries even further: If, as is the case here, an injunction against the target – i.e. the defendant in the main proceedings – would be undermined by the (100%) direct and indirect subsidiaries taking the challenged measures, effective parallel protection must apply.
In effect, under this new rule, the Supreme Court allows preliminary injunctive relief against fully controlled subsidiaries of the defendant, if this is necessary to secure the plaintiff's claims against the parent company.
This is a very welcome development that should work to protect buyers in M&A disputes from the target being denuded during an ongoing dispute and from being left, if they prevail, with the right to an empty shell at newly-disproportionate and not bargained-for cost. To what extent this development will find application in other contexts remains to be seen.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.