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MP211 Applied Company Law Supplementary Assessment 2

1. In this assessment task, you are to select either an organisation, or an element of law, and use it as an example of law in practice in a business or a company.

2. You are then required to write a clear and comprehensive 3,000-word report.

3. In the past, students have chosen famous companies, such as Apple v Samsung (their dispute with intellectual property) or the banking/finance sector (proceeds and findings of the Royal Commission into Banking, or breaches of duty of care (such as the Dreamworld tragedy).

4. This assessment task addresses Student Learning Outcomes A, B, C, D, E and F

Solution:

Volkswagen and Porsche Corporate Merger and Aqcuisition

Introduction

Mergers and acquisitions are essential in the automotive industry because they help to create large, multinational companies that can compete more effectively in the global marketplace. By combining their resources, these companies can develop new products more quickly and produce them at a lower cost than they could if they were separate entities (Christofi et al., 2019). In addition, by acquiring other companies, these multinationals can expand their market share and increase their profits. A corporate merger combines two or more businesses into one entity. This can be done for various reasons, including creating a larger and more powerful company with more excellent resources and capabilities, creating new products or services, or reducing competition. Mergers can also be controversial because they may lead to job losses and other changes in the marketplace. The benefits of M&A are clear, but they also have risks. Mergers can result in the loss of jobs, decreased competition, and increased consumer prices. They can also lead to financial instability and increased risk for investors (Nelson, 2018).

Despite these risks, M&A is an integral part of the business world. It helps companies grow, compete, and innovate. It also creates jobs and improves efficiency (Sha and Wang, 2020). Therefore, M&A should be pursued carefully but should not be avoided altogether.

Introduction to Volkswagen and Porsche

Volkswagen is a German automobile manufacturer producing passenger, commercial, and sport utility vehicles (SUVs). The company was founded in 1937 by the Nazi regime as the Volkswagenwerk AG. In 1973 it became a subsidiary of the Volkswagen Group. Porsche is a German automobile manufacturer that produces luxury sports cars and SUVs. The company was founded in 1931 by Ferdinand Porsche and has been owned by the Volkswagen Group since 1998. The German company law authorities approved the merger, but it has been controversial because of concerns about the impact on competition (Renneboog and Vansteenkiste, 2019).

Different phases of the Merger between Volkswagen and Porsche

The merger involved a series of negotiations and agreements between the two companies, culminating in a formal agreement on June 30, 2014.

The first phase of the merger was creating a holding company, Volkswagen Group Holding SE. This holding company controlled both Volkswagen and Porsche (Snow, 2018). The second phase of the merger involved the integration of Volkswagen and Porsche’s businesses. This involved combining their manufacturing plants, research laboratories, sales networks, and customer databases. The final phase of the merger was the distribution of Volkswagen shares to Porsche shareholders. This involved issuing new VW shares to Porsche shareholders and selling some of Volkswagen’s assets. The government typically scrutinizes mergers between two companies for various reasons (Brull, 2021). The first reason is to ensure that the merger will not result in a decrease in competition. The second reason is to ensure that the new company can survive and thrive in the market. In addition, the government usually reviews mergers based on several factors, including whether the merger would create a monopoly or lead to price gouging (Abdullahu and Fejza, 2020).

In some cases, the government may also require the companies to divest certain assets before the merger can go through. But, overall, the government typically treats mergers between companies favorably.

Legal Aspects of M&A

Martin Winterkorn, CEO of Volkswagen, stated that a merger between Porsche and Volkswagen is impossible due to many legal and financial considerations. The two corporations announced their intention to merge in May 2009, which sparked the alarm. The automobile manufacturer Porsche, headquartered in Stuttgart, is a 50.7% shareholder in Volkswagen. Porsche, the company that was founded by a family connected to the Pich family, which currently owns and operates Volkswagen, borrowed billions of dollars to seize control of Volkswagen (Dreher and Ernst, 2022).

Six months had passed after Porsche disclosed that it had completed its acquisition of 75% of Volkswagen’s equity when the merger was announced (King et al., 2018). The news was detrimental to hedge funds and investors who had been dumping Volkswagen shares before this announcement. The following increase in the price of Volkswagen stock caused short sellers to incur losses of $38 billion. Some individuals even took Porsche to court in the United States (Argentesi et al., 2021).

Porsche’s Financial Strategy

When 2005 rolled around, Porsche had more than three billion euros stashed away in the bank. However, due to the company’s lack of size, it could not invest in the research and development of cutting-edge technologies. New regulations mandate these technologies to reduce pollution and fuel consumption. Wendelin Wiedeking was Porsche’s CEO. He lusted for Volkswagen’s research and development capabilities, production capacity, and financial stability. He also admired Volkswagen’s financial stability (Bradford et al., 2019). In March of 2005, he initiated the first conversation on the Porsche family and the Pich family’s potential acquisition of Volkswagen. To acquire a sizeable stake in Volkswagen, Porsche’s top financial officer, Holger Harter, created a convoluted plan to accomplish this goal. This technique depended on cash-settled options, which enabled participants to sidestep the disclosure rules in Germany. As a result, the families were able to reach an agreement.

Option

The holder of an option, a sort of financial derivative, can decide whether or not to exercise or fulfill the underlying contract but is not required to do so. In this situation, Porsche was the owner of call options, which provided the company the right to buy Volkswagen shares at a future price (referred to as the “exercise”) or “strike.” Options contracts can be purchased with a low initial price, but they are only suitable for a predetermined period before expiration. If the stock’s current price is less than the option price, the owner may decide not to exercise the option and instead purchase the shares on the open market rather than exercising the option. Any money that you have already invested in the option will be forfeited (DePamphilis, 2019). If the option’s exercise price is lower than the current market price, the owner can exercise it to make a profit from the premium by purchasing the option at a lower price than the current market price.

Cash Settled Options

Options contracts listed in the United States typically involve a cash payout as the default type of settlement. However, when an option transaction is settled in cash, rather than the underlying asset being transferred, the seller of the option instead transfers the cash position linked with the option. This indicates that if the owner of an option decides not to exercise it, they will receive payment from the seller that is equivalent to the option’s intrinsic value (Hand, 2018).

Disclosure Regulations

Declaring the ownership of a significant number of shares in a publicly traded company is required by law in both the United States and Germany. This requirement applies to individuals and entities alike. This is done to provide companies with notice of potential takeover offers. According to Regulation 13D, stock ownership in the United States that is greater than 5% is required to be reported to the SEC (Vokinger et al., 2020). Under German law, all parties that possess shares or financial instruments related to voting rights must report their positions. This requirement stems from the Transparency Directive Implementation Act of 2007, which was passed in 2007. Options that can be settled with cash are exempt from this regulation. The market was aware of Porsche’s position in Volkswagen common shares, but it was unaware of Porsche’s position in cash-settled options (Bereskin et al., 2018).

The first announcement was made in 2005, and all subsequent ones since then refer to the same item. The market had no idea of the magnitude of Porsche’s indirect stake in the company. On October 26, 2008, Porsche issued a news release announcing that the firm owned 42.6% of the voting shares in Volkswagen. It was determined that payment settlement options allowed Volkswagen to indirectly hold voting shares amounting to 31.5 percent of the company’s total voting shares. Only 5.6% of Volkswagen’s voting stock was made accessible to the general public when the state of Lower Saxony purchased a 20.3% holding in the company (Zhang et al., 2018). The fact that many investors held short positions in Volkswagen shares did nothing but add to the current turmoil in the market. In October of 2008, coverage was abundant in the media regarding the issues facing the automotive industry. Many investors had already sold their VW shares in preparation for the anticipated price decline. When taking a short position, an investor can borrow shares of Firm XWY from another person. After that, they will sell the shares on the market with the expectation that the stock price will go down. Following the purchase of shares at a more affordable cost, the intention is to hand back the borrowed securities. This was the situation with Volkswagen, which was quite unfortunate for short sellers. Short sellers attempted to buy shares of Volkswagen to buy out their short positions and cover their losses. Because there were only so many Volkswagen shares available, their value skyrocketed due to the gap between demand and supply.

Porsche’s Control Strategy

Porsche needed to accomplish both of these tasks before finalizing its acquisition of Volkswagen. The first advantage was the accessibility of cash-settled option contracts, which could be bought without informing any market of the transaction. The Volkswagen Act was overturned, which was the second significant development.

The Volkswagen Act and Voting Rights

The German Stock Companies Act (also known as the “Aktiengesetz”) requires significant matters such as mergers and acquisitions to receiving approval from 75% of the shares. On the other hand, Volkswagen was exempted from this restriction because of its prime position as the manufacturer of Volkswagen and a symbol of Germany’s economic rebirth following World War II. The “Volkswagen Act” was enacted into law by the federal government of Germany in 1960 (Mueller, 2020). It was declared there that Volkswagen would take more excellent care than other firms to preserve its employees’ rights and look out for the best interests of Lower Saxony. The statute mandated that the decisions regarding the opening or closing industrial facilities receive approval from at least two-thirds (or more) of the supervisory board. More giant German corporations frequently have owner representatives make up one-half of their supervisory boards, while worker representatives make up the other half. The statute limited each shareholder’s voting power to a maximum of 20%, regardless of the percentage of ownership they held in the company. The Volkswagen Act stipulated that most shareholders had to consent before the company could combine, be acquired, or be sold (Clapp, 2021).

The German Stock Companies Act requires a shareholder participation rate of 75%. Due in significant part to the fact that the federal state of Lower Saxony owned 20.3% of Volkswagen’s voting shares, the company was protected from hostile takeovers (Brooks et al., 2018). Wiedeking and other executives at Porsche were placing their bets on the possibility that the Volkswagen Act would be overturned. The foundational principles of the European Union, which allow for the unrestricted movement of wealth worldwide, are fundamental. Every nation member of the EU has committed not to impose any limitations on the ownership of property by other nations. Golden Shares were a common form of investment throughout Europe. They confer extraordinary voting powers on the holders.

Even though they are in the minority, one shareholder can still cast a vote that could decide the outcome—on the other hand, having a “Golden Share” grants them the authority to do so. After the privatization of enterprises previously controlled by the state, it is common to practice giving the government specific voting rights in those companies. The EU Court of Justice has issued judgments against Golden Shares in multiple cases brought against the company. In March 2005, the petition was submitted for official consideration. The European Union Commission decided to challenge the Volkswagen Act in October 2004. The Court of Justice of the European Union concluded that a rule that needed shareholder permission to change corporate control and limited individual shareholders’ voting rights to 20% violated EU principles and, therefore, was invalid. In addition, the European Union Court of Justice concluded that a clause in the Volkswagen Act, which allowed the federal and state governments to each other two members of the supervisory boards provided they owned at most one share, violated EU norms. The clause in question allowed the federal and state governments to each other two members of the supervisory boards. 8 This finding, which had been widely anticipated, was observed in February 2007. Porsche was overflowing with happiness. Finally, it would be okay for Porsche to exercise all of the voting rights that come with being Volkswagen’s largest shareholder.

It is the responsibility of every member state to bring their legal systems into conformity with the rulings of the EU court. On the other hand, on May 27, 2008, the German parliament passed a Volkswagen Act that was mainly comparable to the one that the European Court of Justice had just struck down. On June 5, 2008, the European Commission commenced violating Germany’s failure to comply with the court’s directives due to Germany’s persistent disregard for the court’s authority. The Commission of the European Union ordered the German government in November 2008 to remove the 20% blocking minority from the new Volkswagen Act within two months, commencing in November of that year. On November 13, 2008, the legislature voted to ratify the revised Volkswagen Act, and on December 8, 2008, after the second Chamber approved it, the Volkswagen Act was signed into law. The new act did not guarantee that state or federal governments would be given seats on the board of directors. However, the requirement that two-thirds of the supervisory boards must be present to make decisions about production sites and that eighty percent of shares must be present to make decisions regarding mergers or sales of the company were maintained under the new statute.

Corporate Governance in a Stakeholder Economy

Legal structures have been established in stakeholder economies like Germany to balance competing interests. There should be guidelines that allow workers and managers to participate in strategic decision-making at both the organizational and operational levels. These guidelines should exist at both levels. Labor unions and works councils are the most important stakeholders when it comes to corporate governance.

Unions of Employees Large unions in Germany tend to be based more on regions and sectors than individual companies. Workers at both Porsche and Volkswagen are members of IG Metall, the world’s largest union representing metal workers. Everyone who works for Volkswagen or Porsche, from factory workers to executive-level employees, must join the union. In contrast to the United States, Germany has no such thing as a “non-union” or “unionized” company. Individual workers can sign up to become union members, but their coworkers may or may not be eligible. Only members are responsible for paying dues to the union. The primary responsibility of the union is to negotiate fair working conditions with the companies represented by the union. The union has separate contracts with several different major corporations, including Volkswagen. Whether or not they are union members, the employees who participated in the negotiations are bound by whatever agreement is reached. In specific fields of business, the possibility exists that the labor agreements made by unions could determine middle managers’ pay. These agreements do not cover the salaries of higher-ranking managers and executives in any way, shape, or form. The automotive sector is very knowledgeable about this phenomenon. Unions consult with workers’ representatives on work councils and supervisory boards and act as advocates for the employees’ interests in front of management and legislative bodies. However, they do not play any official part in the operations of the enterprises.

Works Councils

Work councils, also known as Betriebsräte, are vested with the duty of representing the employees’ day-to-day requirements in businesses with five or more workers. They do not belong to a labor union but represent the non-unionized middle and lower management at a given workplace. Each facility chooses representatives for the Works Council on a four-yearly basis. In addition to the regional works councils, a centralized works council (also known as a “Gesamtbetriebsrat”) is likely to be established by a corporation that operates in more than one location. Regarding personnel matters, management frequently makes decisions without consulting the council. Participation can be as minimal as planning, training, and shift work at the production site for staff members. It is also possible to have a significant impact, such as when an individual realizes their ideas and makes them a reality. The works council would have to give its blessing for any personnel adjustment, whether a promotion or a layoff. Bernd Osterloh was a pivotal figure in the struggle for power at Volkswagen. He was the head of the workers’ council there. At Porsche, he worked with Uwe Huck as his counterpart. Both were formerly associated with IG Metall, a consultancy agency for works councils that was established solely to provide assistance to members of labor unions.

The Supervisory Board

When a merger, acquisition, or other strategic choice is made, an additional layer of code determination that comes into play is called for, and that layer is a supervisory board. Insiders and outsiders are represented on one board of directors in American corporations, which follows the standard model used in the United States. The “monistic” (or “single-tier”) model refers to this particular organizational structure (Brueller et al., 2018). This group includes the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). The businesses in Germany utilize a dualistic structure, also known as a dual-tier, which separates the responsibilities of management and oversight. In addition, executives who run the company’s day-to-day operations are represented on the management board. These executives include the chief executive officer and the chief financial officer.

At their regular meetings, which take place at least four times a year but can sometimes be as high as ten, the management board members are overseen, controlled, and appointed by the supervisory board. In addition, the supervisory board is responsible for making decisions regarding major strategic moves such as mergers and acquisitions. Supervisory boards for publicly traded companies like Volkswagen and Porsche, with more than 2,000 employees, must have equal representation from the company’s owners and employees. If there is a deadlock, the chairman can veto two votes (Beaulieu et al., 2020). Even though it is legally required for the company’s chairman to represent the company’s owners at meetings, employees get to vote on who will serve in that role. The supervisory board members have complete discretion over the number of board members appointed. The Volkswagen Group’s supervision board consisted of 20 people, whereas Porsche SE’s board only had 12 members. In addition, employees can propose two to three individuals the company does not currently employ to serve as their representatives on these boards. Typically, these individuals are union representatives. This was a significant turning point in the conflict over the takeover.

Conclusion

The Porsche and Volkswagen merger is a historic event that will have a lasting impact on the automotive industry. The two companies are leaders in their respective markets and will have a more substantial presence in many key regions worldwide.

The merger will create a company with a global reach and significantly increased resources. As a result, the combined company will be able to better compete against larger rivals, such as Toyota and General Motors, and offer customers more innovative products.

Porsche and Volkswagen have a long history of collaboration, dating back to the 1930s. Over the years, the two companies have developed several successful joint ventures, including Audi and Porsche, Bentley and Volkswagen, and Bugatti and Volkswagen. The merger will create synergies between the two companies operations that will benefit consumers worldwide.

The merger is also significant for the automotive industry as a whole. It signals the beginning of a new era in which major players in the industry are consolidating their positions to compete more effectively against competitors such as Tesla Motors and Google’s self-driving car project. As a result, the merger will likely lead to higher car prices, but it will also likely result in improved quality and innovation across the board.

References

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  2. Argentesi, E., Buccirossi, P., Calvano, E., Duso, T., Marrazzo, A. and Nava, S., 2021. Merger policy in digital markets: an ex post assessment. Journal of Competition Law & Economics17(1), pp.95-140.
  3. Beaulieu, N.D., Dafny, L.S., Landon, B.E., Dalton, J.B., Kuye, I. and McWilliams, J.M., 2020. Changes in quality of care after hospital mergers and acquisitions. New England Journal of Medicine382(1), pp.51-59.
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