Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

M&A (General)

Board Ready: Shareholder Activism, Corporate Governance and the Hunt for Long-Term Value

Editor’s Note: This article was authored by Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz.

 

Board Ready: Shareholder Activism, Corporate Governance and
the Hunt for Long-Term Value

* A modified version of this article was recently featured in a publication for public company directors, CEOs and general counsels.

As the spotlight on boards, management teams, corporate performance and governance intensifies, as articles like the Bloomberg and Fortune profiles of Elliott Management (“The World’s Most Feared Investor—Why the World’s CEOs Fear Paul Singer” and “Whatever It Takes to Win—How Paul Singer’s Hedge Fund Always Wins”) and other activist investors become required reading in every boardroom and C-suite, and as activist campaigns against successful companies of all sizes increase worldwide, below are fifteen themes expected to impact boardroom, CEO and investor behavior and decision-making in the coming years.

  1. The CEO, the Board and the Strategy.
  2. Activism Preparedness Grows Up.
  3. Companies Standing Up, Playing Offense and Showing Conviction without Capitulation. 
  4. Activists Standing Down. 
  5. “Shock, Awe & Ambush” Meets the Power of Behind the Scenes Persuasion. 
  6. Better Index IR and Not Taking the Passives (or Other Investors) for Granted. 
  7. Quarterly Earnings Rituals.
  8. Embracing the New Paradigm and Long-Termism.
  9. Convergence on ESG and Sustainability. 
  10. Dealing with the Proxy Advisory Firms.
  11. Board Culture, Corporate Culture and Board Quality. 
  12. Capital Allocation. 
  13. Directors as Investor Relation Officers. 
  14. The General Counsel as Investor Relations Officer. 
  15. The Nature of Corporate Governance.

1. The CEO, the Board and the Strategy.

  • The relationship of the CEO with fellow directors will remain the most important, overriding corporate relationship a CEO has.
  • Strengthening that relationship, addressing disconnects openly and directly, and ensuring internal clarity and alignment between the board and management should be prioritized before an activist, takeover threat or crisis emerges.
  • Boards of directors will become more actively involved with management in developing, adjusting and communicating the company’s long-term strategy and operational objectives and anticipating threats to progress.

2. Activism Preparedness Grows Up.

  • Instead of a check-the-box housekeeping exercise, companies will pursue real readiness for activist attacks.
  • Activism preparedness will be integrated into crisis preparedness, strategic planning and board governance.
  • This will include periodic updates for the board by expert advisors working with management; non-generic break glass plans; a philosophy of continuous improvement and rejecting complacency; training, simulations and education informed by live activism experiences; expert review of bylaws and governance guidelines; and cultivating third-party advocates early.
  • Most importantly, deep self-reflection and self-help will identify opportunities for strengthening the company and increasing sustainable value for all stakeholders, mitigating potential vulnerabilities, getting ahead of investor concerns and ensuring that the company’s strategy and governance is well-articulated, updated and understood.
  • The CEO and other directors will be prepared to deal with direct takeover and activist approaches and handle requests by institutional investors and activists to meet directly with management and independent directors.

3. Companies Standing Up, Playing Offense and Showing Conviction without Capitulation. 

  • Well-advised companies will take a less reactive posture to activist attacks, find opportunities to control the narrative, strengthen their positioning and leverage with key investors and stakeholders and understand investor views beyond the activist.
  • Directors and management will maintain their composure and credibility in the face of an activist assault and not get distracted or demoralized.
  • Companies will proactively take action and accelerate previously planned initiatives with wide support to demonstrate responsiveness to investor concerns without acceding to an activists’ more destructive or short-sighted demands.
  • If a legitimate problem is identified, consider whether the company has a different (better) approach than the one proposed by the activist, and if the activist’s idea is a good one, co-opt it.
  • Companies with iconic brands and a track record of established trust will protect – and appropriately leverage – their brands in an activist situation.
  • Negotiating and engaging with an activist from a position of strength rather than fear or weakness will become more common.

4. Activists Standing Down.

  • Through deft handling and prudent advice, more activist situations will be defused and never become public battles, including where the activist concludes they would be better served by moving on to another target.
  • Companies who move quickly to pursue the right initiatives, maintain alignment within the boardroom and engage in the right way with key shareholders and constituencies will achieve beneficial outcomes, gain the confidence of investors beyond the activist and, where dealmaking with an activist is needed, find common ground or obtain favorable settlement terms.

5. “Shock, Awe & Ambush” Meets the Power of Behind the Scenes Persuasion.

  • Until activism evolves, boards and management teams will continue to grapple with activists who mislead, grandstand, goad, work the media, threaten and bully to get their way.
  • But major investors will increasingly reject such irresponsible engagement and more interesting flavors of activism will emerge, led by self-confident and secure funds who value thoughtful, private discussions as to how best to create medium-to-long-term value, respect that boards and management teams may have superior information and expertise and valid reasons for disagreeing with an activist’s solutions, and pursue collaborative, merchant banking approaches intended to assist a company in improving operations and strategies for long-term success without worrying about who gets the credit.
  • In some situations, working with the right kind of activist and showing backbone against misaligned activist funds and investors will deliver superior results.

6. Better Index IR and Not Taking the Passives (or Other Investors) for Granted.

  • BlackRock, State Street and Vanguard will continue to bring their own distinctive brands of stewardship, engagement and patient pressure to bear in the capital markets and at their portfolio companies.
  • Companies will increasingly recognize that a classical “governance roadshow” promoting a check-the-box approach to governance without a two-way dialogue is a missed opportunity to demonstrate to these funds that the company’s strategic choices, board and management priorities and substantive approach to governance deserve support from these investors.
  • More sophisticated and nuanced approaches for gaining and maintaining the confidence of all investors will emerge.
  • Engagement for engagement’s sake will fall out of favor, and targeted, thoughtful and creative approaches will carry the day.

7. Quarterly Earnings Rituals.

  • While quarterly earnings rituals will remain, for now, a fact of life in the U.S., companies and investors will explore alternatives for replacing quarterly rhythms with broader, multi-year frameworks for value creation and publishing new metrics over timeframes that align with business, end market and operational realities. Giving quarterly guidance will fall out of favor and be increasingly criticized.
  • In the U.K. and other jurisdictions that permit flexibility, more companies will move towards non-quarterly cadences for reporting and issuing guidance and seek to attract more long-term oriented investor bases by publishing long-term metrics.
  • In all markets, companies will increasingly discuss near-term results in the context of long-term strategy and objectives, more management time will be spent discussing progress towards important operational and financial goals that will take time to achieve and sell-side analysts will have to adapt to a more long-term oriented landscape or find their services to be in less demand.

8. Embracing the New Paradigm and Long-Termism.

  • The value chain for alignment towards the long-term across public companies, asset managers, asset owners and ultimate beneficiaries (long-term savers and retirees) – each with their own time horizons, goals and incentives – is now recognized as broken.
  • Organizations and initiatives like Focusing Capital on the Long Term, the Coalition for Inclusive Capitalism, the World Economic Forum’s New Paradigm and Roadmap for an Implicit Corporate Governance Partnership to Achieve Sustainable Long-Term Investment and Growth, the Conference Board, the Strategic Investor Initiative, the Aspen Institute’s Business & Society Program and Long-Term Strategy Group and others will increasingly collaborate and perhaps consolidate their efforts to ensure lasting change in the market ecosystem occurs.
  • Additional academic and empirical evidence will be published showing the harms to GDP, national productivity and competitiveness, innovation, investor returns, wages and employment from the short-termism in our public markets.
  • Absent evidence that private sector solutions are gaining traction, legislation to promote long-term investment and regulation to mandate long-term oriented stewardship will be pursued worldwide.

9. Convergence on ESG and Sustainability.

  • Companies will increasingly own business-relevant sustainability concerns, integrate relevant corporate social responsibility issues into decision-making and enhance disclosures in appropriate ways, while resisting one-size-fits-all approaches delinked from long-term business imperatives.
  • ESG-ratings services will come under heightened pressure to improve their quality, achieve consistency with peer services, eliminate errors and proactively make corrections or retract reports and ratings.
  • Activist hedge funds will continue to experiment with ESG-themed or socially responsible flavored campaigns to attract additional assets under management, drive a wedge between companies and certain classes of ESG-aligned investors and try to counter their “bad rap” as short-term financial activists who privilege financial engineering and worship the immediate stock price.
  • Mainstream investors will increasingly try to apply and integrate ESG-focused screens and processes into investment models.

10. Dealing with the Proxy Advisory Firms.

  • While proxy advisory firms will increasingly become disintermediated, including through efforts like the U.S. Investor Stewardship Group (ISG) and increased investments by active managers and passive investors in their own governance teams and policies, proxy advisors will retain the power to hijack engagement agendas and drive media narratives.
  • More scrutiny will be brought to bear when advisory firms overreach, where special interests drive a new proxy advisory firm policy and if investors reflexively follow their recommendations.
  • Especially in contested situations, winning the support of the major proxy advisory firms is valuable, but well-advised companies will succeed in convincing investors to deviate from negative recommendations and in special cases persuading advisory firms to reverse recommendations.
  • Negative recommendations will be managed effectively without letting the proxy firm dictate what makes sense for the company.

11. Board Culture, Corporate Culture and Board Quality.

  • Leaders who promote a board culture of constructive support and engaged challenge and who foster a healthy and inclusive corporate culture will outperform.
  • Vibrant board and corporate cultures are valuable assets, sources of competitive advantage and vital to the creation and protection of long-term value.
  • Board strength, composition and practices will be heavily scrutinized, including as to director expertise, average tenure, diversity, independence, character, and integrity.
  • Nuanced evaluations of the ongoing needs of the company, the expertise, experience and contributions of existing directors, and opportunities to strengthen the current composition will be integrated into proactive board development plans designed to enable the board’s composition and practices to evolve over time.
  • Failure to evolve the board and its practices in a measured way will expose companies to opportunistic activism and takeover bids.
  • Boards and management teams who know how to navigate stress, pressure, transition and crisis will thrive.

12. Capital Allocation.

  • Investors will have more heated debates among themselves and with companies about preferred capital allocation priorities, both at individual portfolio companies and at an industry level.
  • Companies will be more willing to reinvest in the business for growth, pursue smart and transformative M&A that fits within a longer-term plan to create value and make the case for investments that will take time to bear fruit by explaining their importance, timing and progress.
  • Prudently returning capital will remain a pillar of many value creation strategies but in a more balanced way and with more public discussion of tradeoffs between dividends versus share repurchases and alternative uses.
  • Investors may not agree with choices made by companies and will disagree with each other.

13. Directors as Investor Relation Officers.

  • While management will remain the primary spokesperson for the company, companies will better prepare for director-level interactions with major shareholders and become more sophisticated in knowing when and how to involve directors – proactively or upon appropriate request – without encroaching upon management effectiveness.
  • Directors will be deployed carefully but more frequently to help foster long-term relationships with key shareholders.
  • However, directors will need to be vigilant to ensure the company speaks with one voice and guard against attempts by investors to pursue inappropriate one-off engagements and foster mixed messages.

14. The General Counsel as Investor Relations Officer.

  • The general counsel (or its designee, such as the corporate secretary or other members of the legal staff) will play an increasingly central role in investor relations functions involving directors, senior management and the governance and proxy voting teams at actively managed and passive funds alike.
  • Board and management teams will look to the general counsel to advise on shareholder requests for meetings to discuss governance, the business portfolio, capital allocation and operating strategy, and the board’s practices and priorities and to evaluate whether given demands of corporate governance activists will improve governance or be counterproductive.

15. The Nature of Corporate Governance.

  • Questions about the basic purpose of corporations, how to define and measure corporate success, the weight given to stock prices as reflecting intrinsic value, and how to balance a wider range of stakeholder interests (including employees, customers, communities, and the economy and society as a whole) beyond the investor will become less esoteric and instead become central issues for concern and focus within corporate boardrooms and among policymakers and investors.
  • Measuring corporate governance by how many rights are afforded to a single class of stakeholder – the institutional investor – will be seen as misguided.
  • Corporate governance will increasingly be viewed as a framework for aligning boards, management teams, investors and stakeholders towards long-term value creation in ways that are more nuanced and less amenable to benchmarking and quantification.

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Spotlight on Boards

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

June 1, 2018

Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy;
  • Be aware that sustainability has become a major, mainstream governance topic that encompasses a wide range of issues, such as climate change and other environmental risks, systemic financial stability, labor standards, and consumer and product safety;
  • Recognize the current focus of investors on “purpose” and an expanded notion of stakeholder interests that includes employees, customers, communities, and the economy and society as a whole;
  • Set the “tone at the top” to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals;
  • Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan;
  • Have a lead independent director or a non-executive chair of the board who can facilitate the functioning of the board and assist management in engaging with investors;
  • Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
  • Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;
  • Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
  • Oversee and understand the corporation’s risk management and compliance efforts and how risk is taken into account in the corporation’s business decision-making; respond to red flags if and when they arise;
  • Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate corporate governance proposals, and anticipate possible activist attacks in order to be able to address them more effectively;
  • Be open to management inviting an activist to meet with the board to present the activist’s opinion of the strategy and management of the company;
  • Evaluate the board’s and committees’ performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;
  • Review corporate governance guidelines and committee charters and tailor them to promote effective board and committee functioning;
  • Be prepared to deal with crises; and
  • Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

  • Have a sufficient number of directors to staff the requisite standing and special committees and to meet investor expectations for experience, expertise, diversity, and periodic refreshment;
  • Compensate directors commensurate with the time and effort that they are required to devote and the responsibility that they assume;
  • Have directors who have knowledge of, and experience with, the company’s businesses, even if this results in the board having more than one director who is not “independent”;
  • Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings and engaging with investors;
  • Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;
  • Provide the directors with regular tutorials by internal and external experts as part of expanded director education and to assure that in complicated, multi-industry and new-technology companies the directors have the information and expertise they need to evaluate strategy; and
  • Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that facilitates frank and vigorous discussion and enhances the board’s role as strategic partner, evaluator, and monitor.

Martin Lipton

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

GLOBAL STATISTICAL UPDATE – XBMA Quarterly Review for First Quarter 2018

Editors’ Note: The XBMA Review is published on a quarterly basis in order to facilitate a deeper understanding of trends and developments. In order to facilitate meaningful comparisons, the XBMA Review has utilized generally consistent metrics and sources of data since inception. We welcome feedback and suggestions for improving the XBMA Review or for interpreting the data.

Executive Summary/Highlights:

  • Global M&A is off to a fast start in 2018, as global deal volume in Q1 was the strongest of any first quarter, and the third strongest quarter overall, since the beginning of the post-crisis recovery.
  • The momentum from a strong Q4 2017 in global M&A carried into Q1 2018.  Q1 saw more than US$1.2 trillion in deals for the quarter on the back of a robust M&A environment in Europe and North America, which together contributed almost US$950 billion in transaction volume for the quarter.
  • M&A activity in 2018 to date has been facilitated by optimism about synchronized global growth as well as record amounts of private equity “dry powder.”  Transformational changes in the healthcare industry and tax reform in the United States have also contributed to the boom.
  • The quarter was highlighted by several mega-deals, including Cigna’s approximately US$70 billion acquisition of Express Scripts, and JAB Holdings’ US$23 billion cross-border deal for Dr Pepper Snapple Group.
  • Robust cross-border M&A was an important driver of the global M&A boom, as cross-border M&A accounted for approximately 43% of global M&A volume in Q1, exceeding the recent historical proportion of approximately 36%.
  • Over the last four quarters, the Real Estate and Industrials sectors have been the most active sectors in cross-border M&A, generating nearly US$400 billion of cross-border deal volume in aggregate (or more than a quarter of cross-border deal volume across all sectors).

Click here to see the Review.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

IRISH UPDATE – Recent Trends in Corporate Migrations

Editor’s Note:  Brian O’Gorman specialises in corporate finance with a particular emphasis on mergers and acquisitions, public takeovers, equity capital markets and private equity.  Suzanne Kearney is a professional support lawyer at Arthur Cox.

Over the past decade a global trend of optimising holding company structures has developed amongst publicly traded multinational corporations. The strategic relocation of a holding company is, more often than not, conducted in tandem with a merger or other significant M&A transaction.

Ireland, alongside other jurisdictions such as the United Kingdom and Switzerland, has emerged as an attractive location, particularly for corporations seeking to expand into Europe.

INNOVATIVE STRUCTURES

There are often complex corporate, commercial, regu­latory, operational and tax structuring implications associated with the re-organisation of a global business to a new jurisdiction. The legal mechanisms employed in implementing such relocations will be driven by a range of diverse factors. In this note we explore some of the more interesting structures employed in recent transactions.

COURT SANCTIONED SCHEME OF ARRANGEMENT

The migration of public limited companies incorporated in a common law jurisdiction into Ireland in conjunction with a merger of other significant M&A transaction is often carried out by way of a court sanctioned scheme of arrangement (“Scheme”).

A Scheme is a statutory procedure whereby a company can (with court approval) make a compromise or arrangement with its shareholders (or a class of its shareholders). A Scheme has a wide scope for implementation, and lends itself to two separate methods for effecting a takeover of an existing (foreign) parent company by a new (Irish) parent company:

Cancellation Scheme: involves the shareholders of the existing (non-Irish) target agreeing to all of their shares in the target being cancelled in return for an agreed cash consideration per share being paid by the acquiring (Irish) company to such shareholders. The acquiring company agrees to pay the cash consideration on the basis that the target will use the reserve created by the cancellation of its existing shares to issue an identical number of new shares to the acquiring company.

Transfer Scheme: involves the shareholders of the target company agreeing to transfer all of their shares in the target to the acquiring company in return for an agreed cash purchase price per share being paid to such shareholders.

Structures involving a Scheme have been favoured by companies from the UK, Cayman, Bermudian and other common jurisdictions with legislation which caters for the use of a Scheme. This structure, however, is not available to entities who originate in a civil law jurisdiction, and, as a result, European companies have typically used a variety of other structures in connection with a migration to Ireland.

PaddyPower (Ireland) and Betfair (UK) ‘merged’ pursuant to a Scheme sanctioned by the High Court of England and Wales under UK company legislation, creating a new Irish holding company with headquarters in Ireland, having its main listing on the London Stock Exchange, with a secondary listing on the Irish Stock Exchange.

CROSS BORDER MERGERS

The EU Cross-Border Merger (“CBM”) regime facilitates mergers between Irish companies and EU incorporated companies (and companies incorporated in EEA States that have implemented the EU CBM Directive). The CBM regime permitted true “mergers” for the first time under Irish law, providing a new mechanism for Irish companies to receive a transfer of assets and liabilities from companies in other European/EEA jurisdictions.

European limited companies that are capable of merger under national law can merge into Irish registered companies as a CBM, with the merging company dissolved without going into liquidation on completion of the merger. Shareholder approval is required, followed by court applications by the merging companies in their respective jurisdictions. A CBM into Ireland takes effect pursuant to an order of the Irish High Court. In a CBM all of the assets and liabilities, together with the rights and obligations (including commercial contracts, employees, legal proceedings) of the merging company transfer to the Irish surviving company by operation of law.

A key advantage of a CBM is that it provides a harmonised, streamlined and often familiar procedure for European companies, eliminating the need for individual transfer documents typical under the traditional business sale and purchase model.

Flamel Technologies SA (France), completed CBM into its wholly-owned Irish subsidiary, Avadel Pharmaceuticals plc, with Avadel surviving the merger as the public holding company.

In the UK, the merger of Technip and FMC Technologies into UK incorporated TechnipFMC was achieved by CBM.

In 2017 the High Court of England and Wales authorised the first “reverse cross border merger” whereby a UK parent company, Formenta Limited, was absorbed by its Italian subsidiary.

MERGER INVOLVING NON-EU ENTITY

Only entities incorporated in EU/EEA member states can avail of the CBM regime (see above), however “mergers” by non-EU entities into Irish companies have been structured as a merger agreement pursuant to which the non-EU entity contractually agrees to merge into a newly incorporated Irish public limited company, which becomes the surviving entity post-merger. As such a merger is not governed by legislation, it is not subject to a court order, but approval of the merger agreement by the shareholders is required.

This structure has been used in connection with the merger of a Swiss public limited company into an Irish public limited company as the surviving entity. Following Brexit, this structure may prove useful in connection with the merger of UK companies into Ireland, as it is unlikely to be able to avail of the CBM regime.

Pentair Ltd. (Switzerland), a public limited company entered into a Merger Agreement with its Irish subsidiary Pentair plc., thereby changing its organisation jurisdiction from Switzerland to Ireland. The surviving entity Pentair-Ireland remained subject to U.S. Securities and Exchange Commission reporting requirements and the applicable corporate governance rules of the NYSE.

SOCIETAS EUROPAEA

For public companies incorporated in the EU a corporate migration may be achieved by using a Societas Europaea. The Societas Europaea or “SE” is a European public limited company formed under EU legislation. The SE was initially developed as a new “pan-European” form of company with the objective of enabling companies to operate on a cross border basis under a unified framework, without the obstacles posed by disparities in domestic company law in each member state.

One of the key advantages of an SE is its ability to relocate by moving its registered office to another EU member state without requiring dissolution or the creation of a new legal entity.

It was hoped that SEs would provide a cost efficient mechanism facilitating the restructuring of European businesses by reducing the administrative burden and legal costs associated with establishing in a new jurisdiction. Despite the perceived advantages of this supra-national structure, outside of Germany (where the SE has been more widely availed of, including amongst groups such as Allianz, Porsche, BASF), uptake across Europe has generally been low. The reasons for this may be due to the complexities in creating an SE, which cannot be incorporated on a stand-alone basis, but must be formed from a pre-existing limited liability entity (by merger, as a holding company or subsidiary, or by the conversion from an existing public limited company). Establishing an SE involves an employee consultation process, which at best can take up to several months to complete.

The SE remains an option for European companies considering a relocation within the EU. However, it is likely to be more attractive to those entities which are already registered as an SE and would therefore only be required to undergo the process of transferring its registered office. Other forms of existing companies, would be obliged to follow a two stage process; first, registration as a “Societas Europaea,” followed by a relocation of its registration to Ireland.

James Hardie Industries migrated its parent holding company to Ireland using a Societas Europaea structure.

EXCHANGE (TENDER) OFFER

Another possible structure for effecting a cross border migration is through an exchange offer whereby an Irish public limited company offers to acquire all of the issued securities of the non-Irish target in exchange for issue of new securities in the Irish plc, resulting in the Irish plc becoming the new parent company of the group.

An exchange offer made to shareholders of the non-Irish target will be subject to the form, content and timing restrictions of any local law takeover regime (where applicable).

Exchange offers have to date proved less popular, perhaps due to the 90% acceptance level required to secure full implementation of the merger/ acquisition.

The exchange offer structure was used in the re-domiciliation of Strongbridge (formerly Cortendo AB) from Sweden to Ireland, whereby a newly incorporated Irish plc acquired all of the issued shares of the original Swedish parent company. A prospectus which set out the terms of the exchange offer (approved by the Central Bank of Ireland, the Irish competent authority) was made available to all eligible shareholders of Cortendo AB. The exchange offer was conditional on its acceptance by 90% shareholders in the Cotendo AB. Following completion of the transaction, the original Swedish parent company became a subsidiary of the new Irish ultimate parent company.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

DANISH UPDATE – New Danish Capital Markets Act

Editors’ Note: Mattias Vilhelm Warnøe Nielsen is a Partner at Moalem Weitemeyer Bendtsen Advokatpartnerselskab in Denmark where he is Head of Venture Capital and Startup Companies. Mattias is a highly regarded specialist and advises Danish startup companies on fundraising through private investors and seed investments. Mattias also advises Danish and multinational corporations on mergers and acquisitions. Andreas is a Junior Associate at Moalem Weitemeyer Bendtsen Advokatpartnerselskab where he primarily advises Danish and multinational corporations, both publicly traded and private, on mergers and acquisitions. Andreas also advises both Danish and multinational corporations on litigation, arbitration and bankruptcy proceedings.

1. Highlights:

   a) Prospectuses

         The Danish Securities Trading Act (Past)

         The obligation to prepare and make public a prospectus when offering securities to the public applies if the value of the offering to the public is equal to or above EUR 1,000,000. Only prospectuses prepared for offerings to the public with a value equal to or above EUR 5,000,000 are recognizable in other EU member states.

         The Danish Capital Markets Act (Present)

         The obligation to prepare and make public a prospectus when offering securities to the public applies if the value of the offering to the public is equal to or above EUR 5,000,000. All prospectuses are recognizable in other EU member states.

         Summary of Amendment: The Danish Capital Markets Act repeals the obligation to prepare and make public a prospectus when offering securities to the public at a value between EUR 1,000,000 and 5,000,000 (i.e. small prospectuses), see item 3 below.

 

   b) Public Announcement of Own Shares

         The Danish Securities Trading Act (Past)

         Issuers are obligated to make public their ownership of own shares in the event that such ownership reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3 or 90% of the voting rights or share capital.

         The Danish Capital Markets Act (Present)

         Issuers are obligated to make public their ownership of own shares in the event that such ownership reaches, exceeds or falls below 5% or 10% of the voting rights or share capital.

         Summary of Amendment: The Danish Capital Markets Act repeals the higher thresholds for the issuer’s obligation to make public their ownership. Thus, the obligation solely applies when the issuer’s ownership of own shares reaches, exceeds or falls below 5% or 10% of the voting rights or the share capital, see item 4 below.

 

   c) Equal Treatment of Shareholders

         The Danish Securities Trading Act (Past)

         An offeror making a takeover bid, whether mandatory or voluntary, shall treat all shareholders within the same share class equally.

         The Danish Capital Markets Act (Present)

         An offeror making a voluntary takeover bid with the objective of acquiring control over the issuer shall treat all shareholders equally, regardless of any division of share classes. For mandatory and other voluntary takeover bids, the offeror shall treat all shareholders within the same share class equally.

         Summary of Amendment: The Danish Capital Markets Act introduces a specific requirement of equal treatment of all shareholders in the issuer, regardless of share classes, in the event that the offeror makes a voluntary takeover to the shareholders in the issuer with the objective of acquiring control of the issuer, see item 5 below.

 

2. Introduction

The Danish Capital Markets Act, including certain executive orders, entered into force on 3 January 2018, replacing the former Danish Securities Trading Act and amending certain material aspects of the capital markets regulation in Denmark. Apart from certain amendments to the provisions of the Danish Securities Trading Act, the Danish Capital Markets Act contains provisions similar to those of the Danish Securities Trading Act with some language changes. This XBMA contribution highlights the material changes as a result of the Danish Capital Markets Act.

 

3. Prospectuses

The provisions in the Danish Securities Trading Act regarding the obligation to prepare and make public a prospectus for offerings to the public of a value between EUR 1,000,000 and EUR 5,000,000 have been repealed with the Danish Capital Markets Act which entered into force 3 January 2018.

The Danish Securities Trading Act contained both an obligation to prepare prospectuses for offerings between 1,000,000 and EUR 5,000,000 (i.e. small prospectuses) and an obligation to prepare prospectuses for offerings of or above EUR 5,000,000 (i.e. large prospectuses). The reason for the two different provisions was that the small prospectuses were subject only to Danish national regulation and did not enjoy the so-called EU passport for prospectuses (recognition in other EU member states than Denmark), as the small prospectuses were not prepared in accordance with the regulation as implemented from the Prospectus Directive (2003/71/EC).

As of 3 January 2018, issuers or offerors are only obliged to prepare and make public a prospectus when making offerings to the public of a value of EUR 5,000,000 or above. These are recognizable throughout all EU member states.

The threshold of EUR 5,000,000 is calculated on offerings made by the entity in question over a period of 12 months and on the basis of the market value of the securities in question and the costs associated with the offering to be paid by the investors, including e.g. levies. If the offering is made in DKK, the EUR 5,000,000 threshold is calculated based on the Danish National Bank’s public currency rate at the time of the commencement of the offering.

The Danish Capital Markets Act does not alter the obligation to prepare and make public a prospectus when securities are listed, and no threshold regarding value etc. applies to such obligation.

On 14 June 2017, the European Parliament and the Council adopted a new Prospectus Regulation (EU/2017/1129) that enters into force 21 July 2019. Certain exemptions to the obligation to prepare and make public a prospectus for public offerings entered into force on 20 July 2019, however; these specific exemptions are not the subject of this XBMA contribution.

In connection with the new Prospectus Regulation, the member states are authorized to increase the threshold for the obligation to prepare and make public a prospectus to offerings of a value on or above EUR 8,000,000. The Danish Parliament is currently treating an amendment to the Danish Capital Markets Act which will increase the Danish threshold from EUR 5,000,000 to EUR 8,000,000. If passed, the new threshold will apply from 21 July 2018.

Our opinion: As offerings in Denmark are usually smaller compared to offerings in other EU member states, the repeal of the requirement of small prospectuses and – if passed – the increase of the threshold for the requirement to larger prospectuses certainly lifts an administrative burden for offerors when making public offerings. This might mean that Denmark would become a more attractive forum for making public offerings, and in the future we might experience an increase in offerings.

 

4. Public Announcement of Own Shares

In accordance with the Danish Securities Trading Act, any shareholder in an issuer of listed shares was obligated to notify the Danish Financial Supervisory Agency (the FSA) and the issuer of the shareholder’s holding of shares in the issuer in the event that the holdings reached, exceeded or fell below 5%, 10%, 15%, 20%, 25%, 33%, 1/3, 50%, 66%, 2/3 or 90% of the voting rights or the share capital. The issuer should also notify the FSA in the event that the issuer’s holding of own shares reached, exceeded or fell below the aforementioned thresholds.

This provision has been implemented into the Danish Capital Markets Act. As of 3 January 2018, however, the issuer is only obligated to notify the FSA in the event that the issuer’s holding of own shares reaches, exceeds or falls below 5% and 10% of the voting rights and share capital. Other shareholders are still obligated to notify the issuer and the FSA regarding the holdings of shares in the issuer in the event that their holdings reach, exceed or fall below the old thresholds.

The issuer’s obligation has been amended in that the previous requirement, subject to the higher threshold, was a result of goldplating in Denmark, i.e. a national implementation of the Transparency Directive (2004/109/EC) in excess of the requirements in the directive.

Our opinion: As issuers most often do not hold a large bulk of own shares, the removal of the higher thresholds only has a practical value for a few issuers on the Danish capital markets. However, the amendments may prove to be an improvement of the administrative burden for such issuers. Moreover, should an issuer hold e.g. 20% of its own shares, such information will not be publically available in the future, unless the circumstances under which the issuer came to hold such shares have been disclosed in connection with the disclosure of inside information under the Market Abuse Regulation (EU/596/2014).

 

5. Equal Treatment of Shareholders

The Danish Securities Trading Act contained a requirement on offerors when making takeover bids to treat shareholders within the same share class equally.

The same requirement is adopted in the Danish Capital Markets Act, with exception, however, of a specific requirement on offerors making a voluntary takeover bid to the shareholders of a listed issuer with the objective of acquiring control over the issuer in question. In such event, the offeror shall treat all shareholders equally, irrespective of share classes and whether all or merely some of the share classes are listed on a regulated market place.

The requirement does not apply to a situation where the offeror makes a voluntary takeover bid without the objective of acquiring control over the issuer, nor does it apply to a situation where the offeror already has control over the issuer before making the takeover bid or where the offeror makes a mandatory takeover bid. In such events, the requirement of equal treatment of shareholders within the same share class applies.

Our opinion: There are certain scenarios in which this new requirement may be relevant, however, the most relevant scenario would be where an offeror makes a takeover bid for one share class with voting rights and intends to exclude another share class without voting rights from the takeover bid. In this event, and provided that control is the offeror’s objective, the offeror is forced to offer to purchase the other shareholders’ shares without voting rights on the same terms, including in relation to price etc., as the shareholders’ holding of shares with voting rights. As the shares with voting rights are more valuable to the offeror, we may see less favourable terms for purchasing shares during voluntary takeover bids in the future, seeing as an offeror shall compensate for the obligation of purchasing all shares on the same terms.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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