UK UPDATE – A Guide to Takeovers in the United Kingdom
Executive summary: The linked memorandum is a general guide to takeovers of UK incorporated and listed companies subject to The City Code on Takeovers and Mergers. It first describes the UK bodies which regulate takeovers of such companies and then summarizes the more important legislation and rules under which they do so.
GERMAN UPDATE – New Disclosure Requirements to Prevent Secret Stake-building in German Listed Companies
Executive Summary:
- New share- and instrument holding disclosure rules concerning German listed companies go into force on 1 February 2012.
- The new rules particularly intend to prevent secret stakebuilding in listed companies.
- The new rules are likely to have a significant impact on public takeovers.
- The rules may also apply, under particular circumstances, to non-German companies listed on a German stock exchange.
MAIN ARTICLE
Germany tightens disclosure requirements for significant shareholdings
In April 2011, the Law on the Strengthening of Investor Protection and the Improvement of Financial Markets (Gesetz zur Stärkung des Anlegerschutzes und zur Verbesserung der Funktionsfähigkeit des Kapitalmarkts – “AnSFuG“) was passed. The AnSFuG tightens, inter alia, the disclosure requirements for shareholdings in German listed companies. The main objective of the new legislation is to capture arrangements which so far fell outside the existing disclosure requirements, even though they may be (and have been) used to build up positions in a German listed company (“creeping-in”). The new disclosure requirements will enter into force on 1 February 2012. The rules may also apply, under particular circumstances, to non-German companies listed on a German stock exchange.
I. Existing German Notification Requirements
The German provisions on the disclosure of significant shareholdings conferring voting rights are set out in the German Securities Trading Act (Wertpapierhandelsgesetz – “WpHG“). Based on the European Transparency Directive (Directive 2004/109/EG), the WpHG requires owners of shares in German listed companies to disclose their voting rights by notifying the issuer and the German Federal Financial Services Supervisory Authority (“BaFin“) if certain thresholds (3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%) are reached or crossed. The disclosure requirements applicable to owners of shares are supplemented by provisions which attribute to the notifying shareholder voting shares owned by certain other related shareholders (e.g. shares owned by subsidiaries, shares held by a third party for the account of the notifying party, acting-in-concert). These disclosure requirements applicable to shareholders remain unaffected.
In addition, the current disclosure requirements catch financial instruments which entitle the holder to acquire voting shares, such as call options. Voting shares which can be acquired under such financial instruments must be added to direct or attributed voting share ownership. These disclosure requirements, however, so far, do generally not capture arrangements (such as certain securities lending transactions and repos) which do generally not fall within the ambit of the “financial instruments” definition.
II. Overview of Main Amendments
The following key changes to the German disclosure rules for significant shareholdings will be introduced:
- The existing disclosure requirements for “financial instruments” are extended to include “other instruments” (which do not qualify as financial instruments) granting the right to acquire voting shares.
- New disclosure requirements are introduced for instruments which do not grant an enforceable right to acquire voting shares but still make an acquisition of voting shares (at least economically) possible.
There will, consequently, in future be three disclosure regimes, i.e. (i) for voting shares (§§ 21, 22 WpHG), (ii) instruments granting the holder an enforceable right to acquire voting shares (§ 25 WpHG), and (iii) instruments which do not grant an enforceable right to acquire voting shares but make such acquisition possible (§ 25a WpHG). These disclosure regimes are distinct, but linked by the provisions requiring the aggregation of positions held in each of the different categories.
1. Other Instruments Granting a Right to Acquire Voting Shares (§ 25 WpHG)
The disclosure requirements for financial instruments are amended to include “other instruments” granting their holder the right to acquire voting shares.
As a consequence, the following instruments may, for example, be relevant for purposes of this disclosure requirement:
- Rights for the delivery of voting shares under a share purchase agreement (or other agreement such as a shareholders´ agreement) with deferred delivery or subject to conditions precedent under the exclusive control of the purchaser (e.g., approval of corporate bodies of purchaser).
- Rights for the redelivery of voting shares under a securities lending agreement or repurchase agreement.
2. Instruments making it possible to acquire voting shares (§ 25a WpHG)
New disclosure requirements are introduced for instruments which “make it possible” to acquire voting shares. In contrast to the already existing disclosure requirements for instruments granting a right to acquire voting shares, the instruments captured by the new provision do not grant a legally enforceable right to acquire shares. However, due to their particular economic features or their underlying business logic, they may bring about the opportunity for the holder to acquire voting shares. Furthermore, it will be sufficient for disclosure purposes, if a third party rather than the holder of the instrument is entitled to acquire voting shares (e.g. by way of a contractual agreement for the benefit of third parties / Vertrag zugunsten Dritter).
This broad and somewhat imprecise new rule is complemented by two statutory provisions exemplifying circumstances under which arrangements are deemed to make the acquisition of voting shares possible:
- The counterparty might be able to hedge its risks arising under the instrument, in whole or in part, by holding voting shares; for the disclosure requirements in a given case it is, however, irrelevant whether such hedging actually takes place.
- The instrument provides for the right or the obligation to acquire voting shares.
a) Possibility of hedging through the holding of voting shares
The possibility of hedging through the holding of voting shares will, for example, inevitably be given in a cash settled transaction which confers the economic benefit and burden arising out of voting shares upon the holder of the instrument. Thus, for the new disclosure requirements it is not decisive whether an instrument provides for a cash settlement or the physical delivery of the underlying shares.
As a consequence, the following cash-settled instruments may have to be disclosed:
- Total return equity swaps (from the perspective of the counterparty exposed to the economic risks and benefits of the underlying shares)
- Cash-settled long call/short put options/ contracts for difference
b) Right or obligation to acquire voting shares
As far as the right or obligation to acquire voting shares is concerned, an instrument may be regarded as making the acquisition of voting shares possible within the meaning of the new law even if the initiative for the acquisition of the shares must come from the other party to the transaction. Further, the new provision also captures instruments granting the right to acquire voting shares when these instruments are only subject to conditions whose fulfillment is not under the exclusive control of its holder. Currently, instruments (even in the form of financial instruments) are generally not captured by the existing disclosure requirements if such conditions are agreed.
Neither the new law nor the accompanying legislative materials contain any specific exemption for agreements under corporate law (share purchase agreements, shareholders´ agreements, articles of association), which make it possible to acquire voting shares. The practical handling of such broad obligation will need to be thoroughly reviewed.
As a consequence, the following instruments may, inter alia, be relevant:
- Rights for the delivery of voting shares under a share purchase agreement (or other agreement) which are subject to conditions precedent not under the exclusive control of the purchaser (e.g., merger control clearance, approval of corporate bodies of seller)
- Put options on voting shares with physical delivery (from the perspective of the option writer) unless the bond may exclusively be covered by newly issued shares; this may, inter alia, include the put right of the issuer under a mandatory convertible bond (Pflichtwandelanleihe)
- Rights for the delivery of voting shares under a stock option plan subject to certain vesting conditions
3. Instruments Referring to Baskets or Indices
A disclosure requirement only arises if an instrument relates to voting shares in German listed companies. There is no requirement, however, for the instrument to relate exclusively to such shares. The new disclosure requirements also cover financial instruments referring to baskets or indices. The new law does not require any minimum weight of a particular share within a basket or index in order for the underlying instrument to be relevant for disclosure purposes. However, the German Ministry of Finance is authorized to exempt certain financial instruments from the new disclosure requirements by executive ordinance. It remains to be seen whether the German Ministry of Finance will introduce any safe harbour provisions for well-diversified instruments with a multitude of underlying shares.
4. Disclosure Requirement, Relevant Thresholds and Aggregation Rules
Notifications of significant holdings in relevant instruments are subject to the same publication requirements as notifications of significant shareholdings. This means, in particular, that the relevant issuer must publish information on such holdings received from an instrument holder without undue delay but at the latest within three business days of receipt of the notification.
Whereas the lowest threshold for the disclosure of voting shares held or attributed to the notifying party is 3 % under German law, financial and other instruments relating to voting shares must only be disclosed if they relate to 5 % or more of the voting shares of the listed company. The new law does not provide for long and short positions to be netted off for purposes of the disclosure requirements applicable to significant shareholdings.
In order to determine whether a threshold for the disclosure requirements applicable to financial and other instruments has been reached or crossed, own or attributed shares, instruments granting a right to acquire voting shares and instruments making it possible to acquire voting shares must be aggregated. Besides specifying the aggregate number of voting shares, the relevant notification must, however, differentiate between own and attributed voting shares, instruments granting a right to acquire voting shares and instruments making it possible to acquire voting shares.
The number of voting rights to be disclosed for financial and other instruments is generally determined by the number of shares which can be acquired under the instrument. If the instrument does not relate to a specific number of shares, the number of voting rights must be determined by the amount of shares which the other party would require for a full hedge of its position under the instrument. For instruments which refer to a basket or index, the pro rata amount of the underlying share in the basket or index must be considered. The AnsFuG authorizes the German Ministry of Finance to issue an executive regulation specifying, inter alia, the details of the calculation.
5. Transitional Provisions
The new disclosure requirements will also be relevant for holdings acquired before and still held when the new law enters into force on 1 February 2012. On this date, a party holding instruments making it possible to acquire 5 % or more (taking into account the aggregation rules) of the voting shares of a German listed company, must disclose this holding without undue delay but at the latest within 30 trading days. Existing structures should, therefore, be carefully reviewed.
6. Sanctions
Non-compliance with the disclosure requirements for voting shares may lead to the loss of rights arising under such shares, including dividend rights and voting rights. The same may apply to attributed voting shares, depending on which attribution rule has been violated. In addition, non-compliance may result in a fine from the BaFin.
Non-compliance with the disclosure requirements applicable to financial and other instruments generally does not lead to a loss of rights under the underlying shares even after they have actually been acquired. BaFin may, however, fine such non-compliance. The maximum fine will be increased to EUR 1,000,000 per violation by the AnsFuG.
ITALIAN UPDATE – Formation of New Italian Fund to Protect Italian National Champions, in Reaction to the Takeover of Italy’s Parmalat by France’s Lactalis
Executive summary:
The recent acquisition of Parmalat — one of the biggest Italian listed companies — by the French dairy group Lactalis, caused a huge debate in the financial and political communities in Italy.
Lactalis’ bid was initially met with stiff Italian resistance, including encouragement of potential local “white knights,” issuance of an emergency decree to allow Parmalat to postpone its General Meeting, and debate about possibly issuing a decree granting the government new powers to block foreign bids for companies deemed strategic. But in the end, Italy decided to abandon the fight, and Lactalis managed to complete its takeover bid.
After the “thunderstorm,” the Italian government’s emphasis shifted from introducing protectionist measures to a more far-reaching goal of stimulating the Italian market for domestic mergers and acquisitions, so as to counter foreign competition. As a first step, the Ministry of Economy promoted the establishment of a new fund to invest in companies of “significant national interest”, which has been broadly defined. The initial investor in the fund is the Italian government’s Cassa Depositi e Prestiti, but the fund is also open to banks, insurance companies, and other institutional investors. It is expected that, in the near future, participation in the fund will be opened to foreign private investors as well.
The political fear of losing “national champions” to the advantage of “foreigners” is commonplace almost everywhere in the world, however, in Italy it has its own peculiar origins and reasons.
Italy’s economic base consists primarily of small and medium sized enterprises which contribute to most of the country’s national exports and GDP. Traditionally, Italy has fewer large industrial or financial groups, most of which are family owned or controlled, in comparison to other developed economies such as France, Germany, and the UK. Over the years, this peculiar structure of the Italian economy has contributed to making Italian industrial and financial groups comparatively less dynamic than their foreign counterparts when pursuing mergers and acquisitions. In general, in the Italian business environment, “friendly” transactions tend to be more common than competitive bids where several potential buyers compete for the same target. This is partially due to the fact that, traditionally, only a few Italian companies listed on the stock exchange are actually “public companies”. Also, Italian entrepreneurs often see few incentives in embarking on M&As, as family-run businesses — even when they grow to a meaningful size — can encounter significant difficulties in managing the challenges of external acquisitions.
While our purpose here is not to discuss the effect of the peculiarities of Italian capitalism on the economy as a whole, it is fair to say that, as the Italian M&A market has increasingly opened up to foreign investors over the last couple of decades, Italian companies have been faced with the challenge of foreign competitors which, overall, have been more aggressive and dynamic.
The recent acquisition by the French dairy group Lactalis of Parmalat — one of the biggest Italian listed companies in terms of market capitalization — caused a huge debate in the financial and political communities. Parmalat was turned around after going bankrupt in 2003, thanks to the efforts of a management team that was particularly effective in restructuring the company and making it profitable again. However, that same management was considered too conservative by many, in pursuing a strategy of growth. In fact, when Lactalis moved to acquire a large stake in the company, Parmalat was sitting on a significant amount of cash, while evaluating a few possible business combinations.
Soon after Lactalis increased its stake to around 29%, a group of Italian investors, mainly led by domestic banks, tried to find a “white knight” to launch a bid to prevent Lactalis from controlling the company. Despite significant initial political support, the Italian “white knight” never materialized, mainly because of difficulties in finding a strong industrial partner interested in joining the group. Eventually, Lactalis decided to launch a tender offer, and acquired full control of Parmalat. Notwithstanding the fact that Parmalat’s Board of Directors considered the offer price insufficient, the offer succeeded owing to a lack of concrete alternatives. Lactalis’ bid spurred a significant debate in the media and in the Italian political arena as it revitalized the numerous and vociferous advocates calling for stronger protection for Italian “national champions” from foreign takeovers.
Initially, the Italian government tried to place certain hurdles for the French takeover, and actually adopted an emergency decree to allow the postponement of Parmalat’s General Meeting for a couple of months, in an attempt to gain time to allow a group of Italian companies to launch a bid before Lactalis could appoint a new Board. As any prospect of an Italian “white knight” faded away, the government also considered the possibility of issuing a decree granting it new powers to block foreign bids on companies deemed strategic. This may well have halted the French bid. The new decree was supposed to be modelled on French law No. 2005-1739 of 30 December 2005, which created an authorisation procedure for foreign investments in certain sectors of activities that could have affected public policy, public security, or national defence. This attempt was, however, soon abandoned by the Italian government, fearing the risk that these new rules could have proved to be inconsistent with EU rules on free movement of capital. Thus, after a summit between Berlusconi and Sarkozy, the Italian government decided to drop the fight against the French “invader”, at least this time.
As the thunderstorm on Parmalat ended, with the French group finally taking over Parmalat, from a political standpoint, the problem of protecting Italian “national champions” from foreign attacks remained far from resolved. However, the government policy to curb this political pressure seems to have shifted from introducing restrictive measures aimed at deterring foreigners from taking over Italian companies, to the more far-reaching goal of stimulating the market for domestic mergers and acquisitions, so as to counter foreign competition.
The latter goal is clearly more far reaching and harder to achieve in the short term. In theory, this policy is obviously more desirable and consistent with Italian obligations under European law, however, it carries two significant risks. On one hand, it may not be considered sufficient to satisfy the immediate requests of those factions within the government that believe that the country is undergoing a “looting” of its strategic assets. On the other, its implementation requires strong government commitment to pursue significant changes to the structure of Italian capitalism and, at least, a bit of time.
For the time being, however, the government seems to have chosen an intermediate solution, which should be able to deliver some immediate results and represents a step forward in fostering the domestic M&A market. The idea was borrowed from France, as this next-door neighbour is not only perceived as the most significant “threat” to domestic ownership of Italian companies, but is also considered to be a front runner when it comes to protecting its own national strategic interests from “foreign attack”. The core of this approach is the creation of a fund focused on investing in companies of “significant national interest”, which have been broadly defined by the Ministry of Economy to include companies operating in strategic sectors, such as defense, security, infrastructure, public services, transportation, energy, telecommunications, finance, and high tech, as well as companies that, regardless of their business, exceed certain thresholds in terms of revenue and number of employees. While the broadness of the above definition will not limit a fund’s target choice very much, there is the more significant limitation that will come from the fact that only the buying of minority stakes in companies that are economically and financially sound will be allowed, as European rules on state aid limit the State’s ability to invest in distressed companies.
Similarly to its French predecessor, the Italian fund has been established by enlarging the scope of activity of an entity known as “Cassa Depositi e Prestiti”, a special entity controlled by the Ministry of Economy which lends savings collected through the postal services to public entities and finance infrastructures.
Therefore, as the initial investor of the fund is the Cassa Depositi e Prestiti, which is expected to inject approximately 1 billion euro (and in the aggregate up to 4 billion euro), the fund will be off the state’s balance sheets, as its funding does not actually come from public debt. Also, it is expected that, in the near future, participation in the fund will be opened to foreign private investors as well, in an effort to encourage foreign investment in Italian companies, while keeping them in domestic hands.
Critics argue that the fund may turn out to be an instrument for politicians to exert influence on Italian businesses, somehow recreating under the cover of a new and more acceptable form, the old system of state intervention in the economy — a sort of new IRI — the Istituto per la Ricostruzione Industriale — that over the years represented the State’s long hand in business sectors ranging from the transportation to the confectionery industry.
Even though the fund has yet to start operating, the significant background circumstances relating to the newly appointed Managing Director, Mr. Maurizio Tamagnini, are noteworthy. Mr. Tamagnini headed one of the largest international investment banks in Italy, and his appointment may be regarded as a significant step towards insulating the fund from political pressure, and may even give an indication of the fund’s investment style and strategy for the very near future.
UK UPDATE – Changes Adopted to UK Takeover Regime to Strengthen Position of UK Targets, Prompted by Kraft’s Successful Hostile Takeover of Cadbury
Executive summary:
- A revised edition of the UK Takeover Code took effect on 19 September 2011.
- The revisions were prompted by Kraft’s hostile takeover of Cadbury in 2010, which triggered debate about the weak position of UK target companies.
- The revised Code introduces rules to strengthen the target’s position, namely an enforced “put up or shut up” regime, early identification of potential bidders and a general prohibition on offer-related agreements.
- The revisions provide for greater recognition of employee interests and aim to increase disclosure about financial information, regarding offer-related fees and offeror financing.
- Transitional arrangements apply to offers which were in process on 19 September 2011.
Revision of UK takeover law
Significant reforms to the regulation of takeovers in the UK were implemented on 19 September 2011, with a new edition of the Takeover Code (the “Code”) (the principal rulebook for takeovers in the UK) taking effect. The revised Code is the product of months of public consultation. The review took place in the aftermath of Kraft Food Inc.’s hostile takeover of Cadbury plc, which sparked debate in 2010 about the weak position of UK targets.
The reforms aim to improve the offer process, provide target companies with greater armoury when faced with a hostile approach, and take more account of the position of people who are affected by takeovers. The reforms apply to all offers and possible offers. Transitional arrangements apply to offer situations which were live on 19 September 2011.
This post summarises the most significant reforms implemented by the revised Code.
1. Protection for target companies against protracted “virtual bid” periods
The revised Code modifies the “put up or shut up” regime to protect targets against protracted “virtual bids” and incentivise offerors to ensure secrecy during the initial stages of a takeover.
In the past, a target company could ask the Takeover Panel (the “Panel”) to make a “put up or shut up” ruling, which would require the bidder to announce, within a specified time, a firm intention to make an offer or announce that it would not be making an offer. It was up to the target to instigate this process.
The revised Code introduces the following rules:
(i) Announce the identity of potential bidders
Following an approach to the target, a potential bidder must be named in any announcement made by the target which starts an offer period. If a target has been approached by several potential bidders and is required to make an announcement, it must identify all potential bidders. Once an offer period has started, the Panel will not require target companies to announce the existence of new potential bidders, unless such bidder is subsequently identified in rumour or speculation.
(ii) 28 day “put up or shut up” deadline
A publicly named offeror must, within 28 days of being publicly named, announce a firm intention to make a bid; announce that it will not make a bid; or, jointly with the target, apply to the Panel for an extension of the 28 day deadline. This deadline is automatic; the target no longer needs to request a deadline from the Panel. There may therefore be different deadlines for different bidders, although in practice the Panel anticipates that targets will request a common deadline for all. The Panel has stated that deadline extensions will only be granted shortly before the expiry of the 28 day period, meaning that parties cannot agree at the outset to have a longer negotiation period.
There is a limited exception to the requirements at (i) and (ii) above where the target has put itself up for sale by public auction.
If there is rumour or speculation about a potential offeror such that an announcement would normally be required, a potential offeror can, if the Panel and target agree, avoid being identified in a public announcement by ceasing all active consideration of the offer for a period of time.
2. Prohibition on offer-related agreements
The revised Code implements a general prohibition against offer-related agreements. This prohibition, which was introduced in response to the concern that deal protection packages deter competing offerors and competitive bids, covers traditional protection measures such as inducement or break fees as well as “matching rights”, “no shop” provisions, “no talk” provisions, and any other arrangements entered into as part of offer discussions, such as a related asset sale.
Offeree companies will be able to give certain limited undertakings, namely (i) confidentiality; (ii) non-solicitation of a bidder’s employees, customers or suppliers; (iii) the provision of information or assistance for the purposes of satisfying bid conditions or obtaining regulatory approvals; and (iv) limited irrevocable undertakings from members of the target board.
There will be limited exceptions to the general prohibition. The Panel may grant dispensations regarding white knights (an alternative bidder which may be sought out by a target threatened with an unwelcome bid and which the target board would recommend); takeovers conducted by public auction; or in circumstances where the target is in financial distress and is actively seeking a bid. Where dispensations are allowed, the break fees will be limited to one per cent. of the offer value.
In the case of takeovers conducted by schemes of arrangement, implementation agreements are no longer permitted. Instead, the parties now have to agree a scheme timetable before announcement. The revised Code permits the parties to include within the scheme conditions a long-stop date by which time the scheme must become effective, and specific dates by which the shareholder meetings and court sanction hearing must be held (in each case, unless extended by agreement of the parties).
3. Greater recognition of employee interests
The revised Code improves the quality of disclosure regarding the bidder’s intentions for the target and its employees.
Where an offeror or offeree board makes a statement during an offer period which relates to its strategic plans for the employees of either party, it will be held to such statement for 12 months (or such other period as may be specified in the statement), failing which it may face disciplinary action by the Panel.
The offeror and offeree must notify their employees about the offer at the start of the offer period (i.e. when a possible offer announcement is made). Employee representatives now enjoy greater access to information and may publish their opinion on the offer with the board circular at the company’s expense.
4. Factors which target boards consider when deciding on a bid
The revised Code clarifies that there is no limit on the factors which target boards should consider when deciding whether to recommend a bid.
5. Increased transparency about financial information
Details about offer-related fees, such as advisers fees (e.g. brokers, accountants, lawyers) and financial fees (e.g. draw-down fees, commitment fees) now need to be disclosed.
All offerors must disclose the same level of financial information about themselves in their offer documentation (previously a cash offeror could provide less information). Offerors must also allow their financial documents to go on display in unredacted form from the time of the announcement of the firm intention to make an offer or, if later, from the date of the document. However, offerors are not required to disclose details of any headroom which exists in their financing arrangements which would allow them to revise their offer.
Conclusion
The reforms to takeover law aim to strengthen the position of UK target companies in bid situations. Bidder’s will face additional challenges, having to ensure confidentiality pre-announcement, organise funding and regulatory arrangements swiftly, adapt to the reduction in deal protection measures and follow through on statements of intent.
The Panel proposes to review how the new rules have worked in practice 12 months after the implementation of the revised Code, depending on the level of bid activity in that period.
XBMA – Quarterly Review for Q1 2011
The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.
Highlights:
- Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
- Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
- Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
- Distressed deals have exceeded US$75 billion per annum since 2009.
- Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.
XBMA Quarterly Review for Q1 2011