AUSTRIAN UPDATE – New Disclosure Requirements to Prevent Secret Stakebuilding in Austrian Listed Companies
- As of 1 January 2013 Austria tightened disclosure requirements for significant shareholdings in listed companies.
- The new rules are aimed at preventing secret stake-building in listed companies and target in particular stake-building by cash settled option arrangements and similar financial instruments.
- The Austrian Financial Market Authority interprets the rules broadly to include all types of options and even pre-emption rights.
- The disclosure threshold remains unchanged at 5% and multiples of 5% but an additional disclosure threshold at 4% was introduced and listed companies may lower that threshold to 3% in their articles of association
- In addition to administrative fines, new sanctions for violations include a temporary suspension of voting rights as to the non-disclosed shares until six months after proper disclosure, but no suspension of dividend rights.
Austrian Notification Requirement
The Austrian Stock Exchange Act provides for 2 (separate) disclosure obligations: (i) an obligation to notify the acquisition or disposal of shares in a company traded on a regulated market; and (ii) an obligation to disclose financial instruments held.
- Thresholds: Persons directly or indirectly acquiring or selling shares carrying voting rights of an Austrian listed issuer must inform the Austrian Financial Market Authority, the exchange operating company and the issuer of the share of voting rights held, if their proportion of voting rights reaches, exceeds or falls below 4% (new threshold effective since 2013), 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75% or 90%.
- Financial Instruments: Until 2013 the disclosure obligations under the Austrian Stock Exchange Act applied only if the instrument provided for or resulted in an entitlement to acquire on the holder´s own initiative alone (already issued) shares to which voting rights are attached. The new rules applicable since 2013 now include instruments like cash settled options and swaps.
- Acting in Concert: Disclosure obligations cannot be circumvented or avoided by building a stake via various acquisition vehicles if the vehicles are (ultimately) controlled by the same entity.
- Financial Institutions: Exceptions apply, inter alia, to (i) shares acquired for the sole purpose of clearing and settling within the usual short settling cycle (maximum three trading days); (ii) custodians, if they can only exercise the voting rights attached to the relevant shares under instructions given in writing or electronically; (iii) market makers; and (iv) investment firms and credit institutions.
- Sanctions: Potential sanctions include (i) an administrative law fine of up to EUR 150,000 (increased from EUR 60,000), (ii) damage claims by market participants, (iii) suspension of voting rights (since 2013, irrespective if provided for in the issuer’s articles of association) and (iv) suspension of trading.
The new rules
Scope of instruments qualifying for disclosure enlarged
The broadened definition of Financial Instruments under sec 91a of the Stock Exchange Act now includes instruments that do not grant an enforceable right to acquire voting shares but make the acquisition of voting stock (economically) possible. Since 1 January 2013, it has been irrelevant whether an instrument provides for a cash settlement or physical delivery of the underlying shares. Thus, total return swaps and cash settled options and contracts for difference are to be disclosed. The new disclosure requirements also cover instruments relating to baskets and indices if the issuer’s shares exceed 20% of the total value of the basket or index. In the broad interpretation of the Austrian Financial Market Authority, all types of options and even preemption rights must be notified.
Disclosure Threshold starting at 4%
The 2013 amendment legislation introduced a new additional disclosure threshold at 4%. Moreover, companies may provide for a lower disclosure threshold of 3% in their articles of association. To be effective, such 3% disclosure threshold must also be notified to the FMA and published on the corporate website.
No grandfathering but disclosure by 28 February 2013
By 28 February 2013, those reaching or exceeding the new thresholds of 4% (or 3% if provided under the listed company´s articles of association, or any other additional disclosure threshold by financial instruments newly qualifying for disclosure as of 1 January 2013) must notify the Financial Market Authority, the Vienna Stock Exchange, and the Issuer.
Sanction now include suspension of voting right
Under the 2012 legislation, the administrative law fines for breaching the disclosure requirements have increased to EUR 150,000.
Under a new Sec 94a of the Stock Exchange Act, the law now provides for a temporary suspension of the voting rights of the shares affected by the non-disclosure until six months from the date of disclosure. The suspension of voting rights will not be triggered if, including by request of the issuer, the shareholder meets his notification obligation within two trading days.
This exemption requires that (i) the total shareholding (including the shares affected by the stake-building of that stakeholder or of stakeholders acting in concert) not reach 15% of the total voting stock of the issuer and (ii) the number of shares not yet notified be below 3%. Different from Germany, the Austrian rules on non-compliance with disclosure obligations still do not provide for a suspension of dividend claims.
Under-the-radar stake-building still possible?
Within limits the amended disclosure rules still allow compliant under the radar stake-building by, inter alia, using call options on preference shares or utilizing the bank privilege regarding treasury portfolios, which, however, has been modified. Also, given the definition of the basis for calculating the voting rights of all financial instruments, compliant avoidance structures involving financial instruments may still work.
AUSTRIAN UPDATE – New Approval Requirement for Austrian Foreign Investment by Non-EU, Non-EEA and Non-Swiss Investors
- An amendment to the Austrian Foreign Trade Act (FTA), in force since 8 December 2011 subjects the acquisition of certain interests in enterprises in specific industries (including telecoms and energy) by non-EU, non-EEA and non-Swiss persons, to review and approval by the Austrian Ministry of Economic Affairs
- Approval must be sought before entering into binding acquisition agreement or before announcing the launch of public offer
- Phase 1 approval procedure is up to 1 month, phase 2 procedure up to additional 2 months
- The FTA also provides for ex officio investigation procedure in case of suspicion of circumvention of approval requirements
Which transactions qualify for advance approval under the FTA?
Transactions resulting in the acquisition of an enterprise, of a participation of 25% or of a (co-) controlling interest in an enterprise with seat in Austria, engaged in a protected sector as listed under sec 25a FTA by a foreign investor who is either a non-EU or non-EEA or non-Swiss citizen or has its seat in a third country, if such country is not a member of the EEA or Switzerland (the “Foreign Investor”), fall under the scope of the ex-ante approval requirements.
Which industry sectors qualify as “Protected Sectors”?
The FTA defines and lists the following industry sectors as Protected Sectors:
(a) The sectors relating to the internal and external security of Austria, in particular of the defense equipment industry and security services.(b) The sectors relating to public order and safety and to procurement and crisis services. These sectors include (i) hospitals, ambulance and emergency physician services, (ii) fire fighters and civil protection service, (iii) energy and gas supply, (iv) water supply, (v) telecoms, (vi) railway, water and road traffic, and (vii) universities, schools of various types and pre-schooling institutions.
Who qualifies as Foreign Investor?
Third country investors subject to the approval regime are non-EU, non-EEA (EU plus Norway, Iceland and Liechtenstein) and non-Swiss. Clearly, all overseas investors, including from the US, Australia, Asia, Central Europe (if not EU) and CIS and Middle Eastern countries need to review whether a particular intended investment into a specific Austrian target requires advance approval by the Austrian Minister of Economic Affairs.
Compliant avoidance of Approval Requirement?
Pursuant to the legislative materials, indirect investments by Foreign Investors via EU or EEA acquisition vehicles are not captured by the approval regime, since EU law would not allow such investment restrictions. Accordingly, in case a Foreign Investor invested via an EU domiciled acquisition vehicle, in particular with a multilayered ownership structure or under a technical non-control structure involving non-controlled private foundations, no approval requirement should apply. However, Austrian Ministry practice could still – initially – establish and apply a substantive review in application procedures, resulting in a beneficial ownership test. Moreover, any structure could be tested under the ex-officio review procedure as to – illegal – circumvention of the approval requirement. Given ambiguities as to the scope of application and possible exemptions under the FTA, the new approval requirement will likely caution Foreign Investors to invest at or above 25% without approval by the Austrian Minister of Economic Affairs.
Which procedures apply, what are the timelines to obtain approval?
The FTA provides for (i) the ex ante approval procedure, and (ii) the ex officio review procedure. The ex ante approval procedure is 1 month (phase I) and, in case of in depth review, additional 2 months (phase II). The ex officio procedure has no trigger date within which such ex officio review must be initiated.
The application in the ex ante approval procedure must be submitted before (i) entering into a binding commitment to acquire the relevant interest in the target engaged in a Protected Sector, (ii) announcing the launch of a public offer in such target. During phase I of the approval procedure, the Minister of Economic Affairs must either approve the acquisition within 1 month from the filing of the application or issue a decree initiating a phase II; if no decree is issued, the acquisition is deemed approved. The phase II procedure is up to 2 months. During phase II the Minister may prohibit the acquisition. Alternatively the Minister may issue an unconditional approval decree or approve the transaction subject to the fulfillment of certain conditions to mitigate the risks associated with the acquisition.
Under the statutory wording the ex officio review is aimed at suspicious circumvention structures and requires a reasonable suspicion as to a reasonable threat to certain protected interests. Unfortunately, the FTA does not provide for a time limit within which the ex officio procedure must be initiated.
What are the legal consequences and sanctions of a violation of the approval requirements?
The FTA requires the Foreign Investor to file for approval prior to entering into a legally binding agreement regarding such acquisition. Any acquisition entered into without required approval is invalid and, if implemented, can be unwound. Additionally, even negligent violations of the approval requirements are subject to fines amounting to up to 360 days income or up to 1 year imprisonment of the managers of the acquirer; intentional violation is subject to up to 3 years imprisonment.
- Austrian M&A during Q1 through Q3 2011 was largely driven by (1) consolidation involving intra group restructurings with disposals and exits, and (2) transactions triggered by insolvency.
- Consolidation of the Austrian banking sector remained a key driver for transactional activity.
- New 2011 law implemented Regulation 2009/109 EC, providing among other things for lesser reporting requirements for upstream mergers of subsidiaries into their parent and for company splits where the participation ratios remain unchanged and an improvement of the standing of creditors of companies subjected to a merger or split, giving creditors an actionable right to collateral.
- For the rest of 2011 and beyond, corporate reorganisations on a national level are expected to trigger some larger volume transactions, and distressed M&A involving in particular the financial sector are set to continue.
Austrian M&A during Q1 through Q3 2011 was largely driven by consolidation involving intra group restructurings with disposals and exits. Additionally, some key transactions in the market were insolvency related and generated.
The first half of 2011 was characterized by closings of cross border deals announced in Q 4 2010, like Knowles Electronics, USA/NXP Semiconductors, USA, or German Volkswagen/Porsche, which had a substantial Austrian element of EUR 3.3 billion. Other notable cross border inward investment transactions into Austria included the acquisition by French SNCF of a stake in Westbahn, a private rail project, and the sale of a majority stake in Trenkwalder, Austria´s largest and one of Europe´s leading personnel leasing companies, to Droege Capital , a German private equity firm.
An exit typical for the transactional environment was the first half 2011 dual track private sale/IPO sales process resulting the IPO of aluminium company AMAG, allowing One Capital Partners (OEP), the private equity arm of JP Morgan, to partially exit AMAG which OEP had acquired in 2010.
Consolidation of the Austrian banking sector remained a key driver for transactional activity. In 2011 HHA Bank Group started a program of asset stripping in an attempt to at least partially repay state funding. ÖVAG, the fourth-largest Austrian banking group received substantial government financing in 2009 and was forced to start a massive consolidation and downsizing program.
In Q 3, 2011 ÖVAG, together with co-owners French BPCE and German DZ/WGZ BANK succeeded in selling Volksbanken International, comprising CEE network banks, to Russian Sberbank for a purchase price of up to EUR 645 million. This transaction has been the largest 2011 announced Austrian transaction but also the largest M&A banking deal in Europe in 2011 until date.
The ongoing restructuring of the Austrian banking sector will leave Unicredit Bank Austria, Erste Bank and Raiffeisen Banking Group as the three leading Austrian banking groups.
Also in Q 3 2011, insolvent listed industrial conglomerate A-Tec announced its financial restructuring involving a EUR 210m investment by Contor, funded by Pakistani investor Alshair Fiyaz and Chinese Wolong Group. Subsequently A-Tec will be split up among the investors behind Contor allowing acquisitions by the investors of A-Tec´s subsidiaries including automotive company ATB and copper mill Brixlegg.
Notable outbound private M&A transactions included: In Q1 2011 listed Raiffeisen Bank International agreed to acquire a 70% stake in Polish Polbank for USD 669m. In Q 2 2011 VSE listed Austromicrosystems acquired US TAOS, a Texas based leading light sensing technology company for USD 320 million.
London listed Partygaming acquired Vienna listed Austrian bwin in a reverse takeover valued at about USD 1.76 billion to create the world´s biggest publicly traded online betting company. The transaction was completed during the first half of 2011 and resulted in a delisting of bwin at the Vienna Stock Exchange. The merged company remains listed at the London stock exchange.
During Q1 2011, Unicredit BankAG launched a voluntary public offer for CA Immobilien Anlagen AG and increased its stake in the target from 11,88 % to 16,89 %. This was the second stage in the group internal restructuring of Unicredit’s streamlining of the bank- held real estate group, which had started with the taking private of CA Immo International in 2010. During Q2 2011, small cap LAI Beteiligungsinvest GmbH launched a mandatory offer for Private Equity Performance Beteiligungs AG and increasing its participation in the target from 33,42% to 63,68%. In a prior ruling, the Takeover Commission had held that the Takeover Act was applicable to this public offer despite a change from the regulated to the unregulated market of the VSE. In June 2011, small cap Pankl Racing Systems launched a partial offer collecting 10% of Pankl Racing Systems as treasury shares.
2011 CHANGES IN LAW AFFECTING AUSTRIAN M&A
Simplification of Restructurings
The 2011 law implemented Regulation 2009/109 EC by the European Parliament and the Council from September 2009 on the reporting and documentation requirements in case of mergers and demergers of companies. The simplifications include lesser reporting requirements for upstream mergers of subsidiaries into their parent and for company splits where the participation ratios remain unchanged and a reduction of printed publication requirements of financial statements with online publication being sufficient. Apart from simplifications, the draft Act provides for an improvement of the standing of creditors of companies subjected to a merger or split giving creditors an actionable right to collateral. Finally, under the Act, listed companies will be able to register their company website address with the company register of the court allowing the company court to verify publication of legally relevant company information on a listed company´s website.
Employment Law changes affecting cross border M&A
During 2011 the so-called Red-White-Red Card was introduced implementing a new immigration model easing the access to the labour market for highly skilled specialists and students from non-EU countries. The new scheme is based on the evaluation of inter alia the following target criteria: language skills, qualification, working-experience and age.
Tax Law Changes affecting corporate and financing transactions
Under the 2011 Tax Law Reform enacted in December 2010, numerous changes to the Austrian tax regime will apply to (cross border) corporate and financing transactions. These include:
(i) No interest deduction for related party transactions: From 2011 onwards, but also including leveraged intra group share acquisitions made prior to 2011, interest expenses can no longer be deducted for the leveraged acquisition of participations from foreign or Austrian group companies or controlling shareholders, or for leveraged capital contributions related to such acquisitions. The changes in the law do, however, not affect the deductibility of interest expense incurred in connection with the acquisition of shares from third parties.
(ii) Double dip structures: Dividends paid by non-Austrian companies to Austrian companies are no longer tax free if the dividend can be deducted as an interest expense at the level of the distributing company. This change will eliminate double dip structures through hybrid instruments which previously resulted in the deduction of payments in the source state and made use of a corporate tax emption of the income resulting thereof in Austria.
(iii) R+D tax refund increased: From 2011 onwards, the tax refund on R+D expenses will be increased from 8% to 10% but the alternative R+D allowances of previously 25% to 35% of qualifying R+D expenses will be abolished.
(iv) Stamp Duties for Loan or Credit Agreements abolished: For loan and credit transactions concluded from 1 January 2011 onwards, stamp duty of previously 0.8% to 1.5% of the loan amount will no longer apply. This is good news for (acquisition) financing transactions which previously required complicated compliant stamp duty avoidance schemes by abroad documentation or other measures.
For the rest of 2011 and beyond corporate reorganisations on a national level triggering some larger volume transactions but also distressed M&A involving in particular the financial sector are set to continue in a volatile yet still partially very active M&A market. Medium-sized local and cross-border transactions relating to the Austrian and central and Eastern Europe and CIS markets have remained and are expected to remain relatively stable.
The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.
- 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.