ITALIAN UPDATE – Italian Stock Exchange Commission Enforces Tender Offer Rules
- For the first time, the Italian Stock Exchange Commission applied a law of 2007 that enables it to order the launch of a tender offer, or impose a fine, for breach or circumvention of the mandatory tender offer rules.
- Previously the sanctions, which proved ineffective, consisted of a fine, the freezing of voting rights, and the forced sale of the shares in excess of the statutory threshold.
- The main purpose of this new rule is to enable minority shareholders to obtain fair compensation for their loss without needing to go through long and costly litigation.
- The Commission has broad discretionary powers in determining whether to impose the tender offer, and the price.
Last December, for the very first time, the Italian Stock Exchange Commission (Consob) imposed a sanction ordering the launch of a tender offer on a group of shareholders who, acting in concert, circumvented the mandatory tender offer rules. After a year-long investigation, Consob established that three shareholders of Greenvision Ambiente S.p.A. had entered into an undisclosed agreement to acquire control. More precisely, they purchased stock, in the aggregate, in excess of the 30% threshold that should have resulted in the launch of a mandatory tender offer. These purchases allowed them to appoint six out of the seven board members.
The interesting thing about this ruling is that it is the first application of a law designed to ensure effective compliance with the provisions on mandatory tender offers, set out in Directive 2004/25/CE. The Directive gives member states significant leeway to decide the sanctions for breach of the mandatory takeover rules, and to decide how to grant minority shareholders redress (“The sanctions…shall be effective, proportionate and dissuasive”).
Prior to the new legislation enacted in 2007, when a party breached the mandatory tender offer rules, Consob imposed a pecuniary sanction, “froze” the breaching party’s voting rights, and ordered the sale of the shares purchased in excess of the relevant threshold triggering the obligation to launch a tender offer. Although these remedies may have significantly deterred the buyer (as it was prevented from acquiring effective control over the target), they did not adequately compensate the minority shareholders deprived of the chance to sell their shares at the premium price usually paid by a buyer wanting to gain control of the company.
The ineffectiveness of the existing set of remedies became evident in a high-profile case in 2002 regarding the acquisition, in breach of the mandatory tender offer rules, of over 30% of the share capital of Fondiaria (an insurance company) by its competitor SAI and other intermediaries acting on its behalf. As a result, minority shareholders initiated several court actions, some of which are still on their way to the Italian Supreme Court, based on the application of general principles of civil law, such as tort liability and breach of contract. In general, it is not yet settled that an individual shareholder may seek damages from the buyer in breach of the mandatory tender offer rules (although lower courts have upheld this principle). In any event, the Italian experience shows that leaving the task of granting redress to shareholders solely to the judiciary is less than ideal. In particular, the absence of securities class actions entails a proliferation of trials – in different courts – and entails each minority shareholder incurring the cost of a highly uncertain litigation, as case-law in this area is far from settled.
The Italian legislator attempted to fill this gap by granting Consob discretionary power to impose any person(s) in breach of the mandatory tender offer rules to launch a tender offer (at a price established by the regulator), rather than simply imposing the sale of the shares. The underlying rationale is to allow minority shareholders to receive fair compensation for the loss incurred, without needing to turn to the courts.
Consob’s first application of the provision had been long-awaited by the legal and business communities, which were eager to understand how the Commission will use the broad discretion the new law grants it. In fact, Consob is free to decide whether to impose – on top of the pecuniary sanctions, which are applicable anyway and can equal the consideration for the tender offer – the launch of a tender offer rather than the sale of the shares in excess of the statutory threshold. The decision must be based on the circumstances of the case, including the reasons underlying the breach, and the need to protect minority shareholders.
In the Greenvision case, Consob established that the three shareholders acted in concert to acquire control of the company, circumventing the mandatory tender offer and associated costs: a blatant example of willful misconduct. Moreover, the Commission concluded that, given the limited volume of transactions of Greenvision shares, a forced sale would have depressed their price, and caused the minority shareholders to suffer still further losses. The ruling is particularly interesting as a precedent because the law provides no guidance on how to determine the offer price. Consob stated that it does not necessarily need to be the same as that of the mandatory tender offer that should have been launched at the time of the breach. In the circumstances, it applied a premium to the current market price, consistent with the premium the buyer paid – or could reasonably have been expected to pay – to obtain control of the issuer.
The underlying reasoning of the decision indicates Consob’s willingness to use this remedy only in cases of deliberate breach where there is a special need to protect the minority shareholders. The controlling shareholders may now challenge Consob’s determination of the offer price, but the court will simply be asked to assess whether the Commission reasonably applied its discretionary power in the circumstances. The court may void the assessment, but not re-determine the offer price. From a policy point of view, it is interesting to note the shift towards a remedy that would leave individual shareholder’s claims outside the courtroom, by providing an alternative means of redress capable, in most cases, of granting fair compensation faster and more cost-effectively.