In the financial crisis takeover opportunities have been created due to falling prices and the possibility for larger companies to acquire smaller, struggling players in the market. Nevertheless, the difficulties companies have been finding in obtaining the necessary financing made 2008 the year with the record number of cancelled operations.
Although the first trimester of 2009 has been a slow one for proposals, there have already been four takeover bids in Portugal, and the Portuguese government has granted €175 million ($233 million) to facilitate acquisitions of small and medium companies. But one of the key measures designed to facilitate takeover bids adopted by the Directive on Takeover Bids (Directive 2004/25/EC of the European Parliament and the Council, of April 21 2004) was not totally implemented in Portugal: the break-through rule.
This rule makes certain restrictions inoperable during the takeover period, and also allows a successful bidder to easily remove the incumbent board of the target company and modify its articles of association. The Directive's other key provision, with the same facilitating purpose, was the board-neutrality rule. Portugal had already implemented a regime on broad lines similar to this rule. Therefore, we shall focus only on the Directive's key issue where Portugal's regime for corporate control differs mostly from other countries: the pre-bid defences.
Imposing break through on limited cases
Like most member states, Portugal made use of the possibility given by Article 12 of the Directive to opt out of the compulsory application of Article 11's break-through rule. This gave companies the option to include these provisions in their statutes, allied to the possibility to reciprocate against a bidder not subject to this rule. But the Portuguese Securities Code mandated the application of the break-through rule to companies where the approval of more than 75% of the voters is required to change the articles of association.
Because of the supermajority in question, there is only a limited number of companies that will have to adopt the break-through rule. And considering that the voluntary adoption of the rule depends upon the approval of those benefiting from special rights or of a large proportion of shareholders, there is probably still a long way to go until we see the abolishment of preventive defences. Also, because the break-through rule does not neutralise all pre-bid defences, even Portuguese companies adopting that rule will still be able to maintain other statutory defences.
Portuguese statutory defence measures against hostile takeover bids may be grouped into five main categories:
- golden shares;
- limitations on voting rights;
- control over shares;
- financial schemes; and
- organisational measures.
Some of these measures were largely responsible for the outcome of two major takeover bids that occurred in 2006 and 2007, the years when Portugal last experienced strong activity in this area. We will use these takeover bids as examples on our exposition on statutory defence measures, since we find them to be a good sample of the Portuguese market for corporate control.
Golden shares rights
These special rights concerning the control of privatised companies are still vested on the Portuguese State in three strategic companies: EDP Energias de Portugal (energy sector), Galp Energia (gas and oil sector) and Portugal Telecom (telecom sector).
The creation of golden shares goes back to the Portuguese Law of Privatisations, which allows the exceptional existence of special shares, whenever reasons of national interest so require, that give the State "rights to veto changes in the articles of association and other decisions in the matters therein stipulated".
It is now almost consensual that these kinds of shares deter potential acquirers from presenting a bid for those companies. They are, according to the European Court of Justice, "liable to impede the acquisition of shares in the undertakings concerned and to dissuade investors in other Member States from investing in the capital of those undertakings".
The Directive did implement the break-through rule, but it expressly spared golden shares from the application of these provisions. The Directive did so going against the conviction of a Group of Experts appointed by the European Commission, who believed that "the break-through rule should also apply so as to override special control rights attached to golden shares held by Member States, even if the European Court of Justice would rule they do not violate the Treaty of Rome as such".
When implementing the Directive, the Portuguese Securities Code also left golden shares out of the break-through rule. This left unsolved the controversial outlines of one of the major 2006-2007 takeover bids: the offer the Sonae Group (a retail and property conglomerate also with activity in the telecoms sector) made over Portugal Telecom (PT). PT is one of the above-mentioned companies that were privatised, with the State keeping 500 special shares that give the right of veto on major shareholders deliberations. These can include decision on amendments to the articles of association, the increase of the share capital and the authorisation of the acquisition of more than 10% of the company's share capital by entities whose activity competes with PT. These shares also give the right to veto one third of the company's directors, including the president of the board of administration.
There is no clear indication of the circumstances when special rights given by golden shares may be exercised. The only limitations to this exercise result, on one hand, from the general principles of the Portuguese Constitution, where the prosecution of the public interest is the State's criteria and limit of action. It is subject, on the other hand, to the principle of proportionality stated in the Portuguese Administrative Procedure Code, according to which the State is subject to that principle when acting in the private sector.
The offer for PT was subject to the condition that the golden shares wouldn't interfere with the bidder's restructuring plan for the target company, requiring their abolishment or limitation if that interference was to occur. The offer did not succeed for other motives explained hereunder, but if the abolishment or restriction of the golden shares had been required for the offer to be successful, the task would still not have been easy for Sonae. Additionally, the Portuguese Government said it would let the market decide the outcome, but it would use the golden shares if national interest were at stake. That could have been so if there were suspicions that Sonae's foreign shareholders (France Telecom) planned to gain control after the acquisition.
Because the Directive did not offer a solution on this subject, it is for the European Court of Justice to determine, on a case-by-case basis, if the existence of these special rights breached the dispositions of the Treaty of the European Union. That is what happened in the action brought by the European Commission before the European Court of Justice against Portugal (C-367/98), because of the State's golden shares that limited foreign ownership of shareholdings of privatised companies (according to Article 13(3) of Law no. 11/90 and Decree Law no. 65/94), which were considered to breach the principle of free movement of capital. The legal disposition that allows PT's golden shares was left out of that action against Portugal. Notwithstanding, after sending the Portuguese State, with no results, a formal request to abandon the golden shares in PT, in 2008 the European Commission took this matter to the European Court of Justice, where a decision is still awaited.
The one-share-one-vote goal
The Portuguese Companies Code prohibits multiple vote securities, but it does allow the limitation on the total number of votes exercisable by each shareholder independently of its participation in the share capital. Designed to avoid control positions, these limitations, baptised as shark repellents by Ott and Santoni (1985), are not considered by many to be the most efficient takeover defence mechanism because they are inoperative as such when applicable to all categories of shares. They could have some effect if they were only applicable to the category of shares subject to the offer, but that is not probable.
Notwithstanding, the existence of voting limitations was the reason for the unsuccessful outcome of Sonae's offer over PT. In fact, the offer was conditioned to the elimination of the voting rights limitation existing in PT's articles of association, which exclude from the counting of votes the ones issued by one shareholder that overcome 10% of the total number of the votes linked to the share capital. That would imply the modification of the articles of association, in relation to which the State has a veto right, as mentioned here above. But the State did not exercise its veto, nor did it have to, because the majority of PT's shareholders voted against the elimination of the voting limitation, determining the offer's premature death.
The other major offer that occurred in 2006 also had to face the obstacle of voting rights limitations: the bid made by Banco Comercial Português (BCP), the biggest private Portuguese bank, over Banco BPI (BPI). BPI's articles of association exclude the counting of votes issued by one shareholder (or by entities whose votes the law attributes to that shareholder) that overcome 17.5% of the votes linked to the share capital. Because of those limitations, the offer was conditioned to the acquisition first of 90%, later changed to 82.5%, of the share capital. But if BCP was to be successful in its plan to eliminate the oferee's vote limitations, the offer mentioned that it would reduce its goal to 50% of the company's share capital. BCP did not succeed in eliminating the voting rights limitations, but, even if it did, the offer's outcome of 3.9% of BPI's share capital was far from enough for its success.
There are seven Portuguese companies with voting rights limitations, one of them being BCP itself, with a limit of 10% of votes.
At EU level, the European Commission published an impact assessment on the question of proportionality between capital and control in listed companies in 2007. It concluded that there is no need for action at EU level on this issue, passing on member states the task to solve it internally.
In Portugal, the Portuguese Securities Commission (CMVM) issued a group of corporate governance recommendations known as the White Paper on Corporate Governance (2007), where it recommends the adoption of the one-share-one-vote rule. Following this document, the Portuguese Institute of Corporate Governance issued the "Corporate Governance Code Project" (2009), where the rule is adopted as the only one that allows the shareholders to decide, through the use of their voting rights, the takeover bid's merit. It underscores that it is desirable that there should be a "coincidence between the percentage of the voting rights and each shareholder patrimonial rights".
The Portuguese Government, in its 2006 program, stated that the improvement of the corporate government systems was one of its priorities and that "because of the position it still has in major companies, it must be set as example in the adoption of corporate governance good practices (...). In what concerns privatised companies, or companies in the path to privatisation, the rules to be adopted must be the ones applicable to the companies with shares admitted to trading".
Oddly enough, in Sonae's offer over PT, Caixa Geral de Depósitos, a bank fully owned by the State that had 5.11% of PT's shares, voted against the exclusion of the voting rights limitation, determining the final result of the shareholders' meeting and the failure of Sonae's offer. The Portuguese Companies Code used to exclude from the voting rights limitations the ones belonging to the State (or equivalent entities), but a legislative reform in 2006, which implemented corporate governance rules in that Code, eliminated this exclusion.
Subsequently, a privatised company, Portucel – Empresa Produtora de Pasta de Papel (paper sector), not only abolished the existing restrictions on voting rights but also ended all the State's privileged rights therein. Nevertheless, the Portuguese State is still free from the voting rights limitations existing in privatised EDP. This company's articles of association still limit to 5% the total number of votes linked to the share capital per shareholder, but exclude the State from this limitation.
The Portuguese Companies Code also allows for preference shares with no voting rights, admissible up to the amount of half the share capital. These have limited impact as a takeover bid's defence though, considering that the bid may always fall only on ordinary shares, unless it is general and mandatory, in which case the acquisition of no voting shares may be inconvenient, alerting companies not to reach the limit that triggers the mandatory bid. Note that springing voting rights, which give these shares the voting right in case the company's control changes in result of an offer, is not allowed.
Control over shares
The Portuguese Companies Code prohibits the statute's clauses that exclude the transmission of shares, or that limit that transmission more than what is legally allowed.
It allows, nevertheless, for that transmission to be subject to the company's authorisation and also to the other shareholders' preference or to the existence of other subjective or objective requirements in line with the public interest. But the Portuguese Securities Code excludes the shares with transmission limitations from stock market negotiation. Therefore, in the anticipation of a takeover bid, a company must choose between the admission to trading of its shares and the inclusion of the referred clauses.
This kind of restriction may also be stipulated in a shareholders agreement, leaving shareholders with the choice to choose between accepting the offer and complying (or not) with the agreement, with the necessary contractual and legal consequences. In its bid over PT, Sonae also had to face a restriction on the transmission of PT's shares that was allowed by the Law on Privatisations. PT's statutes required the shareholders' permission for the acquisition of more than 10% of its share capital by a company with an activity that competes with PT's. Sonae, also acting in the telecommunications sector, conditioned its bid on that shareholders' previous permission. This was never discussed on PT's shareholders meeting.
The general shareholders meeting's agenda did determine that the appreciation of the voting limitation was previous to the discussion of the transmission of shares limitation. Sonae unsuccessfully tried to swap the order of the issues on that agenda, so that if the shareholders decided to allow the acquisition of more than 10% of PT's shares, that decision could positively influence the outcome of the decision on the exclusion of limitations on voting rights. Because the agenda was left unchanged, when the shareholders voted against the exclusion of the votes' limitations, the offer automatically died, rendering the discussion of the next issue impracticable.
Another defence strategy may also consist of promoting reciprocal participations between companies, although it must be noted that the shares that correspond to participation over 10% on the share capital have their voting rights suspended.
Finally, the company may also buy its own shares, although with a limit of 10% and with no voting rights, which reduces its effect as a takeover bid defence. Portuguese Law does not allow for the so-called poison pills, a measure that gives the company's shareholders (excluding the bidder) the right to acquire a certain number of shares in the case of a hostile takeover bid.
Financial and organisational measures
Financial schemes, such as giving the board of administration, in case of a hostile takeover bid, the economical benefits known as golden parachutes, are allowed by Portuguese law. Another possibility is the attribution of a high retirement; due from the moment the administrator ceases its functions.
Finally, the Portuguese Company Code also allows for special rules concerning the appointment of the company's directors, which may work as defence measures. A company's articles of association may stipulate a minority of directors to be elected by way of proposals issued by shareholders having shares representing between 10% and 20% of the share capital. They may also stipulate that the minority of shareholders (having at least 10% of the share capital) that voted against the winning proposal has the right to appoint, at least, one director. These directors may not be removed from office without fair justification, if shareholders with more than 20% of the share capital vote against it.
The Portuguese Company Code also allows the requirement of a qualified majority of shareholders votes for the election of the company's directors, also allowing the existence of special rules for their removal from office. These rules will obstruct the immediate election of new directors in the general shareholders meeting following the takeover.
Unfinished key issue
Leaving room for considerable deviation at national level from its key provisions, the Takeover Directive left the issue of defensive measures unfinished. The only conclusion we venture, after going through the main pre-bid defensive measures allowed by Portuguese Law, is that the Takeover Directive's goal of preventing "patterns of corporate restructuring within the Community from being distorted by arbitrary differences in governance and management cultures" still has a long way to go.
| Author biography |
Maria Vaz de Mascarenhas
Pedro Pinto Reis & Associados
Maria has concentrated her practice in finance and capital markets law, M&A, banking law, commercial and corporate law.
Born in 1975, she completed her law degree in 1998 at the University of Lisbon's Law School, becoming a member of the Portuguese Bar Association in 2000. In 2000 she completed postgraduate study in Markets, Institutions and Financial Instruments at the University of Lisbon, together with Nova University of Lisbon and Porto's Derivatives Market. In 2004 she completed an LLM in Banking and Finance Law at King's College of London.
After doing her internship in the Portuguese Law Firm PMBGR – Pena Machete Botelho Moniz Nobre Guedes Ruiz e Associados, Maria was a lawyer in the legal department of the Portuguese Securities Commission (CMVM) where she mostly worked on capital markets regulation and analyzed breaches of market laws and regulations, also conducting CMVM's administrative proceedings.
Between 2004 and 2008 she worked as a legal consultant in finance and capital markets, having worked mainly in the regulative sector, due to the implementation of several Financial European Directives during that period. She then joined the Portuguese Law Firm Pedro Pinto Reis & Associados (PPR&A). Maria is fluent in English, French and Spanish. |