M&A reform

Author: | Published: 1 May 2008
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Few pieces of legislation have taken as much time and effort to be approved as Directive 2004/25/EC of April 21 2004 on takeover bids. The Directive is the result of a tortuous legislative process that started in the mid-1980s. Its declared purpose is "to create Community-wide clarity and transparency in respect of legal issues to be settled in the event of takeover bids and to prevent patterns of corporate restructuring within the Community from being distorted by arbitrary differences in governance and management cultures". Essentially its purpose is to create a level playing field. However, its final version is far from reaching this objective.

The long legislative process that led to the approval of the Directive underlines the political difficulties in agreeing to common rules applicable to takeover bids. The only possible way to approve the Directive was to sacrifice its controversial – and critical – provisions and establish complicated mechanisms (opt-in and opt-out provisions) that, in practical terms, give discretion to each member state on how to implement the Directive. The result is a framework directive, which lays out certain "common principles and a limited number of general requirements that Member States must implement through more detailed rules in accordance with their national systems and their cultural contexts." Therefore political consensus has been reached at the expense of true harmonisation.

The Directive provides that member states should enact the laws and regulations necessary to implement its provisions by May 20 2006. To that end, but nevertheless with a significant delay, Spain approved Law 6/2007 of April 12 2007 and Royal Decree 1066/2007 of July 27 2007 on the rules applicable to takeover bids which developed Law 6/2007. The introduction of this new legislation is one of the major developments in recent years for Spanish commercial law.

Mandatory bids

The old Takeover Law established a system in which intent to exceed any of the then relevant thresholds triggered an obligation to make a mandatory bid. This prevented offerors from acquiring shares without first launching a takeover bid. As a general rule, the previous regulations also permitted partial offers. In contrast, under the new regime, the obligation to make a takeover bid does not arise based on the intention of the offeror to exceed the established control threshold but rather because this threshold is reached. Law 6/2007 sets the threshold triggering a mandatory bid at 30%, which is lower than the previous threshold of 25%. The bidder must make a total offer – that is, the bidder must address its offer to all security holders and for all their securities.

The reduction of the threshold to make a compulsory bid for the entire share capital raises the issue of what happens when a shareholder that currently owns 30% or more, but less than 50%, of the capital of a listed company, wants to increase holdings over the 50% threshold that required an offer for all the securities of the target company at the time Law 6/2007 was enacted. To avoid a legal vacuum, Law 6/2007 provides that any person in this situation must make an offer for all the shares if it acquires 5% or more of the capital in any 12 month period or if it reaches or exceeds 50% of the capital.

Finally, the offer must be made at an equitable price, which, according to the new law, is the highest price that the bidder (or any persons acting in concert) paid or agreed to pay for the same securities during the 12 months preceding the offer. The new regulations provide for certain exceptions to the obligation to make an offer at an equitable price.

Voluntary bids

Takeover bids may also be made voluntarily. Whoever does not hold control over a listed company and seeks to acquire it or, while already possessing a controlling interest, wishes to increase its interest in the target company, may make a voluntary bid. If an offeror acquires a controlling interest in the target company as a result of a voluntary bid, that offeror will then be required to make a mandatory bid unless the offeror can benefit from the exemption described below. Voluntary bids are subject to the same rules as mandatory bids, and the following special provisions: (i) voluntary bids may be subject to certain conditions provided that their fulfilment or non-fulfilment can be verified at the end of the acceptance period for the bid; (ii) voluntary bids need not be made at an equitable price; (iii) in the event that the voluntary bid is structured as an exchange of securities, cash consideration, or a price that is at least financially equivalent to the exchange offered, need not be included as an alternative; and (iv) a voluntary bid for less than the total number of securities may be made (partial voluntary bids are allowed) by a party that, consequentially, will not acquire a controlling interest, or by a party that already holds a controlling interest and is free to increase its shareholdings in the target company.

The acquirer will not be obliged to make a mandatory bid where control is obtained following a voluntary bid for all the securities of the target company if the bid has been made at an equitable price, or the bid has been accepted by holders of securities representing at least 50% of the voting rights to which the bid was directed (excluding the offeror's shareholding and irrevocable undertakings).

In addition, a bid will not be required in any of the following cases: (i) the shares are acquired by funds for the insurance of deposits in banking entities and certain other institutions of a similar nature as well as acquisitions consisting of allotments approved by these bodies; (ii) acquisitions or other transactions are made pursuant to the Compulsory Purchase Law; (iii) when the shareholders of the target company unanimously agree to sell or exchange all or part of their shares or agree to waive the requirement to make a takeover bid; (iv) acquisitions or other transactions resulting from the conversion or capitalisation of claims into shares of listed companies, where that company is experiencing severe financial difficulty and the transaction in question is intended to ensure the company's long-term financial recovery; (v) mortis causa gratuitous acquisitions; (vi) inter vivos gratuitous acquisitions, provided that the recipient of the shares has not acquired shares of the target company in the previous 12 months and that there is no agreement or concert with the transferor; and (vii) when, as a result of a merger, a shareholder of the merged companies directly or indirectly obtains a control threshold in the resulting listed company, provided that the shareholder does not vote in favour of the merger at the relevant general meeting of shareholders, and it can be shown that the merger's primary purpose is not the takeover but an industrial or corporate purpose.

Conditional offers

A mandatory bid cannot be subject to any condition other than the authorisation by the competition authorities. By contrast, voluntary bids may be subject to certain conditions provided that they can be verified at the end of the acceptance period of the bid. The following conditions are permitted: the approval of amendments to the Articles of Association or of structural amendments or the adoption of other resolutions at a general shareholders' meeting of the target company; the acceptance of the bid by a certain minimum number of securities of the target company; the approval of the bid at a general meeting of shareholders of the offeror; and any other condition that the regulator (that is, the CNMV) deems acceptable under law.

When a mandatory or a voluntary bid is made contingent upon securing the authorisation or non-opposition of the appropriate competition authorities (Spanish, EU or other), or if the competition authorities authorise or do not oppose the concentration transaction before the expiration of the acceptance period, the bid will be fully effective. If the competition authorities declare that the proposed transaction is inadmissible before the expiration of the acceptance period, the offeror must withdraw the bid. If no express or implied decision is made by the competition authorities before the expiration of the acceptance period, or those authorities establish that their authorisation is subject to a condition, the offeror may withdraw the bid. If the bid that is made subject to the authorisation of the competition authorities is mandatory, the offeror may not, while the relevant decision is pending, exercise the voting rights corresponding to the excess of its shareholding over the threshold that created the obligation to make the mandatory bid.

Due diligence

The offeror may conduct a due diligence of the target company before making a takeover bid. The new law lays down a general principle of equality of information, so that all offerors are on a level playing field as regards information. The target company must ensure that all potential good faith offerors receive the same information. The target company can only make this information available if the information is specifically requested by the existing or potential offeror, if it has been previously provided to other existing or potential offerors, if the recipient of the information ensures its confidentiality and states that the information will be used for the sole purpose of making a takeover bid; and if the information is necessary to make the bid.

Inducement fees

The new regulations expressly allow for the possibility of the target company and the first offeror to agree on a break-up fee – or inducement fee – payable to the first offeror as compensation for the expenses incurred in preparing the bid if it is not successful due to competing offers. Formerly, only the shareholders of the target company, rather than the company itself, were allowed by the CNMV to enter into this kind of agreement. Such break-up fee agreements are subject to the following conditions: that the fee does not exceed 1% of the total amount of the bid, and that it is approved by the board of directors of the target company with a favourable report of their financial advisers. The fee must also be described in the offer document.

The passivity rule

Spain's previous takeover regulations adopted the so-called passivity rule inspired by the analogous rule of the English City Code. It is no surprise that Spain has opted for the application of Article 9 of the Directive. Until recently, there was little question that an offer was a business between the bidder and the shareholders of the target company as sellers. Directors had a conflict of interest and should therefore remain neutral. However, several recent takeover battles have fuelled a debate on the passivity rule and its limits. In the Mittal bid for Arcelor, a company with a registered address in Luxembourg (which at the time of the offer lacked a takeover law and therefore passivity rule) and shares listed in several jurisdictions, the fierce opposition of the target company's board resulted in several price increases that greatly benefited the shareholders. A similar conclusion could be reached for Spain in the context of the Endesa battle, which has made headlines in the financial press for almost two years. It is legitimate to question whether the passivity rule is, in practice, effective in protecting the interest of shareholders.

Leaving this discussion aside, the new regulations introduce various changes to the passivity rule. It is largely accepted in the market that the passivity rule is addressed only to the directors of the target company and that the shareholders can pass resolutions or authorise the board to engage in actions that can frustrate a takeover bid. In the conflict of interest between shareholders and directors, the former must prevail and the latter abstain. However, the new regulations clarify that shareholders may approve frustrating actions. Also, while the old system focused on the prohibition for directors of engaging in any activities that could frustrate a takeover bid, the new regulations require directors to seek the approval of shareholders before taking any action that could frustrate an offer, with the exception of seeking other offers (the so-called white knight defence) and, in particular, before initiating any issue of securities that could prevent the bidder from acquiring control of the target company. With regard to decisions taken previously but not yet implemented in whole or in part, the general shareholders' meeting must approve or confirm any decision that does not fall within the ordinary course of business and that could frustrate the offer. It is also worth noting that the shareholders may opt, through successive resolutions with an effective period of 18 months each, to release the board of directors from its duty of passivity if the company is the target of a takeover bid made by a foreign entity that does not have its registered office in Spain and is not subject to the same or comparable provisions.

The breakthrough rule

Spanish corporate law does not prevent listed companies from adopting certain anti-takeover provisions in its Articles of Association. While multiple-vote shares are prohibited in Spain, the Articles of Association of a company may establish a maximum number of votes that a shareholder may issue regardless of the percentage of the voting shares held. This is generally considered to be the most effective defence available under Spanish law. Articles of Association can further provide for reinforced quorum and majority requirements for the approval of key resolutions, or establish eligibility requirements for becoming a director or holding a position on the board of directors. The new regulations follow a similar approach as other EU member states by not imposing the adoption of Article 11 of the Directive and allowing companies instead to choose whether or not they want to opt in for the application of neutralisation measures. Accordingly, the shareholders of listed companies may decide, in a general shareholders' meeting, if they wish to adopt the following neutralisation measures: non-application of restrictions to the transfer of securities contained in any shareholders' agreement during a tender offer; non-application of restrictions to the voting rights contained in the company's Articles of Association or in any shareholders' agreement, in any shareholders' meeting deciding on a defence measure; and non-application of any of the above if the bidder acquires at least 75% of the voting rights after the offer. This decision may be revoked by the shareholders at any time. Moreover, companies that have opted in may decide not to apply the regime (that is, opt out), if an offer is made by a person or group that has not adopted equivalent neutralisation measures. When the bid is made by an entity or group that has not adopted equivalent neutralisation measures, listed companies that have opted to apply neutralisation measures to themselves may decide, by means of a resolution adopted within a maximum period of 18 months before the takeover bid being made public, that the measures do not come into play. Accordingly, the preventive measures contemplated in their Articles of Association and shareholders' agreements will be maintained.

Competing offers

A takeover bid will be a competing offer if it affects securities for all or a part of which another takeover bid, the acceptance period of which has not yet expired, has previously been submitted to the CNMV. A competing offer must be submitted at least five days before the end of the acceptance period of the original offer. In the case of partial voluntary bids, it must cover a number of securities not less than that of the immediately preceding offer. It must also outbid the last preceding offer, either by raising the value of the consideration or (in the case of partial voluntary bids) by extending the offer to a larger number of securities.

When more than one competing offer is submitted, the acceptance periods of all offers in existence will be consolidated into a single period, which will be the acceptance period for the last offer submitted. Competing offers are processed in the order of their submission, not their announcement, such that a competing offer will not be processed until the preceding offer has been authorised, if applicable.

The primary effect of a competing offer on the schedule is the interruption of the acceptance period not only of the original bid but also of all competing offers previously submitted. The acceptance period of competing offers is 30 calendar days, from the day following the publication of the first announcement of the offer that has already been authorised. The authorisation of a competing offer may also allow a bid to be withdrawn. Finally, the submission of a competing offer enables prior offerors to modify (improve) the terms of their offers. In this way the new regime maximises shareholders' benefit. The new regulations also allow the offeror to act in association or concert with third parties to improve the terms of the bid as long as certain requirements are satisfied. The process of competing offers ends when all of the offerors that have not previously withdrawn their offer send a sealed envelope to the CNMV containing an improved version of their bid or their decision not to submit an improvement of the offer within five business days of the end of the period established for submitting competing offers. The new regulations have some advantages for the first offeror (first mover advantage). The first offeror may improve its offer provided that the consideration offered in its sealed envelope is not more than 2% lower than the highest consideration offered in the envelopes of competing offerors; and the original offeror improves the price of the best offer made in an envelope by at least 1%, or extends the original bid to a number of securities at least 5% greater than that in the best competing offer submitted in any envelope.

Squeeze-outs and sell-outs

For the first time in Spain, Law 6/2007 regulates reciprocal squeeze-out and sell-out rights of securities for the bidder and the minority shareholders in the target company following a takeover bid. When, following a takeover bid made for all shares and other securities carrying voting rights in the capital of a listed company, the bidder holds securities representing at least 90% of the share capital with voting rights and the offer has been accepted by the holders of securities representing at least 90% of the voting rights to which the offer had been addressed, the bidder may force the remaining security holders to sell the securities at an equitable price (squeeze-out) and the holders of securities in the target company may force the bidder to buy their securities at the same equitable price (sell-out or reverse squeeze-out). Unfortunately, the first squeeze-out experience in the Spanish market reveals that this procedure is far from automatic when the shares are pledged or subject to any charge.

The new regulations contain provisions, such as rules governing takeovers in the case of unexpected or indirect acquisition of control and delisting tender offers, rules conferring broader authority on the regulator to apply the code and expanded requirements on the information that the offeror must include in the prospectus. On the whole, the new regulations modernise Spanish takeover rules and align the system with that prevailing in the rest of Europe – which is based on mandatory and total bids at an equitable price. The regulations benefit from valuable past experience and grant the CNMV discretionary powers that should prove useful in the context of takeover bids, as long as decisions are taken independently and transparently.

Author biography

Carlos de Cárdenas Smith

Uría Menéndez

Carlos de Cárdenas Smith is a partner in the corporate department of Uría Menéndez's Madrid office. His practice includes representing clients in areas such as commercial law, mergers and acquisitions (public and private), and leveraged and project finance. He graduated from Universidad Autónoma de Madrid in 1989, joining Uría Menéndez that year. Between 1997 and 2000 he headed the New York office of Uría Menéndez.