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How takeover offers work (part II)

The general rule of priorly made offers outlined in part I of this article (see IFLR March edition) itself raises several issues.

a) Inconsistency in the working mechanism

One of the major issues arising out of the former wording of the Capital Markets Act (CMA) was the inconsistency existing between the definition of acquisition of control, as provided for by Section 65 (1), and the type of control acquired through a takeover offer.

The former definition of Section 65 (1), as set out in part one of this article, revolved around the acquisition of voting rights, including cases where the acquisition of voting rights was affected without acquiring shares. However, under the provisions of Section 71 of the CMA (1 and 4-5), it was possible to acquire the ownership of shares via a public takeover offer. In a public takeover offer the voting rights were acquired as a result of the acquisition of the ownership of the target (voting) shares. Also, the other elements of the definition, set out in the former provisions of Section 65 (2-6), specified all the ways to acquire control (for example, receiving entitlement to appoint or remove the majority of the executives of a company). As such there may have been cases not included in the statutory definition, which constituted influence (control) over the decisions of the target without obtaining voting rights.

The practice of the Financial Supervisor, which tended to extensively interpret the above definition and attempted to include any conduct constituting influence over the decisions of another company, may actually have caused more confusion. As long as it is possible to acquire control in a public company through a takeover offer only by acquiring shares, it seems senseless to require a previously approved public takeover offer for acquiring control without acquiring shares or voting rights, if this is legally impossible via a takeover offer. It also seems senseless and, most probably, legally impossible to apply sanctions in relation to such an acquisition of control, on the grounds that it is in breach of the statutory requirements.

The above inconsistencies may become obsolete in the light of the newly introduced provisions. This will depend on how broadly the Financial Supervisor (or the competent courts) will interpret the scope of those falling within the definition of persons acting in concert. In case of a restrictive interpretation, defining the harmonized conduct as that of the shareholders of the target, the inconsistencies will remain. However, if this term can also apply in the case of third parties who are not shareholders of the target, it may be a solution for these problematic provisions. Although we could find reasons supporting both interpretations, this issue will be settled within the case-by-case practice of the Supervisor.

The importance of this issue is that standard signing/closing undertakings (providing rights to parties intending a takeover concerning the target's corporate decisions prior to closure) may easily be in breach of the Financial Supervisor's interpretation based on the former regulations.

b) Inconsistency in the scope of target shares

The case of subsequent offers, which in practice may also pose problems regarding proper interpretation, is the one set out in the previous edition of IFLR under I a) (ii). This provision includes cases of inheritance, legal succession, acquisition of control as a result of corporate restructurings and (cross-border) indirect acquisition of control. The latter case means that if a buyer acquires control in a company that already controls a public company registered in Hungary, an obligation to make a public takeover of the Hungarian company's shares is triggered. But it is not clear in practice if this means that the offer has to be made for all the voting shares of the target company in accordance with Section 71 (1) of the CMA. It could mean that the offer should only cover the voting shares not controlled indirectly by the offeror. To date there have been no court cases deciding on this issue.

c) A takeover offer as remedy

Another important issue is this: whether a party that acquires control of a company in breach of the CMA may be entitled to lawfully make a subsequent public takeover offer, and thereby remedy its breach.

According to the practice of the Financial Supervision, an acquisition of control in breach of the CMA does not exclude a later takeover offer for the same shares by the person in breach. Under this practice the obligation of making a public offer, as required by the Financial Supervisor, may serve as a sanction against persons acquiring control unlawfully. There has been no final court decision on this practice of the Supervisor regarding takeover offers.

This practice also means that the acquisition of control and the takeover offer are assessed in separate procedures of the Financial Supervisor.

d) Legal consequences

The possible legal consequences of an unlawful acquisition of control may be the following:

  • the Financial Supervisor can impose a fine on the acquiring party (Section 405 (1) and 406 (2) m) of the CMA);
  • the Financial Supervisor can decide that the shareholders' rights of the acquiring party affected by the breach may not be exercised or, if necessary, it may prohibit the exercise of such shareholders' rights (Section 77 and 400 (1) n) of the CMA),
  • the Financial Supervisor can order that the shares acquired as a result of an unlawful acquisition of control have to be disposed of within 60 days (Section 77 of the CMA).

In line with the above, as set out under paragraph c), it may be argued that the obligation to make a public takeover offer, as required by the Financial Supervisor in a resolution, is a sanction. This way the existence of the offer, and the administrative control thereof, ensures the safeguard of the shareholders' rights against a party intending to take over the company.

e) Legal consequences for subsequent offers

Another issue closely related to the possible sanctions outlined by the CMA is whether the sanctions contained in Section 77 may also apply for subsequent offers. The core of this issue originates from an inconsistency contained in the relevant provision of the CMA. The applicability of this provision will also be affected by the scope of the definition of persons acting in concert, as discussed under II paragraph a).

On one hand Section 77 relates to the "acquisition" of control (that is, obtaining such control), and includes sanctions for an acquisition in breach of the relevant sections (65-76) of the CMA.

On the other hand the concept of subsequent offers provides that a party - in a limited number of cases - is entitled to acquire control in a public company without priorly completing an offer procedure. In such a case the offer has to be made within 15 days of reporting to the Supervisor regarding acquisition of control.

In the case of a subsequent offer the sanctions would be applicable, in contradiction of the language of Section 77, to a situation where a control acquired lawfully under Section 65 (2) became unlawful or was exercised unlawfully (for example, because of the lack of a public offer after the acquisition of control). Without appropriate authority or judicial practice it would be difficult to provide a definite answer to this issue, but there may be strong arguments supporting both interpretations.

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