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Pricing MTOs

The Turkish Capital Market Board's (the CMB) established practice for approval of the offer price in a mandatory tender offer (MTO) appears to be up for an overhaul. In its groundbreaking decision dated May 16 2008, the 16th Administrative Court of Ankara appears to have tied the MTO price of the target company to the actual market price of a listed subsidiary. Specifically, the Court held that in the case of the acquisition of a listed company, the price offered to minority shareholders of a listed subsidiary in a MTO must also take into account its actual stock exchange price on the date of determination of the MTO price. Subject to the Council of State approving the ruling, MTOs triggered by an indirect change of control may become more expensive.

In the subject case, the National Bank of Greece acquired a controlling stake of 46% in Finans Bank. In so doing, the acquirer also obtained indirect control over the target's listed subsidiary, Finans Finansal Kiralama. According to the CMB's interpretation of the applicable legislation, such indirect change of control over the subsidiary triggers an MTO. With its decision dated December 6 2006, the CMB approved the MTO price proposed by the acquirer and the tender offer was held in the period from December 11 through to December 25 2006. One of the shareholders in the subsidiary, East Capital Asset Management, challenged the price approved by the CMB in court, arguing that the price should have been higher. Their position was that the price should have at least equalled the actual trading price of the stock.

The acquirer had calculated the MTO price based on a weighted average of the subsidiary's stock price during the three months preceding the change of control over the target. This resulted in the MTO price being lower than the actual trading price on the date of the CMB's approval. The relevant piece of legislation distinguishes three different tender offer price calculation methods according to the type of the acquisition that triggered a MTO. The accepted methods are a previous voluntary tender offer, a block sale or, as a catch-all means, any other type of acquisition other than a voluntary tender offer or block sale. According to this catch-all method, the tender offer price may not be less than the highest price paid by the acquirer during the last three months preceding the tender offer. All of the three methods assume a direct change of control. A calculation of the price in the event of an indirect change of control is not regulated. Lacking any provision applicable to indirect share acquisitions, the acquirer employed the catch-all method and fixed the MTO price to the average price of the subsidiary's shares in the three month period prior to the change of control, and the CMB approved the transaction.

On May 16, the 16th Administrative Court of Ankara cancelled the CMB's administrative decision to approve the MTO price suggested by the acquirer. The court's finding effectively dismissed the CMB's established practice to approve a calculation of the MTO price based on the weighted average of the trading price on the basis of the catch-all clause in the relevant piece of legislation. In its limited reasoning, the court argued that although the applicable legislation does not provide for an explicit provision with respect to the determination of the MTO price in indirect share acquisitions, the above mentioned catch-all method has a limited scope of application making it inappropriate for indirect share acquisitions. The court reminded the parties that the primary objective of the CMB is the protection of the interests of minority shareholders. It held that in the present case, the fair market value of the shares must be calculated by taking into account the actual stock exchange price on the date of the determination of the MTO price. The court's reference to the trading price on the date of the CMB's decision approving the MTO price may be interpreted as setting the actual trading price as the minimum to be offered to minority shareholders. The CMB's acceptance of the MTO price was reversed because the weighted average trading price was below the stock exchange price on the date of determination of the MTO price. In the situation of low correlation between MTO price and trading price, the primary objective of the CMB of protecting the interests of minority shareholders would not be served.

If the ruling is approved by the Council of State, the CMB will have to change its general practice. The stock exchange value of the shares at the determination date of the MTO price will be one of the most critical factors to be taken into consideration by the CMB. In the case at hand, the acquirer will again have to seek the CMB's approval, and the MTO price for the subsidiary's shares will most probably not be less than the trading price on the date of the CMB's decision. Investors holding the subsidiary's shares will receive a second payout. Notwithstanding this controversial decision, even if the ruling is approved by the Council of State, the CMB still has the option to enter the ring for a second round. The CMB may amend the current legislation with an explicit provision that the MTO price (in the case of an indirect change of control) must be the weighted average of the trading price immediately preceding the change of control. While the CMB's legislative action would not be retroactively applied to the acquirer, it could, nevertheless, be challenged in court by the shareholders of the subsidiary.

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