European Takeover Law: The State of the Art Bocconi University Implementation of the Takeover Directive in France Christophe Clerc
Partner
Marccus Partners
15 December 2008
European Takeover Law: The State of the Art Bocconi University Implementation of the Takeover Directive in France Christophe Clerc
Partner
Marccus Partners
15 December 2008
Table of content
I – Context: shareholders, managers and employees
II – Timeline of an offer
III – Specific issues :
A - Implementation of articles 9 and 11 of the Directive
B - Mandatory tender offers
IV – Compliance review
V – Open issues
I - Context – Entrepreneurs and shareholders
Entrepreneurs Activity: « forecasting the prospective yield of assets over their whole life » (J.M. Keynes) Commitment to a project In-depth knowledge of the company Proximity with stakeholders: need to take into account “negative externalities” Long term investments funded with sound finance
Shareholders
(public companies)
Activity: « forecasting the psychology of the market » (J.M. Keynes) Interest solely in financial results and ROE Because of diversification of portfolio, only superficial knowledge of each company No link with stakeholders:“negative externalities” are disregarded Highly leveraged short term investments
Main views
Team production view (Blair & Stout) Key concepts:
team production - board and management as « mediating hierarchs » - hold-up problem Shareholders Board Management Employees I – Context: Where should the management be? Traditional view Capitalists (shareholders) Employees Key concepts:
capital / workforce - antagonist blocks Finance view (Jensen & Meckling) Shareholders Board Management Employees Key concepts:
« shareholder democracy » - board as representative of shareholders - alignement of interest - principal / agent (master / servant) theory
General setting
a) Legal and regulatory framework
CMF. The Monetary and Finance Code (“CMF”) lays down the main principles and delegates power to the AMF. The law of April 1, 2006 has implemented the Takeover Directive 2004/25/EC of April 21, 2004.
AMF. Public takeovers are mainly regulated and supervised by the Financial Markets Authority (Autorité des Marchés Financiers) (“AMF”).
RGAMF. The main rules and principles governing public takeovers are set out in the AMF's General Regulation (Book II, Title III) (“RGAMF”).
b) Issues to be addressed
General principles
Role of sponsoring banks
Preparing an offer: stake building and preliminary agreements
The offer price
Filing of the offer and offer document and target’s response
Admission of the offer
Duration of the offer
Works council
Tendering the shares
II – Timeline of an offer
2) General principles
The General Regulation sets out some key principles governing public offers, “to allow an offer to
be conducted in an orderly fashion in the best interests of investors and the market”, which are:1
A level playing field between alternative bids.
Equal treatment of, and access to, information by holders of securities concerned by the offer.
Market transparency and integrity.
Fairness in transactions and competition.
1 Article 231-3 RGAMF
3) Sponsoring banks
The sponsor. Tender offers are filed with the AMF by an investment service provider authorised to act as underwriter (prestataire de services d'investissement), acting as sponsor on behalf of the bidder.1
Roles. The sponsor’s main roles are the following:
Advice. It advises the bidder on the tender offer.
Representative. It represents the bidder vis-à-vis the AMF.
Guarantee regarding irrevocability. It guarantees that the bidder's commitments in relation with the offer are irrevocable. Regarding cash tender offers, the sponsor guarantees the payment of the offer price to the shareholders tendering their shares to the offer. The guarantee is also applicable in the event the bidder withdraws its offer when it is not allowed to do so.
Guarantee regarding content. It guarantees the “content” of the offer. This implies that the sponsor should check that the offer, as structured, complies with applicable rules.2
1 231-13 RGAMF
2 CA Paris 10 mars 2006, M James v. DAB Bank AG
4) Preparing an offer: stake building and preliminary agreements
In order to secure the success of an offer, two strategies are often contemplated: pre-offer purchases of shares and agreements with significant shareholders whereby they commit to tender their shares into the offer.
a) Stake building
Stake building raises the following issues :
i) Insider trading
No general prohibition. Stake building in anticipation of an offer is not prohibited by specific laws or regulations, but it should be carefully assessed in light of the prohibition of insider trading.
Case law (Zodiac). It results from case law (the “Zodiac” case)1 that stake building is lawful when its aim is to secure the success of the offer.
In the Zodiac case, the bidder held 33.67% of the target shares prior to the offer and had acquired 0.7% additional shares.
In substance, the Court held the acquisition should be done with the intent to secure the success of the bid, not to save money through the acquisition of shares at a price lower than the bid price.
There is no “bright line” test (in the form of specific percentages, for instance) to decide whether a proposed acquisition is lawful or not.
1 CA Paris, 15 november 1994, Joly Bourse 1995
ii) Declarations of significant participations
Thresholds. In the event any person, acting alone or in concert, comes to hold 5%, 10%, 15%, 20%, 25%, one-third, 50%, two-thirds, 90% or 95% of the target company's share capital or voting rights, disclosure requirements apply.2
Timing. Notification of the AMF within five trading days. The AMF discloses this information to the public. The information must also be addressed to the company.
Sanctions. Failure to make the required disclosures result in:3
Automatic vote deprivation. Shares exceeding the relevant threshold are automatically deprived of voting rights until the appropriate disclosures are made and for a two-year period following the date of such correcting disclosures.
Court decided vote deprivation. Courts may decide that all or part of the shares held by the defaulting shareholder are deprived of voting rights for a maximum period of five years, upon request from the AMF, the company's chairman or any of its shareholders.
Fine. Maximum fine of EUR18,000.
2 Article L.233-7 I and 223-11 et seq RGAMF
3 Article L.233-14 CC
iii) Declarations by company insiders
Full transparency. Company insiders (such as directors and officers) must report to the AMF, electronically and within five business days of execution, all acquisitions, disposals, subscriptions or exchanges involving the financial instruments of such company, as well as all transactions in related instruments.1
iv) Declarations of intention
Principle. If a person crosses the 10% or 20% thresholds in any French company listed on a regulated stock market, it must file a declaration of intention with the company and the AMF, within ten trading days of such crossing.
Content. The declaration must state:
Its objectives or intentions for the following 12-month period.
Whether it is acting alone or in concert with others
Whether it will continue to purchase shares, request the appointment of new board members, or acquire control of the target.
Amendments. If the stated objectives change (which is permitted only in the event of significant changes in the environment, situation or shareholder base of the persons concerned), a new declaration, published in the same way, shall be made and sent to the company and the AMF.2
Sanctions. Failure to make the required disclosures leads to the same deprivation of voting rights as applied to failures to disclose significant participations.3
Legislative changes. Amendments to these rules are currently being contemplated.
1 Articles...
v) Rumors
“Put up or shut up”. Any person reasonably believed to be preparing a tender offer may be required by the AMF to declare its intentions within a deadline set by the AMF. Such intentions are communicated to the public by the AMF.
Specific applications. This rule may in particular be applied when the target shares are subject to significant and unusual changes regarding price or traded volumes. It is also applicable in the event of discussions between the issuers concerned or appointment of advisors with a view to preparing a public offer.4
4 Articles L. 433-5 CMF and 223-32 RGAMF. This rule comes in addition to the general provisions of article 223-6 RGAMF regarding the preparation of transactions.
b) Commitments to tender
Definition. When significant shareholders exist, it is possible to enter with them into an agreement whereby they commit to tender their shares to the offer (subject to competing offers).
Filing requirements. Notification to the AMF within five trading days of execution (if they apply to 0.5% or more of the company’s capital or voting rights).1
1 Article L.233-11 CC
5) The offer price
Freedom. The price is freely determined by the bidder.
Reasonability test. A price that would be significantly disconnected from markets conditions could be objected to on the basis that the offer is not made bona fide and is contrary to the principle that an offer should be conducted in an “orderly fashion”.
Information. The price will be described in the offer prospectus (the “note d’information”).1
Independent expert. In the event an independent expert has been appointed, and in order to determine whether the proposed offer complies with applicable laws and regulations, the AMF shall review the financial terms of the offer, in particular in view of the expert’s report and the reasoned opinion of the target’s board of directors.2
Compulsory inclusion of a cash component.
If the bidder has acquired more than 5% of the target company’s shares or voting rights during the 12 months preceding the offer for a cash consideration, such offer must provide that shareholders have a right to be paid in cash.
1 Article 231-18 RGAMF
2 Article 231-21 5° RGAMF
3 Article 231-8 RGAMF
6) Filing the offer and the draft prospectus
Filing the offer. The offer is filed with the AMF by the sponsor. The offer letter includes:1
The bidder's objectives and intentions.
Details on the target's securities that the bidder already holds (alone or in concert) or that it may hold at its own initiative (including number, type and purchase date).
Information relating to the proposed price, the basis on which such price was determined, and the proposed conditions of payment.
Any condition attached to the offer.
Filing the prospectus. At the same time, the draft prospectus must be filed with the AMF.
Initial disclosure. Upon receipt of the offer documents and draft prospectus, the AMF publishes the summary terms of the offer and posts the draft prospectus on its website. In addition, the bidder must publish a press release in a national financial newspaper, summarizing the main terms of the offer and indicating that the offer is subject to the AMF's approval.
Subsequent disclosure. Any information in addition to that set out in the prospectus must be submitted to the AMF for review and also published in a press release.2
1 Article 231-13 RGAMF
2 Articles 231-13, 231-14 and 231-16 RGAMF.
Content of the draft prospectus. The draft prospectus must include the following:1
Terms of the offer. information relating to the terms of the offer including the proposed price, based on generally accepted objective valuation criteria, the characteristics of the target company and the market for its securities, the number and nature of securities proposed to be purchased, details of the number of target securities already held by the bidder (directly, indirectly or in concert, or that it may hold on its own initiative), as well as the date and terms on which such holdings were acquired, any condition attached to the offer by the bidder, the planned timetable for the offer, the financing the offer and its impact on the assets, business and earnings of the concerned companies.
Intentions. The bidder's intentions for the upcoming 12-month period regarding the concerned companies' financial and industrial strategy and the de-listing of the target's shares.
Labour policy. The bidder's intended labour policy, including any foreseeable changes in relation to the size and organisation of labour in accordance with the financial and industrial strategy outlined in the prospectus.
Agreements. Information relating to any undertaking by target shareholders, any agreement or other undertaking providing for concert actions and any other agreement relating to the offer to which it is a party or of which it is...
7) Target’s response
i) The board’s reasoned opinion and the need for an independent expert
Reasoned opinion. The target's board of directors (or equivalent body) must give its reasoned opinion (avis motivé) regarding:
The benefits of the offer to the company, its shareholders and its employees, in a press release.
The voting conditions under which this opinion was obtained. Dissenting board members
may require that their identity and position be mentioned.1
Independent expert. If the proposed tender offer may create conflicts of interest within the board in a manner that may taint the objectivity of such reasoned opinion:
- Designation: An independent expert will have to be designated by the target company.2 - Report: The expert will prepare a report on the financial conditions of the offer, which shall in particular include an assessment of the target company and of the consideration, an analysis of the valuation work carried out by the bidder’s financial advisers and a statement regarding the fairness of the price.3
1 Article 231-19 RGAMF
2 Article 261-1 RGAMF
3 Article 2 of Instruction 2006-08 of July 25, 2006
ii) The target's response prospectus
Content: The target's response prospectus must contain, among other things:1
Agreements. Any provision in an agreement entered into by the bidder, the target, any person acting in concert with them, or any of there respective shareholders, which may have an impact on the assessment or the result of the offer. If, at any time after the commencement of the offer, any such provision is entered into (and was, therefore, not mentioned in the target's response prospectus), it must be disclosed to the public by way of a press release.2
Information. Information mentioned in Article L. 225-100-3 of the Commercial Code, updated where applicable as at the date of the offer, to the best of the company's knowledge3
Independent expert. The independent expert’s report. In order to protect its legitimate interests, the target company may assume responsibility for not disclosing certain information in the independent appraiser's report, provided such non-disclosure is unlikely to mislead the public
Reasoned opinion. The reasoned opinion of the target's board on the benefits of the offer or its consequences for the target, its shareholders and its employees and the voting procedures by which this opinion was obtained.
Employees. If they are available and different from the above-mentioned opinion, comments by the works council, or, failing that, by staff repres...
8) Admission of the offer
Timing. Generally, the AMF has ten trading days from the beginning of the offer period to determine whether the draft offer complies with applicable laws and regulations. However, when there is an independent expert, the statement of compliance is issued no earlier than five trading days after the target company has filed its draft reply document, i.e. about 25 trading days after the offer has been filed with the AMF.
Review. To determine whether the draft offer complies with applicable laws and regulations, the AMF shall examine:
The aims and intentions of the offeror.
Where applicable, the type and characteristics of and market for any securities proposed in exchange.
The conditions stipulated by the offeror.
The information in the draft prospectus.
If there is an independent expert, the financial terms of the offer, notably with respect to the independent expert’s report and the reasoned opinion of the Board of Directors.
Amendments. The AMF may ask the offeror to modify the draft offer if the AMF believes that it may be in breach with applicable legal and regulatory provisions, and in particular the general principles referred to in article 231-3 of the RGAMF.1
Amendment approval. If the proposed offer complied with applicable laws and regulations, the AMF issues a statement of compliance that also constitutes an approval of the prospectus.
1 Articles 231-20, 231-2...
Disclosure. Once the AMF has granted its statement of compliance, the approved prospectus (or a summary thereof) must be published in a financial newspaper with nationwide circulation. This must be done before the opening of the offer and no later than two trading days after the issuance of the AMF statement.1
Other information: The following rules apply:
- Disclosures about the legal, financial, accounting and other characteristics of the offeror and the target company, which must meet the content requirements specified in an AMF instruction, shall be filed with the AMF and made available to the public no later than the day before the offer opens.
- The reports by the statutory auditors of the offeror and the target company must also be filed with the AMF under the same conditions.
- No later than the day before the offer opens, the offeror, the target company and at least one of the sponsoring institutions must file a declaration certifying that all the above- mentioned information has been filed and has or will be disseminated within the above- mentioned timeframe.2
1 Article 231-27 RGAMF
2 Article 231-28 RGAMF
9) Duration of the offer
Initial duration. The duration of the offer is twenty-five trading days, which may be extended to no more than thirty-five trading days.
Extension. The duration may also be extended in the event of competing offers; however, after 10 weeks, the AMF may apply specific procedures to bring the offer to an end.1
Reopening. If the offer is successful, it shall be re-opened within ten trading days of publication of the outcome. The AMF publishes the timetable for the re-opened offer, which must last at least ten trading days. This signals the beginning of a new offer period, which terminates when the outcome of the offer is published.2
Initial offer. When there is an independent expert, the offer opens on the day after distribution of the approved response prospectus.
1 Articles 231-32, 232-2, 232-12 and 232-13 RGAMF
2 Article 232-4 RGAMF
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