18 December 2019 – need2know
Read about the differences on put up or shut up, mandatory acceptance threshold, launching pad, prohibited parallel transactions and stand-still obligations.
With the announcement of ams late evening on a Friday at the beginning of December 2019, that the “acceptance threshold for ams’ takeover offer for OSRAM is satisfied”, one of the longest and most controversial takeover battles in the past years brought a happy ending for Austrian ams for the time being.
Using the current case this need2know article provides an overview of some of the significant differences between the takeover rules in Austria and Germany worthwhile to be considered by bidders, targets, shareholders and their respective advisors.
Put up or shut up in Austria
Already at the beginning the back and forth in public by the private equity suitors Bain and Carlyle on the bid for Osram raised the eyebrows of Austrian takeover lawyers.
In contrast to Austrian law no put up or shut up rule is applicable under the German Securities Takeover Act (Wertpapierübernahmegesetz – WpÜG), which would require a bidder after its intentions become public, irrespective whether by announcement or due to market rumours, to formalise an offer within a set time period or face a stand-still for longer period.
Such rule would also have blocked ams from joining the first round of the takeover battle, after it withdrew its previously announced bid intention prior to the launch of the bid by the PE suitors.
The Austrian Takeover Act (Übernahmegesetz – ÜbG), however, regulates strict confidentiality in connection with the preparation of a bid:
- A bidder shall keep an intention to launch an offer as well as any considerations with respect to an offer strictly confidential in order to prevent a premature or irregular leakage of considerations or its intention to make an offer. Negotiations with shareholders (whose acceptance is likely to be required for the success of the bid) and the management of the target are permissible. If approached both are subject to statutory confidentiality and entering into a confidentiality agreement is state of the art, but the bidder still runs a leakage risk.
- In case of market rumours or significant share price fluctuations, which have likely been triggered by the preparation of a bid, a bidder is forced to immediately announce respective consideration or an intention to launch a bid. Also the target, if informed, is obliged to make such announcement.
Such announcement triggers a notice period of 10 trading days to submit the offer document to the Austrian Takeover Commission. The bidder may apply at the Commission for an extension of the period of up to 40 trading days.
Further, any negative statement not to intend or to prepare a bid also prompts a stand-still period for the bidder of one year. The bidder may under certain conditions apply with the Commission to lift the stand-still.
The rule is designed to prevent companies from facing the disruptive impact of a prolonged (hostile) takeover and to avoid share price fluctuations due to market rumours or announcements.
This rule, however, has quite material consequences on transactions which have to be carefully considered by bidders as well as the target’s management:
- Already market place rumours force a confidential dialogue with the target’s management or shareholders into public domain, which may have consequences on the pricing of an offer and also may encourage competitive bidders to emerge. This also gives negotiating leverage to the target’s management by responding slowly and forcing the bidder to negotiate against itself or face the standstill.
- When preparing a bid ring-fencing of in-house and adviser teams the confidentiality has to be taken very seriously in order to minimise the leakage risk. On the other hand the rule forces bidders to come to the table already prepared and ready for quick execution, as unprepared bidders runs the risk to face a stand-still.
Mandatory 50% minimum acceptance excluding a launching pad
According to Austrian law voluntary takeover offers intended to acquire control over the target, i.e. 30% plus one share, are conditional upon achieving a minimum acceptance of more than 50% of the shares subject to the offer. The threshold is not calculated from the total number of shares of the target, since shares already held by the bidder or persons acting in concert (launching pad) are excluded. The 50% acceptance threshold is designed to provide a market test for the attractiveness of an offer.
The mandatory acceptance threshold results in 50% plus one share of the total number of shares, only if the bidder does not hold any shares. In case e.g. the bidder already holds 20% of the shares, the offer is directed on the acquisition of 80% and the 50% mandatory acceptance threshold is set at 40% of the total shares, i.e. finally a bidder stake of 60% for a successful offer.
German takeover law does not provide a minimum acceptance threshold as statutory offer condition. However, in practice many bidders voluntarily set an acceptance threshold to secure obtaining control over the target pursuant to the bid or even a higher majority in the shareholders’ meeting to resolve upon a domination and/or profit-and-loss pooling agreement (75% majority required).
Ban on parallel transactions on any better terms
Shares acquired by the bidder in parallel to the offer shall be added to the minimum acceptance threshold under Austrian law described above. However, the Austrian Takeover Act prohibits parallel acquisitions of shares on better terms as provided in the offer. Better terms do not only refer to higher consideration than the offer price, but also to all other terms. In particular any unconditional purchase is classified as made on better terms compared to a conditional offer. Hence, unconditional purchases on the market are prohibited and further do not qualify to be added to the minimum acceptance threshold.
The bidder is not in breach, however, if shares are acquired at a higher consideration and the offer price is improved at the same time, which is anyhow the statutory consequence of such parallel transaction.
Compared thereto the German Takeover Act only addresses purchases at higher considerations compared to the offer price, but does not prohibit other better terms such as an unconditional purchase. In case a better price is granted disclosure is required and the offer price is increased accordingly by operation of law. Beside that the bidder is free to acquire shares in parallel to the offer, which may also be added towards any voluntarily set acceptance threshold of the bidder.
One year stand-still if an offer fails
In the event that an offer fails both Austrian and German law provides a one year stand-still period during which the bidder is blocked to launch another offer for the target. It is clear under Austrian law that the bidder as well as all parties acting in concert with the bidder are subject to the stand-still obligation.
In contrast thereto the wording of the German Takeover Act on the stand-still only addresses the bidder, but does not refer to parties acting in concert with the bidder. This may be considered as loophole. ams, however, was able to circumvent the one year stand-still on that basis and launched its second finally successful bid through a new subsidiary acting as bidder. The German legislator is already in the process to change the Takeover Act and to extend the stand-still also to persons acting in concert.
According to Austrian law the stand-still obligation also prohibits the bidder from acquiring any shares that would trigger a mandatory offer, whereas under German law prompting a (new) mandatory offer by crossing the 30% threshold is not blocked by the statutory stand-still. Such offer, however, must be provided unconditional, e.g. no acceptance threshold can be set. Triggering mandatory offers that way can be used in connection with creeping-in takeover strategies, which leads to the next difference.
Addressing creeping-in takeover strategies
One type of creeping-in takeover tactic is to acquire a stake up to right below the mandatory bid threshold. As next step, often after already after having obtained de facto control with such stake, an acquirer may cross the threshold to prompt a mandatory offer at the right point in time allowing a low-ball bid. If the low-ball bid is leaving the acquirer without actual control over the target (i.e. 50% plus) the acquirer may further increase its participation with additional purchases, but without prompting a mandatory offer anymore.
Such creeping-in tactic is addressed by the Austrian Takeover Act providing a further mandatory offer trigger. If a person holds a controlling interest in a target (i.e. 30% plus), but less than 50% the acquisition of 2% or more of the target shares within a period of 12 months prompts a mandatory offer. The German pendant does not provide for any such restriction.
Excursus: Mandatory cash offer and share for share offer as alternative only
All offers for Osram were in cash. ams, however, compared to private equity suitors, could also have offered its shares instead of cash. German takeover law allows sole share for share offers without cash consideration at all. This gives bidders flexibility to deploy their shares bidding for German listed companies. The share consideration must be granted in liquid shares admitted to trading on a German- or European-regulated market. Share for share offers are also used to execute mergers of German listed companies, such as Linde and Praxair.
The Austrian takeover regime lacks such flexibility. Takeover bids to gain control or mandatory offers by statute must provide for cash compensation. Share for share (or as combination of shares and cash) may be offered as alternative only.
The route left to execute a mandatory share for share transaction is a statutory merger leading to a collective transfer of assets and liabilities and the shareholders of the merged company receive shares in the acquirer with an adequate exchange ratio to be provided in the merger agreement. However, after the merger, each shareholder of the merged and acquiring company may challenge the exchange ratio in a special court procedure with the aim of achieving a top-up payment made to all shareholders of the merged or the acquired company. This review procedure gives shareholders of both companies a substantial leverage putting the acquiring company at risk to come up with high compensation payments in case of a negative court ruling in the aftermath of the merger.
Further, a statutory merger has to be prepared by the management of the companies and to be proposed to their shareholders for approval. This gives the management the decision-making power whereby compared thereto the success of a share for share offer is in general solely decided by the acceptance of the shareholders.
Against this background the Austrian legislator should consider to allow share for share offers, with the required acceptance by the majority of the shareholders as market test provides evidence that the offer in shares is adequate.
Authors: Daniel Reiter, Christoph Nauer
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