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URÍA & MENÉNDEZ |
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The information contained in this Newsletter is of a general nature and does not constitute legal advice |
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BANKING & FINANCIAL LAWRECENT TENDER OFFER REGULATION REFORM IN SPAIN 1. Introduction Royal Decree 432/2003 of April 11 (“RD 432/2003”) was published in the Spanish State’s Official Gazzete (Boletín Oficial del Estado) on April 12, 2003. RD 432/2003 modifies the current regulations on tender offers set forth by Royal Decree 1197/1991 of July 26 (“RD 1197/1991”). The reform seeks to reinforce the protection of minority shareholders and to introduce certain changes intended to make the tender offer regime more flexible. RD 432/2003 modifies the current regime in four main aspects: (i) it introduces additional situations which impose the mandatory launching of a tender offer; (ii) it modifies the exceptions to the mandatory launching of a tender offer; (iii) it allows for conditional tender offers upon certain requirements being met; and (iv) it substantially modifies the regime of competing tender offers. 2. New cases 2.1 General rule 2.2 New cases 2.3 Assumptions of intent to appoint directors 2.4 Reporting of significant shareholdings 3. New exceptions to the mandatory launching of a tender offer 5. New regulation on competing tender offers 5.1 Term 5.3 Removal of first mover advantage 6. Conclusions |
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2.1 Before analyzing the new features introduced by RD 432/2003, it is worth recalling the general rule contained in Article 1 of RD 1197/1991 describing when a tender offer is mandatory. Article 1 of RD 1197/1991 states that any person or entity (the “offeror”) intending to acquire, in one or several transactions, shares, or certain other equivalent securities, of a listed company (the “target company”) in order to reach, together with any stake previously held, a significant shareholding in the voting stock of the target company, is not entitled to do so without first launching a tender offer.
It can be easily concluded from this general rule that the key concept is that of “significant shareholding”, as it triggers the obligation to launch a tender offer. The following are considered to be significant shareholdings:
(a) the acquisition of shares representing 25% or more of the capital of the target company, which triggers the obligation to launch a tender offer for shares representing, at least, 10% of the capital of such target company;
(b) the acquisition of shares representing 6% or more of the capital of the target company during any twelve-month period when the offeror holds a stake between 25% and 50% of the capital, which, again, triggers the obligation to launch a bid for, at least, 10% of the capital of such target company; and
(c) the acquisition of shares representing 50% or more of the capital of the target company, which triggers the obligation to launch a bid for 100% of its capital (full tender offer). Before the enactment of RD 432/2003 the acquirer was only required to launch a bid for 75% of the capital.
2.2 In addition to existing cases which require the launching of a tender offer, recently enacted RD 432/2003 introduces additional cases of mandatory tender offers. These new rules come in response to the alarm caused in the market and public opinion by certain recent transactions which involved the acquisition of a stake slightly below the minimum 25% threshold - and thus outside the scope of the regulation - of the share capital of well known listed companies, in each case paying a substantial control premium that the seller was not required to share with other minority shareholders. These transactions forced the Spanish Government to change the existing takeover regulations to try to avoid these types of situations in the future.
The new regulations introduce two cases where an ex-ante tender offer is mandatory:
(1) When the offeror intends to acquire shares representing less than 25% of the target company’s capital, it must launch a tender offer for a number of shares representing, at least, 10% of the voting stock of the target company (partial bid), if the following conditions are met:
(a) the shareholding that the offeror intends to acquire (i) represents 5% or more of the capital of the target company; or (ii) represents less than 5% but allows the offeror to appoint a number of directors that, in addition to any existing directors previously appointed by it, represent more than one third but less than half plus one of the directors of the target company’s Board; and
(b) additionally, the offeror intends to appoint a number of directors that, in addition to any existing directors previously appointed by it, represent more than one third but less than half plus one of the directors of the target company’s Board. (The drafting of this rule is extremely casuistic, but it may be summarized as follows: any person intending to acquire less than 25% of the capital of a listed company must launch a tender offer for shares representing, at least, 10% of such target company’s capital if such person intends to appoint more than one third but less than half plus one of the target company’s Board).
(2) When the offeror intends to acquire shares representing less than 50% of the target company’s capital, it must launch a tender offer for 100% of the voting stock of the target company (full offer), if the following conditions are met:
(a) the shareholding that the offeror intends to acquire (i) represents 5% or more of the capital of the target company; or (ii) represents less than 5% but allows the offeror to appoint a number of directors that, in addition to any existing directors previously appointed by it, represent more than half of the directors of the target company’s Board; and
(b) additionally, the offeror intends to appoint a number of directors that, in addition to any existing directors previously appointed by it, represent more than half of the directors of the target company’s Board. (This rule may also be summarized as follows: any person intending to acquire less than 50% of the capital of a listed company must launch a takeover bid for 100% of such target company’s capital if such person intends to appoint more than half of the directors of the target company’s Board.)
The new regulations also introduce two new cases in which an ex-post tender offer is mandatory. These new cases mirror the ex ante cases described above:
(1) When the offeror has acquired shares representing less than 25% of the capital of the target company, it must launch a tender offer for a number of shares which represent, at least, 10% of the voting stock of the target company (partial tender offer), if the following conditions are met:
(a) the offeror has acquired shares (i) representing 5% or more of the capital of the target company, or (ii) representing less than 5% but allowing the offeror to appoint a number of directors that, in addition to any existing directors previously appointed by it, represent more than one third but less than half plus one of the directors of the target company’s Board; and
(b) additionally, the offeror has appointed, within the 24 months following the date of the acquisition, a number of directors that, in addition to any existing directors previously appointed by it, represent more than one third but less than half plus one of the directors of the target company’s Board.
(2) When the offeror has acquired shares representing less than 50% of the capital of the target company, it must launch a tender offer over 100% of the voting stock of the target company (full tender offer), if the following conditions are met:
(a) the offeror has acquired shares (i) representing 5% or more of the capital of the target company, or (ii) representing less than 5% but allowing the offeror to appoint a number of directors that, in addition to any existing directors previously appointed it, represent more than half of the directors of the target company’s Board; and
(b) additionally, the offeror has appointed, within the 24 months following the date of the acquisition, a number of directors that, in addition to any existing directors previously appointed by it, represent more than half of the directors of the target company’s Board.
In short, the new cases requiring the mandatory launching of an ex-ante tender offer are transformed into cases requiring an ex-post offer, if, within two years from the date of the acquisition, the offeror nominates and appoints more than one third or more than one half of the target company’s Board. In the first case, the offeror must launch a partial tender offer, and, in the second case, a full tender offer. In both cases, the bid must be launched within two months following the date of the directors’ acceptance of their election to the Board, and be made for a price not below that price resulting from the application of the criteria set forth in Article 7 of RD 1197/1991 (which criteria apply to de-listing shares through a tender offer in a going-private transaction) and, if higher, the highest price paid by the offeror for the same securities within the 12 months preceding the date on which the bid was filed. The intent element (i.e. the intent to appoint directors) of ex-ante tender offers, is replaced, in the case of ex-post tender offers, by the objective fact of the appointment of the directors.
2.3 In order to assist in the application of these new rules of mandatory tender offer, RD 432/2003 has introduced a series of iuris tantum assumptions (i.e., assumptions that may be challenged if proved to the contrary). In accordance with these assumptions, it is presumed that an acquiror of a significant shareholding (even if below 25% or 50%) intended to appoint directors, or has effectively appointed directors, in any of the following events:
(a) if the director has been appointed by the holder of a significant shareholding, or a company belonging to that holder’s group, exercising their right of proportional representation in the Board;
(b) if the director appointed is a director, executive, employee or contract worker (other than on an occasional basis) of the holder of a significant shareholding or a company of that holder’s group;
(c) if the corporate resolution appointing the director has been passed with the favourable vote of the holder of a significant shareholding, or a company of that holder’s group or, in case of direct nomination among Board members (cooptación), the resolution has been passed with the favourable votes of those Board members previously appointed by such shareholder;
(d) if the holder of a significant shareholding, or a company of that holder’s group, is a director of the target company; or
(e) if, (i) in the corporate documentation containing the relevant director’s appointment (including the minutes, certificates, public deeds or any other documentation drawn up in order to obtain registration with the Commercial Registry); or (ii) in the public information of the target company or of the holder of a significant shareholding; or (iii) in any other documentation of the target company, the holder of the significant shareholding acknowledges that the director has been appointed by it, or represents it.
In our opinion, the new rules imposing the mandatory launching of a tender offer are not beyond criticism in certain aspects. With respect to the ratio of a mandatory tender offer regime, the control provided by a shareholding of less than 25% is usually weak and may be challenged in the market through the launching of a hostile tender offer. A recent experience of a well-know real estate company in Spain proves so. Therefore, it is not clear whether it is appropriate to extend the scope of mandatory tender offers to new situations based on the fact that the acquiror appoints a certain number of directors. Furthermore, the new rule does not prevent the acquisition of shareholdings slightly below 25%, involving the payment of a control premium to the seller, if the number of directors appointed by the acquiror to the target company’s Board does not exceed one third of its members. The application of the new rules will also prove difficult in practice since the regulator must prove the acquiror’s intent. By way of example, the presumption contained in paragraph (c) above, if read literally, would prevent the holder of a significant shareholding from voting in favour of the appointment of those directors who meet the conditions to qualify as “independent”, or from voting in favour of the appointment of those directors proposed by another shareholder, without incurring the risk of having to launch a tender offer. It is true that the presumption may actually be negated if proved to the contrary. However, it is also worth noting that such circumstance may force holders of significant shareholdings to abstain from voting, and may therefore lead to deadlock situations which may make it difficult to appoint new directors.
2.4 RD 432/2003 also establishes that any person who acquires shares (i) representing 5% or more of a listed company, or any successive multiples of 5%, or (ii) representing less than 5% but allowing the acquiror to appoint a number of directors that, in addition to any existing directors previously appointed by it, represent more than one third of the directors of the target company’s Board, must include in its significant shareholdings communication (comunicación de participación significativa) to the CNMV a declaration stating that such acquisition does not fall under the scope of application of regulations for mandatory tender offers.
3. New exceptions to the mandatory launching of a tender offer
RD 432/2003 also introduces certain changes with respect to exceptions to mandatory tender offers. The new modifications remove the exception to the obligation to launch a tender offer in the case of acquisitions performed as a consequence of the restructuring of certain economic and financial sectors. As explained in the Preamble to RD 432/2003, the Government considered that such an exception corresponded to a specific context and that public intervention is no longer justified under current market conditions.
However, the most important changes relate to the introduction of new exceptions. It will not be mandatory to launch a tender offer:
(a) when an offeror acquires a significant shareholding as a consequence of the capitalization or conversion of credits into shares as a result of a creditor agreement reached in an insolvency proceeding (procedimiento concursal), provided that the holder of such credits is the original holder and not an assignee.
This new exception attempts to permit “rescue operations” in Spain. However, its scope of application is very limited because it can only be used in the context of insolvency proceedings. It would have been advisable to allow this exception to be applied before the start of insolvency proceedings, in order to avoid them.
(b) when all the shareholders of the target company unanimously agree to the purchase or exchange of shares representing 100% of the company’s capital, or unanimously waive their right to purchase or exchange their shares or other securities within a tender offer.
This exception was partially contemplated by RD 1197/1991, but it has been slightly expanded. The application of this exception will presumably be very limited.
(c) when the relevant acquisition qualifies as a situation of joint control of the target company, according to the Spanish Service for the Defense of Competition (Servicio de Defensa de la Competencia), provided that the following additional conditions are met: (i) prior to the acquisition, those shareholders who have joint control of the target company must jointly own shares representing more than 50% of the capital, and must have appointed more than half of the Board members; (ii) the number of directors appointed by the acquiror cannot increase as a result of the acquisition; and (iii) the acquirer cannot acquire during any twelve month period more than 6% of the target company’s capital and, in any case, the acquiror’s shareholding cannot reach or exceed 50% of the target company’s capital.
The introduction of this complex rule has been criticized, since it is believed that it was designed for a particular case and is unlikely to be applied in other cases.
Until RD 432/2003 was enacted, an offer could only be conditional upon its acceptance by a minimum number of shareholders or upon its approval by Spanish or European anti-trust authorities.
The new regulations allow the offeror to make a tender offer subject to certain conditions whose fulfilment implies the passing of a resolution by the relevant corporate bodies (shareholders’ meeting or Board of Directors) of the target company. By way of example, the offeror may condition the effectiveness of the bid upon the shareholders of the target company amending the by-laws of the target company in order to remove any provisions limiting the exercise of voting rights.
The origin of this new rule is rooted in the difficulties encountered by TXU in its bid for Hidrocantábrico shares. TXU made its bid conditional on the removal by the shareholders of Hidrocantábrico of certain anti-takeover defensive measures contained in Hidrocantábrico’s by-laws, namely, provisions limiting shareholders’ exercise of voting rights.
It is worth noting that a previous draft of the Royal Decree allowed the conditioning of bids on much broader terms than those of the Royal Decree’s final wording; as discussed above, current wording of the RD 432/2003 only allows for those conditions whose effectiveness depends upon the passing of a resolution by the shareholders or by the Board of the target company. It would have been advisable for the Government to adopt an intermediate solution. Such solution should not have been as broad as the initial draft of the Royal Decree, but at the same time, not as narrow as the final form, thereby allowing additional conditions, provided that (i) such conditions were justified; (ii) their fulfilment or non-fulfilment was easy to determine; and (iii) their fulfilment did not depend upon circumstances, decisions or opinions which were directly or indirectly influenced by the offering company or its advisors.
On the other hand, RD 432/2003 maintains the offeror’s right to waive, during the liquidation phase of the offer, the condition consisting of the acceptance of the offer by a minimum number of shareholders. This right incentivates the launching of this type of conditional tender offer, which certainly does not benefit investors. In our opinion, if an offeror introduces and maintains such a condition, that offeror should bear the consequences and, therefore, if the minimum number of acceptances is not reached, the bid should fail.
5. New regulation on competing tender offers
RD 432/2003 introduces several changes to the regime applicable to competing tender offers.
(a) First, competing offers must be filed within 10 calendar days from the beginning of the acceptance period of the last offer filed, provided that no more than 30 calendar days have elapsed from the beginning of the acceptance period of the first offer filed.
Accordingly, the new regulations reduce the term for filing competing offers, and clarify that the relevant days are calendar days, not business days. It must be noted that the silence of the former regulations on this point led to a discussion regarding whether the term referred to calendar days (on the basis of Article 5 of the Spanish Civil Code) or business days (on the basis of Article 48 of Law 30/92). In addition, the new regulations introduce a maximum term within which all competing tender offers must be filed.
However, under the new regime, it is not clear whether the first offeror may improve the terms of its initial offer during the period established for the filing of competing bids. If the first offeror is able to improve its initial offer before the end of the period for competing bids, such offeror could surprise potential competitors by filing the improvement shortly before the end of such period and competitors would not have enough time to react (e.g. competitors would not be able to raise any required additional financing on time, as a recent experience has revealed). In our opinion, the most reasonable interpretation of the new Article 36 of RD 432/2003 is that any improvement of the bid conditions should take place only after the term for filing competing bids has elapsed.
(b) Secondly, as opposed to RD 1197/1991 which required that the competing bid improve the previous bid, either by increasing the price by at least 5% or by extending the offer to at least 5% more securities than the previous offer, RD 432/2003 merely requires an improvement of the conditions, without setting minimum limits. In the event securities are offered as consideration, a report from an independent expert must be submitted stating that the competing bid improves the preceding bid. The rule does not specify the criteria which should be used to determine when an improvement has been made with respect to prior offers.
RD 432/2003 also states that conditioning an offer on acceptance by a number of shareholders higher than those of the preceding bid is not deemed to be an improvement. This rule signifies that the bid must be addressed to, at least, the same number of securities than those of the immediately preceding offer, and in this instance, the price offered must be higher. The reason for this clarification is the controversy created by a decision of the Spanish Securities Exchange Commission (“CNMV”), on September 2001, which forced Ferroatlántica to eliminate the minimum 60% threshold upon which it had conditioned its offer for Hidrocantábrico shares, since the CNMV considered that, for so long as the minimum limit was maintained, Ferroatlantica’s bid did not improve the conditions of a competing bid made by EDP and CajAstur which did not contain such condition.
(c) The most important change consists of the removal of the first mover advantage. In particular, once the public announcements for the immediately preceding offer authorised by the CNMV have been published, or once the maximum term to file a competing offer has elapsed, each of the offerors may either withdraw their offer or improve it by filing a sealed envelope with the terms of the improved offer with the CNMV on the fifth business day. Once the new offers have been received, the CNMV will suspend trading of the affected securities and will, no later than the next business day, open the sealed envelopes and announce the offers which meet the requirements to be processed. Trading of the securities will then resume. Within the two days following the CNMV’s announcement, the offeror must provide a complementary guarantee covering the increase of the improved offer. Once the CNMV has informed the offerors that their bids have been authorized, the offerors must publish the new conditions within the next 5 business days. If several improved offers are authorised by the CNMV, they must all be authorised and published on the same dates. The acceptance period for competing offers must be extended to the date falling 15 calendar days after the publication so that they all expire at the same time. Within such term, the shareholders may revoke their acceptance of any previous offer and accept an alternate offer.
RD 432/2003 deals with several issues, each of them deserving a different judgment.
In our opinion, the requirement imposing an offeror to launch a full tender offer in those cases where the offeror intends to acquire 50% or more of a listed company is definitely positive.
The admission and regulation of conditional offers is also positive. The fact that, under the previous regime, an offeror launching a full offer and acquiring a significant shareholding had to bear the risk of not being able to exercise effective control of the target company was not justified. This notwithstanding, the reform fails to include the possibility to launch tender offers conditional upon other circumstances generally accepted in the international markets.
Despite these positive features, the introduction of new cases of mandatory tender offer may be criticized, as the new rules are extremely casuistic. Additionally, these new rules may be difficult to put in practice, and will exacerbate the difficulty of proving the intent elements which trigger the obligation to launch a tender offer. The Spanish takeover statute has, once again (as it did when introducing ex-ante bids and partial bids), differed from the approach adopted by most other legal systems, where the obligation to launch a tender offer is triggered by the mere acquisition of a certain percentage of the voting stock, regardless of whether or not the acquiror attains effective control, and is a full offer.
On the other hand, the new regulation was passed at a moment in which the political deadlock that prevented the approval of the Thirteenth Directive on tender offers apparently has been broken. Therefore, it would have been advisable to adjust the existing regulations to the spirit of the future European Directive. In any event, if, as expected, the Thirteenth Directive is enacted within a short period of time, it will most likely force Spain to amend, once again, its regulations.