On 9 June 2006, the General Directorate of the Treasury and Financial Policy of the Ministry of the Economy (Dirección General del Tesoro y Política Financiera del Ministerio de Economía) submitted for public comments the draft bill to reform the Securities Market Act, Law 24/1988 (the “SMA”), of 28 July, to transpose to Spanish law Directive 2004/25/EC of the European Parliament and of the Council, dated 21 April 2004, on takeover bids (the “Takeover Bids Directive”) and Directive 2004/109/EC of the European Parliament and of the Council, dated 15 December 2004, on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (the “Transparency Directive”).
The draft bill implements a fundamental change in the existing takeover bid regime and certain modifications to the reporting requirements for the issuers of listed securities.
This note makes a preliminary analysis of the main provisions of the draft bill in each of the two areas.
· Regulations to apply to companies whose registered office is in Spain (section 1).
· Shift from the traditional system where takeover bids had to be launched prior to acquiring a significant shareholding in the target company and partial bids were permitted to a regime where takeover bid are compulsory following attainment of control (i.e., 30% of the voting rights) either by means of an acquisition or an agreement. Transitory regime to apply to increases of holdings between 30% and 50% (section 2).
· New regulations on the obligations of the board of directors of the target company and on defensive measures and their neutralisation (sections 3, 4 and 5).
· Squeeze-out and sell-out provisions when 90% of the share capital of the target company is acquired (section 6).
· Amendments regarding de-listing takeover bids, disclosure obligations concerning takeover bids, and supervision and enforcement provisions (sections 7, 8 and 9).
· Development of the contents of the draft bill by secondary regulations (section 10).
· Amendments to periodic financial reporting regime applicable to listed companies and issuers of fixed income securities (section 1).
· Amendments to the significant holdings disclosure regime (section 2).
· New disclosure obligations on securities issuers (section 3).
· Civil liability regime for financial and non-financial reporting by securities issuers (section 4).
· Amendments regarding the supervision system, empowering the CNMV to review financial information (section 5).
1. Scope of application
The draft bill applies to companies whose shares are, wholly or in part, admitted to trading on an official Spanish secondary market and whose registered office is in Spain. As for companies which do not have its registered office in Spain, secondary regulations will provide the extent to which the Spanish rules shall apply.
2. Establishing a total and a posteriori takeover bid system
The draft bill replaces the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were provided for a regime where takeover bids are only mandatory following attainment of control. Pursuant to the draft bill, whoever acquires control of a listed company shall be bound to make an offer to all the holders of that company’s securities for all their securities at an equitable price, irrespective of whether said control is gained:
a) By acquiring shares or other securities that directly or indirectly carry voting rights in said company;
b) Through conventions or agreements with other holders of securities; or
c) As the result of any other means that may be established in secondary regulations.
For these purposes, a natural person or legal entity shall be understood to have control of a company when he/she/it reaches a percentage of voting rights that is equal to or greater than 30%. This is similar to the thresholds set in other Member States such as the United Kingdom, Germany and Italy. Notwithstanding the above, the Spanish National Securities Exchange Commission (the “CNMV”) may exempt a party from launching a compulsory takeover bid pursuant to the foregoing provisions if another natural person or legal entity directly or indirectly has a percentage of the voting rights in the same company that is equal to or greater than this figure.
The above does not prevent parties from making a voluntary takeover bid for less than the total number of securities, in the conditions that may be established by the secondary regulations approved from time to time, and said voluntary takeover bids shall be subject to the same rules of procedure as the compulsory takeover bids. If the voluntary takeover bid is made for all the securities and, moreover, complies with the requirements established regarding compulsory takeover bids, the voluntary and prior bid shall exempt the bidder from the obligation of presenting a new takeover bid if the 30% threshold is surpassed by means of the initial offer.
On the other hand the rules clearly establish for the first time the obligation to make a takeover bid when control of a listed company is acquired not only by acquiring shares in said company, but also by means of conventions or agreements between shareholders of that company.
The reduction of the threshold for making an obligatory bid for all the share capital from the current 50% to the 30% set in the draft bill gives rise to issues of transitional application, particularly in the case of shareholders who own over 30% but under 50% of the share capital of a listed company, for whom the new regime would in principle eliminate the restrictions established in the regulations in force with regard to increasing holdings (no more than 6% of the capital in twelve months nor acquire 50% or more without first launching a takeover bid).
In this regard, the draft bill establishes that for twenty-four months after the reform comes into effect, any party possessing 30% or more of the voting rights in a company at the time the draft bill comes into force, and who increases said holding by the amount and within the period determined by the secondary regulations that may be approved, shall be obliged to make a bid for the entire share capital of said company.
3. Passivity rule and other obligations of the board of directors of the target company
The draft bill also introduces major modifications to the passivity rule of the directors of the target company. First, and in contrast with the system in force, which focuses on the prohibition for directors to engage in any activities that could frustrate a takeover bid while it is in effect, the draft bill, in line with the Takeover Bids Directive, establishes the obligation for directors to seek the approval of the shareholders prior to initiating activities or implementing previously made decisions that could interfere with the bid.
The draft bill establishes that, for the period of time and under the terms and conditions that may be determined by the secondary regulations approved from time to time, governing bodies and management of the target company, or of the companies belonging to the same group, must obtain the prior authorisation of the General Shareholders Meeting, by means of obtaining the favourable vote of at least two thirds of the voting rights present either in person or by proxy, before they may take any action that could frustrate the success of the offer, with the exception of seeking other offers, and in particular, before initiating any issue of securities that could prevent the bidder from acquiring control of the target company. Concerning decisions taken previously but not yet implemented wholly or in part, the General Shareholders Meeting must approve or confirm any decision that does not fall within the ordinary course of business of the company and that could frustrate the success of the offer.
Second, and as a very important novelty in comparison with the system currently in force, the draft bill establishes a principle of reciprocity whereby the governing bodies and management of the target company are released from the duty of passivity if the bidder company or the parent entity of the group to which the bidder belongs to is not subject to such or other equivalent obligations.
On the other hand, as under the current regulations, the board of directors of the target company must publish a detailed report on the bid in the terms and within the deadline established by secondary regulations from time to time.
4. Adopting previous defensive measures
The draft bill establishes the requirement of gaining a weighted majority for listed companies with its registered office in Spain to adopt defensive measures against a takeover bid to be included in the articles of association. Hence, at least two thirds of the voting rights present, either in person or by proxy, at the General Shareholders Meeting shall be required to approve clauses in the articles of association that restrict voting rights, limit access to becoming a member of the board of directors or its executive or delegated committees, or, in general, that may hinder the exercise of the political rights carried by the securities in proportion with their respective share holding. Although it is not expressly stated, in the event that the articles of association of a listed company should establish a larger majority for approving any of these modifications, said majority shall be applicable to such a case. This requirement of a weighted majority is not applicable to defensive measures existing prior to the new bill coming into force.
5. Neutralising prior defensive measures
The draft bill does not adopt a compulsory regime for the neutralisation of defensive measures to takeover bids, choosing instead for the optional regime (“opt-in”, “opt-out”) set out in the Takeover Bids Directive, by virtue of which, it is the shareholders of each listed company who can decide, in a General Shareholders’ Meeting, the application to the company of the neutralisation of prior defensive measures. Specifically, the decision to neutralise the anti-takeover bid measures must be made at the General Shareholders’ Meeting of the company by at least two thirds of the voting rights present or represented. Said decision may be revoked at the Meeting at any time if the same majority is in favour of revoking it. These decisions shall be reported to the CNMV and to the supervising authorities of the Member States in which the company’s securities are admitted to trading, or in which an application has been made for their admission.
Companies whose shareholders have approved the decision to apply the neutralisation of defensive measures before the deadline for accepting the takeover bid:
a) May not apply to the bidder during the term of the bid any of the restrictions on the transfer of securities provided for in any shareholders agreements relating to said company that were adopted after 21 April 2004;
b) Any restrictions on voting rights provided for in the articles of association of the target company and in the shareholders agreements referring to said company that have been adopted since 21 April 2004 shall be ineffective in the General Shareholders’ Meeting that decides on possible defensive measures that may be put to the shareholders during the term of the bid by the directors pursuant to the preceding section on the passivity rule; and
c) If, following a takeover bid, the bidder should acquire 75% or more of the share capital that carries voting rights, any restrictions provided for in the sections above and any extraordinary shareholder rights concerning the appointment or removal of members of the governing bodies established in the articles of association of the target company, shall be ineffective in the first General Shareholders’ Meeting held after the bid has been settled, convened in order to modify the articles of association or remove or appoint members of the board of directors.
The baseline 21 April 2004 is the date on which the Takeover Bids Directive was approved, although it would seem more reasonable to have chosen the date on which the Takeover Bids Directive was published in the Official Journal of the European Union (30 April 2004) or the date on which it came into effect (20 May 2004). It can be assumed from the above that the neutralisation system cannot be applied retroactively to any defensive measures provided for in the articles of association and in shareholders agreements reached prior to 21 April 2004.
Companies that have opted for the neutralisation regime may choose not to apply it if a takeover bid is made for said companies by an entity or group that has not adopted equivalent neutralisation measures, by a decision taken in the General Shareholders’ Meeting no more than eighteen months before the takeover bid is made public.
6. Squeeze-out and sell-out
Another far-reaching novelty contained in the draft bill is recognizing squeeze-out and sell-out rights of securities for the bidder and to the minority shareholders in the target company following a takeover bid. When, as the result of a takeover bid made for all shares and other securities carrying voting rights in the capital of a listed company, the bidder possesses securities that represent at least 90% of the share capital that carries voting rights and the offer has been accepted by the holders of securities that represent at least 90% of the voting rights that the offer had been made to:
a) The bidder may require the remaining security holders to sell said securities to him/her/it at an equitable price; and
b) The holders of securities in the target company may require the bidder to buy their securities at an equitable price.
The draft bill does not deal with the equitable price but rather defers this matter to secondary regulations. Notwithstanding, pursuant to the Takeover Directive, the price offered in the bid is considered to be an equitable price.
The draft bill does not foresee any transitional rule to clarify if the squeeze-out and sell-out rights when a holding representing at least 90% had been acquired as result of takeover bids filed before the draft bill comes into effect.
7. De-listing takeover bids
The draft bill also includes a reform aimed at offers for de-listing securities from secondary markets, incorporating some of the criteria that have been recently applied in practice by the CNMV for several years. The principal novelties in this sense are the following:
a) First, the scope of application of Spanish regulations is clarified, indicating that the obligation to make a takeover bid affects companies with registered offices in Spain that decide that their shares be de-listed from trading on official Spanish markets.
b) Second, the system currently in force is reversed. Currently, a de-listing takeover bid is not always compulsory, but rather the CNMV is empowered to enforce one when it deems such bid is necessary to safeguard investors’ interests. Under the new system, a de-listing takeover bid is made an obligation in all processes of de-listing shares from trading on security markets unless the CNMV has issued an exemption, which it may do if there is another, equivalent procedure in place that assures the protection of the legitimate interests of the holders of the securities affected by the de-listing.
c) Corporate transactions by virtue of which the shareholders of a listed company may become, wholly or in part, partners of another, non-listed company are assimilated to de-listing (for example, the merger of a listed company with another, non-listed company, or the total or partial spin-off of a listed company into one or more unlisted companies that are not going to apply for admission to trading of their shares on the securities markets).
d) The draft bill also establishes that, in the event of a takeover bid prior to de-listing from trading, the threshold for acquiring treasury stock established in the Limited Liabilities Companies Act (Ley de Sociedades Anónimas) for shares listed on an official secondary market shall be 10% of the share capital.
e) The draft bill establishes the need for de-listing agreements and agreements concerning the takeover bid and the price offered, to be approved by the General Shareholders’ Meeting and by the General Bondholders’ Meeting, if any, of the target company (if there are convertible or exchangeable bonds), requirement which was previously regulated in the recently repealed 1967 Stock Exchange Regulations (Reglamento de Bolsas de 1967).
f) The draft bill also introduces the requirement, that has been applied by the CNMV for many years, to present a report to value the company, drafted by an independent expert, although said expert shall no longer be chosen by the company, as he/she must be appointed by the Commercial Registry (Registro Mercantil), and this report must be accompanied by a report from the board of directors justifying the proposal and the price offered in detail. These reports shall be made available to the holders of the securities in question when the company’s governing bodies are called to approve the bid.
8. Disclosure and transparency obligations
The draft bill also provides an extension to the contents of the annual corporate governance report on listed companies to include important information in this area that the Takeover Bids Directive requires to be published every year. Specifically, the following contents are added to the annual corporate governance report:
a) The share capital structure, including securities that are not traded on an E.U. regulated market, indicating the different kinds of shares, if any, and the rights and obligations that each kind of shares carries and the percentage of the share capital that it represents;
b) Any restriction on the transmission of securities;
c) Significant holdings, direct or indirect;
d) Any restrictions on voting rights;
e) The rules applicable to modifying the company’s articles of association.
f) The powers of the members of the board of directors and, in particular, those concerning the possibility of issuing or buying back shares;
g) Any significant agreements that may have been reached by the company and which come into effect, must be modified or expire in the event of a change in control of the company due to a public takeover bid, together with their effects, unless their dissemination would be seriously prejudicial to the company. This exception shall not be applied if the company is legally obliged to make this information public;
h) Any agreements between the company and its directors and managers or employees that involve compensations if these resign or are unfairly dismissed, or if the employment relationship is concluded due to a public takeover bid.
Moreover, the draft bill establishes that the board of directors of listed companies shall present an annual report to explain the points set out in this section to the General Shareholders’ Meeting.
9. Supervision and sanction system
First, as is the case under the system which is currently in force, the draft bill establishes that any party that does not comply with the obligation to make a takeover bid may not exercise any political rights arising from any of the securities of a listed company he/she/it may be entitled to, without prejudice to any sanctions that may be applicable. This prohibition shall also be applicable to securities held indirectly by the party bound to present the public takeover bid and to the securities of any party acting in concert with him/her/it.
For these purposes, any party that does not present a bid, or who presents if after the deadline established, or who presents a bid with essential irregularities that prevent the CNMV from considering the bid as having been filed or authorising the bid, shall be understood to fail to comply with the obligation of filing a takeover bid.
The draft bill establishes that the CNMV may suspend the political rights at the start of the sanctions procedure, hence clarifying the question of the CNMV’s competence to adopt said decision, which has been the subject of certain doctrinal controversy and different court rulings under the regulations currently in force. The suspension may be maintained, irrespective of whether or not the decision adopted in the procedure is to quash the case. In any event, all parties affected by this measure must be given a hearing.
Any decisions taken by the bodies of a company in which it has been necessary to count the votes of the securities whose political rights are suspended pursuant to this section, in order to constitute said bodies or adopt said decisions shall be null and void. The CNMV shall be empowered to bring the corresponding actions to challenge decisions, without prejudice to the standing that other people may be entitled to. The CNMV may also challenge the decisions of the Board of Directors of a listed company within one year of learning of them.
On the other hand, the system of sanctions has been reinforced to include new infringements related to failure to comply with the obligations established in the Takeover Bid rules, such as the infringement by directors of the passivity rule and non compliance relating to the adoption and neutralisation of defensive measures, which are established as very serious infringements. The failure to comply with the disclosure obligations relating to takeover bids is considered a serious infringement, while the inclusion of misleading omissions and inaccuracies in the takeover bid documentation shall be considered a serious or very serious infringement, depending on the importance of the information or documentation concerned and the amount of the bid or whether the number of investors affected is significant or not.
10. Development of the contents of the draft bill by secondary regulations
Finally, the draft bill foresees that many important matters that are not established in the legal text will be developed by secondary regulations, such as:
a) The rules and terms for calculating the percentage of votes that provides control of a company, taking into consideration direct and indirect holdings, conventions, agreements or other situations of joint control;
b) The person who shall be required to file a takeover bid in the event of conventions, agreements and other situations of control that may occur;
c) The terms in which the bid shall be irrevocable or in which it could be subject to conditions or modified;
d) The guarantees required depending on whether the consideration is payable in cash, with issued securities or securities whose issuance has not yet been agreed upon by the bidder company or entity;
e) The control to be exercised by the CNMV and, in general, the takeover bid procedure;
f) The system of possible competing takeover bids;
g) The rules of apportionment in voluntary partial bids;
h) The exceptions to this regime;
i) The equitable price, forms of payment of said price and the exceptions applicable, if any;
j) The information that must be publicly disclosed before a takeover bid is filed, once the decision to file said bid has been taken, during the bid and when it has been completed;
k) The period of time within which a bid must be filed from the moment that it is publicly announced.
l) The procedure for providing information to the representatives of the employees;
m) The price, contents of the independent expert’s report and the other requirements of the de-listing takeover bids;
n) The rules applicable in the case of takeover bids of companies listed on the Spanish Securities Markets, but which have their registered offices outside Spain;
o) The contents and deadline for publishing the directors’ report of the target company;
p) The procedure and requirements applicable to the obligation to squeeze-out / sell-out; and
q) All and any other circumstances that may require regulation.
1. Modifications to the regime of periodic financial reporting
The draft bill sets forth several modifications to the regime for publishing periodic financial information for the issuers of securities, of which the following are worth highlighting:
a) The draft bill establishes an obligation for the issuers of securities traded on official secondary markets, or on other E.U. regulated markets, to make their annual financial report public (comprising audited financial statements, management report and declarations of responsibility for their contents) and the auditor’s report within a maximum of four months after the close of each financial year, ensuring that it remains at the disposal of the public for at least five years. Issuers are presently obliged to send their annual accounts and auditor’s reports to the CNMV and publish them no later than the date on which the General Shareholders Meeting is called, which, in practise, could be delayed until the end of the fifth month after closing the previous financial year.
b) Issuers of securities admitted to trading on official secondary markets or on other E.U. regulated markets, the draft bill introduces the obligation to draft and publish six monthly financial reports (comprising summarised financial statements, a mid-term management report and declarations of responsibility for their contents) concerning the first six months of the financial year and the entire financial year (in the latter case, only if Spain is the home Member State), as soon as possible after the closure of the corresponding period and, in any event, within two months of said closure, ensuring that they remain at the disposal of the public for at least five years.
To date, the issuers of fixed income securities were not in practice obliged to draft financial reports more often than on an annual basis, since although this possibility was set forth in Article 35 of the SMA currently in force, the necessary secondary regulations had not been developed.
The issuers of debt securities with a face value of at least EUR 50,000 are exempt from these obligations to publish periodic financial information.
a) Moreover, issuers of shares listed on a regulated market shall publish quarterly information covering, at least, an overall description of the financial situation and earnings of the issuer and its group during the period and an explanation of any relevant developments or transactions happened during the quarter and its impact on the financial situation of the issuer. These issuers may publish full quarterly financial statements if desired.
b) Issuers of securities traded on official secondary markets that make their annual report public within two months of closing the previous company financial year shall be exempt from drafting and publishing the periodic financial information from the second semester of the previous year.
Finally, the draft bill foresees the development by secondary regulations of different matters such as the terms and other requirements to send the financial reporting to the CNMV, the contents of the declaration of responsibility, as well as the bodies of the issuer or the persons who should make it, the contents of the quarterly and six-monthly financial reporting, and the adjustments and exemptions, if any, applicable to some different kind of securities, markets or issuers, and the accounting and audit principles which are acceptable for issuers of non E.U. countries and any other aspects necessary to apply these rules.
2. Disclosure of major holdings obligations
In so far as the regime for the disclosure of major holdings is concerned, the draft bill also introduces some new aspects:
a) The obligation to disclose major holdings is extended beyond the acquisition or transmission of shares; it also covers cases in which the proportion of voting rights of a person exceeds, reaches or is reduced below the threshold percentages that make it obligatory to disclose them as a consequence of a change in the total number of an issuer’s voting rights based on the information disclosed to the CNMV and made public by said body, even if there has been no acquisition or transmission of securities.
b) Any persons entitled to acquire, transfer or exercise the voting rights carried by shares, irrespective of their title to them, and any persons that possess, acquire or transfer, directly or indirectly, other securities and financial instruments that include rights to acquire shares that carry voting rights, pursuant to the secondary regulations approved, are also bound to disclose major holdings.
c) The directors of listed companies, apart from disclosing any operations conducted with shares of the issuer or with securities or other financial instruments referenced to said shares, must also disclose to the CNMV any holding they may have had at the time of their appointment and resignation.
d) The obligation to disclose major holdings to the Stock Exchanges is eliminated and the draft bill establishes the obligation for issuers to make public any disclosures they may receive.
e) The obligation for listed companies to disclose their treasury stock portfolio transactions in certain circumstances, set out in the rules in force, has now been made a legal requirement.
3. Other disclosure obligations
The draft bill also mentions other disclosure obligations for the issuers of securities:
a) Issuers of securities that are admitted to trading on an official secondary market or on another E.U. regulated market, if Spain is the home Member State, must make public and disseminate any change in the rights inherent in said securities and new debt issues and send said information to the CNMV.
b) The issuers of shares or debenture securities that are admitted to trading on an official secondary market or in another E.U. regulated market must ensure that all the mechanisms and information necessary to allow the holders of said securities to exercise their rights are available in Spain, if Spain is the home Member State and that the integrity of the data is preserved. To these ends, debt issuers must have a website, just as listed companies are obliged to have under the rules currently in force.
c) When Spain is the home Member State, issuers of securities that are admitted to trading on an official secondary market or other E.U. regulated market that propose any modification to their articles of association must disclose to the CNMV and to the market or markets on which their securities are admitted to trading, the draft modifications, with the same terms, no later than the date of calling of the General Shareholders Meeting that must vote on the modification or be informed of said modification.
d) When issuers propose disclosing relevant information that could hinder the normal course of transactions with the securities of the issuer or endanger the protection of investors, they must disclose the relevant information to the CNMV prior to its publication.
4. Responsibility for the contents of the information
For the first time, the draft bill introduces a civil liability system for the contents of the information mentioned in sections 1 and 3 above, inspired by the regime of civil liability arising from the contents of the prospectus in case of public offerings of securities and admission of securities to trading provided for in Articles 28 of the SMA and Royal Decree 1310/2005, of 4 November (Real Decreto 1310/2005, de 4 de noviembre) (Article 33 and following).
In this way, responsibility for drafting and publishing the indicated information will fall, at least, on the issuer or its directors in accordance with the conditions that established in the secondary rules. The persons responsible for drafting and publishing said information shall be clearly identified in the documentation with their names and posts, or in the case of legal persons, with their trading name and registered offices. They must also declare that, in their opinion, the information in question is in accordance with the facts and that there are no omissions which could affect its import.
The issuer, its board, or both, shall be liable for all damages that may have been caused to holders of securities as a consequence of false information or the omission of relevant data from the information in question. The limitation of action to claim damages will last three years from the moment in which the claimant could have become aware of the inaccuracy or the omissions in the contents of the information in question.
5. Supervision and sanction regime
Finally, the draft bill contains several rules concerning the supervision, inspection and sanctions with regard to the disclosure obligations provided for therein.
First, and as a novelty, the CNMV is attributed with the power to check that the periodic information has been drafted in accordance with the applicable rules otherwise, said body shall require compliance. To this end, the CNMV may present the auditors of the issuer’s accounts with a formal demand in writing for all and any information and documents that may be necessary, and require the issuers to publish additional information, conciliations, corrections or reformulations of the periodic information, if any.
When Spain is the host Member State, the CNMV must also inform the competent authorities of the home Member State if said body observes that the issuers or holders of shares or other financial instruments and other persons obliged to provide the information mentioned in the sections above have committed irregularities or failed to comply with their obligations. If, despite the measures adopted by the competent authorities of the home Member State, or due to the fact that said measures have proved to be inadequate, the person indicated in the section above continues to violate the legal provisions or rules, after informing the competent authorities of the home Member State, the CNMV shall adopt all and any pertinent measures to protect investors, and shall immediately inform the European Commission of the measures adopted.
Finally, new infringements concerning failure to comply with publication obligations are introduced. These are classified as serious or very serious, depending on the significance of the infringement in question.