On April 13, 2007, Act 6/2007, of April 12, amending Act 24/1988, of July 28, on the Securities Market, in order to modify the rules for takeover bids and for issuers transparency (the “Act 6/2007” or the “Takeover Act”) was published in the Spanish Official Gazette [Boletín Oficial del Estado] (“BOE”). This Act, which will enter into effect on August 13, 2007, is intended to partially transpose into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (the “Takeover Directive”) and Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization 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”).
This newsletter is intended to provide a brief analysis of the main provisions of the Takeover Act as regards the rules applicable to takeover bids [ofertas públicas de adquisición], given that such Act has fundamentally modified the takeover rules in effect until now. Another newsletter will cover changes included in Act 6/2007 regarding the transparency and informational obligations of the issuers of listed securities.
· Scope of application of the Spanish rules on takeover bids (see Section 1).
· Replacement of the traditional system of ex ante takeover bids (with the possibility of partial takeover bids) by that of a system of ex post takeover bids for 100%, once 30% of the voting rights have been acquired, whether by acquisition, agreement or as a result of similar circumstances provided for in the regulations (see Section 2).
· New regulations regarding the obligations of the board of directors of the offeree company and neutralization of preventive measures (see Sections 3 and 4).
· Regulation of squeeze-out and sell-out rights when 90% of the voting rights have been obtained (see Section 5).
· New developments regarding de-listing offers [opas de exclusión], obligations to provide information, and the system of supervision and sanctions (see Sections 6, 7 and 8).
· Transitory rules for the new regulations, especially for increases in shareholdings between 30% and 50% (see Section 9).
1. Scope of application of the Spanish rules on takeover bids
Pursuant to the Takeover Act, the obligation to make a takeover bid is understood to refer to those companies whose shares are either wholly or partially admitted to trading on an official Spanish secondary market and whose registered office is in Spain. As regards other companies, the Takeover Act includes within the scope of application of the Spanish rules on takeover bids (under the lex mercatus standard and in accordance with the provisions of the Takeover Directive), upon terms to be established in the regulations, those companies that do not have their registered office in Spain and whose securities are not admitted to trading on a regulated market within a member State of the European Union in which the company has its registered office, provided that the following circumstances are present:
a) the securities of the company are only admitted to trading on a official Spanish secondary market;
b) the first admission to trading of the securities on a regulated market has been on that of an official Spanish secondary market;
c) the securities of a company are simultaneously admitted to trading on regulated markets of more than one member State and on an official Spanish secondary market, if the company decides to submit to Spanish regulations on takeover bids; or
d) as of 20 May 2006, the securities of the company were already admitted to trading simultaneously on regulated markets of more than one member State and an official Spanish secondary market and (a) the CNMV has agreed with the competent authorities of the other markets that it will be subject to Spanish regulations, or (b) in the absence of such agreement, it has so been decided by the company.
It should be noted that, pursuant to the Takeover Directive (although the Takeover Act has not so specified and pending the terms to be established in the regulations), in the cases referred to in b), c) and d) above, all matters relating to the information to be provided to the employees of the offeree company and relating to company law (including the thresholds requiring a takeover bid, any exceptions from the obligation to make a bid and the duty of passivity of the board of the offeree company) shall be subject to the applicable rules of the Member State in which the offeree company has its registered office.
Additionally, the Takeover Act also provides for its application (under the lex societatis standard), upon terms to be established in the regulations, to companies with a registered office in Spain whose securities are not admitted to trading on a Spanish secondary market. This standard can be used to deal with situations not adequately covered by the preceding rules.
2. Establishment of a system of 100% ex post takeover bids. New definition of control for purposes of takeover bids
The new rules contemplate the replacement of the traditional system of ex post takeover bids (which requires the making of a takeover bid in order to exceed a certain percentage of share capital) with a system of ex post takeover bids. This system constitutes the general regime proposed by the Takeover Directive, and by virtue thereof, the takeover bid must be made once a certain threshold in the voting stock of a company has been exceeded.
Furthermore, the Takeover Act eliminates the possibility of a mandatory partial takeover bid and replaces it, in line with the provisions of the Takeover Directive, with a system of total takeover bids. This will contribute to resolving the numerous problems raised by the system of partial takeover bids which, in practice, prevented minority shareholders from selling all of their holdings in the takeover bid where the acquisition is for less than 50% of share capital, thereby causing them to remain in a company practically controlled by the offeror.
Along these lines, the new Act provides that whoever obtains control of a listed company must make a bid for all shares, or other securities that might directly or indirectly give the right to subscription thereto or acquisition thereof, to all holders thereof at an equitable price, whether such control is obtained:
(i) by means of the acquisition of shares or other securities that directly or indirectly give the right to subscribe or acquire voting shares in such company;
(ii) by means of shareholders’ agreements [pactos parasociales] with other holders of securities; or
(iii) as a result of other instances of a similar nature as provided in the regulations.
For purposes hereof, it is deemed that a price is equitable when it is at least equal to the highest price paid by the party required to make the takeover bid or the persons acting in concert therewith for the same securities during a period of time prior to the bid to be determined by the regulations. However, the National Securities Market Commission [Comisión Nacional del Mercado de Valores] (CNMV) may authorize a change in the price so calculated, publishing such decision (which must be reasoned) on its website, in such circumstances and pursuant to such standards as shall be determined in the regulations. The Takeover Act includes a non-exhaustive list of such circumstances (including that a higher price has been agreed upon between the purchaser and the seller, that the market prices for the securities in question have been manipulated, etc.) as well as such standards (the average market price during a particular period, the liquidation value of the company or other commonly-used objective valuation methods) pursuant to which the CNMV could authorize a change in the equitable price.
Furthermore, it is deemed that an individual or a legal entity has, individually or collectively with the persons acting in concert therewith, the control of a company when they directly or indirectly reach a percentage of voting rights equal to or greater than 30% (thus eliminating the various thresholds existing until now, and generally restating them at such 30% threshold, similar to the one set in other countries of the European Union such as the United Kingdom, Germany, Italy and Holland). It should be emphasized that, during the parliamentary process regarding the Takeover Act, this simple notion of control has been complicated with the addition of a new circumstance of control (which in essence was already acknowledged under the prior rules) consisting of reaching a shareholding of less than 30% and appointing, upon terms to be established in the regulations, a number of board members that, together with those already appointed, if any, represent more than one-half of the members of the company’s board of directors.
Notwithstanding the foregoing, upon terms to be established in the regulations, the CNMV will conditionally dispense with the obligation to make a bid when another person or entity directly or indirectly holds an equal or greater voting percentage in the same company.
The obligation to make a bid upon such terms does not prevent the making of voluntary bids for a number that is less than the totality of shares or other securities that directly or indirectly give voting rights in a listed company. These voluntary bids may be made under the conditions established in the regulations, and must be directed towards all holders of such securities and are subject to the same rules of procedure as those for mandatory bids. Logically, when control of a company has been acquired through a voluntary bid (i) made for all of the securities, (ii) directed towards the holders thereof, and (iii) that has complied with the requirements established for mandatory bids, a new takeover bid will not be required.
Furthermore, the new rules for the first time clearly establish beyond a doubt the obligation to make a takeover bid when control of a company is obtained not through the acquisition of shares of the company, but rather by agreement between holders of interests in the company’s capital. Therefore, by virtue of the new rules, the simple signing of an agreement will generate an obligation to make a bid, without the additional requirement that one of the parties to the agreement acquire shares of the company. In any event, it will be necessary to wait for development of the regulations in order to determine the scope of the concept of shareholders’ agreements for these purposes.
Finally, in the event that the consideration offered consists of securities to be issued by the offeror, the Takeover Act gives legal effect to the rule that in such cases provides for the non-existence of the preemptive rights contemplated in Section 158 of the Spanish Companies Act [Ley de Sociedades Anónimas] (“LSA”) for existing shareholders and holders of convertible bonds.
The Takeover Act has opted to continue the tradition of the duty of passivity of the members of the board of directors of an offeree company contained in the rules now being repealed. This duty is based on the principal that the directors may not interfere in the process of the takeover bid, which is otherwise in consonance with their fiduciary duties.
Without prejudice to the foregoing, the new rules on the duty of passivity are more exhaustive than the ones existing until now. The new Act, in line with Article 9 of the Takeover Directive, provides that during the period and upon the terms to be established in the regulations, the board of the offeree company or of the companies belonging to the same group must obtain prior authorization from the shareholders before taking any action that might prevent the success of the bid (except for a search for other bids), and particularly prior to initiating any issuance of securities that might prevent the offeror from obtaining control of the offeree company.
As regards decisions adopted previously and not yet applied in whole or in part, the shareholders acting at a general shareholders’ meeting must approve or confirm all decisions that do not occur in the normal course of business of the company where the application thereof might frustrate the success of the bid. The general shareholders’ meeting at which these issues must be decided may be convened only 15 days prior to the date set for the holding thereof (as opposed to the one-month period generally required by the LSA), and the corresponding resolutions must be adopted in accordance with the provisions of Section 103 of the LSA, i.e., subject to a quorum of 50% on first call and 25% on second call, requiring the favorable vote of 2/3 of the voting rights represented in person or by proxy when there are shareholders representing less than 50% of the subscribed capital with voting rights. Although the Act does not so expressly specify, it should be understood that the bylaws may increase these quorums and majorities under the provisions of Section 103.4 of the LSA.
Secondly, and as a quite significant development with respect to the rules in effect until now, each company is allowed, pursuant to the principle of reciprocity set forth in the Takeover Directive, to resolve to deactivate the duty of passivity of the offeree’s board when the offeror company (or the entity controlling it, pursuant to Section 4 of the Securities Market Act) does not have its registered office in Spain and is not subject to such passivity or equivalent obligations, including the rules necessary for the adoption of decisions by the shareholders at a general shareholders’ meeting. Any decision adopted under this provision shall require authorization by the shareholders at a general shareholders’ meeting, with the quorum and majority requirements set forth above, and adopted no more than 18 months prior to the takeover bid being made public.
Furthermore, as occurred with the regulations in effect until now, the offeree’s board must publish a detailed report regarding the bid upon the terms and within the deadlines to be established in the regulations.
4. Adoption and neutralization (breakthrough) of preventive measures
As regards the possible adoption of bylaw-related preventive measures against a takeover bid, i.e., bylaw clauses that restrict voting rights, limit the access of members to becoming members of their boards or executive committees thereof, or generally hindering the exercise of political rights of securities in a manner proportional their respective percentage interests, the new Takeover Act neither hinders nor imposes any requirements on heightened majorities to adopt these measures beyond what is provided for in Section 103 of the LSA, as was the case with the rules in effect until now.
Notwithstanding the foregoing and as allowed by the Takeover Directive, the Act 6/2007 introduces a complex optional regime on neutralizing preventive measures against takeover bids (opt-in, opt-out), by virtue of which it is the shareholders of each listed company, gathered at a shareholders’ meeting, who may decide on the applicability or inapplicability to the company of the neutralization (breakthrough) of preventive measures.
Specifically, the decision to apply breakthrough to anti-takeover measures must be adopted at the company’s general shareholders’ meeting in accordance with the provisions of Section 103 of the LSA, and the shareholders at such meeting may, at any time and with a majority matching the one required before, revoke such resolution. The resolutions must be communicated to the CNMV and to the supervisors of the member States in which the shares of the company are admitted to trading or for which the admission thereof has been requested. Breakthrough measures by the Takeover Act are the following:
a) the ineffectiveness of restrictions on the transfer of securities set forth in shareholders’ agreements regarding the company during the period for acceptance of the bid;
b) the ineffectiveness of restrictions on voting rights set forth in the bylaws and in shareholders’ agreements regarding the company at the general shareholders’ meeting at which decisions will be made on possible preventive measures that the directors may submit to the shareholders as set forth in sub-section 3 of this newsletter with respect to the duty of passivity; and
c) the ineffectiveness of ex ante restrictions when, after a takeover bid, the offeror has reached a percentage equal to or greater than 75% of the capital with voting rights.
The Takeover Act contemplates the obligation of a company deciding to apply the breakthrough measures provided in the Act to provide appropriate compensation to the shareholders for the rights that have been eliminated.
Finally, the Takeover Act also allows the application of the principle of reciprocity in connection with breakthrough measures. For such purpose, it provides that companies that have chosen the breakthrough system may choose to exclude the application thereof when they are the target of a takeover bid made by an entity or group that has not adopted equivalent breakthrough measures. This will require a resolution of the shareholders adopted at least 18 months prior to the takeover bid being made public, with the majorities provided for in Section 103 of the LSA.
5. Squeeze-outs and sell-outs
Another significant development contained in the new rules regards the grant to the offeror and to the minority shareholders of the offeree company of squeeze out and sell-out rights subsequent to a takeover bid. The implementation in Spain of these mechanisms will facilitate “public-to-private” transactions that, until now, were executed by alternative means that were not free of risk, such as by resorting to a mandatory redemption of shares.
Along these lines, when an offeror holds securities representing at least 90% of the voting capital as a result of a mandatory takeover bid or of a voluntary bid made for all the securities, and the bid has been accepted by the holders of securities representing at least 90% of the voting rights other than those already held by the offeror:
a) the offeror may require the remaining holders of securities to sell such securities at an equitable price; and
b) the holders of securities of the offeree company may require the offeror to purchase their securities at an equitable price.
As can be observed, from among the various alternatives provided for by the Takeover Directive, the Takeover Act has opted for the double-threshold rule, which requires not only the acquisition of a particular percentage of voting capital, but also that such capital represent a particular proportion of acceptances of the preceding bid, which gives the right to application of the mechanism of squeeze-out and sell-out rights. Although it might be reputed to be more protective of minority shareholders, the rule adopted will make the application of such mechanism more difficult when the offeror already has a significant interest in the offeree company prior to the making of a bid.
6. De-listing offers
Although, thanks to the application of the mechanisms of squeeze-out and sell-out rights, it can be expected that the frequency of de-listing offers will decrease, the new rules also modify the rules on these types of takeover bids, including in the rules certain standards that the CNMV has been applying in practice during recent years. Key developments in this area are as follows:
a) First, there is an inversion of the rules in effect until now, by which the making of a de-listing offer was not mandatory in every event, but only if it dealt with an optional power of the CNMV when it considered it necessary to protect the interests of investors. Now de-listing offers are configured as an obligation in all de-listing procedures unless there is a dispensation from the CNMV, which may grant it when another equivalent procedure is articulated that ensures the protection of the legitimate interests of the shareholders affected by the de-listing, as well as those of all holders convertible bonds and other securities that carry the right to subscription thereto.
b) Included within the concept of de-listing are those corporate transactions pursuant to which the shareholders of a listed company may totally or partially become shareholders of another unlisted entity (e.g., the merger of a listed company with another unlisted company, or the total or partial spin-off of a listed company to one or more unlisted companies that are not going to request the admission of their shares to trading on the Stock Exchanges).
c) It is also established that, in the case of a takeover bid prior to de-listing, the limit on the acquisition of a company’s own shares established by the LSA for listed shares on a secondary market will exceptionally be 10% of share capital. However, if the company’s own shares exceed this limit as a result of the takeover bid, they must be redeemed or transferred within a period of one year.
d) The resolution on de-listing and those relating to the takeover bid and the price offered must be approved by the shareholders at a general shareholders’ meeting, which requirement was previously set forth in the Stock Exchange Regulations of 1967 [Reglamento de Bolsas de 1967].
e) Finally, there is an obligation to prepare a report of the directors with a detailed justification for the proposal and the price offered, which must be made available to the holders of the affected securities at the time of the call to meeting of the corporate decision-making bodies that must approve the takeover bid. However, the Takeover Act does not require the provision of a report on the valuation of the company prepared by an independent expert although, given current practice in this regard, a requirement that such valuation report be included in the regulatory development of the law or that it continue to be required in practice should not be ruled out.
7. Informational and transparency obligations
The Takeover Act expands the content of the management report of listed companies in order to include significant information in this area that the Takeover Directive requires to be published annually. Specifically, the following content is added to the management report of listed companies:
a) The capital structure, including securities that are not traded on a regulated market within the European community, with a description, if applicable, of the various classes of shares and, for each class of shares, the rights and obligations conferred thereon and the percentage of share capital they represent;
b) Any restriction on the transfer of securities;
c) Significant direct or indirect holdings of share capital;
d) Any restriction on voting rights;
e) Shareholders’ agreements [pactos parasociales];
f) The rules applicable to the appointment and replacement of the members of the board of directors and amendments to the company’s bylaws;
g) The powers of the members of the board of directors and, in particular, those relating to the ability to issue or repurchase shares;
h) Significant agreements that the company has executed and that enter into force, that are modified or terminated in the event of a change of control of the company as a result of a takeover bid, and the effects thereof, except when disclosure is seriously prejudicial to the company. This exception will not apply when the company is legally required to publish this information;
i) Agreements between the company and members of the board or senior management when they provide for compensation when they resign or are improperly dismissed or if the employment relationship ends as a result of a takeover bid.
Furthermore, the Takeover Act requires that the board of directors annually submit to the shareholders at the general shareholders’ meeting an explanatory report regarding the items contemplated in this section.
8. Rules for supervision and sanctions
In the first place, the Takeover Act provides that whomsoever breaches the obligation to make a takeover bid may not exercise the political rights of any of the securities of a listed company to which they may be entitled for any reason, without prejudice to the sanctions that may be imposed upon them. This prohibition shall also be applicable to the securities held indirectly by the party required to make the takeover bid and to those securities belonging to parties acting in concert therewith.
For these purposes, a party that does not submit a takeover bid, that submits it outside of the maximum period provided therefore, or that submits it with material irregularities, shall be deemed to have breached the obligation to make a takeover bid. This breach qualifies as a very serious violation of the Securities Market Act.
Resolutions adopted by the company’s decision-making bodies shall also be invalid when, for the valid constitution of such bodies or the adoption of such resolutions, it is necessary to count securities whose political rights are suspended pursuant to the provisions described in this section. The CNMV is authorized to make the relevant challenges within a period of 1 year from becoming aware of such resolution, without prejudice to the standing that may be held by other persons. The CNMV may also challenge the resolutions of the Board of Directors of the listed company within a period of 1 year from becoming aware thereof.
Furthermore, the sanction rules are strengthened by classifying new violations relating to the breach of obligations established in the takeover regulations, such as: (i) violation by directors of the duty of passivity and violations relating to the rules on the adoption and neutralization of preventive measures, which are classified as very serious violations; (ii) breach of the obligations to provide information relating to the launching or the proceedings to complete takeover bids, which may constitute a very serious or a serious violation, (iii) the existence of omissions or inaccuracies that induce deception in documentation of the takeover bid, which may constitute a very serious or serious violation based on the relevancy of the affected information or documentation on the amount of the takeover bid or the number of investors affected, whether or not significant.
9. Adjustment to the new takeover thresholds, transitory rules and entry into force
The decrease in the threshold for the making of a mandatory takeover bid for all of the share capital from 50% to 30% set in the new rules raises some questions, such as the establishment of specific rules for holders of interests that fall between the two thresholds, and questions regarding transitional application of the rules.
In this regard, the Takeover Act provides that upon entry into force of the Act, parties holding a percentage of voting rights in a listed company that is equal to or greater then 30% and less than 50% shall be obligated to make a takeover bid when, after the entry into force of the Act:
a) they acquire (in a single act or in successive acts) shares of such company until increasing their shareholdings by at least 5% over a period of 12 months;
b) they reach a percentage of voting rights equal to or greater than 50%, with no time limits; or
c) they acquire additional shareholdings and appoint a number of directors that, together with those they have already appointed, if any, represent more than one-half of the members of the board of directors of the company, with no time limits.
Without prejudice to the foregoing, the Government may establish the particulars that it deems necessary for the application of the rule set forth above, as well as the transactions excluded from these rules. Furthermore, the CNMV will conditionally dispense with the obligation to make a takeover bid when another person or entity directly or indirectly holds a voting percentage equal to or greater than that of the party required to make the takeover bid.
Moreover, as pointed out above, it is provided that the new Act applies to takeover bids for which a request of authorization has been submitted to the CNMV prior to August 13, 2007, but which were not authorized as of such date.
Additionally, upon the entry into force of the Takeover Act, whoever has shareholdings in a company and, after such entry into force and within 24 months following the acquisition of the shareholdings, appoints a number of directors that, together with those that it already appointed, if any, represent more than one-half of the company’s board of directors, must make a takeover bid.
Finally, as already pointed out, it should be mentioned that, in order to facilitate an orderly transition between the old and new rules, and with the expectation that the required regulatory development will occur, it is provided that the entry into force of the Act will occur 4 months from the publication thereof in the Official Gazette, i.e., on August 13, 2007.
10. Regulatory development
Finally, the Takeover Act provides for the regulatory development of many very significant matters that have not been dealt with in the act, such as:
a) The securities to which takeover bids must be directed;
b) The rules and period for calculating the percentage of votes that gives control of a company, taking into account direct and indirect shareholdings, as well as agreements, contracts or situations of joint control;
c) The person that will be required to submit the takeover bid in instances of shareholders’ agreements and situations of indirect control;
d) The terms on which a bid will be irrevocable or on which it may be subject to a condition or be modified;
e) The enforceable guarantees pursuant to which consideration offered is in cash, issued securities or securities for which issuance has not yet been approved by the offeror;
f) The nature of administrative control by the CNMV and, in general, the procedure for takeover bids;
g) The rules for possible competing offers;
h) The rules on pro-ration;
i) The transactions excluded from these rules;
j) Equitable prices, forms of consideration, and exceptions that may apply, if any;
k) Information that must be made public prior to the presentation of a takeover bid, once the decision to submit it has been made, within the course and after the completion thereof;
l) The period in which a takeover bid must be submitted after the public announcement thereof;
m) The rules regarding the expiration of bids;
n) The rules applicable to the publication of the results of bids;
o) The information that must be supplied by the boards of directors of the offeree company and of the offeror to representatives of their respective employees or, in the absence thereof, to the employees themselves, as well as the procedure applicable to such obligation, without prejudice to the provisions of labor law;
p) The conditions for setting the price and other requirements for de-listing offers;
q) The terms upon which the CNMV will grant conditional exceptions from the obligation to make a takeover bid when another person or entity directly or indirectly holds a voting percentage equal to or greater than the percentage held by the party required to make the bid;
r) The content of and period for publication of the report of the directors of the offeree company;
s) The procedure for and requirements applicable to squeeze-outs and sell-outs; and
t) Other matters for which regulation is deemed necessary.