Transcript Document
CROSS-BORDER INVESTMENTS - ELECTIVE COURSE Rainer Kulms Max Planck Institute for Comparative and International Private Law – Hamburg [email protected] 1. 2. 3. 4. 5. 6. Cross-Border Investments – Statistics – Definitions Investment and Risk Patterns – Choice of Form Joint Ventures – Inbound Investment Controls Negotiating an M & A Deal – Company Law Aspects EU Takeover and Competition Laws Acquisition Finance CESL ELECTIVE - APRIL 2015 1 Introduction – The Statistics (Worldwide) Source: European Chamber of Commerce in China (2013) CESL ELECTIVE - APRIL 2015 2 2011 Sectorial China ODI Stock Source: TÜSIAD/2011 Statistical Bulletin of China’s ODI CESL ELECTIVE - APRIL 2015 3 Introduction – The Statistics (EU Questionnaire) Source: European Chamber of Commerce in China (2013) CESL ELECTIVE - APRIL 2015 4 DISTRIBUTION OF CHINESE M & A IN THE EU OF 27 - 2000 – 2010 - CESL ELECTIVE - APRIL 2015 Source: Thompson Reuters (2011) Investment Patterns I (NEUSOFT/Philips) (HYPO 1) NEUSOFT/PHILIPS (Cooperation Phase 1) Neusoft (China) Philips Philips and Neusoft Medical Systems Co. Ltd. 51% 49% Joint Venture Agreement and ‘Best Practices’: Technological Innovations, Patents Use Distributions Chains of Both, Philips and Neusoft CESL ELECTIVE - APRIL 2015 6 Investment Patterns II (NEUSOFT/Philips ctd.) NEUSOFT/PHILIPS (Cooperation Phase 2) Neusoft (China) Philips Philips and Neusoft Medical Systems Co. Ltd. 0% 100% Philips and Neusoft will share access to intellectual property (shared ownership/licences) and will continue partnership for supply of components. CESL ELECTIVE - APRIL 2015 7 Investment Patterns III (Shenyang Machine Tool Group/Schiess) HYPO 2 Phase I (prior to 2004) Schiess privatised, but heavily undercapitalised Shenyang Machine Tool Group owns 40 % Close to insolvency Phase II (after 2004) Schiess Shenyang Machine Tool Group owns 100% ►Shenyang’s Undertakings Invest 40m € to make Schiess competitive Keep German workforce and expand if profitable Envisage Joint Venture with suppliers. CESL ELECTIVE - APRIL 2015 8 Investment Patterns IV (Putzmeister) (HYPO 3) Private Shareholders (Family) Foundations Putzmeister (high-tec pumps) (medium-sized) Sany Heavy Ind., 90% Share deal ! 360 m €, 3000 employees, 6m € profits on sales of pumps Citic PE Advisors, 10% US $ 12 bn in 2013 ►German industrial companies ►CIC (?) buying minority stakes in UK infrastructure co’s. CESL ELECTIVE - APRIL 2015 9 Investment Patterns V (Sanhua/Aweco) (HYPO 4) Sanhua China Aweco Germany Insolvent German patents Banks Sanhua Europe European Subsidiaries ►Share – Asset Deal ▪Sanhua Europe buys Aweco’s European subsidiaries ▪Sanhua Europe buys Aweco’s customer contracts ▪Sanhua buys Aweco’s technology and intellectual property rights (including patents) ▪Sanhua buys Aweco’s production plants and assumes all debts CESL ELECTIVE - APRIL 2015 10 Regulatory Challenges – The Statistics I Source: European Chamber of Commerce in China (2013) CESL ELECTIVE - APRIL 2015 11 Regulatory Challenges – The Statistics II Source: European Chamber of Commerce in China (2013) CESL ELECTIVE - APRIL 2015 12 RISK ASSESSMENT CONSIDERATIONS I ►CHINESE ACADEMY OF SOCIAL SCIENCES (2013): Country Risk Ratings for Chinese Overseas Investment Germany AAA ▪Yield rate for Chinese FDI Australia AA ▪Safety and security of investment Canada AA ▪Key factors France AA Economic foundations, debt paying Italy AA ability, resilient society, political risk, Korea (Rep. of) AA relations with China USA AA ▪Consider cultural differences UK AA High Risk Countries: Vietnam, Mongolia, Angola, Sudan Source: China Daily online (21 November 2013) CESL ELECTIVE - APRIL 2015 13 RISK ASSESSMENT CONSIDERATIONS II ►Investment Target – Form of Cooperation ▪Consider establish of a European subsidiary ▪Long-term contract without establishing a corporate body (consider research cooperation/exploring future joint activities) ▪Consider Framework Contract as a prelude to a closer form of cooperation ▪Joint Venture defines cooperation and lays down rules for activities usually in a body of corporate law ▪Partnerships ▪Limited Liability Companies ▪Listed or non-listed corporations CESL ELECTIVE - APRIL 2015 14 RISK ASSESSMENT CONSIDERATIONS III ►Chinese Regulatory Approvals for Outbound Investments ▪National Development Commission (NDRC) Filing requirements (provincial branch) < 300m US $ File with NDRC direct ≥ 300m US $ Approval for investments ≥ 1 bn US $ or sensitive countries or industries Approval by State Council ≥ 2 bn US $ or sensitive countries or industries ▪MOFCOM: inter alia investment agreement/contract ▪State Administration of Foreign Exchange (SAFE) ▪Rules for State-owned Enterprises ▪Shanghai Exchange/Natural Persons/Industry-specific CESL ELECTIVE - APRIL 2015 15 NON-LEGAL ASPECTS: Culture Guanxi ▪Chinese Negotiation Team: State-owned Enterprises and Privately-owned Enterprises ▪European Negotiating Team (German/non-German): Hierarchical Structure of Enterprises - Subordinate units and middle-management level have more discretion to decide issues independently - Negotiating team will prepare strategy for realising project and will have power to decide with some flexibility– law department or attorney will involved at an early stage - Negotiations to be realised within a certain timeframe and final contract will be prepared CESL ELECTIVE - APRIL 2015 16 OUTBOUND INVESTMENT – CHOICE OF FORM I Source: European Chamber of Commerce in China (2013) CESL ELECTIVE - APRIL 2015 17 OUTBOUND INVESTMENT – CHOICE OF FORM II ▪Branch of a Chinese Company (head office located in PRC): Immediate Focus is not in entrepreneurial activities. Liability concerns are not controlling. Representative Office (legal status?) - cost considerations - some jurisdictions notification duties under trade law - branch of a Chinese corporation (EU law terminology): File documentation with Commercial Registry or equivalent (incl. corporate charter of Chinese corporation): Legal representatives ( board of directors) must have good standing (no breach of law) CESL ELECTIVE - APRIL 2015 18 Investment Patterns Revisited (Sanhua/Aweco) Sanhua China Aweco Germany Insolvent German patents Banks Sanhua Europe European Subsidiaries ►Share – Asset Deal ▪Sanhua Europe buys Aweco’s European subsidiaries ▪Sanhua Europe buys Aweco’s customer contracts ▪Sanhua buys Aweco’s technology and intellectual property rights (including patents) ▪Sanhua buys Aweco’s production plants and assumes all debts CESL ELECTIVE - APRIL 2015 19 Investment Patterns Revisited (NEUSOFT/Philips) NEUSOFT/PHILIPS (Cooperation Phase 1) Neusoft (China) Philips Philips and Neusoft Medical Systems Co. Ltd. 51% 49% Joint Venture Agreement and ‘Best Practices’: Technological Innovations, Patents Use Distributions Chains of Both, Philips and Neusoft CESL ELECTIVE - APRIL 2015 20 OUTBOUND INVESTMENT – CHOICE OF FORM III Partnerships and Creditors ▪(Commercial) Partnerships - a matter of dispute: (quasi-) legal personality - Freedom of contract – very few statutory requirements - Partners: Masters of their business - No legal capital ▪ordinary partnerships under French and German laws - Beneficial tax regime ▪commercial partnerships - No disclosure regime (société en nom collectif) - No co-determination Governance structure?! ▪UK Partnership Act 1890 (for making profits) Consider Hedge and Partnerships and Funds Private Equity Funds CESL ELECTIVE - APRIL 2015 21 OUTBOUND INVESTMENT – CHOICE OF FORM IV ▪(Commercial) Partnerships ctd.: DISADVANTAGES FROM A BUSINESS PERSPECTIVE - Unlimited liability (Germany/UK): partners jointly and severally liable; France: unlimited liability in proportion to members’ participation (General Partnerships) (Fra: prüfen) ►Limited Partnerships (Kommanditgesellschaft/société en commandite simple) - Limited Partners: member’s participation maximum amount - General Partner unlimited liability Hybrids ►Problem zones: Decision-making process Lack of comprehensive legal personality Insolvency scenario CESL ELECTIVE - APRIL 2015 22 OUTBOUND INVESTMENT – CHOICE OF FORM V ▪Establishment of a Corporate Entity (as a Greenfield Investment or as an Entity jointly owned by the Chinese and European Partners) ADVANTAGES FROM A BUSINESS PERSPECTIVE ▪Separate Legal Personality ( Protection from Creditors) ▪Limited Liability ( Assessment of Maximum Losses) ▪Centralised Management under a Board Structure ▪Free Transferability of Shares (Investor Ownership by Contributors of Capital) Limitation on number of ►Consider: Best Corporate Form shareholders Listed Corporations/Non-listed corporations/private (closed corporations) CESL ELECTIVE - APRIL 2015 23 OUTBOUND INVESTMENT – CHOICE OF FORM VI ►Consider: Best Corporate Form ctd. Listed Corporations ▪big enterprises ▪larger number of shareholders (but consider blockholdings v. dispersed ownership) ▪subject to statutory corporate governance requirements and non-binding corporate governance codes ▪capital markets are tapped ▪freedom of contracts is severely restricted by statutory law in order to protect creditors and minority shareholders Shareholders’ Agreements Note: Close corporations and commercial partnerships outnumber listed corporations (Germany/family businesses) CESL ELECTIVE - APRIL 2015 24 OUTBOUND INVESTMENT – CHOICE OF FORM VII ►Consider: Best Corporate Form ctd. Private Corporations & Limited Liability Companies (GmbH’s) ▪smaller and mid-sized (family) businesses (consider Germany) ▪limited number of shareholders ▪de facto limitation on transferability of shares (pre-emptive rights of remaining shareholders) by articles of association or shareholder agreement signed by all shareholders ▪Members control management of the company more directly ▪Access to capital markets is problematic CESL ELECTIVE - APRIL 2015 25 OUTBOUND INVESTMENT – CHOICE OF FORM VIII ►Legal Materials of the European Union Second Company Law Directive (Minimum Capital for (Non-) Listed Corporations (Public Limited Companies) Regulation on the Societas Europaea (EC 2157/2001) ►National Legal Materials ▪UK Companies Act 2006: public limited companies (plc) and private limited company (ltd.) ▪Germany: Aktiengesellschaft (Aktiengesetz – Stock Corporation Act)/Limited Liability Companies (GmbH’s) (GmbH-Gesetz – Act on Limited Liability Companies) ▪France Code de Commerce: Société anonyme (SA)/Société à reponsabilité limitée (sarl) CESL ELECTIVE - APRIL 2015 26 Capital Structure (Legal Capital -Europe) ►EU 2nd Company Law Directive minimum capital 25,000 € ►Rules relating to the raising of capital through the issuance of shares, the maintenance of share capital and the returning of value to the shareholders not infringing the maintenance of capital requirements (Ferran). ▪Pay up shares in cash (including a release of a liability for a liquidated sum or a credit equivalent to payment in cash) ▪No issue at a discount (know-how, patents, non-cash consideration) ▪No undertakings for future activity as consideration US: No ‘stated capital’, no legal capital ►Balance sheet ►Net assets test CESL ELECTIVE - APRIL 2015 France:€ 37000/225000 Germany: € 50000 UK: £ 50000 27 Shenyang Machine Tool Group/Schiess - MODIFIED Phase I Schiess privatised, but heavily undercapitalised Close to insolvency Phase II Schiess Shenyang Machine Tool Group owns 40 % Restructuring Plan ▪Decrease legal capital (1st step) ▪Increase legal capital (2nd step) ▪Shenyang Machine Tool Corp. owns 75%, ‘old’ shareholders stay out ►Shenyang’s Undertakings Invest 40m € to make Schiess competitive Keep German workforce and expand if profitable Envisage Joint Venture with suppliers. CESL ELECTIVE - APRIL 2015 28 Legal Capital – Decrease and Subsequent Increase as Elements of a Restructuring Plan ►Consider Statutory prohibition of paying out legal capital. Corporate need to adjust capital after heavy losses After insolvency: priority rights of secured creditors would have to be respected ►Decrease as consequence of corporate restructuring process ▪Vote of the shareholders’ meeting (duty to accept?) ▪Proportionate reduction may result in a loss. Increase (new shares) to be offered proportionately, but statute allows for derogation in favour of new investor. Consider Joint Venture and Shareholder Agreements CESL ELECTIVE - APRIL 2015 29 Touching Down on the Host Country – Founding a Limited Liability Company or a Corporation - Basics ►Limited Liability Companies (GmbH’s) If Chinese investor is not a private person, legal capital and financing are not a problem. Limited Liability and statutory regime on shareholders’ right are decisive. ►(Non-)Listed Corporation (Aktiengesellschaft) Prestige Raising Capital at the Stock Exchange (cf. IPO’s) One-person stock corporation is permitted. Non-European/European shareholders need not establish a formal joint venture. Corporate charter/shareholder agreement must address potential blocking situations and coordination of wills. CESL ELECTIVE - APRIL 2015 30 Touching Down on the Host Country – Founding a Limited Liability Company or a Corporation (FORMATION I) ►Limited Liability Companies (GmbH’s) Identity and number of founders, scope of business activities and amount of legal capital Shareholders’ Agreement?! articles of association Must be notarised and filed with commercial register (including a list of shareholders) Acting manager (equivalent to CEO) must be appointed who duly represents the limited liability company. Composition Appointment of Supervisory Board (for companies not subject to codetermination laws?) Appointment of an Advisory Committee as a mechanism to balance interests of shareholder groups? Composition Contributions in cash or in kind? 50%:50%? CESL ELECTIVE - APRIL 2015 31 Touching Down on the Host Country – Founding a Limited Liability Company or a Corporation (FORMATION II) ►(Non-)Listed Stock Corporation Agreement on statutes and bylaws by founding members Name of company, scope of business activities Place of business Shareholders’ Agreement?! Amount of legal capital/members contributions Mode of distribution of profits/financial year Appointment of Board of Directors and Supervisory Board Contributions in cash or kind? Check requirements under capital market laws CESL ELECTIVE - APRIL 2015 32 Corporate Governance Structures and the Capital Market One-tier Corporations Board of Directors Shareholders Two-tier Corporations Cf. Updated Action Plan on European Company Law Accounting/Internal Control Mechanisms/Audit and Remuneration Committees Shareholders – Bondholders Other Creditors Board of Directors Supervisory Board THE CAPITAL MARKET Shareholders CESL ELECTIVE - APRIL 2015 33 Corporate Governance Structures - Labour One-tier Corporations Board of Directors Participation of Labour in the Decision-Making Process ▪German codetermination models (≥500 from 1/3 to 50%) (cf. Austria and Denmark) Shareholders Two-tier Corporations Board of Directors Supervisory Board ▪Representative Bodies at the local plant level Works Councils, No participation in decisionmaking, but organisation of work (e.g. overtime) Shareholders CESL ELECTIVE - APRIL 2015 34 Corporate Governance Structures – Directors’ Duties ►Duty of care owed by each member of the Board of Directors in the light of the business judgment rule -Fleshed out by employment contract, corporate governance codes and specific compliance schemes -Does the business judgment rule counterbalance litigious shareholders and judicial activism? -Does the business judgment rule qualify as a safe harbour provision? Director’s liability and expert advice Director’s liability and conflict of loyalties Should the Joint Venture or Framework Agreement lay down a catalogue of directors’ duties? Who polices a breach of duties in a Joint Venture setting? CESL ELECTIVE - APRIL 2015 35 NEUSOFT/Philips Revisited: The Joint Venture Perspective I NEUSOFT/PHILIPS (Cooperation Phase 1) Neusoft (China) Philips Philips and Neusoft Medical Systems Co. Ltd. 51% 49% Joint Venture Agreement and ‘Best Practices’: Technological Innovations, Patents Use Distributions Chains of Both, Philips and Neusoft CESL ELECTIVE - APRIL 2015 36 NEUSOFT/Philips Revisited: The Joint Venture Perspective II NEUSOFT/PHILIPS (Cooperation Phase 2) Neusoft (China) Philips Philips and Neusoft Medical Systems Co. Ltd. 0% 100% Philips and Neusoft will share access to intellectual property (shared ownership/licences) and will continue partnership for supply of components. CESL ELECTIVE - APRIL 2015 37 Joint Ventures - Basics ►Why a Joint Venture? ▪Reduction of cost by sharing resources and network. ▪Cost-effective route for expansion and access to wider market or an increased customer base. ▪Access to technology Joint Ventures v. M & A ▪Empirical evidence: joint ventures may be more profitable. ▪A joint venture may lead to an acquisition. “Equity” and “non-equity” alliances Equity: each of the parties contributes capital to a jointlyowned, separate business (high degree of integration) Non-equity: Cooperation without direct profit-sharing (e.g. R&D collaborations, joint production arrangements). CESL ELECTIVE - APRIL 2015 38 Joint Ventures – Due Diligence (Survey) ►Focus on key assets required to achieve the business objectives ▪Commercial: products, market, distribution, suppliers, risk management, IT etc. ▪Financial: incl. review of current management accounts, profitability of major contracts, cost allocations, material differences in accounting policies ▪Legal: incl. investigation of titles to key assets and properties, material contracts, litigation or claims, regulatory licences, anti-bribery procedures ▪Technology: evaluation of technological assets, know-how patents ▪Land/buildings/facilities ▪Environmental/health and safety ▪Employees/personnel benefits ▪Tax CESL ELECTIVE - APRIL 2015 39 Joint Ventures – Information Exchange Agreement ►In spite of Confidentiality Agreement information may be so sensitive that additional protection against misuse is necessary. Agree on: ▪restricted access to: people who need to know, senior employees (individual confidentiality undertakings) ▪restrictions on: copying information and removing documentation ▪use of electronic or ‘virtual’ data room by: access controlled by protected passwords ▪’staggering release of information’: sensitive information will not be released until disclosing party is reasonably certain that JV will go through ▪making certain information only available to third parties (e.g. accountants, lawyers, financial advisers or other specialists) CESL ELECTIVE - APRIL 2015 40 Joint Ventures – Risks and Challenges I ►Risks of Collaborative Relationships Duration/Jurisdiction ▪Loss of intellectual property ▪Reputational risk arising from association with another company ▪Undue reliance on other firms in core areas ▪Leaking of information on corporate strategy ▪Distraction of personnel from focus on core corporate activity ►Key Challenges During Negotiations ▪Partner’s contributions (cash/know-how/in kind (incl. assets)) ▪Valuation of intangibles ▪Management control ▪Processes to carry out subsequent changes ▪Ownership structure ▪Governance bodies ▪Performance valuation ▪Clear agreement on objectives CESL ELECTIVE - APRIL 2015 41 Joint Ventures – Risks and Challenges II ►Key Challenges During Negotiations ctd. ▪Expected benefits (Dividends/Royalties/Retained Earnings) ▪Cooperation v. Competition ▪Protection of remaining business ▪Legal and management mechanisms to separate existing businesses from newly established joint entity ▪Dispute settlement mechanisms instead of litigation before courts? ▪Exit-strategies and walk-out mechanisms For Framework Agreement and/or Shareholder Agreements see next slides For structure and legal instruments for the negotiation process see M & A section of class CESL ELECTIVE - APRIL 2015 42 Joint Venture Structure and Ancillary Contracts I Technology Joint Venture A Technology Licence Agreement Supply & Purchase Contract B Shareholders’ Agreement Technology Licence Agreement Construction and O & M contracts JVC Production Plant CESL ELECTIVE - APRIL 2015 Supply & Purchase Contract 43 Joint Venture Structure and Ancillary Contracts II - TECHNOLOGY JOINT VENTURE ►JVC is established to pool and develop the technologies in a particular area and develop a production plant utilising that technology ▪undertake joint R&D to share capital cost through JVC in building plant which B is to operate and maintain ▪Technology licence agreements Provision of technology and technical assistance: Substantial remuneration (lump sum and/or royalties payments) or value to be taken in account in the capitalisation of JVC ▪Supply/purchase contracts: Take input of production. Pricing and profitability of the JVC ▪Construction contract CESL ELECTIVE - APRIL 2015 44 Joint Venture Structure and Ancillary Contracts III “Foreign” Production Joint Venture A Shareholders’ Agreement B Site lease Component Supply Technology transfer and assistance agreement JVC Distributorship with a subsidiary of A CESL ELECTIVE - APRIL 2015 Asset transfer/services agreement domestic customers 45 Joint Venture Structure and Ancillary Contracts IV - “FOREIGN” PRODUCTION JOINT VENTURE ►A joint venture is established in a “foreign” country to build a production plant which will be supplying markets. ▪Technology licence agreements Jurisdictional issues between A and JVC for the licence of A’s technology, technological assistance to the JVC, and remuneration and cost reimbursement ▪Distributorship agreement for the distribution export and domestic sales ▪Land transfer or lease between B and JVC for the availability of the site Plant construction contract ▪Asset transfer agreement for the transfer of specific assets (incl. workforce and ancillary services/components)) CESL ELECTIVE - APRIL 2015 46 Joint Ventures – SHAREHOLDERS’ AGREEMENTS I ►Key Issues Transfer situations! ▪Parties to the JVC? Parent company guarantees? ▪Purpose of the JVC? Should a Business Plan be attached? ▪Formation and Capital Choice of law ▪Additional financing (inter alia emergency funding)/guarantees ▪Governance and board structure (removal of directors, supermajority, deadlock resolution procedures) ▪Financial matters: dividend policy/preparation of budget and business plans ▪Reporting and Information (procedures for shareholder info) ▪Inter-party relationship issues: non-compete, secondment, cooperation on tax matters/confidentiality CESL ELECTIVE - APRIL 2015 47 Joint Ventures – SHAREHOLDERS’ AGREEMENTS II ▪Contractual protection v. articles of association ▪Stipulation for strategic minority investments ▪Deadlock and breakdown situations ►Deadlock notices and internal dispute settlement mechanisms ►However, if matter cannot be settled amicably, mediation OR ►Russian Roulette: offer to buy or to sell and recipient of notice must accept, if not: dissolution (OR: mediation) ►Texas Shoot-out: each shareholder may submit sealed bid for purchase of shares, highest bid shall prevail, if not dissolution (OR: mediation) ►Tag-along: third party offer to purchase shares from one shareholder. Selling shareholder may only sell if purchaser buys out the remaining shareholders. CESL ELECTIVE - APRIL 2015 48 Joint Ventures – SHAREHOLDERS’ AGREEMENTS III ►Drag-along: third party offer to purchase shares from one shareholder. Selling shareholder serves notice to other shareholders requiring them so sell as well. ►Put options: Party A is entitled to require party B to purchase A’s shares in the JVC (exit protection for minority shareholders) ►Call options: Party A is entitled to require party B to sell shares in the JVC to (buy-out mechanism for the majority shareholder). ►Default (definition thereof and consequences) CESL ELECTIVE - APRIL 2015 49 CASE STUDY: Putzmeister Revisited I Private Shareholders (Family) Foundations Putzmeister (high-tec pumps) (medium-sized) Sany Heavy Ind., 90% Share deal ! 360 m €, 3000 employees, 6m € profits on sales of pumps Citic PE Advisors, 10% CESL ELECTIVE - APRIL 2015 50 CASE STUDY: Putzmeister Revisited II ►Scenario prior to Acquisition ▪Loss of sales on the Chinese market ▪Loss of traditional European and North American markets due to the financial and economic crisis. ▪Turnover in 2007 1bn €, 2009 less than 500m €, but financially healthy ▪Continuation of crisis will threaten existence of enterprise Strategic Options ▪Shift from Western to new (Asian) markets, cut cost ▪Major weakness: lack of diversification (calls for new strategic partner) ►Take-over or Merger with a business partner (initial talks with a Swedish business partner) Professional Bidding Process to Find the Optimal Partner CESL ELECTIVE - APRIL 2015 51 CASE STUDY: Putzmeister Revisited III ►Transaction Process ▪Disappointing 1st round of offers from Western Hemisphere (Morgan Stanley involvement) ▪2nd Round includes Chinese Bidders (Zoomlion/Sany) ▪End of 2011/early 2012 Invitation to Potential Buyers to Submit Memorandum ▪Sany Offer: 525m € enterprise value, 360m € enterprise value ▪Zoomlion expresses interest, but German owner prefers private Chinese owner Sany does not insist on Due Diligence, but is ok with Due Diligence Presentation by CEO and CFO. ▪Due Diligence Presentation to serve as basis for future contractual stipulations on guarantees and warranties CESL ELECTIVE - APRIL 2015 52 CASE STUDY: Putzmeister Revisited IV ►Negotiation Process and Conclusion of Deal ▪German owner and Chinese negotiators meet in Frankfort. Guanxi seems to have worked. Signature of Acquisition Contract within a week after the first meeting. ▪Regulatory Permits Chinese Authorities Close Cooperation with EU and National Antitrust authorities to obtain clearance of the deal. Ex post Assessment ▪Exemplary Speed in a cross-border deal ▪Sany has fulfilled its assurances with respect to Putzmeister ▪Putzmeister will retain premium standing on non-Chinese markets (Sany cedes market position to Putzmeister) ▪Sany invests in Putzmeister German management retained, former owner joins Sany board CESL ELECTIVE - APRIL 2015 53 HOST COUNTRIES – Controls of Inbound Investments USA I ►Section 721 of the Defense Production Act of 1950, 50 U.S.C. App. 2170Security agreement ►Foreign Investment and National Security Act of 2007 Committee on Foreign Investment in the United States (CFIUS) Review Procedure Presidential “Critical Technology” order can be File a notice with CFIUS challenged in CFIUS investigates and may impose court binding mitigation measures 2012 Presidential Order directing divestiture of a Chinese acquisition in the US: wind farm project in the vicinity of restricted airspace (naval weapons training centre) CESL ELECTIVE - APRIL 2015 54 HOST COUNTRIES – Controls of Inbound Investments USA II (Source CFIUS February 2015) CESL ELECTIVE - APRIL 2015 55 HOST COUNTRIES – Controls of Inbound Investments USA III (Source CFIUS February 2015) CESL ELECTIVE - APRIL 2015 56 HOST COUNTRIES – Controls of Inbound Investments FRANCE ►Décret no. 2014-479 of 14 May 2014 relatif aux investissements étrangers soumis à autorisation préalable: Prior approval for activities with an impact on public order, public safety and national security, and research activities in national defence matters, and ▪supply of water, electricity, gas, hydrocarbon and other source of energy ▪public transport ▪electronic communication network and services ▪public health matters Compatibility with EU law is uncertain CESL ELECTIVE - APRIL 2015 57 HOST COUNTRIES – Controls of Inbound Investments UNITED KINGDOM ►Merger Assessment Guidelines 2010 (Competition Commission/Office of Fair Trading)/Enterprise Act 2002 (s. 4 et seq.) 2002 Secretary of State may intervene in public interest cases: ▪national security (including public security) ▪the interests of maintaining the stability of the UK financial system ▪the need for: Reference to Competition Commission - accurate presentation of news in newspapers - free expression of opinion in newspapers - sufficient plurality of persons with control of media enterprises -availability of wide range of broadcasting CESL ELECTIVE - APRIL 2015 58 HOST COUNTRIES – Controls of Inbound Investments GERMANY ►Foreign Trade and Payments Act of 2013 and Foreign Trade and Payments Ordinance of 2013 ►Sector-wise approach + analysis of security interests Prohibition of an acquisition or specific instructions by the Federal Ministry of Economics to ▪guarantee essential security interests ▪prevent a disturbance of the peaceful coexistence of nations Certificate of non-objection ▪guarantee public order ▪counteract a danger to the coverage of vital needs ▪sector-specific: military goods + products with IT security functions (MUST OBTAIN CLEARANCE) Compatibility with EU law? CESL ELECTIVE - APRIL 2015 59 M & A Statistics (EU) – 2013 Value – US $ bn) • • • • • • • • • • • Business Services 29 Consumer 59.5 Energy, Mining, Utilities 117.5 Financial Services 89.9 Industrials & Chemicals 69.9 Leisure 13.8 Pharma/Medical, Biotech 50.9 Reals Estate 23.8 TMT 132.2 Transport 23.4 Other 21.7 2013 – Activity picks up in UK and Germany Vodafone deal Dutch telecom sells German mobile subsidiary PR merger deal in Amsterdam OmnicomPublicis Germany Real Estate Hannover Rück UK – IPO market CESL ELECTIVE - APRIL 2015 60 CHOOSING THE M&A DEAL STRUCTURE - Basics Shareholders Board Shareholders Board Target Co Assets and Liabilities Assets and Liabilities Bidder Co Assets and Liabilities Consider Takeover law ! Old B Shareholders FINANCE !? T shareholders hold Cash, no stock Risk Analysis! Post-Merger: Bidder Co. holds its assets and liabilities + the old T ones CESL ELECTIVE - APRIL 2015 61 TYPOLOGY OF M & A CASES I ►STOCK FOR CASH MERGER: Pfizer, Inc., and Pharmacia plan to merger into a single firm with Pfizer designated as the surviving corporation. Merger plans calls for Pharmacia shareholders to receive Pfizer common stock amounting to 27 percent of Pfizer’s outstanding stock after the merger is completed. ►ACQUISITION OF CLOSELY HELD COMPANY BY ANOTHER Founder of Business is the sole shareholder of a thriving business with a medium-size number of employees Sale of business through a broker CESL ELECTIVE - APRIL 2015 62 TYPOLOGY OF M & A CASES II ►DISTRESSED MERGER: Acquisition of a company in financial trouble, with liquidity concerns or during bankruptcy proceedings or as part of a court-approved reorganisation. Examine asset sale Due Diligence (Liability Issues) Shift of Directors’ Fiduciary Duties Fraudulent Conveyance – Creditors Acquisitions in a Reorganisation Context Enforceability of Inter-Creditor Agreements Controlled bids – Negotiated M & A – Takeover bid CESL ELECTIVE - APRIL 2015 63 Shenyang Machine Tool Group/Schiess - MODIFIED Phase I Schiess privatised, but heavily undercapitalised Close to insolvency Phase II Schiess Shenyang Machine Tool Group owns 40 % Restructuring Plan ▪Decrease legal capital (1st step) ▪Increase legal capital (2nd step) ▪Shenyang Machine Tool Corp. owns 75%, ‘old’ shareholders stay out ►Shenyang’s Undertakings Invest 40m € to make Schiess competitive Keep German workforce and expand if profitable Envisage Joint Venture with suppliers. CESL ELECTIVE - APRIL 2015 64 TYPOLOGY OF M & A CASES IV ►ASSET DEAL 30 shareholders from an extended and disjointed family Target company manufactures equipment at a leased factory Deal: Purchase the equipment, contain environmental losses Specify the objects covered by the agreement Seek consent for transferring contracts Consider: Distressed M & A/ Divestiture CESL ELECTIVE - APRIL 2015 65 Investment Patterns Revisited (Sanhua/Aweco) Sanhua China Aweco Germany Insolvent German patents Banks Sanhua Europe European Subsidiaries ►Share – Asset Deal ▪Sanhua Europe buys Aweco’s European subsidiaries ▪Sanhua Europe buys Aweco’s customer contracts ▪Sanhua buys Aweco’s technology and intellectual property rights (including patents) ▪Sanhua buys Aweco’s production plants and assumes all debts CESL ELECTIVE - APRIL 2015 66 Share Deal v. Asset Deal ►Purchase of Companies holding assets and liabilities ▪Assets kept a book value ▪Liabilities (disclosed and undisclosed) acquired by the Purchaser, subject to contractual stipulations ▪Tax risks ▪’skeletons in the cupboard’ ►Purchase of Assets of Liabilities ▪Re-setting of amortisation ▪Explicitly assume liabilities (BUT CF. TAX, LABOUR, ENVIRONMENT) ▪Flexibility (but consider name of the company, contracts and permits) CESL ELECTIVE - APRIL 2015 67 Asset Deal v. Corporate Restructuring/Divestiture (HYPO 5) ►A corporation with a port X has shares € 130,000 ►A new corporate entity Management Inc. - a corporation - Harbour Corporation - Legal Capital € 1.7 bn - A 100 pc subsidiary is established, in exchange for shares, the port is transferred to the new corporation Port: 80 per cent 20 pc of assets CESL ELECTIVE - APRIL 2015 68 M & A – Typology III ►NEGOTIATED SHARE DEAL WITH SHAREHOLDERS OF A NON-LISTED COMPANY ( FRIENDLY TAKEOVER) Private Shareholders (Family) Foundations Putzmeister (high-tec pumps) (medium-sized) Sany Heavy Ind., 90% 360 m €, 3000 employees, 6m € profits on sales of Citic PE Advisors, 10% CESL ELECTIVE - APRIL 2015 69 Planning an M & Deal – The Private Contracting Side ►Structuring the Negotiations: Analysis of the Situation Letter of Intent Confidentiality Agreement ►The Agreement Deal Protection Clauses MAC-Clauses Buyer Protection ►Corporate Law Aspects (incl. Squeeze-outs) ► EU Takeover Law (Mandatory Bids) ►EU Competition Law ►Acquisition Finance CESL ELECTIVE - APRIL 2015 70 Acquisition Finance of Packaging Group (HYPO 6 ) ►Packaging Group is put up for sale by Packaging Co. (strategic decisions) • sold to its former management and a financial investor • PURCHASE PRICE € 340m, liabilities to the banks € 100m + transaction fees € 5m. ►Total transaction volume: € 445m. CONFLICTING INTERESTS Equity capital investors: pro debt financing Banks: pro high equity ratio for the minimising the credit risk Focus on cash flow Use of Special Purpose Vehicles of target company Little Collateral CESL ELECTIVE - APRIL 2015 71 Acquisition Finance by a Private Ltd. (HYPO 7) ►Consider competition between strategic buyers and other financial investors ►Communication of seller’s criteria: price/speed/secure financing ►Prepare purchase process • Test and analyse financing of transaction at an early stage • Constant update of latest developments • Prepare negotiation process • Transaction team including full senior level involvement at all stages of the process Professional due diligence process management to ensure flow of information CESL ELECTIVE - APRIL 2015 72 The Economics of M & A – Conceptualising the Deal Flow I ►Decision to Invest: Expectation that future returns to existing shareholders, discounted to present value at a rate reflecting the risks, will then exceed the amount presently invested (add value to the resulting corporation?) ▪How to quantify ‘synergistic’ or other gains? ‘Rational’ norms for ascertaining the gains from the deal – Manager self-interest ►The Decision to Sell: Is enough being received for the value given up? In case of merger: any increased efficiency or profitability? Side-payment for management? ►Distinguish Family Company or close corporation from a target corporation listed at the stock exchange! CESL ELECTIVE - APRIL 2015 73 CONCEPTUALIZING THE DEAL FLOW II Discovering Start of Due Diligence the Deal Negotiations Letter of intent Confidentiality standstill exclusivity Signing the Acquisition Deal protection PostClosing Covenants Internal Approval Date of Closing on Requirements Acquisition Agreement CESL ELECTIVE - APRIL 2015 74 NEGOTIATING AN M & A DEAL - Small Corporations and Non-listed Corporations – ►Initial contact between the parties turn into negotiations and details about merger or acquisitions Pre-contractual Letter of Intent (entirely non-binding?) Liability ?! ▪Necessity to be determined by parties’ discretion ▪Prevent deal-jumping ▪Combine binding/non-binding (Relating to rights during interim process) Confidentiality (due diligence) No-talk/no-shop ▪Prevent misunderstandings about the essentials ►Cf. potential liability under preliminary agreements CESL ELECTIVE - APRIL 2015 75 M & A and Private Auctioning (Private M & A) Phase I ▪Investment Advisor sound the Market (Teaser) ▪Interested buyers will be supplied with an Information Memorandum after signed a Confidentiality Undertaking ▪Seller will then issue Process Letter ▪Indicative Bid Phase II ▪Management Presentations ▪Vendor Due Diligence ▪Binding Offer Signing and Closing CESL ELECTIVE - APRIL 2015 76 THE LETTER OF INTENT (1) (HYPO 8) ►Officials of Palmer Golf Company and Fuqua meet several times to consider a business relationship between the two corporations. Several discussions and negotiations follow. ►A ‘Memorandum of Intent’ is signed: “memorandum will serve to confirm the general understanding which has been reached regarding the acquisition of 25 % of Palmer by Fuqua in exchange for all outstanding stock of a Fuqua subsidiary, and money in the amount of US $ 700,000 for the rendition of management services by Fuqua” … “counsels of Palmer and Fuqua will proceed as promptly as possible to prepare an agreement for the proposed combination of business, satisfactory to either party” “approval of such definitive agreement by the Board of Directors of Fuqua” CESL ELECTIVE - APRIL 2015 77 THE LETTER OF INTENT (2) (HYPO 9 :UAC vs. Paribas) ►On 15 November 1985 UAC sends a letter to Paribas, expressing the intent: “to enter into an agreement pursuant to which the Bank shall sell to UAC the common stock of the Paribas subsidiaries for a price of US $ 2.5m”, … “UAC and Paribas shall immediately direct their respective attorneys to commence preparation of mutually satisfactory form of Agreement, which shall, amongst other things, (i) provide for payment of the price in cash …; (ii) require a closing not later than 27 November 1985, or a later date at the discretion of UAC; and (iii) warranties and conditions which are customary in transactions of this kind”. ►Paribas does not execute this letter. CESL ELECTIVE - APRIL 2015 78 NEGOTIATING AN M & A DEAL - Confidentiality Agreement – ►Confidentiality Agreement (cf. due diligence information exchange) ANTITRUST CONCERNS !! ▪Non-competitively sensitive information (no restriction) ▪Confidential information (information not completely competitively sensitive) Team/’Clean room’ procedures ▪Competitively sensitive information (business and customer information, prices, credit terms, marketing information) ►Can be exchanged without Antitrust Concerns ▪income statements and balance sheets ▪profit and loss statements No exchange of data on future business strategies or specific ▪sales and gross margins customer data ▪general data systems CESL ELECTIVE - APRIL 2015 79 NEGOTIATING AN M & A DEAL - Standstill Agreements ►History of no-shop/no-talk clauses (standstill agreements) 1980’s use in connection with confidentiality agreements: selling corporations asking bidders to execute a standstill in exchange for access to seller’s due diligence materials ►Today: standard – indication of bidder’s true intentions (Potential buyer has a choice between preserving the right to bring a hostile transaction or opt for a standstill) ▪Avoid disruption in negotiations CORPORATE ▪Control bidding and negotiation process GOVERNANCE ISSUES ! ▪Avoid over-bids by third parties May also be included in M & A Agreement to cover the period between signing and closing (Overlap) CESL ELECTIVE - APRIL 2015 80 CONCEPTUALIZING THE DEAL FLOW (Revisited) Discovering Start of Due Diligence the Deal Negotiations Letter of intent Confidentiality standstill exclusivity Signing the Acquisition Deal protection PostClosing Covenants Internal Approval Date of Closing on Requirements Acquisition Agreement CESL ELECTIVE - APRIL 2015 81 NEGOTIATING AN M & A DEAL - THE M & A AGREEMENT I ►Price and Form of Consideration Terms ▪Valuation Issues Distinguish share from asset deals ▪Earnout Clauses to adjust price ex post ▪Warranties and Representations (‘Best knowledge’) ▪Covenants (addressing the interim period between the date of signing the agreement and closing) ▪Conditions precedent to the Closing ▪Remedies for Breach Consider: Negotiating Team must also prepare exhibits CESL ELECTIVE - APRIL 2015 82 NEGOTIATING AN M & A DEAL - THE M & A AGREEMENT II ►Allocation of Risks between Signing and Closing Regulatory and Financing Risk Sandbagging Provisions Survival Time of Warranties Threshold Deductibles and Caps De Minimis and Baskets Escrow, Holdbacks, Bank Guarantees and Warranty Insurance Indemnities (cf. Tax Indemnities/Environmental Indemnities) CESL ELECTIVE - APRIL 2015 83 NEGOTIATING AN M & A DEAL - Intellectual Property Rights ►Intellectual Property Rights (Patents) and know-how are frequently the most important assets of the target company ▪Essential Part of Due Diligence Tax aspects -Analyse intellectual property and licence contracts with third parties (including inventions by personnel (may be protected by special statute) -Intellectual Property Rights in Asset Deals -Know-how and GruppenfreistellungsVO on Technologie-Transfer (316/2014) Due diligence and freedom to operate (assess to what extent third-party intellectual property rights may be affected, consider third-party portfolios) CESL ELECTIVE - APRIL 2015 84 NEGOTIATING AN M & A DEAL - Deal Protection Clauses ►Motivate the Seller to Execute the M&A deal and Refrain from Looking for a New Buyer between Signing and Closing Consider costs of due diligence Incentives to go through with due diligence and the deal ►Break-Up or Termination Fee (cf. 2-4% of the deal value) ►Asset Lock-Up ►No shop-clause/or no solicitation clause (i.e. exclusivity agreement) ‘Fiduciary Out’: Unsolicited Superior Offers Outside bankruptcy to be considered in the context of the entire negotiated transaction (Business judgment rule) ►No-talk clause (renders any due diligence exams by third parties impossible) (Consider Corporate Governance Issues) CESL ELECTIVE - APRIL 2015 85 NEGOTIATING AN M & A DEAL - MAC-Clauses I - ►Improve Allocation of Deal Risks Through Material and Adverse Change (MAC) Clauses: “Any event, fact, circumstance, development or change that, either singly or in the aggregate, would reasonably be expected to have a material adverse effect on various items (e.g. financial condition, results of operations, assets, liabilities, prospects)”. CESL ELECTIVE - APRIL 2015 86 MAC-Clauses II ► The Efficiency of MAC-Clauses (Consider Applicability of Take-over Law!!!) ▪Symmetry? Risk of intra-company procedures within the target puts purchaser at risk, and MAC-clause is a contractual readjustment of asymmetric risk allocation (but consider that MAC-clause does not protect purchaser from a decrease in the seller’s value). ▪Investment Analysis? (Mitigating Seller’s Moral Hazard) Encourage seller to make investments during the interim period (A realistic assessment?). Endogenous risks to the seller, exogenous risks to the purchaser. CESL ELECTIVE - APRIL 2015 87 MAC-Clauses III (+HYPO 10 ) ► The Efficiency of MAC-Clauses (ctd.) ▪Renegotiation Leverage: a bargaining chip or reduction of uncertainty between the parties? ►Risk of reducing certainty that transaction will close ►Risk of reducing clarity on the Securities Markets ►HYPO: ▪Bain Capital and TH Lee agree to buy Clear Channel for US $ 26 bn -US $ 600 m break-up fee for wilful and material breach of the merger agreement by private equity sponsors -US $ 500 m break-up fee if merger did not close because the private equity sponsors did not receive financing. -Clear Channel sues banks for tortious interference ►Parties settle dispute by reducing price per share and slightly increasing the interest spread. CESL ELECTIVE - APRIL 2015 88 Seller’s Obligation to Tell the Truth? (HYPO 11) ►Negotiations on an Acquisition of a Software Company During the negotiations of the deal seller makes incorrect statements on turnover and profits. Due diligence does not reveal the mistake. No evidence of fraudulent behaviour. Acquisition Agreement does not contain stipulations on seller’s representations or warranties as to turnover and profits. After the deal is consummated, it is found that shortly before signing the Acquisition Agreement a 40% drop of turnovers from servicing contracts had occurred due to customer terminations of the respective contracts. ►Failure to Tell the Truth? ►What, if buyer knew he was buying a loss-making company without knowing the exact figures? CESL ELECTIVE - APRIL 2015 89 Seller’s Liability – Basics (1) ►Consider Differences National Contract Law Systems ►Anglo-Saxon contract theory: ▪Unless warranties or representations are made or covenants given, sue for fraud, but not for breach of contract. -representation: presentation of fact made to induce someone to act, esp. to enter into a contract -warranty: express or implied promise that something in furtherance of the contract is guaranteed by one of the contracting parties, esp. seller’s promise that the thing being sold is as represented or promised. i) Seller’s representations to do the deal ii) Representations concerning condition and status of the target (Cf. Negotiations on MAC-Clause!) Provide Seller with Disclosure, serve as a Closing Condition (and form a basis for indemnification claims for private deals) CESL ELECTIVE - APRIL 2015 90 Seller’s Liability – Basics (2) -covenants: promises or agreements to take or refrain from taking certain actions. conduct of business between signing and closing degree of efforts and specified actions necessary to close the transactions post-closing covenants ►National Law Systems with Codified Contract Rules -Contractual Duty: Supply object of sales contract free from material defects and defects of title. Distinguish share deals from asset deals Do statutory definitions include profits? Damages or ‘supplementary performance’ (cf. curing) -Need for Private Contracting CESL ELECTIVE - APRIL 2015 91 CHOOSING THE M&A DEAL STRUCTURE - Revisited Shareholders Board Shareholders Board Target Co Assets and Liabilities Assets and Liabilities Bidder Co Assets and Liabilities Consider Takeover law ! Old B Shareholders FINANCE !? T shareholders hold Cash, no stock Risk Analysis! Post-Merger: Bidder Co. holds its assets and liabilities + the old T ones CESL ELECTIVE - APRIL 2015 92 Asset Deal v. Corporate Restructuring/Divestiture - Revisited - ►A corporation with a port X has shares € 130,000 Management Inc. - a corporation - Harbour Corporation - Legal Capital € 1.7 bn - 20 pc ►A new corporate entity A 100 pc subsidiary is established, in exchange for shares, the port is transferred to the new corporation Port: 80 percent of assets CESL ELECTIVE - APRIL 2015 93 NEGOTIATING AN M & A DEAL - Deal Protection Clauses ( Revisited) ►Motivate the Seller to Execute the M&A deal and Refrain from Looking for a New Buyer between Signing and Closing Consider costs of due diligence Incentives to go through with due diligence and the deal ►Break-Up or Termination Fee (cf. 2-4% of the deal value) ►Asset Lock-Up ►No shop-clause/or no solicitation clause (i.e. exclusivity agreement) ‘Fiduciary Out’: Unsolicited Superior Offers Outside bankruptcy to be considered in the context of the entire negotiated transaction (Business judgment rule) ►No-talk clause (renders any due diligence exams by third parties impossible) (Consider Corporate Governance Issues) CESL ELECTIVE - APRIL 2015 94 M& A AND COMPANY LAW I - Corporate Governance Aspects ►The Principal-Agent Problem: Agency costs as an inevitable consequence of vesting discretion in someone other than the shareholders. ▪The modern corporate structure Minority protection and lack of accountability ▪Board of directors may not unilaterally reallocate power/Majority-minority conflicts/stakeholders ▪Potential conflict of interest Ex ante approaches: (self-dealing etc) mandatory procedures Fundamental Changes: Ex post strategies: business Corporate Divisions judgment rule/fairness and Sales of Assets Take-over law (Capital Assume Liabilities Market Aspects) Control Transactions CESL ELECTIVE - APRIL 2015 95 Business Finance and Corporate Governance – Mergers (HYPO 12) Great Western recapitalises Co-op Sugar Producers Cooperative 22 March 1974 Acquisition Agmt. 100 % Great Western Sugar 22 March 1974 Favourable Fairness Opinion 15 August 1974 Board of Directors realise that sugar prices are rising 14 September 1974 Fairness opinion is withdrawn and Directors recommend not accept deal CESL ELECTIVE - APRIL 2015 96 Scope of Duties Owed by the Board of Directors (HYPO 13) ►TransUnion, a publicly traded, diversified holding company with some difficulty to generate income. Van Gorkom, an officer of TransUnion owns TransUnion shares which he is willing to sell at US $ 55 per share. ►Van Gorkom knows that Pritzker, Inc. is interested in making a cash-out merger offer at Van Gorkom’s proposed price of US $ 55 per share (Sept. 18, 1980). On Sept. 19, 1980 van Gorkom calls a Board Meeting for the following day, and takes advice from TransUnion’s bank. Pritzker is present. During a two-hour meeting on Sept. 20, 1980 Van Gorkom makes a presentation of the Pritzker offer. The CFO tells he is unaware of the negotiations and declines to address the fairness of the price formula. The Board accepts the deal and on Sept. 22, 1980 a press statement on the “definitive Merger Agreement” is made. CESL ELECTIVE - APRIL 2015 97 M& A AND COMPANY LAW II - Corporate Governance Aspects ctd.►The Role of the Board of Directors (Negotiated Acquisitions) Proper Exercise of the Business Judgment/Duty of Care Informed Decision-Making ►Obtain all information reasonable available ►Consult with outside financial advisers ►Fairness opinion from independent third party Disclose all material information reasonable shareholder would consider in deciding on an M&A deal CESL ELECTIVE - APRIL 2015 98 M & A – Ex ante aspects (Securities Regulation) (HYPO 14) ►Prior to 20 Dec. 1978, Basic, Inc. was a publicly traded company engaged in the business of steel products. As early as 1965, Combustion, Inc. had expressed some interest in acquiring Basic. ►Beginning in Sept. 1976, Combustion representatives had meetings with Basic officers and directors, concerning the possibility of a merger. ►During 1977 and 1978, Basic made three public statements denying merger negotiations. ►On 18 Dec. 1978, Basic asks NYSE to suspend trading in shares and issues a release stating it had been ‘approached’ by another company concerning a merger. ►On 19 Dec. 1978, Basic’s board endorses Combustion’s offer of US $ 46 per share, and the following day, publicly announces approval of tender offer. CESL ELECTIVE - APRIL 2015 99 EU TAKE-OVER LAW I Public Offer Mandatory Bid Defensive Measures Acceptance ►Instead of Agreement between buyer and seller: Public takeover bid by the bidder to the shareholders of the target company who decide for themselves normally without a general meeting of shareholders. ▪Market for corporate control ▪Principal-agent problems in takeovers (management/ majority/ minority/shareholders and employers + creditors ▪Special protection problems (pressure to tender/private benefits of control) CESL ELECTIVE - APRIL 2015 100 EU TAKE-OVER LAW II ►EU Takeover Directive 2004/25/EC of 21 April 2004 ▪Art 2 (1) (1) (a) : “‘takeover bid’ or ‘bid’ shall mean a public offer (other than the offeree company itself) made to the holders of the securities of a company to acquire all or some of those securities, whether mandatory or voluntary, which follows or has as its objective the acquisition of control of the offeree company in accordance with national law” ▪Art. 2 (1) (1) (d): “‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid”. CESL ELECTIVE - APRIL 2015 101 EU TAKE-OVER LAW III ►General Principles (art. 3) ▪equivalent treatment” (cf. protection of minority shareholders) ▪sufficiency of time and information (cf. information on bids) ▪duties of the board of the offeree company (‘the interests of the company as a whole’) ▪avoidance of false markets (market abuse/secrecy/insider trading) ▪offeror’s responsible conduct (ability to pay consideration in cash) ►White List by ESMA (Nov. 2013) on ▪siege principle Acting in concert ►Consider percentages indicating control CESL ELECTIVE - APRIL 2015 102 EU TAKE-OVER LAW IV ►Mandatory bid rule ▪no withdrawal of generous offer de facto control is obtained ▪protect minority/disincentive for potential bidders ▪depends on market conditions ▪includes takeover en cascade (may require mandatory bid to minority shareholders of the target subsidiary under certain circumstances) ▪acting in concert ▪consideration may be in cash and shares ►Time allowed for acceptance ▪between two and ten weeks after publication of offer document (may be extended if offeror gives notice of closing the bid at least two weeks’ notice) ►Equitable price CESL ELECTIVE - APRIL 2015 103 EU TAKE-OVER LAW V ►Obligations of the Board of the Offeree Company ►Breakthrough (contra poison pill) (But Member States may derogate from this rule) ►Squeeze-out (90 % situation) Consider Appraisal Remedies under German and Italian Corporate Laws In case of merger (consideration paid is shares for shares) shareholders may sue the surviving company if they wish to attack the exchange ratio ( deterrent against mergers) CESL ELECTIVE - APRIL 2015 104 TAKEOVER LAW AND POISON PILLS Low thresholds ►Based on the class of the security known as a right ▪blank-check preferred stock: Issuance of non-voting convertible preferred stock as a special dividend, price below market What if no-squeeze out? ▪as above + flip-in element: holders may acquire common shares at half price, but not for acquirer and its associates or affiliates Strong position for board ▪redemption provisions (buyer deterred from buying control block prior to the formal offer) ▪Back-end plans: Issuance of rights to shareholders upon specific event (share option) Minimum price for target CESL ELECTIVE - APRIL 2015 105 EUROPEAN MERGER (COMPETITION) LAW I ►EC Merger Regulation No. 139/2004 (Council) (Commission Regulation No. 802/2004 implementing the EC Merger Regulation and Guidelines on the assessment of horizontal mergers (Feb. 2004)) •Prohibition of a concentration which would significantly impede competition in the common market or a substantial part thereof, in particular as a result of the creation or strengthening of a dominant position, •But no prohibition where a concentration, in spite of creating or strengthening a dominant position, does not significantly impede competition in the common market •Pre-notification system (prior to conclusion of agreement, announcement of public bid, or acquisition of control) •Compatibility may be conditioned on appropriate measures CESL ELECTIVE - APRIL 2015 106 EUROPEAN MERGER (COMPETITION) LAW II ►EC Merger Regulation No. 139/2004 (Council) •Community Dimension: -combined world-wide turnover is > 5 ban € and each of at least two parties realized > 250 m € turnover in the EU, or -combined world-wide turnover is > 2.5 ban €; their combined turnover is > 100 m € in each of at least 3 Member States, the turnover of each of at least two of the merging parties is > 25 m €; the Community-wide turnover of each at least of the two merging parties is > 100 m €, unless each of the merging parties obtains more than 2/3 of its EU turnover in and the same Member State. CESL ELECTIVE - APRIL 2015 107 EU Commission: M & A Cases (1990 – 31 Jan 2014) ►Notified Cases 5449 Cases Withdrawn (Ph. I) Cases Withdrawn (Ph. II) ►Referrals ►First Phase Decisions Compatibility Compatible Compatible ►Phase II Proceedings ►Second Phase Decisions Compatibility Compatibility 114 37 52 (out of scope) 4781 2177 (simplified procedure) 229 (with commitments) 219 4 restore competition 54 24 prohibitions 102 (commitments) CESL ELECTIVE - APRIL 2015 108 EUROPEAN MERGER (COMPETITION) LAW III - The EU Commission ►Framework for Assessing Horizontal Concentrations ▪Market Shares and concentration levels ▪Market shares (50% or more) are indicators, but in some cases market shares below 40% lead to a dominant position. ▪Market share of 25% or less is unlikely to impede competition ▪Horizontal competition concerns are unlikely, unless -new entrant is involved -important innovators are involved -cross-shareholdings, mavericks, coordination -one of the parties: pre-merger market share ≥ 50%. CESL ELECTIVE - APRIL 2015 109 EUROPEAN MERGER (COMPETION) LAW IV - The EU Commission ctd. ►Competitive Assessment of Horizontal Concentrations ▪Significant Non-coordinated effects -Merging firms are close competitors -Customers have limited possibilities of switching supplier -Suppliers are unlikely to increase supply if prices increase -Merged entity able to hinder expansion by competitors -Merger eliminates an important competitive force ▪Coordinated effects -Creation or strengthening of a collective dominant position (economically rational to coordinate behaviour without entering into an agreement) -Consider deterrent mechanisms ►Analyse countervailing buyer power CESL ELECTIVE - APRIL 2015 110 CHOOSING THE M&A DEAL STRUCTURE - Revisited Shareholders Board Shareholders Board Target Co Assets and Liabilities Assets and Liabilities Bidder Co Assets and Liabilities Consider Takeover law ! Old B Shareholders FINANCE !? T shareholders hold Cash, no stock Risk Analysis! Post-Merger: Bidder Co. holds its assets and liabilities + the old T ones CESL ELECTIVE - APRIL 2015 111 ACQUISITION FINANCE ►Scenario I: Purchase price to be raised by external loans ►Scenario II: Group of investors wants to acquire a group by forming a new acquisition holding • Equity investments in the holding • Bulk of Purchase Price Raised by External Secured Loans -Negotiate with syndicate of secured lenders -External lenders will require over the assets of the new holding company and subsidiaries -Intra-group guarantees CESL ELECTIVE - APRIL 2015 112 Secured Loans (Basics I) – HYPO 15 Bank provides cash for acquisition finance Purchaser to supply the bank with collateral (security) Assets/book debts etc. of Target Co. ►Bank is willing to credit for cash, but requires security (collateral) ►Purchaser pledges assets and book debts of new holdings or target company to the bank subject to pledge (security agreement) ►Purchaser and target company may not sell, factor, discharge or assign any asset or book debt to third parties without the consent of the bank. CESL ELECTIVE - APRIL 2015 113 Secured Loans (Basics II) - Creation of a Security Interest • Security agreement: Written (i.e. enforceable) agreement, granting a security interest in property to a creditor to guarantee performance of an obligation, to be realised in a worst case scenario • Debtor must have alienable right in the collateral (incl. a leasehold, or a license or right to use the collateral) • Creditor gives value to debtor: binding undertaking to advance credit in the future, or actual advancement of credit. CESL ELECTIVE - APRIL 2015 114 Acquisition Finance – Syndicated Lending (HYPO 16) Co-lender Lead Bank Co-lender Master Agreement Securities in a Trust or Pool of Securities CESL ELECTIVE - APRIL 2015 Borrower pledges Securities either to individual lender or to the pool 115 Corporate Investment Decisions (HYPO 17) Syndicate of senior lenders Syndicate of Secured Mezzanine lenders Working Capital Loan Local Subsidiary Investors (equity/loans) Acquisition Holding Co. Original shareholders Group holding company Local Subsidiary CESL ELECTIVE - APRIL 2015 Local Subsidiary 116