M & A Law Prof Blog

Hostile Takeover Market ... in India?

An article in The Economic Times of India raises that prospect.  But, the takeover market in India is governed by the Securities and Exchange Board of India and is organized along the lines of the UK's Takeover Panel.   So while there may be the prospect of unwelcome offers on the horizon, targets won't have the benefit of the defensive measures that have stymied the hostile acquisition in the US for years.

-bjmq

What about Chinese approval?

 The proposed acquisition of Hummer is a bit of an odd deal.  In addition to the (non)issue that Hummer builds a civilian version of the Humvee, which may cause some US-based political questions – there is now also the issue of Chinese government approval.  The WSJ this morning has a good story outlining some of the issues (here).  Most important, every out-bound investment from China worth more than $100 million must get a government ok.  Where transactions are done by a state-owned enterprise (like the Rio-Chinalco deal that just went south yesterday - here), then it’s easy to imagine that Chinese government approval will be forthcoming.  The gestation periods are long and many times the acquisitions are part of a government/industry strategy.  Such is not quite the case in the Hummer deal.   The English-language China Daily is now reporting that GM and Tengzhong may “have jumped the gun” with this deal (here).   Even the people’s daily noted in its story on the transaction that other recent acquisitions of foreign auto brands had not gone well for the Chinese acquirers (Ssangyong).

 Two issues seem to stand in the way of getting the OK from the Chinese government.  First, is China’s recent adoption of greener automotive regulations.  Buying Hummer is exactly consistent with that objective.  Second, Tengzhong is only a 4 year old company with no experience managing an overseas investment and no experience building anything less than a truck.  If you’ve tried to visit the company’s website recently, the first question you have to ask is whether the company is up to the task of managing a 3,000 person manufacturing division in the US.  It's easy to imagine a Ssangyong-like ending to this transaction.

In any event, if Tengzhong wants to make this transaction happen it will have to get approval from SAFE, the central bank’s foreign exchange regulator and the Ministry of Commerce.  SAFE recently began circulating draft regulations (described here).  The Ministry of Commerce recently updated its outbound rules (descriptions here and again here) that would loosen the approval process.  But, MOFCOM and SAFE remain the gatekeepers for Tengzhong and it’s not yet clear whether they will give an okay to the deal.  However, it's still early since apparently the parties haven't even reached a definitive agreement, yet.

Anyone with a China practice who thinks they know how this deal will go down from a Chinese perspective should feel free to leave comments.

-bjmq  

CFIUS Filing for Hummer Deal?

OK, so GM went the way of Chrysler and filed for bankruptcy yesterday.  Earlier this morning there was an announcement by GM’s management that it had entered into an MOU with a mysterious unidentified potential buyer for its Hummer division.  Now, it’s leaked to the NY Times and Bloomberg (and just about everybody else in the world) that the buyer is Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., based in Chengdu.  They are offering to take the Hummer Division off GM's hands for $500 million in cash.

Of course, a few years ago sale of an automotive division that produces the civilian version of the military’s Humvee would have likely generated cries of outrage about threats to our national security.  Remember Dubai Ports?  Or how about Unocal-CNOOC? Well, with GM in bankruptcy those concerns are not likely to carry the day.  That said, this transaction is a strong candidate for a voluntary CFIUS filing with the US Treasury.  Given the nature of the business (vehicles manufacture with a potential military use) and the nature of the acquirer (News articles are murky about that.  They say it's "privately" owned.  Maybe.), this is precisely the type of transaction that should seek to make a filing.   Worst case for GM would be that they announce this transaction and proceed along a path to closing only to have a Dubai Ports/Unocal-like flare-up kill this transaction.

 -bjmq

Fun and Games Arbitraging DLCs

A full-fledged BHP Billiton bid for Rio Tinto plc raises some interesting legal issues.  The reason is that both companies are dual listed ones.  A DLC structure is a virtual merger structure utilized in cross-border transactions.  The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation.  In the case of BHP Billiton, this structure involves Billiton, an English company, and BHP, an Australian company.  In the case of Rio Tinto the structure involves Rio Tinto plc, an English Company, and Rio Tinto Ltd, an Australian company.

The key to the relationship between the two companies is their equalisation agreement (this link accesses RT's equalisation agreement).  This sets an equalisation ratio between the shares for purposes of liquidation, dividends and takeovers.  In the equalisation agreement for Rio Tinto it is set at 1:1 initially.  In addition, the agreement requires that major decisions of the parties be made by joint decision of the shareholders and boards, the the parties have an identical board.  Most importantly, the equalisation agreement enforces each company's constitutional documents which require that any bidder must make a bid for both companies and the consideration must be equal as set out in the equalisation ratio converted for currency fluctuations (see RT plc Article s. 64 here and RT LTD constitution s. 145 here for their relevant provision). 

So, the first point is that in the case of RT, these agreements likely make it impossible for a third party bidder to come in and bid only for one of the two companies.  This is a nice takeover defense for each.  And because of this, it may run into the U.K. and Australian prohibitions against company's "taking frustrating actions" to inhibit hostile bids.  This prohibition generally prohibits companies from adopting any takeover defensive measures.  Whether the takeover panels of each company considering RTP's "defense" here would overturn it, is unknown, though i suspect it is unlikely given the uniqueness of this structure. 

More importantly, the shares of DLC companies trade outside the DLC equalisation ratio.  Once, I saw someone put up a chart of BHP's English shares and Billiton's Australian shares and showed how they had a 5-10% differential outside the equalization ratio.  The professor highlighted this as evidence of an inefficient market.  The shares should ideally trade at the equalization ratio.  But they don't -- whether this is irrational or due to different legal and tax regimes is yet to be determined.  For more on this see The Limits of Arbitrage:  Evidence from Dual-Listed Companies.  Page 21 and 22 of this chart show that Rio Tinto and BHP Billiton have traded up to 10-15% off their equalisation ratio.

Arbitrage opportunities on this disparity are usually limited though because the shares are not interchangeable.  But here, to the extent this disparity still exists there is a classic arbitrage strategy available if a bid is made.  For the lawyers, though it is a headache.  If Billiton offers shares, it will presumably be BHP shares for the English entity and Billiton shares for the Australian.  But the BHP shares are worth less on the market than Billiton shares (about 7% below the equalisation ratio).  So, in order to meet the test they will have to offer higher consideration in BHP shares than Billiton shares.  This is feasible I think, but likely obligates Billiton to make an equalisation payment to BHP.  Alternatively, BHP Billiton may be able to give RT shareholders a choice between the shares but this would be ill-advised for tax reasons -- the U.K. is likely to treat this as a taxable exchange (remember the problems with UK holders of the Dutch leg of Royal Dutch Shell when it was collapsed?). 

In any event, I'm intrigued to see how BHP Billiton's lawyers deal with this issue. 

SEC Cross-Border No-Action Letters

I've been meaning to post up the latest SEC No-Action letters relating to cross-border transactions.  Here they are:

• Telemar Participações S.A., October 9, 2007
• Barclays PLC tender offer for ABN AMRO Holding N.V., August 7, 2007
• Rio Tinto plc, July 24, 2007
• Royal Bank of Scotland Group plc tender offer for ABN AMRO Holding N.V., July 23, 2007
• Endesa, S.A., July 3, 2007

It is my humble belief that any public M&A lawyer should regularly read these letters as it familiarizes you with the granular issues associated with the Williams Act and public M&A generally.  But, there is a problem here.  All of these releases deal with technical issues and seek to harmonize the U.S. aspects of cross-border transactions that the SEC's Cross-Border Rules did not correct.  For example, Rule 14d-10 of the Exchange Act, commonly referred to as the “all-holders/best-price” rule, requires that an acquiror keep open a tender or exchange offer to all the holders of a class of securities and pay each of them the highest consideration paid to any other shareholder during the tender offer.

The practice in cross-border takeovers is to split the offer into both a U.S. offer and a non-U.S. offer. However, the practice of having separate offers open only to U.S. or non-U.S. holders runs afoul of Rule 14d-10’s requirement that the offer be open to all holders. The Tier II exemption contains a limited exception to this rule (the Tier II exemption is short-hand for the Cross-Border Rule exemptions applicable if 40% or less of the target's shareholders are U.S. holders). It provides an exemption from the all-holders rule for an acquiror to conduct its offer in two separate offers: one offer made only to U.S. holders and another offer only to non-U.S. holders, provided that the offer to U.S. holders is on terms at least as favorable as those offered any other acquiree shareholder.  But, for mechanical reasons bidders want to include all of the ADS holders in the U.S. offer (believe me, doing anything else is almost impossible).  This means that the U.S. offer will include non-U.S. ADS holders; disqualifying the bidder from utilizing the exemption. 

The result is that in almost every single cross-border transaction, no-action relief is required under this Rule.  So, for example in the RBS group's successful offer for ABN AMRO, the SEC granted exemptive relief as follows:

The exemption from Rule 14d-10(a)(1) is granted to permit the Consortium to make the U.S. Offer available to all holders of ABN AMRO ADSs and all U.S. holders of ABN AMRO Ordinary Shares. The Dutch Offer will be made to all holders of ABN AMRO Ordinary Shares located in the Netherlands and to all holders of Ordinary Shares located outside of the Netherlands and the United States, if, pursuant to local laws and regulations applicable to such holders, they are permitted to participate in such offer.

The need to seek this and other technical relief which the SEC regularly grants perverts the purpose of the Cross-Border Release which was to facilitate these transactions.  Moreover, there are other, larger problems with the Cross-Border Rules which make them very user unfriendly.  For example, one of the principal difficulties acquirors have experienced in applying the Cross-Border Rules is the determination of U.S. ownership for purposes of the exemptions.  In both negotiated or “friendly” transactions (rather than unsolicited or “hostile” transactions), acquirors are required to “look through” the acquiree’s record ownership to determine the level of U.S. beneficial ownership. Specifically, an acquiror is required to look through the record ownership of brokers, dealers, banks and other nominees appearing on the acquiree’s books or those of its transfer agents and depositaries.

But the current look-through rule, unfortunately, does not work well in practice. First, the mechanics of shareholding in other jurisdictions make it difficult for acquirors to determine whether any exemptions are available under the Cross-Border Rules. Second, penalties for non-compliance, such as rescission in the case of a noncompliant securities offering, are potentially quite harsh. Consequently, acquirors unable to make a certain determination as to qualification for the exemptions under the Cross-Border Rules are more likely to structure cross-border takeovers to exclude participation by U.S. security holders. Alternatively, acquirors have submitted prospective no-action and exemptive relief requests to the staff of the SEC for relief along the lines of the Cross Border Rules. In fact, in the least U.S. regulated cross-border takeovers, 14E Offers, acquirors often decide to comply with the minimal requirements of Regulation 14E rather than rely on the Cross-Border Rule exemptions due to the expense and problems associated with the look-through analysis. Alternatively, offerors in the United Kingdom and other eligible jurisdictions may choose to structure a transaction as a scheme of arrangement under Section 3(a)(10) of the Securities Act in order to similarly avoid reliance upon the exemptions under the Cross-Border Rules while still minimizing compliance with the U.S. takeover rules and avoiding triggering the Securities Act’s registration requirements (see my post on this practice and schemes of arrangements generally see here).

Ultimately, the Cross-Border Rules are now seven years old.  The SEC is well aware of all of these problems.  They would do well to fix them in a manner which makes cross-border deals more inclusive of U.S. holders and reduces the SEC's administrative burden in repetitively responding to these no-action letters.   It has been too long. 

For more on this see my article, Getting U.S. Security Holders to the Party: The SEC's Cross-Border Release Five Years On

Better Know a Deal Structure: The Scheme of Arrangement

Today, I'll be looking at the scheme of arrangement.  A scheme of arrangement is a reorganization of a company's capital structure or its debts which is binding on creditors and shareholders.  It is not a structure available or utilized in the United States, but instead is prevalent in countries modeled upon the English company law system (England, Australia, New Zealand, South Africa, etc.), as currently embodied in Section 425 of the English Companies Act 1985.  The structure can be best analogized to a U.S. merger, although there are distinct differences between the two structures. 

There are two types of scheme of arrangement:  a creditors' scheme and a members' or shareholders' scheme.  A creditors' scheme is generally used by companies in financial difficulties; the creditors can agree to defer payments and effect a restructuring of the indebtedness of the corporation.  A members' scheme is used to effect corporate reorganizations, particularly a combination with another company.  In general, a scheme of arrangement is carried out in three steps:

1. The court is approached to order a meeting of creditors or shareholders directly affected;
2. The scheme in general must be approved by a vote of more than 50 per cent of the creditors or members present and voting who represent 75 per cent of the total debts or nominal value of the shares of those present and voting at the meeting (the law may vary depending upon the country but this is the law in England); and
3. The scheme is referred back to the court for confirmation.

In England, the scheme of arrangement has seen growing popularity.  This is for three reasons.  First, in the 2003 Debenhams transaction, the unsolicited bidders used a scheme of arrangement to successfully initiate a hostile offer.  Previously, the scheme was not thought to be as flexible an instrument, and the offer the only possible structure in unsolicited situations.  Post-Debenhams, bidders in English takeovers governed by the takeover code have made wider use of this structure over an offer in both hostile and friendly situations (NB.  the same thing has happened in Australia in light of a similar event in the Australian Leisure & Hospitality Limited bid).  Second, the scheme of arrangement ensures a squeeze-out with a lesser threshold amount.  Under a takeover bid in these countries, 90 percent or more of the target is generally required under the law to trigger compulsory acquisition of the remaining minority shareholders' shares.  In contrast, a scheme of arrangement can potentially still succeed with only 75 percent in value and a majority vote.  This is particularly important in leveraged buy-outs where a white-wash proceeding is generally necessary because of the financial assistance the target corporation is giving the bidder, and bidders need to meet the voting thresholds of a scheme anyway in order to effect it (for more on what a whitewash proceeding and financial assistance are under English law see here).  Finally, a scheme of arrangement can be extended into the United States with only minimum Securities Act and Exchange Act compliance.

This last point is due to the exemption under Section 3(a)(10) of the Securities Act.  It states: 

Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval . . . .

The exemption was initially promulgated for state fairness hearings which were prevalent prior to the adoption of the Securities Act.  And still today, particularly in California, the procedure is used in takeover transactions to issue securities exempt from registration under the Securities Act (for more on California fairness hearings see here; every M&A lawyer in California should be familiar with and advise their clients of this structure where appropriate).  Smart U.S. lawyers practicing abroad picked up that this exemption also fit the parameters of the proceedings for a scheme of arrangement and began to petition the SEC for no-action letters to this effect for schemes under the laws of different countries.  A practice developed in the early 1990s that the SEC would issue no-action relief on a case-by-case basis for each scheme.  Then in October 1999, the SEC issued a legal bulletin specifying the circumstances in which a foreign scheme of arrangement could qualify for the 3(a)(10) exemption.  Today, almost all schemes now qualify and the practice is no longer to seek no-action from the SEC, but rather to rely upon the requirements set forth in the October 1999 bulletin. 

The scheme of arrangement is a particularly advantageous way to extend an offer into the United States because there are no filing requirements with the SEC and no real substantive requirements other than that the judge be informed of the exemption and rule specifically on the fairness of the terms and conditions of the transaction.  These are lesser information and filing requirements than required even by the SEC's Cross-Border exemptions.  Because of this, U.S. lawyers often advise their non-U.S. clients to pursue a scheme of arrangement in order to significantly avoid U.S. securities law requirements even when U.S. holders number less than 10% and the cross-border exemptions can be met.  This makes no sense, of course -- why U.S. holders do not get the benefits of U.S. registration requirements or the protections of the cross-border rules for this type of structure but not in the case of an offer has never been justified fully by the SEC other than statements that the strictures of 3(a)(10) are met.  But if the SEC ever attended one of these scheme hearings they would see that the "fairness" ruling upon which the exemption is based is a pro forma event without significant substance.  As I have argued before, the cross-border exemptions are due for some significant fine-tuning.  If and when the SEC finally gets around to this acting to make the exemptions more usable, hopefully they will also reconsider the 3(a)(10) exemption for schemes.    

The Foreign Delisting Wave

Dealbook today has a post today on the rise in delistings by foreign issuers.  The post quotes a USA Today story and states: 

Big foreign companies, mostly from Europe, are saying non, nein and nee to being listed on U.S. exchanges.

A surge of foreign companies are bidding adieu to U.S. markets and their American depositary receipts, as lackluster trading in many foreign listings and a feeling the costs of having a stock listed in the U.S. aren’t worthwhile have dampened enthusiasm. . . . Already this year, 34 foreign companies have delisted from the New York Stock Exchange, and nine more have announced they plan to do so, says the exchange. That tops the 21 foreign companies that have joined the N.Y.S.E. Another 20 have said this year they plan to leave the Nasdaq or have done so already.

However, as I stated back on May 30 don't believe that this is a sign that the U.S. markets are losing their status as the premier place for foreign listings.  Though they may indeed be losing their status though, this delisting wave is just caused by other reasons.  As I stated: 

Expect to see more announced delistings from U.S. stock markets by foreign issuers in the next few weeks.  This is because the SEC's new rules liberalizing the ability of foreign issuers to deregister their securities and terminate their reporting requirements under the Exchange Act take effect on June 4.  Prior to this rule, the Exchange Act was a lobster trap -- deregistering equity securities and terminating or suspending reporting requirements once these securities had been registered was prohibitively difficult if not impossible.  Now, under the SEC's new rules if the average daily U.S. trading volume of a foreign issuer is 5 percent or less of its worldwide trading volume it can freely deregister and terminate its Exchange Act reporting requirements.  To do so, however, the foreign issuer must also delist its securities from the U.S. stock market (i.e., Nasdaq or NYSE). 

So, the new rules will release pent-up demand of foreign issuers who previously desired to deregister their securities and now do so.  Most if not all of these issuers will cite Sarbanes-Oxley to justify the termination of their listing.  But don't always believe it.  These issuers originally listed in the United States for a variety of reasons, and for many a delisting will simply mean the reasons no longer exist (and probably haven't for a long time).  For example, many a foreign high-tech company listed on the Nasdaq during the tech bubble seeking the extraordinary high equity premium accorded Nasdaq-listed tech stocks.  Post-crash, many of these foreign companies still exist but are much smaller or have remained locally-based and a foreign listing is no longer appropriate for them.

All-in-all, though, the rules are a step in the right direction.  Permitting foreign issuers to more freely delist will encourage them to experiment with a U.S. listing in the first place.  The SEC would also do well to take the next step and consider whether all foreign listings need to be regulated at the current level.  Does the SEC really need to regulate ICI [a company listed on the LSE who recently announced a delisting from the U.S.]  to begin with?  It is, after all, regulated by the FSA and LSE in England.  A form of mutual recognition system for issuers listed in foreign countries who provide an acceptable level of regulation would go a long way to making the U.S. more competitive in the global listings market.  It would also provide greater access for U.S. investors to foreign investments.  Both good things. 

For more on this see my forthcoming article Regulating Listings in a Global Market.

The Gates of Taiwan

On Monday, Taiwanese based Acer Inc. announced that it had agreed to acquire Gateway, Inc.  Under  the agreement, Acer will commence a cash tender offer to purchase all the outstanding shares of Gateway for $1.90 per share, valuing the company at approximately $710 million.  For those who bought at $100 a share in 2000, I am very, very sorry.  The acquisition is subject to CFIUS review and a finding of no national security issues (more on this at the end). 

For language hogs, the merger agreement contains some solid contract language dealing with Gateway's exercise of its right of first refusal to acquire from Lap Shun (John) Hui all of the shares of PB Holding Company, S.ar.l, the parent company for Packard Bell BV.   In Section 5.11 (pp. 36-37), Acer agrees to fund the purchase of Packard Bell by Gateway.  The interesting stuff is in Section 7.2 which deals with what happens to Packard Bell if the agreement is terminated.  In almost all circumstances of termination Gateway is required to on-sell Packard or its right to buy Packard to Acer.  The big exception is in the case of a superior proposal.  In such circumstance, if the third party bidder elects, Gateway is required to auction off Packard or its right to buy Packard to the highest bidder.  According to one report on The Deal Tech Confidential Blog, Lenovo is contemplating an intervening bid for Gateway in order to acquire Packard; their lawyers should take a look at these provisions.  In any event, Gateway did not disclose in its public filings that, if the Acer deal fails, it is highly unlikely to remain the owner of Packard Bell if it succeeds in purchasing it. 

For those who track such things the deal has a no-solicit and a $21.3 million break fee -- about normal.  It is also yet another cash tender offer with a top-up option. 

The other interesting thing about this transaction is the Exon Florio condition.  The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988.  The statute grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."

The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury.  Exon Florio was amended in July by The National Security Foreign Investment Reform and Strengthened Transparency Act.  For a summary of the final legislative provisions, see this client memo by Wiley Rein here.  The legislation is Congress's response to the uproar over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition.  The dispute was always puzzling:  Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East.  Nonetheless, the controversy has now spawned a change in the CFIUS review process.  And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process.  However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions.  According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year.  How this will all ultimately effect the willingness of foreigners to invest in the U.S. is still unclear, though you can make a prediction. 

Back to the Acer transaction.  The tender offer is conditioned on:

the period of time for any applicable review process by the Committee on Foreign Investment in the United States (“CFIUS”) under Exon-Florio (including, if applicable, any investigation commenced thereunder) shall have expired or been terminated, CFIUS shall have provided a written notice to the effect that review of the transactions contemplated by this Agreement has been concluded and that a determination has been made that there are no issues of national security sufficient to warrant investigation under Exon-Florio, or the President shall have made a decision not to block the transaction.

This Exon-Florio condition appears prudent given that Lenovo had to make concessions to clear CFIUS review when it bought IBM's computing division.  CFIUS review, though, has a minimum review period of 30 days which is longer than the 20 business day minimum required for a tender offer to remain open.  Given this, I'm surprised Acer and Gateway went the tender offer route; typically in these situations you would use a merger structure which allows for a longer time period between signing and closing, but is more certain to get 100% of the shares in a more timely fashion.  One likely reason is that they did so because they anticipate clearing Exon-Florio quickly.  This, of course, is now in the hands of the U.S. government.   

ABN AMRO Withdraws Barclays Recommendation

The Managing and Supervisory Boards of ABN AMRO today announced that they would no longer recommend the Barclays offer to combine with ABN AMRO.  Instead, the boards announced that they  were not "currently in a position to recommend either" the Barclays offer or the Royal Bank of Scotland consortium "[o]ffers for acceptance to ABN AMRO shareholders".  As at the market close on 27 July 2007, the Barclays offer was at a 1.0% discount to the ABN AMRO share price and the RBS consortium offer was at a premium of 8.5% to the ABN AMRO share price; 9.6% higher than the Barclays offer. 

This essentially leaves the battle for ABN AMRO in the hands of its shareholders.  Nonetheless, there are structural differences which may influence the contest.  The RBS consortium is proceeding through an exchange offer structure (see the Form F-4 here, it is a nice precedent for a U.S./Dutch cross-border exchange offer).   The Barclays offer is pursuant to a Dutch merger protocol.  RBS has launched its offer and Barclays today stated that it intended to make its offer documentation available on August 6.   Given the need for all of the parties to obtain regulatory and other approvals, it is likely that they will remain on the same timing track.  Thus, ultimately, the contest  now largely depends on the share price of Barclays increasing during this time period sufficiently to justify its acquisition proposal:  an uncertain prospect in today's volatile markets.   

Barclays Raises (Slightly)

Barclays today announced that it had raised its offer for ABN AMRO.  The increased offer is €13.15 in cash and 2.13 Barclays shares for each ABN AMRO share. The increased offer is worth €35.73 per ABN AMRO share based on the July 20 closing price of Barclays.  On this basis, the total consideration offered by Barclays is €67.5 billion with approximately 37% in cash.  This €2.9 billion increase in offer consideration is still lower than the bid by the Royal Bank of Scotland consortium.  That mostly cash bid is offering  €71 billion or approximately  €38.40 per share.  Apparently, Barclays is hoping its share price will increase on the new offer making its bid more attractive to ABN AMRO shareholders.

In connection with the increase, Barclays also announced that China Development Bank and Temasek Holdings will invest €3.6 billion in Barclays.  China Development Bank will invest €2.2 billion by buying 201 million Barclays shares at 720 pence a share. Temasek will invest €1.4 billion by buying 135 million shares at 720 pence a share.  Contingent upon completion of an acquisition of ABN AMRO, the two parties will invest an additional €7.6 billion in Barclays.  Barclays plans to purchase up to €3.6 billion worth of its shares to address the dilution caused by this share issuance.

Needless to say, the twist here is the second large investment by the Chinese government in recent months in a western financial institution.   The previous one was the $3 billion invested in Blackstone Group by a financial arm of the Chinese government.   According to Barclays, Blackstone also had a role in this purchase, advising the China Development Bank.  And, with over $1.2 trillion in foreign reserves, expect more of these investments by the Chinese government.   

Verizon/Vodafone and the CFIUS Card

The Financial Times yesterday had an interesting article reporting that "sources" assert that a rumored Vodafone takeover of Verizon would likely entail very close scrutiny by CFIUS.  CFIUS stands for the Committee on Foreign Investment in the United States, an inter-agency committee chaired by the Secretary of Treasury.  It is charged with administering the Exon-Florio Amendment.  This law grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."  The President has delegated this review process largely to CFIUS. 

I am not sure about the national security implications of a Verizon takeover by Vodafone.  But on July 11, Congress passed The National Security Foreign Investment Reform and Strengthened Transparency Act.  The bill is currently sitting on the President's desk for almost certain signature.  The bill would enhance the CFIUS review process, and add to the factors for review critical infrastructure and foreign government-controlled transactions.  A Verizon/Vodafone transaction would now likely fall under the former category.  And, of late, CFIUS has been much more attentive to foreign takeover transactions.  According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year.  And CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. 

Whether a Vodafone/Verizon transaction actually occurs and is reviewed by CFIUS is uncertain.  But given the political atmosphere and the pending bill, an extended review of any such transaction is more likely than ever.  And Verizon is likely to make use of this fact in order to ward off any unwanted Vodafone bid (they may have even planted this FT story).  Expect more targets to try a similar strategy in the future, playing the CFIUS card to deter foreign acquisitions and use it as an anti-takeover device when the unsolicited acquirer is a non-U.S. entity.  Hopefully, CFIUS itself will be able to sort through these cases appropriately and prudently without undue scrutiny, but more likely this enhanced CFIUS scrutiny will deter some foreign bidders to our detriment.    

For a summary of the final legislative provisions of the CFIUS reform bill, see this client memo by Wiley Rein here.  For more on Exon Florio and the CFIUS process see my prior posts:  CFIUS Reform to Become Law; GE, The Saudis and Exon-Florio; and The Politics of National Security.

The Delisting Wave (Part II)

I read my first news story on the foreign private issuer delisting wave last Friday in the International Business Times (you can access it here).   According to the report, since the SEC's new deregistration rules took effect on June 5, 2007, 35 foreign private issuers have taken steps to dereigster their securities and delist from a U.S. stock market (though some are choosing to remain traded on the Pink Sheets).  These include such well-known companies as British Airways, Danone and Imperial Chemical.  According to the news report and not surprisingly, many are claiming that they are delisting to escape burdensome U.S. regulation in the form of Sarbanes-Oxley and to escape the spectre of U.S. shareholder litigation.  The report also quotes Harvard Law School Professor Hal Scott to support these assertions, he states that "[t]he benefit of coming here has decreased, and the costs have increased with litigation and regulation, so they're making a trade-off to get out of here."

Professor Scott is undoubtedly right that some of these companies are delisting because they no longer perceive a U.S. listing as worth the effort.  However, this may not be attributable entirely to current, more stringent SEC regulation.  Prior to the SEC rules taking effect, listing in the United States had been analogized to the Hotel California.  Once you listed here you could never leave (get it?).  But now, under the SEC's new rules if the average daily U.S. trading volume of a foreign issuer is 5 percent or less of its worldwide trading volume it can freely deregister and terminate its Exchange Act reporting requirements.  To do so, however, the foreign issuer must also delist its securities from the U.S. stock market (i.e., Nasdaq or NYSE).   And, as I predicted in a post on May 30: 

[T]he new rules will release pent-up demand of foreign issuers who previously desired to deregister their securities and now do so.  Most if not all of these issuers will cite Sarbanes-Oxley to justify the termination of their listing.  But don't always believe it.  These issuers originally listed in the United States for a variety of reasons, and for many a delisting will simply mean the reasons no longer exist (and probably haven't for a long time).  For example, many a foreign high-tech company listed on the Nasdaq during the tech bubble seeking the extraordinary high equity premium accorded Nasdaq-listed tech stocks.  Post-crash, many of these foreign companies still exist but are much smaller or have remained locally-based and a foreign listing is no longer appropriate for them.   

For those delisting, it may also be short-sighted.  True, some studies have found statistically significant declines in equity premiums for cross-listed firms at the time immediately before and after passage of Sarbanes-Oxley.  But these declines now appear to be short term at best, according to a new study by Craig Doidge et al.,  Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time (June 2007).  Doidge and his colleagues have found in a recently published study that the equity premium for cross-listing on a U.S. market "has not fallen significantly in recent years. . . . In contrast, there is no premium for London listings for any year. Cross-listing in the U.S. leads firms to increase their capital-raising activity at home and abroad while a London listing has no such impact. Our evidence is consistent with the theory that an exchange listing in New York has unique governance benefits for foreign firms."   

Ford's Historic M&A Legacy

It is being reported today that Ford Motor Co. is seeking buyers for its Premier Automotive Group (the potential deal is code-named Project Swift).  The group includes the Volvo, Jaguar and Land Rover brands.  Ford bought Jaguar in 1989 for $2.38 billion, Volvo in 1999 for $6.45 billion, and Land Rover in 2000 for $2.73 billion.  Ford has previously agreed to sell Aston Martin to a U.K. investing consortium led by auto-racing champion David Richards for $848 million.

If it happens, the deal will be a historic one for many reasons, but for M&A history buffs it will mark closure on the first modern-day U.K./U.S. cross-border acquisition.  Ford's acquisition of Jaguar plc in 1989 was made via a cash tender offer.  However, unlike in other prior cross-border takeovers, Jaguar had a large shareholder presence:  Jaguar’s American Depositary Securities were quoted on the Nasdaq and registered under the Exchange Act, at least 25% of Jaguar’s holders were located in the United States, and Ford itself held approximately 13.4% of Jaguar’s securities.  The Ford offer was therefore required to comply with the governing takeover codes in two jurisdictions: the Williams Act in the United States and the City Code on Takeovers and Mergers and the Rules Governing Substantial Acquisition of Securities issued by the U.K. Panel on Takeovers and Mergers.  According to M&A lore, the first time harmonization of the two systems was quite a nightmare and required extensive cooperation between the regulators of both nations and many a late night for lawyers attempting to coordinate the process across the Atlantic (all prior to the time of email and when phone calls were actually expensive).   

But the lawyers and regulators succeeded.  It was the first true cross-border acquisition and it stirred the SEC to begin a decade -long process to adopt specialized rules for cross-border takeovers culminating in the Cross-Border Release Exemptions adopted in 1999.  Truly a land-mark transaction.

The Coming Delisting Wave

The Financial Times is reporting that ICI, the U.K. chemicals company, will delist its American Depositary Receipts from the New York Stock Exchange.  The company expects the delisting to occur on or about June 18 immediately after it deregisters its securities under the Exchange Act.   ICI will remain listed on the London Stock Exchange, but ICI will also issue American Depositary Shares on OTCQX, a new quotation system launched by the Pink Sheets, the U.S. over-the-counter market home to many a penny stock.

Expect to see more announced delistings from U.S. stock markets by foreign issuers in the next few weeks.  This is because the SEC's new rules liberalizing the ability of foreign issuers to deregister their securities and terminate their reporting requirements under the Exchange Act take effect on June 4.  Prior to this rule, the Exchange Act was a lobster trap -- deregistering equity securities and terminating or suspending reporting requirements once these securities had been registered was prohibitively difficult if not impossible.  Now, under the SEC's new rules if the average daily U.S. trading volume of a foreign issuer is 5 percent or less of its worldwide trading volume it can freely deregister and terminate its Exchange Act reporting requirements.  To do so, however, the foreign issuer must also delist its securities from the U.S. stock market (i.e., Nasdaq or NYSE). 

So, the new rules will release pent-up demand of foreign issuers who previously desired to deregister their securities and now do so.  Most if not all of these issuers will cite Sarbanes-Oxley to justify the termination of their listing.  But don't always believe it.  These issuers originally listed in the United States for a variety of reasons, and for many a delisting will simply mean the reasons no longer exist (and probably haven't for a long time).  For example, many a foreign high-tech company listed on the Nasdaq during the tech bubble seeking the extraordinary high equity premium accorded Nasdaq-listed tech stocks.  Post-crash, many of these foreign companies still exist but are much smaller or have remained locally-based and a foreign listing is no longer appropriate for them.

All-in-all, though, the rules are a step in the right direction.  Permitting foreign issuers to more freely delist will encourage them to experiment with a U.S. listing in the first place.  The SEC would also do well to take the next step and consider whether all foreign listings need to be regulated at the current level.  Does the SEC really need to regulate ICI to begin with?  It is, after all, regulated by the FSA and LSE in England.  A mutual recognition system for issuers listed in foreign countries who provide an acceptable level of regulation would go a long way to making the U.S. more competitive in the global listings market.  It would also provide greater access for U.S. investors to foreign investments.  Both good things. 

NB.  The ICI planned listing on the Pink Sheets highlights this problem.  The Pink Sheets is not a stock market, but rather a bulletin board where shares are quoted -- trading on this market is often illiquid and spreads Texas-wide.  Yet, the SEC freely permits foreign companies to quote their shares here under the Exchange Act Rule 12g3-2b exemption.  I am at a loss to explain why this is appropriate yet not a freer stock market listing regime in the U.S. markets for foreign issuers; one that permits these foreign issuers to list on the NYSE or Nasdaq.  Especially since the latter would provide U.S. investors more efficient access to foreign stocks and permit the United States to more easily attract these listings. 

The RBS Consortium's Offer for ABN Amro

The Royal Bank of Scotland Group plc, Fortis and Santander today announced the terms of their proposed €71.1 billion offer for ABN Amro.  If completed, it would be the largest financial services deal in history.  According to the consortium, its bid is at a 13.7% premium to the competing €64 billion bid from Britain's Barclays plc supported by ABN Amro. The consortium is offering €38.40 per ABN share comprising 79% cash with the remainder consisting of new RBS shares.  But the group will also hold back €1 a share in cash (or $2.5 billion) as a reserve against litigation costs and damages that might arise from the Bank of America's lawsuit against ABN Amro to enforce the sale of LaSalle Bank to it.  In a just world this would be money that would come out of the pocket of ABN Amro CEO, Rijkman Groenink and the ABN Amro Supervisory Board for mucking up this sale process instead of their shareholders. 

The group detailed the financing arrangements for the bid, and also detailed their plans to break-up ABN Amro upon its acquisition:  RBS will acquire ABN Amro's Global Wholesale Businesses (including the Netherlands but excluding Brazil), LaSalle Bank and International Retail Businesses for a consideration of €27.2 billion. The full offer document can be accessed here.  The group will now proceed to have their required shareholder meetings and expect to commence the full offer in August of 2007. However, this is a pre-conditional offer -- certain conditions must be satisfied before the full offer can commence.  The most significant pre-condition is one requiring a favorable ruling on the currently pending litigation over the LaSalle matter.  It requires that:

The preliminary ruling of the Dutch Enterprise Chamber that the consummation of the Bank of America Agreement should be subject to ABN AMRO shareholder approval has been upheld or otherwise remains in force, whether or not pursuant to any decision of the Dutch Supreme Court, or of any other judicial body, and ABN AMRO shareholders have failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM.

Thus, like many a U.S. takeover, the final disposition of ABN Amro will be decided by the courts.  The Dutch Supreme Court is expected to rule in July or August.  Until then, there will continue to be significant uncertainty in the market over the RBS-bid and the future of ABN Amro.   

NB.  The RBS group has also decided to take a different course in this offer document with respect to the acquisition of LaSalle Bank.  The consoritum offer itself, once it commences, is now conditioned upon "ABN AMRO shareholders hav[ing] failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM convened for that purpose."  The group's previous offer was cross-conditional on ABN Amro reaching an agreement to sell LaSalle directly to RBS.  Now, it appears RBS is content to acquire only ABN Amro, and subsequently purchase LaSalle.   

Nasdaq/OMX and the Global Listings Market

The NASDAQ Stock Market, Inc. and OMX AB, the Nordic stock exchange, today announced that they have agreed to combine.  The new company will be called The NASDAQ OMX Group.  The combination will be effected through a cash and stock tender offer by NASDAQ for all outstanding shares in OMX. The consideration offered will be equivalent to 0.502 new NASDAQ shares plus SEK94.3 in cash for each OMX share. The offer values OMX at $3.7 billion.

The combination comes on the heels of the New York Stock Exchange's combination with Euronext and alliance with the Tokyo Stock Exchange and Nasdaq's owned failed bid to acquire the London Stock Exchange.  Nasdaq still holds a 29 percent stake in the LSE, and, according to this report, Nasdaq's CEO today refused to comment on Nasdaq's plans with respect to this holding. 

For those who are interested in the economic and regulatory forces which are driving this global stock market consolidation, I refer you to my forthcoming article, Regulating Listings in a Global Market, 85 N.C. Law Rev. __ (Dec. 2007).  In this Article, I discuss SEC regulation and how it has inhibited and limited the ability of non-U.S. issuers to cross-list in the United States thereby fueling a world-wide stock market consolidation: 

The worlds’ major stock markets are now largely for-profit enterprises. The primary sources of their revenue are from listing and trading fees. Stock markets therefore have a strong interest in obtaining the highest number of listings and concomitant trading volume, and to advocate for a level of regulation which produces these. This goal will sometimes be hampered by regulators who set sub-optimal regulation (from a stock market perspective) in order to satisfy their own interests and the interests of other constituents. But, unlike issuers, stock markets can more easily migrate the globe, establishing or buying stock markets in other jurisdictions. Theoretically, stock markets should therefore respond to regulatory inefficiency by erecting multiple markets in separate jurisdictions in order to provide global issuers a menu of regulatory choice for their listing. This is simple consumer economics: the stock markets are only providing a product, a listing, and therefore, in order to maximize profit, will take the necessary steps to ensure that that product is optimal for their consumers, issuers.

The recent wave of consolidation engulfing the exchanges reflects these forces and interests. Stock markets are combining within regions (e.g., Euronext and OMX). They are also consolidating globally: the NYSE is on the verge of acquiring Euronext, and Nasdaq, as of February 10, 2007 had purchased 29.16% of the LSE and failed in a bid to purchase the remaining outstanding shares. Meanwhile, the Deutsche Börse, TSE and Milan Stock Exchange have all been rumored to be further participants in this global consolidation with either each other or other exchanges. This trend is likely to produce a smaller number of global stock markets and more regionally-based, rather than local, trading markets. Importantly, the global and regional reach of these markets should make them less sensitive to the vagaries of regulation in a particular jurisdiction. If a market is over-regulated, global and regional stock markets will maintain an equal regulatory footing among domestic competition while at the same time having the ability to direct global listings to their affiliated, less regulated exchanges. For example, the NYSE can now direct issuers who are dissatisfied with the level of regulation in the United States to the Euronext which may have a more attractive regulatory regime. These issuers would then gain many of the benefits of a NYSE listing without having to subject themselves to U.S. regulation. The market for global listings is thus likely to become even more fluid in the future providing greater flexibility for issuers to cross-list in different markets and engage in regulatory arbitrage, but still advantage themselves of the technology and expertise of a preferred exchange.

The OMX/Nasdaq combination is further evidence of this trend and should be added to the laundry-list in the last paragraph. 

M&A Nirvana: Alcan, BHP Billiton and a Tri Listed Company Structure

The rumors yesterday that BHP Billition was to be a white night for Alcan with respect to Alcoa's pending $28 billion offer to acquire Alcan, had me thinking about M&A nirvana:  the Tri Listed Company.  BHP Billion is a dual listed company.  A DLC structure is a virtual merger structure utilized in cross-border transactions.  The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation.  In the case of BHP Billiton, this structure involves Billiton, an English company, and BHP, and Australian company. 

If BHP Billiton were to acquire Alcan, it could do so by adding a third leg with Alcan and forming the world's first tri listed company.  The agreements to do this would reach new levels of complexity (hence my thoughts of M&A nirvana), and the operation of the company could become a bit complex to say the least.  For example, the shareholder meeting for the company would have to last almost 24 hours in order to encompass meetings on three continents for three companies.  But the structure is feasible.  Thomson, a Canadian company, and Reuters, an English company, showed its viability by recently agreeing to combine using this structure in the first English/Canadian DLC (see my blog post on this here).  The Australian element should be able to fit within this framework. 

And a BHP Billiton acquisition through a TLC would actually make good sense.  It would assuage issues of Canadian nationalism by maintaining the presence of Alcan in Canada.  It would preserve beneficial dividend tax treatment for Canadian shareholders and establish a strong Canadian shareholder base for the TLC.  It would also avoid triggering any existent change of control provisions in any joint venture agreements that Alcan might have.  Finally, an acquisition in this form would ensure that certain valuable hydroelectric, power and other rights and agreements that the Quebec government has granted to Alcan would not be terminated, an event Alcan asserts would happen with a true acquisition.

The above calculus would also apply if Rio Tinto decides to bid for Alcan.  Rio Tinto like BHP Billiton is also a DLC involving an English company and an Australian one. 

If BHP Billiton and Alcan (or Rio Tinto and Alcan) agreed to such a structure it would permit Alcoa to counter with its own DLC proposal thereby raising further complexity to this takeover battle.  And if Alcoa succeeded this would also be a milestone as there has yet to be a true U.S. DLC.  BP came close in 1998 with Amoco, but the SEC refused to allow pooling accounting and so it was at the last minute converted into a true acquisition.  The closest is Carnival, a Panamanian and English DLC.  Carnival's Panamanian company has equivalent U.S. corporate governance provisions and is treated as a U.S. tax-domiciled entity. 

Final Note:  Legal geeks should note that the SEC recently revised its position on the requirement to register the shares of newly-formed DLCs (or presumably TLCs).  Historically, the SEC did not require a new registration statement to be filed as the shares of both companies remained outstanding and there was no triggering offering.  But, with the Carnival DLC the SEC took the position that the changes in the character of the securities of the company were so fundamental that a registration statement is now required with respect to both sets of shares of the DLC.  So, a BHP Billiton/Alcan tie-up would require reregistration of the shares of each of the three companies with the SEC unless U.S. holders constituted 10% or less of the company's shareholder base. 

DaimlerChrysler's Information Gap

DaimlerChrysler AG, is a German company, and though it is listed on the New York Stock Exchange it is governed by more-relaxed SEC rules governing "foreign private issuers".  We are seeing the difference these rules make with respect to Daimler's disclosures concerning the Chrysler sale to Cerberus announced earlier this week.  Had Daimler been a domestic U.S. company, Daimler would have been required to file the Chrysler sale agreement, and any material related agreements, within two business days of its execution.  Instead, since Daimler is a foreign private issuer it only needs to disclose this agreement to the SEC if it is required to provide the agreement to its home country regulator.  This doesn't appear to be the case here, so we have been left in the dark as to the exact closing conditions and risk for the Chrysler sale.  This has been compounded by Daimler's refusal to fully disclose information concerning the sale and the drip-out approach to information it has produced.  Here are a few examples:

1. Union Condition.  It would not be until a conference call on Monday that Dieter Zetsche, CEO of DaimlerChrysler would state that “[t]his deal is not conditional on any aspects of collective bargaining.”

2. Financing.  It would not be until Tuesday that a few details of Cerberus's financing package would be leaked.  A group of five banks has committed more than $60 billion in financing; approximately $50 billion will be used for refinancing and $12 billion will be available as an undrawn credit line to operate Chrysler's business. 

3. Pension.  It would not be until Wednesday that the head of the United Auto Workers, Ron Gettelfinger, would disclose that "Cerberus has committed to contributing an additional $200 million to the pension fund and Daimler is providing a conditional guarantee of $1 billion for up to five years".  Daimler had previously refused to comment on this matter but reports have stated that the pension is overfunded.   

This information gap and the haphazard way information is coming out concerning the sale leaves open a number of important questions including:  What exactly are closing conditions to the deal?  Where is Cerberus getting the five billion in new Chrysler equity and how much of it is in committed financing?  What exactly are any other continuing obligations of Daimler with respect to the transaction?  Why are Daimler and Cerberus shoring up Chrysler's pension plan?  On what basis is Chrysler's pension over-funded (is it on a PBO or ABO accounting basis)?  And does Daimler expect the scrutiny of the Pension Benefits Guaranty Board of the transaction, and if so, is there a likelihood it could require additional contributions to Chrysler's pension fund (see my post on this here)?  Inquiring minds want to know.   

Update:  The PBGC issued a statement today on its talks with Chrysler and Cerberus.  The Interim PBGC director stated:

Daimler has agreed to provide a guarantee of $1 billion to be paid into the Chrysler plans if the plans terminate within five years. Under its new ownership capitalized by Cerberus, Chrysler will make $200 million in pension contributions over the next five years above and beyond the legally required minimum.

From the statement, it appears that on this basis the PBGC will not raise any further issues with the transaction.