Monday, October 25, 2010
As devoted readers know, we’ve spent a lot of time covering BHP Billiton’s hostile bid for Potash (see for example this, this, and this). The deal is a classic example of cultural issues in cross-border transactions and the risks that arise in deals where government approval plays an important role. Not only are the parties dropping cash on the people of Saskatchewan, but the provincial government, as Brian noted last week, is wading deeply into this deal. In addition to last week’s shenanigans, the Saskatchewan Premier Brad Wall is playing the nationalist card in today’s press release urging the Canadian federal government to block the deal, stating that BHP’s former Chair views Canada as a “Branch Office” and that
"[I]t's up to our federal government to ensure we retain Canadian control of our natural resources and that we don't become a ‘branch office,' like BHP apparently sees us," Wall said. "Mr. Argus' words and BHP Billiton's apparent view of Canada should give the federal government plenty of pause as it considers its response to the largest foreign takeover in Canadian history. If Australian business leaders like Mr. Argus are concerned about ceding too much control of Australia's natural resources to foreign control, shouldn't our government feel that same concern about Canada's resources?"
Some conservatives in Canada are now accusing Saskatchewan of becoming the next Venezuela (going a bit overboard, no??) for allegedly asking BHP to pay a billion dollars of potential lost taxes up front…Let the fun continue.
Friday, October 22, 2010
Thursday, October 21, 2010
In the world of takeovers there is only one big ideological divide (and some smaller ones, but I'll ignore them for the timebeing). On the one side, there are those who believe that when it comes to questions about mergers or other corporate transactions the board should have the last word with respect to whether or not shareholders should be permitted to accept, or consider, an offer. The US approach to corporate law has generally taken this approach. On the other side there are those who believe that with respect to mergers or other corporate transactions that the shareholders should be permitted to decide questions about offers on their own without the interference of management, who may, after all, have divergent interests. The UK and its Takeover Panel have generally stood for that proposition.
Last Spring's acquisition of Cadbury by Kraft has changed some of that - moving the divide closer to the US position. The political backlash following the acquisition was the impetus for a review of the current takeover rules. Following a lengthy consultation, the Takeover Panel appears to have changed its mind - it has just issued its consultation report. The Takeover Panel now believes that hostile offers are bad:
After considering these concerns, and the views of respondents, the Code Committee has concluded that hostile offerors have, in recent times, been able to obtain a tactical advantage over the offeree company to the detriment of the offeree company and its shareholders.
In view of this conclusion, the Code Committee intends to bring forward proposals to amend the Code with a view to reducing this tactical advantage and redressing the balance in favour of the offeree company. In addition, the Code Committee has concluded that a number of changes should be proposed to the Code to improve the offer process and to take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders.
In general, it looks like they will be considering adopting rules designed to slow down arbs who move in quickly after a target goes into play and require super majority tender conditions:
i) amending rules which were designed to reflect the provisions of company law (in the case of raising the minimum acceptance condition threshold for offers above the current level of ‘50% plus one’ of the voting rights of the offeree company);
(ii) overriding basic economic rights (in the case of ‘disenfranchising’ shares acquired during the offer period); and
(iii) extending the Code to apply to matters that are currently the responsibility of other regulatory bodies (in the case of providing protection to shareholders in offeror companies).
US-styled deal protections and takeover defenses are still off limits. I suppose that's good news for those of us who like the variation in takeover regulation across jurisdictions. On the other hand, it looks like the Takeover Panel intends to adopt a UK version of constituency statutes that will permit the board to consider many variables, not just offer price, when deciding whether or not recommend and offer. These amendments will provide employees with a greater voice in the decision process - though no veto.
Friday, October 1, 2010
The other great power of the 21st century tends not to get a lot of attention. I don't know why. In any event, that's changing. Afra has just added to growing body of work that helps put the rise of India in context. Her new paper, Rising Multinationals: Law and the Evolution of Outbound Acquisitions by Indian Companies, is available on SSRN. I find it ironic that Indian multinationals have finally begun to come into their own. Maybe that just shows my age. I really enjoyed this paper.
Here's the abstract:
India is one of the fastest growing economies in the world and is predicted to become the third-largest economy in the world after the United States and China. India’s economic transformation has allowed Indian firms to gain significant attention in the world economy, particularly as acquirers of non-Indian firms. In the past decade, Indian companies have launched multimillion and multibillion dollar deals to acquire companies around the globe, with a significant concentration of targets in developed economies, in particular the United States and the United Kingdom.
Finance and business scholars have addressed outbound acquisitions by Indian multinationals, emphasizing the business and economic motivations for such transactions. However, there has been little analysis from a legal perspective of the significance of India’s legal norms and rules, including recent shifts in the country‘s regulatory and legal regimes, in the rapid expansion of Indian multinationals. This Article fills this void by analyzing the role of India’s post-liberalization legal reforms in outbound acquisitions by Indian companies. This examination presents a more complete picture of the legal environment and legal rules that have facilitated outbound acquisitions by Indian multinationals, but also reveals how limitations in India‘s legal reforms have constrained these deals.
This Article argues that Indian corporate law plays a number of important roles in the emergence of Indian multinationals. First, legal reforms since economic liberalization have set the stage for outbound acquisitions by Indian multinationals. Second, Indian legal reforms and legal history have shaped outbound acquisitions both in terms of transaction structure and transaction size. Third, legal constraints on Indian firms’ mergers and acquisition activity impose substantial restrictions not only on the methods that Indian multinationals use in pursuing outbound acquisitions, but also on the future potential of Indian multinationals.
Tuesday, September 28, 2010
For readers who are following our posts (here and here) on BHP Billiton’s hostile bid for Potash, you should take a look at this post by the Deal Professor which considers the possible steps that Potash can take to deter BHP. There is a lot of uncertainty in this transaction, including a host of regulatory and political issues. For now, Potash’s sideshow litigation is moving along in U.S. federal court. Potash has the opportunity to at least drag this out a bit with a ruling allowing the discovery process to proceed.
Wednesday, September 22, 2010
A heated cross-border hostile takeover saga (with big US connections) has been occurring over potash (a key input for fertilizer and other agricultural products), and the moves by the various players should remind our readers of classic plays in the hostile takeover game. In August of this year, British-Australian giant BHP Billiton (the jilted former suitor of Rio Tinto back in 2008) launched a $39 billion takeover bid for Canadian company Potash Corporation of Saskatchewan Inc. (“PotashCorp”). PotashCorp’s board has been actively resisting BHP’s bid, putting forth the usual argument that BHP’s offer is opportunistic, inadequate and coercive, that Potash is better off alone rather than selling to BHP (without of course ruling out a potential sale at some point), and that “superior offers are expected to emerge.” PotashCorp’s management has not relied only on the standard letters, press releases and regulatory filings to resist BHP, as Brian noted earlier, PotashCorp’s CEO has also posted videos to communicate with the company’s shareholders. Meanwhile BHP’s CEO is busy meeting with Canadian lawmakers and defending the Potash bid to his shareholders. Now, there is also news that China’s Sinochem Corp. has allegedly hired expensive bankers (are there any other kind…) to explore a rival offer for PotashCorp. In light of potential competition from Sinochem, BHP’s CEO stated yesterday that BHP would be willing to walk away if the offer didn’t make sense for his shareholders. Of course, this could also be because it is not clear that BHP’s shareholders buy the argument that the PotashCorp acquisition is the way to go (especially since there is a lot of evidence that big transactions like this rarely add value for the shareholders of the buyer). Moreover, unlike these kinds of big deal involving US companies where shareholders of the acquirer often do not get voting rights, BHP may need shareholder approval for its offer under the UK Listing Rules which require approval from shareholders of the acquirer of larger (Class 1 transactions), meaning a transaction that amounts to 25 percent (or more) of any of the company‘s gross assets, profits, or gross capital, or in which the consideration is 25 percent (or more) of the market capitalization of the company‘s common stock.
PotashCorp isn’t waiting around to see if Sinochem comes forward with an offer, it has also filed a suit in US federal court seeking to block the takeover and accusing “BHP of making false and misleading statements in regards to how it plans to run the combined company in the future.” PotashCorp has also raised the BHP shareholder vote issue, stating in its complaint that “BHP failed to disclose to PCS shareholders that on the day it launched its hostile bid, and thereafter in light of the market reaction to the offer price, it was reasonably likely that a vote of BHP shareholders – required under U.K. law for any acquisition where the consideration equals 25% or more of the acquirer’s market capitalization – would be required. Indeed, even BHP’s lowball bid was equal to approximately 23% of BHP’s market capitalization at the time the tender offer was commenced. BHP’s misleading omission deprived PCS shareholders of critical information in at least two respects: that approval of the transaction was uncertain, and that the need for shareholder approval could constrain BHP’s ability to increase its bid to a level closer to fair value.”
For M&A buffs, it is worth keeping an eye on this deal, there are a lot of moving targets and I wouldn’t be surprised if more legal, strategic and regulatory issues arise.
Thursday, July 29, 2010
I spent some of this week in Washington, D.C. at the XVIIIth International Congress of Comparative Law. The congress, which is presented by the International Academy of Comparative Law and the American Society of Comparative Law is taking place all of this week and is hosted by three local law schools, American University Washington College of Law, George Washington University Law School and Georgetown University Law Center. The conference is a wonderful gathering of jurists, lawyers and scholars from around the world.
Part of the week’s events involves the delivery of general and national reports on a variety of legal issues. This year the International Academy of Comparative Law has decided to deal with corporate governance in a session at its 18th International Congress on Comparative Law and has commissioned a general report, as well as various country reports on the matter. The general report, which is based on 32 country reports, focuses on (i) Corporate Governance: Concepts and General Problems; and (ii) the Board and the Shareholders as the Two Key Actors in Corporate Governance. There are also links to specific country reports. For those interested in a broad comparative survey of corporate governance issues, the reports are a useful summary.
Thursday, July 15, 2010
So I’ve been away for a while with a research trip to India and then madly trying to finish a couple of papers related to the trip. Before I left, I blogged about some of Vice Chancellor Strine’s comments during his lecture at Stanford’s Rock Center for Corporate Governance. I think that some of Chancellor Strine’s comments on the efficacy of independent directors should be a warning for those pushing for corporate governance reforms in other countries. I have written previously about the potential pitfalls of importing US-style corporate governance rules with respect to India. I’ve now posted another paper entitled "The Promise and Challenges of India’s Corporate Governance Reforms" which addresses some of the recent reform efforts following the Satyam scandal and the continuing barriers for effective corporate governance. The paper is forthcoming in the inaugural issue of the Indian Journal of Law and Economics.
Recently, there has been some very interesting work on independent directors in India, particularly arising out of unprecedented independent director resignations following the Satyam scandal. The Indian corporate law blog has a very useful post about recent academic literature on corporate governance norms, including the value of independent directors, in India. For those interested in India, all of the papers are worth a careful read.
I think that while the independent director model has much to recommend, there are serious constraints to the model for the Indian context. There is a danger that simply pushing for independent directors will not fully address some important corporate governance concerns in India, particularly the pervasive influence of promoters and controlling stockholders. Others, in particular Umakanth Varottil, have also written on this issue. I highly recommend Umakanth’s recent paper entitled “Evolution and Effectiveness of Independent Directors in Indian Corporate Governance” for anyone who is interested in corporate governance reforms around the globe.
I’ll soon be posting more on other projects related to this trip to India, including a paper on outbound M&A by Indian firms. Stay tuned…
Tuesday, March 23, 2010
Things have been percolating across the pond with respect to the official post-mortems of Kraft's acquisition of Cadbury. In the UK, the acquisition was the source of a good deal of angst -- generating "Keep Cadbury British" campaigns amongst employees who feared the acquisition would be followed by job losses and a moving of production offshore. Central to Kraft's present challenges are statements made by Kraft that the transaction would in fact not result in a net loss of jobs in the UK and would respect the traditions of the British icon. According to the Daily Mail, those statements now seem questionable.
During her pursuit of Cadbury, [Kraft CEO Irene] Rosenfeld stridently declared her 'great respect and admiration for Cadbury, its employees, its leadership and its proud heritage'.Yet just days after Kraft's purchase, the mask came off. Rosenfeld suddenly ditched repeated pledges to reverse plans for the closure of Cadbury's Somerdale plant near Bristol, putting 400 jobs in jeopardy as production is shifted to Poland.
The promise had been a central plank in the publicity battle fought by Kraft during its pursuit of Cadbury. Now it looks like a piece of disgraceful cynicism.
It has also emerged that Kraft is reviewing Cadbury's final salary scheme - an emblem of its historically caring attitude towards employees - possibly putting current workers on to a less generous scheme, while closing the plan to new members.
This came even after a personal pledge by Rosenfeld in a letter to Cadbury chairman Roger Carr on August 28, 2009 - and in subsequent takeover documentation - that employees' pension rights would be 'fully safeguarded'.
All of this has led to a political uproar in the UK. The Takeover Panel is considering changes to the Takeover Code in light of the reaction to the Cadbury transaction and is in the midst of a consultation with respect to rule changes. In addition, last week, Parliament called in Kraft to question representatives over the takeover. Rosenfeld declined an invitation to appear and sent a designated punching bag. No surprise the session didn't really go well.
Kraft executives have made the extraordinary admission that key elements of their bid for Cadbury were based on information gleaned off Google. ...This emerged as Marc Firestone, a Kraft executive vice-president, issued his firm's first apology to workers.
He said he was 'terribly sorry' for breaking the promise on Somerdale, adding: 'I do sincerely personally express my apology.'
Keeping Somerdale open was a key pledge made during the controversial £11.9bn bid battle for Cadbury. Kraft reneged on it just days after winning control last month.
The American company insisted it did not know 'tens of millions of pounds' of equipment had been installed in a new Polish factory.
That's the way these things go I suppose. Rosenfeld is coming under quite a bit of criticism in her UK for dissing the Parliamentary proceedings. Compare Kraft with Toyota -when Toyota was the subject of recent US Congressional hearings, Toyota's CEO found his way to Congress and took his lumps. Rosenfeld on the other hand didn't bother to show up when the Parliament called. Of course, Toyota's CEO made the pilgrimage, in part, because Toyota has significant ongoing business interests at stake and wants to ensure that it can keep selling cars in the US market. Kraft, however, is in a different place. With its deal done, it's not all that interested in the political wreckage left behind. If it results in an overhaul of the takeover rules that won't have a material effect on Kraft going forward.
It's hard to know how this is going to play out over time - whether Parliament is simply venting and does not have a legislative agenda, or whether there is anything that will come out of the Takeover Panel's review. The talk already is about redefining director fiduciary duties so that directors of UK corporations act more like "stewards" for the long-term interest rather than "auctioneers."
If the result of all of this is that the takeover rules are reworked to provide directors with a more active role in defense of the corporation in the face of a takeover threat that would be a wholesale reversal of a long-standing UK governance principle and put the UK on a footing closer to that of Delaware. That would be a disappointing development. I say disappointing mostly because with Delaware on the one side and the Takeover Code on the other, one has a natural experiment. In the UK we have the embodiment of Ron Gilson's passive approach to director action in the face of a takeover. While in Delaware we see Marty Lipton's active managers stewarding the corporation through the shoals of takeover threats.
Monday, March 8, 2010
I’ve been blogging a lot about cross-border M&A, mostly covering Indian conglomerates purchasing firms outside of India. Emerging markets are not just experiencing outbound deals, there is also a lot of interest by western firms in acquiring targets in these markets. According to recent data by Thomson Reuters, 34% of deals announced thus far in 2010 involved a target or an acquirer (or both) in an emerging market. For example, just last week Prudential PLC, the British life insurance and asset management company, announced a $35.5 billion deal to purchase AIG’s Asian assets. The deal would fundamentally transform Prudential, making it a major player in the Asian insurance market.
These cross-border deals represent an important shift in deal-making and M&A activity. This is pretty exciting stuff especially given the overall decrease in M&A activity in the west. But cross-border M&A deals in emerging economies can also be somewhat thorny for deal makers. As articulated in this recent article “while optimism toward emerging-market deals is palpable, and the macroeconomic signs are positive, the reality for deal makers may not be so rosy. Deals in emerging markets often run into surprises like onerous government intervention or corporate management that, at the last minute, changes terms or tactics.”
Cross-border deals involve social, political, cultural and economic sensitivities that require sophisticated deal makers and counsel. For example, due diligence may involve an investigation into deal risks that are not always common in domestic deals (FX issues, political instability, etc.). Lawyers advising clients on emerging market M&A deals will need to be nimble and creative in their thinking, and have an understanding of the macro-economic and political environment beyond the typical domestic deal. Moreover, they must be ready to ask tough questions to which there may not be easy answers. It is not just the diligence process that is different. Deal documents will often look quite different from those used in typical domestic deals. I think some of the interesting questions for scholars and practitioners to investigate are whether, how and why deal documents differ, and to study the extent to which parties entering into acquisition deals in countries that seem to have very different legal rules nevertheless tend to develop roughly similar solutions to the characteristic problems that arise in acquisition transactions.
Monday, February 22, 2010
This morning I opened my email to see news on two multi-billion dollar deals by Indian conglomerates. Bloomberg reported that Reliance Industries Ltd., one of India’s largest companies and owner of the world’s largest oil-refining complex, raised its offer for bankrupt LyondellBasell Industries AF to about $14.5 billion. In addition, India’s Bharti Airtel has been able to line up almost $9 billion in loans for its $10.5 billion bid for Zain’s African assets. These types of large-scale deals generally receive a lot of positive popular press attention in India, some of it with nationalistic sentiments touting the rise of India Inc. Whenever I read these stories they make me wonder about a recent paper by Ole-Kristian Hope, Wayne Thomas and Dushyantkumar Vyas, entitled “The Cost of Pride: Why do Firms from Developing Countries Bid Higher?” which examines whether companies from developing countries bid higher (relative to companies from developed countries) in their quest for international expansion and national glory.
Abstract: Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries (versus those from developed countries) bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications (including alternative measures of national pride) and control variables, are both statistically and economically significant and highlight a source of pride beyond personal hubris which potentially influences corporate decision makers.
In my opinion, the next stage of this research is to see whether deals with national exuberance create positive wealth effects for the shareholders of the bidding companies.
Monday, February 15, 2010
Many thanks to the M&A Law Prof Blog for inviting me to be a contributor. A devoted reader, I am very flattered to be among such fabulous company. Hopefully there will be much to blog about in the M&A world. At least according to the March 2010 issue of Bloomberg Markets Magazine, a recent survey of M&A professionals indicates that almost all expect a resurgence in M&A activity in 2010. Of course, no one expects a quick return to the dizzying heights of 2007, but hopefully 2010 will beat the dismal 2009 numbers. Given my interest in comparative law and outbound M&A deals, I was happy to see that the Asia-Pacific region is expected to be the leading hot spot for M&A activity in 2010. Asian companies have been quite active in cross-border M&A activity in this first quarter, see for example the recent $10.5 billion bid by Bharti Airtel, an Indian telecom company, for Zain’s African assets. I think that these types of South-South deals, and their political/legal challenges, will continue to be a major feature of M&A news in 2010. I'll try to keep our readers updated on the legal angles of these and other hot M&A stories.
Friday, February 12, 2010
Abstract: We find a significant increase in both the number and economic size of cross-border acquisitions conducted by emerging market firms since 1990. The most dramatic turn is that the emerging market firms are becoming increasingly active in acquiring companies in developed countries. The analysis reveals two main growth patterns by emerging markets, either through mega deals (usually involving developed-market targets) or through frequent acquisition of smaller targets (usually involving emerging-market targets). Although the abnormal returns for targets acquired by emerging market firms is always positive, the magnitude more than doubles when the target is from a developed market. More importantly, emerging market acquirers also experience significant positive announcement returns when the target is from a developed market. Overall, we document that in their aim to grow globally emerging market acquirers play a significant role in cross-border acquisitions.
Friday, October 2, 2009
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.
Friday, June 5, 2009
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.
Tuesday, June 2, 2009
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.
Monday, November 12, 2007
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.
Wednesday, November 7, 2007
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
Monday, October 22, 2007
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:
- The court is approached to order a meeting of creditors or shareholders directly affected;
- 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
- 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.
Monday, September 24, 2007
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.