In some jurisdictions, the "mandatory offer" rule could catch out those considering an acquisition of a public listed company—how do you avoid being caught in the trap?
The mandatory offer rule, relating to takeovers of public listed companies, is common across Europe and a number of other jurisdictions, including Hong Kong and Singapore, though not generally in the United States.
The fundamental common principle is that an acquisition of shares in a quoted company above a certain trigger threshold obligates the acquirer to make an offer to all shareholders to acquire their shares.
The trigger threshold varies but is often either 30% or one-third of the company's voting shares (although it can be lower—for example, it is as low as 15% in Argentina).
Even if not intended as such, mandatory offer requirements can serve as limited anti-takeover defenses since potential acquirers may be unwilling or unable to conduct a mandatory offer in accordance with legal requirements or at all.
Why does it matter?
Mandatory offers must generally be in cash at the highest price paid by the bidder for shares over the preceding period (typically 12 months).
In a number of jurisdictions, including the UK, they must also be unconditional, apart from a condition that acceptances result in the bidder holding more than 50% of the company's voting shares. For example, regulatory clearances or bidder financing conditions could not be included.
A regulator may allow a quick sale of shares to reduce the holding back below the trigger threshold, but this may still result in adverse consequences such as censure by the regulator, significant economic loss and reputational damage.
Trap 1: "Acting in concert"
Specific traps will to some extent be jurisdiction-specific; however, there are a few that should generally be considered. First, the trigger threshold may be met if, following an acquisition, the relevant percentage of shares is held by the acquirer (directly or indirectly) together with anyone "acting in concert" with them. Before buying quoted shares, it is therefore important to understand those who may be considered to be acting in concert and whether any of them have acquired shares.
Persons may be treated as acting in concert where:
- under an agreement or understanding (however informal), they co-operate to obtain or consolidate control of a company; or
- they have any of a number of specified relationships with one another which may go beyond those expected (such as group companies or family members) and include, for example in the UK, common shareholders in a private company who receive quoted shares (such as on a share-for-share acquisition).
Trap 2: What are you buying?
The mandatory offer obligation may be triggered not only by the direct acquisition of shares but also by any "dealing" resulting in a person having an "interest in securities" of the relevant company.
These definitions may be broadly drafted to ensure that the rule cannot be circumvented and include a wide variety of instruments, e.g. derivatives, convertibles, options and a wide variety of transactions such as voting agreements, hedging transactions and even spread bets.
We recommend that acquirers, particularly those from jurisdictions where mandatory offers are not a feature of the regulatory landscape, such as the US, take the time to consider carefully the relevant rules before buying quoted shares.
Baker McKenzie's Global Public M&A Handbook focuses primarily on the practice of conducting a takeover of a publicly listed company with summaries of the general legal framework, takeover practices and tactics across 41 jurisdictions.
For more-detailed and jurisdiction-specific tips, request a copy of our Global Public M&A Handbook by contacting Carolyn A. Sandano at firstname.lastname@example.org or visiting http://www.bakermckenzie.com/en/insight/publications/2016/11/global-public-ma-handbook/