On Jan. 1, 2002, the new German Takeover Act came into force, providing, for the first time in Germany, a statutory framework for takeovers. Markus Strelow and Jan Wildberger of European law firm Ashurst Morris Crisp, take a brief look at the issues on public-to-private deals in Germany.
Prior to the Vodafone bid for Mannesmann in 2000 hostile takeovers in Germany were almost unthinkable. Indeed, even friendly public takeovers of listed companies were relatively rare. Corporate law and business culture have not made Germany fertile ground for takeovers with the result that private equity houses have generally avoided the market of public takeovers and public-to-private deal activity has been low in comparison with other jurisdictions. The lack of a takeover tradition comparable to the U.S. and the U.K. is set to change with the recent introduction of the new Takeover Act (the “Act”).
The Act supersedes the Takeover Code, which proved unsuccessful as an attempt to regulate takeovers, and draws heavily on the UK City Code on Takeovers and Mergers. Some of the key issues for private equity investors considering a public to private deal in Germany under the new Act are considered below (a translation can be found at http://www.ashursts.com/pubs/briefings.htm).
New Regime
The Act applies to all public offers for shares, certificates in lieu of shares and comparable securities issued by a domestic German public limited company (AG) or a domestic German public partnership limited by shares (KGaA) and listed on a European stock exchange. The new regime is administered by the Federal Supervisory Office for Securities Trading (BAWe), responsible for vetting offer documents and the orderly conduct of public offers.
Offer Types
The Act distinguishes acquisition offers, takeover offers directed at obtaining control and mandatory offers triggered by an offeror obtaining control, defined as 30% of the voting rights of a target company (the “Target”). Both takeover offers and mandatory offers must extend to all outstanding shares. Subject to certain requirements at stake, building below the control threshold is permitted, but an offer-maker should be aware that the 30% includes all shareholdings of persons acting in concert with him. Before triggering a mandatory offer, an investor should consider carefully whether he has the financial resources to implement it.
All offers must be announced and then conducted in accordance with a strict timetable. This means there are four to eight weeks to submit an offer document to the BAWe, and this may in some cases leave little time for due diligence on the Target.
Due Diligence
One of the big issues on a public-to-private deal is access to information and the opportunity to conduct due diligence. A key concept under German corporate law, reiterated as a general principle in the Act, is the duty of management to act in the best interests of the Target (including employees and creditors). These may not necessarily coincide with the provision of information to suitors but the converse is equally true. In order to ensure information flow it is important to get management onside early on in the process.
An offeror has to be careful that insider dealing rules do not restrict it from dealing in the Target’s shares either before or during the offer period or obtaining all relevant information from management. This can generally be avoided with sufficient planning.
There is no general obligation under the Act for the same information to be made available to a competing offeror. The success of a hostile competing offer will therefore be severely reduced and private equity investors will need to keep a sharp eye on opportunities in the German market.
Offer Conditions
Under the Act an offeror is expected to put his money where his mouth is. A condition to the offer that sufficient acquisition funds will be available is not permissible, nor are subjective conditions under the control of the offeror.
Security
Financial assistance rules prohibit the Target (and its subsidiaries) from providing upstream security or loans to finance its own acquisition. However, conversion into or amalgamation with a private limited company or a limited partnership means substantially fewer restrictions apply. Another solution is to “push down” the debt to the Target or a subsidiary.
Tax
The tax effects of an acquisition have to be carefully factored into the offer structure. Failure to do so may result in a vastly reduced return on the investment. Dividends paid by a German company are generally tax-free (except normally for withholding tax) but costs and expenses, such as interest payments on the acquisition debt, may only be deducted to the extent they exceed the dividends in any given year. However, this can be overcome by the Target refraining from distributing profits for some years.
The offer vehicle is usually a holding company with no independent business so the lack of taxable income means there are no tax savings. Tax deductibility can nevertheless be achieved by implementing a fiscal unity between the offer vehicle and the Target.
“Going Hostile”
What if the Target’s management (Vorstand) and supervisory board (Aufsichtsrat) decides not to back an offer made by a private equity investor? The management is then relatively well placed to make life unpleasant for the investor. However, major road blocks such as “poison pills” will require shareholder approval.
The German legislature has not discarded the wide authority of the Vorstand to conduct the Target’s business notwithstanding an offer. The Vorstand need not refrain from taking any day-to-day decisions that have defensive effects. Moreover, the Act expressly permits the Vorstand to seek an alternative offeror or “white knight” or to take any other defensive measure with prior shareholder approval. However, many of the German equivalents to traditional U.K. and U.S. defence measures, e.g. crown jewel or pac man defence (with share issue) require also prior shareholder approval which may be granted in very broad termsmay be granted up to 18 months in advance. This enables companies to put themselves beyond the reach of a takeover, but because of the possible negative effect on the share price, shareholders are unlikely to authorise this. Moreover, the 18-months-period means effectively that shareholder approval must be obtained in every annual general meeting. Likelihood is that an offer would not go through anyway if shareholder approval is obtainable.
Management Deal
An offeror must not offer management a higher offer price than shareholders of the same class but is permitted to offer or grant cash or benefits of money’s worth to management provided this is not “unjustified”. The Act is unclear what this means and only time will tell what the boundaries are. However, private equity houses should still be able to offer “sweet equity” to incentivise management.
Minority Rights
If there was one thing that discouraged takeovers and public-to-private deals in Germany it was the fear of being left with a small number of minority shareholders intent on disruption. Under the Act it is now possible to “squeeze out” minority shareholders when the threshold of 95%. is reached. Alternatively, with 75%. the Target’s assets can be hived off and the Target liquidated.
Break Fees
Inducement and break fees are not common in Germany but they are important to ensure fund returns are not diminished by wasted costs. Statute does not regulate the percentage of the transaction value but, provided a fee is in the “best interests” of the Target, it is permissible provided it is approved if it constitutes a defensive measure by the back door.
More PTP?
Undoubtedly yes, given a regulated framework and the ability to squeeze out minority shareholders public-to-privates under the Act is a new opportunity for private equity.
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