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China
Caroline Berube and Ralf Ho
HJM Asia Law Co LLC
STRUCTURES AND APPLICABLE LAW
Types of transaction
1 How may publicly listed businesses combine?
In China, ‘business combination’ is a legal concept – in simple terms, it
generally means bringing together two (or more) separate companies
into a single business.
The combination of companies can generally be divided into two
types: absorption and consolidation. Absorption and consolidation are
both types of merger.
Absorption is where a company absorbs another company or
companies. The absorbing company will continue to exist while the
company or companies being absorbed will be brought to an end.
Consolidation is where a completely new company is estab-
lished and the two or more companies being consolidated are brought
to an end.
For both absorption and consolidation, the remaining company
shall take over all the credits and debts of the original companies.
Investors may acquire listed companies through tender offer or
agreed acquisition or by any other legal means.
Statutes and regulations
2 What are the main laws and regulations governing business
combinations and acquisitions of publicly listed companies?
The main laws and regulations governing business combinations in
China are as follows:
• the Company Law of the People’s Republic of China (PRC), effec-
tive since 1 January 2006, revised on 28 December 2013; the latest
amendments came into effect on 26 October 2018: this law sets
out some general procedures and conditions relating to business
combinations, for example, the quorum required to pass a share-
holder resolution with regard to a business combination. https://
hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailnewstype=
1provider_id=1origin_id=3334760isEnglish=Ykeyword_
t=keyword_c=keyword=%E5%85%AC%E5%8F%B8%E6%B3
%95crid=6b3944f1-b9fd-213b-c7db-fe8919274027prid=
024d8525-85b5-4327-8c10-f429b7ddb544;
• the Securities Law of the PRC, effective since 1 January 2006,
revised on 31 August 2014: this law governs the purchase of listed
companies (one of the ways of effecting a business combination).
https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailne
wstype=1provider_id=1origin_id=2441063isEnglish=Ycrid=8
42f73c0-f1b5-436b-8e19-749a3d05e86fprid=d028584a-f410-49e0-
a065-e04fd814db55;
• the State-Owned Assets of Enterprises Law of the PRC, effective
since 1 May 2009. This law sets out some general requirements
for combining state-owned companies: for example, an assessment
of assets may be required before combination. https://hk.lexiscn.
com/topic/legal.php?tps=pg_lsact=detailnewstype=1prov
ider_id=1origin_id=469862isEnglish=Ykeyword_t=keyword_
c=5Zu95pyJ6LWE5LqnLOi1hOS6pyzlm73mnIks5LyB5Liake
yword=5Zu95pyJ6LWE5LqnLOi1hOS6pyzlm73mnIks5LyB5Liacr
id=f6cf334a-88d0-40a6-aac1-6cccb4a2aa16prid=c09ccddf-b5e7-
4e4c-a1e2-f89a8bb8d6c3;
• the Accounting Standards for Enterprises No. 20 – Business
Combination, effective since 23 July 2014: this regulation focuses
on the accounting standards for business combinations. https://
hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailnewstype=
1provider_id=1origin_id=2424426isEnglish=Ycrid=
74faad14-5776-4a01-8409-a2422f42e4f6prid=de68d736-0f2f-4a7f-
82bf-d37900305ddf;
• the Circular on the Merger and Separate Establishment of
Foreign Investment Enterprises, effective since 1 November
1999, recently revised on 28 October 2015: this regulation sets
out the conditions, requirements and procedures around the
combination of foreign-funded businesses. https://hk.lexiscn.
com/topic/legal.php?tps=pg_lsact=detailnewstype=1
provider_id=1origin_id=3255288isEnglish=Ycrid=2dd
b4cb3-7c22-450a-a41d-e438b3d37e39prid=98f69a03-2dd8-4900-
894b-0cace1002949;
• the Notice of the Ministry of Finance and the State Administration
of Taxation on Several Issues Concerning the Enterprise Income
Tax Treatment on Enterprise Reorganisation, effective since
22 February 2008: this regulation stipulates the treatment of
enterprise income tax in relation to enterprise reorganisations.
https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailn
ewstype=1provider_id=1origin_id=231307isEnglish=Ycrid
=825d8481-20ee-4906-8c4c-fa11cdde2219prid=e1148431-fede-
4007-9c73-ebfbfc543efd;
• Announcement No. 4 [2010] of the State Administration of Taxation –
MeasuresfortheEnterpriseIncomeTaxAdministrationofEnterprise
Reorganisations, effective since 1 January 2010: this regulation
sets out relevant tax matters in relation to enterprise reorganisa-
tions. https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=deta
ilnewstype=1provider_id=1origin_id=1314122isEnglish=Yc
rid=5ca61549-80e9-4e75-9c88-726fce2c58f2prid=3a07e8cc-2a30-
4e4e-9968-5704b5aefcb4;
• the Anti-Monopoly Law effective from 1 August 2008 as certain
business combinations may also trigger a review by the Anti-
Monopoly Bureau, which is a part of the Ministry of Commerce.
https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailne
wstype=1provider_id=1origin_id=227418isEnglish=Ycrid=ce
b0e8ce-e4cd-4bea-a6c9-ff5f78b540eaprid=02bb7d4c-4927-4d83-
8230-00cb0af40807; and
• the Administrative Measures for the Takeover of Listed
Companies, effective since 1 September 2006, latest revised
© Law Business Research 2019](https://image.slidesharecdn.com/gtdtpublicma-190812122145/75/Getting-the-Deal-Through-Public-M-A-33-2048.jpg)
![India Khaitan Co
Public MA 201994
Break-up fees – frustration of additional bidders
10 Which types of break-up and reverse break-up fees are
allowed? What are the limitations on a public company’s
ability to protect deals from third-party bidders?
Although much more common in relation to private deals (especially
where financial investors are involved or in the case of termination
due to non-satisfaction of a condition), deal protection devices such
as break fees (payable by the target or promoters to the bidder) and
reverse break fees (payable by the bidder to the target or promoters)
are extremely rare in connection with public deals in India. It is not clear
whether SEBI would approve an offer letter involving such payments,
especially if these arrangements cast a potential payment obligation
on the target company. Separately, the payment of break-fees to non-
residents may require the prior approval of the RBI.
Under the Companies Act, it is unlawful for any public company to
give financial assistance in connection with the acquisition of shares.
Further, the consequences of a breach are stringent and liability of the
company is subject to a fine of a maximum of 2.5 million rupees, and
every officer of the company who is in default is liable to imprisonment
for a term which may extend to three years and with fine of a maximum
of 2.5 million rupees. We believe making ‘financial assistance’ an offence
with potential criminal liability under the Companies Act (with no ‘white-
wash’ procedure) will give rise to several challenges in the future.
Government influence
11 Other than through relevant competition regulations, or
in specific industries in which business combinations or
acquisitions are regulated, may government agencies
influence or restrict the completion of such transactions,
including for reasons of national security?
Yes. If there is a perceived risk to national security, the government
can influence or restrict the completion of a business combination.
For instance, under the exchange control policy, foreign investments
requiring government approval in defence, railway infrastructure,
broadcasting or telecoms sectors are scrutinised from a security stand-
point. Although there is no formal record, it is reported that the central
government had rejected certain investment proposals owing to polit-
ical or national security reasons in sectors such as telecoms.
Conditional offers
12 What conditions to a tender offer, exchange offer, mergers,
plans or schemes of arrangements or other form of business
combination are allowed? In a cash transaction, may the
financing be conditional? Can the commencement of a tender
offer or exchange offer for a public company be subject to
conditions?
Most forms of business combinations will be subject to conditions, in
particular, on obtaining governmental and regulatory consents.
In the case of open offers under the Takeover Regulations, however,
there are certainty of funding requirements and the only conditionality
that can be provided is with respect to minimum acceptance levels
(provided that the higher of 100 per cent of minimum acceptance level
consideration and 50 per cent of total consideration has been depos-
ited, in cash, in escrow). Although, the Takeover Regulations permit
withdrawal of an open offer in the event ‘any condition stipulated in the
agreement for acquisition attracting the obligation to make the open
offer is not met for any reasons outside the reasonable control of the
acquirer’, in our view, SEBI will resist attempts to expand the remit of
conditional offers.
Financing
13 If a buyer needs to obtain financing for a transaction involving
a public company, how is this dealt with in the transaction
documents? What are the typical obligations of the seller to
assist in the buyer’s financing?
Pure leverage cross-border deals are not common in India. Where a
transaction is debt-financed outside India, normally an offshore security
package is put in place by the acquirer as taking security over Indian
assets needs prior approval from the RBI. In such a scenario, funds are
normally drawn down and available at the time of signing the acquisi-
tion documents and making the public announcement in order to satisfy
the merchant banker that necessary financing is available. Even in the
case of purely domestic deals, financing conditions are rarely sought
for, or accepted.
Minority squeeze-out
14 May minority stockholders of a public company be squeezed
out? If so, what steps must be taken and what is the time
frame for the process?
Section 236 of the Companies Act 2013 provides that the majority share-
holders who are the owner of 90 per cent or more of the equity shares
of a company shall have the right of offer by notice to the remaining
shareholders of the company to compulsorily acquire the shares. The
Companies Act 2013 also gives such a right to the minority, to require
the offeror to buy them out on the terms of the offer. The offer to be
made by the minority shareholders to the majority shareholders for
buying the equity shares shall be at a price determined in accordance
with SEBI regulations.
It appears that section 236 of the Companies Act 2013 is intended
to provide an express squeeze-out procedure without the involvement
of the courts. However, in practice, the section 236 procedure can still
involve judicial challenge and, in our experience, remains untested and
unreliable. Accordingly, acquirers and promoters need to still imple-
ment consolidation of their shareholding through the procedures
discussed below.
Another possible method of shoring-up shareholding or squeeze-
out is by way of capital reduction under section 66 of the Companies
Act 2013. Squeeze-out through reduction of capital was discussed by
the division bench of the Bombay High Court in Sandvik Asia Limited
v Bharat Kumari Padamsi ([2009] 92 SCL 272 (Bom)). The High Court
held that it will not withhold its sanction to a resolution resulting in a
squeeze-out of minority shareholders through reduction of capital if it
is established that reduced shareholders are being paid fair value of
their shares, the overwhelming majority of the shareholders voted in
favour of the resolution and reduction is in complete compliance with
the Companies Act and articles of the company. Therefore we can infer
from this decision that majority shareholders (more than three-quarters
of the company) can remove minority shareholders by extinguishing the
share capital held by the minority shareholders alone if the broad condi-
tions as stated above are satisfied. The Bombay High Court in another
case, Elpro International Limited ([2009] 149 Comp Cas 646 (Bom)), held
that a scheme of reduction can be made applicable to a select group
of shareholders so long as conditions under the Companies Act have
been followed.
An appeal preferred before the Supreme Court of India against
Bombay High Court’s Sandvik Asia decision was not admitted by the
apex court, meaning effectively that the apex court did not think it fit to
interfere with the original decision of the Bombay High Court.
Consolidation of shareholding can also be achieved through a
delisting of the shares from the stock exchange pursuant to SEBI
(Delisting of Equity Shares) Regulations 2009 (the Delisting Regulations).
© Law Business Research 2019](https://image.slidesharecdn.com/gtdtpublicma-190812122145/75/Getting-the-Deal-Through-Public-M-A-94-2048.jpg)
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Getting the Deal Through: Public M&A
The 2019 edition of 'Public M&A' provides a comprehensive analysis of mergers and acquisitions, highlighting key trends and statistics from 2018, including the record value of global deals despite a decrease in the number of transactions. It covers various jurisdictions and sectors while emphasizing the significance of private equity activity and the impact of geopolitical uncertainties on M&A dynamics. The document is a resource for legal practitioners and corporate counsel, containing contributions from experts across different regions.
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Getting the Deal Through: Public M&A
- 1. Public M&A 2019 Contributing editor AlanM Klein © Law Business Research 2019
- 2. Publisher Tom Barnes tom.barnes@lbresearch.com Subscriptions Claire Bagnall claire.bagnall@lbresearch.com Seniorbusiness development managers Adam Sargent adam.sargent@gettingthedealthrough.com Dan White dan.white@gettingthedealthrough.com Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 3780 4147 Fax: +44 20 7229 6910 The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer– client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. The information provided was verified between February and April 2019. Be advised that this is a developing area. © Law Business Research Ltd 2019 No photocopying without a CLA licence. First published 2018 Second edition ISBN 978-1-83862-110-0 Printed and distributed by Encompass Print Solutions Tel: 0844 2480 112 Public M&A 2019 Contributing editor Alan M Klein Simpson Thacher & Bartlett LLP Lexology Getting The Deal Through is delighted to publish the second edition of Public M&A, which is available in print and online at www.lexology.com/gtdt. Lexology Getting The Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers. Throughout this edition, and following the unique Lexology Getting The Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Egypt and Thailand. Lexology Getting The Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.lexology.com/gtdt. Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers. Lexology Getting The Deal Through gratefully acknowledges the efforts of all the contribu- tors to this volume, who were chosen for their recognised expertise. We also extend special thanks to Alan M Klein of Simpson Thacher & Bartlett LLP, the contributing editor, for his assis- tance in devising and editing this volume London April 2019 Reproduced with permission from Law Business Research Ltd This article was first published in June 2019 For further information please contact editorial@gettingthedealthrough.com www.lexology.com/gtdt 1 © Law Business Research 2019
- 3. Public M&A 20192 Contents Globaloverview 5 Alan M Klein Simpson Thacher Bartlett LLP Franchise MA 7 Edward (Ned) Levitt Dickinson Wright LLP Cross-border MA: The view from Canada 11 Ian Michael Bennett Jones LLP Bermuda13 Stephanie P Sanderson BeesMont Law Limited Brazil18 Fernando Loeser, Enrique Tello Hadad, Lilian C Lang and Daniel Varga Loeser, Blanchet e Hadad Advogados Canada25 Linda Misetich Dann, Brent Kraus, John Piasta, Ian Michael, Chris Simard and Beth Riley Bennett Jones LLP China33 Caroline Berube and Ralf Ho HJM Asia Law Co LLC Colombia39 Santiago Gutiérrez, Juan Sebastián Peredo and Mariana Páez Lloreda Camacho Co Denmark45 Thomas Weisbjerg, Anders Carstensen and Julie Høi-Nielsen Mazanti-Andersen Korsø Jensen Law Firm LLP Egypt52 Omar S Bassiouny and Mariam Auda Matouk Bassiouny England and Wales 57 Sam Bagot, Matthew Hamilton-Foyn, Dan Tierney and Ufuoma Brume Cleary Gottlieb Steen Hamilton LLP France66 Anya Hristova and Océane Vassard Bersay Associés Germany75 Gerhard Wegen and Christian Cascante Gleiss Lutz Ghana84 Kimathi Kuenyehia Sr, Sarpong Odame and Kojo Amoako Kimathi Partners, Corporate Attorneys India91 Rabindra Jhunjhunwala and Bharat Anand Khaitan Co Ireland100 Madeline McDonnell and Susan Carroll Matheson Italy111 Fiorella Federica Alvino Nunziante Magrone – Law Firm Japan118 Sho Awaya and Yushi Hegawa Nagashima Ohno Tsunematsu Latvia126 Gints Vilgerts and Vairis Dmitrijevs Vilgerts Luxembourg131 Frédéric Lemoine and Chantal Keereman Bonn Schmitt Malaysia137 Addy Herg and Quay Chew Soon Skrine Mexico143 Julián J Garza C and Luciano Pérez G Nader, Hayaux y Goebel, SC Netherlands148 Allard Metzelaar and Willem Beek Stibbe North Macedonia 154 Emilija Kelesoska Sholjakovska and Ljupco Cvetkovski Debarliev, Dameski Kelesoska Attorneys at Law © Law Business Research 2019
- 4. Contents www.lexology.com/gtdt 3 Norway161 Ole KristianAabø-Evensen Aabø-Evensen Co Advokatfirma Poland174 Dariusz Harbaty, Joanna Wajdzik and Anna Nowodworska Wolf Theiss Qatar181 Faisal Moubaydeen Dentons Romania186 Anda Rojanschi, Adina Oprea and Alexandra Vaida DB David și Baias Russia195 Vasilisa Strizh, Dina Kzylkhodjaeva, Philip Korotin, Valentina Semenikhina, Alexey Chertov, Dmitry Dmitriev and Valeria Gaikovich Morgan, Lewis Bockius LLP South Africa 202 Ezra Davids and Ian Kirkman Bowmans Switzerland211 Claude Lambert, Reto Heuberger and Andreas Müller Homburger AG Taiwan220 Yvonne Hsieh and Susan Lo Lee and Li, Attorneys-at-Law Thailand225 Panuwat Chalongkuamdee, Akeviboon Rungreungthanya and Pratumporn Somboonpoonpol Weerawong, Chinnavat Partners Ltd Turkey232 Noyan Turunç and Kerem Turunç TURUNÇ United States 239 Alan M Klein Simpson Thacher Bartlett LLP Vietnam245 Tuan Nguyen, Phong Le, Hai Ha and Huyen Nguyen bizconsult Law Firm Zambia253 Sharon Sakuwaha and Situlile Ngatsha Corpus Legal Practitioners © Law Business Research 2019
- 5. www.lexology.com/gtdt 5 Global overview AlanM Klein Simpson Thacher Bartlett LLP If MA activity in 2017 was a complicated story, 2018 was not much simpler. Globally, activity levels overall continued to be strong, remaining comparable to, or improving on, healthy 2017 levels in many respects. While major regions such as Europe and the US saw continued growth over 2017 volumes, certain other regions such as Latin America regis- tered declines in activity. The total value of announced deals last year was US$3.9 trillion according to Bloomberg, representing a 15.9 per cent increase from the previous year. Despite a substantially increased total value, however, 2018 saw a decrease of approximately 8.5 per cent in the number of deals as compared to 2017. Notably, 2018 marked the fifth consecutive year in which MA activity has broken US$3 trillion. This high level of MA activity was sustained despite increased global geopolitical uncertainty, including the midterm congressional elections in the US, continued uncertainty with respect to Brexit and several pres- idential elections in Latin America. Global MA activity in the first half of 2018 sustained the momentum imparted from the fourth quarter of 2017 but began to slow during the second half of 2018, decreasing markedly during the fourth quarter when it declined by 5 per cent against the previous quarter and registered the slowest period since the second quarter of 2017. Each of the five largest deals in 2018 were announced in the first half of the year. The number of blockbuster deals remained strong, increasing from three deals announced in 2017 exceeding US$50 billion in value to five such deals in 2018, including Takeda Pharmaceutical’s US$80.9 billion acquisition of Shire Plc, Cigna’s US$68.4 billion acquisition of Express Scripts, Energy Transfer LP’s US$59.3 billion merger with Energy Transfer Partners, T-Mobile’s US$57.8 billion proposed merger with Sprint and Comcast’s US$50.7 billion acquisition of Sky. More gener- ally, high-dollar deals dominated compared to 2017, with 36 deals with announced values in excess of US$10 billion in 2018 – six more than were announced in 2017 – and deals with announced values in excess of US$1 billion comprising 61.2 per cent of total deal activity in 2018. As noted above, this increase in MA volume and mega-deals in 2018 was coupled with a decrease of approximately 8.5 per cent in the number of total deals announced worldwide in 2018 as compared to 2017, reflecting increased activity in the bulge bracket. Globally, private equity buyouts in 2018 continued to grow, accounting for 10 per cent of all 2018 MA activity and representing increases of 29 per cent in value and 4 per cent in the number of deals, respectively, from 2017; these numbers represent the strongest year for private equity buyouts in over a decade. Bloomberg reported regional increases in private equity MA activity in 2018 of 15.3 per cent, 14.2 per cent and 4.7 per cent in the American, EMEA and APAC markets, respectively. The continued availability of low interest rates and large corporate cash reserves continued to foster positive conditions for private equity MA activity in 2018. The top industry in terms of global MA activity for 2018 remained the financial sector with US$862.9 billion in announced transactions, which accounted for 21.6 per cent of deal value in 2018, followed by consumer non-cyclical (19.8 per cent), energy (11.2 per cent), communications (10.9 per cent), industrial (10.1 per cent), technology (9.1 per cent), consumer cyclical (8.4 per cent), basic materials (4.4 per cent), utilities (4.2 per cent) and diversified (0.1 per cent). Cross- border MA deals reached 38.9 per cent of total MA value in 2018, surpassing 2014’s previous high of 37.8 per cent while also representing an increase of 32 per cent compared to cross-border volume in 2017. By region the Americas continued to lead the global MA market in 2018 with US$2.4 trillion in activity from 19,249 announced trans- actions, representing a 25.6 per cent increase in total volume, as compared with 2017. The US accounted for 43 per cent of the global value with announced deals worth US$1.5 trillion, increases of 1.4 and 15.4 per cent, respectively, from 2017 and roughly on a par with 2016 levels. Eight of the 15 largest transactions announced in 2018 involved US targets and nine of the 15 also involved US acquirers. The top three sectors leading the US market included energy and power, high tech- nology and healthcare, each of which accounted for 23.6 per cent, 18.8 per cent and 12.5 per cent of the market respectively. Canadian activity also saw a notable increase, with the US$2.75 billion in announced value representing a 15.3 per cent increase over 2017 levels. Latin American 2018 total deal value, however, dropped by 25.3 per cent compared to 2017, according to Mergermarket. MA activity in the Asia-Pacific region posted a notable decline in volume of 4.3 per cent against 2017 totals, dipping under US$1 trillion to US$950.4 billion and representing the slowest annual period in the past three years. Although the US$56.1 billion in China inbound MA repre- sented a 23.3 per cent increase compared to 2017 and also registered as the highest amount ever achieved, outbound China activity continued its slide from 2017 as it fell to US$116.6 billion, a decrease of 5.3 per cent against 2017 levels. The continued decline in US–China activity was particularly noteworthy, with US inbound activity from China tumbling from US$55.3 billion in 2016 to US$8.7 billion in 2017 and even further to under US$3 billion for 2018, representing annual declines of 94.6 per cent and 65.8 per cent respectively. The European MA market, like its American counterpart, saw deal volume increase in 2018 against a falling deal count, with volume rising by 18.8 per cent for 2018 to a total of US$983.8 billion. Although Europe’s 2018 total share of MA value remained comparable to 2017 at 28 per cent, the second half of the year saw MA value fall drasti- cally by 52.8 per cent in the face of continued uncertainty over Brexit. Despite this notable slowdown, private equity activity remained strong in Europe, increasing by 14 per cent over 2017 with average premiums reaching 26.2 per cent. Despite the slide in the second half of 2018, the outlook on deal activity in 2019 is more optimistic than that of the prior year. About 76 per cent of executives at US-headquartered corporations and 87 per cent of leaders at domestic-based private equity firms expect greater deal flow in 2019, compared with 68 per cent and 76 per cent, respectively, for the same time last year, according to Deloitte. Furthermore, 70 per cent anticipate the size of transactions in 2019 to increase. Despite evidence of fewer worries regarding global © Law Business Research 2019
- 6. Global overview SimpsonThacher Bartlett LLP Public MA 20196 economic uncertainty, capital market volatility and deal valuation, there has been an increase in perceived risks because of business legisla- tion, interest rate increases, anti-trust issues and activist shareholders. Additionally, continued uncertainty regarding global trade and tariffs have both registered as having negative impacts on prospective deal making. Even so, corporate cash reserves remain healthy with holders indicating a willingness to put these resources to use, and significant MA activity in 2019 appears likely to continue at a healthy clip. For over 15 years, our predecessor publication, Getting the Deal Through – Mergers and Acquisitions, and now this title, has sought to provide information of use to practitioners and clients around the world. The pace of the globalisation of the MA economy has far outstripped what anyone could have predicted. In that time the global economy has gone through several cycles and suffered cataclysmic reverses and huge booms. We hope throughout that time and for some time to come that this publication has been and will continue to be a resource of great use to those who seek it out. © Law Business Research 2019
- 7. www.lexology.com/gtdt 7 Franchise MA Edward(Ned) Levitt Dickinson Wright LLP Introduction Acquisitions of other businesses, to strategically grow an existing busi- ness or as a financial investment aimed at earning a good return, have been around since the beginning of modern commerce. However, histor- ically, franchise companies grew organically, with traditional financing, as needed. Exit strategies for the entrepreneur-franchisor were often very low on the strategic plan. Today, with the increasing number of boomer-franchisors heading for retirement, the amazing growth of the franchise sector, the acceptance of franchising as a viable business model, a great deal of under-deployed capital waiting on the sidelines for good targets and more and more examples of successful franchise system growth, it is no wonder that we are witnessing today an incred- ible increase in franchise mergers and acquisitions. Adding to these factors is the growth of private equity pools of money and the realisa- tion by these funds that franchising presents an excellent investment because of predictable and steady cash flow through royalties, great leverage from deployed capital and existing assets and almost unlimited possibilities for rapid growth (domestic and internationally). The size and sophistication of some of these franchise systems and the transactions that evolve are impressive and often rival the traditional businesses as to scope and complexity. Certainly, many of the issues, challenges and approaches are the same in franchise and non-franchise MA transactions. However, for a variety of important reasons, franchise MA has an additional layer of complexity and risk. Franchise variables For the uninitiated, franchising might appear fairly uniform and uncom- plicated in an acquisition, but for the knowledgeable, franchising is multifaceted and nuanced in the extreme. MA in franchising can be quite different if: the system is public or private, large or small, provides services or products, the franchisees have multiple units or multiple brands, the franchisor has expanded through master fran- chising or, perhaps, the seller is a large master franchisee itself within a broader system. It is rare for a franchise system to have a lot of hard assets, such as real estate or valuable equipment, even if it has a high valuation. The value of the system resides primarily in its brand, franchise agreements with franchisees and the relationship between the franchisor and the franchisees. The correct value of the system and how the acquisition is executed needs to take into account the strength, durability and trans- ferability of these assets. This leads to a unique set of due diligence issues and choices and, while proper due diligence is important in any acquisition, it is critical in a franchise acquisition. The acquisition process If, as is often the case, a franchise acquisition commences with a letter of intent type document, an interesting question arises as to whether the franchisees should be informed about the sale intention at that stage. There is no legal requirement to do so and most advisors would argue that, at the letter of intent stage, completion is too uncertain to inform the existing franchisees. However, if the franchisor does enter into such a letter of intent it is a strong possibility that this would constitute a material fact requiring disclosure to any prospective franchisees, if the prevailing franchise legislation requires such disclosure. Upon the signing of a binding acquisition agreement, the argument that disclo- sure is required for prospective franchisees gets more compelling, but not with respect to existing franchisees. Some franchisors opt to place a moratorium on new franchise sales during a system sale process because of this issue. Query what a franchisor should do, if, during a sale process, disclosure is required because an existing franchisee is selling its business to a new franchisee or an existing franchisee is renewing its franchise agreement. The acquisition agreement In addition to the usual provisions of an acquisition agreement, the fran- chise acquisition document will contain a number of specific franchise oriented provisions. The nature and extent of these types of provisions will encompass some or all of the following: • the existence of various forms of the system franchise agreements; • a description of the types of franchise arrangements in use in the system, i.e. area development, master franchise, area representa- tive, licensing, etc; • the existence of any franchisee associations or councils; • any existing claims by franchisees or facts upon which a claim by a franchisee is likely; • ongoing litigation, arbitration or mediation; • the status of all leases and subleases; • compliance with all franchise specific statutes, with particular emphasis on franchise sales during any period of franchisee rescission rights; • access to all franchise agreements and franchise disclosure documents; • the economic performance of franchisee operator units and corpo- rate units; • the status and performance of any existing marketing fund; • strength, durability and suitability of any supply chains; • holdbacks for representations and warranties regarding possible franchisee disputes. Due diligence As mentioned above, while the conduct of thorough due diligence is important in the acquisition of any business, it is particularly important in the acquisition of a franchise system. This is so because of the fact that so much of the value rests on the relationship with the franchisees, the ability of the franchisor to support the franchisees in the system and to protect the brand. At the pre-contractual stage of an acquisition, the acquirer is free to approach any of the system franchisees, in any manner desired, to ‘take the temperature’ of the system. In order to avoid creating prob- lems for the existing franchisor, this could be done through professional © Law Business Research 2019
- 8. Franchise MA DickinsonWright LLP Public MA 20198 contractors or investigators in an innocuous way. Once the existing franchisor/franchisee relationship is determined, the acquirer could decide to end its pursuit of the acquisition or to shape its offer to take that relationship into account. For example, even if the relationship is troubled, the acquirer might still want to acquire system, at the right price, in order to solve the problems as the ‘white knight’. This type of acquirer is often referred to as a ‘strategic purchaser’; being an existing franchisor of a competitive franchise system or a key supplier to the system. Financial acquirers (those interested only in a financial return from the system) are also interested in this critical relationship, but are less likely to conclude the acquisition if they sense trouble in the relationship between the franchisor and its franchisees. Whenever or however the existing franchisees in the system are being approached, it is valuable to engage with franchisees who have been in the system for variety of time periods, as this will provide the acquirer with a picture of the evolution of the system and whether or not the system is trending up or down. Some of the typical areas for due diligence, relate to the finan- cial performance of the franchisor and its franchisees, the content of all franchise agreements and leases, the status of any marketing fund, the condition of all accounting and computer systems and the status of all intellectual property. In addition, however, there are some very important, but less common due diligence areas an acquirer of a fran- chise system should consider. For example, what the relationship is like between key management personnel and the franchise community. If it is not a good one, then the acquirer will need to be able to readily replace such people. On the other hand, if the relationship is very good, then the acquirer will want to know what the likelihood is they can be retained after the acquisition is completed. Another is the timing of fran- chise sales. If too many franchises are sold in too short a period of time, it may indicate trouble in the future because all franchisors have to be able to ‘service what they sell’ and a quality franchise culture takes time to grow without the pressure of a constantly and rapidly expanding fran- chisee population. Conversely, if too many franchises are being resold by existing franchisees, there may be trouble lurking in the system. Also, a thorough analysis of what the franchisor spends on site selec- tion, franchisee selection, initial franchisee training and support will be very revealing about the health and viability of the system. Franchise systems that grow quickly and without sufficient resources being deployed in these very crucial areas may present as very successful on the surface, when there is really a lot of rot at the core. Size of the target system The size of the target system will have a significant impact on many aspects of an acquisition. The most obvious being the price paid, but also the need for more or less due diligence and how much money needs to be spent on it. When the system is large, there may not be enough time, money and manpower to review all of the existing docu- mentation. The approach then might be to set up samples of categorised agreements (ie, the forms of franchise agreement that existed as the system grew through various stages). Then the task would be to have a clear and complete list of any special arrangements made with any and all franchisees. Where the franchisor has expanded through large franchisee operations such as area developers or master franchisees, it will be necessary to conduct due diligence on these large franchisees. Where the franchise system is more modest in size, the task of reviewing all documentation is more feasible, but the need to examine the relationship between management and the franchisee community is more critical. Additionally, with the smaller systems, mere guaran- tees of individuals for representations and warranties in the acquisition agreement may not be sufficient comfort for the acquirer and consid- eration might need to be given to actual holdbacks of a portion of the purchase price. Assessing revenue potential The most obvious and customary source of revenue for a franchisor are the royalties paid by the franchisees on (usually) their gross revenue. The evaluation of the strength of this revenue stream, absent widespread discontent by franchisees, is relatively easy for a prospec- tive acquirer. More difficult is the evaluation of supplier rebates, the predictability of which rests on the policies of the suppliers and the marketplace factors such as competition, quality of goods and changes in consumer tastes. Similarly, if the franchisor is relying significantly on revenue from landlord incentives, shifting economies may put such revenues streams at risk. Franchise agreements At the heart of every franchise system are the existing franchise agree- ments. The content and quality of these agreements, from the point of view of the acquirer, are key in assessing the acquisition and setting a price that makes sense. This is true whether or not the acquirer intends to make changes to the system or how it runs or not. Even If the acquirer is going to continue running the system as was done in the past, certain provisions of the franchise agreements are necessary to allow the system to keep pace of inevitable changes in customer prefer- ences, technology and demographics to name a few. Term and renewal Ignoring other provisions in a typical franchise agreement, which require the franchisee to keep the unit up to date, often renewal time is the best opportunity to have franchised units in the system updated and refurbished. Usually, franchisees who have simply lost their drive or behave badly, but not in breach of their agreement, cannot be termi- nated. The only way to remove them from the system, and, therefore, improve the overall performance of the system, is to not renew them when the initial term and all renewal terms have ended. The right of the franchisor to sell While it is usual to find a clause in a typical franchise agreement that the franchisor is at liberty to assign the franchise agreement without the consent of the franchisee and without any conditions, that provision must be checked early in the process. Otherwise the acquisition may not be doable. Changes to the system Particularly for strategic acquirers, who might be competitors, suppliers or others who want to bring about a lot or a little change to the target system, it is very important that the franchise agreements allow the franchisor to revise how the franchised business is run, what products and services are offered to the customer and what brand the franchisee must operate under. While such a provision will not give the franchisor a complete free hand to make such changes, without such a provision, any change will be impossible. Territorial rights It is not unusual for new franchisors to grant too large territories to their initial franchisees or to grant rights of first refusal on contiguous territories to jump start the growth of the system. The acquirer may then be saddled with some unreasonable obstacles to expanding the system to its maximum size. If the acquirer is a competing system and there is overlap in existing territories of franchisees in both systems, the acquirer will have a business and possibly a legal problem, depending upon the language of the franchise agreements. Assignment rights of the franchisee In order to control who can be a franchisee in a system, it is usual for a franchise agreement to have extensive language regarding assignment © Law Business Research 2019
- 9. Dickinson Wright LLP Franchise MA www.lexology.com/gtdt 9 of the agreement. This type of provision usually gives to the franchisor the right to approve the assignee and the right to require an update to the unit. It will also usually require that there are no breaches to the franchise agreement and that the franchisee is up to date on all payments owed to the franchisor. To the extent this type of clause is absent or weak, it would affect the value of the system and the acquir- er’s ability to grow the system well. Guarantees It is very common to allow franchisees to purchase the franchise through a corporation, but then it is equally common to require the shareholders of the corporation to guarantee all of the obligations of the corporate franchisee under the franchise agreement. Without such guarantees, the ability of the franchisor to control the system can be significantly diminished. Termination rights of the franchisor As to substance and procedure, the events of default by the franchisee should be clear and extensive in a well drafted franchise agreement. Otherwise, the acquirer may be saddled with poor performing fran- chisees and a deteriorating system. Post termination, there should be an enforceable non-competition covenant on the part of the franchisee. Intellectual property By far, the most important asset of a franchise system, after the franchise agreements and franchisor/franchisee relationship, is the intellectual property of the franchisor. Foremost among this type of property are the system trademarks. The franchisor should ascertain that the trade- marks are still viable in the marketplace, are owned by the franchisor outright, transferable, registered in all jurisdictions where the system operates and registerable in any jurisdiction the acquirer intends to expand the system. These days, important intellectual property of a franchisor extends to copyright in software, know-how, operating manuals and business systems. Further, with the increasing importance of the internet in markets all around the world, the ownership of domain names and social media sites is a key factor in any acquisition of a franchise system. Operating manuals The operating manual for the franchise system is a very important tool and asset of the franchise system. Its value, both monetarily and practi- cally, increases with its effectiveness and quality. If the system operates in non-English speaking countries and has good translations of the English version, then there is added value for the acquirer. However, operating manuals can also present or contribute to legal problems. For example, the topic of joint employer among franchisors and their franchisees has recently received a lot of attention from the courts and regulators. Inevitably, an examination will be made of the system operating manual in any proceeding to ascertain what control the franchisor exerted over the franchisee’s hiring processes. Similarly, the operating manual can create issues regarding human rights legisla- tion and in other areas of regulation and vicarious liability. Needless to say, the operating manual should be carefully scruti- nised on any acquisition of a franchise system. Advertising funds One of the great attractions of operating as a franchisee is the opportu- nity to pool funds with the other franchisees to increase the advertising and marketing power of the entire system. Having said that, one of the most common areas of disputes in franchising is the advertising fund and how it is administered. Any potential acquirer of a franchise system is well advised to examine the structure, usefulness, administration and franchisee attitudes towards such a fund. Such an examination would likely entail: • a market study to ascertain the effectiveness of the system marketing efforts; • a thorough review of the receipts and expenditures of the fund over several years, including any money charged by the franchisor to the fund; and • projections of the adequacy of the required franchisee contribu- tions in the future. Franchisee associations and councils Franchisee associations and councils can be a blessing or a curse, or completely irrelevant to the operation of the franchise system. However, a prospective acquirer of a franchise system, besides obtaining repre- sentations about the franchisor’s knowledge of the formation or intended formation of any such franchisee groups, should communicate with the leadership of the group and examine the minutes of their proceedings in recent times. At the appropriate time, the acquirer will want to forge a good relationship with the group and use it in the most effective ways. Regulation Today we are witnessing a steady growth of franchise specific regula- tion and other regulation which affects franchising, such as business opportunity laws, agency laws and licensing laws. Some regulation is heavy in presale disclosure, some regulates the relationship between the franchisor and the franchisee and some requires the approval of a government body before a franchise sale can be made. Once it is ascertained in what jurisdictions the franchisor operates, then the appropriate professional in each jurisdiction should be selected to review compliance on the part of the franchisor with the local laws that govern or influence franchising. Where compliance is flawed or questionable, either the franchisor should remedy the flaw, if possible, or some price adjustment or holdback should be instituted to cover the acquirer’s risk. Getting comfortable in this area is not easy. For example, it is not just the content of say a disclosure document that should be checked for accuracy, but the procedures behind the delivery of the document should also be examined. Technology It is difficult these days to keep up with the rapidly changing technology that affects our businesses and our daily lives. From the point of view of the acquirer of a franchise system, it is important to ascertain the adequacy of the technology employed in the operation of the system or, more realistically, to ascertain how quickly the technology will become obsolete. Additionally, cybersecurity is become a massive problem for all businesses and institutions and franchise systems are no exception. As a starting point, the acquirer will want to be assured of the system’s compliance with the various privacy regulations or make provision to rectify any deficiencies. Conclusion Much of the same considerations, requirements and issues in MA transactions with businesses generally apply when an entire franchise system is acquired. Overlaid on all of that is the added franchise specific considerations, issues and challenges. Most importantly, there is the reality that the franchisor/franchisee relationship is at the heart of any successful franchise system and, in an acquisition of the system, preserving and, hopefully, enhancing that relationship is key. This leads to the reality that how something is done is equally important as to what is done. Further, the ability to zero in on the true state of affairs in a targeted franchise system is more challenging than would be the case in the acquisition of another type of business. Finally, an acquirer has to © Law Business Research 2019
- 10. Franchise MA DickinsonWright LLP Public MA 201910 struggle with the legal framework of the business being franchised and the laws that govern franchising specifically. It is impossible to include, in just one chapter, all of what needs to be known in the acquisition of a franchise system. However, it is hoped and intended that this chapter provide the reader with some valuable insight and tools to assist in the task. Edward (Ned) Levitt nlevitt@dickinsonwright.com 199 Bay Street, Suite 2200 Commerce Court West Toronto, ON M5L 1G4 Canada Tel: +1 416 646 3842 Fax: +1 844 670 6009 www.dickinson-wright.com © Law Business Research 2019
- 11. www.lexology.com/gtdt 11 Cross-border MA:The view from Canada Ian Michael Bennett Jones LLP Canadian MA by the numbers To understand Canadian MA market statistics better one should appre- ciate the relatively small number of large and domestic acquisition targets. To illustrate this feature, compare the headline MA statistics for 2018 globally against those for Canada. In 2018, worldwide MA activity totalled US$4 trillion, representing an increase of nearly 20 per cent compared to 2017 global deal value. By number, worldwide deal count actually declined 8 per cent as compared to 2017, a three-year low in fact. These measurements alone highlight the increasing signifi- cance of mega and large deals in global MA activity. When you contrast those global statistics with 2018 deal activity in the Canadian market, a different, and opposite, theme emerges. In 2018, the total announced Canadian deal value decreased slightly by 2 per cent from US$253 billion in 2017 to US$247 billion. However, Canadian MA transactions by number announced in 2018 rose to a new annual record high of 3,415 transactions, an increase of 14 per cent as compared to Canadian MA transactions (any Canadian involvement) announced in 2017. The opposite year over year directional changes in the Canadian MA market as compared to the global MA market by way of deal count and deal value should not surprise Canadian MA market partici- pants. The role of mega and large deals in the global MA environment and their relative importance for large scale investors and financial and legal advisers alike, contrast with their predictably less common occur- rence in the Canadian MA market, even after taking into consideration Canadian involvement in outbound transactions. Consistent with a generally applicable 1:10 relationship with the US, the Canadian market often still regards US$1 billion or US$2 billion transactions as mega- deals as compared to a US$10 billion threshold (if not greater) in US or global markets. The general observation of note is the relative impor- tance of mid-market deals in Canadian MA. From a global perspective, Canadian mid-market deals are more likely to be viewed as lower mid- market transactions. Transactions with values below US$250 million routinely makeup an overwhelming majority of the transactions in the Canadian MA context. For example, in the fourth quarter of 2018, trans- actions with values less than US$250 million accounted for 90 per cent of total announced Canadian MA transactions. Larger transactions do play a role of course in Canadian MA as well, but recent statistics highlight that they are often more commonly found in Canadian outbound transactions led by Canada’s experienced, direct-investing, pension funds, large infrastructure investors and utili- ties operators who are looking for large-scale investments beyond their comparatively smaller home markets. In the fourth quarter of 2018 by way of example, the top 10 transactions with Canadian involvement by deal value ranged from US$1.35 billion to US$17.5 billion. Of these top 10 transactions, only two were wholly domestic transactions with both Canadian buyers and sellers of a Canadian asset. Another two of the top 10 were connected to Canada solely by virtue of a buyer or seller being listed on a Canadian-based stock exchange with the principal assets of each of the buyer, seller and target all located outside of Canada. Finally of note, and in keeping with their global reputation, three of the top 10 Canadian MA transactions, and in fact the three largest, were transac- tions involving Canadian pension fund acquirers of international assets in the industrial, infrastructure and utilities industries. The significance of the outbound segment of the Canadian MA market is highlighted by the fact that in the fourth quarter of 2018, Canadian companies acquired 281 foreign targets representing 41 per cent of total MA transactions with any Canadian involvement at all. Furthermore, cross-border deals in the same period represented 70 per cent of total Canadian MA transactions by value. In terms of country exposure, the US continues to be Canada’s most common cross-border MA partner with just over 60 per cent of cross-border transactions occurring between Canadian and US parties. Given the significant difference in the size of the Canadian and US markets, it is notable that there is a consistent trend that Canadian–US cross border MA activity involves far more acquisitions by Canadian companies of US targets, than US acquisitions of Canadian targets – by nearly a 2:1 margin. Political events 2018 presented Canadian businesses with two cross-border issues of particular significance – Canada’s political relationship with the United States and the United States’ economic tensions with China. With the continued impact of tariffs on steel and aluminium from Canada (imposed on the premise of national security risk) and the public nego- tiation and settlement (though not yet implemented) of a revised free trade agreement between Canada, the US and Mexico both creating economic and political rifts between Canada and the United States in 2018, cross-border acquisition and business development planning was challenged with uncertainty and political animosity. Though 2019 has so far been comparatively quiet, steel and aluminium tariffs imposed by the US, and the broad range of tariffs introduced by Canada in response remain as inefficient market-place disrupters and also as potential impediments to the implementation of the revised Canada–US–Mexico free trade relationship. Separately, the significant escalation of economic tensions between the US and China in 2018 has also likely affected the Canadian MA market. US–China tensions might have normally also created some opportunities for Canada as an alternative market, but the tensions unexpectedly swept into Canada at the end of 2018 with the receipt of an extradition request by Canada from the US for the chief financial officer of Huawei. The status of Huawei’s CFO, as the daughter of the founder of Huawei and a senior officer of national technology champion of China, © Law Business Research 2019
- 12. Cross-border MA: Theview from Canada Bennett Jones LLP Public MA 201912 already the subject of international debate regarding technology secu- rity concerns, forced Canada into an international debate that Canada had certainly hoped to avoid. Canadian MA with Chinese buyers has fluctuated for a variety of reasons (eg, energy prices, currency controls and mineral prices) over the past decade, but it has persisted in its importance and potential. The trade tensions between the US and China, and technology tensions between China and western based technology hubs, has likely contributed to a slowing of inbound MA transactions to Canada from China as compared to prior years. The reduction in these transactions in the US has been far more dramatic with the tightening up of CFIUS approvals that had already proven to be difficult. Outbound investment by China in 2018 fell generally for the third straight year. With 2018 investment in the US totalling just US$13.2 billion as compared to US$50.9 billion of transactions conducted by Chinese buyers in Europe, Canada is at some risk of being skipped over on the way to Europe. Announced transactions from China and Hong Kong into Canada fell from 34 in number with a value of US$5.65 billion in 2017 to 25 in number with a value of US$2.64 billion in 2018, but even with this reduc- tion deal value between Canada and China remains higher than it was in any year between 2013 and 2016. The ongoing tension over Huawei’s participation in 5G technology in many western countries coupled with the ongoing extradition proceedings in Canada involving Huawei’s CFO will continue to present headwinds, but not barriers, for Canada–China MA transactions. Canada–China transactions are continuing, and the appetite of Canadian governments to continue to build economic ties continues. While the current tensions and their impact on the Canadian MA market may not be short lived, they will not be permanent. New industries In 2018, the rise of two particular new industries materially affected Canadian MA – cannabis and artificial intelligence. The legalisa- tion in Canada of cannabis in 2018 stoked the already hot market for cannabis-driven corporate transactions in Canada. Second, and less heralded, was the rise of artificial intelligence (AI) start-ups in a number of technology hubs in Canada. In 2018, building off already considerable momentum in 2017, there were approximately 60 new public companies created in the cannabis industry – most born from reverse takeovers by US businesses finding an opportunity to list on a public market in Canada using another Canadian market feature – the public company mining exploration shell. The Canadian RTO playbook for cannabis busi- nesses was on such a pace in 2018 that market observers noted that the historical availability of public company shells for proposed RTO trans- actions was starting to become a barrier. Given the continued status of cannabis under the federal laws of the US, Canadian stock exchanges and other financial industry infrastructure in Canada have presented significant opportunities to serve as an MA catalyst for US and other international businesses in this industry. The rapid rise in the number of new Canadian public companies in this industry will inevitably stock the shelves for future Canadian MA activity – much of which was already exhibited in 2018. AI companies have also represented a new segment of the MA market. The significant investment of government and university research programmes in this space has spawned world-class AI tech- nology companies that are the current subject of venture financing from international sources, with both the US and China at the top of the cross-border list. The cross-border MA opportunities in AI are begin- ning to surface and will continue to build in this segment of the market. Notwithstanding continuing legal challenges to infrastructure developments of national importance such as pipelines and unresolved trade uncertainties with the US and China, the Canadian MA market has proven to be resilient in the face of similar challenges before and Canadian buyers will continue to be active in the international marketplace. Ian Michael michaeli@bennettjones.com 3400 One First Canadian Place PO Box 130 Toronto ON M5X 1A4 Canada Tel: +1 416 863 5778 Fax: +1 416 863 1716 www.bennettjones.com © Law Business Research 2019
- 13. www.lexology.com/gtdt 13 Bermuda Stephanie PSanderson BeesMont Law Limited STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? The principal methods of business combination are: • private purchase of shares of a target company; • private purchase of a target company’s underlying business; • public offer for shares in a target company; • statutory merger; • statutory amalgamation; and • statutory scheme of arrangement. In Bermuda, amalgamations and mergers are the most common ways to effect an acquisition. The main difference between a merger and an amalgamation is that an amalgamation involves the convergence of the amalgamating companies and their continuance as a ‘new’ amalgamated company, while a merger involves the merging of companies resulting in a vesting of assets and liabilities into the ‘surviving company’. Typically, business combinations are structured as triangular transactions. This type of transaction typically involves the buyer estab- lishing a subsidiary company in Bermuda that amalgamates or merges with the target company. The shareholders of the target company may receive: • cash consideration; • securities or shares; or • a combination of the above. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The Companies Act 1981 is the main statute governing business combinations in Bermuda and Part VII deals with arrangements, recon- structions, amalgamations and mergers and provides for: • amalgamations ; • mergers; • schemes of arrangement; and • purchase of shares. The MA market is generally not regulated in Bermuda; however, specific regulations may apply depending on the nature of the transac- tion, including whether the transaction involves public or private entities and whether there are regulated entities involved. Also, a company may in its by-laws have provisions regulating takeovers. Public MA transactions involving listed Bermuda entities will be regulated by the Bermuda Stock Exchange (BSX) Listing Regulations, which impose obligations on BSX-listed entities. Prior approval from the Bermuda Monetary Authority (BMA), Bermuda’s principal regulator, will generally be required for the issue or transfer of securities (shares) to foreign buyers, except where a general permission applies (for example, for listed securities). The BMA also regulates particular sectors such as insurers, banks and invest- ment businesses. Certain acquisitions will require a change of control application to be made to the BMA, such as acquisitions of regulated or licensed entities, and in those cases the BMA will evaluate the proposed controllers and senior executives according to the applicable criteria. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Transaction agreements may be governed by either Bermuda law or a foreign law. In domestic transactions the governing law will be Bermuda law, but in transactions involving international companies the choice of governing law for the implementation agreement is a matter for nego- tiation. Whereas the statutory amalgamation or merger agreement will be governed by Bermuda law. A scheme of arrangement is effected by means of a court procedure. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The necessary filings will depend on the type of business combination and the nature of a particular transaction. The following Registrar of Companies filings will attract filing fees: • application and registration of a merger or amalgamation; • filing of a prospectus or information memorandum in connection with a public offering of shares; • changes to certain constitutional documents or authorised share capital; and • director filings in relation to changes to the Register of Directors maintained by the Registrar of Companies. There are also filing requirements for BSX-listed entities, for example, in relation to notices, approvals and circulars or announcements. A scheme of arrangement involves a court process and requires particular steps to be followed including the originating summons, peti- tion and court order. See question 18 in relation to taxes. © Law Business Research 2019
- 14. Bermuda BeesMont LawLimited Public MA 201914 Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The BSX Listing Regulations provide a corporate disclosure policy which requires BSX-listed entities to keep the BSX, shareholders and holders of listed securities informed (without delay) by way of public announce- ments or circulars, of any information relating to the group that: • is necessary to enable them and the public to appraise the financial position of the issuer and the group; • is necessary to avoid the establishment of a false market in its securities; and • might reasonably be expected to materially affect market activity in and the price of its securities. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? BSX-listed entities must comply with the disclosure obligations set out in the BSX Listing Regulations. The BSX Listing Regulations govern stakebuilding, and notice must be made to the BSX in respect of any shareholder of a listed entity who directly or indirectly: • acquires the beneficial interest, control or direction of 5 per cent or more of securities; or • has a beneficial interest or exercises control or direction over 5 per cent or more of securities and acquires, in aggregate, an additional 3 per cent or more. In a situation where a listed entity wishes to repurchase in excess of 20 per cent of its listed securities, the entity must obtain prior approval from the BSX whose mandate is to maintain market integrity and ensure equality of treatment for all security holders. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Bermuda law does not impose an all-embracing code of conduct on directors. In practice, a company’s memorandum of association and by-laws comprise its constitution and together with the Companies Act 1981 prescribe the ambit of the directors’ powers. Many of the duties and obligations of a director are statutory whereas others are found in common law. The Companies Act 1981 requires that directors act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors must disclose their interest in any material contract or in any person party to a material contract with the company (or its subsidiaries). Directors must ensure they act on an informed basis after due consideration of relevant materials, deliberation of information and obtaining advice from expert and experienced advisers if appropriate. Directors are responsible to the company and not directly to the shareholders. However, in practice the interests of the company are typically regarded as identical with those of the shareholders as a whole (as constituted from time to time), therefore avoiding attaching the company’s interests to the interests of any one specific shareholder. When a company is approaching insolvency, the directors should have regard to the interests of the company’s creditors in discharging their duties. However, the duty to have regard to creditors’ interests is not a freestanding duty and may only be enforced by the company or by its liquidator (if in liquidation). Controlling shareholders do not generally owe other shareholders any fiduciary duties but should not oppress a minority. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? The approval and appraisal rights of shareholders depends on the busi- ness combination. Merger or amalgamation In relation to a merger or amalgamation, the Companies Act 1981 procedure set out in section 106 must be followed. The directors of each amalgamating or merging company must submit the amalgama- tion agreement or merger agreement for shareholder approval. A notice must be sent to each shareholder and include a summary or copy of the agreement, state the fair value of shares and state that a dissenting shareholder is entitled to be paid the fair value of his or her shares. The Companies Act 1981 provides that unless the by-laws otherwise provide, the resolution of the shareholders approving the amalgamation or merger must be approved by a majority vote of three- quarters of those voting at the meeting and the quorum necessary for such meeting is two persons holding at least more than one-third of the issued shares. Any shareholder who did not vote in favour of the amalgamation or merger and who is not satisfied that he or she has been offered fair value for his shares can apply to the court to appraise the fair value of his or her shares within one month of the company’s issuance of the notice. Asset sale In relation to an asset sale, the board will typically have sufficient power to conduct the sale. However, the company’s constitutional documents may require the approval of shareholders (or a class) for certain actions. Share sale A share sale will require shareholder approval and involvement; account will need to be taken in this regard of the provisions of the by-laws and any shareholder agreement. Scheme of arrangement A scheme of arrangement requires approval by a majority in number representing three-quarters of shareholders or class. Once sanctioned by the court, the scheme is binding on all members or class of members and on the company. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Unsolicited transactions or ‘hostile takeovers’ by way of a takeover bid are permitted in Bermuda, but they are uncommon. © Law Business Research 2019
- 15. BeesMont Law Limited Bermuda www.lexology.com/gtdt 15 The target company’s board of directors must act in good faith and in the best interests of the company, but the board may try to dissuade shareholders from accepting a bid and try to take any other action to prevent the bid from proceeding, including searching for a ‘white knight’ to circumvent the takeover. A company’s by-laws could also contain anti-takeover protections, including a poison pill or other defensive provisions. Disputes concerning hostile bids can lead to litigation. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? The use of deal protection measures such as break fees or reverse break fees are not specifically regulated in Bermuda, and their use would be subject to challenge on the basis of the directors’ fiduciary duties. The quantum of the fee is negotiated and impacted by bargaining strength and other context-specific factors. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? There are restrictions on foreign ownership of shares in local Bermuda companies such that 60 per cent of the total voting rights in the local company must be exercisable by Bermudians – this is known as the ‘60/40 Rule’ unless a licence to exceed this limit has been granted. There are also restrictions governing the ownership of land by busi- nesses (both local or exempted). A foreign entity must obtain a special licence from the Bermuda government if it wants to take control of more than 40 per cent of a local company and carry on business in Bermuda. Such a licence typically includes a condition that the prior consent of the minister is required for a change in control of the licensed company. The criteria that are considered as part of an application for a licence include: • an assessment of the economic situation in Bermuda; • the nature and previous conduct of the company; • any advantage or disadvantage that may result from the company carrying on business in Bermuda; and • the desirability of Bermudians retaining control of the economic resources of Bermuda. The Companies Act was recently amended with the aim of facilitating direct foreign investment in Bermuda. A Bermuda company may be eligible for an exemption to the 60/40 Rule if its shares are listed on a designated stock exchange (including the BSX) and it engages in busi- ness in a prescribed industry including: • telecommunications; • energy; • insurance; • hotel operations; • banking; and • international transportation services (by ship or aircraft). There are also special licensing regimes for a number of key industries in Bermuda. There are no restrictions on foreign ownership of exempted compa- nies. However, for exchange control purposes, the issue and transfer of any securities in companies involving non-residents must generally notify or receive the prior approval of the BMA. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Under Bermuda law, there are no specific legal restrictions on the conditions to a tender offer, exchange offer or other form of business combination and such conditions are subject to negotiation and market standards. While conditions are determined by negotiation, typically trans- actions are subject to limited conditions that include regulatory approval, no material change and shareholder approval and any restric- tions under a Shareholder Agreement or internal Takeover Code. Acceptance thresholds on a takeover bid are often set at 90 per cent of the target shares so that the applicable Companies Act 1981 squeeze-out procedures can be used. Mergers and amalgamations will also be conditional on achieving the relevant shareholder approval thresholds. In a cash acquisition, a bidder will need to make adequate arrange- ments to ensure the availability of funds and financing arrangements may be subject to conditions. Wide-ranging preconditions to closing are not uncommon in the terms of an offer. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? A target company will typically require reassurance or evidence that committed financing is in place for the purposes of the transaction. In respect of a cash offer, the offer announcement should include confir- mation that sufficient funding is in place. If required, the buyer and target will negotiate regarding the extent that the target is to assist with the buyer’s financing efforts, including preparation of documentation or speaking with lenders. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The Companies Act 1981 provides that if an amalgamation or merger agreement is approved in the manner set out in section 106 (see question 8) it is deemed to have been adopted. Where a merger or amalgamation has been approved by the requisite majority of shareholders, such approval is binding on all shareholders (other than shareholders who have commenced an appraisal action). Section 106 of the Companies Act 1981 contemplates that a merger or amalgamation approved by a 75 per cent majority of a quorate meeting is sufficient to bind shareholders to a merger agree- ment. As noted in question 8, the Companies Act 1981 permits the shareholders to provide for a smaller quorum and lower voting majority in the company by-laws. In relation to a scheme or contract involving the transfer of shares, where the offeror has been approved by the holders of not less than 90 per cent of the value of shares to which the offer relates, the offeror may purchase the remaining shares by giving notice to the remaining ‘dissenting’ shareholders. © Law Business Research 2019
- 16. Bermuda BeesMont LawLimited Public MA 201916 Where a buyer has successfully acquired 95 per cent or more of the shares of a company, the buyer can give notice of the intention to acquire the share of the remaining 5 per cent of the shareholders on the terms set out in the notice. When such a notice is given, the buyer is entitled and bound to acquire the shares of the remaining shareholders on the terms set out in the notice unless a remaining shareholder applies to the court for an appraisal. If an appraisal is given by the court, the buyer can either acquire all of the shares at a price fixed by the court or cancel the notice. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Except as otherwise noted in relation to Bermudian ownership and control, there are no specific laws or regulations that apply to the struc- turing of cross-border transactions. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Bermuda does not have competition laws or waiting or notification periods for completing business combinations. However, regulated or licensed entities must adhere to notification and approval procedures and must obtain the BMA’s consent or non-objection (as applicable) under relevant statutory regimes. This would apply, for example, where there is a material change or change of control in relation to a licensed or regulated entity which include insurance companies, trust compa- nies, banks, fund administrator and regulated investment businesses. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Companies in specific industries, including financial services, broad- casting, telecommunications and transportation, are subject to additional regulations and statutes. This includes foreign ownership rules that may affect business combinations. Also see question 16. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Business combinations do not trigger any specific liability to tax. A company establishes tax residency when it is incorporated in Bermuda. However, exempt undertakings are eligible for a tax exemp- tion certificate, which is an assurance from the Minister of Finance that for the period up to 31 March 2035 an exempted undertaking is not liable to pay certain taxes being taxes: • imputed on profits or income; • computed on any capital asset, gain or appreciation; and • in the nature of estate duty or inheritance tax. Any business with employees physically based in Bermuda, whether local or exempted, is subject to Bermuda’s consumption tax regime (whether or not they have a tax exemption certificate). No taxes are imposed on tax non-resident businesses in Bermuda. The sale and purchase of a company’s business or assets will attract ad valorem stamp duty that is payable on the transfer of Bermuda land and certain other Bermuda property. No stamp duty is payable on the transfer of any securities listed on the BSX. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The Employment Act 2000 generally governs the employee and employer relationship and minimum standards with which employers must comply. The Employment Act 2000 provides that where a business is sold, transferred or otherwise disposed of, the period of employment with the former employer must be recognised in order to constitute a single period of employment with the successor employer (as long as the employment was not terminated with severance). However, there is no specific regulatory framework in relation to business combinations. The continuing or surviving company will typically become the successor employer and assume any associated liabilities. There is generally no obligation to inform or consult employees or to obtain employee consent in relation to business combinations. However, in some cases: • certain employees can have contractual rights to receive this notice; and • there can be notice requirements for unionised employees under a collective bargaining agreement. A share sale does not involve a change in employer and: • employment contracts continue; • collective bargaining agreements remain in effect (unless there is an applicable change of control provision); and • there are generally no notice or consent obligations. It is important to note that rights can exist in certain employee contracts or under any applicable collective bargaining agreement. For example, certain senior company executives or management staff may be entitled to resign or be paid an agreed sum on a change of control pursuant to their contracts. There may also be options under share option schemes that become exercisable upon a change of control and holders of stock options may have the option to take shares in the amalgamated or surviving company. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Under Bermuda law, a ‘bankrupt’ company can be put into liquidation. This authority is contained in Part XIII (Winding- Up) of the Companies Act 1981. Where an insolvent company is involved, the process will take the form of a creditors’ voluntary winding up. The company and board usually cooperate during this process. The procedural steps for a winding up are contained in the Companies (Winding-Up) Rules 1982. If the company is uncooperative, it may be necessary for creditors to apply to the court for the appointment of a provisional liquidator or liquidator. In all of these circumstances, the party acquiring the company must deal with the liquidator and determine the best process for acquiring the company, given the fact that it is in liquidation. Bermuda law also recognises the appointment of receivers. A receiver can be appointed by the court or a creditor pursuant to the © Law Business Research 2019
- 17. BeesMont Law Limited Bermuda www.lexology.com/gtdt 17 powers contained in a security instrument. The receiver will take over control of the company and be the party with which a purchaser must coordinate various matters (eg, due diligence and discussions regarding the structure of any acquisition). The scheme of arrangement procedure is also available to solvent or insolvent companies under the Companies Act 1981, as amended, whereby the process is court sanctioned. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? In the context of business combinations, purchasers should generally consider any potential risks or liabilities arising from non-compliance with Bermuda’s sanctions, anti-corruption, anti-bribery and anti-money laundering regimes. These matters should be considered both in rela- tion to dealings with counterparties and in relation to any pre-existing deficiencies affecting the target business or otherwise. Bermuda’s anti-bribery and corruption laws have recently under- gone a process of modernisation with the introduction of the Bribery Act 2016, which came into force in September 2017 and was largely modelled on the United Kingdom (UK) bribery legislation. Certain bribery and corruption offences previously contained in the Criminal Code Act 1907 have been superseded by the Bribery Act 2016. Further, the UK Bribery Act 2010 has extraterritorial effect and thus has potential direct implications for Bermuda, which is a British overseas territory, such that Bermuda-based companies with a nexus to the United Kingdom can possibly be prosecuted in the United Kingdom if they are involved in bribery anywhere in the world. As a British Overseas Territory, Bermuda implements the international sanctions obligations of the UK. The majority of the sanctions in effect in the UK come from the UN Security Council (UNSC) and the European Union (EU). The EU measures normally implement in Europe the relevant UNSC Resolutions (Resolutions), and may also impose additional sanc- tions. The Bermuda International Sanctions Act Regulations 2013 list all of the sanctions regime-related orders in force in Bermuda, and are amended on an ongoing basis to ensure the list remains up to date. Bermuda has a robust anti-money laundering and anti-terrorist financing legislative framework. The BMA has powers to monitor financial institutions for compliance with the Regulations under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008, which gives the BMA the capacity to impose substantial penalties for failure to comply with many provisions in the Regulations. Stephanie P Sanderson spsanderson@beesmont.bm 5th Floor Andrew’s Place 51 Church Street Hamilton HM 12 Bermuda Tel: +1 441 400 4747 Fax: +1 441 236 1999 www.beesmont.bm © Law Business Research 2019
- 18. Public MA 201918 Brazil FernandoLoeser, Enrique Tello Hadad, Lilian C Lang and Daniel Varga Loeser, Blanchet e Hadad Advogados STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Under Brazilian law, publicly listed companies may combine in several different ways. However, the most common types of business combina- tions are the following: • mergers: two different entities combine to form a new entity, which absorbs all assets and liabilities of the previous existing entities; • equity purchase and sale: the shares of a target company are sold to another shareholder or third party; • demergers: spin-off of certain assets and their subsequent merger into either a pre-existing or a newly incorporated company; • absorptions: the assets and liabilities of an entity are entirely absorbed by another entity, and the entity whose assets and liabili- ties were absorbed ceases to exist; • purchase and sale of assets; • joint ventures: two or more legal entities combine their efforts in order to jointly explore business opportunities. Parties to the joint venture may incorporate a new company or acquire equity in an already incorporated company to explore a common busi- ness (traditionally, but not necessarily, by a 50/50 per cent equity arrangement), or enter into a joint venture agreement whereby their rights and obligations are specified, without incorporating a new company or acquiring equity in an already existing one. The business combinations provided above, depending on the circum- stances, may be carried out privately, without the need of a tender offer to the public. However, Brazilian law provides that a tender offer will be mandatory in the following circumstances: (i) if the corporation itself or its controlling shareholder applies for the cancellation of its regis- tration to trade as a listed company; (ii) if the corporation’s controlling shareholder increases its equity participation to the extent that the corporation’s shares may face market liquidity issues, pursuant to the rules enacted by CVM; and (iii) in case of acquisition of the control of a public listed company, in which case the new controller will have to place a tender offer to purchase the remaining shares bearing voting rights. In all these circumstances, the tender offer must be registered with CVM. Moreover, a bidder may also voluntarily place a tender offer to the public (the most common situation being a public takeover bid). In general, the registration of the voluntary tender offer with CVM is not mandatory. However, should the transaction involve an exchange for securities, the registration will be required. The tender offer requires the engagement of a financial institution, which must also sign the offering instrument along with the bidder. The offering instrument must contain the specifics of the offer, such as the number, class and species of securities being purchased, payment and other applicable terms and conditions, date, place and time of the public auction. In addition, the offering instrument must be published in a newspaper of wide circulation. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing business combinations are: • the Brazilian Civil Code – Law No. 10,406/2002; • the Brazilian Corporations Law – Law No. 6,404/1976; • the Antitrust Law – Law No. 12,529/2011; • the Capital Markets Law – Law No. 4,728/1965; • the Brazilian Securities Law – Law No. 6,385/1976; • the regulations enacted by the Brazilian Securities and Exchange Commission (CVM); • the Brazilian Employment Law – Law-Decree No. 5,452/1943, amended by Law 13,467/2017; • the Bankruptcy and Judicial Recovery Law – Law No. 11,101/2005; and • the Anti-Corruption Law – Law No. 12,846/2013. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Although the choice of foreign law is accepted and valid under Brazilian law, the transactions taking place in Brazil, especially if the parties entering into the agreement are Brazilians, are usually governed by Brazilian law. In addition, in order to implement the transfer of shares and certain types of assets, the parties must comply with certain formalities required under Brazilian law. If the shares and assets are of a Brazilian company, the choice of Brazilian law and venue facilitates the enforcement of the agreement as regards the Brazilian company. Tender offers for Brazilian listed companies are mandatorily governed by Brazilian laws. In these cases, the offering instrument will have to comply with the regulations enacted by CVM and the choice of foreign law will not be permitted. © Law Business Research 2019
- 19. Loeser, Blanchet eHadad Advogados Brazil www.lexology.com/gtdt 19 FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The corporate acts of mergers, demergers and absorptions of listed companies are required to be registered with the board of trade of the Brazilian state in which the company is headquartered. In public offerings, as a general rule the issuer must register with CVM a prospectus, along with several other documents and forms. Similarly, in mandatory tender offers, the offeror usually must register an offering instrument with CVM. Should the business combination involve, on one hand, a group of companies whose total gross income or sales volume in the year prior to the year the transaction takes place is equal to or above 750 million reais and, on the other hand, a group of companies whose total gross income or sales volume in the year prior to the year the transac- tion takes place is equal to or above 75 million reais, the parties shall seek prior approval of the Administrative Council for Economic Defence (CADE), Brazil’s antitrust authority. Although stamp taxes do not exist under Brazilian law, registration with the board of trade, with the CVM and with CADE are subject to the payment of fees. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Tender offers for the acquisition of a listed company are subject to specific disclosure requirements. For instance, the offering instrument must disclose the share capital structure of the target company, its financial and economic situation, the exposure of the bidder to deriva- tives whose underlying assets are securities issued by the target company, and information regarding any agreements and covenants to which the bidder is a party involving securities issued by the target company. Should the transaction involve the exchange for stock or other securities, the disclosure requirements applicable to a public offering must also apply. As a general rule, a public offering is also subject to registration. The registration application must be accompa- nied by a prospectus, where certain information must also be disclosed. For instance, the prospectus must contain a summary of the offering, indicating the issuer, the financial institutions involved, the targeted audience of the offering, as well as the price and quantity of the securi- ties to be listed. In addition, the prospectus must contain a schedule of the offering, the justification of the issuing price (in the case of an initial public offering), the explanation of how the proceeds arising out of the listing will be applied and the risk factors of the issuer. Although the disclosure requirements may differ depending on the type of structure that is used, corporations must disclose to the market any information that is deemed to be material information. Pursuant to CVM regulations, material information is any decision of the share- holders or board of directors of publicly listed companies, or any other relevant technical, economical or financial facts or transactions related to the company’s business and activities, which may influence the price of any shares or securities issued by the company, the decision of the investors to buy or sell shares and securities of the company, or the decision of the investors regarding the exercise of any of their rights as shareholders. CVM regulations also provide examples of what would be material information: acquisition of control of a company, execution of shareholders’ agreements involving the corporations’ securities, mergers, demergers and absorptions are among the material informa- tion that must also be disclosed. The list of examples provided by CVM is not exhaustive, so any information that may fall within the definition of material information will be subject to the disclosure requirements. It is also worth pointing out that certain business combinations may be subject to shareholders’ or board of directors’ approval. Given that the minutes of the meetings of the shareholders and board of direc- tors are subject to registration with the Board of Trade, the information provided therein will also be available to the public. Lastly, business combinations that are subject to CADE’s prior approval may also be subject to additional disclosures. Although the economic information submitted to CADE is usually treated as confiden- tial information, the general details about the combination (such as the parties involved) are usually made public. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Listed companies are subject to the disclosure requirements of the CVM, which requires the disclosure of the company’s controlling shareholder (including the ultimate beneficial owner). In addition, listed companies are required to disclose the shareholders or group of shareholders, with a shareholding stake equal to or above 5 per cent of the same class or species of shares and that have common interests or act jointly in relation to the company’s affairs. Business combinations by themselves do not affect disclosure requirements related to substantial shareholdings. However, should the business combination result in a shareholding stake that requires disclosure, such as in the case of controlling shareholder of listed companies, the disclosure requirements shall apply. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Under Brazilian law, directors must observe the duty of care (diligent management of the company’s affairs) and the duty of loyalty (refraining from pursuing personal interests instead of the company’s interests). In addition, directors must always act within the scope of their powers, and shall refrain from participating in the company’s affairs in case of conflict of interest. This is also the case in connection with a business combination among or involving different companies or companies within the same economic group. Although, as a general rule, directors are not liable for the compa- ny’s obligations, in case of ultra vires acts, as well as in case of breach of the laws and the company’s by-laws, they may be personally liable. In addition, although the company’s by-laws may designate different roles to different directors, under Brazilian law all directors may be held jointly and severally liable for damages caused to the company and the shareholders. Although business combinations as a general rule must be approved by the shareholders, directors are responsible for providing accurate information regarding the transaction, so as to enable the shareholders to make an informed decision. When it comes to listed companies in mergers, demergers and absorptions involving its affiliates, the CVM adopts a more stringent © Law Business Research 2019
- 20. Brazil Loeser, Blanchete Hadad Advogados Public MA 201920 interpretation as to the duty of care and duty of loyalty. In such circum- stances, the directors are only discharged of their duties if they have complied with certain specific requirements, such as assuring on an impartial basis that any proposed business combination is carried out in the most beneficial form to the shareholders, including the minority shareholders, and the company. The CVM also requires directors of publicly listed companies to comply with all applicable capital markets rules and regulations. One of the statutory directors of a publicly listed company must be appointed as investor relations director, who will be the person responsible for submitting all required filings and complying with all capital markets rules and regulations (eg, publish a relevant fact of the public company such as a sale or an acquisition), and who may be held personally liable (without prejudice to the corporation’s own liability) for failure to do so. In 2018, the CVM enacted a new (non-binding) guideline (No. 38, dated 25 September 2018) applicable to indemnity agreements executed between publicly listed companies and their directors with the aim at avoiding conflicts of interest, thereby creating new duties to the direc- tors of public companies. Under the indemnity agreements, public companies undertake to compensate directors for damages or losses arising out of arbitration proceedings, court claims or administrative proceedings in general, involving acts, facts or omissions committed by the directors in the exer- cise of their duties or powers. Although in general the parties are free to negotiate the terms and conditions of the agreement, pursuant to CVM’s interpretation, the compensation is not due if the director breached its duty of care and its duty of loyalty. As such, the CVM recommends expressly providing the hypothesis of exclusion of liability in the indem- nity agreement. In addition, the CVM recommends that before making any disbursements, the company must ensure whether the compensa- tion to the director is due, or if it falls into a hypothesis of exclusion of liability. The CVM’s guidelines provide that the directors must implement governance rules to prevent conflicts of interest in the execution of indemnity agreements. In order to be discharged of this duty, the direc- tors must ensure that the indemnity agreements provide which body of the company will be responsible for assessing whether an exclusion of liability applies or not, as well as the applicable rules to avoid conflicts of interest. On specific circumstances, such as the ones that could result in a material loss for the company, the CVM understands that additional governance rules must be adopted, without specifying them. Lastly, it is worth mentioning that the directors are required to disclose the terms and conditions of the indemnity agreements, so as to allow the shareholders to properly assess the liabilities that the company may be exposed to. Regarding controlling shareholders, Brazilian law expressly states that they are liable for the abuse of their powers. Examples of abuse of power include: (i) deviating the company from its scope; (ii) entering into business combinations that are detrimental to the company; and (iii) appointing board members who are not suitable for the role. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Business combinations may be subject to the approval of shareholders, but the quorum for the approval varies depending on the type of transaction. In publicly listed corporations, mergers, demergers and absorptions require by law the approval of the majority of the corpo- rate capital. The shareholders who voted against the merger, demerger or absorption may be entitled to withdraw from the company and be reimbursed for the value of their shares, subject to the following condi- tions: (i) in mergers and absorptions, the right of withdrawal is only applicable to corporations with concentrated ownership; (ii) in the event of demergers, the right of withdrawal applies if there is a change in the company’s business scope (unless the main activity of the entity that absorbs the assets of the demerged entity matches the activities of the demerged entity), if there is a reduction in mandatory dividend payments, or if the demerger results in the participation in a group of companies. The company’s by-laws may contain provisions related to the appraisal methodology for the reimbursement. However, the law sets forth that the reimbursement value shall reflect at least the compa- ny’s net worth, pursuant to the company’s latest approved balance sheet. Should the company’s by-laws authorise, the reimbursement value may be ascertained by an appraisal report prepared by experts, in which case the reimbursement value may be above the company’s corresponding net worth. Tender offers, in general, require the preparation of an appraisal report of the target company, pursuant to the regulations enacted by CVM. If the scope of the tender offer is to delist the company from the stock exchange, or to increase the controlling shareholders’ participa- tion up to the point that it may hinder the market liquidity of the shares, as provided in the rules enacted by CVM, there must be the approval of more than two-thirds of the corporation’s floating stock. In addition, the purchase price of the offer must be fair, corresponding at least to the company’s valuation, ascertained by means of an appraisal report. Nonetheless, should there be clear indications that the valuation report was not accurately prepared, at least 10 per cent of the corporation’s floating stock may request the corporation’s management team to call a shareholders’ special meeting to resolve on the preparation of a new report. Should the new report point out a higher valuation, the new value shall prevail. In the case of a takeover bid, the new controlling shareholder is required to place a public offer to all other voting shareholders of the company. In this circumstance, the offering price must correspond to at least 80 per cent of the price paid for the acquisition of the control. The acquisition of control of a company by a listed corporation is also subject to the approval of the listed corporation’s shareholders in the following circumstances: (i) if the purchase price of the target is deemed to be a relevant investment, as defined by law; (ii) if the average purchase price of the target’s shares is above certain thresholds, as provided in the law. In such circumstances, the corporation’s directors are only compliant with their duty of care if they have submitted the business combination to the perusal of all shareholders, including the minority shareholders and those with no voting rights COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? In Brazil, hostile takeover bids are not yet as common as they are in more mature markets, such as the US and the UK. Nonetheless, in the last decade Brazil has experienced a boost in its capital markets, with a significant increase in the number of publicly held corporations with dispersed shareholdings. Because of this fact, hostile takeovers have gained more attention. According to the Brazilian Corporations Act, the purchaser in a takeover bid is required to make a public offer to all other voting share- holders of the company, for a purchase price of at least 80 per cent of the takeover bid’s price. In addition, in 2010 CVM introduced new rules applicable to takeover bids. © Law Business Research 2019
- 21. Loeser, Blanchet eHadad Advogados Brazil www.lexology.com/gtdt 21 According to the new rules introduced by CVM in 2010, bidders are required not to disclose any information related to the takeover bid until it is finally disclosed to the market. Bidders must also ensure that their managers, advisers and employees also comply with this rule. If the bidder loses control of the information, the bidder will be required to immediately place a public offering or, alternatively, disclose to the market that it intends to place an offer. The bid must take place in a stock exchange or in another author- ised organised market. If a third party is interested in interfering in the public auction for the takeover bid, it must disclose its intention to the market at least 10 days in advance. Also, the bidder must undertake to purchase, in a 30-day period following the bid, all shares of the same class and type that remained unsold, for the same price of the final offer, thereby giving additional protection to minority shareholders. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? In Brazil, break-up fees are not expressly set forth in law. The parties to an MA deal are free to negotiate and agree on a break-up fee for protection against third-party bidders in the transaction agreements. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Certain business activities are subject to additional regulations from governmental agencies, which may impact business combinations. This is especially true for the oil and gas, media/broadcasting, civil aviation, energy and electricity, security and public services in general. All these sectors are regulated by federal government agencies, which may enact enforceable legislation. Another heavily regulated sector is the banking and financial services industry, whose business combinations are also normally subject to the authorisation of the Brazilian Central Bank. The acquisition of land by foreigners (both individuals and compa- nies) is also subject to restrictions, which are based on the size of the land and the scope of the activities to be performed by the foreigner. In addition, some of these restrictions also apply to Brazilian companies controlled by foreigners. In privatisation of state-controlled companies, the government may influence combinations through the use of ‘golden shares’, enabling it to hold influence due to strategic reasons. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? In public offerings and tender offers, the issuer or offeror may subject the offer to certain conditions, as long as the conditions are clearly stated in a prospectus or equivalent document. Public offerings must grant equal treatment to all offerees. The offer must be irreversible and irrevocable, but special conditions may apply in order to protect a legitimate right of the offeror, as long as the usual functioning of the markets is not affected, and to the extent that the fulfilment of the conditions does not directly or indirectly rely on the offeror itself, or a person related to it. The offering price must be uniform, but CVM may authorise price variations in specific transactions, depending on the kind of securities being offered and the qualifications of the offerees. CVM may also acknowledge the existence of material adverse changes following a public offering. If that should be the case, the offeror may request the cancellation of the offer. The offeror may change the terms and conditions of the public offering, without seeking CVM’s prior permission, if the changes are for the benefit of the investors, or if the offeror waives a benefit of its own. In the case of a public offering being revoked, the offer becomes without effect, and any consideration paid by the investors must be refunded pursuant to the terms of the prospectus. In its turn, the acceptance of an offer by an investor cannot be revoked by the investor himself, unless provided otherwise in the prospectus. A tender offer, once the offering instrument is published, may only be amended or revoked by the offeror in the following circumstances: (i) to improve the conditions of the offer; (ii) if previously approved by CVM (in case of mandatory tender offers); and (iii) in compliance with the offering instrument (in case of voluntary tender offers). As previously pointed out, a tender offer will be mandatory if a controlling shareholder intends to delist a company from the stock exchange, or increase its, his or her equity participation to the extent that the security’s market liquidity is hindered, pursuant to CVM regu- lations. The tender offer must be accompanied by a valuation report, but should there be clear indication that the report was not accurately prepared, 10 per cent of the floating stock may request the preparation of a new report. Should the new report increase the security’s value, the offeror may revoke the tender offer and the intended delisting or increase in the equity participation will not be carried out. Changes or cancellation of a tender offer that is subject to CVM’s prior approval may only be effected in light of material adverse changes acknowledged by CVM. Changes to a tender offer require the publication of a new offering instrument, which must highlight the amendments that have been intro- duced, and the new date of the public auction. Should the tender offer be revoked, its cancellation must be published by means of the same channels that were used for its original publication. The law does not provide for any specifics relating to cash trans- actions conditional upon financing. In such circumstances, the general rules concerning tender offers must apply. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Although the parties in theory may agree that obtaining financing by the buyer is a condition precedent to the closing, the seller may be reluctant to accept such provision. Under Brazilian law, there is no obligation on the seller to assist in the buyer’s financing. Typically, it is the buyer’s responsibility to obtain the financing necessary to pay the purchase price up to the closing of the transaction, and the buyer does not transfer the burden to sellers. Notwithstanding, a seller may agree to finance an acquisition by the buyer in other forms, such as by accepting the delay of the payment of part of the purchase price until after closing; by agreeing to receive a portion of the price by means of an earn-out; by means of a consulting agreement; by the exchange of shares of the buyer for the shares of the target company, and so on. © Law Business Research 2019
- 22. Brazil Loeser, Blanchete Hadad Advogados Public MA 201922 Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? As a general rule, minority stockholders may not be freely squeezed out. Brazilian corporate law provides for a series of minority stockholders’ protection rights, such as pre-emptive rights to participate in any capital increases by issuing and paying in shares in the proportion of their equity participation, as an anti-dilution tool. Notwithstanding the above, minority shareholders may be squeezed out in a specific circumstance: following a tender offer for delisting purposes, if less than 5 per cent of the capital stock remains on the free float, the corporation’s general meeting may approve the forced redemption of the floating stock for the purchase price that has been offered in the public tender with the aim to delist the corporation. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? There are no specific laws and regulations that apply for cross-border transactions. However, foreign shareholders may be subject to additional obligations that do not apply to national entities, such as registering its investments with the Brazilian Central Bank and appointing a legal representative domiciled in Brazil with powers to receive summons and notices. Brazilian law allows parties to commercial agreements to choose the governing law and the dispute resolution venue. However, when the companies or assets involved in the business combination are located in Brazil, usually the parties select the Brazilian law as the governing law, and the Brazilian courts (or an arbitration panel located in Brazil) as the dispute resolution venue. The reason for such an arrangement is to expedite enforcement actions, should they be required. As foreign court orders are subject to the prior approval of the Brazilian Superior Court of Justice (STJ), parties usually prefer to directly access Brazilian courts, instead of passing through the STJ approval procedure. Lastly, it is worth stressing that in certain key strategic sectors, such as, for example, the broadcasting and security industries, addi- tional restrictions and regulation requirements regarding foreign investments may apply. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Mergers, demergers and absorptions must be published in a news- paper of wide circulation and in the Official Gazette. In mergers and absorptions, the company’s creditors may oppose the operation within 60 days of its publication. In demerger operations, the creditors of the demerged company may also oppose to the operation by means of a written notice to the demerged company. If that occurs, the demerger may be consummated, but the demerged company will continue to be jointly and severally liable for its liabilities before the creditors who opposed the operation. In public offerings, CVM has 20 days to analyse the offering request. If necessary, CVM may request the issuer to provide additional informa- tion, which must be provided in 40 days. Once the additional information is submitted to CVM, it must confirm or refuse the registration of the offering within 10 days, otherwise the offering will be deemed to be approved. In case of refusal of the registration, the issuer may appeal to CVM’s Board. In mandatory tender offers, the offeror must file the offer registra- tion request, with CVM, within 30 days of the disclosure of the offer to the markets. The request will be analysed by CVM within 30 days of the filing date, and if CVM remains silent, the registration will be deemed approved. If necessary, CVM may designate a term to the offeror (which cannot be greater than 60 days) to provide additional information (the term to be actually designated depends on the complexity of the infor- mation to be submitted). OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Additional regulations may apply to specific sectors, such as the energy, oil and gas, financial, telecommunications and insurance industries. The regulatory activity is carried out by agencies linked to the federal government, such as the National Electric Energy Agency, the National Telecommunications Agency, the National Agency for Petroleum, Natural Gas and Biofuels, the National Civil Aviation Agency and the Brazilian Central Bank. Brazilian regulatory framework may directly affect business combi- nations. For instance, mergers, acquisitions and absorptions among financial institutions may only be effected with the prior authorisation of the Brazilian Central Bank. Foreign investments may also be subject to restrictions in regu- lated sectors. For example, foreign investors are limited to a 30 per cent cap in the share capital of broadcasting companies. Nevertheless, there is a tendency to reduce or even extinguish such restrictions: in 2018, the government enacted legislation allowing foreign companies to hold 100 per cent of the share capital of civil aviation companies (under the previous rule, the threshold was limited to 20 per cent). However, the legislation enacted was an interim measure adopted by the president of the republic and effective during a specific term. In order to become final legislation not limited to a certain period of time, the interim measure needs to be approved by the Brazilian congress and converted into ordinary law. Another sector that is experiencing regulatory flexibility is the financial sector. Under Brazilian laws, a foreign financial institution cannot open a branch, incorporate a subsidiary or increase its equity participation in a Brazilian financial institution, unless the Brazilian government is interested in it. The declaration of interest by the Brazilian government is expressed through a presidential decree. However, in October 2018, the president enacted a decree declaring that the Brazilian government is interested in all entities that are consid- ered to be fintechs. As following the enacting of the decree fintechs are presumably considered to be of interest of the Brazilian government, a foreign fintech is no longer required to seek the declaration of interest by the Brazilian government on an individual basis. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Brazil has a complex tax framework. The country has federal, state and municipal taxes, which shall be taken into account in business combinations. In business combinations involving shares, the main tax concerns refer to capital gains and goodwill that, under Brazilian law, is deduct- ible for tax purposes. © Law Business Research 2019
- 23. Loeser, Blanchet eHadad Advogados Brazil www.lexology.com/gtdt 23 Also, one critical tax issue always raised in business combinations involving both demergers and mergers among two or more legal enti- ties is related to the possibility of taking benefit of losses forward, which might be lost contingent upon the way the combination is structured. In business combinations involving the purchase of assets, other taxes such as VAT may be taken into account. Should the transac- tion involve the transfer of real estate assets, a specific municipal tax may apply. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? As regards an acquisition of shares of a Brazilian legal entity, the acquirer is subrogated in all rights and obligations of the seller. This rule also applies to employment agreements, meaning that the employees will continue their employment relationships with the company acquired. Therefore, the employees will continue to perform their duties for the company acquired, and their employment rights will remain unchanged. Under Brazilian Employment Law and in the context of business combinations, the new business owner is prevented from reducing or otherwise restricting, through the acquired legal entity, the employees’ rights following the business combination. In order to mitigate this risk, the transactional documents usually contain provisions requiring the transferor to defend and hold the acquirer harmless from losses arising out of employment claims. Although the transactional documents may not be opposed against the employees, the contractual indemnification arrangement seeks to ensure that the acquirer may claim damages against the transferor in connection with employment liabilities. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? The main concern of the Brazilian Bankruptcy and Judicial Recovery Law is to avoid the company’s bankruptcy. Prior to entering into a judi- cial recovery, the law allows companies to negotiate with its creditors out of courts, on an amicable basis. If the out of court negotiations do not work, the insolvent company may seek court protection to avoid its bankruptcy. During the judicial recovery, the company must present a recovery plan, which will be the base for negotiations with its creditors. The company’s creditors may present amendments to the recovery plan, or even reject it as a whole. Failure to approve the recovery plan with creditors may lead to the company’s bankruptcy. The recovery plan may provide for the sale of specific assets of the company, business units thereof or the company’s branches, subject to the court’s prior authorisation. In these circumstances, as a general rule, the assets are transferred to the acquirer free from liabilities. Besides the sale of assets, Brazilian Bankruptcy and Judicial Recovery Law provides that the company’s judicial recovery may involve other sorts of business combinations, such as mergers, acquisi- tions and absorptions, which must also be specified in the company’s recovery plan. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Pursuant to the Brazilian Criminal Code, bribery and corruption are criminal offences punishable with imprisonment. The main offences associated with corruption and bribery are active corruption (which consists of offering or promising an unlawful benefit to a public officer in order to encourage him or her to perform, abstain from performing or delaying the performance of an official act) and passive corruption (which consists of a public officer soliciting, receiving or accepting an unlawful benefit based on his or her public office or role). In 2012, Brazil improved its anti-money laundering legislation. Since the enactment of the new legislation, any predicate offence may be considered for the purposes of punishing money laundering (under the previous legislation, only a set of criminal offences could be taken into account). In addition, the new law puts into place more rigorous control mechanisms, requiring several market players to report suspi- cious activities to Brazil’s Financial Activities Control Council. In 2013, Brazil enacted its Anti-Corruption Law. Under the terms of this law, legal entities are strictly liable for corruption acts practised by its officials. The sanctions vary from fines, prohibition to contract with governmental authorities and even the extinction of the entity itself. The law also encourages companies to adopt a compliance programme in order to prevent bribery and corruption. Although an effective compli- ance programme does not fully exempt the entity from sanctions, it may at least reduce the amount of the fines and, in an acquisition of shares transaction, also reduce any risks to which the acquirer of the target company and the target company itself may be exposed. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? Brazilian economic recovery remained sluggish during 2018, but it is likely to gain momentum in 2019. Despite of a landslide victory last year, doubts still remain as to the capacity of the newly elected government to approve the structural reforms Brazil needs, especially pensions reform. However, if the government is successful in its reform agenda, Brazil may experience a surge in investments – both domestic and cross-border. Besides the pensions reform, which intends to increase the number of years a person must contribute before retirement, the government also expects to approve in 2019 a tax reform. Given Brazil’s complex tax framework, the government’s intention is to streamline the country’s tax regime by significantly reducing the number of taxes. Considering the liberal economic approach of the newly elected government, privatisation of state controlled companies is expected to be a heavy trend in 2019 (the government expects to collect US$20 billion in privatisations). Airports, ports, railways and roads are among the targets envisaged by the government. In addition, discussions to privatise Eletrobras, Brazil’s largest energy company, should continue in Congress. Last year, the government sent a bill to Congress to approve its privatisation, but the bill has not yet been voted upon. © Law Business Research 2019
- 24. Brazil Loeser, Blanchete Hadad Advogados Public MA 201924 The IPO market is also expected to pick up again in 2019. In 2018, only three companies went public, but according to some forecasts, there could be up to 30 IPOs in 2019. Regulatory changes within the scope of the Brazilian Securities and Exchange Commission (CVM) are also expected in 2019. An amend- ment to the CVM’s main regulation concerning public offerings may be enacted in order to improve and modernise the current regulatory framework. In addition, the CVM intends to commission a study to amend its main regulations concerning the registration of public compa- nies, and their disclosure requirements. Under the current regulatory framework, issuers may register with the CVM under categories ‘A’ and ‘B’ – the latter being able to issue securities other than shares, and the former being able to issue any kinds of securities, including shares. However, there is a proposal to create a new category ‘C’ applicable to smaller companies, in order to encourage the entrance of new players in the capital markets. Other regulatory proposals include updating anti-money laundering regulations to keep it up with international standards, and sanctions’ regulations to increase the CVM’s enforce- ment effectiveness. Another important change is the new personal data protection legal framework. In August 2018, Brazil enacted Law No. 13,709/2018 (the General Data Protection Law), which restricts the circumstances under which personal data may be processed, and provides for sanc- tions in the event of its breach. Although the new law will only come into force in 2020, it is already affecting MA transactions. For instance, during the due diligence, buyers are already taking into consideration the target’s data processing rules and procedures, in order to identify potential contingencies that could even influence the price of the acqui- sition. In addition, specific contractual protection mechanisms are being included in the transaction documents to safeguard the parties’ inter- ests. As fines arising from data protection breaches could be as high as 50 million reais, this topic has become an important factor to be consid- ered in MA transactions. Fernando Loeser fernando.loeser@lbhlaw.com.br Enrique Tello Hadad enrique.hadad@lbhlaw.com.br Lilian C Lang lilian.lang@lbhlaw.com.br Daniel Varga daniel.varga@lbhlaw.com.br Avenida Francisco Matarazzo, 1400 15º andar, Torre Milano São Paulo , CEP 05001-903 Brazil Tel: +55 11 3879 2800 Fax: +55 11 3879 2801 www.lbhlaw.com.br © Law Business Research 2019
- 25. www.lexology.com/gtdt 25 Canada Linda MisetichDann, Brent Kraus, John Piasta, Ian Michael, Chris Simard and Beth Riley Bennett Jones LLP STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? A business combination involving a publicly listed issuer is generally structured as either a takeover bid or a court-approved plan of arrange- ment, but can also be accomplished through a statutory amalgamation, sale of assets or other fundamental corporate reorganisation. Takeover bid In general, a takeover bid (being the Canadian equivalent of a US tender offer) is an offer to acquire outstanding voting or equity securities where the securities subject to such offer, together with the securi- ties already owned by the potential acquirer, constitute 20 per cent or more of the voting or equity securities of the class subject to the offer. Certain limited exemptions from the takeover bid requirements may be available. However, all non-exempt takeover bids will be subject to the following requirements: • Equal treatment of shareholders: bids must be made to all shareholders of the class of securities subject to the bid and all shareholders of the same class of securities must be offered identical consideration (which can include cash, shares or other securities or a combination). • At least a 105-day bid period: bids will be required to remain open for a minimum of 105 days, subject to two exceptions. First, the target issuer’s board of directors may issue a ‘deposit period news release’ providing for an initial bid period that is shorter than 105 days but not less than 35 days, in which case all outstanding or subsequently launched bids are only required to be open for not less than the shortened bid period. Second, the target issuer may issue a news release that it has entered into an ‘alternative trans- action’, effectively a friendly change of control transaction that is not a bid, such as an arrangement, in which case all outstanding or subsequently launched takeover bids are only required to be open for 35 days from their date of commencement. • 50 per cent minimum tender requirement: bids will be subject to a mandatory minimum tender requirement of more than 50 per cent of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direc- tion is exercised, by the bidder and its joint actors. • 10-day extension requirement: following the satisfaction of the 50 per cent minimum tender requirement and the satisfaction or waiver of all other terms and conditions, bids will be required to be extended for at least an additional 10-day period. Plan of arrangement A court-approved plan of arrangement is a multistep transaction, subject to court approval, which may involve, among other things, an amalgamation, an amendment to the corporation’s articles, a transfer of property, an exchange of securities and a compromise with credi- tors. The principal disclosure document is the management information circular (also referred to as a proxy circular), which is mailed to the target’s security holders (and, in certain circumstances, the offeror’s security holders) in respect of the meeting called to approve the plan of arrangement. A plan of arrangement involves a shareholders’ meeting and two court appearances (one prior to the mailing of the manage- ment information circular and one subsequent to the conclusion of the shareholders’ meeting). The court may approve the arrangement as proposed or as amended by the court. In particular, the court appear- ance held following the shareholder’s meeting considers the fairness of the proposed plan of arrangement. The plan of arrangement becomes effective once the necessary documents, which include the final order of the court, are filed with the applicable corporate registry and, in certain circumstances, a certificate is issued by the corporate registrar in respect of the business combination. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? Generally, corporate transactions (including court-approved arrange- ments) are governed by applicable corporate statutes while takeover bids are governed by applicable securities legislation. Canadian securities regulation is governed primarily by laws and agencies established separately by each of the provinces and territories of Canada. Canada does not have a federal securities regulatory agency, thus each province and territory has its own legislative framework and system that regulates, among other things, takeover bids; however, the rules have been largely harmonised and are generally very similar if not identical in most cases. Securities regulators generally have the power to intervene in transactions considered to be contrary to the public interest. Some provinces have imposed rules designed to protect minority shareholders in connection with certain types of ‘related party’ transactions (related parties include shareholders owning 10 per cent or more of the voting securities of an issuer), insider takeover bids and business combinations. These rules include requirements, in certain transactions and subject to the applicability of exemptions, for approval by a ‘majority of the minority’ shareholders, the preparation and disclo- sure of valuations, and additional disclosure requirements. In late 2018, the Supreme Court of Canada (SCC) unanimously ruled that a proposed pan-Canadian securities regulator is constitutionally acceptable. Notwithstanding this decision, if, when and how legislation implementing new Canada-wide securities regulatory regime will be introduced is still unknown, and the SCC indicated that it remains up to the individual provinces and territories to determine whether participa- tion in such a regime is in that province or territory’s best interest. It remains unclear what actions those provinces that oppose a national © Law Business Research 2019
- 26. Canada Bennett JonesLLP Public MA 201926 securities regulator will take or are available to them in response to the SCC’s decision. Companies have the option to incorporate under the federal Canada Business Corporations Act or one of the largely similar provincial or territorial business corporations acts. Extraordinary corporate trans- actions (such as plans of arrangement and statutory amalgamations used to complete business combinations) must generally be approved by a special resolution of shareholders (typically two-thirds of the votes cast). Shareholders generally have dissent rights, provided for under the corporate statutes or by the court, from extraordinary corporate transactions and the right to demand payment of the ‘fair value’ of their shares (as ultimately determined by a court, if challenged). Further, under Canadian corporate statutes, Canadian courts have been given broad remedial powers to intervene in respect of such transactions that are viewed to be oppressive or unfairly prejudicial to, or that unfairly disregard the interests of, shareholders and other stakeholders. Canada’s senior equity exchange is the Toronto Stock Exchange, but other stock exchanges in Canada include the TSX Venture Exchange, which attracts small to medium-size issuers, and the Montréal Exchange, which focuses on derivatives trading. In addition, there are a number of alternative exchanges, including the Canadian Securities Exchange and the Aequitas NEO Exchange. These exchanges may regulate certain aspects of business combinations. For example, the Toronto Stock Exchange requires a listed acquirer to obtain approval of its share- holders if the acquisition would result in the issuance of more than 25 per cent of the outstanding shares of the acquirer on a non-diluted basis or where a transaction would otherwise materially affect control of the listed issuer (generally where the transaction results in any one party holding 20 per cent or more of the outstanding shares of the acquirer). Business combinations may be subject to a number of industry- specific regulatory laws, as well as laws of general application, including the Competition Act (Canada) and the Investment Canada Act (ICA) (which are discussed in questions 4 and 11). Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? The governing law of a takeover bid is the law of the province or terri- tory in which the shareholders of the target issuer reside, subject to de minimis exemptions, if applicable. The acquirer and the target may enter into a support agreement, which renders the transaction a ‘friendly’ takeover bid. The acquirer may also enter into ‘lock-up agreements’ with shareholders of the target, for the purpose of obtaining their commit- ments to support the transaction. These agreements are contractual in nature, and therefore there is no set rule to determine their governing law. In practice, the governing law is that of the jurisdiction in which the target is incorporated. The governing law of transaction agreements for corporate trans- actions (in the case of a plan of arrangement, typically an arrangement agreement), is also a contractual matter, which may be negotiated. The governing law for such agreements is often the jurisdiction in which the target is incorporated. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The form of business combination determines the necessary filings. In a formal (non-exempt) takeover bid, there are two main filings to be made with the applicable securities regulators: (i) the acquirer must file the takeover bid that describes the terms of the offer along with other required disclosure; and (ii) the target company must file a direc- tors’ circular, which is prepared by the board of the target company, and includes the target board’s recommendations concerning the bid, if any, along with other required disclosure. Also, if the terms of the takeover bid change, notices must be filed disclosing such changes. In a corporate transaction requiring shareholder approval at a meeting, a management information circular and other supplemental materials must be filed with the applicable securities regulators. The content and timing of the filings must comply with the applicable statu- tory requirements. The fees payable in connection with these filings depend on the structure and size of the transaction and the federal and provincial jurisdictions involved. Neither takeover bid circulars nor directors’ circulars filed in connection with takeover bids, nor management information circu- lars filed in connection with corporate transactions, are reviewed by securities regulators, though there is statutory civil liability for misrep- resentations in those documents. If the consideration for a business combination includes the issuance of securities of the acquirer that are listed on a stock exchange, filings will need to be made with the appro- priate stock exchange to obtain the necessary listing approvals. Fees will vary based on the stock exchange and the number of securities issued. In certain circumstances (for example, as described in question 3), an acquirer issuing securities as consideration for a takeover bid or other business combination may be required to obtain the approval of the acquirer’s shareholders. If a business combination or acquisition of a public company involves the acquisition of a business that holds assets in Canada where certain financial thresholds are met (relating to the size of both the parties and the transaction), the parties must file a pre-merger notification of the transaction with the Commissioner of Competition pursuant to the Competition Act and the parties may not close the trans- action until the statutory waiting period has expired (which is initially a 30-day period). The Commissioner will review the transaction to assess whether the transaction would likely result in a substantial lessening or prevention of competition in a market. If the Commissioner. In addition to, or in lieu of, filing a pre-merger notification, the parties may request a formal clearance of the transaction from the Commissioner in the form of an advance ruling certificate (ARC) or, in the alternative, a ‘no-action’ letter. The filing fee in respect of a pre-merger notification and ARC requests is currently C$72,000. However, only one fee is required where a pre-merger notification is submitted together with an ARC request. Any non-Canadian acquiror proposing to establish a new business or acquire control of an existing business in Canada (including a busi- ness combination or acquisition of a public company) will be subject to the ICA. Such transactions may be subject to a ‘net benefit’ review and investments (including acquisitions) may be subject to a discretionary ‘national security’ review, depending upon the identity of the acquiror, the nature of the assets and the structure of the transaction. If the value of the Canadian business exceeds certain financial thresholds (with lower thresholds acquisition of ‘cultural businesses’ or acquisitions by ‘state owned enterprises), the transaction will be subject to a ‘net benefit’ © Law Business Research 2019
- 27. Bennett Jones LLP Canada www.lexology.com/gtdt 27 review, meaning that the acquiror may not close the transaction until the acquiror has filed an application for review and the Minister under the ICA has determined that the transaction is of ‘net benefit to Canada’. If subject to a ‘national security’ review, the Canadian government may review, prohibit or impose conditions on the investment on the basis of national security concerns. If such a transaction is not subject to review under the ICA, the non-Canadian acquiror is only required to file a noti- fication within 30 days of closing of the transaction. There are no filing fees under the ICA. See also question 11 for a more detailed discussion of reviews under the ICA. Canada does not have stamp taxes. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The scope of public disclosure depends on the structure of the business combination. A corporate transaction, such as a plan of arrangement, requires the parties to have agreed to the transaction and its material terms in advance of the public announcement by way of a news release of such transaction. Once terms are agreed and announced, the target company will prepare a management information circular, which is then filed with the governing securities regulator and mailed to shareholders of the target company. The management information circular will set out certain prescribed information with respect to the transaction including, inter alia, a description of the background to the transaction and the negotiation process that occurred between the parties and, more specifically, will include information that is material to the share- holders in order for them to make a reasoned decision to approve, and vote in favour of the plan of arrangement, or reject the transaction and vote against the transaction at a duly called and properly constituted meeting of shareholders. Where the transaction involves the issuance of the acquirer’s securities as consideration, the management information circular must include prospectus-level information, including historical and, in certain cases, pro forma financial information about the acquirer. As discussed in question 4, takeover bids require the acquirer to file a takeover bid circular with the applicable securities regulators. The takeover bid circular must be mailed to shareholders of the target company. A takeover bid circular must contain certain required informa- tion, including: • the terms of the offer; • the acquirer’s intentions in respect of the offer, including a second stage transaction, historical trading in the securities of the target company; • the acquirer’s holdings of the securities of the target company; • sources of financing for the offer; • any arrangements between the acquirer and any director, officer or shareholder of the target company; and • any other information that would be material to the shareholders’ decision to accept or reject the offer. The takeover bid circular must include prospectus-level information about the acquirer, including historical, in certain cases, pro forma financial information, if any securities of the acquirer are offered as consideration for the business combination. By way of response to an offer, directors of the target company must file a directors’ circular with the governing securities regulator and mail it to the shareholders within the prescribed time period. This circular contains certain prescribed information, including the directors’ reasoned recommendations as to whether the shareholders should accept or reject the offer to share- holders (or if no recommendation is made, the directors’ justification for that position), and outline the intentions of the directors and officers of the target corporation, to the extent they are known. When the business combination involves a ‘related party’ of the target company, certain additional information must be included in the disclosure documents (including, unless an exemption is available, a summary of a formal independent valuation of the subject matter of the transaction). Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? When an acquirer acquires beneficial ownership of, or control or direc- tion over, 10 per cent or more of a class of voting or equity securities of a public company, the acquirer becomes an ‘insider’ of the public company for purposes of Canadian securities laws. Upon crossing the 10 per cent threshold, the acquirer must (i) comply with Canada’s ‘early warning’ regime by promptly issuing and filing a news release (announcing its holdings in the public company, the purpose for which the securities were acquired and any future intentions to acquire additional securities of the public company) and, within two business days, filing an early warning report with the Canadian securities regulators in respect of the foregoing, and (ii) file an insider report on Canada’s System for Electronic Disclosure by Insiders (SEDI) publicly reporting the acquir- er’s beneficial ownership of, or control or direction over, voting or equity securities of such public company. Under the early warning regime, the acquirer must promptly file further news releases and early warning reports upon (i) the acquisition or disposition of each additional 2 per cent or more of the outstanding class of voting or equity securities of such public company, (ii) the holdings of the insider decreasing below 10 per cent of the outstanding class of voting or equity securities of such public company, or (iii) a change in a material fact contained in the most recently filed early warning report in respect of such public company. In addition, while an insider of the public company, the acquirer must, from time to time, report on SEDI any changes in its holdings of the class of voting or equity securities of such public company. Also, it should be noted that where the public company is the target of a takeover bid, the reporting threshold under Canada’s early warning regime decreases to 5 per cent. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? All corporate statues in Canada impose certain fiduciary duties on directors and officers. In general, directors and officers have a duty to manage or supervise the management of the business and affairs of the corporation and, in so doing, must act honestly and in good faith with a view to the best interests of the corporation (referred to as the ‘duty of loyalty’); and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances (referred to as the ‘duty of care’). The duty of loyalty means, among other things, that directors owe a fiduciary duty to the corporation (but not to any individual shareholder or other stakeholders). In the context of the duty of loyalty, the stated requirement to act in the ‘best interests of the corporation’ highlights the principle that directors and officers owe an overriding fiduciary duty to the corporation and not directly to the shareholders or any other © Law Business Research 2019
- 28. Canada Bennett JonesLLP Public MA 201928 group of stakeholders. The duty of care requires directors and officers to exercise the care, diligence and skill that a ‘reasonably prudent person’ would exercise in comparable circumstances. A principal aspect of this duty is an obligation to act on an informed basis after due consid- eration of the relevant materials, appropriate deliberation and input, as required, from expert and experienced advisers. The board is responsible for determining the best interests of a corporation. In BCE Inc v 1976 Debentureholders (BCE), the Supreme Court of Canada held that, depending on the circumstances, it may be appropriate for the board of directors to consider, among other things, the interests of those who are affected by corporate decisions, including shareholders, creditors, employees, consumers, governments and the environment. In BCE, the Court indicated that directors are required to ‘act in the best interests of the corporation viewed as a good corporate citizen’, which implies a consideration of interests other than those of shareholders. However, it is important to note that the Court implicitly recognised the importance of shareholder interests in director decision- making. In the change of control context, market pressures and the reality that shareholder approval is crucial to allowing a transaction to proceed mean that, in practice, boards will continue to make an impor- tant focus of their analysis whether a transaction offers the highest value reasonably available to shareholders, even as they consider the best interests of the corporation and the impact of the transaction on other stakeholders. In Canada, the decisions of directors and officers are (in most circumstances) treated deferentially by courts, due to the ‘business judgement rule’. Under this rule, courts will not, with the benefit of hind- sight, substitute their business judgement for the determinations of a board that undertook a diligent and appropriate process. Shareholders, including controlling shareholders, do not gener- ally owe other shareholders any duties. However, if the acquirer is a ‘related party’ of the target company (ie, if it owns 10 per cent or more of the voting shares of the target company), the transaction will gener- ally be required to include enhanced procedural fairness protections, which (subject to certain exceptions) include a formal valuation of the target company’s shares by an independent and qualified valuer; the approval by a ‘majority of the minority’ of disinterested shareholders; and enhanced disclosure requirements. Majority shareholders must remain cognizant of the ‘oppression remedy’ that may be available to certain other parties under applicable corporate law. The oppression remedy provides courts with very broad remedial powers, where it is determined that conduct of the majority is oppressive or unfairly prejudicial to, or unfairly disregards the inter- ests of, any complainant, which can include any security holder, creditor, director or officer. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Corporate transactions generally require approval by a special resolu- tion of the target company’s shareholders (generally two-thirds of the shareholders represented in person or by proxy at the applicable share- holders’ meeting). As mentioned in question 7, corporate transactions involving a related party, generally require approval by a majority of the minority of unrelated shareholders of the target company. In the context of a takeover bid for all of the issued and outstanding shares of the target, once the shareholders decide whether to tender to the bid or not, they are then required to deliver their shares to the offeror who, following completion of the bid, is able to effect a second stage transaction or statutory squeeze-out (a mechanism provided for under Canadian corporate and securities laws and typically conducted by way of amalgamation) to facilitate the acquisition by the offeror of those shares not otherwise tendered under the bid. However, at this stage the offeror will have typically acquired sufficient votes to guar- antee a favourable outcome. Dissenting shareholders generally have dissent and appraisal rights in connection with the shareholder vote undertaken for a corpo- rate transaction (and also in second stage transactions or squeeze-outs subsequent to takeover bids). If the dissenting shareholder contests the fair value of its shares of the target company placed on them by the acquirer, an application may be made to the court to fix a fair value for such shares. See question 14 for further discussion. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Unlike a negotiated or ‘friendly’ transaction that can be accomplished by way of plan of arrangement or takeover bid, an unsolicited transaction or ‘hostile bid’ can generally only be completed by way of a takeover bid. This allows the hostile bidder to appeal directly to the target compa- ny’s shareholders, thus avoiding the need to deal specifically with the management and board of directors of the target company and come to agreed terms and conditions with them in advance of launching the transaction. Canadian takeover bid rules require at least a 105-day minimum deposit period, subject to reduction on consent (possible reduction to a minimum of 35 days), a mandatory minimum (50 per cent) tender condition and a mandatory 10-day extension of the deposit period on satisfaction of the minimum tender condition. See question 1 for further discussion. A minimum 105-day deposit period provides target boards with an extended period of time to either negotiate with the bidder or search for other potential bidders. The ability for the target board to shorten the bid period will likely deter hostile bids for those bidders looking to complete the acquisition quickly and avoid being potentially outbid by others. Issuers subject to a hostile bid may use a variety of means to deter or delay hostile bids. Historically, the most common approach in Canada has been the use of shareholder rights plans (or ‘poison pills’), which unless waived or terminated, would dilute a hostile acquirer’s voting rights and economic interest in the target. However, the historic utility of shareholder rights plans (which were more prevalent in the context of historic 35-day deposit periods) has been muted as a result of the exten- sion of the deposit period to 105 days. As a result, shareholder rights plans have become less prevalent, although the treatment of share- holder rights plans by Canadian securities regulators under a 105-day deposit period continues to evolve. Nevertheless, shareholder rights plans may still be useful in specific situations. Exempt bids, such as bids made through the normal course purchase and private agreement exemptions, are not subject to takeover bid rules. As such, shareholder rights plans can still be effective in situations where an exempt bid is launched, or to protect against ‘creeping bids’ where a substantial share position will be acquired through exemptions in order to avoid triggering the formal takeover bid rules. There is recourse to the courts when disputes arise concerning hostile bids. If, for example, an issuer is subject to a hostile bid, they may challenge such bid on the basis of non-compliance with statutory requirements. Conversely, a bidder may seek redress for defensive actions taken by the target board to frustrate a bid, for example, on the © Law Business Research 2019
- 29. Bennett Jones LLP Canada www.lexology.com/gtdt 29 basis of breach by the target issuer’s directors of their fiduciary duties as outlined above (see question 7). In recent years, shareholder activism has been on the rise in Canada. The new takeover bid rules may result in acquirers that previ- ously would have sought to acquire control of an issuer through a hostile bid, reconsidering such approach and instead consider acquiring control by means of a proxy contest. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? While commonly used and often discussed, deal protection measures such as break fees, right to match provisions, non-solicitation covenants, asset options and so on, are not specifically regulated under Canadian corporate or securities laws, and can be disputed by reference to the directors’ fiduciary duties discussed in question 7. There is little argu- ment that the most commonly utilised deal protection method is the break fee. Break fees are agreed upon payments that a target company will pay to a potential acquirer in the event a business combination is not completed for specified reasons. Break fees are generally included to either protect a potential acquirer from the impact of another contem- plated bid, or to compensate them where the proposed acquisition is unsuccessful. Break fees are often set based on the enterprise value of the target issuer. However, the typical break fee percentage in Canada has consistently remained in the range of 2 to 5 per cent for the last several years (with variations to this standard occurring in certain transactions based on the particular facts of that situation). The size of the break fee is always negotiated, and is therefore affected by the rela- tive bargaining strength of the parties involved and other considerations specific to the transaction. Where the directors are discharging their fiduciary duties to facilitate a transaction, the limited Canadian jurispru- dence suggests that defensive measures will generally be permissible, provided management of the company utilising them can establish a clear rationale and explanation for so doing. However, a balance must always be struck to ensure such measures are not negatively impacting the ability of potential acquirers to ‘come to the table’ and transact. Reverse break fees are payable by the potential acquirer to the target in the event a transaction is not closed for specified reasons (examples have included the rejection of the acquirer shareholders or failure to satisfy certain regulatory conditions), are also not regulated. Theoretically, reverse break fees could be challenged on the basis of the directors’ fiduciary duties, but reverse break fees are not subject to the same potential scrutiny as break fees because the latter may have auction-ending implications. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? The ICA is a federal statute that governs investments in Canadian busi- nesses, including the acquisition of control of Canadian businesses, by non-Canadians. Jurisdiction over investments rests with the Minister of Innovation, Science and Economic Development Canada. Transactions may be subject to two different types of review: a ‘net benefit’ review if certain financial thresholds are satisfied and a ‘national security’ review where national security concerns exist. If subject to a review based on the value of the Canadian business to be acquired, the acquiror may not complete the transaction until the Minister under the ICA determines that the transaction is likely to be of ‘net benefit to Canada’. The ICA requires the Minister consider the following factors in making a ‘net benefit to Canada’ determination: • the effect of the investment on the level and nature of economic activity in Canada, including, without limiting the generality of the foregoing, the effect on employment, on resource processing, on the utilisation of parts, components and services produced in Canada and on exports from Canada; • the degree and significance of (continued) participation by Canadians in the Canadian business (in particular at the director and officer levels) and in any industry or industries in Canada of which the Canadian business forms a part; • the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; • the effect of the investment on competition within any industry or industries in Canada; • the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration indus- trial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and • the contribution of the investment to Canada’s ability to compete in world markets. The review process often includes negotiating contractual undertakings to satisfy the Minister that the transaction would be of net benefit to Canada. These undertakings usually have a duration of five to seven years and may include commitments to maintain jobs and facilities in Canada, to retain Canadian management, to maintain a head office in Canada, to make capital expenditures in Canada, to comply with envi- ronmental regulations, to conduct research and development in Canada and to provide Canadian suppliers the fair opportunity to provide goods and services to the Canadian business. Given the discretionary nature of the ICA review process, the acquiror should consider at the outset potential issues and engage legal and government and public relations advisers to help identify and manage potential concerns. Investments may also be subject to review under the ICA on the basis of ‘national security’ concerns, which allows the Canadian govern- ment to review, prohibit, or impose conditions on a broad range of direct and indirect investments by non-Canadians. On 19 December 2016, the Canadian government released guidelines on national security reviews, which set out the factors considered when assessing national security risk, including, in particular: the effect on Canada’s defence capabilities, transfers of sensitive technology or know-how, critical infrastructure, the enabling of foreign surveillance or espionage, the hindering of law enforcement operations and the potential involvement of illicit actors, such as terrorists or organised crime syndicates. The NS Guidelines also mention as factors the impact on the supply of critical goods and services to Canadians, the supply of goods and services to the federal government, and the impact of an investment on Canada’s international interests or foreign relationships. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Generally speaking, there are no restrictions on the type of conditions that may be included in a business combination provided they are not © Law Business Research 2019
- 30. Canada Bennett JonesLLP Public MA 201930 coercive or abusive of security holders. One notable exception is that transactions completed by way of a takeover bid with cash considera- tion cannot be subject to financing and funds must be readily available to the offeror. Sufficient financing to cover the cash component of a bid must be arranged in advance of the bid being launched such that the acquirer reasonably believes financing is available even if some condi- tions to actually receiving funds are applicable. However, a business combination completed by way of an amalgamation or plan of arrange- ment does not carry such a prohibition. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Where a business combination involves a financing condition, the transaction agreement typically provides for a covenant of the acquirer that it take all steps necessary to obtain acquisition financing. At the same time, the target company typically covenants to cooperate with the acquirer and the financing sources by: giving access to manage- ment, including participation in road shows and due diligence sessions; assisting with the preparation of customary materials for rating agen- cies, offering and private placement memoranda, prospectuses and similar documents; executing any pledge and security documents; and providing any required financial statements or other information. Where a financing condition is in place, the target company often has a reverse break fee where it is entitled to a significant payment from the acquirer in the event the financing condition is not satisfied prior to closing and the business combination is unable to be completed as a result. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? In the context of a takeover bid, most Canadian corporate statutes provide that where a takeover bid has been accepted by shareholders (other than the acquirer and its affiliates) representing 90 per cent or more of outstanding shares of a class, the remaining shares can be acquired or squeezed-out at the same price by operation of law, subject to rights of dissent and appraisal. Upon acquisition of 90 per cent or more of the outstanding shares of a target, the acquirer may send a notice to remaining shareholders that it is exercising its rights to acquire the remaining shares. Each shareholder has the right to dissent in respect of this process and apply to a court to establish a fair market value for the shares. The exercise of dissent rights does not prevent the acquirer from acquiring the shares of the dissenting share- holder, however, the acquirer inherits a court process that is completed following the acquisition, where a court hearing is held to determine the fair value of the dissenting shareholder’s shares. Depending on the outcome of this court process, the acquirer will be required to pay the former shareholder the fair value set by the court, which can be higher or lower than the bid price. The court process requires the former shareholder and the acquirer to adduce evidence as to the fair value of the shares. In some circumstances the fair value process is settled as between the former shareholder and the acquirer prior to the conclu- sion of the court process. Alternatively, a second step acquisition transaction is available to acquirers who do not reach 90 per cent ownership but manage to acquire two-thirds of the target’s outstanding shares (or 75 per cent pursuant to some corporate statutes) and any majority of the minority required. In this case, the acquirer can propose an amalgamation, arrangement, share consolidation or other transaction in order to acquire the remaining shares. In all cases the shareholder vote required will be carried by the acquirer’s holdings. A minority shareholder often has similar rights of dissent an appraisal in the context of such a second step acquisition transaction. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? A Canadian plan of arrangement is often the preferred acquisition method where shares will be issued as consideration for the Canadian target’s shares. In respect of cross-border acquisitions involving Canadian companies with shareholders resident in the United States, section 3(a)(10) of the US Securities Act of 1933 (1933 Act) provides an exemption from the registration requirement for the issuance of securities if the issuance has been approved by a court of competent jurisdiction after a hearing on the fairness of the terms and conditions of issuance, of which all of the target’s security holders that may be arranged receive notice and have an opportunity to attend and be heard. The US Securities and Exchange Commission (SEC) has recognised that Canadian plans of arrangement satisfy the requirements of section 3(a) (10). As a result, a plan of arrangement is often used by acquirers if securities are being issued to any shareholders resident in the United States, since doing so permits the acquirer to complete the acquisition without filing a registration statement in the US. In addition, Canadian foreign private issuers generally are exempt from the SEC proxy rules. Therefore, the SEC proxy rules should also not apply. Exchangeable share transactions also may be used in cross-border acquisitions involving a Canadian target company and a foreign acquirer using share consideration. The purpose of this structure is to provide Canadian resident shareholders of the target company with a tax- deferred rollover on the exchange of their shares of the Canadian target company for exchangeable shares of a Canadian acquisition company. A rollover is not available if the exchange is made directly for shares of the foreign parent, which may result in the selling shareholder realising a capital gain on the disposition. The shares of the Canadian acquisi- tion company received by target shareholders are exchangeable at the holder’s option for common shares of the foreign public parent. This exchangeable share structure will normally defer the taxation of the capital gain until the shareholder sells the exchangeable shares or exer- cises the exchange right for the publicly traded shares of the foreign parent company. The Canada-US multi-jurisdictional disclosure system (MJDS) provides that an eligible takeover bid made for a Canadian target company in compliance with Canadian requirements will generally also comply with US federal requirements provided that certain prerequi- sites are met. In particular, the MJDS provides that a takeover bid that is being made for a target company that is: (i) organised under the laws of Canada or any Canadian province or territory; (ii) a foreign private issuer under applicable US rules; and (iii) not an investment company registered or required to be registered under the US Investment Company Act of 1940, may also be made in the United States to US secu- rity holders in accordance with Canadian takeover bid requirements, provided that US holders hold less than 40 per cent of the securities of the class subject to the bid. Applicable MJDS rules and forms provide for the filing of Canadian takeover bid materials, wrapped in the appropriate MJDS schedule, in order to meet US tender offer filing requirements. If the consideration offered under the takeover bid includes shares, the acquirer must also comply with the registration requirements of the 1933 Act. All bids must be extended to each holder of the class of © Law Business Research 2019
- 31. Bennett Jones LLP Canada www.lexology.com/gtdt 31 securities in the United States and Canada upon terms and conditions not less favourable than those offered to any other holder of the same class of securities, and the transaction itself must be subject to (and not exempt from) the formal Canadian takeover bid rules. With regard to specific laws and regulations relating to cross- border transactions, see also the description of the ICA in question 11. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? A takeover bid must remain open for a minimum of 105 days, subject to the ability of the target company consenting to a shorter bid period of not less than 35 days. Furthermore, the bid may be open for longer and may be extended by the purchaser. Thus, hostile takeover bids must comply with at least a 105-day bid period. On successful completion of the bid, if the purchaser is seeking to squeeze out non-tendering shareholders, it can do so pursuant to the procedures described in question 14. An amalgamation, plan of arrangement or other transaction structure that requires the approval of the target shareholder at a shareholders’ meeting typically requires 50–60 days in order to comply with applicable laws relating to notice periods for shareholder meetings. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Certain industries, particularly those relating to national security or those that are classified as ‘cultural businesses’ are subject to addi- tional regulations. In addition, certain legislation applicable to certain industries may specify a minimum of Canadian-resident ownership. For example, the requirements of the Canada Transportation Act that currently at least 75 per cent of the voting interests of Canadian airlines must be held by Canadians and the requirements of the Telecommunications Act (Canada) that at least 80 per cent of the voting interests of certain holders of radio authorisations and broadcasting licences be Canadians. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Many tax issues are raised in the context of a business combination, including: (i) capital gains taxes for target shareholders and the ability to defer the payment of such taxes; (ii) exchangeable shares and the tax benefits arising from their use; (iii) the impact of withholding taxes on non-Canadian shareholders and any applicable obligations of purchasers in respect thereof; (iv) the treatment of stock-based incen- tive securities, including stock options; and (v) issues arising from the acquisition of control of a Canadian company (including the loss of tax carry-forwards). Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The employment relationship in Canada is governed by obligations arising from three sources: statutory law, contract provisions and common law (or Civil Code in Quebec), all of which are relevant to employee transfer issues in acquisitions. In terms of statutory obliga- tions, most employers will be provincially regulated with respect to employment matters; therefore, such employers must comply with the provincial laws in each province in which their employees work, as opposed to a single federal law that applies to all operations across the country. In terms of contractual obligations, it is best practice in Canada for employers to use written contracts to document their relationship with each of their employees. Written contracts can rebut certain terms normally implied at common law but cannot contract out of, or avoid, minimum statutory obligations. With respect to the third source of obligations, all provinces in Canada except Quebec use a common law legal system where decisions of our courts imply legal principles affecting the employment relation- ship, including rights related to transfer of employment. Quebec varies materially in two respects. First, it has a civil law system. Second, its French language laws require the use of French in connection with most business activities. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? The Companies’ Creditors Arrangement Act (CCAA) and the Bankruptcy and Insolvency Act (BIA) are the statutes that govern the restructuring of insolvent issuers. The CCAA generally offers greater flexibility for reorganisations and restructurings. CCAA proceedings are court super- vised debtor-in-possession proceedings, with a goal of restructuring the debtor entities. Under the BIA, there are two common forms of court-supervised proceedings, being receiverships and bankruptcies. Receiverships and bankruptcies are not restructuring proceedings, but are designed to allow for the liquidation of a debtor’s assets. In all of these proceedings, out-of-the-ordinary course sales of all the debtor’s assets are permissible. Typically, the purchaser of assets in such proceedings will receive the benefit of a court order, approving the transaction and vesting title in the assets in the purchaser, free and clear of all existing creditor claims against the debtor entity. However, purchasers in such scenarios will not be able to rely on receiving mean- ingful representations, warranties or indemnities from the vendor (the debtor company, a receiver or a trustee in bankruptcy). Usually, to approve such a transaction, the Court will require evidence that the purchaser is offering fair value. This evidence is typi- cally provided by way of appraisals, valuations or an actual marketing process having been conducted for the assets. In Canada, creditors’ claims take priority to the claims of share- holders. Therefore, if purchasers wish to acquire the shares rather than the assets of an insolvent debtor, it will be necessary either to pay all the insolvent debtor’s creditors in full, or to compromise their claims for less than the full amount of those claims. In the latter (compromise) scenario, the creditors must be given the opportunity to vote to approve the compromise of their claims. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Canada is a signatory to the 1997 OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transaction (OECD Anti-Bribery Convention). The Corruption of Foreign Public © Law Business Research 2019
- 32. Canada Bennett JonesLLP Public MA 201932 Officials Act (Canada) (CFPOA) was adopted to implement the OECD Anti-Bribery Convention. Pursuant to the CFPOA, bribery of a foreign public official is a criminal offence and occurs where a person, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advan- tage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organisation for which the official performs duties or func- tions. An offer alone can trigger liability for the CFPOA’s bribery offence. The CFPOA asserts jurisdiction over all Canadian citizens and corporations regardless of where the alleged offence is committed. Amendments to the CFPOA in 2013 include the elimination, on a date to be determined, of the current exception for facilitation payments, which permits payments made to expedite routine acts. In the case of an indi- vidual, section 3(2) provides that the maximum penalty is imprisonment for a term of up to five years and in the case of a corporation there is no maximum fine. Penalties and sanctions arising from the violation of the CFPOA are significant and the Canadian federal government is aggres- sively enforcing the CFPOA. For example, in 2011 a C$9.5 million fine was issued and in 2013 a C$10.35 million fine was issued. In relation to private corporate relationships, section 426 of the Criminal Code addresses ‘secret commissions’ and prohibits providing any reward, advantage or benefit of any kind as consideration for doing or not doing, or for having done or not done, any act relating to the affairs or business of the agent’s principal. Payment of a secret commis- sion is an indictable offence and liable to imprisonment for a term not exceeding five years. Linda Misetich Dann misetichdannl@bennettjones.com Brent Kraus krausb@bennettjones.com John Piasta piastaj@bennettjones.com Ian Michael michaeli@bennettjones.com Chris Simard simardc@bennettjones.com Beth Riley rileyb@bennettjones.com 3400 One First Canadian Place PO Box 130 Toronto ON M5X 1A4 Canada Tel: +1 416 863 1200 Fax: +1 416 863 1716 www.bennettjones.com © Law Business Research 2019
- 33. www.lexology.com/gtdt 33 China Caroline Berubeand Ralf Ho HJM Asia Law Co LLC STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? In China, ‘business combination’ is a legal concept – in simple terms, it generally means bringing together two (or more) separate companies into a single business. The combination of companies can generally be divided into two types: absorption and consolidation. Absorption and consolidation are both types of merger. Absorption is where a company absorbs another company or companies. The absorbing company will continue to exist while the company or companies being absorbed will be brought to an end. Consolidation is where a completely new company is estab- lished and the two or more companies being consolidated are brought to an end. For both absorption and consolidation, the remaining company shall take over all the credits and debts of the original companies. Investors may acquire listed companies through tender offer or agreed acquisition or by any other legal means. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing business combinations in China are as follows: • the Company Law of the People’s Republic of China (PRC), effec- tive since 1 January 2006, revised on 28 December 2013; the latest amendments came into effect on 26 October 2018: this law sets out some general procedures and conditions relating to business combinations, for example, the quorum required to pass a share- holder resolution with regard to a business combination. https:// hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailnewstype= 1provider_id=1origin_id=3334760isEnglish=Ykeyword_ t=keyword_c=keyword=%E5%85%AC%E5%8F%B8%E6%B3 %95crid=6b3944f1-b9fd-213b-c7db-fe8919274027prid= 024d8525-85b5-4327-8c10-f429b7ddb544; • the Securities Law of the PRC, effective since 1 January 2006, revised on 31 August 2014: this law governs the purchase of listed companies (one of the ways of effecting a business combination). https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailne wstype=1provider_id=1origin_id=2441063isEnglish=Ycrid=8 42f73c0-f1b5-436b-8e19-749a3d05e86fprid=d028584a-f410-49e0- a065-e04fd814db55; • the State-Owned Assets of Enterprises Law of the PRC, effective since 1 May 2009. This law sets out some general requirements for combining state-owned companies: for example, an assessment of assets may be required before combination. https://hk.lexiscn. com/topic/legal.php?tps=pg_lsact=detailnewstype=1prov ider_id=1origin_id=469862isEnglish=Ykeyword_t=keyword_ c=5Zu95pyJ6LWE5LqnLOi1hOS6pyzlm73mnIks5LyB5Liake yword=5Zu95pyJ6LWE5LqnLOi1hOS6pyzlm73mnIks5LyB5Liacr id=f6cf334a-88d0-40a6-aac1-6cccb4a2aa16prid=c09ccddf-b5e7- 4e4c-a1e2-f89a8bb8d6c3; • the Accounting Standards for Enterprises No. 20 – Business Combination, effective since 23 July 2014: this regulation focuses on the accounting standards for business combinations. https:// hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailnewstype= 1provider_id=1origin_id=2424426isEnglish=Ycrid= 74faad14-5776-4a01-8409-a2422f42e4f6prid=de68d736-0f2f-4a7f- 82bf-d37900305ddf; • the Circular on the Merger and Separate Establishment of Foreign Investment Enterprises, effective since 1 November 1999, recently revised on 28 October 2015: this regulation sets out the conditions, requirements and procedures around the combination of foreign-funded businesses. https://hk.lexiscn. com/topic/legal.php?tps=pg_lsact=detailnewstype=1 provider_id=1origin_id=3255288isEnglish=Ycrid=2dd b4cb3-7c22-450a-a41d-e438b3d37e39prid=98f69a03-2dd8-4900- 894b-0cace1002949; • the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganisation, effective since 22 February 2008: this regulation stipulates the treatment of enterprise income tax in relation to enterprise reorganisations. https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailn ewstype=1provider_id=1origin_id=231307isEnglish=Ycrid =825d8481-20ee-4906-8c4c-fa11cdde2219prid=e1148431-fede- 4007-9c73-ebfbfc543efd; • Announcement No. 4 [2010] of the State Administration of Taxation – MeasuresfortheEnterpriseIncomeTaxAdministrationofEnterprise Reorganisations, effective since 1 January 2010: this regulation sets out relevant tax matters in relation to enterprise reorganisa- tions. https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=deta ilnewstype=1provider_id=1origin_id=1314122isEnglish=Yc rid=5ca61549-80e9-4e75-9c88-726fce2c58f2prid=3a07e8cc-2a30- 4e4e-9968-5704b5aefcb4; • the Anti-Monopoly Law effective from 1 August 2008 as certain business combinations may also trigger a review by the Anti- Monopoly Bureau, which is a part of the Ministry of Commerce. https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailne wstype=1provider_id=1origin_id=227418isEnglish=Ycrid=ce b0e8ce-e4cd-4bea-a6c9-ff5f78b540eaprid=02bb7d4c-4927-4d83- 8230-00cb0af40807; and • the Administrative Measures for the Takeover of Listed Companies, effective since 1 September 2006, latest revised © Law Business Research 2019
- 34. China HJM AsiaLaw Co LLC Public MA 201934 on 23 November 2014. https://hk.lexiscn.com/topic/ legal.php?tps=pg_lsact=detailnewstype=1provider_ id=1origin_id=2481927isEnglish=Ykeyword_t=keyword_ c=keyword=%E6%94%B6%E8%B4%AD%E4%B8%8A%E5%B8% 82%E5%85%AC%E5%8F%B8crid=d4e8de00-65bd-08a9-1313- 902321a365aaprid=ceb0e8ce-e4cd-4bea-a6c9-ff5f78b540ea. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In general, PRC laws govern transaction agreements with regard to business combinations taking place in China. According to articles 22 and 24 of the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (revised in 2009) (https://hk.lexiscn. com/topic/legal.php?tps=pg_lsact=detailnewstype=1prov ider_id=1origin_id=503892isEnglish=Ycrid=43129efa-2810-45c5- 8901-71dd117334dcprid=7b4a30e0-99c7-45e5-b8e9-6f81eb600803), the equity purchase agreement, capital increase agreement and assets purchase agreements should be governed by Chinese law. Contract Law of the PRC expressly provides that three types of contract shall be governed by PRC laws only: Sino-foreign equity joint venture contracts, Sino-foreign contractual joint venture contracts and Sino-foreign cooperation contracts on developing natural resources. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Filings All company combinations shall be filed with the local Administration of Industry and Commerce (AIC) of the city where the company is consoli- dated or absorbed. They shall also be filed with the authorities issuing the relevant company certificates (eg, tax bureaux) if the combination results in the establishment of a new company or in any change on such certificates. Prior approval is required for specific companies as follows: (i) business combinations relating to solely state-owned companies shall be approved by the State-owned Assets Supervision and Administration Commission (SASAC). In addition, a business combi- nation in relation to important solely state-owned companies must also be approved by the People’s government of the city where the company is incorporated after examination by the SASAC; and (ii) a business combination in relation to foreign-funded companies shall be approved by the local Commission of Commerce). When any major event that may materially affect the trading price of a listed company’s stock and is not in the public domain, the company shall immediately submit an ad hoc report on the event to the securities regulatory authority under the State Council and the stock exchange and make a public announcement thereon, in which the cause of the event, the current status and any possible legal consequences of the event shall be indicated. Fees There are no statutory fees or taxes charged for the approval or regis- tration of business combinations. However, a registration fee for a company’s establishment will be charged by the AIC. Registration is free from 1 January 2015; the regis- tration fee for a company change is a fixed amount (usually 100 yuan) per registration. If the business combination is effected via share transfer, income taxes may be imposed on the seller on the income deriving from the sale of its shares. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? For companies without a foreign investor, all the creditors shall be informed about the decision to combine within 10 days and the decision to merge shall be announced in a newspaper (usually locally) within 30 days of the resolution of combination being executed. For foreign-funded enterprises, all the creditors shall be informed of the decision to combine within 10 days and the decision shall be announced at least three times in a provincial or upper level newspaper published nationwide within 30 days of the preliminary approval being made by the competent administration. After registration of the busi- ness combination, an announcement about this registration shall also be published in a nationwide published provincial or upper level news- paper within 30 days of the company change being registered or a new business licence being issued. Before any tender offer is issued the acquirer shall issue a report on the acquisition of the listed company in a written announcement, which shall include the following matters: • the name and address of the acquirer; • the resolution of the acquirer to the acquisition; • the name of the target listed company; • the purpose of the acquisition; • a detailed description of the shares to be purchased and the number of shares the acquirer plans to purchase; • the period of time for which the offer is valid and the offer price; • the amount of money required for the acquisition and a guarantee thereof; and • the proportion of the number of shares in the target company held by the acquirer to the total number of the target company’s issued share capital as at the date on which the report on the acquisition of the listed company is made. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? There is no specific requirement for disclosure of large shareholdings in an ordinary company except the following for listed companies: • Any investor owning a shareholding reaching 5 per cent of the issued shares of a listed company shall report the shareholding to the China Securities Regulatory Commission (CSRC) and to the Stock Exchange, shall inform the listed company and announce such shareholding via the local agency of the CSRC within three days of the shareholding threshold being reached. • Any investor holding 5 per cent or above of the issued shares of a listed company shall report and announce its shareholding for every 5 per cent increase or decrease in the issued shares in accordance with the above-mentioned procedure. In addition, an investor shall disclose further information as follows. © Law Business Research 2019
- 35. HJM Asia Law Co LLC China www.lexology.com/gtdt 35 If it holds more than 5 per cent but less than 20 per cent of the issued shares of a listed company while it is the first majority share- holder or actual controller of the listed company, or if it holds more than 20 per cent but less than 30 per cent of the issued shares in a listed company, it shall disclose: • the structure of the controlling shareholder, actual controller and the controlling relationship of the investor and his or her partner; • the price of obtaining the relevant shares, the required capital amount, the source of the capital, or other payment arrangement; • whether there is competition, continuous transaction between the business of the investor and the listed company; if any, whether the corresponding arrangement is conducted to ensure the independ- ence of the listed company; • the subsequent plan for the adjustment of the assets, business, personnel, organisation or articles of association of the company in the coming 12 months; • any important transaction between the investor and the listed company during the past 24 months; and • evidence and documents demonstrating the good faith of the investor. If the purchaser’s shareholding reaches 30 per cent of the issued shares in a listed company and it continues to purchase shares, it shall issue an offer of purchase to all the shareholders of the listed company. However, in the event that the shareholding exceeding 30 per cent is due to the business combination being approved by the government or SASAC, such shareholder may apply to the CSRC for an exemption from the offer procedure. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? There are no specific duties of the directors, managers or controlling shareholders of an ordinary company, while the following duties apply for listed companies: General duties The directors and managers of a listed company shall be responsible for the safeguarding of the interests of the company and its shareholders; the board of directors shall not abuse its official powers by creating inappropriate obstacles for a takeover, shall not use company resources to provide any form of financial assistance to the acquirer, and shall not undermine the legitimate rights and interests of the company and its shareholders. The controlling shareholder of a to-be-purchased listed company shall not harm the company or the other shareholders by abusing its shareholders’ rights. Regarding purchase by offer The board of directors of a listed company shall examine and investi- gate the identities and credit situations of the purchasers, advise the shareholders on whether to accept the offer to purchase and hire inde- pendent financial consultants for professional advice. The board of directors shall submit the report of the board and the professional advice of the independent financial consultant to the CSRC within 20 days of receiving the offer of purchase. After the purchaser announces the offer and before the purchase is completed, the board of directors shall not, without the approval of the shareholders’ meeting, dispose the assets of the company, or adjust the main business of the company, or provide guarantees or loans on behalf of the company, or take any other actions that seriously affect the assets, debts, rights or operation of the company. The directors of the company to be purchased shall not resign during the purchase period. Regarding purchase by agreement The board of directors of a listed company to be purchased shall disclose promptly any situations that may damage the company. For example, the board of directors shall disclose if the controlling shareholder has not paid off a debt to the company, or if the guarantee provided to the company has not been released. The controlling shareholder, who intends to transfer his or her shares of the listed company to the purchasers by agreement, shall investigate the identity, credit situation and offer from the purchasers and disclose information of such investigation in a report regarding the change of shareholding. Regarding indirect purchase If the actual controller and the shareholder controlled by the actual controller of the listed company do not report or announce the control- ling relation, the board of directors of the company shall refuse the proposal submitted by such controller or shareholder, and shall report the situation to the CSRC and the Stock Exchange. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Shareholders have the power to approve the resolution of business combination. Specific requirements are as follows: • for limited liability companies, the business combination shall be approved upon by at least two-thirds of all the shareholders with voting rights, whether present at the shareholders’ meeting or not; and • for companies limited by shares, the business combination shall be approved upon by at least two-thirds of all the shareholders with voting rights present at the meeting. There is no specific regulation regarding the appraisal or similar rights of the shareholders in business combinations. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? The laws and regulations of the PRC do not expressly define the term ‘hostile transactions’ or stipulate detailed countermeasures for hostile transactions. However, the considerations of disclosure of substantial share- holdings in question 6 cover the unsolicited transactions. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? There is no statutory ‘break-up fee’ stipulated by Chinese laws and regulations. © Law Business Research 2019
- 36. China HJM AsiaLaw Co LLC Public MA 201936 However, regarding limited liability companies, if any of the shareholders wants to transfer his or her shares to a third person, or the company is proposed to be combined with other companies, the other shareholders who disagree with such transfer or combination could have the following options to restrict the ‘break-up’ or transfer, according to the PRC Company Law: • to purchase the shares to be transferred at the equivalent price offered by the third person; or • to request the company to purchase their shares at a reason- able price. Besides the above-mentioned regulations, the ‘break-up fees’ could also be based on the termination and damage terms, if any, in the joint venture agreement between the shareholders. The parties of a contract could either set a fixed amount or rate of liquidated damages for the break-up or stipulate that the damages shall be subject to actual losses therefrom. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Government agencies do influence or restrict the completion of a business combination if it relates to solely state-owned companies or state-owned assets. See (i) under ‘Filings’ in question 4. Such regulations are believed to aim at protecting state-owned assets for the purpose of national security. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? In practice, there are various types of transaction that occur in China, such as leveraged buyouts, venture capital, mezzanine capital and growth capital transactions, angel investments and private investment in public equity. Financing may be conditional in a cash acquisition. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? The buyer and the seller shall include all the transaction details (ie, term, conditions, period) in the transaction agreements. In China, most of the certificates, application letters and reports shall be submitted to the relevant and competent authority for approval. As a consequence, the seller is responsible for providing the related documents to the buyer or the relevant authority, such as the company’s business licence, the audit report, the verification report, the asset assessment report, the resolution of the board of directors or shareholders and the proof of tax payments. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? According to the laws and regulations of the PRC, minority stockholders may be evicted. In a limited liability company, stock can be transferred among stockholders. However, if the stockholder wishes to transfer to any non- stockholder, he or she shall be subject to the approval of more than half of the other stockholders. The stockholder shall notify the other stock- holders in written form about the transfer of stock for their approval. If any of the other stockholders fails to give a reply within 30 days of the receipt of the written notice, it shall be deemed to have agreed to the transfer. If half or more of the other stockholders disagree with the transfer, the stockholders who disagree with the transfer shall purchase the stock to be transferred. If they refuse to purchase shares, they shall be deemed to have agreed to the transfer. Under the same conditions, the other stockholders have a pre-emptive right to purchase the stock rights to be transferred upon their approval. In a joint-stock limited company, stock shall be transferred to anyone in a lawfully established stock exchange or by any other means as prescribed by the State Council. In addition, the stock held by the initiators shall not be transferred for a period of one year starting on the day of incorporation of the company. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Apart from the limitations on foreign investments, China adopts a strict foreign exchange control policy which brings complexity to cross-border transactions if the target company is a Chinese public company. The foreign acquiring party must apply for approval to open a bank account in foreign currency in order to receive capital for the transaction with the local Administration of Foreign Exchange where the listed company is located within 15 days upon its receipt of the official approval from the Ministry of Commerce. All transactions must generally be completed within 180 days upon receipt of the official approval. If the foreign acquiring party fails to complete the whole transaction within the above time limit, the official approval will become invalid automati- cally. The foreign acquiring party shall, upon the approval of the Chinese Administration of Foreign Exchange, purchase foreign currency and remit the capital abroad. The Catalogue of Industries for the Guidance of Foreign investment was issued jointly by the National Development and Reform Commission and the Ministry of Commerce to regulate the restricted and prohibited industry to foreign investments. For example, the industry of production of radio, television programmes and movies only allows foreign invest- ments in the form of cooperative joint venture. For press organisations, foreign investments are completely forbidden. Hence, it is suggested that the foreign investor should first check whether the industry to be entered is restricted or forbidden to foreign investments. Specific laws and regulations apply to cross-border transactions: • the Interim Provisions on Restructuring State-owned Enterprises with Foreign Investment, which took effect on 14 September 1998 (https://hk.lexiscn.com/topic/ legal.php?tps=pg_lsact=detailnewstype=1provider_ id=1origin_id=14450isEnglish=Nkeyword_t=keyword_c= keyword=cnen=tcrid=5adb4224-92c3-47da-82f4- a6f19be96c61prid=94e5d09e-da1d-4f49-bbb5-620ff00d070f); • Ministry of Commerce on Promulgation of the Provisions on MA of a Domestic Enterprise by Foreign Investors, which took effect on 22 © Law Business Research 2019
- 37. HJM Asia Law Co LLC China www.lexology.com/gtdt 37 June 2009 (https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact =detailnewstype=1provider_id=1origin_id=503892isEnglish =Ycrid=a52c3e12-0d65-4ecc-997a-4b200678d6afprid=76cc6e2f- b104-40e0-8e50-fdd17ddab8f4); • Provisions for the Alteration of Investors’ Equities in Foreign-funded Enterprises, which took effect on 28 May 1997 (https://hk.lexiscn. com/topic/legal.php?tps=pg_lsact=detailnewstype=1 provider_id=1origin_id=479055isEnglish=Ycrid=15c 7cfa6-23ae-411c-b183-cfc28ff6c460prid=20218e33-1019-4805- b500-87c1264ae10a); and • the Catalogue of Industries for the Guidance of Foreign Investments (revised in 2017), which took effect on 28 July 2017 (https:// hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailnewsty pe=1provider_id=1origin_id=3090984isEnglish=Ycrid=6c 6abd19-d439-4d92-8cd2-2efd190a9fa8prid=6701715e-f2f7-5bbd- 444b-a708110141e7). Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? As mentioned in question 15, the foreign acquiring party must apply for approval to open a bank account in a foreign currency in order to receive capital for the transaction with the local Administration of Foreign Exchange where the listed company is located within 15 days upon its receipt of the official approval from the Ministry of Commerce. All transactions must generally be completed within 180 days of receipt of the official approval. In addition, when merging a domestic enterprise to establish a foreign investment enterprise, the foreign investor shall, within three months of the day the foreign-funded invested enterprise’s business licence has been issued, pay all the consideration to the shareholders who transfer to them equities or to the domestic enterprise that sells the assets. In the case of any particular circumstance under which such period would need to be extended, the foreign investor, upon approval by the relevant authority, shall pay 60 per cent or more of the consideration within six months as of the day the business licence of the foreign-funded enterprise has been issued, and shall pay in full the consideration within one year, and the proceeds shall be distributed according to the proportion of investments it has actually contributed. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? The most important industry specific regulatory scheme in China is the Catalogue for Guidance for Foreign Investment (CGFI), which indicates the Chinese government’s directions in controlling foreign investments. Industries have been classified into four different categories: allowed, encouraged, restricted and prohibited. For restricted industries, these categories also reflect the extent to which foreign participation is allowed when investing in China. For example, foreign shareholdings in a life insurance company shall not exceed 50 per cent, and those in a securities company shall not exceed one-third of the total shares, and the Chinese shareholder shall be the majority shareholder of a joint-venture security company (arti- cles 26 and 27 of the Restricted Industries section of the CGFI). These may represent limits on potential targets and may have an impact on investment strategies, as exit strategies are more difficult to implement when one is not the majority shareholder. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Themaintaxesdueincaseofbusinesscombinationsaredescribedbelow. Stamp duty Stamp duty shall be charged to the buyer and seller at a rate of 0.05 per cent of the consideration for the transfer of shares. Individual tax The shareholders of the target company (both individual and corporate) shall also be subject to income tax, whether individual (article 2 of the Individual Income Tax Law) (https://hk.lexiscn. com/topic/legal.php?tps=pg_lsact=detailnewstype=1prov ider_id=1origin_id=3315959isEnglish=Ycrid=47fab501-482e-431f- b931-4d64dc5ad898prid=75547705-292b-4e1c-bb9f-4847ab6b4715) (https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailne wstype=1provider_id=1origin_id=3371280isEnglish=Ycrid=b5 9dcf47-6b3a-435c-bd4f-02c362401610prid=6186507b-667f-4f5d-9e29- 0a3ae0e6ac9c), based on the purchase price of the transaction. Value added tax (VAT) Under Chinese tax laws, a share acquisition is more tax-effective than an assets acquisition. For instance, when purchasing tangible assets, VAT shall apply to the purchasing party according to the tax rate appli- cable to each type of asset (article 1 of the Interim Regulations of the PRC on VAT) (https://hk.lexiscn.com/topic/legal.php?tps=pg_lsact =detailnewstype=1provider_id=1origin_id=3198756isEnglish=Y crid=d5d63527-e24f-4a14-ade0-35cf24052c2cprid=779c831c-6bf5- 48e7-ae60-e325ac0fef0d). When transferring ownership of real estate or intangible assets, the business tax was replaced by the VAT. The transferring ownership of real estate is subject to 11 per cent VAT, while the transferring of intangible assets is subject to 6 per cent VAT and the buyer shall pay a deed tax varying between 3 per cent to 5 per cent if the assets involve land-use rights or property titles (articles 1 and 3 of the Interim Regulations of the PRC on deed tax) (https:// hk.lexiscn.com/topic/legal.php?tps=pg_lsact=detailnewstype=1pr ovider_id=1origin_id=226394isEnglish=Ycrid=a0e22b11-df40-4d57- 98ac-70ae82f1d8a8prid=18546fb6-5af0-4115-970b-935470dbb052). The payment method further influences the tax payable in a trans- action. In the event that the buyer will pay by cash, the cash received by the shareholder of the target company shall be subject to income tax. If the acquirer pays with unconvertible bonds, the interest earned on the bonds received by the shareholder shall also be subject to income tax, but the interest paid by the acquirer shall be deducted prior to taxation. If the acquirer pays with convertible bonds, the acquirer can defer the process of converting the bonds to shares. By doing so, the interest paid by the acquirer shall be deducted from the taxable amount and the tax on capital gains from the conversion shall also be deferred, which is beneficial to the acquirer. Finally, if the transaction was carried out through the swapping of shares, it shall be exempted from income tax, as no actual monetary income was earned as a result of the transaction. © Law Business Research 2019
- 38. China HJM AsiaLaw Co LLC Public MA 201938 Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Mergers and acquisitions of a company will not directly influence the current employment relationship between the acquired company and its employees If the new shareholder wishes to terminate the employ- ment relationship with the employees, severance pay shall be given in accordance with the related labour laws and regulations (articles 47 and 87 of the Employment Contract Law of the PRC) (https://hk.lexiscn. com/topic/legal.php?tps=pg_lsact=detailnewstype=1prov ider_id=1origin_id=2335654isEnglish=Ycrid=eac9ba3f-2e9e-4df3- b042-31ae56c8c0a2prid=735d9a8a-fe66-4a35-8af9-073033c05f78). Employment issues, especially the compensation of senior managers of the target company or the compensation to settle the laid-off employees in a state-owned enterprise are important issues to be addressed in the purchase agreement and may sometimes influence the costs of the entire transaction. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? According to the Company Law of the PRC, all the debts of the acquired company shall be borne by the acquiring company or the new company after combination. Therefore, a due diligence report issued by a law firm, a verification report issued by an accounting firm and other relevant documents (ie, asset certificate of the acquired company) are necessary and taken into account to determine the total amount of debts. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? There are no specific rules relating to anti-corruption, anti-bribery and economic sanctions considerations in connection with business combi- nations, therefore, general rules of criminal law on corruption, bribery and economic sanctions will apply to business combinations. As to corruption, it is only applicable to any state functionary, and any person authorised by state organs, state-owned companies, enter- prises, institutions or people’s organisations to administer and manage state-owned property who, by taking advantage of his or her office, appropriates, steals, swindles public money or property or by other means illegally takes it into his or her own possession. The threshold of the crime is 5,000 yuan or above, or the amount is less than 5,000 yuan, but the circumstances are relatively serious. As to the bribery, it is applicable to any individual or legal entity who offers money or property to any state functionary, any person authorised by state organs, state-owned companies, enterprises, institu- tions or people’s organisations to administer and manage state-owned property, and any state organs, state-owned companies, enterprises, institutions or people’s organisations for the purpose of gaining illegal benefits. Bribery is defined as illegal benefits obtained by blackmailing. In addition, corruption and bribery are subject to financial sanctions. Any person who takes into his or her own possession illegal gains derived from bribery shall be convicted and punished in accordance with the Criminal Law (https://hk.lexiscn.com/ topic/legal.php?tps=pg_lsact=detailnewstype=1prov ider_id=1origin_id=1403367isEnglish=Ycrid=277d3306-ffd2-437f- 9d71-08e3f8f49b50prid=096d8852-0120-4e9a-af73-0b08e3451490). Caroline Berube cberube@hjmasialaw.com Ralf Ho rho@hjmasialaw.com B-1002, RF Full Square Plaza No. 16 Ma Chang Rd ZhuJiang New City, Tianhe District Guangzhou, Guangdong 510623 China Tel: +86 20 8121 6605 Fax: +86 20 8121 6505 www.hjmasialaw.com © Law Business Research 2019
- 39. www.lexology.com/gtdt 39 Colombia Santiago Gutiérrez,Juan Sebastián Peredo and Mariana Páez Lloreda Camacho Co STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Publicly listed businesses typically combine through public tender offers in Colombia. A transaction carried out through a public tender offer (as it is required whenever someone intends to acquire 25 per cent of the outstanding shares with voting rights of the listed company, or if a beneficial owner holds at least 25 per cent and intends to increase its interest in more than 5 per cent of the outstanding shares with voting rights) allows to do the payment with shares of listed companies. Nevertheless, Colombian regulation requires that at least 30 per cent of the consideration must be offered and paid in cash. In any case, the minimum bid allowed is for 5 per cent of the outstanding shares with voting rights of a listed company Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main Colombian laws and regulations for business combinations and acquisitions of publicly listed companies are: • Law 964 of 2005 (Capital Markets Statute); and • The Decree 2555 of 2010 (unified financial and capital markets regulation). Additionally, operative guidelines coming from the Colombian Stock Exchange should apply and antitrust laws, such as Law 155 of 1959, Decree 1302 of 1964, Decree 2153 of 1992, Law 1340 of 2009 and the guidelines of the Superintendence of Industry and Commerce, specifi- cally the Unified Circular and Resolution 10930 of 2015, among others may become relevant in the event that antitrust clearance proceedings are required. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In addition to the laws and regulations described in question 2, as a general principle, public tender offers in Colombia are governed by Colombian law. Pre-bid agreements may be entered into for purposes of regulating and obliging a party to carry the bid and the other to accept (notification of such agreements must be given to the Superintendence of Finance and the Colombian Stock Exchange). FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Regarding the combination or acquisition of a publicly listed company, a formal bid request from the entity that intends to carry a public tender offer shall be filed before the Financial Superintendence. This request should be filed along with the documents setting forth its intention to make a public tender offer and should include the following: • the offering memorandum; • the draft of the public tender offer advertisement; • the board of directors’ resolution authorising the interested party to submit the public tender offer; • the certificate of incorporation and good standing issued within the past three months; • the copy of the clearance required from any other Superintendence (for example, the Superintendence of Industry and Commerce), if applicable; • the representation made under oath by the interested party stating that there are no other pre-agreements different from those disclosed in the offering memorandum; and • any other documents or additional information requested by the Financial Superintendence in order to verify that the legal require- ments are duly satisfied. Additionally, a copy of the disclosed pre-bid agreements should be filed, along with the other public tender offer documents. Furthermore, a filing before the Superintendence of Finance must also be made for the approval of share purchases of 10 per cent or when a shareholder with a 10 per cent interest acquires any number of additional shares of a financial, insurance or stockbroker institution. Finally, an antitrust analysis should be carried out in order to determine if the business combination or acquisition has to be approved or notified to the Superintendence of Industry and Commerce. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Under applicable securities regulation, listed companies are generally required to inform the market, through the Superintendence of Finance, all material information in a truthfully, clearly and in timely manner. Any events related to the merger or acquisition of a company must be reported in this regards. © Law Business Research 2019
- 40. Colombia Lloreda Camacho Co Public MA 201940 Disclosure duties entail all material information that would have been reviewed by a prudent and diligent expert to decide whether to buy, sell or keep certain securities related to the proposed business combination. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? In all mergers and spin-offs, all of the shareholders have an inspec- tion right to review the basis of the operation, such as the merger agreement, the spin-off project, the appraisal of the companies and the financial statements. Individuals or a group of individuals representing one beneficial owner who intends to acquire 25 per cent of any given listed company are required to make a public disclosure of their intent through the public tender offer process. Likewise, a beneficial owner that holds 25 per cent of a listed company is required to make a public disclosure of the intent to acquire 5 per cent or more of the company through a public tender offer. During the six months following the disclo- sure of a public tender offer, any stockholder may solicit the offeror to provide information pertaining to the proposal and request the offeror to acquire their stock. Special rules apply to concurrent offers and exchange offers. For instance, in the event that 100 per cent of the stockholders have previ- ously agreed in writing to sell or buy, the public tender offer mandatory procedures would not be applicable. Regarding concurrent offers, see question 9 about unsolicited transactions. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Directors or managers shall guarantee that shareholders have the right to inspect the company’s records before a shareholders’ meeting in order to approve the above-mentioned business combination or when- ever financial statements of the company must be approved. Also, the agenda of shareholders’ meetings where a merger, spin-off or changes in the type of legal entity must include specific consideration of the withdrawal right to which dissident or absent shareholders are enti- tled if the transaction lessens their economic rights or implies higher liability for such shareholders. In these cases, the board of directors shall take into account the best interests of the company when making its recommendation. The directors and managers must protect the rights of the minority shareholders whenever a shareholders’ meeting decision may unjustly affect their rights. The same duty is imposed on the control- ling shareholders. Corporate decisions, which may be considered as an abusive exercise of the majority or minority rights, can be voided by the Superintendence of Companies. Exercising the shareholders’ rights with the intent of harming the company or another shareholder may also be declared as an illegal act by the Superintendence of Companies. Parties harmed by the conducts of other shareholders are allowed to file claims before the Superintendence of Companies to seek compensation for any damages they suffered. Additionally, and pursuant Law 446 of 1998, it is possible for minority shareholders to initiate a proceeding to protect their rights before Superintendence of Finance, whenever these have been breached by the managers, directors or other shareholders. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? As a general rule, only mergers, spin-offs, capital reductions and changes in the type of the corporate structure and the financial statements required for initial public offers must be approved at a shareholders’ meeting. In these cases, the general principle is that the quorum and majorities are the following: • quorum: two or more shareholders jointly accounting for over 50 per cent of the company’s shares must be present or repre- sented at the shareholders’ meeting in order to validly undertake any discussion pertaining to the company’s affairs. Except for listed companies, the by-laws may establish a higher quorum for the approval of such decisions; and • majority: shareholders may approve a business combination when the majority of the votes at the meeting are affirmative. Nevertheless, the by-laws or shareholders’ agreements may require the shareholders’ approval for other types of business combinations. In the event of mergers of financial institutions, minority share- holders who hold no less than 5 per cent of the outstanding shares of one of the intervening companies may request an independent appraisal of the companies involved, which shall be mandatory for the companies involved, unless at least 85 per cent of the outstanding shareholders of each intervening company vote against it. In this last case, the share- holders who did not approve the majorities’ appraisal of the shares shall be entitled to a withdrawal right and their shares shall be paid at the price set forth in the independent appraisal from a capital reduction or reacquisition of the company’s own shares, under the terms and conditions set forth by the Superintendence of Finance. Whenever the combination involves a capital contribution in kind, the appraisal of the contribution shall be approved at the shareholders’ meeting. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Managers in Colombian listed companies do not hold the right to block a takeover transaction, and as a general rule do not play any active role in a given transaction; instead the choice to sell share relies mostly in the shareholders’ decision. Therefore, hostile transactions are not gener- ally applicable in Colombia. During a public tender offer proceeding, it is legally possible for other interested parties to compete by submitting a new public tender offer, in which case such a competing public tender offer must comply with the same requirements as to the original public tender offer. Pursuant to Decree 2555 of 2010, the following are the requirements that should be met by a competing public tender offer: • the offeror of a competing public tender offer cannot be the same beneficiary as the one of the original public tender offer; • the first advertisement of the competing public tender offer should be published at least two days before the expiration date of the acceptance period of the original public tender offer; • the competing public tender offer cannot be for a lesser amount or lesser price than the original public tender offer; • the competing public tender offer must be better than the original public tender offer. It is understood as a better offer if the price is at least 5 per cent higher or if the amount of stock to be acquired is at least 5 per cent higher or, if the price or the amount of stock is equal to that in the original public tender offer, if the minimum © Law Business Research 2019
- 41. Lloreda Camacho Co Colombia www.lexology.com/gtdt 41 number of shares to be accepted to trigger the public tender offer is less than the minimum amount in the original public tender offer; • if the original public tender offer contemplates consideration in securities, then the competing public tender offer may offer cash and securities; likewise, if the original public tender offer contem- plates consideration in cash, then the competing public tender offer can only offer consideration in cash; • if the original public tender offer contemplates upfront payment, then the competitor has to offer the same form of payment; on the other hand, if the original public tender offer contemplates payment in instalments, then the competing public tender offer has to present the payment under the same terms or better; • once the first advertisement of the competing offer is published, any acceptance already made to the original public tender offer will be automatically made to the competing offer; and • in any case, the interested party may at any time improve the conditions of the original public tender offer, following the same procedure for competing offers. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? In general, break-up fees would not be permitted in Colombia, if the agreement or provision obstructs the right of the shareholders to accept competing public tender offers by third parties. Nevertheless, the Superintendence of Finance, when consulted on the matter, has not been slow to accept break-up fees when the shareholders are allowed to sell, and end up selling their shares, to a competing bidder. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? In general, governmental agencies cannot intervene in, influence or restrict the completion of a business combination. The Superintendence of Companies or the Superintendence of Finance, as applicable, may restrict a merger or a spin-off whenever the applicable procedures are not abided by, and creditors or minority shareholders’ rights are affected. Under securities regulations, the Superintendence of Finance may influence or restrict the completion of a business combination whenever market transparency may be affected. Furthermore, the Superintendence of Finance may block mergers among financial insti- tutions if such a transaction affects the public interest or the financial system’s stability. Additionally, pursuant the bankruptcy statute, the Superintendence of Companies shall approve certain transactions that may involve business combinations. Foreign investment regulations may be applicable in very specific scenarios, taking into account that that in Colombia, foreign invest- ment is allowed in all sectors of the economy with the exception of the following: (i) activities related to national security; (ii) processing and disposal of toxic, hazardous or radioactive waste not originated in the country; (iii) private security and surveillance (which in some specific cases such as private security companies can only be provided by legal entities whose equity holders are Colombian individuals, and in others such as valuables transportation foreign individuals or companies can also be equity holders); and (iv) legal entities operating open television services (for which foreign investment cannot exceed 40 per cent of the company’s capital stock). In the event a business combination violates such prohibition, the transaction could be considered null and void. Additionally, in certain telecommunication markets, in which the use of the electromagnetic spectrum is licensed by the state, combination may require divest- ment of licences if, by virtue of the transaction, the thresholds of the maximum licensed spectrum are exceeded. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Public tender offers shall be addressed to all the shareholders of the same class of shares of the target company in equal conditions. The only condition for the acceptance of a public tender offer that can be imposed is that the acceptance is made for ‘all or none of the shares’, in which case the acceptance of the public tender offer is made only if all of the shares from the offeree are acquired by the offeror. Acquisitions through a public tender offer may be paid in cash, in foreign currency (subject to Colombian foreign exchange regulations) or with securities. In cash acquisitions, the availability of financing would not be allowed as a condition to a cash offer. Furthermore, before presenting the public tender offer, the interested party shall grant collateral, as additional security for performing its obligations under the public tender offer. If the consideration is in cash, then the collateral may be a cash deposit in a Colombian or a foreign bank, a standby letter of credit, a performance or blanket bond issued by an insurance company, treasury bonds issued or guaranteed by the Republic of Colombia or the assignment of rights in a collective investment fund. The beneficiary of the collateral shall be the stock exchange. Pursuant to Decree 2555 of 2010, when the consideration for the acquisition (through a public tender offer) consists of securities, they must be free of any liens or limitations of ownership and must be pledged as collateral for satisfaction of the payment. Further, in these cases in which the payment of the acquisition is to be made with securi- ties, at least 30 per cent of the shares to be acquired through the public tender offer must be offered to be paid in cash. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Financing, whenever applicable to these types of transactions, is in most cases a contractual matter. Hence, financing is not generally dealt within the transaction documents as such. As a general rule, financing comes from third parties such as banks and would, most of the time, come down to the negotiation and execution of a credit agreement. When a credit agreement is executed by the purchaser of shares, the purchaser may agree to pledge the shares. The financing of the acquisition of shares of Colombian companies may be made either by foreign financial institutions or by Colombian financial institutions pursuant to Colombian foreign exchange regula- tions. If the financing is made by a Colombian financial institution for the acquisition of shares of the same financial institution or of a third financial institution, it can only be made provided that the shares are © Law Business Research 2019
- 42. Colombia Lloreda Camacho Co Public MA 201942 offered in an initial public offer or in a privatisation process and that the financing is made over other securities that hold a value of at least 125 per cent of the financed amount. Taking into account that financing is generally regulated by contract, the obligations that may be agreed by the seller to assist the purchaser’s financing must also be included as contractual matters. As a general practice, parties agree that the seller must collaborate with the purchaser to obtain the financing by supplying the information of the target company or of the assets that may be required by the finan- cial entity. Finally, Law 1676 of 2013 sets forth a legal framework for movable guarantees, which provide higher access to financing and may be used for financing business combinations. This law and its regulation creates a simple and non-expensive registry for movable securities; provide publicity that makes a security effective against third parties; allows for securities to be granted under different priorities and to different creditors; and, to establish a direct payment to the secured creditor or a simplified enforcement proceeding of the movable security by a notary public, a chamber of commerce or a judicial instance. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? A majority shareholder is obliged to offer the shares of the minority shareholders when the majority shareholder holds more than 90 per cent of the shares of the listed company or when delisting the company. Also, when delisting the company and some of the shareholders voted against delisting or did not attend the shareholders’ meeting in which the delisting was approved, they may solicit a mandatory public tender offer addressed to them, which must be carried within three months of the shareholder meeting. In order for a delisting to become effective, this mandatory public tender offer must be completed. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Cross-border transactions have the same benefits and may be struc- tured under the same circumstances as local business combinations. The foreign investment and exchange regulations provide the respective legal framework for foreign investors. Foreign investors are generally allowed to enter into transactions in Colombia by investing in all indus- tries, except for activities related to national security; processing and disposal of toxic, hazardous or radioactive waste not originated in the country; and private security and surveillance (which in some specific cases such as private security companies can only be provided by legal entities whose equity holders are Colombian individuals, and in others such as valuables transportation foreign individuals or companies can also be equity holders); and legal entities operating open television services (for which foreign investment cannot exceed 40 per cent of the company’s capital stock). Certain regulatory conditions or approvals may apply, for example, for foreign investment in financial institutions. Whenever a cross-border transaction is structured, the only addi- tional and particular requirement for foreign investors is that they must register their investments with the central bank after the transaction takes place (the manner to register the investment may depend on the transaction to be completed by the foreign investor). The purpose of this registration is to obtain the proper exchange rights for their investment, such as drawing rights abroad over net profits and capital reimbursements. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? In public tender offers a minimum period of 10 business days and a maximum of 30 business days should be granted to stockholders for the acceptance of the public tender offer. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? The following industries are subject to additional regulations: • financial, insurance and banking: Decrees 633 of 1993 and 2555 of 2010 and the regulations from the Treasury Ministry and the Financial Superintendence; • television industry: Laws 14 of 1991, 182 of 1995, 335 of 1996, 680 of 2001 and 1507 of 2012 and the regulations of the National Television Agency, Communications Regulation Authority and the Spectrum National Agency; • aviation industry: Commerce Code and Colombian Aeronautical Regulations; • health services: Laws 100 of 1993, 1122 of 2007 and 1438 of 2011 and the regulations from the Ministry of Health and Social Protection; • agricultural industry: Laws 101 of 1993 and 811 of 2003 and the regulations from the Agriculture Ministry; • public services: Laws 142 of 1994, 143 of 1994 (electricity) and 689 of 2001 and the regulations from the Superintendence of Public Services; and • telecommunications (other than the television industry): Law 1341 of 2009 and the regulations from the Information and Communication Technologies Ministry and the Communications Regulation Commission. Companies holding governmental concessions or licences must follow the necessary proceedings for amending said concessions or licences if as a result of a business combination the holder of the concessions or licence changes. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Income tax is exempted in the event of the transfer of shares listed on the stock exchange whenever the amount of shares transferred does not exceed 10 per cent of the company’s outstanding shares. However, if the shares were held for more than two years, capital proceeds tax over its profits will be of 10 per cent. If the shares were held for less than two years, then the profits are charged with income tax at the rate determined on a yearly basis, which for 2019 is 33 per cent. If the seller is a tax resident in Chile, Spain, Canada, Mexico, Switzerland, South Korea, India, Portugal, the Czech Republic or coun- tries of the Andean Community of Nations (Ecuador, Peru and Bolivia), by applying double taxation treaties, lower rates may apply. In any case, if the seller is an entity domiciled abroad, it would be required to file a special income tax return and pay the corresponding tax for the transfer of the shares, if any, within one month of the date on which the transfer © Law Business Research 2019
- 43. Lloreda Camacho Co Colombia www.lexology.com/gtdt 43 takes place. This filing is mandatory regardless of the capital gain or loss arising from the transfer. An income withholding tax on the gross income may apply, if the buyer is a Colombian resident. Whether certain conditions are fulfilled, corporate reorganisations such as capitalisations in kind, mergers and spin-offs may be treated as a tax-free transaction. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Once a public tender offer takes place, the employees may continue as employees of the resulting company and there are no particular requirements for the target company to inform or consult its employees about the public tender offer. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? For combinations or acquisitions involving a target company in an insol- vency proceeding, and in the event that the target owns shares not registered in the National Registry for Securities and Issuers – RNVE, the target may request the Superintendence of Finance to tempo- rarily subscribe those shares in the RNVE in order for them to be sold through an initial public offer. Since this procedure is exclusively to sell these securities, it is not allowed to register such securities before the Colombian stock exchange and the registry before the RNVE will only last six months. Pursuant to Law 1116 of 2006, if the target company is undergoing restructuring proceedings, no sale of assets, going concerns, spin-offs or mergers are allowed without the previous authorisation from the relevant superintendence. Once the restructuring agreement is in force, it shall be reviewed to ascertain whether there are limitations to carrying out business combinations. Special consideration must be given in the case of a merger, as the resulting company will be responsible for all the obligations under the agreement with the target’s creditors. Furthermore, the restructuring committee will also have powers over the resulting company, and the shareholders, managers and directors will be subject to the codes of conduct adopted with the restructuring agreement. During restructuring proceedings in case of a merger or a spin-off the following rights are suspended: (i) withdrawal rights of the shareholders; special provisions for bondholders; and (ii) the rights of the creditors for requesting better guarantees. In addition, in the case of sale of a going concern the creditors may not oppose to the sale. In the event that the target company has been declared in disso- lution, a merger may only take place within 18 months from the date of dissolution, and the absorbing or resulting company shall have the same corporate purpose as the absorbed company. Furthermore, a new company may be incorporated in order to purchase the assets of the company under dissolution and continue with the same business. If the business is under mandatory liquidation, no special considerations should be accounted for in the sale of assets, provided that the deal is made on an arm’s-length basis. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Law 1474 of 2011 enacted the anti-corruption statute that contains several provisions sanctioning corrupt practices. This statute created the criminal offence of ‘private corruption’ that sanctions any person that bribes a director, employee or adviser of a company, in order to favour itself or a third party, against the interest of the company, with four to eight years of prison and a fine of 10 to 1,000 minimum legal monthly wages. In addition, the director, employee or adviser who accepts the bribe will be sanctioned with the same penalty and fine. In the case of the conduct representing economic damage to the company, the crime may be punished with prison terms of between six and 10 years. Furthermore, pursuant to the anti-corruption statute, the crim- inal offence of ‘disloyal management’ for the director, shareholder, employee or adviser of a company that for its own benefit or benefit of a third party, abuses its duties, and commits fraud in order to dispose of the assets of the company or to create obligations for the company, shall be sanctioned with four to eight years in prison and a fine of 10 to 1,000 minimum legal monthly wages. The use by employees, advisers, directors or managers of a company’s privileged non-public information known because of their office or duties, in order to profit from it, either for themselves or for third parties, shall be sanctioned with one to three years’ imprisonment and a fine of five to 50 minimum legal monthly wages. The same penalty would be applicable to any person that due to its profession or office, obtains profit for itself or for third parties, by using privileged information for the negotiation of securities, if such information is not publicly known. In addition, the Anticorruption Statute provides an absolute prohi- bition on former public officials managing private interests. Therefore, it is forbidden for public officials, for up to two years after leaving public office, to directly or indirectly provide advice or represent the interests of companies regarding matters related to the public entity to which the former public official rendered its services, or that were subject to inspection, surveillance, control or regulation by the public entity to which the former public official rendered its services. This prohibition is indefinite with respect to particular matters that were decided by the former public official. In early 2016, Colombia enacted Law 1778 of 2016 by which the OECD standards against bribery and corruption were adopted. Under this new law, bribery (including transnational bribery) and corrupt acts can be punishable not only as a criminal offence, but also through an administrative proceeding conducted by the Superintendence of Companies. The new sanctions provide for fines to companies involved in local and transnational acts of corruption of up to 200,000 times the minimum monthly wage (in 2019, approximately 165 billion pesos), and can even lead to the suspension or the cancellation of the corpo- rate chart. © Law Business Research 2019
- 44. Colombia Lloreda Camacho Co Public MA 201944 UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? At the present time, there are no current proposals to change the regu- latory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a publicly listed company. However, Colombia’s fintech industry is growing and increasing rapidly, proposing new structures to approach different business transactions, including the way the stock exchange market is approached, and consequently the ways a business combina- tion or acquisition of a public company may be approached. Recently, in 2018, the Decree 1357 of 2018 was issued, creating a new type of securities: equity and debt crowdfunding securities that are not considered part of the stock exchange market and are particularly traded and meant to finance start-up companies. In the meantime, these securities have not been yet issued and for this we cannot foresee how these equity securities may impact the way we understand business combinations or acquisitions and if we may or may not consider these type of businesses public or not. Santiago Gutiérrez sgutierrez@lloredacamacho.com Juan Sebastián Peredo jperedo@lloredacamacho.com Mariana Páez mpaez@lloredacamacho.com Calle 72 No. 5–83, 5th floor Bogotá Colombia Tel: +57 1 3264270 / +57 1 6069700 Fax: +57 1 326 4271 www.lloredacamacho.com © Law Business Research 2019
- 45. www.lexology.com/gtdt 45 Denmark Thomas Weisbjerg,Anders Carstensen and Julie Høi-Nielsen Mazanti-Andersen Korsø Jensen Law Firm LLP STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Under Danish law the basic forms of business combinations are: • acquisition of either assets (with or without liabilities) or shares in the target company; • mergers of public or private limited companies, including merger by absorption and merger by incorporation of a new entity; and • public tender offers, including exchange offers, with regard to acquisition of all or part of the shares in a listed company. The consideration in any of the above forms of combinations may be either cash or shares or other contribution in kind, or a combina- tion thereof. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The legal basis for business combinations in Denmark is generally formed by the Danish Sales of Goods Act, the Danish Contracts Act and the Danish Companies Act, and, specifically with regards to acquisitions of publicly listed companies, the Capital Markets Act. The Companies Act regulates both private and public limited companies. In addition, inter alia, the following legislation may apply: • the Takeover Order (implementing the Takeover Directive (2004/25/EC)) and Regulation (EU) No. 596/2014 on Market Abuse (MAR), applicable to companies listed on Nasdaq Copenhagen and First North or other Danish regulated markets or multilateral trading facilities; • the guidelines to the Takeover Order by the Danish Financial Supervisory Authority (the Danish Financial Services Authority (FSA)); • Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (however, not fully in force until 21 July 2019); • Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engage- ment (however, not in force until implemented in Danish law on 10 June 2019 at the latest); • Stock exchange regulations issued by Nasdaq Copenhagen, including the recommendations on corporate governance; • the Danish Competition Act (including Danish merger control regulation); • the Danish Bankruptcy Act; • the Danish Act on Employees’ Rights in the Event of Business Transfers; • the Danish Act on the Processing of Personal Data (as per 25 May 2018: the General Data Protection Regulation (Regulation (EU) 2016/679); and • various pieces of tax legislation, including the Danish Corporate Tax Act, the Danish Value Added Tax Act and the Danish Act on Taxation of Capital Gains on Shares. Legislation from the European Union must be considered in certain larger transactions, particularly in regard to merger control. Further, sector-specific requirements must be considered within certain indus- tries such as the financial sector. Transactions within this sector will, in the main, require prior approval by public authorities. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? The acquisition of a Danish listed company may be in the form of a voluntary takeover bid to the target company’s shareholders for all of the shares in the target company. If the acquisition is made through a voluntary bid, the bidder may seek to enter into agreements (irrevo- cable undertakings) with existing major shareholders regarding these shareholders’ acceptance of a contemplated bid. Further, the bidder may seek to enter into an agreement with the target company for the purpose of obtaining its board of directors’ recommendation of the bidder’s contemplated voluntary bid and with respect to certain process matters and insider issues, confidentiality and due diligence. Of course, a party may also simply wish to acquire a certain share- holding in a Danish listed company without necessarily taking over the entire share capital, and a standard share purchase agreement may in such cases be entered into if not simply traded on the stock exchange trading platform. In this respect, however, the Capital Markets Act and the Takeover Order contain provisions triggering a mandatory bid obli- gation on any shareholder that obtains a ‘controlling influence’ in a Danish listed company through a purchase of shares. In assessing whether a transaction may trigger a mandatory bid obligation, under the Takeover Order, a controlling influence will be established if the acquirer owns more than one-third of the voting rights in the listed target company, unless it can be clearly demonstrated that such ownership, in special cases, does not constitute a controlling influ- ence. A shareholding of less than one-third may, however, also result in a controlling influence, if an acquirer holding less than one-third of the voting rights has: • the right to exercise more than one-third of the voting rights by virtue of an agreement with other investors; © Law Business Research 2019
- 46. Denmark Mazanti-Andersen KorsøJensen Law Firm LLP Public MA 201946 • the right to control the financial and operating decisions of the target company under the articles of association or an agreement; • the authority to appoint or remove a majority of the members of the board of directors and the board has a controlling influence; or • the de facto majority of votes at general meetings and thus the actual controlling influence in the company. When assessing whether a bidder has a controlling influence, the existence and effect of potential voting rights, subscription rights and options to purchase shares, which may be exercised or converted at the time, must be taken into account. Exemptions from the mandatory bid requirement may be granted under certain circumstances by the Danish FSA. In recent years, exemptions have been granted when the only alternative has been the bankruptcy of the listed target company. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Generally, no government filings are necessary in connection with a business combination. However, filings may be necessary in the following situations. Tender offers and delistings Voluntary and mandatory takeover bids as described above in section 3 must be filed with the Danish FSA. If more than 90 per cent of the shares in a publicly traded company is successfully taken over by a single shareholder, the company typically submits a request for delisting of its shares to the regulated market in question. Share transfers Pursuant to the Danish Companies Act, shareholders of both listed and unlisted companies shall notify the company of substantial sharehold- ings (ie, upon attaining 5 per cent of the share capital’s voting rights or nominal value and upon subsequently exceeding or falling below the threshold of 5, 10, 15, 20, 25, 33.33, 50, 66.66, 90 or 100 per cent of the voting rights or nominal value of the share capital, respectively). This information shall be registered by the company, and the register is available for inspection by public authorities, shareholders and board members. Further, a company must register such notifications of substan- tial shareholdings in the Danish Business Authority’s (DBA) IT-system (the Public Shareholders’ Register) in which this information is made publicly available. With regard to listed companies, the above information shall also be notified immediately (on the date of the transaction) by the purchaser to the Danish Financial Supervisory Authority and the company shall make the information available to the market without delay. Violation of the notification obligations is punishable by a fine. Holders of bearer shares in public limited companies attached with less than 5 per cent of the share capital’s voting rights or nominal value are obligated to register their shareholding with the DBA. This requirement does not apply to shareholders in listed companies. The registered information is not made publicly available and is only acces- sible by public authorities for inspection purposes. Asset transfers Depending on the nature of the acquired assets, notifications to public authorities may be required or be advisable. All rights over real estate, including ownership rights, rights of use of another person’s real estate, mortgages and other rights must be perfected by registration with the Danish Land Registry in order to obtain protection against legal proceedings against the property and in relation to subsequent bona fide beneficiaries of rights to the real estate. The registration fee varies depending on the type of right to be registered, the most expensive being ownership rights and mortgage where the fee amounts to a percentage of the purchase price and of the secured amount, respectively. Ownership rights to industrial property under Danish law, including registered trademarks, industrial designs, patents and utility models, are registered with the Danish Patent and Trademark Office and a business transfer will often necessitate amendments to the registered information. Mergers In general, all amendments to the articles of association of limited companies shall be registered with the DBA, for example, change of company name, increases or reductions of the share capital, and so on. With regard to mergers, the DBA shall receive a copy of the joint merger plan executed by the boards of directors of both companies. Any subsequent resolutions to carry out the merger shall be notified to the DBA within two weeks of the resolution date. Merger control Mergers and acquisitions shall be notified to the Danish Competition and Consumer Authority in the event that one of the following thresh- olds is exceeded: • the aggregate annual turnover in Denmark of all of the under- takings involved is at least 900 million Danish kroner and the aggregate annual turnover in Denmark of each of at least two of the undertakings concerned is at least 100 million Danish kroner; or • the aggregate annual turnover in Denmark of at least one of the undertakings involved is at least 3.8 billion Danish kroner and the aggregate annual worldwide turnover of at least one of the other undertakings concerned is at least 3.8 billion Danish kroner. If a merger or acquisition has an EU dimension as defined in the EC Merger Regulation (2004/139/EC) (for example, if the aggregate world- wide annual turnover of all the undertakings concerned exceeds €5 billion and the aggregate turnover within the EU of each of at least two of the undertakings concerned exceeds €250 million), the merger or acquisition shall be notified to the European Commission instead of the Danish Competition and Consumer Authority. Fees Registration with the DBA of incorporation of and subsequent changes made to limited liability companies are subject to fees. The registra- tion fee varies depending on whether the registration is made using a paper registration form or online via the DBA’s IT system. Further, a fee must be paid when filing a merger notification with the Danish Competition and Consumer Authority. The fee for a simplified notifica- tion is 50,000 Danish kroner, while the fee for a full notification amounts to 0.015 per cent of the combined annual turnover in Denmark of the undertakings concerned, subject to a maximum of 1.5 million Danish kroner. Otherwise no fees are charged with regard to the above notifications. © Law Business Research 2019
- 47. Mazanti-Andersen Korsø JensenLaw Firm LLP Denmark www.lexology.com/gtdt 47 Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Rules regarding disclosure of information apply in different situations. General disclosure obligations for companies listed on a regulated market in Denmark or another country within the European Union are set forth in the Market Abuse Regulation and the Danish Capital Markets Act. Such companies shall disclose inside information if this informa- tion pertains directly to their activities; inside information in this context means information that has not been made public and is likely to have a notable effect on the price formation of the company’s shares if made public, for example, business combination agreements. Public tender offers, both mandatory and voluntary, shall be made in accordance with the requirements set out in the Danish Capital Markets Act and the Takeover Order. When a mandatory offer is required or a decision to make a voluntary offer has been made, this shall be communicated to the public by the bidder by means of an announce- ment to this effect to be disseminated through electronic media which, as a minimum, covers the public in the countries where shares of the target company are being traded on a regulated or alternative market. Further, the bidder shall make public an offer document containing information on the financial and other terms of the offer, including the deadline for acceptance of the offer and any other information consid- ered necessary for the shareholders to reach an informed decision on the offer. A statement in which the offer is reviewed by the board of directors of the target company shall be disclosed to the public together with the board’s opinion on any advantages and disadvantages within the first half of the offer period. As regards business combinations by merger, the Danish Companies Act provides that the board of directors of each of the merging companies shall furnish a written statement to the share- holders explaining the merger plan in more detail, including information on the pricing of the shares. The statement may be omitted if all of the shareholders unanimously so decide. Further, an impartial appraiser shall in each of the merging companies prepare a written opinion on the merger plan, including statements regarding the position of the compa- nies’ creditors. These opinions shall also be submitted to the DBA. Both the opinion on the merger plan and the statement regarding the position of the creditors may, however, be omitted if so decided unanimously by all shareholders. Finally, a merger may require publication of a prospectus or an extended company notice approved by the Danish FSA. With regard to employees, the Danish Act on Rights of Employees in the Event of Business Transfers (implementing Directive No. 2001/23/EC) provides that the employees shall be informed of the business transfer, to the extent possible, within a reasonable time. The employees shall be informed of the date of the business transfer, the reasons behind the transfer, financial and social consequences for the employees, and so on. In the event of mass redundancies, the employer is required to give notice to certain public employment boards prior to terminating any employment contracts. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Owners of substantial shareholdings in both listed and unlisted compa- nies, limited partnerships and certain other legal entities shall disclose information to the company if certain changes are made to the size of their shareholdings and, in addition, this information shall be regis- tered in the DBA’s IT system in which this information is made public available; see question 4 for further details. With regard to listed compa- nies, the above information shall also be notified to the Danish Financial Supervisory Authority and the Company shall make the information available to the market without delay. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Members of the board of directors and the management in Danish companies are, by virtue of their position with the company, subject to a fiduciary duty to act in the best interest of the company. This duty to act in the best interest of the company is crucial in takeover procedures (eg, in connection with the board of directors’ recommendation or disap- proval of a voluntary bid). In this context, the interests of the company are not necessarily equated solely with the interests of the shareholders, but must be considered from a broader point of view, comprising other stakeholders such as employees, the company’s creditors, and so on. This fiduciary duty, which is not subject to any general regulation, comprises in addition to a general duty of care and loyalty – several more specific duties, some of which are manifested in special provi- sions under Danish law. The Danish Companies Act thus provides that directors and the management are prohibited from taking part in the discussion and decision-making of issues if the person in question has a major interest therein, which may be contrary to the interests of the company. Further, the members of the company’s board of directors and management are prohibited from entering into transactions on behalf of the company that may cause an unjust advantage to certain shareholders or a third person over the company or other shareholders. In addition, the employment agreements of the management often comprise a duty for the management to be of assistance and therefore play an active role in connection with a business combination. Shareholders are entitled to act in their own interest and are only in extraordinary circumstances obliged to take the interests of other stakeholders into consideration, for example, in companies with a majority or sole shareholder, if such shareholder acts in his or her own private interests through a position in the management. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? It has not been finally established in Denmark whether the board of directors is competent to resolve on the disposal of all (or substantially all) of the company’s assets and liabilities or if such disposal must be resolved by the shareholders. In the DBA’s opinion, the board of direc- tors is competent. However, in practice the approval of the shareholders is often obtained to avoid uncertainty as to the validity of such a disposal. Mergers shall in most cases be resolved by the shareholders of the discontinuing company, whereas the central governing body is the competent body in the continuing company, provided that the merger does not require a capital increase or other amendments to the arti- cles of association of the continuing company, in which case the merger must be approved by the shareholders. Voluntary public tender offers are usually conditional upon the acceptance from shareholders representing a specified percentage of the nominal share capital or voting rights (or both) of the target © Law Business Research 2019
- 48. Denmark Mazanti-Andersen KorsøJensen Law Firm LLP Public MA 201948 company. The relevant percentage depends on the aim the bidder is seeking to achieve. Ordinary amendments of the articles of associa- tion require two-thirds of both votes and capital, while squeeze-out and delisting requires more than nine-tenths of both votes and capital. The Danish Companies Act provides that a minority shareholder may demand that a single majority shareholder holding more than nine-tenths of both the shares and capital buys all of the shares of that minority shareholder. Reference is further made to question 9. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Danish law on public tender offers applies equally to voluntary tender offers irrespective of whether these are recommended or contested by the board of directors in the target company. Several Danish companies have implemented measures against hostile takeovers in the articles of association, including limitations on voting rights, voting ceiling and division of the company’s shares into classes, typically into a class of unlisted shares with the majority of the voting rights and a listed class of shares with minimum voting rights. Given this fact, hostile takeovers are not frequently experienced in Denmark. However, the Danish Companies Act provides that share- holders representing at least two-thirds of both votes and capital may at a general meeting adopt a resolution suspending all special rights or restrictions associated with a shareholding or specific shares if a public tender offer is submitted to the company. This ‘break-through’ rule, which is based on the Takeover Directive (2004/25/EC), only applies to special rights or restrictions established after 31 March 2004. Furthermore, such suspension may be restricted only to a public tender offer submitted by a company within the European Union or European Economic Area. When a voluntary tender offer is made, the board of directors must weigh the interests of the shareholders against other relevant interests, including the interests of the company itself (if contrary to the share- holders), the company’s creditors and the employees. However, the shareholders’ interests will be prominent in most situations. Measures available for the board of directors include: refusal to have due dili- gence carried out by the bidder, a recommendation to the shareholders to refuse the submitted tender offer, determining the possibility of a more favourable competing bid, and so on. Alternatively, the board of directors may decide to act actively against the takeover by the use of a capital increase directed at friendly third parties, ‘poison pills’, conducting merger negotiations with third parties, and so on. However, these measures should be carefully considered as the directors risk incurring liability if not acting in the best interest of the company. It is generally advisable (and in accordance with the Danish Corporate Governance Recommendations) to involve the shareholders in these actions. Further, under the Danish Companies Act, shareholders repre- senting at least two-thirds of both votes and capital may at a general meeting resolve to introduce a procedure whereby the board of direc- tors must obtain the approval of the general meeting before taking any actions that may hinder or frustrate a takeover bid, other than resolving to seek alternative bids. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Break-up fees and other fees of this type are not governed by any specific regulation. Such fees may, however, be modified or set aside, in whole or in part, pursuant to the general clause of the Danish Contracts Act if it is considered manifestly unfair or contrary to the principles of good faith to enforce them. Furthermore, under Danish law a company is as a general rule prohibited from providing financial assistance to a third party for the purpose of acquiring shares in the company or shares issued by its parent company, if any. However, financial assistance is allowed provided that: • a credit assessment has been obtained; • the company’s board of directors has submitted a written report to the shareholders indicating the reasons for the financial assis- tance, the interest of the company in providing such assistance, the conditions on which the assistance is provided, the risks involved in respect of liquidity and solvency of the company, and the price at which the third party is to acquire the shares in the company; • the report from the board of directors is made public via the DBA’s information system; • the shareholders approve such assistance in advance; • the assistance is sound in the context of the company’s finan- cial status; • the financial assistance is granted on market terms; and • the financial assistance does not exceed an amount that could otherwise have been distributed as dividends to the shareholders. A company shall therefore refrain from granting loans, providing assets as security or otherwise making assets available in connection with such acquisitions unless the above requirements are met. Consequently, potential financial assistance aspects of a business combination should be considered carefully, including with respect to break-up fee arrange- ments. The board of directors may otherwise risk personal liability where the company has defrayed such fees. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Except for the Danish Competition and Consumer Authority and rules regulating the sector-specific industries including the financial sector, governmental agencies cannot in general influence or restrict the completion of a business combination. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Business combinations with regard to unlisted companies may in general be subject to any condition agreed by the parties involved, the only restriction being the general clause in the Danish Contracts Act according to which agreements may be modified or set aside, in whole © Law Business Research 2019
- 49. Mazanti-Andersen Korsø JensenLaw Firm LLP Denmark www.lexology.com/gtdt 49 or in part, if it would be manifestly unfair or contrary to the principles of good faith to enforce it. Business combinations involving listed companies must meet certain legal requirements. The Danish Capital Markets Act and the Takeover Order provides that mandatory public tender offers may not be conditional at all. The Danish Financial Supervisory Authority has power to grant an exemption from this rule. Further, voluntary public tender offers must not be conditional upon financing; thus, the bidder’s financing must be in place prior to submitting an offer. Further, according to the practice of the Danish Financial Supervisory Authority, an offer may not include conditions the fulfilment of which the bidder has influence on. Otherwise, the bidder would in practice be able to determine whether or not an offer should be kept open. Apart from the aforesaid conditions, no restrictions apply. Voluntary public tender offers are usually conditional, for example, upon a certain level of acceptance from the shareholders, approval from the Danish Competition and Consumer Authority, non-occurrence of mate- rial adverse changes, and so on. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? From a buyer’s perspective, it is often desirable to make a transfer agreement conditional upon the buyer being able to obtain the financing necessary for its acquisition of the target business. However, a volun- tary takeover offer cannot be made conditional upon the bidder’s control or depend on the bidder’s own discretion and may not be conditional upon financing. A mandatory takeover offer may not be conditional at all. In tender offers, the consideration for the shares shall be paid in cash upon expiry of the applicable tender offer process, and the selling shareholders do not assist in the bidder’s financing. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? A single majority shareholder holding more than nine-tenths of the shares in a company and a corresponding proportion of the voting rights, may demand that the remaining shareholders have their shares redeemed by the majority shareholder. Each minority shareholder of the company has a corresponding right to demand redemption by such a single majority shareholder. The minority shareholders shall be invited to transfer their share- holdings within four weeks. Such invitation shall set forth the terms of redemption and the basis on which the redemption price has been determined. If a squeeze-out procedure is initiated within three months from the expiry of an offer period of a takeover bid, the majority share- holder may redeem the remaining minority shareholders applying the same price per share as offered in connection with the takeover bid. If a squeeze-out process is initiated later than three months from the expiry of an offer period and the redemption price cannot be agreed upon, the price must be determined by an appraiser appointed by the courts. The invitation must include a statement by the board of direc- tors on the general terms of the redemption. Any minority shareholders who have not transferred their shares to the majority shareholder before the expiry of the four-week period shall be invited, through a notification published with the DBA, to transfer their shares within a period of not less than three months. Such notification shall repeat the above-mentioned information. Any shareholdings not transferred to the majority shareholder upon expiry of the three-month period will be considered cancelled upon the majority shareholder’s deposit of the redemption sum in favour of the relevant shareholders. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Danish law does not set out any specific rules in regard to cross-border transactions other than the EU-based legislation on cross-border mergers (Directive No. 2005/56/EC implemented in the Danish Companies Act) and European Companies (Regulation No. 2001/2157/ EC and the Danish Act on the European Company). In addition, the Danish Companies Act also includes specific rules regarding cross- border demergers and rules governing the cross-border transfer of a company’s registered office. The structuring of cross-border transactions is often tax-driven and it is common practice to acquire the whole or parts of a company through one or more holding companies established in jurisdictions with beneficial tax legislation. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Apart from waiting periods under Danish and EU competition law, busi- ness combinations are not in general subject to waiting periods as such. The Danish Capital Markets Act and the Takeover Order provide that business combinations structured as public tender offers include a minimum offer period of at least four and not more than 10 weeks. As a special exception to this rule, the offer period may be extended to a total of nine months pending required public authority clearances. If a competing offer is submitted before the expiry of the offer period of the initial takeover offer, the offer period of the initial takeover offer will automatically be extended until the expiry of the offer period of the competing offer. If a shareholder as a result of a voluntary public tender offer obtains control of the target company, any subsequent tender offers or squeeze-out of remaining shareholders will entail further waiting periods. The rights of the employees in the event of business combinations structured as an asset purchase are regulated by the Danish Act on Rights of Employees in the Event of Business Transfers (TUPE regu- lation). The act provides that the purchaser assumes the rights and obligations pursuant to any collective or individual agreement that existed at the time of the transfer. Accordingly, the purchaser may be subject to certain notification obligations. As a minimum require- ment, the purchaser must inform the employees about the transaction in advance. The merger and demerger procedures pursuant to the Danish Companies Act include some notification and waiting periods. Merger and demerger resolutions must in most cases be approved by the share- holders of the discontinuing company, and often also by the shareholders of the continuing company. Such general meetings must be convened with a minimum of two and a maximum of four weeks’ notice, however requirements as to form and notice under the Danish Companies Act and the articles of association may be waived by unanimous consent of the shareholders. The merger and demerger resolution may not be adopted until four weeks after the DBA’s publication of the merger or demerger plan submitted by the participating companies, except in the case of immediate mergers; see question 4 for further details. © Law Business Research 2019
- 50. Denmark Mazanti-Andersen KorsøJensen Law Firm LLP Public MA 201950 Waiting periods may also arise in connection with tax-exempt transactions should an approval from the Danish taxation authorities be required. This may be necessary with regard to tax-exempted contribu- tions of assets or share conversions under the Danish Merger Tax Act and the Danish Capital Gains on Shares Act, respectively. In connection with tax-exempt mergers, the Danish Merger Tax Act provides that the date of the merger shall coincide with the commencement of the finan- cial year of the acquiring company, which may in practice also imply a waiting period. Transactions within specific business sectors such as banking and other financial services will, as a main rule, require the prior approval by public authorities. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Sector-specific requirements must be considered within certain indus- tries such as the financial sector. Transactions within this sector will as main rule require the prior approval by public authorities. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Danish companies are subject to corporate income tax of 22 per cent. A shareholding of 10 per cent or more in a company is considered a subsidiary investment (provided that the shareholding qualifies for a tax reduction under the Parent Subsidiary Directive (2011/96/EC) or an applicable tax treaty). Dividends received from subsidiary invest- ments (including as a general rule outbound cross-border dividends) and capital gains realised on the transfer of shares in subsidiary invest- ments are tax-exempt and not subject to Danish withholding tax. Also, capital gains realised on the transfer of shares by a company holding less than 10 per cent of the share capital (and having no controlling influence) in an unlisted company are tax-exempt and not subject to Danish withholding tax. Interest is generally deductible for Danish corporate income tax purposes. The deductibility of interest payments may, however, be reduced under applicable Danish thin capitalisation rules as well as asset and earnings before interest, taxes, depreciation and amortisation (EBITDA) limitation rules. The thin capitalisation rules prescribe a debt- to-equity ratio of four to one. Any interest on debt to related parties in excess of this ratio will be subject to deductibility limitations. This rule applies, however, only if the debt to related parties exceeds 10 million Danish kroner and the financing is not made on market terms. Under the EBITDA limitation rule, net financing expenses in excess of 30 per cent of the EBITDA are subject to deductibility limitations. Under the asset limitation rule, deduction of net financing expenses is only allowed if they do not exceed a cap computed by applying a standard rate of return on the tax base of the company’s qualifying assets. The EBITDA rule only applies to interest in excess of 22,313,400 Danish kroner, and the asset limitation rule only applies to interest in excess of 22.3 million Danish kroner, but the rules are not limited to interest on debt to related parties. Asset transfers Asset transactions usually give rise to capital gains taxation on the seller’s side. In asset transactions the purchase price shall be allo- cated among the groups of assets comprised by the transaction, including goodwill, and the different groups of assets are assessed individually. Initial purchase prices (where applicable) and sales prices are compared in order to identify capital gains and losses. Further, depreciation recovery may occur and any depreciation recovered will in general be taxable. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The legal basis for protection of employees in connection with asset transfers (as opposed to share transfers) is essentially formed by the Danish Act on Rights of Employees in the Event of Business Transfers (implementing Directive No. 2001/23/EC). Pursuant to this act, the transferor’s rights and obligations in respect of its employees as per the date of the business transfer shall, by reason of such transfer, be transferred to the transferee. All individual employee rights will thus be maintained following the business transfer (while collective bargaining agreements may be terminated pursuant to a separate procedure laid down in the act). The business transfer will not in itself constitute a reasonable cause for termination. Furthermore, the employees shall be informed of the business transfer in advance, to the extent possible, within a reasonable time. The employees of the target company shall also be informed of a transfer of shares in the company if such share transfer has a material impact on the employees’ employment; see the Danish Act on infor- mation and consultation of employees, which implements Directive No. 2002/14/EC. The Danish Act on Employment Clauses, which came into effect on 1 January 2016, contains mandatory regulation of job clauses, non- competition and non-solicitation clauses, including provisions regarding compensation. Further, pursuant to the Danish Act on Salaried Employees, salaried employees who are remunerated by commission or other performance bonuses are entitled to receive a pro rata share of such bonuses in the year where their employment is terminated. Similar, but less strict, protective regulation applies to stock option programmes and the like. The listed target company and the bidder (and persons acting in concert with a bidder) are prohibited from entering into agreements regarding bonuses and similar benefits for the executive management or the board of directors in the target company. This restriction applies from the initiation of discussions with the listed target company until such have ended or a takeover offer has been successfully completed. Generally, a listed company may not enter into a specific agreement on incentive-based remuneration with a member of its management until the board of directors has laid down general guidelines for incen- tive-based remuneration for the company’s management, the guidelines for which must have been considered and approved by the company’s general meeting and be adopted in the company’s articles of association. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? When a target company has been or risks being declared bankrupt, special precautions must be taken to avoid subsequent disputes with the creditors of the target company. Warranties and guarantees from an insolvent target company are rarely of any value to the buyer and it is customary that the target company is acquired ‘as is’ and without any liabilities for the seller. This increased risk on the buyer side is often reflected in the purchase price. © Law Business Research 2019
- 51. Mazanti-Andersen Korsø JensenLaw Firm LLP Denmark www.lexology.com/gtdt 51 The purchase of assets from an insolvent target company may be voidable if the purchase price does not reflect the fair market value for such assets. Likewise, business combinations in which some creditors of an insolvent target company are given preferential treatment over others may be voidable. The purpose of the Danish reconstruction rules is, inter alia, to keep viable businesses in operation while considering the interests of the creditors. A reconstruction must, as a minimum, contain elements of compulsory composition of the distressed company’s debts or a transfer of its business (in whole or in part). Reconstruction may be commenced when a debtor is insolvent and upon request from the debtor or a creditor. The bankruptcy court will then appoint one or more reconstructors and an accounting expert representative. Further, a date is fixed for a meeting to be held no later than four weeks after the commencement of the reconstruction process with the creditors, at which the creditors shall vote on the reconstruc- tion plan prepared by the reconstructors and the accounting expert representative. Provided that the creditors vote in favour of the recon- struction plan, the initial meeting shall, no later than six months later, be followed up by another meeting, at which the creditors vote on the reconstruction proposal. The bankruptcy court may extend the time limit for voting on the reconstruction proposal twice by two months each time, meaning that the reconstruction process cannot extend beyond 11 months. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Anti-corruption and anti-bribery are not subject to any general regula- tion. However, the offering, giving, receiving or soliciting of any item of value to influence the actions of an official or other person in charge of a public or legal duty, namely bribery, is prohibited by the Danish Penal Code. Violation of this prohibition is punishable by fine or impris- onment for up to six years. Also illegal kickbacks (secret commission) in private deals are prohibited and penalised by prison under the Danish Penal Code. In addition, anti-corruption initiatives have been made by several organisations in Denmark, the key public and private business-relevant organisations being the Danish Export Credit Agency, the Trade Council of Denmark and the Confederation of Danish Industries. These initia- tives are, however, focused on providing Danish companies operating in foreign markets with anti-corruption tools. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? On 6 February 2019, a legislative proposal was submitted implementing the Shareholder Rights Directive II (SRD II), and a final version of the legislation is expected to be implemented prior to the implementa- tion deadline 10 June 2019. The new legislation includes the following main points: • Listed companies are able to better identify shareholders. • Listed companies must prepare and publish a remuneration policy for management members, which sets the framework for fixed and variable remuneration of the management members and publish a remuneration report. • In listed companies, significant transactions between a public limited company and its related parties must be approved by governing body of the public limited company before the trans- action is completed. The public limited company must publish a statement of certain significant transactions with related parties. • Institutional investors and investment managers must publish an active ownership policy or explain why they have decided not to publish this policy. On 28 February 2019, the Ministry of Trade and Industry submitted a legislative proposal to abolish the opportunity to establish an entrepre- neur company (also called ‘IVS’). The entrepreneur company structure was created with the purpose of strengthening entrepreneurship, but the company structure has, according to an analysis conducted by the government, not had the desired effect in the Danish business sector. The government will at the same time lower the share capital requirement for private limited companies from 50,000 kroner to 40,000 kroner. If the proposal is adopted, existing entrepreneur companies must within two years reregister as a private limited company with a share capital of at least 40,000 kroner. The proposal was submitted to first reading by Parliament on 19 March 2019. Thomas Weisbjerg twe@mazanti.dk Anders Carstensen anc@mazanti.dk Julie Høi-Nielsen jhn@mazanti.dk Amaliegade 10 1256 Copenhagen K Denmark Tel: +45 33 19 37 99 www.mazanti.dk © Law Business Research 2019
- 52. Public MA 201952 Egypt OmarS Bassiouny and Mariam Auda Matouk Bassiouny STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Combining business of public companies listed on the Egyptian Exchange (EGX) may take place through asset-based or share-based acquisitions or merger between the businesses. The Egyptian Capital Market Law No. 95 of 1992 (and its Executive Regulations) (CML) allows acquisition of listed shares through open market transactions, block trades, protected transactions or voluntary tender offer, subject to acquiring less than one third of the issued share capital or voting rights of listed shares. If the acquired stake exceeds one third of the issued share capital or voting rights of a listed company, whether directly or indirectly, a mandatory tender offer should be submitted to acquire 100 per cent of the listed company’s issued share capital. Exemptions from this mandatory tender offer may be granted by the Financial Regulatory Authority (FRA) in certain specific situations. Businesses may also be combined through merger. Merger does not trigger a mandatory tender offer subject to submitting a notification to the FRA of the same. As for acquisition of assets, the Egyptian Exchange Listing Rules and their executive regulations issued pursuant to Decree No. 11 of 2014 by the board of directors of the FRA (the EGX Listing Rules) have set specific requirements for the disposal and acquisition of assets by listed companies. The requirements include, inter alia, prior approval by the company’s general assembly in the event the value of the assets that are the subject of the transaction exceeds 50 per cent of the company’s assets, while acquiring assets representing 10 per cent of the share- holders’ equity must be supported by a valuation report to be submitted to the EGX. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing business combinations and acquisitions of publicly listed companies are: • the Egyptian Capital Market Law No. 95 of 1992 (and its Executive Regulations), as amended; • the EGX Listing Rules and their executive regulations issued pursuant to Decree No. 11 of 2014 by the board of directors of the FRA, as amended; and • the Egyptian Companies Law No. 159 of 1981 (and its executive regulations), as amended. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? There is no legal requirement to conclude agreements between the sellers, buyers and target companies for listed shares’ acquisition. Parties, however, remain obliged to execute the transfer documents required by the EGX. Acquisition of listed shares is usually evidenced by the account statements issued by Misr for Central Clearing, Depository and Registry upon being traded and transferred via the EGX while the purchase price is also transferred through the EGX. It is, however, customary in large acquisitions that parties conclude transaction agreements such as a share purchase agreements and shareholders’ agreement, as long as the shareholders’ agreement does not include any contractual restrictions on the ability to trade the listed shares freely, since otherwise the same would be null and void. As for the merger, an agreement must be concluded between the involved entities setting out material terms, such as underlying reasons for the merger and the valuation methodology. The articles of association of the surviving entity post-merger also forms part of the transaction documentation in a merger. For acquisition of assets, parties may be required to execute agree- ments before governmental authorities to effect the transfer depending on the type of the assets (for example, real property should be trans- ferred before a notary public and the agreement should be notarised). Other than documentation required by governmental authorities, there is also a general set of transaction documentation that is customarily concluded among the parties, including asset transfer agreement and escrow agreement to create the relevant contractual framework for the sale and purchase of the underlying assets. As for the governing law, parties may choose any law to govern the transaction documentation, to the extent that there is no specific legal or statutory requirement to apply Egyptian law. Further, despite the choice of law between the parties, the actual transfer of the assets/shares and merger remains to be executed and enforced according to the relevant Egyptian Laws and rules. Typically, the choice of law varies between English law and Egyptian law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Acquisition of listed shares takes place and is effected through the EGX as evidenced on its trading screens. Filing for tender offer must be © Law Business Research 2019
- 53. Matouk Bassiouny Egypt www.lexology.com/gtdt 53 madewith FRA and the procedures involve submission of an informa- tion memorandum enclosed to which a number of documents such as a business plan, and a valuation report of the shares’ fair market value for a mixed tender offer, and all of the foregoing must be receive prior approval from the FRA. Additional documents as required by the EGX should also be submitted to the registered broker to effect the transfer of the shares with the EGX such as sale orders and parties’ acknowledgments. Acquisition and sale of shares representing less than 33 per cent of the company’s issued capital (during a consecutive period of two years) up to 31 May 2019 is subject to stamp duty at a rate of 0.3 per cent of the total consideration, while as of 1 June 2019 the rate will increase to 0.35 per cent. As per the Stamp Duty Law No. 11 of 1980, stamp duty should be borne equally by the seller and the buyer. If the transferred shares represent 33 per cent or more of the company’s issued share capital (as bulk in one transaction), the buyer shall pay a stamp duty of 0.3 per cent and the seller shall pay 0.3 per cent. For share transfer of a percentage of 33 per cent or more of the company’s issued share capital (as a result of several transactions within two consecutive years), a buyer reaching a shareholding of 33 per cent shall pay 0.3 per cent (after deducting the stamp duty tax paid for the previous counted transactions), and a seller reaching the 33 per cent shareholding threshold shall pay 0.3 per cent (after deducting the stamp duty tax paid for the previous counted transactions). The other main governmental fees include EGX transfer fees of the equivalent of 0.012 per cent of the value of the transaction. These fees are levied per transaction and are capped at 5,000 Egyptian pounds, and fees of the FRA at one 1,000th of the offer’s value in Egyptian pounds. As for asset transfers, filings may be required subject to the type or nature of the assets. Nominal stamp duty may apply on the transfer documents, and additional (proportional or ad valorem stamp tax) may apply subject to the type of the transferred assets. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Disclosure requirements and the authorised extent of public information depend on the structure used for the acquisition transaction. In an acquisition of listed shares, disclosure of the potential offer must be made by the offeror to the FRA and the EGX, if, inter alia, the offeror notifies the target company of the offer, the conditions of a mandatory tender offer are met or rumours or unusual activities in the market related to a potential offer emerge. The target company, once it is notified by the offeror of the intent to submit an offer, is also obliged to disclose to the FRA and the EGX any documentation executed for the purpose of tender offer, for example, a memorandum of understanding, a letter of intent and due diligence arrangements. As for the public information, the EGX must disclose on its screens the material information of the tender offer proposal and the submitted information memorandum as approved and notified by the FRA. Following this announcement on the EGX screens, the target company’s board of directors should issue a public report opining on and evalu- ating the offer in terms of its importance, seriousness and benefits to the target company, its shareholders and employees. Further, specific disclosures must be also made as per Chapter 13 (on ultimate beneficial ownership) of the Egyptian Capital Market Law to identify the ultimate and beneficial owner of the person submitting the tender offer. The disclosed information, however, is not shared with the public. In addition to the above, transactions by board members and prin- cipal shareholders are subject to pre- and post-execution disclosure obligations. For the acquisition and sale of assets, disclosures must be made if the underlying transaction is deemed a material event for the publicly listed company or if the latter is acquiring assets (real property or immovable assets) the value of which represent 10 per cent or more of the equity rights of the listed company, as evidenced in the latest financial statements of the company. In this case, the company must submit to the EGX a study of the fair market value of the assets in ques- tion, as supported by a report of the company’s auditor and the board of directors’ ratification on such reports. The EGX in turn should disclose a summary of these documents on its screens and website. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Substantial shareholders, those holding more than a third of the target’ company’s capital, once they are notified of the offeror’s intention to submit an offer, must disclose to the FRA any undisclosed arrange- ments or agreements in place between them and the offeror. As per the EGX Listing Rules, shareholders whose, direct or indi- rect, participation percentage exceeds 5 per cent (or its multiple) of the target company’s listed shares must disclose the same to the EGX. Also, if the indirect shareholding percentage of a shareholder reaches or exceeds 25 per cent of the capital, the shareholder must disclose this issue along with its future investment plan for the company. Disclosure requirements are not affected if the company is a party to a business combination. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? During the period between the date on which the offer is published as ratified by the FRA and the date on which the outcome of the offer is announced, the board of directors and managers of a publicly traded company are prohibited from taking any action that may be deemed a material adverse action. In particular, members of the board may not undertake any action that could materially affect the company’s assets or increase its financial commitments or that may hinder the compa- ny’s future activity. During the said period board members also must be prudent when it comes to disclosure of any information related to the offer. The FRA may in specific cases oblige the company to appoint an independent financial advisor to evaluate the offer (eg, if the offeror is a related party to the target company such as board member or a senior manager therein). In these cases, the report of the financial advisor must be disclosed to the shareholders, irrespective of the opinion and feedback of the board of directors on the report. As for the shareholders, their duties include that shareholders holding more than a third of the target’ company’s capital are restricted from disposing of their shares, unless for the purpose of the offer, during the entire period as of the announcement of the offer and until its execution. Further, in principle controlling shareholders should not preju- dice the rights of minority shareholders. Therefore, as a protection for © Law Business Research 2019
- 54. Egypt Matouk Bassiouny PublicMA 201954 minority shareholders, the FRA, based on the request of the existing shareholders, may require a shareholder that severally or together with related parties has acquired 90 per cent of more of the capital and voting rights of the company to submit a tender offer for the shares of such minority shareholders. The minority shareholders’ request should be submitted to FRA by shareholders holding at least 3 per cent of the capital, or a minimum of 100 shareholders representing no less than 2 per cent of the free float shares within the 12 months from the date the majority shares were acquired. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Disposal of at least 50 per cent of a company’s immovable assets and those related to its activity must be approved by the majority vote of shareholders representing at least two-thirds of the shares represented in an extra ordinary general assembly meeting. Mergers must be approved by the general assembly of both entities involved. The minimum voting threshold on such resolution is approval of shareholders representing at least 75 per cent of the capital. If, and to the extent, the merger would increase the shareholders’ liability, a unanimous approval must be resolved. In addition to the above, the articles of association of a company may include approval rights for the shareholders and management in respect of any actions related to business combinations and higher voting quorums in respect of relevant resolutions. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? A competitive offer may be submitted during the validity period of the original offer and up to five days before the lapse of this period. Accepting a competitive offer is conditional on having the price of the offer in cash with at least 2 per cent increase from the original offer, or any other submitted competitive offer. The FRA may still accept a competitive offer even if the offered price is not higher, however the offer terms are favourable than the existing offer and in the interest of the shareholders. If the FRA accepts a competitive offer, it may extend the duration of the original offer, as it deems necessary. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Neither break-up fees nor reverse break-up fees are mandated or regu- lated by Egyptian law. In private MA, it is common that parties agree on break-up fees. Break-up fees for public transactions although not prohibited by law, are not common or customary. Further, it is important to note that the FRA is entitled during the offer’s validity period and up to five days before the lapse of this period to accept a competitive offer, hence the impracticability of break-up fees in tender offer transactions. Generally, and despite the parties’ agreement on break-up fees or liquidated damages, or both, Egyptian law allows a party to claim reduc- tion of agreed damages, to the extent that the agreed amount is deemed excessive compared to the resulting damages. It must be noted that financial assistance under Egyptian law restricts companies from providing loans to any of its board members or guaranteeing the obligations of any its board members. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Although seldom, government agencies may influence or restrict the completion of a transaction based on justified grounds, such as national security. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? The Egyptian Capital Market Law requires a mandatory tender offer to be final and not to be subject to conditions. Exceptionally, and subject to the FRA’s approval, an offeror can make a mandatory tender offer conditional on the acquisition of a minimum stake of the voting rights or the capital of the target company. Offers can be conditional on acquiring at least 51 per cent with the purpose of controlling the company or 75 per cent if the acquisition is for the purpose of a merger. If however the shares offered for sale do not meet the specified minimum stake, 51 per cent or 75 per cent (as the case may be), the offeror may not acquire the offered lower stake without obtaining the FRA’s prior approval. Further, if the tender offer is through swap of shares that shall be issued through a capital increase, the offer should be conditional on the company’s approval on the issuance of such shares. As for financing being a condition, the offer proposal submitted to the FRA must include a confirmation from a licensed bank in Egypt evidencing the availability of the financial resources to fund and cover the offer. Accordingly, short of a financial solvency confirmation, the FRA should not accept the offer proposal. Subject to the parties’ commercial agreement, financing may be structured as a condition (among other conditions) in asset-based transactions. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? As noted in question 12 above, submission of evidence of financial solvency is one of the tender offer conditions (in cash offers and mixed tender offer of cash or shares). In asset acquisitions, transaction documents may reflect procure- ment of financing as a condition as supported by guarantees, warranties and provision of evidence confirming availability of financing. There are no typical seller’s assistance obligations, but Egyptian law has set specific limitations in this respect such as prohibiting the company from offering loans to board members. It is however not customary to enshrine in the transaction docu- ments seller’s obligations to assist in relation to buyer’s financing. © Law Business Research 2019
- 55. Matouk Bassiouny Egypt www.lexology.com/gtdt 55 Minoritysqueeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? Squeeze-out mechanism is not recognised under Egyptian law, thus, there is no mechanism available to compel minorities to sell their stakes. To the contrary, the Egyptian Capital Market Law has allowed minority shareholders to request and oblige majority shareholders to acquire their stake, as elaborated in question 7. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Not applicable. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? In the context of a tender offer, the offeror must publish the tender offer no later than two days from the date it is ratified by the FRA. The validity of a tender offer may not be less than 10 days (20 days in the event the board of directors must obtain an opinion of an independent financial adviser). In all cases, the overall validity duration of a tender offer may not exceed 30 days but may be extended by the FRA. The Capital Market Law provides for a blackout period of six months, unless otherwise authorised by the FRA where an offeror does not submit an offer after disclosing its intent of the same. An offeror may not during such period submit any offer on the target company or undertake any other dealings that could trigger a mandatory tender offer. Also, if an offeror withdraws its offer during its validity period, a blackout period of six months shall apply, which extendable to 12 months in the event of a mandatory tender offer. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Subject to the relevant sector, specific statutory requirements are appli- cable, such as, requiring prior approvals by: • the Central Bank of Egypt, for the acquisition of 10 per cent or more of the share capital of an Egyptian bank; • the FRA, for merger of a company carrying our mortgage activi- ties with another company of the same activity or transferring or acquiring any micro-finance portfolio or to own by any means 10 per cent or more of any company carrying out insurance, rein- surance and insurance brokerage activities, operating in securities, including investment funds, real estate financing (mortgage finance and refinancing), real estate brokerage, real estate evaluation and financial lease; and • the National Communication Regulatory Authority, for transferring any licence, merger or change of shareholding structure to compa- nies carrying out telecommunication activities. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Other than the stamp duty set out under question 4 above, capital gains realised by a resident or non-resident from the transfer of listed securi- ties should be taxable at a rate of 10 per cent. However, the application of this tax was suspended in 2015, and suspension should expire on 17 May 2020. Transfer of assets is subject to income tax of 22.5 per cent of the assets’ value. Further, the nature and type of the asset could also trigger application of other type of taxes. The foregoing is without preju- dice to any applicable avoidance of double taxation treaty. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Employees and employers rights and obligations are regulated and governed by the Egyptian Employment Law No. 12 for the year 2003 and decrees of the Ministry of Manpower. Generally, the Employment Law favours and protects the employees as supported by several court precedents issued in favour of employees. Although Egyptian law does not oblige the employer to obtain approval of or consult the employees during an acquisition process, the law has still restricted the employer’s ability to make changes to the workforce during this process. In an acquisition, employees’ rights (including their acquired rights) remain protected and may not be discre- tionally limited or changed by the employer. Employees’ dismissal take place by virtue of court orders and are limited to specific major events. Further, any redundancies during acquisitions must take place in coor- dination with the Ministry of Manpower and subject to its approval. This said, it should be noted that in transfer of assets consti- tuting ‘a fond de commerce’, employees’ and tax related liabilities will remain shared from a statutory standpoint between the purchaser and the seller. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? A new bankruptcy law has recently been issued in Egypt, replacing and cancelling the bankruptcy rules set out under the Egyptian Commercial Code. The bankruptcy law has introduced the concept of ‘reorganisa- tion’. Provided that no bankruptcy verdict has been issued, any trader may request the reorganisation of his or her company, if the trader has not committed any fraudulent actions, has carried out the business for two years prior to the submitted request and its capital is no less than 1 million Egyptian pounds. A reorganisation request should be submitted to a committee affiliated to the Court that in turn should prepare a reor- ganisation plan. During the reorganisation period, the trader may not carry out any actions that are out of the ordinary, borrow, create a mort- gage and lend. Further, declaring the bankruptcy of a company takes place by virtue of a court verdict that in turn appoints a bankruptcy judge and a trustee. Any decisions in connection with the company must take place through the trustee and the court, while putting the interest of the creditors and the settlement of the associated debts as a priority. The trustees mainly carry out all bankruptcy procedures and act on behalf of the company for this purpose. A person/entity that has been declared bankrupt may not be appointed as a manager or board member in any © Law Business Research 2019
- 56. Egypt Matouk Bassiouny PublicMA 201956 company and may not carry out any banking, commercial agency, export and import activities and act as a broker for the sale or purchase of securities unless reinstated. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Egypt’s anti-corruption and anti-bribery legal framework consists mainly of the Egyptian Penal Code and Anti Money Laundering Law. Active and passive bribery, corruption and money laundering are prohibited and criminalised by virtue of such laws. The Capital Market Law has also criminalised market abuse and insider trading while subjecting the offender to hefty financial penal- ties or imprisonment, or both. The recent amendments to the Capital Market Law provide that any person disclosing insider information, or who (including the spouse and children of such person) benefits from such information or who misrepresents any details in relevant report to affect dealing on securities shall be subject to (without prejudice to any stricter penalties under any other law) imprisonment of two years and a fine of between 50,000 and 20 million Egyptian pounds or the equivalent of the amount collected or the mitigated loss, whichever is higher. Any violation of the market abuse and insider trading rules laid out in the Capital Market Law and the EGX Listing Rule would also result in delisting from the EGX. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? The regulatory framework has recently been subject to several amend- ments with the purpose of increasing capital market activity, protection of investors and encouraging additional flow of investments. The current trends in public mergers and acquisitions revolve around tender offers, and we expect to see a decent amount of all shares tender offers (which has been recently introduced by the latest amendment of the capital markets regime) alongside the predominant cash and cash or shares tender offers. Update and trends The regulatory framework has recently been subject to several amendments with the purpose of increasing capital market activity, protection of investors and encouraging additional flow of investments. The current trends in public mergers and acquisitions revolve around tender offers, and we expect to see a decent amount of all shares tender offers (which has been recently introduced by the latest amendment of the capital markets regime) alongside the predominant cash and cash or shares tender offers. Omar S Bassiouny omar.bassiouny@matoukbassiouny.com Mariam Auda mariam.auda@matoukbassiouny.com 12 Mohamed Ali Genah Street Garden City Cairo Egypt Tel: +20 2 2796 2042 Fax: +20 2 2795 4221 https://matoukbassiouny.com © Law Business Research 2019
- 57. www.lexology.com/gtdt 57 England andWales Sam Bagot, Matthew Hamilton-Foyn, Dan Tierney and Ufuoma Brume Cleary Gottlieb Steen Hamilton LLP STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? The combination of publicly listed businesses in the UK may be imple- mented through several different transaction structures, which are summarised below. All answers focus on the acquisition of public limited companies incorporated in, and whose securities are listed in, the UK that are subject to the City Code on Takeovers and Mergers (the Takeover Code). In practice, the vast majority of transactions make use of one of the following structures: • a contractual offer made by a bidder to a target company’s share- holders to acquire the shares of the target company (a takeover offer); or • a court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006, pursuant to which all of the shares of a target company are transferred to the bidder (a scheme). A scheme generally requires the cooperation of the target company and so in practice is only used in recommended (not hostile) bids. Under either structure, the consideration for the bidder’s acquisition of the target company’s shares may be cash, securities or a combina- tion of both. A takeover offer can be quicker to implement than a scheme and is capable of being successful with a lower level of support from the target company’s shareholders. It is possible for the acceptance condition to be set as low as 50 per cent of the target’s voting rights plus one share (ie, a simple majority). A scheme requires that a majority in number representing 75 per cent in value of each class of the target company shareholders attending and voting either in person or by proxy at specially convened shareholder meetings vote in favour of the scheme. Once a scheme is approved by the target company shareholders and sanctioned by the court, it has the effect of binding 100 per cent of each relevant class of the target’s shareholders, whether or not they attended the meetings or voted in support of the scheme. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing acquisitions of publicly listed companies in the UK include: • Parts 26 (Arrangements and Reconstructions), 27 (Mergers and Divisions of Public Companies) and 28 (Takeovers) of the Companies Act 2006, which provide the fundamental statutory framework; • the Takeover Code, which provides for regulation of takeovers by the Panel on Takeovers and Mergers (the Takeover Panel). The Takeover Code applies to all companies that have their registered office in the UK if any of their securities are admitted to trading on a regulated market in the UK (eg, the Main Market of the London Stock Exchange) or a multilateral trading facility in the UK (eg, AIM) or on any stock exchange in the Channel Islands or the Isle of Man; • the Financial Services and Markets Act 2000 (FSMA), which regu- lates the financial services industry and makes provision for the official listing of securities, public offers of securities and the communication of invitations or inducements to engage in securi- ties transactions; • the Financial Conduct Authority (FCA) Handbook (which includes the Listing Rules, the Prospectus Rules and the Disclosure Guidance and Transparency Rules (DTRs) made by the FCA, including various obligations applicable to business combinations involving listed companies); • the Criminal Justice Act 1993, which, together with the Market Abuse Regulation EU No. 596/2014 (MAR), the Listing Rules, the DTRs and the Takeover Code, regulates insider dealing and market abuse. The requirement under the DTRs that companies must maintain ‘insider lists’ (namely lists of those people party to inside information at any time) should be borne in mind at an early stage in any proposed transaction; and • the UK merger control rules contained in the Enterprise Act 2002 (as amended), and the EU merger control rules contained in the EU Merger Regulation (the EUMR) (see ‘Antitrust’ section below for further details). Antitrust UK The UK merger control rules are contained in the Enterprise Act 2002 (as amended). The Enterprise Act 2002 applies to transactions that result in the creation of a relevant merger situation, which is where: • the turnover of the target business in the UK exceeds £70 million; or • as a result of the merger, the parties obtain or increase a 25 per cent or more share of supply of any goods or services in the UK or a substantial part of it; and • two or more enterprises are brought under common ownership or control and, therefore, cease to be distinct. The UK has a voluntary merger regime, meaning that there is no obliga- tion on the parties to notify a transaction to the UK competition authority, the Competition and Markets Authority (CMA), before its completion (or at all). The CMA can, however, review cases at its own initiative for up to four months after a merger has completed, or is made public – which- ever is later. The CMA review process involves two phases. At Phase I, the CMA will determine whether there is a realistic prospect that the merger will © Law Business Research 2019
- 58. England and Wales Cleary Gottlieb Steen Hamilton LLP Public MA 201958 result in a substantial lessening of competition and should, therefore, be subject to an in-depth Phase II investigation by an inquiry group of independent CMA panel members, or can be cleared at Phase I (with or without remedies). While the CMA is responsible for taking decisions in merger cases, the UK government can intervene in cases involving defined public interest considerations (see question 11 for details). The main stages and features of the CMA process are as follows: • Parties are expected to engage in pre-notification discussions based on a draft notification before the formal Phase I review period can begin. Pre-notification discussions take a minimum of two to four weeks, and can be considerably longer. • The Phase I review period lasts a maximum of 40 working days. A Phase II investigation lasts 24 weeks (and may be extended by a further eight weeks if there are special reasons for doing so). • Parties can offer remedies within five working days of receiving the CMA’s Phase I decision. • The CMA can impose orders preventing the parties from completing the transaction or integrating their businesses post-completion. • The CMA has formal investigation powers and the ability to impose penalties on parties who do not comply. • Merger fees are payable in all qualifying merger cases reviewed by the CMA (whether notified voluntarily or called in). In March 2018, the UK government introduced new merger thresholds to allow greater intervention in transactions that may raise national security concerns (see question 11 for details). EU The EUMR provides a mechanism for the control of mergers and acqui- sitions at the EU level. The regime is enforced by the Directorate General for Competition of the European Commission in Brussels. Transactions cannot be implemented unless and until they have been cleared by the European Commission. The EUMR applies to concentrations with an ‘EU dimension’, which is met where certain jurisdictional thresholds are satisfied. There are two alternative threshold tests: (i) the original thresholds; and (ii) the alternative test, which provides that some transactions not falling within the original thresholds still have an ‘EU dimension’. The original thresholds are as follows: • the combined worldwide turnover of all the undertakings concerned is more than €5 billion; • each of at least two of the undertakings concerned has an EU-wide turnover of more than €250 million; and • if each of the undertakings concerned has an EU-wide turnover of more than two-thirds of its EU-wide turnover in one and the same member state then no EU dimension exists (the ‘two-thirds rule’). The alternative thresholds are as follows: • the combined worldwide turnover of all the undertakings concerned is more than €2.5 billion; • each of at least two of the undertakings concerned has an EU-wide turnover of more than €100 million; • in each of at least three member states: • the combined aggregate turnover of all the undertakings concerned is more than €100 million; and • each of at least two of the undertakings concerned has a national turnover of more than €25 million; and • this threshold is also subject to the two-thirds rule. Cross-border transactions not falling within the EUMR may still be subject to the national competition laws of the European Economic Area (EEA) and non-EEA jurisdictions. Transactions that meet the EUMR thresholds must be notified to the European Commission. It is also possible to request that jurisdiction be transferred from national authorities to the European Commission in certain circumstances. The substantive test under the EUMR is whether the concentration would ‘significantly impede effective compe- tition in the common market or a substantial part of it, in particular as a result of the creation or strengthening of a dominant position’. The Phase I investigation may take up to 25 working days, which could be increased to 35 working days where the parties have submitted under- takings for consideration by the European Commission. Should the European Commission need to carry out more in-depth investigations and commence Phase II proceedings, it has a basic period of 90 working days to complete its investigation. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In any transaction subject to the Takeover Code (whether implemented by way of a takeover offer or a scheme), the Takeover Code requires the bidder first to announce its firm intention to make an offer. This announcement – known as a firm offer announcement or Rule 2.7 announcement – must contain all the terms and conditions of the offer and certain disclosures about the parties to the offer (see question 5 for details). The firm offer announcement may also contain preconditions (ie, conditions which must be satisfied before the offer will be made, as opposed to conditions which must be satisfied before the offer can complete). See question 12 for more details regarding preconditions and offer conditions. The principal document in a takeover offer is an offer document, which largely tracks the information in the firm offer announcement, but contains the formal offer to the shareholders of the target company. If the offer is recommended, the offer document would also contain a recommendation letter from the chairman of the target. In a hostile takeover offer, the target company’s board would issue one or more defence documents setting out why it believes target company share- holders should not accept the hostile takeover offer. In a scheme, the principal document is the circular to the target’s shareholders – known as the scheme document – which sets out the terms of the scheme and includes notices convening the requisite shareholder meetings to approve the scheme. Similar to an offer docu- ment, the information in a scheme document largely tracks the bidder’s firm offer announcement. The content requirements for an offer or scheme document under the Takeover Code are summarised in question 5 below. In a recommended takeover offer or scheme, it is customary for the bidder and target company to enter into a ‘cooperation’ or ‘bid conduct’ agreement setting out, for example, the parties’ agreement to cooperate in obtaining regulatory clearances and provisions relating to sharing information for the purpose of preparing the offer or scheme document. However, offer-related arrangements between the bidder and the target are heavily regulated by the Takeover Code and the Takeover Panel and only very limited commitments are permitted to be included. For further details on the restrictions on deal protection measures available to bidders, see question 10. The transaction agreements are usually governed by English law. © Law Business Research 2019
- 59. Cleary Gottlieb Steen Hamilton LLP England and Wales www.lexology.com/gtdt 59 FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Formal documents and announcements in public offers governed by the Takeover Code must be sent to the Takeover Panel – although the Takeover Panel famously does not pre-vet or pre-approve offer documentation – and, if listed shares form part of the consideration, a prospectus relating to those shares may be required, in which case it would need to be pre-vetted by the FCA. In a scheme, the court order sanctioning the scheme must be filed with the Registrar at Companies House in order for the scheme to take effect. On the assumption that the shares in the UK target company are held in dematerialised form, with transfers settled through CREST, stamp duty reserve tax (SDRT) will generally be payable by the bidder at a rate of 0.5 per cent of the consideration paid for the shares. This is discussed in further detail in the response to question 18. The Takeover Panel, the FCA and the Stock Exchange charge fees, which are broadly dependent on the value of the transaction in ques- tion and the nature of the transaction. The Takeover Panel’s fees range between £2,000 and £350,000 while the FCA may charge fees up to a value of £50,000. Under the Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003 (as amended), the CMA can levy fees in certain circumstances where there is a relevant merger situation. These fees range from £40,000 to £160,000, depending on the target’s UK turnover and are generally payable once the CMA has made a decision following a Phase I investigation. No fees are payable in respect of notifications to the European Commission under the EUMR. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The Takeover Code’s disclosure regime is intended to provide the market with a greater degree of transparency during the course of a takeover as compared to the disclosure rules applicable at other times (eg, under MAR and the DTRs). The Takeover Code’s disclosure rules can be divided into three subsets: (i) disclosure of the existence of a potential offer; (ii) disclosure relating to the offer itself and the parties to the offer (eg, in the bid documentation); and (iii) disclosure of share- holdings and trading by the parties to the offer and other substantial shareholders during the offer period (on which see question 6). The Takeover Code provides that, prior to an offer being announced, from such time as the bidder begins to ‘actively consider’ a possible offer, if there is any rumour or speculation regarding the possible offer, or an untoward movement in the target’s share price, the Takeover Panel may require the target or the potential bidder to make an immediate announcement either confirming that the bidder is considering making an offer or stating that the bidder will not make an offer. Transactions governed by the Takeover Code frequently enter the public domain for the first time as a result of an announcement required under this rule. An announcement of a possible offer automatically trig- gers a 28-day ‘put-up or shut-up’ deadline on the bidder to announce a firm offer or announce that it will not make an offer. If a potential bidder makes a statement that it will not make an offer, the poten- tial bidder and its concert parties will be restricted from announcing an offer, and taking certain other actions, for a period of six months (subject to certain carveouts, eg, if a third party announces a firm bid for the target). Announcement of a possible offer will commence an ‘offer period’ in relation to the target. The formal offer document (or scheme document, in the case of a scheme) must detail, among other things, (i) the terms and condi- tions of the offer, (ii) background information on the bidder and its financing arrangements, (iii) the bidder’s strategic intentions for the target (including its employees, places of business, fixed assets and any research and development functions), (iv) any irrevocable under- takings received from target shareholders, and (v) any arrangements between the bidder and the target, or their respective concert parties, including any management incentivisation or rollover arrangements. A prospectus, if required in connection with any share consideration offered, must contain all information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer, and the rights attaching to the securities in question. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Under rule 5.1.2 of the DTRs, which implement the EU Transparency Directive (2004/109/EC), any person who directly or indirectly acquires 3 per cent or more of the voting rights in a UK listed company is required to notify that interest to the company concerned (and the FCA in the case of acquisitions on regulated markets) as soon as possible, but not later than two trading days after the acquisition. The listed company is in turn required to announce any interest notified to it via a regulatory information service (RIS) by the end of the next trading day. Further acquisitions that reach or break through percentage points above 3 per cent must also be notified. The DTRs contain provisions requiring the aggregation of voting rights held by parties acting in concert and apply to entitlements to acquire shares and financial instruments considered to be economically equivalent to shares. Separately, rule 8 of the Takeover Code contains a regime for the public notification of shareholdings in certain circumstances. At the start of an offer period, the bidder and the target must disclose, via an RIS, their respective interests in target securities in the form of an ‘Opening Position Disclosure’. For this purpose ‘interest’ includes, broadly, any long exposure to the target’s securities, including via derivatives. The opening position disclosure must also include any interests held by the parties’ respective concert parties (eg, directors and advisers). Any person who holds an interest in 1 per cent or more of any class of the target’s securities at the start of the offer period must also make an opening position disclosure on the same basis. During the offer period, the parties to the offer and any person who holds (or, as a result of any dealing, comes to hold) 1 per cent or more of any class of the target’s securities must disclose the details of any dealing in the target’s securi- ties via an RIS by 12 noon on the business day following the dealing. Disclosures may also be required in respect of the bidder’s securities (eg, if the bidder is offering securities as consideration in the offer). © Law Business Research 2019
- 60. England and Wales Cleary Gottlieb Steen Hamilton LLP Public MA 201960 DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Under the Companies Act 2006, directors of a UK company have a duty: • to act in accordance with the company’s constitution and exercise powers for the purposes for which they were conferred; • to promote the success of the company; • to exercise independent judgment; • to use reasonable care, skill and diligence; • to avoid conflicts of interest; • not to accept benefits from third parties; and • to declare interests in proposed transactions and arrangements. Directors’ duties are owed to the company. The duty to promote the success of the company requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The target board is not under any Revlon-style duty to conduct market checks to ensure that the bidder’s price is the best price reasonably attainable. However, the UK courts have indicated that, given two competing bids, the board has a duty to recommend the higher bid. When exercising their powers, directors must have regard to various factors including the likely long- term consequences of a decision, the interests of employees, the need to foster the company’s business relationships, the community and the environment, the company’s reputation and the need to act fairly as between the members of the company. In the context of a takeover, this duty is supplemented by General Principle 3 of the Takeover Code, which requires the directors of the target company to act in the interests of the company as a whole and not to deny shareholders a chance to decide on the merits of a bid. Additionally, the Takeover Code requires the target’s board to: • obtain competent independent advice on the fairness and reasona- bleness of the financial terms of the offer and publish the substance of such advice (rule 3 of the Takeover Code); • publish its opinion on the offer and its reasons for forming its opinion (rule 25 of the Takeover Code); • ensure sufficient information is made available to the target’s shareholders to enable them make an informed decision on the offer (rule 23 of the Takeover Code); • not take actions that might frustrate an offer or potential offer without shareholder approval (see question 9); and • ensure the highest standards of care and accuracy are met with respect to information published during the course of an offer and take responsibility for the information provided in documents (rule 19 of the Takeover Code). Controlling shareholders do not generally owe fiduciary duties to the company or other shareholders (subject to very limited exceptions). Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? The general shareholder acceptance or approval requirements for takeover offers and schemes are set out in question 1. Unlike jurisdic- tions such as Delaware, shareholders of UK publicly listed companies do not have appraisal or similar rights in the context of sales of a public company. However, shareholders of UK publicly listed companies do have certain limited rights to object as set out in further detail below. Scheme of arrangement A majority of not less than 75 per cent of the votes cast by each class of shareholders present and voting is required to approve the scheme as well as any related amendments to the company’s articles. Eligible shareholders thus have an opportunity to vote against the scheme and/ or amendments to the company’s articles. Before deciding whether to sanction a scheme, the court will take into account any objections from interested parties (including dissenting shareholders), although it is very rare for the UK court to exercise its discretion to refuse to sanction a scheme that has been approved by the requisite majorities of target shareholders in circumstances where they are voting on an informed basis. Takeover offer Takeover offers are usually conditional on a minimum level of accept- ances being received. The acceptance condition must be higher than 50 per cent and is often set at 90 per cent in order to permit the bidder to implement a statutory squeeze-out procedure. A bidder will only be able to squeeze out non-accepting share- holders in order to guarantee the acquisition of 100 per cent of the shares in a target if it has obtained acceptances in respect of 90 per cent of the shares to which the takeover offer relates. Non-accepting shareholders can seek to challenge a squeeze-out procedure initiated by the bidder before the court on the grounds that the statutory process has not been complied with or that the takeover offer is unfair (although such challenges are rare and the bar for success is high). When a takeover offer has become wholly unconditional, bidders often seek to reregister the target as a private limited company to benefit from a more flexible corporate law regime. A shareholder or shareholders holding more than 5 per cent of the shares in the target (or, alternatively, at least 50 shareholders) is entitled to seek to chal- lenge such a reregistration (although in practice challenges are rare and the bar for success is high). COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? In a hostile transaction, both the target and the bidder issue their own announcements and, following publication of the offer document, the target’s board sends a defence document to its shareholders explaining why it thinks the offer should be rejected. From a competition law perspective, the adversarial nature of a hostile bid means that the bidder will often be forced to make any merger control filings (including under the EUMR) unilaterally, without the benefit of information or assistance from the target. A number of provisions in the Takeover Code (although technically applying to all offers) often need to be considered carefully in hostile transactions. The following are particularly noteworthy: • the offer must first be notified to the board of the target company or its advisers (although in practice this could be done immediately prior to publication of the firm offer announcement); • all target company shareholders (of the same class) should be treated equally; • any information given to one bidder or potential bidder must, on request, be given equally and promptly to any other bidder or bona fide potential bidder; © Law Business Research 2019
- 61. Cleary Gottlieb Steen Hamilton LLP England and Wales www.lexology.com/gtdt 61 • there are constraints on share purchases before or during an offer period, the offer price and the type of consideration that can be offered, and stake building can have consequences for the bidder (eg, setting the minimum consideration for the offer and, if the bidder acquires 30 per cent or more of the target’s voting rights, triggering a requirement to make mandatory general offer); • there are restrictions on the board of the target company taking actions that might frustrate an offer or potential offer. The Takeover Code lists some particular actions that may not be carried out to frustrate a bid without shareholder approval, including issuing shares, issuing or granting options, and disposing of material assets; and • advisers cannot be incentivised by the payment of a fee conditional upon the failure of a bid. The Takeover Panel implemented several amendments to the Takeover Code that took effect in January 2018, which affect hostile takeover offers, including: • the bidder being required to make more specific statements about intentions for the target’s business, including its RD functions, the balance of the skills and functions of its employees and the likely repercussions of the bidder’s strategic plans on the location of the target’s HQ and HQ functions; • restriction on publication of offer document until 14 days after firm bid announcement, except with the target’s consent. This rule is intended to give the target’s board more time to prepare and publish its defence document where there is a hostile takeover offer, and will result in the offer timetable being pushed back; and • where a target company is required to obtain shareholder approval in relation to any proposed frustrating action, it must send a circular to shareholders and obtain independent advice as to whether the financial terms of the proposed action are fair and reasonable. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Break fees The Takeover Code includes a general prohibition against certain deal protection measures for bidders. Break fees, exclusivity and non-solicita- tion agreements, matching arrangements, implementation agreements and similar bidder protections are not permitted, subject to certain limited exceptions. The Takeover Panel will permit a target company to enter into a break fee arrangement with a bidder if the target board seeks a ‘white knight’ in the context of a hostile takeover offer, or if the target has put itself up for sale by means of a formal process or is in serious financial distress. Such exceptional break fee arrangements are normally limited to 1 per cent of the value of the target company calcu- lated by reference to the offer price. Even in the very limited circumstances where a break fee is permitted under the Takeover Code, before agreeing to a break fee, the target board will need to conclude that the break fee is in the best interests of the shareholders of the target as a whole (eg, because, in the absence of the company agreeing to pay such a fee, the share- holders would be deprived of an offer that the board would otherwise recommend). The Takeover Code does not prohibit the payment of a reverse break fee by a bidder to a target. However, if the bidder is subject to the UK Listing Rules, if the reverse break fee is greater than 1 per cent of the market cap of the listed company, then it will be deemed to be a ‘class 1 transaction’ and shareholder approval will be required. The Takeover Code also restricts the conditions that can be attached to a reverse break fee (eg, if they could deter potential competing bidders from making an offer). Financial assistance Subject to limited exceptions, an English public company may not provide financial assistance directly or indirectly for the purpose of the acquisition of the shares in itself or its holding company. Financial assis- tance includes guarantees, security, indemnities, loans and any other financial assistance. Additionally, private companies are prohibited from giving financial assistance for the purpose of the acquisition of shares in a public parent company. These restrictions are relevant to bidders and finance providers who will often expect the target’s assets to be pledged as security for the acquisition debt once the offer is complete. This militates in favour of bidders setting a higher acceptance condition so that they acquire enough shares to reregister the target as a private company after the offer is complete. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Public interest considerations The EU and UK merger control regimes are described in question 2. The relevant secretary of state is able to intervene only in excep- tional cases involving public interest considerations. The Enterprise Act 2002 specifies the public interest considerations in relation to which the secretary of state may intervene, including mergers involving compa- nies in the defence, newspaper and broadcast sectors. The Enterprise Act 2002 also allows new grounds for intervention to be added by statutory instrument should the need arise. Foreign investment and national security In March 2018, the UK government announced its intention to intro- duce a first set of measures to increase government scrutiny of foreign investment in relation to national security, which will involve lowering the CMA turnover threshold referred to in question 2 from £70 million to £1 million, and removing the requirement for the merger to lead to an increased market share in the above-mentioned sectors. These meas- ures came into effect on 11 June 2018. In July 2018, the UK government published proposals for legisla- tive reform that would give it significantly greater powers to intervene in transactions on national security grounds. The scope of ‘national security’ is explained in a draft statutory statement of policy intent; the term, however, has not been defined precisely. National security threats may include acts of terrorism or actions of hostile states related to cyber-warfare; supply chain disruption of certain goods or services; disruptive or destructive actions or sabotage of sensitive sites; and espionage or leverage. The regime will not be limited to any particular sectors, nor will there be turnover or market-share thresholds to place certain transac- tions out of scope. However, the following aspects of the UK economy have been identified as likely to give rise to national security risks: • core national infrastructure sectors such as the civil nuclear, communications, defence, energy and transport sectors; • certain advanced technologies including computing, networking and data communication and quantum technologies; • critical direct suppliers to the government and emergency services sectors; and • military or dual-use technologies. © Law Business Research 2019
- 62. England and Wales Cleary Gottlieb Steen Hamilton LLP Public MA 201962 The proposals describe a ‘voluntary’ notification regime whereby parties to a transaction notify the government when a potential ‘trigger event’ is contemplated or in progress. The government would also have the power to ‘call in’ trigger events that have not been notified by the parties. Consultation on the proposals closed in October 2018 and greater clarity on the anticipated timeline for enactment of the new regime is expected in the coming months when the government publishes its response. The regime is unlikely to come into effect until 2020. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? As set out in questions 1 and 8, a takeover offer will be subject to an acceptance condition which will usually be between 50 per cent and 90 per cent. A scheme must be conditional on the approval of a majority in number representing 75 per cent in value of a target company’s share- holders present and voting (either in person or by proxy), and needs to be sanctioned by the court. Although it is common for bidders to include wide-ranging condi- tions in the terms of an offer, the practical effect of these is limited by the Takeover Code and the Takeover Panel’s approach to the application of the rules. Under the Takeover Code, an offer must not normally be subject to conditions that depend solely on subjective judgments by the directors of the bidder or the fulfilment of which is in their hands. With the exception of UK or EU competition conditions, a bidder should not invoke any condition so as to cause an offer to lapse, unless the circum- stances that give rise to the right to invoke the condition are of material significance to the bidder in the context of the offer and the Takeover Panel has given its consent for that condition to be invoked. The avail- ability of finance would not normally be permitted to be a condition to a cash offer. In addition, bids cannot be conditional on completion of due diligence. A bidder may also announce its intention to make a takeover offer (by way of an offer or a scheme) on a preconditional basis. This involves the bidder stating in its firm offer announcement that the making of the offer (ie, the publication of the formal offer document or scheme docu- ment) is subject to one or more preconditions being satisfied before a long stop date. Preconditions can only be used if the Takeover Panel has been consulted in advance. Generally, preconditions are allowed when material official authorisations are needed or there are regulatory clearances required that relate to the offer and the Takeover Panel is satisfied that it is likely to prove impossible to obtain the authorisation or clearance within the offer timetable. The Takeover Code requires that it must be a term of an offer that it will lapse if the proposed merger is referred to Phase II either by the CMA or the European Commission before the first closing date or the date when the offer becomes or is declared unconditional as to acceptances, whichever is later (for an offer), or before the date of the shareholder meetings (for a scheme). It is for this reason that mergers that are considered likely to go to Phase II in the UK or Europe are often structured on a preconditional basis. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? It is a key feature of UK public takeovers that the bidder has ‘certain funds’ at the time of the firm offer announcement in order to enable it to satisfy any cash element of the offer consideration in full. The firm offer announcement and the offer document must include a statement to this effect from an appropriate third party (usually the bidder’s lead financial adviser); this is the ‘cash confirmation statement’. The person giving the confirmation could be required to fund any shortfall if funds are not available to the bidder at the relevant time and the Panel concludes that the cash confirmer did not act responsibly and take all reasonable steps to assure themselves that the cash was available. A description of how the offer is being financed and the source of finance (including the repayment terms and names of lenders, etc) must be included in the offer document. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? In a takeover offer, a bidder that acquires not less than 90 per cent of the relevant shares to which the takeover offer relates and 90 per cent of the voting rights carried by those shares is entitled to compulsorily purchase the remainder of the shares using the statutory squeeze-out process under the Companies Act 2006. In order to do this, the bidder must give notice to the minority shareholders, provided that: • notice is given before the expiry of a three-month period, beginning with the day after the last day on which the takeover offer can be accepted; and • the other procedural requirements of the Companies Act 2006 are complied with. In addition to a successful bidder’s squeeze-out rights, once the relevant 90 per cent thresholds are achieved, the remaining minority share- holders can exercise ‘sell-out’ rights requiring the successful bidder to purchase their shares. Once a scheme becomes effective it binds all shareholders and a bidder will automatically acquire 100 per cent of the target’s shares. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Currently, UK public companies may combine with other EEA businesses using the European merger procedures provided by the Companies (Cross-Border Mergers) Regulations 2007 (the Cross-Border Mergers Regulations), which implements the EU Cross-Border Mergers Directive. However, this structure has rarely been used to implement a takeover of a UK listed company, and, in any event, this structure will cease to be available following Brexit, the UK’s exit from the European Union. © Law Business Research 2019
- 63. Cleary Gottlieb Steen Hamilton LLP England and Wales www.lexology.com/gtdt 63 Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Other than the minority squeeze-out provisions described above and particular requirements applicable to the businesses of specific indus- tries, there are no waiting or notification periods generally applicable. The Takeover Code, however, prescribes a fixed timetable relating to the timing of takeover offers as follows: • an offer document must normally be sent to the target’s share- holders and other required recipients within 28 days of the firm announcement of an offer (and the bidder needs the target’s consent if it wants to publish within the first 14 days); • an offer must be open for acceptance for at least 21 days after it is sent; • the target’s directors must advise shareholders of their views on an offer within 14 days of the offer being made; • any material new information to be published by the target must be published no later than 39 days after publication of the offer document; • an offer may not normally be increased later than 46 days after it is made or less than 14 days from its final closing date; • an offer must normally remain open for acceptance for an addi- tional 14 days after it has become unconditional as to acceptances; • an offer may not be extended beyond 60 days of it being made unless it has become unconditional as to acceptances at the time; • all offer conditions must be fulfilled within 21 days of the first closing date for acceptances or, if later, when it becomes uncondi- tional as to acceptances; and • the consideration must be settled within 14 days of the first closing date for acceptances or, if later, when the offer becomes wholly unconditional. The timetable for a scheme is largely determined by the court process. However, the Takeover Code does impose certain constraints on the timetable for the scheme, in particular: • the scheme document must be sent to the target’s shareholders and other required recipients within 28 days of the firm offer announcement; • the scheme circular must set out the expected timetable for the scheme; • the shareholder meetings must normally be convened for a date no sooner than 21 days following the date of the scheme circular; • revisions to the scheme should be made no later than 14 days before the relevant shareholder meetings or will require consent of the Takeover Panel; and • consideration must be sent to the target’s shareholders within 14 days of the scheme becoming effective. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Water and sewerage sector Mergers in the water and sewerage sectors are subject to special rules on referral to the CMA, if certain minimum turnover thresholds are met. Financial services sector Mergers and acquisitions in the financial services industry, whereby a target or its subsidiary is regulated by the FCA or Prudential Regulation Authority (PRA), are likely to require change of control approval from the one or both of the FCA and PRA (as applicable), a process for which the assessment period is typically 60 working days. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? One UK tax issue that will arise is the need for the bidder to pay SDRT. On the assumption that the shares in the UK target company are held in dematerialised form, with transfers settled through CREST, SDRT will generally be payable by the bidder at a rate of 0.5 per cent of the consid- eration paid for the shares. Under recently introduced legislation, if the bidder is a company and it purchases the shares from a related party, SDRT will instead be charged at 0.5 per cent of the market value of the shares transferred. If the UK target company’s shares are admitted to trading on certain recognised growth markets, including the London Stock Exchange’s AIM and High Growth Segment (and not listed on certain stock exchanges), an exemption from SDRT will apply. The acquisition of shares is exempt from UK value added tax, although other indirect taxes could apply outside the UK, depending on local rules in the jurisdictions of the purchaser or the selling share- holders if they are outside the UK, or both. The tax attributes of the selling shareholders may influence certain aspects of how the acquisition is best structured. For example, sellers may prefer consideration in the form of shares in, or loan notes of, the bidder. Depending on the tax rules of a seller’s jurisdiction of tax resi- dence, consideration in that form may allow the seller to (i) rollover its tax base cost in the UK public company’s shares into the consideration securities without triggering a gain on the disposal; or (ii) hold over any latent gain at the time of the disposal so that it is deferred until a subse- quent sale or redemption of the consideration securities. For UK tax resident sellers, reliefs of this kind may be available, provided certain conditions are met. One potential issue from a bidder’s perspective, is the availability of tax deductions for interest and other expenses of any borrowing used to acquire the UK target company. Many jurisdictions, including the UK, have rules which may limit the ability of borrowers to obtain deductions. For example, deductions may be limited under (i) thin capitalisation rules, if debt funding, in comparison to equity funding, is excessive; (ii) transfer pricing rules, if there is related party debt which bears a non-arm’s length interest rate; and (iii) hybrid mismatch rules, if there is a hybrid instrument (ie, an instrument that is treated as debt in one jurisdiction and equity in another) or hybrid entity (ie, an entity that is recognised as a taxable person in one jurisdiction, but not in another) anywhere in the financing structure. In addition, in response to the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative, many jurisdictions have introduced further restrictions on interest deductibility, based on fixed ratios. For UK resident borrowers, permissible net interest deductions are limited, very broadly speaking and subject to a de minimis rule, to a fixed ratio of the EBITDA of the borrower entity or its group, up to a cap based on the borrower and its group’s worldwide external financing expense. © Law Business Research 2019
- 64. England and Wales Cleary Gottlieb Steen Hamilton LLP Public MA 201964 Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Takeover Code requirements During the course of an offer, announcements and documents must be made available to the target’s employee representatives (or if the target does not have employee representatives, the employees themselves). The Takeover Code does not impose any consultation obligations on the bidder or the target, but employee representatives have a right to prepare a separate opinion on the effects of an offer on employment. They must be informed of this right when the target company distrib- utes the possible or firm offer announcement, or summary circular. The target is responsible for the costs of employee representatives obtaining advice to verify the opinion, and must attach the opinion to its own circular upon receipt. If there is insufficient time to attach the opinion to the circular, the opinion must be published by the target on a website and announced via an RIS. There are also a number of employ- ment-related disclosure requirements within the Takeover Code. The bidder must disclose in the firm offer announcement and offer docu- ment or scheme document: • its intentions regarding the future business of the target, including its plans for any research and development functions of the target; • its intentions involving the continued employment of employees and management, including with regard to any material change in the balance of their skills or functions; • a statement of intention regarding employer contributions into the target company’s pension scheme, the accrual of benefits for existing members and the admission of new members into the scheme; and • its strategic plans for the two companies, in particular the likely repercussions on employment and locations of business, including in respect of the location of the target’s headquarters. Impact of acquisition on employees Share options The treatment of share options in the target group is predominantly governed by the terms of the individual scheme rules. In the case of a takeover offer or scheme, it is likely that change of control provisions in the share option scheme rules will trigger some or all of the options to be exercisable for a limited period after the change of control. To the extent that employees of the target hold share options or other rights over shares in the target company, under the Takeover Code the bidder is required to make them an ‘appropriate’ offer along with any other optionholders. It is common for employees to enter into arrangements where share scheme awards in the target are exchanged for awards in the bidder company. Frequent alternatives are the bidder (i) allowing employee awards to be exercised according to the takeover clauses of the share scheme and enabling shares to be purchased on the same terms as other shareholders; or (ii) making cash cancellation payments that buy out employee share award rights. Employees who hold shares are treated in the same manner as other shareholders. Pensions The bidder, in acquiring ownership of the target company, also acquires the target’s liabilities to its employees in respect of pensions. With respect to any defined benefit pension scheme, the Takeover Code requires the same information and documentation to be provided by the bidder and target to the pension scheme trustees as to employee representatives. Trustees must also similarly be informed of their right to have an opinion on the effect of the offer on the pension scheme appended to the target board’s circular. Bidders thus often seek to have discussions with trustees of defined benefit pension schemes prior to making a firm offer announcement. There is no requirement for the target to pay any of the costs incurred by the trustees in obtaining advice on the opinion. The UK Pensions Regulator is expected to play a more active role in takeover transactions given recent proposals. In June 2018, the Department for Work and Pensions launched a consultation to explore improvements to the Pensions Regulator and pension trustees’ roles in scrutinising corporate transactions. Following the conclusion of this consultation, the Department for Work and Pensions’ intends to intro- duce a requirement for a ‘Declaration of Intent’ to be made on the sale of a controlling interest in a sponsoring employer. This declaration will disclose party intentions in relation to defined benefit pension schemes and will be shared with both the trustee board and the Pensions Regulator. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? While it is not particularly unusual for target companies to be in finan- cial difficulty before the announcement of a bid (and this may be one reason for the bidder’s interest in the first place), it is very rare for a target company to be insolvent or in administration at the outset of the offer period or for the target company to become insolvent or be placed into administration during the course of the bid. Where adminis- trators are appointed, however, it can be very difficult for the Takeover Panel, the bidder or other market participants to enforce the rules of the Takeover Code against the target company and the administrator – whose primary responsibility at that stage will be protecting the inter- ests of the target’s creditors, rather than its shareholders – even though the rules will be enforced against the bidder in the normal way, unless it can obtain bespoke dispensations from the Takeover Panel. One example of a transaction involving a target company in finan- cial difficulty, which placed itself into administration during the course of the bid, is Hailiang Group Co, Ltd’s (Hailiang) hostile offer for ASA Resource Group Plc (ASA). Notwithstanding that ASA was placed into administration after Hailiang had posted its offer document, Hailiang elected not to lapse its offer (even though the Takeover Panel confirmed publicly that Hailiang had the right to do so) and eventually declared its offer wholly unconditional at approximately 53 per cent acceptances. It was notable that, during the course of the bid, the Takeover Panel granted Hailiang certain unusual dispensations from the Takeover Code to reflect the unusual circumstances of the transaction (eg, a preemp- tive dispensation from the rules around making an offer within the 12 months after a current offer has lapsed). Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? There are no anti-corruption, anti-bribery or economic sanctions consid- erations that apply specifically to public MA transactions in the UK (as opposed to MA transactions generally). In the normal way, the bidder would ordinarily consider these issues as part of its due diligence on the target company (where these issues are considered to be a signifi- cant risk). © Law Business Research 2019
- 65. Cleary Gottlieb Steen Hamilton LLP England and Wales www.lexology.com/gtdt 65 UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? Public MA activity in 2018 was down from 2017 by number of deals announced, in part owing to continued political and economic uncertain- ties including the UK’s planned exit from the European Union. During 2018, 23 firm offers were announced for Main Market companies (down from 25 in 2017 and 26 in 2o16) and 19 firm offers were announced for AIM companies (down from 21 in 2017 and 25 in 2016). However, overall public MA deal value significantly increased from £44.3 billion in 2017 to £120.4 billion in 2018. There were 16 offers with a value of over £1 billion, up from 12 offers in 2017. Continuing the trend seen in previous years, schemes of arrangement were more popular than takeover offers, comprising 31 of the 42 firm bids announced in 2018. The remaining 11 (of 42) firm bids were contractual offers, of which seven were initially hostile. Additionally, there were two competing bids in 2018 compared to one in 2017. Sectoral activity 2018 saw an increase in activity in the technology sector: nine of the firm offers announced in 2018 were for target companies in this sector, up from four in 2017. Other sectors that saw significant activity included the pharmaceuticals, biotechnology and healthcare sector (seven offers); support services sector (four offers); mining, metals and engineering sector (four offers); and financial sector (four offers). Brexit The UK’s withdrawal from the EU, which is currently expected to take place on 29 March 2019, is not expected to result in significant changes to the legislative framework applying to takeovers of publicly listed companies in UK. The current expectation is that much of EU law rele- vant to public takeovers will simply be transposed into UK domestic law without material substantive changes. In October 2018, a draft of the Takeovers (Amendment) (EU Exit) Regulations 2019 was published and will make the necessary changes required to Part 28 of the Companies Act 2006 to enable the UK takeo- vers regime to operate outside the framework of the Takeovers Directive in the event of a no deal Brexit. The draft instrument received legislative approval in January 2019. In November 2018, consultation paper PCP 2018/2 was published by the Code Committee of the Takeover Panel reflecting proposed changes to the Code relating to Brexit. The changes include the proposal for the UK to withdraw from the ‘shared jurisdiction’ regime under the Takeovers Directive (with the effect that, from the effective date of the UK’s with- drawal from the European Union (following any transitional period) the Takeover Panel will cease entirely to regulate takeovers of companies registered outside of the UK, the Channel Islands and the Isle of Man. The final amendments to the Takeover Code proposed by the Code Committee are expected to be published prior to 29 March 2019. Following Brexit, the UK will no longer be precluded from investigating mergers under national rules that would currently fall within the exclu- sive jurisdiction of the European Commission under the EUMR. Regulatory intervention In October 2017, the Department for Business, Energy and Industrial strategy published proposals to increase government scrutiny of foreign investment for national security purposes and, in June 2018, introduced the first set of those measures. The government was keen, however, to reiterate that the UK remains open to foreign investment in all sectors and that ‘scrutiny does not mean making any part of the UK’s economy off-limits to foreign investment’. In July 2018, the UK government published a White Paper addressing its further longer term proposals for a significantly revised regime of foreign investment into the UK, including a new national security review process for mergers and acquisitions. Consultation on these measures has now closed but, at the date of writing, the government has not yet announced how (or when) it intends to proceed. Changes to the Takeover Code In a consultation paper published on 17 October 2018, the Code Committee of the Takeover Panel proposed certain changes to the Takeover Code. This paper proposes to amend Rule 29 of the Takeover Code, which relates to asset valuations, in order to provide clarity and codify ongoing practices. The consultation period in respect of these changes closed in December 2018. Sam Bagot sbagot@cgsh.com Matthew Hamilton-Foyn mhamilton-foyn@cgsh.com Dan Tierney dtierney@cgsh.com Ufuoma Brume ubrume@cgsh.com 2 London Wall Place London EC2Y 5AU United Kingdom Tel: +44 20 7614 2200 Fax: +44 20 7600 1689 www.cgsh.com © Law Business Research 2019
- 66. Public MA 201966 France AnyaHristova and Océane Vassard Bersay Associés STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Focusing on combinations leading to a change of control, businesses publicly listed in France can combine through either acquisitions or reorganisations. Acquisition of a majority participation As a rule, shares of publicly listed companies can be acquired either off- market or on the stock exchange. The purchase of a controlling interest in a listed company is possible through a public tender offer, which may be voluntary or mandatory. The applicable thresholds for filing a mandatory public tender offer vary depending on the type of financial market the shares are listed on. On regulated markets, such as Euronext Paris, filing a public tender offer becomes mandatory when the following thresholds are reached: • when an investor, acting alone or in concert with others, becomes the owner, directly or indirectly, of more than 30 per cent of the share capital or voting rights of a listed company; or • when an investor who already holds between 30 per cent and 50 per cent of the company, acting alone or in concert with others, acquires, directly or indirectly, more than 1 per cent of the capital or voting rights of such company in less than a year. Under these thresholds, the purchase of a controlling interest is made through a voluntary public tender offer. Aside from in specific cases, tender public offers must be made for 100 per cent of the shares and securities giving access to the capital or voting rights of the target company. They can be made in consideration of cash, existing or newly listed shares, or a combination of both. Reorganisations There are three main ways of reorganising French listed companies: • mergers: all assets and liabilities are transferred to an existing (legal merger) or new (merger contribution) company; • demergers: the different lines of business of a company are divided into separate existing or new companies; and • partial asset contributions: an autonomous line of business is contributed by a company into an existing or new company, which receives shares in the beneficiary company in return. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? In France rules governing business combinations and acquisitions of publicly listed companies come from a variety of sources at both the European and the national levels. As regards the European level, the main rules are as follows: • Regulation (EU) No. 596/2014 on market abuse; • Regulation (EU) No. 1129/2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market; • Regulation (EU) No. 139/2004 on the control of concentrations between undertakings and Regulation No. (EU) 802/2004 imple- menting Regulation (EU) No. 139/2004; and • European Securities and Markets Authority (ESMA) guidelines. As regards the national level, the main provisions to consider are: • the Monetary and Financial Code (CMF); • the Commercial Code; • the Civil Code; • the General Tax Code; • the Labour Code; • the General Regulations of the French Financial Markets Authority (AMF); and • the rules and regulations of the market operator applicable to the relevant financial market (eg, Euronext Paris and Euronext Growth). Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Whether transaction agreements are concluded when publicly listed companies are acquired depends on the combination used. Combination resulting from acquisition of shares (transfer of shares or takeover) When the investor intends to purchase a controlling interest a public tender offer is filed, which requires a strictly regulated offer prospectus. This offer prospectus is governed by French law. In addition to the prospectus, investors may enter into an agree- ment with the main shareholders of the target company to secure their undertaking to tender their shares. Furthermore, when the board of the target company recommends the bid, investors may enter into an agree- ment with the target company to set out the terms and conditions of the offer. Both types of agreements can be governed by any law at the discretion of the parties but are typically subject to French law when the target company is French. When the transaction agreements are © Law Business Research 2019
- 67. Bersay Associés France www.lexology.com/gtdt 67 governed by a foreign law, French law still governs the formalities for the transfer of shares in all French companies. Combination resulting from a reorganisation (merger, demerger or asset contribution) A merger, demerger or asset contribution agreement, entered into between the participating entities, outlines the legal, financial, tax and accounting terms of the transaction. Such agreement shall be governed by French law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Filings with the AMF and the Trade and Companies Registry During public takeovers a draft offer prospectus is to be filed by the bidder with the AMF. The bidder must also publish on its website a press release presenting the main terms of the offer (see also questions 3 and 5). Upon receipt of the offer prospectus, the AMF publishes the draft offer prospectus and the summary terms of the offer on its website. The AMF then assesses the compliance of the draft offer prospectus with the relevant legal and regulatory rules and against the principles of loyalty and market transparency before approving it. During reorganisations (mergers, demergers and partial asset contributions), a draft simplified prospectus presenting the contem- plated transaction is submitted to the AMF (known as ‘Document E’). Upon receipt of this simplified prospectus, the AMF publishes the draft prospectus and the summary terms of the offer on its website. Information on the transaction shall also be published on the partici- pating companies’ websites, if they are publicly listed, and be made available to the public through different channels (publication in a national newspaper; in the relevant service providers; at the registered seat of the company or from the relevant market operator). Various documents are filed with the relevant Trade and Companies Registries during different phases of the transaction, namely the: • draft reorganisation agreement; • report on the transaction prepared by the external auditor; • minutes of the shareholders’ meetings of the participating companies; • declaration of conformity certifying that the transaction complies with applicable laws and regulations; and • legal notices on the transaction, to be published before and after the execution of the operation. Fees charged by the Trade and Companies Registry for the various above-mentioned filings generally do not exceed €500 for each partici- pating company. Filings with competition authorities French or EU antitrust control rules, or both, apply, above certain thresholds, to mergers with or acquisitions of French companies. French antitrust controls apply to all production, distribution and service activi- ties, including those of public companies but only if the total worldwide pre-tax turnover of the participating parties exceeds €150 million and the total turnover excluding tax realised individually in France by at least two of the parties is greater than €50 million. However, this is not the case when operations fall within the scope of EU merger control, unless the European Commission decides to send it back to the French authorities. EU merger controls apply when: • the combined aggregate worldwide turnover of all the companies concerned is more than €5 billion; and • the aggregate turnover in the EU of each of at least two of the companies concerned is more than €250 million, unless each of the companies concerned generates more than two-thirds of its aggregate EU-wide turnover within a single EU country. If the above-mentioned thresholds are not reached, a concentration nevertheless has an EU dimension if: • the combined aggregate worldwide turnover of all the companies concerned is more than €2.5 billion; • in each of at least three EU countries, the combined aggregate turnover of all the companies concerned is more than €100 million; • in each of at least three EU countries, the aggregate turnover of each of at least two of the companies concerned is more than €25 million; and • the aggregate EU-wide turnover of each of at least two of the companies concerned is more than €100 million, unless each of the companies concerned generates more than two-thirds of its aggre- gate EU-wide turnover in one and the same EU country. The contemplated concentration must be notified to the relevant compe- tition authority by the parties who acquire control before it is completed. After conducting a competitive assessment of the operation and ascer- taining whether it contributes to economic progress, the competition authority may prohibit the transaction or authorise it, in some cases providing that the parties take certain measures to ensure sufficient competition. Other filings For filings specific to foreign investments, see question 11. For tax filings related to and payment of stamp duties, see question 18. For filings specific to certain sectors, see question 17. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Publicly traded companies on a regulated market are required to imme- diately communicate to the public what is known as inside information. This refers to any precise information that has not been made public and is likely to have a significant effect on their share price. Similar provisions are applicable to any person preparing a finan- cial transaction liable to have a significant impact on the market price of shares, or on the financial position and rights of holders of those shares. Such persons must disclose the features of the transaction to the public as soon as possible. If confidentiality is temporarily necessary to carry out the transac- tion and if the person is able to ensure such confidentiality, the General Regulation of the AMF sets out that such person may assume responsi- bility for deferring the disclosure of the transaction. Shareholders and managers of publicly traded companies must also notify the AMF of the following information, which will be made public: • any crossing of thresholds and declaration of intent (see question 6); • shareholders’ agreements concluded between shareholders concerning at least 0.5 per cent of the share capital or voting rights; • draft amendments to the articles of association; • transactions carried out by management on the company’s finan- cial instruments and insider lists; © Law Business Research 2019
- 68. France Bersay Associés Public MA 201968 • any change in the rights attached to the different categories of shares, including the rights attached to the derivative instruments issued by the issuer and giving access to the shares of the issuer; • any change in the terms of the issue that may have a direct impact on the rights of holders of financial instruments other than shares. New issues of debt securities and the guarantees to which they may be attached; and • pro forma financial information intended to provide information on the impact that the transaction in question would have had on a company’s historical financial statements if the transaction had occurred at a date prior to its actual occurrence. The purpose of this information is to assist the shareholder or investor in analysing the entity’s future prospects. Takeover bids In the case of takeovers and reorganisations, specific rules apply. Public tender offers The offer letter filed with the AMF must disclose: • the objectives and intent of the bidder; • details on the target’s securities that the bidder already holds (alone or in concert) or that it could potentially hold at its own initiative (eg, under an option agreement) (including number, type and purchase date); • the price or exchange ratio; conditions precedent to the offer; and • theterms of the acquisition including the identity of service provider. This offer letter is filed along with the draft offer prospectus prepared by the bidder, which includes the: • identity of the bidder (structure, shareholders, accounting and financial situation); • provisional schedule of the offer; • financial conditions of the operation; • political and industrial policies for at least the next 12 months; • guidelines for employment policy; • law applicable to agreements between the bidder and holders of the target company’s securities following the offer, and the compe- tent jurisdictions; and • any agreements with the entities with which the bidder acts in concert. If the bidder and the target did not prepare a joint offer prospectus, the target company must file a reply note mentioning: • any agreements with an impact on the takeover bid; • capital structure; • statutory limits on voting rights and transfer of shares; • rules of the board member’s appointment; • agreements ending in case of control change, if any; • opinion of the social and economic committee; • opinion of the board of directors; and • whether directors intend to bring their securities to the offer. Reorganisations (mergers, demergers, partial asset contributions) A draft reorganisation agreement has to be prepared on which the shareholders of the companies vote, mentioning: • form, name and registered office of all the participating companies; • goals and conditions of the operation; • all the assets and liabilities transferred; • exchange ratio; • merger or contribution bonus, if any; and • terms for the allotment of securities. If a company plans to merge with a company with a controlling interest, the relevant companies must notify the AMF, which then decides whether to set up a public buyout offer to allow minority shareholders to withdraw. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Notification relating to crossing of shareholding thresholds A shareholder (acting alone or in concert with others) who holds shares in a publicly traded company shall inform the company and the AMF when his or her holding exceeds 5, 10, 15, 20, 25, 30, 33.33, 50, 66.66, 90 or 95 per cent of the capital or voting rights of a company based in France and admitted to trading on an EU regulated market or financial instruments market. Other thresholds are applicable to shares listed on multilateral trading facilities (such as Euronext Growth). When crossing these thresholds, shareholders also have to disclose the number of securities they hold that give deferred access to future shares and the voting rights attached thereto and the shares already issued that these shareholders may acquire by virtue of an agreement or a financial instrument. Such notification is also required if the equity participation or voting rights fall below the same thresholds. Declaration of intent If the shareholder exceeds the threshold of 10, 15, 20 or 25 per cent of the capital or voting rights, he or she must declare the objectives that he or she intends to pursue over the next six months. If these declarations are not complied with, the AMF may impose a penalty and the shareholder may be deprived of voting rights attached to the securities in excess of the amount that has not been declared for two years following the date of regularisation. Statutory obligations The company’s by-laws may require additional disclosure obligations based on lower thresholds than those set out by law. All of the above requirements also apply when the company is a party to a business combination. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? General duties Directors and CEOs, individually or jointly, may incur civil liability towards the company, shareholders or third parties if they breach laws and regulations applicable to companies, a company’s by-laws or their duty of care as managers. They can only be held liable to third parties if they have personally committed a fault separate from their functions. The claimant will also have to demonstrate that he or she has personally suffered damages separate to those suffered by the company. Actions against the directors or the CEO for damages suffered by the company can be brought by the CEO, any deputy CEOs or by one or more shareholders. In such case, demonstrating that the directors’ or CEO’s breach has been committed outside the course of their duties is not required. © Law Business Research 2019
- 69. Bersay Associés France www.lexology.com/gtdt 69 In addition, directors and officers (as well as closely related persons) of publicly listed companies shall disclose any sale and purchase of their own company’s shares to the AMF and to the company. Specific rules applicable to business combinations or sales In the event of a takeover bid, managers are allowed to take any measure to frustrate the offer within the limits of the corporate interest of the company. Management must also comply with the public and private disclo- sure requirements specific to each transaction (see question 5). In addition to the documents detailed in question 5, management must make available to the shareholders before the general meeting the external auditor report on the transaction, the annual accounts of the last three years and an intermediate accounting statement. They must also inform and consult the employee representative bodies on the transaction. Management does not owe any particular information to creditors who only benefit from public disclosures. Controlling shareholders do not have duties similar to those of the management; they must only comply with the disclosure obligations detailed in questions 5 and 6. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Public tender offers The shareholders of the bidder If the offer involves a share component, it can be made conditional on obtaining the approval of the issuance of the new shares by the bidder’s extraordinary general meeting. Furthermore, if the legal, regulatory or statutory provisions applicable to the bidder require systematic approval of tender offers by its shareholders, the AMF can authorise the bidder to condition even a cash offer on obtaining such approval (provided that the shareholders’ meeting has already been convened at the time of filing of the offer). The target’s shareholders The public offer does not entail any obligation for shareholders. The shareholders are in principle free to decide whether to accept the offer made to them. They may retain their securities if they deem it preferable. But the scope of this principle is limited. In the event of a successful tender offer, the bidder, who will hold at least 95 per cent of the voting rights, may require the minority shareholders to withdraw from the company (see question 14). The by-laws of the target company may validly limit the manage- ment’s powers during a public offer period, providing for instance that: • all defence measures are authorised beforehand by the share- holders’ general meeting and that all delegations of authority that may cause the offer to fail, except the search for other offers, are suspended; and • any decision of the board taken before the offer period that is not fully or partially implemented, which is not part of the normal course or business of the company and whose implementation may result in the frustration of the bid, must be approved. Following a takeover bid or exchange offer or the acquisition of a control- ling interest, the shareholders who hold the majority of the capital or the voting rights may convene the general meeting. The purpose of this meeting generally concerns the replacement of the board but nothing prevents the shareholders from deciding on other issues, including statutory amendments. Reorganisations (mergers, demergers, partial asset contributions) The combination is approved by the extraordinary general meeting of the shareholders of each of the companies involved, under the condi- tions set out for amending the by-laws. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Hostile takeover bids are allowed in France. The board of directors is nonetheless allowed to take anti-takeover measures to frustrate the offer without the shareholders’ prior approval provided that such meas- ures are taken in the interests of the company and within the limits of the powers reserved to shareholders’ meetings. Set out below are examples of preventive defence measures, which can be implemented by the board of directors or the shareholders: • creation of double voting rights if the detention of shares exceeds a certain time limit so the bidder will not be able to claim it; • shareholders’ agreements such as standstill agreements or pre- emption agreements; • statutory ceiling on voting rights; • flip-in: existing shareholders can purchase additional shares at a discounted price; • issue of bonds with redeemable equity warrants; and • the transformation of the company into a private company limited by shares to separate the capital from the power. Set out below are examples of defence measures that can be imple- mented during the offer by the board of directors or the shareholders: • self-tender offer: purchase of its own shares by the company to limit the number of shares available on the market; • seeking to develop a core group of shareholders, for an anti- takeover fund; • distribution of exceptional dividends during the offer period; and • sale of crown jewels assets: transfer of a strategic asset to a third party (usually an ally), thereby making the offer interest-free for the bidder. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? In the context of prior negotiations to the takeover bid (generally in the case of friendly bids), the potential bidder may propose break-up fees, which are compensation paid to the bidder (break-up fee) or to the shareholders or the target (reverse break-up fee) in the event of renunciation of the offer or blocking of the transaction by an authority. Such clauses are not prohibited per se provided that the freedom not to contract and the principle of the free interplay of bid and counterbid are maintained. The amount of break-up fee must also be proportionate and reasonable. When the break-up fee is payable by the target, the validity of such a clause is more questionable, particularly in view of the corporate interest of the company. Under this clause, the target company under- takes to pay a fee in the event that it recommends to its shareholders a competing offer. However, competing offers are of interest to the share- holders, and so management therefore has no interest in forbidding any competing offer. © Law Business Research 2019
- 70. France Bersay Associés Public MA 201970 Break-up fees payable by a publicly listed company to a bidder must be disclosed to the AMF at the date of filing of the offer and to the public in the offer prospectus. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Foreign investment As a rule, financial relations between France and foreign investors are not restricted. All foreign direct investments in excess of €15 million must be declared to the French Central Bank for statistical purposes within 20 days of completion of the transaction. Nevertheless, in some protected sectors, specific laws prohibit or restrict the ability of foreign investors, mainly non-EU, to take control of French companies. The French CMF lists sensitive activities that require approval from the Ministry of Economy. This list varies depending on the EU or non-EU origin of the investor, with stricter rules applying to investors from outside the EU, and concerns sensitive activities that affect public authority, public order, public security or the interests of national defence. This authorisation is only required if the investor purchases one company’s branch of activity with headquarters in France, the investor acquires control of a French company, or the investor reaches 33.33 per cent of the share capital or voting rights of a French company. The application for authorisation is made by letter to the Ministry of Economy as soon as the parties agree. The Ministry shall take a deci- sion within two months of the request. If the Ministry fails to respond within such period, the authorisation is deemed granted. The Minister may simply authorise the investment or may subject it to conditions to ensure that it will not affect national interests. Public sector A transaction leading to the transfer of a company from the public sector to the private sector can only be implemented after being authorised by a law, a decree or by the Ministry of Economy. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Public tender offers Public offers are irrevocable upon filing, with the following exceptions: • minimum acceptance threshold: all public offers, whether volun- tary or mandatory, automatically lapse if the bidder (acting alone or in concert with others) does not reach at least 50 per cent of the capital or voting rights of the target at the closing of the offer. In voluntary offers, the bidder may set a higher minimum condition (in practice, the AMF does not allow acceptance conditions above two-thirds); • tied offers: bidders can condition voluntary offers on the success of other public offers filed simultaneously; • approval of the competition authorities, when applicable (Phase I clearance only); or • prior authorisation of the bidder’s extraordinary shareholders’ meeting, when applicable, provided that the meeting has already been convened when the draft offer prospectus is submitted. The bidder can waive certain of these conditions between the filing of the offer and the publication of the offer results by the AMF. In addition, bidders can revoke public offers when subject to approval by the AMF, the target adopts measures that modify its substance or result in the offer becoming more expensive for the bidder and when a competing bid has been filed and approved by the AMF. In any event, takeover bids cannot be subject to any financing condition. Reorganisations (mergers, demergers, partial asset contributions) Terms and conditions of reorganisations shall be set out in an agree- ment concluded between the participating entities. This agreement is freely negotiated between the parties who can, therefore, include any conditions in accordance with ordinary rules. In that respect, it shall be noted that purely discretionary conditions are unenforceable under French law. Set out below are common conditions specified in reorganisation agreements: • approval of the transaction by the general meeting of each partici- pating company; • preparation and delivery of the report of the mandatory external auditor on the contemplated transaction; • transfer of authorisations, approvals or specific contracts (leases, borrowing) to the absorbing or beneficiary company; • confirmation by the AMF that the combination will not require the filing of a mandatory tender offer; and • release of existing securities. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? As detailed in question 12, public tender offers cannot be subject to financing conditions. Therefore, prior to the publication of the offer prospectus, bidders must ensure they have the necessary funds avail- able for paying the consideration to the shareholders accepting the offer. Furthermore, the offer prospectus shall describe the means of financing of the offer and their impact on the assets, business and earn- ings of the target and of the bidder. As financing precedes filing of offers, sellers do not have to assist bidders in their financing. Nonetheless, there is a general rule of fairness in transaction, which implies that the seller communicates to the buyer any information that may be needed for the financing of the operation. Outside of public tender offers, should an investor wish to conclude a share purchase agreement with a shareholder, the parties thereto are free to set out any financing conditions in accordance with ordi- nary rules. As for public tender offers, there is no obligation on sellers to assist buyers in their financing besides the general rule that the parties to a contract must perform such contract in good faith, which implies that the seller should communicate to the buyer any information that may be needed for the financing of the operation. © Law Business Research 2019
- 71. Bersay Associés France www.lexology.com/gtdt 71 Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? In principle, shareholders cannot be excluded from the company but the squeeze-out procedure is an exception to this rule. Following the tender offer, the shareholder or the majority group holding at least 95 per cent of the share capital or voting rights can impose on minority shareholders who did not respond to the offer the obligation to withdraw from the company with compensation. The buy- back programme covers all the shares and securities giving access to capital not yet owned by the majority, including those held by the company itself. The squeeze-out procedure is subject to various conditions. When submitting the offer, the bidder must disclose to the AMF whether they want to implement the squeeze-out at the end of the offer or if they reserve the right to request a mandatory squeeze-out only after the offer has been completed depending on the result of it. In the offer, the bidder must provide an assessment of the valua- tion of the securities in accordance with objective methods (stock price, asset value, perspective, etc). As the squeeze-out procedure is insepa- rable from the tender offer, the share value can be the same as long as no new development occurred between both transactions. Furthermore, the target company has to designate an independent expert to control the fairness of the financing conditions, who delivers a report. Automatic squeeze-out When submitting the offer, the bidder should announce its intention to launch a squeeze-out offer as soon as the offer is closed and regard- less of the results of it. The bidder designates an account keeper to centralise the share indemnity transactions and deposits the amount of the compensation in a blocked account opened for this purpose. When the transaction closes, the securities concerned are delisted from the regulated market to which they were admitted. The account keeper must transfer securities not presented to the offer in the name of the majority. The day after closing, the funds are blocked and the account keeper shall credit the shareholders’ accounts. Squeeze-out with conditions When submitting the offer, the bidder reserves the right to proceed with the squeeze-out offer depending on the outcome of the offer. It shall indicate to the AMF, within a maximum of 10 days of the closing of the bid, whether it waives the option. If the bidder decides to proceed with the compulsory acquisition, it informs the AMF of the price proposed for compensation, which is at least equal to the price of the initial offer. If the AMF agrees, it sets out the conditions for implementing the squeeze-out, in particular the date on which its decision becomes enforceable. On this date, as in the automatic squeeze-out procedure, the secu- rities concerned are delisted from the regulated market. The account keeper transfers the shares to the bidder and the compensation to the minority shareholders. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? French law and regulations apply to all takeover bids relating to financial instruments that are listed on a French regulated market, regardless of the nationality of the bidder. The EU Directive of 26 October 2005 on cross-border mergers of limited liability companies institutes special provisions in the case of a merger between companies located in different EU states. A distributive application of the national laws is made for all the terms and conditions. In this sense, each company participating in a cross-border merger complies with the provisions and formalities of the applicable national legislation. The cross-border merger is structured like in France so it results either from the creation of a new company by regrouping several companies or from the absorption of a company by another. It also has the same effects (ie, the complete transfer of assets and liabilities). This Directive does not cover demerger and partial asset contribu- tions. However, these transactions remain possible in accordance with the principle of freedom of establishment. See question 11 for foreign investment rules. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Public tender offers Notification to the AMF Before making a takeover bid, the bidder must file an offer letter with the AMF, which must indicate certain information detailed in question 5. This request must also include a draft offer prospectus, the content of which is also detailed in question 5. Upon receipt of the bidder’s letter, the AMF shall make public the main provisions of the draft offer and may decide to suspend the listing of the shares of the companies concerned. This publication marks the beginning of the offer period. The AMF has 10 days of trading from this date to assess the conformity of the draft offer prospectus with applicable legislative and regulatory provisions. In this respect, the AMF may request additional guarantees or explanations and require that the draft offer prospectus be amended. Where the draft offer prospectus meets the requirements, the AMF publishes a statement of compliance (the ‘visa’) on its website, which constitutes an approval of the offer prospectus. Where the concerned companies did not draw up a joint offer prospectus, the reply note must be submitted to the AMF no later than the fifth day following the publication of the statement of compliance. The AMF then has five days to deliver its visa. Shareholders who wish to participate in the offer can make their orders within 25 trading days from the trading day following the publica- tion of the visa to the offer prospectus or to the reply note, as applicable. Information of employees In the case of public tender offers, employees of both the target company and the bidder must be informed, either directly (in the event of lack of staff representatives) or through the information and consul- tation of such staff representatives (Labour Code, articles L.2312-42 and L.2312-50). Information of the employees’ representative body of the target company Upon the filing of the offer prospectus with the AMF, the target company must immediately convene a meeting to inform its staff representatives (the social and economic committee (CSE), newly implemented and replacing the former French works council) about the filing of the offer, specifying whether the offer has been solicited. During the meeting, the CSE indicates whether it wishes to: © Law Business Research 2019
- 72. France Bersay Associés Public MA 201972 • hear the bidder at a later meeting (to take place within one week of the filing of the draft offer prospectus); and • appoint an accountant, whose duty would consist in drafting a report (within three weeks as from the filing of the draft offer prospectus), assessing the bidder’s industrial and financial poli- cies, its contemplated strategic plans for the company and the repercussions of the implementation of its offer on the employment (the expenses pertaining to the appointment of the accountant are borne by the company). Before the board of directors issues its opinion regarding the interest offer in the reply note (if no joint offer prospectus was issued), the CSE shall be consulted in a meeting on the offer, examine the accountants’ report (if any) and may require that the bidder attend the consultation meeting. Failing to attend the meeting for the bidder’s representa- tive could entail the suppression of its voting rights (Labour Code, article L2312-48). The CSE shall issue its opinion, which does not bind the employer, within one month from the filing of the draft offer prospectus (the CSE is deemed to have been consulted on this matter in case of lack of opinion within this time frame). The CSE can ask for the intervention of a judge in order to obtain additional information, should the CSE consider it has not been provided with sufficient information. Information of the employees’ representative body of the bidder The bidder’s CSE shall be informed and consulted on the content of the offer and its potential impact on employment within two business days from the publication of the offer. At the bidder’s request the target company can consult its CSE within two business days following the announcement of the offer. The schedule provided above would run as from the announcement of the offer. Reorganisations (mergers, demergers, partial asset contributions) When the securities of the acquiring or target company are listed on a regulated market, such company may be exempted from the prepa- ration of a prospectus in the event of a merger, demerger or partial asset contribution if it draws up an equivalent documentation as a prospectus. This document, known as ‘Document E’, must include some particulars (economic and legal aspects of the transaction, remunera- tion of the contributions, consequences for the target company and its shareholders). The prospectus must be submitted to the AMF at the latest two months before the date of the general meeting convened to approve the transaction. The prospectus shall be published in national newspapers, made available at company headquarters and posted on the website of the company and of the AMF as of its registration by the AMF and at least 15 days before the meeting called on to approve the partial asset contribu- tion or one month before the meeting called on to approve the merger or demerger. Creditors of the company hold a right of opposition to the operation of combination if their debt obligation precedes the publication of the draft term. The opposition procedure must be launched within 30 days from the last publication but the company can complete the operation despite the existence of an opposition. In addition, the CSE of each participating entity may have to be informed and consulted on the proposed business combination before any decision is taken. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? French regulations allow the French state to oversee access, exercise and capital control of strategic or sensitive activities. Foreign investment control The French foreign investment control system conditions the acquisi- tion of French companies intervening in certain limited sectors related to defence, national security and public order on the prior authorisation of the Minister of Economy. See question 11 for further details on this control. Sector-based regulations Specific authorisations are required when the target company’s busi- ness is related to certain sectors, in particular: • credit and insurance sectors: acquisitions of one-third, one-fifth or one-tenth of voting rights in a credit institution, a finance company, an investment firm, a payment institution or an insurance company must first be approved by the French banking regulator, the Autorité de Contrôle Prudentiel et de Résolution (ACPR); • media sector: combinations which directly or indirectly concern a publisher or a distributor of radio and television services must be first approved by the French audiovisual regulator, the Conseil Supérieur de l’Audiovisuel (CSA); and • energy sector: the French state must hold a minimum percentage in the share capital of some strategic companies. For instance, it must keep at least 70 per cent in the share capital of Electricité de France or 30 per cent in GDF-SUEZ to preserve the essential interest of France in the energy sector. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Public tender offers and acquisitions of publicly listed companies’ shares Exchange offers (OPE) and cash tender offers (OPA) are treated differ- ently from a tax standpoint. As regards the OPE, a tax deferral regime applies at the level of the shareholder, irrespective of whether it is a company or an individual. The capital gain, if any, resulting from the exchange transaction is not taken into account in the year of the securities’ exchange. Taxation will only occur upon subsequent disposal of the securities received in exchange for the shares initially contributed. The capital gain will be determined by reference to their initial purchase price. This deferred taxation system was adopted so as not to penalise investors who are not getting cash out of these transactions. Conversely, as regards the OPA and the remittance of the shares being done in exchange for cash, no tax deferral applies. Therefore, as regards individuals, the capital gains are subject to a single flat tax of 30 per cent corresponding to 12.8 per cent of income tax and 17.2 per cent of social security contributions, and as regards companies, the capital gain is taxable either at the standard corporate income tax rate (the applicable rate in 2019 is 28 per cent for the first €500,000 and 31 per cent beyond that amount), or at the preferential regime of long-term capital gain leading to an effective tax rate of 3.36 per cent up to €500,000 and 3.72 per cent beyond that amount, provided that the shares qualify as participation shares. © Law Business Research 2019
- 73. Bersay Associés France www.lexology.com/gtdt 73 For non-residents, withholding tax in France will be levied at the rate of 12.8 per cent. The withholding tax rate could be lower depending on the applicable double tax treaty. Acquisitions of securities listed on a French regulated market of a company having its registered office in France, with a market capi- talisation exceeding €1 billion on 1 December of the year preceding the transfer (applicable to 142 companies in 2018), give rise to the payment by the investment service provider of a 0.3 per cent tax on financial transactions. Finally, no registration duties are due on transfers of shares of listed companies when no deed has been drawn up for such transfer. In the situation where a deed has been drawn up, the financial transac- tion tax is not due but ad valorem 0.1 per cent registration duties apply. Reorganisations (mergers, demergers, partial asset contributions) The combination of businesses can be achieved via a merger or disso- lution without liquidation. Although they are not subject to the same corporate law regime, they both benefit from the same tax regime, as it is the case also for demergers and partial assets contributions. French companies may opt for a favourable tax treatment provided for by article 210 A of the French Tax Code, which provides for the tax- neutrality of mergers provided the following conditions are met: • the companies involved are both subject to corporate income tax; • the merger results for the absorbed entity in the transfer of all its assets and liabilities to the absorbing entity; and • in consideration for the transfer, the merged company’s share- holders receive shares in the absorbing company and, as the case may be, a cash payment, which should not exceed 10 per cent of the nominal value of the shares received to be able to benefit from the tax-neutral regime. With respect to cross-border mergers, the favourable tax regime is no longer subject to prior ruling from the French tax authorities. The favourable tax treatment is applicable to the extent that the absorbing company undertakes, in the merger agreement, to: • enter in its own balance sheet the merged company’s provisions; • compute the capital gains that may be realised on a subsequent transfer of non-depreciable assets by reference to the tax value these assets had in the merged company’s balance sheet; • add back the capital gains generated by the transfer of depreciable assets to its own taxable profits over a five-year period (15 years for gains arising from real estate or depreciation on such depre- ciable assets may be computed on the contribution value); and • enter in its own balance sheet the non-fixed assets transferred by the absorbed entity for the value they had in the accounts of the absorbed company. To avoid the loss of outstanding net operating losses, a specific ruling can be requested, subject to specific conditions. As mentioned above, upon receipt of the shares of the absorbing entity in exchange for the shares of the absorbed company, the share- holder benefits from a tax deferral until the subsequent disposal of such securities. The absorbed company, as well as the shareholders of the absorbing company, therefore avoid any immediate taxation. The 0.3 per cent tax on financial transactions does not apply to trans- fers in the case of mergers, demergers or partial asset contributions. Since 1 January 2019, reorganisation operations such as mergers, demergers or spin-offs, or partial asset contributions are no longer subject to registration duties. Previously, these operations were subject to a fixed registration duty of €375 or €500, depending on whether the company’s capital was less or more than €225,000. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? In public tender offers, the target company remains the employer. The target company and the bidder company must inform their employees’ representative body in accordance with the rules specified in question 16. At the end of the public offer, should the bidder have acquired the control of the target company under certain circumstances, the bidder will have to periodically report to its CSE how its declarations of intent, and, as the case may be, its commitments, have been implemented, notably in terms of employment (Labour Code, article L2312-51). In the event of a sale or merger involving the transfer of an auton- omous economic entity retaining its identity, all existing employment contracts, regardless of their nature, are automatically transferred to the merging or beneficiary company, which becomes the new employer of the transferred employees. An autonomous economic entity is defined as an organised group of persons, with its own operating resources, clients and line of business. The automatic transfer of employees is a French public order rule that cannot be bypassed. In this respect, the new employer cannot choose the employees it would want to keep before such a transfer. The dismissals of employees, implemented just before the transfer by the transferor, are thus prohibited and would be deemed void. Employment contracts are automatically transferred without any modification (except for the identity of the employer). However, most of the time, the merger will entail the termination of the employees’ collective rights provided for in the transferor’s company’s bargaining agreements (after a limited period of time). The transferred employees benefit from the existing collective agreements applicable within the new employer. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? In collective proceedings, French law imposes a wide obligation to inform the various parties interested in the procedure, in particular the creditors. Similarly, the AMF and the market must be informed of the opening and further stages of the collective proceedings. Often, these situations of financial difficulties result in the need for issuers to recapitalise by converting claims or providing funds, such transactions requiring a prospectus subject to the AMF approval. Disclosure obligations are more complex in the case of preven- tive proceedings, which are, as a rule, confidential. In such cases, issuers must inform the AMF when the procedure is initiated, and must preserve the confidentiality of information. The market may not be informed of the initiation of such proceedings provided that the condi- tions for delaying the publication of insider information are met (the issuer justifies a legitimate interest, the absence of publication does not mislead the public and the issuer is able to ensure that the proceedings remain confidential). In order to limit the consequences of the issuer’s default risk and to limit the risks of misinformation, issuers may request the market operator to suspend the trading of their shares. Securities of an issuer subject to collective proceedings are grouped in a specific compartment entitled ’compartment of insolvency proceedings‘. © Law Business Research 2019
- 74. France Bersay Associés Public MA 201974 Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? The Criminal Code, article L445-1 et seq criminalises both active and passive bribery. Active private bribery is the fact of proposing without right, directly or indirectly, to a person who exercises a management function, offers, promises, gifts or any advantages for him or herself or for another, to accomplish or refrain from performing an act, in violation of its legal, contractual and professional obligations. Passive bribery is the fact of indulging to a person who solicits, without right, offers, prom- ises, gifts or any advantages to perform or to abstain an act in breach of its legal, contractual or professional obligations. Both types of bribery may be sanctioned with up to five years’ imprisonment or a fine of up to €500,000 or two times the proceeds of the offence. In addition, the Sapin II Law of 9 December 2016 added new sanc- tions for companies of a certain size if they do not set up internal procedures in order to reduce the risk of corruption. Companies covered by these obligations are those with at least 500 employees and a turn- over of more than €100 million. To prevent corruption, these companies must set up a series of measures such as a code of conduct, accounting control procedures and training of the most exposed staff. In the event of a breach of these obligations, the company and its directors may be subject to a financial penalty. The maximum amount payable is €200,000 for natural persons and €1 million for legal entities, it being specified that the amount must be proportionate to the breach and to the financial situation of the person penalised. Since the Sapin II Law was enacted, at the time of a company’s acquisition, more and more anti-corruption due diligences are being performed to assess bribery risks. Anya Hristova ahristova@bersay-associes.com Océane Vassard ovassard@bersay-associes.com 31, avenue Hoche 75008 Paris France Tel: +33 1 56 88 30 00 Fax: + 33 1 56 88 30 01 www.bersay-associes.com © Law Business Research 2019
- 75. www.lexology.com/gtdt 75 Germany Gerhard Wegenand Christian Cascante Gleiss Lutz STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Focusing on business combinations of stock corporations (AG), there are, in principle, three major categories of combinations: reorganisa- tions and mergers; acquisitions; and cooperation models. Reorganisations and mergers The German statutory law on reorganisations recognises and regulates four basic structures: • merger or consolidation by transferring assets of one entity to another pre-existing entity or by transferring the assets of two existing entities to a new entity; • splitting assets and liabilities of one entity and transferring them to another; • transfer of assets for cash; and • change of legal form, such as conversion into a partnership. Acquisitions (of shares and assets) Shares of a listed stock corporation can be acquired by private acqui- sition from certain shareholders, via the stock exchange (both subject to mandatory offer thresholds, see below) or by public takeover (or a combination). Shares may be acquired by tender offers for cash and also by way of exchange offers for shares (or again, a combination of both). However, a foreign bidder (in particular a non-European one) offering shares as the only consideration in a takeover offer will have to have such shares listed on an organised market within the European Economic Area. Thus, shares listed on the NYSE or Nasdaq may not be used as sole consideration. The acquisition of assets may likewise be paid for in cash or with shares. However, in acquiring the essential assets of a business or part of a business, the purchaser will also be deemed to have accepted a transfer of existing employment contracts and may need to comply with further, often stringent, requirements under the Works Constitution Act. Both types of acquisitions (namely, of shares and of assets) may be effected through a special purpose acquisition vehicle (for example, national or foreign new company). The choice of the acquisition vehicle is most often related to international taxation issues. Cooperation models As is the case in most western jurisdictions, there are a number of forms of cooperation available to German entities, from joint venture agree- ments (mostly through a JV-NewCo) to agency, distribution, licence or franchising agreements. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The key German laws governing business combinations consist of the following legislation: • the Takeover Act; • the Stock Corporation Act; • the Reorganisation Act; • the Securities Trading Act; • the Act against Restrictions of Competition; • the Stock Exchange Act; • the Securities Prospectus Act; • the Insolvency Code; • the Commercial Code; and • the Civil Code. In addition, depending on the structure of the business combination, the following may also apply: • the Co-Determination Act; • the One-Third Participation Act; and • the Works Constitution Act. European Union law (particularly regarding merger control and the rules on insider trading and ad hoc disclosures under the EU Market Abuse Regulation) must also be considered in certain (generally larger) transactions. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? The legal documentation required will depend on the type of business combination chosen, namely, reorganisations and mergers; acquisitions of a certain stake or a public takeover; or cooperation models. The requirements for acquisitions of shares of a German stock corporation will depend on the type of shares being acquired (namely bearer shares, registered shares, etc) and whether shares were bought over the stock exchange, subscribed in connection with a capital increase or bought from other shareholders. Depending on the struc- ture of the transaction, more documentation than only a share purchase agreement (SPA) may be required. Typically, SPAs and also other docu- mentation in connection with the acquisition of shares in a publicly listed company are governed by German law. The Reorganisation Act sets out certain requirements as to form and procedure for the respective types of reorganisations and mergers under the Act. © Law Business Research 2019
- 76. Germany Gleiss Lutz PublicMA 201976 A public tender offer will require an offer document governed by German law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? To acquire shares in a listed Stock Corporation via a public takeover requires the bidder to file a tender offer document with the Federal Financial Supervisory Authority (BaFin) (see also questions 3 and 5). Depending on the size and structure of the transaction, in public and private deals, merger control filings and certain notifications may be triggered. Act against Restrictions of Competition The following types of transactions are caught by the German merger control rules: • acquisition of at least 25 per cent of the capital or of the voting rights of the target company; • acquisition of the assets or of a substantial part of the assets of the target company; • acquisition of control over another company; and • any other agreement or combination between companies in which a company can exercise a competitively significant influence over another company. A duty to notify the proposed concentration to the German Federal Cartel Office exists (subject to certain exceptions) if: • the combined worldwide group turnover of all of the parties concerned exceeds €500 million; • at least one participating party has a group turnover exceeding €25 million in Germany; • at least one other participating party has a group turnover exceeding €5 million in Germany; and • a notification with the European Commission is not required according to Regulation No. 139/2004 (EC Merger Regulation) (in which case the European Commission – according to the ‘one-stop shop principle’ – would be competent to review the concentration instead of the antitrust authorities in the respective member states). The ninth amendment to the Act against Restrictions of Competition introduced in 2017 established a duty to notify even if the €5 million- turnover threshold is not met in case the value of the consideration exceeds €400 million and the target is active to a significant extent on domestic markets. Generally, only the opening of second-stage proceedings and formal clearance or prohibition decisions rendered by the Federal Cartel Office in second-stage proceedings must be made public, making it more difficult for third parties to challenge or even to oppose the approval of a concentration. However, the Federal Cartel Office also publishes a list of notified transactions on its website (www.bundeskartellamt.de) on an informal basis. Without the required antitrust approval being granted a transac- tion may not be implemented. It is important to realise that the same German merger control rules also extend to business concentrations taking place outside Germany or involving non-German entities, provided that the concen- tration has an appreciable effect on the German market (assuming the thresholds have been exceeded). As regards disclosure of shareholdings in listed stock corpora- tions, see question 6. Notification to Commercial Registry Reorganisations and mergers as well as some agreements and other measures in connection with acquisitions, such as domination and profit and loss transfer agreements and capital increases, need to be regis- tered with the commercial register to become effective. Notarisation and stamp taxes In Germany, there is no stamp duty. However, some agreements in connection with business combinations (for example, merger agree- ments or purchases of real estate) will need to be notarised to be effective. Notarial costs depend on the transaction value – and addi- tional costs may be triggered by documents in the English language. The signing of an agreement regarding companies that hold, directly or indirectly, German real estate might trigger real estate transfer tax; see question 18. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? What information needs to be made public depends on the structure of the transaction. No general disclosure obligation In Germany, there is no public database containing all purchase agree- ments or other substantial agreements entered into in connection with a business combination or a respective general disclosure obligation. If, however, the business combination is subject to approval of the general meeting of a party thereto, the shareholders have to be put in a position to make an informed decision. Thus, the purchase agreement (including the purchase price and the mechanisms of its determination) and other substantial agreements, if any, entered into in connection with the trans- action may have to be disclosed to the shareholders. In a public takeover, the bidder will have to publish an offer document in which it will have to disclose details with regard to the envisaged transaction, inter alia, its future intentions with regard to the target company, its management and employees. As to disclosure relating to listed securities acquired or sold in another stock corporation, see question 6. Periodic and ad hoc disclosures of listed securities To a listed business combination, detailed rules requiring certain peri- odic and ad hoc disclosures apply. By way of example of a periodic disclosure, an issuer of securities listed on an organised market is required to inform the public via the electronic German Federal Gazette about the issuance of new shares and the exercise of exchange and subscription rights. This also applies to business combinations financed by the issuance of new shares. Furthermore, ad hoc disclosures to the public are required so that the public is made aware of new facts that may have a significant impact on the stock market price. Examples of business combinations and restructurings that would be most likely to require such disclo- sure are major asset or share sales and purchases and mergers. Since 3 July 2016 the duty to publish ad hoc disclosures is governed by the EU Market Abuse Regulation. © Law Business Research 2019
- 77. Gleiss Lutz Germany www.lexology.com/gtdt 77 Disclosureof substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Shareholders of listed stock corporations of German origin (that is, in principle, whose registered office is located in Germany) are required to notify the stock corporation and the BaFin in writing without undue delay (at the latest within four trading days) of directly or indirectly reaching, exceeding or falling below thresholds of 3, 5, 10, 15, 20, 25, 30, 50 or 75 per cent of the voting rights in the stock corporation in a single announcement showing the aggregated voting rights, held directly or indirectly. Failure to lodge the required notices renders the rights attached to the shares (for example, voting rights) ineffective. If the shareholder fails to meet such notification requirements intentionally or due to gross negligence, the voting rights will remain ineffective for a period of six months after the required notifications have been finally submitted. In addition, such failures may result in shareholder liability with fines, with respect to individual persons of up to €2 million and with respect to legal entities of up to the higher of €10 million or 5 per cent of the turnover of the whole group of companies in the relevant busi- ness year. Furthermore, measures and sanctions will be published on BaFin’s website with the names of the respective responsible person. There is a whole set of rules as to when certain voting rights are attributed to certain shareholders, for example, because somebody is holding shares on their behalf or they own call options. In addition, legislation, which came into effect in February 2012 and was amended in November 2015, tightened disclosure obligations, so that cash-settled derivatives and other instruments enabling the holder to acquire shares also trigger disclosure obligations. Shareholders reaching or exceeding the threshold of 10 per cent or a higher threshold need to inform the issuer about the purpose of the acquisition; and the source of the financial means used for the acquisi- tion. Upon receipt of such information, the issuer is obliged to publish it. This rule does not apply if: • the articles of association of the issuer include a provision releasing the shareholder from the obligation to inform the issuer; • the shares are acquired by the financial-market stabilisation fund (the state fund incorporated to ease certain conditions in connec- tion with the financial crisis, as defined in the Act to Stabilise the Financial Markets); or • the threshold has been reached via a public offer as defined in the Takeover Act. Under the EU Market Abuse Regulation, which replaced the Directors’ Dealings Rules of the Securities Trading Act as of 3 July 2016, once a total amount of €5,000 has been reached within a calendar year directors and officers (as well as closely related persons) of listed stock corpora- tions have to disclose any sale and purchase of their own company’s shares to the company and to the BaFin. Such transactions have to be disclosed by the company via media with European-wide coverage such as an electronic news provider, must be transmitted to the company register, and are disclosed in the annual document and on the website of the BaFin. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? General duties of board members and shareholders The members of the management board and supervisory board of a stock corporation have to act in the best interest of the corporation and are under a duty to manage the business with the care of diligent and conscientious managers. Breach of this duty (for example, gratuitous disclosure of confidential business information) can lead to personal liability on the part of, or criminal sanctions against, the respective members. Shareholders of a stock corporation also have certain duties to each other and to the stock corporation (for example, not to commit fraud against minority shareholders). The powers and duties of the shareholders are defined in the Stock Corporation Act. Duties of the bidding stock corporation in a public tender offer Under the Takeover Act, the bidder’s management must: • treat shareholders equally, in particular with regard to information provided and price paid for shares; • provide target shareholders with sufficient time and information to take a reasoned decision; • proceed without unnecessary delay, so as not to obstruct the target in the pursuit of its business unnecessarily; • not distort the market; • secure financing of the bid; and • comply with the disclosure requirements, for example, publica- tion of the offer document; publication of all purchases of target shares after the publication of the offer document; and disclosure to the public of the number of target shares held at the beginning of the offer period, then the number of tendered shares on a weekly basis. In the last week of the offer period, the bidder must disclose the number of tendered shares on a daily basis. Duties of the target stock corporation in a public tender offer Duties of the target stock corporation’s management board in a public tender offer include: • acting in the best interest of the target company, but not neces- sarily in the interest of the shareholders; • abstention by the management board from any measures that could influence the success of the offer (however, with certain exceptions); • compliance with certain disclosure requirements (including ad hoc publicity); • equal treatment of all shareholders; • publication of a substantiated statement on the offer (not later than two weeks after the tender offer has been published); • execution of the process as expeditiously as possible; • seeking cooperation with its supervisory board; and • ensuring no market distortions regarding the trade in shares of the target or bidder or other companies affected by the offer are created. © Law Business Research 2019
- 78. Germany Gleiss Lutz PublicMA 201978 Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Reorganisations and mergers Pursuant to the Reorganisation Act, any reorganisation (merger, demerger, transfer of assets or change of legal form) requires a resolu- tion of the general meeting approving the reorganisation with a majority of at least 75 per cent of the capital represented at the general meeting. Acquisitions (share deal or asset deal) In a public takeover, it is up to the shareholders to decide whether they accept the offer. The transfer of shares in or of assets of a public company generally does not require approval by the shareholders. However, case law (the Holzmüller doctrine as amended by Gelatine) requires shareholders’ approval by a majority of at least 75 per cent of the share capital represented at the general meeting to complete certain transactions that affect almost all of a company’s assets. If all assets are disposed of, not case law but statutory law, (namely, the Stock Corporation Act) requires that 75 per cent of the share capital represented at a general meeting approve of the disposal. Cooperation models An ordinary business cooperation does not require shareholders’ approval. Shareholders only have their general right to information about the company’s affairs. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Unsolicited takeover attempts are still rare in Germany. However, as liquidity and transparency of capital markets have developed and private investors and institutional investors increasingly encouraged stock corporations to focus on shareholder value, the general attitude has become less negative with regard to hostile transactions than it was in the past. Nonetheless, the Takeover Act provides for the target company to defend itself against hostile transactions (see below). Germany has opted out of the stricter rules provided for in the European Takeover Directive, and there is no inclination of corporations to voluntarily opt in. Typically, however, while the target may make it difficult for the bidder or provoke a higher offer price, if an unsolicited offer is attractive, the target has only very rarely the means available to prevent the takeover once it was launched – and most of the time it is rather a PR battle than a legal one. Thus, it is not the defence mechanisms, but more the comparably low free float of many German stock corporations and the tightening of undisclosed stakebuilding (see question 6) that decreases the possibility of seeing too many hostile takeovers. The largest unsolicited takeover offer since the introduction of the Takeover Act was Merck’s bid for Schering in 2006, which, however, failed owing to Bayer’s higher competing offer. It was followed by 2015’s hostile offer of Vonovia for Deutsche Wohnen, which lacked sufficient acceptance and Schaeffler’s bid for Continental, which as far as the tender offer is concerned, ended in a friendly mode. An inter- esting transaction was also the initially unsolicited bid for Techem in 2007, which ended being a joint bid by BC Partners and Macquarie – and failed because it did not exceed the required acceptance threshold. It is important for a bidder to realise that the ‘effective control’ threshold lies at 75 per cent of the voting rights, as this is the majority required at the shareholders’ general meeting for major structural changes to the target stock corporation. Macquarie launched another – successful – takeover offer after having acquired more than 75 per cent of the shares in Techem by several share purchases outside the stock exchange. The unsolicited takeover offer of ACS for Hochtief is one of the rare examples of an unsolicited offer that did not end in a friendly mode or failed owing to a higher competing offer. It was also, however, not a fully fledged takeover, but the offer was at a minimum price and only targeted to use the possibilities granted under the law to build a larger stake once the control threshold is crossed without being subject to the statutory minimum price rules. In recent years, there have been several hostile takeover attempts, which, however, did not trigger comparable discussions about the rules governing takeovers. Interestingly, though, in 2014 we saw for the first time a successful takeover defence when Weidmüller’s takeover attempt of R Stahl failed, and in 2015/2016 the first hostile ‘virtual’ offer by Potash for K+S, which was withdrawn, the failed takeover attempt by Vonovia for Deutsche Wohnen with a rather low premium, as well as Tocos’ hostile takeover of Hawesko notably initiated by an entity owned by a supervisory board member of the target. Further examples of takeovers that at least started as hostile include Standard Industries/Braas Monier (2016), Pfeiffer Vacuum/ Busch (2017), Uniper/Fortum (2017) and Grammer/Hastor (2017). As regards defence against hostile transactions, owing to the ‘duty of neutrality’, after the decision to launch an offer has been published, the management board must not take any action that could prevent the success of the takeover offer. However, the following actions of the management board (including defensive measures) are permitted (without approval at the share- holders’ meeting): • searches for a ‘white knight’; • any action within the scope of the management board’s powers if approved by the supervisory board and if the law (for example, the Stock Corporation Act) does not set forth further requirements; and • actions that would have reasonably been taken if no offer had been launched, for example, measures in the ordinary course of busi- ness, measures to execute contractual obligations entered into before the bid or measures executing the established strategy of the target company. Furthermore, the shareholders may under certain restrictions authorise the management board to take actions within the scope of the powers of the shareholders’ meeting before and independent from any take- over offer. These provisions seem to provide a wide scope to management. However, their impact is mitigated by the fact that pressure from insti- tutional shareholders will prevent most listed companies from using the mechanisms available and because of the necessary compliance with other legal requirements (for example, under the Stock Corporation Act), in particular the duty to act in the best interest of the company. Also, the duty to treat all shareholders equally as set out in the Stock Corporation Act restricts the ability of the target to, for example, use a poison-pill defence (namely, ‘flip-in’ or ‘back-end’ provisions) as it is known in other countries. The shareholders’ meeting may also, as provided under the EC Takeover Directive (Directive No. 2004/25/EC of 21 April 2004), impose a stricter ‘duty of neutrality’, which would then mean that only certain actions of the management board would be permitted. However, in prac- tice, this is irrelevant because no company opts for such a stricter duty voluntarily. Maximum or multiple voting rights, for example, such that each shareholder has only one vote or that certain shareholders’ shares count twice, are impermissible. © Law Business Research 2019
- 79. Gleiss Lutz Germany www.lexology.com/gtdt 79 Break-upfees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Increasingly demanded in cross-border transactions, break-up fees are sometimes seen in private acquisitions and in agreements with share- holders of public companies. Nevertheless, break-up fee arrangements (and, even more so, reverse break-up fee arrangements) with a target that is a German public company are not yet common and are subject to a number of limitations (for example, the target company’s manage- ment board can only enter into them if they are in the best interests of the target). Even without a break-up fee arrangement, there may be, subject to rather strict prerequisites, pre-contractual liability if one party breaks off negotiations unreasonably after it has induced confidence that an agreement would be reached. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Unlike in other European countries, there is no such thing as a ‘golden share’ in Germany. A notable exception is the VW Act, which creates a special legal situation for Volkswagen. The VW Act has been found to be partly inconsistent with Community provisions on the free movement of capital by the European Court of Justice (ECJ). In November 2008 the German parliament amended the VW Act (only) slightly. The ECJ has approved these amendments in October 2013. Under the German Foreign Trade and Payments Act and the pertaining ordinance, foreign investments of formerly 25 per cent, now 10 per cent or more of the voting rights in German businesses active in the defence or encryption sectors require prior approval by the Federal Ministry for Economic Affairs and Energy (BMWi). In addi- tion, the BMWi has the power to review, veto or stipulate conditions for acquisitions (direct or indirect ones) of 25 per cent or more of the voting rights in any Germany business by a non-EU and non-EFTA investor if the ‘public order and security’ of Germany is affected. Upon applica- tion, the BMWi may issue a compliance certificate, ideally at an early stage of the transaction. Recent amendments of the Foreign Trade and Payments Ordinance in July 2017 and December 2018 have not only extended the BMWi’s review deadlines considerably, so that, as a result, the BMWi may decide to review an investment as late as three months after gaining knowledge of the publication of the decision to issue the takeover offer or of the publication of assumption of control. In addi- tion, the recent legislative reforms have also introduced a duty to notify investments in certain sensitive civilian sectors (especially in critical infrastructure, for example, in the energy, water, banking, insurance, transport, traffic, health or food sectors) to the BMWi and have reduced the threshold for the BMWi’s foreign investment control powers in rela- tion to these sensitive civilian sectors to 10 per cent of the voting rights. Besides the described legislative changes, the administrative practice of the BMWi is showing a growing governmental willingness to interfere in foreign investments in Germany, particularly in the area of critical infrastructure and security-related technologies. In the summer of 2018, this willingness was evidenced by two cases in private MA, namely by the federal government’s resolution to prohibit the acquisition of the German machine tool manufacturer for automotive, aviation, aerospace and nuclear industries Leifeld Metal Spinning by a Chinese investor and by the acquisition of a 20 per cent stake in the power transmission system operator 50Hertz by the state-owned development bank KfW in order to pre-empt an investment by State Grid Corporation of China. The legislative amendments and the tightened administrative practice are resulting in increasing numbers of applications for foreign invest- ment compliance certificates and have slowed down many cross-border transactions. Except for antitrust reasons and foreign investment control, as well as supervision of banks, insurance, aviation and media companies, government agencies cannot influence or restrict the completion of business combinations based upon legal considerations. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Under the Takeover Act, a bidder may only make a bid conditional upon the occurrence of events beyond its own control. For example, common conditions include that the required regulatory permits are granted (in particular antitrust clearing from German, EU and US authorities); and that a minimum number of shares are tendered. If an offer is subject to (the bidder’s) shareholder approval, approval has to be granted five days prior to the end of the offer period. Material adverse change (MAC) conditions have become a common feature in takeovers since 2003/2004. The first business MAC in an offer document was accepted in Bosch/Buderus and has been used in different forms ever since. The first market MAC was introduced in the Blackstone/Celanese offer document. However, the BaFin has estab- lished several requirements with which MAC conditions have to comply. In recent years, compliance conditions have also been introduced and are often included in offer documents. Tender offers must no longer be structured such that the share- holders are invited to tender their shares to the bidder (and acquisition is completed when the bidder accepts the offer of the shareholders). Under the Takeover Act, the bidder has to make a binding offer to the shareholders (acquisition is completed when the shareholders accept the offer of the bidder). Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? According to the Takeover Act, the bidder in a public offer must, prior to the publication of the offer document, take the necessary steps to ensure that he or she has at his or her disposal the necessary means for paying the consideration to the shareholders accepting the offer. Where the offer provides for a cash payment as consideration, an investment services enterprise, typically a bank, shall confirm in writing that the bidder has taken the above-mentioned financing measures. The offer document must contain information on such financing measures as well as details of the expected consequences of a successful offer for the bidder’s financial position, financial performance and earnings position. If shares in a certain company are transferred via a share purchase agreement (SPA) rather than public offer, details about the purchas- er’s financing measures and his or her financial position might be mentioned in the SPA or agreed upon in detail. This, however, is at the parties’ disposal. © Law Business Research 2019
- 80. Germany Gleiss Lutz PublicMA 201980 During the financial crisis, obligations of the seller to (at least indirectly) assist in the purchaser’s financing became more common. The parties can, for example, establish an earn-out mechanism, which allows the purchaser to defer the payment of a part of the purchase price depending on the achievement of certain goals regarding the target company’s performance. Another possibility for seller’s assis- tance in the purchaser’s financing is to conclude a vendor note, that is, a loan of the seller to the purchaser regarding a part of the purchase price. In Germany, vendor notes are, however, still not as common as elsewhere. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? There is a general squeeze-out mechanism provided for in the Stock Corporation Act, as well as a special one in connection with public takeo- vers or via a merger. If a shareholder holds 95 per cent of the entire share capital of a stock corporation, the general meeting may resolve to squeeze out the remaining minority shareholders. The resolution has to be regis- tered with the commercial register. On registration, the shares of the outstanding shareholders are transferred by law to the principal share- holder, who must indemnify the former shareholders for the transfer. The principal shareholder must provide a guarantee as security for such indemnification. An independent auditor evaluates whether the indemnification is adequate. Although the question of whether the indemnification is adequate may be an area of dispute, the resolution by the general meeting (and, therefore, the squeeze-out) cannot be chal- lenged on such grounds. Following a takeover, the bidder also has a right to squeeze out the remaining minority shareholders by court decision (namely share- holders’ resolution is not required). If a bidder holds 95 per cent of the registered share capital carrying voting rights, he or she can apply for a transfer of the remaining shares carrying voting rights; if the bidder also owns 95 per cent of the entire registered share capital, he or she can apply for a transfer of the remaining preference shares without voting rights. Remaining shareholders have a right to request the bidder to buy their shares if the bidder meets the requirements for such take- over-related squeeze-out. Both the right of squeeze-out and the right of sell-out can only be exercised within the three months after the end of the acceptance period of the preceding takeover. For different reasons, however, the ‘takeover squeeze-out’ is irrelevant for practical purposes. There is also the possibility of a ‘merger squeeze-out’, which requires a stock corporation to hold 90 per cent of the registered share capital carrying voting rights of another stock corporation. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? In principle, cross-border acquisitions of publicly listed German corpora- tions may be structured as mergers or takeovers. If only a certain stake is acquired also as straight acquisitions. Since the EC Merger Directive was implemented into the Reorganisation Act on 19 April 2007, German entities may merge into non-German EU entities and vice versa. The provisions provide for detailed regulations regarding the procedure, the legal consequences and how such merger becomes effective. The most important documents are the common draft terms, the management report, the independent expert’s report and the pre-merger certificate. Furthermore, German stock corporations must have a two-tier board structure with both a management board and a supervisory board. Particularly in cross-border transactions, the requirement that a super- visory board be composed of up to 50 per cent labour representatives is a feature that commonly leads to confusion and misapprehension by non-German entities and their advisers. Since the EC Merger Directive with respect to regulations about co-determination of employees was implemented, the co-determination regime of the domicile country of the merged company generally prevails, subject to certain excep- tions. Furthermore, it is now possible to negotiate a certain level of co-determination in an elaborate process described in the Regulation on Co-Determination of Employees on Cross-Border Mergers. If the nego- tiations fail, a substitutional legal provision applies. There are also a number of tax considerations in a cross-border transaction. In light of the requirements of EU law, reorganisations (mergers, changes of legal form, split-ups, contributions against shares) can also be performed tax-neutrally in cross-border cases if the partici- pating entities are EU or EEA-based and to the extent that the right of Germany to tax hidden reserves is not excluded or restricted. The same applies for a migration of a German company abroad. It should be noted that this does not apply to non-EU/EEA-based companies (in particular US companies, but also, for example, Swiss companies do not benefit from these rules), and the condition of a non-restricted German tax base raises various questions and concerns. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? There are a number of time periods under the Takeover Act, including: • the publication of the decision to launch a tender offer via the internet and an accepted electronic information system in Germany has to be made without undue delay after the decision has been taken; • without undue delay, the bidder must send the publication to the stock exchange and to the BaFin, and must inform the management of the target company (which must inform its works council) and its own works council; • the bidder must prepare the offer document and file it with the BaFin within four weeks of publication of the decision to tender; • within 10 business days, the authorities have to review the tender offer document and: • allow publication of the offer document; • prohibit tendering the offer; • grant a further period of up to five business days to correct any mistakes; or • issue no decision at all (then the bidder may publish the offer document after 10 business days); • the offer period must be no less than four weeks and not more than 10 weeks; • both the management board and the supervisory board of the target company must publish a substantiated statement regarding the takeover offer without undue delay after receipt of the same; and • if completion of a business combination requires registration of a document with the commercial register, additional waiting periods have to be considered. © Law Business Research 2019
- 81. Gleiss Lutz Germany www.lexology.com/gtdt 81 OTHERCONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Specific rules apply to insurance companies and banks. For example, if a shareholder intends to acquire at least 10 per cent of the capital or the voting rights in a German bank or a German insurance company or, having held such stake, intends to reach or exceed the thresholds of 20, 30 or 50 per cent, the shareholder needs to notify the respective supervisory authority. Under certain circumstances (for example, if it finds that the new shareholder or its representatives are not sufficiently reliable for the respective business or the new shareholder is consid- ered to be financially weak) the supervisory authority can prohibit the envisaged acquisition. As far as transactions in the broadcasting sector are concerned, the transaction has to be notified to the state media agency that granted the broadcasting licence. If a nationwide broadcaster is involved, the Commission on Concentration in the Media (KEK) has to be involved. The purpose of the KEK procedure is to prevent a single entity from exercising a controlling influence on public opinion. Moreover, for trans- actions in the media sector the calculation of the parties’ turnover under the German merger control rules (see question 4) is to be based on the twentyfold value of the actual turnover in the case of revenues gener- ated from broadcasting activities and the eightfold value of the actual turnover in the case of revenues generated from activities relating to newspapers and magazines. Furthermore, German telecommunications law imposes certain notification and permit requirements in addition to those contained in the Takeover Act (for example, with respect to the holding of interests in more than one mobile phone licence). A provision in the German Foreign Trade and Payments Ordinance enables the federal government to prohibit foreign investment of 10 per cent or more in German defence businesses. For further infor- mation see question 11. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? The most relevant taxes for corporations are: • corporate income tax with a single corporate income tax rate of currently 15 per cent; • solidarity surcharge with a tax rate of 5.5 per cent on the corporate income tax; • trade tax with a tax rate around 14 per cent depending on the multi- plier applied by the respective municipality; • real estate transfer tax with a tax rate between 3.5 and 6.5 per cent on the (near) market value of the real estate; • value added tax (VAT), currently 19 per cent (reduced rate of 7 per cent applies on certain consumer goods and daily services); and • wage tax with respect to remuneration paid to employees. Companies have considerable flexibility in arranging their taxable income to reduce the impact of the high marginal rates, for example, by tax grouping, loss carry-forwards and loss carry-backs. However, loss carry-forwards can only be set off up to €1 million and, beyond that amount, up to 60 per cent of the remaining annual profit. This rule applies to corporations as well as to individuals, to income and corpo- rate income tax as well as to trade tax. As a general rule, tax loss carry-forwards at the level of the target expire in full for a share transfer of more than 50 per cent. However, there are exceptions (eg, for intra-group transactions). Further, if the target has hidden reserves the losses and loss carry-forwards do not expire up to the amount of the allocated hidden reserves. For acquisi- tions for the purpose of restructuring the business of the target, loss carry-forwards may not expire, either. Another recent exception applies if the target has been continuously operating the same business opera- tions for at least the past three years and continues to do so until the losses are set off. However, due to some restraints preventing tax arbi- trage, this provision will in practice apply only to start-ups rather than to mid to large-cap business groups. Under the general interest barrier ‘excess net interest expenses’ are disallowed. For the calculation of this excess net interest expenses, interest expenses have to be netted with interest income. Then the taxable earnings before interest, taxes, depreciation and amortisation (taxable EBITDA) has to be calculated. The amount by which the net interest expenses exceed 30 per cent of the taxable EBITDA is disal- lowed. Disallowed interest expenses and unused taxable EBITDA can be carried forward. In the latter case, however, this applies only for a period of five years. The interest barrier in principle only applies to busi- nesses with net interest expenses above €3 million per year. Under an escape clause rule, the deduction of all net interest expenses is allowed if the equity ratio of the German business is equal to or higher than the worldwide equity ratio of the group. The corporate taxpayer has to meet further requirements in order to escape from the interest barrier. Details are complicated and still under discussion (though now backed by an EU anti-avoidance directive, even its conformity with the constitu- tion is in doubt), so this can only be a very general overview. Individual shareholders holding their shares in a corporation as business assets have to pay taxes on 60 per cent of the dividends received and on 60 per cent of capital gains. However, as a general rule, in this case only 60 per cent of the related expenses will be deductible and only 60 per cent of the total amount of capital losses will count as tax losses. Shareholders holding their shares in a corporation as private assets will be subject to a definite withholding tax on both dividends and capital gains at a rate of 25 per cent plus solidarity surcharge; but if the shareholders hold or held in the five preceding years 1 per cent or more of the shares, the regular tax rate applies to 60 per cent of the capital gain. No tax for disposing of the shares in principle accrues if the shares have been acquired before 2009, are held as private property, amount to less than 1 per cent of the shares of the company and have been held for more than one year. Corporate shareholders directly holding 10 per cent or more of the corporation’s nominal share capital at the beginning of the calendar year are 95 per cent exempt from corporate income tax on dividends. Dividends of corporate shareholders directly holding less than 10 per cent are taxable in full for corporate income tax purposes. For trade tax purposes, dividends of corporate shareholders from a German corporation are 95 per cent exempt from tax provided they hold 15 per cent or more of the corporation’s nominal share capital at the beginning of the tax assessment period. Such exemption from trade tax is possible also for dividends received by corporate shareholders from foreign corporations if certain requirements are met. Dividends of corporate shareholders directly holding less than 15 per cent are taxable in full for trade tax purposes. Operating expenses in connec- tion with shareholdings are, as a general rule, deductible for corporate income and trade tax purposes. Corporate shareholders are economi- cally 95 per cent exempt from corporate income and trade tax on capital gains by a sale of shares, subject to certain exceptions. Capital gains derived by foreign corporate shareholders without a German tax base are fully exempt from corporate income tax. Debates whether to fully tax capital gains of corporate shareholders holding less than a certain © Law Business Research 2019
- 82. Germany Gleiss Lutz PublicMA 201982 amount of the corporation’s nominal share have so far shown no results, but have not ended yet. A withholding tax of 25 per cent (plus solidarity surcharge) on divi- dends applies to dividends paid to shareholders by a company that is tax-resident in Germany. This percentage is credited or refunded for domestic shareholders not subject to the definitive withholding tax and may be reduced under double taxation treaties for foreign shareholders if certain requirements are met. If the European parent-subsidiary direc- tive applies (namely, EU corporate shareholder holding 10 or more per cent of the corporation’s nominal share capital) the rate for dividends is zero per cent. Otherwise, German tax law only provides for a general reduction of the rate for dividends to 15 per cent if the recipient of the dividend is a corporate entity. There is an anti-treaty provision that may deny the reduction or refund of the withholding tax if the recipient does not have sufficient substance. Interest payments to a parent company on a fixed interest loan, as general rule, do not trigger a withholding tax obligation in Germany. Real estate transfer tax will be triggered, for example, by a direct or indirect transfer of 95 per cent or more of the shares in a company owning German real estate. It is currently being debated whether to subject further transactions to real estate transfer tax. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Employees generally exert more influence over large stock corporations than in most other jurisdictions, including in questions relating to the operation and organisation of a business as a whole. The two levels of representation are co-determination of the works council and board- level co-determination. Co-determination of the works council The Works Constitution Act entitles employees at workplaces with five or more permanent employees to elect a works council, having certain rights of information, consultation, cooperation, veto rights, rights of consent and other rights of co-determination with regard to a wide range of employment matters. In addition, in companies employing more than 100 permanent employees, a finance committee must be established by the works council. The finance committee usually consists of members of the works council and is the first point of (mandatory) contact for the employer in larger enterprises, especially in most mergers. Board level co-determination Two main pieces of legislation provide employees with representation at board level: • the One-Third Participation Act: companies that have, together with their dominated subsidiaries, over 500 employees must have a supervisory board, which is composed of one-third of employee-elected members and two-thirds of shareholder-elected members; and • the Co-Determination Act: this applies to companies and their subsidiaries with over 2,000 employees, requiring the supervisory board to then consist of equal numbers of shareholders and labour representatives; the chairman of the supervisory board, who typi- cally is a shareholder-elected member of the supervisory board, having a casting vote in the event of a tie. The supervisory board appoints the management board. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? The main differences between business combinations in a normal situ- ation and those involving a target that is insolvent or on the verge of insolvency, arise from legal provisions set forth in the German Insolvency Code. Such provisions may apply if the seller faces insol- vency, for example, in the case of a share deal the selling shareholder and in the case of an asset deal the selling company. Acquisition prior to filing for insolvency Prior to filing for insolvency there are, by and large, no special restric- tions for the acquisition of shares or assets from a seller that may become insolvent. However, if insolvency proceedings over the assets of the seller are commenced after the acquisition is completed, there is a risk that the insolvency administrator may challenge the transaction, arguing that it was to the disadvantage of the insolvency creditors of the seller. This can even be the case if the purchase price paid by the purchaser was adequate and represented the fair value for the target. As a conse- quence of a successful challenge, the purchaser would have to return to the insolvency estate anything that was transferred by the seller (namely, the shares or the assets, respectively). In return, the purchaser would have a claim for the repayment of the purchase price from the insolvency estate. However, the purchaser faces the risk that the insol- vency estate no longer (completely) contains the purchase price or that such purchase price is not held separate from other assets of the insol- vency estate and therefore that the claim for the return of the purchase price would fail. In such a (highly likely) event, the purchaser would only be entitled to receive the insolvency quota for its claim. Furthermore, if at the time of the opening of the insolvency proceedings the underlying acquisition agreement has not been completely executed by at least one party, the insolvency administrator has the right to reject the perfor- mance of this agreement and impede completion of the transaction. Acquisition in the pre-opening period The pre-opening period is the period between the filing for insolvency and the formal opening of the insolvency proceedings by the insolvency court. During this period, which regularly lasts up to three months, the insolvency court in the absence of self-administration, usually appoints a preliminary insolvency administrator who acts on behalf of the failed company or at least has the power to veto transactions. Because transactions at this stage bear a higher risk of being chal- lenged by the final insolvency administrators, executing acquisitions at this stage of the insolvency proceedings remains a theoretical alter- native only. The final insolvency administrator (even being the same person as the preliminary insolvency administrator) may also reject the performance of the underlying acquisition agreement after the opening of the insolvency proceedings if the agreement has not already been fully performed by at least one party by the time the insolvency proceedings are opened. In any case, the parties should seek the insol- vency court’s approval of the transaction. Acquisition during the insolvency proceedings At this stage, transactions with the insolvency administrator are very common. The final insolvency administrator is granted the authority to sell the assets of the insolvent company. The final insolvency admin- istrator has no right to challenge such transactions or to reject the performance of a transaction agreement that he or she himself or herself concluded with the purchasers. It is, however, important to be © Law Business Research 2019
- 83. Gleiss Lutz Germany www.lexology.com/gtdt 83 familiarwith the particularities of MA transactions with the insolvency administrator. For example, the insolvency administrator is prepared to provide only rather limited guarantees, which is important to take into consideration in the determination of the purchase price. Furthermore, the debtor or the final insolvency administrator may develop (sometimes together with a potential purchaser) an insolvency plan to reorganise the insolvent company. An insolvency plan provides various ways and modalities to acquire assets of or shares in the target. The importance of insolvency plans has increased since the amendment of the German Insolvency Code by the Act to Facilitate the Restructuring of Companies in 2012. This act improved the insolvency plan proceed- ings in order to accelerate them and implemented the possibility of a debt-to-equity swap, a transfer of shares or other corporate measures (eg, reorganisations as part of the insolvency plans). In particular, an insolvency plan (including a debt-to-equity swap, a transfer of shares or other corporate measures) can be adopted even without shareholders’ approval. By derogation from the general principle, creditors who partic- ipate in a debt-to-equity swap based on an insolvency plan do not face any liability risk because of a potential overvaluation of their claims. Against this background, the acquisition of shares in an insolvent target under an insolvency plan is an option to be taken into consideration. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? In the context of business combinations, there exist no specific regu- lations in regard to corrupt practices. Corruption is a criminal offence for any natural person involved. Companies that profit from corruption can be subject to criminal forfeiture so that the company loses anything gained as a result of the corruption. There is no limit on the amount subject to forfeiture. If management is involved, the company can also be subject to an administrative sanction. Gerhard Wegen gerhard.wegen@gleisslutz.com Christian Cascante christian.cascante@gleisslutz.com Taunusanlage 11 60329 Frankfurt Germany Tel: +49 69 95514 0 Fax: +49 69 95514 198 Lautenschlagerstrasse 21 70173 Stuttgart Germany Tel: +49 711 8997 0 Fax: +49 711 855 096 www.gleisslutz.com © Law Business Research 2019
- 84. Public MA 201984 Ghana KimathiKuenyehia Sr, Sarpong Odame and Kojo Amoako Kimathi Partners, Corporate Attorneys STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? In Ghana, publicly listed companies undertake business combina- tion through: • acquisition of shares; • creation of joint ventures; • acquisition of business assets; • merger of two or more companies into one of the existing companies; • merger of two or more companies into a new entity set up for that purpose; • amalgamation or arrangement with court approval; • creation of new holding companies for existing entities; and • acquisition of state-owned business entities or assets from the Ghana government under its divestiture programme in accordance with PNDC Law 326. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing business combinations and acquisitions of publicly listed companies are: • the Companies Act 1963 (Act 179) as amended (the Companies Act), which is the primary legislation governing such business combina- tions and acquisitions in Ghana. The Companies Act provides for the manner in which such business combinations and acquisitions should be effected. It provides for combination of businesses by the sale of underlying assets in exchange for shares (share exchange), schemes of arrangement and amalgamation as modes of achieving business combinations for public companies incorporated in Ghana. These schemes, found in sections 230 and 231 of the Companies Act, are usually initiated on the basis of a shareholders’ special resolution and consummated with or without court approval; • the Securities Industry Act 2016 (Act 929) (the Securities Industry Law), the Securities and Exchange Commission Regulations 2003 (LI 1728), the Securities and Exchange Commission Takeovers and Mergers Code (the Takeovers Code), the Central Securities Depository Act 2007 (Act 733), and the Securities and Exchange Commission (SEC) Compliance Manual all serve to govern and regulate trading in securities in publicly listed companies. The Takeovers Code also provides the obligations and procedures to be complied with during MA activity in this context. The Takeovers Code applies to: • all takeovers and mergers where the target company is a public company; and • all takeovers and mergers between or among public compa- nies, whether listed or unlisted on the Ghana Stock Exchange (GSE); and • it is pertinent to note that in addition to the above laws, parties are also required to comply with the applicable provisions in the Companies Act. Specific sectoral legislation also regulates such business combinations and acquisitions. These include: • the Banks and Specialised Deposit-Taking Institutions Act 2016 (Act 930) (the Banking Act), which regulates the banking industry; • the National Communications Authority Act 2008 (Act 769), the Electronic Communications Regulations, 2011 (LI 1991) and the Electronic Communications Act 2008 (Act 775), which regulate the telecommunications industry; • the Insurance Act 2006 (Act 724), which regulates the insur- ance industry; • the Minerals and Mining Act 2006 (Act 703), as amended, which regulates the minerals and mining industry; • the Petroleum (Exploration and Production) Act 2016 (Act 919); • the Fisheries Act 2002 (Act 625); • the Petroleum (Local Content and Local Participation) Regulations, 2013 (LI 2204); • the Energy Commission (Local Content and Local Participation) (Electricity Supply Industry) Regulations, 2017 (LI 2354); and • the Ghana Investment Promotion Centre Act 2013 (Act 865). Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Yes, the parties usually conclude on transaction agreements even for acquisitions of publicly listed companies. The transaction agreements involving business combinations and acquisitions of publicly listed companies are typically governed by Ghana law or any other law that the parties to the agreement voluntarily choose. For banks, specialised deposit taking institutions and financial holding companies, the transaction agreements must be presented to the Bank of Ghana for approval prior to execution. © Law Business Research 2019
- 85. Kimathi Partners,Corporate Attorneys Ghana www.lexology.com/gtdt 85 FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Generally, the filings and fees in connection with such business combi- nations or acquisitions largely depend on the nature of the transaction. Where the transaction involves the merger or acquisition of shares, documents related to the transactions must be filed with the registrar of companies at the Registrar General’s Department. Publicly listed companies, companies are required to pay prescribed fees to the SEC for any filings to be made with the SEC or any statement required under the Takeovers Code, for any takeover, consolidation or merger offer. Under the Companies Act, Ghanaian companies must file returns with the registrar of companies to record changes in directors and officers, changes in the authorised and issued share capital and other statutory matters, including an annual return of particulars of the company. The Companies Act places an obligation on all companies in Ghana to file shareholders’ resolutions that make changes to their Regulations (the equivalent of the memorandum and articles of asso- ciation in other jurisdictions) as a result of any business combination. All the above-mentioned filings require payment of relatively nominal filing fees to the registrar of companies. Mergers or takeovers involving banks and financial institutions must be notified to the Bank of Ghana for approval under the Banking Act. No filing fees are payable. Where the stated capital increases as a result of any business combination, a stamp duty at a rate of 0.5 per cent is paid on the increase in the stated capital of the combined business. The transfer of shares in a company as a result of a business combination is exempt from all stamp duties. However, under section 66(2) of the Companies Act, every company that increases its stated capital must send particulars of the increase within 28 days to the regis- trar of companies for registration. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? In all such business combinations or acquisitions, the companies involved are required to disclose certain information to their share- holders, the registrar of companies and the SEC if they are publicly listed companies. This information largely determines whether approval of a merger, acquisition or takeover would be granted by the SEC. The SEC is authorised by section 3 of the Securities Industry Law to ‘review, approve and regulate takeovers, mergers, acquisitions and all forms of business combinations in accordance with any law or code of practice requiring it to do so’. Under the Companies Act, the registrar of companies is empow- ered under section 279 to accept for registration every prospectus relating to an invitation to the public to acquire or dispose of shares in a public company. Section 275 of the Companies Act provides, inter alia, that within six months prior to the making of an invitation there should have been delivered to the registrar and registered by him or her, a prospectus relating to the shares complying, in all respects, with all relevant provisions of the Companies Act. Section 276 of the Companies Act requires that a prospectus making an invitation to the public shall contain the details of the offer, a brief corporate history of the offeror, the offeror’s shareholding struc- ture and various professional reports relating to the offeror. The SEC Regulations also provide that a prospectus or offer docu- ment issued in connection with or in respect of an offer or invitation to the public to acquire corporate securities shall be submitted to the SEC for examination and approval. Issuers of prospectuses will have to ensure that the prospectus complies with the provisions of the Companies Act and the SEC Regulations. According to the law, a person may not acquire more than 25 per cent of the voting rights of a listed company unless he or she notifies the GSE and fulfils the conditions of a takeover offer. The board of directors of the offeree company upon receiving the offeror company’s statement shall inform the SEC and the GSE. In addi- tion, an announcement by press notice of the proposed takeover offer should be made within 24 hours of receipt of the offeror company’s statement. A press notice shall be made in at least two English-language daily newspapers of national circulation and shall include all material infor- mation contained in the offeror company’s statement. The takeover offer document shall state the following: • whether the offer is conditional upon acceptance of the offer for a minimum number of issued voting shares of the offeree and, if so, the percentage; • where the shares are to be acquired in whole or in part for cash, the period within which payment will be made and the method of such payment; • where the shares are to be acquired through a share swap, the proportion of the share swap and the period within which the offer- ee’s shareholders shall receive the new shares; • whether the offeror is engaged in the same line of business as the offeree; • whether the offer is conditional upon receiving approval under any law in Ghana or other regulatory approval outside Ghana where the transaction involves companies incorporated outside Ghana; • whether the offer is conditional upon maintenance of a minimum percentage of shareholding by the general public to satisfy the continuing eligibility requirements for listing; and • the circumstances that shall apply in the event that the conditions listed above are not fulfilled. If during the takeover period a director of the offeree company is offered a job or position with the acquiring company, then that director is obliged to disclose and excuse him or herself from decision-making of the offeree company’s board of directors. Listed companies on the GSE must reveal to the exchange any information or transaction whose impact on the company’s assets, financial position and business generally will cause substantial share price movements. The information disclosure requirement does not depend on the type of structure used in the business combination or acquisition of a public company. In practice, the same structure – a trust structure – is used for the creation and issuing of securities to both the public and to private investors. The Listing Rules of the GSE also requires a prompt announcement to be made: • upon a joint venture, merger, acquisition or takeover; • a change in control of the business; • when a tender offer is made for the securities of another entity; • on a public or private sale of additional securities; and • any acquisition of voting rights that results in the issuer becoming the holding issuer and is considered material by the board of directors. © Law Business Research 2019
- 86. Ghana Kimathi Partners, Corporate Attorneys Public MA 201986 Further, any person who purchases or sells shares in a listed company is required to inform the market when his or her holdings attain, exceed or fall below each 5 per cent threshold, starting from 10 per cent through 15 per cent and 20 per cent up to 50 per cent plus one share. The disclosure must be made not later than 48 hours after the transac- tion. The disclosure must show the size of the holding in terms of the percentage of the share capital and votes after the transaction and the number of shares purchased or sold should also be included. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Generally, the Listing Rules requires every person who purchases or sells shares in a listed company to inform the market when his hold- ings attain or exceed 5 per cent threshold, starting from 10 per cent through 15 per cent (and 20 per cent up to 50 per cent plus one share). The disclosure must be made in a press release to the market not later than 48 hours after the transaction. This requirement is not affected if the company is a party to a business combination. Further, according to the law, the purchase of a substantial amount of shares or the securing of control of a public company by acquiring the securities of those who control the public company shall give rise to a takeover bid. Thus, a person may not acquire more than 25 per cent of the voting rights of a listed company unless he or she notifies the GSE and fulfils the conditions of a takeover offer. Pursuant to the Takeovers Code, where a person (or persons) acting in concert acquires or intends to acquire more than 30 per cent but less than 50 per cent of voting shares of a public company in any 12-month period; or acquires or intends to acquire 50 per cent or more of the voting shares of the public company; or acquires a company that holds effective control in the public company or, together with shares already held, will result in acquiring effective control of the public company, then that person shall be obliged to make a mandatory take- over offer of such public company and shall be required to comply with the takeover procedures set out in the Takeovers Code. Exemptions may, however, be granted by the SEC with respect to these rules where deemed applicable. No person shall make an offer to acquire shares or voting rights of a public company which may entitle such person to exercise effec- tive control in the target company without complying with the takeover procedures provided for in the Takeovers Code. The Takeovers Code also provides that no person shall acquire effective control over a target company unless the person makes the same offer to all shareholders of the same class of such company in accordance with the Takeovers Code. The mandatory takeover offer requirement may not apply to the following situations: • any purchase of shares from unissued shares provided that the acquisition will not result in a 50 per cent or more ownership of shares by the purchaser; • any purchase of shares from an increase in authorised share capital; • acquiring of shares through inheritance; • purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acqui- sition is made by the debtor or creditor; • purchases in connection with privatisation undertaken by the government of Ghana; and • purchases in connection with liquidation or insolvency under court supervision. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Under the Companies Act, directors stand in a fiduciary relationship towards the company and are obliged to observe the utmost good faith towards the company in any transaction with it or on its behalf. Directors owe a duty to the company to act at all times in the best interests of the company as a whole so as to preserve its assets, further its business and promote the purposes for which it was formed. The Companies Act provides, in relevant part, that in considering whether a particular course of action or transaction is in the best inter- ests of the company, a director may have regard to the interest of the employees and shareholders of the company. In addition, when the director is appointed as a representative of a class of shareholders, employees or creditors, the director may give special, but not exclusive, consideration to the interests of that class. The directors shall not exceed the powers conferred on them by the Companies Act or Regulations, except with the approval of an ordinary resolution of the company. Where a takeover offer document has been sent to the board of directors of the offeree company, the board shall within 15 days of the receipt of the takeover document issue a statement to the holders of voting shares in the offeree company to which the takeover offer relates. This statement shall indicate whether or not the board recom- mends to holders of the voting shares the acceptance of the takeover offers made by the offeror company. The offeree company’s statement to the shareholders must contain all that is required or specified in the Takeovers Code. It is the law that no director shall place himself in a conflict of interest where his or her fiduciary duty to the company conflicts with personal interests or duties to other persons. Controlling shareholders do not have similar duties. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Generally, acquisition transactions must be consented to by share- holders pursuant to the Companies Act. For example, if the transaction involves a public company issuing new shares beyond what it is authorised to and beyond what may already have been approved by the company in a general meeting, the issuance must be approved at an extraordinary general meeting. The Companies Act allows dissenting shareholders during a merger or acquisition to receive a fair value of their shares in cash. In a business combination where one public company is liqui- dated, a liquidator can purchase the shares of dissenting shareholders. However, the price payable for the shares shall be determined by agreement or, in default of agreement, by a single arbitrator appointed by the president for the time being from the Institute of Chartered Accountants in Ghana. The purchase money shall be paid before the public company is dissolved. Dissenting or minority shareholders during a merger or acqui- sition can also apply to the court in order to receive a fair value for their shares. The court may make an order and set what it thinks fit as a fair value for their shares. Before making an order, the court may refer the © Law Business Research 2019
- 87. Kimathi Partners,Corporate Attorneys Ghana www.lexology.com/gtdt 87 matter to the registrar of companies who shall appoint one or more competent reporters to investigate the fairness or otherwise of the offer and to report its findings to the court. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Although hostile transactions generally do not take place in Ghana, there is no legal impediment to making a hostile bid for public compa- nies. However, there may be cases of a competing takeover offer where two or more entities have interests in the same public company target. In such an instance, the competing offeror shall serve a competing takeover offer document as required by the Takeovers Code. This must be done at least 10 days prior to the closure of the original offer period and this period shall also apply to revisions that may be made to the competing offer. Any information given to any offeror, including particulars of share- holders shall be furnished equally and promptly on request to any other competing offeror who has made a competing offer in terms of the Takeovers Code. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? There is no specific legislation in Ghana dealing with break-up or reserve break-up fees. Thus, nothing prevents the parties from providing for such fees in their agreements. The Takeovers Code provides for cases of a competing takeover offer where two or more entities have interests in the same target. Under the Takeovers Code, withdrawal of a takeover offer may occur where: the offeree’s shareholders have rejected the takeover offer; events occur rendering either the offeror or offeree or both incapable of fulfilling their obligations under the takeover offer; or a counter-offer is accepted by the offeree. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Yes. The 1992 Constitution of Ghana gives the government of Ghana the responsibility to ensure that the nation’s interests are always protected and promoted. As such, any business combinations that may affect the nation’s security or may be deemed not to be in the nation’s best interest would be blocked. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? In public takeovers, conditional offers may be made. The Takeovers Code states that the preliminary public announcement and offer document must stipulate the conditions applicable to the offer. For example, it must be clearly stated whether approval under any law in Ghana or other regulatory approval outside Ghana is required. Further, the Companies Act does not expressly set out the conditions which are allowed with respect to plans or schemes of arrangements. However, according to the law, the scheme document must be approved by the court to be effective. The court has the power to approve the scheme or to prescribe such terms as it thinks fit as a condition of its confirmation, including a condition that any shareholder be given the rights to require the company to purchase their shares at a price to be fixed by the court or to be determined in a manner provided by the court. Where the offer is conditional upon the acceptance of a minimum percentage of shares being received, the offer shall specify a date that is not more than 30 days from the date of service of the takeover offer or such later date as the SEC may allow on which the offeror can declare the offer to have become free from conditions. From the reading of the law, it is presumed that the offeror would have the financial capability to complete the offer. Also, the commencement of a tender offer or exchange offer for a public company can be subject to certain conditions set by the bidder in the offer document. The Takeovers Code does not place a restriction on the type of conditions that can be put in the offer document. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? The Takeovers Code requires the takeover offer document to state where shares are to be acquired in whole or in part for cash, the period within which payment will be made and the method of such payment. The seller does not have any express obligation to assist in the buyer’s financing. According to the Takeovers Code, the obligation of the seller during a transaction involves informing the relevant securi- ties exchange (if it is a listed company) and the SEC, and making the required public announcement on receiving the buyer’s bid. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The Companies Act provides for the compulsory acquisition of a minority shareholding if the acquirer has obtained at least 90 per cent in value of the shares of its target within four months of making the offer. The acquirer is mandated, within two months of achieving the 90 per cent, to send a notice to the shareholders who have not accepted the offer advising of its intention to acquire their shares. The minority shareholders may apply to the court against the compulsory acquisition within two months of receiving notice. The court may prevent the acquirer from purchasing these shares or may set terms for such a purchase. However, if they do not apply to the court, the acquirer can compulsorily purchase the shares. In addition, the Takeovers Code makes it clear that, where a takeover results in the offeror’s acquiring 90 per cent or more of the offeree’s voting shares, the offeror shall offer the remaining share- holders a consideration that is equal to the prevailing market price of the voting shares or the price offered to the other shareholders, which- ever is higher. For listed companies, the prescribed minimum public float is set at 25 per cent. Therefore, the approval of the GSE and the © Law Business Research 2019
- 88. Ghana Kimathi Partners, Corporate Attorneys Public MA 201988 SEC must be obtained to achieve a minority shareholder squeeze-out, which leads to a depletion of the public float. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Cross-border transactions are structured by the parties by taking several factors (ranging from the flexibility of enforcement of transac- tion documents to tax implications) into consideration. There are no specific laws and regulations that apply to cross-border transactions, especially with respect to how they should be structured. However, all such transactions may be treated as foreign investment transactions. Applicable laws and regulations that may affect such a transac- tion include the Foreign Exchange Act 2006 (Act 723) and the Ghana Investment Promotion Centre (GIPC) Act 2013 (Act 865). The Foreign Exchange Act requires that any foreign currency or financing to be used for the acquisition must be effected through any of the authorised banks in Ghana. The GIPC Act requires that all foreign investors register their investments with the Centre to ensure the free repatriation of profits, obtain automatic work permits and other benefits. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? An offeror must keep a takeover offer open for acceptance for a period of 30 days from the date the takeover offer document is first served in accordance with the Takeovers Code or such period as may be deter- mined by the SEC. An offer (period) shall be deemed to have lapsed: • in the event of the non-fulfilment of any obligations by the offeror under the Takeovers Code; • where all conditions to which the offer is subject are not fulfilled within 21 days of the first closing date of the offer or on the date the offer becomes unconditional as to acceptances; or • upon the non-acceptance of the offer after the expiry of the offer period. In the case of an offer that lapses in the event of non-fulfilment of any obligations by the offeror under the Takeovers Code, the offeror shall be prohibited from making any offer for the acquisition of shares of any listed company for a period of 12 months from the date of failure to fulfil the obligation. Where an extension of an offer is allowed by the SEC, the offeror shall inform the shareholders of the target company of the next closing date by press announcement on the floor of the GSE (in the case of a listed company), in the electronic media and in at least two daily news- papers of national circulation. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Generally, commercial, trading and manufacturing concerns do not need any approvals. The relevant ministries such as trade and industry have their regulations but do not directly supervise activity in the way that the Minerals Commission or the Bank of Ghana have statutory supervi- sory functions in mining and banking respectively. In the banking sector, the Bank of Ghana is the controlling agency during amalgamations and acquisitions. The Bank of Ghana is respon- sible for granting licences and approval for such activity. Under the Banking Act, a three-month notice to, and the written approval of, the Bank of Ghana is required in any acquisition or sale of shares of more than 5 per cent. Further, the approval of the Bank of Ghana is required for existing shareholders who intend to increase their shareholding above any of the supervisory thresholds. Currently, the supervisory threshold has been set at 5, 10, 20, 30 and 74 per cent. In addition, under section 52 of the Banking Act, the Bank of Ghana must approve any agreement or arrangement that would lead to the sale, disposal or transfer of the whole or part of the business of a bank or a specialised deposit-taking institution or financial holding company; or the amalgamation or merger of a bank, specialised deposit-taking institution, financial holding company or with another bank or any other institution; or the restructuring of a bank, specialised deposit-taking institution or financial holding company. Under Ghana’s Insurance Act, a person who owns or holds a signifi- cant interest in an insurance business shall not sell, transfer, charge or otherwise dispose of the interest in the insurance business, or a part of the interest, except with prior written approval of the sector regulator, which is the National Insurance Commission. In the mining industry, strict approval procedures are required by the law. Mergers and acquisitions by share transactions are tightly regulated. The acquisition of a stake in a mining company which vests in a person (alone or with an associate) control of more than 20 per cent of the voting power at any general meeting of a mining company or its holding company requires the approval of the sector minister. Section 14 of the Mining and Minerals Act 2006 (Act 703) provides that no mineral right or interest therein shall be transferred, assigned or dealt with in any other manner without the prior approval in writing of the sector minister. Failure to meet notification requirements on acquiring any control- ling interest in the mining industry constitutes an offence punishable by a fine or a term of imprisonment, or both. Under the Fisheries Act, where a merger or an acquisition leads to the formation of a new company, a licence granted to a fishing vessel owned by the old company will not as a matter of course be transferred to the new company unless the permission of the Fisheries Commission has been obtained. There are also nationality restrictions that may affect the extent to which mergers and acquisitions are effected. For example, the owner of a local industrial or semi-industrial fishing vessel licensed under the act shall employ a master, officers and crew of whom no less than 75 per cent shall be Ghanaians. The Petroleum (Exploration and Production) Act 2016 (Act 919) principally regulates the petroleum sector. For example, where the merger or acquisition results in the creation of a new company, the sector minister must be notified. In addition, any petroleum agreement cannot be assigned to the new company without the sector minister’s consent. The consent of the minister is also required for the transfer of control of at least 5 per cent of the shares in a petroleum company. If the merger or acquisition leads to the company ceasing operations, the Ghana National Petroleum Corporation shall have the first option in the purchase of its assets. Under the Renewable Energy Act, 2011 (Act 832), a person shall not engage in any commercial activity in the renewable energy sector without a licence granted by the Energy Commission. This licence is not transferable except with the consent of the Board of the Energy Commission. Under the regulations of the National Communications Authority (NCA) (LI 1719), if the transfer of shares in a licensee company would © Law Business Research 2019
- 89. Kimathi Partners,Corporate Attorneys Ghana www.lexology.com/gtdt 89 result in a change of control of the company and also cause that company to breach licence terms relating to its ownership structure, then the NCA must approve such a transfer. However, if no change in control or no breach results from the transfer then a mere notification of the transfer to the NCA will be sufficient. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? The Income Tax Act 2015 (Act 896) (ITA) replaced the Internal Revenue Act 2000 (Act 592) and all other laws inconsistent with the ITA. Under the ITA, there is no separate capital gains and gift tax for companies involved in business combinations or acquisitions involving public companies. However, in lieu of these, unless exempt, gains from assets and liabilities realised by the seller are included in the charge- able income of the seller and taxed at their respective corporate income tax rate. Gains arising from reorganisation, amalgamation or merger of a business are exempt from taxation where there is a continuity of under- lying ownership in the assets of at least 50 per cent. Gains from the replacement of assets are also tax-exempt. Special tax considerations may exist where the home country of a foreign party in such business combinations or acquisitions has in place a double taxation agreement with Ghana. Further, under the ITA, gains from the realisation of securities of listed companies on the GSE are exempt from income tax up until 31 December 2021. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The legislation governing labour and employee benefits is the Labour Act 2003 (Act 651) and the Labour Relations, 2007 (LI 1833). According to the law, if employees lose their jobs as a result of a business combination or acquisition, or suffer any diminution in their terms and conditions of employment, the target company would have to make redundancy payments to the workers. In determining whether a worker has suffered a diminution in the terms and conditions of employment, account is taken of the past service and accumulated benefits of the worker with the target company before the acquisition or merger. Further, the combined entity is required under law to obtain the endorsement of the Chief Labour Officer for the transfer of employees upon a merger or business combination. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? The buyer should be prepared to take over the liabilities and obliga- tions of the target public company. Apart from the usual due diligence required to assess the liabilities of the target company, the buyer must take into consideration any human resource agreements and policy of the public company, its tax standing, and investments where the target owns more than 5 per cent. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? The Criminal Offences Act 1960 (Act 29) provides for sanctions for corruption in general. Under the Criminal Offences Act, both demand and supply sides of corruption are criminal. The sentence for a convic- tion for corruption under the Criminal Procedure Code 1960 (Act 30) is a prison term not exceeding 25 years. Also, companies from the United States and the United Kingdom should ensure that they comply with the Foreign Corrupt Practices Act and the UK Bribery Act (2010). UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? In 2018, the Bank of Ghana (BoG) issued a directive to all commercial banks to recapitalise to meet the new minimum capital requirement of 400 million Ghana cedis. Pursuant to this directive, the BoG published Guidelines for undertaking MAs within the banking sector. The Guidelines provide the process and documents to be presented to the BoG for approval of business combinations. The Competition Bill when passed into law, will represent the most significant regulatory framework for MAs in Ghana. The Bill is expected to be passed into law in the third quarter of 2019. Clause 2 of the Bill, which sets out its objectives, provides in rele- vant part that the Competition Commission of Ghana (the Commission), when established, shall regulate mergers and acquisitions. Clause 5 of the Bill sets out the functions of the Commission, which include regulating mergers and acquisitions in terms of approving (with or without modifications) or blocking them. Part V of the Bill deals with mergers and acquisitions. Clause 32 empowers the Competition Commission to prohibit certain mergers and acquisitions, which, among other things, restrict free competition. Further, Clause 33 mandates companies to seek approval from the Commission for certain sectoral mergers and acquisitions. There is currently a proposal to change the statutory framework governing MAs when the Competition Bill and Companies Bill are passed into law. First, the proposed Competition Bill will result in a higher level of scrutiny from the Commission in respect of MAs. Under the Bill, one of the objectives of the Competition Commission of Ghana is to liaise with sector-specific regulators to ensure compliance with the Competition Law. Second, in respect of the financial sector, following the Bank of Ghana Directive for recapitalisation, the regulator issued a directive for all banks, specialised deposit-taking institutions and financial holding companies seeking to undertake an acquisition or merger allocating to itself the power to approve or decline any acquisition or merger. Third, under the proposed Companies Bill, the statutory frame- work for mergers and arrangements will not be significantly altered. However, there is a change from the term ‘arrangements and amal- gamations’ under the Companies Act, to the use of ‘arrangements and mergers’ in the Companies Bill. © Law Business Research 2019
- 90. Ghana Kimathi Partners, Corporate Attorneys Public MA 201990 Further, clause 239 of the Companies Bill gives the SEC, when a merger or arrangement is proposed, the right to apply to the High Court for a meeting to be held between the classes of members or credi- tors proposing the merger or arrangement. This right was formerly restricted to members, creditors, the company or the liquidator. Clause 361 of the Companies Bill now permits the Registrar of Companies to authorise arrangements, mergers, amalgamations and sale of undertakings to be effected electronically in the manner and through an electronic system approved by the Registrar. Kimathi Kuenyehia Sr kimathi@kimathilegal.com Sarpong Odame sarpong@kimathilegal.com Kojo Amoako kojo@kimathilegal.com No. 6 Airport Road Airport Residential Area Cantonments, Accra Ghana Tel: +233 302 770447 Fax: +233 302 766870 www.kimathilegal.com © Law Business Research 2019
- 91. www.lexology.com/gtdt 91 India Rabindra Jhunjhunwalaand Bharat Anand Khaitan Co STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? The general forms of business combinations that are available to private companies are also available to publicly listed companies. These forms are: asset acquisitions, share acquisitions, and court-approved schemes. But if the publicly listed company is the target, additional layers of Indian securities laws will apply (see responses to question 2). Where both buyer and seller are publicly listed companies, court- approved schemes are preferred. Asset acquisitions It is common for companies to acquire or sell entire businesses or undertakings. Alternatively, an acquirer may wish to cherry-pick certain key assets (for example, intellectual property and employees) and leave certain assets (for example, trade debts) behind. Asset acquisitions may be preferred where the acquirer is wary of past liability issues and prefers to acquire segregated assets rather than acquire the target company as a whole. Share acquisitions Often, it is simpler for an acquirer to take over 100 per cent of the share capital of the target company than to seek to acquire key assets or the whole of the target’s business undertakings. India’s foreign exchange control regime has been considerably liberalised to allow 100 per cent foreign ownership in most sectors of the economy, barring a small nega- tive list where foreign investment is prohibited (for example, betting and gambling, lottery business and atomic energy). In certain sectors, the government has prescribed foreign shareholding caps (for example, banking and insurance sectors) and in some sectors foreign investment is subject to conditions (for example, construction, telecoms and single- brand retail trading). Further, share deals may be preferred over asset acquisitions in sectors where key operating licences or assets cannot be transferred easily or in a timely manner (for example, telecoms and asset management companies). In the case of transactions between a resident seller and a non- resident buyer, deferred consideration and escrows for an 18-month period after the date of the agreement and indemnities with a value of no more than 25 per cent of the full purchase price are permissible without the Reserve Bank of India’s (RBI) approval. Mergers and demergers In India it is possible to either combine two distinct entities into a single entity by way of a merger or to split two distinct undertakings into separate entities by way of a demerger, in both cases through a court- sanctioned scheme. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The Companies Act 2013 (Companies Act or Act) regulates non- pre-emptive issuances of shares, significant sales of undertakings (ie, sale of 20 per cent or more of an undertaking that either represents more than 20 per cent of net worth or generates at least 20 per cent of total income), and court-approved schemes. Together with the Indian Contract Act 1872 (Contract Act), this comprises the basic legal frame- work for business combinations. Schemes involving publicly listed companies need to be pre-cleared by the relevant stock exchanges and reviewed by the Securities and Exchange Board of India (SEBI), before being submitted to the National Company Law Tribunal (NCLT) for approval, and additional conditions regarding disclosures and shareholder voting need to be complied with. Merger control is governed by the Competition Commission of India (CCI) through the Competition Act 2002 (Competition Act), the CCI (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations 2011 (Combination Regulations) and certain other notifications. Transactions that exceed prescribed asset and turnover thresholds must be notified to, and approved by, the CCI before the transactions can be given effect to. The CCI can approve a combination within 30 working days (subject to any ‘clock stops’). However, where the CCI is of the prima facie view that the combination may cause an appreciable adverse effect on competition, it may approve the combination within the statutory outer limit of 210 calendar days from the date of filing (this is also subject to any clock stops). At the level of the buyer and target, or the resultant entity, the thresholds are: (i) 20 billion rupees of combined assets in India; (ii) 60 billion rupees of combined turnover in India; (iii) US$1 billion of combined assets worldwide (including 10 billion rupees of combined assets in India); or (iv) US$3 billion of combined turnover worldwide (including 30 billion rupees of combined turnover in India). Separately, at the level of the group (to which the target or resultant entity would belong), the thresholds are: (i) 80 billion rupees of combined assets in India; (ii) 240 billion rupees of combined turnover in India; (iii) US$4 billion of combined assets worldwide (including 10 billion rupees of combined assets in India); or (iv) US$12 billion of combined turnover worldwide (including 30 billion rupees of combined turnover in India). The mandatory notification requirement does not apply to certain specified categories of, or specified situations involving, combinations under the Combination Regulations. In addition, there is a de minimis exemption for combinations where the target has assets in India of less than 3.5 billion rupees or has turnover in India of less than 10 billion rupees. © Law Business Research 2019
- 92. India Khaitan Co Public MA 201992 Both inbound and outbound business combinations will be subject to India’s exchange control regime, which is governed by the Foreign Exchange Management Act 1999 and various subsidiary legislation. Except for certain prohibited sectors (eg, atomic energy, lotteries and gambling), inbound investment is either freely permitted (automatic route) or permitted with prior governmental approval (approval route). Most sectors allow investment up to 100 per cent but in certain sectors, investment is capped at a certain percentage (eg, 49 per cent in case of insurance) and in other sectors, investment is allowed up to a cap under the automatic route but requires governmental approval beyond that (eg, 49 per cent and up to 100 per cent in case of single-brand retailing). Separately, investments in certain sectors are also subject to additional conditions and operating obligations. Minimum pricing requirements apply to issuances of shares by publicly listed companies. In addition, if the shares of such companies are being acquired or sold by non-resident investors, then minimum or maximum (as the case may be) pricing requirements will apply. Direct acquisitions of 25 per cent or more of voting rights in, or of control over, a listed target will be subject to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the Takeover Regulations) and require the buyer to offer to further acquire at least 26 per cent of the target’s voting capital. Indirect acquisitions of more than 80 per cent of the net asset value, sales turnover or market capi- talisation of the ultimate target are regarded, in all respects, as direct acquisitions. The SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations) prescribe event-based as well as periodic disclosure requirements for publicly listed companies. In most cases, MA transactions are disclosable without application of any materiality thresholds. Additional disclosure obligations under the Takeover Regulations and the SEBI (Prohibition of Insider Trading) Regulations 2015 (the Insider Trading Regulations) will also apply based, generally, on the quantity of shares being traded. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Sale and purchase agreements are entered into for both asset deals and share deals. In asset deals, the transfer of immovable property will require a separate conveyance document and transfers of contracts and other liabilities are normally undertaken through separate novation agreements. In case of a mandatory open offer, the buyer needs to issue a public announcement and a detailed public statement (DPS) and subsequently provide an offer letter to all shareholders. The scheme document that is filed with the NCLT is the principal document in the case of court-approved schemes. Transaction agreements are typically governed by Indian law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? In the case of mandatory open offers, the public announcement, DPS and letter of offer are all filed with SEBI and the relevant stock exchanges. Court schemes need to be filed with the NCLT and also with the relevant stock exchanges. Details of inbound foreign investments need to be reported to the RBI within 30 days. Details of shares transferred on the stock exchanges and involving non-residents need to be reported to the RBI within 60 days. Issuance and transfers of securities (including shares), both in physical and dematerialised form, are subject to stamp duty. The stamp duty rates vary – for issuances of shares the rate is 0.005 per cent; and for transfers of shares, on a delivery basis, the rate is 0.015 per cent. For transfers of shares on a non-delivery basis, a stamp duty rate of 0.003 per cent is prescribed. Stamp duty is to be calculated on an ad valorem basis on: (i) actual trade price for listed securities; or (ii) price identified in instrument of transfer. On payment of stamp duty on the issuance or transfer of the secu- rity, no additional stamp duty is payable on any other document entered in connection with the issuance or transfer, such as share purchase agreement, share certificates or allotment letters. Where merger control thresholds apply (see question 2), the deal parties may have to make either a short-form filing in Form I or a long-form filing in Form II. The Form II filing is generally used where the combined market share is more than 15 per cent in the horizontal market or more than 25 per cent in the vertical market. In the case of foreign institutional investors, venture capital funds, public financial institutions and banks undertaking acquisitions pursuant to an invest- ment agreement, a simpler filing in Form III needs to be made within seven days of the date of closing of the acquisition. Business combinations will also involve secretarial filings to be made with the relevant registrar of companies under the Companies Act. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The Listing Regulations require public disclosure of basic information regarding business combinations. The disclosable information includes the size and turnover of the relevant transaction parties, the relevant business or industry, the transaction objective, the nature and amount of consideration and whether any related parties are involved. In case of share acquisitions, the disclosure obligation is also triggered upon execution of the transaction documentation. Separately, acquisitions and disposals of shares beyond specified thresholds will trigger disclosure obligations under the Insider Trading Regulations and the Takeover Regulations. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Persons holding at least 25 per cent (including holdings of any concert parties) of the voting rights of a publicly listed company need to disclose their aggregate holdings within seven working days of the financial year close (ie, 31 March). Separately, any person holding at least 5 per cent (including hold- ings of any concert parties) of the voting rights of a publicly listed company needs to disclose all transfers of more than 2 per cent. If the publicly listed company is party to a business combination, the disclosure obligations under the Listing Regulations (see question 5) will apply. © Law Business Research 2019
- 93. Khaitan Co India www.lexology.com/gtdt 93 DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Directors’ duties Directors’ duties have now been codified under Indian law. The principal duties of directors under Indian law are similar (but not identical) to those under English law. So, under Indian law, a director’s relationship with the company is fiduciary in nature. A director must act in good faith in order to promote the objects of the company for the benefit of its members as a whole. A director must act with due and reasonable care, skill and diligence. A director must avoid any actual or potential conflict between his or her own and the company’s interests. A director must not achieve or attempt to achieve any undue gain or advantage to him or herself or his or her relatives or partners or associates. However, under the Act, directors’ duties have been muddled by requiring direc- tors to act not only in the best interest of the company but also its employees, the shareholders, the community and for the protection of the environment. There is no guidance for directors regarding which duties override in case of any actual or potential conflict between duties to different stakeholders. If a company proposes to enter into any arrangement or contract in which the director is directly or indirectly concerned or interested, the director is under a statutory obligation to declare such interest at a meeting of the board. Normally the declaration of an interest must be made at the first such meeting at which the matter is considered and thereafter at the first meeting of the board in every financial year or whenever there is any change in the declarations already made. Under the Act, interested directors cannot constitute or form part of a quorum or vote on matters in which they are interested. Statutory restrictions on directors Board approval is required for any contract between a company and any ‘related party’ (which expression includes directors, or certain persons connected with the directors, key managerial personnel or his relative, holding, subsidiary or associate companies, etc) in relation to the sale, purchase or supply of goods or services or for leasing, buying or selling of property of any kind or for underwriting subscription to any securities or derivatives thereof of the company. Moreover, certain transactions with a ‘related party’ also require the prior approval of the company’s shareholders by way of an ordinary resolution (50 per cent majority). However, transactions with a related party by the company in the ordinary course of the business and at arm’s-length basis will not require the board or shareholders’ approval. Further, relaxation from this requirement of shareholders’ approval is also available for trans- actions between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company and placed before the shareholders for approval at a general meeting. Shareholders’ duties Under Indian law, controlling shareholders are not subject to similar duties as directors. However, as in English law, controlling shareholders are obliged not to deal with the minority in an unfairly prejudicial or oppressive manner. Courts have wide-ranging powers in the case a claim of unfair prejudice is successfully made. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Shareholder approval (75 per cent majority) is necessary where a public company proposes to dispose of a substantial part or the whole of an ‘undertaking’. In the case of a merger or demerger, shareholder approval is necessary provided that a majority in number and three-quarters in value of the shareholders and creditors approve such transaction. Listed companies need shareholders’ approval by special resolution in case of disposal of a ‘material subsidiary’ (more than 20 per cent income or net worth on a consolidated basis) or sale or disposal of assets of a material subsidiary. Further, approval of majority of minority share- holders is required in certain cases involving schemes of arrangement between a listed company and promoter or promoter group entities. It should be noted that listed Indian companies tend to be closely held by an individual or a family. Therefore, deal protection can be achieved by ensuring that the controlling shareholders are committed to the proposed transaction. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Historically, unsolicited transactions in the case of publicly listed entities have been scarce in India owing to the concentration of controlling inter- ests in a few individuals or families. Most public deals involve a degree of due diligence by the acquirer and fairly robust representations and warranties package backed by the seller. Accordingly, ‘public takeovers’ closely resemble private MA transactions, with the exception of the acquirer having to complete an ‘open offer’ process in accordance with the Takeover Regulations and make mandatory disclosure under the Takeover Regulations and the Insider Trading Regulations. The Takeover Regulations provides for hostile takeovers of listed Indian companies and set out conditions upon satisfaction of which, an acquirer can make a ‘voluntary offer’ to acquire shares of an Indian listed company. These conditions, inter alia, include: • a voluntary offer can be made only by a person who holds at least 25 per cent shares or voting rights in a company, but not more than 75 per cent (taking account of the maximum permissible non- public shareholding); • the offer size must be for at least 10 per cent of the total shares of the target company; • a voluntary offer can be made only by a person who has not acquired any shares in the target company in the preceding 52 weeks prior to the offer; • during the offer period, the acquirer cannot acquire shares other than through the voluntary offer; and • once the voluntary offer is completed, the acquirer shall not acquire further shares in the target company for six months after comple- tion of the offer. However, this excludes acquisitions by making a competing offer. Since the Insider Trading Regulations make communication of ‘unpub- lished price sensitive information’ an offence, the approach towards due diligence of a listed target and the related public disclosure of the findings requires careful planning as well as execution of appropriate confidentiality and ‘standstill’ agreements between the target and the acquirer. © Law Business Research 2019
- 94. India Khaitan Co Public MA 201994 Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Although much more common in relation to private deals (especially where financial investors are involved or in the case of termination due to non-satisfaction of a condition), deal protection devices such as break fees (payable by the target or promoters to the bidder) and reverse break fees (payable by the bidder to the target or promoters) are extremely rare in connection with public deals in India. It is not clear whether SEBI would approve an offer letter involving such payments, especially if these arrangements cast a potential payment obligation on the target company. Separately, the payment of break-fees to non- residents may require the prior approval of the RBI. Under the Companies Act, it is unlawful for any public company to give financial assistance in connection with the acquisition of shares. Further, the consequences of a breach are stringent and liability of the company is subject to a fine of a maximum of 2.5 million rupees, and every officer of the company who is in default is liable to imprisonment for a term which may extend to three years and with fine of a maximum of 2.5 million rupees. We believe making ‘financial assistance’ an offence with potential criminal liability under the Companies Act (with no ‘white- wash’ procedure) will give rise to several challenges in the future. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Yes. If there is a perceived risk to national security, the government can influence or restrict the completion of a business combination. For instance, under the exchange control policy, foreign investments requiring government approval in defence, railway infrastructure, broadcasting or telecoms sectors are scrutinised from a security stand- point. Although there is no formal record, it is reported that the central government had rejected certain investment proposals owing to polit- ical or national security reasons in sectors such as telecoms. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Most forms of business combinations will be subject to conditions, in particular, on obtaining governmental and regulatory consents. In the case of open offers under the Takeover Regulations, however, there are certainty of funding requirements and the only conditionality that can be provided is with respect to minimum acceptance levels (provided that the higher of 100 per cent of minimum acceptance level consideration and 50 per cent of total consideration has been depos- ited, in cash, in escrow). Although, the Takeover Regulations permit withdrawal of an open offer in the event ‘any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for any reasons outside the reasonable control of the acquirer’, in our view, SEBI will resist attempts to expand the remit of conditional offers. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Pure leverage cross-border deals are not common in India. Where a transaction is debt-financed outside India, normally an offshore security package is put in place by the acquirer as taking security over Indian assets needs prior approval from the RBI. In such a scenario, funds are normally drawn down and available at the time of signing the acquisi- tion documents and making the public announcement in order to satisfy the merchant banker that necessary financing is available. Even in the case of purely domestic deals, financing conditions are rarely sought for, or accepted. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? Section 236 of the Companies Act 2013 provides that the majority share- holders who are the owner of 90 per cent or more of the equity shares of a company shall have the right of offer by notice to the remaining shareholders of the company to compulsorily acquire the shares. The Companies Act 2013 also gives such a right to the minority, to require the offeror to buy them out on the terms of the offer. The offer to be made by the minority shareholders to the majority shareholders for buying the equity shares shall be at a price determined in accordance with SEBI regulations. It appears that section 236 of the Companies Act 2013 is intended to provide an express squeeze-out procedure without the involvement of the courts. However, in practice, the section 236 procedure can still involve judicial challenge and, in our experience, remains untested and unreliable. Accordingly, acquirers and promoters need to still imple- ment consolidation of their shareholding through the procedures discussed below. Another possible method of shoring-up shareholding or squeeze- out is by way of capital reduction under section 66 of the Companies Act 2013. Squeeze-out through reduction of capital was discussed by the division bench of the Bombay High Court in Sandvik Asia Limited v Bharat Kumari Padamsi ([2009] 92 SCL 272 (Bom)). The High Court held that it will not withhold its sanction to a resolution resulting in a squeeze-out of minority shareholders through reduction of capital if it is established that reduced shareholders are being paid fair value of their shares, the overwhelming majority of the shareholders voted in favour of the resolution and reduction is in complete compliance with the Companies Act and articles of the company. Therefore we can infer from this decision that majority shareholders (more than three-quarters of the company) can remove minority shareholders by extinguishing the share capital held by the minority shareholders alone if the broad condi- tions as stated above are satisfied. The Bombay High Court in another case, Elpro International Limited ([2009] 149 Comp Cas 646 (Bom)), held that a scheme of reduction can be made applicable to a select group of shareholders so long as conditions under the Companies Act have been followed. An appeal preferred before the Supreme Court of India against Bombay High Court’s Sandvik Asia decision was not admitted by the apex court, meaning effectively that the apex court did not think it fit to interfere with the original decision of the Bombay High Court. Consolidation of shareholding can also be achieved through a delisting of the shares from the stock exchange pursuant to SEBI (Delisting of Equity Shares) Regulations 2009 (the Delisting Regulations). © Law Business Research 2019
- 95. Khaitan Co India www.lexology.com/gtdt 95 For this, among other compliances, delisting must be approved by a special resolution of the target company (the Delisting Resolution) in a general meeting where the votes cast by public shareholders in favour of the delisting must be at least two times the number of votes cast by public shareholders against it. The pricing of shares for the delisting process is determined by the reverse book-building process with a minimum floor price arrived as per the Takeover Regulations. For the delisting offer to be successful: • the post-offer shareholding of the promoter together with persons acting in concert along with shares accepted through eligible bids at the price arrived as per the Delisting Regulations, reaches 90 per cent of the total shares of that class (excluding shares held by custodians and against which depository receipts are issued); and • at least 25 per cent of public shareholders existing on the date of the Delisting Resolution tender in the reverse book building process (however, such a requirement can be relaxed, in the event acquirer and merchant banker to the offer is able to demonstrate that they have contacted all the public shareholders either through registered post or speed post or courier or hand delivery with proof of delivery or other prescribed means). In the event the delisting offer is successful, any remaining public share- holder holding equity shares of the delisted company may tender his or her shares to the promoter up to a period of at least one year from the date of delisting and, in such a case, the promoter is required to accept the shares tendered at the same final price at which the earlier accept- ance of shares was made. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Generally, prior to consummating a share acquisition in India, offshore buyers typically incorporate a holding company in a jurisdiction with a friendly tax treaty with India (for example, Mauritius, Singapore, the Netherlands, etc) in order to secure favourable tax treatment at the time of exit. Needless to say, the holding company should have ‘commercial substance’, else it could be regarded as a device for tax avoidance by tax authorities. Also, Indian transfer pricing regulations would apply to international transactions entered into between related enterprises. Recent changes, however, to India’s tax treaties with Mauritius and Singapore have withdrawn, in a phased manner and with effect from 1 April 2017, the capital gains benefits offered to investors in these juris- dictions. The Netherlands currently offers more advantageous capital gains tax treatment. Apart from tax considerations, India’s exchange control regime applies to cross-border deals. Earlier, foreign investors could not acquire listed shares directly on-market unless they were registered as foreign institutional investors with SEBI. However, the RBI has removed this restriction and has clarified that foreign investors including non- resident Indians are eligible to acquire shares on the recognised stock exchanges through a registered broker under a foreign direct invest- ment scheme subject to compliance with certain conditions. The Ministry of Finance had announced a new category of investors, qualified foreign investors (QFIs), to directly invest in the Indian equity markets in order to widen the class of investors and attract more foreign funds. Recently, SEBI notified the SEBI (Foreign Portfolio Investors) Regulations, 2014, and with this SEBI has harmonised foreign institutional investors, sub- accounts and QFI regimes into a single investor class – foreign portfolio investors (FPI) and provided a single window clearance through desig- nated depository participants. The FPI route for all portfolio investments in India is aimed at rationalising and simplifying the process for foreign portfolio investments with a unified access route. In addition to inbound mergers, the Companies Act now also allows outbound mergers but only with companies in specified jurisdictions. Valuation in the case of cross-border mergers must be undertaken in accordance with internationally accepted principles on accounting and valuation. Cross-border mergers are subject to various mandatory requirements under Indian exchange control regulations, including in relation to issuance of securities, assumption of existing foreign or domestic liabilities and holdings of other assets. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? The central government has closed down the Foreign Investment Promotion Board, which used to approve foreign direct investment into regulated sectors in India. Currently, such approvals will be directly handled by the relevant governmental department for each sector. The recently instituted approval procedures require that investment approvals be given within eight to 10 weeks, but this time frame may extend in cases where security clearance from the Ministry of Home Affairs is needed. Separately, in regulated sectors (eg, insurance), business combina- tions also require the approval of the relevant regulatory authority in certain cases. In such circumstances, no fixed time frame is provided by the authorities, and business combinations are approved on a case- by-case basis. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Yes. For example, foreign investment in the insurance sector is restricted to 49 per cent of the share capital of the Indian insurance company. In addition, the Indian insurance company is required to obtain a licence from the Insurance Regulatory and Development Authority and adhere to several reporting, solvency and accounting requirements. Accordingly, in addition to exchange control laws, it is important to evaluate the local industry-specific regulations prior to finalising any investment proposal in India. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Share sales Under Indian tax laws, any gain arising out of a direct or indirect transfer of Indian shares is liable to tax in India. Accordingly, it is important to determine whether the gains are long-term or short-term capital gains (depending upon whether the shares are held for: a duration exceeding 12 months or less in case of listed shares; or a duration exceeding 24 months or less in case of unlisted shares). The currently prevailing rates for resident and non-resident corporate sellers are as follows: © Law Business Research 2019
- 96. India Khaitan Co Public MA 201996 Particulars Non-resident seller** Resident seller* Long-term capital gains Short- term capital gains Long-term capital gains Short- term capital gains Where securities (equity shares and units of equity oriented mutual fund) are listed on a recognised stock exchange in India and the transaction of sale takes place on the stock exchange such that the transaction is subject to securities transaction tax (STT) 10% (refer to note 3) 15% 10% (refer to note 3) 15% Listed bonds or listed debentures 10% (refer to note 1) 40% 10% (refer to note 1) 30% Where securities (other than bonds or debentures) are listed on a recognised stock exchange in India and the transaction of sale does not take place on the stock exchange and thus, not subject to STT 10% (without indexation) (refer to note 1) 40% 10% (without indexation) or 20% (with indexation) (refer to note 1) 30% Unlisted shares and securities (other than unlisted bonds and unlisted debentures) 10% without indexation) (refer to note 1) 40% 20% (with indexation) (refer to note 1) 30% Unlisted bonds and unlisted debentures 10% (without indexation) (refer to note 1) 40% 20% (without indexation) (refer to note 1) 30% Equity shares sold in an offer for sale to public included in the initial public offer and where such securities are subsequently listed on a recognised stock exchange 10% 15% 10% 15% * To be further increased by applicable surcharge and cess of 4 per cent. In case of a domestic company, surcharge is applicable at the rate of 7 per cent (where the total income exceeds 10 million rupees but does not exceed 100 million rupees) and 12 per cent (where the total income exceeds 100 million rupees). ** In the case of a foreign company, a surcharge is applicable at the rate of 2 per cent (where the total income exceeds 10 million rupees but does not exceed 100 million rupees) and 5 per cent (where the total income exceeds 100 million rupees). Note 1: In the case of listed securities there is an option to avail of a tax of 20 per cent (without indexation) after certain adjustments or 10 per cent (with indexation) . These adjustments are not applicable to of the underlying security being bonds and debentures or to non-residents. Note 2: The above table is applicable in case of Foreign Direct Investments only. Note 3: Prior to 1 April 2018, long-term capital gains from an on-market transfer of equity shares was not subject to tax in India (subject to certain conditions). However, with effect from 1 April 2018, long-term capital gains in excess of INR 0.1 million (ie, when the relevant capital asset is held for a period of more than 12 months) arising to all investors from transfer of listed equity shares or units of an equity-oriented fund or business trust are taxable at the rate of 10 per cent, provided that STT is paid (i) at the time of acquisition and transfer of equity shares (subject to exceptions); and (ii) at the time of transfer of equity oriented fund and business trust units. The cost of acquisition of such assets shall be higher of (i) actual cost; and (ii) lower of (a) fair market value (FMV) as on 31 January 2018 (computed in terms of the prescribed valuation norms) and (b) full value consideration received on transfer of the shares. Therefore, in effect, long-term capital gains accrued up to 31 January 2018 continue to be exempt. Any benefit of indexation (ie, any adjustment for inflation) or foreign currency fluctuation however, would not be accounted for. The concessional tax regime for FPIs is as under: Long-term capital gains (period of holding exceeds 12 months) Short-term capital gains (period of holding is 12 months or less) Where securities are listed on recognised stock exchange and transaction of sales takes place on the stock exchange by FPIs 10% (see Note 3 above) 15% Other securities 10% 30% Above-mentioned rates to be further increased by applicable surcharge and cess. Surcharge applicable to FPIs is same as applicable to foreign companies as mentioned above. FPIs are also accorded concessional rate of withholding on interest payments at the rate of 5 per cent (plus applicable surcharge and cess) on certain debt instruments such as (listed NCDs, long-term infrastructure bonds) provided the rate of interest on such NCDs does not exceed 500 bps over SBI base rate and are issued before 1 July 2020. In case the conditions mentioned under the Tax Act are not met, withholding on interest payments would be at the rate of 20 per cent (plus applicable surcharge and cess). STT and capital gains The Income Tax Act, 1961 (the IT Act) exempted long-term capital gains (LTCG) tax on listed shares if STT was paid, but pursuant to the Finance Act 2018, LTCG in excess of 0.1 million rupees will be taxed at a rate of 10 per cent, provided that STT is paid at the time of acquisition (subject to conditions) and transfer of the shares. This amendment allows for partial grandfathering (of excluding gains based on fair market value as of 31 January 2018). Indirect transfer of Indian assets As per the IT Act, any share or interest in a foreign company is deemed to be situated in India if its value is derived, directly or indirectly, substan- tially from Indian assets. Accordingly, transfer of such offshore share or interest will be taxable in India. ‘Substantial value’ means if at least 50 per cent of its value is derived from India and value of Indian assets exceeds 100 million rupees. The manner of determination of value of the Indian assets as regards global assets of the foreign company is to be determined in the prescribed manner. The provisions of the applicable tax treaty between country of residence of non-resident and India would also be relevant to determine such taxability in India. Some transactions have been kept outside the purview of these provisions by way of safe harbour provisions. This should be borne in mind while undertaking an offshore or global deal. Deferred consideration The judicial position on the timing of taxability of earn-outs or deferred consideration is not entirely settled. There are contrary judicial deci- sions on the point – while certain rulings have held that the entire sum receivable on the transfer of shares is taxable in the ‘year of transfer’ itself, whether accrued or not; a more recent ruling has held such deferred amount to be taxable in the year of accrual upon satisfaction of certain conditions. Hence, it is imperative to structure the deferred consideration in the most tax-efficient manner. Other considerations Additionally, it will be good if the buyer insists that the seller furnishes a tax clearance certificate before transfer of certain specified assets (eg, shares, immovable property) as under the Indian tax laws the tax authorities in certain circumstances can treat the transaction as void to the extent of the seller’s outstanding tax demand. Likewise, in case of acquisition of business, the Indian tax laws provide that the buyer as a successor can be held liable for the past tax dues of the seller, in certain © Law Business Research 2019
- 97. Khaitan Co India www.lexology.com/gtdt 97 circumstances. Suitable contractual protection is usually agreed upon to cover against such risks. In the case of acquisition of shares it would also be important for both the buyer and seller to have permanent account numbers (which is a tax registration number in India), which needs to be quoted in relevant transaction documents subject to certain exceptions. Buy-back of shares Currently, a 20 per cent tax (plus applicable surcharge and cess) is imposed on the company on its distributed income on account of the buy-back of unlisted shares by a company from its shareholder. The distributed income is the difference between buy-back price and the amount received by the company for the issue of the shares. Such income is not further taxed in the hands of the shareholder. Asset sales Ordinarily, asset sales (other than shares and depreciable assets) also involve the sellers being liable for capital gains. In the case of assets held for more than 36 months, the capital gains tax rate for a non-resident corporate seller is 20 per cent (to be further increased by applicable surcharge and cess of 4 per cent) and in the case of assets held for up to 36 months, the capital gains tax rate is 40 per cent (to be further increased by applicable surcharge and cess of 4 per cent). In addition, goods and service tax (GST) will be levied on sale of movable assets (including intangibles assets) as per rates prescribed under respective state laws. If any consideration is paid for a non-compete obligation, service tax will be payable on such consideration; and for income tax purposes, the non-compete fee could either be characterised as ‘business income’ or capital gains. Slump sale Another option is to sell the business as a whole. Though this would also involve capital gains implications for the seller, the mode of computing such capital gains would differ. There are special provisions dealing with the taxability of capital gains arising on a ‘slump sale’. Accordingly, the sale consideration for transfer of an undertaking is reduced by the net worth of the undertaking to arrive at the taxable capital gains. If the undertaking was held for more than 36 months before the transfer, then capital gains are taxed as long-term capital gains at the rate of 20 per cent (to be further increased by applicable surcharge and cess of 4 per cent), otherwise the gains are taxed as short-term capital gains at the rate of 30 per cent (to be further increased by applicable surcharge and cess of 4 per cent). Most of the states have specifically exempted transfer of business or a division as whole from GST if transferred as going concern. Generally a judicial view has been taken that sale of business as whole is not subject to GST since business as whole is not goods, even where the GST law of a state do not specifically exempt such transaction. Tax relief in cases of resolution of stressed assets For companies undergoing the CIRP under the Code, the Finance Act 2018 allows the aggregate of brought-forward loss and unabsorbed depreciation to be reduced for computing book profits for the purposes of Minimum Alternate Tax. In addition, the Finance Act 2018 also exempts such companies from the restriction on carrying-forward and setting-off past loss (except depreciation) in situations where beneficial ownership changes by more than 49 per cent voting power. General Anti-Avoidance Rules General Anti-Avoidance Rules (GAAR) were effective from 1 April 2017 and may be invoked where the main purpose of an arrangement is to obtain a tax benefit. GAAR provisions empower the tax authorities to investigate any such arrangement as an ‘impermissible avoidance arrangement’ and consequently disregard entities in a structure, reallo- cate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal situs of assets involved, treat debt as equity and vice versa, and the like. By doing so, the tax authorities may even deny tax benefits conferred under a tax treaty. It is provided that GAAR shall not apply, inter alia, to (i) arrange- ments where the aggregate tax benefit in a relevant year, to all the parties involved, does not exceed 30 million rupees; and (ii) any income or gains on transfer, accruing, arising or deemed to accrue or arise to any person from investments made prior to 1 April 2017. Tax residency certificate Non-resident taxpayers are mandatorily required to furnish a tax resi- dency certificate along with the prescribed information such as status of the taxpayer, country of incorporation, tax identification number, etc, for claiming the benefit of an applicable tax treaty. Withholding tax Where the payee is a non-resident or a foreign company, there is a legal obligation on the payer (whether resident or non-resident) to deduct tax at source when making any remittance to the former, if such payment constitutes income which is chargeable to tax under the Tax Act read with the applicable tax treaty. Payment of withholding tax becomes a point of negotiation in cross-border MA deals involving share sales and taxpayers resort to solutions like tax indemnity, escrow mechanism, etc. Payments of a certain nature made to a resident also attract deduc- tion of tax at source, whether the payer is a resident or a non-resident. Entry pricing There are specific pricing provisions that may be relevant for the target or the investor on the primary issuances as well as secondary purchases. If shares are issued at a huge premium to resident investors then in certain circumstances the target can be taxed on the excess premiums. Despite that, no such similar provisions apply if shares are issued to a non-resident investor, the recent trend has been that the Indian tax authorities are examining excess premium charged by Indian companies on allotment of shares to non-residents and are attempting to tax the Indian companies on such excess premiums. So long as factual aspects such as identity, creditworthiness of the investor and source of funds for the investment are established, there should be no adverse implications for a non-resident investor. Also, there are tax implications both from an investor and a seller’s perspective if shares are transacted at a discount to the fair value of the shares (computed in terms of the prescribed valuation norms). Demerger To ensure that a demerger of an undertaking is tax-neutral, the following conditions need to be satisfied: • transfer is pursuant to a scheme of arrangement under sections 230 to 232 of the Companies Act 2013; • transfer of all assets and liabilities of the undertaking; • transfer of assets and liabilities at book value; • consideration for transfer settled solely by issue of shares in the resulting company (except where resulting company is itself a shareholder of the demerged company); • shareholders holding at least three-quarters in value of the demerged company to become shareholders in the resulting company; and • transfer on a going-concern basis. © Law Business Research 2019
- 98. India Khaitan Co Public MA 201998 Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The Industrial Disputes Act, 1947 (the ID Act) defines an undertaking as a unit of an industrial establishment carrying out any business, trade or manufacture. The ID Act provides for compensation to ‘workmen’ in the event of transfer of ownership or management of undertakings from one employer to another by agreement or by operation of law. The term ‘workmen’ applies to those employed in an industry to carry out manual, unskilled, technical, operational, clerical or supervisory work for hire or reward. It also includes persons employed in a supervisory capacity who earn less than a specified amount (currently 10,000 rupees per month). Other employees are governed by the terms of their employ- ment contract. Further, in the case of a business combination involving the transfer of employees, it is mandatory to ensure that employees consent (in writing) for their transfer resulting from transfer of under- taking and are hired by the transferee on terms no less favourable than their original terms of employment. In the event of a transfer of an undertaking, all workmen who have been in continuous service for a period of at least one year are entitled to one month’s notice and compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of six months, as if such workmen have been retrenched. However, compensation need not be paid when: • the service of the workman is not interrupted by such transfer; • the terms and conditions of service applicable to the workman after a transfer are not in any way less favourable than his or her terms and conditions prior to the transfer; and • the new employer, under the terms of such transfer or otherwise, is liable to pay compensation, in the event of his or her retrenchment, on the basis that his or her service has been continuous and has not been interrupted by the transfer. The above exceptions are cumulative and all the conditions must be met if the current employer is to be released from his or her liability to compensate the workmen on the transfer of the undertaking. The new employer will be responsible for paying compensation to a workman in such circumstances. The above requirements of the ID Act do not apply in the case of share acquisitions. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? By way of background, under Indian law, a company or a corporate debtor is regarded to be ‘insolvent’ where it has committed a default of a minimum of 100,000 rupees and an application for insolvency resolution of such a corporate debtor (CIRP) under the provisions of the Insolvency and Bankruptcy Code 2016 (Code) by a financial creditor, operational creditor or the corporate debtor itself has been admitted by the jurisdic- tional National Company Law Tribunal (NCLT). Insolvency Resolution under the Code Once a CIRP application has been admitted by the NCLT, a statutory moratorium or a cure period of 180 days (extendable to a further period of 90 days by the NCLT under special circumstances) that is concurrent with the duration of the CIRP under the Code is initiated. The mora- torium is a period of insulation granted to the corporate debtor by an order of the NCLT against the institution or continuation of suits, execu- tion of judgments or orders, enforcement of security interest over the assets of the corporate debtor. Significantly, with the initiation of the CIRP under the Code, the board of directors of the corporate debtor stands suspended and its powers are exercised by a resolution profes- sional (akin to an administrator) under the scrutiny of a committee of creditors (COC). The COC consists of financial creditors of the corporate debtors with voting powers commensurate to the extent of financial debt owed to them. The COC is empowered by the Code to have the final say on certain special matters pertaining to the operations and manage- ment of affairs of the corporate debtor (including in relation to a sale of assets of the corporate debtor, any change in the capital structure of the corporate debtor); the decision is required to be made by a 66 per cent vote of the COC in a meeting held in such regard. Ordinary course deci- sions, on the other hand, require a 51 per cent approval vote of the COC to take effect. Importantly, the Code has also recently been amended to provide that a CIRP may be withdrawn with a vote of 90 per cent of the COC. A scheme for revival of the corporate debtor or a ‘resolution plan’ is required to be formulated and affirmed by the COC prior to getting it approved by the NCLT. The Code prescribes a two-step process in this regard involving the submission of a non-binding expression of interest followed by a binding resolution plan. For the moment, it appears that resolution plans are only contemplating share acquisitions as the Code requires the corporate debtor to be revived as a ‘going concern’. The Code also provides that a corporate debtor may be liquidated if: (i) the COC cannot agree on a workable resolution plan within the period of the CIRP; (ii) the COC decides to liquidate the corporate debtor during the period of the CIRP; (iii) if the NCLT rejects the resolution plan; or (iv) the corporate debtor contravenes the provisions of a resolution plan that has been approved by the NCLT. Buying assets under the Code The Code has not adopted the ‘UK pre-pack’ or the ‘US section 363’ asset sale models (ie, fast-track sales where the administrator or court finds that the company cannot be revived as a going concern not without selling some assets). However, under the Code, once the NCLT admits an application for CIRP, no asset sales are permitted without approval. On the formation of the COC, no asset sales are permitted without consent of 66 per cent of the COC. The Code does provide a ‘small sale exemption’ for sale of small value unencumbered assets in the ordi- nary course of business, but that will not help with large strategic sales. Furthermore, no transfer of shares of the corporate debtor is permitted except with the consent of 66 per cent of the committee by value during an ongoing CIRP. Therefore, for the moment, a potential buyer has two options: (i) execute the sale with the consent of the COC; or (ii) execute the sale under a resolution plan approved by the COC and blessed by the NCLT as being in compliance with the Code. While (i) will likely be quicker, (ii) is likely to provide more certainty to the transaction with less likelihood of challenge and easier transfer of customers and busi- ness licences. Important considerations The Code arms the resolution professional with a full suite of anti- avoidance powers for identified transactions undertaken in the twilight period (ie, an identified period under the Code prior to the liquidation of the corporate debtor). Potential buyers should be mindful of provi- sions contained in the Code against: (i) preferential transactions (ie, where a transfer of property (or an interest thereof) puts a creditor in a beneficial position than it would have been had the assets of the corporate debtor been distributed at liquidation); (ii) undervalued transactions (ie, where a transfer of assets of the corporate debtor is undertaken for a consideration, the value of which is significantly less than the value of the consideration provided by the corporate debtor); © Law Business Research 2019
- 99. Khaitan Co India www.lexology.com/gtdt 99 and (iii) transactions defrauding creditors (ie, an undervalued transac- tion deliberately entered into by the corporate debtor for keeping its assets beyond the reach of any person entitled to make a claim against the corporate debtor). In 2017, the Code was amended to disqualify certain classes of persons (persons in control of companies under default, criminal offenders, etc) from bidding for assets during the CIRP or as part of a liquidation sale. However, the wide import of this provision led to protracted litigation and unintended disqualification. In June 2018, certain exemptions from some of the amended provisions were granted to ‘pure play’ financial entities, bidders that have acquired assets under the Code and bidders of small-scale industries. Until recently, the RBI supervised multiple debt resolution frame- works for banks and other institutional creditors, but in February 2018, the RBI’s instructions on these frameworks were withdrawn and a new revised and harmonised framework (incorporating certain features of the withdrawn frameworks) was introduced. Key changes include a revised set of prudential norms, time limits for implementation of restructuring plans for large accounts (2 billion rupees or above) and mandatory referral to the insolvency resolution process of the Code (in cases where plans for such large accounts are not implemented in time), and the prospect for enforcement action against lenders (including higher provisioning requirements and monetary penalties) in specified cases of default. In 2018, a number of reliefs and measures were introduced in relation to acquisition of listed corporate debtors under a resolution plan, including a simplified delisting process, longer time period for meeting the minimum public shareholding requirements and exemp- tion from prior consent (of the securities regulator or shareholders) for specified corporate actions. The Indian government has also taken steps to mitigate minimum alternate tax (MAT) liability on the corporate debtor during debt write-off by allowing debtors to reduce the total loss brought forward including unabsorbed depreciation from the book profit for the purposes of levy of MAT. More recently, the RBI has allowed the proceeds of external commercial borrowings to be utilised towards the repayment of domestic rupee loans, allowing prospective bidders to avail foreign loans as part of implementing a proposed resolution plan. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? There is no single comprehensive legal framework in India to deal with anti-corruption and economic sanctions considerations in relation to business combinations such as the Foreign Corrupt Practices Act 1977 (in the United States) or Bribery Act, 2010 (in the United Kingdom). In India, the anti-corruption and economic sanctions regime in relation to business combinations is largely covered by the Act, Indian Penal Code, 1860 (IPC), Prevention of Corruption Act 1988 (POCA), Prevention of Money Laundering Act 2002 (PMLA) and foreign exchange laws and regulations. A corrupt practice or bribe by any public servant, company or its officers may amount to a criminal offence (breach of trust, cheating, fraud, etc) under the IPC and is punishable with imprisonment or a fine, or both. The PMLA forms the core of the legal framework put in place by India to combat money laundering. The PMLA and rules notified there- under impose obligations on banking companies, financial institutions and intermediaries to verify the identity of clients, maintain records and furnish information to the relevant authorities. The PMLA defines money laundering offences and provides for the freezing, seizure and confiscation of the proceeds of crime. Where a company has committed a money laundering offence under the PMLA, every person in charge of and responsible to the company for the conduct of its business at the time of commission of the offence is deemed to be guilty unless he or she proves that the contravention took place without his or her knowledge or that he or she exercised all due diligence to prevent such contravention. This effectively reverses the burden of proof as far as the individual is concerned. India is also a signatory to the United Nations Convention against Corruption and has ratified the same and amended the POCA to bring it in line with the United Nations Convention against Corruption. Under the POCA, any public servant who accepts or attempts to accept from any person, any ‘undue advantage’, either for himself or for any other person shall be punished with imprisonment for a minimum term of three years and maximum of seven years, and ‘undue advantage’ means any gratification other than legal remuneration that a public servant is permitted to receive. Further, ‘gratification’ is not limited to pecu- niary gratifications or to gratifications estimable in money; therefore, even non-monetary considerations such as a better posting, postretire- ment benefits, gifts and favours not estimable in money can also be covered under the ambit of undue advantage. Also, if a person gives an undue advantage to a public official, he or she can also be punished with imprisonment for seven years. Lastly, if a commercial organisation (including a body or partnership incorporated or formed outside India but carrying on business in India) commits any of the offences listed in the POCA with the intention to obtain or retain business or obtain or retain an advantage in the conduct of its business, then the commercial organisation shall be punishable with a fine, the quantum of which is not yet prescribed in the POCA. Rabindra Jhunjhunwala rabindra.jhunjhunwala@khaitanco.com Bharat Anand bharat.anand@khaitanco.com Bangalore Simal, 2nd Floor 7/1 Ulsoor Road Bangalore 560 042 India Tel: +91 80 4339 7000 Fax: +91 80 2559 7452 bangalore@khaitanco.com Kolkata Emerald House 1B Old Post Office Street Kolkata 700 001 India Tel: +91 33 2248 7000 Fax: +91 33 2248 7656 kolkata@khaitanco.com www.khaitanco.com Mumbai One Indiabulls Centre 10th 13th Floor, Tower 1 841 Senapati Bapat Marg Mumbai - 400 013 India Tel: +91 22 6636 5000 Fax: +91 22 6636 5050 mumbai@khaitanco.com New Delhi Ashoka Estate, 12th Floor 24 Barakhamba Road New Delhi 110 001 India Tel: +91 11 4151 5454 Fax: +91 11 4151 5318 delhi@khaitanco.com © Law Business Research 2019
- 100. Public MA100 Ireland Madeline McDonnelland Susan Carroll Matheson STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? There are three principal methods used to acquire an Irish public company, namely a takeover offer, a scheme of arrangement and a cross-border or domestic merger. A purchaser may pay in cash, securi- ties or a combination of both. Under a takeover offer, the bidder will make a general offer to the target shareholders to acquire their shares. The offer must be conditional on the bidder acquiring, or having agreed to acquire (pursuant to the offer or otherwise) shares conferring more than 50 per cent of the voting rights of the target. The bidder may compulsorily require any remaining shareholders to transfer their shares on the terms of the offer if it has acquired, pursuant to the offer, not less than a specific percentage of the target shares to which the offer relates. The percentage for companies listed on regulated markets in the European Economic Area (the EEA) is 90 per cent. The percentage for companies listed on other markets (eg, the New York Stock Exchange (NYSE), NASDAQ or AIM) is 80 per cent. Dissenting shareholders have the right to apply to the High Court of Ireland (the High Court) for relief. The most commonly used structure for the takeover of an Irish target is by way of a scheme of arrangement. This is a statutory proce- dure which involves the target company putting an acquisition proposal to its shareholders, which can be: (i) a transfer scheme, pursuant to which their shares are transferred to the bidder in return for the relevant consideration; or, more usually, (ii) a cancellation scheme, pursuant to which their shares are cancelled in return for the relevant consideration, with the result in each case that the bidder will become the 100 per cent owner of the target company. A scheme of arrangement requires the approval of a majority in number of the shareholders of each class, repre- senting not less than 75 per cent of the shares of each class, present and voting, in person or by proxy, at a general, or relevant class, meeting of the target company. The scheme also requires the sanction of the High Court. Subject to the requisite shareholder approval and sanction of the High Court, the scheme will be binding on all shareholders. Dissenting shareholders have the right to appear at the High Court hearing and make representations in objection to the scheme. Publicly listed companies can also combine by way of a cross-border merger or a domestic merger. A cross-border merger is a statutory procedure under the European Communities (Cross-Border Mergers) Regulations 2008 (the Cross-Border Mergers Regulations) whereby a variety of business combinations between Irish companies and other EEA incorporated companies (including mergers) can be effected. Among other matters, a cross-border merger will require the approval of not less than 75 per cent of the votes cast, in person or by proxy, at a general meeting of the target shareholders, together with the sanction of the High Court. A domestic merger is a statutory procedure under the Companies Act 2014, which facilitates business combinations between Irish companies and is based on the Cross-Border Mergers Regulations. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing business combinations and acquisitions of publicly listed companies include the following. Irish Takeover Panel Act, the Takeover Regulations and the Takeover Rules MA transactions in Ireland involving public companies are primarily regulated by the Irish Takeover Panel Act 1997, as amended (the Takeover Act), the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006, as amended (the Takeover Regulations), and the Irish Takeover Panel Act 1997, Takeover Rules 2013 made thereunder (the Takeover Rules). The Takeover Act, the Takeover Regulations and the Takeover Rules primarily apply to change-of-control and certain other MA transactions involving an Irish registered target with voting shares admitted to trading (or whose voting shares had, in the previous five years, been admitted to trading) on: (i) a market regulated by The Irish Stock Exchange Plc trading as Euronext Dublin (the ISE) (ie, including junior markets such as the Enterprise Securities Market or the Atlantic Securities Market); or (ii) the London Stock Exchange (including AIM), the NYSE or NASDAQ. The Takeover Regulations and the Takeover Rules also apply to change-of-control transactions involving: (i) an Irish registered target with voting shares admitted to trading on one or more ‘regulated markets’ (within the meaning of article 4(1)(21) of Directive 2014/65/ EC of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments) in the EEA (other than Ireland); and (ii) a non-Irish registered target with voting shares admitted to trading on one or more regulated markets in the EEA including Ireland (but not in its country of incorporation). Change-of-control transactions involve the acquisition of shares carrying 30 per cent or more of voting rights of a target company. The Takeover Rules, which are based on seven general principles set out in the Takeover Act (the General Principles), contain detailed provisions applicable to the conduct of takeovers. The spirit, as well as the strict reading, of the Takeover Rules and the General Principles must be adhered to. Among other matters, the General Principles provide that target shareholders be afforded equivalent treatment and sufficient time and information to reach a properly informed decision on an offer. The Takeover Rules are not concerned with the financial or commercial advantages or disadvantages of a takeover or other relevant transac- tions and they include mandatory bid rules, share-dealing restrictions, confidentiality and disclosure obligations, and restrictions on frus- trating actions. © Law Business Research 2019
- 101. Matheson Ireland www.lexology.com/gtdt 101 The TakeoverRules establish timelines within which offers must be conducted and declared unconditional in all respects. There is greater flexibility around the timeline applied to takeovers carried out by way of scheme of arrangement than by way of offer as the Irish High Court’s timetable must also be taken into consideration. The Takeover Rules are administered and enforced by the Irish Takeover Panel (the Takeover Panel), which is the supervisory body for takeovers in Ireland and the designated competent authority under Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids. The Takeover Panel has statutory power to make rulings and to give directions to ensure the General Principles and the Takeover Rules are complied with. The Takeover Panel operates principally to ensure fair and equal treatment of all target company shareholders in rela- tion to takeovers (whether structured by way of an offer or a scheme of arrangement) and certain other relevant transactions. The Takeover Panel operates on a day-to-day basis through its executive, the members of which are available for consultation and guidance on the operation of the Takeover Rules. The Takeover Panel is designated as the competent authority for the purposes of article 4(1) of the Takeover Regulations. The Companies Act The Companies Act 2014, as amended, (the Companies Act) contains, among other matters, the applicable legislative basis for a scheme of arrangement and a domestic merger. The Companies Act is also the core statute which regulates the governance and internal affairs of an Irish company, including the principal fiduciary duties of directors. The Substantial Acquisition Rules The Irish Takeover Panel Act 1997, Substantial Acquisition Rules, 2007 (the SARs) are a separate set of rules issued and administered by the Takeover Panel. The SARs restrict the speed at which a person may increase a holding of voting shares (or rights over voting shares) in a target to an aggregate of between 15 per cent and 30 per cent thereby providing the means by which acquisitions of shares in public limited companies may be made. The main aim of the SARs is to give target companies adequate warning of stake building. Subject to limited exceptions, a person may not, in any period of seven days, acquire shares (or rights over shares) in a target company, which carry 10 per cent or more of its voting rights, if, following such acquisition, that person would hold shares (or rights over shares) carrying 15 per cent or more, but less than 30 per cent, of the voting rights in the target company. The Competition Acts The Competition Acts 2002 to 2017, as amended, (the Competition Acts) govern the regulation of competition law in Ireland. The Competition Acts established the Competition and Consumer Protection Commission (the CCPC), which is primarily responsible for the enforcement of the Irish merger control regime. Depending on the size of the transaction and scale of the parties and their operations in Ireland, a takeover may be required to be notified to and approved by the CCPC under the Competition Acts. Larger transactions, involving multiple jurisdictions, may require notification to and approval by the European Commission under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation). The CCPC shares responsibility for media mergers with the Minister for Communications, Climate Action and Environment (the Minister). The Irish courts have jurisdiction to adjudicate on any allegation of breach of the Competition Acts and on any appeal against a merger decision by the CCPC. The Market Abuse Regulation Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2004 on market abuse (MAR) and the European Union (Market Abuse) Regulations 2016 (MAR Regulations) regulate insider dealing and market manipulation by imposing significant obligations on issuers. The Cross-Border Mergers Regulations The Cross-Border Mergers Regulations apply where the transaction involves a merger of an Irish incorporated entity with at least one other EEA company. The Irish Prospectus Regulations, the Prospectus Directive and the New Prospectus Regulation The EU prospectus regime harmonises requirements for the drafting, approval and distribution of the prospectus to be published when secu- rities are offered to the public or admitted to trading on a regulated market situate or operating within a member state. It is designed to reinforce investor protection by ensuring that all prospectuses, wher- ever issued in the EU, provide clear and comprehensive information while at the same time making it easier for companies to raise capital throughout the EU on the basis of approval from a single competent authority. Currently in Ireland, the Prospectus (Directive 2003/71/EC) Regulations 2005, as amended, (the Irish Prospectus Regulations) regulate public offers of securities. The Irish Prospectus Regulations derive from Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (the Prospectus Directive). The Prospectus Directive is soon to be repealed by Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the New Prospectus Regulation). The New Prospectus Regulation was published in the Official Journal on 30 June 2017 and it has been designed to repeal and replace the existing body of prospectus law. It will apply on a rolling basis, with full appli- cation from 21 July 2019 and will be directly effective in EU member states, meaning that it does not strictly need any national transposing measures to take effect. The Transparency Regulations and the Transparency Rules The Transparency (Directive 2004/109/EC) Regulations 2007, as amended, (the Transparency Regulations) seek to enhance the trans- parency of information provided by issuers on a regulated market by containing certain disclosure requirements for public companies. Further guidance and procedural and administrative requirements were issued by the Central Bank of Ireland (the Central Bank) when it, pursuant to the Companies Act, issued the Irish transparency rules in November 2016 (the Transparency Rules). The listing rules of the relevant stock exchange or market Companies whose shares are listed on the Main Securities Market (the MSM) of the ISE must comply with the Euronext Dublin listing rules (the Listing Rules). The ISE website (www.ise.ie) contains market and regulatory information applicable to listed companies. It also provides access to the Listing Rules and the Irish Corporate Governance Annex published by the ISE (the Irish Annex). The UK Corporate Governance Code (the Code), as supplemented by the Irish Annex, is also applicable to these companies. There are a number of Irish publicly listed companies listed on markets outside Ireland, such as the NASDAQ, the NYSE and the London © Law Business Research 2019
- 102. Ireland Matheson Public MA 2019102 StockExchange (main and AIM markets), and these companies are subject to additional rules applicable to those markets. Some sectors have special rules and additional regulators may be required to get involved. In particular, regulated financial services busi- nesses are subject to rules which require change-of-control consent from the Central Bank; media mergers are subject to the approval of the CCPC and the Minister; and Irish airlines are subject to foreign control restrictions. Memorandum and articles of association An Irish incorporated company is also subject to its memorandum and articles of association (forming a contract between the company and its shareholders). The memorandum of association sets out the prin- cipal objects of the company, while the articles of association set out the internal regulations of the company regarding matters such as shareholder meetings, voting rights, powers and duties of directors, the composition of the board of directors and communications between the company and its shareholders. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? It is typical for transaction agreements to be entered into when publicly listed companies are acquired. Such transaction agreements are usually governed by Irish law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Under the Irish merger control regime, a transaction may require a notification to be made to the CCPC. Each ‘undertaking involved’ in the transaction must submit a merger filing. In practice, joint filings are submitted and the purchaser tends to take the lead on drafting the filing. A filing fee of €8,000 (for each filing) currently applies. As of 1 January 2019, mergers where each undertaking gener- ates turnover of €10 million or more in Ireland and the undertakings together generate turnover of €60 million or more in Ireland must be notified to the CCPC prior to completion. There are criminal penalties for a failure to notify prior to completion of a transaction that meets these financial thresholds. The Phase 1 notification period typically takes 20 to 30 working days for mergers that do not give rise to potential competi- tion concerns. Certain documents relating to public offers governed by the Takeover Rules require the Takeover Panel’s approval. The Takeover Act gives the Takeover Panel the power to impose charges for the purpose of defraying expenses incurred by it in performing its functions. A prospectus, if required, has to be submitted to and approved by the Central Bank prior to being published, together with the appropriate filing fee. Additionally, certain filings may be required to be made to the Irish Companies Registration Office under the Companies Act. See question 18 for information in relation to stamp taxes. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Before a public announcement concerning an offer or possible offer of an Irish incorporated listed public company to which the Takeover Rules apply, the fundamental obligation is that all persons with confidential information (including the bidder and target, their respective directors and other persons acting in concert with them and their respective advisers) must maintain strict confidentiality in respect of the offer or contemplated offer. Every person who is privy to confidential informa- tion, and particularly price sensitive information, concerning an offer or contemplated offer is obliged to treat the information as secret and may only pass it to another person if it is necessary to do so and if that person accepts the need for secrecy. All relevant persons must conduct themselves so as to minimise the possibility of an accidental leak of information. If, prior to an announcement, the target is the subject of rumour and speculation or there is an anomalous movement in its share price, unless the Takeover Panel consents otherwise, an appropriate announcement must be made to the market. Prior to an approach, the responsibility for making such an announcement lies with the bidder; following an approach, the responsibility shifts to the target. The MAR extends the application of the market abuse and inside information regime beyond issuers with shares admitted to trading on regulated markets (such as the MSM) to include issuers of secu- rities traded on multilateral trading facilities (such as the ESM). The MAR requires companies with traded securities within the scope of the regulation to disclose inside information directly concerning them to the public as soon as possible. An issuer may delay an announcement pertaining to inside information so as not to prejudice its ‘legitimate interests’, provided that certain conditions are met (including that the information can be kept confidential and that delayed disclosure would not be likely to mislead the market). Where an issuer chooses to delay its disclosure of inside information so as not to prejudice its legitimate interests, the issuer will be required to inform its regulator in writing, and immediately after the information is disclosed to the public, of its decision to delay the announcement. The MAR also requires an issuer to provide its regulator with a written explanation of how the conditions for the delay were satisfied. A prospectus, to the extent required, must contain all information necessary to enable investors to make an informed assessment of the assets and liabilities, the financial position, the profits and losses, and the prospects of the issuer, as well as the rights attaching to the securi- ties in question. In addition to this overriding requirement, there are detailed rules as to content, including a description of the business, audited financial information for the latest three financial years, an operating and financial review of that period and a confirmation that the issuer has sufficient working capital for its present requirements (the next 12 months). There is an exemption from the requirement to produce a prospectus in connection with securities offered in connection with a takeover or merger. However, a document containing information equivalent to that in a prospectus will generally still be required. One disadvantage of an ‘equivalent’ document is that, unlike a prospectus, it cannot be passported into other EU jurisdictions. The preparation of a circular will be required for certain categories of information to be provided by a listed company to its shareholders. If applicable, the applicable listing rules set out the content and approval requirements for circulars to shareholders, and also the circumstances in which they must be prepared. The principal documents required for a takeover offer are: © Law Business Research 2019
- 103. Matheson Ireland www.lexology.com/gtdt 103 • anannouncement containing the bidder’s firm intention to make an offer (setting out the consideration to be offered and the other terms and conditions of the offer); • an offer document (containing the formal offer, the other terms and conditions of the offer and prescribed additional disclosure (including financial and other information on the bidder and the target, which in the case of historical financial information, may be incorporated by reference)); • a form of acceptance (by which the offer can be accepted); and • a response circular from the target board to its shareholders (setting out, among other matters, the target board’s opinion on the offer and the substance and source of the competent independent financial advice it is required to obtain) – this would, in a recom- mended offer, commonly form part of the offer document. If the transaction is undertaken by way of a scheme of arrangement, the documentation is almost identical in terms of content, but in place of the offer document, there is a circular to target shareholders and a notice convening meetings of shareholders with proxy forms in place of the form of acceptance. Separately, court, competition/antitrust or regula- tory filings may be required. If, after an approach has been made, the target (and in a securities exchange offer, the bidder) issues a profit forecast or a statement that includes an estimate of the anticipated financial effects of a takeover (eg, as to resulting change in profit of earnings per share), it is required to obtain and publish reports from accountants and financial advisers concerned regarding the preparation of the forecast or statement. Save with the consent of the Panel, profit forecasts made before an approach must similarly be reported upon. No valuation of any assets may be given by or on behalf of a bidder or a target during an offer period unless supported by the opinion of a named independent valuer. All documents, announcements, press releases, advertisement (save for certain excluded categories) and statements issued by or on behalf of a bidder or target are required to satisfy the same standards of accuracy as a prospectus. Furthermore, all such documents as well as statements despatched or published by a bidder or a target during an offer period are required, as soon as possible following despatch or publication (and, in any event, by no later than 12 noon on the following business day), to be published on a website or designated microsite. Information that is incorporated by reference to another source must be published on a website or microsite by no later than the date on which the relevant document incorporating such information is despatched or published. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Up to the time of announcement of a firm intention by a bidder to make an offer under the Takeover Rules, the SARs apply to a person acquiring shares. The SARs restrict the speed with which a person may increase a holding of shares in the target. SAR 6 provides that, subject to limited exceptions, an acquirer is obliged to disclose to the target and the Takeover Panel any acquisition of voting rights in a target which when aggregated with its existing holding exceeds 15 per cent of the target’s voting rights, or if the acquirer already holds between 15 per cent and 30 per cent of the voting rights of the target, any acquisition that increases their percentage holding. Where any such notification obligation arises, it must be discharged no later than 12 noon on the day following the relevant acquisition. SARs 3 and 4 also restrict the timing of acquisitions. They provide that a person may not, in any period of seven days, acquire shares (or rights over shares) in the target carrying 10 per cent or more of its voting rights if, following the acquisition, that person would hold shares (or rights over shares) carrying 15 per cent or more, but less than 30 per cent, of the voting rights in the target. Stake-building will also be totally prohibited if it constitutes insider dealing. Dealings in the securities of a target company that is in an offer period under the Takeover Rules (and in certain circumstances, deal- ings in the securities of a bidder) may trigger a disclosure requirement. The Takeover Rules require that a bidder and its concert parties publicly disclose any acquisition of target securities or derivatives referenced to such securities, including those that are purely cash-settled contracts for difference. Other persons interested in 1 per cent or more of the target’s securities are also required to publicly disclose their dealings during an offer period. Complex rules apply to exempt fund managers and exempt principal traders, particularly when they are members of a group that includes the bidder or a financial adviser to the bidder. The Transparency Rules, which may apply depending on which market the target is listed upon, require a stakeholder to notify a listed company once the percentage of voting rights acquired by that stakeholder reaches, exceeds or falls below 3 per cent; and then each 1 per cent thereafter. The Companies Act introduced a statutory disclosure regime (replacing the regime existing under previous legislation) requiring notification within a prescribed time frame where there is a change in the percentage of shares held by a person in a public limited company resulting in: • an increase from below to above the 3 per cent threshold; • a decrease from above to below the 3 per cent threshold; or • where the 3 per cent threshold is exceeded both before and after the transaction, but the percentage level, in whole numbers, changes (fractions of a percentage being rounded down). The European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 (the 2016 Regulations) came into operation on 15 November 2016. The 2016 Regulations require Irish companies to gather and maintain information on individuals described as their ‘ultimate beneficial owner’. The 2016 Regulations do not apply to certain listed companies. Broadly speaking, a shareholding or owner- ship interest (direct or indirect) above 25 per cent is indicative of beneficial ownership. It is expected that legislation to be introduced in 2019 will require beneficial ownership information to be submitted to a publicly accessible central register. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Each director of an Irish incorporated company has a duty to ensure that the company complies with the Companies Act. Upon their appoint- ment, a director is required to acknowledge that, as a director, he or she has legal duties and obligations imposed by the Companies Act, other statutes and common law. Previously, directors’ duties were contained in a range of statutes and common law. The Companies Act contains a non-exhaustive list of fiduciary duties owed by a director to a company. The relevant provi- sions essentially codify the duties that apply to directors under common © Law Business Research 2019
- 104. Ireland Matheson Public MA 2019104 lawand equity, as well as amending and restating the applicable statu- tory obligations under existing company legislation. The eight primary fiduciary duties set out in the Companies Act are as follows: • a director must act in good faith in what the director considers to be the interests of the company; • a director shall act honestly and responsibly in relation to the conduct of the affairs of the company; • a director shall act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law; • a director shall not use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless that is expressly permitted by the company’s constitution or the use has been approved by a resolution of the company in general meeting; • a director shall not agree to restrict the director’s power to exer- cise an independent judgement unless this is expressly permitted by the company’s constitution or approved by the company’s members in general meeting; • a director shall avoid any conflict between his or her duties to the company and to his or her other (including personal) inter- ests, unless that director is released from this duty in accordance with the company’s constitution or by a resolution of the compa- ny’s members; • a director shall exercise the care, skill and diligence that would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director and the knowledge and experience that the director has; and • a director shall have regard to members’ interests (in addition to the duty to have regard to the interests of the company’s employees in general). If an offer has been received by the company, its board of directors has a duty to obtain competent independent advice on the terms of the offer and any revised offer. In this event, the board is required to send a circular to its shareholders setting out the substance and source of the advice, together with the considered views of the board. Any director of the company with a conflict of interest in respect of the offer (and any revised offer) should be excluded from the formulation and communi- cation of advice to the shareholders. Furthermore, any such director should not make any announcement or statement in respect of the offer, unless the full nature of the conflict of interest is disclosed clearly and prominently in the announcement or statement. The board of directors of a company will also be required to obtain competent independent advice if (i) the directors of an offeror company are faced with a conflict of interest in respect of the offer; or (ii) the board of a company proposes to enter into a reverse takeover, and the same obligation to issue a circular to shareholders as set out above applies. A director’s additional statutory duties include various duties of disclosure, as well as duties to ensure that the company keeps adequate accounting records and that it meets various company secretarial compliance obligations. Directors’ duties are owed to the company and, in considering the interests of the company, the courts have equated these interests to mean the interests of shareholders as a whole. Directors of all public limited companies (excluding certain investment companies) are required to prepare a compliance state- ment (which will be included in the Directors’ Report). The compliance statement must: • acknowledge that the directors are responsible for securing the company’s compliance with certain Irish company law obligations and Irish tax law (referred to as ‘relevant obligations’); and • confirm that each of the following has been done (or, if it has not been done, specifying the reasons why it has not been done): • a statement setting out the company’s policies (that in the directors’ opinion, are appropriate to the company) respecting compliance by the company with its relevant obligations has been drawn up; • appropriate arrangements or structures, that are, in the direc- tors’ opinion, designed to secure material compliance with the company’s relevant obligations have been put in place; and • during the financial year to which the relevant statutory directors’ report relates, a review of the arrangements or structures referred to above has been conducted. Individuals who are not formally appointed to the board of directors but act as directors and occupy the position of director, known as de facto directors, are bound by the same duties and obligations and are subject to the same liabilities as formally appointed directors. A shadow director is an individual who has not been formally appointed to the board of directors but is a person in accordance with whose directions or instructions the directors of the company are accus- tomed to act. In most respects, Irish company law treats such a person as a director and holds him or her to the same duties and liabilities. Controlling shareholders are not subject to the above duties in their capacity as shareholders. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? The acceptance condition for a takeover offer must be set at a level that would result in the bidder acquiring more than 50 per cent of the voting rights in the target, although in practice, it is typically set at either 80 per cent or 90 per cent. These are the thresholds for invoking the statutory ‘squeeze-out’ procedure, pursuant to which persons who do not accept the offer may have their holdings compulsorily acquired. The threshold for a target listed on a regulated market is 90 per cent; 80 per cent is the threshold for all other targets. A scheme of arrangement requires the approval of a majority in number of the shareholders of each class, representing not less than 75 per cent of the shares of each class, present and voting, in person or by proxy, at a general, or relevant class, meeting of the target company. The scheme of arrangement also requires the sanction of the High Court. Subject to the requisite shareholder approval and sanction of the High Court, the scheme will be binding on all shareholders. For companies listed on the MSM, the Listing Rules provide that acquisitions of a certain size (broadly, at least 25 per cent of the size of the bidder), or with parties connected to the company (for example, a director or substantial shareholder), must be approved by a general meeting of the company’s shareholders. Rule 21 of the Takeover Rules (which applies to Irish companies listed on the ISE, the London Stock Exchange, NASDAQ and NYSE) prohibits a target board from taking any of the following actions (except pursuant to a contract previously entered into) without shareholder approval or the consent of the Takeover Panel or both, either in the course of an offer, or if the target board has reason to believe that a bona fide offer may be imminent: • the issue of any share; • the grant of share options; • the creation or issue of any convertible securities; • the sale, disposal or acquisition of material assets of a mate- rial amount; • the entry into of contracts otherwise than in the ordinary course of business; or © Law Business Research 2019
- 105. Matheson Ireland www.lexology.com/gtdt 105 • anyother action, other than seeking alternative bids, which may result in frustration of an offer or shareholders being denied the opportunity to consider it. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? A number of provisions in the Takeover Rules (although technically applying to all public offers, whether hostile or recommended) should be given special consideration in hostile transactions. The following are particularly noteworthy: • the offer must first be disclosed to the board of the target company or its advisers before making any announcement concerning the offer. In practice, an approach is frequently, although not always, made in writing from the potential bidder to the chairman or chief executive of the target. Such correspondence is often preceded by a telephone call giving basic details of the bidders’ proposal; • all target shareholders of the same class must be treated equally; • there are a range of restrictions and obligations on persons dealing with target stock; • a target board is prohibited from taking certain actions (except pursuant to a contract previously entered into) without shareholder approval or the consent of the Takeover Panel or both, either in the course of an offer, or if the target board has reason to believe that a bona fide offer may be imminent; and • with limited exceptions, information given by a target to one bidder must be made available to all bidders. A second or subsequent bidder will have to request specific information; it is not entitled, by asking in general terms, to receive all information supplied to the first bidder. The Takeover Rules provide that the board of the target must obtain competent independent advice on every offer in respect of the target and must dispatch to its shareholders a circular setting out the substance and source of such advice, together with the considered views and opinion of the board of the target on the offer. An independent committee may need to be established to consider the offer in the event that any directors have a conflict of interest. As an Irish company, the fiduciary duties and other obligations of target directors will be governed by Irish law. These duties and other obligations will apply to the target direc- tors in deciding whether to engage in a process with a potential bidder, which may result in an offer for the target, and ultimately in deciding whether to recommend, or not recommend, an offer. As noted above, prior to an announcement concerning an offer or possible offer, the bidder, the target and their respective advisers are required to maintain strict confidentiality in respect of the contemplated offer, and negotiation discussions concerning the offer or possible offer must be kept to a very restricted number of people. If, prior to an announcement, the target is the subject of rumour and speculation or there is an anomalous movement in its share price, unless the Takeover Panel consents otherwise, an appropriate announcement must be made to the market. Prior to an approach, the responsibility for making such an announcement lies with the bidder; following an approach, the responsibility shifts to the target. In the case of an unwelcome approach, the target may, at any time following the identity of the bidder being made public, apply to the Takeover Panel to impose a time limit within which the bidder must either announce a firm intention to make an offer or that it does not intend to do so. This is commonly referred to as a ‘put-up or shut-up’ direction. Where the bidder announces that it does not intend to make an offer, subject to certain exceptions, that bidder will, among other matters, be precluded from announcing an offer or possible offer, or making an offer for the target for a period of 12 months. A transaction cannot practically proceed by way of a scheme of arrangement without support from the target board (notwithstanding some commentary on how a target could perhaps be legally compelled to do so). As a result, a hostile transaction will begin as a takeover offer. It would not be unusual, however, for a recommendation to be obtained after the launch of an offer (possibly following a revision to terms) and, in that case, it would be possible, with Takeover Panel consent, to switch from a takeover offer to a scheme of arrangement to implement the transaction. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Break fees are permissible under the Takeover Rules provided that the Takeover Panel has expressly consented to them, pursuant to rule 21.2 of the Takeover Rules. The Takeover Panel customarily grants consent to break-fee arrangements that are (i) limited to specific quantifiable third-party costs; (ii) subject to a cap of 1 per cent of the value of the offer; and (iii) subject to receiving confirmation in writing from the target board and its financial adviser that they consider the break or induce- ment fee to be in the best interests of the target shareholders. The offer document is required to contain details of any break fee agreed to by the target company. The target may enter into an exclusivity agreement, however, this is subject to the Takeover Rules and to the directors’ fiduciary duties. The directors of the target company may also agree to non-solicitation requirements. It is also common, in a recommended transaction, for a bidder to receive irrevocable commitments or letters of intent to accept the offer from the directors of the target and some shareholders. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? In addition to the Irish merger control regime, several industries are subject to additional regulations, such as financial institutions, insurance undertakings, pharmaceutical companies, airlines and telecommunica- tions operators. See also question 16 and question 17. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Although it is common for bidders in a public offer to include wide- ranging conditions in the terms of an offer, the practical effect of these is limited by the Takeover Rules and the Takeover Panel’s approach to the application of the Takeover Rules. Save with the consent of the Takeover Panel, or in the case of Competition Acts or EC Merger Regulation condi- tions, an offer may not be made subject to any condition the satisfaction of which depends solely on subjective judgements of the bidder, or © Law Business Research 2019
- 106. Ireland Matheson Public MA 2019106 whichis within its control. A bidder may not invoke a condition to lapse an offer unless the circumstances giving rise to the right to invoke are of material significance to the bidder in the context of the offer and the Takeover Panel (being satisfied that in the prevailing circumstances it would be reasonable to do so) consents to the condition being invoked. In practice it is very difficult for a bidder to invoke a condition, other than a material regulatory condition, acceptance condition or a condition that is required in order to implement the transaction (such as bidder shareholder approval). In 2017, the Takeover Panel, noting that it had become customary for bidder and target companies to enter into an implementation agree- ment, issued a practice statement (the Practice Statement) in relation to the circumstances in which the parties may lapse an offer by invoking conditions to the effect that: (i) the implementation agreement has been terminated (that is, that it ceased to remain in effect); or (ii) the other party had not complied with specified terms of the implementation agreement. In the Practice Statement, the Takeover Panel noted that the Takeover Rules do not prohibit parties to an offer agreeing contractual arrangements regulating the conduct of the offer. The Takeover Panel’s practice had been to permit parties to an offer to enter into an imple- mentation agreement including terms under which the parties reserved the ability, in a wide range of circumstances, to terminate the agree- ment. The Takeover Panel also noted that the Takeover Rules do not prohibit the inclusion of conditions to an offer that the implementation agreement had not been terminated, or that parties have complied with specified terms of the implementation agreement, unless the satisfac- tion of any such condition depends solely on subjective judgments by the directors of the party for whose benefit the condition is expressed or is within the control of the party. Having regard to the desirability for clarity and consistency, and to ensure that there is a high degree of certainty, the Takeover Panel stated in the Practice Statement that it expects that implementation agreement termination events will be expressly included as conditions to the offer and stated in terms compli- ance with the Takeover Rules. The Takeover Panel further emphasised that the invocation of a condition to an offer, including any such condi- tion, is subject to the consent of the Takeover Panel and falls to be assessed against the ‘material significance’ and ‘reasonableness’ tests prescribed by the Takeover Rules. The Takeover Panel also noted that the fact that it allows or approves the entry into by parties to an offer of an implementation agreement shall not be taken into account in any determination of the Takeover Panel under the Takeover Rules as to whether, in the prevailing circumstances, it would be reasonable for a party to invoke a condition to the offer to lapse or withdraw the offer. Preconditions may be included whereby the offer does not have to be made (that is, the offer document does not have to be posted) unless each precondition is satisfied. The Takeover Panel must be consulted in advance in order to employ the use of preconditions. Preconditions may only be used where they relate to material official authorisations or regulatory clearances, and the Takeover Panel is satisfied that it is likely to prove impossible to obtain the authorisation or clearance within the offer timetable. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? In financing a transaction, consideration offered by a bidder may take the form of any combination of cash or securities or both. The securities offered may be securities of the bidder or of another company. A bidder may only announce a firm intention to make an offer under the Takeover Rules (a Rule 2.5 Announcement) when it and its financial adviser are satisfied, after careful and responsible consideration, that the bidder is in a position to implement the offer. Where the offer is a cash offer or there is a cash alternative, the Rule 2.5 Announcement must include a confirmation from the bidder’s financial adviser (or another appropriate person) that cash resources are available suffi- cient to satisfy full acceptance of the offer. Any required debt and equity funding for the offer must be fully and, save with respect to conditions relating to closing of the offer, unconditionally committed prior to the Rule 2.5 Announcement. If the confirmation proves to be inaccurate, the Takeover Panel may direct the person who gave the confirmation to provide the necessary resources unless the Takeover Panel is satisfied that the person acted responsibly and took all reasonable steps to ensure the cash was available. A bidder that makes a Rule 2.5 Announcement is bound to proceed with a formal offer. A Rule 2.5 Announcement must contain all the terms and conditions of the offer; these terms cannot subsequently be altered without the Takeover Panel’s consent. An offer document issued under the Takeover Rules must include a description of how the offer is being financed and the source of finance (including the repayment terms and names of lenders). In the event that the offer of consideration includes securities of a company, the offer document must include additional financial and other information in relation to that company and dealings in its securi- ties under the Takeover Rules. A valuation report must also be provided in the case of an offer structured as a scheme of arrangement. If transferable securities are to be offered, the bidder must publish either a prospectus or a document containing equivalent information. A prospectus or equivalent document must be approved by the Central Bank or the competent authority of another EEA member state and passported into Ireland. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? When an offer is made in order to gain 100 per cent control of the target, the buyer may use a statutory procedure to compulsorily acquire the shares of dissenting shareholders (the squeeze-out procedure). Under regulation 23 of the Takeover Regulations, the relevant threshold for triggering the squeeze out procedure where the target is fully listed on a regulated market in any EU or EEA member state (such as the MSM or the London Stock Exchange) is the acquisition of 90 per cent of the issued share capital. A bidder has three months from the last closing date of the offer to give notice to dissenting share- holders that it wishes to exercise its rights under regulation 23. Once a notice has been served, a dissenting shareholder has 21 days to apply to the High Court for relief. The relevant threshold for triggering the squeeze-out procedure where the target is listed on ESM or AIM of the London Stock Exchange, NASDAQ or NYSE, is set out in the Companies Act. A bidder must receive 80 per cent acceptances in value within four months of the publication of the offer in order to trigger the squeeze-out procedure. If the bidder already holds 20 per cent or more of the shares in the target, it must receive acceptances from shareholders holding 80 per cent in value of the remaining target shares and receive acceptances from at least 50 per cent in number of the holders of the target shares which are the subject of the offer. Once a notice has been served, a dissenting share- holder has one calendar month to apply to the High Court for relief. In addition to the squeeze-out procedure, once the relevant threshold is achieved, the remaining minority shareholders can exercise buyout rights requiring the bidder to purchase their shares. In the case of schemes of arrangement, approval of a majority of the shareholders of each class, representing not less than 75 per cent © Law Business Research 2019
- 107. Matheson Ireland www.lexology.com/gtdt 107 of theshares of each class, present and voting, in person or by proxy, at a general, or relevant class, meeting of the target company is required. The scheme of arrangement also requires the sanction of the High Court. Subject to the requisite shareholder approval and sanction of the High Court, the scheme will be binding on all shareholders. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability compa- nies (implemented in Ireland by the Cross-Border Mergers Regulations) facilitates cross-borders transactions in Ireland. A cross-border merger may be effected in one of three ways, namely by: • acquisition: a company acquires the assets and liabilities of one or more companies which are dissolved without going into liquida- tion. The acquiring company issues shares to the members of the dissolved companies in consideration of the transaction; • absorption: a parent company absorbs the assets and liabilities of a wholly owned subsidiary, which is dissolved without going into liquidation; and • formation of a new company: a newly incorporated company acquires the assets and liabilities of one or more companies, which are dissolved without going into liquidation. The acquiring company issues shares to the members of the dissolved compa- nies in consideration of the transaction. The procedures for a cross-border merger vary depending on the type of merger undertaken, but each involves the preparation of common draft terms of the merger between the companies involved (the contents of which are prescribed by the Cross-Border Mergers Regulations), the drafting of an explanatory report by the directors that must be made available to the Irish company’s shareholders and an advertisement of the proposed merger. The High Court must also review and approve both outbound and inbound mergers involving Irish companies. Where applicable, employee protection provisions involving employee participation must also be observed. In certain cases, an auditor’s report on the merger will be required. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? In 2009, the European Communities (Assessment of Acquisitions in the Financial Sector) Regulations 2009 (the Assessment of Acquisitions in the Financial Sector Regulations) came into effect in Ireland, imple- menting Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007 into domestic law. The main objectives of these regulations were to do the following: • create greater transparency in the financial services sector; • assist the local financial services regulators in their supervisory roles over the sector; • harmonise information provided by relevant firms on the noti- fication and assessment procedures to be followed with regard to acquiring and disposing transactions in the financial services sector; and • enhance the existing anti-money laundering regime in Europe. The Central Bank is the body designated to supervise acquiring or disposing transactions in the Irish financial sector and has issued a noti- fication form to notify of a proposed acquisition of, or increase in, a direct or indirect qualifying holding in respect of any of the prescribed catego- ries of Irish authorised entities under these regulations. The Central Bank uses the information provided in the form to examine whether there are prudential grounds upon which it should object to the trans- action and if it ought to impose any conditions on an approval of the acquisition. The Assessment of Acquisitions in the Financial Sector Regulations apply to the following categories of entities: • credit institutions; • insurance or assurance undertakings; • reinsurance undertakings; • investment firms or a market operators of regulated markets (MIFID firms); and • UCITS management companies. The Assessment of Acquisitions in the Financial Sector Regulations apply to transactions involving the acquisition, directly or indirectly, of a ‘qualifying holding’ in a target entity. They also apply to the direct or indirect increase in a ‘qualifying holding’, whereby the resulting holding would reach, or exceed, 20, 33 or 50 per cent of the capital of, or voting rights in, a target entity, or a target entity would become the proposed acquirer’s subsidiary. A ‘qualifying holding’ means 10 per cent or more of the capital of, or voting rights in, a target entity or a holding that makes it possible to exercise a ‘significant influence’ over the management of a target entity. The Assessment of Acquisitions in the Financial Sector Regulations also apply on the disposal of a qualifying holding or a holding which results in the disposer’s interest in the target entity falling below the thresholds above or results in the target entity ceasing to be a subsid- iary of the disposer. A complete notification must be acknowledged in writing by the Central Bank within two working days of receipt of the notification form and it is required to carry out the assessment of a proposed acquisition within 60 working days of the date of the written acknowledgement. The Central Bank may request additional information in respect of a proposed acquisition no later than the 50th working day. Such a request for additional information will interrupt the assessment period until a response is received or 20 working days have elapsed. In certain circum- stances the interruption period may be extended to 30 working days. The Central Bank may, based on a prudential assessment of the proposed acquisition, decide to oppose or to approve of a proposed acquisition. In assessing a proposed acquisition, the Central Bank will look at: • the likely influence of the proposed acquirer on the financial insti- tution concerned; and • the suitability of the proposed acquirer and the financial soundness of the proposed acquisition based on the reputation of the entities, whether the entity can and will continue to comply with financial legislation. The Central Bank may set a maximum period within which the proposed acquisition is to be completed or may impose additional conditions or requirements to be met in respect of a proposed acquisition. If it decides to oppose an acquisition, it must, within two working days of the deci- sion being made (and before the end of the assessment period), inform the proposed acquirer in writing and outline the reasons for its decision. This decision may be appealed to the High Court. See also questions 2, 14 and 17. © Law Business Research 2019
- 108. Ireland Matheson Public MA 2019108 OTHERCONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? There is a special regime for media mergers contained in the Competition Acts to protect the plurality of the media and to ensure the ‘diversity of ownership and diversity of content’. The Competition Acts provide for additional steps ‘where two or more undertakings involved carry on a media business in Ireland or one or more of the undertakings involved carry on a media business in Ireland and one or more undertakings carry on a media business else- where’. The term ‘media business’ is defined in the Competition Acts and has been expanded to include online news sources and online broadcast of certain audio-visual material. To carry on a media business in Ireland requires an undertaking to have either a physical presence in Ireland and make sales to customers located in Ireland or to have made sales in Ireland of at least €2 million in the most recent financial year. In addition to the requirement to notify the CCPC, the Competition Acts require a separate notification to the Minister who has an additional responsibility for consideration of media mergers. The Minister has 30 working days, commencing 10 days after the determination of the CCPC, to consider the media merger. If the Minister is concerned that the merger is contrary to the public interest in protecting the plurality of the media, the Minister will request that the Broadcasting Authority of Ireland (the BAI) carry out a Phase II examination. Within 80 working days of receipt of the request, the BAI must prepare a report for the Minister outlining its view on the merger with regard to media plurality and recommending whether the merger should be put into effect (with or without conditions). An advisory panel may be set up to assist the BAI in its review. The Minister will make the ultimate decision, taking into account the BAI report and, if applicable, the view of the advisory panel. The Minister’s final determination must be made within 20 working days of receipt of the BAI report. See also question 11 and question 10. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Where an Irish public company is to be acquired by a target company by way of a scheme of arrangement structured as a cancellation scheme (rather than a share transfer), no stamp duty arises. This is because no share transfer takes place in circumstances where the old shares are cancelled and the new shares are issued to the acquiring target company. Stamp duty may arise on a takeover offer and a scheme of arrangement structured as a share transfer at a rate of 1 per cent. Stamp duty is payable by the purchaser and is payable on the higher of the consideration or the market value of the shares. The most significant tax issue for asset or share acquisitions of public companies is stamp duty. As mentioned above, the rate of stamp duty payable on transfers of shares is 1 per cent. The rate of stamp duty payable on the transfer of non-residential property increased from 2 per cent to 6 per cent for transactions on or after 11 October 2017. The 6 per cent rate generally applies to transfers of property that are non- residential property, however, certain exemptions and reliefs can apply. For example, the transfer of intellectual property and loan capital can qualify for exemptions from Irish stamp duty. In addition, relief is avail- able for intragroup transfers or reorganisations. In recent years, the paper stamping system was abolished and replaced with e-stamping which means that stamp duty returns and stamp duty payments must be made online through Irish Revenue Commissioner’s Online Service (ROS). A full ‘self-assessment’ regime for stamp duty now applies which means that each stamp duty return must contain an assessment of the amount of stamp duty that, to the best of the purchaser’s knowledge, information and belief, ought to be payable. Stamp duty due must be paid within 30 days of the date of execution of the transfer instrument. However, in practice, the Irish Revenue Commissioners allow a further period of 14 days in which to file an e-stamping return and pay the stamp duty. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? In a public offer governed by the Takeover Rules, a bidder is obliged in its offer document to state its strategic plans for the target company and their likely repercussions on employment and on the locations of the target’s places of business, together with its intentions with regard to safeguarding the employment of the employees and management of the target and of its subsidiaries (including any material change in the conditions of employment). Simultaneously with the dispatch of the offer document, both the bidder and the target must make the offer document readily available to the representatives of their respective employees or, where there are no such representatives, to the employees themselves. The board of the target company is required to state in its response circular its opinion on: the effects of implementation of the bid on all the target’s interests including, specifically, employment; the bidder’s stra- tegic plans for the target and their likely repercussions on employment and on the locations of the target’s places of business, as set out in the offer document; and the board’s reasons for forming its opinion. The response circular, to the extent that it is not incorporated in the offer document, must be made available to the target’s employee representatives or, where there are no such representatives, to the employees themselves. Provided it is received in good time before the dispatch of the circular, the target board must append to the response circular any opinion that it receives from the target company’s employee representatives on the effects of the offer on employment. Under the Cross-Border Mergers Regulations, an employee’s rights and obligations arising from his or her contract of employment will transfer to the successor company. The Cross-Border Mergers Regulations also specifically protect ‘employee participation rights’ if a system for such employee participation currently exists in any of the merging companies. Employees will remain employed by the target company, and the transaction will not generally affect the terms of employment of the employees of the target company. In certain circumstances, employees will have negotiated a change of control clause in their contract that may grant additional rights (for example, the right to resign without giving the statutory notice period or the right to be paid a severance sum). In addition, there may be broader obligations to inform and consult with trade unions or other employee representatives bodies (including any works councils that may exist) about a proposed takeover, perhaps under the terms of any separate information and consultation agree- ment, collective agreement, agreement with a works council or with any other employee representative body. In any event, best practice would be to keep employees informed of the transaction so as to avoid employee relations issues. Further, subsequent business restructuring or rationalisation measures could trigger a requirement for the relevant employing entity to make redundancies, in turn possible triggering collective redun- dancy consultation obligations under the Protection of Employment © Law Business Research 2019
- 109. Matheson Ireland www.lexology.com/gtdt 109 Act 1977,as amended (the Collective Redundancies Legislation), and exposure to potential liability for employment-related claims, including unfair dismissal and discriminatory dismissal. Failure to comply with the appropriate notification and consultation obligations under the Collective Redundancies Legislation (where applicable) may result in a claim against the employer by any one of the employees where an Adjudication Officer of the Workplace Relations Commission can award compensation of up to four weeks’ gross remuneration per employee. Criminal sanctions may also be imposed on an employer for failure to comply with the provisions of the Collective Redundancies Legislation, which include a potential fine of up to €250,000 where collective redun- dancies are effected by an employer before the expiry of the 30-day period. Where an employer fails to initiate consultations with employee representatives or fails to furnish to them the required information, then there is a potential fine of €5,000 on summary conviction. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Any buyer of a target company (or the assets of a target company) that is in receivership or liquidation will need to satisfy itself that the receiver or liquidator (as appropriate) has been validly appointed. In the context of purchasing assets from a company in receivership, the buyer should request, at the very least, a copy of the deed of appointment and charge documentation. In a liquidation, the buyer will want to satisfy itself that the liquidator was appointed validly by court order or pursuant to a duly executed creditors’ voluntary liquidation process. Searches of the Irish Companies Registration Office should be carried out. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? When considering a business combination, purchasers should consider potential liabilities arising from non-compliance with the Irish anti- corruption and bribery regimes and the sanctions which may result. Anti-corruption legislation in Ireland generally prohibits bribery of both public officials and private individuals committed in Ireland and, in certain circumstances (where the donor has a connection with Ireland), committed abroad. In contrast with other jurisdictions, the offences under Irish legislation do not generally distinguish between the bribery of persons working in a public or private body with limited exceptions (for example, the presumption of corruption only applies to public officials). The principal statutory source of bribery law in Ireland is the Criminal Justice (Corruption Offences) Act 2018 (the Corruption Offences Act). The Act that commenced on 30 July 2018 consolidated the existing anti-corruption laws and introduced a number of new offences. The Corruption Offences Act prohibits both ‘active’ bribery (making a bribe) and ‘passive’ bribery (receiving a bribe). A person is guilty of passive bribery if he or she corruptly accepts, agrees to accept or agrees to obtain a gift, consideration or advantage, for himself or any other person, as an inducement, reward or on account of the agent doing any act, or making any omission, in relation to the agent’s posi- tion, or his or her principal’s affairs or business. A person is guilty of active bribery if he or she corruptly gives, agrees to give or offers a gift, consideration or advantage to an agent or any other person, as an inducement to, or reward for, or otherwise on account of the agent doing any act, or making any omission, in relation to his or her office or his or her principal’s affairs or business. One of the most important developments in the Corruption Offences Act is the new corporate liability offence which allows for a corporate body to be held liable for the corrupt actions committed for its benefit by any director, manager, secretary, employee, agent or subsidiary. The single defence available to corporates for this offence is demon- strating that the company took ‘all reasonable steps and exercised all due diligence’ to avoid the offence being committed. In practice, there- fore, companies need to ensure that they have robust anti-bribery and corruption policies and procedures in place. A company can also be found liable under common law for the criminal acts carried out by its officers and employees by way of vicar- ious liability. Vicarious liability deems the company liable for the acts of its employees, but those acts remain the acts of the employees and not of the company. The company can also be directly liable where crimes of the company’s controlling officers are viewed as those of the company. This ‘identification’ doctrine has been accepted by the Irish courts in a civil context, although there are no reported decisions of the Irish courts in a criminal context. Extraterritorial jurisdiction exists under the Corruption Offences Act in relation to corruption occurring outside Ireland where the acts are committed by Irish persons or entities or take place at least partially in Ireland. Under the Corruption Offences Act, an officer of a company that commits an offence under the legislation will also be guilty of an offence, if the offence is proved to have been committed with the consent, connivance or approval of the officer, or is attributable to the neglect of the company’s officers. However, to date, there are currently no recorded prosecutions of companies or their officers under Irish anti- corruption legislation. The Corruption Offences Act also provides for various presump- tions of corruption in respect of certain corruption offences where, for example, a gift has been given to a public official or a connected person of a public official by a person who has an interest in the discharge by the official of any of a number of prescribed functions. Depending on the nature of the transaction, a successor entity can be held liable for a prior offence committed by the target entity of bribery or corruption. Therefore, it is very important that a company’s anti-bribery and corruption policies and procedures are reviewed and analysed in advance of any business merger or acquisition. There are a number of criminal and civil sanctions open to companies if found guilty of an offence under Irish anti-bribery and anti- corruption law. Under the Corruption Offences Act, a person or business guilty of either a corruption offence or the discrete offence of corruption in office, is liable on summary conviction to a minor fine or imprisonment for a term not exceeding 12 months. A person convicted on indictment is liable to an unlimited fine or imprisonment for a term not exceeding 10 years or both. There are restrictions on tendering for public contracts at both Irish and EU level following a conviction for an offence under anti- bribery or anti-corruption law. Where a breach of Irish bribery law is committed by a company in connection with a project funded by the World Bank and other international financial institutions, such compa- nies may be debarred from bidding on contracts funded by the World Bank, International Monetary Fund and other international financial institutions, and publicly named. © Law Business Research 2019
- 110. Ireland Matheson Public MA 2019110 UPDATEAND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? Takeover activity during the year to 30 June 2018 was at its lowest level since 2014 with the Takeover Panel supervising just one takeover. However, notwithstanding the very low number of takeovers super- vised, the Takeover Panel reported that it was engaged in a number of regulatory issues that did not result in an offer being made. In its Annual Report 2018, the Takeover Panel noted that, following Brexit, certain Irish registered companies whose securities are listed only on a regulated market in the UK, and that are currently regulated on a split basis between the Takeover Panel and the UK Takeover Panel under the Takeover Regulations, will no longer be subject to the jurisdiction of the UK Takeover Panel in the event of their being the subject of a takeover offer. Instead, they will be regulated solely by the Takeover Panel under the Takeover Panel Act. The Takeover Panel has confirmed that it is currently reviewing the regulatory situation with regard to these companies in order to ensure, insofar as practicable, that transac- tions involving them are not adversely affected by such changes in the regulatory regime. A question that currently presents itself in the context of Brexit is whether or not it is possible for an Irish company to enter into a cross- border merger into the UK in the event of a hard or no-deal Brexit (and indeed, the possibility of a UK company merging into an Irish company in such a scenario). Part of the prescribed procedure as set out in the Cross-Border Mergers Regulations and the relevant UK regulations, the Companies (Cross-Border Mergers) Regulations 2007 (the UK Regulations), involves obtaining a pre-merger certificate from both the High Court in Ireland and the High Court in the UK. Subsequently the merging entities apply to the High Court in the jurisdiction of the successor company for an order confirming the merger and its effective date (a Court Order). For merging companies with no employees, the full process of an Ireland/UK cross-border merger is likely to take in the region of four to six months. As things currently stand, in the event of a hard or no-deal Brexit on 29 March 2019, Irish companies will not be able to complete a cross-border merger into the UK that has not been finally sanctioned by the High Court in the UK pursuant to a Court Order prior to that date. The UK government has proposed draft legislation that would revoke the UK Regulations if the UK leaves the EU without a withdrawal agreement, meaning that there would be no legal frame- work in the UK to facilitate cross-border mergers post 29 March 2019. In addition, as the Cross-Border Mergers Regulations do not permit a merger into a non-EEA jurisdiction, the relevant legal framework would also not exist to enable the High Court in Ireland to sanction a merger of a UK company into an Irish company in the event of a hard or no-deal Brexit. From a practical perspective, if an Ireland/UK cross-border merger transaction was to commence now or any time before the final outcome of the Brexit negotiations are confirmed, then it would need to be established that both the Irish High Court and the UK High Court would agree to start the process, through the issuance of a pre-merger certificate, without certainty as to its outcome. We are not aware of this point having been tested in Ireland or the UK yet, but our initial view is that the respective High Courts would be minded to allow the process to begin provided the significant uncertainty regarding whether or not the process would be able to complete was made clear in the relevant documents. Additionally, the European Commission has published a proposal for a directive to amend Directive (EU) 2017/1132 relating to certain aspects of company law. This proposal aims to provide procedures for cross-border conversions, divisions and mergers to foster cross-border mobility and afford adequate protection to company stakeholders. Madeline McDonnell madeline.mcdonnell@matheson.com Susan Carroll susan.carroll@matheson.com 70 Sir John Rogerson’s Quay Dublin 2 Ireland Tel: +353 1 232 2000 Fax: +353 1 232 3333 www.matheson.com © Law Business Research 2019
- 111. www.lexology.com/gtdt 111 Italy Fiorella FedericaAlvino Nunziante Magrone – Law Firm STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Under Italian law, there are the following types of transaction: • purchase of quotas or shares, respectively, in the case of a limited liability company or in the case of a joint-stock company; • public offering; • transfer of a going concern or part of a going concern; • merger; and • demerger. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The most important law regulating business combinations is the Civil Code (ICC), adopted by Royal Decree No. 261 of 16 March 1942, as further amended over the years. Other than the ICC, there are various laws and regulations that apply to business combinations. In particular, the most important are the following: • Legislative Decree No. 58 of 24 February 1998, the Italian Financial Act (TUF), implemented also with regulations issued by Consob (the Italian authority responsible for regulating the Italian securi- ties market) and by the Bank of Italy; • the most important of the above-mentioned regulations issued by Consob, with reference to relevant transactions, is Consob Regulation No. 11971 of 14 May 1999 as further amended over the years; • Law No. 287 of 10 October 1990, on the protection of competition and the market (the Antitrust Law); • Law No. 300 of 20 May 1970, on the protection of employees (the Workers Statute); and • Royal Decree No. 267 of 16 March 1942, on insolvency proceedings and bankruptcy (the Bankruptcy Law). Furthermore, EU laws and regulations may be applied to relevant trans- actions, if executed between companies of two or more European Union countries. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? As regards the purchase of quotas or the purchase of shares, as well as the transfer of a going concern or part thereof, usually these kinds of transactions are governed by an agreement between the seller and the purchaser, to be executed pursuant to the provisions of the ICC and the laws mentioned above, where applicable. Quotas are freely transferable, unless the articles of association provide for particular limitations, such as pre-emption rights in favour of the non-selling quota-holders, or the subordination of the transfer to the agreement of the corporate bodies. Their transfer must be certified by a notary public and the transfer filed at the competent Registry of Enterprises. The ICC also provides that agreements for the transfer of a going concern or part of it must be in writing and must be filed at the Registry of Enterprises. It is, however, now possible to transfer quotas by an agreement undersigned with the digital signatures of the contracting parties, which is then filed by an authorised intermediary at the Registry of Enterprises. Also as regards shares, the articles of association may set limita- tions on the right to transfer them. The deed transferring the shares must be executed before a notary public, who shall then endorse the relevant share certificates. Public offerings are governed by article 101-bis and following of the TUF and the Consob Regulations, which define a purchase or exchange public offering as one addressed to more than 150 subjects and having a securities value amounting to at least €5 million. As regards mergers and demergers, the most important rules are contained in the ICC. Article 2501 of the ICC provides that mergers can be effected by establishing a new company or by the absorption of one or more other companies into another company. The same provisions are applicable to both these cases. However, particular rules apply in the case of leveraged buyout operations, namely mergers in which one of the companies has contracted debts to purchase the other company, when as an effect of the merger the assets of such latter company represent the general security for or the source of repayment of said debts, as well as in the case of absorption of wholly owned companies and the absorption of 90 per cent-owned companies. In the case of demergers, a company transfers all of its assets and liabilities to more than one company, pre-existing or newly incorporated, or part of its assets and liabilities (in the latter case even to only one company) and the related shares or quotas to their shareholders or quota-holders. `Some of the provisions concerning mergers are appli- cable to demergers, with the necessary adjustments. © Law Business Research 2019
- 112. Italy Nunziante Magrone– Law Firm Public MA 2019112 FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The purchase of shares and quotas as well as the transfer of a going concern or of part of it must be filed at the Registry of Enterprises. The decision to launch a public offering, as well as the arising of the duty to do so, shall be promptly communicated to Consob and to the target company, together with the offering document, and a form to be used for accepting the offer. After Consob’s approval of the offering document, the company shall promptly communicate Consob’s approval to the market and then publish the offering document on websites or in newspapers. Furthermore, Consob regulations provides for certain formalities regarding the offering, and the price per share and its communication. In the case of mergers and demergers, the project, the financial statements for the previous three financial years of the companies participating in the operation and the merger or demerger balance sheet of the companies shall remain deposited at the companies’ regis- tered offices for at least 30 days before the approval of the operation by the companies’ bodies. During this term, the shareholders of the compa- nies may review these documents and obtain a copy of them. The resolution approving the merger or demerger must then be filed at the competent Registry of Enterprises along with the above- mentioned documents. The operation is effective only after 60 days have elapsed from the last filing, unless the creditors consent to the merger or demerger, or the creditors who do not consent are paid the amount due to them, or if a sum equal to the amount of their debts is deposited at a bank, or if the companies participating in the merger or demerger are audited by the same audit firm, it states that financial and asset situation of the companies does not require any guarantee to protect their creditors. In the case of a concentration that meets certain turnover thresh- olds, it must be notified to the Antitrust Authority. Concentrations are defined as cases in which: • two or more companies merge; or • one or more subjects controlling at least one company or one or more companies acquire, by purchasing participations or assets or by means of an agreement or otherwise, direct or indirect control of the whole or part of one or more companies, or in case two or more companies proceed by a common enterprise, by means of incorporating a new company. Pursuant to article 16 of the Italian Antitrust Law, a concentration must be notified to the Antitrust Authority if: • the combined aggregate domestic turnover of all the undertakings concerned exceeds €495 million; and • the aggregate domestic turnover of each of at least two of the undertakings concerned exceeds €30 million. These thresholds are revised annually (the last revision occurred on 7 March 2018) to take into account increases in the GDP deflator index. The updated thresholds will be published in the Competition Authority’s Bulletin once this increase in index is announced officially. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? As regards the transfer of shares, quotas, a going concern or a part of it, there are no mandatory rules on information that must be disclosed for the execution of these agreements. However, article 1337 of the ICC contains a duty of the parties to act in good faith during the negotia- tions for the execution of any kind of agreement. The courts have held that one of the duties covered by this good faith principle is the duty to inform the other party of all the elements necessary to form an opinion on the agreement. As regards public offerings, the communication to Consob shall indicate that the request for authorisation to purchase shares has been submitted to the authorities at the same time, as well as that the compe- tent bodies have resolved on the issue of possible financial instruments to offer as consideration. The most important elements of the offering, such as the related guarantees, the participations held or purchasable by the offering company or other subjects acting jointly with it and the names of eventual consultants must also be communicated to Consob, to the security issuer, and to the market. The offering document shall contain the following information: • any data useful for appraising the offer and an evaluation on the offering by the directors of the company, indicating the majorities adopting the resolution as well as dissenting directors, if any; • the eventual decision to call the shareholders’ meeting in order to authorise acts or operations that may affect the offering; • updated information on the direct or indirect ownership of the company’s shares or of its affiliates’ shares of the company itself or the directors, as well as on the shareholders’ agreements, if any, with reference to the company’s shares; • updated information on the directors’ and the general managers’ remuneration; • relevant facts not indicated in the most recent financial statements or in the last published interim accounts; and • recent developments and forecasts. As regards mergers and demergers, see question 4. With particular reference to merger and demerger projects, they must contain the following information: • the type and the name of the company, the registered offices of the companies participating in the merger or demerger; • the articles of association of the new company resulting from the merger or demerger or of the absorbing or beneficiary company with the amendments, if any, deriving from the merger or demerger; • the exchange ratio of the shares or quotas, as well as the cash adjustments, if any; • the procedure for the allocation of the shares or quotas of the company resulting from the merger or demerger or of the absorbing or beneficiary company; • the date from which such shares or quotas participate in the profits; • the date as of which the operations of the companies partici- pating in the merger or demerger are charged to the accounts of the company resulting from the merger or demerger or of the absorbing or beneficiary company; • the treatment, if any, reserved to particular categories of share- holders and to the holders of securities different from shares; • the particular benefits, if any, proposed in favour of the subject entrusted with the management of the companies participating in the merger or demerger; and © Law Business Research 2019
- 113. Nunziante Magrone –Law Firm Italy www.lexology.com/gtdt 113 • for demergers only, an accurate description if the asset and liability items to be transferred to each of the beneficiary companies together with the cash adjustment, if any. We would note that under Legislative Decree No. 123/2012, the merger or demerger project may be published on the company’s website as an alternative to the filing with the Registry of Enterprises. Furthermore, the same Decree has introduced the possibility of omitting the filing of some documents if agreed by all the shareholders and owners of other financial instruments. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Notification requirements for substantial shareholdings are provided for listed companies. In particular, anyone who participates in the share capital of a listed company shall inform the company and Consob: • should the threshold of 3 per cent be exceeded if the company is not a small to medium-sized enterprise (SME)(if the company is a SME the threshold is 5 per cent) (according to the definition contained under article 1, §1 lett. w-quater 1) of the Italian Financial Act a SME is a listed small or medium enterprise, which, on the basis of its approved financial statements for the last financial year, also prior to its admission for trading, has turnover lower than €300 million or average market capitalisation in the last calendar year lower than €500 million. Issuers of listed shares which have exceeded both the aforesaid thresholds for three consecutive financial, or calendar (as the case may be), years are not considered SMEs); • should the thresholds of 5, 10, 15, 20, 25, 30, 50, 66.6 and 90 per cent be reached or exceeded; or • should the investment falls below the above indicated thresholds. Such communication must also be made should the thresholds be reached or exceeded, or the holding falls below them, as a result of changes in the share capital. This communication should be given within four trading days of the date of the transaction leading to the obligation (regardless of the date on which it is executed), or from the date on which the party obliged to make a disclosure has been informed of events that involve changes in the share capital that will cause the reaching or exceeding of a relevant threshold. Moreover, whoever, following acquisitions or increased voting rights, holds a stake greater than the 30 per cent threshold or holds more than 30 per cent of the voting rights of the same, shall promote a takeover bid addressed to all security holders for all the securities admitted for trading on a regulated market in their possession. In companies other than SMEs, the offer can be promoted also by anyone who, subsequent to acquisitions, comes to hold a stake greater than the threshold of 25 per cent, where there is no other shareholder with a higher stake. A bidder coming into possession, following a global takeover bid, of a holding of at least 95 per cent of the capital represented by securi- ties in an Italian listed company shall have the right to squeeze out the remaining securities within three months of expiry of the time limit for bid acceptance, if the intention to exercise said right was declared in the takeover bid document. In addition, anyone who holds the share capital of a listed company equal or above the thresholds of 10, 20 and 25 per cent shall state the objectives it intends to pursue in the following six months (article 120, paragraph 4-bis, of the Consolidated Financial Act). The declaration shall state under the responsibility of the declarant: • the means for financing the acquisition; • whether the declarant is acting alone or in concert; • whether it intends to stop or continue its purchases, and whether it intends to acquire control of the issuer or anyway have an influ- ence on the management of the company and, in such cases, the strategy it intends to adopt and the transactions to be carried out; • its intentions as to any agreements and shareholders’ agreements to which it is party; or • whether it intends to propose the integration or revocation of the issuer’s administrative or control bodies. The declaration required under article 120, paragraph 4-bis, of the Consolidated Financial Act is transmitted to the issuer and Consob and published according to the terms and formalities set forth by articles 121 and 122 of Consob Regulation. Without prejudice to article 185 of the Consolidated Financial Statements , if, within six months of the commu- nication of the declaration, changes of intentions are made on the basis of objective circumstances that have occurred, a new reasoned state- ment must be addressed without delay to the company and Consob and brought to the knowledge of the public in the same manner. The new declaration shall resume the six-month period mentioned above. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Directors have a general duty to perform their office in compliance with the law and the company’s by-laws, acting with due diligence. In the event of a breach of these duties, directors can be liable towards the company, as well as towards the shareholders or quota-holders. Furthermore, a director must inform other directors and the board of statutory auditors of any interest he or she has on his or her own behalf or on behalf of third parties in a transaction of the company, spec- ifying its nature, terms, origin and relevance; in the case of a managing director, he or she must abstain from the transaction, informing the board of it or reporting it to the shareholders’ meeting, in the case of a sole director. In this case, the board of directors must adequately justify the reasons and the advantages for the company of such transaction. In the event of non-compliance with the above or if the resolutions of the board of directors are adopted with the determining vote of the director in a conflict of interest situation, the resolution, if it could cause detriment to the company, may be challenged by the directors and by the board of statutory auditors within 90 days of the date of its adoption. Any person who consented with his or her vote to the resolution, if the information requirements mentioned above have been complied with, cannot challenge it. In any event, rights acquired by third parties in good faith on the basis of acts performed in implementation of the resolution are preserved. The directors are liable for damages to the company for their actions or omissions and also for the damage that may be caused to the company from the use for their own benefit or that of third parties of data, information or business opportunities obtained in connection with their appointment. Under article 104 TUF, in the event of public offerings, unless express authorisation from the shareholders’ meeting is obtained, the company shall not fight the execution of the public offering. In any case, the directors and the general manager are liable for any act performed. © Law Business Research 2019
- 114. Italy Nunziante Magrone– Law Firm Public MA 2019114 Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? An extraordinary shareholders’ meeting (in the case of an SpA) and a quota-holders’ meeting to be held before a notary public (in the case of an Srl) is competent to resolve on any transaction that may involve amendments in the company’s by-laws (in particular mergers and demergers). The company’s by-laws, however, may reserve to share- holders’ or quota-holders’ meetings further items and in Srls, the management of the company may be granted to the quota-holders. A right of withdrawal is granted to any shareholder who has not consented to the amendment of the company’s corporate purpose, to any operation that causes any amendment in the company’s by-laws or any relevant amendment to the shareholders’ rights. As regards the appraisal rights, article 2501-sexies ICC provides that for mergers and demergers, one or more experts for each company participating in the transaction draw up a report on the adequacy of the share or quota exchange ratio, indicating the methods adopted to establish the proposed exchange ratio and the values resulting from the application of each method and the difficulties in valuation, if any. Furthermore, the report shall contain an opinion on the adequacy of the methods followed to establish the exchange ratio and the relevant importance attributed to each of them in establishing the value adopted. In any other transaction, shareholders may make their own appraisal. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? A public offering is considered hostile when the directors do not agree to its execution. In any event, they are liable for any acts and operations performed in this regard (see questions 5 and 7). Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Break-up fees may be provided by the parties in a letter of intent or in a preliminary agreement. The party who breaks off the negotia- tions without any reasonable cause may be considered liable under article 1337 of the ICC, which provides that the parties have a duty to conduct negotiations in good faith (see question 5). Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Particular regulations may be applied to banks, financial intermediaries and insurance companies, as well as anti-mafia regulations that are applicable to all companies, in particular to those utilising public works or service tenders or public aid, or carrying out business in locations with a particularly high risk of mafia infiltration. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Under Italian law any condition may be inserted in a business transac- tion. The application of the rules on conditions, provided by articles 1353 and 1355 of the ICC, is expressly forbidden. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Typically, if the buyer needs to obtain financing in order to execute a transaction, this is provided as a condition for the transaction or the financing agreement is executed at the same time as the transaction agreement. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The only possibility of squeeze-out is provided by article 111 TUF, under which a bidder coming into possession, following a global takeover bid, of a holding of at least 95 per cent of the capital represented by secu- rities in an Italian listed company shall have the right to squeeze out remaining securities within three months of the expiry of the time limit for bid acceptance, if the intention to exercise said right was declared in the takeover bid document. Where more than one class of securities is issued, the right to squeeze out exists only for classes of securities for which the 95 per cent threshold is reached. The transfer shall be effective from the time when the notice of the deposit of the considera- tion with a bank is given to the issuing company, which shall make the consequent entries in the shareholders’ register. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? The same rules provided for national transactions are applied to cross- border transactions. However, EU law shall apply with reference to antitrust matters, as well as EU Council Regulation No. 139/2004 of 20 January 2004 on the control of concentrations. From a corporate tax standpoint, mergers, divisions, partial divisions, transfers of assets and exchanges of shares involving an Italian company and a company of another EU member state, have to be considered fiscally neutral according to the EU Merger Directive (Council Directive 2009/133/EC of 19 October 2009) (see question 18). Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? With reference to the notice to be given to the Antitrust Authority in the case of a concentration exceeding the above-mentioned thresholds, © Law Business Research 2019
- 115. Nunziante Magrone –Law Firm Italy www.lexology.com/gtdt 115 within 30 days of receipt of the notice, the Antitrust Authority may start an inquiry in order to ascertain whether the concentration that the company wishes to put in place is forbidden. On the other hand, if the Antitrust Authority does not consider it necessary to start an inquiry, it communicates this to the companies participating in the concentration within 30 days of receipt of the notice. However, the Antitrust Authority may start an inquiry after this 30-day term has expired only if the information provided by the companies is shown to be wrong, incom- plete or false. As regards mergers and demergers, see question 4. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? In specific circumstances (mainly concerning the industry and nature of the business carried out by the companies involved in the transaction), Italian mergers and acquisitions may be subject to the supervision or authorisation of other Italian authorities, such as: the Italian Competition Authority; the Italian Insurance Regulatory Authority; the Bank of Italy, which supervises the activities of banks and financial intermediaries; the Consob, which supervises the activities of investment companies; the Italian Electronic Communications and Media Authority; and the European Central Bank. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? In the case of the purchase of shares or quotas, the seller will be subject to standard corporate tax (IRES) at a rate of 24 per cent, while in this kind of transaction regional income tax (IRAP) is not applied. The seller may benefit from a substantial exemption rule, under which it will not pay any tax on 95 per cent of the capital gain at the time of the sale of the shares or quotas, while the remaining 5 per cent is subject to full IRES, if the following conditions are met: • the participation has been held uninterruptedly for more than 12 months, starting from the most recent date of transfer or acqui- sition of shares or quotas (according to the LIFO method); • the participation has been listed among the financial fixed assets in the first financial statements closed during the period of possession; • the participating company is resident in a state or a territory that does not enjoy a privileged tax treatment (the ‘blacklist’); and • the participating company carries out a commercial business. The requirements under the final two points above must exist uninter- ruptedly at the time of the sale, at least at the beginning of the third tax period prior to the same sale, or where the participated company has been incorporated for less than three years, for the shorter period running between the deed of incorporation and the sale of the holding. Lastly, such transactions are not subject to VAT, and a fixed regis- tration tax amounting to €200 is due. On 1 March 2013, the ‘Tobin Tax’ was introduced in Italy. In certain circumstances, the purchase of shares is subject to a 0.2 per cent tax (the rate is reduced to 0.1 per cent if the transaction refers to a listed company). In the case of purchase of a going concern or part of it, the seller will be subject to full IRES taxation (24 per cent) on the capital gain, while IRAP is not applied. The capital gain may, at the seller’s option, be included in the taxable income for its full amount for the year in which it is realised or in equal instalments for the current and following fiscal years, not exceeding the fourth fiscal year, provided that the ongoing business has been held by the seller for at least three fiscal years. The buyer is entitled to write down the difference between the price paid and the book value of the ongoing business acquired. If this value is considered as goodwill, it is depreciated for tax purposes over an 18-year period, notwithstanding the fact that the buyer is an enterprise that has adopted the IAS/IFRS (the International Accounting Standards or International Financial Report Standards which do not provide for the depreciation of the goodwill). In order to obtain a tax depreciation of such difference on assets, it must be demonstrated that the higher value is true and justifiable for statutory purposes. VAT is not applied on these kinds of transactions. Furthermore, the purchase of a business is subject to a registration tax at the rate of 9 per cent for real properties and lands (15 per cent for agricultural land) and at the rate of 3 per cent for goodwill and other values. Said rate applies on the commercial value of the business sold, net of all liabilities resulting from statutory accounting records. Moreover, a real estate transfer is subject to mortgage and cadas- tral taxes equal to the amount of €50 each. If the buyer and the seller do not estimate the value of each asset, the entire business is taxed applying the rate of the asset with the highest rate. In other words, if the business includes real estate, goodwill and other values, the tax rate of 9 per cent will be applicable. Note that the aforesaid rates (9 per cent registration tax and €50 mortgage and cadastral taxes) have been subject to considerable changes (see Law Decree No. 104/2013) with effect from 1 January 2014. The taxable base is equal to the fair market value of the sold ongoing business. It should be noted that the transfer of a going concern can also be performed by incorporating a new company to which the going concern transferred is contributed and the new company’s shares are then sold to the purchaser. In fact, this mechanism of transferring a going concern is tax-neutral, while the sale of shares and quotas is subject to the taxa- tion described above. Mergers and demergers are neutral for income tax purposes and they are not subject to VAT. Transfer of a branch of business activity made by a company in exchange for shares of the receiving company is fiscally neutral from an income tax standpoint if certain condi- tions are met. Moreover, it is not subject to VAT and it is subject to a registration tax of €200. According to the EU Merger Directive, mergers, divisions, partial divisions, transfers of assets and exchanges of shares involving an Italian company and a company of another EU member state, have to be considered fiscally neutral from a corporate tax standpoint. More specif- ically, these corporate reorganisations cannot give rise to any taxation of capital gains in Italy calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes. Tax neutrality is allowed when the assets and liabilities of a branch of business involved in a cross-border merger (in which the foreign company absorbs the Italian one or in which the transferee company is an Italian company) or involved in a cross-border demerger (in which the foreign company is the receiving company) remain effec- tively connected with an Italian permanent establishment of the foreign receiving company. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Article 2112 of the ICC provides that in the event of a transfer of a going concern the relationship continues with the transferee and the employees © Law Business Research 2019
- 116. Italy Nunziante Magrone– Law Firm Public MA 2019116 maintain all rights deriving from it. The transferor and the transferee are jointly liable for all claims that the employee had at the time of the transfer. By the procedure set forth in articles 410 and 411 of the Italian Code of Civil Procedure the employee may consent to the release of the transferor from the obligations deriving from the labour relationship. The transferee is bound to apply the financial and regulatory treatment provided by the national, territorial and company collective bargaining agreement prevailing at the time of transfer, until termina- tion, unless they are replaced by other collective agreements applicable to the enterprise of the transferee. The replacement occurs exclusively between collective agreements of the same level. While the right to resign in accordance with the provisions on termination of employment remains unaffected, the transfer of a going concern does not per se represent a cause for termination. An employee whose employment conditions are substantially changed in the three- month period after the transfer of the business may resign, maintaining a right of indemnity. For the purposes of article 2112 of the ICC, a ‘transfer of going concern’ is defined as any transaction that, as a consequence of an assignment, a merger or a demerger, causes a change of title of an organised economic activity, with or without profit, for the purpose of the production or exchange of goods or services, pre-existing to the transfer and that maintains in the transfer its identity, irrespective of the agreement or the resolution pursuant to which the transfer of the going concern is executed, including the usufruct or the lease of a going concern. Furthermore, the above-mentioned rules shall also apply to the transfer of part of a going concern intended as an autonomous part of an organised economic activity identified as such by the transferor and the transferee at the time of its transfer. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Under Italian law, bankruptcy is a compulsory liquidation procedure to be started should the company be insolvent. In order to proceed with it, the receiver appointed by the court may transfer individual assets or a going concern of the company or part of it, as well as lease a going concern or part of it. In this case, sales may also be executed through competitive proce- dures by means of experts, on the basis of appraisals, of which adequate publicity is ensured to the interested subjects. Furthermore, the Bankruptcy Law provides for other proceedings if the company is not insolvent but is in a crisis state. First, the company may propose a composition among its creditors, a plan that has as its purpose to lead to the continuation of the company’s business and that may provide for the following: • debt restructuring and credit satisfaction, in any form, also by means of transfer of assets, transfers of shares or quotas or any kind of extraordinary transactions; • attributing the activities of the company to an assumptor, which may even be constituted by the company’s creditors; • splitting of the creditors into different classes; and • different treatment for creditors belonging to different classes. However, this procedure may also lead to the company’s liquidation. Lastly, the Bankruptcy Law also provides for debt restructuring that may be voluntarily requested by the company, namely an agree- ment executed by the company and its creditors representing at least 60 per cent of the credit amount in order to ensure regular payment. The content of such an agreement is not provided by law and, therefore, it can include any kind of sale of assets, shares, quotas or ongoing business. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Article 317 of the Italian Criminal Code punishes with imprisonment a public officer who, abusing his or her office or authority, forces someone to unjustly give a promise to him or her or to a third person money or any other utilities. Furthermore, pursuant to articles 318 to 321 and 322-bis of the Italian Criminal Code, corruption is sanctioned as a criminal offence and punished with imprisonment. Furthermore, if the subject committing these criminal offences is a person serving the company as representative, or who holds an admin- istrative or senior executive position within the body or an organisational unit of the same, and being financially and functionally independent, as well as by a person actually exercising the management and control of the same or by persons under the direction or supervision of one of the persons mentioned above, the company may be held liable under Legislative Decree No. 231/2001. If the company is considered liable, the penalties that may be applied are the following: • fines; • disqualification: this may be disqualification from exercising any activity; suspension or cancellation of authorisations, licences or concessions serving to commit the unlawful act; prohibition on entering into contracts with public bodies, unless done so in order to obtain a public service; exclusion from benefits, loans, contri- butions or subsidies and possible cancellation of those already granted; prohibition on advertising goods or services; • seizure; and • publication of the decision. This liability may be waived if the company demonstrates that: • it has adopted an organisational and management model capable of preventing offences provided in the decree; • the task of overseeing compliance with the model and updating the same has been delegated to a body vested with powers to act of its own initiative and conduct monitoring; • the persons committed the offence by fraudulently circumventing the organisational and management model; or • there has been no omission or insufficient oversight on the part of the monitoring body. Therefore, companies normally adopt such organisational models and related internal policies, in which anti-corruption measures can also be provided. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? In 2018, the Italian merger and acquisitions market recorded 882 oper- ations (+8 per cent with respect to the 733 in 2017) for a total value © Law Business Research 2019
- 117. Nunziante Magrone –Law Firm Italy www.lexology.com/gtdt 117 of approximately €49.5 billion (+17 per cent with respect to the €41 billion in 2016). The 2018 MA market grew up and foreign investor interest in Italian companies was confirmed. Italian companies continue to repre- sent an interesting investment opportunity not only in light of the strength of their brands and of the quality of their products, but also for the fact that many of them are facing generational shifts, or need capital injections (and new management features) to support their expansion, or are in turnaround situations. In 2018, investments in MAs by Italian companies and entrepre- neurs had an unexpected growth. They invested €35 billion (+41 per cent from the €20.6 billion last year), both in the process of domestic consolidation and in transactions abroad, mainly in the US and in South America. Again for this year interest in the Italian market will continue: for all analysts, the expected trend for 2019 is positive. Also for the current year an important trend worth mentioning, in the negotiation of agreements for mergers and acquisitions, concerns warranty and indemnity insurance for transaction liability. The adoption of this kind of insurance is spreading more and more, and increased in the past year, both in domestic and cross-border transactions. Warranty and indemnity insurance provides protection against losses suffered by the buyer in the event of breach of the seller’s warranties in an MA contract. Despite a thorough due diligence activity, unknown risks may remain, seriously affecting the value of the new company or the company acquired. Warranty insurance provides financial protection against this type of risk. There are two kinds of warranty and indemnity policies. Seller-side policy A seller-side policy is constructed as third-party insurance. The policy- holder is the seller. By means of this policy the seller ensures that any compensation for damages suffered by the buyer in the event of the breach of the representations and warranties is covered. This type of policy normally has a ‘mirror structure’ because its terms and conditions guaranteed, its ceiling and the period of coverage coincide with the representations and warranties, the amount of the contractual liability limit negotiated between the parties and the period provided for in the purchase agreement. In particular, the seller’s representations and warranties are copied and rewritten in the policy, because they constitute the object of the insurance coverage. Even the definitions in the policy are the same as those in the acquisition or merger agreement. In an acquisition agreement, this type of policy may have some advantages for the seller. First of all, it can help the seller to negotiate a higher price for the target company. It can also avoid the use of fidejussioni (a type of personal guarantee), which are expensive, often hard to find and which transfer the risk to third parties. Furthermore, in a fidejussione contract, article 1950 of the ICC provides for the right of recourse of the guarantor against the principal debtor. Instead, with an insurance policy, in case of losses the insurer has to indemnify the buyer, without any right of recourse against the seller. Generally speaking the policy is usually ‘tailor made’ and based on the specific needs of the parties. A possible negative effect of choosing warranties and indemnities insurance is the fact that the negotiation process may become more cumbersome as it will involve three parties and not just the buyer and the seller. A second issue that may arise, concerns fraud on the part of the seller. In this respect article 1917 of the ICC states that the insurer is not obliged to indemnify the insured when the damages are caused by him or her intentionally. Accordingly, the paradox would arise that in this case, the warranty and indemnity insurance would not cover the most serious case of breach (ie, when the seller fraudulently provides misleading represen- tations and warranties). The buyer-side policy is constructed as a first party insurance (or insurance for damages). The buyer is the policyholder who ensures that he or she has an extra layer of protection compared to that provided in the acquisition agreement, in the event of breach of warranty by the seller. This kind of policy is normally selected when there are limited possibilities of taking legal action to recover damages against the seller. Unlike the seller-side policy, this one does not have the above-mentioned ‘mirror structure’ but normally guarantees higher coverage to buyers (ceiling, duration and conditions) compared to what is provided by the seller in the agreement. For example, it may provide for an extension of the coverage period after that negotiated in the agreement, or a higher ceiling than that warranted by the seller. For this kind of policy, an issue could be the relationship between the duration of the seller’s representations and warranties and the period of the warranty and indemnity insurance coverage. According to Supreme Court ruling No. 16963 of 24 July 2014, the representations and warranties constitute an ancillary performance (prestazione), different from the case of warranties for defects that the seller must provide in a sale contract pursuant to article 1495 of the ICC. According to this article, the buyer loses the right to the warranty against defects when they are not reported by the seller within eight days of their discovery, and, in any event, within one year. The represen- tations and warranties, instead, as they are another type of warranty, are not subject to these short terms, but to the 10-year ordinary limita- tion period, provided by article 2946 of the ICC. The issue arises because insurance companies normally used to provide coverage for up to a maximum of seven years, and not for up to the 10-year limitation period. Accordingly, there could be an uncovered three-year period. Timing Finally, it normally takes about three weeks for the insurance policy to be issued, but when the insurance company has been involved from the very beginning of the negotiations, it is possible for the policy to be executed on the day of signing or on the closing date. Fiorella Federica Alvino f.alvino@nmlex.it Foro Buonaparte 70 20121 Milan Italy Tel: +39 02 6575181 Fax: +39 02 6570013 www.nunziantemagrone.it © Law Business Research 2019
- 118. Public MA118 Japan Sho Awayaand Yushi Hegawa Nagashima Ohno Tsunematsu STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Among various forms of business combinations available under Japanese law, the following methods are most commonly used: • acquisition of outstanding shares through a tender offer (followed by a second-step squeeze-out process in case of an acquisition of full control); • merger (simple merger or triangular merger); • share exchange (simple share exchange or triangular share exchange); • joint share transfer; and • third-party allotment. Acquisition of outstanding shares is a straightforward sale and purchase of shares of a public company between its shareholder (as seller) and the purchaser. Owing to mandatory tender offer requirements (as discussed in greater detail in succeeding questions), acquisition of outstanding shares of a listed company that represent a controlling interest is gener- ally required to be conducted through a tender offer. Cash consideration is commonly used in a tender offer in order to avoid unfavourable tax implications on the seller shareholders that result from payment of non- cash considerations (eg, shares of the acquiring company or another company in the cases of exchange offers). In addition, exchange offers (ie, use of the acquirer’s shares as consideration in a tender offer) are rare due to certain onerous requirements under the Company Law (Law No. 86 of 2005, as amended) (the Company Law). Such onerous requirements under the Company Law include (i) the need for a special shareholder’s approval of the acquirer for issuance of the shares (which will be used as consideration for the share acquisition) at a preferential price, which may be triggered owing to the price premium given to the seller, and (ii) other requirements applicable to an in-kind contribution. Requirements applicable to an in-kind contribution consist of a mandatory investigation by a court-appointed inspector, and the potential exposure of the sellers and the acquirer’s directors to a liability to indemnify the acquiring company for any substantial shortfalls in the value of the contributed asset (ie, shares of the target company) vis-à-vis the amount of such asset as determined by the acquiring company upon its decision to issue its shares in exchange for such in-kind contribution. While there are certain exemptions with respect to the requirement to go through an investigation by a court-appointed inspector, the risk of indemnifica- tion liability cannot be fully eliminated. Notably, an amendment to the Act on Strengthening Industrial Competitiveness (Law No. 98 of 2013, as amended) (the ASIC) was introduced in 2018 with an aim to provide acquirers with more flexibility in the use of share considerations with respect to takeovers of both public and private companies. The amended ASIC provides for a mechanism under which an acquiring company may apply for an approval of a ‘business restructuring plan’ by the Minister of Economy, Trade and Industry and other competent ministers. Once the business restructuring plan is approved, both the requirement for investigation by a court-appointed inspector and the statutory liability of sellers and the acquirer’s directors to indemnify the acquiring company as discussed above will be exempted by operation of the ASIC. Further, the need for a special shareholders’ approval of the acquiring company will also be exempted if the number of shares issued by the acquiring company as consideration is no more than 20 per cent of the outstanding shares, and no objection is made by shareholders holding voting rights above a certain threshold during a two-week window following a public announcement (or individual notifications to shareholders) of the share issuance by the acquiring company. Although we have not seen any acquisition of a Japanese publicly listed company using the special treat- ments under the amended ASIC as of February 2019, it is expected that the amended ASIC will stimulate the use of exchange offers in Japan. Merger is a transaction between two or more companies whereby such companies merge with each other resulting in either one of the companies surviving (absorption type merger) or one new company being formed (incorporation type merger). Generally, shares of the merged company are exchanged for the shares of the surviving company or the newly formed company. Unlike in certain jurisdictions, such as the United States, a ‘reverse’ triangular merger is not feasible under Japanese Law because the Company Law does not allow merging parties to convert or otherwise affect the shares held by the shareholders of the surviving company by operation of the merger. Although the form of merger consideration is not limited to shares of the acquiring company and the Company Law allows other forms of considerations including cash, bonds, share acquisition rights and other assets, shares of the acquiring company (or its parent) are typically used to avoid certain tax implications resulting from failing to meet the criteria of a tax-qualified merger (see question 18 for further details). On the other hand, trian- gular merger is allowed, and practically not unprecedented. Share exchange is a transaction defined and governed by the Company Law, whereby one company becomes the 100 per cent share- holder of the other company. As in the case of a merger, due to tax implications, shares of the acquired company are typically exchanged for the shares of the acquiring company or its parent company. Share transfer is also a transaction defined and governed by the Company Law, whereby an existing company (or, in the case of a ‘joint’ share transfer, two or more companies) form a new parent company and become its wholly owned subsidiary. By operation of a share transfer, the shares of the existing company are exchanged for the shares of the to-be-formed parent company (or a combination of shares and bonds or share acquisition rights of such company). Accordingly, a joint share transfer allows the combining parties to combine under a new joint holding company while maintaining the corporate existence of the respective parties, which is a feature that gives comfort to parties in a ‘merger of equals’. © Law Business Research 2019
- 119. Nagashima Ohno Tsunematsu Japan www.lexology.com/gtdt 119 Third-party allotment allows the purchaser to undertake newly issued shares (including treasury shares). This is another way to achieve a business combination, particularly if the acquirer intends to acquire not all but a substantial portion of the shares in the target company. There are other types of business combinations generally avail- able in Japan, including company splits and business transfers, but they are not suitable for acquisition or combination involving the entire busi- nesses of a publicly listed company. Instead, they are frequently used to transfer a part of a company’s businesses (or in a distressed situation). For this reason, this chapter will not cover company splits and busi- ness transfers, and will focus on the five types of business combinations mentioned above. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The most important law governing business combinations is the Company Law. In addition, the following laws and regulations are also relevant: • the Financial Instruments and Exchange Law (Law No. 25 of 1948, as amended) (the FIE Law); • theCommercialRegistrationLaw(LawNo.125of1963,asamended); • the Law Concerning Prohibition on Private Monopoly and Preservation of Fair Competition (Law No. 54 of 1947, as amended) (the Anti-monopoly Law); • the Foreign Exchange and Foreign Trade Law (Law No. 228 of 1949, as amended) (the FEFT Law); and • the ASIC (see questions 1 and 18 for further details). Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In a share acquisition through a tender offer, the acquiring party may, but is not required to, conclude an agreement with one or more sellers who agree to tender their shares in the tender offer. Although, in theory, parties are free to choose any law as the governing law of a transaction agreement, Japanese law is usually the governing law of these agree- ments. In some instances, particularly when the purpose of the tender offer is to form a capital alliance (ie, the target company remains public), the acquirer and the target company conclude a separate agreement that sets out the terms of the alliance as well as the target board’s commitment to endorse the tender offer. In a buyout transaction, it is less common for the acquirer and the target company to enter into such agreement, although the acquiring company and the target’s board usually negotiate the terms of the tender offer (in particular the tender offer price) and the acquiring company launches the tender offer only after confirming that the board of the target company resolved to endorse and recommend its shareholders to tender their shares in, the tender offer. On the other hand, mergers, share exchanges and joint share transfers are arrangements strictly governed by the Company Law. The Company Law requires the parties to such arrangement to conclude an agreement (or, in the case of a joint share transfer, a plan of share transfer) that satisfies relevant requirements under the Company Law. For this purpose, it is not uncommon for parties to enter into a simple agreement, with provisions limited to those that are statutorily required, alongside a separate agreement with more detailed terms and condi- tions regarding the combination (such as reps and warranties). Because the terms of these arrangements are subject to the requirements under the Company Law, they are governed by Japanese law. In case of a third-party allotment, the acquiring party and the target company typically conclude an agreement governing the transaction. Because the Company Law governs the allotment process, such agree- ment is usually governed by Japanese law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? FIE Law Tender Offer Regulations The FIE Law provides certain requirements specific to tender offers as well as disclosure requirements relevant to tender offers, acquisition and holding of block shares, and business combinations. It also provides for insider trading regulations, which are important in practice but are not covered by this chapter. Under the FIE Law, a tender offer is mandatory for a purchase or purchases of shares of publicly traded companies (or other companies that are otherwise subject to continuous disclosure requirements under the FIE Law), provided that such purchase meets certain criteria and does not fall under any of the statutory exemptions. Without going into the complex details of each of such criteria and exemptions as provided under the FIE Law and pertinent regulations, a mandatory tender offer is typically required if any of the following criteria is met: • as a result of purchases from more than 10 sellers via off-market transactions within a period of 61 days or less, the ‘percentage ownership’ of the purchaser (ie, percentage of voting rights held by the purchaser and certain associated persons) in the target company will exceed 5 per cent; • as a result of purchases from any number of sellers via off-market transactions or certain trade sale-type market transactions, the percentage ownership of the purchaser in the target company will exceed one-third; or • as a result of a combination of (i) off-market transactions or certain trade sale-type market transactions involving shares in the target company representing 5 per cent of the total voting rights, and (ii) other acquisitions of shares (including subscription of newly issued shares), to be implemented within a three-month period from each other, the voting rights of the purchaser in the target company will increase by more than 10 per cent, and the percentage ownership of the purchaser will exceed one-third of the total voting rights. Detailed rules are provided in the FIE Law for the purpose of deter- mining the ‘percentage ownership’ of the purchaser, wherein the shares owned by ‘special associated persons’ as statutorily defined – such as subsidiaries and any third party who has entered into a voting agree- ment with the purchaser – are aggregated with shares directly held by the purchaser. The purchaser is generally allowed to set a cap on the percentage of shares that it will acquire as a result of the tender offer (which means that if the number of shares tendered exceeds the cap, the tendered shares will be purchased on a pro-rata basis); however, if the purchaser intends to purchase shares representing two-thirds or more of the total voting rights of the target company, it is required to purchase all the shares tendered (ie, no cap is allowed). It is also worth noting that it is not permissible to close an off- market purchase that triggers the above-mentioned criteria and then launch a subsequent tender offer; instead, the acquirer must implement the first off-market purchase through a tender offer in such case. © Law Business Research 2019
- 120. Japan Nagashima Ohno Tsunematsu Public MA 2019120 Where a tender offer is required, the purchaser (ie, the offeror) must, at the time of commencing the tender offer, file a tender offer registration statement with the local financial bureau and make a public announcement, both in accordance with the applicable disclosure requirements under the FIE Law. Information to be disclosed includes the purchase price, the tender offer period (from 20 to 60 business days), conditions to the tender offer, the outline of the business plan after the completion of the tender offer, the general information of the purchaser, etc, and the sources of the funds to finance the tender offer. The target company is also required to file a report on its opinion on the tender offer in response to a tender offer. Filings for issuance of shares The FIE Law requires public companies to file a securities registration statement or a shelf registration statement in order to implement a primary or secondary offering of its shares in Japan. Therefore, such filing is required to implement a third-party allotment except where no offering activity takes place in Japan. Also, in the improbable scenario that the securities to be distrib- uted as consideration for a merger, share exchange or share transfer are not subject to disclosure requirements under the FIE Law, the FIE Law requires prior submission of a securities registration statement if the target company in a merger, share exchange or share transfer transaction is a listed company. Other disclosure regulations Apart from the regulations discussed above, the FIE Law also provides for other disclosure requirements. If a party acquires more than 5 per cent of the shares of a publicly traded company (namely, a company listed on a stock exchange or registered for trading over the counter), such party is required to file a large shareholding report within five business days of the acquisition. An increase or decrease of 1 per cent or more in the shareholding ratio of the purchaser will trigger an obligation to file an amendment report (see question 6). Further, the FIE Law requires filing of an extraordinary report in the event, inter alia, a listed company or any other company subject to continuous disclosure requirements under the FIE Law (which may be the acquiring company or the target company) decides to: • implement a merger, share exchange or share transfer; • engage in, or upon the occurrence of, an event that results in a change in its parent company or major shareholder with 10 per cent or more voting rights, or its major subsidiary that meets certain quantitative thresholds; or • acquire a subsidiary for a consideration (including fees and expenses pertaining to such acquisition) exceeding a threshold amount determined based on the purchasing company’s net asset. Disclosure requirements under the rules of the Tokyo Stock Exchange also require timely disclosure (ie, a press release) in each of such situations. Anti-monopoly Law Under the Anti-monopoly Law, subject to certain exceptions, if a company acquires shares (including by share purchase or by share exchange) in another Japanese or foreign company which, together with its subsidiaries, meets a certain amount of sales in Japan, and after the acquisition, the percentage ownership of the company crosses the voting right threshold of 20 per cent or 50 per cent, such company must file a prior notification with the Japan Fair Trade Commission (JFTC). Further, under the Anti-monopoly Law, subject to certain threshold requirements and exceptions, a company implementing a merger or companies jointly implementing a share transfer must file a prior notifi- cation of such transaction with the JFTC. If a filing is required, there is a 30-day waiting period (which may be terminated earlier by discretion of the JFTC upon petition by the filing party). FEFT Law Under the FEFT Law, a foreign investor may be required to file either a prior notification or an ex post facto report with the competent minis- ters through the Bank of Japan when it acquires shares of a Japanese company (see question 15). In the event a prior notification is required, there is a 30-day waiting period (which is normally terminated within two-weeks or less after receipt of such notification, but could be extended to up to five months if the competent ministers deems neces- sary to investigate the notified transaction). Stamp duty and other governmental fees No stamp duty or other governmental fee is imposed on a share acqui- sition agreement, share exchange agreement, or share transfer plan. A stamp duty of ¥40,000 is imposed on a merger agreement. A business combination often involves amendments to the company’s commercial registration, which are subject to various registration taxes, the amounts of which depend on the matters affected. For example, when new shares (as opposed to treasury shares) are issued by the target company in a third party allotment, amendment to the commercial registration to reflect the incidental increase in its stated capital will require a regis- tration tax of an amount equivalent to 0.7 per cent of the increase in the amount of stated capital. There are no governmental fees charged for a tender offer; however, note that a substantial amount of fees are charged by the tender offer agent (typically an investment bank), which is required to be engaged by the tender offeror under the FIE Law. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? As discussed in question 4, there are five categories of relevant, major disclosure requirements. The first is a public announcement required by the rules of the relevant stock exchange. The second to the fifth are the filing of an extraordinary report, the filing of a large shareholding report, the filing of a tender offer registration statement (for a tender offer), and the filing of a securities registration statement (for a third-party allotment or share-consideration merger, share exchange or joint share transfer) under the FIE Law. Details of the ‘large shareholding report’ can be found in question 6. All information disclosed by these means will become public information. The items required to be disclosed include an outline of parties, the outline of transactions, the reason for the trans- action and the future prospects. Details of these required disclosures differ according to the type of business combination or acquisition. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Under the FIE Law, a party that becomes a more than 5 per cent share- holder of a public company (based on the number of shares rather than voting rights) is required to file a large shareholding report. In the report, such party must disclose its identity, as well as the number of shares it owns, the share acquisition and disposition history for the past 60 days, the purpose of acquisition, any material agreement relating to the shares (such as a security agreement), any financing source for acquisition funding and the identities of other cooperating share- holders. In addition, in case of sales of a material number of shares that © Law Business Research 2019
- 121. Nagashima Ohno Tsunematsu Japan www.lexology.com/gtdt 121 results in (i) a shareholding that is less than one half of the maximum shareholding percentage during the preceding 60-day period and (ii) a decrease in shareholding of more than 5 per cent compared to the maximum shareholding percentage, disclosure of the identity of the purchaser and the amount of consideration is required. An increase or decrease of one 1 per cent or more in the shareholding ratio triggers an obligation to file an amendment report. In addition, the FIE Law requires a direct or indirect parent company of publicly traded companies to submit a report on its status within three months of the end of its fiscal year, except where the parent company itself is subject to the continuous disclosure obligations under the FIE Law. The report must contain information concerning its major shareholders, officers and financial results, and shall be made public. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Under the Company Law, directors of a company (whether public or non-public) owe a fiduciary duty to the company. While this duty has historically been distinguished from a duty owed to the shareholders, the academia suggests that directors’ duties include a duty to achieve fairness among shareholders in a situation where interests of the shareholders conflict among themselves (which is typically seen in a management buyout (MBO) situation), and recent court decisions related to MBOs affirm that directors may be liable to shareholders if a director pursues its own or a third party’s interest in an MBO or fails to prevent other directors from carrying out such conduct. The Company Law also provides that the directors of a company shall be liable to third parties (including shareholders and creditors) who suffer any damage owing to wilful misconduct or gross negligence of such directors in the course of performing their duties as directors. Under Japanese law, duties of controlling shareholders are not recognised. However, the Company Law provides that if a materially unfair resolution is adopted at a general meeting of shareholders as a result of affirmative votes cast by one or more interested shareholders, such resolution may be cancelled by legal action, which can be initiated by any shareholder, director or corporate auditor, etc. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? No shareholder approval is required in case of acquisition of shares in a public company through a tender offer. As a matter of course, each shareholder has the choice not to sell its shares (although it may be eventually squeezed out as discussed in question 14). Mergers, share exchanges, and share transfers must be approved by a super-majority resolution of the relevant parties. In small mergers or share exchanges, which fall below certain threshold requirements, shareholders’ approval is not required. Also, if one of the parties to a merger or share exchange is a parent with 90 per cent or more voting rights of another party to such merger or share exchange (ie, a short- form merger), shareholder approval at the subsidiary party level is not required. Dissenting shareholders have appraisal rights, except for (i) shareholders of a company whose shareholder approval is not required because it qualifies as a small merger, and (ii) the parent entity in case of a short-form merger. Under the Company Law, a third-party allotment does not require a shareholder approval unless the allotment is made at a preferential price (in which case a super-majority resolution at the target’s share- holders meeting is required). However, the rules of the Tokyo Stock Exchange require that, in the event the number of new shares to be issued by a listed company is equal to or more than 25 per cent of the number of outstanding shares, such company must either (i) obtain an opinion from an independent person (such as a third-party committee, outside director or outside statutory auditor) regarding the necessity and adequacy of the offering, or (ii) obtain a shareholder approval. In addition, an amendment to the Company Law that came into effect in 2015 introduced a new requirement that, in the event of a third party allotment that results in creating a controlling shareholder (ie, a share- holder holding, directly or indirectly through its subsidiaries, a majority of the entire voting rights), a simple majority shareholder approval at the company’s shareholders’ meeting would be required if share- holders holding 10 per cent or more of the total voting rights provide the company with a notice of objection during a two-week window following disclosure of the plan of the third-party allotment. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? In Japan, the number of hostile transactions is gradually increasing, but the number of those which succeeded remains very small, partly owing to the negative perception associated with hostile transactions in the market. Since 2005, a number of listed companies have adopted anti-hostile takeover plans ranging from ‘poison pills’ to simple declara- tions by management that it will take anti-hostile-takeover measures whenever a hostile takeover is launched that is not in accordance with the best interests of the company and its shareholders. In 2007, the Supreme Court rendered a decision upholding the validity of the anti- hostile takeover plans using poison pills. It should also be noted that while the acquirer is not able to conduct a due diligence investigation of the target in the case of a hostile takeover, disclosure of publicly traded companies in Japan is sometimes not necessarily sufficient compared to other jurisdictions such as the United States (for example, contents of material agreements are normally not disclosed). Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Break-up fees and reverse break-up fees provided in the definitive agree- ments are generally enforceable in Japan, as long as the amount of the fee is reasonable. If the amount of the break-up fee or the reverse break- up fee is unreasonably high, there is a possibility that a court might hold that the arrangement is against the public interest and declare it null and void. Also, the decision of a target company’s directors to agree to an unreasonably high break-up fee may constitute a breach of their fiduciary duty. In practice, however, break-up fees and reverse break-up fees are unusual in the context of mergers and acquisitions involving a Japanese public company as the target. Some deals do involve certain deal protec- tion mechanisms, but typically the parties agree to no-talk or no-shop clauses with a simple fiduciary out exception without any break-up fees. Break-up fee arrangements for exclusive negotiation obliga- tions contained in a letter of intent or memorandum of understanding (ie, agreements concluded at a premature stage of the negotiation towards a definitive agreement) are also generally enforceable, though © Law Business Research 2019
- 122. Japan Nagashima Ohno Tsunematsu Public MA 2019122 such arrangements are normally limited to the recovery of costs and expenses. It should be noted that there is a high-profile transaction case where the Japanese courts denied a request for injunctive relief based on a letter of intent with binding exclusive negotiation provisions on the ground that monetary compensation may be sufficient remedy. In addition, the target company in an MA transaction should generally avoid offering its assets as collateral to secure acquisition finance for the acquirer in view of the interests of minority shareholders unless and until the target company becomes 100 per cent owned by the acquirer as a result of the transaction. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Other than in the two cases mentioned in the question and possible intervention in cross-border transactions under the FEFT Law (which is based on national security as well as other concerns), governmental agencies in Japan have no means of restricting the completion of busi- ness combinations. It should be noted, however, that in many cases, business combinations require commercial registration with the compe- tent legal affairs bureau. Parties wishing to implement atypical business combinations may encounter objections from the officials of the legal affairs bureau when registering such atypical business combinations and should therefore consult with the legal affairs bureau in advance. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Conditions to settling a tender offer are statutorily limited to the following: (i) if the number of shares tendered is less than a speci- fied minimum number, no purchase of shares will be made; (ii) if the number of shares tendered exceeds a specified maximum number (if such specified maximum number is set, it must be less than two-thirds), purchase of shares will be on a pro rata basis; and (iii) a tender offer can be withdrawn upon occurrence of a ‘material adverse change’, which is statutorily defined. Financing can be conditional upon successful completion of the tender offer. However, such financing must be on a firm commitment- basis and thus, a tender offer cannot be conditioned upon the availability of financing. It is permissible to publicly disclose a plan to commence a tender offer for a public company subject to satisfaction of certain condi- tions. However, in order to avoid violating restrictions on ‘spreading of rumours’ and ‘market manipulation’ under the FIE Law, the conditions are generally limited to those that are reasonably necessary before commencing a tender offer, such as the obtaining of competition law clearances. Business combinations, other than in the form of a tender offer, can generally be subject to agreed-upon conditions. However, in practice, business combinations via merger, share exchange, joint share transfer or third-party allotment involving publicly traded companies, are rarely subject to many conditions other than necessary shareholder approval, regulatory approval including competition law clearance and closing of agreed-upon ancillary transactions. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? In the event the purchaser in a tender offer needs to obtain financing, it is necessary to attach a document to the tender offer registration statement evidencing a firm commitment by a lender to finance the transaction. Such document should include substantial conditions prec- edent to the drawdown of the loan, as well as the representations and warranties if they are referred to in such conditions. Because the law does not allow a tender offer to be made conditional on the availability of financing (as mentioned in question 12), in theory, it is possible for the buyer to default if a condition precedent to the drawdown of the loan is not satisfied. There is no specific rule on how to deal with the financing for busi- ness combinations other than in the form of a tender offer; parties enjoy a wide discretion in this regard. Further, there is no typical obligation on the seller to assist in the buyer’s financing. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? Under the Company Law, acquirers are allowed to squeeze out minority shareholders of a public company. While there are a number of options available under the Company Law for implementing a squeeze-out transaction using cash as the consideration, the most common approach is a two-step transaction consisting of (i) a front-end tender offer and (ii) a back-end squeeze-out process (most commonly by way of either a ‘share consolidation’ or a ‘demand for sale of share, etc’). Although it is legally permissible to complete a cash-out transaction without launching a tender offer by way of a straightforward cash-out merger or cash-out share exchange, a merger or share exchange is rarely used in a cash-out because of tax implications as discussed in the response to question 18. Under a two-step approach, the back-end squeeze-out process is most commonly implemented by way of a share consolidation. Through a share consolidation, a considerable number of shares of the target company will be consolidated into one share, leaving all shareholders other than the acquirers with only a fraction of a single share (ie, less than one share). Subsequent to a tax reform in 2017 as discussed in more details in the response to question 18, cash merger has become another practical option that may be used instead of a share consolidation. If, as a result of the front-end tender offer, the acquirer and its wholly owned subsidiaries successfully acquire shares representing 90 per cent or more of the total voting rights in the target company, the acquirer usually uses a ‘demand for sale of share, etc’, which is a fast-track procedure introduced by an amendment to the Company Law, which came into effect on 1 May 2015. In case of a share consolidation, it normally takes at least three to four weeks for a public company to call a shareholders’ meeting after settlement of the tender offer. Also, the effective date of the share consolidation is usually set at a date that is about a month after the date of the shareholders’ meeting in order to complete the delisting procedure of the stock exchange. After the effective date of the share consolidation, on which date all minority shareholders will be squeezed out, and subject to obtaining a court approval, either the acquirer or the target company pay cash consideration to the minority shareholders that have been squeezed out in exchange for the fractions of a share left © Law Business Research 2019
- 123. Nagashima Ohno Tsunematsu Japan www.lexology.com/gtdt 123 in the hand of such minority shareholders. The amount of considera- tion paid will be calculated using the tender offer price of the front-end tender offer. A cash-merger also requires a shareholder approval, and it also requires a creditor protection process, as discussed in question 16. When a ‘demand for sale of share, etc’ is available, the acquirer is allowed to forcefully purchase all shares held by the minority shareholders without any shareholder approval; this purchase may be implemented with the target company’s board approval and notifi- cation to the minority shareholders. Absent the need for convening a shareholders’ meeting, this process allows the acquirer to complete the squeeze out in approximately 40 days (during which the target company will completes the delisting procedure of the stock exchange) following the settlement of the front-end tender offer. It should also be noted that a ‘demand for sale of share, etc’ and a cash merger entitle the acquirer to forcefully purchase all share acqui- sition rights (ie, stock options) issued by the target company. On the other hand, share acquisition rights cannot be forcefully purchased in the event share consolidation is used as the back-end squeeze-out process and it will require case-by-case consideration on how to deal with such outstanding share acquisition rights. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Business combinations resulting in a foreign investor holding 10 per cent or more of the shares of a Japanese publicly traded company will gener- ally require a filing with the relevant ministries through the Bank of Japan under the FEFT Law (note that a foreign investor for the purposes of the FEFT Law includes a Japanese subsidiary or a branch of a foreign company.). This filing is on an ex post facto basis in most cases. However, where the target company is engaged in a certain category of business that is important to national security or other public interest (for example, military, aerospace, fishery, agriculture), prior notification must be filed. It should also be noted that, in order to implement a merger, share exchange or share transfer, parties to these business transactions must be Japanese companies. However, triangular mergers or trian- gular share exchanges allow foreign companies to effect a merger in Japan through a Japanese subsidiary, whereby the shares of the foreign parent company are offered to the shareholders of the target company upon the merger or share exchange. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? As discussed in the response to question 4, certain waiting periods apply if pre-acquisition filings are required under the Anti-monopoly Law or the FEFT Law. Further, parties to a merger (and certain other types of business combination transactions that involve transfer of debts) must undertake a creditor protection procedure, which generally involves public and individual notice requirements and observance of a one month waiting period. The parties may not consummate these transactions until the expiration of this waiting period. Also, a third-party allotment cannot be consummated until the lapse of a 15-day waiting period following the filing of a securities registration statement (or any amendment thereto). Such waiting period may be shortened to seven days in certain circumstances where the issuer has continued to file its securities report for a year or more. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Business combinations involving target companies in regulated indus- tries (for example, banks, securities firms, insurance companies and broadcasting companies) are subject to certain regulatory approval processes under the relevant industry-specific laws and regulations. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Straightforward share acquisitions (including by tender offer) are taxable transactions and the seller will be subject to income taxation for any gains. Sellers are not entitled to tax deferral even if the purchaser’s shares are offered as consideration for such acquisition. It has been considered that this is the primary reason why exchange offer is almost unprecedented in Japan, and the Tax Reform in 2018 (as discussed below), combined with the amendment to the ASIC (as discussed in question 1), is expected to open a practical pathway to the use of exchange offers. If the seller of shares of a Japanese company in share acquisitions is not a resident of Japan, it could be subject to Japanese income taxation for the capital gains; however, an exemption may be available depending on the percentage of its historical ownership of the shares and the number of shares sold or the applicable tax treaty. Statutory business combination transactions often used in combi- nations or acquisitions of a public company (namely, merger, share exchange and joint share transfer) can be implemented without income taxation at the time of the transaction (in substance, tax deferral) if these transactions satisfy the requirements for tax-qualified restructuring. Broadly speaking, such a transaction may satisfy the requirements for ‘tax-qualified restructuring’ if no consideration other than shares of the party taking over the business (including the shares of a parent company owning the entire shares of the purchasing company in the case of trian- gular mergers) is paid out (accordingly, cash-out for squeeze-out will disqualify the transaction), and: (i) it is implemented between a parent and a wholly owned subsidiary or between wholly owned subsidiaries; (ii) it is implemented between a parent and a subsidiary or between subsidiaries, where 80 per cent or more of the employees continue to be engaged in the business concerned and the primary busi- nesses are continued by the surviving entity (in case of a merger), or the wholly owned subsidiary (in case of a share exchange or joint share transfer) (such entities respectively, the surviving entity) or its successor entity if a tax-qualified merger is planned to be consum- mated by the surviving entity after the business combination; or (iii) it is implemented to perform a ‘joint operation’, where: • the businesses of the parties are related to each other, 80 per cent or more of the employees continue to be engaged in the business concerned and the primary businesses are continued by the surviving entity or its successor entity if a tax-qualified merger is planned to be consummated by the surviving entity after the business combination; • the ratio of the size of the businesses of the parties is within a range of 1:5 or the key management members remain the same; and • with certain exceptions, where the ownership structure resulting from the transaction is expected to continue within the applicable parameters. © Law Business Research 2019
- 124. Japan Nagashima Ohno Tsunematsu Public MA 2019124 In the case of a ‘tax-qualified’ merger, share exchange or joint share transfer, neither the target company nor its shareholders (ie, the sellers) are subject to income taxation at the time of the transaction and their tax bases for the relevant shares or assets remain intact after the transaction (thus, tax deferral). However, a cash-out transaction is not tax qualified, meaning that even the target company must recognise taxable gains, if any, from the transaction because its assets (including goodwill associated with the business) must be either deemed to have been sold or revalued on a mark-to-market-value basis for tax purposes. Under the ‘group-based corporate taxation’ regime, business combination or other transactions taking place between a parent and a wholly owned subsidiary or between wholly owned subsidiaries (both Japanese companies) can in general be implemented without income taxation at the time of the transaction (in substance, tax deferral), regardless of whether the transaction is a statutory business combina- tion or is a tax-qualified restructuring as mentioned above. The 2017 Tax Reform has adopted some significant changes to the rules mentioned above relating to the tax-free reorganisation. Among other items, a cash-out merger or share exchange will qualify as a tax-free reorganisation (hence no immediate taxation upon the target company), if the buyer already owns at least two-thirds of the shares of the target company (ie, one-third of the shareholders may be cashed out). Also, certain squeeze-out transactions (as discussed in section 14) will be captured by the tax-free reorganisation rules; so the target company will be subject to income taxation as a result of the squeeze- out unless certain key requirements for the tax-free reorganisation are met. Further, a spin-off transaction (where a Japanese company will distribute the shares of its wholly owned subsidiary to its shareholders on a pro rata basis) will also be designated as a tax-free reorganisation. The 2018 Tax Reform provided for a tax deferral treatment to sellers in certain qualifying exchange offers. The exchange offer must be conducted in accordance with a ‘plan of special business restruc- turing,’ which must be approved by the competent minister under the ASIC as discussed in question 1. It should be noted, however, that, among various other conditions, an acquirer that is a non-Japanese company cannot use the tax deferral treatment, since the ‘plan of special business restructuring’ may only be approved when a Japanese joint stock company plans to use its own shares as the sole considera- tion for acquiring controlling interests in a target entity. The 2019 Tax Reform is expected to effectively expand the scope of tax-qualified triangular mergers and other business combinations, by designating as a qualifying share consideration shares of an indirect parent company, in addition to shares of the direct parent company, owning the entire shares of the acquiring company. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? In general, employment relationships and relevant employee benefits at Japanese companies are primarily regulated by the internal rules (Work Rules) established by the employer company and the applicable statutory provisions. It is rare that a detailed employment contract is signed. In the case of share acquisitions, share exchanges and share transfers, since there is no change in the status of the employer company, employment relationships and employee benefits will remain unchanged after the transaction. In the case of mergers, the employment relationships and employee benefits will automatically be transferred to the surviving or succeeding company. Therefore, the Work Rules and employment bene- fits of the merged company will continue to apply to the ex-employees of the merged company, even after the merger, unless appropriate arrangements for integration are made. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? In the context of insolvency proceedings, acquirers should be careful in setting the timing of an acquisition (whether before the adoption of a restructuring plan or as a part of the plan) and identifying the party having authority to approve the acquisition (administrator, trustee, supervisor or court). It should also be noted that if the transaction is of the type in which an administrator or trustee is appointed in statutory insolvency proceedings, the transaction will have to be implemented on an ‘as is’ basis without any meaningful warranties or indemnities regarding the quality of the business. If the restructuring is under way as a private collective settlement outside the realm of statutory insolvency proceedings, the acquirer should possibly expect a difficult negotiation with the banks or other major creditors. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Bribery of officials is generally prohibited under Japanese law, but this prohibition is not specific to bribery made in connection with business combinations or acquisitions. That is, bribery of foreign public officials with regard to an international commercial transaction for the purpose of gaining illicit profits is prohibited under the Unfair Competition Prevention Act, and individuals who commit this bribery are subject to imprisonment of up to five years or criminal fines of up to ¥5 million or both, and legal persons whose representative, agent, employee or other servant commit this bribery are also subject to criminal fines of up to ¥300 million. Further, bribery of domestic public officials with regard to the officials’ duty is prohibited under the Criminal Code, and those who commit this bribery are subject to imprisonment of up to three years or criminal fines of up to ¥2.5 million or both. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? The MA market in Japan remained active in 2018. A notable trend was the increasing use of purchaser’s shares as consideration in acquisi- tions of foreign target companies. However, it is uncertain whether this trend will continue to be seen in 2019. From a regulatory perspective, substantial revisions to the Company Law are being deliberated upon by the Legislative Council of the Ministry of Justice. On 16 January 2019, the Council adopted an ‘Outline’ for the revisions to the Company Law, following its previous announcement of an interim proposal for these revisions in February 2018. The Outline includes a proposal to introduce a new statutory form of a business combination named ‘share delivery’, under which an acquiring company (that must be a Japanese joint stock company) may © Law Business Research 2019
- 125. Nagashima Ohno Tsunematsu Japan www.lexology.com/gtdt 125 deliver its shares to shareholders of a target company (which also must be a Japanese joint stock company) in exchange for their shares in the target company in a transaction intended to result in the target company becoming a subsidiary of the acquiring company (other than a solely owned subsidiary; this result could be achieved through a conventional share exchange). Many of the procedural aspects of the proposed share delivery are analogous to procedures of a share exchange. Although it is unlikely that these revisions will be enacted during 2019, the revision process warrants close monitoring. Sho Awaya sho_awaya@noandt.com Yushi Hegawa yushi_hegawa@noandt.com JP Tower, 2-7-2 Marunouchi Chiyoda-ku Tokyo 100-7036 Japan Tel: +81 3 6889 7000 Fax: +81 3 6889 8000 www.noandt.com © Law Business Research 2019
- 126. Public MA126 Latvia Gints Vilgertsand Vairis Dmitrijevs Vilgerts STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? There are several forms of combination used in Latvia: • purchase of shares in the target; • purchase of the target’s assets or business; • mergers or demergers; and • acquisition by using a contractual joint venture. Purchase of shares is the most common method of structuring MA deals in Latvia. A purchase of shares is a straightforward way to combine. Less common and more complex is acquisition of the target’s business. In the case of a business transfer both the seller and the acquirer may be liable for all liabilities of the seller associated with the business for a period of five years from the transfer date. No such liability issues arise if an undertaking of an insolvent company is acquired (by way of acquisition during insolvency proceedings). Transfer of assets by banks, insurers or state-controlled entities is subject to special regulations and the same applies to acquisition of shares in these businesses. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? Business combinations are primarily governed by: • the Civil Law, which governs all civil transactions; • the Commercial Law, which governs all company matters including special commercial transactions; • the Competition Law, which deals with merger control and all other competition law areas; • the Group of Companies Law, which deals with company groups, holdings and multilayered company structures; • the Financial Instrument Market Law; • the Law on State and Municipality Owned Shares and Companies; • the Insurance and Reinsurance Law; and • the Credit Institutions Law. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? For private share and asset transactions the parties may choose the governing law. However, some aspects of the transaction are always governed by Latvian law (especially in relation to registration of the shares or real estate transfer as well as other mandatory requirements). For instance, the Commercial Law prescribes what documenta- tion is necessary in case of reorganisation (shareholders’ decisions, reorganisation agreement, auditor’s reports, etc) and what procedures should be followed (always ensuring that the interests of the share- holders and creditors are duly taken into account). In case of a public offer the necessary documentation and information to be included is prescribed by the Financial Instruments Market Law. It is acceptable for a transaction to be subject to non-Latvian law, but owing to its connection with Latvia it might also be necessary to execute local transfer documents. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The Company Register is involved at a certain stage in almost every business combination as it performs, inter alia, registration of share transfers (in case of limited liability companies) and reorganisations, and contains information related to beneficial owners. The standard fees for registration vary from approximately €15 to €350. Share trans- fers in private limited liability companies (SIA) are subject to public notary verification. The costs of verification range from €100 to €1,000. In the event of a merger, the parties have to submit a notice to the Competition Council if the combined turnover of the merger partici- pants during the previous financial year exceeds €35,572,000 or the total market share of the merger participants in any relevant market exceeds 40 per cent. The notification procedure does not apply if there are no more than two merger participants and if their combined turnover during the previous financial year did not exceed €2,134,000. Failure to notify the merger makes it void. In practice, however, the Competition Council has to date issued the post factum permissions for mergers, but imposed the fines for failure to issue timely notification of the merger. The fine is set in the amount of €1,400 per each day of failure to submit the notification to the Competition Council. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The information to be disclosed depends on the type of combination as well as on the type of companies involved in the combination. In the case of private share deals or asset deals no disclosures are gener- ally required. Certain information has to be disclosed in the case of reorganisations and public offers. Companies that have their bonds © Law Business Research 2019
- 127. Vilgerts Latvia www.lexology.com/gtdt 127 or sharespublicly traded are obliged to disclose information in other cases as well. As mentioned above (see question 4) the companies involved in reorganisation are required to make certain filings with the Company Register, namely the Company Register has to be notified on the fact of reorganisation (by, inter alia, filing the reorganisation agreement). This fact also has to be published in the Official Gazette. The companies involved in reorganisation are obliged to duly inform all shareholders and to ensure that all shareholders are provided with an opportunity to review the documents related to organisation. After the reorganisation agreement is approved by the shareholders’ meeting, each company involved in reorganisation has to notify its creditors (as well as publish a notification in the Official Gazette). Public tender offers also require disclosure of certain informa- tion. For instance, within five business days of permission to make the public offer being granted by the Financial Supervision Authority (FSA), information on the offer has to be published in the Official Gazette. Afterwards, the board of the target company is obliged to prepare its opinion (within five business days) on the expressed tender offer. This opinion has to be expressed by means of mass media to ensure that this message reaches as many interested persons as possible. The market organiser as well as the employees of the target company must also be informed about the opinion of the board of directors. Public companies are required to disclose certain information on an ongoing basis. For instance, a listed company is obliged to disclose information that is related to the company or financial instruments issued by it that might materially influence the price of these financial instruments. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? The disclosure requirements for owners are prescribed in the Commercial Law, the Financial Instruments Market Law, the Group of Companies Law and the Law on Insurance and Reinsurance. The general duty of disclosure of the beneficiaries applies to non-EU shareholders. Pursuant to the requirements of the Commercial Law the companies are required to disclose information to the Company Register (this information is not public) about their beneficial owners after this information is received from the shareholders. A shareholder who holds or acquires at least 25 per cent of the shares in his or her name but for the benefit of another person is obliged to disclose who the beneficiary (natural person) is. Specific duty of disclosure is incorporated in the Financial Instruments Market Law and the Group of Companies Law, which require disclosure when the shareholding reaches a certain level. In accordance with the Group of Companies Law, the shareholder should inform the company about the changes in the shareholding. Thereafter, the company must submit a notice in the Company Register if the shareholding of the particular shareholder surpasses or falls below 10, 25, 50, 75 or 90 per cent. A shareholder is also obliged to notify the Company Register in the event a qualifying shareholding is acquired. The Financial Instruments Market Law requires a notification to the company and the FSA when the percentage of voting rights of a share- holder (in a listed public company) reaches, exceeds or falls below 5, 10, 15, 20, 25, 30, 50 or 75 (and 90 or 95 in case the domicile of the company is Latvia) per cent. The Insurance and Reinsurance Law requires such notification when the percentage of voting rights of a shareholder reaches, exceeds or falls below 10, 20, 33 and 50 per cent. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? There is a general obligation of the management and supervisory board members to act with the due care of an honest and diligent owner and they are jointly liable for the losses caused to the company. This general obligation also serves as protection for the creditors and minority shareholders because creditors and minority shareholders may submit a claim against the management and supervisory board members for losses caused due to the breach of this general obliga- tion. Claims against board members of insolvent companies are often brought by insolvency administrators. The Insolvency Law was recently amended increasing the liability of the management board members. It is now prescribed that in case the accounting documents (sufficient to assess the company’s financial standing during the previous three years) are not handed over to the insolvency administrator the manage- ment board members might be personally liable for the whole amount of the outstanding debts towards the company’s creditors. There are also more specific obligations of directors. As already mentioned, the board of directors of the listed target company is required to prepare an opinion on the proposed public offer. It is prohib- ited for the board of directors to impede the process of the public offer by any acts or inaction. In case of reorganisation the board of direc- tors of the company to be dissolved or acquired is obliged to inform the shareholders and the acquiring company of all material changes in the financial standing of the company before the authority of the respective board of directors is terminated. The controlling shareholders also have some duties. A shareholder who is a legal person and holds at least 90 per cent of the shares is obliged to purchase the minority shareholder’s shares if the minority shareholder so requests. If the respective parties cannot reach an agreement on the share price, it is determined by the court. The control- ling shareholder must also refrain from exercising such influence on the company that would induce the company to conclude a disadvanta- geous transaction or would cause any other detriment, unless any loss of the company (and in some instances also direct losses of minority shareholders) is compensated. A shareholder in a listed company has to make a mandatory bid for the remaining shares in the company if its ownership reaches more than 30 per cent of the votes (including the ownership of persons acting in concert with such shareholder). Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Initiation of any reorganisation requires a resolution of shareholders. In the case of SIAs, two-thirds of votes (unless the articles prescribe a higher number) are required to pass such resolution. In the case of public limited liability companies (AS), the number is three-quarters (unless the articles prescribe a higher number). Active shareholders will use their right to review the draft documents (among others, the reorganisation agreement, reorganisation prospectus, auditor’s report and financial accounts of the company) and to request the board of directors to provide information related to the draft documents, legal and economic consequences of the reorganisation and other aspects of reorganisation. The shareholders are also entitled to challenge the © Law Business Research 2019
- 128. Latvia Vilgerts Public MA 2019128 validityof the decision of the shareholders’ meeting to initiate reorgani- sation (such decision may be declared invalid if it is adopted in violation of law or the articles of association). The company share transfers may be subject to right of first refusal. In the case of mergers disagreeing minority shareholders may request buyout of their shares. An auditor may be involved to assess the value of the shares. The auditor’s valuation can be challenged in the courts. In addition to mandatory bid offer obligation in case of listed compa- nies, non-listed companies have a similar obligation. Under the Group of Companies Law, if one of the shareholders owns 90 per cent or more shares, the minority shareholders may demand buyout of their shares. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? The laws of the Republic of Latvia do not make any distinction between friendly and hostile transactions, and the same regulatory framework is applicable in both cases. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? The laws of the Republic of Latvia do not contain any special regulation on break-up and reverse break-up fees. The parties are free to include such provisions in their transactions. As already mentioned, it is prohib- ited for the board of directors to impede the process of the public offer by any acts or inaction. It should be noted that there is a general prohibition for the AS to finance, directly or indirectly, acquisition of their own shares. This restriction does not apply to SIA. The court practice in cases when illegal acquisition finance is successfully jeopardised by the creditors or minority shareholders is under development. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? In general, there are no restrictions except for land ownership near country borders and companies owning important infrastructure assets that may require consent of the National Security Council under the National Security Law. In relation to the sale of the state-owned compa- nies, the government of Latvia may impose restrictions or qualification criteria on potential bidders. A natural person may be restricted by a court decision to carry out certain commercial activities or hold certain positions in companies. If the company owns a land plot and the new shareholder is subject to restrictions to acquire the land plot, consent from the local munici- pality is required to allow the target company to keep the land plot in its possession. If this consent is not received, the target company is obligated to sell the land plot within two years (unless there is a further change of shareholding and the new shareholder is not subject to similar restrictions). Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? The laws of the Republic of Latvia provide requirements on what should be included in the offer (price, terms of the offer, procedure for the acceptance of the offer, etc). There are no provisions on the terms of conditional offers. Any deviation from the standard provisions of the law should be discussed and clarified with the FSA. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? There is no special regulation as regards financing for a transaction in the laws of the Republic of Latvia. The parties are free to reflect on the financing method in the transaction documents. Obtaining financing by the buyer may be set as a precondition of the transaction. The finan- cial provider may require registration of a charge (in Latvia it is called a ‘commercial pledge’) over the target shares, which is usually required to be registered simultaneously with the registration of the share transfer. It is typical that it requires a consent of the seller and its creditor, but in practice they are not supportive. Local banks are used to use the borrower’s other assets as collat- eral for financing, and after closing this collateral is replaced with the target’s assets. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The Financial Instruments Market Law prescribes that a shareholder who has acquired at least 95 per cent of the voting rights of a listed public company may require the rest of the shareholders to sell their shares. This is called a final buyout offer, and the minority share- holders are obliged to sell their shares in this case. A buyout offer may be expressed within three months of at least 95 per cent of the voting rights being acquired. The buyout offer is subject to the decision of the company to leave the regulated market and permission from the FSA. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Cross-border transactions are usually structured as sale of shares. Cross-border mergers are also possible, in which case the regulation on cross-border mergers prescribed by the Commercial Law (implementing the Directive 2005/56/EC) should be observed. Establishment of a European company (Societas Europaea) is regulated by EC Regulation No. 2157/2001 (which is implemented by the Law on European Companies). Cross-border structuring depends on the tax burden and because under Latvian law there is no capital gains tax on profit gained from the sale of the shares by a Latvian company (no minimum holding period required) it is standard practice to organise a Latvian structure for the sale of the shares. © Law Business Research 2019
- 129. Vilgerts Latvia www.lexology.com/gtdt 129 Waiting ornotification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? There are several waiting and notification periods that might be relevant. For instance, in case of private share deals the shareholders (unless the articles of association provide otherwise) of the target company will have statutory first refusal rights. These rights can be exercised within a month of notification. In the event of transfer of an undertaking, the employees have to be informed about it at least one month before. The reorganisation process will also involve waiting and noti- fication periods. The draft reorganisation agreement and financial documents should be available at least one month before the share- holders’ meeting in which it is planned to approve the reorganisation agreement. After it is approved and the shareholders’ meeting passes a resolution on reorganisation (business combination), the creditors of the involved companies have to be informed and information on the initi- ated reorganisation should be published in the Official Gazette. After publication, the creditors should have at least one month to submit their claims, if any. The final documents can be submitted to the Company Register and the reorganisation can thus be finalised not earlier than three months after the official publication. Typically, reorganisation takes between four and six months. The persons expressing the offer (or obliged to express the offer) in public tender offers should immediately notify the board of directors of the target company and submit offer documentation to the FSA (the FSA should review the offer within 10 days). Following permission being granted by the FSA to express the offer, the offeror should publish a notification in the Official Gazette. The term of the offer should be 30 to 70 days. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? There are sector-specific rules in relation to some industries, for instance banking and insurance. To acquire a qualified shareholding (above 10 per cent) in a company operating in the banking or insur- ance sector the person should submit a notification to the FSA and meet certain criteria. The FSA should also be notified whenever the share- holding surpasses or falls below 20, 33 or 50 per cent. The real estate sector is subject to more and more strict regula- tion and restrictions mostly relate to agricultural land, forests and land near to borders and the seashore. It is now forbidden for one person to acquire more than 2,000 ha of agricultural land (the local municipali- ties are entitled to prescribe a lower amount). Moreover, the purchaser should conform with certain criteria (eg, has no tax debts, has confirmed that will commence agricultural activities and has received single area payments under Regulation 73/2009 for at least a year during the last three-year period, etc). Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? In general, reorganisations are tax neutral. However, additional tax liability of the surviving company might be triggered in some cases. So far, the approach of the State Revenue Service has not been consistent in this regard. The corporate income tax has been increased from 15 per cent to 20 per cent; however, the ‘taxation point’ is changed from the date when profits are earned to the date when profits are distributed as dividends. The profits earned by a Latvian company on sale of the shares in a Latvian or non-Latvian company are exempt from corporate income tax provided that the shares are owned for more than three years. It is always advisable to carry out a tax due diligence of the target company prior to closing of the transaction. If the accounting of the target company has been inaccurate in any aspect then there is a high risk that the Latvian taxing authority will spot these inaccuracies during its audit and will impose a substantial fine on the target company. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? As already mentioned (see question 16), employees have to be informed in advance about the planned reorganisation and its legal, economic and social consequences. In reorganisations employees automatically transfer to the receiving company, which should comply with existing collective employment agreements (if they exist) until they are termi- nated or new agreements are executed. These collective employment agreements cannot be amended to the detriment of employees within one year of completion of the reorganisation. Furthermore, reorganisa- tion or transfer of the company itself cannot serve as a basis to terminate employment contracts. However, the employment agreements can be terminated on the basis of company restructuring (economic, techno- logical, organisational or similar restructuring). In theory, in the case of a transfer of undertaking the employees connected with a specific group of assets should become employees of the transferee. There have been mixed results in the courts when employees tried to dispute their layoff shortly before an asset transfer transaction. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Acquisition of an insolvent company or acquisition of assets from an insolvent company are regulated by the Insolvency Law and the Civil Procedure Law. There are no restrictions on concluding agreements with a company that is de facto insolvent, but has not yet been declared insolvent by the court. However, these transactions can be challenged by the insolvency administrator when the insolvency proceedings are commenced (ie, when the company is declared insolvent by the court). The insolvency administrator may challenge any transaction made five years before insolvency and if these transactions were not made at arm’s length (ie, the insolvent company suffered losses). After the commencement of insolvency proceedings the insolvency administrator should identify all the assets of the company and prepare a plan for the sale of these assets. The assets can be sold separately or the company (or its part) can be sold in one transaction (if such transac- tion is more beneficial). The liabilities of the insolvent company do not transfer to the acquirer of the company (or its part). © Law Business Research 2019
- 130. Latvia Vilgerts Public MA 2019130 Anti-corruptionand sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? The general rules on anti-corruption, anti-bribery, money laundering and terrorism financing also apply to business combinations. Latvia is also a party to the international anti-corruption treaties. For breach of these rules banks and other financial institutions may suffer a penalty up to €5 million and other companies up to €1 million. The major obliga- tion to control the origins of the financing is imposed on the banks. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? In 2018, the MA activity in the Baltics was high. Due to some large transactions (such as €1 billion acquisition of 60 per cent of Luminor Group by Blackstone Group), the total value of the deals closed was also record-breaking. Meanwhile, the banking sector was hit by a sudden attack on the non-resident business of Latvian banks. It led to a self-liquidation being commenced by the third largest bank in ABLV and other local banks being forced to change their business models. Due to the above, opening a bank account in a Latvian bank by non-residents has become even more challenging than before because of banks taking extra diligence in respect of KYC and AML requirements. All this means that MA transac- tions might take a longer time to prepare for and execute. Since January 2019, Latvia has a new government following parlia- mentary elections in October 2018 with a change of leading political forces. This might lead to some changes in the MA-related laws in the near future. Gints Vilgerts gints.vilgerts@vilgerts.com Vairis Dmitrijevs vairis.dmitrijevs@vilgerts.com Elizabetes iela 33 Riga 1010 Latvia Tel: +371 67 320 000 Fax: +371 67 320 065 www.vilgerts.com © Law Business Research 2019
- 131. www.lexology.com/gtdt 131 Luxembourg Frédéric Lemoineand Chantal Keereman Bonn Schmitt STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Publicly listed businesses can combine through mergers and takeovers. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main Luxembourg laws and regulations that are applicable, or may, depending on the activities carried out by the publicly listed companies, be applicable are: • the Law of 10 August 1915 on commercial companies, as amended (the Company Law); • the Law of 4 December 1967 on income tax, as amended (the Luxembourg Income Tax Law); • the Law of 5 April 1993 on the financial sector, as amended; • the Law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertak- ings, as amended; • the Law of 10 July 2005, as amended, on prospectuses for securi- ties, as amended; • the Law of 19 May 2006 transposing Directive 2004/25/EC of the European Parliament and the Council of 21 April 2004 on takeover bids (the Takeover Law); • the Law of 11 January 2008 on transparency requirements in rela- tion to information about issuers whose securities are admitted to trading on a regulated market, as amended (the Transparency Law); • the Law of 24 May 2011 on the exercise of certain rights of share- holders in general meetings of listed companies, as amended; • the Law of 21 July 2012 relating to squeeze-out and sell-out (the Squeeze-out Law); • the Law of 6 April 2013 relating to dematerialised securities; • the Law of 12 July 2013 relating to the alternative investment fund managers, as amended (the AIFM Law); • the Law of 28 July 2014 relating to the immobilisation of bearer shares and the holding of the register of registered shares and of bearer shares (the Immobilisation Law); • the Law of 18 December 2015 on the failure of credit institutions and certain investment firms, as amended, transposing Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolu- tion of credit institutions and investment firms (the BRRD Law); • the Law of 23 December 2016 on market abuse (the Market Abuse Law) and Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (the Market Abuse Regulation); • the Law of 13 January 2019 setting up a register of benefi- cial owners; • the Civil Code; • the Luxembourg Labour Code; • the Luxembourg Criminal Code; • the rules and regulations of the Luxembourg Stock Exchange; • circulars of the Luxembourg financial sector supervisory authority (CSSF); and • further laws and regulations in relation to tax, labour law and the domiciliation of companies. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In principle, where both companies are situated in different jurisdictions, the law applicable to the target company or target asset also governs the transaction agreements. However, depending on the nationality of the parties and interests involved in a multijurisdictional business combination, the parties often take advantage of the freedom to subject the transaction agreements to a law other than Luxembourg law. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Generally, a business combination requires administrative filings and publications, such as: • registration with the Luxembourg Register of Commerce and Companies (the RCSL) and publications in the Recueil Electronique des Sociétés et Associations (RESA); • notifications to the CSSF or the Luxembourg Stock Exchange; • storage of information with the Luxembourg Stock Exchange in its capacity as the officially appointed mechanism under the Transparency Law; • declarations to the Direct Tax Administration; • declarations to the Joint Centre for Social Security; and • registrations with the relevant professional chambers. For mergers, the common merger proposal and the minutes of the extraordinary general meeting of the company located in Luxembourg approving the merger have to be filed with the RCSL. They will also be published in the RESA. © Law Business Research 2019
- 132. Luxembourg Bonn Schmitt Public MA 2019132 In the context of a takeover falling within the ambit of the Takeover Law, the bidder must draw up an offer document to be submitted to the CSSF within 10 working days from the day the bid was made public. The Luxembourg Stock Exchange also requires the communication to it in advance of events affecting those securities that are admitted to trading at the Luxembourg Stock Exchange and of other information useful for the protection of investors. A business combination that affects the securities of an issuer, the shares of which are admitted to trading on a regulated market and for which Luxembourg is the home member state, can trigger notifi- cation requirements of the shareholders and the issuer to the CSSF. Notification requirements of shareholders in relation to the acquisition or disposal of major holdings pursuant to the Transparency Law are set out in more detail in question 6. The alternative investment fund managers (AIFMs), when acquiring control over a listed company are subject to notification requirements with the CSSF pursuant to the AIFM Law as set out in more detail in question 6. Moreover, an issuer will have to disclose to the public, file with the CSSF and store with the Luxembourg Stock Exchange (OAM) the total number of voting rights and capital at the end of a calendar month if the business combination affected the total issued capital and voting rights. An issuer would also be subject to notification requirements in case of an acquisition of its own shares if such acquisition would result in it holding a proportion of its own shares that reaches or exceeds the thresholds of 5 per cent or 10 per cent of the voting rights. Further filings with the CSSF and disclosures to the public may be necessary under the provisions of the Market Abuse Regulation. As a principle, no stamp taxes or transfer duties are payable for the transfer of shares in Luxembourg. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The type of information to be made public largely depends on the type of structure used. If the business combination results in a modification of the articles of association of a Luxembourg company, these amendments would have to be filed with the RCSL and published in the RESA. Moreover, all mergers, divisions and similar operations will require, in particular owing to the corporate resolutions and actions that must be taken, among others, filings with the RCSL and publications in the RESA. Disclosure requirements pursuant to the Market Abuse Law, the Market Abuse Regulation, the Transparency Law (only in the case of admission of the securities to a regulated market) and the rules and regulations of the Luxembourg Stock Exchange may apply. In connection with a takeover bid, the offeror is obliged to disclose, among other things, information such as: • the decision to launch an offer; • the approved offer document; • information in case of an extension of the offering period; • information on a squeeze-out or sell-out; and • forms of acceptance. Moreover, the offeror and the offeree company must provide the offer documents required to be drawn up under the Takeover Law to the representatives of the employees or to the employees themselves of the offeror company and the offeree company. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? In accordance with article 8 of the Transparency Law, a shareholder who acquires or disposes of shares, including depositary receipts representing shares, of a company whose shares, including depositary receipts representing shares, are admitted to trading on a regulated market and for which Luxembourg is the home member state and to which voting rights are attached, shall notify the company of the propor- tion of voting rights of the company held by the shareholder as a result of the acquisition or disposal where that proportion reaches, exceeds or falls below the thresholds of 5, 10, 15, 20, 25, 33.33, 50 and 66.67 per cent. The shareholder shall at the same time notify the CSSF. The voting rights shall be calculated on the basis of all the shares, including depos- itary receipts representing shares, to which voting rights are attached, even if the exercise thereof is suspended. The notification obligations also apply to certain financial instruments referenced to shares and those financial instruments shall be aggregated with the shares for the purposes of determining the above thresholds. Under the AIFM Law, if an alternative investment fund manager (AIFM) manages an alternative investment fund (AIF), which acquires, individually or jointly, control (which corresponds to holding more than 33 and one-third per cent of the voting rights of the relevant entity) over a company whose shares are traded on a regulated market, it shall (i) notify the acquisition to the listed company, the shareholders of the listed company whose addresses and identities are available to the AIFM and the CSSF (the notified parties), and (ii) disclose to the notified parties the identity of the AIFM, its conflict of interest policy and the policy for external and internal communication relating to the controlled company. As far as the Squeeze-out Law applies, the holder of the securi- ties shall disclose to the company and the CSSF the information where it becomes a majority holder within the meaning of this law or it falls below the threshold of 95 per cent or where it is a majority shareholder and acquires additional securities of the relevant company. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? All directors or managers of Luxembourg companies should fulfil their duties according to the terms of their mandates and in accordance with the law. In that respect, they could be held liable in the event of misman- agement or for the violation of the Company Law provisions and the company’ articles of association. On this basis, they should take any necessary or useful action to perform the business combination within the limits provided by the law, the company’s corporate object and according to the company’s articles of association. In addition, directors or managers are under a general principle to act competently and in good faith. They also have to act in the company’s corporate interest (which is generally considered as going beyond the sole interest of the company’s shareholders and also encompasses the interest of a larger group of stakeholders such as employees or even creditors). As a result, the directors or managers should act in the best inter- ests of the company on a case-by-case basis within the context of the contemplated business combination and act as a prudent and diligent © Law Business Research 2019
- 133. Bonn Schmitt Luxembourg www.lexology.com/gtdt 133 director or manager would have in the same circumstances, undertaking all the necessary steps and actions required in the context of business combinations, notably in the context of operations involving numerous actions such as a takeover for shares or cross-border merger. Controlling shareholders do not have similar duties. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? The approval of an extraordinary general meeting of shareholders of a company is also required where a business combination entails a capital increase. In the context of a domestic merger or a cross-border merger, the merger should be approved by the respective general meeting of shareholders of the absorbed company and of the absorbing company. However, it has to be noted that there are generally no appraisal rights or cash alternative for shareholders who voted against a domestic or a cross-border merger. In addition, the Company Law does not provide specific rights to minority shareholders to block a domestic or a cross- border merger. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Takeover bids regarding a Luxembourg company whose shares are admitted to trading on a regulated market in Luxembourg are governed by the Takeover Law and supervised by the CSSF. If the target’s board wants to block a hostile bid, it must obey one of the main principles of the Takeover Law (ie, that the board must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid). However, Luxembourg used the possibility under the takeover Directive 2004/25/EC to make anti-takeover measures and the neutralisation of protection measures optional. Thus, only if the general meeting of shareholders of the target ‘opted in’ may its board have to obtain prior authorisation of the share- holders at a general meeting before taking any defensive measures (save for seeking alternative bids). The offeror, in particular in a hostile takeover, must be aware of the following main principles: • all holders of the same class of securities of the offeree company must be afforded equivalent treatment; • the holders of the securities of the offeree company must have sufficient time and information to reach a properly informed deci- sion on the bid; • false markets must not be created in the securities of the offeree company, of the offeror company or of any company concerned in the bid; • an offeror must announce a bid only after ensuring that it can fulfil in full any cash consideration; and • an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a takeover bid (maximum six months from the publication of the decision to make a takeover bid). Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Break-up fees are legally and theoretically possible, but there has not been any development on doctrine or market price in Luxembourg yet. When considering entering into a break-up fee arrangement, this has to be discussed in the context of the doctrine of corporate interest, as it might turn out as an advantage or disadvantage for the target company. The arrangement of break-up fees is solely a matter of nego- tiation with and judgement by the target company’s board. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? In non-regulated industries, there are generally no specific rules or competences given to the Luxembourg authorities to influence or to restrict any business mergers. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? In the context of a takeover, the offeror can impose certain conditions such as the acquisition of a certain threshold of capital and voting rights of the target or obtaining the approval of the authorities. However, the financing cannot be conditional since the bid can be announced only after the offeror has ensured that it can fulfil in full any cash considera- tion, if offered. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Under Luxembourg law, there are no express obligations from the seller to assist the buyer in its financing. However, there is a general rule that the parties to a contract must perform such contract in good faith. Thus, if the obtention of the financing is a condition precedent to the acquisition, the seller will have the obligation to provide the buyer with assistance for the satisfaction of such condition. In addition, it could be possible for the parties to insert in the legal documentation specific covenants such as for instance the obligation for the seller to commu- nicate to the buyer any information related to the target company that may be necessary for obtaining the financing. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The right to squeeze out minority shareholders in Luxembourg is governed by the Takeover Law and the Squeeze-out Law. © Law Business Research 2019
- 134. Luxembourg Bonn Schmitt Public MA 2019134 The right to squeeze out minority shareholders can be exercised following a takeover bid pursuant to the Takeover Law. The offeror in a takeover holding at least 95 per cent of the capital carrying voting rights and 95 per cent of the voting rights of the target company can require all remaining shareholders to sell to it the remaining securities at a fair price. Where the target issues several classes of securities, the squeeze-out right may only be exercised in relation to those classes of securities where the 95 per cent thresholds have been met, provided, however, that the 95 per cent thresholds have also been reached for all the securities issued, irrespective of the class. The offeror must exercise its squeeze-out right within three months from the end of the offer acceptance period during which the holders of securities, to which the public offer has been addressed, have been able to decide to accept or refuse the offer. The offer acceptance period cannot be less than two weeks nor more than 10 weeks from the date of the publication of the offer document by the offeror, unless the 10-week period is extended further. The decision to squeeze out must be disclosed as soon as it is taken by the offeror (ie, if it is made at the same time as the takeover bid, it must be included in the published offer document) and the CSSF should be informed in advance. The Squeeze-out Law provides that the majority shareholder, when it acquires or disposes of securities resulting in attaining, falling below or exceeding a previously attained threshold of 95 per cent, must notify the company and the CSSF of it as soon as possible and no later than four days thereafter. In the case of a squeeze-out, the majority share- holder must appoint a qualified independent expert who will draw up a report in order to determine the fair price to be paid to the minority shareholder within a month of the notification to the CSSF of its inten- tion to effect a squeeze-out. Similarly, where a minority shareholder requests that the majority shareholder purchases its securities at a fair price, the majority shareholder is to appoint a qualified independent expert to determine the fair price to be paid to the minority shareholder. In the event of an opposition in situations of both squeeze-out and sell- out the CSSF shall decide, on the basis of a second report, the price to be paid within three months of the expiry of the opposition deadline. The squeeze-out and sell-out mechanism is still unavailable where the Luxembourg company has never been listed. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? As a principle, cross-border mergers with foreign companies are allowed in Luxembourg on the condition that they are not prohibited by the provisions of the applicable foreign law. Luxembourg has transposed the European Directives relating to cross-border mergers, notably Directives 2005/56/EC and 2007/63/EC. Cross-border mergers are subject to the Company Law. On 3 August 2011, the Luxembourg parliament amended the Company Law to transpose Directive 2009/109/EC on the reporting and documentation requirements in the event of mergers and divisions. A cross-border merger can be realised through a merger by absorption or by incorporation of a new entity, a merger by migration to Luxembourg or by migration from Luxembourg to another jurisdiction or through an upstream merger or a reversed merger. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? As far as the Takeover Law applies, an offeror shall communicate the offer document to the CSSF for its approval, which shall be received by the CSSF within 10 working days from the day on which the bid has been made public. The CSSF notifies its approval to the offeror within 30 working days following the submission. However, if the document was incomplete or additional information is necessary, the time delay only runs from the date on which the offeror provides the requested information. The time period for the acceptance of a bid may not be less than two weeks and not more than 10 weeks from the date of publication of the offer document. However, the 10-week period may be extended under certain conditions. However, the target company shall not be hindered in the conduct of its affairs for longer than is reasonable by a takeover. The time period shall not exceed six months from the date on which the decision to make the bid was made public. For cross-border mergers, there is a waiting period of at least one month between the publication date of the common merger proposal in the RESA and the date of the shareholders’ meeting approving the merger. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Credit institutions, other professionals of the financial sector, insurance companies and investment funds are subject to specific regulations and specific approval rules by a supervisory authority. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? From a tax point of view there are three different main kinds of business combinations in Luxembourg (ie, merger, division and contribution of assets). Generally speaking the tax law facilitates such combinations by granting neutrality or exemption treatment in a wide array of cases. Regarding the shareholders of the transferor company, the exchange of shares should be considered as a sale followed by an acquisition (article 22(5) of the Luxembourg Income Tax Law (LITL)) and capital gains realised by the shareholders upon the sale are taxable. However, shareholders rewarded by new shares should be tax- exempt from the realisation upon the transfer of the shares (rollover relief, under certain conditions) but they are tax liable upon disposal of shares received in exchange (article 22-bis LITL). In the context of mergers and divisions, any operation that results in the transfer of the entire assets and liabilities of a company to another person is treated as a liquidation for tax purposes and, thus, taxable at the level of the transferring company according to article 169 LITL. However, the profit arising from the transfer of assets and liabili- ties of a Luxembourg-resident company to a Luxembourg-resident fully taxable company or a company resident in another EU member state should be tax-exempt provided that the receiving company issues shares with a balancing payment in cash not exceeding 10 per cent of the shares’ value to the shareholders of the transferring company or the shares held by the receiving entity in the transferring company © Law Business Research 2019
- 135. Bonn Schmitt Luxembourg www.lexology.com/gtdt 135 are cancelled, and provided that the exempt profit is transferred under such conditions that its future taxation remains possible in Luxembourg where such profits would not have been otherwise exempted. A shareholder transferring his or her entire participation to the company in which the participation is held is viewed as liquidating the investment held before the cancellation (ie, the company in which the participation is held should be considered as partially liquidated). No dividend withholding tax applies in cases of full or partial liquidation of Luxembourg companies. According to the current administrative prac- tice and case law, the same should apply to deemed partial liquidations (ie, essentially in cases where a whole class of shares is redeemed). In relation to the contribution of assets, by virtue of articles 59 and 59-bis LITL, there should be a tax-neutral exchange for the transferor if the contribution is at book value and to the extent that the contributed assets comprise a business unit or an autonomous part of business and the transferor and the transferee are resident companies fully taxable or the transferee is located within the EU or European Economic Area. The Luxembourg Income Tax Law also contains a favourable tax regime for cross-border divisions. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Pursuant to article L. 127-1 et seq of the Luxembourg Labour Code, in the event of a transfer of undertakings, the employment contracts of the employees who are engaged in the undertakings being transferred are automatically transferred to the new entity. According to article L. 127-1(1) of the Luxembourg Labour Code, the rules on transfers of undertaking apply to any transfer of an under- taking, business, or part of an undertaking or business particularly as a result of a legal transfer, merger, succession, demerger, funds transfor- mation or implementation of a company. However, there is no transfer of undertaking (as defined by the Luxembourg Labour Code) when there is only a change in the majority shareholder of the undertaking. In due time, and in any case prior to the transfer, the transferor must notify the transferee of all the rights and obligations relating to the employees being transferred, where these rights and obligations are known or should be known by the transferor. A copy of this notification must be disclosed to the Luxembourg Labour Inspectorate. Should the transferor fail to notify the transferee of any of the above-mentioned rights and obligations, the transfer of the rights or obligations, as well as, the employees’ rights towards the transferor and the transferee, will not be impacted. In due time, and in any case prior to the transfer, the transferor and the transferee must disclose the following information, by registered letter with acknowledgement of receipt, to the staff’s representation or, in the absence of staff’s representation, directly to each employee: • the date or proposed date of the transfer; • the reasons for the transfer; • the legal, economic and social implications of the transfer for the employees; • any measures envisaged in relation to the employees. In the event of a transfer of undertakings, all employees’ rights and duties (including pension rights and liabilities) arising from an employ- ment relationship with the transferor, that already existed on the date of the transfer, are automatically transferred to the transferee. Automatic transfer is binding on all parties. The transferor and the transferee cannot agree, in the commercial agreement, that all or part of the employment contracts will not be transferred. The transferor’s rights and obligations arising from an employ- ment contract or from an employment relationship existing on the date of the transfer are, by reason of the transfer, transferred to the trans- feree. In the event of rights and obligations deriving from a collective bargaining agreement, the rights and obligations are also transferred and must remain unaffected until their expiry or until a new agreement is concluded. The transferor and the transferee are jointly and severally liable for all obligations towards the employee arising from the employment contract before the transfer. The transfer does not in itself constitute a valid reason for dismissal of the employees. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? The Company Law allows the merger with a Luxembourg company that is subject to bankruptcy or similar insolvency proceedings. This provision applies when the company subject to bankruptcy or similar insolvency proceedings is incorporated in Luxembourg and the absorbing company is a foreign company. However, the Luxembourg law does not exclude the application of the above-described provision to a foreign company subject to restructuring or bankruptcy to the extent permitted by the relevant foreign law. The entering into a business combination with a company subject to insolvency or bankruptcy in Luxembourg during the suspect period, starting at the date of the cessation of payment until the date of judg- ment, should be closely analysed as it could be challenged under the definition of the cessation of payment. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? Companies and persons operating in Luxembourg, particularly those operating in the financial sector including AIFMs, are subject to the provisions of the Luxembourg Criminal Code and the Laws of 12 November 2004 and 27 October 2010, as amended, concerning the fight against money laundering and terrorism financing. To further strengthen the means for the fight against corruption, Luxembourg legislation adopted the Law of 13 February 2011, which amended the Luxembourg Labour Code, the Luxembourg Criminal Code and other laws. Corruption can be penalised by a prison sentence and a fine of up to €250,000 depending on the function of the person having committed the offence. For passive and active bribery committed by or against directors or managers of companies, the Criminal Code provides for imprisonment of one month to five years and a fine of €251 to €30,000. Legal entities are liable for the offence, including extortion, bribery (public or commer- cial), trading influence and corruption offences, and may be punished by one or more of the following penalties, in addition to the compensation of damage to the person who has suffered owing to the fraudulent act: • a fine, in the conditions and modalities provided for by article 36 of the Luxembourg Criminal Code; • specific confiscation; • disqualification from public tenders; and • dissolution, in the conditions and modalities provided for by article 38 of the Luxembourg Criminal Code. © Law Business Research 2019
- 136. Luxembourg Bonn Schmitt Public MA 2019136 In case of takeovers, an administrative sanction in the form of a fine between €125 and €12,500 may be imposed in the case of an infringe- ment of the Takeover Law, which is likely to breach the general principles set out in article 3(a) to (e) of the Takeover Law. Further, the omission of notifications or provision of information to the CSSF or to the representatives of the employees can in certain cases result even in criminal sanctions. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? The year 2018 was much like a continuation of 2017. Luxembourg, as one of the leading jurisdictions in the world in terms of structuring of investment holding platforms, has witnessed major MA transactions involving companies mainly listed in foreign jurisdictions that have generated important cross-border activities. Thus, for instance, 2018 has seen the completion of the combination between Essilor International SA, a French law-governed company listed on Euronext, and Delfin Sàrl, the Luxembourg law-governed parent company of Luxottica Group SpA, for approximately €40 billion. Nonetheless, by reason of the uncertainties at macroeconomic level (eg, Brexit and the repeated commercial tensions between the US and China) it is not certain that the MA activity in Luxembourg will not be hit in the course of 2019 by the global slowdown. No changes to the law are expected in the coming months that will have an impact on public mergers and acquisition. It is worthwhile to note that Luxembourg has implemented article 30 of the European Parliament and Council directive dated 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing by the Law of 13 January 2019 (the EBR Law), which establishes a register of beneficial owners (the Register) as from 1 March 2019. The EBR Law will require the Luxembourg entities to provide the Register with relevant information with respect to their beneficial owners. However, listed companies will benefit from a more flexible regime since they will be only required to file the name of the regulated market on which they are listed with the Register. Frédéric Lemoine flemoine@bonnschmitt.net Chantal Keereman ckeereman@bonnschmit.net 148 Avenue de la Faïencerie L-1511 Luxembourg Tel: +352 27 855 Fax: +352 27 855 855 www.bonnschmitt.net © Law Business Research 2019
- 137. www.lexology.com/gtdt 137 Malaysia Addy Hergand Quay Chew Soon Skrine STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? The combination of public listed business in Malaysia may occur in numerous ways. The most common ways include: • acquisition of shares in a company (which may be subject to certain mandatory takeover requirements under the Malaysian Code on Take-Overs and Mergers 2016 (Code) as discussed below); • acquisition of business or assets of a company by another company; and • formation of a joint venture company through contractual means. Other ways also include: • selective capital reduction under the Companies Act 2016 (Companies Act); and • a scheme of arrangement sanctioned by court order under the Companies Act. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations that govern business combinations are as follows: • the Companies Act (which came into effect on 31 January 2017 and repealed the previous Companies Act 1965) govern companies incorporated in Malaysia and branches of foreign company regis- tered under the Companies Act, and will therefore be applicable to business combinations involving companies; • the Capital Markets and Services Act 2007 (CMSA) and the subsid- iary legislation made thereunder (such as the Code, the guidelines and directives issued by the Securities Commission of Malaysia (SC)), which govern public takeover involving public listed compa- nies and capital markets conduct and products; • Bursa listing requirements (Listing Requirements), which govern, among others, listed companies’ conducts, transactional matters, and disclosure obligations; and • contract laws codified in the Contracts Act 1950, which govern contractual principles and matters in Malaysia. Other laws may also be applicable depending on the types of industry of the target companies to which the combination business relates. Different regulatory bodies may be given power to issue and stipu- late guidelines, conditions or licensing requirements under specific legislations requiring specific approvals to be obtained in respect of combination of businesses. For example, the Financial Services Act 2013 (FSA) requires that the Minister of Finance’s approval be obtained for the acquisition of control over financial services providers such as banks and insurers. The FSA also requires that transfer of business be done by way of a scheme of arrangement requiring approval from the Minister of Finance, and is to be sanctioned by court order. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? The transaction agreements are generally governed by the general principles of the common law, and the contract laws codified in the Contracts Act 1950. The parties to the transaction agreements are also free to agree on the choice of law of the transaction agreements. Generally, the Malaysian courts will recognise and give effect to these choice of law clauses save and except in certain cases whereby there has been, for example, a breach of public policy in that regard. Typically the transaction agreements will be concluded when the transfer of the shares in the public listed companies to be acquired is completed. Completion of the transaction agreements will typically be subject to satisfaction or fulfilment of conditions precedent under the transaction agreements. It is hence important to incorporate the require- ments under the Code into transaction agreements. For example, the completion of the acquisition of public listed shares that cross the statu- tory threshold (and hence required to make a mandatory takeover offer) under the Code shall be conditional upon the offeror having received acceptances that would result in the offeror (and persons acting in concert) holding more than 50 per cent of the voting shares of the public listed company. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? Governmental or regulatory filings In the cases of acquisition of a public listed company, certain filings with the governmental or regulatory agencies or bodies will be required, which, among others, include: • In cases of transactions or takeover involving public companies to which the Code applies, the offer must be accompanied with an offer document and must be submitted to the SC for its clearance and guidance. If the transaction involves, for example, the issuance of securities, a prospectus or information memorandum may be necessary and will have to be lodged or deposited with the SC. © Law Business Research 2019
- 138. Malaysia Skrine Public MA 2019138 • In cases of transactions or takeover involving public listed compa- nies, if the transaction value exceeds the stipulated percentage ratio (calculated based on the formulas or scenarios stated under the Listing Requirements), the relevant listed company is required to make an announcement to Bursa on the stock exchange (see question 8). Under the Companies Act, notification is required to be made to the Companies Commission of Malaysia (CCM), the SC and a relevant public company in respect of a person who holds 5 per cent or more voting shares in the said relevant public company. Notification is also required to be made whereby there is a change in such shareholding in the rele- vant public company. It is common that a regulatory body may impose notification requirements as conditions to the licence granted to a company in a specific industry, requiring the company to notify the regulatory body in respect of change of control or shareholder of the company. For example, the Ministry of International Trade and Industry (MITI) often imposes a licensing condition on a manufacturing company to notify MITI in the event of a change of shareholder or control in the manufac- turing company. Transfer of lands or real properties may be subject to certain restrictions or conditions imposed on the land titles of these properties, requiring approval to be obtained from the relevant land authorities. Transfer of intellectual properties rights is also subject to registra- tion and filing requirements with the Intellectual Property Corporation of Malaysia. Statutory and regulatory fees In respect of filings or lodgement with the SC or Bursa, they may be subject to certain processing fees or clearance fees, depending on the nature and scope of the proposed transactions. For example, there is a fee of 15,000 ringgit payable to the SC in respect of an application for exemption from mandatory takeover offer obligations. On the other hand, there is a fixed fee of 2,000 ringgit payable to Bursa in respect of processing an application for the waiver, modification or extension of time to comply with the provisions of the listing requirements. Instruments of transfer of business or assets will be subject to ad valorem stamp duty ranging from 1 per cent to 3 per cent depending on the value of the transaction. Transfer of shares of a public listed company will attract stamp duty at a rate of 0.1 per cent of the value of the shares subject to a cap of 200 ringgit for each contract note. Note, however, that with effect from 1 March 2018 to 28 February 2021, listed companies with market capitali- sation ranging between 200 million ringgit and 2 billion ringgit trading shares are eligible for stamp duty waiver. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Disclosure or announcement requirements are not strictly dependent on the type of structure used, but rather are dependent on the activity or the companies or parties involved. In respect of a takeover offer to acquire control over a company to which the Code applies (ie, public listed companies or such other compa- nies specified by the SC), the offer must be announced by the offeror and the offeree. The announcement made by the offeror shall include, among other things, the following information: • identity of the ultimate offeror, offeror and all persons acting in concert with the offeror; • basis of the offer price; • basis of consideration; • the terms and conditions of the takeover offer; • types and numbers of the voting shares of the offeree which are held or acquired, directly or indirectly, by the offeror or any person acting in concert with the offeror; and • confirmation by the main adviser that resources are available to the offeror sufficient to satisfy the full acceptance of the offer. In respect of transactions or takeover involving public listed companies, announcements may be required to be made on Bursa if the transac- tion value exceeds the percentage ratio stipulated under the Listing Requirements (see question 4). In addition, information that may have a material effect on the price, value or market activity of any of the listed companies’ securities or the decision of a holder of securities of the listed companies or an investor in determining his or her choice of action, must also be announced to Bursa. Such information may include, among other things: • the entry into a joint venture agreement or merger; • change in management; • borrowing of funds; • purchase or sale of an asset; • the making of a tender offer for another corporation’s securities; and • entry into a memorandum of understanding. There is also a requirement to disclose holding or change of share- holding exceeding 5 per cent in a public company to the SC, the relevant company and the CCM (see question 4). There is generally no disclosure requirement in respect of private company involved in business combination transactions. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? (See question 4.) A person with a shareholding in the voting shares of a public company must notify that company, the SC and the CCM of the shareholding, and must notify those parties in respect of any change to that shareholding. The Listing Requirement requires disclosure by way of announce- ment to Bursa by a listed company of any acquisition (including subscription) or disposal of shares that results in the holding being 5 per cent or more (or less in the case of disposal) of that listed company. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Directors The duties of the directors are codified under the Companies Act. Under the Companies Act, directors are required to, at all times, exercise their powers in accordance with the Companies Act, for a specific purpose and in good faith in the best interest of the company. The directors of a company shall exercise reasonable care, skill and diligence with the knowledge, skill and experience that may reasonably be expected of a director with those responsibilities; and any additional knowledge, skill and experience that the director in fact has. The director who makes a business judgement (ie, any decision on whether or not to take action in respect of a matter relevant to the © Law Business Research 2019
- 139. Skrine Malaysia www.lexology.com/gtdt 139 business ofthe company) meets the requirements to exercise reason- able care, skill and diligence if he or she: • makes the business judgement for a proper purpose and in good faith; • does not have a material personal interest in the subject matter of the business judgement; • is informed about the subject matter of the business judgement to an extent the directors reasonably believe to be appropriate under the circumstances; and • reasonably believes that the business judgement is in the best interest of the company. Further, the directors in exercising their duties as directors may rely on information, professional or expert advice or opinions including financial statements and other financial data, prepared or made by: • any officer of the company who the director believes on reasonable grounds to be reliable and competent on the matters concerned; • as to matters involving skills or expertise, any other person retained by the company in relation to matters that the director believes on reasonable grounds to be within the person’s profes- sional or expert competence; • another director in relation to matters within the director’s authority; or • any committee to the board of directors on which the director did not serve in relation to matters within the committee’s authority. The directors’ reliance is deemed to be made on reasonable grounds if it was made in good faith, and after making an independent assessment of the information or advice or opinions, including financial statements and other financial data, having regard to the director’s knowledge of the company and the complexity of the structure and operation of the company. Having said the above, in cases of a takeover offer where the Code applies, the Code specifies that an offeree’s board of directors shall act in the interests of the shareholders as a whole and shall not deny the shareholders the opportunity to decide on the takeover offer. Controlling shareholders Controlling shareholders do not have similar statutory duties to those of the directors under the Companies Act. However, controlling share- holders shall not oppress or unfairly discriminate against the minority shareholders as such acts may be challenged in court. The court has the power to sanction a remedy against the matters complained of or challenged by the minority shareholders. The Code also specifies that in cases of takeover, all shareholders of an offeree shall, so far as practicable, be treated equally in relation to a takeover offer and have equal opportunities to participate in benefits accruing from the takeover offer, and that all shareholders, particularly minority shareholders, shall not be subject to oppression or disadvan- tage by the treatment and conduct of the acquirer or offeror, as the case may be, or of the board of directors of the offeree. Save as provided above, there is generally no prohibition against the controlling shareholders acting or voting in their own interests in business combinations situations. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Shareholders’ approval or passing of resolutions by shareholders shall be subject to the provisions of the Companies Act and also the constitu- tion of the relevant company. The shareholders have appraisal or approval rights in respect of business combinations involving certain aspects. Under the Companies Act, the shareholders’ approval is required for issuance of shares, acqui- sition or disposal of an undertaking or property of a substantial value, and transactions with a director, substantial shareholder or persons connected with such director or substantial shareholder (as the case may be) in respect of an acquisition of disposal of shares or non-cash assets of the requisite value. Any of the aforementioned transactions carried out without the shareholders’ approval shall be void. In addition, shareholders’ approval is also required in respect of a scheme of arrangement under the Companies Act. In respect of business combinations involving public listed compa- nies, the business combinations will also be subject to the provisions of the Listing Requirements. A listed company that intends to enter into a major transaction (being a transaction with a percentage ratio of 25 per cent or more), requires the prior approval of the shareholders in a general meeting. On the other hand, if the listed company intends to enter into a transaction with a related party (this includes a director or major shareholder, or persons connected with such director or major shareholder, as the case may be) and the transaction has a percentage ratio of 5 per cent or more, then prior approval by the listed company’s shareholders is also required. The basis of the calculation of percentage ratio is set out under the listing requirements, and it includes, among other things: • the value of the assets that are the subject matter of the transac- tion, compared with the net assets of the listed company; • net profits of the assets that are the subject matter of the transac- tion, compared with the net profits attributable to the owners of the listed company; • the aggregate value of the consideration given or received in relation to the transaction, compared with the net assets of the listed company; • the equity share capital issued by the listed company as consid- eration for an acquisition, compared with the equity share capital previously in issue (excluding treasury shares); • the aggregate value of the consideration given or received in relation to the transaction, compared with the market value of all the ordinary shares of the listed company (excluding treasury shares); and • the total assets that are the subject matter of the transaction compared with the total assets of the listed company. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? In respect of a takeover offer to which the Code applies, a hostile bid is permitted but is generally uncommon in Malaysia, as the bidder will normally not be allowed by the target to conduct due diligence on the company and the bidder will have to rely on information that is available in the public domain. The Code and the rules made pursuant to the Code introduce auction procedures in respect of a competing takeover offer which continues to exist in the later stages of the offer period, whereby the SC will require revised offers to be announced in accordance with an auction procedure, the terms of which will be determined by the SC. While a bid may be considered hostile by the board of directors of the offeree, the Code requires that a notice of the takeover bid must be served on the board of directors of the offeree and the board of directors of the offeree is required to dispatch a copy of the written notice to all offeree shareholders within seven days of receipt of the notice. During © Law Business Research 2019
- 140. Malaysia Skrine Public MA 2019140 theoffer period, the board of directors of the offeree shall not undertake any action or make any decision without obtaining the approval of the shareholders at a general meeting on the affairs of the offeree, as it could effectively frustrate any bona fide takeover offer or the share- holders could be denied an opportunity to decide on the merits of a takeover offer. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? Payment of break-up fees is generally not common practice in Malaysia in takeover offer situations. In transactions involving companies not listed on the stock exchange, it is common practice to request the poten- tial purchaser to pay a deposit to enter into the transaction and provides for the deposit to be forfeited in the event the potential purchaser backs out from the deal. While payment of break-up fee by the parties to the transaction is not prohibited under the Code, financial assistance is prohibited under the Companies Act. A company is prohibited from giving – whether directly or indirectly, and whether by means of a loan, guarantee or the provision of security or otherwise – any financial assistance for the purpose of or in connection with a purchase or subscription for any shares in the company. As such, the target company of the transaction is prohibited from paying any break-up fee in respect of an acquisition of shares in the said target company. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? In addition to specific industries in which business combinations are regulated by regulatory agencies, government may through regulatory bodies or agencies impose foreign equity restriction or threshold appli- cable on a target company to be acquired by a potential purchaser. Government may also through regulatory bodies or agencies impose licensing conditions on regulated companies whereby regula- tory approval is required for a change of control or shareholder of the target company. Non-compliance with the licensing condition may result in the licence being revoked or suspended. Government may also exercise influence through a significant shareholding in government-linked entities or promote a policy to encourage mergers or investment in specific sectors through tax incen- tives and reliefs or stamp duty exemptions. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? The CMSA requires a person who obtains control in a public listed company to make a takeover offer, or a person who has obtained control in a public listed company not to acquire any additional voting shares in the relevant company except in accordance with the requirements of the Code and the Rules made thereunder. Mandatory offer A bidder is required under the Code to make a mandatory offer to acquire all the shares of a target public listed company that he or she or persons acting in concert with him or her do not already own, if the bid by him or her together with persons acting in concert is to: • acquire more than 33 per cent voting shares or rights of the target company (mandatory threshold); or • acquire more than 2 per cent of the voting shares or rights of the target company in any period of six months whereby the bidder and persons acting in concert with him or her hold over 33 per cent but not more than 50 per cent of the voting shares or rights of the target company (creeping threshold). Mandatory offers may also be required to be made in situations of: • acquisition of an upstream company that holds or controls more than 33 per cent of the voting shares or rights of a downstream company whereby the former controls the latter either directly or indirectly through intermediate entities, or the former’s holdings when aggregated with those held by the person or group, would secure or consolidate control of the downstream company; and • acquisitions under the mandatory threshold that, in the SC’s judg- ment, trigger the requirement for a mandatory offer (the SC will take into account the degree of control the vendor has over the retained shares, the payment of price for the shares and whether the retained shares are a significant part of the company’s capital. A mandatory offer must be conditional strictly and only upon the offeror having received acceptances that would result in the offeror and persons acting in concert holding in aggregate more than 50 per cent of the voting shares or voting rights of the offeree. In respect of a mandatory offer, the offeror shall provide a wholly cash consideration or other consideration accompanied by a wholly cash alternative. Voluntary offer A bidder is allowed to make a takeover offer for the voting shares or rights of a public listed company where he or she has not incurred an obligation to make a mandatory offer. In addition, a bidder shall not make a partial offer (ie, a voluntary takeover offer in which a person offers to acquire less than 100 per cent of any class of the voting shares or rights of a company from all offeree shareholders) unless approved by the SC. A voluntary offer must be conditional upon the offeror having received acceptances that would result in the offeror holding in aggre- gate more than 50 per cent of the voting shares or rights of the offeree. A voluntary offer may also include other conditions, other than conditions whose fulfilment depends on the subjective interpretation or judgement of the offeror, or whether or not a particular event happens, this being an event that is within the control of the offeror. In respect of a voluntary offer, the offeror shall provide a wholly cash consideration as an alternative where (i) 10 per cent or more of the voting shares or rights of the offeree to which the takeover offer relates have been purchased for cash by the offeror and persons acting in concert during the offer period and within six months, or (ii) the SC determines that it is necessary to give effect to the requirement under the Code. © Law Business Research 2019
- 141. Skrine Malaysia www.lexology.com/gtdt 141 Financing 13 Ifa buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? In transactions involving entities or targets to which the Code applies, while there is no specific requirement for the financing for a takeover to be dealt with or incorporated in the transaction documents, the offer document must contain, among others, information such as the offer price and its basis for the securities of the offeree, and a confirmation by the offeror and the offeror’s financial advisers that resources available to the offeror are sufficient to satisfy full acceptance of the offer (where the offer consists of or includes cash). The buyer may obtain financing through internally generated funds, group borrowings or raising money from financial service providers such as banks. Provision of financial assistance by the seller to the buyer in respect of the transaction is prohibited under the Companies Act. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? Minority shareholders are permitted to be squeezed out in a takeover situation under the Code. The CMSA permits an offeror who has made a takeover offer for all the shares or all the shares in any particular class in an offeree, and has received acceptances of not less than 90 per cent in the nominal value of the offer shares (Compulsory Acquisition Conditions), to within four months of the date of the takeover offer, acquire the remaining shares or remaining shares in any particular class in the offeree, by issuing a notice to the dissenting shareholders. The compulsory acquisition right is exercisable if the notice is issued within two months of the date of achieving the Compulsory Acquisition Conditions and is accompanied by a copy of a statutory declaration by the offeror that the conditions for the giving of the notice are satisfied. In respect of a situation to which the Code and CMSA do not apply, the Companies Act permits an offeror to compulsorily acquire minority shareholders under a scheme of arrangement if the transfer involving holders of not less than 90 per cent of the nominal value shares or of the shares of that class has been approved. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? It is common for parties to factor tax considerations into structuring cross-border transactions, but there is generally speaking no applicable Malaysian law that governs cross-border transactions. It is common (see question 11) for the government to also exercise an influence through promoting policy to encourage mergers or invest- ment in specific sectors through tax incentives and reliefs or stamp duty exemptions. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? The governing law in respect of competition is the Competition Act 2010. However, there is no merger control regime or regulations in Malaysia. Takeovers to which the Code applies are required to comply with the takeover offer timeline specified under the Code and the Rules made thereunder, which relate to the announcement of the offer, dispatch of the offer document, independent advice circular, release of sensitive information, timeline for a revised offer, acceptance of satisfactory conditions and acceptance of offer. In transactional situations to which the Code does not apply, there is usually no relevant waiting or notification period stipulated by law. The parties are generally free to contract and agree on the timeline of the transaction by taking into account factors such as the conduct of due diligence, negotiation of transactional documents, satisfaction of condi- tions precedents and completion of the transaction. However, transactions that are subject to regulatory approval may be subject to a lengthy waiting time. For example, acquisition of control in financial services providers in Malaysia under the FSA requires the prior approval of the Minister of Finance and the application for approval process is normally lengthy and time consuming. Similarly, in trans- actions involving transfer of land whereby the land authority’s prior approval is required, the approval application process can be lengthy and time consuming. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Yes, see questions 2, 11 and 16. There are certain industries that are heavily regulated such as the oil and gas industry or the financial services industries, whereby the completion of the transactions may be subject to the prior approval of the regulatory body. Target companies in other industries or sectors may be subject to regulations or applicable laws under which the regu- latory body may issue guidelines for the target company to comply with. It is also common that the regulatory body exercises influence through imposition of licensing conditions, a foreign equity threshold, minimum paid-up capital requirements, regulatory approval require- ment for change of ownership or director, or notification requirement for a change of ownership or director. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? There is no capital gains tax on business combinations in Malaysia, except that transfer of real property or acquisition of shares in real property companies (ie, a company controlled by persons who own real property with a defined value of not less than 75 per cent of its total tangible assets) may attract real property gains tax payable on the gain of the transfer. Ad valorem stamp duty is payable on the transfer of shares or non- shares assets in respect of business combinations (see question 4). © Law Business Research 2019
- 142. Malaysia Skrine Public MA 2019142 Labourand employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? In cases of acquisition of a company, the employment status of the employees of the target company will not be affected by law. Nevertheless, the Employment Act 1955 (EA) governs the entitlement and protection of employees falling within the ambit of the EA (which mainly include employed persons with wages not exceeding 2,000 ringgit a month), which includes annual leave, medical leave and over- time. It is common practice for the purchaser to request the seller to provide warranties in respect of the target company’s compliance with the applicable employment laws. In cases of a transfer of business, the employment regulations in Malaysia provide that unless the existing employees of the trans- feror have been offered equally favourable terms by the employer, the employment of such employees shall be deemed to have been termi- nated, in which case termination benefits will be payable. The Employees’ Provident Fund and the Social Security Fund are statutory contribution schemes to which the employer is required to contribute in respect of its employees. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Thorough and cautious due diligence and investigations should be carried out on the subject matter of the transfer or acquisition, as the transfer of assets by a receiver or liquidators is typically on limited warranties and on an ‘as is where is’ basis. Due diligence should be carried out to ensure that the purchaser acquires good title of the target, and is not subject to any undisclosed liabilities or encumbrances. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? The anti-corruption laws in Malaysia are governed by the Malaysian Anti-Corruption Commission Act 2009. The legislation does not provide for situations specifically in relation to business combinations, but stipu- late offences in respect of a wide range of bribe or corruptive acts that are caught under the legislation. For instance, any bribery or donation made by a person to an official to abuse his or her position to achieve the said person’s purpose (including the facilitation of obtaining regula- tory approval or sanction) is an offence under the legislation. Addy Herg addy.herg@skrine.com Quay Chew Soon qcs@skrine.com Unit 50-8-1, Level 8 Wisma UOA Damansara 50 Jalan Dungun, Damansara Heights 50490 Kuala Lumpur Malaysia Tel: +603 2081 3879 Fax: +603 2094 3211 www.skrine.com © Law Business Research 2019
- 143. www.lexology.com/gtdt 143 Mexico Julián JGarza C and Luciano Pérez G Nader, Hayaux y Goebel, SC STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Mexican and foreign entities may use different structures to imple- ment a business combination. The most common structures are equity acquisitions, asset transfers or legal mergers. Stock purchase and asset transfer are both regulated by Mexican law, permitting terms and conditions thereof to be generally agreed by the parties. Legal mergers consist of the combination of two or more Mexican entities, where one entity (the merging entity) ceases to exist and the surviving entity acquires all of its assets and liabilities, or alternatively, in the combina- tion of two or more entities, all of which cease to exist, and a new entity is created with all the assets and liabilities of the merging entity. In the acquisition of shares or merger of public traded companies, the bidder will be required to obtain the authorisation from the National Banking and Securities Commission (CNBV) and from any of the two authorised Mexican stock exchanges (MSEs) to issue an acquisition public offer (OPA) through a tender offer. Once the bidder has launched the tender offer, the shareholders of the target entity are entitled to accept or reject the offer made by the bidder. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The most relevant laws and regulation in Mexico applicable to business combinations are: • the General Business Organisations Law, which provides the corporate legal framework applicable for business organisations and the formalities to implement a legal merger; • the Commercial Code and Federal Civil Code, which provide the general contractual provisions for MA agreements; • the Federal Antitrust Law (Antitrust Law), which sets forth the thresholds for those operations that require the prior approval of the Mexican Antitrust Commission (Cofece); and • the Stock Exchange Law (LMV) and secondary regulations, which set forth the requirements and formalities for the acquisition or merger of public traded companies. • the Regulations of the MSEs: Bolsa Mexicana de Valores (BMV) and Bolsa Institucional de Valores (BIVA). Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Mexican law usually applies for this type of transactions. Asset transfer and stock purchase agreements may be submitted to foreign law; however, the parties usually submit to Mexican law to facilitate imple- mentation and enforcement as the target entity or assets or both would be located in Mexico. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The bidder requires the prior authorisation from the CNBV and the corresponding MSE to acquire a public traded company, and must pay the corresponding duties to the CNBV and the fees to the MSEs for the analysis and authorisation process of the tender offer. Also, the following filing may be required: (i) the registration with the Public Registry of Commerce of the extraordinary shareholders’ meetings approving the acquisition (if required) or the legal merger, (ii) the regis- tration of the transfer of certain type of assets (for example, real estate transfer requires its registration with the Public Registry of Property), and (iii) the filing of an application and payment of the corresponding duties to obtain clearance from the Cofece (the current duty amounts to US$9,226.95 at an exchange rate of $20 Mexican pesos per US dollar), if the transaction meets the thresholds set forth in the Antitrust Law. If the target entity is a regulated entity, such as a financial entity, the business combination may be subject to further filings or fees to obtain authorisa- tions from the respective regulator. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Regarding legal mergers, the extraordinary shareholders’ meetings approving the legal merger must be registered with the Public Registry of Commerce and published in the electronic system of the Ministry of Economy. The minutes of the extraordinary shareholders’ meeting must include, among others, the balance sheet, the merger agreement and the capital structure after the merger. The LMV and its secondary regulations contain disclosure obliga- tions applicable to public traded companies with respect to any facts © Law Business Research 2019
- 144. Mexico Nader, Hayauxy Goebel, SC Public MA 2019144 or circumstances that are likely to have a material effect on the price of the shares. Regarding an OPA, the LMV provides that the acquisition by any person or group of persons of the beneficial ownership of the shares from the target through an OPA shall have to be disclosed to the public no later than the immediately following day. In this case, the bidder must also inform the terms and conditions of the tender offer, whether it intends to acquire a significant influence over the target or not, and any other information that may be deemed relevant for the purpose of the tender offer. Other than the foregoing, there are no specific requirements on the information to be made to the public in business combinations. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? There are no special disclosure requirements for substantial share- holders. Please note, however, that there may exist limitations on shareholding of public companies, which may lead to disclosure requirements. In general, public traded companies have the obligation to provide and disclose corporate information about its shareholders. Such information is provided to the CNBV and made public through the applicable MSEs. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? In general, the directors or managers of the target company are not required to comply with specific duties to the company’s shareholders, creditors and other stakeholders in connection with a business combi- nation. In general, the directors or managers shall comply with their fiduciary duties and act in the best interest of the company and its shareholders, and must disclose any conflict of interest that may arise from a proposed transaction. Regarding public companies, the board of directors of the target company shall be neutral and will be required to adopt a public posi- tion on the tender offer within 10 business days after the tender offer has been launched and, together with the general manager, publicly state how they are planning to act in connection with the shares they currently own from the target. The board of directors of the target shall conduct itself in a neutral and transparent manner complying, in all material respects, with their respective duties and disclosing any conflict of interests that may arise in connection with the tender offer or the bidder. The LMV also requires that, from the date of the tender offer until conclusion of the same, the board of directors and the relevant officers of the target shall refrain from taking any action that may hinder the development of a tender offer. In case any of them fail to comply with their duties before the target and cause any economic damage to it, they will be personally liable for the monetary damages and losses caused. Controlling shareholders are not required to comply with similar duties as those provided for directors or managers. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? In the case of a merger of public limited companies, the merging enti- ties must approve such transaction in an extraordinary shareholders’ meeting with a minimum quorum of 75 per cent of the total share- holders, and resolutions must be validly adopted with, at least, the vote of 50 per cent of the voting shares. If the by-laws of any of the merging companies provide a higher quorum or approval threshold, such a threshold will be required to approve the transaction. Minority shareholders of a public limited company representing 25 per cent of the voting shares and minority shareholders of an invest- ment promoting corporation representing 20 per cent of the voting shares may exercise their opposition rights to the resolutions adopted by a shareholders’ meeting, in case certain requirements are met, including that the resolutions were adopted in contravention or without the formalities set forth in Mexican law or the corporate by-laws. Other than the foregoing, there are no additional approval rights of the shareholders set forth in Mexican law regarding business combina- tions or sales of a public company. Also, there are no specific appraisal or similar rights of the shareholders in business combinations. Minority rights, including veto rights, may be generally adopted for all sorts of Mexican companies. Some regulated companies may have restrictions in this regard. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? There is no specific regulation on hostile takeovers of public traded companies in Mexican law. The LMV allows friendly and hostile takeo- vers to take place. In the case of hostile takeovers, the board of directors of the target has limited powers to prevent such types of acquisitions since the board of directors of the target must maintain its neutrality over the acquisition, and is limited to give its opinion on the fairness of the offered price and inform how they will act with respect to shares owned by its members. Notwithstanding the foregoing, the corporate by-laws of the target company may include special provisions or mechanism to prevent the acquisition of shares or the control of the company or both. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? There are no specific regulations or restrictions in Mexican law appli- cable to break-up fees or mechanism to frustrate additional bidders. As it is not regulated, the parties to the transaction may freely agree and adopt break-up fees or similar mechanisms. Such fees must be approved by the board of directors of the target and disclosed to the public. © Law Business Research 2019
- 145. Nader, Hayaux yGoebel, SC Mexico www.lexology.com/gtdt 145 Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Other than the authorisations and clearance required under Mexican law for a specific business combination (antitrust or regulatory), govern- ment agencies do not influence or restrict the completion of business combinations. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? There are no restrictions in Mexico regarding conditional offers. Any condition to a business combination will be valid and enforceable provided that it is not contrary to law, morals or public policy; therefore, a bidder is entitled to subject its tender offer, exchange offer or other form of business combination to any condition or term that the same deems convenient, in the understanding that such a condition or term is expressly provided in the offering memorandum. In the event of a cash acquisition, the financing may be conditional. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? In relation to the financing of the buyer, the MA transaction documents and the financing documents are usually executed at the same time. The seller must obtain sufficient comfort from the financing entity that the disbursements would be made at closing, and the MA transac- tions should be subject to the condition of full disbursement of the loan and payment for the acquisition. The seller must provide the financing entities of all information and documentation required by the financing entities and permit a due diligence to the target company to obtain prior approval for the financing. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? In principle, under Mexican law minority squeeze-outs are not possible; however, shareholders may adopt in the corporate by-laws of the public limited companies call options or resolve other mechanisms that may lead to a minority squeeze-out. The process and the mechanisms for the valuation of shares are usually provided in the corporate by-laws or in a shareholders’ agreement. Also, the majority shareholders may dilute the participation of minority shareholders by approving capital increase in a shareholders’ meeting; however, all shareholders have a pre-emptive right to acquire the shares issued by the company from the capital increase in the same proportion to their participation in its capital stock. The shareholders must exercise this right 15 days following notification of the approval of the capital increase, otherwise the other shareholders may exercise such right, diluting the participation of the non-exercising shareholders. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Except for certain foreign investment restrictions, Mexican law and regulations do not restrict or limit in any manner whatsoever the acqui- sition by foreign shareholders of a participation in the capital stock of Mexican companies, nor require a specific structure to implement cross- border transactions. The Mexican Foreign Investment Law (LIE) restricts or limits foreign investment in certain activities, such as national inland transportation services (passengers and cargo) and certain technical and professional services, which are exclusively reserved to Mexican nationals or Mexican companies with a foreign exclusion clause. Other activities subject to foreign investment restrictions or limitations are, among others, domestic air transport, air taxi transport and specialised air transport, radio broadcasting services, local newspaper publishing and shipping companies dedicated to the commercial exploitation of inshore navigation and coastal fishing. Foreign companies whose intention is to publicly trade securities in Mexico will be subject to the same requirements and regulations appli- cable to Mexican companies. Finally, it should be noted that Mexico is party to several free trade agreements, which may provide additional advantages, benefits and special treatments, as well as limitations or requirements, for foreign investors in their participation in Mexican companies. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Legal mergers The extraordinary shareholders’ meetings approving the legal merger must be registered with the Public Registry of Commerce and published in the electronic system of the Ministry of Economy. The merger will be effective until three months following the completion of the above- mentioned registration. Within such term any creditor of the merging companies may oppose the merger by filing a complaint with the competent court, in which case the legal merger will be suspended until the competent court issues its final resolution. Alternatively, the legal merger will be effective as of the date of completion of the above- mentioned registration: (i) if the merging companies agree on paying all the debts with creditors; (ii) if the merging companies deposit the amount corresponding to such debt in a financial institution; or (iii) with the prior consent of their creditors. Public trade companies Upon receiving the authorisation from the CNBV and the applicable MSE to the OPA, and when all transaction documents are approved, the tender offer will be made public for at least 20 business days and for additional periods of five business days, in case material changes to the original terms and conditions of the tender offer arise, which must be previously approved by the CNBV. The board of directors of the target company must take a public position on the tender offer within 10 business days of the launch of the tender offer and, jointly with the general manager, disclose to the public their position as regards the tender offer with regard to their shares in the target company. Upon expiration of the 20 business days given for the tender offer and no later © Law Business Research 2019
- 146. Mexico Nader, Hayauxy Goebel, SC Public MA 2019146 than three business days following the expiration date of the tender offer, the applicable MSE will settle the tender offer. Foreign investment authorisations If the transaction requires the prior approval of the National Commission of Foreign Investments (Foreign Investment Commission) based on the targeteconomicactivity,anapplicationmustbefiledbeforethisauthority. The Foreign Investment Commission shall issue its resolutions within 45 business days of the day of filing of the respective application; on the understanding that if the Foreign Investment Commission does not issue its authorisation within this term, it should be understood that the authorisation was granted for the foreign participation in the Mexican company pursuant to the terms of the application. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? If the business combinations involves a Mexican financial entity (including banks, insurance companies, brokerage companies, retire- ments investment funds, among others), an authorisation from the respective authority must be obtained prior to the completion of the business combination. Also, if the target entity’s main activity is based under a conces- sion title or special permit (such as mining, telecoms or transportation operations, among others), the business combination will be subject to the prior authorisation from the respective authority. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Tax issues in business combinations in Mexico may vary significantly depending on the structure used for their implementation. One of the main reasons for the parties to adopt any specific structure is the tax benefits or costs that may derive from any particular type of business combinations. The basic tax issues and implications involved in busi- ness combinations are the following. Equity acquisition The seller is subject to income tax for any capital gain arising from the sale of its participation in the target company. If the seller is a Mexican company, any capital gain will be levied at an income tax rate of 30 per cent, and subject to the authorised deductions. If the seller is a foreign entity, in principle, the income tax would be an amount equiva- lent to 25 per cent of the overall purchase price, without any deduction; however, the seller has the option to determine the income tax on the actual capital gain obtained from the sale of its participation in the target company, at a tax rate of 35 per cent and subject to the authorised deductions, provided that, among other requirements, the seller has a representative in Mexico (who must be a Mexican resident or foreign resident with permanent establishment in Mexico), and that the income tax was determined based on a tax opinion issued by a certified public accountant. Asset transfer Tax implications will vary depending on the type of asset to be trans- ferred. In principle, a sale of assets is subject to value added tax at a current rate of 16 per cent, payable by buyer. Recently, tax benefits were published to reduce the tax rate to 8 per cent for sales made in the northern region, subject to the fulfilment of various requirements. Other tax or duties may apply depending on the assets to be trans- ferred (for example, in case of transfer of real estate, such transfer will be subject to the Transfer of Real Estate Tax payable by buyer, in addi- tion to any income tax or value added tax). Legal mergers In principle, legal mergers between Mexican resident companies would not be considered for tax purposes as a sale and transfer of assets and, therefore, would not have any tax implication for the surviving entity, provided that the following requirements are met: (i) a cancellation of registration for legal merger notice is filed with the Tax Payer Registry; (ii) the surviving entity continues to carry out the same activities as those carried out by the merging entity for at least one year following the date in which the merger becomes effective; and (iii) the surviving entity prepares and files the tax returns of the merging entities before the Mexican tax authorities. If these requirements are not met, the legal merger would be considered for tax purposes as a sale of assets subject to the applicable tax rates. Finally, please note that Mexico is party to several tax treaties for avoiding double taxation, which must be considered for the structuring of the business combinations. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The Federal Labour Law (LFT) sets forth the legal framework governing labour and employee benefits. There are no specific labour and employee benefits provided in the LFT arising from a business combination or acquisition involving a public company. From a labour standpoint, the business combination or acquisition should not have an impact on the labour relationship of the target company with its employees, and such labour relationship should be maintained at least on the same terms and conditions with no negative impact for the employees. If there is a change of employer as a result of a legal merger or acquisition, it would be understood that the resulting entity is the new employer and shall maintain the same labour terms and conditions as the previous employer (including the recognition of seniority). If the employee is negatively affected in its labour terms and conditions (owing to a change of location, change of daily work hours, change of employee benefits and perks, among other things), the employee may have the right to claim the termination of the labour relationship before labour courts requesting payment of the corresponding indemnification and sever- ance payment. Often business combinations entailing transfers of employees may include agreements regarding the respective change of employer and the obligations assumed by each of the parties with respect to the employees. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? If the target company is declared in bankruptcy or receivership, in prin- ciple the shareholders must obtain at least the approval of the majority of the recognised creditors under the proceeding to carry out a business combination, except in the case of legal mergers, where any creditor may suspend the process until a final resolution is issued in the bank- ruptcy proceeding. At all times, any resolution regarding the target entity must aim to preserve creditors’ rights. © Law Business Research 2019
- 147. Nader, Hayaux yGoebel, SC Mexico www.lexology.com/gtdt 147 Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? In Mexico, there is no specific law or regulation governing anti-corruption or anti-bribery practices applicable for business combinations. Bribery, corruption and facilitation payments are criminalised under Mexico’s Federal Penal Code and subject to general administrative and criminal regulations sanctions under the new National Anti-Corruption System that became effective on July 2017. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? Tax incentive On 1 December 2018, Mr López Obrador took office as President of Mexico with a proposed agenda that includes changes in the economic, financial and capital markets system. His plan to promote the finan- cial sector includes a reform to the capital markets regulations to promote access from small and midsize companies to financing on the stock market. One of the first measures announced as part of this plan is a proposed tax incentive for initial public offerings. The plan establishes that, during 2019, 2020 and 2021, a reduced 10 per cent income tax rate may apply to Mexican resident individuals, and to non-resident individ- uals or entities, on the profits obtained by these taxpayers from the sale of shares issued by Mexican companies that are residents of Mexico for tax purposes, provided that the sale takes place through an author- ised stock exchange and all other relevant conditions are complied with. This incentive plan is aimed at fostering initial public offerings that may eventually increase public MA activity in Mexico. More reforms are expected to be introduced to reform the capital markets system to create competition and ease access for new issuers (including small and midsize companies) and non-institutional investors. New stock exchange In July 2018, BIVA, Mexico’s second stock exchange, was launched to compete with the BMV, which had been Mexico’s sole stock exchange. The BIVA can trade the same types of instruments as the BMV including for example, equities, debts, FIBRAs, CKDs and CERPIs. The competition between the two stock exchanges is also expected to increase capital markets activity. Julián J Garza C jgarza@nhg.com.mx Luciano Pérez G lperez@nhg.com.mx Paseo de los Tamarindos No. 400-B, 7th Floor Col. Bosques de las Lomas Del. Cuajimalpa CP 05120, Mexico City Mexico Tel: +52 55 4170 3000 Fax: +52 55 2167 3099 www.nhg.mx © Law Business Research 2019
- 148. Public MA148 Netherlands Allard Metzelaarand Willem Beek Stibbe STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? The most common ways for publicly listed businesses to combine are through a public offer or by means of a legal merger. Public offer A public offer can be made in the form of a full offer, a partial offer, a tender offer or a mandatory offer. A full offer is a public offer for the acquisition of all shares in a target company of a specific category or class. This is the most common type of public offer in public takeover practice in the Netherlands. In a partial offer, a public offer is made for the acquisition of shares repre- senting less than 30 per cent of the voting rights in the general meeting of a target company. A tender offer is a public offer where the bidder invites the shareholders of a target company to tender their shares to the bidder at a price determined by each of the shareholders individually, aimed at the acquisition of shares representing less than 30 per cent of the voting rights in the general meeting of that target company. Both the partial offer and the tender offer are relatively uncommon types of public offers. Lastly, if a party – solely or acting in concert – acquires or has acquired shares representing 30 per cent or more of the voting rights in the general meeting of a company (ie, ‘predominant control’), that party is obliged to make a full offer for all shares in that company. Certain exceptions can apply to the obligation to make a mandatory offer. A party is exempt from making a mandatory offer if, for example, that party: • acquires predominant control over a company by declaring a full offer for the shares of the company unconditional, if as a consequence of such declaration that party has acquired more than 50 per cent of the voting rights in the general meeting of the company; • is an anti-takeover foundation (as described in question 9), on the understanding that the anti-takeover foundation may only hold the shares for a maximum period of two years; or • is a trust office that has issued depository receipts for the shares in the company. Legal merger In a legal merger, one entity by operation of law acquires all assets and liabilities of a publicly listed company, which subsequently ceases to exist. WithintheEuropeanEconomicArea(EEA)limitedliabilitycompanies may also enter into a cross-border legal merger, effectively amalgam- ating by operation of law the business of a company incorporated in one EEA jurisdiction with the business of a company incorporated in another EEA jurisdiction (see question 15). Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? Regular business combinations (including legal mergers) are mainly governed by the Civil Code. Public offers, however, are regulated through specific laws and regulations such as the Financial Supervision Act, the Public Takeover Bid Decree and various ancillary regulations. Other Dutch laws and regulations governing business combina- tions and acquisitions of publicly listed companies include: • the Competition Act; • the Works Council Act; • the Merger Code; and • the Corporate Governance Code. European Union law and regulations (eg, on merger control) and national merger control rules of foreign jurisdictions may also be relevant. In the case of a regulated business (eg, financial services and insurance), specific regulatory approvals may be necessary. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In a friendly offer, the bidder and the target company usually enter into a merger protocol. The merger protocol is an agreement that contains certain obliga- tions for the bidder and the (boards of the) target company and the key terms of the offer. In the merger protocol, the bidder undertakes to pursue the public offer and the boards of the target company under- take to recommend the offer to the shareholders. The merger protocol normally also includes provisions on the structure of the offer process. Other matters typically covered in a merger protocol include break fees, non-financial covenants, pre-offer conditions, offer conditions, access to information of the target company, future governance of the target company, exclusivity for the bidder and a ‘fiduciary out’ provision for the boards of the target company in case of a superior competing offer. The merger protocol is usually governed by Dutch law. © Law Business Research 2019
- 149. Stibbe Netherlands www.lexology.com/gtdt 149 FILINGS ANDDISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? In the Netherlands, no stamp taxes or other government fees are due in connection with completing a business combination or acquisition of a public company as such, with the possible exception of real estate transfer tax. See question 18 for tax issues relating to public offers and business combinations involving real estate. The following filings are the most noteworthy. Public offer In the case of a public offer, the bidder must prepare and publish an offer memorandum that must be filed with and approved by the Netherlands Authority for the Financial Markets (AFM). See question 5 regarding the information that needs to be disclosed in the offer memorandum. Legal merger In the case of a legal merger, the management boards of the merging companies have to prepare a merger proposal. This proposal needs to be filed with the trade register of the chamber of commerce and depos- ited at the company’s offices. The relevant companies must also publish a notice of the filing in a daily newspaper with national circulation. Competition filing Under the Competition Act, certain transactions have to be notified to the Netherlands Authority for Consumers and Markets (ACM). A trans- action has to be notified to the ACM if it qualifies as a ‘concentration’ and the turnover of the businesses concerned exceeds the ACM’s juris- dictional thresholds. A concentration is defined as: (i) a merger of two previously independent businesses, (ii) the direct or indirect acquisition of control over a business, or (iii) the establishment of a joint venture that performs all the functions of an autonomous economic entity on a long-term basis. The notification thresholds are that the combined worldwide turnover of the businesses concerned exceeded €150 million in the calendar year preceding the transaction and at least two of the businesses concerned each realised a turnover of €30 million or more in the Netherlands. As a general rule, a transaction that must be notified to the ACM may not be implemented prior to obtaining clearance from the ACM. However, in case of a public offer the shares may be acquired before clearance is obtained, provided that (i) the ACM is immediately notified and (ii) the acquiring party does not exercise the voting rights attached to the acquired shares before the clearance is obtained. If a transaction needs to be notified to the European Commission, no sepa- rate notification to the ACM is required. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? In a public offer, the offer memorandum must include information on: • the names of the bidder and target company; • whether the bidder and target company are party to an agreement regarding the public offer (eg, a merger protocol); • the proposed price or exchange ratio; • an explanation of how the bid is financed; • the offer conditions; • whether the bidder has acquired any irrevocable undertakings from shareholders; • any price-sensitive information related to the bid that might be relevant to a reasonably acting investor; • a statement on the consequences for current employees of the target company; • the total costs related to the transaction and a statement confirming which party bears these costs; and • a summary of the offer memorandum in Dutch if the original version is in English. Ongoing disclosure requirements for public companies Companies listed on a regulated market in the Netherlands have an ongoing obligation to disclose any information which, if made public, would be likely to have a significant effect on the price of its shares. Under the Markets Abuse Directive, such disclosure of information may, however, be delayed if: (i) immediate disclosure is likely to prejudice the legitimate interests of the company, (ii) the delay is not likely to mislead the public, and (iii) the company is able to ensure the confidentiality of the information. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? The Financial Supervision Act includes certain ownership thresholds for shareholders of listed companies (3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 per cent). A shareholder must notify the AFM if he or she obtains shares representing 3 per cent or more of the capital or voting rights. Following notification, the shareholder must notify the regulator if the shareholding reaches, exceeds or drops below one of the thresholds. This disclosure obligation also applies to indirect holdings, potential holdings and economic interests in shares (eg through derivatives). Likewise, short positions must be notified to the AFM. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? General duties The management board and each of its members must perform their duties in the best interests of the company and its business. The compa- ny’s best interests is a combination of the interests of all stakeholders of the company, including shareholders, employees, suppliers and customers. In an acquisition, the management board of the acquiring company is, among other things, obliged to ensure the conduct of proper due diligence on the target company. The supervisory board of a company consists of the non-executive directors of a company. The supervisory board advises and supervises the management board. Supervisory and managing directors can also be combined in a one-tier board. The Dutch Corporate Governance Code contains several govern- ance principles and best practices and is mandatory for listed companies. The focus of the Corporate Governance Code is on continuity and long-term value creation. Shareholders are free to pursue their own interests within the limi- tations of reasonableness and fairness. © Law Business Research 2019
- 150. Netherlands Stibbe Public MA 2019150 Specificduties in case of a public offer The management board and supervisory board of a target company have a central role during a public offer. If the offer is friendly, the management board of the target company, in close consultation with or involvement of the supervisory board, negotiates the financial and non-financial terms of the offer with the bidder. After the bidder has published the offer memorandum, the boards of the target company have to inform the shareholders whether they support the public offer by publishing a position statement. The position statement must include a substantiated explanation of the position of the boards, stating, among other things, their opinion on the offer price and the considerations on which the offer price is based and the consequences of the offer for jobs and employment conditions. In the case of a friendly offer the position statement is usually published together with the offer memorandum. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Shareholders of public companies have a statutory right to approve decisions of the management board relating to an important change in the identity or character of the company or its business. These deci- sions include the transfer of all or substantially all of the business of the company and the acquisition or divestment of an interest in another company with a value of at least one-third of the company’s assets. Further-reaching approval rights can be set out in the articles of asso- ciation of a company. In a full public offer, the target company is obliged to convene an extraordinary meeting of shareholders to discuss the offer. If the public offer is made subject to certain shareholder approvals (eg, approval on post-completion restructuring and/or board appointments), resolutions for such approvals are usually submitted to the shareholders of the target company at the extraordinary meeting. In a legal merger, both the general meeting of the acquiring entity and the general meeting of the entity that ceases to exist decide on the merger by adopting a merger resolution. Alternatively, the acquiring entity may also decide to merge by a resolution of its management board, unless its articles of association provide otherwise. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Although most successful public offers in the Netherlands are friendly, an increasing number of offers start out hostile or unsolicited but eventually become friendly during the preparation phase of the offer process. The rules and regulations relating to public offers as such do not make any distinction between hostile and friendly offers. However, the following is noteworthy in the context of a hostile offer. Put up or shut up rule Under the ‘put up or shut up’ rule, if a potential bidder has disclosed information from which the target company may deduce an offer may be on its way, the target can request the AFM to oblige the bidder to confirm whether or not it intends to launch an offer. If the potential bidder does not confirm that it intends to launch an offer, the potential bidder cannot make an offer for the target during the next six months. Anti-takeover foundation A common defence mechanism against hostile takeovers is the use of an ‘anti-takeover foundation’ (stichting). In short, a foundation is incor- porated and enters into an option agreement with the relevant company under which the foundation has the right to call for newly issued high voting shares in the capital of the company. The potential voting rights of a hostile bidder will be greatly diluted if the foundation exercises its option. Typically special preference shares are used in this mechanism, which may be issued against their nominal value. The anti-takeover foundation can, therefore, acquire a high number of voting rights against minimal cost. The consideration for the shares to be issued to the founda- tion may not be funded with the assistance of the company, as this would violate restrictions on financial assistance. Usually, the anti-takeover foundation has ongoing credit arrangements in place with banks or other institutions for the financing of its subscription to preference shares. This anti-takeover mechanism can, therefore, be utilised at short notice. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? The merger protocol will usually stipulate a break-up fee to be paid by the target company to the bidder in the event the company withdraws its recommendation for the offer or supports a competing offer. Break-up fees are accepted as long as they are intended as reimbursement of the bidder’s realistic expenses. Break-up fees are often calculated as a percentage of the deal value, for example, 1 per cent. The fee may not serve as a de facto ‘poison pill’. However, the board of the target company should be free to consider and possibly support offers that are deemed superior. The definition of ‘superior’ can be negotiated between the bidder and the target as it is not provided by law, although the threshold may not be set too high so as to ensure that the board can comply with its fiduciary duty to act in the best interest of the company and its stake- holders by supporting a competing offer that the board deems superior from an overall perspective. A reverse break-up fee – to be paid by the bidder to the target company – typically might be agreed upon for the event that the bidder does not obtain the relevant clearances for completion of the offer (eg, competition clearance) and hence cannot complete the offer. Reverse break-up fees can be substantial, depending on the circumstances. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Other than the situations as stated in question 17, there is no formal government influence over business combinations or acquisitions. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Conditional offers are allowed under Dutch law and there are generally no restrictions on the types of conditions attached to an offer, provided that the satisfaction of a condition is not controlled by the bidder (ie, © Law Business Research 2019
- 151. Stibbe Netherlands www.lexology.com/gtdt 151 potestative conditionsare not allowed). Examples of frequently used conditions are: • acceptance of the offer by a minimum percentage (usually 70–95 per cent) of shares; • no material adverse change; • no default by a party during the offer process; • no competing offer by a third party; • shareholders to approve post-completion restructuring and board changes; • waiver by anti-takeover foundation of share option; • no withdrawal of irrevocables; and • approval of the competition authorities has been obtained. The financing in a cash acquisition may not be conditional as the bidder must provide a certainty of funds statement by the time the offer memo- randum is filed with the AFM for approval (see question 13). Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? The bidder in a public offer has to provide a certainty of funds statement by the time the offer memorandum is filed with the AFM for approval. In this statement the bidder has to elaborate on the financing of the offer and provide information on how the payment for the shares is ensured. If the bidder wishes to (partially) finance its offer through the issu- ance of new shares or if the bidder wishes to offer newly issued shares instead of cash as consideration for the target shares (eg, in case of an exchange offer), the general meeting of shareholders of the bidder may have to resolve on such issuance. In that case, the bidder has fulfilled its certainty of funds obligation if, ultimately by the time the offer memo- randum is filed with the AFM for approval, the bidder has made a public announcement that a general meeting will take place. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The Civil Code provides two squeeze-out mechanisms for shareholders of Dutch companies. The first is a general mechanism that enables a shareholder who holds at least 95 per cent of the shares of a company to institute proceedings against the other shareholders jointly for the transfer of their shares to the claimant. The proceedings must be brought before the Enterprise Chamber of the Amsterdam Court of Appeal. The Enterprise Chamber will reject the claim against all defend- ants if, notwithstanding compensation, one of the defendants would suffer serious tangible loss by such transfer. The procedure cannot be started if shares with special voting rights are outstanding (eg, golden share or priority shares). The price for the shares is set by the court, usually – but not necessarily – on the basis of the offer price. The second provision is only available to parties who hold at least 95 per cent of the shares of a company as a consequence of a public offer. This provision follows from the implementation of the EC Takeover Directive and only applies if the target company is listed on a market within the European Economic Area. The squeeze-out claim must be filed with the Enterprise Chamber of the Amsterdam Court of Appeal within three months of the expiry of the term for acceptance of the offer. The court will usually set the price for the shares at the offer price unless less than 90 per cent of the shares held by the claimant were acquired in the offer. If the 95 per cent threshold is not satisfied, bidders may resort to alternative options to acquire full control over the business. This control can be achieved, for example, by transferring the business of the target company to a special purpose vehicle owned by the bidder after comple- tion of the offer. In recent years, it has become increasingly common to pre-wire these alternative options as much as possible, for example by negotiating the relevant agreements between the bidder and the target company in advance and by acquiring shareholder approval for the restructuring before completion of the offer. This could save valu- able time following completion of the offer and increases deal certainty. However, none of the alternative structures is free from the risk of being challenged by minority shareholders. Furthermore, these alter- native structures require careful tax review and tax structuring in light of potential tax consequences (eg, withholding taxes and availability of tax relief). Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? A public offer for a Dutch listed company by a foreign bidder is not struc- tured differently from an offer by a domestic bidder. A foreign bidder will usually incorporate a Dutch special purpose vehicle, usually a private limited liability company. Tax considerations, such as interest deducti- bility on acquisition debt and efficient repatriation of future profits to the bidder, are relevant for the acquisition structure, which may include – for example – a holding company located in a Dutch tax treaty jurisdiction. Specific rules apply to a cross-border legal merger, however, this is not a particularly common business combination. The rules for a cross- border merger apply when a Dutch limited liability company merges with a limited liability company incorporated under the laws of another European Economic Area member state. The shareholders of a Dutch entity ceasing to exist who voted against the merger, as well as holders of shares without voting rights, may request to be compensated in cash rather than shares. An independent expert will determine the amount of the cash compensation. Such cash compensation payments may be subject to 15 per cent Dutch dividend withholding tax, depending on the structuring. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Apart from legal mergers, there are no general waiting or notification periods for completing business combinations or acquisitions involving public companies. In a legal merger, a merger proposal must be filed with the trade register of the chamber of commerce and the company’s office. Subsequently, the merging entities must publish a notice of the filing in a daily newspaper with national circulation. After the filing and announcement by all the merging companies, there is a mandatory one- month waiting period. During this period, each creditor of the merging companies may object to the merger in the event none of the companies has provided the creditor with sufficient safeguards for payment of its receivable. The court will reject the objection in the event the creditor fails to demonstrate that the financial position of the acquiring company after the merger provides less certainty of payment to the creditor. Once an objection to the merger has been made, the deed of merger may only be executed after the objection has been withdrawn or lifted. In practice, objections against legal mergers are rarely made. © Law Business Research 2019
- 152. Netherlands Stibbe Public MA 2019152 OTHERCONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Companies operating in certain specific industries are subject to notifi- cation and approval procedures with regard to business combinations. Energy sector In the energy sector, the Minister of Economic Affairs must be notified of any change of control over a power station with a production capacity above 250 megawatts. The business combination can be prohibited for reasons of national security or supply security. Healthcare sector In the healthcare sector, approval of the Dutch Healthcare Authority is required for a business combination involving a healthcare provider if the healthcare provider involved has more than 50 employees. Financial sector In the financial institutions sector, a declaration of no-objection from the Dutch Central Bank is required before acquiring an equity or voting interest of 10 per cent in a financial institution. In the event the financial institution is a bank, a declaration of no-objection from the European Central Bank is required. The decision to grant a declaration of no-objection is based on, among other things, the integrity, suitability and financial soundness of the prospective purchaser. Increases in the interest held by the purchaser above certain thresholds and decreases below those thresholds must be notified to the Dutch Central Bank. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? The tax issues involved depend on the type of business combina- tion involved. Public offer A public offer for the shares in a Dutch listed company is done either directly by a foreign entity or indirectly through a wholly owned Dutch acquisition corporate entity. If the shares are acquired through a Dutch acquisition corporate entity, a fiscal unity may be formed by the acquiring entity together with the Dutch target entities, provided that certain criteria are met (notably that the acquiring entity holds at least 95 per cent of the legal and economic ownership). If a fiscal unity is formed, the interest expenses on acquisition debt at the level of the acquisition entity may in principle be offset against the profits of the Dutch target entities (subject to applicable interest deduction limita- tions limiting, among others, the deductibility of the fiscal unity’s net borrowing costs up to the higher of 30 per cent of its adjusted Dutch taxable profit (the EBITDA for tax purposes) or €1 million). Share deals are in principle not subject to value added tax in the Netherlands. It is important, however, to be aware of the corporate income tax anti-abuse rules in respect of foreign shareholders. According to these anti-abuse rules, a foreign shareholder with a substantial interest (ie, generally a shareholding of 5 per cent or more) in a Dutch resident company may under certain circumstances be subject to Dutch corporate income tax (statutory rate of 25 per cent) as a non-resident taxpayer in respect of dividends received or capital gains realised. Generally, these anti-abuse rules do not apply in the case of active investment in Dutch targets. A tax treaty may shelter shareholders from these anti-abuse rules. Other business combinations Subject to certain conditions, there are rollover provisions available for certain business reorganisations (eg, legal mergers and demergers). Under these rollover provisions, the transfer of assets or shares takes place on a non-recognition basis to the extent that the transferee records those items for the same value in its tax books. Real estate transfer tax With respect to publicly listed real estate investment companies, real estate transfer tax at a rate of 2 per cent (residential real estate) or 6 per cent (commercial real estate) could be levied on the acquisition of shares or similar rights if the buyer obtains, directly or indirectly, an interest of at least one-third in a real estate investment company (including shares and rights already in possession). This is the case if the assets of the resident or non-resident real estate investment company consist of more than 50 per cent of real estate assets and at least 30 per cent of the real estate is situated in the Netherlands provided the real estate, as a whole, is or was mainly used at that time for the acquisi- tion, sale or exploitation of the real estate. There are certain exemptions available. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Works Council Act Employees of Dutch companies are represented within the company through the works council. Companies with more than 50 employees are obliged to establish a works council. The rights of the works council are determined by the Works Council Act. The works council must be given the opportunity to advise on intended economic, organisational and financial decisions of the company (eg, the decision by the board of the target company to recommend a public offer). The advice must be requested at such a point in time that the works council’s advice can (still) influence the actual decision. This means that the advice is to be requested when the content of the contem- plated decision has been sufficiently determined, but before the decision is actually taken. The works council is usually consulted after signing of the merger protocol. When seeking advice, the reasons for the intended decision will have to be explained, as well as any consequences for the employees. If the advice of the works council is neutral or positive, the company may start implementing the decision. If the advice of the works council is negative, the company is obliged to postpone the implementation of the decision for one month. Completion of the works council consultation procedureisoftenincludedasapre-offerconditioninthemergerprotocol. During the aforementioned one-month waiting period, the works council may file an appeal with the Enterprise Chamber of the Amsterdam Court of Appeal. During the postponement period and as long as the proceeding continues, the company may not implement its decision. The works council may also appeal to the Enterprise Chamber if the company implements its decision without seeking advice. There is no specific time frame for completion of the advice process. The entire process generally takes a few weeks (four to eight), but may take longer if the transaction has serious consequences for the employees. Merger Code Under the Merger Code, the Dutch Social and Economic Council and the relevant trade unions may need to be notified of a transaction and the trade unions may need to be given the opportunity to share their views on the transaction. © Law Business Research 2019
- 153. Stibbe Netherlands www.lexology.com/gtdt 153 Restructuring, bankruptcyor receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? In the Netherlands, bankruptcy and insolvency proceedings are governed by the Bankruptcy Act. The Bankruptcy Act does not contain any special considerations for business combinations or acquisitions involving a bankrupt target company. If a company is in financial difficul- ties and heading towards insolvency, it is possible to pre-wire a restart of the company through a pre-pack transaction. There are currently no regulations on pre-packs, but proposals are pending to regulate pre- pack transactions through special legislation. If a company is declared bankrupt, the court will appoint a bank- ruptcytrustee.Thebankruptcytrusteeischargedwiththeadministration and liquidation of the bankruptcy estate and has power of disposal over the assets of the company. As a consequence, transactions, including a transfer of assets or shares in a subsidiary of the bankrupt company, require the consent of the bankruptcy trustee. Furthermore, several actions of the bankruptcy trustee require the prior approval of the bank- ruptcy judge – who supervises the bankruptcy trustee – or a special creditors’ committee. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? There are no specific rules on anti-corruption, anti-bribery and economic sanctions in connection with business combinations with, or acquisi- tions of, a public company. The Criminal Code prohibits corruption and bribery of both government officials (public sector bribery) and non- government officials (private sector bribery). Under the Criminal Code, both the giver and the receiver of a bribe can be held criminally liable. Both individuals and companies can be held criminally liable in certain situations. If a company is prosecuted, individuals, for example directors or other executives, can also be held criminally liable with regard to offences attributed to the company. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? Partly in response to a series of (attempted) unsolicited public offers for iconic Dutch companies, there is an ongoing debate in the Netherlands (and also in the EU) on the protection of companies against hostile take- overs and the protection of vital sectors. In the coalition agreement of the government (published in October 2017), three measures have been included aimed at reducing short-termism and stimulating value crea- tion in the long term: • public companies that are faced with proposals for a fundamental change of strategy at the general meeting or unsolicited takeover bids will have the opportunity to call a reflection period of 250 days; • companies within certain vital sectors (eg, telecoms, energy, IT, drinking water, nuclear sector, financial sector, defence) can only be acquired – subject to materiality thresholds – following govern- ment approval, which approval may be subject to certain conditions; • public companies with an annual turnover of more than €750 million will have the opportunity to ask a shareholder who holds more than 1 per cent of the shares to register with the AFM as a major shareholder. This registration is currently mandatory for shareholders with an interest of 3 per cent or more (see question 6). Note that the coalition agreement reflects principles of policy of the government and that these measures still need to be formalised in legislation. Legislative proposals are being prepared for the 250 day reflection period and the protection of the Dutch telecoms sector. 250-day reflection period It is proposed to grant the management boards of public companies the opportunity to call a 250 days reflection period if – in short – a shareholder proposes to appoint, suspend or dismiss a management or supervi- sory board member or if a public offer is announced or made without agreement with the company, and the board is of the opinion that such proposal or public offer conflicts with the interests of the company and its business. If the management board invokes the reflection period, the board has to collect all information necessary for a careful policy deter- mination and consult the significant shareholders (ie, holding more than 3 per cent of the shares), the supervisory board and the works council of the company. The proposal is still in the form of a preliminary draft. Protection of companies within vital sectors The government is currently analysing certain vital sectors to identify any risks for national security that may arise in case of takeovers by foreign parties. On the basis of the analysis the government will deter- mine whether the existing instruments provide sufficient comfort in that respect. In anticipation of the aforementioned vital sector analysis, a draft legislative proposal to prevent undesirable acquisitions or exercises of control over Dutch telecoms providers was published by the Department of Economic Affairs in February 2017. The proposal introduces a duty of disclosure for a party that wants to take over a Dutch telecoms provider and as a consequence would acquire relevant influence in the telecoms sector. The planned acquisition must be reported in advance to the Department of Economic Affairs, and the Minister of Economic Affairs subsequently has the authority to prohibit the acquisition or exercise of control. The proposal is still in the form of a preliminary draft. Allard Metzelaar allard.metzelaar@stibbe.com Willem Beek willem.beek@stibbe.com Beethovenplein 10 PO Box 75640 1070 AP Amsterdam Netherlands Tel: +31 20 546 06 06 Fax: +31 20 546 01 23 www.stibbe.com © Law Business Research 2019
- 154. Public MA 2019154 NorthMacedonia Emilija Kelesoska Sholjakovska and Ljupco Cvetkovski Debarliev, Dameski Kelesoska Attorneys at Law STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? According to North Macedonian legislation, a company is considered publicly listed if it has been incorporated as a joint-stock company and its stocks are publicly listed on a stock exchange. A business combina- tion of publicly listed companies can be achieved by way of acquisition, by way of ‘status changes’, which include, among others, merger and conjoining, or by way of a cross-border merger. In the latter area of law, North Macedonian legislation is harmonised with the EU acquis communautaire. It should be noted that according to the North Macedonia Trade companies Law, consolidated annual accounts are prepared when a company has a controlling influence (holding directly or indirectly, an amount of shares as a part of the basic capital that gives a majority of the votes at the shareholders’ meeting; owns a majority of votes in another company on the basis of a contract concluded with the share- holders or practically determines, through the votes at its disposal, which decisions will be adopted at the shareholders’ meeting in the company) over another company. The most common type of business combination in North Macedonia is the direct acquisition of a company’s shares or assets. Acquisition of more than 25 per cent of the shares of publicly listed companies is regulated by the North Macedonian Law on Takeover of Joint-Stock Companies (the Takeover Law) and may be done solely by way of a binding takeover bid. However, a combination of business may also be done by way of a merger and conjoining, which may be performed in accordance with the procedure regulated in the Trade Companies Law, namely one or more companies may be conjoined (companies subject to acquisition) by way of transfer of all the assets and liabili- ties to another existing company (acquiring company), in exchange for shares in the acquiring company. Similarly, two or more companies may merge without conducting a liquidation procedure, by transferring of all their assets and liabilities to a newly founded company, in exchange for shares of the newly founded company (beneficiary) (terms conjoining and merger hereinafter referred to as: merger). Furthermore, in accordance with the Trade Companies Law, joint- stock companies registered in North Macedonia and limited liability companies registered in the European Union may merge by way of a cross-border merger. A cross-border merger is possible only between North Macedonian joint-stock companies and limited liability companies registered in the European Union, excluding investment fund manage- ment companies and other similar types of companies with their main business of acquisition of funds for financial investment. Additionally, business combination is possible through public- private partnerships in accordance with the Law on Concessions and Other Forms of Public-Private Partnership. A public–private partnership is a venture undertaken by a private partner for the needs and benefit of the public partner with a paid contribution. In accordance with this law, the public partner may be the Republic of North Macedonia, the municipalities or the city of Skopje, public enterprises and other public institutions, trade companies established either by the state, the munici- palities or the city of Skopje, companies where the state or the bodies of the municipalities and the city of Skopje control them (ie, if any of them owns a significant amount of the capital of the company, if they have a majority of the shareholders’ votes and more than half of the members of the management board of the company), as well as other legal enti- ties that execute public duties following public authorisation. In these cases the private partner can be a foreign or domestic natural or legal entity, or a consortium, to which the public–private partnership contract is awarded. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? In general, the following laws and regulations govern business combinations: • the Trade Companies Law; • the Takeover Law; • the Securities Law; • the Rules for Trade on the North Macedonian Stock Exchange; and • the Law on Obligations. Depending on the business activity of the companies subject to acquisi- tion or the size of the transaction, or both, some particular rules may apply, including but not limited to the ones contained in the following laws and regulations: • the Competition Law; • the Banking Law; • the Investment Funds Law; and • the Insurance Supervision Law. Furthermore, provisions of other laws may have significant effect on the transaction, especially provisions of the following laws: • the Foreign Exchange Law; • the Profit Tax Law; • the Labour Law; and • the Law on Concessions and Other Forms of Public-Private Partnership. © Law Business Research 2019
- 155. Debarliev, Dameski Kelesoska Attorneys at Law North Macedonia www.lexology.com/gtdt 155 Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? In general, acquisition of small amount of shares of publicly listed companies is realised through transaction on the North Macedonian Stock Exchange. The Stock Exchange market is divided into two segments: the official market (consisting of four segments: super listing, stock-exchange listing, mandatory listing and listing of small joint-stock companies) where stock companies are publicly traded and the regular market (the ‘free market’) where joint-stock companies are registered, but their shares are not publicly listed. Purchase and sale of shares in publicly listed companies on the official market may be performed only though an authorised member of the North Macedonian Stock Exchange (a brokerage house, bank or representative office of a foreign brokerage house admitted to membership of the North Macedonian Stock Exchange). Usually, regular trade of stocks on the North Macedonian Stock Exchange requires a one-sided instruction to the authorised member of the North Macedonian Stock Exchange (an order) by the client. Regular trading on the official market does not require conclusion of a trans action agreement between the seller and the purchaser of stocks. In cases of acquisition of more than 25 per cent of any publicly listed company, the transaction is, therefore, not performed on the North Macedonian Securities Exchange market, instead transac- tions are directly registered in the Central Securities Depository (with brokerage of the ‘authorised person’, usually an attorney-at-law or any other person authorised to act on behalf of the bidder in the procedure). As an exception, conclusion of a transaction agreement is obliga- tory for administrators’ block-transactions, which are usually being done outside the regular stock-exchange trade and have a limited number of participants (transactions exceeding 60 million denar), and must reach a minimum value (exceeding 5 million denar). The governing law of the transaction agreements may be agreed upon the parties’ will; however, it should be noted that application of foreign governing law is possible only when the transaction has a foreign element (one of the parties is a non-resident) and it is not possible when both parties are residents. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? In cases of an intent for acquisition of more than 25 per cent of the total number of stocks with voting right in a publicly listed company, the potential acquirer must adhere to the binding public offering procedure as prescribed in the Takeover Law. The procedure of public offering prescribes an obligation for notification for the intent to acquire, namely the potential acquirer would have to notify the management body of the target company, the Securities Exchange Commission, the Central Securities Depository and submit a notification to the Commission for Protection of Competition, and make a public announcement of the intent. Additionally, the potential acquirer would have to obtain prior approval for the public offer from the Securities Exchange Commission before its public announcement. The mandatory regulations prescribe an obligation to pay administrative fees; however total amount of administrative fees of the procedure vary depending on the business activity of the target company (from €250 up to €2,000 or more). It should be noted that the public offer is not compulsory in cases when the value of the transaction is less than €25,000 or the potential acquirer intends to acquire less than 25 per cent of the company’s basic share capital. The transaction made by way of a public offering is not performed on the stock exchange market, but directly in the Central Securities Depository. When a business combination involves the merger of public compa- nies, the procedure is quite similar and includes two phases: Phase I is the ‘Pre-registration’ or ‘Announcement’ phase, and Phase II concerns closing of the transaction – adoption of a decision for confirmation of the agreement by the shareholders’ assembly. That is, after the transaction agreement has been signed (an agreement for merger of companies by the management bodies of the companies involved), a compulsory pre-registration procedure must be carried out. The parties are obliged to notify and report the conclusion of the agreement to the North Macedonian Stock Exchange reporting system immediately after the signing of the agreement. During the Phase I procedure, the agreement shall be reviewed by one or more certified auditors. An auditor shall be appointed separately for each company by the management bodies of the companies that participate in the merger. However, the audit may be performed by one audit firm for all of the companies involved if appointed by the court upon their joint request. One month prior to the adoption of decision for confirmation of the transaction agreement, the management bodies of the companies that concluded the agreement shall, no later than one month prior to the adoption of the final decision on the merger (adopted by the shareholders’ meeting), jointly publish a public announcement on the concluded agreement in the Official Gazette of the Republic of North Macedonia and in at least one daily newspaper. Where a company is aware of creditors whose claims exceed €10,000 in denar counter-value, each of them shall be notified separately in writing. Additionally, the conclusion of the transaction agreement must be registered in the Central Register of Trade Companies within the same term. Once the agreement has been entered, a notice shall be published in the Official Gazette of North Macedonia stating that the pre-registra- tion has been entered in the commercial register and that the agreement is available for inspection by any interested third parties (shareholders or creditors). Additionally, within the same term (ie, at least 30 days prior to the scheduled shareholders’ meeting), the companies involved must make a public announcement and thereby, invite the shareholders’ to partici- pate and to vote on the shareholders’ meeting. Each company participating in the merger shall enable its share- holders to review the documents relevant to the merger for a period of at least one month prior the date on which the shareholders’ meeting is scheduled. The Phase 2 procedure starts after expiry of the compulsory 30-day period, and thereby, the shareholders’ meetings of all companies involved shall adopt a decision for approval of the transaction agree- ment with a simple majority vote. The agreement shall become effective once the shareholders’ general meetings of the companies involved in the transaction approve it. The procedure may be simplified, if the acquiring company owns at least 90 per cent of the parts or shares represented by the share capital of the target company in a way that the approval of the shareholders’ meetings shall not be required. The merger procedure includes costs for administrative fees payable to the CTR ranging from of €10 to €150, depending on the subject of registration. Note that if the business combination qualifies as a concentra- tion pursuant to the Competition Law, a compulsory notification to the Competition Commission is required. © Law Business Research 2019
- 156. North Macedonia Debarliev,Dameski Kelesoska Attorneys at Law Public MA 2019156 A concentration shall be deemed to arise where a change of control on a lasting basis results from the merger of two or more previously independent undertakings or parts of undertakings or the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of shares or assets, by contract or by any other means prescribed by an order of law, of direct or indirect control of the whole or parts of one or more other undertakings. The following thresholds shall apply when the concentration is subject to compulsory notification to the Competition Commission: • the aggregate income of all participating undertakings, gener- ated by the sale of goods or services on the world market, was more than the equivalent of 10 million denar in the business year preceding the concentration and provided that at least one partici- pant is registered on the territory of North Macedonia; • the aggregate income of all participating undertakings, generated by sales of goods or services on the territory of North Macedonia in the business year preceding the concentration, is more than the equivalent of 2.5 million denar counter-value; or • the market share of one of the undertaking participants exceeds 40 per cent or their joint market share on the market exceeds 60 per cent. The administrative fees for notification in front of the Commission for Protection of Competition may vary from €100 to approximately €600. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Types of public announcements depends on the type of the procedure, namely whether the business combination occurs by way of acquisi- tion of a public company with a public offering or by way of merger of public companies. If the business combination involves any legal entity that either has conducted a public offering of securities, besides the announcements in question 4, that legal entity has to notify the Securities Exchange Commission of the results of the public offering and any changes in the ownership of the company that occurs shall be registered in the Central Securities Depository. A compulsory public announcement is to be made on the proposal for the cross-border merger, with the conditions thereof, in the Official Gazette of North Macedonia and on the official website (if any) of the company at least one month before taking the decision of shareholders’ meeting of the company for accepting or refusing the cross-border merger. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? When any legal entity or natural person purchases or otherwise acquires securities issued by a publicly listed company in an amount such that the owner, directly or indirectly, owns in aggregate more than 5 per cent of any class of security issued by the reporting company, the owner shall file a report with the Commission and the issuer disclosing the owner- ship within five business days after the settlement of a contemplated transaction. Any legal entity or natural person who, directly or indirectly, owns more than 5 per cent of any class of security issued by a reporting company shall report to the Commission all subsequent acquisitions and dispositions of all securities issued by the company and the issuer within five business days, regardless of the legal grounds of the change. The requirements are not affected if the company is a party to a business combination. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? The transaction agreement, and all elements deemed as constituent parts of it, are to be made available to all the members or shareholders in the registered office of the companies participating in the merger. The notification referred to above is to specify the time-frame and other details significant for each member or shareholder in regards to the inspection. The creditors of whom the company is aware, whose claims exceed the equivalent in denar of €10,000 are to be notified in writing, individu- ally, at their place of residence or at their registered office if the creditor is a legal person. Creditors of the companies involved in the merger whose claims are still not matured and who consider that the merger could endanger the settlement of their claims, are authorised to file a request to obtain security for their claims. In the event that the companies involved in the merger fail to respond to the creditor’s request within 15 days of the date of the filed request or fail to provide the required security, the creditor may, within the next eight days, submit a claim to the court to stop the procedure for merger. If the court determines that in the course of the procedure for merger the creditor’s request was not considered or that the required security was not provided, it may stop the proce- dure, until the companies involved in the merger submit evidence to the court that the claim of the creditor has been secured. The management bodies that have concluded the transaction agreement should prepare a written report, which is to be made avail- able to the shareholders at least one month prior to the meeting of the shareholders, explaining the following in detail: • the reasons, or the objective to be achieved by the merger; • the legal and business issues, as well as the proposed legal and economic grounds for the merger; • the criteria and methods that determine the exchange ratio of the parts or shares and the criteria for their distribution; • the contents of the documents and the draft agreements for merger; • any difficulties that occurred in the course of the procedure for the appraisal of the assets and liabilities; • the non-monetary contributions transferred, as well as any prob- lems that arose from the appraisal carried out in accordance with article 35 of the Trade Companies Law and a reference to the reports on the basis of which they were appraised and the manner in which such reports have been made available; • any change in the assets and liabilities that occurred between the date of execution of the agreement and the date of the shareholders’ meeting at which a resolution for merger shall be decided upon; and • any amendments made in the agreement due to an obligation to act in accordance with the recommendations of the auditors. The management body of a North Macedonian company in a cross- border merger, as well as the proposal with the conditions thereof, is obligated to announce the following details: • the form, name and registered seat of each company involved in the merger; • the register where each of the companies that are involved in the merger is registered and their registration number; and © Law Business Research 2019
- 157. Debarliev, Dameski Kelesoska Attorneys at Law North Macedonia www.lexology.com/gtdt 157 • for each company involved in the merger, the terms and conditions under which minority shareholders are acquiring their rights, form of settlement for the creditors and the address where information concerning the above can be obtained free-of-charge. Also, the management body must prepare a report for cross-border mergers including an explanation justifying the legal and economic aspects of the cross-border merger and the possible consequences for and influence over the shareholders, creditors and employees. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? In cases of takeover of a public company by way of a takeover bid, it is a basic principle of the procedure that the shareholders of the target company must be fully and accurately informed on the takeover bid in a timely manner in order to have enough time to properly evaluate the bid, define their interests and make a decision to accept or reject the takeover bid. However, it should be noted that the price of the stocks is determined based on listed price in the previous 12 months, or on the basis of the price of a certified appraiser. In any case, the shareholders do not have any right to request appraisal or any other similar rights. In cases when the business combination occurs by way of a merger of public companies, the final decision on the merger is made by the shareholders at the shareholders’ meeting (approval to the transaction agreement signed by the managing bodies of the companies involved). The decision is usually adopted by a simple majority of the votes; however, if the combination would result in increasing the obligations of the shareholders, the decision on the business combination must be made unanimously by all shareholders. The agreement shall have legal effect once the shareholders’ meetings of the companies involved in the business combination approve it. The approval of the transaction agreement by the shareholders’ meeting of the acquiring company is not required if the acquiring company owns at least 90 per cent of the shares represented in the basic share capital of the target companies, involved in the merger. In the event any of the shareholders do not approve the transac- tion, they are entitled to request buy-out of their shares. The price of the shares is determined as stated in the decision adopted at the share- holders’ meeting. If the acquiring company does not accept the buy-out offering, the shareholder may request buy-out of its shares by initia- tion of a court procedure and on a price determined by the appointed appraiser. In a cross-border merger, the proposal with the terms and condi- tions of the merger is subject to a compulsory appraisal by an authorised appraiser, who will prepare an official report. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? In accordance with some of the latest changes to the Company Takeovers Law, during the takeover procedure, the managing board and the supervisory board of the target company must act in the interests of the company as a whole, and must not deter the owners of the shares from taking a decision regarding the takeover bid. The management bodies of the target company are to prepare a report in which they express their opinion on the influence and the business operations of the takeover bid on the target company and the reasons on which their opinions are founded. The fact that the manage- ment must not deter the owners of the shares from taking a decision on the takeover bid gives reason to believe that the management must be neutral, and cannot take any actions to stop or impede the takeover. Moreover, the laws prescribe limitations imposed on the manage- ment board during the time the procedure is active. In accordance with the Takeover Law, once the takeover bid is published, from this moment to the moment of publishing the outcome of the takeover bid, the managing body cannot take the following steps without a resolution of the shareholders’ meeting: • increase the basic capital of the target company; • take actions that do not form part of the ordinary course of busi- ness of the target company; • take actions that could endanger the further working of the target company; • take actions to acquire own shares or other types of own securities by the target company itself, from which a right to swap or acquire own shares arises; and • take actions whose only purpose is to prevent or to make the acceptance of the takeover bid more difficult. The takeover bid may be followed by other takeover bids (competitive bid). Competitive bids may be made at least 15 days before the ending of the initial takeover bid. Based on the information published by the offeror on whether the purchase offer was successful, the Securities Commission brings a resolution on the success of the purchase offer. In the event the takeover bid was unsuccessful; the takeover bid was revoked by the potential acquirer; the takeover bid was conditioned with and thereby terminated as a result of a required approval, permit or other consent by other authorised body, besides the Securities Exchange Commission; or the takeover bid was conditioned and thereby terminated as a result of non-fulfilment of any of the conditions, the offeror cannot make new purchase offers and cannot purchase the securities to which the purchase offer referred to in the 12 months following the resolution of the Commission, if those stocks, along with the remaining stocks that the offeror had already possessed, gave him or her more than 25 per cent of the stocks with voting right. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? No fees are prescribed where the offeror decides to cancel the intention to purchase. However, in this case, the offeror cannot make a new offer before the expiry of a one-year term from the day of the cancellation. The new offer can be given in a shorter period in the case of the cancellation of the intent being made based on the Securities Exchange Commission’s consent. In the case of traditional bidders (competitive bid), the Takeover Law prescribes an option that the bidder can withdraw the acceptance takeover bid. This can be done in the period from the publishing of the purchase prospect until the expiry of the term for the acceptance of the bid. The bidder is to publish the withdrawal within one day of the date of the withdrawal and inform the Securities Exchange Commission and the Central Securities Depository of the withdrawal of the offer. As for competitive bids, it should be noted that they can only be made by a person who is not connected with the person who made the initial bid and is not a bank or a brokerage house making the bid in the name and on behalf of the initial bidder. © Law Business Research 2019
- 158. North Macedonia Debarliev,Dameski Kelesoska Attorneys at Law Public MA 2019158 Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? In general, apart from the competition regulations, legislation in North Macedonia imposes no restrictions on business combinations. Official bodies can object to cross-border mergers only if they breach competi- tion law and other regulations concerning the public interest. Special provisions are only defined for financial institutions, as well as the legal entities performing activities of transfer of real estate, revi- sion and accounting, as well as other similar activities through which real estate is acquired. In accordance with the Law on Prevention of Money Laundering and Financing of Terrorism, the entities that are obliged to reveal and prevent money laundering or financing of terrorism are obliged to undertake measures of prevention such as: • KYC procedures – the entities are obliged to perform analysis of the purpose and the intention of the activities and they must prepare written report for the analysis; • risk assessment procedures – they must determine the risk of money laundering and financing terrorism before introducing in use new technologies or technologies in development and new products or services; they must also determine the risk of using the new technologies for money laundering and financing terrorism; • procedure on recognition of complex and unusual transactions or suspicious transactions that are performed on an unusual way, which does not have obvious economic justification or evident lawful purpose. • special reporting procedures – both insider and reporting to the Financial Intelligence Office (FIO); • other procedures; It a general rule that any transaction that exceeds €15,000 should be reported to the FIO by the end of the day of the performance of the transaction. In the event there is a suspicion over the performance of a criminal act (money laundering or financing of terrorism), the FIO may request the withholding of the performance of the transaction. Also, the Securities Exchange Commission may reject the issuance of a permit for a competitive bid if it determines that it is an offer whose sole intent is to alter the price of the target company’s stocks to which the bids refers. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? The takeover can be conditioned by the smallest quantity of securities to which the takeover bid refers to, which is to be accepted, so that the takeover bid is considered successful. As for conditional financing in a cash acquisition, the purchase offer is to specify the price and conditions of purchase or where the case is an exchange offer, the exchange ratio must be specified. The offeror cannot change the offer or the conditions in the purchase offer apart from the cases where it is approved by the Securities Commission. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Financing for a transaction can be made by a financial institution, with performance of the payment directly from the said institution. A possible way of performing the financing is opening an escrow account, with documentation that explains the purchase transaction. After several conditions are met, and upon joint approval of the parties, a financial transaction can be closed successfully. Also, the buyer can obtain a loan from the financial institution, strictly for the transaction to be made, so the payment can be made directly from the financial institution. The conditions for obtaining a loan depend on the rules and regulations of the financial institutions separately. Generally the seller does not have an obligation to assist the buyer in the financing; however, if this is agreed upon, it shall then depend on the mutual agreement between the seller and the buyer, as this issue is not regulated by law. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? Yes, but only in certain cases. According to article 63 of the Takeover Law, when the bidder in a takeover procedure acquires a minimum of 95 per cent of the shares with voting rights of the target company, the bidder has the right to buy the shares from the remaining shareholders that do not accept the takeover bid. This additional buying must be done according to the same terms and conditions that refer to the takeover bid. If the bidder uses this right, he or she must submit a request to the Central Securities Depository to purchase the shares of the share- holders that do not accept the takeover bid, setting out the same terms and conditions for buying the shares as those set in the public takeover bid; he or she must also pay the amount necessary for buying these shares into the account of the Central Securities Depository. The Central Securities Depository will then inform all remaining shareholders of the submitted request for the offered purchase and call them to provide the Central Securities Depository with the data for the bank account to the payment will be conducted. The request for an offered purchase of shares of the shareholders that do not accept the takeover bid, can be submitted by the bidder in a time period no longer than 90 days from the day of announcement of the decision regarding the success of the takeover bid by the Commission, in the Official Gazette of the Republic of North Macedonia. The request for offered purchase of shares of the shareholders that do not accept the takeover bid, must be announced by the bidder in the Official Gazette of the Republic of North Macedonia, as well as in one public newspaper that is published nationally in the whole territory of North Macedonia. In the request for the offered purchase of shares of the share- holders that do not accept the takeover bid, one of the alternatives for the payment of the shares must be cash payment, disregarding any other method of payment offered and used in the takeover bid. The Central Securities Depository performs the payment of shares on behalf of the bidder and the transfers of the shares on behalf of the bidder; all costs for these transactions shall be borne by the bidder. According to article 64 of the Takeover Law, when the bidder in a takeover procedure buys a minimum of 95 per cent of the shares with voting rights of the target company, he or she has the obligation to buy © Law Business Research 2019
- 159. Debarliev, Dameski Kelesoska Attorneys at Law North Macedonia www.lexology.com/gtdt 159 the shares from the remaining shareholders that do not accept the take- over bid, if those shareholders submit a request for the forced purchase of shares in front of the Central Securities Depository. All of the above stated terms and conditions for conducting the procedure when the bidder states the offered purchase apply to the procedure when the remaining shareholders request a forced purchase. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Cross-border transactions are regulated by the Law on Foreign Exchange Operations. According to this law, cross-border transactions are defined as current and capital transactions. Current transactions are defined as transactions between residents and non-residents, the objective of which is not a transfer of capital. The payments and transfers for a current transactions shall include: • payments due on the basis of goods and services exchanges, as well as the usual short-term banking payment instruments and credit instruments connected with an exchange of goods and services; • interest payments for credit and net income payments from other investments; • repayment of a reasonable balance of credit or payments arising from depreciation of direct investments; and • reasonable remittances for covering the costs of living. Capital transactions are defined as transactions between residents and non-residents with the aim of transferring capital, as follows: • direct investments; • investments in real estate; • securities operations; • transactions with documents for participation in investment funds; • credit operations, • sureties and guarantees; • deposit operations; and • transfers in performance of life assurance and credit insurance. Direct investments are defined as investments by an investor with the aim of establishing lasting economic links or realising a right to manage the trade company or other legal entity in which he or she is investing. The following shall be deemed as direct investments: • establishment of a trade company or increase of the basic share capital of a trade company in full ownership of the investor, establishing branches, or the acquisition of full ownership of the existing company; • participation in a new or existing trade company if the investor holds or acquires more than 10 per cent of the basic share capital of the trade company, that is, more than 10 per cent of the voting rights; • long-term loan with a maturity period of five years, when it is a matter of a loan from the investor and it is intended for a trade company in his or her full ownership; and • long-term loan with a maturity period of five or more years , when it is a loan intended for establishing lasting economic links and if such loan has been granted between economically associ- ated entities. Direct investments of non-residents in North Macedonia shall be free, unless otherwise provided by a separate law. Within 60 days of the performance of the capital transactions serving a legal basis for a direct investment in North Macedonia, non-residents are obliged to report the investment and all subsequent changes thereof to the Foreign Direct Investments Register within Ministry of the Economy. The Ministry of the Economy shall register the investment and all subsequent changes thereof in the register of direct investments of non-residents in the Republic of North Macedonia. The Ministry of the Economy shall keep a registry of direct investments of non-residents in North Macedonia. In accordance with the latest changes of the Law on Foreign Exchange Operations, North Macedonian residents are allowed to invest in securities abroad and may issue or register domestic securi- ties abroad. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? An obligation for notification is imposed on the president of the managing board, who is obliged to notify the Central Securities Depository of the merger within eight days of the day of the recording of the new company (or the merger or the division of the joint-stock company). A warrant is to be given in this term for the changes to be recorded in the share- holders’ book, namely, for opening a new shareholders’ book. Also, each company must submit an application for the recording of the merger in the Central Register. The submission of the application to the Central Register must be accompanied by a statement given by the members of the managing board that all the decisions for the merger have not been challenged in the prescribed period, or that the challenge has been refused with final court decision. In cross-border mergers, a period of at least one month is set forth between announcing the proposal for a cross-border merger and the decision by the shareholders’ assembly. After taking the decision for accepting the proposal for the cross-border merger, the merger company must submit a request for a certificate for the pre-merger from Central Register. The Central Register shall issue a certificate for pre- merger within three days, counting from the date that the completed documents together with the request are received. The Central Register shall issue a final decision on registering the completed cross-border merger within eight days from the day of submitting the completed documents of the new company. The legal consequences of the combination occur from the date of publishing the recording of the inscription of the combination in the trade register. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Some regulated activities may be subject to additional prior approvals or subsequent additional notifications with regard to mergers and acqui- sitions. For example, for a merger or acquisition of a bank, the National Bank of the Republic of North Macedonia must issue a prior permit for the merger before it is carried out or a prior approval for acquisition of the bank. The relevant regulatory body for insurance companies is the Insurance Supervision Agency, which must give prior consent for direct or indirect acquisition of qualified participation in an insurance company. Other sectors that are regulated include fund management companies, financial leasing companies and other non-banking financial companies, etc. © Law Business Research 2019
- 160. North Macedonia Debarliev,Dameski Kelesoska Attorneys at Law Public MA 2019160 Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? In accordance with VAT Law, no VAT is paid on trading with securities. However, when the seller of the securities is a legal entity, corporate tax shall be paid on the amount of income generated by the sale of securi- ties, and this amount is included in the tax basis of the company selling the securities. The capital income represents the difference between the sale price of the securities and their purchase price. The capital income made from the selling of securities is included in the tax basis at 70 per cent. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? Business combinations related to labour and employee benefits are regulated by the Company Law and the Labour Law. The Company Law prescribes certain elements that the merger settlement and the division plans are to contain, such as the conditions under which the working relationship will be continued with employees of the company subject to takeover. This settlement is made between the managing bodies of the company subject to the company combination, and the division plan is made by the managing body of the company that is subject to division. Pursuant to the Labour Law, all rights and obligations concerning the Employment Agreements are transferred to a new employer, resulting from a business combination. The new employer is obliged to keep the employees at least one year. In the case of a business combi- nation, if the rights of the employees are reduced and this results in the cancelling of the employment contract, it shall be considered that the employer cancelled the employment contract for business reasons. Furthermore, the Takeover Law prescribes that in case of acquisi- tion of a publicly listed company, the employees must be notified for the proposed acquisition. However, the obligation to notify the employees or the authorised representatives of the employees’ organisation within the target company is on the burden of the management body of the target company. The employees are authorised to state their own opinion on the takeover bid and the procedure for takeover of the target company. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Mergers of companies can be conducted for a target company that is in bankruptcy on condition that the open bankruptcy procedure will be stopped for the reorganisation of the company, when it has been prescribed in the reorganisation plan of the bankruptcy manager. North Macedonian laws do not prescribe any legal limitations to make a takeover bid for acquiring shares in a company currently in a bankruptcy procedure. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? While significant enforcement practices in relation to white-collar crime have yet to be established in North Macedonia, a new Law for Preventing Money Laundering and Financing Terrorism has been adopted with which the new FIO has been established. The new FIO has stronger authorisations that mainly refers to wider control of the entities that are subject to the control and bigger cooperation with the Public Prosecutor and the relevant institutions. UPDATE AND TRENDS Current trends and proposals for reform 22 What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing MA or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company? Currently, there are no proposals that could significantly change the financial sector and the business combination or acquisition of publicly listed companies. However, since the Republic of North Macedonia recently entered into the Phase II of the Stabilisation and Association Agreement with the EU, and, therefore, North Macedonian issuers are now allowed to issue securities abroad, it is expected that the financial market will improve and will eventually lead to its growth. Emilija Kelesoska Sholjakovska kelesoska@ddklaw.com.mk Ljupco Cvetkovski cvetkovski@ddklaw.com.mk Str. Mirce Acev No. 2/3rd floor 1000 Skopje North Macedonia Tel: +389 2 3136 530 / 2 3215 471 Fax: +389 2 3215 470 www.ddklaw.com.mk © Law Business Research 2019
- 161. www.lexology.com/gtdt 161 Norway Ole KristianAabø-Evensen Aabø-Evensen Co Advokatfirma STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Under Norwegian law, business combinations may be structured by: • private purchase of target company’s assets or stocks involving cash or stock consideration, or both; • legal mergers (essentially an amalgamation of two companies) of public or private limited liability companies that use stock or stock and cash consideration; • public tender offers, including exchange offers, for all or (rarely) part of the stock in a listed company; and • partnerships and joint venture structures. In transactions in which a legal entity divests part of its assets or liabili- ties to one or more acquiring entities, the parties may choose to effect the resulting business combination by way of a statutory demerger. The respective assets and liabilities of the divesting legal entity are transferred by operation of law to the acquiring company, and the stock- holders of the divesting legal entity receive stocks or a combination of stocks and cash in the acquiring company as consideration. Based on Council Regulation (EC) No. 2157/2001, which was imple- mented into Norwegian law in 2005, a business combination involving a European company (SE) may be formed in various ways, including by establishing a holding company (an SE) of a Norwegian limited liability company and another company incorporated in an EU jurisdic- tion. Since Norway has implemented Directive 2005/56/EC, it is further also possible to conduct a legal merger of a Norwegian company cross- border within the European Union and European Economic Area (EEA). However, public tender offers and other offer structures are often used instead of a legal merger, which cannot be used by foreign companies (outside the EU or EEA), only allows 20 per cent of the consideration to be given in cash, requires more formalities and documentation and normally takes longer to complete than a public offer. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The Limited Liability Companies Act, the Public Limited Liability Companies Act and the Partnership Act, provides the fundamental statutory framework and together with the law of contracts, and the Norwegian Sales of Goods Act, form the legal basis for the purchase and sale of corporate entities. In addition: • the Competition Act gives the Norwegian Competition Authority (NCA) power to intervene against anticompetitive concentrations. Companies that are active in the Norwegian market must (gener- ally in a large transaction) also consider and abide by the merger control provisions set out in the EEA Agreement. However, the ‘one-stop shop’ principle prevents duplication of competence of the EU Commission, the EFTA Surveillance Authority (the ESA), and the NCA; • public companies whose securities are listed on the Oslo Stock Exchange (OSE) or another regulated market in Norway, are regu- lated under the Securities Trading Act (STA) and the Securities Trading Regulation (STR). These rules regulate prospectus require- ments, information requirements, and establish a regime to prevent market abuse and insider dealing, and sets out more detailed regu- lations with respect to tender offers involving listed stocks under Norwegian law. These rules are supplemented by inter alia, guide- lines and recommendations issued by the OSE and the rules and regulations of the OSE. Mergers and takeovers of private compa- nies and unlisted public companies have no equivalent regulations; • the STA, the Securities Trading Regulation (2007) and the EU Regulation No. 600/2014 on markets in financial instruments now also include the basic rules for listing on the OSE; • the tax legislation is normally crucial in deciding the alternative and optimal tax structure of a business combination; • the Accounting Act, national accounting rules and practices. Norwegian companies listed on the OSE will also have to publish their consolidated accounts in accordance with IFRS; • the Workers’ Protection Act sets out detailed rules with respect to workforce reductions, dismissals and redundancy notice, transfer and relocating employees, etc, which will have to be observed in particular in a business combination that takes place as an asset deal. These rules are supplemented by notification and discussion obligations in connection with a business combination, set out in collective bargaining agreements, if applicable, with some of the Norwegian labour unions; and • the Reorganisation Act of 2008 sets out detailed rules and imposes an obligation on the owner of a business if it is considered to conduct a workforce reduction that comprises more than 90 per cent of the company’s workforce or if the business activity is considered to be closed down, although the Ministry of Industry, Trade and Fishery has now issued a proposal to abolish this legislation. In addition, for some industries there are sector-specific requirements to consider, such as requirements for public permits and approvals. These industries are banking, insurance, petroleum, hydropower and fisheries, etc. Note that the Parliament resolved to adopt a revised Financial Institution Act in 2015. This new act entered into force from 1 January 2016, regulating the acquisitions of banks, insurance compa- nies and other financial institutions under Norwegian law. In 2016, the Norwegian Media Authority’s control over media ownership was finally abolished. Mergers are dealt with under the Limited Liability Companies Act and the Public Limited Liability Companies Act. © Law Business Research 2019
- 162. Norway Aabø-Evensen Co Advokatfirma Public MA 2019162 Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? If a bidder can secure a publicly listed target company’s support, the bidder will frequently enter into a formal agreement with the target to document the tender offer in greater detail and record the target board’s formal agreement to support the bid. These agreements typi- cally also include provisions on how to conduct the due diligence process and the timetable for the bid. Until the offer is settled, targets may, in such agreements, also consent to abide by certain customary covenants, including; not taking, or omitting to take, any action that could frustrate the launch and completion of an offer. The support agreements can take various forms, and sometimes these issues can be dealt with in one, or in several separate agreements. If the target company is a Norwegian entity, the transaction agreement will normally be governed by Norwegian law, even though the parties may agree to have such agreements governed by another jurisdiction’s law. A merger plan between Norwegian companies will, with more or less no exemp- tion, be governed by Norwegian law. Tender offers for stocks listed on the OSE are effected through an offer document drafted in accordance with the Norwegian STA and will for all practical purposes be governed by Norwegian law. Norwegian law is based on the principle of freedom of contract, subject only to limited restrictions. According to the Contract Act of 1918, contracts, whether oral or written, are generally binding on the parties under Norwegian law. The parties may seek to enforce legally binding contracts before the courts of law pursuant to the general rules of civil procedure. While the parties are free to decide on the terms of the contract, the formation of contracts and the remedies available in the event of breach of contract, are largely regulated in statute and case law. The Contract Act of 1918 largely regulates the formation of contracts, the validity of contracts and the authority to act on behalf of another. In addition, the Norwegian Sales of Goods Act provides certain protection in law for a buyer, including the seller’s obligation to disclose information about the target company. The Norwegian Contract Act and the Sales of Goods Act both apply in so far as it is not contrary to agreement between the parties, commercial practice or custom. Also the laws and regulations mentioned in question 2 may have an impact on the agreement depending on in what form the business combination takes place. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? In general, no governmental filings are required for private business combinations. However, filings are required for merger control purposes either to the Norwegian Competition Authority (NCA) or to the EU Commission, if the business combination meets the relevant turnover thresholds. Mergers and acquisitions that meet the relevant turnover thresholds are prohibited from being implemented before they have been notified and reviewed by the NCA, unless an exemption is granted by the authority. As of 1 January 2014, an acquisition, merger or other concentration involving businesses will have to be notified to the NCA if the following conditions are met: the undertakings concerned have a group turnover in Norway exceeding 100 million kroner; the acquirer has a group turnover in Norway exceeding 100 million kroner; and the combined turnover of the acquirer and the target in Norway is 1 billion kroner or more. The NCA also has the power to issue decrees ordering that business combinations falling below these thresholds must be noti- fied, if it has reasonable cause to believe that competition is affected, or if other special reasons call for investigation. A decree must be issued no later than three months from the date of the transaction agreement, or from the date control is acquired, whichever comes first. In a tender offer, the offer document must be filed and published with the stock exchange. Norway has implemented the Prospectus Directive (Directive 2003/71/EC). Changes to the Prospectus Directive (Directive 2003/71/EC) were approved in Directive 2010/73/EC and the Norwegian government implemented these changes in 2012. If the busi- ness combination involves a new stock issue (irrespective of whether or not the bidder or target is listed), there will generally be a requirement to publish a prospectus, if such an offer is addressed to 150 or more persons in the Norwegian securities market, and involves an amount of at least €1 million calculated over a 12-month period. There are some exceptions to this obligation. Offers that involve issuing stocks above €1 million and less than €5 million are now subject to simplified requirements of a national prospectus to be filed with the Norwegian Register of Business Enterprises. However, offers that involve issuing stocks with a value at or exceeding €5 million, directed to 150 persons or more, will be subject to the requirements of a full prospectus in line with the contents requirement set out in the Prospectus Directive. Such prospectuses will have to be submitted to, inspected and approved by the Financial Supervisory Authority of Norway (FSAN). Pure tender- offer documents in connection with takeovers will be inspected and approved by the OSE. However, if the business combination involves a new stock issue so that it is necessary to issue a combined offer docu- ment, then such combined offer document will have to be inspected and approved both by the OSE and FSAN. We expect certain amend- ments to the Norwegian prospectus rules to be implemented in the near future due to the new Prospectus Regulation (EU 2017/1129) being adopted by the EU. Both the Prospectus Directive and the existing Prospectus Regulation 809/2004 are implemented in Norwegian law, and these rules are set out in the STA and the STR. On 18 June 2018, a government-appointed Committee proposes to amend the prospectus rules in the STA and the STR by implementing the new Prospectus Regulation (EU 2017/1129) into Norwegian law. From the time that the new rules are finally implemented into Norwegian law, the requirement of a prospectus or equivalent document will no longer apply to secu- rities offered in connection with a takeover by means of an exchange offer, merger or a division, provided a document is made available that contains information describing the transaction and its impact on the issuer. As it looks now, we believe, however, it is unlikely that Norway will be able to finally implement the new Prospectus Regulation into Norwegian law until mid-2019 at the earliest. One should note that for business combinations in special sectors such as banking, insurance, shipping, mining, electricity, telecommuni- cations, oil, gas and agriculture, additional sector-specific legislation applies under Norwegian law. Some of these rules require mandatory filing and clearance before a transaction can be implemented. There are no stamp duties, stock transfer taxes or other govern- ment fees in connection with a business combination structured as a stock transfer or an asset transfer. There are furthermore no filing fees required under the Norwegian merger control regime. However, the OSE levies a fee of 215,500 kroner, plus 74 kroner per million market value (for the stocks covered by a tender offer), total- ling a maximum of 369,400 kroner for the approval of the public tender document. If the tender document is subject to dual governing law in accordance with the STA and the Takeover Directive or if the tender document needs to be reviewed and approved by a foreign regula- tory authority, or if the bidder offers consideration in stocks or other © Law Business Research 2019
- 163. Aabø-Evensen CoAdvokatfirma Norway www.lexology.com/gtdt 163 non-cash forms or a combination as settlement of the purchase price, the OSE levies an additional fee of 61,650 kroner to review and approve the public tender document. The same apply in the event that a squeeze- out procedure is combined with a mandatory offer. In order for a bidder to amend the offer or reduce the guarantee for settlement, OSE levies a fee of 24,650 kroner for processing such an application. Also note that if it is necessary to issue a prospectus, the FSAN levies a fee of 88,000 kroner for the approval. Real property is transferred by a separate deed. It is recommended that the deed should be registered to perfect the purchaser’s owner- ship. This attracts a registration tax, which is currently 2.5 per cent of the value of the property plus a nominal government fee. In the case of a legal merger or demerger, registration of deeds is exempted both from registration tax and government fees. However, in such cases a nominal registration fee to the Norwegian Registry of Business Enterprises will still have to be paid in order to register the merger or demerger. Transfers of real estate and ownership to motor vehicles owing to a transformation of a legal entity carried out at tax continuity have now also become exempt from such transfer or registration tax and regis- tration fee, provided such conversion and accompanying transfers took place after 1 January 2016. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? No general publication requirements apply to business combinations involving unlisted or private companies. However, a listed company must publish the fact that a business combination agreement has been entered into, to the extent that it is assumed to have an effect or influence on the value of the company’s issued stocks. Listed companies must also observe certain thresholds set out in the rules: ‘continuing obliga- tions of stock exchange listed companies’ imposing a duty of detailed announcement for certain business combinations and transactions. If the business combination is structured as a tender offer, the information specified in the Norwegian STA must be included in the offer document, irrespective of whether the tender offer is voluntary or mandatory. The board of directors of a listed company must publish a statement evaluating the terms of the offer describing the board’s view on the advantages and disadvantages of the offer. The statement shall give information about the offer and must include information on the employee’s views and other factors of significance for assessing whether the offer should be accepted by the stockholders. If the board members and the manager effectively in charge have any views in their capacity as stockholders in the company, information regarding it must be given. Also note that the Norwegian Code of Practice for Corporate Governance regarding takeover offers (as last amended in October 2018) requires that agreements entered into between a target company and a bidder that are material to the market’s evaluation of the bid should be publicly disclosed no later than at the same time as the announcement that the bid will be made is published. According to section 7 of the OSE’s Continuing Obligations companies listed on the OSE/Axess shall confirm the application of the Norwegian Code of Practice and shall explain possible deviations from the code. The Code of Practice imposes requirements that go beyond the requirements of the STA. If the business combination is structured as a legal merger, the board of directors will after signing a joint merger plan describing the general terms of the merger, have to issue a report to the stockholders explaining the reasoning behind the merger and how this may affect the company’s employees, etc. If a Norwegian public limited liability company (ASA) is involved in a legal merger, there are more detailed requirements for the content of such a report. In addition each of the participating entities’ boards shall ensure that a written statement, which contains a detailed review of the merger consideration payable to the stockholders of the participating companies, is issued, including an opinion of the fairness of such consideration, etc. The statement is to be prepared and issued by an independent expert (such as an auditor). In cases where the participating entity is an ASA company, and in cases where the participating entity is a private limited company (AS) the statement may be issued by the board and confirmed by the compa- ny’s auditor. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? For public limited liability companies, the Public Limited Companies Act requires any member of the board, accountant, general manager and other key employees of the company to immediately inform the company’s board of any purchase or sale of stocks or other financial instruments of the company, including any such transaction conducted by persons from affiliated parties. The STA sets out rules on disclosure of significant stockholdings. The rules on disclosure apply to stockholdings in listed companies in Norway. Pursuant to the STA, a stockholder or other person (namely, an acquirer) of such company is required to notify both the target company and OSE on behalf of FSAN of its holdings (taking into account holdings by controlled entities), when it reaches, exceeds, or falls below any of the following thresholds: 5, 10, 15, 20 or 25 per cent; one-third, 50 per cent, two-thirds or 90 per cent of the share capital, or corresponding proportion of the votes as a result of acquisitions, disposal or other circumstances. Specific rules apply with regard to the calculation of voting rights and share capital. Stocks held by various related parties are, for the purpose of the above calculation, deemed to be included in the stockholding of the disclosing party. The same notification require- ments apply to the acquisition or disposal of subscription rights, options and similar rights. We expect that the Norwegian legislation in the near future will be amended so that derivatives with shares as under- lying instruments, irrespective of such derivatives being cash-settled or settled by physical delivery of the underlying instruments will also be counted when calculating these disclosure thresholds. More detail on this is provided later in this section. In this regard, it is also being proposed to abolish the current disclosure requirements that apply under Norwegian law for warrants and convertible bonds not linked to any issued (existing) shares. Special disclosure requirements now further apply for certain private equity, hedge or venture funds which, subject to certain exemp- tions must notify the FSAN as soon as possible and in no event later than 10 business days after such funds has acquired control (more than 50 per cent of the votes) over a target company. This notification obli- gation is conditional upon the target company’s stocks being admitted to trading on a stock exchange or another regulated market. However, the same notification obligation is triggered, irrespective of the stocks being listed or not, if such target employs 250 or more employees, and either has annual revenues exceeding €50 million or a balance sheet exceeding €43 million. If such funds acquire stocks in such non-listed companies, and the fund’s portion of stocks reaches, exceeds or falls below 10 per cent, 20 per cent, 30 per cent, 50 per cent or 75 per cent of the votes, the fund’s manager will have to inform the FSAN about the transaction. © Law Business Research 2019
- 164. Norway Aabø-Evensen Co Advokatfirma Public MA 2019164 DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Directors and managers of a Norwegian company all have a fiduciary duty to act in the best interest of the company, which is generally inter- preted to mean that directors and managers should act in the joint interests of all stockholders and ensure that all holders of stocks of the same class are treated equally. It is assumed that the directors’ and managers’ fiduciary duty also implies an obligation to duly consider the interests of other stake- holders such as employees, the company’s creditors, etc (depending upon the company’s financial situation) as well as the stockholders’ joint interests. The other stakeholders’ interests are under Norwegian law primarily protected in rules of law set out in specific legislation, which the directors and managers have a general obligation to observe. The directors’ and managers’ fiduciary duty should be interpreted to include two elements, a duty of care and a duty of loyalty. The duty of care includes a duty of the board to inform itself, prior to making a busi- ness decision, of all material information reasonably available to it. It is, however, under Norwegian law currently not clear as to what extent this duty of care also includes a requirement that the board reason- ably informs itself of alternatives or actively seeks alternative bidders in connection with a business combination transaction. The duty of loyalty, however, requires that any decision by the board must be made on a ‘disinterested’ basis and not with a view to obtaining any personal benefit from the business combination. It must further be assumed that this duty mandates that the best interests of the company and its stock- holders take precedence over any interest possessed by any member of the board or any particular group of the company’s stockholders and that is not shared by stockholders generally. A director or general manager of a company may under Norwegian law not participate in the discussion or decision of issues that are of such special importance to the director or general manager in ques- tion, or to any closely related party of said director or general manager, where the director must be regarded as having a major personal or financial special interest in the matter. The directors and the general manager are further under an explicit duty set out in the company legis- lation not to undertake an act or measure that is likely to cause unjust enrichment to a stockholder or a third person at the cost of the company or another person. If a Norway-listed company becomes the subject of a public take- over offer, the board of directors is obliged to evaluate the terms of the offer and issue a statement to its stockholders describing the board’s view on the advantages and disadvantages of the offer. Should the board consider itself unable to make a recommendation to the stockholders on whether they should or should not accept the bid, it shall therefore account for the reasons. According to the Norwegian Code of Practice it is recommended – for each and every bid – that the target company’s board should arrange for a valuation by an independent expert, and that the board should make a recommendation to stockholders on whether or not to accept the offer. The valuation should include an explanation, and should be made public no later than at the time of the public disclo- sure of the board’s statement Exemptions apply in situations where a competing bid is made. The recommendations of the Norwegian Code of Practice go beyond the requirements of the STA. In cases where the members of the target company’s board or management have been in contact with the bidder in advance of a bid, the Code of Practice for Corporate Governance also impose requirements that the board must exercise particular care to comply with the require- ments of equal treatment of stockholders. Further, the board must also ensure that it achieves the best possible bid terms for the stockholders. Also note that if a bid is issued by someone who is a member of the target’s board, or the bid is made in concert with the target’s board, OSE will, in its capacity as the takeover supervisory authority, require that the target board’s response statement is issued by an independent third party financial adviser on behalf of the target company. In general, a controlling stockholder does not have any duty towards minority stockholders and is free to act in his or her own best interest. However, a controlling influence may not be exercised – at board or management level or at the company’s general meeting of stockholders – in a manner that is likely to cause unjust enrichment to a stockholder or a third party at the cost of the company or another person. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? The articles of association and a stockholders agreement may contain provisions that give existing stockholders approval rights over a planned acquisition of stocks or assets in the target company. Asset transac- tions, especially if a substantial part of the target company’s business is disposed of, may require the approval of the general meeting of stock- holders of the target company. If a business combination is effected using a voluntary tender offer, the approval rights of the stockholders will normally depend exclusively on the level of required acceptances set out by the bidder. A bidder seeking to obtain control over the board of directors will, from a legal perspective, require more than 50 per cent of the votes; to be in a posi- tion to amend the target’s articles of association, which requires at least two-thirds of the votes and the capital; and to effect a squeeze-out and delist the target will require more than 90 per cent of the votes and share capital. Most takeover offers will include an acceptance condition of more than 90 per cent of the stock, a condition that can be waived by the bidder. The stockholders’ meeting must approve mergers, demergers, issuing new stocks and instruments that grant the holder a right to subscribe for stocks in the company. Such resolutions will generally require a two-thirds majority of the votes cast and the capital present at the meeting. Through the stockholders’ meeting the stockholders may instruct the board of directors on specific issues. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Norwegian law does not distinguish between friendly and hostile public tender offers. A number of provisions in the Norwegian STA (while tech- nically applying to both friendly and hostile offers) often need to be considered carefully in hostile transactions. The target company is allowed to take a more or less cooperative approach in a takeover situation. There are however, restrictions on the board of the target company taking actions that might frustrate the will- ingness or otherwise of an offeror to make an offer or complete an offer that has already been made. Such restrictions apply after the target has been informed that a mandatory or voluntary offer will be made. These restrictions do, however, not apply to disposals that are part of the target’s normal business operations or where a stockholders’ meeting authorises the board or the manager to take such actions with takeover © Law Business Research 2019
- 165. Aabø-Evensen CoAdvokatfirma Norway www.lexology.com/gtdt 165 situations in mind. As a result of this, a fairly large number of Norwegian listed companies have started to adopt defensive measures aimed at preventing a successful hostile bid. However, advanced US-style poison pills are currently not common in the Norwegian market. If such measures do not apply – or can be overcome – the normal reaction pattern of a Norwegian hostile board would be to seek to opti- mise the position for its stockholders in other ways. In this regard it should be noted that despite the restrictions on frustrating actions, several options remain, including: persuading stockholders to reject the bid; making dividend payments or using the Pac-Man defence; or finding a white knight or white squire. The standard approach would in any event be to contact the chairman of the target’s board prior to launching the offer. In a hostile transaction, it is of particular importance for a bidder to realise that the ‘effective control’ threshold lies at two-thirds of the voting rights and the share capital, as this is the majority required at the stockholders’ general meeting for amending the target’s articles of associations etc, and to effect a squeeze-out of the minority stockholders will require more than 90 per cent of the votes and the share capital. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? No Norwegian regulation exists with respect to break-up fees and as such there are no general prohibitions against agreeing upon such a fee. Break-up fees have, however, generally been less common in merger and acquisitions (MA) transactions in Norway compared with other jurisdictions, but do occasionally occur in public transactions. The enforceability of a break-up fee arrangement under Norwegian law is however to some extent unclear. A break-up fee would have to be considered from the perspective of whether an agreement on this fee is in the best interests of the company and its stockholders. For listed companies this issue is very difficult, but any break-up fees that can be justified by reference to external costs incurred as part of the transaction would probably be acceptable. Some external compensation for internal costs such as management resources and for damage to the company’s reputation would probably also be justifiable. If however, a break-up fee imposes limitations on the target company’s board’s ability to effectively fulfil their fiduciary duties towards the company and the stockholders in a takeover situation, or if payment of the fees (provided that it became effective) would put the target company into financial distress, it could be argued that the fee will not be enforceable and the target company’s directors will be at risk of personal liability if they agree on the fees. In a private business combination, and provided that all parties agree, the scope for enforceable break-up fees would be wider. However, the recommendations set out in the Norwegian Code of Practice for Corporate Governance regarding takeover offers (see questions 5 and 7). According to section 7 of the OSE’s Continuing Obligations, companies listed at OSE/Axess shall confirm the appli- cation of the Norwegian Code of Practice and shall explain possible deviations from the code. As described above, the Code of Practice imposes requirement that go beyond the requirements of the STA. The code now unconditionally recommends that the board must not hinder or obstruct any takeover bids. The code also recommends that the target company should not undertake to pay compensation to the bidder if the bid does not complete (break-up fee) unless it is self-evident that the compensation is in the common interest of the target company and its stockholders. According to these recommendations any agree- ment for financial compensation (break-up fee) to be paid to the bidder should be limited to compensation for the costs incurred by the bidder in making a bid. Except for certain exemptions adopted in 2013, Norwegian company law prohibits that the funds of a target company be used to finance acquisitions of stocks that are issued by itself or by its parent company. The rules imply that a target company may, inter alia, not provide secu- rity (subject to certain exemptions adopted in 2013) for any loans taken out by the purchaser in order to finance such business combinations. As a result of the rules, detailed consideration should be given to how an acquisition of a Norwegian company is financed. If certain conditions are fulfilled it would generally be possible for a Norwegian company to pay out excess funds as dividends to its stockholders following an acquisition. Consequently, the potential financial assistance aspects of a business combination should also be considered carefully, including with respect to break-up fee arrangements. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? If the relevant legal requirements have been complied with, government agencies do not have general authority to restrict completion of busi- ness combinations, except through relevant competition regulations, or in specific industries (including the financial sector) in which restrictions on ownership apply to all stockholders, domestic or foreign. Norway has previously not implemented any type of specific national security review of acquisitions as is sometimes seen in other countries, such as, for example, the type of review of acquisitions conducted by the US Committee of Foreign Investments, but this has now changed. In March 2018, Parliament adopted a bill for the new National Security Act. The new Act grants the government powers to intervene and stop acquisi- tions of shares in a company holding investments in sectors considered vital from a Norwegian national security perspective. The new Act has now entered into force with effect from 1 January 2019, and this means that Norway has implemented a national security review of acquisitions fairly similar to the type of review conducted by the US Committee of Foreign Investments. However, the Norwegian state owns stocks in many Norwegian companies, and the government, therefore, has influence as a stock- holder in these companies. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? In private company acquisitions under Norwegian law, the parties are in general free to contract on whatever terms they agree. In these trans- actions, financing can be, and often is, a condition to completion and will further ordinarily be conditional on Competition Authority, or other third-party consent, where applicable. In a public company takeover under Norwegian law, any person or company that acquires stocks in a Norwegian company listed on the OSE, and as a result owning stocks representing more than one-third of the voting rights, must make a mandatory offer to buy the remaining stocks. It should be observed that following the implementation of the Takeover Directive, Norwegian law now has rules regarding repeated offer obligations at 40 per cent and 50 per cent. Mandatory offers must be unconditional and embrace all stocks in the target company, and © Law Business Research 2019
- 166. Norway Aabø-Evensen Co Advokatfirma Public MA 2019166 the offer settlement needs to be in cash. However, it is possible to also offer alternative forms of consideration under such a mandatory offer, (namely, such as stocks in the offeror), provided an option to receive the total offer price in cash is made available and that this option is at least as favourable as the alternative settlement. The settlement for a mandatory offer must be unconditionally guaranteed by either a bank or insurance undertaking authorised to conduct business in Norway. In a voluntary tender offer or exchange offer for a listed company there is, however, in general no limitation under Norwegian law as to which conditions such an offer may contain. Conditions such as a certain level of acceptance from existing stockholders (90 per cent or two-thirds of the stocks and votes), regulatory or competition approvals, completion of a satisfactory due diligence investigation and no material adverse change would regularly be included in Norwegian voluntary tender offer documents. Since voluntary tender offers issued in the Norwegian market are very often recommended by the board, it has become less common to include a due diligence condition in the offer document itself as the due diligence often has been completed prior to the offer being publicly launched. In some cases, the offeror may decide to include very few conditions in order to complete the transaction quickly or to avoid competing bids. In other cases, an offeror may decide to include more extensive conditions. In a voluntary offer, the offeror can offer consideration in stocks or other non-cash forms or a combination, also with cash as an element. In principle, it is also possible to make a voluntary offer conditional upon financing, but the offer document must include information on how the acquisition is to be financed. If a volun- tary offer is accepted, it triggers an obligation to issue a subsequent mandatory offer and several of the obligations relating to mandatory offers will also apply with regard to a voluntary offer, including an obli- gation of equal treatment of stockholders. However, the offeror is still free to decide which conditions the voluntary offer may contain. Business combinations taking the form of a legal merger under Norwegian law are in general not regulated by the public takeover rules, but the provisions under the securities regulations apply to mergers involving at least one listed company. Also in such cases it is possible to adopt a conditional resolution to merge. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? In private company acquisitions under Norwegian law, a buyer who needs to obtain financing for the transaction may seek to negotiate a right to withdraw from the deal if financing has not been obtained prior to closing. An alternative is to seek the inclusion of reverse termination fee provisions, which permit the buyer to terminate the acquisition for any reason simply by paying a flat fee determined as a percentage of the transaction value. A seller will normally seek to resist these takeover structures. However, if accepted by the seller, the conditions for the buyer’s right to withdraw from a deal will normally be dealt with in the stock purchase or asset purchase agreement. In Norway, debt finance for acquisitions is commonly provided by way of bank loans, often together with other banking facilities such as working capital, overdrafts and performance bonds. The facilities may be granted by one bank or by different types of syndicated loans, all with agreed ranking in the case of an insolvency of the borrower. The terms of the acquisition finance will be documented in a discrete suite of finance documents between the buyer and the different debt providers. During the relative freeze in the debt market in 2008 to 2013, it also became more common for sellers participating in financing acquisitions to provide vendor finance to the buyer. Using debt securities such as junk bonds for acquisitions has tradi- tionally not been very common in Norway. These instruments would historically be documented under New York or English law reflecting what traditionally used to be the main markets for these securities. These instruments could, however, nowadays, more often also be issued with Norwegian law as the governing law for issue in the local market. However, from 2012 and onwards until October 2014, we saw an increasing number of private equity deals, in particular larger trans- actions, being financed by issuing bonds in the Norwegian market. Examples of private equity sponsors issuing such bonds in connec- tion with Norwegian leveraged buyout (LBO) transactions include, among others, Ontario Teachers’ acquisition of Helly Hansen in 2012, Altor’s acquisition of Curato Røntgen in 2013, Altor’s Bain’s acqui- sition of EWOS in 2013 and Nordic Capital’s acquisition of Lindorff in 2014. Owing to the decline in oil prices witnessed in October 2014 and throughout 2015, it was challenging to raise new acquisition financing in the Norwegian high-yield bond market. As a result, we also started to see increased activity from non-bank (alternative) lenders and funds, which are offering to replace or supplement traditional senior secured bank loans. The products these lenders are offering typically include term loan B facilities and unitranche loans. Other forms of debt financing that may be used in acquisitions include securitisations, an even less common creature in Norwegian business combinations. However, since the beginning of 2017 and throughout 2018, the Norwegian high-yield bond market improved significantly, with some recent examples of acquisition financing being raised at favourable coupon rates. In auction processes, sellers will normally seek warranty protec- tion from the buyer that the buyer has received binding financing commitments, and a commitment to submit copies of the financing commitments to the sellers. If the buyer intends to finance the acquisition by equity finance or by a combination of debt and equity, the terms of the equity investments and the arrangements between the various equity investors will be set out in a further set of documents. In a public company takeover under Norwegian law, a voluntary tender offer may be made conditional upon financing, but the offer document must then include information on how the acquisition is to be financed (see question 12). However, a mandatory offer for a public company cannot be made conditional upon financing (see question 12). The buyer will in such case need to obtain financing for the transaction prior to issuing the bid. The buyer may also want to borrow funds from the target company (its subsidiaries following completion of the transaction). While, as a general rule, there are no major obstacles in this regard in an asset deal where the business assets are bought by the entity financing the deal, a ‘debt pushdown’ is substantially more difficult in the case of a stock transaction. Norwegian public and private limited liability companies are prohibited from providing upstream financial assistance in connec- tion with the acquisition of stocks in the target company (or its parent company). This prohibition prevents any Norwegian target company participating as co-borrower or guarantor of any acquisition financing facilities. However, in practice there have always been a number of ways to achieve at least a partial debt pushdown through refinancing the target company’s existing debt, which should not be regarded as a breach of the prohibition against financial assistance. In June 2013, the Norwegian parliament approved amending the Limited Liability Companies legisla- tion aimed at easing Norwegian companies’ ability to provide financial assistance by introducing a type of ‘whitewash’ procedure. The rule came into force on 1 July 2013. Under these rules, both private and public target companies can, subject to certain conditions, provide finan- cial assistance to a potential buyer of stocks in the target. The financial assistance must be granted on normal commercial terms and policies, and the buyer must also deposit adequate security for his obligation to © Law Business Research 2019
- 167. Aabø-Evensen CoAdvokatfirma Norway www.lexology.com/gtdt 167 repay any financial assistance received from a target. Further, the finan- cial assistance must be approved by the target’s stockholders’ meeting by a special resolution. The rule’s requirement for depositing ‘adequate security’ for the target’s borrower’s obligation to repay any upstream financial assistance provided by a target in connection with MA trans- actions means that it is quite impractical to obtain direct financial assistance from the target company in most LBO-transactions, owing to the senior financing banks’ collateral requirements in connection with such deals. Consequently, in practice, the new rules have little impact on how LBO-financing is structured under Norwegian law, at least in private equity LBO-transactions. In most cases, the parties therefore continues to pursue debt pushdowns by refinancing the target company’s existing debt, the same way as previously adopted. It should be noted that in early 2019, the Ministry of Trade, Industry and Fisheries published a revised proposal to amend the Norwegian financial assistance rules, including to abolish the current requirement for adequate security (see ‘Update and trends’). From 1 July 2014, private equity sponsors must also ensure to observe the new anti-asset stripping regime that is set out in the new Act on Alternative Investment Fund Managers. These rules may limit the sponsor’s ability to conduct debt pushdowns, depending on the status of the target company (listed or non-listed), the number of employees in the target company and the size of the target company’s revenues or balance sheet. Under Norwegian law there exist no particular obligations of the sellertoassistinthebuyer’sfinancing.However,inlargestructuredsales processes during 2010 and for the first half of 2011, stapled financing arranged by the seller using its banks seemed to be re-emerging as a tool for sellers looking to facilitate a deal. In these circumstances the seller and its advisers will normally negotiate with its bankers to obtain a commitment letter and term sheet containing the principal terms of the financing offered to the potential bidders in order to create a more competitive auction process. For the second half of 2011 and during the beginning of 2012, however, these staple financing offers became more difficult to arrange as a result of the sovereign debt worries in the euro- zone. Nowadays, stapled financing offers have started to re-emerge, in particular for deals in which the sellers are pursuing an exit via dual- track processes. It is also sometimes seen that the seller itself, under special circum- stances, may be willing to provide finance for a buyout, either in the form of an earn-out arrangement, or by structuring a deferred consid- eration as vendor loan notes. If structured as vendor loan notes these will sometimes, but not always, be subordinated to the other elements of the acquisition finance. The vendor loan notes will then normally be on similar terms to the subordinated loan capital provided by the private equity house, but are usually priced to give a lower rate of return. The split between debt finance and true and quasi-equity will be determined on a transaction-by-transaction basis and particularly by reference to the underlying business and its funding requirements. A seller may also be requested to assist in the buyer’s financing by continuing to provide pre-closing working capital finance to the target’s business during a post-closing transitional period. These working capital facilities may take different forms and will be determined on a transaction-by-transaction basis. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? Minority stockholders may under Norwegian law be subject to a squeeze-out. The Limited Liability Companies Act and the Public Limited Liability Companies Act provide that, if a parent company, either solely or jointly with a subsidiary, owns or controls more than 90 per cent of another company’s stocks and voting rights, the board of directors of the parent company may, by resolution decide to squeeze out the remaining minority stockholders by a forced purchase at a redemption price. Minority stockholders have a corresponding right to demand the acquisition of their stocks by a stockholder with a stake of more than 90 per cent of the company’s stocks. The resolution shall be notified to minority stockholders in writing and registered in the Norwegian Registry of Business Enterprises. A deadline may be fixed, which cannot be less than two months, within which the individual minority stockholders may make objections to or reject the offered price. The acquirer becomes the owner of (and assumes legal title to) the remaining stocks immediately following; a notice to the minority stockholders of the squeeze-out and the price offered; and the depositing of the aggregate consideration in a separate account with an appropriate financial institution. If any of the minority stockholders do not accept the redemption price per stock offered, they are protected by appraisal rights, which allow stockholders who do not consent, to seek judicially determined consideration for their stocks, at the company’s expense. The courts decide the actual value of the stock. In determining the actual value, the starting point for the court will be to establish the underlying value of the company divided equally between all stocks. However, if the squeeze-out takes place within three months after expiry of the public tender offer period for a listed company, then the price is fixed on the basis of the price offered in such tender offer, unless special grounds call for another price. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Traditionally cross-border transactions have been structured as either an asset sale or a sale of stocks. A foreign buyer may prefer to estab- lish one or more acquisition vehicles (SPVs) used to acquire different parts of the business in different jurisdictions in the most tax-efficient or legally beneficial manner. In general, the buyer will for tax purposes seek to arrange that a Norwegian SPV assumes the financing costs in combination with establishing a principal equity investment vehicle in a tax-friendly jurisdiction (perhaps Luxembourg or Netherlands). However, within the EU and EEA at the present time, legal mergers can be completed cross-border under Norwegian law, insofar as the laws of both Norway and the other relevant jurisdictions allow. These cross-border mergers have until recently required approval by the tax authorities in order to be tax-exempted (see question 18). The rules on taxation of cross-border transactions were, however, amended in 2011. Cross-border mergers and demergers between Norwegian companies and a company domiciled within the EU or EEA can, after implementation of the amended rules, be carried out as a tax-free merger or demerger subject to certain conditions being fulfilled. A fundamental condition is that the assets, rights and responsibilities of the Norwegian company (pre-merger or demerger) remain in a Norwegian branch of the foreign company (post-merger or demerger). Furthermore, an exchange of stock, by transferring at least a 90 per cent stake in a Norwegian corpo- ration or public limited liability company in exchange for stocks in an acquiring limited liability company domiciled in another state, may be made without tax consequences for Norwegian stockholders. The same applies where the acquiring corporation or public limited company is domiciled in Norway, and the transferring limited liability company is domiciled in another state. This applies both within and outside the EEA. The rules contains a general prerequisite for a tax-free cross-border merger, demerger or exchange of stock that the corpora- tions involved are not domiciled in low-tax countries outside the EEA, or in low-tax countries within the EEA unless such corporations are © Law Business Research 2019
- 168. Norway Aabø-Evensen Co Advokatfirma Public MA 2019168 actually established and run genuine economic activity in that relevant EEA state. The new tax rules implies that a merger or demerger between two foreign companies no longer will be considered a taxable event for Norwegian stockholders, provided that the companies are not domiciled in low-tax countries. In general, the legal and regulatory framework is identical for internal Norwegian transactions and for cross-border transactions into Norway. Cross-border transactions may be subject to the provisions of EC merger regulations as well as national competition rules (see question 1). In addition, there is a number of tax considerations in any cross-border transaction, in particular thin capitalisation issues and classification issues relating to hybrid financial instruments used in such transactions. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? BusinesscombinationsingeneraldonotrequireconsentfromNorwegian authorities, consequently, no general waiting periods for completing business combinations apply except for the standard waiting periods applicable according to the relevant competition legislation. After the amended competition rules was adopted from 1 January 2014, the NCA has up to 25 working days to make its initial assessment of the proposed transaction, however, allowing for pre-deadline clearance, so that at any time during the procedure the NCA can state that it will not pursue the case further. The NCA must, prior to the expiry of this deadline, notify the parties involved that a decision to intervene may be applicable. In such notification, the NCA must demonstrate that it has reasonable grounds to believe that the transaction will lead to or strengthen a significant restriction of the competition not compatible with the intent behind the Norwegian rules. If the NCA issues a notice that it may decide to intervene and opens an in-depth (Phase II) investigation, it now has a basic period of 70 working days from the date the notice was received to complete its investigation and come to its conclusion on the concentration. This basic period can be extended under certain circumstances. As from 1 July 2016, the total case handling time may now amounts to 145 working days compared with 115 working days under the former regime. There is no deadline for filing a notification, but a standstill obligation will apply until the NCA has cleared the concentration. As under the EU merger rules, a public bid or a series of transactions in securities admitted to trading on a regulated market such as the Oslo Stock Exchange can be partly implemented, notwithstanding the general standstill obliga- tion. In order for such exemption to be effective, the acquisition will have to be notified immediately to the NCA; ‘immediately’ in this regard will normally mean the day on which control is acquired. For asset purchases there may, depending on the circumstances, and notably on the collective agreements applicable to the target, be a need to incorporate notification procedures with regard to the employees into the time schedule. At the very least there is an obligation to inform the employees as soon as possible of the transfer and its effects on the employees. Business combinations structured as tender offers include a minimum offer period. The minimum and maximum offer period for a voluntary tender offer is between two and 10 weeks, and between four and six weeks for a (subsequent) mandatory offer. A subsequent squeeze-out of minority stockholders will also involve a waiting period. A legal merger involves a process in which the stockholders have to be notified about the merger plan at least two weeks prior to the stockholders’ meeting for private limited liability companies. For a public limited liability company, the advanced notice period is one month prior to such stockholders’ meeting; and also involves a filing of the merger plan with the Register of Business Enterprises at least one month prior to such meeting. If approved by the stockholders’ meeting, the merger decision, subsequent thereafter, has to be filed with the Register of Business Enterprises, which will publicly announce its receipt of such decision. Then there is a creditor notification period of six weeks from the date of the announcement before the merger may enter into force between the participating companies. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Companies in certain specific industries, including industries based on concessions or other public approval, are generally subject to notifica- tion or approval procedures in connection with a business combination depending on the relevant regulation. Such rules exists for sectors such as banking, insurance, petroleum, mining, hydropower, telecommunica- tions, agriculture and fisheries, etc (see question 2). In 2009 the Norwegian Financial Institution Act was modified in response to EU Directive 2007/44/EC regarding acquisitions in the financial sector. The amendment was aimed to bring the Norwegian regulations more aligned with the rest of Europe. Taking effect from 1 January 2016, a new Norwegian Financial Institution Act entered into force regulating the acquisitions of banks, insurance companies and other financial institutions. However, note that also the new act continues the former approval regime for an acquisition of stockhold- ings in a Norwegian financial institution exceeding certain thresholds is subject to approval from the Norwegian Ministry of Finance. Such approval may be declined if the new owner is not considered suffi- ciently qualified as owner of such an institution. In 2016, the Parliament resolved to abolish the Norwegian Media Authority’s control over ownership in media companies. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Norwegian companies have considerable flexibility in arranging their taxable income to reduce the tax impact by tax grouping, loss carry- forward and loss carry-backs. In addition to this the most basic tax issue involved in business combinations is, however, whether the transac- tion is taxable or tax-free to the acquirer, target and their respective stockholders. Acquisition of stocks Norwegian stockholders that are limited liability companies, as well as certain similar entities (corporate stockholders), are generally exempt from tax on dividends received from, and capital gains upon the realisa- tion of, stocks in domestic or foreign companies domiciled within the EU and EEA states, and losses related to such a realisation are not tax deductible. Consequently, Norwegian corporate stockholders may sell stocks in such companies without being taxed on capital gains derived from the sale. Costs incurred in connection with such a sale of stocks are not tax deductible. Certain restrictions exist regarding foreign companies not located in the EU or EEA states as well as companies located in low income tax states within the EU and EEA, and that are not conducting business out of such countries (Controlled Foreign Companies Rules). In 1 January 2012 Norway abolished the 3 per cent clawback rule on capital gains so that capital gains earned by corporate © Law Business Research 2019
- 169. Aabø-Evensen CoAdvokatfirma Norway www.lexology.com/gtdt 169 stockholders have become tax-free. The amendment applies regardless of whether the exempted capital gain is derived from a Norwegian or a qualifying non-Norwegian company. Dividends received by a Norwegian company on business-related stocks in group subsidiaries within the EEA held directly or indirectly with more than 90 per cent inside the EEA are also exempted from Norwegian corporate tax on the part of the receiving corporate stockholders. However, the 3 per cent claw- back rule will apply to dividends received by corporate stockholders holding less than 90 per cent of the stock as well as to foreign corporate stockholders having a permanent establishment in Norway that receive dividends from Norwegian companies, subject to the foreign corporate stockholders’ participating or carrying out business in Norway to which the stockholdings are allocated. Under these circumstances, 3 per cent of the dividends is subject to Norwegian taxation as ordinary income at a tax rate of 22 per cent (reduced from 23 per cent with effect from 1 January 2019) (giving an effective tax rate of 0.66 per cent). Dividends received from, or capital gains derived from realisa- tions of, stocks by stockholders who are Norwegian private individuals (personal stockholders) are, however, taxable as ordinary income. With effect from 1 January 2019, the government increased the tax rate on dividends received from, or capital gains derived from realisation of stocks held by Norwegian private individuals. According to the new rules the amount derived from such distributions, capital gains, etc must be multiplied by 1.44 (an increase from 1.33 for 2018), and the grossed-up amount is thereafter to be taxed as ordinary income for these private individuals at a tax rate of 22 per cent. In effect, this increases the effec- tive tax rate on such distributions or gains from the 30.59 per cent under the former tax regime to 31.68 per cent in 2019. Any losses are tax deductible against such personal stockholder’s ordinary income. Capital gains from realisation of stocks in Norwegian limited liability companies by a foreign stockholder are not subject to tax in Norway, unless certain special conditions apply. The extent of the tax liability of such foreign stockholders in their country of residence will depend on the tax rules applicable in such jurisdiction. Normally, an acquisition of stocks in a Norwegian target company will not affect the target’s tax positions, including losses carried forward, and such attributes normally remain with the target, unless the tax authorities can demonstrate that the transfer of stocks is primarily tax motivated. Acquisitions of assets On the sale by contrast of the business assets, the tax treatment is quite different to the tax treatment of stocks. Capital gains derived on the disposal of business assets or a business as whole is subject to 22 per cent tax. Losses are deductible. A Norwegian seller can defer the taxation by gradually entering