Part 2 of a Series on distressed M&A
In Part 1 of our distressed M&A series, we looked at the likely uptick in distressed transactions resulting from the economic challenges of 2020. In this instalment, we focus on how falling stock market prices may entice buyers to consider takeovers of publicly listed companies. However, market players will need to effectively navigate the regulatory requirements to take full advantage of their options.
In Austria, public takeovers are regulated by the Takeover Act (TA) which is enforced by the Austrian Takeover Commission (ATC).
Takeover law provides for restructuring privilege
In general, a bidder who acquires a direct or indirect controlling interest in a public company must launch a mandatory offer for all remaining shares pursuant to Section 22 et seq. of the TA. This covers both the initial acquisition of a controlling stake and any subsequent change of control over a target company. A "controlling interest" is defined as a stake representing more than 30 % of the permanent voting shares. A shareholding between 26% and 30% must be reported to the ATC, and the voting rights of shares representing a participation of more than 26 % (up to 30 %) may not be exercised (safe harbour).
In certain situations, even though they result in the acquisition or change of control, the TA provides for a catalogue of exceptions where no mandatory offer is required. This may be of particular interest to buyers who do not want to be forced to launch a mandatory offer for the shares of a listed target in distress.
Therefore, it may be possible to take advantage of the restructuring privilege if the target is in financial difficulty. To benefit from the restructuring exception, the target must be a) in need of restructuring and b) the buyer must have the demonstrable intention to restructure the target. The need for restructuring can be assumed if insolvency or settlement proceedings have been initiated or the bankruptcy of the target is very likely or cannot be prevented without promising measures. According to the ATC, the target is in need of restructuring if, inter alia, the company's equity ratio is below 8% and the term for debt repayment exceeds fifteen years (see Part 1 of our distressed M&A series) or in the case of a severe and lasting drop of the share price and uncertainty regarding the continued existence of the target. The intention to restructure needs to be evidenced to the ATC by the submission of a restructuring concept demonstrating the serious intention to restructure.
To the extent the mentioned exception (restructuring privilege) applies, the bidder must notify the ATC. Nonetheless, the ATC may upon review of the notification order the launch of a mandatory offer or impose certain terms and conditions (Bedingungen und Auflagen) within one month if it considers this necessary for the best interests of the shareholders.
Voluntary offers can be used to become anchor shareholder
The minimum price rules of the TA do not apply to voluntary takeover offers which are not aimed at control (see below). This offer structure was for instance successfully used by bidder Airports Group Europe S.à r.l. in its 2014 voluntary public offer to obtain a 29.9% stake in Vienna International Airport.
Thus, while the current dip in stock markets may not automatically mean that stock prices are falling enough to warrant a launch of full takeover bids, it may still make it attractive for nimble investors to build a (sizeable) stake in a fundamentally sound business. Once the economic situation improves, a bidder may benefit from either an increase in stock exchange prices, dividend payments – or both.
Depending on the shareholder structure and historical shareholder presence in general meetings, it may be that even with a stake of max. 30%, a bidder is still able to obtain an influential position and, for example, secure adequate board representation and thus strategic insight into or influence on a company.
Creeping in - minimum price rules apply
Pursuant to Sec 22/4 TA, a mandatory offer is also triggered if a bidder already holds a controlling stake but less than the majority of voting rights and increases its stake by an additional 2% or more of the voting rights within a (rolling) 12-months period (creeping in).
The minimum price rules of the TA apply to mandatory offers triggered by creeping-in. It will thus depend on the direction of the stock markets over the coming weeks whether on balance it is an attractive option for bidders to acquire additional shares under this rule.
Disclosure required for material shareholding thresholds
A shareholder of a public company is required to publicly disclose its shareholdings to the Austrian Financial Market Authority (FMA), the Stock Exchange and the issuer, if it – directly, indirectly or through financial instruments or derivatives - reaches, exceeds or falls below 4, 5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75 or 90 per cent of the voting rights.
The articles of association may contain an additional disclosure threshold at 3 per cent which will need to be published on the website of the issuer and, additionally, the FMA needs to be informed.
A shareholder is required to disclose immediately, and in any event within two trading days, each time a relevant holding falls below or exceeds any of the thresholds. If a shareholder does not comply with the disclosure obligations, voting rights attaching to shareholdings not disclosed will be automatically suspended. There are no exceptions to this disclosure obligation with respect to the acquisition of listed targets in finical difficulties. Therefore, the buyer must comply with the disclosure requirements (irrespective of the requirement to launch a mandatory offer or the application of an exception to launch such an offer set out above).
Exception: Price building in distressed scenario
Under the TA, the offer price in a mandatory bid or in a voluntary bid aimed at control (a) shall not be lower than the highest cash consideration paid or agreed upon by the bidder or a party acting in concert with such bidder during the 12 months period prior to notification of the offer document and (b) must be at least equal to the average market price weighted pursuant to the relevant trading volumes for the equities over the six months prior to the day on which the buyer announced its intention to make an offer.
To the extent the buyer wishes to launch a public offer (irrespective of the above-mentioned restructuring privilege), the buyer may be entitled to make an offer below the six-month average to the extent the circumstances have materially changed over the past twelve months.
This exception has been included in the TA to avoid situations where the price determined pursuant to the general rule considering the period of twelve and six months would result in offer prices which are outdated. However, this requires an assessment on a case-by-case basis and based on specific facts, considering that low prices may not result in the desired acceptance threshold.