Posted by Yaron Nili,
Co-editor, HLS Forum on Corporate Governance and Financial Regulation,
on Saturday June 7, 2014 at
Editor’s Note: The following post comes to us
Dirk Besse, at Morrison & Foerster LLP, and is based on a
Morrison & Foerster publication by Mr. Besse and
Over the past few years
there has been a noticeable increase in the frequency of activist
investors building up considerable stakes in German listed companies
in the context of public takeovers. One reason for this development is
what appears to be a new business model of hedge funds—the realization
of profits through litigation after the completion of a takeover. To
this end, the funds take advantage of minority shareholder rights
granted under German stock corporation law in connection with certain
corporate measures which are likely to be implemented for business
integration purposes following a successful takeover.
prominent example of this strategy was the filing of various lawsuits by
hedge funds against UniCredit and its management in the aftermath of
UniCredit’s acquisition of HypoVereinsbank in 2005 and the subsequent
“squeezing-out” of HypoVereinsbank’s remaining minority shareholders in
2007. More recent cases include the takeover offer by Terex for Demag
Cranes (2011), by Vodafone for Kabel Deutschland (2013) and, of late, by
McKesson for Celesio (2013), where Paul E. Singer’s hedge fund Elliott
Management each time acquired substantial shares in the German target.
Companies seeking to acquire control of German listed companies need to be
aware of the risks and costs potentially associated with activist stake
building in takeover situations before making an investment decision.
Below we outline the legal framework for activist funds in post-takeover
situations as well as their strategic behavior during the takeover and
following its completion. Subsequently, we provide some general guidance
to companies considering a public takeover offer in Germany.
Post-Takeover Business Integration and Corporate Measures
Following successful completion of the takeover, the buyer will typically
wish to integrate the target’s business in order to realize synergies. A
commonly used means in this regard is the conclusion of a so-called
domination and profit and loss transfer agreement (“DPLTA”) which enables
the buyer to control the target’s strategy and business decisions and to
access its cash flow. Entering into a DPLTA is possible under German stock
corporation law if the buyer holds at least 75% of the share capital.
Ultimately, a strategic investor may seek to own the target company in its
entirety, i.e. 100% of its shares. In this respect, German law offers a
variety of so-called “squeeze-out” procedures by means of which a
principal shareholder owning at least 90% or 95% of the share capital
(depending on the procedure chosen) can force a transfer of the remaining
shares held by minority shareholders to the principal shareholder.
Minority Shareholder Rights
Pursuant to the German Stock Corporation Act (Aktiengesetz), a
DPLTA must include the obligation on the part of the dominating company to
acquire the shares of the minority shareholders of the dominated company
in return for appropriate consideration, typically in cash, if so
requested by such shareholders. Minority shareholders have the right to
challenge the appropriateness of the consideration for their shares by
means of court proceedings pursuant to the German Act on Legal Challenge
Similar minority protection rights apply to shareholders whose shares are
transferred by virtue of squeeze-out measures as described above.
Activist Strategy and Litigation
Recent history has a series of examples of hedge funds equipped with large
financial resources taking advantage of minority shareholder rights
associated with corporate measures implemented after successful takeovers.
typical fund strategy can be outlined as follows: Once a public tender
offer has been announced, the funds, within a short period of time,
acquire substantial stakes in the target companies, usually ranging
somewhere above 10% of the target’s share capital. However, the funds do
not do so with the aim of blocking the takeover or otherwise hindering its
success. To the contrary, they would tender a portion of their shares into
the offer in order to help it succeed, if, for example, the takeover offer
is made conditional upon the crossing of a minimum acceptance threshold.
Such a minimum acceptance threshold typically equals 75% of the
outstanding shares, which is the qualified majority under German stock
corporation law necessary to implement certain corporate structural
measures such as DPLTAs.
After completion of the takeover, the funds will wait for a DPLTA to be
concluded which, as mentioned above, must include the obligation to
acquire the shares of minority shareholders in return for appropriate
consideration. The activists will then commence court proceedings
challenging the appropriateness of the consideration in an effort to
achieve a higher price for their shares. In the past, hedge funds have
been notably successful in such proceedings, not infrequently obtaining a
considerable premium on the consideration for their shares.
While it is impossible to make generally applicable recommendations, as
any advice needs to be adapted to the specific circumstances of the
contemplated takeover, we provide below some considerations that may serve
as preliminary guidance to foreign investors envisaging a strategic
takeover of a German listed company.
fund strategy described above is essentially based on statutory
shareholder rights under German law. Hence, while there may be ways to
mitigate, at least to some degree, the risks and costs associated
therewith, such behavior by shareholders can generally not be precluded.
Therefore, any foreign investor that considers making a public takeover
offer for a German target should anticipate activists getting involved
during the takeover process, leading, potentially, to an increase in the
costs of the transaction in the form of a higher purchase price to be paid
for a portion of the outstanding share capital.
Taking a closer look at the shareholder structure of the target company
prior to an investment decision is certainly worthwhile—the higher the
free float of a company and the more fragmented its shareholder structure,
the easier it will normally be for a fund to acquire a large stake via the
stock exchange within a short period of time following the announcement of
a tender offer.
According to German case law, the consideration to be offered for
outstanding shares on the occasion of certain corporate structural
measures is calculated taking into account the average weighted stock
price for a period of time preceding the announcement of such corporate
measures. Therefore, the timing of a corporate measure and its
announcement, respectively, are issues to be considered when structuring
the timetable of a public takeover and subsequent corporate integration
Finally, once court proceedings have been initiated in an effort to
challenge the appropriateness of the consideration offered to external
shareholders for their shares, experienced legal counsel is crucial in
order to effectively counter allegations made by the activists in court.
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