On 4 May 2012, the Swiss Takeover Board has proposed a new set of rules governing the obligation of the bidder to offer an all cash alternative in qualified voluntary exchange offers. The most significant change pertains to the extension of the already restrictive rules to the twelve-month period prior to the announcement of the exchange offer. It is uncertain when and to what extent the proposed rules will become effective.
By Dieter Dubs / Mariel Hoch (Reference: CapLaw-2012-41)
Based on the experience gained since the rules regarding the obligation of the bidder to offer a cash alternative in certain situations of exchange offers have first been enacted in early 2009 (article 43 (2) FINMA Stock Exchange Ordinance (SESTO-FINMA)) and the Swiss Takeover Board’s (TOB) Circular No. 4, the TOB has acknowledged that, in some respects, said rules are too burdensome on the bidders. On 4 May 2012, the TOB has proposed a new set of rules governing the consideration to be offered in voluntary exchange offers which include shares whose acquisition would entail a mandatory offer obligation (so called qualified voluntary offers; see proposed article 9a (1) of the Takeovers Ordinance (TOO)). The obligation to provide for a cash alternative in all situations of mandatory exchange offers remains unchanged (article 43 (2) SESTO-FINMA).
The new rules on qualified voluntary exchange offers shall be included in article 9a TOO and related provisions and shall replace the current Circular No. 4 in its entirety. The TOB had invited interested parties to comment on the new set of rules until 28 May 2012. When and to what extent the proposed new rules will become effective has not been communicated by the TOB. We expect the TOB’s respective publication within the next few months.
The TOB proposes to differentiate the new rules in relation to the following three time periods:
- the twelve months preceding the announcement of the qualified voluntary exchange offer (pre-announcement or publication of the offer prospectus);
- from the announcement until the completion of the qualified voluntary exchange offer (the period should in our view end with the expiration of the additional acceptance period in order to avoid an overlap with the third period); and
- from the end of the additional acceptance period until the expiration of the best price rule (i.e. six months following the end of the additional acceptance period).
Under the current regime, the first period is free of any triggers for an obligation to provide a cash alternative in qualified voluntary exchange offers. Under the proposed new rules, however, the bidder shall be obliged to offer an all cash alternative to all recipients of the offer if the bidder has purchased 10% or more target shares for cash during the twelve-month period preceding the announcement of the qualified voluntary exchange offer (proposed article 9a (2) TOO).
In relation to the second period (i.e. from the announcement until the completion of the qualified voluntary exchange offer), no changes are proposed by the TOB under the new rules. Therefore, if the bidder (or any person acting in concert with the bidder such as the target company in case of a friendly offer) purchases any target shares for cash during this period, the bidder must extend an all cash alternative to all recipients of the qualified voluntary exchange offer (proposed article 9a (3) TOO).
It is only with respect to the third period (i.e. from the expiration of the additional acceptance period until the expiration of the best price rule six months thereafter) that the TOB has relaxed the current regime to some extent. The applicability has been limited to target companies, the shares of which are deemed illiquid according to the TOB’s Circular No. 2. The bidder (or any person acting in concert with the bidder) is not allowed to purchase any target shares for cash during said period if the target company’s shares are deemed illiquid (proposed article 9a (4) TOO).
Given that the proposed rules do not contain anything to the contrary, we assume that it will remain permitted that the cash alternative corresponds to the minimum price whilst the shares offered in exchange contain a premium on the minimum price (see Circular No. 4). This important principle should, in our view, be expressly stated in the new set of rules.
The rules requesting cash alternatives for exchange offers are unnecessarily restrictive on the bidder (the new rules even more so than the existing ones). They increase the transaction costs for the bidder significantly and inhibit a number of exchange offers from being made at all. The TOB justifies the rules with arguments of equal treatment of the recipients of the offer and implies that cash is better than shares (the Merger Act implies the contrary). Shareholders may, however, always sell their target shares on the stock exchange if they wish to divest and do not wish to hold the securities offered to them for exchange under the offer. A bidder who may not or is not prepared to offer an all cash alternative must abandon his plan to submit an exchange offer. As a consequence, the potential recipients of such exchange offers are deprived from their choice to accept or decline the offer, which such potential bidder would otherwise have been prepared to launch.