On 1 May 2013, a new set of rules governing the obligation of the bidder to offer an all cash alternative in voluntary exchange offers has come into force. The most significant change pertains to the introduction of an obligation to offer a cash alternative if the bidder purchases target shares for cash during the twelve months preceding the announcement of the exchange offer.
By Dieter Dubs / Mariel Hoch (Reference: CapLaw-2013-12)
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 Takeover Board’s (TOB) Circular No. 4), the TOB has acknowledged that, in certain respects, said rules are too burdensome on the bidders. The alleviations of the new regime are, however, outweighed by additional restrictions which are imposed on bidders of voluntary exchange offers (also called share-for-share offers).
The new rules on cash alternatives in voluntary exchange offers are contained in articles 9a and 9b of the revised Takeover Ordinance (TOO) and related provisions, replacing the current Circular No. 4 which has been abolished in its entirety as of 1 May 2013. These changes have been enacted concurrently with the abolishment of the right to pay control premia prior to the launch of an offer and certain other takeover law changes.
The new set of rules governs the type of consideration to be offered in voluntary exchange offers. It distinguishes between (i) exchange offers which include shares whose acquisition would entail a mandatory offer obligation (defined in article 9 (6) TOO as change-of-control-offers) and (ii) pure voluntary offers where (a) either the threshold for a mandatory offer is not triggered (partial offers) or (b) where the target company has a valid opting-out provision in its articles of association. In mandatory exchange offers, the obligation to always offer an all-cash alternative continues to apply unalteredly (article 43 (2) SESTO-FINMA).
Under the new rules, the following three time segments in relation to the offer should be distinguished:
– the twelve months preceding the announcement of a voluntary exchange offer (pre-announcement or publication of the offer prospectus);
– the period from the announcement until the completion of a voluntary exchange offer; and
– the period from the completion of the exchange offer until the expiration of the best price rule (i.e. six months following the end of the additional acceptance period).
Under the former regime, the first period was free of any triggers for an obligation to provide a cash alternative in voluntary exchange offers. Under the new rules, the bidder is obliged to offer an all-cash alternative to all recipients of a change-of-control offer if the bidder has purchased 10% or more of the target shares for cash during the twelve-month period preceding the announcement of the offer (article 9a (2) TOO). As this new restriction is limited to change-of-control offers, a bidder may purchase shares for cash in pure voluntary offers (i.e. partial offers and where the target disposes of an opting out) in this first period without triggering an obligation to offer a cash alternative.
In relation to the second period (i.e. from the announcement until the completion of the voluntary exchange offer), the new regime extends to all types of voluntary offers, including partial offers and offers where the target company disposes of a valid opting-out provision in its articles. In the event that the bidder (or any person acting in concert with the bidder such as the target company in case of a friendly offer) purchases any equity securities of the target for cash during this period, the bidder must extend an all cash alternative to all recipients of the exchange offer (article 9a (1) TOO).
It is only with respect to the third period (i.e. from the completion of the offer until the expiration of the best price) that the TOB has significantly relaxed the current rules. Unlike under the TOB’s Circular No. 4 which has been abolished with the new regime coming into force, the bidder may purchase an unlimited number of target shares for cash once the offer has been completed. The value of such purchases is, however, governed by the best price rule which forbids purchases at a higher price than the offer price.
The new article 9b TOO stipulates a rule previously only contained in TOB’s new abolished Circular No. 4: the cash alternative and the shares offered in exchange may differ in their respective values. According to the TOB’s explanatory report on the revised rules of 10 April 2013, both types of considerations must, however, comply with the minimum price rule (i.e. a bidder may offer a premium on the share consideration while the all cash alternative may be limited to the minimum price). Although not explicitly mentioned in the explanatory report of the TOB, this reference to the floor setting of the minimum price rule must be limited to change-of-control offers and mandatory offers. In purely voluntary exchange offers, the minimum price rule does not apply (article 32 (4) SESTA) and may consequently not set a floor in relation to the obligation to offer a cash alternative.
With the exemption of the relaxation applying to the period following the completion of the exchange offer (third period), the new rules are increasingly restrictive on the bidder. Among other inconveniences, the financing costs for the bidder will significantly increase with these rules. The TOB justifies the changes with arguments of equal treatment of the recipients of the offer and therefore implies that cash is better than shares (the Merger Act implies, however, the contrary).