The Repurchase of Own Shares Outside a Parallel Buyback Offer: The Decision of the Takeover Board in re Absolute Invest
The Takeover Board is enforcing compliance of buyback programmes exempted via reporting procedure more strictly. It has used a large buyback of an investment company outside a repurchase programme to remind issuers that the fundamental principles of takeover law apply to buyback programmes as well – with some surprising twists and consequences.
By Thomas U. Reutter (Reference: CapLaw-2013-4)
1) Factual Background
Absolute Invest AG (Absolute) is an investment company listed on SIX Swiss Exchange. At the announcement of the buyback programme discussed herein, it had a share capital of CHF 749,355.2, divided into 7,493,552 bearer shares of 0.10 CHF nominal value each. Absolute has a history of conducting share buybacks for the purpose of cancellation. These buybacks are conducted in lieu of dividend distributions, with a view to reducing the discount of the trading price of its share compared to their respective net asset value. On 12 March 2012, Absolute announced a further share buyback on a secondary trading line for the purpose of cancellation of these shares. Its Annual General Meeting (AGM) had approved a share buyback of up to 749,355 shares, corresponding to 10% of its then outstanding shares, on 6 March 2012. The repurchase was to be financed from capital contributions reserves and hence without deduction of Swiss witholding tax.
On 6 March 2012, the date of the AGM, the board of directors also resolved to appoint a tax adviser to clarify the tax impact of a possible combination with Alpine Select AG (Alpine Select), another Swiss investment company. Alpine Select was also Absolute’s largest shareholder, holding approximately 30% of Absolute’s voting rights. On 14 March 2012, a confidentiality agreement was entered into between the two parties. The buyback programme was suspended during the pendency of these discussions. Public announcements were made on 19 March 2012 relating to the fact that merger discussions were being held. A further announcement about completion of the due diligence review was made on 27 August 2012. The merger project was discussed during a board meeting of Absolute on 18 September 2012. It seems that such meeting resolved not to proceed with the merger given that an announcement was made the following day that discussions did not lead to a merger agreement and were discontinued.
Absolute suspended its share buyback programme in the sense that it did not conduct any repurchases after the public announcement of merger discussions on 19 March 2012 and resumed its share buyback programme only on 2 October 2012, i.e., after annoucement that merger discussions came to an end. However, repurchases were made after 6 March 2012, the date of the board meeting resolving to appoint tax advice for a possible merger.
On 2 October 2012, the Frey group of shareholders (Frey Group) sold a total of 979,567 shares, corresponding to roughly 13% of the outstanding shares, to Absolute. The repurchases were made at CHF 37.50. A broker, acting on behalf of Absolute, purchased the shares from the Frey Group through orders made on the first trading line (749,000 shares) and second trading line (230,567 shares; difference to fill the gap to 10%). Absolute communicated that these repurchases were conducted “outside the buyback programme and for other purposes”.
The shareholder meeting of Absolute resolved to cancel the shares bought back on 19 November 2012 and approved a further buyback programme of up to 10% of the issued shares following cancellation. Documentation was submitted ahead of the shareholder meeting to notify the Takeover Board (TOB) of the additional buyback programme in accordance with the exemptions from takeover law provided by the notification procedure (see below). The TOB, however, refused to exempt the intended additional buyback programme in the notification procedure and, after a further exchange of filings, investigated the previous buyback.
2) Pertinent Legal Framework
According to a precedent of the predecessor of the Swiss Financial Market Supervisory Authority (FINMA), the Swiss Federal Banking Commission, and long standing practice, public offers to buy back an issuer’s own shares are considered public tender offers (PTOs) pursuant to the Stock Exchange Act (SESTA). Given that a sweeping application of SESTA and its implementing ordinance would be unduly cumbersome for issuers and of little added protection to investors, Switzerland’s primary regulator for PTOs, the TOB, has exempted most buyback programmes from a strict application of those rules. In particular, no prior TOB approval must be sought if certain requirements are met. A mere notification procedure replaces the more comprehensive approval procedure otherwise applicable to PTOs in such instances.
The requirements that must be met by issuers in order to avail themselves of the “safe harbor” notification procedure and the related exemptions have been promulgated in Circular 1 of the TOB dated 26 February 2010 (Circular). The Circular distinguishes between buyback programmes at a fixed price (including issuance of put options) and buyback programmes at market price such as the programme adopted by Absolute. It sets out general requirements applicable to all publicly announced buyback offers and specific requirements for each type of buyback programme. These requirements mandate, inter alia, that the volume of the buyback programme be limited to 10% of the issued shares (as per registration in commercial register) and to 20% of the issuer’s free float. Another requirement states that the buyback programme “shall not result in any material change in the control exercised over the offeror” (quoted from English translation of official text on http://www.takeover.ch).
The Circular not only sets out when the notification procedure is available to issuers, but also requires these issuers to comply with certain rules when conducting buyback programmes. Inter alia, the offeror may not purchase shares outside of the buyback offer for the same purpose as the purpose stated in the buyback offer documentation. Hence, an offeror that has announced a repurchase programme at market price on a secondary trading line for the stated purpose of cancellation of shares (thus reducing the amount of shares outstanding and increasing earnings per share) may not buyback any of its own shares for the same purpose outside the secondary trading line. Thus, a repurchase in a block trade from a shareholder would not be permitted under this rule, if the repurchase is conducted for the purpose of cancellation.
The TOB, however, only reviews compliance of share repurchases with takeover law and refrains from adjudicating compliance with corporate law provisions (see Note 17 of the Circular).
3) The Decision of the TOB
The TOB reiterated its established practice pursuant to which publicly announced repurchases of own shares constitute PTOs in the sense of SESTA. More importantly, it went on reconfirming the fundamental principles of takeover law: fairness, transparency and equal treatment of investors. It went on to review whether these principles and their respective emanation in specific provisions of the Circular had been observed or not.
Volume limitation: The TOB first examined whether the 10% limitation for repurchase programmes exempted via reporting procedure had been complied with in the present case. On the face of it, non compliance seemed obvious. The volume bought back amounted to 19.99% of all issued shares. Moreover, the same amount of shares was resolved to be cancelled at the November 2012 extraordinary shareholder meeting. It did not help the issuer to argue that the shares repurchased from the Frey Group were intended to possibly be used as a consideration in the merger with Alpine Select. The TOB argued that this possibility was only theoretical as evidenced by the proposal of the board of directors to cancel these shares only a few days after the repurchase from the Frey Group (invitation published on 29 October 2012; repurchase made on 2 October 2012). Hence, the TOB concluded that Absolute breached two requirements of the Circular: The volume limitation of 10% of the issued shares and the prohibition of purchases outside the buyback programme for the same purpose as the one indicated for the buyback programme.
Equal treatment: The TOB then went on to review whether the principle of equal treatment was breached in the present case. The concern of the TOB centered around the fact that Absolute had allowed one group of shareholders, the Frey Group, to sell its entire shareholding. Absolute had argued that the buyback of this stake was in the interest of the company and all other shareholders. Given that the Frey Group wanted to discontinue its investment in the company following the failed merger, Absolute wanted to avoid a potentially sharp decrease of its share price following a steady sale of such a large stake on the exchange. In the TOB’s view, this argument was not convincing. It found that Absolute had “neglected the other shareholders” in their right to sell their shares in the buyback programme.
Transparency: As a final matter of review, the TOB examined whether Absolute had provided sufficient information to shareholders to make an informed investment decision. One issue draws particular attention: Information about changes in control. The TOB argued that Absolute had failed to disclose a possible change in control of Absolute because Alpine Select, if not participating in the buyback programme, would cross the threshold of 33,3% of all shares (and voting rights) issued upon completion of the programme and subsequent cancellation. It dismissed Absolute’s argument that the 33,3% threshold, in light of the exemption from a mandatory bid (Opting out) otherwise kicking in at this threshold, would not be relevant for control. Given the fact that Alpine Select owned roughly 27.8% at the time of notifying the programme to the TOB (8 February 2012) and approximately 30.9% upon the effective date of a further cancellation of shares bought back on 6 March 2012, the TOB took the view that a possible increase above 33,3% should have been notified to it and disclosed to shareholders.
In light of the above, the TOB imposed a duty on Absolute to conduct its upcoming buyback programme in the form of a fixed price offer or by way of issuance of put options. By imposing these (fixed price) buyback techniques the TOB aimed to make sure that its second requirement can be satisfied and policed: The price paid to the Frey Group must be the minimum price for such offer.
4) Analysis of Certain Issues
The breach of the volume limitation of 10% found by the TOB is based on the purpose of the buyback in the Frey Group transaction. If this buyback was conducted for the purpose of cancellation and therefore for the same purpose as the buyback programme, then the 10% limitation and – inherently – the prohibition on purchases outside the offer for the same purpose had not been observed. The TOB did not rely on Absolute’s statements as to its intention with respect to the Frey Group transaction, but rightly adopted a more objective test based on the factual evidence available. This test quite obviously led to the result of a technical breach of the exemption requirements of the Circular. There is little one can object to this.
However, it is worth noting that the TOB reviewed compliance with its own rulemaking, the Circular. No review was undertaken whether its rulemaking is in compliance with SESTA. Unlike many other jurisdictions, the SESTA does not provide for any prohibition of purchases outside a PTO. It only stipulates a notification requirement of any such purchases. Whether a stricter regime is warranted in an exemption procedure is at least debatable. The primary objective of such a prohibition, policing equal treatment, could also be achieved by a mere reporting duty.
The TOB also found that the repurchase from the Frey Group did not comply with the equal treatment principle and that this transaction evidenced a certain “neglect of shareholders”. It remains unclear what exactly constitutes the “neglect of shareholders” that the TOB identified in the present case. It apparently did not view as relevant that not all existing shareholders wanted to tender in the buyback programme: a “slot” of 3% of all shares or one third of the programme was still unused at the time of the Frey Group transaction. Neither did the TOB appreciate the fact that a new buyback programme was to be launched as soon as reasonably practicable after the Frey Group transaction which would have allowed other shareholders to sell shares again.
Absent any indication that any Absolute shareholders were willing to sell their shares, but were refused to do so in favour of the Frey Group, the only issue the TOB could have had was the fact that the opportunity to sell their respective entire shareholding was not offered to all shareholders of Absolute. Obviously, to comply with any such requirement is impossible in a partial offer and in particular in a buyback at market price, where not even pro rata clawbacks are possible. The TOB therefore afforded the protection of takeover law in an abstract manner to non tendering/selling shareholders. Takeover law protection, however, absent a mandatory bid or a forced cancellation of remaining shares (“squeeze-out”), is usually only extended to shareholders who are recipients of an offer by an offeror. Shareholders who are not recipients of an offer (and also do not intend to tender/sell) should have the protection of corporate law and its equal treatment principle, but – at least as a rule – not benefit from takeover law protection. Against this background and given the restraint of the TOB in reviewing corporate law issues (see “Pertinent Legal Framework” above), the decision seems far reaching in this regard.
Lastly, the TOB also picked up the issue of transparency relating a change in control. While the position it adopted on the 33,3% threshold seems justified in substance, it is interesting how it was framed. The TOB handled the possible change in control due to an increased stake of Alpine Select as transparency and disclosure issue even though its own regulations do not require an offeror to make disclosure on this item in the offering document for a buyback exempted in the reporting procedure. In fact, item 2.4 on the notification form to be filed with the TOB addresses information on change in control, but the same form also states that this information must not be included in the public offering document. As indicated above (see “Pertinent Legal Framework”), absence of material change in control is a requirement for the availability of exemptive relief pursuant to the Circular. As a rule, therefore, one would assume that the TOB should either permit exemptive relief (in case of an absence of a material change in control) or dismiss exemptive relief (in case of a material change in control). The fact that the TOB frames change in control as a disclosure issue seems noteworthy. It may indicate that exemptive relief may also be available in the future in case of a material change in control provided appropriate disclosure is made. However, in light of the upcoming major overhaul of the buyback regulation in Switzerland, this is by no means certain.
Thomas U. Reutter (thomas.reutter@baerkarrer.ch)