In a recent decision in the matter of Schindler Holding Ltd (published on 18 October 2013), the Swiss Takeover Board approved the repurchase by Schindler of a significant block of own shares from a single shareholder during its ongoing buyback program requiring Schindler to change its buyback program at market price into a ten-day buyback offer at fixed price addressed to all the holders of shares and participation certificates. The ongoing buyback program at market price had to be suspended for the duration of the fixed-price offer and was resumed thereafter.

By Lorenzo Olgiati/Pascal Hubli (Reference: CapLaw-2014-7)

1) Factual Background

Schindler Holding Ltd, Hergiswil (Schindler), a global provider of elevators and escalators, has a share capital of CHF 7,088,764.50 divided into 70,887,645 registered shares and an additional participation capital of CHF 4,617,190.90 divided into 46,171,909 non-voting participation certificates. Both, the registered shares and the participation certificates of Schindler are listed at the SIX Swiss Exchange (Main Standard). On 3 January 2013, Schindler announced and started a three-year buyback program at market price (Rückkaufprogramm zum Marktpreis) for a maximum of 9.5% of its overall equity capital (share and participation capital), with the additional requirement not to repurchase shares in an amount exceeding 3.6% of the equity capital (4,273,284 shares) or participation certificates exceeding 7.9% of the equity capital (9,378,960 participation certificates) (the Ongoing Buyback Program).

During the Ongoing Buyback Program, an existing shareholder, being a member of the pool of anchor shareholders (consisting of the Schindler and Bonnard families, at the time controlling 70.1% of the voting power) offered to sell to Schindler a block of up to 2,366,697 Schindler shares corresponding to 2.0% of Schindler’s equity capital (the Block Sale).

Schindler intended to repurchase the offered significant block of shares in the context of its Ongoing Buyback Program. However, considering that the maximum volume of allowed daily buybacks during a buyback program at market price amounts to 25% of the average daily trading volume traded during 30 days prior to the publication of the buyback program (Daily Repurchase Limit; in Schindler’s case amounting to only 7,872 shares), Schindler approached the Swiss Takeover Board (TOB). In its initial request to the TOB of 22 May 2013, Schindler applied for a formal exemption from the application of Article 55b (1)(c) of the Stock Exchange Ordinance (SESTO), the new provision setting forth the Daily Repurchase Limit (enacted on 1 May 2013 on the basis of the revised Swiss Federal Stock Exchange Act’s provisions combating market abuse (SESTA)).

As a result of feedback received from the TOB, Schindler submitted a changed request to the TOB on 2 July 2013 asking for the approval of the Block Sale within the framework of the Ongoing Buyback Program, subject to and in accordance with the following main accompanying measures:

• The Ongoing Buyback Program shall be suspended with regard to Schindler’s shares (but not with regard to the participation certificates);
• Schindler shall make a buyback offer at a fixed price (Rückkaufangebot zum Festpreis; Fixed-Price Offer), open for acceptance during 5½ trading days;
• The maximum number of shares to be repurchased shall be published together with the offi cial announcement of the Fixed-Price Offer and the repurchase price shall be within the range of the share price paid for Schindler’s shares during 20 days prior to the announcement of the Fixed-Price Offer;
• To the extent the announced maximum buyback volume of the Ongoing Buyback Program of 9.5% of Schindler’s equity capital shall not have been reached after the expiration of the Fixed-Price Offer, the Ongoing Buyback Program shall be resumed.

2) Main Considerations of the TOB

2.1) Applicable Law and Legal Framework

The TOB qualified Schindler’s request not as a new buyback offer but as a mere modification of the Ongoing Buyback Program’s terms and conditions, meaning, a temporary change from a buyback program at market price to a buyback offer at fixed price without changing the buyback volume.

As a consequence, the TOB held that the TOB Circular No. 1 on buyback programs (TOB Circular 1) in its version as applicable at the time of the announcement of the

Ongoing Buyback Program in January 2013 (i.e. the TOB Circular 1 of 26 February 2010) would still apply to Schindler’s request and not the more recent versions of the TOB Circular 1 (of 7 March 2013 and of 27 June 2013 respectively).

The TOB also reiterated that ever since their coming into force on 1 May 2013, the revised SESTA and SESTO rules against market abuse aiming at preventing and combating insider trading and market manipulation directly apply to all current buyback programs, including the one at hand. As a consequence, only a listed company setting up a public buyback program meeting all the conditions set forth in Article 55a et seq. SESTO may exclude the risk of being charged of an abusive conduct involving insider trading and/or market manipulation and may, thus, enjoy ex lege the irrebuttable presumption of admissible conduct (“safe harbor” protection).

For Schindler the Daily Repurchase Limit set forth in Article 55b (1)(c) SESTO meant that a mere 7,872 Schindler shares could be repurchased per trading day under the safe harbor provision – a drop in the Ocean in comparison to the planned Block Sale of 2,366,697 Schindler shares, representing more than 55% of the total volume of Schindler’s Ongoing Buyback Program for shares. According to the TOB, the Daily Repurchase Limit, however, does not forbid Schindler to buy back a bigger number of shares. Schindler would, as the TOB rather laconically stated, “only” incur the risk that such transaction violated the prohibition of insider trading or market manipulation.

The question, however, whether a daily repurchase volume (much) bigger than the Daily Repurchase Limit pursuant to Article 55b (1)(c) SESTO could be approved by the TOB for the purpose of an individual block sale to be carried out on one single trading day was expressly left open by the TOB.

2.2) Equal Treatment of Shareholders

As a next step, the TOB examined the compliance of the planned Block Sale with the fundamental principle of equal treatment in public takeover matters, in particular, the equal treatment of (i) all shareholders and (ii) all categories of listed securities of a listed company. It pointed out that any holder of any kind of listed securities of a company must be free to tender its securities under the same conditions into an ongoing buyback program during its entire term.

Based thereon, the TOB concluded that, given the Block Sale’s massive volume equaling approximately 55% of the total volume of the Ongoing Buyback Program for shares, a completion of the Block Sale in the context of the Ongoing Buyback Program would give the selling shareholder undue preference over all other holders of shares and/or participation certificates of Schindler. Namely, the TOB argued that due to the Block Sale Schindler would lose its ability to ensure, during the full residual term of the Ongoing Buyback Program, the repurchase of the securities of those holders willing to sell them to Schindler under the Ongoing Buyback Program. Only a conversion of the Ongoing Buyback Program from a buyback program at market price into a Fixed-Price Offer would satisfy the principle of equal treatment, an opinion which the TOB had already expressed in its earlier decision 522/01 dated 4 January 2013 in the matter of Absolute Invest Ltd. There the repurchase of a significant block of shares in the context of an ongoing buyback program at market price was also deemed to be inconsistent with the principle of equal treatment and the TOB, thus, imposed a duty on Absolute Invest Ltd to carry out its next (planned) buyback program in the form of a buyback offer at a fixed price offering the same price as paid in the preceding block transaction.

Schindler’s respective request to make a Fixed-Price Offer was granted. However, contrary to Schindler’s request, the TOB held that the Fixed-Price Offer of Schindler could not only relate to Schindler’s shares but also needed to include the listed participation certificates in order to comply with the principle of equal treatment.

2.3) Suspension of the Ongoing Buyback Program

The TOB confirmed Schindler’s request for a suspension of the Ongoing Buyback Program (at market price) for the duration of the Fixed-Price Offer, namely based on its practice that a listed company may not maintain two parallel buyback programs for the same purpose (in the case at hand for the purpose of subsequent capital reduction; see TOB Decision 519/01 dated 22 October 2012 in the matter of shaPE Capital Ltd).

However, the TOB made again clear that the Ongoing Buyback Program would need to be fully suspended, i.e. not only with regard to Schindler’s shares but also with regard to the participation certificates.

2.4) Main Terms of the Fixed-Price Offer

The TOB set the following basic guidelines for Schindler’s Fixed-Price Offer:

Duration: Schindler had requested its Fixed-Price Offer to be open for acceptance during 5½ trading days only, arguing that the requested acceptance period has become common practice in other capital market transactions, such as share offerings and share placements of listed companies. This request of Schindler was rejected by the TOB. Emphasizing the clear wording in the SESTO (Article 55b (2)(a) SESTO) and the TOB Circular 1 (no 19 of the TOB Circular 1 of 26 February 2010, currently no 17 of the TOB Circular 1 of 27 June 2013), both providing for a minimum offering period of ten trading days for a Fixed-Price Offer, the TOB denied the need to further shorten the ten day offering period.

Offer Price: Pointing out that Schindler may freely set the price of its Fixed-Price Offer, the TOB approved Schindler’s proposed price determination formula, subject, however, to a reasonable proportion between the price offered for Schindler’s shares and the one offered for the participation certificates.

No Daily Repurchase Limit: According to the TOB, the Daily Repurchase Limits, as applicable for buyback programs at market price (Article 55b (1)(c) SESTO), do not apply to a Fixed-Price Offer. Consequently, the TOB allowed Schindler to freely set the number of shares and participation certificates for its Fixed-Price Offer, as long as (i) the volumes of the two categories would stand in a reasonable proportion and (ii) the overall number of equity securities allowed to be repurchased under the Ongoing Buyback Program would not be exceeded.

3) Summary and Conclusion

In sum, based on the new rules in the SESTA and the SESTO aiming at combating market abuse (insider trading, market manipulation), the safe harbor protection for allowed daily volumes of repurchases of own shares by listed companies during an ongoing buyback program at market price is limited (Article 55b (1)(c) SESTO). If higher volumes are nevertheless repurchased, the respective company risks that such repurchase qualifi es as market abusive practice.

How then to buy back a big block of shares in an ongoing buyback program? In its decision in the matter of Schindler, the TOB directed the applicant Schindler to effect its intended repurchase of a significant block of shares offered during its Ongoing Buyback Program at market price by way of (i) changing the Ongoing Buyback Program into a Fixed-Price Offer to all the holders of equity securities of Schindler while, at the same time, (ii) suspending the Ongoing Buyback Program for the duration of the Fixed-Price Offer. If done so, Schindler’s repurchase of the offered significant block of shares would be covered by the safe harbor protection of the SESTO.

The question remains, whether there would have been other legal ways under the rules applicable to share buybacks of listed companies to allow Schindler’s Block Sale during its Ongoing Buyback Program.

In particular, as initially requested by Schindler (see Section 1 above), the question arises whether the TOB could grant a formal exemption from the application of the buyback restrictions set forth in Article 55b (1)(c) SESTO, particularly (but not exclusively) in a situation where a listed company is offered to repurchase a significant block of own shares. While pursuant to Article 55b (3) SESTO the TOB is on the one hand competent to increase the repurchase volume without an express limitation, no legal basis can be found which would, on the other hand, empower the TOB to go one step further and grant exemptions from the provisions of the SESTO (in analogy to Article 4 of the Takeover Ordinance). This result might be regrettable from a practitioner’s perspective, the more as such competence of the TOB would mitigate some inconsistencies deriving from the newly introduced split of the takeover and market abuse rules and the respective separate supervision by the TOB and the Swiss Financial Market Supervisory Authority (FINMA).

Finally, the TOB itself has asked but not answered the question whether it could approve a very significant increase of the allowed daily repurchase volume according to Article 55b (1)(c) and (3) SESTO for the purpose of carrying out a large individual block sale at one trading day (see Section 2 above).

In that respect, the TOB’s scarce practice relating to the new Article 55b (3) SESTO is not (yet) supportive. In its decision 537/01 dated 22 July 2013 in the matter of Castle Alternative Invest Ltd., the TOB held that an increase of the Daily Repurchase Limit could in particular be considered (i) in cases where the listed securities are illiquid (in the sense of TOB Circular No. 2) or (ii) if the trading activity in a specific equity security during 30 days prior to the announcement of a buyback program at market price was exceptionally low (leading in the case of Castle Alternative Invest Ltd. to an increase of the Daily Repurchase Limit from 25% to 37.5%). However, the wording of Article 55b (3) SESTO does not exclude a (substantial) increase of the Daily Repurchase Limit for the purpose of a repurchase of a signifi cant block of shares on one trading day, either. For cases with a more moderate ratio between the volumes of a block sale and an ongoing buyback program than in the matter of Schindler, in line with the principle of equal treatment, it seems of practical value that the TOB explores and develops a pertinent practice allowing the repurchase of a block of shares pursuant to Article 55b (3) SESTO.

TOB Decision 525/01 dated 26 July 2013 in the matter of Schindler Holding Ltd (published 18 October 2013)