This article summarises two decisions of the Swiss Takeover Board regarding the recently announced takeover offer for Kuoni by EQT, which, inter alia, contain relevant guidance in relation to the so-called “Minimum and Best Price Rules” and “irrevocables”. In addition, during the first quarter of 2016 the Swiss Takeover Board has passed a noteworthy decision in relation to EFG International concerning the non-existence of a tender offer duty in connection with the entry into a shareholders agreement.

By Philippe Weber / Thomas Brönnimann (Reference: CapLaw-2016-20)

1) Kuoni

a) Background

On 2 February 2016, Kiwi Holding IV S.à r.l. (Kiwi IV) pre-announced a public tender offer for all publicly held class B Shares with a nominal value of CHF 1 each (Class B Shares) of SIX listed Kuoni Reisen Holding AG (Kuoni). Kiwi IV is a Luxembourg domiciled SPV, which funds managed by EQT control through three intermediate holding companies (Kiwi I, II, III).

The tender offer does not extend to the voting preference class A shares of Kuoni with a nominal value of CHF 0.20 each (Class A Shares), which represent 25% of the voting rights but only 6.25% of the capital of Kuoni and which are held by the Kuoni and Hugentobler-Stiftung (Stiftung).

On 1 February 2016, i.e. immediately before the pre-announcement of the tender offer, the Stiftung and EQT/Kiwi had entered into a Term Sheet, a Shareholders Agreement and a Contribution Agreement regarding, inter alia:

• the contribution by the Stiftung of all Class A Shares into Kiwi III against issuance of Kiwi III shares to the Stiftung, conditional upon the successful completion of the tender offer and at a value to be determined based on a pre-agreed formula;
• a limited exclusivity right in favour of EQT/Kiwi, according to which the Stiftung agreed that it would not tender the Class A Shares to another party in a competing offer, unless the offer price in such competing offer would be at least 10 per cent higher than the price offered by EQT/Kiwi;
• conditional upon completion of the tender offer, certain governance and exit rights, including a drag-along right in favour of EQT/Kiwi.

With respect to the value at which the Class A Shall should be contributed, the Stiftung and EQT/Kiwi agreed as follows:

• number of Class A Shares held by the Stiftung divided by 5 (gives equivalent in Class B Shares) multiplied by the final tender offer price for Class B Shares 
• plus an additional compensation for the contribution of the Class A shares taking into account net benefits arising from further undertakings of the Stiftung in favour of Kiwi/EQT under their agreement to the extent confirmed by the review body and the Takeover Board to be permissible under takeover law (whereby such compensation should not exceed 20% compared to the final tender offer on an adjusted basis).

In other words, according to part one of the above formula, the Stiftung would receive the same price as holders of Class B Shares in the public tender offer plus a compensation for certain benefits arising from ancillary undertakings.

According to the below described decision of the Takeover Board, the “benefits” were meant to, inter alia, include the granting by the Stiftung to Kiwi/EQT of (i) a significant shareholding in Kuoni, (ii) the afore mentioned limited exclusivity right, and (iii) the exit rights including the drag along.

b) Decision of the Takeover Board of 25 February 2016

In its decision of 25 February 2016, the Takeover Board, inter alia, held as follows with respect to the contemplated tender offer by EQT/Kiwi and their related arrangements with the Stiftung:

• It is permissible not to extend the tender offer to the Class A Shares because these shares are not listed.
• Nevertheless, for purposes of the so-called “Best Price Rule” the consideration paid by EQT/Kiwi to the Stiftung in connection with the contribution of the Class A Shares must be taken into account. According to the Best Price Rule the public tender offer price must be at least equal to the highest price paid by the offeror (including any person acting in concert) for equity securities of the target since publication (or pre-announcement) of the offer until 6 months after expiry of the extended offer period).
  In this connection, the Takeover Board assessed the relevance of the above described additional compensation and concluded that:
  – the limited exclusivity right in favour of EQT is not permissible under Swiss takeover law, because (as a rule) Swiss takeover law does not recognise so-called “irrevocables”; consequently, the granting of such exclusivity right would also not justify any additional compensation to the Stiftung outside the scope of the Best Price Rule;
  – the granting of a significant shareholding does not justify a compensation outside the scope of the Best Price Rule, because since a change of law in 2013 Swiss takeover law no longer allows for a control premium (outside the scope of the Minimum and Best Price Rules);
  – according to the Takeover Board, in large share deals such as in the present case between EQT/Kiwi and the Stiftung, the granting of certain representations, covenants, governance and exit rights is customary and, hence, in the present case the stated exit and drag-along rights will not justify any additional compensation outside the scope of the Best Price Rule.

As a consequence of the above, the Takeover Board ordered that at the relevant time the mandated review body (Prüfstelle) will have to confirm to the Takeover Board the compliance with the Best Price Rule in the tender offer, whereby any compensation paid to the Stiftung for granting EQT a significant shareholding in Kuoni, the limited exclusivity right and exit and drag-along rights would have to be taken into account as compensation under the Best Price Rule (and consequently would like to a duty to increase the tender offer price for Class B Shares).

c) Conclusions

The Kuoni decision of the Takeover Board is of significant practical relevance. It states that even limited exclusivity (as described above) is not compatible with the restrictions applicable to “irrevocables”; it also contains quite far reaching assumptions and conclusions about the valuation of additional representations, covenants and undertakings in connection with governance and exit rights and their meaning within the scope of the Minimum and Best Price Rules.

The public tender offer was published on 29 February 2016. The tender offer period started on 15 March 2016 and is expected to end on 13 April 2016. If successful, closing of the tender offer is expected to take place on 19 May 2016 (subject to potential extensions).

On 30 March 2016, the Takeover Board published a decision by which the appeal of the Stiftung against the Takeover Board decision of 25 February 2016 was dismissed. The Stiftung filed an appeal against both Takeover Board decisions before FINMA and requested FINMA to suspend the appeal procedure in order to reach a mutual agreement with the Takeover Board. The FINMA Takeover Committee has approved this request and has provisionally suspended the appeal procedure until 22 April 2016.

2) EFG International

a) Background

On 22 February 2016, EFG International AG (EFGI) announced the combination of EFGI and BSI SA through the acquisition of 100% of the share capital of BSI SA by EFGI from Banco BTG Pactual S.A. (BTG). The purchase price payable to BTG will be satisfied by a combination of cash and newly issued shares of EFGI. The cash component will be financed out of existing reserves and by way of a capital increase and the issue of tier one capital instruments. Upon completion of the transaction, BTG will hold, directly or indirectly, approx. 20% to 30% of the share capital and voting rights of EFGI, while the shareholding of EFG Bank European Financial Group SA (EFG Group), the principal shareholder of EFGI, will be reduced from 54.8% to approx. 38%. EFG Group’s shareholding in EFGI will under no circumstances fall below 33¹/₃% of the share capital and the voting rights of EFGI.

EFG Group is not a party to the acquisition agreement between BTG and EFGI regarding the sale and purchase of the BSI-shares. EFG Group’s support of the transaction is secured by a letter agreement (Letter Agreement) between EFG Group, EFGI and BTG entered into simultaneously with the acquisition agreement. Under the Letter Agreement, EFG Group commits to EFGI on the one hand and BTG on the other hand as follows: EFG Group will (i) not sell any EFGI-shares during the term of the Letter Agreement; (ii) vote its shares in favour of the capital increases required for the completion of the transaction; (iii) support the financing of the transaction through its participation in the capital increase; (iv) prior to closing, elect one (BTG shareholding in EFGI at closing <25%) or two (BTG shareholding in EFGI at closing >25%) directors nominated by BTG to the board of directors of EFGI subject to closing occurring; (v) sign the Pre-Emption Agreement (see below) at closing of the Transaction. The Letter Agreement will terminate automatically at closing of the transaction.

It is further contemplated that at closing of the transaction, EFG Group and BTG will enter into a shareholders’ agreement (Pre-Emption Agreement) which provides for the following: (i) Right of first offer: If BTG intends to sell all or a part of its EFGI-shares in a private transaction, i.e. not over the stock exchange or in an ABB-transaction, to a third party, BTG has to invite EFG Group to submit a first offer for the price indicated by BTG. If EFG Group submits an offer, BTG will have the right to accept the offer or refrain from the sale. If EFG Group does not submit an offer, BTG will be permitted to sell the EFGI-shares at the indicated price within a certain period to a third party; (ii) Right of notification of EFG Group in the event of an Accelerated Bookbuilding Transaction: If BTG intends to sell all or a part of its EFGI-shares through an ABB or a similar transaction, BTG has to notify EFG Group of its intention 20 days prior to the ABB-transaction; (iii) Restriction on pledge: BTG is only permitted to pledge its EFGI-shares in the context of borrowing or issuance of guarantees under the condition that the creditor or the guarantor declare towards EFG Group that EFG Group shall have the right of first offer in the event of an enforcement of the pledge; (iv) Composition of the Board of directors of EFGI: BTG has the right to nominate one (BTG shareholding in EFGI at closing <25%) or two (BTG shareholding in EFGI at closing >25%) members of the board of directors of EFGI and EFG Group undertakes to vote for the member(s) so nominated by BTG. In addition, EFG Group and BTG agree that the majority of the members of the board of directors of EFGI shall at any time fulfil the independence criteria defined by FINMA for members of the board of directors of banks. The Pre-Emption Agreement will terminate automatically if the shareholding of EFG Group or BTG falls below 5% of all the shares in EFGI.

The articles of association of EFGI do not contain an opting-out or an opting-up provision. Accordingly, the provisions of articles 135 s. FMIA regarding the duty to submit a tender offer apply to shareholders of EFGI. Prior to the announcement of the transaction, EFG Group and BTG jointly filed an application to the Takeover Board requesting the Takeover Board to declare that the entering into the Letter Agreement and the Pre-Emption Agreement do not subject EFG Group and/or BTG (as well as their respective direct or indirect controlling shareholders) to the duty to submit a tender offer for all the shares in EFGI or, alternatively, to grant EFG Group and BTG (as well as their respective direct or indirect controlling shareholders) an exemption from the duty to submit a tender offer for all the shares in EFGI.

b) Decision of the Takeover Board of 22 February 2016

In its decision of 22 February 2016, the Takeover Board held that neither the conclusion of the Letter Agreement nor the conclusion of the Pre-Emption Agreement will subject EFG Group and/or BTG (as well as their respective direct or indirect controlling shareholders) to the duty to submit a tender offer for all the shares in EFGI.

The main considerations of the Takeover Board were the following:

• A group of shareholders whose combined shareholding exceeds 33¹/₃% of the voting rights of the target company becomes subject to the tender offer duty if the shareholders act in concert or as an organised group with a view to control the target company (art. 33 FMIO-FINMA). According to the practice of the Federal Supreme Court (BGE 130 II 540), the acting in concert must enable the shareholders to control the target company and the circumstances must indicate that the shareholders seek control over the target company. Upon closing of the transaction, BTG will hold 20% to 30% of the voting rights of EFGI while EFG Group will still hold more than 33¹/₃% of the voting rights. The building of BTG’s stake in EFGI does, by itself, not indicate the intention of the involved parties to exercise joint control because EFG Group still retains a controlling interest in EFGI. However, even in the case of a controlling interest, a change of control may occur if agreements among the parties have the effect that control can only be exercised together with other shareholders.
• With respect to the Pre-Emption Agreement, the “right of first offer” by itself is not sufficient to form a group of shareholders subject to tender offer duty within the meaning of art. 33 FMIO-FINMA. The same is true for the “restriction on pledge” and the “ABB notification right”. In contrast, EFG Group’s promise to elect one or two representatives of BTG to the board of directors of EFGI is suitable in principle to influence the direction of the company. However, given that EFG Group retains a controlling interest in EFGI, EFG Group still has a controlling position in the shareholders’ meeting and can determine all the other members of the board of directors. EFG Group’s promise to elect one or two BTG’s representatives to the board of directors of EFGI does not enable BTG to exert significant influence on the controlling position of EFG Group. The regulatory requirements by FINMA in relation to independency of board members are not decisive in the present context. Overall, from an objective point of view, the Pre-Emption Agreement has not the effect that EFG Group and BTG will have joint control over EFGI.
• As the transaction and its structuring through the Pre-Emption Agreement does not trigger a tender offer duty, it does not need to be further analysed whether or not the preparatory arrangements under the Letter Agreement subject the parties to a tender offer duty.

c) Conclusions

For the Takeover Board it was decisive that EFG Group will still have a controlling interest in EFGI and that the Pre-Emption Agreement does not restrict EFG Group from exercising a controlling influence in the shareholders’ meeting. The Takeover Board stressed however that even in case the acting in concert involves a controlling interest, a change of control may occur if one party has significant influence on the controlling position of the other. Further, the decision clarifies that a (unilateral) right of first offer by itself is unproblematic.

Philippe Weber (philippe.a.weber@nkf.ch)
Thomas Brönnimann (thomas.m.broennimann@nkf.ch)