In the context of a major change of the Swiss law on insider trading, market abuse and similar practices, the Federal Council has proposed an amendment of the minimum price rules in public tender offers. If adopted, the new rules will abolish the possibility to pay a control premium to controlling shareholders ahead of a public tender offer. This article summarises the proposed new rules and puts them into context.
By Hans-Jakob Diem (Reference: CapLaw-2012-14)
1) The current minimum price rules
The Swiss law on public tender offers as currently in force provides two minimum price rules which apply to mandatory offers as well as to voluntary bids that relate to more than one third of the voting rights of a Swiss listed company. According to the current rules, the price of an offer must at least equal the market price, being the volumeweighted average of the prices paid on a Swiss stock exchange during the 60 trading days preceding the announcement of the offer or, if higher, 75 percent of the highest price paid by the bidder and the persons acting in concert with it within the last twelve months. This means that the payment of a control premium to controlling shareholders ahead of an offer is possible under the current rules, provided that it does not exceed 331⁄3 percent of the offer price. With these rules, which in essence entered into effect in 1998, the lawmaker intended to ensure that the minority shareholders have a real exit opportunity at an adequate price in case of a change of control, without depriving the offeror of the possibility to deduct from the offer price a limited premium which it has previously paid to a controlling shareholder in return for its controlling stake. According to empirical studies, premiums were paid in approximately one third of the cash offers made from 1998 to 2010 at a medium level of approximately 15–21.6 percent compared to the offer price. These figures also include, however, those cases where the bidder paid a higher price for target shares on the stock exchange prior to the offer.
2) The proposed new rules
On 31 August 2010, the Federal Council published its formal proposal for an amendment of the Stock Exchange and Securities Trading Act. Upon initiative of the Takeover Board, the proposal includes an amendment of the minimum price rules. According to the proposed new rules, the price to be offered by the offeror in mandatory bids or in voluntary offers that relate to more than one third of the voting rights must be at least the higher of the market price or the highest price paid by the bidder within the twelve months preceding the announcement of the offer. If the proposed new provision enters into force, an acquirer will no longer be able to acquire a stake exceeding one third of the voting rights at a premium compared to the price to be offered in the subsequent mandatory bid. Further, any bidder will have to ensure before its voluntary takeover offer that it and its concerted parties have not acquired any target shares during the last twelve months for a price higher than the envisaged offer price, irrespective of whether such shares have been acquired with a view to the bid or independently from the offer for investment or any other purpose (for instance by the treasury department). This may in particular be restrictive if the offeror envisages an offer in depressed or falling markets.
In its proposal, the Federal Council puts forward in essence two reasons for the proposed amendment. First, according to the proposal, the possibility to pay a control premium ahead of the offer violates the principle of equal treatment of shareholders which is one of the pillars of the Swiss takeover law. Second, the Federal Council holds that the possibility to pay a control premium may discourage foreign investors from investing in Swiss equities as many other jurisdictions, in particular in Europe, do not permit control premiums, which may ultimately result in a competitive disadvantage of Switzerland’s equity market.
3) The proposal in context
The proposed abolishment of the possibility to pay control premiums ahead of public tender offers means a major change of policy and has been criticised for a number of valid reasons.
While the absolute number seems to be decreasing, still more than one third of all listed Swiss companies are “family-owned” businesses in the sense that they are controlled by a single shareholder holding more than 331⁄3 percent of the voting rights. This is probably a higher proportion than in many other jurisdictions. Similarly, there are a high number of privately-owned small to medium-sized businesses in Switzerland which may possibly envisage initial public offerings in the future. If the new rules enter into force, the entrepreneurs controlling such businesses will no longer be able to realise a higher consideration upon exit in return for their increased risk. This may induce such companies to go or to stay private or to introduce an opting-out from the mandatory offer rules, which is (and will remain) possible under Swiss law. An opting-out means, however, that the public shareholders are deprived altogether of their mandatory exit right upon a change of control.
Another criticism has been that the proposed new rule is disproportionate. While there have been cases in the past which may seem abusive in the sense that certain—not necessarily controlling—shareholders received an “unjustified” premium ahead of the public shareholders, such abuses could be prevented by measures that still permit control premiums in justified cases. One measure could be, for instance, to limit the possibility to pay a control premium to the acquisition of controlling interests of a certain minimum size, as it had been suggested in an alternative proposal by the Takeover Board. In addition, it is difficult to see why a higher price paid on the stock exchange prior to the offer should result in an unequal treatment of shareholders since any shareholder would have had the opportunity to realise such price by selling shares on the open market. Consequently, it could be considered to exempt stock exchange purchases prior to the offer from the calculation of the minimum price.
Importantly, the new rules appear overreaching if compared to other jurisdictions. The law of Delaware, the place of incorporation of a majority of the US listed companies, and US Federal law do not impose a mandatory tender offer duty at all. It seems difficult to imagine that the US equity markets are suffering important competitive disadvantages as a result. The EC Takeover Directive requires the Member States to introduce a mandatory offer duty with a minimum price equalling the highest price paid by the bidder during the last six to twelve months prior to the offer. Not only is the minimum reference period of six months shorter than the twelve months proposed by the Swiss lawmaker. Also, the Takeover Directive does not impose a market price as an additional minimum price, nor does it provide any price rules for voluntary offers. As permitted by the Takeover Directive, Germany, for instance, has adopted a reference period of six months. In comparison, the UK City Code provides for a twelve month period for mandatory offers and only a three month period for voluntary bids, and it does not require the bidder to match the prevailing stock exchange price. It results from a quick comparison that the new Swiss rules, should they be adopted as proposed, would be more restrictive than the rules applicable in many other important jurisdictions, including in Europe. It remains to be seen whether this will indeed remove a competitive disadvantage of the Swiss equity markets or whether the opposite will be the case.
4) Outlook
The Council of States (Ständerat) has approved the draft amendment of the Stock Exchange Act as proposed by the Federal Council. The National Council (Nationalrat) is expected to debate the new legislation during 2012. If adopted, and subject to a referendum, the new law may enter into force earliest on 1 January 2013.