In a recent order the Takeover Board had to rule on whether to grant an unsolicited restructurer a reorganization exemption from the statutory duty to make a purchase offer for all shares of a listed company. The decision is of particular interest because the request for the reorganization exemption was not supported by the board of directors of the potential target company. In the case at hand, the Takeover Board denied the grant of a reorganization exemption applying, amongst others, the principle of subsidiarity which precludes the grant of an exemption as long as the company is in search for an anchor investor and is implementing measures to enhance its financial situation.
By Severin Roelli (Reference: CapLaw-2013-16)
1) Facts
a) Schmolz + Bickenbach AG and its Main Shareholders
Schmolz + Bickenbach AG (S+B AG) is a Swiss corporation with its shares listed on the Main Standard of SIX Swiss Exchange. S+B AG is in the business of producing, processing and distributing special steel solutions.
Schmolz + Bickenbach GmbH & Co. KG, Germany (S+B KG) had been the biggest shareholder in S+B AG, holding, through various direct and indirect subsidiaries (S+B Group), 40.46% of the voting rights of S+B AG. A shareholders’ agreement between one of the above mentioned subsidiaries and Gebuka AG provided for a de facto veto right of both parties. As a consequence, S+B KG was considered to control only 20.46% of the voting rights in S+B AG.
b) Financial Condition of S+B AG
In early March 2013, S+B AG publicly announced that it had reached an agreement with all lending banks for amendments to its existing credit agreements. The amended credit facilities provided for a total value of around EUR 930 million with fixed durations until March/April 2015. The terms of the credit agreements are based on current market conditions and the expected development of S+B AG’s business. In addition to the amendment of the financial covenants and credit margins, measures to strengthen the capital of S+B AG were foreseen at that time. With the goal of strengthening the capital base and improving the balance-sheet structure, the board of S+B AG began evaluating various strategic options. Such options, in particular, included equity measures as well as other suitable measures to permanently reduce the leverage.
On 4 April 2013, S+B AG publicly announced that it intended to expand its shareholder base. As part of that strengthening of the capital structure, S+B AG invited selected investors to submit offers with regard to a capital restructuring involving existing shareholders. S+B AG has communicated that it is in discussions with various national and international investors, with whom confidentiality and standstill agreements have been signed.
On 22 May 2013, S+B AG published its quarterly report and announced that its earnings situation had substantially increased. The order backlog and revenues had improved and the cost-cutting measures had begun to show initial results: adjusted EBITDA in the magnitude of EUR 150 million to EUR 200 million are expected for 2013 earnings. Further, it was communicated that S+B AG was examining the possibility of performing a capital increase in the magnitude of approximately CHF 300 million by the issue of subscription rights.
c) Investment and Shareholders’ Agreement
In late April 2013, S+B KG and Venetos Holding AG (Venetos), a company of Mr. Vekselberg’s Renova group, entered into an investment and a shareholders’ agreement with the aim to reorganize S+B AG. Pursuant to these agreements, Venetos would acquire from S+B KG shares and subscription rights for shares of S+B AG (such shares to be issued in connection with the upcoming capital increase) and eventually become the main shareholder of S+B AG.
Under the investment agreement, Venetos and S+B KG agreed on the terms of a EUR 350 million rights offering by means of a “Harmonica” (i.e., capital reduction immediately followed by a capital increase in the amount the capital was previously reduced). S+B KG agreed to take all necessary actions in order to give raise to such a Harmonica. The shareholders’ agreement provided for the terms of the relationship between the parties post-capital increase. It was contemplated that, subsequent to the capital increase, Venetos would hold at least 25.29% and S+B KG would not hold more than 15.17% of the voting rights of S+B AG. Both agreements were subject to various conditions, one of which being that the agreements would only become binding on the parties if the reorganization transaction did not trigger the duty to make a purchase offer for all shares of S+B KG.
2) Request for the Grant of a Reorganisation Exemption
a) Request of Venetos and S+B KG
S+B KG and Venetos filed a request to the Takeover Board (TOB) asking, amongst others, (i) for an exemption from the duty to make a mandatory offer, in case they exceeded the threshold of 33 1⁄3 % of the voting rights of S+B AG, individually or collectively as an organized group due to the signing and consummation of the investment and shareholders’ agreement and (ii) a confirmation that Venetos has no duty to make a mandatory offer (y) in case of the termination of the shareholders’ agreement or (z) in case of Venetos individually exceeded the threshold of 33 1⁄⁄3 % of the voting rights of S+B AG following the reorganization.
In their request, Venetos/S+B KG claimed (i) that the capital increase contemplated under the investment agreement would recapitalize S+B AG, (ii) that such a recapitalization is necessary and (iii) that S+B AG itself confirmed the necessity of a recapitalization in its press release of 4 April 2013. The necessity for a recapitalization in the amount of EUR 350 million was determined through an “outside—in” analysis and a detailed analysis of the capital structure and the debt equity ratio of competitors, as of end of 2012, S+B AG had net financial liabilities of 5.9 x EBITDA and an equity ratio of 26% compared to net financial liabilities of 3.0 x EBITDA and an equity ratio of 53% of its European competitors.
b) Statement of S+B AG to the Request of Venetos/S+B KG
In its statement, S+B AG requested that all motions of Venetos/S+B KG be denied. S+B AG argued that it was not in need of fundamental rehabilitation and its existence in the short and medium term was secured from both a financial as well as operational point of view. S+B AG had taken steps to enhance the debt equity ratio. It had approached various potential anchor investors including Renova, the parent company of Venetos. S+B AG had liquidity available to continue its business until April 2015 and S+B AG had mandated a consultant to conduct a strategic review. The notes of S+B AG that are listed on SIX Swiss Exchange had been recently trading at well above 100%, which evidenced the confidence of the financial markets in S+B AG. At the time of their filing, S+B AG expected positive operating results for the first quarter, which showed that the internal measures (i.e., cost cuts, investment savings plan, etc.) were beginning to show results. In addition, the proposed reorganization measures of Venetos/S+B KG were neither necessary nor proportionate. Finally, S+B AG submitted an appraisal of its financial condition issued by Ernst & Young, its auditor. Ernst & Young stated that it currently believed S+B AG could continue to operate as a going concern.
3) Considerations of the TOB
a) Group acting in concert
The TOB confirmed its practice that several restructurers are considered to be acting in concert if they coordinate the voting of their shares in the shareholders’ meetings as well as in the restructuring of the target. Venetos and S+B KG qualified as a group acting in concert due to their investment agreement and shareholders’ agreement.
b) Confirmation of the Takeover Board’s practice in respect of article 31(2)(a) Stock Exchange Act
Second, the TOB confirmed its practice that the reorganization must be of an economic nature to qualify for an exemption from the statutory duty to make a purchase offer for all shares. Accordingly, a measure only qualifies as a reorganization measure if (i) it serves to remedy the economical weaknesses of a distressed company that is seriously threatened in its existence and helps to recover the company’s earning power; (ii) the measure is necessary and, in the ordinary course of events, reasonably likely to adequately secure the continued existence of the company; (iii) the restructurer(s) incur(s) new obligations or waive(s) existing rights that improve the financial condition of the distressed company, and do not just satisfy legal obligations incurred before the restructuring; and (iv) the long term success of the measure is not required. Lastly, the reorganization exemption is a means of last resort which shall only be granted in case no investor can be found who is willing to invest in the company without relying on the exemption.
c) The Takeover Board’s reasoning
The TOB qualified S+B AG’s efforts towards the implementation of capital restructuring measures as evidence of the absence of the need for fundamental rehabilitation in the meaning of the Swiss takeover law. Only the existence of a threatening weakness of the company would require fundamental rehabilitation. According to the TOB S+B AG did not suffer from such a weakness given that its auditor confirmed that S+B AG could, without reasonable doubt, continue to operate as a going concern for the relevant period (until 31 December 2013) and that the auditor’s 2012 report did not reveal any qualification in this regard. The assessment of the auditor is supported by the fact that S+B AG could avail itself of liquidity from the financing banks until April 2015. The short and middle term liquidity needs of the company are secured, a pattern that is typically not seen in a company dealing with existence threatened circumstances.
Finally, the TOB held that the principle of subsidiarity would hinder the grant of a reorganization exemption as long as S+B AG is continuing its search for an anchor investor and implementing measures to enhance its financial situation.
As a result, the TOB concluded that it could not grant the requested reorganization exemption and that the passing of the 33 1/3 % threshold by Venetos following the capital increase would trigger the duty to make a purchase offer for all shares of S+B AG.
TOB Order 535/01 dated 24 May 2013