Investments and acquisitions
Rarely have events accelerated so rapidly or so radically as they have in the course of the Covid-19 pandemic. We expect the crisis to operate as a catalyst for change and the business environment to look very different. As we transition to a new normal, there will be opportunities for those with access to capital and a desire to invest or participate in industry consolidation.
Opportunities will emerge for new money to be invested and for businesses with robust fundamentals to expand. Whilst we have seen a rise in protectionist sentiment and declining public trust in private and foreign capital, it is also clear that the recapitalisation of many businesses, which will be required following the pandemic to preserve jobs and skills, will need to involve private capital, much of which may come from overseas.
Those looking to explore opportunities emerging from the crisis may find themselves presented with a variety of structures and factors to consider.
We explore each of these means of managing liquidity in greater detail and suggest steps that companies should consider in the short term and in the months ahead. We would expect various combinations of these options to be adopted by companies facing a cash crunch. In every instance, directors must take particular care to discharge their legal duties to the company and its shareholders and creditors. Click a above box to read more.
POLLING DATA AREA
Public to private
Private investment in public equities
Foreign direct investment control (FDI)
We expect to see financial buyers leading public-to-private transactions in the near term and a greater focus on all-share deals between listed corporates. Financial buyers, such as state-owned enterprises, sovereign wealth funds and private equity houses, and consortia will need to be aware of particular issues they may face on a public transaction, for example their interests in shares may be aggregated with others’, with inadvertent regulatory consequences.
Private investment in public equities (PIPEs)
A cornerstone investment may be a more attractive option than a control transaction, for both the investor and the target company. In some jurisdictions, the stake may take the form of convertible bonds or preference shares, whilst in others it may be ordinary shares. Investors will have to identify any restrictions or requirements that may apply on any investment such as pre-emption rights, any requirement for shareholder approval and/or regulatory consents. The investor may seek enhanced rights such as preferred returns and board appointments as part of their investment.
As the practical difficulties in running a process (due diligence, management meetings, site visits, etc) are alleviated, we expect to see transactional activity levels increase sharply. The transactions we are likely to see will involve the usual mix, including leveraged buy-outs, portfolio company bolt-ons and real estate acquisitions. We will also see distressed investors looking to put new money into challenged businesses, with a view to driving a restructuring and taking equity in the business. In distressed situations, speed will be key. We expect bid/ask spreads to be wider than ever and a buyer may wish proactively to explore options to bridge any value gap, as well as consider what bespoke protection it may require.
Governments around the world are extending their powers to intervene in transactions where there is any potential threat to national security, in response to a perceived risk of opportunistic acquisitions of sensitive assets. Potential buyers and investors will have to assess the likelihood of any intervention in a transaction, and state-owned enterprises (SOEs) may be subject to particular scrutiny. However, ultimately, foreign capital will be needed to help companies repair their balance sheets and we expect to see governments securing commitments clearance of transactions.
Whilst we are not seeing extensive changes to merger control regimes, parties should be aware that approval processes may take longer than normal due to the different working conditions that many countries have faced and a likely backlog arising as a result. Market share analysis is likely to have changed in the most affected sectors, and parties will have to conduct their analysis more carefully than ever. However in a distressed scenario, parties may be able to rely on the “failing firm defence” to get clearance.
Having seen finance all but dried up for leveraged deals at the start of the crisis, we are now seeing capacity return to the market. We expect that liquidity, and financing terms, will return to near pre-crisis levels for good assets in the near future. A buyer or investor requiring finance to fund its acquisition or investment may find it harder to obtain than in normal times, and any seller is likely to require any financing to be on a certain funds basis before it is willing to proceed.
Directors’ duties – Directors will need to be mindful of their duties to the company, to shareholders, to wider stakeholders and, where relevant, to creditors. Several jurisdictions have announced relaxations to the duties owed to creditors in the current disrupted climate. It is essential that the whole board is involved in discussions of matters concerning, or which could affect, the company’s future solvency.
Executing documents – Where documentation has to be signed, there may be logistical issues, for example in getting a document witnessed or, in some jurisdictions, executing certain types of documents electronically. Access to notaries may also be restricted. Early planning will be key.
Price sensitive information and market disclosure – Companies with publicly traded securities will be under obligations to disclose price-sensitive information. Whilst delaying disclosure may be permissible in certain situations, a company cannot delay disclosure of financial difficulties, even if it is in negotiations which may help remedy its position.
Ongoing obligations – Companies should not forget their “business as usual” obligations, for example around notifying directors’ dealings, updating the company’s or its officers’ details with the appropriate regulators or registries, filing accounts and corporate reports and returns by the requisite deadline (or applying for an extension if necessary) and renewing insurance policies.
Insolvency law – Companies and their directors must ensure that they do not fall foul of applicable insolvency laws, in particular when considering new or restructured arrangements which may put assets beyond the reach of creditors should the company become insolvent.
State Aid - Companies operating in the EU must comply with EU rules on State aid when taking advantage of available government support (which still apply in the UK during the transitional period following the UK's exit from the EU). Whilst the European Commission has approved multiple support schemes submitted by Member States in light of the current situation, companies should be aware that they may be forced to pay back non-compliant State aid, with interest.
For more information on the EU Commission’s Temporary State Aid Framework, click here and here.
Other issues to consider
For further information and personalised advice please contact your local Herbert Smith Freehills contact
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Foreign direct investment control
Last updated 7 October 2020
Particular sectors may carry their own additional considerations for buyers and investors.
Opportunities for private capital
Globally PE have an estimated US$1.5 trillion of undeployed capital – significantly more when the undeployed capital of institutional investors and sovereign wealth funds is taken into account...
Beneficiaries of government support – In some instances, companies which have taken advantage of government support may be subject to some restrictions on future transactions, such as paying dividends. It will be important to understand what support has been drawn on and any consequences for the business or investment model.
Insolvency reform – Many jurisdictions have been amending their insolvency regimes, whether on a temporary or permanent basis, to protect companies as they face unprecedented disruption. When exploring opportunities, buyers and investors must check whether any protection afforded to a company in financial distress (for example in the target’s supply chain) may impact their transaction.
Inside / price sensitive information – Where the target or investor company is listed, there may be a regime requiring disclosure of inside or price sensitive information to the market as soon as possible. It will be important to monitor for this, both at the outset and throughout the course of the transaction as it progresses.
Dealing with regulators – Regulators’ operations have been affected by the pandemic and so investors may face delays in securing any requisite clearance or approvals. However, regulators may also be able to move swiftly if required in some cases.
Overarching issues to bear in mind
As public M&A activity picks up, we expect financial buyers to be among the most active buyers, as well as corporates offering all-share deals.
Assess (and minimise) any conditionality requirements
Identify how interests will be aggregated
Ensure financing on a certain funds basis
Consider the target’s financial position and any potential impact on the transaction if it deteriorates
Financial buyers (including private equity and institutional investors) are likely to be ready to move sooner than strategic buyers as many have plenty of “dry powder”, that is committed but unspent cash. They may also be able to make an offer with less conditionality, as merger control and shareholder approval are less likely to be required on a bid by a financial buyer. However a financial buyer will need to be aware that on a public M&A transaction, it will face challenges that it will not encounter on a private deal. These vary from jurisdiction to jurisdiction but may include greater levels of regulation and scrutiny, and a need for secrecy that could make it harder to line up a management team, finance providers or a consortium. A buyer may also be restricted from negotiating some of the bespoke deal terms that it would be able to seek on a private deal. Where a financial buyer forms part of a wider investment group or joins a consortium, it will need to understand how its interests may be aggregated with the interests of others in the group or consortium to determine whether key shareholding thresholds, or requirements around price and consideration, may be triggered, as well as considering the regulatory status of any pooled investment vehicle.
Public M&A activity may take a little longer than private M&A activity to return to levels previously seen. However, as prices stabilise and buyers return to the public market, we expect financial buyers, who have plenty of available cash, to be active. The targets will include those worst impacted by the business disruption. Where a strategic buyer emerges, we may see all-share, rather than cash, deals.
Click through for more country-specific information and guidance.
It will be important for buyers of potentially distressed targets to understand what impact the target’s uncertain financial position may have on the transaction. For example, the bidder will want to understand if it will be able to walk away from the transaction if the target becomes insolvent or its financial position deteriorates prior to completion, and whether the target or transaction will be afforded any protection or leniency, either by local takeover regulation or insolvency law. It may also be harder to agree a price so parties may look to explore means of bridging any value gap, such as a contingent value right (CVR) to enable the target shareholders to receive additional consideration if the target business performs better than expected. However, these can be difficult to agree where the trigger for additional payment does not relate to a single defining event (such as the outcome of litigation), so, whilst they may be explored as an option, they are unlikely to be used often in practice.
For corporates also emerging from dealing with the disruption caused by Covid-19, cash may still be a precious resource. We are therefore likely to see them offering shares as consideration. This may also help bridge any value gap in the expectations between buyer and target shareholders. Offering shares as consideration will require some extra preparation on the part of the buyer – for example it is likely to have to prepare offering documentation and may require shareholder approval. It may also have to give some covenants about how it conducts its business pending completion. Any synergy statements are likely to come under much closer scrutiny. The deal will also be more exposed to share price fluctuations as movements in its own share price may affect the willingness of target shareholders to accept the offer.
All share mergers
Taking a cornerstone stake may provide a good opportunity to secure an investment without having to launch a full takeover offer.
Target shareholder approval may be required for the investment, for example if pre-emption rights apply on a new share issue. This may be problematic if the existing shareholders are not receptive to a new investor coming in (particularly if, as a result, their own interests are diluted or the new investor secures enhanced rights).
The investment may be a standalone injection of capital or take place alongside a wider equity capital raise. The regulatory requirements associated with taking a cornerstone investment will have to be carefully navigated and may vary according to the form of the stake the investor takes (e.g. convertible preference shares or ordinary shares). As an alternative, investors can also build their stake via regular stock exchange purchases.
The form of investment is likely to depend on what is most common in the relevant jurisdiction. In some cases, an investment may take the form of convertible loan stock or preference stock, whilst in others taking ordinary shares may be typical. The form may be driven by local legal or regulatory requirements, or simply by what is customary in the relevant market.
Form of investment
An investor may use its capital contribution to the company as leverage to secure some enhanced rights, such as the right to appoint directors to the board(s) or committees of the target company, drag along rights or other exit rights, anti-dilution rights and/or information rights. Conversely the company may ask the investor to agree to a lock-up over the shares and/or a standstill.
Additional rights and obligations
Depending on the size of the stake and local regulatory requirements, the company may have to prepare offering documentation, which will impact the timetable. The investor is also likely to have to disclose its stake in the company to the market. Any future transactions between the investor and the company may be related party transactions, requiring disclosure and/or shareholder approval.
Depending on the sector in which the target company operates, the acquisition of a stake may require regulatory consent – consents are not only required when there is a full acquisition. An investor will need to identify any such requirement and factor that in to any transaction timetable. Other requirements may also arise on the acquisition of a stake – for example rules that apply to a controlling or significant shareholder.
Other regulatory requirements
In some jurisdictions, acquiring a stake above a particular threshold may trigger an obligation to make a mandatory takeover offer for the company. An investor will have to take care not to cross that threshold unwittingly, and understand whether its interests in the company will be aggregated with others’ for the purposes of establishing if that threshold has been crossed.
Mandatory offer for the whole company
Identify what approvals may be required for the investment, and the consequences for the transaction timetable
Consider what additional rights may be sought
Ensure that the aggregated interests will not trigger an obligation to make a mandatory bid
Understand the ongoing implications and obligations arising from taking a stake
As businesses and activity levels begin to recover, we are likely to see parties on M&A transactions focus on a number of issues which may not have been top of the agenda prior to the pandemic.
Often on private M&A transactions, parties elect to have a locked box structure if there is to be any purchase price adjustment. This is because it is seen as giving both the seller and the buyer a greater degree of certainty around the final purchase price, as well as being a faster and more straightforward solution than completion accounts. It is for these reasons that certain parties (most notably private equity) are generally comfortable with locked box structures and often prefer them. However, given the disruption that many businesses have faced in recent months, parties may now instead opt for completion accounts due to the more detailed scrutiny they provide.
In the most affected sectors and businesses, reaching a mutually acceptable price may be more challenging than ever, given recent market volatility and the possibility of a second wave of the pandemic. Earn-outs or deferred consideration may help bridge the value gap (and we have already seen them used in some cases). We are also likely to see some less conventional solutions considered, such as “contingent value rights” to provide additional contingent consideration in the event of a particular set of events occurring. That said, whilst we expect these alternative options to be considered, we do not expect to see them implemented often in practice, due to the difficulties they often entail.
Price adjustment mechanisms
Private M&A transactions may still be impeded in the short term by difficulties that sellers may face in collating information for due diligence and by restrictions on having face to face meetings, as well as challenges in deal execution. However as lockdown restrictions lift and activity picks up, parties are likely to want to focus on some specific issues in light of the pandemic.
Last updated 9 July 2020
Click through for more country-specific information and guidance. Further regional insights will be added soon.
of respondents have already made, or are thinking of making, changes to their corporate reporting timetables as a result of COVID-19
Assess the ability to progress a transaction in light of impediments to creating a data room or having face to face negotiations
Consider options to bridge any value gap
Consider what additional due diligence is required in light of recent events
Explore the availability and cost of W&I insurance
Identify any bespoke protection that may be required
The buyer’s due diligence will have to have an increased focus on certain key areas such as supply chain risk (including force majeure and the possible impact of a second wave of the pandemic) and any uptake of government support, along with the implications of the company receiving that support. It will also be important to understand what steps the business has taken in response to the pandemic, for example as regards payment of rent.
A particular area of focus is likely to be ESG (environment, social and governance) issues. Even prior to the Covid-19 outbreak, we were seeing increased scrutiny on ESG issues and this has only accelerated in recent months. In particular a purchaser will likely be interested in employee issues, such as health and safety and data privacy. Buyers should ensure that ESG issues are explored in detail, both in the context of the law as it currently stands but also in light of how law, regulation and expectations may evolve.
If the W&I insurance market adjusts to the “new normal” quickly, that may facilitate M&A transactions, albeit the process for obtaining cover may take a longer and the cost may be higher than before the start of the outbreak. The pandemic has resulted in a reduction in coverage across certain areas, including general carve-outs for the impact of the pandemic, which of itself creates uncertainty in relation to the coverage that the W&I insurance will provide.
Due diligence focus
The possibility of a second wave of the pandemic and further lock down restrictions being imposed mean that parties may seek to negotiate specific provisions to allocate risk in that scenario. This may take the form of detailed warranty or indemnity protection (though note our comment above about the availability of coverage), or a material adverse change (MAC) condition to completion. However, many sellers are reluctant to enter into transactions that contain a MAC condition or termination right without a pandemic carve out given the potential for a second wave.
Given the increased focus on ESG (as discussed above) from corporates, investors and lenders, a seller may also look for post-completion undertakings from the buyer about how the business will be run in future, including potentially the protection of human capital, representing a particular focus on the “S” in ESG.
Negotiation of bespoke protection
A distressed M&A transaction may involve the buyer transacting directly with the seller (either as the seller tries to avoid insolvency or as it goes into an insolvency process) or dealing with an insolvency practitioner. In distressed situations, speed and a willingness to transact with little post-closing recourse are likely to be key. As a result, it is unlikely that the administrators will give any exclusivity period (or it will be limited). There may be little due diligence material, limited opportunities to request information and no management presentation. This, combined with the need for speed and the limited recourse against the seller, will be reflected in the price that the buyer is willing to offer.
Many W&I insurers have been quick to bring to market new “synthetic” W&I insurance products which can be used in distressed M&A scenarios where administrators typically refuse to give representations, warranties or indemnities. However, it remains to be seen to what extent buyers will look to utilise these products and the uptake will likely be dependent on the insurers’ ability to execute quickly and provide products which offer meaningful recourse for buyers.
A buyer that can move fast and has available cash is likely to be more successful than one with more conditionality so securing financing on a certain funds basis will make a buyer a more attractive prospect.
We expect to see distressed transactions driven by financial creditors forcing disposals of non-core businesses to raise cash, disposals of the business as a whole, or as part of a strategy to take control of the business. Tools commonly used to execute these strategies include pre-packaged administration sales, credit bids, arrangements with creditors and restructuring plans Each situation generally turns on the details, and particularly the terms of the relevant debt documents, so stakeholders involved in these situations will need to understand the leverage of different parties across the capital structure. Some buyers may be concerned with the optics of how the deal will be perceived by the wider market.
Assess the ability to progress a transaction in light of impediments to creating a data room or having face to face negotiations
Consider options to bridge any value gap
Consider what additional due diligence is required in light of recent events
Explore the availability and cost of W&I insurance
Identify any bespoke protection that may be required
The impact of Covid-19 has led governments around the world to enhance their powers to intervene in transactions.
Governments are keen to protect their national industries at a time when they may be vulnerable to overseas acquirers. However, the need for external investment may override the political appeal of blocking a transaction and so we are likely to see governments seeking to extract commitments from buyers and new investors to address any concerns.
In many jurisdictions, governments are able to intervene on national security grounds, or the grounds of national interest. The meaning of national security has been extended in recent years to capture critical infrastructure, communications assets, advanced technology and data. We are now seeing the powers being extended further to capture sectors impacted by or key in the context of the pandemic, such as food security and health. National interest may be interpreted even more widely still.
As well as extending the scope of transactions that could be caught, governments have been lowering the thresholds at which a transaction may fall within the regime. These lower thresholds may mean that transactions are caught by regimes in many more jurisdictions than may be expected, even where there is no significant nexus with the jurisdiction.
Transactions susceptible to intervention
Some regimes may target investors from particular jurisdictions and/or state-owned enterprises (SOEs), whilst others may have global application. It will be important to understand the focus of a particular regime when identifying whether a transaction carries a risk of intervention. Where the regime is targeted, that may impact the attractiveness of the investor to the seller/target if the investor is based in an in-scope jurisdiction.
There may be particular sensitivity around acquisitions or investments by certain SOEs where concerns may exist as to the underlying motives for the transaction.
Instead of blocking a transaction outright, governments may well be willing to accept undertakings or other remedies from buyers or investors to address any concerns, particularly if the investment is needed to secure the future of the business. Investors will need to consider what remedies may be required by the government, and are acceptable to it, in order to be able to proceed. Possible remedies could include, for example, undertakings to ringfence sensitive information and maintain certain business activities or employee numbers in the jurisdiction.
Establish whether the transaction is susceptible to intervention in any jurisdictions
Ensure any filings are consistent as authorities may share information
Consider what remedies may be offered to secure clearance
We have updated our report on Foreign Investment: Rising Tides of Politics in Regulation, to reflect changes to Foreign Direct Investment (FDI) regimes around the world in light of the Covid-19 backdrop.
In the report, published jointly with Global Counsel, we consider both the current landscape and new restrictions due to take effect by the end of 2020 – including the proposed new standalone FDI regime in the UK, and enhanced regimes in the US, Australia, Japan, Canada, India, France and a number of other European countries. We also set out practical advice on how to navigate FDI controls through effective deal planning and execution.
FOREIGN INVESTMENT: RISING TIDES OF POLITICS IN REGULATION *UPDATED REPORT*
THE REPORT IS AVAILABLE HERE
Merger control regimes will have to be navigated carefully given the recent market disruption and the rise of the active regulator.
Investors will need to identify early on in which jurisdictions anti-trust issues may arise. It is important to bear in mind that filings may be triggered even where the target has limited or no connection to the jurisdiction. The clearance processes and timetable vary widely from country to country and each relevant regime will have to be factored into the transaction timetable. Preparatory work should include pulling together any documentation that regulators may require (remembering that most regulators now require internal documents commenting on the deal rationale) as well considering what remedies the parties may be willing to offer to a regulator to secure clearance.
We have seen an increase in the number of merger control regimes around the world in recent years, as well as an increasing willingness on the part of regulators to take a more interventionist stance. Covid-19 is likely to have resulted in disruption to many markets and so a thorough merger control analysis will have be undertaken.
Click through for more country-specific information and guidance.
Identify relevant markets and whether the thresholds for notification/assessment are met
Consider potential scope for reliance on the failing firm defence as part of the assessment upfront
Consider what remedies may be acceptable
Pull together all relevant information that the regulator may require
Ensure strict procedural compliance
Identifying relevant regimes
Where the alternative to a transaction is insolvency of the target, it may be easier for certain buyers to make use of the “failing firm” defence in the merger control process, which if successful could result in a lighter touch and quicker competition review. The key requirements for the defence will typically be that it is inevitable that the target would have exited the market, that there is no substantially less anti-competitive purchaser and that the merger does not represent a substantially less anti-competitive outcome than the exit of the target from the market. Historically competition authorities have set a high evidential threshold for meeting these conditions, but as a result of the pandemic significant harm is being caused to otherwise healthy companies which may make failing firm defence arguments more compelling.
Failing firm defence
Regulators will be ready to fine parties for failure to notify a transaction or for provision of inaccurate information in merger filings. They may also focus on ensuring that a buyer does not start to exercise control over the target assets while awaiting the outcome of the merger review, a practice known as gun-jumping.
Importance of procedural compliance
Before a transaction has been notified, it will be important to monitor whether the thresholds for notification continue to be met as measures such as turnover may have changed significantly. The market positions of companies and businesses may well have changed, and may continue to change. In markets where there have been significant business failures or disruption there may be increased concentration levels, and parties may need to convince regulators that competitive assessment should go beyond market shares.
Threshold tests and market shares
Acquisition financing is increasingly available, dependent on the sector and business to be acquired.
1. ESG – going mainstream
2. P2P – returning to the market
3. Political intervention – the rise continues
4. Deal disruption – the new normal
5. A view from Europe
6. A view from the UK
7. A view from the Middle East
8. A view from Africa
9. A view from Asia
10. A view from China
11. A view from Australia
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In contrast, sponsors will need to keep one eye on future covenant compliance, so may be seeking to reduce the risk of a future default or waiver process by seeking a degree of latitude. This may include seeking to suspend financial covenants; expressly excluding the impact of Covid-19 from Material Adverse Effect provisions and waiving any suspension or change of business defaults and any defaults arising from audit qualifications and the inability to deliver audited financial statements.
There has also been a greater focus on the inclusion of debt buy-back mechanisms in documents to allow sponsors the ability to reduce their exposure to other lenders.
Bolt-on acquisitions and the use of incremental facilities are another option for sponsors looking to purchase complementary businesses; the general relaxation of contractual controls around these additional acquisitions over the past few years should assist in this.
Understandably, lender credit processes are also taking significantly longer than before because of the increased scrutiny of new transactions and also the level of activity in lenders on liquidity facilities and amendments of existing transactions.
On the corporate side, sellers are likely to want buyers to confirm that their financing is on a certain funds basis, given the issues with the potential for defaults and the need for covenant resets or waivers. The buyers that will be most attractive to a seller are those with readily available cash and the fewest approval processes.
We are likely to see renewed scrutiny of cash flows and forward projections, particularly in business that were seen as resilient before the crisis such as cinemas, hospitality and travel.
However cost of capital, credit concerns and uncertainty in the current economic climate are driving higher pricing, as well as more conservative lending terms and the desire for greater controls over target businesses.
Shareholder meetings – The Government has indicated that it will relax requirements for companies required to hold AGMs while there are restrictions on travel and gatherings in place. It is to be hoped that this will extend to all shareholder meetings, including those to approve a transaction. Pending that legislation being passed, we have seen companies holding meetings, with the minimum quorum, but advising shareholders not to attend and to instead vote by proxy.
Stock transfer forms – HMRC has published guidance on how to get stock transfer forms stamped while the COVID-19 restrictions are in place.
Companies House – Same day processing is not currently available at Companies House and this may impact the speed with which a restructuring or transaction can be executed.
Merger control – The CMA has said it intends to continue progressing its cases, making decisions and meeting deadlines, despite the need for remote working, and that it will continue to monitor timetables including, as permitted, extending statutory timeframes where necessary.
Intervention on national security grounds – Whilst the UK has not yet implemented its proposed new foreign direct investment regime, parties should not assume that it cannot or will not intervene – it issued four intervention notices on M&A transactions last year, compared with eight in the preceding 15 years.
Further information on the scheme is available here.
Covid Corporate Financing Facility (CCFF)
Premises: In the UK, there is no program for government relief for rent at the moment but a landlord's entitlement to repossess business (and residential) property is currently suspended. Landlords may benefit indirectly from the package of support available to help businesses through the COVID-19 pandemic, including the increases and expansions to the categories of business tenants able to claim Business Rates Retail Discount (“BRRD”), which may put tenants in a better financial position than otherwise. The BRRD, which was first announced in the 2018 Autumn Budget, provided for discounts on the level of business rates payable for the years 2019/2020 and 2020/2021. In the Spring 2020 Budget, this was increased to provide a 100% discount, and expanded to include the leisure and hospitality sectors. This has now been expanded further to provide a business rates holiday for all retail, leisure and hospitality businesses based in England. There is also a business rates holiday for providers of day nurseries on the OFSTED Early Years register whose premises are wholly or mainly used for the provision of the Early Years Foundation Stage. There is no rateable value limit on the relief, which will, at present, apply until 31 March 2021.
In Australia, which already has a foreign investment screening regime, the regulator has dropped monetary screening thresholds relating to the size of the target entity to zero and lengthened examination periods (to address concerns about opportunistic investment), while also signalling that urgent treatment will be available for proposals which are important to Australian businesses and jobs (and we have experienced exceptionally fast turnaround in such cases to date).
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Meetings: The French government has introduced emergency measures to temporarily relax the rules for holding meetings of boards of directors, executive boards and supervisory boards and general meetings, outside of the physical presence of their members. These measures have a broad spectrum in that they target not only listed and unlisted companies, but also entities with and without legal personality.
For further information see our briefing here.
Premises: Landlords may not terminate commercial or residential leases solely on the grounds that a tenant failed to pay rent during the period from 1 April 2020 to 30 June 2020 (and that period may be extended to 30 September 2020), where such rent arrears arise as a result of COVID-19. A landlord will not be able to terminate a lease on these grounds until 30 June 2022. The rent remains due and payable and interest will accrue on the outstanding rent payments at a prescribed rate. It is not clear whether a landlord can call on any rent security provided by the tenant. The Government is also aiming to facilitate amicable agreements between landlord and tenant, for example regarding a moratorium of the obligation of the tenant to pay rent, by limiting the risk of the landlord being subject to claw back rights (Insolvenzanfechtungsrechte) by an insolvency administrator in the event of that the tenant becomes insolvent.
For further information, see our briefing here.
Shareholder Meetings: The COVID-19 Relief Act simplifies the legal framework for the annual shareholders' meetings, mainly in order to allow virtual annual shareholders’ meetings.
German Transformation Act, Extension of Filing Deadlines up to Twelve Months: In case of a merger (Verschmelzung) the deadlines relating to the reference date (Stichtag) of the final financial statements (Schlussbilanz) of the transferring entity (übertragender Rechtsträger) have been extended. The reference date for the final financial statements may now lie up to twelve months before the filing of the merger with the competent commercial register. The extension of the deadlines relating to the reference date of the final financial statements also apply for all filings of split off measures (Spaltungen) in the course of 2020. The German Federal Ministry of Justice and Consumer Protection has been empowered to extend these measures through to 2021.
Meetings of the board and general shareholders meetings: Even if a company’s articles of association do not expressly allow for this, meetings of the board and other collegiate governing bodies (e.g. commissions and committees) can be held by videoconference, provided that it is possible to identify the attendees via image and audio in real time. Resolutions can also be passed by those bodies in writing, without a physical meeting, provided that this is requested by the chairperson or at least two members.
Foreign direct investment: The Spanish Government has approved a set of provisions to tackle the crisis caused by the COVID-19 outbreak. Under these provisions. foreign direct investments in Spanish companies in certain sectors (including critical infrastructure, critical technology and suppliers of energy, raw materials and food security) by investors that are not resident in the EU or the European Free Trade Association will be subject to prior authorisation.
For further information see our briefing here.
For further information, see our briefing here.
As well as the general issues discussed elsewhere in this guide, investors or buyers in particular sectors may need to be aware of some additional considerations.
By understanding and anticipating the issues, a buyer or investor will be in a better position to navigate a transaction more smoothly, potentially giving it a competitive advantage or making it a more attractive proposition to the seller.
The issues that buyers and investors need to focus on in a particular sector may be the due diligence process (particularly on a distressed transaction), contractual issues or where there is a particular risk of governmental intervention.
In these pages, we look at some key considerations to take into account in particular sectors. Further insights will be added soon.
Globally PE have an estimated US$1.5 trillion of undeployed capital – significantly more when the undeployed capital of institutional investors and sovereign wealth funds is taken into account. Such investors will be incentivised to invest; given recent high prices for standard private equity buyouts and a lack of clarity on the extent to which these prices will fall in the light of the outbreak, it can be expected that a material proportion of this will be available for deployment in restructurings and acquisitions of businesses with a greater or lesser element of distress, presenting the greatest opportunities to those investors who have operations beyond pure buyouts, such as credit, distressed investing, infrastructure and technology funds.
In addition, commentators are warning that significant levels of government-backed loans could turn toxic by next year, as companies impacted by the pandemic struggle to pay back the debt. Consequently, notwithstanding sensitivities around private and foreign capital, we expect private capital will play a significant part in recapitalising companies impacted by the pandemic. By way of example, a group put together by a leading industry body in the UK (TheCityUK) to examine ways to recapitalise businesses has said that “Of the various capital pools, enhancing the role of Private equity, and unlocking capital from UK insurers (potentially through a long term debt solution) and from pension funds appear to be potential opportunities”.
At the same time some private equity firms have been quoted as not wishing to miss opportunities to deploy capital, with some investors noting that they wished they had been more bullish in the aftermath of the 2008-9 financial crisis. The top 10 ranking private equity groups by deal count have already announced deals worth a total of more than US$ 40 billion since the beginning of March 2020.
Some of that capital may be directed to secondary transactions involving existing private funds, as general partners who would ordinarily have sought to dispose of assets around this time may instead seek to recapitalise assets for a lengthened holding period or to restructure assets in continuation vehicles. Similarly, institutional investors may seek to rebalance their own portfolios of private fund interests, which we expect to result in more activity in the secondary market for those interests. Several multi-billion dollar secondary funds have been raised in the course of this year or are currently in the market, seeking to capture investor interest in that market and to capitalise on the opportunities that the current environment presents.
There may be particular appetite for investments in infrastructure, particularly that relating to renewables, which chimes with the calls for a green recovery.
The three main types of transaction considered in this guide (public to private, PIPEs and private market transactions) will all be open to, and of interest to, private capital.
Price sensitive information
Limited ability to invoke a condition to an offer
Bidders should be aware that they are unlikely to be able to invoke a material adverse change (MAC) condition to an offer. The UK Takeover Panel will not allow a bidder to invoke a general condition to an offer unless the circumstances are of material significance to the bidder in the context of its offer. In order to be able to invoke a MAC condition, the circumstances must strike at the heart of the transaction. The Panel refused to allow one bidder to invoke a MAC condition on its bid for Moss Bros, the men’s formal wear retailer, in light of the pandemic and it is unlikely to allow any other bidder to do so.
Concert parties and aggregation
It will be important for a potential bidder to identify which entities will be treated as its concert parties, as the interests of those concert parties will be aggregated for a number of purposes under the Takeover Code, including whether the parties are interested in 30% or more of the target (which would trigger a requirement for a mandatory bid).
A PE fund will be treated as acting in concert with its bid vehicle. It will also be presumed to be acting in concert with its associates, that is persons in whom it has a 20% interest, or which have a 20% interest in it. Limited partner investors in the PE fund will not generally be treated as acting in concert unless they have a significant investment in the bid vehicle or will have some control over it. Other entities in which the PE fund is invested may also be caught, although it may be possible to get a waiver from the Panel for large PE houses with multiple portfolio investments.
Where a sovereign wealth fund or state-owned entity is involved in a bid, the analysis will be more complicated due to the potential for a huge number of entities to be caught by the UK Takeover Code definition of acting in concert.
Other issues for bidders
The Takeover Code stresses the importance of secrecy before an offer is announced. Added to this, if an offer leaks, the bidder will only have 28 days to put together a fully financed offer unless the target consents to an extension. However, the requirement for secrecy will make it harder for a financial buyer to put together a consortium offer or debt financing, or to bring in a management team, as Panel consent is required if more than six people are to be approached about an offer. It will also not be able to secure a break fee or other deal protection from the target.
Requirements as to price
Share purchases in the offer period, or in the previous 12 months, may have implications for the type and level of consideration that has to offered on a bid.
Certain funds requirements on a cash offer
On a cash offer, any financing must be on a certain funds basis and the bidder’s financial adviser will have to confirm that the bidder has sufficient resources to pay the cash consideration in full.
Where a bidder is issuing shares as consideration on an offer, there may be a number of additional workstreams involved, including publishing a prospectus, reporting on any profits forecasts or quantified financial benefit statements (such as synergy statements) and pulling together the information for the additional disclosure requirements that apply on a securities exchange offer , including the requirement for a working capital statement for the enlarged group, including the requirement for a working capital statement for the enlarged group.
Limited conditions permitted
Under French law, a public tender offer must be irrevocable and unconditional except for the following limited number of events which the French financial markets authority (the AMF) may accept as conditions to a tender offer:
threshold conditions: mandatory threshold of 50 % of the share capital or voting rights and voluntary threshold set by the bidder (in practice the AMF usually does not accept a voluntary threshold set above 2/3 of the share capital and/or the voting rights);
antitrust clearance, under certain conditions;
other regulatory clearances;
interrelated offers: in case of tender offers for two or more companies, one tender offer may be successful only if and when all of the other tender offers will be successful; and
authorisation of the general shareholder’s meeting of the bidder.
A public tender offer cannot be conditional on securing appropriate funding or on MAC clauses.
However, the bidder may withdraw its tender offer in the following situations:
competing offer or competing improved offer, or
alteration of the target's substance (i.e. if the target adopts measures that modify its substance, or if the measures taken by the target make the offer more costly for the bidder).
Concert parties and aggregation of interests
Under French law, individuals or legal entities are deemed to be acting in concert when they "have entered into an agreement with a view to buying or selling or exercising voting rights, to implement a common policy in relation to the company or to obtain control of this company."
In addition, during an offer period, individuals or legal entities that: (i) have entered into an agreement with the bidder with the aim of controlling the target company, or (ii) have entered into an agreement with the target company, in order to thwart the offer, are deemed to be acting in concert.
French law also provides that certain parties will be presumed to be acting in concert, such as an executive officer/director of an entity and the entity; an entity and the entity controlling, controlled by or under common control with such entity; or a trustee and the beneficiaries of a trust.
If parties are deemed to be acting in concert, they would be jointly and severally liable for all the obligations resulting from applicable laws and regulations, notably the disclosure obligation on crossing certain thresholds and the obligation to file a mandatory tender offer (if the 30% threshold is reached by the concert parties).
In addition to aggregation of the interests of concert party members, the following will also be aggregated with the shares and voting rights owned by an investor: (i) shares or voting rights owned by other persons on behalf of such investor; (ii) shares or voting rights owned by companies which are controlled by such investor, (iii) shares and voting rights that such investor is entitled to acquire on its own initiative, immediately or in the future, pursuant to a financial agreement or instrument (e.g. bonds exchangeable for shares, options (whether exercisable immediately or at a future date), provided that, where exercise of an option is conditional on the target share price reaching a level specified in the option contract, it will only need to be taken into account once that level is reached), and (iv) shares and voting rights where any agreement or financial instrument gives the right to physical or cash settlement and has, for the person, an economic effect similar to the ownership of such shares or voting rights (e.g. cash settled equity swaps).
Requirements as to price
On a mandatory offer, the price proposed by the bidder is controlled by the AMF. It must be at least equal to the price paid by the bidder in the last twelve months. If there have been no share acquisitions during this time range, the price is set according to a multi-criteria analysis. There is no minimum price for a voluntary offer under ordinary procedure, except tender offers under simplified procedure filed by the holder of at least 50% of the share capital and voting rights of the target or buyout tender offers, in which case the price must be at least equal to the 60-trading day volume-weighted average price before the filing of the offer.
Certain funds requirements on a cash offer
The bidder must evidence the existence of committed funding when filing the tender offer with the AMF. As the bidder's commitments are irrevocable, they have to be guaranteed by the presenting bank (établissement présentateur) at the time of filing of the offer with the AMF.
The shares offered by the bidder for the target shares must provide a certain level of liquidity to the selling shareholders. Therefore, where such shares are not admitted to trading on a regulated market in the European Union or in a state party to the European Economic Area (EEA), either the tender offer must include a cash option or the bidder must undertake to have its shares admitted to trading on such a regulated market.
The bidder will be required to include a full cash alternative when the bidder, alone or in concert, has acquired more than 5% of the share capital or voting rights of the target in cash over the twelve-month period preceding the filing of the tender offer.
Public to private transactions
A bidder may implement a squeeze-out procedure following the closing of a tender offer (i.e. requiring all minority shareholders to transfer their securities for a compensation at least equal to the offer price) if securities not tendered by minority shareholders to such tender offer represent less than 10% of the share capital and voting rights of the target.
Given that the AMF does not accept a voluntary threshold set above 2/3 of the share capital and/or the voting rights, any bidder launching an irrevocable tender offer for listed securities of a French entity might end up holding between 2/3 and 90% of the share capital and voting rights of the target at the closing of the tender offer. If around 33% of minority shareholders remain in the company, that will limit the possibility (i) for corporates to implement the contemplated synergies with the listed target company and (ii) for investment funds to deleverage their investment through cash distribution from the target.
This will also drive the level of premium that a bidder would be ready to offer to target shareholders in order to give the greatest chance of reaching the 90% threshold and so the ability to squeeze out the remaining minority shareholders and delist the target (such premium being closely analysed by the independent expert appointed by the target, under certain conditions).
If the 90% threshold is not reached, the bidder may launch a subsequent tender offer (with the view to implement a squeeze-out), provided that in practice, the AMF requires that if such subsequent tender offer is launched at a higher price, the bidder must wait until publication by the Target of a new set of financial statements.
Bidders should be aware of that they are unlikely to be able to invoke a material adverse change (MAC) condition to an offer. The interpretation of a MAC clause needs, in any case, to consider all circumstances of the single case.
Concert parties and aggregation
It will be important for a potential bidder to identify which entities will be treated as its concert parties, as the interests of those concert parties will be aggregated for a number of purposes under the German Securities Acquisition and Takeover Act (WpÜG), including whether the parties are interested in 30% or more of the target and so a mandatory bid may be required.
All share offer
In the event of a share for share consideration, the entity which increases its shareholding may be required to draft a prospectus for the newly issued shares. In addition, German law restricts the capacity of an entity to hold its own shares which can be used as “transaction currency”.
Termination rights in case of insolvency
In the environment of a distressed market, contractual partners may agree on the right to terminate an agreement once the other party is insolvent. However, such termination right is difficult to agree upon from a German legal perspective.
Regulation and competent bodies
Public takeover bids are governed by the Spanish Securities Market Act, as amended by Act 4/2015, and further developed by Royal Decree 1066/2007 of 27 July on the rules applicable to takeover bids.
The primary regulator and supervisor of public takeovers and mergers is the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) (CNMV).
If the transaction is subject to merger control clearance, the primary regulators are the local Spanish or the EU anti-trust authorities. According to the particular features of the deal, this can be either:
Acquisition of control
According to Spanish law, a public company’s control means:
the Spanish National Commission on Markets and Competition (Comisión Nacional de los Mercados y de la Competencia - CNMC); or
The European Commission.
Additionally, if the target operates in a regulated sector such as finance, insurance, energy or telecommunications, the transaction may be subject to the relevant governmental authorities authorisation.
the direct or indirect acquisition of 30% or more of the voting rights; or
holding less than 30% of the voting rights, but appointing more than half of the members of the board of directors in the public company.
The main ways to obtain control of a public company in Spain include:
acquiring shares or other securities that directly or indirectly hold voting rights in the public company, including through the conversion or subscription of other financial instruments;
through shareholders agreements; or
through indirect or unexpected takeovers, as a consequence of:
the merger or takeover of another company or entity which holds direct or indirect interests in a third-party public company;
a share capital decrease in a public company;
changes to the treasury stock of a listed company; or
any financial institutions or any other person obtaining at least 30% of voting rights in fulfilment of a commitment to underwrite a public offer of securities in a listed company.
No differentiation is made between hostile and friendly takeovers in terms of regulation. However, hostile bids are not common in Spain, due to their reduced chances of success.
Although a target board of directors is subject to a duty of passivity (deber de pasividad) in relation to a bid, whenever a bid is rejected by the target's board of directors, the bid will usually fail. It is important to note that the duty of passivity does not prevent the target's board of directors from (i) looking for a competing bid or (ii) issuing a report stating their opposition to the bid (which will typically have a significant impact on the decision of the shareholders as to whether to accept the offer).
Typically the bidder and the controlling shareholder(s) of target enter into irrevocable commitments where the bidder launches a takeover bid and the selling shareholder accepts the offer subject to the fulfilment of certain conditions (to which the bid will also be subject). These irrevocable commitments must be disclosed in the bid prospectus.
If two parties co-operate as part of an arrangement (whether oral or in writing, express or implied) entered into with a view to gaining control of a listed company, they will be considered to be acting in concert and their respective stakes in that company will be deemed to belong to the same shareholder.
If the parties have entered into a shareholders’ agreement intended to establish a common policy towards the company’s management or to influence it significantly, as well as any other arrangement with a similar purpose regulating the exercise of voting rights on the board of directors, they will be deemed to be acting in concert.
Entering into an arrangement of this nature will trigger an obligation to make a mandatory bid if the parties’ shareholdings in the target in aggregate exceed the relevant threshold(s), without any need for further acquisitions of shares.
Requirements if offering cash consideration
Where a bidder is offering cash, a bank guarantee or letter of credit issued by a credit institution guaranteeing the payment by the bidder must be provided to the CNMV at the time that the filing for the authorization of the bid is made.
Due diligence strategy
Given the uncertainty of Covid-19 impacts, bidders are concerned to secure due diligence, which will drive a bias to friendly, confidential approaches to targets. As with other jurisdictions, there is risk for a bidder in seeking to rely on a MAC condition, so there is a preference for due diligence to evaluate and price in the risks of further Covid-19 impacts. Where the target is reluctant to grant due diligence for what it may see as an opportunistic bid, we are already seeing bidders up the ante to a public “bear hug” approach with a due diligence request attached.
Impacts of regulatory approvals
With Foreign Investment Review Board (FIRB) approval time frames extended, bidders and targets are concerned about the risk and delay involved where FIRB approval is required. This adds to the relative appeal of local bidders. Foreign bidders need to counter this, such as by early lodgement of approval applications and FIRB engagement strategy.
Scheme of arrangement re-think
With various bidders having walked away from bids, Covid-19 has highlighted the challenges in seeking specific performance of a scheme implementation agreement, whether or not a MAC condition has been triggered. Bidders and targets have stepped up their focus on break fee/sole remedy clauses, specific performance acknowledgements and end date provisions.
Targets are concerned to evaluate and disclose their Covid-19 risks (including the risk of additional future impacts) on both the “yes” and “no” case for a takeover, to inform shareholders and mitigate the risk that shareholders later say they would have responded differently to a bid if the risk on either side of the ledger had been disclosed more effectively.
Public to private: HONG KONG
Take privates on the increase
In the first half of 2020 we have seen an increased number of take privates, with controlling shareholders and third parties alike taking the opportunity of depressed market valuations to buy out companies at low prices. The controlling shareholders of two high profile Hong Kong-listed companies, Wheelock & Co and Li & Fung, are among those who have launched significant take-private proposals. To succeed in Hong Kong, a take private must be approved by at least 75% of the votes held by disinterested shareholders (i.e. shares not held by the bidder and any concert parties), with no more than 10% of the votes of disinterested shareholders voting against.
Takeover implications for lenders when enforcing security over listed company shares
Many listed companies in Hong Kong are family-controlled or have dominant controlling shareholders. It is not uncommon for such controlling shareholders to pledge their shares as security for personal fundraising. In the wake of Covid-19, we have seen a rise in borrowers facing economic difficulties and defaulting on loans and, increasingly, lenders are looking to enforce their security over shares in listed companies. Parties, including potential purchasers, need to be aware of the Takeovers Code implications when security is enforced. Generally a receiver or liquidator appointed by a licensed bank or other financial institution accepted by the Securities and Futures Commission (SFC) to take control of secured shares will not be required to make an offer where those shares amount to a holding of 30% or more of the voting rights. However, any purchaser of those shares will be caught by the mandatory general offer requirements. Where the lender is not a bank or financial institution, the SFC will scrutinise the purpose of the loan, the nature of the lender's business and all relevant circumstances in determining whether to grant a waiver from the mandatory offer obligation when the security is enforced.
Rules on delistings set backstop timetable for takeovers of distressed targets
In 2018, the Hong Kong Stock Exchange tightened its rules such that any listed issuer whose share trading has been suspended for more than 18 months will be automatically delisted. Investors targeting distressed companies should be aware of the suspension timetable as this may impact the negotiations and deal timetable, particularly as the delisting deadline draws closer. Companies may be suspended if the Stock Exchange considers that the company does not have sufficient assets or operations to justify its continued listing or if the business is no longer suitable for listing. Companies also face suspension if the auditor indicates that it will issue a disclaimer of opinion or an adverse opinion on the company's financial statements.
Requirements as to price
Investors looking to take advantage of depressed market conditions to stake build need to be aware of the implications in any subsequent offer. Generally if the bidder in an intended voluntary general offer (or any person acting in concert with it) has purchased shares in the target in the three months preceding the offer, the offer price must not be less than the highest price paid by the bidder in that three month period. In addition, if the bidder (or any person acting in concert with it) has purchased shares in the target for cash during the offer period or in the six months prior to its commencement, and such shares carry 10% or more of the voting rights of the target, the offer must be in cash or accompanied by a cash alternative and the offer price must not be less than the highest price paid by the bidder during that period.
Public to private: JAPAN
We have seen an increase in the interest of established Japanese trading houses / financial investors in outbound public M&A, especially into established markets like the UK (including the AIM market). In particular, we have seen Japanese investors interested in taking smaller stakes in listed companies and seeking to understand how they can build such stakes.
In terms of public M&A within Japan, alongside the long-running and (often hotly debated) discussion around corporate governance reform, one issue that has been firmly on the agenda recently is hostile takeovers.
It appears the number of attempted hostile takeovers is increasing, albeit the success rate seems low. Importantly, there continues to be a lot of negative publicity surrounding hostile takeovers within Japan. A number of listed companies have adopted anti-hostile takeover plans ranging from ‘poison pills’ to simple declarations by management that they will take anti-hostile-takeover measures whenever a hostile takeover is launched that is not in accordance with their view of the best interests of the company and its shareholders.
Public to private:
Regulation of public M&A
Historically, tender offers for shares in public companies needed to be arranged with the regulators on a case by case basis. However, in August 2017, Resolution No (18/RM) of 2017, regarding the Rules of Merger and Acquisition for Public Shareholding Companies (the Takeover Code) came into force. It applies to acquisitions of shares in public joint stock companies listed on the Dubai Financial Market and Abu Dhabi Stock Exchange. It is based on the UK Takeover Code (and is analogous to the Singapore Code on Takeovers and Mergers).
The Takeover Code deals with issues such as restrictions on share dealings, “Squeeze Out” and “Sell Out” mechanisms and minimum offer pricing. It provides greater certainty, which should facilitate public acquisitions for financial investors. However, some aspects of the Takeover Code remain unclear. For example, it is unclear whether, in the event that a mandatory takeover offer fails, the purchaser must ‘sell-down’ to below 30%. Similarly, the impact of the mandatory takeover threshold (i.e. greater than 30% shareholding) on foreign ownership restrictions is not yet certain.
Given the limited use of the Takeover Code, and the fact that buyers will want to retain a greater degree of certainty that a transaction will complete, we expect that the traditional ways of implementing pubic M&A transactions (such as statutory merger, strategic investment or mandatory convertible bonds) will continue to be preferred.
The Securities and Commodities Authority (SCA) has also issued new classification rules under the Chairman of SCA Board Decision No. (13 R.M) of 2020 on the Procedures of Dealing with Listed Public Joint-Stock Companies in Financial Distress. The Rules came into force on 1 July 2020 and are intended to highlight listed companies that are in financial distress.
Public to private:
Concert parties and aggregation
It will be important for a buyer to identify which entities will be treated as concert parties with it in South Africa as the interests of those concert parties will be aggregated for certain purposes under the Takeover Regulations, including in determining whether a buyer needs to make a mandatory offer for the target (as discussed in the PIPEs section). A buyer will be deemed to be acting in concert with any person with which it co-operates for the purpose of entering into or proposing an affected transaction, which is broadly a transaction with a company to which the Takeover Regulations apply. A buyer will also be deemed to be acting in concert with its directors, a company controlled by its directors, a trust of which any of its directors is a beneficiary or trustee and any of the company’s pension, provident or share incentive schemes.
We have published a briefing which looks at factors that may influence merger control involving distressed entities following the Covid-19 pandemic which can be found here.
All share mergers
Share consideration is permitted. However if a buyer or its concert parties acquired 5% or more of the voting rights of the target company in the previous 6 months for cash, the consideration must be cash (or accompanied by a cash alternative). Enhanced disclosure requirements are also applicable where shares are offered as consideration.
The South African Competition Act requires mergers of a certain size to be approved by the Competition Commission or Competition Tribunal. Pre-approval is mandatory for all transactions classed as intermediate or large mergers.
State owned enterprises
The economic effects of Covid-19 may increase the likelihood of the partial or whole disposal of certain state owned enterprises, which could open up opportunities for investors. The government is finding it increasingly difficult to continue to bail out failing state owned enterprises.
Public to private:
Flexibility in complying with takeover requirements
In light of the Covid-19 situation, the Securities Commission Malaysia (SC) has introduced certain flexibilities in complying with the takeover requirements during the movement control order period in Malaysia. The SC will permit a hybrid method of serving takeover documentation via electronic publications, with offerees receiving a summary notification informing them of the availability of the takeover documentation online. Offerees will also be able to accept offers electronically, rather than by post. Where an offeror intends to conduct a compulsory acquisition, a written declaration, as opposed to a statutory declaration (which will ordinarily be affirmed before a Commissioner for Oaths) can be prepared. The SC has also indicated its willingness to consider extensions of time to comply with any provisions of the takeover rules, noting however that the grant of such extensions would be assessed on a case-to-case basis.
Withdrawal of takeover offers due to Covid-19
Under the takeover rules, where a takeover offer has been announced, the offeror shall not withdraw the takeover offer without prior written consent of the SC. A recent withdrawal application, which cited the adverse impact of Covid-19 on the financial performance of the target and its subsidiaries, was rejected by the SC. It is likely that the SC will continue to adopt a similar approach moving forward. This approach taken by the SC emphasises that an offeror would be expected to bear any business risks relating to a target upon announcement of a takeover offer. Withdrawals of takeover offers will only be allowed in exceptional cases, the impact of Covid-19 of itself not being one of them.
Private investment in public equities (PIPEs): UK
Mandatory bid requirements
If an investor, together with any parties with whom it is acting in concert, acquires 30% or more of the voting rights in a target which is subject to the UK Takeover Code (or has an interest of between 30% and 50% and acquires an interest in further shares), it will have to make a takeover offer for the target, unless the acquisition is “whitewashed”. In order for a transaction to be whitewashed, the Panel must grant a waiver of the requirement to make bid and a majority of the independent shareholders in the target must approve it. The Panel may agree to relax the requirements in a rescue situation.
An issue of shares for cash will be subject to pre-emption rights (that is the shares must be offered first to the existing shareholders in the target) unless those pre-emption rights are disapplied. Most listed companies in the UK get shareholder approval each year to issue shares up to a certain level (usually 5 to 10% of its existing share capital) on a non-pre-emptive basis. However, if pre-emption rights have not been disapplied, or an existing disapplication is insufficient, a special resolution (requiring the approval of 75% of the shareholders in the target who vote) will have to be passed.
If the target company is listed on the London Stock Exchange (LSE) and the investor is taking a stake of 20% or more (or a smaller stake if the target has already issued shares in the past 12 months), a prospectus may be required in connection with the admission of the new shares to the LSE. If a prospectus is required, that can be a costly and time-consuming exercise.
Controlling shareholder / related party rules
If the target has a premium listing, depending on the size of the stake being acquired, the investor may be subject to additional rules once it has made its investment: if the stake is 10% or more, it will become a “related party” of the company and transactions between the investor and the company may require shareholder approval. If the stake is 30% or more, a relationship agreement will have to be put in place to ensure that the target is able to operate independently of the shareholder.
Consequences of acquiring a stake
If the investor intends to make a full takeover offer for the target in due course, the purchase of shares at this stage may set a floor price for that bid. The target may also seek from the investor a standstill agreement (that is, an agreement not to acquire further shares).
An acquisition of shares in a listed company will also trigger a disclosure requirement (usually at 3%, or any whole percentage point thereafter).
Private investment in public equities (PIPEs): FRANCE
Mandatory bid requirements
On Euronext Paris, a mandatory tender offer must be filed by any shareholder, acting alone or in concert, which:
crosses, directly or indirectly, a shareholding threshold of 30% of the share capital or voting rights of the target; or
holds, directly or indirectly, a stake from 30% to 50% of the share capital or voting rights of the target, and increases, directly or indirectly, its participation or voting rights by more than 1% within a period of 12 months ("acquisition speed" limit).
On Euronext Growth, the shareholding threshold for a mandatory offer is set at 50% of the share capital or voting rights of the target.
The shareholders may benefit from exemptions, as the AMF may waive the requirement to file a mandatory tender offer in specific situations analysed on a case by case basis (e.g. temporary threshold crossing, threshold crossing resulting from a decrease in the number of outstanding shares or voting rights of the target, merger, or partial asset contribution which is subject to the approval of the shareholders' meeting of the target company).
The AMF may also waive the requirement to file a mandatory tender offer in the case of an investor subscribing to a share capital increase of a company in proven financial difficulty (situation avérée de difficulté financière), where such share capital increase is subject to the approval of the general meeting of its shareholders.
Disapplication of pre-emption rights / private placement
Under French corporate law, all shareholders benefit from pre-emption rights on an issue of shares for cash unless expressly disapplied by a 2/3 majority decision at a shareholder meeting. Most listed companies in France get authorisation from their shareholders during the annual general meeting to issue securities without pre-emption rights to certain categories of persons (with determined characteristics, such as funds or firms investing in certain sectors), to a given person or entity, or through a “private placement” (i.e. in favour of qualified investors or a restricted circle of investors).
A private placement may involve up to a maximum of 20% of the share capital of the issuer per year, and is subject to a legal minimum price when it relates to more than 10% of the share capital of the issuer.
On 8 April 2020, ISS provided new guidance for the 2020 annual general meeting in light of the Covid-19 pandemic. For private placement issuances authorisation, their analysis was made on a case-by-case basis. They also considered whether there are such exceptional circumstances as the company being expected to go out of business or file for bankruptcy protection if the transaction is not approved or the company's auditor/management has indicated that the company has going concern issues. In their update of 26 March 2020, with regards to capital raisings and placements, Glass Lewis also adopted a pragmatic, flexible and non-standardised position so as not to penalise companies and thus ultimately shareholders.
Under the European Union’s regulations (notably the Prospectus Regulation (EU/2017/1129)), an issuer must issue a prospectus in connection with either (i) an offer of transferable securities to the public or (ii) an admission to trading of transferable securities on a regulated market.
Whilst a cornerstone investment from a single investor would typically not qualify as an offer to the public, where the admission to trading of the securities to be issued by the target would be requested, a prospectus would in principle be required.
However, certain exemptions may apply. In particular, if the securities to be issued by the target in connection with the investment represent, over a period of 12 months, less than 20% of the number of its securities already admitted to trading on the same regulated market, no prospectus would be required (nor any document of a similar nature).
Drafting a prospectus can be costly and time-consuming for both the target and the investor and will involve a level of disclosure which may create challenges, notably with respect to risk factors and the statement regarding the sufficient working capital.
Under French law, agreements between a company and “related parties”, which do not relate to the ordinary transactions of such company and are not entered into under normal conditions (e.g. negotiated at arm’s length terms and conditions), must comply with a specific procedure (prior approval from the board of directors, immediate disclosure of the main terms and conditions on the issuer’s website and approval from the shareholder’s meeting upon review by the statutory auditors).
Related parties are, inter alia, directors, executives, companies with common directors or executives, and shareholders holding more than 10% of the voting rights of the company.
Statutory provisions from the French Commercial Code impose on any shareholder to declare the crossing of the following thresholds: 5%, 10%, 15%, 20%, 25%, 30%, 33.33%, 50%, 66.66%, 90% and 95% of the share capital or voting rights of a listed entity.
Additional threshold crossing statements may be imposed by the target's articles of association, to prevent any creeping increase in the target's ownership. These additional thresholds may not apply to fractions smaller than 0.5% of the share capital.
When the threshold of 10%, 15%, 20% or 25% is exceeded, the shareholder is also required to declare to the company and the AMF, within five trading days, its intentions with respect to the issuer (notably whether it plans to cease or continue its purchases, whether it intends to take control of the company, whether it intends to request the appointment of representatives at the board) for the following 6-month period.
In the context of the rise of shareholder activism in France, the French Parliament issued a report on October 2019 to which the AMF contributed on 28 April 2020 by publishing its recommendations and proposals, in particular to:
lower the first legal threshold for disclosure of an investor position, which is currently 5%; and
require issuers to publicly disclose (on their website) when they receive a notice from an investor of an acquisition which crosses the threshold set forth in the issuer’s articles of association.
French regulations on this matter could therefore evolve in the near future.
Private investment in public equities (PIPEs): GErmany
Mandatory bid requirements
As discussed in the context of public M&A, if an investor together with parties with whom it is acting in concert, acquires 30% or more of the voting rights in a target which is subject to the German Securities Acquisition and Takeover Act (WpÜG), they may be required to make a mandatory bid for the target.
Any issue of shares will be subject to subscription rights (Bezugsrechte) of the existing shareholders unless those subscription rights are disapplied.
If the target company is listed, generally a prospectus may be required in connection with the admission of the new shares.
Controlling shareholder / related party rules
If the target has a premium listing, depending on the size of the stake being acquired, the investor may be subject to additional rules once it has made its investment. If the stake is 10% or more, it will become a “related party” of the company and so transactions between the investor and the company may require shareholder approval. If the stake is 30% or more, a relationship agreement will have to be put in place to ensure that the target is able to operate independently of the shareholder.
Private investment in public equities (PIPEs): SPAIN
Mandatory bid requirements
A mandatory offer is required in the following scenarios:
where control of a target company is obtained;
where a company decides to de-list its shares; or
where a company decides to decrease its share capital by acquiring treasury shares.
The CNMV may permit a person who acquires more than 30% of a target’s voting rights not to launch a mandatory offer if another shareholder has an equal or larger stake in the target. The CNMV’s permission will be subject to the majority shareholder not reducing its stake in the target below the bidder’s; and (ii) the bidder not appointing more than half of the members of the target’s board of directors. If permission is not granted, or the conditions are not fulfilled, the bidder must launch an offer for the target within three months, unless the stake in excess of 30% is sold within that period and, in the meantime, voting rights are not exercised.
In addition, there are a number of situations in which, although the bidder may acquire control of target as a result of the bid, the mandatory bid is not triggered (subject to certain requirements and conditions):
the shares in question are acquired at no cost;
the shares concerned are acquired by certain public or regulatory authorities/bodies;
the acquisition is a consequence of the application of the Compulsory Purchase Act (Ley de Expropiación Forzosa), or otherwise results from the exercise of public law powers;
all of the target company’s shareholders unanimously agree to the purchase or exchange of shares representing 100% of the company’s capital, or unanimously waive their right to sell or exchange their shares or other securities in a tender offer, and simultaneously approve the company’s delisting;
the significant shareholding is acquired as a consequence of the capitalisation or conversion of debt into shares in a situation where the company’s financial viability is in imminent and serious danger;
control has been gained as a result of a voluntary tender offer addressed to the holders of all the target’s relevant securities and either an equitable price has been offered or holders of securities with at least 50% of the voting rights in the target have accepted the offer; and
the shareholder acquiring control does so as a result of a merger, in respect of which that shareholder has not voted at the relevant target shareholders’ meeting (i.e. it has been approved by the other shareholders), and the merger can be justified on an industrial or commercial basis (i.e. the merger’s main purpose was not merely to gain control over target).
Pre-emption rights and disapplication
Pre-emption rights will not arise when the capital increase results from absorbing another company, or all or a part of the assets and liabilities arising from splitting up another company, or converting bonds into shares.
In addition, if it is in the interests of the company, the shareholders at a general meeting of the company, on deciding to increase capital, may, on the basis of a board of directors’ report explaining the grounds and needs for such exclusion, resolve that all or part of the pre-emption rights will not apply. For this resolution to be valid, the nominal value of the new quotas or new shares, and, if applicable, the amount of the premium, must correspond to the actual value of the quotas or shares (and for listed public companies, the value established by reference to the securities market quotation). This notwithstanding, shareholders at a general meeting of a listed company may resolve to issue new shares at any price, provided it is higher than the net asset value of the shares as set out in the auditor’s report (article 505 of the Companies Act).
Private investment in public equities (PIPEs): AUSTRALIA
Shareholder approval requirements
Australian takeovers rules generally require shareholder approval for an investor together with its associates (including partners with whom it is acting in concert) to acquire 20% or more of ordinary shares, including by conversion of convertible securities under a PIPE structure. The “creep rule” permits increases above 20% at the rate of 3% every 6 months.
An entity listed on the Australian Stock Exchange (ASX) requires shareholder approval to issue more than 15% of its existing capital in a 12 month period. This has been temporarily increased to 25%, subject to various conditions, in response to Covid-19. This increased limit and lesser complexity in ordinary share issues to existing shareholders and institutions have caused bookbuild capital raisings to outpace PIPE structures in the early Covid response. In some cases a cornerstone has taken a substantial position in the ordinary share issue.
Disclosure documentation requirements
The Australian capital raising regime has benefited from past reforms to facilitate quick capital raising when required. As a result, it is usually possible to implement a cornerstone transaction without the need for a formal prospectus. The listed company needs to disclose any material price sensitive information which has not previously been released and confirm in a “cleansing notice” that this has been done.
Related party rules
The ASX listing rules require shareholder approval of significant acquisitions and disposals between a 10%+ shareholder and a listed company. There are limits on the ability of the company to give preferential rights such as director appointment rights and top-up rights to a major shareholder. These can require a level of negotiation with ASX and conditional waivers from the listing rules.
Consequences of acquiring a stake
The price at which shares are acquired sets a floor price for a takeover bid launched within the 4 months following the acquisition.
An investor needs to disclose its holding publicly at 5% and each 1% change after that.
Private investment in public equities (PIPEs): HONG KONG
Mandatory bid requirements
Under the Takeovers Code an obligation to make a mandatory offer arises when certain control triggers are reached – namely when a person acquires 30% or more of the voting rights in a target company, or if it holds between 30% and 50% (both inclusive) of the voting rights and it acquires additional voting rights increasing its total holding by more than 2% from the lowest percentage held in the preceding 12 months (this is referred to as the "2% creeper"). When considering if the control triggers have been reached, the Takeovers Code takes into account the shareholdings of the bidder and all persons acting in concert with it.
Where the mandatory offer obligation is triggered by a cash subscription, the Securities and Futures Commission (SFC) would normally waive the obligation if the independent shareholders (those independent of the transaction) separately approve the transaction (50% approval) and the waiver (75% approval).
The SFC may also consider waiving the mandatory offer requirements where the listed company is in a serious financial position requiring an urgent rescue operation.
Most Hong Kong listed companies seek a general mandate from shareholders at their AGM to enable them to issue up to 20% of their issued share capital each year. The general mandate, where available, can be used to complete investments quickly without the need for further shareholder approval. Securities issued under the general mandate must not be issued for a price representing a discount of 20% or more to a benchmark price, referenced to the higher of the closing price on the agreement date and the average closing price in the five trading days prior to the announcement, date of agreement or date when the subscription price is fixed. The Listing Rules also restrict the general mandate being used to: (i) issue shares to connected persons; (ii) issue convertible securities unless the initial conversion price is not lower than a prescribed benchmarked price; and (iii) issue warrants or similar subscription rights.
Restrictions on dilutive placings
To prevent heavily-diluting share issues, the Listing Rules restricts placings of shares under a specific mandate from shareholders which would result in a "theoretical dilution effect" of 25% or more. This is calculated by reference to a formula prescribed under the Listing Rules, which compares a theoretical diluted price of the shares after the share issue to a prescribed benchmarked price.
The Stock Exchange may be prepared to waive the restriction where there are exceptional circumstances, for instance if the issue is part of a rescue proposal for a company in financial difficulties.
Public float requirements
The size of the stake that an investor takes may have implications. Once an investor holds 10% or more of the voting power at a general meeting of a Hong Kong-listed company it will be treated as a core connected person.
Hong Kong-listed companies are required to maintain a public float with a minimum percentage (25% unless a lower percentage is permitted at the time of listing) held in public hands. Shares held by a core connected person will not be treated as being held by the public. In addition, any shares which have been financed by a core connected person or held by a person accustomed to taking instructions from a core connected person will not be treated as forming part of the public float. If an investment leads to the company not maintaining the public float, the shares in the company may be suspended until the public float can be restored.
Connected transaction rules
Any transactions entered into between the listed company group and an investor holding a stake of 10% or more will be subject to the Listing Rules on connected transactions and may need to be announced, reported on and, potentially, subject to shareholders' approval.
Where an investor holds 5% or more of the voting shares in a Hong Kong-listed company, the investor must publicly disclose its interests in shares. Following disclosure of the initial interest, further notices must be filed when a "relevant event" occurs including when the shareholding interest drops below 5% and when there is an increase or decrease where the interest goes through a full percentage level (e.g. from 5.82% to 6.10%) subject to a de minimis exemption for movements of less than 0.5% provided the new interest is the same percentage level or lower than the last notified interest. More onerous requirements apply to investors that are directors and chief executives.
Private investment in public equities (PIPEs): SOUTH AFRICA
Mandatory bid requirements
A mandatory offer must be made for the rest of the target company shares if an investor’s holding (or holding combined with parties acting in concert) increases to 35% or more of the voting rights of the target company.
Pre-emption rights and shareholder approval requirements
In respect of listed companies, the JSE Listings Requirements include pre-emptive rights on an issue of shares. A general issue for cash (which may not exceed 15% of a company’s listed securities) may be exempt if shareholders waive the pre-emptive requirement by ordinary resolution (passed by a special majority of 75% of the cast votes). A specific issue for cash may be exempt if shareholders waive the pre-emptive requirement by ordinary resolution (passed by a special majority of 75% of the cast votes) or if the dilution is minimal and at a fair price.
Shareholder approval is also required for certain issuances. In addition to the above, a special resolution is required for (i) an issue to any director, officer, related or inter-related person of the company on a non-pre-emptive basis; or (ii) if the voting power of the class of shares that are to be issued will equal or exceed 30% of the voting power of all shares of that class held before the issue.
An offer to the public must usually be accompanied by a prospectus. The ‘public’ includes any section of the public, whether selected as holders of the company’s securities, clients of the person issuing the prospectus concerned, or holders of any particular class of property. The Companies Act contains exemptions from ‘offers to the public’ so that offers can be made without a prospectus to persons whose ordinary business it is to deal in securities, or persons who fall into certain categories, institutional investors or persons who are paying more than a prescribed amount for the securities to be acquired by them.
Related party rules
If the target is listed and an investor acquires 10% or more, pursuant to the JSE Listings Requirements the buyer will be classed as a related party. Certain transactions with related parties require shareholder approval.
An investor is required to disclose its acquisition to the target company if by the time of the acquisition, the investor reaches 5%, 10%, 15% or further multiples of 5% of the issued shares of that class in the share capital of the target company.
Foreign direct investment control (FDI): UK
In December 2019, the UK government confirmed that it plans to introduce a new distinct regime and standalone powers enabling it to investigate and intervene in transactions on the grounds of national security interests. It is anticipated that draft legislation in the form of a National Security and Investment Bill will be forthcoming in summer 2020.
Based on proposals set out in a July 2018 White Paper, it is anticipated that the new regime will involve a voluntary notification regime allowing companies to flag transactions potentially raising national security concerns, alongside a “call-in” power to enable the government to review non-notified transactions. The framework set out in the White Paper had no target turnover or market share threshold, and was intended to be applicable across all sectors, subject to certain “core areas” being identified as being particularly likely to give rise to concerns (including parts of national infrastructure and certain advanced technologies). A “quick and efficient” screening process was expected to rule out national security risks in most cases, but it was envisaged that the government would have powers to impose conditions or – as a “last resort” – block transactions on national security grounds.
For further discussion on what the Bill might entail, see our briefing.
Pending the introduction of the new standalone regime, in June 2018 the UK government enhanced its powers of intervention on national security grounds in transactions involving targets active in certain specified sectors (military and dual-use goods, computer processing units, and quantum technology) by lowering the applicable jurisdictional thresholds; and in July 2020 it also lowered the jurisdictional thresholds for transactions in three further sectors: artificial intelligence, cryptographic authentication technology and advanced materials. On 21 June 2020, the government added “to combat and mitigate the effects of a public health emergency” as a criterion for intervention in a transaction by the government on public interest grounds (under the existing public interest merger regime), with effect from 23 June 2020. This is intended to allow intervention in transactions involving companies which mitigate the effects of a pandemic (such as internet service providers) as well as those directly involved in the public health response (such as vaccine and PPE manufacturers). For further information, see our briefing here.
In a related development, on 8 April 2020 the Foreign Affairs Committee launched an inquiry into the Foreign & Commonwealth Office's (FCO) role in blocking foreign asset stripping of UK companies, especially where there may be national security risks. This ongoing inquiry is examining how the FCO assesses whether a potentially hostile party is seeking to secure significant influence or control over a UK company and in what circumstances the FCO should intervene. The Foreign Affairs Committee has also stated that it will consider what safeguards are required in the forthcoming National Security and Investment Bill to ensure that the FCO has a full role in the decision-making process in relation to interventions.
Last updated 21 July 2020
Foreign direct investment control (FDI): EU
On 10 April 2019, the new EU Regulation on foreign investment screening entered into force, with the new framework to be fully applicable from 11 October 2020. This is based on a proposal tabled by the European Commission in September 2017, in response to increased FDI into European technology and infrastructure assets.
The Regulation does not oblige EU Member States to adopt an FDI screening mechanism or to fully harmonise national regimes. However, it does require existing (and any new) regimes to comply with a minimum set of requirements, and is expected to encourage those EU Member States which do not currently have an FDI regime to adopt one.
In particular, the framework sets out a non-exhaustive list of factors that Member States may consider when assessing FDI. This includes potential effects on a wide range of sectors, including critical technologies, energy, transport, water supply, health, and media. The new rules also call for heightened scrutiny of investments by directly or indirectly state-controlled entities (including through significant state-backed funding, rather than ownership), and encourage Member States to review investments that form part of “state-led outward projects or programs.” It has been suggested that 82% of Chinese M&A transactions in Europe in 2018 would have potentially been caught by the new framework.
The Regulation also provides a mechanism under which the European Commission can intervene when foreign investment in a Member State is likely to affect EU projects and programmes on grounds of security and public order (e.g. Galileo and Horizon 2020). In such cases, the European Commission will be able to issue an opinion which the reviewing Member State must "take utmost account of" (albeit not legally binding).
Alongside this there will also be a co-operation mechanism where foreign investment is likely to affect security or public order in one or more Member States. The ultimate decision on investment will remain with the reviewing Member State, but from a practical perspective review processes are likely to become longer, given the obligation to give the opinion of the European Commission and other Member States' comments due consideration.
Ahead of the Regulation becoming fully applicable from 11 October 2020, the European Commission published guidelines on the screening of FDI on 25 March 2020 in the context of the pandemic. Its stated intention was to ensure “that the current health crisis does not result in a sell-off of Europe’s business and industrial actors”. These guidelines do not create new law. They do, however, provide guidance to EU Member States on how to apply their national rules on FDI screening in line with but ahead of the Regulation becoming fully applicable. They also strongly encourage those Member States that do not currently have their own FDI regimes, to consider introducing their own mechanism.
Foreign direct investment control (FDI): FRANCE
Wide-ranging reforms have recently established a new foundation for FDI in France applicable to all investment applications. The new regime has been developed in three stages, the last of which entered into force on 1 April 2020: (i) a decree of 29 November 2018 (applicable since 1st January 2019) expanding the list of strategic sectors to which the FDI regime applies, to include in particular space operations and R&D activities linked to sensitive technologies and activities (cybersecurity, artificial intelligence; robotics; additive manufacturing; semiconductors); (ii) provisions of the May 2019 Pacte law, significantly strengthening sanctions for non-compliance with the authorisation procedure or the conditions which may be attached to an authorisation; and (iii) new FDI rules set out in a decree and order dated 31 December 2019 (in force since 1 April 2020), which establish a broader definition of control when analysing foreign investors, and lower the triggering threshold to 25% of voting rights for investment by non-EU investors in a French company active in a sensitive sector (lowered from 33.3% of share capital or voting rights).
Major changes have also been made to the authorisation procedure, extending in practice the duration of the procedure to three and a half months (increased from two months). Finally, new items have been added to the strategic sectors, to include production, transformation and distribution of certain agricultural products, in cases where certain food safety objectives apply to the products in question; publishing, printing and distribution of media including online media services and R&D activities linked to sensitive technologies and activities, such as quantum technologies and energy storage.
Two further steps have also recently been taken by the French government in response to the Covid-19 pandemic. On 27 April 2020, an order was made which permanently adds the biotechnology sector to the list of R&D activities linked to sensitive technologies and activities falling within the scope of the FDI regime. Although activities relating to health safety had been covered by the regime since the Montebourg decree of 2014, the French government wanted to protect this sector more specifically, as it affects both research on living organisms and fields as varied as agriculture, health, industry and the environment. On 28 April 2020, a second measure was announced, which will temporarily lower the triggering threshold for the FDI authorisation procedure to 10% of voting rights (as opposed to 25% in normal times) for investment by non-European investors in listed French companies active in a sensitive sector. The review of such transactions by the Ministry of the Economy (MINEFI) will be exercised according to a special accelerated procedure: the investor crossing the 10% threshold will have to notify the MINEFI, which will then have 10 days to decide whether the transaction should be subject to an in-depth investigation, on the basis of a full authorisation request. Such an investigation may result in the investor not being allowed to hold more than 10% of the voting rights. These provisions will be implemented by a new decree (not yet published) which is due to take effect on 1 July 2020 and expire on 31 December 2020.
The French State could also use the “golden shares” system to gain more control over certain companies in which it already has a shareholding. The golden shares grant special rights to the French State with in particular the ability to block potential asset sales where the national interest is considered to be at risk. The Pacte Law which had in 2019, in particular, tightened the procedure and administrative sanctions also extended (i) the possibility for the French State to set up golden shares outside the context of privatisation and (ii) the categories of companies in which golden shares can be created (e.g. companies in which the French State entity Bpifrance owns more than 5%) where the companies are running sensitive activities falling into the scope of the FDI control regime.
Foreign direct investment control (FDI): GERMANY
The German FDI regime has been and will be subject to significant changes in 2020, in part in response to implementing the EU Regulation on foreign investment screening and reacting to the pandemic. By way of first steps, both the Foreign Trade and Payments Act (AWG) and the Foreign Trade Ordinance (AWV) have recently been amended. This has resulted in a significant lowering of the threshold for official orders to be made in respect of FDI in Germany.
Previously, the intervention threshold for non-EU investments required an actual threat to public safety or order (which already afforded the government significant flexibility). However, pursuant to amendments made to the AWG, it is now sufficient if the foreign investment is likely to affect security or public order. A standstill obligation has also been introduced for all transactions where a filing obligation exists. This includes so-called cross-sectoral examinations (covering the acquisition of critical infrastructure et al by non EU/EFTA buyers) as well as sector-specific cases, covering the acquisition of defence and related industries by non-German buyers. A breach of this standstill obligation is a criminal offence, punishable with imprisonment for up to 5 years or a fine for the individuals responsible. For further information see our briefing here (note this briefing was published a little while ago and the amendment has now been passed).
In addition, the recent AWV amendment passed on 20 May 2020 has extended the list of business activities triggering a mandatory filing for FDI from non-EU investors above a 10% voting right threshold. The amendment increases the list to include, inter alia, personal protective equipment, various medicinal products, and in-vitro diagnostics. These changes come in the context of (unsubstantiated) media reports that President Donald Trump attempted to acquire German pharmaceutical company CureVac to secure exclusive Covid-19 vaccine production for the USA. See our briefing here.
Further measures tightening the German regime are expected during 2020, including in relation to the extension of notification obligations and a further expansion of critical infrastructure sectors subject to filing requirements.
Foreign direct investment control (FDI): SPAIN
Prior to the pandemic the FDI regime in Spain was liberalised. Foreign investors were only required to report investments for administrative, statistical and economic purposes, with certain exceptions pertaining to specific sectors and transactions for which prior authorisation was required. However, on 17 March 2020, Spain became the first EU Member State to significantly tighten its rules on FDI, primarily due to the impact of the pandemic on the value of domestic companies.
Acquirers based outside of the EU and the EFTA (or where the ultimate owner is outside the EU and the EFTA), must now obtain prior approval for an acquisition of a shareholding of 10% or more, or a management right, in a Spanish company in a very broad range of sectors. These include critical infrastructure and technology, healthcare, communications, energy and transport, media and also the supply of key inputs such as energy, raw materials and food security, as well as any other sector with access to sensitive information (in particular personal data).
Where the foreign investor is directly or indirectly controlled by a foreign government, the stricter FDI regime now applies for investments across all sectors. The same applies when the investor has made investments in sectors that affect public safety, public policy or public health in another Member State, or when a court or administrative action has been brought against the investor on grounds of having engaged in criminal or unlawful conduct in any other state.
Foreign investment for an amount lower than EUR 1 million is exempted and does not require prior authorisation.
Foreign direct investment control (FDI): ITALY
Foreign investments in certain Italian strategic sectors are subject to the regime set out by Law Decree No. 21 of 15 March 2012, as subsequently amended in 2017 and 2019 (the Golden Power Decree). In particular, under the Golden Power Decree, certain transactions and corporate resolutions in the defence and national security sectors, as well as on networks, plants, assets and relationships deemed strategic for the national interest in other sectors (i.e. communications, energy, transport and high-tech sectors) (collectively, the Strategic Sectors) must be notified to the Italian government. The Italian government can then request information, impose specific rules or conditions or, under certain circumstances, exercise a veto in relation to the relevant transaction or corporate resolution.
As described in the bulletin available here, in order to address the impact on the Italian economy of the Covid-19 crisis, under Law Decree No. 23 of 8 April 2020 (the Liquidity Decree), the governmental powers of intervention in respect of foreign investments have been further extended to certain strategic sectors, including financial services, infrastructures and critical technology, energy, transport, water and health, food security, access to sensitive information and personal data, artificial intelligence, robotics, semiconductors, cybersecurity, nanotechnology and biotechnology (collectively, the New Strategic Sectors). A draft of the Ministerial Decree identifying in greater detail the specific assets and activities subject to the government powers within these sectors is currently under review.
The Liquidity Decree has extended to EU persons the duty to notify to the government any acquisition of a controlling interest in any company holding assets in a Strategic Sector or in a New Strategic Sector, until 31 December 2020.
Over the same period, the Liquidity Decree also introduced a duty to notify to the government acquisitions, by any non-EU person, of interests representing more than 10% of the shareholding in any companies owing assets in a Strategic Sector or in a New Strategic Sector if the acquisition value exceeds EUR 1 million. The government must be notified also for acquisitions leading to a surpassing of each of thresholds of 15%, 20%, 25% and 50%.
In case of breach of the obligation of prior notification, the government can exercise its powers ex officio.
Foreign direct investment control (FDI): AUSTRALIA
On 29 March 2020, a number of temporary but significant amendments to the Australian FDI regime were announced. The Australian government described these measures as "necessary to safeguard the national interest as the coronavirus outbreak puts intense pressure on the Australian economy and businesses", and, in doing so, implicitly recognised the possibility of takeovers of distressed Australian assets.
These changes effectively make all FDI reviewable for the duration of the pandemic by lowering the financial threshold for review in terms of a target’s valuation to AUS$ 0. This represents a significant tightening of the regime, especially when combined with the already relatively low shareholding threshold for review (20% or lower in some cases). Furthermore this is a particularly significant change for investors from countries which have free trade agreements with Australia (such as the USA) – such investors could previously benefit from a threshold of approx. AUS$ 1.2 billion for investments in certain (non-sensitive) sectors. These amendments therefore have a wide application to all foreign investors (to the potential benefit of domestic investors) and are in contrast to the more targeted approach adopted in Spain, France and India.
More permanent and significant reforms were subsequently announced on 5 June 2020, with a renewed focus on sensitive national security-related businesses. This new framework will create new and potentially broad categories of investment that may require Foreign Investment Review Board (FIRB) approval, and shift the focus of the foreign investment framework in Australia towards a qualitative assessment of the nature of the investors and their investments. The new regime is scheduled to take effect from 1 January 2021, with the temporary changes in response to the pandemic outlined above remaining in place until then.
Key changes include the extension of the AUS$ 0 financial threshold and direct interest tests currently applicable to foreign government investors to all foreign private entities that invest in sensitive national security businesses, and the removal of the moneylending exemption for such investments (ordinarily available to foreign financiers taking security over Australian assets for the purposes of their financing activities). In addition, FIRB will be given a new power to ‘call in’ an investment (before or after it occurs) to review whether it raises national security concerns and passes the ‘national security test’, alongside a new ‘last resort’ power to reassess approved foreign investments where national security risks later emerge. A positive development for private equity and pension funds will be the relaxation of the 40% aggregation rule that currently requires stricter review of investments by certain funds with multiple smaller stakes held by ‘foreign government investors’.
Foreign direct investment control (FDI): US
The Committee on Foreign Investment in the United States (CFIUS), the primary US foreign direct investment regulator, is empowered to review transactions that result in the control of, and certain non-controlling investments in, US businesses to assess the potential impact of foreign ownership on US national security. CFIUS is empowered to block (pre-closing), unwind (post-closing), or impose undertakings on transactions subject to its review. To date, CFIUS has not issued regulations or formal advisories in response to the Covid-19 pandemic. CFIUS filings continue to be made and accepted, although reportedly the pandemic has caused a slow-down in the CFIUS review process. Because CFIUS must meet statutory deadlines after it formally accepts a filing for review (e.g. it must conclude its initial review within 45 days of acceptance), CFIUS may be taking more time in areas where it has greater timing flexibility (e.g. by taking longer to review draft filings that are typically submitted by deal parties before making a formal filing, or taking longer to accept formal filings once they are made). Additionally, CFIUS may be requiring more deals to undergo a second-stage fact investigation after the initial review period, which adds another 45 days to the review and thus provides CFIUS with more time to assess a transaction. Thus, deal parties currently in CFIUS review, or those anticipating a CFIUS filing in the short term, might experience a longer than usual CFIUS review schedule.
Foreign direct investment control (FDI): UAE
In September 2018, the UAE issued Federal Law No. 19 of 2018 on Foreign Direct Investment (the FDI Law). The FDI Law provides a framework under which foreign investors can own up to 100% of the shares in companies incorporated onshore in the UAE. Typically, these companies must be at least 51% owned by UAE nationals or an entity wholly owned by UAE nationals. The FDI Law therefore provides for a relaxation of these restrictions. In March 2020, the UAE Cabinet issued Cabinet Resolution No. 16 of 2020 which sets out a list of 122 economic activities in which 100% foreign ownership is permitted (the Positive List), subject to certain requirements such as a minimum capital investment and a minimum percentage of Emirati employees. The Positive List includes certain activities in sectors such as agriculture, manufacturing and various services industries. The FDI Law also lists 13 sectors in which more than 49% foreign ownership is not permitted, such as oil exploration, banking and finance and insurance.
MERGER CONTROL: UK
Although the Competition and Markets Authority (CMA) has not suspended or extended its statutory deadlines as a result of the impact of Covid-19, delays in information gathering by the parties and third parties are likely to result, in practice, in longer review timetables. The CMA has indicated that it will try to take steps to mitigate delays at pre-notification stage, by publishing invitations to comment already during the pre-notification process, but it will not be able to start the phase 1 review period in cases where third parties are unable to engage meaningfully with the CMA’s investigation. See our blog post for further information.
Requests for derogations to interim measures in order to allow the parties to deal with operational challenges caused by the pandemic will be granted swiftly where the parties are able to demonstrate they are necessary to protect the viability of their business.
The CMA has not relaxed its substantive assessment standards in light of the pandemic, but its impact will be factored into the assessment where appropriate. The CMA is however keen to flag that a merger control investigation typically looks beyond the short term and will assess the lasting structural impact of a merger on the relevant market.
On the prospect of the merging parties relying on the failing firm defence, the CMA makes it clear that all submissions will be considered carefully and on a case by case basis, but that its approach to the defence has not changed in light of the pandemic and will be applied in line with its existing guidance and decisional practice. In April 2020 the CMA provisionally cleared Amazon’s acquisition of a minority stake in Deliveroo on the basis of the failing firm defence. It concluded that Deliveroo was likely to exit the market unless it received the additional funding available through the transaction, and the loss of Deliveroo as a competitor would be more detrimental to competition and to consumers than permitting the Amazon investment to proceed. (The provisional findings were reversed on 24 June 2020 insofar as they related to the application of the failing firm defence. This followed evaluation of new evidence by the CMA on the impact of Covid-19 on Deliveroo’s performance and finances.) The final decision is due on 6 August 2020.
Despite showing some flexibility parties should be aware that the CMA remains very much focused on the enforcement of its procedural rules. A breach of initial enforcement orders (IEOs) which requires the purchaser to hold separate the business it has acquired pending completion of the CMA’s review, can result in fines of up to 5% of the global group-wide turnover of the party that fails to comply. Since June 2018 we have already seen six infringement decisions, with the highest fine of £250,000 imposed on PayPal in the context of its acquisition of iZettle. The CMA's tougher stance on enforcement of procedural merger control rules is also reflected in its recent approach to fines for failure to comply with formal information requests issued to merging parties under section 109 Enterprise Act 2002. The latest example is that of Sabre, fined in the context of its acquisition of Farelogix, for its failure to supply a number of responsive documents in response to two information request notices issued under section 109 of the Enterprise Act 2002.
The time limits applying to various procedures, including merger control, were suspended on 12 March 2020, the date on which the health emergency period started in France, until 24 June 2020.
The French Competition Authority however announced in a press release on 18 May 2020 that it would continue to make its best efforts, wherever possible, to issue its decisions in advance, without waiting for the expiry of the legal time limits.
The French Competition Authority tried during the whole state of health emergency period to keep to the very short time limits usually practised to the extent possible in order to take account of the time constraints on companies that wished to carry out mergers and acquisition. Twenty-five mergers were thus cleared between 18 March and 18 May 2020, including some significant transactions, within an average of 22 working days (statutory waiting period being 25 working days in Phase 1).
The Spanish competition rules have not been amended as a consequence of the exceptional circumstances caused by the Covid-19 pandemic. However, the Spanish National Competition and Markets Commission (CNMC) launched an online hotline for operators to report anti-competitive practices or to make enquiries in matters of competition law related to measures or practices adopted as a result of the health crisis:
Creation of a whistleblowing/enquiries tool for competition law matters in Spain
Operators can use the enquiries platform to obtain informal advice from the CNMC on whether their co-operation arrangements are compatible with the competition rules.
The CNMC has produced no specific guidelines in relation to co-operation agreements but has informally stated that the co-operation agreements that may be entered into between competitors as a result of the health crisis should fulfil the following requirements to be considered compatible with competition rules: (i) these agreements should be necessary and proportionate to face the current situation; (ii) they should be temporary and open to third parties; (iii) they must include mechanisms to prevent exchanges of commercially sensitive information; and (iv) these agreements should include an obligation to document all the contacts maintained by the parties and to inform the CNMC about those contacts.
The CNMC has so far provided informal advice on the compatibility with competition rules of co-operation agreements entered into between competitors in the insurance, banking, hospital and sanitary sectors. For more information see here.
Lifted of the suspension of proceedings
All the suspended deadlines and time periods of proceedings pursued before public sector entities (including merger control proceedings) were lifted in early June. Proceedings are now being processed as normal.
Strict enforcement where necessary to protect consumers/markets
In Spain, the CNMC has opened several investigations into a number of financial institutions, related to the terms and conditions imposed to grant state-backed loans, as well as into funeral companies in connection with the prices they charge for their services.
The Italian competition laws have not been amended during the emergency. However, the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato – ICA) has issued specific guidance on its approach to competition law exemptions criteria during the Covid-19 pandemic, as well as a number of interpretative notes on procedural issues:
Guidance on the approach to exemption criteria during the Covid-19 crisis
The ICA has adopted guidance on the application of competition rules to co-operation arrangements aimed at ensuring the supply of essential products and services, including in the health, pharmaceutical and food sectors, clarifying that it will not intervene in any temporary co-operation agreements which are necessary for the security of supplies. In addition, contrary to its standard approach, the ICA will reply to requests for ex ante clearance by way of a comfort letter.
Suspension of payment deadlines
In light of the suspension of deadlines for proceedings before public authorities (set out under Article 103 of Law Decree 17 March 2020, No. 18), the ICA has clarified that all deadlines for imposing penalties and deadlines for payment of sanctions in the context of antitrust proceedings are suspended.
Suspension of proceedings
All deadlines for proceedings are suspended until 16 May 2020. However, no suspension is envisaged in relation to interim measures and terms to comply with orders and remedies.
As the US Federal Trade Commission (FTC) and Department of Justice (DOJ, collectively with the FTC, the Agencies) are remote working, delays should be expected. For example. notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) must now be submitted via the Agencies' temporary e-filing system, effective as of March 17, 2020, rather than in hard copy or DVD. The Agencies’ announcement of the change states that their “review of filings will continue as normal”. However, filing parties may be required to submit hard copies of the filing when the Agencies resume normal operations. The Agencies are also requesting an additional 30 days to review certain transactions, although transactions which raise no competition concerns will generally be cleared within the normal periods. While early termination was originally suspended, the Agencies later announced that beginning on March 30, 2020, early termination would again be available, but "on a more limited basis than has historically been the case”, "in fewer cases" and that processing would occur "more slowly, than under normal circumstances”.
Since February 2020, China’s State Administration for Market Regulation (SAMR) has encouraged parties to submit merger filings either online or by post, as opposed to in person, and subsequent correspondence, such as acceptance notifications, requests for documents, case-handling notifications, and review decisions, is to occur via email or by fax.
SAMR has also accelerated the merger review process for transactions which are:
closely related to the prevention and control of the Covid-19 pandemic and people's daily livelihoods (e.g. pharmaceutical manufacturing, medical equipment manufacturing, food manufacturing, transportation, wholesale and retail, etc.);
heavily affected by the epidemic (e.g. catering, accommodation, tourism and other industries); or
conducted to facilitate the resumption of work and industrial production.
SECTORAL FOCUS: INTELLECTUAL PROPERTY
For those with cash reserves or low debt, this can be an extremely favourable time to acquire a brand or core technology, for instance, without the baggage and cost of taking on a business’s bricks and mortar retail stores, large workforces and the burden of a third party’s complex supply contracts.
The acquiring business may be able simply to add the new brand to its existing repertoire and make economies by making use of its own manufacturing / supply chain capabilities.
Issues for purchasers to consider include:
On a distressed sale, the administrators (or the company) will provide limited (or no) opportunity to carry out traditional due diligence. The buyer will be reliant largely upon their own evaluation of the IP assets, including carrying out their own IP ownership searches, as well as freedom to operate searches.
On a distressed process, the acquisition documentation will provide no warranty (or indemnity) protection in respect of the IP assets, so there is no contractual comfort about defects in title, other existing licensees or the risk of third party infringement claims.
Valuation of IP
This is an important area, where often the business is best placed to judge their pricing in their given market. However, professional assistance is also at hand from expert IP valuers (whether from specialist outfits or the expert valuation teams of the big accountants) to benchmark proposed valuations against empirical data.
Transfer of IP
On an asset sale, there will often be a linked IP assignment to transfer the legal title to any IP assets. However issues may arise where the critical IP assets are software-based or other creative works, such as algorithms, or know-how, product dossiers or databases, that are protected principally by copyright, database rights, trade secret or confidential information protection. In addition, whilst it is easy, for registered rights, to record the change of proprietor with the various local Intellectual Property Offices (IPOs) concerned, where the rights are unregistered, it is harder to put the world on notice.
Ownership split by territory or region
Where ownership of a brand or technology is split by territory or region, it may cause issues going forward, opening up the possibility of parallel (grey) imports from one territory to another, such that the buyer faces unforeseen competition in the market in which it has the exclusive rights to the brand or patented technology. The answer may be to regulate these issues proactively, by entering into a co-existence or delimitation agreement at the time of sale between the buyer and seller (or other buyers) to address issues such as: (a) one party not seeking to registering new trade marks outside their territory; (b) sale into other parties’ territories, whether deliberately or by permitting parallel imports; and (c) use of country specific domains, URLs and social media handles.
For further information see our briefing on Acquiring IP assets in a changing world
The Covid-19 pandemic caused a noticeable slowdown in real estate M&A activity. Despite this, there are early signs in the market of a bounce back. Opportunistic/strategic deals are still completing and many investors have capital reserves ready to be deployed.
Issues for purchasers to consider include:
Covid-19 due diligence is already a focus for buyers and insurers. From a legal perspective, compliance with health and safety regulations, effects on material contracts, insurance coverage and accounting impacts are likely to require attention. For operating real estate businesses, employment matters will also necessitate an additional strand of enhanced due diligence.
Seller business conduct in a split exchange and completion
Where there is a split between exchange and completion, the seller’s conduct regarding the asset or business is commonly restricted in this gap period. In the current climate, we expect sellers to pay much more attention to the detail here to ensure that they have the necessary flexibility required to react to the uncertain circumstances of the present day.
Termination rights between exchange and completion
We are seeing buyers pushing for enhanced termination rights between exchange and completion, a trend we predict will continue to develop. Material Adverse Change (MAC) clauses, which were relatively uncommon in real estate M&A at the start of this year, are increasingly featuring in negotiations. More bespoke and individualised termination rights (e.g. specifically on a rent payment default of a major tenant) can be seen as a bridging position.
Purchase price adjustments
We do not expect buyers to overwhelmingly turn to deferred consideration or contingent consideration. Instead, purchase price adjustments are becoming the source of focus, and this has pushed more parties towards completion accounts over a locked box mechanism. Where locked box is accepted by buyer and seller in name, we are generally seeing these change into complex ‘hybrid’ mechanics (involving elements of locked box and completion accounting) through the course of negotiations.
Dealing with arrears
One area already subject to increased negotiation is the treatment of arrears. Given the reported levels of rent collection in some businesses, there may be levels of income outstanding at the time of any disposal. With this in mind, sellers will want to ensure that they have sufficient protections that pre-completion rent will be pursued and passed through. Conversely, a buyer will wish to ensure that this does not impact on any future recoverability of rents or relations with tenants. Where there are material arrears, we expect parties will wish to pay close attention to the detail of conduct rights and the apportionment of rent between seller and buyer.
For further information, see our briefing, available here.
In the months leading up to the declaration of the Covid-19 pandemic, the global oil & gas majors were all putting in place major divestment programmes to pay down debt and (in the case of some) to re-position their businesses in light of pressure from stakeholders to decarbonise. When Covid-19 hit, it led to a sudden and unexpected hit to oil & gas demand, and coincided with a major battle between the world's biggest suppliers, Saudi and Russia. This combination has hit oil & gas companies hard, leading to tens of billions of dollars of CAPEX cancellations and unprecedented cuts in dividends. It has also produced a highly unfavourable deal environment, causing many planned transactions to stall.
Now that some regions of the world are emerging from lock-down, we are seeing a number of large transactions come back to the table, particularly transactions that are structured to benefit from more certain revenue streams. For example, we saw ADNOC close a US $20 billion+ pipeline deal in Abu Dhabi in relation to its pipeline assets; Shell has announced plans to dispose of an interest in over US$ 2 billion in LNG assets in Queensland; and Chevron has announced plans to dispose of its interest in the North West Shelf LNG Joint Venture in Western Australia. Given the pressure on oil & gas companies to continue to raise to capital, we expect to see more of these structured transactions coming to the market, as they reduce the exposure of buyers to upstream risk whilst maximising the cash-raising potential for the sellers. Transactions of this nature are complex and require a sophisticated understanding of foreign investment regulations, tax, accounting treatment, deal structuring, M&A and financing.
Public to private:
The Securities Industry Council (SIC) must be consulted if a MAC condition is proposed. In general, a condition cannot be attached where it involves the bidder’s subjective interpretation or judgment or is under the control of the bidder. However, it is possible to announce a pre-conditional offer, including pre-conditions which are objective and reasonable and a reasonable time period for fulfilment of the pre-conditions.
The Singapore Code on Take-overs and Mergers (Takeover Code) provides that no pre-condition should be invoked unless the bidder has demonstrated reasonable efforts to fulfil the conditions within the time period specified and the circumstances that give rise to the right to invoke the conditions are material in the context of the proposed transaction.
Temasek withdrew from its S$4.1 billion voluntary pre-conditional partial offer for Keppel Corporation Limited by invoking its MAC pre-condition based on Keppel’s financial performance and condition. The relevant pre-condition required there to be no MAC event, which included Keppel’s cumulative net profit after tax but before non-controlling interests (PAT) of the group for the 12 months up to and including the end of the financial period in the latest financials showing a decrease of 20% or more compared to the group’s PAT (S$696 million) as at 30 September 2019. Keppel’s Q2 FY2020 group PAT was negative S$ 698.8 million, which meant that the cumulative PAT for the 12 months up to and including 30 June 2020 was negative S$164.7 million. Temasek withdrew its offer after consultation with the SIC, who confirmed that it had no objection to Temasek withdrawing its partial offer by invoking the MAC pre-condition.
It is important for a potential bidder to identify which persons will be treated as its concert parties, as the interests of those persons will be aggregated for a number of provisions under the Takeover Code, including the mandatory bid threshold.
Requirements as to price
Where a bidder (or its concert parties) purchases target shares during the offer period or the three months preceding the offer, the offer price (for a voluntary or partial offer) must not be less than the highest price paid by the bidder or its concert parties during that period.
Where a bidder (or its concert parties) purchases shares carrying 10% or more of the target’s voting rights for cash during the offer period or the six months preceding the offer, the offer must be in cash or accompanied by a cash alternative and the offer price must not be less than the highest price paid by the bidder (or its concert parties) during that period.
On a cash offer, financing must be on a certain funds basis and the bidder’s financial adviser will have to confirm that resources are available to the bidder sufficient to satisfy full acceptance of the offer.
Other issues for bidders
Where a bidder is issuing shares as consideration, a circular or scheme document concerning a company listed on the SGX will need to be prepared and approved by the SGX, and SGX approval would be required, for example in relation to a listing of new shares pursuant to an offer.
Other approvals may also be required depending on the transaction and industry involved, for example from the Monetary Authority of Singapore. Industries which are critical to national interests, for example, banking, finance, insurance and media are regulated by statute. Where regulatory approval is required, a bidder will usually announce a pre-conditional offer.
As is the case in Hong Kong, many listed companies in Singapore are family-controlled or have dominant controlling shareholders. The Takeover Code contains similar provisions as discussed in the Hong Kong section of this guide, in relation to there being an exemption from the mandatory offer requirements when security is enforced, but no exemption for a subsequent purchaser to acquire such secured shares.
Private investment in public equities (PIPEs): SINGAPORE
Mandatory bid requirements
Under the Singapore Code on Take-overs and Mergers, an obligation to make a mandatory offer arises when a person acquires 30% or more of the voting rights in a target company, or when a person holds between 30% and 50% (inclusive) of the target’s voting rights acquires additional shares carrying more than 1% of the target’s voting rights in any six-month period. For the purposes of these thresholds, shareholdings of the bidder and all persons acting in concert with it must be taken into account.
When the mandatory offer obligation is triggered by a cash subscription, the SIC would normally waive the obligation if there is an “independent vote” (a vote by shareholders who are not involved in the transaction) and a majority of the independent shareholders approve the waiver.
Most SGX-listed companies seek a general mandate from shareholders to enable them to issue up to 20% of their issued share capital on a non-pro rata basis every year. Where available, the general mandate can be used to complete investments by way of the issuance of new shares in the Singapore company without the need for further shareholder approval.
Securities issued under the general mandate must not be issued for a price representing a discount of 10% or more to the volume-weighted average price for the full trading day on which the subscription agreement is signed. The general mandate also cannot be used to issue shares to a director (or immediate family members), or to a substantial shareholder (shareholder holding 5% or more of the voting shares), or immediate family members or related companies.
Public float requirements
SGX-listed companies are required to maintain a public float with a minimum percentage of 10% held in public hands. Shares held by directors, or substantial shareholders, or their associates will not be treated as being held by the public.
Interested person transaction rules
Any transactions entered into between the listed company group and its interested persons (directors, CEO, controlling shareholder, or their associates) where the value of that transaction exceeds S$100,000 (alone or aggregated with other transactions with the interested person during the financial year), will be subject to the Listing Rules on interested person transactions and requires announcement, reporting obligations and, potentially, shareholders' approval. SGX RegCo has the power to deem a party an "interested person" and to aggregate transactions, even below $100,000, in the same financial year and treat them as one transaction.
Where an investor holds 5% or more of the voting shares in an SGX-listed company, the investor must disclose its interests in shares. Following disclosure of the initial interest, further notices must be filed when there is a percentage change in its shareholdings.
A prospectus is not required if the shares are issued pursuant to one of the exemptions under the Securities and Futures Act (Chapter 289) of Singapore, for example, if the shares are issued as part of a private placement (not more than 50 offerees), or if the shares are issued to accredited and institutional investors.