The most interesting question with respect to public takeover offers is most probably that of the consideration offered. Therefore, the statutory minimum price rules of the German Securities Acquisition and Takeover Act(Wertpapiererwerbs- und Übernahmegesetz, WpÜG) are of particular importance. The bidder must offer an appropriate consideration to the shareholders of the target company. If the consideration provided for in a public takeover offer is not appropriate, the shareholders who have accepted the offer shall be entitled to a subsequent top up payment. This had already been clarified by the German Federal Supreme Court (Bundesgerichtshof, BGH) in its landmark Postbank case in 2014 (Ref.: II ZR 353/12). For bidders and shareholders, recent developments in case law regarding remedies during and after public takeovers are likely to be no less significant.
In a decision dated 7 November 2017, the German Federal Supreme Court ruled that the consideration paid by the bidder for the derivative acquisition of convertible bonds must also be taken into account when determining the appropriate minimum consideration for a public takeover offer to the shareholders (Ref.: II ZR 37/16). US pharmaceutical giant McKesson had acquired bonds convertible into Celesio shares from US fund Elliott and converted them into Celesio shares ahead of the takeover by McKesson of German pharmaceutical distributor Celesio in 2014. The highest purchase price paid by McKesson for the acquisition of bonds from Elliott was the equivalent of EUR 30.95 per share. McKesson’s public takeover offer, on the other hand, only envisaged a price of EUR 23.50 per share.
Celesio shareholder Magnetar Capital claimed payment of the difference of EUR 7.45 per share and the German Federal Supreme Court ruled in the favor of Magnetar. It was held that the so-called previous acquisitions’ rule (section 31 para. 6 WpÜG) is to be interpreted as a general protection against circumvention. The legislator hand intended to ensure that the bidder would be hold to the price which he considered to be reasonable for the shares in a temporal context of the takeover offer. This price expectation of the bidder would also be reflected in the acquisition of bonds and the associated right to acquire shares. Since the main purpose of the legal framework of the WpÜG was to provide a fair and transparent procedure, a broad interpretation was necessary.
Up to now, the German Federal Supreme Court only had to decide on a claim for top-up payment for shareholders who had accepted a takeover offer that was too low. It did not, however, have to decide on a right to tender for shareholders who had not accepted the offer because it (rightly) appeared to be too low to them. It is precisely this question that now concerns the courts of instance. Particularly remarkable is the decision of the Stuttgart Regional Court (Landgericht Stuttgart), which has been appealed and not yet become legally-binding, in the appraisal proceedings concerning the domination and profit transfer agreement entered into by McKesson and Celesio following the takeover offer (Ref.: 31 0 1/15 KfH SpruchG).
In the order of 17 September 2018, the court incidentally considered the conditions of a claim based on pre-contractual liability (culpa in contrahendo), which was directed to payment of the statutory minimum price of EUR 30.95 per share concurrently against the transfer of the shares not tendered, to be met in principle. Nevertheless, the claim was not granted since, according to the Court, the legal alternative conduct of the bidder could also be the withdrawal from the offer. Furthermore it could not be established in the specific case with the necessary degree of conviction of the Court that the bidder would have submitted an offer at EUR 30.95 if he had known the legal minimum price.
From our perspective, it is questionable whether this case law will stand up to scrutiny by the higher court. On the one hand, the non-submission of a takeover offer is ruled out as a legitimate alternative behavior if – as in the case in question – the bidder was obliged to submit a takeover offer at a price of EUR 30.95 per share. On the other hand, essential objectives of the WpÜG, namely the strengthening of minority protection in public takeovers and equal treatment of shareholders, require in principle the recognition of a remedy to those shareholders who have not accepted an offer that is too low.
In the opinion of the Stuttgart Regional Court, however, the consideration actually offered in the context of a takeover offer could be of significance for the examination of the appropriateness of a cash compensation to outside shareholders on the occasion of a subsequent structural measure under German stock corporation law, such as the conclusion of a domination and profit transfer agreement. This shall be the case, in particular, if the structural measure is closely related in time to the takeover offer, which, then, would be “value-forming”.
If this stand will be confirmed, it could have far-reaching consequences for the practice, common since the Stollwerck ruling of the German Federal Supreme Court, of using the higher value of a capitalized earnings value determined in accordance with the principles for the Performance of Business Valuations (IDW S 1) or the average stock exchange price weighted according to turnov r within a three-month reference period prior to the announcement of a structural measure as a basis for calculating the amount of the compensation payment: The consideration actually offered within the framework of a previous takeover offer would mark an additional lower limit for calculating the appropriate compensation to outside shareholders in the case of structural measures. Moreover, if the consideration offered was inappropriate, the amount actually appropriate under takeover law might have to be taken into account.
It follows from the development line of case law outlined above that bidders will have to calculate even more carefully in the future when structuring takeover offers. The same applies, until further notice, to the determination of the amount of compensation for outside shareholders in the case of structural measures such as domination and profit transfer agreements or squeeze-outs.
Munich Private Equity Training, 4/5 July 2019