Public M&A 2013/14: the leading edge

June 2014

Public M&A 2013/14: the leading edge

Contents

2 Introduction 31 Italy 31 Deal activity 4 Global market trend map 31 Market trends 6 The leading edge: country perspectives 32 Case studies 6 Austria 34 Japan 6 Deal activity 34 Deal activity 6 Market trends 34 Market trends 6 Changes to the legislative framework 35 Case study 7 Case study 36 Netherlands 8 Belgium 36 Deal activity 8 Market trends 36 Market trends 8 Changes to the legislative framework 37 Changes to the legislative framework 9 Case study 38 Points to watch 39 Case studies 10 China 10 Deal activity 40 Spain 11 Market trends 40 Deal activity 11 Case study 40 Market trends 41 Changes to the legislative framework 12 EU 42 Points to watch 12 Changes to the legislative framework 43 Case studies 14 France 44 UK 14 Market trends 44 Deal activity 15 Changes to the legislative framework 45 Market trends 16 Case studies 45 Changes to the legislative framework 19 Germany 46 Deal protection measures 19 Deal activity 47 Points to watch 20 Market trends 48 Case study 22 Case study 50 US 24 Hong Kong and Singapore 50 Deal activity 24 Deal activity 50 Market trends and judicial and 25 Market trends legislative developments 28 Market trends 51 Litigation as a cost of doing business 29 Case study 53 Case study 54 Contacts

Freshfields Bruckhaus Deringerllp 1 Public M&A 2013/14: the leading edge

Introduction

Market trends 2013 saw a modest increase in global public M&A activity. 2014 has so far seen a more pronounced increase in public M&A and a few high-profile transactions have been announced. As usual, the US market has driven this activity, with Most markets have among the largest transactions announced in 2013 (eg Silver Lake’s and Michael seen greater confidence Dell’s $25bn purchase of Dell Computer, 3G Capital’s and Berkshire Hathaway’s among investors, $27bn acquisition of Heinz) and 2014 (Comcast’s $45bn acquisition of Time Warner Cable and Actavis’s $25bn acquisition of Forest Labs). Other markets boards and investment have seen some large transactions as well (eg the recently announced proposed/ committees. possible transactions between Holcim and Lafarge, Pfizer and AstraZeneca and GE and Alstom, among others). Overall volumes and values outside the US, unsurprisingly, lag behind both the US and pre-crisis highs.

That said, in the last six months or so, most markets have seen greater confidence among investors, boards and investment committees. This resulted from, among other things, macroeconomic stability and growth prospects, continued access to historically inexpensive financing and significant cash reserves (at least insofar as well-placed corporate buyers are concerned). Most markets are expected to experience an uptick in public M&A dealmaking in 2014. Certainly many directors are telling us (and with their actions, showing us) that shareholders are less focused than they were on companies returning surplus cash to them and are now more open to boards exploring larger M&A opportunities as a way to drive earnings growth. Sectors where this is most apparent include pharma/healthcare (which is going through fundamental macro-level changes in 2014), TMT and industrials.

Although activity in a number of markets has been muted, and there are differences between markets’ regulatory and legal regimes, we have observed a number of public M&A related trends that are common across the globe and that are likely to remain topical in the near term.

• Regulatory interventionism. The number of competition authorities is growing globally. And there is a perception that many authorities are becoming increasingly interventionist and less transparent. This is creating increased uncertainty around both the outcome and timing of certain regulatory processes in the context of transactions (even where the relevant market is not the deal’s centre of gravity). There have certainly been a number of high-profile examples of public M&A transactions either being delayed or blocked by competition regulators in the last 12 months (eg UPS/TNT in the Netherlands, Britvic/Barr in the UK and AB Inbev/Modelo in Mexico). And as can be seen by the coverage of the recently announced proposed Holcim/ Lafarge merger, regulatory considerations and their associated processes are increasingly seen as important on public M&A deals. It is worth noting that, as the reported demands of the UK tax authority in relation to the proposed (but cancelled) Omnicom/Publicis merger have shown,

2 Public M&A 2013/14: the leading edge

regulatory interventionism on public M&A deals is not only restricted to interventionism by competition authorities. Another example is French foreign investments legislation which has recently been expanded, notably to cover the proposed GE/Alstom transaction. US-style shareholder activism has increased • US tax inversions. The rules on US tax inversions – whereby a US company relocates its residency to a lower tax jurisdiction – have tightened over the both within and years (and are proposed to tighten further). M&A is, however, still a viable outside the US and way for a US company to achieve an inversion, if various conditions are met, continues to drive including that the non-US shareholders own 20 per cent or more of the stock of the combined company after the transaction. A number of acquisitions of corporate events. European public companies by US companies in the last 12 months have been structured as inversions (eg Elan/Perrigo and the possible Pfizer/AstraZeneca combination, as well as the proposed but cancelled Omnicom/Publicis deal). Many predict a fresh wave of inversion-driven M&A in Europe in the remainder of this year, though execution will come under a great deal of public scrutiny from lawmakers (and the recent Obama budget has requested a change to the existing regime that could eliminate inversions by as soon as early 2015).

• Shareholder activism. US-style shareholder activism has increased both within and outside the US and continues to drive corporate events, such as the exploration of strategic alternatives leading to sales and spin-offs. Activists can also play a prominent role following the announcement of public M&A transactions (eg Carl Icahn in relation to Silver Lake–Michael Dell/Dell Computer and Elliott in relation to the McKesson/Celesio and the Vodafone/Kabel Deutschland deals in Germany) and can often succeed in securing a change in deal terms or even blocking the deal itself.

• Dissemination of information/social media. Social media are playing an increasingly important role in companies’ investor relations communications, particularly in the US where they often feature proxy fights and takeovers. In April 2014, the SEC issued interpretative guidance that will certainly enhance the ability of market participants to use character-limited social media like Twitter to disseminate information to investors, which, while perhaps welcome news to tech-savvy activist hedge funds, is a warning call to public company boards and executive management teams to understand and be prepared for this new reality. We would expect other non-US markets to follow the SEC’s lead on this front.

Content Public M&A 2013–14. The leading edge details trends and case studies in various markets, divided by jurisdiction. These reports have been prepared by lawyers in our market-leading public M&A practice, and we would be delighted to hear from you if you have any questions or comments on any aspect of the reports. Contact details for each market are on page 54.

3 Public M&A 2013/14: the leading edge

Global market trends

Egypt India

Austria France

• Increased focus on acting in concert. Austrian listed • Increasing importance of litigation in companies typically have one or a group of several the context of public offers in France. strong shareholders with large stakes; therefore, the formation of, and changes in, shareholder groups is • Significant amendments to the French takeover a focused topic of the Austrian Takeover Commission. regime have recently been introduced by the so- called Florange Law and by decree n° 2014–479 • Restructuring privilege. The exemptions applicable extending the list of strategic sectors in which to distressed target companies (Sanierungsprivileg) foreign investments are subject to prior from the strict mandatory offer regime including governmental authorisation. minimum price have been used occasionally, but not as much as expected. Germany

Belgium • Most offers are made after pre-bid arrangements with core shareholders and/or target management. • Increased use of ‘intention to bid’ announcements, whereby a bidder announces its intention to make • Increased activity by private equity bidders using a takeover bid some time before proceeding with 75 per cent minimum acceptance conditions. the actual bid. • Recently, re-emergence of activist shareholders in • Most public takeover bids have included a big-ticket takeover bids trying to have offer prices market MAC linked to the BEL-20 Index since increased (or to get paid out later with a premium the financial crisis. after bid closing). • Greater emphasis on target management to increase China offer price and to strengthen other shareholders’ interest by negotiations with bidders. • Burdensome approval requirements and uneven enforcement of existing laws by the PRC regulators. Hong Kong • Concentrated ownership structure of PRC listed companies where the state continues to play an • Partial offer structure confirmed to be available, important role as controlling shareholder of most which allows a bidder to acquire up to 75 per cent listed companies. of the target while maintaining target listing.

4 Public M&A 2013/14: the leading edge

Italy UK

• Termination of shareholders’ agreements used to • The target recommended most offers made in 2013, control major public companies expected to make and bidders have shown a preference for schemes such companies more targetable by bidders. of arrangement when implementing larger acquisitions. The (non-recommended) offer for • Proposal to replace the current strict and formal ENRC was structured as a tender offer, but provided 30 per cent threshold triggering a mandatory tender a right to elect to implement the acquisition by way offer with a new test based on whether a person can of a scheme. exercise de facto control (regardless of number of shares acquired). • Challenging deal-making environment has increased the popularity of cash consideration, • Increased number of independent directors and which is partly explained by the increasing greater attention to corporate governance in general. dominance of non-UK bidders, who used solely existing cash resources to make 62 per cent of bids.

Japan • 2013 saw an increase in market purchases that have triggered the obligation to make a mandatory offer • Hostile offers are still rarely successful. for the remaining shares in the target company. • Bidders increase disclosure and focus on a ‘fair’ process (in particular, in MBOs) to avoid US the litigation risk. • Globalisation of activism.

Netherlands • Closer scrutiny of controller transactions and banker conflicts, as well as the more general • Bidders more often require targets to support potential to export US deal litigation (fiduciary duty pre-wired post-closing restructuring measures or appraisal rights) to the rest of the world. to instantly achieve full integration. • Global deal jump activity. • Financing banks are getting more involved in negotiating the underlying deal. • Use of social media in investor relations communications, including in takeover battles • Increased focus on non-financial covenants and proxy fights. SEC has issued interpretive in deal negotiations. guidance on this.

• The bull case of boardroom confidence having been Spain restored and institutional investors telling CEOs to do more than buybacks and dividends – (see Larry • No hostile offers or competing bids. Fink’s letter to the S&P 500 here www.cnbc.com/ • Antitrust conditions and break fee arrangements id/101526093) – against the bear case of pricing are uncommon. dislocations, political instabilities and a general sense of having been here before. • The process of taking control in restructuring scenarios has been facilitated.

5 Public M&A 2013/14: the leading edge

The leading edge: country perspectives

Austria Deal activity €262m Over the last few years, there has been moderate activity in public M&A Total deal value in 2013 transactions in Austria. In each of the last two years, five public takeovers were filed with the Austrian Takeover Commission (ATC) and completed. In 2013, three takeover offers were launched. Total deal value amounted to roughly €204m in 2011, €286m in 2012 and €262m in 2013.

Market trends In general, the number of corporations being subject to the Austrian Takeover ATC... would like to Act has decreased from 96 in 2009 to 76 in 2014. This trend is likely to continue see the formal control and is mainly caused by delistings resulting from restructuring procedures, threshold decreased a lack of IPOs and a shift towards listings in unregulated market segments. from 30 to 25 per cent... Changes to the legislative framework • Formal control threshold. In its yearly reports the ATC has clarified that it would like to see the formal control threshold decreased from 30 to 25 per cent (no ‘safe harbour’ between 25 and 30 per cent), taking account of the increasingly lower attendance levels at the shareholders’ meeting of listed companies.

• Restriction on voting rights beyond 26 per cent. The ATC has also stated that it would like to lower the so-called blocking majority threshold based on which a bidder holding a blocking minority between 26 and 30 per cent (ATC favours 20 per cent) is banned from exercising voting rights exceeding 26 per cent until a formal takeover bid has been launched (and closed).

• Requirements for disclosure of shareholdings. On 1 January 2013, a revised regime for the disclosure of shareholdings entered into force, introducing a 4 per cent threshold. Other financial instruments, such as cash-settled equity swaps, are now taken into account when calculating disclosure thresholds. Shareholders that fail to comply with the new publication regime will face a temporary suspension of their respective voting rights as well administrative fines.

6 Public M&A 2013/14: the leading edge

Case study Grosso’s bid for S&T The case concerns an offer by grosso holding Gesellschaft mbH (Grosso) for S&T The S&T case AG, triggered by a statutory merger and acting in concert. In essence, this case confirms that takeover confirms that takeover laws are not restricted to transactions that involve selling and buying shares in a listed company. They also apply to other acquisitions laws are not restricted under civil or corporate law – for example, the conclusion of a shareholders’ to transactions that agreement or a statutory merger: involve selling and Grosso held a 32 per cent stake in listed S&T Systems Integration and buying shares in Technology Distribution AG (the Transferring Company) and the listed S&T AG a listed company. held another 40 per cent stake in the Transferring Company. S&T AG itself was controlled by the Quanmax group (Quanmax), which held 45 per cent of the shares. Following a financial restructuring of the Transferring Company jointly implemented by its major shareholders, ie Grosso and S&T AG, the Transferring Company was merged into the S&T AG as the acquiring company. As a result, Grosso became a 16 per cent shareholder in S&T AG while Quanmax’s stake dropped to 41 per cent. In the Transferring Company’s shareholders’ meeting both Grosso and S&T AG voted in favour of the merger. S&T AG’s shareholders’ meeting approved the merger too. However, Quanmax abstained from voting both as regards the merger resolution and a resolution appointing two persons affiliated to Grosso as new members of S&T AG’s supervisory board. The case was finally brought before the ATC with the following outcome.

• Grosso and Quanmax argued that no mandatory takeover bid should be triggered for the following reasons: the merger neither results in a change of control, nor does the election of two supervisory board members affiliated to Grosso confer joint control because Grosso would become a 16 per cent shareholder of the target only after completing the merger so that Grosso cannot exercise any voting rights before completion of the merger.

• According to the ATC, however, it was not plausible that the election of two new supervisory board members who are affiliated to a future shareholder is resolved without any intention for joint control after the reorganisation since they could not have been appointed without Quanmax’s consent. Accordingly, co-ordinated strategic abstentions may constitute ‘acting in concert’ leading to joint control.

• The target company S&T AG has its corporate seat in Austria, but its shares are traded on the regulated market of the Frankfurt Stock Exchange. Against this background, ATC re-confirmed that it has authority over matters of corporate law, including control thresholds triggering a mandatory bid obligation and that the Austrian Takeover Act applies to corporate reorganisations such as statutory mergers.

7 Public M&A 2013/14: the leading edge

Belgium Market trends The following market trends are worth noting. Since the financial crisis, most public • A number of public takeover bids were announced by publishing an ‘intention to bid’ announcement, whereby each bidder published its intention to launch a takeover bids have takeover bid in the near future. This is unusual under Belgian law. A takeover included a market bid is generally only made public when the prospectus has been officially material adverse notified to the Financial Services and Markets Authority (FSMA). change clause. –– However, the takeover bid by Liberty Global, Inc. (LGI) for Telenet Group Holding NV (Telenet) was announced by way of an intention to bid. –– Similarly, Union Financière Boël published that it intended to make a bid for HENEX three weeks before launching the actual bid. –– Likewise, Ackermans & van Haaren (AvH) and VINCI announced an envisaged transaction (including the launch, in due time, of a mandatory bid) several weeks before the expected date of the actual mandatory public takeover bid. The parties disclosed their agreement on the sale by VINCI of 23.42 per cent in CFE to AvH and the contribution into CFE by AvH of its 50 per cent stake in DEME. These transactions would result in AvH obtaining a stake in CFE exceeding 30 per cent, which would require AvH to launch a mandatory takeover bid on CFE. –– This approach was also taken in a transaction relating to Rosier whereby Borealis announced in February that it had made a firm offer for the 56.86 per cent in Rosier held by Total. A mandatory takeover bid would have to be launched on conclusion of the sale. The actual bid was launched in August 2013.

• Since the financial crisis, most public takeover bids have included a market material adverse change clause, linked to the BEL-20 Index, the index combining the 20 largest Belgian listed companies, whereby the bid could – in most cases – be withdrawn if the BEL-20 Index drops by a certain percentage between the publication date of the prospectus and the date on which the results of the bid are announced.

Changes to the legislative framework • Changes to the public takeover law. The law of 17 July 2013 implements certain EU directives into Belgian law and amends, among others, the public takeover law of 1 April 2007. It specifies that a takeover bid is not considered public if it is addressed to fewer than 150 persons other than qualified investors or if it relates to instruments with a nominal value of at least €100,000. The law also redefines the term ‘qualified investor’, to align it with the definition of ‘professional investor’ as used in the MiFID.

8 Public M&A 2013/14: the leading edge

• Changes to the public takeover decree. The royal decree of 26 September 2013, which also implements certain EU directives, amends the public takeover decree of 27 April 2007. The scope of the response memorandum that a target’s board of directors has to issue in the framework of a takeover The scope of the bid is extended. In the future, it will have to include the target’s board of response memorandum directors’ opinion on whether it is opportune for the securities holders to tender their securities in the offer. If the directors do not share the same that a target’s board opinion, the response memorandum should include the different opinions, of directors has to specifying which directors are independent and which represent specific issue in the framework shareholders. An explanation is needed if the intention of the directors or of a takeover bid the shareholders they represent to tender or not to tender their shares in the offer differs from their opinion on whether it is opportune for other is extended. securities holders to tender. Case study Freshfields advised LGI on its bid for Telenet Freshfields advised cable operator LGI on all aspects of its Belgian public takeover bid for all the shares and certain other securities that it did not already own in Belgian cable operator Telenet. The public takeover bid was made at an offer price of €35 per share. In aggregate, the securities targeted by the offer were on that basis valued at roughly €1.96bn, which made the offer the largest intended public takeover bid in Belgium in 2012. LGI has been the controlling shareholder in Telenet since February 2007 and held, before its public offer, roughly 50 per cent of the outstanding issued share capital of Telenet. Under the offer, LGI increased its stake in Telenet from 50 per cent toroughly 58 per cent.

The transaction has been considered unusual for the following reasons.

• The valuation prepared by the independent expert (a requirement when a bid is made by a controlling shareholder) resulted in a valuation range per Telenet share that was higher than the price per share offered by LGI in the public takeover bid.

• The announcement was made through an intention to bid, two months before the bid was launched. This is an exceptional procedure under Belgian law (see above).

• The offer was made by LGI after Telenet had announced a tender offer on its own shares; this meant the two bids were running in parallel.

• The bid was not recommended by the independent directors of Telenet.

9 Public M&A 2013/14: the leading edge

China Deal activity Although the People’s Republic of China (PRC) has modern takeover laws ...public M&A in China and regulations, public M&A in mainland China remains relatively inactive. consists mainly of This is partly due to the burdensome approval requirement, particularly with restructurings... and respect to foreign acquirers, and uneven enforcement by the PRC regulators. business combinations Another reason is the still concentrated ownership structure of companies listed between domestic on the domestic Shanghai or Shenzhen Stock Exchange where the number of players that are companies that have a controlling shareholder remains high and on average, the controlling shareholder, which in most large listed companies are the state arranged by the PRC or quasi state-controlled entities, holds a high percentage of the outstanding government authorities. voting shares. As a result, to date, public M&A in China consists mainly of restructurings, especially of state-controlled enterprises, and business combinations between domestic players that are arranged by the PRC government authorities.

In fact, in 2012 and 2013, there were only five and 10, respectively, tender offers in the domestic public M&A market, and none of these few tender offers was made by a third party independent from the listed target company.

Even less common are takeovers involving foreign players due to the fairly complicated and unclear regulatory framework and the strict scrutiny applied by PRC regulators in respect of any takeover attempt by a foreign investor. Apart from the general takeover rules, any acquisition by a foreign investor of a stake of 10 per cent or more in a listed company is subject to the rules governing ‘foreign strategic investment in listed companies’, which makes such transactions subject to obtaining foreign investment-related approvals from both the China Securities Regulatory Commission (CSRC) and the Ministry of Commerce (MOFCOM). Furthermore, subject to the applicable filing thresholds being met, the transaction would usually be subject to obtaining merger-filing clearance under the PRC Anti-Monopoly Law. If the target falls into an industry sector that is considered to be sensitive (such as media, infrastructure and sensitive technologies as well as military, of course), the transaction may be further complicated as it may be subject to a ‘national security review’ under regulations introduced by the PRC State Council in 2011.

It is therefore not surprising that the public takeover of Shanghai-listed Shui Jing Fang by UK-based Diageo plc that was completed in 2012 has been one of the few completed takeovers of domestic listed companies by foreign players in recent years, and the time it took Diageo to complete the transaction is only exemplary for the difficulties a foreign investor will face in any takeover attempt for a domestic listed company (see the case study below).

10 Public M&A 2013/14: the leading edge

Market trends In September 2013, MOFCOM released draft amendments to the Administrative 2013 Measures on Foreign Investors’ Strategic Investments in Listed Companies, to ‘promote the development of China’s securities market’. Apart from relaxing Chinese Authorities released qualification requirements a foreign investor has to meet, the draft amendments amendments intended to promote the development propose, among other things, to expand the scope of permitted consideration of China’s securities market. a foreign investor may use for the acquisition of shares in PRC listed companies to include overseas renminbi the investor holds and/or shares or equity interests in PRC companies. At the same time, various plans keep being announced or discussed in an effort to broaden the access for foreign investors to the domestic stock exchanges.

However, despite these efforts, given the continuing concentrated ownership UK-based Diageo plc structure of domestic listed companies and the scrutiny applied by PRC regulators completed its public towards foreign investors, the number of takeover attempts of domestic listed companies by foreign players is unlikely to increase significantly in the near takeover bid for future. Instead, as has been the practice in the past, private placements and/or Shanghei listed Shui acquisitions by private agreements from an existing controlling shareholder Jing Fang after more will likely be the more common ‘way in’ for foreign investors to acquire at least a significant minority stake in Chinese listed companies. than two years. Case study In 2012, after more than two years, UK-based Diageo plc completed its public takeover bid for Shanghai-listed Shui Jing Fang, a Sichuan-based manufacturer of traditional Chinese white spirit or ‘baijiu’.

Diageo’s initial engagement with Shui Jing Fang dates back to 2007 when it acquired a 43 per cent equity interest in Shui Jing Fang’s controlling shareholder, Sichuan Chengdu Quanxing Group Co. (Quanxing). At that time, Quanxing held approximately 39.48 per cent of the voting rights in Shui Jing Fang. After having increased its stake in Quanxing to 49 per cent in 2008, in March 2010, Diageo agreed with its Chinese joint venture partner to acquire an additional 4 per cent equity interest in Quanxing, which would cause Diageo’s interest in Quanxing to increase to 53 per cent.

Under the chain principle established under PRC takeovers rules, on completion of such equity transfer in Quanxing, Diageo would have been deemed to become the holder of 39.71 per cent voting rights in Shui Jing Fang held by Quanxing, resulting in an obligation of Diageo to make a general takeover offer for all shares in Shui Jing Fang not already held by Quanxing. Therefore, on signing binding transaction documents among the shareholders of Quanxing for the 4 per cent equity transfer, Diageo made the required indicative announcement of a public takeover bid for Shui Jing Fang in March 2010.

11 Public M&A 2013/14: the leading edge

EU Changes to the legislative framework The European market for takeovers is challenged by a number of changes The European in the regulatory environment. These include the following points to watch. Parliament approved • The European Securities and Markets Authority (ESMA) has published a public the findings of the statement on practices governed by the Takeover Bid Directive (2004/25/EC) European Commission’s on 12 November 2013, which is focused on shareholder co-operation issues report by resolution relating to acting in concert and the appointment of board members. The statement includes a white list of activities determining that shareholders of 21 May 2013, can continue co-operating jointly without being accused of acting in concert taking account of (it includes information on how shareholders may co-operate to secure board a 2012 Freshfields member appointments). study on public M&A This ESMA public statement is based on a report by the European Commission market practices and on the application of Takeover Bid Directive (2004/25/EC) which, in turn, potential needs for is founded on a legal and economic study prepared by professional advisers. legislative reforms. The study proposes certain measures to harmonise takeover law on EU level, but these proposals do not trigger a formal amendment of the Takeover Bid Directive. The European Parliament approved the findings of the European Commission’s report by resolution of 21 May 2013, taking account of a 2012 Freshfields study on public M&A market practices and potential needs for legislative reforms.

• A Directive (2013/50/EU) amending the Transparency Directive (2004/109/EC) €10m entered into force on 27 November 2013 and must be implemented into national law by 26 November 2015. Changes with impact on public M&A or 5% practices include the following: of annual turnover: revised The obligation to disclose major holdings of voting rights is extended to direct transparency regime entails tougher sanction practice and indirect holdings of all financial instruments with the same economic effect as the holding of shares (irrespective of any physical settlement). This amendment is in line with national regulatory trends tightening the rules on stake-building and creeping-in. Furthermore, member states must implement a minimum standard sanctions regime for infringements of the European transparency regime, including fines of up to €10m or 5 per cent of annual turnover (whichever is higher). This is likely to entail a tougher sanctions practice of the regulatory authorities. Therefore, strict compliance with the (rather complex) transparency regime in transactional scenarios is becoming more important. We have a wealth of experience advising on capital markets regulation, including day-to-day compliance issues.

12 Public M&A 2013/14: the leading edge

• A Directive (2014/57/EU) on criminal sanctions for market abuse (eg insider dealing and market manipulation) (known as ‘CSMAD’) and a Regulation (EU No 596/2014) on market abuse (known as ‘MAR’) have been adopted on 16 April 2014. They shall replace the existing Market Abuse Directive The new regime (2003/6/EC) and will enter into force on 2 July 2014. The new market abuse establishes tougher regime will apply as of 3 July 2016. Both the CSMAD and the MAR were published together with the new EU Financial Markets Directive (MiFID II) rules to prevent, and the new EU Financial Markets Regulation (MiFIR) in the Official Journal detect and punish of the European Union on 12 June 2014. market abuse. The new regime establishes tougher rules to prevent, detect and punish market abuse. For instance, MAR imposes a tougher sanction regime on capital market participants, including fines based on the offending enterprises’ turnover, comparable to the revised Transparency Directive. The MAR also introduces the offence of ‘attempted’ (as opposed to actual) market manipulation. On the procedural level, the MAR is designed to The new MAR* will empower supervisory authorities to regulate and monitor the financial market more efficiently, eg by way of enhanced access to electronically apply as of 3 July 2016 recorded information held by possible offenders or third parties (such telecoms operators) as well as mandatory protection of whistleblowers. As a result, again, strict compliance with EU capital markets law will become even more important.

*Market Abuse Regulation

13 Public M&A 2013/14: the leading edge

France Market trends • Expected recovery in 2014. Following the comeback of significant public The proposed €25.5bn M&A transactions in 2013, 2014 is expected to be a recovery in France. merger of Omnicom M&A transactions involving at least one French group – whether it is seller and Publicis announced or buyer – have rebounded by 153 per cent, to €31.7bn during the first three months of the year. This performance is due to the rise of the companies’ in July 2013 was called market value, low interest rates and net indebtedness, which is an ideal off in May 2014 due to context for a truly sustainable rebound of the M&A market. The proposed ‘cultural discrepancies’ €25.5bn merger of Omnicom and Publicis announced in July 2013 was called off in May 2014 due to ‘cultural discrepancies’ between the parties relating between the parties to the corporate governance of the combined group. relating to the corporate governance • Industrial transactions. Many transactions have occurred in the industrial sector since the beginning of 2014 and continue the trend observed over of the combined group. the past year. The merger announced between Holcim and Lafarge, the world’s two largest cement manufacturers, shows the consolidation trend in some industries.

• New technology transactions. The new technology sector has also seen several mergers announced between major players of this field. The acquisition of SFR by Numericable or the combination between Sopra and Steria, two principal companies of the IT services industry, are examples of large M&A transactions in France.

• Litigation issues. Even if no hostile public offer was launched in 2013, French transactions were characterised by litigation issues (ie, conflicts with minority shareholders). These issues have increased the number of French public offers (Icade’s bid for Silic lasted 14 months and the bid for Club Med should last at least 13 months). 2014 is also featured by disputes arisen between target company’s management and their minority shareholders (eg the tender offer launched by SMABTP on Société de la Tour Eiffel (STE) in January 2014).

14 Public M&A 2013/14: the leading edge

Changes to the legislative framework The French law n° 2014–384 dated 29 March 2014 designed to ‘regain the real economy’, also known as ‘Florange Law’, was published in the Official Gazette (Journal Officiel) dated 1 April 2014. The Florange Law has introduced several The French law... amendments to the French takeover regime. designed to ‘regain the real economy’... • Automatic lapse of tender offers not reaching 50 per cent of share capital or voting rights of the target company. This automatic lapse applies to has introduced several voluntary or mandatory tender offers. In case of mandatory tender offers, amendments to the restrictions on voting rights following the offer will also apply to the bidder. French takeover • Speed of increase of shareholdings. Shareholders holding between 30 per regime... These new cent and 50 per cent of the share capital or voting rights of a listed company rules will apply to are obliged to file a tender offer if they increase their shareholding by 2 per tender offers filed cent over a 12-month rolling period. This threshold will be reduced to 1 per cent from 1 July 2014. from 1 July 2014.

• Strengthening of the works councils’ rights in the event of a tender offer. The mandatory consultation of the works council of the target company will be required before the target’s board issuance of its opinion on the offer and at least one month after the filing of the tender offer. In addition, the works council will be granted substantial new rights: a right to proceed with a hearing of the bidder within the week following the filing; and to appoint an expert for evaluating the policy and strategy of the bidder. In addition, the works council will be granted a follow-up right after the offer (allowing it to scrutinise the implementation by the bidder of its commitments vis-à-vis the target company). These new rules will apply to tender offers filed from 1 July 2014. It is expected that the mandatory consultation of the works council would generate delays in the implementation of the offer, and might generate litigation, as this is often the case in private M&A transactions where such prior consultation already exists.

• End of the principle of neutrality of management bodies in case of tender offer. Article 9 of the Directive 2004/25/EC on takeover bids prevents management bodies from taking frustrating measures without shareholders’ prior approval. The adoption of article 9 by member states was optional, but France opted in, which was considered consistent with French law as it has developed, until the adoption of the directive. The Florange Law has opted out of article 9, allowing management bodies to take frustrating measures without any approval from the shareholders’ meeting, except as otherwise provided for in the articles of association. These new rules will apply to tender offers filed from 1 July 2014.

15 Public M&A 2013/14: the leading edge

• Creation of an automatic double voting right in listed companies. Granting double voting rights for registered shares held for more than two years by a shareholder will now be automatic, unless otherwise expressly provided (after the Florange Law comes into force) in the articles of association ...the scope of the of the company. Under the previous regime, granting double voting rights was protectionist rules only an option for listed companies. has significantly Another important change to the legislative framework for cross-border been extended to transactions in France is the decree n° 2014–479 dated 14 May 2014, relating include more general to foreign investments subject to prior governmental authorisation. Under these rules, transactions that are deemed to have an impact on French national business sectors security (eg transactions in the military sector) require prior authorisation like gas, electricity, by the French government. Against the background of the proposed acquisition transport, water of Alstom, the largest energy and transport systems company in France, by US- based General Electric, the scope of the protectionist rules has significantly been supply, electronic extended to include more general business sectors like gas, electricity, transport, communications water supply, electronic communications and public health, provided that the and public health... sensitive activities are ‘essential to guarantee the country’s interests in relation to public order, public security or national defence’. The French Minister of Economy has stated that the decree is a ‘rearmament of [French] public authority’ notably intended to encourage foreign investors to enter into alliances with French companies, rather than acquiring them. The European Commissioner for the Internal Market and Services (Michel Barnier) indicated that the compliance of the decree with European law would be ‘reviewed very carefully’. Case studies Freshfields advised Icade on its bid for Silic: a ‘litigation offer’ The case involved two French listed companies: Icade as bidder and Silic as target company. Originally, Icade’s main shareholder was Caisse des dépôts et Consignations (CDC), owning a 55.58 per cent stake, and Silic’s major shareholder used to be Groupama, with a 43.95 per cent stake. The respective major shareholders agreed to combine Icade’s and Silic’s businesses under the umbrella of the holding company HoldCo SIIC (HoldCo) and entered into a shareholders’ agreement. In several steps, the major shareholders contributed their shares in Ican and Silic into HoldCo.

As a result, CDC held 75.07 per cent of HoldCo and Groupama held 24.93 per cent. HoldCo held 43.95 per cent of Silic’s share capital and voting rights so that it exceeded the control threshold of 30 per cent due to the contributions made by Groupama. Consequently, HoldCo, or any member of the concert comprising CDC, HoldCo and Icade, was required to file a mandatory offer for Silic. On 14 March 2012, Icade filed a mandatory tender offer with the AMF.

16 Public M&A 2013/14: the leading edge

The offer consisted of a share exchange offer for the Silic shares and a tender offer for the notes redeemable in cash and/or in existing and/or new shares (the ORNANEs) of Silic. The transaction was to create the leading commercial real estate company in France with assets of more than €10bn. Based on the valuations made in the context of the contributions by CDC and Groupama, Icade offered five new Icade shares for every four Silic shares tendered to the public exchange offer; and €126 for each Silic ORNANE (convertible bond) tendered to the cash offer. HoldCo had undertaken to tender all of its shares in Silic to the exchange offer.

The strategic benefit of this transaction for Silic and its employees had been recognised by the board of directors of Silic and the terms of the exchange offer had been deemed fair by the independent expert and by the board of directors of Silic, which recommended the offer. The AMF issued a conformity decision on 24 April 2012 and the offer was initially open from 27 April to 1 June 2012.

However, on 3 and 4 May 2012, a minority shareholder of Silic (SMA Vie BTP) and the French ‘Association for the Defence of Minority Shareholders’ appealed to the Paris Court of Appeal requesting in particular the cancellation of the conformity decision of the AMF. The minority shareholders reproached the unequal treatment of Silic’s shareholders compared with those of Groupama and considered that the financial conditions of the offer were insufficient. The AMF extended the offer until after the decision of the Paris Court of Appeal. On 27 June 2013, the Paris Court of Appeal rejected all appeals and confirmed the validity and regularity of the transaction. The AMF had undertaken to extend the closing date for the public offer so that it could be at least eight days after the decision of the Paris Court of Appeal.

Following the settlement of the offer, Icade held 93.28 per cent of the share capital and voting rights of Silic and 9.57 per cent of the ORNANEs. Finally, Silic was merged into Icade as of 31 December 2013 thereby closing the business combination project between Icade and Silic, which was launched on 12 December 2011. However, the remaining minority shareholders, which did not tender their shares to the offer, are claiming for a squeeze-out.

There are four take-away points from this transaction:

• the contribution of target shares to a bidder before the launch of an exchange offer does not impede the principle of open competition in bids and overbids;

• the AMF (as well as the French Court of Appeal) bases its decisions on the work of the independent expert to deliver its conformity decision;

17 Public M&A 2013/14: the leading edge

• contrary to case law in terms of voluntary offers, if the report of the independent expert did not conclude that the financial terms of the offer were fair, the AMF probably would not have issued a conformity decision; and

• the calendar of the public offer was particularly long (which created a risk of execution), since the AMF had undertaken to extend the closing date for the public offer so that it could be at least eight days after the decision of the Paris Court of Appeal.

MEIF4’s bid for Theolia: a failed friendly offer The failure of a friendly takeover offer is rare in France. However, MEIF4 AX Holdings SAS, which is controlled by Macquarie European Infrastructure Fund 4 (MEIF 4), experienced just that in summer 2013 after it launched a friendly takeover offer for Theolia (which the AMF had approved).

The aim of the offer was to provide French company Theolia, which operates in Europe and Morocco producing electricity from wind energy, with a long-term and majority shareholder that would provide stability in a difficult economic and regulatory environment. It was also aimed at providing the shareholders, the holders of the convertible bonds (OCEANEs) and the holders of the stock warrants (BSA), with immediate and total liquidity at an attractive price. The board-appointed independent expert deemed the offer fair from a financial standpoint, and all Theolia’s board of directors recommended the offer.

However, the offer was conditional; that is, it depended on the bidder getting at least two-thirds of the voting rights of Theolia and on clearance from the German antitrust authority. Although the antitrust authority approved the transaction, the offer lapsed because the only bidder received 64.79 per cent of the voting rights and so missed the threshold. So the tender orders were invalid.

The failure of the takeover offer is the result of the discontent of minority shareholders who challenged the financial terms of the offer. The €1.70 per share offered a premium of 51.8 per cent over the last share price, before the offer was announced, and 40.08 per cent over the volume-weighted average price over the previous month. But according to many individual shareholders, mainly long-term investors, this was 18 per cent less than the share price in September 2011.

Although Theolia noted that a number of its shareholders refused the offer, it deplored ‘the unfounded public accusations’ and the scheming that occurred shortly before the offer closed, which were rumoured to destabilise the company.

18 Public M&A 2013/14: the leading edge

Germany Deal activity €1.2bn During the past two years (H1/2012–H2/2013), 52 public offers for German The value of the offer extended companies have been published. Compared with the previous 24 months, from McKesson to the shareholders activity levels were slightly higher. Whereas the average of the potential value of Celesio AG was relatively high in 2010/11 (€896m), it dropped in the past two years (€407m). In 2012 the largest successful transaction was the takeover of the retail conglomerate Douglas Holding by Advent (€1.3bn). The largest transaction in 2013 was Vodafone’s takeover of Kabel Deutschland with a value of €5.7bn (100 per cent valuation of €7.7bn) which – due to opposition of US-activist shareholder Elliott – surpassed only narrowly a 75 per cent minimum acceptance condition and was completed in October 2013.

In Q1/2014, only four public offers were published. The largest offer with a value of €1.2bn was extended by McKesson to the shareholders of Celesio AG, following ...a previous takeover a previous takeover offer launched in December 2013 that failed after earlier offer... failed after opposition by US-activist shareholder Elliott and despite an increase of the offer price due to the non-satisfaction of the stipulated 75 per cent minimum earlier opposition acceptance threshold (reaching only 72.33 per cent). The new offer was pre- by US-activist agreed with Elliott (holding then about 30 per cent in Celesio, equalling an shareholder Elliott... investment volume of about €1bn) as well as the target company and not subject to any completion conditions. This offer raised doubts regarding the application of minimum pricing rules in determining the prior acquisition prices for the acquisition of New Celesio shares created by converting Convertible bonds.

Premium levels were higher in 2012/13 than in the past year, amounting to 18.9 per cent on average. However, in most cases only the minimum bid price was offered, which often was above market price due to pre-bid purchases. If any premiums were offered, they amounted to up to 70 per cent above the statutory minimum bid price averaging out at 28 per cent. Almost all offers were cash offers. Only one was a share-for-share offer, which was published in October 2013 and involved two listed real estate companies (Deutsche Wohnen/ GSW). The planned (but not formally published) takeover of Kabel Deutschland by Liberty Global included a mixed consideration, ie a share component, but was abandoned due to antitrust reasons. In the past two years, only one competing bid was published, and this concerned only a small cap company.

19 Public M&A 2013/14: the leading edge

Market trends • Despite having disclosure obligations for financial instruments, like irrevocable undertakings or conditional share purchase agreements, there is still a high level of pre-bid deal protection (eg by agreeing on irrevocable The strategy of the undertakings or conditional share purchases or by prior market purchases). target management In seven cases business combination agreements were entered into before in case of a hostile or the bid. neutral takeover bid • To channel market expectations and increase market acceptance when has changed. making the offer, many bidders prefer to disclose key economic terms (often including bid price) early on. Often this is published when the intention to launch on offer is announced. Virtual bids are, however, still uncommon in Germany.

• Even though bidders tend to thoroughly prepare their bids, in many cases the board statements to the takeover bids were either neutral or even negative. The strategy of the target management in case of a hostile or neutral takeover bid has changed. The intention is not to hinder the takeover, but to increase the bid price by intense media communication, talks with major shareholders and revision of business planning and forecasts.

• Private equity bidders take up about a third of all takeover bids.

• In many cases, in particular in public-to-private deals, eg Advent’s takeover of Douglas, minimum acceptance thresholds have been stipulated in takeover offers. The increased use of minimum acceptance thresholds (mainly 75 per cent) is supposed to enable the bidder to integrate the target after closing of the bid, either by squeeze-out or domination and profit transfer agreement and/or consolidation.

• Activist shareholders have entered the big-ticket takeover scene (again) investing substantial funds to have the bid price increased (see Elliott/ Vodafone/Kabel Deutschland; Elliott/McKession/Celesio).

20 Public M&A 2013/14: the leading edge

• The takeover attempt of Rhön-Klinikum by Fresenius with a potential transaction value of more than €3bn failed due to stake-building by hostile stakeholders (ie competitors to Fresenius). Fresenius published a takeover offer conditioned by a minimum acceptance threshold of 90 per cent plus The takeover attempt one share. Irrevocable undertakings were concluded regarding only roughly with a value of more 12 per cent of all shares. To secure a successful offer, the bid price included a premium of more than 50 per cent. However, on the last day of the offer than €3bn failed due period Asklepios – a clinic competitor – released that it was holding a share to stake-building by of 5.01 per cent, and the takeover attempt failed. Finally, however, Fresenius hostile stakeholders. found a different way to reach its goals: in September 2013, Fresenius announced that it was acquiring 43 hospitals and other assets from Rhön Klinikum AG for a consideration of €3.07bn. The transaction was structured as an asset deal, not involving all of Rhön’s assets and therefore without the need of approval from Rhön Klinikum’s shareholders.

• The Federal Supreme Court decided that a target company’s shareholders cannot claim consideration (ie cash or shares) when a mandatory offer is not published despite an attainment of control and the violation of the obligation to publish and to make an offer. The court also decided that an interest claim does not arise as long as a mandatory offer is not published. This means that interests have to be paid to the shareholders when a mandatory offer is published belatedly, but not when it is not published at all. In the latter case a fine of up to €1m may be incurred. However, target shareholders are still not protected because the fine has to be paid to German regulator BaFin.

21 Public M&A 2013/14: the leading edge

Case study Freshfields advised Goldin Group on its bid for Gigaset AG. Gigaset AG operates internationally in communications technology, manufacturing and distributing cordless and corded telephones and telephone systems. When its core business activity declined and it faced financial difficulties, it looked for an investor. The free-float of Gigaset shares was more than 90 per cent. Goldin Group, owned by Hong Kong-based entrepreneur Mr Pan Sutong, operates, among other things, a consumer electronics division and was interested in holding 75 per cent of the shares in Gigaset.

In June 2013, Goldin and Gigaset entered into negotiations. To raise further funding, Gigaset planned a first capital increase and the issuance of convertible bonds, each with subscription rights. It wanted Goldin to act as a backstop investor for these rights issues. Goldin, however, was only willing to invest if it could have a minimum stake of 30 per cent immediately through these rights issues, and if the new shares were issued for €1 per share. The negotiations resulted in an investor agreement between Goldin and Gigaset, signed on 27 September 2013. The investor agreement provided for several capital increases and further issues:

• any shares of the first capital increase and convertible bonds not subscribed for by Gigaset shareholders will be sold to Goldin for an issues price of €1 per share (if in total, Goldin was able to acquire at least 30 per cent);

• Goldin is obliged to publish its decision to launch a public takeover offer at the date of signing the investor agreement;

• Gigaset will set up a new business unit for tablets, smartphones and other mobile communication devices;

• Gigaset will decide on a small, second capital increase without subscription rights (further 5m new shares) and Goldin will buy these shares if the price is €1 per share;

• Gigaset commits to invest the funds received from the first rights issues and any further capital increases into the new business unit;

22 Public M&A 2013/14: the leading edge

• Goldin will invest a certain amount in the new business unit, which will be operated by a subsidiary of Gigaset, and in return Goldin will receive preference shares in the subsidiary; ...during the acceptance • afterwards, a shareholders’ meeting of Gigaset should resolve a third capital period of the takeover increase and Goldin shall contribute these preference shares as a contribution in kind and receive new Gigaset shares in return, to the extent legally offer, Goldin... acquired possible, at an issue price for €1 per share; and roughly 45 per cent of the share capital • Gigaset commits to support Goldin’s interest to eventually receive the majority of the six seats in the supervisory board of Gigaset. by way of several capital increases. In the following, both the first capital increase and the convertible bonds were subscribed by few Gigaset shareholders only. So Goldin was obliged to pick up the rest of these rights issues, giving Goldin a stake of roughly 24 per cent of the shares, and, after conversion of the bonds into shares, a stake of roughly 42 per cent.

In parallel, Goldin launched its public takeover offer for the price of €1 per share. Only shortly afterwards, Gigaset resolved the second capital increase to issue a further 5m new shares. Therefore, during the acceptance period of the takeover offer, Goldin in total had already acquired roughly 45 per cent of the share capital by way of several capital increases. The public takeover offer was accepted by almost 11 per cent of Gigaset shareholders. So, at the end of December 2013, Goldin held roughly 55 per cent of the shares in Gigaset.

Up to now, three supervisory board members have resigned from their office and the shareholders have elected three representatives from Goldin as new supervisory board members. The setting-up and further funding of the new business unit of Gigaset has not yet been completed. And the third capital increase is still outstanding.

23 Public M&A 2013/14: the leading edge

Hong Kong and Singapore Deal activity 53 There were 53 public takeover offers in Hong Kong in 2013. The number of public takeover offers in Hong Kong in 2013 • All were recommended offers; hostile takeovers remain rare in the Hong Kong market.

• All but two of the transactions were cash offers. Of the others, one was a mixed cash and share offer and one a share only offer.

• Roughly half of the transactions were mandatory general offers.

• Only one offer was made by a financial investor; all others were There were 12 public made by strategic investors, five of which were privatisations takeovers in Singapore of a listed target by the controlling shareholder. in 2013. There were 12 public takeovers in Singapore in 2013.

• 10 were recommended and one was hostile. Only one deal had a competing bidder.

• All 12 offers were cash offers.

• There were five mandatory general offers.

• Seven deals were privatisations of a listed target by the controlling shareholder.

• No offers were made by financial investors.

24 Public M&A 2013/14: the leading edge

Market trends: Hong Kong Confirmation of financial resources In Hong Kong, the Executive of the Securities and Futures Commission (SFC), Recent developments which regulates Hong Kong takeovers, also plays a role in the cash confirmation process. This differs from the UK, where the process is completed without have seen the SFC involvement from the regulator. In Hong Kong it is common in bids for any more likely to accept non-bank debt financed cash component of consideration to be paid under alternative sources an offer to be ring-fenced in an account in Hong Kong before the launch of the offer. This has made it more challenging for financial investors to make of cash confirmation, offers for public companies without either drawing down cash before the such as equity announcement or putting in place a bridging facility. Recent developments, commitment letters. however, have seen the SFC more likely to accept alternative sources of cash confirmation, such as equity commitment letters. This is likely to help streamline the public offer process in Hong Kong and bring it more into line with the approach in the UK for private equity funds. Bids in Hong Kong by private equity funds do, however, remain rare.

Greenheart: the chain principle When 30 per cent or more of the voting rights in a Hong Kong-listed company are acquired, it triggers a mandatory obligation on the acquirer to make a mandatory cash offer for all the outstanding shares. Under the so-called chain principle, a mandatory offer obligation is also triggered by an acquisition of statutory control (ie more than 50 per cent) of a holding company that in turn holds 30 per cent or more of the voting rights in a Hong Kong-listed company, if the holding in the Hong Kong-listed company makes up 60 per cent or more of the holding company’s assets, or if the acquisition of the shares in the Hong Kong-listed company was one of the main reasons for the acquisition of the holding company.

As part of a restructuring plan following a debt default, Sino Forest Corporation, formerly listed in Toronto, proposed to sell the entire issued capital in a subsidiary that held over 30 per cent of the voting rights in Hong Kong-listed Greenheart Group Limited to a new holding company held by its creditors. This plan had been approved by noteholders of Sino Forest and the Ontario Court. But it had yet to be implemented when the Hong Kong Takeovers and Mergers Panel, a committee of the SFC, which supervises the Executive, was consulted. Given that the value of the stake in the Hong Kong-listed company itself was insignificant in the context of the overall restructuring and the intention behind the transaction was to implement the restructuring and not to acquire Greenheart, it was argued that this should be outside the scope of the chain principle.

25 Public M&A 2013/14: the leading edge

However, the panel ruled that:

• while it was clearly part of a larger series of interconnected transactions, the acquisition of the subsidiary that held the controlling block in Greenheart ...a partial offer allowed was a transaction in itself that was sufficient to trigger the chain principle; Yuexiu to buy up to 75 • there could be no waiver of the requirement to make a mandatory general per cent of Chong Hing, offer for the remaining shares in Greenheart as the proposed acquisition and maintain Chong clearly triggered this obligation under the provisions of the Hong Kong Hing’s listing. Takeovers Code; and

• in situations such as this, the SFC should always be consulted as early as possible.

This case highlighted both the need to consult the SFC early on, especially where the chain principle is involved and, in the context of the chain principle, that the SFC is likely to look at the significance of the Hong Kong-listed company to the holding company being transferred, even if it is part of a much bigger transaction.

Chong Hing Bank: partial offers One of the risks of a general offer that becomes unconditional is that, if the compulsory acquisition threshold is not achieved or if the offeror wishes to maintain the target’s listing, the offeror may have to restore the 25 per cent minimum public float. This can be done by either selling down existing shares it has acquired or ensuring that the target issues new shares. In either case this would likely be at a discount to the offer price and trigger a loss for the offeror.

In Yuexiu Financial Holdings’ partial offer for Chong Hing Bank, a partial offer allowed Yuexiu to buy up to 75 per cent of Chong Hing, and maintain Chong Hing’s listing. Unlike general offers (where the offeror must accept all shares tendered if the offer becomes unconditional), partial offers, though rare in Hong Kong, allow a bidder to acquire a fixed number of shares. Partial offers require both the consent of the SFC and independent shareholder approval (if the partial offer would result in the bidder holding 30 per cent or more of the voting rights in the target).

26 Public M&A 2013/14: the leading edge

The Chong Hing/Yuexiu transaction clarified two areas relating to partial offers:

• the SFC has accepted that an offeror with no existing target shareholding can launch a partial offer for more than 50 per cent of the shares in the The SFC should always target without triggering a mandatory general offer, if the offeror and its be consulted as early concert parties have not acquired voting rights in the target company in the six months before the start of the offer period; and as possible

• the Hong Kong Takeovers Code states that a partial offer must be made for a ‘precise number of shares’. In this example, while the offeror was happy to buy up to 75 per cent of the target shares, it would have been left with some uncertainty around whether the deal would be successful if the partial offer was for exactly 75 per cent of the target shares. The offeror was allowed to structure the partial offer so that it undertook to buy as many shares as are tendered by target shareholders until it acquired 75 per cent of the target shares (beyond which point, acceptances would be scaled down pro rata), subject to an acceptance condition of 50 per cent plus one share. This allowed the offeror to ensure that, should its offer become unconditional, it would acquire at least 50 per cent of the voting rights in the target, but that the target would also remain listed.

27 Public M&A 2013/14: the leading edge

Market trends: Singapore Fraser & Neave: deadlock options In 2012, two competing offers were made to win control over the Singapore- The Singapore listed conglomerate Fraser & Neave. This resulted in a drawn out deadlock that concluded in January 2013 after rival bidders led by Indonesia’s Riady family takeover regulator (SIC) backed down, allowing Thai businessman Charoen Sirivadhanabhakdi to take announced an open control of the company with an offer that valued the target at US$11.2bn. auction to resolve any This deal is interesting because the Singapore public takeover regime does not stalemate at the end provide for situations where a deadlock arises from competing public takeover of the offer period. bids that are unresolved by the end of the offer period. The Singapore takeover regulator (SIC) announced an open auction to resolve any stalemate at the end of the offer period.

Under this auction process, both parties would have been required to submit bids to the SIC, with each being given time to respond to the opposing bid. At the end of the auction, Fraser & Neave shareholders would have the right to vote on which bid to accept or to accept neither. The mechanism was not needed due to one of the parties backing out. But it drew attention to an area of uncertainty and compelled regulators to consider viable solutions and arrangements for breaking the deadlock.

Following the competing bids in 2004 between Morgan Stanley and Brascan Corporation for control of the Canary Wharf Group in the UK, on which Freshfields advised, a sealed bid option was followed. As a consequence of this deal, an auction process was introduced into the UK Takeover Code. While such deadlock scenarios remain rare in Singapore, it remains open for the public takeover regime to be amended to formally adopt a process to govern any future deadlock situation.

28 Public M&A 2013/14: the leading edge

Case study Freshfields advised dual Hong Kong/Singapore primary listed China Animal Healthcare (China Animal) on its delisting from the Singapore stock exchange The transaction of which required a cash delisting exit offer to shareholders funded in part by subscription by two equity investors for shares and warrants. involved complex subscription China Animal had a primary listing on both the Hong Kong and Singapore arrangements stock exchanges and wanted to delist from Singapore while maintaining its primary listing in Hong Kong. The delisting was effected by a resolution of to provide equity China Animal’s shareholders with a 75 per cent majority and a subsequent financing for China delisting cash exit offer made by way of selective capital reduction (similar Animal’s possible to a share buy-back by way of general offer) governed by the Hong Kong and delisting offer. Singapore Takeovers Codes to give all shareholders the opportunity to exit the company. The transaction involved complex subscription arrangements to provide equity financing for China Animal’s possible delisting offer. The complexity was partly driven by the application of both the Hong Kong and Singapore listing rules and takeovers codes as well as the need to cater for different levels of shareholder take-up under the delisting offer. There were two issues that the equity financing needed to address.

• China Animal had a controlling shareholder holding 53 per cent of the voting rights. If a straight issue of shares were made to any new investors to fund the delisting cash exit offer, it would dilute the controlling shareholder to below 50 per cent. On completion of the selective capital reduction, the voting share capital of China Animal would decrease and the proportion of the voting rights in China Animal would be increased. If this increase were more than 2 per cent, the controlling shareholder would be forced to make a mandatory general offer for the remaining shares.

• If there were a high take-up of the delisting cash exit offer, on completion of the delisting, there would not be the requisite 25 per cent of China Animal shares in public hands, which could cause a suspension of China Animal’s listing in Hong Kong.

29 Public M&A 2013/14: the leading edge

These issues were addressed through:

• the receipt of as many irrevocable undertakings as possible not to accept the cash delisting offer;

• the issue of warrants to subscribe for shares in China Animal to the new equity investors rather than shares. These warrants did not carry voting rights in China Animal and would only become exercisable when such exercise would not breach the public float requirements of China Animal. Accordingly, their issue would not dilute the voting rights of the controlling shareholder (thereby avoiding triggering a mandatory general offer) and prevented equity investors acquiring more than 10 per cent of the voting rights in China Animal and thereby no longer counting towards public float; and

• one equity investor prepaying for shares so that China Animal received the consideration for shares to be issued before the delisting cash exit offer became unconditional (thereby satisfying certain funds requirements), but delaying the issue of these shares until such issue would not breach public float requirements of China Animal.

30 Public M&A 2013/14: the leading edge

Italy Deal activity There has been only modest activity in the Italian public M&A market since Italian banks and 1 January 2013. There were only 10 public deals in 2013. In four of these, industrial companies financial investors launched tender offers, and strategic bidders launched six. terminated shareholders’ Market trends agreements that were • Italian banks and industrial companies terminated or decided to terminate traditionally used shareholders agreements that were traditionally used to control a number to control a number of listed companies, ie Pirelli, RCS MediaGroup and Prelios. As a result, of listed companies those companies will now become more open to the market and more targetable by potential bidders.

• Of the 10 deals completed in 2013, five were connected with some plan by the shareholder-offeror to delist the target company triggered by poor market conditions or low capitalisation.

• In its recent communications, Consob has favoured minority shareholders and the market in general. This has sometimes resulted in a stricter approach in assessing whether the conditions for a mandatory tender offer are satisfied.

• There has been an increase in the number of independent directors and, more in general, greater attention to the governance of public companies.

31 Public M&A 2013/14: the leading edge

Case studies Isagro and Gowan Piemme, which indirectly controls Isagro, a company in the agro-pharmaceutical market listed on the Milan stock exchange, and Gowan, a US agrochemicals company, entered into an agreement. As a result, Gowan would come to own an indirect shareholding in Isagro.

Under this scheme, Isagro would be indirectly owned by a Newco, owned by Piemme through a 51 per cent stake and by Gowan through a 49 per cent stake. The agreement granted to Gowan a de facto veto power for certain reserved matters (eg amendments to the bylaws, dividend distribution, the purchase or disposal of any shareholdings or business, etc), which would require a super-majority quorum at the shareholders meeting and the board of directors of Newco. In respect of the governance of Isagro, the agreement also sets out a consultation procedure to be followed before any shareholders or board of directors meeting called to resolve certain matters (eg mergers, demergers, acquisitions, etc).

Under the Italian Consolidated Financial Act, it may appear that Piemme and Gowan, acting in concert, have joint control over Isagro and are obliged to launch a mandatory tender offer. But Consob clarified that the transaction does not trigger any obligation to launch a mandatory tender offer. This is on the basis of the limited governance powers granted to Gowan. In fact, under the framework agreement, Piemme will still be entitled to designate the majority of the directors of Isagro and the veto powers of Gowan mainly concern matters that fall under applicable law within the competence of the extraordinary shareholders meeting.

32 Public M&A 2013/14: the leading edge

Telecom On 24 September 2013, Assicurazioni Generali, Intesa Sanpaolo, Mediobanca and Telefónica, Spain’s major broadband and telecommunications provider, The Telecom case entered into a shareholders’ agreement concerning their respective shares in Telco. Telco owns a 22.4 per cent stake in Telecom Italia, the largest Italian prompted debate in telecommunications company, listed on the Milan stock exchange. In this Italy on the threshold agreement, Telefónica subscribed non-voting shares from an increase in the triggering a mandatory capital of Telco and undertook to subscribe other non-voting shares to be issued by Telco in the context of a further capital increase, subject to the necessary tender offer. authorisations from the antitrust and telecoms authorities. Telefónica will be entitled to convert its non-voting shares into voting shares. The shareholders agreement also grants Telefónica an option right to buy the shares owned by Assicurazioni Generali, Intesa Sanpaolo and Mediobanca.

Although Telefónica did not, at the time of execution of the shareholders agreement, own sufficient shares to control Telco, it may eventually come to own the majority of the voting shares of Telco. Since the fragmented capital structure of Telecom Italia allows Telco to exercise de facto control over Telecom Italia with a 22.4 per cent stake, by gaining control over Telco, Telefónica will also indirectly be able to control Telecom Italia. Under current legislation, however, Telefónica will not be required to launch a mandatory tender offer on Telecom Italia. Consequently, only Assicurazioni Generali, Intesa Sanpaolo and Mediobanca will benefit from the share premium paid by Telefónica.

The Telecom case prompted debate in Italy on the rules of the Italian Consolidated Financial Act on the threshold triggering a mandatory tender offers. Currently, the Act provides for a strict and formal 30 per cent control threshold whereas the Telecom case has showed that it is possible to gain control without owning 30 per cent of the voting rights. Therefore, policymakers are debating the adoption of a new test triggering a mandatory tender offer already if a person acquires securities that are sufficient to exercise de facto control over a listed company (even if less than 30 per cent). The debate has been intense for a few months and, although it seems to be cooling off a bit now, it is difficult to predict whether and how the provisions in force will be amended.

33 Public M&A 2013/14: the leading edge

Japan Deal activity • The last year has seen an increase in tender offer bids in Japan compared Offer documentation... with 2012 – 56 compared with 48. The annual number of these bids has been is increasing in length around this figure since 2010, which represents a 40 per cent decrease from and detail... as bidders the peak of public M&A activity in Japan in 2007. look to avoid the • A significant proportion of the bids in Japan continue to be management risk of litigation for buyouts (20 per cent), and the average premium on the tendered shares under insufficient disclosure. the bids in 2013 was between 40 and 50 per cent. Both trends are largely consistent with the findings in 2012.

Market trends • Offer documentation provided by bidders is increasing in length and detail – including full explanations of the reasons behind the bid and how the price has been calculated – as bidders look to avoid the risk of litigation for insufficient disclosure.

• Bidders are increasingly focused on ensuring that a management buyout bid process is transparent, fair to all shareholders and that potential conflicts of interest are removed. Many bidders in such bids now specify a minimum level of acceptances, below which the bid will not be successful, to ensure that the bid has the support of the ‘majority of the minority’ shareholders. In some instances, the independent committee of the target (ie a committee not including any individuals involved in the management buyout bid) has obtained a valuation report and retained separate legal counsel.

• Some private equity involvement: financial sponsor bids are generally made together with the existing management in a management buyout situation.

• In certain circumstances, a proposed share purchase would require the buyer to make a mandatory bid under the public takeovers rules in Japan. A recent trend is the use of discounted tender offer bids, in such circumstances, to discourage shareholders from accepting the mandatory bid and ensure that the proposed share purchase goes ahead but the listed status of the company is not jeopardised.

34 Public M&A 2013/14: the leading edge

Case study Cerberus offer for Seibu: hostile bids rarely successful in Japan Seibu Holdings Inc. is a holding company established after the delisting of Hostile bids rarely Seibu Railway Co., Ltd. from the Tokyo Stock Exchange for incorrect financial successful in Japan statements. Even though Seibu is not listed, as a company with more than 1,000 shareholders, the public takeover rules in Japan still apply to any purchase of shares in Seibu where the buyers’ holding exceeds one third.

In March 2013, Cerberus Group, the largest investor in Seibu with a shareholding of 32.4 per cent, launched a tender offer bid for shares in Seibu in accordance with the public takeover rules, which was intended to raise its shareholding to 45 per cent of the voting rights. This would put Cerberus into the legal position to block certain key decisions, such as a merger or amending the articles.

The Seibu board opposed the tender offer. As a result, Cerberus fell short of its target shareholding and ended up with merely 35.5 per cent. This did not change Cerberus’s position much because even with the previous shareholding (32.4 per cent) Cerberus had a de facto veto right given the low attendance ratio of shareholders at any shareholders’ meeting in the past.

In addition, Cerberus submitted a shareholder proposal for the appointment of certain directors nominated by Cerberus, but the proposal was turned down at the shareholders’ meeting. The public battle between Cerberus and the management of Seibu resulted in a deadlock waiting to be resolved.

The small amount of shares tendered is a good example of the reluctance of Japanese shareholders to support a bid that the target’s board does not support. Hostile offers are rarely successful in Japan.

35 Public M&A 2013/14: the leading edge

Netherlands Deal activity Dutch blue chip companies attracted quite some interest from foreign There seems to be competitors and investors in 2013. We saw takeover attempts of KPN increased interest of (€10.2bn) and TNT Express (€5.2bn) and a successful takeover of DE Master private equity houses in Blenders (€5.7bn). 2014 started promising by Liberty Global announcing its recommended offer for Ziggo (€10bn), but otherwise deal activity in public listed companies in the M&A is still relatively low. equity value category €500m to €1.5bn. There seems to be increased interest of private equity houses in listed companies in the equity value category €500m to €1.5bn. In March 2013, Advent successfully completed its bid for Mediq, thereby marking the first private equity public-to-private since 2007. Advent remained in deal mode by acquiring Unit4, another Dutch listed company, early 2014.

Market trends • The challenging deal-making environment has increased the relevance of limited conditionality and high deal certainty. Targets often require a bidder to accept a high degree of antitrust risk. As a consequence, we have seen more extensive pre-announcement exchange of data that are relevant to complete the antitrust analysis. Also, targets increasingly insist on certainty of funds at the date of announcement. Financing banks are therefore increasingly involved in the deal at an early stage of the process. Given the number of people involved, managing confidentiality has become even more of a priority.

• A number of public bids was made by parties who either already had a large stake (>20 per cent) in the target or built up a large stake immediately following announcement of the offer (eg, KPN, Ziggo, Dockwise). The kick- start acquisition of a substantial interest in the target may frighten off potential interlopers. In addition, such a strategy puts pressure on the target to enter into discussions and give access to due diligence. For obvious reasons, private equity bidders are not normally in a position to acquire shares in a target before completion and may therefore be one step behind in competitive takeover situations.

• Discussions between bidder and target on merger protocol items have increasingly shifted towards a focus on non-financial covenants. Typical non-financial items include covenants in respect of strategy, governance, integration, organisation, maximum leverage and social covenants (employees, brand, head office, etc).

36 Public M&A 2013/14: the leading edge

Changes to the legislative framework In July 2012, amendments to the Dutch Takeover Rules entered into force. These were introduced to increase transparency, streamline the offer process and fine-tune the rules on mandatory offers. Put up or shut up – the Dutch Takeover • Put up or shut up. The Dutch Takeover Rules now provide for a ‘put up Rules now provide or shut up’ rule to protect a target company from being held hostage by a potential bidder. In case a potential bidder has published information that for a ‘put up or shut suggests it is considering a public offer, a target may ask the AFM, the Dutch up’ rule to protect a regulator, to instruct the potential bidder to disclose its intentions. If the target company from AFM does so and the potential bidder does not subsequently announce an intention to make a bid, the bidder will not be permitted to make an offer being held hostage by for a freeze-out period of six months. The same freeze-out period applies if a potential bidder. an offer is made but subsequently withdrawn. So far, the new put up or shut up rule has not yet resulted in any AFM instructions. The AFM has not been given authority to unilaterally (without the target’s request) impose a put up or shut up restriction.

• Stop the clock. A mandatory timetable for public offers is triggered when parties have reached (conditional) agreement on the terms of the offer or when a potential bidder announces specific information about its intended bid, eg as a result of a leak. The new rules cater for a ‘stop the clock’. If the target favourably responds to a leak announcement by the bidder, by stating that it is in discussions with the bidder, the parties will have the opportunity to continue negotiations without being squeezed into the mandatory timetable and the corresponding regulated track. In the public bid for Dockwise by Boskalis, we learnt that the AFM considers this exception to be for the benefit of the target and will therefore only consider the exception to be validly invoked if the target explicitly refers to it in its announcement. In other words, the fact that negotiations are ongoing will only ‘stop the clock’ if the target so wishes.

• Increase of offer price. A bidder is permitted to increase its offer price multiple times during the offer period, subject to re-confirmation of certainty of funds. Also, if the offer period is open for less than seven days at the time of the price increase, the offer period is extended by virtue of law so that the offer be open for seven days after the increase. During this statutory extension period, no additional price increases are permitted. If a price increase is offered at the end of the offer period (eg Advent/Mediq), such increase will need to be pitched carefully, as there will only be one final chance to persuade the target shareholders, also because the best price rule that applies following completion of the offer provides for a prohibition for the bidder to acquire target shares at a price that is higher than the offer price for a period of one year.

37 Public M&A 2013/14: the leading edge

Points to watch In the Netherlands, post-merger restructuring measures diluting the remaining minority shareholders in the target have been litigated in the past (eg Shell, Versatel). The Amsterdam Court of Appeal has ruled that post-offer restructuring ...restructuring measures (other than the statutory squeeze-out proceedings available to a bidder measures with holding more than 95 per cent of the shares in the target) implemented with the dilutive effects... sole purpose of diluting the remaining minority are not permitted. Therefore, restructuring measures with dilutive effects, such as a statutory merger or an must be based on intra-group contribution of assets, must be based on sound commercial reasons sound commercial that benefit the target and its stakeholders. reasons that benefit The offer memorandum on the recommended bid for DE Master Blenders the target and its by Benckiser provided full disclosure on the steps to be taken post-completion stakeholders. should the 95 per cent threshold not be reached. To have all approvals in place for such a scenario, the existing shareholders of DE Master Blenders were asked to vote on a pre-wired restructuring, subject to the condition precedent that less than 95 per cent of the shares would have been acquired following completion of the offer. The structure would result in the remaining minority shareholders of DE Master Blenders receiving liquidation proceeds equal to the offer price per share. This approach was quite a novelty as, notwithstanding the absence of a compelling corporate interest, it involved the upfront support of the board of DE Master Blenders. The structure remained untested as the offer acceptances were above 95 per cent, but now serves as a conceptual precedent. We expect similar structures to be used more often, as evidenced also by Liberty Global’s recent bid for Ziggo. In particular, when private equity bidders are involved, lenders will require pre-wired solutions ensuring full integration within a reasonable time frame following completion of the offer. Case studies América Movíl’s creeping acquisition attempt in respect of KPN Dutch Takeover Law provides for the scenario of a partial offer, resulting in the holding of up to 30 per cent of the target shares. This partial acquisition scenario has hardly ever been used. However, in spring 2012, América Móvil announced a partial offer (up to 28 per cent) for KPN. The boards of KPN rejected the partial offer. América Móvil decided not to await the outcome of its partial offer and acquire shares through stake building in the market up to roughly 25 per cent. Only a residual portion of roughly 3 per cent was formally acquired under the offer. KPN was forced to change its position towards América Móvil just a few months after completion of the partial offer, when América Móvil’s vote was required for a rights issue under a recapitalisation programme. In exchange for this support, parties entered into a relationship agreement, stipulating, among other things, that América Móvil would be entitled to nominate two individuals to KPN’s supervisory board.

38 Public M&A 2013/14: the leading edge

We expect that partial offers may be considered more often in the future, particularly by strategic bidders. The instrument may be used to get a near- control position in respect of a target or to test investors’ appreciation in anticipation of a full offer. Since attendance levels at general meetings are ...protective preference relatively low (45–60 per cent), an interest of just below 30 per cent (ie the shares are created for mandatory offer threshold) may still give de facto control to its holder. defensive purposes Only a few months after the equity injection, KPN announced its intention and may be issued to to sell its German operations (E-Plus) to Telefónica. This made América Móvil safeguard the interests decide to end the relationship agreement and announce a full offer for KPN. of the target and its As is common in the Netherlands, KPN had granted a call option to Stichting stakeholders. Preferente Aandelen B KPN, a foundation acting as a protective trust, to acquire protective preference shares up to a maximum of 50 per cent of the issued shares (less one share) – on a fully diluted basis. Such protective preference shares are created for defensive purposes and may be issued to safeguard the interests of the target and its stakeholders. The objective of the issuance of protective preference shares is to create a level playing field and to encourage a constructive dialogue between bidder and target. The KPN Foundation decided to exercise its option on the basis that América Móvil opted for a hostile approach and had not sought to negotiate with the KPN boards, as is common in the Netherlands. This was considered even more important in this case, taking into account the importance of KPN’s services and networks in the Netherlands with a view to national security, telecoms infrastructure and privacy.

Although KPN and América Móvil did start negotiations following the issuance of protective preference shares, no agreement was reached and América Móvil decided not to proceed with its full offer. However, whether or not the intervention has successfully turned away the threat remains to be seen. In the meantime, the protective preference shares have been redeemed and, theoretically, the battle may start all over again.

39 Public M&A 2013/14: the leading edge

Spain Deal activity The last few years have shown a low level of public M&A deal activity in Spain. Rather low deal This is founded in the economic recession and driven by ongoing restructurings, activity due to deleveraging and divestment by Spanish companies. In 2013, there were only six economic recession announced and completed offers, with aggregate value just below €400m. and ongoing Market trends restructurings. Even though there are few market precedents, the following points may be taken from these deals:

• three of the six offers were recommended offers, and there were no hostile offers, with the remaining three deals being delisting offers;

• all the offers included cash as the only consideration, and only one involved debt financing;

• strategic bidders made half the offers, including one delisting offer;

• irrevocable undertakings and/or shareholder commitments were common, being present in four of the six deals; and

• none of the offers had antitrust conditions, break-fee arrangements or a competing bidder.

40 Public M&A 2013/14: the leading edge

Changes to the legislative framework On 8 March 2014, changes were introduced to the takeover rules by Royal Decree-law 4/2014 on urgent measures concerning the refinancing and restructuring of corporate debt. Going forward, the exemption to make The Spanish a mandatory offer shall apply automatically, without need of prior approval government launched from the Spanish regulator (CNMV), in the case of an acquisition of control the National Reform of a listed company as a consequence of acquisitions and other transactions related to the conversion or capitalisation of credits, provided that such Programme... expected conversion or capitalisation is conceived to secure the future financial viability to enhance investors’ of the affected company and results from a refinancing agreement that has perception of the been, in accordance with applicable insolvency laws, judicially approved and supported by an independent expert appraisal report. Spanish securities market and to help Earlier, in 2013, the Spanish government launched the National Reform increase deal activity. Programme, framed into the reformist agenda of the last couple of years. The programme includes measures to improve the effectiveness and ability of the Spanish economy to compete, as well as to overcome the difficulties faced by investors in getting financing to operate in the financial markets. This includes the reform of the Corporate Governance framework, intended to strengthen transparency and good corporate governance practices of public companies. The reform is expected to enhance investors’ perception of the Spanish securities market and to help increase deal activity.

A committee of experts was set up to analyse the existing Spanish framework on corporate governance. It issued its report, including proposed measures for improvement, in October 2013. On this basis, a draft bill on matters of corporate governance has been introduced into the legislative process, which is intended to result in an amendment of the Spanish Companies Act during 2014. The draft bill enlarges the role of general shareholders’ meetings in matters such as instructing the board on management decisions and overseeing remuneration policies of the governing bodies and senior management. The draft bill increases the scope of minority shareholders’ rights, as it is intended to lower the threshold for the exercise of certain rights from 5 per cent to 3 per cent of the share capital. In addition, the draft bill regulates directors’ pay, while it also reinforces directors’ duties, with a view to intensify the responsibility of directors in increasing the value of companies.

41 Public M&A 2013/14: the leading edge

Points to watch Under Spanish takeover law, voluntary offers can be subject to conditions, if they meet certain regulatory standards. For a condition to be admissible, it must, in particular, refer to a specific event and, when required, it must ...voluntary offers be quantified. Compliance and non-compliance with, as well as verification of, can be subject the conditions must not depend on the will or actions of the bidder. The prior to conditions, if announcement of the offer for the renewable energy company Fersa Energías Renovables, S.A. (Fersa) included several conditions, one of which was they meet certain maintenance by the company of ownership and economic rights of its regulatory standards. most important projects and associated assets. However, this condition was dismissed as it gave too broad discretion to the bidder. Alternatively, following discussions with the Spanish regulator (CNMV), a statement was included in the offer document saying that one of the essential objectives of the offer was for Fersa to maintain these projects and warning that the bid could be withdrawn in the event of a material adverse change, subject to prior consultation with and approval of the CNMV. So, contrary to the condition originally included, the bidder was no longer able to decide to withdraw the offer unilaterally. Share prices rising above valuations Improved conditions in Spanish capital markets during the last year have resulted in share prices rising above valuations of investors. As a result, of investors disposals of controlling stakes are being thwarted because of the difficulties posed by existing offer pricing rules under Spanish securities laws. In effect, such rules grant the CNMV the authority to request that the minimum offer price – in a mandatory takeover scenario – be no less than the target’s share trading price, thereby making potential deals less attractive as bidders would be forced to buy out minorities at a higher price.

42 Public M&A 2013/14: the leading edge

Case studies IAG Group’s bid for Vueling Airlines This cash-only offer was made by Veloz Holdco, S.L. (bidder), a wholly-owned subsidiary of IAG, which is also the parent company of Iberia and British Airways, for Vueling Airlines (target). IAG controlled 45.85 per cent of the target through Iberia which, by virtue of an agreement with the bidder, committed not to tender its shares into the offer, nor transfer those shares before the transaction was complete. The tender offer qualified as a voluntary offer so that it was not necessary that the initial price offered (€7 per share) be an equitable price in terms of mandatory takeover rules.

The target’s board opposed this bid because it offered no premium to the market price. This opposition was welcomed by the market causing the target’s share price to rise by almost 5 per cent. Under pressure from various shareholders, the bidder increased its offer by 32 per cent from €7 to €9.25 per share – coinciding with the resignation of Iberia’s CEO. The bidder also extended the acceptance period and reduced the minimum acceptance threshold from almost 95 per cent to 50.01 per cent of the voting rights (including those already owned). Then, the target’s board recommended accepting the amended bid.

Sigma Alimentos’s bid for Campofrío in partnership with Shuanghui As a result of an intra-group merger in 2008, global food giant Smithfield Foods indirectly owned a 37 per cent stake in Campofrío. At the time, the Spanish regulator (CNMV) granted an exemption to the obligation to file a mandatory bid, subject to certain conditions.

In 2013, Chinese meat processing company Shuanghui and Smithfield Foods agreed a merger whereby the former would absorb the latter so that Shuanghui picked up an indirect 37 per cent stake in Campofrío, which triggered a mandatory bid obligation. Shuanghui announced that it would dispose of certain of its shares in Campofrío to avoid submitting a full takeover offer.

In November 2013, Sigma Exterior, belonging to dairy-to-meats group Sigma (the food arm of Mexican conglomerate Alfa), acquired a 44.72 per cent controlling stake in Campofrío, which, in turn, required Sigma group to launch a mandatory bid. Consequently, a subsidiary of Sigma Exterior filed a full takeover bid for all Campofrío’s shares with the CNMV, offering €6.80 per share in cash (slightly more than €1bn in total).

However, Shuanghui was unwilling to give up its holding in Campofrío. Against this background, Sigma and Shuanghui agreed to jointly bid for and run Campofrío. Under this agreement, after completion of the offer, Sigma will hold a 44.72 per cent stake in Campofrío and will appoint four members to the board, while Shuanghui will own 36.99 per cent and will appoint three members to the board.

43 Public M&A 2013/14: the leading edge

UK Deal activity The last two to three years have been very slow in the UK for big-ticket public There are indications M&A with only a few notable exceptions. According to data from the UK that more public Takeover Panel, there has been a seven-year, year-on-year decline in UK public M&A deals are M&A volumes. As shown, deal numbers and value in 2013 lagged far behind 2012. Many commentators have, as in other recent years, predicted an increase being considered in UK public M&A activity in 2014. However, the first quarter has seen only and explored, seven offers announced, compared with 11 in the first quarter of 2013. That compared with 2013. said, there are indications that more public M&A deals are being considered and explored compared with 2013, including by financial sponsors.

Number of deals

Plus 1 deal 2011 2012 2013 19 24 9 Main Main Main Market Market Market deals deals deals Total Deals Total Deals Total Deals 47 56 39 25%

27 32 30 AIM AIM AIM deals deals deals 12.5%

Value of deals 2011 2012 2013

21 32 27 ≤£100m ≤£100m ≤£100m totalling totalling totalling £677,380,000 £852,000,000 £552,100,000

Total Deal Value Total Deal Value Total Deal Value £19,783,030,000 £54,006,000,000 £10,223,380,000

26 24 12 ≥£100m ≥£100m ≥£100m totalling totalling totalling £19,107,400,000 £53,153,700,000 £9,700,210,000

44 Public M&A 2013/14: the leading edge

Market trends Aside from a decline in deal activity, the following recent trends have emerged.

• Most – 32 out of the 39 – offers in 2013 were recommended by the target. The challenging deal- As usual, bidders have preferred schemes of arrangement when implementing making environment larger acquisitions – eight out of 13 of the highest offers (≥£100m) by value has increased the were implemented by way of a scheme. The offer for ENRC was structured as a tender offer as it was not being recommended by the target’s independent popularity of cash board committee, but provided a right to elect to implement the acquisition consideration. by way of a scheme. Of the less valuable deals (<£100m), 15 were tender offers and 11 were offers by way of a scheme.

• The challenging deal-making environment has increased the popularity of cash consideration. All but six of the offers made in 2013 had a cash element. Of these, 25 were all-cash offers. This is partly explained by the increasing dominance of non-UK bidders, which used solely existing cash resources to make 62 per cent of bids.

• 2013 saw an increase in market purchases that triggered the obligation to make a mandatory offer for the remaining shares in the target company under Rule 9 of the Code. There have been six such offers in 2013, compared with only three in 2012.

• The target’s employee representatives only issued an opinion on the likely effects of the acquisition for the target workforce in two of the 39 firm offers announced 2013. These opinions generally supported or, at worst, were neutral towards the proposed takeover.

Changes to the legislative framework Our last ‘Public M&A: the leading edge’ discussed changes to the City Code on Takeovers and Mergers made in 2011. The panel reviewed the impact of these changes in November 2012 and reiterated its findings in its 2013 annual report. These are the main takeaways from the panel’s review.

• The changes designed to protect target companies against protracted ‘virtual bid’ periods (ie where a potential bidder announces that it is considering making an offer but without committing itself to doing so) have achieved their objective.

• The general ban on ‘deal protection measures’ has redressed the balance in favour of target companies by limiting the tactical advantage of bidder companies.

45 Public M&A 2013/14: the leading edge

• The requirement to disclose the fees and expenses expected to be incurred in relation to an offer in offer documents and target board circulars has created more transparency. The market is still • The quality and detail of disclosures by bidders of their intentions with adjusting to the regard to the target and its employees have improved. However, disclosures typically continue to be generic and caveated. ban on offer-related arrangements... • Further amendments to the Code came into effect on 30 September 2013. Among other things, these changes bring a number of companies under the ambit of the Code that had previously not been subject to it (in particular, to certain AIM listed companies). In addition, new rules were introduced in respect of profit forecasts and financial benefit statements made by target companies and bidders that offer securities in full or part consideration for the takeover offer.

Deal protection measures The market is still adjusting to the ban on offer-related arrangements, such as implementation and break fee agreements, introduced to the Code in 2011, with bidders and targets testing the boundaries of the ban. There are several developments of note in this area.

• The panel is generally satisfied that this rule has achieved its goal. But it has criticised parties or advisers for trying to introduce other forms of deal protection in co-operation or other agreements that go beyond the narrow list of exceptions set out in Rule 21.2(b) of the Code. The panel has issued a formal panel statement, which notes that the Executive will take appropriate remedial action for further breaches of Rule 21.2 of the Code.

• 2013 saw the panel grant two dispensations from the general ban on break fee agreements. Both were for offers made in a formal sale process run by the target. This brings the total number of formal sale process dispensations since the 2011 amendments to three (only one was granted in 2012) and acts as a reminder, given the far higher number of formal sale processes in the period, that not every formal sale process will include a break fee arrangement and, even if otherwise agreed to by the parties to the offer, the Panel’s consent is still required.

• The white knight dispensation (Note 1 on Rule 21.2 of the Code), under which the Panel consents to the target entering into a break fee arrangement with a competing bidder where another bidder has announced a hostile offer for the target, is yet to be used.

46 Public M&A 2013/14: the leading edge

• Shareholder break fee arrangements are not yet common practice. (2012 saw two offers with such arrangements, and there was only one such offer in 2013). However, we continue to expect bidders to turn to arrangements with large shareholders where possible, to gain a degree of deal protection.

• Offers made in 2013 made some use of non-director shareholders’ irrevocable undertakings: 18 per cent (a decrease from 29 per cent in 2012) included undertakings with matching or topping rights for the bidder that could be exercised if a higher competing offer was announced (the bidder then being granted from four to 14 days to announce a revised offer); 23 per cent (compared with 14 per cent in 2012) included non-solicitation undertakings, (prohibiting the shareholder from encouraging or soliciting competing offers for the target); and 10 per cent (compared with 7 per cent in 2012) included undertakings from the shareholder to notify the bidder of any approach by a third party that may lead to an offer for the target.

• In respect of irrevocable undertakings given by target company director shareholders, the panel has confirmed that it considers matching or topping rights, non-solicitation and notification undertakings and commitments to recommend a bidder’s offer, to conduct the target business in a particular manner during the offer period or to assist the bidder with its bid in certain ways (such as by providing it with information on the target, by assisting the bidder with the preparation of its offer documentation or the satisfaction of its offer conditions or by convening board meetings and/or voting in favour of board resolutions that are necessary to implement the offer), in each case, as banned offer-related arrangements under Rule 21.2 of the Code.

Points to watch As of 20 May 2013, the Code contains a new requirement for bidders to disclose their intentions with regard to employer contributions into a target’s pension scheme(s). The nature and extent of bidder disclosures under this new requirement should be monitored.

47 Public M&A 2013/14: the leading edge

Case studies Offer by Alexander Machkevitch, Alijan Ibragimov, Patokh Chodiev and the State Property and Privatisation Committee of the Ministry of Finance of the Republic of Kazakhstan for ENRC (Eurasian Natural Resources Corporation PLC) Freshfields advised the independent committee of ENRC on the transaction.

This offer was a take private deal by the trio of central Asian oligarchs who founded ENRC. It was supported by ENRC’s two other major shareholders, the government of Kazakhstan (which formed part of the consortium with the three oligarchs) and Kazakhmys PLC (which was treated as ‘a party to the offer’ for the purposes of the Code).

An independent committee of ENRC’s board, formed to consider the offer, was of the view that the initial proposal by the consortium of bidders materially undervalued the target. Nevertheless, prompted by the consortium, it twice requested that the panel extend the put up or shut up deadline.

A final offer was made on 24 June 2013, nearly six weeks after the initial proposal and on less favourable terms. The independent committee did not recommend the offer because it maintained it materially undervalued ENRC. However, it concluded that there may be reasons for ENRC shareholders to seriously consider the offer. This was motivated by the independent committee taking into account a number of considerations including (among other things): the ongoing investigations by the Serious Fraud Office into allegations of fraud, bribery and corruption by ENRC in connection with its businesses in Kazakhstan and Africa; and the current level of borrowing within the ENRC group and the repayment dates of certain facilities which could put limitations on ENRC’s liquidity and ability to raise additional indebtedness.

Kazakhmys gave an irrevocable undertaking to accept the offer by the consortium for its ENRC shares conditional on: the Panel granting a Rule 9 waiver; and appropriate resolutions being passed at the general meeting of Kazakhmys. As both conditions were satisfied, Kazakhmys was obliged to accept the offer by the earlier of the fourth business day after receipt of a written request by the bid consortium to do so and the 60th day after the date of the offer document, which was posted on 7 August 2013 (or such later time and date as was agreed with the panel). Once Kazakhmys validly accepted the offer, it became unconditional as to acceptances (but remained subject to the other conditions set out in the offer document).

The offer document stated the consortium’s intention to take ENRC private once its offer was declared unconditional in all respects and it had acquired at least 75 per cent of the voting rights of ENRC. As a consequence of the consortium’s existing holdings in ENRC and Kazakhmys’s irrevocable undertaking, the offer becoming unconditional as to acceptances was inevitable. The transaction completed on 4 October 2013.

48 Public M&A 2013/14: the leading edge

Schneider Electric S.A.’s recommended offer for Invensys plc Freshfields advised Invensys plc on the transaction. £3.4bn Schneider’s £3.4bn recommended offer for Invensys plc, announced on 31 July, Largest takeover offer in 2013: was the largest UK public takeover offer of 2013 and came on the back of two Schneider’s bid for Invensys other significant transactions on which Freshfields advised Invensys – the £1.7bn disposal of its rail division to Siemens and the £625m return of cash to shareholders by way of a B/C share scheme.

The offer was implemented by a UK court-sanctioned scheme of arrangement. The shareholders of Invensys were offered cash and new Schneider shares as consideration for each Invensys share. Invensys shareholders were also offered a mix-and-match facility, under which they were entitled to elect to vary the Invensys shareholders proportion of cash and new Schneider shares that they would receive. were also offered a mix-and-match facility, The share component represented 130p of the 502p per share offer and meant Invensys shareholders would hold approximately 3 per cent of the enlarged under which they were Schneider Electric group. Interestingly, Schneider offered Paris-listed shares entitled to elect to vary in exchange for Invensys’s London-listed shares. The transaction was structured the proportion of cash to make the Schneider shares as attractive as possible to Invensys shareholders (including the use of credit depositary instruments for CREST holders and a nil- and new Schneider cost dealing facility for small shareholders). shares that they would receive. In relation to financing, the offer document disclosed the market flex provisions of Schneider’s bridge facility, allowing the bookrunners to increase overall pricing (both margin and fees) up to 0.25 per cent a year to enhance prospects of a successful syndication.

Schneider’s offer was subject to an unusual condition relating to the triggering of a ‘section 75 debt’ under Pensions Act 1995 in relation to Invensys’s UK defined benefit pension scheme and included disclosures under Rule 24.2(a)(iii) of the Code relating to Schneider’s intentions for the UK defined benefit pension scheme. The offer document included an opinion from the pension scheme trustees on Schneider’s offer.

The deal completed on 20 January 2014 following a multi-jurisdictional regulatory clearance process, both relating to antitrust matters (including in the EU, US, China, Brazil and Canada) and CFIUS clearance in the US.

49 Public M&A 2013/14: the leading edge

US Deal activity The US remains the largest and most developed public M&A market in the world. The US remains While annual global public M&A volume since the financial crisis has remained the largest and most at the same level, with public M&A remaining low as a proportion of global developed public M&A equity market capitalisations, over the past few years, US public M&A has been the greatest contributor to global public M&A. In 2013, there were more than market in the world. 140 announced M&A deals for US public targets, 60 of which involved deal consideration in excess of $1bn, and 14 of which had price tags in excess of $5bn (accounting for an aggregate of nearly $200bn in M&A value). 2014 has seen a robust start for US public M&A, with more than 30 announced deals, including the $45bn Comcast – Time Warner Cable merger and the AMEC- Foster Wheeler business combination (discussed below).

Market trends and judicial and legislative developments Taking a snapshot of the current US public M&A market shows many trends at work.

• Shareholder activism continues to drive corporate events, such exploring strategic alternatives leadings to sales and spin-offs. Activists also play prominent roles following announcements – including Carl Icahn’s high- profile involvement in the Dell leveraged buyout – and in many cases in 2013, opposing announced transactions and often improving deal economics. Similarly, deal ‘jump’ activity has returned, including in high-profile transactions such as Dell, Time Warner Cable and The Men’s Wearhouse.

• Delaware courts will closely scrutinise controller buyouts and banker conflicts – the Delaware Supreme Court affirmed the MFW decision, finding that the most exacting standard of review applies to a controller buyout unless (from the transaction’s outset) the deal is conditioned on approval of a majority of the unaffiliated minority shareholders and a properly functioning independent special committee, with the committee meeting its duty of care in negotiating a fair price. In the Delaware Chancery Court’s recent Rural Metro decision, the court found that the target company’s banker aided and abetted the board’s fiduciary duty breach where the banker also pursued financing roles in this and other industry-related transactions, as well as by creating unreasonable process and informational gaps with the board that led to the fiduciary duty breach.

50 Public M&A 2013/14: the leading edge

• In 2013, Delaware’s corporate law was amended to remove the requirement for shareholder approval of a second-step merger, so long as – among other conditions – following the first step tender or exchange offer, the buyer owns at least the percentage of target stock that would be required to In the US, substantive approve the merger (normally a majority of the issued and outstanding takeover law is largely... shares). Most market practioners assumed this would lead to a significant uptick in the use of a tender offer as acquisition structure; however, the a matter of state law set one-step continued to be (even after the change in law in August) the more by state courts following favoured structure. This is likely due to other considerations – for example, deal challenge lawsuits. complex regulatory approval processes that neutralise any timing advantage of a tender offer – but highlights the need for careful consideration of deal structure at the outset.

• Deal ‘technology’ continues to evolve – from applying the LBO ‘reverse break fee/specific performance’ model to other conditions such as antitrust or other regulatory approvals, using go-shop provisions to perform post-signing market checks, heavily negotiated material adverse change clauses and applying sophisticated takeover tactics and defence mechanisms continue to define the US public M&A market.

Litigation as a cost of doing business Unlike many jurisdictions, in which takeover law is heavily influenced by regulators (such as BaFin) or by a self-regulatory organisation (such as the Takeover Panel), in the US, substantive takeover law is largely (except for disclosure matters and tender-offer conduct matters) a matter of state law set by state courts following deal challenge lawsuits. Because Delaware is the state of incorporation for the majority of US public companies, that state’s substantive law – principally around director duties in change-in-control transactions – is the most developed body of law on the subject and regularly informs best practices around the globe.

• For many non-US M&A participants, the mere words ‘US lawsuit’ bring to mind the potential for years, if not decades, of litigation, massive costs and diversion of efforts, and the real potential of liability following a negative outcome. However, viewing US M&A deal-challenge litigation through that lens is naive.

• The comforting reality is – assuming there’s truly no bad behaviour, like conflicts of interest (see above), to worry about – a much tamer beast. It is true that a non-US M&A participant – like any US M&A participant – should expect to be involved in deal challenge litigation. In each year since 2009, lawsuits challenging the deal have been brought in more than 90 per cent of all public M&A deals larger than $500m. That percentage has crept up and remained steady at around 96 percent for the last three years.

51 Public M&A 2013/14: the leading edge

• So why is this kind of litigation different from others? And why is it typically a nuisance, but not something that should engender real fear?

These questions are best answered by looking first at what happens when While deal-related a US public M&A deal is announced. In general, within the first few days, litigation is a fact of several plaintiffs’ law firms will announce ‘investigations’ into the transaction. life in US public M&A, The reality is that this is code for a call to arms of investors owning the target stock, so that a class of plaintiffs can be located, to the law firm as lead counsel it need not limit the in a deal challenge lawsuit. Following that, usually within the next couple ability to do deals. of weeks, a lawsuit is filed. It is worth noting that in general, the more time that elapses following announcement without a lawsuit being filed, the better. Depending on the overall timing of the deal, if two or three weeks have passed and the stockholder meeting to approve the merger (or the tender offer expiration date) is approaching, all things otherwise equal, it is less likely the deal will be subject to challenge litigation.

• So what happens with these lawsuits?

First, they typically allege a breach of fiduciary duty, as well as inadequate disclosure. The garden-variety suit – again not one that involves credible allegations of serious misconduct such as conflicts of interest – doesn’t hold up the deal, and in most cases, is settled or dismissed. For most settlements, the outcome is ‘disclosure only’ (in which the proxy statement or tender offer document includes additional disclosure, typically around the board’s decision-making process and/or the financial adviser’s analysis). Also in the mix, and cynics would say the real motivation for the suits in the first place, is compensation for the plaintiff’s attorney’s fees. Rarely is a monetary settlement to the shareholders required to be paid. And again, assuming the garden-variety case without true bad behaviour, M&A buyers can usually expect the target’s directors’ and officers’ insurance policy to protect (subject to retentions and deductibles) against the expenses incurred in defending and resolving the matter.

So while deal-related litigation is a fact of life in US public M&A, it need not limit the ability to do deals. Proper buy-side legal advice in the M&A process, including, at a minimum, understanding well the target board’s pre-signing process and the scope and limitations of the directors and officers insurance policy, should free up participants to focus on the core drivers of the business combination, and minimise execution risk.

52 Public M&A 2013/14: the leading edge

Case study Freshfields advises Foster Wheeler AG in its sale to AMEC plc €8.5bn Foster Wheeler’s announced business combination with AMEC is one of the post-closing market most complex cross-border public M&A transactions of 2014. With a Swiss- capitalisation incorporated, US publicly-traded target, and a UK public company buyer, the deal involved issues of choice of laws and market practices that are rarely seen in public M&A transactions.

The transaction was noteworthy for, among other things, the following key factors:

• Pre-deal, non-binding announcement. As a result of specific leaks in the ...one of the most market, the parties disclosed the transaction – including key price terms – complex cross- on 13 January 2014, before entering into definitive agreements. This is rare border public M&A for US public company targets, because the US disclosure rules do not require any comment in the face of market rumours, regardless of their specificity. transactions of 2014. However, the UKLA, AMEC’s regulator, required this disclosure. This required close analysis under Swiss fiduciary duty law, as well as co-ordination with the investor relations and communications teams to ensure that the messaging was precise on both sides.

• Contract terms arbitrage. Foster Wheeler is a Nasdaq-quoted Swiss company, with its fiduciary duties governed by Swiss law and its disclosure obligations governed by US federal securities laws. AMEC is a UK plc, subject to English companies law and UKLA rules. Accordingly, there was no ‘natural home’ for the contract terms (governing law or market practice) and the ultimate agreement included elements of many jurisdictions.

• Mixed cash and stock. The transaction consideration is comprised of stock and cash, with investors permitted to elect the desired split, subject to proration to an overall 50/50 mix. The stock component does not included a cap or (asymmetrical or symmetrical) collar, with Foster Wheeler shareholders sharing upside and downside value risk for the stock component of the consideration.

• Non-US issuer entering the US public market through M&A. There are few instances of a non-US company such as AMEC acquiring a US public company such as Foster Wheeler using shares as consideration, and this has never been done in a transaction of this size – $3.2bn in transaction value, resulting in a more than $8.5bn post-closing market capitalisation. Concerns about timing, SEC approvals, execution complexity, share flow-back, as well as post-closing exposure to the US federal securities laws all had to be taken into account to execute this transaction.

53 For more information please contact:

Austria Hong Kong and Singapore Thomas Zottl Edward Freeman T +43 1 515 15 109 T +852 2846 3429 E [email protected] E [email protected]

Simon Weller Belgium T +852 2913 2647 Vincent Macq E [email protected] T +32 2 504 7605 E [email protected] Italy Nicola Asti China T +39 02 625 30348 Heiner Braun E [email protected] T +49 69 27 30 88 88 E [email protected] Japan Jack Wang Takeshi Nakao T +8621 6105 4103 T +81 3 3584 8332 E [email protected] E [email protected]

EU Netherlands Christoph H. Seibt Jan Willem van der Staay T +49 40 36 90 61 61 T +31 20 485 7612 E [email protected] E [email protected]

France Spain Hervé Pisani David Franco T +33 1 44 56 33 36 T +34 91 700 3704 E [email protected] E [email protected]

Germany UK Christoph H. Seibt Stephen Hewes T +49 40 36 90 61 61 T +44 20 7832 7323 E [email protected] E [email protected]

Kai Hasselbach Piers Prichard Jones T +49 221 20 50 71 43 T +44 20 7716 4687 E [email protected] E [email protected]

Arend von Riegen Richard Thexton T +49 69 27 30 84 76 T +44 20 7716 4395 E [email protected] E [email protected]

Stephan Waldhausen T +49 211 49 79 342 US E [email protected] Doug Bacon T +1 212 230 4660 E [email protected]

Matthew Herman T +1 212 277 4037 E [email protected] This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as ‘Freshfields’. For regulatory information please refer to www.freshfields.com/support/legalnotice. The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC. This material is for general information only and is not intended to provide legal advice.

© Freshfields Bruckhaus Deringer LLP, June 2014, 00993 freshfields.com