Public Takeovers in Switzerland - Review 2008 (Part 2)

Author:Dr. Frank Gerhard

Best Price Rule

Distinction from Minimum Price Rule. If the bidder acquires equity securities of the target company in the period running from the publication of the offer until six months after expiry of the additional acceptance period at a price that exceeds the offer price, it must offer this price to all recipients of the offer (and not only to those who have accepted the public offer) 55 (Art. 10 para. 6 OTB).

A share purchase by the bidder will only be subject to the minimum price rule (i.e., the bidder may pay a premium of up to 33 1/3% above the offer price), rather than both the minimum price rule and the best price rule, if such purchase qualifies as a purchase prior to the launch of the takeover offer. 56 More particularly, if the share purchase agreement is entered into prior to the announcement of the takeover offer, and the closing under the share purchase agreement occurs

prior to the announcement of the offer; or after the announcement of the offer and is not subject to any condition precedent or subsequent related to the success of the takeover offer, 57 such share purchase will be considered to be a purchase prior to the announcement takeover offer, in the sense of Art. 41 OTB. Consequently, such share purchase will be relevant when assessing compliance with the minimum price rule (see above under Minimum Price Rule), 58 but will not trigger the application of the best price rule.

However, if the bidder enters into a share purchase agreement with target shareholders prior to the announcement of the takeover offer, but the closing under the share purchase agreement is subject to the completion of the takeover offer (so called "coupled transaction"), 59 such share purchase will trigger the application of the best price rule.

In general, a takeover offer may not be made conditional upon the closing of another share purchase without triggering the best price rule. In such a case, the conditions to closing under the share purchase agreement would become conditions to closing to the takeover offer. As a result, the bidder would make, as a commercial matter, the same offer to the shareholders to which the takeover offer is made as it made to the shareholders party to the share purchase agreement, but such shareholders would receive an offer price 25% lower than the offer price paid under the shareholders agreement. The TB therefore decided that any coupled transaction, straight or reverse, will trigger the best price rule, 60 the only exception being conditions that are per se necessary for such share purchase to be completed (e.g., regulatory approval of the transaction). 61

Treatment of Employee Options. In change of control situations, employee stock option plans (ESOPs) often provide for an immediate vesting of the options granted to employees thereunder so that such employees can exercise such options to acquire shares and tender such shares in the takeover offer. If the bidder desires to acquire any such options not exercised during the offer period, the bidder must make certain that the price offered for such options is not above the offer price. 62 In accordance with the practice of the TB, the best price rule also applies to "out of the money" options. In order to determine whether a purchase of "out of the money" options complied with the best price rule, such options must be valued as of the date of the closing of the takeover offer, 63 either based on the Black-Scholes or binomial model.

Application in Exchange Offers. In the case of an exchange offer, the offer price (relevant for as reference for the best price rule) usually develops in parallel with the price of the shares offered in exchange. If the shares offered in exchange are not listed, the TB has held that it is permissible to take the price of such as determined in the valuation report into account when calculating the offer price. 64 However, since January 1, 2009, this issue is no longer relevant. Indeed, pursuant to the new Art. 43 para. 2 SESTO-FINMA, in the case of mandatory offers, settlement by means of exchange against securities is only permitted if a cash payment is offered as an alternative.

Additional Acceptance Period

Extension of Additional Acceptance Period. If the takeover offer is successful, the bidder must grant an additional acceptance period of 10 trading days from the date of publication of the definitive interim result (Art. 14 para. 5 OTB). In the matter sia Abrasives Holding AG, one of the bidders requested the extension of the additional acceptance period by 5 days arguing that the end of the period would fall in the Christmas and New Year holiday and that an extension would primarily be in the interest of the shareholders. The TB reasoned that when deciding whether to extend an additional acceptance period, the interest of the shareholders in a swift closing of the takeover offer should be weighed against the interest of the bidder in achieving a higher tender rate. Although the TB found the argument that the period ended in the Christmas and New Year holiday unpersuasive, it nevertheless granted the extension because, after giving effect to such extension, the closing of the takeover offer would still take place within the statutory period of 10 trading days after the end of the regular additional acceptance period and the interest of the shareholders remained protected. 65

Conditions Conditions in Mandatory Offers. Unless important reasons can be demonstrated, a mandatory offer may not be subject to conditions (Art. 36 para. 1 and 2 SESTO-FINMA). In accordance with established practice, the TB confirmed in several matters that the closing of a mandatory offer may be subject to receipt of regulatory approval. 66

Minimum Acceptance Level. According to the practice of the TB, a takeover offer's minimum acceptance level must not be so high that achieving such a level would appear impossible at the time it is set. 67 As a general rule, a minimum threshold of 66 2/3% is deemed acceptable. 68 However, in the matter Golay- Buchel Holding SA, the TB reaffirmed its practice of analyzing whether minimum acceptance levels are achievable or not on a case-by-case basis. In the Golay-Buchel Holding SA matter, the TB held that a minimum acceptance level of 90% appeared to be achievable at the time it was set because the securities of the target would be delisted and the shareholders' meeting of the target company had unanimously approved the bidder's acquisition of the target. 69 Similarly, in the matter Growth Value Opportunities, the TB accepted an acceptance threshold of 90% because the bidder and the parties acting in concert collectively held a stake of 70% in the target at the time such threshold was set. 70

MAC. The TB accepts "no material adverse change" (MAC) conditions to takeover offers, provided that the target's losses in turnover or profit reach a certain minimal level. In accordance with the practice of the TB, losses may be considered material if they reach at least 10% of the target's EBIT, EBITDA or NAV or at least 5% of the consolidated turnover of the target company. 71 In principle, MAC clauses that relate to general negative market incidents (e.g., the change of stock index), so-called "market-MAC's", are not permissible conditions to takeover offers, unless such incidents have a concurrent direct adverse effect on the target company itself. For example, a takeover offer may be subject to a market-MAC geared to the market value of a share portfolio on the balance sheet of the target company, provided the loss in market value has a direct effect on the net asset value of the target company, which effect is material. 72 Accordingly, in the case of an investment company whose value primarily consists of its net asset value, it is permissible to make the takeover offer subject to the condition that the target's net asset value will not drop by more than 10 % (which is, indirectly, a market-MAC). 73

Removal of Voting and Transfer Restrictions. It is in the bidder's legitimate interest, and consequently permissible, to make the takeover offer conditional upon the shareholders' meeting amending the tar-get's articles of association to remove any existing restrictions on voting rights and the target registering such amendment with the commercial register. 74 Similarly, the bidder may condition the takeover offer on the absence of new voting or share transfer restrictions. 75 However...

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