Recent Development of Nordic Takeover Regulation: Examples

Changes to takeover rules can be expected to reflect changes in the relative bargaining power of corporate constituencies or changes in the interests of politically dominant corporate constituencies or political coalitions. Regulatory changes can take place through legislative processes at the national or international level, but they can also occur through self-regulation. To some extent, self-regulation is used as a mechanism to pre-empt legislative initiatives. Industry participants may seek to avoid legislative intervention by taking regulatory steps to mitigate political concerns, for example. Self-regulation can be a reactionary measure taken when faced with the threat of more intrusive regulation. In this regard, self-regulation can be seen to reflect salient political concerns. Below, the study discusses certain developments relevant to the position of controlling shareholders in takeover regulation (legislation, regulation and self-regulation, as applicable) in the Nordic countries, mainly Sweden and Finland, and considers how these developments reflect the changing political economy and the interests of different corporate constituencies.

Consideration for Different Share Classes

One of the control-enhancing mechanisms used in the Nordic countries is the adoption of different classes of shares with different voting rights, allowing, for example, founding entrepreneurs to raise equity financing without relinquishing control. Founders can retain shares of the super voting class while the company issues shares with a single vote. Through articles of association and minority shareholder provisions in national company law, the controlling shareholder can give a sufficient guarantee to equity investors that their investment will be adequately protected, despite the controlling shareholder maintaining his or her required level of control.

In Sweden there has been much debate over whether to permit payment of a different consideration for different classes of shares in takeovers. Indeed, a good case could be made for paying a different price for shares with superior voting rights. In a change of control context it should be clear that shares with 20 votes, for example, should be worth more than shares with one vote. However, the different share price would, of course, allow a controlling shareholder to

213SeeRolf Skog,Does Sweden Need a Mandatory Bid Rule?, A Critical Analysis(SUERF Report, 1997),available athttp://wvw.suerf.org/download/studies/study2.pdf.

214Id.

be paid a control premium unavailable to other shareholders. In Sweden, takeover rules initially provided that the relative premiums for different share classes should be same even if the price could differ. The takeover rules later provided more latitude for how the value of non-listed shares could be evaluated (typically the controlling block), allowing for some control premiums.

As the influence of institutional shareholders increased, the price difference was limited through precedents to approximately 10 percent. More recently, new rules have largely eliminated such premiums altogether.²¹⁵

In Finland, on the other hand, differences between the considerations paid for shares of different classes are still allowed. The requirement in Finnish securities law is that the different prices must be “in a fair and just relationship” to each other.²¹⁶Market practice in Finland has also allowed the payment of premiums to holders of super-voting shares.

Cash Mergers

Pursuant to the EU Takeover Directive, national legislation must provide a shareholder with a sufficiently sizeable majority the possibility of redeeming the shares of minority shareholders. In the Nordic countries the thresholds for the “squeeze-out” right have been set at 90 percent of the shares and votes of the target company.

Due to the lack of deal security caused by the high threshold, there has often been interest in different means of completing acquisitions at lower levels of shareholding. A statutory merger, for example, allows a shareholder to integrate the target company and its assets at lower levels of shareholding, typically two thirds of shares and votes represented at a general meeting of shareholders. However, in mergers the shareholders of the company being merged are usually entitled to shares in the receiving company. In cases where the bidder is a much larger company than the target, a statutory merger may nevertheless allow the acquisition of the target without changing the balance of control in the acquiring company through dilution of the holdings of the minority shareholders. However, it is also possible to pay the consideration in a statutory merger in cash. This would allow the bidder to acquire the target without entitling minority shareholders to shares in the bidder.

There has been some debate on whether such a cash merger would fulfil the criteria of equal treatment of shareholders under the national company laws in the Nordic countries. Traditionally, in Finland and Sweden cash consideration in statutory mergers has not been explicitly forbidden in company law. However, it was argued that cash consideration might still contravene equal treatment rules depending on the specific circumstances in each case. Where the intention was to disenfranchise the minority shareholders, cash consideration could be against company law, but

215SeeGöran Nyström & Erik Sjöman,Den svenska takeover-regleringen – ett samspel mellan regelmakaren och Aktiemarknadsnämnden[Swedish Takeover Regulation – Cooperation between the Regulator and the Swedish Securities Council], inAKTIEMARKNADSNÄMNDEN25ÅR–EN ANTOLOGI[THESWEDISHSECURITIESCOUNCIL25YEARS

–AN ANTHOLOGY] 99-100 (Aktiemarknadsnämnden [The Swedish Securities Board], 2011).

216Hallituksen esitys Eduskunnalle arvopaperimarkkinoita koskevaksi lainsäädännöksi [Government Bill for Securities Legislation] 746/2012, at139, and Hallituksen esitys Eduskunnalle laeiksi arvopaperimarkkinalain, kaupakamarilain ja Rahoitustarkastuksesta annetun lain muuttamisesta [Government Bill for the Amendment of the Securities Act, the Act on the Chamber of Commerce and the Act on the Financial Supervision], 6/2006, at 33.

where there were legitimate business reasons for paying the consideration purely in cash, there may have been no legal obstacles.

In Sweden, specific new regulation was introduced in 2009 prohibiting pure cash-consideration mergers and requiring that at least 50 percent of the consideration be in shares.²¹⁷A previous measure intervening in cash mergers had raised the threshold for approval of such transactions from the normal requirement of two thirds to 90 percent of votes given and shares present. The stated reason for introducing the new rules in the Swedish Companies Act was to increase minority protection.

In Finland, no such rule has been introduced. In fact, the Helsinki Takeover Code explicitly suggests that cash mergers could be possible provided there are special circumstances that support the payment of the merger consideration in cash. While no cash mergers have been executed to date among listed companies or in connection with takeover situations, the legality of such transactions cannot be ruled out.

Mandatory Bids

The Takeover Directive introduced the mandatory bid obligation in EU takeover regulation, granting an exit right to minority shareholders in connection with a transfer of control. Pursuant to the directive, a shareholder who acquires shares “giving him/her control” of a listed target company is obligated to make a public bid to all remaining shareholders.²¹⁸The thresholds of shareholdings triggering the bid obligation can be set in national laws, and in the Nordic countries they have been set at the level of a 30 percent shareholding in the target company. In addition, some countries have a dual threshold, triggering mandatory bid obligations at the 50 percent level as well.

The directive further provides that an “equitable price” shall be offered in the mandatory bid.²¹⁹ The price is linked to the highest price paid by the shareholder during a set period prior to the obligation being triggered. One justification for the mandatory bid rule is that a party obtaining control may also be in a position to exploit private benefits of control at the expense of the other shareholders.²²⁰In this regard, the mandatory bid rule prevents inefficient transactions where the bidder seeks to extract private benefits of control at the cost of the other shareholders rather than

217Regeringens proposition 2007/08:155, Skärpta fusionsregler, [Government Bill 2007/08:155, Revised Merger Rules].

218The text of the directive is as follows: “ Where a natural or legal person, as a result of his/her own acquisition or the acquisition by persons acting in concert with him/her, holds securities of a company as referred to in Article 1(1) which, added to any existing holdings of those securities of his/hers and the holdings of those securities of persons acting in concert with him/her, directly or indirectly give him/her a specified percentage of voting rights in that company, giving him/her control of that company, Member States shall ensure that such a person is required to make a bid as a means of protecting the minority shareholders of that company. Such a bid shall be addressed at the earliest opportunity to all the holders of those securities for all their holdings at the equitable price as defined in paragraph 4.”

219The text of the directive isas follows: “The highest price paid for the same securities by the offeror, or by persons acting in concert with him/her, over a period, to be determined by Member States, of not less than six months and not more than 12 before the bid referred to in paragraph 1 shall be regarded as the equitable price. If, after the bid has been made public and before the offer closes for acceptance, the offeror or any person acting in concert with him/her purchases securities at a price higher than the offer price, the offeror shall increase his/her offer so that it is not less than the highest price paid for the securities so acquired.”

220Goergen, Martynova & Renneboog (2005),supranote 198, at 11.

from increased efficiency or synergies. A controlling party may also be in a position to alter the company’s strategy and business in such a way that they no longer reflect the original investment of the other shareholders. In such circumstances it has been deemed appropriate to grant an exit right for minority shareholders. Through the pricing mechanism, the rule also limits the possibility of paying control premiums to controlling shareholders in change of control transactions. However, it has also been claimed that the mandatory bid rule increases the price of takeovers and discourages value-creating transactions.²²¹

The Takeover Directive allows for the granting of exemptions from the obligation to launch a mandatory bid pursuant to national regimes. In Sweden, for example, remarkably many exemptions are granted annually.²²²There are usually several criteria for exemptions. Typically, exemptions can be granted where a large shareholder takes measures to address the financial distress of the target company, where control is transferred within the same group or sphere of control or where a large shareholder ends up with shares as a result of a share issuance where other shareholders have not subscribed for their pro rata share, for example. In addition, exemptions can be temporary or they can restrict a further increase of holdings. Additional whitewash procedures may also be required for an exemption to be granted. It could be argued that to the extent that the extraction of private benefits of control has been effectively restricted, minority shareholders may be sufficiently protected and a mandatory bid would be unwarranted.

The Swedish exemption regime seems to allow controlling shareholders latitude in reorganizing their holdings, which may well be necessary in a system with concentrated ownership.²²³The fairly liberal regime on exemptions applied in Sweden may represent an appropriate response for tailoring EU-based requirements to the national corporate environment.

In Finland the number of bids and exemptions is far lower than in Sweden. The threshold for mandatory bids was decreased from two thirds of shares in connection with the implementation of the Takeover Directive. Requirements for exemptions were revised in 2013, with the aim of emphasizing the need for whitewash procedures as a prerequisite for exemptions. Interestingly, the regime may be more stringent than in Sweden. On the other hand, concentrated ownership and the need to rearrange group or family holdings have not played as significant a role in the Finnish corporate environment as they have in Sweden, as discussed earlier.

Recent Changes to Takeover Codes

Swedish takeover rules were originally introduced in 1971. The Swedish Takeover Code has been amended from time to time, and material amendments were more recently introduced in 2006 and 2009, for example.²²⁴In 2006, the code was amended to reflect the implementation of the Takeover Directive. In 2009, the code was amended with the aim of enhancing the position of target shareholders in takeovers. One of the main amendments in 2009 was a change that generally disfavored any price differences between ordinary and super-voting shares.²²⁵The code was also amended to increase the binding nature of announcements regarding public tender offers

221Id.

222DANIELSTATTIN, TAKEOVER454-456 (2009).

223Id.at 456.

224Further minor changes and clarifications have been introduced in 2012.

225SeeRolf Skog,Nya takeover-regler på den svenska aktiemarknaden – bolag på reglerade marknader[New Takeover Rules on the Swedish Stock Market – Companies on Regulated Markets], NTS 2009:3, 122-130.

and to disfavor any indicative announcements, for example. Requirements regarding the type of conditions acceptable in public tender offers were also tightened. In 2012 further changes to the code, largely of a technical nature, were introduced. However, the code was amended to disfavor break-up fees, even though they were not completely prohibited. Further disclosure requirements were also introduced for bidders.²²⁶The changes in the Swedish Takeover Code can be seen to reflect the increasing influence of minority shareholders. The rules seek to limit the possibility of favoring large shareholders and introduce stringent requirements on bidders with regard to any action that may influence trading in target shares. However, the rules do not, as such, restrict the influence of controlling shareholders outside the context of takeovers.

A takeover code was introduced in Finland in 2006.²²⁷It was then amended in 2013, as a result of changes to the Finnish securities laws, with the introduction of a “comply-or-explain” rule to the code. The code was originally intended to provide general guidance on the application of central principles of company and securities laws and promote uniform procedures in takeover situations.

Importantly, there been no significant pressure from institutional investors or other minority shareholder interest groups with respect to the code provisions. The code also largely acknowledges the position of controlling shareholders and, for example, recognizes that target boards and bidders alike will need to consult with such shareholders in advance of tender offers being launched.