Blog series «Company value and offer price in the context of public takeovers» – conceptual basics
In order to optimise transaction security in connection with a public takeover offer in Switzerland, various other economic aspects must be considered in addition to the economic attractiveness of the offer price for the shareholders of the target company. These are mainly related to the statutory provisions on public takeover offers and the related Swiss company valuation practice.
This can result in various stumbling blocks in the context of defining the offer price, which can lead to delays and, at worst, to the termination of a transaction. In order to ensure a high level of transaction security, these aspects are therefore highly relevant from the perspective of both the offeror and the target company and must be taken into account accordingly when initiating public takeovers in Switzerland.
In a series of several blog articles, we will therefore shed light on the issue of company value and offer price in the context of public takeovers in Switzerland and identify selected stumbling blocks on the way to a successful transaction.
The importance of mandatory and change of control offers
In this context, it is particularly important to distinguish between mandatory and change of control offers on one hand and offers in which the offeror does not take control of the target company in the context of the intended transaction on the other hand.
- In the case of mandatory offers pursuant to Article 135 of the Financial Market Infrastructure Act, the offeror has already exceeded the threshold of a 33⅓% shareholding in the target company prior to the announcement of the public takeover offer.
- In the case of a change of control offer pursuant to Article 9 of the Ordinance of the Takeover Board on Public Takeover Offers (TOO), the offeror exceeds – in the event of a successful offer – the threshold of a 33⅓% shareholding in the target company.
In the case of such mandatory or change of control offers, the aforementioned statutory requirements and thus also the risks for the success of the transaction are accentuated. The aforementioned limit is therefore of great importance in this regard.
It should be added that, in this context, the 33⅓% shareholding threshold can either be raised to a maximum of 50% in the articles of association (opting-up) or waived altogether (opting-out). The introduction of an opting-up or opting-out after the actual listing of a company is always linked to specific requirements and cannot simply be introduced by majority vote. Specifically, 1) the shareholders must be informed in a transparent manner about the introduction of an opting-out and its consequences and 2) the majority of the votes represented as well as the majority of the minority shareholders at the general meeting must approve the opting-out for it to be valid. The Swiss Takeover Board (TOB) generally assesses compliance with these requirements by means of an order. As the example of the MCH Group 2020 has shown, the determination of the majority of the minority is certainly controversial in some cases and must be examined in detail. In the specific case of the MCH Group, the result of the vote was according to the TOB incorrectly determined on the basis of the votes cast and not, as required, on the basis of the votes of minority shareholders represented. On the basis of the adjusted calculations, the TOB found that the previously defined requirement had not been met (i.e. as a result, the introduction was rejected by the minority shareholders). Against this background, the clauses are particularly helpful for the offeror if they are already established and undisputed in the articles of association.
Relevant statutory provisions for public takeover offers
In principle, all public takeover offers (i.e. both mandatory and change of control offers as well as offers without a change of control) in Switzerland are subject, inter alia, to the following statutory provisions relevant to defining the offer price and the determination of the company value in this context:
- The board of directors of the target company shall comment on the public offer in a report pursuant to Article 30 TOO. For this purpose, the board of directors of listed companies in Switzerland usually relies on a fairness opinion prepared by a qualified independent third party.
- In addition, the best price rule pursuant to Article 10 TOO must always be fulfilled. If the offeror acquires equity securities of the target company at a price higher than the offer price between the date of publication of the offer and six months after the expiry of the additional acceptance period, it must offer this price to all recipients of the offer.
For mandatory and change of control offers the minimum price provisions must also be considered, which can significantly influence the determination of the offer price. The minimum price provisions set the minimum price that must be offered at least to all recipients of the offer in the context of a mandatory or change of control public takeover offer.
The minimum price equates to the higher of 1) the stock exchange price and 2) the price from the previous acquisition.
Non-cash mutual ancillary services and different share categories as a particular challenge for the offeror
As the course of proceedings of various transactions over the past years has shown, prices offered or paid often give rise to discussions about the compliance of the offeror with the requirements of the Swiss takeover law regarding the offer price.
A key discussion point in this regard is if, in addition to the cash price paid, any contractually agreed mutual ancillary benefits between the parties involved must also be taken into account, as well as the existence of different share categories. Depending on the structuring of the transactions, this may have a material impact on the definition of the offer price in relation to both the minimum price provisions and the best price rule.
This specific topic will be addressed in appropriate detail in an additional blog.
Company values and share prices in the context of the takeover law
From the offeror’s point of view, economic principles are clearly key in determining the offer price. Thus, from an economic perspective, the initial fundamental question arises as to how high the premium must be in order for the offer to be attractive and successful. At the same time, the offer price including the premium paid on the minimum offer price should not be higher than the equity value plus the expected synergies so that a financial added value results for the offeror’s shareholders.
As explained above, the definition of the offer price in the context of public takeovers in Switzerland must also take into account the guidelines set out in the statutory provisions and the related Swiss company valuation practice. Thus, the offer must comply with the applicable provisions of the takeover law and, in order to gain the support of the board of directors of the target company, must generally also lie within the value range determined in the fairness opinion. Figure 1 illustrates these relationships schematically.
Company values and share prices in the context of takeover law (schematic representation)
Future blog posts in the series
Building on this introduction regarding selected concepts, in the second blog of the series we turn our attention to the fairness opinion as an important criterion for the board of directors of the target company to financially assess an offer, and we will explain the characteristics of such a valuation. The third blog post will look at the definitions of the terms ‘stock exchange price’ and ‘price from a previous acquisition’. In addition, the prerequisites for compliance with these minimum price provisions and the effect on the definition of the offer price will be explained. Finally, the fourth blog post addresses the specific topics of ‘non-cash mutual ancillary services’ and ‘share categories’, which are relevant with regard to compliance with both the best price rule and the minimum price provisions and are of great importance for optimising transaction security as various proceedings in recent years have shown.