Company value and offer price in the context of public takeovers – discussion of special topics
In the fourth part of our blog series on «Company value and offer price in the context of public takeovers», we discuss what to look out for in the special topics «non-cash mutual ancillary services» and «different share categories» in the context of the minimum price rules and the best price rule.
Background on non-cash mutual ancillary services
As the course of proceedings of various transactions in recent years has shown, prices offered or paid often give rise to discussions about compliance by the offeror with the requirements of the Swiss takeover law regarding the offer price. A key discussion point is that, in addition to the price paid in cash, any contractually agreed non-cash mutual ancillary benefits between the parties involved must also be taken into account when assessing compliance with takeover law requirements.
Intuitively comprehensible examples of such benefits are, for example, credit agreements that are advantageous for one party or obligations to assume costs of one party for the benefit of the other.
Depending on how the transactions are structured, this topic is relevant to both the minimum price provisions and the best price rule (see also our first blog in this series). To assess compliance with the requirements of the Swiss takeover law, additional non-cash mutual ancillary services between the parties involved must be included in the calculations.
Depending on their magnitude and effects, such non-cash mutual ancillary services can cause either an increase or a decrease in the minimum price to be offered to public shareholders. Non-cash mutual ancillary services can therefore have a major influence on the offer price and thus on the success of the transaction.
Illustrative example of non-cash mutual ancillary services
Figure 1 shows an illustrative example on the subject of non-cash mutual ancillary services and is based on the following considerations:
- In the illustrative example, a buyer acquires shares in a target company from two types of shareholders (remaining shareholder and public shareholder) via an acquisition holding company in the context of a public takeover bid. The remaining shareholder contributes its shares in the target company to the offeror shareholding structure as part of the public takeover and subsequently also holds an interest in the acquisition holding company (at the corresponding equivalent value). The acquisition holding company, in turn, additionally buys out the shares of the remaining public shareholders in full as part of the public takeover offer.
- According to Swiss takeover law, the two types of shareholders (remaining shareholder and public shareholder) must be treated equally. Consequently, the price to be offered to the public shareholder must at least correspond to the pro equivalent value that results for the remaining shareholder from the new structure. Additional non-cash mutual ancillary services may lead to an unequal treatment in this context. If there are additional non-cash mutual ancillary services in favour of the remaining shareholder from a contractual agreement, for example a shareholders’ agreement with the buyer with regard to the acquisition holding company, their corresponding monetary value would also be owed to the public shareholder.
Figure 1: Illustrative example – assessing non-cash mutual ancillary services
The illustrative example shows that factoring in non-cash mutual ancillary services can have significant effects on a transaction or on the definition of the transaction parameters. Mutual ancillary services have the potential to be a deal-breaker unless they are handled with foresight and addressed in advance.
Affected transactions or companies
The issue of non-cash mutual ancillary services particularly plays a role when individual existing shareholders contribute their shareholding to an offeror shareholding structure as part of a public takeover. In this case, contracts such as shareholders’ agreements are usually implemented between the parties. They include rights and obligations and thus potential non-cash mutual ancillary services. For companies with significant shareholders, this issue can accordingly be of highest relevance.
In Switzerland, this situation is widespread among listed companies. For example, among the 30 largest listed companies outside the Swiss Market Index SMI (i.e. the 30 largest companies in the SPI Extra), around two-thirds have a significant shareholder with a participation of at least 10% in the company. If these shareholders contribute their shareholdings to an offeror shareholding structure as part of a public takeover and implement corresponding contracts with the buyer, the issue of non-cash mutual ancillary services is relevant.
Process for quantifying non-cash mutual ancillary services
The process for assessing non-cash mutual ancillary services can generally be divided into three phases:
- An evaluator (for example, IFBC) analyses the relevant draft contracts on behalf of the offeror and quantifies them with respect to non-cash mutual ancillary services.
- A review body reviews the evaluator’s report and confirms compliance with the relevant takeover law requirements.
- The Swiss Takeover Board approves the valuation report based on the assessment by the review body.
Since many such non-cash mutual ancillary services cannot be valued according to conventional methods, common practice assumes a certain degree of discretion that the evaluator must apply in an economically sound manner. It is therefore recommended that the offeror takes a proactive approach to value such non-cash mutual ancillary services.
IFBC best practice advice
Rights and obligations arising from contractual relationships must be assessed in the context of non-cash mutual ancillary services depending on the situation. In our view, a «conscious» approach to relevant mutual ancillary services is one of the critical success factors for a public takeover offer in Switzerland. Our recommendations for increasing transaction security are therefore:
- Minimize the net benefits resulting from non-cash mutual ancillary services in favour of the seller by drafting the contracts between the involved parties accordingly.
- If this is not possible, early assessment and clarification of the relevant issues is recommended.
Current practice of the Swiss Takeover Board regarding non-cash mutual ancillary services
With the final decision in the Quadrant AG case (2012) and the related ruling of the Federal Administrative Court, non-cash mutual ancillary services came into focus in public takeovers in Switzerland. The abolition of the control premium as of May 1, 2013, finally made the Swiss Takeover Board to adopt a more restrictive approach to non-cash mutual ancillary services in order to prevent covert granting of a control premium.
In the context of the decisions on the Kuoni Reisen Holding AG (2016) and ImmoMentum AG (2017) cases, the Swiss Takeover Board’s approach was finally put into perspective and made more specific. Thus, in the case of investor agreements, the principle applies that the contractual provisions contained therein are not to be considered a non-cash mutual ancillary service, provided that they are clauses typical of such contracts. According to the Swiss Takeover Board, however, this principle cannot be applied without restriction. If such typical contract clauses have a significant value, they must be reviewed for any possible non-cash mutual ancillary services. The Takeover Board therefore reserves the right to request the valuation of mutual ancillary services typical for such a contract if necessary.
The resulting transaction risk must be proactively addressed in the context of public takeovers in Switzerland.
The relevance of different share classes
If two different categories of equity securities are acquired from a company, the prices for both categories must be in appropriate proportion to each other. In this context, it is generally left to the offeror to determine the criteria for establishing the ratio between the offer prices for the different categories of equity securities.
The assessment of the appropriate ratio generally relies on the independent review body, which in turn must review the appropriate ratio presented by the offeror and check its plausibility. The first activity thus lies with the offeror. This is important because the expert is again granted a certain degree of discretion in determining the appropriate ratio of various equity securities. For example, not only the difference in nominal value must be considered.
Practice example of different share categories: public takeover offer of Kiwi Holding IV S.à.r.l. to the shareholders of Kuoni Reisen Holding AG (2016)
In the case of Kuoni Reisen Holding AG, the offer covered two share categories with different nominal values. In this context, the offeror argued that a mere nominal value adjustment in the offer price would not do justice to the difference in value of two share categories with different nominal values. Instead, a share with one voting right with a lower capital investment would be worth more, adjusted for nominal value, than an otherwise comparable share (with the same voting right) with a higher nominal value and thus a higher capital investment.
Analogously to the procedure described above, the offeror therefore specified, quantified and justified the nominal value-adjusted value difference between the two different share categories in advance with the help of IFBC. Both the independent review body and the Takeover Board subsequently followed the provided reasoning.
Accordingly, the appropriate ratio of offer prices of two share categories with different nominal values does not necessarily have to be derived exclusively from the pure nominal value difference. This increases the flexibility of the offeror in setting the offer price and thus increases the chance of a successful transaction.
Concluding remarks on the blog series
The blog series «Company value and offer price in the context of public takeovers» discusses various important aspects in the context of public takeovers in Switzerland and examines them in greater depth in light of current practice.
In general, these discussions show that company value and offer price in the context of public takeovers in Switzerland must be determined very professionally and following applicable «best corporate finance practice», so that they do not become dealbreakers. The diversity of requirements means that adequate preparation is highly relevant for investors and buyers as well as for existing shareholders and particularly for the target company itself.