Takeover bids and acting in concert – New decision from the Danish Financial Supervisory Authority

Date 19 dec. 2008

 

 

Introduction

On 2 December 2008, The Danish Financial Supervisory Authority made a principled decision in a case concerning takeover bids and on whether shareholders may be considered to have a joint deciding influence by having acted in concert. The key question of the case was whether the large shareholder A, in cooperation with others, including shareholder B, had purchased more than 1/3 of the votes in the target company (the “Company”). If this was considered to be the case, the consequence would be a duty to make a redemption offer to the other shareholders of the Company. The Danish Financial Supervisory Authority determined that A, regardless of the fact that A achieved a deciding influence of the Company based on the shareholder composition, had not achieved 1/3 of the votes and therefore a duty to make a redemption offer to the other shareholders could not be imposed upon him.

 

The case in brief

At an ordinary general meeting on 23 April 2008 in the Company, whose shares were admitted to trading on NASDAQ OMX Copenhagen A/S, the Board of Directors were replaced by persons suggested by A’s majority shareholder. In this connection, the Danish Financial Supervisory Authority examined if a group of shareholders led by A had jointly purchased 1/3 of the votes of the Company and had gained a deciding influence of this and were, thus, obliged to present a takeover bid to the remaining shareholders of the Company pursuant to Section 31(1), no. 5, of the Danish Securities Trading Act.

 

Rules applying to takeover bids and the term “acting in concert”

The rules applying to takeover bids are described in Section 31(1) of the Danish Securities Trading Act. The rules of the Danish Securities Trading Act are supplemented by Executive Order no. 1228 of 22 October 2007 on takeover bids.

 

The wording of Section 31(1), no. 5, of the Danish Securities Trading Act is as follows: “If a shareholding is directly or indirectly assigned in a company which has one or more share classes admitted to trading on a regulated market or an alternative market place, the purchaser must give all the shareholders of the company the opportunity to sell their shares on identical terms, if a consequence of the assignment is that the purchaser gets to exercise a deciding influence over the company and gets to own more than a third of the voting rights.”

 

Section 2(1) of the Executive Order on takeover bids further states that the voting rights acquired by persons acting in concert with the purchaser must be added in at the making up of the purchaser’s voting rights in the company.

 

Among other things, the purpose of the rules on takeover bids is to protect the minority shareholders of the company in connection with a takeover bid. In this connection, legislators have realised that also an actual deciding influence may trigger a duty to make a redemption offer. Based on this, the provision has been inserted into Section 5(1) of the Danish Securities Trading Act which applies in situation in which a purchaser, through the purchase of shares in a company, achieves an opportunity to exercise an actual deciding influence, but where the situation is not encompassed by the other provisions of the Securities Trading Act. At the settlement hereof, circumstances such as the purchaser’s opportunity to exercise influence on the composition of the Board of Directors and majority and the composition of the shareholders are taken into consideration.

 

The decision of the Danish Financial Supervisory Authority

The Danish Financial Supervisory Authority stated that A had acted in concert with B on the acquisition of control of the Company and that shares included in A’s option agreements had to be added when measuring A’s shareholdings. Furthermore, the Danish Financial Supervisory Authority stated that A, based on the shareholder composition of the Company, achieved a deciding influence. However, the Danish Financial Supervisory Authority did not find sufficient evidence to determine that A in cooperation with others had purchased more than 1/3 of the voting rights of the Company in that A, by mutual agreement with B only, had purchased 33.28% of the votes of the Company in connection with the ordinary general meeting held in the Company on 23 April 2008. In this connection, the Danish Financial Supervisory Authority remarked that the Company’s holding of own shares was included in the final make up of the voting rights. Based on this, the Danish Financial Supervisory Authority concluded that neither A nor A’s majority shareholder personally as direct purchaser of shares in the Company through his ownership of A could be ordered to make a takeover bid to the other shareholders of the Company.

 

Implications of the Danish Financial Supervisory Authorities’ decision

 The Danish Financial Supervisory Authority’s decision in the case invokes special interest since only limited practice on the interpretation of Section 31(1), no. 5, of the Danish Securities Trading Act, including the term “acting in concert”, exists. In its decision, the Danish Financial Supervisory Authority, thus, lists four key interpretation questions regarding Section 31(1), no. 5, of the Danish Securities Trading Act. Based on this, the Danish Financial Supervisory Authority reaches the following conclusions:

  1. A company’s holding of own shares must be added in at the make up of the purchaser’s ownership of the voting rights of the company.
  2. As a starting point, the voting rights which are associated with an option agreement must not be added until the option has been exercised. At the same time, it must be possible to emphasise the facts behind a specific option agreement so that the shares in question must be added to the make up of the option owner’s total voting rights, anyhow. It is the opinion of the Danish Financial Supervisory Authority that such cases may exist in situations where option agreements actually express the financing of a shareholding. This was the case in the present case.
  3. At the assessment of whether other persons may be said to act in concert with the purchaser to achieve joint control, the presence of a co-ordinated practice between the shareholders on exercising deciding influence over the company so that the shareholders, in practice, have voted, acted and, moreover, outwardly acted as if they were one shareholder, has been emphasised. It has also been emphasised if agreements on pre-emptive rights or voting agreements have been concluded between the shareholders. In order to establish identity between more persons, a long-term co-ordinate practice or actual agreements must exist between the shareholders. Agreement between the shareholders on voting is not sufficient in itself to constitute identity.
  4. The question of when the purchaser is considered to exercise deciding influence over a company pursuant to Section 31(1), no. 5, of the Danish Securities Trading Act is individually considered in each case. The more diffused the ownership is the fewer voting rights are needed to exercise deciding influence and, for example, choose the Board of Directors. When a purchaser achieves an opportunity to exercise actual deciding influence there is, per se, a reason to assume that the purchaser will exercise the deciding influence. As a starting point, such purchaser will therefore be obliged to make a redemption offer to the other shareholders.

 

If you have questions for the decision or require additional information on the rules on takeover bids and the term “acting in concert”, please contact attorney Dan Moalem (dmo@mwblaw.dk).

 

The above does not constitute legal counselling, and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.