Exemption from submitting a tender offer when re-financing a listed company

Date 3 nov. 2008

 

 

On 8 September 2008 the Danish Financial Supervisory Authority ruled in a leading case concerning an investor’s obligation to submit a tender offer in connection with a directed issue in a destitute company listed on the alternative market, First North. The ruling must be considered of general public importance, as it is the first time, since the delegation agreement between the Danish Financial Supervisory Authority and the Copenhagen Stock Exchange (now called Nasdaq OMX) was amended, that the Danish Financial Supervisory Authority publishes a ruling concerning exemption from the obligation to submit a tender offer (as a consequence of a directed issue), but also because the present credit crisis actualises the need for a responsible and pragmatic approach to the possibilities for issuers and investors to implement reasonable refinancing and possible reconstructions.

 

The case in brief   

In a letter of 19 August 2008 a company (“Investor”) made an application to the Danish Financial Supervisory Authority in which it stated that Investor, as part of a reconstruction agreement with the company (“Issuer”), through a directed issue had signed shares for a total of DKK 2.8 million in Issuer, which has its shares listed on the alternative market, First North. It was furthermore stated in the letter that Investor now controlled 76.23 % of the share capital and voting rights in Issuer as a consequence of this issue. The Investor requested that the Danish Financial Supervisory Authority would make an exemption regarding the obligation to submit a tender offer to the remaining shareholders of Issuer.

 

From the facts of the case, it is clear that Issuer for a long period of time had experienced material liquidity problems, and had been on the look out for alternative financing options to ensure the future operation of the company.

 

Rules in force on tender offers   

The rules on tender offers, including the obligation to submit a tender offer can be found in the Securities Act etc. part 8 (“SA”) as well as notice no 1238 of 22 October 2007 concerning takeover offers (“TO”).

 

If a holding in a company, which has one or more classes of shares on sale on a regulated market or an alternative market, is transferred directly or indirectly, the acquirer must give all the shareholders the opportunity to sell their shares on identical conditions, if the transfer causes the acquirer gaining control of the company cf.  SA section 31, subsection 1 and TO section 2, subsection 1. The different variations of “control” is defined in SA section 31, subsection 1, 1-5 and TO section 2, subsection 1, 1-5.

 

Pursuant to SA section 31, subsection 1, the Danish Financial Supervisory Authority has authority to grant an exemption from the obligation to submit a tender offer if specific circumstances call for it, cf. SA section 31, subsection 4. It is clear from the legislative history behind SA that exemptions may be granted in situations where the existence of a company is directly threatened.

 

The Danish Financial Supervisory Authority’s ruling of 8 September 2008

In the specific case the Danish Financial Supervisory Authority assessed that Issuer’s existence was threatened since all other financing initiatives had failed. The Danish Financial Supervisory Authority deemed that this was a case involving unusual conditions, which after a specific evaluation could prompt an exemption from the obligation to submit a tender offer. The Danish Financial Supervisory Authority thus decided that Investor was entitled to an exemption from the obligation to submit a tender offer pursuant to section 31, subsection 1 of SA, cf. section 31, subsection 4 of SA.

 

The Danish Financial Supervisory Authority considered that an exemption from the obligation to submit a tender offer in the specific case would be in the interest of the minority shareholders of Issuer, since the minority shareholders of Issuer at the given time must have had an interest in Issuer being supplied with capital sufficient for the continued operation of the company. The Issuer would thus be given the opportunity to recreate the confidence of the market and eventually increase the value of the company to the benefit of all shareholders.

 

The Danish Financial Supervisory Authority makes a more general and forward-minded statement, that especially the interests of the minority shareholders will be taken into consideration when treating cases concerning exemption from the obligation to submit a tender offer.

 

Estimation of the general nature of the ruling

In the light of the ruling of the Danish Financial Supervisory Authority it must be presumed that any acquirer who in the future obtains control of a “directly threatened” company, with shares listed on a regulated market or an alternative market, will qualify for an exemption from the obligation to submit a tender offer, even if the control has been established as a part of a directed issue.

 

The ruling of the Danish Financial Supervisory Authority is not surprisingly in line with the legislative history behind the amendment of SA concerning the application of the obligation to submit a tender offer in connection with issues. The legislative history clearly states that an exemption from the obligation to submit a tender offer in connection with an issue, is narrowly reserved cases in which the continued operation of destitute companies is directly threatened. When exactly the continued existence of a company can be considered directly threatened, is determined by the specific conditions of the individual cases. However, the following elements can from the ruling of the Danish Financial Supervisory Authority be considered generally applicable:

 

1.       Issuer did not have any other financing options;

 

2.       Issuer would have gone bankrupt if further liquidity had not been injected into the company and;

 

3.       Issuer had not been capable of paying salaries and other operational costs in June and July of 2008.

 

The Danish Financial Supervisory Authority seemed to have considered these elements collectively when estimating that the specific case required an exemption, cf. SA section 31, subsection 4.

 

It must be concluded that the area of application for the exemption from the obligation to submit a tender offer in these cases is situations in which the alternative is a winding-up of the company.

 

It must be expected that the present financial recession and lack of trust in the financial loan markets we in Denmark experience may lead to more cases concerning exemptions from the obligation to submit a tender offer in connection with the reconstruction of destitute companies.

 

We recommend that, prior to the commencement of a reconstruction of a company with shares listed on a regulated market or an alternative market, the acquirer establishes whether or not the financial condition of the company seems to fall within the term “directly threatened” pursuant to the elements mentioned in the exposition above. Thus, one avoids to be inadvertently imposed with the obligation to submit a tender offer to all the shareholders in a company following an issue. In cases where it cannot be established with certainty whether or not  the company is “directly threatened”, it is recommended to send a letter to the Danish Financial Supervisory Authority requesting an exemption and thoroughly explaining why such an exemption should be granted.

 

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.