Professional Documents
Culture Documents
DRIVERS OF M&A
GROWTH
SIZE
Leadership in an industry
o Dominant position
o Confers several advantages
o Creates barriers for new entrants
o Philosophy followed by GE Fix, sell or close strategy
SYNERGY
The 2 + 2 = 5 phenomenon
o he profitability of the combined business to be greater than the sum of both parts
Types of synergies
o Operating synergy Cost reduction through economies of scale
o Revenue-enhancing synergy Complementarities in offerings of the companies
Synergistic Benefits
o NAV = VAB [VA + VB], where VAB = combined value of two companies, VA = value
of A on its own, VB = value of B on its own
But, there are transaction costs too
o NAV = VAB [VA + VB] E, where E = expenses/costs in the M&A process
o Integration costs may be significant but not taken into account at the initial stage.
Opportunity costs too
Other Forms of Synergy
o Taxation benefits
Net operating losses (NOLs)
Unabsorbed depreciation
1
Financial benefits
Access to capital
OTHER FACTORS
Other
o
o
o
Factors
To achieve greater market power (i.e. to increase market-share)
Acquisition of R&D capabilities
Deregulation in an industry
Telecommunications, Airline industry, Banking industry
o Privatisation and disinvestment by the Government in state-owned enterprises
Core Competence and Diversification
o Core Competence - Focusing on core competencies creates unique, integrated
systems that reinforce fit among your firms diverse production and technology
skillsa systemic advantage your competitors cant copy
o Diversification
Creation of a portfolio
De-risking strategy - Dont put all your eggs in one basket
Research on benefits of diversification
Vitiates portfolio theory of investments
Benefits only companies in related sectors
Availability of targets at low prices
o Usually a recipe for hostile takeovers
o Hostile takeovers usually do what boards with poor corporate governance cannot do
Low prices could be either due to:
o Poorly managed companies
o Poor market conditions, e.g. financial crisis
Market for corporate control
o Prices of shares are low in companies that do not realise potential or those that are
mismanaged
o This is assuming that markets are efficient (i.e. efficient capital markets hypothesis
(ECMH))
o Makes it cheap for acquisitions by raiders (e.g. if stock is trading at a low P/E
compared to its peers)
Improved management hypothesis
o New management may be better able to realise potential
On the other hand, this forces existing managers to step up their act if they are to protect
their jobs
o This may lead to existing managers to adopt practices that look good in the short
term but not in the long term. In the extreme, there may be fraudulent activities
such as forgery of accounts
LESSONS OF M&A
They tend to bid at valuations that are substantially higher than those
determined more objectively
Hubris hypothesis is also supported by empirical evidence
o Studies show decline in market value of acquirers shares post-announcement
whereas targets shares tend to appreciate in value
Empire-building by managers of acquirer All of these benefit managers more than
shareholders of acquirer
Winners curse
o Due to informational disparities
o Seller/target has more information about itself than the acquirer
o The issue is more acute in bidding / auction situations
How can these motivational factors surrounding managers be addressed?
Is corporate governance a solution?
o Independent financial analysis is preferred
Problems with integration
o Organisational issues
o Cultural issues
These are soft intangible factors. Proof of the pudding lies in dealing with these
successfully
However, in practice, a number of obstacles need to be surmounted in this process. Note
that the law is of very little help in this area
SUCCESS OF M&A
o
o
o
o
o
COMMERCIAL UNDERSTANDING
TAKEOVER
CONTROL
MERGER
Arrangement;
Assets (and liabilities) of one or more companies become vested in a single company
o One of the companies surviving;
o Or a new company established;
Shareholders of each company become collective owners of the combined company
A combination of assets and ownership (e.g. Pooling of interests)
Generally a merger of equals Companies tend to be roughly of same size
But, difference tends to be one of intent and degree
E.g. same result as a merger can be achieved through a takeover involving a stock-swap
TAKEOVER BID
LEGAL STRUCTURES
Broadly of 3 kinds:
o Asset / Business Acquisition
o Statutory Merger / Amalgamation
o Share Acquisition / Takeover
Liabilities, which are usually deducted from price paid, may not be known or, if known,
quantifiable
o Possibly mitigated by insurance but it comes at a cost
Purchaser may discharge consideration through either:
o Payment of cash
o Issue of its own shares
This may trigger requirement of corporate approvals on the part of the
purchaser
Two or more companies merge into one of them or into a new company
The undertakings (business, assets, liabilities) of the merging companies are transferred to
the surviving company
The merging companies are dissolved in the process
The surviving company may discharge consideration by either:
o Issuing its own shares to the shareholders of the merging companies
o Paying cash to the shareholders of the merging companies (cashout merger)
To squeeze out minority shareholders?
Shares held by those shareholders in the merging company are cancelled
Most companies legislation contain specific provisions for mergers/amalgamations
These transactions require shareholder approvals (and sometimes the sanction of a court)
Once approved, they are binding on all shareholders
o A perceived advantage of this arrangement
Cash-out mergers can be used to eliminate minority shareholders
o Expropriation of shares?
Certain types of schemes of arrangement, e.g. reduction of capital can also be utilised for
this purpose
Squeeze-outs / Freezeouts
Triangular Mergers
o These are usually undertaken to avoid corporate processes involving large
companies processes such as:
Shareholder approval
Appraisal remedies
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DISCUSSION
Do these transaction structures provide too much leeway to parties and their lawyers to
devise options that go against the interests of minority shareholders?
How have the courts in the U.S. dealt with this?
Have courts applied a substance over form approach? Or vice-versa?
What do you think of the ability of courts to re-characterize transactions?
What about the concept of de facto mergers?
Business/Assets Sale
o Direct purchase/ownership
o Assets move out of the seller and into the purchaser
Share sale
o Purchase/ownership of shares of the target company
o Targets legal position is not altered in any way
o Ownership of business/assets continues unabated
Considerations for choice of structure
o Taxation acquirer/seller
o Existence of other non-related businesses that the acquirer is not interested in
o Sellers responsibilities in the business
o Allocation of liabilities of the business
o Formalities of transfer
o Consents and permissions necessary for transfer
Comparison between an asset sale and a share sale
Asset Sale
Sale of a business as a going
concern
Business
to
be
transferred
is
identified in functional terms
o i.e. all that is required to
ensure continuity of business
with the acquirer
Lump sum consideration
o Concepts of net worth and
goodwill buyer is willing to
pay more than net worth of
company forecast of future
profits
Liabilities relating to the business
would go along with it
o Unless expressly excluded
Share Sale
Sale of assets on a piecemeal basis
o Usually required in situations
such as insolvency or distress
sale
Assets
being
transferred
are
identified through specific listing
Individual consideration for each
asset
Liabilities (if any) would remain with
the seller
o Unless expressly transferred
PROCESS
TRANSFERABILITY
CONSIDERATIONS
Time
Inequality of bargaining power
Pre-disclosure of information, especially when a public company is involved
EMPLOYEES
CORPORATE APPROVALS
DISCUSSION
How will a situation such as Hollinger turn out under the Singapore Companies Act?
o Will it make a difference that it is assets of the subsidiary that were sold?
What is the position if assets are merely charged or mortgaged without a sale?
o Selling = affecting shareholders immediately
o Mortgaging = intention to carry on business of company
EFFECT OF NON-COMPLIANCE
Statutory mergers are sometimes structured as asset sales to avoid certain shareholder
requirements, i.e.
o Shareholder approval of acquirer
o Appraisal rights to acquirers shareholders
These are stock-for-asset acquisitions
Often, the seller company becomes a shell entity and is then liquidated
End-result is the same as a statutory merger
DE FACTO MERGERS
Heilbrunn v. Sun Chemical (Del, 1959)
o Suit brought by minority shareholders of Sun
o Sun to buy over all of Ansbachers assets and liabilities
o Sun to issue shares of common stock to Ansbacher
o Ansbacher will dissolve and distribute assets (including Sun shares) to its
shareholders
o Although the transaction was taken to Suns shareholder (due to managers conflict
of interest), they were not given appraisal rights
o Court
No injury inflicted upon Sun stockholders
Sun has merely acquired property and paid with stock
Transaction has not changed the essential nature of the enterprise of the
purchasing corporation
There is no basis for granting of relief in equity on the theory of a de facto
merger
Hariton v. Arco Electronics (Del, 1963)
o Arco agreed to sell all assets to Loral in consideration for issue of shares by Loral
o Arco to undergo dissolution thereafter
o Plaintiff, a minority shareholder of Arco sought appraisal rights invoking the de facto
merger doctrine
o Court
The plan of dissolution and distribution is legal
Sale-of-assets and merger provisions in statute are independent of each other
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SUCCESSOR LIABILITY
Rule
o In an asset sale, the acquirer is not liable for the debts and obligations of the seller
But, exceptions Acquirer may be held liable if
o It expressly or impliedly assumed sellers liability
o There was a consolidation or merger of the seller
o Acquirer was merely a continuation of the seller
o Transaction entered into fraudulently to escape liability
Schumacher v. Richards Shear Co (NY, 1983)
o Injury caused by shearing machine
o RSC, who manufactured machine, sold substantially all assets to Logemann
o Whether Logemann is liable for tortious conduct of RSC or for its own conduct
subsequent to the acquisition
o Court
The transaction did not fall within any of the exceptions
As regards continuity of the enterprise, it usually applies when the seller
corporation is dissolved. Here, that was not to be the case
o Here, it seems to give too much leeway for parties to structure transactions to avoid
liability
Brandon v. APM Associates (7th Cir, 2005)
o Plaintiff the holder of judgment in a diversity suit
o Defendants owned APM
o But, they formed another company St. Clair to squirrel away assets of APM and
avoid recovery in favour of plaintiff
o APM was left as a shell entity
o Court (Judge Posner)
The evasive purpose of creating St. Clair is plain and supports our
interpretation of the rules scope. The rule that a corporation cant have a
successor if it hasnt been dissolved, is not intended to deprive the victim
of a fraud of his legal remedy, as the defendants attempted to do here by
preserving a ghostly existence for APM
APM is brain dead, but is being kept on corporate life support in order to
prevent [the plaintiff] from getting hold of any of St. Clairs assets
[the plaintiff] is entitled to ignore the formation of St. Clair and treat its
assets as if they were APMs
National Labour v. Inn Credible Caterers (2d Cir., 2001)
o Duty imposed on successor of business to bargain with employees
Substantial continuity test
Successor has hired a substantial and representative complement of
employees
However, a more narrow interpretation adopted in other cases
o Semenetz v. Sherling & Walden (NY 2006)
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Courts seem more open to impose successor liability in asset sale transactions compared
to treating them as de facto merger for purposes of protecting minority shareholder
interest
o What might be the reason for this?
SHs have remedies under company law
Creditors have rights under insolvency regimes; their interests have to be
taken into account when bordering insolvency
o Can we deduce any policy rationale?
To protect involuntary creditors who may not have the contractual rights that
voluntary creditors possess courts have to step in to protect the interests of
these involuntary creditors
Objectives that sometimes conflict
o Deterrence for tortfeasors
o Facilitate asset transfers that are value-generating for the economy
Difficulties with current position
o Inadequate deterrence because transfer of assets permits tortfeasor to escape
liability
o Uncertainty in amount of liability prevents efficient asset transfers
Proposed model (Harv. L. Rev. Note)
o Presumption in favour of successor liability
Successors will be held generally liable for predecessors torts
Acquirer will tend to reduce the price to absorb costs of liability taken over
Or seek indemnity from seller what happens if seller has no more assets
seek guarantees of assets/parents?
Settlement prior to the deal
Incentives to sellers to prevent liability in the first place
o Mandatory-litigation class action prior to transfer
To aggregate all current and future tort claims
Pay estimated damages
Then, transfer assets free and clear of all tort liability
Discussion Questions
o Is this a workable model?
What happens to unascertained future claims?
Class actions workable in other jurisdictions?
Incentive of US law firms to bring suits (contingency fees)
Time cost valuation of business/assets may change
Information asymmetry between buyer and seller
o What are the practical issues in its implementation?
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Acquisition of shares
o Cancellation scheme
o Transfer scheme
o Binding on minority no choice but to comply
Especially good when buyer wants 100% of company
Statutory - initiator - target CO, other parties are acquirer & SHs
o As opposed to takeover where minority has option whether to exit or not
Takeover code - the initiator is the acquirer, other parties are SHs
Statutory amalgamation / merger
o Through court process
Outcome of amalgamation
Absorption of the entire undertaking of one or more companies into a surviving company
o Surviving company may be an existing company or a new company
Consideration is paid by the surviving company
o Usually in the form of issue of its own shares, sometimes in the form of cash or both
COURT-BASED APPROACH
STATUTORY PROVISIONS
SCOPE
Scheme of Arrangement
o Wide scope
o Distinguish from compromise
Generally a transaction between CO and creditors where latter agree to
forego something in return for letting CO stay afloat
Between
o A company and its members or a class of them (E.g. Equity, Preference)
o A company and its creditors or a class of them
CLASSIFICATION OF MEMBERS
16
All these should take place among people who share similar interests so that
they wont be persuaded to vote against that by people who dont share the
same interest
o What is the rationale?
Rationale: to promote consultation among persons with common interest
What is a class?
o must be confined to those persons whose rights are not so dissimilar as to make it
impossible for them to consult together with a view to their common interest:
Sovereign Life Assurance Co. v. Dodd
Tests for commonality of interest
o Similarity of rights as shareholder
o Similarity of effect under scheme
In re Hellenic & General Trust (1975, UK)
o Scheme of arrangement Shares to be cancelled and new ordinary shares to be
issued to H, which will pay off other shareholders.
o Forced exit of other shareholders
o Issue Whether subsidiary of H, as a shareholder of the company, constitutes a
separate class?
o Court found that subsidiary of H had an interest that was different from other
shareholders
o Discussion:
Why do courts adopt such a paternalistic approach?
What criterion is used for classification?
Similar approach followed in Singapore (Wah Yuen Electrical, TT International)
Danger of overprotection of minority
o Obstructs deals
Discuss the level of detailed classification required
o Benefits vs. costs
o In Singapore (TT International), issues of classification is to be dealt at the very
outset
INFORMATION
Dissemination of information
o Essential for shareholders to be in a position to make a reasoned decision
o Courts place significant reliance on this factor
Element of transparency
Wah Yuen Electrical (2003,SG)
o Court would take into account the adequacy of information provided in determining
whether to sanction the scheme
o Scheme of compromise between company and its creditors
o Certain related party creditors voted commonly with other creditors
o Court found lack of transparency with respect to related party debts
It prevented the court from making a competent assessment of the bona
fides of the related party votes
Creditors were not in a position to assess the fairness and reasonableness of
the scheme
o Insufficient information on whether returns in proposed scheme were greater than in
liquidation
17
MAJORITY
COURT SANCTION
KEY FEATURES
Short-form amalgamation
o Vertical amalgamation
Wholly-owned subsidiary (WOS) into parent
Couldve different 3P interests (creditors etc)
o Horizontal amalgamation
Among 2 or more WOSs of a common parent
Standard amalgamation
o Those that do not qualify for short-form amalgamation
PROCESS
SHORT-FORM AMALGAMATION
Approval of directors
Solvency statement
o As it relates to the amalgamated company
Shareholders special resolution of the amalgamating companies
Lodging of requisite documents with the Registrar
No requirement to prepare an amalgamation proposal
STANDARD AMALGAMATION
EFFECT OF AMALGAMATION
S. 215G, Sing. CA
o (c) all the property, rights and privileges of each of the amalgamating companies
shall be transferred to and vest in the amalgamated company
Transfer by operation of law
o Both rights and obligations can be transferred
Statutory contract no court order involved
o Achieves the same effect as a vesting order under s. 212
MINORITY PROTECTION
Affected shareholders and creditors may approach the court per s215H
o To deny effectiveness of amalgamation, to modify the terms, etc.
o Need to show unfair prejudice difficult to prove s216
But, there is no buyout right to minority shareholders (i.e. no appraisal rights in Singapore)
o Only burden of proof is that plaintiff voted against proposal
Only other cause of action is unfair prejudice under s. 216, Sing. CA oppression action
o To bring this action, you need to be a member of the final company
More rights to minorities = Rule by minority = increase risks of hold-outs?
20
DELAWARE POSITION
21
Background of squeeze-outs
o To make the company a wholly-owned subsidiary
To avoid the cost of maintaining and servicing small shareholders
For operational ease no need to continue dealing with arms-length
o Minority shareholders are offered an exit from otherwise illiquid investments
o Squeeze out usually follows a takeover offer (and delisting in the case of previously
listed companies)
o Shares provide a bundle of rights in a company (E.g., s. 121, Sing. CA)
Movable property, transferable in the manner provided by the articles of the
company
o Property right available to shareholder
Fairness versus efficiency
Procedural fairness
o Any denial of the right of holding or disposal raises issues
Arguably amounts to expropriation
But, such right is not unconditional it is subject to statute
METHODS OF SQUEEZE-OUTS
COMPULSORY ACQUISITIONS
Sec. 215, CA
o The only statutory provision that directly recognises squeeze out of minority
shareholders
Procedure established
o Scheme or contract for transfer
o To be approved within 4 months of offer
By 90% in value of the shares whose transfer is involved
If buying remaining 50%, need to acquire 90% of the remaining 50%
(i.e. 45%) for a total of 95% shareholding
o Notice of compulsory acquisition can be given within 2 months thereafter
o Acquirer is entitled to acquire shares of dissentient shareholders as well
o Two way-right (i.e. minority can require the majority to buy as well)
No requirement of prior court approval
o However, if dissenting shareholders approach court, then the squeeze out is subject
to court order
This mechanism imposes onerous conditions
o Needs to be preceded by a general offer
o 9/10th of independent shareholders is a steep majority requirement
22
REDUCTION OF CAPITAL
SCHEME OF ARRANGEMENT
Why use scheme of arrangement? Many takeover documents in Singapore are structured
as schemes of arrangement because:
o It allows the acquirer to squeeze out minority shareholders, possibly without their
approval
o It allows the acquirer to obtain 100% control
Other considerations
o Whether majority and minority shareholders will be treated under the same class?
No. See Hellenic & General Trust
o Onerous shareholder approval requirement
Majority in number and 3/4ths in value
o Sanction of the court
Fairness to shareholders
Process + price (valuation)
AMALGAMATION PROCEDURE
Cash-out mergers
o Indirect method for achieving squeeze outs
o Target company is merged with the holding company
o Minority shareholders in the target are paid cash in exchange for the shares held by
them
o The business of the target becomes vested in the holding company with minority
shareholders having exited
o Alternatively, holding company could issue shares to the shareholders of the target,
especially if it is a listed company
Prof Wan Wai Yee opines that this is potentially a method to squeeze out minority
shareholders although it was not intended by the legislature to do so
Approval of shareholders
o Special resolution at general meeting
o Class meetings?
Statute does not require, but some contrary academic opinion exists
Solvency requirements
o Do not impact squeeze-outs directly
o As they are catered towards protection of creditors
Objections by dissenting shareholders
o S. 215H, Sing. CA
Scrutiny of court in case of objections
o Deny effectiveness to scheme
o Modify scheme
o Direct companies to reconsider the scheme
No appraisal rights under Singapore law
o Academic critique
o Compared with New Zealand (also US, Canada)
Note that this amalgamation procedure was based on New Zealands and yet
there were appraisal rights in New Zealand.
But, buyout of shares is a remedy in an oppression action
o S. 216, Sing. CA. However, onerous requirements to demonstrate unfair prejudice
Question:
24
ALTERATION OF ARTICLES
Clause in the articles providing majority shareholder a right to require minority to sell
o Inclusion in the articles at the time of incorporation of company; or
o Subsequent inclusion through alteration of article
Alteration of articles
o Special resolution of shareholders
o Alteration must be bona fide for the benefit of the company as a whole
Allen v. Goldreefs
o Courts have allowed alteration in certain circumstances
Sidebottom v. Kershaw - Amendment that requires competitors to exit the
company is valid and was upheld
o Gambotto (Aust) opined that compulsory acquisition amounts to a form of
expropriation
Whether this is applicable in the wider Commonwealth is questionable.
Question: In what type of companies will this option work?
o Listed
Listing requires some form of shareholdings held by the public.
Also, regulator may take action.
o Public Unlisted
o Private
CHOICE OF OPTION
The most appropriate option must be chosen depending on facts and circumstances:
o Available majority
o Willingness to adopt the court-route
o Appropriateness of an amalgamation
o Willingness to provide solvency certificate
US FREEZEOUT MERGERS
26
PANEL
Takeover Panel
27
The Court would only intervene by way of judicial review where it was
satisfied that the outcome resulted in injustice
Emphasis on principles of natural justice
The need to give sufficient opportunity / hearing
G plc was a witness in inquisitorial proceedings rather than a
defendant to a disciplinary or criminal charge; and that, accordingly,
the panels decisions, while insensitive and unwise, were not such as
required the court to intervene by way of judicial review
The challenge did not succeed on facts
CHANGES TO UK REGULATION
EU Takeovers Directive
o Made effective in 2006
o To bring about uniformity in takeover regime among EU countries
o Significant delay in implementation of the Directive
o Points of contention
Hostile takeovers and role of the targets board
Non-shareholder interests (e.g. employees)
Takeover Panel now has statutory status under the Companies Act, 2006
Additional powers
o To seek enforcement by court
o To order compensation
o But validity of transactions not affected
Discussion Question: What changes, if any, might there be to the operation of the City
Code and the Panel in practice?
o Even with the changes, it is likely that the current market practice will continue to
hold sway
REGULATION IN THE US
REGULATION IN SINGAPORE
29
31
Factors to consider
o Likely attitude of the Targets board
Goes into formulation of strategy in making the offer
o Shareholder profile of the Target
F&N takeover Offeror bought shares directly from OCBC without going
through the board
o Arguments to be presented to Targets shareholders
o Arguments to be presented to Offerors shareholders (in a share offer)
COMMENCEMENT
INFORMATION
INSIDER TRADING
Trading on the basis of price-sensitive information (PSI) not known to the public
Impending takeover is generally price-sensitive
Use by Offeror of information gathered from Target to purchase shares in the market
o But, Offerors knowledge of its own activities and intentions to make an offer is not
a bar
i.e. safe harbour under Securities and Futures Act
o Why? Facilitates takeovers, allows for a premium (offerors less adverse to offering a
premium), uniformity of offer made to all SHs based on PSI
Various scenarios
o Scenario 1 offeror has PSI and made and offer safe harbour
o Scenario 2 offeror has PSI and purchases more than 2% of shares, be it privately
or on the market insider trading
o Scenario 3 offeror makes an offer without PSI privately safe harbour (s299) not
insider trading because the offer was not made on the basis of the PSI
MARKET MANIPULATION
False trading with a view to artificially inflate or deflate the market price of shares
Applies to both Target as well as Offeror (in the case of a share offer)
o Target to deter bid or angle for a better price
o Offeror to make its offer more attractive in case of share swaps
***Care must be taken to ensure that structuring of transaction and timing of
announcement comply with securities laws and regulations***
ANNOUNCEMENT OF OFFER
When
o
o
o
CONDUCT OF OFFER
US APPROACH
Tender offers
o Regulated by the SEC pursuant to the Williams Act
o Basic terms for shareholders
Offer period minimum 20 days
Minimum price
Shareholder withdrawal rights
Pro rata acceptances for oversubscribed offers
Information rights
o Tender offers: deliberately not defined by SEC
CURRENT TRENDS
Greater role of hedge funds and other sophisticated financial investors in takeovers
o Tendency of speculative investments?
35
City Code in the UK has been amended to include derivatives within interest in securities
Singapore Code was amended in 2012 to recognise derivatives see notes 6(a)(iii) and 8
to r 12.3
In the US, specific rules being promulgated by SEC in connection with derivatives and
disclosure under Dodd Frank Act
36
Offer to succeed only if Offeror has acquired (either in the offer or otherwise) 50% of
voting rights in the Target (not de facto but actual) not shares
o Offeror may prescribe a higher threshold: e.g. 90%
Discussion questions
o What is the rationale for such an acceptance condition?
Protects minority SHs by not letting Offerors to take effective control with a
lower price
If not, Offerors may take effective control and compel minority SHs to
accept lower price
o Is there merit in eliminating this concept?
Note: this applies to voting rights and not just shares (or mere interest in shares)
Discussion questions:
o How does this affect an Offeror who may hold derivatives (that represent interest
in securities in the UK)?
o Is it easier or more difficult for such a holder of derivatives to satisfy the acceptance
condition?
37
OTHER CONDITIONS
Case
o
o
o
MANDATORY OFFERS
RATIONALE
CONTROL
Definition of control
o Subjective criteria
Depends on facts and circumstances
Pattern of shareholdings generally in companies
o Objective definition (favoured in UK and SG)
Threshold fixed at 30% of voting rights
Discussion questions:
o Do you agree with having a percentage threshold?
Objective:
Certainty (e.g. 29.9%)
However, may be prone to technical skirting/abuse
Subjective:
Prevent abuse by looking at the situation holistically
Places a bit of uncertainty
o What is the rationale for fixing 30%?
Does a small amount (e.g. 20%) mean no effective control?
Diffused shareholding more power than SH-ing (20% versus other
diffused SHs)
Articles allowing for effective control more than what SH-ing prescribes
Why 30%?
25% - used to be the threshold legal reason for blocking special
resolutions
Why 30%? Probably after conducting a general study of SH-ing
structure in SG
o The lower the threshold, the more onerous for M&A market
o Looking at other jurisdictions
Not a fixed number but can be changed from time to time
Do derivatives/instruments count towards control?
o UK counted towards part of SH-ing (shares + derivatives)
o SG derivatives only counted towards disclosure purposes but for mandatory offers,
Offeror has to consult SIC
CREEPER
When acquirers current shareholding is between 30% and 50%
40
ACTING IN CONCERT
Acquisitions by persons acting in concert (PACs) will be aggregated with that of the
acquirer
Parameters to determine PAC
o Agreement or understanding
o Formal or informal
o Co-operation
o To obtain or consolidate control or to frustrate an offer
General definition is accompanied by presumptions (unless the contrary is established),
e.g.:
o Company parent & subsidiaries
o Company directors
o Fund manager investment company
Scenario: 3 independent COs holding 10% each coming to a common agreement should
they make an offer?
o Which should come first? Acquisition or agreement?
o Literature and regulatory text seems to suggest agreement act of acquisition
triggers the mandatory offer
AGENCY COSTS
Agency costs can be reduced by monitoring the managers in the interests of shareholders
But, who is to monitor?
o Managers: are insiders and may not monitor effectively; also, measurement
problems
o Shareholders: ultimate residual beneficiaries of managers actions, but suffer from
collective action problems
o Hence, external bidder/raider acts as a corporate control check on managers
If stock price is languishing due to poor performance of managers
o Then premium offer by bidder will act to protect shareholders investment
Premium reflects bidders expectation of generating greater returns from the
investment than present management
o Alternatively, the possibility of a bid itself will force managers to act in the interests
of shareholders
However, this means that managers may spend more time and resources defending
against takeovers instead
o Leads to short-termism in terms of performance (quarterly) due to dependence on
share prices
o Distorted incentive to act fraudulent window-dressing of account
o Moves by managers to seek golden parachutes from would-be offerors
MANAGERIAL PASSIVITY?
Subject to duties to shareholders when faced with a takeover bid per the
Takeover Code
Can directors enter into a binding agreement with Offeror to positively recommend the bid
(even though the bid wouldve been recommended under independent due diligence)?
o Looks like it can be done, at least in the US, but on the condition of a fiduciary out
(i.e. directors can opt to rescind the recommendation if at some point in time they
are advised to do so by their independent advisers)
43
The board has limited powers to protect a company from an unwanted (hostile) offeror
The role of the board is determined by two sets of duties:
o Duties under the Takeover Code
To act in the interests of the company as a whole; not to deny shareholders
the opportunity to decide on the merits of a bid (UK: GP 3)
Not to frustrate an offer or to take other similar action without consent of the
shareholders (UK: r. 21.1; Sing: r. 5)
The duties under the Code come into play once an offer has been made
or is imminent
o Duties generally under company law
To act in the interests of the company
To act for proper purpose
The proper purpose duty usually arises in the case of issue of shares
by a target company in the wake of a takeover so as to dilute some
shareholders
These company law duties are determined through a combination of statutory
provisions as well as common law
ADVANCE DEFENCES
Some measures can be taken in advance to prevent takeovers (even before they become
imminent)
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When is it considered imminent? Possibly when rumours start and there is share
price movement
Examples are:
o Voting agreements between shareholders:
To obtain control of the company
Caution against parties to the agreement being treated persons acting in
concert
o Interlocking or circular shareholdings
Combined with common board membership
o Pyramiding
Ability to obtain significant control with minimal economic ownership
o Issue or sale of shares to a friendly holder (similar to a white knight)
E.g. to an employee trust (with a company loan)
Whether this amounts to a proper purpose?
Will this amount to parties acting in concert?
See Hogg v. Cramphorn frustration of an offer?
Will this result in unauthorised financial assistance?
o Subsequent whitewashing?
Usually need to show that the trustee is independent from board
influence
E.g. to a collaborator or business partner
o Defensive merger
o Differential shares
With no voting rights or limited voting rights (e.g. Bushell v. Faith)
Google stock post-IPO
However, restricted in the Singapore context s. 64 of the Companies Act
S. 64: Provides for a one-share one-vote rule on a poll
However, s64(5) limited to public companies
o Service agreements/ management contracts
With beneficial arrangements for employees upon termination (e.g. Golden
parachutes)
Protection for employees personally + defence against takeovers (as they
become costly)
Huge momentum in US/UK to exercise greater oversight over executive
compensation
o
Entering into contract, including services contract, outside the ordinary course of
business
Issue of timing lag may reduce efficacy of defence
Approval SHs may not approve of such defences.
o Even if SHs approve, they may not even accept such offers in the first place
In addition, there are certain company law requirements to obtain shareholders approval
for specific actions
o E.g. issue of shares (Sing: s. 161, Companies Act)
If the company is merely giving effect to pre-existing obligations, then Takeover Panel or
SIC must be consulted
o E.g. conversion of pre-issued securities
o Exercise of options previously issued
o Performance of contract previously entered into
o
DUTIES OF DIRECTORS
Court will give credit to bona fide opinion of directors, and respect their
opinion as to matters of management
But, on trial, it was found that purpose of Millers issue of shares was to dilute
majority voting power held by Ampol
Directors cannot use the power for shifting control in the company
Hence, power was improperly exercised by the directors of Miller
Heron International Ltd v. Lord Grade (1983, ECA)
o Target company: Associated Communications
o Takeover bids from two companies, Bell and Heron
o Transfer of voting shares possible only to person nominated by the directors
o Court of Appeal
When directors have decided that the company be sold, the only duty of
the directors is to obtain the best price
Once the directors decide to hand over control of CO, the duty shifts
from towards the long-term SH interest to short-term SH
interest
Where directors are to decide between rival bidders, the interest of the
company must be the interest of the current shareholders
o Note: Compare this with the position in Delaware: the Revlon Case (discussed later)
In a takeover situation, the board will be judged against one of three standards:
o Business judgment rule
o Enhanced standard (Unocal test)
o Entire fairness standard
Recall earlier discussion relating to freeze-out of minority shareholders
(Weinberger v. UOP)
Much of the Delaware jurisprudence on boards duties revolves around the appropriate
standard to be applied to a given case
FRIENDLY TAKEOVERS
TAKEOVER DEFENCES
Used to make the target unwanted to an acquirer (e.g. sale of key assets (crown jewels))
Handsome rewards to managers (golden parachutes)
Acquisition of another entity to attract competition law concerns
Launch of a bid on the acquirer (Pac-Man defence)
HOSTILE TAKEOVERS
In hostile takeovers (which involves the employment of takeover defences), the enhanced
scrutiny (Unocal test) is applied
o Why is BJR not applicable in hostile takeovers?
o Enhanced scrutiny test seems to be long-term rather than short-term (relates to
corporate policies)
Difficulty in applying BJR per se
o Directors are confronted with an inherent conflict of interest
o omnipresent specter that a board may be acting primarily in its own interests,
rather than those of the corporation and its shareholders. (Unocal)
Before the targets board is accorded protection of the BJR, it must establish:
o Reasonableness test: that board had reasonable grounds for believing a danger
to corporate policy and effectiveness existed from the hostile offer
o Proportionality test: that the boards defensive response was reasonable in
relation to the threat posed
Usefulness of the poison pill continues (no appeal to Delaware Supreme Court in this
case)
o Why no appeal? Circumstances such as share price may have changed.
o Also, costs of appeal are too high?
Reliance on law laid down by the Delaware Supreme Court
A just-say-no defence is valid
o Even though directors have not taken any additional defensive actions
Process followed acquires importance
o E.g. retention of outside legal and financial advisors
o Perhaps independence of the board was a factor
Only insider of the board was the CEO.
Even Air Products nominee directors agreed with Airgas board decision
Role of short-term investors & arbitrageurs
In the current era of short term investors and arbitrageurs, would the court in Revlon have
decided differently and gave SHs so much protection?
Revlon case that shows convergence between US and UK judicial attitudes towards board
conduct in takeovers
o Really?
o Should Heron be decided differently if a majority of its SHs are arbitrageurs?
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When do cases shade from defending the CO (per Unocal) into breaking-up (per Revlon)?
o What happens when 2 offers come in a lower offer that wont break-up the CO or a
higher offer that will break-up the CO?
No break-up = need to defend against threat to corporate policy and
effectiveness (Unocal)
Break-up = obtain best price possible for SHs (Revlon)
STAGGERED BOARDS
Poison pill and other embedded defenses are subject to redemption by the board or
shareholders
Offeror may seek to obtain redemption by taking control of the board through obtaining
enough shares to mount a proxy fight
Hence, in order to ensure robustness of defense, poison pills are usually accompanied
by a staggered board
PROXY FIGHTS
Offeror's attempts to reconstitute the board are taken through proxy fights
o Offeror calls for a shareholders meeting where it seeks to propose its own
candidates for directorship
o These candidates are countered by the management
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Final takeaway from discussions on takeover process, hostile takeovers and defenses
Role of regulation
Differences in the US and UK positions
o Analysis in article by Armour and Skeel
o There are historical reasons why regulations have developed in a divergent manner
need to be cognisant of the players involved in setting up these regulations
Type of shareholding more diffused in US/UK and more concentrated in SG
Which regime is better?
Shareholder primacy (UK/SG position)
Management primacy (US position)
o Short term SHs (do they need so much protection?)
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Share
o
o
o
o
Cash
o
o
swaps
No (or less) cash outflow from acquirer
But, dilution of existing shareholders
Useful for reverse takeovers
When the offeror has a smaller asset size can be used to do backdoor
listing
Need for shareholder approvals s161 CA SH approval for share issues by the board
takeovers
Internal resources
Borrowings
o Why indirect borrowing by sponsor? To separate and limit liability into SPV
Structuring Issues
o Direct borrowings vs. use of special purpose vehicles (SPVs)
Bankruptcy remoteness / limited recourse financing
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Documentation
o Negotiation of conditions
o Confirmation of financial resources
Remember Jade Technologies threshold triggering mandatory
takeovers; need to talk to SIC first
Also need to talk to lender (c.f. danger of info leak)
o Standardization of documentation
o Documentation usually provided by underwriters such loans are binding
upon conditions precedent
Also, sometimes financial advisers will have to look at the financial situation
of underwriters
o Issues for financial advisers to look at:
Is there enough financing?
Are the documentation done properly?
Directors to act in good faith in the interests of the company
o Group company situations
o When subsidiary provides guarantee/security for parents obligations
The rule against financial assistance
o Does security guarantee over Targets assets amount to financial assistance by
Target to Acquirer(s)?
FINANCIAL ASSISTANCE
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Something similar to the Jade Technologies scenario show that MBO isnt
being given favourable treatment
Consequence of 2008 financial ccrisis
How feasible are these conditions?
Are they sufficient to overcome conflicts in MBOs?
Latest position
Further bids by Blackstone & Carl Icahn
How does the board decide on a superior proposal?
Price? Financing terms? Future prospects of the company
Note the Unocal/Airgas versus Revlon scenarios
Auction = long-term interests no longer relevant?
Or since CO is still alive, long-term interests still relevant?
Break fees for termination
Is it FA? No because it isnt for the purpose of acquiring shares.
Also, US regime for FA more lax
o
o
o
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M&A for closely-held COs seem more contractual in nature and less regulated by Code and
regulations compared to M&A for public listed COs
Considerations of expertise versus considerations of confidentiality whether to engage
lawyers
o Expertise binding/non-binding agreements; non-solicitation
o Confidentiality costs
o Questions of announcements need legal advice on the timing of such
announcements?
Due diligence
o May not be that necessary for public companies that have a lot of information in the
public domain. However, some potential offerors still opt to do so because of fears
of liabilities and trade secrets
Signing = signing of an agreement subject to conditions which requires performance by
respective parties at closing
o Some conditions competition, continuation in ordinary course of business, material
adverse change (controversial as it is pretty subjective)
PRELIMINARY DOCUMENTS
CONFIDENTIALITY AGREEMENTS
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LETTERS OF INTENT
o
o
o
o
ACQUISITION AGREEMENT
KEY CLAUSES
Definitions
Purchase and Sale
o In an asset or business sale, identify the assets and liabilities being transferred
o Need to be clear about what liabilities are covered
Consideration cash, shares, notes, etc.
COVENANTS
E.g. to carry on business in the ordinary course between signing and closing
o Non-compete clause
o No sale of assets
o No increasing of liability of CO (e.g. borrowing a lot of $$$)
Also, some post-closing conditions
Breach usually results in indemnification or a claim for damages
o Indemnification akin liquidated damages clause.
Better as it is more certain w.r.t. quantum of damages compared to claim for
damages due to breach of K
o ***Remedy is suing for enforcing another K obligation, not for breach of
K***
Parties have flexibility to provide for conditions of such indemnification
INDEMNIFICATION
EMPLOYMENT AGREEMENTS
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LEGAL OPINIONS
Issued by sellers law firm in favour of purchaser
Covers legal aspects of the transaction
o Mainly an enforceability opinion
Law firm acts as a gatekeeper
o Stakes its reputation
Limitations on legal opinion assumptions, exceptions as to enforceability
Liability of issuing law firm
OTHER ISSUES
A lot of due diligence info here is relevant to private COs. For public COs, a lot of the
information is already available in the public domain
For a public M&A, selective availability of information (that results in share price
movements) may infringe security laws
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GENERAL ISSUES
Utility
o Minimizing risk
o Allocating risk
This is performed largely by deal documentation than by due diligence
o Maximizing shareholder value for client
o Contractual modification to the caveat emptor rule
Parties
o Due diligence is usually conducted by the acquirer on the seller
But, in case of share consideration, seller may conduct limited due
diligence on acquirer
o Also, there may be prior seller due diligence conducted by sellers own lawyers
Clean up act
Areas
o Business, financial, tax, human resources, environment
o Legal
(e.g.
Organisation,
Contracts,
Labour/employees,
Insurance,
Accounting/finance, Tax, Property, Litigation, Environmental matters)
Limitations
o Depends on quantity and quality of data provided by the Seller
o All risks are not diligenceable
o Limitations on time
o Often, competitive bidding does not permit full due diligence
Disputes over Due-diligence
o Sherwood Brands, Inc. v. Levie (US 4th Cir, 2007)
Acquisition of shares from controlling shareholders
Extensive due diligence conducted by acquirers personnel
But, they failed to ask the appropriate questions, despite high level of
sophistication
No relief granted to acquirer,
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VALUATION
Role of Lawyers
o Broad understanding of valuation methodologies
o Technicalities of valuation are not important
o Valuation is usually the most contested aspect in an M&A deal
E.g. minority shareholder litigation
o Historical approach may not work well for future projections
Futuristic approach may not be true in future
VALUATION METHODS
Deficiencies
Choice of relevant date is subjective
Market movements due to extraneous reasons i.e. beta
Questions regarding ECMH (Efficient Capital Markets Hypothesis)
Liquidation Value
o Net asset value
Total assets less total liabilities
o Usually on a break up basis
Not a going concern
o Again, purely historic in nature
Does not incorporate future prospects of business
o
ADJUSTMENTS TO VALUATION
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