When a U.S. company acquires a foreign public company, it must comply with the legal and regulatory scheme of the foreign nation. With much of the current U.S. cross-border merger activity taking place with European, Canadian and Japanese companies, this discussion will highlight some of the regulatory schemes and other legal issues that a U.S. company would have to comply with when acquiring an English, French, German, Canadian or Japanese company.
a. United Kingdom.
In the United Kingdom, all offers for listed and unlisted public companies are governed by the City Code, and the Takeover Panel is the administrative body responsible for administering the Code. The Code contains ten general principles regarding takeover conduct and procedure and a set of rules embodying these principles. Some of these principles include requiring that all shareholders of the same class be treated similarly; during an offer, all shareholders must be provided with the same information; shareholders must be given sufficient time to consider all relevant information; documents or advertisements in connection with the offering must be accurate; rights of control must be exercised in good faith; and directors must only consider the interests of shareholders, employees and creditors when advising the shareholders.(1) The City Code is not a statutory system enacted by the legislature, but is acknowledged by various U.K. self-regulatory bodies as playing a central role in the regulation of takeovers. For example, various securities professionals, including investment bankers and lawyers, are required by the self-regulatory bodies which govern them to observe the City Code. And, a court may view the Code's prescribed conduct as determinative of what a jury may consider reasonable behavior and accordingly interpret the Code's requirements as a matter of law.
Another issue specific to the United Kingdom is that the Takeover Panel can compel disclosure if there are rumors of a combination. The City Code requires that a bidder promptly make a brief public announcement of a possible offer when the target becomes subject to rumor or speculation following an approach by the bidder. If the bidder has formed a firm intention to make an offer or circumstances occur such as rumor, speculation or an untoward movement in the target's share price, the bidder must make a detailed announcement of the terms of the offer or of the possibility of the offer. The bidder is then required to mail an offer document within 28 days of such an announcement.
In France, tender offers are regulated by the Commission des Operations de Bourse and the Conseil des Marches Financiers, both of which are statutorily created. The French rules apply to offers for those companies organized under French law and listed on the official market, the second market or the over-the-counter market of the French stock exchange. In addition to extensive regulation for takeovers, French law subjects the actual terms of takeover bids, including the price offered for the securities, to regulatory scrutiny. French rules provide for a twenty-day minimum offer period.
The German Takeover Code is a hybrid between the United States' and the United Kingdom's approaches to regulation. The German Code follows the United Kingdom's model in that it is voluntary and self-regulatory, which enables a faster and more efficient reaction to changes in the legal and economic environment than a statutory regulation. The German Takeover Commission is comprised of appointed members from the financial community and can amend the Takeover Code whenever necessary. The German Takeover Code does not automatically apply to all takeovers. Rather, a party must provide an affirmative declaration that the party will comply with the Code. The German Takeover Code contemplates a minimum offer period of twenty-eight calendar days.
In Canada, the existence of the Multijurisdictional Disclosure System (the "MJDS"), which the SEC adopted in 1991, has greatly facilitated cross-border merger transactions with U.S. companies. Under the MJDS, tender offers subject to the Williams Act made by Canadian and U.S. bidders for the securities of a Canadian issuer are deemed to comply with the Williams Act so long as applicable Canadian tender offer requirements are met and less than 40% of the subject securities are held by U.S. holders. All tender offers under the MJDS must be extended to all holders of the class of securities in the United States and Canada upon terms and conditions not less favorable than those offered to any other holder of the same class of securities. All provisions of the Williams Act apply to tender offers for securities of a Canadian issuer extended to U.S. shareholders that are not covered by Canadian law or that are covered by a blanket exemption from Canadian regulation. If limited Canadian exemptive relief is granted with respect to the tender offer, the SEC will determine how the Williams Act will be applied to the tender offer on a case-by-case basis. If a tender offer is ineligible for the MJDS because of a failure to meet the 40% test, the Williams Act generally will apply in addition to applicable Canadian regulations.
The normal form for effecting acquisitions of Canadian public companies, even in friendly transactions, is by tender offer. In Canada, an acquirer has 15 business days after on announcement of a tender offer to commence the offer and then must leave the offer open for at least 35 days. "Lock-ups" of large shareholders are very common. In the event that in excess of 90% of the shares of the Canadian target are acquired in the tender, the balance of the shares can be acquired in a "squeeze out" amalgamation.
Under anti-competition law affecting mergers in Canada, assuming the filing thresholds are met, the parties have a choice whether to make a filing with the Bureau of Competition Policy and observe a 21-day waiting period or, alternatively, to apply for an advance ruling certificate. If granted, the certificate precludes subsequent challenge of the transaction but permits the Bureau the right to review the competitive impact of the transaction for a three-year period following completion of the transaction.
Under the Investment Canada Act ("ICA"), foreign acquisitions of Canadian businesses over certain monetary thresholds are reviewed. The stated purpose of the ICA is to encourage investment in Canada which contributes to economic growth and employment opportunities in Canada. As a result of the North American Free Trade Agreement, the thresholds for review are more liberal for U.S. acquiring companies, but remain unchanged in certain business sectors. In some acquisitions of Canadian companies by U.S. companies, in order to gain ICA approval, the acquirer may be required to make a commitment regarding jobs in Canada and growth of the business in Canada.
In Japan, tender offers are governed by takeover bid rules which form a part of the Securities and Exchange Law of Japan. Under the takeover bid rules, any purchase of more than 5% of a listed company's outstanding common shares from more than 10 shareholders or the purchase of more than 33 1/3% of a listed company's outstanding common shares from less than 10 shareholders can be commenced following newspaper publication of the terms of the offer. The offer must be held open for at least 20, and not more than 60, days and must also be filed with the Ministry of Finance of Japan.(2)
These takeover bid rules historically have been used to effect negotiated transactions; hostile offers are a rarity in Japan. In addition, one Japanese practitioner has observed that takeover bids are often used to acquire weaker, struggling companies and at times the price of offers has been less than the then market price of the shares which were the target of the offer. In addition, in such takeover bids for weaker companies the bid price is not usually increased by the bidder, so the bidding dynamic common in the U.S. market in contests for corporate control has been lacking.
Mergers in Japan are also less commonly used as a means to effect acquisitions. The merger of any company whose liabilities are greater than its assets is not permitted. This can sometimes impede a foreign acquirer's ability to merge an acquired company into an acquisition subsidiary. In such instances, if the acquired company has liabilities which exceed its assets, the acquirer must inject capital into the acquired company prior to effecting the merger.
One of the issues encountered by a U.S. acquirer wishing to effect an acquisition of a Japanese company is the creation of a Japanese acquisition vehicle. Unlike a Delaware (or other U.S. state) corporation which can be formed in a matter of hours, the formation of a Japanese corporate entity requires more time and forethought. The threshold issue in forming a Japanese acquisition company is to determine what form such an entity should take. Japanese law has two limited liability corporate entities, the yugen kaisha and the kabushiki kaisha. Kabushiki kaisha are the most common corporate forms used in Japan by large companies and are considered the closest analogue of a U.S. corporation. However, kabushiki kaisha have a significant initial capital requirement. On the other hand, the minimum initial capital required for a yugen kaisha is considerably less. Some Japanese practitioners caution that the use of a yugen kaisha by a foreign investors carries with it a certain stigma as this form is usually used by Japanese small business owners of gas stations, convenience stores and other small proprietorships, not by major corporations. The principal reason that foreign investors continue to use the yugen kaisha form despite the supposed stigma is that for U.S. tax purposes a yugen kaisha is allowed to "check the box" under the Internal Revenue Services's "Check the Box" regulations to elect pass through tax treatment; a kabushiki kaisha cannot make such an election.
Once the foreign investor has chosen the form of corporate vehicle, the creation of the company requires about two weeks. Various registration procedures are required and the investor must use a Japanese bank to handle the subscription for the new shares (of a kabushiki kaisha) or units (of a yugen kaisha). In addition, either a Japanese lawyer or a judicial scrivener (a Japanese legal professional specializing in corporate registrations) is required to perform the formation procedures. Until the formation procedures have been completed, the acquisition vehicle is not able to sign agreements or acquire any shares or assets. Therefore, it is important to commence the procedures for forming a Japanese acquisition vehicle well in advance of the time that the vehicle will be needed.
Another issue encountered by a foreign investor using a newly formed acquisition vehicle to acquire stock or assets of a Japanese company is the jigosetsurestsu procedure. The Japanese Commercial Code requires that any time a Japanese company acquires assets which equal more than 5% of its paid-in capital within two years of its incorporation, the acquiring entity must apply to a Japanese court for the appointment of an appraiser to ensure that the price to be paid for the assets is fair and does not impair the capital of the newly formed company. Unfortunately, the fact that the price of the stock or assets to be acquired is the product of negotiations between independent parties is not sufficient to convince the appraiser that the price is fair. Rather, Japanese counsel often recommends that the acquirer hire an accounting firm or consultant to prepare a report showing that the price of the acquired property is fair. The sophistication of the court appointed appraiser and his or her willingness to accept U.S. financial valuation methods (such as discounted cash flow analysis) in making his or her determination varies. If the company is formed outside of Tokyo, then the ability of the local court and the court appointed inspectors to understand U.S. financial valuation methodologies and deal with English language documentation can be significantly lower. In addition, if the consideration for the acquisition is complicated (for example, involving an earnout), this can cause further uncertainty with respect to the procedure. Even in the Tokyo district court where the process is well understood and a body of experienced potential appraisers is available, the entire process can take 2-3 months, therefore imposing an effective waiting period on the closing of an acquisition. For this reason, the use of newly formed acquisition vehicles in Japan is often avoided by foreign acquirers.
As a general rule, corporate law in the United States is more tolerant of defensive measures than the corporate laws of most foreign countries. In the United Kingdom, for example, any actions taken by a target for the purpose of frustrating a hostile bid must be approved by the target's shareholders. Moreover, the corporate laws of the United Kingdom require a shorter time frame in which to respond to an unsolicited bid. Therefore, persuading the shareholders to vote to block a hostile bid is more difficult.
Most of the other West European nations are more tolerant of defensive measures to hostile bids than the United Kingdom, but less so than the United States. The corporate law of France, for example, allows a corporation's bylaws to limit the ability of a minority shareholder to vote. Germany's corporate law is similar to that of the United Kingdom, but does allow the target to fulfill all contracts entered into before the hostile bid was made.
Notwithstanding the foregoing, cross-border hostile acquisition transactions are rare, and virtually non-existent in some countries, such as Japan. In part this is because a great deal of cooperation is required between the two companies in a cross-border transaction, particularly in satisfying the regulatory hurdles in the country of the target company. Without such cooperation, completing a transaction is usually difficult.
A U.S. acquirer of a foreign target may be interested in minimizing its foreign tax burden. One approach is to increase the leverage of the foreign target to generate interest deductions to shelter the income earned by the foreign target. A technique for increasing leverage is to form a subsidiary in the jurisdiction of the foreign target to borrow funds from the U.S. acquirer or a third party and then acquire the foreign target. The interest expense on the debt must be combined with the income of the foreign target through consolidation, merger or some other technique. Transactions to increase leverage raise issues concerning thin capitalization, withholding tax and general limitations on the deductibility of interest, as well as issues related to foreign currency gains or losses in the case of intercompany debt. Another technique for reducing the foreign tax burden that is available in some jurisdictions is to structure the transaction to provide the foreign target with a "step-up" in the basis of its assets and, therefore, increased depreciation or amortization expense. Obviously the availability of a deduction for interest and depreciation depends on the tax code for the particular country.
In addition, certain countries have specialized structures not available in the U.S. which can be utilized by a U.S. acquirer to reduce its foreign tax burden. For example, one popular form of financing among acquirers and other foreign investors in Japan is the use of a tokumei kumiai or silent partnership. A tokumei kumiai is a contractual relation between a company, which is the proprietor, and a silent partner which provides funding to the proprietor to allow the proprietor to conduct its business in return for a share of the profits of the business. The silent partnership is not an entity like a U.S. partnership and the assets of the proprietor, even if they are acquired with the money received from the silent partner, remain the property of the proprietor. The proprietor also conducts its business in its own name; there is no reference to any silent partner. Despite these distinctive features, the silent partnership is often considered similar to a U.S. limited partnership with the proprietor playing the role of the general partner and the silent partner as the analogue to a limited partner. Typically, an acquirer will capitalize its acquisition vehicle through the use of a silent partnership in which the acquisition vehicle will be the proprietor and the U.S. acquirer or one or more of its subsidiaries will be silent partners.
The key benefit of a silent partnership to the foreign investor is that the proprietor may deduct the amount of profit it distributes to any silent partner for purposes of its own corporate income tax. This means that any silent partner's share of the proprietor's income can avoid Japanese corporate level income tax, although depending on the jurisdiction of the silent partner and the number of silent partners, withholding or other taxes might still be payable on such distributions. If a silent partner is investing from a jurisdiction which has a favorable tax treaty with Japan (the Netherlands is a commonly used jurisdiction), then such foreign silent partner can receive distributions of profits from the proprietor without paying any Japanese taxes. In addition, a silent partnership is a limited liability arrangement in which creditors of the proprietor have no recourse against the silent partner.
From a U.S. tax perspective, a U.S. acquirer of a foreign target must consider its U.S. foreign tax credit position, including the allocation of interest expense to foreign source income and, in the case of a stock purchase, should consider making an election under section 338 of the Internal Revenue Code. A section 338 election allows a U.S. purchaser of stock in a foreign target to treat such stock acquisition as an asset acquisition and to "step up" the basis in the assets of the acquired foreign target (for purposes of depreciation and amortization). Whether such election is beneficial will depend upon the particular facts and circumstances of the companies involved.
In negotiating the acquisition of a foreign target, a U.S. acquirer must make a thorough analysis of employee benefit considerations. Employee benefits provided by both the government and private employers vary widely from nation to nation. For example, contract law in the United Kingdom provides that employees may only be terminated after the running of agreed upon notice periods, absent just cause. Covered employees have a legal right not to be unfairly dismissed, and substantial compensation or a reemployment order is the remedy for infringement of such right. There are also laws regulating work force reductions ("redundancy") requiring union consultation and minimum redundancy pay for any employees who are laid off. There are also government-sponsored statutory sick pay and maternity pay plans. In addition, the government provides basic old age pensions and a state earnings-related pension plan. If the employer provides an occupational pension plan with benefits at least equal to the benefits employees would have received under the government plan, employers and employees may agree that employees' earnings are not subject to the government pension. Independent boards/trustees generally control such private plans. The ability to negotiate covenants altering the parties' obligations following the closing is more limited than in the U.S. All governmental requirements must be adhered to and the target does not have any authority to control the actions of the independent pension boards/trustees. For example, a covenant requiring a transfer of assets from any pension plan to another based on an agreed upon liability calculation method may well not be honored by the relevant pension board/trustee.
State regulation influences transactions in most other European Community member countries as well. Furthermore, union members and work councils have various, and sometimes quite significant, rights in most such countries, which must be factored into any acquisition.
Both the European Union and most countries have laws restricting acquisitions or mergers that would be anti-competitive. See E. Laws Regulating Anti-Competitive Combinations, below. In addition many countries have laws that restrict foreign ownership, particularly foreign ownership in certain industries such as banking or telecommunications.
One obstacle to combinations in some industries in the United Kingdom and France is the existence of "golden shares." A golden share is a share of stock with special rights which is retained by the government after privatization. The rights conferred by golden shares and their duration vary from company to company and from country to country, but such shares frequently provide for governmental veto power in cases of fundamental changes to the issuer, including mergers. In the United Kingdom, for example, in connection with the privatization of British Aerospace, British Telecom and portions of the electric utility industry, golden shares were issued to the government. In France, the golden shares have been issued in connection with the activities linked to national defense (for example, the armaments industry), strategic resources (oil supplies), and national transportation and infrastructures (airlines and railroads).
The influence of worker's councils in Europe are another issue that may arise in a cross-border transaction. Worker's councils frequently have rights to information, consultation, and true participation in management decisions. Under these systems, labor representatives receive advance notice of management's plans that would affect the workplace. The labor representatives then have the opportunity to consult and participate in management affairs that affect employment, including corporate mergers. The existence of worker's councils and the significant rights conferred upon workers often result in more time being focused on labor matters than is commonly the case in purely domestic business combination transactions. Moreover, in Germany and the Netherlands it may be necessary to obtain approval of the supervisory and the management boards before a transaction is allowed to proceed and the supervisory board usually includes a significant number of labor representatives and the supervisory board usually appoints the management board.
There is a substantial difference in the approach taken in investigating acquisition targets between U.S., British and Canadian ("U.S. style") legal advisors, on the one hand, and legal advisors for German, French, Spanish and other civil law countries, on the other hand. The U.S. style is to perform thorough due diligence on behalf of a client considering an acquisition. Typically, a U.S. acquirer will dispatch a team of attorneys and financial advisors to review the books, records, material contracts, etc. of the target in an attempt to analyze and understand the legal, contractual and regulatory issues and exposures and other issues surrounding the business it hopes to acquire. This U.S. style of due diligence is not customary in many civil law countries and can be a source of tension in a cross-border transaction involving a target in a civil law country.(3) In Japan, for example, the U.S. style might be viewed as an indication of mistrust. Legal advisors need to be sensitive to these different views in order not to behave in a way that undermines the goals of the client. In situations in which diligence has been limited, it may be appropriate to seek more in the way of representations, indemnities and even escrows from a foreign seller.
Similarly, the amount of documentation may vary among cultures. In parts of Asia, for example, a "deal" may occur with very little documentation, as long as there is a good relationship between the principals.(4)
A common feature in a cross-border merger agreement is a clause in which the parties state that they will submit to one jurisdiction for the resolution of disputes arising out of the agreement - typically the jurisdiction of the target company - and they agree not to bring any action relating to the agreement in any court other than courts in that jurisdiction.
Scores of countries(5) have "merger control" rules which empower national authorities to review mergers, acquisitions and other consolidations including, in certain circumstances, so-called "foreign-to-foreign" transactions. In addition, the European Commission (the "EC") passes on mergers for the European Union (the "EU"). The European Commission Merger Control Regulation (the "Merger Regulation") is based on provisions contained in the Treaty of Rome. Article 85 of the treaty prohibits collaboration that impedes the influence of effective competition in the common market, and Article 86 forbids the abuse of a dominant position. The EC can review any merger that meets its jurisdictional requirements -- the key factor being whether the merged entity would do enough business worldwide and in the EU to trigger EU jurisdiction under the Merger Regulation. This allows the EC to review mergers even if the two merging companies are not located in the EU. As long as the EC finds the merger has a "community dimension," it will determine if the merger is compatible with the common market, and, in extreme cases, may block the proposed union, order them to separate if they have already merged, impose fines, or compel a settlement. Although the ultimate legality of a proposed transaction depends upon its competitive impact, in most jurisdictions the requirement to report or furnish notification regarding the transaction and, in most instances, wait for clearance before completing the transaction is triggered simply by a revenue or other financial threshold. As a result, transactions between large entities with a significant international presence, even a combination which does not raise significant competition issues, typically require the provision of notice in multiple jurisdictions. Providing notice of a transaction in a number of jurisdictions may have implications for the timing and, in some cases, the structure of a transaction.
As stated, most jurisdictions that require notification impose waiting periods, typically of one month for cases that do not raise substantive antitrust issues. In cases that do raise significant issues, there is usually a second phase of investigation that can extend the waiting period by a period of up to six months or longer. Waiting periods generally run from notification of the transaction to the merger control authority.
While the parties' initial concern typically is the cost and delay that an antitrust review may entail, the waiting periods may also impose severe time pressure on the parties. In the U.S., a Second Request for information from the FTC or the Antitrust Division of the Justice Department extends the waiting period under the Hart-Scott-Rodino Act until 20 days after the parties have substantially complied with the Second Request. That 20 days may be, and often is, extended voluntarily as the parties attempt to resolve any remaining differences with the reviewing agency.
In the EU, the situation is quite different. If the Merger Task Force opens a Phase II investigation after the one-month Phase I review, it must conclude its Phase II work (continuing its review of information from the parties, soliciting information from competitors, customers and suppliers, often issuing a Statement of Objections and conducting an oral hearing, negotiating remedies, if appropriate, and issuing a formal decision) within four additional months. There is no established mechanism to extend this period voluntarily. In a merger with significant competitive impact, this timing can impose a great deal of pressure on the parties and the Commission, especially where divestitures or other remedies must be structured and negotiated. It also frequently means that the EU will run ahead of the U.S. or other jurisdictions in reaching a resolution, which can have significant implications for choosing among divestiture options in a transaction with global competition issues.
The notification process itself can be burdensome, irrespective of the competitive implications of the transaction. For example, all EU filings require full country-by-country market share data by volume and value as well as detailed information about affected relevant markets -- forcing parties to make early decisions on how to define markets, often a complex issue in any merger analysis. On a more mundane level, translating key documents into the regulator's language can be time-consuming, and is generally unavoidable.
In countries that have recently enacted merger control legislation,(6) there may be little institutional experience as to the appropriate economic analysis, the means for collecting information, or, more importantly, the way competition works in a number of industries. This has important consequences in terms of the extent of information that will have to be provided and may influence the order in which merger control authorities are approached. In the absence of institutional knowledge of an industry, considerable effort may be necessary to "educate" regulators about the nature and degree of competition in an industry to enable them to evaluate the transaction appropriately. Further, the relative inexperience of regulators can make it difficult to narrow the scope of information required, even on transactions that raise no genuine issues.
Although it is rare for deals to be structured around merger control issues, it may arise that a change to the structure of a transaction can have a dramatic impact on the regulatory horizon. Because the European Community Merger Regulation preempts national merger regulation and affords "one-stop shopping" to obtain merger clearance, structuring a transaction to reach the ECMR thresholds may be a desirable objective. Joint ventures are treated under the faster and more conclusive provisions of the EC Merger Regulation, so long as the joint venture arrangement is structured to lead to the integration of assets and a competitively autonomous entity. European joint ventures not so structured may be subject to the more protracted and less certain review entailed by Article 85 of the EC Treaty.
Once filing requirements have been identified, there are often strategic considerations in the sequence in which merger filings are made. In cases raising significant issues, it may be advisable to file with the regulator that is least likely to object to the transaction. An approval in one jurisdiction often increases the likelihood that other regulators will not object.
In more straightforward situations, it may be advisable to prioritize filing in the country with the longest waiting period to minimize the delay. While most jurisdictions have a deadline requiring filing within a certain time after signing, in most, filing is also permissible prior to signing agreements, by using an advanced draft.
The merger control implications of a given transaction are most easily managed if the parties identify at an early stage the countries in which filing will be required. Filing requirements can be identified with reasonable certainty from the country-by-country sales data of each party in the last complete financial year, although market share data may be necessary in some jurisdictions to provide definitive information concerning international filing requirements. There are a number of benefits to early identification of filing requirements:
(i) The timing of a transaction can best be planned with full knowledge of the regulatory horizon;
(ii) If it is clear from an early stage in which jurisdictions the transaction will need to be filed, the parties have time to make strategic decisions about the order in which they will file; and
(iii) Early, pre-signing contact with regulators may be appropriate and desirable to allow for more time to develop a familiarity with an industry (and to waive some filing requirements).
When a tender or exchange offer is made to shareholders of a company with shares listed on stock exchanges in more than one country, the tender and exchange offer rules in each of the countries will most likely apply, thereby requiring compliance with multiple, and at times contradictory, sets of rules. For example, if an acquirer wants to buy a foreign company that has shares listed in the United States, the U.S. tender offer rules might conflict with those of the foreign country. These rules affect timing and disclosure obligations. There are also market-making rules from which relief must be obtained in some foreign countries. In the case of acquisitions of companies with shares listed in the U.K. and the U.S., there have been a sufficient number of these transactions so that the U.K. Takeover Panel and the SEC have positions on how to deal with cross-border tender offers. The same is true for companies listed in Canada and the U.S. With regard to other nations' laws, however, there have not yet been enough cross-border transactions for the respective regulatory agencies to have developed positions on how to deal with them. These are not issues that should affect the ultimate outcome of the transaction; however, dealing with them does result in higher transaction costs for the merger.
In a tender offer for shares of a company listed on the London Stock Exchange and, through ADRs, on the New York Stock Exchange, several securities law conflicts arise. Under U.S. law, a bidder must allow for withdrawal of tendered shares until acceptance by the bidder of all tendered shares. Under the City Code in the United Kingdom, however, a tender offer must remain open for at least 14 days after the offer goes "unconditional as to acceptances" (i.e., the number of shares tendered satisfies the minimum tender condition of the bidder's offer). If, during that 14 day period, tendering shareholders are permitted to withdraw their shares, then the offer would no longer be "unconditional as to acceptances" because the number of shares tendered could be reduced below the amount required to satisfy the minimum tender condition. In this and similar cases, the SEC has been persuaded to permit the bidder to terminate withdrawal rights when the offer goes "unconditional as to acceptances," even though shareholders of the target company are still permitted to tender their shares for 14 days after such time.
The SEC has confirmed that the "all holder" rule (i.e., that a tender offer must be made to all holders of the class of securities subject to the tender offer) does not prohibit a bidder from making two separate, but contemporaneous, tender or exchange offers inside and outside the United States. In addition, under certain narrow circumstances, the SEC permits alternative consideration to be offered to non-U.S. shareholders that is not available to U.S. shareholders. One example of when a disparity in treatment might be permitted is when a different security might allow the non-U.S. shareholders to avoid adverse tax consequences.
As the volume of cross-border transactions continues to increase, parties will benefit if the SEC continues its flexible approach, as it has done for many years, with respect to foreign issuers of securities in the United States. An example of this flexible approach is the Multijurisdictional Disclosure System, discussed earlier. The MJDS is intended to facilitate cross-border offerings of securities, including rights offerings and tender offers, by specified Canadian issuers. Under the system, specified Canadian issuers can use Canadian disclosure documents to satisfy U.S. registration and reporting requirements. The Canadian MJDS for U.S. issuers is substantially similar to the MJDS adopted by the SEC. The MJDS is based on the fact that the framework of the securities laws, accounting systems, and auditing standards are very similar in the U.S. and in Canada.
On November 13, 1998, the SEC issued a release proposing rule changes to facilitate the extension of cross-border tender offers and rights offerings to U.S. investors (the "Release").(7) The Release revives initiatives which were first proposed in 1990 and 1991 and reflects the SEC's concern that U.S. investors in securities of foreign private issuers are being denied the opportunity to participate in certain tender offers and rights offerings relating to such securities. U.S. investors are often excluded from transactions so bidders and issuers can avoid the application of U.S. securities laws. While the SEC proposal is intended to relax the compliance burden placed on persons extending a tender offer or rights offering to U.S. holders, the SEC's proposal is also intended to maintain certain basic requirements of the U.S. securities laws in order to protect investors. The Release attempts to fulfill both agendas through five new exceptions, three of which are highlighted here.
First, if U.S. holders hold of record 10% or less of the subject securities of a foreign "private" issuer (a foreign issuer whose shares are not registered in the U.S.), tender offers for such securities would generally be exempt from the Exchange Act and the rules thereunder which govern tender offers. This exemption is referred to as the "Tier I" exemption in the Release and would be available to both U.S. and foreign bidders.
Second, when U.S. holders hold of record less than 40% of the class of securities of a foreign private issuer sought in a tender offer, limited tender offer exemptive relief would be available to eliminate frequent areas of conflict between U.S. and foreign regulatory requirements. This exemption is referred to as the "Tier II" exemption in the Release and largely represents a codification of current SEC exemptive and interpretive positions. Apart from this standard exemptive relief, a tender offer subject to Tier II would generally need to comply with U.S. requirements.
Third, under the proposed new Securities Act Rule 802, subject to certain conditions, securities issued in exchange offers for foreign private issuers' securities (and in certain business combinations involving foreign private issuers) would be exempt from the registration requirements of the Securities Act and the qualifications requirements of the Trust Indenture Act of 1939, if U.S. holders hold of record 5% or less of the subject class of securities.
The proposed exemptions do not affect a bidder's or issuer's potential liability under the anti-fraud rules of the U.S. securities laws.
Cross-border issues arise even in mergers involving two U.S. companies. As noted above, the European Union can review any merger that meets its jurisdictional requirements -- the key factor being whether the merged entity would do enough business worldwide and in the European Union to trigger EU jurisdiction under the Merger Regulation. Examples of the European Community reviewing such transactions include the Boeing-McDonnell Douglas merger and the WorldCom-MCI merger.
The Seagram - PolyGram combination was the acquisition of a Dutch company by a Canadian company. As part of the consideration for Seagram's tender offer, Seagram issued shares and, as a result, a Registration Statement had to be filed with the SEC. While a U.S. acquisition requiring SEC registration would typically be structured as a one-step merger, this transaction was structured as a tender offer because shares of a non-Dutch entity could not be issued in a merger involving a Dutch target. Because PolyGram's shares were listed on both the NYSE and the Amsterdam Stock Exchange, Seagram needed to comply with the tender offer rules of the SEC, the Dutch Merger Commission and the Amsterdam Stock Exchange. To harmonize the differences, Seagram had to ensure that it would provide PolyGram's shareholders with the most favorable protections of all these rules. For example, withdrawal rights are not required during the initial offer period under Dutch law. To satisfy U.S. law, Seagram made withdrawal rights available throughout the offer. From a disclosure perspective, Seagram used one offering document for all PolyGram shareholders that satisfied the disclosure requirements of the various regulatory agencies.
Royal Philips Electronics owned 75% of the PolyGram shares and the other 25% were owned by the public. However, most of the other 25% of the shares were held in bearer form through a book entry trading system in the Netherlands, which made it difficult to know who the beneficial owners were and to assess whether they would tender their shares. Although Philips had agreed to tender its shares, the lack of a registry was significant because Seagram wanted to acquire at least 95% of the shares. Whereas in Delaware a bidder usually needs 90% of shares to be tendered in order to effect a short form merger (or 51% for a two-step transaction), under Dutch law a bidder needs to acquire 95% of the shares in order to acquire the remaining shares pursuant to a judicial "compulsory acquisition" proceeding (which can take more than a year to complete). The 95% minimum condition in the acquisition agreement reflected the threshold needed in a post-closing compulsory acquisition.
Dutch law is more like the Pennsylvania statute than the Delaware statute -- permitting the board of directors of a target company to consider many more variables when evaluating an offer to purchase the company. Seagram made a presentation to the PolyGram board addressing employee issues. As in all acquisitions, employee and executive retention issues needed to be addressed. Especially in multinational transactions, local expectations and integration considerations must be evaluated. Moreover, Dutch law required that the applicable worker's councils and labor unions be consulted regarding the acquisition. In seeking to address employee concerns, the acquisition agreement provided up to $40 million as a retention pool for the purpose of retaining the services of selected key employees and required that Seagram maintain PolyGram's severance plans for at least one year following the closing and generally to make 150% of the severance payments required thereunder.
As discussed earlier, DaimlerChrysler's global ordinary shares are now listed on 19 stock exchanges around the world, including the NYSE (where they trade as ordinary shares, not as ADRs). DaimlerChrysler seems to have overcome any "flow back" issue, with U.S. shareholders continuing to hold a very substantial percentage of the shares. DaimlerChrysler's global share does not, however, qualify for inclusion in the S&P 500, even though the stock of Chrysler was previously included.
Daimler-Benz was not able to make an exchange offer for Chrysler shares itself, since German companies cannot issue shares without a regulatorily approved capital increase, which is somewhat complicated. For that reason and a number of others, including to assure the continued holding of shares by German institutions, a new German company, DaimlerChrysler A.G., was created to acquire both companies, with both sets of shareholders ending up with shares in the new company. The acquisition company had to be incorporated in a country that was a member of the European Union in order for the merger to be tax-free to Daimler-Benz shareholders.(8) An additional reason to incorporate in Germany was that under German law the shareholders receive an imputed tax credit on the taxes the German company has paid in respect of the dividends the company pays to its shareholders.(9) The exchange offer for Daimler-Benz' shares required 80 percent participation and 90 percent to achieve pooling.(10) The exchange ratio was somewhat complicated, providing for an adjustment to account for Daimler's annual dividend, a special distribution and the impact of a Daimler rights offering.
The transaction was tax-free to both sets of shareholders and was accounted for as a pooling of interests. In order to achieve tax-free treatment for Chrysler shareholders, Daimler-Benz shareholders needed to end up with over 50 percent of the combined company.(11)
German companies have two boards of directors, a supervisory board, in which board members are evenly divided between employee representatives and outside shareholders, and a management board, appointed by the supervisory board, consisting of the company's senior managers. In the case of DaimlerChrysler, 10 executives from Daimler and 8 from Chrysler sit on the management board. The German Unions gave one of the seats on the supervisory board to the United Auto Workers. Deutsche Bank Chairman Hilmark Kopper is the Chairman of the supervisory board. On DaimlerChrysler's supervisory board, 5 of the shareholders representatives are from the former board of Chrysler and 5 are from the former board of Daimler. J|rgen Schrempp, the former Chairman of Daimler, and Robert J. Eaton, the former Chairman of Chrysler, are co-chairman of the management board and co-CEOs.(12) Robert Eaton is scheduled to retire in three years. The company maintains dual headquarters in the U.S. and Germany.
Before merging with WorldCom in 1998, MCI, in November 1996, entered into a merger agreement with British Telecom, and subsequently entered into an amended version of that merger agreement in August 1997. BT had purchased a 20% equity interest in MCI in 1994 and the merger agreement was intended to be an expansion of that relationship and "strategic" for purposes of Delaware law.
The MCI-BT merger agreement had a fixed exchange ratio plus a cash component. While the agreement contained a number of merger of equal features, the pricing included a premium to MCI shareholders. The exchange ratio also permitted BT to pay its ordinary dividends and a special distribution to its shareholders prior to the merger. The merger required the approval of both sets of shareholders and various regulatory approvals, including the FCC. The merger was to be effected by the merger of MCI into a wholly owned, newly formed U.S. subsidiary of BT.
While BT had ADRs traded on the NYSE, the number of shares listed represented only slightly over 2% of BT's market capitalization. MCI's market capitalization was approximately 60% of the size of BT's, so the contemplated registration of BT ADRs to effect the merger was massive. In order to reduce the negative market impact of "flow back," it was announced that post-merger the combined company would engage in a substantial share buy-back.
The shareholder profile of the two companies was quite different. BT pays out 60-70% of its net income as dividends and, therefore, attracts investors seeking a return; MCI's shareholder base was growth-oriented. Dividends in the U.K. are tax-advantaged relative to dividends in the United States, since Advance Corporation Tax paid by U.K. companies creates a tax credit for its shareholders. The special distribution before the merger was intended to give BT shareholders a tax advantaged distribution and prepare them for a somewhat reduced dividend in the future.
The transaction would have been taxable to MCI shareholders on their gain, to the extent of cash received, and otherwise tax-free.
Some of the "merger of equals" features included co-chairmen roles for Sir Iain Vallance and Bert Roberts; eight directors from BT, seven directors from MCI; five out of the first ten meetings of the Board each year were to be held in the U.K. with Sir Iain Vallance acting as Chairman and the other five were to be held in the U.S. with Bert Roberts presiding; an Office of the Chief Executive Officer, consisting of one BT officer and one MCI officer; employment contracts for a number of senior management; U.K. and U.S. headquarters and the "hiving down" of BT's operations into an operating company. BT was to be renamed "Concert" and moving BT's operations into a subsidiary and making Concert into more of a co-managed holding company was intended to look and feel more like a merger of equals.
The U.K. government owns a "special share" in BT which essentially provides that without U.K. government approval (i) a non-U.K. person cannot own more than 15% of BT's ordinary shares and (ii) the senior executive of the company must be a U.K. citizen. It was anticipated that in connection with the merger, the U.K. government's special share would be redeemed.
As to FCC approval, the parties were required to go forward with the merger as long as the FCC approval did not contain a "burdensome condition," essentially a condition that would have a materially adverse effect on one of the companies or the combined company.
In connection with the merger, MCI entered into an extensive retention bonus plan for senior management and middle management.
The amended merger agreement provided for a substantial termination fee if BT's shareholders failed to approve the transaction.
The MCI/BT merger had been negotiated as a strategic combination and contained a tight no-shop covenant with a fiduciary out that required MCI's board of directors to conclude, prior to providing any information to, or engaging in discussions or negotiations with, any competing bidder such as WorldCom or GTE, that the unsolicited proposal made by them was a "superior proposal" (satisfying a number of criteria) which, if consummated, would result in a transaction more favorable to MCI's stockholders. To the extent MCI reached such a conclusion, it was permitted to provide information to, or discuss or negotiate with, WorldCom or GTE only if MCI then determined that such action was necessary for the Board to comply with its fiduciary obligations. The MCI Board was able to negotiate a waiver from BT that enabled it to receive information from, and engage in discussions with, WorldCom and GTE. By relying on a waiver, as opposed to trying to satisfy the superior proposal element of its no-shop covenant, MCI avoided terminating its BT agreement and committing to a break-up fee before it had a new agreement. In addition, BT had greater than typical contractual rights in regard to approval of MCI business combinations because of its earlier purchase of 20% of MCI in 1994.
WorldCom ultimately agreed to pay $51 a share for MCI's stock, payable in WorldCom stock. BT consented, and MCI entered into a definitive agreement with WorldCom.
During the regulatory approval process for the WorldCom-MCI merger, MCI was required by the EC and the Justice Department to sell its Internet business, ultimately to Cable & Wireless, in order to ease regulators' concerns that MCIWorldCom would have too large a share of Internet traffic. MCI tried to satisfy regulators concerns by selling its wholesale Internet infrastructure, but the EC was not satisfied and required the sale of the retail Internet business as well. Interestingly, in this merger of two U.S. companies, the EC took the lead in pushing the divestiture, since its review had a more rigid timetable, described earlier, than that of the Justice Department.
In the Teleglobe (Canadian company) - Excel (U.S. company) transaction, shareholders of Excel received registered shares of Teleglobe listed on the N.Y.S.E. in a stock-for-stock exchange, with a newly formed U.S. subsidiary of Teleglobe merging into Excel, with Excel surviving as a subsidiary of Teleglobe. The transaction was structured as a strategic merger of equals containing the following provisions: no premium; balanced representations, warranties and covenants; and 7 directors from each of the companies, with a fifteenth director chosen mutually.
Simultaneously with the execution of the merger agreement, a majority of the shareholders of each of the companies entered into a consent and voting agreement approving the transaction. In addition, each of the companies granted a stock option representing 19.9% of its shares to the other, exercisable under certain circumstances, including if a third party were to acquire in excess of 25% of the issuer's shares. The merger agreement did not contain any "fiduciary outs."
It was a condition to closing that the transaction be tax-free to both sets of shareholders. With Teleglobe, a Canadian company, as the acquirer, tax-free treatment would not be available to the Excel shareholders unless Teleglobe shareholders, following the merger, held a majority of the shares. Because the market capitalizations of the two companies were so close in value, normal fluctuations in trading price could affect the calculation and, as a result, a revenue ruling from the I.R.S. was sought and obtained providing that the U.S. shareholders would not be deemed to own in excess of 50% of the combined company based on historical ownership information, rather than the relative market capitalization at any time.
As a result of the different sets of accounting principles in the United States and Canada (namely, the fact that in Canada, if the shareholders of the acquiring company wind up owning more than 50% of the company following the merger, the transaction is treated as an acquisition, which was the case with Teleglobe and its shareholders), the merger is being accounted for as a pooling of interests in the United States and a purchase in Canada.
In gaining the necessary stock exchange approvals, Teleglobe, a NYSE listed company, was able to benefit from the NYSE's unwritten policy of deferring to the rules of the principal exchange on which an issuer's securities are listed. As mentioned, the shareholders of both companies owning over a majority of the shares acted by written consent to approve the transaction. While the rules of the NYSE suggest that it would not normally approve the taking of action by majority written consent to satisfy the requirement that the stockholders approve the issuance of more than 20% of the outstanding shares of an issuer, because the Toronto and Montreal Exchanges permitted action by written consent and deemed the consent sufficient to approve the issuance of the Teleglobe shares in the merger, the NYSE deferred to the policies of those exchanges and the issuance did not require formal Teleglobe shareholder approval.
The Teleglobe transaction required Teleglobe to solicit the approval of its stockholders for a charter amendment to put in place certain mechanisms to preserve the structure of its Board and management, as agreed to as part of the merger. Because Teleglobe, under U.S. securities laws, is a foreign private issuer, it is not subject to Section 14 of the Exchange Act and therefore was not required to prepare its proxy statement in connection with the charter amendment in accordance with the U.S. proxy rules, nor was it required to deliver an information statement in accordance with Regulation 14C to its shareholders (as was Excel in connection with the approval of the merger) in connection with the approval of the share issuance by written consent.
1. Edward F. Greene et al., Toward a Cohesive International Approach to Cross-Border Takeover Regulation, 51 U. Miami L. Rev. 823, n.6, n.29 (1997).
2. Masatake Yone and Stephen Overton, Asia Law Supplement Japan, CROSS-BORDER M&A.
3. Franci J. Blassberg, Eleventh Annual Corporate Law Symposium: International Aspects of Mergers and Acquisitions, 66 U. Cin. L. Rev. 1071, 1073 (1998)
4. Wilson Chu, The Human Side of Examining A Foreign Target, Mergers & Acquisitions, January/February 1996, at 35.
5. In addition to the U.S., Canada and the EU, the following countries, among others, have merger control legislation: all of the Member States of the EU (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, UK -- if the EU Merger Regulation does not apply to a transaction, the national rules of the relevant member State or States will apply), Australia, Brazil, Czech Republic, Hungary, India, Israel, Japan, South Korea, Mexico, New Zealand, Norway, Poland, Russia, Slovakia, South Africa, Switzerland, Taiwan, Turkey and Venezuela.
6. Of the countries identified in footnote 19, over 70% had no merger regulation legislation prior to 1990.
7. SEC Release No. 33-7611, 34-40678 (November 13, 1998).
8. Deal Spotlight: A Closer Look at Chrysler-Daimler, Corporate Control Alert, July/Aug. 1998, at 8, 9.
11. Id. at 8.
12. Id. at 9-10.