1/ MERGER AND ACQUISITION WAVES

Acquisitions can be paid for either in cash or in shares. Generally speaking, share transactions predominate when corporate valuations are high, as they were in 1999–2000, because absolute values do not have to be determined.

However, in less propitious times, payment in cash is highly appreciated, both by sellers, who delight in receiving hard cash which will not lose its value on the stock market, and by buyers, who are not keen to issue new shares at a price that to them would seem to be discounted. Between 2007 and 2013, cash was back in fashion!

As shown in the above graph, mergers and acquisitions tend to come in waves:

• In the 1960s, conglomerates were all the rage. ITT, Gulf and Western, Fiat, Schneider and many others rose to prominence during this period. The parent company was supposedly able to manage the acquired subsidiaries better, plus meet their capital needs. Most transactions were paid for with shares.
• In the 1980s, most acquisitions were paid for in cash. Many of the big conglomerates formed in the 1960s were broken up. They had become less efficient, poorly managed and valued at less than the sum of the values of their subsidiaries.
• In the 1990s and 2000s, companies within the same sector joined forces, generally in share transactions: Procter & Gamble/Gillette, Pfizer/Wyeth, Arcelor/Mittal, Cadbury/Kraft, etc.
• In the 2010s, the logic is the same and payments are mostly in cash: Kraft/Heinz, SABMiller/AB Inbev, Lactalis/Parmalat, Air Liquide/Airgas, etc. Since 2014, as the stock market has been regaining momentum, we are seeing more and more payments in shares: Peugeot-FiatChrysler, Lafarge-Holcim, Luxottica-Essilor, Worldline-Ingenico, Sprint-T-Mobile.

It seems to us that there are three main principles that explain the cyclical nature of mergers:

• when the economic situation is depressed or very bad, companies focus on their operating activities, seeking to cope with problems and to restructure. When the economy improves, they regain confidence, are more open minded and ready to consider mergers and acquisitions, which are always complicated to implement. But because the economic situation is good, they are prepared to take a risk;
• the availability of equity or debt financing is crucial because an acquisition requires financing. When share prices are low, shareholders are not very keen on being diluted in conditions that are bad for them and it is difficult to carry out capital increases. Also, if share prices are low, this means that it is unlikely that the economy is booming, making it difficult to obtain debt financing. High share prices are often the consequence and the cause of more easily obtainable financing, a clear sign of optimism!;
• finally, herd behaviour will encourage companies in a given sector to carry out mergers when they see another sector player initiating a merger, so that they will not be the only ones creating cost and/or revenue synergies which could give them a clear competitive advantage. This could be witnessed in 2020 in the payment industry (e.g. Worldline-Ingenico, Nexi-Sia, Rapyd-Korta).

Putting the purely financial elements aside, the determinants of mergers and acquisitions can be macroeconomic, microeconomic or human factors, as we will now see.

2/ MACROECONOMIC FACTORS

There are several determining macroeconomic factors:

• Periods of innovation and technological change are often followed by merger waves. During the innovation period (computers in the 1970s, the Internet or renewable energies today), many new companies are founded. Inevitably, however, the outlook for the growth and survival of these start-ups will fade, leading to a period of consolidation (Criteo buying Manage). Moreover, start-ups' heavy financing needs may prompt them to seek the support of a major group that, in turn, can take advantage of the growth in the start-ups' business (Peugeot buying TravelCar, a carsharing rental platform).
• Many companies are undergoing a change in market scope. Thirty years ago, their market was national; now they find that they must operate in a regional (European) or more often worldwide context (Syngenta-ChemChina). Adapting to this change requires massive investment in both physical and human capital, leading to much higher financing needs (pharmaceuticals). As competition increases, companies that have not yet merged must grow rapidly in order to keep up with their now larger rivals. Critical mass becomes vital (Occidental Petroleum-Anardako). The policy of creating national champions in the 2000s encouraged this race for size (GDF-Suez becoming Engie).
• Legislative changes have fostered restructuring in many industries. A broad trend towards deregulation began in the 1980s in the US and the UK, profoundly changing many sectors of the economy, from air transport to financial services to telecommunications. In Europe, a single market was created in conjunction with a policy of deregulation in banking, energy and telecommunications. European governments further scaled back their presence in the economy by privatising a number of publicly held companies. In many cases, these companies then became active participants in mergers and acquisitions (EDF, Orange, ENI).
• The increasing importance of financial markets has played a fundamental role in corporate restructuring. In the space of 30 years, European companies have evolved from primarily credit-based systems, where banks were the main suppliers of funds, to financial market systems, characterised by disintermediation (see Section 15.1). This structural change took place in conjunction with a shift in power from banks and other financial companies (Mediobanca, Deutsche Bank, Paribas, Générale de Belgique) to investors. Accordingly, shareholders now exert pressure on corporate managers to produce returns in line with their expectations:
  • in the event of a disappointing performance, shareholders can sell their shares and, in doing this, depress the share price. Ultimately, this can lead to a restructuring (Aviva) or a takeover (Monsanto);
  • conversely, companies must convince the market that their acquisitions (Occidental Petroleum-Anadarko) are economically justified.
• Low population growth in Europe, combined with strict immigration control, has made it more difficult for firms to grow organically. In response, managers in search of new growth drivers will try to find M&A opportunities (Lactalis-Greenland in Egypt).

3/ MICROECONOMIC FACTORS

There are a number of different determining microeconomic factors:

• By increasing their size and production volumes, companies reduce their unit costs, in particular their R&D, administration and distribution costs (Nestle-Bountiful). Moreover, a higher production volume will put the company in a better position to negotiate lower costs with its suppliers (Tesco-Booker).
• Mergers can increase a company's market share and boost its revenues dramatically. To the extent that companies address complementary markets, merging will enable them to broaden their overall scope. There are two forms of complementarity:
  • geographic (Banijay-Endemol). The two groups benefit from their respective presence in different regions;
  • product (SandroMaje-DeFursac). The group can offer a full palette of products to its customers.
• Although riskier than organic growth, mergers and acquisitions enable a company to save valuable time. In growing sectors of the economy, speed (the first-mover advantage) is a critical success factor. Once the sector matures, it becomes more difficult and more expensive to chip away at competitors' market share, so acquisitions become a matter of choice (Altice-CableVision). The idea is also to get rid of a competitor (S&P-HIS Markit). When a company is expanding internationally or entering a new business, a strategic acquisition is a way to circumvent barriers to entry, both in terms of market recognition (LVMH-Tiffany) and expertise (Apple-Voysis).
• By gaining additional stature, a company can more easily take new risks in a worldwide environment. The transition from a domestic market focus to worldwide competition requires companies to invest much more. The financial and human risks become too great for a medium-sized company (oil and gas exploration, pharmaceutical research). An acquisition (paid in shares) instantly boosts the company's financial resources and reduces risk, facilitating decisions about the company's future growth (Unilever-Onnit).
• The need for cash, because groups are in difficulty (Bombardier, ThyssenKrupp), because they need to deleverage (HNA, Wanda in China) or because they regularly need to make capital gains (sale of Deutsche Glasfaser by KKR) are other reasons why M&A deals happen.
• When groups decide to refocus on their core business, we also see assets being disposed of (Nestlé's disposal of Haagen-Dazs).
• In addition to the economic criteria prompting companies to merge, there is also the human factor. Many companies founded between 1955 and 1980, which were often controlled by a single shareholder manager, are now, not surprisingly, encountering problems of succession. In some cases, another family member takes over (ArcelorMittal, Swatch, Benetton, Reliance). In other cases, the company may have to be sold if it is to survive (Norbert Dentressangle).

4/ THE LARGER CONTEXT

Mergers and acquisitions, regardless of how tricky they are to manage, form part and parcel of a company's life and serve as a useful tool for growth.

Synergies are often overestimated; their cost and time to implement underestimated. For example, making information systems compatible or restructuring staff can be notoriously difficult.

Numerous research works have measured the value created by M&A deals and how this value is shared between shareholders of the buyer and of the target. They demonstrate that value is created for the target's shareholders because of the control premium paid. For the buyer's shareholders, the results are more mixed, even if they tend to show a recent improvement since the beginning of the 2000s, when it was widely assumed that two-thirds of mergers were failing. Excluding some resounding failures (acquisition of Alstom's energy division by GE or the Monsanto by Bayer), which heavily bias the results, M&A deals would appear value-creative because of some largely successful deals such as Sanofi/Genzyme, Office Depot-OfficeMax, Peugeot-Opel. Quality and speediness of the integration process are the key factors for successful M&A deals.

1/ PRIVATE NEGOTIATION

The seller or their advisor contacts a small number of potential acquirers to gauge their interest. After signing a confidentiality agreement (or non-disclosure agreement, NDA), the potential acquirers might receive an information memorandum describing the company's industrial, financial and human resource elements. Discussions then begin. It is important that each potential acquirer believes they are not alone, even if in reality they are. In principle, this technique requires extreme confidentiality. Psychological rather than practical barriers to the transaction necessitate the high degree of confidentiality.

To preserve confidentiality, the seller often prefers to hire a specialist, most often an investment banker, to find potential acquirers and keep all discussions under wraps. Such specialists are usually paid a success fee that can be proportional to the size of the transaction. Strictly speaking, there are no typical negotiating procedures. Every transaction is different. The only absolute rule about negotiating strategies is that the negotiator must have a strategy.

The discussion focuses on:

• how much control the seller will give up (and the status of any remaining minority shareholders);
• the price;
• the payment terms;
• any conditions precedent;
• representations and warranties; and
• any contractual relationship that might remain between the seller and the target company after the transaction.

As you might expect, price remains the essential question in the negotiating process. Everything that might have been said during the course of the negotiations falls away, leaving one all-important parameter: price. We now take a look at the various agreements and clauses that play a role in private negotiation.

2/ AUCTION

In an auction, the company is offered for sale under a predetermined schedule to several potential buyers who are competing with each other. The objective is to choose the one offering the highest price. An auction is often private, but it can also be announced in the press or by a court decision.

Private auctions are run by an investment bank in the following manner. Once the decision is taken to sell the company, the seller often asks an audit firm to produce a vendor due diligence (VDD, also called a long form report) to provide a clear view of the weak points of the asset from legal, tax, accounting, environmental, strategic and regulatory points of view. The VDD will be communicated to buyers later on in the process. For the moment, a brief summary of the company is prepared (a “teaser”). It is sent, together with a NDA, to a large number of potentially interested companies and financial investors.

In the next stage (often called “Phase I”), once the potential buyers sign the non-disclosure agreement,⁴ they receive additional information, gathered in an information memorandum (“info memo”). Then they submit a non-binding offer indicating the price, its financing, any conditions precedent and eventually their intentions regarding the future strategy for the target company.

At that point of time (“Phase II”), a “short list” of up to half a dozen candidates at most is drawn up by the seller and their advisor on the basis of price, other sales conditions, and their confidence in the capability and willingness of the candidates to successfully conclude the sale. Selected buyers receive still more information and possibly a schedule of visits to the company's industrial sites and meetings with management. Often an electronic data room is set up, where all economic, financial, regulatory, environmental and legal information concerning the target company is available for perusal. Access to the data room is very restricted; for example, no copies can be made. At the end of this stage, potential investors submit binding offers.

At any time, the seller can decide to enter into exclusive negotiations for a few days or a few weeks. For a given period of time, the potential buyer is the only candidate. At the end of the exclusive period, the buyer must submit a binding offer (in excess of a certain figure) or withdraw from the negotiations. Exclusivity is usually granted on the basis of a pre-emptive offer, i.e. a financially attractive proposal.

Together with the binding offers, the seller will ask the bidder(s) to propose a markup (comments) to the disposal agreement (called the share purchase agreement, SPA)⁵ previously provided by the seller. The ultimate selection of the buyer depends, naturally, on the binding offer, but also on the buyer's comments on the share purchase.

The seller selecting an auction process to dispose of the company may believe that it will lead to a high price because buyers are in competition with each other. In addition, it makes it easier for the seller's representatives to prove that they did everything in their power to obtain the highest possible price for the company, be it:

• the executive who wants to sell a subsidiary;
• a majority shareholder whose actions might be challenged by minority shareholders; or
• the investment banker in charge of the transaction.

Competition sometimes generates a price that is well in excess of expectations. Moreover, an auction is faster, because the seller, not the buyer, sets the pace.

However, the auction creates confidentiality problems. Many people have access to the basic data, and denying rumours of a transaction becomes difficult, so the process must move quickly. Also, as the technique is based on price only, it is exposed to some risks, such as several potential buyers teaming up with the intention of splitting the assets among them. Lastly, should the process fail, the company's credibility will suffer. The company must have an uncontested strategic value and be in sound financial condition. The worst result is that of an auction process which turns sour because financial results are not up to the estimations produced a few weeks before, leaving only one buyer who knows they are now the only buyer.

A well-processed auction can take three to five months between intention to sell and the closing. It is sometimes shorter when an investment fund sells on to another fund.

3/ THE OUTCOME OF NEGOTIATIONS

In the end, whatever negotiating method was used, the seller is left with a single potential buyer who can then impose certain conditions. Should the negotiations fall apart at this stage, it could spell trouble for the seller because they would have to go back to the other potential buyers, hat in hand. So the seller is in a position of weakness when it comes to finalising the negotiations. The principal remaining element is the representations and warranties provisions that are part of the share purchase agreement.

Representations and warranties (“reps & warranties”) are particularly important because they give confidence to the buyer that the profitability of the company has not been misrepresented. It is a way of securing the value of assets and liabilities of the target company as the contract does not provide a detailed valuation.

Representations and warranties are not intended to protect the buyer against an overvaluation of the company. They are intended to certify that all of the means of production are indeed under the company's control, that the financial statements have been drawn up in accordance with accounting principles and that there are no hidden liabilities.

Well-worded representations and warranties clauses should guarantee to the buyer:

• the substance of fixed assets (and not their value);
• the real nature and the value of inventories (assuming that the buyer and the seller have agreed on a valuation method);
• the real nature of other elements of working capital;
• the amount and nature of all of the company's other commitments, whether they are on the balance sheet (such as debts) or not.

They also facilitate the sharing of known risks within the company at the time of the sale (disputes, defaulting customers) between buyer and seller.

The representations and warranties clause is generally divided into two parts.

In the first part (representations), the seller makes commitments related to the substance of the company that is to be sold.

The seller generally represents that the target company and its subsidiaries are properly registered, that all the fixed assets on the balance sheet, including brands and patents, or used by the company in the ordinary course of business, actually exist. As such, representations and warranties do not guarantee the book value of the fixed assets, but their existence.

The seller represents that inventories have been booked correctly, and that depreciation and provisions have been calculated according to GAAP.⁶ The seller declares that the company is up to date in tax payments, salaries and other accruals and that there are no prejudicial contracts with suppliers, customers or employees. All elements already communicated to the buyer, in particular exceptional items such as special contracts, guarantees, etc., are annexed to the clause and excluded from it because the buyer is already aware of them.

Lastly, the seller represents that during the transitional period between the last statement date and the sale date the company was managed in a prudent manner. In particular, the seller certifies that no dividends were distributed or assets sold, except for those agreed with the buyer during the period, that no investments in excess of a certain amount were undertaken, nor contracts altered, etc.

This is known as the locked-box system, where the price is definitively set on the basis of the latest financial statements provided by the seller and reviewed by the buyer. Otherwise, the company's accounts will have to be closed at the time of sale and price adjustments will have to be made if the equity (or, to simplify the process, the net debt and working capital) recorded is different from that guaranteed by the seller.

In the second part of the clause (warranties), the selleragrees to cover any additional liabilities that were not disclosed to the buyer (which the buyer was unable to factor in when setting the price), that occurred prior to the sale and come to light after the sale, and to do so for a given period (usually three years). Thresholds and a predetermined cap are set. In some cases, it is possible to set off such liabilities against provisions which then fall away or against income from assets sold at a higher price than expected. Warranties are often accompanied by a holdback (part of the purchase price is put in an escrow account)⁷ or a bank guarantee.

The representations and warranties clauses are the main addition to the sale agreement but, depending on the agreement, there may be many other additions, so long as they are legally valid – i.e. not contrary to company law, tax law or stock market regulations requiring equal treatment of all shareholders. A non-exhaustive list would include:

• means of payment;
• status and future role of managers and executives;
• audit of the company's books. On this score, we recommend against performing an audit before the two parties have reached an agreement. An audit often detects problems in the company, poisoning the atmosphere, and can serve as a pretext to abandoning the transaction.
• minority shareholders' agreement; etc.

Of course, the parties to the contracts should also call upon legal experts to ensure that each clause is legally enforceable.

The final step is the actual consummation of the deal. It often takes place at a later date, because certain conditions must be met first: accounting, legal or tax audit, restructuring, approval of domestic or foreign competition commissioners, etc.

Sometimes a link-up is not allowed for competition (anti-trust) reasons (Sainbury's–Asda merger in the UK, Alstom–Siemens in Europe) or control of foreign investments on companies considered as strategic (Carrefour–Alimentation Couche Tard, Broadcom–Qualcomm). Accordingly, these concerns must be anticipated very early on in the merger process and the parties must be assisted by specialised lawyers.

In Europe, the thresholds are €5bn for the combined sales of the parties and €250m for sales made on a combined basis in Europe by at least two parties. An exception exists when all companies concerned generate more than two thirds of their gross revenue within the EU, and within the same single country (the two-thirds rule).

Finally, in the USA, the Hart–Scott–Rodino law allows for notification to be waived if the value of the target is less than $92m. Many types of transactions are, nonetheless, exempted; for example, deals worth less than $368m between companies with sales of less than $184m, target's sales of less than $18.4m, etc.

4/ THE DUAL-TRACK PROCESS

In order to improve its negotiation position or because the likely outcome of the sale process is unclear, the seller may decide to pursue a dual-track process: it will launch a sale process and the preparation of an IPO in parallel. At the latest possible moment, it will choose to sell to the one offering the best price, be it the stock market or a buyer. This is why in 2018, Delachaux cancelled its IPO and replaced an investment fund (CVC) with a Canadian investor (CDPQ).

1/ STAKE-BUILDING

To succeed in acquiring a listed company, the first step can be to start building a block in the company. This is how Vivendi acquired 30% of Gameloft before launching a full offer on the rest of the shares.

There are three methods available to investors seeking to accumulate shares:

• gradually buying up shares on the market. Shares are purchased at the market price and the identity of sellers is generally unknown;
• acquiring blocks of shares, which involves negotiating the purchase of large blocks of shares with identified sellers;
• an equity swap or total return swap (TRS), which is a contract to swap the stock performance (dividends, capital gains and losses) between a bank (which pays the performance to the investor) and an investor (who wishes to take a risk on the performance of a share without holding it, and who pays interest to the bank) or the opposite. The bank hedges this operation by buying shares on the market. At the end of the swap term, the investor buys the bank's shares at the price paid by the latter. This is how Elliott acquired a 2% stake (in addition to the 3.75% stake it held in shares) in Telecom Italia in 2018.

The following conditions must be met for an acquisition of an attractive percentage at a reasonable price:

• the share capital of the target company must be dispersed, with no controlling shareholder actually controlling the company;
• the operation must be carried out in secret to avoid defensive measures being taken by shareholders opposed to the acquirer of the securities and to prevent the target's share price from soaring;
• the volume of daily transactions in the security must be large enough to allow for large purchases without causing a market imbalance.
• Sometimes the purchase of securities is made by several investors acting in concert (see below) and sometimes over a long period of time.

In order to prevent the acquirer from taking control of a company in that way, most market regulations require investors in a listed company to publicly declare when they pass certain thresholds in the capital of a company. If the acquirer fails to declare these shares, voting rights are lost.

The first threshold is most often 3% (UK, Switzerland, Spain, Germany, Italy, etc.).

Regulatory disclosure requirements allow minority shareholders to monitor stake-building and prevent an acquirer from getting control of a company little by little. These requirements are also helpful for the management to monitor the shareholder structure of the company. By-laws can set additional thresholds to be declared (generally lower thresholds than required by law).

Regulatory threshold disclosure requirements are the following:

2/ TYPE OF OFFER

It is very unusual for an acquirer to gain control of a public company without launching a public offer on the target. Such offers are made to all shareholders over a certain period of time (2–10 weeks depending on the country). Public offers can be split between:

• share offers or cash offers;
• voluntary or mandatory offers;
• hostile or recommended offers.

3/ CERTAINTY OF THE OFFER

It would be very disruptive for the market if an acquirer were to launch an offer and withdraw it a few days later. All market regulations try to ensure that when a public offer is launched, shareholders are actually given the opportunity to tender their shares.

Therefore, market regulation requires that a cash offer is fully funded when it is launched. Full funding ensures that the market does not run the risk of a buyer falling short of financing when the offer is a success! This funding usually takes the form of a guarantee by a bank (generally the bank presenting the offer commits that if the acquirer does not have the funds the bank will pay for the shares).

Another principle is that offers should be unconditional. In particular, the bidder cannot set conditions to the execution of the offer that remains in their hands (as an example, an offer cannot be conditional upon board approval of the acquirer). Nevertheless, in most countries, the offer can be subject to a minimum acceptance (which generally cannot be too high) and regulatory approval (including antitrust). In a few countries (the UK, the Netherlands, the US), the offer can be subject to a material adverse change (MAC) clause, which can only be invoked in extreme cases.⁸

4/ DOCUMENTATION AND MARKET AUTHORITY ROLE

The main role of market authorities is to guarantee the equal treatment of all shareholders and the transparency of the process.

In that regard, market authorities will have a key role in public offers:

• They set (and often control) the standard content of the offer document. This document must contain all relevant information allowing the target's shareholders to take a proper decision.
• They supervise the process timetable.
• In most countries their green light is necessary for the launch of the offer (they therefore control the price offered).

5/ DEFENSIVE MEASURES

In theory, a company whose shares are being secretly bought up on the stock market generally has a greater variety and number of defensive measures available to it than a company that is the target of a takeover bid. The reason behind this disparity is the secrecy surrounding shares bought up on the market compared with rules of equality and transparency applied to takeover bids.

If a company becomes aware that its shares are being bought up on the market, it is entitled to invoke all of the means of shareholder control described in Chapter 41. It can also get “friendly” investors to buy up its shares in order to increase the percentage of shares held by “friends” and push up its share price, thus making it more expensive for the hostile party to buy as many shares as it needs. Of course, the company will also need to have the time required to carry out all of these transactions, which generally involve waiting periods.

In the case of a takeover bid, there are fewer defensive measures available and they also depend on regulations in force in each country. In some countries (the UK and the Netherlands), all defensive measures taken during a takeover period (excluding attempts to identify other bidders) must be ratified by an EGM held during the offer period. Proxies granted by the general meeting of shareholders to the board prior to the offer period may be suspended. In some countries, any decision taken by the corporate and management bodies before the offer period that has not been fully or partially implemented, which does not fall within the normal course of business and which is likely to cause the offer to fail, must be approved or confirmed by the general meeting of the target's shareholders.

Furthermore, in some countries, as soon as the takeover bid has been launched, the parties involved are required to ensure that the interests of the target's employees are taken into account, to ensure that all shareholders are treated equally and that no upheaval on the stock markets is caused, to act in good faith and to comply with all regulations governing takeover bids.

The target company can either defend itself by embarking on an information campaign, explaining to shareholders and to the media how it will be able to create greater value in the future than the premium being offered by the predator, or it can use more active defensive measures, such as:

• finding a third party ready to launch a competing takeover bid, called a “white knight”;
• launching its own takeover bid on the hostile bidder;
• getting “friends” to buy up its shares;
• carrying out a capital increase or buying or selling businesses;
• warrants;
• legal action.

Just how far a board of directors is prepared to go to sabotage a takeover bid is determined by each board facing a predator. It could be depriving its shareholders of a potential capital gain and shareholders may question the responsibility of directors.

A competing takeover bid must be filed a few days before the close of the initial bid. The price offered should be at least a few percentage points higher than the initial bid. There is always the possibility that the initial bidder will make a higher bid, so there is no guarantee that the competing offer will succeed. Likewise, the “white knight” can sometimes turn grey or black when the rescue offer actually succeeds. We saw this in 2019 when Thales came to the “rescue” of Gemalto which was “under attack” by Atos.

A share purchase or exchange offer by the target on the hostile bidder, known as a Pac-Man defence, is only possible if the hostile bidder itself is listed and if its shares are widely held. In such cases, industrial projects are not that different given that an offer by X on Y results in the same economic whole as an offer by Y on X. This marks the start of a communications war (advertisements, press releases, meetings with investors), with each camp explaining why it would be better placed to manage the new whole than the other.

The buying up of shares by “friends” is often highly regulated and generally has to be declared to the market authority, which monitors any acting in concert or which may force the “friend” to file a counter-offer!

A capital increase or the issue of marketable securities is often only possible if this has been authorised by the general meeting of shareholders prior to the takeover bid, because generally there won't be enough time to convene an EGM to fit in with the offer timetable. In any event, a reserved issue is often not allowed.

Warrants, described in Chapter 41, are a strong dissuasive element. The negative consequences of warrants being issued for the company launching a hostile takeover bid mean that it is generally prepared to negotiate with the target – neutralisation of the warrants in exchange for a higher offer price.

US experience has shown that “poison pill” warrants strengthen the negotiating position of the target's management, although they don't ensure its independence. If warrants are, in fact, issued, then the matter of director responsibility will be raised, since the directors will effectively have caused shareholders to lose out on an opportunity to get a higher price for their shares.

The transfer of an important asset into a special structure to prevent its disposal. This is the method used by Suez to try to fend off the Veolia bid.

Legal action could be taken to ensure that market regulations are complied with or on the basis of misleading information if the prospectus issued by the hostile bidder appears to criticise the target's management. There is also the possibility of reporting the hostile bidder for abuse of a dominant position or insider trading if unusual trades are made before the offer is launched, for failing to comply with the principle of equality of shareholders or for failing to protect the interests of employees if the target has made risky acquisitions during the offer period. The real aim of any legal proceedings is to gain time for the target's management given that, in general, it takes a few months or quarters for the courts to issue rulings on the facts of a case.

6/ THE LARGER CONTEXT

The various anti-takeover measures generally force the bidder to sweeten their offer, but rarely to abandon it. What can happen is that an initially hostile bid can turn into a friendly merger (SABMiller/AB Inbev, Veolia-Suez). Whether a hostile offer is successful or a white knight comes to the rescue, events invariably lead to the loss of the target company's independence.

Which, then, are the most effective defensive measures? In recent bids involving large companies, those that have taken the initiative far upstream have been at a clear advantage. A good defence involves ensuring that the company is always in a position to seize opportunities, to anticipate danger and to operate from a position of strength so as to be able to counterattack if need be.

7/ SUMMARY OF SOME NATIONAL REGULATIONS

The EU directive on public offers lays down the principle that a shareholder who has assumed effective control over a company must bid for all equity-linked securities. It is up to individual countries to set a threshold of voting rights that constitutes effective control.

The directive states very specifically the floor price of a mandatory bid: the highest price paid by the new controlling shareholder in the 6–12 months prior to the bid (the exact period is set by national regulations). A mandatory bid can be in either cash or shares (if the shares are listed and are liquid).

So far as defence tactics are concerned, the European directive left European states free to:

• ban or not ban the boards of target companies from taking anti-takeover defensive measures during the bid, such as poison pills, massive issuing of shares, etc., without approval from an extraordinary general meeting;
• suspend or not suspend during an offer shareholders' agreements or articles of association limiting voting rights, transfers of shares, shares with multiple voting rights, rights of approval or of first refusal;
• authorise targets to put in place anti-takeover measures without the approval of their shareholders if the buyer does not need similar approval from its own shareholders to put in place similar measures at its own level.

Multiple voting rights and/or restrictions on voting rights disappear as of the first general shareholders' meeting after a bid that has given a bidder a qualified majority of the company. This does not apply to golden shares that have been deemed compatible with European law.⁹

The table below summarises the principal rules applicable to takeover bids in some countries:

10  That is, possibility for the majority shareholder to force the buy-back of minority shareholders and delist the company if minority shareholders represent only a small part of the capital.

11  No threshold (opt-out) or a threshold up to 49% if the by-laws of the target company permit.

12  Minimum acceptance, antitrust authorisations, authorisation of shareholders to issue shares.

13  The Scheme of Arrangement allows for 75% to agree to an acquisition for it to go through.