Austria: Takeover Commission Rulings On Distressed Situations

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Recent rulings by the Austrian Takeover Commission (TC) reflect the special challenges presented by the financial crisis. The TC has granted exceptions from the mandatory offer requirements in cases of targets or target shareholders in distress. The TC is flexible in interpreting the takeover rules, provided the specific solution is in the best interest of the free-float shareholders.

Introduction

In times of economic crisis, the special rules of the Austrian Takeover Act (TA) applicable to distressed companies would be expected to gain in importance. For takeovers of such targets, the obligation by a bidder to launch a mandatory offer can be suspended (sec 25/1/2 Austrian Takeover Act). Alternatively, exceptions to the minimum price rules can be granted (sec 26/3/3 Austrian Takeover Act). Both exceptions must be cleared with the Austrian Takeover Commission. In the past the TC has applied these rules narrowly. During the 2008/09 financial crisis, the TC has, however, resolved the "distress" situations without reliance on these provisions.

To date, the TC has had to deal primarily with cases where core shareholders of companies listed on the Vienna Stock Exchange (VSE) went into distress. These situations posed a threat to the shareholder base and thus the target itself. The two leading cases in this context relate to the financially troubled AvW, an investment advisory business company and investor in the small caps S&T and C-Quadrat, both listed on the VSE. A differently structured case relates to STRABAG SE, listed on the prime market of the VSE. In the STRABAG case, the strategic investor Rasperia Ltd was forced to find a short and medium term solution for its 25% participation in STRABAG. Its participation was in danger of being auctioned off by the creditor banks following default of Rasperia on margin calls of the participation financed by a margin loan.

In both cases, the TC showed flexibility and allowed exceptions from the obligation to launch a mandatory offer, since such offers would have potentially harmed the interests of the free float shareholders.

The AvW case

As a result of fraudulent dealings (currently being investigated by the criminal authorities and the Financial Markets Authority), the financial investor AvW went into financial distress. During these financial troubles, AvW Group exceeded the critical participation threshold of 30% in S&T. The TC1 ruled that, following the acquisition of a stake exceeding 30%, AvW was under an obligation to launch a mandatory offer. But it granted AvW a grace period of 20 trading days to reduce its participation in S&T to 30% or less.

In a subsequent further ruling2, the TC held that Capital Bank, to which AvW´s shareholding was pledged, was not to be seen as acting in concert with AvW Group. The acquisition by Capital Bank of shares in S&T, which exceeded the 30% threshold, did not trigger a mandatory offer duty. The TC showed some flexibility relative to its otherwise strict practice on "acting in concert", based on the following reasoning.

Capital Bank took the shares over on its own account and to protect its own financial interest. Additionally, given the distressed markets and the low liquidity in the S&T share, the bank would not be able to enforce its security by selling the AvW participation to third parties at a reasonable price. The TC reasoned that it could not rely on specific exceptions from the mandatory offer obligation under the Takeover Act – such as the rules on ownership transfer for security purposes and passive control change – since the statutory requirements for applying these rules were not fully met. The TC thus relied on principles embodied in these rules since a different ruling would likely have led to a sharp drop in share price and would not have been in the financial interest of the free float shareholder.

The STRABAG case

In STRABAG3, the shareholder Rasperia Ltd was to lose its 25% participation in STRABAG due to its default on a margin loan. Rasperia Ltd was a core-shareholder in STRABAG, alongside two other core-shareholders, Raiffeisen Group and HPH-Group, which each held 25% plus one share in and co-controlled STRABAG in a socalled unanimity-syndicate.

Given the financial difficulty of Rasperia Ltd to retain its participation, the co-shareholders Raiffeisen and HPH agreed to the following: (i) Rasperia Ltd would sell and assign its 25% participation in STRABAG, but retain one share and remain a fully co-controlling shareholder in the shareholder syndicate with unchanged rights and obligations; (ii) Rasperia Ltd would also be granted a call-option to re-acquire its participation in STRABAG. That option could be exercised in December 2009 or, in case of prolongation, in October 2010.

The TC held that no control change was constituted by the (temporary) acquisition of Rasperia´s 25% participation in STRABAG by the co-shareholders. First, the acquisition was intended to be temporary, as evidenced by the call-option the co-shareholders had granted to Rasperia Ltd. Moreover, during the option period, the syndicate of the three co-controlling shareholders remained unchanged. This allowed Rasperia Ltd to retain its fully co-controlling position in STRABAG despite the fact it had reduced its participation to one share. The subsequent non-exercise of the call option (control change) and the exercise of the call-option (no change in control) would not trigger an obligation to launch a mandatory offer. However, should Rasperia Ltd ultimately not exercise the call-option, the TC would consider imposing conditions and requirements on HPH Group and Raiffeisen Group if they intended to hold their then combined 75%-shareholding permanently.

The STRABAG ruling confirmed that the TC was willing to be more flexible in applying the takeover rules in times of financial crisis. Under normal circumstances, the TC would have ruled that the STRABAG case had triggered the obligation to launch a mandatory offer. In non-crisis times, the asymmetry of participation, being just one share retained by Rasperia Ltd, would not have been seen to outweigh the contractual agreement among the co-controlling shareholders that Rasperia Ltd would retain its fully co-controlling rights, despite the substantial shift in equity from Rasperia Ltd to the co-controlling shareholders during the option period.

During the financial crisis, the Austrian Takeover Commission has proved flexible in applying the take-over rules where the financial interests of the free float shareholders would be negatively affected if the rules were strictly applied.

This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.

Footnotes

1 ÜbK 07.04.2009, GZ 2009/3/1-118.

2 ÜbK 28.05.2009, GZ 2009/3/3-29.

3 Übk 27.04.2009, GZ 2009/3/2-42.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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