UK: Deals and Developments

This newsletter is intended to highlight deals and developments within the field of M&A and corporate finance. In this issue we focus on a number of developments, including the new launch of the EU Takeover Directive, the implications of the recent Sarbanes-Oxley Act of 2002, and the increasing trend of the UK’s top companies towards M&A litigation.

Another Launch For The EU Takeover Directive

The endless saga of the EU Takeover Directive continues. Seventeen years after the proposal was first put forward, and after what most commentators thought at the time was a fatal blow in 2001, when the European Parliament failed (on a tied vote) to endorse a compromise deal, the Commission has now published yet another draft version of the Directive.

The new draft follows on from the report of the EU group of "Company Law Experts" in January this year. The most recent controversial proposal put forward by that group was the "break-though" rule, which would allow bidders who achieved a 75% economic interest in the target company to override special share rights. Although the Commission has decided not to include the break-through rule, it has nevertheless included new proposals in relation to frustrating action and special share rights could prove to be just as controversial.

The key features of the new proposal are:

• Member States must make rules relating to takeovers of companies whose securities are admitted to trading on a regulated market. Only offers for transferable securities with voting rights are caught by the regime.

• The Member State in which the target securities are admitted to trading will have jurisdiction over the bid (or, if the securities are admitted to trading in more than one market, where its registered office is or where its securities were first admitted to trading).

• In any event, however, the Member State where the target’s registered office is will have jurisdiction over issues relating to employees and company law, including the control level that triggers a mandatory bid, and the conditions under which the target board may take frustrating action.

• Member States can decide whether and under what circumstances parties to a bid are entitled to bring administrative or judicial proceedings. This would allow the UK Government to continue with the current system of having the Takeover Panel as the competent authority for takeover bids, and preventing bids being halted by litigation.

• A bid must be made if a person acquires a controlling stake – but the percentage which triggers this requirement is left to Member States to decide.

• The price for a mandatory bid will normally be the highest price paid during the preceding 6 or 12 months. If more than a 5% stake has been acquired during the preceding 3 months then cash consideration must be provided.

• The target board must inform representatives of its employees of the bid once it has been made public and must let them publicise their opinion on the effects of the bid on employment. This does not improve on the employee rights in the last draft Directive and could be a sticking point for the EU Parliament.

• A new provision has been included which requires Member States to create squeeze-out rights – Member States can chose a trigger level of between 90% and 95%.

There are a range of provisions in the draft Directive which restrict the use of defensive corporate structures and special share rights.

• The target board would need the consent of shareholders in general meeting before taking frustrating action once a proposed bid is announced and certain types of restrictions on voting rights would be ineffective at the meeting.

• Companies would be required in their annual accounts to publish detailed information on a range of topics relating to control rights and restrictions on the transfer of securities or voting rights. Every two years, the company’s shareholders would have a right to vote on whether to retain any of these "structural" or "defensive" provisions.

• Any restrictions on the transfer of securities would be unenforceable against a bidder during an offer period.

• Once the bidder has sufficient securities to amend the company’s articles of association then, at the first general meeting following the bid, any restrictions on the transfer of securities or on voting rights and any special rights in relation to appointment or removal of board members would be disapplied.

There are significant technical and practical problems with these proposals on share rights, particularly because some would apply not just to arrangements between the company and a shareholder, but also to arrangements between shareholders.

Although there may now be the political will across Europe to finally push the Directive through, the complexity of some of the proposals in the new draft will mean that agreeing the detail could still be a long, and uphill, struggle.

If you have any further queries regarding the EU Takeover Directive, please contact James Palmer or Carol Shutkever, corporate partners at Herbert Smith.

We continue to strengthen our relationship with Gleiss Lutz and Stibbe, the two leading European law firms with whom we have an alliance. The main objective of the alliance is to meet the needs of the firm’s clients for an integrated, consistently high-quality, cross-border service.

Highlights of the year to date include:

• the three firms working together to advise PwC Consulting on PwC’s separation of its worldwide management consulting business and subsequent US$3.5 billion sale of the consulting business to IBM

• advising Carnival on its bid for P&O. Gleiss Lutz advised on German antitrust issues

• the three firms being appointed to CSFB’s global panel of law firm advisers

• the three firms working together to advise Kruidvat on its € 1.3 billion sale of its European health and beauty retail business to Hutchison Whampoa of Hong Kong

At the same time, we are developing the operational integration needed to underpin the transactional capability of the alliance. This has been manifested in initiatives such as the exchange of know-how, a steady flow of secondments between the three firms and joint seminars for clients.

We are also continuing to build our relationships with leading law firms in southern Europe.

The foundation of the US capital markets is investor confidence. This confidence has been severely shaken by recent scandals involving alleged misdeeds by corporate executives and independent auditors. The Sarbanes-Oxley Act of 2002 (the "Act") was the Congressional response to this threat to the US markets. The Act, which effects sweeping corporate disclosure and financial reporting reform, has been cited as the biggest change to the US securities laws since the establishment of the SEC in 1934. In addition to the disclosure and financial reporting reforms, the Act increases corporate accountability and the regulation of the accounting and legal industry while adding protections for auditors and research analysts.

From a European perspective, the most important fact is that the Act does not distinguish between US and non-US companies and would, as drafted, apply equally to any company which either files periodic reports with the SEC or has filed a registration statement with the SEC (such companies will be referred to in this article as "Issuers"). Consequently, any company which has a listing on a US exchange (such as a listed ADR programme) or which has publicly sold securities in the US will have to be concerned with complying with the Act’s requirements. It is unclear whether and to what extent the SEC will make any exemptions for non-US Issuers. The effects on Issuers are felt mainly in the areas of corporate officer accountability and corporate governance. Recent discussions with the staff of the US Securities and Exchange Commission have indicated that while they generally plan to be firm on disclosure requirements for all Issuers, they may allow some variance from the corporate governance rules for non-US Issuers.

The provisions of the Act concerning corporate officer accountability include, among other things:

• personal certification of financial information, financial reporting and disclosure control procedures by the chief executive and financial officers

• disgorgement of bonuses and incentive or equity-related compensation by the chief executive and financial officers when an accounting restatement is necessary due to misconduct

• a ban on company loans to officers (with limited exceptions). The Act also creates a new offence prohibiting the improper influencing of auditors by officers, directors or any person acting under their direction in order to render financial statements misleading

US accountancy firms who provide Issuers with audits will now be subject to regulation contained in the Act. Additionally, non-US accountancy firms who provide audits to Issuers or who perform a substantial role in the audit process with the auditors for Issuers will also be subject to the oversight imposed by the Act.

The Act replaces the existing self-regulatory system for auditors with a new, independent oversight body. The new Board is charged with adopting auditing, quality control, ethics and independence standards for accounting firms providing audits to Issuers. The Board will also be in charge of inspecting and disciplining such firms.

The Act also imposes a new federal level of regulation of lawyers. The Act mandates that the SEC adopt minimum standards of professional conduct for attorneys "appearing and practicing" before them in any way. These standards must include a "whistle-blowing" provision which would require attorneys to report evidence of material violations of the securities laws, fiduciary duties and other similar violations "up the ladder" within their corporate client. The SEC has published for comment proposed rules which include a duty to effect a "noisy withdrawal" as counsel where a company does not respond appropriately. The proposed rules would cover in-house lawyers and external counsel, whether or not they are admitted to practice in the United States. The comment period for the proposed rules will end on 18 December 2002. The SEC must adopt final standards by 26 January 2003.

In addition to regulating certain professions, the Act attempts to create protections for key professional figures that were deemed to be subject to improper influence in the past. To that end, the Act creates a prohibition of improper influence of auditors, as discussed above. The Act also regulates analyst conflicts of interest and seeks to prevent investment banking personnel from impairing the objectivity of research.

Some of the Act’s provisions were effective on the day the Act was signed by President Bush (30 July 2002). The majority of the provisions will not be effective until the SEC approves final implementing rules. To date, the SEC has approved final rules relating to the corporate officer certification and proposed certain rules regarding corporate governance and attorney conduct. The first major deadline for the approval of final rules by the SEC is 26 January 2003.

If you have any concerns about the Act’s applicability to you or any questions about its provisions, please contact Alex Bafi, US securities partner, or Kathleen O’Hagan, US securities law professional support lawyer, on 020 7374 8000.

A Herbert Smith survey on litigation in M&A transactions confirms anecdotal evidence of an increasingly litigious attitude in the UK and Continental Europe.

Herbert Smith commissioned a research study from Gabriel Ashworth Limited to gauge the extent to which the litigious attitude that has been a feature of public takeovers in the US for many years is increasingly being adopted in the UK and Continental Europe.

The respondents were those responsible for M&A in the UK’s top companies – 86 companies from the FTSE 250, including 46 from the FTSE 100 – across a broad variety of sectors.

Traditionally in the UK in particular, litigation has not featured to a significant extent in M&A transactions. This is partly due to the Panel on Takeovers and Mergers which regulates UK public takeovers – the Panel is not a statutory body and its rules do not have force of law; the grounds for challenging its decisions in the courts are therefore limited and the Code provides for flexibility in dealing with takeovers. It is partly also due to the fact that directors have a wide discretion to run the affairs of a company as they see fit and shareholders have limited rights of intervention, in contrast to the US where shareholders of the target will frequently bring proceedings.

However, it seems that times are changing and there is a widespread belief among the respondents that over the next few years M&A related litigation will increase both in the UK and Continental Europe – 45% said they detected an increasingly litigious trend, although the expectation is that it will remain less common than in the US. This perception of an increasingly litigious attitude is also borne out by the survey. Whilst only 45% said that they had considered invoking litigation or the threat of litigation in the past, 69% said they were likely to consider invoking it in a takeover situation in the next three to five years.

As to the causes of litigation in M&A, the three main triggers were seen to be:

• poor due diligence

• competition or regulatory issues

• fraudulent documentation or financial statements

Respondents felt that fraudulent documentation or financial statements were less likely to be a trigger over a three to five year period than they are in over the next 12 months. There is a perception though that alleged illegal defensive tactics (which was cited as the fifth most likely trigger, after negligent advice) will become more of a trigger.

If you would like to discuss any aspect of the findings, please contact either Harry Anderson or Henry Raine on 020 7374 8000. Copies of the survey report can be obtained from Jonathan Patterson on 020 7374 8000 or jonathan.patterson@herbertsmith.com

On 4 November 2002, the "Draft of a Law for the Dismantling of Tax Privileges and Exceptions (Steuervergünstigungsabbaugesetz – SteVAG)" was published. It includes, in some cases, drastic tax changes in the area of corporate taxation, but also in the taxation of private individuals. While the legislative procedure regarding the SteVAG will presumably not be concluded until the spring of 2003 at the earliest, the planned tax changes are proposed to be applicable in part as early as the cabinet decision on 20 November 2002, but in most cases with effect as of 1 January 2003, although with regard to the changes to VAT not until 1 April 2003 or 1 July 2003.

The current holding periods of not more than 10 years and 1 year, respectively, required for the taxation of personal profits from so called private sales transactions, are proposed to be done away with. Profits from the sale of real estate and corporate shares held as private assets would, accordingly, generally be taxable in future. This will also affect securities and real estate held indirectly through property administrating partnerships, for example most retail private equity funds and a significant part of the real estate funds. Capital gains from the disposal of so-called in kind contribution borne shares will also be fully taxable in future (cancellation of current 7-year blocking period).

In order to levy the taxes, it is proposed to introduce a regime of monitoring reports from banks for private sales transactions and an annual statement from banks for capital yields in general.

The utilisation of losses is proposed to be considerably restricted. By means of limiting the possibilities for carrying losses forward, the presently applicable minimum taxation in the case of income tax is proposed to be increased. A minimum taxation of the annual operating profit is proposed to be introduced in the case of corporation tax and trade tax and the possibility of carrying losses forward is proposed to be limited to seven years. In addition, significant restrictions on the use of losses will be implemented via limitations to the use of a fiscal unity. Moreover, in future, loss carryforwards are no longer proposed to be transferred in case of mergers or divisions and the regulations regarding so-called loss trafficking are proposed to be tightened as well.

According to the currently applicable regulations on the 15-year transition period from the corporate imputation system to the half income tax system, a corporation tax credit reduces the corporation tax in the event of profit distributions by 1/6 of the profit distributions in each case, until the corporation tax credit is used up. The fraction of 1/6 is now proposed to be reduced to 1/7. In addition, the refund of the corporation tax credit is proposed to be restricted to half of the assessed corporation tax.

Further important proposed tax changes are:

• the extension of the disallowance for expenses and reductions in profits in connection with corporate shares

• the abolition of the regulations on calculating profit for merchant vessels in international trade and for agriculture and forestry

• the introduction of an accounting prohibition regarding reserves for anniversary bonuses

• amendments regarding income from rentals and tax credits in the case of foreign income

• amendments to trade tax deductions and add backs

• abolition of a tax-free threshold for customer loyalty programmes

• amendments to the taxation of income from capital investments

• amendments in the Value Added Tax Act, in the Tax Administration Act and in the Owner-Occupied Homes Subsidy Act

• the elimination of the protection against the German CFC rules by certain Double Taxation Conventions

• several amendments to the CFC rules

• the amendment of the transfer pricing rules and the introduction of additional statutory documentation requirements

• the reduction of the straight line building tax depreciation

• the abolition of the accelerated building tax depreciation

In light of the majority the Christian Democratic Union/Christian Social Union has in the Bundesrat (the upper house of parliament), it is to be expected that the SteVAG draft will pass the legislative procedure only after significant changes. The risk exists here that the Länder (states) led by the CDU and CSU will try to bring parts of their campaign platform for the Bundestag (the lower house of parliament) elections into the legislative procedure, in particular the repeatedly advocated general increase in the taxation of capital gains in shares realised by corporations.

Moreover, it should not be overlooked that the planned lowering of the marginal income tax rate from its present level of 48.5% to 47% from 2003 to 2004 has already been postponed, and that the corporate tax rate for 2003 was raised to 26.5%. Further tax increases are already set out by the municipal tax reform planned for 2003.

A more detailed outline of the proposed tax changes and their implications as well as recommendations how to react can be obtained from regina.grossmann@gleisslutz.com upon request.

"Flavour of the month, the corporate team [at Herbert Smith] is currently the name on everybody's lips." Chambers 2002-2003.

Herbert Smith has a long-standing reputation for acting both for corporates and investment banks on mergers, acquisitions, joint ventures, takeovers, securities issues and corporate restructurings. Over recent years we have acted on virtually every type of corporate transaction.

In particular we have developed a reputation for handling complex innovative transactions, such as the establishment of dual-headed companies (as in the Carnival transaction); spin-offs and complex cross-jurisdictional joint ventures and mergers.

We combine our transactional expertise with sector experience, with a number of partners focusing on specific industrial sectors such as energy, transport, media, life sciences, food and retail, technology, e-commerce, financial services and international communications.

We have 69 corporate partners and 195 corporate assistants worldwide. This strength and depth means that we can advise on the largest and most complex corporate transactions.

Herbert Smith/Gleiss Lutz was the leading European team for completed worldwide M&A deals, advising on 92 deals at a total value of over US$373 billion, in the M&A league table published by Thomson Financial Securities Data for the 2001 calendar year. The firm’s corporate team acted on deals representing over 17% of the total value of worldwide deals completed in 2001. In 2002 the corporate practice was awarded two M&A Team of the Year awards.

• TXU Europe Group on the £1.37 billion sale of UK gas and power supply business to E.ON/PowerGen and on the restructuring of its UK and European energy business

• Swiss Life on its SFr1.1 billion capital raising and associated restructuring

• Carnival Corporation on its £3.5 billion offer for P&O Princess Cruises, involving advice on its pre-conditional proposal to enter into a dual listed company (DLC) combination with P&O Princess, combined with a partial share exchange offer for up to 20% of P&O Princess

• Bank of Ireland on its approach to Abbey National seeking a recommended offer (Herbert Smith advised jointly with Arthur Cox)

• Goldman Sachs, ABN Amro, ING on the $800 million IPO of Maxis Communications

• Johnson Matthey on the £260 million acquisition of the Synetix Division of ICI

• PwC Consulting on PwC’s separation of its worldwide management consulting business and subsequent $3.5 billion sale of the consulting business to IBM

• Enterprise Oil in relation to the £4.3 billion takeover by Shell Resources

• Next on its capital reconstruction which is being implemented by the introduction of a new listed holding company, Next Group plc, through a court-approved scheme of arrangement

• Friends Provident on its £4 billion demutualisation and flotation

• Littlewoods on the £750 million sale of the company to LW Investments Limited

• Kruidvaton the € 1 billion sale of its European health and beauty retail business to Hutchison Whampoa of Hong Kong

• KPMG UK on the € 657 million sale by KPMG UK and Netherlands of their consulting businesses to Atos Origin of France

• Associated British Foods on the € 272.5 million acquisition of Novartis AG’s Food and Beverage business

• Time Warner on the European issues of its US$220 billion merger with AOL

• Kruidvat on the acquisition of 40% of Rossmann and its sale to Hutchison Whampoa

• KPMG Deutsche Treuhand Gesellschaft AG on its sale of KPMG Consulting AG to KPMG Consulting Inc

• Munich Re on its increased stake in HypoVereinsbank

• Altadis S.A in the auction for the acquisition of Reemtsma GmbH

• Ralston Purina on its acquisition by Nestle SA for € 10.2 billion

• Suedzucker on its acquiring a 99.7% €1.35 billion stake in the sugar refinery Saint Louis Sucre

• Holsten-Brauerei AG on its sale of EMIG AG to Gerber Foods Holdings Ltd

• Bristol-Myers Squibb on its acquisition of Geschaftsbereich Pharmazeutische from E.I. DuPont

• Robert Bosch on the acquisition of Atecs Mannesmann by Robert Bosch/Siemens for $9.5 billion

• Landesbank Baden-Württemberg on its various acquisition finance projects

• Dresdner Bank on its proposed merger with Deutsche Bank

• Haindl shareholders on the sale of shares in G. Haindl’sche Papierfabriken to UPM Kymmene for € 3.9 billion

• Kempen & Co. N.V. on its successful € 1.1 billion acquisition by Dexia N.V.

• Endemol N.V. on the g 4 billion public offer by Telefonica S.A.

• Phoenix on its € 54.9 million public offer for Brocacef N.V.

• Rodamco Retail Nederland N.V. on its merger with Rodamco Europe N.V.

• IsoTis N.V. with respect to its initial public offering on Euronext Amsterdam

• Allianz AGF on its € 598 million acquisition of Zwolsche Algemeene

• LVMH (corporate and litigation) on its contested participation in Gucci N.V.

• Ballast Nedam on the merger of its dredging activities with Hollandsche Beton Groep and ensuing proceedings with the Enterprise Chamber of the Amsterdam District Court

• Acting for the bourses in Paris, Brussels and Amsterdam on the creation of Euronext

Although used in the past, rights issues (ie offering of shares to shareholders on a pre-emptive basis) have only recently been reintroduced in the Netherlands. Stibbe advises many Dutch and foreign investment banks and listed companies who want to explore this interesting trend.

At the end of 2000, Kempen & Co N.V. (the leading Dutch merchant bank advised by Stibbe, which was acquired in 2001 by Dexia Banque International à Luxembourg as a result of a successful public bid) appointed Stibbe to assist with regard to the share rights issue by Rodamco Asia N.V., a closed-end property investment company with a high-quality property portfolio of over

€ 700 million in Asia. While Rodamco Asia N.V., listed on Euronext Amsterdam, Frankfurt Stock Exchange and the Marché Libre of Euronext Paris, was in need of further capital for the expansion in Asia of its property portfolio, the solution was a discounted pre-placement to institutional investors and the subsequent (tradeable) rights issue, giving shareholders the right incentive. After overcoming complexities, among others in relation to beneficiary holders of (fraction of) shares and conflicting rules of the stock exchanges involved, the transaction has successfully launched in February 2001. This rights issue has – since then – frequently been referred to.

STET Hellas Telecommunications S.A. (STET), a Greek telecom company active in providing GSM mobile telecommunications services, acquired its UMTS licence in 2001. As STET required capital ( e 85 million) to finance the acquisition cost hereof, JP Morgan (financial adviser to STET) advised STET with respect to a (non-underwritten) rights offer to shareholders, holders of American depositary shares (ADSs) and Dutch depositary receipts (DDRs). The ADSs are – since 1998 – listed on the NASDAQ National Market and the shares of STET represented by DDRs are listed on Euronext Amsterdam, hence Stibbe’s role. As a result of the dual listing and the different categories of securities, co-ordination of the manner and timing of settlement and listing became essential. Stibbe was in particular involved by advising JP Morgan in this respect on compliance with Euronext stock exchange rules and Dutch securities law, as well as with respect to clearing and settlement, a legal (key) role that Stibbe frequently plays for foreign investment banks.

In June 2002, Stibbe, working with UK and US securities lawyers from Herbert Smith, represented the Euronext listed food retail group Laurus N.V. in a transaction with a syndicate of banks and the French food retail group Casino Guichard-Perrachon S.A. (Casino), pursuant to which Laurus raised e 400 million of new equity and rescheduled its existing bank debt into a new credit facility of up to € 950 million. The transaction involved a fully underwritten rights issue at an issue price per rights issue share equal to the price paid by Casino and the banks in a private placement, which immediately preceded the rights issue. Due to foreign securities law constraints, transferable share entitlements (SETs) were granted only to identified eligible shareholders, although shareholders who were restricted from trading or exercising their SETs were entitled to a pro rata share in any excess proceeds realised on a private offering of the rump shares. The rights issue was conditional upon the fulfilment of various conditions precedent pertaining to the private placement with Casino and the banks, which were set out in the rights issue prospectus. Despite a significant discounting of the rights issue shares to the market share price at the time of pricing, the rights issue was underwritten by the banks and a considerable number of the shares offered in the rights issue ultimately had to be taken up by the banks under their underwriting commitment against the backdrop of a falling share price. The shares of Laurus are registered shares in uncertificated form held through NECIGEF, the Dutch equivalent of the CREST system in the UK. The clearing and settlement issues surrounding this rights issue were only some of the many challenging issues surrounding this transaction.

by Martijn Haks from Stibbe

Herbert Smith acted for Littlewoods in relation to its takeover by LW Investments, a bid vehicle ultimately controlled by the Barclay brothers.

Littlewoods’ recent takeover brought to a close 80 years of private ownership by the Moores family. Expanding from the original football pools business, founded by the late Sir John Moores in 1923, into high street retail and home shopping activities, Littlewoods frequently found itself on competitors’ shopping lists. As do many privately-held groups, the Liverpool-based company safeguarded its independence with protective provisions in its articles of association. These restrictions inevitably required some careful attention when the family recently agreed to sell the group to the Barclay brothers.

In Littlewoods’ case, the protection adopted took a dual form. On the one hand, limiting the group of people to whom shares could be transferred or issued and, on the other, requiring "third party arrangements" to be approved by a committee of the company known as the shareholders’ committee. Shares covered by unapproved third party arrangements could be stripped of their voting rights by the shareholders’ committee.

In the context of the offer, these restrictions posed obstacles on two fronts. First, transfers of shares to the bidder were prohibited and it was therefore necessary to change the articles to permit them. Second, a shareholder providing an irrevocable undertaking to accept the offer and vote in favour of the changes to the articles would fall foul of the restriction on third party arrangements.

A third party arrangement included any arrangement, legally binding or not, under which a shareholder agreed or undertook or could be required to act in accordance with the wishes of a third party in respect of a general meeting of Littlewoods. A third party encompassed anyone other than a lineal descendant of Sir John or Mr Cecil Moores or a person approved by the shareholders’ committee. Irrevocable undertakings to vote in a certain way at a general meeting fell within the scope of this restriction, the basic effect of which was to disenfranchise those shareholders who signed undertakings.

The shareholders’ committee comprised five members, either appointed by the shareholders or who were shareholders themselves. On receipt of a declaration that such arrangements existed, the committee was required to declare either that the shares concerned be disenfranchised, or that the third party in question be approved.

The impact of the restrictions on the recent takeover was twofold. Shareholdings covered by irrevocable undertakings were required to be declared to the shareholders’ committee. However, an amendment of the company’s articles was also needed in order to permit the acquisition to take place and the offer was therefore conditional on, inter alia, the articles being changed. The twist was in the sequence: before any of the shares covered by irrevocable undertakings could be counted in the vote to amend the articles, the "third party arrangements" had to be approved by the shareholders’ committee.

It was therefore necessary for the shareholders’ committee to resolve to approve these arrangements so that the bidder had the comfort before it launched its bid that shares covered by the undertakings could be voted at the EGM to change the articles and so allow the offer to be implemented.

The offer became wholly unconditional on 1 November 2002.

Littlewoods’ experience serves to illustrate that protection designed to ward off unwelcome advances or prevent concentration can, logically enough, itself be an obstacle to the consummation of a happy marriage. More companies than might be expected have protection of this sort in their articles, particularly in heavily regulated or privatised industries (eg media and defence). Whilst the constitution of Littlewoods is highly unusual, identifying and structuring around these restrictions is vital, particularly in the context of public bids.

Gleiss Lutz and Stibbe worked closely with Herbert Smith in advising the Dutch retail giant Kruidvat in relation to the cross-border e 1.3 billion sale of its European health and beauty retail business, including Superdrug in the UK, to a subsidiary of Hong Kong-based conglomerate Hutchison Whampoa. The Kruidvat Group and AS Watson (Hutchison’s wholly owned retail subsidiary) have a combined turnover of e 7 billion. Herbert Smith, Stibbe and Gleiss Lutz collaborated closely in the transaction as Kruidvat had operations in the UK (the 700- store Superdrug chain), the Netherlands (Kruidvat and Trekpleister) and Belgium (Kruidvat). Kruidvat also had a presence in Poland, Hungary and the Czech Republic through its joint venture in the Rossmann chain, and part of the overall transaction involved granting an option over the company’s stake in this joint venture to Hutchison Whampoa. Gleiss Lutz had only recently acted on the acquisition of this stake in Rossmann in Central and Eastern Europe.

The deal was done under an English style agreement but was governed by Dutch law. Hence, whilst Herbert Smith did most of the drafting in London, the Amsterdam office of Stibbe was also heavily involved.

This was not the first time the alliance had worked together for Kruidvat – in July 2001 Herbert Smith and Stibbe worked together on the acquisition of Superdrug from Kingfisher. This experience proved invaluable this time around as, following the purchaser’s initial due diligence, the deal was put together in a short time. Following competition clearance, the deal was then completed in October.

This deal was a further example of the strengthening of the alliance. A number of secondments, joint meetings and visits have taken place since the alliance was founded. However, the real benefits for our clients arise when we can pool our expertise on a transaction and offer a unified cross-border service.

Herbert Smith acted for Enterprise Oil plc on its £4.3 billion recommended takeover by Shell Resources P.L.C. There had been much speculation in the first quarter of 2002 that Enterprise Oil, then the UK’s largest remaining independent oil producer and explorer, would be taken over. On 8 January, Enterprise Oil announced that it had received an unsolicited approach from a third party which it had rejected. As the industry press continued to debate the identity of this third party and the price which it may have offered, the Minister for Energy, Brian Wilson, warned that a foreign takeover of Enterprise Oil could lead to the under-exploitation of North Sea oil reserves.

In February 2002, in delivering the company’s final results for 2001, Enterprise Oil’s recently appointed Chief Executive, Sam Laidlaw, outlined a new strategy for the Enterprise Group and expressed both his belief in the role that independent exploration and production companies had to play in the industry and his confidence that Enterprise Oil could deliver competitive shareholder returns.

It was on 2 April 2002, following intensive negotiations, that the boards of Enterprise Oil and Shell Resources announced that they had reached agreement on the terms of a recommended cash offer of 725 pence per Enterprise Oil share for the entire issued and to be issued share capital of Enterprise Oil. The offer, which included a loan note alternative, valued the share capital of Enterprise Oil at approximately £3.5 billion. The offer also included net debt of £0.8 billion, thereby valuing Enterprise Oil at £4.3 billion.

The offer represented a premium of approximately 15% to the closing middle-market price of 629 pence per Enterprise Oil share on the last business day prior to the announcement of the offer. It also represented a premium of nearly 60% to the average closing price of 455 pence per Enterprise Oil share during the month prior to the announcement by Enterprise Oil on 8 January of the unsolicited third party approach.

In recommending the offer to its shareholders, the board of Enterprise Oil noted that while significant progress on the Group’s new strategy had been made in a short time and the board remained confident of the long-term attractions of this strategy, the offer provided shareholders with an opportunity to realise more quickly, and in cash, the value which the new strategy would deliver over a longer period of time.

The directors of Shell Resources estimated that the successful integration of Enterprise Oil with Shell’s existing operations would result in synergies of £300 million per year through a combination of operational efficiencies and costs reductions, a disciplined choice of exploration prospects and capital expenditure savings.

On 7 May 2002, having obtained European and US regulatory approval, Shell Resources declared the offer wholly unconditional and trading in the shares of Enterprise Oil on the London Stock Exchange was cancelled on 25 June 2002. Enterprise Oil, formed in 1982 by the British Government to hold the offshore exploration and production interests of the British Gas Corporation was, at the time of the takeover, one of the leading oil and gas companies based in the UK. It had 41 producing fields across the globe including significant operations in the UK, Norway, Italy, Brazil and the Gulf of Mexico. As recently as 1 April 2002, the company had announced a significant oil discovery in partnership with ChevronTexaco in the Gulf of Mexico.

The deal, which is to date the sixth largest European M&A deal of 2002¹ , continued Shell’s new acquisition initiative. The oil major, which had remained isolated during the industry’s period of intense consolidation in recent years – a period which saw firms such as Mobil, Elf, Total, Exxon and BP all announce large acquisitions – had, the previous week, agreed to pay £1.3 billion for Pennzoil-Quaker State, the largest motor oil company in the United States.

Herbert Smith acted for Hammerson plc in relation to its £192 million acquisition of retail warehousing operator, Grantchester Holdings PLC. The deal was announced on 9 September 2002 and Hammerson expects to have completed the acquisition by mid December

Due to a combination of movement by traditional in-town retailers to out-of-town sites and tight planning restrictions on potential new sites, demand in the retail parks sector has been increasing and this deal demonstrates Hammerson’s ability to act quickly to further pursue its stated aim of expanding into the so-called "big box" sector. The Grantchester deal marks Hammerson’s second major acquisition in the sector (following the announcement of its £58 million purchase of Parc Fforestfach, Swansea earlier this year).

There were a number of aspects of the deal that were novel and interesting both from a legal and a commercial perspective. For example, Hammerson’s bid, when made, was wholly unconditional and as a result raised interesting issues relating to the further terms and the conduct of the offer under the Takeover Code. In addition, when announced, the offer was yet to be recommended by the board of Grantchester due to a pre-existing offer led by Grantchester’s management, and the interest shown by other parties.

It was the management’s offer which initially sparked a flurry of interest in Grantchester by a number of suitors, Hammerson included, in late August 2002. The management vehicle, Dundonald Holdings Limited, had made an agreed cash bid for . the company at 218 pence per share. Hammerson considered that the value of Grantchester, and the synergies which it could derive from the acquisition in relation to its existing business, would justify a higher price. After discussions with Grantchester’s independent directors but without having secured a recommendation, Hammerson unilaterally announced an offer of 250 pence per share, trumping the Dundonald offer by nearly 15%. The earlier recommendation of the Dundonald bid was withdrawn but the independent directors of Grantchester declined to recommend the Hammerson bid pending possible expressions of interest from other potential buyers. There then followed a highly charged period of days during which Hammerson went into the market to acquire Grantchester shares at the offer price. First, Hammerson broke through the 30% barrier and was obliged to announce a mandatory offer for Grantchester under Rule 9 of the Takeover Code (the only permitted condition being obtaining over 50% of the company’s shares).

However, with a recommendation still not forthcoming, Hammerson delayed posting its offer document and continued to acquire shares in the market (each sale by a current shareholder helping to endorse the 250 pence announced offer price as being the right one for all Grantchester shareholders). On 19 September, the independent directors of Grantchester recommended the Hammerson offer and, on the same day, Hammerson acquired enough shares to bring it over the 50% threshold. Hammerson’s offer document, which was posted to shareholders shortly afterwards, therefore contained a rarely seen example of a recommended and unconditional offer for the shares of a listed company.

In practical terms, this allowed Hammerson to take control of Grantchester in the shortest time possible and to begin to capitalise on the perceived synergies of the deal. By 23 October, Hammerson had acquired in excess of the requisite 90% to enable it to commence the compulsory acquisition of the remainder of the Grantchester shares. This should therefore see the ownership of 100% of Grantchester shares in Hammerson’s hands in less than three months from the day it posted its offer.

This approach also meant that it was far less likely that any competitive bid would be launched against the Hammerson offer. In regulatory terms, many of the standard terms normally seen in a public company offer were no longer relevant, making the drafting of the offer document a novel task. A further effect was that the Grantchester shareholders accepting the offer had more limited rights of withdrawal than would normally be the case in a conditional offer. This resulted in Hammerson having added certainty in relation to acceptances received.

© Herbert Smith 2003

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