Lenz & Staehelin's Tino Gaberthuel looks at the law covering competing takeover offers in Switzerland and why the regulator's efforts to protect shareholders' interests may be misguided

One of the key principles spanning Swiss takeover law is the protection of offeree shareholders' financial interests. To achieve this it is essential that shareholders are treated equally and that their freedom of decision is preserved.

Swiss takeover law facilitates auctions, which often result in an additional action alternative for, and an increase of the offer price paid to, offeree shareholders. While the Swiss regulator, the Takeover Board (TOB), prohibits measures aimed at frustrating competing offers, it has in a recent decision concluded that not all competing offers are worth being fostered. This article summarises the key characteristics of competing offers, discusses the TOB's recent decision and suggests an alternative route that it could have taken, which arguably would have better served the offeree shareholders' interests.

A rare occurence

Despite the general promotion of auctions and competing offers in Switzerland, it is interesting to note that there has been fewer than a dozen competing offers in Switzerland since 2000 and that the last one dates back to 2006.

While there may be many reasons for this, one of the key factors is probably that bidders often hold or acquire a majority or significant minority position in the target company prior to launching a tender offer. A controlling stake or at least a solid foothold in the target company often puts the bidder at a decisive advantage vis-a-vis (potential) competitors for corporate control.

In about 75% of public offers launched since 2006 in Switzerland, the bidder controlled 25% or more of the target's shares at the time of announcement of the public offer.

Level playing field

To protect shareholders' interests in a competitive situation, Swiss takeover rules require that shareholders be given the right to freely choose between competing offers.

The rules are intended to create a level playing field for competing offers. This is probably best illustrated by the withdrawal rights of offeree shareholders. If a competing offer is launched, investors that have already tendered their shares into the first offer have the statutory right to withdraw from the first offer and accept the competing offer instead. Furthermore, the timetables of the competing offers are automatically aligned and the respective acceptance periods run in parallel.

From a bidder's perspective, it is important to note that in the event of two or more competing offers the target company must treat all bidders equally. This means, for example, that a bidder is entitled to receive the same due diligence information that was provided to a competing bidder. The target company should bear this in mind when deciding whether and to what extent a potential bidder will be allowed due diligence.

Swiss takeover law does not contain a definition of the term 'competing offers'. To qualify as a competing offer, the law just requires that the second offer be launched no later than on the last trading day of the acceptance period of the first offer. If takeover-fightthe second offer is made at a later point in time, it is deemed a standalone offer which does not trigger the consequences of a competing offer and therefore shareholders do not have withdrawal rights.

ACP's offer for Absolute

In June 2011, the investment firm HarbourVest made a public offer for all shares of SIX-listed Absolute Private Equity. HarbourVest's offer was subject to a minimum acceptance threshold of 50% of all issued Absolute shares. During HarbourVest's acceptance period, ACP Acquisition – a vehicle ultimately controlled and managed by fund manager David Abrams – announced a partial offer for roughly 20% of Absolute shares (with a minimum acceptance threshold of 10% of Absolute shares).
Under Swiss takeover law, public offers for minority stakes (partial offers) are permitted.

The law explicitly states that if the number of tendered shares exceeds the number to which the partial offer relates, the bidder will proportionally reduce the number of shares to be purchased from each tendering shareholder. Since 2000 there had only been one partial offer until ACP's offer.

Unlike HarbourVest, ACP did not seek corporate control of Absolute. Instead, ACP intended to substantially increase its stake of approximately 8.6% in Absolute and to give investors the opportunity to sell part of their Absolute shares at a price higher than the price offered by HarbourVest and, at the same time, provide shareholders the prospect of continuing an investment in Absolute as a listed company.

Interestingly, all previous competing offers had in common that all bidders intended to gain corporate control of the respective target company. In this context, for the first time the TOB assessed whether ACP's partial offer for a substantial minority position in Absolute qualified as a competing offer.

TOB favours full offer

The TOB argued that as ACP – unlike HarbourVest – did not seek corporate control of Absolute – it was not a direct competitor of HarbourVest. In view of the different goals of each offer, the TOB held that there was no efficient and value-maximising auction process.

Furthermore, the TOB's view was that Absolute's shareholders were in a dilemma, because they could either sell their shares at a higher price into ACP's partial offer (bearing the risk of being able to sell only a portion of their shares) or tender all their shares into HarbourVest's offer at a lower price. According to the TOB, the rules governing competing offers did not provide a solution to that dilemma.

Based on these considerations, the TOB concluded that ACP's partial offer did not qualify as a competing offer, but as a standalone offer. Despite its conclusion that HarbourVest's and ACP's offers were independent, the TOB ordered that ACP's offer would only start once HarbourVest's offer had expired so that shareholders would know whether HarbourVest's offer had been successful when deciding to tender their shares to ACP.

As Swiss takeover law explicitly allows partial offers and does not limit the applicability of the provisions on competing offers to full offers, the TOB's decision caused certain astonishment and raises a number of concerns:

  • In light of the timing advantage accorded to HarbourVest's offer, Absolute shareholders were more likely to sell their shares in the first offer, thereby enabling HarbourVest to gain corporate control of Absolute. This put ACP's partial offer at a disadvantage.
  • Instead of safeguarding investors' freedom of decision and providing them with an action alternative (ie, to sell part of their shares at a higher price or tender all shares at a lower price), the TOB's decision in fact limited investors' options to only one (ie, HarbourVest's).
  • The qualification of a partial offer as a standalone offer results in an unequal treatment of shareholders. Those shareholders who have already accepted the first offer can no longer withdraw and accept the higher partial offer instead. In the present case, however, the TOB did not have to address this issue because HarbourVest voluntarily granted a contractual withdrawal right for those shareholders who had already tendered their shares.
  • The TOB's decision raises a number of questions and leads to legal uncertainty for future cases. Would the TOB, for example, have come to the same conclusion if the first offer had been a partial offer and the second a full offer? How would the TOB have decided if the first bidder had not offered a contractual withdrawal right?

An alternative approach

In our view, the TOB should have qualified ACP's partial offer as a competing offer. First, Swiss takeover law does not limit the provisions on competing offers to full offers. Second, the application of these provisions to ACP's offer would have been in line with the principle of equal treatment of offeree shareholders and would have preserved each shareholder's freedom of decision. Third, a level playing field would have been created between the two offers.

Although not explicitly stated in the TOB's decision, it seems that the TOB was particularly concerned that Absolute's shareholders would likely have preferred and accepted ACP's partial offer because of the higher offer price, and that as a result HarbourVest's offer could have been jeopardised. Such concern was unjustified because offeree shareholders knew that if they chose ACP's higher offer, they could potentially only sell a portion of their shares. A shareholder would only have chosen ACP's higher offer if he wanted to sell his investment only partially. Otherwise, he would have chosen HarbourVest's offer despite the lower offer price.

If the TOB's concern was in fact justified, it should have been addressed differently. All shareholders could have been granted the right to accept either or both offers, subject to a preference right for the higher partial offer.

Although this solution might not have fully solved the TOB's concern and its execution might have resulted in additional administrative work and costs (the tender agents of the two offers would have had to co-ordinate and collaborate in the technical execution of the offers), it would have had certain clear advantages over the TOB's approach. In particular, the proposed alternative would have recognisedACP's partial offer as a competing offer and allowed all shareholders to proportionally receive the higher price offered by ACP. In addition, neither offer would have had to be put at a disadvantage.

The outlook

In the meantime, HarbourVest's offer has been accepted by shareholders holding more than 90% of Absolute's shares. The TOB has therefore allowed ACP to terminate its offer because it is already certain that such an offer would not be successful considering ACP's minimum acceptance threshold of 10%.

It remains to be seen what impact the TOB's decision will have on future transactions. Interestingly, in a recent conference, one member of the TOB mentioned that it cannot be generally deduced from the TOB's latest decision that partial offers do not qualify as competing offers.

Considering that takeover history in Switzerland has only seen very few partial offers and a rather limited number of competing offers, it will likely take some time until the TOB will have to decide again on a similar transaction.

Tino Gaberthuel is a partner in the Zurich office of Lenz & Staehelin.