A mixed bag of takeover reforms (Joint Stock Company Law amendments)

July 2006

In a move that appears to be aimed at protecting minority shareholders while encouraging consolidation among companies, Russia has amended the provisions of the Joint Stock Company Law governing the acquisition of various levels of control over a Russian open joint stock company.

The amendments are a mixed bag. On the one hand, not all of the tender offer procedures are conducive to a workable process. By making the target and its board a clearing house for communications between offerors and offerees, the amendments have built in an opportunity for the target to engage in tactical defences. On the other hand, the introduction of a minority put option and minority squeeze out promises to be a welcome change for both minorities and potential acquirers.

The amendments become fully effective on July 1 2006 and set out procedures for making a tender offer for the acquisition of ordinary shares and preferred shares with vested voting rights (collectively, voting shares) of a Russian open joint stock company, in excess of 30%, 50% or 75%. Acquisitions in excess of these thresholds trigger both voluntary and mandatory tender offer rules.

Thresholds

There appear to be two plausible interpretations of an acquisition of voting shares "in excess of" the relevant thresholds. First, it could be read as acquisitions that cross above a threshold. So an acquisition in excess of a relevant threshold would occur only when an acquisition of voting shares causes the aggregate holding of a person or its affiliates to cross above that threshold.

Second, it could be read as all acquisitions above a threshold. Here, an acquisition in excess of a threshold would include any acquisition following which a person owns more than 30% of an issuer's voting shares, regardless of whether the acquisition causes the level of holdings to cross above a threshold.

We construe "in excess of" to mean crossing above a threshold. If it meant every transaction which resulted in a holding greater than a relevant threshold, there would have been no need to set three thresholds (30%, 50% and 75%). A single threshold of 30% would have been sufficient. Ordinary canons of construction suggest that such an interpretation, which reduces statutory language to mere surplussage, cannot be correct.

Moreover, a primary purpose of the tender offer rules is to protect minority shareholders during a change of control. The 30%, 50% and 75% thresholds are all associated with levels of ownership at which either effective control or statutory control may pass to a new person. Trading between these ranges may imply that a person has already acquired a level of control, but would not ordinarily imply that control has changed materially or passed to another person. Crossing above a threshold, rather than trading between thresholds, more clearly serves the purposes of the tender offer rules.

Applicability

Several other factors bear on the applicability of the tender offer rules. First, on the face of it, the tender offer rules only cover direct acquisitions of voting shares. Indirect acquisitions or other acquisitions of voting rights (by proxy or trust management agreement for example) are not covered.

Second, unlike the old tender offer rules, the new rules apply to all open joint stock companies regardless of the number of shareholders, and cannot be disapplied by a company's charter.

Third, mandatory tender offer rules cannot be avoided after crossing above a relevant threshold. Neither a disposition of voting shares that reduces a shareholder's interest below a threshold, nor a termination of voting rights in preferred shares, will relieve the shareholder of its obligation to make a mandatory tender offer. In the meantime, shares in excess of the threshold will not be permitted to vote. Accordingly, shareholders of Russian issuers should be aware of the risks of inadvertently exceeding a relevant threshold through minor open market purchases, and should monitor developments that may result in their preferred shares being vested with voting rights.

Fourth, certain transactions will not obligate a shareholder to make a mandatory tender offer, even if they cause the shareholder to cross above a relevant threshold. The most important exemptions relate to: transfers of shares between affiliates; share redemptions and cancellations; acquisitions of newly issued shares through statutory pre-emptive rights; certain acquisitions by underwriters through firm commitment arrangements; and, acquisitions in a voluntary tender offer made under the statutory procedures.

Fifth, the statutory tender offer procedures are not the only way to make a voluntary tender offer if someone intends to cross above a relevant threshold. Indeed, the amendments cast the statutory procedure as the right of a potential acquirer making a voluntary offer. However, the potential acquirer should be careful if it makes a voluntary tender offer that is not in compliance with statutory procedure, and it acquires less than 100% of the voting shares. Its acquisition might not be exempt from the mandatory tender offer rules if it crosses a threshold, and it will not be entitled to effect a minority squeeze out (defined below) even if it acquires more than 95% of the issuer's voting shares. Neither prospect is particularly palatable for a potential acquirer. So anyone making a voluntary tender offer will, in practice, follow the statutory procedures. If for some reason a potential acquirer does not wish to do so, it should condition its offer on the acquisition of not less than 100% of the issuer's voting shares and securities convertible into voting shares.

Tender offer procedures

Under the new rules, a typical tender offer should unfold along the following lines.

Someone that intends to acquire a sufficient number of voting shares to cross a threshold has the right to make a voluntary tender offer to all holders of the company's voting shares and securities convertible into voting shares. Anyone that has already acquired a sufficient number of voting shares to cross a threshold is required to make a mandatory tender offer to the other holders of voting shares of the same class and of securities convertible into that class of shares. The potential acquirer should also by then have obtained anti-monopoly approval to acquire up to 100% of the target's shares, irrespective of whether a voluntary or mandatory tender offer is at issue.

The offer price and form of consideration in a voluntary tender offer are arguably at the discretion of the buyer, but a conservative approach would be to offer cash or securities with a cash alternative. The price in a mandatory tender offer must be paid in cash or securities with a cash alternative, and is subject to minimum price requirements. If the securities in the mandatory tender offer are traded on an organized securities market, the offer price cannot be lower than the weighted average trading price during the six months prior to the filing of the offer with the Russian Federal Service for the Financial Markets (FSFM). If the securities don't have six months' trading history, the minimum price is determined by an independent appraiser. And if (during the past six months) the buyer or any of its affiliates has acquired or committed to acquire any voting shares or securities convertible into voting shares, the price cannot be lower than the highest price of that acquisition or commitment. In either case, a statutory tender offer must be accompanied by a payment guarantee from a commercial bank.

The terms of the offer are delivered to the target on behalf of the security holders and filed with the FSFM. The FSFM may require that the offer be amended to comply with the statutory tender offer requirements. Within 15 days of a statutory tender offer, the target's board of directors must evaluate its terms and must decide whether to recommend it, and forward the terms of the offer, together with the board's recommendation, to the security holders of record as of the date the target received the offer (the record date). In certain cases, the terms of the offer and the board's recommendation should also be published in the mass media.

A mandatory offer must be kept open for at least 70 days, but no more than 80 days (if a mandatory offer) or 90 days (if a voluntary offer) after it is submitted to the target.

In order to prevent the target's board from taking defensive measures, from the record date until 20 days after the expiry of the offer the general shareholders meeting has sole power to increase charter capital, issue securities, repurchase shares and approve certain major and interested-party transactions. In addition, the target's directors and officers may be liable to both the target and its shareholders for violations of the takeover procedures.

Once a voluntary or mandatory tender offer has commenced, third parties can make competing offers for the same securities. The competing offer is subject to the same requirements as the voluntary or mandatory tender offer. It cannot offer a lower price than the offer it is competing against.

Minority put option and minority squeeze out

If, after buying shares in a statutory tender offer, the acquirer and its group holds more than 95% of the voting shares, the remaining security holders may require the acquirer to purchase their voting shares and securities convertible into them (minority put option) or the acquirer may require the remaining security holders to sell such securities to it (minority squeeze out). As with a statutory tender offer, these rights are exercised by delivering notice to the target and filing notice with the FSFM.

The minority put option can be exercised within six months after notice thereof has been given to security holders. The minority squeeze-out notice may be given within six months after expiration of a voluntary offer or mandatory offer conducted in compliance with the statutory procedures.

Both in a minority put option and in a minority squeeze out, the acquirer must offer to pay the price in cash. In a minority put option, the acquirer must back up its obligation with a payment guarantee issued by a commercial bank.

Each offer has a minimum price. In a minority put option the price cannot be lower than that paid in the tender offer that pushed the acquirer over 95% of the issuer's voting shares. If the acquirer has bought or committed to buy voting shares since the expiration of the tender offer, that places the lower limit on the offer price.

In a minority squeeze out the offer price cannot be lower than the market value (determined by an independent appraiser), which cannot be lower than the greater of the price in the tender offer that pushed the acquirer over 95% of the issuer's voting shares and the highest acquisition price paid or agreed to be paid in any acquisition of voting shares since the expiration of the tender offer.

 

Authors: Mark Banovich, Yulia Cherkassova, Kirill Ryurikov.

This article is reprinted with permission from the July 2006 edition of International Financial Law Review. © 2006