Communication no. 3 - Cancellation of "outstanding equity securities" after a public takeover offer
Communication no. 3 of the TOB
Cancellation of "outstanding equity securities" after a public takeover offer
of July 21, 1997
Article 33, SESTA states: "An offeror, who upon expiry of the offer period, holds more than 98 per cent of the voting rights of the offeree may, within three months, petition the court to cancel the outstanding equity securities." The owners of cancelled shares receive the same price as that contained in the offer.
In addition, Article 54, SESTA comprises a transitional rule. It is as follows: "Whosoever, upon the coming into force of this Act, holds, as a result of a previous public takeover offer, more than 98 per cent of the voting rights of a company may, within six months of the coming into force of this Act, apply for a cancellation of the outstanding equity securities pursuant to Article 33. The owners of equity securities which have been cancelled shall be entitled to a fair price which shall be calculated based upon a report by the auditors."
These provisions are applied by the civil courts, which in consequence have the sole competence to interpret them.
However, the Takeover Board has been approached by those concerned with a view to elucidating questions of interpretation. For this reason, it has reached the conclusion that it would be useful if it were to publish its opinion on the most important issues in this respect. This opinion will not be binding on the competent courts.
I. Article 54, SESTA: the transitional rule
1. Is Article 54, SESTA applicable even where the shares of the company have been withdrawn from listing following the public takeover offer?
In principle, the chapter of the Act relating to public takeover offers (Art. 22 to 33) applies only to Swiss companies "whose equity securities are, in whole or in part, listed on an exchange in Switzerland" (Art. 22.1, SESTA).
However, in principle, when less than 2 per cent of the capital of a company remains in circulation, maintaining listing has no sense. In consequence, there would be no justification for insisting that Article 54, SESTA should apply only to companies whose listing has been maintained, such listing having been maintained for this reason only.
In consequence, Article 54, SESTA may be applied even if the shares of the offeree company have been withdrawn from listing following the public takeover offer.
2. May a holder other than the former offeror make such an application?
If an applicant has not himself made a public takeover offer but the shares obtained have been sold to him by the former offeror, such holder is entitled to cite Article 54, SESTA.
This interpretation of the wording of Article 54, SESTA is amply confirmed by Article 58.10 of the Federal Council's Ordinance on Stock Exchanges, which states: "Whosoever acquires equity securities of a company acquired by an offeror in the course of a public takeover offer and possesses more than 98 per cent of the voting rights of that company may apply for cancellation of the outstanding equity securities pursuant to Article 54 of the Act."
II. Article 33, SESTA : the permanent rule
1. How should "outstanding equity securities" be interpreted?
In accordance with the German text of the Act, these comprise the equity securities of the offeree, including shares, participation or bonus certificates and any other participation rights (Art. 2, let. e, SESTA).
In principle, "other participation rights" means all acquisition and conversion rights; the cancellation procedure should therefore cover all such rights and permit the offeror to require such cancellation by citing the procedure described in Article 33, SESTA.
When only a part of the equity securities of the offeree company are listed, Article 33, SESTA nevertheless applies also to unlisted equity securities.
If the offeree company has issued two categories of share, it is sufficient for the applicant to hold 98 per cent of all voting rights, i.e. he does not have to hold 98 per cent of voting rights in each category of share.
Where the offeree company has issued participation or bonus certificates or any other participation rights which do not include voting rights, the Act does not require that the petitioner hold a fixed proportion of these securities. However, the fact is that the legislature did not envisage such a situation: its purpose was to compel minority shareholders to sell their securities in cases where an overwhelming proportion of shareholders had accepted a public takeover offer. The courts must therefore judge in each specific case if it is proper to cite Article 33, SESTA to require the cancellation of a substantial proportion of the participation certificates (or other equity securities which do not include voting rights) of the offeree.
2. Calculating 98 per cent of voting rights
a. those whose voting rights are suspended;
b. those held by the offeror, at the time of the application for cancellation, either indirectly or in concert with third parties.
In consequence, the securities held by the issuer itself will in principle be deemed to be held by the offeror.
3. The offeror must hold more that 98 per cent of voting rights "upon expiry of the offer period"
From the wording of the Act, an offeror appears not to be entitled to invoke Article 33, SESTA if he holds less than 98 per cent of the voting rights upon expiry of the offer period, even though he may exceed this threshold at a later date within a period of three months.
However, the Act does appear to permit such an offeror to make a new public takeover offer at a later date, thereby giving him the opportunity to exceed the 98 per cent threshold.
Strict application of these two rules does not necessarily lead to a satisfactory result. It appears pointless to require an applicant to make a second public takeover offer to enable him to apply for cancellation of the outstanding equity securities, particularly if he had come close to the 98 per cent threshold upon expiry of the first offer and then exceeded the threshold shortly after by purchasing shares on the market.
The Takeover Board is of the opinion that it is impossible to suggest a general and abstract way of interpreting the Act on this issue and that the courts must decide in each specific case taking into account all the circumstances.