Purchase prices for convertible bonds must be taken into account when determining the minimum price for takeover and mandatory offers

In a fundamental judgment for takeover law (case no. II ZR 37/16; published on the website of the German Federal Court of Justice), the Federal Court of Justice held on 7 November 2017 that the prices paid by the bidder for purchasing the target company’s convertible bonds are to be taken into account when determining the minimum offer price of a takeover bid. In this article, Stephan Schulz and Volker Land assess the decision and its practical impact.

Background

Prior to a public takeover bid, the bidder purchased various securities in the target company. These comprised a share package priced at €23.50 per share and two different packages of convertible bonds. It paid a price for the convertible bonds which corresponds to a purchase price of approx. €30.95 for  each new share arising from the conversion. The convertible bonds thus acquired could be converted into shares of the target company at arithmetic conversion prices of €19.05 and €21.66 respectively.

The takeover bid subsequently submitted specified an offer price of €23.50. In the bid, the bidder had used the conversion price of the shares as a basis and considered the purchase price of the convertible bonds irrelevant for the minimum price. The plaintiffs disagreed. They demanded that the bidder pay the difference between the actual offer price and a reasonable offer price of €30.95. The claim was upheld.

Judgment

Pursuant to section 31(1) German Securities Acquisition and Takeover Act, the bidder must offer the target company’s shareholders reasonable consideration. Purchases of shares in the target company by the bidder are thereby to be taken into account. This provision is specified by section 4 German Securities Acquisition and Takeover Act Bid Regulation. According to this, the consideration must be at least the value of the highest consideration granted or agreed by the bidder for the purchase of shares in the target company within the last six months before publication of the offer document. According to section 4 second sentence German Securities Acquisition and Takeover Act Bid Regulation and section 31(6) German Securities Acquisition and Takeover Act, ‘agreements based on which the delivery of shares can be demanded’ are equivalent to a purchase.

The Federal Court of Justice had to decide how this provision was to be interpreted. Taking a narrow view (as financial regulator BaFin did in the context of the approval procedure for the bid document and the first instance), only agreements that form the legal grounds for the purchase of shares are covered. Therefore purchase agreements for convertible bonds are not covered because they only allow for the transfer of the convertible bond. A share purchase only takes place once the conversion rights have been exercised. However, taking a broad view, it is sufficient for the agreement to form only the basis for a later conveyance of shares in a later step.

The Federal Court of Justice follows the second view and emphasises in the grounds for its judgment the nature of section 31(6) German Securities Acquisition and Takeover Act as a provision for general protection with regard to the minimum price rules of the German Securities Acquisition and Takeover Act and the German Securities Acquisition and Takeover Act Bid Regulation.

What does the judgment mean in practice?

The statements by the Federal Court of Justice leave no room for doubt: If a bidder has purchased convertible bonds prior to a takeover or mandatory offer, the purchase price (i.e. purchase price of the convertible bonds, converted to the new shares arising from the conversion of the bond) must be taken into account when determining the minimum price. Accordingly, the offer price can increase if such purchases are made before final notification according to section 23(1) first sentence no. 2 German Securities Acquisition and Takeover Act or off-market within the subsequent purchase period of section 31(5) German Securities Acquisition and Takeover Act. Potential bidders must take this fact into account in the future when planning transactions (see the article [in German only] on our website, Wandelschuldverschreibungen bei der Übernahme börsennotierter Aktiengesellschaften, regarding the strategic options for a bidder in these cases).

However, the judgment also shows that the position of BaFin (which took the narrower view in the case at the Federal Court of Justice) in the context of approval of the offer document gives the bidder no legal certainty with regard to the minimum price. According to the case law, shareholders have a claim against the bidder for reimbursement of the difference between the offer price and a higher minimum price if the former is lower than the minimum price. This claim cannot be challenged based on the original approval of the offer document. 

See also: Public M&A Report - The German market for public takeovers in the first six months of 2017; Wandelschuldverschreibungen bei der Übernahme börsennotierter Aktiengesellschaften [German only]; Chinesische Investoren am deutschen Markt für öffentliche Übernahmen [German only]