In this contributed article for PLATOW Legal + Finance, Munich attorney Siegfried Büttner discusses exchange offers as they relate to the deal market in Germany.
The transaction market has been flourishing in recent months. In terms of both number and volume of deals, 2021 was a record year. When looking at the deal structures, however, it quickly becomes apparent that cash offers clearly prevail in the market whilst exchange offers are extremely rare.
One of the few recent examples is ADTRAN’s takeover offer for ADVA Optical Networking.
But why are exchange offers so rare? In Germany, there are several reasons. Even with cash and exchange offers constituting equal alternatives under German law, so far exchange offers have been much more difficult to execute technically.
If issuers want to launch an exchange offer, they will have to issue new shares in the bidding company. This, however, will also inevitably dilute the holdings of existing shareholders of the bidder. Another prerequisite is that the new shares offered as exchange consideration have to be listed on a stock exchange. And most importantly, the preparation of an offer document with a prospectus annex is required in which many details about the transaction have to be disclosed to the public — comparable to the information disclosed in a securities prospectus. Drafting such a document ultimately takes a lot of time and, therefore, can increase transaction costs.
The EU legislator has recognized these shortcomings. In order to incentivize exchange offers, under certain conditions they are now excluded from the scope of application of the EU Prospectus Regulation. Instead, only a document containing some limited information regarding the transaction and its expected effects on the issuer has to be published. The EU Commission defined the exact content and requirements for this “Exemption Document” in a Delegated Regulation published in March 2021.
An essential part of this Delegated Regulation is the distinction between transactions in which the shares offered for exchange are fungible with shares already listed on a regulated market on the one hand, and, on the other hand, transactions where this is not the case. As a result and depending on the circumstances, issuers may have to disclose significantly less extensive details than before; also regarding the target company.
No Benefits for German Companies
However, German companies hardly benefit from the EU legislator’s time and cost saving adjustments, as their implementation into German law is still pending. The current German rules can only be interpreted in accordance with the simplified EU law provisions, e.g. whenever references in German laws have not yet been updated.
To make matters worse, the courts have even further complicated the regulatory requirements for exchange offers. According to a ruling by the Higher Regional Court of Frankfurt am Main (Oberlandesgericht Frankfurt am Main) in January 2021, the shares offered for exchange must not only meet strict minimum thresholds with regard to their daily trading volume now, but also have a minimum free float of €500 m. The German financial supervisory authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) has aligned its administrative practice accordingly in the meantime. Consequently, exchange offers are no longer a feasible option for numerous German stock-listed companies.
Even companies meeting the new minimum requirements are facing new risks. If, for instance, institutional investors purchase a bigger stake of shares in the bidding company, the shares offered as exchange consideration might be lacking the necessary liquidity. Consequently, an exchange offer can still become inadmissible even after the publication to launch such an offer.
The bottom line: The ruling of the Higher Regional Court of Frankfurt am Main has not done exchange offers in Germany any favors. Contrary to the EU legislator’s intention, the obstacles for exchange offers have further increased. Considering that other EU member states pursue a more liberal approach when interpreting the concept of liquidity with regards to exchange offers, hopes are that the German legislator will soon lower the regulatory hurdles for exchange offers in Germany, too.
*Article originally published in German