This country-specific Q&A provides an overview to M&A laws and regulations that may occur in Cyprus.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The main legal framework for M&A transactions (both for private and public companies) in Cyprus is provided by English common law principles as well as by statutory provisions, primarily, the Cyprus Companies Law, Cap 113 as subsequently amended (the “Companies Law”) and the Control of Concentrations between Enterprises Law of 2014 (Law 83(Ι)/2014) (the “Concentrations Law”).
In particular, the Companies Law regulates the procedure to be followed in mergers, schemes of arrangement and amalgamations which in principle entails obtaining the approval from the shareholders and creditors of the merging companies as well as the sanctioning of the transaction by the competent Court.
Furthermore, M&A transactions involving Cyprus public companies and companies listed in the Cyprus Stock Exchange are also regulated by the following rules/laws:-
- The Public Takeover for the Acquisition of Shares in a Company and Related Matters Law, Law 41(I)/ 2007 (the “Public Takeover Law”);
- The Securities and Cyprus Stock Exchange Law of 1993 (as amended) (the “Stock Exchange Law”);
- The Transparency Requirements (Securities Admitted to Trading on a Regulated Market) Law of 2007;
- The Insider Dealing and Market Manipulation (Market Abuse) Law of 2005; and
- The Cyprus Corporate Governance Code.
The key regulatory authorities designated to regulate M&A in Cyprus are the Cyprus Securities and Exchange Commission (the “CYSEC”) and the Commission for the Protection of Competition (the “CPC”).
It must, however, be noted that, subject to their industry sector and business activities, both private and public companies may also be subject to regulatory controls during M&A from industry specific regulatory authorities and regulatory regimes (i.e. in case the target company is a credit institution, M&A authorisations may be required from the Central Bank of Cyprus).
What is the current state of the market?
Following the upturn in Cyprus economy that has been evident over the last few years the market in Cyprus is showing significant growth both in terms of incorporation of new companies as well as the M&A sector. In particular, over the last 2 years there has been a significant increase in the volume of both local and cross-border mergers within the EU region.
Furthermore, in light of recent developments relating to BREXIT and taking into account that the Cyprus legal system is also based on common law and to a large degree has similarities to the UK legal system this could lead to a further increase in inbound cross-border mergers of entities which would need to maintain their head office within the EU.
Which market sectors have been particularly active recently?
Although most market sectors are showing signs of growth over the last year, the private equity market in Cyprus and the business services, banking and financial services as well as energy and tourism sectors are all showing significant growth rates.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
The stability of the financial sector in Cyprus and the respective growth of the economy have been significant factors contributing in the increased volume of M&A activity and are likely to contribute to future development. Furthermore, the uncertainty relating to BREXIT and the effect it may have on the business may lead to an increased level of inbound merger activity.
Further developments at a European Union level and future regulatory reforms would also have a significant effect on the fortune of M&A activities and the restructuring of several large international structures with a strong presence in the Republic of Cyprus.
What are the key means of effecting the acquisition of a publicly traded company?
The usual mechanisms for effecting the acquisition of a publicly traded company is either through a public offer for the shares under the regulations of the Stock Exchange or outside the market of the Stock Exchange, subject to specific restrictions and the provisions of the Companies Law.
In particular, the Cyprus Stock Exchange Law provides that an acquisition of a publicly traded company executed outside the market of the Stock Exchange is only permitted in the following cases:-
a) In the case of public bonds listed on the Stock Exchange, issued by the Government of the Republic of Cyprus;
b) In the case of securities listed on the Stock Exchange of legal persons or group of persons incorporated under a law abroad, as long as the transaction is executed abroad in accordance with the law; and
c) In the case of securities listed on the Stock Exchange of legal persons or group of persons incorporated in accordance with the Law in the Republic of Cyprus, which have also listed the same securities in another Stock Exchange abroad, as long as the transaction is executed through this other stock exchange and in accordance with the legislation which governs it.
Furthermore, the Cyprus Stock Exchange Law also provides that the following transactions are permitted to be executed outside the Stock Exchange, provided they are announced to it within the time limit provided to this effect by decision of the Council issued as provided in the Stock Exchange Regulations:
a) The issue and purchase of securities by the issuer;
b) Transactions among members of the same family;
c) Gift transactions or other transactions which do not involve monetary consideration;
d) Transfer of securities due to death;
e) Transactions executed following Court order;
f) Transaction of securities listed on the Stock Exchange of a company registered in the Republic, which fulfils the prerequisites of section 28A of the Income Tax Law, wherever this is executed, in the Republic or abroad;
g) Transactions which have as their object movable securities of the same category of a Stock Exchange value of at least one hundred thousand pounds;
h) Transactions executed following direct invitation to all owners of the same category of movable securities of one issuer, which concern at least ten per cent of the total of these securities; and
i) Transactions which are specifically exempted by Stock Exchange Regulations and may be executed outside the Stock Exchange.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
As regards the M&A transaction involving private and public companies in Cyprus, the publicly available information are the information maintained by the Registrar of Companies and Official Receiver in Cyprus (the “ROC”) in its public records. Those include, inter alia, the memorandum and articles of association of the company, the members of the board of directors, the secretary of the company, the share capital and shareholding structure of the company as well as other information including the annual accounts of the company as these are submitted annually to the ROC.
In the context of M&A transactions involving listed companies in the Cyprus Stock Exchange, certain information can be found via the official portal of the Cyprus Stock Exchange. Indicatively, that information includes, inter alia, information regarding the directors and secretary of the company, industry and sector specific details as well as information contained in the annual reports and semi-annual results of the company.
It must be noted, however, that the aforesaid information might not up to date, hence it is highly advisable that the disclosure of information in such cases is usually based on a specific agreement between the relevant parties.
Other than the information that is publicly available (in the public records of the company with the ROC or the Cyprus Stock Exchange, if the said company is listed), the target company’s board is not obliged to disclose any diligence related information to a potential acquirer. Especially, in the case of a hostile bid it is unlikely that such information will be made available to the potential acquirer.
It must further be noted that, pursuant to section 10 of the Concentrations Law, the CPC publishes in the Official Gazette of the Republic of Cyprus a notice of receipt of a notification of a concentration of major importance specifying (i) the identities of undertakings concerned; (ii) the nature of the concentration and (iii) the economic sectors involved. The CPC, in doing so, “takes into account, where possible, the legitimate interests of the undertakings concerned to safeguard their trade secrets”. Section 48 of the Concentrations Law also further safeguards trade secrets and other confidential information communicated to them by providing that such information must not be disclosed unless the disclosure is made (i) in order to prove breach of the law or (ii) for the purposes of enforcing the provisions of the law.
To what level of detail is due diligence customarily undertaken?
Subject to the activities of the specific company the following documents are customarily reviewed in such a due diligence exercises:-
(a) the constitutional documents of the company (i.e. its memorandum and articles of association and any resolutions amending the same);
(b) the corporate registers of the company (which shall include, the registers of registered offices, directors, secretaries, members, transfers and charges);
(c) up to date certificates issued by the ROC in relation to the Incorporation; name of the company; Registered Office; Director & Secretary; Shareholders; Share Capital and No Winding Up of the company;
(f) details in relation to any existing mortgages / encumbrances / floating charges or other obligations as registered with the ROC and/or relating to assets owned by the company;
(j) signed copy of the most recent Annual Returns filed by the Company with the ROC and evidence of payment of the annual levy;
(k) any organisation chart of the group, shareholding agreements, intra-group and financial agreements etc; and
(l) any list of lawsuits, arbitration or other disputes currently pending or soon to be initiated and review of any judgments/decisions/opinions rendered by the courts or relevant governmental agencies and claims by any third parties.
As stated above, subject to the specific business of the company due diligence may be exercised in relation to any regulated activities of that company as well as in relation to any industry specific agreement and/or commercial arrangement that may be in place.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The two decision-making organs of a target company are the company’s shareholders and board of directors. Although the ultimate decision is vested with the shareholders who will accept or reject a bid, the views of the board of directors on a bid are still of vital importance given that the views of the board of directors usually affect in practice the decision of the shareholders.
In the case of a private M&A transaction, the respective boards of directors will discuss, negotiate and approve the terms of the merger and subsequently present them to the shareholders and creditors of the merging companies for their approval.
In the case of an acquisition, the board of directors of the target company may reject a bid made, on a confidential basis and not announce the bid and/or its rejection to the shareholders. It must be noted, however, that as of the date that the directors take notice of a bid, they cannot take several actions unless authorised by the shareholders in a general meeting.
What are the duties of the directors and controlling shareholders of a target company?
The duties of the directors of companies in Cyprus are not fully codified under Cyprus Companies Law. Directors duties in Cyprus are an amalgam of statutory duties, common law principles and the duties contained in the articles of association of a specific company.
In particular, the duties of the directors of the target company include the following:-
a) To act in good faith, in the best interest of the company and to use their powers to benefit the company;
b) To perform their duties with a reasonable degree of skill and diligence;
c) To avoid conflicts of interest; and
d) To act in a manner that is commercial justifiable for the benefit of the company.
The above duties may, in the context of a proposed merger, give rise to several considerations for the directors of the merging companies, including short vs long term implications of the proposed transaction as well as the impact on employees and other stakeholders.
In addition to the above, the Cyprus Public Takeover Law sets out several directors duties applicable in the case of a public takeover. Those are as follows:-
a) When directors and their close relatives sell shares or enter into transactions with a third person, as a result of which that third person is required to make a bid under the Public Takeover Law, the said directors and the persons closely related to them must ensure that as a condition of the sale or other relevant transaction, the third person undertakes to fulfil his obligations under the Public Takeover Law;
b) The offeror, nominees of the offeror and persons acting in concert with it may not be appointed to the board of the target company, nor may they exercise, or procure the exercise of, the votes attaching to any shares they hold in the target company, until the expiration of the time allowed for acceptance of the bid;
c) Following the announcement of the decision to make a bid, the board of the target company is obliged to provide quick and accurate information to its shareholders and the representatives of its employees or, where there are no such representatives, to the employees themselves regarding the content of the bid, as well as about (a) any information about any material change in information previously announced or published; (b) any revision or revocation of the bid; (c) any competing takeover bids submitted; (d) the result of the takeover bid; (e) the views of the board as well as those of special experts on the takeover bid or the revised or the competing bid; and (f) anything else on the takeover bid and for every document or information made public according to the present Law.
d) The board of the target company shall draw up and make publicly available, a document setting out, inter alia, its opinion of the bid or the revised or competing bid as well as the reasons on which it is based.
e) With the exception of seeking alternative bids, as soon as the board of the target company becomes aware that a bid is imminent and until the expiration of the time allowed for acceptance or the revocation or cancellation of the bid, it may not, without prior authorization of the general meeting of shareholders, take any action which may result in the frustration of the bid.
f) In addition to the generality of the preceding paragraph (e), the board of the target company shall obtain the prior authorization of the general meeting of shareholders before deciding, inter alia, (i) the issuing of shares of the company; (ii) any lawful acts entailing the substantial differentiation of the assets or the obligations of the company and (iii) the buy-back of own shares, unless with the approval of the Commission, which is granted when the Commission is satisfied that it does not result in the frustration of the bid.
As regards the duties of the controlling shareholders of the target company, those are stemming either from the articles of association of the company (e.g. pre-emption rights of the shareholders and/or any other restrictions as to the transfer of shares and/or exercise of their voting rights) or from any shareholders’ agreement that may be in place.
Finally, controlling shareholders are under a duty not to act in an oppressive manner to the minority shareholders.
Do employees/other stakeholders have any specific approval, consultation or other rights?
The general principle is that there must be equal treatment to all shareholders of the target company. Hence, the bidder must treat employees or other stakeholders who hold shares or have the right to acquire shares equally in terms of the benefits or terms offered.
In any event, the Safeguarding and Protection of Employees Rights in the Event of the Transfer of Undertakings, Business or Parts Thereof Law (Law 104(I)/2000) grants rights to the employees in the event of a sale or transfer of a business or part of a business. In particular, Law 104(I)/2000 grants the following right to employees in the event of a sale or transfer:-
a) The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee;
b) Provided that the transferor and transferee may agree that after the date of transfer, they shall continue to be jointly and severally liable in respect to obligations created before the transfer and which arise from a contract of employment or employment relationship in force at the time of the transfer; and
c) Following the transfer, the transferee shall continue to observe the agreed terms and conditions of any collective agreement on the same terms applicable to the transferor under that agreement, or practice, until the date of the termination, or expiry of the collective agreement, or until the entry into force, or application of another collective agreement. The existing agreed terms and conditions of employment shall be preserved for a minimum period of one year.
Furthermore, sections 198-200 of the Companies Law regulate the procedure that needs to be followed in private M&A transactions. The Companies Law provides for the approval of the proposed scheme at a general meeting of the members by at least 50% +1 of those present and entitled to vote as well as an approval from a meeting of the creditors (again 50%+1 of those present and entitled to vote) as well as obtaining the sanction of the competent Court.
In relation to a public takeover bid CySec is designated as the competent authority which regulates and sanctions/approves the procedure.
To what degree is conditionality an accepted market feature on acquisitions?
As mentioned above, for schemes of arrangement and private mergers and amalgamations it is necessary to secure the approval of 50% +1 in value of each class of shareholders attending and voting at the relevant general meeting. Furthermore, it is necessary to obtain the consent of 50% +1 in value (out of the creditors present – all creditors must be notified wither in person or via a publication) of separate meetings of the creditors of each merging entity. Finally, the sanction of the competent District Court will also be required for the completion of the procedure.
Furthermore, it is common practice for acquiring parties to include a range of conditions, including receipt of any required regulatory approvals and market specific approvals prior to the completion as well as any merger control procedures that may need to be followed.
It is important to note that for public takeovers an offer may only be revoked in certain specific circumstances as provided by the Public Takeover Law and after approval by the regulatory authority.
What steps can an acquirer of a target company take to secure deal exclusivity?
An acquirer of a target company can contractually secure deal exclusivity with the target company by entering into either (i) a memorandum of understanding or (ii) an exclusivity agreement with the target company securing exclusivity of the deal for a specific period of time.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
In addition to the options mentioned above the most common measure used by bidders is to acquire a stake in the target in order to bolster their chances of following up with a successful bid and in the meantime offer them some protections in case a competing bid ultimately acquires the target at a higher price. Such dealings must always be carefully evaluated and assessed so as to be in line with the relevant legislation and regulatory framework.
In the context of private M&A transactions where there may be a time gap between the signing of the relevant documentation and closing, it is quite common for the seller to agree not to sell or in any way transfer and/or alter the business and/or assets of the target and continue to operate the target in the ordinary course of business.
There are no express restrictions which would prevent a private seller from agreeing to any break fee of the transaction that does not materialize however special care should be taken by the directors of the company to act within their duties towards the company.
Which forms of consideration are most commonly used?
Consideration in an M&A transaction can be either in the form of cash or in kind (or a combination of both).
As regards to the takeover of public companies, the Public Takeovers Law contains specific provisions in relation to the consideration in such transactions. In particular, in accordance with section 16 of the Public Takeovers Law, the bidder may offer cash, shares or a combination of both. In case the offer is for cash consideration, the bidder must support the offer with a guarantee from one or more banks or other organizations or persons with the necessary capital adequacy.
The Public Takeovers Law also provides that in certain specific circumstances, the bidder must offer cash alternatives as part of the consideration. These are as follows:-
“a) When the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market (in the Cyprus Stock Exchange) (the Commission may in such cases set the criteria taken into consideration when deciding whether the securities offered by way of consideration are liquid);
b) When a bidder has purchased shares in the target company within the last 12 months before the announcement of public offer has been made, which amount to 5% or more of the voting rights of the company, cash must be offered; and
c) When a bidder is exercising a ‘squeeze out’ and ‘sell out’ right, or in the event of a mandatory offer.”
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Pursuant to the Cyprus Stock Exchange Law, every natural or legal person who directly or through a third party, acquires or disposes of a participation in a company which has been registered in the Republic of Cyprus and whose shares are listed on the Cyprus Stock Exchange or a regulated market of another Member State, by which the voting rights he holds reach or exceed the thresholds of five per cent (5%), ten per cent (10%), fifteen per cent (15%), twenty per cent (20%), twenty-five per cent (25%), thirty per cent (30%), fifty per cent (50%) and seventy five per cent (75%) (‘substantial participation”), the said person shall notify the company and simultaneously CySec as well as the Stock Exchange as regards to the shares that are listed on the Stock Exchange, the latest within the working day following the execution of the transaction or the day on which he acquired knowledge or should have acquired knowledge of the transaction, with a notification to each recipient.
The said notification shall include the following details:-
(a) the percentage of voting rights and share capital which the person who has the obligation held before and after the acquisition or disposal and, if possible, the chain of related enterprises through which he holds the voting rights;
(b) the date on which the acquisition or disposal was made; and
(c) the identity of the beneficiary of the securities, even if he does not have the right to exercise the voting rights, as well as the identity of the natural or legal person who has the right to exercise the voting rights on behalf of the beneficiary.
At what stage of negotiation is public disclosure required or customary?
Disclosure under the Companies Law
No express provisions require disclosure in the case of private M&As until completion of the procedure. Upon completion of the procedure, the necessary filings will need to be made with the ROC in respect of the change of shareholder of the company.
Disclosure for listed companies in the Cyprus Stock Exchange
Pursuant to the Public Takeover Law, prior to the decision to make a takeover bid, the offeror must make sure that his decision to make a takeover bid is final and must announce his decision only when he has every reason to believe that it can materialize. In addition to the above generality, the offeror is obliged to announce immediately the making of a bid (a) when he has a firm intention to make a bid; or (b) upon an acquisition of securities which give rise to an obligation to make a bid under the law.
Furthermore, within twelve (12) days from the announcement of a firm intention to make a bid, the offeror draws up the offer document according to the directives of the Commission and communicates it to the Commission and the board of the target company. The Commission may, within the time limit set out in the respective legislation, approve the offer documents or indicate to the offeror amendments before final approval or prohibit the publication of the offer document and issues its decision.
As long as the approval of the Commission to publish the offer document is secured, the offeror:-
i. announces, in accordance with section 7, and publishes as soon as possible in at least two daily newspapers the approval of the offer document (the same obligation exists in case the offer document is rejected by the Commission, in which case the reasons for rejection must be stated);
ii. communicates as soon as possible the offer document to the target company and to the representatives of the offeror’s employees or where there are no such representatives, to the employees themselves; and
iii. within seven (7) days from the announcement of the document approval (a) sends by post a copy of the offer document to the holders of securities subject to the bid, (b) lists the said document to its internet site, provided it maintains one, and (c) sends the said document to the regulated market where the securities are listed, with the purpose of listing the document on its internet site.
Finally, in accordance with the provisions of the Public Takeover Law, during the takeover bid period:-
(a) the offeror, any other person holding a percentage of five per cent (5%) or more of the voting rights of the target company or the offeror company, must announce immediately, every acquisition of securities of these companies by themselves, persons acting in their own name on their behalf or in concert with them, by controlled undertakings, as well as the acquisition price and any voting rights already held in that company;
(b) anybody acquiring a percentage equal to half per cent (0,5%) or greater of the voting rights of the offeree company or the offeror, must make an announcement for this acquisition as well as every subsequent acquisition of securities of these companies by himself, persons acting in their own name on his behalf or in concert with him or by his controlled undertakings, as well as the acquisition price and any voting rights already held in that company.
For the purposes of the Public Takeover Law, the obligation to announce is satisfied with simultaneous announcement to the following:-
(a) to the regulated market in the Republic of Cyprus where the securities are listed, and the regulated market lists it on its internet site;
(b) to the Commission;
(c) to the internet site of the person making the announcement, provided it maintains one;
(d) if the announcement is made by the offeror, to the representatives of its employees, or where there are no such representatives, the employees themselves, and the board of the offeree company;
(e) if the announcement is made by the offeree company, to the representatives of its employees, or where there are no such representatives, the employees themselves, and the board of the offeror.
Is there any maximum time period for negotiations or due diligence?
No maximum time period exists for negotiations or due diligence.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In the case of a private M&As the consideration payable is a matter of negotiation and agreement between the parties.
In relation to listed companies, the Regulations issued by the Cyprus Stock Exchange provide that all shareholders of the same category of securities must be treated equally. In general, the price offered in a bid must be the highest price paid or agreed to be paid during the last 12 months before the offer period for the shares in the target company.
If a person (natural or legal) acquires securities which provide them with a total of more than 30% of the voting rights of a company, they have an obligation to make a public offer to acquire an additional number of securities which when added to those already held give him a percentage greater than 50% of the voting rights of the company.
Any person (natural or legal) who acquires securities in any company which added to any already held by him, give them in total more than of 75% of the voting rights of a company, has an obligation to make a public offer to acquire all the securities of the company. Again the consideration offered must be at least equal to the highest price paid for the securities of the same category in the 12 months preceding the obligation to make a public offer.
Is it possible for target companies to provide financial assistance?
Section 53 of the Companies Law prohibits the provision of financial assistance by a company for the purchase of its own shares. In particular it provides that it shall not be lawful for a company to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company, or, where the company is a subsidiary company, in its holding company.
The Companies Law allows, however:-
(a) the lending of money by the company in the ordinary course of its business, where the lending of money is part of the ordinary business of a company;
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company;
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.
Following a recent amendment of the Companies Law, it is now provided that, as regards private companies, the prohibition in relation to the provision of financial assistance shall not apply if:
a) the private company is not a subsidiary company of any public company; and
b) the act of providing financial assistance has been approved by a 90% majority of the shareholders in a general meeting.
Which governing law is customarily used on acquisitions?
Acquisitions in Cyprus are governed by Cyprus Law as well as by English common law principles.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
In the case of a public takeover bid, the following are required:
(i) announcement of the intent to make a public offer or confirming the decision to make a public offer;
(ii) the offer document must include confirmation by a credit institution or other organization that sufficient funds are available to satisfy full acceptance of the offer;
(iii) acceptance and transfer form, issued by the offeror and sent to all of the target’s shareholders;
(iv) a reasoned opinion by the target’s board of directors sent to the target’s security holders accompanied by an independent expert report;
(v) a revised offer document, where applicable; and
(vi) final result of the offer announced and published in daily national newspapers.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Section 73 of the Companies Law contains the only restriction governing the transfer of shares in a Cyprus company and provides that, irrespective of what is contained in the company’s articles of association, the company may not proceed to register a transfer of shares unless a properly executed instrument of transfer is delivered to the company.
In general, however, the following formalities are required in order to document a transfer of shares in Cyprus:-
i. Sale and purchase agreement in relation to the shares being acquired;
ii. An instrument of transfer properly executed and delivered to the company;
iii. A resolution of the board of directors of the company approving the transfer of shares;
iv. Cancelation of the expired and issuance of new share certificates;
v. Amendments in the register of members of the company; and
vi. Filling all the relevant application forms with the Registrar of Companies and Official Receiver in Cyprus.
Nominal local fees would be applicable for the registration of the transfer of shares with the ROC as well as stamp duty considerations which should be taken into consideration.
Are hostile acquisitions a common feature?
Hostile acquisition are not a common feature in Cyprus.
What protections do directors of a target company have against a hostile approach?
In the case of a hostile bid, the bidder will not have access to inside information of the target company by its board of directors nor will it have the possibility of carrying out a due diligence. Similarly, the directors of a target company in a hostile bid may take several defensive measures such as, issue of shares.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Pursuant to the provisions of the Public Takeover Law, where a person, as a result of their acquisition or the acquisition by persons acting in concert with them, holds securities of a company which, when added to any existing holdings of those securities and the holdings of those securities of persons acting in concert with them, directly or indirectly give them a percentage of thirty per cent (30%) or more of existing voting rights in that company at the date of the acquisition, then such a person is required to make a bid at the earliest opportunity to all the holders of those securities for all their holdings at an equitable price.
It must be noted, however, that in case the acquirer already holds more than fifty per cent (50%) of the voting rights of a company, the further acquisition of securities does not create an obligation to make a mandatory bid, provided the Commission grants an exception pursuant to the provisions of the law.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
All shareholders enjoy the rights afforded to them under the articles of association of the company with regard to the class of shares held by them. The Companies Law protects minority shareholders from oppressive behavior by the majority shareholder however any additional protection would be a matter to be governed by the company’s articles of association and/or any agreement between the shareholders.
A minority shareholder in the case of a public takeover may also have a sell out right (as described below).
Is a mechanism available to compulsorily acquire minority stakes?
In the case of a private company then this matter will be exclusively governed by the provisions of the company’s articles of association and any shareholder agreement that may be in place.
In the case of a public takeover, the Public Takeover Law provides for the “squeeze out” or the “sell out” of minority stakes in certain cases.
In particular, according to the provisions of the Public Takeover Law, in case an offeror makes a bid to all the holders of securities of the offeree company for the total of their holding, he is able to require all the holders of the remaining securities to sell him/her those securities in the following situations:-
i. where the offeror holds securities in the offeree company representing not less than ninety per cent (90 %) of the capital carrying voting rights and not less than ninety per cent (90 %) of the voting rights in the offeree company;
ii. where the offeror holds or has irrevocably agreed to acquire, following the acceptance of a takeover bid, securities in the offeree company representing not less than ninety per cent (90 %) of the capital carrying voting rights and not less than ninety per cent (90 %) of the voting rights included in the takeover bid.
Furrthermore, the law provides that, in any of the aforesaid cases, the holder of the remaining securities of the offeree company is able to require the offeror to buy his/her securities from him/her at a fair price.