Hostile Takeovers: Practical Aspects from a Ukrainian Antitrust Perspective
“Hostile takeovers are but gangsterism and the law of the strongest.”
Fran?ois Mitterrand, former President of France, 14 February 1989
“Can it even be unfriendly when someone wants to have influence
over that which he owns?”
Meite Thiede (cited by Gordon, 2003)
Though these quotations are the complete opposite of each other, they nevertheless each reflect certain aspects of the same concept. In recent years, takeovers have become omnipresent in every sphere of industry and trade, crossing all territorial and jurisdictional boundaries. This is explained by the importance of takeovers as a market tool: takeovers may promote industrial consolidation, facilitate movement of capital, create synergies and increase efficiencies resulting in greater competitiveness and economic growth.
What is a takeover?
Generally, takeovers may be consensual or hostile. In a consensual takeover the parties negotiate and finally agree on the terms of a takeover, in a hostile takeover an acquirer typically makes an offer to the target’s shareholders to buy the shares whereas the target’s management strongly opposes the bid.
Though the final decision on an offer is still in the hands of shareholders, in practice the target’s management has a great number of instruments to frustrate a bid. When using different defensive measures against the bid, the target’s management may act in their own interests and in breach of the fiduciary duty they owe to the company and to the company’s shareholders, trying to secure their positions, as a successful bidder is likely to change the incumbent management.
The risk of abuse of shareholders’ interests by the management was acknowledged a long time ago, and the problems arising in connection with hostile takeovers have been addressed in takeover regulations in many jurisdictions.
Regulating takeovers: international practice
The UK has always been at the forefront of takeover regulation, and since the introduction of the City Code on Takeovers and Mergers (the Code) in 1968 by the Bank of England, its takeover regulation system has become one of the most sophisticated and detailed in the world.
The Code is designed principally to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover, and that shareholders of the same class are afforded equivalent treatment by an offeror. One of the main rules established by the Code in order to achieve this goal is the prohibition for the target’s management to take defensive measures to frustrate the bid (e.g. to issue new shares, to dispose of the company’s assets, etc.) (the so-called “board neutrality rule”). Its aim is to protect the interest of the target’s shareholders and give them a chance to decide on the bid themselves.
This rule was also reflected in Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 On Takeover Bids (the Directive), which is based on the UK experience of takeover regulation. The Directive provides that the management of the target company may not take any defensive measures against the bid without the prior authorization of the general meeting of shareholders.
Takeovers in Ukrainian perspective
The Ukrainian merger market looks rather different. There is no special act regulating takeovers, and the current procedure for obtaining the approval of the Antimonopoly Committee of Ukraine (AMCU) for hostile takeovers does not provide any useful guidance on many material issues.
The general regulation of mergers and takeovers from an antitrust perspective still lies within the framework of the On the Protection of Economic Competition Act of Ukraine No. 2210-²²² of 11 January 2001 (Competition Act), whereas the only act that contains specific provisions on hostile takeovers is the Regulation On the Procedure for Filing Applications with the Antimonopoly Committee of Ukraine for Obtaining its Prior Consent for the Concentration of Business Entities (the Regulation on Concentration), approved by the Resolution of the AMCU No. 33-r of 19 February 2002 (the Regulation).
The limited scope of available statutory guidance entails a number of key issues remaining unclear or problematic in practice.
Joint application/availability of information As a general rule, the Regulation requires an acquirer and a target to file a joint application, and to submit detailed information on their businesses, financial performance, affiliated parties and key management. In a hostile takeover where a target often refuses to cooperate with the acquirer and strongly opposes the planned transaction it is unlikely that the acquirer will be in position to gather such information and to persuade the target to sign the joint application.
The Regulation has a carve-out providing for the possibility to file an application solely on behalf of an acquirer supplemented by the confirmation that the acquirer’s request to provide this information has been delivered to the target. However, the Regulation does not contain any indication on deadlines within which the target should respond to such a request, thereby leaving room for abuse.
Further, the AMCU has the right to require (at its own initiative or on acquirer’s request) the target to provide the necessary information. If the target does not fulfill this obligation, the AMCU may impose a fine on the target (in the amount of up to one percent of the net sales of the target in the last financial year). However if a foreign-based target has no subsidiaries in Ukraine, the AMCU would have no real enforcement tools and may not be able to ensure the compliance by a foreign-based target.
Accordingly, the collection of necessary information from the target in order for the application to be accepted for the AMCU’s consideration becomes problematic in practice.
The general rule is that the AMCU considers the application for approval of a takeover in two stages: during the first stage which lasts 15 days the AMCU decides whether to accept the application for consideration, checking if all the required information is provided; and during the second stage, which may last up to 30 days the AMCU considers the application on its merits.
As a general rule the first stage is completed when all required information on the target is provided. According to the Regulation, the commencement of the AMCU’s consideration of the application on the merits is triggered once complete information about the target has been submitted. Therefore, the target may deliberately delay the date when the AMCU starts to consider the application. An acquirer may not influence the commencement of the AMCU’s consideration of such matters if the target does not cooperate with such acquirer.
Furthermore, if all necessary information is finally submitted by the target, and the AMCU takes the application into consideration, the AMCU has no duty to inform the acquirer of this fact, and the date when consideration of the transaction started may be crucial for the transaction schedule. It is, therefore, in the acquirer’s interests to maintain regular contacts with the AMCU regarding the status of its application, as the acquirer needs to know the date when the consideration of an application starts to be able to assess the time deadlines and structure the transaction accordingly.
Although it is provided both in the Competition Act and the Regulation that the general period within which the concentration is to be considered should not exceed 3 months, in practice it is difficult to predict how long the consideration will take.
Possible conflicts with other jurisdictions In practice, delays in taking the application for consideration and long period of consideration of the matter by the AMCU may eventually lead to violation of the takeover rules by the acquirer envisaged in EU and UK legislation, because these rules set out strict timelines for takeovers and the terms within which the deal should be closed.
The Code provides that the offer made by the acquirer to the target’s shareholders has to be closed within 60 days notwithstanding the result of the offer. Under the Directive, the time allowed for the acceptance of the bid may not be more than
10 weeks from the date of publication of the offer document.
As a result, this may lead to a situation where the acquirer’s obligation to acquire the shares from the shareholders pursuant to EU and UK laws would clash with the prohibition to acquire control over the target prior to the AMCU’s approval as a matter of Ukrainian law. In this case, the acquirer is faced with the choice of either violating the law of Ukraine by closing within the time frames set out by UK and EU law without having obtained the AMCU’s approval for concentration, or to wait for AMCU approval and not close in violation of UK and EU laws.
If there is no possibility for an acquirer to comply with the laws of each jurisdiction where clearance of an international transaction is required, the approach may be to assess the potential negative impact on a transaction as a whole in the context of sanctions applicable in respective jurisdictions.
The absence of detailed antitrust regulation of hostile takeovers in Ukraine may be beneficial for the target company and its management strongly opposing the takeover, as numerous obstacles arise for the acquirer in practice. However, the lack of statutory guidance contradicts the fundamental principle of the board neutrality rule implemented in the EU and its member states according to which the management of the target company is not allowed to take any defensive measures against the bid or frustrate it. The shareholders of the target company should be able to have the last word.
The AMCU is currently drafting amendments to the Regulation. It would be beneficial for the Ukrainian merger market if the best international experience of takeover regulation could be used at the stage of drafting so that the above amendments could provide detailed regulation of hostile takeovers and suggest solutions to various issues arising from a hostile takeover.