In a recently published decision of November 7, 2017, the German Federal Court of Justice (Bundesgerichtshof) has added another twist to the much debated acquisition of German Celesio AG by US pharma wholesaler McKesson. McKesson had launched a takeover offer to the free float of Celesio in late 2013, and had entered into a purchase agreement with its then main shareholder Franz Haniel & Cie. to acquire its shareholding of slightly above 50% alongside the takeover bid. The transaction attracted the interest of Paul Singer. Elliott acquired a position of approximately 24% in shares and, in addition, convertible bonds of Celesio, and opposed the initial offer due to an alleged undervaluation. As a result, the initial offer, which was subject to a minimum acceptance threshold of 75%, failed in early January 2014. The 75% acceptance threshold is key under German law, for a bidder to be in a position to exercise control over a German listed corporation and access the cash flows, prior to having effected a squeeze-out of all remaining minorities.
In an attempt to rescue the transaction, the parties agreed on a complicated arrangement which had Haniel acquire the shares previously held by Elliott and then sell its so increased shareholding to McKesson. Given the outstanding convertible bonds in Celesio, which had become immediately exercisable due to a change-of-control trigger, this alone would not have been sufficient to bring McKesson above the threshold of 75% of issued capital on a fully diluted basis however. Thus, McKesson in addition acquired the convertible bonds directly from Elliott and converted them into shares immediately thereafter, thereby securing a shareholding in excess of the desired 75% quota. In addition, McKesson launched a second takeover bid to the free float.
The calculated per-share value of the purchase price paid by McKesson for the convertible bonds was significantly in excess of the per share purchase price paid for the shares acquired from Haniel and offered to the free float in the takeover bid. A number of minority shareholders who tendered into the bid at the offer price sued McKesson, arguing that they are entitled to the higher per-share value paid in the context of the acquisition of the convertible bonds.
In its decision of November 7, 2017, the German Federal Court of Justice has decided in favor of the claimants and resolved a previously disputed question of German takeover law. German takeover law sets forth strict minimum price and most favored treatment rules for any takeover offer, i.e. any offer seeking control of a target company. In particular, it stipulates that the bidder owes “adequate consideration” to minority shareholders and defines such adequate consideration by reference to (i) weighted average stock exchange prices and (ii) prior acquisition prices. Any price paid or agreed by a bidder for shares of the target company within six months prior to the publication of the offer document triggers the obligation to offer at least the same amount to minority shareholders or make them whole if the offer price has been below such amount.
Agreements or arrangements which create a right to acquire shares are to be treated in the same way as straightforward share acquisition agreements. While undisputed that a direct acquisition of convertible bonds from the target company falls within the reach of this provision, it had been unclear whether a secondary acquisition of convertible bonds from existing bond holders is also covered. The German Federal Court of Justice, drawing an analogy to forward sales or options, has now held that the provision is to be interpreted broadly and that it is not decisive whether convertible bonds are acquired directly from the issuer or through a purchase agreement with a bond holder. If they are acquired prior to a public offer within the relevant time window and at least in cases in which they are then converted into shares in close proximity to such acquisition, the bond acquisition triggers most favored treatment rules under German law and minority shareholders are entitled to the per-share value paid in the context of the bond acquisition.
The decision clarifies an important question of German takeover law and should be taken into account when structuring potential approaches of German listed companies.