Prohibition of public offers

First published in Noerr Public M&A-Report 02/2018

Section 15 para. 1 WpÜG authorizes BaFin to prohibit offers under the WpÜG under certain conditions. In the first half of 2018, BaFin made use of this right against Deutsche Balaton AG as bidder for an acquisition offer to the shareholders of Biofrontera AG. This case provides an opportunity to take a closer look at the practice of prohibiting public offers.

Empirical evidence

Since 2002, a total of 17 public offers were prohibited by BaFin (corresponding to around 3.28% of all announced offers). Except in 2003 and 2008, with three prohibitions each, these were spread fairly evenly over the last 16 years. In the last four years, about one offer per year was prohibited on average. The six prohibited offers since the beginning of 2012 comprised three mandatory offers, two takeover offers and one acquisition offer.

The prohibition notices published by BaFin since 2012 show that the authority has based its prohibition in five of six cases on sec. 15 para. 1 no. 1 WpÜG (absence of required information in the offer document) and only in one case on sec. 15 para. 1 no. 2 WpÜG (obvious violation of legal requirements for offer documents). The question of how it could have come to the prohibition can only be answered on a case-by-case basis.

• The prohibition of the exchange offer of Deutsche Wohnen AG to the shareholders of LEG Immobilien AG (2015) concerns a special case. The extraordinary general meeting, at which a capital increase was to be resolved by the shareholders to create the shares to be granted as consideration, was cancelled by the management board of Deutsche Wohnen AG. The reason behind was the parallel takeover offer made by Vonovia SE to the shareholders of Deutsche Wohnen AG, in the context of which shareholders who held shares in both Vonovia SE and Deutsche Wohnen AG signalled that they would not approve the capital increase.
• In three cases of cash offers, the incompleteness of the offer document was based on a missing financing confirmation pursuant to sec. 13 para. 1 WpÜG. The facts contained in the prohibition notices suggest that the bidders had difficulties in financing the offer in these cases.
• In one case, the incompleteness was due to the lack of prospectus-equivalent disclosure in the offer document for an offer in which securities should be offered as consideration. Another case concerned various shortcomings in the offer document, including a condition for the offer which was formulated too vaguely in the opinion of BaFin.7

Legal background and administrative practice

Even though prohibitions of offers are rare, they still occur from time to time. The recent prohibition notices show that BaFin only prohibits offers if an offer document does not contain information specifically required under the WpÜG or the corresponding offer regulation or if its content does not comply with requirements set forth in these bodies of rules. If, in the opinion of the authority, such a case exists, it will regularly address the issue and notify the bidder in the approval process and, if necessary, may extend the time limit for the approval and draw its attention to the addition or correction of the offer document. A shortcoming of the offer document which may justify a prohibition should therefore regularly and readily be avoidable for the bidder without particular effort.

In case of prohibition, the bidder faces further consequences in addition to the prohibition of the publication of the offer document and the invalidity of the already submitted declarations of acceptance.

Firstly, in the case of prohibited acquisition or takeover offers, there is a blocking period of one year pursuant to sec. 26 para. 1 sentence 1 WpÜG. If the bidder allows the offer to be prohibited, it is therefore not possible for him to “rectify” it quickly by means of a new offer.

However, this blocking period only applies to the bidder itself. For subsidiaries of the bidder and other persons acting jointly with the bidder (e.g. an affiliated company), offers are not blocked.

In case of mandatory offers, the legal consequences are more serious. The bidder is obliged to pay the target company’s shareholders’ interest in the annual amount of 5 percentage points above the base interest rate according to sec. 247 BGB (German Civil Code) for the duration of his breach of the duty to make an offer. Even more serious is the fact that the bidder and certain other parties pursuant to sec. 59 sentence 1 WpÜG are affected by a loss of rights. This primarily affects the voting rights at the annual general meeting of the target company. However, the dividend entitlement does not lapse if the offer was not intentionally omitted and the bidder makes up for it (sec. 59 sentence 2 WpÜG).

Conclusion

In recent years, difficulties regarding the availability of the compensation, be it shares of the bidder or cash, have formed the most frequent background for a prohibition of public offers. This conclusion is relevant to the discussions in the literature as to whether the legal consequences of a prohibition of acquisition or takeover bids for the bidder (and its group parent company) are insufficient and open up opportunities for circumvention. The practically relevant constellations in which the bidder is ultimately prevented from submitting a complete offer document by financial reasons are no cases of circumvention.