Takeover by the major shareholder

First published in Noerr Public M&A-Report 01/2024

In the last two years, there have been public offers by major shareholders, i.e., shareholders who already held a controlling stake (Examples: Telefónica/Telefónica Deutschland (2023); Schaeffler/Vitesco (2023); Cinven/SYNLAB (2023); KKR/OHB (2023); Vodafone/Vantage Towers (2022)) or a significant stake below the control threshold under takeover law (Examples: TPPI, Prof. Prefi/Schumag (2023); SWOCTEM, Prof. Loh/Klöckner (2023); Deutsche Balaton/Biofrontera (2022)) prior to the Section 10 Announcement. The phenomenon is not new: If the market is moving downward or sideways and the share price of the target company falls, the investment changes from the perspective of a major shareholder. In some cases, these opportunities are used by major shareholders to increase their stake or launch a takeover bid. There have been similar cases before, for example during the coronavirus pandemic (Examples: EP Global Commerce/Metro (2020); Optima/InTiCa (2020)) or the financial crisis following the Lehman insolvency (Example: Skion, Susanne Klatten/Altana (2008)).

The motivation can vary. Selling the investment is no longer attractive if the share price falls. It is also more favourable to increase the stake, for example in order to pass the control threshold under takeover law and subsequently not be obliged to make a mandatory offer in the event of further share acquisitions, or to prepare for the integration of a target company or a delisting, which in practice is usually only considered if the investor holds shares above a threshold of 60 to 80 %. A downward or sideways market can therefore be used not only by strategists or financial investors for a public offer, but also by major shareholders who can otherwise stabilise the shareholder base and, if necessary, protect the target company against uncoordinated takeover attempts. A bid by a major shareholder differs in some legal and practical aspects from a takeover by a third party.

Typical characteristics of offers from a major shareholder

1. less due diligence,
2. less contact to the management board of the target company,
3. fewer irrevocable undertakings or block purchases,
4. lower premium,
5. neutral or negative reasoned statements of the target company are accepted,
6. supervisory board of the target company must deal with conflicts of interest.

1. Less Due Diligence

Firstly, a major shareholder usually already knows the target company and therefore has little or no need to carry out a due diligence review. Although the authorisation of a due diligence by the target company would also be permissible under stock corporation law in favour of the major shareholder if it is in the interests of the company (it would therefore not fail due to the confidentiality obligation under stock corporation law or the principle of equal treatment). However, the practical need for an in-depth review is often less important than it would be if the offer was from a third party. For example, Schaeffler only used publicly available sources of information (in particular Vitesco’s 2022 annual report and interim financial reports) to prepare the offer document for taking over Vitesco (Schaeffler’s offer document from 15 November 2023 (page 6)). Vitesco only supported Schaeffler by providing information for assessing any regulatory clearance requirements in relation to the implementation of the offer (Schaeffler’s offer document from 15 November 2023 (page 6)). The Spanish Telefónica parent company also only used generally accessible sources of information to prepare the offer document for the acquisition offer to the shareholders of Telefónica Deutschland – known under the O2 brand – and did not separately verify the accuracy and completeness of this information (Telefónica’s offer document from 5 December 2023 (page 9)). Furthermore, the offer documents of Octapharma AG for SNP Schneider-Neureither & Partner SE (Octapharma’s offer document from 26 June 2023 (page 5)) and SWOCTEM GmbH for Klöckner & Co. SE (SWOCTEM’s offer document from 27 March 2023 (page 6)), for example, indicate that no due diligence review was carried out on the target company. In the case of the Cinven/SYNLAB bid, on the other hand, a due diligence review was carried out prior to the Section 10 Announcement (Cinven’s offer document from 23 October 2023 (page 11)).

2. No early contact with the management board of the target company

If a due diligence review and the support of the target company’s management board are not necessary in advance from the perspective of the major shareholder, it may make sense for the major shareholder to refrain from contacting the target company’s management board prior to the Section 10 Announcement. This reduces the risk of confidentiality gaps or publication by the target company, which would lead to a rising share price prior to the Section 10 Announcement and thus to an increased minimum price. According to press reports, the CEO of Telefónica Deutschland was surprised by the announcement of the acquisition offer from the Spanish parent company during a press conference on the quarterly figures (https://www.handelsblatt.com/technik/it-internet/o2-telefnica-will-deutschlandtochter-komplett-uebernehmen-/29486080.html (last accessed on 6 February 2024)). Schaeffler also refrained from approaching Vitesco’s management board prior to the publication of the decision to submit the takeover bid (Vitesco’s press release from 15 November 2023 (https://www.vitesco-technologies.com/de-de/press-events/press/23-11-15; last accessed on 6 February 2024)). Nevertheless, following an increase in the offer price by Schaeffler, a business combination agreement was entered into between Schaeffler and Vitesco (Vitesco’s reasoned statement from 27 November 2023 (page 85)). The management board was also not approached prior to the announcement of the Section 10 Announcement in SWOCTEM GmbH’s takeover offer to the shareholders of Klöckner & Co. SE (Klöckner’s reasoned statement from 31 March 2023 (page 30)). As the offer contained virtually no premium (see also number 4 below), it was not supported by Klöckner’s management in the reasoned statement (Klöckner’s reasoned statement from 31 March 2023 (page 62)). In contrast, Cinven first contacted the management board of SYNLAB in March 2023 (SYNLAB’s ad hoc announcement from 13 March 2023), subsequently entered into discussions and concluded an investor agreement with SYNLAB prior to the publication of the Section 10 Announcement.

3. Fewer irrevocable undertakings or block purchases

Irrevocable undertakings or block purchase agreements with major shareholders are less common in case of a takeover by a major shareholder. Such agreements only make sense if there are other major or block shareholders in the target company whose support the bidder wishes to secure in advance of the offer. This can occur (Example: Cinven’s offer document from 23 October 2023 (page 24)), but is usually the case if other institutional investors (including hedge funds) are involved in the target company and are to be won over to the offer. It is less common for a target company to have more than one major strategic shareholder at the same time.

4. Lower premium

If the bid by the major shareholder also or primarily serves to cross the control threshold under takeover law in order to subsequently be able to increase the share without submitting a mandatory offer – which may be higher than the offer price – a low premium may be offered on the share price of the target company. This intention will not always be clear from the offer document because a control transaction usually also pursues other objectives (In contrast: SWOCTEM’s offer document from 27 March 2023 (page 51): offer serves to exceed the 30 % threshold and is not aimed at acquiring a majority stake). Nevertheless, there are always offers in which a major shareholder who already holds a stake close to the 30 % threshold prior to the offer tenders only a low premium. This may be sufficient to collect a large enough number of shares in the offer and thus exceed the control threshold. An example of this is the takeover bid by SWOCTEM GmbH to the shareholders of Klöckner & Co. SE: The bidder held 29.97 % of Klöckner shares prior to the Section 10 Announcement and the premium was 0.5 % on the minimum price and 2.5 % on the closing price on the day prior to the publication of the decision to launch the bid (SWOCTEM’s offer document from 27 March 2023 (pages 33 and 37)). The takeover bid by Deutsche Balaton Biotech AG to the shareholders of Biofrontera AG didn’t even offer a premium on the relevant three-month average price at all (Deutsche Balaton’s offer document from 15 July 2022 (page 24)). Both the SWOCTEM/Klöckner offer and the Deutsche Balaton/Biofrontera offer were successful insofar as the 30 % threshold was exceeded.

5. Neutral or negative reasoned statement

A low premium can cause the management of the target company to issue a neutral or negative reasoned statement. In the cases of SWOCTEM/Klöckner and Deutsche Balaton/Biofrontera, the offer was categorised by the management as financially inadequate, so in its reasoned statement, the target company recommended the offer not to be accepted (Biofrontera’s reasoned statement from 29 July 2022 (page 51); Klöckner’s reasoned statement from 31 March 2023 (page 62)). Nevertheless, the offers were successful (see number 4 above). The Cinven/SYNLAB acquisition offer was somewhat different:

Cinven had initiated an initial public offering for SYNLAB in 2021 at an issue price of EUR 18.00, followed by the acquisition offer in 2023 at a price of EUR 10.00. Although this still represents a premium of 23 % on the closing price on the last trading day prior to the publication of the decision to make the offer, the offer price was significantly below the issue price at the time of the IPO. Against this background, the reasoned statement of SYNLAB’s management board and supervisory board was neutral, as the offer price did not reflect the long-term value of SYNLAB in their view (SYNLAB’s reasoned statement from 2 November 2023 (page 67)). In the end, the acceptance rate was around 35 %, meaning that Cinven held around 85 % of SYNLAB’s share capital after settlement.

6. Dealing with conflicts of interest on the supervisory board

If the major shareholder is "represented" by one or more persons on the supervisory board of the target company, conflicts of interest may arise on the supervisory board during the implementation of the bid. Although member(s) of the supervisory board may come from the major shareholder’s sphere of influence, as members of the corporate bodies of the target company, they are obliged to act exclusively in the interests of the target company. This means, for example, that they must maintain confidentiality towards the major shareholder. In practice, therefore, a committee is usually formed on the supervisory board that does not include anyone from the major shareholder’s sphere of influence. This committee performs the tasks of the supervisory board in connection with the takeover, in particular preparing the reasoned statement in accordance with Section 27 WpÜG. Examples of this are the transaction committees on the supervisory boards of Telefónica Deutschland (Reasoned statement Telefónica Deutschland from 13.12.2023 (page 54 f.)), Vitesco (Reasoned statement Vitesco from 27 November 2023 (page 80)) and SYNLAB (Reasoned statement SYNLAB from 02 November 2023 (page 65)). However, the organisation of the committee and the delimitation of its tasks from those of the plenary differ in practice.

Conclusion: The above examples may suffice to show that acquisition or takeover bids by a major shareholder differ from bids by third parties at various points. They occur repeatedly, especially in downward or sideways markets. Due to the proximity that a major shareholder typically has to the company, such processes can often be initiated and implemented quickly without the close involvement of the target company, as opposed to a takeover by a third party. This means that listed companies should remain in close contact with their major shareholders in order to be able to help shape and support any processes that are initiated in the interests of the company.