The role of banks in public takeovers under the German Securities Acquisition and Takeover Act
By Dr Volker Land and Dr Stephan Schulz
Banks play an important yet often underappreciated role in public offers under the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, “WpÜG”). The degree to which transaction parties depend on banks’ support can vary from case to case, but banks consistently fulfil key functions for both the bidder and the target company.
It is therefore fair to say that the public takeover market would not operate effectively without the involvement of banks. This article examines the typical roles and responsibilities that banks undertake or are required to undertake in the context of public M&A transactions.
Bidder’s side
On the bidder’s side, banks’ activities can be divided into the areas of advisory, settlement and financing.
Advisory: structuring of offers
As advisors to the bidder with regard to the offer structure or financing, banks do not operate in their capacity as regulated financial institutions. Instead, they compete with corporate finance advisors and other players in the takeover market. The need for advice on the bidder’s side is most pronounced in the run-up to and early phase of the offer process, involving the identification and valuation of the target company, analysis of market conditions and offer structuring. By advising on these issues, banks play a key role in formulating the bidder’s takeover strategy.
Financing: submission of the financing confirmation
Banks are also regularly engaged in financing the offer. This involvement includes traditional financing tasks such as granting loans, arranging syndicated loans and facilitating capital market financing through bond or share issues. However, these tasks are not necessary if the bidder can complete the transaction without external financing, i.e., using existing internal funds or through group financing. In addition, the WpÜG requires the involvement of an independent investment services company (The WpÜG uses this term in the same sense as section 2(10) of the German Securities Trading Act (Wertpapierhandelsgesetz). It includes domestic credit institutions and financial services institutions within the meaning of section 1(1) and (1a) of the German Banking Act (Kreditwesengesetz, “KWG”) as well as foreign institutions domiciled in a state of the European Economic Area pursuant to section 53b (1), sent. 1 KWG) in cash offers. To secure approval of the offer pursuant to section 13(1), sent. 2 WpÜG, the bidder must furnish a financing confirmation.
This confirmation attests that the bidder has taken the necessary measures to ensure that the funds required for the complete fulfilment of the offer will be available when the cash consideration becomes due.
The issuer of a financing confirmation fulfils a control function within the framework of obligations under the WpÜG. Pursuant to section 13(1), sent. 1 WpÜG, the bidder primarily has a financing responsibility; it must take the necessary measures to ensure that the funds required for the complete fulfilment of the offer are available to it when the claim to the consideration becomes due. However, the issuer of the financing confirmation must ensure that (i) the bidder has implemented adequate financing measures, (ii) these measures remain in place until completion and (iii) they guarantee that the bidder can pay the consideration in full and on time. In this context, the issuer must review the measures taken by the bidder in practical and legal terms, with the level of effort required in this respect depending on the specific type of consideration. If the offer is to be fulfilled using funds already available to the bidder, their existence and availability must be verified by the expected date of fulfilment. This can be done without great effort if the funds are available in a blocked account held by the issuer and cannot be used for other purposes without the issuer’s consent. For more complex financing arrangements, especially those involving necessary capital measures, however, more complex checks are required, for which issuers usually seek external legal advice.
The financing confirmation must be included in the offer pursuant to section 11(2), sent. 3, no. 4 WpÜG. A copy of the confirmation is usually attached as an annex. The issuer is liable if, contrary to the financing confirmation, the bidder has not taken the necessary measures and, for this reason, does not have the necessary funds at its disposal at the time the cash payment is due (section 13(2) WpÜG).
Settlement process
The involvement of a bank on the bidder’s side as the settlement agent is mandatory. In this role, the bank is responsible for the settlement process, which primarily includes receiving the shares tendered for acceptance and paying the consideration to the custodian banks for distribution to shareholders who accept the offer as part of the settlement. The settlement agent also performs important tasks in earlier phases, such as coordinating the provision of information to shareholders via their custodian banks, drawing up technical guidelines for settlement and ensuring the tradability of shares for which the offer has been accepted until settlement of the offer. In share-for-share offers, additional tasks include acting as a trustee for the exchange of shares. Often, the bank that issues the financing confirmation also serves as the settlement agent. Between the beginning of 2016 and mid-2024, this dual role was observed in 109 out of 192 public offers, accounting for 56.77 %.
Target company’s side
On the target company’s side, banks usually fulfil two functions.
Advisory
The management and supervisory boards of the target company often need advice on handling offers that goes beyond mere legal and strategic assessments of the offer. This applies in particular to uncoordinated or even hostile takeover attempts. In these scenarios, the question arises as to possible defence strategies, which may include capital market-related actions like placing shares or convertible bonds with the public or a friendly investor (“white knight”). In these situations, banks can play a crucial advisory role, significantly contributing to the success of the defence strategy.
In this context, it is also important to highlight the activities of banks in the context of takeover prevention strategies. When a bidder approaches a target company with the intention of making a takeover bid, experience shows that the time for an appropriate reaction is short. This is particularly true once the intention to make a takeover bid is announced in accordance with section 10 WpÜG (“section 10 announcement”), which imposes the rigid time frame of the WpÜG on the actions of the bidder and the target company. Furthermore, from this point onwards, the management board is subject to the neutrality requirement under takeover law pursuant to section 33 WpÜG, which only permits actions that could prevent the success of the offer if further conditions are met. Therefore, it is prudent for potential takeover candidates to define the key responsibilities within the target company, identify advisors to be involved and outline the first steps for both internal and external communications in the event of a takeover bid. It is also advisable to create a defence manual that outlines these stipulations. Given the central importance of the management and supervisory boards’ (preliminary) assessment of the appropriateness of the offer price, especially for necessary communications after the section 10 announcement has been addressed or published, involving a bank or corporate finance advisor in preparing the defence manual is recommended. If necessary, this early involvement can quickly provide a reliable assessment of the appropriateness of the consideration, enabling the target company’s corporate bodies to respond adequately to the offer.
Evaluation of the offer: issuance of a fairness opinion
The second classic role of banks in advising the target company is to provide support in assessing the financial appropriateness of the consideration offered by the bidder. For this purpose, the target company engages an investment bank to issue a fairness opinion based on a capital market-oriented valuation of the target company. This opinion serves as a foundation for the management and supervisory boards’ statements on the offer. Like advising the bidder, issuing a fairness opinion is not a task that a bank performs due to its regulatory position. In this area, banks compete with non-regulated corporate finance advisors and auditing firms. Particularly in very complex cases or where potential conflicts of interest exist between the management and supervisory boards, several fairness opinions may even be obtained. From the beginning of 2016 to mid-2024, this was observed in 34 out of 192 public offers, representing 17.71 %, with an average market capitalisation at the offer price (MCO) of EUR 4,865.70 million. Although not legally required, obtaining a fairness opinion has nevertheless become standard practice, especially for larger transactions in the takeover market. In the same period, only 68 out of 192 transactions, or 35.42 %, proceeded without a fairness opinion being obtained.
Insights
