| Changing times for Ireland’s corporate finance sector |
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| David O’Donnell examines recent trends in mergers and acquisitions in Ireland and looks to the future, which may see Ireland’s 80 per cent squeeze-out threshold increased to 90 per cent under the proposed EU Takeover Directive |
With the economic outlook more and more uncertain, mergers and acquisitions practitioners, legal, accounting and corporate finance, have been contemplating where the opportunities might arise.
There will always be private company mergers and acquisitions, particularly mid-size transactions. That said, anecdotal evidence suggests that North American acquirers are less enthusiastic than before, partly a result of the overall uncertainty, partly the result of the decline in the value of the dollar, and an obvious consequence of the hard / soft / lumpy landing that the economy is experiencing.
Following the 1998 to 2000 boom time when IPOs were the focus of corporate activity, increasingly it is public-to-private transactions, which are the focus of attention. 2002 saw the exit of Eircom plc, Smurfit Group plc, Seafield plc, Green Property plc and Dunloe Ewart plc from the public markets. In early 2003 ITEQ-quoted call centre operator company Conduit Group plc, software player Riverdeep Group and Alphyra Group plc, the electronics transactions group, were each the subject of an MBO offer. As at the time of going to press the offer for Conduit has gone unconditional. Media speculation continues to suggest that there are numerous other small cap companies about to exit the public company arena on management buyout tickets.
European attack on the 80 per cent squeeze out
Ireland is at present a particularly deal-friendly environment in light of the 80 per cent squeeze-out threshold, as opposed to 90 per cent in the UK, and offers can be structured (as many of them have) so as pre-existing holdings can be included in the 80 per cent. Furthermore, it is possible for takeovers to be organised through court-approved schemes of arrangement, where the approval threshold is a vote of shareholders in favour where a majority of those voting are in favour, and they hold 75 per cent of the shares voting.
In 2000, Warner Chilcott plc used a scheme of arrangement to enable it to be taken over by Galen Holdings plc. In the very recent past Ardagh plc is the only example of the use of a scheme of arrangement. A scheme of arrangement is often a very worthwhile alternative to a straightforward takeover offer, especially when one is contemplating a more complicated transaction, involving a compromise between the company and its shareholders. There can be a substantial tax saving when one opts for the scheme of arrangement route, as no stamp duty is payable on the acquisition of shares in a scheme of arrangement, as compared with a 1 per cent stamp duty liability on the value of the offer in a takeover offer scenario.
A further saving for the bidder in a scheme of arrangement scenario results from the requirement that the scheme originates from the company, not from outside the company, and therefore, most of the fees and expenses are paid by the company, whether the scheme succeeds or fails. However, as against this, it is important to appreciate there are some additional costs involved in a scheme of arrangement, as a result of the court involvement, and the more complicated time frame this places on the takeover timetable.
One cloud on the horizon, which may have an effect on public to private activity, is the proposed Takeover Directive. This proposed 13th Company Law Directive has been floating around the corridors of Brussels over the past decade, and seeks to reconcile the irreconcilable.
On the one side you have the Germans, whose fundamental fear is overseas (specifically USA) acquisitions of their key industries - especially the automotive industry. The Vodafone / Mannesmann acquisition has proven to be a particular trauma. They essentially wish that Boards of Directors be able to resist takeover activity, and for special voting rights to be capable of exercised to repel the advances of unwanted suitors.
On the other side you have the UK (and Ireland) who have a tradition of fair procedures in a takeover, and are not at all interested in permitting poison pills, special rights or other ruses by boards of directors to resist the free market in company takeovers.
In the middle is the European Commission which has decided that rather than go for the best model - i.e. the UK / Irish model - it will instead create something which will satisfy no-one. One exasperated participant in the process is reputed to have commented that the Directive should adopt the UK model and exempt Germany (or maybe just the Volkswagen Audi Group!) from it.
One of the proposed changes is to increase the minimum squeeze out percentage in Ireland from 80 per cent to 90 per cent. This runs contrary to the unanimous report of the Irish Company Law Review Group of December 2001, which advocated retention of the 80 per cent figure in Ireland. This Group had representatives of all market participants, advisors and regulators. Submissions are being made in the strongest possible terms by amongst others, the Law Society, to retain the present structure. If the 90 per cent threshold comes in it may affect not only ‘normal’ takeover offers, but also the use of schemes of arrangement.
In the USA, it is the legislature and courts of the State of Delaware, which have developed the law, experience and jurisprudence to deal with company law matters including that relating to takeovers. The US Federal Government did not come in to invent new law - it allowed the market to choose the best jurisdiction. Here the EU had the choice of allowing the market to choose the best procedures. One is left with the impression of Michael McDowell’s famous image of certain politicians being like chimpanzees with screwdrivers at the back of a television set....
The Directive will inevitably appear this year or next year. Good for lawyers, without doubt, but good for dealmakers? Arguably it may migrate stagnation in capital markets all around the EU.
Competition and merger control law changes
Following the deliberations of the Competition and Mergers Review Group, and the enactment of the Competition Act 2002, the new Irish merger control law finally kicked in on 1 January of this year. Until then Ireland was in the unique situation of having two local merger control regimes (quite apart from sectoral regulation) - the Mergers Act and the Competition Act.
So, is the new law the best solution? It’s too early to say. Rather than have a clear and unambiguous provision as to what deals require clearance and what deals do not, there are two types of deal - one where you must notify and one where you may notify. In brief, if buyer and target have turnover of ?40 million or more in the most recent financial year, the transaction requires clearance from the Competition Authority. All media mergers are caught. But, where the ?40 million threshold is not exceeded by one or both parties, it is still possible for a clearance to be sought, lest the deal fall foul of competition law notwithstanding its size. Again good for lawyers, but not necessarily for dealmakers.
Unlike the previous regime under the Mergers Act, the fact of a notification being made is published to the world, so as interested persons may make representations on it. Time will tell whether a smooth or untidy process will result.
The future
The only question that remains is what will we all do once the deals are done and, in particular, quoted companies acquired? Why, of course, prepare them for IPO.
David O’Donnell is a partner at Mason, Hayes & Curran.With the economic outlook more and more uncertain, mergers and acquisitions practitioners, legal, accounting and corporate finance, have been contemplating where the opportunities might arise.
There will always be private company mergers and acquisitions, particularly mid-size transactions. That said, anecdotal evidence suggests that North American acquirers are less enthusiastic than before, partly a result of the overall uncertainty, partly the result of the decline in the value of the dollar, and an obvious consequence of the hard / soft / lumpy landing that the economy is experiencing.
Following the 1998 to 2000 boom time when IPOs were the focus of corporate activity, increasingly it is public-to-private transactions, which are the focus of attention. 2002 saw the exit of Eircom plc, Smurfit Group plc, Seafield plc, Green Property plc and Dunloe Ewart plc from the public markets. In early 2003 ITEQ-quoted call centre operator company Conduit Group plc, software player Riverdeep Group and Alphyra Group plc, the electronics transactions group, were each the subject of an MBO offer. As at the time of going to press the offer for Conduit has gone unconditional. Media speculation continues to suggest that there are numerous other small cap companies about to exit the public company arena on management buyout tickets.
European attack on the 80 per cent squeeze out
Ireland is at present a particularly deal-friendly environment in light of the 80 per cent squeeze-out threshold, as opposed to 90 per cent in the UK, and offers can be structured (as many of them have) so as pre-existing holdings can be included in the 80 per cent. Furthermore, it is possible for takeovers to be organised through court-approved schemes of arrangement, where the approval threshold is a vote of shareholders in favour where a majority of those voting are in favour, and they hold 75 per cent of the shares voting.
In 2000, Warner Chilcott plc used a scheme of arrangement to enable it to be taken over by Galen Holdings plc. In the very recent past Ardagh plc is the only example of the use of a scheme of arrangement. A scheme of arrangement is often a very worthwhile alternative to a straightforward takeover offer, especially when one is contemplating a more complicated transaction, involving a compromise between the company and its shareholders. There can be a substantial tax saving when one opts for the scheme of arrangement route, as no stamp duty is payable on the acquisition of shares in a scheme of arrangement, as compared with a 1 per cent stamp duty liability on the value of the offer in a takeover offer scenario.
A further saving for the bidder in a scheme of arrangement scenario results from the requirement that the scheme originates from the company, not from outside the company, and therefore, most of the fees and expenses are paid by the company, whether the scheme succeeds or fails. However, as against this, it is important to appreciate there are some additional costs involved in a scheme of arrangement, as a result of the court involvement, and the more complicated time frame this places on the takeover timetable.
One cloud on the horizon, which may have an effect on public to private activity, is the proposed Takeover Directive. This proposed 13th Company Law Directive has been floating around the corridors of Brussels over the past decade, and seeks to reconcile the irreconcilable.
On the one side you have the Germans, whose fundamental fear is overseas (specifically USA) acquisitions of their key industries - especially the automotive industry. The Vodafone / Mannesmann acquisition has proven to be a particular trauma. They essentially wish that Boards of Directors be able to resist takeover activity, and for special voting rights to be capable of exercised to repel the advances of unwanted suitors.
On the other side you have the UK (and Ireland) who have a tradition of fair procedures in a takeover, and are not at all interested in permitting poison pills, special rights or other ruses by boards of directors to resist the free market in company takeovers.
In the middle is the European Commission which has decided that rather than go for the best model - i.e. the UK / Irish model - it will instead create something which will satisfy no-one. One exasperated participant in the process is reputed to have commented that the Directive should adopt the UK model and exempt Germany (or maybe just the Volkswagen Audi Group!) from it.
One of the proposed changes is to increase the minimum squeeze out percentage in Ireland from 80 per cent to 90 per cent. This runs contrary to the unanimous report of the Irish Company Law Review Group of December 2001, which advocated retention of the 80 per cent figure in Ireland. This Group had representatives of all market participants, advisors and regulators. Submissions are being made in the strongest possible terms by amongst others, the Law Society, to retain the present structure. If the 90 per cent threshold comes in it may affect not only ‘normal’ takeover offers, but also the use of schemes of arrangement.
In the USA, it is the legislature and courts of the State of Delaware, which have developed the law, experience and jurisprudence to deal with company law matters including that relating to takeovers. The US Federal Government did not come in to invent new law - it allowed the market to choose the best jurisdiction. Here the EU had the choice of allowing the market to choose the best procedures. One is left with the impression of Michael McDowell’s famous image of certain politicians being like chimpanzees with screwdrivers at the back of a television set....
The Directive will inevitably appear this year or next year. Good for lawyers, without doubt, but good for dealmakers? Arguably it may migrate stagnation in capital markets all around the EU.
Competition and merger control law changes
Following the deliberations of the Competition and Mergers Review Group, and the enactment of the Competition Act 2002, the new Irish merger control law finally kicked in on 1 January of this year. Until then Ireland was in the unique situation of having two local merger control regimes (quite apart from sectoral regulation) - the Mergers Act and the Competition Act.
So, is the new law the best solution? It’s too early to say. Rather than have a clear and unambiguous provision as to what deals require clearance and what deals do not, there are two types of deal - one where you must notify and one where you may notify. In brief, if buyer and target have turnover of ?40 million or more in the most recent financial year, the transaction requires clearance from the Competition Authority. All media mergers are caught. But, where the ?40 million threshold is not exceeded by one or both parties, it is still possible for a clearance to be sought, lest the deal fall foul of competition law notwithstanding its size. Again good for lawyers, but not necessarily for dealmakers.
Unlike the previous regime under the Mergers Act, the fact of a notification being made is published to the world, so as interested persons may make representations on it. Time will tell whether a smooth or untidy process will result.
The future
The only question that remains is what will we all do once the deals are done and, in particular, quoted companies acquired? Why, of course, prepare them for IPO. |
David O’Donnell is a partner at Mason, Hayes & Curran.
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| Article appeared in the March 2003 issue.
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