On the equitable price of the mandatory bid following a previous exchange bid: reflections in light of a recent controversy in the Spanish market

The Takeover Directive waives the obligation to launch a mandatory bid where control of a listed company is acquired through a voluntary bid addressed to all shareholders. However, the Directive's limited harmonising content and its nature as a directive aimed at minimum harmonisation have given rise to considerable divergence among the Member States. Some jurisdictions expressly exempt the bidder from any subsequent mandatory bid regardless of the price offered or the level of acceptance achieved by the prior voluntary bid. Others likewise dispense with any follow-on mandatory bid, but subject voluntary bids to the same equitable price requirements applicable to mandatory bids. Finally, a third group of jurisdictions exempt the bidder from a subsequent mandatory bid only where the bidder acquires more than 50% of the voting rights in the target company through the preceding voluntary bid. Spanish law adopts a hybrid approach by exempting the bidder from the obligation to launch a mandatory bid in either of two alternative situations: where the voluntary bid, which may in principle be launched at a price freely determined by the bidder, is made at the equitable price; or where the bid is accepted by more than 50 % of its addressees, excluding for this purpose those shareholders who have entered into any agreement relating to the bid with the bidder.

From a general perspective, the rationale for this second mandatory bid may be questioned. In such cases, the bidder acquires control through a regular and transparent process in which all shareholders enjoy the opportunity to dispose of their shares on the same economic terms. Moreover, the hypothetical risk that a bidder may obtain control of a listed company by offering a price that does not qualify as an equitable price (so-called lowball offers) is in reality no different from the economic risk posed by mandatory bids themselves, given the rules established by the Takeover Directive for determining the equitable price. Because the equitable price is defined as the highest price paid by the bidder (or persons acting in concert with it) during the six or twelve months preceding the bid, that price is ultimately determined by the bidder itself. The bidder decides both the price it is willing to pay in such prior acquisitions and the moment at which it crosses the control threshold, thereby effectively determining the equitable price applicable to the subsequent mandatory bid. Consequently, an equitable price for the purposes of takeover regulations does not necessarily coincide with a financially reasonable or fair price, since it may diverge substantially from any objective valuation of the shares. The concept of equitable price is a legal rather than an economic one. It is considered ‘equitable’ solely because it guarantees equal treatment by allowing all shareholders to sell their shares at the same price, but without regard to the level of that price or its economic attractiveness. This framework allows for situations in which a bidder may deliberately set a strategically low equitable price in order to discourage widespread acceptance of the offer and thereby validate or legitimize the previous acquisition of a controlling position, as illustrated by certain precedents of mandatory bids in the Spanish market that achieved negligible acceptance rates.

The issue of the second mandatory bid raises additional and distinct challenges where the preceding voluntary bid takes the form of an exchange offer in which the bidder offers its own listed shares as consideration. This question was debated extensively in the Spanish market in connection with BBVA’s ultimately unsuccessful bid for Banco Sabadell. At the time, market participants generally anticipated that the offer would fail to achieve a 50% acceptance rate and that BBVA would likely proceed with a second mandatory bid. As a mandatory bid, such an offer would have had to be launched at the equitable price and would have had to include, at least as an alternative, a cash consideration financially equivalent to the share exchange originally offered. The difficulty in such cases stems from the economic variability of the consideration, owing to the volatility and fluctuations in value experienced by the shares offered in exchange during the takeover process. In the case of the BBVA bid, which was extended for almost eighteen months, largely as a consequence of the merger control procedure, BBVA’s shares increased in value from €9.65 on the date the bid was announced to €15.79 on the final day of the acceptance period.

Under Spanish law, exchange offers must specify the so-called ‘equivalent cash price’, calculated by reference to the average market price of the shares offered in exchange during the three months preceding the announcement of the bid. In the case under discussion, numerous interpretations were advanced regarding the cash price that BBVA would have been required to offer in a second mandatory bid. Most of these interpretations linked the equitable price to Banco Sabadell’s market value at various points following the announcement of the bid. However, the equitable price should instead be determined not by reference to a market price that has been shaped and influenced by the very announcement of the takeover bid, but rather by reference to the aforementioned equivalent cash price, which represents the price or consideration freely determined by the bidder at the time it launches the voluntary bid. This conclusion follows not only from the underlying justification of the mandatory bid regime itself, but also from the legal rationale of the equitable price, which, as the Court of Justice of the European Union has emphasised, is also intended to protect the bidder by allowing it to determine in advance the maximum consideration that it may be required to pay in order to acquire control of the target company.

See the full paper here.

Javier García de Enterría is a Professor CUNEF Universidad and a Consultant (and former partner) of Clifford Chance.