Nicola Charlston
King & Wood Mallesons, Melbourne
nicola.charlston@au.kwm.com

Report on a session of the IBA Corporate and M&A Law Committee at the 19th Annual International Mergers and Acquisitions Conference in New York

Tuesday 14 June 2022

Moderators

Bertrand Cardi Darrois Villey Maillot Brochier, Paris; Vice Chair, Corporate Governance Subcommittee

Melissa Sawyer Sullivan & Cromwell, New York

Speakers

Harry Coghill Macfarlanes, London

Sergio González Galán J&A Garrigues, Madrid

Arne Grimme De Brauw Blackstone Westbroek, Amsterdam

Haigreve Khaitan Khaitan & Co, Mumbai

Introduction

The panel was introduced, and it was noted that the key topics to be covered were:

• multiple voting rights;
• special-purpose acquisition companies (SPACs);
• poison pills;
• transaction litigation;
• lengthening deal timetables; and
• the environmental, social and governance (ESG) climate.

Multiple voting rights

The panel discussed the concept of multiple voting rights and noted that they are an instrument that assists founders and others to retain control of a company. The following points were discussed:

• some markets (in addition to the United States/Canada) are considering introducing multiple voting rights to attract initial public offerings (IPOs);
• multiple voting rights are controversial because investors/proxy advisers are attached to the one-share, one-vote principle, which is inconsistent with multiple voting rights;
• there are differing philosophies in different jurisdictions around the approach to voting rights, for example:

The Netherlands

Dutch corporate law permits multiple voting rights, and there are no specific caps or other rules around them, so there is a lot of flexibility.

United Kingdom

Historically only the standard segment of the London Stock Exchange (LSE) could have dual class structures, not the premium segment which has a higher standard of corporate governance. However, in December 2021 the listing regulator allowed voting rights disproportionate to economic interest, but subject to certain restrictions (for example, on a time-limited basis (five years post-IPO); can only be held by directors; limited to a 20:1 ratio; and the only resolution that can use those voting rights is a resolution to protect the incumbent director).

Spain

Spain recently allowed loyalty shares to 1. promote long term investment, and 2. compete on IPOs with neighbours (eg, France, Italy) that allow loyalty shares. Loyalty shares must be agreed by a 60 per cent majority of shareholders, then re-approved every five years; after ten years they may be withdrawn. There is serious doubt whether these structures really promote long term investment; so far, they have not been very successful in Spain.

India

India is more restricted. The regulator has recently allowed tech companies to have superior voting rights with several conditions to make the listing of tech companies more attractive on Indian exchanges. Limitations include: a max 10:1 ratio; five years (plus this can be extended to another five years) and the founder’s net worth is also restricted.

US

There was an interesting vote in the US recently implementing special voting rights for a founder after an IPO: shareholders agreed the founder could control 40 per cent of the vote regardless of the economics of their stake.

SPACs – recent developments

US

In March 2022, the US Securities and Exchange Commission (SEC) proposed rules that would impose a range of new requirements on SPAC IPOs and de-SPAC transactions. The key aspects involve:

• enhanced disclosure requirements;

• expansion of the scope of, and parties subject to, liability in de-SPAC transactions; and
• changes in processes for SPACs.

The panel noted that SPACs are now in decline − SPACs and de-SPAC activity has slowed considerably since 2020.

Other jurisdictions

SPAIN

There was a lot of interest in SPACs, but that has now declined. The law allows for the existence of SPACs, but corporate law does not allow SPACs in the same way as in the US and complex mechanics must be used to achieve a SPAC. There are proposed reforms to the law, but they may not arrive in time to have an impact given the decline in interest.

UK

The Financial Conduct Authority (FCA) jumped on the SPAC bandwagon in August 2021, but there have only been three UK SPACs through to June 2022. The FCA amended the reverse takeover regime such that if a SPAC was announced, shares were no longer suspended from listing provided certain conditions are met (eg, at least £100,000 must be raised; a redemption option must be allowed; a time limit of two years, extendable to three with shareholder vote or by six months without vote; funds have to be ringfenced and only used for redemptions or de-SPAC activities; a vote by shareholders takes place; and a fairness opinion is required).

Indian regulations do not have a specific regime for listing of SPACs; the current regime is completely incompatible with SPACs. However, India has seen a limited number of cross border de-SPAC transactions.

THE NETHERLANDS

Euronext Amsterdam is the leading lister of SPACs. Dutch corporate law allows SPACs (mirroring the US structure), but very few SPACs have de-SPAC’d.

Poison pills

The panel discussed Suez’s Dutch ‘stichting foundation’ in the context of the Veolia hostile takeover: Veolia launched a takeover of Suez and had to sell the French water business to a private-equity (PE) fund for competition reasons. As a defence, Suez decided to design a new pill to freeze the French asset so that the business could not be sold for four years. This example shows that foreign schemes can be used for the purposes of a local defence.

The Netherlands

The Netherlands normally uses Dutch foundations, with the object of the foundation being to promote the interest of the company which it’s designed to protect through a call option of 250 per cent of voting rights. If the company is threatened, the call option can be exercised to secure a blocking vote. Typically, this is implemented at IPO; it is hard to implement after that point.

UK

In the UK it is fairly difficult to use poison pills because 1. they are considered to be inconsistent with directors’ duties, and 2. the Takeover Code has a rule against frustrating actions.

India

India is like England in that it is very hard to implement poison pills because of directors’ duties and similar constraints regarding frustrating actions. But there is some innovation to design ‘brand pills’ − in the event of a change of control, the target loses brand, which then operates like a poison pill.

US

The US saw a flurry of poison pill adoptions at the outset of the pandemic. It is still a widely recognised and used instrument, although often subject to challenges. The SEC is in the process of revising beneficial ownership rules regarding when a stake must be disclosed to the market.

Transaction and shareholder litigation

US

Almost 85 per cent of public M&A deals in the US result in litigation, from insignificant disclosure claims all the way through to very significant litigation that can cost a buyer additional consideration or block a transaction.

UK

The UK does not historically have a tradition of litigation in public M&A, probably because of the Takeovers Panel dynamic. However, there have been three contentious court hearings in recent years on schemes of arrangements where shareholders have used the second court hearing to raise objections, although not successfully. It looks like courts are trying hard to ensure the wishes of the majority are not derailed by the objections of a minority.

The Netherlands

In hostile M&A activity, there are three things that have to be taken into account which makes litigation quite difficult: 1. a Dutch Board is not obliged to support or engage with an unsolicited bid; 2. when the Board looks at a hostile bid, they may look at all stakeholders, not only value maximising; and 3. Dutch shareholders cannot vote on strategy, that is solely within the authority of the Board. People therefore typically just use the dynamics of the market (eg, bearhugs, publicity, etc) to create pressure.

India

Shareholders have a right to requisition meetings if they fulfil a ten per cent requirement. The Board cannot refuse or sit in judgement of the content of the resolution.

Spain

Shareholders can make claims, for example, that information does not represent a true and fair view. The panel discussed a recent case involving Spanish banks.

Lengthening deal timetables

Due to regulatory constraints, deal timetables are being lengthened. This is a relevant consideration when deciding when to hold a shareholder meeting to mitigate implementation risk.

A long-extended timeframe may result in pricing adjustments, even though not currently customary in public M&A − particularly if the shareholder meeting is months and months before implementation.

Material adverse changes (MACs) and price adjustments are likely hot subjects in the new world we are facing. In the US, MACs were tested during the pandemic, but largely held up and were interpreted in a sensible fashion.

The panel also discussed intervening event fiduciary cases, where the Board called an intervening event fiduciary out, the deal was renegotiated, and the price was increased.