New protective measures for Spanish listed companies: voting caps and valuation rule against expropriation

June 2013 | SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The Spanish legislative body has reacted to demands for protection during these turbulent times for the Spanish economy by implementing two protective measures: protection in terms of voting caps and protection against the decrease in value of companies as a result of expropriation.

Protectionism may not be the best tool to reverse a complex financial situation, but many people believe it is the best of a set of bad measures, seemingly chosen to respond to unreasonable market conditions that leave Spanish champions in a very vulnerable position.

Voting cap

The Spanish parliament passed an act restoring the entitlement of listed companies to include voting caps in their by-laws, while also providing that this defensive measure will not apply when a takeover bid is launched for the company and specific conditions are met.

The act amends prior legislation and introduces various measures. First, it restores the entitlement of listed companies to include voting caps in their by-laws. It is referred to as ‘restoration’ because, under Spanish law, by-law provisions limiting the exercise of voting rights in listed companies were allowed until 1 July 2011, and then banned until the current act was enacted. Spanish listed companies are again allowed to include provisions in their by-laws limiting the number of votes that may be cast by a single shareholder (understood in the broadest sense of the term). Large Spanish listed companies have approved statuary provisions under which no shareholder can cast a number of votes exceeding those corresponding to shares representing, for example, 10 percent of the company’s share capital.

Second, by-law provisions for voting caps will not apply (automatic breakthrough rule) when a takeover bid results in a bidder attaining a stake of at least 70 percent of share capital with voting rights (unless the bidder is not subject to an equivalent regime under a reciprocity rule). The wording of this provision is unclear and may generate debates and uncertainties when attempting to apply it. One of the questions raised is who will judge whether reciprocity exists and, therefore, whether the automatic override measure should apply.

Finally, the 70 percent stake of voting rights will also apply to waive optional breakthrough measures approved by the company.

Voting caps have always been under scrutiny. There are good arguments in favour and against them but, in any case, the fact that the Spanish legislative body has established an automatic breakthrough rule is a mechanism that will limit eventual harmful effects.

Regime for takeover in extraordinary circumstances

Furthermore, the act establishes a special regime for takeover bids launched over Spanish listed companies that, in the two years before the takeover bid is announced, have suffered any of the extraordinary circumstances included in the act (‘Extraordinary Circumstances’). For the purposes of this article, these refer to: (i) exceptional events (natural disasters, war and calamity, and circumstances resulting from force majeure); and (ii) expropriation, confiscation or events resulting from equivalent circumstances that could materially alter the real value of a company’s equity.

To prevent takeover bids from being launched over a company that is going or in the last two years has been through Extraordinary Circumstances at a price that does not reflect the value of the affected company, the price at which such bids may be made is regulated. The act establishes a special rule for calculating the equitable price that will apply not only to mandatory, but also to voluntary takeover bids (which, in the latter case, cannot be freely priced), and obliges the bidder to offer an alternative cash consideration that is financially equivalent to that price.

In general terms, the special rule for calculating the equitable price obliges the bidder to offer a price that is at least equal to the following, whichever is higher: (i) the equitable price calculated as in any other takeover bid; or (ii) the price that results from applying the usual valuation methods (net asset value, quotation average price, liquidation price, price paid by the bidder for the same securities in the last 12 months and other generally accepted valuation methods) in an independent expert report that the bidder must submit, justifying the adequacy of each of these methods.

As regards this last provision, the Spanish legislative body has established a corrective mechanism aimed at large internationalised Spanish companies, which often operate in countries marked by unstable political situations. This is the case with Repsol, for example, which had a majority stake in the Argentinean oil company YPF that was expropriated by the Argentinean government, or Red Eléctrica, whose subsidiary in Bolivia was expropriated by the Bolivian government. Events like these have an obvious negative impact on the price of the affected company’s shares.

Therefore, the measures introduced aim to prevent third-party investors from taking advantage of these circumstances to take over the company by paying an exceptionally low price for its shares. It is precisely this concern that has led the legislative body to enact reforms such as these. Only time will determine whether the measures have a positive impact on the Spanish economy.

Gerard Correig Ferré is a partner at Cuatrecasas, Gonçalves Pereira. He can be contacted on +34 932 905 543 or by email: gerard.correig@cuatrecasas.com.

Gerard Correig Ferré

Cuatrecasas, Gonçalves Pereira