10 April 2006
Hostile bids have traditionally been relatively rare in Sweden. The prevailing business culture is not conducive to hostile bids, with a large number of Swedish companies having substantial blocks of voting shares held by small groups of shareholders.
However, in 2005 South African insurance company Old Mutual launched a public offer for Skandia, a Swedish insurance company and one of the largest and oldest companies on the Stockholm Stock Exchange (SSE). Skandia's ownership structure was somewhat unique from a Swedish perspective, as no controlling owners existed.
Initially the offer was negotiated and Old Mutual conducted its due diligence. However, after a majority of board members announced their rejection to the offer, the bid turned hostile. In its struggle to fight off the bid, Skandia's management undertook certain defence actions that were new to the Swedish market.
Bids for Swedish target companies are regulated by the Takeover Rules, a self-regulating regime that is extensively based on the UK City Code on Takeovers and Mergers. As there have been only a few hostile bids in Sweden in the past, the regulation of defence measures and market practice in this respect is relatively underdeveloped compared with the UK or the US models. However, it is clear from the Takeover Rules that the scope for defensive measures is limited.
The rules state that the board and management may not "take any measure that would normally be likely to have a negative effect on the prerequisites for making the offer or its implementation…", unless approved by the shareholders. Based on this relatively strong wording, the market perception has been that, except for making a statement about the board's view of the bid, no actions can be undertaken by the target board or management that can be interpreted as a takeover defence.
One of the fundamental principles of the Takeover Rules is that the bid is addressed to the shareholders of the company. This means that the target shareholders should be given the opportunity to arrive at a decision regarding the bid without interference from the target board.
However, statements made by the Swedish Securities Council regarding the defensive actions taken by Skandia in relation to Old Mutual's bid look to have changed this rather rigid position.
Skandia issued a defence document to all its shareholders. In this document, the management pleaded for a standalone alternative for Skandia and, to a certain extent, discredited Old Mutual and the bid. Skandia's management also conducted a roadshow to try to convince shareholders not to accept the bid. The defence document included a form for withdrawal of acceptances of the bid.
Defence documents had not previously been issued for a bid in the Swedish market. The Securities Council stated that counter-measures are only prohibited if they are of some material importance from a financial or a business perspective. The rules on defensive actions were not, in principle, applicable to any information efforts by the target company. The rules state that information in a defence document must be correct, but even though Skandia had given incomplete information about Old Mutual's bid in the document, it was not criticised because, according to the council, such information was available to the Skandia shareholders by way of Old Mutual's offer document. The appropriateness of including a withdrawal form was questioned, but not criticised. The Securities Council further stated that it was not for it to tell whether the information in the defence document was correct. It indicated that this was a matter for the SSE. This view seems a bit odd, as the Securities Council clearly had the authority to review the offer document of Old Mutual. By referring this matter to the SSE without any further guidance, the council created imbalance in the bid process.
In addition, Skandia sent a letter directly to Old Mutual's largest shareholders in order to convince them to stop the offer at Old Mutual's shareholder meeting. Not even this action, directly aimed at preventing Skandia shareholders from being given the opportunity to decide on the bid themselves, was regarded as a prohibited defence. The council justified its conclusion by stating that such actions had not been previously undertaken in the Swedish market, and that the examples given in the Takeover Rules included such actions as new issues of shares or transfer of assets. However, as Skandia had previously announced that the company would not take any defence actions, the letter to the Old Mutual shareholders was not in accordance with the rules, especially as the letter contained a false statement regarding Swedish market practice in relation to takeovers.
Prior to the Securities Council's statements, the view in the Swedish market was that defence measures were generally not allowed, except for the board's statement regarding the bid and measures approved by shareholders. At the same time, the target company was under no duty to take any active measures to facilitate the offer, such as cooperation regarding prospectus and regulatory filings. The target company was also allowed to look for white knights or release relevant financial information prematurely. The council's statements have changed this.
The general principle of letting the target shareholders decide on the bid is not totally accurate; only defence measures that constitute 'hard' actions, such as new share issues, are strictly forbidden. Other types of defence measures will need to be evaluated as to whether they are of material importance from a financial or business perspective before it can be judged whether the action is acceptable. The implementation of the Takeover Directive, which is proposed to take place in Sweden on 1 June this year, will most likely not change this position, at least not in the short term.
All in all, the conclusion must be that the management and board of a Swedish target company have been given much more flexibility and room for defence actions as long as they do not constitute 'hard' actions. The limitations for other types of defence measures are yet to be explored.