There’s a storm brewing in Spain, and if the mighty European Commission (EC) is in any doubt over whether it should pull its finger out concerning the Thirteenth European Company Law Directive, it should check out what’s going on over there at the moment. That will wipe the smirk off its collective face.
It has taken 10 years to get to a stage where there is some agreement on a set of laws that will ensure a minimum level of protection for shareholders. However, in December the Strasbourg parliament suggested a fundamental number of changes to the proposed law. So that’s a decade well spent then.
What about the EC looking to Spain to glean a sense of urgency about this situation? If there was ever a case for one country having one set of laws to be guided by, then this is it. Think about this: Spain’s fourth largest electricity utility Hidroelectrica del Cantabrico, represented by its long-term adviser Uría & Menéndez, is currently enjoying the attentions of three interested parties. The first is Ferroatlantica, a privately-owned Spanish industrial company backed by German-based Energie Baden-Wurrtemberg (EnBW), advised by Garrigues & Andersen. The second is Electricidade de Portugal (EdP), backed by savings bank Cajastur, a shareholder in the target company. SJ Berwin is advising the Portuguese bidder, while Freshfields is acting for the financial house. The third interested party is German utility RWE, represented by highly-respected local M&A practice Despacho Melchor de las Heras Albiñana & Suárez de Lezo.
All fine and dandy, until you consider the convoluted and outdated takeover rules each firm has to grapple with. The Spanish code dates back to 1991, when, despite Spain already having a set of rules, the government made some amendments. It was again amended in 1999 to allow offerors in a competing bid to pay for a target in cash or securities. Before that, only cash was accepted.
However, while this last point may seem antiquated, other elements of the code beggar belief – mostly the notion of the “priority bidder”, in this case Ferroatlantica. The Spanish takeover code stipulates that the first company to bid is entitled to up its bid after the competing bids have come in. Ferroatlantica initially put in a very low bid of euro19 (12p) per share for 25 per cent of the company to get its foot in the door. It can now wait to make its move, trumping the euro24 (15p) and euro26 (16p) per share bids put forward by EdP and RWE.
So what is the point of EdP and RWE continuing? On their side, the National Securities Market Commission (NSMC), the Spanish equivalent of our Department of Trade and Industry, has approved the Portuguese bid and is expected to make a decision on the German offer in the coming weeks. EdP already has a 20 per cent shareholding in the target and is hoping to purchase US-based energy company TXU’s 15 per cent share in Cantabrico to shore up its position. TXU unsuccessfully attempted to purchase Cantabrico last March.
This is the first time the code has been tested in terms of a competitive bid – the general consensus among the region’s lawyers is that it needs changing.
Following a period of sustained M&A activity in telecoms, the focus is now on electricity utilities. The chance of local mergers between Spanish utilities are unlikely after the merger between the two biggest utilities. Iberdrola and Endesa was called off following the NSMC ruling that both would have to dispose of many assets to meet government conditions. Will the EC’s Company Law Directive regulate this hotchpotch of anti-competitive rules?
As one lawyer says, why should one company have the final bid when the competing bidders can go higher? Is this really serving the best interests of shareholders? According to one M&A expert, when amendments were made to the code in 1991, the government was open about the fact that it would change once the EC set out its store. Even now, according to one M&A partner, the government is still liable to see what moves will be made by the EC.
The government is stuck in a vicious circle: if it makes amendments again, the directive may come into force; if it doesn’t, and Spain waits, then a long-drawn-out nightmare like this may occur again and the interest of shareholders is put at risk. For any business community, that is simply not good enough.