Limitation on the freedom to set the price of voluntary takeover bids in case of exceptional events

After the declaration of the state of emergency to tackle the COVID-19 health crisis, we review the exceptional regime on voluntary takeover bids under extraordinary circumstances provided in article 137 of the Spanish Securities Market Act. Under this regime, the offeror has limited freedom to set the offer price in case of exceptional events.

Act 1/2012, of June 22, streamlining the reporting and documentary requirements in mergers and divisions of corporations (“Act 1/2012”) introduced a specific regime governing takeover bids (“bids”). Under this regime, the offeror has limited freedom to set the offer price in voluntary bids under exceptional circumstances.

This specific regime is governed by article 137(2) and (3) of Royal Legislative Decree 4/2015, of October 23, approving the consolidated text of the Securities Market Act (“TRLMV”).

Among other extraordinary circumstances, the TRLMV mentions that within two years prior to announcing the voluntary bid, “market prices in general, or market prices of the company involved in particular, be affected by exceptional occurrences such as natural disasters, war or other force majeure events” (article 137(3)(b) TRLMV).

The regime of article 137(2) and (3) must be put forward because the public health emergency triggered by the spread of COVID-19 is having a negative impact on the Spanish economy, and thus on share prices of listed Spanish companies. Upon acceptance of a voluntary bid for a Spanish company, the offeror must abide by the new screening framework for foreign investment. Also, the consideration offered in the bid and the offer price are subject to potential modifications.

The price cannot be lower than the greater of (a) the equitable price mentioned in article 130 TRLMV, and (b) the amount resulting from the valuation methods and criteria provided in an independent expert report submitted by the offeror. This report must include, at least, the following valuation methods and criteria: (i) the average market value over a particular period; (ii) the break-up value of the company; (iii) the consideration paid for the same securities by the offeror within the 12 months prior to the bid announcement; (iv) the company’s underlying book value; and (v) other objective valuation criteria generally used in financial analysis, provided that they guarantee shareholder rights. The report must justify “the relevance of each of the applied methods.”

The offer cannot be exclusively an exchange of securities. The offeror must include an alternative consideration in cash, at least financially equivalent to the value of the exchange.

In terms of consideration, the regime governing voluntary bids made under extraordinary circumstances resembles that of mandatory bids (regarding the need to offer a consideration in cash) and that of bids made by companies for their own shares to delist them, i.e., exclusion bids, (regarding the need to prepare a valuation report, the methods to be applied and their relevance). As for mandatory bids, the Securities and Exchange Commission can modify the equitable price resulting from article 9 of Royal Decree 1066/2007, of July 27, on takeover bids for the securities of companies, where the prices of the target company’s securities during the reference period have been affected by extraordinary events that allow for objectively adjusting the equitable price (article 9(4)(a) of Royal Decree 1066/2007).