04a Slides - Process and Takeover Law

Mergers & Acquisitions – Slide Set Session 4
Process & Legal Environment
Michael H. Grote
©Frankfurt–School.de 1
the processes of M&A
 target firms can be either private or publicly listed (i.e., the firm‘s
shares are traded on a stock exchange)
 the vast majority of firms are private firms,
forming the vast majority of M&A targets
 only about 440 German firms are listed
 very different M&A processes for private and public firms

 main difference about availability to get privileged information for
acquirers of listed firms (all shareholders need to be informed equally)
 we start with M&A processes for private firms
schedule
 SMEs – the German Mittelstand

 process overview
 selling a firm
 buying a firm
 case: selling Plastics Ltd.
 due diligence
 European takeover law

 German takeover law
Mittelstand - Definition
 for economic analyses and political discussions of the

Mittelstand it is essential to structure the stock of enterprises by
size classes.
 the EU-Commission‘s SME-Definition:
Size of Number of Annual

Enterprise Employees Turnover (€)
micro up to 9 up to 2 million
small 10 to 49 up to 10 million
middle up to 250 up to 50 million
(or 43 million
balance sheet)
Mittelstand - Definition
 IfM - Institut für Mittelstandsforschung (institute for research on

smes) - Bonn's definition of small and medium-sized enterprises
(SMEs) is agreed on all over Germany:
Size of Number of Annual

Enterprise Employees Turnover (€)
small up to 9 up to 2 Million
medium-sized 10 to 499 2 to 50 Million
large 500 and more 50 Million and more
Mittelstand - Key Figures
turnover €/year
< 2 million 2-50 million > 50 million
Employees
up to 9 87%
Number of
12%
10-499 420,000 firms
500+ 0,4%
SMEs generate
source: IfM Bonn 2021

 34% of turnover,
 61% of value added,
 78% of employment and
 11% of research & development investments
Small and mid-sized enterprises (sme)
Strategic challenges for midsized companies:
Globalization
Trend towards concentration
Mobilization of shareholder capital
Unsolved succession
Changes in values and lack of managerial capacity
Complex tax and legal environment
"Shareholder-value mentality" in midsized companies
High burden of (fixed) costs
„Time“ as a competitive factor
Mittelstand
Strategic options available to the company:
Internationalization
Outsourcing
Process orientation
Market segmentation
Diversification
Purchase / sale of shares
Strategic alliances / partnerships
Passing on of shares in the business (MBO)
Leasing out companies
Forms of cooperation
Share participation
Company take over

Chance-/Risk potential
Participation
on mutual terms
Joint Venture
Cooperation
Know-how-transfer
Licences
Information and
experience transfer
Strategic partnership
(without share participation)
Intensity of cohesion
Distinctive features of midsized companies
Midsized companies Public corporations

or or
Managing partners Boards of directors
Owners in most cases managing Employed managers

the company
Pragmatic decision-making Complex decision-making

structures structures
Emotional tie to the company Objective view on the business
Links to the social Commercial objectives are top

environment priority
Distinctive features of midsized companies
The company and its owner are closely bound by:
 the entity of proprietorship and liability

 the responsibility of the entrepreneur for managing the company
and for taking all decisions relating to it
 personal relationship between the management and employees
 „The entrepreneur and the enterprise are difficult to

separate“
 The justifiable proudness of the own achievements makes it
increasingly hard to separate from the own company -
succession problem.
The succession problem
The succession problem
Succession will become an issue for more than 700.000 companies in

Germany over the next 10 years. This concerns 3.000 companies each
year with an annual turnover in excess of € 2.5 million.
Statistics show that of every 100 family-owned companies, only
67 % make the transition companies

successfully into the in ... generation
2nd generation
32 % make the transition
successfully into the
3rd generation
16 % make the transition
successfully into the
4th generation
1st 2nd 3rd 4th
schedule

 selling a firm
 buying a firm
 due diligence

consultants
increasing demand for external support as part of planning and

carrying out M&A transactions for mid-sized companies
Factual level Knowledge of product and systems
Conduct level Moderation and „buffer“-function
Value level Reasoning and „sparring partner“ function
Key role of the M&A consultant: to support the process

and act as a catalyst
Model approach for a sell-side mandate
Marketing Pre-merger M&A stage Post-merger

stage stage stage
Setting up 1. Analysis of the current position 1. Re-orientation

contacts 2. Marketable presentation of the
object to be sold 2. Integration
Initial contact
3. Identification of potential 3. ...
Presentation buyers
4. Contact potential buyers
(Pitch/Beauty 5. Negotiating the sale and
contest) closing the deal
M&A-Advisory Business
Sell-side mandate - Overview
Identifying of Sales
Company potential
analysis strategy
investors
Indicative Approaching Negotiation

valuation of identified assistance
candidates
Closing
Company
analysis
Start of the project Information and

with introductory data gathering
 Check list
interviews
Presentation of the Market analysis  Information

company in a Memorandum
marketable form
Identifying of
potential
investors
Evaluation of internal and external

data (often several external databases  Longlist
used; very important sources: google;
industry associations)
Assessment of  Shortlist
identified investors
Indicative
valuation
DCF - Discounted Cash Flow

Valuation
Peer group analysis („Multiples“)  (most likely resulting
in a range of possible
Comparable companies analysis values)*
Comparable transaction analysis
* presumably
frustrates owner
Approaching
of identified
candidates
Personal interviews Blind profile

on board level
Documentation Letter of
of results confidentiality
Evaluation of Letter of intent

submitted offerings
Sales
strategy
Controlled auction
procedure
Discussion of possible
sales strategies :
singular approach
Digression: controlled auction
 origin of controlled auctions in USA
 value maximization as priority („fiduciary duty“)

 confidentiality only secondary
 large number of potential buyers
 competitive bidding process as main goal
(introduction of a market „ market for corporate control“)
 frequently two-staged processes
Digression: possible sales strategies
 negotiated sale
 „bullet shot“
(approaching only the best / most obvious buyers)
 „shotgun“
(broader approach)
 auction
 limited auction –
approach a pre-determined group of buyers
 public invitation to tender
Digression: target is known very often beforehand
 A big share of m&a transactions in Germany involves

two companies from the same city or county:
share in percent; average per year, 1990-1999

(standard deviation in parentheses)
same city same county
of all 15,8% 22,3%

transactions (1,50) (2,12)
of domestic 21,6% 30,5%

transactions (1,09) (1,90)
Source: Zademach 2001 MAR, own calculations
Negotiation
assistance
Setting up the data room and

management presentation
Final selecting of
potential investors
Moderating of final
negotiations
Closing
Calendar
Month 1 2 3 4 5 6
Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Date
1) Preparation of Memorandum Client / DB Client

Consult/ Advisor
2) Longlist / Shortlist
- Identifing Candidates
- Evaluating Candidates
3) Preparation for Financial Data Accountants / DB Concult/ Advisor

Accountants
Valuation
4) Memorandum
- Approval
- Completion
5) Approaching Candidates
6) Indicative Offer
7) Preparation Data Room
8) Management Presentation
9) Data Room
10) Confirmation of Bid
11) Final Selection of Candidates  
12) Negotiations
13) Due Diligence
14) Closing
schedule

 selling a firm
 buying a firm
 due diligence

Buy-side mandate - Overview
Definition of Market screening and

the acquisition identification of potential
profile candidates
ca. 1-2 weeks ca. 4-6 weeks
Consultancy on Approaching Negotiation

the acquisition of identified assistance
strategy candidates
at least 6-12 months
Closing
Definition of
the acquisition
profile
Start of the project Information and

data gathering
 Check list
with introductory
interviews
In-depth business Development of  Target definition

and market analysis an acquisition
profile for possible
candidates
Market screening and

identification of potential
candidates
Research of possible  Longlist

candidates
Evaluation of the Selection of  Shortlist

potential of top candidates
the candidates
Digression: Selection Criteria
all identified companies

a b c d e f g h i j k l
size
too large – equity > € x million
too small – sales < € y million
geographic position - more than z% of

revenues abroad
business mix - less attractive segments

> a% of revenues
general situation
in merger negotations / bankruptcy
Availability: likelihood that company will

fend off acquisition
surviving candidates
Consultancy on
the acquisition
strategy
Discussion of Contact
 Strategy
individual approach
Support in putting Agreement on In-depth

together a company jointly envisaged  Strategy
presentation approach
Approaching of
identified
candidates
Initiation of contacts on board level  Letter of

confidentiality
Preparation of the examination
Negotiation
assistance
Definition of the Moderation of Letter of


negotiation strategy and negotiation process intent
negotiation goals
Support with business- Moderation of final Closing

and financial issues, negotiations

i.e. Due Diligence
schedule

 selling a firm
 buying a firm
 due diligence

Case study of a typical SME - transaction
Company structure (midsized companies):
Mr House Senior Mrs House Junior Mr House Junior
60 % 20 % 20 %
The current situation:

House Building Ltd. (Holding)
100 %
Engineering consult
Building Material Ltd. Construction Ltd. Plastics Ltd.
Ltd.
The group of companies is family-owned. The majority shareholder,

Mr House Senior, is 60 years old.
The main focus of the group lies on the building sector. Plastics Ltd.
(production of special plastic packaging) was founded in the 1970s for the
reason of diversification as well as based on personal interest
(turnover in 2012: approx. € 165 million).
Synergies with Plastics Ltd. could not be realized; the children of
Mr House Senior are primarily interested in the building sector.
The majority shareholder is thinking about retreating from operations
in the near future (question of succession).
Short-profile of Plastics Ltd.
Fields of business
Turnover; number of employees
Production and sale of plastic Turnover
in mill. €
packaging material, above all 180 165.0
162.0
special protective foils with 160
159.5 158.2
151.9
insulating and dampening qualities. 140
120
Patent for a cost-effective
100
production of special foil. 80
Self-designed production 60
0
facilities at the location.
2008 2009 2010 2011 2012
Shareholder structure Number of employees: app. 250
Limited Company, founded in 1974

Other
Nominal capital: € 1.500.000
Shareholders: House Building Ltd., Manager (for many years): Mr Smith
indirectly: There is a works council
Mr House Senior (60 %)
Mrs House Junior (20 %)
Mr House Junior (20 %)
Market overview
Turnover in the field Market share in the field

of special plastic packaging of special plastic packaging
Turnover in
the rel. segmt.
Company in mill. € others Plasto
Specialist 4%
Corp.
Plasto Corp. (US-Group 190.0 Ltd.
with a turnover of € 3 bill.) 22 % 27 %
Euro B.V. (European Group 169.0
with a turnover of € 4 bill.)
Plastics Ltd. (Target) 162.0
Specialist Ltd. (Midsized company 155.0
with a turnover of € 350 mill.)
others 28.0 Plastics
Ltd. Euro B.V.
Total (Special plastics packing) 704.0 24 %
23 %
For this special product of plastic packaging, the whole European

market can essentially be seen as apportioned among four
companies („oligopolistic market structure“).
Plastics Ltd. holds a market share of approximately 23 percent.
Progress
March 2012: Assignment to sell Plastics Ltd.
April 2012: Comprehensive on-site data collection for the

company analysis plus market analysis for the
portrayal of the company in a marketable form
=> company memorandum
April 2012: Identification and assessment of potential

buyers from the same or related industries
through evaluation of internal and external
data bases
=> long list
Progress (II)
At the request of the shareholders, the identified buyers

were not contacted, but priority was given to a personal
contact of Mr House Senior to Specialist Ltd.
=> contacting of Specialist Ltd.
Advisor was not included in the following discussions, but

prepared reasoning and assessment advice on company
value in the background
=> negotiations between Specialist Ltd. and

Mr House Senior
August 2012: failure of negotiations after about three

months
Progress (III)
The last offer submitted by Specialist Ltd. reads as follows:
• Purchase price: € 60 million (equal to the assets

shown in the balance sheet plus hidden reserves)
• Very poor take-over options with regard to

taking over staff and assets
• A compensation package for the dismissed staff would

have threatened the parent company House Building Ltd.
• No long-term guarantee was given about the future

of the site
Offer was rejected.
Progress (IV)
October 2012: Contact was made with both the competitors Plasto Corp.
and Euro B.V. and also with 7 other potential buyers from similar or
adjacent markets (packaging, plastic), amongst them suppliers of Plastics
Ltd.
=> Approach of other potential buyers by Advisor
The approach produced considerable interest on the part of the

companies contacted and a so-called
=> Controlled Auction Procedure
managed by Advisor could be applied.
Progress (V)
The controlled auction procedure included:
 Submission of non-binding offers by the interested

parties; indicated purchase prices: € 80 - 100 million
 Preparation of detailed data in a so-called data-room

 Submission of a binding offer; price range now:
€ 90 - 120 million
 Renewed round of bidding resulted in offers in the

range of € 110 - 125 million
Progress (VI)
The company was finally sold to a supplier of Plastics Ltd.,

a midsized company with a Swedish group as shareholder.
The negotiations were directly supported by the Advisor.

Most of the relevant demand was met by the buyer.
At € 120 million, the purchase price was not quite the highest
bid.
However the shareholders decided in favour of a mid-sized

buyer on account of the cultural similarity and the very
friendly atmosphere in which the negotiations were
conducted, and they turned down the financially higher offer
from the US competitor.
Progress (VII)
Deal was closed late December, 2012.
It proved possible for the demands of the former

shareholders with regard to maintaining the location and
taking over the staff and the Managing Director to be satisfied in

full.
Improvement of the original purchase price offer of

€ 60 million to a final € 120 million (+100%).
Summary of Auction Procedure
No. of pot. Purchase
Stage Procedure buyers Price in €
0 Approaching potential buyers; initial feedback 9 ---
1 The memorandum is handed out to potential buyers 6 ---
A non-binding offer with an indication of the purchase
price is to be handed in on the basis of the information
supplied
2 Selection of interesting (non-binding) offers 3 80 - 100 mill.
Preparation of detailed data in a so-called data room, at
the request of the shareholders without their own
direct involvement
Submission of a binding offer on the basis of the 3 90 - 120 mill.
data-room information
3 Renewed round of bidding with the option for 2 110 - 125 mill.
potential buyers to adjust their offer to the general
level of the offers to hand or to overbid
4 Selection of one of the binding offers; entering into 1
specific negotiations
In certain circumstances renewed company audit on
site as part of the so-called Due Diligence
5 Signing of the contract 1 120 mill.
schedule

 selling a firm
 buying a firm
 due diligence

due diligence
 lacking knowledge about the target company is the most

important obstacle in m&a
 even more prevalent in hostile takeovers
 the due diligence process is intended to confirm the

information previously provided by the target company in
more depth
 aim is to gather as much as possible relevant information

about the target
 absolutely critical to any business transaction
 the financial analysis of a merger is one part of the
overall due diligence process
due diligence
 definitely in the interest of the buyer

 also in the interest of the seller - the more information is
revealed to the potential buyer, the less warranties and
guaranties could be asked for ( vendor due diligence)
 however, there is the risk of giving comprehensive

information to competitors
 therefore important:
 confidentiality agreement
(= statement of non-disclosure) time,
 letter of intent
 memorandum of understanding elaboratedness
(often synonymous to letter of intent)
due diligence
 due diligence is understood to mean the disclosure and

assimilation of public and proprietary information
 related to the assets and liabilities of the business being
purchased
 this information includes financial, human resources, tax,
environmental and legal matters
 remember: not conducted in hostile takeovers!
 due diligence process lasts between several days and

several months
 a team is put together that could consist of m&a advisors
(often steering members of team), business auditors,
consultants, specialized lawyers, antitrust specialists,
environmental specialists, etc.
due diligence
 sources of information during the due diligence process
 (virtual) data room

 is arranged where the requested
documents are put in (often not within the company)
 especially when there are more than one interested
potential buyer
 often photocopies allowed only after request
 management presentations (questions and answers)

 on-site visits
 allow for visual checking of machinery, inventories, real
estate
 talks to employees can be revealing
 interviews with business partners of target
(not that frequent)
due diligence
documents in the data room:

 partner contracts
 annual statements of the last five years
 tax statements
 internal controlling analysis by divisions
 financial and strategic planning for the next five years
 list of real estate
 leasing contracts
 documents about recent m&a transactions
 contracts with important customers and suppliers
 insurances
 loan arrangements
 patents, licences, guaranties, pensions
 detailed headcount statistics
 ...
due diligence
categories of due diligence and how often they are applied
85% 100%
source: Beck, Ralf (2002), Commercial Due Diligence,

commercial financial
/ strategic
90% 71%
human
legal
resources
in: M&A, 11/2002, pp. 554-559

technical
tax
95% 56%
environment organisation
cultural? & IT
44% 58%
commercial and strategic due diligence
 most important for PE buyout firms since they often lack knowledge of
markets and industry developments
 to analyze industries the model most often used, either implicitly or
explicitly, is Michael Porter‘s „five forces“ model
 comprehensive framework for looking at competition in different
industries
 basic assumption: competition in an industry is rooted in its underlying

economic structure
 these in turn determine the ultimate profit potential in the respective
industry
see Porter, Michael: Competitive Strategy, Free Press (1980)

 Porter‘s five forces model:
 competition in an industry works to drive down the rate of return on

invested capital toward the competitive floor rate of return
 this rate of return in perfect markets is approximated by the yield on
long-term government securities adjusted upward by the risk of
capital loss
 investors will not tolerate returns below this rate in the long run
because of their alternative in investing in other industries
 firms habitually earning less than this return will eventually go out of
business
 Porter‘s five forces model:
 presence of rates of return higher than the adjusted free market

return serves to stimulate the inflow of capital into an industry
either through new entry or
through additional investments by existing competitors
 strength of the competitive forces in an industry determines the
degree to which this inflow of investment occurs and drives down the
return to perfectly competitive market level – and thus the ability of
firms to sustain above-average returns
 which are the industries you want to be in?
potential entrants
threat of new
entrants
bargaining industry
power of competitors
suppliers
suppliers buyers
bargaining
rivalry among
power of
existing firms
buyers
threat of substitute
products or services
substitutes
 pressure from substitute products

 all firms are competing with other industries producing substitute
products (performing the same function as the product of the
industry)  substitutes limit profits all the time
 bargaining power of buyers

 concentrated or large volume buyers; products represent a large
fraction of buyer‘s costs; standard or undifferentiated products; low
switching costs for buyers; low profits for buyers; threat of backward
integration; information of buyer
 bargaining power of suppliers

 concentrated or large volume suppliers; not easily substitutable;
industry is not an important customer of supplier group; supplier‘s
product is important input; threat of forward integration; information
of supplier
 barriers to entry
 economies of scale; product differentiation; capital requirements;
switching costs; access to distribution channels; other cost
disadvantages (proprietary product technology, access to raw
materials, locations, etc.); government policy; expected retaliation
 intensity of rivalry among existing competitors

 diversity and size of competitors; speed of industry growth; amount
of fixed costs (filling of capacity); lack of differentiation; strategic
stakes; exit barriers (specialized assets, labour agreements, etc.)
 entry and exit barriers influence returns as well as risks within

the industry
exit barriers
low high
low, low,
low stable returns risky returns
entry barriers
high high, high,
stable returns risky returns
 evaluating industry trends

 grandfather of concepts for predicting the probable course of industry
evolution is the product life cycle
industry
sales
introduction growth maturity decline
time
schedule

 selling a firm
 buying a firm
 due diligence

law & regulation
how to…
takeover laws
laws and for public targets
regulations
concerning
mergers and
acquisitions
allowed or not?
antitrust laws
European directive on takeover bids
in Europe there are attempts to harmonize and regulate takeover

bids since 1974 (!)
several directives were produced by the Commission but failed to
get approval by the EU Parliament
finally, in April 2004, a directive was approved
problem: even with new directive, considerable differences

throughout EU remain (see Dissanaike et al. 2021, Journal of
Corporate Finance)
 question: why it took so long to negotiate?
takeovers: which offers are allowed
 allowed and forbidden:
 an offer which seeks to acquire more than 30 per cent but

is limited to less than 100 per cent of the remaining
outstanding shares (a limited offer for control)
is expressly forbidden
 however, an offer to acquire less than a controlling stake is

permitted, provided it does not ultimately result in control,
directly or through others acting in concert, of 30 per cent
or more of the target company´s voting shares
30 percent threshold
 even if there is no intention to take over a company, a

shareholder may nevertheless gain direct or indirect
control of 30 per cent or more of the voting stock
 the percentage includes
 offeror´s subsidiary´s holdings in the target
 shares held by others for the benefit of the offeror
 or shares held by others acting in concert with offeror
with regard to the target company
 such shareholder will be compelled to extend to all

remaining shareholders an offer similar to that required
under a voluntary takeover bid
share ownership thresholds
prior to reaching the 30 per cent threshold, a shareholder

is under no additional obligation to publish the extent of
his holdings under the Takeover Law
 in Germany (and in many other countries) there are limits, however,

stated in the German Securities Trade Law
the passing of thresholds of 3%, 5%, 10%, 15%, 20%,

25%, 30%, 50% and 75%
 has to be stated to the regulator and to the target
company within four days
different offers
 in general, the new law distinguishes between three types

of offers
 public purchase offer / acquisition offer

 voluntary tender offer
(intended to get control of the target)
 mandatory offer
public purchase offers
 public purchase offers / acquisition offers
 are not directed at gaining control

 could be a partial offer for less than 30 per cent of the
voting rights
 or follow a previous acquisition of control in the target by

the offeror prior to the Act coming into force
voluntary tender offer / takeover offer
 voluntary tender offer / takeover offer
 is directed at gaining control

 threshold is set at shares representing 30 per cent of
voting rights
 threshold is in line with an average attendance of 60% of
voting rights in annual general meetings
 includes voting rights held by parties which are connected,

or are acting in concert, with the offeror
mandatory offer
 mandatory offer
 a mandatory offer must be made once control - i.e. 30 per cent of

voting rights in the target - has been acquired
 aim is to prevent the exploitation of minority shareholders

by large shareholders
publishing duties
how to…
any offeror must publish its decision to make an offer without “undue
delay” in a national journal for statutory stock market announcements,
after having informed the regulator, and often the stock exchanges
the offeror must then submit an offer document to the regulator which
has to be published on the internet and in newspapers
within four weeks of the public announcement of the intention to make

an offer, the offeror is required to submit a detailed “offer document”
offer document
 the offer document must contain

 sufficient identifying information on the offeror
 the consideration being offered
 effective dates of the offer period
 any conditions for acceptance
 the purpose of the acquisition
 means of financing
 post-acquisition plans for the target
 in case of cash or combination offers, a certified statement

from an independent financial institution – normally an
investment bank – confirming that the offeror has secured
adequate means of financing to complete the proposed
transaction is also required
acceptance period
generally, there must be an acceptance period of between four and

ten weeks
the offeror may condition the offer on a minimum of acceptances

however, the offeror may not reserve an unconditional right to
rescind the offer
if a competing offer is issued, or if changes to the original offer are
made, automatic extensions are imposed
if a competing offer is issued, the acceptance period for the original
offer will be automatically extended by two weeks
offer amendments
amendments to the offer may be made until one day prior to its
expiration
these changes may however only be ones favourable to the target
shareholders, such as
an increase in consideration offered
a lowering of the minimum acceptance threshold or
waiver of other conditions
during the offer period, the offeror is obliged to report the number of
acceptances weekly, and during the final week, daily, via the Internet
pricing obligations
which price?
the consideration offered for the shares must be “reasonable”

“reasonableness” is determined by the regulator with reference to
the weighted average market price over the three-months-period
immediately preceding the offer announcement
the offered price must not be lower than the price paid by the
offeror, or those deemed acting in concert, for any shares acquired
over the preceding six months, including non-market packet
purchases
pricing obligations
 if, after the bid has been made public and before the offer closes for
acceptance, the offeror or any person acting in concert with him
purchases securities at a price higher than the offer price, the offeror
must increase his offer so that it is not less than the highest price
paid for the securities so acquired
defensive measures
the Takeover Law now grants a target company´s management

board considerable power in opposing a hostile takeover bid
distinction between measures prior to the announcement of any

takeover offer and after the announcement of an actual offer
defensive measures
after publication of the decision to make a bid, the board of

management of the target company may take no actions which
might prevent the success of the bid
this does not apply…

to actions which even a prudent and conscientious manager of a
company which is not affected by a takeover bid would have taken,
to attempts to solicit a competing bid and
to actions to which the Supervisory Board of the target company has
given its consent
management measures need to be authorized
if the general meeting authorises the board of management to take

actions in order to prevent the success of takeover bids prior to an
offer ...
actions shall be specified by type in the authorisation

authorisation may be granted for no longer than 18 months
resolutions of the general meeting shall require a majority of at least
three-quarters of the share capital represented at the vote
defensive measures
allowed (with permission of supervisory board) defense

measures include
the issue of a large number of further shares in the target company
for example to a “friendly” third party with shareholders´ subscription
rights disapplied
the buy-back of shares
the sale of certain profitable parts of the target company´s business
which are important to the bidder
the launch of a counter-offer for the shares of the bidder company
soliciting alternative offers of friendlier bidders
be aware: this is mostly regulated in national law, i.e., there are
differences across Europe
European squeeze out provisions
upon the request of the principal shareholder who owns 90 per cent
or more of a company's share capital, the general meeting may
squeeze out (i.e., to force them to sell to their remaining shares to
the principal) the minority shareholders provided adequate
compensation is paid
compensation has to take into account the company's situation, with
the lower limit being the average stock exchange price of the target
shares in the three months prior to the general meeting
… and no bribery, please
and, finally, a German “lex Esser” (former CEO of

Mannesmann) …
“the offeror and persons acting in concert with the offeror shall be
prohibited from making or holding out the prospect of unjustified
cash payments or other unjustified benefits having a monetary value
to members of the Board of Management or Supervisory Board of
the target company in connection with the bid”
schedule

 selling a firm
 buying a firm
 due diligence

European directive and German law
 the European directive sets out
to establish minimum guidelines for the conduct of takeover bids

to provide an adequate level of protection for holders of securities
throughout the community
establishing a framework of common principles and general
requirements which Member States are to implement through more
detailed rules in accordance with their national systems and their
cultural contexts
Germany and all other EU states had to implement the EU takeover

directive into national law (Wertpapierübernahmegesetz), however
the EU directive has given the national governments considerable
choice
revision of German takeover law
Germany – as most other states – has chosen the most

defense-friendly (= protectionist) way
and did neither adopt the “neutrality rule” (Art. 9)

[German: Verhinderungsverbot]
nor the “breakthrough rule” (Art. 11) [German: Durchgriffsregel]
both are NOT implied in Germany!

defense mechanisms allowed by WpÜG remain in place
reasoning: if Germany would adopt these rules and other states not,
there would not be a level playing field
board can take sides in Germany
European topic: neutrality rule
any defensive measures taken by the board of the offeree company,

once the bid has started, must be subject to the prior authorisation
of the general meeting of shareholders
decisions taken prior to the bid and which are not yet partly or fully
implemented and whose implementation may result in the frustration
of the bid, have to be confirmed by the general meeting of the
shareholders
voting restrictions in European directive
 breakthrough rule
 two level breakthrough rule
 first set of rules is triggered once the bid is made public:

a) restrictions on the transfer of shares will be
unenforceable against the offeror during the period
allowed for acceptance of the bid
b) restrictions on voting rights cease to have effect in the
general meeting of the offeree that is deciding on
defensive measures
c) multiple voting securities will carry only one vote at the
general meeting which decides on defensive measures
voting restrictions in European directive
 breakthrough rule
 two level breakthrough rule
 second set of rules applies once the offeror reaches the

75% threshold of the voting capital of the target company
a) the offeror has the right to call a general meeting and
cast his vote according to normal rules of company law
in order to amend the articles of association or remove
and appoint board members in the target
b) In that meeting the offeror is not hindered by any
voting restrictions (e.g., voting caps), extraordinary
rights of others (e.g., rights awarded to a shareholder
to directly appoint a director in the board) or any
multiple voting securities (which carry only one vote
for that purpose)
not taken into German takeover law
 again: Germany did opt out of this rules
 however, German companies are allowed to opt in, i.e. to

apply the two rules, voluntarily
 they are also allowed to opt out again after a takeover
offer is in place when the bidder is not applying these rules
itself (reciprocity rule) by a general shareholder meeting
 basically, shareholders can vote which system they want to

have in place
transparancy about defense measures
transparency
involves changes in the German Commercial Code (HGB)
all listed companies are required to disclose and explain in the
annual report their capital and control structures as well as their
defense measures, starting in 2006, e.g.,
different classes of securities; significant direct and indirect
shareholdings (cross shareholdings / pyramid structures);
defensive measures like the board's power to issue buy back shares,
any agreements between the company and third parties that alter or
terminate upon a change of control of the company;
 golden parachutes, etc.
squeeze-out needs 95% of shares in Germany
squeeze out easier
directly after an offer - when the acquirer has at least 95% of the
shares - squeeze outs can be applied for by the “Landgericht
Frankfurt” (local court Frankfurt)
no need to estimate the fair price for squeeze outs when at least
90% of shares have been handed in during the offer
in this case the offer price is also the squeeze out-price because it is
deemed to be the fair market price
however, squeeze out-prices are in cash only
minority sharehodlers can ask for sell out
sell out possible
when the requirements for a squeeze out are met, minority

shareholders can ask for a sell out,
i.e. the acquirer has to buy the shares from the minority
shareholders at the offer price
Mergers & Acquisitions – Slide Set Session 4
-- End of Slide Set 4 --
Michael H. Grote

04a Slides - Process and Takeover Law

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

04a Slides - Process and Takeover Law

Uploaded by

Copyright:

Available Formats

Mergers & Acquisitions – Slide Set Session 4

Process & Legal Environment

 very different M&A processes for private and public firms

 we start with M&A processes for private firms

 SMEs – the German Mittelstand

 European takeover law

 for economic analyses and political discussions of the

Size of Number of Annual

 IfM - Institut für Mittelstandsforschung (institute for research on

Size of Number of Annual

source: IfM Bonn 2021

Strategic challenges for midsized companies:

Strategic options available to the company:

Company take over

Midsized companies Public corporations

Owners in most cases managing Employed managers

Pragmatic decision-making Complex decision-making

Emotional tie to the company Objective view on the business

Links to the social Commercial objectives are top

The company and its owner are closely bound by:

 the entity of proprietorship and liability

 „The entrepreneur and the enterprise are difficult to

Succession will become an issue for more than 700.000 companies in

Statistics show that of every 100 family-owned companies, only

67 % make the transition companies

 SMEs – the German Mittelstand

 European takeover law

increasing demand for external support as part of planning and

Factual level Knowledge of product and systems

Conduct level Moderation and „buffer“-function

Value level Reasoning and „sparring partner“ function

Key role of the M&A consultant: to support the process

Marketing Pre-merger M&A stage Post-merger

Setting up 1. Analysis of the current position 1. Re-orientation

Indicative Approaching Negotiation

Start of the project Information and

Presentation of the Market analysis  Information

Evaluation of internal and external

DCF - Discounted Cash Flow

Personal interviews Blind profile

Evaluation of Letter of intent

 origin of controlled auctions in USA

 value maximization as priority („fiduciary duty“)

 A big share of m&a transactions in Germany involves

share in percent; average per year, 1990-1999

of all 15,8% 22,3%

of domestic 21,6% 30,5%

Source: Zademach 2001 MAR, own calculations

Setting up the data room and

1) Preparation of Memorandum Client / DB Client

3) Preparation for Financial Data Accountants / DB Concult/ Advisor

7) Preparation Data Room

10) Confirmation of Bid

11) Final Selection of Candidates  

13) Due Diligence

 SMEs – the German Mittelstand

 European takeover law

Definition of Market screening and

Consultancy on Approaching Negotiation

at least 6-12 months

Start of the project Information and

In-depth business Development of  Target definition

Market screening and