Danish Update – Specifics of the Danish Takeover Regime
- While the Danish takeover regime is based on the EU Takeover Directive, it includes regulation specific to Denmark which should be considered prior to making investments in Danish companies with shares listed on a regulated market.
- The Danish rules are specific on main areas such as in terms of what constitutes a controlling influence, passive increase in ownership, agreements on bonus to management of the target and rules for making payments from the funds of the target.
- Control under Danish law is generally considered to exist when a shareholder holds a majority of the shares in a company or otherwise has the ability to control the company, including when a shareholder holds more than one-third of the voting rights in the company and the actual majority of the votes of the general meeting and thereby possesses actual controlling influence.
- Under Danish law the obligation to issue a takeover offer is not triggered where a shareholder only passively obtains a controlling influence, i.a. by receipt of a gift or divestment by other major shareholders. Further, Danish law prohibits the offeror from entering into agreements for bonus or other benefits with management of target and requires that it is disclosed in the offer document if payments from the target company’s funds are expected to be made within twelve months of the takeover offer.
- The Danish Financial Supervisory Authority has issued an updated guiding note on the application of the Danish takeover rules and is considering a revision of applicable law.
The Danish takeover regulation is based on Directive EC2004/25 (the “Takeover Directive”). The Takeover Directive provides for a low level of harmonization that sets out the general legal framework that the EU member states must implement but allows for significant national freedom in terms of implementation. As a result hereof material differences apply in the national takeover legislation of the EU member states including in respect of central areas such as what constitutes a change of control and thus when the obligation to launch a takeover offer is triggered. The Danish takeover regime is currently undergoing a review from the public authorities, and in the interim period the Danish Financial Supervisory Authority has issued a revised guiding note to the existing Danish Takeover Order to provide guidance on interpretation hereof. This article touches upon certain key elements specific to the existing Danish takeover regime which should be considered by potential investors prior to making investments in Danish companies with shares listed on a regulated market and certain considerations and potential changes in the undergoing review process.
Specifics of the Danish takeover regime
The Takeover Directive has been implemented in Danish law primarily through provisions in the Danish Securities Trading Act, Consolidated Act no. 855 of 17 August 2012, (the “Danish Securities Trading Act”) and Executive Order no. 211 of 10 March 2010, (the “Takeover Order”). The Danish implementation includes regulation specific to Denmark, including in terms of what constitutes a change of control, in respect of passive increase in ownership, agreements on bonus and benefits to management of the target and payments from the funds of the target.
Change of control under Danish law
The Takeover Directive provides that member states of the European Union must implement rules to assure that, where a person, as a result of his acquisition or the acquisition by persons acting in concert with him holds a specified percentage of securities of a company that gives control over the company, such person shall be obliged to issue a bid for shares of the minority in order to protect their interests. The percentage of voting rights and the methods of its calculation which confers control is determined by the individual member states and the Danish definition of control is quite complex compared to that of other EU member states as it is not simply tied to a specific percentage but requires that an assessment of influence is made for any shareholdings below 50%.
Pursuant to the Danish Securities Trading Act, control, or controlling influence, exists when the acquirer directly or indirectly holds more than half of the voting rights in a company, unless in special cases it can be clearly demonstrated that such holding does not constitute a controlling influence. A controlling influence also exists if an acquirer who owns 50% or less of the voting rights of a company has:
i. the right to control more than half of the voting rights in accordance with an agreement with other investors;
ii. the right to control the financial and operational affairs according to the articles of association or an agreement;
iii. the right to appoint or dismiss a majority of the members of the supreme governing body and this body has a controlling influence in the company; or
iv. more than one-third of the voting rights in the company and the actual majority of the votes of the general meeting or any other similar body and thereby possesses the actual controlling influence in the company.
Actual controlling influence pursuant to number (iv) above is of specific interest due to the broad scope of the provision. It is a requirement that at least one third of the shares are held by the relevant shareholder and that the ownership structure entails that the shareholder has the actual majority of votes of the general meeting. A number of elements will be relevant in making the assessment of whether the shareholding constitutes controlling influence, including the distribution of voting rights among shareholders, voting rights represented at previous general meetings of the company, any agreements between other shareholders, and the ability to influence the election of board members.
Control through passivity
The flexible structure of the Takeover Directive provides that the member states may derogate from the directive’s provisions in order to maintain exceptions from the mandatory bid rules. This has been done in Denmark in respect of shareholders passively obtaining control and the ability of the Danish Financial Supervisory Authority to grant exemptions. Pursuant to rules in the Takeover Order and administrative practice from the authorities, it is a requirement that an active transfer of shares is the factor that triggers passing of relevant ownership and control thresholds. Otherwise the obligation to issue a mandatory offer will not apply.
This implies that where control is obtained through inheritance, gift, or through debt recovery proceedings or similar it will not trigger obligations to issue an offer. The same applies where the passing of the relevant threshold is not the result of an action from the relevant shareholder. This can be the case where the shareholder’s holding of shares becomes a controlling stake as a result of the issuer decreasing its share capital or cancelling restrictions on voting rights in the articles of association. An additional example of passively obtaining control is through other shareholders’ sale of their holdings. Where two shareholders each holding a number of shares that could potentially constitute controlling influence (above 1/3 of the shares) but only the largest of the two shareholders is controlling and the largest shareholder divest his shareholding in minority portions the sole remaining large shareholder will not be obligated to issue an offer even though he has technically obtained control over the company in connection with the divestment by the other large shareholder.
A further derogation from the obligation to issue a takeover offer is provided in the form of the ability of the Danish Financial Supervisory Authority to grant exemption from the rules for mandatory bids, including the obligation to issue a takeover offer and specific rules such as in terms of the length of the offer period and amendments to the offer document. Exemptions from the obligation to launch a takeover offer may be granted in various cases. This includes situations where a company is in distress and under threat of bankruptcy and where it is considered in the interest of the minority shareholders in a reorganization of the capital structure to safeguard their investment.
Bonus and benefits to management and payments from the target company’s funds
Two other specifics of the Danish takeover regime pursuant to the Takeover Order were originally introduced in order to limit perceived negative effects of private equity funds’ acquisitions of equity stakes in the Danish market and apply to both mandatory and voluntary takeovers offers.
Pursuant to the Takeover Order the offeror or persons acting in concert with the offeror and the board of directors of the target may not enter into agreements or change existing agreements on bonuses and similar benefits to the board of directors or executive management of target from the time when negotiations are initiated and until the negotiations are stopped or a takeover bid is implemented. It should be noted that the obligation not to offer such bonus and benefits apply from the time that negotiations are started which may be prior to the time the takeover bid is launched. The aim of the rule is to avoid conflicts of interest between the board of directors and executive management of target and the shareholders of the target entity.
Further, to ensure disclosure of an offeror’s intention to leverage the target and distribute available funds, the Takeover Order provides that the offer document must state any intentions to make payments from the target company’s funds within a period of twelve months from the implementation of the takeover bid.
Revision of the Danish Takeover regime
Recent cases have sparked discussions among legal experts and authorities on the need for clarification of certain of the Danish rules in respect of takeovers and the potential need for a general revision of the Danish Takeover Order. This has recently resulted in the publication of an updated guiding note from the Danish Financial Supervisory Authority on the Takeover Order, guiding note no. 9475/2012.
The updated guiding note provides clarification, inter alia, in terms of (i) timing of publication of the result of the takeover offer, (ii) that obtaining control through the issuance of new shares, and not only acquisition of existing shares, may result in the subscriber obtaining control and (iii) that internal transfer of shareholdings within a shareholder’s group of 100% owned entities will not result in the obligation to launch a takeover offer.
The guiding note has been followed by preparatory steps by the Danish Financial Supervisory Authority on amendments to the Takeover Order. This is the result of the interest in recent years from foreign investors to invest in Danish shares which has accentuated the differences between the Danish rules and the rules of other countries. Further, the specific Danish rules on shareholders passively obtaining control have led to situations where control has been obtained but where it has been unclear whether a takeover offer should be issued. Amongst a number of proposals, the Danish Financial Supervisory Authority have indicated they will consider whether the Danish rules should be amended which could inter alia include setting a fixed threshold percentage for controlling influence, the length of the offer period where approval from competition authorities are requires, the handling of rumours in the market where the authorities in other EU member states may demand that a potential offeror either put forward an offer or informs the market that no offer will be made (“Put Up or Shut Up”). Likewise in other EU member states an offeror is prohibited from putting forward a new takeover offer if the first offer cannot be completed (“Cool Of period”), and the Danish Financial Supervisory Authority will consider the need for similar rules in Denmark.