Post financial crisis, many listed companies used their excess liquidity to invest in treasury shares. In addition to corporate law aspects, listed companies and shareholders of listed companies must be aware of implications under Austrian takeover law. Treasury shares proportionally impact the shareholding quota of all shareholders and the calculation of the various control thresholds under the Austrian Takeover Act. For this and other reasons, treasury shares may not be an adequate means to defend against a hostile takeover. A 2010 ruling of the Austrian Takeover Commission relating to Telekom Austria AG highlights the issue.
The financial crisis caused generally lower stock prices. Furthermore, cost discipline, disposals of non-core businesses, and restraint of industrial companies in costly M&A transactions (resulting from increased risk awareness of boards and uncertainties in the valuations of potential targets) have left industrial companies with substantial excess liquidity to spend. Many companies have considered using, or have used, excess liquidity for share repurchase programmes, taking advantage of the lower prices of their own stock.
Takeover law implications
Apart from corporate law requirements, the purchase or holding of treasury shares by a listed company has significant takeover law implications relevant for the listed company, its shareholder base, and potential investors. Treasury shares are non-voting1 and thus impact the share quota and voting power of all shareholders. Moreover, treasury shares are not included in the calculation of the total share capital for the purpose of determining the relevant control thresholds under Austrian takeover law, ie, whether a shareholder exceeds the control thresholds of 30% or 50%, or the creeping threshold of 2%.
The ATC ruling
This aspect has been highlighted by a recent ruling by the Austrian Takeover Commission (ATC)2. The ATC considered an intended treasury share repurchase programme of Telekom Austria AG in which the Austrian state holding ÖIAG is a core-shareholder currently holding a participation of 28.42%. The ATC held that any increase of treasury shares will impact the calculation of the relevant control thresholds under Austrian takeover law as the non-voting treasury shares are excluded from the calculation in determining the relative share quota of the core shareholder. For purposes of the relevant takeover law threshold calculations, such share quota would be proportionally “elevated” from the current level by an increase of treasury shares of the listed company. The intended increase in treasury shares by Telekom Austria would elevate the relevant share quota of the core-shareholder from below 29% to above 30%, triggering an MTO of the core-shareholder (unless the core-shareholder qualified for an exemption under the Takeover Act). The core-shareholder argued that the exception under Sec 22b Takeover Act should apply (“passive” acquisition of control) since the core shareholder did not purchase any shares but would be forced into an MTO-event by the target company´s behaviour.
“Passive” acquisition did not apply
The ATC ruled that the “passive” acquisition of controlexception did not apply because the exception required that: (i) the person having acquired a controlling interest has not caused the MTO-event to occur by taking any action at a time close to the bid, in particular, by acquiring shares, and (ii) at the time of acquiring, the shares would not have had to expect the acquisition of a controlling interest. The ATC held that, in general, a shareholder must always expect a repurchase of treasury shares by a listed company. The ATC further held that in the specific case the core-shareholder had indeed taken actions at a time close to the bid. The core-shareholder had voted on the authorisation of the treasury share repurchase programme in the shareholders’ meeting, and the members of the supervisory board nominated by the core-shareholder had voted in favour of the actual repurchase. These qualified as actions at a time close to the bid.
The core-shareholder could thus not rely on the so-called “passive” acquisition of control–exemption. If the coreshareholder exceeded the control threshold of 30% due to the company´s purchase of treasury shares, an MTO would be triggered unless the core-shareholder qualified for another exemption under the Takeover Act.3 Telekom Austria eventually chose not repurchase any additional treasury shares. In the pertinent case, the ATC ruled on a fact situation where a core-shareholder was close to the 30%-MTO threshold. The impact of treasury shares is, however, also relevant when calculating whether a shareholder reaches or exceeds the 2% “creeping” thresholds between 30% and 50% during 12-month intervals, thereby triggering an MTO. Given the impact of treasury shares on “control threshold” calculations under Austrian takeover law, any shareholder of or investor in a listed target needs to consider the relevance of treasury shares in stake building. Moreover, a listed company that does not want to force a core-shareholder into an MTO may be practically restricted from purchasing treasury shares up to the maximum legal limit of 10% of the listed company´s share capital.
Requirements and limitations
The following requirements and limitations must also be weighed when the board of a target company considers the use of treasury shares as a “defence” measure. As a preventive measure, treasury shares can be acquired under an authorisation by the shareholders meeting.4 Due to the board neutrality rule under Austrian takeover law, once the intention of a bidder as to a possible takeover has become public, the purchase of treasury shares by the target company to defend the hostile takeover bid by using an earlier shareholder authorisation relating to treasury shares requires a renewed authorisation by the shareholders meeting. Moreover, treasury shares already held by the target company will eventually increase the relative voting power of the successful bidder given the non-voting treasury shares.
Finally, the later placement of treasury shares must be made by observing the equal treatment of shareholders,5 for example by a sale on the market. The placement of treasury shares with a “white knight” may thus not be a viable alternative and further compromises the use of treasury shares as an effective defence measure of the target board.
Apart from corporate law requirements, the purchase or holding of treasury shares by a listed company has significant takeover law implications relevant for the listed company, its shareholder base, and potential investors.