Recent rulings by the Austrian Takeover Commission (TC) reflect a case by case ap-proach to acting in concert situations and changes in shareholder arrangements. The TC will review and decide cases based on a substantive analysis rather than by form or strict letter law, guided by what is in the best interest of the free-float shareholders. This has allowed core shareholders and their advisors to argue the specific facts of a case, often resulting in the avoidance of a mandatory offer.

Acting in concert

The Austrian Takeover Act (TA) defines acting in concert as an agreement based on col-laboration with a bidder to achieve or exercise control over a listed target, in particular by coordinating the voting rights . The legal consequences include: shareholdings of persons acting in concert will be added up; the obligation to launch a mandatory offer will be extended to all parties acting in concert; and/or prior and parallel acquisition of shares will affect the determination of the minimum price applicable to a mandatory offer.

The TA provides for a rebuttable presumption of acting in concert when parties agree or act together in voting to elect members of the supervisory board of the target. To avoid the usually undesired legal consequences of acting in concert, parties will have to argue that coordination of voting in a particular resolution (eg, as to a capital increase or in the appointment of supervisory board members) was a one-time event and will not lead to a permanent influence on or control of the management or supervisory board decision making.

In Binder & Co , the TC held that co-ordinated stake-building and identical board compo-sitions in the boards of two different core-shareholders were relevant when considering whether those shareholders were acting in concert. In a different case, the TC held that coordinated voting in a shareholder aided debt restructuring of the target in distress did not constitute acting in concert . The debt restructuring involved coordinated shareholder action at the target level to allow one of the core-shareholders of the target to take over a major participation of the target against assumption of debt. The corporate reorganisa-tion allowed the re-structuring of the balance sheet of the target in distress.

In Erste Group Bank/Criteria Caixa Corp, the TC had to decide a more complex case . Spanish Criteria Caixa Corp (Criteria) had increased its stake in Erste Group Bank and also entered into various cooperation arrangements under the heading of a so-called Preferred Partnership Agrement with Erste Private Foundation, Erste Group Bank´s 31.12% core-shareholder. The terms of the the Preferred Partnership Agreement included that: (i) Criteria could not influence the business of Erste Group Bank or act jointly with Erste Private Foundation concerning voting; (ii) Criteria could not transfer its shareholding to a party considered hostile by Erste Private Foundation or participate in a hostile offer on Erste Group Bank (it would, however, be allowed to tender into such offer); and (iii) Cri-teria´s supervisory board members would remain in the minority and Erste Private Foun-dation kept control of the supervisory board. The TC held that the parties had sufficiently demonstrated that they were not acting in concert. Given this analysis, both these ar-rangements and the acquisition by Criteria Caixa of 2% or more in the shareholding of the target during 12 month intervals (otherwise “creeping”) did not trigger a mandatory offer. The TC applies special scrutiny to option arrangements, where the it attributes shares to the option beneficiary even before the beneficiary has influence on voting rights if such shares are held for the account of the beneficiary of the option .

Changes in shareholder syndicates

Under the TA, the formation, dissolution and changes in the composition of a group of shareholders acting in concert will trigger a mandatory offer . The TC has developed sub-stantial case law when a change in a shareholder syndicate will constitute a material change which triggers a mandatory offer. In the course of a restructuring of the core-shareholder base implemented by a capital increase in listed construction company Porr , core-shareholders in a so-called unanimity-syndicate re-arranged the syndicate composi-tion. The TC qualified the re-arrangement as an exit of one syndicate member from a syndicate with an ad personam structure, where each shareholder in the syndicate irre-spective of its shareholding percentage had one-vote in the syndicate (a so-called “personalistic unanimity syndicate”).

Under the TC´s standard practice such exit, bringing substantial change in the composi-tion of the the membership in the shareholder syndicate triggered a mandatory offer . However, in the Porr-case, the TC applied special scrutiny and held that the change in the composition of the syndicate was in fact a substantial change of the shareholder syndicate . Rather than concluding that such substantial change triggered a mandatory offer, the TC reviewed whether it in fact endangered the interests of others, in particular of the free float shareholders. The analysis focused on the shareholder structure of the target, on the voting power of non-syndicated minority core-shareholders and free float versus syndicated shareholders. In re-arranging the terms of the syndicate agreement, the syn-dicated shareholders agreed to limit the exercise of the aggregate voting power of the syndicate to 50% plus two votes. Moreover, the syndicate gave up control of the supervi-sory board by increasing the number of and admitting independent supervisory board members. This allowed the TC to conclude that no obligation to launch a mandatory offer was triggered since free float shareholder interests appeared to be sufficiently protected despite the material change in the syndicate of the controlling shareholders.

In re STRABAG , the TC held, against the backdrop of the credit crunch, that no change of control was involved and a mandatory offer was not triggered if one of the partners in the three party co-controlling syndicate at STRABAG temporarily reduced its 25% plus 1 vote shareholding and participation in the syndicate to one registered share with the co-shareholders taking over the former participation for a period of up to 1.5 years. In non-crisis times, the asymmetry of equity participation and contractual voting right in a shareholder syndicate would likely have been deemed to constitute a control change trig-gering a mandatory offer.

In a recent follow up ruling , the TC allowed that the option exercise, and thus re-acquisition of the shareholding by the co-controlling minority shareholder, related to a 17% shareholding rather than to the full 25% with a further extension of the option as to the remaining 8% stake until 2014. The TC held that no mandatory offer was triggered despite “restructuring” of the 2009 option arrangements of the co-controlling shareholders since the re-acquisition of the 17% stake corrected the earlier asymmetry of equity participation and core-shareholder co-control under the syndicate arrangements.

This ruling re-affirmed the casuistic approach of the TC, who is prepared to be flexible in applying the takeover rules where the financial interests of the free float shareholders would have been negatively affected had the rules been applied narrowly.

This article was originally published in the schoenherr roadmap`11 - if you would like to receive a complimentary copy of this publication, please visit: www.schoenherr.eu/roadmap