The financial crisis has hit the Milan stock exchange much like it has any other major stock exchange. With stock prices at historical lows, controlling shareholders of Italian listed companies are now taking the opportunity to buy out minority shareholders and take these once-listed companies private. More than a dozen companies were delisted from the Italian stock exchange in 2008, and six more are currently in the pipeline, including such prominent names as Ducati motorcycles and ERGO life insurance. The liberal legal framework, which was enacted only one year ago (Legislative Decree no. 229 of November 19, 2007, “Transposition of directive 2004/25/EC concerning public tender offers,” published in the Official Gazette no. 289 of 13 December 2007), makes take-private transactions particularly attractive in Italy. However, the new legislation still lacks important procedural rules, which Consob, the Italian stock exchange authority, should have enacted by June 2008. As a consequence, the legal uncertainty of the procedural details makes strategic planning challenging for both buyers and sellers.
No Minimum Listing Period or Minimum Buyout Price
Italian law does not provide for a minimum listing period after the initial public offering (IPO), nor for a black-out period during which a company’s stock cannot be listed again after having obtained a delisting. Consequently, owners of medium-sized businesses may have an incentive to take a company public when markets are bullish and to delist it when stock prices are down. This mechanism works because the law does not impose minimum prices in delisting procedures, so that controlling shareholders may buy back the shares at a price lower than at issuance. Marazzi, for instance, was listed on the Italian stock exchange in 2006 with an issuance price of EUR 10.25 per share, and in August 2008 it was taken private at a price of EUR 7.15.
Regular Delisting and Squeeze-Out
Italian law allows for a delisting procedure when a shareholder comes to own more than 90 percent of the capital stock of the listed company. In such cases, minority shareholders are entitled to sell their shares to the majority shareholder (the sell-out right). Regardless of whether or not any sell-out rights are exercised, the shares will be delisted. In addition, should a shareholder come to own at least 95 percent of the listed stock as a result of a tender offer or exercise of sell-out rights, the shareholder can force the remaining minority shareholders to sell their shares (squeeze-out right).
90 Percent Threshold: Sell-Out and Delisting
Normally, the 90 percent threshold is exceeded through the launch of a tender offer. But there is no need to offer too generous a price, because if the bidder does not manage to acquire more than 90 percent of the issuer’s share capital as a direct result of the tender offer, the bidder can still reach its goal by purchasing the missing shares in the market. These subsequent market purchases can also be made at a higher price, without any impact on the price of the preceding tender offer.
Once the 90 percent threshold has been exceeded, minority shareholders are entitled to their sell-out rights. Details of the sell-out procedure, in particular price determination and timing, remain subject to Consob regulation. The law provides that Consob shall determine a “fair” price by “also taking account of the price of a preceding tender offer and the weighted average stock market price during the past 6 months.” (Only where the 90 percent threshold was exceeded as a direct result of a tender offer, which was accepted by minority shareholders representing at least 90 percent of the outstanding shares, is the sell-out price the same as the bid price of the preceding tender offer.) Consob, in turn, has clarified that it gives little importance to the average stock market price, as that is regularly spoiled by the preceding tender offer and, after the offer, by the lack of liquidity of the stock. Instead, Consob looks more closely at the issuer’s net equity adjusted to current value and to its earnings results and prospects. The uncertainty regarding the weight Consob will attribute to each criteria in each given case, and regarding the time it will take to make its determination, provides the ground for arbitrage and “behind the curtain” negotiations between institutional investors and the majority shareholder.
95 percent Threshold: Squeeze-Out
If the majority shareholder, as a result of the tender offer or the subsequent exercise of any sell-out rights, comes to own at least 95 percent of the capital stock of the listed company, the majority shareholder can force the minority shareholders to sell it the remaining 5 percent of the stock of the company. As Consob ruled in September 2008, it is not necessary that the 95 percent threshold be reached exclusively through the exercise by minority shareholders of their sell-out rights; Consob counts equally the shares that the majority shareholder has voluntarily purchased in the market during the same period. Although the wording of the law seems to suggest the contrary, there is now a precedent demonstrating that the squeeze-out right is also available if the 90 percent sell-out threshold was not exceeded as a direct result of the initial tender offer, but only after the tender offer and through subsequent purchases in the market. In the case of the take-private of Ducati motorcycles, the majority shareholder had acquired only 86 percent of Ducati through the tender offer. In the four months that followed, the majority shareholder purchased another 6 percent in the market, thereby triggering sell-out rights. This sell-out rights procedure closed on December 12, 2008, resulting in the majority shareholder acquiring more than 95 percent of Ducati. With the formal approval of Consob, the majority shareholder of Ducati has now exercised its squeeze-out rights, and the company has been delisted.
What still remains uncertain, however, is if the same squeeze-out right would have applied if the 95 percent threshold had not been reached through exercise of the sell-out rights, but only through subsequent stock purchases in the market. Again, the wording of the law suggests the contrary, and the Ducati case has not resolved the issue.
One would expect that game is over at least for those bidders that have not acquired, through the launch of the tender offer, sufficient shares to realistically exceed the 90 percent threshold. But in those cases, there are still ways to force a delisting—namely, by implementing corporate transactions that indirectly result in the delisting of the shares. These tactics are referred to as a cold delisting. The most effective cold delisting strategy is to merge the listed company into a non-listed company. Recently, this strategy was implemented by the majority shareholder of Lavorwash after the tender offer had not been successful enough to cross the 90 percent threshold. Where the merger is properly prepared, neither Consob nor the company’s minority shareholders can prevent the cold delisting.
In theory, a merger of a listed company into a non-listed company can be implemented by any shareholder owning or controlling at least two-thirds of the corporate capital of the listed company, since this is the necessary majority approval level for the merger resolution. However, the risk is high that minority shareholders may challenge the merger resolution as being abusive if the majority shareholder has not previously launched a tender offer in order to offer minority shareholders an exit at fair conditions. But even a tender offer may not protect against such allegations. For example, minority shareholders challenged the merger of I.Net with British Telecom Italia in 2007 despite the previous launch of a tender offer, making the allegation that the tender offer had been launched at an unfair price and that the exchange ratio offered in the merger was unfair as well. While a decision on the merits is still outstanding in that case, the court argued a decision on a motion for injunctive relief that the merger documentation revealed a lack of sound business reasons and that the majority shareholder had clearly approved and caused the merger for the sole purpose of obtaining the delisting.
Despite this recent ruling, it must be considered whether delisting itself cannot be a sufficient business reason for a company to resolve on a merger. In fact, small or medium-sized companies may benefit from a delisting, particularly in times of a general economic downturn:
- The general trend of the market may result in an undervaluation of the individual company and thereby worsen its refinancing possibilities.
- Non-listed companies are better able to retain and reinvest profits, as minority shareholders of listed companies usually claim dividends.
- Mandatory disclosure requirements applying only to listed companies may jeopardize confidential reorganization projects.
- Higher thresholds for minority shareholders’ rights in non-listed companies reduce the risk of being blackmailed by minorities.
In fact, recently companies have been declaring the delisting more openly as an important reason for the merger. Most times, however, additional arguments and business reasons are added and presented supporting the merger, such as shortening the control chain or realizing synergies.
Conclusions and Outlook
The stock ownership threshold to obtain a delisting is 90 percent. While minority shareholders can resist a squeeze-out if they own or control at least 5 percent, but not more than 10 percent, such minority shareholders may end up with illiquid, non-listed shares. And, notwithstanding the 90 percent ownership threshold to obtain a delisting, minority shareholders generally still have the risk of a cold delisting. Consequently, even if minority shareholders view the consideration offered in a tender offer as inadequate, there remains pressure to tender in order to avoid the risk of ending up with non-listed shares without a public resale market. Majority shareholders strategically declare the possibility of a cold delisting openly and clearly in the tender offer prospectus in order to increase the pressure. The recent boom of going-private transactions shows these tactics have received the attention and increased scrutiny of Consob. According to market rumors, Consob is currently preparing new rules to strengthen minority shareholders’ rights in squeeze-out situations. However, Consob’s possibilities are limited, as it cannot go beyond the limits set by law, which can only be amended by the Italian Parliament. Accordingly, it may be expected that the new rules will remain limited to transparency requirements, while more effective measures will require the intervention of the Parliament. As minority shareholders’ rights do not appear to be the major concern of the Parliament in these times of economic troubles, it may be expected that the boom of going-private transactions will continue as robustly in 2009 as they did in 2008.