Whoever acquires control of a listed company due to a conversion of  debts  into  shares directly attributable to a court-sanctioned refinancing agreement will not have to launch a mandatory bid. This exemption applies automatically without the need for a CNMV evaluation.

INTRODUCTION

Royal Decree-Law 4/2014, of March 7, on urgent debt refinancing and restructuring measures (“RDL 4/2014”) came into force on March 9. Final Provision 8 of RDL 4/2014 modifies the exemption on mandatory takeover bids provided in article 8 (d) of the Royal Decree on takeover bids1 (“ToB Royal Decree”).

According to article 8 (d) ToB Royal Decree, a bid will not be required when acquiring control of a listed company whose financial viability is in serious and imminent danger if control is acquired due to a conversion or capitalization of debts into shares aimed at ensuring the company’s long-term financial recovery. To apply this exemption, the Spanish Securities and Exchange Commission (“CNMV”) must evaluate the transaction and determine if it falls under the scope of article 8 (d) ToB Royal Decree. The new feature introduced by RDL 2/2014 is that when the conversion or capitalization of debts into shares is directly attributable to a court-sanctioned refinancing agreement that has b the subject of a favorable report by an independent expert, the exemption applies automatically without the need for a CNMV evaluation.

To help explain the scope of this modification, we summarize how the exemption under article 8 (d) ToB Royal Decree (known as “Rescue Operations”) currently works, and the implications of the new changes introduced by RDL 2/2014.

ACQUISITION OF CONTROL BY CONVERSION OR CAPITALIZATION OF LOANS

Spanish legislation on takeover bids requires an offer to be made for an equitable price2 when control3 of a listed company is reached to guarantee all shareholders are treated equally, offering them the possibility of sharing the control premium that the offeror may have paid for the controlling package.

The exemptions to the mandatory bid obligation included in article 8 ToB Royal include in paragraph (d) that the CNMV, on request, may determine that there is no obligation to launch a bid after acquiring control due to “conversion or capitalization of loans into shares of listed companies whose financial viability is in serious and imminent danger, even if it is not the subject of bankruptcy, provided that the transactions are intended to guarantee the company’s long-term recovery.”

This exemption will apply in transactions for the exchange or conversion of loans for or into shares aimed at mitigating the debt of a listed company by converting the debt against the company into equity. In its communication published on January 22, 2014, the CNMV recalled that this exemption does not automatically apply when the company concerned undergoes financial difficulties, but an express resolution of the CNMV must exist after proving that the transaction seeks to guarantee the company’s long-term financial viability. The CNMV will grant this resolution, where appropriate, within 15 days from submitting the request.

COURT-SANCTIONED REFINANCING AGREEMENTS

RDL 4/2014 indicates that when  control is acquired as a result of a conversion or capitalization of loans into shares directly attributable to a refinancing agreement sanctioned by a court, as provided in the Spanish Insolvency Act,4 there is no need for a CNMV resolution stating that there is no mandatory bid .

This modification of article 8 d) of the ToB Royal Decree must be linked to the amendments to the court approval of refinancing agreements introduced by RDL 4/2014, which are not the subject of this memo and which we explained in detail in our Legal Flash - Royal Decree Law 4/2014 amends the insolvency act.

The capitalization of loans included in a court-sanctioned refinancing agreement could lead to an acquisition of control of a listed company. In this case, the law now grants an exemption from the obligation to launch a takeover bid without the CNMV having to evaluate if the transaction is intended to ensure the company’s long -term financial recovery.

The following conditions are required to apply this exemption:

  1. Court sanction of the refinancing agreement: RDL 4/2014 introduces an important change when it indicates that a refinancing agreement can be sanctioned if it has been approved by 51% of the “financial debt held by creditors .” This expression includes creditors holding any kind of financial debt, regardless of whether they are subject to financial supervision5. The Spanish Insolvency Act previously required approval of 55% of the “debt held by financial institutions .”
  2. Favorable report relating to the refinancing agreement from an independent expert appointed by the commercial registry where the listed company has its registered office.