This blog sheds light on three legal issues surrounding Unicredit’s ongoing takeover bid for Commerzbank, with the aim of contributing to a more objective discussion of the transaction. In doing so, it is important to bear in mind the limited objectives of takeover law, which are primarily geared toward Commerzbank’s shareholders. Against this backdrop, Unicredit’s “low-balling” strategy is not generally abusive. It is by no means inevitable that the use of derivatives in the takeover process will necessitate reform.
The functions and limits of takeover law
The Commerzbank takeover provides an opportunity to revisit both the objectives and the limits of takeover law. In the debate surrounding Unicredit’s strategy, some commentators conflate a variety of issues, even though the purposes of the relevant fields of law should be considered separately. Put simply, takeover law is designed primarily to protect the interests of Commerzbank’s outside shareholders and, more specifically, their financial interests. Considerations relating to the structure of the German banking sector or the financing of German SMEs should not, and do not, play a role within the statutory framework of takeover law. Nor does the fact that a listed company can be acquired against the will of its management represent a legal loophole. On the contrary, the disciplinary effect that a potential takeover may have on management was one of the motives behind the development of German takeover law. Because a low share price makes a company more attractive as a target for a takeover, management has an additional incentive to operate the company efficiently and to increase shareholder value. The intensive efforts undertaken by Commerzbank’s management in recent months and years further support the notion that this mechanism works as intended.
Evading the mandatory mid requirement: a loophole?
Further criticism has focused on the fact that Unicredit launched a comparatively unattractive takeover offer, with no or even a negative premium on Commerzbank’s current share price, in order to cross the control threshold of 30% in German takeover law. This strategy, commonly referred to as “low-balling”, is possible because, once the current takeover bid has been completed, Unicredit may continue to acquire shares on the stock market without being required to make another public bid for the outstanding shares in accordance with minimum price requirements. If structured as a stock-for-stock offer rather than a stock-for-cash offer, this approach is both more cost-effective and preserves liquidity. Although the specific strategy employed may not have been anticipated at the time the German takeover law was created, it is by no means new. Nor does it constitute an undiscovered loophole in German takeover law. Indeed, in the context of ACS’s acquisition of Hochtief in 2010, the German parliament explicitly rejected a proposal by the Social Democratic Party that would have required subsequent acquisitions following the attainment of control to remain subject to a mandatory offer obligation.
Given that Unicredit’s offer was still subject to the minimum price rules of German takeover law, it is worth asking whether any genuine gap in shareholder protection exists at all. During the extended acceptance period, shareholders who did not accept the offer during the initial period still have the opportunity to tender their shares under the same conditions. Therefore, even at a time when it is foreseeable, based on the announcement of the acceptance rate to date, that a controlling shareholder will emerge in the future, they still have the opportunity to exit. Therefore, under the current legal framework, takeover law grants Commerzbank’s remaining shareholders the protection that they, fully aware of a third party obtaining control, are offered an exit opportunity at a price based on the average market price over the preceding three months. Shareholders who consider this insufficient in light of the current market price remain free to sell their shares on the stock exchange or to hold them in the hope of future share price increases. However, under the capital markets-based shareholder protection system employed in Germany, shareholders cannot expect a bidder to permanently offer to purchase their shares at a price above the shares’ market value.
The role of derivatives in takeovers
Derivatives appear to play an unusually significant role in the ongoing Commerzbank takeover, although the extensive use of derivatives in public takeovers has numerous precedents, such as Porsche/VW or Schaeffler/Continental, which have led to reforms of disclosure rules regarding such derivatives. The events of the last weeks offer several lessons for future takeover transactions.
The debate surrounding the transparency of Unicredit’s use of derivatives has highlighted, first and foremost, that the various positions that the bidder has to disclose regularly during the offer period should not simply be added up, as different positions may economically substitute for each other. Since capital markets law generally requires disclosure of long positions only, it must also be borne in mind that a bidder may simultaneously hold short positions in the target. As a result, the figures reported in these disclosures should not be equated with the bidder’s actual economic exposure. In fact, capital markets disclosure rules explicitly prohibit netting long and short positions against one another. The reason is straightforward: the purpose of these disclosure requirements is different from the issue at stake here. Disclosure obligations for long positions are intended to prevent a bidder from quietly building up a stake in a public company and ensure that the market is informed at an early stage of significant position building. Once a takeover or even a mandatory offer has already been launched, this purpose is largely obsolete. The desire for transparency regarding a bidder’s actual economic exposure during an ongoing transaction, a goal that could only be achieved through additional disclosure of short positions, is therefore conceptually distinct. Against this backdrop, the public criticism of Unicredit’s disclosures in recent weeks should be viewed with greater caution.
Finally, care should be exercised when interpreting the published information. The additional disclosures made by Unicredit, reportedly at the request of BaFin, revealed that more than 95% of its long positions are hedged. This has led to a common interpretation that Unicredit were almost entirely insulated from movements in Commerzbank’s share price and can therefore only benefit from the transaction. However, this conclusion does not necessarily follow Unicredit’s statement. A finding that 96% of positions are hedged does not automatically mean that Unicredit’s economic exposure has been secured against any value loss to the same extent. On the contrary, the various instruments identified by Unicredit suggest that it has entered (only) into layered hedging agreements designed to protect against specific market developments. If so, Unicredit’s positions may be protected against certain scenarios while still leaving it with a meaningful economic interest in particular movements of Commerzbank’s share price. Outside observers cannot determine this with certainty. The same degree of caution should therefore apply to public conclusions regarding Unicredit’s economic exposure.
Conclusion
- Takeover law is designed primarily to protect shareholders. Criticism of Unicredit’s takeover plans based on concerns arising under banking regulation or competition law is therefore misplaced insofar. More generally, the possibility that a listed company may be taken over against the will of the management is not only recognized by the legal framework, but an intentional corporate governance instrument.
- Unicredit’s use of a low-balling strategy to avoid having to make a more attractive mandatory bid is not an overlooked loophole but a well-known mechanism that remains subject to takeover law’s minimum pricing rules. The principle that shareholders may expect only one single opportunity to exit at a price based on the three-month-average share price is neither new nor inherently abusive. In 2010, the German parliament consciously decided not to amend these rules despite being fully aware of the available legal structures. Selectively criticizing this set of rules only when foreign bidders choose to acquire German firms constitutes an anti-competitive double standard regarding takeover policy.
- Derivatives play an unusually prominent role in the current takeover proceedings, but their general significance in takeover bids is not new. The different positions disclosed by the bidder during the offer period should not be simply aggregated and claims regarding the bidder’s economic exposure should be treated with appropriate caution.
Find the corresponding SAFE Policy Letter No. 116
Bero Gebhard is a Doctoral Student at the Leibniz Institute for Financial Research SAFE.
Tobias Tröger is Director of the SAFE Research Cluster Law & Finance and Professor of Private Law, Commercial and Business Law, Jurisprudence at Goethe University Frankfurt.
Blog entries represent the authors‘ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
