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— Analysis —
In Europe, however, it's a different story.
In fact, the issue of shareholders improperly acting in concert recently determined the outcome of a high-profile hostile bid. French construction company Eiffage SA successfully fended off Spain's Sacyr Vallehermoso SA by claiming Sacyr conspired with 89 other Spanish investors in an effort to seize control of Eiffage, which is based in Asnières-sur-Seine. The battle between Eiffage and its Madrid rival lasted for more than two years before Sacyr's capitulation, along with two rulings from French courts, brought it to an end this spring. Eiffage's defense was as effective as it was shrewd. The company held up for months a possible bid from Sacyr by disenfranchising shareholders sympathetic to its Spanish suitor at Eiffage's 2007 annual meeting. The delay proved decisive, since the debt and real estate markets fell apart soon after, leaving Sacyr financially unable to complete a takeover of Eiffage. The French company's uncompromising position reflects European companies' willingness to use much more aggressive takeover defenses than their U.S. counterparts. And like many hostile situations in which the opposing sides come from different countries, this one revealed the powerful effect of nationalism in European M&A -- an effect manifested in the debate over foreign shareholders allegedly acting in concert with a compatriot hostile bidder against a public company. Sacyr and Eiffage first found themselves at cross-purposes when the French government auctioned off three major roadways in 2005. In addition to its construction unit, Sacyr operates toll roads in Spain, Portugal and Latin America and was looking to expand in Europe. But France's Vinci SA owned 23% of Autoroutes du Sud de la France SA and, as expected, acquired the rest. That left Autoroutes Paris-Rhin-Rhône SA, or APRR, and Société des Autoroutes du Nord et de l'Est de la France, known as Sanef. Observers expected only one of the targets to go to a non-French company, and they were right. Eiffage teamed with Macquarie Group Ltd. of Sydney to buy control of APRR, which still has a small public float, while Spain's Abertis Infraestructuras SA beat out Sacyr for Sanef, the smallest of the three concessions. Foiled in its first attempt to enter the French market, Sacyr started building a stake in Eiffage in the early months of 2006. Sacyr CEO Luis del Rivero informed his Eiffage counterpart, Jean-François Roverato (pictured), that he was starting to build a stake in the French company, though accounts of the meeting differ. The Sacyr side claims that Roverato told del Rivero not to make a public disclosure because this might have a negative effect on Eiffage's bid for APRR, while Eiffage supporters say Roverato was strongly opposed to Sacyr from the start. Eiffage ended up stripping Sacyr of voting rights appertaining to the first 4% that it bought. (Some French companies, including Eiffage, require shareholders to disclose the acquisition of every 1% of the company's stock acquired up to 5%.) As required by French law, Sacyr did file with France's securities regulator, L'Autorité des Marchés Financiers, when it crossed the 5% threshold on Feb. 28, 2006. By the Eiffage annual meeting on April 19, 2006, Sacyr had paid an average €60.80 per share for 32.1% of Eiffage, just under the one-third stake that requires a shareholder to make a bid for the rest of the stock -- a threshold that would become critical. At the 2006 annual meeting, Sacyr sought to put four of its executives. including del Rivero, on the Eiffage board but failed in the attempt. Sacyr faced a formidable array of foes. Not only did Eiffage's pension fund vote its 22.7% stake in the company against Sacyr, but Belgian billionaire Albert Frère got a seat on the Eiffage board after buying a 6% stake in the company for €307 million ($377 million then) through his investment group, Cie. Nationale à Portefeuille. And Caisse des Dépôts et Consignations, essentially a French government pension fund, itself bought 3% of Eiffage and later purchased Frère's stake. But the real action took place at Eiffage's 2007 annual meeting. Roverato remained implacably opposed to Sacyr, which left the Spanish company with two choices: It could sell its stake or make an unsolicited bid for Eiffage. Simply holding its 32% stake made no sense because Eiffage would continue to freeze Sacyr out. The interloper expected that it wouldn't have any success at the 2007 annual meeting and so started preparing a hostile tender offer for Eiffage. Sacyr wasn't prepared for Eiffage's defense. Days before the annual meeting, Eiffage director Jean-Claude Kerboeuf, a retired Eiffage employee, combed through the list of the company's shareholders and wrote down 89 Spanish names, the culmination of months of investigation by Eiffage of its Spanish shareholders. Shortly after the start of the annual meeting, Kerboeuf handed Roverato a letter and asked him to read it: "A reading of the roll of the general assembly of Eiffage convened on this day certifies the presence of a very significant number of new shareholders, the majority of whom show great similarities in representation, venue and designation." Those similarities led Eiffaime, a holding company formed by Eiffage managers who own about 5% of the company, to conclude that there were "serious, clear and overlapping clues" that showed a "concert" between Sacyr and 89 shareholders whom the letter characterized as "ibériques." Kerboeuf claimed that the 89, who held 17.5% of the vote, were acting in concert -- a concept similar though not identical to the U.S. securities law term "group" -- without appropriate disclosure and therefore should be stripped of their vote. The French commercial code defines "concert" as "an agreement between two or more persons with a view to buying or selling shares or exercising voting rights, in each case in order to implement a policy in relation to a company." Here the mechanics of French shareholder meetings become important. A so-called bureau comprising three members -- the president of the company and representatives of the two largest shareholders -- supervises such gatherings. Roverato sat ex officio, while Sacyr's lawyer, Christophe Perchet of Davis Polk & Wardwell, represented the Spanish company and Béatrice Brénéol the Eiffage employee shareholders. Roverato put the question to the bureau. Perchet "raised a loud protest against the allegations," according to one judicial opinion in the case, but to no avail. The bureau stripped the "Spanish" shareholders of their right to vote for the next two years. A Spanish representative of one shareholder, Grupo Rayet, made "vehement protests" and called the move "a completely intolerable illegality." His outburst was an understandable response to a completely novel takeover defense. Eiffage's gambit was "the first time that a bureau applied a sanction for undisclosed concert on the basis of pure suspicion," says Dominique Bompoint, a partner at Sullivan & Cromwell LLP in Paris who was not involved in the matter. Roverato's move "was unprecedented," says Hervé Pisani, a partner at Darrois Villey Maillot Brochier in Paris, who represented Sacyr along with Perchet. And it worked. "Sacyr had no information that 89 Spanish shareholders held stock in Eiffage," Pisani says. "But Roverato gained time." Del Rivero was furious. "If there is a Spanish bloc," he told the French press, "then there is a French bloc [Roverato and the employees]." The next day Sacyr launched a hostile bid in which Del Rivero offered 12 Sacyr shares for every five Eiffage shares. That implied a value of €104.59 per Eiffage share, a 6% discount to the target's trading price on the day before the offer. The Tribunal de Grande Instance de Nanterre, a commercial court, upheld the bureau's decision to strip the Spanish 89 of their voting rights in a decision issued on May 6, 2007, but the critical ruling in the matter came on June 26, when the AMF issued its review of Sacyr's tender offer. At Eiffage's prodding, the AMF started investigating the company's new shareholders even before the 2007 annual meeting and thereafter found that Sacyr and at least six of the 89 were acting in concert. Since Sacyr and those six Eiffage shareholders together owned more than a third of the target's stock, Sacyr was bound to make an all-cash bid at €129.30 per share, the highest price paid by any of the shareholders and more than twice what Sacyr had paid for its Eiffage stock. The AMF based its decision entirely on what Sacyr's attorneys say is circumstantial evidence. "There were no e-mails, no documents," Pisani says, though he adds that French law does not require that such an agreement be written. Rather, the regulator looked at business and personal ties between Sacyr and the shareholders suspected to have acted in concert with it as well as other unusual facts. For example, some of the 89 had changed their bylaws in the same way and during the same time period so as to allow them to buy shares in foreign companies, says Patrick Dziewolski, a partner at Bredin Prat in Paris who represented Eiffage along with Lazard on the banking side. Five of the shareholders were allegedly close to two Sacyr directors, and all had invested in a company called Opera Bona. The AMF also theorized that the six didn't have enough assets to acquire large amounts of Eiffage stock, though the six were part of family groups that could have done so, Pisani says. Sacyr appealed the AMF's ruling in the French courts, but as the case dragged on into the fall, "the subprime crisis complicated everything and made it impossible for Sacyr to make a cash offer," says Pisani. In the late fall, Sacyr said it was willing to sell its stock, but even French President Nicolas Sarkozy was unable to broker a deal between del Rivero and an unrepentant Roverato. Instead, the Paris Court of Appeal offered a way out of the impasse on April 2 with a canny ruling. The court annulled the AMF's ruling that Sacyr had to bid for Eiffage by finding that the AMF had not allowed Sacyr and the six entities accused of acting in concert access to files on the matter. Perchet says the court's ruling on the point was correct: "We were never put in a position to understand the AMF's reasoning and show it was false." The Court of Appeal backed the AMF's finding that Sacyr and the six shareholders had acted "in an organized, collective approach" that had as its aim the combination of Sacyr and Eiffage but didn't go so far as to say Sacyr and the six had acted as a group, Bompoint says. "The contention that Sacyr acted independently is dead, but the court didn't go so far as to say that Sacyr and the six had acted in concert," he says. The decision vindicated the AMF's finding that Sacyr had acted in concert with other Spanish investors, but it also saved Sacyr from having to go through with the offer for Eiffage, which might well have bankrupted the bidder. Instead, Sacyr sold its stake to several French investors, Caisse des Dépôts among them, for €62 a share, slightly more than Sacyr had paid two years earlier. The AMF played its part in the peaceful resolution, ruling that since Sacyr had sold its stake, the regulator would not seek a decision forcing a tender offer. After Sacyr sold its stake, another French court weighed in on the issue. The Tribunal de Grande Instance de Nanterre in May found that there was no proof of a concert among Sacyr and any of the 89 Spanish shareholders, who in fact denied such a pact, and, therefore, the bureau acted illegally in depriving the 89 of their voting rights. So what does the Eiffage episode mean for the treatment of actions in concert in the future? Sullivan & Cromwell's Bompoint says the saga provided "no landmark decision" on the issue. But even such a ruling might not matter to hedge funds adept at sidestepping the requirements of various disclosure regimes. Bompoint adds that not only are hedge funds cautious about triggering disclosure requirements, they rarely make tender offers, meaning that their conduct is harder for the AMF to reach than was Sacyr's. Pierre Servan-Schreiber, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Paris, agrees, saying hedge funds are too savvy to be caught in a group and also don't want to be limited in buying and selling shares. But Eiffage's use of allegations of acting in concert to fight a hostile bid does reflect a greatly increased sensitivity on the part of companies to the actions of their shareholders as well as heightened regulatory credence in such fears -- both factors that may lead other targets to consider a similar defense. |
U.S. companies often complain that their shareholders are secretly conspiring against them, plotting that violates Securities and Exchange Commission rules. Embattled railroad operator CSX Corp., for example, recently sued the Children's Investment Fund Management (UK) LLP and 3G Capital Partners Ltd. on the grounds that they acted as a group without making the necessary disclosures. Though that suit generated the first major U.S. decision on the issue, CSX's aggressive stance is still highly unusual. Regardless of the legalities, U.S. companies are generally loath to sue their shareholders, however short-term or hostile their intentions may be. 
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