Hostile Takeover

Introduction There has been a great wave of M&A transaction taken place in Europe. The volume of M&As by European companies is similar to the United States. The mergers and acquisitions marker in Europe continues its slow recovery in the fourth quarter and there is an improvement estimated by most of the bankers despite persistent concerns over Europe’s financial health. 1] M&As in Europe has increased largely in number of deals (2843 deals announced) and total transaction value ($1,383. 10 billion) compared to past decades between 2001 and 2007. [2] Part of above mentioned trend was there due to the introduction of the Euro, the globalization process, technological innovation, deregulation and privatization, as well as the financial markets’ boom and the surge in liquidity. 2] According to Dealogic, there were $228 billion of takeover deals with a European target announced in the quarter through Dec 30, up to 11% from the same period a year earlier. [1] Definitions and key terms According to Leonov (2000), “hostile takeover” is understood to be an attempt to obtain control over the financial and business activity or assets of a target company against the resistance of management or key participants in the company.

Analysis of publications in the business press suggests that the most widespread types of raiding, in terms of the strategies used to carry out the scheme, are: the hostile takeover of companies that possess rights to attractive assets; acquiring control over assets by means of bankruptcy proceedings; disputing rights to assets in the courts; compelling the victim to conclude a deal concerning certain assets, lobbying various state bodies by conspiring with state employees. 3] Europe zone include Albania, Andorra, Armenia, Austria, Azerbajian, Belarus, Belgium, Bosnia and Herzegovina,Bulgaria, Croatia, Cyprus, Crech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Italy, Kazakhstan, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russia, San Marino, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, Vatican City and United Kingdom. Europe Hostile Takeover Case- Redline vsArtnet

Company Background Artnet, an international transaction platform for the art market, enables fast transactions at low costs and provides a global overview of the market. Artnet opened up for the B2C market from B2B Company after 20 years existing. In addition, it operates a qualified C2C business on Artnet Auctions. This dynamism creates its own cycle. The Artnet information services provide the competitive edge for Artnet Auctions. The participants in the auctions are potential new buyers in Artnet Galleries as well as potential new subscribers to other Artnet products.

Art collectors can not only make purchases on Artnet Auctions—they can also make their own sales. [11] As a result, Artnet is synonymous with efficient art sales on the Internet for both art professionals as well as private collectors. [11] Redline’s chairman is Russian billionaire Vladimir Evtushenkov, who controls Moscow-based investment company Sistema JSFC. (AFKS)Sistema owns majority shares in OAO Mobile TeleSystems, Russia’s largest mobile-phone operator, and the oil producer and refiner OAO Bashneft. (BANE)Sistema also controls about 49 percent of Russian oil producer OAO Russneft. [4] Reason

Artnet is well known with its auction price database which helps set a sort of “blue book value” for art. [5] It lists all the prices artists, works achieved at auction and all international auction results of the past 20 years. Redline also attracted by Artnet’s Gallery network as it is one of the profit centers of Artnet. [6] Artnet is leading the whole art auctions on Internet, and it is growing by 23% per year which Artnet sells 70 lots of art work per week. [4] Artnet also introduced the C50TM index in May 2012. It shows the 50 most important contemporary artists development over the last 25 years. 11]This new analytics product will increase the transparency for investors and collectors and is considered a unique assessment tool for the art market. [11] Offers from Redline According to Redline, Artnet’s online auction business continues making losses and suffering from a chronic lack of capital, declining investors’ confidence, management deficiencies and poor profitability. [7] Redline estimated that they would require 5 to 8 million Euros in capital to finance Artnet’s product development and marketing in order to make it profitable. 6] Redline believe that although Artnet has great potential, it is a poorly managed whose management structures do not meet the modern corporate governance requirements for an international listed company. [6]

Redline believe that significant changes has to be made to Artnet’s business structure. [6] Redline announced a voluntary takeover offer for Artnet on the 23rd of July with an objective of transform Artnet into a leading International art information and e-commerce platform and to clearly increase shareholder value. 7] Redline offered the shareholders with a price of €6. 40 per share prior to two conditions which are [8]: 1. Redline will agree to a takeover purchase of artnet if it is able to acquire at least 56% of shares. [8] 2. artnet voids the Articles of Association requiring a 76% agreement for major changes. [8] This takeover bid is valid from 31st August 2012 until 28th September 2012. [9] A price of €6. 40 per share is a 33% premium to Artnet’s current share price which is €4. 8 per share as a closing of August 30, 2012. [9] Redline held 10. 7% of the voting rights and 9. 93% of share in Artnet together with Weng Fine Art AG, Krefeld when the takeover bid was announced. [7]Weng Fine Art AG discloses that the company currently has a precarious debt balance, with €1. 2 million in cash and over €3 million in debts. [10]

He added that he has started selling off shares, presumably to focus on his central business, Weng Fine Art. [10] Action Taken by Artnet This deal offers by Redline might not go into effect unless Redline secures lesser at 56% of the company. 5] The founder of Artnet, Hans Neuendorf and his son, the CEO of Artnet, Jacob Pabst, were said to pass a “poison pill” measure ensuring no major changes to the company would be made without a 75% majority. [5] There is an annual general meeting of Artnet conducted on August 8, 2012 (Wednesday) by the founder, Hans Neuendorf and his son, the CEO, Jacob Pabst. In this AGM, there is a clear endorsement of the course set issued and some important decisions in defending Artnet from takeover bids were approved with a large majority. 11]The most important decisions are: 1. Amendments to the articles of incorporation 2. Elections to the Supervisory Board The shareholders rejected the various counter-motions of Reline Management S. A. in Luxembourg and of Weng Fine Art. Therefore, Redline has failed to take over the majority of Artnet AG. [11] The statement Artnet’s founder Hans Neuendorf made is: “The Company is on a good path. We do not need investors who are solely interested in raising their profile and in profits, instead of art.

Artnet will achieve worldwide success on its own! ” Artnet’s company value has decreased to 24. 4 million euros by the falling of share more or less 12% after the AGM. [4] The new CEO, Pabst who replaces his father on July 1 declared a growth strategy for 2013 and major improved sales and profit expectations for fiscal year 2013. [4]Jacob Pabst said: “We still have ambitious goals. We are not resting on our laurels. Our portfolio of products is comprehensive and unique. ”

Similarity of takeover tactics and defense in Europe & US Takeover defense tactics are in use by Target corporations as a type of defense, from unwanted hostile tender offers made by potential bidders. While some of these defenses are deployed as pre-emptive defenses; that is, in anticipation of potential bids, a wide range of responsive defenses are also available to firms which find themselves prospective targets post-bidding. [17] Furthermore, the types of defense tactics and the manner by which they may be employed vary greatly between the US; particularly under Delaware law, and the United Kingdom. 17] Under Delaware law, where a Target company’s directors defend against a hostile bid, the ‘business judgment rule’ applies, requiring directors to demonstrate that after a “good faith and reasonable investigation,” they perceived a danger to corporate policy. [17] In contrast to this approach, the use of takeover defenses in the UK is not only to a great extent restricted by the City Code on Takeovers and Mergers (“the Code”), but also requires shareholder approval prior to being exercised, under Rule 21. . [17]

Whereas in the US, the dynamics of the of the judicial and regulatory laws render the concept of takeover defenses one which is driven largely by the internal management of a corporation and directors of US Target companies play a pivotal role in implementing the various, and often aggressive defenses, the relevant legal and regulatory framework in the UK provides for a regime that is comprised largely of the interests of institutional investors; the leading regulatory authority on akeovers is “strongly weighted towards protecting the interests of shareholders. ” [17] Further, due to a number of legal and practical differences between the two jurisdictions, certain defenses employed in the US are not applicable in the UK, such as the poison pill. [17] The restriction of coercive partial and two-tier offers by the Code, as an issue of practicality, requires an offeror to make a single-price offer for all of the Target’s shares, this eliminates the need for certain shark-repellents, which are generally targeted at two tier tender offers. 17] Similarly, because the director of a UK company may be removed with or without cause by its shareholders in general meeting, the ‘only for cause’ shark repellent is also generally non-applicable as a defense. Further, due to a great deal of shareholder protection being provided by the Code, the ‘staggered board’ and ‘cumulative voting’ US defenses, are generally not applicable in the UK. [17] It is evident that takeover defenses serve a vital purpose to the independency of a corporation, both in the UK and the US.

Further, as is now evident, the contrast between the approach to takeover tactics employed by the US and UK is significant, with UK law prohibiting defense tactics by managers without shareholder consent, and Delaware law providing managers with a wide scope for maneuver. [17] However, the Delaware approach is not without its disadvantages, with academics contending that it is easier to “anticipate the types of hurdles and judicial treatment that takeovers are likely to experience in Delaware. [17] Despite the arguments in favor of and against each approach however, it is evident from the absence of any significant contemporary reform in respect of either state’s takeover defenses laws, that these individual approaches are suitable to the takeover framework of each state. Differences of takeover tactics and defense in Europe & US Comparison of Defense Options:United State and United Kingdom|

1. Shareholder rights plans: poison pills| United StateIn most US states a pill can be adopted at any time without the obligation to obtain shareholder approval even after a bidder has announced its intention to start a tender offer. 18] Variations on the redemption provisions, that are not applicable in all states, include provisions that prevent redemption for a time period following the announcement of the bid (a no-hand pill) and continuing director provisions that agree to only the board members that held office at the time the pill was adopted to redeem the pill (dead-hand pill). [18]United KingdomIn the UK Rule 21 would not prevent putting a poison pill into place prior to any bid. 19] However, following the announcement of the bid and the bidders request to redeem the pill, the board’s refusal to redeem a pill would violate Rule 21 as it would amount to action that would frustrate the bid and prevent the shareholders from deciding on the merits of the offer. [19] In theory, a pill could be put in place that has no board redemption provision, which would, therefore, require no action on the part of the board. However, it is highly unlikely that any company would attempt to put in place such a pill as it would deter any friendly bid if all shareholders could not be persuaded to relinquish the warrants. 19]|

2. Restructured voting rights| United StateThis is a major defense device in the US. It consists of restructuring the company’s voting rights in order to focus all the voting power and control of the company in the hands of “friendly” shareholders. It basically creates classes of stock with more voting power or classes with no voting power at all. There are principally two methods to deploy this strategy: (a) by forming a dual class common stock with disparate voting rights or (b) by forming a new class of preferred stock with increased or no voting rights at all. 18]United KingdomCompany law in the UK allows for the introduction into the share capital of a company of either (a) common or (b) preferred shares with enhanced or restricted voting rights. [19] Shareholder approval is, however, needed. With regards to the latter, the case law seems to indicate that shareholder majority is required. In the absence of such approval, the actions of the directors are judged on the basis of the proper corporate test. [19]| 3. White Knight & Issuance of New Shares| United StateIn order to discourage a hostile tender the target issues a number of shares to a new entity.

The issuance of this block of shares to the white knight effectively dilutes the equity of the existing shareholders and makes “it even more difficult for the bidder to acquire a block of shares high enough to guarantee him control”of the target. [18] The issuance is subject, under New York law, to the New York Exchange rules which dictates that shareholder approval is needed for issuing new shares that exceed 18,5% of the company’s outstanding stock. [18] Furthermore, U. S. case law has been relatively restrictive with regards to defensive tactics involving employee stock option plans. 18]United KingdomIn the UK, statutory law is much stricter than the US counterparty with regards to this. In the UK the board of directors should either be expressly authorized by the company’s articles or acquire shareholder approval. [19]| 4. Defensive Recapitalization| United State and United KingdomDefensive recapitalization in the UK generally seeks to achieve a similar outcome to that in the US, namely, “to present an economically viable alternative to the hostile offer by providing some immediate short-term economic value to the shareholders,” in addition to a “continuing equity stake in a more highly geared company. An important feature of this defense lies in its limitation in respect of being forced onto shareholders, because the passing of this alternative transaction will be subject to shareholder approval first.

As with the US, activating this defense in the UK will offer the Target Company a similar range of potential actions. E. g. the purchase of assets, which may present regulatory difficulties for the hostile offeror, or an increase in the company’s level of indebtedness through the entering into bank loans or issuance of additional debt securities. Suggestion and other defense strategy In my opinion, targeted firm usually have the ability to thwart the hostile takeover. Before the other firm wish to take over Target Company, it will release a lot of information to the market. Target companies can analysis the information to know about what the company will do. There are many type of defense mechanism to thwart the hostile takeover. First of all, the common type the target company can used if they fall in hostile takeover is shareholder right plan, commonly also call as poison pill.

It is a type of defensive tactic used by a corporation’s board of directors against a takeover. [13] Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the United Kingdom, frowned upon in others such as throughout the European Union. [13] The trigger is the amount of outside ownership that triggers the rights plan; 15% is common. Rights plans can take various forms, but the basic idea is to make it easier for current shareholders to block an outside takeover attempt. 12] The typical shareholder rights plan involves a scheme whereby shareholder will have the right to buy more share at a discount if one shareholder buys a certain percentages of the company’s share. [12] The plan can be issued by the board as an “option” or a “warrant” attached to existing shares, and only is revoked at the discretion of the board of directors. [13] There are several type of shareholder option plan which is preferred stock plan, flip over rights plan, ownerships flip in plan, back end rights plan and voting right plan. 13] The purpose of shareholder right plan provide the management more time to search other offer that can maximizes their stock price. [13] In the period of biding, usually it will take time to progress, however, it also difficult for the target company to find the suitable bidder. Besides, according to many research, the companies with shareholder right plan have received higher takeover premium compare with other without shareholder right plan. [13] It will increase the shareholder value and increase the negotiating power for the target company. [13] The second type of method is targeted repurchase.

It is a technique used to thwart a hostile takeover in which the target company purchases back its own stock from an unfriendly bidder. [15]Target company attempt to stop a hostile takeover by buy back its own stock from a potential acquirer, often at a significant premium above the market price. [14] This method is used when the target company can get another venture capital to support, because it will incurred high cost. Generally the price of purchase back own stock will higher than market value. If they cannot get other financial source to support them, the company normally will fall to same problem again in the future.

However this is a fastest way to the target company to solve the hostile takeover. The third method of defense mechanism can be use is white knight. Target firm can determine 2 type of bidder which is friendly bidder (white knight) and unfriendly bidder (dark knight). [16] The white knight is the “savior” of a company in the midst of a hostile takeover. Often a white knight is sought out by company officials – sometimes to preserve the company’s core business and other times just to negotiate better takeover terms. The intention of the acquisition is to circumvent the takeover of the object of interest by a hird, unfriendly entity, which is perceived to be less favorable. [16]The knight might defeat the undesirable entity by offering a higher and more enticing bid, strike a favorable deal with the management of the object of acquisition. [16] It can be having many type of defense mechanism can be adapted by the company. However, it is difficult to determine which type of defense mechanism is more useful. From the above three type of defense mechanism, it is very common in the business world. Different situation need to have different defense mechanism to deal with the problem.

From the shareholder right plan, it needs the power of shareholder to help the company, without the shareholder support, company cannot take this tactics to protect them. For the target repurchase, the company need more financial source to support them, because in the progress of repurchase, it will incurred high cost to repurchase back their share, and normally the share price also will higher than normal market price. For the white knight, it is difficult to find a friendly bidder, but if the management have the good negotiate skill, it definitely will help them a lot to get the white knight.

All of the method has their disadvantage and advantages. All of the method has their disadvantage and advantages. The bidder wishes to acquire company to expand their market share, however the target company wishes to increase their value when the negotiating period. It is difficult for the company to get the balance between the interest of the bidder and the target company. In order to ensure the both party interest and the shareholder, most of the country also will enact the law to reduce the monopoly risk create by the takeover.

Government becomes a watchdog of the market to protect the citizen’s right. So the defense mechanism is useful for them to solve the problem to move out for the risk of takeover. Conclusion In business world, it is very normal for the merger and acquisition. This behavior is similar with the natural selection in biological world. The business will continue the evolution until the end of world. The weaker cannot be survived and final it will replace by other. Under the takeover, normally it brings both advantages and disadvantages to the consumer.

The advantage is the product and service will continue improve over the time. Consumer will not lose the product even the company has been replacing by others. However, consumer don’t have alternative to compare the product. In the final, the market can be monopoly by some of the company. It is difficult to prohibited the takeover incur in business world. Many companies want to reduce their competitor in order to expand their market share. However, hostile takeover will not be a good way to acquire other company.

It is no fair for the employee, shareholder as well the consumer. Many countries also try to enact some law to avoid the hostile takeover incur. The company also needs to prepare some mechanism to handle this kind of problem. In recent business world, from the 2008 economic crisis until the Europe debt crisis, the business world faces a lot of uncertainty. A good defense mechanism is really important for the company to avoid this type of problem. If the company has a good management, definitely it will help the company to avoid this problem.