Are some European issuers trying to avoid playing fair with their minority shareholders? With the news that USS and Hermes have now tendered their Océ shares after the Enterprise Chamber of the Amsterdam Court of Appeals rejected the pension funds’ request to investigate Canon’s tender offer, shareholders might be left wondering what they can do to protect their interests. USS has vowed to fight on. In a statement USS deputy chief investment officer Elizabeth Fernando that USS would be working with other investors in the Dutch market to encourage changes to the Dutch takeover code. The initiative will seek to “ensure minority interests are better protected in similar situations in the future and to ensure the Dutch market remains an attractive market for both companies and investors”.
The Océ-Canon deal is not the first minority shareholder battle that’s been played out recently. European institutional investors concerned about unfair practices by controlling shareholders may well recall the plan by Novartis AG to take control of Alcon, Inc.
To the surprise of many, the deal has been structured to avoid attempts at redress in European or American courts, unlike Océ-Canon where at the very least USS and Hermes Focus Asset Management could air their concerns.
The Nestlé/Alcon deal is complicated: prior to 2008, Nestlé S.A. owned 77% of Alcon, Inc. and Alcon’s public shareholders owned the remaining 23%. In April 2008, Nestlé and Novartis entered into an agreement by which Novartis purchased approximately 74 million shares of Alcon stock owned by Nestlé (approximately 25% of the outstanding Alcon shares) and acquired an option to purchase the remaining approximately 156 million shares of Alcon owned by Nestlé (another 52%) starting on January 1, 2010. Under the option agreement, Novartis had the right to buy Nestlé’s remaining 52% of Alcon for $180 per share. At the same time, Novartis and Nestlé entered into a shareholders agreement whereby Nestlé effectively gave Novartis control of the Alcon Board of Directors.
On January 4, 2010, Novartis announced it would exercise its option and pay $180 in cash per Alcon share to Nestlé for its remaining shares, representing an aggregate purchase price of roughly $28.1 billion. Novartis also stated that it would acquire the shares in the hands of the public for Novartis stock at an exchange ration of 2.80 Novartis shares for each outstanding Alcon share. This is currently equal to about $150 per Alcon share to the public minority shareholders. As Alcon’s minority shareholders hold approximately 69 million shares of Alcon stock, they stand to lose roughly $30 per share, or over $2 billion as a result of Defendants’ unfair conduct.
Alcon’s Board of Directors Organizational Regulations require that the independent directors on Alcon’s Board approve any merger or similar transaction involving the majority shareholder. Indeed, in numerous public filings, Alcon specifically told its minority shareholders that they could and should rely on this protection. The independent directors have not approved this transaction. To the contrary, they have publicly stated that they oppose the transaction because they believe that the consideration to be paid to the minority shareholders is inadequate. Novartis, however, has indicated that it intends to proceed with the transaction regardless, apparently taking the position that the Alcon Board (which Novartis controls) can amend the Organizational Regulations to eliminate this protection or that it can simply replace the current independent directors with other persons who will do what Novartis wants.
Novartis also takes the position that it has managed to structure its transaction so as to avoid requirements of Swiss law and U.S. law that would otherwise protect minority shareholders. Thus, Novartis claims that because it and Alcon are Swiss companies, U.S. fiduciary law does not apply. Novartis also argues that Swiss law provisions that might otherwise protect minority shareholders do not apply because those provisions apply only when the stock is traded on the Swiss stock exchange, and here Alcon’s stock is traded exclusively on the New York Stock Exchange.
There is litigation pending in U.S. courts over the transaction and as the recent Apache/Chevveden case has highlighted, an opportunity to get the facts out into the open can not only protect fund assets but also help propel the governance debate forward.
The opposition to the Alcon transaction – as expressed by the Alcon independent directors – could well prove to be persuasive. The defendants, however, are expected to challenge whether the case can be pursued in a U.S. court. However, without strong support for the protection of minority rights, discriminatory transactions on such as the Novartis/Alcon deal presents could well pervade the European markets.