Corporate / M&A

Shares Buyback Does Not Trigger Mandatory Takeover Bid in Serbia

Within just two months, the Serbian Securities Exchange Commission (SEC) issued two opposite rulings. In March 2012, it said that a company’s shares buyback may trigger a takeover bid obligation for the company’s majority shareholder. But in May 2012, the SEC changed its mind: the company’s shares buyback does not trigger the takeover bid obligation for the company’s majority shareholder.

A com­pa­ny may repur­chase its shares for dif­fer­ent rea­sons. It may have too much free cash-flow that it wants to dis­trib­ute to its share­hold­ers, and it finds this non-div­i­dend dis­tri­b­u­tion more advan­ta­geous than a div­i­dend dis­tri­b­u­tion (eg, for tax rea­sons). It may be try­ing to deter hos­tile takeovers. Or it may sim­ply wish to boost its poor finan­cial ratios.

The effects of the shares buy­back under Ser­bian takeover law remained obscure for a long time. But this issue has only recent­ly been exam­ined by the SEC when it was asked to clar­i­fy the effects of shares buy­backs on a manda­to­ry takeover bid under the Ser­bian Takeover Act.

Shares buyback triggers a mandatory takeover bid (first ruling)

In Ser­bia, if a share­hold­er exceeds (direct­ly or indi­rect­ly, alone or togeth­er) 25% of the vot­ing shares in a joint stock com­pa­ny1, it must pub­lish a takeover bid for the remain­ing shares. And it must pub­lish a takeover bid for any fol­low­ing acqui­si­tion of the vot­ing shares until it pass­es 75% of the vot­ing shares. To cal­cu­late if a share­hold­er has passed this thresh­old, shares held by per­sons who act in con­cert with the share­hold­er are added to its vot­ing shares.

In its first opin­ion, the SEC main­ly con­cen­trat­ed on the act­ing-in-con­cert rules as defined under Ser­bian Takeover Act. It rea­soned that the com­pa­ny and its major­i­ty share­hold­er are those who act in con­cert. So the trea­sury shares must be added to the major­i­ty shareholder’s shares when assess­ing if the major­i­ty share­hold­er passed the trig­ger­ing thresh­olds.

So the SEC con­clud­ed that, if the com­pa­ny acquires only one trea­sury share, the major­i­ty share­hold­er (who has more than 25% and less than 75% of the vot­ing shares) must pub­lish the takeover bid.

Shares buyback does not trigger a mandatory takeover bid (second ruling)

A month after its first rul­ing, the SEC’s reversed course.2

The main argu­ments behind this sig­nif­i­cant change were the rules of Ser­bian Com­pa­nies Act, Cap­i­tal Mar­kets Act and Takeover Act that define trea­sury shares’ anato­my.

Trea­sury shares are non-vot­ing shares. They thus will not increase the vot­ing shares port­fo­lio that the com­pa­ny and its major­i­ty share­hold­er hold togeth­er. So the SEC con­clud­ed that, since the num­ber of the vot­ing shares does not increase, the trig­ger­ing event for the manda­to­ry takeover bid fails.

The trea­sury shares will not “pas­sive­ly” ele­vate share­hold­ers’ quo­ta and vot­ing rights. To cal­cu­late the share­hold­ers’ quo­ta of the vot­ing shares, all vot­ing shares issued by the com­pa­ny (includ­ing trea­sury shares and the shares with exclud­ed or restrict­ed vot­ing rights) are includ­ed in the cal­cu­la­tion.3 And the SEC rea­soned that the acqui­si­tion of the trea­sury shares will not result in the pro­por­tion­ate increase of the share­hold­ers quo­tas.

Has the SEC overlooked something?

The cor­po­rate lit­er­a­ture recog­nis­es that a com­pa­ny may use a shares buy­back to redis­trib­ute exist­ing share­hold­ers’ vot­ing rights; the redis­tri­b­u­tion might lead to an increase in their vot­ing pow­ers. And the con­trol over a com­pa­ny is exer­cised through the vot­ing pow­ers — the pow­er to get the share­hold­ers meet­ing deci­sion adopt­ed. To this end, the rules gov­ern­ing quo­rum and vot­ing in the share­hold­ers meet­ing must be close­ly exam­ined. It is not clear that the SEC did so.

Under the Ser­bian Com­pa­nies Act, the share­hold­ers meet­ing may decide if at least 50% of all vot­ing shares are present at the share­hold­ers meet­ing. But the trea­sury shares are exclud­ed from that cal­cu­la­tion4. The share­hold­ers meet­ing reg­u­lar­ly decides by the major­i­ty votes cast (unless anoth­er [super]majority is required). To illus­trate, the share­hold­ers meet­ing may amend the arti­cles of asso­ci­a­tion with a major­i­ty of all vot­ing shares. The trea­sury shares are again exclud­ed from that cal­cu­la­tion.

For these rea­sons, if the num­ber of trea­sury shares increas­es, the exist­ing share­hold­ers’ vot­ing pow­er will also increase: the trea­sury shares will pro­por­tion­ate­ly push the share­hold­ers’ vot­ing pow­ers up. Con­trol over the com­pa­ny could thus be changed.

What might the future bring?

It seems that the SEC has not con­sid­ered the quo­rum and the vot­ing pow­ers rules under the Ser­bian Com­pa­nies Act. We do not know if this con­sid­er­a­tion would have affect­ed the SEC’s con­clu­sion.

And the SEC did not say what hap­pens if the com­pa­ny can­cels the trea­sury shares. This would increase the shareholder’s quo­ta and may result in the trig­ger­ing thresh­olds being passed.

The answers to these ques­tions remain blurred. The SEC might soon have anoth­er chance to clear them up.

The effects of the shares buyback under Serbian takeover law remained obscure for a long time. But this issue has only recently been examined by the SEC when it was asked to clarify the effects of shares buybacks on a mandatory takeover bid under the Serbian Takeover Act.

1
A joint-stock com­pa­ny (i) whose shares are being trad­ed at the reg­u­lat­ed mar­ket or mul­ti­lat­er­al trad­ing facil­i­ty, or (ii) which has more than 100 share­hold­ers on each end­ing day in last 3 months and (at least) EUR 3 mln of the share cap­i­tal.
2
Rul­ing of Ser­bian Secu­ri­ties Exchange Com­mis­sion, no. 2÷0−03−117÷2−12, 7 May 2012.
3
Arti­cle 57(3) of the Ser­bian Cap­i­tal Mar­kets Act; Arti­cle 5a(2) of the Ser­bian Takeover Act.
4
Arti­cle 351(2) of the Ser­bian Com­pa­nies Act.