Convertible Bonds and the Best Price Rule: The Celesio Case
J Grant (Ed), European Takeovers: The Art of Acquisition, London, Globe Law and Business, 2018 (2nd Ed.), pp. 370
9 Pages Posted: 9 Dec 2018 Last revised: 23 Sep 2019
Date Written: June 4, 2018
Under German takeover law, in a voluntary bid the bidder must offer the target shareholders a price which is based on the average price of the target’s shares over a given period.
However, if in the run-up to the bid the bidder purchased the target shares at a higher price, the bid price must be increased so that it is at least equal to that higher price. To this end, such purchases include those effected under an agreement “on the basis of which the assignment of shares can be demanded” – such as options. This ‘equivalence rule’ aims to prevent circumvention of the best price rule.
In late 2013 US company McKesson purchased Haniel & Cie’s a 50.01% stake in Celesio through a share and purchase agreement that was conditional on the success of the subsequent voluntary bid – through which McKesson wanted to secure at least 75% of the voting rights in the company.
Having bought both shares and convertible bonds that granted slightly more than 25% of the voting rights in Celesio, US hedge fund Elliott blocked the first bid and then sold McKesson both its shares (through Haniel) and the convertible bonds at a higher look-through price per share. Shortly thereafter, McKesson launched a second voluntary bid offering the same price as that paid to Elliott for its shares. The bid succeeded. However, Magnetar Capital and other Celesio shareholders which had tendered their shares in the second bid sued McKesson to claim the difference between the look-through price per share paid for the convertible bonds and the bid price.
At its core, the legal dispute concerned an issue that is certainly salient to German and European takeover law: whether contracts for the purchase of convertible bonds constitute “agreements on the basis of which the assignment of shares can be demanded”, and thus whether the price agreed in such contracts triggers the best price rule.
Unlike the Federal Financial Supervisory Authority (BaFin) and the Regional Court of Frankfurt am Main, the Higher Regional Court of Frankfurt am Main and the Federal Court of Justice upheld the plaintiffs’ action, emphasizing that the price agreed serves as the proxy for the price that the bidder is willing to pay for the target shares.
After outlining the German takeover regime and setting out the facts of the case, this chapter seeks to deliver a brief analysis of the Bafin´s decision and the subsequent court rulings.
Keywords: Takeovers, Mandatory Bid Rule, Best Price Rule, Circumvention, Tunneling, Tunnelling, Minority Investors Protection, Hedge Fund Activism, Relational Capitalism
JEL Classification: K22
Suggested Citation: Suggested Citation