Amendment No. 16 to the Companies Law, which recently entered into force, changes many arrangements in the field of the corporate governance of public companies. In this article, we chose to focus on one of the arrangements as specified in the amendment, which is more hidden from the spotlight, but is most significant for owners of controlling interest in public companies who seek to write off securities of a public company from trade and to turn it into private. Such alteration is an amendment that benefits such owners of controlling interest (or any other offeror) who approach the minority shareholders in the framework of a full purchase offer.
Background
A few months ago, Amendment No. 16 to the Companies Law entered into force (minority of the amendment’s provisions will enter into force upon later dates) which is a more significant amendment than most of its predecessors seeking to alter a large number of arrangements, most of which are in the field of corporate goverance of public companies.
Thus, within the framework of the amendment’s instructions, many and diverse mechanisms (some would say “eclectic”) were discussed, that pertain to many issues of corporate governance: independence of directors’ discretion, proceeding for approval of transactions of owners of personal interest, clarification of procedures in the activity of the audit committee, process of appointing external directors and extension of their tenure, elasticizing the process for filing derivative claims and much more.
Full Purchase Offer – mollifying the mechanism
One of the mechanisms that are hidden from the spotlight pertains to significant alteration of the ability of owners of controlling interest to write off public companies situated under their control from trade in the stock exchange within the framework of a full purchase offer. It is important to note that the amendment as previously mentioned is aimed to provide an answer to difficulties that occurred during recent years, to complete full purchase offers, difficulties that paved the road for a number of detours that evolved for purpose of attaining the same goal, such as: triple reverse merger in accordance with Article 320 of the Companies Law, and also in accordance with Article 350 to the Law, etc.
Concisely, within the framework of the Companies Law, two separate mechanisms for performing purchase offers in public companies exist: a special purchase offer and a full purchase offer. The Articles dealing with special purchase offers specify provisions pertaining to consolidation of a control core or its increase in companies where no effective control core existed, including the need of egalitarian approach to the entirety of shareholders while publicizing comprehensive data regarding the offer, the obligation of the company’s board of directors to publish its opinion regarding the proceeding, etc.
Within the scope of a full purchase offer the law sets forth provisions in the framework of which a certain offeror (can be the owner of controlling interest in the public company, but can also be external to the company) is entitled to purchase the public’s holdings in the company and to write its securities off of trade at the stock market and actually to turn it into a private company.
The law determines that the offeror is entitled to execute a forced purchase to shareholders who did not consent to its offer inasmuch as they constitute less than five percent of the company’s share capital (or the relevant class of shares). The law (previously to the current amendment) further specifies that owners of shares from the public, are entitled during a 3 months period to approach the court with an application to determine that the price in the purchase offer was lower than the fair value of the shares, and therefore additional consideration should be paid to the shareholders (within the framework of a relief named “Assessment Relief” or “Redress of Valuation”).
The mechanism as set forth in the law made it difficult for controlling shareholders who propose to hedge the risks for completing the full purchase offer and exposed them to extremely high costs that are difficult to assess while it enabled the offerees of the purchase offer to enjoy both worlds: to grant the purchase offer on the one hand, and to expect to receive additional consideration from the court within the framework of the Assessment Relief on the other hand.
This exposure increases sevenfold while a significant and inherent difficulty exists in determination of the “fair value” of the shares. The court determined in a number of rulings that the value of a company will be fixed in accordance with capitalization of the current income flow, as well as capitalization of the potential income flow of the company in accordance with the Company’s investment opportunities.
As a consequence of the foregoing, in a significant part of the full purchase offers an amendment and update of the price of the share in the purchase offer was performed, inter alia in light of the attempt by the owners of controlling interest to avoid being dragged into court, while taking the significant risk of compensating the entirety of offerees in the purchase offer, in accordance with company value that may dramatically alter between the different value assessments[1].
The difficulties placed by the mechanism as determined in the law are many, while it grants offerees with an option out of nothing, for free, to try to convince the court that the current offer does not mirror the fair value of a share while they accepted the offer and agreed to the price stated therein. The economic lapse hereinabove leads to a situation where high risk for false (not to say extortive) claims exists on part of minority shareholders.
The current amendment to the law, makes the process more elastic in the eyes of the offerors while providing them the possibility to determine that offerees have two alternatives: (1) accepting the purchase offer, and alternatively (2) not accepting the offer while maintaining the right of future claim for fair value. Thus, offerees are required to understand that they can no longer enjoy both worlds, and they must choose between accepting the offer and a future argument regarding the fair value of the shares.
Summary and conclusions
Our opinion is that the new amendment to the law is successful in balancing the interests of offerors and offerees properly and soundly, while enabling offerors to hedge, to a certain degree, the risk and the payment framework they will be required to pay in any event where the purchase offer will be granted, by cancelling the current mechanism that created a free option for the offerees.
In this context it is important to note that the amendment to the law maintains (and justly so) the right of the offeree shareholders who accepted the purchase offer to approach the court where suspicion for non-disclosure of information or misleading on part of offeror exists.
Apart for charging the offerees to choose between accepting the offer and approaching the court with a claim for fair value, the current amendment to the law set forth a number of additional changes in the full purchase offer mechanism, while maintaining the delicate balance between the offerors and the offeree shareholders. These and other modifications will be subject of a separate article.
Before concluding let us note that the question of “fair value” remained open for different and diverse interpretations and financial estimations, it still presents a challenge to the court and was not solved within the framework of the current amendment. It is doubtful whether it could be solved in the future amendments as well.
[1] Many articles were written on the difficulty in assessing the “fair value”. A central article in this context is the paper by Professor Amir Barnea, Value assessments in purchase offers, which was published in Law and Business H (5768), pp. 393-400.