Hungary: The Public Takeover Bid – Assessment And Risks

The business decision to make a public takeover bid ("PTB") depends on the assessment of a number of legal, business and financial elements/questions. One of the most peculiar questions remains as to how to gain insider information on the target lawfully, before the announcement of the PTB and without causing overreaction on the market with a potentially price-increasing effect. Alternatively, investors might consider whether it is possible to carry out post announcement due diligence, the outcome of which may allow the bidder to walk away from the offer.

(1) Pros and Cons of Pre-announcement Due Diligence

While in a number of jurisdictions friendly bidders may gain access to high levels of confidential information on a target prior to the public announcement of a PTB, in others, even in the case of recommended bids, management is generally reluctant to provide information on the target, citing the duty not to disclose confidential information on the corporation and not to serve insider information to third parties.

Pursuant to the Capital Markets Act (Act CXX of 2001) ("CMA") - the legislation implementing the Takeover Directive (2004/25/EC) in Hungary - prior to the announcement of the draft public takeover offer, the board of directors of the target may, upon request by the offeror, convey any information to the offeror (or consultants) on the operation of the target, provided that the offeror must treat such information confidentially in line with rules applying to confidential treatment of business secrets and securities secrets, as well as the prohibition on insider trading (CMA Section 73). There is of course a general requirement of equal treatment of potential bidders, if other bidders may also wish to seek pre-announcement due diligence information, e.g. for the purposes of making a counter-offer, even if the management of the target may not find them equally friendly. Another issue to be considered by any potential bidder is that if pre-announcement due diligence is made and ultimately the PTB is not made (e.g. as a result of market gossips, sudden volatility of prices and large volume trades which within a relatively short period of time cause a significant mandatory bid price increase) all potential subsequent transactions of such a potential bidder are exposed to being deemed insider trading.

This means that although in Hungary the legislation and the financial supervisory authority (Pénzügyi Szervezetek Állami Felügyelete – State Supervision of Financial Organizations/SSFO) favors pre-announcement due diligence, potential bidders must carefully consider whether they want to risk a potential sudden price increase in such a relatively closed market.

(2) Could the Outcome of a Post-announcement Due Diligence be a Walk Away Condition?

Under Hungarian takeover rules, the only explicit and permitted cancellation condition pursuant to the CMA (Section 69 (2) i)) is that a takeover bid must contain the declaration of the bidder - if intended by the bidder - on reserving the right to cancel the bid, if on the basis of the acceptance declarations the bidder would not acquire influence exceeding 50% in the target.

As a result of the implementation of the Takeover Directive - in line with its Article 6 3. (h) and 13 (e) - the CMA, as of May 20, 2006, has been modified by an additional mandatory content of the bid, i.e. "the takeover bid must include any other [than explicit other mandatory conditions] substantial circumstances that may influence the takeover offer".

What could that mean?

As per section 228 (1) of the Civil Code, if the parties have stipulated that the condition of the entering into force of their contract is an uncertain future event (suspending condition), the contract shall become effective upon that event taking place.

One may claim that on this civil law basis, which serves as the underlying contract law basis of for takeover offers, such an event may be deemed as a circumstance substantially influencing the takeover offer, which – before the expiration of the deadline for filing the declarations of acceptance (i.e. before the entering into force of the sale and purchase agreement resulting from a successful takeover offer) - is not known by the bidder and the shareholders accepting the offer at the moment respectively of making and accepting the offer, but which may justify that the offer and – by the acceptance thereof – the contracts do not enter into force, if the event is recognized before the lapse of the deadline of the acceptance period of the offer.

This could mean that a bidder may reserve in the offer that the entering into force of the contracts to be concluded upon the acceptance of its offer is conditional upon a suspending condition, provided that the suspending condition is an uncertain event, independent from both the bidder and the shareholders accepting the offer, and which is unknown at the moment of the making the contractual declarations, i.e. the offer and the acceptance thereof.

In Hungary, there is no domestic jurisprudence on the interpretation of such "an uncertain future event". One may be a suspending condition that has already been tested in other EU member states (e.g. Germany). Accordingly, it can be considered as an uncertain future event if, for example, until the lapse of the deadline for the acceptance period of the offer, information has been disclosed by a bidder in the course of a post-announcement due diligence that may or presumably will substantially influence the target company’s annual net profit before taxation, the EBIDTA level or the shareholders’ equity in a detrimental way. It may be considered as a circumstance substantially influencing the net profit before taxation (Material Adverse Change – MAC) if, for example, the net profit before taxation, the EBIDTA level or the shareholders’ equity indicated in the last disclosed flash report has decreased by e.g. at least 10% or another fixed amount. To make such a condition objective, the bidder may introduce in its offer a selection mechanism of an independent auditor for inspecting the circumstance resulting in a substantially detrimental change, who shall communicate to the board of directors of the target company and/or the public the existence of the substantially detrimental circumstance within the acceptance period.

The Hungarian financial supervisory authority, as other authorities in Europe, is reluctant to give a black and white answer on such an interpretation as of yet, due to potential market effects and minority protection considerations. However, it may not be unreasonable to expect that at least in the case of voluntary offers in Hungary, a MAC clause, as a suspending condition may be applied in the future on the above legal grounds.

The contents of this article are intended to provide only a general overview of the subject matter. Specialist advice should be sought for specific matters. Queries relating to this article should be addressed to the authors.

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