There has been a recent surge of public M&A transactions in Sweden. One of the aspects that have been widely debated in connection with several recent public bids have been the use of legal mergers as a substitute for mandatory redemption procedures to reach 100% ownership following a takeover bid. In the ongoing public takeover bid for Capio AB (publ), the bidder, Opica AB, has reserved the right to carry out a legal merger at an acceptance level below 90+% of the shares. Institutional investors opposed to the bid requested that the Securities Council give a statement on whether such use of legal mergers is in accordance with good stock market practice.

Traditionally, the majority shareholder has requested mandatory redemption after completion of the takeover bid, which requires that 90+% of the shares have been acquired. However, the Swedish rules on legal mergers have since changes in the tax legislation a few years back been used in a few cases as an alternative to mandatory redemption. As legal mergers only require two thirds of the shares and votes in the transferor company, i.e. the target company, this has by critics been regarded as an abuse of the minority protection rules stipulating a 90+% threshold for mandatory redemption. Also, critics have pointed out that the minority shareholders are not entitled to have the consideration set by an arbitration panel under the legal merger rules. In the light of this debate, the government proposed earlier this year new rules that would block legal mergers involving cash consideration when the bidder has failed to achieve 90+% acceptances. The proposed rules have been subject to some criticism from a technical point of view and the formal proposal has been delayed. New rules are not likely to come into force before the middle of next year at the earliest.

The Securities Council has in previous statements set out some principles regarding the use of legal mergers as a way of gaining control over minority shares in listed companies against cash consideration. Whilst not excluding legal mergers as a substitute for mandatory redemption procedures under current legislation, the Securities Council has held that it is essential that legal mergers on the stock market are not implemented in manners which may damage the confidence in the stock market and the stock market regulations. The statements have also imposed additional obligations to provide information to the minority shareholders: the intention to use a legal merger must be set out in the offer document and information equivalent to an offer document must be included in the merger plan or disclosed to the minority shareholders. Further, it has been stated that the cash consideration offered in a legal merger involving a listed target must be at least equivalent to the price which would have been determined in a mandatory redemption procedure.

The institutional investors have in their application to the Securities Council in respect of the bid for Capio pointed out that the government’s proposal to increase the threshold for legal mergers against cash consideration was conceptually accepted by most interested parties to whom the proposal had been remitted and that the objections were of a technical nature. To protect minority shareholders until a new law had come into force, it was requested that the Securities Council declared that the practice should not be used as an alternative to mandatory redemption, but that the Securities Council could grant exemptions under exceptional circumstances.

In its statement dated 3 October 2006, the Securities Council declared that the reference to a legal merger in the Capio bid was not contrary to good stock market practice. Neither would it be considered contrary to good stock market practice to effect a legal merger, given that applicable rules and the previous statements of the Securities Council were adhered to. Any use of the legal merger option by Opica AB will hence be regarded in light of whether it may damage the confidence in the stock market and the stock market regulations. However, the Securities Council stated that it will consider revising its position in a plenary session in the light of the recent events and the delays in the legislatory process.

The statement of the Securities Council did little to clarify the future of the legal merger as a substitute to mandatory redemption. Until the next statement of the Securities Council or the implementation of a new law, any attempt to force a legal merger at an acceptance level that is significantly lower than 90% may be subject to heavy criticism by the financial community and even be censured as being contrary to good stock market practice. We may get reason to revisit this question once again in the near future.

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