On 10 October 2007, a consortium comprising Royal Bank of Scotland Group plc (RBS), Fortis N.V. and Fortis SA/NV (Fortis) and Banco Santander Central Hispano, S.A. (Santander) succeeded in its €71.1 billion offer for ABN Amro Holding N.V. (ABN Amro). This was the largest financial services transaction of all time and the first hostile cross-border takeover of a major European bank. The acquisition followed a takeover battle with Barclays plc.
Dual offers. Through its Netherlands-incorporated and UK tax-resident bidding vehicle, RFS Holdings, the consortium made two simultaneous offers on identical terms and conditions: a Dutch global offer to non-US shareholders and a separate US offer to US shareholders, which complied with the US tender offer rules.
Publicly available information. The consortium’s offers were based on publicly available information. This meant that there could be unknown liabilities, the post-acquisition reorganisation might need to be modified, unknown change of control provisions might be triggered and the potential tax consequences of the deal could not be estimated.
Consortium and shareholders agreements. The consortium members and RFS Holdings were party to consortium and shareholders agreements, governed by English law. These agreements set out arrangements for the funding of RFS Holdings, the different classes of shares to be issued by RFS Holdings, RFS Holdings’ board structure, arrangements for management of ABN Amro before completion of its reorganisation and details of which businesses and assets each consortium member would acquire.
Sale of LaSalle. Before the consortium made its offers, ABN Amro had announced the proposed sale of its US bank, LaSalle Bank Corporation, to Bank of America for €21 billion in cash. The consortium’s original offers for ABN Amro were subject to a pre-condition that LaSalle remain with the ABN Amro group. The agreement for the sale of LaSalle to Bank of America included a “go shop” provision entitling ABN Amro to actively solicit alternative offers for a 14-day period and allowing it to accept a superior offer. Although the consortium proposed a higher purchase price, its proposal was rejected because it was inter-conditional with the public offer for ABN Amro. The sale of LaSalle to Bank of America was challenged in the Dutch Enterprise Court by a shareholder advocacy group, and a preliminary injunction preventing the sale was granted. The injunction was subsequently removed and the sale to Bank of America completed in October 2007.
Funding the offers. The consortium members financed the consideration for the acquisition through innovative methods: RBS carried out five simultaneous issues of tier 1 capital instruments, Fortis made a €13.4 billion rights issue and Santander raised around €7 billion through a combination of an issue of mandatory convertibles and other financing sources.Close speedread
On 10 October 2007, a consortium comprising Royal Bank of Scotland Group plc (RBS), Fortis N.V. and Fortis SA/NV (Fortis) and Banco Santander Central Hispano, S.A. (Santander) (the consortium) declared its €71.1 billion offer for the Dutch bank, ABN Amro Holding N.V. (ABN Amro), wholly unconditional (see Glossary).
The acquisition, which followed a takeover battle with Barclays plc (Barclays) and took place against the backdrop of last summer’s credit crunch, was the largest financial services transaction of all time and the first hostile cross-border takeover of a major European bank.
This article looks at some of the noteworthy legal aspects of the deal, which combined the complexity of an unsolicited consortium bid in a highly-regulated sector with innovative fund-raising techniques and dramatic shareholder litigation.
The consortium formed in early April 2007 and made its initial approach to ABN Amro later that month.
The consortium was due to meet with ABN Amro to discuss a possible proposal on 23 April 2007 (see box “Key dates”). However, the meeting was cancelled following the announcement that day that ABN Amro and Barclays had entered into a merger protocol in respect of a proposed €67 billion recommended offer by Barclays for ABN Amro and that ABN Amro had agreed to sell its US bank, LaSalle Bank Corporation (LaSalle), to Bank of America for $21 billion in cash.
Following a period of discussion and negotiation, on 29 May 2007, the consortium announced its proposed €71.1 billion competing offer, which was subject to certain pre-conditions, including LaSalle remaining within the ABN Amro group.
The sale of LaSalle had already been challenged in the Dutch Enterprise Court by a shareholder advocacy group, and a preliminary injunction preventing the sale of LaSalle was granted on 3 May 2007 (see “Sale of LaSalle” below). The injunction was subsequently removed and on 16 July 2007, the consortium’s offer was revised to replace this condition with a condition that ABN Amro not make any further material acquisitions or disposals.
The revised offer formally opened for acceptance on 23 July 2007. Barclays raised its offer to €67.5 billion on the same day. On 30 July 2007, ABN Amro announced that it was not in a position to recommend either offer but would engage with both parties.
Barclays withdrew its offer on 4 October 2007, as the minimum acceptance condition had not been met, leaving the way clear for the consortium to formally announce its offer wholly unconditional on 10 October 2007.
A Netherlands-incorporated and UK tax resident bidding vehicle, RFS Holdings B.V. (RFS Holdings), was set up for the purpose of making the consortium’s offer for ABN Amro.
RFS Holdings offered to acquire the entire issued share capital in exchange for €35.60 cash and 0.296 newly-issued RBS ordinary shares per ABN Amro ordinary share or American depositary share. This valued ABN Amro at approximately €71.1 billion.
The offer in fact comprised two simultaneous offers on identical terms and conditions: a Dutch global offer to non-US shareholders and a separate US offer to US shareholders, which complied with the US tender offer rules. The inclusion of shares in RBS as part of the consideration meant that those shares also had to be registered with the US Securities and Exchange Commission (SEC).
While dual offer structures are not uncommon generally, this was only the second such offer in The Netherlands. In addition, although exchange offers into the US are not especially unusual, hostile exchange offers for non-US issuers are rare.
“Reconciling the overlapping requirements in relation to the public offer documents in the three main jurisdictions (the US, The Netherlands and the UK) was a complicated process which in some areas meant negotiating waivers or derogations to ensure consistency,” says Matthew Middleditch, a partner at Linklaters LLP who advised RBS.
This process was further complicated by the fact that the Dutch public offer rules were in the process of changing while the transaction was taking place, as The Netherlands was still in the process of implementing the EC Takeovers Directive (2004/25/EC).
“The transaction was the first real test of the rules in a competitive situation and has resulted in new legislation to deal specifically with competing bids,” notes Geert Raaijmakers, a partner at Nauta Dutilh who advised ABN Amro.
The fact that the consortium’s offers were based on publicly available information created a further layer of complication. The risk factors set out in the offer documents make repeated and frequent reference to this limitation.
Among other things, relying on publicly available information alone meant that the consortium might find that ABN Amro faced unknown liabilities and that the post-acquisition reorganisation might need to be modified. It also meant that the consortium did not know whether, and to what extent, change of control provisions might be triggered in material agreements to which ABN Amro was a party, such as joint ventures and licences.
Perhaps most notably, the potential tax consequences of the deal could not be estimated. It was possible that the change of control of ABN Amro might mean that tax losses, credits and other tax benefits would be lost.
As a result of the transaction, ABN Amro would acquire a new, UK tax resident, parent company in RFS Holdings, which could trigger additional UK tax. Also, the reorganisation might itself give rise to material tax costs that could not be quantified.
“The mere fact of a consortium bid of this magnitude was in itself remarkable,” notes Jan Louis Burggraaf, a partner at Allen & Overy LLP who advised ABN Amro.
The relationship between the consortium members was governed by a consortium and shareholders agreement made on 28 May 2007 and a supplemental consortium and shareholders agreement made on 17 September 2007, both governed by English law. RFS Holdings was also a party to the agreements.
The agreements set out the arrangements between the parties in connection with the bid, including:
Funding of RFS Holdings. The consortium members agreed to subscribe for shares in RFS Holdings of a sufficient amount to fund the consideration due under the offers. The funding commitment was split among the consortium members:
Further, approximately 6% of RFS Holdings’ commitment was to be met by the issue of new ordinary shares in RBS.
Shares in RFS Holdings. In addition to a class of shares to be held by all the consortium members in proportion to their funding commitments, RFS Holdings was to issue different classes of shares to each member, with capital and income rights linked to the underlying net assets and income of the ABN Amro businesses they were to acquire in the contemplated post-completion restructuring (see box “Acquisition structure”).
On settlement of the offers, RFS Holdings became a subsidiary of RBS, owned by the consortium members.
Governance during the offers. During the conduct of the offers, RFS Holdings was to have six directors; two nominated by each of the consortium members. All decisions, including those relating to the offers, required the agreement of at least one director nominated by each of the consortium members. The consortium members shared expenses in the same proportion as their respective shareholdings.
Governance after completion. On settlement of the offers, the RFS Holdings board was to reduce to four directors; two nominated by RBS and one each by Fortis and Santander. Sir Fred Goodwin was to be one of the RBS nominees and take the role of chairman of the board, with a casting vote.
The RFS Holdings board was to make decisions by simple majority, other than in relation to certain reserved matters, which would require the approval of at least one director nominated by each of the consortium members. Reserved matters included those relating to share capital, winding up group companies, joint ventures, related party contracts on non-arm’s length terms and the commencement or settlement of any material litigation.
Interim management. “The banks knew that, no matter how quickly the restructuring could be effected in practice, they would have to own and manage ABN Amro together for a reasonable period after the bid,” says Tom Shropshire, a partner at Linklaters LLP who advised RBS.
For this reason, the consortium members also had to make arrangements for the management of ABN Amro in the period before the contemplated reorganisation could be effected, and deal with matters such as joint assets, tax, compliance and allocation of regulatory capital.
From settlement of the offers, RBS assumed the lead responsibility for ensuring that ABN Amro was managed in accordance with all applicable regulatory requirements.
Restructuring. The agreements outlined the principles for the post-completion restructuring of ABN Amro, setting out details of which businesses and assets each consortium member would acquire.
Following completion, the parties agreed that the assets they were to acquire would be transferred to each consortium member in a manner “as efficient as is reasonably practicable” for that member from a tax, regulatory, human resources, financial and operational point of view, while minimising the impact on the other investors and the rest of the ABN Amro businesses.
“This part of the agreement seems to have really captured the market’s attention, because the unsolicited nature of the bid meant that the only information the banks had to work from was that which was publicly available,” says Shropshire. Among other things, relying on public information meant that the consortium members did not know which parts of the ABN Amro group received services or relied on other parts of the business.
The parties explicitly acknowledged that they did not know many key facts about the ABN Amro group. This difficulty was overcome by providing that the agreements be construed in accordance with an “overriding principle” that the consortium members would acquire the assets and liabilities attributable to the businesses it was intended to acquire in the restructuring.
This was supported by broad arrangements for agreeing adjustments and payments between the parties and providing transitional services. There were also provisions under which the consortium members indemnified each other for liabilities relating to the respective businesses each was intended to acquire, and for identifying assets that were in the wrong place.
There were also provisions for disputes to be resolved by referral to the chief executive of the consortium member and, failing agreement, expert determination by independent accountants.
The sale by ABN Amro of LaSalle to Bank of America, and the associated litigation in The Netherlands and the US, were key battlegrounds for the competing bidders for ABN Amro. In addition, the sale was itself a significant transaction, and the ninth largest US bank merger in history.
The agreement for the sale of LaSalle, which was governed by New York law and filed with the SEC, included a “go shop” provision, under which ABN Amro was entitled to actively solicit alternative offers for LaSalle for a period of 14 calendar days from 22 April 2007.
Go shop provisions are in stark contrast to the more usual undertakings not to solicit such offers (indeed, in the litigation that followed, Bank of America claimed that it had never previously been asked for or granted a go shop). However, in last spring’s over-heating market they had become commonplace in US private equity deals.
The purpose of a go shop provision is to act as a safety net to enable the target’s directors to check in the market that they have obtained the best price reasonably available in circumstances where they do not wish to undertake an auction process before signing up to the deal. This would typically be the case where the buyer has indicated that it is unwilling to participate in such an auction or there are concerns that it might lead to customer or employee discontent.
Under the terms of the LaSalle go shop provision, ABN Amro could accept a proposal that was superior from a financial point of view to Bank of America’s, for cash and not subject to a financing condition (a superior proposal). Bank of America had the right to match any such superior proposal, and to receive a $200 million termination fee if it did not.
In the negotiations with the consortium that followed its indicative proposal to acquire ABN Amro (including LaSalle), much turned on whether the consortium’s competing proposal for the acquisition of LaSalle constituted a “superior proposal” under the terms of the LaSalle go shop provision.
On 6 May 2007, the consortium’s proposal was finally rejected, despite a proposed purchase price of $24.5 billion ($3.5 billion more than the Bank of America deal). ABN Amro’s management and supervisory boards said that they could not consider the consortium’s proposal a superior proposal because it was inter-conditional with the consortium’s proposed public offer for ABN Amro.
In the meantime, ABN Amro’s deal with Bank of America had been challenged in the Dutch Enterprise Court by a Dutch shareholder advocacy group, the VEB (Vereniging van Effectenbezitters or Dutch Investors’ Association).
The VEB argued that the sale gave sufficient grounds to question the conduct of the affairs of ABN Amro by its management, and should have been made subject to shareholder approval.
Under Dutch law, where there are well-grounded reasons for suspecting that a company has not followed the principles of sound management, the Enterprise Court can grant immediate relief and order an inquiry.
The VEB objected to the sale of LaSalle to Bank of America on the grounds that:
It would frustrate the possibility of a better bid from the consortium and deprive the shareholders of the opportunity to consider such a bid;
The importance of the sale was such that, on the VEB’s interpretation of the Netherlands Civil Code, ABN Amro was required to seek shareholder approval for it; and
The sale equated to a poison pill.
On 3 May 2007, the Enterprise Court granted a provisional injunction preventing the sale without shareholder approval.
“This was a critical moment for the consortium,” says Shropshire. “Not only would the outcome of the litigation have a significant effect on the final structure of the deal, the uncertainty and delay it created gave the consortium time to catch up with Barclays.”
It was no less critical for ABN Amro: “The sale of LaSalle was a vital element in achieving the best value for shareholders,” says Margaret E Tahyar, a partner at Davis Polk & Wardwell who advised ABN Amro.
The Enterprise Court’s ruling sparked a claim by Bank of America for breach of contract and a purported class action lawsuit in the US.
Bank of America claimed that:
ABN Amro had breached representations that it had authority, without violating applicable law, to sell LaSalle to Bank of America without shareholder approval.
The go shop provision did not apply to the consortium’s proposals, on the ground that it did not extend to a bid to acquire ABN Amro “substantially as a whole”.
Bank of America sought:
An injunction preventing the sale of LaSalle to another party;
Specific performance of its agreement with ABN Amro to purchase LaSalle; and
Unspecified monetary damages (claiming it stood to lose “billions of dollars of foreseeable damages”).
It also claimed that ABN Amro had unjustly enriched itself as a result of the transaction, by securing a higher price for LaSalle.
Bank of America’s claims fell away in July 2007, along with the purported class action suit, after the Dutch Supreme Court lifted the provisional injunction preventing its acquisition of LaSalle, which finally completed on 1 October 2007.
However, that is not quite the end of the matter in The Netherlands. “The Enterprise Court still has to make a decision about whether to appoint experts to investigate management at ABN Amro,” says Johan Kleyn, a partner at Allen & Overy LLP who advised ABN Amro. A decision is imminent.
“While the Enterprise Court’s findings may now have been overtaken by events, the case is of continued significance in The Netherlands, as it was the first time the Dutch courts had considered what the directors’ fiduciary duties mean in the context of a takeover,” adds Raaijmakers.
The consortium’s offer of €38.40 per ABN Amro share was made up of €35.60 in cash and 0.296 RBS shares.
The consortium members financed roughly a third of the total consideration each, with 38.3% coming from RBS, 33.8% from Fortis and 27.9% from Santander and various aspects of the financing arrangements for the deal were notable in their own right.
RBS raised approximately €5 billion through five simultaneous issues of tier 1 capital instruments in multiple formats, currencies and markets. It was the largest ever tier 1 package, and launched successfully despite the difficult market conditions.
Fortis made a €13.4 billion rights issue, the second-largest rights issue to date in Europe.
Santander raised around €7 billion through a combination of an issue of mandatory convertibles and other financing sources.
“This was the first ever issue of mandatory convertible bonds under Spanish law,” says Salvador Sánchez-Terán, a partner at Uría Menéndez who advised Santander. “The convertibles are a kind of hybrid and are treated as core tier 1 capital for regulatory capital purposes; the first time this has been achieved in Spain.”
In addition to raising finance for the bid in challenging credit market conditions, the consortium also had to achieve three shareholder votes. While the RBS and Santander shareholder votes were seen as relatively uncontroversial, there was intense speculation that hedge funds would stop Fortis raising an amount equal to roughly one-third of its total market value. However, these fears proved unfounded as both the fundraising and the transaction itself were approved by over 94% of Fortis’ shareholders on 6 August 2007.
In the end, the credit crunch did more damage to Barclays’ all-share offer than to the consortium’s mainly cash bid. “What really made the difference was the fact that each of the banks had a clear strategic vision for the assets it was trying to acquire and the overwhelming support from its shareholders for that vision,” says Middleditch.
For ABN Amro, the main challenge of the credit crunch was to keep the competitive situation alive for long enough to secure the best possible price for its shareholders. “For shareholders, the question that was top of the agenda throughout the summer was whether the market turmoil was sufficient to enable the consortium to invoke the material adverse change condition to the offer,” says Burggraaf.
For the purposes of the offers, a material adverse change was defined to include a material adverse change in national (including the US, UK and Netherlands) or international capital markets or financial, political or economic conditions.
Regulatory complexity was a key theme in the transaction, as all the players operated internationally in the highly-regulated financial services sector. “A mass of regulatory filings had to be made across a large number of jurisdictions,” says Lodewijk Hijmans van den Bergh, a partner at De Brauw Blackstone Westbroek who advised Santander.
The unsolicited nature of the bid complicated matters in relation to regulatory filings too because the detailed information on ABN Amro that was needed for the consortium’s regulatory filings also had to be garnered from public documents.
Complicating matters further was the fact that, in many instances, filings were needed not only in relation to the acquisition but also in relation to the post-acquisition restructuring.
Although filings were made across the globe, the key jurisdictions where filings were needed included The Netherlands, the US, the UK, Belgium and Spain. The offer was conditional on obtaining all mandatory or appropriate regulatory approvals reasonably required in connection with the offers.
“The crucial filing was in The Netherlands, where the size and status of the proposed deal were such that the Dutch Central Bank had to refer it to the Dutch Minister of Finance,” says Kees Peijster, a partner at De Brauw Blackstone Westbroek who advised Fortis. “There was a huge amount riding on his decision, as a number of other jurisdictions made their approval for the transaction subject to approval by the Dutch authorities.”
On 17 September 2007, the Dutch Minister of Finance granted the consortium a declaration of no objection in respect of the offers, subject to certain conditions, including maintaining continuity within ABN Amro so that it would be able to comply with its statutory obligations.
Significant competition and antitrust filings were also required, most importantly with the European Commission and the US Federal Trade Commission and Department of Justice. The offers were conditional on these and other competent antitrust or competition authorities having granted such approvals as were reasonably deemed necessary.
For the consortium, winning the bid is less than half the story. The restructuring is highly complex and will take time to complete (see “Consortium and shareholders agreement” above).
Each of the banks faces the challenge of making their strategic vision for ABN Amro into a reality, and proving to their shareholders that it was worth a 38.4% premium over the share price as it stood before it was affected by market speculation about the bid.
This will mean meeting ambitious targets for cost savings and increased revenues that were set before the credit crunch.
In addition, since the end of January 2008, there has been continuing speculation that RBS will need to make a rights issue to rebuild its capital ratios. RBS’s core tier 1 capital ratio is 4.5% (compared with Barclays’ ratio of 5.1% and a European average of 6.5%).
On 22 April 2008, RBS announced a £12 billion rights issue to increase its core tier 1 capital ratio to 6%, in light of the current market environment.
Nevertheless, the bank remains optimistic about the future: “The board of RBS has full confidence that the executive team will be able to lead RBS through the current challenging conditions, deliver the transaction benefits relating to the acquisition of ABN Amro, and realise the substantial value in RBS’s UK and international franchises.”
Sara Catley, PLC.
Linklaters LLP advised RBS (and Fortis on its rights issue); De Brauw Blackstone Westbroek advised Fortis; and Banco Santander and Uría Menéndez advised Banco Santander. Nauta Dutilh, Allen & Overy LLP and Davis Polk & Wardwell advised ABN Amro.
PLC Which lawyer? named the acquisition of ABN Amro its Deal of the Year 2007. For further details and information on short-listed deals, see the April-June issue of PLC Cross-border Quarterly.
20 March 2007
ABN Amro and Barclays announce talks.
13 April 2007
Consortium writes to ABN Amro seeking talks, meeting subsequently arranged for 23 April 2007.
23 April 2007
ABN Amro and Barclays announce agreed offer and sale of LaSalle to Bank of America.
25 April 2007
Consortium announces indicative offer.
3 May 2007
Dutch Enterprise Court rules that sale of LaSalle cannot go ahead without shareholder approval.
29 May 2007
Consortium announces proposed offer of €71.1 billion, conditional on Dutch Supreme Court upholding Dutch Enterprise Court decision regarding LaSalle.
13 July 2007
Dutch Supreme Court reverses decision of Dutch Enterprise Court.
16 July 2007
Consortium announces revised offer, removing the LaSalle condition.
23 July 2007
Consortium offer formally opens, Barclays raises its offer to €67.5 billion.
27 July 2007
Santander gains shareholder approval for its financing.
6 August 2007
Fortis gains shareholder approval for the transaction and financing.
10 August 2007
RBS gains shareholder approval for the transaction.
1 October 2007
Bank of America absorbs LaSalle.
4 October 2007
Barclays withdraws offer at closing date, acceptance condition not met.
10 October 2007
Consortium declares ABN Amro offer wholly unconditional.
17 October 2007
Settlement of offers.
2 November 2007
Consortium announces that approximately 98.8% of ABN Amro ordinary shares have been tendered.
25 March 2008
ABN Amro applies for de-listing of ordinary shares, expected to be effective 25 April 2008.
American depositary shares (ADS). Shares evidenced by American depositary receipts (ADR). ADS are issued by a depositary bank and represent one or more shares of a non-US issuer held by the depositary bank. The main purpose of ADS is to facilitate trading in shares of non-US companies in the US markets and, accordingly, ADR which evidence ADS are in a form suitable for holding in US clearing systems.
Material adverse change condition. A provision which aims to give the buyer the right to walk away from the acquisition, before closing, if events occur that are detrimental to the target or the transaction.
Merger protocol. In The Netherlands, on a recommended offer, an agreement between the bidder and the target which outlines the agreed terms of the transaction. Among other matters, a merger protocol often deals with the proposed offer price, the proposed managing and supervisory directors of the target company and the number of shares the bidder requires to declare the bid unconditional.
Poison pill. In the context of takeovers, action taken by the target to make itself unattractive to a bidder or potential bidder.
Tier 1 capital. Broadly, a bank’s core capital consisting of equity, reserves, current year profits and certain hybrid instruments which mix both debt and equity features. Regulatory capital requirements are designed to ensure that a bank maintains sufficient capital to absorb any losses it incurs while remaining able to pay creditors and depositors. Different regulators count different instruments as capital. In the UK, the Financial Services Authority follows the framework of the Basel Accord and Basel II which divide qualifying capital into three tiers according to the characteristics or qualities of each qualifying instrument.
Wholly unconditional. On a takeover, the point in time at which all the conditions to the offer have been satisfied or formally waived.