“As the first transaction involving a tender offer for a company publicly traded in the US and Venezuela since Venezuela’s new tender offer law was enacted [in May 2000], this deal was a real trendsetter. We had to synchronize the process to comply with both the US SEC and the Venezuelan Comision Nacional de Valores,” says Laura Drachman, vice-president, M&A Latin America, JP Morgan.
The majority (65%) of Mavesa’s capital was traded by US security holders as American Depository Shares (ADS) on the New York Stock Exchange, with the remainder trading on the Caracas stock exchange, Bolsa de Valores de Caracas.
According to US SEC regulations, if US shareholders hold more than 40% of the target company’s shares as with Mavesa, the bidding company is obliged to comply with US SEC tender offer rules. These include: prohibiting the bidder from purchasing the target’s securities outside the tender offer, applying all anti-fraud and anti-manipulation rules to the cross-border transactions, and ensuring the bidders treat US and non-US shareholders the same.
The Venezuelan SEC, La Comision Nacional de Valores de Venezuela (CNV) requires a pro-rata rule for all offers. For example, when an offer to buy 50% of shares from one holder is made, an offer to buy 50% of all other holders’ shares must also be made. So, when a buyer is ready to purchase a significant portion of a listed company, defined by Venezuelan tender offer rules as 10% or more, it must present a proportionate tender offer to all shareholders. If the bidding company’s offer is less than 100%, then the pro-rata rule applies.
“The transaction is subject to both countries’ regulations,” says Paul Schnell, partner at Skadden Arps Slate Meagher & Flom in New York. “When doing it by tender offer, if the target company has shares traded in the US, you have to conduct two simultaneous tender offers. This can lead to a real legal quandary when you are making an offer to one country’s shareholders. You want to treat them all equally, but at the same time you have to deal with two sets of rules [of each regulatory commission] and those rules can be in conflict with each other,” he says.
According to Walter G Van Dorn, partner at Thacher Proffitt & Wood in New York, in a deal where the two parties’ SEC rules conflict, the US SEC will draft two tender offers. One will comply with regulations of the domestic SEC, in this case Venezuela, and one will comply with the US SEC. This ensures that the rights of each country’s shareholders are protected by the tender offer.
More recently, US pharmaceutical company IVAX acquired a 99.6% stake in Chilean pharmaceutical company Laboratorio Chile for $395 million. This deal also involved two simultaneous tender offers, with one offer made to US holders of LabChile ADSs, and another to the holders of Santiago-traded shares.
Of the 1,300 foreign companies registered with the US SEC, only 114 are Latin American. But the move to aid cross-border M&A is driving several countries to re-evaluate their tender offer regulations and corporate governance standards. Venezuela, Chile and Brazil have introduced reforms to try and match the transaction requirements of the US SEC and attract more US investment to the local equity markets.
Venezuela’s CNV passed its revised tender offer rules last May. Chile passed extensive legislation in December to ensure the protection of minority shareholders in tender offers (Law No. 19,705). In Brazil, companies listed on Bovespa’s Novo Mercado must follow strict corporate governance rules, including the equal treatment of minority shareholders during a takeover and the requirement that 25% of the company’s equity remain in free float. “Given that more Latin American companies now have ADR [American Depository Receipt] listings, we can expect to see an increasing number of simultaneous tender offer transactions taking place,” says Drachman.