Endesa, Metrovacesa and Europistas. These three Spanish companies have one important common denominator: Takeovers launched against them have wound up in the courts. Bloody battles for control of these companies have diverted attention from the stock market, and set off heated discussion about the role of the courts in deciding a company’s fate. Should these deals be brought to the courts? Doesn’t this mean breaking the rules of the marketplace? Experts provide answers to these questions for Universia-Knowledge at Wharton.
“I believe that citizens must be able to turn to the courts to defend their interests. Takeover offers are – and must be – treated as one additional activity in the market of a modern, competitive economy,” explains Benito Arruñada, professor at Pompeu Fabra University in Barcelona, Spain. “I think that anyone should be able to make a claim in court if he believes that his rights have been violated,” adds Juan Mascareñas, professor at the Complutense University in Madrid. “Taking things before a judge is one component that Western systems of defense have in common. In addition, it can also provide a way to gain some time so you can organize another type of defense.”
This much is clear. Experts agree that the courts have become another route for settling business deals, even when those deals involve a takeover offer. Nevertheless, notes Mauro Guillén, a management professor at Wharton, “It would be better if there were legislation that clarified what is permissible, and if there were clear provisions about what legal avenues exist and in what countries they can be adopted.” Guillén cites a case where resorting to the courts turned out to be a questionable move: “When E.ON turned to a court in the United States.”
Last October 16, E.ON, a giant German provider of electricity, filed a lawsuit in a New York court against Acciona, a Spanish engineering company. In that lawsuit, E.ON accused Acciona, owned by the Entrecanales family, of attempting to block E.ON’s takeover of Endesa. How was that possible? Acciona made a concerted effort to buy shares in Endesa, which is headed by Manuel Pizarro. E.ON accused Acciona of filing false information with the S.E.C., which regulates U.S. stock markets.
Acciona reacted quickly, presenting all the documents that its rival was demanding. Then, a few weeks ago, Manuel Conthe, president of Spain’s national stock market commission (CNMV), announced the problem: The laws in Spain and the U.S. are quite different. As a result, Conthe said, the information that authorities in the U.S. were requesting was different from the information required by authorities in Spain.
Because there are significant differences between one country’s laws and another country’s laws, Guillén doubts that E.ON went to court in the U.S. in order to resolve its business battle in Spain. The CNMV did not file any complaint against Acciona. As Conthe has said on numerous occasions, Acciona complied with all necessary requirements in Spain. In contrast, however, the court in New York has issued a preliminary opinion in favor of E.ON.
This complex situation looks even murkier if you add in the lawsuits filed by Endesa and Gas Natural.
Over the past year, Endesa has been the object of two takeover offers. The first offer was made by Gas Natural, and it was considered hostile by Endesa’s board of directors. The second offer came from E.ON, which has long been carefully observing events at Endesa headquarters. E.ON offered a much higher price than Gas Natural had – 27.5 euros per share compared with 21.4 euros offered by Gas Natural. Then, two months ago, a third player entered the fray: Acciona purchased 10% of Endesa. It now controls 20% of Endesa, and its goal is to reach 33% next year, when the laws governing takeovers in Spain will be modified.
The complex morass of would-be buyers wound up in a judicial mess, as various participants jumped into the battle. First, Endesa sued Gas Natural because Gas Natural had agreed to sell some assets to Iberdrola (an electric utility in Spain.) Although Iberdrola needed at least one billion euros to pursue its strategy, Iberdrola managed to paralyze Gas Natural’s takeover efforts. E.ON had already gotten the green light for its takeover offer, but the deal could not close so long as the Spanish courts were paralyzed by Gas Natural’s takeover efforts.
For its part, Gas Natural made its own move. Aware that E.ON had been gaining ground, Gas Natural sued E.ON in a Barcelona court, accusing E.ON of allegedly using privileged information with collusion from Endesa, in making its offer for Endesa.
With so many lawsuits taking place, observers concluded that the participants were all trying to win in court the battles that they were struggling to win in financial markets. Arruñada justifies this approach: “In practical terms, the possible use of litigation as a defense against a takeover is indistinguishable from using litigation to defend shareholders’ interests.” Actually, Endesa’s share price shot up in part because E.ON and Acciona showed up on the scene. At first, E.ON raised its price to 27.5 euros per share. When Acciona jumped in, E.ON raised its offer [for Endesa] to 35 euros. Now, many people believe that its price could ultimately rise as high as 40 euros per share.
Nevertheless, minority shareholders don’t always benefit when a case goes to court. One recent example concerns the experience of Europistas, a Spanish contractor. At first, [Grupo] Isolux, a Spanish engineering firm, offered 5.13 euros per share for Europistas. Then Sacyr Vallehermosa, a Spanish construction firm, made a higher bid of 6.13 euros. When both players had to make their definitive proposal, Sacyr Vallehermosa raised its bid to 9.15 euros. Meanwhile, Isolux maintained the same price. Later, in an effort to stop its rival, Isolux filed an appeal with the CNMV, arguing that the regulatory body should not have approved Sacyr Vallehermosa’s takeover bid. However, CNMV rejected the appeal. Then, Isolux said that it would follow the same steps with the Audiencia Nacional, the National Court of Spain.
If CNMV had judged in favor of Isolux, the minority shareholders in Europistas would have been forced to accept a much lower price for their shares. Something similar happened in the case of Metrovacesa, a construction firm. In that case, the Sanahuja family, who were already the largest shareholders Metrovacesa, was looking for a legal opportunity that would free them from having to launch a takeover offer for 100% of the company. The family wanted to bid for [an additional] 24%. The CNMV rejected that option, opening the door for an ensuing battle between two rivals – Joaquin Rivero, president of Metrovacesa and [Grupo] Juan Bautista Soler.
Nevertheless, Mascareñas believes that both Isolux and the Sanahuja family were simply trying to use every possible avenue for winning the battle. “Bringing takeovers into the courts is neither a good thing nor a bad thing for minority shareholders,” he says. “Everything depends on the share price that results; in that regard, this is exactly the same as any other defensive mechanism you can use. Going to court is just another means of defense.”
In the case of Endesa, “Minority shareholders are going to benefit from the last-ditch defense made by [Manuel] Pizarro, president of Endesa. Even so, minority shareholders don’t have much influence. This is always the nature of being a small shareholder,” says Guillén.
Perhaps as a result, Arruñada admits that going to court is sometimes hard to justify. He suggests that the government get involved by “speeding up judicial processes and demanding an explicit price for users of judicial services, so taxpayers don’t wind up subsidizing frivolous, delaying behavior in the courts. These are things that may be occurring now.”