On 11 September 2020, Altice Europe announced that it had entered into an agreement with its 78% controlling shareholder, Patrick Drahi, on an all-cash offer of EUR 4.11 per share for all shares in Altice Europe. Mr Drahi has also announced his intention to freeze out any non-tendering shareholders, either through a statutory squeeze-out procedure or through a post-offer merger or asset sale.
In two letters (available here and here), Lucerne Capital Management, a hedge fund, voiced its opposition against the deal, stating that “the vast majority of Altice Europe’s minority shareholders believe that the public offer is nothing more than an illicit attempt by Mr Drahi to exploit the Covid-19 pandemic to yet again transfer massive value to himself, to the detriment of the minority shareholders”. Lucerne also initiated proceedings with the Amsterdam Enterprise Chamber, requesting the court to appoint three independent directors and to block the post-offer merger and asset sale. Three other investment funds, Sessa, Sheffield and Winterbrook filed similar proceedings. Their main criticism was aimed at the post-offer freeze-out techniques.
In a 2018 paper for the European Company and Financial Law Review, I compared and evaluated the legal framework in the US and the Netherlands for freezing out minority shareholders after a takeover bid. I concluded that Dutch law does not adequately protect minority shareholders in going-private freeze-outs by controlling shareholders, especially in comparison to the more stringent protection under Delaware law. I criticized the EVC case in the Netherlands, since the Amsterdam Enterprise Chamber did not question a freeze-out in which a majority of the unaffiliated shareholders had rejected the preceding takeover bid (the court relied on the approval by an independent director with veto right and on a fairness opinion by an independent financial advisor).
The case of Altice Europe presented a risk of minority expropriation very similar to the EVC case. On 16 December 2020, however, Mr Drahi announced that he had increased the offer price to €5.35 per share. In return, the hedge funds have agreed to withdraw the proceedings with the Amsterdam Enterprise Chamber and will tender their shares under the offer. Therefore, the main danger for minority shareholder seems to have disappeared. This also means that it will remain unclear for now whether the Dutch courts would be willing to revisit their approach to controlling shareholder freeze-outs.
Nevertheless, the Altice Europe case presents an opportunity to discuss the existing legal framework for controlling shareholder freeze-outs in the Netherlands and how it applies to a concrete case. This is relevant because similar cases may arise in the future. In addition, it cannot be excluded that some minority shareholders will continue to oppose the takeover bid and a possible post-offer freeze-out, and challenge the deal in court.
The Altice Europe case also serves as a warning for other countries that currently allow or are considering allowing alternative freeze-out techniques. In Belgium, for example, similar alternative freeze-out techniques as in the Netherlands are theoretically available, but they have not yet been used in practice. In a 2017 paper for the Tijdschrift voor Rechtspersoon en Vennootschap – Revue pratique des sociétés, I have argued that Belgium should allow alternative freeze-out techniques, but only with appropriate procedural safeguards to protect minority shareholders.
Which freeze-out techniques are available in the Netherlands?
Mr Drahi has made his intentions to acquire 100% of the shares in Altice Europe very clear in the offer memorandum. Dutch law provides for several techniques to freeze out any remaining shareholders after a takeover bid. The traditional route is to use a statutory squeeze-out procedure, which can be divided into the stand-alone squeeze-out and the post-takeover squeeze-out (which is only available within three months after the end of a takeover bid). However, the high threshold for these procedures (95% of the capital for the stand-alone squeeze-out; 95% of the capital and 95% of the voting rights in each class of shares for the post-takeover squeeze-out) could be an obstacle for Mr Drahi.
In addition, alternative freeze-out techniques are available in the Netherlands as well, and Mr Drahi has already announced that he will consider a post-offer merger and a post-offer asset sale to freeze out remaining minority shareholders. In a post-offer merger Altice Europe would merge into a newly established subsidiary, and the shareholders would become shareholders in a newly established holding company, which owns the subsidiary. Mr Drahi would then buy all the shares in the subsidiary from the holding company, after which the minority shareholders can be cashed out by dissolving and liquidating the holding company.
Alternatively Mr Drahi may also freeze out minority shareholders via a post-offer asset sale. Altice Europe would then sell all of its assets and liabilities to Mr Drahi for a purchase price equal to the offer consideration. Next, Altice Europe would be dissolved and liquidated, cashing out the minority shareholders.
Both alternative freeze-out techniques only require approval in the general meeting by an absolute majority of the votes cast, which can be achieved by Mr Drahi alone, if he votes in favor, which he has announced he will do.
Are alternative freeze-out techniques allowed in the Netherlands?
One may wonder whether such alternative freeze-out techniques are possible under Dutch corporate law. In general, the Versatel case law of the Amsterdam Enterprise Chamber and the Dutch Supreme Court has allowed such alternative freeze-out techniques. However, a merger that only serves to freeze out minority shareholders can be contrary to the principle of reasonableness and fairness, depending on the circumstances. Nevertheless, alternative freeze-out techniques have become standard practice in the Netherlands and the courts have not meaningfully reviewed the reasons behind the freeze-out technique, provided the offer memorandum states business reasons explaining why acquiring 100% of the corporation is necessary.
In practice bidders have also been using “pre-wired” freeze-out techniques, meaning that the post-offer merger or asset sale is negotiated beforehand by the (independent) directors of the board of the target corporation and approved by the shareholders before the takeover bid is closed. This is also what Mr Drahi intends to do in the case of Altice Europe: Altice Europe has convened an extraordinary general meeting on 7 January 2021 with the post-offer merger and asset sale on the agenda.
Are minority shareholders sufficiently protected against controlling shareholder freeze-outs?
In my 2018 paper, I have argued that the Dutch law on freeze-outs makes sense for freeze-outs following a takeover bid by an independent third party who is not a controlling shareholder. In these cases the transaction is approved by directors who are independent from the bidder and by a majority of the shareholders. In controlling shareholder freeze-outs, a higher risk of expropriation of minority shareholders exists: controlling shareholders hold considerable power over the board of directors and could unilaterally approve alternative freeze-out techniques in the general meeting. As such these controlling shareholders can enter into transactions that only benefit them (or at least benefit them disproportionally). For these reasons I have argued that controlling shareholder freeze-outs require a higher level of protection of minority shareholders, similar to the protection in transactions at arm’s length: approval by the independent directors and a majority of the minority shareholders, in the absence of which a court should closely scrutinize the freeze-out price.
In the Netherlands, the level of minority protection does not seem to meet this standard. In the EVC case, the Amsterdam Enterprise Chamber allowed a controlling shareholder freeze-out to proceed without a majority of the minority shareholders accepting the takeover bid. The court considered the approval by an independent director with a veto right and the fairness opinion by an independent financial advisor sufficient minority protections.
The EVC case presents a fact pattern similar to the one in the Altice Europe case. In the Altice Europe case, the conflicted directors (Mr Drahi and his affiliates) recused themselves from the deliberations and decision-making of the board. In addition, the non-executive directors also separately approved the transaction, after consulting with their own legal and financial advisors. Both the full board and the non-executive directors also received fairness opinions from financial advisors. Finally, since Mr Drahi intends to vote on the post-offer merger and asset sale, the freeze-out can proceed even if a majority of the minority shareholders oppose the takeover bid, similar to the EVC case.
Some arguments can be made why this may not suffice to simply accept the freeze-out price as fair at face value. First, several authors (for example Bebchuk and Hamdani; Guttiérez and Sáez; and Strampelli) have argued that in a corporation with a controlling shareholder, “independent” directors are not really independent from the controlling shareholder, since they owe their (continued) board position to the controlling shareholder. In addition, Lin has provided empirical evidence for the US that controlling shareholders frequently reappoint independent directors after going-private freeze-outs, potentially making them willing to sacrifice the interests of the minority shareholders for the sake of future employment.
Secondly, the value of fairness opinions has also been questioned by the literature (for example Bebchuk and Kahan; and Davidoff Solomon) arguing that valuation models often come with substantial discretion and that financial advisors have an incentive to use this discretion to deliver board-friendly fairness opinions, because they want to attract future assignments from the board. Lucerne Capital and European Investors-VEB have offered a similar criticism in the Altice Europe case. In addition, the fairness opinions in the Altice Europe case show that the principal portion of the fees payable to the financial advisors is contingent on the success of the transaction, which gives the financial advisors an incentive not to criticize it, for risk of causing it to fail.
Finally, in previous takeover bids the ability to effectuate the post-offer merger or asset sale was typically conditioned on the bidder reaching a certain threshold of shares, with 80% of the outstanding capital being market practice (although lower thresholds have also been used). In the Altice Europe takeover bid, however, there is no minimum threshold. There is a condition that Mr Drahi obtains 95% of the outstanding capital, but he can unilaterally waive this condition “in consultation with Altice Europe” (which still means that Mr Drahi can take the final decision). The board had first asked for a minimum threshold but dropped this demand in exchange for a price bump. The board did negotiate a “fiduciary out”, however, in case a material adverse event occurs. The board notes that in determining whether to change its recommendation it will take into account “the proceedings and the outcome of the EGM, the acceptance of the Offer, the nature and behaviour of the tendering and non-tendering Shareholders and their relevant shareholding period”. This seems to imply that the board could decide to block the post-offer merger or asset sale if it considers the acceptance of the offer by minority shareholders insufficient. The question is, however, whether the board will actually use this power.
Does the implementation of SRD II change anything?
Another question is whether conflicted shareholders, such as Mr Drahi, can still vote on related party transactions, such as controlling shareholder freeze-outs, since the implementation of the Shareholder Rights Directive (“SRD II”) in the Netherlands. The answer is nuanced and complicated. Article 2:169 §3 of the Dutch Civil Code states that material related party transactions outside of the ordinary course of business or not under normal market conditions need approval by the supervisory board, or by the management board if there is no supervisory board, or by the general meeting if the supervisory or management board is unable to decide on the transaction (for example, if all directors are conflicted; or if the corporation does not have a board). §4 of the same article states that managing board members, supervisory board members or shareholders shall not take part in the decision-making if they are involved in the transaction with the related party. Taken at face value, this seems to prevent Mr Drahi from voting in the extraordinary general meeting on the approval of the post-offer merger or asset sale, which was also the position taken by Lucerne and European Investors-VEB.
Mr Drahi and the board of Altice Europe seem convinced, however, that Mr Drahi would be allowed to vote his shares in the extraordinary general meeting. Their position could be justified by an argument made by some legal scholars, including Groenland). The reasoning is that the voting prohibition for shareholders in article 2:169 §4 of the Dutch Civil Code only applies if the general meeting is the “primary” competent body specifically because of the related party procedure, for example because the directors are all conflicted; and that it does not apply when the general meeting is only the “secondary” competent body because of another provision in the Dutch Civil Code, for example because it concerns an asset sale or a merger that always requires shareholder approval in addition to board approval. This interpretation would also be consistent with the provision’s legislative history: the voting prohibition in §4 was only extended to shareholders after §3 was amended to include the possibility of approval of related party transactions by the general meeting if all directors are conflicted, indicating that the government first did not think a voting prohibition for shareholders was necessary.
Conclusion
In conclusion, the case of Altice Europe presents a very similar fact pattern to the EVC case, in which the court allowed a controlling shareholder freeze-out without approval by a majority of the minority shareholders. I have argued in a previous paper that the EVC case law should be overturned. The Altice Europe case showed the importance of the protection of minority shareholders in freeze-outs, even though in this case the minority shareholders prevailed in the end due to their threatened litigation. The arguments made in this blogpost remain relevant, however, either for a possible challenge by other minority shareholders in this case, or for a future case. The withdrawal of the lawsuit in the Altice Europe case means that the legal questions that were raised will only be answered in a next episode of the freeze-out saga, thereby increasing the suspense. To be continued …
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