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A French white knight, a court in Amsterdam, ESOPs fables
The 30-Month Fight for Gucci
A EUROPEAN TAKEOVER UNLIKE ANY OTHER
"It's very simple. If those guys don't pay, I'll cut their balls off and sue them for specific performance." So said Domenico de Sole, chief executive of Gucci.
And that's after all sides reached a settlement.
It took thirty months for Gucci to hand itself over to its white knight and for its attacker to fold its tents and give up the siege. It will take until the year 2004 for the peace treaty to take its full effect, and, if Gucci's stock price remains high, Pinault-Printempts-Redoute would never have to acquire an additional share to maintain control.. Over the two-and-a-half years of this fight between Pinault-Printemps-Redoute and LVMH Moët Hennessy Louis Vuitton, Gucci defended itself with an inventiveness that drew much interest, as well as some controversy and judicial disapproval of both sides. The conduct of the battle and the rulings from the courts in the Netherlands could well change the way takeovers are conducted, both in that country and across the continent. The rules of individual countries remain as important as ever, given the recent defeat at the hands of the German delegation of the European Union's proposal for a standard set of M&A regulations covering unsolicited transactions.
Says Paul Storm, a senior M&A partner in the Rotterdam office of NautaDutilh, who advised LVMH: "This is one of the first times that a takeover battle has been taken to the Dutch courts and the very first time that the inquiry procedure before the Enterprise Chamber has been tried for such a case. For centuries, hostile battles have been frowned upon in the Netherlands. But now the climate for takeovers will never be the same. Already this summer, the Enterprise Chamber refused to allow a white-knight construction. There will be many other cases that will go to the courts."
On September 24, the Securities Board of the Netherlands approved the agreement but insisted that, in addition to the strong contractual protections already in place, Gucci post a letter to support a small portion of the offer PPR is required to make in 2004. U.S. antitrust authorities at press time had not yet spoken but were not expected to raise objections. Says Wachtell's David Katz, counsel to PPR, Gucci's white knight: "It will be one of the most interesting deals of the year. I do not think that Europe has ever seen anything quite like this transaction."
The Amsterdam Stock Exchange, which saw a market turnover in 1999 of some EUR 1.5 billion, is a sophisticated market. Shares in companies have been traded in the capital for four hundred years. Battles for corporate control have always been frowned upon. Says Paul Storm of Amsterdam's NautaDutilh: "Since the beginning of the twentieth century, Dutch companies, including Royal Dutch and Unilever, have invented a wide range of corporate devices to keep power essentially in the hands of management. In listed companies, these devices are in fact protective devices against hostile takeovers. Some of them have even been regulated in the Civil Code."
A Dutch company can create a class of priority shareholders, for example, a group that can virtually dictate the direction of the company and assure its independence. This group can select members of both the supervisory and management boards, decisions that require steep majority votes of the general shareholders to overturn. Board members can themselves own priority shares, although directors cannot own more than half of this class of stock, under the rules of the Amsterdam Stock Exchange. Similarly, if it is a legal entity such as a foundation that is the owner of the priority shares, not more than half of the foundation's directors can be members of the listed company's management board.
Priority shareholders can also be in charge of crucial corporate resolutions. The company's articles of incorporation can require that this class be the only one that can propose certain actions, or it can decree that priority shareholders have a veto over those resolutions, or both. "Such resolutions may include all the important ones--to amend the articles, to issue shares, or to distribute dividends," explains Mr. Storm.
A particularly popular defensive weapon is the so-called "receiptization" of shares, which can mean that an acquiror buys all the receipts and gets voting rights equivalent to as little as one percent of the stock. A company issues shares to a legal entity, typically a foundation, which then issues a depository receipt for each share. The foundation, known as an "administratiekantoor" or AK, exercises the voting rights of the stock and the owner of the receipt gets all the economic benefits. Receipts may or may not be convertible into company stock, although as prerequisites to listing receipts, the Amsterdam Stock Exchange requires that they can in fact be converted into stock without undue restrictions, and that the majority of voting rights on the AK's board be held by independents.
Says Mr. Storm: "Some thirty percent of all quoted Dutch companies other than investment companies have in fact depository receipts quoted rather than their shares."
Protective preference shares, known as "prefs," can be fired from a company's cannons as soon as a hostile bidder appears on the horizon. These shares yield a dividend at a fixed percentage and only 25 percent of the nominal value must be paid up immediately, but they carry the same voting rights as ordinary shares. Again, a foundation is usually the entity to which such shares are issued, and it must conform to stock exchange rules for the company to remain listed. But this is a potent weapon: "When there is a threat of a hostile bid, the competent body will issue such number of prefs as may be needed to prevent the predator from acquiring a majority of the shares," explains Mr. Storm.
The exchange does not allow a company to have more than two of these three defenses. When it decided to apply for a listing on the New York Stock Exchange, the company decided not to arm itself with any of these three defenses available to Dutch companies, fearful that U.S. investors would not find it as attractive if it did so, despite the fact that there are companies on the NYSE incorporated in the Netherlands that do have the traditional arsenal of defenses available in their corporate homeland. Before the battle was joined, Gucci had sought shareholder approval to strengthen its takeover defenses but its efforts were narrowly defeated.
Gucci had no defensive weapons whatsoever, except two.
Battle Is Joined
A week later, LVMH had 9.6 percent of Gucci stock, having snapped up the stake that Prada, another Italian house, had bought in the summer of 1998. When it filed its first 13D ten days after the calls to Gucci, LVMH held a 26.6 percent stake, with purchases of ever-larger tranches at ever-increasing prices. They ranged from 100,000 shares purchased on January 5 at $55.84, to 631,000 shares bought on January 12 at $68.87 per share. By January 25, LVMH stood looming over its target with a total of 34.4 percent. Not only did Gucci have no defenses--save the two it would use later on--but also the Netherlands does not require a full tender offer for all shares of acquirors who cross a given threshold, as is required in Britain, Italy, and France.
LVMH said publicly and privately that there would be no changes to management, and that it had no desire to take over Gucci, but it did demand three seats on Gucci's eight-person supervisory board. Gucci, alarmed at the prospect of a competitor owning so much of its stock and worried for its minority shareholders, urged LVMH to make an offer for all Gucci shares. LVMH refused. Gucci asked for a standstill agreement. By February 16 advised by Martin van Olffen of Amsterdam's De Brauw Blackstone Westbroek and Scott Simpson of Skadden's Canary Wharf office, Gucci sent over a term sheet for LVMH's approval, released the next day, which guaranteed Gucci's independence and limited LVMH's ownership stake. A letter from LVMH CEO François Arnault stated that his company would agree "to preserve the independence of Gucci's management" and that "all commercial proposals by LVMH Group companies to Gucci . . . would be accepted or rejected by Gucci on the basis of its best interest."
The very next day, Gucci issued a press release stating that it had granted an option to a foundation under its control, the Stichting Belangen Werknemers, to purchase 37 million newly issued shares. As part of this employee stock-option plan, or ESOP, Gucci said it had just--at company expense--issued to the foundation a total of 20,154,985 shares. That was the exact number of shares now owned by LVMH. At a stroke, LVMH found its 34.4 percent stake diluted to 25 percent of the company. Moreover, should LVMH increase its stake, Gucci said it would issue more stock to the ESOP on a share-per-share basis.
Because it had none of the other traditional Dutch defenses in place, this was one of the two defenses it had left to it under Dutch law. In 1995, the general meeting of shareholders had granted to the supervisory board a five-year right to issue more of its own stock to a separate legal entity under its control. The target had made a no-interest loan to the ESOP to finance the share purchase. The ESOP would get dividends on the stock but would use that money to pay down the principal, so that the ESOP would not reduce earnings per share or affect Gucci's balance sheet. They were not additional capital, but additional voting rights. Says Mr. Storm: "The stated intention of the ESOP shares was to neutralize the voting rights of LVMH's shares in Gucci."
Gucci had a rationale for its move. Its management insisted that it was always amenable to a tender offer for all shares, and was only trying to prevent an acquiror from taking it over without making such an offer. Gucci could quickly shut down the ESOP, paying a small premium to employees. Scott Simpson of Skadden's London office, advisor to the target, explained that all of the defenses would collapse in the face of a bid for all the stock. That was very important to the board of Gucci, he said, because the company wanted such a bid to remain feasible.
Gucci did not think of the ESOP or Stichting over a few days in the winter of 1999. It had in fact been examining the possibility of such a defense since the previous summer, when it suspected that Prada might be on the prowl. Gucci general counsel Alan Tuttle--who, along with Gucci CEO de Sole, had been a partner at Washington, D.C.'s Patton Boggs before joining the company--asked Skadden's Scott Simpson for advice. Simpson suggested using an ESOP. Gucci's Dutch counsel De Brauw Blackstone Westbroek examined the plan, pointing out that Dutch corporate law generally prohibits a company from financing the purchase of its own shares. However, the Netherlands firm noted, this rule did not apply to ESOPs.
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