“Equitable Price” in a Tender Offer

The Tender Offers

This case relates to a tender offer (OPA) for the shares of Atanor S.A. (“Atanor”). Atanor is an Argentine corporation whose shares were offered to the public and listed in the Buenos Aires Stock Exchange.

DA International, owner of 66.40% of the corporate capital of Atanor, launched a tender offer (OPA) at the end of the year 2003 for the acquisition of 33.60% of the corporate capital that was held by the public. The price offered in the initial tender offer was of AR$ 7 per share. In the bid, DA International stated that in the event that the tender offer were successful, it would “go private” and delist Atanor shares from the stock exchange.

The Board of Directors of Atanor hired the consulting firm INFUPA S.A. to make a valuation, and INFUPA determined that the price of AR$ 7 per share was a reasonable price.

The initial tender offer was successful and resulted in DA International increasing its shareholding to 98.302% of the corporate capital, while 1.698% continued to be held by public holders that did not accept the tender offer. 

Atanor called a shareholders´ meeting which was held on March 2004 that resolved to “go private” and delist the Atanor shares. Accordingly, and pursuant to Section 31 of Decree 677/01, Atanor launched a tender offer under which the holders of 1.698% of the capital stock were mandatorily required to sell their shares to Atanor. This process is also referred to as a “squeeze out”. The price in the second tender offer was of AR$ 7.06 per share, a value that INFUPA S.A determined to be a reasonable price.

When minority shareholders were informed of the abovementioned tender offer, one of them, Guillermo M. Ruberto, filed a claim before the Arbitration Tribunal of the Buenos Aires Stock Exchange (the “Arbitration Tribunal”) objecting said price under the terms of section 30 of Decree 677/01, as he considered that the price tendered was not an “equitable price” as defined under paragraph d, section 32 of Decree 677/01.  Mr. Ruberto claimed the higher price of AR$ 35.32 per share.

Award of the Arbitration Tribunal:

The award resolved by a majority vote of the Arbitration Tribunal provided that the “equitable price” was AR$ 10.935 per share.

As part of the arbitration evidence, an expert accountant was appointed who determined that the equitable price was AR$ 7.97 per share. The majority vote stated that the arbitrators had considered the opinion of the accountant expert, but such opinion was not binding on the tribunal as paragraph d, section 32 of Decree 677/01 authorized them to apply criteria other than the criteria provided under such law.

The Arbitration Tribunal concluded that the “equitable price” was AR$ 10.935 per share based on: (a) the book value resulting from the general balance sheet as of 12/21/03 (AR$ 4.61); plus (b) the share value resulting from the difference –not considered by the parties- between the book value and the values determined in the insurance policies for machinery, equipment, buildings, improvements and content, as these values could be considered closer to the actual value of the assets (AR$ 4.5025); plus (c) a 20% “equitable increase” (calculated on the prior sum of AR$ 9.1125), taking into account the macro and microeconomic circumstances existing on March 2004.  

The arbitration tribunal also weighed, among others, the following factors: (a) that Atanor did not make easily available certain valuation elements, such as its business plan and projection forecasts; (b) the broad acceptance of the first tender offer bid (OPA) launched by DA International at AR$ 7 per share, which was accepted by the minority shareholders who held 31.84% of the capital stock (compared to a potential maximum of 33.60%), (c) the generalized acceptance of the mandatory tender offer made by Atanor at AR$ 7.06, which was accepted by shareholders holding 755,851 shares and was objected only by Mr. Ruberto, holder of 178,600 shares; and (d) that the “Comisión Nacional de Valores” (Argentine Securities Exchange Commission, hereinafter “CNV”) did not object the price tendered, although it has powers to do so under section 32 of Decree 677/01.

Both parties appealed the award.

Judgment pronounced by Panel D of the Commercial Court of Appeals:

In the judgment rendered on October 3, 2007, Panel D of the Commercial Court of Appeals finally ruled that the “equitable price”, pursuant to paragraph d., section 32 of Decree 677/01 was AR$ 7.97 per share, plus a 1% increase.

Judge Pablo Heredia made an exhaustive and profound analysis of the interpretation of the term “equitable price” under applicable legislation. This judgment constitutes a “leading case” in this subject.

Judge Heredia considered that “equitable price” is a concept equivalent to “fair price”, although in the particular case of a mandatory tender offer the “equitable price” must be determined in accordance with the parameters provided under paragraph d. of section 32 of Decree 677/01, which provides:

“SECTION 32. — Conditions. The [mandatory] tender offer […] shall be made pursuant to the following terms and conditions: […]

d) The price tendered shall be an equitable price, which may be determined among other acceptable considerations according to the following criteria:  

I) Book value of the shares as determined by a special balance sheet prepared for the purpose of delisting the shares.

II) Company’s value according to the discounted cash flow method and/or indicators applicable to similar companies or businesses.

III) Liquidation value of the company.

IV) Average market price of the stock during the semester prior to the agreement to file a delisting application, regardless of the number of days in which these were traded.

V) Price of the consideration offered before or for the placement of new shares, in the event a prior tender offer bid had been launched for the same shares or if new shares had been issued, as the case may be, during the last year, as from the date of the stock delisting agreement. [1]

These criteria shall be taken into account either jointly or separately and their relevance shall be justified at the time of launching the tender offer and will be included, duly grounded, in the bid prospectus. In all cases, the opinion of the board of directors, the statutory auditors and of the auditing committee of the company shall be required. The price tendered shall not be lower than that resulting from the application of the standard stipulated in paragraph IV above.  

The “COMISION NACIONAL DE VALORES” shall be entitled to object the price tendered if it deems that said price is not equitable. If no objection is filed, this will not preclude shareholders from exercising their right to object said price before the judicial courts or arbitral tribunals. Objections to the price tendered shall be governed by section 30 [of Decree 677/01]. As for the purposes of this Decree, the COMISIÓN NACIONAL DE VALORES shall take into special consideration the decision-making process used for determining the price tendered, especially, the prior information and the grounds for such decision, as well as whether the opinion of an independent specialized assessment company has been requested and whether the favorable opinions of the auditing committee and statutory auditors have been obtained.   In the event the price is objected by the COMISION NACIONAL DE VALORES, the company or its controlling company will be able to resort to the procedure established in section 30 of this Decree.”

The following is a brief synopsis of the considerations made by Judge Heredia in his vote:

1) The arbitrators stated in the award that it was a de iure arbitration, and none of the parties challenged such statement.[2]

2) The appraisal rights (derecho de receso) provided by Section 245 of the Argentine Companies Law and Section 32 of Decree 677/01 both pursue the purpose of providing a reimbursement to the retiring shareholder for the value of his/her shares as compensation for the loss of liquidity and marketability of the shares resulting from the “going private” transaction and delisting from the stock exchange. However, paragraph d., section 32 of Decree 677/01 establishes specific standards that must be applied in this case and which supersede those provided in the Argentine Companies Law.[3]

3) When referring to “equitable price”, Decree 677/01 intends that the legal concept of “equity” must be applied as a guideline to determine such price.

4) The wording of paragraph d., section 32 does not expressly provide that the price should result from all or some of the criteria listed in said section, or that such criteria are the only applicable, with the exception of the average market price of the stock during the semester prior to the launching of the tender offer (paragraph IV) which in all cases shall be the floor of the bid price.

5) Even when paragraph “d” of Section 32 must not be rigidly interpreted, and different criteria from those mentioned in said section could be applied, such variation must be grounded through an explanation justifying why such different criteria leads to a fairer result or demonstrating why none of the criteria specifically provided by the regulation is useful to determine the “equitable price” in that particular case.

6) The price determined by the expert accountant (AR$ 7.97) was calculated pursuant to the discounted cash flow method, which is expressly provided under paragraph d., section 32, and which was considered by the expert as the most appropriate method from a technical point of view. The arbitrators decided not to apply the value resulting from the expert accountant´s report and they considered that the discounted cash flow method was not applicable, but they did not give reasonable justifications for such decision. The only ground for their deviation from the expert´s opinion was based on press articles describing the general economic situation, which were not even submitted as evidence. They did not apply any of the other criteria established in paragraph d., section 32 of Decree 677/01 either.  Due to the excellent work done by the expert, his report should have been granted high evidentiary value and his conclusions should have been followed, especially in these kinds of matters where the technical nature of the valuation exceeds the knowledge of judges and/or arbitrators. When the expert´s report is grounded on irrefutable technical principles and there is no other convincing evidence that could rebut it, its conclusions should be applied in view of the impossibility of introducing better scientific arguments.  

7) The high level of voluntary acceptance of both tender offers should have been considered as an indicator that the market had perceived the “fairness” of the price tendered during both tender offer bids and, accordingly, as a guideline to be followed regarding economic terms, but the award failed to do so. Moreover, the prices tendered at both tender offer bids, that is, AR$ 7.00 and AR$ 7.06 per share, respectively, are closer to the AR$ 7.97 value determined in the expert´s report than the AR$ 9.1125 awarded by the arbitration tribunal (without considering the 20% adjustment).  

8) The absence of any objection to the price by the CNV must also be taken into account, as said entity is specifically authorized to object the price tendered in the event it considers such price is not equitable (Section 32, para.d.)

9) The “control premium” must be considered when defining the “equitable price”. However, the 20% increase that the arbitrators awarded based on the incidence of the macroeconomic conditions on the determination of the price of Atanor shares is inadmissible due to the excessive generality, vagueness and lack of logical analysis of the explanation and justification of said consideration. Judge Heredia considered that a 1% control premium should apply instead, although he did not base such determination on specific grounds other than equity, which would authorize to “adapt the irregularities of the case and even to adapt it in the event of silence…”