Communication no. 0685312 of 15 July 2020

SUBJECT: Query on the applicability of the rules on the appeal to public savings to a non-proportional partial demerger with an asymmetric option

1. Introduction

Reference is made to the note sent to Consob on 3 June 2020 with which these Law Firms, [... omitted...], have submitted to the attention of the Commission a query (the "Query") concerning the applicability of the rules on the offer of securities to the public to a non-proportional partial spin-off of certain assets and liabilities of "X" in favour of "Y" (the "Demerger"), outlined in the terms described below.

2. The Query

2.1 According to the Query, the proposed Demerger transaction would concern a business branch of X consisting of: (i) assets of X and (ii) liabilities of X. Based on the envisaged terms, the Demerger should be implemented by assigning to Y the business branch with the simultaneous attribution to the shareholders of X of newly issued special class shares of Y (the "B Shares") to an extent not proportional to the shareholding held by the latter in X. In particular, it is envisaged the assignment [to the controlling shareholder Z, ed] of a share of B Shares more than proportional to the holding held by the same in X and, consequently, the assignment to the minority shareholders of X of a share of B Shares less than proportional to the holding held by the latter in X.

B Shares will be without voting rights[1] and, like existing Y common shares, will not be traded on any regulated market or MTF.

According to the Query, the Demerger is expected to involve:

(i) on the side of the Company Demerger X, a reduction in the share capital to be implemented by the cancellation of ordinary shares; and

(ii) on the side of the Beneficiary company, Y, a capital increase through the issue of B Shares.

Since this is a non-proportional demerger pursuant to art. 2506-bis, paragraph 4, of the Italian Civil Code, the transaction will provide for a non-proportional distribution of the B Shares to the shareholders of X: in particular, it has been assumed that the controlling shareholder Z will be assigned 90% of the newly issued B Shares, while the other shareholders of X the remaining 10%. for the reduction of the capital ordinary X to be annulled because of the Demerger; the remaining 10% of the shares to be cancelled will instead be distributed on the shares owned by the shareholders other than the controlling shareholder Z.

As reported in the Query, "as an integral part of the project submitted to the shareholders' meetings", a form of asymmetric mechanism has been defined, with the right for the shareholders of X other than the current majority shareholder of X (i.e., other than the controlling shareholder Z) not to be assignees of 10% of the B Shares, with consequent further increase of their holding (in percentage terms) in X (cd. "Asymmetric Option")[2].

Shareholders other than the controlling shareholder Z who exercise the Asymmetric Option: (i) will not be assigned B Shares; and (ii) no X shares owned by them will be cancelled.

Consequently, the exercise of the Asymmetric Option will entail, always based on the same Exchange Ratio:

(a) the increase in B Shares to be assigned to the controlling shareholder Z (in number equal to those that would have been assigned to the minority shareholders of X if they had not exercised the Asymmetric Option); and

(b) the consequent increase in the X ordinary shares owned by the controlling shareholder Z to be cancelled (in number equal to those that would have been cancelled to the minority shareholders of X if they had not exercised the Asymmetric Option).

In the Query it is specified that the Asymmetric Option does not entail any alteration of the Exchange Ratio, affecting only the allocation ratio[3] as it "affects only the proportion between the distribution to shareholders X of the B Shares and the X shares to be cancelled and, consequently, on the relations between the shareholders respectively in X and Y after the Demerger,  on the basis of the Demerger Project and the Exchange Ratio approved by the shareholders' meetings."

2.2 Regarding the operation described above, these Law Firms have requested that the Commission issues an opinion confirming that (the "Query"):

(i) "the consolidated Consob guideline continues to apply to the Demerger, according to which the assignment of shares in the context of mergers or demergers does not in itself constitute a "public offer" (...)";

(ii) "the legislation related to the offer to the public of subscription and sale of which Articles.93-bis of the TUF and Regulation (EU) 2017/1129 and / or takeover or exchange offers pursuant to Articles. 101-bis et seq. of the TUF does not apply to the Asymmetric Option". 

2.3 The Query claims that the discipline on the appeal to public savings and, consequently, the obligation to request the approval of an offer prospectus pursuant to art. 94 of Legislative Decree no. 58/1998 ("TUF") or an offer document pursuant to art. 101 ss. of the TUF are not applicable to the proposed transaction based on several reasons.

In summary, the Query argues that:

• the demerger transaction, even if not proportional, is relevant to consider applicable the Q&A published by Consob in the Communication DIE/DCG/0089130 of 13 November 2013 according to which: "the current definition of the offer to the public of financial instruments assumes that the individual investor is called upon to take an independent investment decision. (…). Therefore, an offer to the public is not configurable in the presence of transactions which, although having as their object the subscription of financial products, do not allow the subscriber to accept the proposal individually, as they provide that it is accomplished with the approval of the same by a part of the recipients and that, if certain majorities are reached, it is binding on all the recipients of the proposal itself, even if absent or dissenting";
• with specific regard to the Asymmetric Option, in pointing out that the non-proportionality and the provision of the Asymmetric Option are structural, substantial and integral elements of the Demerger subject to approval at the Shareholders' Meeting, the Law Firms underline that (i) the only newly issued instruments are Class B shares issued [by Y] as an exchange for the Demerger; (ii) concerning the possible application of the legislation on public exchange offers, the Asymmetric Option "does not introduce further elements of exchange but involves – from the point of view of the individual shareholder X who exercises it – the 'neutralization' of the exchange and, having regard to the shareholding of X as a whole, affects the criterion for the distribution of B Shares among shareholders X " and, constituting an integral part of the Demerger, does not entail any change in the exchange ratio approved by the shareholders' meetings nor does it introduce further or different economic/valuation profiles with respect to what shareholder X will already have to consider for the purposes of the Demerger to be approved at the shareholders' meeting.

In addition, in the Query it is noted that:

(i) the Demerger always entails - therefore not taking into account the Asymmetric Option - a dilutive effect of the controlling shareholder Z in the shareholding of X and an increase in the shareholding in X of shareholders other than the controlling shareholder Z by virtue of the non-proportional nature of the Demerger;

(ii) the exercise of the Asymmetric Option does not involve any type of contribution or pricing by the shareholder, nor an increase in the number of shares X owned by the person who exercises it (the issue of new shares by X being excluded);

(iii) the decision of the shareholder in the exercise of the Asymmetric Option is not dissimilar to that provided for in the exercise of the right of withdrawal or the right of sale, provided for pursuant to Articles. 2506-bis and 2437 of the Civil Code, or the right of option and pre-emption referred to in art. 2437-quarter of the Civil Code.

3. Analysis of the Query

3.1 Regarding whether the discipline of the appeal to the public savings, in its two distinct profiles of the offer to the public of subscription (art. 94 ff. TUF and EU Regulation no. 1129/2017) and of the public offer for the purchase and exchange (articles 101-bis ff. TUF) can be applicable to the corporate transaction described in the Query, the following considerations are submitted.

As a preliminary remark, it is noted that, in the present case, both the non-proportional allocation to the shareholders of X of the Y’s shares (the beneficiary company of the Demerger) and the provision of the right, for minority shareholders only, to waive this assignment, constitute structural elements of the specific, unitary, demerger transaction described in the query, [... omitted...]. In particular, the provision of the so-called "Asymmetric Option" in the context of the extraordinary transaction, would allow the minority X’s shareholders to maintain their original investment in the listed company, avoiding the purchase of shares of vehicle Y, which, moreover, would not be traded on a regulated market.

It is clear the transaction involves an assignment of securities that arises from the shareholders’ approval of a resolution, which is binding also on any absentees or dissenters if certain majorities are reached. The assignment of Y’s shares [B Shares, ed] deriving from the Demerger, according to the proportions set out by the Exchange Ratio, is based solely on the resolution taken at the shareholders' meeting. From this perspective, the allocation of securities to X's shareholders has the typical characteristics of consent solicitation.  

Having said that, it is considered that neither the asymmetric Option nor the Demerger integrate the conditions for the application of the discipline of the offer to the public relevant for the purposes of the prospectus obligation pursuant to EU Regulation no. 1129/2017, nor of the relevant exchange offer pursuant to art. 101-bis of the TUF.

3.2. With reference to the legislation on the public offer of subscription/sale, it worth noting that, in the present case, the subscription and/or purchase of new securities is completely missing, the decision of which the public offer should be oriented on the basis of its own regulatory definition (see both Art. 1, para. 1, letter t), of the TUF and Art. 1, para. 1, let. d) EU Regulation no. 1129/2017, according to which a 'public offer of securities' means a communication addressed to persons, in any form and by any means, which contains sufficient information on the terms of the offer and the securities offered to enable an investor to decide to buy or subscribe for such securities [...]" [ed., underscore added].

In this regard, an examination of the transaction that X and Y will submit to their shareholders' meetings leads to the exclusion that the shareholder is called to decide on a new investment. The demerger does not contain those elements characteristic of a public subscription offer, such as the presence of a security to be subscribed and the payment of consideration.

In particular, X does not issue new securities but cancels securities already issued according to the proportions established in the Exchange Ratio against newly issued class B securities assignment. The latter, as mentioned above, follows only from the resolution of the shareholders' meeting. Even the envisaged right not to receive Y's newly issued shares, recognized in the Demerger plan for the benefit of minority shareholders only, does not involve any investment in new securities.

In addition, the shareholder of X is not liable to pay a consideration either for the assignment of Y shares or in the event of the exercise of the Asymmetric Option; in particular, regarding the shareholder of X other than the controlling shareholder Z, the latter obtains an increase in the percentage share of its shareholding in relation to the share capital of X following the cancellation of shares of the controlling partner Z.

In essence, the approval of the Demerger resolution will entail for the shareholder other than the controlling shareholder Z either i) the assignment of Y shares, for an amount not proportionate to the controlling shareholder Z according to the allocation and the Exchange Ratio defined in the demerger plan approved at the Shareholders' Meeting,  or, (ii)  in the event that it makes use of the Asymmetric Option, the maintenance of its original shareholding in the listed issuer, which will correspond to a different "weight" on the share capital, reduced following the maximum cancellation of shares X owned by the controlling shareholder Z. Both situations described above derive solely from the exercise of the vote at the Shareholders' Meeting and the following maximum dilution of the shareholder [... omitted...] majority in the society being divided.

Therefore, from the overall examination and from what is represented in the Query, there are no elements of a solicitation to invest.

3.3 The same considerations set out above also apply with reference to the assessment of whether, in the present case, the conditions of the public purchase/exchange offer, the concept of which is contained in Article 1, paragraph 1, let.  (v), of the TUF[4] apply.

Recalling what is represented in the previous paragraphs regarding the structural elements of the transaction and the recurrence of consent solicitation, in fact, it emerges that at no time during the proposed transaction, materially and / or legally, any exchange of securities is achieved. On the other hand, there is only one transaction, the Demerger, which has the effect of exchanging shares and, therefore, the assignment to the shareholders of the company being divided X of the newly issued special category B shares.

Even in the present case, therefore, the shareholder expresses his choice through voting at the shareholders' meeting, based on an extensive and detailed information set according to the applicable provisions. The shareholders' decision on the demerger binds all shareholders, even those who may be absent or dissenting, and the assignment of B shares in exchange to shareholders X operates as a mere effect of the signing of the deed of demerger following the approval of the shareholders' meeting. [5]

That allocation is therefore not the result of an individual choice by the shareholder to take up an offer to exchange securities, nor does the assignment of B shares constitute any consideration, in the form of securities, of a public offer but constitutes the mere effect of the assignment of part of the assets of the company being divided to a beneficiary company. Therefore, the considerations already expressed in general regarding the recurrence of consent solicitation must be reiterated also in this case.

Likewise, with reference to the provision of the Asymmetric Option, it emerges that there is no exchange of securities. The Demerger provides, as an integral element of the transaction, that shareholders X other than controlling shareholder Z may exercise an option whereby they (i) would not receive Y shares and (ii) would see their shareholding in X increase proportionately only as a percentage of the total share capital and without being assigned new X shares.

Therefore, the possible exercise of the Asymmetric Option by the minority shareholders of X could, in fact, affect only the distribution criterion of Y shares among the original shareholders of X. Accordingly, the provision of this option - it is reemphasized, an integral element of the transaction as a whole - does not change the nature of the concerned transaction: the option in question is simply one of the decision-making elements of the demerger on which, like the other decision-making elements thereof such as, for example, the right of withdrawal and the right of sale, extensive information must be guaranteed both in the pre-shareholders' meeting documentation and in that one provided by the applicable regulation on related parties transactions.

4. Conclusion

In view of the above, the Demerger, in all its components, does not fall within the scope of the rules on subscription offers and exchange offers to the public.

Without prejudice to the above considerations, we draw your attention to the need that the shareholders called to decide on the complex Demerger transaction have an adequate set of information for the conscious exercise of their vote at the Shareholders' Meeting. In this regard, the applicable provisions on disclosure of information to shareholders shall be fully complied with.

Finally, it is understood that any further information, modification, integration that may occur in the execution of the Demerger, with respect to what is represented in the Query, shall be provided to us for any further assessment.

THE PRESIDENT
Paolo Savona