The Sika Case Shareholder Perspectives Initial Findings and Open Questions

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1 The Sika Case Shareholder Perspectives Initial Findings and Open Questions Investors Update Banking & Finance/Capital Markets Practice Group Dr. Markus Guggenbühl, LL.M. David Weber, M.A. HSG in Law Rebecca Jeup, LL.M. Partner Associate Junior Associate

2 Topics Voting Shares Convening Extraordinary General Meeting Restriction of Transferability of Shares Opting-Out Limitation of Voting Rights Outlook 2

3 Voting Shares (1) Shareholder Structure (Status quo ante) Burkard Family 100 % Announcement of sale of SWH by Burkard Family to Compagnie de Saint- Gobain («SGO») in December RS 1 13'703 BS 2 1 registered shares 2 bearer shares Conclusion: approx. 16% of the capital corresponds to approx. 52% of the voting rights Schenker-Winkler Holding AG («SWH») Sika AG 2'330'853 RS 28'998 BS 2'333'874 RS at CHF '151'199 BS at CHF 0.60 each share confers one vote Public Shareholders 3'013 RS 2'108'498 BS 3

4 Voting Shares (2) General Rule Art. 693 Swiss Code of Obligations Para. 1 The articles of association may provide that voting rights are determined regardless of the nominal value by the number of shares belonging to each shareholder such that each share confers one vote. Para. 2 In this case, shares with a lower nominal value than other shares of the same company may be issued only as registered shares and must be fully paid in. The nominal value of the remaining shares must not exceed ten times the nominal value of the voting shares. 4

5 Voting Shares (3) Exceptions Art. 693 Swiss Code of Obligations Para. 3 The allocation of voting rights according to the number of shares is not applicable for: 1. the election of external auditors; 2. the appointment of experts for the review of the company's business management or parts thereof; 3. any resolution concerning a special audit; 4. any resolution concerning the initiation of an action for responsibility. 5

6 Convening Extraordinary General Meeting (1) Initial Situation Art. 699 Swiss Code of Obligations Para. 3 The calling of a general meeting may also be requested by one or more shareholders representing together at least 10 percent of the share capital. [ ] Para. 4 Where the board of directors fails to grant such a request within a reasonable time, the court must at the request of the applicant order that a general meeting be convened. 6

7 Convening Extraordinary General Meeting (2) Initial Situation Steps towards escalation: The majority of the Board of Directors («BoD») publicly announced its opposition towards the sale on December 8, As a consequence, on December 9, 2014, SWH requested the BoD to convene an extraordinary general meeting, with a BoD election as the main agenda item. Even after the BoD meetings of December 11, 2014, January 19 and 25, 2015 no extraordinary general meeting was convened by the BoD. The BoD announced that the voting rights of SWH shall be generally limited to 5% of the total number of outstanding registered shares. SWH went to court and requested an order that an extraordinary general meeting be convened. 7

8 Convening Extraordinary General Meeting (3) Decision of the Cantonal Court Zug of March 16, 2015 Standing of SWH confirmed The BoD s claim that SWH does not have standing to sue due to the limitation of the voting rights to 5% was denied by the court. «According to precedents set by the Swiss Federal Supreme Court, the plaintiff is not obliged to prove his shareholder status but must merely provide prima facie evidence. It follows that, according to art. 699 para. 3 and 4 CO [Swiss Code of Obligations], the judge is not obliged to finally deal with and decide the question of ownership of the shares or of a possible limitation of the voting rights in these proceedings.» SWH was entitled to request an extraordinary general meeting Because the question regarding the legitimacy of the voting rights limitation was not to be decided in this summary proceeding, the court confirmed - contrary to the argument of the BoD - that SWH was entitled to call for the meeting despite the limitation of voting rights. Court denied request The court denied the request due to the lack of urgency for an extraordinary general meeting. «On the other hand, one has to agree with the argumentation of the defendant of the request that it does not make sense to conduct an extraordinary general meeting just before the Annual General Meeting of April 14. There is no particular urgency apparent for such an extraordinary general meeting.» 8

9 Restriction of Transferability of Shares (1) Articles of Association of Sika AG Section 4 Restriction of Transferability (1) «The Board of Directors reserves the right to refuse an acquirer of registered shares as shareholder, if the number of registered shares held by him exceeds 5% of the total number of registered shares entered in the commercial register. [ ] Legal entities and partnerships with legal capacity, which are affiliated through common ownership or votes, through common control or in any similar manner, as well as natural persons or legal entities or, which act in concert in view of a circumvention of registration limitations, are regarded under these provisions as a single buyer.» 9

10 Restriction of Transferability of Shares (2) Articles of Association of Sika AG Section 4 Restriction of Transferability (2) «After consulting the party concerned, the Company may cancel the registration in the shareholder s register, if the registration is the result of false information provided by the acquirer. The acquirer must be informed of the cancellation immediately.» 10

11 Court Precedent on Restriction of Transferability (1) Decision of the Commercial Court Zurich of August 26, 2009 Interpretation of restriction of transferability clauses «The direct applicability of group terms as defined in the stock exchange legislation is therefore to be denied in the present case. The wording of the respective clause is decisive. It describes who is regarded ꞌa shareholderꞌ for the purposes of the percentage limit.» [ ] «A factual agreement of the interests, however, cannot suffice for the assumption of a circumvention. [ ] If a shareholder does not grant his substantive voting power to a third party in a legally binding way and bears the economical risk of his shareholder status alone, [ ] there is no legal reason to restrict his voting power.» 11

12 Court Precedent on Restriction of Transferability (2) Decision of the Commercial Court Zurich of August 26, 2009 Amendment of share register «If owners of shares are acknowledged as full shareholders, this decision is principally irrevocable; the decision of the acknowledgement constitutes the exercise of a unilateral right to alter a legal relationship [«Gestaltungsrecht»]. [ ] The acknowledgement as a shareholder can principally only be revoked, if it is based on false information of the acquirer. [ ] If the shareholder, however, did not provide false information and the company knew or could/ought to have known the relevant elements of fact at the time of the acknowledgement respectively the registration, a subsequent amendment based on the old, established facts is precluded.» 12

13 Opting-Out (1) Articles of Association of Sika AG Section 5 Public Tender Offer Opting-Out «An acquirer of shares of the Company is not obliged to make a public purchase offer pursuant to art. 32 and 52 of the Swiss Law on Stock Exchanges and securities trading.» 13

14 Opting-Out (2) Takeover Board («TOB») Order 594/01 of March 5, 2015 The opting-out according to section 5 of the Articles of Association of Sika AG is valid. In case of an elimination of the opting-out by Sika AG, art. 22 para. 3 SESTA (Swiss Stock Exchange and Securities Trading Act) [now art. 125 para. 3 FMIA (Financial Market Infrastructure Act)] and the TOB s practice in this respect regarding a subsequent introduction of an opting-out does not apply. Dismissal of the objection by Order 594/03 of April 1,

15 Opting-Out (3) TOB Order 598/01 of April 1, 2015 Interpretation of the opting-out clause «Contrary to the opinion of the petitioner [Bill & Melinda Gates Foundation Trust/Cascade Investment, L.L.C.] and of Sika, the transferability restriction clause and the opting-out clause can and must be considered separately, in fact both substantially and procedurally.» «According to the prevailing doctrine, articles of association of public companies are principally to be interpreted in the same manner as laws. [ ] It is only to be deviated from a clear wording as an exception, for instance if there are compelling reasons that the wording does not correspond to the true meaning of the clause.» «The [ ] understanding of the petitioner and of Sika, which narrow the target group to the members of the Schenker-Winkler-Family respectively today to the Burkard siblings and therefore want to interpret the optingout as a selective one, is simply not compatible with the clear wording.» 15

16 Opting-Out (4) TOB Order 598/01 of April 1, 2015 Abuse of Law? «With respect to the execution of the transaction Saint-Gobain refers to the opting-out and thereby asserts the true purpose thereof: The general suspension of the rules for mandatory tender offers. [ ] No abuse can be seen in this behavior, Saint-Gobain simply makes use of the legally designated consequences of the opting-out.» «Ultimately, Saint-Gobain is also not acting contradictory by invoking the opting-out clause as an acquirer and at the same time, in view of a possible application of the transferability restriction clause, denying to be an acquirer. No contradiction can be seen in such a behavior at least with regard to the opting-out respectively the assertion thereof.» 16

17 Opting-Out (5) Opting-Out Clause is valid Sika AG and the shareholder group Bill & Melinda Gates Foundation Trust/Cascade Investment, L.L.C. appealed to the Swiss Financial Market Supervisory Authority («FINMA») against the Order of the TOB. FINMA confirmed the TOB s decision that the opting-out clause was valid and dismissed the appeal with its Order of May 4, The further appeal by the shareholder group Bill & Melinda Gates Foundation Trust/Cascade Investment, L.L.C. to the Federal Administrative Court was unsuccessful as it confirmed FINMA s Order and dismissed the appeal with its final decision of August 27,

18 Opting-Out (6) Opting-Out Clause is valid Decision of the Federal Administrative Court of August 27, 2015 «[ ] art. 5 of the Articles of Association does not even need to be construed. Its wording is clear and unambiguous and meets its presented purpose. [ ] Accordingly, the Claimants are not able to derive anything in their favor from the restriction of transferability clause according to section 4 of the Articles of Association of Sika. It is not directly related to the opting-out clause.» 18

19 Limitation of Voting Rights (1) Annual General Meeting of April 14, 2015 Limitation of voting rights Deviating from its initial announcement, the BoD did not limit SWH s voting rights on all agenda items which were to be voted on at the Annual General Meeting, but rather only on those which would advance the envisaged transaction with SGO. Application for preliminary measures by SWH SWH sought preliminary measures from the court to prevent a limitation of their voting rights at the Annual General Meeting. Preliminary measures were not granted by the Cantonal Court Zug with the decision of March 20, The appeal to the Superior Court of the Canton Zug was dismissed on June 10,

20 Limitation of Voting Rights (2) Annual General Meeting of April 14, 2015 Application for preliminary measures by SWH Reasoning of the Superior Court of the Canton Zug: The court found that if, as requested, Sika was prohibited from limiting the voting rights as a precautionary measure, the transfer to SGO would be possible before the legitimacy of the limitation is decided on in an ordinary proceeding. The integration of Sika into the group could hardly be reversed. The legal position of Sika would thereby also be prejudiced in case of an outcome in their interest in the ordinary proceeding. This disadvantage substantially outweighs the disadvantage occurring to SWH of a temporary impossibility to execute the contract with SGO. The question of whether the voting rights limitation is lawful is, therefore, to be decided in an ordinary proceeding. 20

21 Limitation of Voting Rights (3) Annual General Meeting of April 14, 2015 Consequences of limited voting rights for BoD election Election of BoD: All current members were re-elected. SWH s voting rights were limited for the election of seven of the nine members. Their full voting rights were only granted with regard to the election of two members who are close to SWH. Election of new member proposed by SWH: The candidate was turned down due to the limitation of voting rights of SWH. Opting-out clause stays The removal of the opting-out clause (requested by Ethos foundation and several pension funds) was not approved. Request of Special Audit and Appointment of Special Experts The proposal by the shareholder group Cascade/Bill & Melinda Gates Foundation Trust/Fidelity/Threadneedle requesting a Special Audit and the Appointment of Special Experts was approved. Extraordinary General Meeting approved SWH requested an extraordinary general meeting to be held on July 24,

22 Limitation of Voting Rights (4) Extraordinary General Meeting of July 24, 2015 SWH s voting rights were again limited by the BoD. The replacement of the BoD requested by SWH was once again rejected. Annual General Meeting of April 12, Status quo The voting rights of SWH were once more limited by the BoD with regard to agenda items which would advance the acquisition by SGO. SWH s proposal for a new member to be elected to the BoD was rejected. 22

23 Limitation of Voting Rights (5) Lawsuits filed by SWH regarding resolutions SWH challenged the resolutions of the Annual General Meeting of April 14, 2015 as well as the Extraordinary General Meeting of July 24, 2015 before the Cantonal Court Zug. SWH is requesting the annulment of the resolutions due to violation of their voting rights. The court will have to decide on the question of whether the voting rights limitation was lawful. 23

24 Outlook It is now upon the court to decide on the voting rights limitation. If the court deems it unlawful, all resolutions passed under the voting rights limitation will be annulled. If the court holds that the limitation was lawful, the acquisition by SGO is likely to fail. A first instance decision by the Cantonal Court Zug is expected in summer/fall As an appeal will be likely, the acquisition may stay blocked for the near future. 24

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