The common perception is that after the Sarbanes-Oxley Act of 2002 it has become exceedingly difficult for foreign companies to list their securities in the United States. For reasons that are not obvious, our recent experience suggests otherwise. Thus, although stock-for-stock cross-border mergers have been decidedly out of vogue of late, we predict an up-tick in such activity. This article describes an innovative approach to a complex stock-for-stock cross-border merger to illustrate the viability and increasing vitality of such deals in the market.
Sarbanes-Oxley and the new rules at both the New York Stock Exchange (NYSE) and NASDAQ have made it more burdensome for foreign companies to publicly list their securities in the United States. Various studies have indicated the additional expense per year in compliance costs is at least approximately U.S. $1 million. The benefits of being listed in the United States, which include access to additional capital and a readily available acquisition currency, as well as the additional potential that may be derived from the perception that the corporate governance procedures of such companies are better than those of non-listed companies, not to mention the benefits that such transparency brings, however, far outweigh these additional costs. For technology companies in particular, it would appear that for various reasons, those that are publicly traded in the United States usually obtain higher valuation multiples than those that are not traded in the United States.
In order to integrate foreign companies that currently operate under foreign laws into the U.S. securities laws, the U.S. Congress provided certain exemptions from Sarbanes-Oxley to foreign private issuers, defined as any foreign issuer other than a foreign government. These exemptions apply to: (1) independence requirements for directors who are members of the audit committee or executive board of such company; (2) CEO and CFO certifications and (3) internal control procedures. The NYSE and NASDAQ followed suit and allow for exemptions with respect to certain requirements related to: (1) distribution of annual and interim reports (allowing issuer to make reports available for inspection by shareholders at the company instead of distributing them to all shareholders); (2) independence of directors and certain key committees (audit, nominating/corporate governance and compensation), as well as written charters for such committees; (3) rules regarding quorum based on shares cast rather than shares outstanding; (4) solicitation of proxies; and (5) shareholder approval for certain transactions.
We recently represented Aixtron AG (Aixtron), a leading provider of equipment for the compound semiconductor industry that offers its products to a diverse range of customers worldwide to manufacture advanced semiconductor components, in its $143 million stock-for-stock cross-border merger with Genus, Inc. (Genus), a publicly traded manufacturer of critical deposition processing products for the global semiconductor and data storage industries, and in its concurrent listing of its American depository shares (ADS) on NASDAQ. Our client’s ordinary shares already traded on various markets in Germany, primarily the Deutsche Boerse, but our client did not previously have any of its securities publicly traded in the United States.
In many ways, this was an excellent case of first impression for the Securities and Exchange Commission (SEC), NASDAQ and the Deutsche Boerse in that our client has long been at the forefront of good corporate governance practices in Germany. Our client complies with the requisite provisions of the German Corporate Governance Code, as amended on May 21, 2003, and makes the code available on its website. In particular, our examiners at the SEC, NASDAQ and the Deutsche Boerse throughout the registration process went out of their way to assist us on numerous occasions given the exceptional structural requirements of the transaction. For example, the SEC granted us the ability to confidentially submit our drafts of the registration statement on Form F-4 because of our client’s status as a first-time foreign private issuer. The SEC allowed us to redact commercially sensitive portions of our client’s material contracts as well as its responses to the SEC’s comment letters. And finally, the SEC was willing to work with us to accommodate what became an extremely aggressive timeframe, which resulted in part from the need for our client to restate some of its financial results at the busiest time of the year for the SEC.
NASDAQ was equally accommodating in making sure our client’s transition to listing in the United States was a smooth one. For example, NASDAQ allowed our client’s securities initially to be traded on a “when-issued” basis to avoid a gap in trading of a few days. The merger of our client and the U.S. corporation became effective on March 10, 2005. On that same day the share exchange between Aixtron and Genus took place and the shares of the U.S. corporation ceased trading on NASDAQ upon filing of a Form 15 with the SEC. Our client’s American depositary shares commenced trading on NASDAQ on March 11, 2005; however, our client’s underlying ordinary shares were not issued until they were able to be registered with the German local court, on March 15, 2005. NASDAQ allowed the ADSs to be traded on a “when-issued” basis between March 11 and March 15, 2005. Commencing on March 15, 2005, the ADSs started trading on a regular basis, i.e., T+3 settlement. NASDAQ also undertook great efforts to ensure its review coincided with our timing, particularly toward the end of the process when, for the reasons described above, the time frame became very tight.
The German stock exchange needed to be involved because the additional ordinary shares underlying the ADSs now trading on NASDAQ had to be admitted for trading on that exchange. The crucial issue, again, was timing. In order to submit the listing application with financial results from September 30, 2004, we needed to do so before those results went stale. The German stock exchange allowed us to submit our client’s application later than usual but made clear that if we were to submit too late, we would be required to include year-end financial results, which would have delayed the process by at least a week and thrown the process in the U.S. into disarray.
The structure we used in this transaction involved a trust company rather than the holding company structure used in the much publicized Daimler-Chrysler transaction of a few years ago. Under our structure, a trust company acted as an accommodation agent by forming a merger subsidiary that was merged with and into the target company. In a second step, the shares of the surviving company in that merger were contributed to the capital of the German buyer who issued new ordinary shares admitted for trading on the Frankfurt Stock Exchange and in the form of ADSs on NASDAQ. The trust company also acted as exchange agent effecting the share exchange of the target shares for the newly registered ADSs. Under the holding company structure, the shareholders of the buyer would have had to exchange their shares for shares of the newly formed holding company which in turn would have acquired the U.S. target company by way of capital increase. While this structure would have minimized the risk of shareholder contestation suits, it would have been particularly difficult to implement due to a change in German law after the Daimler-Chrysler transaction that would have required the shares of the holding company to have had a trading history, i.e., that they had been publicly traded.
In our transaction, our client appointed JPMorgan Chase Bank, N.A. to act as the depositary, to effect the ADS program, and as exchange agent, to effect the exchange of shares between the U.S. corporation and our client. A corporation, whose shares were owned by JPMorgan as the contribution agent, was created for the sole purpose of merging with and into the U.S. corporation.
JPMorgan exchanged the shares of the U.S. corporation after the merger of the newly formed corporation with and into it for our client’s ADSs. Each common share of the U.S. corporation issued and outstanding prior to the merger with the corporation formed by JPMorgan was canceled and converted into the right to receive 0.51 ADSs of our client. This structure worked in our situation because JPMorgan, as exchange agent and contribution agent for the former shareholders of the U.S. corporation, would own less than 30 percent of our client after the merger. Under German law, in the event that JPMorgan owned 30 percent or more of our client’s shares, JPMorgan would have been required to make an offer for all of our client – a result that was not desired by JPMorgan or our client.
It is most efficient for a foreign private issuer engaging in an acquisition of a U.S. publicly traded company to use one firm for all of its M&A, securities and other legal needs in both jurisdictions to make the transition to listing its securities in the U.S. as seamless as possible. The lawyers in such firm’s domestic and foreign offices need to bring expertise and knowledge of their respective jurisdictions to the table to ensure timely disclosure of relevant public information in both countries. This is particularly important because the drafting of the U.S. registration statement occurs simultaneously with the drafting of the other jurisdiction’s listing prospectus. For obvious reasons, not the least of which is avoiding shareholder lawsuits, it was critical for the information distributed to the U.S. corporation’s shareholders and our client’s shareholders in Germany to be as similar as possible, despite the fact that such information needed to conform to two different underlying sets of laws – those of the U.S. and Germany, and in no event could the information in such documents be contradictory.
An abbreviated version of this article was published by The Deal on August 8, 2005.
Thomas Sauermilch, Konstantin Guenther and Jeffrey L. Rothschild, represented Aixtron in this transaction. They would like to thank Richard Mitchell, Robert Manger and Sonya Ahuja, who also represented Aixtron, for their assistance in drafting this article.