NYSE and Deutsche Borse: New York not home, so merger far from home-free
Feb. 18 (Westlaw Business) The much-ballyhooed merger of the parent company of the New York Stock Exchange with that of German exchange Deutsche Borse makes two things clear – if they can make it through the thicket of global regulatory approvals and similarly convince their shareholders to tender into the offer, they’re home free. The just-filed agreement and related corporate governance documents make equally clear that “home” will not really be New York, and the NYSE Euronext will be the New York Stock Exchange no more. This may make regulatory approval that much more difficult, with U.S. regulators in particular looking at issues from antitrust to financial markets, to national security.
Getting this far could not have been easy, given both the operations, politics and sheer complexity involved. Little surprise that leading law firms led the way. NYSE Euronext was counseled by Wachtell Lipton of New York, led by David Karp and David Lam. Deutsche Borse was guided by Linklaters (in both Germany and the Netherlands), with principal leadership by Ralph Wollburg and Nikolaos Paschos.
For such a blockbuster merger, it may surprise some to see the nearly-routine nature of the agreement that was just filed. Among the terms:
— Bi-directional breakup fees of 250 million euros, payable by each of Deutsche Borse and NYSE Euronext, in certain circumstances
— Shareholder approvals (of 75% for the German entity and over 50% for the NYSE)
— a “No-Shop” clause, also contemplating Superior Proposals for either party
— The merger is, in effect, a series of offers and restructurings and potential squeeze-outs. It is to be accompanied by a slew of prospectuses, proxy statements and other documents to be filed with multiple financial regulators, among them AFM of the Netherlands, BaFin of Germany, and the SEC of the U.S.. The end result is to be a new Dutch holding company with shares triple-listed on the New York Stock Exchange, the Frankfurt Stock Exchange and Euronext Paris.
“NEARLY ROUTINE,” WITH EXCEPTIONS
The operative term in the preceding paragraph , however, is “nearly-routine” – and the exceptions are notable, with three in particular leaping to the front of the pack. If nothing more, these will require a degree of stamina and stick-to-it’iveness seldom seen. These will be necessary in order to keep the parties committed and engaged throughout a difficult few months. The first of the issues could be the handling of material adverse effect. While defined somewhat blandly, it is explicitly left to the judgment of a third-party independent expert.
Second, in what can only be termed a merger arb’s worst nightmare, are a staggering range of regulatory approvals required from multiple global regulators. The regulators involved include not only competition agencies, but also securities regulators throughout Europe and the United States. This list spans not only the SEC, Germany’s BaFin and the Monetary Authority of Singapore, but also a list of stock exchange and insurance supervisors that reads like the membership rolls of the European Union. State level regulators from German districts of Hesse and Berlin must also approve.
Of additional importance, shades of Dubai Ports World, is the potential need for approval by the Committee on Foreign Investments in the United States (CFIUS) under the Exon-Florio Amendment. The involvement of this agency remains to be seen.
Third, clarity-oriented “Governing Law” clauses are similarly complex, which will become an issue if things require nuanced interpretation. Rather than the usual governing law or two, this agreement foresees several different governing regimes. It shifts from Germany to Delaware to the Netherlands, varying by issue from overall agreement interpretation to fiduciary duties.
Should stamina win out, the end result may be a successful merger, but hardly the “merger of equals” the parties have touted. The 60/40 split of share ownership and 10-to-7 allocation of directorships, each in favor of Deutsche Borse, should be signal enough. Even these are not guaranteed beyond what the charter documents term the Initial Board Term, through 2015. However, in other respects as well, the new company’s charter makes clear that one of the companies is more equal than the other.
One final irony is worth noting – the New York Stock Exchange, that heart of U.S. finance founded under the mythical buttonwood tree immediately after the founding of the Republic, is to be reduced to the status of Foreign Private Issuer with the Securities and Exchange Commission. This does come with the benefit of a lighter disclosure load. As further reinforcement of its non-U.S. status, Board meetings are to be held twice-yearly in Frankfurt, once-yearly in the Netherlands (in recognition of the Dutch entity that will become the holding company) and only once per year in New York.
None of this is necessarily a bad thing – but it sure is a change. Further, it is a cause of concern for the parties and the hot-money hedge funds soon to become their shareholders in the runup to the hoped-for consummation. To be clear, the concern stems from the combination of mandated regulatory approvals with the ultimate “migration” of the New York Stock Exchange. In our long term epoch of global finance, this may be necessary – but with the short term need for approval by very local authorities, it makes approval uncertain and certainly not politics-free.
This article was first published by ThomsonReuters’ Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.