One of Europe’s most contentious takeover battles in years was finally brought to a close last month when a beleaguered Aventis, under intense pressure from the French government, accepted a sweetened $63 billion takeover bid from rival French pharmaceutical company Sanofi-Synthélabo.
The combined company, to be called Sanofi-Aventis, will be the third-largest pharmaceutical company in the world behind US company Pfizer and GlaxoSmithKline of the UK.
The deal will create a single French powerhouse with dominant market shares in cancer, allergy and anti-stroke drugs.
But according to French lawyers, the government?s heavy-handed tactics in pushing the merger through could have a decidedly unhealthy effect on the French mergers and acquisitions market, potentially chilling foreign investment into the region while at the same time leaving French companies more vulnerable to raiders.
Specifically, French companies may find that their defences are sharply limited in trying to fend off hostile takeover attempts, after stock market regulator Authorité des Marchés Financiers (AMF) rejected Aventis?s poison pill plan to issue warrants tied to the patent protection of one of Sanofi’s best-selling drugs.
?The AMF ruling could be a big step backwards for the French market,? says Eric Cafritz, a partner at the Paris office of law firm Fried Frank Harris Shriver & Jacobson.
Like most hostile takeover targets, Aventis had thrown up a variety of defensive measures to force the hand of its smaller rival, including engaging Swiss drugs giant Novartis as a possible white knight suitor and filing lawsuits in both the US and French courts, accusing Sanofi of duplicitous and misleading tactics.
But by far the company?s most innovative attempt was its plan to issue equity warrants to its shareholders to insure against Sanofi?s possible loss of its patents on its blockbuster blood-thinner Plavix, which accounts for around a third of the company’s profits.
Under the plan, Aventis?s shareholders would have been given the right to exercise the warrants if Sanofi?s takeover bid was successful, and if a generic version of Plavix was launched in the crucial US market before the end of 2007.
Sanofi, which maintains that its current stable of Plavix patents ensures US exclusivity until at least 2011, is presently defending a challenge to the patents in a New York court.
As drafted, the new warrants would have given Aventis?s shareholders a significantly bigger stake in the merged company if those patents were invalidated.
But days prior to the merger announcement, the AMF rejected the plan in a terse one-page decision, saying that it was not ?within the framework of the principles that guide the course of public offers?.
Sources close to the market say the AMF may have bowed to the political pressure surrounding the merger, a charge the regulator has firmly denied.
But if the reasoning outlined in the decision is extended to other deals, French lawyers claim that it could block companies from adopting a much broader range of anti-takeover defences.
The AMF challenged the warrants on two key grounds. First, that because they could have been activated after the close of the tender offer period, they would have introduced too much uncertainty into the ultimate valuation of Sanofi?s offer.
Second, the AMF said that the warrants would unfairly prejudice Sanofi in the event of a rival bid, since the warrants would apply exclusively to the Sanofi offer.
Under this reasoning however, French companies could find it difficult to adopt any defensive measure that includes a capital increase after the close of a tender offer period, because of the possibility of creating uncertainty about the offer value.
Companies could also be barred from trying to adopt anti-takeover defences in response to a specific takeover threat even if, as in the case of Aventis, the company has received only a single firm offer.
In essence, some French securities lawyers say that French companies could be forced to choose between rejecting a hostile bid at the outset ? by using a pre-approved capital increase to make themselves prohibitively expensive ? or simply allowing a takeover to progress unimpeded.
?Under this decision, it seems that companies can either completely take themselves off of the market, which wouldn?t seem to be in the best interest of shareholders in getting the best price for their shares, or they can allow themselves to be ravaged by a hostile bidder,? says Cafritz.
He is contemplating forming a group of French M&A lawyers to press the regulator for a clarification on the decision.
Some lawyers cautioned against reading too much into the AMF?s decision, noting the unique features of both the deal itself and the warrant plan.
?I?m not sure that the market is going to be following this too closely,? says Thierry Schoen, a partner at Clifford Chance?s Paris office. ?This was a very unusual defence to a very unusual merger, and the AMF could always say they intended their comments to apply only to this one deal.?
But until the next French hostile takeover, or at least until the AMF clarifies its position, any French company that believes it might be a target would be well advised to consult its lawyers.
