Guidelines for Preparing the Target Company's Management Opinion on a Takeover Bid

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Based on Article 15, point 4 of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette nos. 140/05 and 12/12), the Croatian Financial Services Supervisory Agency (hereinafter: Hanfa) at its Management Board meeting held on 5 December 2019 adopts GUIDELINES FOR PREPARING THE TARGET COMPANY'S MANAGEMENT OPINION ON A TAKEOVER BID
1. Introductory Provisions and Purpose of the Guidelines
In accordance with Article 41(1) of the Takeover of Joint Stock Companies Act (Official Gazette nos. 109/07, 36/09, 108/12, 90/13-Decision of the Constitutional Court, 99/13-Decision of the Constitutional Court and 148/13; hereinafter: ZPDD), the target company's management must publish a reasoned opinion on the takeover bid within 10 days of the bid's publication. If the bidder or a person acting jointly with the bidder is also a member of the target company's management, that person shall be exempt from preparing the reasoned opinion on the takeover bid. If the remaining members of the target company's management, without the participation of the exempt member, cannot represent the target company, the target company's supervisory board shall issue the reasoned opinion on the takeover bid, with all provisions of Article 41 of the ZPDD applicable to management being applied accordingly to the supervisory board. The purpose of the target company's management opinion is to provide shareholders with sufficient information to decide whether to accept or reject the takeover bid. The management must present arguments supporting both acceptance and rejection of the bid in its opinion. The target company's management conducts the company's business and has access to all data regarding its financial and operational position as well as its development potential, enabling it to best evaluate the bidder's offer. The management may additionally engage appropriate experts to assist in preparing the opinion, who will assess the information stated in the bid relative to the target company. The management's statements included in the opinion must be substantiated with concrete data. In addition to commenting on the bid's statements and providing statements relating to the mandatory content of the opinion, the target company's management must also alert readers to any ambiguities, illogicalities, and inconsistencies it has identified in the bid. When issuing the opinion, the target company's management must protect the interests of both the target company and its shareholders, rather than its own interests. If circumstances indicate a conflict of interest between the management and shareholders or the target company, it must be explicitly stated in the management's opinion. The target company's management opinion must not merely copy data from the takeover bid, state general assertions, or repeat statements published in previous management opinions or other companies' opinions; rather, it must provide concrete data through which the management explains its opinion on the takeover bid.
2. Reasoned Opinion of the Target Company's Management
The reasoned opinion of the target company's management must contain:
1. Opinion on the Amount of the Offered Consideration
The target company's management explanation regarding the consideration amount primarily concerns the consideration itself. In the opinion, it must state, above all, the management's assessment of whether the offered consideration is appropriate or unduly low. This assessment is particularly important for shareholders, as it significantly influences the decision of shareowners whether to tender their shares. In explaining the opinion on the amount of the offered consideration, it is necessary to set out the basis for assessing its appropriateness. The basis may include reports or opinions of auditors or appropriately qualified experts regarding the offered consideration, as well as audited annual financial statements and the most recently published financial statements up to the date of preparing the opinion (which may be unaudited), information from third parties, and information obtained directly from the bidder. If the target company's management refers to reports or opinions of auditors, appropriately qualified experts, or other third parties in its opinion, it must cite their source by stating the name/company, official address, qualifications, etc. It is specifically noted that assessing the legality of the offered price should not be the cornerstone of the management's opinion on the appropriateness of the bid price, given that Hanfa approves the publication of the takeover bid and verifies whether the bid price is determined in accordance with the ZPDD. The consideration amount is not considered appropriate solely because it complies with statutory provisions prescribing the minimum bid price. It may be unduly low regardless of compliance with the ZPDD. One of the data points that should be included in the opinion is a comparison between the average price of the target company's shares achieved on the regulated market and the takeover bid price, with the management considering to what extent the current or average share price on the regulated market reflects the actual (current and/or future) value of the target company. When explaining the average market price, it is advisable to address trading volume (number of transactions) and provide a rationale for minor or significant price jumps during the observed period, as well as the management's stance on the liquidity of the target company's shares. However, the opinion is not limited to this data point. The target company's management, as the body of the joint stock company possessing the most comprehensive knowledge regarding its operations and development potential, must assess the appropriateness of the consideration amount based on data concerning the target company's financial and operational position. Based on financial statement data, the target company's management may also state its position regarding the book value of the target company's shares. Furthermore, based on data from stock market indices or widely accepted financial performance indicators (e.g., EBITDA, etc.), the
target company's management may express its opinion on the appropriateness of the offered consideration amount.
2. Opinion on the Bidder's Intentions Regarding the Future Operations of the Target Company
Regarding this point, the target company's management should, by examining the current and future operations of the target company, provide a reasoned opinion on whether the bidder's stated intentions regarding the target company's future operations are achievable relative to the target company and to what extent, citing the basis for such an opinion. If the target company is part of a group, it is necessary to evaluate the bidder's statements concerning the future operations of the target company in light of that circumstance. This is particularly important if the target company becomes part of a group for the first time after the obligation to publish the bid arises or after the bid is implemented. Furthermore, under this point of the bid, the target company's management should provide its own opinion on circumstances affecting the future operations of the target company that are not explicitly stated in the takeover bid. Based on its business experience, the management may indirectly draw conclusions from certain data stated in the bid regarding other factors that could influence the target company's future operations, conclusions that shareholders might not reach on their own.
3. Opinion on the Bidder's Strategic Plans Regarding the Target Company and Possible Consequences of Implementing Those Plans on Employment Policy, Labor Law Status of Employees, and Potential Changes Related to the Locations Where the Company Carries Out Its Activities
Regarding this point, the target company's management should, similar to expressing its opinion on the bidder's intentions regarding operations, based on the current and future operations of the target company, provide a reasoned opinion on the bidder's strategic plans concerning the target company, highlighting possible positive and negative consequences of implementing those plans regarding employment policy and labor law status of employees, as well as potential changes in the locations where the target company carries out its activities. If the manner of presenting strategic plans in the bid could create a misleading impression among shareholders and the public, considering data known to the target company's management, it must state facts from which it can be concluded that the bidder's strategic plans are inconsistent with the company's condition. As with the management's opinion on the future operations of the target company, if the target company becomes part of a group for the first time after the obligation to publish the bid arises or after the bid is implemented, the management must state to what extent this circumstance might influence the bidder's strategic plans. The target company's management should not limit itself to commenting on the bidder's strategic plans concerning a shorter period, but should evaluate those plans and their foreseeable consequences over a longer period. Furthermore, in addition to addressing data stated in the bid, the target company's management opinion must include data not stated in the bid that could influence the bidder's strategic plans. Examples of such data include information regarding listing on a regulated market and related changes, the existence of exchangeable bonds, the conclusion of business contracts, the possibility of squeezing out minority shareholders, etc.
4. Statements by Management Members Regarding Their Intent to Accept or Reject the Takeover Bid
In explaining this point of the opinion, the target company's management should primarily state whether individual members of the management are also shareholders of the target company, along with data on the quantity of shares they hold and the voting percentage they exercise based on them (absolute and relative amount of target company shares). Furthermore, it is necessary to state which management members who are also shareholders intend to accept or reject the takeover bid. In doing so, it must be highlighted that if any management member is also a shareholder of the target company, there exists their personal interest in having the takeover bid concluded in accordance with that interest.
5. Statement by Members of the Target Company's Management Regarding the Existence of Their Agreement with the Bidder Concerning the Takeover Bid, as well as the Content of Such Agreement (if it Exists)
Under this point of the opinion, it is necessary to state information regarding the existence of any potential agreement between the management and the bidder concerning the takeover bid, as well as information regarding its content. An example of such an agreement would be, for instance, an agreement under which the management is obligated to pay the bidder a certain amount of money (inducement fees) in case of bid failure, which circumstance would certainly represent a conflict of interest that must be explicitly stated in the bid. In conclusion, it should be noted that the ZPDD prescribes liability for persons who prepared or participated in preparing the opinion for damages to shareholders, if they knew or should have known that the information was misleading.
3. Transitional and Final Provisions
These guidelines will be published on Hanfa's website and enter into force on 1 January 2020.
Upon the entry into force of these guidelines, the previously published Guidelines for Preparing the Target Company's Management Opinion on Hanfa's website cease to be valid.
CLASSIFICATION: 011-02/19-01/09
REFERENCE NUMBER: 326-01-60-62-19-1
Zagreb, 5 December 2019.
CHAIRMAN OF THE MANAGEMENT BOARD dr. sc. Ante Žigman