Corporate / M&A

Slovenia: Out in the cold – State’s voting rights in Slovenian privatisation candidates frozen

The Slovenian Securities Market Agency has suspended the state’s voting rights in state-owned companies. The state’s attempts to circumvent such decisions have not proven successful.

Suspension of voting rights in state-owned companies

In late 2012 / early 2013, the Slovenian Securities Market Agency (Agencija za trg vrednostnih papirjev; SMA) issued several decisions on the suspension of voting rights held by the Republic of Slovenia, several state-owned entities (including the state-owned asset management companies SOD and KAD), and other large shareholders in certain (partially) state-owned companies, due to a violation of Slovenian takeover legislation (failure to launch mandatory takeover bids when takeover thresholds were reached).

The SMA decisions, among other companies, affect two Slovenian blue-chip companies on the privatisation list published by the Slovenian government in summer 2013, and supposedly amongst the next candidates in Slovenia’s sell-off campaign: (i) Telekom Slovenije, Slovenia’s leading telecom service provider (state-owned stake: ca 74%), and (ii) Aerodrom Ljubljana, the operator of Slovenia’s main (central) airport (state-owned stake: ca 65%).

Such suspension of (controlling) voting rights in the above privatisation candidates could severely harm the respective sale processes since it could jeopardise urgently required or beneficial pre-closing restructurings in these companies.

Amendment of the Takeover Act – the state attempts a workaround

To circumvent the voting rights suspension, the Slovenian parliament adopted an amendment to the Slovenian Takeover Act (Zakon o prevzemih; TA), which entered into effect in July 2013. The amendment introduced two new articles that are supposed to enable the state (and state-owned companies), subject to the prior approval of the SMA, to regain the right to exercise its shareholders’ rights in specific, critical situations.

The exercise of voting rights in the public interest 

Based on the newly introduced Article 22c of the TA, any person prohibited from exercising its voting rights in a company based on an SMA decision may exercise its voting rights on shareholders’ meetings for individual decisions that are necessary to safeguard the public interest. Public interest includes security or national defence, public safety, life, health, people’s property, and (a crucial addition) the “sound functioning of the state’s economy”.

Further, the suspended voting rights may be reactivated if certain (capital) measures need to be taken on the shareholder level to ensure adequate capitalisation or the long-term solvency of financially distressed target companies (new Article 22b of the TA).

Whether the prerequisites for such a limited voting rights revival are met will be assessed by the SMA on a case-by-case basis based on a well-founded request to be submitted by the respective shareholder 10 business days before the date of the respective shareholders’ meeting. Based on such shareholders’ request, the SMA may rescind the voting rights suspension for the shareholders’ resolution in question.

SMA shows its teeth – no bianco permissions

Even before the ToA amendments, the SMA never tired of emphasising that it will take a restrictive approach when it comes to Article 22b/c TA permissions (particularly when it comes to deciding whether realisation of the public interest outweighs the risk of seriously harming the interests of minority shareholders in specific situations).

The SMA quickly backed up its words with deeds, denying the first state’s request under Article 22c of the ToA. In September 2013, the SMA rejected the state’s request for revival of its voting rights on the Aerodrom Ljubljana’s shareholders’ meeting for the decision on constructing a second passenger terminal at the Ljubljana airport. This meant that the minority shareholders were able to block the infrastructure project, worth ca EUR 57 mln.

Further implications for the privatisation process

With the above decision, the SMA made it clear not only that it will it not issue bianco permissions to the state’s Article 22b/c requests but also that it could threaten a smooth realisation of the privatisation processes which are, as we know, critical to the overall Slovenian economy.

With such a “no compromises” policy, the SMA is placing the fate of the affected (state-owned) target companies in the hands of minority shareholders, which are, as history shows, no fans of privatisation. Minority shareholders could prevent pay-outs of dividends in cash-free transactions or, more importantly, block the realisation of required pre-closing corporate restructurings (eg, the initially envisaged pre-transactional carve-out of Telekom Slovenije’s infrastructure).

Whether the SMA will change its hardliner position when push comes to shove and the sales process is at stake remains to be seen.

The Slovenian regulator’s decisions to suspend the state’s voting rights in several state-owned companies may have a fateful impact on the pending / upcoming privatisation wave.