By Shayndi Raice And Margot Patrick
LONDON--A centuries-old Dutch legal structure that has become a
popular self-defense tool for companies and wealthy individuals
could play a leading role in a takeover battle now shaping up.
Israel's Teva Pharmaceutical Industries Ltd. said Tuesday it is
bidding $40 billion for Mylan NV, a drug company with headquarters
in Canonsburg, Pa., but incorporated in the Netherlands. In early
April, moving preemptively to thwart such an offer, a Dutch law
firm submitted paperwork on Mylan's behalf to the Netherlands trade
registry to create an obscure but powerful legal vehicle called a
"stichting."
The entity, named Stichting Preferred Shares Mylan, is
essentially an empty shell. But it possesses special powers, thanks
to a shareholder-approved provision tucked into the paperwork for a
previous Mylan acquisition: If Mylan ever receives an unsolicited
takeover bid, the stichting can get veto rights over any
takeover.
Stichtings, which mean "foundations" in Dutch, have been around
for hundreds of years, primarily used by Dutch charities. During
the Second World War, Dutch companies transferred their ownership
to stichtings based in the Dutch Antilles in the Caribbean to
protect assets from the German occupiers, experts say.
More recently, stichtings have become a tool of choice for
multinational corporations to protect against a variety of
perceived ills, anything from hostile takeovers to unwanted taxes
to international sanctions.
Their key attribute is that stichtings, often referred to as
orphan foundations, don't have any legal owners. That means they
can be used to put money or other assets outside the reach of
government authorities, competitors or shareholders. The
stichting's purpose and the responsibilities of its board of
directors can be tailored to the vehicle's needs.
"The stichting is where the buck stops. There is no owner," said
Philippe Steffens, a structured-finance lawyer at Baker &
McKenzie in Amsterdam.
Because of their increased popularity and their design to avoid
outside influences, stichtings are growing controversial in some
quarters.
"All sorts of underhanded and nefarious activity goes on through
these kinds of structures," said Joshua Simmons, policy counsel at
Global Financial Integrity, a Washington-based research
organization studying tax evasion and illicit financial flows.
"It's emblematic of the problem with creating legal fictions like
this that allow you to ... hide assets in broad daylight, solely
through the operation of one country's legal system."
More than 125,000 stichtings are registered in the Netherlands,
according to its company register. Their creators hail from Europe,
the U.S. and elsewhere.
Banks are among the biggest users. According to lawyers and
public records, stichtings are the shareholders in hundreds of
special-purpose vehicles that help banks and their clients move
assets off their balance sheets. The structure helps guard against
banks' having to account for certain assets or reimburse investors
if a vehicle runs into difficulty.
International tax advisers are increasingly promoting stichtings
to wealthy clients as a way to disguise ownership and avoid taxes,
according to private wealth consultants. One appeal is that assets
can be handed down for generations without paying inheritance
taxes. Stichtings used for investments or to hold company shares
rarely pay any tax in the Netherlands. Dividends from stichtingsare
typically taxed in the recipient's home country, like other
investment income.
The vehicles are sometimes used in an attempt to blunt the
impact of international sanctions.
Russian billionaire Mikhail Fridman recently was trying to get
approval for the acquisition earlier this year by his investment
fund, LetterOne Holdings SA, of stakes in 13 North Sea gas fields.
Public documents show LetterOne proposed having a stichting assume
ownership of the U.K. energy assets in case Mr. Fridman was added
to the list of sanctioned Russian oligarchs. The stichting plan was
an effort to assuage concerns that the U.K.'s natural-gas
production could be disrupted if LetterOne's assets were
frozen.
The plan relied on another common function of stichtings:
Temporarily separating a company's legal ownership from the
company's financial owners.
Stichtings can exist for generations or for just a few months.
The board of the stichting can have the power to determine when it
is no longer necessary, dissolving itself and, in some cases,
allowing the assets or proceeds, return to the original owners.
This week, the U.K.'s Secretary of State for Energy, Ed Davey,
rejected LetterOne's plan, and gave the company three months to
sell the gas fields. Among Mr. Davey's reasons: The use of the
stichting could be seen as an attempt to circumvent sanctions,
according to a letter released by LetterOne.
A stichting had been used for a similar purpose in the
Netherlands to keep Libya's Dutch oil arm, Oilinvest, operating
when former dictator Moammar Gadhafi was overthrown in 2011. Being
owned by a stichting put Oilinvest beyond the reach of
international sanctions that froze the assets of its Libyan
shareholders.
Managers of former Russian oil giant Yukos Oil Co. were able to
shield billions of dollars in cash and international assets of
Yukos from the Russian government by using two Dutch stichtings.
The foundations, which continue to hold those assets on behalf of
Yukos shareholders, have played a central role in a decade-long
legal battle between Yukos and Russian government.
A spokeswoman for the foundations said their creation was
necessary to provide legal protections and preserve assets for
shareholders. The Russian government didn't respond to a request
for comment. In court documents, it alleged that the stichtings
were illegally created to place assets beyond the reach of the
Russian tax authorities.
Stichtings are increasingly being used to battle hostile
takeovers. Dutch steel company Arcelor SA locked a Canadian unit,
Dofasco, away in a stichting in an attempt to thwart a hostile
takeover by India's Mittal Steel Co. The merger ultimately was
agreed to by both parties. In 2009, the stichting was dissolved and
Dofasco was transferred to the combined company. Lawyers say this
was one of the first instances where a non-Dutch company made use
of a stichting.
Here's how it works in Mylan's case. In December, the company
asked shareholders to approve its acquisition of a non-U.S. drug
business from Abbott Laboratories. Tucked into the nearly 200-page
securities filing were a few sentences giving Mylan the right to
create a stichting and give it the power to get special shares in
the case of a hostile takeover. On April 3, the stichting was
created with the stated aim of safeguarding Mylan's strategy,
mission and independence. Its board, consisting of Dutch lawyers
and professional directors handpicked by Mylan, has "sole
discretion" to receive the powerful shares with veto rights at any
time.
That was just one of the defensive maneuvers Mylan deployed.
Several days later, Mylan launched a $28.9 billion bid for rival
pharmaceutical company Perrigo Co. Analysts and investors viewed
that bid--which Perrigo rejected on Tuesday--as an effort to make
Mylan so big that it would no longer be feasible for Teva to
acquire it. Mylan had said since the Abbott deal that it planned on
pursuing more acquisitions.
Teva clearly isn't deterred by the stichting's existence.
People familiar with the bidding process noted that many U.S.
companies have poison pills, and yet hostile deals still happen.
They also said that the stichting board, not Mylan management,
would be the one to independently evaluate the rationale for the
deal.
And there's no guarantee that Mylan, which as a U.S.
headquartered company faces high standards for corporate
governance, would actually rely on the stichting to block a
potential deal. One investment banker involved in the deal said
using the stichting for such purposes would be the equivalent of
"the nuclear option."
Selina Williams contributed to this article.
Write to Shayndi Raice at shayndi.raice@wsj.com and Margot
Patrick at margot.patrick@wsj.com
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