Glaxo Wellcome (GW) and SmithKline Beecham (SB) flirted with the idea of merging in 1998, but it was not until two years later that the talks were revived and a firm agreement reached. The companies finally joined forces at the end of 2000, although the union could have come several months sooner if it had not been for a major delay to US competition clearance.
The commercial rationale for the merger held firm throughout that time. Rapid advances in scientific discoveries and technology and increased competition in the pharmaceutical industry meant that it made economic sense for these two powerhouses to combine skills and resources. The £114 billion merger has created a giant with an estimated global market share of 7% of the world pharmaceutical market.
The transaction was structured as a nil-premium merger (see "Glossary") of equals. It was effected by way of a scheme of arrangement in which a new holding company, GlaxoSmithKline, was put in place over the merger parties. On completion, GW shareholders held approximately 58.75% of the issued ordinary share capital of GlaxoSmithKline and SB shareholders held approximately 41.25%.
GW was formed in 1995 when Glaxo plc acquired Wellcome plc. Its products include Flixotide (for the treatment of asthma), Beconase (for hayfever), Relenza (for flu), Zantac (for peptic ulcer disease and a range of gastric acid related disorders) and Betnovate (for eczema). GW's shares were listed on the London Stock Exchange (LSE) and the Paris Stock Exchange. GW's American depositary receipts (ADRs) were listed on the New York Stock Exchange (see box "American depositary receipts").
SB was formed in 1989 through the merger of SmithKline Beckman Corporation, a Pennsylvania corporation, and Beecham Group p.l.c., an English public limited company. Its products include Seroxat/Paxil (for the treatment of depression and anxiety), Augmentin (an antibiotic), Nicorette (an anti-smoking product), Panadol (pain relief) and Ribena and Lucozade (drinks). SB's shares were listed on the LSE. SB's ADRs were listed on the New York Stock Exchange.
The blueprint for the merger structure was chosen in early 1998 when a merger between GW and SB was first proposed. Although the initial attempt at merging did not proceed, the merger structure favoured at that time was chosen as the method by which the two companies would unite two years later when the merger plans were revived.
As both companies are constitued under English law, the two main alternatives considered were a recommended takeover or a merger by scheme of arrangement under section 425 of the Companies Act 1985 (1985 Act) (see box "Schemes of arrangement"). The parties chose a scheme of arrangement, involving reductions of share capital of both GW and SB, in which the two companies merged under a new holding company. This particular arrangement had three main advantages over a takeover:
GW and SB were acquired by a newly formed English holding company, GlaxoSmithKline, by means of a scheme of arrangement of each of GW and SB. Under the scheme GW and SB shares were cancelled in return for the issue of GlaxoSmithKline shares to the former public shareholders in those two companies. GW and SB became wholly owned subsidiaries of GlaxoSmithKline when the scheme became effective (see box "The scheme of arrangement in detail"). As the scheme involved the cancellation of the merger parties' share capital, it is known as a cancellation scheme (see "Schemes of arrangement: Using them in a recommended takeover", PLC, 1992, III(1), 17 ).
The merger required the approval of shareholders of both GW and SB, first at court convened meetings to approve the scheme and secondly at extraordinary general meetings (EGMs) to approve the reductions of capital.
Scheme. A scheme must be approved by a majority in number representing three-fourths in value of the shareholders or class of shareholders voting, whether in person or by proxy (section 425(2), 1985 Act). A meeting to seek this approval is convened at the direction of the court. Once the scheme has been sanctioned by the court, all shareholders (or class of shareholders), and not just those who voted in favour, are bound by the terms of the scheme.
Reduction of capital. As the scheme involved a reduction of capital, it was necessary for both GW and SB to hold an EGM to approve the reduction and the steps required to be taken in connection with it. The special resolutions (requiring a 75% majority of shares voted) put to shareholders were:
The four meetings (a court convened meeting and EGM for each of GW and SB) were held on the same day. As is customary, each company held the court convened meeting first and this was followed shortly afterwards by the EGM. At each of the meetings the resolutions required to implement the merger were passed by substantial majorities.
Approximately 15% of the share capital of the combined companies is held by non-UK shareholders, and of that just over 10% is owned by US shareholders. For historic reasons, SB had a slightly higher level of US ownership than GW. Issuing GlaxoSmithKline shares to overseas shareholders might have breached securities regulations in certain jurisdictions or entailed complying with special requirements. The scheme therefore provided that GlaxoSmithKline shares could be issued to the nominee of an overseas shareholder and then sold, or issued to the overseas shareholder and sold on his behalf. In either case the net proceeds of sale were sent to the overseas shareholder.
A number of overseas GW and SB shareholders held shares in the form of ADRs. The underlying GW and SB shares were subject to the scheme of arrangement and were therefore cancelled and replaced with the appropriate number of GlaxoSmithKline shares in accordance with the agreed ratio (see box "Consideration"). An adjustment to the number of ADRs held by each former SB ADR holder was necessary because each GlaxoSmithKline ADR represents two GlaxoSmithKline shares, whereas each SB ADR represented five SB shares.
The conditions to the scheme were set out in the scheme document posted to shareholders of GW and SB (see "Documents" below). The main conditions were:
Each of these conditions was fundamental to the effectiveness of the scheme or the listing of the new GlaxoSmithKline securities and therefore could not be waived by either GW or SB.
The scheme was subject to a number of other conditions, such as receiving relevant competition clearances (see "Competition" below) and there having been no material adverse change in the businesses of either of the merger parties since the date of the latest audited report and accounts. These conditions were reciprocal, in that they related equally to GW and SB and both companies were granted equal powers of waiver.
The merger was notified to anti-trust regulators in the US and EU and approximately 16 other countries.
US Federal Trade Commission. The merger was subject to the requirements of the US Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which prevents specified transactions from being completed until notified to the Department of Justice and the US Federal Trade Commission (FTC) and specified waiting periods are terminated or expire.
Clearance by the US authorities took much longer than hoped and led to a couple of revisions of the expected date of completion of the merger. When the merger was announced in January the parties said that it was expected to become effective in the summer of 2000. A later announcement specified that this would be August. Another announcement moved the date back to September and in September a further announcement said completion was expected by the end of December 2000.
One factor in the delay was the FTC requesting additional information about smoking cessation products in early September 2000. In the US, GW markets the prescription product Zyban and SB markets the over-the-counter products Nicorette (nicotine gum) and NicoDerm (transdermal patches). The FTC was concerned whether the combination of the smoking cessation products of both companies would raise competition issues in the US.
On 12th December, 2000 the parties announced that they had agreed the terms of a consent decree with the staff of the FTC. This was subject to approval by the Commissioners, given on 18th December, 2000. Under the terms of the consent decree SB agreed to divest Kytril, for the treatment of emesis (vomiting), Famvir, for the treatment of herpes and Vectavir/Denavir (anti-viral products).
The consent decree did not contain any provisions regarding smoking cessation products although the FTC indicated that it would continue its review of that product area after completion of the merger. This is thought to be an extremely rare step for the FTC to have taken. GW and SB proceeded to complete the merger on 27th December and the investigation closed at the end of January 2001.
(For more information about the future of US merger review procedure and policy, see www.lawdepartment.net/global "US merger review: changing at the edges" GC, 2001, VI(2), 16 ).
Consequences of delay. In accordance with usual practice, the scheme contained a back-stop date (31st December, 2000 in this case). The date was six months after the initial expected date of completion. The scheme provided that unless it became effective on or before 31st December, 2000 it would not become effective unless an extension was agreed by GW and SB and approved by the court. Although the parties came perilously close to having to agree an extension and requesting the court's permission to do so, completion occurred four days before that became necessary. The opinion of the parties' advisers was that if GW and SB were able to provide sworn evidence that certain factors remained unchanged, the court would have been very likely to agree an extension. Those factors would have included the following:
As a result of the delay four sets of supplementary listing particulars were required (see "Documents" below).
European Commission. The merger was also caught by the EC Merger Regulation (ECMR). Given the size of the companies involved, the ECMR's thresholds were easily satisfied. It therefore could not take effect until the European Commission (Commission) had given its approval. Once the parties to a merger have made their formal notification on Form CO, the Commission will investigate whether the concentration created by the merger is compatible with the European common market.
A concentration will not be compatible with the common market if it creates or strengthens a dominant position as a result of which competition is likely to be significantly impeded within the common market or a substantial part of it.
Investigation usually lasts for one month but can be extended to six weeks if the parties offer remedies such as divestitures. If the Commission considers that there are serious doubts as to the compatibility of the concentration, the first phase investigation may be followed by a longer second phase investigation that may last up to four months.
In the US the initial notification is generally relatively short, usually consisting of a form of about 15 to 20 pages plus attachments, with the bulk of the information being provided to the FTC at a later date. In the EU, by contrast, the process is front-end loaded. Form CO can be a very substantial document and in a case such as this can run to as much as 200 pages plus files of supporting documents.
The information gathering exercise was extremely demanding as it covered 50 product markets across 15 EU member states. The analysis was aimed at determining which of GW and SB's products overlapped, within each product market. It involved considering the overlaps between existing GW and SB products, between GW pipeline products and SB existing products (and vice versa) and between GW and SB pipepline products. Categorising products in their respective markets is always difficult where the companies class their products differently and in respect of pipeline products, which by their nature are still in the development phase.
A draft CO was filed at the end of February 2000, to allow the Commission time to identify concerns before the formal filing. The formal notification was made on 20th March, 2000. In the EU, unlike the US, the approval process ran smoothly and quickly. Areas of overlap between GW and SB's products were identified early on and agreement was reached as to which divestitures would be made. The Commission completed its investigations within Phase I and approved the merger on 8th May, 2000.
SB undertook to out-license Kytril and Famvir in the European Economic Area (EEA) and (in Spain only) its antibiotic product Monocid. This was because in Europe Kytril and Famvir compete with GW's anti-emetic Zofran and systemic anti-virals Zovirax and Valtrex, for the treatment of herpes simplex (cold sores), respectively, which are being retained. GW and SB undertook to out-license one of either of their topical anti-virals, Zovirax (a GW product) or Vectavir (an SB product). SB also agreed to out-license in the EEA Ariflo, a potential product to treat chronic obstructive pulmonary disease, if all competing pipeline products fail their clinical trials.
The process of obtaining competition clearance in other countries was a major logistical effort involving, for example, the translation of documents into the local language and the production of information specific to the local markets. The merger was not, however, conditional upon these approvals. In granting approval the regulators were generally guided by whether the merger had received competition clearance in the EU and the US.
The principal documents produced in relation to the merger were listing particulars, supplementary listing particulars and a document setting out the scheme of arrangement.
Listing particulars. Listing particulars were required by the Listing Rules in respect of the introduction of GlaxoSmithKline to the Official List (Rule 5.1(b), Listing Rules). Application was made to the UK Listing Authority for the GlaxoSmithKline shares to be admitted to the Official List and to the LSE for the shares to be admitted to trading.
The listing particulars contained the following:
Supplementary listing particulars. Supplementary listing particulars are required under the Listing Rules if, at any time after particulars have been formally approved by the UK Listing Authority and before dealings commence, the issuer becomes aware that:
Completion of the merger took about six months longer than expected because of the delay in receiving US competition clearance. As SB reported interim financial results on a quarterly basis, this gave rise to a need to issue two sets of supplementary listing particulars containing those results. GW produced interim six month results during the period of delay, which also had to be communicated to shareholders. Glaxo SmithKline was also required to report regularly on the progress of the regulatory clearance process, the impact of the delay on arrangements for financial reporting and dividends and the expected timetable to completion. All of these matters constituted significant changes affecting matters contained in the listing particulars.
In total four sets of supplementary listing particulars were published, the first in August, second in September, third in November and fourth in December 2000.
Scheme document. The circular setting out the scheme of arrangement was known as the scheme document. It contained:
Shareholders received a pack containing the scheme document, listing particulars and a joint cover letter from the chairmen of GW and SB. The letter set out in a question and answer format fundamental information for shareholders and ADR holders about the merger, consideration and voting procedures.
Kirsten Birkett is Corporate Finance Editor, PLC magazine.
The author would like to thank Jim Beery, General Counsel, Rupert Bondy, Legal Operations (Manufacturing and Corporate) and Brian Cahill, Legal Operations (Europe), GlaxoSmithKline; Robert Stern, partner, Slaughter and May; Stephen Boughton, partner, corporate finance and Gavin Robert, partner, Competition, Regulatory and Trade Department, Linklaters & Alliance; and George Cary, partner, competition law, Cleary, Gottlieb, Steen & Hamilton.
Slaughter and May advised Glaxo Wellcome and Linklaters & Alliance advised SmithKline Beecham.
For details of the merged company's legal department structure, see "Putting people first" GC, 2001, VI(2), 13 ).
An American depositary receipt (ADR) represents ordinary shares or other securities of a non-US company which have been deposited by the non-US company or its shareholders or security holders with a bank in the US that is referred to as the depositary. The depositary issues ADRs which each represent an agreed number of ordinary shares or other securities in the non-US company. The main purpose of ADRs is to facilitate trading in shares of non-US companies in the US markets and, accordingly, ADRs are in a form suitable for holding in US clearing systems and settle in three business days in accordance with US practice.
A scheme is a statutory procedure under section 425 of the Companies Act 1985 (1985 Act) which allows a company to make a compromise or arrangement with its shareholders or a class of its shareholders or creditors. A scheme is commonly used in recommended takeovers because it has certain advantages over a takeover offer.
The three main requirements are:
Shareholders' meeting. A scheme has to be approved by the members of a company or of the relevant class concerned at a special meeting convened at the direction of the court (section 425(1), 1985 Act). At the meeting the scheme must be approved by a majority in number representing three-fourths in value of the members or class of members voting, whether in person or by proxy (section 425(2), 1985 Act).
Court approval. The scheme must be sanctioned by the court. The scheme does not become effective until a copy of the court order is delivered to the Registrar of Companies for registration (section 425(3), 1985 Act).
Explanatory statement. With every notice of the court convened meeting a statement must also be sent to members explaining the effect of the scheme and, in particular, stating any material interests of directors (whether as directors, members or creditors of the company) and the effect of the scheme on those interests, unless it does not differ from the effect on similar interests of other shareholders (section 426(2), 1985 Act).
The scheme of arrangement was made between GW and its shareholders and SB and its shareholders. The main steps were:
Existing shares cancelled. All the ordinary share capital of GW and SB in issue before the voting record time (6pm on the day two days before the court meetings on 31st July, 2000), and any further shares issued at or after the voting record time and before 6pm on the day before the order date (the date of the court order sanctioning the scheme, that is, 20th December, 2000) were cancelled.
GW and SB became subsidiaries of GlaxoSmithKline. The share capital of GW and SB were increased to their former amount by the creation of new GW and SB shares equal to the number of shares cancelled. GW and SB applied the reserve arising as a result of the reduction of capital in paying up in full at par the new GW and SB shares, which were allotted and issued credited as fully paid to GlaxoSmithKline. GW and SB therefore became wholly owned subsidiaries of GlaxoSmithKline.
GlaxoSmithKline shares issued. In consideration for the cancellation of the shares and the issue of new GW and SB shares to GlaxoSmithKline, GW shareholders and SB shareholders who were on the companies' respective share registers at the scheme record time (that is, 6pm on the business day before the effective date (see below)), received fully paid GlaxoSmithKline shares on the basis of one GlaxoSmithKline share for each GW share and 0.4552 GlaxoSmithKline shares for each SB share.
Scheme became effective. The scheme became effective when the court orders sanctioning the scheme (section 425, Companies Act 1985) (1985 Act) and confirming the reductions of capital (section 137, 1985 Act) were delivered to the Registrar of Companies for registration and, in the case of the reductions of capital, registered by him. The effective date was 27th December, 2000.
Shares issued after the effective date. GW and SB shares issued to any person except GW or SB on or after the effective date are automatically exchanged under the articles of association (as amended) of GW and SB for GlaxoSmithKline shares on the same terms as under the scheme.
For each GW share1 GlaxoSmithKline share
For each SB share0.4552 GlaxoSmithKline shares
For each GW ADR1 GlaxoSmithKline American depositary receipt (ADR) (each ADR representing 2 GlaxoSmithKline shares)
For each SB ADR1.138 GlaxoSmithKline ADRs.
Introduction. Process by which a company first seeks to obtain a listing for one or more classes of its securities on a recognised stock exchange, where a sufficient number of shares of the class (usually a minimum of 25%) are, no later than the time of admission, already held in public hands.
Listing Rules. The rules made by the Financial Services Authority, as the UK's Listing Authority, governing admission of securities to the Official List.
Nil-premium merger. A merger where neither set of shareholders receives a premium over the market value of their shares before the transaction is announced.
UK Listing Authority. The Financial Services Authority appointed as the UK's competent authority to decide on admission of securities to the Official List under the Official Listing of Securities (Change of Competent Authority) Regulations 2000.
US Securities and Exchange Commission. An independent agency of the US government that regulates the US securities market.