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Brussels, 19 June 2000
Proposed Takeovers Directive - questions and answers
The proposal for a Directive would create a pan-EU framework for takeovers laying down certain basic principles and a limited number of general requirements which Member States should implement through more detailed rules. Thus, the Member States would have considerable freedom to regulate a wide range of matters in accordance with their own national structures and practices. The aim is to provide an equivalent protection throughout the Union for minority shareholders of companies listed on the stock exchange in the event of a change in control and to provide for minimum guidelines for the conduct of take-over bids, particularly as regards the transparency of the procedure.
The first proposal was presented in 1989 and amended in 1990. A streamlined framework version was presented in 1996 (see IP/96/120) and amended in 1997 (see IP/97/1022). The May 1999 Action Plan for Financial Services (see IP/99/327) identified the proposed Directive as a key element for integrated financial markets., The March 2000 Lisbon European Summit set 2005 as the target date for implementation of the Financial Services Action Plan.
1. Is a Takeovers Directive really necessary?
The proposed Directive aims to coordinate action by Member States to the extent necessary to afford shareholders a minimum level of protection which should be equivalent throughout the EU. The situation is currently far from being equivalent. For instance, at present the Netherlands and Germany do not require a bid to be launched in the case of a transfer of control.
Furthermore, several Member States permit the board of the target company to take defensive measures in the case of a hostile take over bid without prior consent of the shareholders. This makes corporate acquisitions more difficult. Moreover, the Proposed Directive provides the means of determining which is the competent authority for the regulation of a takeover, and which law is applicable, both of which are of crucial importance, particularly in relation to cross-border takeovers. It will also ensure a basic level of disclosure and information, thus guaranteeing transparency during the takeover bid.
A Directive is the only means by which these objectives can be achieved. Only a Directive can provide the necessary legal certainty. The key aims of this proposed Directive could not be dealt with adequately by Member States acting unilaterally or by a Recommendation which already exists anyway (the European code of conduct on transactions of securities, 1977).
2. What about subsidiarity?
Achieving a degree of harmonisation while at the same time leaving Member States a wide measure of discretion to cope with cultural, market and national differences is the pragmatic application of the principle of subsidiarity.
3. Is the "framework" approach appropriate or does it leave too many differences between Member States' rules?
The proposed framework Directive lays down common principles and minimum requirements which Member States would be required to implement through more detailed rules according to their national practices. Indeed, the draft Directive provides for a structure that would permit the maintenance of some existing national differences. However, these differences cannot go as far as to undermine the common principles and requirements set out at Community level.
4. It has been suggested that in its current form the proposed Directive is so "toothless" as to make no difference is this true?
No. The proposed Directive would require several Member States to adapt their legislation. First of all, all Member States would have to introduce rules to oblige a person acquiring control over the target company to make a bid to all shareholders of that target company for all their holdings in that company, at an equitable price.
As of today, there are several Member States such as the Netherlands and Germany where there is no obligation to make a public offer for all the remaining shares or where such obligation is only limited to a certain percentage.
Secondly, the proposed Directive would eliminate the possibility for Member States to keep or introduce the so-called "means at least equivalent" as an alternative to the mandatory bid rule. Some Member States wanted to guarantee the protection of minority shareholders in the case of the change of control by means other than the obligation to launch a bid to all other shareholders. Such a possibility would be ruled out by the proposed Directive, under which all Member States would have to guarantee the protection of minority shareholders by introducing the mandatory bid rule.
Thirdly, the proposed Directive would forbid the board of the target company from taking any defensive measures during the period of acceptance of the bid once it had received formal notice of the bid, unless it had prior authorisation from a general meeting of shareholders convened for this specific purpose.
As a compromise, however, the proposed Directive would give Member States the option of allowing the board of the target company to increase the share capital during the bid acceptance period, if its general meeting of shareholders had approved an increase in the share capital not earlier than 18 months before the beginning of the period of acceptance of the bid as long as the right of pre-emption of all shareholders was not excluded in whatever manner.
This provision represents a compromise solution between the position of Member States which would prefer a wider scope for defensive measures against hostile take over bids (particularly Belgium and the Netherlands) and that of Member States which oppose all defensive measures (all other Member States but particularly the UK and Italy).
Furthermore, the proposed Directive would provide that when the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market in one or more Member States, such consideration has to include at least some cash as an alternative. Such an obligation would prevent a bidder from offering as an alternative securities which are not easily marketable.
Last but not least, the proposed Directive would introduce the definition of "persons acting in concert" defined as "persons or legal entities who co-operate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, and aimed respectively at obtaining control of the offeree company or frustrating the successful outcome of the bid".
5. Why does the proposed Directive not include more provisions on the elimination of barriers to takeovers?
The proposed Directive does include a provision to prevent the board of the target company from taking defensive measures without the authorisation of the shareholders at general meeting during the bid acceptance period.
As regards other takeover barriers, the proposed Takeovers Directive is a minimum Directive and does not deal, for example, with questions of structural obstacles such as government participation in companies.
6. Does the proposed Directive carry an increased risk of tactical litigation?
The proposed Directive requires Member States to designate one or more supervisory authorities which must supervise the bid. These authorities may be private or public bodies.
The question to what extent recourse against the decisions of a supervisory body is possible before the courts is dealt with differently in different Member States. In conformity with the general practice that proposed company law Directives do not enter into procedural matters, the proposed Directive leaves these matters to Member States. However, it is stated explicitly that the general principles of Community law must be respected, which means for instance that parties should have the right to a fair hearing.
7. Would the proposed Takeovers Directive outlaw the right to appeal against the decisions of the supervisory authority?
No. The proposed Takeovers Directive would not outlaw the right to appeal against the decisions of the supervisory authority.
On the contrary, in accordance with general principles of Community law, and in particular the right to a fair hearing, decisions of a supervisory authority would in appropriate circumstances be susceptible to review by an independent court or tribunal.
This proposed Directive, however, leaves it to Member States to determine whether rights are to be made available which may be asserted in administrative or judicial proceedings, whether in proceedings against a supervisory authority or proceedings between parties to a bid.
8. How would the Directive determine the supervisory authorities and the applicable law in case of a cross border takeover?
The proposed Directive gives a legal framework for takeovers in cases where the target company is not listed in its country of origin. For this purpose, two distinctions have been made in Article 4(2)(e).
The first distinction is the one between the law of the Member State where the target company is listed (so called "market" rules) and the law of the Member State where the company has its registered office (so called "home" rules).
The second one is the distinction between on the one hand matters relating to the procedure and, on the other hand, matters relating to the information of employees and company law.
Based on these distinctions, the proposed Directive provides that:
Consequently, a flexible framework for cross-border take-overs open for future developments has been created, where the co-operation between competent authorities in different Member States is an essential rule (Article 4(3)(a))
However, it is important to stress that there is no perfect solution. Practice will show whether the proposed solution can be improved and the proposed Directive makes provision for the issue to be reviewed three years after the Directive enters into force.
9. Under the proposed Directive, would bids always have to have a cash consideration?
A compromise has been agreed under which, when the consideration offered by the bidder does not consist of liquid shares listed on a regulated market in the Member States, such a consideration would have to include at least some cash as an alternative. Such a solution would prevent a bidder from offering securities which are not easily marketable.
10.Could this mean a shareholder cannot exit the company?
European listed shares are liquid. A shareholder could cash his new shares at any time if he wants to.
If the consideration offered by the bidder did not consist of liquid European listed shares, the consideration would have to include at least some cash as an alternative and shareholders would be able to exit the company.
11.Why is there no definition of the price to be paid in the case of a bid?
In the proposed Directive there is no explanation as to what price has to be paid in the case of a bid. This is because the definitions of such price in the different Member States are too divergent.
However, the proposed Directive stipulates that such a price has to be "equitable" in order to ensure the best protection of the shareholders.
12.Would adoption of this proposed Directive prevent companies from defending themselves against corporate raiders?
Minority shareholders should be given the opportunity to decide on any eventual bid. There may be conflicting interests between minority shareholders and the board of the target company which may not necessarily defend the companies' interests but rather its own position and power.
The proposed Directive would only outlaw defensive measures that may be taken by board of the target company without taking account of the interests of its shareholders.
Nothing in the proposed Directive would prevent the shareholders of the target company from agreeing defensive measures at the shareholders' meeting during the period of acceptance of the bid. It would therefore be up to the board of the target company to convince the minority shareholders not to accept a hostile bid by a corporate raider. That decision would have to be taken on its own merits and should not be influenced by the personal views of individual board members.
13.Could the proposed Directive lead to bids financed in an unsound way (such as by junk bonds)?
The proposed Directive would explicitly prescribe that an offeror must give information about the financing for the bid and announce the bid only after ensuring sound financing.
In addition, when the consideration offered by the bidder did not consist of liquid shares listed on a regulated market in the Member States, such consideration would have to include at least some cash as an alternative. Such a solution would prevent a bidder from offering securities which were not easily marketable.
14.Under the proposed Directive, would the board of the target company, unions and employee representatives be informed about the bid before it took place?
NO. The potential risk of insider trading is huge if, for example, 50,000 people were informed. Such insider information would mean an obstacle to launch a successful bid in countries that eventually authorised this practice.
However, the representatives of the employees or, where there are no such representatives, the employees themselves, would have to be informed by the board of the target company about the bid as soon as the bid had been made public.
The board of the target company would also have to communicate the bidder's offer document to the representative of its employees or, where there are no such representatives, the employees themselves. This is important especially since, according to the proposed Directive, the offer document should state "the offeror's intentions with regard to the future business and undertakings of the target company, its employees and its management, including any material change in the conditions of employment".
Also, the board of the offeree company would have to draw up and make public a document setting out its opinion on the bid, together with the reasons on which it is based, including its views on the effects of implementation on all the interests of the company, including employment.
15.Why has the full mandatory bid approach been adopted to protect minority shareholders?
In the case of an acquisition or a change of control of a listed company, the proposed Directive would require Member States to adopt specific national rules to guarantee that minority shareholders were protected. The full mandatory bid method (the UK method) is seen as the only means of protecting the minority shareholders of a listed company.(1)
16.Are other at least equivalent means an alternative to the mandatory bid (German method)?
As of today only Germany has declared to have such a highly developed system of protection of minority shareholders, other than mandatory bid.
However, a majority of countries, including Germany, have now agreed upon a mandatory bid rule in their system as the best way to guarantee minority shareholders' protection.
Consequently, the means at least equivalent to the mandatory bid may be kept as an additional protection.
In addition, there is a transitional period of 2 years from the date of the transposition of the proposed Directive. During that period Member States which, at the date of the adoption of the Proposed Directive, have the means at least equivalent in their system may continue to apply such means and are not obliged to provide for rules for the mandatory bid.