Brussels, 2nd October 2002
Proposal for a Directive on Takeover Bids Frequently Asked Questions
On 2 October 2002, the European Commission presented a new proposal for a Directive on Takeover Bids (see also IP/02/1402), after the previous proposal had been narrowly rejected by the European Parliament in July 2001 (see IP/01/943).
The proposed Takeovers Directive is a crucial part of the Financial Services Action Plan (see IP/02/796). It would offer transparent pan-European rules for the conduct of takeover bids to the benefit of shareholders (especially minority shareholders), employees and all interested parties. It would also facilitate company restructuring and so contribute to making Europe more competitive. It was identified as a priority by Heads of State and Government at the March 2000 European Council in Lisbon.
After the rejection of the previous proposal, the Commission created a Group of High Level Company Law Experts, chaired by Professor Jaap Winter, with a first mandate to make recommendations on the company law issues raised by the European Parliament. The Group's report was published on 10 January 2002 (see IP/02/24).
What are the main features of the proposed Directive?
First, the proposed Directive sets out fundamental principles to govern takeovers and provides for a means of determining which is the competent authority for the supervision of a takeover and which national law is applicable in the case of cross-border takeovers (see below). It would also ensure a basic level of disclosure of information on the offer, thus guaranteeing transparency during a takeover bid.
Second, the proposed Directive provides that shareholders, in particular minority shareholders, should be afforded a minimum level of protection equivalent throughout the EU and based on:
Is a Takeover Directive really necessary?
Yes. Without it there can be no truly integrated EU capital market. And that would mean a huge plank of the Internal Market would be missing. Europe needs a common legal framework for takeovers, including an adequate level of protection for minority shareholders across the EU in the case of a change of company control. That is what this proposed Directive would provide. Currently, rules differ widely between Member States.
Would the Directive prevent companies from defending themselves against takeovers?
No. The management of the target company would be perfectly entitled to put in place defensive measures. However, before doing so, they would have to have the explicit authorisation of a general meeting of shareholders consulted on the precise terms of the bid. There may be conflicting interests between shareholders and the board of the target company. The board may not necessarily always defend the companies' interests but rather its own position and power.
The proposed Directive would only outlaw defensive measures taken by the board of the target company without consulting 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. The management of the target company would be entitled to recommend to shareholders either the rejection or the acceptance of a bid.
How does the new proposal differ from the previous one rejected by the European Parliament?
The new proposal represents a comprehensive response to the European Parliament's concerns. It would therefore introduce:
How would the squeeze-out and sell-out rights work?
Once a bidder held a large majority of a company's securities as a result of a takeover bid, it could "squeeze out" holders of the remaining minority of the stock by compelling them to sell at a fair price. In order to take account of different national traditions, Member States could set the threshold for triggering the squeeze-out right by reference to capital (between 90% and 95%) or, alternatively, by reference to the number of acceptances in the offer (at 90%).
The"sell-out" right would be "the other side of the coin". Minority shareholders would have the right to compel an offeror who had obtained 90% or more of the capital to purchase their securities at a fair price.
How would the equitable price for a mandatory bid be determined?
The proposed Directive stipulates that the price offered in a mandatory bid one where the bidder is required to make a bid to all shareholders of the target company for all their holdings in that company - should normally be equal to the highest price paid by the offeror for the securities concerned during a period of six to twelve months preceding the offer. Exceptions would only be possible in certain circumstances based on clear criteria e.g. if there had been collusion, if the market price of the relevant securities had been manipulated or if market prices in general had been affected by exceptional events.
How does the proposal tackle creating a "level playing field"?
There are three new types of rules proposed, in addition to the neutrality rule that was already included in the earlier proposal and which stipulates that the board of the offeree company can only adopt defensive measures after approval by the shareholders, given after the launch of the bid (in other words after all shareholders know the conditions of the bid, including the offer price, and can judge its value).
First, to increase transparency and disclosure, listed companies would be required to disclose their capital and control structures as well as their defensive measures in the annual report. In addition, the proposal would require the board to submit these structures and defensive measures to scrutiny by the general meeting of shareholders at least every two years.
Second, to remove unwarranted barriers to the transfer of securities, once a bid had been made public, any restrictions on the transfer of securities in the articles of association and contractual agreements would be unenforceable against the offeror during the period allowed for acceptance of the bid. Any restrictions on voting rights would cease to have effect when the general meeting of the offeree company was deciding on defensive measures. The offeror would have the right to call a general meeting after a successful bid and could cast his/her vote in accordance with normal company law rules without being hindered by ownership or voting restrictions resulting from the articles of association. In addition, special shareholder rights to nominate or revoke members of the board would cease to have effect in the first general meeting of shareholders following the closure of the bid.
Third, to ensure that the Directive kept up with market developments and to allow for a recasting of the rules in the light of how they work in practice, a revision clause is proposed. The Commission would if necessary, propose revisions to the provisions concerning the level playing field five years after entry into effect of the Directive.
But would the proposal do enough to create a level playing field for takeovers, as the European Parliament called for?
The combination of greater transparency concerning the capital and control structures of listed companies with the abolition of voting and ownership restrictions in a takeover bid situation, thereby weakening management entrenchment, should enable significant progress to be made towards the more level playing field for takeovers called for by the European Parliament. The submission of defensive structures and measures to the scrutiny of the general meeting every two years would increase their visibility and allow shareholders to question the board about their possible adverse consequences. Equity markets themselves would be a powerful deterrent to sclerotic structures.
The proposal is a first step; the revision provided for in the proposed Directive would afford an opportunity for examining whether other initiatives should be taken at a later stage in order to level the playing field further.
What about the level playing field between the EU and third countries, such as the United States?
The advantage of the proposed solution is that it would allow significant progress to be made towards a more level playing field without undermining the competitive position of European businesses vis-à-vis their counterparts in non-member countries, and in particular the United States. The proposal does not completely outlaw defensive measures. As far as the United States is concerned, many defensive measures are still possible under the laws of various individual States and more than 400 listed companies, including some very large ones, have multiple voting rights. It should also be noted that three times more capital is flowing from the EU in the direction of the US for takeovers than the reverse at the moment. Moreover, in practice, if US shareholders consider that a target company's management has failed to take their interests into account when putting in place 'poison pill' defences, they tend to sue the company's management in the courts.
What about "golden shares"?
The proposed Directive does not regulate the issue of so-called "golden shares", in the form of special control rights of Member States in privatised companies. This is because the rules on the free movement of capital in the EC Treaty itself (Article 56) already prohibit measures which could represent a direct or indirect restriction on cross-border investment in the EU. The Commission published its interpretation of the Treaty's rules in this respect in 1997 (see IP/97/477) and confirmed this interpretation in June 2001 (see IP/01/872). Moreover, the European Court of Justice has upheld the Commission's interpretation that golden-share type arrangements are only acceptable in very specific circumstances and under very strict conditions (judgements of 4 June 2002 in Cases C-367/98 Commission v Portugal, C-483/99 Commission v France and C-503/99 Commission v Belgium) (see CJE/02/49). As the proposed Directive deals only with company law issues, there is no reason why it should address this question.
As for special control rights of Member States in privatised companies which are provided for in national laws, these are also covered by the case law of the European Court of Justice and are therefore not dealt with in the proposed Directive.
How will the rights of employees be protected?
The previous proposal already provided for extensive information to be given to employees or their representatives in the case of a takeover bid. Employees or their representatives would have the right to issue recommendations to shareholders on whether the bid should be accepted or rejected. The proposed Directive would not introduce new information or consultation rights for employees. It would however specifically refer to the need to apply the various existing Community measures in this area, for example, Directive 94/45 EC on European Works Councils (IP/95/744), Directive 98/59 EC on collective redundancies and Directive 2002/14 on informing and consulting employees (IP/01/1840).
Which recommendations of the High Level Group of Company Law Experts were taken into account?
In accordance with the recommendations of the Group, the proposed Directive contains squeeze-out and sell-out rights as well as a definition of the equitable price to be paid in a mandatory bid (see above). Furthermore, the proposed Directive adopts the recommendations of the Group on increased transparency concerning the capital structure of companies and defensive measures. It would also introduce a "mini-break-through" provision because it would put an end to a number of measures currently used to resist takeover bids even when the bids may be in the interests of shareholders i.e. restrictions on the transfer of securities, voting right restrictions and restrictions on the power to appoint or to remove board members.
Moreover, the proposed Directive follows the principle recommended by the Group that the board of the target company should only be able to take defensive measures after prior approval by the general meeting, once a bid has been made public. However, the proposal would allow Member States to postpone the application of this principle for a transitional period of three years after entry into effect of the Directive.
Why does the proposal not adopt the complete "break-through" solution proposed by the High Level Group of Company Law Experts?
The Group suggested that once a takeover bid has been announced, an authorisation by the general meeting of shareholders to take action to frustrate the bid should only be valid if supported by a majority of votes under a voting system where all holders of risk-bearing capital in the company have votes weighted proportionately to their holding. The Group also advised that a successful offeror who has acquired a substantial part of the risk-bearing capital in a general bid for all the shares of the company should have the ability to "break through" any mechanisms such as voting caps, multiple voting shares or ownership restrictions - which frustrate the exercise of proportionate control.
The proposed Directive does not adopt this break-through solution in full because of the many complex legal problems that would result, including: defining the notion of risk-bearing capital, which does not exist in any Member State; fixing the threshold for triggering the break-through; and the dilution of the rights of ordinary shareholders that would result from giving voting rights to non-voting shares.
Furthermore, the Commission received strong representations from Member States and interested parties about the constitutional problems resulting from the suppression of multiple voting rights, especially if no compensation were provided for the loss of these rights. Not providing for compensation was seen as tantamount to an expropriation of property rights.
There was also evidence that the existence of multiple voting rights has not resulted in relatively less takeover activity in the countries concerned. Shares attracting such rights are also listed and can be bought in the market, albeit at a different price. They have proved to be a useful financing mechanism for bringing companies to the market. It is, however, likely that the increased transparency required by the proposed Directive will make these shares more visible.
Introducing the full break-through solution proposed by the High Level Group was also felt to be against freedom of contract and to constitute an undue encroachment into Member States' company law by a Directive that covers only takeover bids.
Would the proposed Directive increase the risk of tactical litigation?
The proposed Directive would require Member States to designate one or more supervisory authorities which must supervise the bid. These authorities may be private or public bodies. There is no reason why the Directive would contribute to creating a tradition of tactical litigation in Member States.
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.
Would the proposed Directive outlaw the right to appeal against the decisions of the supervisory authority?
No. 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 granted may be asserted in administrative or judicial proceedings, whether in proceedings against a supervisory authority or proceedings between parties to a bid.
How would the proposed Directive determine the supervisory authorities and the applicable law in case of a cross border takeover?
The proposed Directive would provide a legal framework for takeovers in cases where the target company was not listed in its country of origin. For this purpose, distinctions would be made.
The first distinction would be between the law of the Member State where the target company was listed (so-called "market" rules) and the law of the Member State where that company had its registered office (so-called "home" rules).
The second would be 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 would provide that:
Consequently, a flexible framework for cross-border takeovers open for future developments would be created, based on co-operation between competent authorities in different Member States.
However there is no perfect solution. Experience will show whether the proposed solution can be improved and the proposed Directive makes provision for the issue to be reviewed five years after the Directive enters into force.
Under the proposed Directive, would bids always have to have a cash consideration?
No. When the consideration (payment) offered did not consist of liquid securities traded on a regulated market, Member States could prescribe that 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 were not easily marketable.
What consultations did the Commission undertake on the new proposal?
The recommendations of the High-Level Group of Company Law Experts were presented to the Legal Affairs and Internal Market Committee of the European Parliament in January 2002 and formally discussed with Member States in February 2002. Furthermore, the Commission has carefully analysed many submissions made by business organisations and individual companies during the preparation of the new proposal.
The original proposal was first presented in 1989: what have been the main events since then?
The original proposal dates back to 1989 and contained detailed rules. Wide differences in existing national legislation and practices between Member States made agreement on that proposal impossible.
The Commission presented a streamlined version in 1996 (see IP/96/120) based on minimum guidelines for the conduct and transparency of takeover bids, with the choice left to Member States of how to meet these requirements, in line with their existing traditions and structures. That proposal was amended in 1997 (IP/97/1022).
The European Parliament and the Council were initially unable to reach agreement on the 1997 proposal but a conciliation procedure led to a compromise agreement on most issues (see MEMO/01/216). However, when this text was presented to the Parliament's plenary on 4 July 2001, it failed to obtain a majority (273 members voted in favour and 273 members voted against).
After the rejection of the proposal by the European Parliament, the Commission created a Group of High Level Company Law Experts, chaired by Professor Jaap Winter, in September 2001 with a first mandate to come forward with recommendations on the company law issues raised by the European Parliament. The Group's report was published on 10 January 2002 (see IP/02/24).