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Speech by Frits Bolkestein
European Commissioner in charge of Internal Market and Taxation
New proposal on takeover bids
Committee on Legal Affairs and the Internal Market, European Parliament
Brussels, 2nd October 2002
I am pleased to announce that the European Commission has adopted this morning a new proposal for a takeover bids directive.
This directive has always been considered an essential step towards the complete integration of European capital markets which our Heads of State and Government have mandated for 2005. This is the reason why the Commission has done its utmost to come forward with a new proposal which could be approved by the Council and the Parliament as soon as possible.
Let us recall what is the objective of this exercise. First, it is to draw up fair common rules for takeover bids in the EU for all interested parties (companies, shareholders and stakeholders, including employees of the companies concerned). Second, to offer companies increased legal certainty when operating in several Member States. Third, to provide proper protection to minority shareholders in the case of a change of control.
This new proposal answers the concerns you expressed last year without compromising the fundamental principles which had been largely approved by Council and Parliament in relation with the previous proposal.
This proposal has the same scope and fundamental principles as the previous proposal (equal treatment for shareholders in the same situation; full information about the offer; institution of a mandatory bid; control by supervisory authorities and distribution of competencies between them, and the definition of the applicable law,…). In particular, the rule of the Board neutrality has been maintained (Article 9: obligation for the board of the offeree company to obtain the authorisation of the shareholders before adopting any defensive measure when a bid has been launched). This is because it is considered a fundamental principle that the future of the company has to be decided by its owners and not its managers.
However, the new proposal, which builds on the last, contains new elements in order to answer your concerns. In this context, the new proposal follows significantly the recommendations of the Report of the High Level Group of Company Law Experts (Winter Report) which was presented to you in January.
As this Parliament wanted, the new proposal provides for a definition of the "equitable price" for the mandatory bid (Article 5 (4)). It refers to the highest price paid by the offeror for the same securities during a certain period before the bid. (This definition has been inspired by the one used in the UK.)
To answer another demand of the EP, the new proposal installs two procedures after a takeover bid: a squeeze out right, allowing the new majority shareholder to oblige the remaining minority shareholders to sell their securities to himself (Article 14), and a sell out right, allowing the remaining minority shareholders to oblige the new majority shareholder to buy their securities (Article 15), at a fair price.
Now the "level playing field" issue. How have we dealt with the concerns here? Two ways have been chosen, as recommended in the Winter Report.
First, the new proposal provides for general pre-bid information on listed companies (Article 10). Article 10 is about greatly improving the transparency of capital and control structures of all listed companies. The objective is not only to give bidders such information, but also the markets who will sanction companies with bad "corporate governance" practices (i.e. poor management; inflexible control structures, etc). The market sanction will be powerful - a lower relative share price, higher cost of capital for the company and of course it will be far less attractive to investors.
Secondly, the new proposal does away with Transfer and Voting restrictions of Shares In A takeover bis situation (Article 11).
when the bid has been launched, restrictions to the transfer of securities will not be opposable to the bidder. This goes for restrictions which are in the articles of association or in agreements between the company and its shareholders or between The Shareholders. The objective is to give the bidder the possibility to buy the shares concerned by the bid.
when the offeree company decides to adopt defensive measures against the bid, any voting Restrictions are unenforceable. Again, these restrictions have to be contained in the articles of association or in agreements between the company and its shareholders or between shareholders. This is to allow all holders of securities with voting rights to vote in proportion of their holdings.
if the bidder is successful (reaching a threshold of shares in accordance with national company law), the structural defensive devices mentioned above can be Overridden by the new majority shareholder. This is the "break through rule". It means that, if successful, the bidder may call a general meeting to change the articles of association and the board in accordance with national company law. The restrictions to his ownership of securities or to his voting rights will not be able to be applied.
The only difference between the new proposal and the recommendations of the Winter Report is that the "break through rule" only focuses on restrictions to rights, i.e. it does not do away with rights which shareholders have freely negotiated and which are enshrined in different classes of shares. Indeed, it appeared from the many consultations, held by the Commission with Member States and all interested parties, that taking away rights owned by shareholders cannot be done without compensation for the loss or without taking the risk of undesirable economical consequences. Furthermore, it would raise very serious legal and constitutional problems in most of the Member States which would set back these discussions for years and years.
Finally, the new proposal contains an important provision recalling the general legislation applicable to protect the rights of the employees in case of companies restructuring.
A step towards the future
This proposal is a coherent way forward. It is also the most realistic and achievable possible in the 2005 timeframe. It respects the subsidiarity and proportionality principles of the Treaty - avoiding trying to regulate company law through the Takeover Directive. The combination of rigorous transparency and the unenforceability of voting restrictions etc, which can lead to an unjustified protection of the managers, will improve the "level playing field" without compromising the competitive situation of European companies in comparison with those of third countries, and in particular of the US. This is a first step. A revision in five years will allow us to see whether further initiatives may be necessary.
I would like this proposal to be adopted quickly by the Council and the Parliament. It is both balanced and reasonable. It is the result of an extensive consultation of European experts and all interested parties. It avoids the extremes of one side, or the other. And it is in the interest of all stakeholders and also in your own interest that we can, get this proposal adopted very quickly.
Now is the time to move forward.