Impact of the Takeover Directive Ensuring Corporate Governance and Transparency Daniela Weber-Rey 12...

Impact of the Takeover Directive

Ensuring Corporate Governance and Transparency

Daniela Weber-Rey

12 May 2006

A Practitioner's Perspective

Practical Impact of the Takeover Directive · 12 May 2006 2

The Takeover Directive

"It is necessary to create Community-wide clarity and transparency in respect of legal issues to be settled in the event of takeover bids and to prevent patterns of corporate restructuring within the Community from being distorted by arbitrary differences in governance and management cultures"

Preamble of Takeover Directive

Let's look at it…


Minimum harmonization directive

Little detail – principle based approach or mere face-saving compromise?

Differing implementation in Member StatesDefence measuresThresholdsTime period for determination of priceType of securities triggering mandatory bidsExclusion of foreign shareholders

Leaves Member States a wide field of actionTo protect domestic companies?


Pre-bid and post-bid defences Insider and ad-hoc issues Foreign shareholders Corporate law / Capital markets

laws congruence

CORPORATE GOVERNANCE

TRANSPARENCY


Approach regarding takeover defences

Objective of the Commission proposalOpen companies to market by outlawing defence

measures against takeover bidsCreation of a fully integrated market in financial

services – Takeover Directive was one of the priorities of the FSAP

Directive solutionCommission approach as basic principle set forth in

Arts. 9 and 11BUT Art. 12 making Arts. 9 and 11 optional


All optional: opt-in / opt-out system Member States may opt-in or out of Art. 9 and 11 RL

Art. 9: restriction on frustrating actionArt. 11: breakthrough provisions regarding

unenforceability of restrictions on the transfer of shares / rights

If Member State opts out, companies are granted the reversible right to opt-in

If company opts in, Member States can allow company's choice for non- appliance if relevant principles do not apply to bidder (reciprocity clause)

Considerable practical issues Relevance of Corporate Governance Statements?


(Five/Ten) Alternatives of one system

Opt-in MS

Art. 9 RL – General duty to stay neutral

Art. 11 RL – Breakthrough of certain takeover barriers

Opt-out MS

Do the provisions of articles 9 and 11 also apply to Bidder?

Provisions apply

Opt-in of Target No opt-in of Target

Provisions apply

Provisions do not apply

Yes No

Provisions apply Provisions must not apply

Reciprocity

- Choice of Target -

①

② ③

④ ⑤


Transparency vs. Compromise

Opt-in / Opt-out as result of a long debate on neutrality

Agreement on "possible solution" vs. non-attainable "optimal solution" at EU level

Different approaches in the EU Member States

Lack of transparency

Role of advisor: Promote transparency by encouraging opt-in of companies? – Transparency through Corporate Governance!


Role of Corporate Governance codes in reaching transparency

A better regulation approach?


TRANSPARENCY


Corporate Governance Codes

Certain codes – and in particular the international and Pan-European codes – recommend

to give shareholders the right to participate in decisions concerning fundamental corporate changes

to refrain from taking discretionary defensive measures in case of a takeover


Role of Corporate Governance Codes in a face-saving compromise Could national Corporate Governance codes

include recommendations for companies to opt-in Articles 9 and 11 of the Takeover Directive?not to carry out defensive measures without

shareholder consent (pre- and post-bid)? The publication of acceptance statements would

lead to legal certainty and transparency

The tendency of acceptance of recommendations is increasing: in Germany, none of the DAX, MDAX and SDAX companies examined by the BCCG in 2006 refuses application of all recommendations


Insider and ad-hoc issues

Due diligence vs. prohibition of insider trading and ad-hoc notification duties

In a friendly takeover the target company may want to provide bidder with confidential information

Challenge Find a balance between

– Need for transparency– Compliance with principles against Market Abuse– Avoidance of ad-hoc notification

Make use of Business Judgement Rule?


Treatment of foreign shareholders

According to the Takeover Directive, all holders of securities must be afforded equivalent treatment

Certain jurisdictions have special rules regarding exclusion of foreign shareholders in certain cases

Will (May) these exemptions remain after implementation?

Probably yesBasic equality of treatment with exceptions Potentially different approaches in different jurisdictions Transparency?



Equal treatment vs. unreasonable effortsAll shareholders are to receive equal treatment and

cannot in general be excluded from the offerExemption possible in certain cases, if effort is seen

as unreasonable Germany

Supervisory Authority does not as a rule grant exceptions for any jurisdictions, e.g. shareholders domiciled in USA and Canada will have to be considered by German offers



US has acceptable thresholds and an efficient system

Exemption must be requested from the local authorities

In Canada exemption only possible via the regulator

Address of shareholders has to be determined – can take long!

Long-lasting procedure also if only 1 shareholder with 1 share!

Issues: Advice on exemption possibilities: Time constraints resulting from extension of offers to certain jurisdictions – Trigger ad-hoc notifications – Risk of extended speculation period


Corporate law / capital market laws – congruence?

Auditors valuation principles

(Germany: IDW / capitalized earnings value/ discounted cash

flow, as a rule)

Market capitalization (MS may authorise Supervisory Authority

to draw up criteria for price adjustment)

Determination of compensation

Corporate restructuring measures (incl. compensation in

connection with squeeze-out)

Takeover bids

(incl. Subsequent squeeze-outs)


Corporate law / capital market laws – congruence?

Corporate law and capital market laws have partially different approaches

Different treatment of corporate squeeze-out (independent of a takeover offer) and capital market squeeze-out (following a takeover offer)

Different valuation principlesDifferent procedure

Law shopping potential Major practical issues Risk of abuse by activist shareholders


Which way forward?

Optional provisions will be differently implemented

Nevertheless

Member States will have to deal with domestic issues in such way as to ensure Community-wide transparency in the event of takeover bids

Compliance with Corporate Governance principles will play a major role


Corporate Governance is about transparency in corporate law

Compliance is about transparency in the financial and capital markets

Transparency is the overriding principle of modern legislation


TRANSPARENCY

Annexes Status of implementation of

Takeover Directive in certain EU Member States

Principles of Corporate Governance Codes


Implementation status – examples

COUNTRY EXPECTED IMPLEMENTATION DATE

UK 20 May 2006: Consultation period has ended. Awaiting publication of final rule changes (expected end-April)

Belgium Will not meet 20 May deadline: No proposed changes have yet been published

France May not meet 20 May deadline: Awaiting publication of consultation documents (expected shortly)

Italy Will not meet 20 May deadline

Luxembourg 20 May 2006

Germany Do not expect to meet 20 May deadline, but shortly thereafter

Spain Will not meet 20 May deadline

Hungary 20 May 2006

Poland Do not expect to meet 20 May deadline: Polish securities commission believes most of primary goals already implemented, therefore full implementation is not a priority


OECD and ICGN "Shareholders should have the right to participate in, and to be

sufficiently informed on, decisions concerning fundamental corporate changes such as (…) extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company."

"Anti-take-over devices should not be used to shield management and the board from accountability."

"The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company."

OECD Principles of Corporate Governance, also adopted by International Corporate Governance Nettwork


EASD "Shareholders enjoy basic rights, which should be protected.

They have a right to adequate and timely information and appropriate forms of participation in certain decisions affecting the company and themselves."

"Minority shareholders should not unreasonably restrain corporate action."

"The market for corporate control should be allowed to function in an efficient and transparent manner. Takeover barriers should not shield management, the board and influential shareholders from accountability."

Corporate Governance Principles and Recommendations of the European Association of Securities Dealers


Euroshareholders "Major decisions which have a fundamental effect upon the

nature, size, structure and risk profile of the company, and decisions which have significant consequences for the position of the shareholder within the corporation, should be subject to shareholders’ approval or should be decided by the Annual General Meeting."

"Anti-takeover defences or other measures which restrict the influence of shareholders should be avoided."

Euroshareholders Corporate Governance Guidelines

Clifford Chance, Mainzer Landstraße 46, 60325 Frankfurt am Main, Deutschland

© Clifford Chance 2006

Clifford Chance Partnerschaftsgesellschaft von Rechtsanwälten, Wirtschaftsprüfern, Steuerberatern und Solicitors · Sitz: Frankfurt am Main · AG Frankfurt am Main PR 1000

www.cliffordchance.com

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