THE TAKEOVER BIDS DIRECTIVE ASSESSMENT...

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THE TAKEOVER BIDS DIRECTIVE ASSESSMENT REPORT

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Dear Sir or Madam,

We are pleased to submit to you our study on the application of Directive 2004/25/EC on takeover bids (MARKT/2010/10/F) (the “Study”).

The Takeover Bids Directive (the "Directive”) applies to takeover bids for the securities of companies governed by the laws of Member States, where all or some of those securities are admitted to trading on a

regulated market.

The Directive contains minimum guidelines for the conduct of takeover bids, including disclosure, involving securities with voting rights of companies governed by the laws of Member States, where all or some of these shares are admitted to trading on a regulated market. It also contains rules to protect (minority) shareholders. The objectives of the Takeover Bids Directive are (i) legal certainty on the

conduct of takeover bids and community-wide clarity and transparency in respect of takeover bids, (ii)

protection of the interests of shareholders, in particular minority shareholders, employees and other stakeholders, when a company is subject to a takeover bid or change of control, and (iii) facilitation of takeover bids, through reinforcement of the freedom to deal in and vote on securities of companies and

prevention of operations which could frustrate a bid.

Our personal competences and practical experience in capital markets, company law, corporate governance, as well as regulatory and supervisory matters, have been fully supported by offices of Mazars, Marccus Partners and our network of best friends, all highly qualified law firms in these fields.

Our work combines a “top-down” approach, carried out by the Centre for European Policy Studies (“CEPS”), and a “bottom-up” approach, involving qualified law firms in each jurisdiction under review. The results of these two approaches are confronted in a dynamic process so as to provide a

comprehensive and consistent review of all issues that are addressed.

In addition to this analysis, one of our key approaches has been to reflect the best possible understanding of the concrete and “real life” application of the TOD in order to be as close as possible to the

stakeholders. Issuers, institutional investors, retail investors, financial intermediaries, employee representatives, stock exchanges and regulators have been given the possibility to express their viewpoint.

Our Study includes 31 countries: 22 Member States, representing more than 99% of the total EU market capitalization, and 9 third-party countries.

All this information makes it possible to provide a comprehensive assessment of the Directive and

eventually to suggest some possible improvements for the current legislation to meet its fundamental objectives.

We are honoured to have been selected for this tender and, in conducting this external study, to

contribute to the economic and financial objectives of the European Union and its sound legislative process.

On behalf of the Core Team,

Christophe Clerc Fabrice Demarigny Marccus Partners, Partner Marccus Partners, Partner Director of Capital Markets Activities of Mazars’ Group

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Acknowledgment This study, undertaken by Marccus Partners, the law firm for the Mazars Group, and the Centre for European Policy Studies (CEPS) is the result of a team effort that includes the various international teams of Marccus Partners. The project coordinators would like to express their deepest gratitude to all contributors. Above all, we are grateful to the European Commission for having commissioned this study and to the Commission staff for their comments and for the working relationship built up over the past months. The results included in this study have been achieved largely thanks to the collaboration of the following firms; we are therefore grateful to Wolf Theiss (Austria), Eubelius (Belgium), Papaphilippou (Cyprus), Wolf Theiss (Czech Republic), Accura (Denmark), Raidla Lejins & Norcous (Estonia), Roschier (Finland), Karatzas & Partners (Greece), Wolf Theiss (Hungary), Arthur Cox (Ireland), Pavia e Ansaldo (Italy), PH Conac (Luxembourg),Houthoff Buruma (Netherlands), Siemiatkowski & Davies (Poland), F Castelo Branco & Associados (Portugal), Wolf Theiss (Romania), Wolf Theiss (Slovakia), Gómez-Acebo & Pombo (Spain), Setterwalls (Sweden), and Reynolds Porter Chamberlain LLP (United Kingdom); and outside the EU to Freehills (Australia), Miller Thomson (Canada), HHP (China), Cheng Wong Lam & Partners (Hong Kong), JSA Associates (India), Nagashima Ohno & Tsunematsu (Japan), Sameta Tax & Legal Consulting (Russia), and McCarter & English (United States). Our thanks also go to the operational group: Antje Luke, Jacques Deege, Bruno Garell, Sandra Bogensperger, Naomi Waibel, Michèle Bley and Paul Irlando. Chapter four in this study was drafted by Diego Valiante, Research Fellow, (coordinator) and Mirzha de Manuel, Researcher, from the Centre for European Policy Studies (CEPS), a Brussels-based independent think-tank. They would like to thank Damiano Aureli, Visiting Research Assistant, for his operational support.

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TABLE OF CONTENTS

KEY TAKEAWAYS ..................................................................................................................................................... 16

INTRODUCTION AND EXECUTIVE SUMMARY................................................................................................... 22

I. STATUS AND QUALITY OF TRANSPOSITION............................................................................................ 25

I. Status of transposition .................................................................................................................................. 25

II. General assessment on whether the objectives have been reached ................................................ 25

A. Description of objectives.............................................................................................................................................................. 25 1. General objectives of EU law.................................................................................................................................... 25 2. Specific objectives of the Directive ....................................................................................................................... 26

B. Assessment .......................................................................................................................................................................................... 26 1. Scope of changes ........................................................................................................................................................... 26 2. Direction of changes .................................................................................................................................................... 27

II. BROADER ASPECTS AND IMPLICATIONS OF TAKEOVER REGULATION ........................................... 28

I. Economic analysis........................................................................................................................................... 29

II. Broader corporate governance issues ...................................................................................................... 31

A. Preliminary questions ................................................................................................................................................................... 31

B. Basic corporate governance views and their impact on takeover regulation ................................................. 32

C. The market view vs. the blockholder view.......................................................................................................................... 33

III. Comparative law ............................................................................................................................................. 34

A. Theoretical approach.................................................................................................................................................................... 34

B. Empirical review.............................................................................................................................................................................. 34

III. KEY OUTCOMES ............................................................................................................................................... 35

I. National legal framework and operation of the Directive .................................................................. 36

II. The mandatory bid rule ................................................................................................................................ 38

III. Takeover defences.......................................................................................................................................... 42

IV. Squeeze- and sell-out rules .......................................................................................................................... 43

V. Disclosure of information............................................................................................................................. 45

VI. Supervisory authority, enforcement and litigation .............................................................................. 46

VII. Control structures and barriers not covered by the Directive........................................................... 47

STUDY ON THE APPLICATION OF DIRECTIVE 2004/25/EC ON TAKEOVER BIDS .................................. 50

CHAPTER ONE: STATUS AND QUALITY OF TRANSPOSITION ....................................................................... 56

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I. Status of transposition .................................................................................................................................. 58

II. General assessment on whether the objectives have been reached ................................................ 59

A. Description of objectives.............................................................................................................................................................. 59 1. General objectives of EU law.................................................................................................................................... 59 2. Specific objectives of the Directive ....................................................................................................................... 60

2.1. Integration and harmonisation .................................................................................................................... 60 2.2. Protecting the interests of shareholders and stakeholders............................................................. 61

B. Assessment .......................................................................................................................................................................................... 61 1. Scope of change.............................................................................................................................................................. 62 2. Direction of change ...................................................................................................................................................... 63 3. Impact on takeover activity...................................................................................................................................... 67

CHAPTER TWO: BROADER ASPECTS AND IMPLICATIONS OF TAKEOVER REGULATION..................... 69

I. Some key economic issues ........................................................................................................................... 71

A. The collective action issue........................................................................................................................................................... 71 1. The collective action paradox.................................................................................................................................. 71 2. Explanation of the paradox ...................................................................................................................................... 72

B. The pressure-to-tender issue ..................................................................................................................................................... 73

II. Broader corporate governance issues ...................................................................................................... 73

A. Preliminary questions ................................................................................................................................................................... 74

B. The basic corporate governance views and their impact on takeover regulation ........................................ 75

C. The market view vs. the blockholder view.......................................................................................................................... 78

III. Comparative Law ............................................................................................................................................ 79

A. Theoretical Approach.................................................................................................................................................................... 79 1. The “community control gap” ................................................................................................................................. 79 2. The dynamics of federal states ............................................................................................................................... 80 3. The impact of shareholding structure ................................................................................................................. 80

B. Empirical review.............................................................................................................................................................................. 81 1. The three main models............................................................................................................................................... 81 2. Case study: US-EU comparison ............................................................................................................................... 81 3. Case study: the criminal action in Vodafone/Mannesmann...................................................................... 82

CHAPTER THREE: KEY OUTCOMES ..................................................................................................................... 86

I. National legal framework and operation of the Directive .................................................................. 88

A. Clarity.................................................................................................................................................................................................... 88

B. Transposition and loopholes ..................................................................................................................................................... 90 1. Transposition.................................................................................................................................................................. 90 2. Loopholes ......................................................................................................................................................................... 92

C. Developments not directly linked to transposition ........................................................................................................ 92

D. Gold-plating........................................................................................................................................................................................ 96

E. General principles of the Directive ......................................................................................................................................... 97 1. Protection of shareholders ....................................................................................................................................... 98

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1.1. Equal treatment .................................................................................................................................................. 98 a. Descriptions and general assessment ................................................................................................ 98 b. Specific issues................................................................................................................................................ 98

1.2. Proper Information............................................................................................................................................ 99 1.3. Market Integrity ................................................................................................................................................100

2. Protection of employees ..........................................................................................................................................101 2.1. Basic and enhanced protection ..................................................................................................................101 2.2. Traditional limits and recent reforms.....................................................................................................102

3. Protection of other stakeholders .........................................................................................................................104 3.1. Description ..........................................................................................................................................................104 3.2. The core debate.................................................................................................................................................104 3.3. Alternative methods........................................................................................................................................105

F. Exemptions to the Directive .....................................................................................................................................................106 1. Overview.........................................................................................................................................................................106 2. Effects of exemptions on the Directive..............................................................................................................107

G. Comparison with Major Non-EU Jurisdictions ...............................................................................................................107 1. Overview of the existence of general principles set out by the Directive in Major Non-EU

Jurisdictions ..................................................................................................................................................................107 2. Equal treatment equivalent in the US: All-holders/best-price rule .....................................................108 3. US State merger and takeover statutes.............................................................................................................109 4. Class struggle issues in Major Non-EU Jurisdictions...................................................................................110 5. Time frames applicable to the duration of bids ............................................................................................111 6. Protection of market integrity by offerors’ financial advisors ...............................................................111 7. Employee Protection.................................................................................................................................................114

7.1. Assessment of employee protection in Major Non-EU Jurisdictions.........................................114 7.2. Focus on the US .................................................................................................................................................115

a. A variety of laws.........................................................................................................................................115 b. Stakeholders’ statutes. ............................................................................................................................115

8. Corporate Interests....................................................................................................................................................116

H. Perception .........................................................................................................................................................................................116 1. Objectives and application of the Directive.....................................................................................................116 2. General principles.......................................................................................................................................................118 3. Employment issues ....................................................................................................................................................120

II. The mandatory bid rule ..............................................................................................................................121

A. Objectives...........................................................................................................................................................................................122

B. Transposition...................................................................................................................................................................................125 1. Definition of control...................................................................................................................................................126

1.1. Crossing of a specified threshold...............................................................................................................126 1.2. Acquisition of actual control........................................................................................................................128 1.3. Summary view ...................................................................................................................................................129 1.4. Specific computation issues.........................................................................................................................131

2. Definition of acting in concert ...............................................................................................................................132 2.1. “Acting in concert” ...........................................................................................................................................133 2.2. Presumptions of acting in concert and guidance ...............................................................................134 2.3. Specific issues and questions related to acting in concert .............................................................138

a. The “agreement” (nature, parties, evidence)................................................................................138 b. The content of the agreement..............................................................................................................138

3. Exemptions to the mandatory bid rule .............................................................................................................139 3.1. Exemptions: criteria........................................................................................................................................139

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3.2. Discretionary exemptions ............................................................................................................................140 a. Exemptions decided by the supervisory authority ....................................................................140 b. Exemptions decided by shareholders (whitewash procedure)............................................140 c. Specific exemptions ..................................................................................................................................141

(1) Technical exemptions ...................................................................................................................141 (2) Protection of the offeror or the controlling shareholder ..............................................142

(a) Situations where there is no real change of control ................................................142 (b) Situations in which there is a real change of control ..............................................144

(3) Protection of creditors..................................................................................................................147 (4) Protection of other stakeholders .............................................................................................148

(a) The offeree company is in a financially distressed situation ................................148 (b) Control was acquired pursuant to specific types of corporate transactions..149 (c) The rule is not applicable to certain entities that have acquired control .......151 (d) Protection of State interest and public order .............................................................151

3.3. Summary table...................................................................................................................................................152 3.4. Exemption: practice of supervisory authorities .................................................................................155

4. Loopholes and circumvention of the mandatory bid rule ........................................................................155 5. Price determination...................................................................................................................................................156

5.1. Reference to previous acquisitions ..........................................................................................................157 5.2. Additional criteria for determining the “equitable price”..............................................................157 5.3. Adjustment of the price by supervisory authorities.........................................................................159

C. Comparison with Major Non-EU Jurisdictions ...............................................................................................................163 1. Main events triggering mandatory takeover bids........................................................................................163 2. Whitewash procedures in Major Non-EU Jurisdictions.............................................................................166 3. Intra-group exemption in India ............................................................................................................................168 4. Price setting...................................................................................................................................................................169 5. Schemes of arrangement in Major Non-EU Jurisdictions..........................................................................172 6. US takeover bids, one-step mergers and two-tier takeover bids ..........................................................174

D. Perception .........................................................................................................................................................................................175 1. Acting in concert .........................................................................................................................................................175

1.1. Different definitions ........................................................................................................................................175 1.2. Clarity ....................................................................................................................................................................175 1.3. Presumptions .....................................................................................................................................................176 1.4. Enforcement .......................................................................................................................................................177

2. The mandatory bid rule ...........................................................................................................................................177 2.1. Protection of minority stakeholders........................................................................................................177 2.2. The equitable price rule.................................................................................................................................178

a. The perception of the rule .....................................................................................................................178 b. The use of the exemptions to the equitable price rule..............................................................180

2.3. Use of exemptions ............................................................................................................................................180 2.4. Enforcement issues..........................................................................................................................................182 2.5. Economic impact of the mandatory bid .................................................................................................183

III. Takeover defences........................................................................................................................................185

A. Objectives...........................................................................................................................................................................................188

B. Transposition...................................................................................................................................................................................188 1. Board Neutrality Rule ...............................................................................................................................................190

1.1. Opting out/Opting in.......................................................................................................................................190 1.2. Transposition of the board neutrality rule ...........................................................................................191 1.3. Reciprocity...........................................................................................................................................................192

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1.4. Exception to neutrality ..................................................................................................................................193 1.5. Compensation as a pro-bid mechanism .................................................................................................194

2. Breakthrough................................................................................................................................................................195 3. Summary view on neutrality and breakthrough rules...............................................................................196 4. Other defences .............................................................................................................................................................197

C. Comparison with Major Non-EU Jurisdictions ...............................................................................................................199 1. Board neutrality ..........................................................................................................................................................199 2. Breakthrough rule ......................................................................................................................................................202 3. US business judgement rule, Unocal and Revlon duties............................................................................202

3.1. Overview ..............................................................................................................................................................202 3.2. The core principle: the business judgement rule...............................................................................202 3.3. Enhanced standards applicable during takeover bids.....................................................................202 3.4. Stakeholder statutes .......................................................................................................................................204

4. Reciprocity.....................................................................................................................................................................204 5. Defences used...............................................................................................................................................................204

5.1. US takeover defences......................................................................................................................................204 a. Pre-bid defences ........................................................................................................................................204 b. Post-bid defences.......................................................................................................................................205

5.2. Poison pills in Australia .................................................................................................................................205 5.3. Shareholders’ rights plans in Canada ......................................................................................................205 5.4. Changes in the use of defensive mechanisms ......................................................................................206

a. The US.............................................................................................................................................................206 b. Rare bids........................................................................................................................................................207

(1) Hong Kong ..........................................................................................................................................207 (2) Japan .....................................................................................................................................................207

6. Supervisory authority and dispute resolution...............................................................................................208 6.1. Overview ..............................................................................................................................................................208 6.2. Description of “unacceptable circumstances” in Australia............................................................208

D. Perception .........................................................................................................................................................................................209 1. Openness and competitiveness ............................................................................................................................209 2. Intention of stakeholders ........................................................................................................................................210 3. Legislation is no major obstacle to bids............................................................................................................211 4. Transparency................................................................................................................................................................211 5. Application of defences ............................................................................................................................................212

5.1. Use of defences ..................................................................................................................................................212 a. Regarding pre-bid defences..................................................................................................................212 b. Regarding post-bid defences................................................................................................................213

5.2. Success of defences..........................................................................................................................................214 a. Regarding pre-bid defences..................................................................................................................214 b. Regarding post-bid defences................................................................................................................215

5.3. No increase or decrease of defences........................................................................................................216 a. Regarding pre-bid defences..................................................................................................................217 b. Regarding post-bid defences................................................................................................................218

5.4. No impact on frequency or success of bids...........................................................................................219

IV. Squeeze-out and sell-out rules..................................................................................................................219

A. Objectives...........................................................................................................................................................................................220

B. Transposition...................................................................................................................................................................................220 1. Squeeze-out and sell-out following a bid .........................................................................................................220

1.1. Thresholds and available time period.....................................................................................................221

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1.2. Chosen thresholds............................................................................................................................................222 2. Fair Price.........................................................................................................................................................................223

2.1. Analysis of the EU rule ...................................................................................................................................223 2.2. Transposition .....................................................................................................................................................223

3. Enforcement..................................................................................................................................................................224 4. Alternative procedures ............................................................................................................................................225

4.1. Squeeze-out procedures independent from takeover bids ...........................................................225 4.2. Sell-out procedures independent from takeover bid .......................................................................226 4.3. Other ......................................................................................................................................................................227

a. Schemes of arrangement........................................................................................................................227 b. Cash-out mergers ......................................................................................................................................227

5. Mapping of squeeze-out and sell-out rules .....................................................................................................230

C. Comparison with Major Non-EU Jurisdictions ...............................................................................................................237 1. Squeeze-out and sell-out procedures in Major Non-EU Jurisdictions .................................................237 2. Disclosure of dissenting directors’ opinions in the US...............................................................................241

D. Perception .........................................................................................................................................................................................241 1. Clarity and application .............................................................................................................................................241 2. Assessment of the rules............................................................................................................................................243

V. Disclosure of information...........................................................................................................................245

A. Objectives...........................................................................................................................................................................................246

B. Transposition...................................................................................................................................................................................247

C. Comparison with Major Non-EU Jurisdictions ...............................................................................................................248 1. Transparency regarding defences ........................................................................................................................248 2. Overview of information required in the Offer Document in Major Non-EU Jurisdictions .......249 3. Preparation of the offeree company’s opinion on a bid (involvement of independent board

committees and/or advisors)................................................................................................................................251

D. Perception .........................................................................................................................................................................................253 1. Satisfaction regarding disclosures ......................................................................................................................253 2. Support for further disclosure ..............................................................................................................................254 3. Clarity and harmonisation ......................................................................................................................................257

VI. Supervisory authority, enforcement and litigation ............................................................................257

A. Objectives...........................................................................................................................................................................................257

B. Transposition...................................................................................................................................................................................258 1. Guidance by supervisory authorities .................................................................................................................258 2. Enforcement by Supervisors and courts ..........................................................................................................258 3. Sanctions.........................................................................................................................................................................260

C. Comparison with Major Non-EU Jurisdictions ...............................................................................................................264 1. Enforcement of takeover bid rules: the Russian example ........................................................................264 2. Swiss Shareholder Involvement...........................................................................................................................264

D. Perception .........................................................................................................................................................................................265 1. Clarity and guidance..................................................................................................................................................265 2. Enforcement..................................................................................................................................................................265

VII. Control structures and barriers not covered by the Directive.........................................................267

A. Overview ............................................................................................................................................................................................267

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B. Cross-shareholdings and pyramid structures .................................................................................................................267 1. Cross-shareholdings ..................................................................................................................................................267 2. Pyramids.........................................................................................................................................................................268 3. Frequency.......................................................................................................................................................................269

C. Other barriers..................................................................................................................................................................................269

D. Comparison with Major Non-EU Jurisdictions ...............................................................................................................270

E. Perception .........................................................................................................................................................................................270

CHAPTER FOUR: ECONOMIC STUDY .................................................................................................................272

I. Setting the scene: the takeover bid process ..........................................................................................273

II. Rationales for takeover regulation..........................................................................................................274

A. Coordination issues ......................................................................................................................................................................275

B. Agency problems............................................................................................................................................................................278

C. Empire building transactions..................................................................................................................................................279

D. Company-specific investments protection........................................................................................................................279 Box 1. Control as a “corporate asset” ........................................................................................................................280

E. Other relevant issues ...................................................................................................................................................................280 Box 2. Market evolution and the introduction of the Directive.....................................................................283 Box 3. The dataset..............................................................................................................................................................286

III. Designing takeover regulation..................................................................................................................286

IV. Anatomy of the Directive ............................................................................................................................287

A. The Mandatory Bid Rule ............................................................................................................................................................288 1. Key elements.................................................................................................................................................................289 2. Other economic issues..............................................................................................................................................293 Box 4. Alternatives to the mandatory bid rule......................................................................................................298 3. Implementation score...............................................................................................................................................298

B. The Board Neutrality Rule........................................................................................................................................................299 1. Economic impact.........................................................................................................................................................301 2. Optionality .....................................................................................................................................................................302 3. Reciprocity.....................................................................................................................................................................303 4. Implementation score...............................................................................................................................................304

C. Taxonomy of defensive measures..........................................................................................................................................305 1. Shareholder rights plans .........................................................................................................................................306

D. The Breakthrough Rule ..............................................................................................................................................................307 1. Economic impact.........................................................................................................................................................310 2. Equitable compensation ..........................................................................................................................................311 3. Optionality and reciprocity ....................................................................................................................................312 4. Implementation score...............................................................................................................................................313

E. Squeeze-out and sell-out rules................................................................................................................................................314 1. Squeeze-out right........................................................................................................................................................314 2. Squeeze-out rule implementation score...........................................................................................................317 3. Sell-out right..................................................................................................................................................................318

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F. Empirical analysis.........................................................................................................................................................................319

G. Conclusions .......................................................................................................................................................................................320

V. Impact of the Directive on competitiveness..........................................................................................323

A. Defining competitiveness...........................................................................................................................................................323

B. Takeovers and competitiveness .............................................................................................................................................325 1. Introduction ..................................................................................................................................................................325 2. Linking takeovers to the pillars in the GCI ......................................................................................................330

C. The Directive and competitiveness.......................................................................................................................................337

D. Empirical analysis.........................................................................................................................................................................340

VI. Impact of the Directive on employment and employees ...................................................................342

A. Approach to labour market efficiency................................................................................................................................343

B. Effects of takeovers on employment ....................................................................................................................................343

C. Employment provisions in the Directive............................................................................................................................347

ANNEX 1: Definitions ............................................................................................................................................369

ANNEX 2: Tables included in the Study............................................................................................................374

ANNEX 3: Perception Questionnaires ..............................................................................................................376

ANNEX 4: Effects of takeovers on employment: case studies ....................................................................378

ANNEX 5: Planned job creation in M&A deals................................................................................................381

ANNEX 6: Implementation Scores – Methodology ........................................................................................385

ANNEX 7: Stakeholder Protection Indexes ..........................................................................................................0

ANNEX 8: Econometric Analysis .............................................................................................................................4

List of Tables

Table 1. Control transfers ...................................................................................................................273 Table 2. The prisoner’s dilemma.........................................................................................................277 Table 3. Abnormal returns around announcement date....................................................................282 Table 4. Descriptive statistics..............................................................................................................282 Table 5. Voluntary vs. mandatory rules ..............................................................................................286 Table 6. Mandatory bid rule thresholds .............................................................................................291 Table 7. Defensive measures ..............................................................................................................306 Table 8. Availability of poison pills in key EU jurisdictions .................................................................307 Table 9. Presence of control enhancing mechanisms in European companies..................................308 Table 10. Impact of the squeeze-out and sell-out rights ....................................................................314 Table 11. Trade-offs in takeover regulation .......................................................................................320 Table 12. Impact of takeover regulation (± relationship and intensity) .............................................322 Table 13. Competitiveness “pillars” considered by the Global Competitiveness Index of the WEF ..324 Table 14. Linking competitiveness to takeovers.................................................................................325 Table 15. Impact on long-term performance .....................................................................................325

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Table 16. Implementation scores .......................................................................................................386

List of Figures

Figure 1. Coordination issues..............................................................................................................276 Figure 2. Agency costs and ownership concentration ........................................................................278 Figure 3. Abnormal returns (by period, weighted average) ...............................................................282 Figure 4. Abnormal returns in Continental Europe vs. UK..................................................................283 Figure 5. Evolution of takeovers in Europe.........................................................................................284 Figure 6. Numbers of takeovers in the UK..........................................................................................284 Figure 7. Number of Intra-EU Takeover Deals 2003-2010..................................................................285 Figure 8. The Directive’s tools.............................................................................................................288 Figure 9. Mandatory bid rule main trade-off......................................................................................289 Figure 10. Mandatory bids (by periods)..............................................................................................290 Figure 11. Mandatory bids (% of total number of takeovers, per year).............................................290 Figure 12. Threshold level impact.......................................................................................................292 Figure 13. Average completion time...................................................................................................293 Figure 14. Deals with and without acquirer’s initial stake..................................................................294 Figure 15. Weighted average initial stake...........................................................................................295 Figure 16. Takeovers with competing bids .........................................................................................296 Figure 17. Number of competing bids (over total deals, per year) ....................................................296 Figure 18. Hostile deals.......................................................................................................................297 Figure 19. MBR implementation scores..............................................................................................298 Figure 20. Procedural arrangements for adopting defensive measures ............................................299 Figure 21. Decision Tree......................................................................................................................302 Figure 22. BNR implementation scores ..............................................................................................304 Figure 23. Breakthrough rule ..............................................................................................................310 Figure 24. BTR implementation scores ...............................................................................................313 Figure 25. Stake owned by the acquirer after a takeover transaction ...............................................315 Figure 26. Squeeze-out implementation scores .................................................................................318 Figure 27. Methodology – Impact of the Directive on competitiveness ............................................323 Figure 28. From competitiveness to growth.......................................................................................324 Figure 29. Takeovers’ virtuous cycle...................................................................................................328 Figure 30. Number of takeover deals by method of settlement ........................................................329 Figure 31. Consideration paid in takeover deals in Europe ................................................................329

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Report Structure The structure of the report collates all the key expected outcomes of the study. We have identified our Key Takeaways in Twelve Key Results. The Executive Summary composes our analytical conclusion based on the Core Report on the application of Directive 2004/25/EC on Takeover Bids. It also includes the executive summary of the Economic Study prepared by CEPS. The Executive Summary also sets out our views as to whether the Directive currently fulfils its key objectives. Chapters one through four of the Core Report on the application of Directive 2004/25/EC on Takeover Bids details the results of the stakeholder perception and legal questionnaires, interviews, direct research, and the Economic Study, prepared by CEPS. The final section concludes the Core Report. Supervisory authorities and certain laws and regulations referred to in this Study appear in Annex 1. The tables summarizing the results of the stakeholder perception included in the Core Report are specifically attached as Annex 2. The Perception Questionnaires are attached as Annex 3. Annexes 4 through 9 relate to the Economic Study (Chapter four of the study).

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KEY TAKEAWAYS

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Twelve Key Results 1. The Directive has been transposed in all Sample Countries1 and no substantial compliance issue

has emerged, except in a limited number of Other EU Jurisdictions or for a limited set of specific issues.

2. The transposition of the Directive has not led to major changes. Regarding the legal framework in each Member State, this is due to three factors: in a number of countries, the Directive prescribed rules that had been in existence for a long time (e.g. in the United Kingdom); in other countries, changes were introduced in view of the future adoption of the Directive (e.g. in Germany); in several cases, the most important changes were introduced in reaction to sensitive bids or the economic situation, without there being a direct link with the Directive (e.g. Italy or Hungary). Regarding the impact of the Directive on the frequency and structure of bids, the 2008 crisis has rendered meaningful comparisons almost impossible.

3. The Directive has, however, led to improvements (in view of its objectives) that should not be underestimated: coordination regarding cross-border bids; general principles; disclosure; the mandatory bid rule; squeeze-out and sell-out rules. A mapping of changes that have been introduced after the Directive has been transposed, or in view of its adoption, show that the legal system is more “shareholder oriented” 2as a result.

4. The debates that led to the optionality of Articles 9 and 11 of the Directive have not faded away. There is no clear consensus on how to move on the optionality and reciprocity issues and generally speaking, there seems to be little appetite to change these rules. This appears to be due to two factors: at the national level, there seems to be both fear that there is more to lose than to gain as a result of a possible change (this being true for Main EU Jurisdictions, notably the United Kingdom and Germany) and a need to absorb new EU rules (for Other EU Jurisdictions for which the transposition has led to significant changes); at the level of issuers, investors and intermediaries, the feelings regarding defences are balanced. First, such defences are perceived as a way to increase bid prices, but also as creating an increased risk that bids will fail. Second, there is a general feeling that there are not many possibilities for board defences and sufficient abilities to break through existing defences. Regarding other barriers to takeovers, which are not addressed by the Directive, such as pyramid structures and cross-shareholdings, there is both a general desire to remove undue obstacles to bids while also a question as to whether any measures in this respect would be efficient and not counter-productive. Regarding other barriers, such as those that may be derived from the uses of control enhancing mechanisms, there is no evidence that the conclusions reached in the “One Share – One Vote” study commissioned by the European Commission in 2007 should be changed.

5. Legal and economic analysis shows the intrinsic contradiction between the mandatory bid rule, which acts as an anti-takeover device, and the board neutrality rule, breakthrough and squeeze-out rules, the purposes of which are to facilitate bids. From a legal standpoint, the contradictions may be reconciled if the Directive is viewed as intending to facilitate bids (through the board neutrality and breakthrough rules) while protecting the interests of minority shareholders (through the mandatory bid and the sell-out rules).

6. Economic analysis shows that there is no clear evidence that the Directive promotes economic efficiency. From a theoretical standpoint, free movement of capital is an element of overall economic efficiency, under the conditions of rational behaviour, fully informed agents and absence of transaction costs; however, these conditions are not always met (e.g. acquisitions may be made for empire building purposes, shareholders are subject to the contradictory forces of free-riding propensity and pressure-to-tender coercion, information may be missing,

1 Please refer to the introduction of the Executive Summary for the definition of “Sample Countries”, “Main

EU Jurisdictions” and “Other EU Jurisdictions”. 2 However, whether a system is more or less “shareholder oriented” is subject to debate.

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transaction costs may be high for dispersed shareholders) and acquisitions come with negative externalities (e.g. they create a disincentive for firm-specific investment in human capital). As a result, from an empirical standpoint, the evidence in the literature is mixed. Takeovers can both increase or decrease shareholder value.

7. “Corporate governance” analysis shows that the Directive is based on two different views of corporations: shareholder or stakeholder oriented. This contradiction is summarized in the general principle set forth in Article 3.1(c) of the Directive, which states that “an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid.”

8. Comparative analysis shows that three systems of corporate governance co-exist and affect capital markets: a management-oriented system (such as in the United States), a shareholder-oriented system (such as in the UK) and a blockholder oriented system (such as in Continental Europe). Each system should be assessed in light of its specificities regarding shareholder structures (dispersed versus concentrated), legal framework (protection of minority shareholders, employees and other stakeholders and general corporate law regarding fiduciary duties and corporate interest) and financial status (mature financial markets versus emerging markets). Only a comprehensive analysis may prevent the pitfalls of insufficiently tailored legal transplants.

9. Overall, there is a reasonable level of satisfaction among stakeholders regarding the Directive: a majority of stakeholder considers it clear, enforcement is not generally considered an issue, the allocation of competences between supervisors has not raised practical issues, the protection of minority shareholders is seen as having been enhanced by the Directive, the disclosure regime is not contested and seems to be essentially complied with, and the mandatory bid, squeeze-out and sell-out regimes are, in substance, approved.

10. One category of stakeholders, the employees, is however not satisfied with the Directive. They generally view takeovers as creating high risks of lay-offs and voluntary retirements at the purchased company’s level, an assessment that is shared by issuers and investors and intermediaries. They see risks regarding working conditions and early retirements and consider that the risks also exist at the level of the acquirer (an analysis which is generally not shared by other stakeholders). In addition, they consider that the consultation process is not organized in a satisfactory manner and regret the absence of appropriate enforcement mechanisms when offerors do not act in compliance with the intentions they have stated during the bid period.

11. The mandatory bid rule is perceived as effective, although there is some debate regarding some of the (numerous) exemptions that exist, e.g. in connection with exemptions existing for shareholders coming to act in concert without acquiring shares, exemptions regarding certain corporate transactions (such as capital increases) or benefiting certain entities (such as foundations). Stakeholders do not perceive any significant issue regarding the exemption for companies in financial distress, which is frequently used. Price adjustment, although possible, seems to be rare in practice. The frustrations seem to come from three areas: the definition of acting in concert (viewed as potentially too broad by institutional investors), the use of cash-settled derivatives to build up an interest in connection with a takeover bid, and the propensity to try and obtain de facto control through an interest remaining just below the threshold triggering a mandatory bid (e.g. a 29.9% interest). Some concern has also been raised in connection with voluntary bids launched at a low price in order to get slightly above the triggering threshold (e.g. 30%), which allows the offeror to increase its stake in a second step without triggering a mandatory bid.

12. The squeeze- and sell-out rules are generally approved. The former is frequently used while the latter seems a rare occurrence. The 90% and 95% thresholds are generally accepted, with a preference for the former, in particular, since a popular strategy with speculative investors

20

seems to be to acquire a 5% (or 10%) interest to block the squeeze-out and attempt to negotiate a higher price with the offeror. However, solutions exist to limit this risk (such as the German “top-up” rule3). The risk may also be avoided by facilitating alternative means of acquiring 100% control for cash (such as cash-out mergers or schemes of arrangement).

3 Please refer to Chapter III Section I E 1.1 (b) for more information on this concept.

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INTRODUCTION AND EXECUTIVE SUMMARY

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INTRODUCTION Framework. The EU Directive 2004/25/EC on Takeover Bids (the “Directive ” or the “Takeover Bids Directive”) sets out minimum guidelines for the conduct of takeover bids involving the securities of companies governed by the laws of EU Member States, where all or some of these securities are admitted to trading on a regulated market. It also seeks to provide an adequate level of protection for holders of securities throughout the community of Member States by establishing a framework of common principles and general requirements that Member States must transpose by means of (more detailed) rules in accordance with their national systems and cultural contexts. History. The Commission presented the first proposal for a directive regulating takeover bids to the Council in 1989, and, after discussions, a second proposal containing less detailed provisions to the Council and the European Parliament in 1996. The European Parliament rejected the proposal in July 2001, and a third proposal was published on October 2, 2002. The Directive was adopted on April 2, 2004 and Member States were required to transpose the Directive by May 20, 2006. Review of the Directive. Article 20 of the Directive provides that five years after the transposition deadline, the European Commission shall examine the Directive “in the light of the experience acquired in applying it and, if necessary, propose its revision.” In the framework of this examination, the European Commission has entrusted Marccus Partners with producing a Study (the “Study”) assessing the functioning of the Directive. Regarding the economics of the Directive and takeover bids, Marccus Partners has partnered with the Centre for European Studies (“CEPS”), which has produced an economic analysis (the “Economic Study”), set out in Chapter 4. Definition and Scope. Throughout the Study, all EU Member States will be collectively referred to as “Member States” and the 22 Member States reviewed in this Study will be referred to as “Sample Countries.” The Sample Countries are Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Sweden and the United Kingdom. Out of these Sample Countries, France, Germany, Italy, Spain and the United Kingdom are referred to as “Main EU Jurisdictions” and Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Luxembourg, the Netherlands, Poland, Portugal, Romania, Slovakia and Sweden are referred to as “Other EU Jurisdictions.” For the comparison of the Directive’s legal framework in major third-countries, the nine “Major Non-EU Jurisdictions ” are Australia, Canada, China, Hong Kong, India, Japan, Russia, Switzerland and the United States. The stakeholders consulted in connection with this Study are referred to as “Sample Stakeholders.” They are composed of supervisors, stock exchanges, issuers, employee representatives, other stakeholder associations and investors and intermediaries, which are composed of retail investors, financial intermediaries and institutional investors.

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EXECUTIVE SUMMARY

I. STATUS AND QUALITY OF TRANSPOSITION Key concepts. � The Directive has been fully transposed. Significant progress has been achieved regarding

harmonisation, in particular regarding process (supervision of cross-border bids) and substance (mandatory bids, squeeze- and sell-outs).

� A precise analysis of the content of the Directive leads to a balanced conclusion regarding its objectives. The overall effect of the Directive, although difficult to measure precisely, seems to be in line with its original intent. However, a more detailed analysis (developed below) is necessary to assess its impact in comparison with its objectives.

I. Status of transposition Transposition is complete. All Sample Countries have transposed the Directive. Finland has set up a partially non-binding framework and although it is unclear whether such non-binding framework is sufficient, the Finnish rules appear in practice to comply with the Directive. It should be noted that many Member States transposed the Directive gradually, through various pieces of legislation, rather than all at once. The dates of transposition refer to the year in which the Directive was substantially or fully transposed in the relative Member States. Sample Countries and the respective transposition dates of the Directive are listed below:

Year Countries 2005 Poland, Romania. 2006 Austria, Denmark, Finland, France, Germany, Greece, Hungary,

Ireland, Luxembourg, Portugal, Sweden, UK. 2007 Belgium, Cyprus, Italy, Netherlands, Slovakia, Spain. 2008 Czech Republic, Estonia.

II. General assessment on whether the objectives have been reached

A. Description of objectives This Section assesses the Directive in light of the general objectives of EU law and the specific objectives of the Directive itself.

1. General objectives of EU law Description. With regard to general principles, the Lisbon Strategy introduced the EU objective of becoming the “most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth, with more and better jobs and greater social cohesion.” The 1999 Financial Services Action Plan and the 2003 EU Company Law Plan called for an integrated financial market and improved shareholder rights, while remaining sensitive to “social and environmental

26

performance” in view of “long term sustainable growth.” Specific concern for stakeholders has also been mentioned in the Commission’s vision for the single market of the 21st century (February 2007). It may be noted that this principle is also reflected in the OECD principles on corporate governance.

2. Specific objectives of the Directive Description. The objectives of the Directive, as described in its recitals, are: (i) legal certainty on the takeover bid process and Community-wide clarity and transparency with respect to takeover bids, (ii) protection of the interests of shareholders, in particular minority shareholders, employees and other stakeholders, when a company is subject to a takeover bid for control, and (iii) reinforcement of the freedom for shareholders to deal in and vote on securities of companies and prevention of management action that could frustrate a bid. Integration and harmonisation. One of the purposes of the Directive is to promote the integration of European capital markets. Several rules of the Directive work towards that goal: the board neutrality rule, the breakthrough rule and the squeeze-out rule. The board neutrality and the breakthrough rules are, however, mitigated by optional arrangements and the reciprocity exception, resulting in a more balanced approach. The issue of legal transplants. It is now commonly acknowledged that, when transposed into a different legal system, a rule can achieve different results than expected. As the EU legal framework regarding company law is far from harmonized and the ownership structure of companies also varies significantly from country to country, this issue must be taken seriously when evaluating the functioning of the Directive. Protection of various interests. A variety of interests are protected by the Directive. Minority shareholders are protected by the mandatory bid and sell-out rules. The Directive also recognizes the need to protect employees of the offeree company through information rights and the right to issue an opinion. The Directive does not affect national provisions on co-determination. These rules allow employees and employee representatives to proceed with a proper analysis of the bid and, if need be, to express their concerns. Protection of offeree companies is achieved by taking into account the interest of the offeree company “taken as a whole,” and through the rules concerning the disclosure of the offeror’s intentions as to the future business of the offeree company and the likely repercussions of the takeover on the employees of the offeree company. Moreover, the opinion of the Board of the offeree company is taken into account and the bid should not disturb the normal course of business of the offeree company for an excessive duration.

B. Assessment Debate on the net impact of the Directive. There is a general debate as to whether the Directive has had any significant impact and whether, when assessed in light of its objectives, any such impact has been positive or negative. As discussed below, the impact of the Directive is tangible and overall, subject to various caveats, it seems to be in line with its objectives.

1. Scope of changes Creation or reinforcement of the national legal frameworks. The Directive contributed to set up a legal framework in countries (such as Cyprus, Luxembourg and Greece) where no substantial legal framework existed, as well as in others where the legal framework had been put in place while negotiations relating to the Directive took place (e.g. in Germany). In Member States with a substantial pre-existing legal framework, the Directive strengthens or further details certain provisions of the pre-existing legal framework.

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Harmonisation. The Directive led to the harmonisation of certain rules regarding takeover bids such as the mandatory bid rule, the equitable price, employee information rights or squeeze- and sell-out rights. It is interesting to note that the harmonisation triggered by the Directive also took place where the Directive left flexibility (e.g. factual convergence of the thresholds for “control”). In addition, Article 3 of the Directive lays down a series of general principles that must always be complied with (even when exemptions are applied). However, the optionality principle has led to an absence of harmonisation regarding board neutrality. In contrast, the fact that almost no country has opted for the breakthrough rule leads to a harmonised “freedom of contract” approach to pre-bid defences. Facilitation of bids. As its transposition is still rather recent and because of the market turndown in 2008, it is difficult to assess to what extent the Directive facilitates takeover bids. Nonetheless, 59% of the stakeholders consider that the transposition of the Directive produced benefits compared to the previously existing legal framework.

2. Direction of changes Protection of shareholder and stakeholder rights. The general principles set out in the Directive as well as its provisions have generally contributed to increased protection of shareholder and stakeholder rights. However, some issues remain, particularly regarding employee protection. Overall mapping. Producing an overall mapping of changes introduced by the Directive is a complex exercise, which depends on which basis a rule is considered more “shareholder oriented” or “stakeholder oriented.”4 The level of change (significant, not significant, in between) may not be precisely quantified and depends on three factors: (i) the content of the legal framework, (ii) its application in practice by supervisory authorities and jurisdictions, and (iii) its application and perception by interested parties. Based on the legal implications and market perception data gathered (further detailed in the Study), the following mapping of changes may be proposed:

Mapping of changes introduced by the Directive Significant changes Some changes No significant

changes More shareholder-oriented

Cyprus,5 Czech Republic,6 Estonia,7

[Germany],8 Greece,9 [Hungary], Luxembourg,10 Netherlands,11 Poland,12

Slovakia,13 Spain.14

Belgium,15 Finland.16 [Germany], Romania.

4 As discussed in the Core Report, different assumptions would lead to different results. 5 New overall framework. 6 Modified the mandatory bid rule (trigger moved from 2/3 to 30%); clarified the passivity rule, introduced

the squeeze-out and sell-out rules. 7 Introduced the breakthrough rule. 8 Introduced mandatory bid, squeeze-out and sell-out rules in view of the transposition of the Directive.

There are significant changes if compared with the situation before this “pre-transposition” and there are no significant changes since this time.

9 Introduced squeeze-out and sell-out rules. Reciprocity was introduced. The overall regulation has been significantly reviewed.

10 Introduced the mandatory bid rule, squeeze-out and sell-out rules; completed the pre-existing regime. 11 Introduced a new mandatory bid rule and the sell-out procedure. 12 Introduced significant changes clarifying mandatory bid, squeeze-out and sell-out rules. 13 Clarified passivity rule, introduced new squeeze-out and sell-out rules. 14 Enhanced mandatory bid rule (50% threshold moved to 30%); clarified passivity rule; introduced the

squeeze-out and sell-out rules. However, limited reciprocity was introduced. 15 Modified mandatory bid rule: trigger changed from "control" to 30%. 16 Clarified the passivity rule through self-regulation (although non-binding) and trigger of mandatory bid

rule moved from 2/3 to 30% (and 50%).

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Mapping of changes introduced by the Directive Significant changes Some changes No significant

changes More stakeholder-oriented

[Hungary],17 Italy.18 France, 19 Ireland,20 Portugal. 21

Neutral

Austria, Denmark, Sweden, UK.

II. BROADER ASPECTS AND IMPLICATIONS OF TAKEOVER REGULATION

Key concepts. � When analysing the Directive, it is important to understand its theoretical background, both on

the economic and corporate governance side. Laying down the basis of a comparative approach is also useful.

� Two key economic issues are the opposite forces of the collective action issue, and the pressure-to-tender issue.

� Corporate governance theory shapes the regulatory framework of takeovers. It is linked to company law and includes key concepts such as shareholder primacy and team production (please refer to Chapter II Section II B of this Study), which end in opposite views: the market and blockholder standpoints.

� Analysis of the dynamics of cross-border transactions and review of comparative law issues help identify the “community control gap” (please refer to Chapter II Section III A 1.) of this Study). A taxonomy of the three main models (shareholder oriented, management oriented and company-oriented) is also helpful.

17 In 2001 (pursuant to a pre-transposition procedure), mandatory bid and passivity rules were introduced.

"Lex Mol" (2007) removed the passivity rule. Compared with pre-2001, the overall change is shareholder-oriented. Although reciprocity was introduced, compared with pre-2007, it is stakeholder-oriented.

18 Partially introduced the breakthrough rule (voting cap of privatized companies) and simplified squeeze-out; however, provided for company opt-out from passivity and added reciprocity.

19 Enhanced passivity rule, partial introduction of the breakthrough rule (voting caps), and of simplified squeeze-out rule. However, reciprocity and tender offer warrants were introduced.

20 The squeeze-out threshold moved from 80% to 90%. 21 Added reciprocity.

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I. Economic analysis Takeovers. The impact of takeovers on the economy is complex and not necessarily straightforward. Takeovers can have positive effects on the economy by disciplining management and promoting a more efficient allocation of resources. However, takeovers may also generate negative externalities, due to three economic issues: free-riding, agency conflicts, and pressure-to-tender. At the core of these three issues is the problem of asymmetric information and the nature of the relationship between offerors and shareholders, and between shareholders and managers. However, several aspects remain open in the economic theory to different interpretations. Most notably, conflicting views emerge around the mandate of the management function, whether it should be shareholder-oriented or company-oriented, otherwise stated: whether it should maximise shareholder value or protect firm-specific investments and the long-term value of the company as a whole. The Directive. The Takeover Bids Directive strives to balance shareholder protection and the protection of long-term specific investments inside the company. Through its interaction with corporate governance and capital markets regulations, the Directive carries economic effects on multiple areas, such as investor protection or the proportionality between ownership and control. Yet, the specific effects of the Directive crucially depend on the prevailing market structure in each jurisdiction, whether concentrated (blockholder-based) or dispersed. The effectiveness of regulatory thresholds therefore hinges on factoring-in these structural elements. Similar takeover rules can have diverse effects depending on country-level and company-level characteristics, which also determine the effectiveness of these rules in reaching their original objectives. For instance, diverse legal systems have important effects on investor protection and corporate decision-making processes. Regulatory objectives. In its balancing exercise, the Directive reveals the existence of important trade-offs and conflicting objectives. For instance, control contestability may induce managers to behave in line with the interests of shareholders and maximise share value instead of managerial benefits. However, control contestability reduces the incentives of management to carry-out long-term firm-specific projects, as pattern of returns may not maximise shareholder value in the short-term. Contestability of control may also reduce the incentives of other stakeholders to commit to the firm by for instance realising medium to long-term investments in human capital. Impact of takeover regulation (± relationship and intensity)

Volume of takeovers Protection of

(minority) shareholders

Dis-proportionality between ownership

and control TOD rule

CONCENTRATED OWNERSHIP

DISPERSED OWNERSHIP


DISPERSED OWNERSHIP


DISPERSED OWNERSHIP

Overall impact

Mandatory bid rule

– – – + + + + + + HIGH

+ + + Ownership transparency

– – –

+ + + – – MODERATE

Squeeze-out rule

+ + + – – + + LOW

Sell-out rule – – – + + + – – – LOW

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Breakthrough rule

+ + + + + + + + + VERY HIGH

Board neutrality rule

+ + + + – + + + MODERATE

Major elements of the Directive are the mandatory bid rule, the ownership transparency provisions, the squeeze and sell-out rules, the breakthrough rule, and the board neutrality rule. Mandatory Bid Rule (MBR). The mandatory bid rule enhances the protection of minority shareholders particularly in concentrated ownership structures by forcing the offeror to offer the control market premium to all shareholders. However, the rule may have a negative impact on the volume of takeovers, as it raises the cost of deals ex ante and gives incentives to incumbent shareholders to increase their holdings close to the triggering threshold. Further clarification is needed on whether the application of the MBR contributes to increase shareholder concentration, which would compromise at the same time its shareholder protection objective. Since the rule shows its effects ex ante, no conclusive evidence (ex post) has been found in the empirical analysis as to the size of the impact of the mandatory bid rule on the market for corporate control. Yet, a negative relationship with volumes has been observed and is statistically significant. In addition, the harmonisation in the EU of the triggering threshold around 30% has produced a reduction of the average size of the initial stake in the company subject to takeover just below it, which suggests a strategic use of the threshold by incumbent blockholders. For all these reasons the impact of the MBR in influencing the governance and the impact of a takeover can be estimated as ‘high’. Ownership transparency. Ownership transparency appears to have a beneficial impact on all key objectives of the Directive, and in particular on the volume of takeovers and the protection of minority shareholders, since potential offerors are able to see the composition of the ownership structure and plan the offer accordingly. This positive effect may disappear where it comes to the disclosure of subsequent purchases of shares. The disclosure of purchases above a certain threshold makes “creeping-in” takeovers more difficult, enhancing shareholder value. However, transparency may also discourage takeovers, since it may raise the costs of building-up an initial stake before launching a takeover bid if the disclosures thresholds are low. Overall, the impact of this rule on takeover bids is moderate. Squeeze-out and sell-out rules. Squeeze and sell-out rights both have a positive but very limited impact on the volume of takeovers given their very high thresholds. The squeeze-out right protects the offeror from shareholder free-riding while the sell-out right strengthens the power of minority shareholders thereby reducing the incentive to increase ownership concentration. Breakthrough rule (BtR). The breakthrough rule could have a substantial positive impact on the volume of takeovers and the protection of minority shareholders if it would manage to eliminate control-enhancing mechanisms. However, the rule may also create incentives to increase direct control by raising the stake in the company, leading to higher ownership concentration. It may also be arbitraged using alternative mechanisms such as pyramid structures. If coherently devised and consistently implemented, the breakthrough rule would produce a very high impact on the ownership structure of firms, especially in those jurisdictions where ownership and governance are more concentrated. Yet, the limited transposition of such rule does not provide enough information to extract evidence of its impact on takeover bids and governance of the company. Board neutrality rule (BNR). The board neutrality rule may increase incentives to launch an offer by removing post-bid defences, thereby increasing control contestability, in particular where the ownership is dispersed. The empirical analysis in this study, however, shows a slight decrease in cumulative abnormal returns, which suggests that the BNR may have reduced the potential premium

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paid by the offeror, since the rule also reduces the extent to which future controlling shareholders may extract benefits from the company. The board neutrality rule may also induce incumbent shareholders to entrench before any offer is launched, thereby raising the cost of acquiring control for the potential offeror (with additional impact on dispersed ownership structures). The overall impact of the rule is more balanced and so considered ‘moderate’. Empirical analysis. Finally, the empirical analysis carried-out in this study illustrates that the Directive has had an impact on the market for corporate control and the economy. However, this impact is marginal (with low intensity) and is affected by a fragmented transposition across Member States and by the effects of the still ongoing financial crisis. The market for corporate control does not appear to be ‘more contestable’ than before the introduction of the Directive. In terms of relations, no overarching conclusions can be reached with this preliminary analysis, but the results suggest that the Directive had a positive impact on cumulative abnormal returns (and indirectly on volume of takeovers), a positive impact on market capitalisation (but no significance), a positive impact on competitiveness, and a negative impact on financial development. Competitiveness. The impact of the Directive on competitiveness and growth is limited but consistent with the priorities set in the EU 2020 Agenda. A detailed analysis of the contribution of takeovers to competitiveness reveals their potential to increase the efficient allocation of resources but also the existence of several market failures and trade-offs. The different provisions in the Directive can have mixed effects on competitiveness and growth, calling for further reflection as to their individual and joint impact. Employment. Ex-ante, takeovers have a similar chance of affecting employment levels negatively or positively depending on the business plans of the acquirer. In the short term however, pressure to recoup the costs incurred in the transaction might lead to a reduction of employment levels. The Directive protects employees by giving them consultation rights, but the board neutrality rule places the power to decide on shareholders alone.

II. Broader corporate governance issues Impact of the corporate governance premise. As it is difficult to structure a legal framework on the sole basis of economic studies (results of which are often the subject of debate), it is necessary to highlight the various theories that have helped shape modern corporate governance thinking. As will be seen, the legal framework of takeover bids may vary significantly, depending on the corporate governance system selected.

A. Preliminary questions Three questions. Three questions tend to structure the corporate governance debate: What is a corporation? Who “owns” it? Is a corporation a “shareholders democracy”? Depending on the answers to these questions, options will be naturally selected with regard to takeover bids legislation. A preliminary clarification of the debate is therefore helpful. The table below summarizes the debate and its consequences:

What is a corporation?

View one (Jensen & Meckling) View two (legal analysis) Impact on takeovers

� A “nexus of contracts” (investors, management, employees, suppliers, clients, etc.).

� Corporations are a fiction.

� Corporations are legal entities.

� All legal rules are fictions. The most practical fictions should be selected.

� How could a “nexus of contracts” be transferred? Consent of all parties is needed.

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Who owns a corporation?

View one (popular view) View two (legal analysis) Impact on takeovers

� Shareholders own the corporations.

� Corporations (as legal entities or contracts) are not “owned.”

� Shareholders hold transferable contractual rights.

� Conflict between the “ownership” view and (i) squeeze-out (expropriation) and (ii) obligation to share the control premium.

Are corporations based on “shareholders’ democracy”?

View one (popular view) View two (legal analysis) Impact on takeovers � Shareholders represent the

people, management the government.

� Democracy applies “one man, one vote” rule; corporations don’t.

� Political systems and economic institutions are completely different.

� Who should have a final say on the merits of a bid?

B. Basic corporate governance views and their impact on takeover regulation

Main systems. Corporate governance is an open concept. In theory, it is possible to design an almost unlimited number of systems. We can however focus on three, which basically represents three successive states of corporate governance thinking: the traditional view, the shareholder primacy view and team production view: � Traditional view. In the 19th century, when large corporations started to develop on a significant

scale, there was little debate about corporate governance. The relationship between shareholders and employees, described as “capitalists” and “workforce,” was analysed from a philosophical, political and economic standpoint. The time of takeover regulation had not yet arrived.

� Shareholder primacy view. The “agency” issue in the relationship between management and shareholders has become a dominant theme of corporate governance in the 20th century, with the emergence of a growing number of large, listed companies with dispersed shareholders. The main question has become shareholder control over management, in order to prevent the latter, through laziness or theft, from squandering shareholders’ wealth. The “shareholder supremacy” view thus emerged: it applies a “principal/agent” theory, which assumes that shareholders are a “weak” party, and is based on the concepts of “alignment of interest.” Under this theory, pre-bid defences should be removed and post-bid defences should be subject to shareholder approval within the framework of a “no frustration” rule.

� Team production view. The shareholder primacy view has been criticised since the end of the 20th century. At least three criticisms have been formulated: (i) the shareholder primacy view leads to short-termism, (ii) shareholders are not in a weak position, especially compared to employees, and (iii) neglecting other stakeholders creates negative externalities. As a result, alternative models have been designed, among which the “team production” theory has

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emerged. Under this theory, shareholders should be prevented from unduly extracting team production value in a move that would disincentive employees from making useful “firm specific investments” (the so-called “hold-up” problem). As a result, management should act as “mediating hierarchs,” balancing power between shareholders and employees.

Summary table. A table summarises the views that have been developed above.

Traditional View Shareholder primacy view

(Jensen & Meckling) Team production view

(Blair & Stout)

Key concepts: � Capital/workforce � Antagonistic blocks

Key concepts: � Alignment of interest � Principle/agent

(master/servant) theory

Key concepts: � Team production � Firm specific investments � Board and management as

“mediating hierarchs” � Hold-up problem

Result: No developed regulation

Result: “No frustration” rule

Result: checks and balances (company interest)

Capitalists (Shareholders)

Workforce

Shareholders

Board

Management

Employees

Shareholders

Employees

Board

Management

C. The market view vs. the blockholder view The debate. The “market view” of corporate governance is often opposed to the “blockholder view.” It is worth recalling the main terms of the debate, as it has a direct impact on takeover regulations. The main arguments for both sides are thus summarised below:

Market standpoint Blockholders standpoint � Unfettered markets are best places to

monitor companies. � Blockholders are best placed to control

companies. � The fear of takeovers pushes

management to act diligently (“disciplinary effect” against “management entrenchment”).

� If the markets discipline manager, who disciplines the markets? (Issues of market rationality and short-termism). Bases

� Focus: shares as a class of assets. Method: “Forecasting the psychology of the market” (John Maynard Keynes).

� Focus: productive assets. Method: “Forecasting the prospective yield of assets over their whole life” (John Maynard Keynes)

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� Shareholders should have the ultimate power, as they bear the ultimate risks (shareholder primacy). The “no frustration” rule should prevail.

� A system of checks and balances is preferable (consensus formation). Company interest must prevail. Results

� Blockholders may misuse their powers. � Transparency rules and appropriate protective laws should address this risk.

III. Comparative law Plan. Comparing the system of the Directive with the rules applicable in other legal systems can be done from a theoretical as well as empirical stance.

A. Theoretical approach Significant issues. Based on a theoretical approach of comparative law, it is worth noting that certain issues may have a high impact on how takeover legislation is formed. These issues include: � The “community control gap.” The “community control gap” is linked to the increased risk of

negative externalities imposed by foreign shareholders to a local company. It is associated with a perceived loss of cultural and network influence due to a shift of control from local to foreign shareholders. This fear is typical of cross border activity in all countries.

� Structural issues. Structural issues, such as the existence of a federal entity or different shareholding structures at country level, also play a role in the shaping of takeover regulations.

B. Empirical review Three models. When comparing legal systems, it is useful to have in mind three typical models which may be best illustrated as forming the three tips of an equilateral triangle. The main (and archetypical) features of these three modes are described below for reference purposes: Shareholder-oriented model

(UK) Company-oriented model

(Continental Europe) Management-oriented model

(US) � Dispersed shareholders � Blockholders � Dispersed shareholders � No takeover defences � Mild takeover defences � Strong takeover defences � Agency theory

(Principal/Agent) or Master/Servant)

� Corporate interest � Fiduciary duties

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Link with blockholders. The above table may be coupled with an analysis of shareholding situations. This is further illustrated in the following table:

Ownership Control

Dispersed Concentrated

Strong management

US Japan, Hong

Kong

Strong shareholders

UK Continental

Europe

(Adapted from Professor Hideki Kanda22) The chart above illustrates the dual impact of ownership and control that exists globally with regard to takeover law. In each circumstance, variations exist and are constantly in flux in response to the various pressures and interests within each individual jurisdiction. Case studies. A comparison between the US and EU systems show that it may be complex and costly for EU companies to buy US companies because of the ability of US boards to put up defences. In the reverse situation, if the neutrality rule is applied, acquisitions of EU companies may be simpler; the price effect needs to be balanced between the higher price stemming from the mandatory bid rule and the lower price resulting from the inability for the offeree company's board to negotiate efficiently.

III. KEY OUTCOMES Key concepts. � General principles set forth in the Directive enhance harmonisation. They provide for a high

degree of shareholder protection, but a low level of protection for employees and other stakeholders in comparison.

� The mandatory bid rule, which is based on UK law, is specific to the EU. It enhances minority

protection but reduces the number of bids, thus acting as a de facto anti-takeover mechanism. Although the definition of control is not harmonised, there is some convergence around the 30% threshold, but a number of adjacent issues are left open (such as secondary thresholds). The concept of acting in concert, which is not entirely harmonised either, leads to some issues, in particular regarding activist coordination. The high number of exemptions to the mandatory bid rule may be seen as an issue, although they all come with a rationale.

� The board neutrality rule is a relative success (15 Sample Countries out of 22), as is reciprocity

(12 Sample Countries out of 22, with seven Sample Countries that opted out of neutrality and five that opted in). The breakthrough rule is a failure (one Sample Country only is concerned, and no use has been reported). Compensation of “broken-through” shareholders remains an issue, as there is no consensus on how it should be computed. Outside the EU, some major markets allow the use of defences: mostly the US, but also countries like Canada, Japan and Australia. All of them make use of poison pills, a defence whose interest is not to be value-

22 This table has been adapted with the permission of Professor Hideki Kanda of the University of Tokyo,

from his presentation, “Patterns in Takeover Regulations in the World: Puzzles and Explanations” at the Conference of International Takeover Regulators (September 9th, 2011).

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destructive for the company and its shareholders if the bid fails (in contrast with defences such as sale of assets at a discount, for instance). Stakeholders do not consider that the Directive forms an obstacle to bids, regarding defences.

� The Directive provides for squeeze- and sell-out rules pursuant to which Member States shall

ensure that, following a successful bid made to all the holders of the offeree company’s securities, all remaining securities may be purchased by the offeror or sold by the remaining shareholders. Although the Directive apparently provides for a narrow set of choice, there is in fact some diversity in the transposition of the rules in Member States, due to (i) the choice of a uniform or dissociated 90% or 95% threshold, (ii) the choice of the “acceptance” or “ownership” test, or a combination thereof, (iii) the practical application of the fair price rule, (iv) the potential extension of the three-month period, and (v) the application of additional protections (such as independent experts). The EU rules come in addition to procedures that existed in Member States prior to the Directive. Some were close to the EU squeeze-out, but others provided for much broader possibilities, such as the UK-type “scheme of arrangement”. Another way to promote a 100% ownership is the “cash-out” merger, although it does not exist in any Member State in its pure “exclusionary” form. Finally, the German-type “enterprise agreement” is an alternative way to provide full control to a majority shareholder, while protecting the interests of minority shareholders. Stakeholders appear generally satisfied with the squeeze-out and sell-out rules, although the latter is very infrequently used (in contrast to the former). The variety of rules among Member States is often perceived as problematic.

� Disclosure of information is a key component of the Directive. Although some of the key issues are addressed in the Transparency Directive (currently under revision23), it is worth noting some issues, regarding the content or timing of disclosures as well as compliance therewith, especially in connection with issues that are not seen as critical by the markets, but are important to employees. Although stakeholders are generally satisfied with the disclosure regime, they appear to be in favour of an extension of its scope.

� Supervisory authorities have a key role to play in the current context of re-regulation24. However, they seem to have some doubts as to the effectiveness of the penalties they may impose. On a different issue, the Swiss example, pursuant to which shareholders are invited to participate in the procedure, is worth mentioning.

� As a result of the non-transposition of the breakthrough rule in most Member States, pre-bid

defences may remain in place. Regarding other barriers to takeovers, issues such as anti-trust or sectoral regulations remain, but they do not seem specific to the EU and raise questions beyond the scope of this Study.

I. National legal framework and operation of the Directive Clarity and transposition. There is an overall perception that the Directive is sufficiently clear (58%), with national transposition being the main source of unclarity. There are no major transposition issues; it must however be noted that Finland’s transposition has been made through non-binding regulation. Loopholes. As the Directive provides for broad concepts and allows for both gold-plating and exemptions, it is difficult to identify meaningful loopholes. However, some bids may not be captured as they should (negative conflict).

23 A proposal of the revision of the Transparency Directive has been published

(http://ec.europa.eu/internal_market/securities/docs/transparency/report-application_en.pdf). 24 After a period where “less regulation” was often deemed to be “better regulation”, the current context is

more favorable to a new wave of regulatory action, sometimes referred to as “re-regulation”.

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Developments not directly linked to the transposition. Certain Member States have adopted additional takeover bid related regulations that have no direct link with the Directive. This is the case, for instance, in the UK following the Kraft/Cadbury bid, in Italy with the “Decreto Anticrisi” and the recent “Lactalis” decree, and in Hungary with the “Lex Mol.” General principles of the Directive. The general principles of the Directive should be read in conjunction with the associated rules. Protection of (minority) shareholders is addressed through the equal treatment, proper information and market integrity principles, all of which appear to be substantially complied with (or even extended, as in the case with top-up clauses, which are a post-bid extension of the rule). Still, some issues remain, such as exclusionary bids or equality between different classes of shares. In contrast, information rules regarding protection of employees, although formally transposed, appear not to have been always followed (for instance in the UK); in addition, their very design has been criticized as lacking effectiveness. However, some countries have added consultation rights, others have created a right for employees to hear the offeror and, recently, the UK has substantially enhanced employee rights. Protection of other stakeholders is composed of limited information rights, regarding in particular the location of the offeree company’s board, which has a duty to take into consideration “the interests of the company as a whole” (a notion which is not defined but which is necessarily broader than a simple reference to shareholders). Other stakeholders thus have very limited protection. General exemptions. Some Member States (the UK, Finland, Ireland) provide their Supervisory Authority with a general power to grant exemptions. Such exemptions may be granted in cases where the application of a rule appears to operate in a way that is unduly harsh or burdensome, taking into account the general principles of the rules set out in the Directive and the interests of the shareholders. In the UK, the takeover panel can also grant exemptions if the offeree company has a limited number of shareholders, in accordance with certain procedures and in compliance with several safeguards. Comparison with Major Non-EU Jurisdictions. An equivalent to each of the Directive’s general principles exists in most Major Non-EU Jurisdiction (although sometimes not in the United States), except that, under the takeover bid regulations, the offeree company’s board is typically not obliged to give its views on the effects of the bid on employment and conditions of employment. This lack of employee protection is general in Major Non-EU Jurisdictions and employees are, for instance, never involved in the bid process. In most Major Non-EU Jurisdictions shareholder interests are protected by financial advisors or other review bodies which are hired by the offeror on a mandatory basis. Such parties play a key role in protecting the offeree company shareholder interests and sometimes also confirm the offeror’s financing capacity. The minimum and maximum bid durations set forth by the Directive are otherwise in line with the relevant time periods set out by Major Non-EU Jurisdictions which, however, also provide for a maximum time period between the announcement of the bid and its effective opening. Such Major Non-EU Jurisdictions thereby ensure that duration of the virtual bid period does not hinder the offeree company in the conduct of its affaires for longer than is reasonable.All Major Non-EU Jurisdictions comply with the equal treatment principle and oblige the offeror to propose the same price to holders of the same class of securities. Different prices for different security classes may be offered provided such price differences are “equitable,” “justified” or “reasonably related.” Perception. Stakeholders are generally positive regarding the Directive, with the noticeable exception of employee representatives. � Enhanced principles of certainty and transparency. A majority of stakeholders are of the

opinion that the Directive enhanced legal certainty and transparency (65%) and that its transposition enhanced certainty and clarity (67%). Among the stakeholders, who consider that the Directive is unclear, there is disagreement on the source of the lack of clarity. Some stakeholders consider that the vagueness is caused by the Directive itself (40%) while others

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believe that it stems from the national transposition of the Directive. Stakeholders, however, agree that the absence of clarity could be removed through further guidance (77%).

� Divergent opinions on the protection of employees. While stakeholders in general believe that

the obligations set out in the Directive regarding the protection of employee rights are sufficient and enforced appropriately (73%), employee representatives strongly disagree with this view (100%).

� Negative effects of takeovers. Stakeholders at large, however, recognise the negative effects of

takeover bids on employment, admitting that takeovers sometimes or frequently result in lay-offs (76%) and early retirements at the offeree company’s level (63%).

II. The mandatory bid rule Rationale. The mandatory bid rule enhances minority shareholder protection (through the preclusion of two-tier coercive bids) but reduces the potential number of bids. It however acts as an antitakeover device, both when shareholding is dispersed (through the above mentioned preclusion) and concentrated (through mandated sharing of the control premium attached to the blockholding, which results from private benefits of control). Control. Although the Directive grants flexibility for setting the threshold, triggering the obligation to launch a mandatory bid, a large majority of Member States introduced a threshold ranging between 30% and 33% of the voting rights. This clear rule leaves open a loophole, which is the acquisition of de facto control through holdings that remain below the threshold, an issue that has been addressed in Hungary. Some Member States also provide for anti-“creep-in” provisions, whereby acquisitions of shares between 30% and 50% trigger a mandatory bid, as failing to do so may lead to a significant loophole. The increased use of settled derivatives in the context of bids has also led some Member States to include them in the computation of the threshold (the UK, Italy and Spain). Some other countries use the concept of “control” as a trigger for mandatory bids, with a presumption that control is acquired when the 50% threshold is exceeded. It should also be noted that, in Hungary, a dual threshold exists, which takes into account the existence of a larger shareholder. A summary view is provided in the table below: Threshold

Actual control Mixed (both threshold and actual control are provided)

30% 33% or 1/3 Second threshold

Estonia (presumption of dominant influence if (i) a

Denmark (acquirer controls 50% of the

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Threshold


Austria Belgium Cyprus Czech Republic Finland France Germany Ireland Italy Netherlands Sweden UK

Greece Hungary Luxembourg Poland Portugal Romania Slovakia

Finland (50%) Poland (66%) Portugal (50%)

person holds a majority of the votes represented by the shares (i.e. 50% +1); or (ii) a person, being a shareholder of the company, has the right to appoint or remove a majority of the members of the management or supervisory board; or (iii) a person, being a shareholder of the company, alone controls a majority of the votes pursuant to an agreement entered into with other shareholders; or (iv) a person has dominant influence or control over the company or he/it has an opportunity to exercise it)

voting rights through holding or pursuant to an agreement and thereby holds a controlling influence, controls the financial and operational aspects of the company pursuant to the articles of association or an agreement, controls the majority of the members of the board of directors, or owns more than 1/3 of the voting rights and exercises a controlling influence over the company). Spain (acquirer obtains 30% of the voting rights or appoints more than half of the board members within 24 months)

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Additional criteria

No increase Slow increase Large shareholder

Ireland (0.05% increase above 30% within 12 months provided that a single shareholder who holds more than 50% of the voting rights may acquire additional securities) UK (any increase between 30% and 50%)

France (2% in capital or voting rights increase between 30% and 50% within 12 months)

Austria (2% increase between 30% and 50% within 12 months)

Greece (3% increase between 33% and 50% within 6 months)

Italy (5% increase between 30% and 50% within 12 months)

Poland (10% increase by a shareholder holding less than 33% within 60 days or 5% increase by a shareholder holding more than 33% within 12 months)

Spain (5% increase between 30% and 50% within 12 months)

Hungary (25% threshold if no other shareholder holds at least a 10% participating interest in the offeree company)

Acting in concert. The definitions of acting in concert are not harmonised; some countries use the Directive’s definition while others have combined it with the definition from the Transparency Directive. This eventually raises two issues: uncertainty for cooperation between active shareholders (an issue which has been addressed in great detail in the UK, through the notion of “board control seeking” resolutions, as well as in Italy, where different concepts have been used), and questions as to what should really be captured by the definitions (for instance, in some countries, investors deciding to act in concert without acquiring shares are not captured by the definition). Exemptions to the mandatory bid rule. There are a large number of exemptions to the mandatory bid rule that differ significantly between the Member States. The purpose of these exemptions is to find a balance between diverging interests. Some exemptions are discretionary: they may be granted by supervisory authorities (acting either pursuant to specific regulations or following a self-asserted extension of power) or by shareholders pursuant to a whitewash procedure. Other exemptions are precisely defined by the applicable laws and regulations and they fall within four categories: technical exemptions, protection of the interests of the offeror or the controlling shareholder, protection of creditors, and protection of other stakeholders. A table providing the details of all exemptions is included in the Study (please refer to Chapter III Section II B. 3.3.) of this Study). Each exemption category has its rationale and its debatable cases. For instance, some exemptions, meant to protect the acquirer in connection with a real change of control, are debatable, in particular exemptions applicable to free transfers within a family or indirect transfers of holdings. Mechanisms providing for the protection of creditors may also lead to potential circumventions of the mandatory bid rule. Where exemptions relating to companies in financially distressed situations are obviously necessary, those relating to certain types of corporate transactions require a closer review as their rationale is ultimately linked to the corporate interest of the underlying transaction, which is always difficult to assess ex ante. How the interest of shareholders is taken care of in these cases should be closely reviewed (whitewash procedure, ex ante approval by a supervisory authority or by competent

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courts, etc.). Finally, exemptions that are part of a strong defensive mechanism or linked to the protection of a Member State's interest should be assessed in light of the pros and cons of the principle of the free contestability of control and the specificities (or lack thereof) applicable to public entities. Main exemptions. It is difficult to assess precisely the use of exemptions that have been granted, as the information is not always public. Based on declarations by supervisors and stakeholder perception, it seems that the most commonly used exceptions are voluntary bids, specific transactions (such as capital increases or mergers), acting in concert without acquisition, absence of real change of control and financially distressed companies. It should be noted that acting in concert without acquisition may be considered either as an exemption to the mandatory bid rule or as not being addressed by the mandatory bid rule, depending how this rule is interpreted Price adjustments to the equitable price. Pursuant to Article 5 of the Directive, price adjustments are allowed in a large number of Member States. Some Member States only allow price adjustments to a very limited extent, while other Member States grant a discretionary power to the supervisory authorities. The adjustment is typically determined based on the following information: the highest price was set by agreement between purchaser and seller, the market prices of the securities have been manipulated, the market prices in general or certain market prices in particular have been affected by exceptional occurrences, and whether a firm in difficulty should be rescued. Price adjustments by supervisors. In practice, adjustments of the equitable price seem to be rare and lead in most cases to upward adjustments. Mandatory bid in Major Non-EU Jurisdictions. Most Major Non-EU Jurisdictions (other than the United States, where two-tier takeover bids are permissible in which the offeree company shareholders receive higher compensation in the first-tier takeover bid then in the second tier merger) have adopted mandatory or equivalent takeover bid rules. Such jurisdictions have put in place one, or even multiple threshold crossing triggers which are usually equal 30% or 1/3 of the offeree company’s voting rights. A minority of Major Non-EU Jurisdictions have, in addition, applied anti-“creep-in” provisions that allow a person to increase his holdings by a limited percentage only within a specified timeframe. Certain Major Non-EU Jurisdictions provide for additional mandatory takeover bid triggers such as the acquisition of control. A majority of Major Non-EU Jurisdictions provide for “whitewash procedures” in certain limited circumstances such as capital issuances, financial difficulties or the acquisition of control. Perception: acting in concert. Stakeholders have diverging opinions regarding the clarity of the “acting in concert” definition. Two-thirds believe there is enough clarity and one-third is of the opposite view. Disagreement persists also on the means to improve the definition. 64% of the interviewed stakeholders consider that the definition could be improved by redrafting the definition contained in the Directive. Most supervisors, however, are of the opinion that more guidance should be provided at EU (86%) level. Among the stakeholders, there is also broad agreement on the need to create certain new presumptions of acting in concert such as, agreements that trigger an acquisition of control. Finally, stakeholders stressed that the “acting in concert,” definition was often circumvented, mainly because of its vagueness which hinders effective enforcement (60%). Perception: enhanced protection of minority shareholders through the mandatory bid rule. A majority of stakeholders agree that the mandatory bid rule protects minority shareholders appropriately (56%) and 48% perceived a significant increase in the protection of minority shareholders since its transposition. Similarly, stakeholders agree that the discretionary exemptions did not weaken the mandatory bid rule and also that the equitable price rule protects the minority shareholder interests adequately (59%). The legal remedies that are available to enforce the mandatory bid rule are perceived as sufficient by a majority of stakeholders (71%).

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However, 77% of the stakeholders consider that the mandatory bid rule constitutes always, frequently or sometimes a real obstacle to takeover bids.

III. Takeover defences Board neutrality rule. A large majority of Sample Countries (15 out of 22) have transposed the obligation that companies apply the board neutrality rule. Most of these Sample Countries already provided for a board neutrality rule prior to transposition of the Directive. A majority of the Sample Countries (12 out of 22) have also adopted the reciprocity rule. The details of the transposition are as follows: � Transposition by Member States. 15 out of 22 Sample Countries (Austria, Cyprus, Czech

Republic, Estonia, Finland,25 France, Greece, Ireland, Italy, Portugal, Romania,26 Slovakia, Spain, Sweden and the UK) impose the board neutrality rule.

� Existence of pre-existing board neutrality. In 12 cases, the board neutrality rule pre-existed to

the transposition of the Directive (Austria, Czech Republic, Estonia, France, Ireland, Italy, Portugal, Romania, Slovakia, Spain, Sweden and the UK). The board neutrality concept was new in three countries (Cyprus, Finland and Greece). Five Sample Countries transposing the board neutrality rule (France, Italy, Portugal, and Spain27) introduced the reciprocity rule.

� Reciprocity opt-in. The majority of Sample Countries (12 out of 22), including Belgium,

Denmark, France, Germany, Greece, Hungary, Italy, Luxembourg, the Netherlands, Poland, Portugal and Spain, provide for reciprocity. Each allows the offeree company not to apply the board neutrality rule where the offeror is not subject to these rules.

� Passivity opt-out with reciprocity opt-in. Seven Sample Countries do not apply the board

neutrality rule but provide for reciprocity (Belgium, Denmark, Germany, Hungary, Luxembourg, Netherlands and Poland). In these Member States, the reciprocity rule is rarely used, as only companies that have opted-in (a rare occurrence) are subject to the reciprocity rule.

Breakthrough rule. Only one Member State in the Sample Countries transposed the breakthrough rule (Estonia), but there is no reported case that the rule has been used so far. France and Italy have transposed the breakthrough rule partially. In France, the limitation of voting rights provided in the articles of association of a company subject to a takeover bid are suspended for the first general meeting following the closing of the bid if the offeror, either alone or in concert, holds capital or voting rights in excess of two-thirds of the offeree company. In Italy, limitations to voting rights applicable to previous State-owned companies are, in certain cases, suspended following a bid, and shareholder agreements are restricted. In Estonia, the provision transposing Article 11.5 of the Directive requires the offer document to set out the compensation to be offered if the offeror has at the closing of the bid acquired at least 75% of the share capital carrying voting rights. Compensation in the event of breakthrough. In some countries, applicable provisions require the price paid to the shareholders to be reasonable or equitable (such as in Austria, the Czech Republic or Slovakia for example). In certain countries, such as Hungary, the minimum amount of compensation has to be defined in the articles of association of the offeree company and may not exceed the value of the offeree company’s equity multiplied by the number of voting rights attached to the preference share. Also, in certain EU jurisdictions, the relevant supervisory authority is competent to review challenges to the fairness of the price offered in exchange for the removed rights or to determine the

25 The board neutrality rule is transposed in a non-binding legal framework. 26 The board neutrality rule is only transposed for voluntary bids, not for mandatory bids. 27 Reciprocity is only enforceable against non-Spanish companies.

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amount of the equitable compensation (for instance in the Czech Republic, Germany, Ireland or the Netherlands). Defences in Major Non-EU Jurisdictions. The main takeover defences used in the Major Non-EU Jurisdictions do not differ significantly from those in the Member States. In general, most of the Major Non-EU Jurisdictions have some form of shareholder rights plan (poison pill) defence to takeovers. In the US, the use of traditional defensive measures has declined in the last five years as, upon pressure from institutional investors and other activist shareholders, a number of US public companies have revoked and/or purposefully let existing defensive measures expire. However, it should be noted that such defences, even when revoked, may be re-instituted on very short notice, at any time, by the board. Board neutrality and breakthrough rule in Major Non-EU Jurisdictions. All Major Non-EU Jurisdictions (other than the United States) purport to have a board neutrality rule equivalent to some extent. The meaning and scope of the neutrality requirement varies, however, amongst Major Non-EU Jurisdictions (in Japan, for instance, a board may take defensive measures) if the offeror is abusive and the neutrality concept differs from the one of the Directive. Some Major Non-EU Jurisdictions set out a catalogue of measures that a board may not take whereas others set out such list in respect of actions that need to be approved by shareholders. There is no equivalent to the breakthrough rule in any of the Major Non-EU Jurisdictions. Openness of the EU market. Stakeholders largely acknowledge that the restrictions imposed by the Directive on takeover defences have contributed to the openness of the EU market for corporate control (89%). Takeover defences are perceived as having a dual effect. While, at least sometimes, preventing the occurrence of hostile takeover bids (70% of the stakeholders interviewed), they simultaneously, at least sometimes, lead to higher bid prices (77%). No evidence of impact. The existing legislation in Member States is not seen as a significant obstacle to bids by stakeholders: although a high number of pre-bid defences are perceived to be used, only a few post-bid defences are perceived to be used (among which seeking white knights is predominant). Defences existing prior to the Directive generally continue to be available. This includes Finland-style “poison-pill” redemption clauses. New defences (such as tender offer warrants in France) are also available. Frequency of takeover bids. A majority of shareholders did not perceive any material increase or decrease in the use of defences since the adoption of the Directive. This may be linked to the fact that stakeholders perceived the Directive as not having a significant effect on the number of bids (40%).

IV. Squeeze- and sell-out rules Squeeze- and sell-out thresholds. A majority of Member States have opted for a threshold of 90% (13 out of 22). Some Member States use alternative criteria. For example, in the Czech Republic, the threshold is 90% of the voting rights or of the share capital. In Romania, the threshold is 95% of the voting rights or 90% of the share capital (application of the acceptance test is required for the share capital). A majority of Member States (12 out of 22) determines the threshold on the basis of the holding of both voting rights and share capital (application of the ownership test). Italian law provides for a particular protective measure for minority shareholders: it allows a sell-out right when the offeror holds 90% of the share capital, instead of 95%, in the context of low liquidity (unless a float sufficient to ensure regular trading performance is restored within ninety days). Fair price. The transfer of the minority holdings must take place at a fair price (Articles 15.2 and 15.4 of the Directive). The price shall take the same form as the consideration offered in the bid or shall be in cash. Member States may provide that cash shall be offered at least as an alternative. Following a

44

voluntary bid, in both situations mentioned in Article 15, the consideration offered in the bid shall be presumed to be fair where, through acceptance of the bid, the offeror has acquired securities representing not less than 90% of the capital carrying voting rights comprised in the bid. The legal presumptions provided by Article 15.5 of the Directive have been transposed by most Member States without deviation. In addition, some Member States request that either the independent directors mandate an independent expert to prepare a fairness opinion in relation to the evaluation of the offeree company (Belgium) or that in case of a conflict of interest an appraiser be appointed by the offeree company (France). Enforcement. No specific issues appear to arise in connection with the enforcement of the squeeze-out or sell-out rights, other than the evaluation of the price and the attempt to extract higher value. � Litigation. When the consideration offered in the bid is in cash and the squeeze-out or sell-out

price is consequently paid in cash, for the same amount, within 3 months of the end of the bid, there is little room for litigation. However, in other cases, there is room for discussion and, considering the amounts at stake, a high incentive to litigate. This is all the more true given that it is not possible to attribute a single price to a company – only a price range makes sense. In this respect, under French law, the offeror provides the French regulatory authority with an independent expert valuation, except if the squeeze-out is made following a standard cash takeover bid. The requirements for the expert to be deemed independent are high and the work to be performed is extensive.

� Attempts to extract higher value. In certain circumstances, speculative investors may require a

holding just above the 5% or 10% threshold (corresponding to the 95% or 90% squeeze-out threshold) to prevent a squeeze-out unless they are purchased at a higher price. In such cases, the German-type top-up clause (please refer to Chapter III Section I E 1.1 b) of this Study) may provide a solution.

Alternative procedures. In most countries, procedures existed prior to the transposition of the Directive, the effects of which were similar to the squeeze-out and/or sell-out rules. This includes general squeeze- and sell-out rules that are not linked to acquisition of control, integration procedures, schemes of arrangement, and cash-out mergers: � Schemes of arrangement. A scheme of arrangement is a court approved agreement between a

company and its members that can be used to effect, among other things, a recommended takeover. This scheme of arrangement is available in the UK and Ireland. In both countries, court approval and approval by at least a majority in number, representing 75% in value, of the members of each class present and voting in person or by proxy at the meeting(s) convened to approve the scheme.

� Cash-out mergers. Traditionally, mergers were viewed as a stock-for-stock transaction subject

to shareholder vote. In effect, they were essentially a combination of three transactions: the dissolution of the absorbed company, the contribution in kind of its assets by the former shareholders of the dissolved company to the absorbing company and the issue of shares by the absorbing company to such shareholders as consideration for their contribution. This traditional view has long ago disappeared in the US, where mergers are seen as shareholder-approved transactions that may be almost freely structured (leading to “triangular mergers” and “reverse triangular mergers”). In the EU, the rules have not evolved in the same way and only few Member States provide for “cash mergers”. Still, in no Member State may such mergers lead to a full payment in cash to the shareholders of the dissolved company without its consent.

� Enterprise agreements (Germany). Under German law, a parent company is permitted to enter

into an enterprise agreement with its subsidiary, pursuant to which the parent company (i) issue certain instructions to the subsidiary’s management, including instructions that are detrimental to the subsidiary, provided such instructions are in the interest of the parent group (domination

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agreement) and/or (ii) to receive all or a portion of the subsidiary’s profits (profit sharing agreement). The German Stock Corporation Act provides for a detailed procedure (including an approval by the subsidiary’s shareholders by a 75% majority) and various provisions to protect minority shareholders of the subsidiary. Minority shareholders of a stock corporation that is a party to an enterprise agreement, have the right to offer their shares to the parent company at a pre-determined price, for two months as of the date enterprise agreement. The adequacy of the exit consideration is determined on the basis of a valuation involving, among other things, a form of discounted cash-flow analysis, the subsidiary’s liquidation value and its market price.

Squeeze- and sell-out rules in Major Non-EU Jurisdictions28. A limited number of Major Non-EU Jurisdictions do not provide for post-bid squeeze- and/or sell-out mechanisms. Such jurisdictions, however, provide for alternate squeeze-out mechanisms that allow exclusion of minority shareholders (callable shares in Japan, going private or combinations in Canada, compulsory acquisitions in Australia or cash mergers29 in Switzerland). Major Non-EU Jurisdictions that have squeeze- and/or sell-outs usually refer to a 90% threshold, in connection with an ownership and/or acceptance test. The threshold taken into account in sell-out procedures is the same as the one considered by the relevant jurisdiction in connection with squeeze-outs. Squeeze- and sell-outs must be carried out in Major Non-EU Jurisdictions within a relatively short timeframe following the bid (usually four months). In Major Non-EU Jurisdictions that have been exposed to the UK legal system, schemes of arrangement represent an effective alternative to recommended voluntary and mandatory takeover bids as well as to squeeze-outs in order and allow to obtain a 100% control of a listed public company. Perception: Use of squeeze and sell-outs. The rules appear to be clear (68%). The right to squeeze minority shareholders is perceived to be frequently used (61% of the stakeholders) whereas the sell-out right is considered to be of a less frequent occurrence (12% of the stakeholders). The fair price rule is seen as working adequately in practice (76%). The choice of thresholds is approved (82%) with a preference for the 90% threshold (75%), although the existence of different thresholds in the EU is not seen as an issue (65%). The squeeze-out rule is seen as promoting bids significantly (32%) or slightly (53%), while the squeeze-out rule is not seen as having a significant impact in this respect.

V. Disclosure of information Forms of disclosure. The Directive provides for three main forms of disclosures: general disclosures, bid-related disclosures and country-specific additional disclosures. The general form of disclosure in connection with the share and control structures is mandatory for all publicly traded companies, whether or not they are engaged in a takeover bid. The bid-related disclosures are made by the offeror or the offeree company when a takeover bid is launched. The Directive allows Member States to require additional disclosures. Aims of the disclosure requirements. The aim of the disclosure requirements is to enable parties affected by a takeover to make informed decisions. Most of the disclosure requirements aim to provide clarification about ownership and control structures of both the offeree company and the potential offeror. Information on ownership may be useful for both the offeror and the offeree company as the offeror can discover barriers to a potential takeover that may affect its decision to launch a bid and the offeree company can decide what strategy to adopt according to the information gained from the offeror. Information on control structures can be a useful tool for the offeror in

28 Please refer to Chapter III Section IV C 1.) of the Study to have a summary of the squeeze- and sell-out

procedures in Major Non-EU Jurisdictions. 29 A cash merger is a transaction whereby two companies merge but the consideration is paid in cash not in

shares.

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assessing barriers to the potential takeover and determining the control exercised over the offeree company. Costs of Disclosures. The process of disclosure can be time consuming and costly as both the offeror and the offeree company are required to provide information. Companies take disclosure cost into account when deciding whether to launch a takeover bid and such costs may deter potential takeovers if they are perceived as greater than the benefit. However, these costs may generally be seen as limited in comparison with all other costs incurred in connection with a bid. Employee Protection. The Directive provides for employee protection by requiring the disclosure of information that may affect employees. However, this may not adequately protect the interests of employees as the ultimate decision about the bid lies with the shareholders and the board. The interests of shareholders are not particularly aligned with employees in the context of a takeover and thus, disclosure may not provide adequate protection for employees. Comparison with Major Non-EU Jurisdictions. With certain limited exceptions, information to be provided to shareholders on an annual basis is globally similar to the information requirements existing in Member States. Information to be disclosed by the offeror in the offer document is otherwise identical to the information set out by the Directive. In all Major Non-EU Jurisdictions except India, the offeree company’s board is required to prepare a document stating its opinion about the bid. This requirement is similar to the provision in the Directive requiring the offeree company to provide its opinion on the bid. However, in the Directive there is no guidance about the process by which the opinion is issued. In most Member States, companies usually require the assistance of an external financial adviser even though it is not always compulsory. In all Major Non-EU jurisdictions, such opinion is usually mandatory or based on market practice. Most often, the opinion is prepared by a financial advisor and is rarely prepared by an independent board committee. The report prepared by the financial advisor must be disclosed to the offeree company’s shareholders throughout the Major Non-EU Jurisdictions. Perception: support for broad disclosure requirements. A majority of stakeholders are very satisfied with the disclosure requirements set out by the Directive (58%) since the disclosure requirements and their enforcement have led to better informed stakeholders. Nevertheless, stakeholders still show support for the adoption of further disclosure requirements. Moreover, the takeover bid procedure is generally perceived as being sufficiently clear (71%).

VI. Supervisory authority, enforcement and litigation Supervisory practice. Generally speaking, supervisory practice appears to be satisfactory and no cases of particular leniency or lack of control by supervisory authorities have been reported. There are some exceptions, reported by stakeholders: (i) in Greece, the current available framework of fines is not deemed adequate in order to protect minority shareholders, (ii) in Poland, the mandatory bid rule can be too easily circumvented (e.g. through capital contributions), and (iii) in Romania, enforcement appears sometimes difficult as individuals or entities obliged to initiate mandatory takeover bids fail to comply with this obligation.

In addition, in some countries, the practice of imposing fines does not appear to be very harsh. Specialised courts. The quality of transposition and compliance with takeover bid rules depends also on the opportunity to challenge decisions of the supervisory authorities. Some Member States have introduced a specific competence of a higher civil law court for appeals against decisions of the supervisory authority, in order to concentrate specific takeover bid knowledge in one court (e.g. in France, with the Court of Appeal of Paris, in Belgium, with the Court of Appeal of Brussels and in Germany, with the Higher District Court of Frankfurt).

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Practice of enforcement. In almost all Member States, no increased litigation has been observed following the transposition of the Directive. This may in some countries be explained by the fact that the takeover law is recent or the total number of takeovers is low (e.g. Luxembourg, Estonia, Austria), and in others because the Directive did not fundamentally change the existing legal framework (e.g. the UK, France, Germany). Enforcement in Major Non-EU Jurisdictions. It is in general difficult to assess the enforcement of takeover regulation in non-EU jurisdictions. While major markets (such as the US) seem to have substantial compliance procedures in place, the enforcement of takeover bid rules purporting to protect shareholder interests appears in certain Non-EU Jurisdiction to be unsatisfactory and offerors achieve the success of the bid by circumventing such rules or taking advantage of non-bid related rules. In Russia, for instance, non-bid related rules applicable to special shareholder meetings, insolvency proceedings as well as the scope of business management decisions appear to facilitate the circumvention of shareholder protective takeover bid rules. Perception: competence of supervisors. Most stakeholders consider that it is sufficiently clear which supervisor is competent to supervise takeover bids (93%) as well as squeeze-outs (84%) and sell-outs (93%). Supervisors mostly agree that the rules and principles set out in the Directive are easy, or even very easy, to enforce, with some exceptions, such as the rules regarding neutrality or reciprocity. Perception: No significant increase in litigation. A majority of stakeholders did not perceive a significant increase in litigation since the transposition of the Directive, and stakeholders who did perceive an increase say that this is linked to the enhanced awareness of stakeholders concerning their rights (73%).

VII. Control structures and barriers not covered by the Directive Cross-shareholdings. “Cross-Shareholdings” refers to the situation that occurs when company X holds a stake in company Y which, in turn, holds a stake in company X. This may create specific links between companies that may, in certain cases, serve as a basis for defence strategies. Cross-shareholdings are efficient in this respect if it is for an amount which is sufficiently significant (at least 5%) and if they are part of a larger, strategic alliance. Otherwise, cross-participations may be unwound if the price offered in the bid is high enough. Generally speaking, under most legal systems, refusing to offer shares held as cross-shareholdings into a takeover bid offering a reasonable premium added to the market price may be deemed contrary to the company interest or the fiduciary duties of directors. This is why, where cross-shareholdings may have been used in the past, especially in France and Germany, they have become much less frequent. Pyramid structures. “Pyramid Structure” refers to the situation that occurs when an entity (a family) controls a corporation that, in turn, holds a controlling stake in another corporation. This process can be repeated a number of times. A stake will be deemed to be a “controlling stake” when it reaches or exceeds 20% of the voting rights. A pyramid structure may be of interest if, through the use of several holdings, the ultimate holder controls the final issuer with less capital than it would have required in case of a direct control of the issuer. It is a means to keep control with less capital. Use. The tables below show the percentage of pyramids structures and cross-shareholdings in the Sample Countries. It is consistent with the findings of the “Proportionality Between Ownership and Control in EU Listed Companies: A Comparative Study” (the “OSOV Study”) 30, which found, on average within the EU, that 18% of all sample companies had pyramid structures and 2% had cross-shareholdings structures. It confirms that, on an EU-wide basis, cross-shareholdings are not an issue

30 The OSOV Study can be downloaded at:

http://ec.europa.eu/internal_market/company/docs/shareholders/study/final_report_en.pdf

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whereas pyramids remain a popular structure. This is consistent with the fact that continental shareholding structures remain, to a large extent, based on blockholding.

Pyramids Overall Recently listed Total 18.1% 27.5% 20.5%

Cross-shareholding

Overall Recently listed Total 3.5% 0% 2.6%

Other barriers. Other barriers that have been identified typically include anti-trust regulations, sectoral regulations, public funds, co-determination and employee ownership. However, none of these barriers seem to create strong or unjustified obstacles. First, anti-trust regulations deal with competition law and the barriers to a bid associated with them are thus justifiable to further anti-trust policies and are unrelated to takeover regulation. Further, there is no evidence that such anti-trust regulations have been used as a takeover defence. Second, although sectoral regulations such as those relating to the banking sector, insurance companies, credit institutions, and airline companies, can place barriers to a bid, evidence that such regulations have been used for this purpose is merely anecdotal. Next, sovereign funds rarely create strong obstacles to a bid because the amount of the funds that may be used by sovereign funds in this respect is generally too small to significantly affect a bid. Finally, instances of employee ownership do not pose a strong obstacle to a bid because the level of employee ownership is generally too small to have a significant impact. The co-determination model applied for instance in Germany, Denmark, Finland or Sweden, might eventually also be considered as a barrier to takeovers. Offerors might indeed fear not being able to control the company once it has been taken over and thus be more reluctant to launch takeovers on companies organised under a co-determination model. These barriers are further analysed in Chapter III Section VII. C. of this Study. Barriers in Major Non-EU Jurisdictions. Many Major Non-EU Jurisdictions have adopted specific legislation restricting foreign investments in sectors that are considered sensitive in particular in connection with national security. Although Major Non-EU Jurisdictions tend to loosening restrictions applicable to foreign investment, substantial barriers remain in certain industry sectors. These sectors include, amongst others, the insurance and banking sector, certain commodities, aviation and transportation as well as telecommunications, broadcasting and media sectors. In certain cases, foreign share ownerships exceeding certain thresholds are made subject to prior authorisation by a government agency. Main issues. The main issues of interest following the transposition of the Directive thus far are as follows: � Equal treatment of different classes of shareholders (although efforts have been made to

provide some protection, either through information requirements or appointment of an independent appraiser); however, a “post-bid top-up clause” may also extend the concept of equality.

� In relation to employee protection, limited control of real intentions of the offeror and

compliance with the statements it makes. It should however be noted that some countries provide for additional protection through a right granted to the worker's committee to hear a representative of the offeror.

� Protection of other stakeholders is mentioned in Article 3.1 (c) of the Directive, which provides

for a balancing exercise between shareholder and stakeholder rights. This Article essentially leaves Member States with a wide range of possibilities in the way they wish to transpose the Directive.

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STUDY ON THE APPLICATION OF DIRECTIVE 2004/25/EC ON TAKEOVER BIDS

CORE REPORT

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INTRODUCTION The EU Directive 2004/25/EC on Takeover Bids (the “Directive ” or the “Takeover Bids Directive”) sets out minimum guidelines for the conduct of takeover bids involving the securities of companies governed by the laws of EU Member States, where all or some of those securities are admitted to trading on a regulated market. It also seeks to provide an adequate level of protection for holders of securities throughout the community of Member States by establishing a framework of common principles and general requirements that Member States must transpose by means of more detailed rules in accordance with their national systems and cultural contexts.

1) History and adoption of the Directive

First steps. The Commission presented the first proposal for a directive regulating takeover bids to the Council in 1989. It proposed far-reaching harmonisation in the field, an approach that was inspired by the favourable economic climate of the time. The proposal encountered significant opposition from EU Member States, in particular in relation to (i) the mandatory bid rule, and (ii) the limitation of defensive measures. The Commission presented a second proposal containing less detailed provisions to the Council and the European Parliament in 1996. Initial rejection. A compromise text was negotiated in a conciliation procedure between the European Parliament and the Council, but the European Parliament finally rejected the proposal in July 2001, as an equal number of votes had been cast against and in favour of it. The vote was mainly motivated by concerns related to (i) the board neutrality rule (which provides that the board should seek shareholder approval before taking defensive actions), and (ii) insufficient protection of employees. Adoption. Following the rejection of the proposal, the Commission set up a group of high level business law experts (the “Winter Group ”) that were tasked with resolving the issues raised by the European Parliament. A third proposal was introduced on October 2, 2002. The Directive was adopted on April 2, 2004 and Member States were required to transpose the Directive by May 20, 2006.

The Portuguese compromise In the years of negotiation that preceded the adoption of the Directive, one of the most controversial proposed aspects of the Directive was whether to adopt the board neutrality rule (Article 9 of the Directive) and the breakthrough rule (Article 11 of the Directive). These provisions were controversial because they crystallise oppositions on the value of facilitating and frustrating takeovers. In order for the Directive to be enacted, the Member States eventually agreed to a compromise suggested by Portugal, in late 2003. The compromise made was essentially to make Articles 9 and 11 of the Directive optional. That is, Member States could opt out of transposing the board neutrality or breakthrough rule, or both, but they could not prevent individual companies from voluntarily opting in to the rules. This compromise made Articles 9 and 11 of the Directive options for which there are two levels of possible adoption: at the national level, and then at the company level. Even if the breakthrough or board neutrality rule is adopted at the national or company level, the Portuguese compromise further introduced a third option: reciprocity. If a Member State allowed for reciprocity, even if one or both of the opt-in rules is adopted, a company still has the option not to apply the rule when faced with an offeror who has not adopted the same rule.

Review of the Directive. Article 20 of the Directive provides that five years after the transposition deadline, the European Commission shall examine the Directive “in the light of the experience acquired in applying it and, if necessary, propose its revision.” In the framework of this examination, the European Commission has entrusted Marccus Partners with producing a study assessing the functioning of the Directive.

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2) The Study The Study. Marccus Partners, in conjunction with the Centre for European Policy Studies (“CEPS”) presents the following global study (the “Study”) on the application of the Directive. The Study incorporates the economic study (“Economic Study”) provided by CEPS. Definition and Scope. Throughout the Study, all EU Member States will be collectively referred to as “Member States” and the 22 Member States reviewed in this Study will be referred to as “Sample Countries.” The Sample Countries are Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Sweden and the United Kingdom. Out of these Sample Countries, France, Germany, Italy, Spain and the United Kingdom are referred to as “Main EU Jurisdictions” and Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Luxembourg, the Netherlands, Poland, Portugal, Romania, Slovakia and Sweden are referred to as “Other EU Jurisdictions.” For the comparison of the Directive’s legal framework in major third-countries, the nine “Major Non-EU Jurisdictions ” are Australia, Canada, China, Hong Kong, India, Japan, Russia, Switzerland and the United States. The stakeholders consulted in connection with this Study are referred to as the “Sample Stakeholders.” Supervisory authorities and certain laws and regulations referred to in this Study are set out in Annex 3. Description of Stakeholders. They include supervisors, stock exchanges, issuers, employee representatives, other stakeholder associations and investors and intermediaries. Within this last category, distinction can be made between retail investors, financial intermediaries and institutional investors. In addition, interviews have been conducted with a number of stakeholders. Limits to the perception study. The perception study should be taken with some caution. As fewer takeover bids have been launched since 2008, the experience of the various players may be limited, in particular in some of the Other EU Jurisdictions. In addition, a number of stakeholders of the Directive are likely to give only limited views on the Directive for two reasons: the first is that they may not have been involved in a significant number takeovers subject to the Directive and are likely to have considered the takeover only from the perspective of either the offeror or the offeree; second, they are unlikely to be aware of whether the source of any particular regulation is the Directive itself or national measures (either to transpose the Directive or which existed before the Directive was transposed). To assess and evaluate the legal framework and the operation of the Directive, Marccus Partners, together with its network of friends throughout Europe has reviewed and presented the laws and regulations relevant for the review of the Directive in each of the 22 Sample Countries. In parallel, with the stakeholder questionnaires and interviews, which include legal elements, additional legal questionnaires were designed in consultation with the EU Commission and completed by the selected law firms in the 22 Sample Countries. We would like to thank the following law firms for their joint efforts in contributing to this study: � Wolf Theiss (Austria) � Eubelius (Belgium) � Papaphilippou (Cyprus) � Wolf Theiss (Czech Republic) � Accura (Denmark) � Raidla Lejins & Norcous (Estonia) � Roschier (Finland) � Marccus Partners (France) � Marccus Partners (Germany) � Karatzas & Partners (Greece)

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� Wolf Theiss (Hungary) � Arthur Cox (Ireland) � Pavia e Ansaldo (Italy) � PH Conac (Luxembourg) � Houthoff Buruma (Netherlands) � Siemiatkowski & Davies (Poland) � F Castelo Branco & Associados (Portugal) � Wolf Theiss (Romania) � Wolf Theiss (Slovakia) � Gómez-Acebo & Pombo (Spain) � Setterwalls (Sweden) � Reynolds Porter Chamberlain LLP (United Kingdom) The comparison with legal requirements imposed in selected Major Non-EU Jurisdictions is critical for evaluating alternative options and solutions to those existing at EU level. A standardised questionnaire, completed by nine law firms in selected Major Non-EU Jurisdictions has been used to provide an overview of the comparative description of each jurisdiction’s legal framework in connection with takeover bids. The results included in this study have been achieved largely due to the collaboration with nine law firms, each established in one of the Major Non-EU Jurisdictions included in the study. We would like to thank the following firms for their joint efforts in contributing to this study: � Freehills (Australia) � Miller Thomson (Canada) � HHP (China) � Cheng Wong Lam & Partners (Hong Kong) � JSA Associates (India) � Nagashima Ohno & Tsunematsu (Japan) � Sameta Tax & Legal Consulting (Russia) � Homburger (Switzerland) � McCarter & English (United States)

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CHAPTER ONE: STATUS AND QUALITY OF TRANSPOSITION

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Key concepts. � The Directive has been fully transposed. Significant progress has been achieved regarding

harmonisation, in particular regarding process (supervision of cross-border bids) and substance (mandatory bids, squeeze-outs and sell-outs).

� Analysis of the content of the Directive leads to a balanced conclusion regarding its objectives. The overall effect of the Directive, although difficult to measure precisely, seems to be in line with its original intent. However, more detailed analysis (developed below) is necessary to assess its impact in comparison with its objectives.

I. Status of transposition Transposition is complete. All of the Sample Countries have transposed the Directive. Finland has set up a partially non-binding framework and, although it is unclear whether such non-binding framework is sufficient, the Finnish rules appear, in practice, to comply with the Directive. Sample Countries and the respective transposition dates of the Directive are listed below:

Year Countries 2005 Poland, Romania. 2006 Austria, Denmark, Finland, France, Germany, Greece, Hungary,

Ireland, Luxembourg, Portugal, Sweden, UK. 2007 Belgium, Cyprus, Italy, Netherlands, Slovakia, Spain. 2008 Czech Republic, Estonia.

Gradual transposition. It should be noted that many Member States transposed the Directive gradually, through various pieces of legislation, rather than all at once. The dates of transposition refer to the year in which the Directive was substantially or fully transposed in the respective Member States. As such, twelve Sample Countries failed to transpose the Directive by the May 20, 2006 deadline set forth in Article 21 of the Directive. As examples, the histories of French and Italian takeover regulation are set out below:

History of French takeover regulation 1989 � Mandatory takeover bid in case of certain threshold crossings 1993 � Squeeze- and sell-out procedures 2006 � Transposition of the Directive:

− Transposition of the neutrality rule (subject to reciprocity) thereby reinforcing the pre-existing French neutrality rule that had a legal basis only for share capital increases

− Partial transposition of the breakthrough rule thereby reinforcing pre-existing French rules relating to the suspension of voting caps

� Introduction of takeover warrants (so-called “bons d’offre”)

History of Italian takeover regulation 1992 � Absolute board neutrality rule

� Partial mandatory bid rule (enough to “acquire control” and no price rule) 1998 � “Mini” breakthrough rule (regarding, for instance, shareholder agreements:

shareholders can walk away from voting pacts) � Prohibition or very restricted use of pre-bid defences like multiple voting shares, voting

caps, non-voting shares and share transfer restrictions

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History of Italian takeover regulation 2007 � Weaker board neutrality rule because introduction of the reciprocity rule (no longer

absolute neutrality rule) � Breakthrough rule (subject to reciprocity) � Mandatory bid rule

2009 � No board neutrality rule (opt-in) � No breakthrough rule (opt-in)

2010 � Board neutrality rule (opt-out) � No breakthrough rule (opt-in)

2011 � Ability to postpone the holding of annual shareholder meetings (even if already called)

II. General assessment on whether the objectives have been reached

A. Description of objectives Whether a revision to the Takeover Bids Directive is necessary must be assessed in light of the general objectives of EU law and the specific objectives of the Directive itself.

1. General objectives of EU law General principles. In 2000, the European Union, as part of its Lisbon Strategy, set as its goal the objective of becoming the “most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth, with more and better jobs and greater social cohesion.” The communication from the Commission to the Council and the European Parliament on “Common Actions for Growth and Employment: The Community Lisbon Program” confirmed that, “the internal market for services must be fully operational, while preserving the European social model.” Financial concerns. The 1999 Financial Services Action Plan called for “a single EU wholesale market,” particularly so “corporate issuers could raise capital with competitive terms on an EU-wide basis.” The 2003 EU Company Law Action Plan had the objective to strengthen “shareholder rights and third party protection” and the 2005 White Paper on the Financial Services Policy stressed the need to “consolidate dynamically towards an integrated, open, inclusive, competitive, and economically efficient EU financial market” and to “remove the remaining economically significant barriers so financial services can be provided and capital can circulate freely throughout the EU at the lowest possible cost.” Social and environmental concerns. The 2003 EU Company Law Action Plan lays down the basis for social and environmental concerns, stating that, “well managed companies, with strong corporate governance records and sensitive social and environmental performance, outperform their competitors. Europe needs more of them to generate employment and higher long term sustainable growth.” The Commission’s vision for the single market of the 21st century (February 2007) stated that it is the intention of the Commission to make the internal market work better in the interest of, amongst others, a sustainable Europe, recognizing “the social and environmental aspects of the single market.” Stakeholders. The concern of the Commission for all stakeholders has been addressed in the White Paper on Financial Services Policy (2005-2010), which favoured “an approach that is practical, ambitious and reflective of stakeholder sentiment” and committed to share, wherever possible, impact assessment methodologies with relevant stakeholders.

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Consistency with OECD principles. This approach appears consistent with the Organisation for Economic Co-operation and Development’s Principles of Corporate Governance, which provide that “corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

2. Specific objectives of the Directive31 Description. The objectives of the Directive as described in the recitals of the Directive, are: � Legal certainty on the takeover bid process and Community-wide clarity and transparency in

respect of takeover bids;

� Protecting the interests of shareholders, in particular minority shareholders, employees and other stakeholders, when a company is subject to a takeover bid for control; and

� Reinforcement of the freedom for shareholders to deal in and vote on securities of companies and prevention of management action that could frustrate a bid.

2.1. Integration and harmonisation Integration of the European capital markets. One of the objectives of the Directive is to promote the integration of European capital markets. Several rules of the Directive work towards this goal: � The board neutrality rule: if transposed, this rule facilitates the success of a bid by reducing the

post-bid defences that may be put in place by directors.

� The breakthrough rule: if transposed, the breakthrough rule neutralizes restrictions on the exercise of voting rights and tends towards the one share – one vote rule. This limitation aims at promoting the integration of European capital markets by limiting pre-bid defences.

� The squeeze-out rule: this rule allows a successful offeror to acquire the securities of remaining minority shareholders and thus manage the offeree company without interference from minority shareholders. It thus promotes bids.

The board neutrality and the breakthrough rules are however mitigated by optional arrangements and the reciprocity exception. Level playing field. The Directive aims at introducing a level playing field for takeover bids in the European Union. Recital 2 refers to the principle of free movement of capital contained in the treaties and recital 20 asserts that “the interests of holders of the securities of companies governed by the law of a Member State when those companies are the subject of takeover bids or of changes of control,” have to be safeguarded. In order to achieve integration, the legislations in the different Member States should establish a level playing field between the different actors. Indeed, the “ultimate meaning of the goal of levelling the playing field implies a parity principle for bidders coming from different countries.”32

31 Further developments on the objectives of the Directive as they may be analysed from its content, may be

found in Chapter III Section I. E of this Study. 32 Chiara Mosca, The Takeover Bids Directive: An Opportunity for Europe or Simply a Compromise? pp.19

(December 2009); Paolo Baffi Centre Research Paper No. 2009-64, Available at SSRN: http://ssrn.com/abstract=1524151.

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Cartesio and regulatory arbitrage. In the case of takeovers, the nationality of the offeree company determines some of the applicable laws governing the bid. For EU companies, the offeree company's nationality determines, for example, whether the board neutrality rule applies, and if its application is neutralized by the reciprocity rule. In that context, the offeror wants to know which rules will govern the takeover and whether the offeree company is subject to the real seat doctrine or to the doctrine of incorporation. The real seat doctrine asserts that a company is governed by the laws of the country in which its principal place of business is established. The doctrine of incorporation states that a company is governed by the legislation of the country in which the company is incorporated, even if the company might not conduct any business in that country. In the Cartesio case,33 the European Court of Justice held that it is part of the Member States' sovereignty to determine the elements that subject a natural or legal person to its law. Stated differently, each Member State determines whether it wants to apply the real seat doctrine or the doctrine of incorporation. As a result, when the doctrine of incorporation is used, listed companies may more easily select the jurisdiction that suits their requirements, thus increasing the risk of regulatory arbitrage. Legal harmonisation and the issue of legal transplants. It should however be noted that, for an increasing number of scholars, “legal harmonisation does not have a positive value in itself.” 34 Harmonisation should not be a goal in itself if the provisions that are harmonized are not viable in the general regulatory environment in which they have been transplanted. Indeed, transposed into a different legal system, a rule can achieve very different results from the ones expected. As the EU legal framework regarding company law is far from being harmonized, and the ownership structure of companies also varies significantly from country to country.

2.2. Protecting the interests of shareholders and stakeholders Promotion of minority shareholders. The Directive states as one of its objectives the protection of minority shareholders. The rationale of this objective is to attract investors and thus to reduce capital costs. This protection is achieved by the equal treatment principle stated in the recitals and in Article 3 of the Directive as well as the mandatory bid and sell-out rules. The mandatory bid rule protects minority shareholders by forcing a majority shareholder to make a bid once he or she crosses a certain threshold. The sell-out rule allows minority shareholders to force a majority shareholder to acquire their shares after a successful bid. The rules promote investment because shareholders know that there will be a way to leave the company in case of a successful takeover. Protection of employees. The Directive recognizes the need to protect employees of the offeree company. The rules relate to the information employees or employee representatives of the offeree company receive when a takeover bid is introduced. The rules permit the publication of a non-binding opinion by employees on pending takeover bids. The Directive does not affect national provisions on co-determination. These rules allow employees and employee representatives to proceed with a proper analysis of the bid and, if need be, to express their concerns. Protection of offeree companies. This protection is achieved by taking into account the interest of the offeree company “taken as a whole,” and through the rules concerning the publicity of the offeror’s intentions as to the future business of the offeree company and the likely repercussions of the takeover on the employees of the offeree company. Moreover, the opinion of the board of the offeree company is taken into account and the bid must not disturb the normal course of business of the offeree company for an excessive duration.

B. Assessment

33 Case C-210/06 Cartesio Oktató és Szolgáltató bt [2008] ECR I-9641. 34 Marco Ventoruzzo, Freeze-outs: Transcontinental Analysis and Reform Proposals, The Pennsylvania State

University, The Dickinson School of Law, Law Working Paper No. 137/2009 pp. 65 (2009).

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Debate on the net impact of the Directive. There is a general debate as to whether the Directive has had any significant impact and, when compared with its objectives, whether such impact (if any) was positive or negative. As discussed below, the impact of the Directive is real and, overall and subject to various caveats, it seems to be in line with its objectives.

1. Scope of change Creation or reinforcement of the national legal frameworks. The Directive contributed to set up a legal framework in countries (such as Cyprus, Luxembourg and Greece) where no legal framework existed, as well as in others where a legal framework had been put in place while negotiations relating to the Directive were on-going (e.g. in Germany). In Member States with a pre-existing legal framework, the Directive strengthens or provides more details to the pre-existing legal framework. However, certain rules lack clarity. This is for example the case with the definition of “acting in concert.” Harmonisation. The Directive led to the harmonisation of certain rules regarding takeover bids such as the mandatory bid rule, equitable price, disclosure, employee rights and squeeze- and sell-out rights. It is interesting to note that the harmonisation triggered by the Directive also took place where the Directive left flexibility (e.g. factual convergence of the thresholds for “control”). General principles. The Directive has laid down a series of general principles (Article 3 of the Directive), which appear to be set out with sufficient specificity and thus do not raise any particular issue as to their meaning or enforcement. These principles are important as they set boundaries in the context of Article 4.5 of the Directive, which states that Member States should respect these principles when making exemptions to the obligations of the Directive. Existing limits to the harmonisation. Defensive measures are not harmonized within the Member States, as some Member States did not transpose the provisions regarding board neutrality and some of those that did transpose said rules also opted for reciprocity. In addition, exemptions are largely permitted which may weaken the effect of harmonisation (the exemptions vary among the Member States, in particular with respect to the mandatory bid rule). In contrast, the fact that almost no country has opted for the breakthrough rule leads to a harmonised “freedom of contract” approach to pre-bid defences. Perception of the Directive. The perception of stakeholders suggests that the Directive has brought benefits to them. Most stakeholders consider that, compared to the previous legal framework, the entry into force of the Directive lead to benefits (59%). However, this opinion is only shared by a minority of employee representatives (33%). Some investors and intermediaries (26%) even suggest that the entry into force of the Directive has brought about disadvantages. This is illustrated by the chart below:

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Note: Percentages are computed on a basis excluding the “no opinion”; percentages of “no opinion” are computed on overall answers Facilitation of bids. As its transposition is still rather recent and because of the market turndown in 2008, it is difficult to assess whether the Directive facilitated takeover bids. However, some supervisors perceive that the Directive has made cooperation between them easier since the Directive creates a common framework for EU supervisors to operate within. They believe that the Network of Takeover Regulators established under the auspices of CESR (now ESMA) has also provided an effective and useful forum for discussion and exchange of views on best practice.

2. Direction of change Level of changes. Producing an overall mapping of changes introduced by the Directive is a complex exercise. The level of change (significant, not significant, in between) may not be precisely quantified and is dependent upon three factors: (i) what the content of the legal framework is, (ii) how it is applied by supervisory authorities and jurisdictions, and (iii) how it is applied and perceived by interested parties. Difficult mapping. A precise description of the legal framework always shows a number of grey areas, with untested situations and potential conflicts between the spirit and the letter of the applicable laws and regulations. The enforcement of the legal framework by supervisory authorities is difficult to assess as many of them do not fully communicate on their activity and are eager to keep some discretionary power, which is typically justified by the need to fight against attempts at circumventing applicable laws and regulations. Regarding court cases, they are not that frequent in many jurisdictions and are often highly fact-intensive. Finally, in legal matters, and even more in financial matters, perception is key: the best legal framework is not worth much if interested parties are unaware of its existence or do not believe in its correct enforcement. A mapping exercise is all the more complex because it goes beyond a simple description of the current status: a mapping of changes doubles the above-described uncertainties.

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Criteria. The concepts and criteria that are used may also be debated. For the purposes of this mapping, we have considered the following assumptions: � The mandatory bid rule is in the interest of shareholders, as well as the squeeze- and sell-out

rules. The rationale behind this position is that mandatory bids permit all shareholders to benefit from the control premium, the squeeze-out rule is attractive for potential offerors (and thus increases the number of bids) and the sell-out rule provides shareholders with an exit at a fair price.

� Defences are stakeholder-oriented, as incumbent directors and managers are more likely to take into account the interest of the parties with whom they have worked for years (including employees, creditors and local communities) without trying to maximize shareholder value, whereas newly appointed directors and managers whose main objective is to make sure that the offeree company quickly generates enough cash to repay the acquisition price paid by the offeror. Defences may also operate to allow entrenchment of underperforming management.

However, the opposite position could also be defended: � The mandatory bid rule may discourage potential offerors, thus depriving minority shareholders

of the opportunity to receive any portion of the control premium.

� Defences may be used to negotiate higher bid prices, thus leading to higher premiums paid to minority shareholders.

Preliminary Mapping of changes. The table below provides an analysis regarding changes in connection with the Directive. Country Mandatory Bid Passivity Breakthrough Squeeze-out Sell-out Overall

view Austria Yes, not new Yes, not new No, not new Yes, not

new (but amended)

Yes, not new No significant changes

Belgium Yes, not new (but amended)

No, not new No, not new Yes, not new (slightly amended)

Yes, new Some changes

Cyprus Yes, new Yes, new No, not new Yes, new Yes, new Significant changes

Czech Republic

Yes, not new (but significantly amended)35

Yes, not new (clarified)

No, not new Yes, not new (amended)

Yes, new Significant changes

35 Prior trigger events: two-thirds and three-fourths of securities or voting rights. New trigger event: one-

third. Price: expert price replaced by Directive criterion (highest price paid by the offeror in the previous 12 months).

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Country Mandatory Bid Passivity Breakthrough Squeeze-out Sell-out Overall view

Denmark Yes, not new No, not new No, not new Yes, not new (but improved minority shareholder protection)


Estonia Yes, not new (slightly amended)

Yes, not new (specified with Directive and amended)

Yes, new Yes, not new (specified with Directive and significantly amended)36


Finland Yes, not new (but threshold amended) 37

Yes, not new38

No, not new Yes, not new (but amended) (redemption price)

Yes, not new but amended (redemption price presumption)

Some changes

France

Yes, not new Yes, not new (enhanced, but reciprocity added)

No (with one new exception), not new

Yes, not new (but amended)

Yes, not new Some changes

Germany Yes, not new No, not new No, not new Yes, new Yes, new [No significant changes]39

Greece Yes, not new Yes, not new (but reciprocity added)

No, not new Yes, new Yes, new Significant changes

Hungary Yes, not new40 No, not new41

No, not new Yes, not new

Yes, not new Significant changes

36 Before the transposition of the Directive, only squeeze-outs outside the takeover bid situation existed (i.e.

squeeze-outs under the Commercial Code). The “Directive squeeze-out” was introduced once the Directive was transposed by way of amending the Securities Market Act. Therefore, the “Directive squeeze-out” was completely new.

37 Threshold moved from two-thirds to 30% (and 50%). 38 The passivity rule has not been transposed as such in Finland as the Finnish Companies Act included

provisions before the transposition of the Directive that were deemed to be sufficient with respect to the passivity rule. However, the non-binding Helsinki Takeover Code provides further guidance with respect to the passivity rule.

39 However, significant changes made in view of the transposition of the Directive (mandatory bid, squeeze- and sell-out).

40 Pre-transposition of the Directive. 41 Passivity was adopted in 2006 with the transposition of the Directive and abandoned in 2007 (“Lex Mol”).

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Country Mandatory Bid Passivity Breakthrough Squeeze-out Sell-out Overall view

Ireland

Yes, not new

Yes, not new

No, not new

Yes, not new (but new threshold)

Yes, not new (but new threshold)

Some changes

Italy Yes, not new (but amended)

Yes, not new (but added reciprocity and company opt-out)

No, not new Yes, not new (but amended)

Yes, not new (but amended)

Significant changes

Luxembourg

Yes, new No, not new No, not new Yes, new Yes, new Significant changes

Netherlands Yes, new No, not new No, not new Yes, not new


Poland Yes, not new (but clarified)

No, not new No, not new Yes, clarified

Yes, clarified

Significant changes

Portugal

Yes, not new

Yes, not new (but reciprocity added)

No, not new Yes, not new (but more difficult to apply)

Yes, not new (but more difficult to apply)

Some changes

Romania Yes, not new Yes (only for voluntary bids, not for mandatory bids), not new



Slovakia Yes, not new Yes, not new (clarified)


Spain Yes, not new (enhanced)

Yes, not new (clarified, but limited reciprocity added)


Sweden Yes, not new Yes, not new No, not new Yes, not new


UK Yes, not new Yes, not new (slightly strengthened)



Direction of changes.42 Based on the foregoing analysis, the table below provides a summary analysis on the direction of changes that have taken place:

42 This table provides a qualitative analysis whose value is mostly indicative. The option for companies to

voluntarily opt-in the breakthrough and board neutrality rules is in practice never used. As a consequence,

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Mapping of changes introduced by the Directive

Significant changes Some changes No significant changes

More shareholder-oriented

Cyprus,43 Czech Republic,44 Estonia,45

[Germany],46 Greece,47 [Hungary], Luxembourg,48 Netherlands,49 Poland,50

Slovakia,51 Spain.52

Belgium,53 Finland.54 [Germany], Romania.

More stakeholder-oriented

[Hungary],55 Italy.56 France, 57 Ireland,58 Portugal. 59

Neutral


3. Impact on takeover activity Difficult issues to assess. Because of the 2008 crisis, takeover activity overall has decreased. In addition, the recent and piecemeal transposition of the Directive has made it difficult for stakeholders to assess its overall impact on takeover activity. This is why it is logical to find both 50% of the issuers and 30% of the investors and intermediaries have no opinion on whether they considered initiating takeover bids more often since the entry into force of the Directive, and that, among those having an opinion, a majority does not consider initiating bids more often (64% for issuers and 72% for investors and intermediaries).

we have considered that for the direction of changes this opt-in option has no impact and have thus disregarded this option.

43 New overall framework. 44 Modified the mandatory bid rule (trigger moved from 2/3 to 30%); clarified the passivity rule, introduced

the squeeze-out and sell-out rules. 45 Introduced the breakthrough rule. 46 Introduced mandatory bid, squeeze-out and sell-out rule in view of the transposition of the Directive. There

are significant changes if compared to the situation before this “pre-transposition” and there are no significant changes since this time.

47 Introduced squeeze-out and sell-out rules. Reciprocity was introduced. The overall regulation has been significantly reviewed.

48 Introduced the mandatory bid rule, squeeze-out and sell-out rules; completed the pre-existing regime. 49 Introduced a new mandatory bid rule and the sell-out procedure. 50 Introduced significant changes clarifying mandatory bid, squeeze-out and sell-out rules. 51 Clarified passivity rule, introduced new squeeze-out and sell-out rules. 52 Enhanced mandatory bid rule (50% threshold moved to 30%); clarified passivity rule; introduced the

squeeze-out and sell-out rules. However, limited reciprocity was introduced. 53 Modified mandatory bid rule: trigger changed from "control" to 30%. 54 Clarified the passivity rule through self-regulation (although non-binding) and trigger of mandatory bid

rule moved from 2/3 to 30% (and 50%). 55 In 2001 (pursuant to a pre-transposition procedure), mandatory bid and passivity rules were introduced.

"Lex Mol" (2007) removed the passivity rule. Compared with pre-2001, the overall change is shareholder-oriented. Although reciprocity was introduced, compared with pre-2007, it is stakeholder-oriented.

56 Partially introduced the breakthrough rule (voting cap of privatized companies) and simplified squeeze-out; however, provided for company opt-out from passivity and added reciprocity.

57 Enhanced passivity rule, partial introduction of the breakthrough rule (voting caps), and of simplified squeeze-out rule. However, reciprocity and tender offer warrants were introduced.

58 The squeeze-out threshold moved from 80% to 90%. 59 Added reciprocity.

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CHAPTER TWO: BROADER ASPECTS AND IMPLICATIONS OF TAKEOVER REGULATION

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Key concepts. � When analysing the Directive, it is important to understand its theoretical background, both on

the economic and corporate governance side. Laying down the basis of a comparative approach is also useful.

� Two key economic issues are the opposite forces of the collective action issue and the pressure-to-tender issue.

� Corporate governance theory shapes the regulatory framework of takeovers. It is linked to company law and includes key concepts such as shareholder primacy and team production (please refer to Section II B. in this Chapter), which end up in opposite views: the market standpoint and the blockholder standpoint.

� Analysis of the dynamics of cross-border transactions and review of comparative law issues

help identify the “community control gap” (please refer to Section III A 1.) in this Chapter). A taxonomy of the three main models (shareholder oriented, management oriented and company-oriented) is also helpful.

I. Some key economic issues Selected issues. The Directive raises a number of economic issues, a full description of which is studied in greater detail in the Economic Study. Two of these issues are more specifically highlighted in this Section. They are analysed on the basis of typical conduct, and applicable legal rules.

A. The collective action issue

1. The collective action paradox Description of the paradox. The collective action issue may typically arise during a bid when shareholders believe that the offeror is not including in its bid price the full potential of synergies that may be derived from the future entity combining the offeror and the offeree company. If there is no coordination between shareholders, a shareholder “A” will have to make a bet: either � A will bet on the success of the bid (even if A will not himself tender into the bid), and, as a

result, his interest will be not to accept the bid, as the post-bid value his shares will be higher than the bid price (since, as mentioned above, the full value of expected synergies for the offeree company is not fully reflected in the bid price); or

� A will think that the bid may fail if he does not accept the bid, in which case it is in A’s best

interest to accept it. However, if A is a small shareholder (i.e. one who is not likely to make any difference in the outcome of the bid), he should opt for the first solution and keep his shares in order to “free ride” on the success of the bid. This behaviour would be all the more rational because, practically speaking, most bids succeed. This is where the paradox lies: if all the shareholders were acting rationally, bids should generally fail, as the minimum condition typically introduced in the bid (e.g. majority or two-thirds of shares) will never be reached. This is however not the case. How can this be explained?

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Scheme. The following scheme illustrates the issue:

Price value Price value Post-bid price Bid Price

Shares Shares

During the bid After the bid A

Retained bidders’ synergies (RBS)

Shared bidders’ synergies (SBS)

Pre-bid company value (PBCV)

Retained bidders’ synergies (RBS)

Shared bidders’ synergies (SBS)

Pre-bid company value (PBCV)

RBS

SBS

PBCV

2. Explanation of the paradox Several explanations. Apart from the pressure to tender issue (which will be examined below), there are three main explanations to the absence (in practice) of collective action issues. Economic inability for shareholders to cooperate. The better shareholders can cooperate, the higher the risk that they will free ride. This is best explained through an example: consider a bid with a 50% minimum condition, and a shareholding structure where 40 shareholders each hold 2%. Their interest is to cooperate so as to offer each 1.25%, so that the bid will succeed, while each keeping 0.75%, so as to benefit from post-bid synergies. Practically speaking, however, this situation is not frequent and the shareholding structure is either more concentrated (with blockholders holding much larger blocks) or more dispersed. In the former case, there will be a discussion between the offeror and the blockholder and if they agree on a price, the blockholder will offer his shares, which will be seen as a strong indication that the bid is likely to succeed – in this case, some free-riding is possible (unless there are other obstacles). In the latter case, cooperation is likely to be too costly and too complex to be applied. Legal impediment to cooperation. There is one rule that may have been ignored as an impediment to cooperation: the so-called “defensive concert,” created by Article 5.1. of the Directive. This rule may be understood as creating a risk for cooperating shareholders to have to launch a bid. Of course, this obligation will only arise if the cooperating shareholders aggregate enough shares to reach the threshold triggering a mandatory bid (e.g. 30%) and if the offeree company is involved in the cooperation. Cooperating shareholders may take appropriate steps to avoid the realisation of this risk. However, these steps will add to the costs and complexity of cooperation, thereby pushing small shareholders to opt for the easiest solution, i.e. tendering their shares. Irrational behaviour. The core assumption of the free-riding issue is that shareholders behave rationally. This hypothesis is based on two premises: � There is sufficient information to assess the post-bid value of the offeree company; and � Shareholders correctly discount the value of time. It is however likely that these assumptions are not true: � There is only little information on potential post-bid synergies (and the offeror has no incentive

to disclose any meaningful information in this respect); and

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� Shareholders are likely to have a short-term bias when confronted to a bid (under the theory that “it is better to have a bid in the hand rather than two in the bush”). Actually, the easiest solution for a shareholder, when a bid is announced, is to sell his shares at a price that is close to the bid price. There is no bet, the gain is certain and there are absolutely no costs associated with this strategy. Thus, what may seem to be an irrational behaviour from a theoretical standpoint may well be very rational conduct for all practical purposes.

B. The pressure-to-tender issue Defining the issue. As discussed above, the so-called “pressure-to-tender” issue is one of the reasons why shareholders tender into bids when they would be better off “free-riding.” There may be two main determinants to this issue: � Liquidity issue. Shareholders may fear that post-bid liquidity is severely reduced, thus affecting

their ability to sell (the pure “liquidity” effect) and potentially reducing the listed price of their shares (the “price” effect). The liquidity effect is most salient for small caps, where already low liquidity is further reduced. The price effect is likely to take place in all events, as investors (and in particular international institutional investors) are likely to divest from controlled companies whose float is limited.

� Extraction of private benefits of control. Shareholders may fear that the controlling shareholder

will extract some value from the offeree company to the detriment of other shareholders, through an undue appropriation of private benefits of control.60 The ability to proceed in such a way is obviously linked to the overall legal framework, and in particular to the way related-party transactions are structured.

Thus, minority shareholders will be pressured to tender even if the acceptance of the bid is not in their collective self-interest and the offeror may consequently be able to acquire an offeree company for a low premium constituting only a small fraction of the takeover’s gain. Solving the issue. The pressure-to-tender issue can be alleviated in a number of ways (which will be more thoroughly discussed below), including: � Providing for an automatic re-opening of the bid, which would allow the shareholders to know

the potential outcome of the bid when they decide to tender; � Enhancing the rules regarding related-party-transactions; and � Introducing more transparency for private benefits of control.

II. Broader corporate governance issues Impact of the corporate governance premise. As it is difficult to structure a legal framework on the sole basis of economic studies (results of which are often the subject of debate), it is necessary to highlight the various theories that have helped shape the modern corporate governance thinking. As we will see, the legal framework of takeover bids may vary significantly, depending on the corporate governance system that is selected.

60 On these benefits, please refer to Chapter IV Section I of this Study.

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A. Preliminary questions Three preliminary questions. In the background of corporate governance issues, three questions are always present, although they may not always be explicit. They are: What is a corporation? Who “owns” a corporation? Are corporations “shareholder democracies?” What is a corporation? There are two ways to view a corporation. The traditional legal analysis considers a corporation as an “incorporated” body, i.e. as a legal entity of its own, with its assets, liabilities and contracts. Under a different approach,61 a corporation may be seen as a “nexus of contracts” between investors, management, employees, suppliers, clients, etc.; legal personality is thus a fiction. If this latter view were to be preferred, it would entail a complex legal structuring for takeover bids: as all contracts are potentially entered into with all other parties, the change of one set of contracting parties (i.e. the investors) would need to be approved (or at least pre-approved) by all other parties. This is why the traditional, “legal personality” view, is generally preferred. This position is based on the fact that if it is true that legal personality is a fiction, it should not be seen as an issue: after all, all legal rules are a fiction; the most practical and useful fictions should be selected. Who “owns” a corporation? A popular view holds that shareholders are the “owners” of a corporation. They have invested some money, they can sell their shares and they have financial and political rights. This view, in connection with takeover bids, is problematic in two respects: first, if shareholders are owners, the use of squeeze-out mechanisms against minority shareholders should be deemed an expropriation in favour of a private party (the majority shareholder) and in the interest of such party, which is a source of difficult debates; second, if shareholders own the corporation, majority shareholders own their majority rights and thus the price of this majority, which leads to another difficult question: how is it possible to justify the sharing of the control premium with all shareholders when this premium is the property of the majority shareholders? This question, as well as the previous one, is best solved in the traditional framework of corporate law. From a legal standpoint, companies are not “owned”: shareholders hold transferable contractual rights, just as other finance providers; they have no rights to the company assets, and incur no liability in connection therewith, and regarding the notion of control, it has also been held that it would be considered a corporate asset.62 This analysis appears especially relevant in the context of listed companies, where the relationship between a company and its shareholders is often weak. Are corporations a “shareholder democracy?” Companies are often described as a “shareholder democracy.” Shareholders are compared to the people in a democracy; they are accordingly deemed to hold the ultimate power. Directors, as elected representatives, are considered as the “executive branch.” Under this theory, in a takeover bid, directors should have no autonomy – they should defer to the shareholders for all decisions that may frustrate the bid. The “shareholders’ democracy” theory has been criticised from two standpoints. First, a company has nothing to do with a political system, and the comparison appears to have no scientific value. Second, if the comparison was to be made, then corporations should apply the “one man, one vote” principle that is typical of democracies; the “one share – one vote” concept, which provides more voting rights to wealthier shareholders owning several shares, is more akin to a “plutocratic” regime. Summary tables. How the various positions that may be taken on corporate governance may impact takeover regulation is summarised in the tables below.

61 See Michael C. Jensen and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs

and Ownership Structure, Journal of Financial Economics (1976). 62 Please refer to Chapter IV Section II D of this Study.

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What is a corporation ? View One (Jensen & Meckling) View Two (legal analysis) Impact on takeovers

� A “nexus of contracts” (investors, management, employees, suppliers, clients, etc.).

� Corporations are a fiction.

� Corporations are legal entities.

� All legal rules are fictions. The most practical fictions should be selected.

� How could a “nexus of contracts” be transferred? Consent of all parties is needed.

Who owns a corporation ?

View One (popular view) View Two (legal analysis) Impact on takeovers

� Shareholders own the corporations.

� Corporations (as legal entities or contracts) are not “owned.”

� Shareholders hold transferable contractual rights.

� Conflict between the “ownership” view and (i) squeeze-out (expropriation) and (ii) obligation to share the control premium.

Are corporations based on “shareholders’ democracy”?

View One (popular view) View Two (legal analysis) Impact on takeovers � Shareholders represent the

people, management the government.

� Democracy applies “one man, one vote” rule; corporations don’t.

� Political systems and economic institutions are completely different.

� Who should have a final say on the merits of a bid?

B. The basic corporate governance views and their impact on takeover regulation

Main systems. Corporate governance is an open concept. In theory, it is possible to design an almost unlimited number of systems. We can however focus on three, which basically represent three successive states of corporate governance thinking: the traditional view, the shareholder primacy view and the team production view. Traditional view. In the 19th century, when large corporations started to develop on a significant scale, there was little debate about corporate governance. Most companies were family-controlled and the legal framework, in particular regarding securities regulation, corporate law and labour law, was not as complete and sophisticated as it is today. Corporate governance issues had been identified by various philosophers and economists, including Adam Smith and Karl Marx, but no precise set of rules had been proposed. The relationship between shareholders and employees, described as “capitalists” and “workforce,” was analysed from a philosophical, political and economic standpoint. The time of takeover regulation had not yet arrived. Shareholder primacy view. The “agency” issue in the relationship between management and shareholders had become a dominant theme of corporate governance in the 20th century, with the emergence of a growing number of large, listed companies with dispersed shareholders. The main

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question had become shareholder control over management, in order to prevent the latter, through laziness or theft, from squandering shareholder wealth. The “shareholder supremacy” view had thus emerged: drawing on the old master/servant legal concept, it has applied a “principal/agent” theory to the relationship between shareholders and management. Its premise is a complete reversal of the traditional view: where shareholders, as capitalists, used to be seen as the “strong” party in a corporation, they suddenly were viewed as the “weak” party, with only residual income rights, where other parties (such as creditors, employees or management) were viewed as “strong” parties protected by their fixed-income revenues. Shareholders therefore had to be protected. Two key concepts were thus introduced to this effect: first, the “alignment of interest” theory, which aimed at aligning the financial incentives of management with that of shareholders; the massive development of stock options was one result of that idea. Second, the “disciplinary effect” theory, which provided that takeover bids should be facilitated as the fear of being taken over would continuously push managers to increase their company’s performance (or, at least, to take steps to boost the share price of their company). As a result, under this theory, pre-bid defences should be removed and post-bid defences should be subject to shareholders approval within the framework of a “no frustration” rule. Team production view. The shareholder primacy view has been criticised since the end of the 20th century. At least three criticisms have been formulated: (i) the finance view leads to short-termism,63 (ii) shareholders are not in a weak position, especially if compared with employees (see box below, entitled Shareholders as “residual claimants” and employees as “beneficiaries of fixed-income revenues.” Who bears the risk?), and (iii) neglecting other stakeholders creates negative externalities. As a result, alternative models have been designed, among which the “team production” theory has emerged for its overall consistency.64 Under this theory, a company is characterised by several features, including the following: (i) when production is made in a team, it is difficult to allocate precisely the merits of success or failure to specific team members, (ii) most contracts entered into between a company and its stakeholders (in particular, employees) are “incomplete”: they do not specify everything that may happen, as it would be too complex, (iii) employees are encouraged to make “firm specific investments,” which have a value for the company but are lost for the employee if he or she moves to another company. In the context of “incomplete contracts,” the encouragement mainly comes from implicit promises that firm specific investments will be rewarded in the future, through increasing wages and internal promotions. One of the main issues to be solved is thus the following: How to make sure that no stakeholders unduly obtain a portion of the profit that should be shared among all stakeholders? This “hold up” problem may appear in the event of a takeover: new controlling shareholders may be tempted to disregard all implicit promises made by the previous management in order to reap the benefit of all past investment for themselves.65 In this setting, the board is called to act as a “mediating-hierarch,” with a view at keeping a fair balance between the interests of all involved stakeholders. This role is facilitated by the fact that managers are the only party to have some proximity with all stakeholders.66 It is thus important to empower the management in its relationship with shareholders. A “no frustration” rule is not appropriate in this respect, if it leads to a complete shift of power in the hands of the shareholders.

63 In particular, the “disciplinary effect” has some negative consequences (please refer to Chapter IV Section

IV G. of this Study). 64 Margaret M. Blair, A Team Production Theory of Corporate Law, Virginia Law Review, Vol. 85, No. 2,

pp. 248-328, March 1999. 65 Paul L. Davies, Edmund-Philipp Schuster and Emilie Van de Walle de Ghelcke, “The Takeover Directive

as a Protectionist Tool?” ECGI - Law Working Paper No. 141/2010 pp. 19 (February 17, 2010). “A shareholder-focused system can discourage employees from investing in firm-specific skills, as no credible promises of long-term employment are available. A lack of highly specialised workforce may well yield higher efficiency costs than prevented control shifts resulting from an entrenched management for certain firms or even sectors of the economy.”

66 This is also why the role attributed to the board by the team production theory is often seen as providing a better description of what boards actually do than the shareholder primacy view.

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Summary table. A table summarises the views that have been developed above, while a box explains the respective situation of shareholders and employees regarding risk.



(Blair & Stout)










Workforce

Shareholders

Board

Management

Employees

Shareholders

Employees

Board

Management

Shareholders and employees: a risk analysis. An analysis of the respective risks of shareholders and employees in listed companies shows that shareholders, although they are “residual claimants,” may not bear as much risk as employees, with their “fixed-income revenues.” The comparison is summarised below:

Shareholders as “residual claimants” and employees as “beneficiaries of fixed-income revenues.” Who bears the most risk?

Period Shareholders Employees Beginning of the relationship

At the time of investment, shareholders of listed company:

� may choose among thousands of companies

� benefit from extensive normalised information prepared by management (who may be liable if the information is false or misleading), reviewed by auditors and controlled by supervisors

� may diversify their risks as precisely as they wish

At the time of hiring, a prospective employee of a listed company:

� may choose among a few companies

� has little access to information, which is not normalised and essentially not controlled

� cannot diversify risk

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Shareholders as “residual claimants” and employees as “beneficiaries of fixed-income revenues.” Who bears the most risk?

Period Shareholders Employees During the relationship

Shareholders who have made a one-off money investment:

� decide the level of control they want to have over the affairs of the company (no control, vote at shareholders’ meetings, active engagement)

� receive a residual payment (dividends), which is partly the result of the control that has been exercised

� may benefit from a high reward in the event of a takeover bid with a large premium

Employees, who are making a continuous time investment:

� have limited or no control over the affairs of the company

� receive a fixed-income payment (wages)

� incur the risk of a ”hold up” in the event of a takeover bid

When the relationship terminates

Upon exit, shareholders:

� receive a benefit or suffer from a loss, depending on the share price

� may apply their exit strategy within seconds or minutes (sale order transmitted by phone or internet)

When leaving, employees:

� are in a neutral position vis-à-vis the share price

� are faced with long delays to apply their exit strategy (notice period upon resignation, time to find a new job)

C. The market view vs. the blockholder view The debate. The “market view” of corporate governance, which is often considered the “finance” standpoint, is typically opposed to the “blockholder view,” which is often in line with the “industrial” standpoint. It is worth recalling the main terms of the debate, as it has a direct impact on takeover regulations. The main arguments for both sides are summarised below:

Market Standpoint Shareholders Standpoint � Unfettered markets are best places to

monitor companies. � Blockholders are best placed to control

companies. (Issues of transaction costs). � The fear of takeovers pushes

management to act diligently (“disciplinary effect” against “management entrenchment”).

� If the markets discipline managers, who disciplines the markets? (Issues of market rationality and short-termism). Bases

� Focus: shares as a class of assets. Method: “Forecasting the psychology of the market.” (John Maynard Keynes).

� Focus: productive assets. Method: “Forecasting the prospective yield of assets over their whole life.” (John Maynard Keynes).

Results � Shareholders should have the ultimate

power, as they bear the ultimate risks (shareholder primacy). The “no frustration” rule should prevail.

� A system of checks and balances is preferable (consensus formation). Company interest must prevail.

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� Blockholders may misuse their powers. � Transparency rules and appropriate protective laws should address this risk.

III. Comparative Law Plan. Comparing the system of the Directive with the rules applicable in other legal systems can be done from a theoretical as well as empirical stance.

A. Theoretical Approach A variety of issues. From a theoretical standpoint, a number of issues may be addressed. We have selected the three following questions: (i) to what extent are cross-border transactions specific? This raises the “community control gap” question; (ii) what does comparative law teach us about law making in federal structures regarding takeover bids?; and (iii) to what extent does the specific shareholding structure in a country impact its takeover regulations?

1. The “community control gap” Community fears. Legal control is not the only way to influence an institution’s conduct. Community control, through cultural habits and proximity network, may play a role. A typical fear associated with cross-border acquisitions is the loss of this community control, which may typically lead to the loss of the ability to keep headquarters in the country of origin, develop high added-value products and research and development in the same country, and protect employment and environment at home. These issues, in economic terms, may be considered an increased risk of negative externalities imposed by foreign shareholders to a local company. The extent to which these assumptions hold true is beyond the scope of this Study (as it may be the case, for instance, that an international group acquiring a small local offeree company may apply enhanced social or environmental rules as part of its general corporate policy). However, these concerns exist and are exacerbated in the context of acquisitions of large companies (often listed companies) and of highly publicized takeover bids, and more specifically, unsolicited takeover bids. This issue, which may be referred to as the “community control gap”, should thus be borne in mind when designing potential legislation affecting takeover bids. Scheme. This issue may be visualized in the scheme below.

Community

Community

Shareholders

Shareholders

Managers

Employees

Managers

Employees

Community control gap

Potential solution. There are two main ways to address the issue. The first one is to convince that such fears are ill-founded or that they exist but are counterbalanced by positive effects (e.g. improved overall economic efficiency, lower consume prices, or gains obtained from the freedom for each national company to acquire foreign offeree companies). The second way is to address the issue

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through regulatory action. If reciting the free market for corporate control is not an option, then the main alternatives are the following: � Enhancement of community protection through:

- Increased regulation of company activities; - Increased accountability of shareholders.

� Incentivise proper management conduct through the enforcement of a rule whereby managers

must act in the interest of the company taken as a whole.

Impact on takeover regulations. If the community control gap issue is to be addressed through takeover regulation, the simplest way to proceed seems to be to insert a “company interest” rule. This rule already exists in the Directive but, as it is balanced with the “no frustration” rule, its overall effect is unclear (please refer to Articles 3.1(c) of the Directive).

2. The dynamics of federal states EU and US. The European Union presents some of the characteristics of a federal state in that the rules originate from two levels of legislation, the first level being the legislatures of the individual Member States and second, the legislature at EU level. The dynamics between these two levels of regulation can be described as follows: 67 the rules on takeovers at a local level will be less favourable to bids whereas the rules adopted at a federal level will be more favourable to takeover bids. This can be explained by the fact that offeree companies know that they will invariably be governed by the takeover law applicable in their jurisdiction whereas offerors generally do not know in advance which offeree company they will acquire, i.e. to which set of rules the bid will be subjected. Offeree companies therefore can concentrate their political efforts on the local level and influence legislation such as to create obstacles to takeovers. At a federal level however, this advantage of offeree companies disappears and the rules adopted thus appear to be slightly tilted in favour of offerors.

3. The impact of shareholding structure Shareholder dispersion. Much literature has been written on the topic of shareholder dispersion and its impact on a bid process. The impact of shareholder concentration is said to affect shareholder power to collectively impact a bid. Some have also argued that a dispersed shareholder structure causes localized laws to be made in favour of incumbent management due to the fact that the management are often greater organized and carry local influence, whereas highly dispersed shareholders are less organized collectively and less local. The largest example of such an effect is in the US, where most of the state takeover law came as a result of lobbying efforts from management of companies who engaged in takeover activity either as an offeror or an offeree company. In EU markets, however, where there are dispersed shareholder structures, this observation has not necessarily remained true. For example, in the UK, the shareholder structure is quite dispersed as compared to other Member States, yet UK takeover legislation that protects minority shareholders has still been effectively promulgated. The same can be said for dispersed shareholder markets in Canada and Australia. Conversely, in certain markets with more concentrated shareholder structures such as Japan or China, shareholders have been less influential on certain aspects of takeover legislation. These examples suggest that, while shareholder dispersion is indeed an element that impacts takeover law, it is not alone, the paramount impact.

67 G. Ferrarini and G. Miller, A Simple Theory of Takeover Regulation in the United States and in Europe,

ECGI Law Working Paper No.139/2010, pp. 3-5.

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Corporate Control. Another aspect of market structure that impacts the development of takeover law globally is degree of corporate control. In markets such as Japan, Hong Kong, and the US where there is strong management, they may be more likely to impact policy regardless of the concentration of shareholders. Similarly, it can be said that shareholders in the EU are quite strong as compared to other countries and thus, may be able to more aptly impact legislation regardless of their shareholder concentration. This can be seen in the influence of organized institutional investors in the UK.

B. Empirical review A variety of issues. Company legal systems may be used to identify models against which the Directive may be compared. They can also be used to highlight specific issues, such as comparisons of bids launched by a US company in the EU and vice versa, or a completely different attitude towards certain conducts.

1. The three main models Three models. When comparing legal systems, it is useful to have in mind three typical models which may be best illustrated as forming the three tips of an equilateral triangle. The main (and archetypical) features of theses three models are described below for reference purposes: Shareholder-oriented model

(UK) Company-oriented model

(Continental Europe) Management-oriented model

(US) � Dispersed shareholders � Blockholders � Dispersed shareholders � No takeover defences � Mild takeover defences � Strong takeover defences � Agency theory

(Principal/Agent) � Corporate interest � Fiduciary duties

� Ex ante controls on takeover bids (Takeover Panel)

� Mixed control (ex ante/ex post) on bids

� Ex post judicial control in takeover bids

Link with blockholders. Linking the above-mentioned models to relevant shareholding structures results in the following table:

Ownership Control

Dispersed Concentrated

Strong Management

US Japan, Hong

Kong

Strong Shareholders

UK Continental

Europe

(Adapted from Professor Hideki Kanda68 )

2. Case study: US-EU comparison

68 This table has been adapted with the permission of Professor Hideki Kanda of the University of Tokyo, from

his presentation, “Patterns in Takeover Regulations in the World: Puzzles and Explanations” at the Conference of International Takeover Regulators (September 9th, 2011).

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A balanced situation. Considering the size of both the US and EU capital markets, it is interesting to propose a high level summary of the situation today of a US company wishing to launch a bid on an EU company, and vice versa: � On a practical level, it might be more expensive for a US company to take over a company

located in the European Union because of the mandatory bid rule that would be applicable, thus preventing partial bids. The price may however be pushed down as a result of the incapacity of the board to negotiate with the offeror. However, taking over a European company might be easier for a US offeror since it faces less opposition from the offeree company board, which has fewer defences at its disposal in the European Union than in the United States. If, however, the reciprocity clause has been adopted, board neutrality might not be applicable in case of a takeover by a US corporation.

� From the perspective of European Union companies, it might be less expensive to take over US companies since there is no mandatory bid rule in the United States and shareholding is generally dispersed. However, the boards on US companies might be more resistant to takeover bids since they can apply more defences, and their defence may effectively push up the price.

3. Case study: the criminal action in Vodafone/Mannesmann Criminal sanction or normal conduct? An interesting case shows what may be a completely different attitude towards the board’s conduct during a bid. In a shareholder primacy system, compensating offeree company board members for substantially increasing the bid price through tough negotiations would probably be seen as consistent with what their duties are. An opposite approach may be taken, as is evidenced through the criminal action that was launched in the Vodafone/Mannesmann case.

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Background. The factual background of the bid was the following:

Bonus award. On February 2, 2000, the day on which Klaus Esser, CEO of Mannesmann, and Christopher Bent, CEO of Vodafone, concluded the takeover, Klaus Esser was awarded the 15 million euros appreciation award at the behest of Mannesmann’s largest shareholder, Hong Kong based conglomerate Hutchinson Whampoa. The compensation committee approved Esser’s award on February 4, along with the other bonuses, which included a 3.1 million euros bonus for Joachim Funk, a Mannesmann management team member, which was suggested and voted upon by Joachim Funk himself. Irregularities in the approval process for the awards prompted a recall of the compensation committee and on February 28, they re-approved all the bonuses. By this time, Düsseldorf’s public prosecutor had already received complaints concerning the legality of the awards, which eventually led to a public inquiry that culminated in the 2004 criminal trial. The question was whether six former directors of Mannesmann breached their fiduciary duty, when in the aftermath of the takeover they approved, in good faith, awards and pension enhancements worth almost 60 million euros to 18 executives. The trial adjudicated whether lucrative “golden parachutes,” typical in Anglo-American style capitalism, breached German law simply because of their size. All the defendants were found not guilty by the Düsseldorf court; however, the prosecutors appealed to the German Federal Court of Justice, which in 2005 overruled the Düsseldorf district court’s acquittal. The defendants argued that big pay-outs to executives are common in the United States and the UK, and are needed to motivate corporate leaders to take risks. Prosecutors contended that the payments were illegal because they were designed to persuade managers and Klaus Esser in particular, to drop their resistance to Vodafone’s bid after the long takeover battle. A settlement finally came on November 24, 2006, with managers agreeing to pay a certain amounts as part of a settlement. In return for the payments, prosecutors agreed to drop charges of criminal breach of trust.

The Vodafone/Mannesmann takeover timetable November 14, 1999

Vodafone’s friendly merger bid (involving a swap of 43.7 Vodafone shares for one Mannesmann share) is refused by Mannesmann’s CEO. This refusal is confirmed at the end of November by Mannesmann’s Supervisory Board.

Starting on November 16, 1999

Intense media battle between Vodafone and Mannesmann as Vodafone takes the swap bid directly to the shareholders.

December 24, 1999

Opening of the Vodafone bid on Mannesmann proposing a swap of 53.7 Vodafone shares for one Mannesmann share with no cash component.

February 3, 2000

Vodafone and Mannesmann announce an agreement on Vodafone’s improved bid giving Vodafone a 50,5% and Mannesmann a 49,5% share in the merged company.

February 9, 2000

Vodafone’s bid for Mannesmann shares becomes unconditional upon acceptances

March 21, 2000 Closing of Vodafone’s bid for Mannesmann convertible bonds (approximately 99.72% of Mannesmann’s convertible bonds were tendered).

March 27, 2000 Closing of Vodafone’s bid for Mannesmann shares (approximately 98.62% of Mannesmann’s shares were tendered).

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CHAPTER THREE: KEY OUTCOMES

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I. National legal framework and operation of the Directive Key concepts. �� The Directive is generally considered clear and without significant loopholes (if we leave aside

the optionality issue, which will be further described below). Although in certain countries some events, generally linked to highly publicized and country-sensitive takeover bids, have induced some amendments to takeover regulations that were not connected to the transposition process and not in the original spirit of the Directive, and despite the impact of exemptions, the Directive is altogether well perceived.

�� General principles of the Directive, when read in conjunction with associated rules, protect well shareholders well, even if there is room for harmonised improvement. The protection of employees is less satisfactory, as their protection mechanism is much more limited and the enforcement of their rights far less efficient. Recent reforms in the UK are interesting in this respect.

� Major Non-EU Jurisdictions tend to have similar general principles centred essentially at protecting minority shareholders.

� The perception study confirms the overall satisfaction of shareholders and dissatisfaction of employees.

A. Clarity Majority view on certainty and predictability. A majority of stakeholders believe that the Directive provides enough legal certainty or predictability (58%). However, a significant minority (42%), take the opposite view.

Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers

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National transposition as the main source of unclarity. A majority of stakeholders think that the national transposition of the Directive is the source of unclarity (60%), while 40% hold the opposite view.


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Further guidance to remove uncertainty. A majority of stakeholders (77%) is of the opinion that such unclarity could be removed by providing additional guidance.

Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Possible explanations for lack of clarity. Lack of clarity may be explained through several factors, including: � Complexity resulting from the transposition. In some cases, the transposition has led to the

replacement of a simple concept by a more complex one. For instance, in the Czech Republic, the event triggering mandatory bids has been changed from a percentage threshold (simple concept) to the holding of “actual control” (complex concept). However, if the Directive had been transposed in strict compliance with its wording, the notion of “control” should not have been used. Rather a specific threshold, deemed to grant control, should have been set.

� Lack of guidance. In some countries, such as Romania, there is a lack of guidance from the supervisory authorities and a tendency not to disclose applicable rules with sufficient transparency.

�� Lack of clarity. Lack of clarity is further discussed in relation to the general principles and is therefore dealt with in Chapter III Section I H. of this Study.

B. Transposition and loopholes

1. Transposition No main issue with transposition. As of today, all Member States have transposed the Directive into national law. Possible lack of transposition is relevant only with respect to some details of certain national provisions where there could be a doubt if such national provision is in line with the Directive. This issue has been observed in only a limited number of cases.

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Transposition through non-binding regulation (Finland). A unique situation exists in Finland where takeover law is partly based on non-binding rules – the “Standards” and the “Takeover Code”: � The Finnish Financial Supervisory Authority (the “Finnish FSA”) issues “Standards” that are

partly binding and partly recommended procedural and application guidelines on the provisions of the Finnish Securities Market Act. Standards applicable in a takeover context include the Standard 5.2c on Public Tender Offers and Mandatory Offers (the “Takeover Standard”) as well as the Standard 5.2b on the Issuer’s and Shareholder’s Duty of Disclosure.

� A second source of law in Finland is the non-binding Helsinki Takeover Code (the “Takeover

Code”) initiated by the Confederation of Finnish Industries, Central Chamber of Commerce of Finland and NASDAQ OMX Helsinki Ltd. and endorsed by the Takeover Panel of the Central Chamber of Commerce (the “Takeover Panel”). Whereas the Finnish FSA Standards address matters regulated in the Securities Market Act, the Takeover Code aims to clarify the bid process and several other issues primarily regulated in the Finnish Companies Act (the “Companies Act”) where further guidance may be needed in a takeover context, such as the actions that the offeree company board should and can take after the offeree company has been approached by an offeror. Examples of these are decisions relating to allowing due diligence, taking frustrating action and entering into a combination agreement with the offeror.

� Even though the Takeover Standard is for the most part formally non-binding, it is closely

followed by the parties to a takeover bid as it represents the views of the Finnish FSA on good market practice in a takeover context. Regarding the Takeover Code, it should be noted that the leading law firms, investment bankers and other players in the market have participated in its drafting and, even though it is not formally binding, it is considered to represent good securities markets practice and has been well received by market participants. There is no official private enforcement mechanism such as “cold-shouldering” associated with violations of the Takeover Code. However, the Finnish FSA has in its Takeover Standard confirmed that the Takeover Code constitutes good securities market practice in connection with takeover bids and stated that a securities broker should not act as a financial advisor in a bid where good securities market practice is not followed. Reported cases of non-compliance are limited and relate mostly to information requirements (relating for instance to the timing of the bid).

� Although it appears that, in practice, the provisions of these rules are largely complied with,

one could raise the question as to whether such partly non-binding transposition is in compliance with the requirements of the Directive.

Circumvention (Poland). In Poland, it has been observed that the mandatory bid rule may be too easily circumvented by certain measures, in particular by a contribution in kind (please refer to Chapter III Section II B. 4.) of this Study). Transposition of general principles. It is not always easy to identify clearly whether the general principles set forth in Article 3 of the Directive have been fully transposed. When there is a verbatim transposition, there is no issue. However, transposition may also be done through transposition of specific rules or with reference to generally admitted principles of corporate laws or securities regulations. An example of this issue is given by Dutch law, which has not explicitly transposed the principles set forth under Articles 3.1(c), (d) and (f) of the Directive. However, principle (c) can be considered as a general principle of Dutch company law. This general principle imposes a general duty on the board of directors and supervisory board to act in the best interest of the company, including its business, taking into account the interest of all stakeholders. Principles (d) and (f) do not seem to have been directly transposed into the Dutch takeover rules. The Dutch Takeover Decree does, however, impose additional notification obligations relating to transactions in the securities of the offeree company on both the offeror and the offeree company and the rules on market abuse are

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applicable. The Dutch government has further announced the introduction of a “put-up or shut-up” rule.

2. Loopholes Few loopholes in the Directive. As the Directive provides for broad concepts and allows for both gold-plating and exemptions, it is difficult to identify meaningful loopholes. Competence of supervisors. However, a potential loophole exists in connection with the competence of supervisors. Pursuant to the Directive, an offeree company is entitled to determine which of the supervising authorities of the involved Member States shall be competent to supervise the bid, if the securities were first admitted to trading on regulated markets of several Member States. There are no rules regulating the competence of the supervising authorities if the offeree company does not (intentionally) determine the competent authority. If the transposing law does not provide for a specific rule in that case, there is a potential loophole in favour of issuers listed in several jurisdictions. Negative Competence Conflict. The Directive’s mandatory takeover bid and squeeze-out rules are not applicable to companies whose securities are admitted to trading in a Member State but that are not headquartered in a Member State. Such company’s non-EU home country mandatory takeover bid provisions, if any, may also not be applicable, if the non-EU home countries only consider such rules applicable to companies which securities are listed in the respective home countries. This negative competence conflict leaves shareholders of such a company unprotected; this result appears particularly unfair in cases where countries - the company’s home State and the Member State in which the securities are admitted to trading - provide for mandatory takeover bid rules. Illustration. Case in point, a majority of the mandatory public takeover bid rules applicable to Swiss or French public companies are inapplicable to a company with a registered office in Switzerland and shares admitted to trading on the French regulated market. Given that such a company is headquartered in Switzerland, a country that is neither a member of the EU nor the EEA, under general AMF regulations, provisions to mandatory public takeover bids and squeeze-outs do not apply. Swiss regulations also do not apply to such a company as its shares are not listed on a Swiss stock exchange. In practice, such Swiss companies attempt to avoid the lack of shareholder protection by incorporating the Swiss mandatory takeover bid rules in their articles of association. It is, however, questionable whether these statutory provisions provide the full protection afforded by the respective AMF or Swiss mandatory takeover bid regulations as it is unclear whether these provisions may be enforced by the company’s shareholders.

C. Developments not directly linked to transposition Developments. Some developments in takeover laws have taken place at the same time or after the transposition, although they had no direct link with it. This is the case, for instance, in the following countries: � Italy. In Italy, the Decreto Anticrisi69 modified, as a reaction to the financial crisis the defensive

measure regime to give Italian companies the option to reflect in their articles of association their opinion on takeover bids. This regulation puts in place protective barriers in order to defend Italian companies from hostile foreign takeovers triggered by decreased stock prices.70

69 Law No. 2 of 28 January 2009. 70 The defensive measures regime was later modified by Legislative Decree No. 146 of 25 September 2009.

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In addition, a decree71 has introduced certain provisions that entitle Italian companies to postpone the holding of annual shareholders’ meetings (even if such meeting have already been convened). The decree was adopted in connection with the acquisition by a French company (Lactalis), of a participation in an Italian listed company (Parmalat). In practice, this regulation gives listed companies that are subject to a takeover a means to put in place defences. This Italian decree is generally considered as an attempt to give legal protection to strategic Italian companies by permitting them to put in place defences against hostile takeovers.

� Hungary. In Hungary, the context of the attempted takeover of the Hungarian oil and gas

champion (MOL) by its Austrian rival (OMV), the Hungarian Parliament passed an additional anti-takeover act (Act CXVI of 2007 or customarily referred to as the “Lex Mol”). Lex Mol aims to protect strategic companies in the energy and utilities sector, by increasing the shareholder majority required for the removal of board members and by giving offeree companies a relatively free hand in adopting protective measures, such as share buybacks or voting right limitations. Lex Mol provided special regulations for companies in which the Hungarian State had held a preference-voting (or golden) share. The EU Commission launched an investigation against Lex Mol examining whether the law constituted a barrier against the free movement of capital. As a consequence of the investigation, Lex Mol was slightly amended and has remained in force since.

� Netherlands. In the Netherlands, the application of a “put-up or shut-up” (“PUSU”) rule has been announced.

� Finland. In Finland, a revision of the “non-binding” transposition system has been announced for 2012.

� France. In France, a PUSU rule was introduced in 2006. Under this rule, if there exist facts reasonably leading to the suspicion that an entity may be preparing the launch of a takeover bid, the AMF may require that this person disclose its intentions by way of a press release. If the entity confirms its intention to make a takeover bid, the AMF will set a date for the filing or the announcement of the main terms of the takeover bid; the choice of this date will be left to the discretion of the AMF.

If the potential offeror indicates that it does not have the intention to make a takeover bid, or if it does not comply with the filing / announcement date set by the AMF, in the situation where it had acknowledged its intention to prepare a bid, it will be barred from filing a takeover bid for the company for a six-month period, unless there is a significant change of circumstances.

71 Law Decree No. 26 of 25 March 2011.

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� United Kingdom. In the UK, following the acquisition of Cadbury by Kraft Foods, there have

been significant reforms implemented by the Takeover Panel with the explicit purpose of empowering the offeree company when a bid is launched.

Recent UK reforms following the Kraft/Cadbury bid

In the wake of the 2009/2010 controversial acquisition of Cadbury by the US food company, Kraft, the UK Takeover Panel undertook to make appropriate changes to the UK Takeover Code (the legal instrument under which the Directive was transposed). The Code Committee of the Takeover Panel issued a consultation paper in June 2010 to investigate whether the existing regulatory framework of the Takeover Code (which transposed the Directive) left UK companies too vulnerable to hostile bids. Among the key issues which the UK Takeover Panel aimed to address were the following: � Whether the minimum voting rights acceptance threshold (50% plus one) should be raised to 66%.

� Disenfranchisement of voting shares acquired in the offeree company during the bid period.

� Whether there should be greater disclosure in offer documents and offer voting intentions.

� Possible standardisation of various aspects of the existing “PUSU” rule including:

− Imposing a standardised deadline

− Automatic application of the rule upon the announcement of a possible bid.

− Whether a private PUSU rule should be allowed if the possible offeror has not been made

public yet.

� Rules regarding inducement fees in recommended bids or other protective measures concerning the bid.

� Whether the timetable of the Code should be shortened. Throughout the consultation paper, the UK Takeover Panel made reference to the general principles of the Directive and how their concerns coincided with the objectives therein. The revisions to the Takeover Code came into force 19 September 2011and encompassed the following changes:72 1) Enhanced protection of the offeree company. � Greater protection for offeree companies against protracted “virtual bid” periods. 73 A “virtual bid”

refers to a scenario in which a potential offeror announces that it is considering launching a bid but without committing itself to doing so. If the announcement of a potential bid is made by an offeree company, the name of the offeror and any other potential offeror who has been in discussions with the offeree company regarding a potential bid (that has not been rejected), must be disclosed by the offeree company in their announcement. If the potential offeror makes the announcement to launch (regardless of whether the announcement was intended or leaked), the offeree company is not required to disclose to any other potential offeror that such launch took place. However, if the

72 See The Takeover Panel Code Committee “Review of Certain Aspects of the Regulation of Takeover Bids,”

PS 210/22 (21 October 2010). 73 See The Takeover Panel “Review of Certain Aspects of the Regulation of Takeover Bids, Response

Statement by the Code Committee of the Panel Following the Consultation on PCP2011/1,” RS 2011/1, at pp. 7-32 (21 July 2011).

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Recent UK reforms following the Kraft/Cadbury bid presence of another offeror is announced by the offeree, intentionally or through a leak, the offeree company must disclose the identity of such potential offeror.

Following the announcement of any potential offeror, a 28 day PUSU deadline is enforced upon which such offeror must announce a firm intention to launch a bid or not. This deadline can only be extended at the request of the offeree company to the Takeover Panel who will “normally consent” to such extensions.

The intended purpose of the PUSU deadline is to minimise uncertainty arising from bid rumours and allow shareholders and other market participants the benefit of this information so that they may make informed decisions.

The effect of the rule is to empower offeree companies with greater ability to control the pace and information disclosure of the bid.

� Prohibition of deal protection measures and inducement fees.74 Concerned over packaged deal protection measures and the pressure they placed on offeree company boards and other potential offerors, the Takeover Panel has instituted a general ban on “any offer-related arrangement,” such as inducement fees, with the offeror or those acting in concert with them. The rule carves out exceptions for certain “offer-related agreement” which are not prohibited, including a specific exception for inducement fees for white knights.

Bids that are structured as schemes of arrangement are subject to the same general prohibition, however, the offeree company recommending the scheme much disclose the scheme along with a timetable for its application (which it must abide by), within 28 days of the offerors announcement of a firm intent to launch a bid.

� Offeree company board’s ability to give an opinion on the bid.75 The offeree company board must obtain independent advice on the bid in giving its opinion on the bid to its shareholders. The offeree company board is not limited in the factors it may consider when giving its opinion on the bid and is specifically not restricted to considering the bid price. Article 9 of the Directive does not include any such rule requiring independent advice on the bid, however in view of the objectives of the Directive, there is no indication that the Directive disfavours such a practice.

2) Enhanced disclosure regime.

� Disclosure of offer-related fees and expenses.76 The total of offer-related expenses such as fees for financial advisors, lawyers and accountants, relating to the bid must be estimated and disclosed by all parties to the bid. If the actual aggregate fees and expenses exceed the disclosed figure by more than 10%, the Takeover Panel may require a second disclosure regarding the actual figures.

� Disclosure of bid financing and other financial information.77 Financial information regarding a bid and its financing relating to an offeree company or an offeror must be disclosed by publishing the relevant financial information for the last to financial years to a website providing the website address.

3) Improved employee rights. These rights are described in Chapter III Section I E. 2.2.) below.

74 Id. at 37-40. 75 Id. at 58-59. 76 Id. at 60-62. 77 Id. at 67-68.

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D. Gold-plating Minimum harmonisation. The Directive allows Member States to introduce provisions going beyond the Directive's requirements in order to enhance the protection of those whose interests are supposed to be protected by the Directive (Article 3.2 (b) of the Directive, “gold-plating”). For those Member States which had already introduced regulations regarding takeovers or other public bids before entering into force of the Directive, it is questionable whether one shall really treat such provisions that are not provided for by the Directive as “gold-plating,” since their adoption was not the result of a specific choice made in view of the Directive. For completeness sake, they are addressed in this Section. Typical examples of gold-plating. Provisions granting additional protection most frequently relate to the following issues: � Threshold triggering the obligation to submit a mandatory bid. Some Member States provide

for a double threshold (e.g. in Finland: exceeding 30% and 50% of the voting rights), or apply the threshold not only to voting rights but also to capital (France), whereas the Directive’s “control” definition only refers to a single threshold expressed in voting rights.

� Criteria for equitable price for mandatory bids:

- Price determination. To determine the equitable price, a significant number of Member States78 use a supplemental criterion, which provides for additional protection to minority shareholders. In these Member States, equitable price must be at least equal to the (weighted) average stock exchange price of the shares of the offeree company during a reference period. Other Member States request that either the offeree company’s independent directors mandate an independent expert to prepare a fairness opinion in relation to the evaluation of the offeree company (Belgium) or that, in cases of conflicts of interest, an appraiser be appointed by the offeree company (France).

- Post-bid adjustments. Adjustments of the bid price have to take place retroactively in

connection with certain cases of share acquisitions made after the expiry of the bid period (e.g. Germany, Finland).

- Compulsory cash component. With respect to the choice between a consideration in cash

or in kind, some Member States always request a cash alternative while the Directive requires such cash alternative only in certain cases (e.g. Finland, Belgium).

- Application of the equitable price rule to voluntary bids. Some Member States such as

Germany apply the equitable price rule not only to mandatory but also to voluntary bids. In such cases, the criteria taken into account to determine the equitable character of the consideration offered in a voluntary bid are the same as the ones used in connection with mandatory bids. Similarly, certain Member States such as France require a compulsory cash component to be offered also in voluntary bids where no liquid securities admitted to trading on a regulated market are offered by the offeror or where the latter has during a reference period acquired for cash securities carrying at least 5% of the offeree company’s voting rights.

� Content of the offer document. Some Member States (e.g. Ireland) require the offer document

to contain more detailed information and indications than the items requested by the Directive.

78 E.g. Austria, Belgium, Germany, Greece, Portugal, Spain and (only under certain circumstances) Italy.

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� Rights of employees. Some Member States have reinforced the rights of the employees within the bid process and provide for specific consultation and hearing rights (e.g. France and Belgium).

E. General principles of the Directive “Guiding principles”. Article 3.1 of the Directive contains general principles that the Member States must comply with. These “general principles” should be interpreted in the light of the decision issued by the Court of Justice of the European Communities on 15 October 2009,79 which provides that they are “guiding principles” for the transposition of the Directive and cannot be regarded as general principles of Community law80. The level playing field. Much emphasis has been placed on the need for a level playing field as a rationale for the adoption of the Directive,81 as it may be argued that the regulatory framework to protect investors who are entitled to participate in a supra-national market involving public bids (as the Directive aims to do), must be harmonised to a degree of uniformity at an EU level.82 It has however been noted that the concept of the level playing field alone does not provide definitive guidance in determining the best corresponding regulatory framework for takeovers.83 It is useful to examine what the possible drawbacks to the level playing field are and how they operate in the context of takeover regulation. General considerations. The main issues to be analysed with respect to these general principles are: � whether these principles sufficiently protect the interests of the constituents, whether they are

specific enough, and whether they grant a sufficient level of protection;

� what actions do Member States require from listed companies and offerors in order to comply with these principles; and

� have listed companies, boards and/or offerors taken specific measures to comply with these principles?

Plan. Generally, the principles provided in Article 3.1 of the Directive are fully transposed (sometimes with a verbatim transposition) or do not raise fundamental legal issues. In this Section, the Study therefore examines if (i) each general principle is specific enough to protect the interests of the relevant constituents, and (ii) transposing laws raise legal issues or are helpful for the application of these general principles.

79 Judgment of the Court (Fourth Chamber) of 15 October 2009, Case C-101/08, European Court reports

2009, Page I-09823. The Court considered that “it cannot be inferred from the use of the term ‘general principles’ in Article 3 of that directive that the Community legislature thereby intends the principles mentioned in that Article to be treated in the same way as general principles of Community law. As is clear from the words ‘for the purposes of implementing this Directive’, they are only guiding principles for the implementation of that directive by the Member States”.

80 These principles also set boundaries to the right granted to Member States to derogate from the Directive rules (Articles 4.5 and 5.4 of the Directive).

81 See “Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids” (European Commission January 2002) (Winter Report 1).

82 Chiara Mosca, “The Takeover Bids Directive: An Opportunity for Europe or Simply a Compromise?” Paolo Baffi Centre Research Paper No. 2009-64, p. 20 (December 2009).

83 Paul L. Davies, Edmund-Philipp Schuster and Emilie Van de Walle de Ghelcke, The Takeover Directive as a Protectionist Tool? ECGI - Law Working Paper No. 141/2010 p. 2 (17 February 2010).

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Existence of general principles in Major Non-EU Jurisdictions. A summary table indicating whether the general principles set out by the Directive are also in effect in Major Non-EU Jurisdictions is provided in Chapter III Section I G. 1.) of this Study.

1. Protection of shareholders

1.1. Equal treatment

a. Descriptions and general assessment The principle. According to Article 3.1(a) of the Directive, “all holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected”. The protection of the minority shareholders is therefore added to the principle of equal treatment. Associated rules. Equal treatment and the protection of minority shareholders are more specifically addressed by the mandatory bid rule under Article 5 of the Directive and the equitable price provision under Article 5.4 of the Directive. The provisions regarding the publication (Article 6 of the Directive – information concerning bids and Article 8 of the Directive – disclosure of bids) serve prima facie the proper information to shareholders, but also ensure their equal treatment because such provisions grant all shareholders access to the same information. The requirement for a fair price in the squeeze-out and sell-out provisions (Article 15 of the Directive) is also intended to protect minority shareholders. No major application issue. The sufficient specificity of the principle of equal treatment itself is not an issue in nearly all Member States. The general principles referred to in connection with the application and operation of the Directive appear rather to help interpret other rules, when such rules contain uncertainties. General principles are further used to fill gaps within the Directive or national frameworks. Article 4.5 of the Directive, allows Member States to derogate from certain rules of the Directive but also provides that such derogations must still comply with the general principles laid out in Article 3.1 of the Directive. The principle of equal treatment along with the other core principles of the Directive is not weakened by such derogations. All-holders/best-price rule. For comparative purposes, it may be noted that in the US, only a portion of the equal treatment principle set out in Article 3.1(a) of the Directive is applied through the so-called “all-holders/best-price” rule. The protection of the minority shareholders, at least regarding the obligation to launch a mandatory takeover bid, is not included in this rule (please refer to Chapter III Section I G. 2.) of this Study). Such protection is, however, granted in the US by certain State rules (please refer to Chapter III Section I G. 3.) of this Study).

b. Specific issues Exclusionary bids. In contrast with the equality principle, most Member States allow bids to be structured so as to exclude some foreign shareholders (typically located in the US). Although it is questionable whether these exclusions are lawful, they seem necessary, in practice, when extending a bid abroad would impose excessive costs on the offeror in the light of the number of shareholders that may be concerned. The “class struggle” issue. According to the Directive, only shareholders of the same class must be afforded equal treatment, but the boundaries of this principle are unclear. The principle of equal treatment is at stake when certain classes of shareholders are excluded from a voluntary or mandatory bid (if a parallel bid in the states in which certain shareholders are located would be too burdensome) or if a distinct price is proposed for different categories of shareholders. Although it is indeed permitted to offer different prices for different classes of shareholders, it may be difficult in practice to determine to what extent differentiations are justified or how substantial such divergences in price

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may be. This issue may however be addressed at a national level, or in Major Non-EU Jurisdictions, as described below: � Separate treatment of each class. German regulation provides expressly that the minimum price

must be calculated for each class separately. The bid must contain an explanation of the price calculation and set forth why the price is justified. This also includes an explanation of different calculations/evaluations for different categories of securities. A distinction between different categories is admitted (but diverging opinions may exist regarding the question of how to evaluate the different categories).

� Independent expert. French regulation states that the offeree shall appoint an independent

appraiser if a squeeze-out pertains to different classes of financial instruments and is priced in a way that could jeopardize the principle of equal treatment. The independent expert will typically consider the price that was offered in a previous bid for each security class.

� The “class struggle” issue in Major Non-EU Jurisdictions. All Major Non-EU Jurisdictions

authorise an offeror to offer different prices for different security classes. Most of these jurisdictions require the price differences to be “equitable,” “justified” or “reasonably related” but do not set specific criteria that would need to be taken into account by the offeror (please refer to Chapter III Section I G. 4.) of this Study).

Extension to other situations. In some countries, the equal treatment principle has been further extended to provide equal rights to shareholders whose situations are different. � Post-bid top-up clause. In Belgium and Germany, for instance, if within one year after the

closing of the bid, the offeror acquires securities subject to the bid at a price that exceeds the bid price offered for said securities, all holders of said securities who accepted the bid are entitled to receive the price difference. In Finland, the automatic bid adjustment applies within a nine-month period. Thus, shareholders who have tendered their shares benefit from the same price as shareholders who have kept their shares during the takeover bid and sold them afterwards. These top-up clauses may also prevent shareholders from blocking the application of a squeeze-out. In Switzerland, a Major Non-EU jurisdiction, a similar principle is applicable: the best-price rule applies from the pre-announcement or publication of the bid until six months after the expiry of the additional acceptance period. If, during such period, the offeror acquires additional securities for an amount exceeding the bid price, the offeror is under an obligation to offer such higher price to all recipients of the public bid.

� Extension to competing offerors. It has been recommended by some supervisors to include a provision in the Directive, which provides equality of information to competing offerors (similar to Rule 20.2 of the UK Takeover Rules), subject of course to certain safeguards (in order to facilitate competing bids and allow shareholders the opportunity to decide on the merits of the bid in accordance with Article 3.1(c) of the Directive). This would be an extension of the equal treatment principle from relationships among shareholders to relationships among offerors.

1.2. Proper Information Principles and associated rules. According to Article 3.1(b) of the Directive, “the holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid”. The content of the required information is more specifically set out in Article 6 of the Directive (information concerning bids) and Article 8 of the Directive (disclosure of bids). The general principle of “sufficient time and information” is further developed in Article 7(1) of the Directive which states that “the Member States shall provide that the time allowed for the acceptance

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of a bid may not be less than two weeks nor more than 10 weeks from the date of publication of the offer document”. No significant issue. No significant issue seems to have arisen in connection with these general principles. Regarding information, it is a matter of customary enforcement to make sure that proper information is disclosed to the market. With respect to timing, the procedures typically provide for an adequate time frame; however, circumstances such as anti-trust procedures or litigation may, de facto or de jure, extend the period during which the offeree company is “in play”. Double time frame applicable in Major Non-EU Jurisdictions. On a comparative basis, the minimum and maximum bid durations set forth by the Directive are in line with the relevant time periods set out by Major Non-EU Jurisdictions. Notably, a certain number of Major Non-EU Jurisdictions provide for a maximum time period between the announcement of the bid and its effective opening. The Directive lacks an equivalent specific rule and merely provides in Article 3 paragraph 1(f) that “an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities” (please refer to Chapter III Section I G. 5.) of this Study). Disclosure requirements in Major Non-EU Jurisdictions. For a description of information required in offer documents in Major Non-EU Jurisdictions, please refer to Chapter III Section V C. 2.) of this Study.

1.3. Market Integrity Principles and associated rules. Under Article 3.1(d) of the Directive, “false markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted”. In addition, Article 3.1(e) of the Directive provides that “an offeror must announce a bid only after ensuring that he can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration”. Article 3.1(e) of the Directive confirms Article 3.1(d) of the Directive in that an offeror who announces a bid without fulfilling his cash consideration discloses false information that may contribute to creating false markets. Prevention of false markets. This principle is typically secured through the transposition of transparency requirements and market abuse prohibitions, which are outside the scope of this Study. Full financing requirements. In order to secure a consideration in cash, some Member States either request a bank guarantee or a bank confirmation: � Bank guarantee. Under French law, at least one financial services provider, acting as a sponsor

on behalf of the offeror (usually one or more French or European banks or an investment bank duly licensed in France), must file the draft offer document with the French regulatory authority and guarantee that the offeror’s commitments in relation to the bid are irrevocable.

� Confirmation by an independent expert credit institution. Under German law, although the

offeror does not need a sponsor in order to submit its bid, it must provide confirmation issued by an independent credit institution that it has taken all measures necessary to ensure that it disposes of the means necessary in order to fulfil its payment obligations. In reviewing the bid before its publication, the supervisory authority ensures that this requirement is fulfilled. The supervisory authority may refuse the publication of a bid where it determines, for example, that the credit institution issuing the confirmation is not independent. Credit institutions must carefully weigh up whether to provide such confirmation, since the credit institution may be

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held directly liable by a shareholder who accepted the bid of an offeror that ultimately was not able to pay the proposed bid price.

Protection of market integrity by offerors’ financial advisors. From a comparative perspective, financial advisors or other review bodies acting in certain Major Non-EU Jurisdictions play a key role in protecting the interests of the offeree company’s shareholders. In addition, the offeror’s financing capacity is sometimes assessed by such persons or may in some Major Non-EU Jurisdictions be guaranteed by other means, such as escrow payments or bank guarantees (please refer to Chapter III Section I G. 7.) of this Study).

2. Protection of employees Principle and associated rules. According to Article 3.1(b) of the Directive, “where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company’s places of business”. General provisions regarding the information of works representatives, co-determination, etc. provided by national laws apply in parallel (Article 14 of the Directive). The practical application of these principles is further described below. Disclosed information. Offer documents must contain certain information, including on the future business of the offeree company, the safeguarding of its employees’ jobs and strategic plans (Article 6 of the Directive). The same applies to the opinion published by the board of the offeree company, which must include the board’s view on the effects of the bid on, among other things, employment and the locations of the company (Article 9.5 of the Directive). The documents that are published (bid documentation, amendments thereto and the position of the offeree company’s board) must be disclosed to the representatives of the employees of the offeree company (or the employees themselves) (Article 6.2 and Article 8.2 of the Directive). Structure. The interests of employees are thus protected in two manners. First, the provision of information gives them the ability to voice their concerns (which may have an impact on the offeror) and to exit (although this second option is in most cases essentially theoretical). Second, their specific interests are represented by the board of the offeree company, as employees have no decision-making authority. However, it has been argued that this system is not efficient84, as ultimately the final decision-making authority rests with the offeree company’s board, which has little or no incentive to take into account employee protection in the process. Because of this structure, the disclosure requirements of the Directive may have very little effect on employee protection. Major Non-EU Jurisdictions. For comparative purposes, it is worth noting that, under takeover bid regulations in Major Non-EU Jurisdictions, the protection of employees in terms of information as well as their involvement in the bid appears to be extremely weak. At most, an offeror is sometimes obliged to disclose in the offer documents its intention regarding offeree company employees and the effect of the bid on the latter (for instance, in Australia, Canada, China and Hong Kong). In none of the Major Non-EU Jurisdictions is the offeree company’s board otherwise required to inform or consult with employees about the bid (please refer to Chapter III Section I G. 7.1) of this Study).

2.1. Basic and enhanced protection Effective transposition in all Member States. The formal transposition of the information requirements regarding employees does not, in principle, raise specific issues. All Member States have introduced the information requirements of the Directive. The majority of Member States have transposed the

84 Beate Sjåfjell, The Core of Corporate Governance: Implications of the Takeover Directive for Corporate

Governance in Europe, UCD Working Papers in Law, Criminology & Socio-Legal Studies Research Paper No. 27/2010, pp.15 et seqq

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Directive without imposing further information requirements in the offer document or in the public statement of the offeree company’s board. Enhanced transposition in some Member States. Some Member States have introduced further requirements. For instance: � Additional information. Some countries have added information requirements that relate to

information to be provided in the offer document. For example, in Ireland, further requirements have been introduced relating to the information provided to the employees concerning the long-term commercial justification for the bid and the offeror’s intentions regarding any re-development of the fixed assets of the offeree and its subsidiaries. In other cases, such additional information must be provided by the board in its public statement. For example, in the Netherlands, the board must explain why, if applicable, it disagrees with the works’ council’s opinion regarding a transaction that is to take place between the offeree company and the offeror.

� Consultation rights. In some Member States (e.g. Belgium, Estonia, France, the Netherlands), works councils or representatives of the employees not only make a statement which must be published along with the statement of the board or management of the offeree company, but also have a consultation right.

� General protections. General labour law may often provide some additional protection. For

instance, it may be necessary to consult the works council or employees’ representatives in connection with the takeover bid or its application. However, general laws in this respect may be difficult to apply in view of the confidentiality requirements of the pre-announcement period and the time constraints associated with the bid period.

� Meeting rights. Some countries have gone a step further. Taking into account the need to

initiate a dialogue between employees and the offeror (as potential new controlling shareholder), such countries have provided for a meeting right, as described in the box below.

Right to hear the offeror In France, the works council of the offeree may decide to hear the offeror. The authorised representative of the offeror must, in a hearing, first present the offeror’s industrial and financial strategies, its strategic plans for the offeree company and the impact on the interests at stake, and subsequently receive comments and answer questions on the bid from the works council. If the offeror’s representative does not attend the hearing, the offeror’s shares are deprived of their voting rights until after the hearing takes place. In Belgium, the works council has the right to invite the offeror for a hearing at the latest 10 days after the start of the acceptance period. Co-determination system. In Member States where a co-determination system is in place (such as Germany), the employees’ delegates on the supervisory board directly participate in the public statement made by the offeree company’s supervisory board.

2.2. Traditional limits and recent reforms Significant enforcement issues. Employee representatives have clearly stated that there are significant issues with the enforcement of employees’ rights under the Directive, indicating that there were numerous cases where employee representatives were not informed in an appropriately and timely

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manner and many cases where the information provided was not adequate. As a result, in some countries, such as the UK, it appears that employees’ rights have almost never been used, thus creating a real compliance issue with the Directive. Limited prior review; no post-bid enforcement. Another issue in relation to the protection of employees is that although information provided to employees may be controlled before the bid (for instance, in Belgium, France, Italy and Germany the supervisory authority reviews the offer document), no enforcement takes place after a successful bid. Thus, an offeror may fail to comply with what it had stated or diverge from its plans. Furthermore, even if an ex-ante control of the information provided in the offer document takes place, it is more of a formal tick-the-box control and does not question the offeror’s real intentions. UK analysis of recent reforms. In the UK, following the Kraft takeover of Cadbury, the above-mentioned concerns were addressed through a revision of takeover regulations regarding employee protection. As a starting point, the Takeover Panel noted that, during recommended bids, employee representatives had no time to express their views. If, as is usually the case in recommended bids, the firm offer announcement and the offer document are published on the same day (with the offeree company board’s circular effectively being combined with the offer document), there will not be time for the employee representatives to produce a circular expressing their views. The offeree company board has no obligation to subsequently disclose to the market any circular that it may have received from employee representatives. In practical terms (especially where the offeree company operates through a number of divisions), it appears difficult for employee representatives to collate information on the likely effects of the bid on all divisions within the bid timetable. As such, the Takeover panel observed a lack of protection of employees during a takeover bid, stating the following: � The ability of the offeree company board and other interested constituencies to comply with

their own obligations, and to provide meaningful information to offeree company shareholders and employees, depends on the accuracy and adequacy of the information published by the offeror in accordance with its own obligations.

� Better communication between the offeree board and the offeree employees (and employee

representatives) would enable employee representatives to provide their opinion on the effects of the bid on employment more effectively and, in so doing, would facilitate a wider understanding of the implications that the bid may have for the interests of offeree company employees.

The Takeover panel has thus made the following amendments, which are presented below as they may also be of interest for other Member States:

UK reforms regarding employee protection Improving employees’ information. � Right to be informed. Clarify that the Code does not prevent the provision of information in

confidence to employee representatives acting in such a capacity during the bid period. � Timing of information. Require the offeree company board to inform employee

representatives at the earliest opportunity of their right to circulate an opinion on the effects of the bid on employment.

� Publication at offeree company’s expense. Require the offeree company board to publish employee representative circulars (which have not been received in good time) on the company’s website (and make an announcement that the circular has been thus published).

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UK reforms regarding employee protection Clarify that it is the responsibility of the offeree company board to publish the opinion of the employee representatives at the offeree company’s expense. However, the employee representatives’ opinion will be excluded from the scope of the offeree company board’s responsibility statement.

� Reimbursement of representatives’ costs. Require the offeree company to pay the costs

incurred by employee representatives in obtaining any advice needed to verify the information in the employee representatives’ opinion in order to meet required information standards under the Code.

Strengthening the offeror’s obligations. � Negative statements. Offerors should make negative statements if there are no plans

regarding the offeree company’s employees, locations of business and fixed assets, or if it considers that its strategic plans for the offeree company will have no repercussions on employment or the location of the offeree company’s places of business.

� 12-month minimum validity of the statements. Any party to a bid must adhere to any public statement it makes during the bid period relating to any course of action it intends to take (or not to take) after the end of the bid period. Where no time period for the application/non-application of the course of action is specified, the statement should be adhered to for a period of at least 12 months from the date on which the bid becomes or is declared wholly unconditional.

3. Protection of other stakeholders

3.1. Description Principle and associated rules. According to Article 3.1(c) of the Directive, “the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid”. Furthermore, “an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities” (Article 3.1(f) of the Directive). One of the purposes of time frames for acceptance (Article 7 of the Directive) is to prevent the offeree company from being hindered in the conduct of its affairs.

3.2. The core debate Interests of the company and interests of stakeholders. It is always a difficult and controversial task to define what the “interests of a company” encompass. From a prima facie reading of Article 3.1(c) of the Directive, it appears that the “interests of the company” are not equivalent to the interests of shareholders; otherwise the sentence would be mostly redundant and thus essentially meaningless. The reference to the company taken “as a whole” also points in favour of a broad analysis of the concept and suggests that the company is considered a representative of the interests of all of its stakeholders. There is no definition of the stakeholder concept, but the Directive suggests two directions: employees (who are the subject of several clauses of the Directive) and local communities (which are addressed in Article 9.5 of the Directive through the reference to the “locations of the company’s places of business”). Other interests of the company taken “as a whole” would typically include the interests of creditors, contracting parties (such as sub-contractors) and public authorities. The environment may also be included, to the extent it affects both the employees and the local communities.

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Striking the right balance. The Directive does not explain how conflicts between stakeholders’ and shareholders’ interests may be resolved. Such conflicts may for instance occur when an offeror intends to break up a company, relocate its activities, proceed with massive lay-offs or disregard its contractual commitments or legal obligations. Depending on the circumstances and the identity of the stakeholders considered, the offeror may act in a manner contrary to the interests of the company “taken as a whole”. On the other hand, if a company puts up a defence, even if its objective is to negotiate a higher price, it risks acting in breach of Article 3.1(c) of the Directive. The Directive leaves to Member States the task of setting the limits of what is permitted or prohibited. Prohibited conduct. Article 3.1(c) of the Directive would seem to call for a proportionality test between the two rules with which the board has to comply during a bid – acting in the interest of the company as a whole and not denying the holders of securities the opportunity to decide on the merits of the bid. A Member State applying one of the two rules in full and completely disregarding the other would probably not be compliant with the Directive. For instance, no legal system should allow the board to adopt frustrating measures without strong grounds to do so – and the more efficient the measures, the stronger the grounds should be. On the other hand, no board should be fully prohibited from putting up defences which are necessary to defend the interest of the company – the more restricted the board’s ability to defend the company’s interests, the stronger the company’s interest in the bid should be. Transposition. This Article does not seem to have a strong impact on the way the Directive has been transposed. Member States that have transposed Article 9 of the Directive tend to consider that the passivity rule should override all other concerns, although their legal systems formally acknowledge that the board should not act against the company’s interests. Member States that have not transposed Article 9 emphasise the board’s duty to defend the company’s interest, and pay less attention to the consequences this may have on shareholders’ rights.85 In fact, Member States tend to justify their position as follows. Where Article 9 has been transposed, it is claimed that the company’s interests (taken as a whole) are best served by the disciplinary effect that comes with the non-frustration rule: this leads to better-managed companies and a lower cost of capital, both of which ultimately serve the interests of all stakeholders. Where Article 9 has not been transposed, the reverse position is adopted: the overriding duty to protect the company’s interests is deemed to best serve the interests of all shareholders, at least in the long run. Is either attitude compliant with the Directive? It is rather difficult to provide a clear answer. Major Non-EU Jurisdictions. Major Non-EU Jurisdictions do not use the concept of “interests of the company,” but instead refer to the “corporate interest” concept – which, however, they do not define. A variety of situations may ensue. For instance, in Switzerland, the “corporate interest” concept appears largely to overlap with shareholders’ interests; as such, offeree company boards are required to maximise the latter. In contrast, approximately 30 US States have enacted so-called “other constituency” statutes that authorise an offeree company’s board to consider the interests of stakeholders other than the financial interests of shareholders (please refer to Chapter III Section I G. 8.) of this Study).

3.3. Alternative methods Defining stakeholders. Rather than opposing the company’s interests to the shareholders’ interests, a list could be drawn up of all stakeholders that would have directly enforceable rights under the Directive. Some supervisors have, for instance, suggested that the Directive provide rules regarding the interests of creditors/bond holders.

85 In Germany, for instance, the management board and the supervisory board must always respect the

general principles set out in the Stock Corporation Act. They must serve the interest of the company, which includes the interests of shareholders and other stakeholders. In case of a voluntary takeover bid or a mandatory bid, the management board must, again, act in the interest of the company as a whole.

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Additional stakeholders could be suppliers, clients, local community, etc. The difficulty with this method is the design of an appropriate mechanism that would allow all categories of stakeholders to make their voice heard. This is probably why, if stakeholders are to be protected, the simplest concept remains the company interest concept (at least for stakeholders who are outsiders).

F. Exemptions to the Directive

1. Overview

The principle and its purpose. According to Article 4.5 paragraph 2 of the Directive, Member States may, in their national legal frameworks, provide certain exemptions or derogations from the rules of the Directive, or grant supervisory authorities the power to waive certain rules. However, such derogations are still subject to the general principles in Article 3 of the Directive. The granting of exemptions may help to improve attainment of the objectives and general principles of the Directive, in particular where they help to balance diverging, protected interests. On the other hand, such exemptions may undermine the objectives and rules of the Directive. Therefore, they must be analysed, in particular where the supervisory authority is granted significant discretionary power. All Member States provide for the possibility to exempt listed companies or offerors from certain obligations provided in their national frameworks. General exemptions. Some Member States (the UK86 , Finland87 and Ireland88 ) entrust their supervisory authority with the general power to grant exemptions without specifying the provisions for which an exemption can be granted. Such exemptions take effect in cases where the application of a rule appears to operate in an unduly harsh or burdensome manner, taking into account the general principles of the rules and the interests of the shareholders. In the UK, such exemptions can also be granted if the offeree company has very few shareholders, provided that a certain procedure and several safeguards are observed. The aim of these national legislations is to give the supervisory authorities a certain degree of flexibility in granting exemptions, since the authorities are not required to detail the cases where such exemptions may be granted. However, according to our information, this general power is applied in a restrictive manner.

86 General exemption. The Panel may derogate or waive the application of a rule to a person (provided, in the

case of a transaction and rule subject to the requirements of the Directive, that the general principles are respected), either: (i) under the circumstances set out in the rule; or (ii) under other circumstances where the Panel considers that the particular rule would operate unduly

harshly or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner (in which case a reasoned decision will be provided).

87 General exemption. According to a provision in the Finnish SMA, the Finnish FSA can for a special reason authorise exemptions from the provisions of Chapter 6 of the Finnish SMA. Iits Takeover Standard, the Finnish FSA has stated that the exemption consideration is based on an overall assessment of all circumstances at hand, taking into account the effect of the exemption on the position of the minority shareholders as well as the question of whether the minority shareholders were aware of the arrangement beforehand and had an opportunity to affect its contents (e.g. in a general meeting of shareholders). The Takeover Standard sets out examples of circumstances that can constitute a special reason to diverge from the mandatory bid obligation.

88 General exemption. The Panel, as the Irish supervisory authority for the purposes of takeovers bids under the Takeover Regulations, has the power under Irish statute “to grant derogations from, or waive, any rules under [Section 8 of the 1997 Act (i.e. the Takeover Rules)] in relation to a particular matter where, in the opinion of the Panel, having regard to the exceptional circumstances of the matter but taking into consideration the schedule principles, it is appropriate to do so”.

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In the other Member States, exemptions or derogations are granted specifically for certain obligations. Specific exemptions. The most widespread and most frequently-applied exemptions are the exemptions from the mandatory bid rule. These exemptions will be dealt with in Chapter III Section II B. 3.) of this Study. The same applies to exemptions from the equitable price criteria set in the respective national frameworks, which are described in Chapter III Section II B. 5.3.). Compared to the exemptions from the mandatory bid rule and minimum price requirements, there are only a small number of other exemptions. These relate, for example, to the different time lines set in the bidding process.

2. Effects of exemptions on the Directive No significant weakening. From a legal standpoint, the possibility for Member States to create exemptions to the obligations set out by the Directive and their ability to grant their supervisory authorities power to waive such obligations (Article 4.5 of the Directive) should be seen less as a weakening of the Directive than as a necessary flexibility, allowing situations that a mandatory bid rule without exception would not adequately address to be taken into account. For instance, the granting of exemptions may allow the objectives of the Directive to be achieved better in circumstances where offeree companies are in a financially distressed situation. Exception. In Greece the exemption to the mandatory bid rule for the privatisation of a State-owned company has been perceived by some shareholders as contradictory to the general principle of protecting minority shareholders, for instance in the case of the Hellenic Telecommunication Organization TE/Deutsche Telekom takeover (please refer to Chapter III Section II B. 3.2) (c) 4) (d) of this Study).

G. Comparison with Major Non-EU Jurisdictions

1. Overview of the existence of general principles set out by the Directive in Major Non-EU Jurisdictions

Description. An equivalent to each of the Directive’s general principles exists in most Major Non-EU Jurisdictions (other than, in many cases, the US), although the offeree company board is not required in any of these jurisdictions to give its views on the effects of the bid on employment and conditions of employment. Summary. The table below indicates, for each Major Non-EU Jurisdiction, whether an equivalent to the general principles of the Directive exists. Australia Canada China Hong

Kong India Japan Russia Switzer-

land US

3.1(a) – All holders of the securities of an offeree company of the same class must be afforded equivalent treatment. Yes Yes Yes Yes Yes Yes Yes Yes No

mandatory takeover bid rule

3.1(a) – If a person acquires control of a company, the other holders of securities must be protected. Yes Yes Yes Yes Yes Yes Yes Yes Yes 3.1(b) – The holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly-informed decision on the bid. Yes Yes Yes Yes Yes Yes Yes Yes Yes

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Australia Canada China Hong Kong

India Japan Russia Switzer- land

US

3.1(b) – Where it advises the holders of securities, the board of the offeree company must give its views on the effects of application of the bid on employment, conditions of employment and the locations of the company’s places of business. No No No No No No No No No 3.1(d) – False markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted. Yes Yes Yes Yes Yes Yes Yes Yes Yes 3.1(e) – An offeror must announce a bid only after ensuring that he can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the fulfilment of any other type of consideration. Yes (reason-able grounds)

Yes (suffi-cient financing)

Yes (assess-ment by financial advisor)

Yes (sufficient financing)

Yes (escrow deposit)

Yes (sufficient financing)

Yes (bank guarantee)

Yes (assessment by review body)

No

3.1(f) – An offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities. Maxi- mum 12 months

No maximum

Maximum 60 days

Maxi- mum 81 days

Maximum 20 days

Maxi- mum 60 business days

Maximum 80 days

Maximum 40 days

Maximum 60 days (cash offer)

2. Equal treatment equivalent in the US: All-holders/best-price rule Overview. In the US, the first part of the equal treatment principle set out in Article 3.1(a) of the Directive (“all holders of the securities of an offeree company of the same class must be afforded equivalent treatment”) is applied through the so-called “all-holders/best-price” rule set out by the SEC in Rule 14d-10 of the Securities Exchange Act of 1934. The “all-holders/best-price” rule applies to takeover bids, both friendly and hostile, but does not apply to statutory mergers (for an examination of both takeover bids and statutory mergers, please refer to Chapter III Section II C. 6.) of this Study). All-holders rule. Under Rule 14d-10, no offeror is permitted to make a takeover bid unless the bid “is open to all security holders of the class of securities subject to the tender offer”. It is customary that, if a bid is made for less than all the shares of a particular class, the offeror will purchase the shares tendered on a pro rata basis. Best-price rule. Rule 14d-10 also provides that “the consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder for securities tendered in the tender offer”. Rule 14d-10 does not apply to any consideration that is offered and paid according to employment compensation, severance or other employee benefit arrangements entered into with security holders of the offeree company, so long as such amounts are: � paid or granted as compensation for past services rendered or future services to be performed

by the shareholder, or future services from whose performance the latter is to refrain; and � not calculated on the basis of the number of securities tendered or to be tendered in the takeover

bid by the shareholder. The Rule also includes a non-exclusive safe harbour provision so that arrangements approved by certain independent directors of either the offeree company’s or the offeror’s board of directors (compensation committees), as applicable, will not be prohibited by the rules.

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In the past, issues had arisen when the language of the best-price rule of Rule 14d-10 read “during such tender offer” rather than “tendered in the tender offer”. When establishing rulings on best-price rule claims in the past, courts generally employed either an “integral-part test” or a “bright-line test” to determine whether arrangements for employment compensation, severance or other employee benefits violated the best-price rule. The integral-part test stated that the best-price rule applied to all integral elements of a takeover bid, including employment compensation, severance and other employee benefit arrangements or commercial arrangements that were deemed to be part of the takeover bid, regardless of whether the arrangements were executed and performed outside the period in which the takeover bid formally commenced and expired. Courts following the integral-part test ruled that agreements or arrangements made with security holders that constituted an “integral part” of the takeover bid violated the best-price rule.89 The bright-line test, on the other hand, stated that the best-price rule applied only to arrangements executed and performed between the times when a takeover bid formally commenced and expired.

Jurisdictions following the bright-line test held that agreements or arrangements with security holders of the offeree company did not violate the best-price rule if they were not executed and performed “during the tender offer”.90 The SEC amended Rule 14d-10 in 2006 in order to create certainty as to when the best-price rule applies. It changed the language of the rule so that only consideration “paid to security holders for securities tendered into a tender offer” would be evaluated in the determination of the highest consideration paid to any other security holder for securities tendered into the takeover bid. The SEC stated that the best-price rule was never intended to apply to consideration paid pursuant to arrangements entered into with security holders of the offeree company, including employment compensation, severance or other employee benefit arrangements, so long as the consideration under such arrangements was not paid in order to acquire such parties’ securities. The SEC believes that the fiduciary duty requirements of board members, coupled with significant advances in the independence requirements for compensation committee members and advances in corporate governance, provide safeguards to allow employment compensation, severance or other employee benefit arrangements that are approved by independent compensation committee members and groups of independent board members to be exempted from the best-price rule (for an examination of directors’ fiduciary duty requirements, please refer to Chapter III Section III C. 2.2) of this Study).

3. US State merger and takeover statutes Protection of minority shareholders. Under State merger statutes, if an offeror proposes to acquire control of an offeree company by means of a merger pursuant to the laws of the State of incorporation of the offeror and the offeree company, both the majority and minority shareholders of the offeree company must receive the same price and type of consideration in exchange for their shares. In addition, under the laws of many States, if minority shareholders believe that the price being offered by the offeror is below the fair value of the shares, but a majority of shareholders nevertheless accepts the bid and the merger occurs, the minority shareholders (often called “dissenters”) have the right to petition a court to set a “fair value” for their shares. If a court rules in favour of the minority shareholders, the surviving company is required to purchase their shares for a cash amount equal to the fair value.

89 See Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995), rev’d on other grounds sub nom.; Harris v. Intel

Corp., 2002 U.S. Dist. LEXIS 13796 (N.D. Cal. 2002). 90 See Gerber v. Computer Assoc. Int’l, Inc., 303 F.3d 126 (2d Cir. 2002); In re: Digital Island Securities

Litig ., 357 F.3d 322 (3d Cir. 2004).

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Protection of the offeree company. While takeover statutes vary from State to State, all States generally prohibit offerors who acquire a controlling block of offeree company stock from engaging in certain transactions with the offeree company for a period of time usually ranging from three to five years after the acquisition, unless the acquisition was pre-approved by the offeree company’s board of directors. These statutes have the effect of making offerors obtain the offeree company board’s approval before acquiring a controlling share in the company. This allows the offeree company’s board of directors to bargain for provisions that are protective of minority shareholders.

4. Class struggle issues in Major Non-EU Jurisdictions Overview. All Major Non-EU Jurisdictions oblige the offeror to propose the same price to holders of the same class of securities and allow the offeror to offer different prices for different security classes. Most of these jurisdictions (except the US and Russia) require the price differences to be “equitable,” “justified” or “reasonably related” but do not set specific criteria or clear standards to be taken into account by the offeror. In other respects, price differences are usually reviewed by the competent market authorities. Summary table. The situation may thus be summarised as follows:

Overview Requirement to offer the same price to holders of securities of the same class

Option to offer different prices for securities of different classes

Australia Yes Yes, but the bid must be equitable taking into account the respective rights and obligations of each class.

Canada Yes

Yes

China Yes

Not applicable in the absence of different share classes.

Hong Kong Yes Yes, but the consideration offered for different classes must be comparable.

India Yes Yes, but the offeror is required to provide reasons justifying any price differences.

Japan Yes Yes, but the consideration must be equitable for all classes of securities. Russia Yes Yes. There is no legal requirement for the price of the various classes to

be reasonably related to each other. Switzerland Yes Yes, but the bid prices must be reasonably related to each other.

Determining a reasonable ratio between the bid prices must be based on: � the highest price paid for any equity security in comparison with its

par value; � its market price; � the voting rights it confers; � any other rights attached to it.

US Yes Yes. There is no legal requirement for the price of the various classes to

be reasonably related to each other.

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5. Time frames applicable to the duration of bids Common rules. According to Article 7 of the Directive, the time allowed for the acceptance of a bid may not be less than two weeks or more than 10 weeks from the date of publication of the offer document. The minimum and maximum bid durations set forth by the Directive are broadly in line with the relevant time periods set out by Major Non-EU Jurisdictions (except Australia), although it is notable that minimum acceptance periods set forth by Major Non-EU Jurisdictions tend to be longer than the EU two-week period. Additional protection for the offeree company. A certain number of Major Non-EU Jurisdictions provides for a maximum time period between the announcement of the bid and its effective opening. The Directive lacks such a specific rule, but provides in Article 3.1(f) that “an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities”. Setting forth a specific maximum time period between the announcement of the bid and its opening could reduce the sometimes lengthy disruption to the offeree company’s affairs that occurs in certain EU Member States. Moreover, such a specific rule would be in line with the “put-up or shut-up” rules introduced by certain Member States (such as France and the UK) which provide for a maximum time frame during which a declared offeror must take certain actions resulting in the launch of a bid. Summary table. The situation may thus be summarised as follows:

Acceptance period* Maximum time period between announcement of the bid and its opening Minimum Maximum

Australia Two months One month 12 months Canada Not applicable 35 days No maximum time period China Not applicable, the bid period

opens upon announcement 30 days 60 days

Hong Kong 21 days (cash offer) and 35 days (exchange offer)

21 or 28 days. Unless unconditional, the bid must remain open for a further 14 days.

81 days

India 55 days 20 days 20 days Japan Not applicable 20 business days 60 business days Switzerland The bid may be pre-announced

up to six weeks before its publication (subject to extensions). The acceptance period starts at the end of a 10-day cooling-off period beginning on the publication of the bid.

20 days (but may be shortened to 10 days)

40 days

Russia Not applicable 70 days 80 days US Not applicable 20 days 60 days (cash)** * Subject to extensions, e.g. in case of competing bids and/or regulatory or antitrust approvals. ** An exchange offer usually adds six to eight weeks (or more) to the cash takeover bid timetable due to registration

requirements and/or offeror’s shareholder approval required in connection with certain capital increases.

6. Protection of market integrity by offerors’ financi al advisors Common rules. In certain Major Non-EU Jurisdictions (particularly China, Switzerland and India), financial advisors or other review bodies must be hired by the offeror on a mandatory basis and play a

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key role in protecting the interests of the offeree company shareholders. Financing arrangements made by the offeror must always be disclosed in the offer documents and offerors must generally confirm that their financing is sufficient to complete the bid. Additional mandatory protection. Certain Major Non-EU Jurisdictions go one step further by requiring financial advisors to confirm the offeror’s financing capacity (Switzerland and China) or by obliging the offeror to place funds in an escrow account (India) or to provide a bank guarantee (Russia). More specifically: � Independent review body (Switzerland). In Switzerland, an offeror must appoint a review body

(a licensed securities dealer or an auditor approved to review securities dealers) to assess the offer document. This review body must be independent from the offeror and the offeree company. Before the bid is published, the review body reviews the offer document to assess its compliance with applicable takeover laws. The report issued by the review body and published in the offer document must in particular confirm that:

− the offer document is complete and correct;

− shareholders have been treated equally; and

− the offeror has the necessary funds to complete the transaction.

� Qualified financial advisor and attorney (China). In China, the offeror must retain a qualified

financial advisor registered in China to submit the relevant bid documentation and provide an opinion on, among other things, the lawfulness of the takeover bid and the offeror’s financial capacity to complete it. The attorneys hired by the financial advisor must further issue a conclusive opinion on the authenticity, accuracy and completeness of the bid report.

� Independent merchant banker and escrow account (India). In India, the offeror must appoint an independent merchant banker who ensures that the former fulfils its obligations under the applicable takeover regulations. The merchant banker is required to file a due diligence certificate and final report with the Indian market authority, stating compliance with the takeover regulations and all other laws applicable in this regard. Further, the offeror must maintain cash and other securities in an escrow account with a commercial bank as a deposit towards the security for performance of its obligations. Information regarding the details of the money deposited in escrow needs to be disclosed.

� Bank guarantee (Russia). In Russia, in the absence of any legal obligation, it is customary for the offeror to retain a financial advisor to help the board in preparing the bid. Although there is no legal requirement for an offeror to have committed funding before announcing the bid, the offeror must provide information on a guarantor under a bank guarantee and the terms of such guarantee. The bank guarantee must be attached to the documents pertaining to a mandatory or voluntary bid.

Where there are no mandatory rules, it is customary to provide additional protection as follows: � Japan. In the absence of any legal obligation, it is customary for an offeror in Japan to retain a

financial advisor to assist the board in preparing the bid. An offeror must disclose information about funding in the registration statement of a public bid and file a document indicating that it has the necessary funds in relation to the bid (including its bank balance). However, guarantees by financial institutions are not required, nor is the joint liability of financial advisors.

� Hong Kong. In Hong Kong, the offeror’s board is usually required to obtain competent independent advice as to whether a bid is in the interests of its shareholders, i.e. whether the bid is financially viable and in the best interests of the offeror’s shareholders. Such independent

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financial advice must further be obtained where the bid consists of a reverse takeover, or in conflict-of-interest situations. The offeror needs to confirm in the offer documents that it has sufficient resources to satisfy the bid.

� Australia. In Australia, in the absence of a mandatory requirement, in practice offerors nonetheless retain financial advisors. An offeror must disclose in the bid documents the source of any proposed cash consideration. Although there is no explicit requirement to have committed funding, the offeror must have reasonable grounds to expect that it is able to pay for acceptances under its bid and its arrangements for borrowed funds must be in place (although not necessarily formally documented) when the bid is announced.

� Canada. In the absence of any legal obligation, it is customary for an offeror in Canada to retain a financial advisor to assist the board in preparing the bid. Statutory bid rules require the offeror to make adequate arrangements prior to the bid to ensure that funds required for the cash component of the bid are available to make full payment for all securities that the offeror has offered to acquire. These arrangements must be disclosed in the bid documentation.

� US. US rules applicable to offeror and offeree companies are similar; as such, there is no obligation for the offeror’s internal special committee to appoint financial advisors. In practice, however, such advisors are engaged by the offeror to advise on the legality and feasibility of bids and to provide “fairness opinions”. There is no legal requirement for an offeror to have committed funding before announcing a bid, although the sources and amount of funds, as well as any material conditions attached to the financing, must be publicly disclosed.

Summary table. The situation may be summarised as follows: Mandatory

financial advisor / review body

Role of the financial advisor / review body

Mandatory disclosure of the offeror’s financing

Committed funding / bank guarantee

Australia No, but yes in practice

Limited Yes No, but offeror must have reasonable grounds to believe that it is capable of fulfilling its obligations

Canada No, but yes in practice

Limited Yes No, but offeror must have sufficient financing in place

China Yes Extensive Yes Yes, sufficiency of offeror’s funds is assessed by a financial advisor

Hong Kong Yes Intermediary Yes No, but offeror must confirm that it has sufficient financing

India Yes Extensive Yes Yes, offeror must secure its obligations by a deposit held in escrow

Japan No, but yes in practice

Limited Yes Yes, offeror must provide evidence of sufficient financing

Switzerland Yes Extensive Yes Yes, sufficiency of offeror’s funds is assessed by the review body

Russia No, but yes in practice

Limited Yes Yes, a bank guarantee must be attached to the offer documents

US No, but yes in practice

Limited Yes No

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7. Employee Protection

7.1. Assessment of employee protection in Major Non-EU Jurisdictions Overview. Under takeover bid regulation, the protection of employees in Major Non-EU Jurisdictions in terms of information as well as their involvement in the bid appears to be extremely weak. At most, an offeror is sometimes obliged to disclose in the offer documents its intention regarding offeree company employees and the effect of the bid on the latter. Otherwise, in the Major Non-EU Jurisdictions the offeree company’s board is not typically required to inform or consult with employees about the bid. Summary. Under takeover bid regulations, the situation regarding employees may be summarised as follows: Offeror Offeree company Australia Offeror must, in the offer documents,

provide information on the future employment of the present offeree company employees.

The offeree company’s board is not required to inform or consult with employees about the bid.

Canada Offeror must, in the offer document, provide details of its plan with respect to the offeree company employees.


China Offeror must, in the takeover bid report, provide a follow-up plan on future adjustments to the listed company’s assets, business, employees, organisational structure, articles of association etc. during the forthcoming 12 months. In this section, the offeror states whether it will make substantial adjustments to the employee recruitment plan and, if applicable, describe such adjustments.


Hong Kong Offeror must, in the offer documents, provide details of its plan with respect to the offeree company employees.


India Offeror must, in the offer documents, provide information on its future plans, if any, in relation to the offeree company and the application of such plans.


Japan There is no requirement and it is not common in practice to mention in the offer documents the safeguarding of offeree company employees’ jobs, or any changes in the conditions of employment or the locations of the companies’ places of business.


Switzerland Offeror must, in the offer documents, state its intention regarding the offeree company’s management and board of directors.


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Offeror Offeree company Russia Offeror may, but is not obliged to,

disclose in the offer documents its plans with regard to offeree company’s employees.

The offeree company’s board is not required to inform or consult with employees about the bid. However, if the offeror has disclosed its plans with regard to the offeree company’s employees, the offeree company’s board must assess such plans in its recommendations.

US Offeror must disclose in the offer documents any plans, proposals or negotiations that relate to or would result in any material change in the offeree company’s business or board of directors or management.

The offeree company’s board is not required to inform or consult with employees about the bid. Although the offeree company board is not specifically required to address the effects of application of the bid on its employees, conditions of employment and the locations of its places of business, in situations where the board opposes a bid it will usually disclose its views on these factors as part of the rationale for its recommendation to shareholders.

7.2. Focus on the US

a. A variety of laws. In general, the protection of employees in takeover transactions is not directly addressed by US federal securities laws, State corporation statutes or law. However, some protective measures can be found in various federal and State laws. Laws are in place that require a successful offeror to recognise and negotiate in good faith with a union representing the employees of the offeree company; that require any company planning to close a facility to provide adequate advance notice to the employees affected; and that require companies to provide continued insurance coverage (at the employees’ cost) following a termination (whether after a takeover or not). However, none of these laws require any pre-or post-bid consultations with, or dissemination of information to, the employees or employee representatives of either the offeror or the offeree company.

b. Stakeholders’ statutes. Currently, 30 States have statutes that authorise an offeree company’s board to take into consideration the interests of stakeholders, including employees, along with the financial interests of shareholders. In situations where a merger does not involve a change of control of the offeree company, State laws permit the offeree company board to consider the effect of the transaction on non-stockholder constituencies, including employees. However, in Delaware and in most states, if the offeree company board has decided that a sale or change of control of the company is appropriate, then the board is subject to the Revlon duty to maximise shareholder value exclusively and thus cannot consider the interests of other stakeholders, including employees.

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8. Corporate Interests Corporate interest concept. Major Non-EU Jurisdictions do not use the concept of “interests of the company,” but instead refer to the “corporate interest” concept which, however, they do not define. Typically, the interests of stakeholders seem to be taken into account if this consideration affects the interests or the value of the offeree company, and thus the interests of the shareholders. Switzerland. In Switzerland, “corporate interest” is a multi-faceted concept that requires directors to take into consideration the interests of the enterprise as a whole in view of a sustainable increase of the value of the corporation. Swiss doctrine generally holds that the shareholders (in particular the principle of maximising shareholder value) are one of the constituencies, but not the only one, whose interests must be safeguarded. On the contrary, Swiss law requires the board of directors also to take into account the interests of other constituencies, such as creditors, employees and the general public. Other constituency statutes. Interestingly, approximately 30 US States have enacted so-called “other constituency” statutes that authorise an offeree company’s board to consider the interests of stakeholders other than the financial interests of shareholders. These statutes typically permit the board to consider the effects of a proposed takeover on the corporation’s employees, customers, creditors, suppliers, and the communities in which the offeree company or its subsidiaries maintain offices or facilities or conduct operations. In a few of the States in question, the offeree company board is even required to consider the interests of stakeholders other than its shareholders.

H. Perception

1. Objectives and application of the Directive Satisfaction with the furtherance and application of the objectives of the Directive. A majority of stakeholders are of the opinion that the Directive has contributed to the furthering of the principles of legal certainty and transparency (65%)91 and that its application has enhanced the principles of certainty and clarity (67%). Stakeholders in general (51%) and more particularly investors and intermediaries (52%) consider that takeover bids have been facilitated by the Directive. This view is also shared concerning the application of the Directive (44%). Regarding the specific situation in each category, the following opinions have been expressed: � Shareholders. In general, the Directive is considered to have enhanced the protection of

shareholders’ interests (66%). Especially issuers (79%) and investors and intermediaries agree with this (70%). Stakeholders considered as a whole (58%) are also satisfied with the application of the Directive in this respect. Moreover, stakeholders are satisfied with the protection of minority shareholders’ interests (68%); issuers (85%) and investors and intermediaries (69%) in particular have expressed their satisfaction.

� Employees. Stakeholders are generally less satisfied with the protection afforded to the interests of employees (only 50% satisfied). Issuers, investors and intermediaries and employee representatives in particular consider that the protection granted by the Directive to employees is insufficient. Also, the way in which the Directive has been applied is not considered to be protective of the interests of employees in general (48% satisfied). This view is particularly strong among investors and intermediaries (50% satisfied) and employee representatives (0% satisfied).

91 Throughout the study, unless otherwise specified, the calculation of the percentages excludes the responses

received in the category “don’t know”.

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� Other stakeholders. 47% of stakeholders are satisfied with the protection given to other stakeholders’ interests. 65% of investors and intermediaries consider that the protection given to other stakeholders’ interests is satisfactory. However, no clear answer has been provided by the other stakeholder associations, since 22% said that the interests of other stakeholders were protected and 67% said that such interests were only partially protected. Similarly, other stakeholder associations do not agree on the question of whether the objectives of the Directive are being furthered, with 25% considering that the application of the Directive promotes these interests and 13% disagreeing with this analysis.

General satisfaction with the obligations and their application. Stakeholders were asked their opinion on the key sections of the Directive, as cited below. In general, the majority of stakeholders consider that these principles constitute helpful obligations that fulfil the objectives of the Directive. However, regarding the rules on the disclosure of information to the employee representatives of the offeree company, the views expressed are more nuanced, with 67% of stakeholders asserting that the rules are helpful in reaching the objectives of the Directive and 30% considering the obligation neutral. The same nuance is evident regarding opinion on the reciprocity rules, which 73% of stakeholders considered to be helpful and 10% consider prejudicial. The same views have been expressed concerning the application of these obligations.

Obligation Application

Principle Helpful Neutral Prejudicial Helpful Neutral Prejudicial

Compliance with general principles (Article 3 of the Directive)

90% 10% 0% 86% 14% 0%

Designation of supervisory authority competent to supervise a bid (Article 4 of the Directive)

92% 7% 1% 89% 10% 1%

Mandatory bid rule (Article 5 of the Directive)

90% 8% 2% 87% 11% 2%

Information and disclosure rules regarding the bid (Articles 6, 8, 10 of the Directive)

90% 10% 0% 89% 11% 0%

Maximum duration of a bid (Article 7 of the Directive)

80% 19% 1% 76% 23% 1%

Rules regarding the opinion of the board of the offeree company (Articles 9.5 and 14 of the Directive)

79% 20% 1% 74% 25% 1%

Rules regarding the provision of information to the employee representatives of the offeree company (Article 9.5 of the Directive)

67% 30% 3% 68% 29% 3%

Rule regarding the neutrality of the board of the offeree company (Articles 9.2, 9.3, 12 of the Directive)

74% 21% 6% 69% 26% 5%

Rule regarding breakthrough (Articles 11 and 12 of the Directive)

71% 21% 8% 67% 25% 9%

Reciprocity principles (Article 12.3 of the Directive)

73% 17% 10% 73% 17% 10%

Rules regarding squeeze-out 87% 10% 3% 84% 12% 4%

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(Article 15 of the Directive)

Rules regarding sell-out (Article 16 of the Directive)

85% 11% 4% 80% 18% 3%

2. General principles Satisfaction regarding general principles. Interviewed on their perception of the obligations set out in Article 3 of the Directive, stakeholders expressed their satisfaction, with the exception of employee representatives and investors and intermediaries with regard to the opinion of the offeree company and the interests of the company. � Employee representatives. Employee representatives expressed the opinion that the interests of

employees are not taken into account in the Directive with regard to the opinion of the offeree company (25% satisfied) and in the board’s obligation to act in the interest of the offeree company (25% satisfied).

� Stakeholders other than employee representatives and investors and intermediaries. Comments received from stakeholders highlighted the following areas: - Omitted stakeholders. Stakeholders tend to consider that the protection of the interests of

other stakeholders is limited to the interests of employees and offeree companies and does not, for example, address potential shareholders such as pension funds, suppliers and local communities, among others.

- Categories of shareholders. Stakeholders also expressed concern that the principle of equal treatment does not take into account the existence of differential treatments from which different categories of shareholders may benefit. It has therefore been suggested by regulators and investors and intermediaries that the equal treatment principle be complemented in order to ensure an adequate adjustment between the different categories of shares and a proportionate treatment of the holders of these securities.

- Practical scope of the principles. Finally, some supervisors highlighted the fact that the general principles, in setting the essential framework for the regulation of takeover bids, are necessary but not sufficient; thus they would need to be supplemented by more detailed rules. However, the principles should be relied on if a new situation arises which is not specifically covered by rules.

Item Interests of

shareholders Interests of employees Interests of other

stakeholders Yes No Partially Yes No Partially Yes No Partially

1

Equal treatment

90% 0% 10% Not applicable Not applicable

2 – A

Informed decision

92% 0% 8% Not applicable Not applicable

2 – B

Opinion of the offeree company

76% 2% 22% 54% 6% 41% 60% 5% 34%

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Item Interests of shareholders

Interests of employees Interests of other stakeholders

Yes No Partially Yes No Partially Yes No Partially

3 – A

Interests of the company

74% 2% 24% 66% 8% 27% 68% 7% 25%

3 – B

Interests of the shareholders

84% 0% 16% 57% 14% 29% 71% 11% 18%

4

Prohibition of false markets

86% 4% 11% 78% 6% 16% 75% 7% 18%

5

Bid funding 87% 1% 11% Not applicable Not applicable

6

Reasonable time for the offer

91% 1% 8% 76% 8% 16% 85% 3% 11%

The table below describes in greater detail the items for which stakeholders were interviewed.

Item Description 1

Equal treatment

All holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected.

2 – A

Informed decision

The holders of the securities of an offeree company must have enough time and information to enable them to reach a properly informed decision on the bid.

2 – B


Where it advises the holders of securities, the board of the offeree company must give its views on the effects of application of the bid on employment, conditions of employment and the locations of the company’s places of business.

3 – A

Interests of the company The board of an offeree company must act in the interests of the company as a whole.

3 – B

Interests of the shareholders The board of an offeree company must not deny the holders of securities the opportunity to decide on the merits of the bid.

4


False markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted.

5

Bid funding

An offeror must announce a bid only after ensuring that he can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the fulfilment of any other type of consideration.

6

Reasonable time for the offer An offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities.

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Application of specific measures to comply with the general principles. As stated in the table below, offeree companies, and to a lesser extent offerors, have taken specific measures to comply with the general principles of the Directive. Principles Measures taken by listed

companies/boards Measures taken by offerors

Yes No Partially Yes No Partially

1

Equal treatment 55% 17% 28% 52% 15% 33%

2 – A

Informed decision

67% 13% 20% 44% 15% 42%

2 – B


53% 12% 35% 38% 21% 40%

3 – A

Interests of the company

44% 13% 43% 33% 21% 47%

3 – B

Interests of the shareholders

60% 12% 31% 46% 12% 41%

4


57% 12% 31% 46% 12% 41%

5

Bid funding 61% 22% 17% 69% 14% 17%

6

Reasonable time for the offer

60% 18% 22% 51% 16% 33%

Diverging opinions on employee rights. While stakeholders in general (73%) consider that the obligations set forth in the Directive with regard to employees are sufficient and are appropriately enforced, employee representatives (100%) categorically disagree and take the opposite view.

3. Employment issues Significant impact of bids on employment. Stakeholders generally consider that bids have a significant impact on employment, leading frequently or sometimes to lay-offs at the offeree company (76%), with laid-off staff being appointed to other tasks at the purchaser (50%) or the offeree company (58%), voluntary resignations at the offeree company (67%) and early retirements at the offeree company (63%). These views are shared by employee representatives regarding lay-offs (with 67% responding that they sometimes or frequently occur) and voluntary retirements at the level of the offeree companies (63%).

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Costs. The costs of the employment consequences of a takeover are considered to be borne first by the offeree company (48%), second by the offeror (29%), third by public entities (the State, local entities or social security) (24%) and finally by private employment insurance (38%). Other impacts of bids on employment. Stakeholders acknowledge that bids may have other effects, such as replacement of senior staff by younger staff, replacement of permanent contracts by fixed-term contracts or deterioration of working conditions. However, a similar proportion of stakeholders holds the opposite view. Once again, employee representatives take a much stronger stance, considering such events to be a frequent occurrence.

II. The mandatory bid rule Description of the rule. Under the mandatory bid rule (Article 5 of the Directive), if an entity acquires control over a company, it is obliged to make a takeover bid for all the remaining voting securities of such company at an equitable price. This rule protects minority shareholders by granting them both a

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right to sell their shares in the event of a change of control, and the benefit of the premium paid for the controlling stake. The percentage of voting rights conferring control and the method of calculation of this percentage must be determined by the Member State in which the registered office of the company is located. The supervisory authorities may be authorised by Member States to adjust the equitable price under certain circumstances and in accordance with criteria that are clearly determined. Any such decision must be substantiated and made public. US “control share cash-out” laws. There is no direct counterpart to the Directive’s mandatory bid rule under US federal law or, with only a few exceptions, under the laws of most US States (including Delaware). The only exception is that three States (Maine, Pennsylvania and South Dakota, none of which have a significant number of public companies incorporated under their laws) have “control share cash-out” laws which provide that if an offeror gains voting control over a specified percentage of the outstanding shares of a company (ranging between 20% to 50%), the other shareholders of the latter can require the offeror to purchase their shares at a “fair price”. Key concepts. � The mandatory bid rule protects minority shareholders through the prohibition of two-tier bids

and the sharing of the control premium, while potentially reducing the number of bids, thus functionally acting as a takeover defence. This issue is confirmed by economic analysis and the perception of stakeholders.

� Its application raises some issues such as the lack of harmonisation in the key concepts of

control and acting in concert, and in the key concepts of the exemptions that may be granted. However, different shareholding structures mean that a cautious approach is required regarding the harmonisation of control. “Acting in concert” is a notion to which active shareholders who wish to coordinate pay close attention, and which has been the object of specific scrutiny in the UK.

� The variety of exemptions (more than 35) is justified by the diversity of situations and interests

that are covered; however, it seriously reduces the predictability of the Directive in this area.

A. Objectives Pyramids. When the Directive was adopted, a balance had to be struck between respecting the various differences in existing national legal frameworks and market structures, and achieving a harmonised approach that would protect minority shareholders while also giving offerors the capability to predict, with some degree of certainty, the cost of a potential takeover.92 In this regard, there are three main components to the mandatory bid rule:93 � The obligation to make the same bid to non-tendering shareholders after acquiring control.

� The threshold at which “control” is acquired and a mandatory bid must thus be made.

� The price at which the mandatory bid must be made.

A takeover-hostile provision. The mandatory bid rule may be seen as a “takeover-hostile” provision in that it prevents the offeror from using coercive bid structures such as partial bids and two-tier bids94 92 See Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids

(European Commission January 2002) (Winter Report 1). 93 Beate Sjåfjell, The Core of Corporate Governance: Implications of the Takeover Directive for Corporate

Governance in Europe, UCD Working Papers in Law, Criminology & Socio-Legal Studies Research Paper No. 27/2010 p. 64 (30 April 2010).

94 Luca Enriques, European Takeover Law: The Case for a Neutral Approach, UCD Working Papers in Law, Criminology & Socio-Legal Studies Research Paper No. 24/2010 p. 11 (14 December 2009).

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(please refer to Chapter III Section II C. 6.) of this Study for an overview of certain US rules applicable to the acquisition of a company by way of mergers, including two-tier bids). In addition, the mandatory bid rule may increase the cost of acquisitions both friendly and hostile to a level that acts as a deterrent to takeover bids altogether. Such positions necessarily require an analysis of the value-increasing or value-decreasing effect of the mandatory bid rule on takeovers, national markets and the European market as a whole. The mandatory bid rule as a takeover defence prior to the Directive.95 It is important to recall the various national mandatory bid rules that existed prior to the Directive and the rationales behind them. Prior to the Directive, Member States may have promulgated a mandatory bid rule in anticipation of an impending Community-wide rule or for the purpose of protecting minority shareholders. However, certain Member States may have adopted the mandatory bid rule as a defensive tactic for potential offeree companies. Prior to the Directive, a mandatory bid rule may have been considered in Sweden (by law) and Finland (by companies) as, to a certain extent, a defensive tool. It has been suggested that in Sweden, in spite of opposition to the rule, powerful interested persons such as managers, directors and majority shareholders lobbied national legislators to impose a mandatory bid rule for the very purpose of deterring hostile offerors, in order to retain their control positions.96 Similarly, in Finland, many companies, such as Nokia, voluntarily undertook to comply with significantly lower thresholds than those required under Finish law.97 From this perspective, it can be argued that the mandatory bid rule impedes takeovers by forcing a potential offeror who may only wish to purchase, say, 35% of the shares, to be prepared to purchase 100%.98 This substantially increases the prospective cost of a takeover for the offeror and may deter it from launching a bid at all. If one follows the logic that shareholder control equates to economic value,99 this value may be diminished by a mandatory bid requirement because it increases the cost of a change of control for offerors who must now account for the possibility of having to purchase 100% of the shares even if they only want to hold significantly less shares. This issue is summarised in the next figure:

95 For further develpments on the “chilling effect” of the mandatory bid rule, please refer to Chapter IV

Section IV A.1) of this Study. 96 Beate Sjåfjell, The Core of Corporate Governance: Implications of the Takeover Directive for Corporate


97 Id. (Nokia required a mandatory bid at 33.3% and 50%, whereas Finnish law set a 67% threshold). 98 Beate Sjåfjell, The Core of Corporate Governance: Implications of the Takeover Directive for Corporate


99 Rolf Skog, Does Sweden Need a Mandatory Bid Rule? A Critical Analysis, Société Universitaire Européenne de Recherches Financières, Amsterdam p. 53 (1997).

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Bid Price Price per share/ value

Shares Blockholder Other shareholders

Bidder’s expected synergies

Private benefit of control

“Basic” share price

Share value of the private benefit of control

Share price

A

B C

D

E

As this table shows, the offeror’s expected synergies (E) need to be sufficient to pay both the private benefit of control of the blockholders (A) and the extra amount resulting from the application of the mandatory bid rule (D), otherwise there will be no bid (unless the blockholder is ready to give away a portion of its private benefits of control, which would not be rational). Private benefits of control. The amount of the private benefits of control is a significant component of the analysis, as it has a direct impact on the anti-takeover effect of the mandatory bid rule. It has been the subject of a certain number of studies. Although the precise figures may be subject to debate, they give a broad indication as to the possible levels of private benefits of control in different countries. For instance, the following figures have been computed:100

Value of private benefits of control US Germany UK France

1% 1% 2% 2%

Spain Finland Sweden Denmark

4% 7% 7% 8%

Portugal Italy Austria Czech Republic Brazil

20% 37% 38% 58% 65%

The “value-increasing” takeover. It is difficult to determine whether a particular takeover bid is ultimately beneficial to an offeree company and its shareholders. An initial spike in short-term profit for offeree company shareholders generally follows the announcement of a bid, and one could thus say that takeover bids are value-increasing for offeree company shareholders, at least in the short term. However, it should also be noted that the benefits received in exchange by the acquirer include control of the offeree company itself and also the private benefit of control, which the acquirer can use for its private advantage. By increasing the acquisition price, the mandatory bid rule may serve to

100 Alexander Dyck, Luigi Zingales, Private Benefits of Control: An International Comparison, 59 J.Fin. 537,

2004.

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incentivise the acquirer to recover its expenses from acquisition of the offeree company by exploiting the offeree company’s assets or the private benefit of control.101 Short-term profit increases for offeree company shareholders are not the only measure of value for which takeovers should be assessed. Nor can it be said that narrowly focusing on short-term profits for shareholders necessarily results in positive effects for the company, shareholders, employees or society as a whole. The value of the company does not reside solely in its share price. If a company is being run poorly, a change of control may be necessary; however, if the company is too easily subjected to such change of control, it may lead to a heightened level of shareholder apathy for long-term investment. It is commonly believed that the spike in share price following a takeover bid is a fiction created by the market in anticipation of the premium to be paid for the takeover and does not necessarily correlate to any long-term gains for the company or the share price.102 In this regard, even shareholders with long-term investment intentions may be inclined to tender their shares when faced with the one-off opportunity to sell at the predictably inflated price during the bid period. This interpretation suggests that the incentive for shareholders to tender is perpetuating a kind of short-termism that may discourage consideration of long-term effects on the company. Regardless of how much information regarding future plans and strategy for the company is disclosed (such as location, use of existing assets or treatment of employees), future earnings will still be speculative and carry a higher risk than the immediate, and far more certain, short-term gains produced by a takeover. Exit right of shareholders in the event of a change of control. One of the primary rationales of the mandatory bid rule is to protect minority shareholders by recognising the right of shareholders to exit the company without suffering a disadvantage in the event of a change of control.103 Shareholders may more thoroughly evaluate their decision to remain in or exit from the offeree company if they have no possible loss to fear. This analysis may differ, however, depending on the level of ownership concentration associated with the company. For example, in countries such as Germany and Sweden with more concentrated ownership structures, requiring a mandatory bid to be extended upon acquisition of control may make takeovers significantly more burdensome for the offeror.104 The cost of having to purchase shares from blockholders can be much greater than purchasing shares in a dispersed ownership structure due to the size of the increments. Such considerations contributed to the compromise in the Directive of delegating to Member States the authority to determine thresholds constituting acquisition of control triggering a mandatory bid.105 As shown in the table set out in Chapter III Section II B. 1.3.) of this Study, it is interesting to note that despite this authority, most Member States have settled at a threshold of around one-third.

B. Transposition Dynamics of transposition. The mandatory bid rule evolved in many Member States before adoption of the Directive. In four out of 22 Member States (Cyprus, Greece, Luxembourg and the Netherlands), no mandatory bid rule existed prior to the transposition of the Directive, and in five other Member States the rule has been amended in connection with the transposition of the Directive. Generally the Directive has helped to improve protection of minority shareholders by lowering the threshold,

101 The private benefit of control refers to the power of a controlling shareholder to use corporate resources for

its private advantage. 102 Sjåfjell, Beate, The Core of Corporate Governance: Implications of the Takeover Directive for Corporate


103 Rolf Skog, Does Sweden Need a Mandatory Bid Rule? A Critical Analysis, Société Universitaire Européenne de Recherches Financières, Amsterdam p. 44 (1997).

104 Indeed, the mandatory bid rule faced opposition from such Member States with concentrated ownership markets during the initial proposals of the Directive.

105 See Article 5.3 of the Directive.

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specifying the triggering events, requiring control over the price and setting out time periods within the bid processes. Mandatory takeover bids in Major Non-EU Jurisdictions. Most Major Non-EU Jurisdictions have adopted mandatory or equivalent takeover bid rules and put in place one, or even multiple threshold-crossing triggers which are usually equal to 30% or one-third of the offeree company’s voting rights. A minority of Major Non-EU Jurisdictions have, in addition, applied anti-creeper provisions that allow a person to increase his holdings by a limited percentage within a specified time frame. Certain Major Non-EU Jurisdictions provide for certain additional triggers such as the acquisition of control (please refer to Chapter III Section II C. 1.) of this Study).

1. Definition of control Flexibility. The Directive has granted Member States a large degree of flexibility in the definition of “control”. As a criterion for defining “control,” Member States use either the crossing of a specified threshold, the acquisition of de facto control, or a combination of both criteria. In accordance with Article 5.1 of the Directive, Member States provide that the obligation to launch a mandatory bid is triggered by the acquisition of both direct or indirect “control”.

1.1. Crossing of a specified threshold Success of the “threshold” approach. With the exception of Estonia, all Member States provide for a specific threshold of voting rights or shares carrying voting rights that must be met or exceeded. This is generally considered to be the simplest method of defining “control” , although, to be meaningful, it must come with a number of exemptions (such as the “larger shareholder” exemption, which provides that a shareholder crossing the specified threshold does not need to launch a mandatory bid if there is a shareholder with a larger holding). Concentration on 30% and 33% and the issue of de facto control. Although the Directive grants flexibility to the Member States in the determination of this threshold, in most Member States the threshold is either 30% or 33%. This convergence is interesting, as there is no “magic” in these numbers. Whereas the 33% threshold may, in some cases, correspond to the blocking minority for decisions subject to super-majority vote, the 30% has no specific justification. Compared with the “hard” control level of 50%, it is low. However, if it is meant to prevent acquisition of de facto control, it is often too high, since companies with a widespread shareholding and an average turnout ratio at general meetings of 50% or less may be controlled with 25% of the voting shares. One manner of addressing the “de facto” control issue is the “Hungarian method”.

The Hungarian method In Hungary, two thresholds have been introduced and the holdings of the other shareholders are taken into account. A person must launch a mandatory bid if he: � acquires (directly or indirectly) more than 33% of the voting shares or voting rights (regardless of

the shareholdings of others); or � acquires (directly or indirectly) more than 25% of the voting shares or voting rights in an offeree

company in which no shareholder other than the offeror holds more than 10% of the voting rights. The “creep-up” issue. A shareholding between 30% and 50% does not give its holder the certainty that it will retain control of the company forever. Such shareholders are thus left with an uncertainty,

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as a result of which they may be tempted to “creep up,” i.e. to move from 30% to 50% without triggering a bid. There are two approaches to address this issue: � The restricted increase approach. Some countries provide that any acquisition of shares – or of

a certain quantity of shares over a certain time period – above the 30% (or 33%) threshold will give rise to a mandatory bid. Examples of such additional percentages and relevant time period are:

- France: 2% of shares or voting rights within 12 months; - Greece and Italy: 3% of voting rights within 12 months; - Ireland: 0.05% of voting rights within 12 months; or - The UK: one share (which means that any acquisition triggers a mandatory bid). However, these rules have different functions:

- In France and Greece, which have a large number of blockholders, the rules allow

blockholders to slowly increase holdings. Large blockholders thus retain some freedom to increase their participation and the market has ample time to be informed.

- In the UK and Ireland, where shareholding is more widespread, no leeway is granted.

� The 50% threshold approach. If the “magic” figure is 50%, the easiest way to address the issue

is to set a second threshold at the 50% level. This has been done by Portugal and Finland. Poland has followed a similar approach, but with a second threshold set at 66%.

Illustration of the “creep-up” rule: the Hochtief case. The Hochtief case, described below, shows that a lack of appropriate regulation may lead to circumvention:

The Hochtief case In September 2010, A.C.S., a Spanish construction company, launched a voluntary takeover bid on Hochtief, the price of which was generally considered to be inadequate. Through this voluntary bid, A.C.S. intended to raise its stake in Hochtief above the 30% voting rights threshold and, following the bid, to increase its holding in Hochtief by way of open market acquisitions. Crossing the 30% threshold by means of a voluntary takeover bid thus allowed A.C.S. to increase its holdings in Hochtief after the voluntary bid without having to launch a mandatory bid, which would have incurred a higher price. The BaFin granted A.C.S. an exemption from the obligation to launch a mandatory takeover bid (concluding that A.C.S.’s bid did not conflict with applicable takeover bid rules), provided that the 30% voting right threshold be reached by the end of December 2010. In December 2010, when A.C.S had not yet reached the critical 30% threshold, Southeastern, a common shareholder of A.C.S. and Hochtief, tendered half of its Hochtief holdings to A.C.S. even though the bid price was not considered attractive. This tender allowed A.C.S. to increase its stake in Hochtief to 29.84% and, by the end of December, to cross the 30% threshold. The BaFin carried out investigations in order to determine whether A.C.S. and Southeastern had been acting in concert, as Southeastern held a 6.5% stake in A.C.S. and had acquired some of its Hochtief shares only a couple of weeks before A.C.S. launched its bid on Hochtief. However, in 2011 the BaFin concluded that there was no evidence that the two parties had been acting in concert and decided that the acquisition of the Hochtief shares by the two companies was not the

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The Hochtief case result of an agreement or of a concerted action.

1.2. Acquisition of actual control Compliance with the Directive. The Directive requires a threshold to be considered when determining if control has been taken. However, this may leave the door open to the use of the notion of actual control coupled with a presumption of control set at a certain threshold, as well as the use of a threshold combined with other criteria. In any event, the sole use of a threshold would not be possible, as crossing the specialised threshold when another shareholder holds effective control (for instance, through a larger stake) should not trigger a mandatory bid. This issue is typically addressed through the use of exemptions. Reference to actual control (only). Only Estonia refers to the notion of actual control. In this case, control is defined as the power of the offeror to appoint or remove a majority of the company’s board members. There is a presumption of control set at 50% of the voting rights; however, if control is acquired below this threshold, the mandatory bid rule will be triggered. Reference to a threshold and the notion of actual control. Two Member States, Denmark and Spain, combine two alternative criteria: either crossing a specified threshold (of 50% or 30%, respectively) or holding actual control. In Spain, control is defined as the appointment of half of the board members within 24 months. In Denmark, control is defined in the same manner, with an additional reference to the right to exercise a controlling influence over the company. Although these systems differ formally from the Estonian system, in fact they are close to it.

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1.3. Summary view The definition of “control” used in the various Member States is thus the following: Threshold


30% 33% or 1/3 Second threshold

Austria Belgium Cyprus Czech Republic Finland France Germany Ireland Italy Netherlands Sweden UK

Greece Hungary Luxembourg Poland Portugal Romania Slovakia

Finland (50%) Poland (66%) Portugal (50%)

Estonia (presumption of dominant influence if (i) a person holds a majority of the votes represented by the shares (i.e. 50% +1); or (ii) a person, being a shareholder of the company, has the right to appoint or remove a majority of the members of the management or supervisory board; or (iii) a person, being a shareholder of the company, has sole control over a majority of the votes pursuant to an agreement entered into with other shareholders; or (iv) a person has dominant influence or control over the company or the possibility of exercising it)

Denmark (acquirer controls 50% of the voting rights through holding or pursuant to an agreement and thereby holds a controlling influence, controls the financial and operational aspects of the company pursuant to the articles of association or an agreement, controls the majority of the members of the board of directors, or owns more than 1/3 of the voting rights and exercises a controlling influence over the company) Spain (acquirer obtains 30% of the voting rights or appoints more than half of the board members within 24 months)

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Additional criteria No increase Slow increase Large shareholder

Ireland (0.05% increase above 30% within 12 months provided that a single shareholder who holds more than 50% of the voting rights may acquire additional securities) UK (any increase between 30% and 50%)

France (increase by 2% in capital or voting rights between 30% and 50% within 12 months)

Austria (increase by 2% between 30% and 50% within 12 months)

Greece (increase by 3% between 33% and 50% within six months)

Italy (increase by 5% between 30% and 50% within 12 months)

Poland (increase by 10% a shareholder holding of less than 33% within 60 days or 5% increase by a shareholder holding by more than 33% within 12 months)

Spain (increase by 5% between 30% and 50% within 12 months)

Hungary (25% threshold if no other shareholder holds at least a 10% participating interest in the offeree company)

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Map. A synthesised map is shown below.

* Hungary: 33% voting rights with additional criterion: 25% increase if no other shareholder holds more than a 10%

participating interest in the offeree company

1.4. Specific computation issues No computing rules. Unlike the Transparency Directive, which goes into great detail on the question of how thresholds must be computed, the Directive leaves a free hand to Member States on this issue. This is consistent with the notion that the definition of control itself is not harmonised. However, it can lead to some practical issues. The “disaggregation issue”. As an example of an issue raised by the lack of harmonisation, an institutional investor provided the following example:

Clarification of the exemption from aggregation, known as “disaggregation” The exemption from aggregation, known as “disaggregation” (i.e. when reporting can be computed at the level of the individual entity instead of at the group level) is unclear. In general, EU legislation seems inconsistent in its application of the principle of disaggregation across Directives. The Transparency Directive recognises the principle of disaggregation for both EU and non-EU investment management groups. Disaggregation in this context is accepted in most major EU financial markets (e.g. the UK, France, Germany). In contrast, the Takeover Directive is silent on

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Clarification of the exemption from aggregation, known as “disaggregation” disaggregation, leaving it to Member States to determine how interests are calculated. Member States are free to include disaggregation in their national rules (e.g. France, Germany) or not (e.g. the UK). Accordingly, transposition is not consistent within the EU. Further, in a single Member State, disaggregation may be recognised for transparency but not for takeover purposes (e.g. the UK). From a practical standpoint, tracking compliance with the Directive is complex and expensive since monitoring has to take place on a country-per-country basis and cannot be combined with the tracking performed in the context of other EU Directives (e.g. the Transparency Directive). In consequence, the disaggregation principle should be recognised in a simple, consistent way in similar contexts. As far as the Takeover Directive is concerned, the rules should be limited to those governing the reporting requirements under the Transparency Directive in order to secure consistent treatment. It is worth noting that an alignment of the aggregation rules in the Transparency and Takeover Directives context, as provided for in France, has proven workable and valuable. Indeed, French legislature has consolidated the provisions regarding ownership reporting obligations that could apply to any situation (see Articles L233-6 et seq. of the French Commercial Code), regardless of the underlying law from which they derive (transparency requirements or takeover thresholds), into one comprehensive set of requirements. Therefore, the disaggregation principle also applies to ownership reporting for the purpose of the monitoring of takeover bids. In practice, this reduces compliance costs and prevents contradictory signals from being sent to the market.

2. Definition of acting in concert A significant issue. The issue of acting in concert is relevant for calculating the control threshold. In a significant number of Member States, the definition of “acting in concert” and the question as to whether persons were acting in concert, and were thus committed to a mandatory takeover bid, has frequently been discussed and has led to various law suits and enforcement decisions by supervisory authorities. The Deutsche Börse case reflects the difficulty in assessing whether certain forms of behaviour constitute concerted action.

The Deutsche Börse case In 2005, Deutsche Börse had to withdraw its takeover bid for the London Stock Exchange because of the strong opposition of some of its shareholders, which were headed by The Children’s Investment Fund Management (“TCI”) and in the aggregate looked likely to hold more than 30% of Deutsche Börse’s voting rights. TCI, owner of a 7.9% stake in Deutsche Börse and several fund management companies, opposed the bid, arguing that the price offered was too high. The pressure exercised on Deutsche Börse’s management resulted in the resignation of the company’s CEO, Werner Seifert. Under German securities law, any person holding over 30% of the voting rights in a listed company must launch a mandatory bid on the remaining shares of such company if shareholders combining their efforts to influence a company’s management are considered to be acting in concert. The BaFin carried out investigations in order to determine whether TCI and the other fund management companies had acted in concert to influence Deutsche Börse’s management, and thus whether they had the obligation to launch a public takeover bid on Deutsche Börse. However, following the investigation, the BaFin determined that there was insufficient evidence to conclude that the shareholders in question had been acting in concert. Following this decision, in 2008 German legislature passed the Risk Limitation Act which extended the scope of the “acting in concert” provision. Under the previous law, courts had taken a narrow approach in determining whether shareholders had acted in concert by considering only their conduct

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The Deutsche Börse case at shareholders’ meetings. The new legislation extends the scope of the factors to be considered, also taking into account shareholders’ conduct outside of shareholders’ meetings.

2.1. “Acting in concert” The main definitions. Article 2.1(d) of the Directive defines “acting in concert” as follows: “‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offferor or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid”. According to Article 10(a) of the Transparency Directive, acting in concert involves “… a third party with whom that person or entity has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question…”. The concept of acting in concert is also included in the Acquisitions Directive (2007/44/EC). However, the very broad definition provided in the Acquisitions Directive’s level 3 guidance is not used by Member States in connection with mandatory takeover bids. This may reflect a willingness of Member States to use a narrow definition for the purpose of greater clarity and foreseeability. Two possible approaches. Member States take two different approaches with respect to the definition of acting in concert: they either retain a definition that is very close to the one in the Takeover Directive, or add to this definition the concept of concert as defined in the Transparency Directive. The Transparency Directive definition does not specifically refer to acquisition situations, but envisages concerts relating to the (long-term) strategy of the offeree company. In this context, the concert would be the exercise of voting rights with a view to applying a certain policy and influencing the management and strategy of the offeree company. Consequently, a concert within this meaning can also occur independently of an acquisition, if shareholders already holding shares agree on the strategy.106 Conversely, in Member States such as the UK that have opted for the definition provided by the Takeover Directive, such concerted parties must also acquire additional shares in order to trigger a mandatory bid. Investors acting in concert are thus more likely to find themselves in a situation where they need to launch a mandatory bid in Member States that combine the two definitions. Specific situations. Two countries are in a somewhat intermediate situation. They use a definition that is close to the Directive’s definition, but with a slightly different content that potentially points to the definition contained in the Transparency Directive: � In the Czech Republic, reference is made to the acquisition of control “over the management of

the operations of the offeree company”.107

� In Estonia, the concept of control is replaced by a notion of “dominant influence”.108 106 Please refer to the Deutsche Börse case presented in Chapter III Section II B. 2.1.) of this Study. 107 A person acting in concert shall mean a person who consciously cooperates with the offeror with the aim

of acquiring or enforcing joint control over the management or the operation of the offeree company, particularly by means of a joint exercise of the voting rights, or a person who cooperates with the offeree company on the basis of an agreement with the aim of frustrating the takeover bid. It is assumed that the persons acting in concert are the controlling and controlled persons as well as the parties to the agreement on the exercise of voting rights in connection with the appointment of the board members of the offeree company and concerned members.

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In Finland, the definition mainly results from guidance given by the supervisory authority. In Germany, the definition that is more similar to the one used in the Directive is only used for the purposes of handling situations of misuse. Categories. The countries may thus be categorised as follows:

Definitions of “acting in concert” Directive Intermediate Directive &

Transparency Directive

Main jurisdictions Italy, UK France, Germany,109

Spain Other jurisdictions Austria, Cyprus,

Denmark, Hungary, Ireland, Luxembourg, Netherlands, Slovakia

Czech Republic, Estonia, Greece

Belgium, Finland,110Poland, Portugal, Romania,111 Sweden

2.2. Presumptions of acting in concert and guidance Rebuttable presumptions. In the definition of control, most Member States provide for legal presumptions of acting in concert or similar rules. Presumptions typically involve: � subsidiaries, affiliates, shareholders and other associated companies (N.B. in the UK and in

Cyprus, companies in which the offeror holds 20% of the voting rights are also included);

� companies with any of their directors (together with their close relatives and related trusts);

� parents, spouses and other family members;

108 Section 167(1) of the Finnish SMA defines “persons acting in concert” as follows: “persons acting in

concert are connected persons and other persons who, either alone or together with other persons, act together with the person obligated to make the takeover bid or with the person making the takeover bid or with the target company on the basis of an oral or written agreement in order to gain, maintain or increase dominant influence over the target company or in order to frustrate the takeover bid”. For the purposes of the Finnish SMA, connected persons are a controlled company, a person controlling such company and other companies controlled by this person.

109 Two definitions of “acting in concert” are used depending on the issue (mandatory bid rule or the price). 110 According to the Finnish SMA, for the purposes of calculating the ownership that triggers the mandatory

bid obligation, the voting rights attached to the shares held by other natural persons, organisations or foundations that are acting in concert with the shareholder to exercise control in the company shall be aggregated with the voting rights of the shareholder. The Finnish SMA does not provide any further guidance as to what exactly constitutes acting in concert, and this has caused uncertainty regarding the application of the “acting in concert” provision on the Finnish market. The preparatory works of the Finnish SMA and the Takeover Standard issued by the Finnish FSA indicate that the aim of the parties and the long-term nature of the cooperation are relevant considerations, but that in general, the concept of acting in concert is open to interpretation. In Finland, the mandatory bid obligation could thus be triggered even without any related acquisition of shares and voting rights in the offeree company. Some changes have been proposed to the definition of acting in concert in connection with the proposal for new securities market legislation. Such changes would bring the Finnish definition closer to the definition set forth in the Directive.

111 According to the Capital Markets Law, “acting in concert” involves a situation in which several persons enter into an agreement, expressly or implicitly, for the purpose of pursuing a common goal with respect to a listed company.

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� pension funds of the offeror or its related parties;

� proxies empowered to buy and sell securities; or

� investment fund managers with any investment company. It should be noted that, in order to improve certainty and enforceability, some supervisors consider that a list of circumstances in which the parties would be presumed to be acting in concert should be included. Shareholder eng agement or activism. Some concern has been raised that overly broad definitions of acting in concert may lead to undue restrictions on shareholder engagement or activism or other forms of collective shareholder action. This issue has been addressed recently in both the UK and Italy. The positions these countries have taken serve a similar goal (easing the way for collective shareholder action), but the measures chosen are different. In the UK, the Takeover Panel has issued a broad statement revolving around the following key concepts: � Only “board control-seeking” resolutions should be addressed.

� A resolution is not normally “board control-seeking” if the directors to be appointed are either

independent directors or non-executive directors appointed to improve the company’s corporate governance.

� No mandatory bid will be imposed if the parties acting in concert have taken steps not to acquire shares or, if they have acquired shares, they undertake to dispose of them within an appropriate time period.

In Italy, new Consob regulation excludes a certain number of cases of cooperation from the scope of actions in concert. Such cases include coordination regarding the appointment of less than half of the board members. Examples of specific regulatory frameworks. For reference purposes, the full text of the UK and Italian positions are reproduced below:

Takeover Panel position on shareholder activism112 The Panel Executive understands that concerns have recently been expressed that certain provisions of the Takeover Code (the “Code”) act as a barrier to co-operative action by fund managers and institutional shareholders. Specifically, concerns have been expressed that collective shareholder action (for example, shareholders jointly seeking to bring influence to bear on the board of a company) could be constrained by the Executive’s application of the Code’s “acting in concert” provisions and mandatory bid requirements. The Executive does not believe that the relevant provisions of the Code have either the intention or the effect of acting as a barrier to co-operative action by fund managers and institutional shareholders or of constraining normal collective shareholder action. This Practice Statement therefore describes the way in which the Executive interprets and applies the relevant provisions of the Code in this area. In summary, a mandatory bid may only be triggered by activist shareholders if both of the following tests are satisfied:

112 Practice Statement No. 26 of 9 September 2009.

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Takeover Panel position on shareholder activism112 � Those shareholders requisition a general meeting to consider a “board control-seeking” resolution

or threaten to do so; and

� After an agreement or understanding is reached between the activist shareholders that a “board control-seeking” resolution should be proposed or threatened, those shareholders acquire interests in shares such that the shares in which they are interested together carry 30% or more of the voting rights in the company (or, if they are already interested in shares carrying 30% or more of the voting rights of the company, they acquire further interests in shares).

For these purposes, a resolution will not normally be considered to be “board control-seeking” unless it seeks to replace existing directors with directors who have a significant relationship with the requisitioning shareholders with the result that those shareholders would effectively be in a position to control the board. A resolution will not normally be considered to be “board control-seeking” if the directors to be appointed are independent of the activist shareholders or if the primary purpose of the proposal is to appoint additional non-executive directors in order to improve the company’s corporate governance. As stated below, the following factors would not of themselves lead the Executive to conclude that a concert party had come together: � Discussions between shareholders about possible issues which might be raised with a company’s

board;

� Joint representations by shareholders to the board; and � The agreement by shareholders to vote in the same way on a particular resolution at a general

meeting. In addition, a proposal to change the manner in which a company is managed but which does not involve changes to the board will not normally be considered to be “board control-seeking” unless the activist shareholders make it known that, if their initial proposals are not applied, they will put forward “board control-seeking” proposals. In practice, “board control seeking” resolutions are rare and, in the majority of normal collective shareholder actions, no mandatory bid issues would therefore arise. In any event, even if a “board control-seeking” resolution were to be proposed by activist shareholders, no mandatory bid would be required if, at the time that any such agreement or understanding is reached, steps are taken to prevent the acquisition of interests in shares in the relevant company by the activist shareholders. The current provisions of the Code regarding collective shareholder action were introduced into the Code following consultation in 2002, with the specific aim of assisting normal shareholder activism. Since that time, the Executive has not required any mandatory bid to be made in the context of a “board control-seeking” resolution. If interests in shares were to be acquired in the context of a “board control-seeking” resolution notwithstanding that appropriate measures had been taken to prevent any such acquisitions, the Executive would be much more likely to require the disposal of the relevant interests over an appropriate time period than to require a mandatory bid to be made. In view of this, the Executive believes that the risk of activist shareholders accidentally triggering a mandatory bid requirement is negligible. The Executive is available for consultation if shareholders have any doubts as to the application of the Code in this area, in particular as to whether a particular proposal would be considered to be “board control-seeking,” as described below. The Executive’s experience indicates that, where it is consulted, concerns that particular proposals could be considered to be “board control-seeking” arise relatively

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Takeover Panel position on shareholder activism112 infrequently.

Italian regulation on shareholder activism113 The following cases of cooperation among different parties do not constitute concerted action: � Calling of the shareholders’ meeting upon shareholders request, invalidity of resolutions, validity

of the resolutions of the board of directors of a company, judicial action of directors’ liability started by shareholders, judicial action of directors’ liability started by single shareholders or third party, general managers, complaint to the board of statutory auditors, report to the Court, liability within the direction and coordination regulation, additions to the agenda of the shareholders’ meeting, right to ask questions prior to the shareholders’ meeting, effects of audit opinions on the accounts;

� Agreements relating to the presentation of lists for appointment of corporate bodies provided that such lists propose for the appointment (i) a number of candidates representing less than half of the members to be appointed or (ii) minority shareholders representatives;

� Cooperation among shareholders aimed at opposing the approval of an extraordinary or ordinary

resolution relating to (i) compensation of the members of the corporate bodies, compensation policies or shareholders’ plans based on financial instruments, (ii) related-party transactions, (iii) authorisations in connection with directors’ non-compete obligations and defensive measures.

� Cooperation among shareholders aimed at (i) encouraging the approval of a resolution relating to

the liability of the members of the corporate bodies or a proposal of the agenda, calling of the shareholders’ meeting upon shareholders request or additions to the agenda of the shareholders’ meeting, (ii) collecting votes for a single list which candidates a number of persons lower than half of the members to be elected or is structurally aimed at the election of minority shareholders representatives, also through solicitation of proxies aimed at the voting of such a list.

Sales between concert parties. Another difficult issue is the question of how to address sales between concert parties. Whether a concert, taken as a whole, controls a company is a difficult issue to decide when a sale that changes the balance of power between the concert parties should trigger a mandatory bid. An example of how this issue may be addressed is described below:

Sale between concert parties: the Irish example While the Irish Takeover Panel normally treats a group of parties acting in concert as a single person, there are circumstances in which the acquisition of securities by a member of a group will trigger the mandatory bid rule only for such person. Regardless of whether the securities are acquired from a fellow member of the group or not, if the acquiring member holds at least 30% but no more than 49.95%, any increases in such person’s voting right by more than 0.05% in any period of 12 months will trigger a mandatory bid obligation for him unless the Irish Takeover Panel consents otherwise. Where the securities are acquired from a fellow member of the group, the Irish Takeover Panel may consider a waiver and may take into account the following issues: � whether the member with the largest individual shareholding has changed;

� whether the balance between the holdings in the group has changed significantly;

113 Regulation on Issuers, as amended on 5 April 2011.

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Sale between concert parties: the Irish example � the price paid for the securities acquired; and

� the relationship between the concert parties and how long they have been acting in concert.

2.3. Specific issues and questions related to acting in concert Noteworthy elements and issues regarding the definition of acting in concert in different Member States relate either to the “agreement” that forms the basis of the concert (nature, parties, evidence) or to its content.

a. The “agreement” (nature, parties, evidence) Non-binding agreements. In Italy, non-binding or void agreements may qualify as acting in concert. Reciprocal additions and chain addition. A “star-shaped” concert exists when, where A is acting in concert with B and B is in turn acting in concert with C, the voting rights held by B and by C are attributed to A. In France for example, such “star-shaped” addition takes place for members of different concerts. Evidence of acting in concert. Supervisory authorities often encounter difficulties in establishing cases of acting in concert. In France, the AMF and the competent courts use a method based on concordant pieces of evidence114. In Romania, the additional circumstances presumed to constitute creation of control include (i) the identical exercise of voting rights in the general meeting of shareholders of the offeree company; and (ii) the existence (in the present or in the past) of any commercial relations between entities, whether or not they are connected with the capital markets. In practice, in connection with the non-existence of concert situations, the Romanian supervisory authority did not accept as evidence to the contrary a statement of the entities concerned that they were not acting in concert.

b. The content of the agreement Agreements regarding consultation procedures. A difficult issue concerns agreements providing for consultation procedures that do not necessarily lead to the same voting behaviour at the general shareholders’ meeting. Although the parties to such agreements are left with the freedom to decide on how they wish to vote, the Directive does not prohibit a reading that would deem them to be acting in concert. For instance, this is the position that was taken by the Belgian FSMA in the following circumstances:

Agreements regarding consultation procedures: the position of the FSMA (Belgium)

114 Main elements used in the landmark decision of 2 April 2008 of the Paris Court of Appeal, Sacyr v.

Eiffage, CA Paris No. 07/11675.

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At the request of the parties to a shareholders’ agreement, the Belgian supervisory authority (FSMA) examined whether the relevant agreement constituted concerted action. The shareholders agreed, among other things, to consult whenever the company’s and the shareholders’ interest required this, and in any case before each general shareholders’ meeting. The consultation was meant among other things to give the parties the opportunity to discuss sustainable common policies with regard to the company. These consultations were not binding: each party was free to exercise its voting rights at the general shareholder’s meeting at its sole discretion. In addition, the parties agreed to consult, and, if required, to confer with the company on the position each party would take concerning any public takeover bid or proposed acquisition of control. The purpose of this consultation was to strive for a possible consensus on the parties’ attitude with regard to a public takeover bid or to a proposed acquisition of control. The agreement provided for a formal consultation procedure. The FSMA ruled that in order to qualify as an agreement concerning the exercise of voting rights to pursue a sustainable common policy regarding the company, such agreement need not necessarily lead to the same voting behaviour at the general shareholders’ meeting. The FSMA therefore found that the shareholders’ agreement qualified as concerted action. Exemption or exclusion of “one shot concerts”. According to the approach taken by the countries that follow the definition of the Transparency Directive, concerts relating only to a single case are excluded because they do not relate to a “lasting common policy”. This exclusion from the definition aims to allow shareholders to have a certain “activity” with respect to the exercise of their voting rights. It is debatable whether such exemptions are always compliant with the Directive. Agreements relating to election of supervisory/other board members and board of directors. The approaches taken by the different Member States with respect to the election of supervisory or other board members diverge quite widely. While some Members States expressly include in the presumption of acting in concert agreements relating to the election of board members or the exercise of voting rights by board members (e.g. Austria in relation to elections of members of the supervisory board; Spain), other Member States include the election of board members in the definition of acting in concert only when such election is not a single decision but reflects a strategy (Germany, on the basis of case law and BaFin practice). In Germany, the Federal Civil Court has decided that agreements relating to the exercise of voting rights within the board (in the case at hand, election of the chairman of the supervisory board by the members of the supervisory board) do not fall under the definition of acting in concert, which only includes the exercise of voting rights at shareholders’ meetings.

3. Exemptions to the mandatory bid rule

3.1. Exemptions: criteria General framework. All Member States allow exemptions to or derogations from the obligation to submit a mandatory bid. These exemptions can be divided into two groups: exemptions are either discretionary or defined by the legal framework. Where exemptions are discretionary, in certain cases the supervisory authority issues guidelines or a regulation listing examples of possible exemptions. Where the exemptions are defined by the legal framework, in certain cases discretionary power is granted to the supervisory authority in the application of these exemptions. Exemptions are significant. In the following Section, the exemptions to the mandatory bid rule are presented with a significant level of detail because they are crucial for the assessment of mandatory bids, which are a key topic of the Directive. Furthermore, the variety of exemptions granted by the

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Member States is particularly significant. Finally, the assessment of whether a situation is within the scope of an exemption is extremely fact-driven and thus difficult to perform in practice.

3.2. Discretionary exemptions

a. Exemptions decided by the supervisory authority General discretionary power. Only some Member States (UK, Finland, Ireland) grant a general discretionary power to the supervisory authorities. In these three Member States, the competent authorities have issued guidelines for the different situations that may fall within the scope of exemptions. These categories are also included in the following analysis. Limited “discretionary” power. In Germany, the supervisory authority does not have a general discretionary power to grant exemptions. However, the BaFin is empowered by a general clause to exempt a company from the obligation to publish the acquisition of control and to issue a mandatory bid “if, having regard of the interests of the applicant and the holders of shares in the target company, this appears justified in view of the manner of attainment, the objectives being pursued with the attainment of control, a drop below the control threshold subsequent to the attainment of control, the shareholder structure of the target company, or the actual possibility of exercising control”. Further guidance is provided by the German takeover bid regulation, which contains a list of circumstances which would in particular justify an exemption. Unilateral extension of limited power. In France, although the AMF does not have a general discretionary power, it on a recent occasion extended the scope of its authority to grant an exemption in view of all relevant circumstances, including those that occurred after the acquisition that triggered the mandatory bid obligation. This position was upheld by the Court of Appeal115 and may thus serve as a precedent for further extensions of power.

b. Exemptions decided by shareholders (whitewash procedure) Description. Some countries take the view that shareholders should be authorised to waive the mandatory bid rule, since the rule aims to protect shareholders. However, since controlling shareholders may overrule minority shareholders, a whitewash only protects majority shareholders, unless majority or interested shareholders are excluded from the vote. Member States. Such a “whitewash procedure” exists, for example, in the UK (in specific cases) and in Ireland (according to guidelines). In the Netherlands, the following general whitewash procedure exists:

General whitewash procedure (Netherlands) A person who acquires a controlling interest in an offeree company is exempted from making a mandatory bid if, not longer than 30 days before the acquisition, the general shareholders of the offeree company approved such exemption by at least 95% of the votes cast, excluding the votes of the controlling shareholder and concert parties. However, as this threshold is very high, in practice the provision is rarely used. In the UK, a more limited procedure exists:

Specific whitewash procedure (UK)

115 Paris Court of Appeal, 2 April 2008, Sacyr v. Eiffage, CA Paris No. 07/11675.

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Specific whitewash procedure (UK) The Panel may be asked to provide a waiver from the mandatory bid obligation in circumstances where, as a result of the issue of new securities as consideration for an acquisition or a cash injection or in fulfilment of contractual obligations to underwrite the issue of new securities, a person or group of persons acting in concert acquires an interest or interests in shares of 30% or more. The procedure and criteria for obtaining such a waiver from the Panel are as follows: � no disqualifying transactions by the person or group seeking the waiver in the previous 12

months;

� prior consultation with the Panel by the parties concerned (or their advisors);

� advance approval by the Panel of an explanatory circular to shareholders;

� approval of the proposals by an independent vote; and

� disenfranchisement of the person (or group) seeking the waiver and of any other non-independent party at any corresponding meeting.

Whitewash procedures in Major Non-EU Jurisdictions. A majority of Major Non-EU Jurisdictions provide for “whitewash procedures” in certain limited circumstances such as capital issuances, financial difficulties or the acquisition of control. In addition, the Swiss “opting-out” and “opting-in” whitewash procedures have an extremely broad scope (please refer to Chapter III Section II C. 2.) of this Study).

c. Specific exemptions Diversity of interests and complexity. As stated below, a detailed analysis of the various exemptions shows a relatively complex legal structure. A closer look shows that, taken as a whole, exemptions display a pattern of protected interests. The exemptions can thus be classified as follows: technical exemptions, protection of the interests of the offeror or the controlling shareholder, protection of creditors and protection of other stakeholders.

(1) Technical exemptions Some cases were not meant to be covered by the Directive. The mandatory bid rule is therefore not applicable in the following cases. Excluded entities. In the Netherlands and Hungary, open-ended collective investment schemes are specifically excluded. Exclusion procedures. There is no reason to launch a mandatory bid if the acquirer has acquired enough shares to be allowed to proceed with the squeeze-out of minority shareholders, provided that the latter are sufficiently protected by the relevant exclusionary rules. In Austria, if a party has acquired 90% or more of the voting and capital rights of the offeree company, it is not required to launch a mandatory bid to the extent that the exclusionary procedure is applicable. Through this exclusionary procedure, a majority shareholder excludes minority shareholders from the offeree company within five months of the acquisition of the controlling interest in accordance with the Act on Exclusion of Minority Shareholders.116

116 Exclusionary procedure. The Law on Exclusion of Shareholders (Gesellschafterausschlussgesetz; Austrian

Federal Law Gazette Part I No. 2006/75) regulates the squeeze-out of minority shareholders (following or outside a takeover bid situation).

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Controlling agreements. The same principle applies to acquisitions by a person who entered into a controlling agreement or a profit transfer agreement with the company, provided that such person effects a buyout of the minority shareholders (Germany, Czech Republic).

(2) Protection of the offeror or the controlling shareholder This category of exemptions is the most common one. Situations where there is no real change of control need to be distinguished from situations where there is a real change of control.

(a) Situations where there is no real change of control Rationale. Where no real change of control has occurred, an exemption from the mandatory bid rule may be justified due to the fact that the acquired voting rights do not confer control. Therefore, a large number of Member States provide for exemptions where formal control is acquired, but in fact, the relevant entity does not have control. The principle may be stated in general terms (e.g. Czech Republic, Portugal, Austria). Elsewhere, the following cases can be distinguished: Temporary change of control. Certain Member States provide for a threshold and a time period, others only for a time period in which a correction has to be undertaken. Examples include: � Threshold and time period: Italy (3% excess, 12 months and no voting right)117, Belgium (2%

excess, 12 months)118, Cyprus (3%, 12 months119 and excess by mistake120), Greece (3%, six months), France (3%, six months and no voting rights);

� Only time period: Estonia (10 working days for correction),121 the Netherlands (30 days),

Portugal (four months), Germany (no specific threshold, correction without undue delay),122 Czech Republic.123

The situation may thus be presented as follows: One share 2% 3% Rapidly Germany

117 Temporary change of control. The thresholds are exceeded by not more than 3% and the purchaser

undertakes to transfer to non-related parties the securities in excess within 12 months and not to exercise the relevant voting rights in a percentage higher than the exceeded threshold.

118 Temporary change of control. If the 30% threshold is exceeded by no more than 2% and the acquirer (i) disposes of the securities held in excess of the 30% threshold within 12 months and (ii) does not vote with such securities at the general meeting, the acquirer does not have to launch a bid.

119 Temporary change of control. The percentage acquired does not exceed 3% of the voting rights in a company and the acquirer undertakes in writing to transfer the percentage in excess within a year.

120 Mistake. The acquisition was made by mistake and the acquirer undertakes in writing to transfer the securities to independent buyers within a short period set by the Commission.

121 No prior intention. A dominant influence was gained without any such prior intent, and the acquirer of dominant influence surrenders it to a third party who is not acting in concert with the acquirer within 10 working days of gaining dominant influence, upon condition that no general meeting of the shareholders of the offeree company be held during such term.

122 Temporary exceeding. Correction without undue delay, Section 37 (1) Securities Acquisition and Takeover Act, § 9 (1) No. 6 Takeover Offer Regulation; if the correction does not take place, the exemption may be revoked.

123 Temporary. Where the change of control is only temporary, an approval of the Czech supervisory authority is required.

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10 to 30 days Estonia, Netherlands

More Portugal Belgium Italy, Cyprus, Greece, France

Mistake and/or absence of intent. The change of control was the result of a mistake and/or there was no intention to take control. Cases where the acquisition of control is the result of a mistake (or where there was no intention to take control) may be considered akin to situations where the change of control is only temporary, because a “mistake” will be accepted as a basis for an exemption only if it is corrected without delay. Member States using this exception include Ireland, Czech Republic,124 Estonia, Romania125and the UK. Larger Shareholder. The offeror will not be able to control the company after the bid because there is a larger shareholder. This exemption is applied, for example, in Finland, the UK, France (other shareholder holding a majority), Germany126, Greece, Ireland127, Portugal, Spain (with a potential decrease taken into account),128 Italy (larger shareholder holding 50% or more of voting rights), Belgium (larger shareholder).129 Intra-group transaction. The transaction takes place within the same group of companies (no change of ultimate controller). Such exemption is applied, for example, in Germany, Italy, Belgium, Cyprus, Denmark, Estonia, France, Finland, the Netherlands, the Czech Republic, Romania and Poland. As regards Major Non-EU Jurisdictions, India has an extremely broad intra-group exemption which favours the concentration of shareholdings in Indian companies (please refer to Chapter III Section II C. 3.) of this Study).

124 No voluntary act. The change of control did not result from a voluntary act and the acquiring person could

not reasonably expect to acquire the voting rights in the company. 125 No intention to take control. The 33% threshold is deemed to be involuntarily reached if its crossing results

from the exercise of the right of first refusal, subscription, or the conversion of the initial rights, as well as from the exchange of the preferred shares against ordinary shares.

126 No actual control. A third party has a higher portion of voting rights provided these voting rights do not have to be added to the offeror’s voting rights; on the basis of the capital entitled to vote and represented at the three most recent ordinary shareholders’ meetings, it is not expected that the offeror will have more than 50% of the represented voting rights, § 9 (2) No. 1 and 2 Takeover Offer Regulation.

127 50% control by another shareholder. Where voting securities of 50% of more are held by one person or where the holders of 50% or more of the voting securities state in writing that they will not accept the mandatory bid.

128 Larger shareholder (with potential decrease addressed), existence of a similar participation. The Spanish supervisory authority (CNMV) shall grant an exemption from the obligation to launch a takeover bid in cases where there is another shareholder or group of shareholders acting in concert with an equal or higher voting percentage. A request for the application of this exception must be submitted to the CNMV by the acquiring party. Nevertheless, if the percentage held by such third party decreases below the percentage held by the acquirer, the latter will have to launch a takeover bid at the equitable price or a price calculated in accordance with de-listing price criteria (whichever is higher), unless, within the following three months, such acquirer reduces its interest to a level under the control threshold or cancels the agreement under which such percentage had been reached.

129 Larger shareholder exemption with no change during three years. If a person, alone or in concert, exceeds the 30% threshold while another person controls the offeree company or still holds, alone or in concert, more securities carrying voting rights than the acquirer, the acquirer does not have to launch a bid (cf. Appendix B, a)) (Article 52 § 1, 3° Decree). This exemption is subject to the condition that such person does not, alone or in concert, following additional acquisitions, come to hold the largest shareholding within a three-year period and does not, as a result of such additional acquisitions, acquire exclusive or joint control of the company within the same period. If such cases materialise, the acquirer must launch a bid immediately subject to the conditions (price, etc.) which prevail at that moment (Article 52 § 4 Decree).

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Same “acting in concert” group. The transaction takes place within the same “acting in concert” group (Belgium,130 Czech Republic131). Small acquisition. The acquisition is small in Cyprus, concerning less than 1% of the voting rights. Financial derivatives. In Italy, if the thresholds are crossed as a consequence of a purchase of financial derivative instruments, the purchaser may be exempted if it undertakes (i) to transfer the derivatives or the securities in excess to non-related parties within six months, and (ii) not to exercise, during the same period, the voting rights in excess of the crossed threshold.

(b) Situations in which there is a real change of control Rationale. This category of exemptions covers cases where a real change of control has occurred, but where such change either did not result from voluntary acts or, in specific situations, where it is customary to consider that there is no change of control. While most of these exemptions appear to be justified, some are debatable in view of the goal of the mandatory bid rule. No voluntary act. Some Member States, for example Italy and Belgium132, grant general exemptions if the change of control was not caused by voluntary actions. In other Member States, such exemptions are specified in more detail, providing either that (i) the acquisition of control is the consequence of the disposal of shares by another investor (for example in Finland), or (ii) a change in the total number of shares or voting rights occurred which was not caused by the offeror, for example in: � Cyprus (share buyback);

� Estonia (capital reduction);

� Finland, Ireland, the UK (enfranchisement of non-voting shares);

� France (reduction in the total number of equity securities or voting rights of the offeree

company);

� Germany (reduction in the total number of voting rights); and

� Romania (decrease in the share capital through a share buyback followed by their annulment). Voluntary bid. The Directive states (Article 5 (2) of the Directive) that the mandatory bid rule is not applicable where control has been acquired following a voluntary bid made in accordance with the

130 Same “acting in concert” group. If two or more persons together hold more than 30% of the securities

carrying voting rights, and a third (or, for that matter, fourth or fifth) party adheres to the concerted action by acquiring securities from one or more parties in the initial concert, a bid must be launched unless parties to the initial concert have continuously, i.e. without any interruption, retained more than 30% of the securities carrying voting rights. To this extent, this exception leaves room for a change in parties, i.e. the complete or partial withdrawal of a previous party in favour of a new one. The exception does not apply, however, if as a result of such a change of parties, one party holds more than 30% of the securities carrying voting rights. In that case, such party is obliged to launch a mandatory bid.

131 If a concert is created with a party who already controlled the company, the mandatory bid rule does not apply.

132 No mandatory bid in the event of passive crossing. If a person comes to hold more than 30% of the securities carrying voting rights as a result of an event other than an acquisition (e.g. a share buyback with nullification of shares), such person should, in principle, not be obliged to launch a mandatory bid as the threshold was exceeded without such person making any acquisition. The question then is what happens if such person acquires additional shares thereafter. From a reading of the Belgian legal framework, the conclusion may be that, in such a case, that person is not under any obligation to launch a bid; in fact, only if the threshold of 30% is exceeded as a result of an acquisition does such a person have to launch a bid.

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Directive to all holders of securities. The conditions under which Member States apply this exemption vary. In certain Member States, any voluntary bid for all the shares of the offeree company may qualify (e.g. Belgium, Finland, Ireland, Netherlands, Portugal, Czech Republic, Slovakia). In other Member States, only a voluntary bid complying with certain requirements may qualify for the exemption, for instance: � in Italy, the provisions regarding mandatory takeover bids do not apply if the shareholding is

acquired as a result of a cash or exchange takeover bid on at least 60% of the securities in each category and certain conditions are met133, including a whitewash procedure;

� in Germany,134 Greece135 and Romania, the voluntary bid must be launched in accordance with the equitable price rules;

� in Spain, an equitable price has to be offered or a holding in excess of 50% to be obtained after a voluntary bid.136

It is noteworthy that the differences between these requirements are partly caused by diverging conditions and requirements for voluntary bids among Member States. Finally, the issue created by the combination of the voluntary bid exception and the absence of “creep-up” thresholds between 30% and 50% creates a risk of circumvention: an offeror may launch an offer at a low price, obtain between 30% an 50% of the offeree shares and then buy additional shares up to 51% (or more). The offeror is thus able to acquire the control of the offeree without

133 The conditions are as follows:

(i) the offeror and persons acting in concert with the offeror have not acquired shareholdings exceeding 1% (including shares acquired under forward contracts maturing at a later date) either in the 12 months preceding the notice to Consob disclosing the takeover bid or during the bid period;

(ii) the bid has been approved by a number of shareholders who jointly own the majority of the relevant securities excluding securities held by the offeror, by the majority (or relative majority) shareholder if that shareholding exceeds 10%, and by persons acting in concert.

134 Voluntary takeover bid. In Germany, voluntary bids are subject to the requirement of an equitable price applicable to mandatory bids (please refer to Chapter III Section I. D. of this Study).

135 Voluntary bid. The obligation to launch a mandatory takeover bid does not apply if the level of the shareholding triggering a mandatory takeover bid was reached by means of a voluntary takeover bid addressed to all shareholders of the offeree, provided that the compensation offered was determined in accordance with the equitable price rules applying to mandatory takeover bids. In the recent past, it has been intensively debated whether in case of a voluntary takeover bid the offeror is allowed to (i) bid in securities by way of consideration, and whether at the option of the offeree’s shareholders it is mandatory also to offer a cash consideration and (ii) to set a minimum acceptance threshold as a condition of the voluntary takeover bid. Both interpretation issues have so far been addressed through an informal letter of the HCMC which clarified that, in the context of a voluntary takeover bid as described above, the offeror can offer listed securities by way of consideration and is allowed to set a minimum acceptance condition. In the same letter, the HCMC also set the equitable price rules with which voluntary takeover bids as described above need to comply. Furthermore, by virtue of Article 41 of the amending Law 3943/2011 published on 31 March 2011, Article 8b of the Law has been amended so that it is now clear that the respective voluntary takeover bid does not need to be combined with an alternative cash consideration. The other open issues relating to the features of such voluntary takeover bids, including the minimum equitable pricing of a share-for-share offer, have not yet been clarified at the legislative level and are so far addressed only in the informal context of the above-mentioned HCMC letter.

136 Voluntary bid. Where control is attained after a voluntary bid which was made for all the shares of the offeree company and the bid was either (i) filed at an equitable price or (ii) accepted by shareholders representing at least 50% of the voting rights targeted by the bid, excluding voting rights already owned by the offeror for which the offeror had reached an agreement with shareholders.

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triggering a mandatory bid and at a low price. The Hochtief case has illustrated this risk in Germany (see B 1.1 of this Section). This risk may be avoided if applicable regulations provide for a compulsory minimum acceptance condition providing that, if the offeror does not hold more than 50% of the shares after the offer, the offer is deemed unsuccessful.

Indirect control. Some Member States grant an exemption if the acquisition occurs indirectly. In such cases, the offeror acquires a holding company that in turn controls the offeree company. An exemption may be granted in these Member States if the primary aim of the offeror’s acquisition was the acquisition of a stake not in the offeree company, but only in the holding company. Such Member States apply a substance test in addition: In some Member States, there is no specific definition of the relevant threshold for the substance test (e.g. France: “no essential asset”).137 In other Member States, the law defines a substantial asset (e.g. Belgium (less than 50% of the net assets of the indirect holding company or less than 50% of the holding company’s net results);138 Austria (less than 25% of the book value of the net assets)139 and Germany (less than 20% of the book value of the net assets).140 Personal events. A widely used exemption is based on circumstances where the acquisition results from a personal event that is beyond the control of the offeror. Such events generally include inheritance and donations. To this list, marriage and divorce are sometimes added, providing extensive protection to the family. These exemptions are applied as follows: France (free transmission), Germany (inheritance and division of inheritance, donation between certain degrees of relatives, divorce), Italy (inheritance, donation), Belgium (inheritance, marriage, divorce, donation), Cyprus (donation, inheritance), Denmark (inheritance, donation), Estonia (inheritance, donation, divorce)141, Greece (inheritance), Ireland (donation), the Netherlands (inheritance, marriage), Poland (inheritance), Spain (gift if no prior acquisition, inheritance)142, Czech Republic (inheritance), Slovakia (legal successor), Romania (inheritance). In Austria, the transaction may also be exempted if

137 Indirect acquisition. Acquisition of control of a company which directly or indirectly holds more than 30%

of the capital or voting rights in another company the equity securities of which are admitted to trading on a regulated market in a Member State of the European Union or a State party to the EEA agreement, including France, where such subsidiary does not constitute an essential asset of the company over which control has been acquired.

138 The interest in the listed company needs to represent a substantial proportion of the holding (50% test). A company, a legal person or a “similar construction” is only considered to be a Holding Company when it holds more than 30% of the securities carrying voting rights of a listed company and either: (i) the value of such participation exceeds 50% of the net assets of that company in its last statutory

accounts; the value of the shareholding must be included in both the numerator and the denominator at the average stock market price 30 calendar days before the acquisition of control or of 50% of the Holding Company mentioned above or

(ii) the average revenues from such a shareholding over the last three accounting years exceed 50% of that company’s net results.

139 Substance test. The direct interest in the offeree company amounts to less than 25% of the book value of the net assets of the legal entity holding the direct interest.

140 Substance test. The book value of the holding company’s interest in the offeree company amounts to less than 20% of the company’s balance assets (§ 9 (2) No. 3 Takeover Offer Regulation).

141 Inheritance, 10 working days. A dominant influence was gained as a result of inheritance, gift or division of marital property, and the acquirer of dominant influence surrenders it to a third party who is not acting in concert with the former within 10 working days of gaining dominant influence, upon condition that no general meeting of the shareholders of the offeree company is held during this term.

142 Gifts and inheritance. Free causa mortis acquisitions as well as free inter vivos acquisitions leading to control are exempted, provided that, in the latter case, the acquirer has not acquired shares or other securities that give right to acquisition or subscription of shares in the 12 months prior thereto, and that the acquirer does not enter into any agreement or pact with the party performing the transfer.

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it takes place within the same family group143. In particular, donations and transactions taking place within the same family could be considered as problematic exemptions in the light of the mandatory bid rule. Mere concert. In three countries (Belgium144, Slovakia and Finland), an exemption may be granted if a new party has joined the concert but no shares are acquired. In some other countries, in such a case, the mandatory bid rule does not apply in the absence of any share acquisition (the UK, Ireland).

(3) Protection of creditors Description. Certain exemptions aim to secure the interests of creditors who have granted loans and financing to a third party or in case of underwriting agreements. For instance, this is the case in: � Cyprus (guarantee);

� Denmark (debt enforcement);

� Ireland (enforcement of security);145

� Poland (security by certain entities or pledge);146

� Germany (purpose of securing a claim);147 and

� UK (enforcement of security for a loan). Rationale and risks. If on the one hand such exemptions appear justifiable if the acquisition of control was the result of the execution of a security (pledge over the shares of the offeree company), on the other hand they may also favour circumvention mechanics and must thus be carefully controlled. Therefore, some Member States require that the shares be disposed of after a certain time period, as for example in: � Belgium (underwriting agreement or financial security to be disposed of within a one-year

(extendable) period);148 and

143 Transfer within family control. Shares are transferred to another legal entity in which only the relatives of

the existing shareholders hold shares directly or indirectly in addition to the existing shareholders; the same applies to transfers to a private foundation over the management of which the relatives can exercise a controlling interest.

144 Newly-formed concert. No mandatory bid if the threshold is crossed due solely to concerted action, except in case of an additional acquisition within three years. Where two or more persons initiate a concerted action and, as a result, together hold more than 30% of the securities carrying voting rights of a listed company, they do not have to launch a bid since there is no simultaneous acquisition. However, a bid will have to be launched in case of an additional acquisition by one of the parties acting in concert within a three-year period. The obligation to launch a bid in such a case lies jointly and severally with all partners in the concerted action unless, as a consequence of such additional acquisition, one of the parties holds more than 30% individually. In that case, such person alone should launch a bid (Article 52 §§ 4 and 8 Decree).

145 Loan. The enforcement of security by the lender of a loan. 146 Financial security. In compliance with an agreement establishing financial security between authorised

entities pursuant to the Act on Certain Financial Collaterals dated 2 April 2004 or a pledge established in favour of a pledgee who is empowered to satisfy his/her claims through acquisition of the pledged asset ownership.

147 The BaFin may grant an exemption in case of acquisition of control for the purposes of securing claims, § 9 (1) No. 4 Takeover Offer Regulation.

Protection of creditors. If a financial intermediary acquires more than 30% in the framework of an underwriting agreement or upon exercising a financial security (i) while disposing of the supernumerary securities within 12 months and (ii) not participating in the vote with such securities at the general meeting, he does not have to launch a bid. The Belgian supervisory authority may extend the one-year period.

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� Estonia (disposal within 10 working days which significantly limits the practical scope of this

exemption).149

(4) Protection of other stakeholders Main categories. The last category of exemptions aims to maintain the correct balance between shareholders’ and other stakeholders’ rights in view of the long-term interests of companies. Relevant situations relate to the acquisition of control: � by an investor in a financially distressed situation;

� following specific types of corporate transactions;

� by certain entities; and

� when the protection of the State interests is invoked.

(a) The offeree company is in a financially distressed situation Description. A significant number of Member States grant exemptions if the offeree company is in a financially distressed situation and the purpose of the control is to restructure the offeree company. This is the case for France,150 Germany (with control of the investor),151 Italy (with a whitewash procedure in certain cases),152 Belgium,153 Denmark, Finland, Greece,154 Ireland,155 the Netherlands, Poland, Portugal, Spain,156 the Czech Republic157 and the UK.

However, in principle, if after one year the acquirer is still beyond the 30% threshold, he must launch a bid at the conditions (price, etc.) which would have prevailed at the time the threshold was initially exceeded (Article 52 § 3 Decree). Moreover, the legal interest (6% in 2007) should be added to the price.

149 Pledges and collateral. A dominant influence was gained as a result of pledging or establishing a financial collateral, and the acquirer of dominant influence surrenders it to a third party who is not acting in concert with the former within 10 working days of gaining dominant influence, upon condition that no general meeting of the shareholders of the offeree company is held during this term.

150 Financially distressed situation. Subscription to a capital increase by a company in recognised financial difficulty, subject to the approval of a general meeting of its shareholders.

Restructuring measures. In the event that the offeree company is to be restructured, the BaFin may grant an exemption (§ 9 (1) No. 3 Takeover Offer Regulation) if the investor presents a serious strategy for the restructuring and accepts commitments. The exemption may be revoked if the undertakings are not fulfilled.

152 Financial distress and crisis. The purchase takes place: (i) in the framework of a plan for the recapitalisation of a listed company or other financial improvement

plan, where the company is in a financially distressed situation which is evidenced by defined procedures (…);

(ii) in the absence of other purchases made or agreed within the preceding 12 months, exclusively through the subscription of a capital increase of the listed company, with the exclusion of the option right – suitable to allow, also through a debt restructuring, the restoration of the indebtedness position of the company and to assure the restoration of its financial position – put in place to implement a restructuring plan (…); and

(iii) within a situation of crisis not contemplated under items 1) and 2) above, provided that: - where the transaction falls under the competence of a shareholders’ meeting, the relevant resolution

is approved, without the contrary vote of the majority of the attending shareholders other than the offeror and the shareholder or shareholders holding, even jointly, the majority shareholding or relative majority shareholding if higher than 10%;

- where the transaction is not the object of a resolution of the shareholders’ meeting, it is approved with the favourable vote of the majority of the shareholders, other than persons under 3)(i) above, which expressed its vote by means of a declaration included in a voting form prepared and made available by the company.

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Rationale. It is obvious that the mandatory bid rule should not hinder the assistance of financially distressed companies. However, it is important, in order to avoid circumvention of the rule, to provide either for clearly defined cases where this rule may be applied, or for a systematic control by supervisory authorities of its use, or for a combination of both.

(b) Control was acquired pursuant to specific types of corporate transactions Rationale. Exemptions may be granted or exist if control was acquired pursuant to specific types of corporate transactions. The rationale for such exemptions is twofold. First, they typically involve business transactions that are deemed useful to the company. The goal is thus to facilitate such transactions, as they ultimately benefit all shareholders and stakeholders. Second, they all involve votes in general meetings pursuant to procedures providing some information and protection to shareholders. In addition, in certain cases, such as capital increases with preferential subscription rights (“PSRs”), all shareholders have the opportunity to subscribe – those who have not done so have a weaker stance to ask for an exit through a mandatory bid. However, it must be noted that this is an area where there may be some conflicts between the short-term interests of the company and its minority shareholders. Description. The main exemptions are the following: � Capital increases (with or without PSRs): in the UK (with a whitewash procedure), Belgium

(capital increase with PSR), Cyprus (no PSR, with a whitewash procedure and independent advice),158 Denmark, Estonia (with PSR),159 Finland (with PSR), Greece (with PSR), and Ireland (whitewash).

153 Financial distress. Financial difficulties causing the net assets of the listed company to fall below half of

the capital. 154 Restructuring. The acquisition of securities results from restructuring procedures under Greek pre-

insolvency law. 155 Financial distress. Where the company is in such a serious financial position that the only way to solve its

problems is by means of an issue of new securities. 156 Acquisitions made by certain institutions in connection with financial distress. Acquisitions or other

transactions that may be carried out by the deposit guarantee funds in banks, savings banks or credit unions, the investment guarantee fund, the insurance compensation fund or other similar legally-established institutions in the fulfilment of their functions, as well as acquisitions consisting of the share allotments that such organisations agree to carry out in fulfilment of their functions, and which are subject to the rules on the publication and competition of bids as established in the specific regulations relating thereto. Whatever the voting percentage that results from the aforementioned allotments, such exemption shall be extended to the control obtained indirectly if, in the opinion of the relevant supervising authorities, which shall communicate their opinion to the Spanish supervisory authority, such exemption is advisable in order to guarantee the successful completion and financial viability of the corrective transaction in question, depending on the cost of obtaining such indirect control. The exemption shall not apply to any subsequent transfers or transactions carried out by the successful offerors from the organisations referred to in the first paragraph of this Section.

Capitalisation of credits in connection with financial distress. Acquisitions or other transactions proceeding from the conversion or capitalisation of credits in shares of listed companies whose financial viability is in grave and imminent danger, even if they have not been declared bankrupt, provided that the purpose of the planned transactions is to guarantee the company’s financial recovery in the long term. It shall be incumbent on the Spanish supervisory authority to state whether a public takeover bid is required within a maximum period of 15 days as from the filing of the relevant application by any interested party.

157 The exemption also applies to capital increases the aim of which is to meet capital adequacy requirements. 158 Capital increase with whitewash. The acquisition was the result of the issue of new shares and: (i) the shareholders have waived their pre-emption rights; (ii) the issue and allotment have been approved by a majority of shareholders that are independent from

the parties to the transaction; and

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� Mergers and divisions or split-offs: France, Italy (with a whitewash procedure),160 Belgium

(with a whitewash procedure)161, Cyprus, Estonia (control acquired in view of merger, lost post-merger),162 Greece (merger of affiliated companies), Spain (business objective and whitewash),163 Romania, Portugal, and Finland.164

� Reorganisations, such as in Estonia (10 working days).165

� Contributions in kind (France, Poland (leading to circumvention),166 Finland).167 � Distributions (France168).

Schemes of arrangement (the UK and Ireland). A scheme of arrangement is a compromise or arrangement between a company and its members and is therefore generally only used in recommended bids where there is no reasonable likelihood of a competing bid. Court-sanctioned schemes of arrangement bind all the shareholders within a class and have stamp duty and tax advantages over a public bid. Schemes require approval by a majority in number representing at least 75% in value of the shareholders voting at the relevant meeting.

(iii) prior to the shareholders’ meeting, all the shareholders have been notified about the details of the

proposal by means of a memorandum containing independent advice regarding the contemplated transaction and an explanation of the new structure of the company and the issue price.

159 Capital increase. A shareholder gained dominant influence by exercising a pre-emptive rights subscription attached to his/her own shares (as opposed to the pre-emptive subscription rights attached to shares acquired from other persons).

160 Mergers and divisions. The purchase takes place as a consequence of a merger or demerger approved at the shareholders’ meeting of the company whose securities would otherwise be subject to a takeover bid. In addition, such merger or demerger must have been approved by a majority of attending shareholders, other than the interested parties and shareholders, who alone or in concert hold a majority shareholding or shareholders’ relative majority shareholding, if higher than 10%.

161 Mergers. In connection with a legal merger, if and to the extent the person acquiring, alone or in concert, more than 30% of the surviving entity did not exercise more than half of the voting rights during the meeting of the merged company, if said company is listed.

162 Mergers and divisions. A dominant influence was gained for the purpose of carrying out a merger or division prior to the approval of the merger or division agreement, provided that the dominant influence of the person or persons acting in concert ended as a result of the merger or division of the offeree company.

163 Mergers. In case of a merger, the shareholders of the affected companies and entities are exempted from the obligation to file a takeover bid when, as a consequence of the merger, such shareholders directly or indirectly acquire the percentage of voting rights in the resulting listed company mentioned in Article 4 of the Directive, provided that they did not vote in favour of the merger in the shareholders’ meeting of the offeree company and that the transaction’s main purpose was not to take control but rather to obtain an industrial or business result.

164 Mergers. Where a person’s ownership in the offeree company rose above 30% as a consequence of a share deal on a merger and there were strategic and commercial grounds for such transaction, the purpose of which was not to exercise control in the offeree company, an exemption is granted from the mandatory bid obligation provided that the ownership of the shareholder decreases under 30% within one year.

165 Reorganisations. A dominant influence was gained as a result of the transformation, reorganisation or restructuring of the offeree company, and the acquirer of dominant influence surrenders it to a third party other than a concert party within 10 working days of gaining dominant influence, provided that no meeting of the offeree company is held during this period.

166 Please refer to Chapter III Section II B. 4) of this Study. 167 Following a company’s disposal of its subsidiary to the offeree company in exchange for offeree company

shares, the company’s ownership in the offeree company exceeded 30%. The purpose of the arrangement was to combine the companies’ business operations for commercial reasons. The shareholders’ meeting had approved the arrangement and an offer document had been made available. The intention of the company subject to the mandatory bid obligation was to distribute the shares to its shareholders at a later stage. An exemption is granted for a period of nine months, after which the company’s ownership must decrease below 30%.

168 Distribution of assets. Distribution of assets by a legal person in proportion to the rights of its members.

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Schemes of arrangement in Major Non-EU Jurisdictions. In Major Non-EU Jurisdictions that have been exposed to the UK legal system, schemes of arrangement represent an effective alternative to recommended voluntary and mandatory takeover bids in order to obtain control of a listed public company (please refer to Chapter III Section II C. 5.) of this Study).

(c) The rule is not applicable to certain entities that have acquired control Rationale. In some cases, exemptions to the mandatory bid rule have been structured as part of a broader system of defensive measures. This logic must be assessed in the light of the overall debate regarding the pros and cons of the principle of free contestability of control. Description. In Belgium, exemptions apply to foundations acquiring shares for free169 or the acquisition of certificates. In this respect, Belgian law provides that if a person acquiring more than 30% of the securities carrying voting rights of a company is (i) a legal person (e.g. stichting-administratiekantoor), who is (ii) issuing in exchange, with the cooperation of the listed company, certificates which entitle the former owner of the securities to all future revenues arising therefrom, such legal person does not have to launch a bid to the extent that such certificates, within three years of their issuance, can at all times and under all circumstances be re-exchanged against the initial securities (Article 52 § 1, 12° Decree). If such free exchange is no longer possible within the three-year period, the legal person must launch a bid immediately at the conditions (price, etc.) prevailing at that time (Article 52 § 4 Decree). In the Netherlands, the mandatory bid requirement does not apply to (i) an independent foundation that acquires control after the announcement of a hostile bid as a protective measure for a maximum period of two years, or (ii) an independent trust office (administratiekantoor) that has issued depositary receipts. Although no voting rights are attached to depositary receipts, the holders of such receipts may ask the independent trust office (stichting administratiekantoor) to give a proxy to vote. The independent trust office may refuse to grant a proxy if a public bid has been announced or is made in respect of a share in the capital of the company. In the event that an independent trust office gives a proxy to vote and (consequently) a holder of depositary receipts is able to use at least 30% of the voting rights, it becomes obligatory to launch a mandatory bid. The independent trust office itself is exempted from the obligation to launch a public bid.

(d) Protection of State interest and public order State interest. An example of such an exemption exists in Greece, where a person investing in the privatisation of a State-owned company may be exempted. This exemption enables the Greek State to benefit from the full control premium without sharing it with minority shareholders. On the basis of this exemption, any person who, in the context of an officially approved and declared privatisation process, directly or indirectly acquires more than 1/3 of the voting rights of a privatised, listed state-controlled entity is not obliged to launch a mandatory takeover bid. In the past, this exemption has been used in connection with the privatisation of the Hellenic Telecommunications Organization, a controlling stake of which was acquired by Deutsche Telekom AG (in July 2008, July 2009 and June 2011). Another example can be found in Romania, where an exemption may be granted in connection with the acquisition of securities from the Ministry of Public Finances (or another competent State entity) during the process of enforcing the receivables held by the State budget. The Ministry of Public Finances (or another competent State authority) may initiate an enforcement procedure against a company for non-compliance with tax payment obligations. If the enforced assets consist in shares of

169 If the person acquiring more than 30% is a public utility foundation (stichting van openbaar nut / fondation

d’utilité publique) subject to the Law of 27 June 1921 and is acquiring such securities for free (Article 52 § 1, 10° Decree).

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listed companies, they may be sold for the recovery of the State’s receivables. The entity purchasing the securities does not have to comply with the mandatory bid rule in the event that the relevant threshold is exceeded. Public order. When a transaction is completed in order to meet specific statutory obligations, the acquirer may be exempted from the requirement to launch a mandatory bid (Czech Republic). Indian exemption. Indian regulation provides for an exemption to the obligation to launch a mandatory takeover bid where shares are acquired by government companies. Any such acquisition exceeding 5% of the voting share capital of a company must be notified within four days prior to its closing to the stock exchanges where the shares of the relevant company are listed. In addition, a report must be filed with the Securities and Exchange Board of India within 21 days.

3.3. Summary table The following table summarises the main applicable cases and provides examples of their use. I. Discretionary exemptions170 1 A. Exemptions decided by the supervisory authority.

(The change of control was linked to exceptional circumstances or it would be inappropriate or unduly burdensome to apply the mandatory bid rule under the circumstances.)

UK, Finland, Ireland, Germany, France, Belgium,171 Denmark, Italy, Sweden.

2 B. Exemptions decided by shareholders (whitewash procedure). (The general meeting of shareholders of the offeree company granted an exemption.)

Ireland, Netherlands, Spain, UK.

II. Defined exemptions A. Technical exemptions 3 1. Certain offeree companies are exempt (e.g. open-

ended collective investment scheme). Hungary, Netherlands, Romania, Italy.

4 2. Exclusion procedures Austria. 5 3. Controlling agreements Germany, Czech Republic. B. Protection of the offeror or the controlling shareholder 6 1. There is no real change of control Czech Republic, Portugal, Austria,

Finland.172 7 a) The change of control is only temporary Austria, Italy, Belgium, Cyprus,

Denmark, Estonia, Netherlands, Portugal, Germany, France, Finland,173 Spain.

170 In Finland, almost all of the exemptions are discretionary and require the explicit approval of the Finnish

FSA. The only automatic exemptions not requiring the Finnish FSA’s approval are threshold crossing by means of a voluntary bid for all shares and other securities in the offeree company; existence of a larger shareholder; and threshold crossing resulting from actions not taken by the shareholder, who did not take any active measures to increase its holding.

171 In exceptional circumstances, however, the SMA may grant well-reasoned (conditional) exemptions to any provision of the Law or the Decree, including the mandatory bid rule (Article 35 Law) (please refer to Article 4.5 ii) of the Directive). The SMA must justify its decision with express reference to the guidelines laid down in Article 9 of the Law (please refer to the general principles laid down in Article 3.1 of the Directive).

172 Requires Finnish FSA approval. 173 Requires Finnish FSA approval.

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8 b) The change of control was the result of a mistake and/or there was no intention to take control

Austria, Ireland, Cyprus, Czech Republic, Estonia, UK, Romania,174 Finland,175 Germany, France.

9 c) Existence of a larger shareholder Austria, Finland, France, Germany, Greece, Ireland, Portugal, Spain, Italy, Belgium, UK.

10 d) Intra-group transaction (no change of ultimate controller)

Austria, Germany, Italy, Belgium, Cyprus, Denmark, Estonia, France, Finland, Netherlands, Poland, Czech Republic, Romania, Luxembourg, Slovakia.

11 e) The transaction takes place within the same “acting in concert” group

Belgium, Czech Republic, Luxembourg, Romania.176

12 f) The acquisition is small Austria, Cyprus. 13 g) Financial derivatives Italy. 2. There is a real change of control 14 a) The change of control did not result from a

voluntary act Austria, Italy, Belgium, Czech Republic, Finland, Germany.

15 (i) Disposal of shares by another investor Finland. 16 (ii) Changes in the total number of shares or

voting rights not caused by the offeror Cyprus, Estonia, Finland, Ireland, France, Germany, UK, Romania, Denmark.177

17 b) The change of control is the result of a voluntary takeover bid

Austria, Slovakia, Finland.178

18 (i) Any voluntary bid for all the shares of the offeree company may qualify

Italy, Belgium, Finland,179 Ireland, Netherlands, Portugal, Czech Republic.

19 (ii) The voluntary bid must comply with certain requirements (for instance regarding its price)

Italy, Greece, Spain, Germany, Romania.

20 c) The acquisition is indirect and a “substance test” is applied

France, Belgium, Romania (no “substance test” is applied), Austria.

d) The change of control results from a personal event

21 (i) Inheritance, donation, marriage, divorce Austria, France, Germany, Italy, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Greece, Ireland, Netherlands, Poland, Spain, Romania, Finland.

22 (ii) The transaction takes place within the same family group

Austria, Finland180 (change of generation), France.

174 If the controlling shareholder does not intend to initiate the takeover bid, it must dispose of the shares in

excess of the threshold within three months. 175 Requires Finnish FSA approval. 176 There is no express provision in this respect. However, this should likewise apply in Romania, since the

crossing of the 33% threshold is assessed by taking into account the shareholdings of all concert parties. 177 An acquisition of offeree company shares is required. A capital decrease would, for instance, not trigger a

mandatory takeover bid. 178 The voluntary bid must be made for all shares and other securities entitling to shares in the offeree

company. 179 The voluntary bid must be made for all shares and other securities entitling to shares in the offeree

company. 180 Require FFSA approval.

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23 e) A concert is formed but no shares are acquired Belgium, UK, Ireland, Denmark,181 Romania.182

C. Protection of creditors. (The acquisition is made upon exercising a financial security (such as a pledge).)

24 1. Without any other conditions Cyprus, Denmark, Ireland, Poland, UK.

25 2. The acquirer needs to sell the acquired shares within a certain time period

Belgium, Germany, Estonia.

D. Protection of other stakeholders 26 1. The offeree company is in a financially distressed

situation183 Austria, France, Germany, Italy, Belgium, Denmark, Finland,184 Greece, Ireland, the Netherlands, Poland, Portugal, Spain, Czech Republic, Slovakia, UK.

2. Control was acquired pursuant to specific types of corporate transactions

27 a) Capital increases or reductions (with or without preferential subscription rights)

UK, Belgium,185 Cyprus, Estonia, Finland,186 (only rights issue) Greece,187 Ireland, Romania,188 France.

28 b) Mergers Germany, France, Italy, Belgium, Cyprus, Estonia, Greece (only intragroup), Spain, Portugal, Romania,189 Finland, Slovakia.

29 c) Divisions Germany, Italy, Cyprus, Estonia,190 Romania,191 Finland.192

30 d) Reorganisations Germany, Austria, Estonia, Finland.193

31 e) Contributions in kind France, Poland, Finland.194

181 Shares must be acquired before a mandatory bid is triggered. 182 There are no express provisions in this respect; however, the only criteria for triggering the mandatory bid

requirement is the crossing of a shareholding threshold. Consequently, any concert that does not involve the acquisition of shares is irrelevant.

183 This category includes all kinds of financial distress. Accordingly, any capital increase, merger, reorganisation or contribution in kind (etc.) applied in connection with a financially distressed situation falls within this “financially distressed” category.

184 Requires Finnish FSA approval. 185 Only in the event of a capital increase with preferential subscription rights decided by the shareholders’

meeting. 186 Requires Finnish FSA approval. 187 Only with preferential pro rata subscription rights. 188 If the controlling shareholder is not willing to initiate a takeover bid, it must dispose of the shares

exceeding the threshold within three months. 189 If the controlling shareholder is not willing to initiate a takeover bid, it must dispose of the shares

exceeding the threshold within three months. 190 An exemption may be granted under Estonian law if the dominant influence was acquired for the purpose

of carrying out a merger or a division, provided that the dominant influence in question ended as a result of the merger or division.

191 If the controlling shareholder is not willing to initiate a takeover bid, it must dispose of the shares exceeding the threshold within three months.

192 If the threshold is crossed in connection with M&A transactions the de facto purpose of which is not to acquire control, the Finnish FSA may grant an exemption.



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32 f) Distributions of company assets to shareholders France. 33 g) Schemes of arrangement UK, Ireland. 34 3. The rule is not applicable to certain entities that have

acquired control (e.g. foundations or issuers of sponsored depositary certificates)

Belgium, Netherlands.

4. Protection of State interest and public order 35 a) Privatisation exemption or other State interest Greece, Poland, Romania. 36 b) Need to meet statutory obligations Czech Republic.

3.4. Exemption: practice of supervisory authorities Procedural issues. The conditions and procedures for obtaining an exemption may vary depending on the grounds of exemption on which the derogation is granted. In some cases, situations as described above do not trigger the obligation to launch a mandatory bid (for example, in Austria, the exemption applies de lege and the offeror merely has to inform the supervisory authority of the situation). In other countries (for example in Germany), the interested person must always request a formal exemption within a certain time frame. However, this distinction is largely formal. When a situation clearly falls within the scope of an exemption, the approval (if required) will be almost automatic. On the other hand, when a situation is unclear, interested persons in practice consult with supervisory authorities (even if this is not compulsory) in order to avoid any risk attached to potential non-compliance (i.e. being forced to launch a bid). A fact-intensive exercise. Determining whether an exemption should be granted is always a fact-intensive exercise and requires numerous elements to be taken into account. This is exemplified in the way the Finnish FSA addresses the issue. The Finnish FSA can, for a special reason, authorise exemptions from the provisions of Chapter 6 of the Finnish SMA. In its “Takeover Standard”195, the Finnish FSA has stated that the decision to grant an exemption is based on an overall assessment of all circumstances at hand; in this respect, particular attention is paid to the effect of an exemption on the position of minority shareholders and this prior awareness of the arrangement and the opportunity to influence its contents (e.g. in a general meeting of shareholders). Main exemptions. It is difficult to assess precisely the use of exemptions that have been granted, as the relevant information is not always public. Based on declarations by supervisors and stakeholders’ perceptions, it seems that exceptions are most commonly made for voluntary bids, specific transactions (such as capital increases or mergers), acting in concert without acquisition, absence of real change of control and financially distressed companies.

4. Loopholes and circumvention of the mandatory bid rule Methodological issues. It is always difficult to assess whether a rule has been circumvented. In connection with an alleged case of circumvention, two situations may arise. In the first situation, the circumvention may never lead to enforcement action or litigation, in which case evidence will typically be lacking. In the second situation, the alleged circumvention may be subject to enforcement or litigation, in which case it will either be punished (in which case it fails and there is no longer any circumvention) or not (in which case there has never been any circumvention). In order to assess whether the mandatory bid rule has been circumvented, it would thus seem necessary to assess known forms of conduct in the light of the primary objectives of the Directive. The difficulty with the Directive arises from its flexibility and the number of exemptions provided, which blur its actual

195 The FSA issues “Standards” that are partly binding and partly recommendatory procedural and application

guidelines on the provisions of the Finnish Securities Market Act. Standards applicable in a takeover context include the Standard 5.2c on Public Tender Offers and Mandatory Offers.

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goal. In this respect, the actual goal of the Directive as finally adopted should be distinguished from its original goal. The following analysis will therefore focus on potential loopholes arising from inherent risks contained in the national legislation and on issues that have not yet been resolved. Inherent risks. Circumvention of the mandatory bid rule may occur where exemptions can be granted and the boundaries of such exemptions lack precision, or where the exemptions are at risk of being misused. For example, this may be the case for exemptions granted on the basis of factual situations that are subject to change (e.g. presence at shareholders’ meetings) or on the basis of certain behaviour of the investor that is not monitored afterwards (e.g. exemptions for financing securities or restructuring of a distressed offeree company). However, generally speaking, the available information did not show specific cases of circumvention, which could be a result of the fact that the practice is not sufficiently developed in all Member States. Examples of unresolved issues. The following examples are representative of issues that may be considered persistent loopholes. The first example reflects the difficulty of analysing facts underlying an exemption. The second example illustrates the possibility to use the rules in order to avoid the application of a mandatory bid. The third example illustrates how financial instruments may be used to avoid the mandatory bid rule. In each example, however, one could argue that there is no “circumvention” as the Directive provides sufficient flexibility to allow for such conduct. � Pre-existing family control (France). In France, the question as to whether circumvention had

taken place was particularly discussed in relation to the LVMH/Hermes case. After LVMH had acquired a significant holding in Hermes, members of the founding family contributed their shares to a newly-formed holding company, which, as a result, held more than one-third of the voting rights of Hermes. The question was whether implicit family control existed before the contribution. The assessment was complex because, on the one hand, some elements pointed towards prior joint control through concerted action, while, on the other hand, the family members had so far firmly denied any acting in concert. On the basis of a factual analysis, the French supervisory authority granted the exemption. On 15 September 2011, the Paris Court of Appeal confirmed the decision of the AMF.

� In-kind contributions. In Poland, in-kind contributions may be used in connection with the dual

threshold mechanism (33% and 66%) to circumvent the mandatory bid obligation. The most common example is (i) an in-kind contribution to company B of shares held in company A, attaching voting rights between 33% and 66% in company A (e.g. 65.9%) and (ii) a subsequent sale of all such shares held by company B to an entity which intends to acquire the majority in company A. The result is that the entity intending to acquire the shares in company A has to launch the mandatory bid only in regard to the remaining portion of shares within the given threshold (in our example the threshold is 66%, thus the mandatory bid would only be for 0.1%). Therefore, the right of the minority shareholders to sell their shares in company A is, in practice, limited. This mechanism circumvents the current regulation and the rules which afford protection in regard to the price that should be paid for shares during the takeover bid. In the currently-contemplated amendment to the Act on the Public Offer, legislature states that a takeover bid for all remaining shares will be mandatory once the one-third voting rights threshold in a public company has been exceeded.

� Financial derivatives. Recent cases have shown that cash-settled derivatives may be used to

circumvent good market practices. As a result, some countries have included such derivatives in the computation of the threshold (the UK, Italy, Spain); however, most Member States have not done so.

5. Price determination Principles set forth in the Directive. The mandatory bid must be launched at an equitable price as defined in Article 5.4 of the Directive.

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The following principles apply to the equitable price: � Minimum price. This price must correspond to “the highest price paid for the same securities

by the offeror, or by persons acting in concert with him, over a period, to be determined by Member States, of not less than six months and not more than 12 before the bid referred to in paragraph 1 shall be regarded as the equitable price. If, after the bid has been made public and before the offer closes for acceptance, the offeror or any person acting in concert with him purchases securities at a price higher than the offer price, the offeror shall increase his/her offer so that it is not less than the highest price paid for the securities so acquired” (Article 5.4 of the Directive).

� Potential adjustments. According to Article 5.4 of the Directive, Member States may authorise their supervisory authorities to adjust the price referred to in the first paragraph of Article 5.4 in certain circumstances and in accordance with criteria that are clearly determined.

� Type of consideration. The offeror may offer consideration in cash, securities or a combination of both. Where the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market, it shall include a cash alternative. The obligation to provide a cash alternative also applies where the offeror has, during a reference period of not less than six and not more than 12 months, purchased cash securities carrying 5% or more of the voting rights in the offeree company.

� General transposition. Article 5.4 of the Directive (equitable price criteria) has been transposed in all the Member States. Differences exist, however, in connection with the price determination. Such differences relate to the reference made to previous acquisitions and to additional criteria used to determine the equitable price.

Price setting in Major Non-EU Jurisdictions. Almost all Major Non-EU Jurisdictions set the minimum mandatory takeover bid price by reference to the highest price paid by the offeror over a specific pre-bid time period ranging from three to 12 months. Certain Major Non-EU Jurisdictions in addition refer to some sort of weighted average price of the securities over a 60-day to six-month pre-bid time period (please refer to Chapter III Section II C. 4.) of this Study).

5.1. Reference to previous acquisitions Reference period. The criterion used by the Directive is the highest price paid for previous acquisitions by the offeror or other concerted persons during a reference period that may not exceed 12 months. Certain Member States (for example the UK, Italy, Belgium, Ireland, Spain, France, Romania and Austria) refer to a 12-month period, whereas a minority of Member States (Finland, Germany, Greece and Portugal) refers to a six-month period. Issue regarding “acting in concert”. In practice, an issue may arise regarding the question of how previous acquisitions must be taken into account. In this respect, in Germany the definition of acting in concert that is used in order to take into account previous acquisitions differs from that used for the purposes of the mandatory bid rule.

5.2. Additional criteria for determining the “equitable price” Weighted averages. Several Member States196 use an additional criterion for the determination of the equitable price, which is the (weighted) average stock exchange price of the shares of the offeree

196 E.g. Austria, Belgium, Germany, Greece, Portugal, Romania, Spain and Italy (only under certain

circumstances).

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company during a reference period varying from 30 days (Belgium) to 12 months (Romania). The weighted average stock exchange price takes into account the volumes of securities traded. Different rules and reference periods. The reference period used for the determination of the average stock exchange price may be the same as the reference period used in connection with previous acquisitions.197 The reference period for the weighted average may, however, also be much shorter than the period relating to previous acquisitions. For example, in Germany, the reference period for the weighted average is three months whereas it is six months for previous acquisitions. This can be explained by the different objectives of the two rules. The rule regarding previous acquisitions is only meant to ensure equal treatment between shareholders. The longer the period, the better the objective is served (albeit within a limit: after a long period, shareholders are in different situations, so that the equitable price rule is no longer meaningful). The rule regarding the weighted average protects shareholders against a significant reduction of the offeree company’s share price and may thus be meaningful, to the extent that shareholders are protected against a decrease that took place between the event triggering the mandatory bid and the date on which it is launched (which should be a relatively short period). A longer reference period would be difficult to justify (especially if voluntary bids are not subject to the same rule). Net asset value. Romania198 provides, in addition, that the price must be at least equal to the value of the net asset per share according to the last financial statement of the issuer. Indirect acquisition. There is no obvious method to determine the equitable price when the mandatory bid is triggered by an indirect acquisition. If the acquired holding company has no assets other than the listed shares, the price may be calculated on an implicit and transparent basis, i.e. by dividing (i) the total price paid by the offeror for the securities of the acquired holding company by (ii) the number of securities of the offeree company held by the acquired holding company (Belgium). Multi-criteria approach. Where there has been no previous acquisition by the offeror, a multi-criteria approach makes sense, as used for instance by Spain. However, such a method may also be used for all mandatory bids, in which case it is a means to secure a higher price for minority shareholders (see the Spain and Hungarian approaches in the tables below).

Multi-criteria approach (Spain) Equitable price in the absence of an acquisition within the previous 12 months. In the event that the offeror or the parties acting jointly with the offeror have not acquired any shares of the listed company in the previous 12 months, the equitable price cannot be lower than the price calculated in accordance with the criteria for de-listing takeover bids. The bidding price should be based on the results obtained by the following methods:

� The average listed value of the securities during the half-year immediately preceding the time of announcement of the proposed de-listing.

� The value of the consideration offered previously, if a takeover bid was made in the year preceding the date of the resolution passed on the de-listing of the company.

Other assessment methods applicable to the specific case and commonly accepted by the international financial community may also apply such as, discounted cash flows, assessment based on market multiples of similar companies and transactions, and others.

Multi-criteria approach (Hungary)

197 E.g. Greece, Portugal, and Italy. 198 The Romania rules are applicable only if no acquisition by the offeror took place in the previous 12

months.

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Multi-criteria approach (Hungary)

Hungary has applied price-related provisions that are stricter than the corresponding provisions of the Directive. Consequently, the purchase price is the highest of:

� the average stock market price of the shares calculated by the trading index in the last 180 days preceding the submission of the offer; or

� the highest price contracted by the offeror for such securities during the 180 days preceding the submission of the offer; or

� the average stock market price of the shares calculated by the trading index in the last 360 days preceding the submission of the bid (if available); or

� the average of the call price and the fee of the purchase or repurchase call option exercised by the offeror and affiliated persons in the last 180 days preceding the submission of the offer; or

� the average of the call price and fee of the purchase or repurchase call option fixed in an agreement entered into by the offeror and affiliated persons in the last 180 days preceding the submission of the offer; or

� the consideration per share received for the exercise of voting rights by the offeror and affiliated persons; or

� the amount of equity capital per share of the offeree company.

5.3. Adjustment of the price by supervisory authorities Article 5.4 of the Directive provides that Member States may authorise their supervisory authorities to adjust the mandatory bid price in accordance with criteria that are clearly determined. To this end, they may determine a list of circumstances in which the highest price may be adjusted either upwards or downwards. Article 5.4 of the Directive provides for four examples: � where the highest price was set by agreement between the purchaser and a seller; � where the market prices of the securities in question have been manipulated; � where market prices in general or certain market prices in particular have been affected by

exceptional occurrences; and � in order to enable a firm in difficulty to be rescued. Most countries have not transposed all cases, but only some of them. However, the partial transposition should be analysed in the light of the discretionary power retained by some of the supervisory authorities. Upward or downward adjustment. According to the Directive, the price may be either increased or decreased. However, the upward or downward adjustment of the price depends on the policy of each national supervisory authority. In Italy, a higher price may be determined only when such measure is necessary for the investors’ protection. In Germany, takeover regulations generally do not provide for the possibility to lower the price, except in some specific cases.

Downward adjustment in Germany

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Downward adjustment in Germany The price may be lowered if, for example, the offeror has to amend its bid due to circumstances that occurred after the bid was launched. This is the case if the consideration offered in a bid consists of shares, and additional shares have to be offered as the market rate of the offered shares has decreased. In addition, after the submission of the bid, the price may be lowered due to “special events” which may have occurred after the bid, such as a share split, a capitalisation of reserves, a dividend payment, or a use of pre-emption rights. Furthermore, if the offeror, persons acting in concert with him, or subsidiaries of the latter acquire shares in the offeree company off-market within one year of the publication of the bid for a consideration exceeding the consideration offered in the bid, the offeror must make a cash payment in euro equal to the difference to the shareholders who accepted the bid. Automatic bid adjustments. The price adjustment may be automatic, e.g. when after the announcement of the bid, the offeror or concerted persons acquire shares for a price exceeding the price originally offered. Post-bid adjustments. Some Member States such as Germany extend the automatic bid adjustment to a post-bid period. This rule may disadvantage certain shareholders (for instance hedge funds) which take a position just above the squeeze-out threshold to prevent its success in an attempt to negotiate with the offeror, post-bid, a higher price for the purchase of their shares. This rule makes such a post-bid purchase so costly for the offeror that any strategy based on such a purchase becomes highly uncertain. Reasons for adjusting. Some Member States allow price adjustments only in a rather limited manner. This is the case for Finland, Poland, Spain, Germany, Italy and France. In these countries, price adjustments are permitted only in certain specific cases set out by applicable provisions. Moreover, in some of these Member States, adjustment to a lower price appears to be very limited (Germany,199 Finland,200 Spain). Discretionary power of the supervisory authority. In some Member States, the supervisory authority is granted some form of discretionary power, subject to some guiding principles. Article 5.4 of the Directive provides that Member States may authorise their supervisory authorities to adjust the price of the mandatory bid in accordance with criteria that are clearly determined. To this end, they may draw up a list of circumstances in which the highest price may be adjusted either upwards or downwards. Article 5.4 of the Directive provides for four examples which are presented in four distinct columns in the table below: � where the highest price was set by agreement between the purchaser and a seller (column “A”

in the table below), � where the market prices of the securities in question have been manipulated (column “B” in the

table below), � where market prices in general or certain market prices in particular have been affected by

exceptional occurrences (column “C” in the table below), and � in order to enable a firm in difficulty to be rescued (column “D” in the table below).

199 In Germany, certain exemptions from the weighted average stock exchange price are granted, e.g. in case

of a limited number of transactions; price adjustment to a lower price is formally inadmissible but may be possible in a very limited number of circumstances (e.g. special occurrences such as share splits or capital decreases).

200 A price adjustment is allowed only in case of a market price.

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The table below sets out which of the four cases listed by the Directive are used by Member States. Additional cases presented in national legislations are provided in the column “Additional cases/comments”.

Circumstance provided in Article 5.4 of the Directive used by the supervisory authorities in each Member States

Country A B C D Additional cases/comments Austria X201 Indirect acquisition.202 Belgium X203 X204 Czech Republic X X X Exceptionally low liquidity / material economic

change.205 Denmark X X X If the offered is considerably below the market

value. Circumvention of shareholder equality in terms of price.206

Finland X Unfair proportion between classes of securities.207

France X208 X209 X210 Manifest change in the characteristics of the offeree company.

201 The price in a mandatory bid may be adjusted if the consideration paid or promised by the offeror within

the preceding 12 months was fixed by taking into account special circumstances or if the circumstances have changed significantly in the preceding 12 months.

202 The price in a mandatory bid may be adjusted if the obligation to make a mandatory bid arises (i) because of an acquisition of shares or other rights in an entity that owns, directly or indirectly, a controlling interest in the offeree company, and (ii) where such entity holds assets in addition to the stake in the offeree company or has debts.

203 If the seller of the securities made certain undertakings in respect of the assets and liabilities of the offeree company (e.g. extensive representations and warranties) that have caused a price reduction, the Belgian supervisory authority may allow the bid price to be lowered. The reverse may be true if the acquirer of the securities committed to certain direct or indirect benefits or advantages to the seller (e.g. to its directors) on top of the price.

204 A correction of the price may also be allowed by the Belgian supervisory authority if there are serious indications that the stock market price is not relevant or that it has been manipulated.

205 The offeree company went through a material economic change within the preceding 12 months. 206 The general principle of shareholder equality is stipulated in the Danish Public Companies Act. 207 Upward price adjustments are possible in the following circumstances: (i) the price paid for one class of

securities is not in reasonable and fair proportion to the price offered for another class of securities; (ii) special benefits to certain holders of securities have been agreed upon in arrangements closely related to or preceding the bid, or in other arrangements; (iii) the party under obligation to launch a bid or its related parties acquired a significant proportion of the offeree company’s securities from individual holders of such securities at a price exceeding the bid price during the time period starting 12 months and ending six months before the obligation to launch a mandatory bid was triggered; and (iv) the market price in force when the obligation to launch a bid was triggered is significantly higher than the price to be offered in the bid determined on the basis of the law, provided that the obligation to launch a bid arose for a reason other than the acquisition of shares. The Finnish FSA takes into account the following circumstances when deciding on a downward price adjustment: (i) the timing of earlier acquisitions of securities, the size of individual acquisitions and the relation between the price paid and the market price at the time of the acquisition; (ii) the opinion of the board of directors of the offeree company on the divergence from the minimum price; (iii) whether the securities acquired at a higher price were acquired from the management of the offeror or the offeree company or other persons closely related to the offeree company; and (iv) the total amount of shares acquired during the six months preceding the obligation to launch a bid.

208 The price results from a transaction that includes related items involving the offeror, acting alone or in concert, and the seller of the securities acquired by the offeror over the last 12 months.

209 Events likely to materially alter the value of the relevant securities occurred in the 12-month period before the draft bid was filed.

210 Recognised financial difficulty of the offeree company.

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Country A B C D Additional cases/comments Germany X X Impossible to take into consideration the market

price (the offeree company was listed too recently).

Greece No price adjustment by the supervisory authority. The price must be determined and adjusted exclusively by operation of law.211

Hungary No authorisation granted to the Hungarian Financial Supervisory Authority. The takeover bid pricing methods are very sophisticated and even more complex than the Directive’s pricing provisions.

Ireland X X X Attitude of the offeree board / bona fide gift or inheritance / pattern of purchases.212

Italy X X X Collusion of offerors or persons acting in concert and sellers.

Luxembourg X X X X No relevant Grand-Ducal regulation.213 Netherlands 10% divergence.214 Poland X215 Portugal X X Low liquidity. Romania Romanian supervisory authority’s extension.216 Slovakia No price adjustment by the supervising

authority. Spain X X217 X218 X219 Additional compensations.220

211 More specifically, the price of the mandatory bid shall be the higher of: (i) the volume-weighted average

on-exchange price of the underlying security during the period of six months preceding the date on which the offeror became obliged to launch the mandatory bid, or (ii) the highest price at which the offeror or any concerted parties acquired the underlying securities during the period of six months preceding the date on which the offeror became obliged to launch the mandatory bid. The price calculation does not take into account any market purchases of securities effected by credit institutions or investment services firms in fulfilment of their assumed obligations as (i) “market-makers” in a regulated market or (ii) systematic “internalisers” or (iii) members of clearing and settlement systems being responsible for the clearing and settlement of transactions.

212 The number of securities purchased in the preceding 12 months, and the pattern of such purchases during the period in question in terms of number of securities and prices paid. Identification of the buyers who are closely connected with the offeror or the offeree (e.g. directors).

213 Under Luxembourg law, except in the cases listed in Article 5.4 paragraph 2 of the Directive, “a Grand-ducal regulation may provide other circumstances in which market errors could have an impact on the setting of the price according to the first subparagraph of this paragraph”. To our knowledge, no Grand-Ducal regulation provides for such a case.

214 The “fair price” request must be made within two weeks of the announcement of the bid and can only be granted if the “fair price” diverges by more than 10% from the average closing price of the shares during the three months preceding the request and the interests of the person making the request are disproportionally affected. There is no case law on the exact meaning of “disproportionally affected”; this therefore needs to be determined on a case-by-case basis.

215 The average market value of the shares differs significantly from their equitable value due to (i) dividends, (ii) company deterioration (significant deterioration of the company’s property or financial standing due to events or circumstances which could not be prevented or foreseen by the company), or (iii) financial distress (danger to the company’s solvency).

216 By secondary legislation, the Romanian supervisory authority has extended the cases where, in case of mandatory takeover bids, the main rules relating to price determination cannot be complied with.

217 The market price of the listed company has been manipulated in accordance with Spanish law and the Spanish supervisory authority has opened a disciplinary file.

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Country A B C D Additional cases/comments Sweden There are no rules authorising the supervisory

authority to adjust the price. UK X Certain circumstances may be taken into

account, such as the size and timing of the relevant acquisitions, the attitude of the offeree company, share acquisitions at high prices from directors or other persons closely connected with the offeror, or the bid to rescue a company facing serious financial difficulties.

C. Comparison with Major Non-EU Jurisdictions

1. Main events triggering mandatory takeover bids Overview. All Major Non-EU Jurisdictions that have adopted mandatory or equivalent takeover bid rules have put in place one, or even multiple (e.g. Russia) threshold-crossing triggers. Such triggers usually equal 30% or 1/3 of the offeree company’s voting rights, although some triggers take into account share capital (Russia) or refer to smaller voting right percentages (India). However, a minority of Major Non-EU Jurisdictions (Hong Kong, India and Japan) have, in addition, used anti-creeper provisions that always allow a person to increase his holdings by a limited percentage within a specified time frame (three to 12 months). Other noteworthy triggers of a mandatory takeover bid are the acquisition of control (India) and the acquisition, by way of a (partial) bid, of securities, where the offeror following such bid holds a total of at least 20% of all of the offeree company’s equity or voting securities (Canada).

218 The listed company has paid a dividend or has experienced an extraordinary situation. The equitable price

was lower than the average price on the day on which the shares were acquired or the equitable price reflects the acquisition of a non-significant volume of shares.

219 Where the offeree company is in a difficult economic situation, the equitable price shall be calculated in accordance with the objective criteria set forth for de-listing takeover bids.

220 Where the acquisition price in the period of reference included additional compensations.

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Summary table. The situation may thus be summarised as follows: Threshold crossings Speed control Others Australia No increase of voting

power above 20% unless a takeover bid is accepted (or in case of certain other exceptions).221

Subject to certain exceptions, acquisition of additional voting power between 20% and 90%. Speed control exemption: Only 3% or less of the offeree company’s securities may be acquired over a six-month period (provided the acquirer held at least 19% of the securities).

Canada Acquisition of securities of any class representing, together with the offeror’s securities, in total at least 20% of the offeree company’s outstanding equity or voting securities.

Acquisition of any shares unless, in particular: Speed control exemption: Less than 5% of the offeree company’s securities are acquired over a 12-month period, or Block exemption: The securities are acquired from not more than five persons in private transactions where the value of the consideration paid for such securities does not exceed 115% of their market price.

China Acquisition by means of a securities trade in a stock exchange, if any person holds more than 30% of the outstanding shares of a company and such person intends to increase its shareholding ratio.

N/A N/A

221 Australia does not have a mandatory bid rule. Instead, the legislation provides that a person is prohibited

from acquiring control of more than 20% of shares unless an exception applies, one of which covers acceptances received under a takeover bid.

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Threshold crossings Speed control Others Hong Kong Acquisition of 30% or

more of a company’s total voting rights.

Acquisition, by any person holding between 30% and 50% of a company’s voting rights, of additional securities increasing the voting rights held by such person by more than 2% over a 12-month period.

N/A

India Acquisition of shares or voting rights resulting in the crossing of the 15% threshold of a company’s total voting rights.

15%-55%: Acquisition, by any person holding between 15% and 55% of a company’s voting rights, of additional shares or voting rights increasing the voting rights held by such person by more than 5% in any financial year. 55%-75%: Acquisition, by any person holding between 55% and 75% of a company’s voting rights, of additional shares or voting rights, with the proviso that such person may acquire up to 5% of voting rights through open market purchases without crossing the 75% voting right threshold.

Irrespective of any threshold crossing by way of an acquisition of voting rights, if an acquirer acquires control over the offeree company, whether directly or indirectly. Subject to certain exceptions, control is defined as the right to appoint a majority of the directors or to control the management or policy decisions that can be made by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.

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Threshold crossings Speed control Others Japan 1/3 rule: Acquisitions on

exchange markets resulting in voting rights exceeding a voting ratio of one-third. 5% rule: Security acquisitions outside of any exchange market resulting in a voting ratio exceeding 5%, unless such securities are acquired from 10 or fewer sellers within 60 days. Off-hour trading: Security acquisitions outside of any exchange market, if the number of total sellers is 10 or less and the voting ratio exceeds 1/3 after the acquisitions.

If within three months: over 5% of voting shares are purchased outside of any exchange market, or over 10% of voting shares are purchased on or outside of any exchange market or obtained through share issuances; in both cases the total voting ratio exceeds one-third after the purchase or the issuance.

Contested acquisitions: If during the period in which another party’s public bid is made, a party whose total voting ratio before the purchase exceeds one-third, purchases over 5% of the voting shares.

Switzerland Acquisition of one-third or more of a company’s voting rights (whether or not such voting rights can be exercised).222

N/A N/A

Russia Acquisitions resulting in the crossing of 30%, 50% and 75% thresholds of a company’s shares.

N/A N/A

US No mandatory takeover bid.

2. Whitewash procedures in Major Non-EU Jurisdictions Overview. A majority of Major Non-EU Jurisdictions that have adopted mandatory takeover bid rules provide for so-called “whitewash procedures” permitting shareholders’ meetings to waive the obligation to launch a mandatory takeover bid. Such waivers are permitted in certain limited circumstances such as capital issuances (China, Hong Kong), financial difficulties (China) or the acquisition of control (India). Summary table. The situation may thus be summarised as follows: Existence of whitewash

or similar procedures Voting requirements Comment

222 Opting out and opting up to 49% are allowed provided that this does not prejudice the interests of

shareholders (i.e. no duty to submit an offer) (please refer to Chapter III Section II C. 2.) of this Study).

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Existence of whitewash or similar procedures

Voting requirements Comment

Australia No mandatory takeover bid rule.

N/A The law allows independent shareholders to approve an acquisition over 20% without a takeover bid.

Canada No N/A - China In connection with:

� an issuance of new

securities, or � a listed company

facing serious financial difficulties; and

� the relevant person undertaking not to transfer such shares for a period of three years.

The non-affiliated shareholders may approve the exemption of the relevant person from its obligation to make a mandatory bid. In case of financial difficulties, the restructuring plan to rescue the listed company must have been approved by the shareholders.

The exemption must be approved by the Chinese Securities Regulatory Commission, which also assesses whether certain conditions have been met.

Hong Kong In connection with: � an issuance of new

securities as consideration for an acquisition;

� a cash subscription; or

� the taking of a scrip dividend.

“Independent voting” at a shareholders’ meeting. Independent vote refers to a vote by shareholders who are not involved in, or interested in, the transaction in question.

The exemption must be approved by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission and is usually obtained, unless the person to whom the new securities are to be issued has: � acquired voting rights in

the company (save for subscriptions for new shares) in the six months prior to the announcement of the proposal, but subsequent to negotiations or discussions with the directors of the company regarding the proposed issue of new securities; or

� acquired or disposed of

voting rights without the Executive’s prior consent in the period between the announcement of the proposals and the completion of the subscription.

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Existence of whitewash or similar procedures

Voting requirements Comment

India Only in connection with the obligation to launch a mandatory takeover bid in connection with the acquisition of control (i.e. not applicable to mandatory takeover bids triggered by threshold crossings).

Approval of the change of control by a 3/4 shareholder majority.

-

Japan No N/A - Russia No N/A N/A Switzerland A shareholders’ meeting

can, by amending the offeree company’s articles of association: � discard the duty to

make a mandatory bid (opting-out); or

� raise its threshold from one-third to 49% (opting-up).

Simple majority of the shares represented at the shareholders’ meeting.

The latest decisions of the takeover board tend to soften the acceptance criteria for opting out and up. Opting out or up should be accepted by the takeover board provided that: (i) the adoption of such opting out or up by the shareholders’ meeting (i.e. amendment of the articles of association of the offeree company) has not been successfully challenged by a shareholder within two months of the shareholders’ meeting, and (ii) the shareholders were adequately informed about all elements, in particular any future transaction with a potential offeror, relevant to the adoption of such opting out or up (i.e. if a transaction is planned, the shareholders must be informed before the adoption of the opting up or out).

US No mandatory takeover bid.

3. Intra-group exemption in India Applicable Indian takeover regulations grant an exemption from the obligation to launch a mandatory takeover bid in case of inter-se transfers taking place among intra-group companies and immediate affiliates. Interestingly, such exemptions also apply to transactions taking place amongst (i) “Qualifying Indian Promoters”, (ii) “Qualifying Promoters” and foreign collaborators who are shareholders of the offeree company, provided that the transferor and the transferee have held shares in the offeree company for a period of at least three years prior to the date of the transfer.

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The term “Qualifying Promoter” means any person who is (i) directly or indirectly in control of the offeree company, or (ii) named as promoter, particularly in any offer document offering securities of the company to either the public or its existing shareholders. Qualifying promoters include: � a relative of such Qualifying Promoter (being an individual);

� a subsidiary or holding company of such Qualifying Promoter (being a corporate entity); or

� any firm or company which is directly or indirectly controlled by the Qualifying Promoter or a

relative of the Qualifying Promoter or a firm or a Hindu undivided family in which the Qualifying Promoter or his relative is a partner or a coparcener or a combination thereof, provided that in case of a partnership firm the share of the Qualifying Promoter or his relative should be not less than 50%.

Inter-se transfers taking place with Qualifying Promoters should not exceed by more than 25% the price that would be determined for the purpose of making an open bid. The Indian “Qualifying Promoters” exemption appears to be extremely broad and thus favours the perpetuation of shareholding concentrations in Indian companies without the obligation to launch mandatory bids.

4. Price setting Overview. Major Non-EU Jurisdictions provide that cash or securities, or a combination of both, may be offered in a mandatory takeover bid. Hong Kong and Russia require the offeror to provide a cash option in every case. Seven out of eight Major Non-EU Jurisdictions (the US does not have mandatory takeover bid rules) set the minimum mandatory takeover bid price by reference to the highest price paid by the offeror over a specific pre-bid time period ranging from three to 12 months (interestingly, Switzerland only requires the bid price to be at least equal to 75% of the highest price paid). In Japan, there is no requirement to set a minimum price. India, Russia and Switzerland in addition refer to some sort of weighted average price of the securities over a 60-day to six-month pre-bid time period. Without referring to such weighted average in the first instance, China provides that if the bid price (determined based on the highest price rule) is less than the average of the daily weighted average price over the 30 trading days preceding the bid announcement, the offeror’s financial advisor must justify the offered price. Most Major Non-EU Jurisdictions require special valuation reports for illiquid securities offered as consideration. Summary table. The situation may thus be summarised as follows: Permissible

consideration in a mandatory takeover bid

Minimum price of a mandatory takeover bid

Comments

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Permissible consideration in a mandatory takeover bid


Comments

Australia No restriction (Australia has no mandatory takeover bid rule; the price-setting rules are thus applicable in the event a voluntary bid is made).

Highest price paid during the four preceding months.

If the consideration paid for shares in the four preceding months includes non-cash consideration that has no clear market value (such as unlisted securities), a valuation report may need to be included in the offeror’s statement to support the conclusion that the consideration is worth at least as much as any pre-bid acquisition. Generally, the mid-point of a valuation range will be acceptable for this purpose.

Canada Cash and securities.

Highest price paid during the 90 preceding days.

China Cash and tradeable securities.

Highest price paid during the six preceding months.

If the bid price is less than the average of the daily weighted average price of such class of shares during the 30 trading days prior to the announcement of the bid, the offeror’s financial advisor must analyse the share trading within the six-month period and, in particular, confirm the reasonableness of the proposed price and the absence of stock price manipulation, undisclosed acquisitions by persons acting in concert with the offeror or payment arrangements of the offeror in past acquisitions.

Hong Kong Requirement of a cash option.

Highest price paid during the six preceding months.

Only with the supervisory authority’s consent can the highest price not be taken as the bid price.

India Cash and securities.

The price paid by the offeror under the agreement triggering the bid or the highest price paid during the preceding 26 weeks, whichever is higher;

or,

with respect to frequently-traded offeree company shares, the average of the weekly high and low of the closing prices of the shares of the offeree

Any payment made to persons other than the offeree company for non-competes exceeding 25% of the bid price must be added to the bid price.

If necessary, the Securities and Exchange Board of India may require a valuation of the not frequently-traded securities by an independent merchant banker or an independent chartered accountant of minimum 10 years’ standing or a public financial institution.

Where offeror securities are offered in lieu of cash, the value of such securities must be determined by the persons

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Comments

company during the preceding 26 weeks or the average of the daily high and low of the prices of the shares during the preceding two weeks, whichever is higher.

With respect to not frequently-traded offeree company shares, the price determined based on, in particular, the return on net-worth, share book value, earning per share, or price earning multiple vis-à-vis the industry average.

listed above.

Japan No restriction. No requirement. An independent valuation report or opinion is required or, in practice, obtained.

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Comments

Russia Requirement of a cash option.

Weighted average price of the securities over the preceding six months,

and

highest price paid during the preceding six months.

The cash and security consideration must have the same value. The market value of securities which are not admitted to trading or traded for less than six months must be assessed by an independent appraiser.

Switzerland Requirement of a cash option.

Weighted average price for the preceding 60 trading days,

and

75% of the highest price paid during the preceding 12 months.223

In the absence of a liquid market for the offeree company shares, the offeror must appoint an independent licensed security dealer or approved auditor to prepare a valuation of the offeree company shares, which replaces the minimum price determination.

If previous acquisitions included substantial benefits in addition to cash (for example, guarantees or a price adjustment undertaking), the minimum price can be increased or reduced by an amount corresponding to these benefits.

The best-price rule applies from the time the preliminary announcement or the bid is published (or, in the absence of such announcement, the publication of the offer document) until six months after the expiry of the additional acceptance period. If applicable, the offeror must offer the higher price to all recipients of the public bid, including those who have accepted the bid.

US No mandatory bid rule.

5. Schemes of arrangement in Major Non-EU Jurisdictions Occurrence of schemes of arrangement. In Major Non-EU Jurisdictions that have been exposed to the UK legal system (India, Australia, Canada and Hong Kong), so-called “schemes of arrangement” represent an effective alternative to recommended voluntary and mandatory takeover bids in order to obtain control of a listed public company. 223 Prior to the preliminary announcement, the offeror may pay to the offeree company’s shareholders up to

33.33% more than offered to the other shareholders during the offer, provided that the commitment of sale is not coupled to the takeover bid.

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Description. A scheme of arrangement is a court-approved agreement between a company and its shareholders (or creditors, such as lenders or debenture holders). Depending on the relevant Major Non-EU Jurisdiction, a scheme of arrangement may provide for almost any type of transaction or combination of transactions, such as share purchases, amalgamations, share redemptions, transfers of assets or share issuances. In Hong Kong, for instance, the statutory procedure in practice usually involves either the cancellation of all the existing offeree company shares and the subsequent issue of new offeree company shares to the offeror (a cancellation scheme), or the transfer of all the existing offeree company shares to the offeror (a transfer scheme), in return for the issue of either cash or offeror shares to the former shareholders of the offeree company. Voting requirements. Schemes require the offeree company to put in place a proposal to its shareholders and must be passed: � in India, by a majority in number representing at least 75% in value of the shareholders;

� in Australia, by a majority in number representing at least 75% of the votes cast;

� in Hong Kong, by a majority in number representing at least 75% of the votes cast by

disinterested shareholders; and

� in Canada, by a 66% to 75% majority of the votes cast. Once approved by the court, the scheme is binding on all shareholders. Such court approval usually involves a hearing on the fairness and reasonableness of the transaction. Interestingly, in Hong Kong, a scheme of arrangement only becomes binding when the number of votes cast against the scheme at the court hearing does not account for more than 10% of the votes attaching to all the disinterested shares. The Indian takeover regulations grant an exemption for any transfer or acquisition of shares or control over the offeree company which takes place pursuant to a scheme of arrangement or reconstruction, including amalgamation or merger or demerger under any law or regulation, Indian or foreign. Advantages. The advantages of using a scheme instead of a (recommended) takeover bid are, in particular: � the flexibility in structuring a takeover;

� the certainty of obtaining 100% of shares on a specified date, provided the requisite majority

and the court approve the scheme; � the threshold for a successful scheme is lower than that for a takeover bid (which usually

requires between 90% and 95% acceptances in the relevant Major Non-EU Jurisdictions before the offeror can compulsorily acquire the remaining offeree company shares); and

� a court approves the scheme, which may repel challenges to the transaction. Downsides. Noteworthy downsides of using a scheme are: � the duration of the process (lengthy due diligence and negotiation phases, mandatory

shareholder disclosure, convening of a shareholders’ meeting and the application to court); and

� unlike a formal bid, a scheme does not allow the offeror to adjust the terms of the bid quickly.

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6. US takeover bids, one-step mergers and two-tier takeover bids Overview. In the US, mergers are a common way to acquire control of companies. As opposed to cash tender and exchange bids, mergers are not subject to Rule 14d-10 of the Securities and Exchange Act of 1934, according to which the consideration paid to any shareholder for securities must be the highest consideration paid to any shareholder for securities tendered in such bid, and all shareholders must have an equal right to elect the type of consideration from among those offered (all-holders/best-price rule) (please refer to Chapter III Section I G. 2.) of this Study). One-step mergers. A one-step or statutory merger is one in which the offeror and offeree company enter into a merger agreement subject to the approval of the owners of a majority (or super-majority if required by State law or the offeree company’s incorporation documents) of the outstanding shares of the offeree company. Rule 14d-10 does not apply to one-step mergers. However, to the extent that minority shareholders believe that the price being offered by the offeror is below the fair value of the shares, but the majority of shareholders nevertheless accepts the bid and the merger takes place, State merger statutes give minority shareholders (often called “dissenters”) the right to petition a court to set a “fair value” for their shares. The price set by the court, however, does not necessarily need to be the highest price paid by majority shareholders. Two-tier takeover bids. In a two-tier takeover bid, the offeror will make a takeover bid to obtain voting control of the offeree company. In a second stage or tier, the offeror votes its controlling interest to obtain merger approval at a shareholders’ meeting. Typically, the offeree company’s shareholders would receive higher compensation for their shares in the first tier (takeover bid) than in the second tier (merger). This is the exact scenario that is prevented by the mandatory bid rule under Article 5 of the Directive. The corporate statutes of Delaware and most States permit majority shareholders to engage in a squeeze-out merger without the approval of the minority shareholders. The triggering event for a second-step squeeze-out merger is that the offeror hold at least 90 per cent of the offeree company’s voting shares following a takeover bid or other share acquisition programme. There are, however, other anti-takeover measures that a company can use to counter the threat of a two-tier takeover bid. For example, a company may add fair price and super-majority amendments to its corporate charter. A fair price amendment stipulates that an acquiring company must pay a fair price for all of the offeree company’s shares that it purchases (although this does not necessarily mean the highest price the acquiring company has paid). A super-majority amendment increases the necessary majority to approve an acquisition or merger from one-half to two-thirds. Appraisal rights. Depending on State law, the offeree company’s shareholders who do not tender their shares in a cash takeover bid and who do not vote in favour of the merger may have appraisal rights. Appraisal rights entitle such shareholders to a cash payment from the offeror equal to the value of its shares as determined by a court. It should be noted that a court may determine a price lower than the price received in the original takeover bid; therefore, even with appraisal rights, minority shareholders are not guaranteed a price equal to that received during the initial takeover bid. Appraisal rights are rarely exercised in the US. Sell-out: In most cases, if an offeror acquires a significant interest in an offeree company and has no intention of acquiring the remaining interests held by minority shareholders, it is not obliged to do so. A few States, however, including, Maine, Pennsylvania and South Dakota, have “control share cash-out” provisions which provide that if an offeror acquires voting shares above a specified threshold, the other shareholders can demand that the offeror purchase their shares for cash at a fair price. The triggering event for the sell-out procedure is that the offeror have acquired at least the following threshold amounts of offeree company voting shares: 20% in Pennsylvania; 25% in Maine; and 50% plus one voting share in South Dakota.

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D. Perception

1. Acting in concert

1.1. Different definitions Few problems in practice arising from from different definitions. The different definitions contained in the Takeover Bids Directive, the Transparency Directive and the Acquisitions Directive are rarely perceived to create problems in practice (27%). Most supervisors (70%) are of the opinion that these differences rarely constitute an issue (63%) while many issuers state they sometimes do. Finally a majority of investors and intermediaries have no opinion on the matter.

1.2. Clarity No agreement with regard to clarity of the definition on the EU or national level. There is no agreement among stakeholders as to the clarity of the definition of “acting in concert” either in the Directive or the national legislations. While 60% of stakeholders consider that the definition provided in the Directive is reasonably clear, 33% disagree. For the definition given in the national legislations these figures are 57% and 35% respectively.

Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers No agreement on how to clarify the definition. Stakeholders do not agree on the manner in which the definition of “acting in concert” could be clarified in the Directive or in the national legislations. A majority of issuers consider that the definition could be clarified by redrafting the Directive (64%) or the national legislations (38%). Most supervisors, for their part, consider that further guidance should be provided at EU level (86%) and at the national level (100%).

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� Investors and intermediaries. Investors and intermediaries are divided between those favouring a redrafted definition in the Directive (44%) or the national legislation (56%) and those in favour of further guidance in the Directive (56%) or the national legislation (44%).

� Issuer associations. Some issuer associations have also suggested removing the notion of

defensive concert, which prevents shareholders from organising a common defence against a bid that they wish to reject. In addition, it appears to be difficult to further elaborate the definition of “acting in concert” in the Directive, since behaviour is qualified as “acting in concert” on a case-by-case basis. Finally, it has been suggested that the divergent interpretations be limited through the elaboration of guidelines by ESMA.

Divergent opinions on the consequences of the lack of clarity of the definition of “acting in concert”: the “activism” issue. In general, most stakeholders perceive as a major consequence of the lack of clarity of the “acting in concert” definition its prevention of useful cooperation between shareholders (48%). Many institutional investors consider that if any doubt arises as to whether an action might constitute “action in concert”, most major players would prefer not to take the risk and step back. It has been suggested that the Commission clarify in what cases the exchange of information and the common goal of changing company policy will be permitted and, in particular, when board changes can be supported in the event that company management refuses to change its course. Putting more emphasis on the purpose of the cooperation would also be useful. However, some stakeholders consider that the main issue is the opposite one, i.e. that the definition’s lack of clarity has permitted some concert actions to escape scrutiny: 34% of stakeholders are of the opinion that the rules have not triggered mandatory bids when they should have done so in order to protect minority shareholders.

1.3. Presumptions Agreement to create new presumptions of acting in concert. A substantial majority of stakeholders suggests that agreements triggering an acquisition of control always constitute “acting in concert” (63%). Also, a majority of stakeholders (51%) considers that agreements granting one person a definite right to acquire control of an issuer in future should in principle be considered acting in concert. There is no agreement among stakeholders as to whether agreements granting persons a contingent right to acquire control of an issuer in future should constitute acting in concert. In fact, 37% of stakeholders are in principle in favour of such a change, whereas 39% are in principle against it. A majority of stakeholders believes that three situations should in principle be recognised as constituting acting in concert: � Within the same transaction, if Person A and Person B act in concert, and Person B and Person

C act in concert, all three should be considered to be acting in concert (52%).

� Agreements having the effect of replacing board members (35%).

� Agreements among shareholders which aim to replace existing board members by persons who have a significant relationship with such shareholders (46%).

However, there is no majority in favour of considering the two following situations as acting in concert: � Agreements among shareholders to vote in the same way on a specific matter with a specific

purpose.

� Preemption rights.

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Item Yes, always

Yes, in principle (rebuttable presumption)

No, in principle (rebuttable presumption)

No, never (safe harbour)

1. Agreements having as their effect the acquisition of control (irrespective of its aim).

63% 33% 3% 1%

2. Agreements granting a person a (definite) right to acquire control of an issuer in the future (e.g. by means of an unconditional call option).

33% 51% 11% 5%

3. Agreements granting a person a (contingent) right to acquire control of an issuer in the future (e.g. a call option the exercise of which is subject to a condition).

19% 37% 39% 5%

4. Within the same transaction, if Person A and Person B act in concert, and Person B and Person C act in concert, should Person A, B and C be considered as acting in concert together?

19% 52% 26% 3%

5. Agreements having the effect of replacing board members.

32% 35% 26% 7%

6. Agreements among shareholders which threaten to replace board members if a certain action is not taken.

35% 39% 34% 8%

7. Agreements among shareholders to vote in the same way on a specific matter with a specific purpose.

21% 29% 43% 7%

8. Agreements among shareholders which aim to replace existing board members by persons who have a significant relationship with such shareholders.

24% 46% 26% 3%

9. Preemption rights 8% 24% 49% 19%

1.4. Enforcement Easy circumvention of the “acting in concert” definition. Although a majority of stakeholders considers that the acting in concert rule “often” attains its objective (50%), the definition is easily circumvented. A majority of stakeholders is of the opinion that the rule is too vague to be enforced (60%). This opinion is shared by a majority of supervisors (67%), whereas certain issuers state that the rule is too broad and includes situations that should not be covered (33%). Finally, investors and intermediaries are generally of the opinion that other reasons explain the rule’s failure to reach its objectives.

2. The mandatory bid rule

2.1. Protection of minority stakeholders

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The mandatory bid rule protecting minority shareholders. 56% of stakeholders are of the opinion that the mandatory bid rule protects the interests of shareholders appropriately, whereas 42% think it does so only partially. Most stakeholders consider that if the protection is not optimal, this is due in part to the Directive itself (47%) or to its transposition into the national legislations (53%). The stakeholders who consider that there is a lack of protection feel that this is due to the improper application of laws and regulations (71%) and to the improper practice of national supervisors (29%). According to an issuer association, in the case of mergers and capital increases, the mandatory bid is seen to protect the interests of the stakeholders only partially in that shareholders may wish to vote in favour of the transaction without wanting this transaction to trigger a mandatory bid. In this respect, the introduction of a whitewash procedure is desirable.

Significant increase in the protection of minority shareholders. 48% of stakeholders perceived a significant increase in the protection of minority shareholders since the application of the mandatory bid rule. Discretionary exemptions. Stakeholders generally agree that discretionary exemptions do not weaken the mandatory bid rule (71%). However: � Investors and intermediaries. Most investors and intermediaries in the Main EU Jurisdictions

state that discretionary exemptions do have the effect of weakening the mandatory bid rule (67%). 56% of investors and intermediaries in the Other EU Jurisdictions agree with this analysis. In all jurisdictions analysed, 61% of investors and intermediaries share this opinion.

� Issuers. In cases where the change of control was the result of a mistake and/or there was no

intention to take control, 61% of issuers consider that the corresponding exemption weakens the mandatory bid rule. Issuers in the Main EU Jurisdictions are particularly concerned about the weakening effect of this exemption (71%) whereas only 25% of issuers in the Other EU Jurisdictions share their concern.

2.2. The equitable price rule

a. The perception of the rule An efficient protective rule. In practice, 59% of stakeholders consider the equitable price rule to protect the interests of minority shareholders adequately, while 35% say it protects such interests very well. 78% of issuers consider the rule to be adequately protective of minority shareholders’ interests, an opinion which is shared by 42% of investors and intermediaries. 86% of stakeholders consider that the application of the equitable price rule results in better protection of minority shareholders with almost no resulting deterrent effect.

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers No agreement on the source of problems. Where the equitable price rule is seen as not protective enough, there is no agreement on the source of the problem. 40% consider that the rule is not clear enough, while another 40% consider that it is not properly designed.

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b. The use of the exemptions to the equitable price rule Effects of the adjustments. Most supervisors believe that price adjustments sometimes result in a higher price of the bid (42%) and only rarely in a lower price (53%). Many supervisors believe that price adjustments are infrequent, with 41% of them believe that prices are never automatically adjusted upwards. However, 32% of supervisors believe that prices are frequently discretionarily adjusted upwards. 50% believe that they are never automatically adjusted downwards and 61% believe that they are never discretionarily adjusted downwards. Supervisors. The UK supervisors have pointed out that downward adjustments are permitted with the consent of the UK Takeover Panel, but have only rarely been made. The Estonian Financial Supervisory Authority has been asked once to correct the price upwards but is not permitted to adjust the price on a discretionary basis. In France, the supervisor has twice been confronted with cases of downward adjustments. The AMF further experienced two cases which derogated from the rule of the highest price during a mandatory bid. In the first case, the offeror purchased shares on the market even though the issuer had not revealed to the market its financially distressed situation. In the second case, purchases of shares on the market had been made by the offeror ahead of the economic and financial downturn of autumn 2008, which negatively and significantly influenced the value of the relevant shares. In both cases, the AMF authorised the offeror to price its bid at a price that was lower than the highest price paid over the preceding 12 months. Lack of data. The use of exemptions does not always give rise to publicly available information. As such, the opinion of stakeholders, and among them supervisors, is vital in this respect.

2.3. Use of exemptions Mapping. Upon being interviewed on the frequency of the application of exemptions to the mandatory bid rule, stakeholders expressed the following opinions: � The following exemptions are frequently used: voluntary bids, companies in a distressed

situation, specific types of corporate transactions, acting in concert without acquisitions, and absence of real change of control.

� Protection of the State interest and public order: 14% of stakeholders perceive the exemptions

granted in this respect to be frequent, even though 73% of supervisors say such exemptions never occur. However, these exemptions apply only in Greece and Romania (State interest) and in the Czech Republic (public order). This suggests that issuers are afraid that supervisors may be biased by the national interest.

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Item Description

a Discretionary exemptions

b Technical exemptions

c The change of control is only temporary

d The change of control was the result of a mistake and/or there was no intention to take control

e Existence of a larger shareholder

f Intra-group transaction (no change of ultimate controller)

g Other (e.g. there is no change of control because the transaction takes place within the same “acting in concert group,” or the acquisition is small or involves financial derivatives)

h The change of control did not result from a voluntary act

i The change of control is the result of a voluntary takeover bid

j The acquisition is indirect and a “substance test” is applied

k The change of control results from a personal event

l A concert is formed but no shares are acquired

m The acquisition is made upon the exercise of a financial security (such as a pledge)

n The offeree company is in a distressed financial situation

o Control was acquired pursuant to specific types of corporate transactions

p The rule is not applicable to certain entities that have acquired control

q Protection of State interest and public order

2.4. Enforcement issues Availability of legal remedies. Concerning the enforcement of mandatory bids, the legal remedies available are perceived as sufficient by a majority of stakeholders (71%). Adjustment of the equitable price. The possibilities to request an adjustment of the equitable price are judged sufficient by 74% of stakeholders. Steps taken by minority shareholders. Most stakeholders consider that minority shareholders sometimes take steps to enforce the mandatory bid rule through the supervisor (38%). Others consider that such steps are taken rarely (31%). Even fewer stakeholders consider that they are never taken (16%). Enforcement of the mandatory bid rule through courts. Most stakeholders (33%) find that minority shareholders sometimes enforce the mandatory bid rule in court. 29% consider such enforcement to be rare and 21% consider it never happens.

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Types of transactions used to circumvent the mandatory bid obligation. Most supervisors consider that the launch of a voluntary bid with a low price resulting in the acquisition of control is rarely used to circumvent the rule (63%). Supervisors perceive acquisition of de facto control as a mechanism that is sometimes used to circumvent the mandatory bid rule (40%). 73% of supervisors think that the conditions for the applicability of an exemption are rarely artificially created. Finally, the successful concealment of the factual basis for the applicability of the mandatory bid rule is perceived as a mechanism that is frequently used to circumvent the rule (40%). Some institutional investors emphasise that the easiest way to avoid a bid is to be a blockholder without acquiring a stake larger than 30%. If the capital is dispersed, the quorum is usually between 50% and 60%. However, 29% of the capital is already enough to have de facto control. The law should prevent this by imposing a takeover (or a similar mechanism) if a shareholder rapidly increases its participation without going beyond 30%. Also, exemptions should be limited.


Item Definition 1 A voluntary bid with a low price has been

launched, resulting in the acquisition of control. 2 De facto control has been acquired but not legal

control (“creeping acquisition”) 3 The conditions for the applicability of an

exemption have been artificially created. 4 The factual basis for the applicability of the

mandatory bid has been successfully concealed.

2.5. Economic impact of the mandatory bid The mandatory bid rule as a real obstacle to acquisitions. Economic theory predicts that the mandatory bid rule may result in an increase of the size of blockholdings. The argument goes as

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follows: (i) in a dispersed shareholding setting, it is attractive for a shareholder to create a block the size of which is just below the threshold triggering a bid (e.g. 29.9%), as any potential offeror will have to negotiate with him (since the easiest way to by-pass him, i.e. a two-tier partial bid on 51% of the shares, is not available); and (ii) in a concentrated shareholding setting, where there are several blockholders, it may – to keep the same example – be attractive for one of them to increase his stake to 29.9% in order, if a bid is launched, to secure more voting power at any general meeting held during the bid to decide on defences.224 56% of stakeholders perceive the mandatory bid rule to sometimes be a real obstacle to acquisitions. This view is shared by supervisors (66%), stock exchanges (60%), issuers (46%), and investors and intermediaries (48%). These results can be explained by different considerations: (i) the above-mentioned strategies may simply be too costly and too risky to be realistic (relying, as they do, on the speculation that a bid will be launched); and (ii) the constitution of a 29.9% block has a chilling effect on bids, as a potential offeror will need to have enough synergies to pay both the blockholder its control premium and all other shareholders the same amount per share. � Supervisors. 64% of supervisors consider that the mandatory bid rule can sometimes create a

real obstacle to takeovers.

� Stock exchanges. 60% of stock exchanges consider that the mandatory bid rule can sometimes create a real obstacle to takeovers.

� Issuers. 46% of issuers consider that the mandatory bid rule can sometimes create a real obstacle to takeovers.

� Investors and intermediaries. 48% of investors and intermediaries consider that the mandatory bid rule can sometimes create a real obstacle to takeovers.


224 Please refer to Chapter IV Section IV A. 1.) of this Study.

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No visible effect on the size of blockholdings. 58% of stakeholders state that the mandatory bid rule has not affected the size of the blockholdings, since these have remained about the same over time.

III. Takeover defences Key concepts. � Defences may be used by managers in a self-serving manner; they may also be considered as a

method to negotiate the bid price.

� The board neutrality rule is an attempt to prevent such self-serving conduct. It is a relative success (15 Sample Countries out of 22). Reciprocity has also been largely adopted. The breakthrough rule is a failure.

� Outside the EU, some major markets allow defences to a certain degree: mostly the US, but also countries like Canada, Japan and Australia. All three of these make use of poison pills, a defence which aims to avoid value destruction for the company and its shareholders if the bid fails (in contrast with defences such as the sale of assets at a discount, for instance).

� Stakeholders do not consider that the Directive is an obstacle to bids with regard to defences. Excluded issue

Threshold crossing and disclosure obligations. Disclosure requirements applicable in the event that certain capital or voting rights thresholds are crossed alert issuers to significant movements affecting their share capital. While hindering creeping control attempts, these disclosure requirements enable potential offeree companies to put in place defence strategies in connection with potential bids. In a way, therefore, threshold-crossing disclosure requirements constitute the first takeover defence. Issues relating to Member States’ transposition of the disclosure requirements set out in the Transparency Directive have been addressed in the corresponding assessment report prepared by Marccus Partners and Mazars, and are therefore not further discussed in this Study. Categorising defences Types of defences. One of the key issues in the context of takeover bids is the application of takeover defences by offeree companies. These defences may prevent a change of control, make takeover more difficult or costly, or allow offeree companies to negotiate higher prices. Takeover defences can be classified as “pre-bid defences” and “post-bid defences” as is explained below. � “Pre-bid defences” may constitute barriers to the acquisition of shares in the company (e.g.

share transfer restrictions contained in the company’s articles of association) or barriers to the exercise of control at the general meeting (e.g. voting restrictions, shares with multiple voting rights). The most common pre-bid defences are the following:

- multiple voting rights shares,

- non-voting shares,

- non-voting preference shares,

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- pyramid structure,

- priority shares,

- depository certificates,

- voting rights ceilings,

- ownership ceilings,

- super-majority provisions,

- golden shares,

- partnership limited by shares,

- cross-shareholdings, and

- shareholder agreements. � “Post-bid defences” are put in place once the company has become subject to a takeover bid.

The most common post-bid defences are the following:

- seeking a white knight (a “white knight” is an alternative merger or acquisition partner who is on friendly terms with the management of the offeree company and who is generally solicited to buy a majority block of shares),

- seeking a white squire (a “white squire” is an alternative merger or acquisition partner who is on friendly terms with the management of the offeree company and who is generally solicited to buy a large minority interest in the offeree company (as opposed to a majority interest as is the case with a “white knight”),

- capital increase,

- debt increase,

- share buyback,

- acquisition of assets,

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- sale of assets (this includes, but is not limited to, the “crown jewel defence”, in which the offeree company engages in the sale of its most attractive assets to a friendly third party),

- dividend payment,

- sale of treasury shares,

- “pac-man defence” (bid launched by the offeree company on the offeror company),

- offer launched on another company,

- merger, and

- issue of warrants (this includes “poison pills” or “shareholder rights plans” in which, for instance, the target company facilitates the issuing of shares to its shareholders at a discount).

Alternative classification of defences. Another way to classify takeover defences is to look, once the bid has failed, at the value of the defence from the offeree company’s and its remaining shareholders’ perspective. Analysing the value of takeover defences is relevant in order to assess their impact and evaluate how regulation or facilitation of such defences correlate to the objectives of the Directive. The categories are identified in the following chart:

Examples � Value-enhancing Capital increase, warrants (poison

pills).

� Value-destructive Crown jewel,225 share buyback.

� Value-neutral (no possible ex-ante classification) Seeking a white knight, white squire, dividend pay-out,226 sale of treasury shares, pac-man defence,227 acquisition of assets, bid launched on another company, merger.

Value-enhancing defences. A capital increase used as a takeover defence is observably value-enhancing for the offeree company and its shareholders, as it brings in new cash to the company that may either be used in the company’s projects or as dividends to post-bid shareholders. Likewise, insofar as issuing warrants (poison pills) gives existing offeree company shareholders the right to subscribe to new shares at a discount while also infusing capital into the company, such defences are

225 The crown jewel defence could also be value-neutral depending on the proceeds from the sale of the

relevant assets. 226 Assuming that the dividend is substantial enough to discourage the offeror, this defence could be value-

enhancing for the shareholders and value-destructive for the company, resulting in an equilibrium. 227 So long as the offeror was rational in its decision to launch the initial bid, the pac-man defence would also

be rational. This could potentially result in a value-enhancing merger.

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similarly value-enhancing. In addition, poison pills are never value-destructive, as their highly deterrent effect results in the fact that such warrants are never exercised – their exercise is only threatened. Value-destructive defences. Conversely, defences such as share buybacks, if they are exercised solely for the purpose of defending against a bid, will likely result in a value reduction for the offeree company and its shareholders and are thus value-destructive. A crown jewel defence is generally value-destructive to the extent that the disposed assets were strategic or sold at a discount. Value-neutral defences. The value of other defences cannot be categorised in advance; it depends on an analysis of fact-specific considerations, including the economic rationality of the decisions that are made. Variables that affect value. Clearly, it is difficult to accurately categorise any defence as absolutely value-enhancing or value-destructive due to the fact that such valuations ultimately depend on the outcome of a particular defence for the company. In many cases, the overall value of a successful defence may be affected by variables such as the rationality of the board, market conditions and incentives unrelated to normal business practice.

A. Objectives Winter Report. Based on the assumption that takeovers assessed as a whole are generally positive, the principles of the Winter Report were guided by the notion that regulations should facilitate bids but also protect opportunities for shareholders to exercise proportionate control when deciding on the merits of the bid. Alternative considerations. Other reasons to regulate defences could be: (i) their impact on the ability to negotiate a higher price; (ii) their inherent quality (value-destructive or not); (iii) the role they play in the ability of the board to defend interests of other stakeholders and to prevent team production hold-ups; and (iv) their potential impact on the “social control gap” issue.

B. Transposition Provisions relating to takeover defences. Since Member States have traditionally had fundamentally differing approaches to takeover defences, the way to treat such defences constituted a key issue in reaching a compromise necessary to adopt the Directive. The final compromise provides for a board neutrality rule (Article 9 of the Directive) and a breakthrough rule (Article 11 of the Directive); however, Member States are allowed to choose whether they wish to apply the two above-mentioned rules or not (Article 12 of the Directive). However, if a Member State decides not to make these rules mandatory, it cannot prevent companies from applying them on a voluntary basis. The decision to voluntarily apply the rules must be adopted in turn by the shareholders’ meeting and can be reversed in the same manner. Furthermore, the reciprocity exception (Article 12.3 of the Directive) allows Member States to authorise companies applying the board neutrality rule and the breakthrough rule to cease applying them against an offeror who is not subject to the same rules in his country, and thus to “retaliate” against such offeror. The structure of the choices made available by the Directive with regard to the board neutrality rule can seem complex. Please refer to the chart below, which describes the choices available to Member States and companies regarding the board neutrality rule and breakthrough rule.

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Board neutrality rule: Member State choices

Board neutrality rule: company choices

(Adapted from P. Davies228)

Article 10 of the Directive. Article 10 of the Directive requires companies to publish certain minimum disclosures. Such disclosures provide some protection to shareholders in the context of takeover defences by informing them of the company’s capital structures, control structures, powers of the board to issue or buy back shares, and similar restrictions. By prescribing the provision of this information, Article 10 of the Directive at least gives shareholders the opportunity to make informed

228 Paul L. Davies, The Board Neutrality Rule and the Implementation of the Takeover Bids Directive,

presentation given at the Conference of International Takeover Regulators in Vienna on 9 September 2011.

Are Articles 9.2 and 3 of the Directive (board neutrality)

mandatory?

Is reciprocity regarding the board neutrality rule applied?

Company choice to apply

reciprocity

Company choice to opt in with or

without reciprocity

No company choice

Company choice to opt in without

reciprocity


No

No Yes

Yes No Yes

Are Articles 9.2 and 3 of the Directive (board neutrality)

mandatory?


Mandatory board neutrality with

company reciprocity option

No neutrality with reciprocity option

for companies

“Strict neutrality”

All-or-nothing neutrality


No

No Yes

Yes No Yes

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decisions regardless of whether the relevant Member State or company has or has not chosen to apply the board neutrality rule or the breakthrough rule. The disclosures mandated by Article 10 are generally more helpful in the case of post-bid defences, since in the light of the bid, shareholders are aware that decisions taken are bid-related.

1. Board Neutrality Rule Description. The board neutrality rule (Article 9 of the Directive) relates to post-bid defences. It provides that during the bid period, the offeree company’s board must obtain the authorisation of the shareholders’ meeting before taking any action that may result in the frustration of the bid. This rule may facilitate takeover activity by limiting the board’s power to raise obstacles to hostile takeovers. However, it is questionable whether requiring shareholder approval for the application of defensive mechanisms is at all relevant considering the impact of the defence on shareholder and blockholder interests. This question is addressed in more detail below.

1.1. Opting out/Opting in Member States which have opted out. Seven out of 22 Member States have opted out from the board neutrality rule (Belgium, Denmark, Germany, Hungary, Luxembourg, the Netherlands and Poland). However, Germany229 provides for a modified passivity rule that existed before the transposition of the Directive. None of the aforementioned Member States had a strict board neutrality obligation before the transposition of the Directive. Company opt-in. The Member States which have opted out have introduced the opt-in procedure, which allows companies to choose to apply the neutrality rule. According to the information available, companies do not seem to apply the board neutrality rule on a voluntary basis and are not likely to do so. Default neutrality rule with opt-out (Italy). Italy has adopted a different system: the default neutrality rule with an opt-out option at the company level. Pursuant to Article 104 of Italy’s Consolidated Financial Law, the passivity rule is mandatory for Italian companies except in case of express derogation in the articles of association. Apparently, the following companies have so far used the opt-out option. Most of them are controlled by blockholders.

Italian companies that have opted out of the board neutrality rule Company name Market value (in million

euro) Fiat S.p.A 8,232.27 Banca Carige S.p.A 2,659.62 YOOX S.p.A. 510.23 Marcolin S.p.A. 273.41 Tamburi Investment Partners S.p.A. 201.81 AcegasAps S.p.A 189.68 EL.EN. S.p.A. 52.88 Mondo Home Entertainment S.p.A 10.82 Meridie S.p.A. 7.00 Nine companies, total market capitalisation 12,137.70

229 Compared to the Directive, the German passivity rule allows more exceptions from board passivity, e.g. if

the consent of the supervisory board has been obtained or in case of actions that a prudent manager of a company not subject to a takeover bid would have taken.

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Rationale for the board neutrality rule. The rationale for the board neutrality rule is stronger in situations in which the share capital is dispersed among several shareholders, as it is more difficult to acquire control of companies in which a blockholder holds a substantial proportion of the share capital, at least where such blockholder is not favourable to the bid. A significant increase in the number of widely held companies was observed in continental Europe between 1996 and 2006. The UK, historically, has had dispersed shareholdings in 90% of its companies.230 In Germany this figure has increased from 26% to 48%, in France from 21% to 37% and in Italy from 3% to 22%.231 In the light of these developments, the rationale for reinforcing the board neutrality rule may be regarded as stronger today than before.

1.2. Transposition of the board neutrality rule Transposition by Member States. 15 out of 22 Member States (Austria, Cyprus, the Czech Republic, Estonia, Finland,232 France, Greece, Ireland, Italy, Portugal, Romania,233 Slovakia, Spain and the UK) impose the board neutrality rule. All of these Member States (except Cyprus and Greece) had a board neutrality obligation in their pre-existing legal framework before the Directive entered into force. Existence of pre-existing board neutrality. In 11 cases, the board neutrality rules pre-dated the transposition of the Directive (Austria, Czech Republic, Estonia, France, Ireland, Italy, Portugal, Romania, Slovakia, Spain and the UK). They were new in three countries (Cyprus, Finland and Greece). Four of these Member States (France, Italy, Portugal and Spain234) introduced the reciprocity rule. In two Sample Countries (Italy and Hungary), the national framework previously included a mandatory board neutrality rule which was removed or weakened after the transposition of the Directive. Italy weakened its board neutrality rule in connection with the transposition of the Directive in 2007. It moved from a pre-transposition absolute board neutrality rule to a post-transposition board neutrality rule that is limited in its scope by the reciprocity rule.

The application of the board neutrality rule in Italy and its consequences: Olivetti’s hostile takeover of Telecom Italia235

The application of the board neutrality rule. Telecom Italia was founded in 1994 as a State-owned company and completed its privatisation in 1997. In 1999, the company became subject to a hostile takeover from the Italian company Olivetti. The privatisation programme had created a new group of companies without a dominant shareholder and aimed to broaden the investor base by encouraging the participation of small savers. Italian retail investors could buy shares in Telecom Italia for a 3% discount. Many of the shareholders were not Italian; 37% of Telecom Italia voting shares were held by foreigners at the time of Olivetti’s takeover bid. As a result, the company was more vulnerable to takeover than a typical Italian company. Italian law and Telecom Italia’s shareholding determined the calendar of the bid. In particular, under Italian law, once a bid is in place, the offeree company can no longer adopt defensive measures without the approval of at least 30% of its shareholders.

230 Paul L. Davies, Edmund-Philipp Schuster and Emilie Van de Walle de Ghelcke, The Takeover Directive as

a Protectionist Tool? ECGI - Law Working Paper No. 141/2010 p. 17 (17 February 2010). 231 Id. 232 The board neutrality rule is transposed in a non-binding legal framework. 233 The board neutrality rule is only transposed for voluntary bids, not for mandatory bids. 234 Reciprocity is only enforceable against non-Spanish companies. 235 For a detailed description of the circumstances and the consequences of the cases, please refer to Timothy

A. Kruse, Ownership, Control and Shareholder Value in Italy: Olivetti’s Hostile Takeover of Telecom Italia (2005).

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The application of the board neutrality rule in Italy and its consequences: Olivetti’s hostile takeover of Telecom Italia235

In February 1999, Olivetti sent the Italian supervisory authority a letter stating its intention to launch a bid on the shares of Telecom Italia. Olivetti used Tecnost, a 97%-owned Olivetti subsidiary, as an acquisition vehicle. Part of the consideration offered was cash that came from a syndicated loan package and new Tecnost bonds and shares. The board of Telecom Italia set up three defences to make Telecom Italia too expensive for Olivetti: converting the savings shares into voting shares, repurchasing 10% of the voting shares using cash on hand, and purchasing a participation in Telecom Italia Mobile. Following completion of the plan, the total value of Telecom Italia’s voting shares would have exceeded 90 billion euro. Only 22% of the shareholders attended the general meeting concerning the adoption of the defensive plan, far short of the 30% required. Consequently, the shareholders had to choose between Olivetti’s cash-and-securities bid, and keeping their shares and waiting for long-term benefits. At the end of May 1999, six out of seven of Telecom Italia’s remaining core shareholders tendered their shares to Olivetti, which ultimately purchased about 52% of Telecom Italia’s voting shares. Follow-up of the hostile takeover. After the bid, Olivetti made two attempts to modify the structure of the group. In June 1999, Olivetti decided to transfer Telecom Italia’s 60% stake in Telecom Italia Mobile directly to Tecnost. The primary benefit would have been to reduce the overall group dividend expense, because the group would no longer have had to distribute a portion of the dividends paid by Telecom Italia Mobile to Telecom Italia’s minority shareholders. In addition, the plan increased the cash flows available as dividends, so that Tecnost could have met its interest expenses. New Tecnost shares would have been used to compensate Telecom Italia’s minority shareholders for the loss of their indirect Telecom Italia Mobile stake. Because issuing the new Tecnost shares would have had a major dilutive effect on Olivetti’s existing 70% Tecnost stake, a key issue would be the number of new Tecnost shares paid for each Telecom Italia share. Olivetti did not want the link in the pyramid weakened too much and was aware that Telecom Italia’s minority shareholders had already missed one opportunity to receive Tecnost shares during the original takeover bid. Olivetti settled on an exchange ratio which would have reduced Olivetti’s Tecnost stake to approximately 42%, and simultaneously announced plans to repurchase 34% of Telecom Italia’s savings shares. Telecom Italia’s minority shareholders called on the Italian government to use its golden share to block the deal. Olivetti agreed to commission an independent analysis. Following analysts’ recommendations, Olivetti abandoned the project. In May 2000, the boards of Olivetti and Tecnost agreed to merge the two companies. Olivetti proposed a bid that required the majority vote of Tecnost’s minority shareholders. Olivetti also took steps to protect Tecnost’s bondholders as part of a public relations campaign emphasising the fairness of the transaction to Tecnost’s investors. Specifically, Olivetti promised to increase the coupon rate in the event of a downgrade by either Moody’s or Standard & Poor. Following almost unanimous approval of the Tecnost minority shareholders and bondholders, the two companies merged on 31 December 2000.

1.3. Reciprocity Reciprocity opt-in. A majority of Sample Countries (12 out of 22: Belgium, Denmark, France, Germany, Greece, Hungary, Italy, Luxembourg, the Netherlands, Poland, Portugal and Spain) provide

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for reciprocity. They allow the offeree company not to apply the board neutrality rule where the offeror is not subject to these rules. Two scenarios exist: Passivity opt-out with reciprocity opt-in. Where Member States do not apply the board neutrality rule, companies are free to apply the rule voluntarily. This type of transposition has occurred in seven Member States (Belgium, Denmark, Germany, Hungary, Luxembourg, the Netherlands and Poland). In such cases, the reciprocity rule is never used, as only companies that have opted in will be subject to the rule. Some Member States have not transposed the Directive’s board neutrality rule but have applied a board neutrality rule that is specific to their national legal framework. In some of these Member States, such as Germany, issuers can opt out of the national board neutrality rule and opt in to the board neutrality rules set out by the Directive, which thus become binding for such issuers. Where the aforementioned Member States have, however, adopted the Directive’s reciprocity rule (e.g. Germany), the issuers can disapply the opt-in to the Directive’s board neutrality rule in connection with a takeover bid, for instance if the offeror is not subject to equivalent provisions. In such a case, the offeree company that has disapplied the opt-in automatically becomes subject once again to the national neutrality rules which may prevent its board from taking certain defensive measures (unlike under the provisions of the Directive, pursuant to which defensive measures can be applied freely). Passivity with reciprocity. Of the 15 Member States applying the board neutrality rule, five (France, Greece, Italy, Portugal and Spain) also apply the reciprocity rule. Where the board neutrality rule and reciprocity apply, reciprocity typically applies automatically by effect of law and without any further provisions in the articles of association of the company.236

1.4. Exception to neutrality New role of pro-offeror hedge funds. The Directive provides for an exception to neutrality where shareholders of the offeree company agree to a takeover defence during the bid period.237 This exception may fail to take into account the full spectrum of investors and their respective incentives, particularly with regard to activist shareholders, private equity funds, hedge funds and the like. For example, hedge funds often buy blocks of shares in order to exercise greater voting power, without, however, carrying long-term interest in the company.238 In such circumstances, the board neutrality rule may not protect minority shareholders at all, but rather may merely help an offeror-friendly blockholder, such as a hedge fund, to block a defensive measure to the potential detriment of minority shareholders. Indeed, “hedge funds acting as arbitrageurs will favour the bidder and seek to secure the success of the bid, by accepting it and voting against defensive measures, if asked to do so”.239 In companies with dispersed shareholders, the balance of power has thus been further tilted in favour of the offeror over the offeree company due to the fact that dispersed shareholders lack the collective will to stand against the vote of an activist blockholder. This can be remedied through the suspension, in general meetings where there is a vote on defences, of voting rights of shareholders that acquired their shares after the bid was announced, thus excluding hedge funds which invest in companies once a bid has been launched.

236 Reciprocity applies in Italy subject to each company’s articles of association. 237 Article 9(2) states that during the bid period, “the board of the offeree company shall obtain the prior

authorisation of the general meeting of shareholders given for this purpose before taking any action, other than seeking alternative bids, which may result in the frustration of the bid…”.

238 Eddy O. Wymeersch, The Takeover Bid Directive, Light and Darkness, Financial Law Institute Working Paper No. 2008-01 (January 2008), available at SSRN: http://ssrn.com/abstract=1086987.

239 Paul L. Davies, Edmund-Philipp Schuster and Emilie Van de Walle de Ghelcke, The Takeover Directive as a Protectionist Tool? ECGI - Law Working Paper No. 141/2010 p. 2 (17 February 2010).

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“Toothless Defences”. It should also be noted that defences which require support by the general meeting of shareholders after the bid has been launched significantly weaken the ability of boards to resist a bid. The effect of such a requirement is that the success of a bid becomes staked on the question of whether shareholders of the offeree company believe that their incumbent board can improve on the bid, either by negotiating a higher price or by making profitable improvements to the company240 (which in practice cannot be evidenced within the bid period). This effectively renders the defence toothless as a mechanism for an offeree company board to resist a hostile bid.

1.5. Compensation as a pro-bid mechanism The Commission’s recommendation. The Commission has adopted several recommendations applicable to the compensation of directors of listed companies (among others Recommendation 2009/384/EC dated 30 April 2009). Although these recommendations are not specifically targeted at takeover bids, they may have an impact on them. The Commission considers that remuneration practices, in particular in the financial services industry, tended to “reward short-term profit and gave staff incentives to pursue unduly risky activities which provided higher income in the short term while exposing financial undertakings to higher potential losses in the longer term”.241 Consequently, the structure of directors’ remuneration should promote the long-term sustainability of the company and ensure that remuneration is based on performance. Variable components of remuneration should therefore be linked to predetermined and measurable performance criteria, including criteria of a non-financial nature. Limits should be set on the variable components of remuneration. Significant variable components of remuneration should be deferred for a certain period, for example three to five years, subject to performance conditions.242

In particular, the Commission has emphasised that “termination payments should not exceed a fixed amount or fixed number of years of annual remuneration, which should, in general, not be higher than two years of the non-variable component of remuneration or the equivalent thereof”. 243 In addition, “shares should not vest for at least three years after their award” and “share options or any other right to acquire shares or to be remunerated on the basis of share price movements should not be exercisable for at least three years after their award”.244

The impact of compensation. Professor Luca Enriques, on the basis of a US academic study drafted by Professors Kahan and Rock,245 has examined the impact of management compensation packages on bids. Professors Kahan and Rock state that “both greater use of stock options and greater restrictions on takeover defences make it more likely that an unsolicited bid will be consummated, but managers are likely to favour the former over the latter” . On this basis, Professor Enriques deems that stock options may promote takeover activity. The potential impact of the Commission’s recommendation. For Luca Enriques, if “Member States were to implement the Recommendation’s provisions on share-based compensation and termination payments, it would become much harder to lure directors’ into “accepting” hostile takeovers (i.e. into refraining from adopting available defensive tactics, especially in the various countries that have opted out of the board neutrality rule) via such a contract-based device”.246 It is thus clear that stock

240 Barbara White, Conflicts in the Regulation of Hostile Business Takeovers in the United States and the

European Union, Ius Gentium, Vol. 9, pp. 161-195 (Fall 2003). 241 Recommendation 2009/384/EC dated 30 April 2009, § (3). 242 Commission Recommendation complementing Recommendations 2004/913/EC and 2005/162/EC

regarding the regime for the remuneration of directors of listed companies, § (6). 243 Id. 244 Id. 245 Ed B. Rock and Marcel Kahan, How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to

Takeover Law, 69 U. CHI. L. REV. 871, 896 (2002). 246 Luca Enriques, European Takeover Law: The Case for a Neutral Approach (2009), UCD Working Papers

in Law, Criminology & Socio-Legal Studies Research Paper No. 24/2010, p. 14.

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option plans and other share-based compensation work as a pro-bid mechanism and will continue to do so as long as the Commission’s recommendation is not followed.

2. Breakthrough Description. The breakthrough rule (Article 11 of the Directive) neutralises pre-bid defences during a takeover. This rule reiterates certain restrictions (e.g. share transfer or voting restrictions) during the takeover period and allows a successful offeror to easily remove the incumbent board of the offeree company and to modify its articles of association. Based on the principle of proportionality between capital and control, this rule overrides multiple voting rights at the general meeting authorising post-bid defensive measures as well as at the first general meeting following a successful takeover bid. Application. Only Estonia has fully transposed the breakthrough rule. To date, there is no reported case where the breakthrough would have been activated. Partial transposition. France and Italy have transposed the breakthrough rule only partially. In France, the effects of the limitation of voting rights provided in the articles of association of a company that is subject to a public bid are suspended during the first general meeting following the closing of the bid if the offeror, either alone or in concert, comes to hold a proportion of the capital or voting rights of the offeree company that exceeds two-thirds of the share capital of the offeree company. In Italy, limitations to voting rights applicable to previously State-owned companies are in certain cases suspended following a bid. Breakthrough with voluntary opt-in. In Member States that have opted out of the breakthrough rule, companies may still voluntarily opt in. Some of these Member States (Denmark,247 Finland248 and Greece249) have placed certain restrictions on the ability to opt in. It is questionable whether such restrictions are compatible with the Directive. Voluntary opt-in. The voluntary opt-in to the breakthrough rule typically requires approval from the shareholders having special rights that may be neutralised. We have not identified any company where this opt-in has been exercised. The fact that no company has reported voluntarily opting in to the breakthrough rule suggests that the optionality renders the rule inefficient. Unclear rules regarding compensation. The wording of the Directive does not specify whether it is the offeror or the offeree company that has to compensate shareholders for the damage suffered when their rights are removed under the breakthrough rule. If the objective of the Directive is the furthering of takeover bids, then the absence of clear rules regarding the breakthrough rule inhibits potential offerors from launching bids, since they do not know at the outset how much exactly the bid will cost them. Further uncertainty arises from the absence of any indication regarding the time at which “equitable compensation” should be calculated. If the compensation is calculated before the end of the bid, the time necessary to proceed with this calculation is likely to cause the bid to fail. An exclusion of the bid period in the calculation would also be contrary to the principle that the time allowed for acceptance of the bid should be limited, since the Directive asserts that “the time allowed for the

247 Opt-in subject to grandfather clause for agreements concluded before 31 March 2004. 248 The non-binding Finnish Takeover Code provides some guidance in respect of the voluntary application of

the breakthrough rule and also points out that it is unclear whether the breakthrough provision intends or may be used in connection with a contractual relationship between two parties. The Takeover Code concludes that the Directive may be interpreted as not preventing an arrangement in accordance with Finnish law currently in force, according to which a party that breaches a shareholders’ agreement, e.g. by exercising voting rights or conveying shares, is contractually liable towards the other contracting parties.

249 The breakthrough rule is not applicable with regard to voting rights on defensive measures and post-bid shareholders’ meetings where such restrictions are provided for or agreed in exchange for special monetary benefits.

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acceptance of a bid should be regulated”.250 If, on the other hand, the price of the compensation is calculated after the end of the bid, the offeror will have no certainty at the outset of the bid as to the exact cost of the bid. It therefore seems difficult to design an appropriate scheme addressing the compensation issue. Reciprocity. 11 out of the 22 Member States that do not apply the breakthrough rule allow reciprocity where companies apply this rule voluntarily (Belgium, Cyprus, Denmark, Germany, Greece, Hungary, Italy, Luxembourg, the Netherlands, Poland, Portugal and Spain). The countries that do not apply reciprocity are Austria, the Czech Republic, Estonia, Finland, France, Ireland, Romania, Slovakia, Sweden and the UK. As there is little, if any, evidence that companies voluntarily apply the breakthrough rule, reciprocity is in practice not very relevant. Criticisms. It could be argued that the breakthrough rule may violate the principle of shareholder decision-making, which is used to validate the principle of board neutrality. Furthermore, even if the breakthrough rule were to be applied by a company in practice, its authority could be inconsistent in that some divergences from the one share – one vote rule are covered, whereas others – such as preferred shares, double voting rights, golden shares or restricted shares – are not.251 It has also been suggested that if the breakthrough rule were made mandatory, companies wishing to keep the same voting structures could simply reorganise their corporate structure into a pyramid structure. This is supported by the example of Belgium, where following the introduction of the one share – one vote rule in 1934 there was an increased emergence of pyramids.252

3. Summary view on neutrality and breakthrough rules Summary tables and map. The situation regarding neutrality and breakthrough can be summarised as follows:

Neutrality Yes No

Yes France, Greece, Italy,253 Portugal, Spain.254

Belgium, Denmark, Germany,255 Hungary, Luxembourg, Netherlands, Poland.

Reciprocity No Austria, Cyprus, Czech Republic,

Estonia, Finland,256 Ireland, Romania,257 Slovakia, Sweden, UK.

Breakthrough

Yes No

Reciprocity Yes Belgium, Cyprus, Denmark, Germany,

Greece, Hungary, Italy258, Luxembourg, Netherlands, Poland, Portugal, Spain.

250 Takeover Bids Directive, recital 14. 251 Koen Geens and Carl Clottens, One Share – One Vote: Fairness, Efficiency and (the Case for) EU

Harmonisation Revisited, p. 21 (4 February 2010). 252 Id. at 17. 253 Subject to the opt-out in the bylaws. 254 Neutrality applicable to non-Spanish companies not subject to passivity rule in their country of origin 255 Modified neutrality rule. 256 The neutrality rule has not been transposed as such in Finland, as the Finnish Companies Act included

provisions before the transposition of the Directive that were deemed to be sufficient with respect to the passivity rule. However, the non-binding Helsinki Takeover Code provides further guidance with respect to the passivity rule.

257 For voluntary bids only, not for mandatory bids. 258 Exception: shareholder agreements.

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No Estonia. Austria, Czech Republic, Finland, France,259 Ireland, Romania, Slovakia, Sweden, UK.

4. Other defences Ongoing debate on defences. The complexity of takeover defence regulation is increased by the continuous debate around defensive mechanisms, which remain popular both within and outside the EU as is evidenced by the flux of new defences being created. Some examples of these new defences are listed below. � Defensive measures of formerly State-owned companies. For instance, Italian laws authorise

State-owned companies to use defensive measures including the following:

- National interest and State participations are protected260 mainly by means of (i) “golden share” rights and (ii) limitations of shareholdings held by private entities.261

- “Poison pill”-type defences for companies in which the State has a qualifying

participation.262 In particular, such companies are allowed to issue, in favour of one or

259 Exception: voting caps are suspended at the first GM following a successful bid (2/3 post-bid holding). 260 Legge sulle privatizzazioni means the Law Decree No. 332 of 31 May 1994 (converted into Law No. 474

of 30 July 1994), as amended. 261 Such limits have been included, in particular, in the articles of association of companies in which the State,

also through the Cassa Depositi e Prestiti, owns a controlling shareholding. 262 Finanziaria 2006 means Law No. 266 of 23 December 2005.

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more shareholders, shares and financial instruments granting the right to request the attribution of new shares or financial instruments with voting rights.263

� However, Article 3 of the Italian Legge sulle Privatizzazioni, as amended by the

Implementation Decree,264 provides that articles of association of formerly State-owned companies (operating in strategic fields) that limit holdings are not operative if the relevant limits are crossed following a takeover bid which results in the offeror holding more than 75% of the voting share capital (thus working on a “mini-breakthrough”).

� Tender offer warrants. Under French law, issuances of tender offer warrants are allowed to

create a threat of dilution of the offeror’s equity holding and voting interest in the offeree company. The vote of the offeree’s general meeting of shareholders deciding the potential issue of tender offer warrants may be held prior to the bid. The authority granted to the board of directors to issue tender offer warrants is valid for a maximum period of 18 months but may not be applied against an offeror who is subject to the board neutrality rule and the breakthrough rules in his country. However, the vote may also take place during the bid period, in which case the authority may be used against any offeror, irrespective of whether the reciprocity exception applies or not. This mechanism, which is always subject to shareholders’ approval, has been designed to empower offeree company boards to negotiate a higher bid price.

� “Poison pills” redemption clause. In Finland, a so-called “poison pills” redemption clause may

be introduced in the articles of association of an offeree company. The articles of associations of several listed companies contain provisions imposing an obligation to redeem other shareholders’ shares when one party has acquired a certain amount of shares, the threshold usually being one-third or 50% of the outstanding shares. Such redemption is usually made according to pricing rules that differ from the ones set out for takeover bids. As the threshold triggering the mandatory bid has been reduced to 30%, it is typically set as a condition for completion in voluntary bids that the poison pill provision (if any) be removed from the articles of association before the bid is completed in order to prevent conflicting pricing rules from becoming applicable.

� Voting rights ceiling. In Spain, voting rights ceilings have been suppressed; however, this issue

is pending before the Supreme Court. Spanish national legislation has been recently amended with respect to listed companies to state that “in no event shall the articles of association limit the maximum number of votes that can be cast by one single shareholder or companies belonging to the same group, and clauses in the articles of association that directly or indirectly establish that limitation shall be null and void as a matter of law”. In September 2010, Iberdrola filed an appeal against the amendment before the Supreme Court based on allegations of serious irregularities that occurred in the amendment procedure.

Preference shares approved by shareholders. The European Court of Justice’s case law has suggested that certain preference shares may be a valid defensive mechanism if these mechanisms are provided for in the company’s articles of association. In the Volkswagen case,265 the court in Luxembourg decided on 23 October 2007 that preference shares allotted to the German government contravened the EC Treaty because they had been granted to the government under the Volkswagen law (the Volkswagen law provided for the capping of voting rights at 20%, the fixing of the blocking minority at 20% and the right for the Federal State and the Land of Lower Saxony each to appoint two representatives to the supervisory board). The European Court of Justice, however, specified that these provisions would not have been contrary to the EC Treaty had they been provided for in the company’s articles of association. This specific clarification by the European Court of Justice

263 Such a provision de facto grants an offeree company in which the Italian State holds a share the right to

realise a capital increase through which the public entity shareholder can increase its participation. 264 Legislative Decree No. 229 of 19 November 2007. 265 Case C-112/05 Commission of the European Communities v. Federal Republic of Germany [2007] ECR I-

8995.

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indicates that even where such preference shares may act to frustrate a bid, they are permitted provided that they have been approved (by a vote required to amend the articles of association) or acquiesced to by shareholders (through the purchase of shares in a company with a pre-existing preference share provision in its articles of association).


1. Board neutrality Overview. All Major Non-EU Jurisdictions (other than the US) purport to have, to some extent, a board neutrality rule equivalent. The neutrality requirement is assessed in different manners by each jurisdiction, but schematically states that a board may not freely take actions that would prevent shareholders from considering the merits of the bid or that would cause the offeree company’s assets to deteriorate. Some Major Non-EU Jurisdictions set out a catalogue of measures that a board may not take, whereas others set out such list in respect of actions that need to be approved by shareholders. Summary table. The situation may thus be summarised as follows: Board

neutrality equivalent

Duty of the offeree company’s board in connection with a bid

Shareholder approval

Australia Yes, in practice.

Directors’ duty to act bona fide in the interests of the company.

Necessary where board actions may: � interfere with the reasonable and

equal opportunity of the shareholders to participate in an offer; or

� inhibit the acquisition of control over their voting shares taking place in an efficient, competitive and informed market.

Further, the ASX Listing Rules require shareholder approval where: � the board seeks to issue equity in

the three months after it is informed of the takeover;

� the board seeks to issue equity exceeding 15% of its issued share capital;

� the board seeks to issue equity if the holder of more than 50% of ordinary securities notifies the company in writing that it intends to call a general meeting to appoint or remove directors.

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Board neutrality equivalent



Canada Yes, in practice.

Directors may not take steps that make it impossible for a takeover bid to be delivered to the offeree company’s shareholders or for shareholders to respond to the bid.

Defensive tactics are generally available whether or not they are authorised by the shareholders. However, shareholders’ rights plans normally need to be ultimately approved by shareholders and certain asset sales can trigger the need for shareholder approval, for example in the event that the asset sale will constitute a sale of all or substantially all of the offeree company’s assets.

China Yes, in practice.

Directors may not cause the assets, debts, equities or business profits of the offeree company to be materially affected by way of asset disposals, investments, changes of the main offeree company business or the granting of securities or loans.

Actions materially affecting the offeree company’s assets, debts, equities or business profits may be performed following shareholder approval.

Hong Kong Yes Directors may not take any frustrating actions or any other actions that effectively deny shareholders the opportunity to consider the merits of the bid.

The following actions may only be performed following shareholder approval: � share issuances; � issuances or grants of convertible

securities, options or warrants; � acquisitions and dispositions of

assets of a material amount; � entering into contracts, other

than in the ordinary course of business; and

� acquisitions or redemptions of any company shares.

The supervisory authority may waive the shareholder approval requirement in appropriate circumstances or when the offeror agrees to such waiver. Even if shareholder approval is obtained, directors must comply with their fiduciary duties and consider whether the use of anti-takeover devices is in the best interests of the company.

India Yes, in practice.

Neither the offeree company board nor its shareholders can prevent the offeror from

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acquiring the shares other than by not tendering their shares in the open bid.

Japan Yes, in practice.

Recent court decisions suggest that the offeree company board can take defensive measures if the offeror is abusive and would adversely affect the corporate value of the offeree company and thereby the common interest of the shareholders of the offeree company. In practice, the abuse is difficult to establish, so that in fact shareholders’ approval is required.

Defensive measures require shareholder approval if the offeror is not abusive and would not adversely affect the corporate value of the offeree company. However, even in case of prior shareholder approval, defensive measures are only allowed if they appear equitable and reasonable for the purpose of defence.

Russia Yes, in practice.

No specific board neutrality rule but shift of corporate powers during the bid.

During a bid, offeree company shareholders have the exclusive authority to:

� increase the share capital; � issue convertible securities,

including share options; � approve acquisitions or

divestments exceeding 10% of the offeree company’s book value (unless effected in the ordinary course of business or prior to receipt of the offer);

� approve interested-party transactions;

� approve the acquisition of offeree company shares;

� increase any fees, compensation or indemnities paid to the members of the offeree company’s corporate bodies.

Such limitations cease 20 days after the expiry of the acceptance period.

Switzerland Yes, in practice.

Without shareholder approval, the offeree company board may not enter into any legal transaction which would have the effect of significantly altering the assets or liabilities of the offeree company. In particular, the offeree

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company board may not: � sell or acquire assets the value

of which exceeds 10% of the total balance sheet or contributes in excess of 10% to the offeree company’s earnings;

� enter into contracts with members of the board of directors or management board that provide for unusually high exit compensation payments;

� subject to certain exceptions, issue shares or convertible securities without preferential subscription rights;

� acquire offeree company shares.

US No Please refer to Chapter III Section III C. 2.2) of this Study.

2. Breakthrough rule No equivalent. There is no equivalent to the breakthrough rule in any of the Major Non-EU Jurisdictions.

3. US business judgement rule, Unocal and Revlon duties

3.1. Overview Introduction. Much of US State corporate law deals with whether the board of directors meets its fiduciary obligations when it employs defensive tactics to discourage a hostile takeover. Unlike ordinary, everyday business decisions, which are largely protected by the “business judgement rule,” a decision to employ a defensive tactic in the face of a hostile bid faces a higher standard of review from courts.

3.2. The core principle: the business judgement rule In the US, directors, when making everyday business decisions, are in most cases protected from liability by what is known as the “business judgement rule”. So long as directors act (i) on an informed basis, (ii) in good faith, and (iii) in the honest belief that the action was in the best interests of the company, they will not be held liable for decisions that ultimately result in harm to the company. In effect, the business judgement rule creates a strong presumption in favour of the board of directors of a company, freeing such directors to take risks without the constant fear of lawsuits. As such, a court will not substitute its own notions of what is or is not a sound business decision.

3.3. Enhanced standards applicable during takeover bids

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Unocal duties. In the takeover context, directors are held to a higher standard of review. The Delaware Supreme Court found in Unocal Corp. v. Mesa Petroleum Co.266 that directors are under an “enhanced duty” to show that their decision to launch takeover defences is meant to further the welfare of the company and not just protect their jobs. Directors must show that they applied takeover defences as a response to a legitimate threat to company policy and effectiveness, and that their actions were “reasonable in relation to the threat posed”. Therefore, Unocal duties expand on the business judgement rule by requiring directors to show that there were reasonable grounds for launching takeover defences and that the defences were proportionate to the threat posed. Revlon duties. Under the seminal case Revlon v. MacAndrews & Forbes Holdings, Inc., 267 in connection with the break-up or sale of control of a company, the overriding duty of a board of director is to maximise the short-term value to shareholders. Revlon duties differ from Unocal duties in that the duty to maximise shareholder value is only triggered if the dissolution or breakup of the company is “inevitable”. The Revlon court case lays out the difference between Unocal and Revlon duties. In Revlon, the Delaware Supreme Court found that the directors of Revlon, Inc. acted reasonably when they launched two defences to stop a perceived takeover threat by Pantry Pride, Inc. However, the court held that once it became clear that Revlon was going to be sold, its directors failed in their obligation to maximise the company’s immediate value for the benefit of the shareholders by stopping a bidding war between Fortsmann Little & Co. (Revlon’s white knight) and Pantry Pride. After a failed attempt at a friendly acquisition, Pantry Pride launched a hostile bid for Revlon at $45 per share. The Revlon board, perceiveding this as a grossly inadequate price for the company and questionning Pantry Pride’s financial strategy to purchase the shares “junk bond” financing followed by a break-up of Revlon and disposing of its assets, introduced a poison pill in the form of a shareholders’ rights plan which allowed shareholders to purchase shares at a premium if anyone acquired beneficial ownership of 20% or more of Revlon’s stock, unless the purchaser acquired all of the company’s stock for cash at $65 or more per share. After Revlon set up the poison pill, Pantry Pride made its second hostile move, offering Revlon shareholders $47.50 per share. The Revlon board advised shareholders to reject the bid and commenced its own bid to repurchase up to 10 million shares of Revlon stock. Subsequently, Pantry Pride made a further bid. The Delaware court held that up to that point, the Revlon board had fulfilled its Unocal duties as it reasonably believed the price offered by Pantry Pride was significantly too low. However, shortly after Pantry Pride’s second bid, the Revlon board authorised management to start negotiating with other parties. Revlon then began talks with Fortsmann, Revlon’s white knight. Fortsmann and Revlon initially agreed to a leveraged buyout by Fortsmann. Revlon’s stock price fell when news of the potential Fortsmann/Revlon merger surfaced. Subsequently, Pantry Pride made a third bid, and Fortsmann and Pantry Pride began a bidding war that eventually ended when Fortsmann and Revlon entered into an agreement that included lock-up and no-shop provisions. Shareholders brought suit after Fortsmann and Revlon finalised the agreement. The trial court ruled in favour of the shareholders and enjoined Fortsmann from purchasing Revlon’s stock. The Delaware Supreme Court affirmed this ruling, holding that once it became clear that Revlon was going to be sold, Revlon’s directors failed in their obligation to maximise the company’s immediate value for the benefit of the shareholders by stopping the bidding war between Fortsmann and Pantry Pride. The directors had embraced the notion that Revlon was going to be sold and therefore their decisions were no longer protected by the business judgement rule; nor could they continue under their Unocal duties, as there was no longer a perceived threat to the company. Application of Revlon duties. Once it was clear that Revlon would be sold, the “directors’ role changed from defenders of the corporate bastion to auctioneers charged with getting the best price 266 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. Supr. 1985). 267 Revlon v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. Supr. 1985).

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for the stockholders at a sale of the company”. Once the Revlon board crossed the line between fending off the perceived threat and accepting the fact that the company was going to be sold when it began talks with Fortsmann, its obligation to the shareholders changed. The court held that it was at this point that Revlon duties commenced and Unocal duties ceased. It went on to say that stopping a bidding war in favour of a white knight is impermissible as “market forces must be allowed to operate freely to bring the target’s shareholders the best price available for their equity”. Determining the Revlon duty trigger is entirely fact-driven and case law-dependent. The absence of a bright-line test applicable in any given situation in order to determine whether the company is being auctioned requires a case-by-case determination, frequently by way of litigation, of applicable standards. The absence of predictability would thus appear to be one major down-side of the US rules.

3.4. Stakeholder statutes More than 30 States incorporate “other constituency” or “stakeholders” statutes, which specifically allow directors to consider the interests not only of shareholders, but also of employees, suppliers, creditors and customers as well as the community when considering a merger. It is not clear how such statutes would be interpreted in the context of a specific bid situation. However, they are not in line with Revlon duties, and thus create an issue as to whether directors’ obligations consist solely in maximising shareholder value or whether the standard applied in merger or takeover scenarios should be maximising the value of the company as a whole.

4. Reciprocity No equivalent. There is no equivalent to the reciprocity rule in any of the Major Non-EU Jurisdictions.

5. Defences used The main takeover defences used in the Major Non-EU Jurisdictions do not differ significantly from those in EU Member States. In general, most of the Major Non-EU Jurisdictions have observed some form of shareholder rights plan (poison pill) defence against takeovers. Although not formally banned in Australia, US-style poison pills are only permitted if the ASX determines that they are appropriate and equitable. Canada permits poison pills, but ultimate control over the application of such defences must be granted to shareholders (please refer to Chapter III Section III C. 5.2) of this Study).

5.1. US takeover defences Common defences. The most common takeover defences used in the US are the following.

a. Pre-bid defences Shareholder rights plan (poison pill). The most common form of takeover defence is shareholders’ rights plans, which take effect the moment a potential acquirer (i) announces his intention to launch a bid, or (ii) crosses a share percentage threshold (for example, 20% ownership of a share class). Under such plans, all other shareholders can purchase additional company stock at a discounted price, thus making it far more difficult for the potential acquirer to take control of the company as his voting power is diluted. The poison pill is set up by the board and does not need to be approved by shareholders. Staggered board of directors. Groups of directors are elected at different times for multi-year terms, creating a significant obstacle for a prospective offeror to overcome, as the offeror is obliged to win

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multiple proxy fights over time and deal with successive shareholders’ meetings in order to successfully take over the company. Voting rights plan. These plans are applied when a company charters preferred stock with superior voting rights to common shareholders. Even if an offeror were to acquire a substantial quantity of the offeree company’s voting common stock, it would not be able to exercise control over its purchase as those with preferred stock, and thus superior voting rights, would prevent any offeror from taking over the company. Limiting when directors can be removed. The board of directors, through its company’s articles of association or bylaws, can adopt measures prohibiting the removal of directors without cause, making it difficult for an offeror to penetrate such company’s board.

b. Post-bid defences White knight. An offeree company seeks a friendly offeror with whom to negotiate a pre-emptive sale of the company. The intention behind such acquisition is to circumvent the takeover of the offeree company by a third, unfriendly offeror. The white knight might defeat the undesirable offeror by offering a higher and more enticing bid, or by striking a favourable deal with the offeree company’s management (for an example of a white knight, please refer to Chapter III Section III C. 2.2.) (c.) of this Study). White squire. Similar to a white knight, but instead of purchasing a majority interest, the White Squire purchases a lesser interest in the offeree company. Pac-man defence. In such a defence, the offeree company turns the tables on the hostile offeror by mounting its own bid to acquire the bidding company before it acquires the offeree company. Recapitalisation. This is performed by adding debt, eliminating idle cash and debt capacity. In this way, prospective offerors would face the daunting task of repayment after the acquisition and are therefore less likely to launch a bid. Making an acquisition. An offeree company makes an acquisition, preferably through stock swaps or a combination of stock and debt. This has the effect of diluting the offeror’s ownership percentage and thus makes the takeover significantly more expensive.

5.2. Poison pills in Australia Easier use of poison pills. In Australia, poison pills may be used as a defensive mechanism and as a bargaining tool to negotiate with a potential acquirer. They may also be used as an alternative mechanism to force an offeror to launch a bid on all the equity securities of the issuer. However, the permissibility of poison pills is unclear under Australian law and depends mainly on ASX’s judgement. In the past, the ASX Listing Rules prohibited companies from issuing poison pills because such pills were considered to frustrate takeover bids. This rule has, however, been removed, and nowadays the ASX is competent on a discretionary basis to decide whether the terms of a poison pill are “appropriate and equitable”.

5.3. Shareholders’ rights plans in Canada Rare hostile bids. Canadian takeover bid legislation is very offeror-friendly and offeree companies thus appear vulnerable and subject to changes of control. However, the Canadian market is characterised by a concentration of shareholders/ownership and dual-class holding, with the result that it is almost impossible to take over Canadian companies that are controlled by small groups of

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shareholders. Therefore, hostile takeovers are in practice rare and shareholders have the opportunity to influence board of directors on an informal basis. Securities regulation promotes shareholders’ approval of pills. Securities regulators are responsible for considering issues that arise in connection with shareholders’ rights plans, based on the guiding principle that shareholders, not directors, must decide on the success of a takeover bid. The board of directors of an offeree company cannot pre-empt shareholders’ access to a hostile bid on the basis that the bid is considered inadequate, and is generally prohibited from taking any action that inhibits open and unrestricted takeover bids. As a consequence, shareholders must approve the adoption of the shareholders’ rights plan within six months of the adoption of such plan by the board of directors. Pills to buy time and defeat opportunistic bids. Shareholders’ rights plans are in general permitted only as a means to buy time for the offeree company board to look for alternatives and maximise share value. Shareholders’ rights plans in Canada thus seek to establish certain parameters for some of the non-pricing terms of hostile bids (either before or after the bid is launched). This device should not be a defence mechanism but should favour auction procedures. In the Alberta Securities Commission hearing Re Pulse Data Inc., 30 November 2007 (“Pulse”), and the OSC hearing In the Matter of Neo Material Technologies Inc., 11 May 2009 (“Neo”), securities regulators reviewed shareholders’ rights plans that offeree company boards had intended to keep in place indefinitely to frustrate takeover bids they believed were not in the companies’ best interests. Normally, regulators take the position that, because such “poison pills” should be available only to afford a board time to find more favourable bids, it is appropriate to end trade poison pills after 45 to 60 days. However, in Pulse and Neo, regulators recognised that, at least in some narrow factual circumstances, offeree company directors may use rights plans to defeat certain opportunistic bids indefinitely. The recent British Columbia Securities Commission decision in Icahn Group v. Lions Gate Entertainment Corp., 18 October 2010, seemed to reassert the principle that stalling a bid is the only appropriate reason to have a poison pill and that, at some point, the pill must be terminated. A subsequent OSC decision, In the Matter of Baffinland Iron Mines Corporation, 3 December 2010, affirmed that the law will intervene on public interest grounds to terminate a poison pill if continuation thereof is likely to deprive offeree company shareholders of their right to respond to a bid, and in circumstances where it is likely that continued operation of the pill will not achieve any additional value enhancement for offeree company shareholders.

5.4. Changes in the use of defensive mechanisms

a. The US Relative decline of defences. Generally speaking, in the US, the use of traditional defensive measures has declined in the last five years. In fact, a number of US public companies have revoked and/or purposefully let existing defensive measures expire. This is the result of pressure by institutional investors, and other active shareholders, on companies whose shares they hold, to eliminate such defences based upon their view that most takeover defences are merely mechanisms to entrench existing management and to discourage takeover bids. The US federal securities laws generally facilitate the inclusion of shareholder proposals mandating the dismantling of takeover defences in public company annual meeting proxy statements; moreover, active shareholders have made use of this. As a result, many companies have agreed to voluntarily dismantle various takeover defences in lieu of being required to submit them to a shareholder vote. A particular focus has been on the dismantling of poison pills and on giving shareholders the right to call special meetings. It must, however, be noted that boards of US companies may, in the absence of a board neutrality rule, reinstate such defences (subject to certain limits) in case of a takeover bid.

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Limits. As boards may set up a poison pill quickly when a bid occurs, the reduction in the number of defences that are set pre-bid does not necessarily mean that defences will be less frequently used.

b. Rare bids

(1) Hong Kong Family ownership. Hostile takeovers and, in consequence, takeover defences are rare in Hong Kong, due to the prevalence of family ownership of companies coupled with tightly-held blockholding structures controlled by the founding families, which makes acquisition of control difficult. This phenomenon has gradually begun to change, both because family ownership is starting to move to the second and third generations and because the current financial crisis has placed a significant burden on companies, creating a need for restructuring.

(2) Japan Former cross-shareholding structures. Similarly, until the early 2000s, hostile takeovers were virtually non-existent in Japan, due mainly to the prevalence of cross-shareholding structures. In an effort to enhance flexibility, Japan initiated corporate law reforms in the 1990s that broke down the stable cross-shareholdings and ultimately led to a rise in foreign ownership and hostile takeover bids.268 Rise of takeover defences. Probably as a result of the rise in hostile takeovers, since 2004 there has been a dramatic increase in the use of takeover defences in Japan, particularly poison pills. As the application of poison pills in Japan increased, from two in 2004 to 634 in 2008,269 there was initially little guidance initially as to when these defensive mechanisms would be permitted. Following several high-profile takeover attempts, the takeover defences were brought before the Tokyo High Court, which clarified that the power to take defensive measures against a hostile bid lies with shareholders and that boards may adopt such defensive measures only with the approval of the shareholders or under emergency circumstances. Specifically, in the attempted takeover of Nippon Broadcasting by Livedoor, the Tokyo High Court approved the defence in accordance with this principle, which is referred to as the “power allocation doctrine.”270 Under the doctrine, boards may initiate defensive measures against a hostile bid, but the shareholders should decide whether to allow the defence unless there is some “exceptional situation”, for instance if the offeror attempts to disrupt the company.271 The Tokyo High Court did not find that such an exceptional situation existed in the Livedoor takeover bid, but gave no explanation as to what would be sufficient to constitute such an exception. Following the decisions of the Tokyo High Court, in May 2005 the Japanese Ministry of Economy, Trade and Industry and the Ministry of Justice issued the “Guidelines regarding Takeover Defences for the purposes of Protection and Enhancement of Corporate Value and Shareholders’ Common Interests”272. Although the guidelines are non-binding, their impact has been significant. They outline the following principles for allowing pre-bid defences:273 � The purpose of the defence must be to enhance corporate value and internal shareholder value.

268 Jennifer G. Hill, Takeovers, Poison Pills and Protectionism in Comparative Corporate Governance,

Sydney Law School Research Paper No. 10/120; Vanderbilt Public Law Research Paper No. 10-43; Vanderbilt Law and Economics Research Paper No. 10-33; ECGI - Law Working Paper No. 168/2010, at p. 7 (7 November 2010).

269 Id. 270 Kanda, Hideki, Takeover Defences and the Role of Law: A Japanese Perspective, Perspectives in

Company Law and Financial Regulation 413, 416-17 (2009). 271 Id. 272 Kanda, Hideki, Takeover Defences and the Role of Law in Japan, UT Soft Law Review No.2, at pp. 3-4

(2010). 273 Id. at p. 4.

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� The defence must be based on the shareholder’s will. � The defence must be necessary and proportionate to the purpose sought. These guidelines were followed by several regulatory developments, including new disclosure rules and clarification of tax implications. These were accompanied by the application of stricter rules and guidelines by the Tokyo Stock Exchange, including the barring of “golden shares” or other “dead hand” poison pills.274 In accordance with these developments, the triggering of a poison pill is now usually performed either by a special committee of independent individuals or after approval at the general meeting of shareholders. The emphasis of the Tokyo High Court on the shareholders’ power to decide on the triggering of a defensive scheme induces most companies today to require shareholder approval for the triggering of a poison pill. Thus, although there is no explicit rule in Japan requiring shareholder approval for the use of defensive measures, for the moment the courts in Japan seem to favour shareholder consent and most companies seem to be acting in accordance with this notion voluntarily.

6. Supervisory authority and dispute resolution

6.1. Overview Switch from courts to Australian Takeover Panel. Before 2000, resolutions of takeover disputes in Australia were traditionally decided by courts. However, in 2000, these disputes were shifted to the authority of the Australian Takeover Panel. The shift was made in an effort to reduce tactical litigation, and has had the effect of changing the analysis used to assess defensive action taken by offeree company boards. Where the Australian courts had previously analysed the permissibility of such defensive tactics according to the fiduciary duty standards of directors (i.e. on a basis similar to that used in the US), the Australian Takeover Panel’s analysis of takeover defences is whether the defence amounts to a “frustrating action”. A “frustrating action” means conduct of an offeree company board that, in a takeover bid scenario, triggers conditions that are likely to result in the failure of the bid.275 This analysis significantly changed the permissible application of takeover defences in Australia by shifting the focus away from the purpose and onto the effect of the directors’ decision to use the defence.276 In China, the supervisory authority with broad discretionary power over the enforcement and interpretation of Chinese takeover law is the China Securities Regulatory Commission.

6.2. Description of “unacceptable circumstances” in Australia The Takeover Panel. In Australia, unacceptable circumstances may be established particularly in connection with defensive measures or offerors’ actions. The Panel does not apply a precise set of rules in order to determine whether an action or inaction took place in unacceptable circumstances, but reviews each situation on a case-by-case basis. The Panel pays particular attention to the commercial objective of the relevant action or inaction in connection with the takeover bid. Actions of the offeree company which take place in the ordinary course of business or which were previously 274 Id. at 5. Golden shares are shares that carry a special voting right that can supersede all other shares in

certain circumstances. Similarly, dead hand poison pills prevent shareholders from removing the defence by mandating that only the directors who instituted the pill can dismantle it. Both of these conditions have the effect of ensuring that a defence favoured by the board will be implemented regardless of the will of the shareholders.

275 See Australian Takeovers Panel Guidance Note 12 – Frustrating Action, at p. 2 (2003). 276 In this regard, the Australian Takeovers Panel’s policy is based on Sections 602(a) and (c) of the

Corporations Act, which require that control acquisitions of listed companies “take place in an efficient, competitive and informed market” and that, as far as practicable, shareholders “have a reasonable and equal opportunity to participate in any benefits that accrue to holders through any proposal under which a person would acquire a substantial interest in the company, body or scheme”.

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announced, or which were taken pursuant to agreements entered into before the offeree company became aware of the bid will not result in unacceptable circumstances. Also, actions or inactions are unlikely to be considered unacceptable if the decision to perform them is based on a legal or commercial imperative. The White Knight defence. The white knight defence is not strictly prohibited; however, listed companies are subject to stringent restrictions limiting share issuances (ASX Listing Rules generally authorise share issuances of up to 15% within 12 months). Applicable regulation views as a legitimate purpose the seeking of another offeror by an offeree company in order to obtain the best possible price for the latter’s shareholders. However, the purpose of the issuance may not be to defeat or block a takeover bid, which would lead to a declaration of unacceptable circumstances by the Panel. Indeed, such an issuance would prevent shareholders from benefiting from a takeover bid. The Poison Pill defence. The ASX is authorised to review on a discretionary basis the permissibility of a poison pill defence. If the terms of the defence are deemed not to be “appropriate and equitable,” the defence is likely to establish unacceptable circumstances (please refer to Chapter III Section III C. 5.2.) of this Study). Other defensive measures. The Panel can be asked to find unacceptable circumstances in case of misleading conduct by an offeror, particularly if such offeror departed from its stated intention during the bid. However, once the bid is closed, it is unlikely that an offeror’s actions will be reproved.

D. Perception

1. Openness and competitiveness Openness and competitiveness of the EU market. The restrictions imposed on defences by the Directive have been largely acknowledged by Other and Main EU Jurisdictions as contributing to the openness of the EU market for corporate control (82% and 94% respectively). To a lesser extent, this assessment is also true in respect of the competitiveness of the EU market (81% and 86% for, respectively, Other and Main EU Jurisdictions). Whereas investors and intermediaries generally believe in competitiveness, the significant number of “no opinion” answers received indicates that this is less the case for issuers. Employee representatives seem even more doubtful as to whether the restrictions set out by the Directive have enhanced the competitiveness of the EU market.

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Pyramid and cross-shareholding structures. The significant number of “no opinion” answers reflects widespread uncertainty as to whether taking into account pyramid and cross-shareholding structures would contribute to the openness and competitiveness of the EU market. However, amongst the respondents who expressed an opinion, there is strong support – particularly from investors and intermediaries – for taking cross-shareholding structures and, to a lesser extent, pyramid structures into account (81% and 86% for Other and Main EU Jurisdictions respectively).

2. Intention of stakeholders Protection of stakeholder interests. The restrictions imposed by the Directive on defences that may be applied by the offeree company board are overwhelmingly perceived as being shareholder-protective (86% of opinions expressed), with only a limited number of diverging opinions or persons not expressing any opinion. The protective effect of the Directive on the offeree company itself is also strongly acknowledged, although to a lesser extent (81% of opinions expressed). In contrast, the protection granted by the Directive to employees and other stakeholders is less apparent, as is reflected by the significant number of negative opinions and “no opinion” answers. Nonetheless, 69% and 80% of the opinions expressed view the Directive as being protective of, respectively, employees and other stakeholders; however, employee representatives feel strongly that there is a lack of protection for these constituencies under the Directive.


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3. Legislation is no major obstacle to bids. Effect of the passivity and breakthrough rules. The differences in legislation within the EU are mostly considered to create an obstacle to bids “sometimes” (41%) or “rarely” (35%). In addition, there is a general opinion that there are “sufficient” possibilities for boards to take defensive measures (79%) and to break through existing defensive mechanisms (82%). These responses are true for both issuers and investors and intermediaries. It thus appears that a satisfactory balance has been found between the possibilities for the offeree company boards to apply defences and for the offeror to remove pre-existing defences, such balance not being affected by existing differences amongst Member States. Some issuer associations stressed that, as far as reciprocity rules are concerned, it is imperative that they be fully applicable in cases involving non-EU countries.


4. Transparency Limited impact of transparency on application of defences. Considering the pattern of responses and the significant number of “no opinion” responses (approximately 58%), it appears to be mostly unknown whether transparency contributes to the dismantling of defences. Thus, no clear link seems to be drawn between these two circumstances. No stakeholder stated that transparency always causes defences to be dismantled. Amongst the other opinions, the responses are evenly split between those who believe that transparency “never” (14%) or “rarely” (41%) contributes to the dismantling of defences, and those who think that this is “sometimes” (10%) or “frequently” (34%) the case.

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5. Application of defences

5.1. Use of defences

a. Regarding pre-bid defences Pre-bid defences that are sometimes used. The following five pre-bid defences are perceived to be used “always,” “frequently” or “sometimes” by more than 50% of stakeholders: shareholders’ agreements (75%), voting rights ceilings (59%), pyramid structures (53%), cross-shareholdings (52%) and multiple voting rights (50%). In addition to these pre-bid defences, a total of five other defences are perceived to be used “always,” “frequently” or “sometimes” by more than 30% of stakeholders: super-majority provisions (41%), partnerships limited by shares (40%), non-voting shares (39%), ownership ceilings (37%) and non-voting preference shares (31%). Golden shares are perceived to be used “always,” “frequently” or “sometimes” by only 20%. Interestingly, supervisors tend to perceive fewer defences than other stakeholders. Pre-bid defences that are “frequently” used. Only two categories of pre-bid defences are considered to be used “always” or “frequently” by more than 20% of the stakeholders having an opinion: shareholders’ agreements (23%) and multiple voting rights shares (25%). Spain. The Spanish Supervisor pointed out that provisions regarding voting rights ceilings in articles of association have been forbidden by law since 1 July 2011. Before this date, such provisions were quite common. However, in all cases the general shareholders’ meeting of the offeree companies that had included them in their articles of association decided to remove them as a result of a takeover bid.


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b. Regarding post-bid defences No clear view on board neutrality. Stakeholders may not always have a clear view as to how frequently the board neutrality rule is applied in their respective jurisdictions. This may be a result of the reduced number of bids since the 2008 crisis, and of the fact that most bids have taken place in countries where the neutrality rule is applied. In the latter case, the question relating to the frequency of application of the neutrality rule is of little relevance. Limited use of post-bid defences. Only the two following post-bid defences are perceived to be used “always,” “frequently” or “sometimes” by more than 50% of stakeholders: seeking a white knight (82%) and, to a much lesser extent, seeking a white squire (51%). In addition to these post-bid defences, no more than two defences are perceived to be used “frequently” or “sometimes” by more than 30% of stakeholders: proceeding with dividend payments (47%) and proceeding with a capital increase (35%). It should be noted that such payments can be considered to constitute a defence only to the extent that the terms of the bid did not indicate that the bid price could be reduced by the amount of any dividend payment made after the announcement, which in practice should be rare. Again, supervisors tend to perceive fewer defences than other stakeholders.


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5.2. Success of defences Success of application of takeover bid defences. Interviewed with regard to the success of companies in applying certain defence mechanisms, many stakeholders asserted that they had no opinion on the subject. The answers provided by those stakeholders who did express an opinion are described below.

a. Regarding pre-bid defences Analysis. Generally, stakeholders consider that pre-bid defences are rarely successfully used. Two exceptions are notable for their lack of success: � Pyramid structures. Most stakeholders consider that pyramid structures are sometimes used

successfully to prevent takeover bids (31%) whereas a majority of supervisors consider that this defence is never successful (67%).

� Depositary certificates. Most stakeholders state that depositary certificates are never used successfully (52%); supervisors agree with this analysis (100%).

The more successful mechanisms include: � Golden shares. This defence is perceived by most stakeholders (21%) as one of the most

successful, the view being that it always succeeds in averting the takeover bid. 20% of supervisors agree with this analysis.

� Cross-shareholdings. 8% of stakeholders perceive this as a successful defence, whereas 25% of supervisors agree.

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Table. The following table illustrates these views:


b. Regarding post-bid defences Analysis. Generally, stakeholders consider that post-bid defences are rarely used with success. The most successfully used mechanisms are the following: � Seeking a white knight. 20% of stakeholders and 38% of supervisors consider that seeking a

white knight is a defence mechanism that frequently works. � Debt increase. 50% of stakeholders and 25% of supervisors consider that increasing the

company’s debt is sometimes a successful mechanism. � Dividend payment. Only 9% of stakeholders, but 25% of supervisors consider this defence

mechanism to be successful.

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Table. The table illustrating these views is the following.


5.3. No increase or decrease of defences Frequency of application of takeover bid defences. Interviewed on the frequency of application of certain defence mechanisms, many stakeholders asserted that they had no opinion on the subject. The answers collected from those stakeholders who did express an opinion were as follows.

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a. Regarding pre-bid defences

Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Analysis. A majority of stakeholders did not perceive there to have been any material increase or decrease in the use of takeover defences since the adoption of the Directive. � Depositary certificates. 22% of stakeholders consider that depositary certificates are much less

frequently used since the transposition of the Directive, and 25% of supervisors agree. � Cross-shareholdings. 16% of stakeholders consider this defence mechanism to have been used

much less frequently since the transposition of the Directive; 33% of supervisors are of the same opinion.

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b. Regarding post-bid defences Analysis. Generally, stakeholders consider that post-bid defences have not been used more frequently since the transposition of the Directive. � Acquisition of assets and issue of warrants. 20% of stakeholders consider that these two

defences have been used much less frequently since the transposition of the Directive; 33% of supervisors agree with this analysis.


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5.4. No impact on frequency or success of bids No significant impact of the Directive. Generally speaking, stakeholders believe that the Directive has not had a major impact on the number of bids (whether hostile or not) (40% in both cases), or on threats to launch a bid (56% and 59% respectively).

Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Success of actions. Overall, stakeholders believe that since the transposition of the Directive, both actions – hostile takeover bids and shareholder pressure based on takeover threats – have been equally successful (56% and 53% respectively).

IV. Squeeze-out and sell-out rules Key concepts. � The Directive provides for squeeze-out and sell-out rules pursuant to which Member States

must ensure that following a successful bid made to all of the holders of the offeree’s securities, all remaining securities can be purchased by the offeror or sold by the remaining shareholders. The right to squeeze out minority shareholders (Article 15 of the Directive) allows an offeror that has acquired a very large portion of the share capital to acquire the outstanding shares. The sell-out right (Article 16 of the Directive) provides minority shareholders with a counterpart to the squeeze-out right: it allows them to force the majority shareholder to purchase their shares at a fair price.

� A limited number of Major Non-EU Jurisdictions does not provide for post-bid squeeze-out

and/or sell-out mechanisms. Major Non-EU Jurisdictions that have squeeze-outs and/or sell-outs usually refer to a 90% threshold in connection with ownership and/or acceptance test(s) (please refer to Chapter III Section IV C. 1.) of this Study).

� Although the Directive apparently provides for a narrow set of choices, there is in fact some

diversity in the transposition of the rules due to (i) the choice of a uniform or dissociated 90% or 95% threshold, (ii) the choice of the “acceptance” or “ownership” test, or a combination thereof, (iii) the practical application of the fair price rule, (iv) the potential extension of the

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three-month period, and (v) the application of additional protections (such as independent experts).

� The EU rules apply in addition to procedures that existed in Member States prior to the

Directive. Some of these procedures were close to the EU squeeze-out, whereas others – such as the UK-type “scheme of arrangement” – provided for much broader possibilities. Another way to promote a 100% ownership is the “cash-out” merger, which however does not exist in any Member State in its pure “exclusionary” form. Finally, the German-type “enterprise agreement” is an alternative means to provide full control to a majority shareholder while protecting the interests of minority shareholders.

� Stakeholders appear generally satisfied with the squeeze-out and sell-out rules, although the

latter (in contrast to the former) are very infrequently used. The variety of rules among Member States is often perceived as problematic.

A. Objectives Squeeze-out as a bid enhancement mechanism. The squeeze-out rule is intended to facilitate and increase takeover activity, since forcing minority shareholders to exit the offeree company allows the offeror to avoid costs and risks caused by such shareholders. As this rule may only be applied following a bid made to all of the holders of the offeree company’s securities for all their securities and at a fair price, it does not harm minority shareholders. However, it should be noted that the squeeze-out procedure may lead to value-decreasing takeovers, for instance when a 100% post squeeze-out holding allows the offeror to replace equity by tax-deductible debt and thus to obtain a public subsidy for a private transaction. The sell-out as a minority protection. The sell-out rule is the counterpart to the squeeze-out rule, as it protects minority shareholders from possible abuses by the majority shareholder of the latter’s dominant position where such protection is not available below the sell-out threshold under national law. Furthermore, the obligation to provide fair compensation may enable minority shareholders to obtain a better price for their shares than the one set by a potentially illiquid market. This rule alleviates the pressure to tender, as minority shareholders will not be likely, if they do not tender, to become “trapped” in a situation where they have low liquidity and a high risk of extraction of private benefits of control. This generally promotes investment.277

B. Transposition Dual system. An overall review of the transposition of these rules shows that many Member States, prior to the transposition of the Directive, applied squeeze-out and sell-out procedures similar to those applicable in takeover bid situations. In these countries, the triggering threshold may differ from the one provided for by the Directive and the price determination may be specified in more detail. In countries that provided few specific rules relating to takeover bids prior to the transposition of the Directive, the squeeze-out and sell-out rules are, on the contrary, innovative. The merit of the Directive was to harmonise applicable rules among Member States. Alternative procedures. In practice, alternative procedures such as mergers or schemes of arrangement may be preferred by the majority shareholders seeking to acquire shares held by a minority of shareholders.

1. Squeeze-out and sell-out following a bid

277 Please refer to Chapter IV Section IV E of this Study.

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Squeeze-out. In connection with the transposition of the Directive, seven Member States introduced a takeover-related squeeze-out for the first time (Cyprus, Estonia, Germany, Greece, Luxembourg, Slovakia and Spain). Sell-out. In connection with the transposition of the Directive, 10 Member States introduced a sell-out procedure for the first time (Belgium, Cyprus, the Czech Republic, Estonia, Germany, Greece, Luxembourg, the Netherlands, Slovakia and Spain). Typically, these Member States do not provide for any sell-out outside of the scope of the Directive. Modified thresholds. Some of the Member States which already applied squeeze-out or sell-out rights had to amend the pre-existing thresholds. As an example, under Irish law, the threshold was increased from 80% to 90%. Ireland chose to adopt this increased threshold in respect of takeover bids alone; accordingly, the reduced threshold of 80% still applies with respect to takeovers (not takeover bids) that are not subject to the Takeover Regulations. In Italy, the squeeze-out threshold was slightly decreased (from 98% to 95%).

Squeeze-out and sell-out rules Squeeze-out 90% Squeeze-out 95% Different threshold for sell-out278 Ownership

Austria, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Poland, Sweden.

Belgium, France, Germany, Italy, Luxembourg, Netherlands, Slovakia.

Romania, Luxembourg.

Acceptance Romania, Spain, UK. Romania.

1.1. Thresholds and available time period Ownership and acceptance. According to the Directive, Member States must ensure that an offeror is able to require all the holders of the remaining securities to sell those securities in the following circumstances: � where the offeror holds securities representing not less than 90% of the capital carrying voting

rights and 90% of the voting rights in the offeree company (hypothesis A); or � where, following acceptance of the bid, the offeror has acquired or has firmly contracted to

acquire securities representing not less than 90% of the offeree company’s capital carrying voting rights and 90% of the voting rights comprised in the bid (hypothesis B).

Hypothesis A refers to the “ownership test,” which is based on the shares held by the initiator at the end of the bid (whether held prior to the bid or acquired during or pursuant to the bid). Hypothesis B refers to the “acceptance test,” which is based on the shares acquired (or acquisition of which is firmly contracted) in the bid. Only under hypothesis A, Member States may set a higher threshold not exceeding 95% of the capital carrying voting rights and 95% of the voting rights. The same threshold applies, mutatis mutandis, to sell-out procedures. Can the thresholds for sell-outs and squeeze-outs differ? The Directive does not specify whether the thresholds for the sell-out and squeeze-out rights have to be identical. The wording of Article 16 of the Directive is ambiguous and states that i) holders of remaining securities after a bid shall be able to require the offeror to buy those securities “under the same circumstances as provided for in Article 15.2.” of the Directive, and ii) that Articles 15.3 to 15.5 of the Directive “shall apply mutatis

278 Thresholds are the same unless indicated in the table.

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mutandis”. Article 16 of the Directive could be read to mean that the threshold set by the Member States for the squeeze-out must be identical to the threshold set under Article 15.2 of the Directive, or, on the contrary, to mean that the threshold to be set for the sell-out right must be fixed within the same thresholds as set out in Article 15 of the Directive, but does not have to be identical. As such, it is unclear whether the Directive allows Member States, for instance, to set the squeeze-out threshold at 90% and the sell-out threshold at 95%.

1.2. Chosen thresholds Same thresholds for squeeze-out and sell-out (except in Romania and Luxembourg). Nearly all Member States provide for (i) the same threshold (90% or 95%) in connection with the squeeze-out and sell-out rights and (ii) the same criteria to determine the squeeze-out and sell-out thresholds. The majority of Member States has opted for a threshold of 90% (14 out of 22). Only Romania and Luxembourg provide for different thresholds for squeeze-outs and sell-outs, thus raising the above-mentioned compliance issue (with Romania having a 90% test for squeeze-outs and a 95% test for sell-outs, and Luxembourg having a 90% test for sell-outs and 95% test for squeeze-outs). Alternative criteria. Some Member States use an alternative criterion. For example, in the Czech Republic, the threshold is 90% of the voting rights or of the share capital. In Romania, the threshold is 95% of the voting rights or 90% of the share capital (acceptance test applicable to share capital). Dual test (voting rights and share capital). A majority of Member States (18 out of 22) determines the threshold on the basis of the voting rights and the share capital (ownership). In Portugal and Spain, thresholds are 90% of the voting rights held (ownership) and 90% of the voting rights acquired following acceptance of the bid (acceptance). In the UK, acceptance is required with a 90% threshold for both voting rights and share capital (for squeeze-out procedures only). In Belgium, the threshold is 95% of the share capital and voting rights (ownership) in the context of a mandatory bid. In the context of a voluntary bid, the offeror must also exceed the threshold of 90% of the share capital following acceptance of the bid (acceptance). These dual tests render the application of squeeze-outs more complex, particularly where there are significant discrepancies between the numbers of capital and voting rights (e.g. due to the suspension of voting rights, shares without voting rights or shares with multiple voting rights). Enhanced protection for minority shareholders. Italian law provides an additional protection for minority shareholders: it allows a sell-out right if the offeror holds 90% of the share capital (instead of 95%) in the context of low liquidity (unless a float sufficient to ensure regular trading performance is restored within 90 days). 1.3. Available time period EU three-month rule. The Directive provides for a three-month time period after the bid to apply the squeeze-out and the sell-out. Member States were often obliged to amend their pre-existing legal framework to transpose this rule. For instance, under the former procedure in the UK, the offeror had four months from the date of the bid to reach the 90% threshold and then a further two-month period in which to commence the squeeze-out procedure. In contrast, in the Netherlands, the squeeze-out proceedings could be applied out after a public bid even if the three-month period had expired. Saving “trapped shareholders”. In Member States without a dual system that, in accordance with the Directive, only permit squeeze-outs and sell-outs after a bid that purports to acquire control of the offeree company (such as Luxembourg), holdings are to a large extent frozen after the lapse of the three-month period following the bid during which squeeze-outs or sell-outs may be applied. This is due to the fact that after the expiry of such period, majority shareholders holding securities in excess of the applicable squeeze-out thresholds may nonetheless not squeeze out minority shareholders: such majority shareholders have already acquired control in a previous bid and therefore cannot launch

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another bid. Similarly, after the expiry of the three-month period, minority shareholders are not permitted to request a sell-out, as the closing of the bid by which control was acquired occurred more than three months previously. One way to reduce the “trapping” of minority and majority shareholders could be to extend the time period after the bid during which squeeze-outs and sell-outs may be applied from three months to one year.

2. Fair Price

2.1. Analysis of the EU rule Directive provisions. The sale must take place at a fair price (Articles 15.2 and 15.4 of the Directive). The price must be in the same form as the consideration offered in the bid, or be in cash. Member States can provide that cash must be offered at least as an alternative. Following a voluntary bid, in both of the cases referred to in the Directive, the consideration offered in the bid shall be presumed to be fair where, through acceptance of the bid, the offeror has acquired securities representing not less than 90% of the capital carrying voting rights comprised in the bid. Inconsistency of the fair price test. It is worth nothing that in those countries that have opted for an ownership test at 90%, offerors may not benefit from the presumption that the price they offered in the bid is fair, even if they have fulfilled the ownership test threshold set by the applicable legislation. Indeed, countries such as Estonia, Austria, Hungary, Greece or the Czech Republic have opted for an ownership test at 90% in order to squeeze out minority shareholders after a successful bid. According to Article 15.5 of the Directive, the consideration offered to the shareholders by the offeror is presumed to be fair if the offeror “has acquired securities representing not less than 90% of the capital carrying voting rights comprised in the bid”. The Article thus presumes that the price paid is fair if the 90% acceptance test is fulfilled. This, however, leaves a gap between the 90% ownership test and the 90% acceptance test in which the offeror will have to demonstrate that the consideration offered for the shares is fair.

2.2. Transposition Rebuttable presumptions. The legal presumption provided by Article 15.4 of the Directive has been transposed by most Member States without divergence. However, where the 90% acceptance test presumption is deemed rebuttable, extensive litigation may ensue. An example of a country where this issue arises is Cyprus. The Czech Republic and Romania (only after a three-month period) stipulate that the price shall be determined by an independent expert; minority shareholders may contest the price or the form of consideration offered within six months of the announcement of the squeeze-out. In Germany, a court has held that the squeeze-out presumption may be rebutted. This possibility may lead to extensive litigation. Consideration. Regarding the choice between cash and in-kind consideration, some Member States (e.g. Belgium, Cyprus, France and Portugal) have opted also to impose a cash option in all cases. In some countries, such as Finland, it is unclear how the squeeze-out price should be determined in the event that only share consideration was offered in the preceding voluntary bid. As a general rule, liquid shares must be offered, and in some countries the supervisory authorities are empowered to determine the price (Italy). Independent experts. As extra protection for minority shareholders, some Member States request either that independent directors mandate an independent expert to prepare a fairness opinion in relation to the evaluation of the offeree company (Belgium), or that, in case of a conflict of interest, an independent appraiser be appointed by the offeree company (France).

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Dissenting opinions in the US. On a comparative basis, it may be noted that in the US, dissenting directors’ opinions in going private transactions must be disclosed by the offeree company (please refer to Chapter III Section IV C. 2.) of this Study). Assessment of the fair price. Assessing the fair price may be complex, in particular when market prices have dropped. An example of the issues raised before the courts is provided in the box below:

Corporate procedure and court decision (Estonia) Principle. The Estonian Commercial Code gives a majority shareholder holding consisting of at least 90% of the share capital of a public limited company the right to request that the general meeting decide the squeeze-out of the remaining shareholders. This right applies to all public limited companies, regardless of whether or not their shares are traded on a regulated market. The threshold for passing the squeeze-out resolution is 95% of the votes represented by shares. Impact of the financial crisis on the fair price. As evidenced in the AS Eesti Telekom case, the determination of the fair price may be sensitive when the reference period was during the financial crisis.

Court decision. The Estonian Supreme Court has analysed the notion of fair price in the context of squeeze-outs under the Commercial Code in several decisions.279 In 2004,280 it highlighted that the compensation will be deemed fair if a minority shareholder is provided with full economic compensation for the loss of his shareholding. Potential future gains of a shareholder related to its shares also need to be taken into account. In the determination of the compensation, the opportunities for shareholders to influence the company’s activities are not taken into account.

� In September 2009, TeliaSonera AB (TeliaSonera), a Swedish company, launched a takeover bid on 39.03% of the shares of Eesti Telekom (Eesti), an Estonian company. The bid price was set at 93 EEK per share. After the takeover bid, TeliaSonera owned directly and indirectly 97.58% of the share capital representing votes of Eesti.

� TeliaSonera used its right to squeeze out the minority shareholders of Eesti and set the amount of the fair price at 93 EEK per share, which was the bid price. The price was set in compliance with the pricing tests provided for in the Estonian takeover bid rules and was significantly higher than the fair price calculated under such rules. The Estonian supervisory authority supported the determination of the price.

� Minority shareholders considered that the fair price of the shares was much higher than the price proposed by TeliaSonera because (i) the reference period coincided with the 2008-2009 financial crisis and (ii) Eesti was debt-free and cash-rich with a dividend yield higher than 10%. The case is currently pending before court.

3. Enforcement Room for litigation. No specific issues seem to exist in relation to the enforcement of the squeeze-out or sell-out rights other than the evaluation of the price. When the consideration offered in the bid is cash and consequently, the squeeze-out or sell-out price is paid in cash for the same amount within three months of the end of the bid, there is little room for litigation. However, in all other cases, there is room for discussion and, considering the amounts at stake, a high incentive to litigate. This is all the

279 Case No. 3-2-1-145-04 of 21 December 2004, case No. 3-2-1-138-04 of 20 December 2004 (case No. 3-2-

1-114-05 of 2 November 2005). 280 Supreme Court judgement of 21 December 2004, case No. 3-2-1-145-04 (sections 29-35).

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more true given that it is difficult to attribute a single price to a company – only a price range makes sense. Independent experts as an incentive to comply (France). Offerors may be incentivised to comply by means of a review of the price by a qualified and fully independent expert. Specifically, under French law, the offeror must provide the French regulatory authority with an independent expert valuation unless the squeeze-out takes place following a standard cash takeover bid. The requirements for the expert to be deemed independent are high and the work to be performed is extensive.

Appointment of the expert and report (France)

Under the regulation issued by the French supervisory authority, an expert, appointed according to a specific procedure, issues a report on the financial terms of the bid.

Appointment and independence of the expert. The offeree company in a takeover bid must appoint an independent expert if the transaction is likely to cause conflicts of interest within its board of directors, supervisory board or governing body that could impair the objectivity of the reasoned opinion mentioned in such body’s report.

The offeree company must also appoint an independent expert before applying a squeeze-out. The independent expert may not have a conflict of interest in relation to the parties involved in the public bid or transaction or with their advisors. The independent expert may not work repeatedly with the same sponsoring institution(s) or within the same group if the regular nature of such work could compromise his independence.

Expert’s report. The independent expert prepares a report on the financial terms of the bid or transaction. The report’s conclusion takes the form of a fairness opinion. No other type of opinion is considered a fairness opinion for takeover bid purposes. In particular, the report includes the following:

� appraisal of the offeree company and the consideration of the bid; � description of the due diligence carried out by the expert; � a statement acknowledging that the price and other financial considerations are fair; � list of the appraisals realised in the last 12 months; � the amount of the expert’s fees; � a statement of independence certifying that there are no known past, present or future ties between

the expert and the parties involved in the bid or transaction or their advisors that could compromise the expert’s independence or impair the objectivity of his assessment when carrying out the appraisal. If there is the risk of a conflict of interest but the appraiser deems such risk unlikely to compromise his independence or impair the objectivity of his assessment, he must mention this risk in his statement, including relevant supporting information.

4. Alternative procedures

4.1. Squeeze-out procedures independent from takeover bids Main aspects. About half of the Member States disposes of a general set of rules regarding squeeze-out procedures. In most cases, such legal framework existed before the transposition of the Directive. These squeeze-out rules provide for a threshold that is often similar to the threshold chosen in connection with the transposition of the Directive (e.g. Austria, Belgium, Estonia, Finland, Germany, the Netherlands, Portugal). However, in some countries, there may be differences in terms of:

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� the characteristics of the shares (share capital and not voting rights in Portugal),

� the level of the threshold (Ireland: 80% ownership or if initial holding exceeds 20%, 75% of outstanding shares), and

� the procedure (Estonia,281 Germany282). National legislations do not always provide for squeeze-out proceedings outside takeover bid situations (e.g. Luxembourg,283 Romania, Spain).

Specific procedure. In the Netherlands, any shareholder who personally owns at least 95% of the issued share capital in a Dutch public company or limited liability company may institute proceedings against the other shareholders in order to acquire their shares. The proceedings must be initiated before the Enterprise Chamber. There are only a few technical differences between the takeover squeeze-out proceedings and the general squeeze-out proceedings. Integration. In Germany, before the introduction of the general squeeze-out rule, the only possibility to “squeeze out” minority shareholders according to the Stock Exchange Act was through “integration”. “Integration” was possible when the majority shareholder already held 95% of the share capital. The general assembly of the controlled company could decide its “integration” into another stock corporation (Sec. 320 Stock Corporation Act). The consequence of such “integration” was that the remaining shares were transferred to the majority shareholder and the management of the controlled company became subject to the management of the controlling company. The majority shareholder had to offer the minority shareholders its own shares or adequate compensation in cash. As the majority shareholder became responsible for the losses of the integrated company, such “integration” was attractive for the majority shareholder only in certain cases.

4.2. Sell-out procedures independent from takeover bid General aspects. Sell-out rights independent from takeover bids exist in some Member States, such as Finland, Ireland and Portugal. In most of these countries, the conditions for the general sell-out procedure are the same as for the general squeeze-out procedure. Outside takeover bid situations, national legislations provide for a smaller number of sell-out proceedings than squeeze-out proceedings (e.g. Austria, Belgium, Luxembourg, Romania, Spain). 75% sell-out. In Hungary, the following provisions apply outside the takeover bid situation: where any member (shareholder) of a private limited liability company or a private company limited by shares (“controlled company”) acquires a qualifying participation (i.e. holds directly or indirectly 75% or more of the voting rights in the controlled company), any member (shareholder) of the controlled company may – within a 60-day period – request that his shares be acquired by the owner of the qualifying participation. The owner of the qualifying participation must purchase such shares at the market value prevailing at the time the request was submitted, which may not be lower than the value the shares represent in the company’s equity capital.

281 In Estonia, in the absence of a takeover bid, a majority shareholder holding 90% of the share capital can

request a general meeting in connection with a squeeze-out; however, the resolution must be approved by 95% of the shareholders.

282 In Germany, a shareholder holding at least 95% of the share capital can, at the shareholders’ meeting, request the transfer of the shares belonging to the minority shareholders in return for adequate compensation. Unlike the squeeze-out procedure following a takeover bid, the general squeeze-out is also available for non-listed companies and is decided by the shareholders’ meeting.

283 A bill that undertakes a modernisation of the Luxembourg Companies Law has been introduced which may create a right to squeeze-out and sell-out shareholders of a listed or formerly listed company outside the legal framework context of a public takeover bid.

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Conversion of legal entity. When the securities of a French public limited company are converted to a limited partnership with shares, the person who controlled the company prior to conversion, or the active partners in the limited partnership with shares, is required to file a buyout bid as soon as the shareholders have adopted the resolution regarding the conversion. The bid may not include a minimum condition and must be drawn up in terms that can be declared compliant with French law by the French regulatory authority. Subsequently, the offeror informs the French regulatory authority whether or not it reserves the right, depending on the result of the bid, to request that all equity securities and securities giving access to the capital and voting rights of the company be delisted from the regulated market on which they are traded.

4.3. Other Motivation. Where the requirements of squeeze-out and sell-out procedures set forth in the Directive are too demanding, companies may favour schemes of arrangement, cash-out mergers or enterprise agreements.

a. Schemes of arrangement Schemes of arrangement. A scheme of arrangement is a court-approved agreement between a company and its members that can be used to effect, among other things, a recommended takeover. Schemes of arrangement are available in the UK and Ireland. In both countries, the agreement requires court approval and approval by at least a majority in number representing 75% in value of the members of each class present and voting in person or by proxy at the meeting(s) convened in order to approve the scheme. Increased use. The scheme of arrangement is reportedly increasing in popularity, since the benefit of obtaining total control of an offeree company without having to undertake a bid followed by a squeeze-out is obvious to offerors. The scheme of arrangement provides for greater certainty than a bid, as once the transaction has been voted and approved by the court, it becomes binding on all shareholders. (For further details, including in respect of Major Non-EU jurisdictions, please refer to Chapter III Section II C. 5.) of this Study.)

b. Cash-out mergers Principle. Traditionally, mergers were viewed as a stock-for-stock transaction subject to the shareholders’ vote. In effect, they were essentially the combination of three transactions: the dissolution of the absorbed company, the contribution in kind of the latter’s assets by its former shareholders to the absorbing company, and the issue of shares by the absorbing company to such shareholders as consideration for their contribution. This traditional view has long since disappeared in the US, where mergers are seen as shareholder-approved transactions that can be almost freely structured (leading to “triangular mergers” and “reverse triangular mergers”). In the EU, the rules have not evolved in the same way and only a few Member States provide for “cash mergers”. However, such mergers may never, in any Member State, lead to the shareholders of the dissolved company receiving the full consideration in cash without its consent. The table below summarises the situation:

Cash merger Yes No Other

Czech Republic

Denmark (the merger must be decided by the general meeting of the absorbing company and the shareholders can decide to

Austria

Belgium

France

Ireland

Estonia: Neither expressly allowed nor prohibited; there is no relevant practice in this regard.

Finland: The question of whether an offeror could effect a statutory

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Cash merger Yes No Other

accept cash or shares in the latter)

Germany (may be offered as alternative)

Greece (but may only commence after the expiry of the acceptance period for the takeover bid and the period for the exercise of the sell-out rights of any minority shareholders)

Hungary (at the sole discretion of the shareholders of the absorbed company)

Slovakia (amount determined on the particular company’s statement; the shareholders of the dissolved company must consent)

Sweden (more than half of the aggregate value of the consideration must consist of shares)

Italy

Luxembourg

Netherlands (partial cash-out mergers are possible but not full cash-out mergers)

Poland

Romania

Spain (except when the absorbed company is already 90% owned by the absorbing company)

UK (but scheme of arrangement is still available)

merger against cash consideration after acquiring two-thirds of the shares and votes in the offeree company has been debated. The Finnish Takeover Panel has issued an interpretation statement that restricts the possibility to perform such a statutory merger. According to the statement, the shareholders of the absorbed company should, as a starting point, be allowed to continue as shareholders of the absorbing company. Shares in the offeror should thus be offered at least as an alternative in a potential post-completion merger, and the use of an all-cash consideration requires a special reason. The interpretation of the Takeover Panel has been subject to discussion in view of the provisions of the Companies Act, which also allows the application of an all-cash merger.

Cash-out mergers (Greece). In Greece, the cash-out merger may commence only with the approval of the shareholders’ meetings of both companies by a two-thirds majority with a quorum of two-thirds, 50% or 20% in the first, second and third reiterative meetings respectively. Pursuant to a recent change of law 2190/1920 on Greek stock corporations, any challenge to the validity of a merger by minority shareholders based on an allegation of unfairness of the consideration (as opposed to any other grounds) leads only to compensation and not to the unwinding of the merger. According to Article 30 of this law in conjunction with the application of HCMC Decision No. 17/427/2007, cash-out mergers which result in a squeeze-out of shareholders of a listed company may commence only if a mandatory takeover bid for the total shares of the offeree has been launched previously. Legal mergers (Netherlands). In the Netherlands, there is a legal merger procedure where two companies can merge and the absorbing entity is permitted to exclude shareholders in the absorbed company. This procedure is also available if the absorbing company does not own all of the shares in the absorbed company and owns fewer shares than are required for a squeeze-out. Enterprise agreements (Germany). Under German law, a parent company is permitted to enter into an enterprise agreement with its subsidiary. Such an enterprise agreement typically provides for the parent company (i) to issue certain instructions to the subsidiary’s management, including instructions that are detrimental to the subsidiary, provided such instructions are in the interest of the parent group (domination agreement); and/or (ii) to receive all or a portion of the subsidiary’s profits (profit sharing agreement). Given the significant impact of an enterprise agreement on the subsidiary’s corporate governance regime, the German Stock Corporation Act stipulates a detailed procedure for the conclusion of an enterprise agreement (including a requirement for the approval of the subsidiary’s shareholders by a 75% majority), as well as various provisions to protect the minority shareholders of the subsidiary.

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Minority shareholders of a stock corporation that is a party to an enterprise agreement have the right to tender their shares to the parent company at a pre-determined price. The period during which the outstanding shareholders can tender their shares in exchange for the exit consideration must be at least two months as of the date on which the commercial register publicly announces the registration of the respective enterprise agreement. Unless the controlling shareholder is a stock corporation or stock partnership, the exit consideration must be in the form of cash. The adequacy of the exit consideration is determined on the basis of a valuation involving, among other things, a form of discounted cash-flow analysis, the subsidiary’s liquidation value and its market price. Minority shareholders of a subsidiary that is a party to a profit sharing agreement who have not tendered their shares in exchange for an exit consideration have the right to receive annually from the controlling shareholder an “adequate” profit sharing compensation based on the profits transferred from the subsidiary under the profit sharing agreement. The adequacy is determined on the basis of the subsidiary’s profits in the past, necessary write-offs, and estimates of the subsidiary’s future profits, with the assumption that all of the subsidiary’s profits are distributed to its shareholders. Minority shareholders of a subsidiary that is a party to a domination agreement who have not tendered their shares in exchange for an exit consideration are guaranteed an annual dividend equal to the profit sharing compensation that would have accrued if such subsidiary had been a party to a profit sharing agreement. In such a case, the parent company is required to pay the difference between the guaranteed profits and the actual dividends distributed by the subsidiary each year. Minority shareholders’ rights are ultimately safeguarded by an independent court-appointed auditor who must prepare a written report including, in particular, a statement as to the adequacy of the exit consideration and the profit sharing compensation or guaranteed profits.

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5. Mapping of squeeze-out and sell-out rules Proposed mapping. Based on the foregoing analysis, the following mapping may be proposed:

Squeeze-out/sell-out284 Country Directive

squeeze-out Directive sell-out

Fair price Squeeze-out outside the takeover bid situation

Sell-out outside the takeover bid situation

Austria

90% C & VR (not new but amended) ownership test

90% C & VR (not new but amended) ownership test

Bid price 90% C Non-existent

Belgium

95% C & VR (not new) ownership test (dual test after voluntary bid, also 90% C acceptance, no dual test for mandatory bid)285

95% C & VR (new) ownership test (dual test after voluntary bid, also 90% C acceptance, no dual test for mandatory bid)

Bid price (in case of ordinary squeeze-out: cash is compulsory, an expert report on the squeeze-out conditions is required)

95% VR Non-existent

Cyprus

90% C & VR286 (new) ownership test

90% C&VR (new) ownership test

Price at least equivalent to the bid price and cash alternative287

compulsory

No information

No information

Czech Republic

90% C or 90% VR (not new) ownership test

90% C or 90% VR (new) ownership test

Price determined by expert

90% C or 90% VR

Non-existent

284 Definitions. “Directive squeeze-out” means the right of an offeror, following a bid made to all of the

holders of the offeree company’s securities for all of their securities, to require all the holders of the remaining securities to sell him these at a fair price. “Directive sell-out” means the right of a holder of remaining securities, following a bid made by an offeror to all of the holders of the offeree company’s securities for all of their securities, to require the offeror to buy his securities from him at a fair price (Articles 15.1 and 16.1 of the Directive). “Ownership” refers to the shares held (whether prior to the bid or acquired during the bid or pursuant to the bid). “Acceptance” refers to shares acquired (or acquisition of which is firmly contracted) in the bid.

285 Compared to an ordinary squeeze-out bid, no independent expert will need to be appointed, no separate offer document is needed and no separate memorandum needs to be drafted by the board of the offeree company.

286 Two-month period for squeeze-out. 287 Minority shareholders can contest price value or form of consideration offered within six months of the

announcement of the squeeze-out.

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Denmark

90% C &VR (not new) ownership test

90% C & VR (not new) ownership test

Bid price, subject to re-evaluation upon shareholder demand

90% C &VR 90% C &VR

Estonia

90% C & VR to request GM; 90% approval

(new) ownership test

90% C & VR (new) ownership test

Fair price 90% C to request GM, 95% approval

Non-existent

Finland



Price determined in arbitration but bid price is presumed to be the fair price (unless special reasons to diverge from bid price288)

90% C &VR 90% C & VR

France


95% VR (not new) ownership test

Bid price (independent expert in case of exchange offer)

95% VR 95% VR + conversion of a public limited company to a limited partnership with shares

288 Squeeze-out price is paid in cash. It is unclear whether the squeeze-out price could, as an alternative, be

paid in shares in the event that there was only share consideration in the preceding takeover bid. There are no clear rules on how the squeeze-out price should be determined in the event that only share consideration was offered in the preceding voluntary bid.

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Germany

95% VR (new) ownership test


Fair price (presumption if 90% of acceptance)

95% C & VR Non-existent, other mechanisms (enterprise agreements, mergers)

Greece



The consideration payable shall be at least equal to and in the same form as the consideration paid by the offeror in the context of the preceding takeover bid and may not be lower than the price offered in the context of a mandatory takeover bid

95% C within five years of the acquisition289

95% C within five years of the acquisition290

Hungary



Bid price291 Non-existent 75% VR

Fair value of such shares. The aforementioned majority shareholder must file an application to the Multi-Member Court of First Instance certifying the satisfaction of the above-mentioned corporate law requirements and determining the fair compensation for the minority shareholders. Court-approved independent valuation. For this purpose, the majority shareholder must submit a non-binding fair valuation report issued by a special state audit committee or by independent chartered auditors. Once the court approval has been granted, the majority shareholder must deposit with a credit institution, acting as paying agent, the total purchase price for the shares and must instruct the agent to transfer such funds to the minority shareholders upon receipt of the respective securities. The majority shareholder must provide the paying agent with the court decision and the underlying valuation report. In order to exercise such squeeze-out right, the majority shareholder must also notify the public of the issuance of the court decision, the applicable purchase price, the details of the paying agent and the respective payment arrangements. The squeeze-out of minority shareholders cannot be revoked or cancelled by any legal means; specifically, any actions on appeal do not affect the legality of the share transfer.

290 Fair value of such shares. The aforementioned minority shareholders must file an application to the Multi-Member Court of First Instance, which will certify the satisfaction of the above-mentioned corporate law requirements and will determine the payable fair compensation. For this purpose, the court may order an independent valuation of the company; if the minority shareholders accept such valuation, they may elect not to proceed with the sell-out of their rights, in which case they must bear the costs of the court and valuation procedure.

291 The price is the bid price or the equity per share (nominal value), whichever is higher.

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Ireland

90% C & VR

(not new) ownership test

90% C & VR

(not new) ownership test

Bid price292 80% nominal value of the shares, or if initial holding exceeds 20%, 75% of outstanding shares293

80% nominal value of the shares, or if initial holding exceeds 20%, 75% of outstanding shares

Italy

95% C (not new, amended) ownership test

95% C, 90% if low liquidity294

(not new, amended) ownership test

Price of the previous cash takeover bid subject to 90% acceptance295

Not applicable

90% C if low liquidity

292 Irish law provides that, where alternative forms of consideration were offered in the bid, these must be

offered in the squeeze-out/sell-out. The offeror may, however, provide that a specified form of consideration will be paid if the dissenting shareholder does not respond within 14 days of provision of the notice.

293 General squeeze-out and sell-out procedure (not applicable to companies listed on the official market). 80% ownership (or, if initial holding exceeds 20%, 75% of outstanding shares). The compulsory squeeze-out/sell-out provisions set out in Section 204 of the Companies Act 1963 apply to all takeovers of Irish companies (other than to takeover bids of relevant companies admitted to trading on a regulated market and takeovers effected by way of a scheme of arrangement). Given the paucity of takeover bids effected under the Takeover Regulations to date, 1963 Act squeeze-outs/sell-outs are considerably more commonplace. The threshold under the 1963 Act is four-fifths in nominal value of the shares and, where on the date of the bid more than one-fifth of the aggregate value of the shares in the company is already in the beneficial ownership of the offeror, three-quarters in number of the holders of such outstanding shares. This threshold must be achieved within four months of the publication of the bid; the offeror then has a further two months in which it may give notice to the non-accepting shareholders that it intends to exercise the squeeze-out right. Any dissenting shareholder then has one month in which to make an application to the Irish High Court. In terms of the sell-out, the shareholders have a corresponding right to require the offeror to acquire their shares within three months of receiving a notice from the offeror notifying them that it has achieved the necessary threshold (the offeror being obliged to give notice of this within one month of reaching such threshold). In either case, the 1963 Act provides that the same terms must apply to the acquisition of shares from dissenting shareholders as apply to the acquisition of securities in respect of which the bid has been accepted.

294 Low liquidity: 90% threshold. Without prejudice to sell-out obligations triggered by the exceeding of the 95% threshold mentioned above, any party acquiring a participation of over 90% of the capital represented by securities admitted to trading on a regulated market is required to apply the sell-out rule with regard to the remaining securities admitted to trading on a regulated market held by any holder thereof, unless a float sufficient to ensure regular trading performance is restored within 90 days. Where more than one class of security is issued, the sell-out rule applies only to classes of securities for which the above-mentioned 90% threshold is reached.

295 Supervisory authority determines the price. In the event that the offeror did not acquire more than 90% of the offeree company’s shares with voting rights as a consequence of his offer, the Italian Supervisory Authority determines the price, taking into account the price of the shares for the previous six months or the possible previous bid price. If these obligations to acquire the offeree company’s outstanding shares derive from a public bid on the offeree company’s entire corporate capital, the price must be paid in the

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Luxembourg

95% C & VR


90% VR


Bid price296 No legal provision (bill introduced)

No legal provision (bill introduced)

Netherlands



Bid price for mandatory bids297

95% C298 Non-existent

Poland



No less than bid price

95% C and VR, no more than 5 s/h

s/h holding no more than 5% C

Portugal

90% C & VR and 90% VR subject to the bid (not new) acceptance test

90% C & VR and 90% VR subject to the bid (not new) acceptance test

Bid price in cash

90% C299 90% C300

same form as for the previous offer; however, the shareholders may request an alternative payment in cash, in which case the price is determined by the Supervisory Authority.

296 As a general rule, the bid price is presumed to be fair in a mandatory squeeze-out bid. The same presumption applies in a voluntary squeeze-out bid, if, through acceptance of the bid, the offeror has acquired 90% of the securities (90% acceptance test). In any event, the choice of a cash consideration must be offered. Share consideration must be liquid.

297 Fair price presumption for Directive squeeze-out (90% acceptance). Article 2:359c(6) DCC (Directive squeeze-out proceedings) provides that if at least 90% of the shares which were subject to a voluntary public bid (i.e. 90% of the shares not already owned by the offeror) have been tendered, the bid price will be deemed to be the fair price for the purposes of the squeeze-out proceedings. In case of a mandatory public bid, the fair price will, in principle, also be deemed the fair price for the purposes of the squeeze-out proceedings. In both cases it constitutes a refutable presumption (weerlegbaar vermoeden). The Enterprise Chamber can appoint independent experts if it has reason to believe that the bid price is not a fair price. The general squeeze-out provisions do not include the presumption that if the bid is accepted by more than 90% of the shares, through acceptance, the bid price is deemed to be fair. The general squeeze-out proceedings can also take place after a public bid, even if the three-month period has expired.

298 Squeeze-out outside a takeover situation (95% holding shares). Pursuant to Section 2:92a and 2:201a of the Dutch Civil Code, any shareholder who for his own account owns at least 95% of the issued share capital in a Dutch public company or limited liability company may institute proceedings against the other shareholders to acquire their shares. The proceedings must also be initiated before the Enterprise Chamber. There are some technical differences between the takeover squeeze-out proceedings and the general squeeze-out proceedings.

299 General squeeze-out procedure: 90% holding (share capital). Any company holding, directly or indirectly, 90% of the share capital in another company must communicate this fact to the controlled company within 30 days of gaining such position. At the latest six months after such communication has been served, the controlling company may make a bid for the acquisition of the shares held by the remaining shareholders. The consideration for such acquisition may be in cash or in shares of the controlling company, and must be justified by a report issued by an independent, official public chartered accountant. The controlling company may become the owner of the shares belonging to the remaining shareholders if it makes a

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Romania

95% VR or 90% C (not new) acceptance test

95% VR (not new) ownership

Bid price Non-existent Non-existent

Slovakia



Equitable compensation (cash compensation, compensation in the form of securities or a combination of these)

No information

No information

Spain

90% VR, 90% VR subject to the bid (new) acceptance test

90% VR, 90% VR subject to the bid (new) acceptance test

Bid price Non-existent Non-existent

Sweden 95% C (not new) ownership test

95% C (not new) ownership test

Bid price 95% C 95% C

corresponding declaration in the proposal of acquisition, such acquisition being subject to registration. Such registration is only effective if the controlling company has deposited the consideration, calculated in accordance with the highest amounts forecast in the report issued by the independent official public chartered accountant.

300 General sell-out (same condition as general squeeze-out). In the event that the controlling company does not issue a proposal of acquisition as described above, minority shareholders may, at any time, demand that it do so. In the absence of such a proposal by the controlling company or if such proposal is unsatisfactory, the minority shareholders may ask the court to declare the acquisition of such shares by the controlling company and to set the consideration for such acquisition.

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UK

90% C & VR (not new) acceptance test


Bid price Applicable in “takeover” situations not covered by the Directive, such as the acquisition of a private company with a large number of shareholders

Applicable in “takeover” situations not covered by the Directive, such as the acquisition of a private company with a large number of shareholders

Synthesised view. A synthesised view of the main squeeze-out and sell-out rates is provided below:

Squeeze-out and sell-out rules Squeeze-out 90% Squeeze-out 95% Different threshold for squeeze-out301 Ownership

Austria, Cyprus, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Poland, Sweden.

Belgium, France, Germany, Italy, Luxembourg, Netherlands, Slovakia.

Romania, Luxembourg.

Acceptance Romania, Spain, UK. Romania.

301 Thresholds are the same unless otherwise indicated in the table.

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* The capital rights thresholds mentioned are also applicable capital thresholds in the following countries: Austria,

Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Ireland, Italy (only capital threshold for squeeze-out), Luxembourg, the Netherlands, Portugal, Romania, Slovakia, Spain, Sweden (only capital threshold), UK.


1. Squeeze-out and sell-out procedures in Major Non-EU Jurisdictions Overview. Three out of nine Major Non-EU Jurisdictions (China, Japan and the US) do not provide for an option to squeeze out minority shareholders following a successful takeover bid. However, such jurisdictions provide for alternative mechanisms permitting the exclusion of minority shareholders. Major Non-EU Jurisdictions that contemplate squeeze-outs usually refer to a 90% threshold (although this is 95% and 98% for Russia and Switzerland respectively) in connection with an ownership and/or acceptance test(s). Five out of nine Major Non-EU Jurisdictions (India, Canada, Japan, Switzerland and the US) do not provide for a minority shareholder right to force the majority shareholder to sell out their shares. The threshold taken into account in sell-out procedures is the same as the one considered for squeeze-outs in the relevant jurisdiction. Such threshold is, however, only taken into account under the ownership test, since the acceptance test is not used for sell-outs. In Major Non-EU Jurisdictions, squeeze-outs and sell-outs must be performed within a relatively short time frame following the bid (usually four months).

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Summary. The situation regarding squeeze-outs and sell-outs may be summarised as follows: Squeeze-out Sell-out Comments

Australia

Yes, if following a bid an offeror acquires:

- control over at least 90% of the securities in the bid class (ownership test); and

- at least 75% of the securities that it offered to acquire under the bid (acceptance test).

Yes, if following a bid, an offeror has control over at least 90% of the securities (ownership test).

Squeeze-out and sell-out: Acquisitions to be made at the previous takeover bid price.

Sell-out procedure: The minority holder must serve a notice on the offeror within one month of the end of the bid period, thereby forming a contract for the sale of the securities held on terms that applied under the takeover bid or, if both parties agree, on different terms.

Alternative procedures: Non-bid related compulsory acquisition methods exist in which an independent expert must assess the fairness of the cash amount offered.

Canada Yes, if following a bid an offeror acquires at least 90% of the securities that it offered to acquire under the bid (acceptance test).

No sell-out. Squeeze-out: The 90% threshold must usually be met 120 days after the takeover was made.

Alternative procedures: Where the 90% threshold is not achieved, it may be possible to exclude minority shareholders through going private transactions or business combinations.

China No squeeze-out. Yes, if following a bid, an offeror holds more than 90% of the offeree company’s outstanding shares (ownership test).

Sell-out: Acquisitions to be made at the previous takeover bid price. Cash and tradeable securities may be offered in the sell-out.

Hong Kong

Yes, if following a bid, an offeror acquires at least 90% in value of the shares of the offeree company (ownership test).

Yes, if following a bid, an offeror holds at least 90% in value of the shares of the offeree company (ownership test).

Squeeze-out and sell-out: The 90% threshold must be crossed within four months of posting the offer documents. Squeeze-out: The offeror must acquire the remaining shares at the same terms as the original bid if notice is given within five months of the original bid. Sell-out: Within one month of the expiry of a mandatory bid, the

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Squeeze-out Sell-out Comments

offeror must give notice to all remaining shareholders, calling on them to decide whether or not to exercise the sell-out right. A minority shareholder cannot require the offeror to purchase his shares later than two months after the date of such notice. Where the remaining shareholders exercise their right to be bought out, the offeror is obliged to acquire the shares on terms that are equivalent to or better than the terms of the bid.

India Yes, if following a bid, an offeror acquires at least 90% of the shares that such person offered to acquire in the bid (acceptance test).

However, if such offeror already held more than 10% of the company shares prior to the bid, a squeeze-out may only be applied if the shareholders who have tendered their shares (representing at least 90% as set out above) also represent at least 75% in number of the company shareholders (acceptance test).

No sell-out. Squeeze-out: The 90% threshold must be crossed within four months of the expiry of the bid. Notice of the squeeze-out must be given within two months of the expiry of such four-month period and the squeeze-out must be performed within one further month.

Japan No squeeze-out.

No sell-out. Squeeze-out and sell-out: The introduction of squeeze-out and sell-out rules is currently being discussed, but no concrete proposals exist at this stage.

Alternative procedures: Offeree companies become wholly-owned subsidiaries by, for instance, transforming the offeree company’s shares into callable shares, through which the offeree company’s minority shareholders are squeezed out with cash or other considerations. There is no threshold requirement for such squeeze-out mechanism, which needs to be approved by the shareholders’ meeting with a two-third majority. Interested shareholders are in principle

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authorised to participate in the vote (the resolution may, however, be revoked if it is extremely unfair).

Switzer-land

Yes, if following a bid an offeror holds at least 98% of the offeree company’s shares.

No sell-out.

Squeeze-out: A court order must be obtained to cancel the minority shares. The offeror must file a request for cancellation of such shares with the relevant court within three months of the end of the additional acceptance period. The offeree company must reissue and allot the shares to the offeror at the bid price. There are no appraisal rights and thus the court does not review the adequacy of the price.

Alternative procedure: As an alternative, an offeror holding more than 90% but less than 98% of all an offeree company’s voting rights may effect a squeeze-out merger between the offeree company and a Swiss wholly-owned subsidiary of the offeror. This merger must be approved by 90% of the offeree company’s shareholders. In a squeeze-out merger, the minority shareholders do not receive the absorbing company’s shares, but instead receive cash or any other form of consideration (such as the parent/offeror company’s shares or debt securities). The compensation must be equal to the value of the shares that are squeezed out. Minority shareholders can challenge the merger and/or the compensation in court within two months of the holding of the shareholders’ meeting approving the squeeze-out merger.

Russia Yes, if an offeror exceeds the 95% threshold as a result of either a voluntary or a mandatory bid (ownership test).

Yes, if an offeror exceeds the 95% threshold as a result of either a voluntary or a mandatory bid (ownership test).

US No squeeze-out. No sell-out. Squeeze-out: Although there is no compulsory bid mechanism in the US, an offeror will usually use a second-step “squeeze-out” merger

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to buy out the remaining minority shareholders (please refer to Chapter III Section II C. 6.) of this Study).

2. Disclosure of dissenting directors’ opinions in the US Dissenting opinions in going private transactions. In the US, certain transactions require an offeree to disclose a dissenting director’s opinion. Under Item 1014 of Regulation M-A of the Securities and Exchange Act of 1934, in a Rule 13e-4, or “going private” transaction, which is a transaction that converts a publicly traded company into a private entity, an offeree’s opinion must identify any dissenting director and indicate, if known after making reasonable inquiry, the reasons for the dissent or abstention. Such disclosure is only required in going private transactions.

D. Perception

1. Clarity and application Clarity of squeeze-out and sell-out rules. These rules appear to be clear, as evidenced by the table below:

Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Application of squeeze-out and sell-out. Squeeze-out appears to be frequently used (61%); when the right is not exercised, it is due first to reasons linked to the offeror (the price was too low or the offeror did not want to exercise the right), and second to acquisitions by speculative investors wishing to obtain a quick profit through the re-sale of their block to the offeror. The sell-out right appears to be much less frequently used (12%). In both cases, the fair price rule appears to work adequately (76%) and related litigation appears to be limited. The detailed figures regarding this analysis are reproduced in the tables below:

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Reasons for the non-exercise of the squeeze-out and sell-out rights. Where the squeeze-out and sell-out rights are not exercised in practice, most stakeholders state that this is due to the low price of the bid (41% and 44% respectively).


Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers Frequency of challenges to the fair price. Many stakeholders consider that shareholders sometimes challenge the fair price of squeeze-outs and sell-outs (45%).

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2. Assessment of the rules Appropriateness of the rules. Stakeholders generally think that the 90% and 95% thresholds of the sell-out and squeeze-out rules are appropriate (82%), while, if they have to choose, they tend to prefer the 90% threshold (75%). The three-month time period to exercise these rights is generally perceived as appropriate (83%). Impact of the rules. The impact of the squeeze-out rule is the promotion of bids; the impact of the sell-out rule on bids appears not to be significant. In both cases, the fair price rule is seen to increase the protection of shareholders. Finally, a majority of stakeholders (65%) thinks that the existence of different thresholds in the European Union causes problems. Uncertainty through the lack of harmonisation on squeeze-out and sell-out rules. Some supervisors consider that the different sell-out and/or squeeze-out thresholds for a given security lead to uncertainty in the market place, both for offeree companies and their respective securities holders, and for potential investors and acquirers in Europe. They observe that, to the extent that securities are multi-listed, securities holders located in a jurisdiction different to the one where the competent supervisory authority is located may, irrespective of the national legislation otherwise applicable to them, have to undergo a sell-out or squeeze-out process on the basis of thresholds different to those applicable on their own national market. Supervisors further suggest that clear, harmonised squeeze-out rules could also lead to a harmonised de-listing regime for (multi-)listed companies.


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V. Disclosure of information Key concepts. � One of the many goals of takeover regulation is to protect shareholders by means of the

increased transparency and procedural fairness provided by mandatory disclosures. The Directive provides for disclosure in three main forms:

- Pre-bid general disclosures (Article 10 of the Directive) relate to share and control

structures that are compulsory for all publicly traded companies, irrespective of whether they are presently engaged in a takeover bid.

- Bid-related disclosures (Article 6, Article 8, Article 9.5, Article 14 of the Directive)

made by the offeror or the offeree company (including the offeree company’s board opinion on the bid) that are triggered by the launch of a takeover bid.

- Country-specific additional disclosures (Article 13 of the Directive) relating to additional

disclosures required by a Member State beyond those articulated in the Directive.

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� Disclosure of information is a key component of the Directive. Although some of the key issues in this respect are addressed in the Transparency Directive (currently under revision), it is worth taking note of some issues regarding the content or timing of disclosures as well as compliance therewith, especially in connection with issues that are not seen as critical by the markets but that are important to employees. Although stakeholders are generally satisfied with the disclosure regime, they appear favourable to an extension of its scope.

A. Objectives General objectives. The disclosure requirements imposed by the Directive serve to protect shareholders, increase transparency and encourage shareholder involvement in the bid process. Ultimately, the aim is to provide sufficient informational tools for the parties affected by a takeover to make informed decisions regarding the takeover, without unnecessarily burdening the bid process. The function of many of the disclosure requirements is to clarify and reveal ownership and control structures in both the offeree company and the potential offeror. Ownership. Information about the ownership positions of an offeree company may reveal barriers to a potential takeover and is thus helpful to potential offerors and shareholders alike in considering the possibility of a takeover attempt. Likewise, disclosure of such ownership information regarding a potential offeror is relevant for the offeree company and its shareholders in determining whether it is in the best interest of the company to facilitate the takeover bid or to apply a defensive mechanism. Control. Disclosures that reveal control structures are also important for the adequate assessment of the decisions regarding a potential bid, to the extent that control structures may create barriers to a bid that could affect a potential offeror’s decision to launch the bid. Information regarding control can be of particular importance to an offeror or shareholder, since even if certain parties are not tied to the offeree company through direct ownership, they may still be considered to exercise control over it. This is particularly the case when determining the concept of “acting in concert”. Disclosure as a “speed bump” to takeover bids. Disclosures may also be said to serve a purpose other than the mere provision of information. They may act as a “speed bump” to takeovers. For example, there has been pressure from representatives of pension funds in the UK to impose greater disclosure requirements regarding the question of how a potential takeover would be likely to affect an offeree company’s pension plan. The challenge to regulation in this regard is whether such a disclosure would increase the cost of launching a bid to such an extent that this might ultimately frustrate the bid, or whether it would amount to a mere “speed bump” for businesses looking for a quick acquisition.302 When faced with a potential takeover bid, shareholders generally make decisions regarding it (e.g. whether to tender their shares or whether to allow the application of a takeover defence) based on the market value of the company. The market value of any company is the sum of two components: the value of the company with the existing management (status quo), and the expected change in value of the company resulting from a change in corporate control.303 Further, the expected change in value of the company from a change in corporate control is calculated as the probability of a takeover multiplied by the change in value from the takeover.304

302 See Financial Times, Takeover Panel urged to consider M&A pension toll, May 30, 2011, available at:

http://www.ft.com/cms/s/0/20cb7dee-8af9-11e0-b2f1-00144feab49a.html#axzz1azmcXpeS. 303 Ruback, R. S. “An Overview of Takeover Defences” in Mergers and Acquisitions, edited by A. J.

Auerback, Chicago: University of Chicago Press, at p. 50 (1988). 304 Id.

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Market value of the company

=

Value of the company under existing management

+

Probability of change in corporate control

x

Change in value of the company from a change in corporate control

Adapted from Ruback and Grossman.305 Therefore, information that is useful in determining each of these variables is paramount to shareholder decision-making. Disclosure issues. Notwithstanding the benefits that can be derived from disclosures, two issues are typically addressed: � Costs. Providing information carries a monetary and time cost that can counter the possible

benefits of such information to the parties involved.306 The nature of disclosures requires the preparation and provision of information by both the offeror and the offeree company. Such cost factors are taken into account in a company’s decision as to whether to launch a takeover bid, and may deter potential takeovers if the cost is perceived as being greater than the potential benefit. However, in most cases, such costs are likely to be insignificant when compared to the total costs incurred by an offeror (i.e. mainly the bid price, but also the costs of financial, legal, strategic and PR advisors). As such, their deterrent effect should not be overestimated (except perhaps for non-sophisticated would-be offerors wishing to acquire a small company).

� Toeholds. This issue is addressed by the Transparency Directive, which is currently under

revision, and as such will not be explored here. It is, however, worth recalling that this issue has been addressed in the Transparency Directive Study,307 the final recommendation of which was full transparency and aggregation of total share ownership during the bid period, including hidden ownership of (cash-settled) equity derivatives.

B. Transposition Effectiveness of disclosures. The effectiveness of disclosures is difficult to quantify. However, it is necessary to consider the incentives and interests involved as well as the realistic distribution and use of the information provided (please refer to Chapter III Section III B. of this Study for a discussion of the effectiveness of Article 10 disclosure). Limited number of issues. If we exclude the above-mentioned issues, disclosures in the takeover context are mostly non-controversial from a theoretical standpoint. However, five items have been identified nonetheless: � Content of disclosures. Although the bid disclosures appear significant already, there seems to

be strong support from stakeholders for further disclosures (see Section D below).

� Format of disclosure. Disclosures under the Directive are far less harmonised than under other Directives such as the Prospectus Directive. It has thus been suggested that an improved formatting exercise could be contemplated, with specifications regarding language. The use of plain wording and the presentation of key information could also be better harmonised.

305 See id.; S.J. Grossman, and O.D. Hart, “Disclosure Laws and Takeover Bids, The Journal of Finance, vol.

XXXV, No. 2 (May 1980). 306 Luca Enriques, Matteo Gargantini and Valerio Novembre, Mandatory and Contract-Based Shareholding

Disclosure, p. 731 (11 April 2011). Uniform Law Review/Revue de Droit Uniforme, pp. 713-742, 2010. Available at SSRN: http://ssrn.com/abstract=1807047.

307 See Section 3.6.3.2. of the Transparency Directive Assessment Report pp. 135-139 (December 2009).

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� Enforcement of disclosures. To the extent that information disclosed is perceived as significant

by the market, enforcement appears generally appropriate, as both the offeror and the offeree company are under the scrutiny of supervisors and plaintiff shareholders. However, information less sensitive for the market may be addressed with less care, for instance when such information concerns employment or location of business. “Boilerplate” disclosures tend to become the norm, revolving around the idea that no decision has been taken. This approach, when it becomes market practice, is a circumvention.

� Timing of disclosures. According to employee representatives and regulators, in many cases the procedures provided by the Directive were not followed where employees were concerned. As well as to the above-mentioned issue, this is due to a tendency to provide information to employees too late for it to be useful. This timing strategy was prevalent in the UK for a long time until the recent reform of the City Code that reformed the rule in this respect.

Information processing and independent review. The Directive provides that the offeree company must disclose its opinion on the bid. However, no guidance is given regarding the process whereby such disclosure should take place. While in most countries it is typical for companies to require the assistance of an external financial advisor, this is not always compulsory. In this respect, it is interesting to note that almost all Major Non-EU Jurisdictions require the offeree company’s board to prepare and disclose an opinion on the bid. This opinion is usually prepared, either mandatorily or in market practice, with a financial advisor and/or more rarely by an independent board committee. Please refer to Chapter III Section V.C. 3.) of this Study.


1. Transparency regarding defences Summary. The table below outlines transparency requirements regarding defences in Major Non-EU Jurisdictions.

What information needs to be provided to shareholders at least on an annual basis? Yes No The structure of their capital, including securities which are not admitted to trading on a regulated market in a Member State, where appropriate with an indication of the different classes of shares and, for each class of shares, the rights and obligations attaching to it and the percentage of total share capital that it represents

Australia Canada China India Japan Russia Switzerland US

Hong Kong

Any restrictions on the transfer of securities, such as limitations on the holding of securities or the need to obtain the approval of the company or other holders of securities

Canada China Hong Kong India Japan

Russia Switzerland US

Australia

Significant direct and indirect shareholdings (including indirect shareholdings through pyramid structures and cross-shareholdings)

Australia Canada China India Japan

Russia Switzerland US

Hong Kong

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What information needs to be provided to shareholders at least on an annual basis? Yes No The holders of any securities with special control rights and a description of such rights

Australia Canada Hong Kong India Japan

Russia US

China Switzerland

The system of control of any employee share scheme where the control rights are not exercised directly by the employees

Australia Canada India Japan Russia

Switzerland US

China Hong Kong

Any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the company’s cooperation, the financial rights attaching to securities are separated from the holding of securities

Canada India Japan Russia Switzerland US

Australia China Hong Kong

Any agreements between shareholders that are known to the company and that may result in restrictions on the transfer of securities and/or voting rights

Canada India Russia US

Australia China Hong Kong Japan Switzerland

The rules governing the appointment and replacement of board members and amendment of the articles of association

China Hong Kong India Japan Russia

Switzerland US

Australia Canada

The powers of board members, and in particular the power to issue or buy back shares

Canada China Hong Kong India Russia

Switzerland US

Australia Japan

Any significant agreements to which the company is a party and which take effect, change or end upon a change of control of the company following a takeover bid, and the effects of such agreements, except where their nature is such that their disclosure would be seriously prejudicial to the company; this exception shall not apply where the company is specifically obliged to disclose such information on the basis of other legal requirements

Canada China Japan Russia Switzerland US

Australia Hong Kong India

Any agreements between the company and its board members or employees providing for compensation if such persons resign or are made redundant without a valid reason or if their employment ceases because of a takeover bid

Australia Canada Japan Russia Switzerland US

China Hong Kong India

2. Overview of information required in the Offer Document in Major Non-EU Jurisdictions

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Summary. The following table shows the information that must be provided in the Offer Document in Major Non-EU Jurisdictions.

What information needs to be included in the Offer Document? Yes No The terms of the bid Australia

Canada China Hong Kong India

Japan Russia Switzerland US

The identity of the offeror, where the offeror is located, the type of offeror and its registered office

Australia Canada China Hong Kong India


The securities or, where appropriate, the class or classes of securities for which the bid is made



The consideration offered for each security or class of securities and, in case of a mandatory bid, the method used to determine such consideration, in particular the way in which it is to be paid



The compensation offered for the rights which might be removed as a result of the breakthrough rule of Article 11.4 of the Directive, in particular the way in which such compensation is to be paid and the method used to determine it



The maximum and minimum percentages or quantities of securities which the offeror undertakes to acquire


Japan Switzerland US

Russia

Details of any existing holdings of the offeror, and of persons acting in concert with him, in the offeree company



All conditions to which the bid is subject Australia Canada China Hong Kong India

Japan Switzerland US

Russia

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What information needs to be included in the Offer Document? Yes No The offeror’s intentions with regard to the future business of the offeree company and, insofar as it is affected by the bid, the offeror company; its intentions with regard to the safeguarding of the jobs of the companies’ employees and management, including any material change in the conditions of employment; and in particular the offeror’s strategic plans for the two companies and the likely repercussions on employment and the locations of the companies’ places of business



The time allowed for acceptance of the bid Australia Canada China Hong Kong India


Where the consideration offered by the offeror includes securities of any kind: information concerning such securities



Information concerning the financing for the bid Australia Canada China Hong Kong India


The identity of persons acting in concert with the offeror or with the offeree company; where such persons are companies, their types, names, registered offices and relationships with the offeror and, where possible, with the offeree company



The national law which will govern contracts concluded between the offeror and the holders of the offeree company’s securities as a result of the bid and the competent courts

Australia Canada India Japan

Switzerland US

China Hong Kong Russia

3. Preparation of the offeree company’s opinion on a bid (involvement of independent board committees and/or advisors)

Overview. In terms similar to the rule set out in Article 9 paragraph 5 of the Directive, all Major Non-EU Jurisdictions, except India, require the offeree company’s board to prepare and disclose to its shareholders a document presenting its opinion of the bid and the reasons underlying it. In Major Non-EU Jurisdictions, this opinion is usually prepared, either mandatorily or based on market practice, with a financial advisor (who may issue a distinct opinion) and/or more rarely by an independent board committee. The report prepared by the financial advisor must be disclosed to the offeree company’s shareholders throughout the Major Non-EU Jurisdictions. Country Analysis:

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� India is the only Major Non-EU Jurisdiction that does not require an offeree company’s board to prepare an opinion on the bid for its shareholders. However, where the offeree company’s board “sends its unbiased comments and recommendations on the offer to its shareholders”, it must either engage an independent financial advisor to issue a professional opinion or set up a committee of independent directors.

� At the other end of the spectrum, Hong Kong is the only Major Non-EU Jurisdiction where an independent board committee must issue an opinion on the bid and in addition obtain independent financial advice. Members of the independent committee must include all non-executive directors of the company who have no interest in the bid, other than as shareholders of the company.

� In Switzerland, the offeree company board must prepare a report that sets forth all information necessary for the offeree company’s shareholders to make an informed decision on the bid, as well as the board’s position. If the board issues a recommendation on the bid, a fairness opinion is usually obtained from an audit firm or an investment bank chosen by the offeree company. A fairness opinion is mandatory if fewer than two board members qualify as independent.

� In China, the offeree company’s board must provide an opinion on the bid and therefore, on a mandatory basis, engage an independent financial advisor who issues a professional opinion containing, in particular, an analysis of the financial status of the offeror and the proposed consideration.

� There is no duty in the US for an offeree company to appoint an independent board committee to review a bid unless one or more members of the board are “interested parties” in, or an affiliated person is a party to, the bid, i.e. unless there is a “conflict of interest”. However, for offeree companies incorporated in Delaware (where a majority of US public companies are incorporated) and in most other States, it is customary to appoint special internal committees comprised of independent directors who review takeover bids, as well as legal and financial advisors to advise on the legality and feasibility of bids and to provide fairness opinions. Because of the plaintiffs’ bar in the US, this applies even in situations where there is no apparent conflict of interest. “Strike suits” are frequently filed in the State court in the US following the announcement of a takeover bid, alleging that the directors of the offeree company violated their fiduciary obligations to shareholders in approving a bid.

� In Russia, notwithstanding the absence of any obligation, it is customary for offeree companies’ boards to retain a financial advisor when reviewing the bid and issuing their opinion.

� In Australia, the directors of the offeree company are required to give a recommendation as to whether or not shareholders should accept the bid, stating their reasons. Interestingly, directors may choose to give no recommendation; however, in such case they must explain their reasons. There is no legal requirement for an offeree company to release a report by an independent advisor on the fairness and reasonableness of the takeover bid, except where (i) the offeror’s voting power in the offeree company amounts to at least 30%, or (ii) the offeror and the offeree company have at least one director in common. It is nonetheless very common for directors of offeree companies to commission a report in order to help shareholders to assess the value of the company and the attractiveness of the takeover bid.

� In Canada, it is typical for an offeree company board to establish an independent committee, which would normally retain its own financial and legal advisors to assist in preparing a recommendation to the offeree company shareholders. If the directors are unable to make a recommendation, the directors’ circular must indicate that the board needs more time to consider the bid (in such case a supplementary board circular must be filed no more than seven days before the expiry of the bid).

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� In Japan, the offeree company is required to file an opinion report with the local finance bureau stating whether it endorses the bid and recommends shareholders to tender their shares, including its reasons for such opinion (and the process used to reach the opinion). There is no general requirement to appoint an internal independent committee or an external independent advisor to review the bid or issue an opinion. However, if the offeree company recommends (i) a management buyout or a bid conducted by a parent company, or (ii) a bid by which the de-listing of the offeree company shares is anticipated, it is required to submit a valuation report or fairness opinion obtained from an independent appraiser. In addition, in a management buyout or a takeover bid conducted by a parent company, it is becoming common practice for the offeree company to obtain an opinion from a third party panel in order to avoid a conflict of interest between the management of the offeree company and the offeror.

Summary table: The situation may thus be summarised as follows: Mandatory opinion

by the offeree company’s board

Mandatory independent board committee

Mandatory financial advisor

Australia Yes, but may choose not to issue an opinion

No Only in certain cases, but yes in practice

Canada Yes No, but yes in practice No, but yes in practice China Yes No Yes Hong Kong Yes Yes Yes India No Yes, if the board issues

an opinion Yes, if the board issues an opinion

Japan Yes No No, except in certain conflict of interest situations

Switzerland Yes No Yes, but only in certain cases

Russia Yes No No, but yes in practice US Yes No, but yes in practice No, but yes in practice

D. Perception

1. Satisfaction regarding disclosures Satisfaction with the disclosure requirements. Stakeholders are very satisfied with the disclosure obligations contained in the Directive (58%) as well as with their content and enforcement.

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers 77% of stakeholders are of the opinion that the national framework sufficiently complements the disclosure obligations contained in the Directive, and 65% think that the rules regarding the content of the offer document are sufficient. Moreover, 56% of stakeholders consider that the disclosure requirements are appropriately enforced. � Stock Exchanges. Some stock exchanges believe that the Directive should set forth a general

framework for the disclosure of key information in an effort to harmonise EU financial laws, and to better protect investors and other market participants by ensuring a level playing field in terms of disclosure obligations. Such a framework could take the form either of a predefined summary as provided for in the revised Prospectus Directive, or of a distinct key information document, but should in any case provide for a standardised framework. Key information to be included could encompass the offering calendar, the form and amount of consideration, financial markets covered by the takeover bid in case of multi-listings, offering conditions, settlement terms and the intention to eventually conduct a squeeze-out, if applicable. Furthermore, it is pointed out that the Directive should provide a general framework governing translations of offering documents, leaving the Member States to define what languages they accept for that purpose.

� Supervisors. The UK takeover panel considers that the requirement for disclosure of detailed information about concerted parties of the offeror and, where applicable, the offeree company is too broad, taking into account the provision in Article 2(2) and the first presumption in the definition of “acting in concert” in the Takeover Code, which relates to group companies. Strict compliance with this provision in the case of an offeror that is part of a large group could be extremely burdensome. The Panel therefore considers, and provides in the Code, that the information disclosed should be restricted to the information that shareholders need in order to enable them to reach a properly informed decision on the bid.

2. Support for further disclosure Strong support for further disclosures. With regard to benefits of additional disclosure requirements, stakeholders gave the following answers:

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Note: Percentages are computed on a basis excluding the “no opinion” answers; percentages of “no opinion” are computed on overall answers.

Description a Offeree company Detailed situation of the offeree company in the offer document. b Management

package Details of any agreement between the offeror and the management and board members of the offeree company (management package).

c Deal protections Details on deal protections (such as break-up fees). d Long and short

positions Details of any existing or potential long and short positions of the offeror, and of any persons acting in concert with him, in the offeree company, whether such positions exist or are potentially available pursuant to a contract.

e Environmental policy

Details of the offeror’s intentions regarding the environmental policy of the offeree company.

f R&D Details of the offeror’s intentions regarding the research and development policy of the offeree company.

g Commitments Details of the offeror’s commitments (as opposed to mere “intentions”) regarding issues such as employment, environmental policy, research and development, and the location of the offeree company’s place of business.

h Local business partners

Details of the offeror’s intentions regarding the main local business partners and sub-contractors of the offeree company.

i Pension funds Details of the offeror’s intentions regarding the offeree company’s pension fund (including with respect to its nature and funding).

j Divestment of assets or activities

Details of the offeror’s intentions regarding any significant divestment of assets or activities of the offeree company.

k Significant investments

Details of the offeror’s intentions regarding any significant investments of the offeree company.

l Dividend policy Details of the offeror’s intentions regarding the dividend policy of the offeree company.

m Combined debt Details of the offeror’s intentions regarding the combined debt of the offeror and the

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offeree company after the bid. n Offeree company

opinion on items mentioned

Opinion of the offeree company on items d) to m), to the extent that you have answered “Yes” to such questions.

Analysis of the support by type of disclosure. There is broad support for additional disclosures, except for disclosure on environmental policy and local business partners. Interestingly, stakeholders support the concept that there should be commitments (as opposed to mere intentions). Strong support for additional disclosures.

Analysis of support for further disclosure requirements Nature 40% - 50% 50% - 70% >70% Description of bid and offeree company

Offeree company Management package, deal protections, long and short positions

Intention of the offeror Employment policy, local business partners

R&D, pension funds Divestment of assets or activities, significant investments, dividend policy, combined debt

Commitments of the offeror

Commitment

Offeree company’s opinion on the above

Offeree company opinion on mentioned items

Detailed analysis. � Analysis by topic: Request for more disclosure. A majority of investors and intermediaries (71%) disagree with the suggestion that stakeholders would be better protected with a disclosure requirement concerning local business partners and sub-contractors. 57% of them are of the same opinion with regard to environmental policy disclosure. A majority of issuers believe that stakeholders would be better protected with a disclosure requirement concerning environmental policy (64%) and local business partners (67%). Issuers show stronger support (77%) than investors and intermediaries (67%) for disclosure of the offeror’s commitments regarding issues such as employment, environmental policy, research and development and the location of the offeree company’s place of business. Nonetheless, it should be noted that investors and intermediaries believe that disclosure requirements for each item would better protect stakeholders. � Analysis by stakeholders:

- Employee representatives. Generally speaking, a majority of employee representatives (mostly 100% for each item) and other stakeholder associations strongly support all suggested disclosures.

- Supervisors. Supervisors support additional disclosures slightly less than employee representatives and other stakeholder associations. For instance, only 42% of supervisors believe that disclosure regarding environmental policy would provide better protection.

- Stock exchanges. Overall, stock exchanges show less support for disclosures than other stakeholders. For instance, only 40% of stock exchanges favour disclosure regarding environmental policy and local business partners. Similarly, stock exchanges are less

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supportive of disclosure regarding employment, environmental policy, research and development, location of the place of business (60%) and pension funds (50%).

Other suggestions. Other suggestions have been made: � Some stakeholder associations suggested requiring disclosure of details of the consideration of

other alternatives by the board of the offeree company as well as of the assessment of the bid(s) that have been tabled.

� Some supervisors are in favour of mandatory disclosure of the offeror’s intentions regarding

maintenance of the listed status or de-listing of the offeree company’s securities, and of its intentions to apply the squeeze-out right or not.

� One issuer association suggested that, in any event, the elements should only be required if they

are material for the companies concerned.

3. Clarity and harmonisation Clarity. Stakeholders generally perceive the takeover bid procedure to be clear enough (71%). Those who disagree consider that the lack of clarity results mainly from the national applications of the Directive (48%). Harmonisation. A majority of stakeholders are of the opinion that there are significant differences between the EU procedures (79%) but that this does not constitute an obstacle to the efficient execution of takeover bids (58%).

VI. Supervisory authority, enforcement and litigation Key concepts. � Supervisory authorities have a key function in the current re-regulation setting. � They find that enforcing the rules is generally “easy”, except in connection with issues such as

neutrality and reciprocity. A wide range of sanctions and remedies is available in the event that takeover regulations are breached. However, supervisors seem reticent in the use of their own powers: they issue penalties only rarely and hold mixed views regarding the effectiveness of the sanctions they can impose. This conduct may be linked to the current low level of takeover activity or may indicate that supervisors lack the means to conduct their enforcement mission.

� Regarding procedure, an interesting system is the one used, outside the EU, by the Swiss

supervisory authorities. Upon request, the latter grant minority shareholders (holding at least a 2% interest) the right to participate in the procedure.

A. Objectives Key component. There can be no regulation without supervision and enforcement. This is especially true with regard to a highly sophisticated, dematerialised and international structure such as financial markets. The times of “light touch regulation” seem essentially gone and there are widespread calls for re-regulation. In this setting, the role given to supervisory agencies is expanding. Effective application of the Directive requires guidance by the competent supervisory authorities regarding the clarification of national transpositions of the Directive where necessary, which contributes to making takeover law more predictable. Moreover, infringements of the transposing regulation must be penalised in an effective, proportionate and dissuasive manner by the competent

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judicial or administrative national authorities in order to ensure that the transposition provisions are, in practice, also enforced at the Member State level.

B. Transposition

1. Guidance by supervisory authorities Guidance. Substantial guidance is issued in certain Member States such as the UK (where it is provided by the Panel on Takeovers and Mergers), Ireland and Finland308. Supervisors (such as the AMF in France and the BaFin in Germany) issue annual reports describing the most important decisions and issues at stake, or publish other documentation such as guidance papers or statistics. Where decisions are published (e.g. in France), investors receive additional guidance. The level of guidance available depends largely on when pre-existing takeover law was introduced in the relevant Member State. In Member States with a relatively new takeover law (e.g. Luxembourg or Greece), there is little guidance because only a few decisions currently exist. The level of guidance also depends on the size of the takeover markets in the respective countries. In smaller countries, few cases are at hand. Some countries, such as Romania, thus lack precise guidance. Cooperation. The Directive has made cooperation between supervisors easier, as supervisors of Member States are now working on the basis of a common framework. The Network of Takeover Regulators established under the auspices of CESR (now ESMA) has also provided an effective and useful forum for discussion and the exchange of views on best practice.

2. Enforcement by Supervisors and courts National competence. According to Article 4.6 of the Directive, the Directive does not affect the power of the Member States to designate judicial or other authorities to deal with disputes and to make decisions regarding irregularities that occur in the course of bids, or their power to regulate whether and under what circumstances parties to a bid are entitled to bring administrative or judicial proceedings. Specialised courts. Quality of enforcement and compliance also depends on the possibility to control decisions of the supervisory authorities. In order to concentrate knowledge in one court, some Member States have determined that specific competence for appeals against decisions of the supervisory authority lies with a higher civil law court (for instance, in France with the Paris Court of Appeal, in Belgium with the Brussels Court of Appeal and in Germany with the Higher District Court of Frankfurt). In a few Member States, specialised courts have competence: for instance, in Finland, appeals are brought before the Finnish Market Court. In the Netherlands, appeals are initially brought before the District Court of Rotterdam and then before the Trade and Industry Appeal Tribunal. In Slovakia, appeals are first lodged with the Financial Market Supervision Unit of the National Bar of Slovakia and then with the Bar Board of the National Bar of Slovakia. The table below summarises this analysis: Countries Supervisory authority Courts Austria Austrian Takeover Commission Limited appeal before the Independent

Administrative Tribunal of Vienna, no specialised courts.

Belgium Financial Services and Markets Limited appeal before the Brussels Court of

308 In Finland, there is the particularity that the Finnish Financial Supervisory Authority issues “Standards”,

that is, guidelines that are partly binding and partly recommendatory.

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Countries Supervisory authority Courts Authority (FSMA) Appeal, no specialised courts.

Czech Republic

Czech National Bank Appeal before administrative courts, no specialised courts.

Denmark Danish Financial Supervisory Authority (Danish FSA)

Limited appeal before, first, the Danish Business Law Supervisory Committee and, second, the ordinary courts.

Estonia Estonian Financial Supervision Authority

Appeal before administrative courts, no specialised courts.

Finland Finnish Financial Supervisory Authority (Finnish FSA)

Appeal before the Finnish Market Court, which is a specialised court.

France French Financial Markets Authority (AMF – Autorité des marchés financiers)

Appeal before the Paris Court of Appeal (judicial court), no specialised courts.

Germany Federal Financial Supervisory Authority (BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht)

Appeal against BaFin decisions before the higher court of Frankfurt (OLG); third party claims, if admitted, before ordinary courts.

Greece Hellenic Capital Markets Commission

Athens Administrative Court of Appeal, no specialised courts.

Hungary Hungarian Financial Supervisory Authority

No appeal, but judicial review before the judicial courts in a lawsuit (review conducted by the Administrative Departments of the judicial courts).

Ireland Irish Takeover Panel Appeal before the Irish High Court (judicial court), no specialised courts.

Italy Commissione Nazionale per le Società e la Borsa (Consob)


Luxembourg Commission de Surveillance du Secteur Financier (CSSF)


Netherlands Netherlands Authority for the Financial Markets (AFM)

Appeal before, first, the District Court of Rotterdam and, second, the Trade and Industry Appeals Tribunal, which are specialised courts.

Poland

Polish Financial Supervision Authority (KNF)

No appeal but retrial; appeal after the retrial before the administrative courts, no specialised courts.

Portugal Comissão do Mercado dos Valores Mobiliários (CMVM)

Appeal before the Administrative Court of Lisbon, no specialised courts.

Romania

Romanian National Securities Commission (NSC)

Appeal before the Bucharest Court of Appeal (both judicial and administrative court), no specialised courts.

Slovakia

National Bank of Slovakia Appeal before, first, the Financial Market Supervision Unit of the National Bank of Slovakia, and, second, the Bank Board of the National Bank of Slovakia, no specialised courts.

Spain National Securities and Exchange Commission (CNMV)

Appeal before the Audiencia Nacional (National Audience), no specialised courts.

Sweden Swedish Financial Supervisory Authority (Swedish FSA)

Appealed before Aktiemarknadsnämnden (AMN), the Securities Council.

UK Takeover Panel Appeal before, first, the Takeover Appeal Board and, second, the ordinary courts.

Scope of challenges. The extent to which decisions of the supervisory authority can be challenged varies from Member State to Member State. In Belgium, only certain decisions of the FSMA can be

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challenged in court (for example, the approval of the offer document cannot be challenged but, in contrast, the refusal to approve it can). In Germany, there exists a debate as to whether third parties may challenge decisions of the supervisory authority and to what extent the German Securities Takeover and Acquisition Act confers third party rights. While the supervisory authority and the Higher District Court of Frankfurt appear to refuse such rights, according to certain authors and requirements of the Constitutional Court, procedural rights must be granted at least to certain third parties (such as minority shareholders). Swiss shareholder participation in proceedings. On a comparative basis, it may be worth noting that, in Switzerland, applicable rules favour shareholder involvement by authorising shareholders who hold, directly or indirectly, 2% or more of the voting rights in the offeree company to be a party in proceedings before the Swiss Takeover Board (please refer to Chapter III Section VI. C. 2.) of this Study). Major Non-EU Jurisdictions. Enforcement issues in respect of shareholder protection rules also exist in Major Non-EU Jurisdictions (please refer to Chapter III Section VI. C. of this Study).

3. Sanctions National sanctions. According to Article 17 of the Directive, the Member States are competent to determine the sanctions to be imposed for infringements of the national transposing law. Member States must take the necessary steps to ensure that the national transposing law comes into effect. The sanctions thus need to be effective, proportionate and dissuasive. The way in which enforcement is ensured in the UK is generally given as an example. The box below provides a short description in this respect.

Enforcement in the UK If the Hearings Committee finds a breach of the Code or of a ruling of the Panel, it may: � issue a private statement of censure; � issue a public statement of censure; � suspend or withdraw any exemption, approval or other special status which the Panel has granted

to a person, or impose conditions on the enjoyment of such exemption, approval or special status, in respect of all or part of the activities to which such exemption, approval or special status relates;

� report the offender’s conduct to a UK or overseas regulatory authority or professional body (most notably the Financial Services Authority (“FSA”)) so that such authority or body can consider whether to take disciplinary or enforcement action; and

� publish a Panel Statement indicating that the offender is someone who, in the Hearings Committee’s opinion, is not likely to comply with the Code. The rules of the FSA and certain professional bodies oblige their members, in certain circumstances, not to act for the person in question in relation to transactions subject to the Code, including dealings in relevant securities requiring disclosure under the Code. This is known as “cold-shouldering”.

In the last five years (2006-2011), the Panel has issued three statements of public censure and 35 statements of private censure (of which nine were market-related, 18 related to the conduct of the persons concerned and eight related to a failure to consult the Panel). One “cold-shouldering” statement has been issued, in 2010. This is only the second time that such a statement has ever been issued by the Panel. Available measures. Measures available for private enforcement of the transposing law include the voiding of share purchases concluded in breach of the transposing law, in particular without launching a mandatory bid; the forfeiture of voting rights acquired or held in violation of the mandatory bid rule

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(e.g. Germany, Italy); and damages claims for shareholders or other stakeholders.309 In most Member States, administrative sanctions and fines can be applied in case of infringement of certain provisions of the transposing law (e.g. infringement of the mandatory bid rule, omission to publish a bid lacking content, failure to respect minimum price requirements). The amount of fines varies amongst the Member States. In Germany, fines may amount to one million euro, while in Italy, the maximum fine for failing to launch a mandatory bid can equal the entire price that would have been payable under the mandatory bid rule. Penalties for violation of guidance issued by supervisors. Most supervisors state that penalties are never issued (63%). Regarding their deterrent effect, 50% have no opinion and 38% think that penalties have no such effect. This may be linked to the fact that takeover activity has been low, so that occasions to issue penalties have been few.

Summary tables. The enforcement of sanctions is a key aspect of the application of the provisions of the Directive. Without effective sanctions, companies are not incentivised to comply with the Directive. The tables below summarise different sanctions relating to three situations of non-compliance with the Directive: � failure to launch a mandatory bid after relevant threshold crossing;

� offeree company’s application of an unauthorised defence; and

� disclosure of inaccurate information under Article 10 of the Directive. For each situation, different sanctions may be enforceable. The most common sanctions are fines and damages.

309 In Germany, damages claims are difficult to obtain, as the Securities Takeover and Acquisition Act is

generally not deemed to confer specific individual protection rights, e.g. upon shareholders.

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Offeree company’s application of an unauthorised defence

Court order to remove the defence

Fines Damages Other

Belgium Estonia Finland France Hungary Italy Luxembourg Netherlands Portugal Romania Spain Sweden UK

Austria Belgium Czech Republic Denmark Estonia Finland Greece Portugal Romania Slovakia Sweden UK

Austria Czech Republic Estonia Finland France Italy Luxembourg Netherlands Portugal Spain UK

Belgium (publication of the FSMA’s decision or conclusion that a party has not complied with its obligations) Finland (imprisonment) Ireland (hearing to determine appropriate sanction) Netherlands (suspension of the voting rights, temporary transfer of the management of the shares, suspension or voidance decisions of the general meeting of shareholders, granting of preliminary relief; other potential arrangements by the courts are possible) Sweden (warning)

Disclosure of inaccurate information under Article 10 Mandatory disclosure of amended correct information

Fines Damages Other

Austria Czech Republic Estonia

Austria Belgium Czech Republic

Austria Belgium Czech Republic

Belgium (penalties per calendar day; imprisonment;

Failure to launch a mandatory bid after relevant threshold crossing Suspension of offeror’s voting rights

Fines Damages Obligation to launch bid with accrual of penalty fees for delay

Other

Austria Czech Republic Estonia France Germany Greece Hungary Italy Luxembourg Poland Portugal Romania Spain Sweden

Austria Czech Republic Denmark Estonia Finland Germany Greece Hungary Italy Luxembourg Netherlands Poland Portugal Romania Slovakia Spain UK

Austria Belgium Czech Republic Estonia Finland Germany Luxembourg Portugal Romania UK

Finland France Germany Poland Portugal Romania Sweden

Belgium (publication of the FSMA’s decision or conclusion that a party has not complied with its obligations) Finland (public admonition / warning, monetary penalties) Hungary (mandatory sale of the securities exceeding the relevant thresholds) Ireland (hearing to determine appropriate sanction) Italy (mandatory sale of the securities exceeding the relevant thresholds) Romania (suspension of the authorisation, temporary prohibition to perform financial activities) Slovakia (any measure to eliminate and remedy the detected defaults)

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Disclosure of inaccurate information under Article 10 Mandatory disclosure of amended correct information

Fines Damages Other

Finland France Hungary Italy Luxembourg Netherlands Romania Portugal Spain Sweden UK

Denmark Estonia Finland Greece Italy Luxembourg Netherlands Poland Portugal Romania Slovakia Sweden UK

Estonia Finland France Hungary Luxembourg Poland Portugal UK

suspension or prohibition of trading in financial instruments for a maximum of 10 days; publication of a warning; suspension of the rights attached to the shares; adjournment of the general shareholders’ meeting for a determined period; sale of relevant shares) Estonia (prohibition of the use and disposal of the relevant securities) Finland (imprisonment, administrative sanctions) Ireland (hearing to determine appropriate sanction) Slovakia (any measure to eliminate and remedy the detected offences) Sweden (warning)

Litigation. Almost all Member States report that no increased litigation has been observed since the enforcement of the Directive. In some countries (e.g. Luxembourg, Estonia, Austria), this may be explained by the fact that the takeover law is recent or the total number of takeovers is very low, while in others (e.g. the UK, France, Germany) it may be due to the fact that the Directive did not fundamentally change the existing legal framework. Specific situations. In Greece, the framework of fines currently available appears not to be adequate to protect minority shareholders. Although Greek law provides for administrative fines of up to 3,000,000 euro, based on the information disclosed by the Hellenic Capital Markets Commission, the most substantial fines imposed since the transposition of the Directive have been (i) a fine of 300,000 euro against Iberdrola Renovables in October 2008 for the breach of its obligation to launch a mandatory takeover bid, and (ii) a fine of 50,000 euro against Marfin Investment Group because it had not delisted Vivartia, contrary to what was stated in the information disclosed during the preceding takeover bid. A special situation exists in Finland, as the Takeover Code is a self-regulatory instrument and therefore not binding, with the result that no binding enforcement mechanisms exist. However, according to a report by the Finnish Takeover Panel issued in 2008, the recommendations of the Takeover Code have, generally speaking, been relatively well complied with, so that compliance appears to be satisfactory in spite of the non-binding character of the Takeover Code.

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1. Enforcement of takeover bid rules: the Russian example Potential circumvention. In certain Major Non-EU Jurisdictions, the enforcement of takeover bid rules intending to protect shareholders’ interests appears to be unsatisfactory, with offerors achieving the success of the bid by influencing shareholders or taking advantage of non-bid related rules. As an example, applicable Russian takeover bid rules are reasonably protective of shareholder interests but are in practice sometimes circumvented through the following means: � Special shareholders’ meeting. A minority shareholder holding at least 10% of the offeree

company’s shares is authorised by Article 55(4) of the JSC law to convene and conduct a special shareholders’ meeting. In such case, an offeree company’s supervisory board is not permitted to propose amendments to the agenda of the meeting. In consequence, minority shareholders are likely to be highly instrumental in favouring a takeover bid by proposing offeror-oriented resolutions at a special shareholders’ meeting. 10% shareholders may also file a complaint stating that the decision of the controlling shareholder at such meeting was detrimental, or arguing that the minority shareholder was not properly informed in connection with the meeting. If successful, the complaint may lead to a withdrawal of the controlling shareholder’s voting rights at the special shareholders’ meeting.

� Insolvency proceedings. Offerors may also take advantage of the provisions of Federal Law

number 6 on insolvency. Pursuant to this law, creditors of companies that have debts exceeding 100,000 roubles may initiate legal bankruptcy proceedings against the company. Offerors may thus cooperate with the offeree company’s creditors and the trustee appointed for the bankruptcy proceedings in order to favour a bid. This strategy also takes advantage of the weakness of the banking sector in Russia, which is often outweighed by other industrial creditors.

� Offeree company’s management. Certain offerors cooperate with the offeree company’s

managers in order to favour the outcome of the takeover bid. Managers are permitted by Article 64(1) of the JSC law to take a number of daily business management decisions without prior shareholder approval. If managers have an incentive to favour a takeover bid, they may, for instance, dilute the company’s assets by transferring valuable assets offshore or make decisions that may put the solvency of the company at risk in order to take advantage of the above-mentioned insolvency law.

2. Swiss Shareholder Involvement Qualified shareholders. Since 1 January 2009, shareholders holding, directly or indirectly, 2% or more of the voting rights in the offeree company, whether exercisable or not (so-called “qualified shareholders”), may be a party to takeover proceedings before the Swiss Takeover Board within five trading days in the following circumstances: � after the publication of the offer document; or

� if the first order by the Swiss Takeover Board regarding the bid is published before the offer document (for example, orders relating to the pre-announcement), after publication of such order.

Qualified shareholders may also, if they have not applied to obtain legal standing and have yet to participate in the proceedings, file an appeal with the Swiss Takeover Board against the first order

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issued by the Swiss Takeover Board on the bid within five trading days of publication of such order, if published prior to or together with the offer document. Participation. Upon admittance, the qualified shareholders may: � participate in the proceedings;

� access the Takeover Board’s file; and

� challenge the Takeover Board’s order before the FINMA. The Takeover Board is likely to suspend the bid period if a decision relating to the bid is challenged before the Takeover Board or before the FINMA. Therefore, the participation of qualified shareholders in proceedings before the Takeover Board may delay the bid timetable.

D. Perception

1. Clarity and guidance Clarity as to the competent supervisor. A vast majority of stakeholders considers that it is sufficiently clear which supervisor is competent to supervise takeover bids (93%), the use of squeeze-outs (84%) and the use of sell-out rights (83%). Frequency of guidance issued. Most supervisors state that they sometimes provide guidance on national legislation transposing the Directive (62%).

2. Enforcement Penalties. Most supervisors state that penalties are never issued (63%). Regarding the deterrent effect of such penalties, 50% of supervisors have no opinion and 38% think that they have no such effect. This may be linked to the fact that takeover activity has been low, so that occasions to issue penalties have been few. Enforcement. A majority of supervisors considers that the rules and principles set out in the Directive are very easy or easy to enforce. However, the following exceptions apply: � Breakthrough rule. The breakthrough rules have been designated as difficult to enforce by a

majority of supervisors (58%). This question is a rather theoretical one, since the only country to have transposed the rule is Estonia. Supervisors probably believe that if this rule were to be transposed, it would be difficult to enforce.

� Reciprocity rules. The same analysis applies to the reciprocity principle (50% difficult). Only five countries have chosen to transpose it, and companies very seldom opt into reciprocity.

� Board neutrality rule. A majority of stakeholders (53%) considers the board neutrality rule difficult to enforce.

Item Description Very easy Easy Difficult

Very difficult

1 Compliance with general principles (Article 3 of the Directive)

22% 44% 29% 0%

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2 Designation of supervisory authority competent to supervise a bid (Article 4 of the Directive)

47% 41% 12% 0%

3 Mandatory bid rule (Article 5 of the Directive) 18% 65% 18% 0%

4 Information and disclosure rules regarding the bid (Articles 6, 8, 10 of the Directive)

24% 65% 12% 0%

5 Maximum duration of a bid (Article 7 of the Directive) 3%1 63% 6% 0%

6 Rules regarding the opinion of the board of the offeree company (Articles 9.5 and 14 of the Directive)

18% 71% 12% 0%

7 Rules regarding the provision of information to the employee representatives of the offeree company (Article 9.5 of the Directive)

25% 56% 19% 0%

8 Rule regarding the neutrality of the board of the offeree company (Articles 9.2, 9.3, 12 of the Directive)

7% 40% 53% 0%

9 Rule regarding breakthrough (Articles 11 and 12 of the Directive)

17% 17% 58% 0%

10 Reciprocity principles (Article 12.3 of the Directive) 8% 17% 50% 0%

11 Rules regarding squeeze-out (Article 15 of the Directive)

23% 62% 15% 0%

12 Rules regarding sell-out (Article 16 of the Directive) 23% 54% 23% 0%

Litigation. Stakeholders do not consider that the Directive has led to a significant increase of litigation. Where litigation did in fact increase, this appears to have been mostly due to an enhanced awareness on the part of stakeholders of the respective right (75%). The detailed figures are shown in the tables below:


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VII. Control structures and barriers not covered by the Directive Key concepts. � Control structures and barriers not covered by the Directive, such as pyramids and cross-

shareholdings, are only a few of all the pre-bid defences. Most of such defences are covered by the breakthrough rule, which has been transposed (among the Sample Countries) only in Estonia. For all practical purposes, it may be considered that all pre-bid defences are to be treated in the same way in this Study, which is essentially what has been done in Chapter III, Section III on defences.

� In keeping with the findings of the OSOV Study, pyramids remain a popular mechanism, while cross-shareholdings stay at a low ebb. Both mechanisms are perceived as defences not frequently used (see B.3 below).

� Other barriers, such as anti-trust or sectoral regulations, remain potential obstacles to bids. The

situation does not seem to have changed as a consequence of the Directive, and non-EU countries have essentially kept the same regulations.

A. Overview Scope. Control structures and barriers to takeovers exist in areas not covered by the Directive. The OSOV Study, published by the Commission, emphasised different control enhancing mechanisms. Among such mechanisms, the Directive does not cover pyramid structures and cross-shareholdings. Generally, the results of the OSOV Study appear to retain their validity.

B. Cross-shareholdings and pyramid structures

1. Cross-shareholdings Rationale for cross-shareholdings. “Cross-shareholdings” refers to the situation that occurs when company X holds a stake in company Y which, in turn, holds a stake in company X. This creates specific links between companies that may, in certain cases, serve as a basis for defence strategies, typically with a view either to improving the bid price or to protecting the company’s interests. Cross-shareholding is efficient in this respect if it is for an amount which is sufficiently significant (at least 5%) and if it is a part of a larger, strategic alliance. Otherwise, the cross-participation may be

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unwound if the price offered in the bid is high enough. Generally speaking, under most legal systems, refusal to tender shares held as cross-shareholdings into a takeover bid when there is a reasonable premium added to the price risks being deemed contrary to the company interest or the fiduciary duties of directors. This is why, where cross-shareholdings have been used in the past, especially in France and Germany, they have become much less frequent. Legal framework. Several countries regulate cross-shareholdings by taking into account a 10% threshold. The voting rights held above this threshold are suspended (Italy, France, Belgium, Spain). Some jurisdictions refer to the capacity for a company to control another. In Greece, cross-shareholdings are allowed, provided that neither company is a subsidiary of the other.310 In Luxembourg, a certain level of cross-shareholdings is allowed provided that neither company directly or indirectly holds a majority of the voting rights in or directly or indirectly exercises a dominant influence over the other. National legislations are sometimes more complex. For instance, German law provides for a double threshold. Companies directly holding more than 25% of the share capital of another stock corporation must notify such corporation of their holdings, and the latter must publish this information. Voting rights may be restricted to a maximum of 25%, of all outstanding voting rights of the company. German law does not prohibit cross-shareholdings, but penalises them by reducing the corresponding voting rights and thus economic rights (other than the subscription rights). In addition, if one company controls the other, shares held by the controlled company in the controlling company are considered shares of the controlling company to which restrictions on the holding of treasury shares apply (e.g. 10% limitation). Assessment. If cross-shareholdings raise concerns in the context of takeover laws, their regulation should be assessed in the broader context of corporate law.

2. Pyramids Rationale for pyramid structures. “Pyramid structure” refers to the situation that occurs when an entity (such as a family or a company) controls a corporation that in turn holds a controlling stake in another corporation. This process can be repeated a number of times. A stake is deemed to be a “controlling stake” if it reaches or exceeds 20% of the voting rights. A pyramid structure may be of interest if, through the use of several holdings, it enables the ultimate controller to control the issuer with less capital than would be needed to control the issuer directly. Given that they allow control to be gained with less capital, pyramids are typically used when a founder or family wishes to retain control of a growing company, but does not have the financial means to support this development. As external shareholders are not likely to invest in intermediary holding (with low liquidity) without negotiating appropriate protection, the ultimate “control” held through a pyramid is typically diluted and there is thus potential control over the extraction of private benefits. Regulation. Generally speaking, pyramid structures are not specifically regulated in Member States in connection with takeover bids. Pyramids may be addressed through rules applicable to parent-subsidiary relationships, in particular in connection with accounting laws, tax laws, related-party transactions, or disclosure obligations under applicable securities laws. In the context of takeovers, the mandatory bid rule will typically be triggered in the event of indirect acquisition of listed shares through the acquisition of shares in a “pyramid” parent company. If pyramids are considered in a negative light, the most efficient mechanism to dispose of them would appear to be through taxation of intra-group dividends.

310 In Greece, a company is deemed to be a subsidiary of another entity where such entity holds the majority

of the capital or voting rights of the company, has the right to directly or indirectly appoint and revoke members of the company’s board of directors or exercises a dominant influence over the company.

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3. Frequency Use. The tables below show the percentage of pyramid structures and cross-shareholdings existing in the Sample Countries where information is available.311 The tables are consistent with the findings of the OSOV Study, which showed that, on average within the EU, 18% of all sample companies had pyramid structures and 2% had cross-shareholding structures. It confirms that, on an EU-wide basis, cross-shareholdings are no longer an issue (for instance, in France and Germany, this formerly popular structure was substantially unwound in the 1990s), whereas pyramids remain a popular structure. This is consistent with the fact that continental shareholding structures remain, to a large extent, based on blockholding.312

Pyramids Overall Recently listed Total 18.1% 27.5% 20.5%

Cross-shareholding

Overall Recently listed Total 3.5% 0% 2.6%

Using pyramids and cross-shareholdings as a defence. As indicated in Chapter III, Section III, D. of this Study, only 12% and 4% of the stakeholders stating an opinion think that pyramids and cross-shareholdings are always or frequently used, whereas 45% and 48%, respectively, believe that they are rarely or never used.

C. Other barriers Anti-trust regulations. One of the most significant legal barriers to takeovers results from the anti-monopoly regulations. Large groups are often shielded from takeover bids launched by their larger competitors thanks to these rules – where, in a number of cases, such competitors would be the most likely candidates to launch such a bid. Sectorial regulations. Sectorial regulation is significant in all countries, particularly in relation to the financial, insurance and media sectors. For instance, in France, the authorisation of the French banking regulatory body is required if a company (either French or foreign) wishes to acquire, directly or indirectly, alone or in concert, more than 10% of the voting rights in, or the effective power to manage, a French financial institution. Similarly, the authorisation of the insurance regulator is required if a company (either French or foreign) wishes to acquire, directly or indirectly, alone or in concert, more than 50%, one-third, 20% or 10% of the voting rights in, or the effective power to manage, an insurance company. Furthermore, the prior authorisation of the Finance Minister is required for foreign investments in certain sectors, such as gambling, R&D of sensitive or toxic products, and IT security systems. Public funds. In the public sector, some investors such as the FSI (the French sovereign investment fund) are reference shareholders. Takeover bids involving such reference shareholders are more difficult to handle since the reference shareholder needs to be convinced by the project before tendering new shares. Italy is discussing a project to create a similar fund. Co-determination. In Germany and Austria, co-determination may cause certain foreign investors to refrain from launching a takeover bid because they may fear that they will not ultimately control the company in question. However, well-managed co-determination may also be seen as an asset for a

311 The sample includes about 200 companies. 312 In this respect, it should be noted that pyramids remain very rare in the UK: they represent 10% of the

sample and are only present in the segment of recently listed companies.

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company having an industrial project likely to interest employees. The overall impact of co-determination on takeovers thus remains uncertain, although there is much anecdotal evidence to suggest that this system exists in a significant number of highly successful industrial companies. Employee share ownership. Employee ownership may sometimes be seen as an obstacle to takeover bids, in particular if the latter are not solicited. However, this may only be the case if employee ownership reaches a significant level (at least 5% to 10%, depending on the shareholding structure of the company), which is rarely the case in large companies due to employees’ budgetary constraints.

D. Comparison with Major Non-EU Jurisdictions Overview. Many Major Non-EU Jurisdictions have adopted specific legislation restricting foreign investments in sectors that are considered sensitive, particularly in connection with national security. Although Major Non-EU Jurisdictions tend to have looser restrictions with regard to foreign investment, substantial barriers remain in certain industrial sectors. These sectors include the insurance sector (Australia, Hong Kong, Russia and Switzerland), the aviation/transportation sector (Australia, Canada, India, Japan, Russia, Switzerland and the US), the banking sector (Australia, Canada, Hong Kong, Russia, Switzerland and the US), and the telecommunications, broadcasting and media sectors (Australia, Canada, Japan, Switzerland and the US). Also, in Switzerland and Australia, the acquisition of residential property by non-nationals is subject to specific regulations. In Russia, the regional gas supply and gas distribution systems benefit from specific protection. Thresholds. For instance, foreign share ownerships are subject to prior authorisation by a government agency if certain thresholds are reached (Australia, India, Japan, Russia). � Japan. In Japan, a foreign company intending to acquire 10% or more of the shares of a

Japanese company must notify such intention to the Minister of Finance and the Minister in charge of the relevant industry.

� India. In India, the caps on foreign share ownerships are limited to certain sensitive sectors and the threshold remains relatively high (for example, the foreign ownership limit in the aviation sector is 74%).

� Russia. In Russia, foreign share investments in strategic companies exceeding 5% are subject to preliminary approval by the Federal Antimonopoly Service. Companies are considered as strategic if their business relates, in particular, to geological surveying and/or exploration, or mining operations on subsoil plots of federal importance.

� Australia. In Australia, the Foreign Acquisitions and Takeover Act requires foreign investors to apply to the Federal Treasurer for approval before acquiring, on an individual or aggregate basis, stakes exceeding 15% or 40%.

E. Perception Cross-reference. The perception study on the control structures and barriers not covered by the Directive is presented in the Section on defences against takeover bids (please refer to Chapter III Section III D. of this Study). Since only one country, Estonia, has adopted the breakthrough rule, none of the defences supposed to be “broken through” are, in effect, covered by the Directive. As a result, there is no reason, from a practical standpoint, to make a distinction between the two categories and to believe that stakeholders will be able to make this distinction in turn.

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CHAPTER FOUR: ECONOMIC STUDY

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This chapter discusses the economic foundations of takeover regulation and the incentives that drive actors to behave in certain ways and regulators to use the tools defined in more detail by the Directive. More generally, it illustrates why and when a regulatory framework for takeovers is needed. Finally, the chapter sets forth the empirical results of the econometric analysis run to assess the effects of the Directive.

I. Setting the scene: the takeover bid process Takeover. A takeover can be technically defined as a takeover bid to acquire the control over a company listed on a public market.313 “Control” is achieved when the offeror has acquired enough shares of the offeree company to be able to appoint directors to the company’s board (Davies and Hopt, 2004). “Control” may therefore be shared by one or more controlling shareholders or exercised by the board of directors that represents all shareholders and the company (fully dispersed ownership). A transfer of control can be achieved in two ways (Bebchuk, 1994; see Table 1): by means of a private sale of control or a public bid to all shareholders. In both cases, the transaction may concern shares listed on secondary markets. Private sale. A private sale of control is a bilateral negotiation between the acquirer and the acquiree (usually the controlling blockholder). Private sales of control will take place more frequently in an environment with full or partial concentration of ownership and control, where (due to coordination problems) it would be difficult to organise a private sale in a dispersed ownership environment. In the case of private sales of control, the acquirer will offer a premium that is tailored to the controlling shareholders’ willingness to sell the benefits they are able to extract from minorities (so-called “private benefits of control” or simply “PBC”314). PBC are not necessarily value-expropriating (e.g. self-dealing); rather, they can also be value-creating, i.e. by increasing utility of the controller without damaging minority shareholders or the company’s value (for instance by using otherwise unused internal research for productive purposes; Dyck and Zingales, 2004). From a purely economic standpoint, PBC create incentives for value-creating takeovers by giving the acquirer additional, measurable benefits from the acquisition (Berglof and Burkart, 2003). However, the existence of PBC has led regulators to introduce more general principles into the Directive, such as the equal treatment of shareholders (Article 3.1(a) of the Directive 2004/25315; see also High Level Group of Company Law Experts on Issues related to Takeover Bids or “Winter Report,” 2002, p. 1).

Table 1. Control transfers

Sale of control Takeover bid (takeover)

No coordination problems (bilateral)

Controlling shareholders-acquirer

Coordination problems (multilateral)

Offeror-shareholders-management

Among shareholders

313 For “public markets”, the text refers not only to the main market where companies originally listed their

shares, but also to all secondary markets where shares are actually traded. 314 PBC are the benefits enjoyed by controllers through the exploitation of corporate resources (self-dealing,

etc.; Jensen and Meckling, 1976). PBC can also be calculated as the difference between the market price in the tender bid and after the takeover is completed. In effect, market prices usually go down after a change of control as a result of market value discounting the cost of the PBC that the offeror had to pay to the offeree company controlling shareholders.

315 Takeover Bids Directive, 2004/25/EC, hereinafter the Directive.

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Private offer Public offer

Control premium Market premium

Low transparency High transparency

Source: Authors. Public bid. A takeover is a general public bid to all shares of a listed company launched to acquire control of the latter. It is a public bid in which the premium over the current share value is the result of market considerations OU “A public bid is one in which the premium over the current share value is the result of market considerations”. An additional premium also comes in the form of an “abnormal return”, which is the difference between the realised and expected return during the offer period (Burkart, 1999). This does not necessarily reflect the market premium, but rather the additional benefit brought to the share value by the control transfer in its own right over a specified time span. Takeovers are intrinsically more transparent than private sales of control because the details of the transaction are usually disclosed to the market and publicly available to all investors. Transparency allows the creation of an implicit auction process, which tends to allocate resources to those who value shares the most. The possibility of a competing bid for the offeree company increases gains for offeree company shareholders. Takeover process. The takeover process is split into three phases (Tirole, 2006):

1. Building interest in the company (by purchasing a “toehold”) and potential setting of ex-ante takeover defences (by increasing potential offerors’ costs);

2. Launch of the takeover bid: a. with a uniform price for all voting shares or a portion of them; b. with a multi-tiered bid having different thresholds.

3. Reactions to the bid by the offeree company board and/or shareholders: a. no reactions (friendly takeover); b. post-bid defences (hostile takeover).

In addition to ex-ante and ex-post defences, a public bid may also create coordination issues among shareholders which may not emerge in a bilateral setting. The two main coordination problems are a pressure-to-tender problem and a free-riding problem.

II. Rationales for takeover regulation Rationales. Takeovers are generally viewed as an important institutional tool to promote allocative efficiency through an active market for corporate control (EU Commission, 2007, Tirole 2006, Winter Report 2002, Burkart 1999, Romano 1992, Manne, 1965). The two classical rationales to promote takeovers are:

a. Better allocation of resources through transfer of control to those who value the company the most. More allocative efficiency will ultimately reduce the cost of capital. This statement assumes that all takeovers are value-increasing, because shareholders will not tender shares for a value-decreasing deal.

b. A tool to address managerial behaviour by threatening managers with a change to their status quo (as an alternative to shareholder activism, which produces a “disciplinary effect”; Fama and Jensen, 1983; Grossman and Hart, 1982) and the dissemination of good practices and know-how. This statement assumes that the market is able to recognise poorly-performing companies and to replace misbehaving managers (even if their failures are only small), and in particular that share prices are always a good proxy of the real value of the company.

Regulatory framework. A well-functioning market for corporate control is part of a continuous auction process around the company’s value. As a consequence, the regulatory framework must create the conditions to stimulate takeovers over time, and so lower costs of capital. Designing a regulatory

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framework for each phase of a takeover transaction may support ex-ante efficiency and the quality of the auction process (including the use of defences). Market failures. The negative externalities generated by market failures are another reason to regulate takeovers. In practice, sources of market failures are:

a. coordination issues among offeree company shareholders (or the “collective action” problem);

b. empire building transactions (in which competitors are swallowed); c. agency problems (shareholders versus managers, or controlling versus non-controlling

shareholders); d. insufficient investments in firm-specific assets and human capital (Blair and Stout, 2006).

In order to reduce the negative impact of these failures, corporate governance regulation can increase the voice or provide exit rights to those parties negatively affected by them.

A. Coordination issues Coordination among shareholders. There are two coordination issues among shareholders in a dispersed ownership environment: the free-riding problem and the pressure-to-tender problem. Both problems relate to the post-takeover value of the shareholding. Free-riding. The free-riding problem, first identified by Grossman and Hart (1980; see also Cohen, 1991), arises when there is full coordination among shareholders, i.e. shareholders have full information about the bid and can coordinate among themselves (e.g. because there is a concentrated ownership environment with few blockholders) in order to determine ex-ante whether the bid will be successful. In effect, fully informed shareholders may directly or indirectly316 coordinate and keep their shares in order to benefit from the ex-post higher value, thus increasing transaction costs for the offeror to a level that may discourage the launch of a bid (creating a so-called “hold-up” problem). As a result, the more shareholders reject the acceptance of the offer, the less benefit for the offeror, who may end up with a minority stake in the company. Non-tendering shareholders thus free ride on the increased post-takeover value that the offeror and accepting shareholders are actually generating. This situation may discourage any attempt of potential offerors to acquire control. In practice, since shareholders cannot be fully informed ex-ante317 about the future success of a bid (full coordination), the free-riding problem is in fact limited to a residual stake of the company, particularly when the offeror has already acquired the majority and is looking to take over the remaining stake. Free-riding can also succeed in a situation where shareholders hold partial information; however, the probability that it will succeed is lower, as shareholders have fewer chances to coordinate directly or indirectly with other shareholders. In such case, minority shareholders may individually decide to hold up the offeror in order to extract a higher payoff. Therefore, in line with the principle that shareholders should share the same conditions in a bid (sharing principle; Article 3.1(a) of the Directive; see also Winter Report, 2002, p. 1318), takeover regulation usually applies a squeeze-out rule, which allows the offeror to force the remaining shareholders to sell their shares at the same terms offered to the other shareholders. Moreover, if shareholders are not fully informed, the free-riding problem in the acquisition of a majority stake is less significant in an environment in which private benefits of control are high enough to provide incentives for bids with a higher-than-expected market premium (see McCahery and Rennebog, 2003). However, the presence of blockholders may facilitate coordination through co-operative behaviour practised with a view to extracting greater benefits from the potential bid.

316 Even without talking to each other, shareholders with full information (and understanding) will behave in a

coordinated fashion in the same direction, since this is the best strategy to take with the available information.

317 Full information means that shareholders cannot derive from available information the exact probability distribution of future events.

318 This principle was first elaborated by Prof. Jennings (1956) and Prof. Andrews (1965).

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Figure 1. Coordination issues

Full coordination No coordination

Shareholders

Free-riding Pressure-

to-tender

Sharing

principle

e.g. Mandatory bid rule

Partial coordination

Agency problem

Solution

Problem

Sharing

principle

e.g. Squeeze-out rule

• Full information (dispersed ownership)

• Cooperation (concentrated ownership)

• No information (dispersed ownership)

• No cooperation (concentrated ownership)

Source: Authors. Pressure to tender. The second coordination issue, the so-called pressure-to-tender problem, arises in a dispersed or concentrated ownership environment when shareholders have insufficient or no information at all about the post-takeover value, with no opportunity to indirectly or directly coordinate their behaviour. The shareholders’ concern is whether to tender or not, with the risk that a shareholder may make a distorted choice and thus suffer unequal treatment. A distorted choice would arise in relation to shareholders’ expectations concerning the post-takeover value of minority shares (Bebchuk 1985, 1987). The causes of the problem are twofold. First, pressure to tender may derive from insufficient information about the bid and the company in question, which may induce shareholders to tender due to uncertainty about the post-takeover value of their stake and the impossibility of cooperating. They are only aware of the current value of the company and cannot predict the success of a bid with very little information. This certainly increases pressure to tender. Second, a distorted choice may result from a partial or two-tier bid (price discrimination), which creates uncertainty about the success of the bid and conveys insufficient information to produce coordination among shareholders. In effect, a partial bid may create a prisoner’s dilemma for offeree company shareholders (Burkart, 1999) and allow the offeror to extract more benefits. An example, which can apply to both a dispersed and concentrated ownership environment,319 is when a potential offeror – who may or may not own a small non-controlling stake in the company – decides to acquire control over the company. The situation is even clearer if we consider that there is no one controlling shareholder or controlling pact, since otherwise the offeror would make a direct bid for the controlling stake. The offeror launches a bid to acquire the controlling stake (partial offer), which may be 51% or lower. Let’s narrow the situation down to two offeree company shareholders (A and B) with a non-controlling stake in the company that cannot cooperate. If the bid does not succeed, the payoff will be 1 (as the additional post-takeover net present value, “NPV”, of future cash flows with no controlling shareholders but increased market appetite after the offer). The bid can only succeed if at least one of the shareholders offers for it, but since they don’t have full information, they are not aware and so cannot bargain with the offeror (this is particularly likely to happen in a dispersed ownership

319 However, in a more concentrated environment (with blockholders), shareholders may cooperate and

indirectly share information about the post-takeover value of their stake. Therefore, there may be some degree of coordination.

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environment). For the sake of simplicity, we will consider the marginal shareholders, i.e. the last two that are crucial for the transfer of control320. If the bid succeeds, the expected payoff is 2 instead (1 plus an additional market premium of 1) for those accepting the bid, and -1 for those who do not tender, since the new setting with a controlling shareholder lowers the NPV over future cash flow, as we assume the controller will extract benefits from minorities. Minorities therefore perceive that the additional 1 is lost, so their payoff is -1. Four outcomes will thus emerge:

1. If shareholder A tenders and B does not, A (first payoff) will get 2321 and B will get -1, as the additional post-takeover net present value (“NPV”) of future cash flows, which is negative in comparison to the original payoff when there is no controlling shareholder who can extract private benefits of control from minority shareholders322.

2. If shareholder B tenders and A does not, B will get 2 and A will get -1 (vice versa). 3. If both shareholders tender, they will get the premium times the probability that their bid will

be accepted (p=0.50), as we assume that the offeror bids only for what is necessary to gain control. Only one of the two will be allowed to tender. If we assume that all shareholders have the same information and the same chance to be counted in the takeover bid and that no shareholders have a controlling stake, this probability should be 50% or below for each marginal shareholder323. Therefore, p*2 will be 1 or below. Considering the offeror wants to acquire formal control (51%), the expected payoff for both shareholders will be p*2 + (1-p)*(-1), which equals 0.50.

4. If neither shareholder tenders, they will both get 1, as the additional post-takeover net present value (“NPV”) of future cash flows with no shareholder able to extract private benefits of control.

Therefore, the shareholders need to decide ex-ante, with limited or no coordination, between “tendering” (T) and “not tendering” (NT). If they individually decide to tender, the sum of the two potential payoffs – irrespective of the other’s decision – will be 0.50+2, which is higher than the potential payoffs if the decision is not to tender (-1+1). Both shareholders will therefore choose “to tender”. As a result, if parties cannot cooperate, they will end up with a sub-optimal payoff (TT). Table 2. The prisoner’s dilemma

A

T NT

T 0.50 ; 0.50 -1 ; 2 B

NT 2 ; -1 1 ; 1

Source: Authors.324 In effect, the dominant decision for both will be “to tender” anyway, therefore the final payoffs will be 0.50 ; 0.50 (with total value 1.00), which is a suboptimal equilibrium compared to the common decision “not to tender” (NTNT) with total value 2. Pressures to tender, in an “uncoordinated”

320 This allows the situation to be illustrated in a less complex fashion; however, results would be the same in the more complex model. 321 This is basically 1 (50% premium) plus the expected payoff (which the parties do not know) of 1. 322 We do not use expected values in T-NT and NT-T because we assume, for the purposes of easier illustration, that we are dealing with marginal shareholders, i.e. with the decision to tender or not of those two shareholders that determine the acquisition of the 51%, whatever stake of the company they own. The change of control will occur if at least one of the two tenders. 323 As mentioned in the previous footnote, to model the game (a prisoner’s dilemma) with simple payoffs, we assume that we are dealing with the marginal shareholders, i.e. the last two shareholders before the offeror acquires 51% of the company. 324 The first from the left of the two payoffs in each cell is A’s. Deleted: ¶

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environment, lead marginal shareholders (who are determinant for the success of the offer) to tender, even when it would be better for them to hold their shares in case a chance to access more information arises. Solutions. Solutions to the pressure-to-tender problem can be multiple. First, prohibiting partial (or two-tier) bids (e.g. through a mandatory bid rule) will reduce pressures, but at a cost. Second, by increasing the flow of information in favour of offeree company shareholders, it is possible to reduce pressures to tender and thus distortions in the offeree company shareholders’ choice. This can be achieved in two ways: by introducing disclosure requirements to the market that would allow shareholders and other investors (who may be interested in launching a competing offer) to obtain enough information to make an informed choice; and by combining the takeover bid with shareholders’ voting on the full proposal submitted directly to shareholders for approval (Bebchuk and Hart, 2001). Voting shareholders would then not be able to hold up their shareholdings if approved, which would solve the free-riding problem. The board may also be required to look for a white knight to launch a competing bid and thus provide more choice for shareholders (Mucciarelli, 2006). This, however, could be costly and would not necessarily be effective, as the board would look for someone that would preserve its position of control.

B. Agency problems Information asymmetry. As shown in Figure 1, there are situations when shareholders may have some degree of information; this setting applies to a vast majority of takeovers. In practice, offeree company shareholders may not have enough knowledge to acquire and process complex information, and thus cannot ordinarily be considered to be fully informed about the company’s post-takeover value. Conversely, shareholders usually receive some degree of information from the offeror to avoid strong pressures to tender. In this case, free-riding and pressure-to-tender issues are less frequent, but open up space for other issues such as agency costs, i.e. costs that a party will suffer due to the asymmetry of information with the other party (see Ross, 1973; Fama and Jensen, 1983; Milgrom and Roberts, 1992). Information asymmetries may arise among shareholders and between shareholders and management, as individuals process information differently. With or without a legal mandate in their favour, shareholders may experience information gaps with the management of the company or the majority shareholders, especially concerning the monitoring of both. Monitoring costs may be high enough to create moral hazard (Holmstrom, 1979). Agency costs will therefore potentially increase as ownership becomes more dispersed (see

Figure 2).

Figure 2. Agency costs and ownership concentration

Agency costs

Fully concentrated

ownership

0 +++

Semi-concentrated

ownership

Semi-dispersed

ownership

Fully dispersed

ownership

Ownership

concentration

ConflictNo conflict (one

owner)

Majority vs minority

shareholders

Shareholders vs

management

No conflict (no

monitoring)

+ ++

Source: Authors. Agency costs. In practice, in a fully concentrated environment, the owner is usually identifiable with the executive officer (manager) who deals with the company’s daily affairs; certainly, management is

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very loyal to the owner. In contrast, in a fully dispersed environment with no corporate governance rules (e.g. general meeting, proxy voting), shareholders hold a small stake in the company and may be unwilling to participate in the company’s activities (i.e. may display so-called shareholders’ apathy) because it is too costly. Therefore, there will be no monitoring of the persons running the company. In addition, two further intermediate situations are highly relevant for corporate law and takeover regulation (including as a result of interaction with regulation). Each situation raises a different conflict. First, with a semi-concentrated ownership structure, the agency conflict is between majority shareholders (who control the company and appoint the board) and minority shareholders, assuming that there is an indirect mandate by majority shareholders to work indirectly in the minority shareholders’ interest. Second, with a semi-dispersed ownership structure, clusters of non-controlling shareholders may be interested in monitoring the board and management, as well as in steering the company’s strategy in a certain direction. Therefore, a conflict may arise between the respective self-interests of shareholders and managers regarding the way in which the company should be run. Remedies. To reduce agency conflicts, then, mechanisms of voice and exit rights should be made available respectively to minority shareholders and clusters of shareholders (e.g. proxy voting) in order to reduce monitoring costs and give investors sufficient incentives to invest in equity ownership. Concerning takeovers, agency costs may favour potential offerors who can actually exploit the coordination issues among shareholders, for instance by siding with management in a dispersed ownership environment, thus minimising the possibility of takeover defences from the offeree company launched by the management. Overall, contestability of control is typically higher in case of dispersed ownership structures than in case of concentrated ones, making it easier for blockholders to entrench around their controlling stake (see below). Finally, there is also an agency conflict between the offeror and the board of the offeree company (since the offeror cannot immediately appoint new directors), especially concerning corporate strategy.

C. Empire building transactions Business strategies. Another market failure concerning takeovers may come from an attempt to monopolise the market and charge a mark-up on competitive prices by constraining volumes. A lack of competition may lead a major incumbent to launch a takeover on the main competitor (usually a smaller company). After the takeover, the company will be “swallowed” by the parent and taken out of the market if sunk costs to integrate the business are too high, or merged with the “swallowing” company where the costs to integrate the former competitor are sustainable. These market operations are thought to be frequent, but in many countries competition authorities take steps to neutralise such attempts.

D. Company-specific investments protection Company value. Some authors (including Blair 1995; Blair and Stout, 2006) advocate a new way to look at corporate governance and thus takeover regulation. Regulation should not focus on a purported mandate to maximise shareholder value (Manne, 1965) but rather on the value of the company as a whole, which is intrinsically related to the protection of company-specific investments and long-term contracts (Williamson, 1979).325 The transaction costs model disputes Coase’s theory that the company is a nexus of contracts used “only” as a point of reference to minimise the transaction costs of dealing directly with single agents (Coase, 1937, and strengthened by the principal-agent model discussion of Jensen and Meckling, 1976), suggesting rather that it is a legal tool to protect company-specific assets from being attacked by agents’ creditors. In effect, the company’s assets are shielded from shareholders’ (and other agents) personal creditors thanks to the company’s legal entity. Elevating the principal-agent problem to company level rather than treating it as a specific contractual issue does not give sufficient importance to legal personality. As a result, directors and management should maximise the company’s value, which is erroneously identified 325 In effect, when an offeror launches a bid to gain control over a company, shareholders have the most liquid

asset in the company (even if it is a partial offer).

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with shareholder value. The value of a company often resides in company-specific assets acquired with high “sunk” costs that cannot be recovered (i.e. know-how). Employees and creditors are part of those company-specific assets, as they cannot switch from one company to another in the way investors can switch from one financial instrument to another. Value-creating transactions. Recognising the pre-eminence of the transaction cost model over the contractual approach would have a twofold implication: the objective of takeover regulations would not be the equal treatment of shareholders and maximisation of share value, but rather the fostering of value-creating transactions; and regulation would then offer greater protection to those agents that provide more company-specific capital (e.g. human capital, know-how, tailored services, etc.), such as employees and creditors. As a result, the monitoring of management results would be carried out not only by shareholders (and thus by the market), but also by the entire group of relevant stakeholders having direct or indirect participation with the board. Greater protection for employees and creditors means, among other things, increasing their voice and exit rights. For employees, for instance, this could imply a stronger voice in the board (such as in the German co-determination process) rather than the option for a lump sum amount when offeree company shareholders decide to accept the offeror’s bid. For creditors, on the other hand, greater protection would entail some sort of involvement in the decision-making process of the company rather than a lump sum for their credits when the offeror takes over control, or the possibility to swap their credits for convertible bonds to be exercised when the offeror launches the public bid. Consumer protection. Another company-specific asset may be a set of consumers (with low elasticity) that represents a stable client of the company over time. In this respect, greater consumer protection would consist of regulation of the offeree company, as consumers do not have any means to protect themselves from sudden unexpected changes of control. Current takeover regulation tries to combine shareholder value maximisation and equal treatment with some level of protection for major stakeholders, which can lead to conflicting objectives and to potential deadlocks.

Box 1. Control as a “corporate asset” A relatively old but nevertheless important theory (Berle and Means, 1932) argues that the benefits of a takeover transaction (control premium) should go to the company’s corporate treasury, since “control” is a corporate asset. This theory advocates an even stronger equal treatment rule than the one proposed by Jennings and Andrews (see footnote 318), i.e. one that puts all providers of inputs (capital, human capital, etc.) on the same level. Moreover, in this case, there is no recognition of shareholder supremacy.

E. Other relevant issues The decision to launch a takeover and its outcome are also affected by other relevant variables, which are linked to the structure of corporate governance and the rules in place. These variables are:

• ownership concentration; • governance rules and decision-making models and how they affect offerors’ expected profits

(Control Enhancing Mechanisms (“CEMs”) and defensive measures); • shareholder/investor protection; and • abnormal returns (unpredictable gains).

Ownership concentration. First, the concentration of ownership and control has relevant implications. In particular, in an environment with a highly concentrated ownership, a potential offeror may be forced to reach an agreement with blockholders and provide an additional premium for the private benefits of control that they are enjoying. The control premium would not be easy to calculate, as there is a no clear market benchmark, and would entail a high risk of free-riding by incumbent shareholders by means of “acting in concert” (through disclosed and undisclosed agreements). In this context, management is nominated and closely monitored by controlling shareholders and the conflict

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of interest is between controlling and minority shareholders. The rationale of regulatory intervention in this case would be to protect minority shareholders from potential expropriation of managers and large blockholders in case of a takeover.326 In a dispersed ownership structure, on the other hand, there may be less room for blockholders’ opportunism and the premium may be more easily calculated, as the market price represents a reliable benchmark to start with. The difficulty that shareholders have in monitoring management exacerbates the conflict among them. Consequently, takeover regulation needs to facilitate the transfer of control for poorly-performing companies and minimise the costs of hostile takeovers in order to create sufficient pressure and to discipline management. Addressing this conflict would also improve overall shareholder protection. Governance rules. Second, the statutory rules and self-regulatory actions that govern a company have a relevant impact on the offeror’s incentives to launch a bid. In particular, the Winter Report (2002) and, in part, the EU takeover regulation endorse the principle of proportionality (i.e. the principle that establishes some sort of proportionality between the ultimate risk borne by the shareholder and the level of control held over the company). The recognition of the validity of the proportionality principle (between ownership and control) would confirm the endorsement by the EU takeover regulations of a one share – one vote principle, therefore setting boundaries to the freedom to contract and create new mechanisms to increase voting power without entailing a proportional economic risk (so-called Control Enhancing Mechanisms; see Shearman & Sterling et al. 2007 for a full taxonomy of CEMs). CEMs may, in effect, reduce the appetite of a potential offeror in the offeree company by worsening the free-riding problem, with relevant implications in terms of resource allocation in the economy and thus potentially leading to less growth and innovation (see Levine, 1997; Morck et al., 2004). However, CEMs can also help distinguish long-term firm investments from market “short-termism” and commercial strategies (e.g. empire-building transactions). The takeover regulation attempts to find the right balance between the freedom to contract and the proportionality principle by allowing a flexible approach to CEMs (e.g. breakthrough rule as an option). Decision-making models. Moreover, the established models of decision-making may influence the success of a takeover bid and the incentives of a potential offeror to promote the bid in the first place. There are two main models (Davies and Hopt, 2004, p. 164): one is shareholder-oriented, the other management-oriented. The first model can be split into two sub-categories: legal regimes (e.g. the blockholder model in Continental Europe) that grant block shareholders the full decision on defences, and other regimes that in addition strongly limit ex-ante any potential action to frustrate bids (e.g. the UK). In effect, the board can engage in a few defensive measures,327 for instance by looking for a white knight or simply persuading shareholders not to accept the bid. However, there is no ban on pre-bid (ex-ante) defensive measures, such as some CEMs. This decision-making model gives almost full control of the offeree company over the bid process by shareholders, who are usually seen as the last claimants over the companies’ assets and thus must benefit from a specific mandate to operate in their interest. In cases involving a more management-oriented model (widespread in the US and applied, in some aspects, in EU countries such as Germany),328 the board and shareholders jointly decide on defences, as there are supposedly stronger safeguards against management skirting its duties due to the role of fiduciary duties (e.g. the US duty of loyalty and care). In this context, the management may be authorised to issue “poison pills”329 to reduce the post-takeover value of the equity for the offeror, 326 As mentioned above, this objective is challenged by a solid stream of literature that links the expropriation

of minority shareholders and extraction of private benefits of control to the overall protection granted to investors by the national legal system, rather than a different governance culture only (Dyck and Zingales, 2004). Therefore, the best way to tackle “expropriation” would be to reinforce investor protection rules in the entire legal system, avoiding expensive (in terms of efficiency) actions in the framework of takeover regulation.

327 The UK City Code on Takeovers (Rule 21) requires the management to seek shareholders’ approval for any action that may result in the frustration of a bid.

328 In Germany, shareholders (general meeting) may authorise the board of management in advance to use defensive measures for up to 18 months with a ¾ majority and the consent of the supervisory board (Section 33(2) Securities Acquisition and Takeover Act).

329 Poison pills are typically special rights of offeree company shareholders to purchase additional shares at low prices or sell shares at higher ones after the raider has acquired a stake in the offeree company.

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or even to sell strategic assets to make the offeree company less attractive. Rationales for such a model rely on greater control, for instance in the US, by judicial review over the actions of the management of the offeree company to ultimately protect business. In addition, clustering offeree company shareholders in a widely dispersed ownership structure may be extremely expensive. Investor/shareholder protection. Third, the level of investor/shareholder protection granted by the legal system matters for the ownership structure and thus indirectly for a potential offeror. In effect, countries with greater investor protection are able to attract more capital (La Porta et al., 2000) and thus create better conditions for a more active market for corporate control. Abnormal returns. Fourth, abnormal returns are the difference between realised and expected returns during the event period (Burkart, 1999; Jenner, 2010), i.e. the unpredicted returns above the natural benchmark. Abnormal returns are typically higher around the announcement date, more specifically when the market price gradually begins to discount information about the deal. Timing depends on the specific aspects and deal information disclosed, and on the previous performance of the company. Table 3. Abnormal returns around announcement date

[-41;+41] Weighted Avg AR




Positive AR 810 17.17% 821 13.66% 813 11.47% 827 10.82%

Negative AR 199 - 188 - 196 - 182 -

Source: Authors’ calculation from Thomson Reuters SDC Platinum, Datastream and STOXX sector indices.

Table 4. Descriptive statistics

Mean Stand. Deviation Min Max Median

AR [-41;+41] 0.258916252 0.382896343 -1.351175882 3.305239172 0.200317776

AR [-10;+10] 0.200443098 0.296759647 -0.777467044 2.327778113 0.147980205

Source: Authors’ calculation from Thomson Reuters SDC Platinum, Datastream and STOXX sector indices. Figure 3. Abnormal returns (by period, weighted average)

11.73%

16.17%

13.52%

21.89%

0%

5%

10%

15%

20%

25%

2003-2006 2007-2010

[+10;-10] [+41;-41] Source: Authors’ calculation from Thomson Reuters SDC Platinum, Datastream and STOXX sector indices.

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The table above confirms positive abnormal returns around the announcement date for roughly 80% of 991 offeree companies subject to takeovers between 2003 and 2010 in which the bidding company’s initial stake was below 50%. Calculations are based on four different time ranges (days before and after the formal announcement). Abnormal returns are calculated as the cumulative sum of the difference between the intraday market returns of share prices and the intraday market return of related sector indexes.330 They are the difference between the expected and the effective market return. Abnormal returns decrease as the announcement date draws closer and prices become more informative. They show the additional impact (on the market premium, i.e. the expected return) of the takeover, as some sort of measure of value-increasing deals (in the short term). In addition, the figure above shows an increase in abnormal returns with the transposition of the Directive. Figure 4. Abnormal returns in Continental Europe vs. UK

Source: Authors’ calculation from Thomson Reuters SDC Platinum, Datastream and STOXX sector indices. As suggested above for the UK in 2003 and 2004, abnormal returns can also be negative, which means that – despite the market premium – the takeover deal does not bring additional value to the company if the premium is adjusted over a longer time horizon than the announcement date (when the market acquires information about the market premium). Additional links between abnormal returns and the Directive will be further discussed below in the paragraphs on the empirical analysis. More interestingly, recent research (Bebchuk et al., 2010) shows that abnormal returns decrease when the market is able to price company performance better. Therefore, the attention to the way in which companies are governed implies that aspects other than company performance (such as investor protection rules and the absence of important corporate governance requirements) would have less influence on abnormal returns. Improving governance (and thus takeover) regulation would give incentives to the market to focus more on company performance and increase investors’ interest in the governance of the company, therefore improving the likelihood that market prices will more closely track the fundamentals of the company.

Box 2. Market evolution and the introduction of the Directive. The market for corporate control has evolved together with the economic cycle in Europe. Takeovers experienced an upward trend from 2003, both in number and value. In the run-up to the financial crisis, the use of leverage measured as loan proceeds grew exponentially to finance ever-larger deals.

330 Stoxx supersector and industry sector indices have been used to define a proper benchmark for abnormal

returns. The formula for the calculation of the cumulative abnormal returns for company i is: , where is the market price at day t and is the value of

the sector index (benchmark) at day t (t can be any day before or after the announcement date).

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The collapse of financial markets and the global recession had a direct impact on the market for corporate control in Europe, leading to complete deleveraging. In 2010, the average value of deals was back to the level in 2003 while the number of deals had decreased even further.

Figure 5. Evolution of takeovers in Europe

Source: Authors’ elaboration from Thomson Reuters SDC Platinum.

The graph above suggests that debt was used in no more than 25% of deals, but reached 70% of the value of takeovers in 2007. Therefore, availability of credit appears to have had a significant impact on the market for corporate control between 2005 and 2008. This situation reflects the impact of monetary policies and the overall economic situation on this market. The European Takeover Bids Directive was transposed into national legislation in most Member States in 2006 and 2007 just before the meltdown in financial markets. The effects of the Directive on the market for corporate control in Europe may be difficult to disentangle from those of the financial and economic crisis.

The most liquid financial market in Europe, the UK, seems to lead takeover activities in Europe (see below). However, this leadership has been challenged since the financial crisis, as the number of UK takeovers has declined over the past three years while remaining relatively stable in continental Europe.

Figure 6. Numbers of takeovers in the UK

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Historically, the UK market for takeovers has been over 50% of the whole EU market for corporate control. With the financial crisis, however, the number of takeovers completed in the UK has consistently shrunk over time, in particular in the 2008-2010 period.

The overall intra-EU market for corporate control has consistently shrunk since 2007, in particular due to the financial crisis as shown in the graph below.

Figure 7. Number of Intra-EU Takeover Deals 2003-2010


The number of deals between EU countries is currently low, but the overall number of EU deals has constantly grown in the past years. Fiscal and legal barriers, however, remain impediments to a fully-fledged European market for corporate control.

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Box 3. The dataset The empirical part of this Study builds upon the analysis of a dataset kindly provided by Thomson Reuters from its SDC Platinum Database. The dataset considers completed deals where the offeree company is domiciled in the European Union. In line with the legal review, the geographical scope of the empirical analysis is limited to a selection of Member States (Austria, Belgium, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Lithuania, Luxembourg, the Netherlands, Poland, Portugal, Romania, Slovenia, Spain, Sweden and the UK). Excluding those deals where the acquirer held an initial stake in the offeree company above 50%, the dataset has been filtered to exclude deals where there was no novel acquisition of control.

In terms of the breadth of the dataset, Thomson Reuters provided the Centre for European Policy Studies (CEPS) with deal-level information, both descriptive and quantitative. Information about the parties involved in the transaction included name, nationality, industry and a breadth of financial and stock-market variables. For each deal, Thomson Reuters provided information regarding value, stake held and acquired, consideration paid, debt proceedings and elements of the deal history such as the recommendation of the board or the presence of competing offerors. In addition, Thomson Reuters provided information about stock prices from its DataStream database, which CEPS used to calculate the offeree company cumulative abnormal returns in a (-41,41) trading days window around the date of announcement of the deal. A total of 991 takeover transactions integrate the final dataset used in this empirical analysis.

To complement the market data provided by Thomson Reuters and based on the legal review by Marccus Partners, CEPS built a series of scores to capture the quality of transposition of the main provisions of the Takeover Bids Directive by each Member State. The aim of these scores is to allow an econometrical analysis of the effects of different transposition across countries. CEPS also considered macroeconomic data and competitiveness indicators from the World Economic Forum to carry out this analysis. For further information, please refer to the annexes to this Study.

The empirical analysis carried out in this Study also considers a range of stakeholder protection indexes. CEPS and Marccus Partners have run a research project to survey and score the level of protection afforded to different stakeholders by national legislation. Initial findings have been used in the econometric analysis conducted for the present study on the Directive.

III. Designing takeover regulation Voluntary vs. mandatory rules. As shown above, takeovers can both increase or reduce a company’s value. Regulation thus strives to minimise the number of value-decreasing transactions and maximise those that do not negatively affect a company’s value. Regulation in corporate governance certainly matters in terms of its implications on markets and thus ownership structure (and its link with investor protection; see Demsetz and Lehn, 1985, and La Porta et al., 1996, 1997 and 2000; Levine, 1999). The design of corporate governance (and takeover) rules has typically been an object of discussion, with some advocating a set of voluntary rules (self-regulation) and others advocating mandatory ones. Takeover regulation tries to find a delicate equilibrium between mandatory EU rules (harmonisation) and individual national approaches (through optional requirements) which are often supported by self-regulatory actions. Table 5. Voluntary vs. mandatory rules

Voluntary Rules Mandatory Rules

High flexibility Low flexibility

287

Moral hazard Regulatory capture

Low compliance costs High compliance costs

Source: Authors. Mandatory rules imply low flexibility (once approved), compliance costs and the risk of regulatory capture by specific market interests. Voluntary rules, in contrast, are more flexible and can be easily modified, which results in low compliance costs (because they are tailored to market needs); however, they may generate moral hazard, as the monitoring costs (for the creation process and surveillance) may be too high, resulting in circumvention or insufficient application. For takeovers, the EU opted for an intermediate solution, which consists of a Directive that grants high flexibility on how to apply certain given principles and leaves Member States the option to apply some of its rules. Default rules. Enriques (2009) argues that, since regulation is not able to distinguish between value-increasing and value-decreasing control transactions, takeover regulation should follow a different approach based on default rules, i.e. regulators should set rules that do not impede or promote takeovers. In Enriques’ view, companies should be free to choose how control is reallocated and should, in particular, be able to opt out of default rules (e.g. takeover rules). However, this proposal may indirectly leave the achievement of any distributional objective (whether equal treatment or other) and other objectives (weight of majority shareholders) to the discretion of some agents within the company, depending on the voting mechanism that is set. This voting mechanism would need to be designed around specific (and non-conflicting) regulatory objectives (e.g. shareholders-only or stakeholders’ equal treatment).

IV. Anatomy of the Directive Objectives. The Directive represents a European effort to design a common regulatory framework for takeovers.331 The Directive tries to find an equilibrium between the ability of shareholders to determine the way corporate control is exercised and the need to provide effective tools to deal with free-riding, pressure to tender, and agency (self-interest) problems, thus increasing shareholder protection (Article 50.2(g), EU Treaty).332 The legislative text tackles these issues through:

a. a minimum harmonisation approach (a level playing field to facilitate restructuring of corporate assets and to lower transaction costs); and

b. equal treatment of shareholders (e.g. one share – one vote principle and protection of minority shareholders).

Optionality. Through the use of exceptions and derogations, the Directive aims to achieve some level of flexibility and minimum harmonisation in the way both newly developed and long-standing governance structures in the European market for corporate control should be considered in regulatory terms (Recital 6 of the Directive). In its original conception, this approach also aimed to limit the adoption of protectionist national legislations (which typically protect incumbent shareholders and management); to stay in line with the EU Treaty (Article 49); to avoid regulatory competition between jurisdictions (for fear of race-to-the-bottom incentives); to promote greater economic integration by producing greater efficiencies and facilitating M&A transactions; and to allow opt-in and opt-out mechanisms to make the text flexible enough to suit the peculiarities of different Member States. Equal treatment. The Directive also advocates the equal treatment of shareholders through greater protection of minority shareholders and the removal of voting restrictions, and limits any special 331 For a review of the process that led to the Directive, see Moloney (2004), pp. 810-818. 332 As mentioned in the section on transaction cost theory, the Treaty can also be interpreted as promoting the

protection of all parties who contribute to the company’s value (shareholders, employees, creditors, etc.). In that case, the current approach to takeover regulation may radically change.

288

rights if not in line with the Treaty (Recital 9, 19, and 20 of the Directive) which are distributional concerns. Additionally, the text recognises a greater involvement of employees in the consultation process concerning the takeover bid (Article 14 of the Directive). In practice, despite the predominance of the non-frustration model and shareholder supremacy, continental countries like Germany and the Netherlands give the same relevance to the role of employees in the takeover process. The Directive thus, despite its strong shareholder protection principles, seeks to find a balance between these two views by granting some flexibility in the application of main parts of the legislative text (e.g. the breakthrough rule) by means of a specific clause (Article 4.5 of the Directive). In general, EU corporate law is a hybrid model that tries to balance the interests of all stakeholders (Goergen et al., 2005). Key areas. The Directive has four main areas:

1. the mandatory bid rule (also “MBR”); 2. the board neutrality rule (also “BNR”); 3. the breakthrough rule (also “BTR”); and 4. squeeze-out and sell-out rules (also “SO/SEO”).

These four tools, plus important disclosure requirements, were included in the Directive to tackle the three major recurrent economic problems in connection with takeovers: free-riding, pressure to tender, and agency costs. However, only the first and the fourth rules are mandatory; Member States can opt out from the second and the third rules, in case of reciprocity by single companies. Figure 8. The Directive’s tools

Mandatory Bid Rule

Board Neutrality Rule

Breakthrough Rule

Squeeze-out Sell-out rule

Free-riding Agency costsPressures-to-

tender

Source: Authors. As suggested above, the mandatory bid rule aims to reduce pressures to tender but may also increase opportunistic behaviour (agency costs), as it may increase costs for a potential raider. The board neutrality rule forces the board to become neutral to takeovers, thus reducing opportunistic behaviour. The breakthrough rule instead levels voting powers among shareholders, thus reducing opportunistic behaviour and the risk of free-riding. Finally, the squeeze-out and sell-out rules target, respectively, free-riding and pressure-to-tender problems.

A. The Mandatory Bid Rule

Introduction. The mandatory bid rule minimises the coordination issue (pressure-to-tender problem) for non-controlling minority shareholders and increases investor protection through the equal treatment of shareholders in the event of a transfer of control.

289

1. Key elements Objectives. The mandatory bid rule (Article 5.1 of the Directive) provides that when a natural or legal person (acting individually or in concert) acquires a share of a company above “a specified percentage of voting rights” that may give him control over the company, such person must launch a bid and offer the same terms to all shareholders. The primary economic objective of this rule is to minimise the coordination issue (pressure-to-tender problem) among non-controlling minority shareholders, even if a partial bid may occur below the triggering threshold (Enriques, 2004). The secondary objective of the rule is to increase the protection of minority shareholders (by giving them an equal opportunity to participate in a control shift), preventing value-decreasing transactions and thus reducing the cost of capital. The literature is divided on the question of whether these objectives are actually achieved. However, it is united in its suggestion that the mandatory bid rule may potentially have negative effects, as it focuses exclusively on distributional concerns rather than efficiency. In this respect, inefficiencies increase the overall costs of a transfer of control transaction, while “overprotection” may end up reducing shareholder activism. In effect, despite the fact that the MBR increases ex-post shareholder protection (after the launch of the takeover bid) (by forcing the offeror to offer the same market premium to all shareholders), it also produces ex-ante negative effects by reducing incentives for potential offerors to launch a bid or (better) a competing one, which would ultimately increase the final price of the bid. Paradoxically, the result can be to the detriment of all shareholders, including minorities.

Figure 9. Mandatory bid rule main trade-off

Reducing pressures-to-tender

Increasing costs of control

transactions

PRO

CON

Source: Authors. Key aspects. Main elements of the MBR are:

• acquisition of shares (e.g. acting in concert, Article 2.1(d) of the Directive); • threshold of voting rights (Article 5.3 of the Directive); • acceptance period (Article 7 of the Directive) and • equitable price (Article 5.4 of the Directive).

Circumvention. New shares may be acquired by being purchased directly on secondary markets or through cooperation between shareholders to gain control over the company. The definition of “acting in concert” leaves space for national financial authorities and judicial review to define “cooperation” and the existence of an oral or written “agreement” (see the legal review). The risk of circumvention and arbitrages among EU countries is potentially high, therefore weakening the actual transposition of an absolute voting rights threshold. As shown in the figure below, the number of mandatory bids has remained relatively low since the transposition of the Directive (roughly 5% of the total bids), although it is still higher than for the preceding period. However, this information does not help us to reach any definite conclusion, since the MBR typically affects incentives of potential offerors ex-ante.

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Figure 10. Mandatory bids (by periods)

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2003 -2006 2007-2010 Source: Thomson Reuters SDC Platinum. Effectiveness of the rule. Reasons for such trend may be related either to the effectiveness of the rule in ensuring that potential offerors do not violate the equal treatment principle, or to specific exemptions and the application of loose definitions (such as “acting in concert”) in some important countries, which may have limited the transposition of the rule. Moreover, the MBR is most effective ex-ante in that it affects incentives to bid. However, it is hard to measure ex-ante potential effects with no real indicators. The figure below shows that more mandatory bids were launched in 2008 and 2009, although the number is still less than 10%. In 2010, the number is below the number of mandatory bids before the transposition of the Directive. This result may be explained both by a transposition that has left open spaces for national exceptions and circumvention, and by the lower overall number of takeover transactions in 2010. For instance, the absence of a common definition of when “cooperation” should be considered as “concert” is a relevant regulatory gap (Papadopoulos, 2007).333 Figure 11. Mandatory bids (% of total number of takeovers, per year)

0.00%

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2003 2004 2005 2006 2007 2008 2009 2010 Source: Thomson Reuters SDC Platinum. 333 The author suggests using the same definition as the UK City Code by looking at shareholders’ proposals at the general meeting. If these proposals are “board control-seeking”, parties are considered to be acting in concert. However, this proposal does not consider the ways in which shareholders can exercise some sort of joint control in other EU jurisdictions. It may also discourage shareholder activism if applied too strictly.

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Threshold. A threshold of voting rights is applied to the acquisition of new shares, above which the Directive assumes that some sort of (working) control over the offeree company has been reached and that remaining shareholders should receive the same treatment. Exceeding the threshold triggers the obligation to launch a takeover bid for all shares. As shown below, thresholds are defined on a country-by-country basis and overall the threshold is, with the exception of three countries, between 30% and 33%.334

Table 6. Mandatory bid rule thresholds

Austria 30% Ireland 30%

Belgium 30% Italy 30%

Cyprus 30% Luxembourg 33%

Czech Republic 50% Netherlands 30%

Denmark 50% Poland 33%

Estonia 50% Portugal 33%

Finland 30% Romania 33%

France 30% Slovakia 33%

Germany 30% Spain 30%

Greece 33% Sweden 30%

Hungary 33% UK 30%

Source: Marccus Partners. Ownership structure. However, “control” changes across countries as the ownership structure varies (Burkart and Panunzi, 2003). As a result, in a concentrated ownership structure the offeror will be forced to extend the market premium bid, including the NPV of the PBC, to non-controlling shareholders. Takeovers thus become more expensive, reducing the likelihood of both value-increasing and value-decreasing transactions (“chilling effect”; Bebchuk, 1994), in line with the idea that pursuing distributional objectives reduces the likelihood that there will be gains at all (Easterbrook and Fischel, 1982). In this way, the MBR protects minority shareholders ex-post, but reduces the likelihood of value-increasing transactions (ex-ante). Furthermore, it does not provide any incentive to reduce the risk of majority shareholders extracting benefits, as this possibility depends on the general framework of corporate law and in particular its rules for the protection of minorities (Dyck and Zingales, 2004). Additionally, the rule incentivises shareholders to cluster and blockholders to adjust their stake close to the threshold in order to extract more from potential offerors. The MBR may thus promote greater ownership concentration. Ideally, the MBR would be most effective in a fully dispersed ownership structure, where the offeror who really wanted to gain control and exploit PBC would pay for it and give an exit right to other shareholders, who bought their shares with a completely different ownership structure. As an example, let us consider the case of one controlling blockholder (with working control) where the remaining ownership is mostly dispersed. With no MBR, there are two options: the offeror launches the bid for 51% of shares, or he makes a deal with the shareholder to obtain working control (it is indifferent to him whether he has

334 A few countries have opted for a higher threshold to take into account only acquisitions that ensure full control over the offeree company.

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working or formal control335). The offeror has limited contractual power to exercise with the controlling blockholder. In effect, it is easier for the offeror to ask the blockholder for working control; however, the price that will have to be paid can go up to the value of 51% of shares at market price, which is the alternative bid to avoid bargaining with the blockholder. In contrast, with the MBR, the shareholding of the blockholders has more value if it is close to the triggering threshold, which we assume is 30%. In this case, the offeror can certainly bypass discussions with the blockholder; however, to gain either working or formal control it has to trigger the MBR threshold, particularly if the blockholder has acquired a stake of, for instance, 29.9% in the company. The alternative is to hold discussions with the blockholder in order to persuade it to sell its controlling stake. In this case, the controlling blockholder will be able to ask a price for the control up to the value of 71% of the shares (the alternative cost for the offeror that will trigger the mandatory offer). With the MBR, blockholders can extract more value from their stake if they increase its size close to the triggering threshold. In an ownership structure with few controlling blockholders, the value that they can extract is lower, and decreases with the level of concentration. Static threshold. Furthermore, the use of a “static threshold” certainly comes at the cost of not being able to control the effects of a specific ownership structure on the acquisition of control. If the threshold does not take into account ownership structures, assuming that countries apply the MBR in the same way and with the same exceptions, this may create disparity of treatment among countries. For instance, in some countries control may be obtained with a threshold lower than 30% (the current threshold in many countries, e.g. the UK), while in countries with a greater ownership concentration, such as Italy, it may most likely be reached only at a threshold well above 30%. This potentially makes acquisition of control more expensive in Italy than in the UK. In effect, if the threshold is set well above the controlling stake, the rule will be ineffective in both dispersed and concentrated ownership structures for ensuring equal shareholder treatment in control transfers.

Figure 12. Threshold level impact

Level of threshold MBR effectiveness MBR costs

Above control stake LOW LOW

Equal to control stake HIGH MODERATE

Below control stake HIGH HIGH

Source: Authors. Dynamic threshold. An alternative option to the static approach is to set a “dynamic” threshold. The threshold could be equal to the national mean controlling block (Sepe, 2010) or equal to the actual controlling stake in the company, as long as the same definition of “working control” is shared among Member States. In this way, the MBR would certainly be more effective both in concentrated and dispersed ownership countries, thereby minimising disparities among countries but on average increasing the costs of takeovers for all investors. Acceptance period. Additionally, Article 7 of the Directive defines the acceptance period that must be specified in the offer document. The period should not be less than two weeks or more than 10 weeks, which provides enough time for shareholders to reflect on the information and for potential competing offerors to make a counter-offer. This rule also aims to reduce pressures to tender, as well as to reassure offerors that the acceptance period will not last too long, increasing costs for offerors (e.g. the management’s search for a white knight).

335 Even if the offeror goes for 100% of the company, the results of the example do not change.

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Figure 13. Average completion time

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Source: Authors’ calculation from Thomson Reuters SDC Platinum. Completion time. The table above shows that the average completion time for a deal (in the above-mentioned dataset) fell drastically to about 10-15 weeks336 after Member States started transposing the Directive. In the period after transposition, this average is lower in all countries except Spain, Belgium and Austria. Equitable price rule. Finally, the equitable price rule (Article 5.4 of the Directive) sets the price of the takeover bid equal to the highest price paid for the same securities in a specified period of time before the deal337. This rule, in combination with the disclosure requirement concerning purchases above a certain threshold, should reduce the incentives to begin a “creeping-in” takeover, i.e. the gradual purchase (below disclosure thresholds) in the open markets of a controlling stake. It would also minimise the risk of buyers offering a higher price to shareholders up to the triggering threshold (especially if the threshold is very close to the controlling stake). However, the potential offeror can still discriminate by keeping the non-controlling stake for the specified time and then launching a bid on the residual amount of shares at a lower price in order to gain working and/or formal control. In any case, Member States and their financial authorities have ample discretion to determine specific circumstances justifying a direct or indirect discount in the cost of the takeover bid.

2. Other economic issues Additional aspects that affect the economic impact of the Directive, and specifically the mandatory bid rule, are the “toehold” or initial stake, disclosure requirements, and the sanctioning mechanisms. Initial stake. First, the acquisition of an initial stake by the potential offeror in the company increases the likelihood that he will obtain control over the company, and also incentivises the offeror to overbid because he may receive a higher price from a competing offeror (for his initial stake) or more easily obtain control over the company. However, there are conflicting views as to whether a toehold only makes offerors more aggressive (Bulow et al., 1999) or brings them to overbid in some instances (Burkart, 1995). There is certainly a risk of an inefficient outcome caused by overbidding, i.e. the “winner’s curse”, if the offeror is only interested in provoking a competing bid to extract more gains. By being more aggressive, a competing offeror will become more conservative and perhaps refrain from raising his offer. However, if one considers takeovers as an English or a Vickrey auction,338 the

336 The execution time is calculated as the difference between the date of announcement (first public disclosure) and the date effective, which can be either when all conditions of the bid have been fulfilled (for conditional deals) or the deal has been completed (for unconditional deals). 337 Member States can decide within a period lasting from six months to 12 months. 338 An English auction is the most common type of auction, in which offerors compete with each other by offering subsequent bids, always higher than the previous ones. A Vickrey auction is an auction in which the

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purchase of a toehold by an offeror interested in obtaining control in the company is the best strategy, whether or not he in the end succeeds in gaining control over the company. In effect, gains obtained through ownership of an initial stake are equal to the initial stake multiplied by the difference between the share value under current management and the share value under the offeror’s control. If the offeror knows that at least its takeover bid will increase the post-takeover value, whether or not it will obtain control and assuming that there are no inefficient defences and that offeree company shareholders do not know the post-takeover value, the acquisition of a toehold is the strategy to pursue. If all competing offerors have an initial stake in the company, prices will be higher, but the initial offeror may have a greater chance of winning the auction as competitors will behave more conservatively (Bulow et al., 1999).

Figure 14. Deals with and without acquirer’s initial stake

0 50 100 150 200 250 300 350 400 450

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2007-2010

2003-2006 2007-2010

No initial stake 390 384

Initial stake 137 143

Source: Thomson Reuters SDC Platinum.

The graph above suggests that in both the period before and after the transposition of the Directive, the number of takeovers in which an offeror had an initial stake was around 27% (26% in 2003-2006 and 27.13% in 2007-2010).

final price is the second highest bid paid by the offeror who offered the highest one (also called “second-price sealed-bid auction”).

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Figure 15. Weighted average initial stake

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2003 -2006 2007-2010 Source: Authors from Thomson Reuters SDC Platinum. As the figure above shows, the weighted average size (by deal size) of the initial stake dropped from 30.38% to 28.4% in the period after the transposition of the Directive, below the lowest triggering threshold applied by Member States (30%). Disclosure threshold. The disclosure threshold of the acquisition of an initial stake, on average set by Member States between 2% and 5%, may signal the potential competing offeror’s attempt to gain greater influence (if not control) over the company, thus increasing shareholder value and decreasing the potential offeror’s expected profits. However, the acquisition of an initial stake in the company increases costs for potential offerors and is a primary source of profit for the offeror who knows the post-takeover value of the company and stimulates a higher competing bid on his own holdings. A disclosure threshold set too low may thus reduce the incentives to launch a takeover bid. The disclosure of a holding also ensures that investors receive more information on who exercises working or formal control over the company. Moreover, it reduces incentives for creeping-in takeovers and overbidding (Burkart, 1995), as well as opportunistic behaviour by incumbent blockholders who try to add unexpected costs and hold potential offerors up. However, the transparency requirements can be somewhat softened by acquiring call options with the strike price just below the price of the takeover bid, which increases the possibility of gains from the offeror’s own bid and the possibility to minimise the total cost of the takeover. Equal treatment. Overall, disclosure requirements foster equal treatment among shareholders. In particular, Article 10 of the Directive requires companies to disclose detailed information on key aspects of the company, based on the assumption that capital markets have semi-strong efficiency and are therefore able to process past and current material information into prices that approximate the present value of future cash flows (Gilson and Kraakman, 1984, 2003). This assumption would place companies that are not performing well (in terms of expected cash flows) under the threat of a change of control in favour of parties who expect to obtain a higher cash flow by controlling the management of the former. Further disclosure. The Directive also prescribes a broader set of disclosure requirements regarding the bid (minimum content requirement; Article 6 of the Directive), the disclosure of the bid (Article 8 of the Directive) and information about listed companies governed by the laws of the Member States (Article 10 of the Directive). These rules aims to:

• improve price informativeness and stimulate a more efficient market for corporate control; and

• increase shareholder and investor protection.

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Market efficiency. By providing more information to markets, market prices should become more informative with regard to companies’ performance. Based on the assumption of semi-strong market efficiency, this should stimulate greater contestability of corporate control and more competing bids in the bidding process. However, as suggested below, the transposition of the Directive seems to exclude an improvement in terms of the contestability of control for ongoing bids.

Figure 16. Takeovers with competing bids

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2003-2006 2007-2010 Source: Thomson Reuters SDC Platinum. The number of deals involving competing bids (over the total per year) constantly declined (see Figure 17) after the widespread transposition of the Directive, showing no or a negative impact. This figure is now below the weighted average for the entire period between 2003 and 2010. Figure 17. Number of competing bids (over total deals, per year)

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Source: Thomson Reuters SDC Platinum. Competing bids. The launch of a competing offer, however, is primarily affected by other important factors, such as credit availability and the economic outlook (see section on the description of the dataset). As a result, the impact of the recent financial crisis may certainly be considered greater than the impact of the application of stricter disclosure requirements that were already in place in some of the Member States.

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Figure 18. Hostile deals

Source: Thomson Reuters SDC Platinum. As suggested above, the number of potentially hostile takeovers has generally increased after the transposition of the Directive, from 36 in 2003-2006 to 49 in 2007-2010. However, since the increase is very minimal, it would be inappropriate to draw any conclusions. Information flow. Greater information about the post-takeover value of the company helps shareholders to make more rational and informed choices about the bid and therefore reduces information asymmetry. However, an excessive flow of information may undermine shareholder ability to understand complex information and therefore make rational choices. Finally, sound rules on how the bid should be disclosed (Article 8 of the Directive) pave the way for the fair disclosure of information and the avoidance of the creation of false markets, i.e. the publication or dissemination of false or misleading information (Moloney, 2004). Sanctions. Finally, apart from specific exceptions applied to the MBR, the Directive does not define any sanctioning mechanisms in case companies do not comply, which dramatically weakens the effectiveness of the rule. Moreover, Member States have applied sanctioning mechanisms in different ways, due perhaps to different legal systems and judicial traditions. For instance, violating the MBR by not launching the takeover bid for all shares is sanctioned differently in Italy than in Germany (Mangiaracina, 2010). As a result, the Italian financial authority (Consob) can force the offeror to launch a mandatory bid on all shares in case of a violation (with administrative and potentially criminal charges), while the German financial authority (BaFin) has no such power. Where it is not possible to enforce the mandatory takeover bid or where the remedy of selling shares above the triggering threshold is insufficient for those shareholders that have suffered a potential loss339, in Italy a company violating the MBR would be condemned to pay damages to the shareholders that have not benefited from the application of the rule. Italian jurisprudence seems conflicted on what kind of protection (for damages) shareholders should receive (contractual or non-contractual liability; e.g. Sai-Fondiaria case law; Poliani, 2009 and Desana, 2009). Both in Italy and in Germany, voting rights are suspended on the shares above the triggering threshold (Rule 59, German Securities Acquisition and Takeover Act). However, in Germany the only sanction that is immediately applicable is an administrative fine (section 60, German Securities Acquisition and Takeover Act) equal to 5% interest on the price of the takeover bid for the duration of the violation, to be paid to all remaining shareholders or only to those who have accepted the offer. If the German regulator cannot force the company to launch the mandatory offer, the company may simply decide to keep violating the rule as long as the benefits of the violation outweigh the costs imposed by the administrative fine. Therefore, the mandatory application of the rule may be ineffective.

339 Because the company has been acquired anyway, or the tender bid would affect the current value of the company.

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Box 4. Alternatives to the mandatory bid rule

As mentioned above, the mandatory bid rule can be effective but, at the same time, costly. Therefore, alternatives to the MBR have been discussed over the years. Among others, Bebchuk and Hart (2001) argue that regulation should give offeree company shareholders the option to vote on the launch of a takeover bid (binding authorisation); if approved, all shareholders would need to tender. This solution would solve both the pressures-to-tender and free-riding problems, even though it is essential to control what kind of information is disclosed to offeree company shareholders (ex-ante) to avoid a “pressure-to-approve” issue. Another proposal is the extension of the acceptance period if the bid is successful (Enriques 2004); however, it is not clear whether this would imply the acceptance of partial or two-tier bids that could cause pressure-to-tender issues on those shareholders that would need to decide to tender before the bid succeeds.

3. Implementation score All Member States considered in this Study have transposed the mandatory bid rule in their legal systems. However, in some countries, the real transposition of the rule has been softened by rules, such as derogatory powers given to competent authorities, which may ultimately have distorted its impact to some extent. Figure 19. MBR implementation scores340

Source: Authors (see Annex 3)

Countries transposing the mandatory bid rule in a more stringent manner are mainly southern European countries and a few continental countries, such as France, Austria and Poland. However, other countries (such as the UK) have also transposed the rule with an almost full score. The only two countries that have transposed the rule in a less stringent manner are Denmark and Estonia.

340 For details of the calculation of the scores, see 0. In this section, we will use the terms “transposition” and “implementation” interchangeably.

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Findings #1. Evidence regarding the effects of a mandatory bid rule in Europe is mixed. Benefits of greater ex-post shareholder protection must be weighted with lower ex-ante incentives to engage in a takeover transaction due to the greater costs. The application of the rule has been partially watered down by exemptions at Member State level and diverse interpretations of key sections of the Directive (e.g. acting in concert). However, more mandatory bids have been launched since the Directive was transposed, and stakes held before the launch of the bid have declined below 30%. Overall, data used in this Study suggests that the market for corporate control has not become more open or contestable than before since the transposition of the MBR. For all these reasons, the impact of the rule appears to be marginal and to have different implications across Member States.

B. The Board Neutrality Rule

Introduction. The board neutrality rule limits the capacity of the board to adopt defensive measures by shifting decision-making to shareholders. It aims to promote the market for corporate control by enforcing shareholder decision-making and reducing the scope for takeover defences. The rule reduces agency and free-riding problems.

Objectives. The board neutrality and breakthrough rules in the Directive pursue complementary objectives by addressing both post-bid and pre-bid defences respectively. These rules aim to facilitate takeovers and promote shareholder supremacy. In this regard, the board neutrality rule limits the capacity of the board to adopt defensive measures, thereby shifting decision-making from board members to shareholders. By reducing the scope for defences, the Directive aims to promote an active market for corporate control (Kirchner et al. 2000). In many Member States, board neutrality rules existed in one form or another prior to the transposition of the Directive (Marccus Partners in this Study). However, breakthrough rules were rare and still remain an extreme expression of the one share – one vote principle (Marccus Partners in this Study). Context. The board neutrality rule needs to be analysed in the context of corporate law at large. The rule does not prohibit defensive measures, but simply allocates to shareholders the power to decide whether to adopt any. It is therefore not a substantive rule but a procedural provision, which needs to be considered in the broader framework of decision-making within the corporation (Goergen et al. 2005). Different decisional arrangements are foreseeable to allocate power between management and shareholders when approving potential defensive measures. Decision-making power is ultimately held by shareholders, but may be delegated to management either temporarily or indefinitely. A temporary granting of discretion to management usually requires an ordinary resolution (majority voting), while a qualified majority may be necessary where discretion is granted on an indefinite basis or shareholders relinquish part of their core ownership rights, such as pre-emptive rights over the issuance of new stock. Management may be granted the power to adopt defensive measures either before or after the announcement of a takeover bid. The board neutrality rule in Article 9 of the Directive requires the board to ask shareholders for approval of any defensive measures following a takeover announcement. The table below represents three alternative procedural arrangements for adopting defensive measures within the company. The arrangement set out by the board neutrality rule is represented as Solution B.

Figure 20. Procedural arrangements for adopting defensive measures

Less restrictive More restrictive

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TIME Solution A Solution B Solution C

Management

May request powers indefinitely (modification of statutes or bylaws)

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May call meeting to revoke powers by majority voting

Approval by majority May call meeting to confer powers (approval by majority)

� Model followed by the Takeovers Bid Directive

Source: Authors. Timing. Good timing of shareholder decision-making is a crucial aspect of the passivity rule in the Directive. Under Solution B, shareholders may grant managers discretion at any point in time, although this discretion will need to be renewed in case of a takeover. It overcomes the problem highlighted by Davies et al. (2010): “[...] in the absence of a board neutrality rule shareholders may have to accept the cost of enhancing managerial discretion in relation to a bid in order to reap the benefits arising from management’s increased discretion in a non-takeover scenario [...]”. Requiring only pre-bid shareholder authorisation as in Solution A does not protect shareholder interests sufficiently, because investors face a perception bias and information asymmetries before a takeover is announced. Moreover, while shareholders may call a meeting in Solution A to revoke managerial powers or remove management altogether, the board neutrality rule is a more efficient instrument to control management during a takeover bid given the practical difficulties in reversing any defensive measure already applied, and the time constraints, in the conduct of a takeover. Compared to Solution C, where authorisation to apply defensive measures may only be requested after the takeover announcement, Solution B remains a better alternative as it affords a reasonable degree of flexibility to make defensive measures effective if authorised by shareholders. In sum, Solution B protects shareholders, overcoming their rational apathy before the offer, without disabling takeover defences where they benefit from their support. Moreover, the rule in the Directive is easily applied, since it takes into consideration only the likely effect of the defensive measure and not any subjective elements such as intent or bad faith, which would increase the risk of litigation (Davies et al. 2010). Availability of defences. There have been extensive discussions in academia regarding the practical importance of the board neutrality rule to the extent that takeover defences are available and effective in the first place. Gerner-Beuerle et al. (2011) thoroughly analyse company law statutes and case law in the UK, Germany and Italy to assess the availability of takeover defences in each of these countries. This research concludes that there is little opportunity to effectively apply takeover defences in these jurisdictions to begin with, notwithstanding the board neutrality rule (see also Gordon 2004). While limits to defensive measures in general corporate law would result in board neutrality not being invoked frequently in practice, it should not be concluded that the rule is irrelevant per se. A broad board neutrality rule prevents the appearance of new defence mechanisms, for which there might be no specific limitation in general corporate law. The discussion on the ex-ante availability of defensive measures in company law is pertinent to frame the context of takeover regulation. However, board neutrality brings in additional value as described above and, given its clarity and over-arching scope, makes circumvention difficult.

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“Neutral” defences. The board neutrality rule does not prohibit defensive measures, but prescribes the procedure for their adoption. However, an outright prohibition of some defensive measures might be desirable in some cases. The challenge is to distinguish defensive measures that manage to neutralise the bid without causing harm to the company from those which result in substantive harm, such as some sales of assets. Sjåfjell (2010) considers that only takeover defences that are destructive for the company should be forbidden by an ex-ante rule, while defences that are neutral for the company itself but inhibit the offeror from acquiring its offeree company should be left to the discretion of the board, with the consent of shareholders. In this regard, Article 9 of the Directive provides an exception to board neutrality, which allows managers to seek a competing offer, given that competition among offerors will generally benefit shareholders without any detriment to the company (Mucciarelli 2006).

1. Economic impact

Economic impact. The board neutrality rule aims to protect shareholders. In this respect, it appears to be an effective way to enforce the managerial duty of loyalty to shareholders and avoid circumvention of the latter in a takeover. By reducing the ability of incumbent management to adopt defensive measures, board neutrality reduces managerial entrenchment and makes the threat of a takeover more credible, encouraging management to better perform its duties vis-à-vis shareholders (Enriques 2009, Fama and Jensen 1983). An active takeover market is supposed to result in more efficient companies. However, while the positive impact of board neutrality in promoting takeovers is apparent, there is reason to question the positive economic impact of the rule from two angles: the level of ownership and control concentration, and the protection of stakeholder and company interests. a. Level of ownership and control concentration: Where ownership and control are dispersed, the

board neutrality rule helps shareholders overcome their collective action problems. In the absence of board neutrality, fragmented shareholders would have difficulty in reaching the threshold necessary to call a general meeting to revoke the power of management to adopt defensive measures (compare Solution A and Solution B in the table above). The rule also helps shareholders overcome rational apathy and perception bias when granting management discretion to adopt potentially defensive measures before a takeover is announced. However, where ownership is concentrated and blockholders control management directly, there is no agency problem between management and shareholders that the board neutrality rule might address (Liu 2010, Kirchner et al. 2000). Instead, there is an agency problem between majority and minority shareholders for which the board neutrality rule provides no answer (Ventoruzzo 2008). Nevertheless, board neutrality is also effective when control is held by several large shareholders together, so that an alliance between some of them and some minority shareholders could win a majority vote (Davies et al. 2010).

b. Protection of stakeholders and company interest: The board neutrality rule places the emphasis

on shareholder supremacy to accept or reject a takeover bid. It may not allow for the proper balancing of the interests of all stakeholders, notably including employees but also including customers and creditors. Proponents of this view consider that shareholders are not in a position to balance the interests of the company as a whole (Davies et al. 2010, Clarke 2010, Kirchner et al. 2000). In effect, shareholders decide whether to tender their shares in isolation, which exacerbates their preference for liquidity (Sjåfjell 2010). While the risk of managerial entrenchment that the board neutrality rule attempts to address is certain, so are the negative consequences of managerial rotation and disregard of the interests of stakeholders. Short-term management bias reduces the incentives for stakeholders to make firm-specific investments, and may lower performance. It is feared that these problems are intensified by board neutrality. As an alternative, the authors mentioned above propose an increase of the discretion of the board to enact takeover defences in the interest of the company as a whole, as in Solution A in the above table. Kirchner et al. (2000) believe that allowing ex-post shareholder voting to veto defensive measures would

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be an effective mechanism if expedited via electronic means. It is also feared that board neutrality, by reducing managerial discretion, may lead to foregone opportunities where these require swift action from management (Davies et al. 2010).

2. Optionality Optionality. The optionality clause in the Directive grants discretion to Member States to decide whether or not to transpose board neutrality rule in their jurisdictions. However, there is one limit to this discretion: Member States that opt out must allow companies to be able to opt back into the rule. In addition, Member States must decide whether to transpose reciprocity. The decisional tree is represented below. Crucially, the introduction of the board neutrality rule in countries where it does not apply depends on the initiative of shareholders – as opposed to the application of reciprocity, which depends on the initiative of management. A company’s decision to apply the board neutrality rule is reversible and must be taken following the procedure established to modify the company’s articles of association, which usually requires the agreement of a qualified majority. In conclusion, the adoption of board neutrality at company level is subject to a number of procedural hurdles that add to shareholder coordination problems. In practice, no case has been found where shareholders opted back into the board neutrality rule (Marccus Partners in this Study, Davies et al. 2010).

Figure 21. Decision Tree

Source: Authors. Optionality level. Optionality at Member State level is frequently portrayed as catering to the specific characteristics of each national market for corporate control, including in particular the structure of control and the dispersion of ownership. However, the evolving nature of control and the differences in its concentration among companies within a Member State call into question the convenience of placing optionality at Member State level. In this regard, commentators argue that optionality should be placed solely at company level, and that board neutrality should apply by default in all cases given

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shareholders’ coordination problems (Davies et al. 2010, Enriques 2009). It would then be the responsibility of the management to find a majority of shareholders that would back a proposal to opt out of the board neutrality rule. Authorisation to refrain from applying board neutrality would either be granted for a limited period of time in the absence of a takeover announcement, or after the announcement of a bid and for that bid only, in order to mitigate rational apathy, cognitive biases and asymmetry of information. Default rule. Two elements are of relevance with regard to optionality: the level at which optionality is placed, and identifying the default rule. The Directive places optionality at Member State level, which opens the door to political considerations. In Europe, there is no consensus on the role of the board and how best to balance stakeholder interests to maximise company performance over the long run. The board neutrality rule is central to this divide between shareholder and stakeholder-oriented systems. If board neutrality is not to be discarded outright, regulatory coherence in the single market may benefit from removing discretion from Member States and placing it at company level. The choice then would be whether board neutrality should apply by default as proposed above (Davies et al. 2010, Enriques 2009), or whether a corresponding request by shareholders should be required. Under these arrangements, the business plan of the incumbent management would compete with the plans put forward by potential offerors. The general meeting of shareholders would have the power to decide on the application of board neutrality, perhaps requiring super-majority approval. Placing optionality at company level will set incentives for management to look after the value of the company as a whole, rather than to aim to please only controlling shareholders.

3. Reciprocity

Reciprocity. Under the Directive, Member States may allow offeree companies to refrain from applying the board neutrality rule where the offeror is not subject to this rule itself. The reciprocity exception aims to level the playing field with companies from countries within and outside Europe where board passivity does not apply. Reciprocity, however, may deter value-creating bids from companies established in countries where boards have discretion to adopt defensive measures. The economic rationale for reciprocity is therefore difficult to justify, since it bears no relation to the economics of the bid. In the words of Becht (2003), “[...] reciprocity in takeovers is not desirable since it unduly restricts the pool of offerors and reduces the potential benefits of contestable control [...]”. Reciprocity is therefore based on industrial policy considerations, given both a concern about foreign acquisitions and a desire to protect so-called “national champions”. While it has been argued that some companies could introduce board neutrality to avoid situations where potential offeree companies invoke the reciprocity exception (Davies et al. 2010), no evidence has been found of companies opting into board neutrality (Marccus Partners in this Study).341 Formulation. There are also concerns about the way reciprocity is regulated in the Directive. Shareholders need to approve the application of reciprocity at company level. However, they cannot do this for a single specific bid, but must do so for all bids during a certain time period. Authorisation may therefore be requested where no threat of takeover exists and shareholders suffer from rational apathy, cognitive bias and asymmetry of information (Davies et al. 2010). On a different note, strict phrasing in the Directive may allow offeree companies to invoke reciprocity if the offeror does not apply the board neutrality rule but an equivalent provision. Some jurisdictions have, however, transposed the Directive more leniently and consider measures of equivalent effect sufficient to overcome the reciprocity test (Marccus Partners in this Study). 341 Davies et al. (2010) conduct an in-depth survey of the countries where the board neutrality rule applies but

reciprocity is left to the discretion of the companies. These are France, Greece, Slovenia, Portugal and Spain. Only in the case of France is there a significant opt-in to the reciprocity provision, namely by about one-fifth of the CAC 40 companies according to Davies et al. (2010). We would advance several reasons for this phenomenon: (a) the possibility to issue defensive warrants in France; (b) relatively high state intervention and ownership; (c) the fact that reciprocity may act as a form of commitment by several shareholders; and (d) the non-application of the breakthrough rule.

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Circumvention. Possible circumvention of the reciprocity provision is also a cause of concern. The application of the board neutrality rule by the offeree company may be assured, circumventing the reciprocity requirement, by using a subsidiary to launch the bid. In this scenario, a parent company that is not subject to the board neutrality rule but that retains the economic interest in the acquisition would use a subsidiary, which is subject to the rule, to conduct the deal. It is uncertain whether national supervisors monitor the ultimate economic interest or entity behind each transaction; however, the potential for circumvention could undermine the objective of the reciprocity rule in the Directive.

4. Implementation score

The transposition of the board neutrality rule has been fragmented across EU countries. While some countries, such as the UK and Sweden, have made the rule mandatory with no reciprocity requirement, other countries, such as Germany and the Netherlands, have left companies the choice to opt into the rule or not. The latter countries obtain a lower score, since it is unlikely that companies in their jurisdictions would opt in given the risk that competitors might not choose to do so. Figure 22. BNR implementation scores342

Source: Authors (see Annex 3) Finally, Italy has adopted board neutrality as a default rule by making it mandatory but leaving companies the possibility to opt out. It is likely that Italian companies would opt out where they face a takeover threat in order to raise barriers to the potential transaction, or if they fear being more vulnerable to potential offerors.

Findings #2. The board neutrality rule protects shareholders in a pre-bid situation, when they suffer rational apathy, while allowing them to adopt defensive measures once the bid has been announced.

342 For details of the calculation of the scores, see 0.

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The rule addresses agency problems where ownership is dispersed. Optional transposition of the rule appears beneficial given the diversity of corporate governance structures across Europe. However, placing optionality at the Member State level fails to account for company-specific characteristics. Conditionality based on reciprocity is not backed by a straightforward economic rationale. Board neutrality reduces the scope to factor the interests of other stakeholders into the takeover process.

C. Taxonomy of defensive measures

Defensive measures. In an environment with information asymmetry about the post-takeover value, defensive actions – aimed at increasing costs for the potential acquirer – may be deployed. Defensive measures may be pursued by shareholders or directly by management if such parties’ information/perception about the post-takeover value of the company is different from the offeror’s, and they wish to try to extract more value from the offeror. Management may also deploy defences to avert a hostile takeover, independently from the market premium offered by the offeror. Following Tirole (2006), defensive measures (whether statutory or not) can be classified in two types of actions:

a) actions expanding control over the company (ex-ante measures); and b) actions diluting raiders’ equity (ex-post measures).

Expanding control. First, shareholders exercise defences that aim to maintain greater control over the company. Ex-ante defensive actions include the following practices: - staggered board (practice through which only a fraction of the board is elected at a time so

that a potential acquirer has to go through several proxy fights to gain full control over the company);

- super-majority rule (e.g. so-called business combination rules requiring more than 50% of votes for the approval of a merger or a reorganisation);

- fair price clause (constraints on voting power if a “fair” price is not offered to all shareholders);

- differential voting rights (privileged voting rights for shares held over an extended period); - dual-class recapitalisation and other multiple voting shares (which give some shareholders

more votes than are proportional to their actual share in the capital of the company); - control acquisition rules (requiring shareholder approval before the offeror can exercise its

voting rights); - other control enhancing mechanisms (such as pyramid structures and cross-shareholdings); - disgorgement rules (obliging the offeror to transfer away all profits by selling shares of an

offeree company in a failed offer); - moving the legal headquarters or place of listing (to benefit from a regulatory setting that is

less favourable to takeovers); and - conditional sales (sales of company assets that are conditional to the success of a takeover

bid).

Diluting equity. Additional defences may be established by management (typically approved by the board but not necessarily by shareholders) in order to dilute the raider’s equity (ex-post) and so push it to retire the bid or bring the bid to fail. Such actions are: - scorched-earth policies (selling crown jewel assets to reduce the value of the company or

selling assets that could create valuable synergies with the potential offeror); - litigation with the raider (to increase its acquisition costs and the time needed to complete the

offer);

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- poison pills (to reduce the value of the equity by using, for instance, equity derivatives; see next section);

- white knight (a common management practice that consists in looking for an alternative acquirer who is able to offer more and/or to save the management from removal);

- green mail actions (a management practice that consists in buying, with company money, the raider’s block at an additional premium); and

- buybacks (acquiring shares on the market in order to increase the market price and cause the offeror’s bid to fail).

Despite the Directive’s implicit preference for the one share – one vote principle in relation to voting powers (although it contains no mandatory rules in this regard), some defensive measures are not prejudicial or may even be beneficial for the company (see below).

Table 7. Defensive measures

Potential benefits Potential drawbacks

Long-term protection of projects Managers’ short-term self-interest protection

Greater information to the offeror Little flow of information into market prices

Solves shareholders’ coordination issues Controlled by few

Promotes competition among offerors Favours specific blockholders

Source: Authors. Benefits. In effect, defensive measures may be used to protect the long-term projects of the company and to make sure that the offeror is also offering a reasonable price for such projects. Furthermore, a defensive measure helps the offeror to obtain more information on the interests and the strategies of the company’s management. In countries with a dispersed ownership structure, such as the US, shareholders may be too numerous and uncoordinated, with the result that managers can negotiate (i.e. leverage on their power to impose defensive measures) and cut a deal in the interest of shareholders (or in the interest of the company). Finally, defensive measures such as the white knight strategy may stimulate a competing offer, which tends to increase the gains for offeree company shareholders. Drawbacks. On the other hand, defensive measures may harbour disadvantages, as managers can use them discretionally to protect their interests from the intrusion of the acquirer. Defensive measures may impede the correct flow of information into prices by affecting them for reasons not strictly related to the company’s fundamentals. In addition, governance rules may not necessarily require the approval of defensive measures by a majority of shareholders, in turn allowing such tools to be used in the interest of certain shareholders which may not be aligned with the general shareholder interest or the interest of the company as a whole. Lastly, in concentrated ownership structures, defences may allow controlling blockholders to defend their position by building upon complaisant management (nominated by the controlling shareholders themselves).

1. Shareholder rights plans

Poison pills. Shareholder rights plans (poison pills) are a type of defensive measure frequently used in the US, where shareholders retain the right to acquire additional shares at a discount when one shareholder acquires a stake overtaking a certain percentage of the capital. They are therefore based on the issuance of new stock carrying rights that are only triggered during a takeover bid. A poison pill results in “discriminatory dilution” of capital, which increases the cost of the takeover for the offeror (Hill 2010). In the US, poison pills can generally be adopted by management without

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shareholder approval, in stark contrast with the board neutrality rule in the Directive. The key characteristic of these pills is that they deter takeovers without harming the business of the offeree company, unlike for instance the sale of key assets. In addition, their effectiveness carries a powerful deterrent effect, which means pills are rarely triggered in practice (Davies et al. 2010). Taxonomy. There are two main types of shareholder rights plans: flip-in pills, which provide options to purchase shares in the offeree company, and flip-over pills, which allow shareholders to purchase shares in the offeror after a merger (Gerner-Beuerle et al. 2011). An example of a flip-in pill is given by Gordon (2004): assuming an offeree company has 100 shares of stock outstanding and the offeror acquires more than 15 shares, the remaining shareholders would be allowed to acquire 85 shares at a 50% discount. The resulting dilution effect is so strong and creates such an increase in the cost of conducting the takeover that a flip-in pill effectively saves the company against hostile bids. Boards in the US may also introduce barriers to the redemption of the pill via dead hand pills, which can only be redeemed by the directors who established the pill, and no-hand pills, which cannot be redeemed during a certain period of time. Effectiveness. The effectiveness of poison pills relies on two elements of the broader corporate governance framework: the existence of a staggered board in the offeree company and the right to issue shares and forego pre-emptive rights without shareholder authorisation (Hill 2010, Gerner-Beuerle et al. 2011). In a staggered board, the removal of every member at a single point in time is not possible, except where expressly provided for by law. Under these circumstances, the board does not face the risk of dismissal by the shareholders due to the application of defensive measures. Conversely, without a staggered board, a proxy fight could force the board to renounce triggering the pill. However, staggered boards are not a feature of European company law (Marccus Partners in this Study). As to the right of the board to issue shares and forego pre-emptive rights without shareholder authorisation, while Delaware Law allows flexibility in this regard, in Europe the Second Company Law Directive requires shareholder authorisation for any issuance (Article 25 of the Directive). Furthermore, rules on the equal treatment of shareholders do not allow discrimination against the offeror. The possibility to launch a poison pill in Europe is therefore very limited (Ferrarini 2000). Gerner-Beuerle et al. (2011) find that there is no legal authority in the UK, Germany and Italy to launch a standard poison pill. The authors arrived at this conclusion by performing a detailed survey of company law and practice in the relevant jurisdictions, without considering the application of the board neutrality rule. Table 8. Availability of poison pills in key EU jurisdiction s

UK Germany Italy

- Possible but requires ex-ante shareholder approval

- Not available in its standard form - Convertible bonds (without

redemption rights) have been used. There may have been a defensive purpose in some cases

- Issuance of warrants possible - Uncertainty whether the offeror

could be excluded from exercising the warrants (principle of equality among shareholders)

Source: Adapted from Gerner-Beurle et al. (2011).

The strength of poison pills combined with staggered boards allows managerial entrenchment, which has lead to pressure for regulatory reform in the US to better protect the rights of shareholders. Hill (2010) reports a sharp decrease in staggered boards and poison pills in the US in recent years following pressure by institutional investors.

D. The Breakthrough Rule

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Introduction. The breakthrough rule attempts to introduce the one share – one vote principle when shareholders decide upon the adoption of post-bid takeover defences. It aims to facilitate takeovers by reducing the scope for entrenchment of managers and blockholders, thus reducing agency costs and limiting free-riding problems.

Objectives. The breakthrough rule in the Directive attempts to limit the power and use of pre-bid takeover defences. It introduces the one share – one vote principle by dissociating control and ownership, moving decisional power away from control groups onto the wider shareholder base. In the Directive, the rule appears together with the board neutrality rule, since any limitation of post-bid defences (BNR) introduces incentives to adopt pre-bid incentives and vice versa (Ferrarini et al., 2010). Proportionality between ownership and control allows the offeror to overcome possible post-bid defences. The breakthrough rule therefore complements the board neutrality rule, which limits the capacity of the board to adopt post-bid defensive measures, enforcing shareholder supremacy. Both rules are based on the principles of shareholder decision-making and proportionality (Mülbert, 2003). However, while board neutrality has been transposed in most Member States surveyed in this Study, the breakthrough rule has only been fully transposed in Estonia (Marccus Partners in this Study). By reducing the scope for defences, the Directive aims to promote the market for corporate control (Kirchner et al., 2000; Coates, 2003; Ferrarini, 2006). Control enhancing mechanisms. Ownership and control are dissociated through multiple control enhancing mechanisms, such as dual-class shares, multiple voting rights, non-voting shares, pyramid structures, voting rights ceilings, golden shares or cross-shareholdings. In 2006, the European Commission undertook a study on the proportionality between ownership and control in listed companies in the European Union (Shearman & Sterling et al., 2007), which revealed the widespread use of control enhancing mechanisms across Member States. The results of this study, which surveyed the 20 largest listed corporations per country and a number of small and recently listed companies, highlighted the differences in the use of control enhancing mechanisms in Europe.

Table 9. Presence of control enhancing mechanisms in European companies

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Belgium 32 16 50% 0 0 0 11 0 0 1 0 10 22 288 8%

Denmark 23 8 34% 5 0 0 0 2 1 0 0 0 8 207 4%

Estonia 14 2 16% 0 0 0 2 0 0 1 0 0 3 126 2%

Finland 25 10 40% 8 0 0 0 2 0 0 0 1 11 225 5%

France 40 29 72% 23 0 0 7 4 0 0 2 7 44 360 12%

Germany 40 9 23% 0 2 5 5 1 0 1 1 0 16 360 4%

Greece 31 16 51% 0 0 1 10 2 3 0 0 2 18 279 6%

Hungary 22 13 60% 1 0 1 7 4 0 6 0 1 20 198 10%

Ireland 23 9 39% 0 1 4 0 1 1 1 0 1 9 207 4%

Italy 39 23 59% 0 0 7 11 3 7 6 1 9 44 351 13%

Luxembourg 19 3 16% 0 0 1 6 0 1 1 0 0 9 171 5%

Netherlands 23 15 65% 10 0 0 3 0 0 0 2 1 16 207 8%

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Poland 40 17 43% 10 0 0 2 5 0 5 0 0 22 360 6%

Spain 24 15 62% 0 0 0 4 7 1 3 0 3 18 216 8%

Sweden 29 19 65% 17 0 0 14 1 1 0 5 2 40 261 15%

UK 40 12 31% 1 0 12 1 2 2 0 0 1 20 360 6%

Source: Adapted from Shearman & Sterling et al., 2007. Scope. The scope of the breakthrough rule in the Directive addresses the problem of control enhancing mechanisms partially. It extends to (a) multiple-vote securities belonging to a separate class, (b) restrictions on voting rights, (c) extraordinary rights of shareholders to appoint or remove board members, and (d) restrictions on the transfer of securities. These control enhancing mechanisms are also subject to disclosure requirements, the importance of which for pricing and governance should not be underestimated (Ferrarini 2006).343 Legal doctrine discusses the extent to which the formulation of the breakthrough rule in the Takeover Directive allows for circumvention. However, since the rule has only been transposed in Estonia, lack of practice and case law mean that only theoretical discussion is possible. For instance, Papadopoulos (2008) considers that certificates of shares and non-voting depositary receipts would allow shareholders to circumvent the breakthrough rule. Under these financial instruments, voting rights are separated from their shares and transferred to an administrator. A certain potential for circumvention of the breakthrough rule using these certificates arises from the absence of rules requiring detached voting rights to revert to the shareholders in the event of a takeover. However, disclosure provisions apply to the use of depositary receipts. Formulation. Papadopoulos (2008) considers that the formulation of the breakthrough rule is both too wide and too narrow. It is too wide since the rule may encompass neutral and takeover-friendly instruments, such as pre-emption rights, option rights, sale agreements with deferred settlement, or agreements to accept a takeover bid (Sjåfjell 2010). It is too narrow since some of its requirements discriminate between instruments with similar economic functions but different legal architectures. In this regard, the Directive defines shares as carrying voting rights – potentially excluding non-voting shares – and defines multiple-voting as belonging to a separate class – apparently leaving out ceiling and time lapse shares, which also carry varying voting rights but do not formally belong to a distinct class of securities.344 The Directive also fails to address the use of proxies by financial institutions, which frequently hold interests in the company and therefore face a conflict of interest. Circumvention. Crucially, the breakthrough rule does not apply to pyramid structures and cross-shareholdings, two of the most powerful mechanisms to dissociate ownership and control. Pyramids allow end shareholders to achieve control in a given company via a chain of interposed entities, holding a lower amount of capital overall than would have been necessary to achieve the same level of control via direct shareholding. Pyramids are relatively opaque structures when compared, for instance, to dual-class shares, as they increase the difficulty for outside investors to understand, evaluate and monitor control (Coates 2003). Both multiple-vote securities and pyramids fulfil the same economic objective: they allow blockholders to enhance control by leveraging more voting power than is proportionate to their ownership share. However, only multiple-vote securities are addressed in European takeover regulation. From an economic standpoint, it is difficult to justify the selective application of the one share – one vote principle only to a selection of control enhancing

343 Article 10, Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids. 344 Articles 2.1.e and 2.1.g, Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids.

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mechanisms. Cross-shareholdings where one company holds a stake in another and vice versa should be distinguished, since they not only enhance control but also allow for coordination. Solutions. Lack of consistency in addressing control enhancing mechanisms would dilute the intended effect of the breakthrough rule if transposed by Member States. Instead of enforcing the one share – one vote principle in a takeover event, as intended by the Directive, the current formulation of the rule rather induces blockholders to switch from multiple-voting shares to pyramid holdings, leaving their status quo intact in case of a takeover. However, this phenomenon has not been observed empirically, as the breakthrough rule has not been fully transposed in any country except Estonia and has been partially transposed only in France (see Marccus Partners in this Study). According to the 2006 study by the European Commission cited above, multiple voting securities are frequent in France, Sweden, the Netherlands, Poland, Finland and Denmark, but are rare in most other jurisdictions. Conversely, pyramids are commonly used in Sweden, Belgium, Italy, Greece and the Netherlands (see table above). It follows that the application of the breakthrough rule will have dissimilar effects across companies in different Member States. However, choosing a regulatory instrument to address the use of pyramid structures is not simple. In the 1930s, the US introduced double taxation of inter-corporate dividends as a declared policy to avoid the use of pyramids (Ferrarini 2006). The scope for addressing pyramids in a simple and effective manner via takeover regulation needs to be further researched. The main difficulty lies in distinguishing ordinary corporate groups from cases where pyramids are being used. Figure 23. Breakthrough rule

Source: Authors.

1. Economic impact Market impact. The breakthrough rule affects companies where there are several classes of shares with different voting rights attached. Bennedsen and Nielsen (2004) have studied the effects of this rule on control. They analysed the distribution of voting and cash flow rights in more than 1,000 companies with dual-class shares in 10 European countries. The authors found 3% to 5% of companies where controlling owners held more than 50% of voting rights but less than 25% of the shares, therefore making them subject to a direct loss of control in the face of the breakthrough rule in the Directive. The majority of these companies were located in Denmark, Germany, Italy and Sweden. In addition, 11% to 17% of companies were controlled by less than 50% of voting rights and less than 25% of shares, and were hence subject to a potential loss of control. Conversely, according to the authors’ estimations, existing control would not be affected by the rule in about 80% of companies. Market responses. While the breakthrough rule is meant to reduce the costs of the bid and promote takeover activity, it introduces an incentive for controlling shareholders owning a disproportionately low amount of outstanding shares to acquire a higher proportion of low voting shares (Bennedsen and Nielsen, 2004). Bearing in mind that the impact of the rule does not depend solely on the existence of

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dual-class shares but also on the disproportion between votes and cash flow, if controlling shareholders consolidate their position, the breakthrough rule could result in higher ownership concentration. Already, in a large number of listed companies, blockholders exercise control by owning the largest share of capital without diverging from the one share – one vote principle (Coates 2003). The opposite thesis is put forward by Papadopoulos (2008), who believes that uncertainty about control rights that diverge from the one-share one-vote principle could lead to dispersed ownership. This observation, however, fails to consider that it may be cost-efficient for controlling shareholders to top up their ownership stake in order to keep their private benefits of control. Private benefits of control. Disproportionate control is linked to the extraction of private benefits by the controlling shareholder. Here, private benefits refer to precisely those benefits that spring from the discrepancy between the level of ownership and control held by the incumbent blockholder (European Corporate Governance Forum, 2007). From this perspective, reducing the disproportion between ownership and control would redistribute benefits more uniformly among shareholders. However, two caveats apply. On the one hand, part of these benefits can be considered as compensation for the costs involved in monitoring management (Dyck and Zingales, 2004). Uncertainty about control rights reduces the incentives for incumbent blockholders to perform monitoring and other company-specific investments. At the same time, the one share – one vote principle provides an incentive for institutional shareholders to engage (Becht, 2003). On the other hand, private benefits of control also arise where the one share – one vote principle applies, to the extent that there is concentrated ownership. For instance, the controlling shareholder may capture business opportunities on preferential terms through its affiliates. The breakthrough rule therefore only concerns private benefits arising from the use of control enhancing mechanisms. Economic impact. The breakthrough rule may increase the cost of raising capital. Bennedsen and Nielsen (2004) suggest that the rule discourages companies from issuing new shares to parties other than the controlling shareholders, and instead provides an incentive to use more expensive channels to raise capital. Alternatively, companies may be prompted to buy back their own shares. However, this effect is unlikely to materialise in practice, given that the rule does not apply to pyramids and cross-shareholdings. Incumbent shareholders will likely find that it is more cost-efficient to switch the mechanism through which they hold control and build up a pyramid scheme. Pyramids remain an effective and relatively inexpensive means of holding control without owning the majority of the shares in a given company. The widespread permissibility of pyramid structures and cross-shareholdings brings further uncertainty as to the effect of the breakthrough rule with regard to ownership concentration and control. It frustrates the objective of the rule, namely, to apply the one share – one vote principle in case of takeover in order to facilitate the change of control. Furthermore, the opacity of these structures may have a negative impact on capital markets (Coates, 2003). One share – one vote. Ultimately, the economic analysis of the breakthrough rule reverts to the discussion on the rationale for introducing stricter proportionality between ownership and control. Enforcing the one share – one vote principle in a takeover event is separate from its outright enforcement in corporate law (Coates, 2003). However, measures affecting takeovers have an impact on the use of control enhancing mechanisms by blockholders over the medium to long term. From this perspective, coherence of takeover rules within the overall framework of corporate governance is desirable. However, the breadth of this discussion greatly exceeds the scope of this report (Adams and Ferreira 2008, Geens and Clottens, 2010).

2. Equitable compensation Quantification. The Directive provides for the payment of “equitable compensation” to shareholders whose rights are broken through.345 This provision is in line with the protection of private property and the requirement to compensate the loss of enjoyment in case of expropriation. However,

345 Articles 11.5, Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids.

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difficulties arise when it comes to applying these principles in practice. Appraisal procedures to quantify compensation may delay the takeover process, particularly if appeals are permitted and adjudication steps in. Papadopoulus (2008) considers that delays in quantification exacerbate the pressure-to-tender problem, since shareholders risk seeing the value of their shares decrease over time. A straightforward method of quantification should reduce delays and make it clear to the offeror ex-ante what consideration is needed to gain control. However, even a straightforward method would not afford full certainty to the offeror ex-ante, since total compensation will still depend on the number of shareholders who refuse to tender – above the threshold provided in the Directive. Where no convergence is observed, terms for determining compensation and the arrangements for the payment of the compensation are left to Member States (see Marccus Partners in this Study). Proxy measurement. Ferrarini (2006) assesses the difficulties in pricing compensation for preferential voting rights, since the value of the latter depends on the private benefits of control derived from their exercise. These benefits are intrinsically opaque and difficult to value. Dick and Zingales (2004) compute them as the difference between the price per share paid for the controlling block and the market price of a share after the change of control is announced. The former would reflect the value of preferential shares, while the latter would reflect the value of ordinary shares (Barclay and Holderness 1989). This methodology illustrates that an ex-ante calculation is difficult in practice. Moreover, the principle of equal treatment of shareholders does not allow for a different price to be paid for controlling shares under the Directive. If an exact quantification is not possible, two options arise for regulators: either to forego compensation altogether or to establish a proxy measurement. A proxy measurement should be easy to calculate ex-ante to allow potential offerors to factor in the cost of equitable compensation. It could be subject to limited adjudication to better protect blockholder rights while preventing delays in the takeover process. For instance, restrictions could apply as to the timing of adjudication, starting after the takeover deal has been completed, and the quantum that might be awarded, limited to a certain percentage of the proxy measurement. Additional research would be required to devise a proxy measurement applicable throughout Europe.

3. Optionality and reciprocity Optionality. The Directive grants discretion to the Member States as to whether to transpose the breakthrough rule or not. As for the board neutrality rule, Member States who have opted out must provide the possibility for companies to opt back into the breakthrough rule. In addition, Member States must decide whether to transpose reciprocity. The decisional tree is represented in the section referring to board neutrality. All Member States of the European Union surveyed in this Study have opted out of the breakthrough rule except Estonia and, to a certain extent, France (Marccus Partners, in this Study). Two elements are of relevance with regard to optionality: the level at which it is placed and the default rule. The Directive places optionality at Member State level. While for board neutrality, there are arguments for placing optionality at company level (see the relevant section in this Study), these arguments do not apply to the breakthrough rule. It would be irrational to allow blockholders to decide on the limitation of their voting rights in case of takeover. Lack of transposition. Lack of transposition of the breakthrough rule by Member States highlights concerns about the impact on the structure of corporate ownership and the functioning of capital markets. An in-depth cost-benefit analysis would be required to assess the convenience of removing optionality and introducing the breakthrough rule across the Union. As stressed before, enforcing the one share – one vote principle in a takeover event has an impact on the use of control enhancing mechanisms by blockholders over the medium term. The discussion on the economic costs and benefits of proportionality between ownership and control exceeds the scope of this Study, but it is an open debate where no clear-cut answers have been found (Geens and Clottens 2010, Adams and Ferreira 2008). If the one share – one vote principle is to be introduced in Europe, this should take place after careful consideration of the overall framework of corporate governance. Besides by these fundamental concerns, lack of transposition by Member States is also explained by the current formulation of the breakthrough rule, which only partially covers pre-bid takeover defences, as explained in the previous paragraphs.

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4. Implementation score

The breakthrough rule in the Directive has been transposed by hardly any Member State. The reasons explaining this situation are twofold. On the one hand, the formulation of the rule would render it ineffective in inhibiting the use of control enhancing mechanisms, whereas it might induce companies to switch to a different type of control over the governance structure, e.g. from dual-class shares to a pyramid structure. On the other hand, there might be no consensus among Member States on the one share – one vote principle, given its overarching consequences for corporate governance and industrial organisation. The rule has only been fully transposed in Estonia (see figure 24).

Figure 24. BTR implementation scores

Source: Authors (see Annex 3). France has partially transposed the rule, allowing no reciprocity, while some countries such as the UK have made it optional for companies to opt into the rule, but with no reciprocity. Finally, countries such as Germany, Italy and Spain have left it to companies to decide whether to opt in, but with reciprocity.

Findings #3. The current formulation of the breakthrough rule encompasses only a restricted number of control enhancing mechanisms, inducing regulatory arbitrage and frustrating the objective of the rule. The limited transposition of the rule means that there is not enough information to draw definite conclusions regarding its impact. The application of the one share – one vote principle in company law is a fundamental step, which would require an in depth cost-benefit analysis and consensus among Member States.

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E. Squeeze-out and sell-out rules

Introduction. The squeeze-out right allows the offeror to acquire any residual shares following a successful offer, with the result that it gains full control of the offeree company. It also reduces the incentive for incumbent shareholders to hold up their shares (free-riding on other shareholders) and facilitates acquisitions. The sell-out right appears as a quid pro quo whereby residual shareholders may force the acquirer to buy their shares, thus reducing pressures to tender at an inferior price.

Objectives. The squeeze-out and sell-out rights are similarly structured in the Directive, but pursue markedly different objectives. On the one hand, the squeeze-out right benefits offerors by mitigating the incentive for incumbent shareholders to hold up their shares. In so doing, the right allocates a larger portion of takeover gains to the offeror at the expense of some shareholders. On the other hand, the sell-out right benefits minority shareholders by allowing them to force the acquirer to buy their residual shares. It may discourage bids that do not seek to control all the shares of the offeree company. Crucially, while the squeeze-out rule reduces the hold-up problem, the sell-out rule has the opposite effect. By reducing the pressure to accept the tender, the sell-out right may result in higher share prices and a higher overall cost of the takeover, allocating a larger share of profits to the incumbent shareholders at the expense of the offeror. The table below summarises the effects of the squeeze-out and sell-out rules considered in isolation. The following sections consider the effects of both these rights in greater detail. Table 10. Impact of the squeeze-out and sell-out rights

Squeeze-Out Sell-Out

Pressure to tender ��

Free-riding ��

Total consideration ��

Shareholder profits ��

Offeror profits �� Source: Authors own elaboration.

1. Squeeze-out right Full control. Offerors are frequently interested in gaining full control, which is commonly considered a basic condition for their acquisition planning. The squeeze-out right is an instrument sometimes present in takeover regulation that allows the offeror to force residual shareholders to sell their shares and gain full control. Evidence suggests that use of the squeeze-out right by offerors is widespread (Van der Elst et al. 2006, Martinez et al. 2010). The graph below illustrates the extent to which takeover deals lead to the acquisition of full control in Europe.

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Figure 25. Stake owned by the acquirer after a takeover transaction

Source: Authors’ own elaboration from Thomson Reuters SDC Platinum. Full ownership may have a higher value than majority or large majority ownership for a variety of reasons (Van der Elst et al. 2006, Ventoruzzo 2010): - facilitating the recouping of the costs of the offer; - avoiding costs associated with retaining a small number of shareholders, in particular transaction

costs; - aligning the strategy and management of the acquired company with those of the parent company

within a group of companies; - going private, thereby avoiding the cost of public ownership (direct cost of listing and indirect

cost of complying with the legal requirements for listed companies, including transparency provisions);

- benefiting from accounting consolidation for tax purposes, which in some jurisdictions requires full ownership;

- reducing legal uncertainty in those jurisdictions where minority shareholders may claim part of the control premium ex-post; and

- in case of private equity leverage buyouts, replacing all equity with debt that is tax-deductible.

Hold-up. Whether the offeror discloses the stake it wishes to acquire or not, it faces a problem of hold-up by incumbent shareholders (Van der Elst et al. 2006, Grossman and Hart 1980). Hold-up by investors has three main sources: (1) shareholder preferences are not homogenous and thus their supply functions have different slopes; (2) shareholders may reasonably anticipate that the price offered by the offeror is lower than the value of the company; and (3) shareholders anticipate that the margin of shares required to gain full control has a higher value for the offeror. As a result, a small number of investors may decide not to tender at the offered price, holding up their shares and forcing the offeror to pay a higher premium for the residual stake necessary to attain full control. Holding up is therefore likely to increase the cost of takeovers and reduce the volume and efficiency of the market for corporate control (Burkart et al. 2003). In addition, when holding up, some shareholders free ride on the others, attempting to capture a higher fraction of the takeover premium. In sum, holding up and free-riding appear together in practice but affect two distinct aspects of takeover regulation: (a) balancing the protection of incumbent shareholders against the efficiency of control transfers, and (b) ensuring the equal treatment of all shareholders.

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Compensation. The squeeze-out right, by forcing residual shareholders to sell, reduces the hold-up problem. The rule needs to be understood in conjunction with the principles that serve to fix the price that would be paid for the residual shares. Broadly speaking, the Directive prescribes compensation equal to the price paid to the other shareholders in case of a successful mandatory bid, thereby enforcing the principle of equal treatment and avoiding free-riding among fellow shareholders. The determination of the squeeze-out price has a direct impact on the economic efficiency of the acquisition. Goergen et al. (2005) consider that as long as squeeze-outs do not raise the premium for shareholders, they are likely to reduce overall consideration paid in the tender and allocate a larger part of the takeover gains to the offeror, increasing the efficiency of the transaction. As they enforce the principle of equal treatment, the rules on price determination in the Directive are unlikely to result in an increase of the overall consideration. Where the squeeze-out right reduces the overall consideration to a level lower than the post-takeover value of the company, offerors will tend to make their acquisitions conditional on reaching the squeeze-out threshold (Burkart et al. 2003). Threshold. The threshold for exercising the squeeze-out right is also important. The optimal threshold depends on the level of shareholder concentration in the offeree company (Van der Elst et al. 2006, 2009). However, regulators have so far not succeeded in finding a formula to determine the optimal threshold at company level. Instead, a single threshold is applied to all companies within the same jurisdiction. This solution is simple but sub-optimal, since ownership and control concentration are not homogenous even within the same country. Most corporate law systems have converged towards a threshold of over 90% using trial and error (Van der Elst et al. 2006). Shareholder rights. At a fundamental level, fixing the threshold needs to balance (a) the protection of the rights of investors over their shares and (b) the interest of the offeror in acquiring full control. A low threshold would infringe the rights of incumbent shareholders, who legitimately may not wish to sell at the price offered by the offeror because they have a low preference for liquidity and expect higher value from retaining their shares. In the US, corporate law adopts a different perspective and considers shareholding not as a property right but rather as a financial interest in the corporation that requires a lesser degree of protection (Ventoruzzo 2010). Following this approach, regulation of squeezing-out (freezing-out) is more permissive in the US than in a majority of Member States in Europe. At a fundamental level, however, the existence of a squeeze-out right is based on the assumption that the acquisition of full control by the offeror is socially useful and justifies the limitation of shareholders’ property rights. Nonetheless, caution is required in this respect, as full control may be profitable for the offeror but not always socially useful. For instance, full control allows the offeror to more easily recoup the costs of the bid on the assets of the offeree company. There is hence a risk that easy squeeze-outs may marginally encourage value-decreasing takeovers. Practical thresholds. The Directive provides for a threshold above 90% but below 95% of the shares/votes, and affords Member States some discretion. Van der Elst et al. (2006) assess the practical explanations behind these thresholds. On the one hand, a threshold above 95% would make it difficult to solve the practical problem of both untraceable and intractable shareholders, that is, shareholders who cannot be found or who refuse to accept the sale even on reasonable terms. On the other hand, a threshold below 90% would disrupt a large number of continental European companies characterised by high ownership concentration. The authors also point out the link between squeeze-out thresholds and the thresholds to obtain tax benefits in several Member States. Scope. Squeeze-out procedures exist in some jurisdictions irrespective of how the threshold has been reached. The economic rationales behind full control do not depend on the underlying transaction and would justify squeeze-outs independently of the way in which the stake had been acquired. However, coherence between takeover and merger regulations with regard to squeeze-outs has not yet been fully achieved in Europe (Papadopoulus 2007). Outside a takeover transaction, the determination of an equitable price is more difficult given the absence of a reference price for control, such as the one offered in the context of a mandatory bid. Appraisal by the courts of justice is expensive and dysfunctional (Ventoruzzo 2010).

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Harmonisation. Differences in the regulation of squeeze-out rights across Member States are significant (Van der Elst et al. 2009). The importance of homogeneous squeeze-out rules for achieving consistency throughout the single market should not be underestimated. There has been little research on squeeze-out rights beyond that by the few academics cited here who focus on this issue; yet this is an important element for the achievement of integrated financial markets and equal shareholder protection in the European Union. Squeeze-out rules carry significant economic importance given the interest of offerors in gaining full control and going private. Facilitating squeeze-outs is likely to promote the market for corporate control. Following this rationale, Ventoruzzo (2010) considers the thresholds in the Directive too high, arguing that they give excessive relevance to a small minority of the minority shareholders. Ventoruzzo favours a more pragmatic and simple approach that simply sets the threshold at 75% of the shares in order to stimulate activity in the market for corporate control. However, a low threshold would probably not suit the level of shareholding and ownership concentration prevalent in most European economies. Given uncertainty about shareholder rights, a relatively low threshold would likely discourage investment and shareholder engagement. It might also exacerbate short-term focus on investing. Quite apart from the level of the threshold, compensation for shareholders needs to be equitable in order to avoid discouraging investment. The level of shareholder compensation determines how the benefits of full control are spread, but distributional issues affect stakeholders at large. As such, there is no easy answer to the question regarding the social desirability of squeeze-outs. Indirect squeeze-out. Finally, an indirect squeeze-out may occur through statutory mergers or de-listing, which can impose lower valuations on remaining shareholders. In practice, the threshold for the approval of such deals is far below the squeeze-out threshold (e.g. 75% of voting rights for statutory mergers in Germany; Papadopoulos, 2007).

2. Squeeze-out rule implementation score The squeeze-out rule has been widely adopted across Europe in line with the Directive, but with some differences. Some countries, such as Spain and Sweden, have opted for the least restrictive application of the rule, with an eased threshold of 90%. In this case, all kinds of shares may contribute to the reaching of the threshold. Other countries, such as the UK, apply a threshold of 90% as a percentage of shares with voting rights.

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Figure 26. Squeeze-out implementation scores

Source: Authors (see Annex 3). Germany and Italy apply a squeeze-out rule with a 95% eased threshold. Finally, France, Belgium and the Netherlands, among others, have adopted a squeeze-out rule of 95% as a percentage of shares with voting rights.

3. Sell-out right

Sell-out. The sell-out right of incumbent shareholders is best understood as a provision mirroring and balancing the squeeze-out right of the acquirer. The latter carries most of the economic importance while the former is devised as a sort of quid pro quo (Burkart 2004). As previously mentioned, the sell-out rule awards residual incumbent shareholders the right to force a successful acquirer to purchase their shares at a fair price. In isolation, the sell-out right could be an incentive for shareholders to hold up their shares, which would increase the cost of takeovers and bring down activity in the market for corporate control (Goergen et al. 2005). However, in combination with the principle of equal treatment of shareholders and the squeeze-out right, these pernicious effects are cancelled out. In the Directive, the sell-out right allows residual shareholders to sell their shares to the offeror under similar conditions as the offeror is allowed to purchase this residual stake. The economic justification of the sell-out right, similarly to that of the mandatory bid rule, is to protect minority shareholders by giving them exit rights following a takeover. It is therefore relevant for the promotion of investment and the development of the capital markets. As for the squeeze-out right, the effect of the sell-out right depends on the principles used to determine the price of the residual shares and the threshold required for the exercise of these rights. In the Directive, both factors closely mirror the factors governing the squeeze-out.

Findings #4. The acquisition of full control allows the offeror more easily to align the management of the offeree company with its own interest. A high threshold for the exercise of the squeeze-out right

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protects the rights of incumbent shareholders, while a low threshold would stimulate the market for corporate control. There is no economic rationale to justify different squeeze-out rights for different underlying transactions. The link between squeeze-out and de-listing should be further explored.

F. Empirical analysis

Regressions. Using 996 observations from the above-mentioned dataset on takeover deals between 2003 and 2010 (see 3), this section on the empirical analysis briefly discusses the results of the econometric regression using different regressands. It is important to clarify that this is a preliminary analysis to show whether or not the Directive has had an impact on the market for corporate control and on the economy overall. Additional analyses are needed in future in order to assess the overall impact of the Directive. In any case, the lack of harmonisation and the financial crisis further complicate the econometric analysis, rendering it inevitably subject to distortions. For a full reference to the results of the econometric regressions, please refer to Annex 5. CARs. We regressed the cumulative abnormal returns (CARs, -41;+41) to explore the unexpected returns of a takeover transaction. We assume that cumulative abnormal returns, calculated as the difference between the sector return and the company return in real terms (prices) around the announcement date, are a good proxy for the unexpected benefits accruing to the offeror in a takeover transaction. The higher the value of the CAR, the higher the incentive of a potential acquirer to bid, assuming the offeror compares the market premium calculated using a theoretical model with the additional abnormal returns above this market premium for that given sector. Overall, a high CAR means that the value of the company or of the sector is currently undervalued, so an offeror can extract more than what could potentially be expected in a sector with low CAR values. CARs not only capture the market premium, but also all the other factors which cannot easily be factored in a model but may be used by the incumbent shareholders to bargain a higher premium. Therefore, by extension, if a variable has a positive correlation with CARs, it increases the unexpected market returns of a takeover against which the potential offeror will benchmark its premium, thereby potentially increasing the incentives to launch a bid.

Other regressions. We have also regressed the market capitalisation, the competitiveness index related to the deal (based on the GCI of the WEF), and the financial development index (market capitalisation over GDP). Outcome. Indexes of shareholder, employee, and creditor protection have been added to the model, in particular to control for the other legal requirements in place that may affect the dependent variable apart from the transposition of the Takeover Directive. In all regressions but the one explaining market capitalisation, the introduction of the Directive had an observable impact. However, coefficients suggest that the impact is very low if not negligible. In terms of relations, the results cautiously suggest that the Directive had a positive impact on cumulative abnormal returns (0.13799; p<0.01), a positive impact on market capitalisation (0.00215; but no significance), a positive impact on competitiveness (0.01037; p<0.01), and a negative impact on financial development (-0.09170; p<0.01). The impact is very low to allow for the extraction of clear-cut conclusions. Greater shareholder and employee protection negatively influence CARs, which means fewer unexpected returns and more entrenchment for incumbent shareholders. Reducing, as it does, the possibilities for post-bid defences, the introduction of the board neutrality rule has had a negative impact on CARs as it narrows the space for unexpected defensive actions. The breakthrough rule and the mandatory bid rule are less important in this empirical analysis, as their effect relates mainly to ex-ante incentives. The minority shareholder protection index seems to be significant in all regressions, thus establishing a definite link between takeovers and the promotion of market capitalisation (in line with La Porta et al., 1998). Overall, it is possible to conclude that the Directive has had an impact on the market for corporate control and the economy. However, as could be reasonably anticipated, the intensity of this

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impact is marginal. The introduction of the Directive appears to be positively related with CARs and thus with the volume of takeovers (increasing the weight of unexpected factors, perhaps due to the fragmented transposition of the legal text) and negatively related with the broad index of financial development. In effect, in the most developed financial markets, price efficiency reduces CARs because investors’ expectations are already able to price many factors, which may not feed into prices in less developed markets. Additionally, the board neutrality rule appears to have a negative impact on CARs, which is theoretically related to the fact that, by reducing the scope for defences, incumbent shareholders will be able to extract a lower premium, thereby reducing the value of both the CARs and the benchmark employed by the potential offeror. The regression shows that the BNR had a positive impact on increasing incentives to launch a takeover in the countries where it has been fully transposed. However, the impact is low as the BNR may also raise pressures for incumbent shareholders to entrench, therefore raising the cost of acquiring control for the potential offeror (with additional impact on dispersed ownership structures).

G. Conclusions Multiple impacts. Takeover regulation has multiple impacts on the economy. In particular, it affects relevant areas such as investor protection, ownership and control over a company through the crucial role of capital markets, which allow the development of an efficient market for corporate control. Depending on the characteristics of the company (ownership structure) and the legal system, takeover rules can have diverse effects and effectiveness in reaching their original objectives. Whether the ownership structure is more concentrated (with private benefits of control) or more dispersed does matter, especially for the intensity of the impact of some of the rules on the market for corporate control and on the contestability of control. It is questionable whether private benefits of control should be addressed through takeover regulation or whether they should rather be the object of broader regulatory action in corporate law. Moreover, the legal system does matter, too, particularly with regard to investor protection and setting the framework for corporate decision-making, whether shareholder or management-oriented. Efficiencies and discipline. Transfers of corporate control (takeovers) may result in a more efficient allocation of control if the offeror presents a higher valuation of control because it is capable of using the pool of assets in the offeree company to generate greater value than the incumbent. Takeovers may also have disciplinary effects by aligning the interests of managers with those of the company. Company interests may not necessarily be those of controlling shareholders, and regulation should take into account other aspects such as the protection of long-term firm-specific investments, which may not be in line with the short-term resolve of incumbent shareholders to tender their shares to the highest bid. Trade-offs. This study of the Directive reveals three important trade-offs and conflicts among regulatory objectives. Table 11. Trade-offs in takeover regulation

Disciplining management

(agency problem) � Preserving long-term firm-specific projects

Control contestability � Protection of minority shareholders

Addressing free-riding � Increasing pressure to tender

Source: Authors. Disciplining management. First, by increasing contestability of control, takeovers induce managers to behave in line with the interests of shareholders, reducing agency costs. However, control

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contestability reduces the incentives of management to carry out long-term firm-specific projects precisely because of the possibility of losing control by not performing well in the short term and thus not being able to push up shares prices. This situation may ultimately, especially in concentrated ownership structures, reduce shareholder value for minorities that have invested in the firm’s long-term projects. Alignment of managers and shareholder interests may induce short-termist behaviour in management, depending on the shareholder structure. Contestability of control reduces the incentives of managers and blockholders to make firm-specific investments, such as investments in human capital, which generate company value over the medium to long term. Protection of minorities. Second, strengthening the protection of minority shareholders may increase takeover costs, thereby dissuading takeovers and reducing control contestability (as shown in the empirical analysis). The intensity of the trade-off critically depends on the company’s shareholding structure. Protecting shareholders should be a primary concern in case of concentrated ownership in order to limit expropriation. Conversely, in case of diluted ownership, promoting takeovers may be more important than protecting shareholders (Enriques, 2009). Besides, not all measures of shareholder protection necessarily increase takeover costs. Free-riding. Moreover, by addressing free-riding issues and reducing hold-up by shareholders, takeover rules may increase the influence of the potential offeror, thus creating pressures to tender and vice versa. The table below summarises these trade-offs by presenting the objectives in conflict. Takeover rules. At rule level, the table below summarises the impact of the main aspects of takeover regulation on key objectives of the Directive. The major components of the Directive are the mandatory bid rule, ownership transparency, the squeeze-out and sell-out rules, the breakthrough rule, and the board neutrality rule. Key objectives of the Directive are increasing control contestability and facilitating takeovers to discipline management; strengthening (minority) shareholder protection; and reducing the incentives to keep ownership concentrated, through both direct incentives such as control enhancing mechanisms and indirect incentives. The table measures the intensity of the impact of these rules by level of ownership concentration, and uses two levels of gradation. The same signs across rules do not necessarily mean that the rules have the same level of impact on the key objectives of the Directive. The two rules that have a broader “net” negative impact on the objectives of the Directive are the mandatory bid rule and the squeeze-out rule (with two red areas out of three). In a nutshell, the rules that have a greater “net” positive impact on the key objectives of the Directive are the disclosure of ownership structure, the breakthrough rule and the board neutrality rule. Conversely, the negative impact of the squeeze-out rule on protection of minority shareholders and ownership concentration is rather negligible due to the high level of the threshold set in the Directive. The following paragraphs refer to each of the provisions in greater detail. Mandatory bid. The mandatory bid rule has a negative impact on the volume of takeovers because it increases the cost of takeovers ex-ante. It also carries a negative impact on ownership concentration as it incentivises incumbent shareholders to increase their holdings close to the triggering threshold. The rule has a greater impact on dispersed ownership structures where control does not yet lie with only a handful of blockholders. In contrast, however, the mandatory bid rule enhances the protection of minority shareholders particularly in concentrated ownership structures by forcing the offeror to offer the control market premium to all shareholders. Such bold shareholder protection must be weighed against the potential adverse affects on the launch of new takeovers. Transparency. Ownership transparency has a beneficial impact on all three key objectives of the Directive, and in particular on the volume of takeovers and the protection of minority shareholders, since potential offerors are able to see the composition of the ownership structure and plan their bid accordingly. This positive effect may disappear where it comes to the disclosure of subsequent purchases of shares. In this respect, the disclosure of purchases above a certain threshold does not allow “creeping-in” takeovers, which enhance shareholder value. However, this rule may also discourage takeovers, since it may be more expensive for the potential offeror to build up an initial stake before the launch of the bid if the threshold is set too low.

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Squeeze-out. Squeeze-out and sell-out rights may both have a positive impact on the volume of takeovers. The squeeze-out right protects the offeror from shareholders’ free-riding, while the sell-out right has a positive impact on strengthening the power of minority shareholders, thereby reducing the incentive to increase ownership concentration. Squeeze-out rules also carry significant economic importance given the interest of offerors in gaining full control and going private. From this perspective, facilitating squeeze-outs helps to make the market for corporate control more “contestable”. However, the impact of both rules is limited due to the level of the thresholds set in the Directive. Breakthrough. The breakthrough rule could have a substantial positive impact on the volume of takeovers and the protection of minority shareholders if it managed to effectively eliminate all control enhancing mechanisms. However, the rule may also create incentives to increase direct control by raising the stake in the company, leading to higher ownership concentration. Further, it may be arbitraged using alternative mechanisms such as pyramid structures. If coherently devised and consistently applied, the breakthrough rule would produce a very high impact on the ownership structure of firms, especially in those jurisdictions where ownership and governance are more concentrated. However, the limited transposition of the rule means that not enough information is available to extract evidence of its impact. Board neutrality. Finally, the board neutrality rule certainly increases incentives to launch an offer, since it constrains the capacity of the board to set out impediments and protects minority shareholders, increasing the value of their shares by rendering control more easily contestable. However, it may raise pressures for incumbent shareholders to entrench by increasing their stake in the company in order to raise the cost of acquiring control for potential offerors (with greater impact especially on dispersed ownership structures). Nevertheless, increasing the ownership stake held in the company may be very expensive for incumbent shareholders, which mitigates the negative effect of the board neutrality rule. Table 12. Impact of takeover regulation (± relationship and intensity)



Disproportionality between ownership and control


DISPERSED OWNERSHIP


DISPERSED OWNERSHIP


DISPERSED OWNERSHIP

Mandatory bid rule – – – + + + + + +


– – – + + + – –

Squeeze-out rule + + + – – + +

Sell-out rule – – – + + + – – –

Breakthrough rule + + + + + + + + +

Board neutrality rule + + + + – + + +

Source: Authors’ elaboration.

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Empirical analysis. In conclusion, according to the empirical analysis, the Directive seems to have had an impact on the market for corporate control and the economy. However, the impact seems rather marginal and may be significantly affected by the actual fragmented transposition across Member States. Further analyses of the Directive in the coming years may help to strengthen the preliminary results of this Study.

V. Impact of the Directive on competitiveness

Europe 2020. Fostering competitiveness and growth is a primary concern of the European Union in the framework of the Europe 2020 Agenda. Competitiveness is a multi-faceted concept and so are its links with the market for corporate control. The purpose of the present section is to shed light on the impact of the Takeover Bids Directive on the level of competitiveness and growth of the European economy. The scope of the Directive is narrow in comparison with the vast number of factors that determine competitiveness in one way or another. To best address this mismatch, this section follows a methodology based on three steps, as illustrated in the figure below. In sum, this section will (a) shed light on the links between takeovers and competitiveness and (b) consider how the Takeover Bids Directive affects those links.

Figure 27. Methodology – Impact of the Directive on competitiveness

Source: Authors.

A. Defining competitiveness Definition of competitiveness. Defining competitiveness at the level of individual countries may prove elusive given that it is a multi-faceted concept. Moreover, the number of factors that determine the level of competitiveness of an economy and the interactions between these factors very likely defies measurement. For instance, the OECD defines competitiveness as a measure of a country’s advantage or disadvantage in selling its products in international markets. Traditional competitiveness indicators are based on the differential between domestic and competitors’ unit manufacturing labour costs and consumer prices. However, these indicators seem to say little about the origin and sources of competitiveness, since they do not make explicit the contribution of aspects such as education, training, innovation, governance and company sophistication. Therefore, instead, this report considers the approach followed by the World Economic Forum (WEF), which assesses multiple factors grouped into 12 pillars to compile its Global Competitiveness Index (GCI ). This index places the emphasis on the link between competitiveness, sustained economic growth and long-term prosperity, and therefore represents a useful tool for policy making. Available since 2004, the index covers 139 countries, including most European economies.

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Determinants of competitiveness. Competitiveness is defined by the WEF as “the set of institutions, policies, and factors that determine the level of productivity of a country”.346 It is the result of the interaction of 12 pillars, which bring together a variety of factors, surveyed and scored to compile the index. These pillars are split into basic requirements (first row in the table below), innovation and sophistication factors, and efficiency enhancers (all other factors). Table 13. Competitiveness “pillars” considered by the Global Competitiveness Index of the WEF

institutional environment infrastructure macroeconomic environment

health and primary education

business sophistication innovation higher education and training

goods market efficiency

labour market efficiency financial market development

technological readiness market size

Source: Authors. Economic growth. The link between competitiveness and growth is well established in economic theory. However, this link is drawn differently depending on the concept of competitiveness that is chosen. Under the WEF definition followed here, competitiveness determines productivity, which in turn explains the rates of return of the different factors employed in the economy. Hence, given higher rates of return, a country with higher competitiveness and productivity would be more prosperous. Competitiveness would therefore explain actual and potential economic growth. For economies at an advanced stage of development, productivity and growth depend primarily on the innovation and sophistication components of competitiveness. Figure 28. From competitiveness to growth

Source: Authors. Europe 2020 Agenda. It is worth noting that the pillars postulated by the WEF are in line with the vision of competitiveness in Europe embodied by the Europe 2020 Agenda. The GCI has been endorsed by the Joint Research Centre of the European Commission as a robust indicator of competitiveness. The Europe 2020 Agenda is based on three priorities:

• Smart growth – developing an economy based on knowledge and innovation. Policy action is undertaken in the fields of innovation, education and digital society.

• Sustainable growth – promoting a more resource efficient, greener and more competitive economy. Action under this heading refers to industrial policy, climate change and energy efficiency.

• Inclusive growth – fostering a high-employment economy delivering economic, social and territorial cohesion. Action refers here to the labour market, training and poverty.

The 2020 Agenda also considers other actions in direct relation to the pillars of the GCI, such as the strengthening of the single market, the upgrade of the institutional setting of the monetary union and the improvement of macroeconomic imbalances. The table below summarises the linkages between

346 The Global Competitiveness Report 2010-2011, p. 4.

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the pillars of the GCI and the priorities of the Europe 2020 Agenda. The next section will discuss the impact of takeovers on competitiveness. Table 14. Linking competitiveness to takeovers

Europe 2020 Global Competitiveness Index

Higher education

Innovation

Technological readiness Smart growth

Business sophistication

Infrastructure Sustainable growth

Goods market efficiency

Health and primary education

Training Inclusive growth

Labour market efficiency

Financial markets development

Market size

Institutions Other actions

Macroeconomic environment

Source: Authors.

B. Takeovers and competitiveness

1. Introduction

Takeover attributes. Research on the effect of mergers and acquisitions on company performance does not provide consistent evidence. Instead, results vary across studies depending on the country, sector and time span examined, rendering any overall conclusion precipitate. Empirical studies consider either share prices, under an assumption of market efficiency, or accounting information, under an assumption of full disclosure and materiality. With regard to offeror performance, studies do not show clear evidence of an improvement in performance either in the short or in the long run (Turch and O’Sullivan 2007). Similarly, evidence regarding the performance of acquired companies is mixed even when controlling for different parameters in the transaction (Martynova et al. 2006, see table below). Furthermore, these studies do not distinguish between mergers and acquisitions, which should be borne in mind given the limited scope of this report.

Table 15. Impact on long-term performance

Parameter Expected impact on long-term performance347 Empirical evidence

347 Adapted from Martynova et al. (2010).

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��

��

found in literature348

Method of payment Cash Stock No impact

Deal atmosphere Hostile Friendly No impact

Acquirers’ financial position Leveraged Excess cash flow Inconclusive

Industry relatedness Same sector Different sector Inconclusive

Size of the offeree company Big Small Inconclusive

Geographical focus Cross-Border Domestic Inconclusive

Source: Authors. Stock returns. Measuring takeover stock market returns is not a direct indicator of the impact of takeovers on competitiveness and growth. Shareholder gains represent a transfer of wealth from one economic agent to another. Instead, the impact of takeovers on competitiveness hinges primarily on the realisation of efficiencies and on the balance of these with the costs derived from the transaction. Efficiencies. Takeovers may induce different kinds of efficiencies, either direct or indirect, in the form of synergies and positive externalities. On the one hand, direct efficiencies are the result of the application of the business plan of the acquirer, meaning that not all takeovers result in the realisation of all possible efficiencies. While the existence of exploitable inefficiencies is a rational motivation to launch the offer, studies have failed to show relative poor performance of the offeror prior to the takeover (Franks and Mayer 1996 in OECD 1999). This result does not in itself negate the significance of the realisation of efficiencies by the offeror, but rather puts the emphasis on corporate strategy. The acquirer will be able to introduce efficiencies into the offeree company depending on its sophistication and know-how and its business plan for the acquiree (Andrade et al. 2001, Pyykkö 2010). On the other hand, indirect efficiencies may derive from synergies between the activities of the acquirer and the acquiree and from the realisation of positive externalities, both of which are difficult to measure. For instance, research and development may benefit from cooperation between the acquirer and the acquiree. Similarly, cooperation may result in the opening up or formation of networks and clusters, with positive effects for third parties and the economy overall. These effects are thought to be particularly relevant for transnational takeovers (Thomsen 2007). Costs. However, takeovers come at cost, including transaction costs and the premium payable to shareholders. Among the other transaction costs, financing costs and legal and advisory fees represent on average 4% of the purchase price, but may be significantly higher at deal level (OECD 1999). The premium paid to shareholders also depends on the characteristics of each deal, but on average amounts to approximately 40% (Pyykkö 2010). Under the efficient market hypothesis, the shareholder premium will be equal to or lower than the expected increase in cash flows realised by the acquisition. However, other variables, such as managerial hubris, may bring the premium paid above expected future gains. Besides, expected gains may not ultimately materialise.

Recovery. Takeover costs being non-negligible, they may substantially affect the financial situation of the offeror. For instance, the offeror may be forced to reduce the amount spent on research and development, at least in the short term. Alternatively, it may seek to recover part of these costs by expropriating rents from other stakeholders, including employees. These disruptions caused by the impact of takeover costs on the financial situation of the offeror are likely to be limited to the short term, but nevertheless affect competitiveness negatively.

348 Adapted from Martynova et al. (2010).

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Distribution. Redistribution concerns also affect the impact of takeovers on competitiveness. The question to be asked concerns the origin of the gains captured by the takeover premium and advisory fees. Where these gains are disproportionately realised at the expense of employees and other stakeholders, what may appear as a zero-sum game is unlikely to be economically neutral. Expropriating wealth from employees and other stakeholders may negatively impact competitiveness by reducing such parties’ incentives to make firm-specific investments (OECD 1999). The foregoing assertion is not intended to discredit all forms of restructuring arising in the aftermath of a takeover bid. Restructuring can streamline procedures, incentivise performance and reduce superfluous costs and free-riding (i.e. improve operational efficiencies). It therefore has the potential to increase the productivity of the company without reducing the incentives of stakeholders to make firm-specific investments, thereby increasing competitiveness. However, where costs incurred in the transaction are high, management may face enormous pressure to recoup such costs in the short term. Clever restructuring may then turn into predatory cost-cutting to the detriment of competitiveness and growth. Redistribution concerns also affect public finances, which may be negatively affected by the socialisation of some of the losses realised by restructuring.

Time. A further complexity in determining the impact of takeovers on competitiveness concerns the time horizon. In this regard, it is worth highlighting that the costs involved in a takeover deal are, by their very nature, one-off costs, while efficiency gains have the potential to be dynamic and long-term. Addressing the long-term impact of takeovers on company performance is a difficult exercise given the difficulties in isolating the effect of the takeover from other factors. As such, evidence in this regard is limited (Martynova et al. 2006).

Ownership concentration. On a different note, the level of shareholder concentration resulting after a takeover is also likely to have an impact on competitiveness and growth (OECD 1999). The absence of stable shareholders can curtail the ability of management to pursue long-term value creation and induce it to prefer projects with short-term payoffs instead. This phenomenon may occur where there is high ownership dispersion and managers face a continuous threat of dismissal. Conversely, ownership concentration reduces the agency problems between management and shareholders, although its effects on performance are unclear given the higher risk of extraction of private benefits. National legislations strive to adapt to the level of ownership and control concentration prevalent in their jurisdiction, while they also shape it by enforcing rules such as the one share – one vote principle.

The academic literature presents mixed evidence on the link between ownership concentration and corporate performance. Distinguishing between short-term and long-term performance appears particularly difficult in this regard. In a survey of the relevant literature, Maher and Thomas (OECD 1999) conclude that results are country and sector-specific, but that performance tends to increase in line with concentration at low levels of concentration. At the same time, higher shareholder concentration increases the risk of extraction of private benefits, which the literature has found to be significant (Zingales 1994, Barca 1995 in OECD 1999). Private benefits exceeding the compensation for control and non-diversification are inefficient and will negatively impact competitiveness.

Stakeholders. Corporate governance is thought to affect both performance at the level of the company and the overall competitiveness and growth of the economy (OECD 1999). Balancing the interests of the different stakeholders involved appears crucial in this regard. As a precondition, shareholder protection is essential to maximise the amount of resources invested in the economy. Where shareholders face the risk of expropriation by management or controlling blockholders, their willingness to invest will be reduced (La Porta et al. 1997, 1998). However, shareholders are not the only agents who invest in the corporation. Other stakeholders, such as employees and suppliers, also make company-specific investments that have a direct impact on company performance and competitiveness. The engagement of all stakeholders is of particular importance in activities with high asset specificity and added value (OECD 1999, Mayer 2006).

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Figure 29. Takeovers’ virtuous cycle

Source: Authors.

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Box 5. Method of payment and consideration in takeovers

The following graphs present the payment method and the distribution of the consideration paid by acquirers in takeovers in Europe. More than 70% of deals are settled using cash only, which makes up most of the consideration paid overall. A fair amount of research has been conducted on the impact of the method of payment on offeree company shareholder gains and company performance. Martynova et al. (2006) conduct a review of this literature and conclude that the method of payment does not influence long-term performance.

Figure 30. Number of takeover deals by method of settlement

Source: Authors’ own elaboration from Thomson Reuters SDC Platinum.

Figure 31. Consideration paid in takeover deals in Europe

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2. Linking takeovers to the pillars in the GCI

This section will consider the potential effect of takeovers on competitiveness with reference to selected pillars of the Global Competitiveness Index which have the most direct connection to takeover activity (see table below).

Table 16. Linking competitiveness to takeovers

Global Competitiveness Index Takeovers Impact

Higher education

Innovation YES

Technological readiness YES

Business sophistication YES

Infrastructure

Goods market efficiency YES

Health and primary education

Training

Labour market efficiency YES

Market size YES

Financial markets development YES

Institutions

Macroeconomic environment

Source: Authors. (a) Goods market efficiency – efficient markets are those able to produce the right mix of products

and services given demand and supply conditions while ensuring their effective distribution.349

Table 17. Determinants of goods market efficiency in the GCI

supply responsiveness efficient distribution healthy market competition

minimum red tape

moderate and neutral taxation

openness to foreign direct investment

trade openness customer orientation and sophistication

Source: WEF GCI.

349 The Global Competitiveness Report 2010-2011, pp. 5-8.

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Scale and scope. Takeovers have the potential to increase the efficiency and productivity of a company in supplying the goods and services demanded by the economy (Thomsen 2007, OECD 1999350). The realisation of economies of scale and scope are particularly apt to generate efficiency gains that affect not only production but also research, marketing and distribution, with a positive impact on the economy as a whole (OECD 2001). These effects are assumed to be more significant where takeovers are transnational, given the increase in market size and trade (OECD 2001). Company restructuring following a takeover also has the potential to streamline procedures, incentivise performance and reduce superfluous costs. Supply responsiveness and the efficiency of distribution can therefore be positively transformed as a result of takeover activity. Competition. The effect of takeovers on competition remains unclear and depends on the circumstances of each deal. By increasing concentration, takeovers alter the structure of the marketplace and may therefore negatively impact competitive dynamics. This is why takeovers are frequently subject to screening by competition authorities, as in the EU Merger Regulation (Article 3.1.b). Takeovers may result in the accumulation of dominant positions, which may later be abused, but may also disrupt market structures, rendering the latter unable to deliver the benefits that follow from competition (Whish 2009). There is evidence that takeovers may lead to a reduction in competition and increased prices, although this evidence does not in any way establish a general rule (Thomsen 2007). For instance, it is important to differentiate between horizontal takeovers, involving companies that compete at the same level of the production chain, and vertical takeovers, which involve companies at different levels and are therefore less likely to reduce competition. Moreover, in sectors engaged in transnational consolidation, the geographical focus of the marketplace will shift to the international level without necessarily reducing competition. Overall, therefore, the impact of takeovers on competition is difficult to anticipate.

(b) Market size – market size allows companies to reach economies of scale, thereby increasing productivity.351 Table 18: Determinants of market size considered in the GCI

domestic market size trade openness economic integration legislative integration

Source: WEF GCI. Efficient scale. Takeovers have the potential to help business gain an efficient scale, thereby increasing both business size and productivity (Martynova et al. 2006). In the context of the European Union, market size is realised through the legislative and economic integration of the national markets of Member States, which come together to form the single market. Transnational takeovers of a European dimension are therefore instrumental to the constitution of the single market. An open market for corporate control is a useful tool to develop an international production base (OECD 1999) and to secure the potential for economies of scale and scope within the single market. In addition, transnational takeovers tend to increase trade integration both for the final product and for intermediate supplies (Thomsen 2007). Furthermore, by facilitating trade integration, transnational takeovers can play a role in fostering political stability (Thomsen 2007). A larger market size is expected to increase the mobility of resources and boost competition for these resources, thereby directing them towards more productive utilisations (OECD 2001).

350 Corporate Governance: Effects on Firm Performance and Economic Growth, Maria Maher and Thomas

Andersson, OCDE 1999. 351 The Global Competitiveness Report 2010-2011, pp. 5-8.

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Box 6. Integration of the European market for corporate control

The number of cross-border takeovers in the EU has increased since 2003, although relatively speaking, it has been more strongly affected by the financial crisis in 2008 and 2009 than takeovers taking place within the same EU country and deals involving a non-EU offeror. In terms of value, the share of EU cross-border deals is very significant but varies quite widely across time. In 2005, EU cross-border deals accounted for more than 50% of the total value of takeovers. This share decreased significantly in the following years but recovered in 2010.

Figure 28: Number of takeovers by location of the parties


Figure 29: Value of takeovers by geographical location of the parties


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(c) Labour market efficiency – efficient labour markets are those where human resources are best allocated and are appraised by their performance.352 Table 19: Determinants of labour market efficiency in the GCI

allocation flexibility wage flexibility incentives based on performance

gender equality

Source: WEF GCI. Human resources. Takeovers have the potential to further the efficient management of human resources at company level, thus increasing competitiveness. However, the effect of takeovers on employment and labour market efficiency is the object of a separate section in this report. Three main factors are involved: (1) the presence of exploitable inefficiencies in the offeree company and any restructuring plans of the offeror devised to capture the benefits available; (2) the business plan of the offeror and the success of the deal, which may result in business expansion over the medium term and an increase in workforce numbers; and (3) the engagement of employee representatives and management to mitigate the effects of restructuring on individual employees. There is evidence that acquisitions are used by some European companies to reach their optimal employment levels, which they cannot otherwise reach given strict employment protection legislation (Gugler and Yurtoglu 2004). A separate section in this report is dedicated to the effects of takeovers on employment and employees.

(d) Technological readiness – technological readiness is a measure of the capacity of the economy to best dispose of technology to enhance productivity.353 Table 20: Determinants of business sophistication considered in the GCI

ICT penetration technological availability readiness of adoption customisation

Source: WEF GCI. ICTs. Takeovers may boost the development and application of information and communication technologies (ICTs), since these are instrumental in managing bigger or more diversified organisations. ICTs allow for more flexible business practices, swifter communication and better customisation of products and services. They are therefore crucial for the integration of regional and national markets, helping to reap economies of scale and scope (OECD 2001). At the same time, organisations with a multi-product or multi-market base are more likely to invest in ICTs to satisfy their increased need for these technologies, which springs precisely from their presence in different markets.

(e) Innovation – innovation is measured by the ability to further the frontiers of knowledge, beyond the integration and adaptation of exogenous technologies.354 Table 21. Determinants of innovation considered in the Global Competitiveness Index

research and development

public sector support quality research institutions

networks and clusters

protection of intellectual property

352 The Global Competitiveness Report 2010-2011, pp. 5-8. 353 The Global Competitiveness Report 2010-2011, pp. 5-8. 354 The Global Competitiveness Report 2010-2011, pp. 5-8.

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Source: WEF GCI. Transfer of technology. Takeovers are thought to foster the transfer of technology between offeror and offeree companies, both internally and by enabling access to third-party providers and networks. Transnational takeovers are particularly useful in this regard, since they bring together providers and experts operating in different markets and jurisdictions (OECD 2001, Sachwald 2000). Learning effects may have a positive impact in increasing the innovative capabilities of actors and economies on both sides. Countries at an intermediate stage of development, such as Member States which have acceded to the European Union more recently, are expected to benefit the most from technological transfers. Countries at a further stage of development, closer to the technological frontier, benefit less from transfers themselves and more from positive externalities arising from the formation and consolidation of networks (Thomsen 2007, OECD 2001, Little 2005, and Al Azzawi 2004). On a different note, the distribution of the benefits arising from technological transfers depends to a large extent on the location of research and development facilities, which may be relocated, thus disadvantaging one of the parties involved in the takeover. Volume of research. Besides technology transfers, takeovers are also likely to affect the volume of research undertaken by both the offeror and offeree companies. The amount of resources dedicated to research and development (R&D ) may decrease due to rationalisation and pooling of programmes and competencies following the takeover. However, such reduction is unlikely to weaken R&D outcomes and may instead strengthen them. It is not possible to advance a general rule; rather, it is the business plan of the acquirer that will determine the amount of resources that the acquiree allocates to research and development. Nevertheless, as previously discussed, costs incurred through the takeover deal may result in a reduction of the financial ability of both offeror and offeree company to invest in R&D, at least over the short to medium term. Market for corporate control. The level of activity in the market for corporate control also has an impact on research and innovation. The evidence, however, is mixed. An inactive market for corporate control may incite management to stifle innovation in order to avoid stimulating product competition and thus “creative self-destruction” (Morck et al. 2000, Morck and Yeung, 2004). However, it may also encourage company-specific investments and long-term internal innovation by reducing pressures on management and employees to perform in the short term (Hitt et al. 1996). In practice, companies which are the object of a constant takeover threat are likely to invest less in internal innovation and rely more on external sources (Hitt et al. 1996). Furthermore, stimulating product competition may offset any reduction in innovation due to the lack of activity in the market for corporate control. It is well established that strong monitoring of dominant behaviour and anti-competitive practices is necessary to avoid takeovers having pervasive effects on the economy, both in terms of higher prices and reduced innovation. Ownership concentration. The level of ownership and control concentration arising after the bid is not neutral to innovation either. Concentrated control over corporate assets may distort capital allocation and reduce the rate of innovation (Morck et al. 2004). However, dispersed ownership and control, if coupled with a lack of stable shareholders, may induce short-termism in managerial behaviour and also reduce the rate of innovation. Balanced ownership structures are likely to avoid the misallocation of resources and maximise innovation.

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Box 7. Takeovers by industry subsector The following graphs present the distribution of takeover deals and value per industry subsector in the sample considered in this Study. Takeovers occur in all sectors but more frequently in energy and power, financials and materials. However, the distribution of value follows a different pattern. Most notably, while the high technology subsector attracts only 4% of the deals, these deals are worth 17% of the total value across sectors.

Figure 30: Takeovers by industry subsector 2003-2010 (value of deals)


Figure 31: Takeovers by industry subsector 2003-2010 (number of deals)


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(f) Business sophistication – business sophistication measures the quality of business networks and

clusters within an economy.355

Table 22. Determinants of business sophistication considered in the Global Competitiveness Index

quantity and quality of local suppliers

business networks business clusters position in value chain

Source: WEF GCI. Networks and clusters. Takeovers have the potential to result in the formation and consolidation of both business networks and clusters. For instance, this potential is particularly high in the case of transnational takeovers, where there is scope for the creation of networks across markets that would otherwise be difficult to achieve. The effect of takeovers on the creation of networks and business sophistication is not restricted to the acquirer and acquiree, but frequently extends to resource providers that did not previously interact. In the context of the European Union, establishing business networks across different Member States allows actors to reap the potential of the single market for competitiveness and growth. Vertical spillover. Where takeovers connect companies working at different levels of the value chain, they also have the potential to strengthen the position of both companies. They may, for instance, allow for more efficient sourcing or distribution, resulting in more efficient production processes and better targeting of consumers. At the same time, takeovers result in the transfer of know-how and skills that have the potential to raise the level of sophistication of the companies involved, together with that of their suppliers and distributors.

(g) Financial markets development – efficient financial markets channel resources to the soundest economic activities.356

Table 23. Determinants of financial markets development considered in the Global Competitiveness Index

deepness access to capital prudential regulation

transparency and investor protection

Source: WEF GCI. Equity markets. An active market for corporate control is linked to the existence of functioning equity markets. At the same time, it increases the efficiency of these markets by providing opportunities for the valuation and transfer of control, allowing investors to acquire such control and channel their capital towards value-creating investments (Rajan and Zingales, 2003). Where ownership and control are dissociated, the protection of investors is essential to foster their participation in capital markets. In any case, corporate governance (and takeover regulation) affects the development of capital markets and therefore resource allocation (capital mobility), ultimately affecting competitiveness and growth357.

355 The Global Competitiveness Report 2010-2011, pp. 5-8. 356 The Global Competitiveness Report 2010-2011, pp. 5-8. 357 Certain authors, such as Lucas (1988), argue that the impact of the financial system on economic growth is limited and reject the notion of a strong link between finance and growth.

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Capital markets. Despite criticism due to the recent financial crisis concerning resiliency in distressed times, financial markets unquestionably tend to solve problems related to information asymmetries and transaction frictions (Levine, 1997). Moreover, they represent the most efficient tool available in promoting the contestability of control, even at cross-border level. Following Levin (1997), financial markets address transaction costs, which may impede an efficient allocation of resources, by – among other things – exerting control over companies’ performance and management. It follows that this situation is most likely to favour growth through capital accumulation and technological innovation. Long-term investments. However, it is crucial to design a financial system that creates liquidity around long-term investments, which ultimately produce high returns, through the proper mix of financial contracts, markets and institutions (Boyd and Smith, 1996). A financial system that is designed around the need to increase returns in the short term due to widespread short-term funding needs may not generate sufficient liquidity for long-term investments. This in turn stunts the development of technological changes and innovation, and consequently greater competitiveness and growth. This will impinge growth and will potentially put the whole financial system on the brink of a broader collapse. A financial system that lowers the monitoring costs over the efficiency of investments increases company performance and competitiveness. If markets are able to price and provide liquidity for long-term projects, they will also reduce incentives to increase ownership concentration to protect long-term projects.

Table 24. Competitiveness indicators affected by takeover activity

Country / Economy

AVERAGE INDEX

Goods market efficiency

Market Size

Labour market efficiency

Technological readiness

Innovation Business sophisti-cation

Financial markets develop-ment

Greece 3.78 3.91 4.52 3.71 4.06 3.00 3.41 3.88

Romania 3.83 4.08 4.41 4.32 3.82 2.94 3.24 4.01

Slovakia 4.08 4.34 3.97 4.66 4.48 2.95 3.54 4.61

Hungary 4.10 4.16 4.27 4.46 4.41 3.55 3.71 4.16

Italy 4.13 4.16 5.63 3.81 4.12 3.40 4.11 3.70

Portugal 4.16 4.32 4.34 3.85 4.63 3.77 3.98 4.26

Estonia 4.22 4.71 2.89 4.91 4.94 3.68 3.90 4.50

Cyprus 4.22 4.97 2.82 4.64 4.4 3.66 4.07 5.01

Poland 4.26 4.38 5.08 4.58 4.02 3.31 3.76 4.66

Spain 4.27 4.20 5.47 3.88 4.64 3.47 3.96 4.28

Czech Republic 4.42 4.58 4.47 4.75 4.55 3.92 4.19 4.49

Ireland 4.53 5.09 4.20 4.87 4.99 4.25 4.55 3.79

Austria 4.80 5.00 4.59 4.75 5.09 4.48 4.97 4.74

Belgium 4.84 5.08 4.77 4.64 5.22 4.59 4.91 4.64

Luxembourg 4.87 5.49 3.16 4.71 6.11 4.53 4.76 5.35

France 4.92 4.69 5.76 4.47 5.28 4.48 4.83 4.96

Denmark 5.06 5.10 4.25 5.47 5.62 4.89 5.15 4.94

Finland 5.07 4.92 4.15 4.85 5.17 5.56 5.43 5.38

Netherlands 5.10 5.17 5.10 4.83 5.99 4.77 5.16 4.71

UK 5.14 4.96 5.80 5.29 5.58 4.65 4.98 4.73

Germany 5.15 4.97 6.01 4.40 5.36 5.19 5.51 4.62

Sweden 5.31 5.30 4.58 4.89 6.12 5.45 5.67 5.15

Source: WEF (2011)

C. The Directive and competitiveness

Regulatory environment. The impact of takeovers on competitiveness is strongly influenced by the regulatory environment in each jurisdiction. For instance, dysfunctional factor and product markets

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may limit forecast efficiency gains, while discrimination against foreign companies, as in public procurement, will hamper transnational deals and reduce their potential for generating efficiency gains. Conversely, well-grounded national policies in the areas of research, education and skills will boost the positive effects of takeovers, while at the same time diminishing the chances of relocation (Thomsen 2007). Corporate governance. Takeover regulation needs to be understood as part of the broader system of corporate governance, which impacts on productivity and competitiveness. To foster productivity and competitiveness, corporate governance must achieve a complex balance. It needs to be capable of attracting long-term capital by privileging the interests of shareholders, while at the same time taking into account the interests of employees and other stakeholders, whose performance determines productivity and competitiveness (OECD 2001). Economic integration. Takeover regulation needs to effectively take into account the increasingly international nature of deals, given the growing importance of cross-border mergers and acquisitions (OECD 2001). In the case of the single European market, harmonising takeover regulation appears to be a necessary element for the proper governance of deals and the reduction of arbitrage. A common set of rules is expected to increase the efficiency of the market for corporate control and have a positive impact on competitiveness. The crucial questions are, however, what level of legislative integration is most adequate and whether such regulation should be based on full or partial harmonisation. As stated in every discussion on the Directive, there is no full harmonisation of takeover regulation in Europe. Partial harmonisation is combined with the introduction of a number of optional provisions that Member States may or may not transpose into national law. Notably, the board neutrality rule and the breakthrough rule are optional provisions of this kind. Harmonisation. There is lack of consensus as to the desirable level of harmonisation. Homogenous rules can have widely different effects in practice depending on the ownership structure prevalent in each country (Ventoruzzo 2008, Goergen et al. 2005). Optional provisions would therefore be a useful tool to account for national diversities in the governance structure (McCahery and Vermeulen 2010). However, the former come at the expense of lower legal certainty and higher transaction costs (Humphery-Jenner 2010, Davies et al. 2010, Clarke 2009, Enriques 2004). Partial harmonisation may even result in a race to the bottom in connection with regulatory standards. In this regard, the Commission concluded in 2007 that the “number of Member States implementing the Directive in a seemingly protectionist way is unexpectedly large” (EC 2007). Mandatory bid rule. The level of concentration of ownership and control in the offeree company appears as a main determinant of the impact of the provisions of the Directive. In case of a dispersed ownership structure, the mandatory bid rule protects minority shareholders from the entrance of a large blockholder. However, in case of concentrated ownership, it protects the incumbent blockholder by making the acquisition more costly due to the fair price rule. Higher transaction costs are likely to have a negative impact on competitiveness both at the company level and throughout the economy as a whole. For instance, costs may disrupt research and development in the short term or be passed on disproportionately to employees, reducing the incentives to commit to firm-specific investments. Board neutrality rule. Ownership and control concentration also determine the effect of the board neutrality rule. In case of dispersed ownership, this rule addresses the agency problem between management and ownership and thus protects shareholders. However, in case of concentrated ownership, the rule becomes irrelevant for the protection of minority shareholders given the alignment of interests between blockholders and management. At the same time, the board neutrality rule is non-neutral for competitiveness. On the one hand, by protecting shareholders, the rule maximises their incentives to invest, therefore contributing to the development of capital markets, the links of which with competitiveness and growth are well established (La Porta et al. 1997, 1998). On the other hand, by removing all power of decision from the board, the rule may not allow for the proper consideration of the interests of other stakeholders, including employees, whose contribution to competitiveness and growth is also of great importance.

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Breakthrough rule. The breakthrough rule also affects competitiveness. The rule is tantamount to the introduction of the one share – one vote principle on an ex-post basis. It therefore facilitates changes in corporate control where concentration of ownership and control diverge due to the use of control enhancing mechanisms, notably dual shares. By facilitating changes of control where dual-class shares are present, the breakthrough rule is likely to deter the use of such shares, which is to some extent associated with the exploitation of private benefits of control. However, if rights are altered on an ex-post basis it introduces legal uncertainty and can therefore negatively affect the development of financial markets. In contrast, the rule is ineffective where pyramid holdings are used, rendering its effects less clear. Moreover, it has not been transposed in any Member State except Estonia. Like the mandatory bid rule, the breakthrough rule may reduce the scope for the interests of stakeholders to be factored into the takeover process due to the enforcement of the one share – one vote principle. Squeeze-out rule. The squeeze-out right, too, affects competitiveness by reducing the hold-up problem and facilitating changes in control. Most importantly, the squeeze-out right affords the offeror the possibility to gain full control over the offeree company by excluding residual shareholders, de-listing the offeree company and making it a private company. Hence, the impact of the squeeze-out right on competitiveness depends on the trade-off between remaining public or going private. The strengths and drawbacks of public versus private companies is a broad question that exceeds the scope of takeover regulation and cannot be addressed in this report. Table 25. Impact of key Directive provisions on competitiveness according to ownership structure.

Concentrated ownership / control Dispersed ownership / control

POSITIVE IMPACT

NEGATIVE IMPACT

POSITIVE IMPACT NEGATIVE IMPACT

Mandatory bid rule ☺☺

Protects minority shareholders

��

Raises costs of takeover

None

��

Raises costs of takeover


None

None

☺☺

Protects shareholders

��

Does not allow the interests of other stakeholders to be taken into account

Breakthrough rule ☺ ?

May reduce extraction of private benefits

� ?

Does not allow to take the interests of other stakeholders into account

None

None

Source: Authors own elaboration. Summary. The table below summarises the discussion in the previous sections with reference to each of the pillars in the Global Competitiveness Index (CGI) for the mandatory bid rule and the board neutrality rule. The former, by protecting minority shareholders, has a positive impact on the development of capital markets, albeit confined to instances where ownership is concentrated. Conversely, by raising the cost of acquiring control, the mandatory bid rule may negatively affect the

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other determinants of competitiveness. For instance, it may deter some takeovers with a potential to generate efficiencies and increase the geographical scope of good markets. This higher cost may also result in a reduction of the funds invested in human resources or research and development, at least over the short to medium term. As to the board neutrality rule, it is only relevant where the interests of managers and owners are not aligned, that is, where ownership is dispersed. By granting shareholders full decisional power, board neutrality promotes the development of financial markets. Moreover, since it does not allow management to adopt defensive measures, the rule facilitates takeovers, including those with a potential to generate efficiencies and increase the geographical scope of good markets. However, board neutrality limits the extent to which stakeholder interests are taken into account in the takeover process, reducing their incentives to make company-specific investments. Table 26. Impact of key provisions of the Directive on competitiveness

Concentrated ownership Dispersed ownership

Global Competitiveness Index Mandatory bid rule


Mandatory bid rule


Goods market efficiency � � ☺

Market size � � ☺

Labour market efficiency � � �

Technological readiness � �

Innovation � �

Business sophistication

Financial markets development ☺ ☺

Source: Authors’ own elaboration.

D. Empirical analysis Application. The link between the Directive and competitiveness is difficult to establish empirically. An indication may be obtained by mapping Member States’ transposition and their respective positions in terms of competitiveness. The graph below compares the scores for implementation of the Directive with an indicator of competitiveness based on the average scores for the selected pillars of the Global Competitiveness Index (GCI). There appears to be a positive link between better transposition and higher competitiveness for those countries with low to medium CGI scores. However, countries with high CGI scores have transposed the Directive in dissimilar ways, achieving both high and low implementation scores but no median ones. Mapping of this kind is illustrative and does not allow for the extraction of general conclusions. It shows that the impact of the Directive on competitiveness and growth, while relevant, is limited. At the same time, it provides some indication that transposition close to the mean is associated with relatively poor competitiveness. It also shows that poor transposition is not necessarily linked to low competitiveness.

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Figure 32: Competitiveness and transposition of the Takeover Bids Directive

Source: Authors’ own elaboration Abnormal returns. Cumulative abnormal returns (CARs) for offeree company shareholders appear to be positively correlated to competitiveness. While this result does not reflect the impact of the Directive itself, it shows a link between shareholder returns and the level of competitiveness in the offeree company’s country. This evidence is consistent with the relevance attributed by the academic literature to country-specific variables in the performance of mergers and acquisitions (OECD 1999, Pyykkö 2009). The graph below features the average CARs accruing 41 trading days before and after the announcement of a takeover. It considers over 500 takeover deals that took place after the transposition of the Directive in each Member State until 2011, where such takeovers aimed to acquire control of an offeree company based in the European Union.358 Data was kindly provided by Thomson Reuters for the purpose of this Study from its SDC Platinum and DataStream databases. Cumulative returns take as a benchmark the Stoxx Europe 600 Index corresponding to the sector or industry of the offeree company. A positive trend appears where CARs are mapped at country level and the indicator of competitiveness is based on selected pillars of the GCI. However, given the many caveats discussed in the previous sections, the use of stock market returns as an indicator of takeover performance needs to be taken with caution. The econometric analysis (see Annex 5) confirms this relationship with significance and relevant impact.

358 Takeovers are filtered according to the stake held by the acquirer before announcement. Takeovers are

deemed to be aimed at acquiring control where the acquirer held less than 51% of the shares before announcement.

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Figure 33: CARs and competitiveness after the transposition of the Takeover Bids Directive

Source: Authors’ own elaboration The evidence highlights the link between stock market returns for the shareholders of the offeree company and the level of competitiveness of the target Member State. It does not, however, directly address the question of the impact of takeovers on competitiveness. Given the almost infinite number of factors that explain the level of competitiveness and growth in an economy, it is not possible to isolate the impact of takeovers in an econometric regression. Nonetheless, the mapping above represents a valuable indication of the relevance of takeover activity to country-wide competitiveness and growth.

VI. Impact of the Directive on employment and employees

Introduction. Takeover deals result in a transfer of control that is likely to affect employees in diverse ways depending on the business plan of the acquirer. Where a takeover is followed by restructuring, collective lay-offs may occur, which worries both employees and public authorities. To address the impact of takeovers on employment and employees, this section follows a methodology based on three steps: (1) defining labour market efficiency with reference to the flexicurity approach, (2) considering the links between takeovers and employment, and (3) referring to the rules in the Takeover Bids Directive.

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Figure 34. Methodology – impact of the Directive on employment and employees

A. Approach to labour market efficiency

Approach. Given the many different approaches to employment protection and labour market efficiency, considering the effects of the Directive on employment is by no means straightforward. Exploiting any inefficiency in the management of human resources in the offeree company may constitute part of the economic rationale of a takeover. In this regard, the offeror may wish to apply changes in employment conditions, such as salary, working schedules or training, which will directly affect employees. Similarly, employment levels may be reduced or increased depending on the business plan of the offeror and the existence of expansion opportunities. Before discussing these effects, it is important to clarify the approach to employment protection and labour market efficiency that will be followed. Flexicurity. Modern labour market policy in the European Union is built upon the “flexicurity” approach, which recognises the need for a flexible workforce given global competition and rapidly changing economic conditions. It therefore acknowledges that restructuring, such as that which might follow a takeover bid, can have a positive effect on productivity and competitiveness within the company and the economy as a whole. On the other hand, “flexicurity” gives equal importance to the individual and social costs of changes in employment levels and working conditions. To address these costs, the emphasis is placed on the effectiveness of active labour market policies, comprehensive lifelong learning strategies and modern social security systems. The goal is to ensure human resources are efficiently reallocated so that workers do not face long periods of unemployment, thereby reducing the risks associated with social exclusion and budgetary burdens on the State.359

B. Effects of takeovers on employment

Available evidence. Empirical evidence on the effects of takeovers on the labour market is scarce due to insufficient data collection and dissemination. Where it exists, data is anecdotal, and while indicative, cannot be taken as fully representative. In addition, empirical studies face a number of methodological constraints that have so far not been overcome: - finding control groups of comparable companies where no takeover has taken place; - disentangling organic job growth from acquisitions and divestitures; - taking into account jobs created elsewhere, through outsourcing; - measuring efficiency and productivity gains; and - accounting for the distributional effects of efficiency and productivity gains obtained via

collective dismissals and early retirement schemes.

359 Communication of the Commission on the common principles of flexicurity (June 2007) Council conclusions on the common principles of flexicurity (November 2007)

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EMCC Database. The most useful pan-European database for assessing the overall effects on employment levels is compiled by the European Monitoring Centre on Change (EMCC), which considers planned job creation and reduction according to the type of restructuring: bankruptcies and closures, business expansions, mergers and acquisitions, off-shoring and delocalisation, outsourcing, relocation and other internal restructuring. However, the database relies only on information available in public media.360 Mergers. The EMCC database considers takeovers not as a separate category, but within the category of mergers and acquisitions. In this category, average net job creation is negative from 2002 to 2010, except for 2007 where exceptional planned creation was registered (see the summary table below and the complete table in Annex 2). To best interpret data for this category, it should be noted that the arguably major cause behind layoffs in mergers – avoiding the duplication of tasks – is by its very nature not present in acquisitions. Net job creation is in any case explained by the business plans of the acquirer. It is therefore probable that net job creation in takeovers and other acquisitions is higher than in the case of mergers. Table 27. Planned job creation by year in M&A deals in the EU-27 and Norway.

Year Cases Job creation Job reduction Net job creation Average net job creation

2002 21 0 -12163 -12163 -579

2003 17 160 -4535 -4375 -257

2004 35 360 -15203 -14843 -424

2005 55 2315 -25303 -22988 -418

2006 51 3170 -27763 -24593 -482

2007 49 69183 -16988 52195 1065

2008 38 1840 -25772 -23932 -630

2009 23 480 -13229 -12749 -554

2010 18 3950 -10973 -7023 -390

Total 307 81458 -151929 -70471 -230

Source: EMCC (European Monitoring Centre on Change) Abnormal observations. Average net job creation for mergers and acquisitions is higher than most other restructuring categories considered in the EMCC database for the period 2002-2010. This assertion only holds partially if observations are excluded for 2007, when abnormal planned job creation was recorded. The tables below make this comparison across headings in the EMCC database for both time intervals. Table 28. Planned job creation by type of restructuring in the EU-27 and Norway (2002-2010)

Type of restructuring Cases Job creation

% job creation

Job reduction

% job reduction

Net job creation

% net job creation

Average net job creation

Bankruptcy / Closure 7260 71863 3.17% -3826888 52.81% -3755025 75% -517 Business expansion 3809 2029834 90% -1175 0.02% 2028659 -41% 533

360 Media reports have a bias towards reporting restructuring announcements, but rarely follow up on the actual measures

taken. In addition, there is a national bias towards reporting.

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Internal restructuring 4774 69757 3% -2964728 40.91% -2894971 58% -606 Merger / Acquisition 307 81458 4% -151929 2.10% -70471 1% -230 Off-shoring / Delocalisation 558 331 0.01% -180404 2.49% -180073 4% -323 Other restructuring 47 3605 0.16% -30880 0.43% -27275 1% -580 Outsourcing 61 395 0.02% -33356 0.46% -32961 1% -540 Relocation 231 6850 0.30% -56836 0.78% -49986 1% -216 Total 17047 2264093 100% -7246196 100.00% -4982103 100% -292 Source: EMCC (European Monitoring Centre on Change) Table 29: Planned job creation by type of restructuring in the EU-27 and Norway (2002-2010 excluding 2007)

Type of restructuring Cases Job creation

% job creation

Job reduction

% job reduction

Net job creation

% net job creation

Average net job creation

Bankruptcy / Closure 1666 1495 0% -580537 17% -579042 33% -348 Business expansion 3038 1601320 95% -1175 0% 1600145 -91% 527 Internal restructuring 4165 58945 4% -2499994 72% -2441049 138% -586 Merger / Acquisition 237 12275 1% -122778 4% -110503 6% -466 Off-shoring / Delocalisation 484 291 0.02% -157444 5% -157153 9% -325 Other restructuring 45 3605 0.21% -30560 1% -26955 2% -599 Outsourcing 51 300 0.02% -18153 1% -17853 1% -350 Relocation 175 5590 0% -41291 1% -35701 2% -204 Total 9861 1683821 100% -3451932 100% -1768111 100% -179 Source: EMCC (European Monitoring Centre on Change)

Employment levels. The tables above show that planned job reduction was higher than planned job creation for all restructuring types, except for business expansion. Net job creation for mergers and acquisitions was persistently negative except for 2007, and still lower than for internal restructuring and other restructuring. In a consideration of all observation from 2002, average net job creation for mergers and takeovers is situated in the lower range of the scale. Academic studies. Besides the EMCC database, there are several scientific studies that consider the effects of takeover bids on employment. These studies are based on small samples and while they do not arrive at general conclusions, they do find evidence that takeovers do not have a straightforward effect on employment. Accordingly, the effect on employment may be either positive or negative, depending on the business plans of the acquirer. Business plans. A survey of over 26 recent deals conducted in 2007 by Eurofund emphasises the link between business plans and employment outcomes. It finds instances of both increases and reductions in employment. Nevertheless, the survey, which considers mostly acquisitions, finds more examples of employment contraction than expansion.361 A summary table of these case studies is presented in Annex 1. US. Gugler and Yurtoglu (2004) consider a large number of mergers and acquisitions in the US and Europe between 1981 and 1998. Using empirical techniques, the authors find that average demand for labour does not significantly diminish in the US while it diminishes by almost 10% in Europe. They attribute this difference to rigid employment protection legislation in Europe. According to the authors, European companies use mergers and acquisitions to attain their optimal employment levels, which they cannot reach otherwise given the strictness of legislation. In view of labour reforms in many EU Member States in recent years, these results should be interpreted with caution. Greece. Other studies take place at the national level. The Greek General Confederation of Labour surveyed all mergers and acquisitions considered by the Hellenic Competition Commission between 1995 and 2005, before the introduction of the Directive. While most of the deals in the sample are takeovers, the results of the study once again need to be interpreted with caution given that they include mergers. The study finds that the effects on employment of mergers and acquisitions depend on the time horizon considered. As a general rule, the number of employees decreases in the short 361 Employee Relationship Management: The consequences of mergers and acquisitions. European Foundation for the

Improvement of Living and Working Conditions. Available at www.eurofund.europa.eu.

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term but picks up in the medium term. The study finds strong correlation with employment trends in the overall economy.362 France. Margolis (2006) uses data from the French National Institute for Statistics and Economic Studies from the 1990s, referring once more to both mergers and takeovers. The author finds that acquired companies are likely to lay off more workers than their acquirers in the first three years following the deal. It also finds that the characteristics of the workers that are laid off are not associated with long-term unemployment. This latter finding is probably significant only for France and the period surveyed. Spain. A 2007 study by Fradejas and Aguilar supports the idea that the situation in a company before acquisition is a main determinant of the depth of any restructuring undertaken by the acquirer. The study surveyed 67 Spanish non-financial companies that were the object of a takeover bid between 1990 and 2000, and found that job losses were more frequent in those offeree companies having the lowest productivity and return as shown by O’Shaughnessy and Flanagan (1998). Fradejas and Aguilar suggest that in countries where labour legislation is relatively stricter, takeovers are more likely to involve collective dismissals. Working conditions. Besides employment levels, a takeover may also affect employment conditions. The existence of inefficiencies in human resource management in the offeree company may constitute part of the gains expected by the offeror. In this respect, it is likely that changes in working conditions will be directed at saving costs and increasing productivity. The list below presents the changes most frequently considered by commentators: - Changes in productivity through the substitution of relatively underperforming employees. - Changes in remuneration via, for instance, the early retirement of relatively aged and well-paid

employees, who are later substituted by relatively younger and lower-paid workers. - Changes affecting collective bargaining, such as the individualisation of employment relations for

new entrants. - Changes affecting job security, such as the use of temporary contracts for new entrants. - Other changes in the internal management of human resources affecting aspects such as working

schedule, remuneration mix, training or performance evaluation. - Changes derived from outsourcing and relocation. Social costs. The social costs of restructuring may be very significant, but lie outside the objective of this Study. They consist of costs for the individuals involved, local communities and society at large. In this regard, the cost of early retirement and unemployment benefits may fall disproportionately on public budgets, while the benefits of restructuring may be captured privately. These structural issues, while relevant to the effects of takeovers on employment, do not directly pertain to the realm of takeover regulation and are for the largest part better addressed using horizontal legislation. Summary. To summarise, the effects of takeover on employment are not necessarily pervasive and need to be considered over the medium rather than the short term. Three main factors are at stake: (1) the presence of exploitable inefficiencies in the offeree company and any restructuring plans by the offeror devised to reduce such inefficiencies and capture the benefits; (2) the business plan of the offeror and the success of the deal, which may result in business expansion over the medium term, possibly with the recruitment of new employees; and (3) the commitment of employee representatives and management to mitigate the effects of restructuring on individual employees. The Directive intervenes only at the level of information and consultation rights for employee representatives, promoting negotiation to alleviate the effects of any restructuring planned by the offeror.

362 Kouzis, G., Stamati, A., Karakioulafi, C., Boukouvalas, K. and Matzouranis, A.., Mergers and acquisitions of enterprises

in Greece: Impact on employment and labour relations, INE/GSEE-ADEDY No. 30, Athens, 2008.

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C. Employment provisions in the Directive Trade-offs. The regulation of takeovers faces several trade-offs as highlighted previously in this report. Some of these trade-offs relate to the balancing of the interests of the different stakeholders involved, including employees and shareholders. These interests are usually presumed to be contradictory, although this assumption may not always be accurate in practice. The Directive includes a number of provisions in favour of employees’ interests, mainly concerning information rights (Articles 6 and 9 of the Directive). At the same time, the Directive does not affect national rules relating to the information and consultation of employee representatives (Article 14 of the Directive). In the latter regard, three legislative texts are of particular relevance at EU level: - Directive 2002/14/EC establishing a general framework relating to information and

consultation of workers; - Directive 2001/23/EC on transfers of undertakings; and - Directive 98/59/EC on collective redundancies.

Legislative recast. The European Commission started to revise this legislation in 2010 and is due to introduce new proposals in 2012.363 It follows that future revision of related provisions in the Directive should take into account any changes introduced in the overall framework of the Directives above. In this regard, it may be desirable to consolidate all legislative provisions referring to employee information and consultation in a single instrument. As highlighted in a 2006 impact assessment commissioned by the European Parliament, consolidation would allow European co-legislators to conduct an in-depth cost-benefit analysis. Furthermore, consolidation would help clarify workers’ rights and enhance legal certainty by unifying the legal base. Board neutrality rule. Besides to information and consultation, the discussion on the protection of employees in the Directive also relates to the latter’s core provisions. In this respect, the academic literature is particularly wary of the board neutrality rule.364 It argues that imposing passivity at board level significantly reduces the extent to which employees’ interests may influence the outcome of the bid. The relevant authors point out what they consider to be a fundamental incoherence in the Directive: on the one hand, at the level of principles, the board is required to act in the interests of the company as a whole, following a stakeholder approach, and therefore encompassing the interests of employees (Article 3.1.c of the Directive). On the other hand, at the rule level, the neutrality rule withdraws from the board the power to decide over the deal, granting such power solely to shareholders. As a consequence, the interests of employees are likely to have little influence on the process of the deal and any subsequent restructuring despite the information and consultation procedures in the Directive. Stakeholder interests. Several authors highlight that given the premium and liquidity offered by the offeror, shareholders are likely to pay little attention to firm-specific investments by employees when confronted with a takeover. Some commentators use the expression “blind voting” to refer to shareholder behaviour during a takeover and consider that board neutrality exacerbates short-termism in management. The tension between stakeholder and shareholder interests and its link with long-term value creation and firm-specific investments is therefore of the utmost relevance in takeover regulation. This tension affects corporate governance legislation as a whole, not just the Directive. Piecemeal solutions are likely to have unintended effects and therefore a structured approach running through the entire legislative body is preferable. In the figure below, the provisions in the Directive are organised according to which interest they are intended to further. As explained in the discussion above, the reader will find that the core provisions uphold shareholder interest rather than employee interest.

363 “Fitness check” on EU acts in the area of Information and Consultation of Workers, Information Note, European

Commission, 2010. 364 Sjåfjell, 2010

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Figure 35. Employees’ interest versus shareholders’ interest

(Article 6.1)

Information right of employees as soon as the bid is public

(Article 6.3.i)

Offeror to disclose employment plans in offer document

(Article 9.5)

Offeree board to draw up opinion on employment (Article 9.5)

Employees’ own opinion appended to the board’s

(Article 14)

National rules on information

and consultation

(Article 3.1.c)

Offeree board to consider the interests of the whole company

(Article 9)


(Article 5)

Mandatory bid rule

(Article 5)

Equitable compensation

(Article 16)

Squeeze-out right

(Article 3.1.c)

Offeree board not to deny shareholders the opportunity to decide on the merits of the offer

Board participation. The distribution of voice and voting rights between shareholders and employees determines how these interests are balanced in case of a deal. The board neutrality rule confers decisional rights solely on shareholders. However, the balancing of rights in a takeover bid cannot be fully understood without considering the broader framework of corporate governance law. In this regard, employees participate in board decisions via codetermination procedures in a minority of cases, while in most jurisdictions they are only awarded information or consultation rights. Co-operative culture. The degree of workers’ participation in managerial decisions may explain, at least partially, the attitude of employees and their representatives in case of restructuring. Consultation and codetermination procedures are expected to encourage co-operative behaviour and mitigate discrepancies between shareholders and employees. Conversely, the lack of information or negotiation may lead to hostility and industrial action, exacerbating any divergences between the two

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stakeholder groups.365 A 2009 European Company Survey (ECS) conducted by Eurofund found that a majority of both employee representatives and management believe that there is a rather good co-operative culture between them, and that social dialogue is positive for the workplace.366 These results probably signal the existence of a balanced approach to workers’ participation in the European Union as a whole. However, given the methodological constraints of this survey, its results should be interpreted with caution. Planning horizons. Given the impact of shareholding structure on management’s horizons, the degree of shareholder and control concentration also explains industrial relations. Dispersed ownership may reduce planning horizons and force management to focus excessively on short-term performance, disregarding firm-specific investments through human capital. On the other hand, the presence of stable and larger shareholders allows managers to focus more on generating value over the medium to long-term, encouraging firm-specific investments in the workforce. As found by Fehn and Meier (2000), the institutional structures on capital and labour markets are not independent from each other, but rather are strongly intertwined. Fehn and Meier’s empirical research shows a negative correlation between labour protection and shareholders’ rights. Bridging the gap. Together, the degree of workers’ participation in decision-making and the level of concentration of ownership and control explain the nexus between co-operative industrial relations and the long-term performance of the company, both in the ordinary course of business and in case of restructuring or takeover. As represented in the figure below, stable shareholders and employee decision-making favour firm-specific investments in human capital for the benefit of the company’s long-term performance. At the same time, cooperation by employees and their representatives in case of restructuring, including collective lay-offs, increases the chances of restoring the viability and profitability of a troubled company. Cooperation in case of restructuring will probably be more effective if employee participation has existed throughout the ordinary course of business than if regulation only requires it in case of restructuring. Figure 36: Ownership concentration and workers’ participation

Varying degrees of ownership concentration and workers’ participation partially explain management’s time horizons and trade unions’ attitudes

Short term MANAGEMENT’S HORIZON Long term

OW

NE

RS

HIP

C

ON

CE

NT

RA

TIO

N

Dispersed ownership Concentrated Ownership

Information / Consultation Codetermination

Hostility TRADE UNIONS’ ATTITUDE

Cooperation

WO

RK

ER

S’

PA

RT

ICIP

AT

ION

365 Industrial relations aspects of mergers and takeovers. Available at EIRO online:

http://www.eurofound.europa.eu/eiro/2001/02/study/tn0102401s.htm 366 2009 European Company Survey, European Foundation for the Improvement of Living and Working Conditions

(Eurofund).

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As such, the link between corporate governance and firm-specific investments in human capital should not be underestimated. Information and consultation provisions in the Directive do further these investments by promoting workers’ cooperation in the event of a deal. Nonetheless, as highlighted, these provisions play a relatively minor role within the overall legislative framework on employee participation. Their impact therefore remains limited, even where the board neutrality rule is not enforced.

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CONCLUSIONS

The Directive has been transposed in all Sample Countries367 and no substantial compliance issue has emerged. Although the completion of its transposition is recent, and the 2008 crisis makes it difficult to compare pre-Directive and post-Directive periods in any meaningful way, some conclusions may be drawn from this Study.

I – THE DIRECTIVE IS AT THE CENTRE OF BROADER CORPORATE GOVE RNANCE AND

ECONOMIC DEBATES

Conflicting standpoints. In a reflection on the Directive in a broader perspective, the rejection of a first draft by the European Parliament in 2001 may be considered as a starting point. There are two reasons for this: - First, this rejection was the basis on which a compromise was built. Such compromise is

characterised by a high level of optionality, based on (i) the right for Member States to opt out from the board neutrality and breakthrough rules (Article 12) and (ii) an extensive right to derogate from the Directive (pursuant to Articles 4.5 and 5.4), subject only to compliance with a limited number of general principles.

- Second, the compromise reflected a debate between shareholders’ and stakeholders’ positions, as provided for in Article 3.1(c) of the Directive, which states that “an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid”. This debate has not faded away and is fuelled by corporate governance and economic analyses.

Before any detailed analysis is carried out, it is therefore critical to understand the corporate governance and economic concepts underlying the Directive. A) The corporate governance analysis Main systems. Three main corporate governance systems, which basically represent three successive stages of corporate governance thinking, are relevant when reviewing takeover bid regulations. They are the following: � Traditional view. In the 19th century, when large corporations started to develop on a significant

scale, there was little debate about corporate governance. The relationship between shareholders and employees, described as “capitalists” and “workforce,” was analysed from a philosophical, political and economic standpoint. The main concern was the sharing of the surplus, seen as a political issue, not a technical one. The time of takeover regulation had not yet arrived.

� Shareholder primacy view. The “agency” issue in the relationship between management and shareholders has become a dominant theme of corporate governance in the 20th century, with the emergence of a growing number of large, listed companies with dispersed shareholders. The main question has become shareholder control over management, in order to prevent the latter, through laziness or theft, from squandering shareholders’ wealth. This has led to the emergence

367 Please refer to the introduction of the Executive Summary for the definition of “Sample Countries”, “Main

EU Jurisdictions” and “Other EU Jurisdictions”.

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of the “shareholder primacy” view, which applies a “principal/agent” theory assuming that shareholders are a “weak” party, and is based on the concepts of “alignment of interest”. Under this theory, pre-bid defences should be removed and post-bid defences should be subject to shareholders’ approval within the framework of a “no frustration” rule.

� Team production view. The shareholder primacy view has been criticised since the end of the 20th century. At least three criticisms have been formulated: (i) the shareholder primacy view leads to short-termism, (ii) shareholders are not in a weak position, especially compared to employees, and (iii) neglecting other stakeholders creates negative externalities. As a result, alternative models have been designed, among which the “team production” theory has emerged. Under this theory, shareholders should be prevented from unduly extracting team production value in a move that would disincentivise employees from making useful “firm-specific investments” (the so-called “hold-up” problem). As a result, management should act as “mediating hierarchs,” balancing power between shareholders and employees.

Summary table. The following table summarises the views developed above.



(Blair & Stout)










Workforce

Shareholders

Board

Management

Employees

Shareholders

Employees

Board

Management

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Three models. In order to avoid the pitfalls of insufficiently careful analysis of legal transplants, it is also useful to bear in mind three typical models which may be best illustrated as forming the three tips of an equilateral triangle. The main (and archetypal) features of these three models are described below:

Shareholder-oriented model

(UK)

Company-oriented model

(Continental Europe)

Management-oriented model

(US)

� Dispersed shareholders � Blockholders � Dispersed shareholders

� No takeover defences � Mild takeover defences � Strong takeover defences

� Agency theory

(Principal/Agent or

Master/Servant)

� Corporate interest � Fiduciary duties

B) The economic analysis Takeovers. The impact of takeovers on the economy is complex and not necessarily straightforward. Takeovers can have positive effects on the economy by disciplining management and promoting a more efficient allocation of resources. However, takeovers may also generate negative externalities, due to three economic issues: free-riding, agency conflicts and pressure to tender. At the core of these three issues is the problem of asymmetric information, and thus the nature of the relationship between offerors and shareholders and between shareholders and managers. However, several aspects of the economic theory remain open to different interpretations. Most notably, there are conflicting views regarding the question of whether the mandate of the management should be shareholder-oriented or company-oriented, in other words whether it should maximise shareholder value or protect firm-specific investments and the long-term value of the company as a whole. The Directive. The Takeover Bids Directive strives to balance shareholder protection and the protection of long-term specific investments within the company. Through its interaction with corporate governance and capital markets regulations, the Directive has economic effects on multiple areas such as investor protection or the proportionality between ownership and control. However, the specific effects of the Directive crucially depend on the prevailing market structure in each jurisdiction, whether concentrated (blockholder-based) or dispersed. The effectiveness of regulatory thresholds therefore hinges on factoring-in these structural elements. Similar takeover rules can have diverging effects depending on country-level and company-level characteristics, which also determine the effectiveness of such rules in achieving their original objectives. For instance, diverse legal systems have important effects on investor protection and corporate decision-making processes. Regulatory objectives. In its balancing exercise, the Directive reveals the existence of important trade-offs and conflicting objectives. For instance, control contestability may induce managers to behave in line with the interests of shareholders and maximise share value instead of managerial benefits. However, control contestability reduces the incentives of management to carry out long-term firm-specific projects, as pattern of returns may not maximise shareholder value in the short term. Contestability of control may also reduce the incentives of other stakeholders to commit to the firm, for instance by making medium to long-term investments in human capital.

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II – ASSESSING THE DIRECTIVE A) What has changed? No radical change. The transposition of the Directive has not led to radical changes in the legal framework of most Member States. This is due to three factors: in a number of countries (e.g. the UK), the Directive prescribed rules that had been in existence for a long time; in other countries (e.g. Germany), changes were introduced in view of the future adoption of the Directive; while in several cases (e.g. Italy, Hungary or, recently, the UK), the most important changes were introduced in reaction to sensitive bids or the economic situation, without there being a direct link with the Directive.

Overall improved harmonisation. However, the Directive has led to improvements (in view of its stated objectives) that should not be underestimated: harmonised rules regarding cross-border bids have been adopted; a set of common general principles is applied throughout the European Union; a basic set of common disclosure rules applies; and the mandatory bid rule, squeeze-out rule and sell-out rule have been introduced in all Member States. Some smaller Member States, which previously had no takeover regulations, now have an almost complete set of rules. If harmonisation has thus progressed, it should nonetheless be noted that ESMA has no coordinating rule, which may be seen as an obstacle to more detailed harmonisation. Overall mapping. A mapping of changes that have been introduced in connection with the Directive show that the legal system is more “shareholder-oriented”368 as a result.

Mapping of changes introduced by the Directive

Significant changes Some changes No significant changes

More shareholder-oriented

Cyprus, Czech Republic, Estonia, [Germany], Greece, [Hungary], Luxembourg, Netherlands, Poland, Slovakia, Spain.

Belgium, Finland. [Germany], Romania.

More stakeholder-oriented

[Hungary], Italy. France, Ireland, Portugal.

Neutral


B) What has worked (or not)? 1) Assessment of the main provisions Mandatory bid rule. The mandatory bid rule, which is based on UK law, is specific to the EU (and to legal systems derived from UK law). It enhances minority protection but reduces the number of bids, thus acting as a de facto anti-takeover mechanism – a feature that, in the context of concentrated shareholding, is in part associated with the existence of private benefits of control.

The mandatory bid rule is perceived as effective, although questions are raised regarding some of the (numerous) exemptions that exist, for instance in connection with shareholders acting in concert without acquiring shares, certain corporate transactions (such as capital increases), and certain entities (such as foundations). Stakeholders do not perceive any significant issues regarding the exemption for companies in financial distress, which is frequently used, or for exemptions coupled with whitewash

368 However, whether a system is more or less “shareholder-oriented” is subject to debate. Detailed

explanations on this table, including as to why some countries appear in two different boxes, are provided in the Core Report.

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procedures. Price adjustment, although possible, seems to be rare in practice. Some frustrations seem to arise from the following areas:

- the definition of acting in concert, which is viewed as potentially too broad by institutional investors – in this respect, it is worth noting the detailed rules that exist in the UK and in Italy;

- the use of cash-settled derivatives to build up an interest in connection with a takeover bid – an issue which is currently being addressed in the proposed revised version of the Transparency Directive;

- the propensity to try and obtain de facto control through an interest remaining just below the threshold triggering a mandatory bid (e.g. a 29.9% interest) – a risk that is specifically addressed by Hungarian legislation and is minimised in Australia, where a 20% threshold applies;

- voluntary bids launched at a low price in order to get slightly above the triggering threshold (e.g. 30%), which allows the offeror to increase its stake in a second step without triggering a mandatory bid – an issue that is addressed in several Member States through the use of additional thresholds for shares acquired above the threshold triggering the mandatory bid.

Defences. The Directive’s provisions regarding defences present a mixed picture:

- The board neutrality and breakthrough rules are both incomplete rules. The former applies only to conduct that is likely to frustrate a bid, not to mechanisms that create an inherent pro-bid bias such as stock options (or other similar types of remuneration) that vest upon a change of control; while the latter does not apply to all control enhancing mechanisms, as, for instance, pyramid structures are outside of its scope.

- The board neutrality rule is a relative success (15 Sample Countries out of 22), as is reciprocity (12 Sample Countries out of 22, with seven Sample Countries opting out of neutrality and five opting in). However, the breakthrough rule is a failure: only one Sample Country is concerned, and no use has been reported. In addition, compensation of “broken-through” shareholders remains an issue, as there is no consensus on how such compensation should be computed. In addition, some Member States, such as France and Italy, apply a partial breakthrough rule.

- The flexibility left to Member States on neutrality, breakthrough and reciprocity has given rise to creative systems: for instance, in Spain, reciprocity exists but is not applicable to bids launched by Spanish companies (which raises the ancillary question of what the result would be if all Member States were to adopt the same rule at the national or EU level); in Italy, companies are authorised to opt out from the board neutrality rule (which is mandatory); and in France, reciprocity is given its full effect through the potential use of tender offer warrants, a type of shareholders’ right plans requiring shareholder approval.

A comparison of the Directive to legal systems outside the EU shows that some major markets allow the use of defences: mostly the US, but also countries like Canada, Japan and Australia. All of these countries make use of poison pills, a defence the interest of which lies in the fact that it is effective without destroying value for the company and its shareholders if the bid fails (in contrast with defences such as sales of assets at a discount). In this context, the debates that led to the optionality of the neutrality and breakthrough rules have not faded away; the above-mentioned issues regarding shareholder value and stakeholder interest, together with the issue of the “social control gap”, remain significant. There is no clear consensus on how to move on the optionality and reciprocity issues, and generally speaking, there seems to be little appetite to change these rules. This appears to be due to two factors:

- At country level, there seems to be both a fear that there is more to lose than to gain as a result of a possible change (this is true for Main EU Jurisdictions, notably the UK and Germany), and a need to absorb the new EU rules stemming from the Directive (this is the case for Other EU Jurisdictions for which the transposition has led to significant changes).

- At the level of issuers and investors and intermediaries, feelings regarding defences are mixed. First, such defences are perceived both as creating a risk of bid failure and as a means

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to increase bid prices; and second, there is a general perception that there are not many possibilities for board defences and sufficient means to break through existing defences. Regarding barriers to takeovers that are not addressed by the Directive such as pyramid structures and cross-shareholdings, there is both a general desire to remove undue obstacles to bids and doubt as to whether any measures in this respect would be efficient and not counter-productive.

Disclosure regime. A majority of stakeholders is satisfied with the disclosure requirements set out in the Directive. This majority also supports the adoption of further disclosure requirements. The main concern relates to the statements to be made by offerors, in particular:

- the lack of precision of such statements;

- the time period during which commitments remain valid; and

- the absence of appropriate enforcement mechanisms, since typically neither the supervisor, the company (or any independent committee thereof) nor its stakeholders are in charge of following up commitments made by the offeree company.

Squeeze-out and sell-out rules. The squeeze-out and sell-out rules are generally approved. The former are frequently used, while the occurrence of the latter seems rare. The 90% and 95% thresholds are generally approved, with a preference for the former; in particular, a popular strategy among speculative investors seems to be to acquire a 5% (or 10%) interest in order to block the squeeze-out and attempt to negotiate a higher price with the offeror. However, solutions exist to limit the risk of not acquiring all shares (an example being the German “top-up” rule). The risk may also be avoided by facilitating alternative means of acquiring 100% control for cash (such as cash-out mergers or schemes of arrangement). 2) Overall assessment by the stakeholders of the Directive Overall satisfaction. Generally, there is a reasonable level of satisfaction among stakeholders regarding the Directive: a majority of stakeholder considers it clear, enforcement is not generally deemed to be an issue, the allocation of competences between supervisors has not raised practical issues, the protection of minority shareholders is seen as having been enhanced by the Directive, the disclosure regime is not contested and seems to be essentially complied with, and the mandatory bid, squeeze-out and sell-out regimes are in substance approved.

Employee representatives. However, one category of stakeholders, employees, is not satisfied with the Directive. Employees generally view takeovers as creating high risks of lay-offs and voluntary retirements at the level of the acquired company, an assessment that is shared by issuers and investors and intermediaries. Employees perceive risks regarding working conditions and early retirements, and consider that these risks also exist at the level of the acquirer (an analysis which is generally not shared by other stakeholders). In addition, they consider that the consultation process is not organised in a satisfactory manner and regret the absence of appropriate enforcement mechanisms when offerors do not act in compliance with the intentions they stated during the bid period. Finally, employees consider that the no-dismissal rules contained in the 2001/23 Directive should be applicable to takeover bids, as, from an economic standpoint, transferring undertakings or acquiring the control of a company are in many respects similar.

357

C) What has been the economic impact of the Directive? 1) Assessment of the main provisions of the Directive

Mandatory bid rule. The mandatory bid rule enhances the protection of minority shareholders, particularly in concentrated ownership structures, by forcing the offeror to offer the control market premium to all shareholders. However, the rule may have a negative impact on the volume of takeovers, as it raises the cost of deals ex-ante and incentivises incumbent shareholders to increase their holdings close to the triggering threshold. Further clarification is needed on whether the application of the mandatory bid rule contributes to increased shareholder concentration, which would compromise its shareholder protection objective. Since the rule shows its effects ex-ante, no conclusive evidence (ex-post) has been found in the empirical analysis regarding the scale of the impact of the mandatory bid rule on the market for corporate control. However, a negative relationship with volumes has been observed and is statistically significant. In addition, the harmonisation in the EU of the triggering threshold around 30% has produced a reduction of the average size of the initial stake in the company subject to takeover just below this level, which suggests a strategic use of the threshold by incumbent blockholders. For all these reasons, the effect of the mandatory bid rule in influencing the governance and the impact of a takeover can be estimated as “high”. Ownership transparency. Ownership transparency appears to have a beneficial impact on all key objectives of the Directive, and in particular on the volume of takeovers and the protection of minority shareholders, since potential offerors are able to see the composition of the ownership structure and plan their offer accordingly. This positive effect may disappear where it comes to the disclosure of subsequent purchases of shares. The disclosure of purchases above a certain threshold makes “creeping-in” takeovers more difficult, enhancing shareholder value. However, transparency may also discourage takeovers, since it can raise the costs of building up an initial stake before launching a takeover bid if the disclosure thresholds are low. Overall, the impact on takeover bids of this rule is moderate. Squeeze-out and sell-out rules. Due to their very high thresholds, squeeze-out rights and sell-out rights both have a positive but very limited impact on the volume of takeovers. The squeeze-out right protects the offeror from shareholder free-riding, while the sell-out right strengthens the power of minority shareholders, thereby reducing the incentive to increase ownership concentration. Breakthrough rule. The breakthrough rule could have a substantial positive impact on the volume of takeovers and the protection of minority shareholders if it managed to eliminate control enhancing mechanisms. However, the rule may also create incentives to increase direct control by raising the stake in the company, leading to higher ownership concentration. Further, it may be arbitraged using alternative mechanisms such as pyramid structures. If coherently devised and consistently implemented, the breakthrough rule would produce a very high impact on the ownership structure of firms, especially in those jurisdictions where ownership and governance are more concentrated. However, the limited transposition of the rule means that not enough information is available to extract evidence on its impact on takeover bids and governance of the company. Board neutrality rule. The board neutrality rule may increase incentives to launch an offer by removing post-bid defences, thereby increasing control contestability, particularly where ownership is dispersed. The empirical analysis in this Study, however, shows a slight decrease in cumulative abnormal returns, which suggests that the board neutrality rule may have reduced the potential premium paid by the offeror, since it also reduces the extent to which future controlling shareholders may extract benefits from the company. Moreover, the board neutrality rule may induce incumbent shareholders to entrench before any offer is launched, thereby raising the cost of acquiring control for the potential offeror (with additional impact on dispersed ownership structures). The overall impact of the rule is more balanced and is thus considered “moderate”.

358

Impact of takeover regulation (± relationship and intensity)



Disproportionality between ownership

and control TOD rule


DISPERSED OWNERSHIP


DISPERSED OWNERSHIP


DISPERSED OWNERSHIP

Overall impact

Mandatory bid rule

– – – + + + + + + High


– – –

+ + + – – Moderate

Squeeze-out rule

+ + + – – + + Low

Sell-out rule – – – + + + – – – Low

Breakthrough rule

+ + + + + + + + + Very high


+ + + + – + + + Moderate

2) Overall impact of the Directive Empirical analysis. Finally, the empirical analysis performed in this Study illustrates that the Directive has had an impact on the market for corporate control and the economy. However, this impact is marginal (with low intensity) and is affected by a fragmented transposition across Member States and by the effects of the still ongoing financial crisis. The market for corporate control does not appear to be “more contestable” than before the introduction of the Directive. In terms of relations, no overarching conclusions can be reached on the basis of this preliminary analysis; however, the results suggest that the Directive has had a positive impact on cumulative abnormal returns (and indirectly on volume of takeovers), a positive impact on market capitalisation (but no significance), a positive impact on competitiveness, and a negative impact on financial development. Competitiveness. The impact of the Directive on competitiveness and growth is limited but consistent with the priorities set in the EU 2020 Agenda. A detailed analysis of the contribution of takeovers to competitiveness reveals their potential to increase the efficient allocation of resources, but also the existence of several market failures and trade-offs. The different provisions in the Directive can have mixed effects on competitiveness and growth, calling for further reflection as to their individual and joint impact. Employment. Ex-ante, takeovers have a similar chance of affecting employment levels negatively or positively depending on the business plans of the acquirer. In the short term, however, pressure to recoup the costs incurred in the transaction can lead to a reduction of employment levels. The Directive protects employees by giving them consultation rights, but the board neutrality rule confers the decision-making power on shareholders alone.

359

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369

ANNEX 1: Definitions

370

I. Main defined terms used in the Study “CEPS” means the Centre for European Policy Studies; “Directive” or “Takeover Bids Directive” means the EU Directive 2004/25/EC on Takeover Bids; “Main EU Jurisdictions” means France, Germany, Italy, Spain and the United Kingdom; “Major Non-EU Jurisdictions ” means Australia, Canada, China, Hong Kong, India, Japan, Russia, Switzerland and the United States; “Member States” means all EU Member States; “OSOV Study” means the study entitled “Proportionality Between Ownership and Control in EU Listed Companies: A Comparative Study” dated 18 May 2007 provided to the Commission; “Other EU Jurisdictions” means Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Luxembourg, the Netherlands, Poland, Portugal, Romania, Slovakia and Sweden; “Sample Countries” means Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Sweden and the United Kingdom; “Sample Stakeholders” means the stakeholders consulted in connection with the Study composed of supervisors, stock exchanges, issuers, employee representatives, other stakeholder associations and investors and intermediaries (which are composed of retail investors, financial intermediaries and institutional investors); and “Study” means the study provided by Marccus Partners and CEPS to the Commission in relation to the revision of the Directive.

II. Supervisory authorities and certain laws and regulations referred to in the Study

Countries Supervisory Authorities and

related definitions Law referred to in the Study and related definitions

Member States

Austria Austrian Takeover Commission Gesellschafterausschlussgesetz, sometimes

referred to as the “Act on Exclusion of Minority Shareholders”.

Belgium Financial Services and Markets Authority (the “FSMA”)

Royal Decree on Public Takeover Bids, sometimes referred to as the “Decree” Belgian Companies Code, sometimes referred to as the “BCC”

Cyprus Cyprus Securities and Exchange

371

Countries Supervisory Authorities and related definitions

Law referred to in the Study and related definitions

Commission Czech Republic Czech National Bank Denmark Finanstilsynet, the Financial

Supervisory Authority (the “Danish FSA”)

The Danish Public Companies Act

Estonia Finantsinspektsioon, the Estonian Financial Supervision Authority

Estonian Securities Market Act, sometimes referred to as “SMA” The Commercial Code, sometimes referred to as the “Estonian Commercial Code”

Finland Finnish Financial Supervisory Authority (the “Finnish FSA”)

Helsinki Takeover Code, sometimes referred to as “The Takeover Code” Act 624/2006, sometimes referred to as the “Finnish Companies Act” Chapter 6 (Public Tender Offer and Mandatory Offer Obligation) of the Finnish Securities Market Act, sometimes referred to as the “Finnish SMA” Standards on Public Tender Offers and Mandatory Offers, sometimes referred to as the “Finnish Takeover Standards”

France Autorité des Marchés Financiers (the “AMF ”)

Germany Bundesanstalt für Finanzdienstleistungsaufsicht, Federal Financial Supervisory Authority (the “BaFin”)

Aktiengesetz (AktG), sometimes referred to as the “German Stock Corporation Act” Risikobegrenzungsgesetz, sometimes referred to as the “Risk Limitation Act ” German Securities Takeover and Acquisition Act

Greece Hellenic Capital Market Commission (the “HCMC ”)

Hungary Hungarian Financial Supervisory Authority

Act CXVI of 2007, sometimes referred to as the “Lex Mol”

Ireland Irish Takeover Panel European Communities (Takeover Bids (Directive 2004/25/EC) Regulations (S.I. No. 255 of 2006), sometimes referred to as the “Takeover Regulations” Companies Act of 1963

Italy Commissione Nazionale per le Società e la Borsa, the National Commission for Companies and the State Exchange (the “Consob”)

Law Decree No. 332 of 31 May 1994 (converted into law No. 474 of 30 July 1994, sometimes referred to as the “Legge sulle privatizzazioni” Law No. 266 of 23 December 2005, sometimes referred to as the “Finanziaria 2006”

372


Law referred to in the Study and related definitions Legislative Decree No. 229 of 19 November 2007, sometimes referred to as the “Implementation Decree” Law Decree No. 185 of 29 November 2008, sometimes referred to as the “Decreto Anticrisi ” Law Decree No. 26 of March 25, 2011, sometimes referred to as the “Lactalis decree”

Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”)

The Netherlands Autoriteit Financiële Markten, the Netherlands Authority for the Financial Markets

The Dutch Decree on Public Takeover Bids, sometimes referred to as the “Dutch Takeover Decree” The Dutch Civil Code

Poland Lomisja Nadzoru Finansowego, the Polish Financial Supervision Authority

Portugal Comissão do Mercado dos Valores Mobiliários, the Portuguese Securities Market Commission (the “CMVM ”)

Romania Romanian National Securities Commission

Romanian Law on Capital Markets No. 297/2004, sometimes referred to as the “Capital Markets Law ” Regulation No. 1/2006 of the National Securities Commission relating to Public Companies and Transactions Involving Securities, sometimes referred to as the “Romanian Regulation”

Slovakia National Bank of Slovakia Spain Comisiòn Nacional del Mercado

de Valores, the National Securities Exchange Commission

Sweden Finansinspektionen, the Financial Supervisory Authority

UK The Takeover Panel (the “UK Takeover Panel”)

City Code Takeover and Mergers

Major Non-EU Jurisdictions

Australia Australian Takeover Panel

Australian Securities and Investment Commission (the [ici il manque quelque chose]

The Corporations Act

Canada Ontario Securities Commission

373


Law referred to in the Study and related definitions

(the “OSC”) China China Securities Regulatory

Commission

Hong Kong The Securities and Futures Commission

India Securities and Exchange Board of India

The Companies Act 1956, sometimes referred to as the “Companies Act”

Japan Ministry of Economy, Trade and Industry (the “METI ”) Ministry of Justice (the “MOJ ”)

Switzerland Swiss Financial Market Supervisory Authority (the “FINMA ”) Swiss Takeover Board

The Takeover Ordinance, sometimes referred to as the “TOO”

Russia Federal Service for Financial Markets

Federal Law as of 26.12.1995 N 208-FZ “On joint stock companies, sometimes referred to as the “Joint Stock Companies Law” or the “JSC Law”

US Securities and Exchange Commission (the “SEC”)

Securities Act of 1934, sometimes referred to as the “Securities Act”

374

ANNEX 2: Tables included in the Study

376

ANNEX 3: Perception Questionnaires

378

ANNEX 4: Effects of takeovers on

employment: case studies

379

Effects of takeover bids and related deals on employment: Case Studies

Source: Employee Relationship Management: The consequences of mergers and acquisitions. European Foundation for the Improvement of Living and Working Conditions. Available www.eurofund.europa.eu.

Year / Country / Type of deal

Companies involved Reason for deal Involvement of

trade unions Effects on

employment Outcome for the

company

2006 Belgium

Acquisition

Mittal Steel acquired Arcelor

To expand market share

YES (Information

rights) Reduction

Mittal’s position strengthened

2007 Bulgaria Merger

HVB Bank Biochim and Hebros Bank merged with

Bulbank

To rationalise activities and

expand market share

YES (Information

rights) Reduction

Increase in equity value

2005 Czech Republic

Acquisition

Kooperativa Pojišťovna

acquired ČPP

To increase competitiveness and rationalise

activities

NO Creation Increase in turnover

2008 Germany

Acquisition

Bayer acquired Shering


YES (Voting rights)

Reduction Increase in profits

2005 Estonia

Acquisition

Sorbes AG acquired Repo

Vabrikud


NO Reduction Repo became

biggest producer in Baltic Region

2001 Ireland

Acquisition

Trustee Svaing Banks was

acquired by Irish Life and

Permanent

Market expansion

YES (Collective negotiation

rights)

Creation Unclear

2005 Greece

Acquisition

Mytilineo Group acquired

Aluminium de Grèce

To strengthen market position

YES (Information

rights) Unchanged Turnover rose

2004 France Merger

Neuf Telecom merged with

Cegetel

To improve market position

YES (Information

rights) Reduction

New company became the

biggest French operator

Italy Acquisition

ABB acquired Elasag Bailey


YES (Information

rights) Creation

ABB position strengthened

2006 Cyprus

Acquisition

Laiki Bank acquired Egnatia bank and Marfin Financial Group

To increase size NO Creation Group became

stronger

2006 Latvia Merger

Tapeks acquired Aile

To rationalise activities and

expand market share

NO Creation

(expected) Larger market

share

2006 Lithuania

Acquisition

PKN Orlen acquired

Mažeikių Naftą

To strengthen market position


rights)

Unchanged

PKN became the largest oil refiner

in central and eastern Europe

2005 Luxembourg Acquisition

IVC acquired Tarkett


geographically NO Creation

Geographical expansion

2005 Hungary

Acquisition

BAA acquired Budapest airport Handling (BAH). After 18 months Celebi acquired

BAH

Unclear concerning BAA.;

to enter the European market concerning Celebi


rights)

Unclear Business expansion

2006 Malta

Acquisition

Emirate International

Telecommunications Malta Ltd


NO Reduction Modernisation, profitability and

expansion

380

acquired 60% stake in

Maltacom PLC

2007 The Netherlands

Acquisition

Royal Bank of Scotland, Bank

Fortis and Banco Santander took over the ABN

AMRO



rights)

Reduction Decline in the

financial position

2005 Austria

Acquisition

Frenzel acquired Frost

To expand market share NO Unclear

Frost avoided closure risks

2008 Poland

Acquisition

Bauer Publishing acquired Interia.pl

To expand market share NO Creation

Revenues increased

2007 Portugal

Acquisition

Sonae Distribuição

acquired Carrefour in

Portugal


YES (Information

rights) Unchanged

Expansion and decrease in

overall costs

1999 Romania

Acquisition

Renault acquired Automobile Dacia


YES (Information

rights) Reduction Expansion

1997 Slovenia

Acquisitions

Saturnus Avtooprema

acquired Hella

To find strategic partner and to

expand operations

YES (Information

rights) Creation

Increase in turnover and employment

2005 Slovakia

Acquisition

Enel acquired 66% of the shares

of Slovenské Elektrárne (SE)

To strengthen SE’s position in

the domestic electrical market

YES (Information

rights) Reduction

Increase in competitiveness

2006 Finland Merger

Tallink Finland Oy acquired Silja

Oy Ab



rights)

Reduction Reduction in

costs

2005 Sweden

Acquisition

Ericsson and Marconi


YES (Information

rights) Reduction

Ericsson strengthened its

competitive position

2006 UK

Merger

Boots and Alliance

UniChem merged in Alliance Santé

Economies of scale and scope

YES (Information

rights) Reduction

Rationalisation of the operations and

international expansion

2006 Norway

Acquisition

Statoil acquired Norsk Hydro

To gain competitiveness and rationalise

activities


rights)

Unchanged Expansion and rationalisation

381

ANNEX 5: Planned job creation in M&A deals

382

Planned job creation by year in M&A deals in the EU-27 and Norway

Source: EMCC (European Monitoring Centre on Change)

Country

No. of Planned Job Reductions

% Planned Job Reductions

No. of Planned Job Creations

% Planned Job Creations

No. of Cases

% Cases

France 4708 38.71% 0 0% 9 42.86% UK 2480 20.39% 0 0% 4 19.05% Belgium 3175 26.10% 0 0% 4 19.05% Germany 1100 9.04% 0 0% 1 4.76% Sweden 150 1.23% 0 0% 1 4.76% Netherlands 250 2.06% 0 0% 1 4.76% Ireland 300 2.47% 0 0% 1 4.76%

2002

Total 2002 12163 100.00% 0 100% 21 100.00%

Country No. of Planned Job Reductions



% Planned Job Creations No. of Cases % Cases

UK 1925 42.45% 0 0% 5 29.41% Italy 1010 22.27% 0 0% 4 23.53% Finland 60 1.32% 160 100% 2 11.76% Netherlands 125 2.76% 0 0% 2 11.76% Spain 390 8.60% 0 0% 1 5.88% Portugal 305 6.73% 0 0% 1 5.88% Germany 470 10.36% 0 0% 1 5.88% Denmark 250 5.51% 0 0% 1 5.88%

2003

Total 2003 4535 100.00% 160 100% 17 100.00%





UK 7535 49.56% 250 69.44% 14 40.00% France 3159 20.78% 0 0.00% 8 22.86% Germany 2234 14.69% 110 30.56% 7 20.00% Netherlands 340 2.24% 0 0.00% 2 5.71% Finland 685 4.51% 0 0.00% 2 5.71% Austria 1000 6.58% 0 0.00% 1 2.86% Sweden 250 1.64% 0 0.00% 1 2.86%

2004

Total 2004 15203 100.00% 360 100.00% 35 100.00%





Germany 6329 25.01% 0 0.00% 13 23.64% UK 6822 26.96% 0 0.00% 11 20.00% France 2584 10.21% 100 4.32% 8 14.55% Poland 6568 25.96% 1000 43.20% 5 9.09% Netherlands 1125 4.45% 0 0.00% 4 7.27% Romania 100 0.40% 370 15.98% 3 5.45% Austria 370 1.46% 0 0.00% 2 3.64% Sweden 800 3.16% 0.00% 2 3.64% Slovenia 175 0.69% 0.00% 2 3.64% Czech Republic 0 0.00% 250 10.80% 1 1.82% Denmark 230 0.91% 0.00% 1 1.82% Estonia 0 0.00% 295 12.74% 1 1.82% Italy 200 0.79% 0.00% 1 1.82% Slovakia 0.00% 300 12.96% 1 1.82%

2005

Total 2005 25303 100.00% 2315 100.00% 55 100.00%





Germany 7375 26.56% 700 22.08% 12 23.53% France 1139 4.10% 0 0.00% 6 11.76% UK 3266 11.76% 450 14.20% 6 11.76% Italy 8150 29.36% 0 0.00% 4 7.84% Spain 2637 9.50% 0 0.00% 4 7.84% Czech Republic 1190 4.29% 470 14.83% 3 5.88% Austria 904 3.26% 0 0.00% 3 5.88% Belgium 408 1.47% 0.00% 2 3.92% Finland 728 2.62% 0.00% 2 3.92% Romania 1300 4.68% 0 0.00% 2 3.92%

2006

Poland 100 0.36% 470 14.83% 2 3.92%

383

Greece 0.00% 1000 31.55% 1 1.96% Sweden 100 0.36% 80 2.52% 1 1.96% Norway 200 0.72% 0.00% 1 1.96% Ireland 106 0.38% 0.00% 1 1.96% Slovakia 160 0.58% 0.00% 1 1.96%

Total 2006 27763 100.00% 3170 100.00% 51 100.00%





France 1987 11.70% 62388 90.18% 8 16.33% Germany 4130 24.31% 150 0.22% 7 14.29% Austria 544 3.20% 275 0.40% 4 8.16% Spain 610 3.59% 150 0.22% 3 6.12% Czech Republic 450 2.65% 630 0.91% 3 6.12% Italy 2700 15.89% 0.00% 3 6.12% UK 920 5.42% 0.00% 3 6.12% Romania 0.00% 5200 7.52% 2 4.08% Sweden 100 0.59% 190 0.27% 2 4.08% Portugal 141 0.83% 200 0.29% 2 4.08% Belgium 303 1.78% 0.00% 2 4.08% Hungary 500 2.94% 0.00% 2 4.08% Ireland 970 5.71% 0.00% 2 4.08% Netherlands 1500 8.83% 0.00% 1 2.04% Finland 115 0.68% 0.00% 1 2.04% Poland 200 1.18% 0.00% 1 2.04% Norway 1500 8.83% 0.00% 1 2.04% Denmark 118 0.69% 0.00% 1 2.04% Greece 200 1.18% 0.00% 1 2.04%

2007

Total 2007 16988 100.00% 69183 100.00% 49 100.00%





France 2429 9.42% 515 27.99% 8 21.05% UK 5772 22.40% 625 33.97% 7 18.42% Germany 7928 30.76% 0 0.00% 5 13.16% Netherlands 2045 7.93% 0 0.00% 5 13.16% Austria 220 0.85% 0 0.00% 2 5.26% Italy 6136 23.81% 0 0.00% 2 5.26% Poland 170 0.66% 0 0.00% 1 2.63% Norway 352 1.37% 0 0.00% 1 2.63% Lithuania 340 1.32% 0 0.00% 1 2.63% Ireland 0 0.00% 100 5.43% 1 2.63% Slovenia 0 0.00% 120 6.52% 1 2.63% Sweden 80 0.31% 0 0.00% 1 2.63% Portugal 0 0.00% 100 5.43% 1 2.63% Belgium 300 1.16% 0 0.00% 1 2.63% Greece 0 0.00% 380 20.65% 1 2.63%

2008

Total 2008 25772 100.00% 1840 100.00% 38 100.00%





UK 6200 46.87% 0 0.00% 6 26.09% France 1019 7.70% 0 0.00% 5 21.74% Czech Republic 350 2.65% 480 100.00% 4 17.39% Spain 420 3.17% 0 0.00% 2 8.70% Estonia 166 1.25% 0 0.00% 1 4.35% Belgium 104 0.79% 0 0.00% 1 4.35% Denmark 100 0.76% 0 0.00% 1 4.35% Austria 1000 7.56% 0 0.00% 1 4.35% Germany 220 1.66% 0 0.00% 1 4.35% Italy 3650 27.59% 0 0.00% 1 4.35%

2009

Total 2009 13229 100.00% 480 100.00% 23 100.00%




% Planned Job Creations

No. of Cases % Cases

France 596 5.43% 1800 45.57% 5 27.78% Spain 3030 27.61% 0 0.00% 3 16.67% Germany 1750 15.95% 150 3.80% 3 16.67% Austria 100 0.91% 0 0.00% 1 5.56% UK 150 1.37% 0 0.00% 1 5.56% Poland 0 0.00% 2000 50.63% 1 5.56%

2010

Latvia 100 0.91% 0 0.00% 1 5.56%

384

Netherlands 5000 45.57% 0 0.00% 1 5.56% Belgium 122 1.11% 0 0.00% 1 5.56% Italy 125 1.14% 0 0.00% 1 5.56%

Total 2010 10973 100.00% 3950 100.00% 18 100.00%

385

ANNEX 6: Implementation Scores –

Methodology

386

Implementation Scores – Methodology

These scores have been elaborated by CEPS on the basis of the legal review by Marccus Partners. 1. Board neutrality rule (BNR)

a) Basic criteria 0 points: BNR optional 2 points: BNR default rule 3 points: BNR mandatory

b) Additional criteria 1 point: reciprocity not available

2. Breakthrough rule (BTR)

c) Basic criteria 0 points: BTR optional 1 point: BTR mandatory but partially transposed 3 points: BTR mandatory and fully transposed

d) Additional criteria 1 point: reciprocity not available

3. Squeeze-out right (SqOR)

a) Basic criteria 3 point: threshold 90% 1 point: threshold 95%

b) Additional criteria 1 point: dual test (ownership/acceptance test are alternative) 1 point: threshold only refers to voting rights/capital

4. Mandatory bid rule (MBR)

a) Basic criteria: points are awarded given the definition of control: 2 point: 1/3 or 33% threshold or lower 1 point: consideration of working control

b) Additional criteria: one point is added where the national implementation effectively considers:

2 points: consideration of creeping-in 1 point: second threshold 1 point: acting in concert does not require acquisition

c) Negative criteria: one point is subtracted where national provisions in the following areas are found to undermine the MBR:

– 1 point: derogatory discretion granted to supervisory authorities

Table 16. Implementation scores

BNR BTR SqOR MBR BNR BTR SqOR MBR

387

Austria 4 1 3 4 Ireland 4 1 3 3

Belgium 0 0 1 3 Italy 2 0 2 4

Cyprus 4 0 3 2 Luxembourg 0 0 1 2

Czech Republic 4 1 4 2 Netherlands 0 0 1 2

Denmark 0 0 3 1 Poland 0 0 4 4

Estonia 4 4 3 1 Portugal 3 0 3 4

Finland 3 1 3 3 Romania 2 1 2 3

France 3 2 1 4 Slovakia 4 1 1 2

Germany 0 0 2 2 Spain 3 0 4 4

Greece 3 0 4 4 Sweden 4 1 4 2

Hungary 0 0 4 3 UK 4 1 3 3

Source: Authors.

388

Board Neutrality Rule Country SCORE Description

Austria 4 Yes. No reciprocity.

Belgium 0 No. Reciprocity.

Cyprus 4 Yes. No reciprocity.

Czech Republic 4 Yes. No reciprocity.[1]

Denmark 0 No. Reciprocity.

Estonia 4 Yes. No reciprocity.

Finland 3 Yes. No reciprocity.

France 3 Yes. Reciprocity.

Germany 0 No (modified passivity rule). Reciprocity.

Greece 3 Yes. Reciprocity.

Hungary 0 No. Reciprocity.

Ireland 4 Yes. No reciprocity.

Italy 2 Yes (subject to opt-out in the bylaws). Reciprocity (subject to bylaws).

Luxembourg 0 No. Reciprocity.

Netherlands 0 No. Reciprocity.

Poland 0 No. Reciprocity.

Portugal 3 Yes. Reciprocity.

Romania 2 Yes (for voluntary bid only, not for mandatory bid). No reciprocity.

Slovakia 4 Yes. No reciprocity.

Spain 3 Yes (clarified). Reciprocity.

Sweden 4 Yes. No reciprocity.

UK 4 Yes (slightly strengthened). No reciprocity.

389

Breakthrough Rule Country SCORE Description

Austria 1 No. No reciprocity.

Belgium 0 No. Reciprocity.

Cyprus 0 No. Reciprocity.

Czech Republic 1 No. No reciprocity.[1]

Denmark 0 No (optional only, subject to grandfather clause for agreements concluded before 31/03/2004). Reciprocity.

Estonia 4 Yes. No reciprocity.

Finland 1 No. No reciprocity.

France 2 No (exception: voting caps are suspended at the first GM following a successful bid, that is, 2/3 post-bid holding). No reciprocity.

Germany 0 No. Reciprocity.

Greece 0 No. Reciprocity.

Hungary 0 No. Reciprocity.

Ireland 1 No. No reciprocity.

Italy 0 No. Reciprocity (subject to bylaws).

Luxembourg 0 No. Reciprocity.

Netherlands 0 No. Reciprocity.

Poland 0 No. Reciprocity.

Portugal 0 No. Reciprocity.

Romania 1 No. No reciprocity.

Slovakia 1 No. No reciprocity.

Spain 0 No. Reciprocity.

Sweden 1 No. No reciprocity,

UK 1 No. No reciprocity.

390

Squeeze-out Right

Country Basic score Additional score Description (C=capital; VR=voting rights) TOTAL SCORE

Austria 3 90% C & VR ownership test 3

Belgium 1 95% C & VR ownership (dual test after voluntary bid, also 90% C acceptance, no dual test for mandatory bid) 1

Cyprus 3 90% C & VR ownership test 3

Czech Republic 3 1 90% C or 90% VR ownership test 4

Denmark 3 90% C &VR ownership test 3

Estonia 3 90% C & VR to request GM; 90% approval ownership test 3

Finland 3 90% C & VR ownership test 3

France 1 95 % C & VR ownership test 1

Germany 1 1 95% VR ownership test 2

Greece 3 1 90% VR ownership test 4

Hungary 3 1 90% VR ownership test 4

Ireland 3 90% C & VR ownership test 3

Italy 1 1 95% C ownership test 2

Luxembourg 1 95% C & VR ownership test 1

Netherlands 1 95% C & VR ownership test 1

Poland 3 1 90% VR ownership test 4

Portugal 3 90% VR and 90% of acceptance 3

Romania 1 1 95 % VR or 90% C (acceptance) 2

Slovakia 1 95% C & VR ownership test 1

Spain 3 1 Dual test: 90 % VR, 90% acceptance test 4

Sweden 3 1 90 % C ownership test 4

UK 3 90% C & VR (acceptance) 3

391

Mandatory Bid Rule Basic threshold Consideration of

actual control Second threshold Consideration of

creeping in Acting in concert Derogatory discretion

granted to supervisory authorities

Country Brief Description

*

SCORE

Brief Description*

2

SCORE

Brief Description*

3

SCORE

Brief Description*

4

SCORE

Brief Description*

5

SCORE

Brief Description*6

SCORE

TOTAL

SCORE

Austria 30% 2 0 0 2% increase between 30% and 50% within 12 months

2 TOD 0 0 4

Belgium 30% 2 0 0 0 Both 1 0 3

Cyprus 30% 2 0 0 0 TOD 0 0 2

Czech Republic

30% 2 0 0 0 Intermediary TOD-Transparency Directive

0 0 2

Denmark 50% 0 Either majority of members of the board or controlling influence

1 0 0 TOD 0 0 1

Estonia 50% voting rights

0 Or [??] majority of members of the board

1 0 0 Intermediary TOD-Transparency Directive

0 0 1

Finland 30% 2 0 50% 1 0 Both 1 General discretion

-1 3

France 30% (capital and voting rights)

2 0 0 2% increase between 30% and 50% within 12 months

2 Both 1 Self-granted discretion but approved by Court of Appeal

-1 4

Germany 30% 2 0 0 0 Both 1 Limited discretion

-1 2

392

Greece 33% 2 0 0 3% increase between 33% and 50% within 12 months

2 Intermediary TOD-Transparency Directive

0 0 4

Hungary 33% 2 0 25% if no other shareholder above 10%

1 0 TOD 0 0 3

Ireland 30% 2 0 0 0.05% increase between 30 % and 50 % within 12 months

2 TOD 0 General discretion

-1 3

Italy 30% 2 0 0 3% increase between 30% and 50% within 12 months

2 TOD 0 0 4

Luxembourg 33% 2 0 0 0 TOD 0 0 2

Netherlands 30% 2 0 0 0 TOD 0 0 2

Poland 33% 2 0 66% 1 10% increase by a shareholder holding less than 33% within 60 days or 5% increase by a shareholder holding more than 33% within 12 months

0 Both 1 0 4

Portugal 33% 2 0 50% 1 0 Both 1 0 4

Romania 33% 2 0 0 0 Both 1 0 3

Slovakia 33% 2 0 0 0 TOD 0 0 2

Spain 30% 2 Or [??] majority of

1 0 5% increase between 30%

0 Both 1 0 4

393

members of the board within 24 months

and 50% within 12 months

Sweden 30% 2 Both 1 General discretion

-1 2

UK 30% 2 0 0 Any increase between 30% and 50%

2 TOD 0 General discretion

-1 3

0

ANNEX 7: Stakeholder Protection Indexes

1

Stakeholder Protection Indexes

Adapted by CEPS from La Porta et al. (1998) and Martynova and Renneboog (2010) with the support of Marccus Partners. A. SHAREHOLDER RIGHTS PROTECTION INDEX

Maximum 23 points. The higher the score, the higher the protection for shareholders. The index does not take into account rules transposed under the Takeover Bids Directive.

1) Proxy voting by mail:

o 2 if allowed o 0 if not allowed

2) Requirement to deposit/register bearer/nominal shares prior to a general meeting: o 0 if deposit required o 1 if only registration o 2 if deposit and registration are forbidden

3) Requirement for related-party transactions to be approved by shareholders: o 2 if required o 0 if not required

4) Percentage needed to convene an extraordinary meeting: o 2 if 5% or less o 1 if 20% to 6% o 0 if 20% or more (or no right to convene meeting provided)

5) Voting caps which would hold in the event of a takeover bid: o 0 if allowed o 3 if not allowed

6) Two-tier boards: Nomination of the board by shareholders: o 2 if required o 0 if not required

7) Two-tier boards: Overlap between management and supervisory board is forbidden: o 0 if allowed o 2 if not allowed

8) One-tier boards: CEO can be the chairman of the board of directors: o 0 if allowed o 2 if not allowed

9) Separate board of auditors: o 2 if independent body separate from the board o 1 if specific committee set up inside the board o 0 otherwise

10) Requirement to disclose top managerial compensation: o 2 if required on individual basis o 1 if required on aggregate basis o 0 if not required

11) Requirement to disclose any transactions between management and company: o 2 if required o 0 if not required

B. MINORITY SHAREHOLDER RIGHTS PROTECTION INDEX

Maximum 21 points. The higher the score, the higher the protection for minority shareholders. The index does not take into account rules transposed under the Takeover Bids Directive. Issues number (4), (5), (6) and (7) are shared with the general shareholder protection index.

1) Minority representation on the board:

o 2 if required o 0 if not required

2) Voting caps limiting the power of large shareholders:

2

o 2 if allowed o 0 if not allowed

3) Multiple voting rights and non-voting shares: o 0 if both allowed o 1 if one allowed o 2 if none allowed

4) Percentage needed to convene an extraordinary meeting: o 2 if 5% or less o 1 if 20% to 6% o 0 if 20% or more (or no percentage is provided)

5) Two-tier boards: Nomination of the board by shareholders: o 2 if required o 0 if not required

6) Two-tier boards: Overlap between management and supervisory board is forbidden: o 0 if allowed o 2 if not allowed

7) One-tier boards: CEO can be the chairman of the board of directors: o 0 if allowed o 2 if not allowed

8) Principle of equal treatment among all shareholders: o 1 if mandated o 0 if not mandated

9) Percentage for mandatory disclosure of large ownership stakes: o 3 if 5% or less o 2 if 6% to 10% o 1 if 11% to 24% o 0 if 25% or more (or no mandatory disclosure provided)

10) Percentage for minority claim against the board: o 3 if 5% or less o 2 if 6% to 10% o 1 if 11% or more o 0 if 25% or more (or no minority claims allowed)

C. CREDITOR RIGHTS PROTECTION INDEX

Maximum 10 points. The higher the score, the higher the protection for creditors. The index does not take into account rules transposed under the Takeover Bids Directive.

1) Reorganisation is allowed by insolvency legislation:

o 0 if allowed o 2 if not allowed (legislation only provides for liquidation)

2) Automatic stay on the assets in case of reorganisation: o 0 if compulsory o 2 if not compulsory

3) Ranking of creditors in a liquidation procedure: o 3 if secured creditors are ranked first o 0 if government and/or employees are ranked first

4) Creditor approval of bankruptcy to initiate reorganisation or liquidation: o 2 if required o 0 if not required

5) Appointment of independent third party to manage reorganisation/liquidation procedure: o 1 if required o 0 if not required

D. EMPLOYEE RIGHTS PROTECTION INDEX

1) Employee voice in the board: o 2 if required

3

o 0 if not required 2) Employee voting rights in the board:

o 2 if required o 0 if not required

Country Shareholder

rights protection index

Minority shareholder

rights protection index (full)

Minority shareholder

rights protection index

(excluding issues in common with

shareholder rights protection

index)

Creditor rights protection index

Employee rights protection index

Austria 13 11 4 6 2

Belgium 8 7 7 4 0

Cyprus 9 9 6 3 2

Czech Republic 17 14 8 6 2

Denmark 9 10 6 1 2

Estonia 14 11 6 4 0

Finland 12 11 6 4 0

France 16 13 9 1 1

Germany 14 13 8 4 2

Greece 10 10 8 4 0

Hungary 12 10 4 4 0

Ireland 10 8 7 4 0

Italy 13 14 10 3 0

Luxembourg 16 8 4 1 2

Netherlands 15 11 6 8 0

Poland 18 16 10 4 0

Portugal 11 11 5 5 0

Romania 13 11 8 4 0

Slovakia 9 12 6 1 2

Spain 11 10 8 3 0

Sweden 14 7 4 6 2

UK 16 11 7 6 0

4

ANNEX 8: Econometric Analysis

5

Econometric Analysis

VARIABLES Sub-indices d = deals c = country t = time Dependent variable

— Cumulative Abnormal Returns (-41, 41) event window

Independent variables — Rank value (size indicator)

— Hostile bid =1 — Cash only =1

— Debt proceeding =1 — Stock market capitalisation per deal, per country, per year (market size indicator)

— Stock market capitalisation over GDP per deal, per country, per year (indicator development financial sector)

— EU GDP growth (economic cycle indicator) — Credit to non-financial institutions (financial cycle indicator)

— Shareholder protection index (offeree company country) — Shareholder protection index (offeree company country) – restricted (to avoid

overlapping with the minority shareholder index) — Minority shareholder protection index (offeree company country) – restricted

— Creditors protection index (offeree company country) — Employee protection index (offeree company country)

— Competitiveness indicator (based on the GCI of the WEF) — Board neutrality rule implementation score, 2003-2010369 — Breakthrough rule implementation score, 2003-2010 — Mandatory bid rule implementation score, 2003-2010

— Squeeze-out right implementation score, 2003-2010 — Deal covered by Takeover Bids Directive (deal occurring after the transposition of

the Directive in each Member State) =1

REGRESSIONS SPECIFICATION Regression 1: Consideration of the effect of the introduction of the European Takeover Bids Directive. This regression considers deals occurring from the beginning of 2003 up until the end of 2010.

369 We have calculated a score for the implementation of the rule from 2003 because some of the countries already used some of the rules imposed by the Directive

6

_cons ....5555444400007777555500003333 ....2222000044449999111188886666 2222....66664444 0000....000000008888 ....1111333388886666000066666666 ....9999444422228888999944441111 mbrddc ....0000000077779999888899996666 ....0000222288880000111166669999 0000....22229999 0000....777777776666 ----....0000444466669999999922224444 ....0000666622229999777711116666 sorddc ....0000333344446666999911118888 ....0000222233332222999922228888 1111....44449999 0000....111133337777 ----....0000111111110000111199992222 ....0000888800004444000022229999 btrddc ....111188888888666688881111 ....0000444444441111111177771111 4444....22228888 0000....000000000000 ....1111000022221111000033332222 ....2222777755552222555588888888 bnrddc ----....0000555555550000111155558888 ....000011119999000011115555 ----2222....88889999 0000....000000004444 ----....0000999922223333333311118888 ----....0000111177776666999999997777 epi ----....1111888888885555777788881111 ....0000888899998888888899995555 ----2222....11110000 0000....000033336666 ----....3333666644449999888822224444 ----....0000111122221111777733339999 minndr ----....0000333377777777555500007777 ....0000111133339999000077776666 ----2222....77771111 0000....000000007777 ----....0000666655550000444433338888 ----....0000111100004444555577776666 sharndr ----....0000111177774444000088885555 ....0000111122221111555544441111 ----1111....44443333 0000....111155552222 ----....0000444411112222666600005555 ....0000000066664444444433335555 gdp ----....0000111100009999999966661111 ....000000003333444477776666 ----3333....11116666 0000....000000002222 ----....0000111177778888111177777777 ----....0000000044441111777744446666 lncap ....000022224444888888881111 ....0000111199991111888877779999 1111....33330000 0000....111199995555 ----....0000111122227777777744444444 ....0000666622225555333366663333 ddebt ....0000666600003333555522225555 ....0000888833333333777700001111 0000....77772222 0000....444466669999 ----....1111000033332222555577776666 ....2222222233339999666622226666 dcashonly ....0000888866662222999944443333 ....0000333300002222777799992222 2222....88885555 0000....000000004444 ....0000222266668888777722227777 ....1111444455557777111155559999 dhostile ----....000055553333000033332222 ....0000444444444444666655554444 ----1111....11119999 0000....222233333333 ----....1111444400002222999933334444 ....0000333344442222222299993333 carl Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 111144443333....000000003333777711115555 999966665555 ....111144448888111199990000333377779999 Root MSE = ....333377775555 Adj R-squared = 0000....0000555511110000 Residual 111133334444....000011116666333311111111 999955553333 ....11114444000066662222555577772222 R-squared = 0000....0000666622228888 Model 8888....99998888777744440000444422223333 11112222 ....777744448888999955550000333355553333 Prob > F = 0000....0000000000000000 F( 12, 953) = 5555....33333333 Source SS df MS Number of obs = 999966666666

legend: * p<.1; ** p<.05; *** p<.01 _cons ....55554444000077775555000033334444************ mbrddc ....00000000777799998888999955555555 sorddc ....00003333444466669999111188885555 btrddc ....11118888888866668888111100002222************ bnrddc ----....00005555555500001111555577776666************ epi ----....11118888888855557777888811114444******** minndr ----....00003333777777775555000077773333************ sharndr ----....00001111777744440000888844447777 gdp ----....00001111000099999999666611115555************ lncap ....00002222444488888888000099996666 ddebt ....00006666000033335555222255554444 dcashonly ....00008888666622229999444422229999************ dhostile ----....00005555333300003333222200004444 Variable active

By adding the competitiveness index (WEF) and removing growth and market capitalisation:

legend: * p<.1; ** p<.05; *** p<.01 _cons ----....88889999555599992222333344449999 mbrddc ....00003333000099996666000077775555 sorddc ....0000222222222222777711111111 btrddc ....11113333111166661111555588881111******** bnrddc ----....00002222999977770000000033331111 epi ----....111144448888444433335555**** minndr ----....00000000555588885555666666663333 sharndr ----....00002222333377772222000066661111******** lncompnd ....88887777444466663333777722229999******** lncre ----....00001111111155552222888844441111 ddebt ....00007777888888882222666600006666 dcashonly ....00008888777766667777333322223333************ dhostile ----....0000555511110000000077777777 Variable active

Regression 2: Consideration of the implementation scores for those deals occurring after the transposition of the Takeover Bids Directive in each Member State. This regression considers the deals occurring after the transposition of the Directive in each Member State until the end of 2010.

7

_cons ....2222111111113333888866668888 ....1111666600004444222255551111 1111....33332222 0000....111188888888 ----....1111000033334444333399992222 ....5555222266662222111122228888 dcov ....1111333377778888444499999999 ....0000222255554444444477776666 5555....44442222 0000....000000000000 ....0000888877779999111100004444 ....1111888877777777888899995555 epi ----....0000444455555555000088888888 ....0000777700001111333355555555 ----0000....66665555 0000....555511117777 ----....1111888833331111444466661111 ....0000999922221111222288885555 minndr ----....0000222222221111777777778888 ....0000111100002222333333336666 ----2222....11117777 0000....000033330000 ----....0000444422222222666600007777 ----....0000000022220000999944448888 sharnd ----....0000000011113333000022222222 ....0000000088885555000077772222 ----0000....11115555 0000....888877778888 ----....0000111177779999999977771111 ....0000111155553333999922226666 gdp ----....0000000099994444555566661111 ....0000000033334444666699998888 ----2222....77773333 0000....000000007777 ----....0000111166662222666655554444 ----....0000000022226666444466667777 lncap ....0000111199992222999988889999 ....0000111188880000777788882222 1111....00007777 0000....222288886666 ----....0000111166661111777788887777 ....0000555544447777777766665555 ddebt ....0000444488887777000044442222 ....0000888822229999777766668888 0000....55559999 0000....555555557777 ----....1111111144441111333333335555 ....2222111111115555444411118888 dcashonly ....0000777788886666333355555555 ....0000333300001111333355552222 2222....66661111 0000....000000009999 ....0000111199994444999966667777 ....1111333377777777777744442222 dhostile ----....0000666611115555888822223333 ....0000444444441111666666667777 ----1111....33339999 0000....111166664444 ----....1111444488882222555577771111 ....0000222255550000999922226666 carl Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 111144443333....000000003333777711115555 999966665555 ....111144448888111199990000333377779999 Root MSE = ....33337777444411113333 Adj R-squared = 0000....0000555555554444 Residual 111133333333....888811117777111133339999 999955556666 ....111133339999999977776666000088887777 R-squared = 0000....0000666644442222 Model 9999....11118888666655557777666622224444 9999 1111....00002222000077773333000066669999 Prob > F = 0000....0000000000000000 F( 9, 956) = 7777....22229999 Source SS df MS Number of obs = 999966666666

legend: * p<.1; ** p<.05; *** p<.01 _cons ....22221111111133338888666688882222 dcov ....11113333777788884444999999992222************ epi ----....00004444555555550000888888882222 minndr ----....00002222222211117777777777779999******** sharnd ----....0000000011113333000022222222 gdp ----....00000000999944445555666600007777************ lncap ....00001111999922229999888888888888 ddebt ....00004444888877770000444411117777 dcashonly ....00007777888866663333555544448888************ dhostile ----....00006666111155558888222222226666 Variable active

Regression 3: Consideration of the implication of protection indexes, growth, and the Directive on market capitalisation.

_cons 6666....111144442222555555555555 ....2222777722228888555566665555 22222222....55551111 0000....000000000000 5555....666600007777000099991111 6666....66667777888800002222 dcov ....0000000022221111555511118888 ....0000555533334444000011114444 0000....00004444 0000....999966668888 ----....111100002222666644445555 ....1111000066669999444488887777 epi ----2222....333300005555000044447777 ....111122226666222288882222 ----11118888....22225555 0000....000000000000 ----2222....555555552222888866668888 ----2222....000055557777222222227777 crednd ....1111222200001111444411113333 ....0000111188882222333377773333 6666....55559999 0000....000000000000 ....0000888844443333555511118888 ....1111555555559999333300008888 minond ....0000999933330000666655552222 ....0000111177772222555511116666 5555....33339999 0000....000000000000 ....00005555999922221111 ....1111222266669999222200004444 gdp ....0000111155551111999999995555 ....0000000077773333444411114444 2222....00007777 0000....000033339999 ....0000000000007777999922224444 ....0000222299996666000066666666 lncap Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 1111000099990000....99999999444444441111 999966665555 1111....11113333000055556666444411116666 Root MSE = ....77779999444411118888 Adj R-squared = 0000....4444444422221111 Residual 666600005555....444499993333888866668888 999966660000 ....666633330000777722222222777777779999 R-squared = 0000....4444444455550000 Model 444488885555....555500000000555544445555 5555 99997777....1111000000001111000099991111 Prob > F = 0000....0000000000000000 F( 5, 960) = 111155553333....99995555 Source SS df MS Number of obs = 999966666666

legend: * p<.1; ** p<.05; *** p<.01 _cons 6666....1111444422225555555555555555************ dcov ....00000000222211115555111188882222 epi ----2222....3333000055550000444477773333************ crednd ....11112222000011114444111133334444************ minond ....0000999933330000666655552222************ gdp ....00001111555511119999999955552222******** Variable active

Regression 4: Consideration of the implication of protection indexes, cumulative abnormal returns, and the Directive on the financial development index.

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_cons 1111....000044442222222222224444 ....1111222288888888111166666666 8888....00009999 0000....000000000000 ....7777888899994444222299999999 1111....222299995555000011119999 dcov ----....0000999911117777000055551111 ....000022224444111177772222 ----3333....77779999 0000....000000000000 ----....111133339999111144441111 ----....0000444444442222666699991111 epi ----....5555555599998888666666668888 ....0000555588889999000066669999 ----9999....55550000 0000....000000000000 ----....666677775555444466668888 ----....4444444444442222666655555555 crednd ....0000777788882222000000006666 ....0000000088885555111100005555 9999....11119999 0000....000000000000 ....0000666611114444999999992222 ....000099994444999900002222 minond ----....1111000077775555777788882222 ....0000000088880000333355555555 ----11113333....33339999 0000....000000000000 ----....1111222233333333444477774444 ----....0000999911118888000099991111 lnval ----....0000111111111111111155557777 ....0000000055555555333344443333 ----2222....00001111 0000....000044445555 ----....0000222211119999777766663333 ----....000000000000222255555555 lncapgdp Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 222211112222....222200002222333355551111 999966665555 ....222211119999888899998888888800009999 Root MSE = ....33337777000066662222 Adj R-squared = 0000....3333777755554444 Residual 111133331111....888866663333000077772222 999966660000 ....111133337777333355557777333366667777 R-squared = 0000....3333777788886666 Model 88880000....3333333399992222777788884444 5555 11116666....0000666677778888555555557777 Prob > F = 0000....0000000000000000 F( 5, 960) = 111111116666....99998888 Source SS df MS Number of obs = 999966666666

legend: * p<.1; ** p<.05; *** p<.01 _cons 1111....0000444422222222222244444444************ dcov ----....00009999111177770000555500006666************ epi ----....55555555999988886666666677775555************ crednd ....00007777888822220000000066661111************ minond ----....11110000777755557777888822222222************ lnval ----....00001111111111111111555566668888******** Variable active

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Summary Table (betas, standard error, p-value)

legend: b/se/p F 5555....333322226666 7777....333311116666 111155553333....999955551111 111111116666....999977778888 rmse 0000....333377775555 0000....333377774444 0000....777799994444 0000....333377771111 r2_a 0000....000055551111 0000....000055556666 0000....444444442222 0000....333377775555 r2 0000....000066663333 0000....000066664444 0000....444444445555 0000....333377779999 df_m 11112222....000000000000 9999....000000000000 5555....000000000000 5555....000000000000 df_r 999955553333....000000000000 999955556666....000000000000 999966660000....000000000000 999966660000....000000000000 N 999966666666 999966666666 999966666666 999966666666 0000....0000000088885555 0000....1111555511117777 0000....0000000000000000 0000....0000000000000000 0000....222200005555 0000....111166664444 0000....222277773333 0000....111122229999 _cons 0000....555544441111 0000....222233335555 6666....111144443333 1111....000044442222 0000....0000444444449999 0000....000000006666 lnval ----0000....000011111111 0000....0000000000000000 0000....0000000000000000 0000....000011118888 0000....000000009999 crednd 0000....111122220000 0000....000077778888 0000....0000000000000000 0000....0000000000000000 0000....000011117777 0000....000000008888 minond 0000....000099993333 ----0000....111100008888 0000....0000000000000000 0000....9999666677779999 0000....0000000000002222 0000....000022225555 0000....000055553333 0000....000022224444 dcov 0000....111133338888 0000....000000002222 ----0000....000099992222 0000....7777777755556666 0000....000022228888 mbrddc 0000....000000008888 0000....1111333366667777 0000....000022223333 sorddc 0000....000033335555 0000....0000000000000000 0000....000044444444 btrddc 0000....111188889999 0000....0000000033339999 0000....000011119999 bnrddc ----0000....000055555555 0000....0000333366662222 0000....4444555544445555 0000....0000000000000000 0000....0000000000000000 0000....000099990000 0000....000077773333 0000....111122226666 0000....000055559999 epi ----0000....111188889999 ----0000....000055555555 ----2222....333300005555 ----0000....555566660000 0000....0000000066668888 0000....0000222277772222 0000....000011114444 0000....000011110000 minndr ----0000....000033338888 ----0000....000022223333 0000....1111555522224444 0000....6666333377771111 0000....000011112222 0000....000011111111 sharndr ----0000....000011117777 ----0000....000000005555 0000....0000000011116666 0000....0000000066665555 0000....0000333388887777 0000....000000003333 0000....000000003333 0000....000000007777 gdp ----0000....000011111111 ----0000....000000009999 0000....000011115555 0000....1111999955550000 0000....2222111133333333 0000....000011119999 0000....000011118888 lncap 0000....000022225555 0000....000022223333 0000....4444666699993333 0000....5555666644449999 0000....000088883333 0000....000088883333 ddebt 0000....000066660000 0000....000044448888 0000....0000000044445555 0000....0000000099998888 0000....000033330000 0000....000033330000 dcashonly 0000....000088886666 0000....000077778888 0000....2222333333333333 0000....1111666644442222 0000....000044444444 0000....000044444444 dhostile ----0000....000055553333 ----0000....000066661111 Variable CARru~s CARdir CAPd CAPGDPd

THE TAKEOVER BIDS DIRECTIVE ASSESSMENT...

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