The EU Takeover Directive: An uncertain future

United Kingdom
The future of the draft thirteenth directive on company law concerning takeover bids (the "Takeover Directive") is now a little more uncertain following amendments made to the draft directive by the European Parliament during the second reading on 13 December 2000.

Background

The Takeover Directive was approved by the Council of Ministers in June 1999, subject only to the United Kingdom and Spain resolving an issue concerning the takeover authority for Gibraltar (which they subsequently did) and passage of the Takeover Directive through the European Parliament at the second reading. On 7 September 2000 the President of the European Parliament referred the Takeover Directive to the Committee on Legal Affairs and the Internal Market (the "Legal Affairs Committee") and this Committee appointed Klaus-Heine Lehne (a German MEP) as rapporteur. On 29 November 2000 the Legal Affairs Committee tabled a number of amendments for the second reading, many of which were approved by the European Parliament.

Frustrating Action

As a result of the changes, the position of companies facing a hostile bid has been strengthened. The draft Takeover Directive approved by the Council of Ministers effectively prevented a company from taking defensive (i.e. frustrating) action in the face of a hostile bid without the prior approval of shareholders. However, the European Parliament's amendments go much further by permitting target company boards to take defensive action provided they comply with national law, without the approval of the company's shareholders. It will be up to the Member States to introduce rules and guidelines as to what defensive actions are permissible.

In its recommendation, the Legal Affairs Committee said that the original frustrating action position adopted by the Council of Ministers would have had the effect of making it easier for American companies to take over European companies and yet the management bodies of American companies would, when faced by bids from European companies, be able to adopt and carry out defensive measures without consulting shareholders (although they are subsequently answerable to their shareholders and/or the courts). These amendments have been heavily criticised by certain MEPs, European Union officials and investment protection bodies who are concerned that the amendments may prejudice the adoption of the Takeover Directive, undermine minority shareholder protection and change a crucial principle underlying the proposed Takeover Directive being that the management of target companies must consult shareholders before putting in place defensive "poison pill" measures. The European Commissioner for the internal market has been quoted as saying that the change could result in management being able to act to defend their own potentially narrower interests rather than being obliged to act in the interests of the target company's shareholders as a whole. Indeed it is hard to see how these changes will help the European Commission achieve its objective of producing a directive that would prevent the "pattern of EU corporate restructuring from being distorted by arbitrary differences in governance and management cultures".

Protection for employees

Of the other amendments approved by the European Parliament many are designed to improve the rights of employees in companies subject to takeover bids. For example, it is made clear that the directors of a target company, whilst under a general obligation to act in the interest of the company as a whole, must in particular take into account the repercussions of a takeover on matters such as corporate policy and employment policy, and it appears the board must act with a view to safeguarding jobs. Employees (or employee representatives) are also to be given sufficient time and information to enable them to reach a view on any takeover bid. Amendments have been made seeking to oblige a bidder to provide information on its strategic planning for the target company and the effect such plans would have on jobs (and where they would be located) and the consequences for bodies which represent the interests of workers. Workers' representatives will also be entitled to receive on request from the parties to a takeover bid any information in their possession which is necessary for those representatives to discharge their functions. If there is an opinion of the workers' representative body on a takeover bid it should be enclosed with the document setting out the views of the offeree board on the takeover bid.

Next Steps?

The next stage in this process is for the European Commission to try and engineer a compromise in the conciliation procedure between the European Parliament and the Council of Ministers but it is clear that the fundamental nature of the changes made from the text agreed by the Council of Ministers could put adoption of the Takeover Directive at risk.

If you would like further information on takeovers or the Takeover Directive generally please contact corporate partner Nick Callister Radcliffe on ncr@cms-cmck.com or call him on +44 (0)20 7367 2394. Nick returned from the Takeover Panel in October 2000 where he was joint secretary.