EU Takeover Directive - final announcement is days away

United Kingdom
Takeover Takeoff?

The path of the European Union's Takeover Directive to its current status has been tortuous to say the least. It is over 15 years since the European Commission announced its intention to propose a Directive on takeover bids. Although the Council of Ministers adopted the common position on the Directive in June 1999 (which was accepted by the European Commission in July 2000) the debate goes on, although the end is in sight. The Directive is currently in conciliation at the European Commission as a result of 15 amendments to the text being approved by the European Parliament during the final reading of the Directive in December of last year, only three of which were acceptable in full to the European Commission and one in part.

In particular, an amendment strengthening the position of directors of a target company facing a hostile bid has proved to be a particular bone of contention. The common position effectively prevented a target company from taking defensive (i.e. frustrating) action in the face of a hostile bid without the prior approval of shareholders (thus following very closely the current UK position). The European Parliament, however, went much further and its amendments would permit target company boards to take frustrating action, providing such action did not breach the national law and was in accordance with guidelines adopted by the national regulator (or specific permission was obtained from the national regulator).

If this amendment remained it would be left to each Member State to determine what defensive actions are permissible (rather than the EU setting the minimum level of shareholder protection throughout the EU). Although it appears that Germany has changed its mind and now opposes the common position adopted on defensive measures there is still hope that this will not derail the whole process and that the outcome of the conciliation process will be positive.

The conciliation process is due to end in June. If agreement has been reached the Directive will need to be adopted formally and Member States will then have a fixed time within which to implement the Directive in national legislation. If no agreement is reached, the EU will be forced to re-start the formulation process for the Directive from the very beginning – something that could take years.

With this backdrop in mind, we at CMS Cameron McKenna decided earlier this year to canvass the opinions of in-house lawyers, corporate financiers and senior management in leading European businesses on their views and knowledge of the Directive, with a particular focus on whether or not they believed the Directive, if passed, would meet its basic objectives and what they thought its impact on the takeover process would be. We conducted research among 150 leading UK and other European businesses. The results make interesting reading and some of the major findings are highlighted below.

The prime objective of the proposed Directive is set out in the recitals as being to ensure adequate protection of shareholders throughout the European Union by laying down minimum rules for the conduct of public takeover bids. According to our survey, there is clearly widespread agreement in European business that there is a need to give shareholders of EU companies, subject to a takeover bid, an equal level of protection across the EU. Over three-quarters (79 per cent) of respondents agree with this statement. However, the views of those who support this standpoint diverged when we asked how it should be achieved. Only a quarter of UK businesses believe that EU-wide legislation is the way forward in this respect. Ignoring the UK, there is wider support, with over two-thirds (69 per cent) of the European businesses we surveyed believing that legislation would be the preferable option, a figure that decreases to 43 per cent for the survey as a whole. Clearly our research illustrates that many businesses have misgivings about the concept of a Directive as the best way forward.

Awareness of the two key shareholder protection measures in the Directive – on permitted defensive action and the mandatory bid – was particularly low in our survey sample. Two-thirds of European businesses appear to be unaware that the European Parliament's amendments would allow Member States the ability to permit target company boards in Member States to take frustrating action without prior shareholder approval. A further 58 per cent is ignorant of the fact that the Directive does not specify a control threshold for triggering a mandatory bid, but leaves it up to Member States to determine their own percentage thresholds. However, business is clear on one thing with regard to these provisions – they will not deliver sufficient investor protection. A mere seven per cent of our respondents believe that these measures would do so.

What of the Directive's wider impact on the bid process as a whole? Again European companies appear to have taken a sceptical stance. Fifty-seven per cent expect it to make the bid process more complicated and almost half (44 per cent) think it will also slow it down.

There is also particular concern over one scenario that is likely to become more, rather than less, common in the EU. When a target company is registered in one EU State, but its shares are traded in another, the Directive provides that authorities in each of the countries will be involved in the regulation of the bid. This appears to be fertile ground for confusion and conflict and business agrees. Sixty-four per cent of European companies surveyed believe that in such situations conflict between the different regulatory bodies would be inevitable, with 63 per cent stating that parties involved in the bid would exploit any areas of uncertainty and overlap for tactical purposes.

Perhaps one final statistic sums up business opinion on the Directive. Almost three-quarters (73 per cent) of businesses surveyed believe that the Directive will impact on their company, but only 13 per cent see this impact as being positive.

The Directive was intended to prevent the pattern of European corporate restructuring from being distorted by arbitrary differences in governance and management cultures. Our research shows that there is support for the creation of a level playing field across Europe to achieve this end, but no unanimous agreement that a Directive is the best way to achieve it. Furthermore, there are significant question marks over the Directive. Even if agreement is reached to drop the proposed poison pill amendments (and their protectionist overtones) the vague mandatory bid provisions and the potential for regulatory conflict are causing concern. Such measures may not provide the European Commission with its goal of "EU wide clarity and transparency in respect of legal issues to be settled in the event of a takeover".

Only time will reveal the final content of the Directive and we eagerly await the outcome of the conciliation process. However, one matter is certain – if agreement is reached and a final version of the Directive is produced, it will not be the last word on the subject. The effectiveness of the Directive will, to a significant extent, depend upon how EU governments implement the Directive. I suspect the pressure the capital markets choose to bring to bear will be an important factor in the approach taken.

By Nick Callister Radcliffe, Corporate partner at CMS Cameron McKenna and former Secretary to the UK Takeover Panel Executive