Takeover Directive - Conciliation Committee reaches agreement

In the early hours of 6 June the Council and European Parliament delegations to the Conciliation Committee finally reached agreement on the Takeover Directive. The two outstanding key issues, namely the acceptability of "poison pills" against hostile takeover bids and employee rights to information have been agreed on the basis of compromise proposals put forward by the European Commission.

The common position reached in June 1999 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 have permitted target company boards to take frustrating action, provided 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). Although the final text is awaited, the compromise announced this week will preserve the common position. However, Member States will not be obliged to transpose the Directive into national law until the end of 2005 and will also have the option of postponing the implementation of Article 9 (which is the Article on frustrating action) for a further one year (i.e. until the end of 2006). There is thus a five year period before the EU will have phased out laws permitting poison pill defences against hostile bids without the approval of shareholders.

Employees of a target company will have the right to receive sufficient information on the terms of the bid, including the likely impact of the takeover on employment. We await to see the text but it is expected that employees will receive information at the same time as shareholders.

The agreement reached by the Conciliation Committee will still need the formal approval of the Council of Ministers and the European Parliament. The European Parliament will vote in July and MEPs will, in effect, be being asked to reverse the position they voted for in December.

However, even if the Takeover Directive is adopted, that is not the end of the story. The European Commission has agreed to set up a committee of company law experts to look at three particular areas.

• At present the Takeover Directive requires that a mandatory bid should be at an "equitable price" and the company law experts will be considering how "equitable price" should be defined (the European Parliament in its proposed amendments had suggested a definition).
• They will also be considering whether there should be an obligation on all EU Member States to introduce legislation permitting the compulsory acquisition of minority shareholders following a takeover bid (again this was a point proposed by the European Parliament).
• Thirdly, they will be considering whether more can be done to ensure that there is equal treatment of shareholders in all Member States (i.e. "creating a level playing field").

The committee, in delivering its views, will also give its view on how these three issues impact on Article 9 of the Takeover Directive. The committee is due to report by March 2002 and the European Commission has said that there would be a "legislative follow-up" to any concrete proposals made by the committee.

Whilst we await the final text, the agreement reached on poison pills reflects the sentiments of the respondents to the CMS survey, carried out earlier this year on the Takeover Directive, who overwhelmingly believed that permitting poison pills without shareholder approval would not deliver sufficient protection to shareholders of EU companies. It is also interesting to note the proposal to consider further the question of equality of treatment for shareholders as over three-quarters of the respondents to our survey agreed there was need to give shareholders of EU companies, subject to a takeover bid, an equal level of protection across the EU (although whether such protection should be through the medium of a directive or otherwise was one on which views diverged).

It is over 15 years since the European Commission announced its intention to propose a directive on takeover bids, and two years since the Council of Ministers reached a common position, but it now looks likely the Takeover Directive may be finally adopted. However, this is not the end of the story as the company law experts may propose further legislation following the review. Even then, Member States do not need to implement the Directive until the middle of this decade and barriers to hostile takeovers will still be permitted until the end of the 2006. Member States may take this as an opportunity not to develop their takeover laws until the last minute (and companies similarly may continue to use poison pills where permissible), with potentially adverse consequences for the pace of European corporate activity during the first 5 years of this decade. However, whilst this may happen, it is possible that more hostile bids will be launched during the next four years if potential hostile bidders take the view that targets (and their governments) may be reluctant to be seen taking (or condoning) actions which the EU has agreed should be outlawed.

If you would like further information, please contact Nick Callister-Radcliffe, Corporate partner at CMS Cameron McKenna and former Secretary to the UK Takeover Panel Executive.

Phone: 020 7367 2394

e-mail: [email protected]

A full report on the final directive and our report findings will be published in June.