New proposal for a Takeover Directive

Following the narrow rejection by the European Parliament in July 2001 of the European Commission's previous proposal for a directive on takeover bids, some commentators were sceptical as to whether a Takeover Directive would ever make it through the Parliament. The Commission has recently presented a new proposal intended to meet the Parliament's concerns without compromising the principles approved unanimously by the Council of Ministers.

In particular, the new proposal:

• permits the UK to preserve the position of the Takeover Panel as non-statutory regulator of takeover bids, and the existing rules as to when the Panel's decisions are capable of being over turned (Article 4);
• leaves it to individual member states to determine the appropriate voting control threshold to trigger the obligation to make a mandatory bid (Article 5); and
• requires that once a bid has been announced target shareholders must approve in advance any frustrating action proposed by the board (Article 9).

New provisions

The principal new provisions are:

• the setting of the price to be paid in a mandatory bid (the "equitable price") at the highest price paid by the offeror, or by persons acting in concert with the offeror, over a period of between six and 12 months preceding the announcement of the offer. Member states will have the flexibility to permit their supervisory authorities to adjust the price (up or down) provided the circumstances and criteria for such adjustments are clearly defined. The supervisory authority will be required to publish its reasons for any such decision (Article 5);
• a new transparency requirement requiring disclosure in a company's annual report of details of structures and measures that could hinder the acquisition and exercise of control over the company by an offeror. Companies must allow their shareholders to vote on the suitability of these potentially frustrating mechanisms at least once every two years and the company's board will be required to state the reasons for them (Article 10);
• a "break-through" right aimed at removing potential barriers to takeovers, particularly where management has entrenched rights. The new proposal allows the offeror to break through mechanisms and structures that might frustrate a bid. It requires that during the period when an offer is open for acceptance any restrictions in the articles of association or in any contractual agreement between the target and its shareholders (or between shareholders themselves) on the ownership of, or the transfer of, securities will be unenforceable against the offeror. In addition, any restrictions on voting rights (whether contained in the articles of association or in any contractual agreement) will cease to have effect at any shareholder meeting convened to decide on any defensive measures proposed by the target board. Where an offeror's holding is such that, under the applicable national law, it would normally be able to amend the target's articles of association, any restrictions on transfers of securities or on voting rights, as well as any special shareholder rights to control the appointment or removal of board members, will be overridden. The successful offeror will be able to convene a general meeting to change the articles and board in accordance with national law and any restrictions as to his ownership of securities or to his voting rights will be disapplied (Article 11). Although the Article itself is not clear on the point, the Explanatory Memorandum states that these provisions do not concern securities carrying double or multiple voting rights;
• a "squeeze-out" right that will enable an offeror compulsorily to acquire the shares held by any remaining minority shareholders at a fair price (which in most cases will be presumed to be the consideration offered in the bid). The threshold for triggering the squeeze-out right is either determined by reference to the capital of the target held (90 per cent) or arises where the offeror has acquired through acceptances of the bid not less than 90 per cent of the capital which is the subject of the bid (although a higher threshold of 95 per cent can be set by member states). If a target has more than one class of share capital the rule applies to each class separately (Article 14); and
• a "sell-out" right that will enable minority shareholders, following the takeover bid, to require the majority shareholder (the offeror) holding 90 per cent or more of the capital to buy their securities at the same fair price. A higher threshold is permitted to be set by member states but must not exceed 95 per cent (Article 15).

Will the directive be accepted?

The new proposal does not take up all the recommendations of the Winter Report (produced by the group of company law experts set up by the Commission following the rejection of the previous proposal), especially as regards the creation of a level playing field for companies facing takeover bids. In particular, it does not regulate the exercise of multiple voting rights. The Commission states that it received strong representations from member states and interested parties about the constitutional problems resulting from the suppression of multiple voting rights, especially if no compensation were provided for the loss of these rights. It also contends that there is "evidence that the existence of multiple voting rights has not resulted in relatively less takeover activity in the countries concerned". The Commission further argues that, because shares with such rights can also be listed and purchased in the market at a different price, they have proven to be a useful financing mechanism for bringing companies to listing.

It should be noted that the new proposal does not regulate the issue of shares with special control rights ("golden shares") held by member states in privatised companies, or other special control rights of member states contained in national laws - the Commission considers these to be governed by the rules on the free movement of capital in the EC treaty (Article 56) and the case law of the European Court of Justice. Although the new proposal does move further towards the creation of a level playing field within the EU there will still be an uneven playing field between Europe and the US, where "poison pill" measures are common. The lack of a level playing field, particularly with the US, was a prime consideration in the Parliament's rejection of the original version of the Directive. The Parliament considered then that until there was a level playing field for companies within the EU facing takeover bids, it was not right that, during a bid, the target board could not take "frustrating" action without first obtaining shareholder approval.

Despite the Commission noting that protection of employees was another key consideration in the Parliament's rejection of the original version of the Directive, the new proposal does not introduce any new information or consultation rights for employees. Instead, Article 13 refers to the need to apply national law in this area and draws attention to measures implemented under Directives 94/45/EC (on European Works Councils), 98/59/EC (on collective redundancies) and 2002/14/EC (on informing and consulting employees).

As not all of the Parliament's concerns in relation to protection of employees, neutralisation of defensive measures and the creation of a level playing field have been addressed, it remains uncertain as to whether the Parliament will approve the new version of the Directive.

For further information please contact Ian Stevens at [email protected] or on +44 (0)20 7367 2597.