The Takeover Directive and its prospective amendments Prof. - - PowerPoint PPT Presentation

The Takeover Directive and its prospective amendments

• Prof. Federico M. Mucciarelli

University of Modena and Reggio Emilia federicomaria.mucciarelli@unimore.it

Tender offers and takeover bids in general

Scope of application of the Takeover Directive

Takeover-bid

• Art. 2(1)(a): “public offer […] made to the holders of

the securities of a company to acquire all or some of those securities, whether mandatory or voluntary, which follows or has as its objective the acquisition of control of the offeree company in accordance with national law” Only Control Transactions

Scope of application of the Takeover Directive

Which “target” companies?

• Art. 1(1): takeover bids for the securities of companies:



governed by the laws of Member States, and

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where all or some of those securities are admitted to trading on a regulated market in one or more Member States

Securities

• Art. 2(1)(e): “transferable securities carrying voting rights in a

company” Minimum harmonisation Member States can apply the principles of the Directive to other kind of tender offers

Agency problems within control transactions

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Agency problems between the target’s board and target’s shareholders



Target with no controlling shareholders: the deal is between the shareholders’ (as individuals) and the offeror, while the control de facto is shifted from the board to the offeror



Target with controlling shareholder: target’s board might be prone to the interests of majority shareholders (so when the target has a controlling shareholders the second agency problem is more relevant)

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Agency problems between minority and majority shareholders’

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Target with no controlling shareholders: coordination problem of dispersed shareholders vis-à-vis the offeror

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Target with controlling shareholders: controlling shareholder might sell the control to a “looter” – who will hamper minorities’ interests.

Agency problems within control transactions

 Systems with concentrated ownership

The real agency problem is between controlling shareholders and minority shareholders

 Systems with widespread ownership

The real agency problem is between target’s board and minority shareholders

General principles (art. 3)

Equality “within the bid”: all holders of the securities of an offeree company of the same class must be afforded equivalent treatment. Protection of minority shareholders: if a person acquires control of a company, the other holders of securities must be protected (see: mandatory bid rule article 5). Time and information: target’s shareholders should have sufficient time and information (timing of the offer and board’s opinion) Consideration: an offeror must announce a bid only after ensuring that he/she 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 Target’s board duties: The board “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” (see: no frustration rule). Limit to no frustration rule: an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities. Market integrity: false markets must not be created.

The offer proceeding

Information on the bid (article 6)

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Target’s shareholders should have sufficient information about the terms of the bid.

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The decision to launch a Takeover Bid should be made public without delay.

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Option for MS: to provide the duty to communicate the Takeover Bid to the competent authority first

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An offer document containing all necessary information should be (a) communicated to the supervisory authority and then (b) made public.

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Option for MS: to provide that, in addition, the Offer Document shall be approved by the competent authority, with the consequence that it shall be recognized by all other Member States.

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All parties to the bid should be required to provide the supervisory authority with all the information it deems necessary.

The offer proceeding

Period for acceptance (art. 7)

 Normally between two weeks and ten weeks 

Option for MS: allow extension of the period, providing that the

• fferor gives a 2-weeks notice of his/her intention to close the bid



Option for MS: specific derogation from the general rule

Disclosure (art. 8)

 The bid should be made public “in such a way as to ensure

market transparency and integrity for the securities of the offeree company, of the offeror or of any other company affected by the bid, in particular in order to prevent the publication or dissemination of false or misleading information”

 Disclosure of all information and documents required by Article 6:

they should be “readily and promptly available to the holders of securities at least in those Member States on the regulated markets of which the offeree company’s securities are admitted to trading”.

Mandatory bid rule (art. 5)

Acquisition of target’s control



Also by persons acting in concert with the bidder

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Also if the control threshold is reached summing the acquired securities with securities held by the bidder or by persons acting in concert with him/her

Duty to launch a takeover bid

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to all holders of securities

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for all their holdings

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at an equitable price

Rationale: protection of minority shareholders

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coordination problem among dispersed share holders (in case of dispersed

• wnership) and the agency problem between controlling shareholder and

minority shareholder (in case of concentrated ownership)



It reduces pressure to tender in case of partial bids or two-tier bids.

Mandatory bid rule

The best price rule “Equitable price”: “The highest price paid for the same securities by the offeror, or by persons acting in concert with him/her, 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.” Art. 5(4). Exceptions: the competent authority can be authorized to provide exceptions to this general rule on a case by case basis Control threshold: is established at Member State’s level

Mandatory bid rule

Outcomes of the “best price rule”



Equal treatment of all shareholders upon the control transfer regarding the distribution of the control premium (we can say that all shareholders have the right to receive a fraction of this premium)

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Takeover bids are more expensive and, as a consequence, less frequent (this rule might deprive shareholders of the opportunity to sell their shares and might reduce the positive effects of the market for corporate control upon board’s behaviors)

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Dispersed ownership regime (U.K.): the best price rule does not affect the takeover activities due to market pressure and due to the fact that control threshold is lower that share ownership that triggers the mandatory bid rule (in UK 30%)



Concentrated ownership (Continental Europe): mandatory bid rule + best price rule is de facto a structural defensive measure, as it makes takeover bids more expensive

No frustration rule

 The target’s board “shall obtain the prior

authorisation of the general meeting of shareholders given for this purpose before taking any action,

• ther than seeking alternative bids, which may result

in the frustration of the bid” (art. 9)

 Post-bid defensive measures:

 Selling relevant assets;  Issuing new shares without pre-emptive rights;  Litigation;  Tender offer on bidder’s shares (“pac-man”);  Share’s repurchases;  Seeking of a competing bid.

No frustration rule

 Period of the no frustration rule:

 At least from the time the target’s board receives official

notice of the offer by the bidder (art. 9(2))

 Member States can anticipate the initial moment of the no

frustration rule (e.g. London City Code)

 Board’s opinion

The target’s board should make public a document setting up its opinion on the offer:

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Whether the offered price is coherent with the target’s value;

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Impact on shareholders’ and stakeholders’ interests (also employees)

No frustration rule

Outcomes of the No Frustration Rule (or “NFR”)



Dispersed ownership regimes:

The NFR can limit target’s board powers to block unsolicited takeover bids

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Concentrated ownership regimes:

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The NFR does not really shift the power to minority shareholders, as the controlling shareholders have sufficient voting power to approve defenses;



The NFR has “only” a transparency effect (controlling shareholders are compelled to make public the goal to frustrate the bid)

Breakthrough rule

 Pre-bid or structural barriers

 Voting and/or ownership caps;  Multiple voting shares;  Shareholders agreements;  By-laws limits to share transfers;  Shareholders individual right to appoint or remove

board’s members;

 Automatic conversion of shares without voting

right into shares with voting right upon the launch

• f a tender offer (or similar poison pills)

Breakthrough rule

1.

Restrictions to the transfer of securities



Either in the by-laws or in shareholders’ agreements

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Do not apply to vis-à-vis the offeror during the bid

2.

Restrictions on voting rights

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Either in the by-laws or in shareholders’ agreements

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Are in effective in the general meeting on defensive measures

3.

Multiple-voting shares

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Carry only one vote in the general meeting on defensive measures

4.

General BTR

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If a takeover bid succeeds and the bidder holds more than 75% of securities with voting right, “pre-bid” defenses are ineffective

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Restrictions on the transfer of securities and on voting rights (in by-laws or shareholders’ agreements) become ineffective;

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Shareholders individual right to appoint or remove board’s members shall not apply;

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Multiple voting shares are converted into ordinary shares

Breakthrough rule

Limits of the BTR:

 Adequate compensation for the loss of the special

rights: the BTR has a “cost” and it is not clear who should pay for it (the bidder or the target?):

 If the bidder does not reach the 75% threshold

pre-bid defenses are still in place: in practice the “General BTR” can be ineffective in countries with concentrated ownership;

 Several countries do not allow per se pre-bid

defenses (such as voting caps or restrictions to shares’ transfer)

Optional arrangements

The relation between default rules at EU law level and Member States’ law is however more complicated, as Member States have several options regarding the implementation

• f the BTR and the NFR:

 both the No Frustration Rule and the

Breakthrough Rule are not mandatory

 Member States can provide for a “reciprocity”

condition

Opt-out by Member States

Opt-out

 Member states can choose not to implement the NFR

and/or the BTR in their legislation

 The majority of MS have implemented the NFR as a

mandatory rule, but have not implemented the BTR.

 However, if a Member State does not implement the NFR

• r the BTR should then allow corporations to adopt such

rules in their by-laws (“opt-in”) In systems with concentrated ownership controlling shareholders will probably not implement the NFR and the BTR in the by-laws.

Reciprocity

Member States can exempt companies which applies the BTR and/or the NFR from applying such rules, if these companies become object of a takeover-bid launched by a corporation that does not apply these rules (art. 12(3)) The “reciprocity” raises several issues:

 Does the reciprocity apply only to NFR and BTR

encompassed in by-laws (where MS have opted-out) or also to statutory NFR and BTR?

 What if the target applies only the NFR and the bidder

applies the BTR (or vice versa)?

 What if the bidder is an “entity” that can not adopt the NFR

and/or the BTR due to its nature (e.g. mutual funds; natural persons; limited liability companies)

Squeeze-out and sell-out

 Squeeze-out (art. 15)

 The bidder launches a 100% takeover bid and after the bid

holds at least 90% of voting right’s shares

 Right to buy all-outstanding shares at a “fair price”  Rationale: protection of the bidder from residual minorities

 Sell-out (art.16)

 Same circumstances of squeeze-out  The holders of remaining shares can require the bidder to

buy his/her shares at a “fair price”

 Rationale: minority protection

Competent authority and applicable law

Which authority is competent (and what law is applicable) to “cross-border “takeovers (i.e. takeover bids having “contacts” with several countries, as each MS can adopt different connecting factors regarding takeover regulation)? General principle of the Directive: identity of Competent Authority and applicable law. Competent Authority

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Target listed in MS of the registered office: authority of the same MS

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Target listed in another MS:

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Authority of the MS of the regulated market

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Listed in more Regulated Markets: Authority of the country where it was listed first

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Listed in more RM at the same time (after the deadline to implement the Directive – 20.11.2006): the corporation should choose the Authority

Competent authority and applicable law

Applicable law



Target company listed in regulated market of the MS of the registered

• ffice: the law of the same MS applies

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Target company listed in a regulated market of a different MS:



“Takeover regulation”: law of the MS of the competent authority (issues relating to the consideration offered in the case of a bid and to relating to the bid procedure, “in particular the information on the offeror’s decision to make a bid, the contents of the offer document and the disclosure of the bid”)



“Company law issues”: law of the MS of the registered office (e.g.: “information to be provided to the employees of the offeree company and in matters relating to company law, in particular the percentage of voting rights which confers control and any derogation from the obligation to launch a bid, as well as the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the bid”)

Issues left to Member States

 The Takeover Directive does not address

following issues:

 Lapsing of the bid;  Revision of the bid;  Competing bids;  Disclosure of the bids;  Irrevocability of the bid;  Conditions to the bid.

Implementation and revision

 Deadline for national implementation: 20.5.2006;  Revision: five years after the deadline for

implementation (i.e. 20.5.2011) the Commission re- examines the Directive

 Which kind of amendments?

 More or less regulation at EU level? 

Regulation of all or some matters left at MS level?

 Amendments of rules that hinder takeovers? 

Information rights and proceeding’ regulation

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Mandatory bid rule (and/or “best price rule”)

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Opt-out from NFR and/or BTR (e.g. the NFR might become default rule for all Member States)

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Reciprocity