Takeovers and the European Legal Framework

A British Perspective

Jonathan Mukwiri

• Publisher: Routledge-Cavendish
• Year: 2009
• ISBN:
  9781134007806
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Fusiones y adquisiciones

Since the implementation of the European Directive on Takeover Bids, a European common legal framework governs regulation of takeovers in EU Members States. The European Directive on Takeover Bids was adopted in April 2004, and implemented in the UK and in other Member States on 20th May 2006. The Directive seeks to regulate takeovers by way of protecting investors, and harmonising takeover laws in Europe. In facilitating the restructuring of companies through takeovers, the Directive aims at reinforcing the free movement of capital.

Takeovers and the European Legal Framework studies the European Community Directive on Takeover Bids, in order to provide greater understanding of both the impact and effect of the European legal framework of takeover regulation. It firstly looks at the Directive from a British perspective, focusing on the impact of the transposition of the Takeover Directive into the UK. The book examines the provisions of the City Code on Takeovers and Mergers, and discusses the takeover provisions in the Companies Act 2006 that implement the Takeover Directive in the UK, arguing that the Directive will provide a new basis for UK takeover regulation, and that the system will work well.

Jonathan Mukwiri goes on to consider the Directive in relation to the EU, arguing that despite its deficiencies, in that Member States are free to opt to restrict takeovers, the Directive provides a useful legal framework by which takeovers are regulated in different jurisdictions. Mukwiri highlights how the freedoms of the EC Treaty and EU Directives interact, and the effects of the Takeover Directive on political considerations in the law-making process in European Community. Moreover, he argues that the future of EU takeover regulation is likely to follow the lead of the UK, making this book relevant to a wide range of policy makers and academics across Europe.

1
Legal framework of takeover regulation

1.1 Introduction

Takeovers are one means of one company acquiring control over another, the latter company being commonly referred to as the target company. The process usually involves the buying of a sufficient number of shares in the target company. The typical takeover follows a process whereby the offeree (target company) becomes the subject of a takeover bid from the offeror.¹ Where a takeover bid is used as a technique of acquiring control of the offeree, the process involves making an offer to the shareholders, and, if a certain percentage in value of the shares accepts the offer, the offeror may compulsorily acquire the shares of the remaining shareholders in the offeree.

In the UK, the conduct of takeover bids in public companies has since 1968 been regulated by the Panel on Takeovers and Mergers (the ‘Panel’) and has been subject to the rules contained in the City Code on Takeovers and Mergers (the ‘Code’). The operation of the Panel and the Code has always been without statutory backing. As of 20 May 2006, the implementation of the European Directive on Takeover Bids (the ‘Directive’) puts both the Panel and the Code and its enforcement on a statutory footing. It is in regard to the effects and impact of this change that the Directive is discussed in this book. The adoption of the Directive seeks to provide a regulatory framework of common principles for takeover bids throughout Europe. In the UK, the rules under the Code already provide the framework under which the Panel supervises takeover activities. The Companies Act 2006 (the ‘CA 2006’) gives the Code the force of law to come within the Directive.²

One of the questions this book confronts is whether regulating takeovers by way of a Directive should have been deferred to national measures such as the Code. This calls for an examination of the subsidiarity principle.³ The subsidiarity principle is laid down in Art 5 of the EC Treaty, which states that:

In areas which do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.

Did the Community have competence in regulating takeovers? Could this regulation be sufficiently achieved by individual Member States? If the answer to these questions is ‘Yes’ and ‘No’ respectively, then the subsidiarity test is met. Regulating takeovers at a European level is meant to remove takeover barriers and create a level playing field that would harmonise takeover rules in Europe. Professor Hopt rightly observes that European legal harmonisation is particularly appropriate where individual Member States use their legal systems to erect or maintain barriers to market access.⁴ He adds that, in the area of takeover bids, it was this very problem – namely, the absence of a level playing field – which led to the efforts of achieving legal harmonisation. He concludes that this is true for barriers to public takeover bids generally, and specifically for the numerous and far-reaching defence mechanisms that are permissible in many Member States.

Notwithstanding the removal of national barriers as a justification for not leaving the regulation of takeovers to Member States pursuant to Art 5 of the EC Treaty, the Directive, as will be seen, fails to remove these legal barriers. On this basis, and especially from the UK point of view, it could be argued that the subsidiarity principle should have been applied and regulation deferred to national measures. The Code, as will be seen, suffices to regulate takeovers, at least to the extent that the Directive adds nothing that the Code does not already provide.

One of the objectives of the Directive is to facilitate restructuring of companies throughout the EU. This is achieved in two ways: first, by requiring that once the offeror has gained a certain level of control of the offeree company, then the offeror must make a mandatory bid as a means of protecting the remaining minority shareholders of that company;⁵ and second, by requiring that the board of the offeree company refrain from taking actions that may frustrate the takeover bid unless such actions are authorised by the general meeting of shareholders.⁶

Thus, whilst protecting shareholders, the Directive seeks to remove barriers that would frustrate free movement of capital and company restructuring by way of takeover activities. As such, the right of establishment and the free movement of capital have a great potential impact on the regulatory framework for companies,⁷ and indeed for takeover activities in those companies. However, much as the Directive is now transposed into the UK, its merits, as an appropriate regulatory framework, is still much a matter of academic debate given the questionable aspect of its impact.

On the other hand, the transposition of the Directive requires taking into account the need for the alignment of the Community market (hereinafter referred to as the ‘internal market’) perspective and the national market perspective. In transposing the Directive to the national market, Community law principles have to be followed. Where national market interests conflict with internal market interests, the latter should take precedence in transposing a Community measure, unless a derogation under Community law applies. Whether and to what extent the implementing law, particularly the national market regulation of Member States other than the UK, adhere to Community law principles governing the internal market remains to be seen.⁸

To remove barriers to free movement of capital and establishment in takeovers, the Directive prohibits the use of defensive measures that may frustrate the bid,⁹ but at the same time gives Member States the leeway of opting out of the very prohibition.¹⁰ The effect of this option is twofold. First, where Art 9 is disapplied, it creates the barriers the Directive aims at removing, the result of which is unlevelled implementation of the Directive throughout Europe. Second, the non-application of Art 9 would mean that hostile takeovers are not facilitated. Hostile takeovers are seen as a measure of disciplining the board of the offeree company, thereby compelling the managers to make better use of the assets of the company for the interests of the shareholders.¹¹

That this sceptical view of the optional prohibition is worth the analysis, one only need to consider the safeguards in the Directive, where a Member State opts out of the prohibition. As a safeguard to the effect of opting out of applying the prohibition, the Directive allows for companies to have a reversible option of being subject to the prohibition¹² – that is, opting to restrict their defensive actions to a prior approval of the general meeting of the shareholders. According to Murley, given that ‘article 9 is very similar in its effect to General Principle 7 and r 21.1 of the Code, the Panel believes that it is essential that the UK opts in to this provision’,¹³ so that directors are prohibited from taking action that may frustrate the bid unless authorised by the shareholders.

However, if the application of the prohibition from defensive measures is subject to an offer launched by a company that does not apply the same prohibition, then the Directive gives room for the prohibition to be inapplicable.¹⁴ The compromise in Art 12, which allows Art 9 to be optional, may have the effect of putting the UK at a disadvantage, as the UK may not achieve any good by opting in where the offeror has opted out. In that respect and to that extent, the Directive will add very little of benefit to the UK system.¹⁵ This puts a gloss of doubt onto the Directive’s impact as a regulatory framework.

1.2 The Takeover Directive and its background

On 21 April 2004 the Directive was formally adopted into European law, with the aim of promoting a framework of common principles and general requirements to govern takeovers throughout Europe and to be implemented by Member States by 20 May 2006.¹⁶ The Directive is a product of over 30 years of negotiations,¹⁷ characterised by drawbacks, frustration, opposition and compromises. The difficulties over the years have been the result of the tension between the wider aim of achieving an integrated internal market for Europe and satisfying the unity of Member States with diverse corporate governance structures and cultures. After a history of disappointments, the final draft of the Directive emerged as a compromise, the result of which cannot be claimed as a triumph. Broadly, the Directive fails to meet the objectives set out by the European Commission (the ‘Commission’) in its Financial Services Action Plan of 11 May 1999,¹⁸ that is, to achieve an integrated and harmonised market for financial services in Europe.

The initial attempts to integrate and harmonise takeover rules in Europe, and to issue a Takeover Directive for that purpose, were started over 30 years ago when Professor Pennington was appointed by the Commission to write a report on takeovers in Europe. In November 1974, Professor Pennington produced a report on Takeover Offers, and presented the report to the Commission.¹⁹ The Pennington Report had a draft directive attached, which had been modelled on the Code, with a heavy UK influence. Years passed by with no progress and the Pennington recommendations were abandoned, as the Member States showed no interest. The Commission modified the Pennington recommendations and issued guidelines in 1977, which were contained in the Recommendations on Securities Transactions.²⁰ These were based on Art 100 of the EEC Treaty. However, the recommendations came under heavy critici...