Maybe someone should have seen trouble coming. With its first meeting scheduled for September 11, 2001, the European Commission’s so-called high-level group of company law experts didn’t have the best of backgrounds against which to begin deliberations on the future regulation of European takeover bids. Since issuing its initial report in January, it has been embroiled in controversy.
Although no-one could be blamed for the lack of prescience about September 11, the European takeover directive has followed a very rocky road. The high-level group itself was created to prepare new proposals after the original directive collapsed in the European Parliament last July. Germany pulled out of a cross-border agreement which had given the directive momentum in its final few months. Their reason? Fear that German companies would fall victim to international predators.
Internal market commissioner Frits Bolkestein was reportedly livid that some twelve years of negotiations had failed to achieve their goal. His immediate response was to look for a revised proposal as soon as possible, hence the formation of the grandly-named high-level group. Chaired by Jaap Winter, legal advisor to Unilever in the Netherlands, the group produced its initial report in January 2002 to a warm welcome from Bolkestein.
Areas of concern
The Winter report focuses on three issues highlighted by the European Parliament as needing ‘harmonization’ before any further proposal for a directive on takeover bids.
First, it sought to create a level playing field so all shareholders would be given equal treatment across all member states. The proposal is that when a takeover offer succeeds in acquiring 75 percent or more of the ‘risk-bearing capital’ in the target company, the bidder is entitled to gain control of the company. The crucial point here is the follow-up line: ‘Notwithstanding any constitutional or structural provisions in the company that would prevent the exercise of such control.’
Basically, any defensive measures such as poison pills, golden parachutes or any other form of dual voting rights should become null and void if 75 percent or more of the effective equity is acquired. Shareholder power then rules on a one-share, one-vote basis and no compensation will be paid to those who lose out due to biased voting rights.
Next up, Winter tackles the thorny issue of equitable price, arguing that when a bidder takes control of a company, the price to be offered for the remaining ‘minority’ shares should normally be the highest price paid by the bidder during the previous six to twelve months. The report recommends that EU member states be left to set the exact period themselves.
Finally, the high-level group moves onto what has become widely known as squeeze-out, recommending that if a bidder acquires in excess of, say, 90-95 percent of a company, it should be entitled to buy out the minority at a fair price – usually the offer price mentioned above.
Gloves off
And then the trouble started. The same domestic concerns – and more – that blocked the vote last July have been quick to reemerge. The German government and MEPs have been among the most vocal, fearing that its flagship car maker, Volkswagen, will fall into foreign hands. Volkswagen is currently protected by a 20 percent golden share arrangement controlled by the State of Lower Saxony.
Bolkestein is not mincing his words this time round and has already had meetings with Hans Eichel, the German finance minister, to try and find a way forward. When asked recently whether he thought it was Berlin rather than the European Parliament that lay at the hub of the problem, his response was curt and to the point: ‘The thought has occurred to me that the last time the thing was shipwrecked was because of a certain influence.’
It is not just Germany this time round, though. Families with artificially-maintained controlling interests in companies have also become embroiled in the discussions because they’re worried about their dual voting rights. Sweden’s Wallenberg family is probably the highest profile example, with its network of cross-holdings across Sweden and beyond. Jacob Wallenberg, chief executive of Investor, the family’s main holding company, maintains that any attempt to wrest control of companies using the 75 percent rule to cancel voting rights would be a breach of human rights – a serious infringement of the freedom to contract between the buyer and seller.
Erik Belfrage, the Wallenberg family spokesman at Investor, points out that ‘no-one was forced to buy these shares. They knew what they were buying.’ He suggests dual voting rights are an effective means of encouraging small and medium-sized companies onto the market without fear of losing control. ‘You have opposition to the proposals from Sweden, Finland, Denmark, France and Germany,’ he says, adding that it is almost impossible to envisage the proposals being passed with no means of compensating dual voting right shareholders for their loss of voting power.
Back-biting
The likelihood of there being such broad-based antipathy towards the new proposals at governmental level is remote. Nonetheless, it is easy to see why the previous directive got bogged down in domestic politicking. One person interviewed for this article claims Jaap Winter’s Dutch origins led to a favorable outcome for Dutch companies. Such thinking is not backed up by the Philips Pension Fund in Eindhoven, whose spokesman says the Winter report is likely to bring ‘an improvement in corporate governance across the EU.’
Lars Milberg highlights some of the difficulties that may lie ahead. As legal advisor to Aktiespararna, the Swedish shareholders’ association, Milberg is in favor of the creation of a level playing field for all shareholders in all takeover bids. But he also cautions that it may be necessary to think on a larger scale. By that he means it could be dangerous for European companies to open themselves up to takeovers without any defense mechanism if there isn’t a reciprocal agreement from, say, US companies. ‘We must have a much bigger playing field,’ Milberg says. ‘The thinking in Brussels is that the US is behind Europe when it comes to takeover regulation. That’s nonsense. Look where the money is. Look where the [big institutional] investors are. We need to find a level that is close to the US system.’ Not surprisingly, such thoughts are also backed up by Belfrage on behalf of the Wallenberg family.
Milberg also questions whether the proposed approach to dual voting rights is feasible. Sure, the idea is good – you can’t deny the appeal of one-share, one-vote. But what about compensating shareholders who have lived with dual voting for many years? ‘You cannot just take the rights away from A-share holders,’ he argues.
Ulrich Hocker, managing director of DSW, a German corporate governance advisory group, welcomes the thrust of the Winter proposals and believes the recent German takeover legislation went down the wrong route by potentially moving control away from shareholders. But the Takeover Directive is a whole other issue. For Hocker, the problem lies in ensuring that all countries accept a truly level playing field with takeover defense mechanisms of any form made redundant by the directive. ‘If every country in Europe accepts that thinking, then we can move forward. Until then I don’t think the German government will accept it.’
Outside looking in
Many UK observers find themselves on the outside looking in, which isn’t an unusual perspective when it comes to the EU. The City believes it has one of the most open and well-regulated takeover systems in Europe. And according to Philip Remnant, director general of the Takeover Panel in the UK, the UK system already jibes with many of the Winter proposals: ‘In any case, at the moment these proposals are just recommendations from a committee of experts. As far as the Takeover Panel is concerned, we will regulate whatever we are given to regulate.’
Remnant’s views on transatlantic harmonization contrast with Milberg’s. ‘That view is a very protectionist attitude,’ affirms Remnant of trying for reciprocal agreements in the US. ‘Yes, there are various provisions in the US context but it is very different to the European environment. For example, poison pills may be allowed in the US, but they tend to have the effect of achieving a higher price rather than frustrating an offer.’
Despite the high level of polemic surrounding the debate, the European Commission under Bolkestein seems intent on pressing forward with a revised Takeover Directive within the first half of this year. Whether that will entail an about-turn compared to last year’s abandoned directive, an attempt to force through Winter’s proposals, or a recognition of the need to include the US in more international discussions, remains to be seen.
David Cheyne, a partner at the leading international law firm of Linklaters & Alliance, remains skeptical about how close a solution is likely to be. ‘There is still a lot of resistance to a transparent takeover structure across Europe and I certainly won’t be holding my breath,’ Cheyne cautions. ‘Eventually something will come out of it, but quite how attractive that will be remains to be seen.’
