EU Directive fails to harmonize takeovers
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European overview
EU Directive fails to decision during an offer period that does
not form part of the normal course of the
target’s business and the implementation
harmonize takeovers of which might result in the frustration
of a bid (Article 9(3)). These rules, for
example, limit a target’s ability to adopt
or implement a shareholder rights plan
(that is, a poison pill) or otherwise issue
shares to dilute a bidder’s stake in the
Scott V Simpson and Lorenzo Corte of Skadden, Arps, Slate, Meagher & target, without prior shareholder
Flom ponder the future direction of takeover regulation in Europe approval.
Article 11 of the Takeover Directive
C
ross-border and national takeover and national protectionism could contains breakthrough provisions
legislation in the EU is likely to continue to be a characteristic of cross- designed to render unenforceable clauses
change dramatically in the coming border takeovers in Europe in the in the articles of association of target
years. Germany adopted a new takeover post-Takeover Directive environment. companies and agreements between the
code in 2002 and France is in the midst of target and target shareholders or among
amending its securities and takeover laws. The Portuguese compromise target shareholders that could have the
In the Netherlands, court decisions have In its 2002 Takeover Directive proposal, effect of limiting the ability of target
shaped the outcome of high-profile the Commission introduced two rules shareholders to tender into a bid. The
European cross-border takeover battles. aimed at creating a level playing field breakthrough rules provide that:
Continental Europe has been the venue of among EU companies and removing • share transfer restrictions in the target’s
large and prominent cross-border hostile barriers to takeovers. One rule prevents articles of association, and in
takeover battles in the last few years, boards from adopting takeover defences agreements between the target and
including, LVMH’s attempt to acquire without first obtaining shareholder target shareholders or among target
Gucci, Vodafone’s takeover of Mannesmann approval (Article 9). The other rule shareholders (such as irrevocable
and Sanofi-Synthéélabo’s acquisition of mandates the unenforceability of special undertakings, assuming the bidder is a
Aventis. Nevertheless, on more than one voting rights, voting restrictions and shareholder, and shareholders’
occasion the cultural and political aversion limitations on share transfers after a bid agreements contemplating lock-ups or
of continental EU member states to cross- has been made public (Article 11). Debate rights of first refusal), are
border hostile takeovers has manifested over these rules threatened to cause the unenforceable vis-à-vis a bidder during
itself strongly, in some cases heavily failure of this new Commission proposal the tender offer acceptance period;
influencing the outcome of bids. in 2003. The Portuguese compromise • restrictions on voting rights (except
The debates on the EU Directive on reached by member states in the fourth where they are compensated by
Takeover Bids and the compromises quarter of 2003, which gives member specific pecuniary advantages, as with,
reached to adopt the Takeover Directive states the ability to opt out of the for example, preference shares), in the
on April 21 2004, after 15 years of failed adoption of one or both of these rules, led target’s articles of association or in
attempts, stand as clear evidence of this to the enactment of agreements
continuing cultural and political the Takeover between the target
sentiment in continental Europe. Directive. However, and target
Initially, the objective of the Takeover the price paid as a
Regulatory arbitrage and shareholders or
Directive was to harmonize EU takeover result of this national protectionism could among target
law through the adoption of a pan-
European takeover code (along the lines
political
compromise will
continue to be a characteristic of shareholders,
at a general
lapse
of the UK Takeover Code) that would likely be the lack of cross-border takeovers in Europe meeting called to
foster consolidation in Europe by EU-wide decide upon the
creating a level playing field for harmonization of
in the post-Takeover Directive adoption of
companies across the EU. While rules relating to environment defensive measures
regulators and companies anxiously await takeover defences. during the period
the implementation of the Takeover The Takeover when a bid has
Directive by individual member states, Directive provides that from the time the been made public;
there are already strong indications that target board is informed of a bid until • multiple voting securities carry one
the Takeover Directive will not align the end of the offer period, the target vote only at any general meeting called
takeover rules throughout Europe as board may not take any frustrating action to decide on the adoption of defensive
originally expected. The Takeover that might cause the offer to fail, other measures during the period when a
Directive’s harmonizing effect has been than seeking alternative bids, without bid has been made public; and
substantially curtailed by political obtaining prior shareholder approval • following a bid, if the bidder has
concessions known as the Portuguese (Article 9(2)). As regards decisions taken acquired at least 75% of the capital
compromise, which made the adoption before the beginning of the offer period carrying voting rights, any restrictions
of rules limiting the use of takeover and not yet fully implemented, the on transfer of securities or the exercise
defence mechanisms optional. As a result Takeover Directive provides that a general of voting rights (except where voting
of this compromise, regulatory arbitrage shareholders’ meeting must approve any right restrictions are compensated by
www.iflr.com A special IFLR supplement 15European overview
Author biography
application. For example, are member
Scott V Simpson states authorized to opt out selectively,
Skadden Arps Slate Meagher & Flom (UK) LLP only with respect to certain industries, or
adopt the rules only in part, by
Scott Simpson has been based in London since 1990 after incorporating a list of exceptions to the
practising law in Skadden’s New York office during the 1980s. rules? By way of further example, with
Simpson concentrates on cross-border merger and acquisition respect to Article 11, it is unclear how a
transactions, including contested takeovers. company could voluntarily opt into rules
Simpson’s European merger and acquisition assignments providing for the neutralization of
include his 1999/2000 representation of Mannesmann in the agreements it is not a party to, such as
$199 billion acquisition of Mannesmann by Vodafone AirTouch (the shareholders’ agreements.
largest corporate acquisition ever completed). He has advised the Gucci Group since 1997, A further element of the Portuguese
representing Gucci in its successful defence in 1999 against a hostile takeover attempt by compromise is the reciprocity rule, set
LVMH Moët Hennessy Louis Vuitton, and in the acquisition of Gucci in 2004 by Pinault- out in Article 12(3). It provides that
Printemps-Redoute. where targets apply Articles 9(2) and (3)
Simpson was involved in Sanofi’s 2004 $60 billion takeover of Aventis (representing and/or Article 11, member states may
Aventis’ financial advisors). He also represented Westfield in its 2001/2002 $5 billion hostile exempt targets (under conditions
takeover of Rodamco North America, and in its 2004 £2 billion acquisition of Duelguide. determined by national law) from the
Simpson lectures and participates in seminars on topics related to his practice, including application of those articles in situations
those sponsored by the Practical Law Institute and the American Bar Association. He has also where the bidder (or the entity
written and co-authored articles for, among other publications, Business Lawyer. American controlling the bidder) has not adopted
Lawyer featured Simpson in 2000 as one of 12 notable American transaction lawyers, The the same rules. This provision of Article
Daily Deal ranked Simpson among the top 10 European transaction lawyers in each of 2002, 12 is especially unsophisticated. It does
2003 and 2004, and Mergermarket ranked Simpson first in the 2004 European M&A league not state what regime would apply in the
tables, both in terms of number of completed transactions and size of transactions. event of competing offers: would a
member state be permitted to exempt
specific pecuniary advantages) or any nullify contractual provisions providing targets from applying Article 9 and/or 11
special rights of shareholders regarding for joint voting agreements, lock-up and vis-à-vis all bidders, or only those that do
the appointment or removal of board exit arrangements, irrespective of the law not apply Article 9 and/or 11?
members will cease to have effect and governing the agreement, the place of Furthermore, if for example, a target
multiple voting securities will carry incorporation of the contracting parties applied only Article 9 and of two bidders
one vote only, at the first shareholders’ and the size of their combined share one applied only Article 9, while the
meeting after the bid called by the ownership. As such, these rules might other applied only Article 11, would the
bidder in order to amend the articles conflict with constitutional, property and target be permitted to raise takeover
of association or to remove or appoint contractual principles both in EU and defences against both bidders?
board members. non-EU countries. The jurisdictional The reciprocity rule also provides that
The breakthrough provisions will only basis for neutralizing clauses of an member state legislation may exempt
apply to agreements between shareholders agreement governed by New York law, for targets from applying Articles 9 and 11,
entered into after the adoption of the example, and entered into by two non- even if the bidder applies those rules, if
Takeover Directive. Where rights are EU shareholders – even when the the bidder is controlled by an entity that
being removed, equitable compensation agreement relates to an EU company – is does not apply Articles 9 and 11 (such as
must be provided for any loss incurred by an issue that is likely to be contentious a US or a private parent). The purpose of
the holders of these rights. The rules for and will need to be addressed. this is to prevent bidders from
determining this compensation are to be As part of a political compromise (the circumventing the rule by incorporating
determined by member states, and the Portuguese compromise) intended to special takeover vehicles. But in practice
terms of this compensation are required garner support for the adoption of the this could mean that any European
to be disclosed in the bidder’s offer Takeover Directive notwithstanding public company controlled by a private
document. Commentators and opposition to Articles 9 and 11, Article person or by a non-EU entity could be at
practitioners have questioned the 12 of the Takeover Directive allows a disadvantage in a takeover battle. Much
practical ability of member states to member states to opt out of the rules will depend on how loosely the term
implement rules that will set the restricting defensive measures (Article control is defined by each member state,
parameters for valuing special rights. It is 9(2) and (3)) and/or the breakthrough and which definition of control will
likely that for those member states that provisions (Article 11). Member states apply – the one adopted by the bidder’s
decide to adopt the Takeover Directive’s may in fact reserve the right not to jurisdiction, or that adopted by the
breakthrough rules, the determination of require companies to apply these target’s jurisdiction.
what is equitable compensation will provisions. However, in such case, Member states are required by the
become a serious contentious issue, with member states have to give companies the Takeover Directive to implement its
potential effects on the use or substance right to opt in by voluntarily adopting provisions by May 20 2006. Let’s look
of irrevocable undertakings and Article 9 and/or Article 11. The rule is briefly at the direction that takeover law
shareholders’ agreements. drafted loosely, and leaves many is likely to take in four of the principal
The breakthrough provisions would questions unanswered as to its practical takeover jurisdictions in Europe (the UK,
16 A special IFLR supplement www.iflr.comEuropean overview
France, Germany and the Netherlands), rendered ineffective. Furthermore, Article • in contested takeover situations,
focusing on the future availability of 11 potentially prevents offeree defences that confer an advantage to a
defensive mechanisms. shareholders coming together to form a bidder, determining the success of that
consortium to make a joint bid for an bidder’s offer, are prohibited.
Developments in the UK offeree company by cutting across the Based on these restrictions, French
The UK is, from a cultural and a share transfer restrictions that would corporations have so far not used many
regulatory standpoint, more open to cross- typically be contained in their US-type defence mechanisms, most
border takeovers than any other consortium agreement. Moreover, dual- notably shareholder rights plans. There
jurisdiction in Europe. As such, the listed company transactions involving are instances, however, in which takeover
impact of the Takeover Directive on rules voting structures (where the votes of one defences could be implemented during
governing takeover defences will be company are replicated at meetings of the an offer period by a target board without
minimal, given that the ideas and corresponding entity in that structure) the approval of a shareholders meeting
concepts for the Takeover Directive – in could not, on the face of it, be sustained. (for example, crown-jewel lock-ups or
particular Article 9 – were largely drawn strategic acquisitions) —and in fact the
from the UK model and rules. Indeed, as Developments in France bidder is entitled, subject to the approval
a minimum standards directive, the French securities laws and regulations, of the relevant regulatory authority (the
Takeover Directive provides a relatively including takeover laws and regulations, AMF), to withdraw its offer if the target
compatible underlay for the UK takeover have been amended considerably over the adopts concrete and immediate actions
regime. past three years, a process that has resulted modifying the target’s consistency
In January 2005, the UK government’s in far-reaching institutional reforms. (mesures d’application certaines et
Department of Trade and Industry (DTI) Nonetheless, French takeover law will have imméédiates modifiant sa consistance).
issued a consultation document, and the to be further amended in connection with These takeover defences would no longer
UK Takeover Panel (the Panel) published the implementation of the Takeover be available if Article 9(2) of the Takeover
an explanatory paper, on the Directive. At this stage, it is generally Directive were implemented.
implementation of the Takeover assumed that France will implement Article It is not clear whether France will
Directive. The DTI and the Panel largely 9(2) and (3) of the Takeover Directive. adopt Article 11, but the consequences
confirmed that it would be business as If Article 9 of the Takeover Directive would be dramatic from the perspective
usual in the UK once the Takeover was adopted, the target board’s of target companies if France were to do
Directive has been implemented. obligations with respect to the use of so. Given that French companies might
However, fine-tuning will be required. defensive measures during offer periods not easily adopt takeover defences during
The Panel confirmed that the UK would be more stringent than those the offer period (without shareholder
would adopt Article 9, which broadly currently applicable under French approval), preventive takeover defence
reflects the concept already contained in takeover law. mechanisms,
General Principle 7 and Rule 21 of the Generally, neither including in
UK Takeover Code prohibiting French corporate particular share
frustrating action being taken by a target law nor securities The price paid as a result of this transfer restrictions
during a bid or when a bid is imminent, regulations and restrictions on
without approval by shareholders in expressly prohibit political compromise will likely voting rights, play a
general meeting. To align the provisions target companies be the lack of EU-wide key role in the
of the Takeover Code to those of the from adopting French context.
Takeover Directive, the Panel intends to measures designed harmonization of rules relating According to a
broaden the definition of frustrating to fend off hostile to takeover defences recent study, more
action in the Takeover Code (although takeovers. than half of the
this will probably have a minor impact However, this French CAC 40
on how the rule is applied in practice). general principle companies have
The Panel also intends to eliminate the is tempered by several rules that tend to adopted these types of defences or
added flexibility under Rule 21, which reduce the scope of a target board’s shareholder arrangements. For example,
allowed the Panel to permit pre-existing discretion in responding to hostile these defence mechanisms include voting
contractual arrangements (the completion takeover threats: right limitations set out in a company’s
of which would otherwise be frustrating) • although not expressly set out in articles of association that prevent
to be completed. applicable laws and regulations, shareholders from voting shares in excess
Given the disparity of conceptual absolute defences (défenses absolues) – of a certain threshold. Neutralizing such
approach between Article 11 and UK that is, defences precluding the success restrictions in connection with takeover
general market practice, it appears likely of any tender offer – are prohibited bids would render French companies very
that the UK will opt out of Article 11. (this prohibition being qualified as a vulnerable to hostile takeover attempts.
Otherwise – and ostensibly general principle of French securities
unintentionally – the ordinary market laws by numerous scholars); Developments in Germany
practice in the UK of gathering • any defence must comply with the Hostile takeover attempts have been rare
irrevocable undertakings from offeree requirements set out by the fuzzy in Germany so far. Vodafone’s takeover of
shareholders (not to accept a rival offer notion of social interest (intérêt social); Mannesmann in 2000 was one of the few
and not to transfer their shares) would be and exceptions, and it provided some
www.iflr.com A special IFLR supplement 17European overview momentum for the enactment of German and restrictions on share transfers in parties). While the use of anti-takeover takeover legislation in 2002. The low public companies are generally restricted devices has in recent years become the number of hostile takeover attempts is due to a limited number of industries. The subject of increased criticism in the to the German economy being breakthrough rules, however, would be Dutch market and scrutiny by the courts characterized by a strong base of owner- more relevant with regards to contractual (particularly the use of devices that were managed (often family owned) businesses, arrangements among shareholders, which put in place by target companies before cultural and political aversion to commonly include provisions for pooling an actual threat actually materialized), confrontational resolution of conflicts and voting rights and provide for rights of they have been consistently upheld in the the lesser importance of the capital first refusal and lock-ups. Dutch courts. markets in Germany as a source of The Takeover Directive is likely to have financing compared to other countries. Developments in the a limited impact on the range of anti- The German Takeover Act Netherlands takeover devices currently available under (Wertpapierwerbs-und Übernahmegesetz), Dutch takeover law has so far been Dutch law. The Dutch government adopted in January 2002, did not characterized by the absence of a takeover intends to opt out of Article 9. In contemplate measures designed to open code similar to that in force in the UK, particular, the DoJ believes that target Germany to hostile takeovers. On the France and Germany. In European companies should have the option to contrary, the German Takeover Act jurisdictions where a takeover code is in trigger a pre-existing anti-takeover device provides management with considerable place, a shareholder is usually required to (previously approved by the general flexibility (compared, for example, to the make a mandatory offer for all of a target meeting) or to leave in place such a UK) to take frustrating actions against company’s shares as soon as the device for a limited amount of time, for unsolicited takeovers. shareholder’s stake in the company exceeds instance following a successful offer. It appears that the Takeover Directive a given threshold. Dutch takeover law According to the DoJ, this would allow will not do much to change this state of does not contemplate this principle. the target’s board time to negotiate with affairs in Germany. Historically, Germany Accordingly, Dutch takeover law stands to the bidder about the merits of the offer, has been one of the principal opposers of be deeply affected by the adoption of the for instance resulting in an increased the Takeover Directive, and voted in Takeover Directive’s mandatory bid rules. takeover premium or continued favour of its rejection by the European However, it appears at this stage that the employment commitments for the parliament in 2001. When the Dutch government intends to opt out of benefit of the target’s employees. The Commission proposed a new draft of the Article 9 and adopt Article 11 only in DoJ also points out that the (temporary) Takeover Directive in 2002, Germany part, which should soften the impact of use of an anti-takeover device could allow continued to oppose it on the same or the Takeover Directive with respect to the the target company time to enter into similar grounds until member states availability of takeover defences in the discussions with a white knight, with the reached the Portuguese compromise. It Netherlands. aim of obtaining a competing offer. appears now that Germany intends to On September 7 2004, the Dutch At the time of going to press, the avail itself of all the flexibility resulting Minister of Justice issued a policy Netherlands is considering a partial from the compromise. document on the modernization of adoption of Article 11. Although share There is greater tolerance for defence Dutch company law, where reference was transfer restrictions and restrictions on mechanisms under the German Takeover made to the general aspects of the voting rights would not be neutralized by Code than under the Takeover Directive implementation of the Takeover law during the offer period, the or the takeover codes of the UK and Directive. The Dutch government’s Netherlands is considering the adoption France. It is likely that, consistent with its Department of Justice (the DoJ) is of the post-bid 75% rules contemplated historical stance against flat prohibitions currently preparing a proposal of law, by Article 11. The DoJ has indicated that of defence mechanisms, Germany will intending to follow as much as possible it believes that, notwithstanding opt out of the requirement to implement the guidelines laid down in the policy companies’ freedom to determine the the provisions of Article 9 and retain the document. level of anti-takeover devices they desire status quo. Germany will have to give In the Netherlands there is no set rule to adopt, it would be undesirable for companies the option to opt into the for or against takeover defences. Rather target companies’ to ignore (new) realities provisions of the Takeover Directive, and than following the takeover code within their shareholder base indefinitely. specify the statutory provisions that will approach, Dutch law relies on essential Consistent with intentions voiced by the apply to such companies as a result of principles of good business judgment Dutch government in recent years, the their opting-in. It is expected, however, (elementaire beginselen van behoorlijk DoJ states that it is desirable that a that only few (if any) German ondernemerschap), as interpreted by the successful bidder can break through the corporations will make use of this option. Dutch courts. Historically, Dutch courts target company’s anti-takeover defences As many other jurisdictions in Europe, have been relatively inclined to accept the following a reasonable period of time. Germany is likely to opt-out of Article use of anti-takeover devices by target 11. On the other hand, the relevance of companies if such companies could make Takeover Directive fails this rule with respect to provisions of a good faith argument that the takeover It would appear that the Takeover German statutory law is not extensive. threat was against the best interest of the Directive has failed to harmonize the German law does not permit shares with target and all its constituents (which approach to takeover defences in Europe. multiple voting rights (which is more includes its shareholders, but also its The range of positions taken by the common in Scandinavian jurisdictions), employees, creditors and other relevant governments of the four member states 18 A special IFLR supplement www.iflr.com
European overview
considered in this article is telling. The Indeed, targets could use this mechanism concurrently in The M&A Journal. This
UK will probably adopt Article 9 and opt to defend selectively against cross-border article was prepared with the assistance of
out of Article 11. France will also adopt takeover attempts by attempting to raise Piers Johansen, corporate associate in
Article 9, but its position as to Article 11 barriers against takeover bids from any Skadden Arps London; Armand W
is still unclear. Germany will opt out of EU bidder that has not adopted Articles Grumberg, corporate associate in Skadden
both provisions and maintain the status 9 and/or 11, and virtually any non-EU or Arps Paris; Matthias Horbach, corporate
quo. The Netherlands will opt out of private bidder. partner in Skadden Arps Frankfurt; and
Article 9 and potentially adopt part of the As a general matter – and with the Alexander J Kaarls, corporate partner, and
provisions Article 11. exception of the Netherlands – courts Evelien WI Visser, corporate associate, in the
What remains unclear is whether have not so far factored in any major way London office of Houthoff Buruma.
member states that adopt Article 9 in many cross-border European takeover Elements of this article were drawn from
and/or Article 11 will do so subject to situations. Given the differences that are the M&A roundtable discussion hosted by
reciprocity. While member states appear likely to develop between European Skadden in May 2004 entitled Cross-
to be reluctant to take an early position jurisdictions as a result of the Takeover Border and Transatlantic Perspectives on the
on this aspect of the Portuguese Directive, European courts might have a Future Direction of European Takeovers.
compromise (although the recently much more prominent role in the future.
published UK government consultation
paper proposes to reject the reciprocity Scott Simpson (ssimpson@skadden.com)
principle), it seems unlikely that all is a corporate partner, and Lorenzo Corte
member states will decide against the (lcorte@skadden.com) is a corporate
adoption of this rule, because it was an associate in the London office of Skadden, Skadden Arps Slate Meagher & Flom
integral part of the Portuguese Arps, Slate, Meagher & Flom (UK) LLP. 40 Bank Street
compromise. It is at least conceivable, The views, opinions and positions in this Canary Wharf
therefore, that some member states will article are those of the authors and not of London, E14 5DS
adopt this reciprocity-based approach to Skadden Arps or its clients. All rights
counterbalance the introduction of rules reserved. The authors may use significant Tel: +44 20 7519 7000
that open up the defences of companies portions, or the entirety, or adaptations, of Fax: +44 20 7519 7070
incorporated under their jurisdiction. A this article in client mailings, publications, Web: www.skadden.com
new and important element of hostile speeches and similar communications.
takeover bids could develop as a result. This article is being published
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