The new proposal of a directive on company law concerning takeover bids and the achievement of a level playing field with particular reference to the recommendations of the High Level Group of Company Law Experts set up by the European Commission.
1.1.- The historical background: past proposals and debate concerning a directive on takeover bids.
According to the Financial Services Action Plan adopted by the Commission in 1999 and to the position expressed by the European Council in Lisbon, the enactment of a framework directive on takeover bids represents an important component of the EC capital market regulation: a regulation that, after a slow start, has now emerged as a fully fledged aspect of EC law for the construction of the single market.
Such directive should set indeed a common European framework for cross-border takeover bids, whereby contributing to the reorganisation of European companies and to the development of a single capital market.
In the White Paper on the completion of the internal market published in 1985 the Commission first expressed its intention to draft a directive to harmonise Member States provisions on take over bids. In 1989 the Commission was finally able to publish a detailed first proposal but, since the European Council considered it overly detailed and the proposal encountered the opposition of many Member States, the Commission preferred to drop it and to publish a revised version in 1996 in the form of a framework directive which set out general principles but at the same time left wider scope to the legislation of Member States. The proposal was recommended by the Economic and Social Committee and by the European Parliament, which proposed however 20 amendments.
In 1997 the Commission published therefore a new version which took account of the recommendations of the European Parliament. In 2000 a common position was achieved in the European Council. On second reading, however, the discussion in the Parliament revealed major differences between the European Parliament and the European Council. In particular, the European Parliament posed the question of the regulation of a squeeze out and sell out right which was not covered by the proposal and required a more detailed definition of the “equitable price” paid in the event of a mandatory bid. Furthermore the Parliament stressed the importance of adding provisions for the protection of employees affected by a takeover bid.
The following conciliation procedure ended up with a compromised text which failed to obtain the required majority for enactment in the plenary session of the European Parliament on 4 July 2001 (when 273 members voted in favour and 273 members voted against the conciliation text). The Parliament still considered that:
a) a principle whereby the board of the target company could not take defensive measures in the face of a bid without the prior approval of the shareholders’ meeting to be held once the bid has been launched, could not be accepted until such time as a level playing field was created for European companies facing a takeover bid;
b) the protection afforded by the Thirteenth directive proposal to the employees was still insufficient;
c) the proposal failed also to achieve a level playing field with the United States.
Following such a vote of the European Parliament, the Commission set up a High Level Group of Company Law Experts (hereinafter referred to as “the High Level Group” or “the Group”, as the case may be) with the mandate to examine the issues raised by the Parliament in relation to the ill fated Thirteenth directive proposal. The Group rendered its advice with a Report delivered on 10 January 2002.
On 2 October 2002 the Commission submitted a new directive proposal, which on one hand confirmed many of the provisions of the 2001 ill-fated Thirteenth directive proposal but on the other hand also endeavoured to properly address the issues which were raised by the European Parliament in July 2001.
1.2. - The new 2002 proposal.
In principle the new directive proposal has the same scope (namely listed securities ( ), unless Member States do not extend the applicability of its provisions also to non listed securities when implementing the directive) and, as already mentioned, lays down the same basic provisions as its predecessor, also confirming the rule set out in Article 9 that it is for the shareholders to decide on defensive measures once a bid has been made public.
Nevertheless, the new proposal now:
a) defines, under Article 5 (4), the equitable price to be paid in the event of a mandatory bid as the highest price offered by the bidder during the last six to twelve months before the bid;
b) sets out, under Article 10, a new, specific duty of publishing information concerning the structures and measures that could hinder the acquisition and exercise of control over the company;
c) provides, under Article 11, a break through rule, albeit more limited in scope than the one recommended by the High Level Group, aimed at making unenforceable during the bid and at dismantling, if the bid is successful, at least some of the most common pre bid defensive measures that can be regarded as hindering bids;
d) provides, under Article 13, an information and consultation procedure with the representatives of the employees;
e) introduces, under Article 14, the squeeze out procedure requested by the European Parliament which enables a shareholder who holds a given percentage of voting securities following a takeover bid to require the remaining minority shareholders to sell her or him their securities at a fair price;
f) introduces, under Article 15, a sell out right for the benefit of the minority shareholders upon the same terms and conditions provided for in the squeeze out procedure.
g) incorporates, under Article 17, a new provision on committee procedure (to replace the former contact committee arrangements), which somehow extends to the domain of company law the Lamfalussy procedures set out for financial markets and which therefore has already raised some political concerns within the Parliamentary circles;
h) provides, under Article 18, a revision clause aimed at achieving, at a later stage, a more level playing field in takeover bids; and
i) sets out, under Article 19, a transitional period of no more than three years for compliance with the neutrality rule set out in Article 9.
The proposal does not cover the “golden share” issue on the assumption that the (limited) break through rule set out in Article 11 should be concerned specifically with private law restrictions and that public law restrictions should be dealt with by the Commission on a case by case basis according to the principles set out by the European Court of Justice in the judgments of 4 June 2002 in the cases C-367/98 Commission v. Portugal, C-483/99 Commission v. France and C-503/99 Commission v. Belgium.
Finally, following the advice rendered by the High Level Group, the new proposal does not provide any specific rule concerning the level playing field with non Member States and, in particular, with the United States.
1.3.- The provisions on “equitable price”, “squeeze out and sell out right” and the information and consultation procedure with employees.
In the wake of the presentation of the new proposal it appeared immediately clear that the debate should, and would have, focused, in the legislative process and elsewhere, especially on the issue of the level playing field. In fact, the Commission proposals concerning the equitable price, the squeeze out and sell out rights, the information and consultation procedure with employees reflected the technical advice rendered by the High Level Group and substantially met the requests made last year by the European Parliament. In principle, these proposals are therefore expected to receive quite general acceptance.
Also in our view they are substantially correct in both scope and wording although, in principle, it might be questioned that the adoption of the “highest price” as the price for the mandatory offer, whereas it affords the best protection to the minority shareholders, might render the launch of a bid too costly (especially when prices are decreasing), thereby impairing the contestability of control.
We would moreover invite the Parliament to carefully consider:
a) whether to supplement Article 5 (3), with the specification that the rules set out by the Member State concerning the “percentage of voting rights” which triggers the mandatory bid should also provide to the national supervisory Authority a power to derogate to the threshold, if it results that control exists at a lower threshold. The experience accrued to date shows indeed that the common threshold of about 30% may result too high to capture, under certain circumstances, all changes of control in listed companies when Article 5 (1) is clear in referring the mandatory bid to the acquisitions of a specified percentage of voting rights as “conferring the control of the company”;
b) whether to supplement Article 5 (4) where it is stated that the equitable price is “the highest price paid for the same securities over a period of between six and twelve months prior to the bid” with the expression “and during the bid”: such provision would indeed clarify that, according to the principle of equal treatment among shareholders of the same class and in order to avoid the circumvention of the principle set out by the same Article 5 (4), the bidder has to supplement the price offered in the bid, should a higher price be paid during the same; and
c) whether to clarify under Article 5 (5) that the cash consideration alternative to non liquid securities (which is currently indicated by the proposal as “a cash consideration at least as an alternative”) has to be for the whole price and cannot be partial: the proper expression used by the Note on Rule 9.5 of the City Code on Takeovers and Merger is “a cash alternative of at least equal value”.
1.4.- The strongly debated question of a level playing field in the context of takeover bids. Scope of this Report.
A much more controversial question, instead, is, and will certainly be in the Parliamentary debate, how is it possible to deal with those differences among national company laws which enable companies to take lawful pre bid defensive measures and adopt lawful pre bid corporate structures which are different from Member State to Member State and constitute company specific barriers to takeover bids, that – as the High Level Group put it - make the expectation of success of takeover bids uneven in the different Member States and prevent shareholders from having equivalent opportunities to tender their shares in all Member States. This is what is generally referred to as the lack of a “corporate control level playing field” (or simply, the “level playing field”) among Member States and, if ever possible, with non Member States.
This Report shall therefore focus specifically on the level playing field issue, in order to provide the European Parliament with the information needed in order to properly evaluate the Commission´s new directive proposal. In particular the Report, taking into account the results of the High Level Group Report, shall endeavour to answer the following questions:
a) Does a level playing field exist within the European Union? If not, is it necessary to tackle this issue within the new framework directive proposal in light of the anti-takeover measures existing in the different Member States?
b) Are the recommendations of the High Level Group on this respect fully satisfactory?
c) Is the level playing field issue properly solved by the new Commission proposal?
All these questions shall be thoroughly discussed here below and at the end of this Report we will provide our recommendations to the Parliament, which we hope might be of some help in devising a viable technical solution for this regulatory problem.
2.- THE FOUNDATION OF THE DEBATE: WHY TO REGULATE TAKEOVER BIDS AT THE EUROPEAN LEVEL?
2.1.- The need for a European regulation facilitating cross border takeover bids.
As the legal history of the draft directive shows, the question of the level playing field is not a new issue in the context of European takeover regulation.
From the outset, the implied political foundation in itself of a takeover directive was indeed to be found in the need to create a level playing field within the European internal market which could facilitate and accelerate the European integration process and could make it as easy for a British or Italian company, for example, to acquire, through a successful takeover bid, a French or German company as it would have been for a French or German company to acquire the controlling interest in the British or Italian company. In other words, takeover bids had to be possible freely within the European internal market.
The underlying rationale for that was and still is twofold also in the new proposal of the Commission.
On one hand, it is necessary to duly implement Article 43 of the Treaty providing for the principle of freedom of establishment. Such principle refers indeed not only to the incorporation but also to the management of companies. Accordingly, Article 44 g) – which constitutes the legal basis of the directive proposal – requires the Community to issue directives under the co-determination procedure set out under Article 251 to coordinate certain safeguards which, for the protection of the interests of members and others, Member States require of companies governed by the law of a Member State with a view to making such safeguards equivalent throughout the Community. This means - as the Commission proposal indicates in the third recital – that a Community action is needed to “prevent patterns of corporate restructuring within the Community” (namely the consolidation of the European industry, also through cross border take over bids) “from being distorted by arbitrary differences in governance and management culture”. Since the freedom of establishment is to be also recognised in the acquisition of the control of a company established in a different Member State, it can be effectively implemented only through the introduction of a level playing field throughout Europe concerning takeover bids.
On the second hand, if we assume (as it is the case of the Commission proposal) that, as a matter of policy, takeovers are to be generally considered economically beneficial for the shareholders, both as an instrument of industrial consolidation and, especially where the ownership is widely dispersed among shareholders, of external monitoring and displacement of slack management, they should be regulated in order to favour the contestability of control and, by doing so, to foster the on going process of transnational growth of the European companies to an optimal scale in order to duly protect – as it is required by Article 44 g) of the Treaty – the interests of members.
To this purpose, as it will be thoroughly discussed here below, the right to take decisions which might hinder the success of the bid and thus the change of control should be vested into the shareholders of the target company and not into the management of the same. Managers could easily act, in this respect, in conflict of interest. In other terms contestability of control requires shareholders’ empowerment as a reaction to any possible form of management entrenchment ( ).
Consistently with these principles, with the proposed directive, the Commission endeavours to create a Community wide framework for takeovers, explaining that:
a) they could contribute to the development and restructuring of the European economy, without which European undertakings could not survive in international competition and without which a European financial market could not be achieved;
b) their regulation at the European level is also intended to increase legal certainty in cross border transactions and to ensure adequate protection to minority shareholders throughout Europe.
A more detailed discussion of these political objectives can be found in the Report delivered to the Commission by the High Level Group. The Group indeed considers takeovers to be – usually, albeit not always - economically beneficial in several respects. First, they are said to be a means to create prosperity through the use of synergies between the undertakings involved. This is considered important especially for European companies as they must grow to an optimal size in order to be able to effectively cope with the single market and compete in global markets.
Furthermore, takeover bids are reported to give shareholders the opportunity to sell their shares to bidders who are prepared to pay a price above the current market price. Such a price is said to be offered where bidders believe that the resources of the company can be better developed and used under their management and control.
Finally, actual and potential takeover bids are considered to constitute an important means to discipline the management of listed companies with dispersed ownership. If managers perform poorly, the price of the shares will generally remain below the actual value in relation to the potential of the company and a bidder might be easily induced to tender the shares on the assumption that, if the bid is successful, it will manage the business with greater competence. This disciplinary effect on management and the following reallocation of resources is in the best interests of all parties involved over the long term.
It is thus apparent that the efforts to create harmonised European rules on takeovers are clearly influenced (also) by the theory of a “market for corporate control”, which was developed especially by American scholars in the field of business economics. The starting point for this concept is that, since big companies with widely dispersed ownership structures are not managed by the equity holders, but by managers who are not necessarily shareholders and in any event are not relevant shareholders, this triggers a principal-agent problem. As the managers do not participate directly in the success of the company, they could in principle also pursue objectives which may be in their own interests, but would not serve to maximise the shareholders’ investment value. Such “private benefits” of the management could exist for example in the form of excessive remuneration. Although shareholders are granted by company law some monitoring devices and could in principle dismiss slack managers through the exercise of their voting power, this rarely happens in the case of public corporations with widely dispersed shareholders because small investors will generally find it too difficult and too costly to exercise their rights.
The market for corporate control is suggested to remedy that. As the poor management of the company will regularly be reflected in lower share prices, a potential bidder, able to identify such companies, would have a strong incentive to tender these shares because she or he could obtain control over the company at a lower price, dismiss its management, and take the new and more advantageous path for the company. At the same time, the shareholders could benefit from the takeover premium. Moreover, according to the theory, the disciplinary role of takeover is already performed by the simple threat of a takeover, because it already supposedly forces management to pursue business policies in the investor’s interests, in order to avoid the risk of a bid being launched.
Yet, the theory of a market for corporate control is not undisputed in the economic literature. In particular, it is contended whether empirical findings regarding takeover bids really support the assumptions underlying this theory. A recent study on the British takeover market came for instance to the conclusion that it is hardly provable that target companies achieve on average lower earnings than comparable companies which are not tendered and that therefore the hostile bid exerts a disciplinary function on poorly performing companies and slack managers ( ).
Many contend, moreover, that takeover bids are not necessarily beneficial from an overall economic point of view. Not only the restructuring measures following a takeover often adversely affect suppliers and employees, but even shareholders of the target company might be worse off in the wake of a bid. Some observe indeed that shareholders usually do not have a choice between several offers and are not able to change the terms and conditions unilaterally fixed by the bidder, so that they experience a significant coercion to sell. Moreover, the latent threat of a takeover could easily cause the management to pursue short term as opposed to long term business policies.
Others argue that in many circumstances takeovers are motivated by reasons such as the increase of market shares, the acquisition of technology or the achievement of personal power (“empire building”). In these circumstances there is no disciplinary function to be found in the takeover. Quite on the contrary there might be disadvantages from the overall economic point of view. For example, a takeover of a company which is undervalued at the stock exchange and is broken up after the takeover, might easily destroy the economic value of the company. Similarly, where a bidder takes over the target company for an excessively high price due to the empire building ambition of its management, there is no disciplinary function on the management of the target company but there is a misleading business policy by the bidder, and its shareholders are harmed therefrom.
Moreover, it is argued that the theory of a market for corporate control has been nicely developed with regard to the Anglo American ownership patterns characterised by widely dispersed ownership with “strong managers and weak owners”. On the contrary in continental legal systems patterns of concentrated ownership are the most common (although a change appears to have begun to take place in recent years). The principal-agent problem described above with reference to the American corporation is not thus quite the same in Europe where a controlling or relevant shareholder usually exists and can naturally control management much better than a great number of small shareholders.
On the other hand, there is in Europe the danger that the controlling shareholder might be willing to extract private benefits from the company, thereby reducing the profits flowing to all other shareholders. It is questioned however whether an efficient market for corporate control could effectively react to such a danger.
On the whole, it thus becomes clear that the idea underlying the directive, namely that takeovers are sensible from an overall economic point of view, and that European legislation to facilitate takeovers is therefore necessary, could perhaps be disputed in its very foundations. But since the directive is clearly based on this idea it is certainly outside the scope of this Report to review this issue. We will instead focus on the proposal accepting its implied premises, and we will endeavour to review whether the directive logically and consistently implements its underlying rationale.
2.2.- The lack of a level playing field in Europe. a) General.
As already noted, the major reason for the failure of the Thirteenth directive on company law in July 2001 was the Parliamentary objection that there was an absence of level playing field within the European Union.
Initially, both the Commission and the Council denied the absence of a level playing field, arguing that the different anti takeover measures existing in the economic and legal systems in each Member State neutralised each other. Consequently, all companies within the European Union were said to have substantially the same possibilities of defending themselves against hostile takeover bids regardless of the Member State in which they were incorporated.
This initial position has now been correctly overturned.
b) Are there comparable pre-bid defensive measures in the different Member States?
In fact, in the area of company law there is a great number of techniques which can be used as an instrument to maintain control over a company and thus to hinder hostile takeover bids or, at least, make them more difficult. Examples to be mentioned here include provisions in the articles of association granting privileges in, or restrictions to, the right to vote such as multiple voting shares, non-voting shares and voting caps; restrictions in the articles of association to the transfer of shares; special nomination rights; staggered terms of office for the directors; contractual agreements between the company and third parties or between shareholders; pyramid structures, cross-shareholdings and special constructions under company law such as the Dutch foundation constructions or the German KGaA (as well as the parallel Italian “accomandita per azioni” or French “Société en Commandite par actions” and alike). In addition, some Member States have retained special rights in privatised undertakings (so-called “golden shares”), all of which serve to preserve control for the Member State and to ward off hostile takeovers.
Nevertheless, these anti takeover measures do not exist identically in all Member States. Whereas, for example, multiple voting shares have been abolished in Italy, Austria, Spain, and Germany, they are still common in France, Sweden and in the other Scandinavian countries. Pyramids on the other hand are much more common in continental Europe (particularly in Italy) than in Northern Europe. Voting caps in turn are admissible for instance in Austria, the Netherlands, France, Spain, and Italy (and are quite common in France and Italy) whereas they are now forbidden in Belgium and Germany. Non-voting shares and voting rights agreements are admissible and common almost everywhere in Europe but shareholders’ agreements are perhaps more common in Continental Europe than in the United Kingdom. The possibility to retain special rights – the so-called golden shares – in privatised companies has also been used by different Member States in varying degrees. In Spain, Italy, the United Kingdom and Portugal it was almost usual for the State to reserve such rights for itself in a privatisation, and France also makes generous use of the possibility. In Germany, on the other hand, such golden shares do not exist at all, apart from the “Volkswagen Law” (law of 21 July 1960 as modified by law of 31 July 1970).
Although no comprehensive study has been made so far to review all these different anti takeover pre bid techniques in all different Member States, it seems to be possible to suggest – as it was also recently confirmed by a study of the McKinsey Company of April 2002 - that companies incorporated in some Member States have a far greater range of possibilities to use provisions of their articles of association or other legal means to protect themselves against hostile takeovers than companies incorporated in other Member States. Thus, as the High Level Group also correctly indicates, there is no level playing field for hostile takeover bids among European companies.
2.3.- The “silence” of the previous directive proposals on the level playing field and the reasons why it should be introduced by the new directive.
Despite these findings, as anticipated, until the new proposal, none of the previous directive proposals have ever set out provisions specifically aimed at dismantling the pre bid technical barriers erected or allowed by national company laws of the different Member States to discourage takeover bids. And it has been so, although the Commission has been aware of the problem at least since 1990, in the wake of the publication of the Booz Allen report ( ) and of the Coopers & Lybrand study ( ), which devoted great attention to this specific issue.
Actually, the Commission initially reacted to those reports putting forward a comprehensive set of amendments’ proposals to the Second directive, to the draft Thirteenth directive (this latter however solely in order to limit the use of resolutions authorising the board to buy back own shares passed prior to the bid) and particularly to the draft Fifth directive on Company Law which have become known as the “Bangemann Proposals” and were directed to make the playing field less uneven.
Unfortunately, with the sole exception of the amendments to the Second directive (approved by the Council in 1985), these proposals were unsuccessful, as both the Fifth and Thirteenth directive proposals remained blocked.
Later, with the ill fated 2001 proposal the Commission preferred to focus only on the post bid technical barriers, hereby adopting the “neutrality rule” set out in Article 9, and to set aside the question of the harmonisation of the great many company law features which could, and in fact (with different patterns in the different Member States) did and do, function as pre-bid protections against takeovers, impairing the contest for corporate control.
As the commentators correctly noted, this restrictive approach to the level playing field question somehow insisted, theoretically, on a slippery distinction between core company law and securities law. In other words, it was adopted on the implied assumption that tackling pre bid measures would have entailed the introduction of major changes in European company law and would have been outside the scope of the directive.
It was argued on the contrary that if the rationale of the neutrality rule set out in Article 9 of the directive proposal was and is to be found in the facilitation of the contest for the corporate control, the difference between pre bid and post bid measures blurs. Focusing only on post bid technical barriers would leave companies free to adopt governance devices that effectively block a hostile takeover from ever being made and thereby insulate them from the market for corporate control.
This restrictive approach of the Commission was therefore rejected by the European Parliament. Several arguments appear to justify the Parliamentary decision.
b) The new directive is the proper place for Community action intended to introduce a level playing field.
In the first place, takeover regulation in Europe is not only a component of securities regulation but also an important creature of company law and corporate governance. The provisions on transparency and disclosure in the takeover process are certainly crucial in so much as they play a major role in redressing market imperfections providing the investors with a sufficient flow of information, but at the same time it cannot be neglected that a very significant focus of takeover regulation rests on the protection of minority shareholders in the change of control and in their fair treatment. This is why, although this regulation is clearly at the interstices of company and securities law and covers both aspects, the new proposal is going to become a directive on Company Law, it has its legal basis in the second paragraph of Article 44 g) of the Treaty concerning company law harmonisation and in its recitals expressly emphasises the need “to prevent patterns of corporate restructuring within the Community from being distorted by arbitrary differences in governance and management cultures”. It was and would be therefore hard to accept that corporate matters should remain outside the scope of the same insofar as they affect the takeover activity, rendering the launch of an unfriendly takeover virtually impossible ( ). The legal basis of the directive proposal in itself authorises measures which are in the corporate field. And this is particularly true for matters of effective company governance, impinging on the properly disciplined and competitive management of European listed companies. A major public interest is engaged here.
Furthermore, the revision of company law implied by the takeover discipline in order to facilitate the contestability of control would be fully justified even if we assumed that the primary focus of the new directive be on securities matters. In fact, the adoption by the directive of specific provisions concerning pre bid defensive measures and enhancing the contestability of control throughout Europe would affect solely listed companies: a primary concern (also) for securities law and the proper realm of the new directive. In other words, it would seem to us that, despite the different attitude shown by the Bangemann proposal some years ago, there would be little merit indeed in providing the company law rules directed to enhance the contestability of corporate control of listed companies with the Fifth directive on Company Law which is devoted to all joint stock companies irrespective of the listing of their shares. Doing so, the legislation would easily force into a single statutory provision situations which instead are or might be different due to the different ownership patterns and the inherent bargaining power of the shareholders (which is certainly to be seen much more in close companies than in public companies) and might well require different regulatory approaches. A clear example is given by the most debated “one share one vote” rule: such a mandatory rule, if appropriate for listed companies (as it will be discussed here below), could be less appropriate for closed companies. It might therefore be usefully inserted in the Thirteenth directive but hardly in the Fifth.
In the second place, as it was mentioned above, there is a wide consensus among the commentators that, if the underlying policy of the directive is (also) to foster the contestability of control as it results from the neutrality rule set out in Article 9, a different regulatory approach to pre bid techniques and post bid defences is hardly acceptable in the light of the corporate control level playing field and of the goals of market integration. It has been scholarly noted in this respect ( ) that the pre offer barriers – which are part of the formal structure of the corporate governance environment – do facilitate the erection of structural barriers, which by contrast reflect the effect of existing conditions in the economic environment, and include such circumstances as concentration of ownership in families, the influence of large universal banks and the reliance on debt as opposed to equity financing. Technical pre bid barriers therefore serve to insulate pre-existing outcomes in the economic environment when change would otherwise shift the efficient boundary of the firm. More recently, both institutional investors and scholars have begun to urge that European companies make significant changes in their formal governance institutions to converge as to more closely resemble the dispersed ownership pattern of the Anglo-American style governance. Therefore, as it has been correctly noted in recent studies, the need for the removal of technical barriers is particularly significant now, when there is some (albeit not conclusive) evidence that the patterns of ownership and control throughout Europe might be going to change towards a more dispersed ownership.
Finally, the distinction between pre bid and post bid regimes seems to be also politically untenable at least in the European Parliament arena. Understandably enough, those Member States who would have to change their legislation in order to comply (as it is the case for instance in Germany), with the neutrality rule set out by the directive proposal and do not offer to their national companies pre bid company law defences comparable to those of other Member States see an effective level playing field in the domain of the pre bid techniques as a prerequisite for their approval of the directive.
Thus we agree in principle with the High Level Group that also company’s ownership patterns cannot be outside the scope of the new directive and that the harmonisation process, to be successful, implies equally open target companies throughout Europe.
c) The new ECJ decisions on golden shares favour a Community action aimed at dismantling pre bid defences.
The judgments rendered by the ECJ on 4 June 2002 on “golden shares” somehow confirm the need to tackle this issue with the takeover directive.
These judgments, being based on Article 56 of the Treaty, cannot provide direct support to the directive, which is based instead – as already mentioned – on Article 44 letter g) and on the freedom of establishment.
Nevertheless, the principles stated by these judgments cannot be neglected in tackling this issue.
In fact, in its judgments of 4 June 2002, the ECJ for the first time rendered a decision on the compatibility with Community law of restrictions on the acquisition of shares and on special voting rights granted to the government. In the opinion of the Court, such provisions in principle infringe upon the freedom of the movement of capital protected by Articles 56 et seq. of the Treaty, unless they are justified by one of the reasons listed in Article 58 or by compelling reasons of general interest within the meaning of the “Cassis de Dijon” case law, and are suitable for the achievement of the intended purpose, necessary and proportionate.
Both the French decree number 93-1298, which granted to the French State a special share in Société Elf-Aquitaine, and the Portuguese law no. 11/90, which allowed the Portuguese Republic among other things to restrict the influence of foreign investors on privatised companies, were regarded on the basis of this legal principle as an infringement of the freedom of the movement of capital. Only the two Belgian regulations which granted to the State special shares in Société Nationale des Transports par Canalisation and in Distrigaz were considered to be compatible with the freedom of the movement of capital. The right to object granted to the Minister in the two regulations was also considered to interfere with Article 56, but to be justified for reasons of public safety, and also to be proportionate in view of the intended objective. The crucial aspect in this respect was that an objection had to be made within a certain deadline, in a certain form and only for certain reasons, and was subject to judicial review. Therefore, in the opinion of the Court, the interference with the freedom of the movement of capital caused by the regulations was limited to the extent necessary to achieve its purpose.
The ECJ case law embodied in the three judgments primarily concerns national provisions which may give a Member State control over undertakings which have already been privatised. However, there is an increasing number of voices in the legal literature which demand that obstacles to takeovers created by agreement, such as multiple voting shares and voting caps, be covered by the new case law. If these legal opinions were correct, this would perhaps question the need to tackle the matter through a directive based on Article 44 letter g) of the Treaty.
However, by extending the scope of application of these court judgments to takeover obstacles created by agreement, we do believe that these judgments might be overestimated.
First, pre bid anti takeover measures are not based on legal provisions adopted by Member States, but are adopted by the articles of association of the company concerned or through shareholders’ agreement. They are therefore attributable to the State only in an extremely indirect manner. The role of the State in the creation of such obstacles is limited to refraining from prohibiting the creation of such takeover obstacles by freely concluded contracts and in principle restrictive effects arising from the absence of national provisions seem to be irrelevant. It could therefore be very difficult to derive from the freedom of movement of capital an obligation of the State to prevent takeover obstacles created by private parties.
Although it is generally recognised that protective duties can follow for the Member States from the basic freedoms of the Treaty, and that Member States can also be obliged under certain conditions to enforce these freedoms against any third party interference, it will always be necessary in such cases to reasonably balance the freedom of the individual and the intended restriction of the basic freedoms. The Member State shall therefore act to enforce the basic freedoms only in cases of especially serious violations by a private party. It might be questioned, thus, that takeover obstacles created by private parties constitute such a serious violation which would impose upon the Member State a duty to act according to Article 56 of the Treaty in order to restrict the freedom of private parties to agree upon such anti takeover measures.
Secondly, even if we assumed that (along the lines of the interpretation given for instance to the freedom of movement of goods in respect to agreements isolating national markets) Article 56 might be construed as to limit the ability of private parties to enter into agreements whose scope or effect might be to isolate the market of corporate control of the single Member State, and that this could determine the invalidity of the agreements entered into by private investors, this would nevertheless not disfavour the adoption of specific measures in the new directive.
Indeed, without such harmonised measures, the protection granted to the bidder by Article 56 would not suffice because it would still require either a Commission proceeding against each individual Member State pursuant to Article 226 of the Treaty or the reference by the national judge addressed by the bidder of the question of the compatibility of such takeover obstacles with the EC Treaty to the ECJ by way of a proceeding for a preliminary ruling pursuant to Article 234 EC Treaty. Both alternatives based on Article 56 would entail such a long duration of the proceedings so as to clearly be inconsistent with the time constraints which characterise a takeover bid.
We do believe therefore that the three judgments of the European Court of Justice are relevant insofar as they indicate that the isolation of the national market for corporate control is against the basic principles of the European Union. In doing so, they reinforce the need for an appropriate Community action to introduce a level playing field for cross border takeovers through a directive based upon Article 44, letter g) of the Treaty.
In fact, these judgments and Article 56 of the Treaty as such would not suffice, in our view, to adequately dismantle the antitakeover measures which are addressed by the directive proposal and could not take the place of the harmonisation action reflected in the directive proposal.
d) More transparency and market forces are not enough to achieve a level playing field.
Once admitted that the directive could and should also intervene on company law in order to introduce a level playing field, it is yet to be seen which measures are the most appropriate to that end. This question is of significance not only because a provision should be all the more problematic the deeper it is embedded in the company laws of Member States but also because such a rule might easily affect the free bargaining power of a shareholder, i.e. the right of the parties involved to tailor, as they deem fit, the articles of association and/or the shareholders’ agreements they enter into.
This is even more true in view of the fact that this interference is intended precisely to safeguard the functioning of a market, and namely the market for corporate control, i.e. an institution based on the exercise of the right to freely contract.
Therefore the first option and less intrusive regulatory approach might be to focus mainly on disclosure requirements making it necessary for all listed companies to disclose, on a permanent basis, their ownership structure and the existing pre bid technical barriers to takeover bids. According to this approach (which is currently adopted by the Commission proposal albeit supplemented by a limited break through rule, as will be further discussed here below), it will then be the market to evaluate these structures, better pricing the shares of those listed companies whose ownership structure is open and where proportionality between risk bearing and control effectively exists.
This could tentatively be described as the “transparency approach”: it would disclose, but not displace ownership structures which function as pre bid technical barriers. This disclosure approach would generalise the principle currently set out under Article 49 (2) of the Consolidation Directive 2001/34/EC of 28 May 2001 which requires disclosure to the market that the controlling stake of shares of a listed company are not listed, thereby favouring the adoption of certain restrictions to the transferability of the same.
Yet, if a similar approach were to be adopted, it could also be argued that, for the sake of consistency, voting caps - which are subject to the limited break through rule set out in the directive proposal - could also be simply subject to transparency requirements, without any need for a break through rule. As it is the case for multiple voting shares and pyramids in the directive proposal, it could be argued that, assuming a proper disclosure is granted, the investors should be aware that – due to the voting cap – a bid should be made only if conditional upon the prior removal of the voting cap by the extraordinary shareholders’ meeting and that, therefore, the voting cap, albeit not impeding the launch of a bid, would certainly make it less likely, or at least less likely to succeed. The price of the relevant securities should therefore reflect the existence of this impediment to the change of control.
Concurring with the opinion expressed by the High Level Group, we believe however that such a transparency approach alone cannot bring about the necessary level playing field, at least at the present degree of development of securities markets in Europe.
Although it could be suggested that disclosure alone would suffice in a fully integrated, well developed and efficient market, no such market currently exists in Europe. Securities markets, including those which are more developed and efficient, differ greatly and only in a few Member States, if any, such disclosure could nicely serve to allow investors to properly evaluate companies in respect of the barriers in question.
Moreover, the effectiveness of disclosure as an efficient reaction to market imperfections should not be overestimated. Anyone who, like the proponents of the theory of a market for corporate control, assumes that investors are hardly inclined to exercise their controlling rights in the company because of “rational apathy” will find it difficult to explain why the same investors should, on the other hand, make a precise decision on the basis of a selection of the available information, when general life experience shows that bulky information is often reviewed only selectively or not at all.
Moreover, a mere disclosure duty would not change in the least the fact that the technical barriers described above prevent a takeover from ever being launched.
Also in our opinion, therefore, information alone is not enough to establish a level playing field in Europe and a regulation directed to dismantle pre bid technical barriers is necessary.
e) The new directive and the subsidiarity principle.
It might be questioned, however, whether a directive which sets out the “substantive” provisions that are needed to bring about a level playing field would be consistent with the subsidiarity principle. The point of subsidiarity was indeed raised some time ago for instance by the British Department of Trade with respect to a previous draft of the Thirteenth directive which did not provide any such measure.
Whereas we understand the view of the Department whereby according to the subsidiarity principle there might be little justification for harmonisation of takeover bids if the directive does not also tackle the different underlying systems of company law and corporate governance, we do believe that if a level playing field is effectively brought about, the Community legislation would be properly founded. A level playing field would indeed facilitate cross border transactions both by removing barriers and simplifying the takeover process throughout Europe. This objective could not be achieved other than through a European directive.
In addition, it is well established law that the subsidiarity principle does not prevent the Community from introducing legislation when:
a) the objectives of the proposed Community measure cannot be sufficiently achieved by action on the pMember States individually and can therefore be better achieved by art of the Community;
b) Community measures leave as much scope for national decision as possible, consistently with securing the aim of the measure and observing the requirements of the Treaty.
This happens to be the case.
f) Summary. There is a great number of company law provisions in Europe which prevent or make it difficult to launch and/or to successfully complete a takeover. If takeovers are considered to be economically desirable, and are promoted throughout Europe, a takeover directive must therefore also contain a provision dealing with these company law restrictions impairing the contest for the corporate control. Otherwise the so-called level playing field and thus an equality of opportunities in the contest for corporate control would not exist in Europe. For this purpose, the directive cannot be limited to a duty to disclose the obstacles described. Instead, it is necessary to introduce provisions directed to dismantle these obstacles, at least when a bid is launched.
3.- THE HIGH LEVEL GROUP PROPOSALS AIMED AT ACHIEVING THE LEVEL PLAYING FIELD.
3.1.- The break through rule and its national models.
Therefore it was certainly to be welcomed the recommendation of the High Level Group to devise, within the framework of the new directive, a workable legal tool which could allow the offeror to “break through” pre bid technical barriers in the event of a successful takeover bid.
This rule is in fact a thoughtful attempt to create a sufficiently level playing field also in respect of pre bid techniques albeit leaving these mechanisms and structures in place unless a general takeover bid is made and has become successful. Doing so, in the opinion of the High Level Group, said rule “would strike an appropriate balance between, on the one hand, the need, at least for the time being, to allow differences in the capital and control structures of companies in view of the current differences between Member States and, on the other hand, the need to allow and stimulate successful takeover bids to take place in order to create an integrated securities market in Europe”( ).
The “break through rule” was not unknown in the European Union before the High Level Group recommendation.
It was put forward for the first time in 1992 by the French COB when, according to Article 177 of the Law of 24 July 1966 ( ) BSN Danone amended its articles of association to set out a voting cap. In that occasion, COB obtained that the articles of association of the company had to also provide that the cap would have automatically become uneffective if a bid were successful in obtaining shares representing 2/3 of the voting rights ( ).
A statutory provision of the break through rule was then to be found in Italy under Article 3 of Law no. 474 of 30 July 1994 on privatisation and it is now reflected in Article 212 of the 1998 Italian Consolidated Act on securities regulation. It should be noted in this respect that, the former version of the rule published in 1994 made the break through conditional upon the attainment by the bidder of the majority of the voting rights, whereas the latter provision of 1998 dropped, at least in the wording of the provision, such requirement ( ).
Despite these differences in the details of the French and Italian models, a common feature of both national experiences was to be found in that the rule addressed only voting caps. It left untouched, instead, all of the statutory or by-laws provisions concerning the appointment and removal of the board of directors, which in different ways could delay or hinder a swift substitution of the board on the part of the successful bidder (e.g. double voting in France, special rights to nominate board members, staggered board, fixed term appointment, supermajorities, long lasting office tenure as a requirement for appointment to the board).
This rule, albeit new, was therefore rather moderate in scope. It proved however quite sensitive in order to facilitate the success of hostile bids by making the acquisition of a majority stake sufficient to automatically empower the bidder to exert control over the company without needing a formal resolution of the shareholders’ meeting to remove the cap ( ).
It is also worth noting that such a rule is directed to dismantle the corporate structures which function to assure that no owner/decision-maker exists (cap voting) and to postpone, in the sole interest of the management, the swift removal of the same, consistent with a “mutability principle” which had also been advocated in the past by authoritative academic studies
The High Level Group proposal widened, however, the scope of the remedy, transforming the same into a general device operating not only in the field of voting caps but also in respect of a much greater variety of pre bid technical barriers. According to the view of the High Level Group, the break through rule should indeed displace all voting arrangements (such as dual class voting shares, multiple or double voting shares, non voting shares) deviating from the principle of proportionality between risk bearing and control. To this effect a highly successful bidder acquiring 75% or more of risk bearing capital should be able to exercise a corresponding percentage of the total votes that can be cast in a general meeting of shareholders and the provisions in the by-laws affecting the “one share one vote” principle should be correspondingly overridden.
In so doing it is apparent that such a new legal instrument significantly impinges on the corporate structure of listed companies and is therefore a company law measure in character, albeit strictly limited to publicly listed companies. But as we said, we agree with the High Level Group that there cannot be any sensitive harmonisation of takeover regulation without some sort of harmonisation of the affected corporate law structures. And there are no reasons to deny both harmonisations from being achieved, to the degree presently needed, by the same piece of (framework) legislation.
3.2.- The reasoning and the recommendations of the High Level Group: an overview.
The implied rationale of the break through rule advocated by the High Level Group seems to be that shareholders are free to define as they deem fit all sorts of voting arrangements and other restrictions on the transferability of control in the articles of association (also delivering the control to one or a few shareholders regardless of the proportion between risk and control) but, at the occurrence of a takeover, confirmation of their initial agreement must be sought after. To the extent they tender the vast majority of their shares to the bidder, the shareholders reverse their initial agreement on the pre bid technical barriers against takeover and the bidder should therefore, upon reaching the threshold, be able to break through said provisions in the articles of association.
The High Level Group has come to recommend the adoption of such a rule being guided by two principles: i) shareholders’ decision-making and ii) proportionality between risk and control.
From the principle of shareholders’ decision-making it follows that it is not for the board of a company to decide whether a takeover bid for the shares in the company should be successful or not. The board must remain neutral with respect to the bid except for its responsibility to draw up and make public a document which states its opinion on the bid.
The proportionality principle between risk and control means, in turn, that every shareholder must have control over the company to the extent that she or he bears the risk of the company.
However, as anticipated, the High Level Group does not advocate a general application of the principle of proportionality between risk and control as to prohibit any deviating rules so as to introduce a general “one share one vote” rule. This, in the opinion of the Group, would in fact have far-reaching effects whose consequences could hardly be assessed in advance.
Instead, the High Level Group does advocate:
a) a general disclosure duty for the capital and control structures of listed companies in their annual reports, in their listing particulars and in the prospectuses companies are required to publish when issuing securities, and on their websites, in order to create transparency for investors;
b) a break through rule, directed to dismantle technical measures deviating from the proportionality principle only if and when a takeover bid is launched. Therefore, if a takeover bid is announced, a resolution taken by the general meeting approving measures aimed at frustrating the bid should be effective only if it is taken by a majority of the holders of the risk bearing capital of the company. The general meeting would vote for this purpose according to the proportionality principle. The bidder should also take part in this meeting with the share of the risk bearing capital already acquired. After a successful takeover, the bidder should have the ability to break through any mechanisms which frustrate the exercise of proportionate control to the extent that the principle of proportionality would confer controlling rights for the share of the risk bearing capital. As anticipated, as a threshold for the applicability of the breakthrough rule, the High Level Group proposes a percentage of no more than 75% of the risk bearing capital. A bidder who succeeds in acquiring 75% or more of the risk bearing capital should in particular be able to appoint the management.
Moreover, according to the High Level Group Report:
a) the employee co-determination principles set out in the laws of the Member States should not be overridden;
b) the break through rule should apply to golden shares: exceptions for special control rights enjoyed by a government should be justified only for reasons of public interest;
c) the break through rule should take effect immediately upon the successful completion of the offer. The successful bidder should have the right to convene a shareholders’ general meeting in order to put the break through rule into effect. Here, the High Level Group does not make clear however whether a formal resolution of the general meeting should be necessary to that end;
d) the bidder should not be obliged to offer compensation for the loss of control rights stemming from the application of the break through rule since the holders of special control rights would lose them as a matter of public policy and should therefore be granted compensation only in exceptional cases.
3.3.- The scope of the break through rule advocated by the High Level Group: what is included?
As it has been noted, the break through rule proposed by the High Level Group should apply after the successful completion of a takeover bid, to all provisions in the articles of association and the related incorporation documents of the company which deviate from the principles of shareholder decision-making and proportionality.
The High Level Group expressly includes in this definition certain restrictions of voting rights, such as general voting caps for shareholders or classes of shares with limited voting rights, or multiple or double voting rights conferred by the articles of association. Furthermore, provisions of the articles of association or other incorporation documents should be overridden in the event of a takeover in which a certain kind of risk bearing capital is conferred no voting rights at all, or inversely non-risk bearing capital is conferred voting rights. Such provisions would thus be ineffective after the successful completion of a takeover bid, so that there would be a reallocation of voting rights in the company consistent with the principle of proportionality.
But the break through rule advocated by the High Level Group is not limited to provisions relating to voting rights. Instead, provisions which stand in the way of the successful bidder’s right to appoint or dismiss the members of management and to fix their terms of employment are also to become ineffective, it being irrelevant whether these provisions are contained in the articles of association or embedded in the law. Examples given include provisions which grant the holders of a special class of shares the right to appoint management or board members, as well as provisions in the articles of association which provide for a staggered term of office for the members of management or for an appointment for a fixed period of time. Furthermore, the break through rule proposed by the High Level Group is intended to make also ineffective provisions, which make an amendment of the articles of association contingent upon a prior proposal by management.
Furthermore, all kinds of provisions in the articles of association or in other incorporation documents which restrict the transferability of shares (i.e. registered shares) are also to become ineffective.
It should be finally noted that the rule advocated by the High Level Group does not apply only to the affected measures after the successful completion of the bid, but makes also these measures unenforceable during the bid.
3.4.- The scope of the break through rule: what is excluded?
a) Agreements between the target company and third parties.
Expressly exempted from the break through rule are agreements which are conditional upon the change of control of the company. Examples of such agreements are generous settlement payments to directors for the loss of their job in the event of a takeover (so called “golden parachutes”) as well as contractual provisions on a change of control which trigger the early termination of loan and credit agreements as well as supply or license agreements which might be very relevant in the on going management of the company. The reason given for factoring out these instruments is that the other party to the agreement might have totally acceptable reasons for such an agreement, might have entered the same in good faith, and might have to be compensated for the loss of its legal position. Such contractual agreements should therefore be treated, according to the High Level Group, on the basis of general contract and company law.
b) Shareholders’ agreements.
The Report also initially factors out of its break through rule such contractual agreements between shareholders which – in some cases on penalty of substantial monetary fines – prohibit the transfer of shares by these shareholders to a bidder. Here, the High Level Group recommends however that the Commission carefully examines whether such agreements should be made unenforceable when a takeover bid is launched following the Italian regulatory experience.
The so-called pyramid structures should also remain unaffected by the break through rule according to the High Level Group Report. Where a person exercises control over a company through integrated listed and unlisted holding companies, with each company holding a dominating share in the next, and the company at the lowest level of the hierarchy being at the end of the day controlled through a relatively small financial participation, the result achieved would be substantially comparable to that achieved by way of multiple voting rights. Nevertheless, as opposed to multiple voting rights, it is difficult to see how a break through rule could override these structures. For this reason, as already anticipated above, the Group recommended a Community action in this respect within the framework of a more general reform of company law in Europe, recommending the exclusion of such holding companies from listing “unless the economic value of such admission is clearly demonstrated” (recommendation V.4 of the “Report on a Modern Regulatory Framework For Company Law in Europe”).
d) Golden shares under special circumstances.
Basically, a break through rule should in the opinion of the High Level Group also cover control rights which Member States reserved for themselves when privatising formerly nationalised undertakings. From the point of view of company law, there is said to be no reason to distinguish between companies in which private persons have special control rights and companies in which Member States which have such rights. Control rights enjoyed by the Government should therefore be overridden in the event of a successful takeover.
However, this should not apply if these control rights were created in the general interest and were contained in legal provisions subject to the principles of public law. In the opinion of the High Level Group, this would contribute to ensuring the proper exercise of these rights by the Member States.
e) The issue of compensation.
The High Level Group considered whether the holder of shares carrying disproportionate voting rights or special control rights should be compensated for the loss of these rights which results from the bidder reaching the break through threshold in the wake of a general takeover bid. The High Level Group concluded however that in its opinion there was no need to offer such compensation to the party affected, as the loss of these special rights would be the result of a public policy choice made by the European Union and by Member States in order to create a level playing field for takeover bids across the Union.
f) No positive measure to achieve a level playing field with non Member States.
In the discussion which led to the rejection of the most recent proposal for a takeover directive it was argued that the directive would not create equal conditions in the European Union and the United States. European companies were said to be largely restricted by Article 9 of the directive in their use of defensive measures, whereas American companies can frustrate takeover bids in various ways.
Although a break through rule would certainly increase the existing differences between the European Union and the United States, the High Level Group sees no reason to limit the proposed rules solely to European takeovers. Instead, the proposed rules are to be applicable – according to the High Level Group – regardless of the nationality of the bidder and regardless of the law to which it is subject.
3.5.- The reception of the High Level Group Report.
Some of the recommendations of the High Level Group had quite a cold reception in the political and professional circles.
Many argued that the break through rule advocated by the High Level Group would involve a significant curtailing of the freedom of companies and their shareholders to organise their affairs as they deem appropriate and would not give sufficient weight to the possibility of relying on market forces to produce the desired result (assuming that proper disclosure is required regarding the capital and control structures).
It has also been questioned whether such a rule would not bring some issuers to incorporate and seek listing outside the European Union in order to preserve the flexibility which in practice will be lost.
Some have argued, moreover, that this approach is too lenient, because it does not advocate the straightforward introduction of a “one share one vote” rule and it accepts the free bargaining rule as applied to voting arrangements, although it suggests that said arrangements be considered by the legislator contingent upon the occurrence of a takeover bid. Others have argued that this approach is too strict, because after the bid has been launched, the proportionality principle it advocates might also provide voting powers to shareholders that according to the provisions of the applicable law and of the articles of association would not be entitled to vote. This depends on the definition of “risk bearing capital” entitled to a “resurgence” of voting power in the wake of a bid given by the Group.
And indeed, as it has been generally contended, the precise identification of this notion represents a very slippery issue, which in the view of many commentators appears to be covered by the High Level Group in an overly simplistic way. In fact, it is not clear whether “risk bearing capital” holders should be considered as only those having lowest priority in the event of the insolvency of the company or, as it seems to be in the intention of the Group, also some other sort of capital suppliers ( ) whereby rendering very obscure a rule which in contrast should be very clear in order to avoid the risk of litigation and to allow the bidder to calculate, in advance the cost of the takeover.
4.- THE COMMISSION’S NEW PROPOSAL: A FAIR COMPROMISE?
4.1.- An overview.
As anticipated, partly following the advice rendered by the High Level Group, in order to establish the level playing field the new directive proposal submitted by the Commission on 2 October 2002 combines disclosure requirements (set out in Article 10) with a break through rule (provided for in Article 11) which is however more limited in scope than the one recommended by the High Level Group.
Article 10 meets the needs of transparency. The directive proposal sets out an obligation to publish detailed information on the structure of the company’s capital as well as on cross-shareholdings, pyramid structures, restrictions on the transfer of securities, special control rights, limited voting rights and agreements between shareholders which may result in restrictions on the transfer of securities.
Article 11, in turn, provides that any restrictions on the right of ownership which may prevent takeovers (for example, a right to veto a transfer of securities) should be rendered unenforceable against the offeror during the bid. Consistently any restrictions on voting rights in the articles of association or in the shareholders’ agreement which might prevent shareholders of the offeree company from exercising their voting rights in the general meeting called upon to resolve on defensive measures during the bid should be rendered unenforceable.
In addition, the proposal provides that any restrictions on the transfer of securities (like registered shares with limited transferability) and any special rights of shareholders concerning the appointment or removal of board members should “cease to have effect” at the first general meeting following closure of a successful bid.
The directive proposal stresses that securities without voting rights carrying, however, specific pecuniary advantages as well as securities with multiple voting rights shall not be covered by the directive. The Commission argues that multiple voting rights do not cause management entrenchment and that there is no proof that the existence of multiple voting rights renders takeover bids impossible. Furthermore, according to the Commission, the abolishment of such rights, particularly without compensation, could be unconstitutional in some Member States.
Finally, as already noted, the proposal does not cover the “golden share” issue on the assumption that the (limited) break through rule set out under Article 11 should be concerned specifically with private law restrictions and that public law restrictions should be dealt with by the Commission on a case by case basis according to the principles set out by the European Court of Justice in the judgments of 4 June 2002 in the cases C-367/98 Commission v. Portugal, C-483/99 Commission v. France and C-503/99 Commission v. Belgium.
4.2. Consistency of the new proposal with the High Level Group Report.
The Commission´s new proposal has followed the High Level Group recommendations in that it does not prohibit as such those provisions in the articles of association or in the shareholders’ agreements which could aggravate or even prevent takeover bids from ever being launched. Instead, these provisions have been made subject to a (limited) break through rule in the sole event of a takeover bid.
Moreover, the Commission has followed the advice rendered by the High Level Group where it has made unenforceable during the bid, and after a successful bid, agreements between shareholders, or between shareholders and the company affecting the transfer of securities or the exercise of voting rights as well as where it omitted to provide any specific rule concerning the level playing field with non Member States and, in particular, with the United States.
On the contrary, the Commission has not followed the High Level Group recommendations in that:
a) it denied the application of the break through rule as a general device applicable to any restriction to the change of control; the proposed rule does not cover multiple voting shares and covers non voting shares only if they do not carry specific pecuniary advantages. Neither does it cover (with the sole exception of the special rights to nominate board members) the statutory or by-laws provisions concerning the appointment and removal of the board of directors, which in different ways could delay or hinder a swift substitution of the board on the part of the bidder (e.g., staggered board, fixed term appointment, supermajorities, long lasting office tenure as requirement for the appointment to the board);
b) it made pyramid structure subject only to a duty of disclosure, overlooking the finding of the High Level Group (anticipated in the first Report and made much clearer in the Second Report on Company Law) that pyramids achieve, although in a different way, a disproportionality between ownership of risk bearing capital and control rights.
In its explanatory Communication the Commission makes it very clear that the proposal has not taken up all the recommendations of the High Level Group as regards the neutralisation of the defensive measures “because the recommendations met with opposition from virtually all Member States and interested parties, notably because of the legal problems to which they may give rise (application threshold, concept of risk bearing capital, compensation for rights forgone etc.). Moreover – the Commission adds – a large majority of those questioned were opposed to the inclusion in the proposal of measures that would have had far reaching implications for company law”.
The precise meaning of the compromise proposed with the new directive proposal is made clear by the same Communication where the Commission “takes the view that this proposal represents a consistent approach that is the most realistic as things stand. The combination of the measures set out in Articles 10 and 11 should enable – according to the Commission – significant progress to be made towards the more level playing field called for by the European Parliament, without undermining the competitive position of European businesses vis-à-vis their counterparts in non-member countries, and in particular the United States”. It should also be noted, however, that in the Commission’s opinion “this is a first step” and the “revision provided for by Article 18 will afford an opportunity for examining whether other initiatives should be taken in order to level the playing field further”.
4.3.- A comment on the Commission’s proposals concerning the achievement of the level playing field.
The Commission’s new proposal does represent a significant step forward in the direction of more contestability of control for European listed companies and, to some extent, to a more level playing field throughout Europe. In particular, Article 11 shall effectively react to some important existing statutory and contractual restrictions to the change of control.
Therefore the new proposal is certainly to be welcomed also in the light of the requests advanced by the European Parliament in July 2001.
b) Some questions on the transparency requirement set out in Article 10.
As we noted, the Commission proposes greater transparency of the defensive structures requiring that they i) be published in a detailed and thorough manner in the annual report (and updated during the year, where appropriate, according to Article 36 of directive 1983/349/EEC) and ii) be put to the vote of the general meeting at least every two years with a prior duty of the board to state the reasons for those structural aspects and defensive mechanisms.
This provision – whose insufficient effectiveness for the achievement of the level playing field also due to current market imperfections has been already considered above in paragraph 2 (3) letter d) of this Report - poses at least a few technical questions.
First, if complete information on the capital structure of listed companies has to be given it should be inserted in Article 10 (1) letter a) that also other securities shall be considered where they provide a subscription or conversion right or, according to national company law, despite their hybrid nature, they provide one or more rights relevant in the governance of the company (as it is the case of the Swiss Partizipationscheine, whose model shall be replicated by the hybrid securities provided for by the forthcoming new Italian company law, which will confer upon the holders a right to nominate one member of the board).
Secondly, in order to cover all relevant shareholders’ agreement, the wording of Article 10 (1), letter g) should probably be amended specifying that the relevant agreements are not only those providing for restrictions on the transfer but also “on the exercise” of voting rights.
Thirdly, it could be questioned whether, in order to be effective, the information should not be published also in an excerpt (having the usual form of a “tombstone”) on one or more newspapers, as is the case for a great deal of similar price sensitive information according to the securities law of many Member States.
Finally, it is unclear how the provision of Article 10 (3) should be interpreted where it states that “the general meeting of shareholders makes a decision at least every two years on the structural aspects and defensive mechanisms referred to in paragraph 1”.
On one hand, some of these mechanisms are outside the competence of the shareholders’ meeting according to company law and it is therefore difficult to see how the shareholders’ meeting could interfere with them (a clear example would be those shareholders’ agreements mentioned in Article 10 (1), letter g). On the other hand it should be clarified whether this refers to a “real” resolution of the general meeting confirming the further existence of the measures in question or to a simple “acknowledgement”. Even if it were a “real” resolution, its effectiveness would however appear quite limited, since the pattern of ownership concentration currently typical in continental Europe would make the upholding of the measures put to the vote of the general meeting by the controlling shareholder very likely, with very limited benefits, if any, to the contestability of control.
c) Some questions on the functioning of the break through rule set out in Article 11.
As we said, under Article 11 the Commission introduced two separate provisions whereby any restrictions on the transfer of securities (e.g. the imposition of a ceiling on shareholdings or restrictions on the transferability of shares) and on voting rights (e.g. restrictions on the exercise of voting rights and deferral of voting rights) provided for in the articles of association or in contractual agreements:
a) are made unenforceable during the bid and against the offeror (Article 11, paragraphs 2 and 3); and
b) are overridden, together with any special rights of shareholders concerning the appointment and removal of board members after the bid, if the offeror holds a number of securities of the offeree company which, under the applicable national law, would enable him to amend the company’s articles of association (Article 11, paragraph 4).
Whereas the first provision is clear in its wording and in its workability (also where it correctly limits the unenforcement of the restrictions on voting rights only “to the general meeting called upon to decide on any defensive measures in accordance with Article 9”) and would simply require the specification that the unenforcement is not only against the bidder but also against the party concerned (in order to make very clear that no remedy for the breach of contract can be applied against the party accepting the offer or exercising its voting rights contrary to the obligations undertaken with the shareholders’ agreement), the wording of the latter provision is ambiguous.
In fact, it remains unclear whether the break through:
a) operates automatically, as it would be suggested by the national French and Italian models and by the words “shall cease to have effect at the first general meeting following closure of the bid” and as it seems to result from the Explanatory Notice; or
b) entails a formal resolution of the meeting, as the following paragraph (“to that end, the offeror shall have the right to convene a general meeting at short notice”) would suggest.
Hence in our view it should be clearly stated that the provision of Article 11 is a break through rule and therefore, whenever the threshold majority is reached, it operates at the first meeting automatically, without a formal resolution passed by the same. Otherwise, it would be difficult to understand the difference existing between this special legal tool and a conditional bid subordinated to the removal by the shareholders’ meeting of the cap and of all other technical barriers set out in the articles of association prior to the execution of the transfer of the shares (which would require the prior resolution of the shareholders’ meeting): a feature, the latter, which would also be available to the parties lacking the provision of Article 11.
A second technical point which deserves close scrutiny with Article 11 concerns the threshold to be reached in order to have the break through rule become effective. As we mentioned above, the recommendation of the High Level Group was to set the majority at 75% of the “risk bearing capital” (or the lower majority required by the law and/or by the articles of association to amend the by-laws). The Commission referred to the holding of “a number of securities of the offeree company which, under the applicable national law, would enable him to amend the articles of association”.
This wording does not, however, consider that the majority provided for under the applicable national law can be increased, under certain jurisdictions, by the articles of association. The reference in the clause to the “applicable national law” should therefore be duly explained, at least in the recitals, suggesting that the statutory majority is the relevant majority, also where the provisions of the articles of association opt for a higher majority. If the directive is to favour the contestability of control, the lower majority must be used as a reference for the break through rule.
It should be considered moreover that the majority required to amend the articles of association differs among Member States (some Member States adopt in fact a majority of ¾ either of the votes or of the voting capital represented in the meeting; others a majority of 2/3 of the votes and some even a lower majority of 50% + 1). A complete level playing field is therefore not attained through the reference to the existing national company laws. Nonetheless, the reference to such a “variable” majority rather than to the fixed threshold suggested by the High Level Group seems to be advisable, because in fact it makes the threshold lower than the one proposed by the High Level Group and, by so doing, it fosters the contestability of control.
Furthermore, it is not clear from the wording of Article 11 (4) whether the majority referred to herein is to be “conventionally” considered the majority which would be required if all shareholders attended the meeting or whether such a majority is not a fixed one, being dependent on the number of shareholders effectively attending the meeting held after the closure of the bid.
In the former case, the rule, albeit fixing a clear threshold, would not consider the “rational apathy” of minority shareholders and would require for the operation of the break through a majority usually much higher than the one in practice sufficient to amend the articles of association.
In the latter case, it should be also remembered that some Member States require a double quorum: for the valid constitution of the meeting and for the approval of the resolution. The directive, if the majority is not fixed but is dependent upon the number of shareholders effectively attending the first meeting to be held after the closure of the bid, should therefore clarify, at least in the recitals, that, if the contestability of control has to be fostered, the majority to be considered is the voting majority, irrespective of the quorum for the valid constitution of the meeting, if any.
Finally, it should be clarified that the unenforcement during the bid and the break through of any restriction on the exercise of voting rights does not apply to the “own shares” possessed by the company. Otherwise, Article 11, contrary to its rationale, would not dismantle, but involuntarily provide a defence to the management which has already been ruled out by the Second directive.
d) The implied rationale of Article 11 of the directive proposal.
As we already noted above, the implied rationale for Articles 9 and 11 is that shareholders should be empowered, after a bid has been launched, to take any decision which might affect the success of the bid (and namely any decision on how to vote on measures aimed at frustrating the bid as well as any decision on whether or not to accept the offer) without being bound by statutory or contractual arrangements concerning the transfer of shares or the exercise of voting rights entered into before the bid was launched.
Here there is a clear deviation from the general rules of privity of contract and “pacta sunt servanda”: a deviation which was advocated by the High Level Group and has been accepted by the Commission on the implied assumption that there is a major public interest in fostering the cross border consolidation of the European industry and the contestability of control of listed companies.
As mentioned above, it falls outside the scope of this Report to discuss thoroughly this rationale and the usefulness of the contest for the corporate control, whereas, according to the mandate given by the European Parliament, we should rather investigate whether the proposal put forward by the Commission is inherently consistent with it and does realise an effective level playing field as requested by the European Parliament. We will accept therefore, in principle, the unenforcement and break through measures provided for under Article 11 and we will investigate whether a further step can be made (onwards and not backwards) towards the direction of more contestability of control and a more level playing field.
Nevertheless, it should be briefly noted here that we consider it to be right, in principle, that the measures affected by the directive proposal should be covered by the break through rule. All such measures constitute obstacles to takeovers and must therefore be rejected in view of the purpose of the directive, namely to promote takeovers as economically effective means to bring about necessary restructuring action.
Voting rights’ restrictions in the articles of association deviate from the principle of “one share one vote”, the observance of which – as already noted in view of the two guiding principles of the High Level Group – is advocated for an optimal functioning of the market for corporate control, as studies in the field of business economics have shown. Moreover, the anti-takeover effect of, for example, maximum voting rights is obvious. They prevent the bidder from exercising its influence on the company and thus make the company unattractive for a takeover. The same applies, albeit to a lesser extent, to nomination and appointment rights which are nothing but a partial voting rights’ restriction in respect of the appointment of members of management.
Likewise, also restrictions on the transferability of shares in the articles of association or agreed upon with the company represent a takeover obstacle. This becomes especially clear through the example of registered shares whose transferability is restricted in that they generally require the approval of the board. Management would thereby have a say in the outcome of the bid. But this would clash with the principle that defensive measures must be decided by the shareholders and not by the members of management that are interested in preventing a takeover from being successful.
The directive proposal also affects agreements between shareholders on the transferability of the shares or on the exercise of the voting rights. This is one more clear interference with the principle of “pacta sunt servanda” which dominates all of European private law. To justify this, the High Level Group argued that the takeover bid is not known to the shareholders when they enter into the agreement. But this alone can hardly justify such a serious interference. The general principle requiring the parties to abide by a contract makes it impossible for the parties to cancel an agreement once concluded simply because another more advantageous offer has been made.
But the point here, again, is that a deviation from the principle of “pacta sunt servanda” is consistent with the purpose of the directive, to foster the contestability of control. Such agreements can in fact be suitable for making takeovers more difficult or even impossible. Therefore, the inclusion of the same in the proposal has to be accepted if we are to have an effective level playing field.
5.- THE MOST IMPORTANT PRE-BID DEFENSIVE MEASURES NOT COVERED BY THE COMMISSION PROPOSAL AND SOME RECOMMENDATIONS FOR THE AMENDMENT OF THE DIRECTIVE PROPOSAL.
5.1.- The multiple voting issue. The need for the application of the break through also to multiple voting arrangements.
As anticipated, deviating from the recommendation of the High Level Group, the (limited) break through rule set out in Article 11 of the directive proposal does not cover double and multiple voting rights. The Commission explains in this respect that securities conferring multiple voting rights form part of a system for financing companies and that there is no evidence that their existence renders takeover bids impossible. The same is said to apply to securities conferring double voting rights, which, according to the Commission, can contribute to a certain stability of the ownership pattern. Moreover, the removal of such rights, especially if without compensation, could raise in some legal systems questions of constitutional nature that could jeopardise or at least delay for a long time the adoption of the directive.
This is not persuading.
As it shall be indicated here below, the application of the break through should cover both the provisions of the articles of associations conferring upon one or more classes of common or preference shares multiple voting rights and, in order to avoid the circumvention of the rule, to the provisions formally conferring upon one or more classes of common or preference shares one vote, but at the same time providing for a fractional nominal value of the relevant shares, thereby indirectly conferring multiple voting rights.
In our view the doubts about the constitutionality of such a rule are without merit provided at least that a fair compensation is paid. A workable provision is also possible in this respect.
b) Multiple voting as an effective anti-takeover defence.
Double and multiple voting rights make takeovers more difficult. It is apparent that a bidder must acquire a greater number of shares, in order to obtain control where multiple voting rights exist, than would be necessary if the equity capital and the voting rights were proportionally divided up. If a shareholder owns only a minority share of the capital but possesses a majority of the votes because of the multiple voting rights any hostile takeover becomes difficult, even impossible. Accordingly, the purpose of multiple voting rights has always been considered, in the legal literature, to be to prevent hostile takeovers.
In the light of the above, the argument put forward by the Commission to exempt multiple voting shares from the break through rule (namely that it has not been proved that multiple voting rights frustrate takeovers) is not tenable and is even inconsistent with the admission made by the same Commission when it conceded that double voting rights can, in fact, “make for a stable shareholder base”.
This conclusion is confirmed by the American economic literature discussing the theory of the market for corporate control. Several studies based on model takeover situations found indeed that an unequal allocation of voting rights makes it easier for an existing management team – or to the minority shareholder behind it – to frustrate a takeover ( ). According to these theoretical studies, in the event of a takeover bid managers shall have an incentive to frustrate the bid through the acquisition of voting rights if the amount of the private benefits extracted by the company exceeds the cost of acquiring these voting rights. Thus, the costs of voting rights directly determine the ability of management to defend itself against a takeover. Shares conferring voting rights which are disproportionate in respect of the percentage of the capital which they represent are - in relation to the voting right – cheaper than shares where voting rights and cash flow rights are proportionate, as they react only with a below average price gain to a dividend increase which would be involved in the takeover by a different and more capable management team. An unequal allocation of voting rights and dividend rights thus facilitates the defence by the existing management team against a takeover offer which would be beneficial for the shareholders. The socially optimal solution in the sense of an increase of the value of the company is therefore only the proportionate relationship between voting rights and equity capital, i.e. the principle of “one share one vote”, which is currently advocated by institutional investors and, although with some flexibility, by the vast majority of the Corporate Governance Codes of Conducts ( ).
The economic theory thus shows that multiple voting rights are capable of preventing takeovers being desirable from the overall economic point of view. If one regards – as the directive does – takeovers of companies as a means to ensure effective management control, the exclusion of multiple voting rights is thus highly inconsistent.
This becomes even clearer if one takes into account that the existence of multiple voting rights almost inevitably indicates the existence of "private advantages" which do not benefit the company, but only the shareholder concerned, as the shareholder will only be interested in preserving his disproportionate voting right if this represents a special advantage, which would not be the income from dividends. The existence of a multiple voting right thus seems to also indicate a sub-optimal management of the company, which might deserve to be subject to the disciplinary effect of the contestability of control.
c) The rationale for the inclusion of multiple voting rights in the domain of the break through.
In addition to this, the exclusion from the break through rule of multiple voting rights also seems to be inconsistent with the regulation of voting caps provided for by the directive proposal. It is certainly true that the two instruments differ in their structure (the voting cap limits the voting power of every relevant shareholder, whereas the multiple voting right represents a preferential treatment of a shareholder) and it might be argued that - since voting caps favour management encroachment preventing the occurrence of ownership patterns without strong owners whereas multiple voting favours ownership patterns with strong owners - the two situations are different and deserve different treatment.
Nevertheless, on the one hand it should be considered that multiple voting rights and voting caps are totally equivalent where two classes of shares are introduced, and a voting cap is introduced only for one of them.
On the other hand we do believe that in both cases (multiple voting and voting caps) stakeholders with a minority interest in the company are an obstacle to the mutability of control: in the former case, these stakeholders are the directors, usually acting together with a coalition of few shareholders who hold shares up to the voting cap and de facto control the company; in the latter case, these stakeholders are the multiple voting holders, which usually are small equity providers with strong powers. And the latter case is perhaps even worse than the former in the perspective of the contestability of control because in the former, even without a break through, it would always be possible for a coalition to jointly bid for the company, with each member of the coalition acquiring a shareholding under the cap, but being finally able, acting in concert with each others, to displace the slack management and the old coalition. In the latter, instead, if the multiple voting shareholders, albeit representing a small share of the overall equity, have the majority of voting rights, the change of control could not be achieved without the consent of the same.
It is thus clear that voting caps and multiple voting rights have extremely similar practical consequences. An unequal treatment in the case of a takeover as provided for in the directive proposal is therefore difficult to accept.
Furthermore, we have seen above that the unenforcement and break through principles set out in Article 11 with regard to voting rights can be justified only assuming that voting arrangements (in the articles of association or in the shareholders’ agreements) are considered contingent upon the launch of a bid, which is thus considered by the legislator as a special circumstance triggering the suspension of the voting arrangement during the bid and the termination thereof if the bid is successful.
Due to the public interest underpinning this provision, the parties should not be entitled to derogate from it, or expressly anticipate, in the agreement, any behaviour if a bid is launched.
The rationale of the rule is therefore that shareholders cannot agree in advance anything legally binding concerning their behaviour during the bid and after the bid, if the bidder receives the stated threshold of acceptances.
If this is true, then there is no reason not to apply the same principle already stated by the new proposal of the Commission with respect to voting arrangements limiting the voting rights, also to voting arrangements increasing and leveraging the voting rights. Shareholders’ empowerment also implies here that shareholders must be requested to reconfirm, after the bid has been launched, their agreement on the allocation of multiple voting rights.
We suggest therefore that a consistent approach should be followed, contrary to the Commission’s new proposal, also with by-laws provisions concerning the allocation of voting rights, and namely providing multiple voting rights.
d) A multiple voting shareholder is not comparable to a “one share one vote” controlling shareholder.
It might also be argued however that even under the “one share one vote” rule we might have (and we often have) one shareholder who holds the majority of ordinary shares and therefore is entitled to frustrate a bid by simply rejecting the offer.
But here the point is different. Said shareholder is indeed empowered to do so because she or he has invested at least a substantial part of the overall equity in the company. Therefore, since she or he has substantial wealth at risk, according to the principle of proportionality between risk and control advocated by the High Level Group, we may expect that her or his decision be in the best interest of the company. The same cannot be said for multiple voting shareholders.
This is confirmed also by those scholars who strongly criticize the role of the contest for corporate control as an efficient external monitoring device on slack management and question the rationale for any rule preventing the adoption, prior or during the bid, of anti-takeover measures.
They acknowledge in fact that, in a situation of slack management, “thin” owners (i.e. owners contributing equity in a disproportionate way with respect to the multiple voting rights they receive), being also the managers of the company have a much stronger incentive to defend their managerial position than strong owners who have contributed more than 50% of the overall equity of the company. A favourable bid is indeed much more interesting for the latter, because they will earn a lot as shareholders to compensate the loss of the managerial position, than for the former who do not have such a comparable compensation ( ).
It can thus be concluded that the inclusion of multiple voting rights within the scope of the break through rule is necessary in view of the purpose of the directive. If multiple voting rights were not included, there would be a danger that a growing number of European companies might in the future use this instrument in order to prevent takeover bids from ever being launched and this might also favour a race to the bottom among Member States which would clash with the implied rationale of the directive and the establishment of an efficient European securities market.
5.2. The related issue of the fair compensation to be granted to the multiple voting shareholders if the break through is applied.
a) General. As anticipated, an important issue related to multiple voting is, however, whether the beneficiaries of multiple voting affected by the break through rule should deserve fair compensation for the loss of their disproportionate voting rights upon completion of a successful bid. The High Level Group put forward a very straightforward solution, suggesting no compensation whatsoever, unless in exceptional cases where specific damage may be demonstrated. We would rather advocate a more cautious approach. The Commission correctly pointed out that the suppression of such rights would give rise to questions of constitutional nature if no compensation were provided.
We suggest therefore that the directive require the bidder to pay “fair compensation” to the holders of shares carrying multiple voting rights.
This conclusion, as it will be indicated here below, is consistent with the consolidated jurisprudence of the European Court of Justice and of the Court of Human Rights concerning the indemnification to be granted where property rights are affected by public law measures.
b) The applicable “constitutional” provisions on property.
Should the new directive provide for the break through of multiple voting rights, the lawfulness of such a provision and of the implementing national laws should first of all be measured not in the light of the national legal systems, but in the light of the fundamental Community rights (and namely Article 1 of the Protocol annexed to the European Convention on Human Rights) as developed by the ECJ in its case law so far ( ). These are now reflected in a non-binding manner in the Charter of Fundamental Rights for the European Union which sets out under Article 17 a detailed provision concerning the protection of property rights, including the right to fair compensation in the event of expropriation.
The primary reference to fundamental European rights follows from the principle of primacy of Community law over national law at every level, which the ECJ has upheld in a consistent line of rulings since 1963. The ECJ has repeatedly emphasised that this primacy principle applies also without restrictions against the constitutional law of the Member States. In the Member States, this simple but strict doctrine adopted by the ECJ has essentially been recognised, especially by the courts.
c) The ECJ relevant jurisprudence.
Shares as membership rights certainly fall within the scope of protection of property rights under Community law. Despite this, the ECJ has never expressly stated this principle so far. This conclusion can however easily be derived from the general principles developed by the ECJ. According to these principles, a financial benefit is covered by the protection granted to property rights under European law if it represents the result of the investment of capital and work, and it is legally allocated to its owner in a manner comparable to classical ownership of things. This certainly applies to shares.
Therefore, if the break through rule set out in Article 11 of the directive proposal were extended to such multiple voting rights, this would easily amount – in the terminology of the Court – to a restriction of the property rights and/or of the use thereof.
Such restriction would however comply with the purposes of Community law if it were proportionate with respect to the objectives of general interest pursued (in our case, the contestability of control and the cross border consolidation of European industry, which, as we said, are two of the touchstones of the directive) and, according also to Article 17 of the Charter of Fundamental Rights, there were timely and fair compensation.
d) The national Constitutions.
Even on the national level, in our view, the break through rule would not amount to a violation of the Constitution, provided however that a fair compensation is granted.
First, since the Community Charter of Fundamental Rights sets out a rule which is fully consistent with those existing at the national level, there is no reason to believe that Community legislation which complies with Article 17 of the Charter could be found in violation of national constitutional rights.
Secondly, the German experience accrued to date supports the view that, also at national level, the fundamental right of property is validly affected if multiple voting rights and voting caps are overridden (as it has been in Germany with a flat ban and not a simple break through with the KontraG of 1998) but fair compensation is granted.
In fact, in Germany, before the law was enacted, the compatibility of such a flat ban with the guarantee of ownership under German constitutional law was strongly debated in the legal literature. But at the core of this discussion, there was only the question as to whether and to what extent the property right protected by the Constitution required fair compensation for the party deprived of the right. Nobody ever questioned the admissibility of the abolition of multiple voting rights. Therefore, when such a flat ban was finally introduced the German law was clear in providing for compensation.
The legal situation in the other Member States should not differ substantially from the one in Germany and therefore, if a fair compensation is provided, no constitutional questions whatsoever also at the national level should prevent the adoption and implementation of the directive.
e) How to determine the amount of fair compensation.
The point rests then on how to determine the amount of fair compensation.
Such a determination could be facilitated, in our view, where both classes of shares (multiple voting shares and “one share one vote” shares) are listed. Here, since the bidder is obliged to tender both classes of shares, she or he will offer a differentiated price reflecting the different voting rights pertaining to the shares. In so doing, she or he will also discount by the current price of multiple voting shares the regression effect determined by the break through and vice versa incorporate in the price of the common shares the control rights which might derive from the application of the break through rule. The market should therefore succeed in defining the two different prices.
The difference between the price offered to those holding multiple voting shares and to those holding “one share one vote” shares, divided by the number of the voting rights conferred by the multiple voting shares should then roughly represent the market value of each voting right and a very sensitive parameter to define the fair compensation to be paid to those multiple voting shareholders who did not accept the offer but saw their multiple voting rights overridden as a consequence of the success of the bid.
If, however, one of the two classes of shares is not listed (as is often the case) or there are reasons to believe that the market, due to its imperfections, would not easily find the best pricing of the different classes of shares (as it could be the case where the multiple voting shares represent only a small percentage of the equity and there might thus be a strong coercion to sell stemming from the break through rule), the definition of the fair price could, however, be based on the average voting right premium to be found on the market. Many studies of differential voting shares in different countries have recently indicated this premium as being generally worth between 10 per cent and 20 per cent of the value of the common stock.
This point deserves close scrutiny.
Financial literature has studied quite intensively this point in recent years. The experience indeed shows that where shares confer identical pecuniary rights, those conferring a greater voting right to their holders have the higher market value. However, this can hardly be explained on the basis of the classical financing theory which determines the value of a share only taking into account the flow of payments to be expected. According to the classical theory, therefore, the voting right as such could, in principle, have no value.
The most recent literature has shown however that there might be at least two explanations for the differential value of dual class shares.
On one hand, if the shareholder could influence the payments flowing to him through the voting right, the value of a voting right would indicate that the shareholder, by exercising her or his voting right, is able to cause the company grant her or him private benefits.
On the other hand, where there is a market for corporate control, this concerns by definition only shares which confer voting rights and affects solely the market value thereof. This is confirmed by the fact that, during a takeover bid, the price difference between non-voting and voting shares tends to rise greatly. On the other hand, it remains somehow not explained why non voting shares have a lower value also in legal systems where takeovers practically do not occur.
In view of this background, it might be argued that the holder of a multiple voting right should receive compensation, in the absence of appropriate market data for each voting right, equal to the value of an ordinary share granting a simple voting right. Such determination of the amount of compensation would, however, be certainly wrong, because the value of the ordinary share also reflects the flow of payments to be expected through dividends and the liquidation proceeds (which are exactly the same for the shares conferring multiple voting right and for the “one share one vote” shares assuming that the former do not confer any pecuniary advantages). Moreover, such a determination would make the break through of multiple voting rights virtually impossible or extremely difficult in many cases, as hardly any bidder would be able to pay such compensation for shares with, for instance, a twenty-fold multiple voting right, thereby impairing the contest for corporate control and the objectives of the directive.
A first indication on how to determine the amount of reasonable compensation for multiple voting rights is provided, however, by the German experience accrued under the KontraG 1998 which provided that multiple voting rights in German joint stock companies shall expire on 1 June 2003, unless the general meeting passed a resolution beforehand to abolish them or to maintain them after that date. As already anticipated, where a multiple voting right ends thereby, the holder must receive compensation pursuant to Article 5 EGAktG, whose fixed amount however was not defined by the legislator. In practice, it has been suggested thus that, where no amicable solution can be found by the parties concerned, the amount due cannot be derived from the change in value of the ordinary share after the removal of the multiple voting right. Instead, it has been argued that one should take into account the difference between the market price for ordinary shares and preference shares (i.e. the premium which an ordinary share usually has compared to a non-voting preference share). This value should then be increased or reduced in view of the special preferential terms and rights conferred by the share of the company ( ).
This method has met some objections ( ). For example, it has been contended that there are (albeit few) cases where preference shares have a higher market price than the ordinary shares. Accordingly, it is argued that the premium between the classes of shares should derive primarily not from the voting right, but from the lower sales volume which usually characterises the preference shares, inducing higher transaction costs for the investor.
Despite these objections, which seem to be based on exceptional circumstances, we believe that, in accordance with the most significant financial literature, the reference to the price difference between ordinary and non voting shares should be used at the regulatory level because it still offers the most convincing and workable solution for the determination of the amount of fair compensation.
Where this premium cannot be derived by the market for the specific target company affected by the break through (as it is the case mentioned above where only one class of shares is listed), we tend to believe that the directive could use as a reference the average premium paid on the market for such dual class shares. It should not be neglected, in fact, that fair compensation does not necessarily amount to the market price and that the directive should bring about a clear and workable solution which should draw a fair balance between the public interest to the contestability of control and the private property right affected.
Here (i.e. where the marked does not provide an indication of the specific premium paid for the voting rights of that particular company) three approaches seem to be theoretically possible.
A first, more straightforward approach would advocate the determination of the amount of a fixed compensation, equal for all Member States, based upon the average premium paid in the European markets for a voting right. A number of different empirical studies exist in this respect, which determine the premium conventionally attributed to a single voting right by comparing the market price of the different classes of shares. However, the values they found differ considerably from one country to the other. For example, the average price difference in the USA is said to amount to 5,4% ( ), in Sweden 12% ( ), in Great Britain 13,3% ( ), 18% in Switzerland ( ), in Germany 17,2 % ( ), 51,3% in France ( ) and in Italy 82,5% ( ).This dramatic differences in the amount of the premium observed the last two countries resulted somehow corrected in the most recent literature ( ).
These studies are far from being conclusive ( ) but they already provide an important indication for regulatory purposes. They also tend to indicate that the premium is lower in countries – like the US or the United Kingdom – where shareholdings are widely dispersed and extensive protective provisions exist for the shareholders whereas it is higher, the more the ownership patterns are concentrated and the weaker investor’s protection is. This could confirm that the possibility to extract private benefits plays a major role in the evaluation of a voting right. Such private benefits however are to the disadvantage of other shareholders and are to be considered outside the proprietary position which would have to be protected through fair compensation. It might be therefore reasonable to adopt the average premium observed in countries with a pronounced share culture, e.g. USA and Great Britain as the amount of fair compensation and to conclude that the amount of fair compensation could range between 10% to 20% of the market value of the ordinary shares per voting right.
A second and less straightforward approach would be to accept that any general and fixed determination of the amount of compensation might easily result to be somehow arbitrary, also due to the fact that, as anticipated, in some Member States such as France and Italy the voting right premium appears to be much higher (it being a function, not only of the amount of private benefits available to the controlling shareholders but also of the contestability of control). It might therefore be considered to follow the German experience accrued with Article 5 EGAktG and to leave it to the national supervisory Authority (as it is the case for the squeeze out and sell out rights set out under Articles 14 and 15 of the directive proposal) to determine at a national level, on a case by case basis, the due fair compensation, specifying however in the directive that the national supervisory Authority shall take into account the differential price offered to the dual class shares as well as the average voting right premium existing in that Member State.
A fair compromise between these two approaches might perhaps be found, in order to phrase a clear rule which could provide some flexibility in its application and at the same time could avoid the risk of regulatory capture of the national supervisory Authority. Such a compromise could be to determine in the directive a fixed percentage of about 15% of the market value of the ordinary shares as fair compensation for each voting right, granting at the same time to the national supervisory Authority the power to derogate to this percentage by increasing or decreasing this fixed percentage of about 10% of the market value of the ordinary shares per voting right taking into consideration the average premium observed in the national market.
In conclusion, we suggest applying to multiple voting the same principle already stated by the Commission’s new proposal in respect to voting arrangements limiting the voting rights. The break through should include the provisions of the articles of associations conferring upon one or more classes of common or preference shares multiple voting rights and, in order to avoid the circumvention of the rule, to the provisions formally conferring upon one or more classes of common or preference shares one vote but at the same time providing for a fractional nominal value of the relevant shares, thereby indirectly conferring multiple voting rights.
The beneficiaries of multiple voting affected by the break through rule should get fair compensation for the loss of their disproportionate voting rights which shall be determined by the market where both classes of shares are listed and tendered or, where this is not the case, by the directive: i) either in a fixed percentage representing the average European premium for a voting right or ii) by the competent national authority taking into account the differential price, if any, paid for the two different classes of shares of the target company or, failing this, the average voting rights’ premium observed in general, on that market, or iii) in a fixed percentage determined by the directive with the power granted by the national Authority to derogate to this percentage by increasing or decreasing this fixed percentage of about 10% of the market value of the ordinary shares per voting right taking into consideration the average premium observed in the national market.
5.3.- Non voting shares carrying specific pecuniary advantages.
According to Article 11 (5) of the directive proposal non-voting shares carrying specific pecuniary advantages are out of the scope of application of the break through rule. No precise reasons for this exception are given.
As it has been pointed out by the High Level Group and by a substantial amount of American literature, in view of the concept of a market for corporate control, this exception is not unproblematic. Indeed, if one accepts the widely held view that only the principle of “one share one vote” provides for the optimal functioning of the market for corporate control, also non voting shares (in the ordinary shareholders’ meeting) carrying specific pecuniary advantages deviate from it and should therefore be somehow reconciled with it.
The point is, however, that at this stage of development of European securities market:
a) the investor subscribing or acquiring these shares is or should be well aware of the fact that these securities, in exchange of the pecuniary advantages granted to them, do not confer voting rights and do not matter in the corporate control contest. This results not only from the listing particulars and/or the prospectus (as it is the case of the existence of dual class shares) but from the “title” itself and visibly affect the price of the same;
b) preference shares do not usually prevent a takeover from being launched or make it more difficult because they simply do not matter in the contest for the corporate control. This situation is thus not comparable to that of multiple voting rights. Where multiple voting rights make it more difficult for other ordinary shareholders to exit at a premium at the occurrence of a takeover, this is not true in the case of preference shares. Moreover, preference shareholders are not necessarily harmed. If they do not take part in any takeover premium, they however receive compensation in the form of preference dividends and the price discount which usually exists points out the ability of the market to properly address this point.
c) A generalized extension of the break through rule to non voting preference shares would be extremely difficult. For example the question would arise as to whether, in return for the revival of the voting right, the preferential right should be eliminated and as to whether ordinary shareholders should be somehow compensated for the dilution of their voting rights;
d) a generalized inclusion of the non voting shares in the break through rule would make takeover bids far more expensive and could thus even have the effect of being an obstacle to takeovers.
We believe, however, that the issue of non voting preference shares should not be admissible without any limitations. In a perfect market it might be possible that market forces alone could constrain the ability of listed companies to issue too many preference shares or non voting shares in order to favour “thin” owners contributing a small fraction of the overall equity and subscribing however the majority of the ordinary shares. Markets are however still far from being perfect and therefore disclosure alone appears to us insufficient.
Thus, since according to the High Level Group, the principle of proportionality between risk and control has a disciplinary effect in that it grants the control over the company to those who have contributed a substantial portion of its equity, at this stage of development of the European securities markets we believe that it might be advisable at least to set a mandatory ratio in the directive between common shares and preference or non voting shares.
In this respect it might be worth remembering that Article 33 of the Fifth directive proposal presented by the Commission, set out a rule according to which “the shareholder’s right to vote shall be proportionate to the fraction of the subscribed capital which the shares represent. The laws of the Member States may authorize the memorandum and the articles of association to allow restrictions or exclusion of the right to vote in respect of shares which carry special pecuniary advantages. Such shares may not be issued for an amount exceeding 50% of the subscribed capital. If the company does not fulfil the obligations arising in respect of such shares, the holders of those shares shall acquire, in proportion to the fraction of the subscribed capital which those shares represent, voting rights equivalent to those of the other shareholders which they may exercise during such time as they are not in receipt of the abovementioned pecuniary advantages”.
This rule is obviously more straightforward than the break through rule advocated by the High Level Group and, as it stands, it would not be compatible with the Commission’s new proposal because it would override multiple voting rights with a flat ban.
Consistently with the general philosophy of the directive proposal, therefore, we would rather recommend to draft a rule according to which the non-applicability of the break through rule to non voting and preference shares depends on whether the issue of these shares exceeds the same maximum limit of 50% of the subscribed capital.
Although this approach would certainly curtail the absolute freedom of companies and of their shareholders, currently existing in some Member States, to allocate through the issue of non voting and preference shares the voting powers as they may deem appropriate, it would seem to be better suited to:
a) react to market imperfections without overestimating the positive effects of simple disclosure;
b) react to ownership concentration by imposing at least a reasonable level of proportionality between risk and control;
On the other hand, we agree that the directive cannot provide a specification regarding the amount of the preferential treatment required. Although there is quite obviously a risk that companies will try to circumvent the applicability of the break through rule to non voting shares without pecuniary advantages by conferring insignificant benefits to them, it is hardly possible to generally define the minimum preference necessary for the privilege. Instead it should be left to the market to determine the same, it being clear that preference shares with too small a preferential treatment might easily be difficult to sell.
5.4.- Convertible bonds and options.
In addition to preference shares, the legal systems in the Member States contain a number of other rights which strictly speaking do not constitute share capital, but clearly relate to it. To be named primarily here are convertible bonds and options. Through convertible bonds, the company grants a creditor the right to exchange the participation into shares; on the other hand, the creditor is granted the right, in addition to his repayment claim, to acquire a certain number of shares for a fixed amount.
Neither right is covered by the break through rule in the directive proposal. This also does not appear to be necessary.
According to company law, if the holder of a convertible bond or of another right to subscribe shares wants to profit from the takeover bid, she or he can do so by exercising, when the bid is announced, the subscription or conversion right if the subscription or conversion period is open. Otherwise her or his exclusion from the bid shall on one hand simply depend on the terms and conditions of the issue, which were agreed upon at the time of the subscription and on the other hand would not impair the contestability of control.
The only problem possibly raised with respect to takeover by convertible bonds and subscription rights open during the bid could be that the circle of addressees of a takeover bid would extend, and the bidder could, under certain circumstances, be compelled to purchase the shares from a greater number of shareholders than originally intended for a price which was calculated on the basis of the earlier lower number of shares. However, the information concerning conversion and subscription rights are generally available (and would be reinforced with Article 10 of the directive, if our recommendation related thereto is followed) and a bidder can assess thereupon which additional burdens must be expected.
In this sense, one could consider the use of convertible bonds or options as a precautionary defensive measure against a takeover bid. The same could be said where a third party is granted such subscription rights, to be exercised in the case of a takeover on the basis of an agreement with the management. This, however, is not a problem that the break through rule can or should address. And insofar as these rights are issued according to a resolution of the shareholders’ meeting, they already comply with the rule recommended here below under paragraph 5.7. in respect to agreements contingent upon the launch of a bid.
5.5. Trust offices and company law technicalities which may hinder the success of a bid or delay the swift substitution of the management.
From the wording of Article 11 it results that the break through rule adopted by the Commission is very narrow in scope and covers only a few pre-bid defensive measures. We disagree with this.
Concurring with the opinion of the High Level Group, we do believe indeed that Article 11 should cover any type of arrangements the effect of which is the same as the effect of those statutory or contractual arrangements which are expressly mentioned in Article 11. A limitation to only a few of such technicalities, setting aside other equivalent technicalities, would appear indeed fully inconsistent.
One very good example was already given by the High Level Group and refers to the situation in which a company has issued voting shares to a trust or administration office which in turn has issued listed non voting depository receipts in respect of those shares. As suggested by the High Level Group, the unenforcement rule should be tailored here to make the depository receipts freely exchangeable into the underlying shares in the event of a general takeover bid.
Similarly, when the shareholders’ agreement is a voting trust, it should be clear that the unenforcement of the restrictions on voting rights confer the right to vote as they deem appropriate in the meeting convened to pass resolutions concerning the adoption of post bid techniques directly to the beneficial owners and not to the trustee. It might also be advisable to carefully examine whether this rule should also apply to the constituent documents at creating foundations, making unenforceable the obligation sometimes herein set out to maintain control at all times.
On the other hand, this would also suggest to specify that the break through rule shall cover all those statutory or by-laws provisions concerning the appointment and removal of the board of directors, which in different ways could delay or hinder a swift substitution of the board by the bidder (i.g. staggered board, fixed term appointment, supermajorities, long lasting office tenure as requirement for the appointment of the board). At the first shareholders’ meeting the successful bidder should be able to immediately nominate the new management.
5.6.- The issue of pyramids.
An additional corporate law topic which would definitely deserve close scrutiny and is strictly interrelated to the one of multiple voting is the one of pyramid structures. This issue is indeed a fully fledged component of the ownership conundrum so that dismantling the former without intervening on the latter would easily result in an outbreak of even more pyramid structures. And such outbreak would also result in those Member States where the pattern had recently declined.
Shareholders would simply shift from voting arrangements like multiple voting shares to even more pyramid structures.
The High Level Group also correctly found that pyramid structures (i.e. the chain of holding companies whose sole or principal asset is the shareholding in another listed company) in a different way achieve a similar disproportionality between ownership of risk bearing capital and control rights to that which is, for example, achieved by multiple voting rights and, as it has been noted, in the “Report on a Modern Regulatory Framework for Company Law in Europe” the Group recommended a Community action be taken.
The Commission’s proposal addresses this issue under Article 10 extending to both multiple voting and pyramids the same “transparency” approach. This already indicates that, for the sake of consistency, there is a clear case to subject multiple voting and pyramids to the same approach. Therefore, if the break through has to be extended to multiple voting, pyramids – to which the break through rule cannot be technically applied - should also deserve specific substantive measures other than simple disclosure.
The topic is, once again, clearly a matter of both company and securities law and the new directive should, in our view, tackle the same at least with two different rules:
a) it should prohibit in the future the listing of any company whose main asset is the shareholding in another listed company, according to a practice already followed for instance by the Italian listing rules ( ) and now also recommended by the High Level Group. This however, according to the High Level Group recommendation, unless the economic value of such admission is clearly demonstrated. It should also be considered whether to introduce, for those pyramids already listed, a duty to list in a specific segment of the regulated market as well as an obligation to delist when the existing operating company is transformed in a simple pyramid vehicle;
b) it should provide for those listed companies which hold a shareholding in another listed company exceeding the percentage set out by Article 5 (3) and whose principal asset is the participation in said listed company that the transfer of control of the controlling company triggers a mandatory bid also on the shares of the controlled company. To this purpose, Article 5 of the Commission’s proposal should be supplemented, in our view, with a new paragraph devoted to a detailed regulation of this specific issue. The current “silent” reference to the “indirect control” to be read under Article 5 (1) appears, as such, to be insufficient. Some guidance in drafting said rule could be found in the well established regulatory French and Italian experience as well as in the City Code on Takeovers and Mergers under Note 8 to the Rule 9.1.
5.7.- Other arrangements conditional upon the launch of a takeover bid.
One issue which was raised by the High Level Group, but was deemed by the same to fall outside the scope of the new directive and, consistently, which was not covered by the Commission’s new proposal is that of the agreements (for example; golden parachutes, loan and credit agreements, call option rights to buy assets of the company) which are contingent upon the change in control of the company in the wake of a bid.
Although we agree with the High Level Group that these arrangements should not be subject to the break through rule and in principle should be dealt with in general contract law and company law, we would nevertheless favour the introduction in the directive - perhaps, in a last paragraph of Article 9 - of a provision inspired by Article 556 of the Belgian Company Code, according to which the shareholders’ meeting must formally approve any transaction whereby the company grants a right to a third party contingent upon the launching of a public offer for its shares or upon the change of control of the same ( ).
This rule is indeed consistent with the principle of shareholders’ empowerment advocated by the High Level Group and accepted by the Commission’s new proposal and would certainly discourage management opportunism.
Clear examples of the application of such a rule could be either the “poisoned debt” or the so-called golden parachutes, whereby board members obtain high settlement payments in the event of a change of control. These agreements would probably not prevent a bid from ever being launched but would certainly expose the bidder to higher costs or to the loss of relevant assets of the target company dependent only on the desire of management to thwart hostile takeovers.
5.8.- Listed companies other than joint stock companies.
Not covered by the break through rule set out in Article 11 are also special company forms which deviate from the guiding form of the stock corporation, as set up by the capital directive, but with shares nevertheless listed on the stock exchange, thus in principle falling within the scope of application of the directive.
In view of the purpose of the break through rule, i.e. the creation of a level playing field in Europe, this needs to be carefully examined. The question can be discussed taking as examples two company forms: the partnership limited by shares and the cooperatives.
Both companies deviate from the principle of proportionality between risk and control, but like the joint stock corporation, both can be listed at least under certain circumstances ( ). The cooperatives deviate from the proportionality principle in that they grant one vote irrespective of the amount of equity contributed; the partnership limited by shares in that the management of the company is granted to one or several personally liable shareholders. Because of their position as personally liable shareholders, they manage and represent the company for an indeterminate time.
The directive proposal literally covers all listed companies. However, the break through rule set out in Article 11 is not applicable here because it does not mention the legal form of the target company among those special pre-bid measures which are overridden in the event of a successful bid. In our view this is a tenable solution, because the application of the break through rule to the company’s legal form would amount to a mandatory transformation of the target company into a joint stock company, which would occur without respecting the company rules which govern such a transformation.
This would represent indeed a far-reaching interference with the company law of the State of incorporation which would be incompatible with the spirit ( ) of the directive and could also pose constitutional problems.
Moreover, it would not take into account that, already from the name of the partnership limited by shares or from that of the cooperatives, the investor subscribing or acquiring these shares is or should be well aware of the fact that these securities referring to a corporate entity other than the joint stock companies do not confer voting rights which matter in the corporate control contest as in the joint stock company. This results not only from the listing particulars and/or the prospectus (as it is the case of the existence of dual class shares) but from the “title” itself and visibly affect the price of the same.
We recommend therefore clarifying in the recitals of the directive proposal that the break through rule does not affect companies other than listed joint stock companies.
5.9 - Golden shares and other public law restrictions on the transfer of shares and on the change of control of listed companies.
A final issue which in our view deserves close scrutiny is that of “golden shares” and other public law restrictions to the transfer of shares and to the change of control of listed companies.
As already mentioned above, the Commission’s proposal left aside this issue commenting that, in its opinion, the directive should be concerned specifically with private law restrictions on the transfer of securities and the exercise of voting rights.
This approach is based on the implied assumption that, in the wake of the judgments of the European Court of Justice on 4 June 2002, it shall take all necessary action under Article 56 on a case by case basis against any national public law measures not complying with the Treaty.
Nevertheless, as already mentioned, the time needed to displace a golden share or any other public law restriction through the infraction procedure triggered by the Commission could easily be inconsistent with the time pressure which comes along with takeover bids.
An alternative solution, which might have however strong political and organizational implications whose assessment is beyond the scope of this Report, would perhaps be to qualify golden shares and other public law restrictions to the transfer of shares or the exercise of voting rights as impediments to the freedom of establishment according to Article 43, in that they hinder the management of the company as required by Article 44 g) and to require with the directive Member States to duly notify the same, in advance, to the Commission.
If this could be deemed feasible in terms of costs and overall organizational resources of the Commission, this rule (which seems to be less radical than the one put forward by the High Level Group) could certainly provide an effective instrument not only to force Member States to substantiate in advance the reasons of public interest which, in their view, might underpin the public law measure concerned but also to prevent the implementation of national measures not conforming to Community law.
The enforcement of said national measures should in fact be subject to the prior approval of the Commission. In evaluating the measure, the Commission should act according to the evaluation criteria set out by the European Court of Justice on 4 June 2002 ( ).
6.- LEVEL PLAYING FIELD WITH NON MEMBER STATES.
Assuming that the directive might finally bring about an effective level playing field throughout Europe, a final and related issue is whether or not the directive should also provide special measures to face takeover bids launched by a non European bidder (namely, but not by way of limitation, American).
The point is in fact that there is no level playing field with non Member States and, as it is well known, U.S. state legislation provides for a wide range of anti takeover devices.
The High Level Group primarily suggested not to take any specific action, based on the finding that current patterns of European flows of investment towards the United States “show that defensive mechanism and state defensive laws have not blocked European companies taking over American companies” ( ). Only “if political concerns remain”, the Group recommended to provide that the benefit of the break through rule and of the other measures devised in the report, “can be enjoyed by listed European companies making general takeover bids for other listed European companies, to the extent that this would not violate international agreements and could be practically enforced”.
It is, however, not clear why the enjoyment should be limited to “listed European companies”, whereby unreasonably excluding non listed European bidder and whether or not, in the opinion of the High Level Group, such a provision should take the form of a reciprocity clause.
If it were a reciprocity clause focusing on Articles 9-11 (providing that these provisions do not apply if the bidder is not European, unless the national legislation of the bidder set out similar rules applicable to European bidder), the result would be however to empower the management when the bidder is non European and to dis-empower the shareholders and make them prisoner of the company when the bidder is non European. This would clash with the philosophy of the directive.
Furthermore, a reciprocity clause focused only on Article 11 would easily result insufficient because Article 9 is also crucial in the anti takeover defence.
Moreover, the takeover regimes in the United States and the European Union are hardly comparable: in the United States the Williams Act does not provide a mandatory bid (although some States allow listed companies to provide for a similar duty in their articles of association) and therefore anti takeover measures, largely admitted by State legislation, are used by the management to get a better price for the shareholders. Managers are also under the pressure of shareholders’ litigation if they use their power contrary to the interest of the company and its shareholders. In Europe, on the contrary, it is the mandatory bid which justifies the neutrality rule and the elimination of pre bid anti takeover measures. It could be very difficult, therefore, to assess whether the regime of one or more US States fulfils the reciprocity obligation.
This might explain why the Commission decided not to put forward in the new proposal any special regime for takeover bids launched by non European entities.
It could be argued, however, that due to the “petrification effect” which to some extent distinguishes Community legislation, one should be very careful in omitting any specific provision only based upon current trends of the investment flows. These trends could be easily reversed in the near future and it might then be difficult to timely amend the directive and the legislation of the single Member States. Moreover, the revision clause currently set out under Article 18, whereas it refers to Article 11, does not mention Article 9.
If a position on this issue were deemed to be politically necessary or appropriate, in our view a possible alternative to the solution currently reflected in the directive proposal could be to expressly clarify in the directive (perhaps also in the sole recitals) that Member States, subject to the international obligations of each Member State, are free to provide their supervisory authority with a veto power with respect to takeover bids launched by a bidder whose ultimate controlling entity is incorporated in a State other than the Member States, if they deem and can substantiate that a national or European company would not be entitled to take over upon comparable terms and conditions a listed company incorporated in the State of incorporation of the bidder. The matter is however “political” in its very essence and its final assessment falls therefore well beyond the scope of this Report.
7.- CONCLUSION. SUMMARY OF THE RECOMMENDATIONS.
According to the mandate received by the European Parliament, we therefore conclude and recommend that the Parliament, in the review of the Commission’s new directive proposal on takeover bids and in particular when addressing the provisions set out in Article 9, 10 and 11 of the proposal for the introduction of a level playing field throughout Europe in the domain of takeovers as advocated by the High Level Group, does consider the following:
1) WHETHER TO supplement Article 9, inserting between paragraphs 4 and 5 a new paragraph according to which, in any time and not only during the bid, the shareholders’ meeting must formally approve any transaction whereby the company grants a right to a third party contingent upon the launching of a public offer for its shares or upon the change of control of the same.
2) WHETHER TO supplement and amend Article 10 in order to:
a) provide in paragraph 1, letter a) that also other securities shall be considered for the purposes of the same paragraph, where they provide a subscription or conversion right or, according to national company law, despite their hybrid nature, they provide one or more rights relevant to the governance of the company;
b) specify in paragraph 1, letter g) that the relevant agreements are not only those providing for restrictions on the transfer but also restrictions “on the exercise” of voting rights;
c) to provide in paragraph 2 that the information should also be published in an excerpt (having the usual form of a “tombstone”) on one or more newspapers;
d) to clarify, at least in the recitals, how the provision of paragraph 3 should be correctly interpreted where it states that “the general meeting of shareholders makes a decision at least every two years on the structural aspects and defensive mechanisms referred to in paragraph 1”, also specifying on which matters, among those listed in paragraph 1, such a resolution is effectively needed.
3) WHETHER TO supplement and amend Article 11 in order to:
a) specify in paragraph 2 that the restrictions contemplated herein are made unenforceable not only against the offeror but also “against the shareholder concerned”;
b) to specify in paragraph 3 that the restrictions on voting rights provided for in the articles of association which shall cease to have effect according to that paragraph shall include also the allocation of multiple voting rights as well as any limitation or exclusion of voting rights as applied to non voting shares which carry specific pecuniary advantages where and to the extent that the amount of these non voting shares issued by the company exceeds 50% of the subscribed capital. In this event the recital should also clarify that the holders of non voting shares shall be entitled to vote in the general meeting referred to under paragraph 3 and in the subsequent meetings, if the bidder achieves the threshold referred to in paragraph 4, only proportionally for those non voting shares that exceed the threshold herein set forth;
c) to specify in paragraph 3 that the restrictions on transfer of securities or on voting rights provided for in the articles of association or in contractual agreements which shall cease to have effect according to that paragraph shall include also trust arrangements whereby, for instance, the shares are conferred to a trust or administration office which in turn has issued listed non voting depository receipts in respect of those shares. In this event the depository receipts should be freely exchangeable into the underlying shares during the bid;
d) to specify in paragraph 3 that the restrictions on voting rights provided for in the articles of association which shall cease to have effect according to that paragraph shall not include the restrictions to the voting right pertaining to the own shares held by the company;
e) to specify in paragraph 4, or at least in the recitals, that the threshold mentioned in that paragraph shall be the one generally fixed by the applicable national company law to pass the resolution to amend the company’s articles of association also where the articles of association of the target company derogate to it, increasing the majority required;
f) to clarify in paragraph 4, or at least in the recitals, how it is to be calculated the majority referred to in paragraph 4
g) to specify in paragraph 4 or at least in the recitals that, if the recommendation provided for herein under letter b) above is followed, the majority referred to by paragraph 4 shall be calculated excluding any multiple voting right and including, within the limits discussed above, the voting right allocated to non voting shares according to the same recommendation;
h) to clarify in paragraph 4 that the restrictions and the special rights contemplated herein shall include multiple voting rights and, within the limits discussed above, the exclusion of voting rights to non voting shares according to the recommendation provided for herein under letter b);
i) to clarify at the end of paragraph 4 that the restrictions and the special rights contemplated herein shall cease to have effect automatically, without the need of a formal resolution, it being sufficient that at the meeting the bidder holds the required majority to trigger the break through rule;
j) to specify in the second part of paragraph 4 that the shareholders’ meeting herein referred to shall have the right to revoke the existing management bodies and shall nominate new management bodies, without being hindered by company law technicalities such as staggered board, fixed term directors’ appointment, supermajorities, long lasting office tenure as a requirement for the appointment of the members of the board;
k) to specify in paragraph 4 that, where following a bid, the offeror holds a number of securities of the offeree company which triggers the break through rule set out in paragraph 3, the holders of multiple voting shares are entitled to fair compensation for the loss of the multiple voting rights. Such compensation shall be fair and shall be determined by the national supervisory Authority referring to the market price of each voting right, where both classes of shares (multiple voting shares and ordinary shares) are listed and tendered or, if this is not the case, in an amount which could be either: i) set by the directive in a fixed percentage representing the average European premium for a voting right, or ii) determined by the competent national Authority taking into account the differential price offered to the two classes of shares, if any, as well as the average voting right premium observed on the market of that Member State; or iii) set by the directive in a fixed percentage representing the average European premium for a voting right, with the power granted to the national Authority to derogate to this percentage by increasing or decreasing this fixed percentage of another fixed percentage taking into consideration the average premium observed in the national market.
4) WHETHER TO introduce a provision whereby:
a) in the future the listing of any holding company whose main asset is the shareholding in another listed company will be prohibited, unless the economic value of such admission is clearly demonstrated;
b) the holding companies referred to herein which are already listed shall be inserted in a specific segment of the regulated market;
c) listed operating companies shall be delisted, with the grant of appropriate protection to the minority shareholders, if and when they are transformed into a simple pyramid vehicle according to the definition set out herein;
d) clarifying the notion of acquisition of indirect control already mentioned in Article 5 (1), by adding a new paragraph in Article 5 stating that the acquisition of control of a listed company which has a shareholding in another listed company exceeding the percentage set out by Article 5 (3) and whose principal asset is the shareholding in said listed company shall impose to the offeror to make a mandatory bid also on the shares of the controlled company.
5) WHETHER TO introduce a new provision, whereby, if feasible according to the organizational resources of the Commission, Member States are required to notify in advance the Commission of any “golden shares” and other public law restrictions to the transfer of shares or the exercise of voting rights adopted in each Member State and whereby the enforcement of said national measures shall occur only upon the prior approval of said measure by the Commission according to the evaluation criteria set out by the European Court of Justice with its decision of 4 June 2002 and by the directive, if any.
6) WHETHER TO introduce a new provision or at least specify in the recitals that, subject to the international obligations of each Member State, the directive shall not prevent Member States from conferring upon their national supervisory Authority a veto power with respect to takeover bids made by an offeror whose ultimate controlling entity is incorporated in a non Member State, if they can substantiate that a national or European company would not be entitled to take over upon comparable terms and conditions a listed company incorporated in the State of incorporation of the offeror.
PROF. BARBARA DAUNER LIEB
PROF. MARCO LAMANDINI
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