Creeping Acquisitions in Europe

Creeping acquisitions—surreptitious grabs of a public company’s control without the prior launch of a formal tender offer—had long been considered a thing from the past in corporate America: poison pills kept this acquisition technique at bay. After Sotheby’s, Allergan and similar “wolf pack”-styled hedge fund activists’ campaigns, some fear creeping acquisitions might be back.

Other than in the U.S., becoming targets of a creeping acquisition has never ceased to be a real possibility for European companies with a dispersed ownership structure: without pills or analogue structural defenses available (or, at least, in place), they run the risk of being taken over through such an acquisition technique. Indeed, acquirers have made significant attempts to that effect over the last decade or so—sometimes successfully (Schaeffler’s takeover of Continental, Lactalis’ acquisitions of Parmalat), sometimes not (LVMH’s failed attack on Gucci, Nasdaq’s attempt at the London Stock Exchange Group). In our paper Creeping Acquisitions in Europe: Enabling Companies to Be Better Safe than Sorry, we analyze the level and type of protections European companies can find in the law (whether EU or national) and via private ordering (which of course is constrained by the law itself).

While maintaining a timidly positive view on the net benefits of activism, we do not think such phenomenon should go as far as condoning the reintroduction of techniques like creeping acquisitions, which we believe present many undesirable effects. First, after the acquirer is satisfied with the stake it accumulates, the stock price is likely to drop below pre-acquisition values and the remaining shareholders are stuck with what have become minority shares. Second, creeping acquisitions can also have long-ranging consequences for the market for corporate control, such as too many acquisitions by suboptimal acquirers, as well as the permanent loss of a company’s contestability status and therefore of any prospects to obtain a control premium Third, there can be negative consequences on the governance of a company, as de facto control can lead to the extraction of higher private benefits of control.

Notwithstanding all such risks, EU corporate and M&A laws largely fail to address the issue, both at the European level and in individual member states. In our paper, we survey the main devices to protect companies against creeping acquisitions, namely the Transparency Directive ownership disclosure obligations and the Takeover Bids Directive mandatory bid system and conclude that no such device is truly effective. In particular, the mandatory bid threshold is generally high (ranging from 30% to one third in most cases) and does not cover purchases below that level. Also, acquirers can count on numerous exemptions and evasion via derivatives is possible in some member states. As a result, applicable European takeover laws do not pose significant obstacles to implementing one or more of the following transactions, subject to ownership disclosure obligations: (i) an acquirer can obtain de facto control by making stock purchases up to right below the mandatory bid threshold; (ii) after having reached de facto control, an acquirer can obtain full control (that is, 50% plus one share) by launching a tender offer, which can easily take the form of a low-ball bid, because little resistance can be expected from directors and shareholders by virtue of the fact that the bidder’s starting point (de facto control) makes the possibility of any rival bid very unlikely and any resistance by the board short-lived; (iii) an acquirer can secure a high toehold with the aim of beating a potential rival bidder in an upcoming or actual corporate control contest; and (iv) an acquirer can even use a partial tender offer to achieve de facto control below the mandatory bid threshold.

Because the current legal landscape is not up to the task of containing a potentially dangerous phenomenon, we consider possible reforms. However, we do not think a legislative tightening of current regimes—and especially of the mandatory bid system—is a sensible policy tool to address creeping acquisitions: top-down solutions may well be overreaching given the drawbacks of one-size-fits-all regimes and the risk of shutting down the market for corporate control or clamping down hedge fund activism. Instead, this paper recommends a lift on existing limitations to a company’s freedom to determine its preferred level of openness to creeping acquisitions (and takeovers more generally). We believe European legislation should provide an optional regime whereby companies can select effective arrangements to thwart or limit creeping acquisitions.

In the paper, we address some potential objections to our approach: first, that optionality might lead to lack of uniformity and therefore to an increase in transaction costs in the market for corporate control; second, that it might favor the proliferation of conflicted, self-serving choices by some insiders. We argue that the virtues of uniformity are often exaggerated especially in a market with a limited number of transactions (as opposed to the number of transactions taking place on the stock market), which already involve high costs borne by sophisticated actors: understanding the governance structure and defense profile of a company is a negligible cost in the context of an acquisition. As to the risk of conflicted choices, while we reckon that more options can sometimes give more opportunity for abuse, we do not believe that is a good reason for limiting the spectrum of substantive choices that would benefit a company and its stockholders; rather, we suggest that more generally policymakers carefully re-assess, as the case may be, the procedures for charter amendments (including, powers of initiative, conflict of interest rules, possible re-openings, and so forth) to ensure the ultimate decisions are not tainted by some biased group’s undue influence.

The full paper is available for download here.