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E-MailPaul L Davies is Emeritus Professor of Corporate Law at Harris Manchester College, University of Oxford. Alain Pietrancosta is Professor of Law at Sorbonne Law School, University of Paris. This post is based on their recent working paper.
This year is the 20th anniversary of the adoption by the European Union of its Directive on Takeovers. A group of scholars associated with the European Corporate Law Experts Group (ECLE) has compiled a set of papers assessing the performance of the Directive. One of these papers is concerned with the Directive’s rules on defensive measures in response to tender offers. It assesses them predominantly from an industrial policy perspective.
During the (very lengthy) negotiations among the Member States, the European Commission was enthusiastic about the benefits of removing barriers to takeovers, on the grounds that making the control of companies contestable would both help to solidify the Union’s internal market and strengthen European companies in global competition. Some Member States were less convinced. A notable expression of this opposition was the actions of the German government which in 2001 blocked at the very last minute in the Union’s legislative procedure the adoption of a version of the Directive which contained a prohibition on post-bid defensive measures unless a majority of the shareholders gave their consent in the face of the bid – the so-called board neutrality rule (BNR). This was the result of an assessment in Germany of the implications of the takeover of Mannesmann by the British bidder Vodafone in 1999. This reaction was surprising, since the bid had strong internal market credentials and didn’t give rise to ‘level playing field’ concerns, as the UK’s rules were (and still are) favourable to takeovers.
Final agreement on the Directive in 2004 could be secured only on the basis that the rules on defensive measures were to be optional. Member States could choose not to impose a BNR on companies incorporated in their jurisdictions – or the less extensive control over pre-bid defensive tactics which was aimed primarily at the impact of dual class shares on takeovers (the so-called “breakthrough rule” or BTR). Even if either rule was imposed, Member States could permit their companies to ignore the prohibition in relation to bidders which were not subject to the same controls over defensive measures – the so-called “reciprocity exception” – which affected, and was probably aimed at, US bidders predominantly. The result was a grievous disappointment to the Commissioner in charge of the Directive who at one point described it as not worth the paper it was written on (see Vanessa Edwards (2004) 1 European Company and Financial Law Review 426-7).
The immediate results of the Directive were threefold. The BTR was ignored by most Member States, even those which before the Directive had imposed a BNR. Many (but not all) states with an unqualified BNR before the Directive chose to qualify it post-Directive with the reciprocity exception. Important examples were France and Spain (but not the UK). Third, states strongly opposed to the BNR were able to avoid it, important examples being Germany and the Netherlands. Overall, the Commission failed to achieve its original objective of a uniform BNR operating across the Union.
In our paper, we address two sets of arguments which make the case that the failure of the Directive to achieve the Commission’s goals was (and is) a matter of limited significance. We find the first set of arguments not fully convincing, but the second set we think explain why the Commission is unlikely to return to this topic, despite its (unfulfilled) promise to do so immediately after the Directive as adopted.
The first version of the first set of arguments suggest that the proposed ban on defensive measures was trivial because other features of national legal systems rendered unilateral defensive measures (at least post bid) unavailable to incumbent management. It is certainly true that the lack of a BNR in a particular jurisdiction does not remove all the legal obstacles to the adoption of defensive measures. What those obstacles are and how effective they are, requires a detailed analysis of the corporate laws of each Member State. Even without that, two generalisations are possible. Some member states are open to defensive measures, of which the best example is probably the Netherlands. We point to a trend in re-incorporations in the Netherlands to take advantage of this facility, a trend which naturally puts pressure on the departing states to change their corporate laws. This is not to say that there are no controls over defensive measures in the Netherlands; rather that Dutch law is more likely to accept managerial arguments to protect the company against hostile bids than other legal systems in the Union. It is important to note that, unlike many other EU states, the Netherlands is an “incorporation theory” state, i.e. it is not necessary to move the company’s headquarters to the Netherlands to take advantage of Dutch incorporation.
Even when national corporate law puts significant obstacles in the way of unilateral defensive measures, the addition of a BNR is likely to add to the effectiveness of the anti-defence rules. The BNR is a bright-line rule whose relevance to defensive measures is much easier for management and their legal advisers to grasp than, for example, a fiduciary standard whose applicability may be highly fact-dependent. Moreover, the Directive requires its rules to be enforced by a regulator, often operating in real time, whose impact is likely to be greater than that of the courts operating ex post.
An alternative version of this argument refers, not to national legal provisions, but to the concentration of shareholdings. It is certainly true that shareholdings in listed companies are generally concentrated in the Member States of the EU (other than Ireland, Finland and (formerly) the UK), so that if the goal is simply ‘no defensive measures without shareholder consent’, concentrated shareholding is likely to deliver that, even without a legal rule. However, in few Member States, if any, are the shareholdings in all listed companies concentrated or concentrated in blocks which it is impossible for a bidder to break open, and there is some evidence of a trend towards less concentration. This second version of the first set of arguments is thus more convincing than the version based on national corporate law, but it does not deprive the BNR of all significance.
The second set of arguments for the unimportance of the Directive’s provisions on defensive measures goes to the heart of the Commission’s industrial policy reasons for proposing their prohibition without shareholder consent. After the great financial crisis and the end of the first decade of this century, the recent Covid pandemic and the increasing fragmentation of the global trading system, the Union’s industrial policy and those of the Member States have taken a more protectionist turn. Hostile takeover bids are now seen in a negative light. Thus, at Union level, the availability of dual class shares has become a requirement in certain circumstances, in stark contrast with a Commission proposal at the beginning of the century to make ‘one share, one vote’ mandatory. At member state level, tenure voting provisions have been adopted, despite evidence that their main effect is to consolidate the position of controlling shareholders.
Specifically in relation to takeover defences, recent developments have demonstrated that a weakness of the Directive was not only the options it made available to Member States, but also the fact that there were no time limits on their exercise. A good example is France. Before the adoption of the Directive France applied an unqualified ban on post-bid defensive actions; in 2006 in its initial transposition of the Directive into French law it introduced the reciprocity exception, together with a form of share warrant arrangement which provided an effective defence; and in 2014 (with the loi Florange) it removed the prohibition on post-bid defensive measures entirely (unless the company chose to opt into it). The reasons given in the Parliamentary debates for this reversal particularly reflect the current thinking on the relationship between industrial policy and hostile takeovers. French companies were seen as “particularly vulnerable to unsolicited takeovers such as hostile or creeping takeovers” because of their “fragmented capital and low stock market valuation”. More generally, the promoters of this reversal displayed a certain mistrust towards the benefits of the takeover mechanism itself, which would favour shareholders’ short-termism and be “harmful to employment and the development of our industry”. They clearly defended an orientation towards another path, more proactive and engaged, more interventionist and overtly “patriotic”, that the recent financial crisis had helped fuel. Parliamentary work insisted indeed on the need to fight against French deindustrialization, caused by the prominence of finance over the real economy; to end the “diktat of financial performance”, which forces managers “to focus on today’s dividends rather than tomorrow’s investments, jobs and exports”. Despite the considerable scholarly work which suggests such arguments are overblown, these propositions seem to be driving industrial policy at both Union and national level.
