This article appeared in Finance Magazine

New EU takeover Directive needs to address concerns before adoption
David Widger examines the implications of the recently revised Takeover Directive, which has been criticised over the issue of multiple voting rights, and is due to be adopted shortly.
The European Commission published the much-awaited revision of the Takeover Directive in October 2002. The revised Directive follows the rejection of the previous draft by the European Parliament by a single vote in June, 2002. The new Directive is currently with the EU Council which is expected to adopt an opinion on the Directive shortly. It is currently proposed that the Directive, if adopted, will be implemented in member states by 2005.

Harmonised takeover rules
The aim of the Directive is to provide for harmonised rules for the conduct of takeover bids throughout the EU and to provide equivalent protection throughout the EU for minority shareholders.

To this end the Directive includes provisions which:-
• Harmonise rules relating to minority squeeze out provisions (i.e. provisions entitling a bidder who obtains a certain level of acceptances to compel the remaining minority shareholders to sell their shares).
• Harmonise rules relating to mandatory bids such as the price at which shares must be bought where a mandatory bid is triggered.
• Outlaw a range of defensive measures against hostile takeovers.
• Require that before permitted defensive measures can be put in place by the target’s board, prior approval must be obtained from shareholders which approval must be obtained after the bid has been made.
• Require permitted defensive measures to be approved by shareholders of the company at least every two years.
• Require that any permitted defensive mechanisms or agreements be disclosed publicly.

Multiple voting rights issue
The issue of ‘multiple voting rights’ has been the most controversial issue in the new and previous draft of the Directive. Certain Member States such as France and the Scandinavian countries permit the issue by companies of preferential shares with multiple voting rights.

This allows a minority of shareholders to keep control of the company, thus making it more difficult or even impossible for a hostile bidder to obtain control of the company even if the majority of shareholders would favour the bid. Controversially the new Directive does not outlaw multiple voting rights.

This is a point of concern for certain other Member States such as Germany. Germany wants a ‘one share one vote’ system to create equal conditions across the EU and argues that multiple voting rights amount to significant restrictions on takeover activity. Germany fears that her national companies would be more vulnerable to takeovers, while French and Scandinavian companies could effectively protect themselves using the multiple votes system. Scandinavian countries argue however that these rights are necessary to protect small, innovative companies from takeovers by non-community giants.

The Commission’s stated position is that the removal of such rights involves significant legal difficulties and that they may not in any event be a significant barrier to takeover bids provided there is appropriate transparency.

It is generally accepted however that the principal reason why multiple voting rights are not outlawed by the Directive is that the Commission knew that it could not muster sufficient support to push such proposals through.

Minority squeeze out provisions
As mentioned above, the Directive provides for a squeeze out right by which a bidder who obtains sufficient shares of a target can compel the remaining minority shareholders to sell their shares. The Directive effectively sets the threshold at which the minority can be squeezed out at 90 per cent. In Ireland however the threshold is currently 80 per cent.

This lower threshold was deliberately introduced in Ireland having regard to the relatively small market capitalisation of Irish companies and the profile of their shareholders. It is the view of many Irish market participants that to impose the 90 per cent threshold on the Irish market could well result in market stagnation.

As a consequence, the Law Society in Ireland has submitted that Member States should have freedom to set the minimum squeeze out percentage and that they should not be required to increase it.

Supervisory authorities
The Directive has been criticised for providing that where a target company is listed in one Member State but is incorporated in another, matters relating to the bid process and price should be dealt with by the rules and supervisory authority of the Member State where the company is listed whereas company law and employee matters should be dealt with by the rules of the country of incorporation.

The Director General of the UK Takeover Panel has said that these provisions will bring ‘regulatory chaos’ because of the potential regulatory overlap it could create. These provisions are particularly relevant in an Irish context as it is common for Irish companies to be listed in overseas jurisdictions.

It remains to be seen whether these, and other concerns will be addressed by the European Parliament.
David Widger is a partner in A&L Goodbody Solicitors.
This article appeared in the May 2003 edition of Finance Magazine.