Explanatory Memorandum to COM(2002)534 - Takeover bids - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2002)534 - Takeover bids. |
|---|---|
| source | COM(2002)534  |
| date | 02-10-2002 |
In its 1985 White Paper on completing the internal market, the Commission announced its intention to propose a directive on the approximation of Member States' legislation governing takeover bids. On 19 January 1989 it presented to the Council an initial proposal for a Thirteenth Directive on company law concerning takeover and other general bids. i On 10 September 1990 it adopted an amended proposal i that took account of the opinions of the Economic and Social Committee i and the European Parliament. i
This was an ambitious text aimed at achieving detailed harmonisation in the field of takeover bids at a time when economic circumstances were propitious. However, as the economic situation changed, the proposal encountered strong opposition from certain Member States. Consequently, the Commission indicated in its declaration on subsidiarity to the European Council at the Edinburgh Summit in December 1992 and confirmed to the Essen European Council in December 1994 that it was planning to revise its proposal on the basis of consultations with the Member States as of June 1993.
On 8 February 1996 the Commission presented to the Council and to the European Parliament a new proposal for a Thirteenth Directive on company law concerning takeover bids. i The proposal contained a 'framework' directive drawn up in the light of consultations with the Member States and setting out general principles but not attempting detailed harmonisation. At the end of 1997 the Commission adopted an amended proposal that took account of the opinions of the Economic and Social Committee and the European Parliament.
On 19 June 2000 the Council unanimously adopted its common position. i In December 2000 the European Parliament proposed on second reading a number of amendments i that were not such as to meet with the Council's approval. The ensuing conciliation procedure ended with an agreement within the Conciliation Committee on 6 June 2001.
On 4 July 2001 there was a division in the European Parliament, with the compromise text being rejected (273 votes for and 273 votes against). The European Parliament's decision was motivated by three main political considerations: i rejection of the principle whereby, in order to take defensive measures in the face of a bid, the board of the offeree company must first obtain the approval of shareholders once the bid has been made, and this until such time as a level playing field is created for European companies facing a takeover bid; i regret that the protection which the directive would afford employees of companies involved in a takeover bid was insufficient; i the failure of the proposal to achieve a level playing field with the United States.
However, the Lisbon European Council placed this directive, which forms part of the Financial Services Action Plan, i among the priorities as regards the integration of European financial markets by 2005. This view is shared by UNICE, which has repeatedly stressed the need for a common framework for cross-border takeover bids. The European Parliament itself recognised that a directive would be useful and important in this field. Under the circumstances, the Commission considers it essential to provide a European framework for cross-border takeover bids as part of the Financial Services Action Plan.
Such transactions can contribute to the development and reorganisation of European firms, a key condition for withstanding international competition and developing a single capital market. That said, they are still subject to very divergent national rules and give rise to numerous problems when they involve two or more Member States, e.g. the law applicable and the competent authorities. These uncertainties are neither acceptable nor even desirable within the European Union.
The Commission has, therefore, decided to present a new proposal for a directive that meets the concerns of the European Parliament without compromising the basic principles approved unanimously in the Council's common position of 19 June 2000. With this in mind, it set up a Group of High-Level Company Law Experts under the chairmanship of Professor Jaap Winter with the task of presenting suggestions for resolving the matters raised by the European Parliament. In preparing its proposal, the Commission has taken broad account of the recommendations made by the Group in its report on issues related to takeover bids, which was published in January 2002. i
The new proposal pursues the same objectives as its predecessor: alongside the general objectives of integrating European markets in line with the Financial Services Action Plan and undertaking harmonisation conducive to corporate restructuring, it sets out to strengthen the legal certainty of cross-border takeover bids in the interests of all concerned and to ensure protection for minority shareholders in the course of such transactions. It establishes a framework for action by Member States by laying down certain principles and a limited number of general requirements while allowing Member States to adopt the detailed implementing rules in accordance with their national practices, provided that the differences are not such as to jeopardise implementation of the directive at Community level.
The new proposal also has the same scope and lays down the same basic principles as its predecessor. However, it has been supplemented in such a way as to incorporate the amendments adopted by the European Parliament to the previous proposal. The proposal here follows the recommendations set out for the Commission in the Winter Report as regards a common definition of 'equitable price' (Article 5) and the introduction of a squeeze-out right (Article 14) and a sell-out right (Article 15) following a takeover bid.
In line with the recommendations of the Winter Report, the new proposal retains the principle (in Article 9) that it is for shareholders to decide on defensive measures once a bid has been made public and proposes greater transparency of the defensive structures and mechanisms in the companies affected by the proposal (Article 10). These structural aspects and defensive mechanisms will be published in a detailed and thorough manner. The proposal adds to these recommendations an obligation to put the measures concerned to a vote at the general meeting every two years, together with the reasons for such measures.
The proposal does not take up all the recommendations of the Winter Report as regards neutralisation of defensive measures following a successful takeover bid (break-through right). This is 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, 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.
Nevertheless, following the logic of the Winter Report, the proposal stipulates that restrictions on transfers of securities (e.g. the imposition of a ceiling on shareholdings or restrictions on the transferability of shares) and restrictions on voting rights (e.g. restrictions on the exercise of voting rights and deferral of voting rights) are rendered unenforceable against the offeror or cease to have effect once a bid has been made public (Article 11). Following a successful bid, the offeror should also have the right to call a general meeting at short notice with a view to amending the articles of association and replacing the members of the board, provided that the company law rules in force are met, without any restrictions on the transfer of securities or the exercise of voting rights being imposed on the offeror.
The Commission takes the view that this proposal represents a consistent approach that is the most realistic as things stand. Combination of the greater transparency required by Article 10 with the unenforceability of measures that could result in management entrenchment, stipulated in Article 11, should enable 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. This is a first step; 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.
The Commission wishes, before concluding this general introduction, to refer to the recent judgments of the Court of Justice concerning infringements of the fundamental principle of the free movement of capital provided for in Article 56 of the EC Treaty (judgments of 4 June 2002 in Cases C-367/98 Commission v Portugal, C-483/99 Commission v France and C-503/99 Commission v Belgium). Although these judgments concern only rules adopted by Member States, the Court recalls, generally, that any restriction on investment or on the exercise of control in European companies is in breach of the principle of the free movement of capital: 'the free movement of capital, as a fundamental principle of the Treaty, may be restricted only by national rules which are justified by reasons referred to in Article 58 of the Treaty or by overriding requirements of the general interest and which are applicable to all persons and undertakings pursuing an activity in the territory of the host Member State. Furthermore, in order to be so justified, the national legislation must be suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality'. The present proposal is in no way intended to depart from this approach. Article 11 is concerned specifically with private-law restrictions on the transfer of securities and the exercise of voting rights and renders them unenforceable or ineffective in the event of a takeover bid. This precision is useful in the light of the resolution adopted by the European Parliament on 5 April 2001 concerning the updating of certain legal aspects relating to intra-Community investments.
Contents
- Lastly, the proposal also incorporates provisions on committee procedure (Article 17) to replace the contact committee arrangements. Commentary on the articles
- Article 2 - Definitions
- Article 3 - General principles
- Article 4 - Supervisory authority and applicable law
- Article 5 - Protection of minority shareholders; mandatory bid; equitable price
- Article 6 - Information on the bid
- Article 7 - Period for acceptance
- Article 8 - Disclosure
- Article 9 - Obligations of the board of the offeree company
- Article 10 - Information on companies referred to in Article 1(1)
- Article 11 - Unenforceability of restrictions on the transfer of securities and voting rights
- Article 12 - Other rules applicable to the conduct of bids
- Article 13 - Information for and consultation of representatives of employees
- Article 14 - Squeeze-out right
- Article 15 - Sell-out right
- Article 16 - Sanctions
- Article 17 - Committee procedure
- Article 18 - Revision
- Article 19 - Transitional period
- Article 20 - Transposition
Lastly, the proposal also incorporates provisions on committee procedure (Article 17) to replace the contact committee arrangements. Commentary on the articles
Article 1 - Scope
As in the previous proposal, the Directive applies to companies governed by the law of a Member State all or some of whose securities are admitted to trading on one or more stock exchanges in the European Union. The words 'all or some of' are the only innovation compared with the previous text and indicate clearly that the Directive applies also in cases where only a proportion of the offeree company's securities conferring voting rights is listed.
Since the Directive lays down minimum requirements, Member States are free to apply its provisions to companies whose securities are not listed on a stock exchange.
This Article defines in the same way as in the previous text the most important terms used in the Directive. No change has been made.
It should be stressed that the provisions of the Directive apply to both mandatory and voluntary bids. A bid may be mandatory where it is required by Member States as a means of protecting minority shareholders in the event of a change of control. A bid may be voluntary when it is launched by a person with there being no obligation on him to do so, in order to acquire control of a company.
It is also worth pointing out which types of securities are covered by the Directive. It applies only to transferable securities carrying voting rights in a company. However, since the Directive lays down minimum requirements, Member States are free to apply its provisions to other types of securities.
As in the previous proposal, this Article contains a series of general principles which must be respected by the national rules transposing the Directive.
As in the previous proposal, Member States are required to designate a supervisory authority or authorities to supervise all aspects of the bid and to ensure compliance by all the parties to the bid with the rules made pursuant to the Directive.
Determining which supervisory authority is competent and which law is applicable is a simple matter where the offeree company's securities are traded on a regulated market in the Member State in which it has its registered office: they are those of that Member State. The situation is somewhat more complex where the offeree company's securities are traded on a regulated market in one or more other Member States. The Directive draws a distinction according to whether the issues raised relate to the bid itself or to the operation of the company: in the latter case, the competent authority and the applicable law remain those of the Member State in which the company has its registered office whereas, in the former case, the competent authority and the applicable law are those of the Member State in which the company's securities are traded or the Member State in which they were first admitted to trading.
In order to ensure that the Directive is applied flexibly but that such flexibility does not go so far as to undermine its general principles, Member States may grant their supervisory authorities powers to waive certain national rules adopted pursuant to the Directive. Nevertheless, in doing so, the supervisory authority should always comply with the general principles laid down in the Directive. Such flexibility may be necessary in order to enable the supervisory authority to cope with the great variety of circumstances which can arise in fast-moving financial markets.
It is desirable to avoid systematic litigation during takeover bids. Member States are therefore free to decide to what extent and in what conditions judicial action may be brought, without prejudice to the right of an injured party to have recourse to the courts in order at least to claim compensation in case of damage.
As in the previous proposal, paragraph 2 of this Article is the subject of a revision clause (Article 18).
As in the previous proposal, the aim of this Article is to ensure that, every time a person or entity acquires control of a listed company as a result of an acquisition, minority shareholders are protected. To that end, the Directive requires that national rules afford proper safeguards to minority shareholders by obliging that person or entity to address a bid to all holders of securities, for all their holdings, at an equitable price.
As in the previous proposal, and unlike earlier texts, the Directive itself does not attempt to specify the percentage of voting rights above which control can be deemed to have been acquired or the method of calculating such a percentage. It was decided that these matters were to be determined by the Member State where the supervisory authority is located.
Nevertheless, unlike the previous proposal, Article 5 i defines the price to be paid in the case of a mandatory bid. To ensure that the minority shareholders obtain the best price in all cases and to afford the offeror the greatest possible legal certainty, the highest price paid for the same securities by the offeror, or by persons acting in concert with him, over a period of between six and twelve months prior to the bid is regarded as an equitable price. Nevertheless, in the current economic and financial climate this principle needs to be applied with some flexibility; Member States may therefore authorise their supervisory authorities to adjust that price in circumstances and according to criteria that are clearly determined, by means of a reasoned decision that is made public.
It is desirable to introduce the committee procedure (Article 17) to spell out these circumstances and criteria.
As in the previous proposal, national rules must ensure that the addressees of a bid have sufficient information about the terms of the bid.
Moreover, as soon as the offeror decides to make the bid he must announce his intention to the supervisory authority and to the board of the offeree company. The offeror must also be required to prepare and make public in good time an offer document containing all the necessary information to enable the addressees of the bid to reach a properly informed decision. All parties to the bid should also be required to provide the supervisory authority, at its request, with all the information it deems necessary in order to discharge its duties.
It is desirable to introduce the committee procedure (Article 17) for amending, should this prove necessary, the list of information required in paragraph 3.
As in the previous proposal, the period for acceptance may not normally be less than two weeks or more than ten weeks in order that the conduct of the companies' affairs is not unduly hindered.
Member States must ensure that information capable of having an influence on the market in the securities concerned is made public in such a way as to reduce the risks of the creation of false markets and insider trading.
As in the previous proposal, and unlike earlier texts, the Directive does not enumerate the different forms of disclosure but leaves the Member States substantial discretion to decide on the matter, provided that all the necessary information is both clear and promptly available to the addressees of the bid.
As in the previous proposal, this Article requires Member States to ensure that the board of the offeree company refrains from taking any defensive measures that may result in the frustration of the bid unless it has the prior authorisation of the general meeting of shareholders for the purpose. Where control of the offeree company is at stake, it is important to ensure that its fate is decided by its shareholders. The authorisation of the general meeting must therefore be given explicitly with a view to responding to a specific bid.
The Directive does not define the measures which can frustrate a bid. In general, such measures may be all operations which are not carried out in the normal course of the company's business or not in conformity with normal market practices.
The board of the offeree company must also be required by national rules to give its opinion on the bid, together with the reasons on which it is based, in a report setting out the arguments for and against acceptance of the offer. The offeree company's employees should be associated with the opinion and should be able, if they disagree, to communicate their own opinion at the same time. These opinions are addressed to the shareholders, who have the responsibility to decide on the bid.
Member States are allowed a transitional period for the application of this provision.
This new Article meets the need for transparency, something which is extremely important in the case of companies that may be the target of a takeover bid. It lists the particulars that companies covered by the Directive should publish at least in their annual report, with special reference to the structures and measures that could hinder the acquisition and exercise of control over the company by an offeror. The information should, where appropriate, be updated during the year. This Article should be seen in close connection with other Community rules on transparency (Council and Parliament Directive 2001/34/EC of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities i and draft proposal for a directive on transparency obligations for issuers and holders of securities admitted to trading on a regulated market). The Commission has repeatedly stressed the need for transparent information on listed companies. Recent events, such as the Enron affair, have served to confirm this need.
It is also proposed that all the shareholders should take a decision every two years on the structural measures and defensive mechanisms and that the board should state the reasons for them.
This Article should be re-examined, with a view to possible revision, five years after the deadline for implementing the Directive. It should be possible at that point to ascertain the extent to which market forces have, thanks to the transparency introduced by this Article, levelled the playing field for takeover bids.
This new Article reflects the need to level the playing field in takeover bids in the European Union by banning certain legal restrictions that can be regarded as hindering bids. It therefore proposes that:
- any restrictions on the right of ownership which may prevent the offeror from acquiring securities of the offeree company, such as limitations on ownership or a right for the company or other holders of securities to veto any transfer of securities, should be rendered unenforceable against the offeror;
- any restrictions on voting rights which prevent holders of the offeree company's securities from exercising their rights when the general meeting decides on defensive measures after a bid has been announced, such as limits on voting rights, deadlines for exercising voting rights or agreements between holders of securities, should be rendered ineffective. In accordance with the principle laid down in Article 9, holders of securities should be able to make a completely free and properly informed decision on the bid;
- any restrictions on the transfer of securities and on voting rights, as well as any special rights of shareholders concerning the appointment or removal of board members, which may prevent an offeror who holds sufficient securities of the offeree company from exercising the corresponding voting rights in order to amend the company's articles of association should be lifted at the first general meeting following closure of the bid. 'Sufficient securities' means a particular percentage which is normally required under the relevant national law for taking such decisions.
It should be noted that securities without voting rights are not regarded as restrictions in so far as they carry a preferential entitlement to a share in the profits or liquidation surplus.
These provisions are aimed at measures that could result in management entrenchment; they do not concern securities carrying double or multiple voting rights. It can be argued that securities with multiple voting rights form part of a system for financing companies and that there is no proof that their existence renders takeover bids impossible. The same applies to securities with double voting rights, which may make for a stable shareholder base. Moreover, the suppression of such rights, especially if no compensation were provided, would in some legal systems give rise to questions of a constitutional nature that could jeopardise or at least delay for a long time the adoption of the Directive. Nevertheless, if it were to prove at some later stage that such securities are used mainly as defensive mechanisms against takeover bids, the revision clause written into Article 18 would enable the Commission to re-examine the issue.
As in the previous proposal (former Article 10) and in line with the principle of subsidiarity, this Article lists a number of matters which national rules must cover, without going into any detail. This approach leaves the content of such rules to the discretion of the Member States, which must nevertheless ensure that the rules they adopt pursuant to this Article do not undermine the general principles of the Directive.
This new Article responds to concerns voiced by certain Members of the European Parliament regarding protection of the employees of companies involved in a takeover bid (both the offeror and the offeree company).
It confirms that the close and effective involvement of the companies' employees, via their representatives, is an important factor not only for the success of the operation but also for proper consideration of the different interests that may be affected by the takeover. It stresses that, in addition to the national rules which may be applicable, certain provisions of Community law may be relevant in this context.
Such information and consultation is in addition to the specific procedure to be followed in the event of a takeover bid as provided for in Articles 6(3)(h) and 9 i.
This new Article responds directly to an amendment made by the European Parliament to the previous proposal. It introduces a common squeeze-out procedure enabling a shareholder holding a given percentage of securities of a company to require the remaining minority shareholders to sell him their securities at a fair price.
The Directive nevertheless limits this right to cases where the percentage of securities was acquired following a takeover bid.
This new Article constitutes the quid pro quo, for the benefit of the minority shareholders, of the right created by Article 14 for the benefit of the majority shareholder. It provides that, under similar conditions and again following a takeover bid, a minority shareholder can require the majority shareholder to buy his securities from him.
It is important that Member States should provide for adequate sanctions in the event of infringement of the measures taken pursuant to the Directive.
The previous proposal (former Article 11) set up a Contact Committee for monitoring application of the Directive. That provision can now be replaced by a provision on committee procedure.
As in the previous proposal, a procedure is established for re-examining and if necessary revising some of the Directive's provisions. Any such revision would be aimed at achieving a more level playing field in takeover bids (Articles 4 i, 10 and 11).
It is nevertheless useful for Member States to be able to give their companies time to adjust to the new rules by allowing a transitional period of not more than three years for complying with Article 9.
It is important that the national measures implementing the Directive should be in force at the end of the Financial Services Action Plan, to which it should make a key contribution.