E.U. Develops A Common Takeover Regime In Watered-Down Form
September 14, 2006
This article originally appeared in the July 14, 2006 issue of The Lawyer’s Weekly published by LexisNexis Canada Inc.
After 15 years of negotiations the member states that make up the European Union finally have a common takeover regime; sort of. Not surprisingly, in order to get agreement from the requisite number of member states the final form of the E.U. Directive on Takeovers watered down most of the controversial areas such as the position on takeover defences and gave member’ states opting in and opting out powers so that important differences will continue to exist within European takeover law.
The takeover directive had to be implemented by all member states no later than May 20, and set out, for the first time, minimum E.U. rules concerning the regulation of takeovers of companies whose shares are traded on a regulated market. In the U.K., the Main Market of the London Stock Exchange is a regulated market for these purposes but the AIM market is not. AIM has deliberately opted out of "regulated market" status and continues to enjoy an unique status within Europe. For example, even the new European prospectus rules generally do not affect AIM-listed companies.
The interesting aspects from a Canadian perspective of implementation of the takeover directive are that:
- A regulatory framework only now exists for the body that supervises takeover bids in the U.K.;
- Provisions restricting barriers to takeovers (such as action that might be taken to prevent a takeover by a company or its board of directors) have been codified;
- In the U.K., many of the rules that governed substantial acquisitions of shares, similar to early warning requirements in Canada, have been abolished.
Statutory powers for U.K. takeover panel
Believe it or not, since 1968 takeover regulation in the UK. has been overseen by a body called the Panel on Takeovers and Mergers which had no statutory basis. This panel administers rules contained in the City Code on Takeovers and Mergers but prior to May 20, the code and, in fact the panel itself, had no legal force. The takeover directive required that certain of the regulatory activities of the panel be placed within a legal framework and this has now been implemented.
London may be one of the few capital markets that could operate as efficiently as it has without the need for all of the rules that govern conduct in the markets to have a statutory footing. Where else in the world would you find a body that governs takeover activity and the rules over which it governs both lacking any statutory basis? It is only a slight exaggeration to say that up until now the U.K.’s takeover code was little more than a loose agreement among the financial institutions that operate in London about how they would behave in the course of takeovers. Yet the code and the panel never seemed to have been challenged on jurisdictional grounds. The panel has made pronouncements on acceptable and unacceptable behaviour, punished market participants and adopted new policies all without ever being challenged on its right to do so.
Under the new regime the panel will have power to make rules in relation to takeover regulation. It will continue to make rulings on the interpretation, application and effect of the Takeover Code and to give directions.
The UK. is opting out of what are called the "breakthrough" pro-visions in article 11 of the takeover directive (dealing with pre-bid defences). In theory the break-through provisions are designed to allow a hostile bidder to override defensive devices adopted by companies prior to or following a bid. The U.K. is opting into article 9 which requires tie board of a target company, as currently required under the code, to obtain prior approval from its share-holders before it takes any action, other than seeking alternative bids, to frustrate a takeover bid. Poison pills, for example, are not a feature of U.K. takeover defences as to do so would require prior shareholder approval. Boards under the E.U. directive will be required to remain neutral unless they have shareholder approval to act other-wise.
Rules governing substantial acquisitions of shares
The U.K.’s Rules Governing Substantial Acquisitions of Shares were abolished and as a result, there is no longer a restriction on stakebuilding up to 29.9 percent of the shares of a company. The threshold at which a mandatory offer to all shareholders must be made is 30 percent in the UK.
The former rules had been issued by the panel and were designed to restrict the speed with which a person could acquire shares (or rights over them) in a company that would give an aggregate holding of between 15 percent and 30 percent of the voting rights of the company. The substantial acquisition: rule ceased to apply, once a takeover offer had been announced. Per-sons must still disclose all their holdings once they acquire three per cent or more of the shares in a public company but they will no longer be required to wait a certain period before making further acquisitions once they reach the 15 per cent level. So "dawn raids" are again possible in the U.K. and they have been used recently with devastating effect such as in the takeover of BAA by Ferrovial.
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