The Takeover Directive and its prospective amendments Prof. - PowerPoint PPT Presentation

The Takeover Directive and its prospective amendments Prof. Federico M. Mucciarelli University of Modena and Reggio Emilia federicomaria.mucciarelli@unimore.it

Tender offers and takeover bids in general

Scope of application of the Takeover Directive Takeover-bid Art. 2(1)(a): “public offer […] made to the holders of the securities of a company to acquire all or some of those securities, whether mandatory or voluntary, which follows or has as its objective the acquisition of control of the offeree company in accordance with national law” Only Control Transactions

Scope of application of the Takeover Directive Which “target” companies? Art. 1(1): takeover bids for the securities of companies: governed by the laws of Member States, and  where all or some of those securities are admitted to trading on a  regulated market in one or more Member States Securities Art. 2(1)(e): “transferable securities carrying voting rights in a company” Minimum harmonisation Member States can apply the principles of the Directive to other kind of tender offers

Agency problems within control transactions Agency problems between the target’s board and target’s  shareholders Target with no controlling shareholders: the deal is between the  shareholders’ (as individuals) and the offeror, while the control de facto is shifted from the board to the offeror Target with controlling shareholder: target’s board might be prone to  the interests of majority shareholders (so when the target has a controlling shareholders the second agency problem is more relevant) Agency problems between minority and majority shareholders’  Target with no controlling shareholders: coordination problem of  dispersed shareholders vis-à-vis the offeror Target with controlling shareholders: controlling shareholder might sell  the control to a “looter” – who will hamper minorities’ interests.

Agency problems within control transactions  Systems with concentrated ownership The real agency problem is between controlling shareholders and minority shareholders  Systems with widespread ownership The real agency problem is between target’s board and minority shareholders

General principles (art. 3) Equality “within the bid”: all holders of the securities of an offeree company of the same class must be afforded equivalent treatment. Protection of minority shareholders: if a person acquires control of a company, the other holders of securities must be protected (see: mandatory bid rule article 5). Time and information: target’s shareholders should have sufficient time and information (timing of the offer and board’s opinion) Consideration: an offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration Target’s board duties: The board “must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid” (see: no frustration rule). Limit to no frustration rule: an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities. Market integrity: false markets must not be created.

The offer proceeding Information on the bid (article 6) Target’s shareholders should have sufficient information about the terms of the  bid. The decision to launch a Takeover Bid should be made public without delay.  Option for MS: to provide the duty to communicate the Takeover Bid to the competent  authority first An offer document containing all necessary information should be (a)  communicated to the supervisory authority and then (b) made public. Option for MS: to provide that, in addition, the Offer Document shall be approved by the  competent authority, with the consequence that it shall be recognized by all other Member States. All parties to the bid should be required to provide the supervisory authority with  all the information it deems necessary.

The offer proceeding Period for acceptance (art. 7)  Normally between two weeks and ten weeks Option for MS: allow extension of the period, providing that the  offeror gives a 2-weeks notice of his/her intention to close the bid Option for MS: specific derogation from the general rule  Disclosure (art. 8)  The bid should be made public “in such a way as to ensure market transparency and integrity for the securities of the offeree company, of the offeror or of any other company affected by the bid, in particular in order to prevent the publication or dissemination of false or misleading information”  Disclosure of all information and documents required by Article 6: they should be “readily and promptly available to the holders of securities at least in those Member States on the regulated markets of which the offeree company’s securities are admitted to trading”.

Mandatory bid rule (art. 5) Acquisition of target’s control Also by persons acting in concert with the bidder  Also if the control threshold is reached summing the acquired securities with securities  held by the bidder or by persons acting in concert with him/her Duty to launch a takeover bid to all holders of securities  for all their holdings  at an equitable price  Rationale: protection of minority shareholders coordination problem among dispersed share holders (in case of dispersed  ownership) and the agency problem between controlling shareholder and minority shareholder (in case of concentrated ownership) It reduces pressure to tender in case of partial bids or two-tier bids. 

Mandatory bid rule The best price rule “Equitable price”: “ The highest price paid for the same securities by the offeror, or by persons acting in concert with him/her, over a period, to be determined by Member States, of not less than six months and not more than 12 before the bid referred to in paragraph 1 shall be regarded as the equitable price.” Art. 5(4). Exceptions: the competent authority can be authorized to provide exceptions to this general rule on a case by case basis Control threshold: is established at Member State’s level

Mandatory bid rule Outcomes of the “best price rule” Equal treatment of all shareholders upon the control transfer  regarding the distribution of the control premium (we can say that all shareholders have the right to receive a fraction of this premium) Takeover bids are more expensive and, as a consequence, less  frequent (this rule might deprive shareholders of the opportunity to sell their shares and might reduce the positive effects of the market for corporate control upon board’s behaviors) Dispersed ownership regime (U.K.): the best price rule does not  affect the takeover activities due to market pressure and due to the fact that control threshold is lower that share ownership that triggers the mandatory bid rule (in UK 30%) Concentrated ownership (Continental Europe): mandatory bid rule +  best price rule is de facto a structural defensive measure, as it makes takeover bids more expensive

No frustration rule  The target’s board “ shall obtain the prior authorisation of the general meeting of shareholders given for this purpose before taking any action, other than seeking alternative bids, which may result in the frustration of the bid ” (art. 9)  Post-bid defensive measures:  Selling relevant assets;  Issuing new shares without pre-emptive rights;  Litigation;  Tender offer on bidder’s shares (“pac-man”);  Share’s repurchases;  Seeking of a competing bid.

No frustration rule  Period of the no frustration rule:  At least from the time the target’s board receives official notice of the offer by the bidder (art. 9(2))  Member States can anticipate the initial moment of the no frustration rule ( e.g. London City Code)  Board’s opinion The target’s board should make public a document setting up its opinion on the offer: Whether the offered price is coherent with the target’s value;  Impact on shareholders’ and stakeholders’ interests (also  employees)

No frustration rule Outcomes of the No Frustration Rule (or “NFR”) Dispersed ownership regimes:  The NFR can limit target’s board powers to block unsolicited takeover bids Concentrated ownership regimes:  The NFR does not really shift the power to minority  shareholders, as the controlling shareholders have sufficient voting power to approve defenses; The NFR has “only” a transparency effect (controlling  shareholders are compelled to make public the goal to frustrate the bid)

Breakthrough rule  Pre-bid or structural barriers  Voting and/or ownership caps;  Multiple voting shares;  Shareholders agreements;  By-laws limits to share transfers;  Shareholders individual right to appoint or remove board’s members;  Automatic conversion of shares without voting right into shares with voting right upon the launch of a tender offer (or similar poison pills)