• Takeover Legislation Fails In Europe
  • May 5, 2003
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • Striking a recent blow to the concept of uniformity of laws throughout Europe, a twelve-year effort to establish minimum cross-border rules regarding takeovers and acquisitions was recently rejected by the European Parliament. Following the EU anti-trust authority's rejection of the GE/Honeywell merger, this seems to reverse earlier liberalizations.

    The key goal of the Takeover Directive was to establish basic common EU takeover rules which would ensure consistent and fair treatment of both bidders and targets throughout Europe. Similar in principle to the Williams Act, under the U.S. Federal Securities Laws, the Takeover Directive was part of a larger effort to foster a more competitive European economy, as well as integrate the financial services industry in Europe. The Takeover Directive attempted to:

    • require a mandatory offer to all shareholders if certain ownership levels were reached;

    • force management to obtain shareholder approval before taking certain defensive measures, such as poison pills (where existing management has the right to issue preferred shares or take similar action which dilutes, disenfranchises or otherwise pacifies "hostile" shareholders); and

    • require workers to be informed of the takeover and its likely impact on employment.

    The Takeover Directive was supported by the European Commission, which even went so far as to express regret at the decision of Parliament. In the absence of such rules, each individual country's government will maintain and draft their own legislation. There are fears - due to the demise of the Takeover Directive - that poison pills and other pro-management vehicles will be further implemented throughout Europe. Laws exist or are being planned in several countries, including Germany and Italy. Unlike the U.S., however, where courts typically require management have some regard for shareholder interests, European countries place few requirements on management regarding a takeover. This does not mean that takeovers, even large hostile ones, are impossible in Europe, as demonstrated by the takeover of Mannesmann by Britain's Vodafone. The UK takeover market is unaffected by the EU legislation due to the perceived fairness of the UK's City Code on Takeovers and Mergers which covers basic shareholder protections.

    Other important economic and legal developments affect EU takeovers and acquisitions more generally. German tax reforms, for example, which include capital gains relief, should encourage the sale of large family-owned blocks of shares. In fact, it has been suggested that Germany helped defeat the Takeover Directive due in part to fears about the combined effect of its own tax reforms and the proposed takeover reform on ownership of German companies. European takeovers are subject to other considerations as well, including the concept of the golden share (in which a country's government retains veto rights over takeovers of former state-owned companies), differentiated voting rights, and large, protected, state-controlled acquirers such as EdF and other utilities.

    European takeovers are also substantially affected by the EU's anti-trust/competition rules, which require that larger acquisitions be reviewed centrally at the EU level. Smaller acquisitions can require specific approval by the competition authorities in one or more countries. This approval process can substantially delay transactions. Employment laws and other similar benefit issues are also important to consider in connection with acquisitions in Europe.

    Although takeovers and acquisitions will continue, they will be without some of the tools and framework established in the U.S. and U.K. Meanwhile, institutional and other large shareholders are pushing management to focus - at least to an extent - on shareholder interests. Without the guidelines established by the Takeover Directive, early careful thought regarding European takeovers and acquisitions is important to help avoid delays and barriers further down the road.