Revision of the Takeover Revision of the Takeover directive directive

Eddy Wymeersch

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OverviewOverviewPart 1. Is a revision needed ?Part 2. Two types of takeoversPart 3 Anti-takeover defences

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Part 1. Is a revision Part 1. Is a revision needed ?needed ?Filling blanks and updating needed

7 years after adoption, 5 years after entry into force◦See role of implementing instruments

In-depth review ?

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What has changed?What has changed? Markets

interconnection, multiple trading venues; MTF

HFT, Hedge Funds, ‘Admission to listing’ is obsolete Hidden ownership issues ESMA: new rulemaking

mechanisms Company Law changes

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Company Law changes

Corporate governance was ignored in TOD Increase of transparency Shareholder Rights Directive: voting Role of independent directors Efficient Market Hypothesis is ? Role of private equity Role of institutional investors: Stewardship,

role of block holders LT perspective v. HFT; call for LT

perspective

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Part 2. Two types of Part 2. Two types of takeoverstakeoversVoluntary

◦Standard commercial transaction◦Allows for price maximisation◦Disclosure mandated and supervised◦Some rules on market conduct◦TOD: Mainly defensive mechanisms /

neutrality/ entrenchment◦Often consensual: block holders

tender in voluntary bid, no price commitment

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Mandatory bidMandatory bid

Thresholds: 25 to 50+ Price: max pre-bid acquisition or

average price Usually after private block transfer

Includes concert action Includes market acquisitions

No pre-existing control but creates control

Widely accepted rule, part of market pricing

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Effects of mandatory bids Effects of mandatory bids The mandatory bid rule creates

negative externalities◦Is it justified for market acquisitions ?

No premium

◦Are blocks not tendered in voluntary bid? Or are subject of transfer commitments/options ?

◦Bidders prefer voluntary bids: cheaper ? More flexible, but risk of higher bids

◦Hidden Ownership; to be made transparent

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Effects of mandatory bids Effects of mandatory bids Freezes control blocks?Increases overall price for bidder

◦Reduces willingness to bid◦Effect on future investment

Does one need all shares to exercise control and turn around the company?

Often bid, large response + squeeze out

Makes bids uncontestable: ◦Upward effect on price

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control transactionscontrol transactionsWhy distrust for control

transactions◦From control of selling blockholder to

control by buying blockholder: what is the change?

◦Control or stable shareholdership is useful as the basis for long term investment

◦Issue is mainly private benefits of control

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Private benefits of controlPrivate benefits of controlIs essentially a question of

◦conflicts of interest-related party transaction◦These exist throughout the life of the

company◦Are not always dealt with on an ongoing basis◦Why sanction them in case of transfer of

control?Need to have a robust regulation on

CoI/RPT◦Definitions are difficult; group context◦Transparency, expert opinion, decision by

board, AGM (ex conflicted parties)

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Directive Revision Directive Revision 1. Robust rules on conflicts of interest

◦To be applied on a permanent basis2. Exclude market acquisitions from

the Rule3. If no private benefits, exempt the

private transfer (art.4.5)4. Declare pre-bid transfer

commitments void◦Make bids contestable

5. = Restrict the scope to the rule

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Part 2 Institutional changePart 2 Institutional changeMultistate transactions – art. 4

State of incorporation; who is competent authority?

State of admission to listing; obsolete concept

Trading in numerous venues, outside control of issuer

Most significant trading venue should have lead responsibility, other venues to be heard

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ESMAESMACooperation of national authoritiesESMA regulation

◦Allows for supervisory colleges: cooperation, common decision making

Mediation in case of conflicts: binding Rulemaking; Regulatory Technical

Standards◦On proposal by ESMA, endorsed by

Commission◦Oversight by Council/Parliament: revoke

delegation or call back

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ESMAESMAGuidance and recommendationsAppropriate decision making

procedures for non-ESMA members

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Directive RevisionDirective RevisionESMA’s formal competence for the TOD

2Rulemaking for present blanks,

◦e.g. art 13, squeeze out and sell outCoordination of national rules and

practices◦Guidance and recommendations

Affirm competence for all markets concerned◦College of supervisors

Provide for mediation competence 16

Part 3 Anti-takeover Part 3 Anti-takeover defencesdefencesShould we review this matter?

◦Compromise was not real; most states used art.12

◦Neutrality has better survived◦Breakthrough was nice idea, but not

practisedWhy oppose defences?

◦Entrenchment of the board TOB as disciplining instrument

◦Entrenchment of the block-holder◦Defences can be used to defend the

shareholders See US law

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Disciplining instrumentsDisciplining instrumentsDifficult subject: see remuneration

debateDisciplining Techniques have

improved◦Independent board members◦Stronger role for shareholders

Stewardship and engagement◦Wider use of voting:

shareholders rights directive, record date, electronic voting,

◦Activist investors◦Shareholder committees

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Disciplining Disciplining The unsolicited Takeover is the

strongest, most brutal, and most expensive, but also the most risky disciplining instrument

Activism is useful but often short time minded

Engagement should be more useful in a long term perspective

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Reaffirm the role of the Reaffirm the role of the AGMAGMA takeover is a form of decision

making◦Whether to keep the company as it is,

or change it, usually radically◦It is based on individual decisions by

each shareholder◦There is no company strategy or view

that is developed; it is usually the board versus the bidder, the shareholder not being involved, but deciding

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Reaffirm the role of the Reaffirm the role of the AGMAGMWhy not allow for defensive

mechanisms but make them subject to a vote in the AGM

The individual decision replaced by a collective one; “maintain the defences or not”

At least some debate about the future of the company, in full clarity

Majority: the usual supermajority, bringing Takeover in line with merger decisions and rules on significant disposals

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