The ECs 13th Company Law Directive - Essay Example

Do you consider that the 13th Company Law Directive is the right instrument to achieve an effective pan-European market for corporate control and to facilitate cross-border takeovers? Introduction The EC’s 13th Company Law Directive formally known as EC Directive 2004/25/EC was adopted on the 21st April, 2004.1 The directive aims at governing takeover bids.2 Cross-border acquisitions particularly those involving hostile takeovers reflect one of the more intense results of the single market economy.3 Within the scope and range of the 13th Company Law Directive, its primary purpose can be said to protect the interests of the minority shareholder together with employees and other related parted. Another identifiable purpose is the facilitation of a more cohesive takeover regime by relaxing, if not removing the barriers. The Commission perceived that the Directive on takeovers was necessary for pan-European corporate control via the reconstruction of common rules and procedures applicable to the single market and minority shareholder protection in takeovers.4 It has been a long standing goal of the EC to harmonize company laws among the Member States, an area of EC law plagued by diversity.5 The question for consideration, is whether or not the 13th Company Law Directive is able to contribute to achieving this goal and thereby serve as the right instrument for pan-European market for corporate control and at the same time facilitate cross-border takeovers. It will be argued that the 13th Company Law Directive does not live up to its mandate since it fails to provide for harmonization of anti-takeover defenses by allowing Member States to opt out.6 Other residual threats to harmonization and by extension, threats to a pan-European market for corporate control, and the facilitation of cross-border takeovers will be explored. 13th Company Law Directive Article 8 of EC Directive 2004/24/EC presents an obvious problem for pan-European corporate control and the facilitation of takeovers. Article 8 provides that Member States are required to regulate that the targeted company’s board: “…at the latest after receiving the information (on an unsolicited bid) and until the bid is made public or the bid lapses, …should abstain from completing any action other than seeking alternative bids which may result in the frustration of the offer, and notably from issuing any shares which may result in a lasting impediment to the offer or to obtain control over the offeree company, unless it has the prior authorization of the general meeting of shareholders given for this purpose, during the period of acceptance of the bid.”7 It is important to note that from a transborder perspective, Article 8 is fraught with difficulties since it fails to converge “the rules of the game” because in the end, Member States are at liberty to administer their own company laws to take account of anti-takeover legislation, that can conceivably restrain “the acquisition of effective control”.8 As McCahery, Renneboog, Moerland and Raajimakers explain: “one may expect that both member states and individual firms will seek for ex ante structural protection against unsolicited tender offers to avoid the apparent problems Article 8 of the Directive will cause.”9 The two primary elements of the 13th Company Law Directive, the “board neutrality rule” and the “break-through rule” are lacking in that they are not mandatory so that Member States may opt out.10 In this regard, diversity of company law among member states will remain an ongoing impediment to the pan-European market for corporate control and will likewise compromise the facilities for cross-border takeovers. The general idea of the 13th Company Law Directive was to create and foster a level playing field with respect to takeover bids in the EC and was based on recommendations by the High Level Group of Company Law Experts.11 The European Parliament did not agree with this approach, arguing and rightly so that: “no level playing field could be reached, because in some countries there are pre-bid defences that are not affected by the directive, and that fact provides for extra protection for the companies in these countries.”12 This rejection by the European Parliament gave way to the High Level Group of Company Law Experts’ new proposal for the 13th Company Law Directive. Their report was tendered in January 2002 and two basic approaches to takeover bids were expounded upon.13 The first recommendation was that shareholders “should be the ones” to determine “whether or not a bid in successful.”14 This was known as the board neutrality rule and did no more than reconfirm the position previously rejected by the European Parliament.15 The second recommended approach was that it should be the shareholders that have the requisite influence “pro rata to their participation in the risk bearing capital of the company” in takeover scenarios.16 The result was the “breakthrough rule” which maintains that a in the event a bidder acquires at least 75 per cent of the company’s capital, that bidder should be in a position to take control of the company regardless of any pre-bid defences. In other words, the bidder in such a case should be in a position to “break through these defences.”17 The European Parliament and a number of delegates from Member States found these recommendations to be inconsistent with the ideal of a level playing field.18 Ultimately, an opt out provision was determined to be the solution.19 The final outcome was Article 9 of the 2004/25/EC which provides that member states were not obligated to comport with the board neutrality rule20 and Article 11 made the same concession with respect to the breakthrough rule.21 Articles 9 and 11 provides that Member States may provide companies with a registered seat within their respective jurisdictions an option to forgo the board neutrality rule and the breakthrough rules although Member States are likewise required to grant these companies an option to comport with the two rules.22 Be that as it may, the company’s decision to comport with or refuse to comport with these rules is a matter for shareholders in a general meeting.23 The difficulty with this optional proviso is that companies opting for the application of Articles 9 and 11 face the possibility of being subjected to a takeover by a company that does not subscribe to these Articles.24 This is where the reciprocity rule comes in. The reciprocity rule dictates that when a company opts for the board neutrality rule, it may ignore the rule if a company attempting the takeover did not likewise apply the board neutrality rule.25 Since the breakthrough rule does not apply in these scenarios there is no “opt-in” for companies and no “opt-out for Member States.”26 Consequently a company has the following options in respect of takeover scenarios: By virtue of Articles 9 and 11 if they apply, board neutrality and breakthrough; If Articles 9 and 11 do not apply, no board neutrality and no breakthrough options; If Article 9 applies but Article 11 does not, board neutrality and no breakthrough. If Article 9 does not apply but Article 11 does, breakthrough and no board neutrality.27 The 13th Company Law Directive in its final form is a significant departure from the original proposal made some 29 years ago.28 The original proposal envisaged by the Commission provided for “pro-market and pro-competitive” aspects.29 The original proposal for the 13th Company Law Directive was far more conducive to a pan-European market for corporate control and facilitated more efficient cross-border takeovers. The adopted form of the proposal more than twenty years later, was altered into a legal framework that permits Member States to “adopt protectionist opt-outs” a happenstance that is entirely inconsistent with the objectives of “freedom of establishment”30 pursuant to Article 43 of the EC Treaty.31 Ultimately, the 13th Company Law Directive is no more than a skeletal framework which leaves the most important details to the member states to regulate.32 The directive focuses on takeover bids with respect to companies’ securities which are governed by member states’ laws and either all or at least some of the securities trade “on a regulated market.”33 The most controversial provisions are the board neutrality rule, the breakthrough rule and to some extent the reciprocity rule, which some academics maintain will raise more barriers to transborder takeovers rather than tear them down.34 The opt-out provision under Article 12 of the 13th Company Law Directive was entirely a political compromise.35 This compromise grants Member States free range to determine “whether or not” to subject listed corporations to an “open corporate regime” within their respective territories.36 Logically, what is left is: “…the typical result of an agreement to disagree with Europe, and results in a hopscotch of national legislations instead of the level playing field strived for.”37 Embedded in this political compromise is a division of powers among the host state and the home state. In other words, power resides at a supervisory level in the state where the target’s registered office is located, provided its securities are placed for trade within that jurisdiction.38 On the other hand, the procedures for regulating bidding prices and the conduct of bidding are determined by the host state and issues in respect of the target’s workforce, company law, voting rights and frustrating methods are for the home state.39 As Homann, Koslowski and Luetge maintain: “The member states’ fear or losing the last word in cases of transnational takeovers obviously prevails.”40 Obviously, the most significant means of protection minority shareholders of the target subjected to takeovers, is by virtue of the mandatory bid.41 Ultimately, once a bidder either “directly or indirectly” gains controlling interest in the target, the successful bidder is required to provide minority shareholders with “an option to buy them out at an equitable price.”42 The board neutrality rule allows shareholders to seek a “white knight”, a concept which makes allowances for the possibility of greater competition with respect to bid prices.43 In any event, frustrating action is for the shareholders alone. To this end, the shareholders should have the final say.44 However, these provisions are compromised by the opt-out regime encapsulated in Article 12 of the 13th Company Law Directive.45 The opt-out regime appears to be the greatest barrier to the 13th Company Law Directive achieving a pan-European market for corporate control and further compromises the facilitation of trans-border takeovers. Conclusion Both academic and political reaction to the 13th Company Law Directive was mixed to a certain degree.46 Essentially, the majority was satisfied that the Directive provided for a takeover regulatory regime in Europe that ultimately facilitated the needs required of an internal market, external governance and shareholder protection. However, there was significant concern that the final form of the 13th Company Law Directive, more especially the opt-out provisions compromised the harmonization goals of the EU’s single market economy agenda. In the end, these opt-out provisions will only have the result of conflicting and inconsistent regulations and procedures for takeovers across borders. Conflict and inconsistency is not congruent to harmonization of corporate governance within a pan-European market for corporate control. In this regard, the 13th Company Law Directive is not the right instrument for such a goal. Bibliography Bartman, S. (2006) European Company Law in Accelerated Progress. Kluwer Law International. Becht, M. (2003) “Reciprocity in Takeovers.” ECGE – Law Working Paper No. 14/2003 1-29. Benink, H. and Schmidt, R. (2004) “Europe’s Single Market for Financial Services: Views by the European Shadow Financial Regulatory Committee.” Journal of Financial Stability Vol. 1(2) 157-198. Campbell, C. (2006) International Liability of Corporate Directors. Lulu.com EC Directive 2004/25/EC. EC Treaty. Edwards, V. (2004) “The Directive on Takeover Bids – Not Worth the Paper It’s Written On?” European Company and Financial Law Review Vol. 1 (4) , 416-439. Gatti, M. (2005) “Optionality Arrangements and Reciprocity in the European Takeover Directive.” European Business Organization Law Review, Vol. 6(4), 553-579. Haan-Kamminga, A. (2006) Supervision on Takeover Bids: A Comparison of Regulatory Arrangements. Kluwer. Homann, K.; Koslowski, P. and Luetge, C. (2007) Globalisation and Business Ethics. Ashgate Publishing, Ltd. Mihaupt, C. (2003) Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-border Deals. Columbia University Press. McCahery, J.; Renneboog, L.; Moerland, P. and Raajimakers, T. (2002) Corporate Governance Regimes: Convergence and Diversity. Oxford University Press. Papadopoulos, T. (2007) “The Mandatory Provisions of the EU Takeover Bid Directive and Their Dificiencies.” Law and Financial Markets Review, Vol. 1(6) 525-533. Ventoruzzo, M.(4 Oct. 2005) “The Thirteenth Directive and the Contrasts Between European and US Takeover Regulation: Different Regulatory Means, Not so Different Political and Economic Ends.” Bocconi Legal Studies Research Paper No. 06-07, 1-81. Read More