Opinion of the Economic and Social Committee on the 'Proposal for a 13th European Parliament and Council Directive on company law concerning takeover bids` () (96/C 295/01)

On 26 March 1996 the Council decided to consult the Economic and Social Committee, under Article 54(2) of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 12 June 1996. The Rapporteur was Mr Burani.

At its 337th Plenary Session (meeting of 11 July 1996), the Economic and Social Committee adopted the following Opinion by 89 votes in favour, with one abstention.

1. Introduction

1.1. The rules contained in the proposed Directive must be seen in the context of completion of the Internal Market and the harmonization of company law. Following their announcement in the 1985 White Paper, they were presented by the Commission on 19 January 1989 (), subsequently amended in 1990 (), and finally withdrawn and re-submitted in a revised version.

1.2. Consequently the progress of this Directive - necessary as it is - has been far from smooth and has encountered serious opposition in the past from certain Member States, as the Commission itself points out ().

1.3. In its Opinions on the initial proposal (), and then the amended proposal (), the Economic and Social Committee suggested a number of amendments to the Commission texts. It is happy to note that the Commission has taken some of these suggestions into consideration when drafting its new proposal.

1.4. The Committee regrets that the new proposal does not take into account the comments that it made in its Opinion of September 1989 with respect to the necessity of adequate information and consultation of the workers' representatives of the involved companies (ref.: Chapter 2 of the Opinion, comments on Art. 19). In its view, this matter, which is currently governed only by national rules, should be regulated uniformly at European level.

1.5. By way of general conclusion, the Committee would point out that the Directive - whose aim is 'minimal harmonization` - leaves several grey areas conducive to interpretations which would allow the Member States to leave their current rules totally unchanged. On the other hand, it has to be acknowledged that the Commission's efforts - designed to secure adoption of the Directive in the face of clear opposition - could probably not have been more ambitious.

2. General comments

2.1. In its Opinion of 28 February 1991 on the amended proposal (point 1.1), the Committee pointed out that 'in the field of takeovers there is a need for national regulatory authorities to be provided with powers that allow some measure of flexibility. Given the nature of takeovers, it is prudent that the supervisory authority be able to operate within an established framework of general principles which enable it to react quickly to changing situations and to adopt a flexible approach to the application of detailed rules`.

2.2. The Committee regretted that '..., the Directive does not grant the supervisory authority general power to suspend or adapt rules. Nor does it subordinate the detailed rules of the Directive to a set of general principles. The approach is to set out detailed rules and provide for exemption from them on an Article by Article basis, either at the option of the Member States, or, at the discretion of the supervisory authority`.

2.2.1. This observation prompted the following comment:

'A possible approach would be to limit the Directive to stating the general principles and to include the detailed rules by way of an appendix to serve as possible guidelines and suggestions to the Member States which could then develop their own detailed rules based on the general principles.` 2.2.2. It may be useful to reiterate some additional remarks made by the Committee in this Opinion:

'Great care also needs to be taken to ensure that the Directive does not offer scope for tactical litigation during the course of an offer, either by the parties to a bid against the supervisory authority or between the parties to a bid. The risk is that the Directive would spawn large amounts of litigation during the course of a bid which has, for example, bedeviled American practice in this field, as pointed out in the Committee's original Opinion.

To that end, the supervisory authority should be responsible for the determination of questions concerning compliance by the parties to a bid with the obligations arising from the Directive and to have flexibility within the framework of general principles.

As the earlier Opinion of the Committee makes clear, the state of both takeover activities between Member States and its regulation, differs widely throughout the Community. Whatever the merits of reducing these differences, it would seem prudent to take them into account by avoiding, where possible, a prescriptive approach.` 'The principle of a takeover or other general bid for all the securities of the offeree company is justifiable on the ground that it prevents the acquisition of companies for a price which does not reflect their true value; however, in the event of an agreement with the target company a partial takeover bid must still be possible so to avoid wasting energy and money in battles which harm the economy as a whole.` 2.3. The new version of the 13th Directive partially reflects the above recommendations.

2.3.1. Observing the principle of subsidiarity, in line with the undertakings the Commission gave at the Edinburgh and Essen European Councils, the proposed new 'framework` Directive sets out the same general principles for takeover bids as the previous proposal but no longer contains detailed provisions for the harmonization of implementing arrangements.

2.3.2. In contrast to the previous proposal, mandatory bids are no longer treated as the only means of protecting minority shareholders. Member States will not be required to apply mandatory bids if they provide for other appropriate means, which are at least equivalent, to protect shareholders of a listed company.

2.3.3. The draft Directive only covers certain techniques of protection against hostile bids. There are reservations about this narrow focus, since it favours takeover bids in certain Member States and virtually precludes them in others. It is therefore essential to cover all relevant legal techniques and practices, in order to ensure that the situations in the various Member States are comparable.

3. Comments on specific Articles

3.1. Article 1 - Scope 3.1.1. The coordinating measures apply to laws, regulations and administrative provisions 'or other mechanisms or arrangements` of the Member States. It is not entirely clear what this new concept of 'other mechanisms or arrangements` means. If the reference is to rules drawn up by a professional association authorized for market regulation purposes (as in the case of the United Kingdom), the Commission should preferably amend the wording of this Article to read:

'The coordination measures prescribed by this Directive shall apply to the laws, regulations and administrative provisions, as well as to mechanisms or arrangements, decided by a Member State or an association officially authorized for market regulation purposes in respect of takeover bids for the securities of a company governed by the law of a Member State...` 3.1.1.1. Though these 'officially authorized` associations obviously cannot issue 'laws`, the revised wording of Article 1 would be clearer and reflect the de facto situation.

3.1.2. The inclusion of the phrase 'wholly or partially` is a welcome innovation, which the Committee had recommended.

3.2. Article 2 - Definitions 3.2.1. The proposed Directive defines the 'offerer`, as 'any natural person or legal entity in public or private law making a bid`. The laws of certain countries encompass in this definition:

- joint action by several offerers;

- a bid made by a person in his own name but on behalf of someone else, or a bid by a person who has undertaken to cede all or part of the shares he acquires through a takeover bid (the assignee cannot be regarded as an 'offerer`);

- the situation where several persons act in unison. For instance, a number of individual takeover bids are launched by common agreement: taken separately, they come below the threshold indicated in Articles 3.1 and 3.2, but together they could constitute 'control`.

3.2.2. However, other countries, such as the United Kingdom, have rules that define 'offerer` in more restrictive terms. To take account of this diversity, the text should therefore be reworded as follows:

'any person making a takeover bid in accordance with national rules as defined in Article 4(2) of the present Directive.` 3.2.3. The definition of 'securities` includes the phrase 'or conferring entitlement to obtain transferable securities carrying such rights`. Here the Committee pointed out, in its Opinion of 28 February 1991, that 'the Directive should only apply to acquisitions of "securities" which actually carry voting rights and not to instruments which "confer an entitlement" to obtain such securities in the future. Convertibles and options should, therefore, be excluded until such time as they are converted or are exercised (as appropriate). The requirement to make a mandatory bid should only be triggered when voting rights above the threshold are actually acquired (whether by acquisition, conversion or exercise of options)`.

These arguments still hold good.

3.3. Article 3 - Protection of minority shareholders 3.3.1. This Article is the Directive's compromise article as it:

- no longer specifies a minimum threshold ('a specified percentage - to be determined by the Member States - of voting rights... conferring on him the control of that company`) unlike the previous proposal, which set a minimum of one third of voting rights; and - no longer requires mandatory bids but allows the Member States to devise other equivalent means of protecting minority shareholders.

3.3.2. Here, the Committee would point out that:

- some Member States (e.g. Belgium) have made no provision in their takeover rules for any specified percentage above which control could be considered to exist but have set 'qualitative standards` (to be determined by a supervisory authority);

- the possibility of fixing this percentage freely will generate major discrepancies between the Member States.

3.3.3. The new wording does not solve the problem of any protectionist measures that might be taken in the case of national concerns (some Member States could set very low thresholds and others very high ones).

3.3.4. There is one major omission in this Article. It is taken for granted that all bids and trading fall within 'normal` stock market operations. Yet a takeover bid can be made through an operation on the 'futures` market: acquisition may not be immediate but is substantially the same.

Article 3(1) should therefore preferably be amended to read:

'Where a natural person or legal entity who, as a result of immediate or anticipated acquisition, obtains or will obtain securities which...` 3.3.5. A further omission is exemptions. The Directive should make it clear that such exemptions refer solely to direct taking of control through acquisition. In line with normal practice in almost all Member States, indirect acquisition as a result of a holding company not registered on the stock exchange becoming the majority shareholder of a registered company should fall outside the scope of the Directive.

3.3.6. Similarly, the Directive should enable Member States to exempt cases where the buyer holds the controlling shares on a temporary basis with the intention of transferring them to a third party or third parties, or has acquired them without the intention of exercising control and sells them again immediately.

3.3.6.1. The principles of transitional acquisition or acquisition of a majority shareholding without the intention of exercising control are already established in European legislation as grounds for exemption from provisions regarding the taking of control, as in the case of the Second Banking Directive [77/780/EEC of 15. 12. 1989, Article 12(4)].

3.3.7. Lastly, Members States should be authorized to grant exemptions for cases where voting rights are acquired in connection with acquisition of shares forming part of the trading portfolio of companies acting as intermediaries in security dealings. Such companies' activities do not cover taking control of a company.

3.3.8. Article 3 of this Directive should be accompanied by exemptions for the cases referred to in points 3.3.5, 3.3.6 and 3.3.7 above.

3.4. Article 4 - Supervisory authority 3.4.1. The second paragraph does not deal fully with the matter of 'territorial competence`. Will the competent authority continue to be the authority of the country where the company has its registered office in all cases of failure to fulfil the conditions 'on whose regulated market the securities of the company were first admitted to trading and are still traded`? 3.4.2. In the Committee's view, this premise is not viable. If the key criterion is the 'market` as opposed to the 'registered office`, the proposed Directive should state clearly - obvious as it may be - that the 'regulated market` is the one on which the shares are listed, even if it is not the 'first` market, should they no longer be listed on the first market.

3.4.3. As regards possible derogations by supervisory authorities (fourth paragraph), the Committee's comments in its earlier Opinion remain apposite:

'... It is unacceptable that the exemptions from the mandatory bid requirement are merely optional for the Member States. This runs counter to the Directive's objective of harmonizing national legislation.` 3.4.4. In the present instance, the Committee would reiterate even more forcefully that protection of shareholders' interests hinges on legal certainty. It is out of the question that derogations to legislation (or to legally recognized rules) should be left to the appraisal, albeit substantiated, of the supervisory authorities. It is therefore vital, in the Committee's view, for national laws to state clearly and explicitly the cases where derogations may be made when need arises.

3.5. Article 5 - General principles 3.5.1. Under point 1(a), all holders of securities who are in the same position are to be treated equally. This principle is perfectly acceptable but the proposal does not make it clear whether the bid should relate to the company's entire capital, including the part consisting of shares without voting rights.

3.5.2. In the Committee's view, the bid should not include shares without voting rights. To take the opposite approach would be tantamount to allowing shareholders without voting rights to benefit from redistribution of the control premium.

3.5.3. The reference in point d) to 'false markets` is vague. The Committee would ask the Commission to clarify this concept.

3.6. Article 6 - Information 3.6.1. The list of information to be provided should, in the Committee's view, also include, in the case of crossborder bids, particulars of the methods and terms of payment for shareholders living in a country other than the country where the company has its registered office or the shares are listed.

3.6.2. On the third paragraph of Article 6 (information relating to the bid), the Committee feels bound to express some reticence regarding the deadline by which the bid has to be accepted: the proposed Directive specifies no fewer than four, and no more than ten, weeks. In view of the potential disruption that a takeover bid can cause to the normal management of the offeree company, this period should preferably be as short as possible, consistent with the time required for reflection and adoption of the necessary measures.

3.6.3. Further, to avoid excessive procedural complications and arbitrary demands for information that is not essential for the supervisory authority to carry out its institutional tasks, the fourth paragraph of Article 6 should be amended to read as follows:

'...all information in their possession concerning the bid which is requested by the supervisory authority insofar as this information is necessary for the discharge of its functions.` 3.6.4. The supervisory authority's appraisal of 'necessary` information would then become less subjective or arbitrary.

3.6.5. In the Committee's view, the deadline for acceptance could be reduced to no fewer than three, and no more than ten, weeks.

3.7. Article 7 - Disclosure 3.7.1. The Committee takes the view that the mandatory information must include the conclusions of consultations with workers' representatives.

3.7.2. The Committee stresses, in line with its 1989 Opinion that the Directive should contain on explicit obligation to inform and consult the workers' representatives of both the offering and offeree company.

3.8. Article 8 - Obligations of the board of the offeree company 3.8.1. The provision requiring the board of the offeree company to 'abstain from any action which may result in the frustration of the offer` gives rise to some uncertainty.

3.8.1.1. Firstly, it should be specified that such actions do not include the communication to the general public or shareholders of the board's stand on the takeover bid or the board's right to seek alternative bids.

3.8.1.2. Secondly - but most important - it must be assumed that in case of emergency the relevant company administrative bodies are in a position to adopt the required measures, even without calling a general meeting of the shareholders. This principle is enshrined in the second Council Company Law Directive [77/91/EEC of 13. 12. 1976, Article 19(2)] which authorizes an administrative or management body to acquire the company's shares - in countries where this is permitted - to avoid serious and imminent harm to the company, with the sole obligation of informing shareholders at the next general meeting. The reference to the case of a takeover bid is self-evident.

3.8.2. In any event, it should be assumed that an administrative board enjoys the trust of the company's shareholders and hence will act responsibly - in all circumstances - to protect their interests, and particularly in emergencies where speedy decisionmaking is incompatible with excessively lengthy legal deadlines for the convening of a special general meeting. The same is true for a governing board when it also exercises administrative powers.

3.8.2.1. The distinction between a 'friendly` and 'hostile` takeover bid is far from easy and it is true that a shareholders' general meeting could view matters differently from an administrative board but that is a risk that shareholders have to run and be aware of. To avoid any doubt, if shareholders feel that they can place full trust in the company's administrative bodies, they should give them a permanent mandate (in the company's articles of association) or temporary powers through decisions taken at general meetings.

3.8.3. Accordingly, Article 8(1)(a) should be amended to read as follows:

'..., the administrative or governing board of the offeree company should abstain from any action which may result in the frustration of the offer if the necessary representative powers have not been conferred on it at a general meeting of the shareholders and such actions are prohibited under national legislation. This provision relates also to the issuing of shares which may result in a lasting impediment to the offeror to obtain control over the offeree company;` 3.9. Article 10 - Mandatory bid 3.9.1. Optimum protection of minority shareholders would be ensured only through a bid covering all shares. However, since the Committee is aware of the difficulty of securing consensus among the Member States on this approach, it accepts that the bid should cover 'a substantial part` of shares. However, a Directive which seeks to achieve - albeit minimal - harmonization, cannot omit to specify this threshold, which should be no lower than 75 %.

Done at Brussels, 11 July 1996.

The President of the Economic and Social Committee Carlos FERRER

() OJ No 162, 6. 6. 1996, p. 5.

() OJ No C 64, 14. 3. 1989.

() COM(90) 416 final - SYN 186.

() COM(95) 655 final - Explanatory memorandum, point 2.

() ESC Opinion of 27. 9. 1989, OJ No C 298, 27. 11. 1989.

() ESC Opinion of 28. 2. 1991, OJ No C 102, 18. 4. 1991.