On April 21, 2004 the EU Takeovers Directive (the "Directive") was adopted by the European Union, finally ending a 30-year period of controversial discussions among the EU Member States on the harmonization of national regimes governing the acquisition of publicly listed companies.
Although the aim of the Directive is to lay down minimum standards that must be applied by all the Member States, thus creating a level playing field in the market for corporate control of publicly listed companies in Europe, it should be noted that each Member State's regime will continue to differ in various and significant areas.
The Directive was due to be implemented across the European Union on May 20, 2006; nonetheless, many European countries, including Italy, have not met the implementation deadline and until then the full impact of the Directive on cross-border and national takeover legislation will not be completely clear.
This article looks at some of the main provisions laid down by the Directive and compares their effects against the Italian regulation on takeovers.
1. Key Provisions Of The Directive
The Directive contains six general principles governing bids, which include requirements that shareholders get equivalent treatment and be given sufficient time and information to be in the position to reach a properly informed decision and that the board of the target company acts in the interest of the company as a whole.
1.1 Jurisdiction And Shared Jurisdiction
In its intent to harmonize the national regime of the Member States, the Directive sets out which supervisory authority has jurisdiction over a certain takeover, providing also for the ability of Member States to determine the extent to which parties to a bid may bring judicial proceedings.
According to the Directive, a takeover will be regulated by the competent authority where the target company has its registered office if its shares are admitted to trading on a regulated market in that country. This means there will no longer be "orphan" companies that are not regulated.
This provision, however, rather than avoiding complicated questions of overlapping jurisdiction, introduces the concept of "shared jurisdiction" for those companies that do not have their registered office and shares admitted to trading on a regulated market in the same Member State. Bids for such companies will have to be made in compliance with two sets of rules and the competent authorities will have a specific jurisdiction over different elements of the bid. For instance, this concept of "shared jurisdiction" has already raised questions in Deutsche Brse and the New York Exchange's battle for Paris-listed Euronext (which is incorporated in the Netherlands), with national regulators set to debate who should be the ultimate arbiter.
1.2 Equivalent Treatment
As we have already pointed out, one of the key principles laid down by the Directive is that shareholders of a target company receive equal treatment. Although the concept of "equivalent treatment" may still leave some room for interpretations that could allow the bidder to differentiate among shareholders and still comply with the "equivalent treatment" principle, for example by using a different form of consideration, the purpose of the Directive is to ensure that all shareholders of the same class can tender their offer under the same terms.
Incorporation of this principle into the legislation of Member States will require for some of them adequate considerations as to the possibility to continue to allow the exclusion of target shareholders in certain jurisdictions from the offer. Bidders have traditionally done this where the difficult procedural rules involved in extending an offer to a particular jurisdiction compared with the number of shareholders involved meant it was not worthwhile. Generally speaking, a bidder would normally take the necessary steps to extend its offer to shareholders of a certain jurisdiction if their number is such as to increase the likelihood of it satisfying the acceptance condition for a positive outcome of the offer and reaching the relevant squeeze-out threshold.
Because of the Directive, it will be harder to exclude shareholders of jurisdictions belonging to the European economic area from an offer. The "equal treatment" principle may also render it more difficult to exclude shareholders of any other jurisdiction from an offer. As a consequence, bidders will need to obtain advice on the implications of not extending an offer into all jurisdictions where there are target shareholders.
1.3 Mandatory Bid And The "Equitable Price" Principle
The Directive also provides for a mandatory bid rule aimed at ensuring that once a person reaches a certain percentage of voting rights in the target company which gives him control of the company, he shall make an offer at an equitable price to all holders of securities for all their holdings. The relevant percentage as well as the method of calculation are left to the determination of each Member State.
The "equitable price" principle operates at two different levels.
Firstly, in cases where the obligation to launch a mandatory bid is triggered, the price to be offered to all shareholders shall be equal to the highest price paid for the same securities by the bidder over a period determined by the Member States. According to the Directive, however, such a period cannot be less than six months and not more than twelve months prior to the launch of the tender offer.
Secondly, in cases where the bidder acquires any securities of the target company following the commencement of the offer period at a price higher than the one offered to the shareholders, the price offered to the shareholders in the tender offer shall be increased up to such highest price.
1.4 Transparency Provisions
Transparency and disclosure are considered, beyond any doubt, as a cornerstone of the effective operation of capital markets and the market of corporate control. In an effort to increase the transparency and the dissemination of information to the market, the Directive requires all listed companies to disclose in their annual report additional information including, by way of example, the composition of their capital structure, the existence of any restrictions on share transfers and the description of any defensive measures available to the board of directors in order to frustrate the positive outcome of a bid over the relevant company.
In addition to this information, the Directive also requires the directors of listed companies to present an explanatory report to the annual meeting of shareholders on the capital and control structure and defensive measures.
Furthermore, the Directive provides for increased transparency and disclosure in relation to takeovers, requiring the bidder to promptly inform the competent supervisory authority of its decision to launch a bid and thereafter to render public such a decision without delay. The increased transparency and disclosure are also pursued by requiring the bidder to draw up and make public an offer document containing the information necessary to enable the shareholders of the target company to reach a properly informed decision on the bid. To this end, the Directive sets forth the minimum content of information that shall be included in the offer document.
1.5 Defensive Measures
The Directive's provisions introducing restrictions on frustrating actions and the so-called "breakthrough" provision represent two of the most controversial provisions in the Directive and will be likely to affect European targets, particularly by non-European bidders.
According to the Directive, Member States can choose whether to apply the restriction on frustrating actions or the "breakthrough" provisions (which allow a bidder to override target shareholders' blocking rights, such as restrictions on transfers of securities, limitations on share ownership and weighted voting rights). Even if Member States opt out of the compulsory application of these provisions, individual companies are still able to voluntarily opt back in. These options for individual Member States and companies will lead to a level of uncertainty for bidders as to which provisions will apply in any particular target's case. Even where countries opt out, there may still be existing restrictions in their local laws which are similar.
The "reciprocity" provision, which allows Member States to exempt companies which apply either or both of the aforesaid provisions (i.e., the restrictions on frustrating actions and the "breakthrough" provisions) from applying them in case they become the subject of an offer launched by a company which does not apply the same provisions, adds a further layer of complexity. One of the main concerns raised by the "reciprocity" provision is that there are strong different positions between Member States, for instance as to whether such provision should be applied against non-European bidders or as to whether the "reciprocity" provision only operates if the company applies the relevant provisions voluntarily rather than because it is required to do so by operation of law. All this complexity has raised concerns that litigation will be more likely during hostile takeovers in Member States that allow target companies to take reciprocal action over questions of the correct interpretation of the Directive.
1.6 Squeeze-Out And Sell-Out Rights. Other Minority Protections
By introducing the rights of squeeze-out and sell-out, the Directive addresses the problem of, and for, minority shareholders following a successful bid. In particular, squeeze-out rights, enabling a successful bidder to compulsorily purchase the securities of remaining shareholders who have not assented to the bid, are aimed at facilitating the corporate restructuring by the bidder while sell-out rights, granting minority shareholders the right to require the bidder to purchase their securities, are aimed at improving shareholders protection by giving them the option to benefit from the offer even after the end of the offer period if they so decide.
As such rights involve the compulsory sale or purchase of securities against the will of the holder of the securities or the purchaser, the Directive sets forth high thresholds to the exercise of such rights and protective rules on the price that must be paid for the securities. According to the Directive, Member States can set the threshold for triggering the squeeze-out or sell-out rights by reference to the capital ownership (between 90% and 95%) or, alternatively, by reference to the number of acceptances in the offer (90% of the voting rights comprised in the bid). If the threshold chosen by the relevant Member State is met, the rights must be exercised within the three-month period following the end of the offer. The price to be paid for the securities acquired through the exercise of either of these rights shall be fair and in the same form (i.e., cash or securities) as the consideration offered in the bid. Following a mandatory bid, the consideration offered in the bid is presumed to be fair, while in voluntary offers the consideration offered in the bid is presumed to be fair if the bidder has acquired, through acceptance of the bid, securities representing not less than 90% of the capital carrying voting rights comprised in the bid.
Another important protection introduced by the Directive in favor of minority shareholders is the so-called "cash alternative." According to the Directive, in an offer the consideration must include either liquid securities or cash. However, the Directive provides for an offer of cash to be mandatory, at least in the form of a cash alternative, in case (i) the consideration offered consists of illiquid securities not traded on a regulated market; or (ii) the bidder, during the acceptance period for the offer, acquires securities carrying 5% or more of the voting rights of the target company in cash; or (iii) the Member States decide to require that a cash consideration must be offered, as an alternative, in all cases.
2. The Impact Of The Directive On The Italian Legislation
As already indicated, Italy did not meet the implementation deadline. Initial proposals for implementation of the Directive were published in late 2005 and June 2006. However, the current Italian legislation is similar in many respects to the provisions of the Directive, so few material changes of substance are expected.
Based on the content of the current draft proposals, and considering the principles laid down by the Directive, as briefly described in this article, the main changes that the Italian legislator is likely to introduce to the current legal framework may be summarized as follows.
The jurisdiction rules will have to be aligned with those of the Directive to reflect the new regime of "shared jurisdiction;" also, providing for a mechanism aimed at addressing in an efficient manner possible issues of co-operation with other national regulators as to the operation of their respective authority.
While Italian legislation already ensures that all shareholders of the same class can tender their securities under the same terms, thus imposing an "equivalent treatment" to all of them, the criteria for the calculation of the "equitable price" on a mandatory offer will need to be changed. The offer price is currently determined as the arithmetic mean of the highest price paid by the bidder in the twelve months preceding the offer and the average market price over the same period. In this respect there are proposals to amend this criteria providing that the offer price shall be equal to or higher than the highest price agreed or paid by the bidder in the twelve months preceding the launch of the bid. If these proposals are accepted, it is likely that the economic burden for bidders will be higher than under the current provisions.
As far as the option, granted by the Directive, to apply the restriction on frustrating actions and the "breakthrough" provisions is concerned, no major changes are expected since Italian companies cannot undertake any frustrating action that may prejudice the positive outcome of a bid unless approved by shareholders and shareholders may withdraw from any shareholders' agreement in the event of an offer. Therefore, it is expected that Italy will opt in to these provisions (articles 9 and 11 of the Directive), but Italian companies will continue to be able to include provisions in their by-laws aimed at permitting recourse to frustrating actions in certain pre-determined circumstances. In this respect major doubts arise in connection with the application of the "reciprocity" provision. Indeed, from press reports there appears to be a difference of opinion regarding the "reciprocity" provision between the Ministry of Finance and Italian regulator Consob. Nonetheless, it is likely that Italy will also opt in to the "reciprocity" provision.
Other changes that the Italian legislator will have to introduce regard the squeeze-out and sell-out rights. Although the current legal regime provides for a squeeze-out right, the actual threshold (set at 98% of the voting rights) will have to be reduced to be aligned with the new thresholds set forth in the Directive. In this respect, while Consob would prefer to set the new threshold at the highest figure permitted by the Directive (i.e., 95%) there is some debate as to whether it should be lowered to 90%. Furthermore, the time period allowed for the exercise of such a right shall be reduced to meet the three-month exercise period permitted by the Directive. In this context, it would also be advisable to amend the provision regarding the determination of the purchase price, which currently shall be determined by an independent expert, to reflect the presumptions of fair price allowed by the Directive. Finally a new sell-out right will have to be introduced.
Gherardo Cadore is an Associate in the New York office of Gianni Origoni Grippo and Partners and can be reached at (212) 957-9600.