Revision of the Takeover directive

1. Revision of the Takeover directive Eddy Wymeersch

2. Overview • Part 1. Is a revision needed ? • Part 2. Two types of takeovers • Part 3 Anti-takeover defences

3. Part 1. Is a revision needed ? • Filling blanks and updating needed • 7 years after adoption, 5 years after entry into force • See role of implementing instruments • In-depth review ?

4. 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 • Markets • interconnection, multiple trading venues; MTF • HFT, Hedge Funds, • ‘Admission to listing’ is obsolete • Hidden ownership issues • ESMA: new rulemaking mechanisms • Company Law changes

5. 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

6. Part 2. Two types of takeovers • Voluntary • 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

7. Mandatory 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

8. 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

9. 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

10. control transactions • Why 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

11. Private benefits of control • Is 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)

12. Directive Revision • 1. Robust rules on conflicts of interest • To be applied on a permanent basis • 2. Exclude market acquisitions from the Rule • 3. 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

13. Part 2 Institutional change • Multistate 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

14. ESMA • Cooperation of national authorities • ESMA 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

15. ESMA • Guidance and recommendations • Appropriate decision making procedures for non-ESMA members

16. Directive Revision • ESMA’s formal competence for the TOD 2 • Rulemaking for present blanks, • e.g. art 13, squeeze out and sell out • Coordination of national rules and practices • Guidance and recommendations • Affirm competence for all markets concerned • College of supervisors • Provide for mediation competence

17. Part 3 Anti-takeover defences • Should we review this matter? • Compromise was not real; most states used art.12 • Neutrality has better survived • Breakthrough was nice idea, but not practised • Why 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

18. Disciplining instruments • Difficult subject: see remuneration debate • Disciplining 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

19. 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

20. Reaffirm the role of the AGM • A 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

21. Reaffirm the role of the AGM • Why 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