LAW ON TAKEOVERS IN THE EU (THIRTEENTH DIRECTIVE)

1. LAW ON TAKEOVERS IN THE EU(THIRTEENTH DIRECTIVE) др Вук Радовић, LL.M.

2. ACQUIRING VOTING CONTROL Two ways of ex post acquiring voting control of the company: • buying offered shares on the market • public takeover bid

3. ACQUIRING VOTING CONTROL Problems associated with buying free shares on the market: • unknown results – no guarantees • high costs • length of the procedure TAKEOVER BID

4. TAKEOVERS SHs of X SHs of Y cashor securities shares of company Y X Y bidder target company

5. TAKEOVERS X SHs who haven’t accepted the bid SHs who accepted the bid ScenarioI CompanyX acquires voting control in company Y Y

6. TAKEOVERS X SHs who haven’t accepted the bid SHs who accepted the bid ScenarioII CompanyX does not acquire voting control in company Y Y

7. TAKEOVERS Definitions in takeover law • takeover bid • bidder (offeror) • acquirer • target company (offeree company) • securities • hostile takeover • market for corporate control • voting control • board of the target company

8. TAKEOVER DIRECTIVE History of Takeover Directive (divided into four phases) • First phase: 1970-1985 • Pennington’s draft (1974) • reason for failure: • undeveloped takeover market • rare takeover cases • modest or non-existent national takeover legislature • unclear area

9. TAKEOVER DIRECTIVE • Second phase: 1985-1992 • 1988 – Carlo de Benedetti takeover attempt • 1989 – first takeover directive proposal (amended in 1990) • major characteristic: detailed takeover regulation • reasons for failure: • opposition by Germany • MBR • takeover defenses • opposition by UK • implementation measures

10. TAKEOVER DIRECTIVE • Third phase: 1993-2001 • 1996 – second takeover directive proposal • three differences in comparison with first proposal • framework directive • way of implementation • deadline for implementation • problems raised by the EP • equitable price in mandatory bids • principle of neutrality • employee protection • introducing squeeze-out right

11. TAKEOVER DIRECTIVE • Third phase: 1993-2001 • July, 2001 – EP voting (tie vote) • key event: Vodafone took over Manesmann • division between Member States: • Germany, Austria, Netherlands and Italy – AGAINST • UK, France, Denmark and Sweden – IN FAVOR • major problem: who is authorized to adopt takeover defenses • GMS • Board of directors

12. TAKEOVER DIRECTIVE • Fourth phase: 2001-2004 • 2001 – High Level Group was formed • Winter report on takeovers (2002) • principle of shareholders’ decision-making • principle of proportionality • squeeze-out and sell-out right • equitable price • deadlock was imminent • Portugal proposed a solution Takeover Directive was adopted in 2004 Optional character of Articles 9 and 11

13. TAKEOVER DIRECTIVE General principles: • equal treatment of all shareholders • minority shareholders protection • full, accurate and timely information to shareholders • board of directors must act in the interest of the company • shareholder decision-making • prohibition of creating false markets • securing the necessary funds to purchase the shares • to avoid preventing target company to conduct normal business for longer than is justifiable – obligation to implement the takeover procedure in the shortest time possible

14. TAKEOVER DIRECTIVE Nature of Takeover Directive provisions: • minimum requirements that have to be observed by Member States • Member States are free to introduce additional more stringent conditions and requirements • principle of flexibility

15. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

16. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

17. TAKEOVER DIRECTIVE MANDATORY BID RULE • Justification • minority SHs protection • justifiable distribution of takeover premium • Basic characteristics • only one situation where an acquirer has an obligation to publish a takeover bid • acquiring voting control is necessary • the way of acquiring is irrelevant • the percentage of voting rights which confers control is not defined

18. TAKEOVER DIRECTIVE MANDATORY BID RULE • Basic characteristics • further instruments cannot replace MBR • must be addressed to all holders of voting securities • acting in concert introduced w/o further explanations • short time for launching MB • sanctions are left to Member States • Exception • voluntary full bid • other exceptions

19. TAKEOVER DIRECTIVE MANDATORY BID RULE • Equitable price • presumption – highest price paid (6-12 months) • possible derogations by MS • ex post purchase • Nature of consideration • cash (in three situations obligatory at least as an alternative) • securities • both

20. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

21. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

22. TAKEOVER DIRECTIVE SQUEEZE-OUT RIGHT • Justification • minority SHs presence creates risks and costs to majority shareholder • makes takeover bids more attractive to potential bidders • efficiency argument • Diversity between Member States • Types of target company • Link to takeover bid • following a full bid

23. TAKEOVER DIRECTIVE SQUEZEE-OUT RIGHT • Threshold • usually 90-95% of voting rights • two alternatives: • indirect connection with takeover bid (90-95%) • direct connection with takeover bid (90%) • Consideration • amount – fair price • voluntary bid – 90% have accepted • mandatory bid • other situations • form

24. TAKEOVER DIRECTIVE SELL-OUT RIGHT • Justification • risk of abuse of dominant position by the majority shareholder • difficult to obtain fair market price in illiquid market • counterpart for squeeze-out right • not such a big burden for majority shareholder • to lower the pressure to tender in the takeover bid • Mutatis mutandis application of squeeze-out right rules

25. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

26. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

27. TAKEOVER DIRECTIVE DUTY OF NEUTRALITY • The most disputable provision – Article 9 • Two opposite principles – meaning and justification • DUTY OF NEUTRALITY • BOARD VETO RULE • Takeover directive principles • must act in the interest of the company as a whole • must not deny the holders of securities the opportunity to decide on the merits of the bid

28. TAKEOVER DIRECTIVE DUTY OF NEUTRALITY • Scope of application • Personal scope of application • target company • board • Temporal scope of application • beginning of ‘neutrality zone’ • end of ‘neutrality zone’ • Material scope of application • actions that may result in the frustration of the bid • actions that may deny the holders of securities the opportunity to decide on the merits of the bid

29. TAKEOVER DIRECTIVE DUTY OF NEUTRALITY • Prior authorization of the GMS • short period for convening the GMS • quorum and majority are not defined • takeover defense must be known (specific and concrete) • Exceptions from duty of neutrality • white knight defense • writing an opinion of the bid • normal business operations

30. TAKEOVER DIRECTIVE DUTY OF NEUTRALITY • Ex post approval of the GMS • Optional regime • three levels of application: • primary level (Member States level) • secondary level (individual corporations level) • reciprocity rule (member States level)

31. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

32. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

33. TAKEOVER DIRECTIVE BREAKTHROUGH RULE • Second most disputable provision – Article 11 • Ius novum • Principle of proportionately • Applicable only in connection with takeover procedure • Applies to takeover defenses adopted: • ex post or ex ante • by the board or GMS

34. TAKEOVER DIRECTIVE BREAKTHROUGH RULE • Temporary non-application of takeover defenses • Applies only to enumerated takeover defenses • that limit SHs of target company • to accept the bid • to vote • that limit the acquirer • additional conditions

35. TAKEOVER DIRECTIVE BREAKTHROUGH RULE • Exceptions • Equitable compensation for any loss • Optional regime • Breakthrough rule in the future

36. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

37. TAKEOVER DIRECTIVE Five pillars of Takeover Directive MANDATORY BID RULE SQUEEZE-OUT AND SELL-OUT RIGHT DUTY OF NEUTRALITY BREAKTHROUGH RULE DISCLOSURE OF INFORMATION

38. TAKEOVER DIRECTIVE DISCLOSURE • Bidder’s obligations • publication of a decision to make a bid • publication of a bid • minimum content of a bid • time allowed for acceptance

39. TAKEOVER DIRECTIVE DISCLOSURE • Target company’s obligations • opinion of the bid and reasons on which it is based • transparency of takeover defenses • general application • permanent disclosure • addressees • general public – annual report • shareholders – explanatory report