An American Perspective on the New German Anti-Takeover Law

Abstract

The new German Takeover Act contains anti-takeover provisions that reject the "board neutrality/shareholder choice" of the rejected draft of the 13th Directive. These anti-takeover provisions may have a particular (albeit temporary) justification as part of negotiating strategy to obtain a Directive with a "level playing field" approach to a wide variety of control barriers in the EU. This is because assent to cross-border mergers and the transnational economic integration associated with such mergers ultimately depends upon the control of economic nationalism. General vulnerability to takeover bids, in which acquirers who engage in value-reducing home country bias would face a control threat, can play a valuable role in controlling economic nationalism.

Nevertheless, the German anti-takeover provisions would have much more adverse impact than the U.S. counterparts to which they are frequently compared. First, the favored U.S. defensive measure, the poison pill, is not available under prevailing German principles of preemptive rights and non-discrimination against any shareholder. German firms are likely to substitute irreversible, value-decreasing measures that were replaced in the U.S. by the pill, such as capital structure changes or asset dispositions. Second, the typical U.S. practice of annual shareholder elections of board members combined with heavy institutional investor ownership in large public firms means that managements are highly sensitive to public shareholder interests in considering a takeover bid. By contrast, German supervisory boards turn over much more slowly, and are co-determined. German management feels less legal and cultural pressure to adhere to public shareholder interests. Third, stock option-laden compensation packages make U.S. managers highly receptive to premium bids, especially because a takeover typically triggers the accelerated vesting of such options. German compensation arrangements do not now and, as a matter of culturally constraint, are unlikely to imitate the U.S. version. So if Germany insists too hard on a 13th Directive to its exact taste, it risks sacrificing internal and cross-border mergers that would produce efficiency gains and aid the EU transnational project.

Keywords: takeover bid, anti-takeover law, corporate governance, comparative corporate governance

JEL Classification: F02, G34, G38, K22