Takeover Regulation: Through the Regulatory Looking Glass

Abstract

It is too early to make a complete judgment on the effectiveness of Directive 2004/25/EC on Takeover Bids as a regulatory mechanism. Such a decision would involve determining whether the Directive: achieves its goals, secures high levels of compliance from Member States and market participants and is democratically accountable. However, this paper places the Directive under a regulatory microscope in order to reflect upon some of its potential strengths and failings in respect of these criteria. A central regulatory problem for European legislators involved determining the optimal balance between harmonization and diversity. In an attempt to reach agreement between Member States, a framework Directive was agreed laying down minimum standards for takeover regulation and a number of key provisions were made optional. On the one hand, it is argued that even this "light regulatory touch" may have jeopardised the existing efficient self-regulatory regime which operates in the UK, the largest European takeover market. On the other hand, by allowing Member States a significant degree of discretion in implementing the Directive, problems of interpretation and classification arise (is the Directive a company law directive or a capital markets directive?), regulatory gaps may be identified, national differences emerge and the achievement of the Directive's goal of facilitating takeovers and yielding a level playing field may be thwarted. In respect of the latter, the paper focuses on the restrictions on frustrating action and the breakthrough rule. Finally, the paper seeks to determine whether, in this context, competition is preferable to harmonisation. It was hoped that by setting down benchmarks the Directive might "put a floor to the race to the bottom." Unfortunately, it is argued that the picture post-implementation does not support this contention.

Keywords: takeovers, EU Directive 2004/25/EC, defensive actions, market for corporate control, breakthrough rule, corporate governance

JEL Classification: G34, K22, K33