The Takeover Directive as a Protectionist Tool?
Paul L. Davies
University of Oxford- Faculty of Law
London School of Economics - Law Department
Emilie van de Walle de Ghelcke
Freshfields Bruckhaus Deringer
February 17, 2010
ECGI - Law Working Paper No. 141/2010
When the European Commission first proposed a harmonised legal framework for takeovers in the EU, its aim was to facilitate takeover bids in order to create a more efficient and competitive corporate landscape and to further the single market. In the view of the Commission, a functioning market of corporate control required rebalancing the division of powers between shareholders and management in companies facing a takeover bid. Taking the UK, EU’s most active takeover market, as a model, the Commission proposed to assign the sole decisionmaking power regarding the bid to the shareholders, with management primarily playing an advisory role.
This so-called board neutrality rule, however, caused much controversy among the member states, and it was one of the main reasons for the Takeover Directive’s notoriously long adoption history. Failing to achieve consensus on this topic, the Takeover Directive was finally adopted in a “watered down” version, without a mandatory board neutrality rule. Instead, a rather complicated system of “options” was introduced, both at member state and at company level. Although it was clear that this approach would not create the same barrier-free market for corporate control the Commission originally had in mind, it was still hoped that it would be a step in this direction. At the very least, it was certainly expected that this approach would retain the status quo.
This paper examines how the implementation of the Directive changed the takeover rules applicable to European companies. To that end, we analyse the pre-implementation rules regarding management’s role in takeovers in all member states, and compare them with the current legal framework. We find that, instead of facilitating the Commission’s ideal of a comprehensive, mandatory board neutrality rule, the Directive has, in aggregate, likely had an opposite effect. We argue that there are signs of protectionist motives driving member states’ choices regarding board neutrality, and we find that the system of company-level choices is ineffective in its current form.
We propose a simplified and more coherent board neutrality rule, solely based on shareholder decision making. Acknowledging that a system allowing management to prevent unwanted bids might have advantages over a pure board neutrality rule in certain circumstances, we argue that shareholders are in a better position to decide on the optimal rules for a particular company than legislators.
Number of Pages in PDF File: 62
Keywords: European Takeover Directive, board neutrality rule, reciprocity in takeovers, takeover defences, poison pill, ownership structure, contestability of corporate control
JEL Classification: K22, G34, G38
Date posted: April 1, 2010 ; Last revised: June 15, 2010