Takeovers, Secrecy, and Conflicts of Interest: Problems for Boards and Banks
Klaus J. Hopt
Max Planck Institute for Comparative and International Private Law; European Corporate Governance Institute (ECGI)
October 1, 2002
TAKEOVERS IN ENGLISH AND GERMAN LAW, J. Payne, ed., p. 33-63, Hart, 2002
ECGI - Finance Working Paper No. 03/2002
The German Takeover Act on public securities offers and takeovers of December 20, 2001, in force since January 1st, 2002, does not solve important problems of secrecy and conflicts of interest of boards and banks. Secrecy before the offer does not follow from the Takeover Act, but from insider law and the general company law secrecy. The conflict between insider and takeover law might involve European law and the European Court of Justice. Instant disclosure of takeover plans is mandated under takeover law as well as securities law and presents a number of legal problems. The involvement of advisers and banks by the offeror is safe except for warehousing. It is less clear whether the offeror can freely approach various banks for financing or potential purchasers or offerors for forming a takeover offer consortium. Takeover plans made before final approval by the supervisory board present a special problem of the German two-tier board. It is highly controversial at what moment instant disclosure must be made of a decision that has been reached. Instant disclosure is usually a question for the offeror and not for the offeree. However, in rare cases, the offeree company may have its own duty of instant disclosure. Instant disclosure in group situations is highly controversial. Two fact patterns should be distinguished. In the first, the relevant information has an impact on the price of the securities of the group member. In the second, the parent had or could have had an influence on the nondisclosure by the subsidiary. Insider law should not prevent defensive measures by the offeree that are allowed under takeover law, i.e., working together with shareholders and banks in anticipation of a hostile bid as well as searching for a white knight. The European insider trading directive is not clear on this. If a prospective white knight has been allowed to inspect the books of the offeree company in a due diligence exercise, it is unclear under German law whether the same information must be given to the offeror. In Germany, inducement fees are not yet commonly known or discussed. The legal treatment is ambiguous.
The best way of dealing with conflicts of interest is to prevent them from coming into existence. This can be done by Chinese walls, the principle of general incompatibility, or rules of special incompatibility. Under German law and possibly also under UK law, at least after Bolkiah, establishing Chinese walls is not considered a safe haven in itself for the bank or another party subject to conflicts of interest. General and special incompatibility rules are problematic. It remains to try to solve the conflict of interests in a takeover when the offer is prepared or has already been made and questions arises as to how the bank and the bank deputy in the offeree company should behave. There seem to be at least four possibilities: abstaining from voting, exclusion from deliberation, stepping down, and revocation of office. As to the choice between rule of law and self-regulation, there are major differences in history, corporate governance, and financial culture between the UK and Germany. They are related to history or, as one says today, they are path-dependent.
Number of Pages in PDF File: 40
Keywords: German takeover act, takeover law, information disclosure, conflicts of interests in takeovers, board structure, inducement fee, Chinese walls, all-purpose banks, self-regulation
JEL Classification: G34, G38, K22
Date posted: October 22, 2002 ; Last revised: December 16, 2009