The European Directive on Takeover Bids: A Comparison with U.S. Tender Offer Practices
When the European Directive on Takeover Bids went into effect on May 20, 2004, 30 years of controversial discussions among the EU Member States concerning the harmonization of national regimes on the acquisition of publicly listed companies finally came to an end. The key issue requiring compromise was the need for a level playing field in the market for corporate control of publicly listed companies in Europe.
Based on the U.K. takeover regime, the Directive provides for minimum standards that must be applied by the Member States. Although the Member States’ takeover laws will follow the Directive’s basic concepts, their laws will continue to differ in various areas.
This article describes certain key requirements imposed by the Directive and contrasts such requirements against U.S. tender offer practices, as appropriate.
The Directive’s Key Concepts and Contrast Against U.S. Tender Offer Practices
The Directive’s key concepts include the following topics:
Scope. The Directive applies if (i) the target company is organized under a Member State’s laws, and (ii) the target’s securities are admitted to trading on at least one of the Member States’ regulated markets. Hence, the Directive does not apply to offers for shares issued by non-EU companies, even though such shares are admitted to trading on a Member State’s regulated market. (For example, bids for Altria’s (U.S.) shares or Nestlé’s (Swiss) shares on the Paris Euronext market would not fall within the scope of the Directive.)
In contrast, U.S. securities laws generally apply to all offers made in the U.S. or to U.S. persons, regardless of where the target is incorporated. The broad reach of U.S. securities laws reflects the SEC’s fundamental goal of protecting U.S. investors regardless of the target’s nationality.
Mandatory Bid. One of the Directive’s key concepts is the equal treatment of the target’s shareholders: "all holders of the securities of an offeree company of the same class must be afforded equivalent treatment" (Article 3.1(a)). In this spirit, bidders must make a mandatory tender offer for all of the target’s outstanding shares upon reaching a Member State-specified ownership threshold. Minority shareholders must be offered an "equitable price" that reflects the highest price paid by the bidder for the target’s shares over a six- to 12-month period prior to the offer.
In Europe, transfer of control has traditionally been effected through privately negotiated sales of large holdings. The Directive’s mandatory tender offer requirement is meant to extend any premium paid for a control block in the target to the minority shareholders. In contrast, there is no similar mandatory tender offer concept under U.S. securities laws. In the U.S., a bidder purchasing a control block is generally not required to buy out the minority shareholders. In addition, the controlling shareholder selling its stake in the target need not share its premium with the minority shareholders.
The Directive’s mandatory tender offer requirement also prevents a bidder from accumulating a large position in the target in the open market (i.e., a "creeping takeover") without paying a premium for its stake or extending a tender offer for 100 percent of the target’s shares. In the U.S., takeover defenses such as poison pills and state business combination statutes are available to target boards to protect against creeping takeovers.
It is unclear whether the Directive’s mandatory tender offer mechanism will better protect minority shareholders’ interests because Member States have a wide latitude in setting the triggering thresholds under the Directive and may choose relatively high thresholds (for example, 45 percent).
Disclosure. The Directive strengthens certain disclosure requirements regarding takeover defenses and employees. The Directive requires EU companies to disclose in their annual reports information relating to their capital structure, any restrictions on transfers of securities, any significant shareholdings and any special rights attaching to them, employee schemes, and restrictions on voting rights. EU companies must also disclose in their annual reports any shareholders’ agreements of which they are aware, any significant agreements entered into by such companies that contain a change-in-control provision, and the effect of such provision. In addition, the board of directors must present an explanatory report on these disclosures to the general meeting of shareholders. In comparison, shareholders’ agreements in the U.S. are disclosed by the shareholders themselves if they hold more than 5 percent of the target’s outstanding securities.
Regarding employees, the Directive requires that the bidder and the target inform their respective employees of the bid once it is made public. In its offering documents, the bidder must disclose the impact of its strategic plans on the employees of both the target and the bidder, including the locations and places of business of both companies in the future. Similarly, the target board must give its views on the effects of the bid on employment, conditions of employment, and the locations of the target’s places of business. In contrast, U.S. securities laws governing the content of tender offer documents do not specifically require the target or the bidder to address the implications of the bid on employment.
Type of Consideration. Under the Directive, the bidder may offer cash, securities, or a combination of both. However, the Directive imposes certain types of consideration in the circumstances described below.
If securities are offered as consideration without a cash alternative, such securities must be "liquid" and admitted to trading on a Member State’s regulated market. As a consequence, a bidder with shares exclusively listed in the U.S. must obtain a secondary listing for its shares on a regulated market within the EU prior to offering such shares as consideration in a share-for-share transaction with an EU target. Obviously, this requirement will put U.S. bidders that do not have secondary listings in the EU at a serious disadvantage vis-à-vis other bidders that have listings in the EU.
The Directive also mandates a cash alternative in certain circumstances. A bidder must offer cash as an alternative to securities if it has paid cash for shares representing at least 5 percent of the voting rights in the target over a six- to 12-month period prior to the offer or during the offer. The exact length of this period will be defined by each Member State.
Finally, the Directive mandates a bidder to ensure that it can pay in full any cash consideration prior to announcing a cash bid. If the bidder intends to offer securities, it must take all reasonable measures prior to the announcement of the offer to "secure the implementation" of such consideration.
In the U.S., generally securities laws do not mandate a certain type of consideration to be offered to the target shareholders, apart from the requirement that the target shareholders must be afforded equal rights to elect any type of consideration among those offered by the bidder. U.S. securities laws require appropriate disclosure of the terms and conditions of the offer so as to allow the target shareholders and the target board to make a fully informed decision. Similarly, U.S. tender offer rules do not require bidders to secure appropriate financing prior to launching a cash bid or to take all reasonable measures prior to the announcement of an exchange offer to secure the implementation of the related stock consideration. Instead, the bidder must disclose the terms and conditions of its offer and its sources of funds.
Price. In a mandatory bid, a bidder must offer a set minimum "equitable price" for the target company’s shares. Under the Directive, a price is deemed "equitable" if it equals the highest price paid by the bidder, or a party related to the bidder, for shares in the target over a six- to 12-month period prior to the offer. However, if the bidder offers a higher price to any shareholder during the offer, the "equitable price" must be raised to such higher price. In addition, Member States’ supervisory authorities may adjust this highest price upward or downward in certain clearly defined circumstances, including: (i) bidder and seller set the highest price by agreement; (ii) market prices of the securities in question have been manipulated; (iii) market prices generally, or "certain market prices" specifically, have been "affected by exceptional occurrences"; and (iv) to enable the rescue of a firm "in difficulty."
In contrast, U.S. securities laws do not require the bidder to offer an "equitable" price to the target shareholders. Instead, the consideration paid to any target shareholder pursuant to the offer must be the highest consideration paid by the bidder to any other target shareholder during the offer.
Defensive Measures. Under Articles 9 and 11 of the Directive, shareholder approval must be obtained before a target board takes any action that may frustrate an offer. This rule, which is derived from the U.K. regulatory regime, is based upon the principle that target shareholders should have the right to decide on the merits of an offer without any management interference. By the same token, in a general meeting to approve such defensive measures, any voting restrictions contained in the target’s charter or any shareholders’ agreements would be deemed unenforceable. Similarly, provisions of the target’s articles of association contemplating multiple voting rights would also be deemed unenforceable.
Because the implementation of Articles 9 and 11 would render EU companies vulnerable to non-EU bidders, such as U.S. companies that enjoy stronger defense mechanisms, each Member State may opt out of the implementation of these Articles. Even if a Member State decides to opt in, it may still exempt targets from these Articles’ application if the EU bidder is incorporated in a jurisdiction that has not adopted the same rules. This latter rule may disadvantage U.S. bidders in contested offers while competing with EU bidders incorporated in jurisdictions where the Articles are applicable. In addition, any Member States that opt out of Articles 9 and 11 must give EU companies with registered offices within their respective territory the option to opt in. Articles 9 and 11 have been the most controversial provisions of the Directive and will likely create many disparities among the takeover laws of the Member States.
In contrast, U.S. target boards are able to respond to hostile tender offers with a wide variety of defensive measures without the need for shareholder approval (e.g., implementing poison pills, selling the target’s crown jewels, granting lockup options to a white knight, and contractually binding the target to make severance payments to incumbent managers in the event of a change in control). In fact, almost 60 percent of S&P 500 companies have shareholders’ rights plans in place, and 60 percent make use of a staggered board to retard a bidder’s ability to gain control of the board and terminate the rights plan. However, the use of such defensive measures by U.S. boards is subject to the proper exercise of their fiduciary duties, and such actions are frequently challenged in court.
Squeeze-Out. The Directive mandates that Member States provide bidders with the right to squeeze out minority shareholders within a three-month period immediately following the end of the acceptance period "in one of the following situations": if the bidder (a) holds not less than 90 percent of the target’s securities and 90 percent of the target’s voting rights (Member States may increase this threshold up to 95 percent), or (b) acquires at the bid’s closing 90 percent of the target’s securities it did not already hold at the commencement of the offer. While scenario (a) refers to the post-offer shareholder structure in the target, scenario (b) refers to the degree to which the offer has been accepted. As a result, the bidder’s strategy as to how to acquire control in the target may affect its ability to perform a subsequent squeeze-out of the remaining shareholders under scenario (b).
With regard to the type of consideration offered for the remaining shares, the Directive provides that it must be either the same as under the preceding offer or in cash, but Member States may require that cash must be offered as an alternative. The price for the remaining shares must be "fair." If a mandatory offer preceded the squeeze-out, the price set forth in that offer is always deemed fair. If a voluntary offer preceded the squeeze-out, the offer’s price is deemed fair only if shares representing 90 percent of the share capital sought in the offer have been tendered thereunder.
In contrast, a 50.1 percent shareholder in the U.S. may cash out the remaining shareholders subject to such shareholders’ appraisal rights. However, appraisal rights are not often exercised and provide limited relief to the cash-out shareholders. In addition, under New York, Delaware, and California corporate law, a shareholder owning 90 percent of a public or closely held company may squeeze out the remaining 10 percent shareholders without a shareholders’ meeting, subject to such shareholders’ appraisal rights.
Sell-Out. Under the Directive, if the bidder may perform a squeeze-out (as described above) at the end of the acceptance period, the remaining shareholders may in turn request the bidder to purchase their shares during a three-month period immediately following the end of the acceptance period. In this occurrence, the principles applicable to a squeeze-out procedure also apply to the sell-out of the remaining shares.
In the U.S., sell-out provisions are generally not available. However, controlling shareholders tend to cash out the minority for fear of legal actions based on alleged breaches of fiduciary duties owed by the board and the majority shareholder to the minority shareholders.
The Directive will provide minority shareholders with more protection and harmonize a number of issues in European takeover regimes following its implementation by May of 2006, including the equitable price, the cash offer, the mandatory bid, and certain disclosures. In addition, the squeeze-out and sell-out rights find a balance between the bidder’s and shareholders’ interests. However, the Directive is a real political compromise that establishes more of a unified framework for the different takeover regimes of the Member States, as opposed to a completely level playing field. Takeover rules in individual Member States will vary due to each Member State’s additional or more stringent takeover rules. For example, Member States will be able to opt in or out of certain defensive measures provided for in Articles 9 and 11 of the Directive. Nevertheless, the Directive is an important step toward a level playing field for European public companies.
Jere, a partner in the New York Office, is co-head of that office’s corporate practice. He has had primary Firm responsibility for supervising a wide variety of mergers and acquisitions, securities offerings, restructurings, and related matters.
Juergen is Partner-in-Charge of the Frankfurt Office. A corporate and transactional lawyer, he advises on the acquisition and sale of companies in Germany and abroad and on the establishment of international joint ventures. He also deals with the legal aspects of the financing of such transactions.
Adrien Fournier De Launay
Adrien is an associate in the Firm’s New York Office. He advises U.S. and non-U.S. clients in connection with international mergers and acquisitions and corporate finance transactions.
Hanno Schultze Enden
Hanno, an associate in the Frankfurt Office, practices in the areas of mergers and acquisitions and in capital markets. He also has experience in German and European antitrust/merger control regulations.
Amanda is an associate in the London Office whose practice involves a full range of corporate work, with particular emphasis on mergers, acquisitions, and joint ventures both in the U.K. and in cross-border activities.