Positive evolution, but… Are the differences that have so far prevented a Community system for public takeover bids about to be overcome? The report by the "high-level" group of experts in company law made public last week (see our bulletin of 11 January, p.6) was well received. Commissioner Bolkestein praised the imagination and creativity of its authors and announced that he would present a new draft by the end of April aimed at replacing the one that failed to get through (by one vote!) in the European Parliament. The parliamentarian who led the opposition, Klaus-Heiner Lehne, also said that he was on the whole satisfied, assuring that Parliament would be "co-operative" and that it would try to reach an agreement with the Council in a single reading. All this is positive, as the takeover system is essential for the restructuring of European industry. But have the perplexities that lay at the root of Parliament's negative vote been clarified?
While simplifying, and avoiding the trap of excessive technicality, the reservations or reluctance expressed during the days of the grand debate essentially concerned three points:
a) in the case of a hostile bid, the withdrawn draft provided for the management of a company under attack not being able to adopt "defensive measures" without going through the assembly of shareholders. The opponents within the EP, as well as the German Government, had asked, on the contrary, for managers to be able to adopt defensive measures, with as only condition that they had previously secured a general brief from shareholders along those lines;
b) the situation was asymmetric from one Member State to the next, in the sense that that companies in some Member states could be "attacked" by those of another country without real possibility of reciprocity. The situation was therefore discriminatory;
c) the trade unions considered that worker information/consultation procedures were to weak, and their position gained significant support within Parliament.
Eradicating artificial mechanisms. The high-level experts believe that they have provided a satisfactory response to the objections, resting their proposals on the rules and principles of an efficient financial market. The abolition of inequalities from one country to the next and the arbitrary intervention of public authorities would, they believe, eliminate any justification of the option enabling the management of a company under attack itself to take defensive measures and justify the option of handing back to shareholders all powers in this field. Thus: 1) in each Member State, all shareholders must have a control over the company proportional to the venture capital they hold; 2) in the case of a takeover bid, it is the shareholders who decide whether the bid should be accepted. They may authorise their administrators to take defensive measures, though a specific decision following the launch of the bid (and not by virtue of a general mandate secured previously). Whatever, the defensive measures will not be able to prevent the author of the bid taking control of the company under attack, as soon as it has 75% of the capital (a substantially lower percentage would generally be sufficient; this provision aims at countering mechanisms such as the golden shares and other ploys incompatible with the proportionality between venture capital and control).
The group's conclusions, as set out in the report and exposed to the press by its chairman Jaap Winter, Professor at the Erasmus University of Rotterdam and legal advisor for Unilever, seem convincing both technically and economically. They are based on three principles: the single currency needs a unified financial market to express all its potentials; if States want companies in which they have shares to turn to the financial market, they must respect the rules; artificial mechanisms aimed at thwarting market rules and which prevent transparency must go. This would involve, in some Member States, a genuine revolution of company law or current practices. The abolition of special rights attached to shares held by public authorities (golden shares) is the most spectacular measure, but is far from being the only one. The general tidying up should apply to a large number of mechanisms or bad habits that have accumulated over the years (company pyramids, trade union pacts between companies, "Chinese boxes", crossed-shareholding, etc.) that render the market opaque, allowing for abuses and that set situations in stone to the advantage of the powers in place, impeding renewal.
At the same time, the group of experts defined clear guidelines, especially for the protection of minority shareholders: the author of a bid will be obliged to buy all shares offered to it at a fair price, and not only those it deems necessary. …/..
A unilateral view? Given the preceding comments, one might think that the directive is almost on the statute books - proposal by the end of April, Council and Parliamentary approval in a single reading… So why did I add a question mark to the first part of my column? Because some European milieus wonder whether the discussion and work launched by Frits Bolkestein take into account the events that led last year to the German government's change of heart (supported by other governments) and the rebellion of half the European Parliament. Last year's debate went beyond technical and financial aspects to cover wider issues of the "European model of society". How to strike a balance between the interests of shareholders and a company's workers? How to control big multinationals that want to relocate companies that they have used their financial power to acquire control over? Should national, regional or even local authorities lose all direct influence over where economic activity is based? Should "golden shares" be formally banned from the European legal system without a Court of Justice ruling?
The high level experts did not touch on this area, which was outside their brief. But one definitely gets the impression that they do not have a unilateral view - they are all university lecturers and consultants for big business or industrial associations, apart from one former president of a Member State stock market surveillance authority and therefore highly qualified for suggesting how to improve the financial markets in order to facilitate and encourage the restructuring of industry. Let us be clear - Commissioner Bolkestein was absolutely right when announcing to journalists that a new proposal would be put together by the end of May and it would be up to the European Commission College to decide on the issue; the Commission was waiting for the Court of Justice ruling on the "golden shares" cases; the views of the European Parliament will be solicited on the new text in codecision with the Council. But the debate is far from concluded.
US pensioners and bad managers. The following needs to be taken into account:
1. The new German law authorising a company subject to a hostile takeover bid to take defence measures without consulting shareholders, if it has already been given a general mandate - which is precisely what the experts recommend banning.
2. The Court of Justice Advocate-General, Damaso Ruiz-Jarabo, feels that countries should keep the option of intervening in privatised state enterprises on the principle of "He who can do more can do less". State enterprises are authorised, we know, in the EU legal system; the Advocate-General believes the state has the right to be an owner and a fortiori, must have the right to still control or restrict the companies it privatises. This view has been strongly criticised, with various lawyers arguing that the Court would not agree with him - we need to await the outcome of the three rulings before the Court to see.
3. The absolute priority of shareholders' rights over all other considerations has occasionally been challenged on the political level. The most recently cited example is the anomaly of the US pension funds which have enormous cash flows for acquiring control of important companies across the world. Pension fund managers are neither industrialist nor entrepreneurs; their legitimate concern is to get the highest returns possible for their investments to be able to pay as high a pension as possible. Considerations concerning the location of activities and industrial, social and regional dimensions are of no interest to them. If new owners, from a purely financial perspective, decide to end production or transfer it somewhere else, a traditional bedrock for a region can disappear. How to deal with this? This is the essential underpinning of gold shares and other exceptional measures like, for Volkswagen, preferential shares for the Land of Lower Saxony, or the ban on anyone holding more than 20% of the company's shares.
4. All the same, it is not true that management is always the best defender of a company's interests. Boards of Managers can be ineffective or be more concerned with their members' than their shareholder's interests. This happens more frequently that one would imagine, but the main concern of a new owner is generally to relaunch and extend the business.
As we see, this is a complex issue and the manicheistic view (good vs bad) does not apply. It is important for an issue of this type, so closely connected with the European model of society, be discussed openly, taking account of all the different interests involved.
(F.R)