I would like to make a small contribution to the debate to be held by the European Parliament on 16 December, in plenary, on the directive on take-over bids (see this section on 3 December). The financial, industrial, union and political circles involved in this issue know much more about it than I do; but it is a complex subject, and the specialist press doesn't always make it any easier to understand, so that an effort to explain things could help to clarify what's behind this forbidding terminology. It would all be so much easier if one of the two fundamental hypotheses were clearly superior; but, in reality, neither is short of weighty arguments, which makes a clear, definitive decision quite difficult. If I were a professor, I'd set one group of students to study hypothesis A, and the other hypothesis B, and I am quite certain that in the absence of a real debate, each group would support the hypothesis assigned to it. Judge for yourselves.
Hypothesis A: decisions on take-over bids should remain within the hands of the shareholders. Nobody would deny that shareholders are the legitimate owners of a company, and that they are free to sell their shares if an interesting offers comes their way. As a result, the decision on take-overs belongs to them, which includes decisions on defensive measures they could decide to employ against a hostile take-over bid. The administrators and the board are employees, with specific responsibilities certainly, but without the right to decide, without consulting the shareholders, to increase the capital (creating shares for sympathetic groups, to play the role of "knights in shining armour", creating a majority to push out the bid), or to sell one or another of the group's companies to make the acquisition less attractive.
Added to these legal reasons are economic reasons. Companies can be badly run, due to the neglect of the board in place, and new shareholders replacing managers could breathe new life into the company, which is no bad thing for the staff, employment in general and the national economy. Managers could fight the take-over bid just to keep their jobs, taking defensive measures effectively blocking a boost to the company.
Generally speaking, the smooth running of the internal market of the Union and the creation of a unified European financial market require the purchase of companies to be freed up, even in cases of "hostile" take-over bids of former property. Restructurings and modernisation depend on this; the correct functioning of take-over bids is thus a condition for the expansion of the European economy.
Hypothesis B: a company is more than the sum of its shares, it is an entity which must take on board its social, regional and environmental responsibilities, and others. A company's shareholders can sometimes be greatly removed, physically and psychologically, from the headquarters of the company itself. The example was given of pensions funds, especially American ones. These funds, by their very nature, have considerable assets, which they must invest as profitably as possible, to play their institutional role of providing the shareholders with the best pensions possible. Pension fund managers do not claim to manage the companies in which they have shares; their sole concern is the profitability of their shares. They have no direct regional or social responsibility.
Let's now have a look at the case of the German car firm, Volkswagen, which is often used as an example, because the national law (dating back to 1961) has set a ceiling for shareholder voting rights, however large their stake. In practise, the Land of Lower Saxony, where it is situated, can veto major decisions, even though it holds only 18.2% of the capital. A liberal take-over regime would give a new majority shareholder voting rights in line with his or her stake in the capital. This shareholder could, theoretically, decide against building certain models of car in their normal production sites for reasons of industrial strategy, and de-localise certain activities for reasons of profitability, with no concern for the regional impact of these decisions, nor for the industrial tradition of the area in question. This example is more hypothetical than realistic, because it is hard to see why a company would make considerable sums of money available to take control of an automotive firm with no intention of making it pay; but it is a symbolic example.
The management in place would have knowledge and responsibilities enough to be genuinely concerned about various aspects of the company's management, and to take account of the various planks of the responsibility for the company in question. This means that under this second hypothesis, the European rules …/…
on take-over bids should leave it up to managers to take defence measures, even in the absence of a specific mandate from the shareholders. At the same time, for the sake of balance, the multiple voting rights attached to certain shares should be left alone.
Managers have destroyed their own image. When the fifteen years of Community discussions on this issue began, many favoured hypothesis B, which moderates market laws, giving the advantage of weight to social, environmental and regional factors, and others. But managers' scandalous abuses in certain startling cases (in the United States as well as in Europe) have tarnished their image. These scandals concern only a very small percentage of managers, it is true, but a certain amount of solidarity was seen, because there was no generalised outcry; and anybody who dares not disassociate himself or herself from this kind of behaviour, deserves to be included in the distrust. Allow me to remind you of two types of abuse that have been discovered.
The first concerned pay and bonuses or severance payments, sometimes set at levels which defy logic. The stratospheric salaries that managers pay themselves bear no relation to the results obtained; if the company's results are bad, workers lose their jobs and shareholders see the values of their shares go into freefall, but the managers still get their fat paycheques. The second type of abuse is even more disgraceful- "stock options". Managers give themselves the right to buy shares of the company they manage at knock-down prices. If the price of shares rises, they are disproportionately rewarded, and if it falls, they lose nothing because they just don't exercise their option. A win-win situation for managers, even when their shareholders suffer heavy losses. Even less acceptable is the use managers sometimes make of accumulated shares. They can become a majority shareholder in a company in their group, and then sell it, pocketing tidy sums whilst impoverishing the company, which loses an asset. They can also "start a clean sheet" by separating the business of which they are majority shareholder from the rest of the company, and the effect is the same: wealth for them, impoverishment for the company and its shareholders.
If this is the mentality, how are we to believe that "defence measures" against a hostile take-over bid can be decided on in the interest of the company under attack, rather than in the interest of those making the decision?
An almost impossible choice for now. Faced with the situation I have outlined, it's no easy matter to decide on what's right for Europe. The formula which favours shareholders seems most in line with the principles of free competition, and with what's best for the economy, especially as American pension funds are starting to look more for investments based on the environmental and social quality of the companies they choose. As for the managers, boosting our trust in them will only be possible when Europe has all the instruments it needs for corporate governance. Frits Bolkestein's dynamism has allowed not inconsiderable progress to be made, and several projects are being looked into. But we are still way off the mark (the US reacted to the scandals with greater force and effect). Experts say that there are at least four fields in which the EU needs exhaustive and efficient rules: accounting rules (encompassing the stock-options regime); the creation of European bodies to regulate the financial markets; clear and strict rules for rating agencies; a regime for "non-executive directors". A certain discipline in directors' pay, involving transparency, first and foremost, is also indispensable, but depends ultimately on the shareholders.
As long as there are no rules in certain fields, the confidence of savers and the public at large will remain lost, and differences between the Member States on the take-over bids regime will subsist. Germany (which, apparently, was shocked when Mannesmann was taken over by the UK's Vodafone, and would like its "national champions" to be able to fight off hostile take-over bids) will not give up the "defence measures", and Sweden will not give up the "shares with multiple voting rights" (which it says are necessary to protect national ownership of Ericsson, for instance).
Advantages of the Italian compromise. Under these conditions, the Italian compromise may well be the only possible immediate and provisional way out. It does not force a choice which, for the time being, is extremely difficult to make, in that it leaves the choice largely up to the Member States, but also provdes for revision in five years' time, as proposed by the Commission, in the light of experience. Its harmonising effect is certainly not great, because certain fundamental choices will remain national; but the directive all the same contains a substantial body of uniform European rules which are obligatory for all.
This compromise has received Council's unanimity (with one abstention). If it also gets the support of the European Parliament, the Commission will have to bow to the will of the double legislative power, accept the provision regime, monitor it closely once in place, and start preparing the definitive regime. (F.R.)