1. Impact of the
Takeover Directive
Ensuring Corporate
Governance and
Transparency
Daniela Weber-Rey
12 May 2006
A Practitioner's Perspective

2. Practical Impact of the Takeover Directive · 12 May 2006 1
The Takeover Directive
"It is necessary to create Community-wide clarity and
transparency in respect of legal issues to be settled
in the event of takeover bids and to prevent patterns of
corporate restructuring within the Community from
being distorted by arbitrary differences in governance
and management cultures"
Preamble of Takeover Directive
Let's look at it…

3. Practical Impact of the Takeover Directive · 12 May 2006 2
Minimum harmonization directive
 Little detail – principle based approach or mere
face-saving compromise?
 Differing implementation in Member States
 Defence measures
 Thresholds
 Time period for determination of price
 Type of securities triggering mandatory bids
 Exclusion of foreign shareholders
 Leaves Member States a wide field of action
 To protect domestic companies?

4. Practical Impact of the Takeover Directive · 12 May 2006 3
 Pre-bid and post-bid defences
 Insider and ad-hoc issues
 Foreign shareholders
 Corporate law / Capital markets
laws congruence
CORPORATE GOVERNANCE
TRANSPARENCY

5. Practical Impact of the Takeover Directive · 12 May 2006 4
Approach regarding takeover defences
 Objective of the Commission proposal
 Open companies to market by outlawing defence
measures against takeover bids
 Creation of a fully integrated market in financial
services – Takeover Directive was one of the priorities
of the FSAP
 Directive solution
 Commission approach as basic principle set forth in
Arts. 9 and 11
 BUT Art. 12 making Arts. 9 and 11 optional

6. Practical Impact of the Takeover Directive · 12 May 2006 5
All optional: opt-in / opt-out system
 Member States may opt-in or out of Art. 9 and 11 RL
 Art. 9: restriction on frustrating action
 Art. 11: breakthrough provisions regarding
unenforceability of restrictions on the transfer of
shares / rights
 If Member State opts out, companies are granted
the reversible right to opt-in
 If company opts in, Member States can allow
company's choice for non- appliance if relevant
principles do not apply to bidder (reciprocity clause)
 Considerable practical issues
 Relevance of Corporate Governance Statements?

7. Practical Impact of the Takeover Directive · 12 May 2006 6
(Five/Ten) Alternatives of one system
Opt-in MS
Art. 9 RL – General duty to stay neutral
Art. 11 RL – Breakthrough of certain takeover barriers
Opt-out MS
Do the provisions of articles 9 and 11 also apply to Bidder?
Provisions
apply
Opt-in of Target No opt-in of Target
Provisions
apply
Provisions do
not apply
Yes No
Provisions apply Provisions must not apply
Reciprocity
- Choice of Target -
①
② ③
④ ⑤

8. Practical Impact of the Takeover Directive · 12 May 2006 7
Transparency vs. Compromise
Opt-in / Opt-out as result of a long debate on neutrality
Agreement on "possible solution" vs. non-attainable
"optimal solution" at EU level
Different approaches in the EU Member States
Lack of transparency
Role of advisor: Promote transparency by
encouraging opt-in of companies? – Transparency
through Corporate Governance!

9. Practical Impact of the Takeover Directive · 12 May 2006 8
Role of Corporate Governance
codes in reaching transparency
A better regulation approach?
CORPORATE GOVERNANCE
TRANSPARENCY

10. Practical Impact of the Takeover Directive · 12 May 2006 9
Corporate Governance Codes
 Certain codes – and in particular the international
and Pan-European codes – recommend
 to give shareholders the right to participate in
decisions concerning fundamental corporate
changes
 to refrain from taking discretionary defensive
measures in case of a takeover

11. Practical Impact of the Takeover Directive · 12 May 2006 10
Role of Corporate Governance Codes in
a face-saving compromise
 Could national Corporate Governance codes include
recommendations for companies
 to opt-in Articles 9 and 11 of the Takeover Directive?
 not to carry out defensive measures without
shareholder consent (pre- and post-bid)?
 The publication of acceptance statements would
lead to legal certainty and transparency
The tendency of acceptance of recommendations is
increasing: in Germany, none of the DAX, MDAX
and SDAX companies examined by the BCCG in
2006 refuses application of all recommendations

12. Practical Impact of the Takeover Directive · 12 May 2006 11
Insider and ad-hoc issues
 Due diligence vs. prohibition of insider trading and
ad-hoc notification duties
 In a friendly takeover the target company may want to
provide bidder with confidential information
 Challenge
 Find a balance between
– Need for transparency
– Compliance with principles against Market Abuse
– Avoidance of ad-hoc notification
 Make use of Business Judgement Rule?

13. Practical Impact of the Takeover Directive · 12 May 2006 12
Treatment of foreign shareholders
 According to the Takeover Directive, all holders of
securities must be afforded equivalent treatment
 Certain jurisdictions have special rules regarding
exclusion of foreign shareholders in certain cases
 Will (May) these exemptions remain after
implementation?
Probably yes
 Basic equality of treatment with exceptions
 Potentially different approaches in different jurisdictions
 Transparency?

14. Practical Impact of the Takeover Directive · 12 May 2006 13
Treatment of foreign shareholders
 Equal treatment vs. unreasonable efforts
 All shareholders are to receive equal treatment and
cannot in general be excluded from the offer
 Exemption possible in certain cases, if effort is seen
as unreasonable
 Germany
 Supervisory Authority does not as a rule grant
exceptions for any jurisdictions, e.g. shareholders
domiciled in USA and Canada will have to be
considered by German offers

15. Practical Impact of the Takeover Directive · 12 May 2006 14
Treatment of foreign shareholders
US has acceptable thresholds
and an efficient system
Exemption must be requested from the local authorities
In Canada exemption only
possible via the regulator
Address of shareholders has to
be determined – can take long!
Long-lasting procedure also if
only 1 shareholder with 1 share!
Issues: Advice on exemption possibilities: Time
constraints resulting from extension of offers to certain
jurisdictions – Trigger ad-hoc notifications – Risk of
extended speculation period

16. Practical Impact of the Takeover Directive · 12 May 2006 15
Corporate law / capital market laws –
congruence?
Auditors valuation principles
(Germany: IDW / capitalized
earnings value/ discounted cash
flow, as a rule)
Market capitalization (MS may
authorise Supervisory Authority
to draw up criteria for price
adjustment)
Determination of compensation
Corporate restructuring
measures (incl. compensation in
connection with squeeze-out)
Takeover bids
(incl. Subsequent squeeze-outs)

17. Practical Impact of the Takeover Directive · 12 May 2006 16
Corporate law / capital market laws –
congruence?
 Corporate law and capital market laws have partially
different approaches
 Different treatment of corporate squeeze-out
(independent of a takeover offer) and capital market
squeeze-out (following a takeover offer)
Different valuation principles
Different procedure
 Law shopping potential
 Major practical issues
 Risk of abuse by activist shareholders

18. Practical Impact of the Takeover Directive · 12 May 2006 17
Which way forward?
 Optional provisions will be differently implemented
Nevertheless
 Member States will have to deal with domestic
issues in such way as to ensure Community-wide
transparency in the event of takeover bids
 Compliance with Corporate Governance principles
will play a major role

19. Practical Impact of the Takeover Directive · 12 May 2006 18
 Corporate Governance is about
transparency in corporate law
 Compliance is about transparency in
the financial and capital markets
 Transparency is the overriding
principle of modern legislation
CORPORATE GOVERNANCE
TRANSPARENCY

20. Annexes
 Status of implementation of
Takeover Directive in certain EU
Member States
 Principles of Corporate
Governance Codes

21. Practical Impact of the Takeover Directive · 12 May 2006 20
Implementation status – examples
COUNTRY EXPECTED IMPLEMENTATION DATE
UK 20 May 2006: Consultation period has ended. Awaiting publication of final rule changes
(expected end-April)
Belgium Will not meet 20 May deadline: No proposed changes have yet been published
France May not meet 20 May deadline: Awaiting publication of consultation documents
(expected shortly)
Italy Will not meet 20 May deadline
Luxembourg 20 May 2006
Germany Do not expect to meet 20 May deadline, but shortly thereafter
Spain Will not meet 20 May deadline
Hungary 20 May 2006
Poland Do not expect to meet 20 May deadline: Polish securities commission believes most of
primary goals already implemented, therefore full implementation is not a priority

22. Practical Impact of the Takeover Directive · 12 May 2006 21
OECD and ICGN
 "Shareholders should have the right to participate in, and to
be sufficiently informed on, decisions concerning fundamental
corporate changes such as (…) extraordinary transactions,
including the transfer of all or substantially all assets, that in
effect result in the sale of the company."
 "Anti-take-over devices should not be used to shield
management and the board from accountability."
 "The corporate governance framework should ensure that
timely and accurate disclosure is made on all material matters
regarding the corporation, including the financial situation,
performance, ownership, and governance of the company."
OECD Principles of Corporate Governance, also adopted by
International Corporate Governance Nettwork

23. Practical Impact of the Takeover Directive · 12 May 2006 22
EASD
 "Shareholders enjoy basic rights, which should be protected.
They have a right to adequate and timely information and
appropriate forms of participation in certain decisions affecting
the company and themselves."
 "Minority shareholders should not unreasonably restrain
corporate action."
 "The market for corporate control should be allowed to
function in an efficient and transparent manner. Takeover
barriers should not shield management, the board and
influential shareholders from accountability."
Corporate Governance Principles and Recommendations of the
European Association of Securities Dealers

24. Practical Impact of the Takeover Directive · 12 May 2006 23
Euroshareholders
 "Major decisions which have a fundamental effect upon the
nature, size, structure and risk profile of the company, and
decisions which have significant consequences for the
position of the shareholder within the corporation, should be
subject to shareholders’ approval or should be decided by the
Annual General Meeting."
 "Anti-takeover defences or other measures which restrict the
influence of shareholders should be avoided."
Euroshareholders Corporate Governance Guidelines

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© Clifford Chance 2006
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Impact of the
Takeover Directive
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