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When the European Parliament debates the European Union’s long-stalled takeover directive this week, the stage will be set for a clash between liberalizers who want to open Europe’s economy, and socialists and economic nationalists who want to protect local companies from takeovers. The dividing lines were drawn in the Parliament’s legal affairs committee over recent weeks, as committee members lined up to make various changes in the measure, which officials of the European Union’s 15 member countries painstakingly negotiated in the three years since the parliament sent an earlier version back for reworking in 1997. The directive, 11 years in the making, was supposed to bring some consistency to Europe’s diverse takeover laws and protect shareholders from both unscrupulous corporate raiders and entrenched managements. After so many years of haggling, however, the watered-down directive contained few specifics by the time EU member states signed off on a revised text last summer and sent it back to parliament. One key provision, which would make hostile takeovers easier, did survive, but the legislative committee has amended it to include a large potential loophole. The provision is a ban on a target’s defensive maneuvers after a bid has been made, unless shareholders approve the move. Like other EU legislation, this provision would not directly apply in any EU country. Instead, each member state must enact its own laws, conforming with the outlines set in Brussels. Other important measures have also been altered in ways that critics, particularly in the U.K., claim make the law inconsistent with other laws and, in some cases, incoherent. Below are several key provisions of the original directive, the proposed amendments and problems they could create. The original text prohibited a target “from completing any action other than seeking alternative bids, which may result in the frustration of the offer,” except with shareholder approval. An amendment would leave a gaping hole in the ban by allowing member states to “adopt guidelines [on] � other defensive measures.” This would open the way for each country to create its own set of permissible takeover defenses. The directive would establish mandatory-bid laws so that any company that acquires control of another must offer to buy all of a target’s shares. The bid must then be at “an equitable price.” Neither “control” nor “equitable price” was defined in the text that went to the parliamentary committee. An amendment approved in the committee would define a 30 percent holding as controlling, which would make the law more uniform. (Most European countries have mandatory bid procedures with thresholds between 25 percent and 33 percent.) But the amendment has a seemingly self-contradictory qualifier: It does not apply if any shareholder holds more than 5 percent. Read literally, there would never be an obligation to launch a bid because anyone reaching the control threshold would come under the 5 percent exception. Another amendment that passed now defines an equitable price as “at least the highest price paid by the offeror on a regulated market … within the last 12 months” before the bid. This could make bids unattractive in cases where a company’s stock price has dropped substantially — the triggering event for many bids. Another amendment would require a buyer to make an all-cash offer if it has acquired more than 5 percent of the stock in the six months before the bid. An alternative amendment would require a cash offer if the bidder had acquired 10 percent in the previous year. Either way, the changes would deter offers where the bidder had acquired some stock prior to the offer but wants to offer stock rather than cash. The text that went to parliament attempted to clarify which country’s law applies to an offer. In general, it would be the law of the country of incorporation if the stock is traded there. But if the stock was traded in another country, jurisdiction was to be split. That could have been problematic. But an amendment seems to make matters even worse. It says that, if the company is not traded where it is incorporated, it would be regulated in the country “whose market represents the greatest equity market capitalization for the company concerned.” Though the language is not clear, that appears to mean the country with the greatest trading volume. For dual-listed companies, that could result in regulatory jurisdiction changing if trading migrates from one market to another, or if unusually heavy trading occurs on one exchange. An amendment was offered to add a squeeze-out right for acquirers. Acquirers would benefit from that, and the right does not exist under German law and is limited in other countries, such as France. But the acquirer would first have to win 95 percent of the stock, a high threshold, before it could force the remaining shareholders to sell out. More problematic, the acquirer would then have to pay in cash “the maximum price paid … in the three months prior” to the offer, even if the original offer had been in stock. Members of parliament from socialist parties have inserted several amendments that would seem to make big changes in the roles of directors and employees. Critics say they were drafted without any appreciation of their consequences for existing corporate law. The original text said that shareholders must have enough time to make an informed decision. Socialists added that the target’s “employees or their representatives” must also have time to make their informed decision, though it is not clear what that implies about their role. A provision stating that the target’s board must “act in the interests of the company as a whole and must not deny [shareholders] the opportunity to decide on the merits of the bid” has been amended to say that the board must also act “in the interests of corporate policy and its continuation, shareholders and staff, and with a view to safeguarding jobs.” It is unclear how the amendments will fare in the full parliament, but several Brussels observers expect the committee’s changes regarding defenses to be adopted. The amendments, reflecting a compromise negotiated among parties of the left and the center-right, was approved by a 17-6 committee vote. If the full parliament approves the amendments, the legislation would go through the “conciliation” process with the European Commission, an executive branch of the EU and its clearinghouse for mergers. But most of the changes will be unacceptable to lawmakers because they would not win support from all EU member states. If no compromise is reached between the Commission and parliament, the Commission would have to start afresh and present a new proposal to parliament next year. In the meantime, there will be no pressure on member states to reform their takeover laws. Copyright (c)2000 TDD, LLC. All rights reserved.

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