Key Notes

Community Directive on Takeover Bids

The Community directive on takeover bids seemed to be a never-ending saga. It started on 19 January 1989 with the Commission's first proposal. This was an ambitious proposal aimed at completing the internal market as regards control of companies. It has negotiated an obstacle course, with a constant alternation between far-reaching proposals unacceptable for some (the Member States and the EU Council of Ministers) and minimum compromises unacceptable for others (the European Parliament). The decisive moment in this never-ending saga was 4 July 2001, when the European Parliament rejected the conciliation committee's joint text. The compromise that had been reached at that stage did not create an internal market in company control (level playing field) since, although it granted decision-making power on takeover bids to the meeting of shareholders and ruled out interventions by the board to frustrate the takeover bid (passivity rule), it left untouched all the defensive measures allowed by the Member States: social and quasi-social pacts, restrictions on voting rights and multiple voting rights, private golden shares and non-voting trusts (pre-bid defence measures). The compromise would have been damaging for Italy: with legislation particularly favourable to takeover bids, it would have been exposed to incursions by foreign 'raiders' without any guarantee of reciprocal activity. Approving the compromise would also have prevented Italy from bringing in more restrictive measures, as the Court of Justice has confirmed in the principles set out in the case law in connection with the conduct of Member States following the approval of a directive.

After the Commission had gathered suggestions from a group of high-level experts – including our own Guido Rossi – it drew up a new proposal, put forward in October 2002, which seemed much more promising. As well as maintaining the passivity rule (Article 9) it sought to meet the objectives set by the European Parliament and by the experts which Parliament had interviewed, to introduce the neutralisation of certain pre-bid defensive measures (Article 11), and to achieve a balance between risk capital and voting rights. However, the instruments which were in fact the most dangerous, such as trusts and multiple voting rights, remained outside the scope of this neutralisation. Parliament, which had also had recourse to the opinions of independent experts (among them the Italian Marco Lamandini) aimed to tighten up the Commission's proposal by introducing the neutralisation of multiple voting rights. This would bring the directive very close to the Italian model.

This solution obtained Commission support, and it appeared that the requisite majority would be achieved in Council also. Suddenly, however, progress became complicated. On the one hand, the Scandinavian countries were opposed to the neutralisation of multiple voting rights, wishing to safeguard their 'family capitalism' model, under which control is based on multiple voting. On the other hand, Germany was going through an identity crisis under conflicting pressure to reform (from the industrial and financial community) and stronger conservative pressure (from the unions) aimed at preserving the codetermination model of corporate governance based on substantial employee representation on companies' supervisory boards.

The United Kingdom, which has always accepted the directive slightly reluctantly, attached as it is to its system of self-regulation (the City Code on Takeovers and Mergers), was unhappy about a very inflexible proposal for a directive on temporary employment. A trade-off quickly emerged: a minimalist Takeover Bids Directive which did not interfere with Germany's defensive measures, in exchange for a directive on temporary employment which was favourable to the United Kingdom.

The losers would be Italy and the other countries with systems without protection. In those dire circumstances, our government and some Italian Members of the European Parliament dug their heels in both in Council (as part of a blocking minority including France, Portugal and Spain) and in Parliament (supporting the rapporteur Lehne, who was under pressure from Germany and others), and prevented a negative outcome.

This brought us to an impasse, however: no proposal succeeded in obtaining majority support. But then, last June, Portugal pulled a compromise out of the hat: in practice, this was a proposal giving the Member States and listed companies the option to choose between the model of the directive with the passivity rule and neutralisation of defensive measures (type-A company) or to maintain defensive measures (type-B company). This went together with a requirement to ensure maximum transparency of the rules governing companies. To put all operators on an equal footing, there were provisions to enable type-A companies to decide not to expose themselves to attack by type-B companies. The proposed solution is not without merit: it indicates the ideal solution, type-A (the benchmark), and establishes reciprocity. The neutralisation of defensive measures, moreover, lays down a first uniform rule of European company law, at a time when the proposal for a fifth directive on company law is still a distant prospect.

Article 11a, which allows these options, is essentially a derogation from the standard system in Article 11. These options may be removed once the market, rewarding type-A companies, has created the necessary conditions. They are a temporary expedient which can be discarded when no longer required, like the crutches which a patient discards once his leg has healed. Not only that: with the current system, listed companies subject to legal systems which do not include the passivity rule and neutralisation may opt for competition to apply, which they would not be able to do without the directive. Large companies such as the German firm Siemens have already expressed considerable interest in the opportunity now being offered to them.

Also, the maximum transparency with regard to company governance and internal rules laid down both by Article 10 of the proposal for a Takeover Bids Directive and by the parallel proposal for a directive on the transparency of quoted companies, which is also currently under discussion at Parliament and at the Council, ensures that type-A companies, those that accept the whole of Article 9 and 11, the 'stars', the true European companies, are clearly identifiable. This will enable the market to reward them. Institutional investors would in fact have to explain to their clients why they are investing in a type-B company which may not be the subject of a takeover bid, instead of a type-A company which may be.

Finally, the compromise, by making provision for partial preventive takeover bids, ensures that Italy does not have to substantially change its own legislation and so risk exposing our companies to unfair competition from foreign companies.

In practice, the system makes it possible to check whether the market, by rewarding the benchmark, succeeds in making the rules evolve toward the better option. In short, the market is being put to the efficiency test under the best conditions: maximum transparency and no risk for those which opt (or, like Italy, have already opted) for the virtuous solution. Around the Portuguese proposal, enriched by Italian creativity, Minister Buttiglione has patiently and flexibly woven a safety net. He was so successful in this endeavour that Germany supported the compromise, and even the Scandinavian countries did not raise any insurmountable obstacles. All that remained was the European Commission, which, in the face of a general agreement between the Council and Parliament, seemed disposed to oppose it. It is hard to understand this position, given that experience has already shown the political impossibility of achieving an even more liberal solution. This opposition therefore threatens to deprive Europe for yet more long years of an essential directive. The absence of real reaso.s makes this opposition seem like a fit of pique towards Parliament, which rejected the joint text in July 2001. The advantages compared to the Commission's original proposal are evident, even if the system is complicated.

The solution we are adopting is the only one possible at this stage which is acceptable to the Member States and the entrenched economic groups behind them. After having attempted to achieve the maximum, we are contenting ourselves with a directive which, while uninspiring, is useful. Besides, the internal market, and also the whole process of European integration, are the result of incremental change, of one step which requires the next. For this reason, the directive will be reviewed after five years with the aim of harmonising the rules and thus overcoming the dual A and B system. If the market is efficient, the crutch which the options represent may be thrown away. So, despite the claims of certain commentators who write about European matters on a superficial level, without having the patience or humility to study them in depth and to learn, the consistent efforts made by the Italian presidency deserve support. Even from Mr Prodi, who would thereby promote European integration and at the same time show that he had no intention of needlessly hampering the efforts of the Italian government in the European arena.

The final approval of the directive on first reading by Parliament and the Council in December 2003 was nothing short of a miracle, due to the patient work of the European Parliament's rapporteur, Klaus-Heiner Lehne, and the Italian Presidency. This success is a feather in the EPP-ED's cap and marks a further significant step towards the completion of the internal market.