Duty of Neutrality
Result of the Conciliation Procedure
Germany's Response

Rejection of Takeover Directive in Parliament


The 12-year debate on a revised EU Takeover Directive seemed to have ended on June 5 2001 with a rejection of the German government's proposal to allow member states broad leeway with regard to defensive measures in takeover battles. The German proposal had been introduced into the regulatory process at a very late stage and, according to commentators, took account of the reservations that German politicians, trade associations and a section of German industry held towards the duty of neutrality, which the proposed EU directive sought to establish. The compromise reached in the discussions envisaged a reasonably long implementation period for the directive - five years with regard to the duty of neutrality. The joint text approved by the Conciliation Committee required approval by the European Parliament and Council. This was expected to take place in July 2001. Instead, on July 4 the European Parliament rejected the text previously agreed by the delegations of the Council and the Parliament in the Conciliation Committee, and thereby frustrated the final attempt for a EU Takeover Directive.


Since the so-called Pennington Draft for an EU Takeover Directive in 1974, there have been several attempts to create a pan-European common regulatory framework for corporate takeovers. The first draft did not find approval within the European Commission itself, and a further draft in 1989 was rejected by the European Council. In early 1996 the commission published a third draft. This was shorter than its predecessors and took the form of a framework directive, which set out the basic aspects of a regulatory framework to be complemented by each individual member state. This draft was approved by the Social Committee in July 1996 and, with amendments, by the European Parliament in June 1997. The commission took account of most of the European Parliament's proposed amendments and published a revised draft in November 1997. Having discussed the commission's proposal, the European Council then published a common position on the draft in June 2000, which was discussed in the European Parliament. In December 2000 the Parliament proposed 15 amendments to the draft and the draft became subject to the so-called 'conciliation procedure'. Under this procedure the Conciliation Committee, which is composed of representatives from each member state and delegates from the European Parliament, seeks to reach a compromise on the amendments required by the European Parliament.

The key issue during the conciliation procedure was the exact nature of the duty of neutrality for the board of a target company, which the EU directive aimed to establish.

Duty of Neutrality

The proposed directive sought to protect the interests of holders of securities in companies governed by the law of an EU member state when these companies are subject to a takeover bid or to a change of control and their securities are admitted to trading on a stock market. But why is a regulatory framework necessary? First, the theory of the market for corporate control argues that the threat of becoming a takeover bid target will enhance the efficiency of a company's management, since efficient company management leads to higher stock prices, which in turn makes takeover bids unlikely. Takeovers are thus a necessary precondition for competition between corporate managements. In the end, it is the shareholder who will benefit from the efficient management of a company. In order for the market for corporate control to work effectively, it is argued, clear and expedient rules for takeovers are necessary. Further, to create a level playing field, pan-European common principles are required.

At the core of the regulation of takeover activity lies the question of which defensive measures a target company should be permitted to take in order to frustrate a takeover bid.

The German approach
The Federal Ministry of Finance released an official draft of the Securities Purchase and Takeover Act on March 12 2001. Section 33 included a specific provision on the duty of neutrality and permitted defensive measures on the part of the target company. Pursuant to this provision, the management board and supervisory board of the target company were, in principle, under a duty of neutrality - that is, they were required to abstain from measures which could prevent the success of a takeover bid in the period between the launching of the bid and the end of the offer period. The draft act expressly condemned as illegal the issuance of shares, the acquisition of its own shares, and any measure which would lead to a significant increase or decrease in the target company's assets or liabilities.

However, the target company was not left without defence. The draft act expressly permitted:

  • the search for a 'white knight';

  • the issuance of shares based on a shareholders' vote that took place within the 18 months preceding the bid;

  • measures in the ordinary course of business;

  • the fulfilment of contractual obligations which preceded the takeover bid; and

  • defensive measures taken on the basis of a shareholders' vote in the course of the takeover procedure.

In spite of these permitted defensive measures the provision establishing a duty of neutrality for the board of the target company was criticized as too far-reaching, especially by industry representatives and politicians. This led the German government to change its position.

With a hint at the wider scope for defensive measures in other jurisdictions (eg, in the United States under the 'qualified business judgement' rule) and statutory hurdles for takeovers in some EU member states (eg, in the form of 'golden shares'), the German government now intends to allow for defensive measures that are taken on the basis of shareholder approval prior to the publication of a takeover bid. This means, in effect, that the shareholders' assembly may empower the board in advance to take defensive measures in the case of an attempted takeover. On July 11 2001 the German government published a revised draft Takeover Act which in Section 33 allows for the advance shareholder approval of defensive measures. Such approval would have to state expressly the allowed defensive measures, requires a 75% vote of the capital present at the general meeting and could last for up to 18 months. Subsequently, the management board need only ask for the supervisory board's approval to adopt a defensive measure once a takeover bid has been launched.

Since EU member states are legally bound to implement an EU directive into national law, it was clear that the German government would seek to ensure that its new position was recognized in the provisions of the draft directive in the course of the conciliation procedure.

Result of the Conciliation Procedure

Part of the European Parliament was in favour of the German position. However, the Parliament delegation in the Conciliation Committee voted against the German proposal, thus approving the position adopted by the other 14 member states not to allow advance shareholder approval of defensive measures.

The Conciliation Committee took account of the German government's concerns with regard to an uneven playing field. It requested the European Commission to provide an expert report by March 2002 which would assess competitive distortions resulting from limitations on voting rights, golden shares and similar measures that may deter takeover bids which are in force within the member states.

Germany's Response

Shortly after the Brussels compromise, the German government declared that it did not intend to change its plans regarding advance shareholder approval of defensive measures in order to bring the proposed German Takeover Act into line with the forthcoming directive.

The German government argued that its deviation from the draft directive would secure a level playing field until the implementation into national law of the EU Takeover Directive leads to pan-European harmonization.

However, it was questionable whether the German government was allowed under the Treaty of Rome to adopt a new law that clearly contravenes a forthcoming directive, even if the directive's implementation period has not yet expired. This question has now become obsolete.
Rejection of the Takeover Directive in Parliament

In the plenary session of the European Parliament on July 4 2001, the Parliament rejected the text of the draft EU Takeover Directive which had previously been agreed by the delegations of the Parliament and the Council in the Conciliation Committee. Two hundred and seventy three members of the European Parliament voted in favour of and 273 against the proposed directive. With only one more vote needed for approval, the result could not have been closer.

Shortly after the rejection the commission expressed its regrets, calling the rejection a setback to the European Union's financial services action plan for an integrated European capital market by 2005.

It is thus likely that the German government's goal to enact a German Takeover Act which permits defensive measures on the basis of advance shareholder approval by early 2002 can be achieved.

From a business standpoint, it is doubtful whether the envisaged German regulation of defensive measures is in the interest of the capital markets, investors and shareholders. The capital markets will likely recognize the company boards that may take defensive measures on the basis of advance shareholder approval, which will probably be reflected in their share prices on the stock exchanges. The intention of the German takeover act - to enhance competition between corporate managements in the interests of shareholders - has thus been traded off against the protection of German companies against foreign takeover bids.

For further information on this topic please contact Oleg de Lousanoff at Hengeler Mueller by telephone (+49 69 17 09 50) or by fax (+49 69 72 57 73) or by e-mail ([email protected]).
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