Introduction
The Court's Decision
The Takeover Code
The EU Directive on Takeovers
Outlook
The question whether or not a target company's management board is entitled to take defensive measures against a hostile tender offer has been discussed in German legal literature for many years, but without common ground being reached. In the absence of mandatory takeover regulations, the scope of views ranges from comprehensive prohibition of defensive measures on the one side to complete freedom of such measures on the other side. Nevertheless, a prevailing view has developed according to which the target company's management board is subject to an obligation of neutrality during the term of the hostile tender offer. This neutrality obligation is said to derive from the principle of equal treatment of all shareholders laid down in Section 53a of the Stock Corporation Act and from the circumstance that the management board lacks the entitlement to influence the composition of the shareholders' circle.
In December 1999 and for the first time, a German court had to deal explicitly with the admissibility of defensive measures against a hostile tender offer. The proceedings before the District Court of Düsseldorf were instituted by three shareholders of Mannesmann AG. They applied for an injunction to prohibit the company's management board from taking any measures that would run counter to the interest of the shareholders of Mannesmann in taking advantage of the offer made by Vodafone AirTouch plc.
The court rejected the granting of the injunction. It held that only in very exceptional circumstances are shareholders entitled to bring a claim against the management board requiring it to refrain from taking certain management measures. Such circumstances had clearly not been given in the present case. The measures taken by the management board of Mannesmann with a view to frustrating the hostile offer made by Vodafone (eg, the enumerable road shows, advertising campaigns, public statements) constituted ordinary management measures within the meaning of Section 76 of the Stock Corporation Act. Moreover, the target company's management board was free to choose the method of discharging its information obligations towards the shareholders.
For the sake of argument the court referred to and took into consideration the Takeover Code of the Exchange Expert Commission (Takeover Code) which, as an instrument of voluntary self-regulation, does not have the force of law and is not capable of creating rights and obligations enforceable in court. Since both Mannesmann and Vodafone have submitted to the applicability of the Takeover Code, the admissibility of the measures taken by Mannesmann's management board under the Takeover Code is worth being examined.
In accordance with the prevailing view in German legal literature, the Takeover Code provides for a neutrality obligation of the target company's management board during the term of the hostile tender offer. Article 19 of the Takeover Code stipulates that following publication of the tender offer and until publication of the outcome of such offer, the target company's management board must not take any measures that would run counter to the interest of the shareholders in taking advantage of the tender offer, unless those measures have been authorized by the general assembly in the event of a hostile tender offer situation. The measures mentioned explicitly in this provision include, among others, resolutions as to:
- the issuance of new shares;
- a substantial change in the assets or liabilities of the target company; and
- the conclusion of agreements outside the scope of ordinary business activities.
From this list of frustrating measures, it clearly derives that ordinary management measures fall outside the scope of Article 19 and therefore are not subject to the neutrality obligation. Furthermore, the Takeover Code does not impose on the target company's management board an absolute 'stand-still' obligation. This can be seen in Article 18 which provides that the target's management board is obliged to issue a substantiated comment on the hostile offer.
It follows that the measures taken by the management board of Mannesmann were admissible under the Takeover Code since they constituted ordinary management measures and, as such, were not subject to the neutrality obligation laid down in Article 19. (A different view might have been taken if, during the term of the hostile tender offer, Mannesmann had taken up a participation in AOL Europe or if the deal with Vivendi had succeeded.)
In February 1999 the Exchange Expert Commission declared that the efforts to establish a system of voluntary self-regulation had failed and it recommended mandatory takeover regulations to be put in place. The main reason for this conclusion was the unsatisfactory number of accessions to the Takeover Code and therefore the absence of a 'level playing field' for takeovers. As of November 28 1998 more than 50% of the companies listed on a German exchange had not acceded to the Takeover Code, including 32 of the DAX-100 and four of the DAX-30 (BMW, Hoechst, VIAG and VW). Other weaknesses of the Takeover Code that the commission identified included the restrictions on its powers of enquiry and its lack of authority to impose effective sanctions, such as fines.
The Federal Ministry of Finance has begun drafting a Takeover Act that is likely to be introduced within the framework of the Fourth Act for the Promotion of the Financial Market. This Takeover Act will also serve as a transformation vehicle with respect to the Thirteenth EU Directive on Takeovers which is about to be enacted. Against this background, the days of the Takeover Code seem to be numbered.
The draft of the EU directive, as presented by the European Commission in November 1997, does not contain strict and elaborated takeover regulations. Rather, it provides the framework for more specific legislation which, in the end, may differ slightly between member states.
Like the Takeover Code, the EU directive subjects the target company's management board to an obligation of neutrality during the term of the hostile tender offer. Article 8 of the directive provides that following receipt of the tender offer notification and until revelation of the outcome of such offer, the target company's management board must not take any measures which would thwart the tender offer, unless those measures have been authorized by the general assembly during the term of the tender offer. The issuance of new shares is explicitly prohibited if such issuance is capable of frustrating permanently the offeror's attempt to gain control over the target company.
Since Article 8 does not regulate ordinary management measures, the target company's management board may take any such measures during a hostile tender offer without violating its neutrality obligation.
In June 1999 the EU directive was discussed by the European Council of Ministers which reached agreement on its final wording. Even though the final wording of the directive has not yet been officially published, it is rumoured that two exceptions to the neutrality obligation have been inserted. The first allows the target company's management board to search for a better and more liked offer from a 'white knight'. The second allows the management board to issue new shares during the term of the tender offer provided that the issue of shares has been authorized by the general assembly within the 18 months preceding the commencement of the tender offer.
Even though Mannesmann and Vodafone managed to reach an amicable solution to their tender offer battle, the divergences in the evaluation of the admissibility of measures taken by Mannesmann's management board show that the introduction of mandatory and elaborated takeover regulations in Germany is desirable.
In accordance with the decision of the District Court of Düsseldorf, takeover regulations should not provide for an absolute 'stand-still' obligation, but should instead allow ordinary management measures to be taken in a hostile tender offer situation. Admittedly, the differentiation between ordinary management measures and defensive measures may be difficult in some cases.
In any event, the target company's management board must not be deprived of the right to issue comments on the tender offer since, to do otherwise, would make for a situation where shareholders would receive one-sided information - and this cannot be in their best interest.
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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