BRIEFING

S U M M A RY

J U LY 2 0 0 6

Implementing the Takeover Directive in the EU

W H AT D O E S I T M E A N I N T H E M E M B E R S TAT E S ?

The Takeover Directive was due to be implemented in the EU by 20 May 2006. Only a small number of countries met this deadline and others are in different states of readiness. This briefing is in response to an increasing number of questions as to how the Directive will affect offers for companies in the various major European jurisdictions.

The Takeover Directive was due to be implemented by EU member states by 20 May 2006. Denmark, France, Hungary, Luxembourg and the UK met this deadline. Ireland has since implemented the Directive and Germany is likely to shortly. Other countries have tabled draft legislation. This briefing looks at how the Directive will affect offers for companies in the various major European jurisdictions.

Share for share offers

Issues for all countries

Jurisdiction

As a result of the Takeover Directive the jurisdiction rules are being harmonised: a takeover will be regulated by the competent authority where the target company has its registered office if its shares are admitted to trading on a regulated market in that country. The residence test applied by some countries will go. This means there will no longer be orphan companies that are not regulated (such companies have sometimes built change of control provisions into their constitutional documents to promote investor confidence). There will now be complicated questions of overlapping jurisdiction for a small number of companies that do not have their registered office and shares admitted to trading on a regulated market in the same member state. Bids for such companies will have to be made in compliance with two sets of rules. All countries jurisdiction rules will have to reflect this concept of shared jurisdiction in certain cases.

If a takeover offer involves an offer of shares, the Prospectus Directive will also apply to the transaction. There is an exemption for takeovers but this depends on the offeror preparing a document that is regarded as equivalent to a prospectus by the competent authority in each member state where the offer is made (this could be a significant number if there are shareholders spread around Europe). Because there is no passporting of equivalent documents, offerors may instead choose to prepare a prospectus for a share exchange offer. Provided this is approved by the offerors competent authority, it should be accepted in all the jurisdictions where the offer is made. Translation requirements will depend on the language of the approved prospectus and at least a summary in the local language is likely to be required for all jurisdictions where the offer is being made. Although the passporting regime means there is a streamlined process for share exchange offers, it is important to realise that the takeover rules and requirements of the competent authority of the target company will also apply. Germany, for example, requires that the offer document incorporating information from the prospectus is in German. The Takeover Directive also provides for mutual recognition of offer documents: where the document has been approved by the competent authority (usually the authority in the targets jurisdiction), the document must be recognised in any member state where the target has

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securities admitted to trading on a regulated market. Mutual recognition is likely to be of limited use. It will only be relevant where the target has multiple listings in Europe. Also, some competent authorities do not approve documents such as the Takeover Panel in the UK.
Excluding shareholders in difficult jurisdictions

if it is bid for by a company that does not apply the same articles (Article 12(3) the reciprocity option). So member states have two choices to make: whether to opt in or out of articles 9 and/or 11; and whether to allow reciprocity. The likely approach of certain member states is set out on page 7. But even if countries opt out, there may still be similar (but less strict) restrictions, as will be the case with Germany in relation to Article 9 it will opt out but retain its current restrictions on a board taking frustrating action. However, for some countries that opt out of Article 9, their companies will be able to take frustrating action, for example Luxembourg. The reciprocity issue has caused a certain amount of debate in some member states, for example France and Italy. The reciprocity provisions in the Directive are not entirely clear, for example, can they be applied against non-EU bidders (probably not) and do they only apply if a company applies the relevant article voluntarily rather than because it is required to do so by national law? (France, for example, is taking the latter view.) There are concerns therefore that litigation will be more likely during hostile offers in member states that allow target companies to take reciprocal action over questions of the correct interpretation of the Directive. Companies in countries that are likely to opt out of either article should consider whether there is any benefit in opting back in. This could be the case with Article 9 as it could improve investor sentiment towards the company if it voluntarily applies the restriction on frustrating action. Having said this, as explained above, a number of countries that are likely to opt out of Article 9 (but not all) will continue to have their own national law restrictions on a board taking frustrating action. Most countries are opting out of Article 11 so the Directive will not result directly in anti-takeover structures being neutralised. But again, national law may override such structures. Also, certain implementing measures in the Netherlands will greatly reduce the impact and continued existence of a number of widely used anti-takeover measures. There may be an advantage for a company to opt back in to Article 11 because if it is a bidder, this will prevent a target taking reciprocal action against it (where Article 11 applies to the target and it is

The Directive requires equal treatment of target shareholders. As a result, member states have had to consider whether to continue to allow the exclusion of target shareholders in certain jurisdictions from the offer. Bidders have traditionally done this where the difficult procedural rules involved in extending an offer to a particular jurisdiction compared with the number of shareholders involved meant it was not worthwhile. A bidder would normally take the necessary steps to extend its offer into any jurisdiction where there were significant numbers of shareholders in order to increase the likelihood of it satisfying the acceptance condition and reaching the relevant squeeze out threshold. Because of the Directive it is harder to exclude EEA (European Economic Area) based shareholders from offers. Excluding non-EEA shareholders may also be more difficult. As a result, bidders will need to obtain advice on the implications of not extending an offer into any EEA or non-EEA jurisdiction where there are target shareholders. The Takeover Directive does provide for a system of mutual recognition of offer documents but as discussed above this depends on the relevant takeover regulator approving the offer document, which may not occur in all member states. Also, it will only assist in jurisdictions where the target has its shares admitted to trading on a regulated market.
Approach to optional articles

Member states can choose whether the restriction on frustrating action (Article 9) and/or the unenforceability of restrictions on the transfer of securities and certain voting and other rights (the breakthrough principle in Article 11) will apply to companies that are registered in their territories. If a country decides to opt out of the relevant article it must still grant companies the option (which is reversible) of applying articles 9 and/or 11 if they want. If either or both of the articles apply, member states can allow companies to disapply the relevant article

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permitted by its jurisdiction to take reciprocal action against bidders that are not subject to the same restriction). However, this decision can probably only be made once all member states approaches to reciprocity are known later in 2006.
Transparency provisions

Belgium

All companies subject to the Directive, ie companies with a registered office in an EU jurisdiction and with shares admitted to trading on a regulated market, will have to publish certain additional information in their annual report as a result of Article 10. This includes details of share capital, restrictions on share transfers and shareholder agreements containing restrictions on share transfers. It is likely that a lot of the information that Article 10 requires to be published is already required for publication by existing market rules or corporate governance codes, but probably not in the annual report. Note also the requirement to publish details of significant agreements to which the company is a party that are affected by a change of control following a takeover. Article 10 uses broad terms, such as significant agreements, without detailed definitions. It was hoped that national laws would be drafted more precisely (but, by way of example, the UK and Luxembourg legislation simply repeats Article 10).
Provisions involving member state choice

No draft legislation is available yet. From our analysis of the current rules and contact with the Belgian banking and finance commission, the following changes are likely. The mandatory offer rules are likely to change and include a specific percentage that is deemed to confer control and trigger a mandatory offer (no percentage is specified currently). Also under the current rules, a bid is only triggered if a premium is paid, which is not the case under the Directive. Sell-out rights for dissenting shareholders following an offer for all the targets shares will have to be introduced. It is not yet known whether Belgium will opt in or out of Article 9 on prohibiting frustrating action without shareholder consent and Article 11, the breakthrough provision. Currently, a target board is prevented from taking certain measures without shareholder approval once a bid is announced but there is not a total freezing of the boards powers. In relation to restrictions on transferability of shares, these can be used against a bidder currently subject to certain conditions ie there is currently no breakthrough principle.
France

A number of articles in the Directive leave member states to fix the appropriate threshold or time period. For example, the mandatory bid rule leaves member states to fix the appropriate control threshold and the pre-offer period, during which acquisitions of shares will be taken into account when determining the minimum price for the mandatory offer. It is likely that most countries will retain their existing thresholds for mandatory offers and squeeze out. See further the table on page 7.

Country analysis
A number of countries will take the opportunity to make other changes to deal with recent issues relating to takeover practice while amending their rules to reflect the Directive.

A new law on takeover offers came into effect in April 2006 to implement the Directive (additional changes to the takeover regulations of the French securities regulator (AMF) will be required to achieve full implementation). The new law, which also introduced two defence tactics regarding the issue of warrants, was finalised in the political context of hostility to unsolicited bids for French companies. The legislation involves a number of other changes to how public takeovers are conducted in France. The main changes are as follows. There will be a minimum price requirement for mandatory bids this is equal to the highest price paid for the same securities by the bidder in the 12 months before the launch of the offer. There will continue to be a restriction on frustrating action without shareholder approval and the ability of shareholders to approve frustrating action will be limited by AMF regulations. However, a new form of bid defence is now available involving the issue of free

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warrants to existing shareholders in the event of an offer. The shareholders would then be entitled to subscribe for new shares on preferential terms. Shareholders could approve the issue of such warrants during an offer or they could be issued in accordance with a standing authority in the event of an offer to which reciprocity applies (see further below). France has opted out of Article 11 but two provisions of Article 11 that were already AMF policy are being implemented (breakthrough of transfer restrictions in a companys by-laws during an offer and overriding of caps on voting rights in a companys by-laws at the first shareholders meeting following a successful offer). French companies will be able to adopt the other provisions on a voluntary basis. Reciprocity is not permitted in respect of Article 11. France is allowing reciprocity in respect of Article 9 to release a French company from the restriction on taking frustrating action where a bid has been launched for it by entities which do not, or whose parent companies or concert parties do not, apply the French restrictions on frustrating action or equivalent measures. France is adopting a broad interpretation of reciprocity and targets will be able to take reciprocal action in the event of a bid by any bidder, including unlisted and non-EU companies. In the case of multiple bidders and concert parties, it is sufficient for one of the parties not to apply Article 9 (or equivalent measures) for the target company to be released from the restrictions against all bidders. There is a new category of squeeze out procedure (retrait obligatoire) that may be used within three months of the end of the offer period at the offer price if the bidder holds at least 95 per cent of the capital and voting rights of the target. Unlike the original squeeze out procedure, this follow-on squeeze out offer will not have to be preceded by a buy-out offer (offre publique de retrait). The original procedure also remains in place. Following prolonged market speculation of an imminent bid by PepsiCo for Danone over the summer of 2005, the AMF has been given the power to require a person who it reasonably believes is preparing a public takeover to make their intentions known to the AMF, which will then make the

information public. It will also be able to block an offer for a certain period if a person has said that they do not intend to launch an offer. The closing stages of negotiations on the new law focused on defence tactics the shareholder warrants as referred to above and also clarification of how existing provisions of French law could be used to issue equity-linked securities to a white knight. A senate report published in February 2006 recommended that French companies take advantage of existing provisions of French law allowing shareholders to approve an issue of warrants to a defined category of investors with the board being authorised to select the appropriate investor. The directors would then be able to use this power during a hostile offer to issue such white knight warrants. Shareholders would either have to approve the issue during the offer or in advance but in the latter case (as with the shareholder warrants described above) they could only be issued during an offer to which reciprocity applies. The new law includes an oblique reference to these warrants. As a precaution, it is likely that French companies will include the relevant authorities in this years round of AGMs.
Germany

Draft legislation was published in February 2006 and is likely to come into force by the end of July 2006. The following changes are likely to be made to the takeover rules. Germany will opt out of Articles 9 and 11. However, German companies may voluntarily opt in to both. Also, reciprocal action by target companies will be permitted regardless of whether the bidder is EEAresident or not. The existing rules on prohibition of frustrating action will remain in place. Even if companies decide to opt in to Article 11, voting right restrictions relating to preference shares will not be affected because the breakthrough provisions do not apply to shares where the restrictions on voting rights are compensated for by a preference dividend. The minimum price rules applicable in the case of takeovers and mandatory offers will continue to go beyond what is required by the Takeover Directive. The minimum price must not be lower than the

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average share price during the last three months prior to the offer announcement and the highest price paid by the bidder during the six months before the offer launch. Germany will retain the wider scope of its current mandatory offer rule: a bid obligation will be triggered if shareholders holding at least 30 per cent of the companys voting rights are involved in concert party arrangements even if these are not linked to the acquisition of shares in the target company. A new takeover-related squeeze out regime will be introduced alongside the existing squeeze out provisions. A shareholders resolution will not be needed in the case of a takeover-related squeeze out, which should eliminate potential problems as a result of shareholder action. BaFin, the German financial supervisory authority, will be given additional rights of supervision.
Italy

The Netherlands

A draft proposal to implement the Directive was published in March 2005 with a subsequent bill issued in December 2005 that was then submitted to the lower house of parliament in January 2006. The Dutch government is expected to publish further implementing decrees shortly. Implementation is expected in January 2007. The main changes to Dutch takeover rules are as follows. A mandatory offer rule will be introduced for the first time. The obligation will arise when a person, or persons acting in concert, obtain predominant control that is defined as being able to cast at least 30 per cent of the votes at a shareholder meeting. The Netherlands will opt out of Article 9 (the restriction on frustrating action). However, a companys articles may be drafted so as to provide that, following the first public announcement of a public offer, the company may not take frustrating action without shareholder approval. Shareholders may decide, however, that this restriction should not apply if the bidder is itself not subject to a similar restriction. The Netherlands will also opt out of Article 11, although Dutch companies will be able to apply this provision on a voluntary basis. In any event Dutch law will be amended to include a mechanism to break through anti-takeover measures. A shareholder that has, as a result of a public offer, acquired at least 75 per cent of the issued share capital (excluding shares issued pursuant to the employment of any anti-takeover measure) will be able to make use of this mechanism. The Enterprise Chamber will have the power to impose certain sanctions if a person is required to make an offer but fails to do so, including ordering an offer to be made.
Spain

The timing of draft legislation is now unclear and no official statement has been made as to how Italy will implement the Directive. From press reports there appears to be a difference of opinion regarding reciprocity between the ministry of finance and Italian regulator Consob. The current Italian legislation is similar in many respects to the provisions of the Directive so few material changes of substance are expected. The chances are likely to be as follows. The jurisdiction rules will have to be aligned with those in the Directive. The criteria for the calculation of the equitable price on a mandatory bid will need to change this is currently the arithmetic mean of the average market price of the shares over the previous 12 months and the highest price paid by the bidder for any shares in the same period. The reference to the average market price will have to be removed. A new sell-out right will have to be introduced. The squeeze out threshold of 98 per cent will have to be reduced Consob would prefer this to be the highest figure permitted by the Directive (95 per cent) but there is some debate as to whether it should be lowered to 90 per cent.

A draft bill has recently been published in Spain. Implementation is likely to be in two stages with proposed amendments to the Spanish securities market act first, followed by amendments to the takeover bid regulations. The following changes are likely.

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The jurisdiction rules will have to be aligned with those of the Directive. The current restriction on frustrating action in Spain is stricter than the Directive (the current Spanish rules do not contemplate that shareholders can approve frustrating action). The draft legislation has opted in to Article 9 and so includes the possibility of shareholder approval for frustrating action. As expected the legislation opts out of Article 11. Spain will introduce minority squeeze out and sellout provisions for the first time.
UK

Information on bids also has to be given to employees (or their representatives). Also, employees of the target company are given the right to have their opinion on the bid appended to the defence circular. The definition of frustrating action in Rule 21 has been widened to match the scope in Article 9 (although this is not a material change in substance because of the old General Principle 7). There will be no prohibition on the completion of pre-existing contractual arrangements or other obligations because this is permitted by Article 9.3, although Panel consent will be needed to proceed without shareholders consent.

Legislation to implement the Directive came into force on 20 May 2006, as well as changes to the Takeover Code. The main changes were as follows. There were few material changes of substance to the Code, although the six Directive general principles replaced the 10 general principles (there is no difference of substance between the two). The Takeover Panel was given additional powers to demand documents and information, to order compensation to be paid in the case of breaches of certain Code rules and to apply to the UK courts to enforce its rulings. The Panels sanctions for non-compliance with the Code remain broadly the same. However, there is a new criminal offence for a bidder to publish an offer document if it knew that it did not comply with, or was reckless as to whether it complied with, certain Directive-based content requirements (as set out in the Code), and it failed to take reasonable steps to secure that it did comply. The offence also covers any director, officer, member or employee of the bidder who causes the offer document to be published, and applies in the same way to the directors and officers of the target in relation to defence circulars. The UK has opted in to Article 9 and out of Article 11. Reciprocal action by target companies is not allowed. The definition of persons acting in concert has been widened because the Directive definition does not require active co-operation, is not limited to parties co-operating through the acquisition of shares, includes persons who co-operate with the target company to frustrate a bid and deems all affiliated persons to be acting in concert.

For further information please contact

E

Julian Francis
T + 44 20 7832 7184

julian.francis@freshfields.com

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This material is for general information only and is not intended to provide legal advice.
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Approach of selected member states to optional provisions

Country Legislation available/in force? Likely mandatory bid threshold (Article 5(3)) Likely period relevant for minimum price in mandatory bid (Article 5(4)) Likely approach to Article 9 (opt in/out?) Likely approach to Article 11 (opt in/out?) Reciprocity allowed? Likely threshold for squeeze out/sell out (Articles15(2)/16(2))

Austria

Yes draft bill issued in January 2006

Currently 30% of voting rights Unknown no percentage specified currently 1/3 of share capital or voting rights

(12 months?)

(In?)

(Out?)

Unknown

Unknown

Belgium

No

Currently 12 months

(Out?)

(Out?)

(Yes?)

Unknown

France

New law came into force in April 2006 Yes amended legislation likely to come into force by the end of July 2006

12 months

In

Out (partly)

Only Article 9

95% of capital and voting rights

Germany

30% of voting rights

6 months (average share price during 3 months before announcement also relevant)

Out

Out

Yes

95% of voting shares and voting rights

Italy

No

Currently 30%

Currently 12 months

In but discussions on reciprocity

(In?)

Yes under discussion

95%

Luxembourg

New law came into force on 24 May 2006

33.3% of voting rights

12 months

Out

Out

Yes

95% of capital carrying voting rights and 95% of voting rights

The Netherlands

Yes draft bill issued in December 2005 (subject to change). Expected implementation date: January 2007

30% of voting rights (30 day grace period to reduce stake below threshold)

12 months

Out

Out

Yes (except for one provision very similar to Article 11(4))

95% of shares and voting rights

Spain

Yes draft bill issued in June 2006 Legislation came into force on 20 May 2006

30% of voting rights

6 months? (Not in draft bill will be covered in more detailed decree) 12 months

In

Out

Only Article 9

90% of voting rights

UK

30% of voting rights

In

Out

No

90% by value and 90% of voting rights

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Implementing the Takeover Directive in the EU