Revision of the Takeover directive Eddy Wymeersch 1

Overview Part 1. Is a revision needed ? Part 2. Two types of takeovers Part 3 Anti-takeover defences 2

Part 1. Is a revision needed ? Filling blanks and updating needed 7 years after adoption, 5 years after entry into force See role of implementing instruments In-depth review ? 3

What has changed? Markets interconnection, multiple trading venues; MTF HFT, Hedge Funds, Admission to listing is obsolete Hidden ownership issues ESMA: new rulemaking mechanisms Company Law changes 4

Corporate governance was ignored in TOD Increase of transparency Shareholder Rights Directive: voting Role of independent directors Efficient Market Hypothesis is ? Role of private equity Role of institutional investors: Stewardship, role of block holders LT perspective v. HFT; call for LT perspective 5

Part 2. Two types of takeovers Voluntary Standard commercial transaction Allows for price maximisation Disclosure mandated and supervised Some rules on market conduct TOD: Mainly defensive mechanisms / neutrality/ entrenchment Often consensual: block holders tender in voluntary bid, no price commitment 6

Mandatory bid Thresholds: 25 to 50+ Price: max pre-bid acquisition or average price Usually after private block transfer Includes concert action Includes market acquisitions No pre-existing control but creates control Widely accepted rule, part of market pricing 7

Effects of mandatory bids The mandatory bid rule creates negative externalities Is it justified for market acquisitions ? No premium Are blocks not tendered in voluntary bid? Or are subject of transfer commitments/options ? Bidders prefer voluntary bids: cheaper ? More flexible, but risk of higher bids Hidden Ownership; to be made transparent 8

Effects of mandatory bids Freezes control blocks? Increases overall price for bidder Reduces willingness to bid Effect on future investment Does one need all shares to exercise control and turn around the company? Often bid, large response + squeeze out Makes bids uncontestable: Upward effect on price 9

control transactions Why distrust for control transactions From control of selling blockholder to control by buying blockholder: what is the change? Control or stable shareholdership is useful as the basis for long term investment Issue is mainly private benefits of control 10

Private benefits of control Is essentially a question of conflicts of interest-related party transaction These exist throughout the life of the company Are not always dealt with on an ongoing basis Why sanction them in case of transfer of control? Need to have a robust regulation on CoI/RPT Definitions are difficult; group context Transparency, expert opinion, decision by board, AGM (ex conflicted parties) 11

Directive Revision 1. Robust rules on conflicts of interest To be applied on a permanent basis 2. Exclude market acquisitions from the Rule 3. If no private benefits, exempt the private transfer (art.4.5) 4. Declare pre-bid transfer commitments void Make bids contestable 5. = Restrict the scope to the rule 12

Part 2 Institutional change Multistate transactions – art. 4 State of incorporation; who is competent authority? State of admission to listing; obsolete concept Trading in numerous venues, outside control of issuer Most significant trading venue should have lead responsibility, other venues to be heard 13

ESMA Cooperation of national authorities ESMA regulation Allows for supervisory colleges: cooperation, common decision making Mediation in case of conflicts: binding Rulemaking; Regulatory Technical Standards On proposal by ESMA, endorsed by Commission Oversight by Council/Parliament: revoke delegation or call back 14

ESMA Guidance and recommendations Appropriate decision making procedures for non-ESMA members 15

Directive Revision ESMAs formal competence for the TOD 2 Rulemaking for present blanks, e.g. art 13, squeeze out and sell out Coordination of national rules and practices Guidance and recommendations Affirm competence for all markets concerned College of supervisors Provide for mediation competence 16

Part 3 Anti-takeover defences Should we review this matter? Compromise was not real; most states used art.12 Neutrality has better survived Breakthrough was nice idea, but not practised Why oppose defences? Entrenchment of the board TOB as disciplining instrument Entrenchment of the block-holder Defences can be used to defend the shareholders See US law 17

Disciplining instruments Difficult subject: see remuneration debate Disciplining Techniques have improved Independent board members Stronger role for shareholders Stewardship and engagement Wider use of voting: shareholders rights directive, record date, electronic voting, Activist investors Shareholder committees 18

Disciplining The unsolicited Takeover is the strongest, most brutal, and most expensive, but also the most risky disciplining instrument Activism is useful but often short time minded Engagement should be more useful in a long term perspective 19

Reaffirm the role of the AGM A takeover is a form of decision making Whether to keep the company as it is, or change it, usually radically It is based on individual decisions by each shareholder There is no company strategy or view that is developed; it is usually the board versus the bidder, the shareholder not being involved, but deciding 20

Reaffirm the role of the AGM Why not allow for defensive mechanisms but make them subject to a vote in the AGM The individual decision replaced by a collective one; maintain the defences or not At least some debate about the future of the company, in full clarity Majority: the usual supermajority, bringing Takeover in line with merger decisions and rules on significant disposals 21