The Future of Corporate Takeovers in Europe ECGI Session at the Federation of European Securities Exchanges' 6th European Financial Markets Convention Brussels, 31 May 2002

"Should the European Union Adopt the Winter Group's Proposals on Regulating Corporate Takeovers in Europe?" Moderator Richard Lambert Former Editor, Financial Times Panel Patrick Bolton, Princeton University, CEPR & ECGI Michael C. Jensen, Harvard Business School & ECGI Colin Mayer, Saïd Business School Oxford, CEPR & ECGI Marco Pagano, University of Salerno, CEPR & ECGI

Curing symptom or disease? Marco Pagano Università di Salerno and CEPR

Corporate Control: Rarely Contested in Europe In most cases, controlling shareholders own a majority stake (ECGI 2001)  control unassailable. In a few large companies where they don’t, they still manage to protect control in many ways.

Ways to Keep Grip on Control Dual (or multiple) share classes Pyramiding schemes / Chinese boxes Poison pills Shareholder agreements Non transferable shares Limits to large stakes / voting caps

Disease and Symptoms “Disease”: controlling shareholders’ ability to extract private benefits at expense of non-controlling shareholders. 1. They try to keep a majority stake. 2. If 1 is too costly, they use anti- takeover devices.

Winter Group Proposal In case of takeover bid, neutralize the defenses arising from dual class shares and non- negotiable shares. Objective: mobilize corporate control in Europe. Problem: just targeting two of the symptoms.

Likely Outcome of Therapy Dual class shares will disappear, but other symptoms will substitute for them. 1. Controlling shareholders will increase their stake. 2. If 1 too costly, will resort to other anti- takeover devices. 3. Otherwise, may give up seeking funding.

Winter Group is Aware … … that other defensive techniques remain available, and warn against them. Still, how wise is it to attack one of many symptoms, if ‘disease’ remains? Very important footnote: concentrated ownership is not a “bad” symptom per se.

Proposal is NOT Just About “Breakthrough Rule” Many other sensible suggestions: 1.Enhance and standardize information about capital and control structures. 2.Passivity rule. 3.Squeeze-out rule. 4.Sell-out rule, etc.

These Suggestions Deserve Attention Some could be effective to mobilize corporate control (passivity rule, squeeze-out rule). Others to protect non-controlling shareholders (disclosure, sell-out rule).

"Should the European Union Adopt the Winter Group's Proposals on Regulating Corporate Takeovers in Europe?"

Continue the Debate