Impact of the Takeover Directive Ensuring Corporate Governance and Transparency Daniela Weber-Rey 12 May 2006 A Practitioner's Perspective

Practical Impact of the Takeover Directive · 12 May The Takeover Directive "It is necessary to create Community-wide clarity and transparency in respect of legal issues to be settled in the event of takeover bids and to prevent patterns of corporate restructuring within the Community from being distorted by arbitrary differences in governance and management cultures" Preamble of Takeover Directive Let's look at it…

Practical Impact of the Takeover Directive · 12 May Minimum harmonization directive Little detail – principle based approach or mere face-saving compromise? Differing implementation in Member States Defence measures Thresholds Time period for determination of price Type of securities triggering mandatory bids Exclusion of foreign shareholders Leaves Member States a wide field of action To protect domestic companies?

Practical Impact of the Takeover Directive · 12 May Pre-bid and post-bid defences Insider and ad-hoc issues Foreign shareholders Corporate law / Capital markets laws congruence CORPORATE GOVERNANCE TRANSPARENCY

Practical Impact of the Takeover Directive · 12 May Approach regarding takeover defences Objective of the Commission proposal Open companies to market by outlawing defence measures against takeover bids Creation of a fully integrated market in financial services – Takeover Directive was one of the priorities of the FSAP Directive solution Commission approach as basic principle set forth in Arts. 9 and 11 BUT Art. 12 making Arts. 9 and 11 optional

Practical Impact of the Takeover Directive · 12 May All optional: opt-in / opt-out system Member States may opt-in or out of Art. 9 and 11 RL Art. 9: restriction on frustrating action Art. 11: breakthrough provisions regarding unenforceability of restrictions on the transfer of shares / rights If Member State opts out, companies are granted the reversible right to opt-in If company opts in, Member States can allow company's choice for non- appliance if relevant principles do not apply to bidder (reciprocity clause) Considerable practical issues Relevance of Corporate Governance Statements?

Practical Impact of the Takeover Directive · 12 May (Five/Ten) Alternatives of one system Opt-in MS Art. 9 RL – General duty to stay neutral Art. 11 RL – Breakthrough of certain takeover barriers Opt-out MS Do the provisions of articles 9 and 11 also apply to Bidder? Provisions apply Opt-in of TargetNo opt-in of Target Provisions apply Provisions do not apply YesNo Provisions applyProvisions must not apply Reciprocity - Choice of Target - ① ②③ ④⑤

Practical Impact of the Takeover Directive · 12 May Transparency vs. Compromise Opt-in / Opt-out as result of a long debate on neutrality Agreement on "possible solution" vs. non-attainable "optimal solution" at EU level Different approaches in the EU Member States Lack of transparency Role of advisor: Promote transparency by encouraging opt-in of companies? – Transparency through Corporate Governance!

Practical Impact of the Takeover Directive · 12 May Role of Corporate Governance codes in reaching transparency A better regulation approach? CORPORATE GOVERNANCE TRANSPARENCY

Practical Impact of the Takeover Directive · 12 May Corporate Governance Codes Certain codes – and in particular the international and Pan-European codes – recommend  to give shareholders the right to participate in decisions concerning fundamental corporate changes  to refrain from taking discretionary defensive measures in case of a takeover

Practical Impact of the Takeover Directive · 12 May Role of Corporate Governance Codes in a face-saving compromise Could national Corporate Governance codes include recommendations for companies to opt-in Articles 9 and 11 of the Takeover Directive? not to carry out defensive measures without shareholder consent (pre- and post-bid)? The publication of acceptance statements would lead to legal certainty and transparency  The tendency of acceptance of recommendations is increasing: in Germany, none of the DAX, MDAX and SDAX companies examined by the BCCG in 2006 refuses application of all recommendations

Practical Impact of the Takeover Directive · 12 May Insider and ad-hoc issues Due diligence vs. prohibition of insider trading and ad-hoc notification duties In a friendly takeover the target company may want to provide bidder with confidential information Challenge Find a balance between –Need for transparency –Compliance with principles against Market Abuse –Avoidance of ad-hoc notification Make use of Business Judgement Rule?

Practical Impact of the Takeover Directive · 12 May Treatment of foreign shareholders According to the Takeover Directive, all holders of securities must be afforded equivalent treatment Certain jurisdictions have special rules regarding exclusion of foreign shareholders in certain cases Will (May) these exemptions remain after implementation?  Probably yes Basic equality of treatment with exceptions Potentially different approaches in different jurisdictions Transparency?

Practical Impact of the Takeover Directive · 12 May Treatment of foreign shareholders Equal treatment vs. unreasonable efforts All shareholders are to receive equal treatment and cannot in general be excluded from the offer Exemption possible in certain cases, if effort is seen as unreasonable Germany Supervisory Authority does not as a rule grant exceptions for any jurisdictions, e.g. shareholders domiciled in USA and Canada will have to be considered by German offers

Practical Impact of the Takeover Directive · 12 May Treatment of foreign shareholders US has acceptable thresholds and an efficient system Exemption must be requested from the local authorities In Canada exemption only possible via the regulator Address of shareholders has to be determined – can take long! Long-lasting procedure also if only 1 shareholder with 1 share! Issues: Advice on exemption possibilities: Time constraints resulting from extension of offers to certain jurisdictions – Trigger ad-hoc notifications – Risk of extended speculation period

Practical Impact of the Takeover Directive · 12 May Corporate law / capital market laws – congruence? Auditors valuation principles (Germany: IDW / capitalized earnings value/ discounted cash flow, as a rule) Market capitalization (MS may authorise Supervisory Authority to draw up criteria for price adjustment) Determination of compensation Corporate restructuring measures (incl. compensation in connection with squeeze-out) Takeover bids (incl. Subsequent squeeze-outs)

Practical Impact of the Takeover Directive · 12 May Corporate law / capital market laws – congruence? Corporate law and capital market laws have partially different approaches Different treatment of corporate squeeze-out (independent of a takeover offer) and capital market squeeze-out (following a takeover offer)  Different valuation principles  Different procedure Law shopping potential Major practical issues Risk of abuse by activist shareholders

Practical Impact of the Takeover Directive · 12 May Which way forward? Optional provisions will be differently implemented Nevertheless Member States will have to deal with domestic issues in such way as to ensure Community-wide transparency in the event of takeover bids Compliance with Corporate Governance principles will play a major role

Practical Impact of the Takeover Directive · 12 May Corporate Governance is about transparency in corporate law Compliance is about transparency in the financial and capital markets Transparency is the overriding principle of modern legislation CORPORATE GOVERNANCE TRANSPARENCY

Annexes Status of implementation of Takeover Directive in certain EU Member States Principles of Corporate Governance Codes

Practical Impact of the Takeover Directive · 12 May Implementation status – examples COUNTRYEXPECTED IMPLEMENTATION DATE UK20 May 2006: Consultation period has ended. Awaiting publication of final rule changes (expected end-April) BelgiumWill not meet 20 May deadline: No proposed changes have yet been published FranceMay not meet 20 May deadline: Awaiting publication of consultation documents (expected shortly) ItalyWill not meet 20 May deadline Luxembourg20 May 2006 GermanyDo not expect to meet 20 May deadline, but shortly thereafter SpainWill not meet 20 May deadline Hungary20 May 2006 PolandDo not expect to meet 20 May deadline: Polish securities commission believes most of primary goals already implemented, therefore full implementation is not a priority

Practical Impact of the Takeover Directive · 12 May OECD and ICGN "Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as (…) extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company." "Anti-take-over devices should not be used to shield management and the board from accountability." "The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company." OECD Principles of Corporate Governance, also adopted by International Corporate Governance Nettwork

Practical Impact of the Takeover Directive · 12 May EASD "Shareholders enjoy basic rights, which should be protected. They have a right to adequate and timely information and appropriate forms of participation in certain decisions affecting the company and themselves." "Minority shareholders should not unreasonably restrain corporate action." "The market for corporate control should be allowed to function in an efficient and transparent manner. Takeover barriers should not shield management, the board and influential shareholders from accountability." Corporate Governance Principles and Recommendations of the European Association of Securities Dealers

Practical Impact of the Takeover Directive · 12 May Euroshareholders "Major decisions which have a fundamental effect upon the nature, size, structure and risk profile of the company, and decisions which have significant consequences for the position of the shareholder within the corporation, should be subject to shareholders’ approval or should be decided by the Annual General Meeting." "Anti-takeover defences or other measures which restrict the influence of shareholders should be avoided." Euroshareholders Corporate Governance Guidelines

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