Takeover Law: Foundations and Rules of Public Takeover Bids at Luiss

Takeover Law Foundations

prof. Paola Lucantoni LUISSFoundations "Takeover" is a general term referring to the transfer of control of a firm (the target) from one group of shareholders to another (offeror). In case, if it is through a mutual consent, it is a friendly takeover. If it is not, it is called a hostile takeover. In hostile takeovers, the bidding company directly approaches the shareholders of the company or attempt to replace the management to get the deal approved.

Takeover Directive Overview

LUISSFoundations Takeover Directive (TOD) - Directive 2004/25/EC TOD aims to provide equivalent protection throughout the EU for minority shareholders of companies listed on an EU regulated stock exchange in the event of a change of control, and to provide for minimum guidelines on the conduct of takeover bids. However, the Takeover Directive makes some of its provisions - relating to defensive measures and voting rights/restrictions - optional, which means that, even after implementation, different regimes exist in different countries. The application of most of the Directive is mandatory

Public Takeovers in the EU

LUISSPublic Takeovers The Takeover Directive applies to all companies governed by the laws of an EU Member State where the securities are listed on an EU regulated stock exchange. The main exceptions are

• collective investment companies; and
• the Central Banks of Member States.

General Principles of the Takeover Directive

LUISSPublic Takeovers The Takeover Directive states some general principles:

• equivalent treatment of all shareholders;
• rights of minorities to be safeguarded;
• the target shareholders must be given sufficient time and information to be able to decide whether to accept an offer;
• the target board must give its views on the effect of the implementation of an offer, including on employment;
• the target board must act in the interests of the target company as a whole;
• the target board must not deny holders of securities the right to decide on the merits of the offer;
• false markets must not be created;
• an offeror should only announce a bid when it has the cash to implement it; and
• the target should not be subject to a bid for too long.

Competent Authority for Takeovers

LUISSCompetent Authority Each Member State must designate a competent authority to supervise takeovers. In general, a target company will be subject to regulation in the state in which it has its registered office if it has securities listed on a regulated market in that state. However, jurisdiction may be shared between competent authorities in different states where, for example, a company has its registered office in one state but its shares are only admitted to trading in another state. (Companies with a registered office outside the EU will be regulated by the Member State in which they first listed securities in the EU)

Compulsory Offers and Control Acquisition

LUISSCompulsory Offers Acting in concert: when two or more persons cooperate in a coordinated way to acquire control. Where a person or a group of persons acting in concert acquires a controlling stake in a target company, it must make an offer to all other shareholders at the "equitable price". The level constituting "control" will be defined by the State in which the target company has its registered office (e.g., in Italy, 30% or 25% for SMEs).

Equitable Price Determination

LUISSEquitable Price The "equitable price" is the highest price paid by the offeror (or its concert parties) during a period fixed by the competent regulator. That period must be between 6 to 12 months prior to the bid. An offeror who purchases shares during the offer period will trigger (farà scattare) a requirement to increase the offer price, if it is lower than the price paid in the market. The competent regulator also has power to increase or reduce the equitable price.

Consideration in Compulsory Offers

LUISSConsideration under a compulsory offer Consideration under a compulsory offer may consist of:

• cash; or
• securities; or
• a combination of the two. However, a full cash alternative must be provided in certain cases (e.g. the consideration securities are not listed)

Offer Documents and Period

LUISSOffer documents and offer period An offer document, containing certain specified information, must be sent to target shareholders. Employees of both companies must be informed. The offer document can be used in all other Member States without change, except that it may sometimes be required by the relevant state to deal with local issues, such as different methods of acceptance and any different tax consequences. Target companies must publish a document giving their views on the bid, including its impact on employees. An offer, unless the regulator agrees or provides otherwise, must remain open for acceptance for at least two weeks, but no longer than 10 weeks. A further extension of 2 weeks can be granted (concessed) upon certain conditions

Squeeze-out Mechanism

LUISSSqueeze-outlegal mechanism that allows a controlling shareholder (usually ≥90%) to force the minority shareholders to sell their remaining shares, at a fair price. Each Member State is required to introduce a squeeze-out right to remove a minority post-bid. One of two types of right must be introduced:

• where an offeror holds 90% (or, at the option of the Member State, a higher percentage up to 95%) of the target voting shares; or
• where an offeror acquires 90% of the voting shares which are the subject of the offer. It's the price or payment that the controlling shareholder must pay to force minority shareholders to sell their shares. The squeeze-out consideration must be the same as under the offer, although Member States can require a cash alternative. Countries in the EU may also require that this consideration be offered in cash, even if the original offer included shares or other forms of payment. There should also be a reciprocal right for a target shareholder to require an offeror which could exercise a squeeze-out to buy its shares.

Disclosure of Defensive Structures and Mechanisms

Disclosure of Defensive Structures and Mechs. TOD requires that Member States introduce provisions that obligate companies to make their defensive structures and mechanisms transparent. This enable potential offerees to assess the target and possible barriers to takeover bids. Such rules apply to companies whose securities are all or partly admitted to trading on regulated markets. Information is published in the company's annual report.

Capital Structure Disclosure

LUISSDisclosure of Defensive Structures and Mechs. (a) the structure of their capital, including securities which are not admitted to trading on a regulated market in a Member State, where appropriate with an indication of the different classes of shares and, for each class of shares, the rights and obligations attaching to it and the percentage of total share capital that it represents;

Restrictions on Transfer of Securities

(b) any restrictions on the transfer of securities, such as limitations on the holding of securities or the need to obtain the approval of the company or other holders of securities, without prejudice to Article 46 of Directive 2001/34/EC;

Significant Shareholdings Disclosure

LUISSDisclosure of Defensive Structures and Mechs. (c) significant direct and indirect shareholdings (including indirect shareholdings through pyramid structures and cross-shareholdings) within the meaning of Article 85 of Directive 2001/34/EC;

Special Control Rights Disclosure

(d) the holders of any securities with special control rights and a description of those rights;

Employee Share Scheme Control

LUISSDisclosure of Defensive Structures and Mechs. (e) the system of control of any employee share scheme where the control rights are not exercised directly by the employees;

Voting Rights Restrictions

(f) any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the company's cooperation, the financial rights attaching to securities are separated from the holding of securities;

Shareholder Agreements Disclosure

LUISSDisclosure of Defensive Structures and Mechs. (g) any agreements between shareholders which are known to the company and may result in restrictions on the transfer of securities and/or voting rights within the meaning of Directive 2001/34/EC;

Board Member Appointment and Amendment Rules

(h) the rules governing the appointment (nomina) and replacement of board members and the amendment of the articles of association;

Board Member Powers and Agreements

LUISSDisclosure of Defensive Structures and Mechs. (1) the powers of board members, and in particular the power to issue or buy back shares; (j) any significant agreements to which the company is a party and which take effect, alter or terminate upon a change of control of the company following a takeover bid, and the effects thereof, except where their nature is such that their disclosure would be seriously prejudicial to the company; this exception shall not apply where the company is specifically obliged to disclose such information on the basis of other legal requirements; (k) any agreements between the company and its board members or employees providing for compensation if they resign or be dismissed without valid reason or in the event of termination oh their employment because of a takeover bid

Passivity Rule in Takeovers

LUISSPassivity rule (or board neutrality rule) The board of directors of the target company must abstain from adopting any action or having the company involved in any transaction that may adversely/negatively affect the achievement of the goals of a pending (in corso - ongoing) takeover bid Such action and/or transaction, however, can be approved by the ordinary or extraordinary shareholders' meeting respectively (depending on their respective areas of attributed decision-making powers). However, the articles of association (statuto) of the target company may allow the board of directors to derogate, wholly or in part, from the passivity or board neutrality rule (opt-out system). The passivity (or board neutrality rule) applies from the date of the Initial Notice until the end of the bid or until the bid expires. The mere search for other bids ("white knights") is not subject to such rule. LUISS A white knight is an alternative, friendly bidder that the board can search to go against a hostile takeover.

Breakthrough Rules in Takeovers

The breakthrough rules this rule is part of the opt-in system, meaning it only applies if it is included in the articles of association of the target company. The articles of association of the target company may include the following provisions (opt-in system):

• any limitations on the transfer of securities provided (presviste) in the articles of association shall have no effect on the bidder;
• any limitations on voting rights provided in the articles of association or shareholders' agreements (patti parasociali) in cases where a shareholders' meeting is called to authorize the actions or transactions referred to above under the passivity or board neutrality rule, shall have no effect on the bidder; and
• any limitations on voting rights envisaged in the articles of association or shareholders' agreements or any special rights in relation to the appointment or removal of the directors or members of the management body or supervisory board shall have no effect at the first shareholders' meeting of the target company following the end of the bid, called to amend the articles of association or to remove or nominate the directors, if as a result of the takeover bid the bidder comes into possession of at least 75% of the voting securities of the target company. The breakthrough The breakthrough rule Antirdurationof themsentensive campers in the corporate structure of a target company during a takeover bid.