Merger rules lose their sting

Date: 30/11/1995

By Fiona McHugh

AFTER six years of tinkering, the European Commission has finally come forward with a set of minimum rules to govern the conduct of company mergers and acquisitions in the EU.

But so many concessions have been made to member states along the way that most observers now question the draft directive's ability to create a level playing field for take-overs, even before the proposal begins its legislative round through the EU institutions.

As one German diplomat commented bluntly: “The 13th company law directive is so thin that one wonders if it would make any difference at all.”

Until now, controversy has surrounded the directive, which seeks to ensure fair play in the take-over field by making combatants fight within certain formal rules.

That controversy now looks likely to fade, but at the expense of a number of key provisions.

The current watered-down version of the directive, which is due to be adopted by the Commission on 13 December, lays down general objectives, but leaves it up to the EU's 15 member states to decide exactly how to achieve those aims.

One of the directive's main objectives is to ensure corporate democracy by enshrining the principle of equal treatment for all shareholders during take-overs, regardless of size and influence.

At the moment, predator companies can, in some countries, gain control of target companies by doing 'sweetheart' deals with majority shareholders. Minority shareholders - ranging from private individuals with a handful of shares to small institutional investors - often discover that control of their company has changed hands only after the event.

This has caused resentment among minority shareholders and in some cases, disputes have ended up in the courts.

For example, in 1992, SPEP - the major shareholder in French electrical engineering firm Schneider - decided to rationalise its Belgian operations and launch a take-over of local subsidiaries Cofibel and Cofimines.

The local minority shareholders fought the deal because they believed a number of the subsidiaries' financial operations had favoured major shareholders and the company over them, and because they thought the price offer was too low.

They won the day after an official complaint lodged in 1993 resulted in a criminal investigation and the eventual arrest of Schneider's president.

More often than not, however, minority shareholders are treated like second-class citizens during take-overs.

The original 1989 proposal attempted to address this problem by forcing bidders to make a generalised public offer for all the target company's shares once they had built up a 30&percent; stake.This trigger point provision, however, received a hostile reception from a number of member states, notably Germany, where governing boards are allowed to act on behalf of minority shareholders as long as they keep their interests at heart.

It has now been dropped and replaced with, quite simply, a call for the protection of small shareholders.

Germany had wanted a minimum standard of worker participation on company boards written into the directive, but that too has been abandoned following fierce opposition from the UK.

In Germany, most large companies have two boards of directors, one of which is made up of representatives of minority shareholders. This board ensures their wishes are taken seriously.

Bonn was afraid that laxer laws in other EU member states would encourage German companies to set up shop abroad simply to escape tough worker participation obligations imposed at home.

London, for its part, feared the directive would lead to 'nuisance' litigation which would slow down and even stop take-overs. Like the US, the UK corporate system is heavily geared towards take-overs and mergers, with many companies publicly quoted on the stock exchange and large block shareholdings seldom held by financial institutions.

Recent figures from the Organisation for Economic Cooperation and Development showed the UK leading the way in take-over activity last year. Of more than 1,000 cross-border mergers announced in 1994, UK companies accounted for more than half.

To address the UK's fear, the new text allows disgruntled shareholders to challenge company acquisitions, but only after the take-over in question has been completed.

It also says that take-overs can be policed by either a private or a public authority, a clause designed to allow the UK to keep its cherished private panel on take-overs and mergers.

While the directive does not ban so-called 'poison pills' - tactics used to fend off unwanted take-over bids - its transparency provisions should make them more difficult to use.

Such a tactic was used by Northwest Airlines earlier this month in its battle to stop Dutch airline KLM, a major shareholder, taking control of the company. Northwest's board voted to create a 'poison pill' by effectively limiting the stake which any single shareholder could hold to 19&percent;.

If any company or person bought more than 19&percent;, the existing shareholders would buy new shares at half the market value in order to dilute the bidder's stake, the board decided.

Northwest's defences are accepted practice in the US, where the take-over scene is much rougher. In the EU, however, such tactics often reflect nationalism rather than commercial sense.

The case most often cited by Commission officials was the failed attempt in 1988 by Italian entrepreneur Carlo de Benedetti to buy Société Générale de Belgique. This financing company, with stakes in areas as diverse as steel, cement, diamonds, engineering and mining, was founded in 1822 and was considered by many to be a part of Belgium's heritage.

De Benedetti's move to take over the firm was frustrated at every turn, sometimes by methods that would not have been allowed in other member states.

Eventually, a coalition was formed to keep de Benedetti out and attract a 'white knight' or friendly bid from the French group Suez.

Though the Commission did not intervene then, it decided afterwards that common take-over practices needed to be established in the run-up to the single market. But its response, the original 1989 version of the 13th company law directive, soon fell prey to intense political wrangling.

France, which revived the directive during its EU presidency, had held out hope that Germany's iron grip on national companies would be broken.

Paris is bound to be disappointed with the final text, which is unlikely to achieve that objective.

Because banks own large chunks of most big German companies, chunks which they seldom sell, take-overs are virtually impossible in the Federal Republic. For example, Deutsche Bank owns a 28&percent; stake in Daimler-Benz, Germany's largest industrial firm and only the remaining shares are listed. “Our national law will remain almost the same. I do not think it will make it any easier for foreign firms to buy German companies,” said a German diplomat.

Weighted voting systems in the Netherlands, which concentrate power in the hands of a small number of shareholders, also make hostile take-overs difficult to stage there.

If the current version's passage through the legislative procedure is smooth, it should come into force in 1997, five years after the original target date.