Take-over jousting begins over MEP charter for ‘white knights’

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Series Details Vol 7, No.15, 12.4.01, p21
Publication Date 12/04/2001
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Date: 12/04/01

As conciliation begins over a new take-over directive, MEPs and EU governments are still poles apart. Peter Chapman reports

The European Parliament meets governments this week to try to defuse a vicious row on new rules for take-overs. So far their interactions would make the most friendly merger look like a hostile bid.

Last summer member statesbacked new rules to smooth the way for company take-overs, while ensuring minority shareholders were protected. But MEPs voted in January to give boards more powers over their shareholders.

But don't assume this is a case of the latter turning their back on the little guy. Or that a white knight is necessarily a Sir Galahad gallantly riding to the rescue of a maiden in distress (they're aren't enough maidens in boardrooms anyway).

The take-over joust faced by MEPs and governments is a complex one, currently entering a 'conciliation' phase designed to achieve a deal. It will be a tough job to bridge the gulf that divides the sides.

Of course, not all take-over bids are hostile. But nothing in corporate Europe is guaranteed to cause such a fuss as a bid by a foreign raider. Witness the furore when the UK's Vodafone launched its successful smash-and-grab bid for German industrial giant Mannesmann.

Nationalism aside, without sensible investor protection rules, minority shareholders risk seeing their rights trampled on. Attacking companies can leave lesser investors in the cold by offering big prices to a few corporate shareholders with major stakes.

Likewise, the target company's directors often have an incentive to administer a 'poison pill' to ward off a hostile bid. If they can get away with it, they will issue shares to a friendly 'white knight' who will use his new voting rights to reject a take-over.

Again, the little guy, left holding a diluted stock, is the loser.

A case in point is the legal row over luxury-goods giant LVMH's unsuccessful take-over of Italian fashion house Gucci. LVMH said Gucci had abused lax Dutch laws and acted against the interests of its shareholders when it placed 40% of the company in the hands of white knight French businessman Francois Pinault.

Most member states have regulations to ensure shareholders get a fair deal. But the situation varies widely from one country to another.

In a bid to redress the balance, the European Commission launched a draft directive 12 years ago to establish minimum rules to protect the underdog while encouraging a restructuring process that economists claim will help Europe catch up with its fitter, leaner US rival.

The measure was blocked until last year by a dispute between Spain and the UK over Gibraltar. But since then, member states and Euro-MPs have been divided over what the directive should achieve and whom it should protect.

Governments said last June they would like to set up a few core principles that everyone must abide by: Firstly, if a take-over attempt is launched then the attacking company must make a full bid for all the target's shares at an equitable price. This rule is designed to protect minority share-holders.

Secondly, shareholders must be given enough time and information to let them reach an informed decision.

Finally, the board of the target company must act in the interests of the company as whole and not deny shareholders the opportunity to decide on the merits of the offer.

But in January a majority of MEPs, led by Germany's Klaus-Heiner Lehne, told governments they had their priorities wrong. The draft take-over code would be fine, says Lehne, if we lived in an ideal world. The problem, he claims, is the imbalance in company law from country to country.

For example, in some member states, it is legal for firms to have voting restrictions on shares. In others, such as Germany, it is not. This is unfair, says Lehne.

A case in point is the London Stock Exchange. Last year, it held merger talks with Deutsche Borse; but the LSE's share structure made it virtually impregnable when OM Gruppen, owner of the Stockholm bourse, tried in turn to take it over.

Why, asks Lehne, should companies like the LSE be able take advantage of less stringent rules elsewhere to clinch a take-over or strategic merger?

"The LSE has a limit on voting rights," he says. "You can have 50% of the shares but only 5% of the votes. It is very easy for companies like this to protect themselves." Lehne claims the Commission has promised to look at these broader issues at a later date, although officials claim nothing is written in stone.

This step has helped to focus the debate on one key issue: what boards of directors can do to block an unwanted bid. Lehne's position is clear.

"If we are not able to harmonise shareholder rights we have to take care of the different attitudes by allowing some defensive actions," he says.

Firstly, he says it is impractical for "ultra-large" companies such as DaimlerChrysler to be forced to hold shareholder meetings before the board can respond to a bid. One solution, he claims, is for boards to be allowed to seek general approval for defensive actions in advance of a bid. Or, more controversially, they could take defensive measures without obtaining shareholder permission, provided national regulators approved. Disgruntled shareholders could always challenge the decision in the courts.

Furthermore, he argues that the balance between attacking companies and their victims is skewed. Raiders can water down their own stock by offering new shares to a target company without legal hurdles. But the directive would give shareholders pre-emption rights, meaning target firms wishing to issue shares to a white knight must offer them to all shareholders on the same terms.

"They are binded with what they can do with the shares. The attacking company is not," said the German MEP. "We want to delete these pre-emption rights," he added, saying that it was "nonsense" that such a move would jeopardise the rights of shareholders in the target firm.

Diplomats claim there are few takers for Lehne's view of the world.

"That is totally unacceptable to member states," said a senior negotiator, pointing out that Lehne's stance on pre-emption rights was never part of the Parliament's formal position on the directive. "It's like comparing apples and pears."

Noel Hinton, deputy director-general of the UK's take-over panel, seen by many as the model regulatory body, says directors should not be allowed to block deals that would favour shareholders. "Shareholders are the only people who have an investment decision to take," says Hinton, who claims boards should be forced to let them decide.

Despite the acrimony, Lehne is confident that the six-week conciliation process will yield a compromise.

In the meantime he issues a parting shot to critics such as Liberal Democrat MEP and economist Christopher Huhne, who says Lehne and his supporters are "dinosaurs" who do not understand the negative impact their proposals could have on EU business by hindering take-over bids.

Says Lehne: "I don't believe those who say they are all good. Less companies in the market means less competition.

Major feature. As conciliation begins over a new take-over directive, MEPs and EU governments are still poles apart.

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