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Europe's M&A minefield
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June 18, 1999: 11:23 a.m. ET
New rules aim to smooth takeovers but investors still may be short-changed
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LONDON (CNNfn) - Corporate egos have loomed large in the takeover battles that have rocked European boardrooms as merger activity has soared. But it is the patchwork of law in the European Union that has done more to frustrate executives and investors.
European trade ministers will meet in Luxembourg Monday to thrash out a harmonized system of takeover rules aimed at providing shareholders with a guaranteed level of protection during bids.
However, some financiers fear the meeting threatens only to highlight the vast differences between existing legislation and replace varying legislation with one bad law.
Investors seeking to profit from the near-doubling of European mergers and aquisition activity this year often have been bemused by the tactics employed in some headline deals.
The well-publicized court battles that have surrounded hostile bids such as those between Olivetti and Telecom Italia and LVMH's pursuit of Italian fashion house Gucci have clouded shareholders' ability to rate offers and plan their strategy.
Threat of litigation
The pursuit of harmonized European rules has rumbled through the corridors of Brussels for almost 10 years. The latest compromise deal proposed by Germany aims to protect shareholders during cross border deals.
The plans focus on how shareholders should be treated and companies conduct themselves during takeovers and don't comment on competition and anti-trust matters. They also aim to clarify which is the competent authority for regulating deals and which law to apply.
The United Kingdom has been a vociferous opponent of the plans, arguing they will harm its own successful system and provide no benefits for investors or companies pursuing deals.
Britain still accounts for almost half of M&A activity in the EU and argues its own mature system is working well. It also points to the failings of other countries such as Germany and the Netherlands, where bidders aren't obliged to make a public offer for all shares
The U.K. denied Friday that it would sign on to the new deal, though approval in Brussels requires only a qualified majority of the 15 EU member states.
Patrick Drayton, director general of the U.K. takeover Panel, argues the proposals will increase the amount of time companies spend in court. "The danger is that these changes create conditions for technical litigation during deals," he told CNNfn.com. "There is far more judicial intervention [in continental Europe] than you would see in Britain."
However, EU officials maintained that the plan provided a framework to reduce the amount of time deals spend in court. "Everyone agrees that technical litigation should be avoided," said one official.
Protection levels
Critics of the German proposals claim they remain vague and have diluted the level of protection afforded to shareholders.
The most contentious areas concern rules on mandatory bids for takeover targets and the defenses which management can deploy.
The U.K. system requires bidders to make a cash offer to all shareholders when they have secured effective control of a target -- set at 30 percent of voting shares -- at the same price as offered in building up control.
In most Continental countries, the threshold is set much higher, usually above 50 percent, and Drayton said the new plans fail to clarify "control", pricing or the form of payment. "This is an absolutely critical protection for minority shareholders," he said.
Critics also claim the proposals fail to clarify what management at target companies can and cannot do when approached. The U.K. rules forbid companies taking any frustrating action without shareholder approval.
The EU plan introduces a similar prohibition but not until the acceptance period after a bid has been formally made, giving management plenty of time to build elaborate defenses. "The directive would not make a blind difference to a blatant bit of frustrating action," Drayton claimed.
The third contentious area is the competent regulator. "Everyone agrees that the regulation of bids should be done by the member state in which the offeree is incorporated and listed," the EU official said, leading to questions of why a directive is needed in this area.
The difficulty comes when the country of origin and listing vary, increasingly common practice as companies seek broader investor bases. "The directive ends up with an awful fudge," said Drayton.
The plan calls for matters of company law to be handled in the country of incorporation while procedural matters are handled by the country of listing. With multiple listings, it is the original country of listing that will take precedent.
The Commission admitted the new plan would have made no difference to the conduct of the Olivetti bid and the hostile contest for Société Générale launched by BNP.
However, the Commission said "a battle similar to LVMH/Gucci would have had to be conducted quite differently under the proposed directive." Many of the Italian firm's defenses, including a share issue to employees to dilute the LVMH stake, would have been banned. 
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European Commission
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