Cross-Border Mergers and Acquisitions in Europe: Reforming Barriers to Takeovers

Monday, January 1st, 2001 at 12:00 am by Scott Mitnick
Scott Mitnick, Cross-Border Mergers and Acquisitions in Europe: Reforming Barriers to Takeovers, 2001 Colum. Bus. L. Rev. 683

One of the most dramatic changes in European markets in recent years has been the increased frequency and ferocity of takeover battles. The Washington Post reported in March 1999 that ‘[t]he change in corporate culture and behavior here in the past few years has been nothing short of radical. The government-coddled climate in France, the cozy shareholder relationships in Germany, the secretive empires of the Italians – are all giving way to American- style cowboy capitalism.‘ While the substance of the claim is debatable, its spirit has been evident, particularly in the cross-border context. Hostile takeovers, the hallmark of 1980s U.S. capitalism, have become a strategic alternative in the European quest to expand into historically distinct markets.

Consider the British telecom giant Vodafone’s hostile acquisition of its German rival Mannesmann in 1999. The $180 billion deal was the first foreign hostile acquisition of a German firm since World War II. It took nearly six months to convince German shareholders to tender their holdings, and in the end they walked away with a premium of nearly 150 percent. Next consider the unsuccessful bid by French luxury giant LVMH Moet Hennessy Louis Vuitton SA (“LVMH”) to acquire Gucci, the Italian fashion house that trades on the Amsterdam Exchange. LVMH had quietly bought shares, amounting to 34 percent of Gucci, on the open market. At that point, LVMH attempted to gain representation on the board of directors, but Gucci resisted. Gucci then rebuffed overtures for a friendly acquisition, instead finding an alternative in white knight Pinault Printemps Redoute (‘PPR‘), another French firm. Without shareholder approval, Gucci’s board issued stock equal to 42 percent of the company’s existing share capital, and sold it to PPR in conjunction with a five-year standstill agreement. The validity of that transaction has been upheld in the first wave of litigation, but appeals are pending.

The experiences of Vodafone and LVMH are particularly interesting in the context of the creation of the European Union in 1992 and monetary unification in 1999. As European officials have attempted to create a single European financial market, they have struggled to develop a response to the patchwork takeover and financial market regulations that led to radically divergent takeover activity throughout the E.U. Germany, France, and the U.K., the three largest European markets, were responsible for 28 percent, 18 percent, and 13 percent, respectively, of G.D.P. in the E.U. during the 1990s, but they also accounted for 17 percent, 14 percent, and 30 percent of M&A activity. The difference between the size of the economies and the development of their control markets is astonishing. Germany, with double the G.D.P. of the U.K., had only half as many M&A transactions during the past decade.

In part, these differences can be attributed to different methods of financing corporate activity. The U.K. relies on highly developed capital markets, while Germany relies on a sophisticated network of bank relationships; but, the differences extend beyond the characteristics of their financial markets. The legal framework for takeovers in Europe is as varied as the languages and cultural traditions. The United Kingdom has traditionally tolerated, if not encouraged, takeover activity, going so far as to develop a takeover code that establishes the rules for bidding and response, and integrates a broad conception of shareholder protections. Germany, in contrast, has little explicit takeover regulation. The company law integrates the bank-dominated financial system with corporate governance mechanisms that make hostile takeovers nearly impossible. Italy had no takeover law until 1998, and in the Netherlands, directors have free reign to accept or rebuff bids even though shares are widely held.

The aggregate effect of European financial and legal integration on M&A activity has been mixed. Mergers and acquisitions have increased nearly 50 percent since 1991. Throughout the 1990s, the percentage of gross M&A activity involving a European firm acquiring outside the common market rose from 8 percent to 17 percent, reflecting the impact of globalization on the European mindset. However, the percentage of cross-border activity aimed at E.U. states has remained fairly constant, at roughly 14 percent. The most likely explanation for this dichotomy is that while cross-border investment has become increasingly popular, the legal and structural impediments to the takeover of European firms have posed consistent barriers.

The ‘Thirteenth European Parliament and Council Directive on Company Law Concerning Takeover Bids,‘ was proposed twelve years ago in order to remove many of the legal and structural barriers to takeovers in the E.U. It has been the subject of fierce debate ever since. The stated objective of the Thirteenth Directive is to ‘protect the interest of holders of securities of companies governed by the law of a Member State when these companies are subject to a takeover bid and their securities are admitted to trading on a regulated market.‘ The most recent version of the directive creates a framework that member countries would then apply to domestic takeover laws. Since the first proposal in 1989, the Commission has consistently communicated its intent to establish a base level of shareholder protection by promoting disclosure, restricting the size and price of purchases, limiting the defensive measures by a target company, and establishing formal regulatory bodies in each state. In 1990, the Commission further stated that:

[t]akeover bids may be viewed in a positive light in that they encourage the selection by market forces of the most competitive companies and the restructuring of European companies which is indispensable to meet international competition.

Thus, while the directive is intended to address threats to the welfare of shareholders during a change of control, particularly in the cross-border context, it was understood that such an endeavor would contribute to European integration by stimulating takeovers.

The mechanism through which a seemingly innocuous proposal to protect minority shareholders could substantially impact the level of takeover activity lies in two provisions of the Thirteenth Directive. Specifically, Article 5 requires member states to adopt a mandatory bid provision, and Article 9 prohibits the adoption of defensive measures. The combination of these provisions has the potential to revolutionize corporate governance in continental Europe by incubating a unified pan-European market for corporate control.

This note combines an empirical examination of the cross-border market for corporate control in Europe with a theoretical inquiry into the effects of adopting a mandatory bid rule and a prohibition on defensive measures, as found in the Thirteenth Directive. Incorporated into this discussion is consideration of the following issues: (a) whether it is possible to achieve financial integration of the control markets in countries with radically different market structures; (b) whether adoption of a system that emphasizes cross-border allocational efficiency is consistent with the diverse structural and technical foundations of national corporate law; (c) the conflict between efficient resource allocation and distribution of wealth among shareholders; (d) the tension between the British/American system of shareholder primacy with the Continental emphasis on stakeholders; and (e) the effects of harmonizing takeover laws on financial market development.

The remainder of this paper will be organized as follows: Part II will present a brief history of the Thirteenth Directive; Parts III and IV will summarize the function of a market for corporate control; Part V will provide an overview of the structural and technical features of the takeover markets in the United Kingdom and Germany (polar extremes in the takeover context); Part VI will provide an analysis of the mandatory bid rule; and Part VII will explore the prohibition on defensive measures; finally, Part VIII will reconcile the empirical findings on the takeover market with an analysis of the European regulatory regimes.

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