Defects of the Mandatory Bid Rule

The original purpose of the European Directive was to harmonize the takeover rules among its Member States, to create a level playing field for takeover activities and to protect shareholders, especially the minority shareholders’ legitimate rights. The Mandatory Bid Rule was introduced into the European Directive to ensure that every shareholder could have a fair opportunity to exit in takeovers.

Shareholder protection was a common sense among all the Member States of the E.U., and this was why the Mandatory Bid Rule had not raised

367 Belgium, Cyprus, Denmark, France, Germany, Greece, Hungary, Italy, Luxembourg, Netherlands, Poland, Portugal, Slovenia, Spain, etc.

368 Austria, the Czech republic, Estonia, Finland, Ireland, Latvia, Lithuania, Malta, Sweden, the United Kingdom before the Brexit.

369 COMMISSION OF THE EUROPEAN COMMUNITIES. Report on the implementation of the Directive on Takeover Bids. Brussels, 21.02.2007.SEC(2007)268. Annex 1.

any controversies like the Board Neutrality Rule and the Breakthrough Rule had in the past, even it was mandatorily required by the European Directive at the beginning.

In practice, the Directive allows every Member States to set the threshold of the Mandatory Bid Rule according to their economic situation and practical needs, varying from 25% lowest to 66% highest.³⁷⁰

Hungary and Slovenia had set the trigger of Mandatory Bid Rule when the acquirer had obtained 25% voting rights of the target company. Italy, Belgium, Cyprus, Germany, Finland, Ireland, Italy, the Netherlands, Spain, Sweden and the United Kingdom before withdrawal from the E.U. had set the trigger of Mandatory Bid Rule when the acquirer had obtained 30% voting rights of the target company. Greece, France, Luxembourg and Slovakia had set the trigger of Mandatory Bid Rule when the acquirer had obtained 1/3 voting rights of the target company. Czech Republic and Lithuania had set the trigger of Mandatory Bid Rule when the acquirer had obtained 40% voting rights of the target company. Latvia, Malta and Portugal had set the trigger of Mandatory Bid Rule when the acquirer had obtained 50% voting rights of the target company. Poland had set the trigger of Mandatory Bid Rule when the acquirer had obtained 66% voting rights of the target company. Denmark and Estonia did not set a substantial figure for the trigger of the Mandatory Bid Rule, but they did require the acquirer to send out a general tender offer for all outstanding shares of the target company to all the stockholders if the acquirer:

1. holds the majority of voting rights in the company;

2. becomes entitled to appoint or dismiss a majority of the members of the board of directors;

3. obtains the right to exercise a controlling influence over the company on the basis of the articles of association;

4. reaches any agreement with the company in general;

370 Id. Annex 2.

5. controls the majority of voting rights pursuant to an agreement with other shareholders;

6. is able to exercise a controlling influence over the company and holds more than one-third of the voting rights.³⁷¹

Some Member States allowed the target company to lower the trigger of the obligation to make a mandatory bid in the company's articles of association; ³⁷² as the Mandatory Bid Rule could largely increase the takeover cost of the acquirer, it has strong inhibitory effect for hostile takeovers. Therefore, a sudden lowering-down of the Mandatory Bid trigger could be an effective anti-takeover defense even the Breakthrough Rule could not “breakthrough”.

On one hand, if the trigger of the Mandatory Bid Rule is too low, it could have huge inhibitory effects on takeovers; on the other hand, if the trigger of the Mandatory Bid Rule is too high, it could not provide sufficient protection for the shareholders, especially the minority shareholders. Hungary and Slovenia had a trigger too low that the potential acquirers had to unfairly bid for all shares of the company before they could secure control of the target company. In comparison, Latvia, Malta, Portugal and Poland had a trigger of 50%. Usually, acquirers do not have to obtain 50% of the voting rights to assume absolute control of the company, therefore, there is simply no need for them the across the 50% trigger and bid for unnecessary shares. Moreover, the controlling minority structure and voting leverages are not common in Latvia, Malta, Portugal or Poland, a Mandatory Bid Rule with 50% voting rights trigger could not offer any substantial protection for the shareholders. ³⁷³

Another general issue for all Member States was that, almost every one of them had stipulated very loose exemptions for the Mandatory Bid Rule.³⁷⁴ In Austria, the

371 Id.

372 For instance, Austria. See COMMISSION OF THE EUROPEAN COMMUNITIES. Report on the implementation of the Directive on Takeover Bids. Brussels, 21.02.2007.SEC(2007)268. Annex 2.

373 Id.

374 Only Cyprus, Hungary and Latvia did not allow any exemptions for the Mandatory Bid Rule.

Mandatory Bid obligation could be exempted when the shareholder subject to the obligation cannot exert a significant influence on the target company. In Belgium, the executing decree provided certain exceptions from the Mandatory Bid Rule, for example, changes of control within the same corporate group, inheritance and rescue operations. In the Czech Republic, the law provided for exceptions from the Mandatory bid obligation, for example, inheritance, temporary stepping over of the mandatory bid threshold, increase of capital under certain circumstances, changes of control within the same group. In Denmark, the Mandatory Bid obligation did not apply to acquisitions by inheritance, gift, debt enforcement and transfer within the same group. In Estonia, the supervisory authority had the power to grant exemption from the Mandatory Bid obligation when change of control within the same corporate group, the dominant influence was gained for the purpose of carrying out a merger or division, or temporary acquisition of shares for the purpose of further transfer. In Germany, supervisory authority may release the offeror from the obligation to publish and submit a mandatory bid insofar as this seems justified having regard to the interests of the offeror and the shareholders of the target company, the way in which control was obtained, the shareholder structure of the company, the actual possibility of exercising control or the fact that the share in the target company is reduced below the control threshold subsequent to the acquisition of control. In Greece, the law provides exceptions from the mandatory bid obligation, for instance, temporary stepping over of the mandatory bid threshold, another person holds a higher percentage of the voting rights; securities have been acquired through the exercise of pre-emption rights during share capital increase, merger between affiliated companies, privatization, etc. In Finland, the law provided for exceptions from the mandatory bid obligation, for instance, another person holds a higher percentage of the voting rights, the mandatory bid threshold has

been stepped over because of measures taken by the target company or by another shareholder. In France, the supervisory authority has power to grant exemptions from the mandatory bid obligation in conditions such as: merger authorized by the shareholders in general meeting, changes of control within the same corporate group, changes of control in order to save a company from bankruptcy and so on. In Ireland, the supervisory body had the power to provide for derogations and waivers in the rules in relation to particular matters having regard to exceptional circumstances and “in other circumstances”. In Italy, the law currently in force provided for exceptions from the Mandatory Bid obligation, for instance, voluntary partial bid addressed to all shareholders for at least 60% of the voting capital, transactions aimed at rescuing companies in crisis, changes of control within the same corporate group, transactions of a temporary nature, mergers. In Lithuania, the law on the securities market provided certain exceptions from the Mandatory Bid Rule, such as reorganizations under certain circumstances, stepping over the threshold in accordance with the rules on restructuring of enterprises, change of control within the same corporate group and so on. In Luxembourg, the supervisory authority may grant exceptions under “specific circumstances of certain implementing rules”. In the Netherlands, no (immediate) obligation to launch a takeover bid would arise in the following situations: preference shares held by a foundation, share certificates held by a foundation, restructuring within a group, change of control through inheritance or marriage, bankruptcy, shares held by a custodian who` votes according to instructions. In Poland, a subsequent bid was not mandatory if the acquisition of the voting rights at the level of the threshold is made: 1. through a previous general takeover bid; 2. through an insolvency process; 3. through the merger of companies, if the decision of the relevant shareholders explicitly refers that the merger operation would give rise to a mandatory bid. In Spain,

exceptions to the mandatory bid rule were likely to be maintained in situations like unintentional acquisition of control, acquisition following a decision of the shareholders of the offeree company, certain operations in the context of bankruptcy procedures, operations within the same group. In Slovakia, in situations such as changes of control within the same corporate group or inheritance, the Mandatory Bid Rule obligation could be waived. In Slovenia, in situations such as inheritance, merger or division if the purpose of the operation was not the takeover of the target company, reduction of the capital of the offeree company, the Mandatory Bid Rule obligation could be waived.

In Sweden, in situations such as temporary acquisition and inheritance, the Mandatory Bid Rule obligation could be waived. In the United Kingdom before withdrawal from the E.U., specific derogations from rules are included in the Takeover Code where necessary to facilitate a pragmatic approach to long-established practice.³⁷⁵ The various exemptions and derogations had provided the acquirers with sufficient room to circumvent the Mandatory Bid Rule, undermining the fair protections for the shareholders.