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1.

Equity markets display an important function in fostering allocative efficiency. Indeed, they appear not only to lower entry barriers into the market by providing a wider access to capital (especially important for start up technological companies or other emerging firms), thereby promoting a more decentralised economy (than the one of bank-centred systems) and a more rapid pace of economic growth and innovation [1], but also to: a) provide a tool for the external control of the “agency costs” implied in the shareholders/corporate managers relationship, through the exposure of the ownership of the companies to changes driven by the market whose associated ordinary effect is thought to be the displacement of existing non performing management; and b) prompt, by means of market operations directed at fostering the company’s external growth, industrial reorganization and consolidation, especially on a wider international scale (alongside with the opening of more integrated global markets). In so doing securities markets basically allow companies to benefit from their major structural advantages in respect to other organizational forms which do not admit ownership transmission (as the state enterprise) or neutralise the control effects of ownership on management (as cooperatives and not-for-profit associations). This proved essential to respond to the challenges posed by a market economy environment characterised by imperfect competition (and therefore by a distinct tendency towards oligopolistic concentration) and was one of the reason for the rise and success of the public company model in modern free market economy. Takeovers – i.e. the friendly or hostile public offers to purchase shares, ordinarily in an amount sufficient to control the company – are therefore, in principle, not just a technique for the company’s change of control but an instrument of allocative efficiency. To be sure, they are not market techniques without substitutes. The disciplinary effect on the management exerted by the threat of a takeover can be obtained, indeed, also through other market practices like the solicitation of proxies and the public offer to purchase votes (instead of shares), if and where, departing from the traditional veto of such a practice in the, albeit different, political context and from a principle of necessary correlation between risk and control, this practice is allowed [2]. The industrial consolidation can [continua ..]

2.

In the U.S. federal legislation on takeovers – enacted with the 1968 Williams Act and amended in 1970 – refrains from intervening in the process other than by imposing to the bidder a few mandatory rules of conduct intended to enhance shareholders’ value such as: a) the disclosure of a sufficient degree of information (the “early warning” Schedule 13G due under § 13d and the Schedule TO, containing the filing disclosure statement and its annexed tender offer, under § 14d), so as to avoid, as indicated in the House Report, that the shareholders of the target company be forced to make a choice on the acceptance or refusal of the offer “without the benefit of full disclosure” and without receiving “full and fair disclosure analogous to that received in proxy contests”; b) a minimum duration of the process (the 20 days set forth by SEC Rule 14e-1), designed to provide the shareholders the opportunity “to examine all relevant facts in an effort to reach a decision without being subject to unwarranted pressure” or “being forced to act hastily”; c) a pro-rata rule, whereby the bidder, even if it is left free to fix the amount of shares tendered as it deems fit, without any obligation to tender all shares carrying voting rights (as it is on the contrary the case of the mandatory tender offer provided for by European law), must prorate shares received during the offer under SEC Rule 14d-8 (which extends during the entire life of the offer a principle with § 14(d)(6) would limit to the acceptances received in the first 10 days); d) the non discrimination rule, whereby the bidder must offer to all holders (under Rule 14d-10) and at the same and best price (§ 14(d)7) the acquisition of the targeted amount of shares. The Williams Act, however, does not require that the acquisition of control of a listed company comes along with a compulsory tender offer (and therefore a moneyed exit solution) to all existing shareholders at the same price nor mandates the launch of a (subsequent) bid in order to align the economic treatment of dispersed shareholders with the one reserved, in an over-the-counter transaction, to the former controlling or substantial shareholder(s), if any. In other terms, American takeovers are not determined by law but by market forces alone. The legal permissibility of partial bids and even of “two tier bids”, in which the bidder offers a [continua ..]

3.

The Delaware Supreme Court, in a series of remarkable and most cited cases starting from Unocal Corporation v. Mesa Petroleum [4], whilst requiring some justification and proportionality of the board defensive decisions “in respect of the threat posed” by the tender offer, confirmed (and progressively broadened) the wide authority of the board to adopt post bid defensive measures without shareholders’ approval. In Paramount Communications, Inc. v. Time [5] and even more straightforward in Unitrin v. American General Corporation [6] – where the Supreme Court found legally sufficient the board motivation to adopt a defensive measure without seeking the approval of the shareholders since “Unitrin’s shareholders might accept American General’s inadequate offer because of ignorance or mistaken belief regarding the board’s assessment of the long term value of Unitrin’s stock” [7] – case law evolved to the point as to recognize the board general power, under the common law of fiduciary duties, to adopt defensive measures without the need to obtain prior shareholders approval with very little in the way of justification [8]. In addition to that, anti-takeover state provisions – upheld by the Supreme Court in its landmark decision of 1987 in CTS Corp. v. Dynamic Corp of America [9] in so far as they impose additional disclosure requirements or corporate law restriction but refrain from mandating a prior notice to the target company and to state officials some time before the commencement of the offer [10] – often supplement further the weapons available to the board, by, for example, a) setting forth that a person acquiring over a certain threshold of stocks can vote only with the approval of other shareholders (“control share acquisition statutes”); b) prohibiting the combination of the target company with the hostile bidder for a period from 2 to 5 years (“business combination moratorium statutes”); c) requiring supermajority approval for a merger when it fails to satisfy a fair price test (“fair price statutes”); d) expressly authorizing the board to take into consideration, when assessing the suitability of the offer, also the interests of stakeholders other than shareholders (“non shareholders constituencies statutes”). The catalogue of defensive measures available to U.S. (mostly Delaware) [continua ..]

4.

Contrary to the appearance and to a quite common misconception, though, the formal existence of effective anti-takeover measures did never convert into a general and functional insulation of U.S. listed companies from the market of corporate control. As it has been convincingly put forward by Professor Gordon:   «US corporate governance institutions have adapted so that US managers rarely resist a premium bid (emphasis added). Acquisition activity in the 1990s was, if anything, more intense than in the 1980s, measured both as a percent of market capitalization and in the number of transactions and much greater if measured in real dollar terms or a percent of the GDP. The degree of hostility declined across the decades, but we have come to realize that in many cases hostility is merely an artifact of when a deal becomes public. Many transactions that start off as unwelcome overtures end up as “friendly” rather than “hostile” if target management decides that resistance is unsustainable and undesirable. There are very few financial buyers pursuing highly leveraged hostile burst up, but this is more because of the dearth of target for which this 1980s deal strategy now makes economic sense. During the 1990s the hostile bidders were strategic buyers, including some of the most widely respected firms, with access to internally generated capital. This shift in the nature of the buyers helps to explain why the minuet of resistance and capitulation often played out privately. Nevertheless the threat of going hostile is still very important because many friendly deals are negotiated against the backdrop of the hostile bid possibility».   In a quantitative perspective – looking thus at the overall numbers of takeover transactions without distinguishing qualitatively in respect to the bigger or lesser sensitivity of certain industries or companies to the pressure for the isolation from the market for corporate control – it has been possible, therefore, to argue [12] that “defensive measures do not really protect US firms from hostile bid. Generally speaking, they merely structure a process in which the target board can negotiate an higher price for the shareholders (emphasis added). But that fortunate outcome is the result of institutions and practices that may not be easy to reproduce elsewhere. Thus the same basic legal rules may lead to radically different outcome” in other legal [continua ..]

5.

Qualitatively, however, it remains somehow unclear how the anti-takeover philosophy embedded in the state corporate laws and in the current judicial construction of the board’s fiduciary duties is exerting, under the pressure of local politics, a role in insulating from the market of corporate control specific relevant companies incorporated in the U.S., displaying a central role within the American economy: a question which appears especially relevant in a transatlantic cross-border perspective [16]. In other terms, if we look at the control of “Corporate America”, it remains to be investigated to what extent strategic U.S. public listed companies are contestable by foreign bidders – to be true, not only European companies but possibly, today, even Russian or Indian or Chinese private or state-funded investment vehicles – and to what extent international law can provide a level playing field for U.S. and non-U.S. investors. In fact, a few relevant restrictions to foreign takeovers exist, despite the multilateral international provisions of GATS aimed at liberalizing market access and foreign investment [17]. In particular, the “Exon-Florio” provision [18] entitles the President to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. firm that is found to threaten the national security. The proviso is implemented by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee chaired by the Secretary of Treasury in charge of reviewing proposed transactions, usually upon a voluntary prior notice. The confidential nature of the CFIUS review process makes it difficult to account for the cases. According to one source, however, CFIUS conducted so far full investigation of 25 cases. To our knowledge, of these 25 cases, thirteen transactions were withdrawn upon notice that CFIUS would conduct a full review and twelve of the remaining transactions were sent to the President with a single order prohibiting the acquisition in 1990 of Mamco Manufacturing Company (an aerospace parts manufacturer) by the China National Aero-Technology Import and Export Corporation (CATIC), owned by the Government of the People’s Republic of China [19]. Since 11 September 2001, it is reported that the CFIUS review process has intensified due to sensitive national security concerns. In the Telecommunication sector, in turn, Section 310 of the Communications Act of [continua ..]

6.

In Europe, the regulatory experience on takeover bids draws extensively from the original English model. In the United Kingdom, in fact, hostile takeovers became a quite common market practice in the 1950s [20], also thanks to the financial ability of bankers like Sigmund Warburg and Charles Clore. The first regulation was thus to be found in the Notes of Amalgamations of British Business of 1959 and, nine years later, in the first edition of the self-regulatory Code on Takeovers and Mergers of 1968: a remarkable collection of “soft” rules, enforced by the private Panel on Takeovers and Mergers, which set and anticipated most of the basic principles which are today embedded in the European harmonized legislation. The City Code dictated indeed specific provisions: a) on the procedure, designed first to prevent the bidder from coercing the targeted shareholders into an hasty decision on whether to accept or not the offer and, second, to favour the smooth performance of the transaction and shareholders’ price maximisation, by consenting both price increase by the bidder and competing offers, if any; b) on the information to be provided during the process by the bidder and by the board of directors, so as to put the shareholders in an unbiased position for adopting a conscious decision on the acceptance or refusal of the offer; c) on minority protection, bringing about the obligation to launch a bid at comparable conditions when the acquisition over-the-counter of a controlling stake triggered a change of control (so called “mandatory offer”); d) on the neutrality of the board, which, under General Principle 7, was from the outset barred, once a bona fide offer had been made or had been announced as imminent, from taking any action which could “frustrate the bid” without the prior shareholders’ approval. The contestability of the corporate control did represent, thus, one of the takeover policy goals from the very outset of the first European model of takeovers (self)regulation. This was not related solely to post-bid defences. The English law, in fact, addressed also, albeit partially, the issue of pre-bid anti-takeover measures. As it has been correctly pointed out [21]: «There are a number of relevant statutory and London Stock Exchange rules that impede the adoption of certain types of defensive tactics. In addition to these provisions, there is a common law doctrine that managers may only [continua ..]

7.

Building on this model and at the end of a long and extremely disputed legislative history (reflecting both the very different starting point of national corporate laws regulating pre-bid and post-bid defences and, more broadly, the non converging political and historical approaches of national industries to the contest for corporate control prior to harmonization), the European Union recently reached, with directive 2004/25/EC an harmonized platform grounded on these principles. As a matter of fact [22], according to the Financial Services Action Plan adopted by the Commission in 1999 and to the position expressed by the European Council in Lisbon, the enactment of a framework directive on takeover bids was expected as an important component of the EC capital market regulation, precisely designed to set a common European framework for cross-border takeover bids, whereby contributing to the reorganisation of European companies and to the development of a single pan-European capital market. In the White Paper on the completion of the internal market published in 1985 the Commission first expressed its intention to draft a directive to harmonise Member States provisions on take over bids. In 1989 the Commission was finally able to publish a detailed first proposal but, since the European Council considered it overly detailed and the proposal encountered the opposition of many Member States, the Commission preferred to drop it and to publish a revised version in 1996 in the form of a framework directive which set out general principles but at the same time left wider scope to the legislation of Member States. The proposal was recommended by the Economic and Social Committee and by the European Parliament, which proposed however 20 amendments. In 1997 the Commission published therefore a new version which took account of the recommendations of the European Parliament. In 2000 a common position was achieved in the European Council. On second reading, however, the discussion in the Parliament revealed major differences between the European Parliament and the European Council. In particular, the European Parliament posed the question of the regulation of a squeeze out and sell out right which was not covered by the proposal and required a more detailed definition of the “equitable price” paid in the event of a mandatory bid. Furthermore the Parliament stressed the importance of adding provisions for the protection of employees affected by a [continua ..]

8.

Directive 2004/25/EC “lays down measures coordinating the laws, regulations, administrative provisions, codes of practices and other arrangements of the Member States, including arrangements established by organisations officially authorised to regulate the markets, relating to takeover bids for the securities of companies governed by the laws of Member States, where all or some of those securities are admitted to trading on a regulated market in one or more Member States”. Member States can however extend, if deemed appropriate, the applicability of its provisions also to non listed securities when implementing the directive and, under Article 3(2)(a) “lay down additional conditions and provisions more stringent than those of the directive for the regulation of the bids” or, under Article 4(5)(i), “include such derogations in their national rules” which, without derogating to the general principles of the directive (referred to here below), be necessary “in order to take into account of circumstances determined at national level”. The directive sets out in Article 3, a series of general principles which must be complied with in the implementation of the directive and namely that: a) “all holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover if a person acquires control of a company, the other holders of securities must be protected”; b) “all holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company’s places of business”; c) “the board of an offeree company must act in the interest of the company as a whole and must not deny the holders of the securities the opportunity to decide on the merits of the bid”; d) “false markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid”; e) “an offeror must announce a bid only after ensuring that he/she can fulfill in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of [continua ..]

9.

According to said general principles, the directive covers a wide range of issues. a) It dictates, under Article 4, a principle for the allocation of the supervisory functions in respect to cross-border takeovers which, on one hand, where the target company has its registered office in a Member State other than the one of listing and trading, gives some leave way to European regulatory and supervisory arbitrage and, on the other hand, differentiate between matters relating to “market rules” or “securities law provisions” (those on the consideration to be offered, the bid procedure and the information to be provided) – which are governed by the “rules of the Member State of the competent authority” and matters “relating to the information to be provided to employees of the offeree company and in matters relating to company law” – herein included, however, “the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the bid” – governed by the laws of the Member State in which the offeree company has its registered office[26]. b) It sets out in Article 5, for the protection of the minority shareholders, a mandatory bid at equitable price, it being the highest price offered by the bidder during the last six to twelve months before the bid. c) It details, under Article 6, the basic information to be provided for by the bidder in the offer document (a provision supplemented by additional disclosure duties under Article 8, in order to “prevent the publication or dissemination of false information”). d) It defines, in Article 7, the duration of the offer from a minimum of two weeks to a maximum of 10 weeks (Member States are however allowed to extend it “on condition that the offeror gives at least two weeks’ notice of his/her intention of closing the bid” or “in order to allow the offeree company to call a general meeting of shareholders to consider the bid”). e) It posits in Article 9 a “non frustration rule”, whereby the “board of the offeree company (such being, in a two-tier board system, “both the management and the supervisory board”: Article 9-6) shall obtain the prior authorisation of the general meeting of shareholders given for this purpose before taking any action, other than seeking alternative bids, which may result in the [continua ..]

10.

It is apparent from the foregoing that the “most innovative core” of the directive relies on the provisions concerning the contestability of control. Indeed, most of the harmonized rules on disclosure and procedure – as well as the one on mandatory bids – essentially ratify a convergence, inspired by the original U.K. model, which, at the date of enactment of the directive, had already taken place in (at least) the principal Member States. Not surprisingly, these well settled provisions received quite general acceptance, despite the inevitable existence of inside inconsistencies, as a result of the multiplicity of policy goals traditionally pursued by the takeover (British-style) regulation, for example between the provision of a mandatory bid at the “highest price” and the (coexistent) purpose of fostering the market for corporate control [28]. Despite the fact that the innovative conceptual core of the directive relies in the provisions of articles 9-11 aimed, in their true substance, at fostering the contestability of control of European listed companies, it would be wrong to read such a directive as the final recognition of a general European ban of national, public or private, defensive measures capable of insulating the ownership of listed companies from the market for corporate control. On one hand, indeed, the harmonizing rules directed at setting a level playing field in respect to private-law pre-bid and post-bid defences are made only optional by Article 12. They do represent, thus, a European benchmark for policymakers, but not yet a compulsory rule mandated throughout Europe. In practice, thus, as the directive’s legislative history and its subsequent national implementation show, the “sunlight” on national regulatory choices brought about by the political debate accompanying the directive proposal served to highlight the existing uneven openness to the contest for corporate control of national champions and the political inability to reach a European convergence on the level playing field. This, ironically, prompted – instead of the removal of existing barriers – a nationalistic insurgence of new ones (at least in the short term). On the other hand, public-law restrictions to the contestability of control fall outside the scope of the directive and are covered straight by the Treaty, as interpreted by a rising flow of path-breaking ECJ decisions. Both issues deserve [continua ..]

11.

As regards private-law pre-bid and post-bid defences, it seems correct to state that, from the outset, the implied political foundation of a takeover directive was indeed to be found in the need to create a level playing field within the European internal market which could facilitate and accelerate the European integration process and could make it as easy for a British or Italian company, for example, to acquire, through a successful takeover bid, a French or German company as it would have been for a French or German company to acquire the controlling interest in a British or Italian company. In other words, takeover bids had to be possible freely within the European internal market. The underlying rationale for that was twofold. On one hand, it was necessary to duly implement Article 43 of the Treaty which sets out the principle of freedom of establishment. Such principle refers indeed not only to the incorporation but also to the management of companies. Accordingly, Article 44 g) – which constitutes the legal basis of the directive – requires the Community to issue directives under the co-determination procedure set out under Article 251 to coordinate certain safeguards which, for the protection of the interests of members and others, Member States require of companies governed by the law of a Member State with a view to making such safeguards equivalent throughout the Community. This means – as the directive itself acknowledges in the recitals – that a Community action is needed to “prevent patterns of corporate restructuring within the Community” (namely the consolidation of the European industry, also through cross border take over bids) “from being distorted by arbitrary differences in governance and management culture”. Since the freedom of establishment is also to be recognised in the acquisition of the control of a company established in a different Member State, it could be effectively implemented only through the introduction of a level playing field throughout Europe concerning takeover bids. On the other hand, if we assume (as it is the case of the current European approach, in response to a trend toward oligopolistic consolidation which characterizes since long the global markets) that, as a matter of policy, takeovers are to be generally [29] “presumed” economically beneficial for the shareholders and the overall economy, both as an instrument of industrial consolidation [continua ..]

12.

Initially, both the Commission and the Council denied the absence of a level playing field, arguing that the different anti takeover measures existing in the economic and legal systems in each Member State neutralised each other. Consequently, all companies within the European Union were said to have substantially the same possibilities of defending themselves against hostile takeover bids regardless of the Member State in which they were incorporated. This position soon proved flawed, when it resulted that anti-takeover technical barriers embedded in national corporate laws do not exist identically in all Member States. Whereas, for example, multiple voting shares had been abolished in Italy, Austria, Spain, and Germany, they were still common in France, Sweden and in the other Scandinavian countries. Pyramids on the other hand were much more common in continental Europe than in Northern Europe. Voting caps in turn were admissible for instance in Austria, the Netherlands, France, Spain, and Italy (prior to the company law reform of 2003) whereas they were forbidden in Belgium and Germany. Non-voting shares and voting rights agreements were admissible and common almost everywhere in Europe but shareholders’ agreements were perhaps more common in Continental Europe than in the United Kingdom. Although no comprehensive study had yet been made to review all these different anti takeover pre bid techniques in all different Member States [32], it emerged quite soon that, although each Member State offered one or more technical pre bid defences, companies incorporated in some Member States had a far greater range of possibilities to use provisions of their articles of association or other legal means to protect themselves against hostile takeovers than companies incorporated in other Member States. Despite these findings, as anticipated, none of the previous directives had ever set out provisions specifically aimed at dismantling the pre bid technical barriers erected or allowed by national company laws of the different Member States to discourage takeover bids. And it was so, although the Commission was aware of the problem at least since 1990, in the wake of the publication of the Booz Allen report [33] and of the Coopers & Lybrand study [34], which devoted great attention to this specific issue. Actually, the Commission initially reacted to those reports putting forward a comprehensive set of amendments’ proposals to the Second [continua ..]

13.

Later, with the ill fated 2001 takeover proposal the Commission preferred to focus only on the post bid technical barriers, hereby adopting the “passivity rule” set out now in Article 9 of the directive, and to set aside the question of the harmonisation of the great many company law features which could, and in fact (with different patterns in all Member States) did and do, function as pre-bid technical barriers to takeovers. As scholars correctly noted, this restrictive approach to the level playing field question somehow insisted, theoretically, on a slippery distinction between core company law and securities law. In other words, it was adopted on the implied assumption that tackling pre bid measures would have entailed the introduction of major changes in European company law and would have been outside the scope of the take over directive, perceived as a securities’ piece of legislation. It was argued on the contrary that if the rationale of the neutrality rule set out in Article 9 of the directive proposal was and is to be found in the facilitation of the contest for the corporate control, the difference between pre bid and post bid measures necessarily blurs. Focusing only on post bid technical barriers would leave in fact companies free to adopt pre bid governance devices that effectively block a hostile takeover from ever being made and thereby insulate them from the market for corporate control. It has been correctly added to it [35] that the pre offer barriers – which are part of the formal structure of the corporate governance environment – do also facilitate the erection of structural barriers, which by contrast reflect the effect of existing conditions in the economic environment, and include such circumstances as concentration of ownership in families, the influence of large universal banks and the reliance on debt as opposed to equity financing. Technical pre bid barriers therefore serve under several respect to insulate pre-existing outcomes in the economic environment when change would otherwise shift the efficient boundary of the firm. Furthermore, takeover regulation in Europe is not only a component of securities regulation but also (and perhaps even more so) an important creature of company law and corporate governance. The provisions on transparency and disclosure in the takeover process are certainly crucial in so much as they play a major role in redressing market imperfections providing the [continua ..]

14.

Based on the above, the distinction between pre bid and post bid regimes quickly appeared to be also politically untenable. Understandably enough, those Member States who would have to change their legislation in order to comply (as it was the case for instance of Germany), with the passivity rule set out by the directive proposal and did not offer to their national companies an array of pre bid company law defences comparable to that of other Member States saw an effective level playing field in the domain of the pre bid techniques as a necessary prerequisite for their approval of the directive [38]. All these reasons led to the introduction in the final text of the directive not only of Article 9, addressing the post bid defence with the passivity rule, but also of Article 11, addressing post bid defences with the so called “break through rule”. Such a break through rule is in fact an ingenious attempt to create a sufficient level playing field in respect of pre bid techniques albeit leaving these mechanisms and structures in place unless and until a general takeover bid is made and has proved successful. Doing so, in the opinion of the High Level Group which recommended its adoption to the Commission, said rule “would strike an appropriate balance between, on the one hand, the need, at least for the time being, to allow differences in the capital and control structures of companies in view of the current differences between Member States and, on the other hand, the need to allow and stimulate successful takeover bids to take place in order to create an integrated securities market in Europe” [39].

14.

Based on the above, the distinction between pre bid and post bid regimes quickly appeared to be also politically untenable. Understandably enough, those Member States who would have to change their legislation in order to comply (as it was the case for instance of Germany), with the passivity rule set out by the directive proposal and did not offer to their national companies an array of pre bid company law defences comparable to that of other Member States saw an effective level playing field in the domain of the pre bid techniques as a necessary prerequisite for their approval of the directive [38]. All these reasons led to the introduction in the final text of the directive not only of Article 9, addressing the post bid defence with the passivity rule, but also of Article 11, addressing post bid defences with the so called “break through rule”. Such a break through rule is in fact an ingenious attempt to create a sufficient level playing field in respect of pre bid techniques albeit leaving these mechanisms and structures in place unless and until a general takeover bid is made and has proved successful. Doing so, in the opinion of the High Level Group which recommended its adoption to the Commission, said rule “would strike an appropriate balance between, on the one hand, the need, at least for the time being, to allow differences in the capital and control structures of companies in view of the current differences between Member States and, on the other hand, the need to allow and stimulate successful takeover bids to take place in order to create an integrated securities market in Europe” [39].

15.

The “break through rule” was not unknown in the European Union before the High Level Group recommendation. It was put forward for the first time in 1992 by the French COB when, according to Article 177 of the Law of 24 July 1966 [40] BSN Danone amended its articles of association to set out a voting cap. In that occasion, COB obtained that the articles of association of the company had to also provide that the cap would have automatically become ineffective if a bid were successful in obtaining shares representing 2/3 of the voting rights [41]. A statutory provision of the break through rule was then to be found in Italy under Article 3 of Law no. 474 of 30 July 1994 on privatisation and was then reflected in Article 212 of the Italian Decree no. 58 of 1998. It should be noted in this respect that, the former version of the rule published in 1994 made the break through conditional upon the attainment by the bidder of the majority of the voting rights, whereas the latter provision of 1998 dropped, at least in the wording of the provision, such requirement [42]. Despite these differences in the details of the French and Italian models, a common feature of both national experiences was to be found in that the rule addressed only voting caps. It left untouched, instead, all of the statutory or by-laws provisions concerning the appointment and removal of the board of directors, which in different ways could delay or hinder a swift substitution of the board on the part of the successful bidder (e.g. double voting in France, special rights to nominate board members, staggered board, fixed term appointment, supermajorities, long lasting office tenure as a requirement for appointment to the board and alike). Albeit limited in scope, this rule facilitated however the success of hostile bids by making the acquisition of a (qualified) majority stake sufficient to automatically empower the bidder to exert control over the company without the need of a formal resolution of the shareholders’ meeting to remove the cap [43]. A similar effect, in respect to shareholders’ agreement carrying transfer or voting restrictions, was to be found in Article 123 of the Italian Decree no. 58 of 1998, consenting to each party of the agreement to terminate it at no cost upon the occurrence of a bid (a provision subsequently mimicked, albeit in slightly different form, by Spanish law 17 July 2003, no. 26/2003 and in particular by its [continua ..]

16.

As anticipated, though, the adopted version of the break through rule – which can be read in Article 11 and, as noted above, was broadened in scope in the wake of the parliamentary debate – encompasses only some of most common pre-bid technical barriers to takeover (herein included multiple vote shares [44], refraining from providing a general rule designed to “break through” any type of such barriers [45]. Moreover, it does not affect companies’ models other than  public listed companies (such as the partnership limited by shares and cooperatives: Article 11-7) nor dictates alternative remedies to neutralise additional pre-bid barriers to takeovers like pyramids and relevant agreements conditional upon the change of control for which the break through rule is not well-suited [46] but which would have deserved, however, a similar pro-competitive regulation. The most critical (and disturbing) point is however that the adoption of the “break through” rule was possible only at the price of waiving the mandatory nature of the harmonised provisions of Article 9 and 11. At the price of making, thus, the level playing field only optional. Article 12 of the directive – ironically adopting in Europe, due to nationalistic political constraints, a regulatory choice advocated for U.S. federal securities laws by Bebchuk and Ferrel [47] – sets out indeed that: «Member States may reserve the right not to require companies  which have their registered offices within their territories to apply Article 9(2) and (3) and 11». It was therefore permitted to Member States to opt out these core provisions of the directive when implementing the same. Having waived the mandatory nature of such provisions, the European aspiration to foster the contestability of control represents no more than a simple benchmark recommended to Member States. This is somehow confirmed by the fact that, where Member States opt out, they must nevertheless “grant companies which have their registered office within their territories the option of applying Article 9(2) and (3) and/or Article 11”. This pro-contestability aspiration is particularly timid, though. Suffice to say that the company’s decision to adopt Article 9 and 11 requires an opting in resolution to be taken by the shareholders’ meeting with the highest majorities required for the amendment to the articles of [continua ..]

17.

As it was certainly likely and expected, the implementation of the directive marked a general failure in the attainment of a pan-European level playing field for cross-border takeover bids in Europe. Liberalism failed. Indeed, as of February 2007, the Commission reported in its “Report on the Implementation of the Directive on Takeover Bids [49]”that, in the fourteenth Member States were the directive had been implemented by its deadline, the passivity rule of Article 9 was implemented in all cases but for Denmark, Germany [50], Luxembourg. All the opting in States, however, had already a similar obligation in place before transposition (except for Malta and its 13 listed companies) and, due to the application of the reciprocity clause of Article 12 by many of the opting in Member States, many of them, whilst accepting in principle the pssivity rule subject it now to reciprocity (France, Greece, Hungary, Portugal, Slovenia and no Italy). The Commission correctly pointed out, thus, that “these Member States have increased the management’s power to take frustrating measures without the approval of shareholders”: a situation which “likely holds back the emergence of an open takeover market rather than promote it”. As regards the “break through rule” of Article 11, the general outlook is even bleaker. The Commission finds that “the vast majority of Member States have not imposed (or are unlikely to impose) the breakthrough rule, but have made it optional for companies [51]. Break through is expected to be imposed only in the Baltic states”. Following the opt out decisions of the Member States, very few companies are expected to apply Article 11 on a voluntary basis. Finally “the majority of Member States have allowed companies to reciprocate against a bidder not subject to Articles 9 and 11 [52]”.

18.

On the question of trans-Atlantic and, more in general, non pan-European cross border takeovers, the directive chose not to specifically address the issue of an international level playing field and of the treatment to be reserved to a non European bidder. The preparatory works focussed, in this respect, solely on the trans-Atlantic relations considering that U.S. state legislation (as showed above) provides for a wide range of anti takeover devices. The High Level Group, however, suggested not to take any specific action, reasoning that current patterns of European flows of investment towards the United States show “that defensive mechanism and state defensive laws have not blocked European companies taking over American companies” [53]. Only “if political concerns remain”, the Group recommended to provide that the benefit of the break through rule “can be enjoyed by listed European companies making general takeover bids for other listed European companies, to the extent that this would not violate international agreements and could be practically enforced”: a sort of anticipation of the reciprocity clause then set out in Articles 12. Not surprisingly, in the silence of the directive, the final outcome of the process of national implementation was basically to subject non-European bidders to the reciprocity clause, at least in any Member State adopting such a reciprocity clause (where this is not the case, national or international multilateral and bilateral general rules on foreign investment control the matter). How to assess, however, whether a U.S. or Russian or Chinese bidder is or is not contestable, remains practically obscure, prompting both very significant administrative [54] and judicial discretion at the national level (and ex-ante uncertainty) and a strong risk of nationalistic capture. As we already noted, in fact, the takeover regimes in the United States and the European Union are, for instance, hardly comparable and in the U.S. anti-takeover measures are generally said to be used by the management to get a better price for the shareholders rather than to frustrate the bid and insulate the company from the market of corporate control. It could be very difficult, therefore, to assess whether the Delaware regime as applied to the specific articles of association of the offeror does or does not meet the reciprocity requirement. On the other hand, the silence of the directive confirms that Member [continua ..]

19.

Despite these exceptional restriction set out by the law in the national public interest, ironically, whilst it was being consummated the political failure of the European attempt to dismantle private-law pre-bid barriers to takeovers, the Commission was successful – partly using its powers based upon free circulation of capital and freedom to establish and partly using the new and effective weapon enshrined in Article 21(4) of the new Merger Regulation no. 139/2004 – in addressing many of the hidden administrative barriers lifted by Member States to the cross border market for corporate control. This occurred, for instance, with respect to the traditionally fortified “national bastions” in the historically strategic banking, highway and energy sectors. In the banking field [57], the perceived opportunistic use of denials or delays in the prudential authorisation for bank acquisitions by the former Governor of the Bank of Italy (lately in the Antonveneta and BNL cases, where, ironically, the criminal proceedings based on the harmonized market abuse regime brought about an Eliot Spitzer effect “the Italian way”, sweeping away “backroom” defences and ultimately favoring cross border takeovers ) prompted the adoption of the recently approved Directive amending directives 92/49/EC, 2002/83/EC 2004/39/EC 2005/68/EC and 2006/48/EC [58]. In the highway sector, the  failed cross border merger between Autostrade and Abertis, abandoned by the parties in 2006 due to the refusal of Italian authorities to transfer highway concessions, prompted a double reaction of the Commission (both based on free circulation of capital and article 21 of the merger regulation) which led to the adoption of a new Italian ministerial “directive” preventing any opportunistic use of administrative discretion for national protectionism. Similar was the outcome in the energy sector in the wake of the three “Endesa” cases [59], with the final adoption of a new directive in the field.

20.

The same can be said in respect of “golden shares”. Indeed, although the takeover directive is explicitly excluding from the “break through rule” “golden shares”, on the assumption that they must be considered by the Commission on a case by case basis, the European Court of Justice, beginning with its path-breaking judgments of 23 January 2000, in the case C-58/98, Commission v. Republic of Italy, and, two years later, 4 June 2002 in the cases C-367/98  Commission v. Portugal, C-483/99 Commission v. France and C-503/99 Commission v. Belgium, inaugurated a substantial flow of cases (some of which still pending) [60] dismantling such restriction based on Article 56 of the Treaty, unless it could be showed that: i) they are justified by one of the reasons listed in Article 58 or by compelling reasons of general interest within the meaning of the “Cassis de Dijon” case law; ii) are suitable for the achievement of the intended purpose, iii) necessary and proportionate. The catalogue of “golden shares” found inconsistent with the Treaty is quite long and there is an apparent tendency towards the broadening of the scope of Article 56 of the Treaty. In the words of Advocate General Poiares Maduro of 7 September 2006 in the joint-cases C463/04 and C-464/04 (discussing a situation where “as a result of the combined effect of the right of direct appointment of up to a quarter of the members of the board of directors set out in the articles of association based on a special provision reserved to State or other public entities and the right to participate in the election of directors by voting on the basis of lists, the Comune di Milano can control an absolute majority of appointments to the board of directors, despite its minority shareholding”) «18. (There are) three underlying issues. The first is whether it is of importance that the powers of appointment at issue are, at least in part, based on a provision of private law. The second is whether Article 56 EC applies ratione personae to public bodies when they are not exercising their public authority. The third issue involves the question which rights, when held by a public body in the role of shareholder in a company, are ‘liable to dissuade investors in other Member States from investing in the capital of [that company]’. I shall discuss each issue in turn. 19. In my opinion, the fact that the powers of [continua ..]

21.

It remains to be questioned, in the light of the above, if the nationality of the owners does really matter in protecting the interests of the national economy, as the protectionist attitudes indicated above (and often voiced in the political debate) would suggest. To the best of my knowledge, there are no studies, so far, quantitatively measuring the impact of the nationality of the (final) owners on the company’s performance and its alignment with the national interests of the maximization of domestic wealth, production and labour creation. The impression is, however, that national (final) ownership essentially meets the needs of the national politics (and, due to the close interplay between politics and economy in the modern society, of national oligarchies controlling both fields) to exert some kind of control, albeit in an opaque and indirect way, on strategic industries (following a “twist the arms” approach in respect to nationals controlling such industries which, clearly enough, cannot be extended to foreigners). There is no particular reason to believe, however, that such an informal and not transparent influence actually serve the needs of the national community as a whole more than the private needs of the (national) “oligarchs”. Not surprisingly, most of those controlling listed companies do so through foreign holding companies which benefit from the existing fiscal regulatory competition and, by doing so, do transfer part of the national wealth abroad, despite their citizenship. Increased pan European corporate mobility, in turn, makes company’s nationality a reversible choice for shareholders and renders the current nationality of the company by nature subject to change, irrespective of the nationality of the controlling shareholders. It is certainly true, on the other hand, that the existing uneven structural economic development at the international and European level, coupled also with uneven ownership structures, makes the market for corporate control strongly unilateral: this is a pattern clearly showed, in recent times, by the large outflow of foreign direct investments from original Member States to new entrants in the European Union, for instance in the banking and financial industries. This trend could thus pre-empt the growth of national champions in weaker economies. National champions are not a good in itself, though. There is often the case, indeed, of foreign companies finely serving the [continua ..]

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