Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids in the European Union

Jaap W. Winter
University of Amsterdam; Vrije Universiteit Amsterdam

Jan Schans Christensen
University of Copenhagen

José M. Garrido Garcia
International Monetary Fund (IMF); University of Castilla-La Mancha (Spain)

Klaus J. Hopt
Max Planck Institute for Comparative and International Private Law; European Corporate Governance Institute (ECGI)

Jonathan Rickford
European Corporate Governance Institute (ECGI)

Guido Rossi

Joelle Simon
French Business Confederation MEDEF

January 10, 2002

REFORMING COMPANY AND TAKEOVER LAW IN EUROPE, G. Ferrarini, K. J. Hopt, J. Winter, E. Wymeersch, eds., Annex 2, pp. 825-924, Oxford (Oxford University Press) 2004


This document constitutes the High Level Group of Company Law Experts’ first report, in conformity with the Group’s terms of reference which were defined by the European Commission on 4 September 2001.

The Group has been set up by the European Commission to provide independent advice in the first instance on issues related to pan-European rules for takeover bids and subsequently on key priorities for modernising company law in the European Union.

The Group has been asked to consider the following three issues:

– How to ensure the existence of a level playing field in the European Union concerning the equal treatment of shareholders across Member States;

– The definition of the notion of an «equitable price» to be paid to minority shareholders;

– The right for a majority shareholder to buy out minority shareholders («squeeze-out right»).

An important goal of the European Union is to create an integrated capital market in the Union by 2005. The regulation of takeover bids is a key element of such an integrated market.
Currently there are many differences between the various Member States, in terms of such general and company specific factors. Annex [4] gives an overview of company specific barriers to takeover bids which are lawful or actually applied in the Member States and which the Group has reviewed…. This is what is generally referred to as the ‘lack of level playing field’ in the area of takeover bids in the European Union.

In the light of available economic evidence the Group holds the view that the availability of a mechanism for takeover bids is basically beneficial. Takeovers are a means to create wealth by exploiting synergies and to discipline the management of listed companies with dispersed ownership, which in the long term is in the best interests of all stakeholders, and society at large. These views also form the basis for the Directive. This is not to say that takeover bids are always beneficial for all (or indeed any) of the parties involved.

The mandate of the Group is to review whether and to what extent a level playing field for takeover bids should be created under company law in Member States. The Group acknowledges that any approach on this basis would leave the various general differences existing in Member States untouched. It believes, however, that its recommendations with respect to company law mechanisms and structures would, in addition to market driven changes, mark an important step forward in developing a general level playing field for takeover bids in the European Union.

The Group believes that any European company law regulation aimed at creating a level playing field for takeover bids should be guided by two principles:

1. Shareholder decision-making

In the event of a takeover bid the ultimate decision must be with the shareholders. They should always be able to decide whether to tender their shares to a bidder and for what price. It is not for the board of a company to decide whether a takeover bid for the shares in the company should be successful or not. This is not to say that the board has no responsibility at all in the context of a takeover bid.

It is sometimes argued that allowing the board to frustrate a takeover bid can be justified as a means to help take into consideration the interests of shareholders and other stakeholders in the company, notably the employees. The Group rejects these views. Defensive mechanisms are often costly. Most importantly, managers are faced with a significant conflict of interests. Shareholders should be able to decide for themselves and stakeholders should be protected by specific rules (e.g. on labour law or environmental law).

2. Proportionality between risk-bearing capital and control

In the Group’s view, proportionality between ultimate economic risk and control means that share capital which has an unlimited right to participate in the profits of the company or in the residue on liquidation, and only such share capital, should normally carry control rights, in proportion to the risk carried. The holders of these rights to the residual profits and assets of the company are best equipped to decide on the affairs of the company as the ultimate effects of their decisions will be borne by them. This report will use the term ‘risk-bearing capital’ to refer to this concept.

The holder of the majority of risk-bearing capital should be able to exercise control. Capital and control structures in a company which grant disproportionate control rights to some shareholder(s) should not operate to frustrate an otherwise successful bid for the risk-bearing capital of the company. The concept of risk-bearing capital used here does not include those preference shares which have no exposure to the surplus but only carry a limited right to distributions of profits and on liquidation.

Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids in the European Union

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