The Defensive Measures Provisions of the Takeover Directive: From Ambition to Resignation to Distrust

This paper examines the defensive measures provisions of the EU Takeover Directive of 2004 in the light of the changing policy orientation of both the EU Commission and the Member States towards the role of takeovers in relation to industrial policy. It is part of a series marking the 20th anniversary of the Takeover Bids Directive and put together.by the European Company Law Experts (ECLE) Group (https://europeancompanylawexperts.wordpress.com). For useful feedback we would like to thank participants in the ECLE Workshop “Twenty Years of the Takeover Directive,” Stockholm, October 12-13, 2023.

In a first part, the paper analyses the history of the Directive from its adoption to the present day, in three phases. In the first phase the Commission had high expectations about the role of takeovers, especially those unwelcome to incumbent management, in promoting both the integration of the Single Market and the overall competitiveness of EU companies in relation to the rest of the world. When, therefore, it proved impossible to secure Member State acceptance of the Board Neutrality Rule (BNR) and the Breakthrough Rule (BTR) except on an optional basis, the reaction of the Commission was one of extreme disappointment, as the initial exercise by the Member States of their options fell short of the Commission’s vision. 

The Commission promised to return to the issue at an early moment. However, it never did so. The disagreements among the Member States on the value of hostile takeovers continued and so the Commission’s attitude of disappointment turned to one of resignation and acceptance that the optional arrangements of the Directive were not realistically open to re-negotiation. However, in principle the Commission retained its view of the value of unwanted takeover bids for the promotion of industrial policy. In a third phase, the Commission developed a mistrust of this value, as demonstrated by its adoption of policies which hindered the contestability of corporate control, such as the promotion of dual class shares and greater public interest scrutiny of proposed takeovers. These changes reflected similar moves at Member State level, for example, in France, where the initial BNR was removed and tenure voting rights made a default from which companies needed to opt out. 

In the second part, the paper analyses the significance of the Commission’s failure to meet its goals. First, the paper examines the arguments that the BNR is trivial because other mechanisms operate effectively to require shareholder consent for defensive measures, ie the BNR is unnecessary. This argument can be based on the provisions of general corporate law or on shareholder structure. The paper rejects the argument based on general corporate law. The argument based on shareholder structure has greater salience, but it also demonstrates the limitations of the BNR. A controlling shareholder position constrains managerial autonomy but does not necessarily make control of the company more contestable, if private benefits of control are not tightly regulated.

Second, the paper analyses the argument that the BNR is (or would be) ineffective because, in the light of failure of Member States to implement the BTR, effective pre-defences will be available to potential targets. There is substantial weight in this argument, though the weight varies from Member State to Member State. Moreover, recent developments at both EU and Member State level have strengthened it, especially when coupled with greater freedom for companies to reincorporate into states friendly towards pre-bid defences.