the future of corporate takeovers in europe ecgi session at the federation of european securities...
TRANSCRIPT
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The Future of Corporate Takeovers in Europe
ECGI Session at the
Federation of European Securities Exchanges'
6th European Financial Markets Convention
Brussels, 31 May 2002
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"Should the European Union Adopt the Winter Group's Proposals on Regulating Corporate
Takeovers in Europe?"
Moderator
Richard Lambert
Former Editor, Financial Times
Panel
Patrick Bolton, Princeton University, CEPR & ECGI
Michael C. Jensen, Harvard Business School & ECGI
Colin Mayer, Saïd Business School Oxford, CEPR & ECGI
Marco Pagano, University of Salerno, CEPR & ECGI
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Should the EU adopt the Winter Group Proposals?
Patrick Bolton
Princeton University, CEPR & ECGI
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Outline
• Hostile Takeovers and Takeover defenses • The European context• The Winter group proposal for EU Takeover
Regulation• Scope of the break-through right• Interaction with other rules • How will companies respond?• Conclusion
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Hostile Takeovers and Takeover defenses (1)
• Main economic justification for hostile takeovers: to discipline management when share ownership is dispersed
• In theory hostile takeovers discipline management better if:
1. Higher disclosure thresholds,
2. Can squeeze out and/or `dilute’ minorities
3. There are no defenses
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Hostile Takeovers and Takeover defenses (2)
But,• better discipline may come at the expense of a
better price or better minority protection
(dual-class share structure can increase firm value)• Hostile takeovers may have other motives than
replacing or disciplining bad managers• They may be inefficient in ‘short-termist’ markets
(e.g. Mannesman and Vodafone?)
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The Case for regulating Takeover defenses
• Shareholders may put up too strong defenses in an attempt to appropriate a bigger share of the value added by the raider
• A fortiori, management may put up too strong defenses
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The challenge of Takeover Regulation
How to facilitate disciplining takeovers without:
1. undermining control rights
2. Undermining freedom of contracting
3. ‘crowding out’ control by blockholders
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The European context
EU objective of creation of an “integrated capital market in the Union by 2005”
Breaking up ‘local business establishment’
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The Winter group proposal for EU Takeover Regulation (1)
One objective: creating a “level playing field”
Two guiding principles:
1. Shareholder decision-making
2. Proportionality between risk bearing and control
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The Winter group proposal for EU Takeover Regulation (2)
13th Takeover bid directive: (board neutrality, mandatory bids, squeeze-out and sell-out rights, equitable price)
+
New proposed rule: the break-through right
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The break-through rule
At 75% (maximum) of equity cash-flow rights the bidder can:
1. Impose a one-share-one-vote rule,2. Remove any ‘pre-bid defenses’ approved
by shareholders,3. Remove voting rights on “non-risk-
bearing capital”4. Amend corporate charter
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The break-through rule and shareholder rights
The break-through rule violates one of the two stated basic principles: (ex-ante) shareholder decision-making
“In the period prior to the bid shareholders will not be able to take into account and weigh all the circumstances which are relevant for their decision”
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Scope of the break-through right
Open questions:
Should holders of ‘risky debt’ or convertible debt be entitled to voting rights?
Do ‘supermajority’ or ‘unanimity’ rules (veto rights) apply after the break-through?
Are ‘poison pills’ overridden?
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Interaction between the break-through right and other rules
• The mandatory bid rule may discourage takeovers by raising their cost,
• The threshold for mandatory bids (30% in UK) could undermine the break-through rule,
• no disclosure requirements of “toeholds” in non-voting equity
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How will companies respond?
A number of options are open to firms who want to protect their control rights:
1.Substitute ‘EU defenses’ by ‘US defenses’2.Incorporate outside the EU,3.Set up ‘pyramidal structures’4.Delist or not go public in the first place
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Conclusion (1)Facilitating takeovers in the EU as a way of
‘shaking up’ complacent local business elites or disciplining managers may be desirable
By implication regulation of takeover defenses may be desirable, but…
The break-through rule goes too far in undermining freedom of contracting,
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Conclusion (2)
Why not respect (ex-ante) shareholder decision-making?
“Proportionality between risk bearing and control”
Is not a universal principle in Finance
Why not allow for an opt-out clause to be approved by shareholders?
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Conclusion (3)
Should a “level playing field” be pursued at all cost?
Should “harmonization” be pursued at all cost?
Why not focus more on EU wide disclosure rules?