EU directive could cause takeover chaos
Tuesday 30 May 2006
The European Union's botched attempt to smooth out the rules on cross-border mergers is threatening to plunge future takeovers into chaos.
Legal experts have warned that bids for companies with split jurisdictions face lengthy delays, millions of additional pounds in advisers' fees and months of uncertainty on the back of the new EU takeover directive, which came into force last week.
The new rules were intended to create a level playing field for companies seeking to acquire European rivals by, for example, making it harder for groups under siege to use "poison pill" tactics as a defence from an unwelcome predator.
But strong opposition from member states such as Germany and Sweden meant the directive has had the opposite effect and is instead helping to fan the flames of protectionism burning across Europe in the wake of several contentious energy deals.
There is particular confusion over which country's takeover rules will apply in bids involving companies with split jurisdictions - where one group is incorporated in one EU country but trades its shares on the bourse of another.
"The rules on which regulator has jurisdiction over various aspects of a bid in split jurisdiction cases are far from clear, so there could be real confusion," Selina Sagayam, corporate partner at Simmons & Simmons, a London law firm, said yesterday. Bids for companies operating in politically sensitive sectors from energy to defence will be most at risk, she warned.
With no firm guidelines, national regulators will have to vie with each other on a bid-by-bid basis to decide who gets to be the ultimate arbiter. Takeover rules in each member state vary wildly, which will make it very difficult to establish a precedent.
Current deals at risk include Deutsche Börse's battle with the New York Stock Exchange for control of Euronext, which may be a Paris institution but is incorporated in the Netherlands. Arcelor, which is Luxembourg-based but listed in France among other countries, is also caught up in the confusion.
The directive covers the EU's 25 members plus Norway, Iceland, Liechtenstein and Switzerland.
Ms Sagayam said: "It will be quite challenging for companies to make preparations in advance [to launch bids]."
Brussels watered down the new takeover rules to allow countries to opt out of certain clauses. Crucially, the law left member states free to ignore the core clauses on "poison pills". Some countries have moved to make it easier for companies to fend off unwelcome suitors.
In the wake of Mittal Steel's hostile bid for Arcelor, France drew up fresh legislation allowing companies facing a hostile bid to make themselves more expensive to acquire by giving them the right to issue warrants convertible to shares at a discounted price to existing shareholders.
To further complicate matters, just five of the 29 countries affected met the 20 May deadline to implement the directive.
There has been a rash of deals between companies in different EU member states so far this year.
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