This newsletter is intended to highlight deals and developments within
the field of M&A and corporate finance. In this issue we focus on a number
of developments, including the new launch of the EU Takeover Directive,
the implications of the recent Sarbanes-Oxley Act of 2002, and the
increasing trend of the UK's top companies towards M&A litigation.
Another Launch For The EU Takeover Directive
The endless saga of the EU Takeover Directive continues. Seventeen years after the proposal was first put forward, and after what most commentators thought at the time was a fatal blow in 2001, when the European Parliament failed (on a tied vote) to endorse a compromise deal, the Commission has now published yet another draft version of the Directive.
The new draft follows on from the report of the EU group of "Company Law Experts" in January this year. The most recent controversial proposal put forward by that group was the "break-though" rule, which would allow bidders who achieved a 75% economic interest in the target company to override special share rights. Although the Commission has decided not to include the break-through rule, it has nevertheless included new proposals in relation to frustrating action and special share rights could prove to be just as controversial.
The key features of the new proposal are:
Companies and securities to which the Directive applies
ï Member States must make rules relating to takeovers of companies whose securities are admitted to trading on a regulated market. Only offers for transferable securities with voting rights are caught by the regime.
ï The Member State in which the target securities are admitted to trading will have jurisdiction over the bid (or, if the securities are admitted to trading in more than one market, where its registered office is or where its securities were first admitted to trading).
ï In any event, however, the Member State where the target's registered office is will have jurisdiction over issues relating to employees and company law, including the control level that triggers a mandatory bid, and the conditions under which the target board may take frustrating action.
ï Member States can decide whether and under what circumstances parties to a bid are entitled to bring administrative or judicial proceedings. This would allow the UK Government to continue with the current system of having the Takeover Panel as the competent authority for takeover bids, and preventing bids being halted by litigation.
ï A bid must be made if a person acquires a controlling stake - but the percentage which triggers this requirement is left to Member States to decide.
ï The price for a mandatory bid will normally be the highest price paid during the preceding 6 or 12 months. If more than a 5% stake has been acquired during the preceding 3 months then cash consideration must be provided.
ï The target board must inform representatives of its employees of the bid once it has been made public and must let them publicise their opinion on the effects of the bid on employment. This does not improve on the employee rights in the last draft Directive and could be a sticking point for the EU Parliament.
Squeeze-out and sell-out rights
ï A new provision has been included which requires Member States to create squeeze-out rights - Member States can chose a trigger level of between 90% and 95%.
Frustrating action, defensive structures and share rights
There are a range of provisions in the draft Directive which restrict the use of defensive corporate structures and special share rights.
ï The target board would need the consent of shareholders in general meeting before taking frustrating action once a proposed bid is announced and certain types of restrictions on voting rights would be ineffective at the meeting.
ï Companies would be required in their annual accounts to publish detailed information on a range of topics relating to control rights and restrictions on the transfer of securities or voting rights. Every two years, the company's shareholders would have a right to vote on whether to retain any of these "structural" or "defensive" provisions.
ï Any restrictions on the transfer of securities would be unenforceable against a bidder during an offer period.
ï Once the bidder has sufficient securities to amend the company's articles of association then, at the first general meeting following the bid, any restrictions on the transfer of securities or on voting rights and any special rights in relation to appointment or removal of board members would be disapplied.
There are significant technical and practical problems with these proposals on share rights, particularly because some would apply not just to arrangements between the company and a shareholder, but also to arrangements between shareholders.
Although there may now be the political will across Europe to finally push the Directive through, the complexity of some of the proposals in the new draft will mean that agreeing the detail could still be a long, and uphill, struggle.
If you have any further queries regarding the EU Takeover Directive, please contact James Palmer or Carol Shutkever, corporate partners at Herbert Smith.
Update On Our Alliance
We continue to strengthen our relationship with Gleiss Lutz and Stibbe, the two leading European law firms with whom we have an alliance. The main objective of the alliance is to meet the needs of the firm's clients for an integrated, consistently high-quality, cross-border service.
Highlights of the year to date include:
ï the three firms working together to advise PwC Consulting on PwC's separation of its worldwide management consulting business and subsequent US$3.5 billion sale of the consulting business to IBM
ï advising Carnival on its bid for P&O. Gleiss Lutz advised on German antitrust issues
ï the three firms being appointed to CSFB's global panel of law firm advisers
ï the three firms working together to advise Kruidvat on its Ä 1.3 billion sale of its European health and beauty retail business to Hutchison Whampoa of Hong Kong
At the same time, we are developing the operational integration needed to underpin the transactional capability of the alliance. This has been manifested in initiatives such as the exchange of know-how, a steady flow of secondments between the three firms and joint seminars for clients.
We are also continuing to build our relationships with leading law firms in southern Europe.
Sarbanes-Oxley Act Of 2002
The foundation of the US capital markets is investor confidence. This confidence has been severely shaken by recent scandals involving alleged misdeeds by corporate executives and independent auditors. The Sarbanes-Oxley Act of 2002 (the "Act") was the Congressional response to this threat to the US markets. The Act, which effects sweeping corporate disclosure and financial reporting reform, has been cited as the biggest change to the US securities laws since the establishment of the SEC in 1934. In addition to the disclosure and financial reporting reforms, the Act increases corporate accountability and the regulation of the accounting and legal industry while adding protections for auditors and research analysts.
Effect on non-US companies
From a European perspective, the most important fact is that the Act does not distinguish between US and non-US companies and would, as drafted, apply equally to any company which either files periodic reports with the SEC or has filed a registration statement with the SEC (such companies will be referred to in this article as "Issuers"). Consequently, any company which has a listing on a US exchange (such as a listed ADR programme) or which has publicly sold securities in the US will have to be concerned with complying with the Act's requirements. It is unclear whether and to what extent the SEC will make any exemptions for non-US Issuers. The effects on Issuers are felt mainly in the areas of corporate officer accountability and corporate governance. Recent discussions with the staff of the US Securities and Exchange Commission have indicated that while they generally plan to be firm on disclosure requirements for all Issuers, they may allow some variance from the corporate governance rules for non-US Issuers.
The provisions of the Act concerning corporate officer accountability include, among other things:
ï personal certification of financial information, financial reporting and disclosure control procedures by the chief executive and financial officers
ï disgorgement of bonuses and incentive or equity-related compensation by the chief executive and financial officers when an accounting restatement is necessary due to misconduct
ï a ban on company loans to officers (with limited exceptions). The Act also creates a new offence prohibiting the improper influencing of auditors by officers, directors or any person acting under their direction in order to render financial statements misleading
Regulation of public company auditors
US accountancy firms who provide Issuers with audits will now be subject to regulation contained in the Act. Additionally, non-US accountancy firms who provide audits to Issuers or who perform a substantial role in the audit process with the auditors for Issuers will also be subject to the oversight imposed by the Act.
The Act replaces the existing self-regulatory system for auditors with a new, independent oversight body. The new Board is charged with adopting auditing, quality control, ethics and independence standards for accounting firms providing audits to Issuers. The Board will also be in charge of inspecting and disciplining such firms.
Regulation of attorneys
The Act also imposes a new federal level of regulation of lawyers. The Act mandates that the SEC adopt minimum standards of...