The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 6, January 2001, Panel Publishers, New York, NY.


By Robert W. Wood

Okay, maybe its an exaggeration to call the European M&A market stagnant. But the fact remains that the U.K. and overall European M&A market has slowed enormously. This despite the massive German tax changes we've covered in previous months, and the "me, too" tax legislation that other European countries were starting to emulate.

Now, the merger machine in Europe has been characterized as "sputtering" (see Raghavan, "Pace of European Mergers Slows," Wall Street Journal, Nov. 16, 2000, p. C1). It is not only European activity, however, that is making bankers blue rather than rosy-cheeked. Indeed, the Financial Times characterized the "rush hour" in Japanese mergers and acquisitions, too, as having fallen flat (a mixed metaphor but nonetheless descriptive). See Ibison, "M&A Rush Hour Falls Flat," Financial Times (London), Nov. 17, 2000, p. II. It appears that in the wake of the European market, the strong signs that M&A activity in Japan would burgeon may have been elusive.

Parliamentary Changes

One of the more far-reaching developments is poised in the European parliament, with its proposals to make changes to the European union's takeover rules. Some say the long-awaited changes may make it almost impossible for companies to launch hostile takeover bids. In late November, the changes discussed at one parliamentary committee would effectively contradict the purpose of legislation to protect shareholders. The primary proposed changes to the takeover rules would permit the management of a company to take defensive measures against a bid without consulting shareholders. Courts (and national courts in particular) would then have to decide whether the directors had acted in accordance with their fiduciary duties.

The latter proviso makes it clear that this could tie up contested bids in litigation for several years. The head of the UK's takeover panel, Patrick Drayton, has criticized such proposed amendments as effectively emasculating investor protection. See Hargreaves, "Euro-MPs Threaten to Stymie Hostile Takeovers," Financial Times (London), Nov. 22, 2000, p. 2.

The battle is apparently becoming somewhat bitter. Indeed, the European Parliament's Committee on Legal Affairs has inserted changes into a draft European takeover directive. The directive comes after more than a decade of discussion — things do not move terribly quickly in government, even there. It is supposed to be voted on in the European Parliament in early to mid-December (after The M&A Tax Report goes to press). The proposal seeks to unify Europe's patchwork of rules regarding mergers and acquisitions with one set of uniform regulations.

Among the changes to be proposed (or probably made) is a measure that would allow member states to permit directors of target companies to frustrate unsolicited takeovers by adopting defensive measures. Apparently there is some dispute over whether this will ultimately allow that action without shareholder consent. Another measure to be voted on by the European Parliament would require member states to insure that companies targeted by takeover bids seek to safeguard jobs. A third proposed change would potentially undermine efforts in the original takeover directive to protect minority shareholders when a change of control occurs. For discussion, see Raghavan, "In Europe, a New Storm Over Takeover Rules," Wall Street Journal, Dec. 5, 2000, p. A21.

Comments regarding the proposals are mixed, but are generally quite critical. Although a uniform system of rules governing takeovers might be seen to be unifying by itself, there is an oxymoron at work here. Various London lawyers have been quoted as saying that these changes will put the clock back a decade and will frustrate the fundamental goal of the European Union to create a single market for takeovers. Id.

The well (and often) cited example of the mixed European landscape is the now legendary Gucci success in fending off French giant LVMH Moët Hennessey Louis Vuitton, SA. That was accomplished by Gucci N.V. selling a 42% stake in itself to French retail group Pinault Printemps Redoubt SA without shareholder consent. In the UK, such a sale could not have been accomplished without shareholder approval. But the technique apparently has worked (so far) in Gucci's case.

Pills and More Pills

These proposals come on the heels of interesting activity in Germany, particularly the takeover of Germany's mobile phone company, Mannesmann, by its UK rival, Vodafone, during 1999. One part of the proposed change is to insure that poison pills cannot be decided by management of target companies without consulting shareholders. This represents a crucial part of the proposal. So, should shareholders be consulted before a poison pill is adopted?

One argument is that without consulting shareholders, allowing the management to adopt such a position lacks safeguards. It is primarily the U.S. model (where poison pills are common), that is being gazed upon as the benchmark of the future. At the same time, if poison pill defenses are taken by companies and then later challenged in court, hostile takeover bids could end up stagnant — stuck in court, something that Europeans have far less patience for than Americans. (Even elections, it seems, can languish in court in America, something Europeans find hard to comprehend!) As noted, a good example of how sluggish court battles can be is the still-pending Dutch court action in which Gucci has still been attempting to fend off the bid by LVMH.

Which makes us wonder: is this kind of battle in the offing for more European companies?

European Deals Stagnant, Vol. 9, No. 6, The M&A Tax Report (January 2001), p. 6.