The following article is adapted and reprinted from the M&A Tax Report, Vol. 10, No. 2, September 2001, Panel Publishers, New York, NY.


By Robert W. Wood

One need only open The Wall Street Journal these days to see the full-page ads by various brokerage firms touting all of the investment opportunities available in Germany because of German tax reform. But there is far more underneath this than the big ads might at first blush suggest. Here is just a sampling of headlines that are worth following to their birth (or grave).

In early July, the German Finance Ministry addressed its mounting pressure to water down the landmark legislation to abolish taxes on corporate profits from the sale of shareholdings in other companies. Due to take effect in January 2002, we'll all wait to see just what happens here. See Williamson, Wiesmann and Major, "Germany Under Pressure to Dilute Tax Reforms," Financial Times, July 4, 2001, p. 2. Not content with merely affecting tax laws, of course, the European Parliament could finally kill the European Union's controversial takeover directive if the hard lobbying Germans do what they said they would do — turning what was to be a rubber stamp vote into a battle. See Hargreaves, "Germans Seek to Kill Off EU Takeover Directive," Financial Times, July 3, 2001, p. 2. Only a day later, on the auspicious July 4, 2001 holiday in this country (but not in Germany) a Financial Times editorial called it as they saw it — that the European Union's takeover director was in danger of falling apart at the last hurdle. See "At Germany's Bidding," Financial Times, July 4, 2001, p. 12.

Barely a week later, the German cabinet approved a draft law regulating company takeovers and enabling managers to take defensive measures against hostile bids. This decision came only a week after there was a successful move by the Germans in the European Parliament to block European Union legislation on takeovers that would have banned this kind of takeover measure. Needless to say, the Germans are being criticized. See Williamson, "Germany Acts to Limit Hostile Takeovers," Financial Times, July 11, 2001, p. 2.

Pills, Poison & Takeovers

It's all about the inimitable "poison pill" of course. The German law which has been in the stew pot since March (or is that sausage pot?) would allow company management to gain shareholder permission to enact defensive measures against a potential takeover, even if no takeover bid has been presented. Id. Once again, we all have to wait to see how all this shakes out. On this side of the Atlantic, the coverage has been somewhat more neutral. The Wall Street Journal recently noted that the legislation would not be presented to Parliament until Fall, and that the draft law would allow management to take whatever steps it thinks are necessary to fend off a takeover (and that could include selling off a desirable subsidiary or seeking out a white knight).

Clearly, bankers are naysayers, noting that this law will favor management at the expense of shareholders, and is simply bad policy. But some others are saying that the bill isn't overly favorable to companies compared with the rights accorded U.S. firms. Poison pills in the U.S., for example, are a common practice but forbidden in Germany. German law requires all shareholders (including unwanted buyers) to be treated equally.

On this one, we will all have to wait for what will happen. For an interesting discussion, see Rhoades, "German Bill Gives Managers Tools to Fight Hostile Bids," Wall Street Journal, July 12, 2001, p. A12.

Germany in the News Again, Vol. 10, No. 2, The M&A Tax Report (September 2001), p. 8.