A view from frankfurt
25 June 2001
The German legal market has receNTLy been gripped by the saga of the draft Takeover Act and the ensuing battle over the European Union Takeover Directive.
The point of contention in the discussions was the role of management in planning a defensive move in takeovers. Should the management have a strong role in determining and applying defence mechanisms, or should the decisions be left to the shareholders?
Eventually, the German government agreed with the majority of European Union (EU) members that the management should not have the decisive role. It was decided that, as a rule, the management board and the supervisory board should not interfere in any way to prevent a successful takeover. The target management shall be allowed to present a white knight and to apply takeover defences on the basis of shareholder resolution taken during the offer period, thus allowing the shareholders to decide on the defences, if any.
The German government changed its position on the matter twice within a short period of time during the EU discussions. Traditionally in support of a weak role for management at the EU level, Germany turned against the majority of member states, which were arguing for strong management. Then, when the issue went to the table, Germany returned at the last minute to its old position, thereby allowing the directive to be approved.
The main sticking point of the EU discussions was the 'poison pill' issue. It was argued that, as US companies can use the defence mechanism, it would be unfair if it was ruled out under the EU directive.
It was a valid discussion - there is not a yes or no answer to this problem - but the EU has taken far too long to decide the issue. We have been waiting for more than 10 years for this law.
By bringing in the changes indicated in German law and the EU takeover directive, takeovers will become more reliable and easier for both sides to complete. Both sides will now be on safer ground, knowing what is feasible and what is not.
In view of the large payments made to the Mannesmann board members by Vodafone, the act will provide explicitly that no payments must be made to members of the target management board and/or supervisory board.
Despite the history of German companies, in which the Vodafone takeover of Mannesmann was the first ever successful hostile deal, there is no major concern that the new regulations will open the floodgates to foreign companies looking to swallow up German ones. The media is not saying that in the near future all these beautiful German companies are going to be taken over by foreign firms.
In fact, the response to the draft bill has been rather positive. There was a realisation that it had to happen and the market had been prepared for it by the Vodafone-Mannesmann deal. The draft bill will improve the situation, although whether it will have a great influence remains to be seen. It will add greater flexibility to the German market and as a result the German market will become even more attractive to investors - and there are all sorts of companies that would like to take over German concerns.
Another added bonus for the M&A market are the recent tax reforms, which have made it much easier for companies to shed subsidiary operations. Before the reforms, the tax charged on the sale of subsidiaries discouraged many deals. The same was true for banks with large investments in companies. Now the companies are able to benefit from the new tax rules. Both moves together will lead to an upsurge in work - hopefully to the exceptional level of last year.