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06 September 2006
The long-awaited, highly politicized EU Takeovers Directive (2004/25/EC), which was signed on April 21 2004 and came into force on May 20 2004, should have been transposed into national law by member states by May 20 2006. Although Cyprus missed this deadline, it is expected that the directive will be implemented in Cyprus before the end of the year.
Under the current regime the Cyprus Stock Exchange is the authority charged with approving public takeover bids. After the enactment of the relevant national law the supervising authority will be the Securities and Exchange Commission, whose duties will include (i) ensuring that the parties to a bid comply with the rules made or introduced pursuant to the directive, and (ii) imposing penalties for the infringement of national measures adopted pursuant to the directive.
Furthermore, pursuant to Article 4.5 of the directive, member states may provide, in the implementing rules, for derogation from those rules by granting their supervisory authorities powers to waive such national rules to take account of circumstances determined at national level or other specific circumstances, in which case a reasoned decision must be required, provided that the general principles of the directive are respected. Although this could leave such powers open to abuse, decisions of the Securities and Exchange Commission will be subject to annulment by means of recourse to the Supreme Court, in accordance with Article 146 of the Constitution.
The new law will apply according to Article 1 of the directive - that is, it will apply to takeover bids for the securities of listed companies governed by the laws of member states where all or some of those securities are admitted to trading on a regulated market (within the meaning of EU Directive 93/22/EEC on Investment Services in the Securities Field) in one or more member states. Collective investment schemes and takeover bids for securities issued by member states' central banks will not fall under the directive.
The current regime is set out by the Stock Exchange (Public Bid or Public Offer to Purchase Titles of and Merger of Companies Listed on the Stock Exchange) Regulations 1997, which are expected to be repealed or amended by the new law. The regulations comply with the directive to some extent, but uncertainties, problems and new issues introduced by the directive will have to be resolved.
For example, the existing regulations allow a partial voluntary or mandatory bid for percentages between 50% and 100%. Therefore, the question arises of whether the minority shareholders are protected:
All three practices are allowed and, at present, are widely used.
Article 5 of the directive deals with the protection of minority shareholders, the mandatory bid and the equitable price. This article is welcome as it introduces mandatory bid provisions but leaves it to (i) member states to fix the threshold for the mandatory bid obligation, and (ii) the supervisory authority to adjust the price in certain circumstances in accordance with clearly determined criteria. In the consultation paper published by the Securities and Exchange Commission in July 2006 the commission stated that it will not get involved in price adjustments.
Regarding the thresholds, the commission has stated that all public bids, whether voluntary or mandatory, should be for the whole shareholding (100%). However, the commission will retain the right to grant exceptions in the following circumstances: (i) where the bid is a partial bid, the bidder will not be allowed to make purchases during the bid period; and (ii) where, before submitting the bid (whether voluntary or mandatory), the bidder has made important purchases, it shall be obliged to make a bid for the whole shareholding.
In relation to mandatory bids, the commission suggests that the mandatory bid rule be triggered where a person acquires more than 30% of the shareholding in a company. In cases where a person already holds more than 50% of the shareholding, the general position is that the acquisition will not trigger the mandatory bid rule unless, as a result, the rights of minorities are affected.
Much of the controversy raised by the directive related to the restrictions on frustrating action and the breakthrough provisions. These are contained in Articles 9 and 11 of the directive - and member states can choose whether to implement these articles.
Article 9 deals with obligations of the board of the offeree company. The question at issue here is what defences a target company should be allowed in order to frustrate a takeover bid when, at the same time, the interests of shareholders need to be protected. In other words, what is the nature of the neutrality expected by the board of directors of the target company? The answer is found in the strict wording of Article 9, which allows the board to take defensive measures only if they are agreed upon at the general meeting.
As the Securities and Exchange Commission intends to opt in to Article 9, Articles 9.2 and 9.3 will be applicable. Article 9.2 states:
"During the period referred to in the second subparagraph, the board of the offeree company shall obtain the prior authorization of the general meeting of shareholders given for this purpose before taking any action, other than seeking alternative bids, which may result in the frustration of the bid and in particular before issuing any shares which may result in a lasting impediment to the offeror's acquiring control of the offeree company.
Such authorization shall be mandatory at least from the time the board of the offeree company receives the information referred to in the first sentence of Article 6(1) concerning the bid and until the result of the bid is made public or the bid lapses. Member states may require that such authorization be obtained at an earlier stage, for example as soon as the board of the offeree company becomes aware that the bid is imminent."
Article 9.3 states that:
"As regards decisions taken before the beginning of the period referred to in the second subparagraph of paragraph 2 and not yet partially or fully implemented, the general meeting of shareholders shall approve or confirm any decision which does not form part of the normal course of the company's business and the implementation of which may result in the frustration of the bid."
Provisions equivalent to Article 9 are set out by Regulation 21 of the existing regulations.
The provisions of Article 9 must be seen within the context of Article 11, which is designed to address the obstacles to free competition for company takeovers by introducing the breakthrough provisions in order to prevent the use of pre-bid defences prior to any bid being made, and even prior to the company's shares being listed. In other words, Article 11 enables the hostile bidder to break through any of the following provisions:
Restrictions on voting rights shall not have effect at the general meeting of shareholders ruling on any defensive measures in accordance with Article 9. Multiple-vote securities shall carry only one vote each at the general meeting ruling on any defensive measures in accordance with Article 9.
The Securities and Exchange Commission's intention is to opt out of the arrangements contained in Article 11 on the basis that the current regime allows companies to include such provisions in their articles and, therefore, there is no need for additional legislative provisions to allow opting into Article 11. However, the commission felt it was obliged to refer to these existing provisions so that the obligation to notify the possible application of such provisions by companies to the commission be regulated by legislation.
The directive places great emphasis on the provision of information and documents about the offer to the employees of the offeror and the offeree company. Therefore, Article 14 (on information for and consultation of employees' representatives) states that the directive shall be without prejudice to the relevant national provisions relating to information and consultations and in particular those adopted pursuant to the following EU directives:
Articles 6, 8 and 9 are relevant in relation to documents that need to be made available (see Articles 6.2, 6.3, 8.2 and 9.5).
The provisions of Articles 15 and 16 of the directive deal with squeeze-out and sell-out rights. Similar provisions to those set out by these two articles were proposed when amending the EU Second Company Law Directive (1977/91/EEC), but were finally rejected after negative reactions from member states.
Article 15, which provides for the right to squeeze out minority shareholders following a takeover where the offeror holds a specified percentage of the offeree's securities (no less than 90% and no more than 95%) by requiring the minorities to sell their shares to it at a fair price, is balanced by the provisions of Article 16 and the option now given to minorities to sell their holdings to the offeror following a takeover bid at an acceptable (ie, fair) price.
For further information on this topic please contact Stavros Pavlou or Lia Iordanou-Theodoulou at Patrikios Pavlou & Co by telephone (+357 25 871 599) or by fax (+357 25 344 548) or by email (firstname.lastname@example.org or email@example.com).
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Lia Iordanou Theodoulou