July 26 2006
The EU Takeovers Directive (2004/25/EC) was finally adopted in April 2004. The principal aim of the directive is to strengthen cross-border restructuring and financial services. The directive applies to takeover bids made for securities of an EU company whose securities are admitted to trading on a regulated market in at least one EU member state. Thus, takeovers of Irish Enterprise Exchange listed companies will not be subject to the directive.
The directive has been transposed into Irish law by the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006, which are effective as of May 20 2006. Many of the provisions therein are similar to the rules already contained in the Companies Acts (1963 to 2005) and the Irish Takeover Rules; as a result, the directive is unlikely to have a significant impact in Ireland.
Two of the key features of the directive are set out in Articles 9 and 11. Article 9 prohibits directors from engaging in any action which might frustrate a hostile takeover without prior shareholder approval. This might include the use of 'poison pills' such as an obligation to make substantial payouts to executives in the event of a hostile takeover. Article 11 contains certain rules which remove transfer and voting restrictions in a takeover situation. The directive specifies that member states are free to decide whether to adopt these two articles. This is largely academic in Ireland as the pre-existing legislation already prohibits devices such as poison pills and special voting shares to prevent unwanted takeovers. However, other member states have decided not to apply Article 9. This results in inconsistent legislation throughout the EU member states, which conflicts with the fundamental aim of the directive.
One relatively significant impact that the directive is likely to have in Ireland relates to Section 204 of the Companies Act 1963. Section 204 provides for a mechanism whereby minority shareholders could be forced to sell their shares in a target company even where they do not wish to do so. Provided that shareholders holding not less than 80% of the shares in the target company accept the offer (which must be made to all shareholders of the target), the minority shareholders could be obliged to sell to the proposed purchaser pursuant to the terms set out in the offer notice.
The directive has now tightened up the 'squeeze-out' rule. The level of acceptance has been increased from 80% to 90%. This change brings Ireland into line with several other EU member states, which have implemented similar provisions in relation to the forced buy-out of minority shareholders. The higher threshold brought about by the regulations will make it more difficult for a purchaser to avail of the compulsory acquisition procedure, which may result in a greater proliferation of other takeover methods such as schemes of arrangement, which ultimately require the consent of a 75% majority of shareholders voting at the meeting at which the scheme is approved, as opposed to the higher threshold of 90%.
The directive also contains new provisions in relation to employees of both the offeror and offeree companies. Representatives of the employees have a right to be consulted and provided with information in relation to a potential takeover, including details of the proposed future of the business and any material changes thereto that are likely to affect employees.
Thus, the EU Takeovers Directive does not represent any major innovation in Irish law. The main provisions found in Articles 9 and 11 are already catered for under pre-existing legislation. Nor is the addition of an obligation to inform and consult employees a radical change, considering that existing transfer of undertakings and employment legislation in Ireland requires comprehensive consultation with employees as to any transfer of a business or part thereof. The one introduction of note however, relates to squeeze-out rights and the increase in the percentage of shareholder consent required to exercise such right. This represents the only significant change brought about by the new directive.
For further information on this topic please contact Marco Hickey or Zelda Deasy at LK Shields Solicitors by telephone (+353 1 661 0866) or by fax (+353 1 661 0883) or by email (email@example.com or firstname.lastname@example.org).
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