The European Union's decades-long struggle to abolish "poison pills" and other barriers against hostile takeovers has ended in failure, the European Commission will conclude today, while warning that it could overhaul the union's ineffective takeover law earlier than planned.
"A large number of member states have shown strong reluctance to lift takeover barriers," the Commission says in a report that examines the effects of the EU takeover directive.
The report finds that the vast majority of states have exploited the law's numerous loopholes to ensure that takeover defences can be used as extensively as before.
The report's publication today comes at a time of rising concern about protectionism in several European countries, and follows recent controversy over the growing power of hedge funds, private equity groups and other activist investors.
The report's downbeat conclusions also suggest that most EU governments remain unconvinced by the Commission's assertion that takeovers offer "benefits for companies, investors and ultimately the European economy as a whole".
The EU takeover directive - finally adopted in 2004 after more than 14 years of debate - was originally designed to make it much harder for companies facing a takeover bid to employ poison pill defences, such as issuing new shares or entering into complex joint ventures.
It would also have curbed the use of shares with multiple voting rights, another method of keeping suitors at bay.
But strong resistance from countries such as Germany and Sweden and a last-minute change of heart by the European Parliament meant the proposal was watered down. Crucially, member states were allowed to opt out of a key provision that forces companies to seek shareholder approval for poison pill defences.
Another vital clause, known as the breakthrough rule, to ensure that existing defences become ineffective during the takeover period was also made optional.
The Commission report, a copy of which has been obtained by the Financial Times, finds: "The vast majority of member states have not imposed [ or are unlikely to impose] the breakthrough rule."
Only Estonia, Latvia and Lithuania have opted into the clause, which means that fewer than 1 per cent of listed companies in the EU will apply the rule on a mandatory basis.
The report also finds that only Malta will change its rules on seeking shareholder approval for poison pills in the wake of the law.
"The number of member states implementing the directive in a seemingly protectionist way is unexpectedly large," the report says.
Charlie McCreevy, the EU internal market commissioner, has repeatedly voiced his frustration over the final version of the takeover directive.
The report suggests he may want to return to the issue earlier than planned. The directive is scheduled to be revised as late as 2011, but the report says that, "in the light of the evaluation", this may have to be brought forward.
- (Financial Times service)
