Takeover Bids Directive

1. Takeover Bids Directive And the broken dream of shareholder engagement Jaap Winter 9 September 2011

2. Europe at the cross-roads • Seminal moment: 04/07/2001 • Takeover Bids Directive voted down in European Parliament • European institutional relations • Corporate governance in Europe • EU industry politics • Level playing field • Post- bid (art. 9, board neutrality) en pre-bid (art. 11, break-through) • Portuguese compromise: cafetaria regime of MS opt-in/ opt-out • Fundamental change of sentiment 2001-2004 • withdrawal to national interests • Union seen as a threat rather than an opportunity

3. What to expect from review of Directive? • Sentiment has not turned to pro-Europe • French and Dutch rejection of Treaty • Financial Crisis • Eurocrisis • MS application of art. 9 and 11 • Board neutrality imposed less than prior to Directive, and with reciprocity escape • Break-through rule only imposed in Baltic states • Agreement to change unlikely beyond some technical improvements

4. Any relevant change in circumstances? • Broken dream of shareholder engagement • Post financial crisis analysis (eg Walker Review) • Key drivers • Excessive diversification of portfolios • Way beyond levels indicated by finance theory (na added value beyond 40 companies, instead portfolios extend to 1000s) • Intuitive preference for liquidity • Competition for mandates between asset managers • Warped understanding of asset manager fiduciary duty (don’t lose competition) • Industry vested interests in trading business model (rather than holding) • Regulation: prudent investor, concentration risk penalty, accounting

5. Effect on governance Diversification of portfolio and constant focus on liquidity does not allow for serious engagement expected in governance framework No incentives, no ability, no interest to engage beyond shallow formalities (compliance engagement) and incidental activism (intervention) Green paper on Corporate Governance Framework with suggestions for improvement Impossible to improve beyond without fundamental deconstruction of current investment paradigm and mythology What does this mean for governance? No regular disciplining of management by shareholders Comply or explain reduced to mutual box ticking (by managers and shareholders)

6. Another seminal moment • Engagement vacuum has two effects: • Scope for activism • Scope for takeover bid • Two possible responses: • Give up on on shareholder role in governance all together, restrict shareholder rights, activism and takeovers are destructive consequences of lack of engagement • Strengthen opportunities of shareholder activism and takeovers as disciplining fall-backs in absence of structural engagement • In current environment first response more likely than second (NL, D against activism, F protecting national industries) • Governance thinking should favour second

7. Value destruction by takeovers • Evidence of value destruction by takeovers: bidder shareholders lose out • Nonetheless strong business push to continue (friendly) M&A, restructure companies, respond to changing markets and products • Key question: how much value is lost because of complete lack of disciplining? • Structural underperformance and shirking, inefficient empire building • Dutch buying spree 2nd half 90s, followed by huge write-offs and near bankruptcies • lack of disciplining on bidders • Mandating shareholder vote on large acquisitions • Plus, some cost of dynamic industry restructuring may be acceptable • Lack of restructuring in old industries may be highly detrimental in terms of wealth creation ECL I, lecture 1+ 2, 04+ 09-02-11

8. Facilitating takeover bids Takeover bids (threat of) are essential disciplinary force plus facilitator of industry dynamics Reconsider opt-in and opt-out provisions of directive, art. 12 Nothing wrong with board neutrality Break-through was criticised, not only by those with stake to lose Better alternative to deal with pre-bid defence mechanisms? Emmenthaler break-through is ineffective, broaden scope Threshold to mirror mandatory bid threshold? Deal with compensation issue: irresponsible legislation to mandate compensation but not set out what and how Remove reciprocity, probably in breach of 49 TFEU and WTO anyway Mandate shareholder vote for bidders (above thresholds) ECL I, lecture 1+ 2, 04+ 09-02-11

9. Level playing fields forever Level playing field with rest of the world relevant argument? Never believed in it, see High Level Group report US dynamics are very different from EU Ability to just say no and defend have very different outcomes than EU structural pre-bid mechanisms Do what is best for EU (discipline and dynamics) Concerns on excessive foreign (Chinese) investment in EU? Never stopped us from buying massively in US and now China Sensitive industries to be protected on basis of special (EU) legislation, not general restriction on takeover bids ECL I, lecture 1+ 2, 04+ 09-02-11

10. At least changing defaults • Rather than MS opting-in or out • Art. 9 and (improved) art. 11 to be imposed by MS as default • But companies may opt-out by shareholde vote • Paul Davies will elaborate • Shareholder vote • Proportionality in that vote • Lack of engagement • Changing defaults back and forth? ECL I, lecture 1+ 2, 04+ 09-02-11

11. Conclusion For the sake of the upcoming debate Governance situation has changed, or at least our understanding of it Structural lack of shareholder engagement and disciplining Argument for facilitating takeover bids even stronger today Calls for removal or reversal of cafetaria regime If Lucian Bebchuck has his way, that may over time even create a level playing field with the US.