EU agrees new bid rules

June 6, 2001
Web posted at: 1047 GMT

LONDON (CNN) -- The European Union reached agreement on Wednesday over proposals for a common code on hostile takeover bids.

The new rules are part of moves by the EU to break down barriers to cross-border mergers, while protecting minority shareholders, as the EU aims to become the world's most dynamic economy by 2010.

"It's a victory for Europe," said Sven-Eric Soder, a representative of Sweden, which holds the revolving EU presidency and brokered the final part of the deal.

One of the stumbling blocks in approving the new rules was the issue of defensive, or "poison pill", measures taken by targets of hostile bids.

A poison pill is a financial arrangement like the conditional sale of a core asset at a cheap price that would reduce the value of the target company. Its purpose is to deter the hostile bidder.

But poison pills may not be in the interests of minority shareholders and may also serve to entrench the positions of poor managers who have left the company open to a hostile bid in the first place.

EU officials finally got agreement that target companies would be required to consult all shareholders before enacting "poison pill" measures, but member states have up to five years to enact the legislation on that point.

This poison pill clause was crucial to the EU directive, which aimed to ensure that minority shareholders are treated the same as large institutions.

Hostile takeovers, however, are very much the exception to the rule in the EU and elsewhere.

During the past 11 years, only 2 per cent of companies involved in big European mergers and takeovers have been the subject of hostile bids, according to European Commission figures.

The EU is also targeting laws in member states that make takeovers difficult, and is putting stock structures like "golden shares" and "special voting rights" under scrutiny.

One example is in Germany, which has a "Volkswagen Law", enacted 40 years ago for what became Europe's largest carmaker.

The law limits any investor from holding more than 20 percent of Volkswagen's voting rights and effectively prevents a takeover. EU officials have already called for the protection to be removed.

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