Death by a Thousand Cuts: The Hostile Bids Regime in Europe, 2004-2023

In 2004, the European Union (EU) adopted the Takeover Directive, a framework statute aimed at regulating corporate control transactions and takeover bids targeting EU listed issuers. The Directive, amidst aspirations of fostering a unified market for corporate control and ensuring shareholder protection, was expected to facilitate takeovers as drivers of value creation. However, in the two decades since, subsequent economic, political, legal, and governance developments have deviated from these initial intentions, creating a market and legal landscape less conducive to takeover activity.

In our recent paper, Death by a Thousand Cuts: The Hostile Bids Regime in Europe, 2004-2023, we address the main factors that have shifted the European takeover environment away from its original pro-market stance.

The Directive

Initially, the EU aimed to promote a unified market for corporate control, emphasizing the need for a level playing field and expressing a preference for contestability of corporate control. This vision included facilitating takeover bids, even hostile ones, as integral components. The European Commission endorsed a model based on board neutrality, allowing shareholders to decide on takeover outcomes without undue interference from target company boards. However, this approach faced challenges early on.

An earlier proposal famously succumbed before the European Parliament in 2001; inspired by the pro-takeover regulation of the British City Code, the proposal found fierce opposition from German lawmakers, highlighting the clash between different national perspectives on hostile takeovers. Historically opposed to hostile takeovers, Germany grew even more averse after the loss of its national champion Mannesmann at the hands of British competitor Vodafone. The compromise that ultimately helped broker the approval of the Directive made some of its core provisions optional for Member States and reflected a shift towards preserving national prerogatives over pan-European takeover policies.

A Thousand Cuts

Around the time the Directive was adopted, several high-profile cross-border deals (both hostile and negotiated) upset national socio-economic circles, reinforcing pressures towards an even less takeover-friendly legal environment, as the ensuing paragraphs illustrate.

Stakeholderism. The corporate governance landscape significantly evolved after the adoption of the Directive. Shifts towards stakeholderism since the late 2000s have challenged the primacy of shareholder value maximization, affecting attitudes towards takeovers. Stakeholderism may justify non-shareholder-based defenses, especially in jurisdictions that do not impose board neutrality and offer effective defenses against takeovers. But even in other jurisdictions the expressive force of stakeholderism questions the benefits of takeovers and the market for corporate control.

Changes in geopolitical landscape and macroeconomic shocks. Geopolitical turmoil, epitomized by events like the Brexit referendum, fostered economic nationalism and protectionist sentiments, influencing corporate governance policies. Macroeconomic shocks, including the Financial Crisis and the Covid pandemic, have further justified interventions aimed at protecting existing ownership structures at corporations and limiting foreign direct investment. This resulted in a series of changes in takeover and financial markets laws, changes in company laws and corporate governance practices, and in various foreign direct investment controls legislation throughout the European Union.

Changes in corporate and securities law. Changes to takeover and financial market laws have had an impact on takeovers. First, Member States made use of the optionality of some of the main features of the Directive. For instance, the board neutrality rule has moved from mandatory to optional in France and Italy. EU securities laws were also significant. For instance, the revised Transparency Directive has required disclosure of long positions held via derivatives, which made intentions of potential hostile bidders and activists known to the public earlier. The Market Abuse Regulation increased the risk of violating insider trading bans for prospective bidders building a toehold, leading to ambiguity and potential prosecution risks. Against this background, some Member States also engaged in 'goldplating,' by requiring holders of significant stakes to declare their intentions vis-à-vis the company.

Company laws and corporate governance practices also changed. On the one hand, several European countries, including Belgium and Italy, amended their company laws, introducing tenure voting as a tool hitherto unavailable to insulate companies from hostile takeovers, with France going one step forward and making tenure voting the default rule for listed companies. On the other hand, some large issuers, including Fiat (now Stellantis) and Ferrari, reincorporated in the Netherlands to take advantage of the greater leeway to fend off hostile takeovers that Dutch corporate law provides. All the while, dual-class share structures started to appear in Europe as bans on multiple voting shares were lifted with the goal of making companies more takeover-proof.

Foreign direct investment legislation. Moreover, in an overall more protectionist environment, legislations on foreign direct investment (FDI) tightened. Although the EU Screening Regulation aimed to harmonize FDI review mechanisms, Member States implemented the rules differently, with variations in thresholds, sectors, and assessment criteria, reflecting concerns about investments from countries like China and Russia but often also applying to acquisitions by EU buyers. While FDI reviews are crucial for national security, they are objectively at odds with an open takeover market.

Insiders and National Politicians as the Main Beneficiaries of the New Environment

As we question who ultimately benefits from a more interventionist political economy that hampers deal-making, we note that the market for corporate control of large European firms has historically elicited a lot of attention from public opinion and national politicians and that the new ecosystem favors corporate insiders and politicians, leading to greater insulation from hostile takeovers but potentially higher agency costs for European businesses.

The authors' full paper is available here.

Luca Enriques is a Professor of Corporate Law at the University of Oxford and a Fellow Member of ECGI. 

Matteo Gatti is a Professor at Rutgers University and a Research Member of ECGI.