Lowballing under the EU Takeover Bid Directive: Strategies, Concerns and Gold-Plating Remedies

This year marks the twentieth anniversary of the EU Takeover Bid Directive (TBD), a cornerstone of European corporate governance designed to harmonize the rules for takeover bids across Member States. In our new working paper, we provide a novel analysis of one persistent challenge of the TBD—'acceptance-minimizing lowballing strategies’. This practice was highlighted by the European Commission in 2012 following high-profile cases such as ACS/Hochtief and Porsche/VW. Despite an initial interest, the issue has remained unresolved and lowball takeovers continue to occur.

Understanding Lowballing in the Context of the TBD

‘Lowballing’ refers to a strategy whereby an offeror sets a bid price that is typically below the market price of the target company's shares. Under the EU mandatory bid regime, lowball offers are often designed to be accepted by only very few or even no shareholders. This strategy exploits two structural provisions of the TBD: (i) the exemption from mandatory bids and (ii) the single control threshold requirement. According to Article 5(2) of the TBD, if control is acquired through a voluntary bid that meets all the requirements of the Directive, the acquirer is exempt from making any mandatory bids. The TBD mandates a one-off obligation to make a mandatory bid when the control threshold is exceeded for the first time, unless the threshold is exceeded by a voluntary bid in accordance with Article 5(2) of the TBD. Subsequent acquisitions do not trigger additional mandatory bids, irrespective of the percentage of shares acquired or the price paid. Therefore, under the TBD, lowballing strategies are typically ‘acceptance-minimizing lowballing strategies.’

Acceptance-Minimizing Lowballing Strategies in Practice

Lowballing can take the form of both mandatory and voluntary bids. In mandatory lowballing bids, bidders acquire control at a low price by timing acquisitions to ensure that the minimum price requirement is based on historically low pre-acquisition prices. This minimises the mandatory bid price, resulting in few or no shares being tendered and allowing the offeror to maintain control without further mandatory bids. In lowball voluntary bids, bidders can build up a stake just below the control threshold and then launch a lowball voluntary bid. This strategy, which makes use of the exemption from mandatory bid requirements in Article 5(2) of the TBD, allows offerors to obtain control without making a mandatory bid to all shareholders.

Concerns about Lowballing Under the EU Mandatory Bid Rule

The double limitation of the obligation to launch a mandatory bid—under Article 5(1), which provides for a one-off mandatory bid, and Article 5(2), which exempts the offeror from future mandatory bids—means that a successful lowball bid releases the offeror from any further obligations under the TBD. This raises concern as to whether lowballing strategies circumvent the mandatory bid rule (MBR) or are permissible circumvention strategies. Whether such lowballing strategies circumvent the MBR or constitute a permissible avoidance strategy, and whether regulatory loopholes should be closed, depends on one's assessment of the MBR itself. Evaluating lowballing bids solely on the basis of the mandatory framework provided by the TBD reveals a nuanced legal landscape. In principle, the TBD framework allows for strategic timing of both voluntary and mandatory bids. However, given the underlying rationale of the MBR—time-bound equal treatment and the provision of a reasonable exit option—these strategies raise concerns for those lowballing voluntary bids that strategically use the exemption from the mandatory bid requirement set out in Article 5(2) of the TBD. For mandatory bids, however, lowballing is ‘not a bug, but a feature’ of the TBD—albeit one that is only available for rather atypical acquisitions, ie. control acquisitions at or below the current market price.

Gold-Plating Remedies: Effectiveness and Admissibility Under the TBD

Remedies to discourage lowballing strategies are limited. Extending minimum price rules from mandatory bids to voluntary bids increases the cost of voluntary bids and reduces their likelihood but cannot completely prevent lowballing. However, two mechanisms available in some Member States are promising: additional mandatory bid(s) for subsequent acquisitions and mandatory minimum acceptance thresholds. Many EU Member States require a further mandatory bid if control increases within a specified period after the initial bid. However, this measure does not deter bidders from making an initial lowball bid. Admittedly, an additional control threshold may discourage or even prevent lowball bids if the bidder's intention is to further increase its controlling position without being constrained by takeover law. The introduction of a minimum acceptance threshold for voluntary bids, as in the UK, the Netherlands, Austria and France, is a more effective way of addressing concerns about lowballing voluntary bids. Although it does not remove all concerns about equal treatment, it does significantly mitigate issues about the exit option rationale.

Conclusion and Future Directions

While the TBD has established a robust framework for takeover bids, the persistence of lowballing strategies highlights the need for continued refinement and harmonisation across Member States. Our paper underlines the importance of addressing these challenges in order to uphold the Directive's core principles of fairness and the protection of minority shareholders. As the EU Takeover Bids Directive enters its third decade, it is crucial that policymakers take into account the findings of recent research and adapt the regulatory framework to better address lowballing. By implementing more consistent and rigorous measures, the EU can ensure a fairer and more transparent market for corporate control, ultimately fostering greater confidence and stability in its financial markets.

The authors’ complete article can be accessed here.

Peter O. Mülbert is a Professor of Law at the University of Mainz, Germany.

Alexander Sajnovits is a Post-Doctoral Research Fellow at the University of Mainz, Germany.