Social barriers mean that cultural traditions of the Japanese business consider enterprise as a community of life employees having an informal hierarchy and its own system of promotions. That is why “takeover” of companies with employees is severely condemned. Normally, employees, trade unions, administration and main shareholders take a united position in relation to the proposed transaction. For Western companies resistance by employees is the main obstacle when they attempt to take over Japanese enterprises. Perhaps the fact of “being close”, the orientation towards internal sources of growth helped the Japanese economy to attain the sustainable economic growth in the post-war period and to become one of the three leading industrialized nations. However the stagnation of the 90-s might mean that this model of corporate governance has exhausted its potential and needs to be modified to increase its efficiency.
The recent empirical studies to some extent have weakened the interest to theoretical analysis of the “atomistic” corporation. In Japan and in the continental Europe countries, even the largest companies (with shares traded not only on the national exchanges but internationally as well) ownership and control most often are characterized by a high degree of concentration. In many cases the owner who acquired control is directly involved in the process of management. Under the circumstances the regulatory mechanisms inherent to capital markets might work in specific situations where “hostile” takeovers of underperforming companies become almost impossible.
Moreover, it would be safe to say that modern methods of company formation bring about a system of economic incentives that prevent breaking down of established large blocks of shares which would inevitably result in a drop in the company’s market value (see Shleifer, Vishny 1986).
Overall, legislation of developed economies (see Kulagin, 1997, pp. 131-138; Shelenkova, 1998) envisage such forms of re-organization of legal persons as merger (two or more companies merge into one new company – a new legal entity), a takeover (îone or several companies join an established legal person), divisions (a legal person breaks down into two or more new legal entities), and split-off ( (transfer of part of the assets to a newly established entity without liquidation of the company-donor).
In France re-organization of mutual enterprises companies (the law “On commercial partnerships” of 1966) is allowed in the following forms: fusion (unification of at least two established partnerships through one of them taking over the other or through forming a new partnership), division (transferring of the assets of one partnership to established partnerships), and fusionPolicy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK division (the partnership transfers its assets into established partnerships or participates in setting up new partnerships). The partnership acquiring as a result of the above operations all or part of the assets of the other partnerships becomes its legal successor.
The German legislation permits of mutual enterprises mergers in two forms: through transfer of the company’s assets to another company in exchange for the shares and through forming a new mutual company that acquires the assets of the merged companies.
Both the legislation and the doctrine lack a concerted opinion on what should constitute a takeover bid. The following specific features of the institution are usually identified:
- this is a public offer to buy the shares of a certain company under terms stipulated by the tender offer;
- the bid should be addressed to all holders of securities of certain classes;
- the bid should be made by a corporation.
Making a mandatory bid might be subject to a number of conditions: acquisition of the company can be made subject to an agreement by the general meeting (see p. 2, Article. 80 of the RF law “On Corporations); shareholders might be given the right to put forward conditions for acceptance of the offer; a partial offer covering 2/3 of the total number of ordinary shares can be made.
Nevertheless, in England this institution to a larger degree is associated with the concept of “takeover bid” as in accordance with the English law the aim of the operation should be to acquire control over company that has its shares being bought. In France Âthose who initiate such an operation might try to use it not only to acquire but also to solidify control over a company (in Russia solidifying/widening of control served as the main incentive for takeovers before 1998). In any case an operation aimed to acquire less than 15% of the company’s capital cannot be considered as a takeover bid.
In Great Britain, the City Code on Takeovers and Mergers envisages that acquisition price can not be below the highest price at which the offeror acquired such shares within the last 12 months. In accordance with the German Takeovers Code acquisition price should not drop below 25% of the price at which the offeror acquired the company shares within the 6 months prior to reaching the percentage threshold (under the Russian legislation — not below the average weighted price of buying shares within the 6 months prior to the date of acquisition of at least 30% of the shares).
There are differences in timing of mandatory bids: in Great Britain it should be made immediately, in Germany – within 21 months from the moment of reaching the percentage threshold.
The issue of what should be the threshold for making a mandatory bid is also a controversial one: in Great Britain — 30%, in France — 1/3, in Germany — 50%, in Denmak, Belgium, and in Italy — acquisition of control over the company.
For the purposes of the present study it would be reasonable to apply universally accepted definitions used in the theory of corporate finance and the world practices of such operations. 38 The following three forms of corporate control are widely used across the world and account for over % of the total volume of transactions (see Roudyk, Semenkova, 2000; Roudyk, 2001).
1) Merger – is normally a synonym of a friendly takeover (in other interpretation – a financial transaction resulting in a merger of two or more corporations into one accompanied by converting of the shares of the merging corporations, maintaining the owners and their rights).
See Radygin, Entov (2002à) Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK A merger is an agreement between management groups of the buying company and the target company concerning the selling of the latter. Managers of the company being acquired should enter into negotiations concerning the merger only after the negotiations have been approved by its Board of Directors and shareholders. Thus, a merger is first of all a contract between the management groups of the two companies worked out in the course of negotiations. During such negotiations managers of the corporation being acquired first of all play the role of agents of the shareholders.
2) Takeover - is a paid-up transaction resulting in transfer of corporate ownership rights and most often accompanied by changes in management of the acquired company and in its financial and production policies. The deal involves two parties – the buying company and the target company.
The following variants of takeovers are possible: à) the buying corporation makes a tender offer (an offer to buy-out 95-100 % of shares of the target company) to the target company management (friendly takeover); b) the buying corporation makes a tender offer to the target company shareholders to buy-out a controlling block of ordinary voting shares by-passing the management (hostile takeover).
Tender offer should be made public and executed irrespective of its approval/non-approval by the target corporation management. In this way a hostile takeover results in removal from office of the target company management. In theory, acquiring a controlling interest (50%+1 ordinary voting share of the target company) is enough to successfully finalize a hostile takeover of any corporation.
As a “business-term” hostile takeover implies an attempt to acquire control over economic activities or assets of the target company against the wish of its management or the main participants.
Referring the transaction to the category of “hostile ones” depends largely on the target company management and/or shareholders/participants reaction (the usual practice in Russia) if the attacking company has met all the requirements by the regulatory authorities concerning the publication formalities (Leonov, 2000).
3) LBO–leveraged buyout is a financial tool (not an operation) applied from the mid-80s to transform a public corporation into a private one. A group of external or internal (managers) investors buys out all the corporation shares that are in circulation with 80-90 % of the resources needed to buy them out raised through emission of debentures (most often trash/high-yielding securities). In 3 to 6 years the shares return to the open market, although cases are known when companies remained private.Apparently, re-organization of legal persons is prone with many problems related not only to control by the government bodies over concentration of economic power and widening of legal capacity of companies taking over other enterprises operating in the other sectors of the economy (see Kulagin, 1997). Of no less importance are the problems of protection of the interests of shareholders who disagree with the re-organization plans and company creditors participating in the operation that should be resolved within the national (or a uniform, European, for example) legislation.
In this connection mention should be made of the mixed feelings researchers have on takeover bid.
Some authors believe it is an institution designed to protect the interests of minority shareholders (better terms of selling shares than at the stock exchange plus indirect control by the management) while others are less optimistic. An offer to buy-out shares the controlling group makes to minority shareholders might be preceded by certain moves (lowering the dividends, manipulating the Acquiring control over the Board of Directors without buying the controlling interest in the share capital through proxy vote can be viewed as the 4th form.
Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK information) aimed to lower the market prices and to produce an illusion that the deal is beneficial for the minority shareholders. Hostile takeovers might present similar problems.
2.4.2. Regulation of mergers and takeover in the EU law The issue of powers to control mergers by the EU institutions was raised practically immediately after the Treaty of Rome came into force.40 The problem was related to the fact that Articles 85-concerning competition and abuse of dominating position on the market did not provide for direct control over mergers. In 1972 and 1987 the European Court set precedents by ruling that Articles 85-86 were applicable to mergers under certain circumstances (for example, buying a large block of shares under condition of additional purchase of shares in future that would result in changes in control over the company). In 1989 the Council adopted Regulation 4064/89 (the unofficial name – “Regulation on Mergers”) which set criteria for referring mergers to the EU Commission competence and procedures of making the necessary decisions.
To the Regulation (and to refer the case to the exclusive competence of the EU Commission) the total world turnover of all the companies involved should exceed 500 bln euros and the total turnover within the EU territory should reach 250 bln euros. The companies should notify the EU Commission within one week after buying the controlling interest, publicizing the information about the tender or signing an agreement.
Importantly, the Regulation uses the term “concentration” which is essentially an economic term covering a wide range of transactions resulting in concentration of control. Regulation defines the following methods of concentration:
- merging two previously independent companies;
- acquiring direct or indirect control over company (companies) through buying out shares or assets with signing a contract or without signing a contract;
- the so-called concentrated mutual enterprises (agreements aimed to acquire control over actually a single economic entity).
In practical terms the following schemes are most often applied: acquiring personal control, acquiring joint control, acquiring joint control over a mutual enterprise, and switch from joint to personal control. It is believed that the regulation happened to be a very efficient tool of carrying out competition policy within the EU. After its adoption the EU Commission started to receive 5060 notifications a year – the figure that has doubled by now.
The problem of regulating takeovers41 has been under discussion within the EU for over quarter of with a varying degree of intensity (the 1974 Pennington Project, the direct recommendation in the 1985 EU Commission White Book on adopting a special Directive, etc.). Originally, the proposal on the project under discussion (the so-called Thirteenth Directive “Directive on Takeover Bids” was adopted by the EU Commission in 1988. In February 1996 the Commission issued a new proposal characterized as a “framework directive”. Draft Directives were repeatedly reviewed by the EU in 1989-2001. See Entov 2001; Brittan, 1991; Cook, Kerse, 1996, and Anners, 1996; Puchinsky, Bezbah, Ermakova et al., 1999;
Borko, Kargalova, Yumashev, 1995; Nickerov, 1999.
Hereinafter the term “takeover” is used in the meaning it has in England, i.e. by its economic content it is most close to defining a transaction aimed to acquire a stock company. As mentioned above in England the term «takeover-bid» corresponds to the notion “an offer to acquire control”. These terms – “takeover” and “takeover bids” are used in the English copies of EU documents.