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OJ 32 C64/8 and COM (95) 655 final. Unlike in case with mergers where a possibility of supra-national regulation is based on the EU Court rulings, the EU Commission does not have an exclusive competence in the area of takeovers Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK The general approach to regulating takeovers at the EU level has certain peculiar features:

- use of the principle of subsidiarity ; the EU acts in accordance with the comparative efficiency criterion, i.e where national regulation is deemed insufficient and the potential operations in terms of their volume and result could be better performed at the EU level;

- lack of a single playing field (as a consequence of retaining national legal barriers) in the area set additional objectives for regulation (apart from the traditional ones, such as protection of investors and proper functioning of capital markets): establishing a new order of business activities as a prerequisite for free market competition;

- most of the provisions of the Directive set only general (framework) principles of regulation and minimum harmonization standards while developing details remains in the competence of national law-maker (EU Member States can retain or introduce tougher national takeover regulation).

The following provisions of the draft merit to be mentioned specifically44:

- equality of the offeror and the offeree companies (Article 5 (1) of the draft),which means, in the most widely accepted interpretation of national laws, that all holders of shares of the same class should be treated equally;

- prohibition of manipulations on the securities market (taking into account insider activities):

a bid should not result in structural changes in trading inn securities of the offeror and the offeree (Article 5 (1) d of the draft);

- transparency of the bid (Article 6 of the draft): shareholders of the offeree company should have the documents necessary to reach a properly informed decision.

- two requirements were set for the offeree company: neutrality of the management body and the obligation to of the board to draw up and make public its opinion on the bid;

- protection of minority shareholders.

The last issues is in fact the fundamental one and represents a compromise between the British and the continental law approaches.

First of all, it is related to the obligation to bid for acquiring shares of the minority. This requirement is characteristic of the countries of common law. It was fixed for the first time by the 1972 English City Code on Takeovers and Mergers. In 1974, a limit of 30% of voting shares was set for the offeror and its affiliated persons. By now most of the EU Member States (Germany, Austria, France, Belgium, Denmark, Italy, Spain, Ireland) introduced this norm in their antimonopoly legislation and codes (for example, the 1995 Takeovers Code in Germany) or stock exchange regulations (see also p. 2, Article 80 of the RF law On Corporations. Nevertheless, in a number of countries (Sweden, to some extent Belgium and Germany) doubts have been raised concerning effectiveness of a mandatory bid.

In view of the above (the draft Directive) the EU Member Countries should prove availability of regulations, rules or procedures that oblige persons who acquired a certain percentage of shares to make a bid (an offer) or set some other equivalent means of protecting minority shareholders regulation. Therefore, as far as takeovers are concerned the Directive (not the Regulation) can be applied as a European legal act.

For the first time this principle was fixed by the new wording of Article 130 of the EU Treaty adopted in the Single European Act. At present, Article 3 b II of the EU Treaty is under discussion.

The draft Directive does not prescribe any procedure of acquiring a company (making a bid, its change and withdrawal, access for competing bids, etc.) as this is within the competence of national law-maker.

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK (Article 3 of the draft). As a result the obligation to make a bid to acquire shares of the minority shareholders is devoid of its absolute character within the project. The choice should be made within national legal traditions.

In accordance with Article 10 of the draft Directive the offeror should make an offer to the shareholders to buy out their shares at an equitable price. Consequently, the problem of acquisition price should be resolved by national legislations.

A compromise (draft Directive, 1996) variant is envisaged also for the percentage threshold which defines the necessity to make a bid. This issue is referred to the competence of the national law of the country where the offeree has its seat (Article 3).

One more problem is related to by-country differences in merger regulation. Germany and the Netherlands are known to have a stringent state supervision over company acquisitions, welldeveloped cartel legislation and procedures of negotiations with the company employees. The regulatory system of Great Britain and Ireland is based on the principle of self-regulation and extralegal execution of takeovers (for example Great Britain applies the non-statutory City Code on Takeovers and Mergers non-judicial Panel on Takeovers and Mergers. The principle of voluntary compliance helps to reduce the number of legal disputes in courts45. Mixed regulation is characteristic of France, Belgium, and Spain.

It is important that in Great Britain self-regulations has a meaning different from its meaning in the counties of continental law. In these countries self-regulation and self-control have lost their initially autonomous nature and have been embodied in legislative provisions. Codification of provisions concerning insider activities within the EU is the most vivid example. A similar position in relation to takeover regulation was taken by Switzerland, where a voluntary takeovers code of 1989 was transformed into provisions of the law On stock-exchanges and stock trading of 1995.

The draft Directive envisages availability of national control bodies and the necessity to coordinate their activities (Article 4). However, these functions could be performed by private organizations as well. At the same time it is determined that the voluntary self-control method should be used to avoid involvement of administrative and judicial bodies in resolving takeover issues.

The above provisions of the draft demonstrate that its predominantly general character in fact preserves national features of takeover regulation in the EU countries. As in the case of the European company the conflict of national approaches results in lengthy discussions and the search for compromises that leave supranational regulation drained of its content.

The problem of resistance to innovations in the area should also be taken into account. In 1993, out of 12 EU Member States opposed adopting the EU Commission Directive on regulation of merger and takeover transactions. An analysis shows that these countries account for 70 % of such operations and for 94 % of all attempts of hostile takeovers (Kobyakov 1997). Germany traditionally viewed as a country of adequate corporate culture - occupies a prominent position among those countries.

The latest draft Thirteenth Directive on Takeovers was rejected on 4 July 2001 by the EU Parliament vote. Frits Bolkestein, Member of the EU Commission, said the decision was disappointing.

In this connection, establishing in 2001 of the High Level Group of Company Law Experts means that the Commission is committed to move forward and to introduce in 2002 a new proposal taking The draft Directive contains a number of rules that could be found in the City Code on Takeovers and Mergers.

However, many British analysts believe this will result in more litigation and lower flexibility of the body that will control regulations than is the case with the existing Takeovers Committee.

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK into consideration a widest possible range of opinion. In late 2001, taking into account the position taken by the EU Ministerial Council and the European Parliament during the discussions about the draft Directive (MEMO/01/255) the Group presented a report focused on the following issues:

- how to ensure a level playing field in the EU concerning the equal treatment of shareholders across Member States;

- the definition of the notion of an equitable price to be paid to minority shareholders;

- the right for a majority shareholder to buy out minority shareholders (the squeeze-out procedure).

The following key proposals by the Group that will be reviewed by the EU at a later stage merit a special attention:

- a level playing field for takeover bids: where the offeror acquires 75% or more of the share capital of the company being bought as a result of the bid46 he should be able to control the Board of Directors and the constitution of the company being bought in proportion to his share in its capital irrespective of any provisions in its constitution or articles of association against such control;

- equitable price: if the offeror takes control over a company the price to be paid for the remaining shares in accordance with the Directive should normally be equal to the highest price paid by the offerror for shares of the relevant class during a period of 6 to 12 months preceding the date of the acquisition including the period of acquiring the control;

- squeeze-out procedure: if the offeror acquires shares of the company in excess of the set percentages (between 90 to 95%) or, alternatively when his bid is accepted by owners of 90% and more of the shares, the offeror should have the right to buy out the minority shares at an equitable price (an equitable price is the price of the initial offer). Conversely, when the offeror acquires shares in excess of the set percentage (similarly, between 90 to 95% of all the shares) a minority shareholder should have the right to compel the majority shareholder to purchase his shares from him at an equitable price.

The Group believes that shareholders across the EU should have similar opportunities and rights concerning the takeover procedure, i.e a level playing field. Therefore, any European company law should be guided by two principles:

- in the event of a takeover bid the ultimate decision must be with shareholders (not with the Board of Directors): they should be able to decide whether to tender their shares to the bidder and at what price;

- there should be proportionality between risk-bearing capital and control: only share capital which has an unlimited right to participate in the profits of the company or in the decision on liquidation, and only such capital should normally carry control rights, in proportion to the risk capital.

In view of the above the Group made the following recommendations:

- listed companies should be required to disclose complete information about their capital and control structures (with continuous updating of such information);

The term risk-bearing share capital, is used in the English-language copy of the Group Report. Essentially it means securities the owners of which take part in company profit sharing.

Policy Paper RECEP Alexander Radygin, Revold Entov UNIFICATION OF CORPORATE LEGISLATION:

WORLD TRENDS, EU LEGISLATION AND RUSSIAS OUTLOOK - after actual announcement of the bid, the Board of Directors of the offeree company should be permitted to take actions frustrating the bid only upon authorization by the general meeting of shareholders ( by a majority vote) - after acquiring a certain percentage of the share capital (the threshold should not be set at higher than 75 % across the EU) the bidder should have the right to repeal immediately all the protective mechanisms (in constitution and in the control structure) that hinder the exercise of his control rights;

- the break-through rule should be applicable to the golden share giving special control rights to the EU Member States (within the powers provided by the EU legislation the countries wanting to retain control over companies should achieve this through adopting a relevant legislative act based on the common law principles);

- the restrictions on the transferability of shares (envisaged by the company constitution) should not be enforceable on the bidder;

- the EU Commission should rule when pyramid structures, circular or cross-shareholdings between companies should be regulated and what adequate measures of protection of minority shareholders should be enforced in all the EU Member States.

2.5. Bankruptcies The EU Convention on Bankruptcy is one of the main documents in the field. It aims to provide a uniform framework for insolvency in a situation when company assets are spread across more than one EU Member State. The idea is to establish a procedure for primary liquidation or bankruptcy carries out by a liquidator having the right to operate in other countries where the company has its assets. If there is a need to carry out a secondary bankruptcy on the territory of another Member State, such a procedure can be initiated only as a subordinate one (in relation to the primary one).

The EU Convention on Bankruptcy was adopted in October 1995 and signed by all the EU Member States except for Britain. In accordance with Article of the Treaty the Convention is applied to cases of insolvency that involve disinvestment of the debtor. It excludes such procedures of saving companies as, for example, appointment of external administration (Great Britain). The proposal and the Convention cover insolvency of both companies and private persons.

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