Comment: New EU takeover rules will raise the threshold for compulsory takeovers in the Irish market as well as legislating for the involvement of employees in the takeover process, writes David Byers.
Ireland has largely been able to minimise changes to its takeover regime, with its recent implementation of the EU takeovers directive. The impact of the directive is likely to be less significant here than in many member states, where it has proved to be highly controversial.
That said, the Takeover Bids Regulations 2006 have resulted in some substantive changes to the Irish takeover regime, particularly with respect to the operation of the "squeeze-out" compulsory acquisition procedure.
The directive has been a long time coming. The first attempt to harmonise takeover rules across EU member states dates back to the early 1970s, and the first draft of the takeover directive was presented in 1989.
The directive is a minimum harmonisation measure, meaning that member states can widen their scope and add more stringent rules.
From an Irish perspective, many of the key provisions of the directive are similar to the takeover rules and the provisions in the Irish Companies Acts on takeovers.
The central issue in the later stages of negotiations was the extent to which the directive should override the barriers to takeovers which exist in a number of member states. Ultimately, the directive establishes a new scheme under which two of the most controversial provisions are, in principle, optional both for member states and for industry participants.
These provisions - the "board passivity" or "neutrality" rule (which regulates, broadly speaking, post-bid defences) and the "breakthrough" rule (which regulates pre-bid defences, such as restrictions on the transfer of securities and continental-style voting restrictions or multiple voting rights) - are optional, in that member states may choose whether to make companies organised under their laws subject to either or both of them.
Where a member state elects not to require companies to apply these rules, companies in that member state may voluntarily opt in, if they obtain shareholder approval. This voluntary opting-in is reversible.
Ireland has required companies to apply the board passivity rule (which is closely related to the prohibition on "frustrating action", which has from the outset been a feature of the Irish takeover rules), but not the "breakthrough" rule. It is expected that very few companies will choose to opt in on this measure.
The directive applies to takeover bids for EU companies with voting securities admitted to trading on an EU "regulated market". Takeovers of IEX or AIM-listed companies are not regulated by the directive (although the Irish Takeover Panel will continue to regulate bids for Irish IEX or AIM companies).
The residency test, which had been applied by some countries (including the UK) has been removed. The result is a comprehensive scheme of regulation - there should no longer be listed, EU-incorporated companies that are not subject to takeover regulation.
Until May 20th, there had been a limited number of "orphans", such as Eircom, a UK-incorporated but Irish tax-resident company, which had not been subject to any formal takeover regulation.
There is the possibility of split jurisdiction among member states - bids for companies that do not have their registered office and shares admitted to trading in the same member state will have to be made in compliance with two sets of rules.
The level of acceptances necessary to enable a bidder for an Irish-listed company to acquire compulsorily the shares of non-accepting shareholders has been increased from 80 per cent to 90 per cent. The directive required Ireland to come into line with the European standard on this.
This will constitute a significant change in Irish takeover practice. The availability of the "squeeze-out" right is critical to takeover activity. On a leveraged bid, the bidder needs to be confident of its ability to exercise the "squeeze-out" right, as it is only when the bidder has acquired 100 per cent of the target's shares that it can take the steps necessary to secure its borrowings on the target's assets.
The experience has been that an 80 per cent acceptance level can be difficult to achieve in the Irish market, typically where the target has many individual shareholders who may not respond to an offer. The increase in the compulsory acquisition threshold to 90 per cent may result in more bidders seeking to use schemes of arrangement to effect takeovers.
A scheme of arrangement, as used in the RBS acquisition of First Active and the announced Babcock & Brown acquisition of Eircom, is a statutory procedure which enables an arrangement between a company and its members to be made binding on all members, subject to shareholder approval and court sanction.
A bidder may acquire 100 per cent control of a target under a scheme with the approval of a majority in number representing 75 per cent in value of those shareholders voting at the meeting to approve the scheme, rather than the 90 per cent in value of all shareholders required to operate the "squeeze-out" procedure.
The new rules are set to increase employee involvement in takeover bids. More detailed information will need to be included in the offer documentation concerning the bidder's intentions regarding the future of the business, the safeguarding of jobs, any material change of conditions of employment and the strategic plan for the two companies, including likely repercussions on employment.
Employees, or their representatives, are entitled to have their own opinion on the bid incorporated in the target board's response document, provided that they give it to the target board in good time.
In Ireland, where bidder statements as to the effects of the bid on the target's employees have tended to be anodyne, whether these rules will result in a substantial change in practice may depend upon how that phrase - in good time - comes to be interpreted.
David Byers is a partner at McCann FitzGerald Solicitors.
