Germany and takeover codes

Germany is in the thick of debating and negotiating a new Takeover Code onto its statute books, which has raised a lot of interest given the timely convergence of a number of factors.

Firstly, there is the fact that Germany’s voluntary takeover code, which was introduced in 1995, has turned out to be pretty insipid. This is thanks to the German corporate and financial community – and beyond – on occasion giving it a wide berth. A recent case in point being the UK Internet incubator, NewMedia SPARK, which took advantage of the lack of any enforceable guidelines to buy shares in Sputz, the Frankfurt-listed financial services group, at different prices applied to different shareholder groupings.

Secondly, there is the expected unwinding of large cross holdings of listed corporates thanks to tax reforms effective next year and the slump in global stock markets, which has proved just as depressing for the stock prices of Germany’s listed companies, in particular on the Neuer Markt.

It is increasingly important to have an enforceable Takeover Law in Germany because at present there are only around 700 companies listed on the Frankfurt Stock Exchange and so many of these possess complicated cross-holding structures that there are, in practice, few companies that could actually be bid for. With the deterrent of cross-holdings looking likely to begin to disappear with the introduction of new tax reforms next year there is a more pressing need for a takeover and acquisition of shares system that treats all shareholders fairly and transparently. And then there are the 300 plus companies listed on the Neuer Markt in it’s three and a bit year’s of existence, which don’t have the cross-holding deterrent and are suffering from depressed share prices.

Thirdly, there has been a significant amount of domestic interest generated in the practical application of a German takeover law following the high profile hostile takeover of Mannesmann – a German national champion – by Vodafone in June last year in a protracted deal first announced in November 1999. It was seen by many as a watershed in German corporate history that the domestic authorities allowed the hostile takeover to proceed without intervention. However, one result of this deal is that there has been considerable pressure for Germany’s new Takeover Law, (which is anticipated to take effect in January 2002) to include measures to deter hostile takeovers.

Finally, the level of interest in Germany’s new Takeover Code must be viewed in the context of the voting down – by a single vote – of the proposed European Takeover Directive in June this year. The defeat of the EU Takeover Code was a major set back in the wider EU modernisation of financial markets and no less keenly felt because it had been 12 years in the gestation. It fell at the final hurdle thanks to German objections regarding the provisions within the Takeover Code that restricted the use of so-called poison pill takeover defence measures.

Germany has long had work underway on its new Takeover Code in part because, according to one observer, the European Takeover Directive actually contained very little detail so it was important to outline a code with practical examples. To this end in March 2001 the first draft of Germany’s proposed Takeover Code saw the light of day and a revised second draft, currently under examination, appeared in July 2001.

SJ Berwin outlines the elements of the Takeover Law draft (see page 34) – under discussion as evcj went to press – that are likely to impact the private equity industry namely in the context of achieving public to private transactions.

On a wider note, the EU appears determined to press ahead with the European Takeover Directive inspite of the disappointment of its recent defeat. If that goes head in the form that was presented this summer it will closely replicate the UK Takeover Code. Essentially over its 12-year gestation period the EU Takeover Directive came to increasingly resemble the UK Takeover Code. While the UK code is voluntary it has been widely respected by all market participants – with the exception of Conrad Black buying shares in The Telegraph newspaper group in 1994 to a level that triggered a mandatory bid, but not actually making that bid. His excuse for not proceeding was a rise in the stock market prices that left him unwilling to bid for the remaining shares at a price higher than that at which he had gained control.