Creeping Acquisitions in Europe: Enabling Companies to Be Better Safe than Sorry

Luca Enriques

University of Oxford – Faculty of Law; European Corporate Governance Institute (ECGI)

Matteo Gatti

Rutgers, The State University of New Jersey – School of Law-Newark

European Corporate Governance Institute (ECGI) – Law Working Paper No. 264/2014

Abstract:

Creeping acquisitions — grabs of a company’s de facto control without the launch of a formal tender offer — are an acquisition technique that presents many risks. Not only can stock prices be negatively affected in the short term (after the acquirer is satisfied by the stake it accumulates, the stock price is likely to drop below pre-acquisition values and the remaining shareholders are stuck with minority shares), but such acquisitions can also have long ranging consequences for the market for corporate control (too many acquisitions by suboptimal acquirers, as well as permanent loss of a company’s contestability status and therefore of any prospects to obtain a control premium), as well as in the governance of a company (de facto control can lead to the extraction of higher private benefits of control). Notwithstanding all such risks, EU corporate and M&A laws largely fail to address the issue, both at the European level and in individual member states. As a result, European public companies can easily become the target of a creeping acquisition, whereas poison pills and other defensive mechanisms have shielded U.S. companies quite effectively. This paper argues that a legislative overhaul of current regimes — especially of the mandatory bid system — to address creeping acquisitions may well be overreaching given the drawbacks of one-size-fits-all solutions and the risk of shutting down the market for corporate control or clamping down hedge fund activism. Instead, this paper recommends a lift on existing limitations to a company’s freedom to determine its preferred level of openness to creeping acquisitions (and takeovers more generally). European legislation should provide an optional regime whereby companies can select effective arrangements to thwart or limit creeping acquisitions.

Creeping Acquisitions in Europe: Introduction

Corporate governance and mergers and acquisitions (“M&A”) markets around the world testify of a significant evolution in the last few decades: thanks to changes in ownership structures and business practices, shareholders have gotten increasingly more powerful, and can sometimes be considered virtually, and however jointly, in control even in dispersed ownership companies.

That has been since long the case in the United Kingdom, where institutional investors have often been able to coalesce and keep management on a tight leash.2 The same is ever more true for the U.S. as well. Traditionally passive institutional investors, thanks both to law reforms and to the sheer size of their aggregate and individual holdings, now massively exercise their voting rights in U.S. companies and take sides with specialized corporate governance intermediaries, namely activist hedge funds, who aim to discipline management in a way that was previously possible only via a hostile bid.

Even in continental Europe, despite the lower degree of average ownership dispersion, activist investors have agitated for change, especially – but not exclusively – in companies with no controlling shareholder (or coalition). In Europe, activists can even lever upon corporate law rules that are traditionally much more shareholderempowering than in the U.S. In this environment, the agency problems the market for corporate control traditionally tackled can also be addressed by the “market for corporate influence,”
which does not require any single shareholder to gain full control, let alone to take the company private. To be sure, the market for corporate control complements and reinforces the market for corporate influence, because both activists and third parties having gained interest in the target following an activist’s campaign may force change via a takeover bid.8 Yet, other things equal, a full-blown change in control by way of a (hostile) takeover is less necessary than in the past to bring change to a company’s strategies.

In the new landscape, aggressive strategies that in the past may have been condoned as the necessary evil in a world where unsolicited takeovers were (at least according to some) a force for good can now be judged more evenly for the risk they pose to a company and its shareholders. One of such strategies is the creeping acquisition (“CA”), that is, the more or less surreptitious building of a stake large enough to secure control, negative control or at least the assurance that full control can be acquired at low cost, given the low probability of competitive bids and resistance.

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Creeping Acquisitions in Europe: Enabling Companies to Be Better Safe than Sorry