Shareholders’ cooperation and mandatory takeover bids in Italy

About ten years ago the Directive 2004/25/EC on takeover bids (“TBD”) of April 21, 2004 provided EU Member States with minimum guidelines for takeover bids involving corporations listed in the European Union. TBD’s main goals were to harmonise corporate law in respect of takeover bids and favour free movement of capital within the EU.
 
Under both the TBD and Italian law,(1) all those acting in concert who comes to hold securities exceeding 30% of the voting rights are obliged to launch a mandatory tender offer.  Instead, there are no consequences for those who come to hold voting rights below the relevant national threshold, even if they acted in concert.  In this respect, TBD did not change pre-existing Italian law. 
 
Consob (the Italian stock market regulator) has calculated that, in 2010, 66% of Italian listed companies were controlled by the same shareholder and an additional 20% were controlled by a coalition of shareholders, while only 12% of listed corporations were really “public” and potentially subject to a hostile takeover.  Against this background, the above 30% shareholding threshold appears somewhat arbitrary: in 2013, in Italy, a major construction company was taken over through the simple replacement of the board, by a shareholder holding less than 30%.  Lawyers practicing in the field know that the rule on mandatory takeovers has often been viewed as a sort of poison pill protecting incumbent directors and controlling shareholders, rather than a means to extend to the minority shareholders the benefits enjoyed by the majority.  Certainly, from the bidder’s perspective, the rule on mandatory takeover bids makes corporate control transactions more expensive than they would otherwise be, hence, the tendency of EU shareholders to coordinate and act “in concert” in order to achieve control and avoid to have to launch a tender offer on all of target’s capital.
 
More precisely, under the TBD(2) those “who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid” are deemed to be acting “in concert” and may be subject to mandatory tender offer.
 
The vague wording of the clause has resulted in uncertainties affecting the behaviour of investors desirous to cooperate in order to monitor or actually influence the governance of corporations listed in the EU. In order to avoid the risk to be forced to launch a mandatory tender offer, these investors could refrain from actively managing their investment in order to improve the governance of EU listed entities and may also avoid the investment in EU listed companies altogether.   Ultimately, such occurrences would adversely affect the value of EU listed entities.
 
Since it is hard to dispute that shareholders need to know when they can exchange information and cooperate with one another without running the risk that their actions may trigger unexpected legal consequences, on 12 November 2013 the European Securities and Markets Authority (“ESMA”) published a statementand indicated certain topics on which shareholders’ cooperation appears to stimulate and promote good corporate governance, independently of any intention to acquire or exercise control over a company: (i) commercial matters (such as acquisitions or disposals, dividend policy, or financial structuring), (ii) matters relating to the management of the company (such as board composition or directors’ remuneration), and (iii) matters relating to corporate social responsibility (such as environmental policy or compliance with recognised standards or codes of conduct). 
 
To sum up, ESMA has proposed a “White List” of activities which, in principle, have nothing to do with “acting in concert”:
 
(i) discussions about matters to be raised with the board;
(ii) making representations to the board about policies, practices or certain corporate initiatives;
(iii) exercising shareholders’ statutory rights to (a) add items to the agenda of a general meeting, (b)table draft resolutions for items included or to be included on the agenda of a general meeting, (c) call a general meeting(3); and
(iv) agreeing on a vote for the approval or rejection of (a) a proposal relating to directors’ remuneration, (b) an acquisition or disposal of assets, (c) a reduction of capital and/or share buy-back, (d) a capital increase, (e) a dividend distribution, (f) the appointment, removal, or remuneration of auditors, (g) the appointment of a special investigator, (h) the accounts of the company, (i) policies on matters relating to social responsibility or compliance with recognised standards or codes of conduct, (j) related party transactions.
 
According to ESMA, shareholders cooperation on matters different from those indicated above should not automatically imply “concert”.  National authorities should review each case based on its own facts.  Likewise, ESMA recognises that even the matters indicated in the White List may in appropriate circumstances reflect a broader agreement or an understanding to acquire or exercise control over the company.  In such a case, a “concert” would be deemed to exist.  
 
Appointment of directors obviously is particularly sensitive in the context of mandatory takeover bids, because cooperation to appoint directors my result in control over the company.  Considering the differences in corporate governance structures within the EU, joint activity aimed at influencing appointments to the board was not included in the White List, but the following are deemed worthy of a thorough review of the facts before alleging “concert”:
 
(i) entering into an agreement to vote for the appointment of one or more board members;
(ii) tabling a resolution to replace one or more board members; and
(iii) tabling a resolution to appoint one or more additional board members. 
Finally, in order to facilitate good corporate governance and provide shareholders with non-controversial parameters without triggering unexpected obligations under the TBD and the relevant national law provisions, ESMA suggested that national authorities should decide after reviewing:
(i) the nature of the relationship between the shareholders and the proposed board member;
(ii) the number of proposed board members being voted for pursuant to a shareholders’ voting agreement;
(iii) whether the shareholders have cooperated in relation to the appointment of board members on more than  one occasion;
(iv) whether the shareholders are not simply voting together but are also jointly proposing a resolution for the appointment of certain board members; and
(v)  whether the appointment of the proposed board members will lead to a shift in the balance of power on the board.
 
Italian law implementing the TBD(4) provides that those cooperating for the purpose of “acquiring”, “maintaining” or “strengthening” control over the issuer shall be regarded as acting in concert and lists situation in which the presumption that “concert” exists may not be challenged:
 
(i) shareholders’ agreement providing for (a) the exercise of voting rights or consultation undertakings prior to voting, (b) limits to the transfer or undertakings to purchase shares, (c) the exercise of a dominant influence;
(ii) parent company and subsidiaries;
(iii) companies subject to joint control;
(iv) a company and its directors or general managers.
 
 Also, activities carried out by any physical person (including his/her spouse, cohabiting partner, persons related by consanguinity or affinity, and direct relatives and relatives up to the second degree, and children of his/her spouse or cohabiting partner) and, under certain conditions, the financial advisor to the issuer, in case a member of the advisor’s group purchases the target’s securities, are deemed to result in “concert”, unless evidence to the contrary is provided.
 
Finally, the following are expressly deemed not to result in “concert”, unless a broader interpretation of the parties’ behaviour leads to a different conclusion:

(i) coordination amongst shareholders in order to exercise shareholders rights attributed to them under Italian law;
(ii) agreements for the submission of lists of candidates for the election of the corporate bodies when such lists include a number of candidates which is less than half of the members to be elected;
(iii) shareholder cooperation to prevent the approval of a shareholders’ resolution on (a) the remuneration of the directors, (b) remuneration policies and compensation schemes based on financial instruments, (c) related party transactions; (d) non-competition clauses of board members and acts opposing takeover bids;
(iv) shareholder cooperation in order to: (a) favour the approval or resolve upon the liability of directors; (b) organise for a list of candidates that is less than half of the members to be elected, also through the solicitation of voting proxies; (c) authorise non-competition clauses for directors and acts opposing takeover bids.
 
The above efforts on the part of regulators is commendable, because one of the adverse effects of  the provisions on mandatory takeover has been to raise the level of uncertainty as to what may be the right shareholders’ behaviour to avoid triggering the duty to launch an offer. However, making rules which try to encompass all profiles of investors’ behaviour is notoriously complex. Behaviour which is intended to exclusively contribute to good governance may be difficult to distinguish from coordination in order to gain (or exercise) control of a corporation and, ultimately, the wise exercise of administrative discretion by the regulators is likely to bring about better results than enforcement of general rules.  Certainly, the rules above are evidence that the complaints of active investors have helped highlight one of the costs of having mandatory takeover rules. Some of these costs are probably unavoidable: time will tell whether the international effort described above will really generate greater confidence on the part of active shareholders.