European takeover law: designing a neutral approach

This paper argues that, in revising the Takeover Bid Directive, EU policy-makers should adopt a neutral approach toward takeovers, i.e. enact rulesthat neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contest-ability of control is not cost-free, because it has a negative impact on man-agers’ and blockholders’ incentives to make firm-specific investments ofhuman capital, which in turn affects firm value. It is thus argued that indivi-dual companies should be able to decide how contestable their control shouldbe. After showing that the current EU legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeover-neutral intervention of the EU in the area of takeover regulation (pre-emption of “takeover-hostile”, protectionist national regulations, default rules protecting shareholders vis-à-vis managers’ and dominant shareholders’ opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.