512 18 Takeover Defences
firmed that the adoption of such a rights plan by the board of a Bermuda company could
constitute a “proper and constitutional” exercise of the board’s powers.^38
Community law. US-type poison pills are rare in the EU. Basically, EU company
law does not prohibit shareholder rights plans. However, the other components of
poison pills typically are not compatible with the provisions of EU company law
or Member States’ national company laws.
All transactions by the company are constrained by the purpose of the company
under Member States’ national company laws and company law rules according to
which the powers must be exercised for a proper purpose.
According to the Second Company Law Directive, any increase in capital must
be decided on by the general meeting.^39 The board may be authorised to decide on
a limited increase in capital for a limited period of time (section 5.4).^40 Sharehold-
ers – even the bidder – have pre-emptive rights (section 5.4).^41 After becoming a
shareholder, the bidder is protected by the principle of equivalent treatment of
shareholders in the same position (Volume I).^42 The bidder is also protected by re-
strictions on targeted repurchase actions (see below).
18.9 Greenmail and Other Targeted Repurchase Actions............................
For legal reasons, greenmail and other targeted repurchase actions are rare in the
EU. They are governed by the same rules.
Greenmail. Greenmail means repurchasing shares from a hostile acquirer by
paying a substantial premium over the market price. However, share buy-backs
are generally constrained by the principle of equivalent treatment of all holders of
shares who are in the same position^43 as well as by: restrictions on the distribution
of assets to shareholders and the amount of distributable assets;^44 provisions on
corporate decision-making;^45 and an optional 10% cap.^46
Other targeted repurchase actions. Other targeted repurchase actions are con-
strained by the same rules. The rules are more flexible in Delaware. For example,
the right to undertake a targeted repurchase was upheld by Delaware Supreme
Court in the famous Unocal case.^47
(^38) See Walcott LA, Poison Pills in the Commonwealth Caribbean, JBL 1996 pp 206–219.
(^39) Article 25(1) of Directive 77/91/EEC (Second Company Law Directive).
(^40) Article 25(1) of Directive 77/91/EEC (Second Company Law Directive).
(^41) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^42) Article 42 of Directive 77/91/EEC (Second Company Law Directive). See also recitals 2
and 5. Article 3(1)(a) of Directive 2004/25/EC (Directive on takeover bids).
(^43) Article 42 of Directive 77/91/EEC (Second Company Law Directive) and Article 13(1)
of Directive 2004/109/EC (Transparency Directive).
(^44) Article 15 of Directive 77/91/EEC (Second Company Law Directive).
(^45) Article 19(1)(a) of Directive 77/91/EEC (Second Company Law Directive).
(^46) Article 19(1) of Directive 77/91/EEC (Second Company Law Directive).
(^47) See Betton S, Eckbo BE, Thorburn KS, op cit.