528 19 A Listed Company as the Target
cision-making;^54 and an optional 10% cap.^55 In practice, it is even more important
that selective share buy-backs are constrained by the principle of equivalent treat-
ment of shareholders. The existence of such restrictions also means that the target
company cannot use greenmail as a defence (for greenmail, see section 18.9).
Second, the sale of a large block of shares on the market can depress share
price. It can be difficult for the acquirer to increase the price by its own actions.
There are also legal constraints. The prohibition of market manipulation^56 covers,
for example, transactions which secure the price of financial instruments at an ab-
normal or artificial level.^57
Creeping takeover by means of swaps. Depending on the governing law (with
the home Member State of the regulated market as the connecting factor),^58 the
acquirer may be able to manage both the cost of the takeover and the adverse ef-
fect of disclosure rules by using derivatives. This method can be illustrated by the
attempted takeover of Volkswagen by Porsche and the attempted takeover of Con-
tinental by Schaeffler. The purchase by IFIL and Exor of shares in Fiat raises fur-
ther questions.
Porsche. Before acquiring a controlling block of shares in Volkswagen AG,
Porsche applied a creeping takeover method.
Porsche took an 18% stake in September 2005 and built its stake to 31%. This
triggered an obligation to make a mandatory bid. Porsche made a mandatory bid
but stressed it did not want to get a majority stake.^59 Porsche offered the lowest
price it could according to the applicable rules, and few shareholders accepted the
offer. In 2008, Porsche decided to take its holding above 50%.
Porsche had regulated the cost of the acquisition by options on VW’s shares.
The options could be swapped into shares at any given time but were settled in
cash. Cash-settled options qualified for compensation between the price that was
locked in and the actual share price.
Now, in an equity swap, the “long” side receives from the “short” side an eco-
nomic return equivalent to the return on the underlying shares. A party that takes a
“short” equity swap position typically hedges its position, and one of the ways to
do it is to buy shares long. As the price of VW’s shares soared due to increasing
demand and anticipated demand, Porsche made windfall profits from its deriva-
tives business. In order to secure control, Porsche still had to actually buy VW
shares. However, Porsche had hedged its position against rising share price.
The creeping takeover strategy employed by Porsche was partly made possible
by the absence of a duty to disclose positions in cash-settled derivatives under
Community and German law. The Transparency Directive which requires the dis-
(^54) Article 19(1)(a) of Directive 77/91/EEC (Second Company Law Directive).
(^55) Article 19(1) of Directive 77/91/EEC (Second Company Law Directive).
(^56) Article 5 of Directive 2003/6/EC (Directive on market abuse).
(^57) Article 1(2) of Directive 2003/6/EC (Directive on market abuse).
(^58) Articles 36(4) and 4(1)(20)(b) of Directive 2004/39/EC (MiFID).
(^59) Porsche AG, Porsche schließt Pflichtangebot ab, Pressemitteilung, 4 June 2008. Less
than 1% of shares were traded.