504 18 Takeover Defences
- the use of barriers to exertion of control over the assets of the target;
- the creation of financial burdens as a consequence of the transfer of control; and
- the creation of regulatory problems.
Structural takeover defences. Most pre-bid defences can also be called structural
takeover defences. The Directive on takeover bids requires each company whose
shares have been admitted to trading on a regulated market to disclose in its an-
nual report certain information that enables investors to assess the existence of
structural takeover defences.^4 In addition, the board has a duty to present an ex-
planatory report to the annual general meeting of shareholders on such matters.^5
Control enhancing mechanisms. Most structural takeover defences function by
enhancing blockholders’ control over the company. They can thus be called “con-
trol enhancing mechanisms” (for blockholding as a corporate governance tool, see
Volume I). Another Report commissioned by the European Commission^6 divides
control enhancing mechanisms into three main categories:
- mechanisms allowing blockholders to enhance control by leveraging voting
power; - mechanisms used to lock in control; and
- other mechanisms.
Mechanisms allowing blockholders to enhance control by leveraging voting power
include the use of: shares with multiple voting rights; non-voting shares; non-
voting preference shares; and pyramid structures.
Mechanisms used to lock in control include: priority shares; depository certifi-
cates; voting right ceilings; share transfer restrictions; and supermajority provi-
sions.
Other mechanisms include the use of: partnerships limited by shares; golden
shares; cross-shareholdings; and shareholders’ agreements.
Post-bid defences. The Report of the High Level Group of Company Law Ex-
perts also identified the following post-bid defences:
- reducing the amount of shares that can be acquired by the bidder;
- increasing the cost of the bid; the creation of regulatory problems;
- the search for an alternative bidder (the White Knight defence);
- the acquisition of the bidder’s interest in the company (the Greenmail defence);
and - making a bid for bidder shares (the Pacman defence).
(^4) For a detailed list of structural takeover defences, see Article 10(1) of Directive
2004/25/EC (Directive on takeover bids).
(^5) Article 10(3) of Directive 2004/25/EC (Directive on takeover bids).
(^6) Report on the Proportionality Principe in the European Union, 18 May 2007. It was pre-
pared by Institutional Shareholder Services, the European Corporate Governance Insti-
tute, and Shearman & Sterling LLP.