The Directive 2004/25/EC: Are the optional principles of “Board Neutrality” and “Break Through” leading towards Takeover Efficacy in the European Market?

Abstract

This paper will examine the two core optional provisions of the Directive 2004/25/EC1 on Takeover Bids as implemented in 2004 after years of negotiations. The Board Neutrality Rule under Article 9 of the Directive, aims to limit the power of the target company’s managerial board to use defensive measures against a potential bid and places the decision making authority in the hands of the shareholders. Further on, there will be a discussion on the Breakthrough Rule, Article 11 of the takeover Directive which aims to enable the bidder to break through any rights already held by shareholders or other individuals which may form an obstacle towards achieving the takeover of the desired company. It remains up to the Member States’ discretion if those two principles will be implemented in their national laws, a right given to the Member States under Article 12 of the Directive which will be further criticized as to the impact it imprints on the entire Takeover Directive, as well as, how the optionality provision affects the effectiveness of the takeover regulation and consequently the development of a Harmonized European Union and the internal market overall. In this analysis, it will be evaluated to what extent the two principles facilitate the Directive to achieve its main objectives and put on the spot the gaps and weaknesses of the optional provisions as proven by their performance. Lastly, reference will be made to the US System to provide an overview of the similarities and differences takeover bids have in the two most influential markets in the world.