- The Washington Times - Tuesday, November 25, 2003

In crafting a common law on regulating takeover bids, Europe is once again proving the hazards of building policies that sweep a continent. The balancing of so many interests in Europe may cause the lowest common denominator to prevail on takeover policy. An unholy combination of political horse-trading and protectionist sentiments have created within the European Union (EU) wide support for a flawed consensus on takeovers, which would, if approved, make it more difficult for U.S. companies to make bids for European corporations. Tomorrow, at an EU ministers’ meeting in Brussels, key governments are expected to back the new takeover directive.

The United States has cautioned Europe that such a new takeover law would create a “fortress Europe” and could cause Europe to run afoul of World Trade Organization (WT0) provisions and international guidelines. Certainly, Europe would be bunkering down with its planned directive on takeovers, obstructing hostile bids, and, as a consequence, foreign capital that tends to flow where laws allow shareholder value to be optimized. Such a scenario would be bad not only for U.S. companies, but for European ones as well.

Crafting a continent-wide policy on takeovers was originally intended to make merger and acquisition activity more brisk in Europe. But the German government worried that such an outcome would lead to an onslaught of hostile takeovers on German companies —concerns that were echoed by Nordic countries. Though the efforts of Germany and others to protect their corporations from takeover bids were opposed by other European countries, such as Britain, Germany was successful in winning their agreement by making concessions in other areas.

Frits Bolkestein, the European Union’s single market commissioner, has criticized the takeover proposal, backing U.S. claims that it would take Europe in the wrong direction. “This [compromise] proposal would take the heart out of the directive,” he said. “It could tempt member states to allow barriers to takeovers that do not currently exist.”

If Mr. Bolkestein remains firm in his opposition, then it would take a unanimous EU vote to override his position. The pressure on EU states to go along to get along with this provision has been intense. The European Commission has been trying for 14 years to form a European takeover law. Italy wants to see a deal struck before its rotating presidency ends this year and would apparently accept a procedural consensus — which is what the compromise appears to be.

Even though Europe had been striving to establish a continent-wide law, the consensus plan would allow some governments to opt out of the substance of the law. This would open the door for European governments to erect so-called defensive provisions against takeovers. Although the law would in principle ban EU companies from fending off a takeover through poison pills and would limit multiple voting rights, it would allow governments to opt out of this ban. It is difficult to see, therefore, how such a law would create the strived-for uniformity within Europe.

But the compromise does reflect the dynamics of power in Europe. Multiple voting shares, which allow some shareholders to control a company without holding a majority share, are held by some prominent and politically powerful families in Europe, such as the Wallenbergs in Sweden. Uncoincidentally, Sweden supported the opt-out compromise. Poison pills, which entail anything from unattractive conditions to an acquisition to issuing shares to stymie a takeover bid, are permitted in some U.S. states, but the regulatory context is distinct from Europe’s. In the United States, shareholder power makes merger and acquisition activity more vibrant than in Europe.

If Europe passes the compromise version of the takeover law, it could head for another confrontation with the United States at the WTO. The United States has, in its arsenal, the ability to push hard on Europe’s de facto ban on genetically modified organisms at the WTO — a politically charged issue in Europe. Also, in January 2004, the so-called peace clause on agriculture subsidies, established in the Uruguay Round, expires, opening the door for some testy confrontations in this area. An escalation of trans-Atlantic tensions would have a profound impact on the global economy — and Europe in particular. The U.S. deficit with Europe last year totaled more than $82 billion.

Europe should think twice, and three times, before taking this next step toward a U.S.-EU trade war. While Europe stands to lose more than the United States, it would be very bad news for both sides.


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