The Collapse of the European Union Directive on Corporate Takeovers:

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The Collapse of the European Union Directive on Corporate Takeovers:
The EU, National Politics, and the Limits of Integration
Berkeley Roundtable on the International Economy
Discussion Paper
John W. Cioffi*
September 28, 2001
I. Introduction
The twelve-year process of debating, amending, and garnering support for and opposition
against the 13th Directive on Takeover Bids is now over. An unusual coalition of Christian
Democrats and Social Democrats killed the Directive in the European Parliament. The defeat of
this effort was effected by a broad political backlash led by managerial and labor interests
against the adoption of Anglo-American “shareholder capitalism,” a mode of economic
organization that favors shareholder interests in the governance of firms and the economy as a
whole. The rejection of the Directive may represent the end of an agenda for the harmonizing of
company law and the uniform regulation a common market for corporate control in the European
Union. It certainly delays the completion of the much-vaunted Financial Services Action Plan
for a single unified market in financial services in Europe by 2005 and may require a substantial
reconsideration of what this unified market will look like in the end. For a number of reasons,
considered below, the Takeover Directive may constitute the high water mark of an attempt to
import neo-liberal governance structures into Continental Europe.
The extraordinary interplay of domestic and EU politics and the fractiousness of EU
political actors and institutions triggered by the Takeover Directive prompts a wide range of
questions central to the future of political and economic development in Europe. These issues
can be examined at three broad levels of analysis. The first level of analysis focuses on the
intense political struggle over the Takeover Directive provides a window into the domestic
politics of economic and legal reform at the level of the member states. To answer why this
Directive failed when initiatives in so many other areas, ranging from financial services to data
privacy, have not generated such broad opposition requires an analysis of the domestic interest
group politics in the member states. Second, the collapse of the Takeover Directive indicates
changes in the allocation of policymaking power and regulatory capacity in Europe. What does
the failure of such an important EU initiative indicate about agenda setting and policy making in
the EU, particularly with respect to the balance of power between the Commission, the European
Parliament, and the member states? The third level of analysis concerns the practical
repercussions and implications of the failure of the Directive and compels consideration of a
advanced continental economy without a basic mechanism of corporate and sectoral
restructuring and a mode of corporate governance and capital reallocation that has come to
* Assistant Professor, University of California, Riverside, Department of Political Science and Research
Associate, Berkeley Roundtable on the International Economy.
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occupy a central place in the technology-driven American political economy. Conversely, the
collapse of the dot.com-fueled stock market bubble over the past eighteen months may call into
question the oft-assumed necessity of embracing Anglo-American models of finance and
corporate governance as a precondition of commercializing new technologies and ratcheting up
the pace of technological and economic innovation in Europe.
The discussion that follows hypothesizes that the failure of the Takeover Directive, and
with it the creation an American-style market for control complete with hostile takeovers,
represents a substantial shift in (though not a breakdown of) EU governance patterns, but will not
seriously impede European economic and technological development. The failure of the
Takeover Directive and the apparent continued paralysis in the harmonization of European
company law does indicate that institutional and economic development in European countries
and the EU as an entity will follow a different path from that traveled by the United States (or,
for that matter, in the United Kingdom) since the early 1980s. The institutional structures at the
national and EU levels will generate distinctive comparative advantages (and disadvantages) for
European economies, vis a vis the United States, and will create different policy challenges.
Three propositions derived from the evolution, denouement, and analysis of the Takeover
Directive are advanced to provoke and facilitate discussion of the current status of company law
and the prospects for corporate restructuring across Europe1:
(1) The EU Commission’s push to adopt a Takeover Directive activated cross-cutting
political cleavages in European national polities and has interposed national politics as a
significant constraint on neo-liberal trends in EU policymaking and the construction of an
integrated European market economy along liberal market lines.
(2) The failure of the Takeover Directive reveals the emergence of multiple power centers
within the EU that threaten to complicate and diminish the EU’s capacity to formulate,
enact, and implement policies to promote the restructuring of markets and economic
modernization. The medium to long term implications of this development may be political
deadlock that prevents Europe from creating an integrated market with attendant
economies of scale, and the shift from established sectors to those base on new technologies.
(3) The consequences of the Takeover Directive’s failure should not be overstated: a
significant market for corporate control already exists in Europe, competitive product
markets drive innovation and adjustment, and the substantial and ongoing harmonization
of securities market regulation is sufficient to allow substantial corporate and sectoral
restructuring, the formation of risk capital, and its reallocation to more productive uses.
Rather, the true significance of the failure of the Takeover Directive Europe’s development
of a distinctive model of capitalism that likely will embody and encourage policy
preferences and competitive strategies divergent from those characteristic of the American
model of capitalism.
1 Note that these propositions are framed in hypothetical fashion to raise the salient issues and provoke discussion.
As the following discussion will indicate, they are not intended to state propositions of fact or a set of mutually
consistent theses.
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II. Background
The harmonization of company law, of which a common takeover code is a central
component, has been on prominent agenda item of the EU for nearly thirty years. The first
formal incarnation of the recent Takeover Directive proposal dates back to 1989 as amended in
1990.2 The original draft proved too detailed and prescriptive, as the number of specific features
magnified conflicts over the proposal among member state governments, interest groups, and
within the European Parliament. The Commission sought to avoid a complicated legislative
battle by presenting a more general framework for the draft Takeover Directive in 1996 and a
further amended draft version in 1997.3 The Council unanimously adopted a common position
on the draft Directive in June 2000 and Commission accepted that common position in July
2000. Sent to the European Parliament in September 2000, the Parliament approved the draft
Directive with fifteen amendments in December 2000. The Commission and Parliament
disagreed on a number of amendments drafted to allow greater managerial latitude in adopting
defenses against hostile takeovers and greater consultation rights of employees of the target
company.4 As a result, the Commission and Parliament initiated a conciliation process to resolve
the impasse. In the meantime, the Lisbon meeting of the European Commission identified the
Takeover Directive a policy priority for the increased competitiveness of the EU economy. With
less than a day to the expiration of a treaty imposed deadline, the Commission and Parliament
agreed to a common position on the Directive on June 6, 2001, and formally submitted the draft
Directive for the required bare majority vote of approval by the European Parliament. This vote
constituted a watershed event in economic and corporate governance on the Continent, but it was
not to be the major advance toward EU policymaking and market harmonization envisioned by
its drafters and its backers within the European Commission.
The draft Directive was the clearest and most far-reaching attempt to introduce Anglo-
American concepts of shareholder value, and shareholder capitalism generally, into the European
political economy. And for this reason, the Directive became one of the most divisive pieces of
legislation to ever come before the European Parliament, sparking fierce opposition and unusual
alliances that reveal the substantial social and political differences between Anglo-American
neo-liberalism and the legacies of Continental statist and corporatist political economic
institutions. The principles articulated in the Directive would have made takeovers much easier.
By far the most controversial provision and the lightning rod of opposition, Article 9 of the draft
imposed a requirement of “neutrality” on directors and senior managers in responding to a
hostile takeover bid.5 This would have prohibited corporate boards and managers from adopting
2 See Thirteenth Council Directive on Company Law Concerning Takeover Bids, OJ C 64, 14.3.1989, p. 8;
European Commission’s Amended Proposal, 10 September 1990, OJ C 240, 26.9.1990, p. 7.
3 Second Proposal for a Thirteenth Directive on Company Law Concerning Takeover Bids, OJ C 162, 6.6.1996, p. 5;
Third Amended Proposal, OJ C 378, 13.12.1997.
4 This indicates the novel politics and structural dynamics of efforts to reform European economies: the
counterattack against a stringent piece of neo-liberal legislation, the Takeover Directive, combined an embrace of
quintessential American anti-takeover defenses and an extension of codetermination rights— a quintessential
European and social democratic form of corporate governance
5 Article 9 provided:
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poison pills and other defensive measures without shareholder approval and would have
prohibited the solicitation of shareholder approval in advance of a hostile bid. The fight over
Article 9’s neutrality duties eclipsed provisions, contained in Articles 3 and 10, requiring equal
treatment of all shareholders of a target corporation and member state implementing legislation
containing mandatory bid rules compelling an offer for all outstanding shares of a publicly trade
firm when the acquirer’s holdings exceeded a specified level. This controversy shifted the
political debate from the improvement of European corporate governance and securities markets,
which the equal treatment and mandatory bid requirements would have advanced, to one over the
economic and social desirability of hostile takeovers. Despite the indications of deep-seated
opposition in the European Parliament, the Council rejected a substantive amendment loosening
the restrictions on defenses and agreed only to an extension of the phase-in period for the
provision from four years to five.
The anticipated benefits of the draft Directive should not be blithely dismissed. The draft
Directive would have increased both securities market liquidity and the capacity for corporate
restructuring throughout Europe. Europe would have begun to create the structural conditions
for more potent and relentless market pressures to force economic restructuring at the firm,
sectoral, and national levels. The Takeover Directive would have created more powerful market
and governance forces to break up conglomerates in favor of increased concentration and
specialization through increased mergers and spin-off transactions. This would have helped
sectors to consolidate and rationalize on a European basis. The draft directive also would have
helped to increase the attractiveness and thus the development of European equity markets by
shifting rents to shareholders. This would have been good news for technology-intensive
sectors, requiring venture and risk capital with access to deeper and more liquid equity markets
than Europe has been able to provide historically.6 The recent takeover of Telecom Italia netted
insiders (who themselves had launched a successful takeover of the company only a few years
before) an 80% premium for their controlling block of shares without any benefit to the
remaining minority shareholders who will have to bear the increased risks of leverage incurred to
finance the acquisition. It is precisely this sort of inequitable rent stripping by insiders that the
Directive was to have eliminated. In the absence of protective rules, Continental stock markets
have been and are likely to remain less attractive and developed than those of the United States
and the United Kingdom.
The neo-liberal approach to corporate governance, and to hostile takeovers in particular,
embodied in the draft Directive also must be weighed carefully and comparatively. The
perceived deficiencies of American shareholder capitalism were not lost upon the politicians and
Obligations of the board of the offeree company
Member States shall ensure that rules are in force requiring that:
(a) after receiving the information concerning the bid and until the result of the bid is made public, the
board of the offeree company should abstain from any action which may result in the frustration of the
offer, and notably from the issuing of shares which may result in a lasting impediment to the offeror to
obtain control over the offeree company, unless it has the prior authorization of the general meeting of
the shareholders given for this purpose;
(b) the board of the offeree company shall draw up and make public a document setting out its opinion
on the bid together with the reasons on which it is based.
6 However, as Eliot Posner argues in another discussion paper in this series, Europe has developed a venture capital
industry and technology intensive securities markets with surprising speed and success.
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interest groups throughout the European Union. First, takeovers have, at best, a mixed record as
a mechanism of corporate and economic restructuring and as a disciplinary mechanism in
corporate governance. The empirical record on the efficiency-enhancing benefits of takeovers at
the firm and macroeconomic levels does not support the rather expansive claims of proponents.
Takeovers and much of the policy and legal infrastructure of shareholder capitalism arguably
reflect rent seeking rather than an agenda for economic competitiveness (despite the rhetoric to
the contrary). The draft Directive threatened to bring to Europe many of the less desirable sideeffects
of American capitalism and the hostile takeovers of the 1980s: excessive leverage,
downsizing, diversion of capital from long-term strategies and investment to short-term profits
and returns, and growing income inequality between holders of capital and wage earners, and
between senior managers and ordinary employees.
Second, by the time the Directive reached the European Parliament the American boom
in the American stock markets and the high technology sector had collapsed and was threatening
to bring the entire economy into recession. The economic boom of the 1990s had animated the
push for more finance friendly policies and regulatory regimes at the national and EU levels
throughout the decade and these efforts reached their apotheosis in the Takeover Directive.
European policy elites, public and private, had been preoccupied with adopting structural
features of the American economy that were perceived as facilitating extraordinarily robust
economic growth and technical innovation. The Takeover Directive was regarded as a means of
increasing market discipline over managers, expanding the financing capacity of securities
markets, and speeding the restructuring of European industry. The wreckage of the dot.com
crash cast considerable doubt over the utility of shareholder capitalism and increased shareholder
power as a means of promoting faster, stable, and equitable economic growth. The end of the
American boom left critics of the neo-liberal model of capitalism with ammunition to attack the
export of this economic model to Europe. Accordingly, they attacked the draft Directive’s
emphasis on empowering finance capital to maximize returns as an engine of economic and
social destabilization and an inappropriate mechanism to restructure the economy.
These concerns were shared throughout much of Europe and as such they sparked a
European debate on the desirability of hostile takeovers and any legal reforms that would
encourage them. However, by June of 2001 the majority of EU member state governments had
approved the draft Directive, as had the European Commission. The political opposition that
killed the Directive began in Germany and grew to shift the balance of power in the European
Parliament against the measure. An examination of the German politics of takeovers is
necessary to explain this sequence of events.
A. German Politics
Two factors drove the ultimate rejection of the Takeover Directive by the German
government and German members of the European Parliament: interest group politics and its
intensification by the vulnerability of German corporations created by domestic governance
reforms enacted in Germany prior to the consideration of the Directive in its final form.
Mounting opposition and the weakening of the government’s resolve in support of the measure
came as a shock to other European governments, especially those of Sweden (holding the EU
presidency at the time) and the United Kingdom (the Directive’s biggest proponent). The
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German government had been a strong proponent of the measure.7 German Chancellor
Schroeder's tax reforms were deliberately designed to encourage takeovers and restructuring by
lowering the tax barriers to corporate sales of cross shareholdings that protected German
companies from hostile bids. In fact, the proposed German takeover law, still under
reconsideration, was modeled on the draft Directive. Only a few weeks from completion of the
political process, the German government shifted its position to oppose the Directive, generating
accusations of betrayal from other EU governments.8
First, and most generally, domestic politics reasserted themselves because of the direct
and inherent threat posed to vested economic interests by takeovers. Managers reportedly led by
those of DaimlerChrysler, Volkswagen, BASF, and several German chemical companies saw the
directive as a threat to their own positions and that of German corporations generally.9
Volkswagen was a particularly effective lobbyist.10 Lower Saxony owns one fifth of VW shares,
and politicians at the state (“Land”) level had no desire to see shareholder pressure induce job
cuts or plant closures. They were even more opposed to legal changes that might make VW
vulnerable to a takeover in a consolidating global automobile sector. In short, they did not want
to see what happened in the American car industry (i.e., downsizing and Chrysler-style
takeovers) repeat itself in Germany. More broadly, the hostile takeover of Mannesmann by the
British Vodafone had steeled opposition to takeovers across a broad swath of German interest
groups and voters. Indeed, far from heralding the beginning of a wave of domestic and crossnational
hostile takeovers in Germany, the 1998 Mannesmann takeover remained a unique
event.11 The German industrial unions were adamantly opposed to the importation of Anglo-
American forms of law, governance, and economic organization. Organized labor saw the
Takeover Directive as a means of shifting both power and income from employees to
shareholders, as had been the case in the United States and United Kingdom since the 1980s.
However, German unions are far more politically and economically powerful than their
American, British, and French counterparts. German managers and labor thus formed a potent
coalition across class and ideological lines to oppose the Directive.12
Second, the opposition was intensified by the sequence of domestic corporate governance
reforms in Germany that had the effect of rendering German corporations particularly vulnerable
to takeovers under the terms of the Directive.13 Germany outlawed golden shares and
7 See “Takeovers? Nein!” The Wall Street Journal Europe, REVIEW & OUTLOOK (Editorial), May 30, 2001,
available on Westlaw, 2001 WL-WSJE 21829756; “Takeover Troubles,” The Economist (May 10th 2001); Gledhill,
Dan, “The Thing Is... Hostile Takeovers,” The Independent – London, December 17, 2000 (Business Section),
available on Westlaw, 2000 WL 29496281.
8 See Hargreaves, Deborah, “Germany Backs out of EU Corporate Takeover Accord,” Financial Times, May 1,
2001; Krause, Klaus Peter, “Shareholders May Soon Have the Right to Block Takeovers in Advance,” Frankfurter
Allgemeine Zeitung, May 8, 2001.
9 See “Takeovers? Nein!” The Wall Street Journal Europe, REVIEW & OUTLOOK (Editorial), May 30, 2001,
available on Westlaw, 2001 WL-WSJE 21829756; Simonian, Haig, “Berlin Bows to Pressure,” Financial Times,
May 2, 2001.
10 Id.
11 See “Hostile Bids Give Way to Millennium Sensitivities,” The Financial News, June 11, 2001, available on
Westlaw, 2001 WL 12506312.
12 Simonian, Haig, “Berlin Bows to Pressure,” Financial Times, May 2, 2001.
13 See Oxford Analytica, “EUROPEAN UNION -- Takeover Tensions,” In Perspective , The Analytica Weekly
Column, May 24, 2001.
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differential share voting rights in 1998 (under the Control and Transparency Law) and in 2000
passed a far-reaching tax reform law (“Steuerreform”) intended to erode cross-shareholding.
While prohibiting most defenses to hostile takeovers undertaken by managers and corporate
boards, the Takeover Directive would have allowed both golden shares and cross-shareholding to
shield those companies with such ownership structures. Golden shares eliminate the need for
alternative defense mechanisms by vesting control in the minority holding them. Crossshareholdings
perform a similar defensive function by taking a large number, and sometimes a
majority, of shares out of “play” and away from the threat of a tender offer. (They also destroy
the value and financing utility of equity by reducing the turnover of shares and therefore the
liquidity of investments and by precluding a market for control that benefits all shareholders.)
This left German firms asymmetrically vulnerable to takeover threats from firms based in
France, Italy, and the Netherlands where golden shares are common, and Italian firms within
protective webs of cross-shareholdings and ownership “cascades.” Ironically, the draft Directive
also would have placed far more stringent restrictions on takeover defenses than any state in the
United States.14 American firms, by far the world’s most savvy and experienced in M & A
activities, have greater latitude under state corporate law to adopt poison pills and other defenses
prohibited under the draft Directive. Thus, German firms would have been threatened with
takeover by American firms better suited by their financial and governance structures, hard won
tacit knowledge of the offensive and defensive techniques of takeovers, and well-developed
relations with financial institutions specialized in takeovers and related financial activities. The
(remarkably belated) realization of how mismatched German corporations might be under the
draft Directive mobilized broad-based opposition and induced the German government’s shift
against the directive.
In the Commission, the Germans were pressed by other member state governments into
signing on to the Conciliation Committee draft after being outvoted initially by 14-1. The
Germans tried to kill article 9 outright and, failing that, then proposed a blanket prospective
consent for any and all future poison pills and other defenses.15 The Commission also rejected
this proposal in the Conciliation Committee. The opposition then moved to the European
Parliament, which was then faced with a stark choice between a neo-liberal takeover framework
and an outright rejection of the draft Directive and twelve years of work.
B. EU Politics
Following the conciliation procedure in late May and early June, the Germans continued
to attack the draft Directive. German Christian Democrat Klaus Heiner Lehne was both the
14 Cf. “Shopping around in Europe,” The Economist (Global Agenda), June 6, 2001; Betts, Paul and Deborah
Hargreaves, “No Way In,” Financial Times, May 2, 2001. An additional irony is that many commentators
complained that Germany’s Daimler-Benz enjoyed just such an advantage in takeover protections when it acquired
Chrysler in 1998, and that the protected position of German firms had allowed them to be aggressive acquirers of
other European companies during the late 1980s and early 1990s when European industry experienced a
consolidation wave in anticipation of the pan-European market created by the Maastricht Treaty and the Single
Market Act of 1992.
15 This shareholder consent would have been approved in a resolution voted on at any annual general meeting of the
shareholder and would then operate indefinitely to authorize management and directors to adopt anti-takeover
defenses. See Krause, Klaus Peter, “Shareholders May Soon Have the Right to Block Takeovers in Advance,”
Frankfurter Allgemeine Zeitung (English Edition), May 8, 2001.
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rapporteur for the Directive and the leader of the opposition to it. Lehne, hailing from the area
near Mannesmann’s home base in Dusseldorf, argued that the draft Directive failed to address
the remaining substantial differences among the company laws of different countries and that
these variations would confer unfair advantages in an ensuing struggle for economic power
through corporate control. Though the fear was significantly overstated, he also argued that
German and other European corporations would be at a disadvantage against better defended
American firms in an international market for corporate control.16 While Lehne emphasized that
the Takeover Directive would put German companies at a competitive disadvantage against
other European and American companies, he framed his arguments in terms of a broader
reallocation of corporate and economic power that would operate unequally across EU member
states. These arguments resonated with European Parliament members from a number of
member states.
In the European Parliament, only the liberals supported the Conciliation Committee
compromise as a united block (the fifty-two MEPs affiliated with the Liberal, Democrat and
Reform parties).17 The two major parliamentary blocks, the Party of European Socialists (the
Social Democrats with 181 members) and the European People's Party (the Christian Democratic
block with 232 members), both split along national lines. Two issues stressed by Lehne
predominated.18 First, the draft Directive left “golden shares” intact and permitted their
continued deployment and use (as has a recent preliminary opinion of a Advocate General of the
European Court of Justice). This share structure, common in France and the Netherlands, would
give firms possessing it a strategic advantage in the market for control.19 This was especially
worrying to firms in Italy and Spain under takeover threat from French companies— some
recently privatized and endowed by the government with golden shares. Second, the fear of
cross-national takeover threats from American firms and financial institutions raised by German
representatives was reportedly widely shared across Europe. The opposition block used these
two asymmetries to undermine support for the draft Directive in the European Parliament.
Finally, the draft Directive was perceived as posing a direct threat to national sovereignty
in a core area of political economic organization. Corporate governance links capital markets,
labor relations, and the internal adjustment capacities and comparative advantages of national
economies in a complex institutional framework. Company law mediates all these relations by
16 Apparently, the countries continuing to support the Directive by and large believed they would gain more within
Europe than they would lose to any American encroachments on their national firms. However, the fear of attack
from imperviously entrenched and defended American firms substantially misstated the state of American law in the
most important corporate law jurisdictions. In Delaware in particular, takeover defenses are permitted, but fiduciary
duties prevent them from completely blocking takeovers. In practice, they can delay and improve the premium paid
for a controlling stake and this has led to the virtual disappearance of hostile takeovers in the United States since the
1980s. In this light, it is arguable that the United States has struck a reasonable balance with respect to hostile
takeovers by making them difficult, but not impossible, and that the Takeover Directive failed to strike a similar
reasonable balance. That argument, however, was not advanced in the battle over the Takeover Directive.
17 See Hong, Victorya, “Vote on European Takeover Law Heats Up,” The Daily Deal, Monday, July 2, 2001,
available on Westlaw, 2001 WL 20235168.
18 Id.
19 For an account of the manipulation of share and ownership structures to ward off threats of takeover in the
Netherlands and a provocative comparison with Delaware law allowing opinion pills, see Raghavan, Anita, “Deals
& Deal Makers: Netherlands Remains Cool to Investors' Concerns,” The Wall Street Journal, December 22, 2000,
available on Westlaw, 2000 WL-WSJ 26620875
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supplying the framework of rules within which competing interests are recognized and, to the
extent possible, reconciled. The Takeover Directive threatened to impose a substantial change in
the duties of managers and directors, on the one hand, and the rights of shareholders, on the
other. Thus, it would have disrupted these complicated and potentially contentious relationships
and the distinctive balance of interests worked out at the national level over the post-war period.
The longer-term implications of the draft Directive posed a threat to German and Dutch
codetermination, which endow employees with a significant institutionalized voice in corporate
governance, would have been significantly circumscribed by the draft Directive’s neutrality
requirements in takeover situations when the interests of shareholders and employees would
come into sharpest conflict. Further, the neo-liberal governance structures and practices heralded
in the Takeover Directive threatened the EU’s more corporatist countries with significant
economic and political disruption. This threat was most pronounced in countries where
corporatist structures and practices of negotiation pervaded the firm itself.20 These countries,
including Germany, the Netherlands, and Austria, have well-developed institutional
arrangements underpinning stable, long-term linkages between capital suppliers and industrial
firms, and a more negotiated and consensual form of firm governance based on tripartite
relations among management, capital, and employees. From the vantage point of organized
labor, social democrats, and many Christian democrats, the neutrality provision was not neutral
at all, but a decisive shift in the legal framework of corporate governance in favor of shareholder
interests and neo-liberal shareholder capitalism. Conversely, even in the United Kingdom, the
source of the most unequivocal political support for the Takeover Directive, there were criticisms
that the measure’s imposition of more uniform legal standards would weaken shareholder
protections under British corporate governance rules and derogate from the country’s
sovereignty.21
By a tied vote of 273 to 273 (with 22 abstentions) the European Parliament rejected the
draft Directive in the final form adopted by the Conciliation Committee.22 A block of MEPs
comprised of both Christian democrats and social democrats, largely from Germany, the
Netherlands, Austria, Spain, and Italy embraced Lehne’s position.23 Opponents argued that there
would be no “level playing field” in the market for corporate control at the European or
international levels and that the Conciliation Committee’s draft failed to address these
concerns.24 MEPs also stressed their resentment of and opposition to the inflexible attitude often
shown by Council and Commission in the conciliation process (and thereby flexed their own
institutional muscles).25
20 Hence, Scandinavian countries such as Sweden, where corporatism is manifest at the national and sectoral levels
and less evident within the firm, did not display the same levels of hostility towards the Takeover Directive as did
Germany, the Netherlands, and Austria.
21 Tringham, Melanie, “Bid Battles Under Attack,” The Times of London, December 21, 2000, available on
Westlaw, 2000 WL 28139519 (noting that opposition to the draft Directive increased in the UK in response to
German and EU Parliament attempts to amend it to allow freer use of defensive measures).
22 EU rules required a bare majority in the European Parliament for adoption of the Directive.
23 Unfortunately, at the time of this writing, a breakdown of the voting in the European Parliament was not available.
24 See Klaus- Heiner Lehne (EPP-ED, D), “Takeover Agreement Rejected After Tied Vote,” Report on takeover bids
- proposal for a 13th Council directive (Press Release), Doc.: A5-0237/2001 (Procedure: Codecision procedure (3rd
reading), Debate: July 3, 2001, Vote: July 4, 2001).
25 Id.
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III. Three Propositions for Discussion: Implications of the Failure of the Takeover
Directive and the Future Prospects for European Corporate Governance
The failure of the Takeover Directive raises a wide array of critically important issues.
The politics of the Takeover Directive battle cast light on the substantial political economic
differences among Continental European countries, and between these countries and the liberal
market economies led by the United States and the United Kingdom. Further, these politics
reveal the political and economic tensions and cleavages within Western European countries and
within the EU over the phenomenon of economic liberalization and globalization. The splits
opened in the struggle over the draft Directive may indicate the opening of a new phase in the
EU’s institutional development and in European attitudes towards the organization of the
economy and the mechanisms fashioned for its governance. Of the many issues raised by these
considerations, only a few can be dealt with here.
(1) The EU Commission’s push to adopt a Takeover Directive activated cross-cutting
political cleavages in European national polities and has interposed national politics as a
significant constraint on neo-liberal trends in EU policymaking and the construction of an
integrated European market economy along liberal market lines.
The cooperation of Social Democrats and Christian Democrats in both Germany and in
the European Parliament suggests that the Takeover Directive failed because it threatened a
range of economic and ideological interests and thus triggered opposition from across the
political spectrum. A combination of interest group politics and ideology appears to have driven
the debate in the European Parliament. A coalition of managerial interests with close ties to the
Christian Democrats and labor interests represented by Social Democrats saw their (usually
divergent) interests threatened by the empowering of equity capital in corporate governance.26
These constituencies may be favorably disposed to other forms of economic modernization,
including financial market development and improved securities regulation, but they were
resistant to conferring as much power and influence to finance capital as contemplated by the
Takeover Directive. Both interest groups saw the Takeover Directive as a threat to the job
security of managers and employees alike. They also viewed it as contrary to the long-term
corporate planning and (relatively) egalitarian norms characteristic of European variants of
capitalism. Accordingly, rejection of the draft Directive constituted a rejection of has been
identified as American “short-termism” and the massive shifting of rents and wealth to holders of
financial assets in the United States since the early 1980s. This interest group politics suggests
why the EU has been quite successful in advancing securities law reform, but has been paralyzed
in its attempts to harmonize company law. More developed securities markets may sharpen
economic pressures on firms, but such policy efforts seek to perfect capital markets rather than
extend the market to corporate control itself. They therefore do not fundamentally reallocate
power within the firm or the economy as a whole. A more cynical view, however, is that
European managers wanted a balance between takeover facilitating rules and permissible defense
26 This is only a crude sketch of the interest group politics and representation. There are many managers with close
ties to Social Democrats as these parties have moved towards the center during the 1990s. Most notably,
Volkswagen, where Schroeder once had been a supervisory board member as the premier of Lower Saxony, has
close ties to the German Social Democratic party and the government in Berlin. Likewise, some Christian
Democrats had ties to organized labor (or at least did not want to unduly antagonize the labor movement).
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mechanisms that would, as in the United States, command greater rents for senior executives
through golden parachutes and stock options. In this view, managerial opposition to the
Takeover Directive does not indicate rejection of the American model, but a desire to emulate it
more perfectly.
The political breakdown of consensus on the Directive produced fractures along largely
national lines.27 These lines separated the Germans, Dutch, Austrians, Spanish, and Italians,
from the British, Irish, French, Swedes, and Danes. The division between these country
groupings appears to have hinged on the perception of how threatening more liberal takeover
rules would be to powerful organized interests, namely incumbent managers and labor. These
interest groups in the former group of nations perceived takeovers as a far greater threat than
those in the second.
These divisions, and thus the outcome of the struggle over the Takeover Directive, can be
most readily explained through an institutional analysis focusing on a few political and structural
variables: (1) the most prevalent anti-takeover defenses in a given country, (2) the effect the
proposed Takeover Directive would have had on these defenses, and (3) the presence and
strength of codetermination as a component of the national corporate governance regime.
European firms tend to fall within nationally distinctive corporate structures that exploit
different characteristic defense mechanisms. French, Dutch, and Italian firms commonly used
golden shares, management-friendly voting trusts, and “ownership cascades” to insulate
themselves from shareholder pressure and takeover. Golden shares have been particularly
common in France where the government created these protective arrangements as part of its
privatization program to prevent the transfer of domestic economic control to foreign industrial
and financial interests. German firms have been protected historically by cross-ownership
networks and occasionally by golden shares, but golden shares were outlawed in 1998 and most
observers in and out of business anticipate that recent tax reforms will quickly erode crossownership
structures as firms seek to extract and use the capital long locked within them.
German managers felt at a strategic disadvantage in terms of protective share and ownership
arrangements because of recent domestic policy reforms. In contrast, the French would benefit
from the continued legality of golden shares. Press accounts indicate that the prevalence of these
golden shares in various public utilities sectors raised serious concerns in Spain and Italy, where
newly privatized French utilities firms have been seeking to launch bids from behind their
protective share structures.
27 The managerial and labor elites identified in the foregoing discussion as hostile to the draft Directive were
nationally, not regionally, defined. Further, the sub-national regions where support for the Directive and the
adoption of a more finance-driven form of capitalism would be particularly strong are those with substantial
financial centers that would benefit from such a legal and economic regime. However, these regions, such as
London, Paris, and Frankfurt, are too few and too small to have driven the politics of the Takeover Directive’s initial
embrace by the EU and its ultimate rejection. There is some evidence of supra-national regionalism. The voting in
the European Parliament reflected a core group of Germanic countries comprised of Germany, the Netherlands, and
Austria opposed to the draft Directive. Conversely, the UK’s intense advocacy and Ireland’s consistent support for
the passage of the Takeover Directive indicates a supra-national Anglo-Irish block in favor of more neo-liberal
corporate governance and the institution of finance capitalism in Europe.27 Yet, these national groupings cannot
explain the close division of the vote on the Takeover Directive or the national breakdown of opposition and
support.
12
German and Dutch firms also operate under a regime of relatively powerful firm-level
codetermination structures that serves as another line of defense against hostile takeovers.28
Codetermination fulfills a significant— and increasingly important— representational function
that turns managers and employees into “insider” allies against outside pressures exerted by
would-be raiders, acquirers, and minority shareholders. However, as shown by the Mannesmann
takeover, codetermination does not provide an absolute defense against takeover. Welldeveloped
codetermination institutions do confer important benefits to labor (and to the
operation of the firm) and labor fought to preserve them against the threat posed by the Takeover
Directive. The Directive’s neutrality requirement was seen as imposing a form of “shareholder
primacy” under which directors and managers would be legally bound to refrain from taking
action on behalf of non-shareholder constituencies in the face of a takeover bid. While the
presence of codetermination may be viewed as a proxy for a strong domestic labor movement,
the domestic political and economic strength of organized labor is not the critical factor here.
Scandinavian countries have even stronger labor movements and institutions, but less developed
versions of codetermination, and they came out in favor of the Takeover Directive (perhaps
because labor’s interests could be protected through other means in the national labor relations
system). Consistent with the more important role codetermination plays in their labor relations
systems, labor organizations in Germany and the Netherlands vigorously opposed the draft
Directive, presumably because codetermination plays a greater role in labor relations because it
would have been directly and deliberately weakened these institutions.
British firms, operating under a takeover code already prohibiting most defensive tactics and
having no experience with codetermination, were adapted to conditions of constant takeover
threat as contemplated by the Takeover Directive. As a result, their best defense against
takeover has been to maintain high share prices. With firms having little to lose from the draft
Directive, and with traditionally powerful British financial institutions and interests having much
to gain, British politics was shaped by its liberal market structure and favored the expansion of
that structure across Europe. This policy preference follows from the dominant position of
market-driven financial institutions in the British political economy at the expense of labor and
the manufacturing sector generally. British managers have adapted to this environment—
frequently by withdrawing from competitive manufacturing sectors— and thus did not form a
defensive coalition with labor against the Takeover Directive.29
In contrast to the United States, poison pill defenses are unusual in Europe. To date, there
has been little reason to adopt them. European capital markets (with the exception of the London
Stock Exchange) have been relatively undeveloped, shareholders quiescent, fiduciary duties
weak and poorly enforced, and other defensive mechanisms prevalent and effective. This
situation has begun to change throughout Europe during the 1990s. Developments in many
securities markets increased pressures from shareholders (especially British and American
institutional investment funds) for higher returns and greater managerial accountability. With
their traditional defenses outlawed or eroding due to legal changes and facing increasing pressure
28 Employee representatives on corporate supervisory boards are typically hostile to takeovers because they fear that
such deals will result in greater pressures on wage and employment levels. Strong works councils may help ward
off takeovers by making more difficult to push the risks and transition costs of takeovers onto the workforce.
29 The absence of a labor-management coalition also reflects the historically adversarial and conflict-ridden
relationship between these groups that has precluded cooperative and competitive economic adjustment in the
United Kingdom.
13
from shareholder constituencies, German managers wanted the option to adopt American-style
poison pill defenses. One can reasonably speculate that Spanish and Italian managers under
threat from French firms apparently felt similarly.
This analysis suggests that the institutional and legal environment of the firm powerfully
shapes interest group politics. In other words, the structure of the corporate firm constitutes the
interests of the individuals and groups taking part in its activities. One perspective is that the
dramatic and disruptive impact of takeovers mobilizes both managerial and labor interests in
concert and made this area of company law a particularly explosive policy domain. If true, the
Takeover Directive debacle may be a passing episode in which unusually powerful and intense
domestic interests broke through politics as usual in Brussels. Another view, however, is that the
EU, after a long process of successfully advancing European legal harmonization and economic
integration, has found itself reaching the limits of its own legitimacy in the pursuit of neo-liberal
policies. From this perspective, popular opinion and interest group politics at the national level
are increasingly mobilized and effectively expressed in EU politics. The first casualty of this
shift was the Takeover Directive. The broader implications of this view include an EU more
frequently deadlocked over attempts to further integration and legal harmonization, a more
modest EU policy agenda, and more fractious, but also potentially more democratic, politics in
Brussels. Which view turns out to be more accurate will turn on both the political development
within the member states and the institutional dynamics of politics within the EU itself. Of
course, these two perspectives are stylized hypothetical poles. The politics and policy situation
in Europe and the EU is most likely somewhere closer to the middle. Opposition to EU policies
and legislation is, and will continue to be, in part situation specific and that triggered by the
Takeover Directive was unusually fierce because of its potential adverse impact on both
managers and employees. Yet even this more limited view of the political collapse of the
Takeover Directive describes a distinctively neo-corporatist political coalition common in
Continental politics and at variance with the American and British political situations and a
limitation on EU policy making that will channel the European political economy into its own
unique developmental trajectory.30
(2) The failure of the Takeover Directive reveals the emergence of multiple power centers
within the EU that threaten to complicate and diminish the EU’s capacity to formulate,
enact, and implement policies to promote the restructuring of markets and economic
modernization. The medium to long term implications of this development may be political
deadlock that prevents Europe from creating an integrated market with attendant
economies of scale, and the shift from established sectors to those base on new technologies.
Does the failure of the Takeover Directive indicate that the European Commission, and
perhaps even the European Council, have lost power and influence to shape the policy agenda
and that the European Parliament and the European Court of Justice have gained power as a
result? The answer to this question will in large part determine the ultimate significance of the
failure of the Takeover Directive. Together with its leading role in the collapse of the Delors
Commission, the rejection of the Takeover Directive suggests that the European Parliament has
emerged as a more potent force in EU politics and now policy making. The rise of the
30 This issue is discussed in connection with Proposition 3, infra.
14
Parliament represents a further fragmentation of political and institutional power in an already
unwieldy institutional architecture. From this development flow the implications that policy
making process will become more difficult and lengthy, legislation will be subject to an
additional veto point, and the capacity of the Commission and the Council to fashion coherent
and far-reaching policy initiatives will likely decline. Paradoxically, this very fragmentation of
power and the governance and policy problems likely to follow from may place the European
Court of Justice in a more powerful and authoritative position in reforming Europe’s economy.
These institutional dynamics reduce the likelihood of adopting divisive and unpopular
legislation, but increase the chances that EU legislation will be construed by the ECJ in ways that
advance European integration and legal harmonization.
The rejection of the Directive and the evident resentment of MEPs towards the Council
and Commission that contributed to it reflect an enduring shift in the balance of power within the
EU? The European Parliament may well become the institutional channel of choice for populist
politics and the articulation of domestic interests in the EU. This would turn the proffered
justifications for the EU institutional structure on their head. The European Parliament was
supposed to be the forum for pan-European interests, while the Council was ostensibly the body
devoted to national interests. The repercussions of this evident change with respect to structural
allegiances and the evolution of EU institutions and governance are unclear, as are the
implications of changes in the organization and representation of interests in the European
Parliament. However, this issue will become more important following EU institutional reforms
that will make national delegation sizes in the Parliament more proportional to national
population. This reform exchanged increased German representation as a proportion of the
European Parliament for continued German-French voting parity in the Council of Ministers.
The central role German Parliamentary delegates played in killing the Takeover Directive may
be a harbinger of legislative battles to come.
This increased activism and changed composition of the European Parliament also
promises to trigger a battle among member states over the proper role, power, and
responsibilities of EU institutions. The incentives created by the institutional reforms suggest
that Germany should favor granting more power and an increasingly active role to the European
Parliament where it’s representatives will have greater sway. France has an incentive to retain as
much power and authority in the Council as possible where it has maintained parity with
Germany. The likely outcome is only a modest reallocation of power to the Parliament. This
outcome is likely for three reasons. First, the German government will be wary of supporting a
substantial shift of power to the Parliament where the opposition Christian Democrats, as is the
case now, hold the majority of German representation. Second, the difficulty of translating
preferences into collective action in a legislature, particularly one divided by ideological and
national lines, limits the effectiveness of that body as a vehicle for advancing policy agendas.
Finally, to the extent that the German government and political elite along with other European
elites remain committed to an integrating Europe, as seems to be the case for the foreseeable
future, there will be a disincentive to disperse policy making power in ways that make pursuit of
that agenda more difficult.
Although (and perhaps because) the European Parliament is unlikely to take on a
substantially more active and autonomous role in EU governance and policy formation, the
15
European Court of Justice (ECJ) is likely to continue its steady accumulation of power and
influence. The increasing separation of powers and conflict among EU institutions will
strengthen the role of the European Court of Justice. This is particularly true in the knotty area
of company law and corporate governance, where the Parliament, on the one side, and the
Commission and Council, on the other, are in conflict. Where such conflicts exist, the ECJ can
stake out a position somewhere between the two opposing views and render an interpretation of
EU treaties that imposes the court’s policy preference without fear of the other institutions
colluding in overriding its ruling. Already in 1998, the ECJ, apparently frustrated by the EU’s
failure to harmonize company law despite nearly thirty years of effort, has already moved to
require “mutual recognition” of company law regimes, i.e., member states must allow
corporations chartered elsewhere in the EU to do business unimpeded (except for some narrow
exceptions to prevent fraud and other illegality).31
To the extent that the Takeover Directive would have allowed flexibility in
implementation, it would have encouraged just such competitive lawmaking as jurisdictions
sought to placate managers and shareholders (the two groups with the most influence over the
legal situs of the corporation). Competition among countries for incorporations would have
diminished political, and thus democratic, control over the governance of nationally based
corporations and, ultimately, the substantive content of company law and corporate governance.
The failure of the draft Directive may induce increased activism by the ECJ or it may scare off
the Court given the obvious political divisiveness of these issues. The opacity and autonomy of
the ECJ decisionmaking leaves this an open question until future decisions are actually issued by
the Court.
(3) The consequences of the Takeover Directive’s failure should not be overstated: a significant
market for corporate control already exists in Europe, competitive product markets drive
innovation and adjustment, and the substantial and ongoing harmonization of securities market
regulation is sufficient to allow substantial corporate and sectoral restructuring, the formation of
risk capital, and its reallocation to more productive uses. Rather, the true significance of the failure
of the Takeover Directive Europe’s development of a distinctive model of capitalism that likely will
embody and encourage policy preferences and competitive strategies divergent from those
characteristic of the American model of capitalism.
A. Less Than Meets the Eye?
The political push for the expansion of securitized finance by the EU and European
governments during the 1990s was in large measure inspired by the example of the American
31 See Centros Ltd v Erhvervs- og Selskabsstyrelsen, ECJ, March 9, 1999, C.21/297 (preliminary opinion of the full
court). This ruling creates a “constitutional” structure very similar to the mutual recognition of corporations
chartered under state law in the United States in order to ensure a single integrated market. Thus, this ruling raises
the prospect of a market for charters as companies use the jurisdiction with the most congenial company law for
incorporation, and will likely generate market pressures in the EU to adopt company laws favoring managerial and
shareholder interests akin to the “Delaware effect” in the United States. The ECJ rendered this ruling despite the
fact that it was fairly clear that EU treaty provisions guarantying the free movement of enterprises did not constitute
a self-executing agreement to harmonize or permit the circumvention of national company law. That the ECJ would
construe EU treaties to create market pressures to harmonize the law indicates that the Court with a proharmonization
and pro-integration agenda will mediate increased conflicts and deadlock between the Parliament and
the Commission and Council.
16
economy and the role of stock markets in the technology boom. The failure to approve the
Takeover Directive thus can be seen as a repudiation of the American model of capitalism and
corporate governance. British critics in particular have argued that the rejection of the Takeover
Directive represents a backsliding into allegedly antiquated forms of economic organization and
protectionism. However, the consequences of the Takeover Directive’s failure should not be
overstated. Europe has changed substantially over the course of the decade and is not nearly so
uncompetitive and technologically backward as critics often contend. A significant market for
companies and corporations already exists in Europe. Indeed, European firms struck merger
deals worth over one trillion Euros in 2000. Competitive product markets drive innovation,
adjustment, and investment without the harsh, and often excessive, discipline of a market for
control. Further, the substantial and ongoing harmonization of securities market regulation is
sufficient to allow substantial corporate and sectoral restructuring, the formation of risk capital,
and its reallocation to more productive uses. Indeed, the EU may be unwittingly developing a
hybrid model of capitalism that adopts some of the institutional features contributing to the
dynamism of the American economy while avoiding the features that have led to damaging
financial and structural adjustment excesses at the firm and macroeconomic levels.
Critics of the European political economy often argue that its laws are poorly designed to
improve the availability of risk and venture capital, the restructuring capacity of sectors and
firms in the wake of technological upheaval and financial volatility, and the development and
commercial exploitation of new technologies. Europe certainly has significant economic
problems regarding slow growth and high unemployment, but these problems are due more to
problems of monetary policy, welfare state policies, and an anti-entrepreneurial bias (especially
in bankruptcy law). None of these problems are likely to be addressed by company law reform
and corporate takeovers. On the other hand, Europe’s record in developing finance and new
technologies is admirable. European economic development during the 1990s does not indicate
technological and economic stagnation. Europe’s lead in wireless technologies, its many
internationally competitive manufacturing firms, and the many accounts of large scale corporate
restructuring indicate that the criticisms of “Eurosclerosis” have been somewhat overblown. It is
likely that the American and European models of capitalism possess different relative merits. It
may well be true that the more market-driven and flexible American economy and the
institutions that constitute it are better suited to producing breakthrough technologies and exploit
short-term production and commercialization strategies. The European economies, particularly
the more corporatist countries, historically have excelled at the incremental improvement of
product design and production processes. The current cycle of technological innovation has not
yet produced compelling evidence that this historical pattern has been broken. Indeed, the vast
wealth created in the American boom of the 1990s followed the plummeting stock prices and
manufacturing weakness in the United States indicate that this is a more extreme version of past
cycles in which American producers begin as lead innovators but are hobbled by institutional
disadvantages and steadily lose ground to foreign competitors.
In addition, the legal infrastructure of European finance has been transformed at the EU
and national levels during the 1990s. Legal harmonization and increased regulatory oversight of
the financial markets have increased the attractiveness of equity financing to investors and
issuers alike. These changes should confer aggregate economic benefits by increasing the supply
of risk capital and improving the efficiency of capital reallocation to higher value uses. These
17
benefits will likely exceed any anticipated from the adoption of a more liberal legislative
approach to hostile takeovers. Indeed, the American experience suggests that takeovers destroy
value in the majority of cases and that cross-national mergers fare even worse. Further, the
emphasis on increasing the utilization of equity and other forms of securitized finance as a key
component of improving competitiveness has fared poorly in the past year as stock values have
collapsed, particularly in the technology intensive sectors, markets, and indices, and the global
economy is threatened with the first financially driven recession since the 1930s.32
B. Trouble in the Consensus Economy?
Given the substantial progress on the transformation of European finance already
accomplished and the modest economic benefits of takeovers, the more important implications of
the emerging model of European corporate governance and political economy may be political.
The changes in finance and financial institutions that have swept across Europe during the past
decade have both shifted more power to suppliers of capital and their interests. Securities law
reforms have improved transparency and narrowed the scope of managerial discretion in
financial and organizational decisions. At the same time, the growth of shareholding and the
movement of traditional banks into securities related business encouraged the creation of a
shareholders class and the reformation of national financial sectors. This may well represent one
component of an emerging tension between increasingly securitized finance with interests in
maximizing returns and shorter time horizons, and a coalition of managers and labor that favors
established practices and institutions, the security provided by stable organizational and financial
relations, and consensual governance that protects their interests.
National political economies have evolved over the course of the post-war era, and
remained substantially intact during the post-cold war period. The institutional arrangements
that define these national economies evolved to mediate economic conflict and link firms,
finance, and labor markets. The rapid change in European finance and financial markets coupled
with the retention established institutional features such as codetermination, sectoral wage
bargaining, cross-shareholding networks, and golden shares fundamentally changes the dynamics
of these linkages and the relationships among managers, employees, and shareholders in firm
governance. Just as more statist and neo-corporatist forms of firm and sectoral governance
fashioned reasonably complementary relationships among these actors and their interests, the
introduction of increasingly liberal and marketized financial structures and practices may
introduce more conflictual political and economic dynamics and reduce the overall systemic
functionality of European political economies.
Takeovers will probably return to some extent during the next economic and stock
market upswing, as corporate stock becomes, once again, an attractive and effective transaction
currency that obviates the need to raise expensive takeover financing. American and European
financial firms are already building up their M&A staffs on the Continent, and especially in
32 A far more important and beneficial area for legal reform in Europe would be a thorough liberalization of
bankruptcy law, which remains excessively protective of creditors and punitive to debtors. This discourages
entrepreneurial activity and the founding of new firms. This is a sharp and crucially important distinction between
the American and European legal and economic arrangements that receives far less attention than it should and
rarely surfaces in corporate governance debates.
18
Germany, in anticipation of this development.33 Takeovers are thus likely to continue, will
probably grow more common, and will continue to attract the attention of the public and policy
makers. There will be legal responses to the consequent pressures exerted on firms and interest
groups by takeovers.
The failure of the Takeover Directive makes it almost inevitable that there will be more
significant legislative, regulatory, and judicial responses to takeovers as the politics of corporate
governance and takeover law now returns to the domestic policy arena. The question then is
what will be the source of this law and what constraints do different political actors face in trying
to fashion it? Left-wing, pro-management, and nationalist political forces will each likely
support more protectionist and anti-shareholder/finance laws and policy responses allowing
greater latitude in adopting defenses. In the immediate wake of the rejection of the EU’s
Takeover Directive, the German cabinet has just approved a national takeover statute that
subjects takeover bids to greater formal and mandatory regulation, but is more permissive than
the EU measure with respect to defensive measures. The era of odd political bedfellows and
unusual political coalitions is not over yet. Further, the politics will not be as muted as in the
United States where the political left and organized labor were effectively moribund by the mid-
1980s. Labor and the center-left political parties will have a far greater say in Europe and will
drive a harder bargain with managerial interests than was the case in the U.S. in the 1980s and
early 1990s.
Conversely, European courts may become more active in the protection of shareholders
and thereby act as an institutional counterweight to legislative impulses to protect corporate
incumbents. In light of the EU’s failure to adopt the Takeover Directive, a broad and by now
well-established trend towards some form of shareholder capitalism at the level of the member
states may induce greater governance activism by national courts. In particular, national courts
may seek to develop stronger doctrines of fiduciary duties in order to protect minority
shareholders and provide guidance for the adjudication of takeover battles in the future— with or
without an EU law. These trends are already in evidence. French courts are developing
company law and fiduciary duty doctrines to protect minority shareholders. German courts and
regulators are using new securities law and regulations to protect shareholder interests and
improve the accuracy and timeliness of disclosures of material information to the capital
markets.34 Such a move by Continental courts, however, would require substantial judicial
innovation and case-by-case lawmaking that conflicts with the civil law tradition.35 The civil
law constraints of legal tradition and institutional legitimacy suggest that judicially driven
corporate governance reform will tend towards modest, not radical, breaks with prior practice. It
also portends that the liberalization of company law in Europe likely will require legislative and
regulatory action to make up for the absence of more activist courts capable of addressing market
and governance failures through case law and case specific adjudication.
33 Cf. Kissling, Elise, “Merger Wonderland,” Frankfurter Allgemeine Zeitung, July 4, 2001.
34 However, Germany and other countries with strong codetermination laws are structurally constrained form
strengthening fiduciary duties to shareholders since the legal obligations of corporate directors, and to some extent
managers, runs to both shareholders and employees. This leaves the disclosure and anti-fraud provisions of the
securities laws as the most powerful legal mechanism for the protection of shareholder interests.
35 Unlike common law systems, the civil law tradition does not recognize courts and case law as legitimate and
authoritative sources of law.
19
C. Potential Conflicts with the United States
Finally, the European turn away from hostile takeovers and policies supporting an active
market for corporate control may trigger policy conflicts with the United States in such areas as
antitrust, financial market law, and the conduct of cross-border mergers and acquisitions.
Europe’s legal environment reduces pressures, incentives, and opportunities for mergers and
acquisitions and thus for sectoral consolidation. For a variety of reasons— including the absence
of a market for control— extensive networks of smaller firms have been more common and
important in Europe than in the United States. The continued shielding of European firms from
the most extreme takeover pressures will tend to preserve this form of economic organization. In
contrast, the strong structural predisposition of the American economy towards merger-driven
sectoral consolidation places the United States on a different organizational and developmental
track that has already begun to run afoul of European competition policy. The conflict between
American and EU authorities over merger-related market concentration is therefore not an
episodic phenomenon brought to the fore by isolated transactions such as GE’s failed bid to
acquire Honeywell, but a structurally generated feature of US-EU relations that should persist.
Another set of conflicts between the EU and United States concerns cross-border
takeovers. This essentially replicates the European debate over a “level playing field” for hostile
takeovers on the international level. The conflict over comparative exposure to foreign takeover
bids also constitutes the mirror image of European worries over their potential vulnerability of
firms to takeover by American companies protected by legal defense mechanisms. After the
failure of the Takeover Directive, American managers may sense their own vulnerability to
tender offers by European firms.36 The advanced industrial countries may be entering a period in
which market and political pressures impel them towards two conflicting regulatory equilibria:
one characterized by stronger anti-takeover defenses in which dominant nationally-based firms
are protected against foreign takeover and one by legal frameworks facilitating takeovers in
which there is a reasonably level playing field for international mergers and takeovers. Tensions
over which equilibrium should and will prevail will likely pit the United States (and, within the
EU, the United Kingdom) against the EU in the development of company law and securities
regulation. In this respect, the battle over the Takeover Directive reveals the European domestic
and EU politics over takeovers, but not its resolution at the level of international politics. Just as
American interest groups have used international negotiations to seek legal reforms they could
not obtain through domestic politics, the European financial sector and political elites, including
the European Commission may seek to use international negotiations as an alternative route to
reform takeover law. Thus, international treatment of takeovers and mergers and acquisitions
may provide the culmination of a process through which liberalization has been achieved by
relocating policymaking at higher and higher levels. Just as financial market reform has come
largely through EU legislation, having been blocked by domestic politics for years, the politics
36 Some commentators sounded this alarm following the 1998 acquisition of Chrysler by Daimler Benz. Arguments
reminiscent of those made when Japanese firms went on an acquisition spree in the United States in the 1980s were
leveled against Germans who could acquire the cream of America’s corporations while defended against takeover.
The irony, of course, is that Daimler proved to be a much stronger and profitable company and Chrysler has become
a substantial burden on it in the years since the acquisition.
20
swirling around corporate takeovers may create the international policy conflict necessary to
shift the debate to an arena more amenable to advancing liberalization of takeover rules.
Conclusion
The overview here has identified three layers of analysis implicated by the failure of the
EU Takeover Directive. First, the politics of the collapsed effort to liberalize the European
market for corporate control reflects a potentially substantial change in the political relationship
between the European Union and its member states. It appears that the high water mark of the
neo-liberal policy agenda has been reached and oppositional forces have mobilized to an extent
not seen in the prior fifteen years of EU economic integration. The limits of this agenda have
been set by the resurgence of domestic politics— and political opposition— in EU policymaking.
This transformation implies a second set of changes in the internal politics of the European
Union. The European Commission has been the institutional engine of integration policy and
strategy during the 1980s and 1990s. Now, that leadership role, at least with respect to core
areas of economic policy, appears to be facing greater constraints and competition from the
Council and, more importantly, from the European Parliament. These are the institutional
avenues through which revitalized domestic politics will make themselves felt at the EU level.
However, increased tensions among the Council, Commission, and Parliament raise the
likelihood that the European Court of Justice will play an increasingly important and active role
in shaping the legal and policy terrain of the EU as it mediates disputes among the other organs
of EU governance. These tensions and frictions among institutions will impose significant
hurdles on EU policymaking and reduce the chances that bold and potentially divisive policy
agendas will be pursued and adopted in the future. Finally, the EU’s recent confrontation with
limits of neo-liberalism does not entail the failure of economic integration or modernization as
whole— or even in substantial part. However, it does suggest an era of more divisive and
conflictual politics within the EU and internationally as the institutional and juridical differences
among advanced industrial countries becomes a flashpoint for battles over the prevailing
structure of the European and global economies.