Emerging trends and developments of country-specific defense strategies against hostile takeovers

Table of Contents

1 Introduction

2 The historical development of M&A
2.1 Current situation
2.2 Reasons for Mergers & Acquisitions
2.2.1 Hostile takeovers – A definition
2.3 Arguments for and against hostile takeovers
2.4 Defense options of hostile takeovers
2.4.1 The legitimacy of defense strategies / legal basis
2.4.2 Preventive defense measures
2.4.3 Effective defense measures of the management
2.4.4 Obligation to neutrality of the management board
2.5 Takeover laws in France

3 Corporate Governance as determinant
3.1 Definition of Corporate Governance
3.2 Corporate Governance in Germany
3.3 Corporate Governance in France
3.4 Corporate Governance in Great Britain and Canada

4 Regulatory environment & decision-criteria
4.1 Success factors of acquisitions
4.1.2 International experience
4.1.3 Industry
4.1.4 Enterprise size
4.1.5 Degree of relationship/target country

5 Hostile takeovers in the 21st century

6 Conclusion

7 Bibliography

8 Appendix

1 Introduction

With the crash of stock markets at the beginning of the new millennium, it seemed reasonable that the market of Mergers & Acquisitions would level out - resulting in the numbers of takeovers decreasing and less ambition and financial capabilities of companies to expand through M&A activity (Appendix A). However, the global economy remains exposed to continuously increasing merger waves, which also do not flinch from German companies. Albeit national resistance – one has to remember the German-French conflicts in 2003/2004 (Sanofi-Synthelabo taking over Aventis) – this happens in an international context. In contrast to Anglo-American countries where hostile takeovers were already a fixed part of an appreciated and praised business strategy 20 years ago, they were more like an exception on the European continent. This statement is especially valid for Germany through the Rhenish capitalism, as explained in 2.4.2 (Appendix K).

Numerous aspects play a decisive role for the organization and evaluation of takeovers, not to forget the national legal framework. In this respect, the subject is of economic as well as of legal importance.

In the following chapters I will address especially different options of defense strategies against hostile takeovers - after some introductory comments. How these models can find practical adoption and how the trend of their application could look like will be subject of my explanations. At the end, I will provide not only a conclusion of my research, but also a prospect on future trends of the M&A market, its players, positions, activities and strategies.

I would like to point out, that this topic has obtained special attraction in the worldwide media through the takeover of Mannesmann by Vodafone and new laws, which were enacted as a consequence of this battle (e.g. the Wertpapiererwerbs- und Übernahmegesetz^[1] (WpÜG) in 2002).

2. The historical development of M&A

The first M&A-wave appeared in the context of the industrial revolution, between 1897 and 1904. A primary strategic objective was the prevention of overcapacities and price deterioration through horizontal mergers and the establishment of so-called "trusts". These M&A-waves can absolutely be regarded as a cyclical phenomenon^[2]. The second M&A-wave occurred in the time frame between WWI and WWII from 1919 until 1929 with the strategic ambition to gain both a market dominating position and control over the entire production cycle through a vertical integration. This phase ended with the stock crash in 1929.

The third M&A-wave followed in the time between 1965 and 1969 with the formation of big conglomerates as primary strategically objective, which has been achieved mainly through portfolio-extension and diversification. The theory of diversification was especially popular in the US. This development vanished abruptly with the introduction of the Tax Reform Act of 1969 and with the crash of stock markets in the late 1960s.

The fourth M&A-wave started in 1984 and ended in 1990. A real "merger-mania" erupted as a reaction on the liberalization of the monopoly- and tax-legislation, as well as on the deregulation from the US government. Strategic objective was the focus on core competencies and the development of new synergies. After numerous companies have gone bankrupt and investors have lost confidence in such investments, this wave ended after a substantial slump in the market.

The current M&A-wave started in the mid 90s. Characteristic for this wave are the global mega-deals, ongoing digital globalization, the creation of the Single European Market and value-based corporate governance. Beginning in 2000, the wave has been influenced by the heavy stock market collapse, which resulted in a decline of M&A-activities^[3]

2.1. Current situation

Almost no day goes by without news in the economic press, which reports about spectacular mergers or acquisitions - often involving companies from different countries. The already quoted hostile takeover of Mannesmann by Vodafone at the beginning of the new millennium is only one example of the media-effect of takeovers, which increasingly attracts the attention of the population. This fact is less astounding than the immense amounts of money which change their owners in the course of such transactions. However, those huge transactions are only the top of the iceberg. If one has a look on the statistics, it seems that M&A has enjoyed a substantial upturn in terms of popularity among both managers and owners. The stagnation of the transaction volume from 1999 until 2000 arose from the decreasing market capitalization of many companies (Appendix A).

The underlying tendency of the statistics is emphasized through the boom of the previous year. According to Thomson Financial, 3.6 trillion $ were flowing in transactions. Thus, the value of the hitherto existing record year 2000 has been overstepped and the market "tends to exaggerations", according to the news coverage^[4].

The trend gets even more energized from the positive economic atmosphere und the expectation of more peak levels. Backgrounds, motives and interests of the different market players will now briefly illustrated in the following chapter.

2.2 Reasons for Mergers & Acquisitions

In the light of the above-mentioned strongly acceding tendency regarding quantity and volume of M&A-activities, the question comes up why external growth became an increasingly important factor for business development during the past years. From an economic point of view, mergers or acquisitions of companies are nothing else than reallocations of resources over a market, where firms are bought and sold^[5]. Presuming the superiority of the market mechanism for the efficient allocation of resources, M&A can be classified as an efficiency-enhancing tool for the allocation of capital, when looking at the economy as a whole. That means that from a management's point of view both an acquisition as well as a merger is a matter of a strategic measure, which can have a sustainable impact on corporate policy^[6]. Thereby, one distinguishes between growth- and shrinkage-strategies. Shrinkage-strategies are implemented through the sale of companies or parts (fixed assets) of them. On the contrary, there is the purchase or the merger of a company, which is among the growth strategies. Growth- as well as shrinkage-strategies both serve the purpose to change the present business portfolio of a company. In this thesis I am going to focus on the growth strategies. Company acquisitions are a strategy of external growth, which is generated through the purchase of an entitlement to disposal over already existing capacities^[7]. In order to narrow this definition, one distinguishes between horizontal, vertical and lateral M&A.

Governmental organs are often interested in a takeover to be successful; particularly when the argument of the protection of jobs in a globalized world is brought up. So-called "synergy-effects" are supposed to increase the opportunities and chances of both parties. Although the business world is in a continuously changing process, there are still substantial differences between countries concerning their individual economic, legal, political and cultural framework. Despite globalization, it is therefore necessary to build up a regional market presence, to ensure a high-quality service for customers in order to address the need of regional diversification^[8]. Thus, an appropriate entry strategy to a regional market can be implemented by the acquisition of a company that already operates in the respective country.

Other reasons for increasing M&A-activities are as follows: beyond globalization, the fast drive force towards technical innovation leads in many business sectors to the fact, that "time" represents a central competitive factor. Especially in the high-technology sector, the effort and striving for having a lead over competitive companies in terms of knowledge requires sizeable financial resources. At the same time, this means a reduction of the product life cycle, as innovation is pushed continuously forwards.

While these trends are developing themselves differently – they depart from each other in the opposite direction – it is absolutely necessary to gain market entry in different markets simultaneously, in order to keep pace with global competition. Gaining market entry through M&A allows a considerable acceleration of the market development, as one can have access to already existing customer contacts, experienced personnel as well as knowledge about the local market. In addition, M&A also allows a distribution of costs. However, the second side of the coin represents the fact that only 20% of all M&A transactions are successful; only they actually create real value^[9]. When taking into account the factors of international business, the market environment has clearly become more complex and dynamic.

Success factors of international business activities are not least the continuous improvement of own capabilities while adapting to local circumstances at the same time^[10]. But how is that possible in the case of hostile takeovers?

2.2.1 Hostile takeovers – A definition

Generally, the term "hostile takeover" (often also referred to as an "unfriendly takeover") describes the acquisition of a target company, whose management does not agree on this potential transaction. This is very important to mention, otherwise it could give the false impression that a hostile takeover would always lead to commercial/economic disadvantages for the new company or the owners of the target company. Hence, “hostile” primarily refers to the management, not necessarily to the shareholders.

In contrast, there is the "friendly takeover", which is perceived as mainly positive to some degree by the management as well as by the owners^[11]. In line with a hostile takeover, there are four widely spread attack-strategies, which are following listed below:

- Tender Offer
- Dawn Raid
- Proxy Fight
- Bear Hug

In my thesis I would like to address the procedure of a hostile takeover, respectively, the defense strategies against it.

Hostile takeovers were particularly existent in the mid 1980s in Great Britain and the US (Appendix B), especially when investors detected a big enough discrepancy between specific company assets and the correspondent stock market valuation^[12]. Those transactions aimed at obtaining the control over a company and, as the case may be, to apply a method that is referred to as "asset stripping".

As briefly mentioned above, “corporate raiders” usually pursued one or more of four different tactics of hostile takeovers, which I would like to explain now.

"Tender Offer" describes a public offer for a takeover, addressing the shareholders of a target company. This is usually accomplished when the buyer has already acquired enough shares at the stock exchange and then makes an offer (limited in time) to the remaining shareholders to gain majority of shares^[13]. With the passage of the WpÜG^[14], those modalities are regulated.

In contrast to the previously described form of attack, an attacker tries to accumulate shares on the sly when adopting a "Dawn Raid"; he wants to change the controlling interest to his favor by acquiring big enough blocks of shares. However, there are countries in which this method is prohibited by law. For instance, in Germany, a "Dawn Raid" is forbidden with listed companies (due to § 21 WpHG^[15] ): with increasing voting rights - 5%, 10%, 25%, 50% and 75% - both the target company and the German Federal Securities Supervisory Office have to be informed within 7 days as soon as a threshold has been overstepped. Thereby, share prices increase in the short term, which makes the takeover process more difficult or at least more expensive. In addition, a "Dawn Raid" is made complicated due to the policies of the WpÜG.

A "Proxy Fight" occurs when at least one party tries to gain the trust of shareholders to gain a majority. According to Investopedia: “When a group of shareholders are persuaded to join forces and gather enough shareholder proxies to win a corporate vote^[16]. This is also referred to as a proxy battle.

"Bear Hug" describes an offer made by one company to buy the shares of the target company for a much higher share price than what that company is actually worth. This strategy was adopted when it was uncertain that the target company’s management will be willing to sell. By paying a “generous” premium per share, the management of the target company comes in the delicate situation to justify its decision in front of their shareholders if they plan to reject the offer. Most likely, they will accept it or need to find another defense strategy. Otherwise, they make themselves liable of having destroyed shareholder value.

Beside this definition it would be interesting to know which opinions argue for and against hostile takeovers. This will be discussed in the following chapter.

2.3 Arguments for and against hostile takeovers

Maximization of shareholder value is the primary objective of all entrepreneurial activities. Based on this striving, there are many theories which are supposed to proof how corporate takeovers can generate added value. Corporate takeovers - according to the postulate of synergy effects - are conducted on a rational basis with the objective to increase the consumption of operating, financial and management synergies. This is based on the consideration that a combination of two companies is able to operate more efficiently and cost-saving as opposed to two companies, which act independently of each other.

Operating synergies are created through the consolidation of functional areas such as Research & Development, Production or Marketing, which were separated before. From the avoidance of dual functions arises the potential of saving expenses, which serves the objective of value enhancement. Financial synergies can be created through the merger of equity and debt. The purchase of loans becomes easier as the creditworthiness is improved. Thus, borrowing costs can decrease. Additionally, leadership-synergies can be achieved when the management of the acquiring company disposes of skills that can make processes of the target company more efficient^[17].

Frequently mentioned is the reason that a target company is perceived as being undervalued and therefore becomes a victim of a takeover. In this case, the share price of the target company does not reflect the real value of the firm. This can be explained in several ways. Quite often, it is due to the assumption that management works inefficiently^[18]. The acquiring company is ambitious to create a value enhancement, once the target has been taken over – through the improvement of management and efficient usage of resources. A further aspect concerns the market power of a company, respectively, the individual market outlook. Takeovers of companies within the same industry are supposed to enhance the market position and increase market share^[19]. Thus, the new company may hold a "monopoly position" and is taken to a higher level, where it can have a greater influence on the price structure. Under these circumstances, takeovers sometimes lead to a market-dominating position (à cartels) and therefore to a limitation of competition, which can result in a potential veto from anti-trust institutions.

These reasons are opposed to other aspects, which argue against a hostile takeover. According to general assumptions, hostile takeovers usually negatively affect the behavior of the target company's management^[20]. The management puts all its efforts in the defense of the existing bid. In order to fight against the attack of bidders, the management is merely focused on the care of its share price. Thereby, corporate policy is more interested in short-term advantages and loses sight of the more sustainable long-term perspective. Often, a takeover goes hand in hand with a change in management. Based on this fact, management is likely to fight for its own job. If management gives up the defense battle too soon – e.g. when it is dangled with profitable "golden parachutes" - it might have a negative impact. The corporate identity then also suffers from a takeover battle. Big takeover battles are under continuous observation by the public. The media might prejudge negatively or only to one side, which can result in a substantial loss of reputation for the company. On the Human Resource level there remains the risk of employees loosing motivation, and therefore, job satisfaction. Basically, a corporate takeover means primarily uncertainty regarding the future of the company.

2.4 Defense options against hostile takeovers

After having written some basic comments about the evolution and development of the M&A market, I would like to address now hostile takeovers and defense strategies against them in more detail. My analysis incorporates economic as well as legal aspects of this subject. Basically, the common objective of all defense measures is to gain time; either to develop alternatives for shareholders and management, or to ensure that the company does not change ownership at a too low value (Appendix L). Sometimes, just by “playing on time”, target companies can get rid of certain bidders, as event-driven stock prices can make a potential takeover too costly. Also, in case of a hedge fund having the required amount of capital budget only for a certain time period, a delay could be a deal breaker as well.

2.4.1 The legitimacy of defense strategies / legal basis

The following aspects include defense alternatives against hostile takeover attempts. Shortly, I will address the different legal conditions of both Germany and France. In general, defense strategies have to be examined by the management if they can withstand legal audits^[21]. The question is, if the board of directors as an employed management body is authorized to adopt measures in order to defend its company against public offers – also without the approval of the shareholders. At this point, one should have a look at discussions, recently happened on a European level. Until now, each EU member country had its own individual laws regarding regulations of public takeovers. These policies also embody the possibilities of permitted defense measures. In Germany, the corresponding WpÜG^[22] became effective in 2002. Particularly the conflict of interest of the management was reconsidered and was implemented by the regulations of § 22 paragraph 1, clause 1 WpÜG. It also includes the alternative of a "pooled decision", which allows the board of directors of the target company temporarily to defend itself against undesired takeover attempts. Numerous alternatives are given, especially for preventive measures to avoid hostile takeover attempts. On the other hand, tools - which can be adopted autonomously and systematically from the management body against hostile takeovers – are not prohibited by law in Germany. In fact, it is permitted for the management to seek and find approval by the annual general meeting.^[23]

The biggest hurdle for takeovers in France is the multiple voting right^[24]. Shareholders, who have been holding shares for a longer period – usually 2 years – are granted a double voting right by the company. However, this is an option which is not taken by everybody. Hence, it is essential to pull those shareholders already in the forefront of a takeover on one's side. Thereby, the board of directors in France is given the possibility to defend itself against unfriendly takeovers^[25].

After discussions of 15 years, a cross-national policy has been implemented. According to this, management is generally obliged to keep up perpetual neutrality. Not the board of directors but the owners – namely the shareholders – are to decide if an offer should be accepted or not. Therewith, interminable takeover battles are supposed to be avoided.

However, this policy is not binding, against the will of the former EU-commissioner Bolkenstein^[26]. Therefore, each member country of the EU is allowed to find an individual/national solution for this problem. This is a compromise-solution, which makes especially advances to Germany. The original proposal earmarked, that the multiple voting right (as existent in Scandinavia) or the double voting right (as in France) shall be persisting, but the German "pooled decision" is to be abolished. Since 1998, there are no more special voting rights. German companies did not dispose of any other defense measures and therefore felt disadvantaged. According to the passed minimal solution, the WpÜG still remains valid, so are the pooled decisions. The policies in France and other EU-countries also remain existent. Companies may opt if they comply either with the liberal European law or rather with the more protectionist policies of their home country. As a consequence, defense strategies will remain valid – according to the legal framework in those countries, in which the companies are based. The EU member countries can decide, if they will adopt national law or rather the new liberal EU takeover directive in case of corporate takeover situations.

The directive, which was finally adopted in 2004, was created to make it more difficult for target companies to use poison pills, just like issuing new shares or entering into complex joint ventures.

When addressing once more the issue of the German legal basis in more detail, we can conclude the following: The WpÜG, which has been passed in 2002, regulates public offers for the purchase of securities^[27]. It substituted by the voluntary takeover codex. An important characteristic is now the threshold, at which the legislator acts on the assumption of control of a target company: it lies substantially below the previous policy, namely at 30 % of voting rights. Another principle of the WpÜG is the equal treatment of shareholders. However, it refers only to shares of equal types (common or preferred). Anybody, who has acquired at least 95 % of stock of a listed company, could urge out minority shareholders at the general meeting (Squeeze-out). This uncloses the option of gaining a 100 %-stake of the target company^[28]. The decision of the bidder of making an offer has to be made public without measurable delay. After the decision for an offer, the bidder is urged to send a notice to the administrations of the stock exchanges. Before the notice can be made public, only the administration is allowed to use them in order to decide if the determination of the market price has to be intermitted or even discontinued. The time limit for the acceptance of the offer must not be less than four weeks and must not exceed the ten-week-threshold. The term of acceptance starts with the publication of the submission of the offer^[29]. Subsequent to that follows a statement of the management and the supervisory board of the target company.

The statement must address the following points in detail:

- Type and amount of offer
- Potential consequences of a successful offer for the target
company
- Pursued objectives of the bidder related to the offer
- Intentions of the members of the management and supervisory board

The execution of the offer, in particular the transaction of securities to the bidder by the owners, who accepted the offer as well as the service in return is not defined by the WpÜG. However, the basic principle of § paragraph 3, clause 1 states that the bidder is urged to conduct the process as fast as possible.

2.4.2 Preventive defense measures

Defense measures adopted by the management, the annual meeting or the shareholders are by all means common and permitted in the forefront of a takeover offer, provided that the matter of case is maintained under company law.

Through the generation of reciprocal investments held, the free float without sanctions can be reduced at most by 25 %. Thus, a part of the shares of the threatened company is owned by a friendly company. Hence, the takeover of control is made impossible, as the shares – which are essential for gaining a majority – are held by other companies. This alternative is widely spread in the Rhenish capitalism^[30] (Appendix K). However, I have to point out that the creation of reciprocal investments held leads to reductions at the capital market^[31].

Further measures in a preventive sense are securities according to stock corporation law.

The equity structure for preventive defense measures is therefore of vital importance. When the equity stock is allocated according to defense-strategically considerations and when these shares are traded at their real value, a hostile takeover appears often unattractive for speculative reasons. Following, the different securities are explained and analyzed regarding their suitability for a (preventive) takeover defense. In particular Germany disposes of some special features in this context.

The bearer share is a real bearer paper. Its advantage lies in the uncomplicated transferability.

However, the bearer share has disadvantages in the context of defense strategies:

- Anybody, also the unauthorized holder, can make use of the certified rights of the share title
- The transfer of shares is effected without any control of the company
- The acquirer remains anonymous towards the administration
- The composition of control within the bearer stock capital is not determinable. Thus, it remains the risk that the real circumstances might not outcrop until the annual meeting or do not even become generally known due to fiducially proxies.

Correspondingly, one has to refrain from a predominant equity composition of bearer shares. Especially exposed to takeover risk are publicly owned firms listed on the stock exchange. With unlisted corporations it is the individual case and the allocation of bearer share equity which is the key factor^[32]. Thus, it is absolutely possible that a small family company with mainly bearer stock can avoid an undesired sale of their firm due to family structures and internal agreements. But even in such a case the remaining risk of a sudden sale cannot be excluded from consideration.

Which measures can be undertaken by a corporation whose equity is predominantly composed of bearer shares? In the first instance, the equity capital has to be restructured early. The following alternatives are available:

- Recapitalization through the issue of nominal shares
- Reallocation of oppositional equity stakes

In this thesis, the increasingly important "Management Buy Out" will not be addressed in detail. The purchase of the own company through the management financed from own resources is mainly possible with small cap companies. Companies with bigger market capitalization can usually only be bought with the support of debt financing, which creates the necessity of seeking investors. In addition, both the management and (indirectly) the company are exposed to the risk of a high level of debt^[33].

At the bottom line, equity – composed totally or partially of bearer stock – is under defense-strategic considerations virtually unprotected against corporate takeovers. This potential status quo should be improved by a restructuring of the equity structure, striving for a majority of nominal shares.

Through the issuance of nominal shares instead of bearer shares (§ 10 AktG^[34] ) the board of directors is enabled to get an overview of the shareholder structure and can therefore anticipate potential takeover attempts in advance which allows the adoption of counter measures in a timely manner.

The application of preventive defense alternatives using nominal shares:

Compared to bearer shares, it is advantageous that the transfer of nominal shares requires an endorsement (§ 685, clause 2), which impedes the transfer process. The company is allowed to check within the scope of registration if the transaction has been conducted in compliance with the law^[35]. If the formal audit leads to a substantial doubt about its legitimacy, a second audit would be conducted in order to check the validity and authenticity of the endorsements. With the authorization regarding the registration in the stock register, the administration has a tool which allows control of the identification of individual members. Thereby, a vague estimation of the allocation of stocks is possible.

The very fact, that common nominal shares have the characteristic of a more complicated transferability compared to the bearer share makes it a less attractive security - from an acquirer's point of view. Nevertheless, companies issuing nominal shares have a certain level of control about the allocation of ownership with the stock register. However, it could be harmful that the acquisition of nominal shares via straw men^[36] cannot be controlled. In some cases, acquirers get hold of blocks of nominal shares through the interposition of an intermediary for confidential reasons^[37]. They do not want the company to take notice of the stealthy change of ownership. The stock register only shows the direct shareholders of the company and the real ownership situation cannot be seen from this register. Thus, the transfer of nominal shares to straw men can neither be controlled nor prevented by the stock register.

Furthermore, the stock registration does not shed light on the ownership situation of registered nominal shares and does not provide a reliable control of the power structure within the capital stock.

For this reason, the administration will not be able to identify an unfriendly takeover well in advance, when acquirer pursues this strategy of "purchase-splitting". If the acquirer of common nominal shares accomplishes the preconditions of registration and if there is no evidence for a merely fictitious ownership, the company has to conduct the registration and to acknowledge the acquirer as a legitimate shareholder. The fictitious position usually becomes obvious – as most cases have shown in the past – when the battle for control in a takeover situation starts. One measure in order to avoid a concentration of nominal shares in one hand is the numerical statutory limitation of registered nominal titles per shareholder in the stock register^[38]. This leads to a delay and accordingly to a higher difficulty of the takeover.

If a company gets under pressure due to oppositional investors, the stock register gets often closed for a certain time period. However, this requires an educated guess with solid evidence and will be of short duration anyway in case of success.

Another alternative in this context could be the issuance of nominal shares where the transferability is restricted (“vinkulierte Namensaktien”).

The deterring impression of nominal shares can be substantially emphasized by the restriction. In other words, the organ in charge – normally the supervisory board – can refuse the registration of an acquirer of shares without mentioning any reasons. This has an impact on the attractiveness of the security certificate though.

The basic principle of uncomplicated transferability of nominal shares can easily be broken through the application of the restriction. The difference to ordinary nominal shares lies in the bylaws. These are authorized to make the registration in the stock register dependent either on specific preconditions or they allow a distinctive management body to reject the registration at its own discretion (in practice this role is usually taken by the administrative board). The refusal can be explained by statutory reasons or without giving any reason at all. The legal intensity of the restriction has to be defined by the bylaws. Through the restriction a personal element is established into the corporate structure of a corporation. That gives the company a means of excluding persons from its business life, who might not be considered as "desired members" from a business point of view. Reasons can be the refusal of financially weak shareholders, the sustainability of a company's characteristic or the protection from foreign infiltration. The latter point is particularly of interest in the context of defense strategies and includes both the defense against foreign or domestic competition and against takeovers in general. Strong evidence is required in order to refuse a candidate. In practice, this is given when a candidate is most likely to harm the company's interest.

The transfer of restricted nominal shares will only be executed if the compliance with prescriptions under company law^[39] is provided.

Restriction policies are only permitted with companies, whose shares are registered on names according to the bylaws. In reality, it is irrelevant if shares are actually issued or not. Thus, the restricting policies are also applicable to interim certificates of nominal shares or to other uncertified share securities. On the other hand, transfer restrictions on bearer shares or bearer interim certificates are not allowed as it would diminish circulation ability and consequently destroy the characteristic of a bearer security. Before the application of a restriction it has to be ensured that the capital stock already comprises bearer shares. Then, the limitation of transferability is implemented by changing the bylaws.

In the contrary case that the equity stock is composed of bearer shares, the restriction can only be implemented by a transformation in nominal securities or by a recapitalization that introduces restricted nominal shares. However, this form of restriction does not have significant meaning in practice, as it would call into question both the capitalistic character and transferability. Thus, an approval by the shareholders would theoretically be required for the transfer of restricted securities^[40]. This alternative could only serve as a defense measure for corporations emphasizing the value of being very individual-related. But in this case a change of the legal form would be more appropriate instead of introducing the most intensive level of restriction. Under these circumstances it can be said that the prohibition of transferability is not up to discussion when referring to midsize/big or publicly owned firms.

The defense efficiency of a statutory registration denial without giving any reason can be ranked as “good” due to the following aspects:

- Unattractiveness of restricted securities
Speculative purchase of shares can be curbed to some degree. Securities are less free to circulation.
- Rigorous registration procedure

Since the administration can abandon the indication of reasons for denial, a consequent and long-dated process of authority for registration is possible. Interested candidates should be prepared well in advance for a complicated registration process.

- Eased argumentation in case of denial of a candidate

A candidate can be rejected in any case, when the interest of the company is endangered. How far this basic guideline is applicable in case of a takeover situation is likely to depend of the individual case.

Despite of the positive evaluation one must not forget about the following threats: If the company – respectively the organ in charge – rejects the registration without indicating any reason, practice has shown that this instrument was abused in order to accomplish own interests by bypassing the protection of minorities; whether to consolidate power, or to diminish any change in structure^[41].

Which aspects, that already have been discussed, can be kept to address the question for defense measures against hostile takeovers?

Repurchasing own shares is an appropriate preventive measure to avoid a takeover. Usually, the target company makes a lucrative repurchase offer to the bidder for his stakes, normally being substantially higher than the corresponding market price. In this context a phenomenon called "greenmailing" has emerged in the USA. A green mailer threatens the management of a target company with gaining a majority stake, if the management should not repurchase his already acquired shares for a profitable price. Those transactions frequently go hand in hand with "standstill agreements" between the former stakeholder and the target company. A "standstill agreement" obliges the former stakeholder to refrain from the acquisition of further shares during a specified time period^[42].

The strategy of controlling and influencing the shareholder structure by purchasing own shares is particularly relevant for personal-structured corporations – primarily family-corporations - with a clear circle of stakeholders^[43]. To ensure and maintain the high degree of influence and the powerful family position within the company structure, it is common to make "pooled" agreements among the members. These pooled agreements are often very complex and are supposed to provide - in case of retirement of a stakeholder - a purchase option regarding the left-over-stake to the remaining stakeholders.

Another preventive measure against hostile takeovers is rooted in the company law of the Federal Republic of Germany. Containing the dual system of Supervisory Board and Executive Board, it has already a deterring impact regarding hostile takeovers. To gain the total control about the acquired company, the raider needs to appoint the members of the Executive Board, who have to be appointed by the Supervisory Board though. Deselecting a Supervisory Board member is only possible with a ¾ majority of the annual meeting. However, there are some exceptions. Those regulations might also be a constraint concerning internal matters and are not generally recommended. Moreover, after a successful takeover a bidder will be most likely in the position to restructure and reappoint the management body according to his conception anyway.

In the US, an interesting trend has reached more than 50% of S&P 500 companies: for the first time, these companies have declassified their boards. That means each director is elected annually. According to Corporate Governance experts a classified boards “deters potential bidders from buying a company”^[44]. Hence, shareholders are increasingly voting for declassified boards (Appendix M), as they anticipate higher returns by motivating potential acquirers.

In the context of the management structure, a so-called staggered board of directors (also called shark repellent^[45] s) can serve as a strong protection against hostile takeovers: directors are divided into several classes and are elected in different time periods.

Strategies in the framework of "poison pills" can be adopted by including all measures which provide the raider financially worse settlements, once the takeover attempt has been made public. Thus, an increase in costs is supposed to be achieved.

The most spread type (in the US) are options that allow the shareholders of the target company to acquire shares far below the market price in a takeover situation. In Germany, a recapitalization to the exclusion of options to buy for shareholders comes into consideration. It is important to mention that such a measure requires the support of the general meeting (according to § 33, clause 1 & 2, WpÜG).

A brief explanation of types of poison pills:

- "People Pill"

Management team resigns after a successful bid. This approach is quite dodgy though, since this could be exactly the objective a hostile acquirer is aiming for when he/she wants to announce an own team as soon as possible. Hence, this could even be a motivator rather than a deterrent.

[...]

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^[1] The WpÜG is the German Security and Takeover Law which was passed in 2002

^[2] Picot, Handbuch Mergers & Acquisitions, 2nd edition, 2002

^[3] Jansen/Picot/Schiereck, Internationales Fusionsmanagement, Erfolgsfaktoren grenzüberschreitender Unternehmenszusammenschlüsse, p. 27, 2001

^[4] http://www.nzz.ch/2006/12/21/bm/articleERNV8.html

^[5] Sedlmaier, Firmenjäger. Wie Raider Unternehmen kaufen, zerschlagen und verschachern, 2001

^[6] Picot, Handbuch Mergers & Acquisitions, 2002, p. 15

^[7] Kerler, Mergers & Acquisitions und Shareholder Value, 2000, p. 62

^[8] Sauermann, Zum Bankensystem im Transformationsprozess, 2000, p. 44

^[9] Perella/Bruner, Applied Mergers & Acquisitions, 2004, p. 30

^[10] Hofstede, Globales Denken und Handeln, 2001

^[11] Picot, Handbuch Mergers & Acquisitions, 2002

^[12] Perella/Bruner, Applied Mergers & Acquisitions, 2004, p. 74

^[13] Picot, Handbuch Mergers & Acquisitions, 2002, p. 190

^[14] German Security and Takeover Law

^[15] WpHG (Wertpapierhandelsgesetz) is the German Security Exchange Law

^[16] Finance dictionary on Investopedia.com, viewed on 10/02/2007

^[17] Sedlmaier, Firmenjäger. Wie Raider Unternehmen verkaufen, zerschlagen und verschachern, 2001, p. 53

^[18] According to the Agency Theory

^[19] Kerler, Mergers & Acquisitions und Shareholder Value, 2000, p. 42

^[20] Semmler/Vollhard, Arbeitshandbuch für Unternehmensübernahmen. Vorbereitung – Durchführung – Folgen, 2001, p. 27

^[21] Helmis, Die Regulierung von Unternehmensübernahmen aus ökonomischer Sicht, 2003, p. 10

^[22] German Security and Takeover Law

^[23] Baums, 1999, p. 172

^[24] Heftrich, Corporate Governance, 2003

^[25] Changes in the French system to be discussed later

^[26] http://europa.eu

^[27] http://www.bafin.de/cgibin/bafin

^[28] Wirtz, Gefangenendilemma bei Übernahmeangeboten?, 2004, p. 5

^[29] Wirtz, Gefangenendilemma bei Übernahmeangeboten?, 2004, p. 10

^[30] Keyword „Deutschland AG“ (= „The Germany Corporation“), analogical to the French “noyaux durs” until the mid 1990s

^[31] Picot, Handbuch Mergers & Acquisitions, 2002, p. 189

^[32] Eberstadt, Marketing für Finanzprodukte und Finanzmärkte, 1998, p. 181

^[33] Schuster/Zschocke, Das deutsche Aktiengesetz, 1996, p. 48

^[34] AktG=Aktiengesetz (German Stock Law)

^[35] Schuster/Zschocke, Das deutsche Aktiengesetz, 1996, p. 53

^[36] Straw man = Intermediary who acquires shares on behalf of somebody else who does not want to be in obvious relation with the transaction and reveal his/hers real intentions

^[37] Skog, 1997, p. 312

^[38] Schuster/Zschocke, Das deutsche Aktiengesetz, 1996, p. 71

^[39] Hampel, Erwerb eigener Aktien und Unternehmenskontrolle, 1994, p. 45

^[40] Hopt, Comparative Corporate Governance, 1997, p. 370

^[41] Hampel, , Erwerb eigener Aktien und Unternehmenskontrolle, 1994, p. 58

^[42] Kopp, Erwerb eigener Aktien. Ökonomische Analyse vor dem Hintergrund von Unternehmensverfassung und Informationseffizienz des Kapitalmarktes, 1996, p. 29

^[43] Kopp, Erwerb eigener Aktien. Ökonomische Analyse vor dem Hintergrund von Unternehmensverfassung und Informationseffizienz des Kapitalmarktes, 1996, p. 35

^[44] The Wallstreet Journal, www.wsj.com, viewed on 10/02/2007

^[45] Moscato, M&A presentation, 2007