The Irrelevance of the European Union's Takeover Directive

Abstract

The European Commission persists in implementing the Directive on Takeover Bids despite continuing opposition from many member states. This persistence is partly a reflection of the influence exercised by the agency theory of corporate governance and partly a reaction to the emergence of institutional investors as a dominant force in the European capital market. Since these investors prefer to limit shareholdings in companies and since it is a central tenet of agency theory that minority shareholders can only effectively control company managers if they have the takeover weapon at their disposal, it would seem to follow that the European Commission has to create an active takeover market in Europe if it wants to succeed in promoting the interests of institutional investors. This paper argues that the Commission's line of reasoning is wrong. As a result of changes in the scale and structure of institutional asset management and of the corresponding changes in the way that corporations are monitored and compared, the European capital market has acquired a new and direct power of attraction over European companies. Given that institutional investors can already control companies through the gravitational pull of their collective actions, it follows that they do not need to use the hostile takeover weapon as a means of leveraging up their control. Our conclusion is that the European Commission should abandon its attempt to create an active takeover market in Europe on the grounds that this policy not only does not advance the interests of institutional investors but also gets in the way of those policies that do advance their interests.