Abstract

This paper focuses on the wave of cross-border Mergers & Acquisitions (M&As) currently

filling the business headlines. It looks at M&As as a significant and growing component of Foreign

Direct Investment (FDI) into a country. The discussion involves analysis of the reasons behind why

firms do M & As in the first place. It also gives a brief overview of how cross-border Mergers &

Acquisitions are regulated in the UK (England & Wales), France, and the United States (US).

Looking at a wide range of industries in different jurisdictions, this paper has come to the

conclusion that understanding cross-border M&As is quite complex and its regulation involves a

fine balancing act.

Introduction

Global business has become such a catch phrase of our times. On a superficial level, one

just has to notice the proliferation of global brands such as Starbucks, Nike, Samsung, Sony and

countless others.

But how does a business go global? Well, it has to establish presence in foreign countries. In

short, invest in these foreign markets.

These investments known as Foreign Direct Investments (FDI) represent the flow of capital

across national borders, and the firms that engage in FDI are referred to as Multinational

Enterprises (MNEs). FDIs are distinct from Portfolio Investments, in that FDI gives the investor

control over the investment instead of merely being a passive investor.1

Now, there are two types of FDI namely -

1. Greenfield Investments – these represent direct investment in new facilities, capital, and

enterprise. These are often encouraged by government agencies of the host country as

they are seen as an injection of capital, employment, technology, and know how into the

local economy.

2. Mergers and Acquisitions (M&As) – cross-border mergers involve the coming together of

two firms from different countries to form a new legal entity in the host country. Cross-

border acquisitions on the other hand involve the transfer of control from the local firm to

the foreign one. The local firm then becomes a subsidiary of the foreign parent entity.

This paper focuses on the wave of cross border M & As currently filling the business headlines.

The discussion involves analysis of the reasons why firms do M & As. It also gives a brief overview

of how M & As are regulated in the UK (England & Wales), France, and the United States (US).

Another Wave of Merger Mania?

The once bitten twice shy syndrome seems not to apply to MNEs. Looking at the business

headlines today, it would seem that the world is riding on another wave of Merger Mania, the sixth

one since the turn of the 20th century. The last wave ended in 2000 with $9 Trillion worth of

mergers in Europe and the US and it destroyed so much wealth that it is said to have reduced

these economies by 3.5 per cent.2

So how large and what types of deals constitute this new M&A wave and how significant

would it be for the world?

Well, for starters worldwide M&A deals was estimated to total $931 billion in the first quarter

of this year 2006 alone.3 The pace of deal making was so feverish during this period that value of

global M&A averaged $10 billion a day, the highest since the dotcom frenzy of the late 90s.4

1 Wikipedia contributors. Foreign direct investment. [2006] Wikipedia, The Free Encyclopedia <http://en.wikipedia.org/w/index.php?title=Special:Cite&page=Foreign_direct_investment&id=58239337> at 29 May 2006. 2 Newsweek International, Deals That Work - With the world caught up in merger mania again, studies suggest fewer tie-ups will fail, this time [2006] <http://www.msnbc.msn.com/id/12335370/site/newsweek/> at 10 June 2006. 3 Note 1 4 The Economist Group, Once more unto the breach, dear clients, once more - Takeovers are booming—with the usual

The types of deals on the table also seem to be of the kind as to have a significant effect on

global business and politics.

Stock Exchanges of the World Unite or at least trying to

A good example would be the repeated attempts of the world's largest stock exchanges to

merge or acquire one another.

There is the ongoing saga of suitors wooing the London Stock Exchange (LSE). Since the

LSE demutualised in March 20005, there have been -

● a proposal to merge with the German Stock Exchange Deutsche Borse to form iX

international exchanges in May 2000 which was eventually withdrawn in September 2000.

● a hostile bid from OM AB that failed in November 2000.

● Deutsche Borse tried again in December 2004 but once again was rejected.6

● February 2005, Euronext made a gesture but with no price put on the table.7

● Macquarie Bank Limited, an Australian investment bank forming a consortium made an offer

in December 2005 which was rejected outright by the LSE board because “this derisory

proposal [...] fundamentally undervalues the Company and lacks any strategic or

commercial credibility”.8

● In March this year, the American exchange Nasdaq Stock Exchange Inc (Nasdaq) made an

offer which was again rejected by the LSE Board because “it substantially undervalues the

company”.9

● Then in a surprise move in April, Nasdaq acquired 15% of the LSE which places it in front of

the queue in the event of a takeover battle for the LSE. However, UK Takeover law prevents

it from making a hostile bid until September this year and from acquiring more than 29.9 per

cent in the next six months.10 Nasdaq has since increased its stake to 25%.11

Throughout the saga, the LSE board, management, and shareholders are riding the wave

with delight as the share price continues to soar.12

hyperbole [2006] <http://www.economist.com/background/displaystory.cfm?story_id=6775136> at 6 April 2006. 5 The London Stock Exchange, Corporate Information History [2006] <http://www.londonstockexchange-ir.com/lse/corporateinfo/history/ > at 4 June 2006. 6 The London Stock Exchange, Newsroom Press Releases [2004] <http://www.londonstockexchange.com/en-gb/about/Newsroom/pressreleases/2004/131204approach.htm> at 4 June 2006. The Economist Group, Seifert's second proposal, Deutsche Bourse's fresh approach to the London Stock Exchange [2004] <http://www.economist.com/finance/displaystory.cfm?story_id=E1_PVDPSGD> at 2 June 2006. 7 The London Stock Exchange, Newsroom Press Releases [2005] <http://www.londonstockexchange.com/NR/exeres/AF856EB4-B673-4414-BEE9-B6D1C174D166.htm> at 2 June 2006. 8 The London Stock Exchange, Newsroom Press Releases [2005] <http://www.londonstockexchange.com/NR/exeres/5377F928-911E-453A-8ABD-56AD8AE9E4E3.htm> at 2 June 2006. 9 The London Stock Exchange, Newsroom Press Releases [2006] <http://www.londonstockexchange.com/NR/exeres/B8F0CA12-9780-409A-AEBE-6CBC8BA12C98.htm> at 2 June 2006. 10 The Economist Group, The passions of spring NASDAQ’s surprise acquisition of nearly 15% of the London Stock Exchange for £448m ($781m) makes it a favourite to complete a possible future takeover. But there are rumours aplenty of mergers and takeovers among the world’s big stock exchanges and many attempted unions have come to nothing [2006] <http://www.economist.com/agenda/displaystory.cfm?story_id=6802831> at 2 June 2006. 11 Note 12 12 Note 9.

However, it is now more likely that Nasdaq's rival the New York Stock Exchange (NYSE)

would be the first to form a Trans-Atlantic merger with its €8 Billion for Euronext which unlike the

LSE was welcomed by the Board.13

As merger talks between the exchanges heat up, other exchanges in Europe are going

public in the hopes of joining the fray.14

But why?

In the case of the stock exchanges, the reasons put forth include the following -

1. It makes sense in this era of cross border trading of assets. There is certainly a need or

advantage for an exchange capable of offering trading in stocks, options, and futures.15

Furthermore, there is a drive towards a single market in financial services particularly in

Europe.16

2. To cut costs as the merged entities could benefit from economies of scale in sharing trading

platform and back office costs as well enable investment in new technology to handle larger

and more complex transactions. Although, there is the question if these savings would

translate to lower trading costs or would they actually go up given the oligopoly pricing the

entities could exercise and more importantly who would be regulating the actions of a

combined entity.17

3. To avoid the Sarbanes Oxley law enacted as a reaction to the Enron scandal which makes

it more onerous to list in the US markets. By acquiring European exchanges, the US

exchanges could still serve clients who wish to avoid the complexity and hassles of

Sarbanes Oxley.18

4. Survival, in the face of electronic exchanges being set-up and used by investment brokers.

Furthermore, there is the increasing demand by hedge funds of being able to make large

trades in split second opportunities provided by a larger and larger market.19

So at least for stock exchanges, there are good strategic reasons for M&A. But how about for

other businesses? Well first, it would depend on the type of merger being envisioned20 -

1. horizontal integration – when two similar firms combine.

2. vertical integration – when two firms at differ points in the supply chain combine.

3. diversification – when two firms with nothing in common combine.

13 The Economist Group, NYSEly does it, An €8 billion bid by the New York Stock Exchange for Euronext marks the latest attempt among big stock exchanges to team up, after years of failed approaches. In theory consolidation makes good sense. But the devil is in the detail [2006] <http://www.economist.com/agenda/displaystory.cfm?story_id=6967801> at 23 May 2006. 14 The Economist Group, Crowding the dance floor, As merger talk heats up, two more bourses consider going public [2006] <http://www.economist.com/finance/displaystory.cfm?story_id=6956921> at 18 May 2006. 15 The Economist Group, Linking hands across the Atlantic, The creation of NYSE Euronext makes good sense [2006] <http://www.economist.com/agenda/displaystory.cfm?story_id=E1_SDNPVDS> at 2 June 2006. 16 Wharton, LSE, NYSE, OMX, Nasdaq, Euronext ... Why Stock Exchanges Are Scrambling to Consolidate [2006] < http://knowledge.wharton.upenn.edu/article/1428.cfm> at 26 March 2006. 17 The Economist Group, Courting, and competing, Consolidation is welcome, so long as trading costs fall [2004] <http://www.economist.com/opinion/displaystory.cfm?story_id=3501779> at 2 June 2006. 18 Note 15. 19 The Economist Group, Battle of the bourses [2006] <http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=6978712&subjectid=682272> at 25 May 2006. 20 The Economist Group, Mergers and acquisitions [2006] <http://www.economist.com/research/backgrounders/displaybackgrounder.cfm?bg=1010722> at 7 April 2006.

A good example of a horizontal merger is that of JP Morgan and Chase Manhattan Bank to

form JP Morgan Chase. The two entities took advantage of the deregulation in the US financial

markets that allowed the merger between an investment bank (JP Morgan) and a commercial bank

(Chase). By combining the two were able to compliment each others strength in terms of

geography and product offerings. Together they were also able to be on the worldwide top 10 of

their chosen markets which previously they were not able to do as separate entities.21

An example of a vertical merger would be that of Time Warner who owns media content and

Turner Broadcasting who owns the cable to distribute these content22, and eventually with AOL

who could distribute content via the Internet. Although, in hindsight, the Time Warner AOL merger

was one of the disastrous merger brought by the dotcom frenzy.23

A successful diversification MNE would be General Electric (GE), a company borne out of

Thomas Edison's experiments with the light bulb, which through numerous acquisitions is now, ,

into industrial manufacturing, financial services, healtcare, infrastructure, media and entertainment

in addition to the manufacture of household appliances.24 GE’s recent acquisitions being Vivendi

Universal, the French-owned Hollywood studio, and Amersham International, the British medical

diagnostic and bioscience company.25

At first blush, these assertions make a lot of sense.

A Closer Look – Waves and Comparative Advantage

What has been discussed so far from the business press seem to be confirmed by closer

scrutiny. Using two large data sets on international trade flows and M&As, the following can be

gleamed26 -

1. Cross-border M&A constitute a significant part of a country's economy particularly that of

Developed Countries. For example, “at the peak of the 5th merger wave in the late 1990s,

for instance, cross-border M&As (as a percentage of GDP) were 16.3 in the UK and 13.7 in

the Netherlands.”27

2. M&A activity over time comes in waves, three of which are recent. “The 3rd wave took

place in the late 1960-early 1970s, the 4th wave ran from about the mid 1980s until 1990,

and the 5th wave started around 1995 and ended in 2000 with the collapse of the 'New

Economy'.” Furthermore, the waves are positively correlated with the increases in share

21 Logan, Lysiak, McCall, Sozio, “An Analysis of the J.P. Morgan Chase-Manhattan Merger” [?] <http://beatl.barnard.columbia.edu/dye/JP_Morgan_Chase_Manhattan_Merger_Project.pdf> at 10 June 2006. 22 The Economist Group, One house, many windows [2000] <http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=318423> at 9 June 2006. 23 The Economist Group, Time Warner and AOL - From :-) to :-( Once the darling of the internet, AOL is struggling to remain relevant [2006] May 18th 2006 | NEW YORK From The Economist print edition <http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=6952043&subjectid=348978> at 4 June 2006. 24 GE Business Directory [2006] <http://www.ge.com/en/company/businesses/index.htm> at 11 June 2006. 25 GE in the News [2006] <http://www.ge.com/en/company/news/man_of_the_year.htm> at 10 June 2006. 26 Brakman, Steven, Garretsen, Harry and van Marrewijk, Charles, Cross-Border Mergers and Acquisitions: On Revealed Comparative Advantage and Merger Waves [2005].CESifo Working Paper Series No. 1602 <http://ssrn.com/abstract=870389> at 2 June 2006. 27 Note 25, p 3.

prices and business cycles generally.28

3. Using mathematical analysis, it was shown that cross-border M&As are undertaken by

strong firms, acquisitions tend to be efficient, and are undertaken in sectors that have a

revealed comparative advantage29 - which in economics explains why it is more beneficial

for countries to trade (in this case for companies to merge) even if separately they could

produce the goods and services cheaper than the other.30

Extending this comparative advantage hypothesis, it could be shown that “trade liberalisation

can trigger international merger waves, in the process encouraging countries to specialise and

trade more in accordance with comparative advantage”.31

Further areas of inquiry or study along this line would be on how the formation of the

European Union (EU), the stepping up of the General Agreement on Tariffs and Trade (GATT) into

the World Trade Organisation (WTO) and the proliferation of free trade agreements such as the

Australia-United States Free Trade Agreement (AUSFTA) spur or affect cross-border M&As. The

'gravity' of deep financial markets created by these agreements indicate that they do foster

M&As.32

Management Hubris

Interestingly, an analysis of the 1980s merger wave reveals that management hubris may be

the prime motivation for M&As at that time. This stems from the agency problem brought about by

the separation of ownership and management of publicly owned corporations. While the primary

interest of the shareholders would be to maximise the value of their shares, management's motives

and agenda may not be always at harmony with this. Management's overriding agenda could be

the preservation and expansion of their power base and enhancement of their perks. Following

this, management would want to expand the company's operations whenever possible – either

through surplus cash or cheap debt.33

Although, a more recent study shows that whilst management hubris or agency problems is

one of the main reasons for M&As, the predominant reason is still synergies. And as a vote for

horizontal mergers, the study's results “suggest that bidding firms should not diversify by acquiring

target firms that do not match their core business.”34

28 Note 25, p 4. 29 Note 25 p 3-21. 30 Wikipedia contributors. Comparative advantage. [2006] Wikipedia, The Free Encyclopedia <http://en.wikipedia.org/w/index.php?title=Comparative_advantage&oldid=57187318 > at 11 June 2006. 31 Neary, J. Peter, Cross-Border Mergers as Instruments of Comparative Advantage [2004] CEPR Discussion Paper No. 4325. <http://ssrn.com/abstract=536223> at 10 June 2006. 32 Di Giovanni, Julian, What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening [2002] Center for International and Development Economics Research. Paper C01-122. < http://repositories.cdlib.org/iber/cider/C01-122> at 10 June 2006. 33 Bhaumik, Sumon Kumar, Mergers and Acquisitions What can we Learn from the “Wave” of the 1980s? [1999)] ICRA Bulletin Money & Finance <http://www.qub-efrg.com/uploads/icra_merger.pdf> at 10 June 2006. 34 Goergen, Marc and Renneboog, Luc, Shareholder Wealth Effects of European Domestic and Cross-Border Takeover Bids [2003] ECGI - Finance Working Paper No. 08/2003 <http://ssrn.com/abstract=372440 > at 10 June 2006.

In Search of a Bargain – Undervalued Companies around the World

A simple but very good reason why M&Es opt for M&As is that it may simply be cheaper to

buy existing operations and search the world for undervalued assets35. This seem to be confirmed

in the case of British companies which are being bought a record phase, with the figures doubling

from $41 billion in 2004 to a record $91.4 billion last year because they are relatively cheap.

Examples include Dubai's DP World purchase of P&O, a worldwide ports operator for £3.88 billion

($6.8 billion), and O2, a mobile-phone company sold to Spain's Telefónica for $31.7 billion. The

bargain equation is further skewed by tax and accounting rules favouring locals in some countries.

For example, Spain grants tax relief on acquired goodwill thereby favouring the buyer.36 This may

be a significant factor in another major acquisition in the offing – Grupo Ferrovial's, a Spanish

construction company, takeover of BAA, a British company which is the biggest operator of airports

in the world.37

When Politics steps in

Not all decisions in relation to Cross-border M&As boils down to the company, its

management, and shareholders. Politics and government particularly in the host countries do have

a hand in the outcome of a merger. Furthermore, not all governments are as welcoming as Britain.

A clear example would be the French “economic patriotism” reaction to M&As as host to the

target countries. France has named ten strategic industries that must be protected from foreign

predators. The result of which was the denunciation of the rumoured takeover of Danone, a French

dairy firm by PepsiCo. However, on the other side of equation as the host to the 'predators', the

French seem to have no problems whatsoever. “In the first eight months of 2005, France topped

the league table for European cross-border acquisitions, bagging €59.5 billion ($71.8 billion),

according to Dealogic, a banking analyst. Pernod Ricard, a drinks company, bought Allied

Domecq, its British rival. Suez, a utilities firm, picked up Belgium's Electrabel. France Télécom

nabbed Spain's Amena, a mobile-phone operator”38.

The protectionist attitude seems to be spreading to other countries in the European

continent. For example, ”Spain’s government made clear that a bid by E.ON, a huge German gas

and electricity provider, for Endesa, a Spanish utility, was unwelcome”39. This protectionist attitude

35 Gonzalez, P , Vasconcellos, GM , Kish RJ, Cross-Border Mergers and Acquisitions: The Undervaluation Hypothesis [1998] The Quarterly Review of Economics and Finance <http://users.pandora.be/shadowteam/Corporate%20Finance/M&A/crossborder%20m&a%20undervaluation%20hyp.pdf > at 10 June 2006. 36 The Economist Group, More hunted than hunting Why British companies are being bought at a record pace [2006] <http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_ID=5578706&subject=Britain> at 2 March 2006. 37 The Economist Group, On the runway- Ferrovial, a Spanish firm, gets the all-clear from BAA in its bid to buy the world's largest operator of airports [2006] <http://www.economist.com/agenda/displaystory.cfm?story_id=7031690&fsrc=nwl> at 8 June 2006. 38 The Economist Group, French protectionism Fearful Fortress France - French politicians could have responded to the No vote like statesmen. Instead they seek refuge behind old barriers and old ideas [2005] Oct 27th 2005 PARIS From The Economist print edition < http://www.economist.com/world/europe/displaystory.cfmA?story_id=5090886> at 4 June 2006. 39 The Economist Group, Closing the borders to business, A wave of cross-border mergers is sweeping across Europe. But as globalisation and no-holds-barred capitalism gather strength on the continent, France and others are trying to stiffen the barriers to economic integration on strategic grounds. The latest example of this is the attempt by Dominique de Villepin, the French prime minister, to prevent an Italian bid for Suez by merging it with another French utility [2006] <http://www.economist.com/agenda/displaystory.cfm?story_id=5569766 > at 1 March 2006.

can sometimes lead to an apparent disregard for the welfare of shareholders as in the case of

Arcelor, the biggest European steelmaker, trying to ram through a merger with Russia's Seversta

to protect itself from a takeover bid by India's Mittal Steel.40 However, the forces of business seems

to be stronger than protectionism as the current European merger wave continues to swell.41

Lest one comes to a forgone conclusion, this protectionist attitude is not confined to the

European continent. There is some of it in the US as well, although for different reasons. The

takeover of British P&O ports mentioned earlier by DP World, a company owned by the Dubai

government received hostile reactions from American legislators. Some of P&O' ports are located

in America, and there is some concern over the security of American ports being controlled by a

company owned by an Arab government. However, not everything can be explained by national

security, “ Last year, CNOOC, a state-controlled Chinese oil firm, scuttled away from Unocal, an

American company it had hoped to buy, after opposition to the deal in Congress reached fever

pitch”.42

How about the Rest of the World?

So far the M&As discussed are located in the largest economies of the world. However, it

should not be mistaken that cross-border M&As affect only these countries. In the 1990s FDI flows

into developing countries became the leading source of external financing far surpassing traditional

sovereign borrowing. What's more, M&As grew more rapidly than greenfield FDI particularly in

countries undergoing extensive privatisation of public enterprises. For example in Latin America,

from 1995-99, M&A accounted for close to 50 per cent of total FDI inflows. Furthermore, a study

shows that in developing countries higher M&A typically is followed by higher greenfield FDI.43

Regulation of Cross-border M&As

The foregoing discussion so far has established that there is very likely a new wave of cross-

border M&As, this form a significant of FDI flows into countries, and that the motivation behind

these M&A is not straightforward and is affected by several factors including politics and

government. It should also be mentioned that M&As also affect other stakeholders such as

employees who could be laid off following a merger and customers who could either benefit from

cost savings brought by synergies or suffer from higher prices brought about by increased market

clout.

40 The Economist Group, Treating shareholders as pig iron, Arcelor, the biggest European steelmaker, is trying to ram through a merger with Russia's Severstal [2006] <http://www.economist.com/research/articlesBySubject/displayStory.cfm?subjectid=348978&story_id=7015197> at 4 June 2006. 41 The Economist Group, Europe's merger wave, Bids by Nasdaq for the London Stock Exchange and Merck for Schering suggest that Europe’s merger wave is continuing to swell, despite an upsurge of economic nationalism among the continent’s governments. The forces of business may prove stronger than those of protectionism [2006] <http://www.economist.com/agenda/PrinterFriendly.cfm?story_id=5621793 > at 1 June 2006. 42 Note 39. 43 Calderón C, Loayza N, Servén L, Greenfield FDI vs. Mergers and Acquisitions: Does the Distinction Matter? [August 2002] Central Bank of Chile Working Papers N° 173< http://scholar.google.com/scholar?hl=en&lr=&safe=off&cluster=11274910979229479125 > at 10 June 2006.

Given these repercussions, how are cross-border M&As regulated then? Well, it depends on

countries involved as it is still largely a matter of national law.

UK (England and Wales)44

In the UK, to get control of a public company, a bidder can make an offer to the target's

shareholders to acquire shares in the target or the target could undertake a statutory court process

called a scheme of arrangement. Hostile bids are allowed and well-established. Furthermore a

hostile bid may become recommended during the offer period.

Main Regulations The main source of regulation is the City Code on Takeovers and Mergers45 (the Code)

which until recently was non-statutory. The Code contains detailed rules based on a number of

General Principles to ensure fair and equal treatment of shareholders and set standards of good

commercial behavior.

The UK being part of the EU had to implement the Directive on Takeover Bids

(2004/25/EC)46 (the Takeover Directive) into UK national law by 20 May 2006. The implementing

legislation is contained in the Company Reform Bill (the Bill) which is not expected to become law

until Spring 2007. Therefore, the Takeovers Directive (Interim Implementation) Regulations 2006

(SI 1183/2006)47 (the Regulations) have been introduced to implement the Directive until the Bill is

enacted. The Regulations generally apply only to takeover offers for companies whose securities

are admitted to trading on a regulated market, which includes the LSE but not Alternative

Investment Market (AIM) that is transactions to which the Takeover Directive applies.

With effect from 20 May 2006, the implementation of the Takeover Directive means that the

Code have been placed on a statutory footing in relation to takeover offers to which the Takeover

Directive applies and Code rules that are subject to the requirements of the Takeover Directive.

This leads to an interim two track regime. Where the particular transaction is outside the scope of

the Regulations, the Code and the Panel will continue to operate for such transactions on a non-

statutory basis as they did prior to 20 May 2006, for example in relation to a takeover offer for a

company whose shares are admitted to trading on AIM or a scheme of arrangement,. When the Bill

becomes law, the Panel's statutory powers will extend to all transactions to which the Code

applies.

The Rules Governing Substantial Acquisitions of Shares (SARs) – another set of non-

statutory rules that regulate the speed at which the shares could be acquired when holdings reach

between 15% and 30%. SARS kicked in in relation to the Nasdaq purchase of LSE shares as 44 Practical Law Company, A Q&A guide to mergers and acquisitions (public) in the UK (England and Wales) [2006] < http://crossborder.practicallaw.com/9-202-3024 > at 10 June 2006. 45 http://www.thetakeoverpanel.org.uk/new/codesars/DATA%5Ccode.pdf 46http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=32004L0025&model=guichett 47 http://www.opsi.gov.uk/si/si2006/20061183.htm

previously discussed.

SARs has been abolished effective 20 May 2006 as a result of the implementation of the

Takeover Directive.

The Listing Rules48 of the UK Listing Authority applies if one of the parties to the takeover is

listed, meaning admitted to the Official List of the UK Listing Authority or is seeking a listing. The

Listing Rules require the bidder to obtain consent of shareholders if the takeover is a relatively

large acquisition.

The Companies Act 1985 contains some relevant provisions, including those relating to

requirements of disclosure of certain interests in shares and compulsory acquisitions of minority

shareholdings.

The Criminal Justice Act 199349 contains provisions which make certain insider dealing

(dealings in securities with inside information) a criminal offence.

The Financial Services and Markets Act 200050 contains a number of relevant provisions,

that inlcudes prohibiting behaviour amounting to market abuse and regulating the way promotions

of financial investments are made.

The Enterprise Act 200251 contains provisions having an impact on larger mergers as they

relate to the merger control regime in the UK.

The Regulators The regulatory bodies involved in M&As in the UK are as follows:

The Takeover Panel52 (the Panel) is an independent body, established in 1968, whose main

functions are to issue and administer the Code, supervise and regulate takeovers and other

matters to which the Code applies. It is made up of representatives of financial institutions and

professional bodies. The Panel can be consulted and gives rulings on points of interpretation

before or during transactions. Its decisions are subject to appeal.

It was until the recent implementation of the Takeover Directive, a non-statutory body.

The Financial Services Authority53 (FSA) is an independent body that regulates the financial

industry in the UK. It is also the Listing Authority in the UK. It also regulates inter alia banking and

insurance. It can have a role in approving the takeover of a regulated target for example if the

Panel asks the FSA to take action against authorised persons (for example, the financial adviser to

a bidder) for breach of the Code in his own accord or on behalf of a client.

FSA’s statutory powers are conferred by FSMA. Whilst operationally independent from the

Government and entirely funded by the firms it regulates, the FSA is accountable to Treasury

Ministers, and through them to Parliament.

The Alternative Investment Market of the London Stock Exchange54 (AIM) is an Exchange

48 http://fsahandbook.info/FSA/html/handbook/LR 49 http://www.opsi.gov.uk/acts/acts1993/Ukpga_19930036_en_1.htm 50 http://www.opsi.gov.uk/acts/acts2000/20000008.htm 51 http://www.opsi.gov.uk/acts/acts2002/20020040.htm 52 http://www.thetakeoverpanel.org.uk/new/ 53 http://www.fsa.gov.uk/ 54 http://www.londonstockexchange.com/en-gb/products/companyservices/ourmarkets/aim/

Regulated Market. It is regulated by the LSE and caters for growing businesses. It offers a flexible

regulatory regime that enables quoted companies to reduce additional obligations imposed by EU

Directives such as the Prospectus Directive (2003/71/EC)55. AIM has been quite successful. Since

it opened in 1995, more than 2,200 companies have been admitted and £24 billion collectively

raised.56

The Office of Fair Trading57 (OFT) and Competition Commission58. The OFT can refer a

merger to the Competition Commission if it believes the merger has resulted or may result in a

substantial lessening of competition. This can delay takeovers considerably or may even prevent

them happening.

France59

Taking control of a French public company is usually done through a voluntary or mandatory

public tender offer. Statutory mergers (fusions) or business or asset contributions (apports partiels

d'actifs) are also used, but more often in intra-group transactions. Hostile bids are allowed and

have been used frequently in recent. An example would be Mittal Steel’s bid for Arcelor as

previously mentioned.

The Financial Markets Authority (Autorité des Marchés Financiers)60 (AMF) is the main

regulator that supervises public takeovers. After an assessment of terms and merits essentially

financial in nature, the AMF can grant or deny admissibility of an offer. It has the power to grant

approval (visa) to the prospectus filed in relation to the offer.

The main regulations governing public takeovers are set out in the AMF's General Regulation

(Book II, Title III)61. The General Regulation sets out some key principles governing public offers

such as –

Market transparency and integrity

Equal treatment of, and access to, information by holders of securities concerned by

the offer

A level playing field between alternative bids

Loyalty in transactions and competition.

Following from these the AMF then defines in greater detail various rules and procedures to

follow in the acquisition of a French listed company.

Like the UK, France also had to implement the Takeover Directive. A new law has been

passed relating to takeovers and some amendments are to be made to the AMF Regulations. Full

55 http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=32003L0071&model=guichett 56 Note 53 57 http://www.oft.gov.uk/default.htm 58 http://www.competition-commission.org.uk/ 59 Practical Law Company, A Q&A guide to mergers and acquisitions (public) in France [2006] < http://crossborder.practicallaw.com/8-202-2789 > at 10 June 2006. 60 http://www.amf-france.org/Default.asp?lang=en 61 http://www.amf-france.org/affiche_plan.asp?IdSec=4&IdRub=96&IdPlan=159&Id_Tab=0

implementation of the directive is expected this month, June 2006.62

Some provisions of the Commercial Code (Code de commerce) and the Monetary and

Financial Code (Code monétaire et financier) also may apply.

The US63

The main way of obtaining control of a public company in the US is through a tender offer in

cash, shares, or a combination and if accepted, is followed by a statutory merger. The other way is

through one-step statutory mergers under state law.

In both cases, a wholly-owned subsidiary of the bidder carries out the acquisition, so that the

target becomes a wholly-owned subsidiary of the bidder. In the case of a merger of equals, the

acquisition can be completed either through a direct merger between the bidder and target.or by

the creation of a joint holding company.

Hostile bids although allowed are not common because they take longer with the outcome

uncertain due to the use of takeover defence and defensive actions.

Public takeovers in the US are regulated at both federal level through securities and anti-trust

laws and state level through corporate law. Furthermore, some industries like utilities, banking,

insurance or communications are subject to significant restrictions on investments by both US and

non-US persons.

Federal laws

The following principal federal regulations govern public takeovers:

Section 13(d) of the Exchange Act, requiring the disclosure of an acquisition of 5% of

a class of voting equity in a public company.

Sections 14(d) and (e) of the Exchange Act, in relation to tender and exchange offers.

Regulations 14A and 14C of the Exchange Act, governing proxy contest solicitation of

shareholders to take control of a public company's board of directors.

Registration requirements of the Securities Act that requires registration of shares

sold to the public unless an exemption applies.

Rule 13e-3 of the Exchange Act, regulates public to private company transactions

where existing shareholders or affiliates of a company could squeeze-out public

shareholders.

Acquisitions of US companies or foreign companies with significant interests in the US must

also comply with the anti-trust filing and waiting period requirements of the Hart-Scott-Rodino

Antitrust Improvement Act 1976, as amended.

62 Freshfields Bruckhaus Deringer, Update on implementation of the Takeover Directive in France [2006] < http://www.freshfields.com/publications/pdfs/2006/14849.pdf > at April 2006. 63 Practical Law Company, A Q&A guide to mergers and acquisitions (public) in United States [2006] < http://crossborder.practicallaw.com/7-202-2624 > at 10 June 2006.

State laws General corporate law - A merger is governed by the corporate law of the state where the

target is incorporated. This determines the extent of a director's fiduciary duties when accepting a

merger agreement or resisting a hostile takeover attempt.

Anti-takeover laws - A large number of states have laws that offer protection from corporate

takeovers. Examples include –

Control share acquisition statutes - denial of voting rights to a bidder that acquires

more than a specified percentage of a target's stock unless the target's shareholders

who are not affiliated to the bidder approve the acquisition.

Business combination or moratorium statutes - for a limited time period and subject to

exemptions , restricts a bidder that acquires more than a specified percentage of a

target's stock from engaging in a merger with the target to force out minority

shareholders who did not tender their shares in a tender or exchange offer

Constituency statutes permit or require a board to consider the interests of other

related groups such as employees, customers, suppliers and communities served by

the company in addition to the interests of the shareholders, in deciding whether to

approve a merger or bid

Statutes endorsing defensive action that authorise a target's board to defend a hostile

bid, including adoption of a shareholders' rights plan (a poison pill) without

shareholder approval.

And the three showed us

The brief overview of how M&As are regulated in the three jurisdictions somehow provide

additional insights to the M&A phenomena just discussed. For example, the UK seems to have a

open arms, laissez faire approach to foreign takeovers because they are largely regulated by an

independent and until recently and only because of an EU directive non-statutory body composed

of people from the industry itself. Furthermore, there are several regulatory bodies who more or

less have to concur before a takeover can be blocked.

Compare this to France where only one body, the AMF can decide if a merger can go ahead

or not. Furthermore, this body is made up of public servants with the Chairman appointed by the

President of the Republic.64 No wonder it is quite easy for the government to push for a

protectionist approach to business.

The US is another bowl of soup altogether, with two layers of regulation, it is not surprising

that the biggest American stock exchanges are keen to have a foothold in jurisdictions with less

complex regulation.

The overarching effect of EU directives on the national laws of the UK and France as

discussed show a pathway for harmonising the different M&A regulations in the different countries 64 http://www.amf-france.org/affiche_page.asp?urldoc=lesmissionsamf.htm&lang=en&Id_Tab=0

involved in a cross-border merger. For example, could it make sense for a directive system similar

to that of the EU to apply to signatories of a Free Trade Agreement? After all, at the heart of the

EU just like any Free Trade Agreement is a treaty amongst nations.

This brings us to the question as to how does regulation affect the level of cross-border

M&A? Well, at least one study65 has shown that in many jurisdictions the effect of stringent merger

review laws are to cut the amount of cross-border mergers in half.

Also going back to the JP Morgan Chase example earlier, at least in the financial services

industry, deregulation could be a motivation for M&As, or put negatively, “banks operating in more

regulated environments are less likely to be the targets of international bank mergers”. “Also,

mergers tend to be less frequent if information costs are high”.66

Conclusion

The discussions on this paper has shown that just like a real wave out there in the ocean, the

swelling wave of current cross-border M&As is a powerful and complex creation. Many factors

influence it and its effects are far reaching.

However, it is a wave one must not fear but ride. Not to be overwhelmed or drowned just as

what the previous wave has done but not to be missed either.

The challenge for regulators all goes back to the razor’s edge the law must walk in protecting

the interests that need to be protected whilst not stifling the surging efficacy of business - a fine

balancing act of riding the wave so to speak.

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