Restricting Corporate Takeovers

Posted on by bsmac in Learning & Research

Introduction

In recent years, Italy has strenghtened the availability of tools for companies to protect from undesired acquisitions. Two core mechanisms emerge: Golden Power and internal anti-takeover solutions, mainly Increased Voting Rights.

In the evolving M&A landscape, understanding how these tools work and interact is essential for getting a better picture of the mechanisms behind the structure of deals and their different outcomes.

Objectives of the paper are:

  • analyzing the rationale and scopeof Golden Power and internal anti-takeover defences;
  • highlighting key differences and complementaritiesbetween the two instruments;
  • illustrating Italian cases of both mechanisms in action.

Historical background

With the process of privatizations in Europe in the 1980s (and in Italy in the 1990s), direct ownership of controlling stakes in companies operating in strategic sectors by States, used to protect national interest, was replaced by the use of Golden Shares. However, the Court of Justice of the European Union (CJEU)has pointed out many times the incompatibility between Golden Shares and the provisions on free movement of capital contained in the Treaty on the Functioning of the European Union (TFEU), particularly in Article 63, given that they discourage cross-border investments, unless justified by public interest and adopted under proportionality.

In this context, in 2012, Italy adopted a completely new system, called Golden Power.

Golden Power

The mechanism grants the Italian government special powers to block, veto, or impose conditions on corporate control transactions involving companies belonging to two possible groups:

  • companies operating in national defence and security systems;
  • companies operating in the energy, transportation and communications sectors (and more recently healthcare and agri-food).

The instrument complies with EU Law as it is focused on objective criteria of intervention and carried out with judicial review (accelerated) and under national interest.

Affected parties (both EU and non-EU entities) must notify the government, which can:

  • impose conditions on the deal;
  • veto key decisions (e.g. asset sales, governance changes);
  • block the acquisition outright.

Its application was initially rare, but it has expanded significantly during the COVID-19 Pandemic to prevent predatory acquisitions of vulnerable firms and there have been extensions to cases of acquisitions of non-controlling stakes and to sectors, such as banking and insurance, which have a diffused share ownership.

Golden Power: issues

The significant extensions in the scope of application of Golden Power has led to worries of use of the tool with the objective of economic sovereignty and protectionism, given that many of the exceptions included during the Pandemic are still in place, with growing risk of ad hoc interventionism without clear thresholds.

Other concerns relate to administrative burdens on firms and activity disruptions, which may create delays and uncertainty in M&A execution.

Finally, there is the risk of discouraging foreign investment in companies in strategic sectors, creating unfair competition between sectors (advantage for non-strategic firms).

Case study: Golden Power in action

A recent case of the Italian State making use of Golden Power is the sale of Netco, the fixed network infrastructure of TIM (Telecom Italia Mobile), to US fund KKR in a deal valued up to €22 billion. Given the asset’s strategic relevance for the country (communications is one of the strategic sectors under the Golden Power regime), the Italian Council of Ministers authorized the deal with conditions: the government will keep playing a role in strategic decision making, all research and maintenance activities will continue taking place in Italy and a security task force will be established. Moreover, the Italian Ministry of Economy and Finance keeps a significant 16% ownership stake.

The takeaway is that the State can intervene with different degrees of calibration, from veto to conditions on a case-by-case basis.

Internal defence mechanisms: focus on Increased Voting Rights

Companies can adopt themselves tools to deter hostile takeovers.

In general, the Passivity Rule applies. In fact, under Italian Law, listed companies cannot adopt defensive measures (Board must remain neutral) unless authorized by shareholders, but Bylaws can opt-out of this default rule. This design protects shareholders’ rights but can limit managerial flexibility in responding quickly to hostile bids.

Another defence tool is Increased Voting Rights (IVRs). These can be attributed to shareholders who have held their shares continuously for a given period of time. The extra voting power is represented by up to 2 votes per share after 24 months of continuous ownership. However, Italian Law allows IVRs for listed companies only and it is adopted via Bylaws’ amendments (opt-in).

Its strategic objectives include:

  • incentive for long-term investment reducing short-termism;
  • support IPOs, as families do not fear losing control of their business, increasing free float and liquidity;
  • alternative to shareholder agreements, which tend to be less transparent.

Increased Voting Rights: issues

Some analysis has shown that this tool is not yet as used as other anti-takeover mechanisms, mainly because the advantage of greater control on the company is reduced by the burden of mandatory takeover bid (Article 106 Testo Unico della Finanza) when voting threshold are exceeded. For this, it is mainly used when stable shareholders already have control and, following the increase, can divest part of the shareholding. However, during the Pandemic, many companies in strategic sectors preferred the use of this tool to combat takeovers to the activation of Golden Power.

The use of the mechanism in case of State-owned strategic firms may raise concerns of restriction to free movement of capital. This is defended by clarifying that the tool is available to all shareholders of a listed company, not only to the State, and possible coalitions among minority shareholders (also benefiting from the increase) can oppose resolutions proposed by the State. Moreover, a resolution of the shareholder’s meeting is needed to introduce the increased vote in the Bylaws in the first place. Therefore, the tool does not seem to deter investment or violate free movement of capital.

Case study: IVRs in action

In 2016, French conglomerate Vivendi launched a hostile takeover attempt over Mediaset, Italian leading private broadcaster, by gradually acquiring shares in the open market, building a 28.8% stake, translating to 29.94% of voting rights, just below the 30% takeover threshold under Italian Law. In defence, Fininvest, the holding company controlled by the Berlusconi Family, increased its stake in Mediaset to over 40% of voting rights and pushed to introduce increased voting in the Bylaws. The dispute led to legal battles and regulatory scrutiny, and Vivendi has been ordered to pay Mediaset only €1.7 million in damages.

The takeaway is that IVRs can be leveraged as a defence mechanism in Italian corporate governance when resisting to hostile bids.

Golden Power vs. IVRs

The two mechanisms present some significant differences:

  • Golden Power is a Public Law tool, while IVRs are a corporate governance one;
  • Golden Power applies to both listed and private companies, while IVRs are only suitable for listed companies;
  • IVRs can be used by the State as anti-takeover tool only for companies with public participation;
  • Golden Power can be only applied after sale agreement, while IVRs preclude purchases of controlling stakes ex-ante;
  • While Golden Power can be triggered immediately, IVRs are not suitable to deal with crises because of the 24-month period necessary for the rights to mature;
  • Golden Power can be used only for strategic sectors, while IVRs apply to all sectors;
  • Golden Power is in the hands of the State, while IVRs are activated by shareholders.

Analysis of potential overlap

Golden Power and IVRs are not mutually exclusive. They can coexist, especially in listed firms operating in strategic sectors, with Golden Power working as a last resort in case of failure of the internal defence.

One factor to consider is the level of ownership concentration. In case of high concentration (stable public or family ownership), internal defences are ultimately controlled by controlling shareholders and IVRs can be structured early to consolidate control. Golden Power becomes crucial when internal defences are not enough or when controlling shareholders are willing to sell.

In case of widespread ownership, Golden Power retains its value when resolutions on defensive measures are hard to pass, for instance due to difficulty in obtaining necessary majorities. However, in the case of private companies, Golden Power remains the only tool.

If the State owns itself a stake in companies in strategic sectors, it could obtain the building of internal anti-takeover measures, thus avoiding the need to exercise Golden Power. This would allow the State to leave Golden Power as a last resort.

Final considerations

Italy relies on both Golden Power (State-driven) and Increased Voting Rights (shareholder-driven) to protect its companies from hostile or foreign takeovers.

Golden Power is essential for quick, calibrated intervention and it covers broad cases, including private and foreign transactions. It is most effective in settings of crisis or fragmented ownership.

Increased Voting Rights promote long-term investment and stability of control and they favour companies with concentrated shareholders. They require advance planning due to the maturity period required to activate the rights.

In conclusion, these tools are not substitutes, but can they be strategically combined, and understanding their interaction is critical for M&A success in Italy.

Authors: Luca Scevola, Lorenzo Ferrante.

Bibliography:

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