EU compromise on new takeover code is a sorry business

Yet another compromise. When will it all end? Probably never. The latest, and previous episodes, tell a sorry tale.

From last week's shenanigans, it is pretty clear that the EU is averse to introducing the highest standards of corporate governance. Ignoring the recommendations of the Commission, the EU has opted for a watery edition of a new takeover code.

That stance, and others in the pipeline, will not enhance competitiveness and will dent aspirations for the EU to become an economically cohesive collection of states capable of rivalling the US.

Last week was dismal for the EU's economic development. First, we had the suspension of the EU's Stability and Growth Pact due to the intransigence and non-compliance of dominant members Germany and France. Second, the 14-year wait for a single takeover code has ended with a compromise which could well increase protectionism. Third, the abandonment of planned profit/loss quarterly statements must be a retrograde step.

Let's look first at the proposed single takeover code. Legislation governing the Irish Takeover Panel will have to be amended, but the main EU recommendations, on the use of devices such as "poison pills" and special voting shares to thwart a hostile takeover bid, are unlikely to affect the operation of our code.

The use of these devices will now be optional. The use of poison pills (devices created such as substantial payouts to executives if a company is taken over) to fend off an unwanted takeover is banned under the Irish code, and multiple voting rights (used extensively by Nordic countries) are not an issue here.

The rule on poison pills is likely to stay; it is inconceivable that the Irish legislation would be watered down.

The Commission had rightly sought to have these defences banned without shareholder approval. But now there will be an uneven playing field. Those with the fairer rules will be disadvantaged while those with more protective mechanisms can benefit. So much for common rules.

Two other recommendations will affect Irish takeovers. First, the squeeze-out rule will be tightened up. Now the outstanding shares can be compulsorily acquired if the bidder gets 80 per cent; this will rise to 90 per cent, as in the UK. That will make it a little harder to mop up.

Second, the nationality of the regulator of the takeover rules will now change. Under existing rules, the regulator will be from the target company's registered address. That will change to where the target firm's shares are quoted.

And, with implications for the future, last week also saw a dilution in proposals to increase investor protection and transparency by dropping plans for mandatory profit and loss data, in quarterly statements, for all publicly quoted firms.

The new rules are a cop-out. Firms will now be required to publish "qualitative" quarterly reports describing business trends and outlook. This contrasts with the Commission's plan to introduce international accounting standards for all listed companies from 2005.

The EU reckons just 1,100 out of the 6,000 quoted firms publish quarterly financial reports under high standards such as national GAAP, IAS or US-GAAP and include cash-flow statements. That is just 18.3 per cent of the total and is a mere shadow of what happens in the US.

Most Irish publicly quoted companies are opposed to the introduction of quarterly reports. Many of these same companies opposed the introduction of interim results and only did so when forced to.

It could be argued that publication of interim results encourages firms to meet market expectations by massaging figures. That view has little validity as such a game quickly catches up with the manipulators. Costs could pose a problem for a small firm with a large shareholder base, but ironically, the new rules will still entail the dispatching of quarterly reports. Do eurocrats never think things through?

It is interesting and relevant that a survey conducted in late October by the Association for Investment Management and Research (the Society of Investment Analysts in Ireland is a chapter of this body) found 81 per cent of Irish investment professionals considered mandatory comprehensive quarterly reporting in the EU would improve the quality of financial information available. Also, 84 per cent said such reports would boost investor confidence in cross-border investing within the EU.

What all investors need is a flow of up-to-date information on their firm. This should not be confined to a select few. As the EC says, this information should be "disclosed to the investing public and not only to an elite few - supervisory boards, analysts and institutional investors".

Clearly the proposals on quarterly results, which have yet to be approved by European Parliament, are distinctly watery and pander to vested interests desperate to retain as much of the status quo as possible.

Mr Frits Bolkestein, single market commissioner, must be frustrated at the dilutions but he has aptly summed up the future. Responding to the EU's compromise on a single takeover code, he said: "If the council [of EU ministers] continues to take decisions like this one, the EU will never reach its target of becoming the most competitive economy in the world by 2010."

Ditto. And even if you are an optimist, look to a much more distant date.