Is the Single European Market an Illusion? Obstacles to Reform of EU Takeover Regulation

• Date: 01 July 2005
• Author: Jette Steen Knudsen
• DOI: http://doi.org/10.1111/j.1468-0386.2005.00273.x
• Published date: 01 July 2005

Is the Single European Market an Illusion?

Obstacles to Reform of EU Takeover

Regulation

Jette Steen Knudsen*

Abstract: Since 1989 the European Commission has attempted to harmonise rules

governing EU takeovers as a crucial step towards the integration of Europe’s capital

markets. The article takes its starting point in the vote in the European Parliament in

July 2001, which turned down a proposal for a Takeover Directive. Members of the

European Parliament overwhelmingly voted according to national rather than party

lines, which is unusual. The article develops an explanation for opposition to the directive,

which emphasises differences between national systems of corporate governance. The

outcome is asymmetric vulnerability, which means that the likelihood of a company

becoming the target of an unwanted takeover bid differs depending on the nature

of national incorporation. The article shows how national differences constituted

obstacles to real reform within a context of arguments about how to create a level playing

field.

In March 2000, the European Council in Lisbon decided on a ten-year strategy to make

the EU the world’s most dynamic and competitive economy. The lofty rhetoric con-

ceals an important fact: although the 1957 Treaty of Rome proposed the creation of a

single market in goods, services, capital, and people, Europe maintains a wide range of

barriers to a single market. The European Commission’s Directorate General (DG) for

the Internal Market has carried out several studies, which show that economic gains

could be had if numerous existing barriers to trade were removed within the EU. Cer-

tainly the 1987 Single European Act and the subsequent push for reforms included in

the 1992 single European market project have removed numerous barriers to trade

in the EU. Examples include liberalisation of telecommunications, banking, and

European Law Journal, Vol.11, No. 4, July 2005, pp. 507–524.

© Blackwell Publishing Ltd. 2005, 9600 Garsington Road, Oxford OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA

* I thank Michel Goyer for suggesting the original idea for this article. I also thank Martin Höpner, James

Mosher and Francesco Duina for helpful input. Lauge Rasmussen provided very able research assistance.

Research funding for this article was provided by the Danish Social Science Research Council and the

Copenhagen Business School. Most of the work was done while in residence at the Centre for European

Policy Studies,and the article was finalised while at The Copenhagen Centre for Corporate Social Respon-

sibility.Previous versions of the article were presented at the 2003 ECPR conference in Marburg, Germany

and at the 2004 ECPR workshop in Uppsala, Sweden. All errors, of course, remain my own.

electricity. However, numerous barriers remain, including in consumer insurance,1tax-

ation,2and financial market integration.

This article examines the objection of Member States to financial market integra-

tion. In particular, it examines the European Commission’s unsuccessful attempts to

create a legal framework for consistent takeover rules across Europe. Such a directive

was intended as part of a broader programme of capital reform. In its 1985 White

Paper on completing the internal market, the European Commission proposed the

adoption of a takeover directive to create a legal framework for consistent takeover

rules across the EU. Subsequently, in January 1989 the Commission proposed a law

concerning takeover bids. After a long and difficult political process, the proposal was

rejected in the European Parliament on 4 July 2001 in a historic vote, which was tied

273–273.3This article examines why EU Member States have found it so difficult to

agree on a takeover directive, and focuses in particular on the vote in the European

Parliament on 4 July 2001.4A new proposal from the Commission, including the

removal of multiple voting rights, was rejected in the Council of Ministers, forcing the

Commission to present a watered-down proposal in autumn 2003, which was subse-

quently adopted. This vote is also briefly considered.

The single European market programme rests on the premise that liberalisation will

increase economic restructuring and growth. One of the main reactions from business

to the Single European Act was a massive increase in mergers and acquisitions. Secur-

ing a legal framework for takeovers can therefore be seen as a major building block in

order to establish a single European market. Why then has it been so difficult to agree

on a takeover directive in the European Union when such a directive could possibly be

considered one of the cornerstones of the single European financial services market?

Surprisingly, EU scholars today do not pay much attention to the problems involved

in establishing a single European market. The assumption seems to be that the single

European market is now fully operational. However, many barriers to a single market

remain. Thus, in January 2003 Romano Prodi, the European Commission President,

accused Member States of backtracking on their promises to liberalise their economies.

According to the Financial Times, ‘even relatively modest proposals such as the cre-

ation of a common EU patent or agreeing on an EU takeover directive have become

bogged down in national disagreement’.5

The 2001 takeover directive proposal is perhaps unique in that not many proposals

are rejected following a reconciliation process in the European Parliament. The Com-

mission typically does not present a proposal for new legislation without it standing a

good chance of adoption. Proposals to harmonise taxes, for example, are seen as highly

unlikely to win support and the Commission has therefore not pushed them.6Similarly,

European Law Journal Volume 11

508 © Blackwell Publishing Ltd. 2005

1S. Schmidt, ‘The impact of the Single Market in Services on EU Member States: An Implementation

Study’, paper presented at the ECPR conference,Marburg, September 2003.

2P.Genschel, ‘Why so Little EU reform on Taxation?,paper presented at the ECPR Conference, Marburg,

September 2003.

3A proposal is rejected when a vote is tied in the third and final vote in the European Parliament.

4As a result of the European Parliament’s rejection of the proposal in the third and final vote, the Com-

mission had to draft a fresh legislative proposal. In October 2002 the Commission presented its new

proposal.

5G. Parker, ‘EU’s big three promise to push reforms’, (6 February 2003) Financial Times Europe,8.

6P.Genschel, ‘Why so Little EU reform on Taxation?’,paper presented at the ECPR Conference, Marburg,

September 2003.