EUROPE - Fund manager F&C this week hailed as a victory the ban of "creeping takeovers" in Germany, arguing it was good news for minority shareholders' rights.

The German financial market regulator BaFin recently closed a loophole in the law that allowed hostile shareholders to build up controlling stakes without alerting the market, following several such takeover attempts.

George Dallas, head of corporate governance at F&C, told IPE: "It's a classic case of companies taking advantage of minority shareholders by using the letter of the law. The larger message is that minority investors have rights and they need to be respected by companies wanting minority shareholders as capital providers."

F&C launched its campaign to remove the loophole following an outcry from institutional investors in 2008 when Porsche and Schaeffler used cash-settled options to accumulate - largely undetected - significant shareholdings in Volkswagen and Continental.

In the former case, Porsche built up 74% shareholding and triggered severe market distortions that had nothing to do with Volkswagen's intrinsic value. 

In a statement, the firm said such loopholes devalued minority shareholdings without allowing them to benefit from a higher share price.

"In effect, this is a transfer of wealth from minority shareholders to the bidding company - and insofar as it is done without their knowledge or consent, can be viewed as illegitimate," it said.

Yet it appears Germany's Investor Protection and Capital Markets Improvement Act - which, introduced in April, ended the practice and triggers reporting of above 5% shareholdings - leaves similar loopholes in other European jurisdictions.

"I don't claim to be an international legal scholar but I don't think this is a feature that is exclusive to German law," said Dallas. "From what I've seen, it is a theoretical possibility in other European markets."

Dallas said the firm's focus now would be on individual engagement with companies in its portfolio, although he added that it would put forward submissions to the European Commission's green paper on corporate governance in financial institutions and the independent commission on banking.

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