VI Sources of takeover regulation
9. Danish law – revisited
9.1 Introduction. When comparing Danish regulation of takeovers with the regulation of other countries, a somewhat varied picture emerges.
VI. Sources of takeover regulation
The two countries that have known contested acquisitions for the longest time, the United States and Great Britain, have each quite exten
sive rules pertaining to corporate acquisitions. The United States’ regula
tion of takeovers is chiefly found in statutory federal law and state law. In Great Britain, on the other hand, the prime source of regulation is the City Code and the SAR, i.e. voluntary rules. Among the other countries dis
cussed, most have chosen to regulate by non-statutory means.
Statutory regulation gives rise to few problems in terms of determining the nature of the regulation. Therefore, we will focus on the use of non- statutory regulation. We have seen two types of non-statutory regulation.
One type, known from e.g. Great Britain, Switzerland, and Sweden, are sets of non-statutory rules in the “purest” sense; they have been adopted by private bodies that are not established pursuant to a statute or according to rules promulgated pursuant to a statute. These rules are extra-legal.
The other concept includes rules that are not statutes but are issued by bodies established pursuant to statutes or rules promulgated thereunder.
The Danish takeover regulation found in the rules issued by the Board of the Copenhagen Stock Exchange belongs to this category.
The question we want to focus on now is how we should qualify legally this hybrid between statutory and extra-legal regulation.
In the report that created the basis for the reform of the Copenhagen Stock Exchange in 1986 (dated October, 1985, prepared by a committee appointed by the Ministry of Industry), the question of the means of regu
lation is briefly discussed (p. 64-65). After stating (p. 64) that violation of the (then) existing ethical rules cannot lead to sanctions “in a legal sense”, the report recommends that the Rules of Ethics of the Stock Exchange should, as a main rule, not be set forth in statutes. The reason for this is, according to the report, that “the usual procedures under administrative law as well as the requirements of intent or negligence, proof, penalties, etc., would then apply” (p. 65).
In the report (p. 65) the com m ittee further recom m ends that the Board o f the Stock Exchange and the M inistry o f Industry review the (then) existing ethical rules for the purpose o f evaluating the need for sanctions. A ccording to the re
port, such sanctions ought to be transformed into or repeated in a M inisterial Or
der.
Not all share the view referred to in the text above. In a report prepared by a com m ittee appointed by the Danish A ssociation o f Financial Analysts (” Den D anske Finansanalytikerforening” ) on the legal position o f minority sharehold
ers (1989) the com m ittee proposes that a num ber o f aspects o f takeovers be
VI. Sources o f takeover regulation
regulated by “real statutory provisions” ("egentlige lovregler” ) (p. 40). However, the report does not clearly explain why this ought to be so.
The statement in the 1985-report quoted above suggests two implications of using statutes rather than non-statutory regulation: first, that statutes are, but non-statutory regulation is not, governed by the “usual procedures under administrative law”; second, that the operation of the penal system depends on whether statutory regulation is applied or not.
These two issues constitute a useful starting point for analyzing the na
ture of Danish takeover regulation and we will, therefore, give them some further thought.
9.2 Public and private law. The statement in the 1985-report is confusing in that it presupposes that a clear distinction exists between the implica
tions of using statutory rather than non-statutory regulation. In doing so, the report disregards the development in Danish jurisprudence affecting the frontiers between public (’’offentlig”) and private (’’privat”) law. The views expressed in the quotation above are thus excessively formalistic.
It is not possible to maintain a clear distinction of where private law ends and public law begins, and vice versa.
The following example may illustrate this point.
The law of obligations (’’obligationsretten”) is part of what is labelled
“private law”, Its focus is the regulation of the legal relationship between contracting parties.
As a point of departure, the law of obligations allows parties the
“freedom” to enter into the contracts they wish (’’aftalefrihed”).60 A con
tract which has come legally into existence is binding upon the parties to it.
A party bound by an agreement cannot normally be freed from his obli
gations even though the motive for the other party to the contract to pursue his rights under the agreement is less laudable or perhaps even bad.
However, in Danish jurisprudence and case law, a mala fide-doctrine (”chikane”-regel) has developed. Although a party has been granted cer
tain rights pursuant to an agreement, he may, according to this doctrine, be barred from exercising his rights if he has no bona fide reason to do so and the exercise of the right would cause harm to the other party.
60 The freedom o f parties to contract as they may wish is discussed by Gomard, Alm indelig kontraktsret p. 18 f., Henry Ussing, A ftaler p. 186 f. and Stig Jør
gensen, Kontraktsret, Vol. I, p. 25 ff.
VI. Sources o f takeover regulation
This theory was developed by N.P. M adsen-M ygdal in Festskrift til Henry Uss- : ing (1951) p. 348 ff. See also the court decision by the Danish Supreme Court Jensen v. G u lf Oil A /S (U 1981.300, Sup. Ct.) and the reflections regarding this case by M ogens M unch in U geskrift for Retsvæsen 1981.B.298 ff.
The mala fide-doctrine is interesting because it has many features in com
mon with the misuse of power-doctrine (’’magtfordrejningslæren”), one of the important doctrines in Danish administrative law. (Madsen-Mygdal’s article referred to above is thus called “Problems of Misuse of Power in Private Law” (’’Magtfordrejningsproblemer i Civilretten”). It seems fair to say that this is an example of how principles of public law may have an area of application that goes beyond the public law area.
The point made here is further illustrated by the fact that certain activi
ties by private parties are subject to standards that to some extent remind us of the standards which public authorities must adhere to. For example, the Act on Banks and Savings Banks (”Lov om banker og sparekasser m.v.”) stipulates in § 1, Subsection 6, that banks and savings banks must operate in accordance with “honest business practice” and “good banking practice”. Although these concepts are very general and vague, they prob
ably embody notions of misuse of power and equality.
For a discussion o f the dem arcation between private and public law, see G o
mard, Introduktion til Obligationsretten p. 7 ff.
The above is not intended to mean that it is not useful to use definitions such as “public law” and “private law” as tools of analysis or that we can
not define the meaning of the word “public authority” the way it should be understood in the context of e.g. the Act on Public Administration (’’Forvaltningsloven”), the Act on Publicity (’’Offentlighedsloven”) or the Act on the Ombudsman (’’Ombudsmandsloven”).
The point is that when we want to examine certain features of the Copenhagen Stock Exchange we should focus on the particular functions of the Exchange rather than initiating our analysis by attempting to label the Exchange as “public” or “private”.
The principal question in our analysis is what role legislature intended the Copenhagen Stock Exchange to play and what standards it wanted the Stock Exchange to adhere to.
9.3. The functions of the Copenhagen Stock Exchange. The functions of the Copenhagen Stock Exchange that we want to discuss can be divided into two categories. The first category may be designated as “rule- making”, i.e. the preparation and issuance of general rules aimed at regu
VI. Sources of takeover regulation
lating the behavior of the participants in the activities conducted at the Stock Exchange. The second category includes decisions made to ensure compliance with the rules issued by the Exchange.
9.3.1. Rule-making. The Stock Exchange Rules of Ethics and the Rules on Information Obligations are issued in the Exchange’s capacity as rule- maker.
The question we want to focus on here is if, and if so to whom, these rules are binding in the sense that violators would face sanctions (not nec
essarily penalties) of some kind.
For the purpose of our inquiry we will first consider the authority (’’hjemmel”) for and thus the validity (’’gyldighed”) of the rules. Second, we will focus on their contents, and, third, the means of enforcing them set forth in the Stock Exchange Act.
§ 12 of the Stock Exchange Act authorizes the Board of the Copenhagen Stock Exchange to issue the two sets of rules dealt with here and thus to regulate in detail within the framework of the statute. By granting this authority to the Board of the Copenhagen Stock Exchange, the Act thus vests the rule-making power that legislature has in the Board.
When acting in its capacity as a rule-maker, the Board of the Copen
hagen Stock Exchange plays the same role as any public body that has been granted the authority to lay down detailed regulation pertaining to a specific area.
The rules discussed here are of a general nature, addressed to citizens and seeking to regulate their behavior.
Provided that such general rules fall within the boundaries of the au
thority pursuant to which they were issued and provided that the contents of the rules have been publicized61, they should ordinarily be considered valid.
§ 12 of the Stock Exchange Act is worded broadly, and the language of the Stock Exchange Rules of Ethics and the Rules on Information Obliga
tions probably falls within the boundaries set forth in § 12.62
Moreover, although the rules are not published in the Danish Law Gazette (’’Lovtidende”), they are communicated to all interested parties
61 See Jon Andersen, Forvaltningsret p. 20 f. and Claus Haagen Jensen in For
valtningsret, alm indelige em ner p. 135.
62 This does not mean to say that the practice by the Board o f the Stock Exchange in connection with the rules necessarily always falls within the purposes which the Stock Exchange Act seeks to further.
VI. Sources o f takeover regulation
through the mass media and, likewise, changes of the rules are communi
cated via press releases etc.
Altogether, we may assume that the rules discussed here are valid.
The authority for public authorities to issue orders is discussed in detail by M o
gens Moe, Juristen & Økonom en 1981, p. 228 ff.
The next question is if the Board of the Stock Exchange has exercised the powers conferred on it by the Act to issue rules that seek to bind the citi
zens. The focus is, in other words, on the contents of the rules.
Perhaps some commentators would argue that, at least, the Rules of Ethics merely constitute a recommendation and do not attempt to impose on citizens any obligations or restrictions. The very term, “Rules of Ethics”, suggests that this point may have some merits. On the other hand, however, the language used in the rules themselves leaves little doubt that the rules do not merely seek to make recommendations.
See, for exam ple, the w ords in Rule 3.1.1. ... “are under an obligation to ensure ...” and 3.1.2. ...” it is the responsibility o f ... to ensure Also, Rule 4.2 uses the word “m ust” when describing the obligation o f the transferor o f a controlling shareholding to inform the acquiror o f his duties pursuant to the rule.
It should be noted that these are only examples and that throughout the entire set of rules terms are used which clearly reflect the intent on the part of the Copenhagen Stock Exchange to regulate and not just to recommend.
But what if the rules issued by the Board of the Stock Exchange are vio
lated? Natural persons or legal entities are only bound by the rules if fail
ure to follow these can be sanctioned in some fashion.
Both issuers and stockbroker companies may be ordered by the Finance Inspectorate to follow the rules discussed here. If they do not comply with such order, they may be fined. In addition, issuers may experience that the listing of their shares is suspended or discontinued, cf. 1.1. above. It is, therefore, fair to conclude that the Rules of Ethics and the Rules on Information Obligations are binding upon issuers and stockbroker com
panies.
Since no sanctions are provided for in the Act aimed at violations made by others, the rules are not legally binding on natural persons or entities that do not belong to either of the two categories mentioned. It follows from this that e.g. acquirors of shares are bound by no particular body of regulation.
However, one may raise the question if acquirors could be viewed as having a duty to adhere to the rules based on a contractual relationship.
Could we view the rules as terms of a standard contract which anybody
VI. Sources o f takeover regulation
participating in the activities at the Stock Exchange could be said to submit to, simply by making use of the services and facilities provided by the Exchange? It is frequently seen that contracts are entered into without being signed by both parties but simply because the parties act in a way which shows that a consensus exists between the parties to the effect that the terms of the contract are to govern their relationship.
Under Danish law, a party may bind him self even though he does not explicitly accept the term s o f a contract if his acts (and sometim es his passiveness) can be construed as an acceptance o f the term s o f the contract, see Gomard, Alm indelig kontraktsret p. 58 ff. and Ussing, A ftaler p. 393 ff.
Stating that anybody who purchases shares of a listed company by doing so submits himself to the rules issued by the Board of the Stock Exchange would be to stretch the concept of being bound by one’s acts very far, however. Of those buying shares some have probably no knowledge of the rules and even fewer are familiar with their contents. The Stock Exchange is not a marketplace where those buying and selling meet in person to ex
change their goods and have the opportunity to become acquainted with rules aiming at regulating their trading.
We do not have a basis for concluding that acquirors are legally bound by the rules at focus here.
The prime sources of motivation for them are the ethical or moral sanc
tions attaching to violations. The publicizing of the failure to follow the rules is likely to be considered embarrassing by many companies.
The notion o f moral norms and moral sanctions, and the motivating effects such sanctions may have, is further discussed by A lf Ross in Skyld, A nsvar og S tra f p.
165 ff.
9.3.2. Decision-making. The second category of the functions of the Copenhagen Stock Exchange encompasses specific decisions made to ensure compliance with the above mentioned rules.63
The threshold question here is whether such decisions should be viewed as merely of guidance with no binding effect, or if they should be consid
ered as binding and thus imposing on private parties restrictions in their freedom (financially or otherwise) to act.
63 Decisions by the Board o f the Stock Exchange made pursuant to the Stock Ex
change Act regarding other matters, such as, e.g., the listing o f shares (see Chapter 4 o f the Act) are not dealt with here.
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The Stock Exchange provides facilities and renders services which cre
ate an organized, public market for shares of companies. Provided that the listing requirements are met, any company can be listed at the Exchange.
Likewise, anybody may invest in the securities traded on the Exchange, provided, of course, that the various requirements regarding trading are observed. The Stock Exchange is thus public in the sense that the public has access to the facilities and services of the Exchange.
Chapter 1 of the Stock Exchange Act states the purposes of the Stock Exchange, while Chapters 2 and 3 contain provisions regarding the orga
nization of the Exchange as well as the conduct of its operations.
The Board of the Copenhagen Stock Exchange and its acts and decisions are part of the regime created by statute. An important part of the Board’s function is to be a “watchdog”. The Board must thus seek to ensure obser
vance of the body of regulation created by the Act, the ministerial orders and the rules issued by the Board itself.
Altogether, the system set forth in the Stock Exchange Act could seem to reflect an intent on the part of legislature to make the Board of the Copenhagen Stock Exchange an instrument of the government.
However, legislature did not empower the Board of the Stock Exchange to issue sanctions, should its decisions not be followed. The Finance In
spectorate may order an issuer or a stockbroker company to comply with a decision by the Board, and in the event that the violator fails to follow such order he may be fined. But in such case it is the order of the Inspec
torate – and not the decision by the Board of the Stock Exchange – that is binding.
Against this background, my conclusion is that the decisions by the Board of the Stock Exchange are not legally binding.
An analysis o f the extent to which the Copenhagen Stock Exchange could be considered a public authority in the various contexts this term is used falls out
side the scope o f this book.
For a general discussion o f the definition o f public authorities, see Poul A n
dersen, D ansk Forvaltningsret p. 61 ff., Lis Sejr in Forvaltningsret, alm indelige em ner p. 60 ff., A sbjørn Jensen et al., Forvaltningsloven p. 28 ff. and Karsten Loiborg in Juridisk grundbog, Vol. 4, Forvaltningen, p. 37 ff.
The Danish Central Bank (’’Danm arks N ationalbank” ) which could be said to resemble, at least to a certain extent, the Copenhagen Stock Exchange, is for many purposes considered to be a public authority, see, e.g. Poul A ndersen, D ansk Forvaltningsret p. 69 and Bent Christensen, Nationalbanken og Forvalt
ningsret p. 15 ff. and Karsten Loiborg in Juridisk grundbog, Vol. 4, Forvaltnin
gen, p. 39. The Danish National Radio (’’D anm arks Radio” ) is also considered a
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public authority in many regards, see e.g. Asbjørn Jensen et al., Forvalt
ningsloven p. 28.
For a discussion o f the sim ilar issue in connection with the Danish Securities Center (’’Værdipapircentralen” ), see Christen Boye Jacobsen, Lov om en væ rdi
papircentral p. 31.
A discussion o f the legal status o f the Stockholm Stock Exchange may be found in an article by Mats Tjem berg in Svensk Jurist Tidning 1/1991, p. 40 ff.
9.3.3. Some further aspects. Considering that the rule-making function by the Board of the Stock Exchange is, at least in some respects, of a binding nature, the question is how the general principles of administrative law should be applied to such function.
A num ber o f notions are found in Danish adm inistrative law which serve to protect the citizens. In addition to various formal rules, the aforem entioned prin
ciple o f misuse o f power and the principle o f equal treatm ent are exam ples of substantive rules that aim at protecting citizens. The notion o f equal treatm ent is discussed by Bent Christensen, Forvaltningsret, H jem m elsspørgsm ål p. 107 ff.
and Poul Andersen, D ansk Forvaltningsret p. 426 ff.
The activities conducted by the Board of the Stock Exchange differ from the activities by typical public authorities (such as, e.g., governmental agencies under a Ministry). The fact that the Stock Exchange is a market place where shares are traded entails that the Board of the Stock Exchange will have to consider, for example, the impact that a rule adopted by the Board would have on the willingness of investors to enter the market. Our concern is if the principles of administrative law leave sufficient flexibility with the Board.
We need not be too concerned about this, however. Administrative law creates a framework within which bodies that are authorized to issue rules, make acts or render decisions which are binding upon the citizens must discharge their duties, but the framework is not so rigid that all the exer
cise of authority must be carried out in a uniform fashion by all bodies.
Rather, when determining the legal criteria that a body should follow, the paramount standard is the purpose of the regulation administered by that body.64
64 See Bent Christensen, Forvaltningsret, H jem m elsspørgsm ål p. 91 ff. See also Bent Christensen, Nationalbanken og Forvaltningsret p. 76 ff. regarding the criteria o f relevance for the Danish Central Bank w hen exercising its rights to regulate the provision o f funds.