The BBVA-Sabadell case opens the door to exploring the limits of the laws at stake in a takeover bid.

MadridThe BBVA-Banc Sabadell case has opened the door to exploring the limits of the laws that have come into play throughout the hostile takeover bid, one of the most media-covered and politicized in recent years, which ultimately derailed. Consequently, the need, or lack thereof, to review and update some of the regulations has been on the table, the content of which has been at one point or another a key issue during these seventeen months that marked the outcome. The Competition Law and the Takeover Law have been placed in the spotlight. Had a merger between BBVA and Banc Sabadell been successful, the banking law, which leaves it up to the Spanish government to authorize or reject a merger, would also have come into play.

The first to speak out when the outcome of the takeover bid was still unknown was none other than one of the banks' rivals: "I won't comment on the operation, but we can reflect on whether the legislation [the Competition Law] is adequate. It's something we'll have to rethink when this [the takeover bid] is over," Gonzalo Gortázar said at a financial forum. The Competition Law is the one that guided the analysis process by the National Commission of Markets and Competition (CNMC), which ended with a ruling in favor of authorizing the takeover bid, albeit under commitments and conditions. It also allowed for the Spanish government to intervene with the approval of additional conditions for reasons of public interest.

The general interest: a thunder box

Of all this, the most controversial aspect of the law is the timing—the CNMC's process took almost a year—and the role of the Spanish government, specifically its ability to act for reasons of public interest. In the first case, some believe it has now "drawn attention" because the Competition Authority was dealing with a transaction involving two large companies, which poses further problems. "Otherwise, it would have gone unnoticed."

Regarding the government's role, BBVA has decided to appeal the central government's decision to the Supreme Court, arguing that the approved conditions are contrary to the philosophy of the regulation. In the Basque bank's opinion, the government cannot toughen the Competition Authority's decision.

"I think it's been the most controversial point of all," says a legal source, and other sources from law firms consulted agree. What was the spirit of the law? Was it that the government should be more or less restrictive than the Competition Authority? Some recall that the Competition Law was reformed in 2007 to give, precisely, greater power to the supervisory bodies, and less to the executive branch in power. The fact is that there is only one precedent where it was done in the public interest, and that was to water down the Competition Authority's conditions. "The discussion is whether the article is intended for the government to bypass a restrictive decision [by the CNMC] or to restrict it even further. I think it's the former," says the same source.

At the time, the Competition Department declined to add insult to injury, but did acknowledge that, even when the law was passed, doubts arose about whether it was a good idea to leave the interpretation of this article so open. They also questioned whether the conditions under which the general interest is defined were not sufficiently defined.

"Sometimes there are those who exploit the loopholes in the rules. Does that mean restricting them further? Not necessarily, you just have to keep in mind that in a hostile takeover, the scenarios will be more open."

What is a fair price?

The other major regulation that has come into play is the takeover bid law, reformed in 2007, precisely in the wake of a hostile takeover bid: Gas Natural's takeover of Endesa. Days later, with the outcome already on the table, the National Securities Market Commission (CNMV) offered the Spanish government a chance to discuss its review.

In the case of Gas Natural's takeover bid for Endesa, the most contentious issue was the duty of passivity. But with BBVA and Sabadell, the prospect of a second takeover bid and its fair price have been a real headache for the supervisory body. "The fair price has always been the focus," notes a legal source, who argues that the current takeover bid law is not bad: "I think it allows for different strategies, but it's not an ambiguous text. It's what we've had since 2007, and there have been many transactions, and sufficient certainty has been provided on most of the issues raised," he adds.

The president of the CNMV offered another reflection: the balance between the written word and the practical case. "You can't technically modify a law to the point of making it rigid," notes Fernando Mínguez, a lawyer specializing in commercial, banking, and financial law, who gives the example of the limits of the takeover bid's duty of passivity. "You can't paralyze the activity of a commercial company for such a long period of time, which has been a characteristic of this takeover bid," adds Mínguez. "The law must establish a level playing field, which cannot be so restrictive because these are dynamic processes," the lawyer points out.

Waiting for a response from Brussels

However, the Spanish government has yet to respond to Brussels' request for two of the laws that have come into play (it has until October 29th). First, the Competition Law, and second, the 2014 banking law approved by Luis de Guindos, then Minister of Economy of the People's Party (PP), and current Vice President of the European Central Bank (ECB).

"The government was entitled to consider the general interest. We have done so, and it has not prevented the takeover bid from proceeding and the shareholders from expressing their opinion," Economy Minister Carlos Cuerpo defended this week regarding the first law. "We are convinced that [Spanish] regulations are fully in line with European ones," he reiterated. However, Cuerpo has also confirmed his intention to transpose the European directive that grants the Bank of Spain (BdE) the power to approve a merger.