Select Committee on European Communities Seventeenth Report



Letter from Lord Tordoff, Chairman of the Committee, to Lord Simon of Highbury, Minister for Trade and Competitiveness in Europe, Department of Trade and Industry

  Sub-Committee E, to which the above revised proposal and your Explanatory Memorandum were sifted, considered this matter at its meeting on 18 February. The proposed Directive has particular importance for the United Kingdom as the major centre of takeovers activity in Europe.

  You will recall that the Sub-Committee carried out a detailed enquiry into the earlier version of the proposal, the results of which were set out in the Select Committee's Report Takeover Bids (13th Report, 1995-96). That Report concluded that the United Kingdom had an effective and efficient extra-statutory system for the regulation of takeovers which should not be put at risk without substantial and clearly identifiable benefits. The Commission had not made out a case for a Directive and the Committee did not believe that there should be one.

  The Sub-Committee has considered the changes now proposed by the Commission. While a number of them (for example those proposed for Articles 6 and 8) provide helpful clarification or (such as Article 10) are a small step in the right direction, others (in particular, those relating to Article 4.4 and 4.5 and Article 5.1(c) are not helpful and could even make matters worse than was the position under the earlier draft. The Panel must retain the flexibility it has under the Code and be able to act promptly and as circumstances may require without fear or threat of actions for damages being brought against it.

  The Committee shares the view of the Government that the proposed Directive does not satisfy the requirement of subsidiarity as laid down by Article 3(b) of the EC Treaty. Moreover, there is nothing in the changes now proposed to allay the concerns expressed by the Takeover Panel and others as to the detrimental effects of the Directive.

  The Committee remains of the view expressed in its earlier Report. The balance of advantage remains clearly against there being any Directive. The position of the Code and the Panel must be protected.

  This letter clears the document from scrutiny. The Committee would, however, be pleased if you would keep it informed of developments.

19 February 1998

Letter from Lord Simon of Highbury, Minister for Trade and Competitiveness in Europe, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  In your letter to me of 19 February 1998, you reported that Sub-Committee E had considered the revised proposal for a thirteenth company law Directive on takeover bids. You explained that the Committee remained of the view expressed in its earlier Report (Select Committee on the European Communities, Session 1995-96, Thirteenth Report), that the balance of advantage remained clearly against any Directive; and the position of the Code and Panel must be protected. Whilst your letter cleared the document from scrutiny, the Committee asked to be kept informed of developments.

  As explained in my Department's Explanatory Memorandum dated 11 December 1997 (12335/97), only one Council working group meeting was held under the Luxembourg Presidency. None was held under the UK's Presidency which was completed at the end of June last year. However, since that time the proposal has been given fresh impetus under the Presidencies of Austria and Germany with several working group Council meetings being held under each Presidency. It is the German Presidency's intention to put the draft Directive to the Internal Market Council meeting of Ministers due to be held on 21 June. Accordingly, I thought I should write to let you and members of your committee know of developments since the submission of EM 12335/97.

  As the original EM 5147/96 dated 19 March 1996 made clear, the Directive is subject to qualified majority voting. During discussions in Brussels our negotiating aim has been to secure changes to the text which would help to preserve the position of the Takeover Panel and City Code and to ensure that any change to the legal basis of the regulation of takeovers in the UK does not result in it being easier for parties to a bid to challenge decisions through the courts and to engage in tactical litigation. We have also tried to secure improvements to the text which would help to open up European markets by requiring the dismantling of current barriers to takeovers.

  EM 12335/97 outlined the principal changes to the original 1996 proposal that had been included in the version dated 14 November 1997. The principal further changes that have been included in the latest text of the draft Directive—a copy of which is enclosed—are set out at Annex A (not printed).

  The changes in Annex A numbered 1, 2, 3, 7, 8, 10 and 11 bring the Directive more into line with the City Code and are therefore to be welcomed (in respect of the change to Article 5, mandatory bids are a requirement of the City Code). The changes in Annex A numbered 9, 13, 14 and 15 are of little consequence to the UK (in respect of the change to Article 6(2), offer documents are not subject to prior approval by the Takeover Panel and the provision would therefore not apply). It may be helpful if I comment specifically on the other changes.

4.   Article 4.2

  The Government is unhappy with the present text of Article 4.2 which provides for a split in the jurisdiction of the supervisory authorities supervising the bid where the offeree (the target company is incorporated in one country but listed only in another. The supervisory authority in the country of incorporation will be responsible for supervising the "company law" aspects of the bid and the supervisory authority in the country of listing for supervising the "procedural" issues. Given that the vast majority of companies are listed in the country in which they are incorporated—and in which case the only supervisory authority to be involved will be in the country of incorporation—the number of cases where there will be split jurisdiction will be small. However, the split in jurisdiction will, in the Government's view, lead to ineffective regulation in relevant cases and may not work well in practice. The Government's preference would be for the supervisory authority always to be that where the offeree is incorporated. However, this view is not shared by a majority of Member States and the Government's objective, therefore, is to secure improvements to the present proposal which will at least make it enforceable.

5.   Article 4.4

  This Article allows the supervisory authority to grant derogations as long as "the general principles are respected". It is not clear what these general principles are and, in the Government's view, the reference should be to allowing the supervisory authority to grant derogations as long as "the fundamental principles in Article 3 are respected". Otherwise, there is the possibility that Article 4.4 could be interpreted as not allowing the supervisory authority to grant derogations from requirements elsewhere in the Directive which could be construed as general; for example, the mandatory bid requirement in Article 5.1. The Takeover Panel has the power to grant such derogations at present and should, in the Government's view, be allowed to continue to do so.

6.   Article 4.5

  This Article is the key Article for the UK and the present text is strongly supported by the Government. Whilst Article 4.5 does not prevent Member States from freely creating rights and remedies in the national courts, it also makes clear that the Directive does not require Member States to create any such remedies or rights, beyond those which will be available in any event (such as the right to be treated fairly by the supervisory authority, and the right to a fair hearing). The intention is to allow a Member State to limit the scope for litigation in the takeover process, whether between parties to a bid or between a party and the supervisory authority itself, and thereby preserve the existing position in the UK (as explained in the judgement of the Court of Appeal in the Datafin case). However, decisions of the Takeover Panel will continue to be subject both to an internal appeal procedure and, ultimately, to judicial review, and the right to a fair hearing is a right which is protected both by general principles of Community law and by Article 6 of the European Convention on Human Rights.

12.   Article 8(2)

  Article 8(1)—which is unchanged—would permit the boards of target companies to take frustrating action after they have received information concerning the bid only if they had the prior authorisation of shareholders given for this purpose during the period of acceptance of the bid.

  The new Article 8(2) would permit the boards of target companies to take frustrating action if they have the prior authorisation of shareholders given up to 18 months before the beginning of the period of acceptance of the bid. By virtue of being a Member State option, Article 8(2) would not affect the Takeover Panel's administration of the City Code. Furthermore, since the frustrating action is limited to the issuing of new shares, and the requirement for pre-emption rights to apply is not lifted, it represents only a small derogation from the general rule against frustrating action in Article 8(1). Nevertheless, the Government would prefer there to be no derogation at all, in the interests of opening up European markets to takeover activity.

  Please let me know if there is any further information that you need.

6 May 1999

Letter from Lord Simon of Highbury, Minister for Trade and Competitiveness in Europe, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  I enclose an Explanatory Memorandum on the proposed EU Takeovers Directive.

  The Directive is scheduled to feature on the agenda of the Internal Market Council on 21 June, and the position on a number of issues is changing rapidly in the run-up to the Council. By far the most important issue with this Directive for the UK is the question of litigation during takeover bids. We have been pressing for the inclusion of a clause (Article 4.5) which is intended to minimise the threat of such litigation. A recent draft of the text did not include the clause as we had proposed it. We have therefore been seekings its re-instatement, or wording that is closely similar, and as noted in the EM, the latest indications are that we can expect to be successful in this.

  I understand that the Takeover Panel has submitted a paper to the scrutiny committees considering the Directive, arguing that it should be opposed. I believe that this paper is commenting on the version of the text which did not include the wording we are seeking in Article 4.5. I agree with the Panel's view that this version of the text could not be supported, and I am clear that there can be no question of lifting our reserve on the Directive if acceptable wording on this point is not included in the text.

25 May 1999

Letter from Lord Tordoff, Chairman of the Committee, to Lord Simon of Highbury, Minister for Trade and Competitiveness in Europe, Department of Trade and Industry

  Sub-Committee E (Law and Institutions) considered the amended proposal at its meetings on 9 and 16 June. The Committee had before it your Explanatory Memorandum, written submissions from the Takeover Panel and your letter of 15 June to Jimmy Hood, Chairman of the European Scrutiny Committee (not printed).

  You will recall that in 1996 the Committee conducted a detailed enquiry into the proposal which resulted in its report, Takeover Bids (13th Report 1995-6)[1]. In the present circumstances it has not been possible to undertake a further enquiry. It seems clear, however, that the issue of greatest concern is that raised by Article 4(5).

  The impact of the Directive on the relationship between the Code and the courts was an important feature of our 1996 Report. The Report made a number of points on Article 4(5), whose objective was seen as being to maintain the United Kingdom policy and practice of non-intervention by the courts during the course of takeover bids. The Committee notes that the text of Article 4(5) has since changed and that its effectiveness in achieving that objective is now put in doubt by the addition of certain words referring to the general principles of Community law. Your letter indicates that you intend to argue for the removal of the words in question, while acknowledging that neither the Panel nor national courts can disregard such principles, as the right to a fair hearing, non-discrimination, proportionality and the protection of legitimate expectations.

  We are pleased to note that the Government intends to make clear at the Internal Market Council that UK acceptance of the Directive is conditional on the inclusion of an acceptable text of Article 4(5). It is essential that the Directive should not be allowed to give any unnecessary encouragement to tactical litigation or litigation designed to affect the outcome of the bid and that Article 4(5) should, as you say, be as clear and strong as possible.

  This letter clears the amended proposal from scrutiny. I would be pleased if you could keep the Committee fully informed of developments.

17 June 1999

1    HL Paper 100 Back

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