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AMENDMENT TO COMMONS AMENDMENT NO. 180A

180BLine 8, at end insert—
("and such provision may specify that behaviour conforming with the City Code is behaviour which is considered by the Panel on Takeovers and Mergers as conforming with the City Code").

3.15 p.m.

Lord Alexander of Weedon : My Lords, I beg to move Amendment No. 180B, as an amendment to Commons Amendment No. 180A.

This is a long, technical, regulatory Bill, but this is not an arid technical point. I believe—as, unanimously, does everyone who works in the City—that it is an important point of principle for your Lordships to consider. Can we preserve the well established, effective current system under which the Takeover Panel does its work? Or are we—as the government amendment would do, in spite of the Minister's eloquence—to risk undermining the panel's authority, to open the door to the disruption of the takeover process and stifle the work of the panel in the rampant bindweed of tactical legal manoeuvres? As takeover activity is a significant part of business in financial markets, the issue is one of considerable importance to shareholders, great and small.

I am well aware that the Conservative Party supports my amendment. But I in no sense raise the issue as a party-political one. I do so as a former chairman of the panel. I hope that the House will recognise that the success of the panel transcends party politics and affects the strength of City markets to which, or so I believe, all of us are committed.

Perhaps I may briefly remind your Lordships of the history of the panel and its achievements. It was established under aegis of the Bank of England more than 30 years ago and has been consistently supported by the Bank. The impetus for its creation was the need to make sure that all shareholders received equal treatment during takeovers, that they were properly informed of the sometimes complex arguments and that a bid was conducted within an orderly and clear timetable. The panel has to supervise bids to see that parties comply with the well known code and it has to guard, during a bid, against market abuse such as share ramping.

Over the years, the panel has monitored some 7,000 bids. In the last full year alone, it has supervised some 300 proposals. These are not just important to the

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Titans of the corporate world; they directly affect pension funds, investment trusts and small shareholders. The panel has a conspicuous record of always being vigilant to see that the interests of small shareholders are not overlooked and that they are fully protected.

No one would pretend that the monitoring of takeover bids is an easy task. The bid process often represents a gladiatorial contest where there is much at stake both for companies and for their investment banking advisers. Powerful company chiefs lay their reputation and their future on the line. Behaviour is tactical. The parties to a bid, as I know from experience, will pursue any course of action within the bounds of law and regulation which may advance their cause. Advisers are paid large fees to be inventive and forceful, and the earning of those fees sometimes depends on their success. They often seek to tough it out with the panel.

In this demanding task the panel has a record of very considerable success. Its processes have been speedy, open, fair and relatively inexpensive. The panel has a tradition of giving firm judgments and properly reasoned decisions. It has always been chaired by a senior lawyer, from the time of Lord Shawcross to that of Sir David Calcutt QC, the present incumbent. It has its own appellate procedure, with an appeal panel invariably chaired by a former senior judge of high standing. The importance that the City attaches to the work is reflected by the willingness of experienced senior figures to take part and to do so at short notice.

There are other merits of the panel system. The code is interpreted flexibly to ensure compliance with the spirit of the rules and not just with the letter. The panel will give rulings in advance of proposed action so as to keep the train on the rails and not just pick up the pieces after the accident. In more than 30 years in the law I have found this the most effective process I have known for the fair and speedy resolution of disputes. Nor, so far as I am aware, has there been a shadow of a suggestion that its procedures have not complied with the European Convention on Human Rights.

May I give your Lordships one illustration of the strengths and virtues of the panel in action? In 1987 there was a contest between Guinness and Argyll, which were vying with each other to acquire the ailing business of Distillers. Some months after the bid was over, Guinness having won, it was discovered that some of its conduct raised concern that there had been market abuse through share support operations. The panel was able to investigate within a matter of months and ordered Guinness to pay almost £80 million by way of compensation. Guinness sought judicial review and claimed that the panel should have taken no action until all the criminal proceedings arising out of the incident had been completed. That would, of course, as was no doubt the intention, have held up action for years. But the Court of Appeal, presided over by the noble and learned Lord, Lord Donaldson, rumbled what the aim was and dismissed the case. That was fortunate, since both criminal and other regulatory

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procedures limped on for years. Only the panel was able to take clear, firm and decisive action to give prompt redress to shareholders.

I believe that it has been widely recognised that the effectiveness of panel judgments would be seriously diminished if they could not be promptly enforced. Indeed, in the well known Datafin case the Court of Appeal held precisely for that reason that the panel should not normally be subject to judicial review during the course of a takeover; otherwise, tactical litigation by parties seeking to gain time and disrupt the bid process would be inevitable. Successive governments have recognised the wisdom of that decision by speaking up firmly at Brussels in debates on a European takeover directive to preserve the panel's non-statutory status and so prevent its being sucked into the legalistic procedures of the courts.

The noble Lord the Minister made it clear the last time the issue was before your Lordships, and he has made it clear again today, that the Government fully support the work of the Takeover Panel and that they want it to continue doing the job in the way that it has been doing it. The paradox is that their proposal would in reality foul up the process. As the noble Lord said today, it would allow the panel's decisions to be second-guessed. The FSA, he said, would take them into account. The implication of that is that he is contemplating that it will be second-guessed. That means that the panel will be brought into a legalistic framework from which it has previously been healthily exempt.

That fear has been widely expressed across the City and by a virtually unanimous press in recent weeks. Any participant in a takeover disappointed by the panel's decision could—and the noble Lord appears to suggest that this is a virtue—go over the panel's head to the FSA. Once the FSA had ruled, whichever party did not like its decision would in turn take a taxi and head from Canary Wharf to seek judicial review in the Law Courts in the Strand. The floodgates would be open for tactical manoeuvring, delay and uncertainty. As The Times said very recently,


    "the way will be open for almost any company that finds itself in a takeover situation to shriek 'market abuse' and head for the courts where any bid could be barred for months, even years".

The Government's reaction has been extremely curious. They were slow to respond to the panel's concerns and to understand that the argument might have any validity. They now say that they see that it does, for what they have put before your Lordships is an amendment that suggests that behaviour that complies with the City code shall not amount to market abuse. The amendment is a start, but it clearly completely misses the mark. Who is to decide whether there has been compliance? The Government say that the FSA must be the final arbiter, because it is the statutory regulator. I find that response both doctrinaire and perverse. Who will understand the takeover process better—the panel or the FSA? Who has a proven track record of success in this area—the panel or the FSA? Will the panel's authority be undermined if participants know that it is simply a staging post on the road to the FSA?

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Nor could the FSA decline requests to second-guess the panel, and the noble Lord does not suggest that it could. The government amendment imposes a clear statutory duty on the FSA to hear the case, and that means that it cannot decline jurisdiction; nor can it in any sense fetter its discretion by saying that it will invariably or normally uphold the panel. After that, whichever party was discontent, if there had been a division of opinion between the panel and the FSA, would seek judicial review from the successors of the noble and learned Lord, Lord Donaldson.

It is no wonder that on the last occasion the noble Lord, Lord Newby, speaking for the Liberal Democrats, said very wisely that he supported


    "a form of words that makes it absolutely clear that the interpreter of the City code is indeed the Takeover Panel—it is its code—rather than the FSA".

The noble Lord concluded:


    "That is important".—[Official Report, 18/5/00; col.406.]

I entirely agree with him. Exactly the same principle is at stake today.

When the House considered this issue a few weeks ago your Lordships accepted that a somewhat different amendment would have protected the panel's work. I do not believe that the essential mischief has been cured. My amendment seeks to improve the amendment from the other place, which, as it stands, would undermine the panel's work. I am not suggesting for a moment that your Lordships play indefinite ping-pong with the other place, but it should be given the opportunity to recognise that this amendment is appropriate and indeed necessary to sustain proper City regulation.


    "unless this Bill is amended, there will be significant damage to the quality of takeover regulation in the UK. This will in turn damage the reputation of the UK financial markets for integrity and efficiency".

Are these not strong words coming from the most consistently successful of City regulatory bodies? For some time, I hoped that a government who assert that they understand and are committed to business, would respect and heed that view. I hope that the House will do so.

Moved, That Amendment No. 180B, as an amendment to Commons Amendment No. 180A, be agreed to.—(Lord Alexander of Weedon.)

3.30 p.m.

Lord Donaldson of Lymington: My Lords, I agree with and support the amendment of the noble Lord, Lord Alexander. However, I am troubled by a different point; namely, subsection (2) of the Commons amendment. It provides that the FSA cannot exercise this power under the amendment without the consent of the Treasury.

I understand from what has been said in another place and today that there is no criticism of the work of the panel. There is general agreement that the City needs the panel. It is an essential part of its infrastructure. There is general agreement that the panel must be allowed to continue to operate as it now does. I can summarise the two essential operational

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requirements of the panel. They are these. First, it must be capable of giving almost instantaneous rulings in the course of a bid. That is the case at present and I do not think that it would be varied by the Government's proposed amendment. The second essential operational requirement is that the rulings must not be capable of challenge in the context of the takeover in which they are given. It is that second requirement which is absolutely vital. At present it is guaranteed by the policy of the courts to which the noble Lord referred. In the context of the suggestion that a statutory body must always have more authority than a non-statutory body, I must point out that the courts were faced with a choice between exercising their own powers—they are certainly as great as those created by a statutory body, and possibly greater—and those of the Takeover Panel. They decided that as long as the Takeover Panel was confined in its proof against attack to what was done in a particular takeover, its authority should prevail.

Perhaps I may use an analogy. In effect the courts were saying that the Takeover Panel is in the same position as a referee in a tennis or football match (with which we are much afflicted at present). It does not mean to say that one cannot review what has happened by means of television and other wonders and by that process prove beyond a doubt that the referee was right or wrong. But if he were wrong, the decision stands. That is what we must have in the context of the panel.

That does not mean that a review of its decisions is impossible or would be unprofitable. That second look in a more leisurely context may enable the FSA, the panel or both to decide that there must be a change in the rules in the future. However, the rulings in the context of the bid must remain inviolate.

That is why I am troubled by subsection (2). The Government, the Treasury, might be minded to say that the panel could exercise permissive powers granted under subsection (1) in any way it likes provided that it maintains the overriding authority of the FSA. If so—I agree with the noble Lord, Lord Alexander—there will be a traffic jam between Canary Wharf and the Strand; and that we cannot have.

We shall have to see. I do not understand why this clause, of all clauses relating to the FSA panel, has to require Treasury consent. Any other provision in the code can be made by the FSA and all it has to do is to tell the Treasury. No doubt it would tell the Treasury in advance and the Treasury would have a view. But that is not the point. It could just make the code and tell the Treasury, but it cannot do so under this provision. Why not? I know that the Economic Secretary to the Treasury in another place stressed that the FSA must be preferred in the case of a conflict because it is a statutory body. The Minister said much the same today. That is what frightens me, even if there is not an amendment today.


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