Select Committee on European Union Twenty-Eighth Report


CHAPTER 2: BACKGROUND TO PROPOSED DIRECTIVE AND SUMMARY OF ITS PROVISIONS

Brief history of the proposal

8.  The history of the proposal can be traced back to 1985 when the Commission announced its intention, as part its programme for the completion of the Single Market, to bring forward a directive on takeover bids. A text was formally presented by the Commission in 1989. Both the Economic and Social Committee (ECOSOC) and the European Parliament gave it their general support, but a number of Member States, including the UK, had serious problems with what was being proposed. Not all Member States could accept the notion of a mandatory bid[7] required to be made when the offeror has reached a certain level of shareholding. The UK was concerned to safeguard its highly efficient self-regulatory system. Member States had differing views on the degree of prescription which the Directive should have and on the level of detail.

9.  During the period 1992-95 the future of the Directive was extensively considered as part of a general review of proposals to be amended or withdrawn in application of the principle of subsidiarity. A majority of Member States took the view that some harmonisation on takeover bids was desirable and most of those thought that a framework directive would be the right approach. The Commission's 1996 text was the Commission's response.

The High Level Group

10.  Following the narrow failure of the Takeover Bids Directive (ie the 1996 text as amended in the negotiations in and between the Council and Parliament) to be adopted in 2001, the Commission appointed a High Level Group of Company Law Experts[8] to look at three issues which the Commission identified as of concern to the European Parliament:

  —the issue of the "level playing field" for shareholders (ie the problems created by the existence in Member States of differential voting and control structures, such as shares with multiple voting rights or restrictions on transfer of shares or voting rights);

  —the definition of the "equitable price" to be paid to shareholders by a takeover bidder; and

  —the right of a majority shareholder to buy out minority shareholders following a successful takeover.

11.  To address the "level playing field" issue, the Group proposed[9]:

  —rigorous disclosure provisions, so that differential voting and control structures were fully transparent to the market; and

  —a "breakthrough" procedure, whereby any takeover bidder acquiring 75 per cent or more of the risk-bearing capital (in UK terms, the "equity" or "ordinary" shares) of a company would be able to override any defence structures that prevented it acquiring effective control of the target company (for instance, the right to dismiss the board of directors).

As will be seen, these proposals are developed in Articles 10 and 11 of the Directive respectively.

12.  On the other two issues, the Group proposed that:

—a harmonised approach to equitable price be adopted across the EU based on the highest price paid by the bidder in a period of up to 12 months prior to the bid; and

—provisions be included to deal with the problems of, and for, residual minority shareholders following a bid ("squeeze-out" and "sell-out" rights).

These recommendations have formed the basis for Articles 5, 14 and 15 of the Commission's text.

The proposal in outline

13.  Like the 1996 text, the current proposal is essentially a minimum standards/framework directive containing general principles but leaving considerable latitude for Member States and their takeover supervisory authorities to deal with the detailed implementation of those principles. It builds upon the (2001) Conciliation Text, and includes a number of new measures which, whilst not adopting in their entirety the proposals of the High Level Group, reflect the issues considered and the solutions proposed by them.

The general principles

14.  Article 3 would require Member States to ensure that their domestic regimes for regulating takeovers respect six "general principles":

—all shareholders in the same class are to afforded equivalent treatment;

—shareholders must have sufficient time and information to enable them to reach a properly informed decision on any takeover bid;

—the board of the target company is to act in the interests of the company as a whole and shareholders of the target company must be allowed to decide on the merits of the offer;

—a bid should not lead to the creation of false markets or the distortion of the normal functioning of the markets;

—a bidder should only announce a bid where proper steps have been taken to ensure the offer can be fulfilled in cash (where a cash offer is made) or all reasonable measures have been taken to secure the implementation of any other type of consideration; and

—target companies must not be hampered in carrying out their normal activities for longer than is reasonable.

15.  The Greek Presidency has proposed the inclusion of a further "principle" which seeks to ensure that the Directive should not be impeded by Member States' laws.[10] But, in our view, it would add nothing and risks creating confusion.

The supervisory authority

16.  Member States would be required to designate a supervisory authority to be responsible for supervising takeover bids, and for ensuring that parties to a bid comply with the Directive's requirements (Article 4). This would include a duty for parties to a bid to supply to the supervisory authority on request necessary information related to the bid (Article 6). The supervisory authority would be that of the Member State where the target company has its registered office if the company's shares are traded on a regulated market in that Member State (Article 4 (2)(a)).

Protection of shareholders—mandatory bid, equitable price

17.  Article 5 requires Member States to adopt a "mandatory bid" rule. Where a party acquires a specified minimum percentage of a company's shares, thereby gaining control of the company, it would be required to make a bid to all the shareholders for all of their holdings at the equitable price.[11] The Directive leaves it to individual Member States to determine the percentage of voting rights which confers control of a company for this purpose. Generally, the "equitable price" will be the highest price paid by the bidder for the class of shares concerned within a period to be set by Member States but which may not be less than 6 months nor more than 12 months prior to the bid or during the bid (Article 5(4)).

Information and disclosure

18.  The Directive specifies the minimum information to be included in the public offer document made available to the target company's shareholders (Article 6). This includes the terms of the bid (such as the consideration offered for each class of shares and all conditions to which the bid is subject) and also the offeror's intentions with regard to the future business of the company (including the likely impact upon employees).

19.  The bid must be made public in such a way as to avoid the creation of false markets in shares. Information and documents are to be made available to shareholders promptly (Article 8).

Defensive measures

20.  The board of the target company would be prevented, once it had been notified of a bid, from taking action which could frustrate that bid, without the prior authorisation of its shareholders (Article 9).

21.  The Directive also contains detailed provisions requiring companies to disclose their share structure and control systems so that the market can identify differential voting mechanisms and other control devices across the EU. Article 10 would require certain matters to be published in the company's annual report, including:

—capital structures and the rules governing amendments to the company's articles;

—rights and obligations attaching to different classes of shares;

—restrictions on voting rights and on the transfer of shares (including agreements between shareholders which might result in restrictions on voting rights or the transfer of shares);

—rules governing the appointment of board members, their powers and agreements between the company and its board members or employees which provide for compensation if they are made redundant following a takeover bid;

—significant shareholdings (including indirect holdings through intermediaries);

—the holders of shares with special control rights;

—the system of control of any employee share scheme (where the employees themselves do not directly exercise such control);

—significant agreements to which the company is a party taking effect, altering or concluding on the change of control of the company.

Article 10 also requires the board to present an explanatory report on the above matters to a meeting of shareholders every year.

Breakthrough

22.  Under Article 11 any restrictions on the transfer of shares provided for in the company's articles of association or in contractual agreements between the target company and its shareholders or between shareholders of that company would be unenforceable against the bidder. Restrictions on voting rights would also cease to have effect at any meeting summoned to consider defensive measures in response to the bid. Where the bidder held the number of shares necessary under the applicable national law (in the United Kingdom, 75 per cent)[12] to make constitutional changes to the company, these restrictions on transfer of shares or voting rights would cease to apply at the first meeting following closure of a successful bid. The override procedure does not apply to shares without voting rights which carry specific pecuniary advantages (for example, in the UK, preference shares).

Employee rights

23.  The Directive requires the prompt disclosure of the bid to representatives of the employees (Article 6 (1)) and requires the board of the target company to make public a document setting out its opinion on the effect of the bid on all the interests in the company, including employment. It also provides that, where the board of a target company receives in good time a separate opinion from the representatives of the employees, this should be appended to the document (Article 9(5)). Additionally, Article 13 specifically recognises employee rights and, in particular, those conferred under the directives on the European Works Council, Collective Redundancies and Information and Consultation.[13]

Protection of minorities—"squeeze-out" and "sell-out" rights

24.  Member States would be required to put in place rules enabling a successful takeover bidder to acquire minority shareholdings (Article 14—"squeeze-out rights") and enabling minority shareholders to require the takeover bidder to buy out their remaining shares in these circumstances (Article 15—"sell-out rights").

Other rules relating to the conduct of bids

25.  Member States would also be required to put rules in place governing matters such as withdrawal or revision of bids, competing bids, disclosure of the results of bids, irrevocability of the bid, and conditions permitted (Article 12). The Directive does not stipulate the content of these rules.


7   See footnote 3. Back

8   The group was chaired by Jaap Winter, Chief Legal Counsel of Unilever. Back

9   The High Level Group produced a report, "Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids," (the full text of which can be found at:

http://europa.eu.int/comm/internal_market/en/company/company/news/02-24.htm ) on 10 January 2002. Back

10   The additional text proposed is as follows: "(g) the exercise of rights and the discharge of obligations as mandated by this Directive and whose content is clearly defined in this Directive should not be hindered by national law requirements related to this Directive whose content is defined by Member States such as the ones addressing compensation arrangements, ownership/control thresholds, timeframes and deadlines, derogations by supervisory authorities". Back

11   The mandatory bid obligation would not, however, apply where a person had gone over the threshold as a result of a voluntary bid made to all shareholders for all of their shares (Article 5 (2)). Back

12   The Greek Presidency has suggested that a 75 per cent threshold be inserted into Article 11. Doc 6064/1/03. Back

13   Directives 94/45/EC, 98/59/EC and 2002/14/EC. Back


 
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