Select Committee on European Union Twenty-Eighth Report


CHAPTER 3: ANALYSIS OF PROPOSED DIRECTIVE

The new proposal

26.  When the Committee looked at the 1996 proposal for a Takeovers Directive we queried whether any Directive was justified or necessary. Member States were already adopting rules to deal with takeovers. Driven by market forces a process of "soft harmonisation" was under way and, we were told, has continued. So, for example, the majority of Member States now have a mandatory bid provision. However, the current position across Europe is not uniform (Q 3).

27.  We asked the Government whether it accepted that there was a case for action at Union level. The Minister said: "the balance at the moment, in our view, is that there is still a case for a Directive and that there would be gains to be had out of a Directive" (Q 58). She acknowledged that there would be no benefits in relation to takeovers of companies under the provisions of the City Code. It was, however, necessary to consider the wider European position. The Commission had put forward a two-fold justification for its proposal: the Single Market objective of providing a legal framework for takeovers across the EU and the need to provide adequate legal protection for shareholders. The Government supported both of these broad aims. The Minister said that there was a need to make the financial services markets work better across Europe. The Directive would play a key role in that process: it was an important part of the Financial Services Action Plan. The enhanced shareholder protection across Europe, especially the extension of the mandatory bid and the improved rule on equitable pricing, would be beneficial from a UK point of view. The Minister also believed that the Directive would have a general impact on good corporate governance and practice which would in turn bring increased investor confidence (p 33, QQ 58, 63, 95).

28.  The Takeover Panel confirmed that the Directive would not bring about any improvements in the UK. Mr Remnant, the Panel's then Director General, said: "there is nothing in the Directive that I would say enhances the system of takeover regulation in the UK. We have the most sophisticated and developed system of takeover regulation in Europe, which has proved itself over the last thirty years or so and I do not think that it is in any way enhanced by the very basic requirements of the Directive, which is a minimum standards Directive. However, being a minimum standards Directive, it does enable Member States to have more detailed and more rigorous rules, which of course we have and which will mainly not be impacted by the Directive" (Q 2).

29.  Witnesses agreed that it was necessary to look at the position in other Member States to see what benefits the Directive might provide for UK firms and investors. Mr Remnant said: "There are some provisions in the Directive—notably I would say the Article which deals with the requirement for mandatory bids, which is Article 5, and indeed Article 9 which deals with management not being able to take action which might frustrate a bid without the approval of shareholders—which are provisions which will be important in helping protect UK investors and UK companies in Europe" (Q 2). Mr Oliver, Chairman, CBI Companies Committee and Boots Company Secretary, said: "It is our view that the Directive is better than nothing, that there is a need for the Directive, that it achieves potential benefits for UK companies and for UK investors, UK companies wishing to make bids in Europe and all those who do invest in Europe already and have minority shareholdings" (Q 5). Mr Oliver identified the need to extend the opportunities for cross-European takeover activity. He said: "In some ways we are almost at a disadvantage in as much as EU firms which are not incorporated and subject to the Panel can make an easy bid within the UK but we do not have the ability because we have a level playing field in this country and so our market is open. UK firms wishing to invest in other Member States sometimes do not have the same advantage. So we have an open market, others do not, and we prefer to see the open market across the Union" (Q 49).

30.  The Directive would not bring any potential benefits to companies or shareholders in the UK but could confer benefits for them outside the UK. The procedures and rules operated under the City Code have been worked out over years and generally at a higher level of protection than is proposed in the Directive. But even though the UK position is, we believe, satisfactory, there is a UK interest in having good arrangements working in all Member States. It must be in the interest of UK companies and UK investors in other European markets that there are strong and efficient regulatory regimes in those jurisdictions, in particular so that they can have confidence in, and take the fullest advantage of, the Single Market. There is also the wider interest mentioned by the Minister that the Directive is one part in a Financial Services package designed to open up the financial services markets across Europe. We accept therefore that there is a good case for having a directive regulating takeover bids in Member States, though as we explain below, any such directive must be clearly of a sufficient minimum standard as to secure those benefits while not prejudicing unnecessarily the well-established position of the Takeover Panel and the City Code in the UK.

The future of the Panel and the Code

31.  The Directive will require changes to be made in the UK. In order to implement the Directive, the regulation of takeovers would have to be placed within a statutory framework. Legislation would designate a supervisory body. The Directive makes clear that a private body, such as the Takeover Panel, could be designated (Article 4(1)). The Government envisages that, in addition, some aspects of the Directive's proposed regulatory framework currently in the Code may have to be incorporated into legislation. The Directive refers to the need for Member States to ensure that rules are in force which satisfy certain requirements, but recognises such rules may include "codes of practice or other arrangements". The Government believes that the Takeover Panel could continue to perform its function of drawing up the detailed rules contained in the City Code, although in future that would be done under a statutory framework (p 28).

32.  We asked how, in broad terms, the City Code and the Takeover Panel would be affected by the Directive. The Government held the view that the main elements of the proposal were covered by the Code. There were no significant requirements in the Directive in relation to the takeover bid process that go beyond the requirements of the Code, though it was accepted that some of the rules in the Code might need amendment. (There would, however, be more substantial company law changes, in particular in implementing the Directive's requirements (Article 11) for disclosure of company information (see paragraph 21 above) and also the breakthrough procedure (see paragraph 22). The Takeover Panel took a similar overall view of the Directive. The Panel nevertheless had a number of specific concerns with the text (QQ 4, 10).

33.  It is important that the Takeover Panel and the City Code should be able to continue to police takeover bids in the UK. That would be possible under the Directive, though they would have to operate under a statutory umbrella (we consider the implications of this below). As to the detail of the rules being proposed, there is no evidence that the current UK system falls in any way below the Directive's standards. Though there are provisions in the Directive which need to be improved, we are satisfied that the Directive as it presently stands would not have any major negative impact on the provisions of the Code. It is also important that the Directive should not impede unnecessarily the ability of the Panel to amend and update the Code in response to commercial and legislative developments.

Tactical litigation

34.  In our 1996 Report we expressed concern that the Directive, which would require our current procedures to be given a statutory basis, would open up the way for tactical litigation. The effect of the Court of Appeal's decision in Datafin[14] has been to discourage such litigation. Panel decisions are subject to judicial review but the courts would expect to intervene only after the event, not during the bid, and usually only by way of declaration as to what some provision in the Code means. The scope for tactical obstructive litigation is thus limited.
Article 4(6)

This Directive shall not affect the power of the Member States to designate judicial or other authorities responsible for dealing with disputes and for deciding on irregularities committed during the bid procedure or the power of Member States to regulate whether and under which circumstances parties to a bid are entitled to bring administrative or judicial proceedings. In particular, this Directive shall not affect the power which courts have in a Member State to decline to hear legal proceedings and to decide whether or not such proceedings affect the outcome of a bid. This Directive shall not affect the power of the Member States to determine the legal position concerning the liability of supervisory authorities or concerning litigation between the parties to a bid.

35.  Article 4(6) has been specifically designed to allow individual Member States to prevent tactical litigation which might frustrate or delay a takeover bid. The Minister was confident that "the wording retained from the Conciliation text would be sufficient to safeguard the benefits of the existing UK system of takeover regulation and minimises the scope for tactical litigation to be imported" (p 29). Mr Remnant, for the Takeover Panel, accepted that Article 4(6) was "probably as good as one is ever going to get" (Q 53). The Minister was clear that the only way to avoid any risk of increased litigation would be to have no directive (Q 98).

36.  The Minister acknowledged that it would be essential to implement Article 4 (6) "properly". The Government "intended to make the maximum use of the flexibility provided by Article 4(6)". The aim would be to maintain as far as possible the present legal position established by the courts (QQ 59, 61, 62, 97). The Takeover Panel envisaged the need for detailed implementing provisions. Mr Remnant said: "We do think that it is going to be very important that the implementing legislation in the UK specifically takes account of what is in Article 4(6) to make sure that, to the extent there is the possibility of litigation, it is very much a defined procedure with defined safeguards including time limits in order to limit as far as possible the amount of litigation" (Q 15).

37.  We asked the Minister how she envisaged implementing Article 4(6). We assumed that some detailed preparatory work had already been done, else the Government could not be so confident that Article 4(6) would have the sought-after effect. The Minister confirmed that some thought has been given to the issues, including the question of compatibility with Article 6 ECHR. Furthermore, the Government intended to consult widely in due course. But only "a small resource" was devoted to the Directive. The Minister said: "It is very effective in terms of the negotiation but it will not be very effective if we spend too long worrying about the detail of implementation" (QQ 92, 96). She accepted, however, that there was a need for detailed work to be done (Q 100).

38.  Putting the Code onto a statutory footing will inevitably increase the scope for litigation. Article 4(6) is well intentioned and very broadly drafted. But we do not believe that a Member State could, for example, make it impossible to question before a court whether the local law complied with the basic provisions of the Directive. Further, it would not be possible, especially if there is to be compatibility with the ECHR, to exclude some degree of judicial supervisory jurisdiction. There is a strong public interest in ensuring compliance with Article 6 ECHR here as elsewhere. We emphasise the need for clear thinking about the measures that the Government uses to take maximum advantage of Article 4(6). It is important that there should be wide consultation and that that should not be delayed. If there are likely to be problems then it is better to know them now than later when the Directive has been adopted. There may be resource restraints within the DTI but that is a matter which Ministers can speedily address. Ministers should be aware of the consequences of getting the Directive, and Article 4(6) in particular, wrong.

A minimum standards directive

39.  As mentioned above, one of the grounds on which the original (1989) text of the Directive was opposed by Member States was that it was too detailed and prescriptive. A framework Directive setting minimum standards should benefit the UK. As Mr Remnant, for the Takeover Panel, said, such a Directive would have "the advantage of enabling the UK to preserve its own very effective takeover regulation: it does allow more scope for the UK to keep the detailed rules which are tried and tested, which otherwise might not be the case" (Q 14). On the other hand, as we pointed out in our 1996 Report, the Directive should have sufficient clarity and require a sufficient measure of harmonisation in the interest of companies wishing to take advantage of the Single Market and in the interest of minority shareholders.[15] We remain of that view. Two Articles are particularly relevant in this context: Article 5 (mandatory bids), Article 9 (defensive measures).

Mandatory bid—minimum threshold

40.  Article 5 is a significant improvement on the 1996 text. Member States would have to have a mandatory bid rule, requiring the bidder to make a bid for all the shares of the minority shareholders. Article 5 also provides for a minimum equitable price. We note that it now deals with concert parties.[16] But in the Takeover Panel's view it remains a weak provision because it does not actually define a common threshold for control (Q 2).

Article 5(1)-(4)

(1) Where a natural or legal person who, as a result of his own acquisition by persons acting in concert with him, holds securities of a company referred to in Article 1(1) which added to any existing holdings and the holdings of persons acting in concert with him, directly or indirectly, give him a specified percentage of voting rights in that company, conferring on him, the control of that company, Member States shall ensure that this person is required to make a bid as a means of protecting the minority shareholders of that company. This bid shall be addressed at the earliest opportunity to all holders of securities for all their holdings at the equitable price as defined in paragraph 4.

(2) Where control has been obtained following a voluntary bid made in accordance with this Directive to all holders of securities for all their holdings, the obligation to launch a bid laid down in paragraph 1 shall no longer apply.

(3) The percentage of voting rights which confers control for the purpose of paragraph 1 and the method of its calculation shall be determined by the rules of the Member Sates in which the company has its registered office.

(4) The highest price paid for the same securities by the offeror, or by persons acting in concert with him, over a period of between six and twelve months prior to the bid referred to in paragraph 1 or during the bid itself shall be regarded as the equitable price. If after the bid has been made public and before the offer closes for acceptance, the offeror or any person acting in concert with him purchases securities at above the offer price, the offeror shall increase his offer to not less than the highest price paid for the securities so acquired.

Member States may authorise their supervisory authorities to adjust the price referred to in the first subparagraph in circumstances and according to criteria that are clearly determined. To that end, they may draw up a list of circumstances in which the highest price may be adjusted either upwards or downwards, for example where the highest price was set by agreement between the purchaser and a seller, where the market prices of the securities in question have been manipulated, where market prices in general or certain market prices in particular have been affected by exceptional occurrences, or in order to enable a firm in difficulty to be rescued. They may also determine the criteria to be applied in such cases, for example the average market value over a particular period, the break-up of value of the company or other objective valuation criteria generally used in financial analysis.

Any decision by a supervisory authority to adjust the equitable price shall be substantiated and made public.

41.  The Minister accepted that setting the mandatory bid threshold was of key importance. And it was a relevant factor in balancing the advantages and disadvantages of the Directive. But she said that it was necessary "to be realistic about what can be achieved on a European front". There had been long drawn out fruitless discussions in the past on the issue of a common threshold. She was prepared to accept that the Directive would not go as far as UK takeover provisions did (Q 64).

42.  Article 5 should be strengthened. The present text of the Directive does not prescribe a threshold at which a mandatory bid has to be tabled and accordingly it would be open to Member States to set a high threshold and thus limit the protection which shareholders should have. Without an effective mandatory bid requirement shareholders might have no right of exit from the company. We recommend therefore that a minimum threshold should be set down in Article 5 (1). Member States would be free to set a lower threshold but the Directive would stipulate a minimum level of shareholder protection across Europe.

Mandatory bid—cash consideration

43.  The Takeover Panel argued that that it should be obligatory to offer minority shareholders a cash consideration. Minority shareholders should be offered the opportunity of a clean exit for cash from a company where control has already passed (QQ 10-11).
Article 5(5)

The offeror may offer as consideration securities, cash or a combination of both.

However, where the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market, such consideration has to include a cash alternative.

In any event, the offeror shall offer a cash consideration at least as an alternative where he or the persons acting in concert with him, over a period beginning at the same time as the period decided by the Member State in accordance with paragraph 4 and ending when the offer closes for acceptance, he has purchased in cash securities carrying 5% or more of the voting rights of the offeree company.

Member States may provide that a cash consideration shall be offered, at least as an alternative, in all cases.

44.  Article 4(5), in the Presidency's proposed text, states that Member States may provide that there must be a cash consideration offered in all cases. In the Minister's view, the text was satisfactory as it would permit Member States to require a cash consideration. The existing UK rule could therefore be maintained. (Q 67).

45.  The text does not go as far as making it compulsory that there should be a cash consideration offered to all shareholders. The Minister did not think this was negotiable. The latest text was, in her view, a marked improvement. She said: "It may not be perfect and we would certainly continue to work if we thought that there was more to be gained on it but we have worked very hard to achieve the position that we have currently achieved" (Q 68).

46.  There is a strong case for saying that it is essential that shareholders who want to leave the company should be able to do so on cash terms. We agree with Government that the present text is satisfactory in that it safeguards the position in the UK. It is, however, regrettable that the Directive does not establish, as a minimum standard to be applicable in all Member States, the right of all shareholders to be offered a cash consideration for their shares. "Liquid securities" are the next best thing, but it is difficult to see why there should not be a requirement for cash.

Article 9—defensive measures

47.  As we pointed out in our 1996 Report, Article 9 (formerly Article 8) is another key provision of the Directive. All forms of action which might frustrate a bid would be prohibited. Defensive measures would not be in the hands of the directors of the target company. Article 9 retains the principle that it is for the shareholders to decide on defensive measures once a bid has been made public.

Article 9(2)

During the period referred to in the second subparagraph, the board of the offeree company must obtain the prior authorisation of the general meeting of shareholders given for this purpose before taking any action other than seeking alternative bids which may result in a lasting impediment to the offeror in obtaining control over the offeree company.

Such authorisation shall be mandatory at least from the time the board of the offeree company receives the information concerning the bid referred to in the first sentence of Article 6(1) and until the result of the bid is made public or the bid lapses. Member States may stipulate that such authorisation is to be obtained at an earlier stage, for example from the time when the board of the offeree company becomes aware that the bid is imminent.

48.  The Minister said: "Article 9 … is a highly important Article simply because it does enshrine the principle of management not interfering in the process of a bid and gives shareholders the right ultimately to decide on the merits of a bid at any given time. We recognise the importance that the City and business attach to that. We rate that as a very high priority in terms of Article 9" (Q 65). Both the Takeover Panel and CBI considered Article 9 to be fundamental to investor protection and would be opposed to any directive on takeover bids without such a provision (Q 27).

49.  We requested clarification of the Government's position from the Minister because there was a suggestion that if it proved impossible to reach agreement on Article 11 (in particular to provide for the overriding of multiple voting rights—we return to this at paragraph 62 below) and it had to be dropped from the Directive then, as a quid pro quo, Article 9 might also be dropped. The Government has denied that it has accepted that position.[17] Whatever the outcome on Article 11 the Government should stand firm on Article 9. The requirement that the board of the target company should, without shareholder approval, be prohibited from taking action which could frustrate the bid, is an indispensable provision of any directive on takeover bids.

Split jurisdiction

50.  Under Article 4 the basic rule is that a bid will be subject to control by the supervisory authority in the State where the target company has its registered office if the company's shares are traded on a regulated market in that Member State. If that is not the case, then the supervisory authority is that of the Member State on whose regulated market the shares are traded while the company law and employee information obligations would remain to be governed by the law of the State of incorporation.

Article 4(2)

(a) The authority competent for supervising the bid shall be that of the Member State in which the offeree company has its registered office if the securities of that company are admitted to trading on a regulated market in that Member State.

(b) If the securities of the offeree company are not admitted to trading on a regulated market in the Member State in which the company has its registered office, the authority competent for supervising the bid shall be that of the Member State on whose regulated market the securities of the company are admitted to trading.

If the securities of the company are admitted to trading on regulated markets in more than one Member State, the authority competent for supervising the bid shall be that of the Member State on whose regulated market the securities were first admitted.

(c) If the securities of the offeree company are first admitted to trading on regulated markets within more than one Member State simultaneously, the offeree company shall determine which of the supervisory authorities of those Member States is the competent authority for supervising the bid by notifying these regulated markets and their supervisory authorities on the first trading day.

If the securities of the offeree company are already admitted to trading on regulated markets in more than one Member State at the date referred to in Article 20(1) and were admitted simultaneously, the supervisory authorities of these Member States shall agree on which one of them is to be the competent authority for supervising the bid within four weeks of the date mentioned in Article 20(1). Otherwise, the offeree company shall determine which of these authorities is to be the competent authority on the first trading day following the expiry of the period of time mentioned in the first sentence.

(d) Member States shall ensure that the decisions referred to in (c) are made public.

(e) In the cases referred to in (b) and (c), matters relating to the consideration offered in the case of a bid, in particular the price, and matters relating to the bid procedure, in particular the information on the offeror's decision to make a bid, the contents of the offer document and the disclosure of the bid, shall be dealt with in accordance with the rules of the Member State of the competent authority. In matters relating to the information to be provided to the employees of the offeree company and in matters relating to company law, in particular the percentage of voting rights which confers control and any derogation from the obligation to launch a bid, as well as the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the bid, the applicable rules and the competent authority shall be those of the Member State in which the offeree company has its registered office.

51.  Under the Code the Panel has jurisdiction where the offeree/target company is incorporated within the UK and has its place of central management within the UK. Where its shares are traded is not a relevant criterion. Mr Remnant was critical of the approach being proposed in the Directive. He said: "Although there are some examples given in the Directive as to which falls into which category, they are only examples and there are many issues on which it would be unclear as to whether they fell into one category or the other. Further, there is no mechanism for resolving jurisdictional disputes between supervisory authorities and we think it is inevitable that this will cause delay, potential litigation and frankly is a recipe for regulatory chaos" (Q 31).

52.  The Government's preference was for the supervisory authority always to be that where the target company was incorporated (p 29). But they believed that the Directive's shared/split jurisdiction rule would only be applicable rarely (Q 75). While the proposed rules were not what the Government would advocate the Minister believed that the Directive "would at least lay down a rule, albeit one that we would not prefer, where there is presently no EU wide rule on jurisdiction at all" (Q 74). The views of Member States differed on the issue and Mr Edbury, Assistant Director, Company Law and Investigations, DTI, said: "Aside from those Member States who are actually against us on this point, there is a number who, for fairly understandable reasons, are reluctant to unpick the text of the conciliation Directive after all those years of negotiation" (Q 77). In the Minister's view, there seemed to be little scope to reopen this issue and if it were to be, there would a risk that the result might be something less attractive (Q 79).

53.  We agree with the Government and other witnesses that it is not desirable to have split jurisdiction and that in all cases supervision should be the responsibility of the authorities of the State of incorporation. In many cases the jurisdiction of the Panel will not be affected under the rules currently proposed in the Directive. This is because in most cases a company will have its registered office and its shares traded in the Member State where it is incorporated. But there will be cases where under the proposed rules a takeover bid will simultaneously be subject to two regimes. We have great difficulty in seeing how the split regime as proposed by the Directive will work in practice. The Government have judged it something which they can accept and appear reluctant to reopen the issue. But for those closest to the present UK system it remains a potentially serious problem. We therefore urge the Government to reconsider the position.

The breakthrough/override procedure—golden shares

54.  In her Explanatory Memorandum, the Minister identified two "potentially significant consequences for the UK" in relation to the proposed override procedure in Article 11; (a) golden shares, and (b) contractual arrangements between shareholders. As regards the former, only a small number of UK listed companies was involved. There was, however, some disagreement with the Commission as to whether Article 11 applied. The Minister made clear that the Government would seek to preserve the key public interests (including the confidentiality and integrity of defence manufacture and research, preserving the continuity of fuel and power supply) currently secured by golden shares in the articles of the companies concerned (QQ 83-4).
Article 11

(1) Without prejudice to other rights and obligations laid down in Community law for companies referred to in Article 1(1), Member States shall ensure that the provisions referred to in paragraphs 2 to 6 apply when a bid has been made public.

(2) Any restrictions on the transfer of securities provided for in the articles of association of the offeree company shall be unenforceable against the offeror during the period for acceptance of the bid laid down in Article 7(1).

Any restrictions on the transfer of securities provided for in contractual agreements between the offeree company and holders of its securities or between holders of securities of the offeree company shall be unenforceable against the offeror during the period for acceptance of the bid laid down in Article 7(1).

(3) Restrictions on voting rights provided for in the articles of association of the offeree company shall not have effect at the general meeting which decides on any defensive measures in accordance with Article 9.

Restrictions on voting rights provided for in contractual agreements between the offeree company and holders of its securities or between holders of securities of the offeree company shall not have effect at the general meeting which decides on any defensive measures in accordance with Article 9.

Multiple voting securities shall carry one vote only at the general meeting which decides on any defensive measures in accordance with Article 9.

(4) Where, following a bid, the offeror holds 75% of the capital carrying voting rights, any restrictions on the transfer of securities and on voting rights referred to in paragraphs 2 and 3 and any special rights of shareholders concerning the appointment or removal of board members shall not apply and multiple voting securities shall carry one vote only at the first general meeting following the closure of the bid, called by the offeror in order to amend the articles of association or to remove or appoint board members.

To that end, the offeror shall; have the right to convene a general meeting at short notice, provided that the meeting does not take place within two weeks of notification.

(4a) Where rights are being removed on the basis of paragraph 4, equitable compensation must be provided for the loss incurred by the holders of these rights. The terms for determining such compensation and the modalities of its payment will be set by Member States.

(5) Paragraphs 3 and 4 shall not apply to securities where the absence or restrictions of voting rights are compensated for by specific pecuniary advantages.

(6) Member States may provide that paragraphs 2 to 5 shall not apply to companies referred to in Article 1(1) for a period of five years from the date of the first listing of the company's securities on a regulated market of a Member State.

(7) This article shall not apply to securities which are held by Member States in accordance with the Treaty for reasons of public security, defence or national security.

55.  Since we met the Minister there have been two important developments affecting this Article. First, the text of Article 11 has been amended to afford protection to securities held by Member States on public security, defence and national security grounds. The new text is set out in the box above. This change has, in the Government's view, substantially reduced the impact of Article 11 on golden shares (p 31). Second, on 13 May, the Court of Justice handed down its judgment in the case brought by the Commission against the UK in respect of its golden share in British Airports Authority (BAA).[18] The Court reiterated that the EC Treaty prohibits all restrictions on the movement of capital between Member States and between Member States and third countries and that direct investments in the form of participation in an undertaking by means of shareholding or the acquisition of securities on the capital market constitute capital movements.[19] The Court rejected the UK Government's argument that the measures at in issue in relation to BAA were solely the application of private company law mechanisms. The Court declared that by maintaining in force the provisions limiting the possibility of acquiring voting shares in BAA as well as a procedure requiring consent to the disposal of the company's assets the UK had infringed Article 56 TEC.

56.  It is clear, however, from the earlier "golden share" judgments[20] and the case brought against Spain[21] heard alongside that against the UK, that while golden shares may entail restrictions on the movement of capital between Member States Member States may be justified in having a degree of influence within undertakings that were initially public and subsequently privatised, where those undertakings are active in fields involving the provision of services in the public interest or of strategic services.[22] Such restrictions, when they apply without distinction to nationals of the Member State concerned and to other Community nationals, may be justified by overriding requirements of the general interest. To be justified in that way, the restrictions must also accord with the principle of proportionality.[23]

57.  We support the approach being taken by the Government. There should be no uncertainty as to the position of the UK's golden shares under Article 11.

The breakthrough/override procedure—contractual arrangements

58.  The effect of Article 11 would be to make restrictions on the transfer of shares and on voting rights unenforceable. The issue is a controversial one. The High Level Group looked at the question in some detail and could not come to a definitive view. They referred it back to the Commission and that has resulted in the contractual override provisions in the Commission proposal, which are still retained in the current text.[24]

59.   Both the Takeover Panel and the CBI expressed concern over the potential implications for contractual arrangements between shareholders. It was difficult to see what was offensive about contractual agreements between shareholders to which neither management nor the company were a party. Further, the scope of Article 11 was so wide that it would encompass certain arrangements which actually facilitated takeovers.[25] The Panel believed that the Article would be achieving the opposite objective to that intended (Q 23). The CBI agreed (Q 25).

60.  The Government believed that freely negotiated contractual arrangements should not be overridden by the Directive. Contractual provisions could assist takeover activity (Q 80). When asked whether the inclusion of contractual arrangements in Article 11 was a sticking point, the Minister relied: "I do not think that is something where we have come to a bottom line at the present time. We are certainly strongly arguing that these things should be taken out. We do think that the value of contractual arrangements is considerable and perfectly acceptable" (Q 81). The changes recently made to Article 11 have not alleviated the Government's concerns about the proposed override of contractual provisions (p 31).

61.  Article 11 would interfere, in our view unnecessarily, with freedom of contract and risks having the effect of striking down important and unobjectionable arrangements, some of which may be totally unrelated to the takeover bid and others which might, as the Takeover Panel indicated, be considered helpful. It has also been suggested that Article 11 could even interfere with normal market trading.[26] We agree with the Government that contractual rights should not be overridden and therefore that they should be taken out of Article 11.

Multiple voting rights

62.  The override procedure, as originally set out in Article 11, would not have affected the rights of dual or multiple voting shares. It was reported that opponents of the Directive in Germany were unhappy that the Directive permitted multiple voting rights, which are illegal in Germany, but outlawed defence measures (poison pills) which are more common in that country. On the other hand, a number of Member States (in particular Sweden, Finland and Denmark) have multiple voting share arrangements. Other Member States have similar kinds of pre-bid defensive measures.[27]

63.  The Minister acknowledged that there were conflicting views on the issue of multiple voting rights: "A wide variety of differential share structures are possible in the UK but I recognise that there are those in the UK who have argued cogently in favour of retaining the flexibilities of the existing system. I think it is fair to say that differential share structures have been generally been disapproved of by the markets, particularly the institutional investors, and such structures are now rare among our listed company community. Institutional investors have viewed positively the possible override of multiple voting rights and indeed on balance it is considered that the disadvantages resulting from the impact domestically through override of multiple voting rights are outweighed by the possible openings elsewhere in Europe for UK companies that will result" (Q 55).

64.  The CBI considered that the breakthrough provision should extend to multiple voting rights. They recognised, however, that there were both political and practical difficulties in doing so. Mr Oliver said "there are some significant issues that are raised by abolishing multiple voting rights and principally the question of should people be compensated for the loss of those multiple voting rights" (Q 9). Mr Remnant, for the Takeover Panel, doubted whether it would be possible to reach agreement on the scope of Article 11 and was concerned that certain countries, especially Germany, would suggest Article 11 should be dispensed with entirely provided Article 9 (preventing management taking frustrating action without shareholder approval) were also deleted. The Panel considered Article 9 to be absolutely fundamental to investor protection and therefore to the protection of UK investors in European companies (Q 26).

65.  The Greek Presidency has put forward proposals to address the issue of multiple voting rights in Article 11. The Minister believed that the approach to multiple voting rights now being proposed was "a positive development" (Q 57). The effects of the latest text would be greater in other Member States than in the UK because there were few UK listed companies with multiple voting rights. The Government believed that the override of multiple voting structures might increase the opportunities for UK companies to engage in takeover activity elsewhere in the Union. The Minister acknowledged that detailed consideration would need to be given to devising a workable compensation regime in implementing legislation (p 31). The CCBE (Council of the Bars and Law Societies of Europe) has argued that any dispute on the amount of compensation should not be allowed to frustrate the bid. There should be two separate legal phases, one concerning the bid and its completion and the other concerning the determination of fair value compensation.[28]

66.  A number of objections have been raised concerning the treatment of multiple voting rights proposed by the Greek Presidency. The main objection is that the Directive would no longer be limited to regulating transactions and behaviour but would be extending its reach into property rights. It is argued that Article 44(2)(g) TEC, the legal basis for the Commission's proposal, cannot be used to modify property rights. Further, multiple votes are part of the "system of property ownership" which the Treaty cannot prejudice (Article 295 TEC). Economic and practical arguments have also been put forward.[29] Uniform governance structures are not a prerequisite for an open takeover market. Sweden, which permits multiple voting rights, has one of the highest proportions of foreign ownership of the capital of listed companies. Finally, it is argued that the abolition of multiple votes would not necessarily create a level playing field because other devices, such as pyramid ownership structures and non-voting shares, can also act as barriers to takeovers.[30]

67.  We agree with the Government that the Directive should provide for multiple voting rights to be overridden. But we aware of the sensitivity of this issue in some Member States, especially the Scandinavian countries, and the practical problems and delays which could arise in fixing appropriate compensation in a particular case. Most careful consideration needs to be given to the compensation issues raised. It is for consideration whether more should be said about compensation rights in the Directive. Ideally, the basic principles should be spelt out. In any event, the Directive should expressly provide that disputes over compensation should not be permitted to delay or frustrate the bid.

Employee representation

68.  The 1996 draft Directive was amended in the European Parliament to give employees certain rights to information, including the prompt disclosure of the bid to representatives of the employees. This was perceived to be a potential problem when the Committee examined the original proposal. The Directive retains provisions from the Conciliation text requiring the prompt disclosure of the bid to employees' representatives (Article 6(1)) and requiring the board of the target company to make public a document setting out its opinion on the effect of the bid on all interests of the company including employment (Article 9(5)). Article 9(5) also provides that where the board of the target company receives in good time a separate opinion from the employees' representatives, this should be appended to the offer document. Further, the Directive expressly recognises employees' rights under the European Works Council Directive, the Collective Redundancies Directive and the Information and Consultation Directive[31] (Article 13).

69.  The draft Directive has been criticised by those representing employees' interests on the grounds that Articles 6(1) and 9(5) only require representatives of employees to be informed; they are not required to be consulted. Further the references to the existing Directives, though welcome, needs strengthening. None of three Directives mentioned in Article 13 sets rules tailored specifically to takeover bids. Nor do they implicitly provide that representatives of the employees of the offeror and offeree companies have to be informed and consulted before decisive steps in the bidding process are taken. It has been suggested that Article 6(1) should impose an obligation for the offeror to inform and consult employees' representatives before a final decision to make a bid is taken. Article 9(5) should oblige the offeree company board to inform and consult the representatives of the employees on the position to be taken on the bid.[32]

70.  We asked the Panel and the CBI whether they were content with what was now being proposed. Mr Remnant said: "We are happy with what is in the Directive at the moment because it basically confers rights of receipt of information on employees but it does not confer rights of consultation or decision making. We would not support extensions of the Directive into those areas and it is possible there will be various amendments proposed, especially from within the Parliament, in that regard. We think that it is unrealistic to seek to harmonise laws of Member States on such a sensitive topic as employee rights in a Directive on takeovers which is designed for the protection of minority shareholders not employees" (Q 16). The CBI was especially concerned that the Directive should not impose an obligation to consult before the bid was made public. They believed that the draft Directive (Article 6(2)) was not sufficiently clear on this (Q 16). The CBI also queried what practical effects the Information and Consultation Directive might have: "The issue relates to the timing of the requirement to inform the employees of the bid. There is significant concern that the provisions of the Information and Consultation Directive could require employees to be informed before the offeror is ready to go public and launch its bid. Issues of market abuse, insider information and false markets and the like arise" (p 13).

71.  The Minister said that the Government supported both Article 6 (requiring the respective boards of the offeror and offeree companies to inform employees once the bid is made public) and Article 9 (enabling an employee statement to be annexed to the opinion of the board of the target company on the merits of the bid). In the Government's view, Article 13 gave no new rights but simply acknowledged the existing law. As regards the Information and Consultation Directive, the Minister said: "that Directive actually gives employees specific rights to be consulted about businesses they work for, including the prospects for employment. There are safeguards in relation to price-sensitive information not yet publicly disclosed, for obvious reasons. We think we should consider the necessary implementing measures, including the interaction with the takeover regime, and we are looking to publish a consultation document and draft legislation later on this year" (QQ 85, 88).

72.  We reiterate the view expressed in our earlier Report. Employee consultation provisions should not be allowed to frustrate the process of takeovers. Consultation of employees in advance is, we believe, impractical and would seriously jeopardise any necessity to keep negotiations secret. We note that the Government is to consult on the implementation of the Information and Consultation Directive.[33] That should help to clarify the position. We do not believe that it can be right, however, that the Information Directive should be allowed to undermine the objectives of the Takeovers Directive.

Comitology

73.  Article 17 of the draft Directive would establish a comitology committee and give the Commission the power to make detailed rules on the equitable price (Article 5(4)), cash consideration (Article 5(5)) and on the contents of the offer document (Article 6(3)). Both the Takeover Panel and the CBI queried the appropriateness and desirability of using a comitology committee to set such minimum standards. Mr Oliver, for the CBI, said: "If this is a minimum standard Directive that is what it should set. There is reason for there to be a review of the minimum standards to see if they are working properly but then amendments should be made to the Directive in the normal and proper course of making a Directive" (Q 45). Mr Remnant (Takeover Panel) said: "So our preference would be to go back to what was in the last draft, which was a Contact Committee which was responsible for proposing future amendments in the light of practical experience, but those amendments would go through the normal legislative procedure involving the Parliament and the Council" (Q 13). The CCBE could accept that arrangements for publishing the bid documents could be left to the European Securities Committee but not rules for determining an equitable price and the nature of the consideration. These matters had a "constitutional connotation (protection of ownership)".[34]
Article 17—Committee procedure

(1) The Commission shall be assisted by the European Securities Committee established by Commission Decision 2001/527/EC (hereinafter referred to as the "Committee").

(2) Where reference is made to this paragraph, Article 5 and 7 of Decision 1999/468/EC shall apply, having regard to Article 8 thereof, provided that the implementing measures adopted according to this procedure do not modify the essential provision of this Directive.

(3) The period referred to in Article 5(6) of Decision 1999/468/EC shall be three months.

(4) Without prejudice to the implementing measures already adopted, on the expiry of a four-year period following the entry force of this Directive, the application of its provisions requiring the adoption of technical rules and decisions in accordance with paragraph 2 shall be suspended. On a proposal for the Commission, the European Parliament and the Council may amend the provisions concerned in accordance with the procedure laid down in Article 251 of the Treaty and, to that end, they shall review them prior to the expiry of the period referred to above.

74.  The Government were also opposed to the inclusion of comitology provisions in the Directive. They did not consider that comitology had a role to play in the Directive. The Directive is concerned with minimum standards to be applied according to Member States' takeover rules. Member States had different perspectives on the Directive. Some saw it as relating to financial services, others as concerning company law. The Government was in the latter group, which saw no place for comitology in the Directive. The Government would be pressing for the deletion of the references to comitology (QQ 89, 90).

75.  Already the negotiations have led to the suggested deletion of Article 5 (6), which would have triggered the Article 17 comitology procedure for detailed rules on the equitable price (Article 5(4)) and on cash consideration (Article 5(5)). But Article 6(4), providing for the Commission to make detailed rules on the offer document, remains. Though this is the least troublesome of the three matters originally proposed for comitology committee procedure we share the view of our witnesses that the Directive is a minimum standards Directive and there should be no need for the Commission to be given the power to make further, more detailed, rules under the Directive and therefore no place for comitology here. We support the Government in pressing for the deletion of all references to comitology in the Directive.


14   R v Panel on Takeovers and Mergers, ex.p. Datafin plc [1987] Q.B. 815. Back

15   Takeover Bids, 13th Report, 1995-96, HL Paper 100, at para 97. Back

16   ie. dealings by offerors and persons acting in concert with them. The City Code recognises that parties often "act in concert" in connection with takeover offers and that rules which only apply to an offeror could easily be circumvented by that offeror arranging with another person to acquire shares (or take other actions) on its behalf. We commented on the omission of concert parties from the 1966 text in our earlier Report (13th Report, 1995-96, HL Paper 100) at para 113. Back

17   In his letter of 29 May 2003, Alan Johnson MP, Minister of State for Employment Relations, Industry and the Regions denied the allegation in The Times of 19 May that the UK had opposed the adoption of the Takeovers Directive and sought to "wreck the Agency Workers Directive". The correspondence is printed with this Report, at pp 35-36. Back

18   Case C-98/01 Commission v United Kingdom. Judgment of 13 May 2003. The Commission took issue with the rights attaching to the UK's special share in BAA plc. The Articles of Association of BAA, a privatised undertaking which owns a number of airports in the UK, create a special share held by the UK Government which requires the Government's consent to certain of the company's operations (winding-up, disposal of an airport). The Articles also prevent the acquisition of more than 15 per cent of the voting shares in the company. Back

19   The Court regarded it as settled law that Directive 88/361, [1988] OJ L178/5], could be used for the purposes of defining what constitutes capital movement. Case C-98/01, judgment at para 39. Back

20   C-367/98 Commission v Portugal, C-483/99, Commission v France, and C-503/99, Commission v Belgium. Judgments of 4 June 2002. Back

21   Case C-463/00 Commission v Spain. Judgment of 13 May 2003. Back

22   In the BAA case, the UK Government expressly stated that it did not wish to rely on any justification based upon possible overriding requirements relating to the general interest. The Court therefore saw no need to examine the provisions in question ton see whether they could be justified on that basis. Case C-98/01, judgment at para 50. Back

23   ie. they may not go beyond what is necessary in order to attain the objective which they pursue. Back

24   Q 81. Back

25   For example, if an offeror, who was also a shareholder, had sought and obtained from another shareholder an irrevocable undertaking to accept an offer and as part of that arrangement the person giving the irrevocable undertaking agreed not to sell his shares to another bidder, not to vote them or to vote them in a particular way, then that agreement, which was not uncommon in practice, would fall foul of Article 11 and be rendered unenforceable (Q 23). Back

26   A commitment to sell shares to a third party or an agreed option or pre-emption right which was bought, and which in either case is uncompleted at the breakthrough date, might be avoided by a shareholder seeking to argue that this was a restriction on selling to the bidder. Submission of 5 March 2003 of City of London Law Society Company Law Sub-Committee and the Law Society of England & Wales' Standing Committee on Company Law to EC Commission and to the European Parliament Committee on Legal Affairs and the Internal Market. Back

27   Q 56. Back

28   Comments by Hans-Jurgen Hellwig, Chairman of the Company Law Committee and First Vice President of the CCBE, at the public hearing on the Directive held by the European Parliament Committee on Legal Affairs and Internal Market. Brussels, 28 January 2003. Back

29   A summary of the economic arguments was presented by Professor Joseph A. McCarthy to the European Parliament at the public hearing on the Directive held by the European Parliament Committee on Legal Affairs and Internal Market. Brussels 28 January 2003. Back

30   Stefano Micossi, Dangerous precedent could undo the takeover directive, European Voice 15-21, May 2003. Back

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

32   Proposal made by Joan Bloemarts, Netherlands Trade Union Confederation FNV, at the public hearing on the Directive held by the European Parliament Committee on Legal Affairs and Internal Market. Brussels 28 January 2003. Back

33   A DTI Discussion Paper, High Performance Workplaces: the Role of Employee Involvement in a Modern Economy, was published in July 2002 preliminary to the Government presenting specific proposals for implementing the Information and Consultation Directive. Back

34   Comments by Hans-Jurgen Hellwig, Chairman of the Company Law Committee and First Vice President of the CCBE, at the public hearing on the Directive held by the European Parliament Committee on Legal Affairs and Internal Market. Brussels, 28 January 2003. Back


 
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