Select Committee on European Union Twenty-Eighth Report

CHAPTER 4: Conclusions

76.  Since we last looked at the proposed Takeovers Directive it has undergone a number of changes. The Directive remains a minimum standards measure, laying down general principles to be applied, basic procedures to be followed and standards to be met. But in a number of respects it has been improved. For example, a mandatory bid rule is now obligatory. But we cannot yet give the Directive our unconditional support.

77.  A major concern from the UK standpoint has been that the Takeover Panel should be able to carry on its role of enforcing the City Code as it has done, most effectively and successfully, for over thirty years. The Directive would allow the Panel to be appointed as the supervisory authority for the UK. The Takeover Panel was generally positive about this. Subject to a small number of changes (for example, the jurisdiction rule) the general principles and minimum rules in the Directive can be accommodated within the UK system of supervising takeover bids. Some amendments to our company law would also be needed, but the Government does not believe that these would be problematic.

78.  However, in one major respect the Directive has not changed and remains a potential source of difficulty for the UK. The Takeover Panel and the City Code would have to be put on a statutory footing. That would inevitably increase the risks of litigation, including tactical litigation aimed at disrupting a takeover bid. The Government has negotiated a special provision (Article 4(6)) designed to enable it to maintain, so far as is possible, the present position when implementing the Directive in UK law. It is generally agreed that there must be minimal scope for litigation. Article 4(6) is helpful, but is only part of solution. Any lack of clarity in the Directive and in its subsequent implementation may also lead to litigation.

79.  Looked at from the narrow view of the domestic impact of the Directive on the conduct of bids in the UK, there seems to be little, if any, advantage to be gained from the Directive. We already have an efficient and effective system. The Directive would not necessary lead to any significant improvements. Indeed it could simply provide more opportunities for tactical obstructive litigation. There is, however, a wider UK interest to consider.

80.  There is, we believe, a clear UK interest in the Directive improving the position in other Member States, and in particular opening up markets for UK companies and making more secure the position of UK investors in Europe. Accordingly in assessing the balance of advantages in relation to the Directive one must look outside the UK and towards the rest of Europe to try to ascertain whether the Directive would introduce certain minimum standards which are not currently observed in some other Member States which are important markets. All our witnesses believed that the Directive could have some positive and beneficial effects. It would introduce a significant measure of harmonisation, with the potential for increasing shareholder protection and opening up markets in other Member States for UK companies. But that support for the Directive was not unqualified. Some provisions of the Directive need to be improved. Others must not be diluted.

81.  There are three places where we believe the Directive contains serious defects or shortcomings. There should be a common minimum threshold for triggering a mandatory bid (Article 5). The rules on jurisdiction need simplifying, giving precedence in all cases to supervisory authorities in the State of incorporation of the target company (Article 4). Contractual arrangements between shareholders should not be overridden and thus should be excluded from Article 11 (the breakthrough rule). The present provision overriding multiple voting rights needs to be retained, but with the addition of common rules on compensation (Article 11).

82.  There is no doubt the successful negotiation of the Directive is going to be difficult, not least in relation to those matters listed in the previous paragraph. It has been reported that when the Directive was discussed at the recent Competitiveness Council no agreement could be reached.[35] A number of Member States indicated readiness to accept the latest text with the omission of Articles 9 (shareholder control of defensive measures) and 11 (the breakthrough rule). Other countries considered that the notion of common rules would be lost without the inclusion of those Articles. We agree with those countries and hoped that the UK Government will be arguing most strongly for the retention (and indeed strengthening) of both Articles 9 and 11. If these provisions are not included the UK should firmly reject the proposal.

83.  In summary, the Directive requires a difficult judgement to be made, balancing the potential advantages that would be derived from UK companies/investors in Europe against potential disadvantages with the risk of increased litigation in the UK. If that balance is to tilt in favour of the Directive, there are some important changes which need to be made. Further, key provisions, such as Articles 9 and 11, must not be given up or weakened.

Summary of detailed conclusions and recommendations

84.  Our detailed conclusions and recommendations are as follows:

  —It is important that the Takeover Panel and the City Code should be able to continue to police takeover bids in the UK (para 33).

  —It is not possible to remove [entirely] the risk of tactical litigation. Consultation on implementation of Article 4(6) should not be delayed (para 38).

  —Article 5(1) should set down a minimum threshold for mandatory bids. Member States would be free to set a lower threshold but the Directive would stipulate a minimum level of shareholder protection across Europe (para 42).

  —It is 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 (para 46).

  —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 (para 49).

  —It is not desirable to have split jurisdiction. Supervision should be the responsibility of the authorities of the State of incorporation (para 53).

  —There should be no uncertainty as to the position of the UK's golden shares under Article 11 (para 57).

  —We agree with the Government that contractual rights should not be overridden and therefore that they should be taken out of Article 11 (para 61).

  —The Directive should provide for multiple voting rights to be overridden. It is for consideration whether more should be said about compensation rights in the Directive. Ideally, the basic principles should be spelt out. The Directive should expressly provide that disputes over compensation should not be permitted to delay or frustrate the bid (para 67).

  —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 (para 72).

  —There is no place for a comitology committee in this Directive (para 75).


85.  The Committee considers that the Commission's proposal for a Directive on takeover bids raises important questions to which the attention of the House should be drawn, and recommends the Report to the House for debate.

35, 20 May 2003. Back

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