Select Committee on European Union Minutes of Evidence

Letter from The Takeover Panel

  Thank you for your letter dated 13 March. I am happy to comment on the revised Presidency compromise proposal made earlier this month. I have confined my remarks to the changes made in that proposal, rather than repeating (other than where necessary) my views given in oral evidence before the Committee on 12 February.

1.   Footnote 1 on page 2

  The suggested Council minute is, I believe, designed to address those who are concerned about an apparent lack of level playing field between Member States subject to the Directive and countries outside the EU, such as the United States, which operate a different system of takeover regulation. To the extent that the minute states no more than the existing legal situation, then in theory it should be nothing to quibble with but I understand that the Commission's legal services department has been asked to provide an opinion on the legality of such a minute and also of alternatively including such sentiments within the main body of the Directive.

  From the Panel's perspective, level playing field issues are less important than the fundamental protections, especially in the shape of Articles 5 (mandatory bid) and 9 (frustrating action), afforded by the Directive to minority shareholders of the target company. These shareholders should have a right to such protection, irrespective of whether the offeror is subject to the jurisdiction of another Member State or not.

2.   Recital 18 (page 4), Article 2(1)(g) (page 8) and Article 11 (page 17)

  These changes relate to the inclusion of multiple voting securities within the scope of the restrictions set out in the breakthrough provision of Article 11.

  Although Articles 9 and 11 both relate to the level playing field, they should not be seen as inextricably linked: Article 9, which stipulates that frustrating action cannot be taken without the authorisation of shareholders given at the time of the bid itself, is a fundamental provision of investor protection, whereas restrictions placed on multiple voting rights within the new Article 11 are concerned with redistribution of property rights between different classes of shareholder.

  Be that as it may, parties within the European Parliament and the Council are making such linkage and believe that a level playing field can only be created if the Commission's text is amended either to include multiple voting securities within the ambit of Article 11, whilst leaving Article 9 as is, or to leave Article 11 as is whilst diluting the provisions of Article 9. The Presidency compromise proposal opts for the former course and, in principle, the Panel believes that this is preferable, given our longstanding and strongly held belief that an effective Article 9 is an absolutely critical element of this Directive.

  However, there are some worrying practical consequences of the incorporation of multiple voting securities within Article 11, which require still to be addressed if the Directive is to function effectively. First, how does one calculate the "75 per cent of the securities of the offeree company" which a bidder needs to have acquired to be able to exercise his breakthrough rights? It obviously cannot be by reference to voting rights, but it might be by reference to nominal capital, to market value or some other methodology. The second key issue relates to possible compensation for rights removed as a result of the breakthrough rule. The revised wording of Recital 18 leaves this up to Member States to decide, one suspects because the draftsman cannot produce wording for an appropriate method of calculating compensation which is both fair and certain. Failure to grasp this nettle at the EU level may well lead to confusion and a lack of effective harmonisation at a national level, even accepting that Member States could devise mechanisms which work satisfactorily.

  The Panel believes that, if multiple voting rights are to be included within the scope of Article 11, the Article must be drafted clearly so that it is plain from the start of any bid what constitutes the capital to be bid for and what compensation, if any, is payable. A bidder must know when he first makes his bid what he has to pay for the company and exactly what and how many securities he has to buy to exercise his breakthrough rights. Otherwise, if there is any uncertainty on these matters, it will mean that nobody will ever bid for companies with differential voting rights and the Article will achieve precisely the opposite effect to that intended. Protracted litigation must not be a feature of deciding either issue.

3.   Article 5 (page 11)

  All the changes which the Presidency is proposing to make to the key mandatory bid provisions of Article 5 have been promoted by the UK and are strongly supported by the Panel.

4.   Articles 14 and 15 (pages 19 and 20)

  These Articles relate to squeeze-out rights and reciprocal sell-out rights, which the Panel views as falling principally within the realms of company law rather than takeover regulation. The Law Society has proposed drafting changes to these Articles which are supported by the Panel.

5.   Article 18 (page 21)

  The transitional period set out in Article 19 will end in 2010. The changes made to Article 18 mean that Article 4(2), which contains the controversial shared jurisdiction provisions which the Panel regards as thoroughly unacceptable, will only be reviewed in 2015, ten years after implementation of the Directive. This 10 year period contrasts with three years specified in the failed Directive of 2001 and five years in the Commission's text. The Panel is still hopeful that Article 4(2) will undergo fundamental changes before the Directive is passed and indeed a satisfactory amendment has been proposed by the rapporteur of the European Parliament's Legal Affairs Committee (and others) to address precisely the Panel's concerns. However, were Article 4(2) to remain unaltered, then its operation should be reviewed under Article 18 in line with the last Directive's suggested timescale of three years.

  If you or the Committee have any questions on the points made in this letter, please let me know.

21 March 2003

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