Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 60-79)



  60. There is a provision, I think, in the proposal which will allow individual Member States to take action to try to prevent excessive tactical litigation.
  (Miss Johnson) Yes.

  61. Has the Government got any plans in that direction?
  (Miss Johnson) We certainly recognise the value of Article 4(6), which I think is what you are referring to, which is taken from the text. The Department can be assisted by the Panel and have taken considerable steps to ensure that as good a text as could be was negotiated on Article 4(6). As a result of our work together on Article 4(6), I think it is very important that we have that provision in there. We think 4(6) is as good as we possibly could have arrived at and it is intended to make the maximum use of the flexibility provided by Article 4(6).

  62. Are there any formulated plans as to how this is going to be done?
  (Miss Johnson) We will want to make maximum use of it in order to maintain as far as is possible the present legal position which has been established by the courts in respect of takeover bids and obviously we would look at consulting widely on draft implementing legislation but we are some way off that, as you will appreciate, because all of the discussions and negotiations are still very much ongoing.

  63. Yes. What benefits do you think are likely to be derived from these proposals so far as British companies are concerned?
  (Miss Johnson) In terms of having the Directive itself, I think there is quite a number of potential benefits. First of all, there is a possible increase in European takeover activity itself. As I have said, that has got to be seen in the context of the financial services' action plan and I think there are clear gains there to be had in terms of the Cross-borders Mergers Directive and the potential for a vigorous business environment within Europe in which UK companies can plan an energetic part. Secondly, the enhanced shareholder protections which will come across Europe, most importantly the extension of the mandatory bid and the improved rule on equitable pricing, are going to be a big assistance, I think, from a UK point of view and indeed we also like the impact generally on good corporate governance and the practice there and the increased investor confidence which should flow from that.

  64. The Directive of course lays down minimum standards which each Member State must introduce in this area. Is the Government content with the level of the minimum standards the Directive proposes?
  (Miss Johnson) We think the standards do not replicate the sophistication of our own takeover regime and we wish they went further but I think, especially in the light of what happened to the earlier conciliation text, one has to be realistic about what can be achieved on a European front here. For example, there have been long drawn out fruitless discussions in the past on the issue of a common threshold. I think that setting the mandatory bid threshold is of key importance. It is where the balance is actually to be struck in the Directive between facilitating the Takeover Directive and the need to protect shareholders. So I think we are realistic about it and, as I said, it is always going to be a balance about the attractions of having it but we do think that there are certainly things here which do not go as far as our own takeover provision does.

  65. Are there any sensitive points here that you are going to be pressing for in the negotiations for improvement? The obligations on the board of directors, for example: are you content with those, Article 9?
  (Miss Johnson) On Article 9, the management provisions, as a basic position on the Takeovers Directive, first of all, as I said, we agree with the EU's position that we need a genuine contribution to a single market which does make a difference to the way the single market works and also improved protections for shareholders. I think that is difficult to express in terms of specific Articles. We certainly would not want to give up Article 4(6), which we were talking about a moment ago. Article 9 is also clearly very important, as you mentioned, and we recognise that that 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.

  66. What about Article 5, in particular in regard to the cash consideration, the last sentence of Article 5(5). It is one of the new provisions. It says "Member States may provide that a cash consideration should be offered".
  (Miss Johnson) Yes. We thought that the October 2002 proposal had two weaknesses. It would not have ensured that all Member States required liquid securities consideration in all cases and that was a step backwards from the conciliation text and also the higher standards imposed by the UK of cash consideration in all mandatory bid cases would have been prohibited. We have pursued both those matters vigorously in the working groups and that has taken time but we now think that they are satisfactorily resolved in the latest presidency compromise proposal—

  67. This proposal simply says that Member States may provide that there be a cash consideration, as opposed to making it compulsory that there should be a cash consideration offered. I am looking at the 7th March version.
  (Miss Johnson) Yes. I have not got the text in front of me. In our view, the matter has been satisfactorily resolved. The higher standard of shareholder protection offered by Member States such as our own, which actually requires a cash alternative in all cases, would not have been permitted under the February compromise, as I understand it, and that has long been a safeguard that we wanted to see. It has taken rather longer but in our view it is now satisfactorily embodied in the March compromise.

  68. Minister, may I press you on this. The March version says "Member States may provide". The corollary of that is that they need not provide. Is there not a very strong case for saying it is essential that shareholders who want an out should be able to have an out in cash terms?
  (Miss Johnson) This at the moment has been the best that I think we can achieve. It is a marked improvement over the March presidency compromise text. 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.

  69. Although there need not be a cash consideration on offer on takeovers in some Member States?
  (Miss Johnson) That is one of the sorts of difficulties for the level playing field question and for the question which we believe is important, of transparency and treatment of shareholders, but from our point of view obviously it would be the case in the UK, as it always has been the case in the UK, and it would be permitted to be continued in the UK, as our existing provision is under the proposals.

  70. When we have implementing legislation in this country, as we will need to have, presumably this will require a cash consideration to be offered?
  (Miss Johnson) I do not think we would want to get away from our long-held position on this and indeed we have supported this and pursued it vigorously in the negotiations but, as I said earlier on, one has to be realistic about what can be achieved. As I opened up by saying on this point, it is the case that we wish there was more sophistication in aspects of the proposals but we recognise that our own regime is more sophisticated and we are certainly planning to maintain our existing regime.

Baroness Thomas of Walliswood

  71. I was actually going to raise the subject of subsequent legislation. Your responses indicate that in many areas you think, and indeed it is clear from the papers before us that that is the case, that our regime is already, as it were, of a higher level, so what are the areas in which you think subsequent legislation will need to be carried forward in this country to implement these proposals?
  (Miss Johnson) I do not think that we have got in any detail to that stage in things. This is before

   you the current, and indeed very current, as you know, state of the negotiations. We would have to look and see the detail and there is obviously a lot of implementing work to be done but we are still in a stage of the negotiations where our resource, which is not large, is devoted actually to those negotiations rather than to the implementation necessary.

  72. You would wish, perhaps, to designate an organisation or an authority to oversee the process?
  (Miss Johnson) You are inviting me to speculate. I do not think I wish to be drawn into speculation at this stage given the importance of getting it right, as it were. As I said earlier, there would be discussion and certainly full consultation on anything which required any legislation for implementation purposes and it would be at that stage that we would expect an extensive dialogue with interested parties and indeed would obviously be seeking the views particularly of key parties in the City.

  Baroness Thomas of Walliswood: Thank you.


  73. Minister, could I ask you about the jurisdictional problem which arises under Article 4? As I read Article 4, which is intended to identify the Member States who have to take responsibility in a particular case, 4(2) says: "(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." It is going to be rather unsatisfactory, is it not, for a country which is not the country of the company, where the company is incorporated, to have the responsibility of regulating the duties of directors? How is this going to work?
  (Miss Johnson) We would certainly prefer it if the supervisory body was that of the country of incorporation in all cases. That will be our preferred position on the question of jurisdiction. But in fact the provisions have not altered since the former proposal, which failed, and that arrived at a consensus which we felt we could live with even though it was not ideal, and I think you have just sketched out what that was.

  74. Could you explain how we can live with this?
  (Miss Johnson) It is less than ideal, I entirely accept that. It has to be viewed in the context that most UK companies of course are listed in London so the jurisdiction will remain entirely in the UK but it 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. So we would have a rule to refer to. Matters of company law and information to employees would remain with the state of incorporation. In the case of companies listed and incorporated in different Member States, as I said, there is currently no rule. We would end up with basic principles out of this by which issues related to the overlap of regulatory authorities could be dealt with, albeit not, as you say, based entirely upon the incorporation status, as we would prefer.

  75. Going back to Article 9, that is speaking of obligations of the board of the offeree company, so we are looking at the directors, what they must do and what they must not do. One is also, I imagine, looking at what remedies there may be against directors, and so on. These are company law matters in respect of which ordinarily speaking one would be applying the law of the place of incorporation. For my part, I find it very difficult to see how these proposals can work when you are going to have the law of some other country imposed upon the directors who are subject to the law of the country of incorporation.
  (Miss Johnson) First of all, we are talking about listed companies here. This provision obviously only relates to those which are listed or quoted and in the case of most UK companies they are actually listed in London so it would be a distinct minority of cases where there was any kind of issue in any event. That is my understanding of it. Also there are practical provisions in the Directive which we think will help with some of the difficulties which you are identifying, first of all about cooperation and the exchange of information but more relevantly the re-establishment of a contact committee to promote discussion of the practical issues between Member States and also a review provision, but the UK will press for this to be reduced to three years (as it is in the conciliation text).

  76. You have told us that the Government did press for the jurisdiction to be based upon the authority in the country of incorporation. What reasons were put forward which led to the failure of this to obtain general approval?
  (Miss Johnson) I could perhaps ask Mike Edbury to answer that because he was present at the discussions.

  77. I find it very difficult to see what sensible arguments could be advanced against that.
  (Mr Edbury) Yes. Thank you, my Lord Chairman. We also find it extremely difficult to find any reasonable arguments as to why we should not just stick with a law of incorporation. I think it is a wider question that is going on within this Directive about whether this is really a financial markets instrument or a company law instrument and that is going on in a number of contexts, for instance, the comitology provisions within the Directive. The same argument is being had, is this about financial supervision or is it really about company law? The UK's position is that it should be about company law. Company law is the basis and that is in fact what we have intensively lobbied other Member States and the Commission about. Ministers have raised it directly with high officials in the Commission but sadly the result of those bilaterals is that we do not feel at the moment that we would be able to change this text. 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.

  78. Yes, I follow that last point. It is a sort of practical point, I guess, but I must say as a lawyer I would have thought that provisions of this sort would be good for lawyers but not for many other people?
  (Mr Edbury) I agree entirely.

  79. Is this now, a fait accompli? Has the Government got no scope for still pushing for a more sensible provision?
  (Miss Johnson) I think one has to judge these things all the time when you are negotiating, what there is scope for opening up and what there is not scope for opening up, but I think much of the Directive has proved so very difficult that actually opening up things, albeit which are slightly uncomfortable and which we might regard as less than ideal a compromise has been reached, is something where you do have to think carefully about the attractions of opening it up with the danger always that you get something less attractive than what you have got at the moment as a result.

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