Select Committee on European Union Minutes of Evidence



Explanatory Memorandum submitted by the Department of Trade and Industry on Council Presidency compromise proposal for a Directive of the European Parliament and of the Council (OTNYR) of 28 April 2003 concerning takeover bids

Subject Matter

OVERALL OBJECTIVES

  1.  The Greek Presidency of the Council have issued a further compromise proposal for a draft Directive on takeover bids which seeks to establish a framework for the protection of shareholders throughout the European Union and to provide for minimum guidelines on the conduct of takeover bids. It would apply to the regulation of takeover bids for companies incorporated in the EU whose shares are traded on a regulated market in the EU.

  2.  The current proposal builds upon the Commission proposal dated 2 October 2002 and the subsequent Presidency compromise proposals and results from discussions in the Council Working Groups held following publication of the original Commission proposal. The principal changes that have taken place in the text of the proposed directive since the first Greek Presidency compromise proposal dated 14 February 2003 (subject of Department of Trade and Industry unnumbered explanatory memorandum (OTNYR) dated 4 March 2003), together with the Government's comments on these, are set out at Annex A.

HISTORY

  3.  Political agreement to a directive on takeover bids remains an objective of the Financial Services Action Plan, agreed to by Heads of State and Government at the Lisbon Summit in March 2000, for completion by 2005 and with the aim of creating an integrated financial market within the EU. Discussions on a possible takeover bids directive have been ongoing for approaching 20 years since the Commission announced its intention to propose such a directive in 1985. A first proposal for a directive made by the Commission in 1989 included detailed rules on which it became clear it would be difficult to obtain agreement in Council. Consequently, a revised proposal was published by the Commission in 1996 on the basis of a framework directive containing general principles, but leaving considerable latitude for Member States and the relevant takeover supervisory authorities to deal with the detailed implementation of those principles.

  4.  The 1996 text was subject to extensive consideration within the Council and the European Parliament before, ultimately, a joint text of the directive was approved by the Conciliation Committee on 6 June 2001 (the "Conciliation Text") but failed by one vote to be adopted by the European Parliament on 4 July 2001.

THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS

  5.  Following the narrow failure of the takeover bids directive to be adopted in 2001, the Commission appointed a High Level Group of Company Law Experts to look into 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 of differential voting and control structures, such as shares with multiple voting rights or restrictions on transfer of shares or voting rights, across the EU);

    —  The definition of "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.

  6.  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/internalmarket/en/company/company/news/02-24.htm) on 10 January 2002.

  7.  To address the "level playing field" issue, the Group proposed:

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

    —  A solution known as "breakthrough" 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 exercising control of the target company (for instance, the right to dismiss the Board).

  8.  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).

  9.  In considering the High Level Group Report, the Commission held a Working Group Meeting on 7 February 2002, with company law experts from Member States and received subsequent representations from interested parties. The current proposal seeks to build upon the Conciliation Text, but includes a number of new measures which closely reflect the issues considered by the High Level Group.

PROVISIONS RETAINED FROM THE CONCILIATION TEXT

General principles

  10.  Member States would be required to ensure that their domestic regimes for regulating takeovers respected six general principles as follows:

    —  equivalent treatment for shareholders in the same class;

    —  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.

  11.  Member States would be able to provide for the supervisory authority to grant derogations from the rules set out in the text, provided that the general principles above were respected. The scope of such derogations under the new proposal is limited to types of circumstances determined at national level and/or other special cases. In addition, Member States' implementing measures could go beyond what is required by the directive.

Detailed provisions

  12.  Member States would be required to designate a supervisory authority which would be responsible for supervising takeover bids, and for ensuring that parties to a bid complied with the directive's requirements, as implemented by rules laid down by the Member State concerned. This would include a duty for parties to a bid to supply to the supervisory authority on request necessary information related to the bid.

  13.  The supervisory authority will 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. However, if that is not the case, the supervisory authority is that of the Member State on whose regulated market the shares are traded. Detailed provisions are also included to deal with the situation where the shares are traded on regulated markets in more than one Member State. The supervisory authority would be responsible for matters related to the consideration offered by the bidder and the bid procedure, whilst the rules applicable to matters of company law or information to employees would be for the law of the Member State in which the target company was incorporated.

  14.  The directive would require Member States to adopt a "mandatory bid" rule by which, where someone acquires a specified minimum percentage of a company's shares, thereby gaining control of the company, they would be required to launch a bid to all its shareholders for all of their holdings. The proposal leaves it to individual Member States to determine the percentage of voting rights which confers control of a company. This obligation would not 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.

  15.  Requirements as to the information which must be included in the public offer document made available to the target company's shareholders are set down to ensure that shareholders have proper information to make a decision on the bid. These requirements cover both the specific terms of the bid (such as the consideration offered for each class of shares and all conditions to which the bid is subject) but also issues related to the offeror's intentions with regard to the future business of the company (including with regard to the likely impact upon employees).

  16.  It is required that the bid must be made public in such a way as to avoid the creation of false markets in shares and that information and documents are made available to shareholders promptly.

  17.  Rules would also have to be put 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. The directive does not stipulate the content of these rules.

SUBSTANTIVE NEW PROVISIONS SINCE THE CONCILIATION TEXT

The Level Playing Field

  18.  Defensive measures—In line with the Conciliation Text, Member States would have to ensure that rules were in force which prevented the board of the target company—once it had been notified of a bid—from taking action which could frustrate that bid, without the prior authorisation of the shareholders. However, the former provision which would have allowed Member States in their implementing rules to permit the boards of target companies to issue new shares (subject to certain rules relating to the rights of existing shareholders) if they had the prior authorisation of shareholders given up to 18 months before the beginning of the period of acceptance of the bid is no longer present.

  19.  Disclosure and transparency—Detailed provisions requiring companies to disclose their share structure and control systems have been included to ensure that the market can identify differential voting mechanisms and other control devices across the EU. These matters are to be published in the company's annual report. Matters to be disclosed include:

    —  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); and

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

  20.  Additionally, it would be required that the board present an explanatory report on the above matters to a meeting of shareholders every year.

  21.  Breakthrough—The proposal seeks to adopt the principles of the High Level Group's breakthrough proposal whereby any takeover bidder acquiring 75 per cent or more of the "securities" (defined to mean "transferable securities carrying voting rights") of the target company would be able to override certain defensive structures both at any meeting summoned to consider possible defensive measures and at the first general meeting following completion of the bid. The types of structures overridden would include restrictions on the transfer of shares and voting rights, both in the company's articles and in contractual arrangements between either the company and shareholders or between shareholders of the company, and the rights of multiple voting shares (in a distinct and separate class and carrying more than one vote). The breakthrough procedure is not intended to apply to shares where restrictions on voting rights are compensated for by specific pecuniary advantages (in general terms within the UK, preference shares). Member States shall provide that appropriate compensation is paid where rights are removed as a result of breakthrough.

  22.  Review provision—ten years after the directive comes into force, the Commission will be obliged to examine whether, in the light of experience in applying them, any modifications are necessary to the defensive measures and breakthrough provisions.

Other additional measures

  23.  Employee rights—The Directive retains provisions from the Conciliation Text requiring the prompt disclosure of the bid to representatives of the employees and requiring the board of the target company to make public a document setting out its opinion on the bid on all interests of the company, including employees. The new proposal also specifically provides that, where the board of a target company receives in good time a separate opinion from the representatives of the employees, this shall be appended to this document. Additionally, the directive specifically recognises employee rights conferred elsewhere and, in particular, under the directives on the European Works Council, Collective Redundancies and Information and Consultation.

  24.  Equitable price—The proposal considerably extends the previous requirement under the Conciliation Text that any offer should be made to shareholders for all their shareholding at an "equitable price". 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 period itself). Member States may set out circumstances in which this general provision may be adjusted by the relevant takeover authority.

  25.  Squeeze-out and sell-out rights—Member States are required to put in place rules enabling a successful takeover bidder to acquire minority shareholdings ("squeeze-out rights") and parallel rights allowing minority shareholders to require the takeover bidder to buy out their remaining shares in these circumstances ("sell-out rights"). These provisions are designed to address the twin problems of disproportionate costs associated with small residual shareholdings following a bid and abuse of a dominant position by a majority shareholder. There is some latitude as to the thresholds that Member States set at which these provisions are triggered, which must not be lower than the acquisition of 90 per cent of the shares and, in respect of squeeze-out, as to whether this is calculated on the basis of the percentage of total shares of the company held or shares acquired through acceptance of the bid.

  26.  Commencement date—the new provisions would take effect from 1 January 2005, with the exception that Member States would be allowed to delay implementation of the provisions relating to the obligations of the board of the offeree company (article 9) and on breakthrough (article 11) for a period of five years.

Scrutiny History

  27.  The Department of Trade and Industry submitted an explanatory memorandum (12846/02) on 12 November 2002 on a "Proposal for a Directive of the European Parliament and of the Council on Takeover Bids". A further unnumbered explanatory memorandum (OTNYR) was submitted by the Department on 4 March 2003 in relation to the first Greek Presidency compromise proposal dated 14 February 2003.

  28.  The Commons European Scrutiny Committee considered the proposal politically and legally important, not cleared and recommended for debate in European Standing Committee C (Report 4, Item 23965, Session 02/03). That debate took place on 19 March 2003. The Lords Select Committee on the EU referred it to Sub-Committee E in connection with an inquiry they are holding into the proposed Directive on Takeover Bids (Progress of Scrutiny, 31 March 2003, Session 02/03)

Ministerial Responsibility

  29.  The Secretary of State for Trade and Industry has primary responsibility.

Legal and Procedural Issues

Legal Basis

  30.  Article 44(1) of the Treaty establishing the European Community.

Legislative Procedure

  31.  Co-decision (article 251).

Voting Procedure

  32.  Qualified majority voting in the Council.

Impact on UK Law

Provisions retained from the Conciliation Text

  33.  Takeover regulation is carried out in the UK by the Takeover Panel which administers the City Code on Takeovers and Mergers. The City Code is non-statutory. While the main elements of the takeover bids proposal which have been retained from the Conciliation Text are covered by the City Code, they are not set out in legislation.

  34.  In order to implement the directive, the regulation of takeovers would have to be placed within a statutory framework. Legislation would be needed to make provision to designate a supervisory body (although the supervisory body designated may be a private body such as the Takeover Panel). In addition, some aspects of the regulatory framework set out in the directive 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". Thus the Takeover Panel could continue to perform its function of drawing up the detailed rules contained in the City Code, although it would now be doing so within the context of a statutory framework.

New substantive provisions since Conciliation Text

  35.  The new proposed substantive provisions cover broader areas than simply relating to takeover regulation, including company law matters that are currently contained in the Companies Act 1985 (such as the squeeze-out and sell-out proposals) and matters of disclosure (dealt with both under the Companies Act and the UK Listing Rules). Certain aspects of the proposals (notably, the breakthrough procedure) are currently not provided for under UK law. Implementation of these new provisions would, therefore, be likely to involve both legislative changes and amendment of the Takeover Code.

GIBRALTAR

  36.  The proposal would apply to Gibraltar.

European Economic Area

  37.  The measure is potentially applicable to the European Economic Area.

Subsidiarity

  38.  In the Explanatory Memorandum and Legislative Financial Statement which accompany the proposal, the Commission justified the proposed directive on the grounds that it:

    —  Is part of the Financial Services Action Plan identified by the March 2000 European Council in Lisbon as a priority in moving towards the integration of EU financial markets by 2005;

    —  Would facilitate pan-European restructuring and so contribute to the development and reorganisation and development of European companies;

    —  Sets down fundamental principles to govern takeovers and provides for the means of determining the competent authority for the control of a takeover (particularly important in the context of cross-border bids);

    —  Lays down basic levels of disclosure and information relating to the bid; and

    —  Provides shareholders with a minimum level of protection throughout the EU whereas the present situation is far from equivalent (for instance, some Member States do not presently require a full bid to be launched in the case of transfer of control, whilst others allow the management of the target company to take defensive measures in response to a bid without the prior consent of the shareholders).

  39.  The Government remains committed to extending the opportunities for cross-European takeover activity (exploiting synergies and acting as a discipline upon corporate management whilst protecting minority shareholders).

  40.  Serious concerns have previously been expressed within the UK as to the extent to which the Conciliation Text justified itself on subsidiarity grounds. These concerns centred primarily around two issues:

    —  Whether the Directive genuinely did meet the objective of providing a minimum standard of protection for shareholders as it allowed for significant differences in the approach towards such protection; and

    —  The removal of the right of Member States to operate fully non-statutory systems of takeover regulation, even though these systems would otherwise fulfil the Directive's principles and objectives.

  41.  On the first of these points, it is considered that the extent to which meaningful harmonisation of protection to shareholders is achieved would be enhanced by the detailed provisions on equitable price and squeeze-out and sell-out; the principles underlying the disclosure provisions and the revised provision relating to the limitation on the right of the boards of a target company to take defensive measures in the absence of approval from shareholders at the time of the bid.

  42.  On the second issue, it remains the case that the only way of avoiding any threat to the legal basis of the current operation of the City Code (and the potential for litigation that ensues) would be for there to be no directive at all. However, the wording achieved (at article 4.6 of both the Conciliation Text and the current proposal) in the course of negotiations to minimise the scope for litigation during bids is considered satisfactory.

Policy Implications

Provisions retained from Conciliation Text

  43.  Much of the content of the Conciliation Text which has been retained is of a very general nature and—although much less extensive and less detailed than the requirements of the Takeover Code—is broadly in accordance with the approach already adopted in the UK. The content and the subject matter of these principles and rules, therefore, have only limited policy implications for the UK.

  44.  The Government's principal concern historically with regard to a directive on takeover bids has been that the directive would alter the legal basis of takeover regulation in the UK, thereby making it easier for parties to challenge decisions of the Takeover Panel through the courts, to litigate against each other, and to engage in tactical litigation designed to hinder or thwart a bid. However, it is considered that 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.

  45.  The Government remains concerned by the provisions whereby jurisdiction might be split between two supervisory authorities supervising the bid where the target company is incorporated in one country but admitted to trading in another. The supervisory authority in the country of incorporation will be responsible for supervising the "company law" aspects of the bid and the supervisory authority in the country of trading for supervising the "procedural" issues related to the bid. Given that the vast majority of companies are admitted to trading in the country in which they are incorporated—in which case the supervisory authority involved will be in the country of incorporation only—the number of cases where there will be split jurisdiction is anticipated to be small. However, the split in jurisdiction will, in the Government's view, lead to ineffective regulation in relevant cases and may not work well in practice. The Government's preference would be for the supervisory authority always to be that where the offeree is incorporated. However, this view is not shared by a majority of Member States.

New Substantive provisions

  46.  Within the UK, market pressure, brought to bear in particular by institutional investors, has ensured that there are few UK listed companies with differential voting structures or restrictions on transfer of shares or voting rights. Such structures are, however, more prevalent elsewhere in Europe. The Government can welcome in principle an overall approach designed to ensure greater transparency of differential share and control structures across the EU and which sends strong signals to the market of the general undesirability of such structures as a step towards a genuinely more liberal capital market within the EU.

  47.  An area where there are potentially significant consequences for the UK is in relation to the proposed breakthrough procedure. In view of the rarity of UK listed companies with restrictions on the transfer of shares and voting rights or multiple voting rights, it is considered that, in terms of the market as a whole, the effect of the override of such provisions would be limited. Such structures are, nevertheless, present in a small number of listed companies, including so called "Golden Share" companies which were previously in public ownership but have been privatised (currently, there are 11 such companies in the fields of defence and national security, nuclear power and strategic power networks). Breakthrough would not apply to securities held by Member States on grounds of public security, defence and national security. The application of the breakthrough procedure to contractual arrangements which have been freely negotiated between shareholders also gives cause for concern.

  48.  The squeeze-out and sell-out and equitable price provisions are broadly in line with existing UK law and practice, whilst the provisions related to employee rights and information recognise rights conferred elsewhere to employees.

Consultation

  49.  Consultation undertaken by the Department is referred to in the attached Regulatory Impact Assessment.

  50.  Additionally, senior representatives of the Takeover Panel have, in an advisory capacity, accompanied Department of Trade and Industry officials to Council Working Group Meetings held on this proposal. Meetings of the existing Consultative Group (consisting of key City and business interests) are also held as necessary by the Department of Trade and Industry to discuss important developments in respect of this proposal.

Regulatory Impact Assessment

  51.  A Regulatory Impact Assessment is attached. The amendments proposed in the Greek Council Presidency compromise proposal dated 28 April 2003 are not considered to alter the potential estimates of costs and benefits in respect of the original October 2002 Commission proposal.

Financial Implications

  52.  There are unlikely to be any financial implications.

Timetable

  53.  A number of Council Working Group Meetings have now been held and the Council Presidency have expressed a desire to achieve early agreement to the directive. Consideration of the proposal proceeds in parallel in Committees of the European Parliament which has also commissioned and received its own independent academic report and held a public hearing on the proposal on 28 January 2003. There remain, however, a number of outstanding issues to be resolved, both within the Council and the European Parliament in order to obtain consensus support for the Directive. Accordingly, the likely timetable for progress of negotiations on the Directive remains unclear.

8 May 2003

Annex A

Principal Changes to the Text of the First Greek Council Presidency Compromise Proposal Draft Takeovers Directive Dated 14 February 2003 (OTNYR—Subject of Unnumbered Explanatory Memorandum Dated 4 March 2003) Included in the Further Greek Council Presidency Compromise Text of 29 April 2003

ARTICLE 3 (GENERAL PRINCIPLES)

  A new general principle has been added at paragraph 1(g), the aim of which would seem to be to ensure that the Directive should not be impeded by Member States' laws.

Comment: The Government considers this addition unnecessary, unclear and inconsistent with the other general principles at article 3 and is seeking to have it deleted.

ARTICLE 5 (PROTECTION OF MINORITY SHAREHOLDERS: MANDATORY BID; EQUITABLE PRICE

  Paragraphs 1 and 4 have been amended to seek to clarify the meaning of the term "equitable price" and that the period during which the highest price paid by the bidder may be calculated is extended to include the period of the bid as well as the stipulated pre-bid period.

  Paragraph 5 has been extended to allow Member States to require a cash consideration alternative in all mandatory bid cases.

Comment: The Government welcomes these changes as consistent with existing UK practice and an improvement of the safeguards afforded to minority shareholders under the directive.

ARTICLE 11 (BREAKTHROUGH—PREVIOUSLY ENTITLED "UNENFORCEABILITY ON THE TRANSFER OF SECURITIES AND VOTING RIGHTS")

  This provision has been extended to include override of multiple voting rights—as well as restrictions on transfer and voting rights of securities. The provision also now includes a requirement for Member States to provide for compensation in certain circumstances where existing rights are overridden. Consequential amendments have been made to article 2 (to define "multiple voting securities"), article 6 (to include a requirement that information related to compensation payable where rights may be removed is included in the offer document) and recital 18.

  To enable protections to be put in place for companies which are new to the markets. Member States have an option to provide that breakthrough will not apply to companies for a period of five years from the time of first listing.

  Additionally, breakthrough would not apply to securities held by Member States in accordance with the Treaty for reasons of public security, defence or national security.

Comment: There are few UK listed companies with multiple voting rights and consequently the effect of this provision is limited within the UK. Override of multiple voting structures might increase the opportunities and open markets for UK companies in seeking to restructure through takeover activity elsewhere within the EU. Detailed consideration will need to be given to devising a workable compensation regime in implementing legislation.

  The new provisions of this article do not alleviate the Government's previous concerns about the proposed override of contractual provisions, although the proposed protection to be afforded to securities held by Member States on public security, defence and national security grounds does substantially reduce the Government's concerns about the impact of this provision on Golden shares (see paragraph 47) of the Explanatory Memorandum).

ARTICLE 18 (REVISION)

  Member States will be required to provide the Commission with detailed information relating to takeover activity falling within their country, including the outcome of the offer and the country of origin of the offeror, to assist the Commission in reviewing the operation of the Directive. Review of articles 9 (obligations of the board of the offeree company) and 11 (breakthrough) will take place in 2015. Review of article 4(2) (jurisdiction) will take place in 2010.

Comment: The Government is content with the review provisions and that the requirement to provide information about takeover activity is reasonable.

ARTICLE 19 (TRANSITIONAL PERIOD)

  The provisions implementing articles 9 (obligations of the board of the offeree company) and 11 (breakthrough) would not have to be brought into force by Member States until 1 January 2010.

Comment: This reflects the more extended scope of the provisions of article 11 (dealing with pre-bid defensive measures) and its relationship with article 9 (post-bid defensive measures).


REGULATORY IMPACT ASSESSMENT

Further Greek Council Presidency compromise proposal dated 28 April 2003 for a Directive of the European Parliament and of the Council (OTNYR) concerning takeover bids.

I.  INTRODUCTION AND SUMMARY

  1.  This assessment estimates the costs and benefits of the further Greek Council Presidency Compromise proposal dated 28 April 2003 for a directive concerning takeover bids ("The Proposal").

  2.  A directive on takeover bids was identified by the Spring European Council at Lisbon in 2000 as a priority measure under the Financial Services Action Plan agreed to by Heads of State and Government and which aims to create an integrated capital market across the EU by 2005.

  3.  The issue of a directive on takeover bids has been under consideration since 1985. The present text builds upon a proposal published by the Commission in 1996 on the basis of a framework directive containing general principles but leaving considerable latitude for Member States and the relevant takeover supervisory authorities to deal with the detailed implementation of those principles. Following detailed discussions within the European Parliament and the Council, a joint text of the directive was approved by the Conciliation Committee on 6 June 2001 but failed by one vote to be adopted by the European Parliament on 4 July 2001.

  4.  Since July 2001, the Commission has appointed a High Level Group of Company Law Experts to examine a number of issues related to takeovers which the Commission considered to have been of concern to the European Parliament, principally the issue of ensuring a "level playing field" for shareholders across the EU. The High Level Group reported finally on these issues in January 2002 ("Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids"—the full text is available at http://europa.eu.int/comm/internalmarket/en/company/company/news/02-24.htm. The Commission presented a new proposal for a directive in October 2002. The present Council Presidency Compromise proposal reflects discussions on that proposal in Council Working Groups held since October 2002.

  5.  A consultative document seeking views on the 1996 Commission proposal was issued by the Department of Trade and Industry in April 1996. It was sent to over 1,000 organisations and individuals. A summary of comments was issued in August 1996 and sent to all respondents to the consultative document and anyone else who requested a copy. Since that time, there have been regular meetings of a Consultative Group that has been set up to discuss the directive. This consists of members of the Department and the Takeover Panel along with representatives from the Confederation of British Industry, the Financial Services Authority, HM Treasury, Association of British Insurers, British Bankers Association, Investment Management Association, Law Society, Law Society of Scotland, London Investment Banking Association, the London Stock Exchange and the National Association of Pension Funds.

  6.  The 1996 consultation exercise revealed serious concerns as to the possible undermining of the existing non-statutory regulation of takeovers in the UK overseen by the Takeover Panel and about the possible adverse affects of tactical litigation being introduced to frustrate the bid process. The current proposal is considered to enable the UK to preserve a panel-based approach to takeovers regulation.

  7.  There has also been widespread debate within the UK about the merits of provisions within the directive which would override restrictions on transfer of shares or voting rights and multiple voting rights following a successful takeover. It is accepted that the impact of such provisions would be limited within the UK due to the relative scarcity of such share structures amongst domestic listed companies and to which the directive applies. Various views have been expressed on this issue, with a number of those (including from companies with such restrictions) favouring an approach based upon freedom of contract associated with the full disclosure of differential voting and control structures; whilst others (particularly representing the institutional investment community) have emphasised the benefits in wider corporate governance and market terms of seeking to reduce the prevalence of these types of structures.

II.  PURPOSE AND INTENDED EFFECTS OF THE MEASURE

  8.  The directive seeks to establish a framework for the protection of shareholders throughout the European Union and to provide for minimum guidelines on the conduct of takeover bids. It would apply to the regulation of takeover bids for companies incorporated in the EU whose shares are traded on a regulated market in the EU.

  9.  Central features of the directive are as follows:

    —  a "mandatory bid" rule whereby any person acquiring control of a company would be required to launch a bid for all of the company's shares;

    —  provisions preventing a target company's management taking defensive measures without approval of shareholders at the time of the bid;

    —  extensive disclosure and transparency provisions requiring companies to disclose their share structure and control systems to allow the market to identify and address defensive share structures across the EU;

    —  A review clause which will require the Commission in 2015 to assess whether market forces have had the desired effect of "levelling the playing field" in listed company share structures across the EU;

    —  A breakthrough provision which would permit override of restrictions on the transfer of shares and voting rights contained within the company articles or contractual agreements and multiple voting rights (shares in a distinct and separate class and carrying more than one vote) following a successful takeover bid;

    —  Provisions designed to deal with the problems of, and for, minority shareholders following a successful takeover ("squeeze-out" and "sell-out" rights);

    —  Detailed provisions to ensure that shareholders receive an "equitable price" for their shares; and

    —  Provisions related to information to employees of target companies and analysis of the probable impact of a takeover upon them.

III.  BENEFITS

  10.  The principal benefits likely to arise from the Directive are in relation to the possible encouragement of cross-border takeover activity as a central element of the Financial Services Action Plan. Takeover activity can serve to exploit business synergies, act as a discipline upon corporate management and allow shareholders to sell their shares for a price above the existing market value. Such advantages can benefit all those with a stake in the markets, whether directly or indirectly (such as through pensions funds).

  11.  The regulation of takeovers is presently undertaken in the UK by the Takeover Panel administering the City Code on Takeovers and Mergers. There are no significant requirements in the directive in relation to the takeover bid process that go beyond the requirements of the City Code (although some of the rules in the City Code may need to be amended—and the wider implications for disclosure of company information and the proposed breakthrough procedure are dealt with at paragraphs 18 and 19 below) and there would, therefore, be no benefits in relation to takeovers of companies under the provisions of the Code.

  12.  A key feature of the directive of importance to UK shareholders in companies incorporated outside the UK is the "mandatory bid" rule—which lies at the heart of the City Code. This would require Member States to introduce a rule whereby once a party had acquired a certain percentage of voting rights (the threshold would be determined by individual Member States—in the UK it is currently 30 per cent) it would be required to make a bid for all the remaining shares. Without a mandatory bid requirement, shareholders will have no right of exit from the company, a right which they may find essential if they are unhappy with the identity of the new effective controller of the company. The present proposal does not, however, prescribe a threshold at which a mandatory bid has to be tabled which could allow Member States to set a very high threshold and thereby limit the protection offered to shareholders.

  13.  Another benefit to UK shareholders, and also to UK companies seeking to bid for overseas companies, is the requirement in the directive that boards of target companies only be permitted to take frustrating action (ie with the intention of delaying or stopping a bid) if they have the prior authorisation of shareholders given for this purpose during the period of acceptance of the bid. This requirement reflects provisions in the City Code.

  14.  Additionally, the proposed provisions on disclosure and transparency of company share structures and control systems will benefit the markets generally across the EU in seeking to address protective company control structures.


IV.  COMPLIANCE COSTS ESTIMATES

  15.  The directive applies to companies traded on a regulated market. There are approximately 2,500 such companies incorporated and traded in the UK and around a further 500 companies incorporated outside the UK but traded within the UK. These companies will fall within all sectors of business.

  16.  The proposal does not apply to private limited companies or to public limited companies which are not traded on a regulated market.

  17.  While the adoption of the proposed directive would change the legal basis of takeover regulation in the UK, it would not require significant changes to the City Code since much of the substance of the directive reflects the approach already adopted in the UK. In addition, since the directive applies only to companies whose shares are traded on a regulated market—the City Code applies to all public companies—it would not bring more companies within the scope of takeover regulation.

  18.  The disclosure and transparency requirements of the directive are broadly consistent with principles underlying existing UK disclosure requirements. However, there may be a need for some of the information already disclosed to be reformatted for presentation in the annual report and there would also be a new requirement for there to be an annual explanatory report presented by the board to shareholders each year on the structural and defensive aspects of the company. It is, however, the case that these costs may be offset by the increased ease of access to information on share and control structures on companies elsewhere within the EU and from wider benefits to the company arising from periodic review of the appropriateness of its corporate structures.

  19.  Market pressures, particularly those brought to bear by the institutional investors, have ensured that there are only a small number of UK listed companies with restrictions on transfer of shares and voting rights and multiple voting rights that would be affected by the proposed breakthrough procedure in the event of its being subject to a successful takeover. The breakthrough procedure would not in itself involve costs, as it would simply lead to a realignment of voting powers of existing shares. Whether this led to a cost or benefit would depend on the subsequent activities of the company following a takeover which otherwise might not have occurred. There would also be costs involved for any company with differential voting or control structures currently in place which chose to restructure in order to safeguard existing control rights against the breakthrough procedure.

  20.  There are considered to be no further costs associated with this proposal.

V.  OTHER COSTS NOT SUBJECT TO THE DIRECTIVE

Budgetary costs

  21.  There are no budgetary costs.

Publicity costs

  22.  Publicity as to the requirements of the directive would take place as part of the ongoing dialogue between the Department of Trade and Industry and City and business interests and also through existing initiatives within the community of companies which are traded on a regulated market. Accordingly, it is not envisaged that there will be separate publicity cots attributable to implementation of the directive.

Enforcement costs

  23.  Ensuring that parties to a takeover bid complied with the requirements of the City Code on Takeovers and Mergers would remain the responsibility of the Takeover Panel.

  24.  Securing compliance with disclosure and transparency provisions would fall to the Department of Trade and Industry and financial markets regulators.

VI.  MONITORING AND REVIEW

  25.  Specific provision is contained within the Directive for Member States to provide the Commission with detailed information relating to takeover activity falling within their country, including the outcome of the offer and the country of origin of the offeror, to assist the Commission in reviewing the operation of the Directive. Review of articles 9 and 11 (relating to pre- and post-bid defensive mechanisms) will take place in 2015. Review of article 4(2) (jurisdiction) will take place in 2010. The Department of Trade and Industry intends to liaise closely with relevant City, business and regulatory interests to be able to contribute to that review.

DECLARATION

  I have read the Regulatory Impact Assessment and I am satisfied that the balance between cost and benefit is the right one in the circumstances.


 
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