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