Select Committee on European Scrutiny Twelfth Report




COM(00) 893

Commission Report on the application of Directive 85/374 on liability for defective products.
Legal base:
Document originated: 31 January 2001
Forwarded to the Council: 1 February 2001
Deposited in Parliament: 12 March 2001
Department: Trade and Industry
Basis of consideration: EM of 10 April 2001
Previous Committee Report: None; but see (20429) 10609/99: HC 34-xxviii (1998-99), paragraph 7 (20 October 1999) and HC 23-x (1999-2000), paragraph 4 (1 March 2000)
To be discussed in Council: Not applicable
Committee's assessment: Legally and politically important
Committee's decision: Cleared


3.1  Directive 85/374, which was transposed into UK law by Part I of the Consumer Protection Act 1987, imposes strict liability on producers for death, injury, loss or damage to property caused by defective (that is, unsafe) products. As a result, people who are injured by a defective product can sue for compensation without having to prove that the producer was negligent, if they can prove that the product was defective and that the defect in the product caused the injury. The Directive applies to consumer products and products used at a place of work. Directive 1999/34 of 10 May 1999 amended the 1985 Directive by extending the strict liability system to primary agricultural products and game (that is, food sold in its raw state) so that all food products are now covered.

3.2  In July 1999, the Commission published a Green Paper[4] as the first step in reviewing the Directive, as it is required to do every five years. When we considered this document, we asked to see the Government's response and to be told of any particular concerns on the part of business and consumer organisations made known to the Department. On receipt of the response, in February last year, we noted that its general tenor was against amending the Directive.

3.3  The current document summarises the responses to the Green Paper and sets out the Commission's conclusions. It is the second report since the adoption of Directive 85/374.

The document

3.4  According to the report, the Commission received about 100 responses to the Green Paper. These came from four broad groups: national and European consumer organisations; both sides of industry; public administrations of Member States and other European countries; bodies specialising in product liability.

3.5  The Green Paper raised a number of issues with a view to possible amendment of the Directive. The report analyses the responses in relation to these issues. Generally, the difference of views reported to us in February 2000 by the Parliamentary Under-Secretary of State for Consumers and Corporate Affairs (Dr Kim Howells) still holds good: businesses consider that the Directive works well and achieves the right balance between the protection of consumers and the interests of producers; consumers disagree. However, the Commission notes that little hard evidence is provided by either side.

3.6  Given this lack of objective factual information on which to draw firm conclusions, the Commission concludes that changes to the Directive would be premature. Instead the Commission proposes two short-term information-gathering initiatives to enable it to assess better the need for any improvements.

3.7  The first involves the establishment of an expert group on product liability with representation from Governments of Member States, industry, consumer associations, lawyers and insurance interests. The expert group would collect information in all Member States on the legal application of the Directive, on recent case law and on changes in national legislation.

3.8  The second proposal is for a study to assess the economic impact on all interested parties of removing two options currently available to Member States under the Directive. One of these options allows a producer a "development risks" defence against liability where he can show that the state of technical and scientific knowledge, at the time the product was put into circulation, was not such as to enable the defect to be discovered. This option, which has been adopted by the UK, is particularly unpopular with consumer organisations. The other option, which has not been adopted by the UK, allows Member States to set an upper limit for damages resulting from death or injury caused by identical items with the same defect.

3.9  The Commission also proposes an investigation into the feasibility and advisability of greater harmonisation of product liability at Community level. To this end, it will launch a study to analyse and compare the practical effects of the different systems in Member States for bringing product liability claims, and consider whether a uniform product liability system could be introduced in the Community.

3.10  The report also outlines follow-up measures in other areas which are complementary to product liability. These include amendments to the General Product Safety Directive,[5] and initiatives related to access to justice for consumers.

The Government's view

3.11  The Minister comments:

"The Directive is an important measure which seeks to balance the interests of consumers on compensation rights without discouraging innovation or imposing prohibitive costs on businesses. Any proposals for improving compensation rights for consumers which may result from further review following the proposed studies will need to be carefully weighed to ensure that they do not place undue burdens on businesses."


3.12  We note that the disagreement between business and consumer organisations about the Directive (to which the Minister alerted us in March 2000 on the basis of the responses he had seen) is confirmed now that all the responses have been analysed. We also note that the Government still appears unwilling to agree amendments to the Directive which might (unduly, in its view) favour consumers.

3.13  It is encouraging that the Commission is seeking firmer information before deciding on specific proposals related to the Directive ; we shall scrutinise any such proposals, and the Government's view of them, carefully. Meanwhile, we clear this document.




COM(01) 77

Commission Opinion on the European Parliament's amendments to the common position of the Council regarding the draft Directive on company law concerning takeover bids ("the Takeovers Directive").
Legal base: Article 44 EC; co-decision; qualified majority voting
Document originated: 12 February 2001
Forwarded to the Council: 13 February 2001
Deposited in Parliament: 13 March 2001
Department: Trade and Industry
Basis of consideration: EM of 30 March 2001
Previous Committee Report: None; but see paragraph 4.2 below
To be discussed in Council: June 2001
Committee's assessment: Legally and politically important
Committee's decision: Cleared


4.1  The proposed Takeovers Directive has two main objectives:

— to harmonise national rules on takeover bids, particularly regarding the information to be provided about a bid, the period for acceptance of a bid, disclosure to the market, obligations of the board of the target company (including restrictions on defensive measures in the case of hostile bids), and the conduct of bids; and

— to set minimum standards across the EU for the protection of minority shareholders in companies where there is a change in control of their company by requiring that a "mandatory bid" be made for all remaining securities.

The Directive will apply to bids for companies incorporated in the EU whose securities are admitted to trading on a regulated market in the EU.

4.2  The draft Takeovers Directive was originally proposed in March 1996. It was considered by our predecessor Committee in March and October 1996[6] and debated in European Standing Committee B on 12 February 1997.[7] The proposal has undergone a series of revisions in the light of views from the European Parliament and the Economic and Social Committee and negotiations in Council Working Group meetings. For some time, the main outstanding issue for the UK has been that the proposed Directive will alter the legal basis on which the City Code and the Takeover Panel operate, thereby making it easier for parties to engage in tactical litigation designed to hinder or thwart a takeover bid. However, it has also been apparent for some time that the UK Government has no realistic chance of persuading the other Member States and the Commission that this proposal should be abandoned. We cleared the revised proposal on 16 June 1999.

4.3  Lord Simon (then Minister for Trade and Competitiveness in Europe) wrote to us on 23 July 1999 reporting that political agreement on the Directive had been reached at the Internal Market Council on 21 June 1999, and that the UK had secured the wording it was looking for on litigation, but that the agreement had been blocked by Spain as part of its dispute over Gibraltar. Following resolution of that problem, the Council unanimously adopted a common position on 19 June 2000. In its second reading on 13 December, the European Parliament approved the common position with fifteen amendments. The Council subsequently rejected these amendments, thereby triggering the conciliation process, which is continuing.

The document

4.4  The document indicates the Commission's views on the European Parliament's amendments. Overall, the Commission accepts three of the fifteen amendments in full and one in part, but rejects the others.

The Government's view

4.5  The Government assesses the amendments as follows:[8]

"Amendment 1 deletes certain words from Recital 5. The Government does not agree with the amendment. It would in any event have no substantive effect because Parliament did not amend the corresponding wording in Article 5. The Commission said it could not accept this amendment.

"Amendment 2 deletes certain words from the definition of 'takeover bid' in Article 2. The Government does not agree with the amendment because it renders the definition less clear. The Commission said it could not accept this amendment.

"Amendment 3 adds to the definition of 'securities' in Article 2. The Government does not agree with the amendment because it would require Member States to bring 'convertibles' (i.e. instruments convertible into vote-carrying securities) within the scope of their rules for all purposes. Convertibles come within the scope of some, but not all, of the provisions in the Takeover Code. The common position gives Member States discretion as to how to apply their rules to non-voting securities such as convertibles (see Recital 8), The Commission said it could not accept this amendment.

"Amendment 4 would require that employees (as well as shareholders) should be given sufficient time and information to enable them to reach a properly informed decision on a bid. The Government does not agree with the amendment because employees do not have a decision to take on the bid, in the same way that shareholders have a decision to take. The Commission said it could not accept this amendment.

"Amendment 5 would require the board of an offeree company to act in the interests of 'corporate policy and its continuation' as well as employees and 'with a view to safeguarding jobs'. The Government does not agree with the amendment because it would fundamentally alter the nature of directors' duties when considering a takeover offer, and by requiring them to put their interests above those of company restructuring could seriously impact the efficiency and competitiveness of EU companies, ultimately having a damaging effect on employment in the Community. The Commission said it could not accept this amendment.

"Amendment 7 would limit the circumstances in which supervisory authorities may grant derogations from their rules. The Government does not agree with the amendment because it appears to prevent derogations in individual cases. This would prevent the supervisory authority applying its rules flexibly in order to take account of new and unforeseen circumstances which can arise during the course of a bid. Although the Commission stated that it can accept this amendment, it has since confirmed that it will support a modified version of the common position which clarifies that a reasoned decision is required for all derogations.

"Amendment 8 would specify in more detail the 'equitable price' that must be paid, and the circumstances in which cash or a cash alternative must be offered, pursuant to a mandatory bid. The Government could accept these amendments in principle, subject to minor changes. The Commission said it could not accept this amendment.

"Amendment 12 would insert a new provision requiring Member States to have a so-called 'squeeze-out' power, whereby an offeror could compulsorily acquire the shares of minority shareholders who had not accepted his offer. Whilst the Government is not averse to a harmonising provision in respect of such compulsory acquisition powers, it believes the present Directive is not the appropriate place. Moreover, Parliament's amendment in its present form would require retrograde changes to our own law on compulsory acquisition, and so is not acceptable. The Commission said it could not accept this amendment.

"Amendment 13 would require additional information to be provided in the offer document about the offeror's intentions concerning employees and jobs. The Government could not accept the amendment as it stands because the wording is not sufficiently clear, but it could accept a modified version. The Commission said it could not accept this amendment.

"Amendment 14 would require the offer document to state which law governs contracts for the sale and purchase of shares following acceptance of the offer. The Government and the Commission said it could accept this amendment.

"Amendment 15 would require the parties to a bid to provide the board of the offeree company and the workers' representatives at any time on request with all information they possess concerning the bid. The Government could not accept the amendment because it is a corruption of the requirement in Article 6(4) which is designed to ensure the supervisory authority has all the powers it needs to demand information from the parties so as to carry out its supervision and enforcement responsibilities. The Commission said it could not accept this amendment.

"Amendment 16 would restrict the circumstances in which extensions to the offer period may be made. The Government could not accept the amendment because extensions to the offer period may be needed in a range of circumstances, for example, while awaiting regulatory clearance for the takeover from competition authorities, and to enable minority shareholders who have not accepted an offer to change their minds once it is clear the takeover has succeeded. The Commission said it could not accept this amendment.

"Amendment 17 would give Member States much greater discretion to allow defensive measures to frustrate a hostile takeover bid without the consent of shareholders. It would also require them to give the courts an explicit role in deciding whether the board of the offeree company had acted properly. The Government could not accept this amendment because it fundamentally undermines one of the key principles of the Directive — that shareholders should decide on the merits of a bid, and should not be denied the opportunity to do so. It would also introduce the courts into the process in a way the Government has sought to avoid. The Commission said it could not accept this amendment.

"Amendment 18 would reduce the transposition period from four years to two. The Government could not accept this amendment because it may give insufficient time to draw up, consult on and adopt the legislation required to implement the Directive. The Commission stated that it could accept this amendment.

"The first part of Amendment 20 would bring forward the time from which the board of an offeree company is prevented from taking frustrating action without the consent of shareholders. The Government and the Commission could support this amendment. The second part of Amendment 20 would require the supervisory board (if any) of a company to approve defensive measures. The Government does not support this amendment because it could mean the wishes of shareholders were thwarted. The Commission rejected this part of the amendment. The third part of the amendment would require the board of the offeree company to include in its document setting out its opinion on the bid, the opinion of employees' representatives if available. The Government could not accept this amendment in its present form, but could do so if modified to make clear that the employees cannot use this right to hold up the bid. The Commission said that it could not accept this amendment."

4.6  In his Explanatory Memorandum of 4 April 2001, the Minister of State for Energy and Competitiveness in Europe at the Department of Trade and Industry (Mr Peter Hain) states:

"One of the key aspects of takeover regulation in the UK is the absence of litigation during takeover bids. The courts have indicated that, whilst [Takeover] Panel decisions are in principle subject to judicial review, in practice the character of the Panel and its situation in, and the time-scales of, financial markets may limit the scope and opportunities for judicial review. The only way to be sure of avoiding such a threat from the Directive would be to have no Directive at all. This was not an option because the measure is subject to qualified majority voting in the Council and it was clear that a large majority of Member States supported it. In view of this, the Government's primary negotiating aim has been to include wording in the Directive designed to minimise the scope for litigation during bids. The common position adopted in June 2000 includes a clause intended to achieve this, the wording of which the Government agreed with the Takeover Panel. Having successfully secured wording in Article 4.6 (formerly Article 4.5) that it and the Takeover Panel considered acceptable, the Government was able to vote for the common position. Article 4.6 was not the subject of any amendment by the [European] Parliament."


4.7  We considered it would be useful to report the latest developments to the House. The Government will submit a further Explanatory Memorandum if the conciliation process produces an agreed joint text. Meanwhile, we clear the document.

4   (20429) 10609/99; see headnote to this paragraph. Back

5  (21297) 8585/00; see HC 23-xxii (1999-2000), paragraph 4 (21 June 2000) and HC 23-xxx (1999-2000), paragraph 13 (22 November 2000).  Back

6  (17000) 5147/96; see HC 51-xiv (1995-96), paragraph 5 (27 March 1996) and HC 51-xxix (1995-96), paragraph 1 (16 October 1996). Back

7  Sub-Committee E of the House of Lords Select Committee on the European Communities reported on the proposal (13th Report, Session 1995/96, HL Paper 100); that Report was subsequently debated on 14 January 1997. Back

8   The amendments are numbered in the same way as in the Commission opinion, Gaps in the sequence reflect the fact that the Parliament did not adopt all the amendments that were proposed. Back

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