FOURTH REPORT
The European Scrutiny Committee has agreed to the
following Report:—
1. TAKEOVER BIDS
(23905)
12846/02
COM(02)534
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Draft Directive on takeover bids.
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| Legal base: | Article 44(1) EC; co-decision; qualified majority voting
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| Document originated: | 2 October 2002
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| Deposited in Parliament: | 25 October 2002
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| Department: | Trade and Industry
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| Basis of consideration: | EM of 12 November 2002
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| Previous Committee Report: | None; but see (22494) 3629/01: HC 152-ii (2001-02), paragraph 13 (17 October 2001)
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| To be discussed in Council: | Not known
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| Committee's assessment: | Legally and politically important
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| Committee's decision: | For debate in European Standing Committee C
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Background
1.1 This draft Directive is intended as a framework to
protect shareholders throughout the European Union and to make
provisions on the conduct of takeover bids. The possibility of
such a Directive has been under discussion since 1985. It is an
objective of the Financial Services Action Plan, aimed at creating
an integrated financial market within the EU, which it was agreed
at the Lisbon European Council in March 2000 should be completed
by 2005.
1.2 A draft Directive was previously proposed by the
Commission in 1996. In July 2001, after extensive consideration
and negotiation, an amended text (the "Conciliation Text"),
agreed in the Conciliation Committee of the Council and the European
Parliament, was rejected by one vote in the European Parliament.
1.3 Attempts to agree a Directive also have a considerable
scrutiny history, with a debate in European Standing Committee
B in 1997[1] and reports
to the House in 1998, 1999 (twice)[2]
and 2001 (twice).[3]
1.4 After the rejection of the Conciliation Text the
Commission appointed a group of company law experts to consider
three issues identified as of concern to the European Parliament:
- a level playing field for shareholders — that is, the
problems created by different company governance systems across
the EU;
- the equitable price to be paid to shareholders by a takeover
bidder; and
- rights of a majority shareholder to buy out minority shareholders
following a successful takeover.
1.5 On the level playing field issue the group proposed:
- rigorous disclosure provisions; and
- a "breakthrough" provision whereby any bidder acquiring
75% or more of the risk-bearing capital (e.g. in the UK equity
or ordinary shares) of a company would be able to override any
defence structures that prevented it exercising control of the
target company.
1.6 On the other two issues the Group proposed:
- an equitable price to 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 relating to residual minority shareholders, that
is "squeeze-out" rights, enabling a successful bidder
to buy out minority interests, and "sell-out" rights,
enabling residual minority shareholders to compel a successful
bidder to buy them out.
The document
1.7 After further discussions with the expert group and
interested parties, the Commission has proposed a new draft Directive.
This builds on the Conciliation Text, but includes some new measures
which, whilst not wholly incorporating the expert group's proposals,
reflect the issues considered by it.
1.8 Six general principles are retained from the Conciliation
Text:
- equivalent treatment for shareholders in the same class;
- shareholders to have enough time and information to allow
a properly informed decision on any bid;
- the board of a target company to act in the interests of the
company as a whole and shareholders to be allowed to decide on
the merits of the bid;
- bids not to lead to creation of false markets or distortion
of the normal functioning of the markets;
- bidders to announce a bid only if proper steps have been taken
to ensure the offer can be fulfilled in cash (in the case of cash
offers) or all reasonable measures have been taken to secure any
other type of consideration; and
- target companies not to be hampered in their normal activities
for longer than is reasonable.
1.9 Member States would be able, within limits, to allow
a supervisory authority to derogate from the Directive, so long
as the general principles were respected. In addition, Member
States' implementing measures could be broader than the Directive.
1.10 The new draft also retains the following detailed
provisions from the Conciliation Text:
- Member States to designate an authority to supervise takeover
bids and to ensure parties to a bid comply with the Directive's
requirements, including a duty to supply to the supervisory authority
necessary information related to the bid;
- the relevant supervisory authority to 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. If not, the supervisory authority to be that of the Member
State in whose regulated market the shares are traded. Provision
is also made for the situation where shares are traded in regulated
markets in more than one Member State;
- the supervisory authority to be responsible for matters related
to the consideration offered by the bidder and bid procedure,
whilst the rules applicable to matters of company law or information
to employees are to be for the law of the Member State in which
the target company is incorporated;
- Member States to have 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. It is left to individual Member States
to determine the percentage of voting rights which confers control
of a company;
- requirements as to the information in the public offer document
made available to the target company's shareholders, to ensure
that shareholders have proper information to make a decision on
the bid. The requirements are to cover both the specific terms
of the bid (such as the consideration offered for each class of
shares) and issues related to the bidder's intentions with regard
to the future business of the company (including the likely impact
upon employees);
- the bid to be publicised so as to avoid the creation of false
markets in shares and information, and documents to be made available
to shareholders promptly; and
- Member States to have rules governing matters such as withdrawal
or revision of bids, competing bids, disclosure of the results
of bids, irrevocability of the bid, and conditions permitted.
1.11 The new draft contains the following new provisions
related to the level playing field concept:
- defensive measures: Member States, in their rules to prevent
the board of a target company from taking action which could frustrate
that bid without the prior authorisation of the shareholders,
could not permit the boards of target companies to issue new shares
under an existing authorisation;
- disclosure and transparency: detailed provisions requiring
companies to disclose their share structure and control systems
to ensure that the market can identify differential voting mechanisms
and other control devices across the EU. These matters to be published
in the company's annual report and changes during the year also
to be disclosed. Additionally, the board to explain the reasons
for the structural aspects and defensive mechanisms and such aspects
and mechanisms to be subject to authorisation by a general meeting
of shareholders at least every two years;
- override or "breakthrough" procedure, whereby restrictions
on the transfer of shares and voting rights would be overridden
following a successful takeover. The override procedure would
not apply to shares without voting rights which carry specific
pecuniary advantages (in general terms within the UK, preference
shares);
- review provision: five years after the Directive comes into
force, the Commission is to examine whether experience suggests
any changes are needed to the disclosure and transparency provisions
and the override procedure.
1.12 Other new provisions are:
- employee rights: the draft retains Conciliation Text provisions
on the prompt disclosure of a bid to employees and publicising
the target company's opinion of the bid's effect on all stakeholders,
including employees. The draft adds a provision about publicising
any separate opinion from the representatives of employees and
recognises employee rights conferred elsewhere, including in the
Directives on the European Works Council, Collective Redundancies
and Information and Consultation;
- equitable price: the draft considerably extends the Conciliation
Text provision that any offer 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 given
period and subject to certain exceptions, both to be set by Member
States;
- squeeze-out and sell-out rights: Member States' rules to enable
a successful takeover bidder to acquire minority shareholdings
("squeeze-out rights") and to give parallel rights allowing
minority shareholders to require the successful takeover bidder
to buy out their remaining shares ("sell-out rights");
and
- commencement date: new provisions to take effect from 1 January
2005, but Member States may delay for a further three years implementation
of provisions restricting target company managements from taking
action designed to frustrate a bid.
The Government's view
1.13 In her Explanatory Memorandum the Parliamentary
Under-Secretary of State for Competition, Consumers and Markets,
Department of Trade and Industry (Miss Melanie Johnson), describes
the impact the new document would have on UK law. The Minister
reminds us that takeover regulation is undertaken by the Takeover
Panel, which administers the non-statutory City Code on Takeovers
and Mergers. The main elements of the draft Directive which have
been retained from the Conciliation Text are not set out in legislation,
but are covered by the City Code. To implement the draft Directive,
the regulation of takeovers would have to be placed within a statutory
framework, with a designated supervisory body, which could be
a private body such as the Takeover Panel. The draft requires
Member States to ensure that certain rules are in force, but recognises
that such rules may include "codes of practice or other arrangements".
Thus the Takeover Panel could continue, albeit within a statutory
framework, to draw up the detailed rules contained in the City
Code.
1.14 As for the new substantive provisions in the draft
directive, the Minister says these cover broader areas than simple
takeover regulation, including matters currently contained in
the Companies Act 1985 (such as the squeeze-out and sell-out proposals)
and disclosure issues (dealt with both under the Companies Act
and the UK Listing Rules). Other aspects of the proposals (notably
the override procedure) are currently not covered by UK law. Implementation
of the new provisions would be likely to involve both legislative
changes and amendment of the City Code.
1.15 The Minister tells us the Government remains committed
to extending the opportunities for cross-European takeover activity.
But she recalls that there were concerns about whether the Conciliation
Text was justified on subsidiarity grounds. The issues were:
- whether the proposal genuinely met the objective of providing
a minimum standard of protection for shareholders, as it allowed
for significant differences in the approach towards such protection;
and
- removal of the right of Member States to operate fully non-statutory
systems of takeover regulation, even though these systems could
fulfil the Directive's principles and objectives.
1.16 On the first of these issues the Minister says harmonisation
of protection of shareholders 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 limits on the right of a target company
board to take defensive measures without shareholder approval.
On the second issue, she says it remains the case that the only
way of avoiding any threat to the legal basis of the City Code
(and the resulting potential for litigation) would be for there
to be no Directive at all. However, the wording achieved, in both
the Conciliation Text and the current proposal, to minimise the
scope for litigation during bids is satisfactory to the Government.
1.17 In relation to the policy implications of the document
the Minister tells us:
"Provisions retained from Conciliation Text
"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.
"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.
"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
"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.
"An area where there are potentially significant consequences
for the UK is in relation to the proposed override procedure.
In view of the rarity of UK listed companies with restrictions
on the transfer of shares and 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 12 such companies
in the fields of defence and national security, nuclear power
and strategic power networks). The application of the override
procedure to contractual arrangements which have been freely negotiated
between shareholders also gives cause for concern.
"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."
1.18 The Minister also provided a Regulatory Impact Assessment
(RIA). The RIA identifies the main benefit of the draft Directive
as possible encouragement of cross-border takeover activity (a
central element of the Financial Services Action Plan). It notes
that there are no significant requirements in the draft in relation
to the takeover bid process beyond those of the City Code and
there would, therefore, be no benefits in relation to takeovers
under the provisions of the Code. But an important potential benefit
to UK shareholders in companies incorporated outside the UK is
the "mandatory bid" rule, which lies at the heart of
the City Code. Without a mandatory bid requirement, shareholders
have no right of exit from a company, a right which is essential
if they are unhappy with the identity of the new effective controller
of the company. However the RIA notes that the present proposal
does not prescribe a threshold at which a mandatory bid has to
be tabled, which could allow Member States to set a very high
threshold (in the UK it is currently 30%) and thereby limit the
protection offered to shareholders.
1.19 Another benefit cited in the RIA for UK shareholders,
and also for UK companies bidding for overseas companies, is the
requirement in the draft Directive, reflecting provisions in the
City Code, that boards of target companies may only take action
to delay or stop a bid with prior authorisation by shareholders,
related to the specific bid. The RIA adds that the provisions
on disclosure and transparency of company share structures and
control systems, addressing the issue of protective company control
structures, will benefit markets generally across the EU.
1.20 On the costs of the draft Directive, the RIA says
compliance costs would arise only in relation to the disclosure,
transparency and override provisions and that these might be offset
by resulting benefits for the individual companies concerned.
There would be no budgetary or new publicity costs arising from
the proposal. There would be enforcement costs for the Department
of Trade and Industry and financial market regulators in securing
compliance with the disclosure and transparency provisions.
Conclusion
1.21 We were content to clear the previous draft of
the proposed Takeovers Directive (the Conciliation Text), not
only because it had been overtaken by events, but because it was
similar to the Common Position we had cleared earlier. The new
document appears to retain much of benefit from earlier drafts.
But securing a satisfactory outcome may still be difficult.
1.22 We note that on some issues, for instance protection
of shareholders or avoidance of tactical litigation, the Government
regards the new provisions as acceptable. On the other hand, on
other issues, such as the possibility of jurisdiction being split
between supervisory authorities, the threshold for mandatory bids
or the potential effect of the override provision on freely negotiated
contractual arrangements, achieving a satisfactory outcome seems
less certain.
1.23 The proposal for a Takeovers Directive continues
to raise important issues which warrant closer examination. Accordingly
we recommend that the document be debated in European Standing
Committee C.
1 Official
Report, European Standing
Committee B, 12 February 1997, cols. 1- 36. Back
2 (18557)
12335/97; see HC 155-xii (1997-98), paragraph 3 (14 January 1998),
HC 34-xxi (1998-99), paragraph 3 (26 May 1999) and HC 34-xxii
(1998-99), paragraph 5 (16 June 1999). Back
3 (22206)
6367/01; see HC 28-xii (2000-01), paragraph 4 (25 April 2001),
and (22494) 3629/01; see headnote. Back
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