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European Standing Committee C Debates

Takeover Bids

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European Standing
Committee C

Wednesday 19 March 2003

[Mr. Joe Benton in the Chair]

Takeover Bids

[Relevant Documents: European Union document No. 12846/02 and the unnumbered Explanatory Memorandum from the Department of Trade and Industry dated 4 March 2003 on the Council Presidency Compromise Proposal of 14 February 2003.]

2 pm

Dr. Stephen Ladyman (South Thanet): On a point of order, Mr. Benton. May I, through you, pass a message to the European Scrutiny Committee that if it wishes us to debate matters, its report should use words that conform to the rules of Scrabble? It uses the word ''comitology'' three times. I completely fail to understand it and it is not even in the longer Oxford dictionary. It is difficult to understand the document without understanding that word, and the European Scrutiny Committee should take that on board when writing to us.

The Chairman: That is not a point of order for me, but I sympathise with the hon. Gentleman and his comments will be noted.

The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson): The proposal under discussion today—a directive on takeovers—has a long and tortuous history, as Members may be aware. Its predecessor failed, infamously, by only one vote to be adopted by the European Parliament in July 2001. Thirteen years of toil on the 13th European company law directive have proved neither fruitful nor lucky. If the history of the proposed directive is shrouded in disappointment, we now have a proposal with a number of positive elements to provide real benefits. The Commission has made considerable efforts to revive the proposal since it fell before the European Parliament and, in particular, the January 2002 report of the high-level group of company law experts appointed by the Commission included stimulating and thought-provoking ideas.

On balance, the Government agree with the high-level group of experts that takeovers may promote business synergies, act as a discipline on corporate management and result in premiums to shareholders. That is not to say that all takeovers are necessarily a good thing, but they are a fact of business life and, to that extent, common standards of takeover regulation throughout the EU are desirable to promote a single market in corporate control.

Launched in October 2002, the Commission's new proposal has two main expressed purposes: taking forward the Lisbon single market agenda to foster a competitive economy in the EU while ensuring that proper safeguards are in place for investors. The

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Government have no difficulty in supporting both those aims.

So far, there have been six Council working groups. The presidency's latest compromise proposal was issued in March and it reflects the working group discussions to date. The European Parliament, which has obtained its own independent academic report, held a public hearing on 28 January. The proposal is being considered by a number of European Parliament Committees and we are closely following their deliberations.

The directive would apply to takeover offers for the shares of companies incorporated and traded within the EU. The new draft retains core elements of the 2001 proposal. That includes both general principles, such as equivalence of treatment for shareholders, as well as more detailed provisions relating, for example, to the information to be provided to shareholders. The proposal also builds on the work of the high-level group of experts on, for example, the detailed provisions as to disclosure of company control and share structures to hone the cutting edge of market forces.

On shareholder protection, the proposal contains a number of important elements, not least the mandatory bid and equitable price provisions. They will ensure that a predator cannot assume control of a target company without having to offer a fair price to all shareholders. Similarly, new provisions—called ''squeeze-out'' and ''sell-out''—deal with the problems of, and for, residual minority shareholders following a successful takeover bid. Those welcome provisions are largely consistent with existing UK law and practice.

On the wider matter of corporate control within the EU, the issues are more ambiguous. Central to the 2001 proposal's failure was the question of the level playing field and the extent to which it is proper for the proposal to override existing defensive corporate control and share structures across the EU. That important debate goes on, and the UK is well placed to influence it positively.

UK law does not constrain the types of share structures that companies may adopt. Nevertheless, the markets, led by the institutional investor community, have come to see differential share structures as contrary to the best standards of corporate governance. Consequently, such structures are few and far between among UK-listed companies. Equally, the UK takeover code contains robust provisions to prevent the management of a target company from taking action to frustrate a takeover bid without approval from shareholders at the time of the bid.

It is not difficult to see why the balance of the Commission's October 2002 proposal attracted criticism. The proposal was relatively hard hitting against frustrating action by management, but more restrained in the extent to which it overrode pre-existing share structures. Restrictions on transfers of shares and voting rights of shares were in, and multiple voting rights were out. The new compromise proposal seeks to address that imbalance

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by overriding shares in a distinct and separate class carrying more than one vote. The Government believe that the right approach is to seek a directive, which, on the basis of consensus among member states, is a real step forward towards a single market for corporate control. I look forward to hearing Committee members' remarks on such matters and to their support for the motion.

The Chairman: We have until 3 o'clock, at the latest, for questions to the Minister. I remind Members that questions should be brief and should be asked one at a time. There is likely to be ample opportunity for all Members to ask several questions.

Mr. Crispin Blunt (Reigate): I have a series of questions, which I will ask one at a time—issue by issue. Will the Minister begin by explaining the meaning of ''comitology'' to the hon. Member for South Thanet (Dr. Ladyman) and by telling the Committee how her colleagues in the European Parliament voted on the takeover directive?

Miss Johnson: I am grateful to the hon. Gentleman for asking the question that my hon. Friend the Member for South Thanet raised earlier. Comitology is a procedure, and the term is used in European processes. I am not sure that my hon. Friend is as ignorant of those processes as he pretends.

Comitology is part of a process. It is, for example, a means of introducing secondary legislation in the financial services field. It works as an arrangement for the distribution of the balance of how decisions are made across the Community and it relates to arrangements between what is dealt with in primary legislation and what is dealt with in secondary. In this case, the second tier is the European Securities Committee, which decides whether to adopt the Commission's proposals. Four tiers are envisaged under the Lamfalussy procedures, which resulted from work done by Baron Lamfalussy and his group, who looked at how arrangements might work. The term ''comitology'' is widely used in European parliamentary and Council decision-making processes. Was there a second question?

Mr. Blunt: I asked about the attitude taken by the Minister's colleagues in the European Parliament.

Miss Johnson: I am grateful. The UK MEPs were broadly supportive in 2001. We have maintained contact with them during the current discussions and hope that they will be broadly supportive again if it comes to a further decision by the European Parliament, as we hope it will, eventually.

Dr. Ladyman: Nobody in the House is a greater supporter of the European Union than me, but I will not have it playing with words. We should draw a line there, because absence from the Oxford dictionary is a step too far. I thank my hon. Friend the Minister for explaining what the Europeans think that ''comitology'' means. Will she explain why it is important to have a level playing field across the European Union for takeover bids? For obvious reasons, companies want to be quoted on a highly regulated stock market such as that in the UK, but what is in it for the UK if other stock markets are less

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well regulated and therefore less able to attract major companies?

Miss Johnson: We believe that the measure is attractive because it is a key component in implementing the financial services action plan. We have always broadly supported the financial services action plan, which is attractive because there are huge opportunities in making the single market for financial services work well. Indeed, there are a number of opportunities for the UK financial services sector and for UK business in making the single market work better. The takeovers directive is a key component of the plan.

Importantly, we can influence the debate because we have a genuinely open market in the UK and we are not subject to some of the constraints operating in other EU member states. There are, of course, all sorts of possible advantages, and my hon. Friend asked me about them. I have already said that the measure is a key component of the financial services action plan, and it could lead to increased European takeover activity, which might be taken with corporate restructuring measures. We believe that it will promote an EU business environment in which we can play a fuller part. The shareholder protections—for example, the mandatory bid extension and the improved rule on equitable price—will be attractive to shareholders in Europe. That will help us generally to strengthen the EU financial markets.


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