House of Commons - Explanatory Note
Company Law Reform Bill [HL] - continued          House of Commons

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The Panel and its rules

Clause 642: The Panel

1115.     This clause confers on the Panel the takeover regulatory functions set out in Chapter 1. The Panel is empowered to do anything that it considers necessary or expedient in relation to its prescribed functions and it may also make arrangements for such functions to be carried out on its behalf by a committee or sub-committee of the Panel or an officer or member of staff of the Panel or a person acting as such.

1116.     The Panel will remain an unincorporated body, as constituted from time to time, and, as such, having rights and obligations under the common law. Those rights and obligations will be supplemented by the specific provisions set out in the Bill.

Clauses 643 and 644: Rules; and Further provisions about rules

1117.     The Panel is given the power to make rules in relation to takeover regulation. The rule-making power is broadly drawn to ensure that the Panel can continue to make rules on the range of matters presently regulated by the City Code on Takeovers and Mergers. The following provisions are included:

    a)     The Panel is placed under an obligation to make rules as required by specified Articles of the Takeovers Directive. These are the general principles (Article 3.1 of the Directive), jurisdictional rules (Article 4.2), matters related to the protection of minority shareholders, mandatory bid and equitable price (Article 5), contents of the bid documentation (Article 6.1 to 6.3), time allowed for acceptance of a bid and publication of a bid (Articles 7 and 8), obligations of the management of the target company (Article 9) and other rules applicable to the conduct of bids (Article 13). In making rules in relation to these Articles, the Panel will be entitled to exercise Member State options where these are provided for in the Directive. The Panel's rules will not, however, deal with certain matters contained in the Directive such as squeeze-out and sell-out (Articles 15 and 16), information to be published by companies in their annual reports (Article 10) and barriers to takeovers (Article 11) which are more appropriately dealt with in company legislation (and are the subject of further provision at Chapters 2 and 3 of this Part).

    b)     The Panel is permitted to make rules on takeover bids (including, but not limited to, those which are the subject of the Directive), mergers and other transactions affecting the ownership or control of companies. The power is designed to be broad enough to cover the existing scope of the Code and sufficiently flexible to take account of future market developments. Types of matters currently covered by the Code but not covered by the Directive include the takeovers of companies not traded on a regulated market and transactions involving a change of control of a like nature to takeovers.

1118.     When making rules under this clause, the Panel must do so by a committee of the Panel, except in the case of rules for fees and charges under clause 657 which must be made either by a committee of the Panel or by the Panel itself.

1119.     The further provisions about rules that may be made by the Panel under clause 644 include the power to grant derogations and waivers, which by virtue of clause 643(1) must respect the general principles laid down in Article 3.1 of the Directive.

1120.     Clause 644(2) to (7) makes provision as to the form, public availability and verification of rules made by the Panel.

Clause 645: Rulings

1121.     This clause enables the Panel, including (by virtue of clause 642(3)) its Executive, to make rulings on the interpretation, application or effect of the rules made by the Panel.

1122.     To the extent and in the circumstances specified in the rules, a ruling of the Panel has binding effect unless reviewed by the Hearings Committee or successfully appealed to the Appeal Board in accordance with rules made under clause 651. It is envisaged that rules made under clauses 643 and 644 will address matters such as notice to parties and right of representation of persons who might be bound by a Panel ruling.

Clause 646: Directions

1123.     This clause allows the Panel to make provision in its rules for it to give a direction preventing a person from breaching the rules (including on an interim basis whilst a matter is awaiting determination by the Panel) or otherwise to ensure compliance with the rules.


Clause 647: Power to require documents and information

1124.     The Panel has historically had no formal power to require those involved in takeover activity to provide it with the information the Panel requires to carry out its functions. Persons authorised under the Financial Services and Markets Act 2000 are required by the rules of the Financial Services Authority to provide information and assistance to the Panel. In relation to others, the Panel has relied on the voluntary co-operation of market participants to provide explanations and documents which are not publicly available.

1125.     This clause enables the Panel to require the production of such documents and information as it may reasonably require in the exercise of its functions. The Panel may also authorise a person to exercise the powers under the clause on its behalf, for example, if the Panel were to appoint a law or accountancy firm to help it collect and analyse documents.

1126.     Clause 647(7) provides that a lien on a document is not affected by the production of that document in compliance with a requirement imposed by the Panel or someone authorised on its behalf. A lien is a legal right to keep possession of a document belonging to someone else until a claim is satisfied - for example, a claim for payment of professional fees. This subsection does not entitle a professional to refuse to hand over a document to the Panel but preserves his rights over those documents.

1127.     The clause provides that the Panel may require the production of information in hard copy where it is held in some other form (for instance, electronically on a floppy disk).

1128.     The Panel may not compel the production of documents which would be protected from disclosure in legal proceedings on the grounds of legal professional privilege or confidentiality of communications.

Clauses 648 and 649: Restrictions on disclosure; Offence of disclosure in contravention of section 648

1129.     These clauses provide that information obtained by the Panel in the course of its functions will be subject to restrictions on onward disclosure. Aside from the desirability of such provisions so that those providing information to the Panel can do so knowing that it will not be subject to improper further disclosure, these provisions also meet a requirement under Article 4.3 of the Directive that Member States shall ensure that information provided to those employed, or formerly employed, by takeover supervisory authorities shall not be further divulged: "to any person or authority except under provisions laid down by law." Clause 648, accordingly, prescribes the conditions under which such information can be released.

1130.     Information concerning the private affairs of an individual or a business provided to the Panel in connection with its functions may not be disclosed during the individual's lifetime or while the business is carried on without the consent of the individual or business in question except for the purposes of carrying out the Panel's functions or unless it is disclosed to a person or for a purpose set out in Schedule 2.

1131.     Schedule 2 sets out the "gateways" for disclosure of information obtained by the Panel in the exercise of its functions which are permitted under clause 648, including the circumstances in which a disclosure to an overseas regulatory authority is permitted. Under clause 648(4) and (5), the Secretary of State has the power to amend the Schedule, but only to specify persons exercising functions of a public nature or descriptions of disclosure where the purpose for which the disclosure is permitted is likely to assist in the exercise of a function of a public nature.

1132.     Clause 648(6)(a) provides that certain authorities mentioned in subsection (7) are not bound by the restrictions on disclosure imposed by subsection (2). These bodies are those other takeover supervisory authorities and financial services regulators with which the Panel has a duty to co-operate. Subsection (6)(b) provides that persons or bodies obtaining information from those authorities (whether directly or indirectly) are also not bound by the restrictions on disclosure imposed by subsection (2). These provisions are necessary to implement fully Article 4.4 of the Directive. Those bodies mentioned in subsection (7), and persons and bodies receiving information from them, will themselves be subject to restrictions on disclosure that will mirror those imposed by clause 648, and so information originating from the Panel will still be protected from improper further disclosure.

1133.     Clause 649 makes it an offence to disclose information in contravention of clause 648. A person guilty of such an offence is liable on conviction on indictment to two years' imprisonment or a fine or both; and on summary conviction to twelve months' imprisonment (six months in Scotland and Northern Ireland) or a fine or both. Clause 649(1) provides a person with a defence if he can prove that he did not know, and had no reason to suspect, that the information in question had been provided to the Panel in the exercise of its functions; or that he took reasonable steps to prevent wrongful disclosure.


Clause 650: Panel's duty of co-operation

1134.     Article 4.4 of the Directive requires that takeover supervisory authorities and financial services regulators provide reasonable assistance to other such authorities within the EEA for the purposes of the Directive. This clause is designed to give effect to this requirement by obliging the Panel to co-operate with overseas takeover and financial services regulatory authorities.

1135.     The form and manner of co-operation will be as the Panel considers appropriate in the light of the circumstances (in particular, its power to require documents and information may be exercised to support such an authority) and may include sharing information which the Panel is not prevented from disclosing. The clause mirrors similar co-operation obligations imposed on the Financial Services Authority by section 354 of the Financial Services and Markets Act 2000.

Hearings and Appeals

Clause 651: Hearings and Appeals

1136.     This clause ensures that proper procedures for review of and appeal against decisions taken by the Panel in connection with its regulatory functions are provided. Clause 651(1) requires that the rules made by the Panel provide for a decision of the Panel to be subject to review by a "Hearings Committee" when requested by affected persons specified in the rules. Clause 651(3) provides for a right of appeal, as provided for in the rules, to an independent tribunal (the "Takeover Appeal Board") against a decision of the Hearings Committee. The rules may make provision in relation to the Hearings Committee as to procedural matters, evidence and the powers of the Committee. Further, rules may contain provisions related to enforcement of decisions of the Hearings Committee and the Takeover Appeal Board.

1137.     The clause also requires the rules to provide that:

    a)     when appearing before the Hearings Committee or the Takeover Appeal Board, the Panel must act through an officer or member of staff of the Panel (who must not be a member of the rule-making committee referred to in clause 643(5), the Hearings Committee or the Appeal Board); and

    b)     no person who is, or has been, a member of the rule-making committee can be a member of the Hearings Committee or the Takeover Appeal Board.

1138.     The general rules of natural justice will preclude a person who had taken part in a decision from later considering a review or appeal in relation to that decision.

1139.     This approach is designed to ensure a clear and transparent division of responsibilities between the various organs of the Panel in its executive, judicial and rule-making roles.

Contravention of rules, etc

Clause 652: Sanctions

1140.     This clause confers on the Panel the power to make rules for imposing sanctions for breach of its rules or directions given under clause 646. The Panel's current sanctions regime, which is set out in the Introduction to the City Code on Takeovers and Mergers and which it is envisaged will remain in place under the Bill, provides for private and public statements of censure of persons in breach of the Code.

1141.     Particularly flagrant breaches may lead to the Panel publishing a statement indicating that the offender is someone who is not likely to comply. The rules of the Financial Services Authority and certain professional bodies oblige their members, in certain circumstances, not to act for such persons in a transaction subject to the City Code on Takeovers and Mergers, including dealing in relevant securities requiring disclosure under rule 8 of the Code (so-called "cold-shouldering"), and this may continue in respect of transactions subject to Panel rules after the Bill comes into force. (The Panel will also be able to pass information concerning breaches of rules to other regulatory authorities and professional bodies by virtue of the statutory "gateways" set out at clause 648 and Schedule 2.)

1142.     Should future rules made by the Panel confer a power on the Panel to impose a sanction of a kind not contained in the City Code on Takeovers and Mergers as it has effect immediately before the passing of the Bill, the Panel must prepare a policy statement in respect of the sanction. The policy statement must set out the policy of the Panel with regard to imposition of the sanction and, for financial penalties, the penalty that may be imposed. An element of the policy must be that the Panel, in making a decision about any such matter, have regard to the seriousness of the breach or failure, the extent to which the breach or failure was deliberate or reckless and whether the person on whom the sanction is to be imposed is an individual.

Clause 653: Failure to comply with rules about bid documentation

1143.     This clause creates new offences in relation to takeover bid documentation (i.e. offer documents prepared by the bidder and documents in response to the bid prepared by the board of the target company). Provisions related to bid documentation are laid down in particular by Articles 6.3 and 9.5 of the Directive which are to be implemented by rules which the Panel are obliged to make under clause 643. Consequently, in each case an offence will be committed where the document in question does not comply with rules designated by the Takeover Panel as giving effect to those provisions. The offence relating to offer documents may be committed by the bidder and any of its directors, officers or members who caused the offer document to be published. The offence relating to response documents may be committed by directors or other officers of the target company. Where either offence is committed by a corporate body (for instance, a corporate director), provisions are also included dealing with liability of directors, officers or members of that body. In each case, an offence will be committed only where the relevant person knew that the document did not comply (or was reckless as to whether it did so) and failed to take all reasonable steps to ensure that it did comply.

1144.     A person guilty of an offence under this provision is liable on conviction to a fine (on summary conviction limited to the statutory maximum).

Clause 654: Compensation

1145.     This clause confers on the Panel the power to make rules providing for financial redress (together with interest (including compound interest)) in consequence of a breach of rules which require monetary payments to be made (for instance, a payment by the bidder to shareholders of any difference between the price actually paid and any higher price for shares that the bidder should have paid under the rules).

Clause 655: Enforcement by the court

1146.     This clause provides a mechanism by which the Panel may, if necessary, apply to the court in order to enforce Panel rule-based requirements as well as requests for documents and information under clause 647. The Panel may apply to the court either where there is reasonable likelihood that a person will contravene a requirement imposed by or under the rules or where a person has failed to comply with such a requirement or with a requirement imposed under clause 647.

1147.     It is expected that in accordance with usual practice, the court will not, in exercising its jurisdiction under this clause, rehear substantively the matter or examine the issues giving rise to the ruling or, as the case may be, the request for documents or information except on "judicial review principles", where there has been an error of law or procedure.

1148.     The court is given a broad discretion as to the order it may make to secure compliance with the requirement; but aside from the power granted to the Panel by this clause, there is no right to seek an injunction (or interdict) to prevent a person contravening, or continuing to contravene, a rule-based requirement or disclosure requirement.

Clause 656: No action for breach of statutory duty etc

1149.     Compliance with the rules made by the Panel is a matter solely for the Panel. This clause does two things:

    a)     it excludes new rights of action for breach of statutory duty for contraventions of requirements imposed by or under rules or a requirement imposed under clause 647; and

    b)     in order to ensure certainty, it provides that transactions are not made void or unenforceable and (subject to any provision of the rules) that the validity of any other thing is not affected. As currently, transactions will be capable of being set aside or unravelled in cases of, for example, misrepresentation or fraud.


Clause 657: Fees and charges

1150.     This clause enables the Panel to make rules for the payment of fees or charges to the Panel for the purposes of meeting the Panel's expenses incurred in exercising its functions. Such fees and charges may be imposed to meet expenses of the Takeover Appeal Board; the cost of repaying capital and paying interest on loans; and

the cost of maintaining adequate reserves. The rules under this clause must be made by the Panel itself or by a committee of the Panel (clause 643(4)).

Clause 658: Levy

1151.     This clause gives the Secretary of State the power to make regulations imposing a levy for meeting the costs of the Panel. In determining the appropriate rate of the levy, the Secretary of State must take account of other income received, or expected to be received, by the Panel (which would include fees and charges under clause 657) and may take account of estimated as well as actual costs of the Panel.

1152.     It is anticipated that a levy would only be imposed if the existing voluntary levy funding arrangements (contributions collected by member firms of the London Stock Exchange and Ofex currently set at a flat rate charge of £1 on contract notes on all chargeable transactions with a consideration in excess of £10,000) were no longer viable. The categories of persons or bodies to which the levy would apply may include only those capable of being directly affected by the exercise of the Panel's functions or otherwise having a substantial interest in the exercise of those functions.

1153.     The first regulations made in respect of the levy power - and any further regulations which change the persons or bodies by whom, or the transactions on which, the levy is payable - will be subject to the affirmative resolution procedure in both Houses of Parliament (but a draft of an instrument containing such regulations will not be treated as being hybrid even if otherwise it would be). Any other subsequent regulations will be subject to the negative resolution procedure.

Clause 659: Recovery of fees, charges or levy

1154.     This clause provides that an amount payable by a person as a consequence of fees and charges imposed by the Panel under clause 657 or as a result of any levy fixed by the Secretary of State under clause 658 will constitute a debt owed by that person to the Panel and be recoverable by the Panel as a debt.

Miscellaneous and supplementary

Clause 660: Panel as party to proceedings

1155.     This clause provides that, notwithstanding its unincorporated status, the Panel may in its own name bring proceedings under this Chapter and bring or defend other proceedings.

Clause 661: Exemption from liability in damages

1156.     This clause confers limited immunity on the Panel and those involved in carrying out its regulatory activities. The immunity provisions are consistent with those recently extended to the Financial Services Authority and the Financial Reporting Council in the exercise of their duties under financial services and companies legislation.

1157.     The clause exempts the Panel, its members, officers and staff (which would include secondees), and persons authorised under clause 647(5) by the Panel to exercise its powers in relation to requiring documents and information, from liability in damages for things done or omitted in relation to the Panel's regulatory activities. (The Takeover Appeal Board benefits from a common law immunity on account of its exercise of judicial functions.)

1158.     Clause 661(3) sets out the circumstances where the exemption will not apply - that is to say, where the act or omission was in bad faith or where it was unlawful under section 6(1) of the Human Rights Act 1998.

Clause 662: Privilege against self-incrimination

1159.     This clause provides that a statement made by a person to the Panel, or a person authorised on its behalf, in compliance with a requirement to provide information under clause 647 (or a court order made to secure compliance with such a requirement under clause 655) cannot be used against that person in most types of criminal proceedings. Such statements can, however, be used in proceedings for offences of making false statements otherwise than on oath under section 5 of the Perjury Act 1911 and its Scottish and Northern Irish equivalents. These offences exist to deter and punish the making of false statements and it would not be possible to prosecute such offences if the false statements themselves could not be used in evidence against those by whom they were made.

Clause 663: Annual reports

1160.     Consistent with the Panel's existing practice, the Panel will be required to publish an annual report containing annual accounts, setting out how the Panel's functions were discharged and including other matters considered by the Panel to be of relevance. Annual reports published by the Panel are available on the Panel's website.

Clause 664: Amendments to Financial Services and Markets Act 2000

1161.     This clause repeals section 143 of the Financial Services and Markets Act 2000 ("FSMA") which, by endorsing the City Code on Takeovers and Mergers, presently provides a mechanism for the Financial Services Authority to bring disciplinary and enforcement action against authorised persons for misconduct in relation to the Code. Given that the Code will be replaced by rules which have legal force as a consequence of the Bill, it is considered that there is no longer a need to maintain section 143.

1162.     This will not, however, preclude the Panel from reporting breaches of the Code by authorised persons in relation to takeover bids to the Financial Services Authority, as at present, and any such breaches will still be taken into account by the FSA, for example, in assessing whether such persons are fit and proper to be authorised for business of that kind or have otherwise complied with their regulatory

obligations (for example, whether they are meeting proper standards of market conduct).

1163.     A consequential amendment is made by clause 664(3) to preserve the definition of "consultation procedures" currently contained at section 143(7) for the purposes of the provisions in section 144 of FSMA relating to price stabilising rules. Additionally, consistent with the requirements of Article 4.4 of the Directive as regards the duties of takeover regulatory and financial services authorities within the EU to co-operate with each other, the existing disclosure and regulatory co-operation obligations of the Financial Services Authority under sections 349 and 354 of FSMA are amended to include cooperation with relevant authorities referred to by the Directive and to remove restrictions on disclosure to such authorities. These duties reflect the disclosure and co-operation provisions in clauses 648 and 650 (including provisions related to the rules on disclosure that apply where information is passed to other takeover supervisory authorities and financial services regulators described in relation to clause 648(6)).

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Prepared: 26 May 2006