CHAPTER 1: Introduction
1. Takeovers are a common feature of corporate
and commercial life. They occur when one company acquires control
over another, usually by the purchase of a sufficient number of
shares. Takeovers of public companies in the UK have since 1968
been subject to an extra-statutory system of control by the Takeover
Panel which has formulated, interpreted and enforced a body of
rules, the City Code.
Those rules have sought to secure the fair treatment of all shareholders
in the target company and the orderly conduct of takeover bids
on the securities markets. In particular the Panel will police
any hostilities between the companies where the bid is not agreed
and is a hostile one (ie not recommended for acceptance
by the board of the target company). The UK system is generally
considered to have operated most effectively notwithstanding that
it has no "visible means of legal support".
2. The proposal for an EC Takeovers Directive
(the Directive) would establish a framework for the protection
of shareholders throughout the Union and provide minimum guidelines
on the conduct of takeover bids. It would apply to all companies
traded on a regulated market. The Directive would lay down common
rules and principles providing for equal treatment for shareholders
in the same situation, full information about the offer, institution
of a mandatory bid,
and control by supervisory authorities. The Directive would fundamentally
change the position in the UK by requiring the City Code and its
enforcement to be put on a statutory footing. There would be less
freedom for the Panel to amend the Code. Consistency with the
Directive would be required. There would be increased opportunities
for legal challenges. There is a risk that litigation, tactical
or otherwise, would increase.
3. This is not our first Report on this subject.
The proposal for an EC Takeovers Directive has a long history.
The matter has proven to be an exceptionally difficult and controversial
one and is of considerable interest to a number of Member States
including, because of the implications, described above, the UK.
4. The Commission first put forward a draft in
It was over detailed and ran into substantial opposition. Following
consultation with the Member States a revised text was published
in 1996. This was the subject of detailed inquiry and Report by
the Select Committee.
Following extensive negotiations a compromise was, in 2001, eventually
hammered out between the Council and the European Parliament.
This produced the so-called Conciliation text. Success appeared
to be within grasp. But the text had to be put to the vote in
the European Parliament and, by the narrowest of margins (just
one vote), the proposal fell.
5. However, a Takeovers Directive remained high
on the list of priorities in the Financial Services Action Plan
(FSAP) agreed to by Heads of State and Government at the Lisbon
Summit in March 2000: the FSAP has the aim of creating an integrated
financial market within the EU and is scheduled for completion
by 2005. The Commission, having first sought the views of a "High
Level Group of Company Law Experts" and after a brief consultation,
has brought forward a revised text. It adopts some of the ideas
of the High Level Group by providing, for example, for general
pre-bid information on listed companies to be published and for
a "breakthrough" procedure.
The new text also responds to some of the concerns expressed by
the European Parliament. Notably, it provides a definition of
the "equitable price" to be offered by the mandatory
bid. It also contains harmonised rules for two procedures that
might be needed after a successful takeover: first, a "squeeze
out" right, allowing the new majority shareholder to require
the remaining minority shareholders to sell their shares to him;
and, second, a "sell-out" right, enabling minority shareholders
to require the new majority shareholder to buy their shares. Technically
the Directive is a new proposal but because it bears many of the
features of the Compromise text and contains the main changes
described above it is to be hoped that it will have a speedy path
through the legislative process. But there remain a number of
important issues to resolve. We refer to these in Part 3 of this
6. In our 1996 Report we were far from enthusiastic
about the notion that there should be a European Takeover Directive.
We doubted whether any directive on takeover bids was necessary.
The UK has a sophisticated and highly effective system of control
of takeovers and a directive would inevitably change the fundamental
nature of the control regime, bringing with it an increased risk
of disruptive tactical litigation. We have therefore approached
this current proposal with a particularly critical eye. We wish
to be sure that there would be real benefits for the Union and
its Member States, and especially the UK, in harmonisation by
directive and that the Directive as adopted would be likely to
deliver them. This has been our starting point and the focus of
the questions put to our witnesses in this brief inquiry.
7. Sub-Committee E (Law and Institutions), whose
members are listed in Appendix 1, carried out the inquiry into
the issues raised by the Commission's revised text of the Takeovers
Directive. We took evidence from Melanie Johnson MP, Parliamentary
Under Secretary of State, Department of Trade and Industry, and
from the Takeover Panel and the CBI. We are grateful for their
assistance in this inquiry. The witnesses are listed in Appendix
2. The evidence, both written and oral, is printed with the Report.
1 For a more detailed account of the supervision of
takeover bids in the UK and the role of the Takeover Panel and
the City Code, the reader is referred to Part 2 of our earlier
report, Takeover Bids (13th Report, 1995-96, HL Paper 100). Back
As Lord Donaldson of Lymington described the situation in the
leading case on the position of the Panel: R v Panel on Takeovers
and Mergers, ex.p. Datafin plc  Q.B. 815. Back
An obligation on the offeror, when he has reached a certain level
of shareholding, to bid for all the remaining shares. Back
Proposal for a Thirteenth General Directive on company law concerning
takeover and other general bids.  OJ C 64/8. Back
Takeover Bids, 13th Report, 1995-96, HL Paper 100. Back
This would enable the takeover bidder having acquired 75 per cent
or more of the risk-bearing capital of the target company to override
any defence structures that prevented it exercising control of
the company (for instance, the right to dismiss the board of directors). Back