Select Committee on European Union Twenty-Eighth Report

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.[1] 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]

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,[3] 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 1989.[4] 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.[5] 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.[6] 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 Report.

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

2   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 [1987] Q.B. 815. Back

3   An obligation on the offeror, when he has reached a certain level of shareholding, to bid for all the remaining shares. Back

4   Proposal for a Thirteenth General Directive on company law concerning takeover and other general bids. [1989] OJ C 64/8. Back

5   Takeover Bids, 13th Report, 1995-96, HL Paper 100. Back

6   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

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