Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Gentlemen, good afternoon. May I, on behalf of the Committee, thank you all very much indeed for taking the time this afternoon to come and help us with the new Takeover Directive proposals. I know you are all very busy and we are very grateful to you for the time you have taken to come. May I start by inviting you each for the purposes of the record just to introduce yourselves.

  (Mr Remnant) I am Philip Remnant, Director General of the Takeover Panel.
  (Mr Hinton) I am Noel Hinton, deputy Director General of the Takeover Panel.
  (Mr Armitage) I am Roderick Armitage. I am head of company affairs at the CBI.
  (Mr Oliver) I am Michael Oliver. I am Chairman of the CBI Companies Committee.

  2. Thank you all very much indeed. You will know that this Committee under Lord Hoffmann, who was then the chairman, looked at proposals for a Takeover Directive in 1996 and took evidence from individuals in all the institutions that you represent or that you are members of and published a report which queried whether a European Union Takeover Directive was really necessary or justified. One of the particular fears was that if there was such a Directive implemented by legislation it might be expected to lead to tactical litigation—which is not a feature of the takeover scene in this country at the moment. I wonder if you have a view as to whether a Directive now, some seven years on, in 2003, is justified or necessary having regard to the way in which the takeover controls, the regulatory system, works in this jurisdiction?
  (Mr Remnant) Perhaps I could make one or two comments on that. Certainly, there is nothing in the Directive that I would say enhances the system of takeover regulation in the UK. We have the most sophisticated and developed system of takeover regulation in Europe, which has proved itself over the last thirty years or so and I do not think that it is in any way enhanced by the very basic requirements of the Directive, which is a minimum standards Directive. However, being a minimum standards Directive, it does enable Member States to have more detailed and more rigorous rules, which of course we have and which will mainly not be impacted by the Directive. If you are looking at the Directive with perhaps a wider UK hat on, then you have to weigh up what benefits may be gained by UK investors in European companies and indeed UK companies wanting to help in the consolidation of European markets and indulge in takeover activity. There are some provisions in the Directive—notably I would say the Article which deals with the requirement for mandatory bids, which is Article 5, and indeed Article 9 which deals with management not being able to take action which might frustrate a bid without the approval of shareholders—which are provisions which will be important in helping protect UK investors and UK companies in Europe. But the Directive is very thin on substantive detail and even those Articles I have referred to are not ideal; they are fairly weak. For instance, the mandatory bid Article does not actually define a common threshold for control. It has, however, been improved now in terms of providing a minimum equitable price. I think overall there is a balance to be struck between potential advantages that would be derived from UK companies/investors in Europe against potential disadvantages with the potential for increased litigation in the UK. What we would not want to see is the provisions of the Directive, as it stands at the moment, diluted in any way, specifically as regards Article 9, and there are certain other improvements that we would want to see.

  3. I will come back to the improvements you would like to see in a moment, if I may. Lord Hoffmann's report referred to what he called "soft harmonisation", by which I understand him to mean harmonisation which is not directed by some sort of legislative instrument, which he expected to happen in the ensuing years after the publication if his report. As I say, we are some seven years on. Has there been any significant degree of soft harmonisation in this area that might make the intervention of legislation unnecessary?
  (Mr Remnant) I think there definitely has been such soft harmonisation. The position now is very different from what it was fourteen years ago, when there were the first discussions on the Directive, and I think through market forces—although it is certainly not uniform in any way through the EU and of course we are just about to have a number of additional countries added to the Community who perhaps are not as sophisticated in terms of takeover regulation as perhaps the existing Members of the EU—over that time a number of countries which either did not have any takeover regulation before now have such regulation, or indeed those countries which did have some form of takeover regulation have strengthened their provisions. I think that now, for instance, the majority of countries within the EU do have a mandatory bid provision.

  4. That being so, what is your professional experienced view as to the justification now of legislative intervention in this particular field?
  (Mr Remnant) We have believed for some time, especially since the UK signed up to the Common Position four years ago, that there was likely to be a Directive and therefore the Takeover Panel's views and efforts have been very much focussed on working with the DTI and with MEPs, and speaking to authorities in other Member States, in trying to make the text of the Directive as acceptable as possible. Our view when the last Directive failed by one vote in the European Parliament just short of two years ago was that, if it had been passed in that form, it would have been "liveable with" and there have definitely been some improvements to the Directive that have now been introduced by the Commission; equally there are still certain areas that we feel are in need of improvement for the Directive at the end of the day to be acceptable.

  5. Would any other of you like to comment on those preliminary matters?
  (Mr Oliver) I really have very little to disagree with what has been said. It is our view that the Directive is better than nothing, that there is a need for the Directive, that it achieves potential benefits for UK companies and for UK investors, UK companies wishing to make bids in Europe and all those who do invest in Europe already and have minority shareholdings. We would wish it to go further in that we would wish it to cover multiple voting rights, although we accept there are difficulties in doing so.

  6. In what way would you like to see it cover multiple voting rights?
  (Mr Oliver) As a general rule we do not believe in multiple voting rights being there and we think the breakthrough provision should cover multiple voting rights. That does, however, beg a lot of questions that are not answered because the issue is not raised and that is the issue of compensation.

  7. You mean you would like to outlaw multiple voting rights?
  (Mr Oliver) That is our view.

  8. One share, one vote?
  (Mr Oliver) One share, one vote.
  (Mr Armitage) In the circumstances of breakthrough of a takeover bid. I do not think we are going so far as to say outlaw multiple voting rights.

  9. I understand in Germany that is the position.
  (Mr Armitage) It is indeed and that, of course, is why the Germans are so annoyed with that, coupled with the fact that although the Directive allows multiple voting rights to continue it does away with voting caps, which the Germans still have, and of course applies to some quite significant companies such as Volkswagen.
  (Mr Oliver) But we do agree that there are some significant issues that are raised by abolishing multiple voting rights and principally the question of should people be compensated for the loss of those multiple voting rights.

  10. Are there any particular points of substance in respect of which the City Code and the Takeover Panel's present arrangements would have to be changed if the Directive in its present form came into effect?
  (Mr Remnant) Not in detail. The principles of the Directive that are set out are based very much on the principles of the City Code and, as I have mentioned, because it is a minimum standards Directive, then Member States are allowed to have more detailed provisions into which a lot of the rules that we have would fall. I think particularly we would have to look at something as fundamental as the jurisdiction provisions because the scope of the directive applies to companies which are both incorporated and traded within the EU. The jurisdiction of the Takeover Code relates to incorporation and place of central management, rather than listing, so that will have to be looked at but I do not believe that this would throw up any particular problems. We do have one major concern in terms of a change which has been made to the Directive this time, which involves the nature of the consideration that is offered in a mandatory bid. That is in two respects. First, an offeror would be allowed to offer listed securities alone in such circumstances in a mandatory bid.

  11. You mean by liquid securities?
  (Mr Remnant) Yes, apologies, liquid securities alone, which I think is meant to relate to listed securities, whereas of course the Takeover Code stipulates that this is not sufficient and requires him to offer cash. Secondly, if a bidder offers illiquid securities, cash consideration as an alternative would be optional now rather than mandatory, as it was before, and those changes, if they remain, we believe would undermine the benefits of a mandatory bid to minority shareholders who should be offered the opportunity of a clean exit for cash from a company where control has already passed.

  12. To get out, yes. Leading on from there, one of the features of the proposal is that the Commission should have power to make rules which would be binding on all Member States in relation to the cash part of the consideration, among other things. Do you have a view on the suitability of that? I think that is 5(4), is it not?
  (Mr Remnant) Yes, we do. I think the procedure is set out in Article 17, which is referred to as the comitology procedure.

  13. That just means subordinate legislation really, does it not?
  (Mr Remnant) Yes. There are two principal issues, I would suggest, with that. One is that that procedure (i.e. using the European Securities Committee to assist the Commission effectively to make legislation) is actually only permissible in the field of securities and not company law issues into which category this Directive falls. I am not sure whether you call that a constitutional issue but I think that is an issue which is going to be raised, certainly by the Parliament, so I am not sure that that will actually at the end of the day stay as it is. I think there is also an issue as to how that procedure works with a minimum standards Directive without imposing wider requirements and additional rules through that procedure which are specifically the preserve under the Directive of individual Member States. So our preference would be to go back to what was in the last draft, which was a Contact Committee which was responsible for proposing future amendments in the light of practical experience, but those amendments would go through the normal legislative procedure involving the Parliament and the Council.

  14. You described the contents of the Directive as imposing minimum requirements so the consequence would be that each Member State would have to have a regulatory authority which would lay down rules which would at least come up to this minimum standard but subject to that, and again subject to the comitology point, it would be open to Member States to decide what rules they thought appropriate in their own jurisdiction so there would not in fact be harmonisation across the European Union of the Takeover scheme. Is that something to welcome or to regret?
  (Mr Remnant) My view is that, if one is working towards a Directive which applies across Europe, the extent to which that harmonises the procedures must be a good thing. However, as far as looking at what I believe is a very effective form of UK regulation, a minimum standards Directive, whilst perhaps not achieving harmonisation throughout Europe and therefore perhaps not inherently a good thing, does have the advantage of enabling the UK to preserve its own very effective takeover regulation: it does allow more scope for the UK to keep the detailed rules which are tried and tested, which otherwise might not be the case.

  15. One of the main fears, and I think I have referred to this already, expressed in Lord Hoffmann's report was that the introduction of legislation as the platform on which regulation is built would meant that disputes would potentially be justiciable in the courts and the fear was that this would lead to tactical litigation designed to buy time, designed to produce some publicity and have some publicity advantages, and so on. My understanding is that Article 4(6) has been particularly designed to try to allow individual Member States to prevent tactical litigation of the sort I have described. Is this something you have directed your mind to? I wonder to what extent 4(6) is satisfactory for the purposes of achieving the end I have described or whether anything more might be needed. Do you have a view about that?
  (Mr Remnant) We have directed our minds to it over the years and in fact I think it is largely as a result of the UK efforts that that provision is in the Directive. Most of our attention, to be frank, was directed at it more than a couple of years ago because it was in the last draft of the Directive: and the starting point for the way the Commission has brought forward the new Directive is essentially to take the Directive which just failed in respect of its existing provisions and to put in some additional amendments in the light of various recommendations which had been made in the meantime. We are by and large satisfied that Article 4(6) is as good as could be expected. We do think that it is going to be very important that the implementing legislation in the UK specifically takes account of what is in Article 4(6) to make sure that, to the extent there is the possibility of litigation, it is very much a defined procedure with defined safeguards including time limits in order to limit as far as possible the amount of litigation.

  16. That is helpful. Thank you. One of the amendments which I think was made in the European Parliament when the previous proposal was still alive was to add a provision giving employees certain rights to information. I think the original proposal had been to the effect that the bidder, the offeror, had to state its intentions towards the employees but there was nothing specific giving them a right to information. That has now been added and is now in Article 13 of the current proposal. Are you content with that or are there any potential problems arising out of this?
  (Mr Remnant) I do not want to hog the floor from my colleagues from the CBI but perhaps I could kick off on that. Article 13 does no more than reflect the existing position (i.e. it refers to other European Directives). Of course, one of those Directives is commonly referred to as the Information and Consultation Directive, which has passed through Brussels and now needs to be implemented by the Member States. I think there will be public consultation on that within the UK promoted by the DTI some time this year, and that in itself may well have an impact upon what happens in takeovers. We are happy with what is in the Directive at the moment because it basically confers rights of receipt of information on employees but it does not confer rights of consultation or decision making. We would not support extensions of the Directive into those areas and it is possible there will be various amendments proposed, especially from within the Parliament, in that regard. We think that it is unrealistic to seek to harmonise laws of Member States on such a sensitive topic as employee rights in a Directive on takeovers which is designed for the protection of minority shareholders not employees.
  (Mr Armitage) If I could just make one point on that. At the CBI we are very concerned that there is no obligation on companies to consult, etcetera, before the bid is made public and that is there in paragraph 2 of Article 6. I take what has been said on the Information and Consultation Directive and that of course is open for debate in the future but Article 13 also contains wording about information for and consultation of employees' representatives and it is not entirely clear what the combination of the two is because I understand that one of the Directives listed in Article 13 does use some terms like "as soon as possible", which is possibly in conflict with "when it is made public".

  17. With 6(2), yes.
  (Mr Armitage) So it is something that we are not entirely sure about. We have spoken to the rapporteur, to ECOSOC). It is not a point which has been raised by anybody else so far and we are doing a bit of research into it.

  18. Thank you, Mr Armitage. While you are, as it were, on the floor does the CBI have any comment on the tactical litigation issue?
  (Mr Armitage) Yes, we do. We do not think that tactical litigation is to be encouraged in any way. It is one of the main noteworthy features of our system that it has not been a feature. I think there have been one or two cases in the past but they are few and far between. I think one of the problems here is that it does appear that as there are particular powers under the Directive which are going to be foisted on the national authorities, like the Takeover Panel, that is possibly going to take them from being an entirely private body into something a bit more than that. I was talking to Philip about that before we came in and that, I believe, could be one of the reasons why there could be more litigation.

  19. Do you mean on the footing that the Takeover Panel at the moment is private?
  (Mr Armitage) Yes.

  Chairman: For my part, I rather doubt whether that would make any difference.

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