Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 20-39)



Lord Neill of Bladen

  20. With respect, my Lord Chairman, that is not right. They have been held to be operating functions which are in the public arena and therefore they are justiciable in the sense of judicial review so it just is not right to say that because they are private they escape the scope of that review. There are other reasons why they have escaped it but not because they are private.
  (Mr Remnant) I hesitate to volunteer any observations on this in this august company but my understanding is that the basis of the decision in Datafin back in the 1980s, which has effectively meant since then that whereas Panel decisions are subject to judicial review the courts would expect to intervene only after the event not during the bid, was that the Panel was a non-statutory body applying a voluntary code which has no legal force. That would no longer be the case, I think, after the Directive is implemented because the Panel will be exercising statutory powers. The Panel itself will remain a private body but it will be designated by statute and the concern is that thereby rights of action between the parties could be created and rights of action against the Panel might be created, both in the way the Directive has been implemented and the way in which the Panel has interpreted the Directive. This is why it is so important that the provisions of Article 4(6) are encapsulated appropriately within the UK implementing legislation.

Lord Lester of Herne Hill

  21. I also hesitate to say anything in this august company on this subject but I suppose it is right, is it not, that the Takeover Panel even now is probably a public authority which is determining, in some sense, rights of property and therefore the Human Rights Act, for example, would impose obligations upon it right now without any move from its present position; and that would become even more so, would it not, as they are given more obvious public functions?
  (Mr Remnant) Yes. We have taken extensive advice on the Human Rights Act, and whereas perhaps it is not absolutely entirely clear that the Panel is subject to it, certainly the Panel has assumed that it is. Therefore, some of our procedures have been refined with the result that we have been advised that the way the Panel operates is in compliance with the Human Rights legislation.

Lord Grabiner

  22. My Lord Chairman knows quite a bit about the law as well, but I thought the actual decision in Datafin was to the effect that it was susceptible to judicial review but that from a practical point of view the Court of Appeal were saying that there would simply be an exercise of judicial self-restraint, an unusual phenomenon but one that would be applied as far as is practical and I think that has happened. I do not think we are really in disagreement but what I wanted to ask you in that context was, since Lord Hoffmann's report we have had the Financial Services Act passed, the effect of which is, I think, to render the Takeover Panel liable, so to speak, to be removed from the picture and replaced by the Financial Services Authority in an appropriate case. As far as I am aware that has not yet happened in any case. But also would I be right in thinking that it has not actually given rise to any more tactical litigation since then than was the case previously?
  (Mr Remnant) I would agree with all that. Yes, there is now overlapping jurisdiction between what the FSA does and what we do in the sense that the FSA is responsible for market abuse and we are responsible for the regulation of takeovers. To the extent that market abuse falls within the context of a takeover, both of us have jurisdiction. We have spent a lot of time with the FSA and they have on more than one occasion made it clear that, whilst they cannot of course delegate their authority automatically to us, they would expect only to intervene in takeovers in exceptional cases and not before the Panel's appeal processes have been exhausted. That has indeed been the case. As you would expect, there have been times when parties have gone to the FSA on particular cases and those parties have been asked whether they have taken these issues up with the Panel and whether they have gone through the Panel appeal processes. To date there has not been a case where the FSA has seen fit to intervene in a takeover.


  23. Thank you. I wanted to ask you a question or two about some of the provisions of the Article 11 override procedure. In the explanatory memorandum the Government has expressed concern about two aspects of that: first of all, in relation to golden shares the Government has been attached to some companies previously publicly owned and now privately owned; and, secondly, in relation to contractual arrangements made between shareholders. These are all capable of being overridden as part of the override procedure. Do you have any views about the concerns that have been expressed with regard to those matters?
  (Mr Remnant) I do not think golden shares are covered by Article 11 and I do not think there is at the moment any move to include them within that Article. That is principally because golden shares have been the subject of a number of ECJ decisions recently and broadly those who have an interest in the Takeover Directive and an interest in the scope of Article 11 believe they are being adequately dealt with in terms of when they should be allowed to operate and when they should not. As far as contractual arrangements between shareholders, which are encompassed within the scope of Article 11, are concerned, we do have concerns and actually do not believe they should be included, for two reasons really: one, as a matter of principle the Commission says that Article 11 is designed to stop management entrenching their position and it is difficult to see what is offensive about contractual agreements between shareholders to which neither management nor the company are a party and, secondly, the scope is so wide that it will also encompass certain arrangements which actually facilitate takeovers. For instance, if an offeror who is also a shareholder wants to make a takeover offer and goes to another shareholder and gets him to give him an irrevocable undertaking to accept an offer, which is quite a common occurrence, and as part of that arrangement the person giving the irrevocable undertaking agrees not to sell his shares to another bidder, not to vote them or to vote them in a particular way, then that is an agreement which falls within the scope of Article 11 and which would be rendered unenforceable. So the Article would be achieving precisely the opposite objective to that intended.[1]

  24. Unless the other bidder comes along, in which case it would be impeding his bid?
  (Mr Remnant) It would, but in many cases the original bidder would never have made the bid in the first place if there is a significant shareholder out there with say 30 per cent of the company unless he knows that he will agree to the bid.

  25. Then is this particular provision in Article 11 something which you think deserves attention and objection?
  (Mr Remnant) It is, and it is one of the things we have been addressing. I know that the DTI are also addressing it and we believe that contractual arrangements between shareholders should be excluded from the scope of Article 11.
  (Mr Armitage) Yes, we agree with the Takeover Panel on that. It is entirely right to say that these arrangements between shareholders can be quite conducive to at least the start of the bidding process. It is entirely up to shareholders as to what protection they put in. It is quite common to negotiate an opt out at a higher price, above a certain amount, etcetera. So we agree entirely with the Takeover Panel on this. We think it requires attention.

  26. Thank you. You have already mentioned problems which might arise with regard to dual or multiple voting shares. Is there anything else that is necessary to be said about those or the extent to which defensive measures and the creation of poison pills are to be made ineffective?
  (Mr Remnant) I would like to make one further point, if I may, and that is I think it is going to be very difficult to get agreement between all sides on whether multiple voting rights should be included or not because the views which are held on both sides of the debate are strongly held—and I am talking about in a wider context than the UK because these are shares which by and large are not very common in the UK but in certain countries, for instance Scandinavian countries, are extremely prevalent—and I do not think there is a chance of one side ever being able to convince the other side of to its point of view. So my concern is that it will be impossible to reach agreement on the scope of Article 11 and that if it is not possible to reach agreement on what certain countries, especially Germany, regard as a fundamental provision of the level playing field, they will make the suggestion that they would be happy to dispense with Article 11 completely if Article 9 (which is the provision which prevents management taking frustrating action without shareholder approval) is also deleted. We have always felt that Article 9 is absolutely fundamental to investor protection and is fundamental therefore to the protection of UK investors if they are investing in European companies.

  27. So you would go to the extent, would you, of saying that if those defensive measure provisions in Article 9 are to go you would rather not have the Directive at all and that would be a ground for opposing it totally?
  (Mr Remnant) Certainly to date we have always said that those provisions are absolutely fundamental.
  (Mr Armitage) We would agree entirely with the Panel on that aspect. I think on multiple voting rights, as Jaap Winter, the head of the experts' report, put it the other day, most Member States want to go to Heaven but they do not want to die first and this is one of the illustrations of that. I thought the experts' report was very brave and courageous in suggesting that breakthrough should apply to multiple voting rights but with no compensation. Whether there is a possibility of negotiation between the Member States on that point I do not know. It is worth pointing out that multiple voting rights are a fairly common feature of many large US companies.

  28. Has that particular suggestion been raised with Government to your knowledge?
  (Mr Armitage) The UK Government has of course sided with Germany on this now. They are supporting, as I understand it, the German position in return for Germany supporting the UK on the Directive on rights for temporary agency workers.

  29. But a compromise would come if necessary because, say, Sweden refuses to agree to the proposal on that footing?
  (Mr Armitage) I think it would be difficult. I would not take entirely a no view on this. I think it is quite likely that it could result in no Directive but I think we have not seen the end of negotiations on compensation yet.

  30. Yes. Mr Remnant, you mentioned right at the beginning that there were certain matters on which you had concerns about the contents of the proposed Directive. I am sure we have mentioned some of them in the course of the questions you have been helping us with. Are there any that we have not yet mentioned?
  (Mr Remnant) We had three principal ones, I think two of which we have mentioned, which were changes made to the nature of the consideration offered in a mandatory bid and the scope and potential implications of the override procedure in Article 11. I do not think we have talked about the unchanged provisions relating to shared jurisdiction, which is another major concern of ours.

  31. Yes. I think we touched on that but did not go into it in any depth. That is the possible split jurisdiction point.
  (Mr Remnant) Jurisdiction is split where you have the target company incorporated in one Member State but its shares are traded only in another Member State. What the Directive says is that the supervisory authority in the Member State where the company is registered is responsible for the company law issues of the bid and the supervisory authority in the country where the shares are traded is responsible for issues relating to the procedure of the bid. Although there are some examples given in the Directive as to which falls into which category, they are only examples and there are many issues on which it would be unclear as to whether they fell into one category or the other. Further, there is no mechanism for resolving jurisdictional disputes between supervisory authorities and we think it is inevitable that this will cause delay, potential litigation and frankly is a recipe for regulatory chaos.

  32. In the cases where there is a split between the country where the shares are traded and the country where the company is incorporated, as I understand it you would opt for the country of incorporation as having jurisdiction?
  (Mr Remnant) That is our preferred view. The reason why this arose in the first place was because certain Member States wanted country of incorporation and other Member States wanted country of trading, so in a typical European compromise it was decided to give responsibility for some issues to one and some to the other, but that is the worst solution of all. Our preference would certainly be incorporation, which I think last time the majority of Member States wanted but there were certainly some who elected for trading.

  33. What happens at the moment with whatever soft harmonisation there is where you have the split between country of trading and country of incorporation? What does the Takeover Panel do in that case?
  (Mr Remnant) It does not happen at the moment because trading is not an issue. Our jurisdiction relates to offeree companies which are incorporated within the UK and have their place of central management within the UK.

  34. Where companies are listed here but are managed elsewhere, you do not cover them at all?
  (Mr Remnant) It is rare but there are those instances and they do not come within our jurisdiction.

Lord Lester of Herne Hill

  35. With regard to the countries which prefer country of trading to country of incorporation, what arguments do they put forward to explain why that is a better solution?
  (Mr Hinton) The simple argument has been that in a takeover you are buying shares and the shares are being traded on a particular exchange and because they are being traded on that exchange they should be the regulatory body which is responsible for the acquisition of all the shares. As I understand it, that has been the very simple and straightforward argument all along.

  36. What is the contrary argument for place of incorporation over that? Why is that a better solution?
  (Mr Hinton) I think in our experience company law is the foundation of the company and takeover regulations tend to deal with company law matters, in particular about how the company is taken over. Whether it is traded or not in some ways is irrelevant because you are actually speaking to the shareholders directly, inviting them to accept your offer. Obviously in the UK we deal with both listed and unlisted public companies.


  37. Company law deals with the duties of directors and these become an issue sometimes in takeover matters and it would be quite awkward, would it not, if the country of trading imposed on the directors' sanctions or requirements which the country of incorporation did not recognise?
  (Mr Hinton) Yes.

Lord Plant of Highfield

  38. I am sure this is going to be a terribly naive question but are there circumstances in which a company would be incorporated outside the Union and therefore not part of a Member State and yet the shares are traded on an exchange within the Union. What would happen then?
  (Mr Remnant) It is quite possible that that would happen and that would not be governed by the Takeover Directive.

  39. But would it if we went for the trading option of jurisdiction rather than the incorporation?
  (Mr Remnant) No, because you have to consider whether the Directive applies at all if the offeree company is both incorporated and traded within the EU.

1   Note by witness: The chairman asked me about golden shares in the context of Article ll and I replied that golden shares are not covered by Article ll. In actual fact, whilst the Commission's intention was to exclude all golden shares from the scope of this Article and whilst golden shares established by statute are indeed excluded, the wording of the Directive is not, I believe, effective in excluding from its scope those golden shares whose rights are established through the articles of association of the relevant company. Most UK golden shares are established in this way. This is something of which the DTI are well aware and are addressing with the Commission. Back

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