Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 40-54)



Lord Grabiner

  40. Is it fair for us to assume, then, that this has not given rise to any problems or concern? For example, if you have got a Luxembourg incorporation and shares traded only on the UK market, listed in the UK, that has not given rise to any concern that the Takeover Panel should have jurisdiction in a case like that?
  (Mr Remnant) There have been such issues. I can remember one not so long ago of a Swiss company which reincorporated in the UK and in fact was listed in the UK but had its place of central management outside the UK. It wanted to come within the jurisdiction of the Code. In that case, the Executive ruled that jurisdiction is such a fundamental issue which must be clear: it is beyond doubt, according to the Code, that that company is not subject to the Panel's jurisdiction. Jurisdiction cannot be a matter of choice. It was actually appealed to the full Panel, who upheld the Executive's decision. But certainly in the context of the Directive, then clearly the Panel, or the code Committee of the Panel, will have to look at the jurisdiction of the Code which would have to be amended if the Directive goes through in its current form.

Lord Neill of Bladen

  41. Do you get a situation in the takeover world which has certainly come up in other fields of company law? I am thinking particularly of banking, and insurance may be the same. In some banking examples companies have been deliberately incorporated in countries with a weak supervisory regime, strong secrecy laws and a totally ineffective local supervisor. Does that situation come up in connection with companies which have shares which have been traded here? Do you get, a sort of collusive or mala fide registration to get out of a tough local incorporation, or is that a non-existent problem?
  (Mr Remnant) No.

  42. It does not happen?
  (Mr Remnant) One would think the answer must be that there must be such instances but I do not think either of us can actually recall that ever happening.

  43. There is Luxembourg, Cayman, the Isle of Man, all the famous jurisdictions where people register companies. It does not happen?
  (Mr Remnant) No.

  44. That is very reassuring.
  (Mr Armitage) In fact, I think to get around that problem, if it ever was a problem, the Prospectus Directive tries to get at it by defining who the regulatory authority will be, including in the case of foreign companies listed in the EU.


  45. There has been mention already of the proposal that the Commission should have power to make rules in relation to the cash consideration to be offered for the shares or the company being taken over, but there is the same proposal in relation to the equitable price. It is proposed that the Commission should be able to make rules relating to that and that it should be able to make rules relating to the contents of the offer document. These are, at the moment, matters which are all dealt with domestically and the proposed power of the Commission to make rules in these respects would then potentially override the rules made domestically. I particularly wonder whether the CBI has any comment on this proposal.
  (Mr Oliver) I think our reply would be the same as the reply the Panel made in respect of the cash consideration. If this is a minimum standard Directive that is what it should set. There is reason for there to be a review of the minimum standards to see if they are working properly but then amendments should be made to the Directive in the normal and proper course of making a Directive.

  46. It is a minimum standards Directive in the sense that it has to be implemented by Member States and, in implementing it, they may provide for greater regulation than is required by the European instrument, but so far as the Commission has power to make rules, those are not going to be limited by any minimum standard approach necessarily.
  (Mr Oliver) But our view would be that you should not be able to change a minimum standards Directive by subsequent Commission regulation in the way that is proposed in this Directive.

  47. Yes. That might be something of a Trojan horse?
  (Mr Oliver) It may.

Lord Neill of Bladen

  48. Could I ask a broader question? I am just trying to get a sort of overview of where we stand in relation to this Directive. If one looked at it from the narrow UK point of view, I think what you are saying is that it has got perhaps in three places some serious defects that you would want to have corrected. If that were done then it would be tolerable but it would not confer any great benefits. The world and the City of London would not be a brighter place as a result of it. You will have a Directive put into a decent shape. Without those corrections you would have serious problems, the ones that you have mentioned. If you look more broadly, which Mr Oliver was arguing right at the beginning, and look outside the UK and towards the rest of Europe there are advantages to be gained because you would have introduced certain minimum standards which are not observed in some countries which are important markets in trading shares. Is that a correct view of your evidence, Mr Oliver?
  (Mr Oliver) Yes, it is.

  49. So there is a sort of balance here—what is the overall benefit—and Mr Oliver's argument would be that looking outwards there is a benefit to be obtained. Internally there is not a great deal to be gained because we are, frankly, the leaders in the Takeover Code. We have been at it for thirty years and it is extremely good and very efficient.
  (Mr Oliver) If I may respond to that. In some ways we are almost at a disadvantage in as much as EU firms which are not incorporated in the UK and subject to the Panel can make an easy bid within the UK but we do not have the ability because we have a level playing field in this country and so our market is open. UK firms wishing to invest in other Member States sometimes do not have the same advantage. So we have an open market, others do not, and we prefer to see the open market across the Union.

  50. Germany used to be cited. You just could not really get into a takeover situation with the Germans because all the shares were held by banks and some were a complete lock up and totally different from the free movement in the UK scene?
  (Mr Oliver) Yes, and so we perceive the benefit not being in change in the regulation in the UK but in change in regulation outside the UK, which will be to the benefit of UK firms wishing to invest in those other Member States.

Lord Lester of Herne Hill

  51. Following up that question, it seems to me, I do not know whether you agree, that the Commission's explanatory memorandum on its third page summed up quite well the wider European benefit when it talks about international competition and a single capital market, the very divergent national rules, the problems that creates, the uncertainties, and so on. I am looking at the second and fourth paragraphs on page 3. Broadly speaking, that seems to me to be a fair summary of the advantages. I do not know whether the CBI would agree with that?
  (Mr Oliver) Yes, we would.
  (Mr Armitage) We would but it could also go further, but we think it is just about right at the moment. We do agree on one or two major points made by the Takeover Panel, for instance the place of incorporation, etcetera. At the moment that could be a recipe for chaos but hopefully that will be fixed.
  (Mr Oliver) The split jurisdiction.


  52. Thank you. You have given us a great deal of help on a number of points. Is there anything else you think we should direct our attention to in considering this issue, any as yet untouched on problems that we must pay attention to?
  (Mr Armitage) We talked quite a bit about multiple voting rights and you were asking me what I thought would happen on this and I said that of course the game is not yet over and we will have to see what happens. At the public hearing at the European Parliament, which Mr Remnant and I both went to, there was quite a lot of discussion as to whether or not, bearing in mind that American companies do have multiple voting rights and some of the companies are quite big, if this goes through the breakthrough on multiple voting rights should be open to American companies. I think we can expect more of that in the dialogue.

  Chairman: That is an interesting thought. Thank you.

Lord Neill of Bladen

  53. I am interested in this justiciability question covering Article 4(6). The language of that is extraordinarily broad and purports to give to Member States a very big power to say you are not going to have legal proceedings in this, that or the other type of case. I will not read it out, you all know what it says. It goes a very, very long way and I wonder whether you had have any advice on how that would stand up to a legal challenge. An obvious example, it would seem to me, is that a Member State could not make it impossible to find whether the local law complied with the basic provision of the Directive and I do not see how you could oust the jurisdiction to have a legal consideration of a topic like that. Whether that is a good example or not, my more general question is, have you had advice that this is going to stand up to challenge in the ECJ, for example?
  (Mr Remnant) We took advice from senior counsel in the years leading up to the failed Directive last time round and we even got as far as drafting some suggested implementing legislation which we either did suggest or were on the point of suggesting to the DTI at that stage. Certainly, the advice we received was that Article 4(6) was sufficient to allow various provisions to be inserted into the implementing legislation in a way that should help severely to curtail the possibility of litigation. But I think we could never be absolutely certain that that would be successful because, once there is a Directive, presumably there is nothing to stop somebody going off to the European Court of Justice to say that the Government has not implemented the Directive correctly or indeed that the Panel has not interpreted the Directive correctly. I think in the context of a Directive that that sort of provision is probably as good as one is ever going to get but it does come back to the point, in terms of the overall worth of the Directive, that there is nothing in the Directive which is beneficial to the UK system of regulation. There is only the potential for dis-benefit through the risk, hopefully remote, of increased litigation.

  Lord Neill of Bladen: The current position with Datafin is completely brilliant. The court said that you are susceptible to jurisdiction but it will never really be exercised except ex post and then by way of declaration as to the future, as to what some provision in the Code means. Who is going to spend hundreds of thousands of pounds bringing a suit to benefit another lot of people years later? It is not how litigation is fought but it is a brilliant position.

Lord Lester of Herne Hill

  54. I should declare an interest because I may be involved in some Lloyd's litigation but my question is a general one prompted by my thoughts about that. One good example of legal uncertainty in this provision would be immunity provisions written in purporting to immunise the supervisory authority from liability, let us say for negligence, where the Directive clearly gives an opt out allowing those clauses to be written in. However, am I not right in thinking that a challenge might be made not on the basis of the Directive as such but say Article 6 of the Human Rights Convention, the right to a court, and the Directive either being read down or the supervisory authority's immunity under this opt out being subject to legal challenge. Is that not the sort of problem which this Directive cannot deal with and the opt out cannot deal with because it arises under other legal instruments? Is my question clear?
  (Mr Remnant) I understand the question. I was only hesitating because I am not totally sure of the answer. Certainly the FSA has immunity from litigation, in so far as it is effective, and the intention would be to try to mirror that. I think there are also various provisions in legislation in the UK governing utility regulation through the Electricity Act, which has similar sorts of provisions. We have received, hopefully, very good legal advice that Article 4(6) of the Directive—and the provisions must be put expressly into the primary legislation rather than implicitly relying on the Directive—should go a very long way towards protecting the system from tactical and other litigation, but I do not think that anybody could say that it will ever totally remove the chances of that happening.

  Lord Lester of Herne Hill: As you know, the joint Select Committee of both Houses of Parliament took evidence on this question on the Financial Services and Markets Bill and again I have to declare an interest. I seem to remember I was an advocate on one side of the argument, with Sir Sydney Kentridge on the other. It seems to me that that whole issue as to whether, for example, the FSA's immunity or other regulators' immunity would stand up to challenge before our Lord Chairman if it came to a judicial committee of this House or in Strasbourg remains an open question. I do not think there has ever been a clear answer yet. That is why I raised the question.

  Chairman: Gentlemen, thank you very much indeed for the very helpful way in which you have dealt with our questions and the time you have given us this evening. We will have to deliberate on this matter and we will be the better for having had your assistance. Thank you very much.

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