Select Committee on European Union Minutes of Evidence

Supplementary memorandum and letters

Memorandum by the CBI


  1.  We consider that the draft Directive sets out many of the appropriate principles that should be followed in takeovers in Europe, and the CBI broadly supports the Directive as far as it goes in seeking to provide some minimum rules for protection of investors and minority shareholders in companies subject to bids.

  2.  The Directive should not have a major impact in the UK, because of our well developed Takeover Code, but the Directive will presumably require some legislation to underpin the Takeover Panel as the supervisory authority and the arrangements in that regard.

  3.  However the proposed Directive does not necessarily make it easier for UK companies to make acquisitions in Europe—one example being companies with multiple voting rights who are not included within the application of the break-through rule for the purposes of Articles 9 and 11, which was a key recommendation in the Experts' Report of January 2002.

  This issue is also of concern to German business, and it was the lack of support from Germany which caused the previous Directive to fail in 2001.

  4.  If full application of the break-through rule to include multiple voting rights is not addressed in amendments to this Directive, we strongly recommend that this issue is kept under review by the European Commission with a view to the matter being satisfactorily addressed when the Directive comes up for review after five years under the provisions of Article 18. It might also be appropriate if the five year period was somewhat shorter, say three or four years.

  5.  We set out overleaf our detailed comments on particular provisions of the proposed Directive.


Article 3—General principles

  6.   The CBI broadly supports the general principles set out in Article 3.

  7.  However, one particular concern relates to phantom type bids, when a potential bidder announces the possibility of a bid, but it remains unclear whether and when any such bid might be made, or that the potential bidder has decided not to bid, thus leaving the target company in play, and uncertain as to its future. There is also the burden of management time being diverted and the costs incurred by the target company in dealing with a potential but uncertain bid. The Directive should therefore require that Member States set down clear rules as to what constitutes a bid, and for a time limit on making an actual bid following any initial announcement of a potential bid. If the potential bidder fails to make an actual bid by the deadline, the potential bidder should be prohibited from subsequently launching a bid for a specified period, such as one year.

  8.   It is therefore important that the general principles and the provisions of Article 6 make clear what constitutes a bid, and when a potential bidder must "put-up or shut-up".

Article 4—Jurisdiction

  9.  The rules need to be clear as to the applicable law and the appropriate supervisory authority where the offeree company is listed in a member state which is not its country of incorporation, or is listed in more than one member state. The present provisions of Article 4.2 seek to distinguish between company law issues and bid procedures in setting the rules, and the resulting position is left very unclear and uncertain.

  10.   We consider the simplest and most appropriate solution is for the bid to be regulated in accordance with the rules and by the regulatory authority of the offeree's country of incorporation.

Article 5—Protection of minority shareholders; mandatory bid and equitable price

  11.   We broadly support Article 5, subject to the comments below.

  12.  A mandatory bid should normally be made at not less than the highest price paid by the offeror.

  13.  Where the consideration consists of liquid securities traded on a regulated market in the EU, there should normally also be a cash alternative.

  In particular, where any part of the consideration consists of illiquid securities, there must always be a full cash alternative, and never a partial cash alternative. The term liquid securities should also be defined.

Article 6—Information on the bid

  14.  We support the provisions of this Article, including the provisions for providing information to employees after the bid is announced, informing them or their representatives of the bid, and any consequences for future employment. We agree that employees should not have the power to veto a bid approved by the company's shareholders.

  We also support the provisions of Article 13 on information for and consultation of employees' representatives.

Article 9—Obligations of the offeree company board, including the provisions regarding defensive measures

  15.   We strongly support the provisions on Article 9, which is fundamental to an effective Directive providing minimum rules for the conduct of takeovers.

  16.  Shareholders should decide whether or not to accept an offer.

  The offeree company board, and other stakeholders such as employees, should not be able to deprive them of that decision.

  Defensive measures proposed by a target board must be specifically approved by the shareholders after an actual bid is launched.

  17.  This Article could also be strengthened by application of the Expert's Group break-through rule on the one share one vote principle according to the proportionate amount of risk bearing capital held by shareholders, and not in accordance with voting rights in existence before the bid.

  We discuss this further in connection with Article 11 below.

Article 10 regarding information on companies

  18.  This is one of the areas of change from the previous text and we can broadly support many of the additional disclosures proposed.

  19.  However regarding Article 10.1(g) and disclosure of transactions among shareholders, we are not clear how companies will know what transactions may have taken place unless they are a party. We therefore consider that Article 10.1(g) should either be deleted or be limited to transactions to which the company is a party.

  20.  The reference in Article 10.1(k) to "employees" should be deleted, as not appropriate. The sub-clause should only be concerned with the position of directors.

  21.  The provisions of Article 10.3 also need reconsideration. Disclosure to shareholders, rather than a decision by shareholders, should be sufficient, with a shareholder vote only necessary in accordance with the provisions of Article 9 if the offeree board seeks to invoke defensive measures.

Break-through Rule

Article 11—Unenforceability of restrictions on the transfer of securities and voting rights

  22.  We support the principle promulgated in the Experts Group report of January 2002 that a bidder who has acquired 75 per cent of the risk bearing capital should have proportionate voting control and the ability to pass special resolutions changing the constitution of the company. Risk bearing capital would be shares carrying unlimited rights to participate in profits, or in the surplus on a liquidation.

  23.   The CBI supports the principle of one share one vote.

  Accordingly our major concern with Article 11 is that this Article does not prohibit or disapply the use of multiple voting rights in application of the break-through rule, as recommended in the Experts Group report of January 2002.

  24.  The failure to include such structures within the application of the break-through rule provisions in Article 11 continues to leave an unlevel playing field for UK companies, where multiple voting rights are now rare amongst listed companies, compared with the situation in a number of other countries in Europe.

  This issue is also of concern to Germany, and German business, and it was the lack of support from Germany which caused the previous Directive to fail in 2001.

  25.  We also believe that there may be difficulties in extending the break-through rule to contractual agreements referred to Article 11.2, such as whether compensation should be payable. This may be appropriate in the case of existing contracts, but perhaps not if the shareholders adopt defensive measures under Article 9. At the least contractual arrangements between shareholders to which the offeree company is not a party should be excluded.

  In particular these provisions should not affect the enforceability of an irrevocable undertaking by some shareholders to accept an offer, which is often fundamental to the making of an offer in the first place.

Articles 14 and 15—Squeeze-out rights and Sell-out rights

  26.  We broadly support these provisions.

  27.  However it may be appropriate to include a time limit for the exercise of such rights, and for notification to the holder of a sell-out right that it has arisen.

Article 17—Committee procedure—Comitology

  28.  It is not clear how the comitology procedure would operate with a minimum standards directive, such as this Directive, without imposing requirements and additional rules which are specifically the preserve of individual Member States.

Article 18—Revision

  29.  Particularly if this Directive is not amended to include multiple voting rights within the break-through rule for the purposes of Articles 9 and 11, it might be appropriate to set the review date earlier than five years, perhaps after four or even three years.

February 2003

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