Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 80-99)



  80. Could I now ask you about the override procedure in Article 11? Member States have to ensure that the safeguards referred to in paragraphs 2 to 6 are afforded when a bid has been made public and the first of these says: "Any restrictions on the transfer of securities provided for in the articles of association of the offeree company shall be unenforceable against the offeror . . ." I can understand that in so far as the restrictions take the form of defensive measures introduced to protect against a takeover merger, which is what they are plainly aimed at, but there are a number of contracts which are made from time to time between individual shareholders, for whatever reason, where rights of pre-emption may be given in return for some commercial advantage which have nothing whatever to do with takeovers or mergers. Is it really going to be said that these are all to be overridden in the context of the takeover or merger? It seems so unreasonable.
  (Miss Johnson) We believe that freely negotiated contractual arrangements should not be overridden. Contractual provisions can actually assist takeover activity anyway and I think it is not fair to override other freely negotiated contracts between shareholders by subsequent legislation. So we are seeking to have the contractual arrangements taken out of Article 11.

  81. I am delighted to hear that. Perhaps one might almost go further and ask, would the Government be prepared to agree to it in this form?
  (Miss Johnson) I do not think that is something where we have come to a bottom line at the present time. We are certainly strongly arguing that these things should be taken out. We do think that the value of contractual arrangements is considerable and perfectly acceptable. There is of course some tension there and it is that tension between the idea of the contractual arrangements restricting the transfer of shares and the idea of a freely tradable securities market, which there is some tension between. But the high level group of course looked at this question in some detail and they themselves could not come to a definitive view. The high level group suggested the Commission look at this question and that has resulted in the contractual override provisions in the original Commission proposal, which are still retained in the current text.

  82. So far as 11(2) is concerned and its scope for interfering with private contractual rights which are unconnected with the takeover, I would have thought there was a serious question as to whether that sort of interference would not be so disproportionate to any legitimate aim as to run the risk of being a breach of the rights conferred by Article 1 of the first protocol to the European Convention on Human Rights.
  (Miss Johnson) I am sure you are in a much better position to opine on that subject than I am, but what I certainly do think is that in our view the benefits of encouraging takeover activity would not necessarily override or should not override in this case the pre-existing contractual arrangements and if we were forced to choose I think that might be the choice that we would be balancing.

  83. Thank you. Another problem which has been spotted arising out of Article 11 relates to what are sometimes called golden shares which the Government has in some ex-publicly owned businesses which have been privatised. What is the position in regard to those?
  (Miss Johnson) First of all, if I could just clarify in relation to golden shares, I think on my recent explanatory memorandum there were altogether a group of 12. It is only 11 that we think are currently affected. It is important to the UK because we have sought to transfer publicly owned industries to the private sector and it has been a feature of that, as I do not need to explain to you. The Directive does override the UK golden shares which are in the articles of UK companies but the UK is in a unique position. In other Member States the golden share rights are set out in public law and now only the 11 that I mentioned publicly listed golden share companies (which are in defence, national security, strategic networks and nuclear fields) are at issue here. There are diverse issues, I think. As far as we are concerned there are key things like the confidentiality and integrity of defence manufacture and research, preserving the continuity of fuel and power supply, and we consider it necessary therefore to preserve public interest elements that are secured by golden shares.

  84. Is that going to be another sticking point for the Government?
  (Miss Johnson) The Commission has said that Article 11 does not override golden shares. The actual Directive does override the UK golden shares which are in the articles of the UK companies, so it would be an issue there and it would be one where we would have to continue to assert our cause, I believe.

  85. Yes. Thank you. The original proposal which was amended in the European Parliament to give employees certain rights to information did include prompt disclosure of the bid to representatives of the employees and this, I think, was thought to be a problem when the Committee examined the original proposal some years ago now. Is this still a problem so far as the current proposals are concerned? I think it is Article 13 which now deals with this.
  (Miss Johnson) It is. It does not actually give employees new rights to information, it simply acknowledges, I think, the existing law. We have already implemented in the UK the European Works Council and the Collective Redundancy Directives so it will not change the existing position. Also, the Information and Consultation Directive which was adopted last March is expressly referred to and that Directive actually gives employees specific rights to be consulted about businesses they work for, including the prospects for employment. There are safeguards in relation to price-sensitive information not yet publicly disclosed, for obvious reasons. We think we should consider the necessary implementing measures, including the interaction with the takeover regime, and we are looking to publish a consultation document and draft legislation later on this year.

  86. That is for our implementing legislation.
  (Miss Johnson) Indeed. We do not think it gives any rights, Article 13.

  87. Are we content that it should not?
  (Miss Johnson) We are content with what it does and I believe that those who were concerned on the question of employee rights—and it was one of the key issues which cropped up, as you know, in the difficulties which the original conciliation text ran into—are generally more reassured than they were on this and that this will be much less an issue, although points may no doubt need to be made about exactly the way this will work and the information and other rights for employees and how those are covered.

  88. For example, whether there should be any obligation to consult employees before the bid is made public?
  (Miss Johnson) Yes. We do support a number of measures within the Directive, for example the express provisions of Article 6, which require the respective boards of the offeror and offeree companies to inform employees once the bid is made public. There is a right under Article 9 in addition for an employee statement to be annexed to the opinion of the board of the target company on the merits of the bid, which is required to be sent to the shareholders. So we would support that provision but, as I say, I think some of the heat has gone out of the issue if my political understanding of it is correct. It was one of the key reasons why the last conciliation text ground to defeat in the parliamentary vote.

  89. Yes. Thank you. Minister, you mentioned earlier the comitology implications of Article 17. This text leaves the Commission with the power to make detailed rules relating to the offer document. What is the justification for that? Why should the supervising authority in each Member State not deal with matters of that sort?
  (Miss Johnson) I think the answer to your question is that we regard it as an important safeguard that all the information and the Article 6 list of requirements for information to be included in the offer document are very detailed and that all that information is available to those who are concerned by the bid and that that is actually set out in the Directive and not subject to revision by the comitology procedures. We do not consider that comitology has any role to play in the Directive. The Directive is actually based on minimum standards to be applied according to Member States' own takeover regulatory traditions and it goes back to the point Mike Edbury was making earlier on about the different perspectives in relation to this, in relation to financial services matters and company law matters, as to where you are to a degree on the comitology debate. Where we are is clear on that, I think.

  90. Will the Government then be pressing for Article 2 to be deleted from this proposal?
  (Miss Johnson) I have not got the details of it in front of me, but we will be pressing for the deletion of the references to comitology, if that is what you are referring to in that reference.

  91. Exactly, yes. I suppose in that connection as well there is the subsidiarity point. It is the point you have already made that the Member States in question would be better placed to make the detailed rules than the Commission would be sitting in Brussels?
  (Miss Johnson) Yes. There are points about that, I think. In terms of why we should go down the route of looking for this, I think I set out before why I thought it was important and why the soft harmonisation is working but has not worked far enough. But as I said, it is an important question, I think, of balance at the end of the day. Our provisions are quite sophisticated. We do not want to throw out any babies with the bath water on this and we need to get something which is actually making real steps forward. We do think that there is a single market step forward in the new Directive and that is important to trade off and the question of subsidiarity and the need for the Directive. There are the new transparency and disclosure provisions which help the market to address restrictive share structures and that is good, and the more robust Article 9 preventing action, which we have talked about, by management.

  92. Minister, as and when the proposal becomes final, assuming that it does—it is co-decision again—there will then have to be implementing legislation in this country and I imagine that would be primary legislation? The Government would not seek to do this under its subordinate legislative powers?
  (Miss Johnson) I stand corrected by anyone who is able to do so, but normally I think it is not a matter of choice generally speaking which route we go down but that we either need to go down a primary route or not. The options were looked at, as I understand it, in 1996. I was not around at the time but there is a possibility of designating the Panel as a supervisory body, which would not produce the legal certainty needed. I do not really want to go down the route of suggesting that we are particularly endorsing the 1996 approach, which I know I have been invited to do, and to continue to speculate on this because I do think we have a small resource devoted to this. It is very effective in terms of the negotiation but it will not be very effective if we spend too long worrying about the detail of implementation. We will go through a full process of looking at the best ways of implementing it and consulting with those interested parties, taking the view of the Takeover Panel in the City and shareholder interests in all of this hopefully when the time comes when we actually have a Takeovers Directive which we consider on balance to be in the interests of the UK.
  (Alissa Bell) If I may add that implementation will not necessarily require primary legislation. It will depend on the approach we take to implementation as to whether or not primary legislation is used or whether secondary legislation is used.

  93. Yes. I am sure that there is power to do it, if you want to, by secondary legislation but I am just wondering whether the importance of this and its implications for company law might not make it more suitable to be done by primary legislation?
  (Alissa Bell) Clearly that will be a matter for Ministers to take into consideration at the time when decisions are being taken as to how we implement this.

  94. I suspect it is probably a matter in respect of which the Scrutiny Committees would also think it appropriate to make some comments.
  (Miss Johnson) I am sure they would have views about this and I am sure they will express them if and when the time comes. I think also clearly the affirmative route of secondary legislation provides many more opportunities for both Chambers to effectively debate things than does a secondary route which is negative, so there is a difference there, but I think it would also depend a lot upon how controversial things were and whether it was clear to all the parties that there was a preferred route and whether, as a result of the consultation, a degree of consensus arrived which led us to think that both a secondary route was an attractive route and that there was a great deal of consensus amongst all parties about the right way of implementing anything.

  Chairman: I am sure that is right and also it might depend upon whether some of the particularly objectionable features of this remained in it and appeared to require the Government to legislate accordingly, I suspect. If that were the case, and I am sure it will not be, both Houses would think primary legislation was more appropriate. I do not know whether any other members of the Committee would like to ask the Minister any questions?

Lord Neill of Bladen

  95. I have got one or two, my Lord Chairman. Minister, could I just go back to a question you were asked right at the beginning about the balance of consideration, as to whether it is worth having a Directive at all. If I recollect correctly what the Director-General of the Panel said, I understood him to say that if you look at this Directive from the point of internal UK operations, what happens in the London market, there really is no real dividend in having the Directive because, as you have been saying repeatedly, a lot of the provisions operated under the Code have been worked out over years and at a higher level of perfection than anything proposed in the Directive. The advantage comes—and I think Mr Remnant saw that there was an advantage—in opening doors in other jurisdictions where Member States perhaps do not have provisions as good as or anywhere near as good as we have here and so UK companies, looking at it from the narrow point of view, would have an interest in what was going to take place in other jurisdictions. Is that in general the Government's view?  (Miss Johnson) First of all, there is a need to make the financial services markets work better across Europe and I think that this will provide a key part of making those markets work better and that is a very important consideration for us. That in itself might not affect the way we work within the UK at all but it will actually have the advantage of opening up markets much more to the financial services sector, which the UK has very strong representatives of, and strong possibilities for our companies to do business across Europe on a more level playing field than they can at the moment. So I think it will promote an EU business environment which is healthier and UK business ought to profit from that. I think also the improved shareholder protections which we have been talking about are important. I mentioned, I think, earlier on the mandatory bid and the equitable price provisions. Also, I have already talked about the corporate governance good practice which I think flows from this, where again we are trying to set standards and to see that those are picked up more widely, and I think there are the possibilities through strengthened financial markets of the kind I was talking about that the UK citizen will actually gain as well through pensions, endowments and other savings. So there is a range of aspects to this and I think it would be quite difficult to quantify some of those benefits. We obviously are required to do our best at quantifying them but it is quite difficult to actually arrive at the figures on those. What we can say, though, is that I think it will promote the kind of activity that we have in the UK, the possibilities of that on a much wider basis, and it ought to benefit the EU more widely and therefore the UK as part of that.

  96. Thank you very much. I think that is rather in line with what I was putting to you on the basis of what Mr Remnant had said. Could I ask you a quite different question. I am a lawyer. I have to reveal that unfortunate fact! My question relates to the provisions, and I think you have talked about Article 4(6), which allows provisions to be made. If we could just look at the text for a moment and in particular if you would just glance at the first sentence, that a Member State can designate the authorities responsible, but it is the next sentence which strikes me as very interesting. "In particular, this Directive shall not affect the power which courts may have in a Member State to decline to hear legal proceedings and to decide whether or not such proceedings affect the outcome of a bid." Just take the first half of that sentence, that it does not affect the power of a court to decline to hear proceedings. As you probably know, in the UK it has been determined that the courts have got power to judicially review decisions taken by the Panel but they have really declared (the Court of Appeal certainly) self-denying ordinance that they will not interfere, and in particular that they would be disinclined to give a ruling, leaving aside natural justice or something like that, on the question of interpretation of the Code which affects the instant case. The problem, as I see it, is that we have now got the European Convention on Human Rights, we have got Article 6; and prima facie people, including companies, are entitled to an independent judicial tribunal to determine legal rights. Obviously in the case of a takeover enormously important financial rights are at stake and I just wonder whether the Government has a view on whether arrangements such as we currently have to try to keep the courts out of the takeover battlefield are going to stand up to Human Rights scrutiny when this system is introduced?  (Miss Johnson) I am aware of the wider considerations such as the Human Rights Act. I am not sure that I am briefed to answer your question. I am certainly not legally equipped to answer your question because I have to confess I am not a lawyer. There may be issues on which we could write to you further or on which Alissa would want to comment now.  (Alissa Bell) I am happy to add that there is no question of seeking to circumvent the right to a fair hearing which follows from general principles of community law and the European Convention on Human Rights. In our implementation we will be taking into account rights which will be available in any event in accordance with general principles of community law, and indeed there is a recital in the Directive which puts a marker down to that effect.

  97. Does that not rather point in the opposite direction? It points in favour of the courts having full discretion to intervene and not having any exclusory rules. I may be misinterpreting you but it almost sounded to me as though you are not planning to take advantage of the second sentence of 4(6)?  (Alissa Bell) On the contrary, it is intended to make maximum use of the flexibility provided for by Article 4(6) in order to maintain so far as possible the present legal position established by the courts in respect of takeover bids.  (Miss Johnson) We will want this to as much mirror our existing provision as it is possible to achieve.

  98. My question really went to whether the legal advice the Government is getting is that that can be achieved in practice in the face of the Human Rights Convention?  (Miss Johnson) In general the advice we have is that 4(6) provides us with a lot of scope for doing that. As we have both said, we plan to make maximum use of the flexibility which 4(6) actually provides. We think that the text is a good one. Of course there is scope for litigation, as you are mentioning, but our intention is to achieve the sort of balance which we have currently got and I think on the balance of risk, which Philip Remnant was commenting on when he gave evidence before you, the Panel themselves believe that they can live with the risk, that there are benefits to offset against that. No one would say there was zero risk. As I said earlier on, the only way of having zero risk is actually to have no Directive.


  99. I should think it is a stone cold certainty that there will be more litigation when you have a statutory regime than when you have the present self-regulatory system and the Government is understandably prepared to put up with that, as indeed the Panel is as well, for the benefits which may accrue.  (Miss Johnson) Indeed.

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