Explanatory Memorandum submitted by the
Department of Trade and Industry on Council Presidency compromise
proposal for a Directive of the European Parliament and of the
Council (OTNYR) of 28 April 2003 concerning takeover bids
1. The Greek Presidency of the Council have
issued a further compromise proposal for a draft Directive on
takeover bids which seeks to establish a framework for the protection
of shareholders throughout the European Union and to provide for
minimum guidelines on the conduct of takeover bids. It would apply
to the regulation of takeover bids for companies incorporated
in the EU whose shares are traded on a regulated market in the
2. The current proposal builds upon the
Commission proposal dated 2 October 2002 and the subsequent Presidency
compromise proposals and results from discussions in the Council
Working Groups held following publication of the original Commission
proposal. The principal changes that have taken place in the text
of the proposed directive since the first Greek Presidency compromise
proposal dated 14 February 2003 (subject of Department of Trade
and Industry unnumbered explanatory memorandum (OTNYR) dated 4
March 2003), together with the Government's comments on these,
are set out at Annex A.
3. Political agreement to a directive on
takeover bids remains an objective of the Financial Services Action
Plan, agreed to by Heads of State and Government at the Lisbon
Summit in March 2000, for completion by 2005 and with the aim
of creating an integrated financial market within the EU. Discussions
on a possible takeover bids directive have been ongoing for approaching
20 years since the Commission announced its intention to propose
such a directive in 1985. A first proposal for a directive made
by the Commission in 1989 included detailed rules on which it
became clear it would be difficult to obtain agreement in Council.
Consequently, a revised proposal was published by the Commission
in 1996 on the basis of a framework directive containing general
principles, but leaving considerable latitude for Member States
and the relevant takeover supervisory authorities to deal with
the detailed implementation of those principles.
4. The 1996 text was subject to extensive
consideration within the Council and the European Parliament before,
ultimately, a joint text of the directive was approved by the
Conciliation Committee on 6 June 2001 (the "Conciliation
Text") but failed by one vote to be adopted by the European
Parliament on 4 July 2001.
5. Following the narrow failure of the takeover
bids directive to be adopted in 2001, the Commission appointed
a High Level Group of Company Law Experts to look into three issues
which the Commission identified as of concern to the European
The issue of the "level playing
field" for shareholders (ie the problems created by the existence
of differential voting and control structures, such as shares
with multiple voting rights or restrictions on transfer of shares
or voting rights, across the EU);
The definition of "equitable
price" to be paid to shareholders by a takeover bidder; and
The right of a majority shareholder
to buy out minority shareholders following a successful takeover.
6. The High Level Group produced a report,
"Report of the High Level Group of Company Law Experts on
Issues Related to Takeover Bids", (the full text of which
can be found at http://europa.eu.int/comm/internalmarket/en/company/company/news/02-24.htm)
on 10 January 2002.
7. To address the "level playing field"
issue, the Group proposed:
Rigorous disclosure provisions, so
that differential voting and control structures were fully transparent
to the market; and
A solution known as "breakthrough"
whereby any takeover bidder acquiring 75 per cent or more of the
risk-bearing capital (in UK terms, the "equity" or "ordinary"
shares) of a company would be able to override any defence structures
that prevented it exercising control of the target company (for
instance, the right to dismiss the Board).
8. On the other two issues, the Group proposed
A harmonised approach to equitable
price be adopted across the EU based on the highest price paid
by the bidder in a period of up to 12 months prior to the bid;
Provisions be included to deal with
the problems of, and for, residual minority shareholders following
a bid ("squeeze-out" and "sell-out" rights).
9. In considering the High Level Group Report,
the Commission held a Working Group Meeting on 7 February 2002,
with company law experts from Member States and received subsequent
representations from interested parties. The current proposal
seeks to build upon the Conciliation Text, but includes a number
of new measures which closely reflect the issues considered by
the High Level Group.
10. Member States would be required to ensure
that their domestic regimes for regulating takeovers respected
six general principles as follows:
equivalent treatment for shareholders
in the same class;
shareholders must have sufficient
time and information to enable them to reach a properly informed
decision on any takeover bid;
the board of the target company is
to act in the interests of the company as a whole and shareholders
of the target company must be allowed to decide on the merits
of the offer;
a bid should not lead to the creation
of false markets or the distortion of the normal functioning of
a bidder should only announce a bid
where proper steps have been taken to ensure the offer can be
fulfilled in cash (where a cash offer is made) or all reasonable
measures have been taken to secure the implementation of any other
type of consideration; and
target companies must not be hampered
in carrying out their normal activities for longer than is reasonable.
11. Member States would be able to provide
for the supervisory authority to grant derogations from the rules
set out in the text, provided that the general principles above
were respected. The scope of such derogations under the new proposal
is limited to types of circumstances determined at national level
and/or other special cases. In addition, Member States' implementing
measures could go beyond what is required by the directive.
12. Member States would be required to designate
a supervisory authority which would be responsible for supervising
takeover bids, and for ensuring that parties to a bid complied
with the directive's requirements, as implemented by rules laid
down by the Member State concerned. This would include a duty
for parties to a bid to supply to the supervisory authority on
request necessary information related to the bid.
13. The supervisory authority will be that
of the Member State where the target company has its registered
office if the company's shares are traded on a regulated market
in that Member State. However, if that is not the case, the supervisory
authority is that of the Member State on whose regulated market
the shares are traded. Detailed provisions are also included to
deal with the situation where the shares are traded on regulated
markets in more than one Member State. The supervisory authority
would be responsible for matters related to the consideration
offered by the bidder and the bid procedure, whilst the rules
applicable to matters of company law or information to employees
would be for the law of the Member State in which the target company
14. The directive would require Member States
to adopt a "mandatory bid" rule by which, where someone
acquires a specified minimum percentage of a company's shares,
thereby gaining control of the company, they would be required
to launch a bid to all its shareholders for all of their holdings.
The proposal leaves it to individual Member States to determine
the percentage of voting rights which confers control of a company.
This obligation would not apply where a person had gone over the
threshold as a result of a voluntary bid made to all shareholders
for all of their shares.
15. Requirements as to the information which
must be included in the public offer document made available to
the target company's shareholders are set down to ensure that
shareholders have proper information to make a decision on the
bid. These requirements cover both the specific terms of the bid
(such as the consideration offered for each class of shares and
all conditions to which the bid is subject) but also issues related
to the offeror's intentions with regard to the future business
of the company (including with regard to the likely impact upon
16. It is required that the bid must be
made public in such a way as to avoid the creation of false markets
in shares and that information and documents are made available
to shareholders promptly.
17. Rules would also have to be put in place
governing matters such as withdrawal or revision of bids, competing
bids, disclosure of the results of bids, irrevocability of the
bid, and conditions permitted. The directive does not stipulate
the content of these rules.
The Level Playing Field
18. Defensive measuresIn line with
the Conciliation Text, Member States would have to ensure that
rules were in force which prevented the board of the target companyonce
it had been notified of a bidfrom taking action which could
frustrate that bid, without the prior authorisation of the shareholders.
However, the former provision which would have allowed Member
States in their implementing rules to permit the boards of target
companies to issue new shares (subject to certain rules relating
to the rights of existing shareholders) if they had the prior
authorisation of shareholders given up to 18 months before the
beginning of the period of acceptance of the bid is no longer
19. Disclosure and transparencyDetailed
provisions requiring companies to disclose their share structure
and control systems have been included to ensure that the market
can identify differential voting mechanisms and other control
devices across the EU. These matters are to be published in the
company's annual report. Matters to be disclosed include:
capital structures and the rules
governing amendments to the company's articles;
rights and obligations attaching
to different classes of shares;
restrictions on voting rights and
on the transfer of shares (including agreements between shareholders
which might result in restrictions on voting rights or the transfer
rules governing the appointment of
board members, their powers and agreements between the company
and its board members or employees which provide for compensation
if they are made redundant following a takeover bid;
significant shareholdings (including
indirect holdings through intermediaries);
the holders of shares with special
the system of control of any employee
share scheme (where the employees themselves do not directly exercise
such control); and
significant agreements to which the
company is a party taking effect, altering or concluding on the
change of control of the company.
20. Additionally, it would be required that
the board present an explanatory report on the above matters to
a meeting of shareholders every year.
21. BreakthroughThe proposal seeks
to adopt the principles of the High Level Group's breakthrough
proposal whereby any takeover bidder acquiring 75 per cent or
more of the "securities" (defined to mean "transferable
securities carrying voting rights") of the target company
would be able to override certain defensive structures both at
any meeting summoned to consider possible defensive measures and
at the first general meeting following completion of the bid.
The types of structures overridden would include restrictions
on the transfer of shares and voting rights, both in the company's
articles and in contractual arrangements between either the company
and shareholders or between shareholders of the company, and the
rights of multiple voting shares (in a distinct and separate class
and carrying more than one vote). The breakthrough procedure is
not intended to apply to shares where restrictions on voting rights
are compensated for by specific pecuniary advantages (in general
terms within the UK, preference shares). Member States shall provide
that appropriate compensation is paid where rights are removed
as a result of breakthrough.
22. Review provisionten years after
the directive comes into force, the Commission will be obliged
to examine whether, in the light of experience in applying them,
any modifications are necessary to the defensive measures and
Other additional measures
23. Employee rightsThe Directive
retains provisions from the Conciliation Text requiring the prompt
disclosure of the bid to representatives of the employees and
requiring the board of the target company to make public a document
setting out its opinion on the bid on all interests of the company,
including employees. The new proposal also specifically provides
that, where the board of a target company receives in good time
a separate opinion from the representatives of the employees,
this shall be appended to this document. Additionally, the directive
specifically recognises employee rights conferred elsewhere and,
in particular, under the directives on the European Works Council,
Collective Redundancies and Information and Consultation.
24. Equitable priceThe proposal considerably
extends the previous requirement under the Conciliation Text that
any offer should be made to shareholders for all their shareholding
at an "equitable price". Generally, the "equitable
price" will be the highest price paid by the bidder for the
class of shares concerned within a period to be set by Member
States but which may not be less than 6 months nor more than 12
months prior to the bid (or during the bid period itself). Member
States may set out circumstances in which this general provision
may be adjusted by the relevant takeover authority.
25. Squeeze-out and sell-out rightsMember
States are required to put in place rules enabling a successful
takeover bidder to acquire minority shareholdings ("squeeze-out
rights") and parallel rights allowing minority shareholders
to require the takeover bidder to buy out their remaining shares
in these circumstances ("sell-out rights"). These provisions
are designed to address the twin problems of disproportionate
costs associated with small residual shareholdings following a
bid and abuse of a dominant position by a majority shareholder.
There is some latitude as to the thresholds that Member States
set at which these provisions are triggered, which must not be
lower than the acquisition of 90 per cent of the shares and, in
respect of squeeze-out, as to whether this is calculated on the
basis of the percentage of total shares of the company held or
shares acquired through acceptance of the bid.
26. Commencement datethe new provisions
would take effect from 1 January 2005, with the exception that
Member States would be allowed to delay implementation of the
provisions relating to the obligations of the board of the offeree
company (article 9) and on breakthrough (article 11) for a period
of five years.
27. The Department of Trade and Industry
submitted an explanatory memorandum (12846/02) on 12 November
2002 on a "Proposal for a Directive of the European Parliament
and of the Council on Takeover Bids". A further unnumbered
explanatory memorandum (OTNYR) was submitted by the Department
on 4 March 2003 in relation to the first Greek Presidency compromise
proposal dated 14 February 2003.
28. The Commons European Scrutiny Committee
considered the proposal politically and legally important, not
cleared and recommended for debate in European Standing Committee
C (Report 4, Item 23965, Session 02/03). That debate took place
on 19 March 2003. The Lords Select Committee on the EU referred
it to Sub-Committee E in connection with an inquiry they are holding
into the proposed Directive on Takeover Bids (Progress of Scrutiny,
31 March 2003, Session 02/03)
29. The Secretary of State for Trade and
Industry has primary responsibility.
Legal and Procedural Issues
30. Article 44(1) of the Treaty establishing
the European Community.
31. Co-decision (article 251).
32. Qualified majority voting in the Council.
Impact on UK Law
Provisions retained from the Conciliation Text
33. Takeover regulation is carried out in
the UK by the Takeover Panel which administers the City Code on
Takeovers and Mergers. The City Code is non-statutory. While the
main elements of the takeover bids proposal which have been retained
from the Conciliation Text are covered by the City Code, they
are not set out in legislation.
34. In order to implement the directive,
the regulation of takeovers would have to be placed within a statutory
framework. Legislation would be needed to make provision to designate
a supervisory body (although the supervisory body designated may
be a private body such as the Takeover Panel). In addition, some
aspects of the regulatory framework set out in the directive may
have to be incorporated into legislation. The directive refers
to the need for Member States to ensure that rules are in force
which satisfy certain requirements, but recognises such rules
may include "codes of practice or other arrangements".
Thus the Takeover Panel could continue to perform its function
of drawing up the detailed rules contained in the City Code, although
it would now be doing so within the context of a statutory framework.
New substantive provisions since Conciliation
35. The new proposed substantive provisions
cover broader areas than simply relating to takeover regulation,
including company law matters that are currently contained in
the Companies Act 1985 (such as the squeeze-out and sell-out proposals)
and matters of disclosure (dealt with both under the Companies
Act and the UK Listing Rules). Certain aspects of the proposals
(notably, the breakthrough procedure) are currently not provided
for under UK law. Implementation of these new provisions would,
therefore, be likely to involve both legislative changes and amendment
of the Takeover Code.
36. The proposal would apply to Gibraltar.
European Economic Area
37. The measure is potentially applicable
to the European Economic Area.
38. In the Explanatory Memorandum and Legislative
Financial Statement which accompany the proposal, the Commission
justified the proposed directive on the grounds that it:
Is part of the Financial Services
Action Plan identified by the March 2000 European Council in Lisbon
as a priority in moving towards the integration of EU financial
markets by 2005;
Would facilitate pan-European restructuring
and so contribute to the development and reorganisation and development
of European companies;
Sets down fundamental principles
to govern takeovers and provides for the means of determining
the competent authority for the control of a takeover (particularly
important in the context of cross-border bids);
Lays down basic levels of disclosure
and information relating to the bid; and
Provides shareholders with a minimum
level of protection throughout the EU whereas the present situation
is far from equivalent (for instance, some Member States do not
presently require a full bid to be launched in the case of transfer
of control, whilst others allow the management of the target company
to take defensive measures in response to a bid without the prior
consent of the shareholders).
39. The Government remains committed to
extending the opportunities for cross-European takeover activity
(exploiting synergies and acting as a discipline upon corporate
management whilst protecting minority shareholders).
40. Serious concerns have previously been
expressed within the UK as to the extent to which the Conciliation
Text justified itself on subsidiarity grounds. These concerns
centred primarily around two issues:
Whether the Directive genuinely did
meet the objective of providing a minimum standard of protection
for shareholders as it allowed for significant differences in
the approach towards such protection; and
The removal of the right of Member
States to operate fully non-statutory systems of takeover regulation,
even though these systems would otherwise fulfil the Directive's
principles and objectives.
41. On the first of these points, it is
considered that the extent to which meaningful harmonisation of
protection to shareholders is achieved would be enhanced by the
detailed provisions on equitable price and squeeze-out and sell-out;
the principles underlying the disclosure provisions and the revised
provision relating to the limitation on the right of the boards
of a target company to take defensive measures in the absence
of approval from shareholders at the time of the bid.
42. On the second issue, it remains the
case that the only way of avoiding any threat to the legal basis
of the current operation of the City Code (and the potential for
litigation that ensues) would be for there to be no directive
at all. However, the wording achieved (at article 4.6 of both
the Conciliation Text and the current proposal) in the course
of negotiations to minimise the scope for litigation during bids
is considered satisfactory.
Provisions retained from Conciliation Text
43. Much of the content of the Conciliation
Text which has been retained is of a very general nature andalthough
much less extensive and less detailed than the requirements of
the Takeover Codeis broadly in accordance with the approach
already adopted in the UK. The content and the subject matter
of these principles and rules, therefore, have only limited policy
implications for the UK.
44. The Government's principal concern historically
with regard to a directive on takeover bids has been that the
directive would alter the legal basis of takeover regulation in
the UK, thereby making it easier for parties to challenge decisions
of the Takeover Panel through the courts, to litigate against
each other, and to engage in tactical litigation designed to hinder
or thwart a bid. However, it is considered that wording retained
from the Conciliation Text would be sufficient to safeguard the
benefits of the existing UK system of takeover regulation and
minimises the scope for tactical litigation to be imported.
45. The Government remains concerned by
the provisions whereby jurisdiction might be split between two
supervisory authorities supervising the bid where the target company
is incorporated in one country but admitted to trading in another.
The supervisory authority in the country of incorporation will
be responsible for supervising the "company law" aspects
of the bid and the supervisory authority in the country of trading
for supervising the "procedural" issues related to the
bid. Given that the vast majority of companies are admitted to
trading in the country in which they are incorporatedin
which case the supervisory authority involved will be in the country
of incorporation onlythe number of cases where there will
be split jurisdiction is anticipated to be small. However, the
split in jurisdiction will, in the Government's view, lead to
ineffective regulation in relevant cases and may not work well
in practice. The Government's preference would be for the supervisory
authority always to be that where the offeree is incorporated.
However, this view is not shared by a majority of Member States.
New Substantive provisions
46. Within the UK, market pressure, brought
to bear in particular by institutional investors, has ensured
that there are few UK listed companies with differential voting
structures or restrictions on transfer of shares or voting rights.
Such structures are, however, more prevalent elsewhere in Europe.
The Government can welcome in principle an overall approach designed
to ensure greater transparency of differential share and control
structures across the EU and which sends strong signals to the
market of the general undesirability of such structures as a step
towards a genuinely more liberal capital market within the EU.
47. An area where there are potentially
significant consequences for the UK is in relation to the proposed
breakthrough procedure. In view of the rarity of UK listed companies
with restrictions on the transfer of shares and voting rights
or multiple voting rights, it is considered that, in terms of
the market as a whole, the effect of the override of such provisions
would be limited. Such structures are, nevertheless, present in
a small number of listed companies, including so called "Golden
Share" companies which were previously in public ownership
but have been privatised (currently, there are 11 such companies
in the fields of defence and national security, nuclear power
and strategic power networks). Breakthrough would not apply to
securities held by Member States on grounds of public security,
defence and national security. The application of the breakthrough
procedure to contractual arrangements which have been freely negotiated
between shareholders also gives cause for concern.
48. The squeeze-out and sell-out and equitable
price provisions are broadly in line with existing UK law and
practice, whilst the provisions related to employee rights and
information recognise rights conferred elsewhere to employees.
49. Consultation undertaken by the Department
is referred to in the attached Regulatory Impact Assessment.
50. Additionally, senior representatives
of the Takeover Panel have, in an advisory capacity, accompanied
Department of Trade and Industry officials to Council Working
Group Meetings held on this proposal. Meetings of the existing
Consultative Group (consisting of key City and business interests)
are also held as necessary by the Department of Trade and Industry
to discuss important developments in respect of this proposal.
Regulatory Impact Assessment
51. A Regulatory Impact Assessment is attached.
The amendments proposed in the Greek Council Presidency compromise
proposal dated 28 April 2003 are not considered to alter the potential
estimates of costs and benefits in respect of the original October
2002 Commission proposal.
52. There are unlikely to be any financial
53. A number of Council Working Group Meetings
have now been held and the Council Presidency have expressed a
desire to achieve early agreement to the directive. Consideration
of the proposal proceeds in parallel in Committees of the European
Parliament which has also commissioned and received its own independent
academic report and held a public hearing on the proposal on 28
January 2003. There remain, however, a number of outstanding issues
to be resolved, both within the Council and the European Parliament
in order to obtain consensus support for the Directive. Accordingly,
the likely timetable for progress of negotiations on the Directive
8 May 2003
Principal Changes to the Text of the First
Greek Council Presidency Compromise Proposal Draft Takeovers Directive
Dated 14 February 2003 (OTNYRSubject of Unnumbered Explanatory
Memorandum Dated 4 March 2003) Included in the Further Greek Council
Presidency Compromise Text of 29 April 2003
ARTICLE 3 (GENERAL
A new general principle has been added at paragraph
1(g), the aim of which would seem to be to ensure that the Directive
should not be impeded by Member States' laws.
Comment: The Government considers this addition
unnecessary, unclear and inconsistent with the other general principles
at article 3 and is seeking to have it deleted.
ARTICLE 5 (PROTECTION
Paragraphs 1 and 4 have been amended to seek
to clarify the meaning of the term "equitable price"
and that the period during which the highest price paid by the
bidder may be calculated is extended to include the period of
the bid as well as the stipulated pre-bid period.
Paragraph 5 has been extended to allow Member
States to require a cash consideration alternative in all mandatory
Comment: The Government welcomes these changes
as consistent with existing UK practice and an improvement of
the safeguards afforded to minority shareholders under the directive.
ARTICLE 11 (BREAKTHROUGHPREVIOUSLY
This provision has been extended to include
override of multiple voting rightsas well as restrictions
on transfer and voting rights of securities. The provision also
now includes a requirement for Member States to provide for compensation
in certain circumstances where existing rights are overridden.
Consequential amendments have been made to article 2 (to define
"multiple voting securities"), article 6 (to include
a requirement that information related to compensation payable
where rights may be removed is included in the offer document)
and recital 18.
To enable protections to be put in place for
companies which are new to the markets. Member States have an
option to provide that breakthrough will not apply to companies
for a period of five years from the time of first listing.
Additionally, breakthrough would not apply to
securities held by Member States in accordance with the Treaty
for reasons of public security, defence or national security.
Comment: There are few UK listed companies with
multiple voting rights and consequently the effect of this provision
is limited within the UK. Override of multiple voting structures
might increase the opportunities and open markets for UK companies
in seeking to restructure through takeover activity elsewhere
within the EU. Detailed consideration will need to be given to
devising a workable compensation regime in implementing legislation.
The new provisions of this article do not
alleviate the Government's previous concerns about the proposed
override of contractual provisions, although the proposed protection
to be afforded to securities held by Member States on public security,
defence and national security grounds does substantially reduce
the Government's concerns about the impact of this provision on
Golden shares (see paragraph 47) of the Explanatory Memorandum).
ARTICLE 18 (REVISION)
Member States will be required to provide the
Commission with detailed information relating to takeover activity
falling within their country, including the outcome of the offer
and the country of origin of the offeror, to assist the Commission
in reviewing the operation of the Directive. Review of articles
9 (obligations of the board of the offeree company) and 11 (breakthrough)
will take place in 2015. Review of article 4(2) (jurisdiction)
will take place in 2010.
Comment: The Government is content with the review
provisions and that the requirement to provide information about
takeover activity is reasonable.
ARTICLE 19 (TRANSITIONAL
The provisions implementing articles 9 (obligations
of the board of the offeree company) and 11 (breakthrough) would
not have to be brought into force by Member States until 1 January
Comment: This reflects the more extended scope
of the provisions of article 11 (dealing with pre-bid defensive
measures) and its relationship with article 9 (post-bid defensive
Further Greek Council Presidency compromise proposal
dated 28 April 2003 for a Directive of the European Parliament
and of the Council (OTNYR) concerning takeover bids.
1. This assessment estimates the costs and
benefits of the further Greek Council Presidency Compromise proposal
dated 28 April 2003 for a directive concerning takeover bids ("The
2. A directive on takeover bids was identified
by the Spring European Council at Lisbon in 2000 as a priority
measure under the Financial Services Action Plan agreed to by
Heads of State and Government and which aims to create an integrated
capital market across the EU by 2005.
3. The issue of a directive on takeover
bids has been under consideration since 1985. The present text
builds upon a proposal published by the Commission in 1996 on
the basis of a framework directive containing general principles
but leaving considerable latitude for Member States and the relevant
takeover supervisory authorities to deal with the detailed implementation
of those principles. Following detailed discussions within the
European Parliament and the Council, a joint text of the directive
was approved by the Conciliation Committee on 6 June 2001 but
failed by one vote to be adopted by the European Parliament on
4 July 2001.
4. Since July 2001, the Commission has appointed
a High Level Group of Company Law Experts to examine a number
of issues related to takeovers which the Commission considered
to have been of concern to the European Parliament, principally
the issue of ensuring a "level playing field" for shareholders
across the EU. The High Level Group reported finally on these
issues in January 2002 ("Report of the High Level Group of
Company Law Experts on Issues Related to Takeover Bids"the
full text is available at http://europa.eu.int/comm/internalmarket/en/company/company/news/02-24.htm.
The Commission presented a new proposal for a directive in October
2002. The present Council Presidency Compromise proposal reflects
discussions on that proposal in Council Working Groups held since
5. A consultative document seeking views
on the 1996 Commission proposal was issued by the Department of
Trade and Industry in April 1996. It was sent to over 1,000 organisations
and individuals. A summary of comments was issued in August 1996
and sent to all respondents to the consultative document and anyone
else who requested a copy. Since that time, there have been regular
meetings of a Consultative Group that has been set up to discuss
the directive. This consists of members of the Department and
the Takeover Panel along with representatives from the Confederation
of British Industry, the Financial Services Authority, HM Treasury,
Association of British Insurers, British Bankers Association,
Investment Management Association, Law Society, Law Society of
Scotland, London Investment Banking Association, the London Stock
Exchange and the National Association of Pension Funds.
6. The 1996 consultation exercise revealed
serious concerns as to the possible undermining of the existing
non-statutory regulation of takeovers in the UK overseen by the
Takeover Panel and about the possible adverse affects of tactical
litigation being introduced to frustrate the bid process. The
current proposal is considered to enable the UK to preserve a
panel-based approach to takeovers regulation.
7. There has also been widespread debate
within the UK about the merits of provisions within the directive
which would override restrictions on transfer of shares or voting
rights and multiple voting rights following a successful takeover.
It is accepted that the impact of such provisions would be limited
within the UK due to the relative scarcity of such share structures
amongst domestic listed companies and to which the directive applies.
Various views have been expressed on this issue, with a number
of those (including from companies with such restrictions) favouring
an approach based upon freedom of contract associated with the
full disclosure of differential voting and control structures;
whilst others (particularly representing the institutional investment
community) have emphasised the benefits in wider corporate governance
and market terms of seeking to reduce the prevalence of these
types of structures.
II. PURPOSE AND
8. The directive seeks to establish a framework
for the protection of shareholders throughout the European Union
and to provide for minimum guidelines on the conduct of takeover
bids. It would apply to the regulation of takeover bids for companies
incorporated in the EU whose shares are traded on a regulated
market in the EU.
9. Central features of the directive are
a "mandatory bid" rule
whereby any person acquiring control of a company would be required
to launch a bid for all of the company's shares;
provisions preventing a target company's
management taking defensive measures without approval of shareholders
at the time of the bid;
extensive disclosure and transparency
provisions requiring companies to disclose their share structure
and control systems to allow the market to identify and address
defensive share structures across the EU;
A review clause which will require
the Commission in 2015 to assess whether market forces have had
the desired effect of "levelling the playing field"
in listed company share structures across the EU;
A breakthrough provision which would
permit override of restrictions on the transfer of shares and
voting rights contained within the company articles or contractual
agreements and multiple voting rights (shares in a distinct and
separate class and carrying more than one vote) following a successful
Provisions designed to deal with
the problems of, and for, minority shareholders following a successful
takeover ("squeeze-out" and "sell-out" rights);
Detailed provisions to ensure that
shareholders receive an "equitable price" for their
Provisions related to information
to employees of target companies and analysis of the probable
impact of a takeover upon them.
10. The principal benefits likely to arise
from the Directive are in relation to the possible encouragement
of cross-border takeover activity as a central element of the
Financial Services Action Plan. Takeover activity can serve to
exploit business synergies, act as a discipline upon corporate
management and allow shareholders to sell their shares for a price
above the existing market value. Such advantages can benefit all
those with a stake in the markets, whether directly or indirectly
(such as through pensions funds).
11. The regulation of takeovers is presently
undertaken in the UK by the Takeover Panel administering the City
Code on Takeovers and Mergers. There are no significant requirements
in the directive in relation to the takeover bid process that
go beyond the requirements of the City Code (although some of
the rules in the City Code may need to be amendedand the
wider implications for disclosure of company information and the
proposed breakthrough procedure are dealt with at paragraphs 18
and 19 below) and there would, therefore, be no benefits in relation
to takeovers of companies under the provisions of the Code.
12. A key feature of the directive of importance
to UK shareholders in companies incorporated outside the UK is
the "mandatory bid" rulewhich lies at the heart
of the City Code. This would require Member States to introduce
a rule whereby once a party had acquired a certain percentage
of voting rights (the threshold would be determined by individual
Member Statesin the UK it is currently 30 per cent) it
would be required to make a bid for all the remaining shares.
Without a mandatory bid requirement, shareholders will have no
right of exit from the company, a right which they may find essential
if they are unhappy with the identity of the new effective controller
of the company. The present proposal does not, however, prescribe
a threshold at which a mandatory bid has to be tabled which could
allow Member States to set a very high threshold and thereby limit
the protection offered to shareholders.
13. Another benefit to UK shareholders,
and also to UK companies seeking to bid for overseas companies,
is the requirement in the directive that boards of target companies
only be permitted to take frustrating action (ie with the intention
of delaying or stopping a bid) if they have the prior authorisation
of shareholders given for this purpose during the period of acceptance
of the bid. This requirement reflects provisions in the City Code.
14. Additionally, the proposed provisions
on disclosure and transparency of company share structures and
control systems will benefit the markets generally across the
EU in seeking to address protective company control structures.
15. The directive applies to companies traded
on a regulated market. There are approximately 2,500 such companies
incorporated and traded in the UK and around a further 500 companies
incorporated outside the UK but traded within the UK. These companies
will fall within all sectors of business.
16. The proposal does not apply to private
limited companies or to public limited companies which are not
traded on a regulated market.
17. While the adoption of the proposed directive
would change the legal basis of takeover regulation in the UK,
it would not require significant changes to the City Code since
much of the substance of the directive reflects the approach already
adopted in the UK. In addition, since the directive applies only
to companies whose shares are traded on a regulated marketthe
City Code applies to all public companiesit would not bring
more companies within the scope of takeover regulation.
18. The disclosure and transparency requirements
of the directive are broadly consistent with principles underlying
existing UK disclosure requirements. However, there may be a need
for some of the information already disclosed to be reformatted
for presentation in the annual report and there would also be
a new requirement for there to be an annual explanatory report
presented by the board to shareholders each year on the structural
and defensive aspects of the company. It is, however, the case
that these costs may be offset by the increased ease of access
to information on share and control structures on companies elsewhere
within the EU and from wider benefits to the company arising from
periodic review of the appropriateness of its corporate structures.
19. Market pressures, particularly those
brought to bear by the institutional investors, have ensured that
there are only a small number of UK listed companies with restrictions
on transfer of shares and voting rights and multiple voting rights
that would be affected by the proposed breakthrough procedure
in the event of its being subject to a successful takeover. The
breakthrough procedure would not in itself involve costs, as it
would simply lead to a realignment of voting powers of existing
shares. Whether this led to a cost or benefit would depend on
the subsequent activities of the company following a takeover
which otherwise might not have occurred. There would also be costs
involved for any company with differential voting or control structures
currently in place which chose to restructure in order to safeguard
existing control rights against the breakthrough procedure.
20. There are considered to be no further
costs associated with this proposal.
V. OTHER COSTS
21. There are no budgetary costs.
22. Publicity as to the requirements of
the directive would take place as part of the ongoing dialogue
between the Department of Trade and Industry and City and business
interests and also through existing initiatives within the community
of companies which are traded on a regulated market. Accordingly,
it is not envisaged that there will be separate publicity cots
attributable to implementation of the directive.
23. Ensuring that parties to a takeover
bid complied with the requirements of the City Code on Takeovers
and Mergers would remain the responsibility of the Takeover Panel.
24. Securing compliance with disclosure
and transparency provisions would fall to the Department of Trade
and Industry and financial markets regulators.
25. Specific provision is contained within
the Directive for Member States to provide the Commission with
detailed information relating to takeover activity falling within
their country, including the outcome of the offer and the country
of origin of the offeror, to assist the Commission in reviewing
the operation of the Directive. Review of articles 9 and 11 (relating
to pre- and post-bid defensive mechanisms) will take place in
2015. Review of article 4(2) (jurisdiction) will take place in
2010. The Department of Trade and Industry intends to liaise closely
with relevant City, business and regulatory interests to be able
to contribute to that review.
I have read the Regulatory Impact Assessment
and I am satisfied that the balance between cost and benefit is
the right one in the circumstances.