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Lord Goldsmith: The amendment raises an important question about the operation of irrevocable undertakings. We recognise that such agreements are commonplace, and that they can help a bidder to act with confidence, knowing that his bid has a stronger chance of success because he knows that support for the bid can be guaranteed from those who have entered into such agreements. We understand that the amendment is designed to test whether the operation of these agreements will be undermined by the operation of breakthrough provisions in respect of a company which has chosen to opt in to the provisions. We cannot exclude agreements which aim to secure that the holder will accept a takeover bid in the way proposed by the amendment. That would not be in accordance with the directive's provisions.
Where does that leave irrevocable undertakings? I recognise that that question remains. In the case where only one bid is made, irrevocable undertakings between an offeror and a shareholder would not operate any differently than at present. A more difficult situation arises when a rival bidder has entered the marketplace. Irrevocable undertakings could place some restriction on transfer of shares to a rival bidder. Where they do, the opt-in provisions would invalidate such agreements. If the original offeror had suffered a loss in that case, he would have the right to apply to the court for compensation, because, in accordance with the requirements of the directive, we have made provision for compensation at Clause 643(5).
Shareholders can consider the effect on the operation of irrevocable undertakings when they are contemplating whether or not to opt in. I have tried to give the noble Lord some comfort in respect of how irrevocable undertakings would operate, but to accept the amendment would be inconsistent with Article 11.
Lord Hodgson of Astley Abbotts: I am grateful to the Attorney-General for that explanation. This is a very important issue. While he dealt with a hard irrevocable undertaking, there remains the still more difficult, grey area of soft irrevocable undertakings, which people give provided that their offer is not trumped by a certain percentage. The practitioners will feel a lot of concern about this, because an important part of the armoury of bidding companies is being able to secure a bridgehead. They are entering considerable expenseprofessional fees, diversion of management time and so onand want to achieve the maximum amount of certainty. Indeed, it is sometimes in the interests of the target company for that situation to persist. We need to read carefully what the noble and learned Lord said, but I rather suspect that we will come back to the matter and press the Government on it. In the mean time, I beg leave to withdraw the amendment.
"( ) The reference in subsection (2)(c) to rights to vote at a general meeting of the company that decides whether to take any action which might result in the frustration of the bid includes a reference to rights to vote on a written resolution concerned with that question."
The noble and learned Lord said: The amendment will complete implementation of the provisions of Article 11.3 of the takeovers directive. The amendment provides for override of contracts which place restrictions on voting rights on written resolutions relating to frustrating action during the bid. It is necessary because, in the case of private companies, we need to recall that shareholders can express their wishes by means of written resolutions as well as by voting at a general meeting. I beg to move.
"( ) Any provision of the company's articles of association to which this section applies is invalid in so far as its places any restriction
(a) on the transfer to the offeror, or at his discretion to another person, of shares in the company during the offer period;
(b) on the transfer to any person of shares in the company at a time during the offer period when the offeror holds shares amounting to not less than 75% of the capital carrying voting rights in the company;
(c) on the appointment or removal of directors of the company at a time during the offer period when the offeror holds shares amounting to not less than 75% of the capital carrying voting rights;
(d) on rights to vote at a general meeting of the company that decides whether to take any action which might result in frustration of the bid;
(e) on rights to vote at a general meeting of the company that
(i) is the first such meeting to be held after the end of the offer period, and
(ii) is held at a time when the offeror holds shares amounting to not less than 75% of the capital carrying voting rights."
The noble Lord said: We may have chewed this issue in our earlier discussions. Amendments Nos. A163A and A163B concern the clause's effect on contractual restrictions. We have already discussed the provisions of Article 11 of the takeovers directive. This clause deals with the effect on contractual restrictions. There appears to be no provision, other than the second condition in Clause 641(3), which was the subject of the earlier amendment of the noble Lord, Lord Sharman, to deal with the effect of opting in on a company's articles of association. This amendment would ensure that this anomaly is addressed. I have no doubt that, even if the Government were minded to accept it, the parliamentary draftsmen would find the drafting inadequate. But we should at least discuss the anomaly, even if the way in which it is to be corrected can be more felicitously phrased. I beg to move.
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Lord Goldsmith: As the noble Lord said, this really does come back to our earlier debate. The amendment is a helpful illustration of what might have been provided if we had decided to go down a different legislative route. But having determined to go down the legislative route that we have taken, which I explained in answer to a previous amendment from the noble Lord, Lord Sharman, this is not the approach that we have adopted. We believe that the approach taken in the Bill provides greater flexibility for companies and their shareholders; therefore the amendment is inappropriate.
Lord Hodgson of Astley Abbotts: I understand the background to this and we have discussed it. We may wish to return to this, as may the noble Lord, Lord Sharman; meanwhile I beg leave to withdraw the amendment.
The noble Lord said: We have received representations about the drafting of subsection (2) at the bottom of page 312, particularly the drafting of paragraph (a), which is unusually wide in that it treats as shares other instruments that, although convertible, have not yet been converted. We are seeking an explanation from the Government for that in this probing amendment. I beg to move.
Lord Goldsmith: The reason for the change is so that we can bring within the terminology that we normally use in Companies Act legislation things that are necessary as a result of the takeovers directive.
That definition is important in both scoping the breakthrough provisions at Article 11 and laying down squeeze-out and sell-out rights at Articles 15 and 16. In Chapter 2, we are concerned with the Article 11 breakthrough provisions. But clearly, for consistency, we need to ensure that what we do in defining directive-driven provisions is on all fours throughout the Bill with the Companies Act 1985.
Whereas the directive uses the term "securities", our legislation does not generally use it. Instead, we nearly always refer to "shares". We sought by this specific definitional provision to use the word "shares" as we normally do, but bring it into line with the takeovers
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directive. That happens in one or two places in the Billand Clause 646(2) is one such provision. For the purposes of squeeze-out and sell-out, Section 430F of the Companies Act specifically includes "convertible securities" within the ambit of the current squeeze-out and sell-out regime.
We concluded that what may be termed "convertible securities" fell within the meaning of "securities" as defined by the directive. There was a ready-made definition of such instruments at Section 430F of the Companies Act. Consistency between the approach in relation to breakthrough, squeeze-out and sell-out would be assured by borrowing that definition. So, that is what we have done. I expect that the noble Lord and his advisers will want carefully to consider whether that satisfies them. I hope that they will, because although this is an unusual formulation, there is a good reason for it and it reaches the right result.
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