This article was written by Nick Callister Radcliffe at the beginning of January 2000. See end of article for update on progress as at 7/11/00.
It is nearly 15 years since the European Commission announced its intention to propose a Directive on takeover bids. Following the rejection in 1991 of a detailed text, the Commission produced a proposal in the form of a "framework" Directive which sought to establish general principles to govern takeovers.
There have been a number of changes made to the proposed Takeover Directive but it is questionable whether the Commission has achieved its objective of producing a Directive that will create "E.U.-wide clarity and transparency in respect of legal issues to be settled in the event of (a) takeover bid" and prevent the "pattern of E.U. corporate restructuring from being distorted by arbitrary differences in governance and management cultures". In June 1999 political agreement was reached on the proposed Directive, subject only to the United Kingdom and Spain resolving an issue concerning the takeover authority for Gibraltar.
The litigation risk
If the Directive is ultimately approved by the European Parliament, the United Kingdom's non-statutory system of takeover regulation under the Takeover Code, as administered by the Takeover Panel, will have to be put on a statutory basis. This will represent a fundamental change in the character of the Code and the Panel and could undermine the strengths of the U.K. system (being the speed, certainty and flexibility of Panel rulings) without necessarily improving takeover regulation and investor protection in the E.U. as a whole.
These strengths are underpinned by the attitude of the U.K. courts to the Panel. Although the Court of Appeal has held that the rulings of the Panel are subject to judicial review, it has also made clear that, save in the most exceptional cases, the courts will not intervene in the course of a bid. Therefore the present U.K. system provides very little scope for litigation against the Panel or inter partes. The mere fact of placing the U.K. system on a statutory basis would, prima facie, increase the opportunities for litigation in takeover bids.
It must be realistically assumed that if there is any scope in U.K. law for a party to a contested bid to apply to the courts, for example to challenge a Panel ruling, the action of another party or even the implementation of the Directive, that opportunity will be taken if it is thought such action would enhance that person's position. The consequent delays and disruptions could prejudice the bid process.
It is because of these risks of litigation that Article 4(5) of the draft Directive is so important for the United Kingdom. The Article would allow the United Kingdom (or indeed any Member State) to have an administrative process of takeover regulation; enable the U.K. courts to decline to hear actions brought during a bid and to prevent litigation affecting the outcome of a bid; and allow the United Kingdom to avoid additional grounds arising for litigation between parties to a bid. However, while these provisions are designed to minimise the scope for litigation their effectiveness will be determined by how they are implemented into U.K. law and the attitude of the courts. It will also be crucial that the European Parliament does not alter or delete Article 4(5) during the second reading.
Arguably, Member States have not taken the opportunity provided by the Directive to improve the level and quality of shareholder protection. The two specific measures in this area which provide some protection are the Articles dealing with mandatory bids (Article 5) and the restrictions on offeree boards taking frustrating action (Article 8). However, both of these Articles give Member States significant scope to take different approaches. For example, Article 5 does not specify a control threshold for triggering a mandatory bid and Article 8 permits offeree boards to take frustrating action, without prior shareholder approval, at any time up to the announcement of an offer even if the offeree board is aware of a bid prior to its announcement.
If the Takeover Directive is to achieve the objectives set out for it by the Commission then it must be clear which supervisory authority has jurisdiction for any particular bid. If the offeree company is admitted to trading on a regulated market in the Member State of its registered office the position is clear: a bid for that company will be regulated by the supervisory authority of that Member State. However, if an offeree company is admitted to trading solely in a different Member State from that of its registered office the question as to who has jurisdiction for a bid for that company is not clear. The Directive provides that in such situations jurisdiction is shared between the supervisory authorities in the two Member States concerned. Matters arising in relation to "company law" are the responsibility of the supervisory authority in the Member State in which the offeree company has its registered office, while matters relating to "the procedure of the bid" are the responsibility of the supervisory authority in the country of trading. No definitions are provided of "company law" or "the procedure of the bid" (although examples of each are cited) giving Member States the opportunity to interpret these concepts differently.
Therefore, notwithstanding that for certain bids the Directive contemplates two supervisory authorities to take responsibility for supervising a bid (which of itself creates scope for disagreement and confusion), the failure of the proposed Directive to delineate clearly between company law and bid procedure enhances the likelihood of disputes and possible court action. It could be said that today there are very few companies that would be affected by this jurisdictional uncertainty (examples would include companies trading only on EASDAQ and registered outside Belgium) but the position could change if European stock exchanges merge and new markets develop.
Since this article was written, the United Kingdom and Spain have resolved the issue concerning the takeover authority in Gibralter. The Directive has moved to the second reading stage with adoption likely in early 2001 and a last date for implementation probably no later than 2003. There have also been some minor amendments to the text of the Directive, including the renumbering of Article 4(5) to Article 4(6). In addition, the possibility raised by the now aborted merger of the Deutsche Bourse and the London Stock Exchange, of blue chip stocks being traded in London and high-tech stocks traded in Frankfurt (and the general move towards the consolidation of stock exchanges), has served to emphasise that the jurisdictional confusions highlighted above could very quickly become more real than theoretical. It is therefore very important that this issue is addressed by the European Parliament.
If you would like further information on takeovers please contact corporate partner Nick Callister Radcliffe on [email protected] or call him on +44 (0)20 7367 2394. Nick returned from the Takeover Panel in October 2000 where he was Joint Secretary.