May I say good morning to Committee members?
On Thursday the Government Whip, the hon. Member for Birmingham, Hall Green (Steve McCabe) was keen to move on to the takeover part of the Bill. This morning, I was giving that some thought; could it have been a cynical attempt to move quickly on to our starred amendments? Surely not, I thought. Clearly, such appalling Government tactics would have led to a breakdown of the usual channels and a breach of trust. No, it could not have been that; he must have been keen to discuss the new role of the panel. So I think that we should oblige him.
Since Thursday’s proceedings, a number of concerns about this part of the Bill have been brought to our attention. Those concerns centre mainly on the implementation of the European takeover directive. In the same way, we do not believe that the Government have taken a proportionate or measured response to the requirements set out by the Commission.
Before I get to the meat of the contentious issues at stake, it will benefit the Committee to give some thought to the clause dealing with the takeover panel. Richard Murley described the takeover panel as follows:
“The Takeover Panel is the regulatory body which publishes and administers the City Code on Takeovers and Mergers. It is concerned with takeovers of companies whose shares are held by the public. The Code is designed to ensure high business standards and fairness to shareholders. Maintaining fair and orderly markets is crucial to this.
The commercial merits of takeovers are not the responsibility of the Panel; these are matters for the companies concerned and their shareholders. Wider questions of public interest are the concern of the governmental authorities in the UK and, in some circumstances, the European Community, through the Office of Fair Trading, the Competition Commission or the European Commission.
The panel was set up in 1968 in response to mounting concern about unfair practices in the conduct of takeover offers. The composition and powers of the Panel have evolved over the years as circumstances have changed and the market place has developed.
The essential characteristics of the Panel’s system of takeover regulation are flexibility, certainty and speed”.
On a point of order, Mr. Bercow. We have had an open discussion on the clause already. We are now being treated to a handbook on the background to the takeover panel that seems merely to be a time-wasting exercise. As Chairman, Mr. Bercow, is there anything that you can do about that?
I am grateful to the hon. and learned Gentleman for his point of order, but I am listening attentively to proceedings, as he would expect—that is my responsibility. My patience is not unlimited, but no disorder has yet occurred.
Thank you for that confirmation of your position, Mr. Bercow.
I shall continue:
“The essential characteristics of the Panel’s system of takeover regulation are flexibility, certainty and speed founded upon a principles-based approach to regulation, enabling the parties to an offer to know where they stand under the Code in a timely fashion. It is important to the financial community that these characteristics should be retained in order to avoid over-rigidity of the rules and the risk of takeovers becoming delayed by litigation of a tactical nature, which may frustrate the ability of shareholders to decide the outcome of an offer.”
That is how the takeover code is run. Will the Minister explain how putting it on a statutory footing and giving it criminal sanctions will retain the “flexibility, certainty and speed” that make the panel so effective?
The point that my hon. Friend is making about the statutory footing of the panel is important and significant. Certainly, in previous operations, the strength of the panel has been its flexibility, and almost the unwritten rule in the corporate market and the City as a whole was that it should not be breached—it was almost self-enforcing. Does he believe that there is a risk that that attitude, and the benefit of the previous operations of the panel, might be challenged or threatened by putting it on a significant footing?
On paper, there is a risk that that could happen. From consultations that I have been holding, not only with the panel but with interested parties and various stakeholders, the feeling is that that will not happen. However, my hon. Friend makes an important point; there is a possibility that it might. To that extent, it is important that we investigate the potential for wrongdoing. Things might be fine today but not necessarily in a year or 10 or 20 years’ time. Hon. Members will be fully aware that the last time that we looked at companies legislation in the round was 1985.
The code comprises 10 general principles and 38 rules. However, it can be summed up in four broad objectives that constitute the underlying purpose of the panel and the code. Those objectives have remained unchanged throughout the life of the code.
The first and most fundamental objective is to ensure quality of treatment between shareholders, whether large or small. The second is the need for adequate and timely information to enable shareholders to decide on the merits of an offer. The third is the preservation of a fair market in the shares of companies that are involved in takeovers. The fourth is to prevent the boards of target companies from taking action that would frustrate an offer against the wishes of the shareholders.
Those four broad objectives encapsulate the essential spirit of the code. They underlie the 10 general principles that form the opening section of the code. In turn, the general principles are applied in practice through the 38 rules of the code and the accompanying notes.
The panel administers the rules governing substantial acquisitions of shares, which I mentioned to the Minister on Thursday—and to which she did not come back in her remarks. Those were devised to address the practice, which developed in the early 1980s, of corporate predators launching so-called dawn raids to purchase large numbers of shares in a short period, mainly for major institutional shareholders. The SARs govern the manner in which stakes of between 15 and 30 per cent. may be acquired irrespective of takeover offers and require prompt disclosure at each 1 per cent. step in that band.
The effect of the SARs is to slow down the rate at which substantial stakes in companies can be built up so that boards can comment on such developments if they wish and all shareholders have a greater chance of disposing of their shares at any premium price that a significant buyer may be prepared to offer. However, the SARs do not apply to a purchaser who has announced a general offer for the company. Any such offer and associated share purchases will be subject to the full rigour of the code.
It has been proposed that the SARs are to be abolished. I would be grateful if the Minister explained the policy behind that decision. There are a number of rules in the takeover code, and we need to explore some of them in greater detail as they go to the heart of what the clause is all about.
I hear what my hon. Friend says about individual rules. Clause 642 sets out that
“The Panel may do anything that it considers necessary or expedient for the purposes of, or in connection with, its functions.”
Those are described in chapter 1 of part 24. To my mind, one of the strengths of the panel is the statement in the blue book—and I note that my hon. Friend has not read this out—that it is not only the letter of the law but the spirit of the takeover code. Is he afraid that the statutory basis will undermine the flexible application of the takeover rules, because the spirit of the code will become rigid and legal and people will have to go through a more formalistic box-ticking exercise?
My hon. Friend makes an interesting—a practitioner’s—point. In practice, the delight of dealing with the panel is its adaptability and lack of statutory status. That means that matters can be dealt with efficiently, effectively and on a relatively informal basis. That works. It is one of those institutions that has evolved its own style, which is highly regarded not only in this country but around the world. My hon. Friend is concerned that making the process statutory could affect the workings of the panel, and that is a possibility in the medium to long term.
It is rare for panel decisions to be taken to court. Judicial review is possible, but it rarely occurs in practice, mainly because of the consensual approach and people’s respect for the institution. That could change, and more court cases could arise because of the statutes.
Is it not the case that on every occasion when a panel ruling has been challenged by the court since the panel came into existence 25 years ago, the court has upheld the panel’s judgment?
I did not know that as an absolute fact, but I knew that it was pretty much the case. I am grateful to my hon. Friend for advising the Committee of it. It does not surprise me.
Does my hon. Friend agree that there is a further unknown quantity inherent in the proposed legislation in that a fallback power is vested in the Government to replace the panel as regulator? We might end up without any takeover panel at all.
My hon. Friend makes a wise observation. To be honest, he caught me off guard. This could be an issue and we ought to give more thought to it before consideration on Report. I assure him that we will consider it further.
I move on to general concepts. The four broad objectives outlined have been the basis for the code since it was first published in 1968. The first version of the code contained 35 rules, and there are now 38. The rule book is thicker because most of the individual rules are now accompanied by notes on interpretations and practices established by cases brought before the panel or the panel executive. It illustrates how case law has developed the code.
Perhaps the best-known rule in the code is rule 9, which requires the person who acquires 30 per cent. or more of the voting shares in a company to make a cash offer to all other shareholders at the highest price paid in the previous 12 months. That is a classic application of the requirement for equal treatment of all shareholders. Control of a company cannot be bought by paying a premium price to the controlling shareholder and leaving the remainder behind with a new controller. For the code’s purposes, 30 per cent. of the voting rights is regarded as conferring effective control.
Rule 9 is important because it provides a fair and proper safeguard for the interests of shareholders with minority holdings. It is more effective than the minority protection devices in other jurisdictions, which can lead to undesirable consequences. For example, it has been argued that it is because the US system lacks the equivalent of a 30 per cent. rule that poison pills are needed to help the boards of defending US companies to negotiate a fair deal for all shareholders.
Rule 11 requires the offer to include a cash alternative whenever an offeror purchases offeree company shares during an offer period. Before July 1998, the obligation to provide cash was triggered only if 10 per cent. or more of the voting rights for a particular class of share in an offeree company had been acquired during the offer period or in the 12 months preceding its commencement. That long-standing provision will continue in force alongside the new requirement.
Accordingly, under rule 11, the cash alternative must be made at the highest price paid during the offer period or, if more than 10 per cent. has been acquired, at the highest price paid during the preceding 12 months. The scope of the law has recently been extended to require a full share offer where an offeror has purchased 10 per cent. or more of the offeree company’s shares in the three months before commencement of the offer period.
Rule 16 prohibits deals unfavourable to particular shareholders. Rule 23 requires that shareholders be given sufficient information and advice to arrive in good time at properly informed decisions regarding the offer. It is founded on general principle 4 of the code. The rule 23 obligation, which attaches to all information provided to shareholders, whether it emanates from the offeror or offeree, is reinforced by the requirements of rule 3, which states that the company must appoint a competent independent adviser, whose views on the offer must be made known to all shareholders. As a result, they benefit from the adviser’s views as well as from the recommendation of the directors, who may lack experience of takeovers or have vested interests in the outcome.
Rule 8, together with other disclosure rules, requires prompt disclosure of market dealings by all relevant parties. Disclosure is the principal way in which the panel seeks to preserve a fair market in the shares of companies subject to bids. Since 1986, when it became apparent that improved transparency of dealings would be necessary, rule 8.3 has required daily disclosure of dealings by any holder of 1 per cent. or more of a class of shares in a company involved in a takeover. Rule 20 requires information given to a preferred offeror by an offeree company also to be given on request to competing offerors. That is an application of the anti-frustration principle.
An offeree company is not allowed to give the favoured suitor an unfair advantage by providing it with information while at the same time depriving a less favoured rival of the same information, thereby making it more difficult for the latter to compete and perhaps denying shareholders a better offer. Will the Solicitor-General confirm that no changes are planned to those fundamental rules?
It would also be helpful to learn what the panel considers is its role and how it is to be made up. The panel states that it is a
“regulatory body that administers the City Code on Takeovers and Mergers. It is concerned with takeovers of companies whose shares are held by the public. The Code is designed to ensure high business standards and fairness to shareholders. Maintaining fair and orderly markets is crucial to this. The commercial merits of takeovers are not the responsibility of the Panel; these are matters for the companies concerned and their shareholders. Wider questions of public interest are the concern of the governmental authorities in the UK and, in some circumstances, the European Community, through the Office of Fair Trading, the Competition Commission or the European Commission.”
It is the panel’s practice to focus on specific consequences for shareholders of rule breaches, rather than simply on disciplinary action, with the aim—this is the point made by my hon. Friend the Member for Hornchurch (James Brokenshire)—of providing appropriate redress. If the panel finds that there has been a breach, it may have recourse to private reprimand, to public censure and to reporting the offensive conduct to other regulatory authorities, such as the Department of Trade and Industry or the Financial Services Authority, as it thinks fit. That is one of the key issues that we will deal with in every clause in this part of the Bill, and it is behind what my hon. Friend said.
The panel draws its membership principally from major financial and business institutions, which nominate 11 members. That ensures a spread of expertise in takeovers, securities markets, industry and commerce. The panel has benefited since its inception from the support of the Bank of England, and the Governor appoints the chairman, the deputy chairman and four independent members.
My hon. Friend is talking about the rules in the context of the panel. I note that he has had discussions with the panel and certain other interest groups. Does he have a feel as to whether, in the context of this changed regime, the panel will seek to modify its rules? Will it make them more legalistic as a consequence of the changes, as happened with the change in status of the stock exchange rules, which became much more rigid and formulaic compared with the rules that existed under the Yellow Book?
My hon. Friend asks a very important question and I would be grateful if the Solicitor-General addressed the issue. I do not believe, from my discussions with the panel and other parties, that they feel that they are going to switch to a more tick-box, statutory approach. All parties intend to maintain the current adaptability. My hon. Friend earlier raised the question whether putting the panel in statute will, over time, lead to something different. That has yet to be seen, but it is not my understanding from the interested parties.
The role of the code committee is to be kept under review. Where appropriate, it will put forward, consult on and make amendments to the substantive provisions, such as the general principles and rules of the code and the rules governing substantive dispositions of shares. I believe that that is now abolished.
Members of the code committee are appointed by the panel. There is a right of appeal from the panel to the appeal committee in certain circumstances, particularly where the panel finds a breach of the code and proposes to take disciplinary action. An appeal may also be made in other cases with the leave of the panel. The chairman of the appeal committee and his deputy will usually have held high judicial office. The chairman and deputy chairman are appointed by the Governor of the Bank of England.
One problem with tying initial statements in the code to the content of the statute is that the code pads things out and gives more background information. Will the Solicitor-General confirm the position, even if it is just that the background information will carry over?
The executive is headed by the director general, who is usually an investment banker on secondment. Some of the executive are permanent, which provides an essential element of continuity. They are joined by lawyers, accountants, stockbrokers, investment bankers and others on two-year secondments. It is one of the more prestigious matters for a City firm to be asked to second some staff to the panel, and secondment is an important part of the education of a corporate finance lawyer or accountant.
One strength of secondments is the impact and influence that they provide for practitioners in the field, who therefore have greater commercial sense. Clause 642 states, in effect, that the panel may make arrangements for any of its functions to be discharged by persons, officers or members of staff. Does my hon. Friend have any feel as to whether that will have implications for the structure and nature of the panel and whether there will be an impact on what I believe to be one of the panel’s strengths—drawing resources from practitioners, rather than just creating officiators of rules who do not necessarily have experience, either before or after their time at the panel?
My hon. Friend makes a good point, and I would be interested to know whether the Solicitor-General has heard any concern that that might be the implication. I have not heard that that might be the case and I certainly hope it will not be, in view of the huge benefit that the City receives from people giving their time to the panel, as well as the resulting joint experience, continuity and consensual approach.
The executive monitors takeovers, and checks all actions taken and all documents and announcements issued for compliance with the code. It keeps aclose watch on dealings in relevant securities and is available for consultation and for rulings and interpretation before, during and—when appropriate—after takeovers. The panel encourages, and in some cases requires, early consultation so that problems can be avoided. A major part of the executive’s role is to provide guidance.
The early consultation provisions are one of the great benefits of the system. I have no feeling that they will be affected by the workings of the Bill, but if we became more formulaic and cautious of early discussions, and became more form filling, that could be detrimental, because a great advantage of the system is that it is possible to speak to the panel before something happens.
Many inquiries about the possible effects of the code on prospective transactions need a swift response to allow the potential bidders, once an offer has been announced, to meet the code’s strict timetable. The chairman’s statement says:
“The Director General’s report describes the progress towards implementation of the Takeovers Directive. The support shown by the Government in its Consultative Document for the Panel’s independence and for a future regime which maintains the speed, flexibility and certainty of the existing system has been welcome; we understand that the comments from responding parties also support the proposed approach. We will be working to ensure that the policy outlined in the Consultative Document is ultimately adopted in the legislation.”
It proceeds to discuss the number of bids, saying that there is no sign of the established pattern changing and adding:
“The number of appeals heard by the Panel from decisions of the Executive has also remained low”.
There were only three in the last year. The chairman also says that he believes that that
“reflects in particular the relatively low level of hostile or competitive bids in recent years, as well as the fairly settled nature of a number of the key provisions in the Code.”
The statement continues:
“However, the trend towards offers being announced at a preliminary stage has continued. There has been much comment about the increased incidence of so-called ‘virtual bids’. Early announcements of possible offers are made for a variety of reasons, but a leak, or fears of leaks, is often a factor. Leaks are a source of great concern to the Panel and the Executive co-operates with the Financial Services Authority to facilitate its investigation of possible insider dealing and other market abuse. Parties may also have other reasons for an early announcement such as, for example, to allow due diligence to take place or to allow other issues (such as obtaining clearances and authorisations) to be resolved.”
In future the need for parties to negotiate with pension fund trustees and to fulfil their obligations under the Information and Consultation Directive will further add to the likelihood of early announcements. The Code has been developed to cater for the rise in possible offer announcements, both through the introduction of the “put up or shut up” provision and through the regulation of statements made by potential offerors and the regime applicable to pre-conditions.
The code committee has had a busy year focusing on reform and updating of the market-related provisions in the Code. In particular, the proposed reforms of the regime for disclosure of interests held through derivatives and options have received much attention and have been widely welcomed. The proposed changes provide a good illustration of how the Code is able to keep pace with market developments, and to ensure that fair and transparent markets are maintained.”
Once again, I have heard no reason why putting that code and its provisions in statute will enable it to keep pace with market developments. Has the Minister considered that concern?
The statement continues:
“I am conscious that the Code Committee is only one of a number of organisations which publishes detailed consultation documents which have to be considered by industry bodies and others in the market. The load these bodies bear is significant and I thank them for the care and professionalism which they bring to their responses. Although the task is heavy, the responses are highly valued and improve the ultimate result.
An important part of the panel’s activities involves cooperation with the FSA. This extends beyond investigating potential instances of insider dealing to looking into wider issues of market abuse and we have built a close and constructive working relationship in the period since N2 in 2001. It is a priority for the Panel to ensure that the FSA is fully informed and supported by the Executive in those areas of bid activity where the FSA also has responsibilities for enforcement. Considerable efforts are devoted by the Executive to ensure that this is in fact the case. Our two organisations also work closely together on the way in which the range of Directives that come out of Brussels should be implemented in the field of takeovers. Apart from the Takeovers Directive itself, each of the Market Abuse, Prospectus and Transparency Obligations Directives will have implications for the regulation of takeovers.”
Will the Minister confirm that, from the Government’s point of view, the co-operation that Peter Scott QC is talking about between the panel and the FSA is in good working order and does not need a separate review?
The chairman also said:
“It is the role of the Code Committee to keep the Code and the SARs under review and to consider, consult on and make amendments as appropriate. Such amendments might arise from specific experience, from market developments or from the particular concerns of those operating within the markets. During this past year, the work of the Committee has been largely dominated by market developments and the concerns arising from them.”
I do not think that Government intend to involve themselves in the role of the code committee or to keep the code under review, but it would be good if the Minister could confirm that for the record.
On that point, I think that the ongoing role of the panel and how that sits within the regulatory regime is important. Clause 642(2), in part 24, states:
“The Panel may do anything that it considers necessary or expedient”.
I note that when we come on to further clauses, the issue arises of the definition of a designated supervisory authority for the purposes of article 4.1 of the takeover directive. How does my hon. Friend envisage those working together? How will the takeover panel sit in the overall framework of financial services regulation? How will it be able to ensure that its rules are complied with in that wider context and framework?
That is a tough one. My hon. Friend makes a good and fair point. The basis of the relationship when one has discussions with the panel, or anyone else, is one of mutual respect and collaboration. As to the technical pecking order, I am no financial services expert, but perhaps the Solicitor-General could put us right on that.
My concern—I am sure that we will come on to this in greater detail later—is about the criminal sanctions and who will interpret the rules. While it may be for the panel to say that the rules mean something, ultimately we are talking about criminal sanctions and criminal liability, which may involve other agencies interpreting what those rules mean.
That may have been part of the mindset of putting the panel on to a statutory footing so that ultimately it can stand up to others and have the clout that perhaps it theoretically did not have as a non-statutory body. My hon. Friend makes a fair point. Again, as to the pecking order, that will probably depend on the issue. I should be interested to hear the Solicitor-General’s views on that.
It is the committee’s practice, once it is agreed that something should be pursued, to delegate preparation of a public consultation paper to the executive, which consults as appropriate with parties who have a particular interest or relevant expertise in the subject matter. Once the committee has approved the PCP, it is published and made available on the panel’s website. Consultation periods are normally between six and eight weeks, but may be longer if the subject is particularly complex. The committee will then reach conclusions taking account of all responses to the PCP and those conclusions are published with the final code amendments in a response statement.
On occasion the Committee may decide, in the light of responses received, to vary this procedure by consulting further on a particular matter before publishing a final response statement. Each response statement is also available on the website. A full list of PCPs and response statements published during the year can be found on the website. I should be grateful if the Solicitor-General confirms that he foresees no conflict between that consultation procedure and the statutory provisions in the Bill. It is quite an important point because the panel generally consults very widely on proposed changes to the code and it would be a matter of concern if that system were affected in any way by the provisions.
The committee’s first publication of the year was PCP2004/3, which addressed a number of market-related issues concerning the treatment of the code and the SARs of dealing activities of persons during the course of an offer. In particular it addressed dealings by principal traders and fund managers and the relaxations of the usual presumptions of concertedness that would apply when a principal trading or fund management operation is part of the same group as a party or an adviser to a party to a code transaction: the application of the disclosure requirements of rule 8 of the code for certain dealings; the application of the definitions of “acting in concert” and “associate” in certain situations; and the procuring by an offeror or an offeree company of irrevocable commitments and letters of content in the making of statements of shareholder support. A number of other miscellaneous matters relating to dealing activities were also discussed, including stock borrowing and lending.
We can see that the nature of consultation is important and is also very much an ongoing process. There was also broad support for most of the proposals in the PCP, but a few proved to be controversial. An executive carried out further consultation with interested parties in the light of which the committee made amendments to its original proposals particularly as regard to presumptions of concertedness. The committee also adopted a number of other clarifying changes to its proposals in the light of comments made and published its full response in RS2004/3 in March 2005. The committee delayed the implementation of the code amendments arising from its consultation by approximately six weeks to give practitioners time to familiarise themselves with the detailed technical changes. That shows the adaptability of the panel and the impact of consultation on rule changes.
I shall give one more example. In January the committee embarked on the first stage of a major consultation on dealings in derivatives and options by parties to an offer, their concert parties and other market participants, which has been in the news a lot recently. The volume of such dealings has increased significantly in recent years, and the executive’s experience in certain cases led the committee to believe that the rules on substantial acquisitions of shares should be amended to reflect the change in practice.
In view of the importance and complexity of the matter the committee decided to consult, first in PCP2005/1, on the outline of its proposals. That consultation paper elicited strongly held views from a number of practitioners and was followed with further consultation by the executive of the parties concerned. Taking account of the views expressed, the committee published in early May 2005 the second stage of the consultation, PCP2005/2, which included detailed proposals for amendments to the code on the disclosure of dealings in derivatives and options. It is now considering responses to a further consultation paper on the impact of controlling such dealings by parties to an offer and those whose interests fall into the 30 to 50 per cent. band, which will be published in due course. There have been three layers of consultation, which shows how much the panel is prepared to undertake. It has been a busy year for the panel but, as busy as it is, it undertakes consultations and as a result has the respect of the City. Will the Solicitor-General confirm that the application of the statue will not effect the way in which the panel conducts its consultations?
The takeover directive itself is the guts of the provisions and, some would say, the reason why the changes have been proposed. The executive has spent a considerable amount of time preparing for the implementation of the directive. It has worked closely with officials from the Department of Trade and Industry and is grateful for the constructive approach that they have taken. The Government published their proposals for the implementation in a consultative document in January 2005. On the same day, the panel published an explanatory paper expanding on the Government’s proposals. The Government have stated that implementation will be by primary legislation, and here we are today. If implemented as proposed, the directive should ensure that the key benefits of the panel system remain in place. The panel will become a statutory body and there will need to be a number of adjustments to its constitution. There will be measures to ensure that the orderly conduct of bids will not be disrupted by tactical litigation, and the panel will be given extra powers, although the key features of its sanctions regime will remain unchanged. Much of our debate will focus on those extra powers.
The executive believes that parties to a bid and their advisers will experience little change in their dealings with it following implementation of the directive. Practitioners will still be able and encouraged to consult the executive in advance, and the secondment system that has served the panel well over the years will remain. The executive will still be able to interpret the code flexibly to offer the right solution depending on the circumstances of a case, and it will still expect to respond quickly to inquiries. Parties unhappy with a decision of the executive will be able to seek a hearing of the panel in the same way as they can today. Thus, although the system will have a statutory framework, the day-to-day impact will be small. It is important that the Solicitor-General put on record his agreement with that.
Will the Solicitor-General also confirm that now the panel is to be put on to a statutory footing, there will be no change in the essence of its constitution? It has proved remarkably successful and it would be folly to tamper with an institution that is not broken.
Current law on takeovers and the Government’s proposed changes are set out well in a briefing note that we have received from the Practical Law Company. A number of important issues arise from it, and I will ask the Solicitor-General for his views on certain changes to the law. The briefing states:
“From 20 May 2006 when the Directive on Takeovers Bids... was implemented in the UK, the Panel on Takeovers and Mergers... has been placed on a statutory footing in relation to takeover offers to which the Directive applies and Code Rules that have been amended or adopted due to the requirements of the Directive. The Panel has been specifically designated as the supervisory authority to carry out various regulatory functions in relation to takeover offers to which the Directive applies.
Although legislation to implement the Directive in relation to takeovers is contained in Part 24 of the Company Law Reform Bill, as the Bill is not anticipated to become law until 2007 and the Directive was required to be implemented into national law by 20 May 2006, interim regulations were introduced. The Takeovers Directive (Interim Implementation) Regulations 2006... were introduced to implement the Directive for an interim period from 20 May 2006 until the enactment of the Bill when the Regulations will cease to have effect. The Regulations generally only apply to transactions to which the Directive applies, namely to takeover offers for companies whose securities are admitted to trading on a regulated market, which includes the London Stock Exchange but not AIM.”
At the end of our last sitting, I asked Ministers to elaborate on that and explain to the Committee whether the regulations, which have been in place for a couple of months, have worked smoothly and whether any immediate changes have been considered since implementation. To the extent that provisions of the Bill mirror provisions in the statutory instrument, clearly we would not want to pass law knowing that something that had already been implemented was not working. Therefore, from 20 May 2006 until the enactment of the Bill, there is to be a two-track regime.
The briefing continues:
“For transactions outside the scope of the Regulations (for example a scheme of arrangement or a takeover offer for a company whose shares are admitted to trading on AIM) the Panel and the Code will continue to operate on a non-statutory basis as they did prior to 20 May 2006.
For offers to which the Regulations apply (offers for companies whose securities are admitted to trading on a regulated market) the Panel will have a number of statutory powers of enforcement in relation to those of the Code Rules that have been adopted or amended in order to implement the provisions of the Directive. Such Code Rules will therefore also have statutory force from 20 May 2006 (but only in relation to offers to which the Directive applies).
In practice, however, the Code remains mandatory for all transactions to which it applies, as there are a number of sanctions available to ensure compliance including public censure from the market place and the risk of sanction by the UKLA or other regulated bodies of which the relevant parties to the offer are members and which co-operate with the Panel and operate a mutual exchange of information.
As a result of the implementation of the Directive and certain other consultation procedures by the Code Committee of the Panel prior to 20 May 2006, a number of changes were required to be made to the Code and a new edition of the Code (the eighth) has been published and took effect on 20 May 2006... The Code Rules apply to all offers and other transactions and companies to which the code applies.
The changes that have been made to the regime governing takeovers as a result of the implementation of the Directive are therefore found in two principal places: the Regulations; the Code, as amended.
Article 11 of the Directive was introduced with the intention of preventing pre-bid defences, such as share transfer restrictions, enhanced voting rights attached to shares, for example multiple voting rights and other restrictions on voting rights from being put in place, by providing that once a bid is made public, the offeror will be able to over-ride (or ‘break-through’) any of the following provisions...
Any restrictions on the transfer of securities in the target company’s articles of association; any restrictions on the transfer of securities contained in any contractual arrangements between the target company and its shareholders; any restrictions on voting rights contained in the target company’s articles of association or in contractual arrangements between the target company and its shareholders.
In the case of any voting restrictions, wherever contained, these will not then be valid at any general meeting held for the purposes of voting on defensive or frustrating measures regulated by the Directive. Any shares to which multiple voting rights attach will only have one vote per share at a general meeting which decides on any frustrating action in connection with the bid. Where any such special rights are so removed, the Directive provides that ‘equitable compensation’ should be paid to the relevant shareholders in respect of their loss of such rights.
On the basis that these ‘break-through’ provisions caused concern during the consultation process, the Directive also provides for member states to elect to opt-out of the arrangements... The UK Government has decided to opt-out of such arrangements on the basis that they prefer to leave shareholders of companies to make the decision as to whether to implement such pre-bid defensive measures (although such measures have not been commonly adopted by UK companies). The Directive provides that where a member state elects to opt out of the ‘break-through’ provisions, it must nevertheless”—
On a point of order,Mr. Bercow. I realise that the hon. Gentleman is reading from a long, scripted brief that has been provided by some organisation, the name of which I am afraid I have forgotten, as it has been so long since he started reading. At the same time, the brief seems to be about breakthrough provisions, which we are going to discuss later. Trying to deal with them during a debate on clause 642 stretches the credulity of the Committee more than a little.
I am happy to respond to the point of order from the Solicitor-General. I have studied the clause carefully. It is short, but it has broad scope. I am as keen to ensure orderly conduct in the Committee as he is.
I assure all members of the Committee that I listen faithfully to everything that is said. As I said earlier, my patience is not unlimited, but so far the hon. Member for Huntingdon (Mr. Djanogly) has remained perfectly in order. I fear that the point of order is in fact a point of frustration.
“The Panel may do anything that it considers necessary or expedient for the purposes of, or in connection with, its functions.”
That is exactly what I am talking about.
“I am conscious that you may have questions of various sorts as the Bill proceeds. Often these will be points that you will want to raise with me or my colleagues in Committee and I do not wish in any way to limit our discussions there.”
I would like to think that all we are doing is taking up the Minister on her very kind offer.
My hon. Friend makes a fair intervention; I had forgotten about that. It all seems so long ago, but it is an important point that he makes. I am sure that the Minister would not resile from her intent, so let us continue on that basis.
Regulations 20 and 21 set out the detail on the procedures to be followed by a UK company opting in and out of the breakthrough provisions. A company that wishes to opt into the breakthrough provisions will need to pass a special resolution. It can do that only if it has met certain specific conditions. The company must have voting shares admitted to trading on a regulated market—that is, effectively, the potential offeree company to which the directive applies.
The company’s articles of association must not contain any share transfer restrictions or restrictions on voting rights, or, if the company’s articles of association contain any such restrictions, they must also contain provision for such restrictions to fall away in the circumstances in which they would be disapplied under the breakthrough provisions of article 11 of the directive. The company’s articles of association must not contain any other provisions that would be incompatible with article 11.
No shares conferring special rights on the company may be held by any Minister or any of his nominees or any company that he directly or indirectly controls. A company may, at a later stage, elect to opt back out of the breakthrough provisions, in which case it will need to pass a further special resolution for that purpose. However, a company that has opted in may not subsequently opt out for a period of one year from the date on which a copy of the opting-in resolution was forwarded to the registrar.
The panel must be notified of the passing of a special resolution either opting in or opting out of the breakthrough provisions. Where the company has voting shares admitted to trading on a regulated market in a member state of the European economic area other than the UK, the supervisory authority designated under the directive in that EEA member state must also be notified of the passing of the special resolution.
Notification must be given within 15 days of the passing of the relevant special resolution or, if admission to trading on a regulated market in another EEA member state occurs at a date after that of the relevant special resolution, notification must be made within 15 days after such an admission date.
Where a takeover offer is made for a company that has opted into the breakthrough provisions, a bidder who holds not less than 75 per cent. in value of all the voting shares in the target company may requisition an extraordinary general meeting in accordance with the provisions of section 368 of the Companies Act 1985.
The effect of opting in for a UK company is that any pre-bid defensive measures put in place will be invalid once the bid is made public. The Solicitor-General will be pleased to know that I shall leave the matter there, because, as he correctly said, we will return to it and discuss it at greater length in due course.
I move on to directors’ reports. Regulations 25 to 28 introduced additional disclosure requirements relating to directors’ reports for a company in respect of its financial year beginning on or after 20 May 2006 and whose securities carrying voting rights were admitted for trading on a regulated market at the end ofthe company’s financial year. The provisions are supplemental to the requirements relating to directors’ reports in section 234ZZA of the 1985 Act.
One of the main reasons for the additional requirements is to ensure the provision of more publicly available information on the company’s share structure, including any restrictions relating to the company’s securities, such as restrictions on their transfer or on voting rights, which might impact on a takeover and details of agreements that contain change of control provisions that could be triggered by a takeover offer.
Directors’ reports must cover the following matters: names of the directors for the relevant financial year; the principal activities of the company and any subsidiaries during the relevant financial year; and the amount, if any, that the directors recommend bepaid as a dividend. Concerns have been raised overthe disclosure of directors’ pay details in bid documentation, and I would be grateful if the Solicitor-General gave us his views on that.
In relation to schedule 7 to the 1985 Act, in addition to the matters that must be included pursuant to section 234ZZA, the directors’ report for those companies whose securities carrying voting rights are admitted to trading on a regulated market at the end of the company’s financial year must include the following details: the structure of the company’s share capital, including particularly the rights and obligations attaching to the shares or classes of share, and, where there is more than one class of share, the percentage of the total share capital represented by each class.
The following details are required for company securities of any class that are not admitted to trading on a regulated market: any restrictions on the transfer of the company’s securities, including limitations on holding securities and requirements to obtain the approval of the company or other shareholders for the transfer of securities; in relation to each significant securities holder, whether the holding is direct or indirect, the identity of the holder, and the size and nature of the holding; where any securities are held that carry special rights regarding control of the company, details of the identity of the holder; where the company has an employee share scheme and the shares to which the scheme relates have rights regarding control of the company that are not exercisable directly by the employees, details of how such rights are exercisable; any restrictions on voting rights, including limitations on voting rights of holders in a given percentage of numbers of votes—
My hon. Friend is stating for the Committee the clear details of the directive. The regulations, as he rightly said, relate to companies whose shares are traded on a regulated market. He identifies the fact that the alternative investment market is not so regulated. In the current situation, the rules apply equally—at least they did before May—to all plcs, whether they are listed on the official list or on the AIM. Does he feel that the rules he is describing will be applied to AIM companies, albeit while the panel is wearing its non-statutory hat, given that the companies will not be caught in that context?
I think the answer is no, but the Solicitor-General might comment usefully on this. I would be grateful to hear his views on that important point.
I had come to restrictions on voting rights. [Interruption.] The Solicitor-General is laughing. I am not here to provide free legal advice, so we shall rely on him today.
The report must include any limitations on voting rights of holders of a given percentage of numbers of votes; deadlines for exercising voting rights and arrangements by which, with the company’s co-operation, financial rights attached to the securities are held by a person other than the holder of the securities; any agreements between holders of securities that are known to the company that might result in restrictions on the transfer of securities or on voting rights; rules that the company has on the appointment and replacement of directors or the amendment of the company’s articles of association; the powers of the company’s directors, including any powers in relation to the issuing or buying back by the company of its shares; any significant agreements to which the company is a party that take effect, alter or terminate on a change of control of the company following a takeover bid; and the effects of any such agreements other than—
Order. I have listened very carefully and I recognise the considerable knowledge that the hon. Gentleman has of such matters, but I am conscious too of the terms of the clause, specifically the significance of the role of the panel. It seems to me that the hon. Gentleman is now straying somewhat wide of the clause, and I must ask him to focus his remarks specifically on the regulatory and prescribed functions of the panel.
Thank you for that clarification,Mr. Bercow. On that basis, let me shorten my remarks. My intention is to provide scope through the clause that sets out what we shall talk about, what the basic constitution of the panel is and the areas that will be affected by the provisions.
The clause will, for instance, have implications for offers to overseas shareholders and a timetable for exercising the squeeze-out. You are quite right,Mr. Bercow, to say that we shall come to those issues in more detail when we discuss applications to the court. That is important in relation to the panel because with takeover offers that are subject to the schedule 2 procedure, a dissenting shareholder who has applied to court will need to show that the offer value is unfair before the court will require consideration of a higher value to be paid in respect of the shares to which the application relates.
On a point of order,Mr. Bercow. Can you clarify something? As I understand it, the hon. Gentleman has already set out his initial points on clause 642 and, on the last occasion that the Committee sat, the Government then responded to those initial concerns. I think we are now dealing with the hon. Gentleman’s response to the Government, which seems a little verbose.
The subject of verbosity could constitute an essay in itself, as the Solicitor-General and other members of the Committee will be only too aware. My concern is not with verbosity or prolixity, but with the maintenance of good order and fair play. This is a debate and therefore even if the hon. Member for Huntingdon is coming back on points that have been raised previously, that is certainly not in itself out of order, but in order.
At this stage, I want to emphasise that as the hon. Gentleman develops and, possibly, concludes his remarks, it is not sufficient merely to animadvert to the responsibilities of the panel and then to dilate on other matters. He must focus on the responsibilities of the panel and that, I am sure, is what he is about to do.
I am indeed, Mr. Bercow. I shall move on to other concerns that we have about the constitution of the panel and its activities.
One of the amendments that was recently proposed by the panel code committee will elaborate on that point—that is, the revised provisions for details of service contracts of individual board directors and target companies. The committee argued that requiring the disclosure of payments to individual directors was in line with current corporate governance practice. Another proposed change would require a target company in a unilateral offer to spell out in its first major circular any known material changes in its financial or trading position since its last published and audited accounts.
The code committee said that it was still waiting on several third-party reviews before finally deciding whether the lending and borrowing of shares during a takeover period should be subject to the same disclosure rules as other dealings. Meanwhile, it wants to amend the code to enshrine the current stance that such transactions are not normally regarded as dealing. At the same time, it is proposed that the disposal of voting control over shares should be considered dealing for disclosure purposes. The possibility of a target company’s seeking a temporary suspension of trading in its shares ahead of making an announcement that it had been approached would be removed under another proposed change.
The committee said that it was unlikely, in any case, that such a suspension would be granted. It would be helpful if the Solicitor-General gave us an update on the position in relation to the concerns that have been raised.
We believe that such concerns that will become more pressing now that the takeover panel is to be put on a statutory footing. One key issue that emanates from the clause is, as my hon. Friend the Member for Hornchurch said, the relationship between the panel and the courts. Proceedings of the panel are, like those of other public administrative bodies, open to judicial review by the courts. Leave to apply for judicial review has been sought in very few instances. One is the Datafin case, which related to rival bids for McCorquodale in December 1986 and in which the Master of the Rolls, Lord Donaldson, held that
“in the light of the special nature of the Panel, its functions, the market in which it is operating, the timescales which are of interest in that market and the need to safeguard the position of third parties, who may be numbered in thousands, all of whom are entitled to continue to trade upon an assumption of the validity of the Panel’s rule and decision, unless and until they are quashed by the court, I should expect the relationship between the Panel and the court to be historic rather than contemporaneous. I should expect the court to allow contemporary decisions to take their course, considering the complaint and intervening, if at all, later and in retrospect by declaratory orders which would enable the Panel not to repeat any error and would relieve individuals of the disciplinary consequences of any erroneous finding of breach of the rules.”
The Guinness case was the subject of a Court of Appeal judgment in July 1988. In that case also, the courts indicated their reluctance to interfere in the panel’s decisions. Lord Diplock held that there was a public interest in the panel’s acting to enforce the code and that as no injustice had been done by the panel’s refusal to adjourn its case against Guinness, there was no case for judicial review.
The Court of Appeal’s approach was confirmed in late 1988, when Grand Metropolitan sought judicial review of the panel’s decision not to require any remedy for breaches of the code that the panel held had been committed by Irish Distillers and Pernod Ricard, when the latter was gathering irrevocable undertakings to support its successful offer.
The High Court refused to grant Grand Metropolitan an expedited order for the judicial review hearing on the grounds that the Court of Appeal had made it plain that such proceedings were not intended to reverse panel decisions taken in the course of takeovers. As a result, the proceedings were discontinued. Such judgments demonstrate the courts’ support for the panel and lend authority to its decisions.
The Court of Appeal’s decision in the Datafin case underlies the DTI’s approach on the tactical litigation package proposed as part of the takeover directive implementation proposals. It is intended that the implementing legislation should neither undermine nor be inconsistent with the proposals established in that case. Last Thursday, I asked the Minister to set out the Government’s position on that. She did not respond in much detail, so I would be grateful if the Solicitor-General addressed the matter further.
I have mentioned the relationship that has existed so far between the panel and the courts. My other question relates to the European aspect of the matter. Bob Sherwood has some interesting things to say in an article in the Financial Times, in which he claims that new measures in the proposed European takeover directive will be unworkable and act as a deterrent to bid activity in Europe.
In a damning attack on the latest draft of the directive, some of the country’s most prominent merger and acquisition lawyers say that it will create problems that the European Commission has not even considered. In a letter to the European Commissioner for the single market and MEPs, they claim that there are significant technical problems with some new provisions that, if not addressed, will make the provisions unworkable in practice, providing a significant deterrent to takeover activity in Europe as well as interfering with free capital markets activity.
The plans, which were unveiled in an effort to complete the directive after 13 years of wrangling, aim to create a level playing field across Europe. However, the provisions would limit the ability of companies to thwart bids through privately agreed restrictions on the transfer of securities and voting rights. Many believe that the changes are an attempt to placate Germany, where companies feel vulnerable after the stock market slide.
Germany has complained that the voting rights of companies in Scandinavia and France give power to a privileged few and form barriers to takeovers. Lawyers from the City of London Law Society claim that the moves could have the opposite effect and that if a directive was introduced with provisions that had the unintended effect of restricting proper and lawful activity, takeover activity could be restricted. If groups were able to set aside restrictions on voting rights, problems could be created for dual-listed companies, for example.
My hon. Friend is setting out some rightful concerns about the effect of the takeover directive on the roles and functions of the panel and its administration. The panel has developed its rules over a considerable period, taking account of market effect. From the article that he has referred to, does he know the panel’s feelings about the interpretation of those rules and regulations and the possible impact on the flexibility that has been the panel’s strength for such a long period?
For the most part, the panel probably feels that events in Europe have gone our way, but not in the totality. This is a fast-moving field in which European national Governments are reviewing takeover rules to get the best for their own countries—French yoghurt manufacturers come to mind. We could be entering a difficult period for the constitution of the panel in relation to Europe.
A small point: I think that the suggestion from the article is that takeovers might be more difficult and inhibited by the directive. One strength of our economy—this is an important factor—has been a flexible approach to the rules on companies bidding and how that has tied in to the roles and functions of the panel. Is my hon. Friend suggesting that there is a risk that that competitive advantage to our economy, provided by the structure of our corporate takeover laws, might be reduced, even slightly, as a consequence of the directive?
To be fair, a lot of the concerns have been ironed out. We have gone some way, but that does not make my hon. Friend’s points any less important. I would be grateful for the Solicitor-General’s views.
Other companies employ a certain ownership structure for tax reasons. Lawyers warn that any changes could land companies with a big tax bill and that the proposals do nothing to facilitate the takeover of companies where there are large stable blocks of investors such as family owners. Herbert Smith has said that it has a lot of sympathy with some objectives of the proposals, but that they will create lots of technical problems—technical details often determine whether takeovers succeed or fail.
That is an important point and one that we should remember as we discuss this part of the Bill. It is often not the high-level issues, but the nitty-gritty, that is used in a takeover battle, particularly to thwart a bidder’s movements.
That is the European take on the matter. It is worth pointing out how other member states have implemented the takeover directive without resorting to, for instance, heavy-handed criminal sanctions. For example, in Ireland, if rules are breached, there is only a civil liability. The same is true in Germany. Our concerns can be addressed differently from the Government’s proposals. We will come to the detail in later clauses.
While we are on the subject, an article appeared in The Lawyer on 20 March, entitled, “As Takeover Panel becomes a statutory body, bid lawyers warn of ‘disaster’”. It reads:
“Corporate lawyers are bracing themselves for a sweeping overhaul of the M&A world, with the Takeover Panel set to become a statutory body next year.
The Department for Trade and Industry released a White Paper earlier this month that sets out comprehensive reform of the Company Law Bill, including plans to make the Takeover Panel a statutory body to bring it into line with the European Directive on Takeover Bids.
The move has sparked fears amongst the City’s top corporate lawyers that the Takeover Code’s new legal status could lead to interference by the courts, particularly on hostile bids.
Clifford Chance M&A star and former Takeover Panel secondee Guy Norman said litigation arising from perceived breaches of the Takeover Code could spell ‘disaster’ for potential deals.
‘There only needs to be one case to make a precedent and that will open the floodgates,’ he said, echoing numerous corporate partners contacted by The Lawyer. ‘I’m sure someone will try to do it and I have no doubt there will be a test case, but it depends on how the courts react.’
Simmons and Simmons corporate partner, Selina Sagayam, who has just returned to the firm after a two-year spell as assistant secretary at the Takeover Panel, said aspects of the European directive were not clear, which increases the risk of court action.
‘Aspects of the directive are quite vague in a number of areas and it has been left up to regulators to come up with the answers, and that could be challenged.’”
Order. It is open to hon. Members to quote from an article, or indeed a series of articles. The convention, however, is that they do just that: quote from the article. A continued recitation of virtually the whole content of a series of articles is probably not in order. I say that with due caution, because I recognise that the hon. Gentleman is seeking to inform the debate. However, he said that he would confine himself to the short version and I know that he would not want to leave the Committee to wonder what would constitute the long version.
Thank you, Mr. Bercow, for those kind remarks. The long version is on my desk and that is why I am being picky as to which bits I select for the attention of the Committee, because I know that time is pressing.
May I help the Committee? If we are looking for a long version, a study of Hansard will show that Labour Members were keen to talk about Eccles cakes and their relevance to the Bill. How they managed to bring that in only they can say, but I leave it to those who are interested to check.
My hon. Friend makes an important point. Eccles cakes are now such a distant memory that I had forgotten about them.
The Opposition believe that there is an element of gold-plating of the EU takeover directive in this part of the Bill.
Is my hon. Friend saying that a risk is being created that people might seek to challenge competition laws, so that rather than wait until the takeover has occurred they might directly challenge the takeover in the courts, using the takeover panel code, as well as going down the Office of Fair Trading or Competition Commission route?
Yes. The fact is that until a recent statutory instrument was put in place, the way to challenge panel decisions was through panel procedures, and ultimately through judicial review, which was very rarely used. The article that I just read out quoted a series of City solicitors who said exactly that. The fact that matters are being put on a statutory basis changes the legal environment and will create more opportunities for legal cases. My hon. Friend is right to highlight that.
To make my comment on gold-plating clear to Committee members who are new to this subject, we need to spend some time examining how we reached this point in relation to takeovers. If you will forgive me, Mr. Bercow, I will quote a relevant comment from “A Practitioner’s Guide to the City Code on Takeovers and Mergers”, which is one of the key documents. It states:
“Having at different periods over the past 14 years either languished in stalemate or been subject of intense political negotiation, a strategic trade-off was achieved in November 2003 between the European Parliament’s Internal Market and Legal Affairs Committee and the Council on a compromise text for the Takeover Directive, which in turn was approved by the European Parliament on 16 December 2003. On 21 April 2004 the European Parliament and the Council of the European Union adopted the Takeover Directive. Member states are required to implement the Directive...The Takeover Directive is an important part of the European Union’s financial services action plan which is aimed at creating integrated market and financial services throughout the EU. The original objective of the Directive was to provide a common framework for the regulation of takeover bids in the EU. However, over the course of the lengthy negotiations leading to its adoption, the finally agreed text has been significantly watered down from the Commission’s original proposal and therefore falls far short of setting a uniform standard of takeover rules throughout the EU. For example, it proved impossible to reach a consensus amongst Member States on the need for offeree company boards to be prevented from taking defensive measures. The decision as to whether to impose these restrictions is therefore optional for each member state under article 9 of the Takeover Directive. The Panel believes this is a major weakness of the Takeover Directive as a harmonising measure and, because the directive is a ‘minimum standards’ directive and provides little by way of detail, harmonisation in many other areas of takeover regulation is at a low level.”
That goes very much to the point that my hon. Friend the Member for Hornchurch made.
The guide continues:
“Accordingly, while the Panel believes that the directive will do little to improve the UK system of takeover regulation, if implemented appropriately, it will allow the current working approach of the Panel to continue largely unchanged.”
That gives some answer to my hon. Friend’s earlier remarks. I should be grateful to hear the Solicitor-General’s views on that.
The guide goes on to say:
“The first stage of the DTI’s implementation process has commenced with the publication of its Consultative Document in January 2005. On the same date, the Panel published an Explanatory Paper setting out in broad terms how it intended to put in effect the necessary changes that will result from the Directive and the Government’s proposals. The Panel has been engaged in detailed discussions with the DTI in preparation of its proposal for implementation of the Directive with a view to ensuring that the Panel and the key features of its current system of regulation of takeover bids, promulgating rule changes and administering and applying the Code are retained.”
That was backed up by the statement I read out from the panel itself. The guide continues:
“In particular the Panel has stressed the importance of preserving the flexibility ofapproach and the speed and certainty of decision-making which the current system offers.”
Again, that was repeated in the panel’s statement.
The guide then says:
“The proposals from the DTI Consultation Document reflect this approach and in particular provide for the Panel to act as a supervisory authority for the purposes of the Directive. The proposals are also founded upon the continued independence of the Panel and have been designed to ensure that the day-to-day constructive working relationship between the Panel and its regulated community will be largely unaffected.
The DTI has considered various options for implementing a regulatory framework for takeover bids in connection with the Takeover Directive and ultimately it has recommended the establishment of a ‘light touch’ statutory regime in primary legislation, which will give the Panel the necessary rule making and other powers to carry out its role as the supervisory authority under the Takeover Directive.”
If the DTI has recommended a light-touch approach, please will the Solicitor-General explain how we have come to be debating the implementation of criminal sanctions for a breach of the takeover code? In what possible way could criminal sanctions be considered a light touch?
Thank you, Mr. Bercow. I am not going to pursue that point further here. The matter is relevant to the debate, but because we shall debate it later on, I will not say the same thing twice.
The guide continues:
“The DTI’s proposals for the implementing legislation include measures to limit the possibility of tactical litigation in takeover bids (which has been a key feature and advantage of UK takeovers) and measures to grant immunity to the Panel and those involved with it in the exercise of its regulatory functions.
The changes that will be required by the DTI’s implementation proposals affect both the Panel and the Code. The changes to the Panel relate to: (1) the scope of its jurisdiction, its constitution and the functions of its constituent committees; (2) new powers to obtain information and enforce the Code; (3) sanctions that the Panel will be able to impose; and (4) confidentiality of information and co-operation between the Panel and regulatory authorities in the UK and overseas.”
It will not surprise the Committee to hear that we shall concentrate on those issues as we debate this part of the Bill.
The guide says:
“In conjunction with this, the Panel has decided to take the opportunity to review its own internal procedures and operations (including its judicial procedures). The scope of the Panel’s jurisdiction will be changed as a result of the Takeover Directive.
The scope of the Directive is different from and generally narrower than the current scope of the Code. The DTI is however proposing that the Panel’s regulatory authority under the legislation should cover both companies and transactions covered by the Directive and those other companies and transactions which do not fall within the scope of the Directive but which are currently regulated by the Panel (for example, schemes of arrangement, dual holding company transactions and partial offers). It also proposes that the Panel should have the flexibility to make rules to deal with future market developments in the field of takeovers as they arise.”
That is a key element in retaining flexibility. Perhaps the Solicitor-General could confirm that that is the Government’s intention.
The guide states:
“The changes to the jurisdiction of the Code are proposed to include the following:
(1) the current residency test which applies to the UK registered and traded companies will no longer apply;
(2) the Code will continue to apply to offers for listed and unlisted public and certain private companies essentially in the same way as it does now. Accordingly, the residency test will continue to apply to these companies; and
(3) as required under article 4.2 of the Directive, the Panel will have shared jurisdiction with other EU and Member States in certain cases where registration of the company and admission to trading of its securities are split and/or effected simultaneously on several regulated markets within the EU. Except in these so-called “shared jurisdictions”, the Code will continue to apply to takeover and merger transactions, however effected. This will include partial offers, offers from minorities, schemes of arrangement and dual holding company transactions...The DTI is proposing that the implementing legislation should establish the basic framework of the Panel’s constitution but that the Panel, which will continue as an unincorporated association, will retain the discretion to determine the details. The proposed changes to the Panel’s constitution have been summarised.
In order to comply with the Directive, the DTI has noted in its Consultation Document that it will be necessary to provide the Panel with certain new enforcement powers to ensure ‘that all parties comply with the rules made or entered in pursuant to [the] Directive’. Central to these new powers will be a right for the Panel to require persons in possession of information which is reasonably required by the Panel and the conduct of its activities, to pass that information to the Panel. The proposed revised Introduction to the Code will also set out in greater detail the Panel’s expectation of co-operation from those with whom it deals with. The DTI is also proposing that the Panel should be given the power to make rulings restraining any breach (or possible breach) of the Code or a Panel ruling, or requiring a person to take such steps as the Panel may specify in order to remedy the breach or secure compliance. In addition, the Panel is to be given a power to require the payment of compensation in cases where there has been a breach of certain rules of the Code. Finally, the DTI is also proposing that the legislation should provide the Panel with further powers to enforce compliance, compensation rulings and requests for documents and information if necessary. This is to be effected by granting the Panel the power to make an application to the court to secure compliance with a Panel ruling or request and failure to comply with the resulting court order would amount to a contempt of court.
The Code Committee has also identified that some changes will be required to the mandatory bid provisions in Rule 9.”
I have discussed that, so I shall not go into it again. The guide states:
“Finally, the DTI has proposed in its Consultation Document that the UK Government ‘opts in’ to Article 9”.
Again, I dealt with that issue before.
That is the background. As the Attorney-General said himself:
“The starting point is Article 17 of the takeovers directive, which requires member states to put in place sanctions which are ‘effective, proportionate and dissuasive’. That is to ensure the rules of the directive are complied with”.—[Official Report, House of Lords, 28 March 2006; Vol. 680, c. GC304.]
The directive requires that a failure to comply with the rules about bid documentation must be subject to sanctions that satisfy article 17. The Government’s approach is that the only option that satisfies that requirement is criminal sanctions. They believe that the panel will otherwise not have sufficient power effectively to deal with a failure to comply with the rules about bid documentation.
We do not think that that is the case. The panel already has effective sanctions. Although the panel is a non-statutory body, the remedies and sanctions that are available to it have proved sufficient to ensure compliance with the code and the SARs and been effective in practice. Where the panel finds a breach of the code, its first concern is to secure the appropriate remedy, which might be a retraction or clarification of a misleading statement or the revision of an offer. Where appropriate, the panel might require compensation for shareholders.
An example of that was the panel’s rulingthat Guinness should make payments totalling approximately £75 million to some former Distillers shareholders as a remedy for breach of rule 11 of the code during its 1986 bid, when it purchased shares from certain Distillers shareholders for cash at a higher price than that which was available to shareholders generally under the offer.
My hon. Friend makes a valid point about sanctions, about the rights that the panel already has and will continue to need, and therefore about how it would exercise its functions going forward. Will he comment on the unwritten arrangements that operate in the financial markets? For example, a criticism that might seem quite light in the more general context of regulation is seen as extremely serious in the context of financial markets. An individual who is the subject of an adverse opinion from the panel might find it extremely hard to continue employment within the financial market or to seek employment elsewhere.
My hon. Friend goes right to the heart of the issue. That is why most practitioners and companies do not believe that there is a need for criminal sanctions. The ultimate sanction of having one’s name read out by the panel is one that no director, business man or shareholder would want to face, because it would basically mean that no one would do business with them again. The existing sanction is every bit as effective in destroying a person’s career as a criminal sentence, if not more so. It has been sparingly used in practice, because whenever it is raised things normally tend to happen quickly and be put right. My hon. Friend makes an important point that we shall no doubt debate again when we discuss criminal sanctions.
The panel already has effective sanctions—public and private censure or reporting of conduct to another regulatory body. It can also issue directions to those responsible to put the matter right and can order a person to pay compensation to put the matter right, an example of which I have just given.
One point about compensation that came up in the Grand Committee in the House of Lords was thatthe Bill as drafted allows the takeover panel to order the payment of compensation if certain specified rules are broken. The panel has stated that that will apply to those codes of rules dealing with the payment of money. Please could the Minister give some guidance on what parameters, if any, are likely to be ordered in relation to that? That would be useful for all parties concerned in takeover bids and would clear up some confusion about what the parameters are. Concrete guidance on the matter could prevent future arguments which could be costly and time-consuming.
It is useful to spend a little time setting out how effective the takeover panel’s existing sanctions have been thus far. In its coverage of Terra Firma’s bid for East Surrey Holdings, the Financial Times said on18 October 2005:
“Terra Firma’s difficulties in pulling out of its bid for East Surrey reflect concern for shareholders”.
The article continued:
“Agreeing a takeover is hard enough, but unwinding one is even harder.
Terra Firma discovered this yesterday when the Takeover Panel ordered”
the private equity firm concerned
“to proceed with a £453 million bid for East Surrey Holdings.
Terra Firma had asked the Panel if it could shelve the offer after Northern Ireland’s energy watchdog said it was reviewing the licence terms set for Phoenix Natural Gas, East Surrey’s gas distribution business.
However, the Panel ruled that recent developments were not enough to end the agreement.
The Panel’s tough stance is explained by its determination to protect shareholders in target companies from being messed about.
This is also why it insists bidders must have all necessary funding in place before making an offer and why it has the ability to order potential bidders whom a target feels is taking too long to ‘put up or shut up’.
Terra Firma is not the first bidder to have been denied the right to change its mind.
My hon. Friend is making an interesting point. His example highlights the stakes that are likely to be at risk in relation to panel decisions, and the fact that bidders are prevented from exercising rights to exit from certain deals. Does he believe that, although there is a feeling that judicial review actions will not be encouraged as a result of the statutory basis, examples of this nature and the change in the way in which the panel is constructed—and the rules that it must apply as a result of the takeover directive—mean that there is a risk, given the stakes involved, that there will be an increase in legal challenges, with the implications that that might have?
My hon. Friend makes an interesting point. The key in all actions in relation to the panel is his phrase, “given the stakes involved”. Where large bids are involved, bright lawyers seek inventive ways to look at the panel’s role—
The hon. Gentleman is experienced enough as a Member to know that although he was keen to put those remarks on the record—and they will have been noted—they did not constitute a point of order, I am afraid.
If the hon. Member for Birmingham, Hall Green had made one positive contribution during our two months of debate I might have some sympathy with his unnecessary comment.
My hon. Friend the Member for Birmingham, Hall Green has made some very valuable contributions in adjourning this Committee on a number of occasions, to great acclaim.
As my hon. Friend says, not today.
The Financial Times article continued:
“The Panel resisted the exigencies of Sir Martin and his advisers, ruling that WPP could not prove the terrorist attacks would have a long-term impact on the industry. WPP was forced to acquire Tempus for $490 million. Back in 1990, invoking a MAC clause did work for Godfrey Davis, the car-dealing and laundry group: it was allowed to drop its £126 million offer for Sketchley, the dry-cleaners. This was after the defence document included a warning that full-year profit was set to fall by 65 per cent.”
The point here is that, according to a “person close to ESH”, Terra Firma wanted to pull out but it must now be questioning whether it should have gone down that route. It is a good outcome for East Surrey Holdings, which got the deal at that price, and it should also prove a good deal for Terra Firma, although there is uncertainty about gas pricing.
Order. It is unclear to me what the merit is, for the purposes of the consideration of the clause, of our hearing a recitation of the corporate history of Terra Firma. I appreciate that the hon. Gentleman is seeking to inform the Committee’s deliberations, but I wish to make the point that quotations and recitations of case histories must be pithy and relate to the central functions of the panel and the question whether the clause should stand part of the Bill.
Thank you, Mr. Bercow. I shall do my best to comply with your ruling. The point that I was making on Terra Firma, by the way, was that the coverage shows that the takeover panel’s existing powers have proved effective in dealing with powerful City players. I was putting that point in the context of the proposals to criminalise the sanctions. I am sorry if I was long-winded or not clear.
On a point of order,Mr. Bercow. The discussion has been broad; for example, we have considered sanctions, which are dealt with in clause 652, at considerable length. I trust that when we come to such clauses you will bear it in mind that there has been discussion on them. That will no doubt be reflected in the way in which we may discuss those clauses at that time.
Of course I agree with the Solicitor-General. We have taken such an approach throughout our proceedings. [Laughter.] There are many, many articles that I could be rooting out. The point is that the naming and shaming of advisers who flout acquisition rules will always be the main weapon in the takeover panel’s arsenal as it clamps down on companies using takeover rules as an excuse to hide details from investors. If that is no longer to be the case, it could have profound and unwelcome consequences.
The point that comes from the articles is that, throughout its existence, the takeover panel has held that the fear of public rebuke alone is often enough to keep the City in line. It would be helpful if the Solicitor-General could accept that. If not, will he set out cases in which the panel has failed in its role by not having done so? It is worth noting that the panel has recently become more effective, as shown in a July 2006 article in the Financial Times. It states that a French bank
“was forced to admit it had hired an investment bank to study the UK’s seventh-largest bank as part of an assessment of potential acquisitions in Europe. Yesterday, after seven weeks of speculation”—
On a point of order, Mr. Bercow. I should perhaps declare an interest in this point of order. Is it in order for hon. Members to quote at such length from published articles in the case of which, were it not for parliamentary privilege, there would be a problem with the author’s copyright? I fear that it might therefore be in order to quote whole books written by my colleagues back in academia, which would then appear in Hansard, and their royalties would fall dramatically.
That is a reasonable point. I do not want to get into a general debate on the rights of copyright holders, and certainly not on the subject of royalties. However, I will briefly underline the point that quotations from articles must be pithy. I am sure that from now on, as the hon. Member for Huntingdon develops his remarks, they will be.
Without wishing to detract from his articulacy, eloquence and manner of delivery in quoting from the articles, it is fair to say that the point that my hon. Friend is trying to convey may be best summed up in the language of a journalist—to allow those of us who are not lawyers to appreciate it in a layman’s way—rather than through legalistic delivery, which is common practice in such a Committee. Would my hon. Friend agree with me?
Order. As the morning has progressed, I have noticed that interventions, even when carefully constructed, have tended to get longer and longer. I would urge hon. Members to exercise a self-denying ordinance. An intervention is supposed to be just that—an intervention—rather than a mini speech.
Thank you, Mr. Bercow. The problem with long interventions is that they hold up proceedings and make it all a much longer business. To push on, I shall pithily read out the key points that it is important to ask and which the 6 July 2006 Financial Times raised:
“Some bankers believe the FSA’s greater focus on market abuse, particularly since the introduction earlier this year of the EU Takeover Directive, may be encouraging the Panel to be quicker on the draw.
While it is inevitable that the level of speculative bids and market abuse will rise in a robust mergers and acquisitions environment, forcing a bidder to declare its hand too early can make completing a transaction very challenging. ‘If you are looking for a recommendation, it is important for a target company to hear principal-to-principal about an approach first, rather than read about it in the press because of a panel statement following a leak,’...This is particularly relevant to private equity bids, which are often highly dependent on a raft of pre-conditions, such as due diligence, the agreement of pension fund trustees and the recommendation of the board.
Ironically, bouncing bidders into making a statement early can work to their advantage.
‘By coming out early, a potential bidder can quickly get a market view on whether it should proceed with a bid or not, which is helpful to them and retail investors’ ”.
My point is to question whether the speed element will be affected by statutory codification. That would be detrimental from all commentators’ points of view.
On a point of order, Mr. Bercow. I am aware that the hon. Gentleman is looking increasingly uncomfortable. I do not know if he needs a short break. I wonder if we might have a two-minute suspension so that he can have that break and we have a chance to splash some cool water on our faces.
I am grateful to the hon. Gentleman for that attempted point of order. At this stage I see no need for a suspension of the proceedings, but I am grateful to the hon. Gentleman for his humanitarian concerns.
I never knew Whips to have humanitarian concerns. No, I take that back absolutely and unreservedly. We further believe that that is not an appropriate area for criminal offences as failure to comply with the rules could in itself constitute a criminal offence. Those rules are made by the takeover panel itself. Although the panel will become a statutory body, it will retain a great deal of its independence. It will be an independent body—subject to parliamentary scrutiny—able to alter its own rules and create new criminal offences.
However, we do not propose that the way to rectify that is through greater control of the takeover panel. The panel is one of the great City success stories and has been effective in carrying out its purpose. Burdening the panel with more bureaucracy would not be in the best interest of its smooth running. There is a simpler, more straightforward way ahead. Would the Solicitor-General please explain why the panel cannot be allowed to deal with the breach by means of sanctions under the Bill, which could easily meet the requirements of article 17?
On 21 April 2006, I had a constructive meeting with the takeover panel.
I am sure that the hon. Gentleman will want to join me in welcoming Barbara Muston, who is a member of the panel and who will no doubt be able to report back to it.
I would just say that word will get back to the panel about the seriousness with which the Conservative party appears not to take these matters. We have had a very long-winded speech, which has raised a vast number of questions, most of which are largely irrelevant to the clause, although they are in order, as you rightly ruled, Mr. Bercow.
The Solicitor-General believes that my approach to the Bill is too long-winded, but I doubt, in all seriousness, whether he would be able to find many Committees that have covered so much ground in the time that we have had.
I have been doing a slight study of this matter, and my hon. Friend is entirely correct. At precisely this time a week ago, we were considering clause 158, which is an important part of the Bill, and the same is true of the provisions relating to the takeover panel. Our discussion of clause 158 took slightly longer than one sitting, but that did not prevent us from covering 261 clauses last week. My hon. Friend should continue to lay out the groundwork for this important debate on the takeover panel, and I am sure that those who are watching the debate will be perfectly satisfied that Her Majesty’s Opposition take the issues very seriously.
Thank you, Mr. Bercow. My hon. Friend the Member for Reigate (Mr. Blunt) makes the point very well.
One of our concerns, which needs to be discussed, relates to barriers to takeovers and to the fact that the panel needs to maintain a level playing field. One of the central controversies during negotiation of the directive related to the extent to which the directive should address in substance barriers to takeovers in the EU. There are numerous examples of such barriers, but they might loosely be characterised under two headings: pre-bid and post-bid defences. As the Government have stated, they have long supported reducing barriers to takeovers in Europe, and that is certainly a Conservative party policy objective. It was a key UK objective to ensure that the directive included provisions on post-bid defences.
Another important issue in considering barriers to takeover provisions was the question whether it was appropriate to ring-fence the directive’s provisions from bids made by third-country offerors—companies registered outside the EU. It was argued that it would be unfair for EU companies, which might be subject to a radical liberalising regime under the directive, to be exposed to bids from companies from outside the EU, which would be allowed to maintain vigorous defences to takeovers. On that latter point, City and business consultees stressed the advantages of the open takeover regime that operates in the UK no matter where the bid is located.
All those issues came to be dealt with under the banner of the level playing field, reflecting the need to achieve some equity in the manner in which the directive addressed post-bid and pre-bid defences and to deal with the question of parity with third-country takeover regimes. Ultimately, it became impossible for political agreement to be reached on a directive that would deal robustly with defence measures, and a proposal was made that sought to overcome that hurdle by making optional key articles 9 and 11, which deal with barriers to takeovers. That solution was adopted to secure final agreement to the directive, and optionality operates at three levels, as I discussed in general terms earlier. Although I shall not discuss that again at this stage, we shall return to it.
Finally, to assist in exposing barriers to takeovers—[Interruption.] Finally on this point, the hon. Member for Birmingham, Hall Green will be pleased to hear. To assist in exposing barriers to takeovers across the EU, extensive disclosure and transparency provisions were laid down in article 10 of the directive, and they apply on a continuing basis to all companies admitted to trading in a regulated market in the EU. There are consequently three policy choices to be made: whether all companies registered in the UK whose shares are admitted to trading in a regulated markets should be obliged to comply with the requirements of article 9; whether such companies should be obliged to comply with article 11; and whether the UK should adopt reciprocity provisions.
The provisions of article 9 have long been at the heart of the takeover code, in rule 21, as the key to protecting minority shareholders. They include the fundamental principle that it should be for shareholders—not the management of the target company—to decide on the merits of a takeover bid. Throughout the negotiations on the directive, important UK city and business stakeholders emphasised their support for article 9 and the principles underlying it. The Government therefore intended that the implementing legislation should require all companies registered in the UK and admitted to trading in a regulated market to be bound by the obligations of article 9. The detailed provisions relating to article 9 would be laid down in the rules made under the proposed rule-making power, to extend to the takeover panel, and would be set out by the panel.
There are currently no restrictions on the way in which UK companies that are admitted to trading in a regulated market can structure their share capital and control. However, market pressure, brought to bear in particular by institutional investors, has ensured that there are now few UK-listed companies with differential voting structures or restrictions on transfer of shares for voting rights. Such structures are, however, more prevalent elsewhere in the EU. It would be helpful if the Solicitor-General would respond to those points.
The ever-changing nature of company law also gives rise to issues to be considered. In an age of virtual bids and derivatives it is sometimes the adaptability of the panel that needs to be examined, to assess whether it can cope with company law, as it changes from time to time. I want to refer to an article about Mr. Richard Murley, who was the director general of the takeover panel. He said that his time there was marked by the rise of the “virtual bid”, as well as a lengthy debate about disclosure and regulation of derivatives, such as contracts for difference. The article continued:
“After two stages of consultation, the new regime on disclosure of derivative positions during offer periods came into effect”
and quoted Mr. Murley as saying:
“What we have tried hard to do is keep the rule book up to date with what’s going on in the market”
“Offerors now expect days if not weeks of due diligence before they even bid.”
The answer to that is that the debate is on clause stand part, so the hon. Gentleman is not obliged to state the part of the clause that he is referring to or to have his remarks traced back to any particular provision in the clause. The Question is that the clause stand part of the Bill.
The article stated:
“Evolution in bid practices and financial instruments inevitably means the Panel more often adds to the Takeover Code than subtracts from it.
‘The reason the book is more complex is that deals are more complex,’ Mr. Murley said. But that complexity is focused in certain discrete areas: the disclosure regime and activities of integrated houses. The rules on the conduct of bids, he argues, are quite simple.
The Panel, moreover, removes language that is no longer necessary. For example, it is proposing to delete rules governing the timing of substantial acquisitions of shares, added in the 1980s era of ‘dawn raids’.
The overall approach in drafting rules, Mr. Murley said, ‘is to have the flexibility to respond to things that were not anticipated when a rule was put into the Code’.
It took the same approach with the European directive. Where changes were necessary to comply with it, ‘we’ve tried very hard not to do more than the increment required. We’ve tried very hard not to gold-plate’.
As a result, although the Panel is due to become a statutory body after 37 years in various degrees of nonstatutory existence, the way it works is not expected to change that much.
‘The Panel is known for speed, flexibility and certainty,’ Mr Murley said, and he is confident that will not change.”
That is pleasing to hear.
The article continued:
“But some things are much different these days. Investment bankers used to be prized for deal-doing skills and detailed technical knowledge of the rule books. Now they are more business-driven and revenue-focused and, apart from a few specialists in each bank, less focused on technicalities. This means a bigger role for law firms; each keeps a database of its Panel experience and skills. But the UK system is still marked by an absence of litigation. Even though lawyers are involved, dealing with the panel executive—often entailing consultation, guidance and negotiation—is not like going to court. The executive is the ‘first port of call in a quasi-judicial system’,Mr. Murley said. Very few decisions of the executive are appealed to the full Panel—only five in his two-and-a-half years, of which only one was overturned. The panel’s main concerns remain an orderly market and shareholders in target companies. ‘We think very much about them, especially individual shareholders,’ Mr. Murley said. There will still be plenty for his successor to do.”
Order. This is a verbatim recital of the terms of the article, as far as I can see. I must exhort the hon. Gentleman either to explain how exactly the terms of the article relate to the Question whether the clause should stand part of the Bill or to discontinue his reading of it.
The application of the article,Mr. Bercow, is to explain the concern of Conservative Members that codifying and providing a statutory framework should not put the speed and flexibility that exist in the current system at risk. It was also to explain that the takeover panel itself does not believe that it will be put at risk and then to ask the Government to confirm their understanding that it will not be put at risk.
Order. The hon. Gentleman’s explanation is clear and it is entirely in order for him to develop that argument. I simply appeal to him to respect the point that in adducing academic or journalistic support for his position, he does so with brief quotations rather than total recitations.
Thank you, Mr. Bercow. The problem being that so many of these quotations are useful in supporting my argument. One gets tempted into saying a little more than one perhaps ought.
Briefly, I shall go on to restrictions on disclosure, and that aspect of the clause. In Grand Committee in the House of Lords, Lord Hodgson raised concerns that this part of the Bill allows the takeover panel to disclose virtually any information it acquires to a wide range of bodies. We shall return to that in greater detail.
The fear in respect of companies’ confidential information is a real one. If it were to be realised, it could be highly detrimental to UK plc. Perhaps the Solicitor-General could explain the background to these exclusions to protection from onward disclosure, especially in relation—
It is interesting that my hon. Friend strayed on to clause 648, because unfortunately for the Committee, clauses 647 and 648 are inextricably linked. Clause 647 is about the power to collect information, which is clearly the information set that clause 648 could require disclosure of, so I can easily see how he might have strayed off on to clause 648. I, too, am looking forward to getting on to that topic.
Order. The hon. Lady is generous and charitable in her interpretation of what motivates the hon. Member for Huntingdon. Although I entirely accept the point about one clause being inextricably bound up with another, we must nevertheless follow the principle of a chronological sequence. It is for that reason that he is not at liberty to dilate on that later clause, to which we will, in any case, come in due course.
Thank you for that clarification,Mr. Bercow. I take the point made by my hon. Friend the Member for Putney (Justine Greening), and we shall come to that later.
You are rising ever more frequently to your feet,Mr. Bercow. I appreciate that there are many other clauses in this part of the Bill on which we will be able to elaborate our points. I have made wide points on clause 642 and established a framework on which discussions can take place. On that basis, I look forward to the remainder of the debate.
I shall add a few comments. I am mindful that my hon. Friend has raised some of the points that I wanted to make. I shall try not to repeat them, but by necessity I might need to refer to some of them.
The takeover panel fulfils an important role in business and we need to ensure that its operation is as flexible as possible. In view of the statutory issue that has arisen, I urge the Solicitor-General to give an assurance that that flexibility will remain. The business environment is fast-moving and the terms used in 1985 Act are different from those used now. For example, the term “virtual takeover” did not exist then, and we need to ensure that there is sufficient flexibility for the panel to move quickly and adapt to a changing business community before we introduce the next Companies Act, which may well be in many years’ time.
I shall quote in part an article in the Financial Times by Una Saigol, which illustrates clearly the panel’s difficulty. It states:
“The Panel has a difficult balancing act to achieve. On the one hand, it has a duty to protect a target company and its employees from a prolonged period of uncertainty, which can destabilise a business, as well as protecting shareholders.”
The article goes on to give an example with which I shall not trouble the Committee. It then continues:
“It can also be costly for the target company to be in an uncertain offer period,”
as a particular company found out when it had to pay £2.6 million in fees alone. On the other hand, to highlight the difficulty that it faces, the article states:
“the Panel has to ensure that there is no false market in shares.”
The article continues:
“In March, the UK market regulator said it had found widespread signs of improper share price moves before corporate takeovers are announced.”
With that in mind, the article introduces the concept of the takeover panel working closely with other organisations, particularly the Financial Services Authority.
I also wish briefly to quote the panel’s most recent annual report. The chairman, Peter Scott QC, mentions the importance of the panel’s activities for other organisations, particularly the FSA. One paragraph states:
“An important part of the panel’s activities involves cooperation with the FSA. This extends beyond investigating potential instances of insider dealing to looking into wider issues of market abuse and we have built a close and constructive working relationship... It is a priority for the Panel to ensure that the FSA is fully informed and supported by the Executive in those areas of bid activity where the FSA also has responsibilities for enforcement. Considerable efforts are devoted by the Executive to ensure that this is in fact the case. Our two organisations also work closely together on the way in which the range of Directives which come out of Brussels should be implemented in the field of takeovers. Apart from the Takeovers Directive itself, each of the Market Abuse, Prospectus and Transparency Obligations Directives will have implications for the regulation of takeovers.”
I would very much welcome an assurance from the Solicitor-General that the flexibility of which we speak will be maintained.
“My...point is the inclusive make-up of the panel. It currently includes representatives from a wide variety of City and other organisations, such as institutional investors and bankers as well as business. That ensures a balance of views from Cityand business participants.”—[Official Report, House of Lords,28 March 2006; Vol. 680, c. GC286.]
I would welcome the Solicitor-General’s assurance that appointment to the panel will be strictly on an arm’s length basis, that people will be appointed entirely on merit, that no element of the “old pals act” will operate, and that there will be total transparency.
I was hoping to be brief, but I will happily give the Solicitor-General the example of the appointment earlier this week of two people to the Monetary Policy Committee of the Bank of England. Questions arose—
Order. Those matters have absolutely nothing to do with the composition of the panel, and I therefore exhort—indeed, instruct—the hon. Gentleman not to be drawn down the blind alley of a generalised discussion about the meritocratic nature, or otherwise, of appointments. However, he will, I am sure, want to continue with his remarks—in order.
I am grateful for that guidance,Mr. Bercow. I stand corrected if I gave the wrong example; I was simply referring to the transparency of public appointments and to the need to avoid the kind of comments that arose as a consequence of another public appointment, to which I referred earlier. It was simply by way of analogy, and I recognise that that is difficult.
The hon. Gentleman asked a serious question, so let me give him a serious answer. Basically, the appointment of members to the panel is nothing to do with Her Majesty’s Government; it is a matter for those who run the City panel.
In order to explain my position, I seek your permission, Mr. Bercow, to refer briefly to the appointment of two individuals to the Bank of England Monetary Policy Committee, if only to illustrate why I mentioned it. Two members were appointed to that committee earlier this week by the Governor of the Bank of England. However, subsequently articles in the press have stated that at least one of the people appointed had a link to Ministers. Although the appointments were made by the Governor, we wish to avoid a repetition of assertions being made in articles about links between people appointed to the panel and Ministers. The Solicitor-General is making a far bigger point than the issue deserves. All that I wish to make clear is that there should be transparency in the appointment, and there should be no room for any subsequent questions.
The hon. Gentleman asks for transparency and that people not be appointed in particular ways, but I repeat that appointments to the panel have nothing to do with Her Majesty’s Government.
My hon. Friend raises a fair point. Ministers will not appoint people, but perhaps my hon. Friend is trying to say that as a result of putting the provision in statute, the process will seem to be more governmental by nature, and we must be wary of that.
I am grateful to my hon. Friend. That is exactly what I was saying. I wish that I had used his words rather mine, which have left me open to questions from the Solicitor-General.
I am mindful of the time and am keen to make my final point. We have increasing co-operation and workings with the European Union. My hon. Friend referred to Britain’s tendency to gold-plate regulations and rules that emanate from Brussels. I urge the Solicitor-General to ensure that when the takeover panel is subject to such European Union rules and regulations, it will be given the flexibility needed to ensure that business interests come first, rather than those of bureaucrats who are concerned more about bureaucracy than the efficacy of business.
I must congratulate my hon. Friend the Member for Huntingdon on what was, in the circumstances, a succinct commentary on a very important clause that seeks to establish, for the first time, the takeover panel on a statutory footing. He covered the ground well.
I would like to raise a particular matter with the Solicitor-General. I referred to it in an intervention on my hon. Friend and it was touched on in another place when the Attorney-General opened the debate on the clause. The noble Lord referred to the ninth report of the Delegated Powers and Regulatory Reform Committee which made two recommendations. In particular, I invite the Solicitor-General to comment on the report where it said:
“The House will wish to be assured that the Panel will continue to be an appropriate body to which the powers may be delegated and the House may wish to seek assurances from the Government that no changes are possible to its constitution which could change its suitability to be a rule-making authority.”
In response to that recommendation, the Attorney-General said that he was happy to give such assurances. He gave them on six grounds. The first was on the panel’s history. He complimented the panel on its 38 years of existence during which it had been one of the “great regulatory successes” and had played an important role in the continuing prominence of London as a “world-class financial centre”.
The second ground was the existing authority of the panel, which is acknowledged in case law and by statute. The panel is an interesting body because itis a hybrid and operates without parliamentary intervention, but nevertheless it is recognised in statute. The third ground was the existing working arrangements. The Attorney-General pointed out that the panel had well-developed links with other financial regulators and institutions.
The fourth ground—this point was mentioned by my hon. Friend—was the inclusive make-up of the panel. The fifth was that the Government
“believe that there that there is widespread support for the panel assuming the role of a rule-making authority.”
I think that that was, indeed, correct.
Finally, the Attorney-General mentioned what he described as the
“fallback power to replace the panel as regulator.”
He went on to say:
“The Government would retain the power through secondary legislation, particularly the European Communities Act 1972, either to remove and replace the panel as regulator or substitute rules made by the panel which were contrary to Community law. I should perhaps say ‘and/or substitute rules made by the panel’ because either or both would be possible.”
“In the event that the panel ceased to be an appropriate regulatory body or there were concerns about the compliance of panel rules with the directive, those powers could be exercised.” —[Official Report, House of Lords, 28 March 2006; Vol. 680,c. GC286.]
Those would be powers either to replace the panel or to changes its rules. He went on to say that he regarded that very much as a last resort.
Those remarks cause me some concern and I invite the Solicitor-General to elucidate on them. Perhaps he could further clarify the circumstances under which the panel might be regarded as no longer being an appropriate regulatory body. What criteria would be applied in making that decision and who would apply them? In other words, who would monitor the panel’s activities? Under what circumstances would they deploy that weapon of last resort, by deciding that the panel was no longer an appropriate regulatory body? What sort of concerns about compliance with the directive would trigger the replacement of the panel or the substitution of its rules? What mechanism would be in place to do that?
The Attorney-General indicated that the replacement of the panel or its rules would be done through secondary legislation. How would that secondary legislation operate?
My hon. Friend raises some important points. Those powers might never be used, but they exist nevertheless. Does he agree that the Government ought also to consider consultation before taking any action?
Yes, indeed. In fact, the threat of operation by secondary legislation perturbs me in particular. To what extent would there be parliamentary scrutiny outside that procedure?
The point about consultation that my hon. Friend raises is important. The panel has a firm and strong history of consultation. How would that tie in with consultation under the procedure for statutory instruments?
My hon. Friend’s point is important, which is exactly why I have raised the issue. The power to replace the takeover panel through secondary legislation seems draconian. I have no doubt that the Attorney-General meant it when he gave those assurances that it would be used as a weapon of last resort. Nevertheless, the point was touched on in Grand Committee in another place but, so far as I can see, it was not explored further. It is a matter of concern and one on which we should like considerable clarification.
Furthermore, if the takeover panel were indeed replaced via secondary legislation, under what framework would the body that had replaced it operate?
I have long experience of the operation of the panel, both in the City—as a practitioner and a corporate financier—and as a former City editor of a national newspaper. I have long welcomed its flexibility, but I also recognise the calls that have been made from time to time for it to be put on a more statutory footing. However, in all the representations that I have received during this Committee, I have not yet received one from the takeover panel objecting to the Government’s proposals. Has the hon. Gentleman received such a representation?
No I have not, but with respect the points that I am raising are on matters of clarification. So far as I can see, they have never been investigated. They are mentioned obliquely by the Attorney-General as a residual power that might be deployed in some circumstances. The Committee has a right to know, and is anxious to know, under what circumstances they will be deployed.
I am interested to know under what framework the body that replaced the takeover panel would operate. Would it operate under part 24, with the name of the new body simply interpolated for that of the takeover panel, or would a new framework be proposed?
These are matters of concern, and the principal concern is that the powers have been retained by—
They are a matter of concern for me, for one, but I have no doubt that they are a matter of concern to a number of other people, including several residents of the City of London. Nevertheless, it is a matter for clarification. It was not fully investigated in another place.
We have not heard representations from the takeover panel. It has no concerns about the matter. There is no reason to expect that the panel will cease to be the appropriate body. As the Attorney-General said, it is an ultimate fall-back position if the panel should somehow collapse, but the Government do not anticipate that it will do so. We would certainly hold appropriate consultations if it ever did, but the circumstances would be so extreme that I suspect the number of people concerned is very limited.
I am sure that the Solicitor-General is right and that the powers would be deployed only as a matter of last resort. Nevertheless, will he explain the basis on which they would be deployed and how they would be deployed? It is not sufficient to say that the powers would never be deployed if in fact they exist. If they are to be deployed, can he clarify upon what basis? I look forward to the Solicitor-General’s response to my points.
I had not intended to contribute to the discussion, but so that there can be no doubt in anybody’s mind that the Opposition have not passed over the clause with excessive haste and levity, let me make it clear that all Conservative Members have focused on this important matter.
I shall make two rapid points in the time available. The first is that the takeover panel, by general and international consensus, is the single best example anywhere of successful self-regulation in financial markets. Its record during the past 25 to 30 years—it is probably more than 30 years now—is quite extraordinary. As I said, its decisions have always been upheld by the courts. That is quite a remarkable tribute.
The panel’s principles have been the basis for many other countries’ development of takeover codes. Even the fundamental principles in articles 9 and 16—the need to protect small shareholders, the need to make a complete bid if 30 per cent. is achieved and so forth—have become standard in takeover laws and codes in many other countries, including countries within the European Union. The concept of concert parties, which is absolutely essential, was identified as a problem and dealt with by the panel. Numerous scandals in the more distant past in this country and in recent decades elsewhere have shown the need for clear rules about concert parties.
The takeover panel should receive nothing but praise from the Committee, and I would be very worried if a statute providing a framework for the panel’s activities were to threaten in any way its future effectiveness and credibility. There is only one reason, in my view—
Let me finish my sentence. There is only one reason for including the panel in statute and providing that framework: we in this country have a great interest in a level playing field throughout the European Union, and, in principle, the rules under which other EU-based companies can make bids for British companies should be comparable to those under which British companies can make bids on the continent. Everybody should be clear about what the rules are. It is necessary, if we are to have a level playing field—
If rules are to apply across the European Union, clearly we must agree on a common directive. That means that it must be embedded in British law as it is in the law of continental members of the Union, or indeed the Republic of Ireland. That seems sensible. The courts have had strong support for the panel and its own decisions until now, and I do not believe that a statutory framework will change that.