Article 11 of the takeover directive seeks, in certain circumstances relating to takeovers, to override a number of defensive devices that may be adopted by companies prior to the bid, such as differential share structures under which minority shareholders may exercise disproportionate voting rights, restrictions on the transfer of shares in the company’s articles on contractual agreements, and limitations on share ownership.
There are currently no restrictions on how UK companies admitted to trading on a regulated market may structure their share capital and control. However, market pressure, particularly that brought to bear by institutional investors, has ensured that few UK listed companies now have differential voting structures. As permitted under article 12 of the directive, it has been decided not to apply the provisions of article 11 in all cases but instead to include in the Bill a provision for companies with voting shares traded on a regulated market to opt in to its provisions should they choose to do so.
This was the subject of some debate in the other place. Indeed, I discussed the philosophical side of it this morning, but I do not intend to go over that again. [Interruption.] A smile crosses the Solicitor-General’s face. However, I discussed the matter with the panel. It is worth recording that it set out its position in correspondence. It said that it would come back, principally in relation to the Grand Committee debate, on these clauses. That debate was about how the Government propose implementing article 11 of the takeover directive.
Articles 9 and 11 of the directive are both concerned with reducing barriers to takeovers. Article 9 provides a framework for preventing a board from frustrating a takeover bid. Article 11 provides a framework for preventing shareholders who hold a minority of the share capital but who have disproportionately high voting rights from blocking a bid. Article 12 gives member states the option of imposing articles 9 and 11 on all companies registered within their territories. If the member state chooses not to impose either of those articles—that is, to opt out—it must nevertheless, by virtue of article 12(2), give companies the option, which must be reversible, of choosing to apply the articles individually.
Article 9 is consistent with the fundamental principle underlying the takeover code; accordingly, it was always the Government’s intention that it should be imposed on all UK registered companies having shares traded on a regulated market. The UK has therefore opted in, and article 9 is being implemented under rule 21(1) of the code, which has been amended to reflect the specific provisions of the article.
On article 11, the question whether certain voting structures should be imposed on companies is a matter for company law and is not, therefore, a part of the directive over which the panel has any responsibility. As a result, the panel has never been involved in any debate with the Government about how the optional provisions of article 12 would apply to article 11, save to clarify that it would be concerned if the legislation undermined irrevocable commitments. The DTI has proposed not imposing article 11, partly because the shareholding structures concerned are rare in the UK and partly because it does not wish to restrict companies’ flexibility to construct share structures as they see fit.
Having reviewed the Lords debates on this chapter and taken soundings, we are generally of the view that the Government have got the implementation of the directive right. However, we have continued to receive reports, mainly from City solicitors, that the wording of the clause is confusing and that it might be helpful if the Government published a more detailed explanatory note to reflect what has been said, not least in the other place.
I have to say that, in clause 666, the devil is in the detail—[Hon. Members: “Oh dear.”] I had to get that one in. An explanatory note on the clause would be extremely long, and there is actually a good description of how the clause would work in the DTI consultation document on the matter. Indeed, I was reading it last night to get my mind around some of the detail of the opting in and opting out arrangements in relation to article 11. I shall certainly consider whether a more detailed explanatory note would be of assistance and discuss the matter with my right hon. Friend the Minister for Industry and the Regions. I am not convinced that such a note would be of assistance, but I shall consider the matter, and we shall write to the hon. Gentleman about whether that is the appropriate way forward. However, it is an enormously complex area.