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Companies Act 2006

ANNEX A: TRANSPOSITION NOTES

Part 28: Takeovers, etc. – Directive on Takeovers Bids (2004/25/EC)

The Takeovers Directive

1731. Part 28 of the Act implements Directive 2004/25 EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids (OJ L142, 30 April 2004).

1732. The Takeovers Directive lays down, for the first time, minimum EU rules concerning the regulation of takeovers of companies whose shares are traded on a regulated market. The Directive was one of the measures adopted under the EU Financial Services Action Plan and aims to strengthen the Single Market in financial services by facilitating cross-border restructuring and enhancing minority shareholder protection.

1733. The Takeovers Directive contains general principles that Member States must adhere to in regulating takeover activity and a framework relating to the functions and jurisdiction of takeover regulatory authorities. It also lays down provisions relating to the mandatory bid (a requirement whereby a party gaining control of a company must make an offer to all shareholders at an equitable price), takeover bid documentation, time allowed for acceptance of the bid, the obligations of the board of the offeree company and other matters related to the bid.

1734. Additionally, the Takeovers Directive has provisions addressing barriers to takeovers (such as action that might be taken by a company or its board before or during a bid to prevent a takeover), requiring disclosure of certain information by companies traded on a regulated market and dealing with the problems of, and for, residual minority shareholders following a successful takeover bid (so-called ‘squeeze-out’ and ‘sell-out’ provisions).

The Takeovers Directive (Interim Implementation) Regulations 2006

1735. In view of the fact that the Takeovers Directive was required to be implemented by 20 May 2006, by which date the Act had not completed Parliamentary passage and received Royal Assent, interim implementation provisions were introduced under section 2(2) of the European Communities Act 1972 (ECA 1972). These provisions are contained in The Takeovers Directive (Interim Implementation) Regulations 2006 (S.I. 2006 No.1183). A copy of those Regulations together with the accompanying Explanatory Memorandum, Regulatory Impact Assessment and Transposition Notes is available on the website of the Office of Public Sector Information (http://www.opsi.gov.uk/stat.htm). The Regulations will be repealed and replaced on commencement of Part 28 of the Act.

Part 28 – Takeovers etc

1736. Since 1968, takeover regulation in the UK has been overseen by the Takeover Panel administering rules and principles contained in the “City Code on Takeovers and Mergers”. In order to bring UK takeover regulation within the requirements laid down in the Directive, Part 28 of the Act is designed to place it within a complete and coherent statutory framework.

1737. The detailed rules relating to takeover regulation in compliance with the Directive will be prescribed by the Panel in its Takeover Code, under a statutory rule-making obligation imposed upon the Panel by the Act (section 943(1)). The Takeover Code has already been revised with effect from 20 May 2006, on an interim basis under the 2006 Regulations, to make it wholly consistent with the requirements of the Takeovers Directive.

1738. ‘Squeeze-out’ and ‘sell-out’ provisions were previously prescribed by Part 13A of the 1985 Act. Chapter 3 of Part 28 of the Act replaces those provisions in their entirety with certain amendments which ensure they are wholly consistent with the Takeovers Directive requirements.

1739. Provisions related to disclosures by companies are contained in Part 7 of the 1985 Act and amendments to that Part are made in Chapter 4 of Part 28 to give effect to the additional disclosure requirements imposed by the Takeovers Directive on companies traded on a regulated market.

1740. Responsibility for the measures, described in this transposition note, taken to implement the Takeovers Directive lies with the Secretary of State for Trade and Industry.

1741. The table below describes the substantive provisions implementing the Takeovers Directive.

Part 24: Takeovers etc: Transposition Measures

Article Objective Implementation

1 Defines the scope of Directive in terms of transactions and types of company to which it applies (“takeover bids for the securities of companies governed by the laws of Member States, where all or some of those securities are admitted to trading on a regulated market”).

No specific implementing provision necessary.

2 Contains key definitions for the purposes of the Directive (such as, “takeover bid”, “offeree company”, and “securities”).

No specific implementing provision necessary.

3.1 Lays down general principles which Member States shall ensure are adhered to for the purpose of implementing the Directive.

Section 943(1) requires that the Panel give effect to the general principles set out at Article 3.1 of the Directive in the exercise of their statutory rule-making duty.

3.2 Provides that Member States may, in ensuring that the minimum requirements laid down by the Directive are adhered to, lay down additional conditions and provisions more stringent than those of the Directive.

No specific implementing provision necessary.

4.1 Requires Member States to designate supervisory authorities (which must act independently of parties to a bid).

This will be achieved by administrative designation of the Takeover Panel as supervisory authority for the purposes of the Directive.

4.2 Lays down jurisdictional rules in relation to takeover regulation

Section 943(1) requires that the Panel give effect to the jurisdictional provisions of the Directive in the exercise of their statutory rule-making duty.

4.3 Requires Member States to ensure that persons employed or formerly employed by takeover regulatory authorities are bound by professional secrecy (information covered by this obligation should not be disclosed other than under conditions laid down by national law).

Section 949 makes it a criminal offence to disclose information provided to the Takeover Panel other than under the circumstances and gateways laid down in section 948 and Schedule 2.

4.4 Lays down cooperation obligations in relation to EU takeover and financial markets supervisory authorities.

Section 950 requires the Takeover Panel to cooperate with EU takeover and financial services regulators. The existing cooperation duties of the Financial Services Authority under section 354 of the Financial Services and Markets Act 2000 are extended to include relevant authorities (section 964).

4.5 Requires that takeover supervisory authorities be provided with all powers necessary for carrying out their duties and provides that Member States may, provided that the general principles are respected, permit derogation from the rules of the Directive in certain circumstances and grant supervisory authorities the power to grant waivers.

In addition to the rule-making duty at section 943(1) and rule-making powers at section 943(2), the following powers are provided to the Takeover Panel:

Section 945 – power to make rulings

Section 946 – power to give directions

Section 947 – power to require documents and information

Section 952 – power to set down sanctions by rules

Section 954 – power to order compensation in certain circumstances

Section 955 – power to apply to the court for enforcement

Section 960 – power to bring and defend proceedings.

Section 944(1) authorises the Takeover Panel to provide for derogations and waivers in certain circumstances from rules made under section 943.

4.6 Makes provision for certain Member States’ powers to be unaffected by the Directive (for instance, designation of judicial or other authorities responsible for dealing with disputes, the circumstances in which parties may bring administrative or judicial proceedings, any capacity of the courts to decline to hear legal proceedings and the liability of supervisory authorities).

Section 951 provides for matters relating to reviews of and appeals from Takeover Panel decisions to be contained in the rules made by the Panel.

Section 945(2) provides that a ruling of the Takeover Panel is to have binding effect (subject to provisions in the Panel’s rules and any review or appeal).

Section 956 provides that there shall be no action for breach of statutory duty, or any voidness or unenforceability of transactions, as a result of breach of rules made by the Panel.

Section 961 provides for exemption of the Takeover Panel (and those involved in its functions) from liability in damages in certain circumstances related to the regulatory activities of the Panel.

5 Requires that a “mandatory bid rule” is introduced requiring a person acquiring “control” of a company to make a bid to all holders of securities at an equitable price.

Contains rules related to the calculation of the equitable price.

Section 943(1) requires that the Panel give effect to the “mandatory bid” and “equitable price” provisions in the exercise of their statutory rule-making duty.

6 Requires that the decision to make a takeover bid is made public.

Contains detailed provision related to the contents of the takeover offer document.

Requires that the parties to a bid are obliged to provide supervisory authorities with information related to the bid.

Section 943(1) requires that the Panel give effect to the “bid” disclosure and documentation provisions in the exercise of its statutory rule-making duty.

Section 947 provides the Takeover Panel with power to require documents and information.

7 Lays down rules related to the time allowed for acceptance of the takeover bid.

Section 943(1) requires that the Panel give effect to the offer “acceptance” period provision in the exercise of its statutory rule-making duty.

8 Requires that takeover bids are made public so as to ensure market transparency. It also provides for the disclosure of bid documentation to shareholders and employees’ representatives (or, where there are no such representatives, the employees directly).

Section 943(1) requires that the Panel give effect to the bid disclosure provisions in the exercise of their statutory rule-making duty.

9 Imposes obligations on the board of the offeree company, including the obligation not to take action to frustrate the bid without the approval of shareholders at the time of the bid and to draw up and make public a statement containing their views on the effects of implementation of the bid.

Section 943(1) requires that the Panel give effect to the provisions relating to the obligations of the board of the offeree company in the exercise of their statutory rule-making duty.

10 Requires that companies shall publish detailed information on their share and control structures, etc. in their annual report and present an explanatory report on such matters to the annual general meeting of shareholders.

Section 992 (amending Part 7 of the 1985 Act) requires that the relevant information, including necessary explanatory material, is set out in the annual report of companies.

11 “Breakthrough” – This provision overrides, in certain circumstances connected with a takeover, provisions in the articles of companies and contractual arrangements related to restrictions on transfer and voting rights of shares, etc. It does not apply to special shares held by Member States or to cooperatives.

This provision may be made optional by Member States for companies under the provisions of article 12.

The right to make these provisions optional for companies is exercised in the implementing provisions.

Sections 966 and 967 define the types of companies, circumstances and mechanisms by which a company may opt-in to “breakthrough”.

Section 968 lays down the effect on contractual restrictions overridden by “breakthrough”.

12.1 Provides that Member States may make optional the provisions of articles 9(2) and (3) and/or Article 11.

Exercise of this option has been taken only in relation to the provisions of Article 11 (the relevant implementing provisions of which are described above).

12.2 (and 12.4) Requires, where optional arrangements are in place, that companies have the right to voluntarily opt-in to the provisions of the relevant articles. Such a decision must be communicated to the supervisory authorities and be disclosed.

Section 970 requires that any opting-in decision be communicated to the Takeover Panel without delay.

The opting-in resolution passed by the company must be filed with the Registrar of Companies under section 30.

12.3 (and 12.5) Permits Member States to provide that the effects of Articles 9(2) and (3) and/or Article 11 only apply on a “reciprocal” basis, i.e. where the takeover bid is made by a company also subject to the effects of the relevant articles. Such restrictions on the application of Articles 9(2) and (3) and Article 11 shall be subject to the authorisation of the general meeting of shareholders of the offeree company.

The Member State option to provide for “reciprocity” has not been exercised.

13 Requires that rules relating to the lapsing or revision of bids, competing bids, disclosure of results of bids and irrevocability of bids be put in place.

Section 943(1) requires that the Panel give effect to the requirement that such rules be put in place in the exercise of its statutory rule-making duty.

14 Provides that the Directive shall be without prejudice to various provisions relating to information and consultation of employees and their representatives.

No specific implementing provision necessary.

15 Requires Member States to put in place rules enabling a bidder to compulsorily purchase the shares of minority shareholders following a successful takeover bid (“squeeze-out” rights).

The circumstances in which such a right must apply (including time periods and relevant thresholds) and relating to the price that must be paid are set out.

“Squeeze-out” rights were previously contained in the 1985 Act (Part 13A (sections 428-430F)).

These have been replaced by Chapter 3 of Part 28 of the Act (necessary amendments to ensure these provisions are consistent with Article 15 have been made).

16 Requires Member States to put in place rules enabling minority shareholders to require a bidder to compulsorily purchase their shares following a successful takeover bid (“sell-out” rights).

The circumstances in which such a rule must apply (including time periods and relevant thresholds) and relating to the price that must be paid are set out.

“Sell-out” rights were previously contained in the 1985 Act (Part 13A).

These have been replaced by Chapter 3 of Part 28 of the Act (necessary amendments to ensure these provisions are consistent with article 16 have been made).

17 Requires that effective, proportionate and dissuasive sanctions be put in place.

Sections 952 and 954 provide that the rules made by the Takeover Panel may confer power on the Panel to impose sanctions on those who transgress its rules or order compensation in certain circumstances.

Section 949 makes it an offence to contravene the provisions of section 948 (relating to the restrictions on disclosure of information provided to the Takeover Panel).

Section 953 provides an offence where takeover bid documentation does not comply with Panel rules giving effect to Articles 6.3 and 9.5 of the Directive.

Misconduct in relation to takeover activity also needs to be viewed in the wider context of the overall regulatory framework and the protections available to shareholders and others.

A robust market regulatory regime and company law framework is in place in the UK to investigate and pursue misconduct in relation to takeover activity (for instance, sanctions with stringent sanctions are already in place to deter fraudulent misrepresentation or market abuse).

18 Lays down a Committee procedure whereby the Commission may adopt rules related to the application of Article 6.3 (contents of takeover bid documentation).

No implementing provision necessary (no such rules have been adopted).

19 Requires the EU Commission to establish a Contact Committee to facilitate the harmonised application of the Directive and advise the Commission, if necessary, on any additions or amendments to the Directive.

No implementing provision necessary.

20 Provides for the review of the Directive by the EU Commission five years after its entry into force.

No implementing provision necessary

Requires that Member States provide the Commission annually with certain information related to takeover bids

Such information will be provided to the EU Commission as an administrative process.

21 Requires that the relevant provisions of the Directive be transposed no later than 20 May 2006. Details of transposition measures shall be communicated to the Commission.

No specific implementing provision necessary (NB paragraph 5 above regarding the Takeovers Directive (Interim Implementation) Regulations 2006 which came into force on 20th May 2006). Details of the transposition measures will be communicated to the EU Commission by administrative process.

22 Provides that the Directive enters into force on 20 May 2004

No implementing provision necessary.

23 Addresses the Directive to the Member States.

No implementing provision necessary.