Companies Act 2006 – Sections 965

Sections 965 and 973: Power to extend to Isle of Man and Channel Islands

1229. These sections allow any provisions of Chapters 1 and 2 to be extended to the Isle of
Man or any of the Channel Islands by Order in Council, with any specified modifications.

CHAPTER 2: IMPEDIMENTS TO TAKEOVERS

Summary and background

1230. Article 11 of the Takeovers Directive seeks to override, in certain circumstances
relating to a takeover, 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 transfer of shares in the company
articles or in contractual agreements; and limitations on share ownership.

1231. There are currently no restrictions on the way that UK companies which are admitted
to trading on 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.

1232. As permitted by 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 Act (sections 966 to 972)
provision for companies with voting shares traded on a regulated market to opt in to its
provisions should they choose to do so.

Sections 966, 967 and 970: Opting in and opting out; Further provision about opting-in
and opting-out resolutions; Communication of decisions

1233. A company may pass a special resolution opting in to Article 11 (an “opting-in
resolution”) provided that three conditions are met:

a) it has voting shares admitted to trading on a regulated market (it is not considered
necessary to extend this provision to other types of companies which are not covered
by the Directive);

b) the company’s articles of association do not contain restrictions of the kind mentioned
in Article 11 (or other provisions which would be incompatible with Article 11) or, if
they do contain such restrictions, the restrictions will not apply in circumstances
related to a takeover bid as described by Article 11. Article 11 relates to both the
takeover bid period and the time following the bid when the bidder has acquired 75%
or more of the company’s capital carrying voting rights. It provides that restrictions
both on the rights to transfer shares and on voting rights that are contained in the
articles of the company should not apply. It also provides that, in certain
circumstances, shares carrying multiple voting rights shall only have one vote and
extraordinary rights of shareholders concerning the appointment or removal of board
members should be disapplied; and

c) no shares are held by a Minister conferring special rights in the company and no such
special rights are provided for in law. The Directive expressly provides that Article 11
does not apply to shares held by Member States conferring special rights on the
Member State which are compatible with the Treaty, or to special rights provided for
in national law which are compatible with the Treaty. The UK Government holds a
number of so-called “golden shares” in formerly publicly-owned businesses which
have been privatised to ensure that essential public interest considerations are
protected. This provision will exclude all such companies where the Government
holds the beneficial ownership of a golden share (since holdings by nominees and
subsidiaries are also covered). The concept of Minister is broadly defined in section
966(7) of the Act to include Scottish Ministers and Northern Ireland Ministers under
section 7(3) of the Northern Ireland Act 1998. (As a result of the Government of
Wales Act 2006, the definition of Minister will be changed to include Welsh
Ministers). Under section 966(8), a power is provided to the Secretary of State by the
negative resolution procedure to apply the provision in section 966(4) (Minister
holding golden shares) to persons or bodies exercising functions of a public nature as
it applies in relation to a Minister.

1234. Section 966(5) enables a company to revoke an opting-in resolution by means of a
further special resolution (an “opting-out resolution”).

1235. Section 967 sets down provisions relating to the date on which the opting-in and
opting-out resolutions will take effect. Generally, this will be the date stated in the resolution.

1236. Section 970 requires companies, within 15 days of an opting-in or opting-out
resolution being passed, to notify the Panel and any other takeover supervisory authority in a
Member State in which the company has shares admitted to trading on a regulated market or
has requested such admission. Where a company fails to comply with this requirement, the
company and every officer in default will be guilty of an offence and be liable on summary
conviction to a fine not exceeding level 3 on the standard scale (and to a daily default fine for
continued contravention).

Section 968: Effect on contractual restrictions

1237. This section provides that agreements entered into between shareholders in the
company on or after 21 April 2004 (the date on which the Takeovers Directive was adopted),
and agreements entered into between a shareholder and the company before as well as on or
after that date, are invalid in so far as they impose any of the restrictions set out in subsection
(2).

1238. Those restrictions relate both to the bid period and to the time following a takeover
bid when the bidder holds 75% or more in value of all the voting shares in the company.
Types of restrictions overridden are those imposing restrictions on the transfer of shares and
on rights to vote at general meetings of the company to decide on action to frustrate the bid
and at the first meeting to be held after the end of the offer period. For the purposes of
determining when the bidder holds 75% or more in value of all the voting shares in the
company, both debentures and shares which do not normally carry rights to vote at a general
meeting (such as preference shares) held by the bidder are to be disregarded (see subsection
(8)).

1239. The provisions related to the types of contractual agreements to which the override
will apply (including the date at which such contracts were entered into) and the restrictions
which are made invalid are designed to replicate the provisions of Article 11 of the Directive.

1240. Section 968(6) provides that a person who suffers loss as a result of a contractual
agreement being overridden can apply to the court for compensation. It is expected that, in
the first instance, such compensation will be offered by the bidder in making the takeover
offer. Where, however, the compensation offered by the bidder is not acceptable to the person
whose rights are being overridden, there is a right to apply to the court. The court will award
compensation to the person who suffers loss on a just and equitable basis to be paid by any
person (which could include the bidder or the other party to the contract which has been
overridden) who would have been liable to him for committing or inducing the breach of
contract which would have been committed had the restriction in question not been made
invalid by this section.