Takeovers (Amendment) (EU Exit) Regulations 2019

Lord Fox Excerpts

Tuesday 15th January 2019 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, these regulations will be made under powers in the European Union (Withdrawal) Act 2018. They amend Part 28 of the Companies Act 2006 so that the United Kingdom’s corporate takeovers regime can operate independently of the EU in the event of a no-deal exit. They provide clarity and certainty to businesses and shareholders.

The takeovers regime ensures that shareholders receive fair and equal treatment when the company in which they have invested is subject to a takeover bid. Part 28 of the Companies Act 2006 transposed the takeovers directive, 2004/25/EC, into UK law. The directive was intended to harmonise certain aspects of takeovers supervision across the European Economic Area, creating expectations of reasonable behaviour to which company shareholders could hold bidders.

The Companies Act requires the Takeover Panel to make rules to give effect to the directive in the UK. The panel has done so in the City Code on Takeovers and Mergers. These regulations preserve the statutory underpinning of the code and make only minimal changes to the way the UK regime functions.

In developing the regulations, we have worked closely with the UK’s supervisory authority, the Takeover Panel. It has consulted on the changes it will need to make to the takeover code to reflect these regulations. The takeovers regime is wholly separate from the mergers regime in the Enterprise Act 2002, which considers the competition implications of mergers. These regulations have no bearing on the mergers regime, or the powers and responsibilities of the Competition and Markets Authority.

For the most part, these regulations import and correct provisions from the directive necessary for the independent operation of the UK regime, but do not change how the domestic regime operates. They make only three substantive changes. First, they remove the shared jurisdiction regime. The EEA takeovers regime includes a system of shared jurisdiction for companies registered and listed in different countries. The supervision of a company captured by the shared jurisdiction system is usually by two regulatory authorities, one in the country where the company has its registered office and the other in the country where the company is listed. The shared jurisdiction regime works on a reciprocal basis. Since the reciprocal arrangements will no longer apply to the UK after EU exit, the regulations will remove shared jurisdiction from the UK takeovers regime. The panel has consulted on how the takeover code should apply to UK-registered companies that would otherwise have fallen within the shared jurisdiction regime because they have shares trading on another EEA state’s regulated market. It has proposed that the takeover code should apply to takeover bids for such companies if their place of central management and control is in the UK. Companies not fitting this criteria may be supervised by another authority.

The second feature of the regulations relates to the duty of co-operation. Section 950 of the Companies Act 2006 places a duty on the Takeover Panel to co-operate with its counterparts and certain other regulatory agencies in any country or territory outside the UK. It also imposes a duty to co-operate with EEA supervisory authorities. The duty to co-operate with supervisory authorities in the EEA is derived from the takeovers directive. After exit, EEA member states will no longer be bound to co-operate with the UK under the directive. These regulations therefore remove the obligation to co-operate with EEA supervisory authorities as it will no longer be reciprocal. However, the Takeover Panel will still be required to co-operate with the authorities of EEA member states under the duty in Section 950 to co-operate with any international supervisory authority with an equivalent role.

The third feature of the regulations relates to restrictions on the disclosure of confidential information. Section 948 of the Companies Act restricts the disclosure of confidential information obtained by the Takeover Panel during the course of its duties and sets the conditions under which this information can be shared. It applies to both the panel and the organisations with which information is shared. To breach the Section 948 restriction is a criminal offence. The Companies Act provides an exemption from the Section 948 restriction for EEA public bodies using confidential information disclosed by the panel for the purpose of pursuing an EU obligation. Instead, the EEA framework provides reciprocal protections to prevent the inappropriate disclosure of information and maintain professional secrecy. After EU exit, these reciprocal protections will no longer apply to the UK and the removal of the exemption for EEA public bodies ensures that there is a sanction for inappropriate onward disclosure of confidential information.

In conclusion, corporate mergers and takeovers are an important part of a healthy economy. By encouraging efficiency gains, spreading knowledge and promoting innovation, they drive economic growth and job creation. It is vital that we seek to safeguard the legal framework that gives companies and their shareholders the confidence to engage in merger and acquisition activity. These regulations achieve that goal by making only those changes needed to fix deficiencies in UK law arising from EU exit. They will have a negligible overall net effect on our economy. I beg to move.

[Lord Fox (LD)]

My Lords, this time last year I was engaged in my civilian life on one of the largest contested takeovers in the British Stock Exchange, so I have some first-hand experience of the Takeover Panel and its operations—which I will not regale the House with today. However, after that experience I was left with the realisation that there are major issues around takeover policy in this country and I beg to disagree with the last words of the Minister when he described the beneficial effects of takeovers. Many of them prove not to be beneficial. Although some are, as he says, part of a healthy and vibrant economy, many are driven by the wrong motives and have outcomes that are not necessarily favourable to the economy of the United Kingdom. However, this is not the medium through which to have that discussion or to make those changes, so I will not attempt it.

The role of the Takeover Panel is interesting. While this is not a game, the way in which it operates is very much as a referee. Two sides are contesting and the Takeover Panel acts as a referee. It has a lot of experience—although each takeover is different, so the process of learning is for the Takeover Panel as well. In essence it is a put-together team in terms of the referees as well as the contesting companies. That process of consultation is quite interesting because what kind of response you get will depend on who you speak to from the Takeover Panel. It is the same as taking 10 Premiership referees and asking them how to change the rules of association football; they would all come up with different ideas. So I would like a little more information on the consultation process.

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[Lord Fox]

I thank the Minister for giving way and for his answer. Am I therefore to understand that 35 companies—25 from the EEA and 10 from the UK—come out of UK jurisdiction, or is it 35 companies coming into UK jurisdiction? It is not clear.

[Lord Henley]

I am sorry; I miswrote down what the noble Lord originally said. It does say 35 in the order: 35 EEA companies come out and 10 UK companies go in. I think the noble Lord has got it right. Again, I will write to him on that if I am wrong. He also referred to paragraph 20, on what drove changes to the definition of a takeover and what other amendments have been made. I can give an assurance that there have been no changes to the definition of a takeover, and the scope of companies that can be subject to takeover has been narrowed, obviously, to UK companies. That would be implicit in the order.

My noble friend Lord Leigh asked, very helpfully, about shared jurisdiction. The EEA takeovers regime includes a system of shared jurisdiction for companies registered and listed in different countries. Since the reciprocal arrangements underpinning the system will no longer apply to the UK after exit, the regulations will remove shared jurisdiction from the UK takeovers regime. My noble friend then asked whether that was likely to bring more companies to the UK. He and I are always optimists in these matters and there is every chance it might have that effect, although that is a matter not for the Government but for the companies themselves. I believe I have answered all the points put to me but if I failed to deal with any I will write to noble Lords.