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:
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);
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
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.
Sections 969 and 972: Power of offeror to require general meeting to be called; Transitory provision
1241.Section 969 provides the bidder with the special right to require the directors of an opted-in company to call a general meeting of the company when he holds 75% in value of all the voting shares in the company (excluding debentures and shares that do not normally carry rights to vote at a general meeting (such as preference shares)). Section 969(3) applies sections 303 to 305 of the Act, which deal with the calling of meetings, to such a request (with the necessary modifications). But as those sections may not be in force at the time when section 969 comes into force, section 972 makes the same sort of adaptations in relation to the equivalent provisions of the 1985 Act. In particular, section 972(3) alters the application of section 378(2) so that a special resolution may still be passed at a general meeting called at only 14 days’ notice (normally at least 21 days’ notice would have to be given of the meeting for it to be able to pass a special resolution).