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Takeovers (Amendment) (EU Exit) Regulations 2019

Volume 795: debated on Tuesday 15 January 2019

Motion to Approve

Moved by

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.

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.

The Minister mentioned in his helpful opening remarks that the code will apply to companies where the place of central management and control remains in the United Kingdom. A definition of that comment would be helpful if the Minister can update us. His very helpful accompanying notes to the regulations state that,

“the definition of takeover bid has been amended and consolidated in paragraph 20”.

Again, I would appreciate some information on what drove those changes and what amendments have been made. With that express proviso, what other amendments have been made and not stated here? I ask that because it is quite difficult to look at what was there and what is here now and understand exactly what has and has not been changed.

In conclusion, the Minister said that these regulations would have a negligible impact on the British economy. However, the notes state clearly that there will be an impact on 25 EEA companies and 10 UK companies. While everything averages itself out, that does not help you if you are on the downside of the averaging equation. Can the Minister give us some sense of the scope of the impact on those companies rather than on the overall economy?

My Lords, I rise partly in response to the noble Lord, Lord Fox, who I was worried at one point was about to decimate the industry from which I have made a modest living for some years—albeit in the private sector rather than in the public sector. I declare my interests as set out in the register and that some 10 years ago I sat on the appeal committee of the Takeover Panel.

The Takeover Panel has been a remarkable success. The way in which it resolves difficulties and issues instantaneously without litigation is envied around the world. If it did not exist, we would most certainly seek to create it. Everything that can be done to ensure its effectiveness must be applauded, including this statutory instrument.

My question to the Minister is about shared jurisdiction. Because so many companies want to be covered by the Takeover Panel, and indeed cannot be included in various listings unless they are covered by it and thus want to have more shareholders invest in them, does this mean that companies which at the moment are not satisfying the residency test will move their business to the UK to ensure that they do cover the residency test, thereby bringing more employment and more business to the United Kingdom?

My Lords, I will pick up on a couple of points raised by the noble Lord, Lord Fox, and respond in part to some of the points made by the Minister in his introduction of this memorandum, about which we have very little of substance to complain because it does what it says it is going to do on the tin, as they say.

I first reinforce the wider context, which—although I think it sent shivers through a number of those sitting opposite me—we will have to return to before too long in one context or another. The arrangements under which company takeovers and mergers are taken are complex. This is bedevilled by the fact that some are statutory and some not. The role of the statutory bodies does not always fit perfectly with those of the listing arrangements under the Stock Exchange rules. The problems bedevilling British industry, which are too well known to need rehearsing here—short-termism and often acting without regard to national interest—have been raised by the Government over a number of years, but we still do not have their final conclusion or decisions, and we await them with some interest.

Having said that, this SI has similarities with a number we discussed in previous weeks. Only yesterday we talked about intellectual property. I am struck by the difference in approach taken by the department in this SI on takeovers and those we discussed yesterday on intellectual property, patents and trademarks. Does the Minister agree that one of the underlying themes of the debate yesterday on intellectual property was what appeared to be a fairly clear steer by the department that it wished to bring into play regulations that would future-proof discussions that may emerge should there be some form of deal or, even if there is not a deal, some sort of discussions and debates about how the country would wish to engage with partners in the EU on intellectual property, trademarks and patents? Is he struck, as I am, by the fact that the asymmetric approach taken yesterday in those SIs is not being picked up today?

The issue here is whether there should be some form of joint supervision and some mutual recognition of arrangements and structures. Companies increasingly operate across borders. It may not always be easy to identify precisely where the headquarters are. Indeed, some companies have made a virtue of having more than one headquartered operation in a number of countries. Simply doing it on a numerical basis of where securities are listed is not going to get to the same conclusion, as the SI admits. So we have a potential problem, in a sense not dissimilar to that addressed in the SIs we dealt with yesterday, which could perhaps provide an opportunity for further discussion. Does he therefore agree that this SI, as we have it before us, does not meet the asymmetry test in the terms we discussed?

On a slightly different line, consultation was raised extensively and has been raised in all these EU exit regulations. I can understand why the Minister will respond by saying that the consultation was appropriate for the circumstances. But in this case the only consultation I can see mentioned is with the Takeover Panel itself. There has been no attempt to try to look out to a wider interest—for example, to consumer interests, trade union interests or employee interests more directly—in the way these operations take place. There is no reference to the CBI or the FSB. I am a bit surprised about that, and I wonder if he would like to comment on whether he felt the department had the best advice possible in circumstances where so few people were consulted.

My final point is the question raised earlier this evening, which is relevant again now. There is nothing in the SI itself or the Explanatory Memorandum to confirm whether this statutory instrument will continue in the event that there is no no deal. As mentioned in the last debate, I wonder where the poison pill lies in this. What are the circumstances under which elements of this SI will fall away, and how will that be achieved? Does it require a further debate and discussion? Does it require a new statutory instrument? I would be grateful if we could be put in the picture. It would be interesting, if somewhat frustrating, to feel that all the effort we are putting into these statutory instruments today is simply a rehearsal for going back and redoing them should no no deal take place. We should presumably know in about 20 minutes whether that is likely to be the case.

In conclusion, it may be that elements of this SI would continue to any deal scenario. The Secondary Legislation Scrutiny Committee pointed this out on another SI that we will discuss shortly. I wonder if that is the case here and, if so, if the Minister could identify which elements of this would continue in any future discussions and negotiations.

My Lords, I thank both noble Lords for their contributions, particularly the noble Lord, Lord Fox, for saying how helpful the notes attached to this order were. This does not often happen and I must thank the noble Lord on the occasions that he is as polite as that. I also welcome the experience he brings to this debate, particularly with his knowledge of takeovers, although I am not sure I fully share his view of the general helpfulness or unhelpfulness of shareholders. Perhaps I could deal with some of the questions that he, my noble friend Lord Leigh and the noble Lord, Lord Stevenson, put.

First, as always, let me remind the noble Lord, Lord Stevenson, that these are no-deal regulations only brought before the House for the eventuality that we leave the EU without a deal. In the event of a deal, as has been made clear by other colleagues from the Front Bench, there will need to be legislation in the Act that will come before us in due course to deal with that. We will have time enough to debate that.

I also do not think I accept his point—I am not sure I fully understood it—whereby he suggested we were taking an asymmetric approach to these matters when we dealt with those three orders yesterday. I imagine we will deal with them again in the Chamber in due course, but not on this occasion. I never quite understand what the noble Lord means by that asymmetric approach.

I do not want to delay the House unduly, but I would not wish the evening to conclude with the Minister going off in confusion and worrying all night. Just to be certain, there was no need in the drafting we saw yesterday—let us take the trademark arrangements, for example—for us as a UK emerging from the EU as an independent state to offer to recognise trademarks registered in the EU. That does not seem to be taking back control, because one is opening up to UK manufacturers which have their own trademarks a chance to lose out to trademarks they will have to compete against which are registered elsewhere in the EU, and we are not part of the EU. I can understand the logic of it, but it certainly does not seem to fit the criteria set out for a no-deal Brexit.

The interesting arguments that emerged during the debate yesterday were that the primary reason that was there was that it might be negotiable in the future for similar arrangements for UK trademarks to be deemed to be registered also in the EU. In that sense, that symmetry of each section—the EU 27 and the UK having their own arrangements for registering trademarks which are then mutually recognised—is symmetrical, but what the SI proposed was very much asymmetrical.

I take the noble Lord’s point, but I do not think it is relevant to the regulations we are dealing with today, so I will get back to the various questions that noble Lords put. I will first deal, as always, with consultation, which is so important to noble Lords. I can again give an assurance that in developing these we worked very closely with the United Kingdom supervisory authority, the Takeover Panel. The noble Lord, Lord Fox, talked about its role as a referee. I do not think it is necessary at this stage for me to get on to the composition of it. The Takeover Panel includes representatives from a range of business sectors. I can give an assurance that it consulted publicly on the changes it will need to make to the Takeover Panel to reflect these regulations. No doubt, if it is available, I will seek advice from the Takeover Panel and give a little more information to the noble Lord.

The noble Lord also asked about the impact on the companies affected. I can say that the only cost to business arising from these regulations will be that associated with compliance with a different supervisory regime. That will affect only the few companies that previously fell under the Takeover Panel’s jurisdiction and will no longer do so after exit, following the loss of that shared jurisdiction regime. The cost of compliance between the different regimes is unlikely to vary significantly as the takeover directive establishes standard requirements, and these costs will arise only in the event of a takeover. I give way to the noble Lord.

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.

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.

Motion agreed.