In good company

The Takeover Directive

The Takeover Directive is expected to be adopted into UK law in the next few months. It aims to produce a common minimum European standard for the conduct of public takeovers and is part of the European Union's (EU's) Financial Services Action Plan for the setting up of a financial services single market by 2005.

Alan Paul, corporate partner at Allen & Overy (A&O), explains that the UK has the most sophisticated method of regulation and experiences a huge amount of activity compared with other member states. The proposed directive is based on the UK Takeover Code, but it will still have implications for the UK regime because the Takeover Code is a flexible regime backed up by sanctions, but is not law. Legislation will be required in each member state to give effect to the directive.

Paul highlights the City's concerns that forcing the takeover framework to be set in law could give greater recourse to, and promote a tactical use of, the courts. The risk is that shareholders' interests will not be best served. "Only time will tell if it will be true," he says, and differentiates the UK and US systems. In the US, litigation over takeovers is common, and Paul quotes a popular US saying: "In the US, it's better to be a lawyer, and in the UK it's better to be a shareholder." He says there will be vagueness over the relationship between the Takeover Code and the implementing legislation to come. As shares become more open, Paul says cross-market takeover activity has increased, but that harmonisation throughout Europe will be unlikely. He predicts instead a "mishmash of regimes", because each member state will implement the rules differently.

European Company Statute

The creation of a new corporate creature, the European company, will be possible under European Community (EC) law, three years from when the laws are adopted. Known as Societas Europeae, or by the acronym SE, they will derive from the European Company Statute, established by a regulation and a directive.

SEs will operate on a Europe-wide basis, be registered nationally and governed by the laws of the EU member state where the administrative head office is located (to reduce the use of SEs for tax fraud or money laundering). The new structure will enable organisations to establish their headquarters in different member states without winding up their operations and re-establishing themselves in the new country. Such companies will be able to establish unified management and reporting systems and give rise to administrative advantages and cost savings.

Quoted SEs will be treated according to national listing rules. The minimum capital requirement for SEs will be euro120,000 (£74,055) to encourage medium-sized companies to create SEs. The legislation is due to be formally approved by the European Council in June 2001.

Tim Herrington, head of the global asset management group at Clifford Chance, is sceptical as to whether SEs will take off, and does not think they will hold any advantages for multinational companies based in the UK. He stresses that his is the view of a UK practitioner and that the Continental approach may be very different.

Herrington thinks it could be a disadvantage for UK companies to comply with some of the European company requirements, such as employee participation and board representation. He also points out that SEs cannot be used as devices to get out of more restrictive company legal requirements in other countries. He gives the example of German companies, which must still comply with minimum worker participation even if they transform to the European structure. On this basis, Herrington suggests there may be scope to promote the UK as a user-friendly system for businesses to operate in other member state jurisdictions.

Proposals on Ucits

Political agreement has been reached by the Council of Economics and Finance Ministers on proposed directives to reform the management structures for undertakings for collective investment in transferable securities (Ucits). Coordinated rules on market access and operating conditions would permit a European passport for financial undertakings authorised in one member state to offer services in others without further authorisation. The two proposed directives will also form part of a financial services action plan to integrate Europe's financial markets by 2005, widely debated at the Stockholm Summit.

David Calligan, a partner in SJ Berwin's financial services group, explains that the changes would extend the current passport scheme for Ucits products to Ucits managers. "This will create a level playing field with bankers, stockbrokers and insurance companies," he says.

Other changes would include abolishing the corporate division between those managing unit trusts and those managing individual portfolios, permitting the two to be combined.

Although Ucits are broadly welcomed, as they encourage investment in a range of schemes, Calligan says enthusiasm about the proposals is not universal due to concern that they could be more expensive to establish because of minimum licence standards, such as the minimum capital adequacy requirement.

Cross-border regulation on pension funds

Currently, there is no European framework for pensions. The European Commission has adopted a proposal for a directive to bring occupational pension funds within the internal market and open them up to the principles of free movement of capital and free provision. The directive will be put before the European Parliament for its first reading in May 2001 and is intended to be adopted in 2002.

Jane Samsworth, head of pensions at Lovells, believes that the European Commission will ultimately encourage

cross-border pension provision, although the directive itself will not achieve this aim. The legislation will not apply to state pension schemes or social security pension schemes like the French-based system. Pensions that run on book reserves are also excluded, which according to Samsworth covers much of the German model.

Samsworth welcomes the proposals, but feels they could go further. In her view, tax implications need to be addressed if member states are to be encouraged to operate pensions across states. The directive has been modelled on the best practices of member states that operate occupational pensions. Consequently, Samsworth hopes that the minimum funding standard, which the UK Government has announced will be abolished nationally, will also be dropped at the European level. "Now that we've won this victory for common sense, I hope the Government will exert its influence to ensure that the directive is shaped to reflect this experience," she says.

Digital Copyright Directive

The internet and the digital age have necessitated legislation to address copyright issues. With the final draft of the Copyright Harmonisation Directive, the European Commission intends to harmonise members states' laws and update them to take account of developments in technology. After a long gestation period, the final draft was adopted by the Council of Ministers on 9 April.

Alexander Ross, an associate in the entertainment group at Theodore Goddard, believes that the directive achieved its objective of updating the law, but not of harmonising it. The European Commission was subjected to heavy lobbying by the music industry on one side and telecom companies and internet service providers on the other. Cautiously, Ross says that on balance the directive "perhaps" came out in favour of copyright owners.

The directive will require member states to introduce mandatory exemptions to prevent liability for temporary acts of reproduction without economic significance in the course of internet use. Cache copies of the website on the user's hard drive may not fall in with the exemption, which Ross says is a source of complaint. More controversial, he says, is the right of member states to opt to include exemptions to the owner's exclusive right of reproduction online, particularly the private copying exemption.

Ross cites the recent Napster litigation in the US as a situation where the directive will give more certainty than UK law. Under the directive, the Napster service of directing users to files and then to copy them, would more likely be copyright infringement, as the copyright owner has exclusive rights to make such files available.

Proposed council regulation on community design rights

The European Commission has proposed a regulation to provide for a unitary EC system to protect industrial design. Two forms of protection are being devised – unregistered short-term design rights and a longer-term registered regime.

Registrations would be processed at the Office for Harmonisation in the internal market, situated in Alicante in Spain, and would be effective in all EU member states for

five-year periods up to a maximum of 25 years. The process would aim to be as straightforward and cost-efficient as possible. Design rights established under the proposal would coexist with national design rights.

Unregistered rights would afford protection for three years from the date of publication in the EU. Rights holders would not be able to oppose designs resulting from the independent creation by another designer.

Nick Briggs, senior associate at Wragge & Co, explains the changes will be introduced in two stages. A directive aims to harmonise member states' laws and a regulation is proposed to establish new EC-registered design rights and preliminary unregistered design rights. The proposals are controversial, he says, particularly in the automotive industry.

The question arises as to whether original equipment manu-facturers (OEMs) will be able to use new design rights to prevent spare part manufacturers from competing. According to Briggs, it causes an "insoluble" problem. The European Commission is studying further this aspect and is expected to report on it in 2004. Briggs sees the design right proposals as raising uncertainty as to how the EC and UK systems will coexist.

Debate on software and business method patents

The European Commission is consulting on whether software and business methods should be patentable, given uncertainty surrounding the area. A UK Patent Office consultation was carried out in tandem with the European Commission's review and a report issued by the commission. It established that there was no consensus among respondents on how far software should be patentable and the conclusions will be communicated to the commission.

Simon Stokes, head of commercial intellectual property at Tarlo Lyons, explains that software patentability is a separate question unto itself, but is set against a broader debate regarding reform of the patent and patent litigation systems. According to Stokes, harmonisation of the law is important because of confusion in the area. The European Patent Convention 1973 (as amended) states that software and business methods are not patentable. In practice, the European Patent Office has interpreted this to allow reg-istration of such patents, provided that the invention has "technical effect".

According to Stokes, industry in Europe has been slow off the mark to apply software patents whereas US companies have exploited software patent registration, given the broader registration scope in the US. Small to medium-sized enterprises (SMEs) have not got to grips with the possibilities and, in Stokes' opinion, are losing out. Equality of opportunity for all organisations reinforces the requirement for clarification of the law.

According to Stokes, the real thorn in the debate is the registration of business methods as patents. He adheres to the European practice, which is in complete conflict with the US system. Stokes believes that businesses are better off without such a restriction and views business method patents as "dangerous".

Opening up of electricity and gas markets

Amendments to the directives regulating the internal market in gas and electricity to completely open up the market to competition by 2005 are in the pipeline. Non-discriminatory access to electricity and distribution grids by consumers and competing producers will be ensured, together with security of supply. Provisions on quality of public service will also be strengthened by the new legislation.

Electricity: Robert Lane, head of energy, projects and construction at CMS Cameron McKenna, says that the proposed directive has arisen from the success of the current European legislation. The new directive requires tran-smission system operators (TSOs) to be separate to the rest of the utility company and to have "full control". Subsidiary TSO companies without transmission assets are unlikely to suffice, although Lane ex-plains that the meaning of this phrase is not yet clear. The proposals will be quite a change, and Lane predicts that they will be unpopular.

Other legislation changes include streamlining the process of third-party access and deletion of the single buyer model. The European Commission will have a greater overview of national public service obligations, which Lane views as

get-out clauses from the basic directive obligations. He says this is a more intrusive role for the European Commission, particularly with the creation of an advisory committee to the commission made up of representatives to national independent regulators, which must also be established. Lane believes that these proposals will lead to a pan-European rule on transit pricing.

Gas: Susan Farmer, a partner in Denton Wilde Sapte's energy and infrastructure group, welcomes the acceleration of the harmonisation and liberalisation of the gas market. She says that it is a positive move that access tariffs will be regulated rather than negotiated, and that they must be approved in advance by regulatory authorities, although this will not apply to liquefied natural gas (LNG), which will be treated differently. Farmer stresses that it is very important to look at the individual circumstances of each member state in assessing the market. Each country is unique, she says, for example Belgium is a transit state only, which does not have a huge consumer market. As a result of strong lobbying, the incumbent providers are to a certain extent protected.

Green paper on liability for defective products

Product liability is an area subject to regular review. The European Commission consulted industry and consumers to monitor whether the product liability directives (85/374/EEC and 99/34/EC) were achieving their objectives to protect consumers and facilitate trade in goods within the EU. It issued a report in January 2001 containing the responses to its green paper proposals.

Litigation partner at Simmons & Simmons Miles Alexander encouraged his manufacturing clients to respond to the European Commission's green paper because some of the proposals were "Draconian". They included shifting the burden of proof away from the claimant once the damage is shown to the producer for defectiveness and causal links. The abolition of the state-of-the-art defence and market share liability were other strict measures that the commission rejected, says Alexander.

These measures were not implemented this time around, being premature given the lack of research into the effectiveness and use of the directive.

However, Alexander believes that the commission's expert group, set up as a result of the green paper response, will reopen these issues. He says there will be a drive to remove the development risks' exemption and manufacturers will need to think how to prepare for its removal.

Access to justice is another area that the European Commission looked at in relation to product liability. Alexander maintains that "usually in a product liability case, there's a genuine difference of opinion", and as the cases are of a technical nature, he does not think they are susceptible to informal resolution procedures.

National remedies are being used in addition to, or in preference of, a product liability action, according to Alexander. The European Commission will look at how these existing laws work and will decide whether a greater harmonisation of product liability law within the EU is advisable. "I suspect that the commission will seek to limit the availability and effect of local alternative contractual and tortious remedies," he says.

Alexander also believes that representative actions, similar to US class actions, as discussed in the Lord Chancellor's consultation document, are another relevant development to watch.