EC takeover directive meets opposition

The latest EC proposal for a framework directive on takeovers consists of a set of principles and requirements which member states will be expected to implement according to their national practices.

In the UK, takeover regulation is governed by the Panel on Takeovers and Mergers, a non-statutory body which issues and administers the City code, a framework for the regulation of takeovers.

The panel was set up in 1968. It believes that effective regulation of takeovers requires a quick and flexible response, backed by certainty for the companies and markets involved. But practitioners see this threatened by the proposed EC directive.

This is best illustrated by reference to the approach presently adopted by UK courts. The Datafin case (1987) established that courts would give the panel latitude in interpreting the takeover code and would be unlikely to intervene in takeover situations unless satisfied that the panel had acted unfairly.

Since that case, parties have appreciated that attempts to commence litigation, against one another or against the panel, are unlikely to succeed and scope for tactical litigation has effectively been removed.

But the fact that the panel's present status is likely to change if the directive is implemented by statute may make tactical litigation easier.

This will particularly be the case if the directive creates legal rights against the supervisory authority (in this case, the panel) and among private parties, while also requiring a provision for compensation. Although the directive (article 4.5) attempts to limit the scope for tactical litigation, there is concern that litigation will be encouraged and takeovers delayed or blocked by the courts. This is what has happened in countries which have statutory regimes, such as the US.

A number of practitioners are concerned that it will be easier to judicially review the panel once a directive has been interpreted by it. There is also a possibility that injunctive relief could be sought which would interfere with the bid process.

The Financial Law Panel, set up by the Bank of England three years ago to look at legal uncertainties, concluded in April 1996 that the directive will have little effect on the conduct of takeovers in the UK. Its report suggests concerns about legal uncertainties arising from the directive were probably overdone. While it acknowledges that the directive may increase the threat of frustrating litigation, it says UK courts are unlikely to allow the threat to materialise.

In contrast, the European Communities Committee of the House of Lords believes the proposed directive should not be adopted. In its report, issued on 18 July 1996, it said that any gains in harmonisation would be outweighed by the risk of damage to the existing arrangements in the UK. The takeover panel itself, and many corporate lawyers, are strongly opposed to the proposed directive.