The European Union is stepping up its efforts to push through a draft directive aimed at harmonising European takeover regulations. But City opposition is focused on the directive's inherent threat to self-regulation by the Takeover Panel, placing its regime on a statutory footing.
City lawyers' main argument is: “If it ain't broke, don't fix it”.
The problem is summed up by Tim Emmerson, the Freshfields partner advising the Takeover Panel, who says: “The directive is modelled on our current takeover code. But it tries to turn it into law.”
Its lack of flexibility is another concern. Herbert Smith partner Anthony Macaulay says: “My main concern about the draft directive is its lack of flexibility. The latest amendments have greatly reduced the ability of the regulatory body to be flexible in its decision… There is a real danger that shareholders' interests will be prejudiced. The controversy over the current Financial Services and Markets Bill shows that this degree of flexibility would not be acceptable in a statutory system.”
The boom in large-scale mergers and acquisitions, including hostile takeovers, has prompted the EU's current drive to build a harmonised system within its jurisdiction.
“In political terms there has to be a directive,” says Gouldens partner Max Thorneycroft.
Emmerson adds: “Europe is waking up to the fact that they'd better get something on the table.”
The sheer scale of hostile takeovers now sweeping the Continent has sparked the EU's urgency, and the current draft of the directive has borrowed a lot from the UK's experience. As Thorneycroft points out: “Our system has been tried and tested over 20 years.”
He adds: “Many of our concerns have been removed. But in strict legal theory there will still be problems.”
But it is the possible involvement of the courts that is disturbing Herbert Smith's Macaulay, who contends that the courts are too slow and cumbersome in the fast-moving world of takeovers.
“I can certainly see hostile takeovers being held up in the courts as companies seek to use the law to challenge the action of other parties and the regulatory body,” he says.
“The timetable of four to six weeks makes no provision for an extension if a new bid should arise in the meantime. And if there was a serious challenge, it would be a matter for the courts to decide.”
Emmerson's personal view of the directive is that it is in nobody's interest to make it possible to litigate in the courts: “For me what counts is flexibility over certainty. But if it were possible to keep the panel's exclusive jurisdiction within the framework of the directive the advantages of flexibility would not be lost.”
There is also a theoretical debate as to whether the panel could have exclusive jurisdiction, because EU-derived law can always theoretically be appealed to the European Court of Justice.
Emmerson says the court is more used to applying the technical letter of the law, while the panel is more capable of making rapid and flexible decisions. As a consequence, he says: “I don't think you will find anyone in the City who thinks the directive is a good thing.”
He contrasts the English legal system with that of other European jurisdictions, saying: “its [European law's] complexity is premised on a myth of certainty”.
He suggests there is a fundamental difference in approach between common and civil law systems: “It is a big dichotomy. Where the two systems interact there can be tensions – on cross-border takeovers – because of a different set of underlying assumptions.”
“The problem is,” says Macaulay, “Brussels does not really understand how the takeover rules apply in the UK. The jurisdiction that applies to the incorporation and corporate governance of a company is the right one to control a takeover of that company.”