Call for subsidiarity in take-over rules

Date: 25/07/1996

By Tim Jones

ALISTAIR Defriez is a poacher turned gamekeeper.

As a merchant banker at SBC Warburg in the City of London, he honed his skills in the black arts of corporate finance.

He knows how to buy off shareholders in a firm targeted for take-over by his client and, more importantly, he is prepared to use any legal means necessary to defend a client firm against a hostile bid.

Most recently, he sat on the defence team of Rocco Forte as he (unsuccessfully, as it turned out) fought off Granada's 5-billion-ecu bid for the hotel chain.

Now that he has been on the other side for two years as director-general of the UK Takeover Panel - the body which enforces the City's merger rules - Defriez feels he can speak with special authority when he opposes the European Commission's draft take-overs directive.

“There is a risk that people will think this is just the Brits again, getting upset about Europe. In fact, this is a sensible and principled stand,” said Defriez during a visit to the Commission to make his views known.

The draft directive, which was adopted by the Commission in December, is intended to establish common rules for corporate take-overs, enshrining the principle of equal treatment for all shareholders regardless of size and influence.

In some countries, firms can win control of target companies through negotiated deals with big stakeholders, while small shareholders can discover that control of their company has changed hands afterwards.

“In the main, I applaud measures which will help to safeguard the interests of all parties - particularly the shareholders - in take-over bids,” said the director-general. “Our problem with the directive is that if we have to transpose it into law - which is the advice our lawyers have given us - it will for the first time bring the conduct of take-over regulation in the UK within a legal framework while, at the moment, we operate on a non-statutory basis.”

Created in 1968, the Takeover Panel administers the City of London's code on mergers, aiming to ensure equal treatment for all shareholders during bids. For example, when a person or group builds a 30&percent; stake in a company, it must make a cash offer to all other shareholders - and favourable deals for selected shareholders are banned.

Last year, 156 announced take-overs fell within the panel's jurisdiction. It took part in detailed consultations on a further 241, as well as thousands of different decisions on the code.

Many of these rules are embodied in the directive. The difference is that the so-called 'City Code' is voluntary and not backed by the law.

“The principles within the framework directive are based, in large measure, on the principles in the code,” said Defriez.

“What is really at issue here is whether implementation of the directive will have the unfortunate side-effect of putting a legal umbrella over the panel and the code which may, in turn, lead parties to litigate to try to second-guess the panel.

“Once you are in the courts, everything slows down, everything gets expensive and life becomes much more difficult for the bidder. It only needs one judge in one court to say there is an arguable case for the authority of the panel to be seriously undermined.”

As a banker defending a target company, Defriez has little doubt that he would have used litigation if there had been a chance of calling a panel decision into question.

“All the time, take-over bids throw up new situations or a combination of circumstances which we believe no body of law could ever fully properly cover. There will always be a need for interpretation,” he said.

“We apply the rules flexibly to achieve the right outcome, which is not necessarily to follow the letter of the rules. We apply their spirit as well. The authority of the panel is well respected and we have a very high degree of compliance. Almost nobody seeks to ignore our rulings. The risks that we see under a legal framework are that our authority might be undermined by people litigating against each other or going off to the courts and seeking to resolve their disputes that way.”

He believes the directive should become a recommendation. That way each member state would be free to adopt the system of take-over regulation which it found appropriate.

“We should follow the subsidiarity principle and recognise that people have different business, legal and financial traditions,” he said.

“We prefer to apply the principle that if it does not do any good, can it do any harm? Unfortunately, we say 'yes it can'.”