Definition of takeover offer (section 428(3A))

1218.     In order to be a takeover offer for the purposes of Part 13A, an offer to acquire shares has to be on terms which are the same in relation to all the shares to which the offer relates. One problem with the existing legislation is how to treat any variations in value between shares of the same class that are attributable to the fact that some of the shares, because they were allotted later, do not yet carry a dividend. New section 428(3A) rectifies this problem by providing that, even if the offeror offers to pay more for shares that carry a dividend than for those in the same class which do not, the offer will be treated as being made on the same terms in relation to those shares.

Definition of a takeover offer and communication of that offer (section 428(4A), (4B), (4C))

1219.     To deal with issues arising from an increasingly globalised market in shares and different legislative regimes outside the EEA, it is made clear that an offer is not prevented from being a takeover offer for the purposes of Part 13A merely because there are some offerees who will be unable to accept it (for instance, where the offeree cannot accept the offer because of restrictions on the cross-border transfer of cash or securities in the country in which the offeree resides). It is also provided that an offer will be a takeover offer for the purposes of the squeeze-out and sell-out provisions if a shareholder has no registered address in the UK and the offer is not communicated to him to avoid contravening the law of another country as long as either the offer itself is published in the Gazette or a notice is published in the Gazette stating that a copy of the offer document can be obtained from a place in the EEA or on a website.

Shares that the offeror has "contracted to acquire" (sections 428(5) and 429)

1220.     A number of clarificatory amendments are to be made to these provisions. In the phrase "contracted to acquire" in section 428(5), which deals with the offeror's position at the start of the bid, for the purposes of determining which shares cannot be counted towards the achievement of the 90% threshold (at which point shares may be compulsorily purchased), it is presently unclear as to whether section 428(5) covers conditional as well as unconditional contracts. It is, therefore, clarified that, in ascertaining the offeror's position at the start of the bid, the shares he has conditionally contracted to acquire (other than those subject to irrevocable undertakings (see below), as at present) should be treated as being shares already held by the offeror. This means that only shares that the offeror has either acquired or unconditionally contracted to acquire will count towards the 90% total needed to exercise squeeze-out. Consequential changes are also made to the provisions on joint offers and associates of the offeror to bring these into line with the above (sections 430D and 430E).

1221.     As the 1985 Act stands, the registered holder of shares may give an irrevocable undertaking to accept a takeover bid, and if he does this for no consideration or only in exchange for a promise to make the bid, his shares are still treated for the purposes of squeeze-out as included within the offer. This is extended to include undertakings given for only negligible consideration and undertakings the effect of which is to require the registered holder to accept the offer (where the undertaking is given by a person who is not the registered holder of the shares but can contract to bind the registered holder, such as the manager of shares held by a bare nominee). ("Irrevocable undertakings" are contractual agreements entered into by a bidder usually with major shareholder(s) of a proposed target company. Such agreements aim to give the bidder certainty - he will know that support for the offer can be guaranteed from shareholders party to the contract - so that his bid has a greater prospect of success. Such undertakings would normally prevent the giver of the undertaking from selling their shares or exercising voting rights to prevent the takeover from becoming successful.)

Date of the offer (section 429(6A))

1222.      The "date of the offer" is defined to mean either the date of publication, or if the offer is not published or notice of the offer is sent out earlier, the date on which the offeror first sends notice of the offer to the offerees.

Right of offeror to buy out minority shareholders: treatment of options etc (section 429(2B))

1223.     Where an offeror makes an offer for all the target company's allotted shares and all or any shares subsequently allotted, it is provided that (a) in deciding whether the offeror has reached the 90% threshold for the purposes of section 429(1), the offeror need only bring into the calculation shares which are actually in issue (i.e. allotted) at the relevant time; (b) if the offeror serves notices under section 429(1) and more shares are subsequently allotted which take the percentage of acceptances then received below 90%, that will not invalidate squeeze-out notices already served; and (c) if the offeror wishes to serve further squeeze-out notices under section 429(1), he must have at least 90% acceptances of shares (or shares in a class) then in issue and subject to the offer at the time he sends the notices out.

Consideration not exclusively in cash (section 430(3A) and (4))

1224.     It is clarified that where an offer of shares, or a mixture of shares and cash, is made, and it is no longer possible when the offeror exercises his right of squeeze-out to give the consideration in shares, the offeror should pay the cash equivalent irrespective of whether the shareholders had previously been offered a choice (i.e. whether the offer was "mix and match" or not). Parallel changes are made as regards sell-out (section 430B(3A) and (4)).

Shares that the offeror has "contracted to acquire" (section 430A(1B)(b) and (2))

1225.     These provisions are clarified so that, in addition to shares acquired by the offeror, shares subject to both conditional and unconditional contracts of acquisition are included in calculating whether the sell-out threshold has been reached. As a result of this change, there might be circumstances where the 90% threshold required for sell-out to be exercised was reached only because of shares which the offeror had conditionally contracted to acquire. However, if the conditions of such contracts were not fulfilled, the offeror could in fact find that he was being required to buy a minority shareholder's shares even though the offeror had not actually acquired 90% of the shares. So section 430A(3A) and (3B) provide that, if that is the case at the time when the minority shareholder exercises his right of sell-out, the offeror does not have to purchase the shares unless he has acquired or unconditionally contracted to acquire 90% or more of the shares by the time the period referred to in section 430A(2C) (the period within which shareholders can exercise sell-out rights) ends. (A corresponding change is made in section 429 by new subsections (3B) and (3C) to prevent minority shareholders in this situation who have to wait to see if they can exercise sell-out from being squeezed out in the meantime.)

Applications to the Court (section 430C)

1226.     This section provides that a shareholder receiving a squeeze-out notice may make an application to the court (within six weeks of receiving the notice) seeking to overturn an offeror's intention to purchase his shares compulsorily (or the terms of that purchase). A requirement that the offeror be promptly notified of such an application is now included. As a consequence of this requirement, it is also required that the offeror is obliged, at the earliest opportunity, to notify shareholders who are being squeezed out or who are exercising their rights of sell-out, and are not party to a section 430C application, that proceedings have been initiated.

PART 23: COMPANY INVESTIGATIONS

BACKGROUND

Powers to appoint inspectors

1227.     The 1985 Act gives the Secretary of State the power to appoint competent inspectors to carry out inspections, and report the result to him, in a number of circumstances. There are three categories of inspections at present:

• investigations into the affairs of companies;

• investigations into the membership or control of companies; and

• investigations of dealings in share options by company directors and their families and failure to disclose interests in shares.

1228.     Investigations by inspectors into the affairs of companies and certain other bodies corporate can be initiated under sections 431 and 432. Such inspections can be launched on the application of a company or a proportion of its members, or on the Secretary of State's own initiative, and must be carried out where the court orders it.

1229.     Investigations by inspectors into the membership or control of companies are initiated under section 442. The Secretary of State can launch such an inspection on his own initiative under section 442(1), and is obliged to do so where the requisite number of members of a company apply.

1230.     Inspections in the third category, under section 446, relate to suspected contraventions of certain provisions of Part 10 of the 1985 Act. The Bill repeals the relevant provisions of Part 10 (see clause 769) and section 446 is repealed in consequence.

1231.     Two inspectors are generally appointed to carry out an inspection - usually a QC and a partner in one of the leading accountancy firms.

1232.     Inspectors are appointed to investigate and to report the results of their investigations to the Secretary of State. At the end of an inspection, the inspectors generally have a duty to make a final report to the Secretary of State. The inspectors may also make interim reports during the course of the inspection, and the Secretary of State can direct them to do so.

1233.     Unless the appointment was made on terms that any report is not for publication (section 432(2A)) interim and final reports are publishable; the Secretary of State has discretion to publish an interim or final report under section 437(3). The availability of a published report is a crucial aspect of the inspection system.

Changes proposed by the Bill

1234.     The Bill confers new powers on the Secretary of State to bring to an end an investigation when it is no longer in the public interest to continue with it, to revoke the appointment of an inspector and to issue directions about the scope of an investigation, its duration and certain other matters.

1235.     The main purpose of these clauses is to give the Secretary of State power to take appropriate action where an investigation appears to be taking too long. The clauses also provide for situations not currently explicitly provided for, such as the resignation or death of inspectors, and the ability to appoint replacement inspectors.

1236.     The details of these changes and the circumstances in which the changes will apply are set out below.

Clause 651: Powers of Secretary of State to give directions to inspectors

1237.     Subsection (1) inserts new sections 446A and 446B into the 1985 Act, which provide new powers for the Secretary of State to give directions to inspectors with which they are obliged to comply (new section 446A(1)).

1238.     The power in new section 446A(2) is exercisable by the Secretary of State in relation to inspectors appointed under sections 431, 432(2) and 442(1). Directions under new section 446A(2) can either relate to the investigation itself or the inspectors' reports of the results of their investigations. Regarding the former, such directions can take two forms:

• a direction as to the subject matter of an investigation (whether by reference to a specified area of a company's operation, a specified transaction, a period of time or otherwise); or

• a direction which requires an inspector to take or not to take a specified step in his investigation.

1239.     As regards inspectors' reports the Secretary of State will have a power to secure that any report (new section 446A(3)):

• includes the inspector's views on a specified matter;

• does not include any reference to a specified matter;

• is made in a specified form or manner; or

• is made by a specified date.

1240.     New section 446A(4) enables directions by the Secretary of State to be capable of being given on an inspector's appointment. It also provides that directions may vary or revoke a direction previously given and may be given at the request of an inspector.

1241.     New section 446A(5) confirms that the scope of the term "investigation" will include any investigation undertaken under section 433(1) into the affairs of the company's holding company or subsidiary (or a subsidiary of its holding company or a holding company of its subsidiary).

1242.     New section 446B(1) will give the Secretary of State power to direct an inspector to take no further steps in an investigation, and the inspector shall comply with any direction given to him under this section (new section 446B(5)). However, if the appointment of inspectors is one that the Secretary of State is obliged to make (either because a court orders that a company's affairs ought to be so investigated or because the requisite number of its members has applied for an investigation into its ownership), such a direction can only be given if matters have come to light in the course of the investigation which suggest that a criminal offence has been committed and those matters have been referred to the appropriate prosecuting authority (new section 446B(2)).

1243.     Under new section 446B(3), any direction given to the inspector under section 437(1) to produce an interim report, and any direction under new section 446A(3) in relation such a report, shall cease to have effect.

1244.     If the Secretary of State directs an inspector to take no further steps in an investigation then the inspector shall not make a final report to him unless:

• the requisite number of a company's members has applied for an investigation into its ownership, matters have come to light in the course of the investigation which suggest that a criminal offence has been committed, those matters have been referred to the appropriate prosecuting authority and the Secretary of State directs the inspectors to make a final report; or

• the inspector was appointed following a court order that a company's affairs ought to be investigated (new section 446B(4)).

1245.     New section 446B(6) confirms that the scope of the term "investigation" will include any investigation undertaken under section 433(1) into the affairs of the company's holding company or subsidiary (or a subsidiary of its holding company or a holding company of its subsidiary).

1246.     Subsections (2) to (5) concern consequential changes to other sections within the 1985 Act.

Clause 652: Resignation, removal and replacement of inspectors

1247.     This clause inserts new sections 446C and 446D which provides for the resignation or revocation of an inspector's appointment and the provision to replace an inspector.

1248.     New section 446C(1) and (2) provides not only that an inspector may resign but also that the Secretary of State has the power to revoke his appointment.

1249.     New section 446D(1) provides that, if an inspector resigns, dies or has his appointment revoked, the Secretary of State has the power to appoint a replacement inspector to continue the investigation. Any appointment which takes place under new subsection (1) will be treated as though it were made under the provision under which the former inspector were appointed (new section 446D(2)).

1250.     The Secretary of State is obliged to ensure that at least one inspector continues the investigation (new section 446D(3)) unless such a step would be pointless because he could direct the termination of the investigation in circumstances which would result in a final report not being made (new section 446D(4)).

1251.     New section 446D(5) confirms that the scope of the term "investigation" will include any investigation undertaken under section 433(1) into the affairs of the company's holding company or subsidiary (or a subsidiary of its holding company or a holding company of its subsidiary).

Clause 653: Power to obtain information from former inspectors etc

1252.     Subsection (1) inserts new section 446E into the 1985 Act.

1253.     New section 446E(1) provides that, where an inspector resigns or has his appointment revoked or is given a direction under section 446B (termination of an investigation) (new section 446E(2)), the Secretary of State can direct him to hand over documents that he has obtained or generated during the course of his investigation, either to the Secretary of State or to another inspector appointed under this Part (new section 446E(3)).

1254.      A requirement under new subsection (3) includes the power to ensure that the production of a copy of the document is made in hard copy or in a form from which a hard copy can be obtained (new section 446E(4)). A document includes information recorded in any form (new section 446E(7)(b)). New section 446E(5) enables the Secretary of State to direct any person to whom this section applies to inform him of any matters that came to that person's attention as a result of the investigation. New section 446E(6) confirms that a person shall comply with any direction given to him under this section.

1255.     New section 446E(7)(a) confirms that the scope of the term "investigation" will include any investigation undertaken under section 433(1) into the affairs of the company's holding company or subsidiary (or a subsidiary of its holding company or a holding company of its subsidiary).

1256.     Subsections (2) and (3) concern consequential changes to other sections within the 1985 Act.

Clause 654: Disqualification orders: consequential amendments

1257.     Subsections (a) and (b) extend the Company Directors Disqualification Act 1986 so that decisions on whether to take action to disqualify directors can be taken on the basis of information that was obtained or generated by an inspector (or came to his knowledge) as a result of his investigation, notwithstanding whether such information is or will be included in any formal report. In some cases this may speed up the ability to seek to disqualify directors.

PART 24: UK COMPANIES NOT FORMED UNDER THE COMPANIES ACTS

1258.     The CLR considered the position of unregistered companies in Chapter 9 of Completing the Structure and presented their recommendations in paragraphs 11.34 to 11.37 of the Final Report. The provisions in this part have been developed with these recommendations in mind.

CHAPTER 1: COMPANIES NOT FORMED UNDER THE COMPANIES ACTS BUT AUTHORISED TO REGISTER

Clause 655: Companies authorised to register under the Companies Acts

1259.     This clause replaces section 680 of the 1985 Act. Companies incorporated within the UK, but not formed under the Companies Acts (or certain earlier companies legislation), may apply to register under the Bill. The types of company that can take advantage of this provision are listed in subsection (1). They include companies formed before 2 November 1862; companies formed by private Act of Parliament and companies incorporated by royal charter.

1260.     The company may apply to register as a company limited by shares, a company limited by guarantee or as an unlimited company. Subsections (4) and (5) impose restrictions on this choice. So, a company with limited liability may not register as an unlimited company, and only a company with share capital may register as a company limited by shares.

1261.     A company may wish to apply to register under the Bill in order to take advantage of legislation applying to companies registered under the Companies Acts. Subsection (6) makes clear that a company may register even if it is in order to take advantage of certain provisions of the Insolvency Act 1986 not available to unregistered companies. For example, under section 221(4) of the Insolvency Act 1986, unregistered companies may not be wound up under that Act voluntarily (except in accordance with the EC regulation on insolvency proceedings).

Clause 656: Definition of "joint stock company"

1262.     This clause explains what is meant by "joint stock company". The definition is the same as that currently contained in section 683 of the 1985 Act. Clause 655 allows some joint stock companies to register under the Companies Acts as a company limited by shares.

Clause 657: Power to make provision by regulations

1263.     This clause confers a new power on the Secretary of State to make regulations in connection with the registration of a company following an application under clause 655 (application by UK company not formed under the Companies Acts to register under the Companies Acts). Regulations made under this clause will replace the provisions made by sections 681 to 682, 684 to 690 and Schedule 21 of the 1985 Act. The regulations will cover the procedural requirements for registration, the conditions to be satisfied before registration and the documents to be supplied on an application for registration. The regulations will also set out the consequences of registration, including the status of the company following registration and the application of the Companies Acts to such companies following registration. The regulations are subject to the negative resolution procedure.

Clause 658: Application of provisions to existing companies

1264.     Provision equivalent to clause 655 (enabling certain companies not formed under the Companies Acts to register under the Companies Acts) is currently made by section 680 of the 1985 Act and before that was made under earlier Companies Acts (such as Part 8 of the Companies Act 1948). This clause applies the provisions of the Companies Acts to companies registered but not formed under any of the former Companies Acts in the same way as they apply to companies registered under clause 655 (by virtue of regulations made under clause 657).

CHAPTER 2: UNREGISTERED COMPANIES

Clause 659: Unregistered companies

1265.     This clause replaces section 718 of the 1985 Act. The clause confers a power on the Secretary of State to apply provisions of the Companies Acts to certain unregistered companies. These are companies incorporated in the UK, and having their principal place of business in the UK, but not formed or registered under the Companies Acts or any other public general Act of Parliament. Examples include companies formed by letters patent or by private Act of Parliament. Subsection (1) exempts certain other companies from regulations under this clause, including those exempted by direction of the Secretary of State.

1266.     Regulations under this clause will replace the provision made by Schedule 22 to the 1985 Act. The regulations may apply specified provisions of the Companies Acts to specified descriptions of unregistered company, and may make limitations, adaptations and modifications to the application of the Companies Acts to unregistered companies. The regulations are subject to the negative resolution procedure.

PART 25: OVERSEA COMPANIES

Introductory

1267.     This Part applies to companies incorporated outside the UK ("oversea companies"). It enables various registration, reporting and disclosure requirements to be imposed on oversea companies.

1268.     This Part, together with the regulations to be made under it, will replace the provisions made by Part 23 and Schedules 21A-D of the 1985 Act. Regulations made under this Part will continue to implement the requirements of the Eleventh Company Law Directive (89/666/EEC), which imposes disclosure requirements on oversea companies that set up branches in the UK.

1269.     As originally enacted, Part 23 of the 1985 Act applied to companies incorporated outside Great Britain that established a place of business in Great Britain. Subsequently, the Eleventh Company Law Directive imposed a different set of disclosure requirements on those oversea companies with branches in the UK. The branch disclosure requirements also differ depending on whether or not the oversea company is incorporated within another EEA State. The result is that there are at present effectively two parallel regimes that apply to oversea companies.

1270.      The CLR set out their initial analysis of the rules for regulating companies formed abroad in Chapter 5.6 of the Strategic Framework and then put forward their provisional detailed conclusions in their consultation document of October 1999 entitled "Reforming the law concerning oversea companies." The CLR presented their conclusions in paragraphs 11.21 to 11.33 of the Final Report.

Clause 660: Oversea companies

1271.     This clause explains that for the purposes of the Companies Acts an "oversea company" means a company incorporated outside the UK. This is wider than the definition of oversea company in section 744 of the 1985 Act which it replaces. Section 744 of the 1985 Act refers to companies incorporated outside Great Britain that establish a place of business in Great Britain. Under the Bill the regulations will be able to specify the connection with the UK that gives rise to the various disclosure obligations imposed under this Part.