Saturday 7 April 2007

The majority of EU countries are flouting a European Directive designed to stop them blocking takeovers by companies from other member states, according to the Adam Smith Institute (ASI).

The economic think-tank says that eight of the 25 EU members have failed to adopt the Directive at all, while the majority of the rest have conveniently neglected key parts of it. This means that they can block UK takeovers of their own companies, while the UK has to accept takeovers by theirs.

The Institute’s Regulatory Monitor reports that EU countries, including Italy, Poland and Spain, have completely failed to adopt the European Takeover Directive. Indeed, Spain has clashed repeatedly with Brussels over its moves to prevent the acquisition of Spanish firms by companies from other EU member states. Last year, Spain imposed no less than 19 blocking conditions on the bid by German energy company E.On for the Spanish utility group Endesa.

Meanwhile, many of the seventeen countries who have signed up for the Directive have failed to adopt the key Article 11, which is designed to prevent so-called ‘poison pill’ defences by a target company, and which prevents minority shareholders from having too much control and blocking takeovers.

“The Takeover Directive was supposed to be a key part of the EU’s Financial Services Action Plan,” says ASI Senior Fellow Keith Boyfield. “It aimed to increase competition and deliver economies of scale by preventing the petty economic nationalism of EU countries.”

“But the practical reality is that many countries have opted out of crucial parts of the Directive, others have not adopted it at all. There is simply no consistency – no level playing field at all.”

“This puts countries who do obey the rules, like the UK, at a considerable disadvantage. Frankly, we might well be better off without any EU Takeover Directive at all.”

Regulatory threat to London

The failure of Brussels to create a level playing field on company takeovers has increased UK scepticism against the EU’s ambitious Financial Services Action Plan. While the plan aims to extend the European Single Market to insurance and banking, critics say it is too complicated, with at least 42 separate regulatory initiatives.

Regulations being introduced under the Plan include the Markets in Financial Instruments Directive, the Insurance Mediation Directive, and the Second Money Laundering Directive. While the compliance costs of such measures run into the billions, some argue that the net benefits negligible, and perhaps even negative.

Boyfield calculates that complying with the Plan could cost the UK’s important financial market as much as £23.5bn by 2010, and is concerned that this regulatory burden may drive business to other, lower-cost financial centres, in the Far East for example or in tax havens such as Bermuda – and even Paris – as some firms have already threatened.

Even the EU’s own internal market commissioner, Charlie McCreevy, has expressed doubts about the regulations, particularly the Markets in Financial Instruments Directive, which he says could turn into a “nightmare”, with each member state interpreting the law in different ways.

Speaking in London recently, Mr McCreevy said: “I fear that there is a real risk that the dream of a single new rule book replacing 27 existing rule books could be turned into a real practical nightmare. This will certainly happen if we end up supplementing the single rule book with the handiwork of a dozen or more gold-platers, with manuals of interpretative guidelines, with a multiplicity of different types of numbers of reporting fields – demanded by 27 different regulators.”

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