Is it time to take out the takeover panel?

BUSINESS OPINION: The Irish Takeover Panel has found itself under scrutiny following its ruling last week that the investors blocking Mr Noel Smyth's plans for Dunloe Ewart are not acting in concert. This was the second time this year that the panel has adjudicated on a concert party allegation, writes John McManus

Earlier this year it examined allegations that shareholders in Gresham Hotels were acting in concert when they sought the restructuring of the board.

Here again the panel ruled there was no concert party in operation, much to the surprise of some observers. What both cases highlight is that there is considerable confusion over what legally constitutes a concert party and the powers available to the takeover panel to investigate allegations.

The net effect of being deemed a concert party is that the shareholdings of the individual shareholders who are deemed to make up the party are lumped together for the purposes of takeover rules. This can have a number of consequences depending on the transaction in question.

Under the Irish Takeover Panel rules, it must be shown that the members of the alleged concert party are acting in a coordinated fashion. What this comes down to is having hard evidence that there is some form of contact between the members of the alleged concert party to synchronise their actions.

Anybody making an allegation must have a smoking gun with which to substantiate their claim and in its absence the presumption of innocence in the Takeover Panel rules means that the panel will almost certainly find there is no concert party.

There is a built-in weakness in the way the Irish Takeover Panel is constituted. Because it is a statutory body and, in effect, an arm of the State, all of the Irish Takeover Panel's rulings can be appealed to the courts. It follows from this that if the panel wants its rulings to survive such challenges, it should abide by the standards of evidentiary proof required by the High Court.

To facilitate this, it has the powers of the courts to compel people to give evidence and produce documents. In theory, it should be able to carry out a process similar to legal discovery which, if done correctly, would have a good chance of unearthing a smoking gun, should one exist.

But as anyone who has been involved in a complex financial court action will tell you, a discovery action can take months and, in some cases, years. The average takeover battle rarely lasts more than a few months. As a result, the Irish Takeover Panel's powers are of only limited use given the short timeframe in which they must make their judgments. It would appear that they can do little more than make a ruling on the evidence provided to them by the complainants.

The net effect of this is that any group of individuals that sets out to act in concert would not have too hard a job as long as they do not make any stupid mistakes. Similarly it is difficult for the individual alleging that a concert party is in place to get a favourable ruling.

By contrast, the Takeover Panel in London - on which the Irish panel is based and borrows most of its rules - is not a statutory body. It is a self-regulatory organisation which relies greatly on the moral force of its rulings. It is a throwback to the days when the City was seen as a gentleman's club and failure to adhere to its rulings could see you being shunned by other members of the club. Arcane as it may be, the system still operates and goes a long way to explaining why the London panel regularly rules that parties are acting in concert.

Because the London panel's rulings are not likely to be appealed to the courts, it obviously has more leeway when it comes to arriving at judgments. For the London panel it is a case of something being a duck if it looks like one and walks like one. In Dublin, the duck must look like a duck, walk like one and have a couple of incriminating emails stuck under its wing.

It is ironic that the decision to establish the Irish panel on a statutory basis would appear to have made it harder for it to do its job. With self regulation in the legal and accountancy professions under the cosh as never before, it is hard to advocate a reversal of this approach.

The way the panel operates is a compromise between the need for laws to protect the interests of all the shareholders in takeovers and the requirements of the principals on both sides of the takeover for decisions in a shorter timeframe than can be obtained through the court system. The question is whether the right balance was being struck when the panel was established in 1997 and that was never going to be known until the panel was up and running and heard a few cases.

It appears that balance is not in the ordinary shareholder's favour. Someone who breaks the panel's rules still has all the protection afforded by the court's rule of evidence, but does not have to undergo the type of discovery process which is the counterbalance in the normal way.

Perhaps it would be better to abolish the Irish Takeover Panel and let the rules governing takeovers be enforced directly by the courts.