Memorandum submitted by The Takeover Panel
EXAMINATION OF THE PRINCIPLES UNDERLYING
MERGERS, TAKEOVERS AND ACQUISITIONS
FROM THE PANEL ON TAKEOVERS AND MERGERS (the
"Panel")
INTRODUCTION
The Panel Executive understands that the Business,
Innovation and Skills Committee is to hold an oral evidence session
on 12 January 2010 on the principles underlying mergers, takeovers
and acquisitions and Government policy in that area.
The Panel Executive is therefore providing this
submission in order to summarise: the constitution of the Panel;
the nature, purpose and scope of application of the City Code
on Takeovers and Mergers (the "Code"); the approach
of the Panel to the regulation of takeovers; and the General Principles
and Rules set out in the Code.
THE PANEL'S
CONSTITUTION
The Panel is an independent body, established
in 1968, whose main functions are to issue and administer the
Code and to supervise and regulate takeovers and other matters
to which the Code applies in accordance with the General Principles
and Rules set out in the Code.
On implementation in the UK of the European
Directive on Takeover Bids (the "Directive") on 20 May
2006, the Panel was designated as the supervisory authority to
carry out certain regulatory functions in relation to takeovers
pursuant to the Directive. The Companies Act 2006, which implemented
the Directive, sets out the Panel's statutory duties and powers.
The Panel comprises up to 35 members, including
a Chairman (who is normally a senior QC) and up to three Deputy
Chairmen, all of whom are appointed by the Panel on the recommendation
of its Nomination Committee.
Panel members include senior individuals appointed
by the following bodies:
The Association for Financial Markets in Europe
(formerly the London Investment Banking Association);
The Association of British Insurers;
The Association of Investment Companies;
The Association of Private Client Investment Managers
and Stockbrokers;
The British Bankers' Association;
The Confederation of British Industry;
The Institute of Chartered Accountants in England
and Wales;
Investment Management Association; and
The National Association of Pension Funds.
Other members are appointed by the Panel and
are drawn from senior practitioners in the market, major UK companies
and the Trades Union movement.
Each Panel member is designated as a member
of either the Hearings Committee (which deals primarily with questions
of interpretation of the Code) or the Code Committee (which makes
the Rules).
The day-to-day work of the regulation of takeovers
is carried out by the Panel Executive, which operates independently
of the Panel and comprises a mix of permanent staff and secondees
from investment banks, law firms and accountancy firms.
The Panel is self-funded and receives no Government
funding.
THE NATURE,
PURPOSE AND
APPLICATION OF
THE CODE
The Code is designed principally to ensure that
shareholders are treated fairly and are not denied the opportunity
to decide on the merits of a takeover and that shareholders of
the same class are afforded equivalent treatment by an offeror.
The Code also provides an orderly framework within which takeovers
are conducted. In addition, it is designed to promote, in conjunction
with other regulatory regimes, the integrity of the financial
markets.
The financial and commercial merits of takeovers
are not the responsibility of the Panel: these are matters for
the companies concerned and their shareholders. Wider questions
of public interest are the concern of government authorities in
the UK and, in some circumstances, the European Union, through,
for example, the Office of Fair Trading, the Competition Commission
or the European Commission.
Thus, save for requiring certain levels of disclosure,
the remit of the Code and the Panel does not extend to:
— questions of public policy;
— the business and operational plans a
bidder may have for a target company following a successful bid;
or
— the commercial merits of a takeover.
The scope of the application of the Code is
determined by the nationality and status of the offeree company.
Broadly speaking, it applies to offers for UK, Channel Islands
or Isle of Man registered public companies that are either traded
on a regulated market in any of those jurisdictions or, if not
so traded, that are considered by the Panel to have their place
of central management and control in the UK, the Channel Islands
or the Isle of Man. The Code does not generally apply to an offer
for a non-UK company, even if made by a UK company (so, for example,
the Code did not apply to the Royal Bank of Scotland's offer for
ABN Amro). The Code also applies to offers for private companies
in certain circumstances.
THE PANEL'S
APPROACH TO
REGULATION OF
TAKEOVERS
The essential characteristics of the Panel's
approach to takeover regulation are flexibility, certainty and
speed. The Panel follows a principles-based approach to regulation
which enables it to set high standards and to prevent circumvention
of its requirements. The Panel Executive gives advice to parties
to takeover bids and their advisers and makes rulings on matters
of interpretation of the Code. The Panel deals quickly and pragmatically
with matters which arise during takeovers and has flexibility
to adapt its Rules to changing market conditions. This helps to
ensure that bids are not delayed by tactical litigation, which
could have the effect of frustrating the ability of shareholders
to decide the outcome of an offer and extending the period of
uncertainty for the company's management, employees, customers
and suppliers.
Decisions of the Panel are binding but may be
appealed to the Takeover Appeal Board, which is independent of
the Panel.
THE GENERAL
PRINCIPLES AND
RULES OF
THE CODE
The Code comprises six General Principles and
38 Rules, based on those Principles. The General Principles are
expressed in broad general terms and the Code does not define
the precise extent of, or limitations on, their application. They
are applied in accordance with their spirit in order to achieve
their underlying purpose.
The General Principles, which derive from the
Directive, are as follows:
1. All holders of the securities of an offeree
company of the same class must be afforded equivalent treatment;
moreover, if a person acquires control of a company, the other
holders of securities must be protected.
2. The holders of the securities of an offeree
company must have sufficient time and information to enable them
to reach a properly informed decision on the bid; where it advises
the holders of securities, the board of the offeree company must
give its views on the effects of implementation of the bid on
employment, conditions of employment and the locations of the
company's places of business.
3. The board of an offeree company must act in
the interests of the company as a whole and must not deny the
holders of securities the opportunity to decide on the merits
of the bid.
4. False markets must not be created in the securities
of the offeree company, of the offeror company or of any other
company concerned by the bid in such a way that the rise or fall
of the prices of the securities becomes artificial and the normal
functioning of the markets is distorted.
5. An offeror must announce a bid only
after ensuring that he/she can fulfil in full any cash consideration,
if such consideration is offered, and after taking all reasonable
measures to secure the implementation of any other type of consideration.
6. An offeree company must not be hindered in
the conduct of its affairs for longer than is reasonable by a
bid for its securities.
The detailed Rules are extensive and not capable
of an accurate summary in this short submission. However, by way
of illustration, they cover matters such as:
— when a takeover approach has been made
or is being considered for a company and there is rumour in the
market or untoward movement in the target company's share price,
an announcement of a "possible offer" is required so
as to avoid the creation of false markets;
— when a possible or proposed offer announcement
has been made, the company concerned enters an "offer period"
and is then subject to certain restrictions. For example the target
company cannot carry out transactions which would constitute "frustrating
action" and be prejudicial to the potential offeror without
the approval of its shareholders. In addition, dealings in its
securities (and of the offeror, if it is offering securities)
become subject to a heightened disclosure regime so as to facilitate
transparency of ownership and voting control during an offer period;
— when a possible offer is announced, the
target company may ask for a "put up or shut up" deadline
to be imposed on the bidder, by which time the potential offeror
must either announce a firm offer or state that it is not making
an offer, in which case, it may not make a new offer for a period
of six months;
— when a firm intention to make an offer
is announced (as opposed to a possible offer) an offeror may not
withdraw its offer or reduce its price save in very limited circumstances
(such as a reference to the Competition Commission or European
Commission);
— if an offeror buys shares for cash during
an offer period, a cash offer must be made to all shareholders
at the highest price paid in a specified period; offerors may
not treat shareholders unequally by, say, offering shares to some
and cash to others;
— the mandatory bid rule: any person who
acquires interests in shares in a company carrying 30% or more
of the voting rights of that company (or who increases an interest
that is already between 30% and 50%) must make a cash offer to
all other shareholders at the highest price paid for those interests
in the previous 12 months;
— the requirement to make a bid if interests
in shares of 30% or more are acquired cannot be circumvented by
parties who act in concert to obtain or consolidate control of
a company splitting the 30% limit between themselves; if a member
of a concert party buys shares so that the concert party in aggregate
goes through the 30% threshold, a bid must be made;
— during the course of an offer, documents
published and announcements made must be prepared with the highest
standards of care and accuracy. In particular, parties to an offer
must not make statements which might mislead the markets; for
example, if a party says publicly that it will not make an offer
for a company, it is not permitted to change its mind within six
months; similarly if a party says that it will not increase an
offer, it is not permitted to change its mind and make a higher
bid, except with the Panel's consent;
— in order to ensure that a target company
is not exposed to an undue period of siege and that shareholders
have sufficient time to consider an offer and the arguments for
and against accepting it, once a firm offer is made, various timetable
constraints apply and the offer must either be declared unconditional
or lapse by no later than 60 days following the publication of
the formal offer document;
— the contents both of offer documents
(including information about the offeror's intentions regarding
the future business of the offeree company and its employees)
and of documents giving the offeree board's opinion (including
its views on the effect of the offer on all the company's interests)
and advice from its independent advisers. Representatives of employees
must be informed of the bid and their views must be appended to
the offeree board's opinion if received in good time before its
circulation; and
— an offer may only be declared unconditional
if the offeror receives acceptances of over 50% of the voting
rights in the target company so that shareholders are in no doubt
that the offeror would, on successful completion of its offer,
have statutory control of the company.
5 January 2010
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