The City Code, administered by the Takeover Panel, specifies the behaviour which companies are expected to adopt during a takeover or merger. The Code is issued by the Panel on Takeovers and Mergers (the Panel), and whilst it does not deal with the price to be offered in a merger or acquisition, both the Code and the Panel operate to see that shareholders receive fair and equal treatment during this process.
The fundamental objectives of the Takeover Panel are to ensure fair and equal treatment for all shareholders and their main areas of concern are as follows:
Shareholders who may be treated differently – for example, because they belong to a very large business or they hold a large number of shares
Insider dealing
Actions that is not in the best interests of the shareholders
Lack of adequate and timely information released to shareholders
Artificial manipulation of the share price
Slowing down of the bid process.
The Panel on Takeovers and Mergers (POTAM) is the City watchdog whose job is to oversee the conduct of takeovers involving companies listed on the London Stock Exchange. The Panel writes and enforces the City Code on Takeovers and Mergers which sets out in meticulous detail the management and timing of takeover bids. The objective of the City Code is to ensure that high standards of integrity and fairness are maintained, and that shareholders in both the bidding and target company are treated equitably. The Panel is not concerned with the financial or commercial advantages or disadvantages of a takeover, nor is it concerned with competition issues. The City Code does not have the force of law, but, as the Code says "those who seek to take advantage of the facilities of the securities markets in the United Kingdom should conduct themselves in matters relating to takeovers in
accordance with best business standards and, so, in accordance with the Code". It goes on to say that "those who do not so conduct themselves may find that, by way of sanction, the facilities of those markets are withheld".
Extent of Coverage of the Code
The Code applies to offers for all listed and unlisted public companies as well as, when appropriate, statutory and chartered companies considered by the Panel to be resident in the UK, the Channel Islands or the Isle of Man and it provides the main governing rules for companies engaged in merger activity. It also applies to an offer in respect of a private company of the same residency, where at some time during the 10-year period prior to the announcement of the offer:
(a) Its equity capital has been listed on the Stock Exchange;
(b) Dealings in its shares have been advertised in a newspaper on a regular basis for a continuous period of at least six months; or
(c) It has filed a prospectus for the issue of equity share capital at Companies House.
The Code is concerned with takeovers and mergers for all companies defined above and includes partial offers and offers by a parent company wishing to acquire shares in its subsidiary. Generally, the Code excludes offers for non-voting, non-equity capital.
You should note that, unlike legislation, the Code is not enforceable in law. However, those who fail to conduct themselves in accordance with its rules may, by way of sanction, have the facilities of the securities markets withdrawn from them.
The Code is made up of a number of general principles, which are essentially statements of good commercial conduct, together with a set of Rules supported by substantial notes. The Rules are not laid down in technical language, and they should therefore be interpreted by their underlying spirit and purpose rather than appertaining to some specific legal framework.
General Principles
The six general principles are listed below:
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 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.
From time to time conflicts of interest may arise for the financial advisors involved. This may apply where material confidential information is available to them or where the advisor is a part of a multi-service organisation. Where the first situation arises, conflict may be removed by the advisor declining to act; in the second circumstances, a careful segregation of the business will be necessary to prevent conflict occurring within the rules – the latter is sometimes referred to as "building a Chinese wall".
Rules of the Code
Numerous rules are contained in the Code that stretches to over 250 very detailed pages and they are supported by detailed notes. Whilst you do not have to memorise individual Rules, you should have an understanding of their nature and the way they impact on the parties to a takeover. We will consider the Rules of the Code under the following headings:
The approach, announcements and independent advice
Dealings and restrictions on the acquisition of shares and rights over shares
The mandatory offer and its terms
Conduct during an offer
Substantial acquisition of shares
(a) The Approach, Announcements and Independent Advice
The buying firm usually employs advisers to help make a takeover bid. (Indeed, identification of suitable takeover targets might be one of the first jobs of the various advisers.)
An offer should be proposed to the board in the first instance. The identity of the offeror or, in an approach with a view to an offer being made, the potential offeror must be disclosed at the outset. The board must be satisfied that the offeror has the
resources to implement the offer.
An announcement should be made as soon as sufficient details have been decided.
Any announcement of a firm intention to make an offer must contain:
(i) The terms of the offer;
(ii) The identity of the offeror and details of any existing shareholding;
(iii) The conditions to which the offer is subject;
(iv) Details of any arrangements which may be an inducement either to deal, or not to deal, in the shares.
Promptly after the start of the offer period, the board of the offeree company must send a copy of the announcement to its shareholders and to the Panel.
Any person stating that he does not intend to formulate an offer for a company will normally be bound by the terms of that statement. All statements should be as clear and unambiguous as possible.
Another rule requires that the board of the offeree company must obtain competent independent advice on any offer and the substance of that advice must be
communicated to the shareholders. This is especially important in cases such as management buy-outs which we shall look at later in the unit. The Panel consider that it is inappropriate for independent financial advice to be given by a person who is either in the same group as the financial advisor to the offeror or who has a substantial
interest in either the offeror or the offeree.
(b) Dealings and Restrictions on the Acquisition of Shares and Rights over Shares Whilst some rules deal specifically with the criminal offence of insider dealing (the EC Directive on Insider Dealing was implemented through the Criminal Justice Act 1993), another rule restricts dealing in the securities of the offeree company by any person other than the offeror, where such a person has access to confidential, price-sensitive information, from the time when there is reason to believe an offer is imminent to the time of its determination (or lapse). Additionally, dealing will not be permitted in the securities of the offeror company where the offer is price-sensitive in respect of the offeror's securities.
A rule restricts the sale of securities in the offeree company by the offeror during the period of the offer, unless the Panel has given its approval and at least 24 hours' public notice has been given. After such consent and notice, the offeror may make no further purchases.
A rule limits the opportunity for persons to contact private or small corporate
shareholders with a view to seeking irrevocable commitments to accept (or to refrain from accepting) an offer, or a contemplated offer, without the prior approval of the Panel.
Generally, unless a person (including those acting in concert with him) holds less than 30%, or rights over less than 30%, of the voting shares in a company, he may not acquire a holding that would carry voting rights of more than 30%. Where a person similarly holds between 30% and 50% of shares, or rights to shares, of the voting kind within a company, he may not acquire more than a further 1% (2% before 3rd March 1993) of the voting rights in any 12-month period. Exempt from those described in this paragraph are those who make an offer for the company.
When an offer is contemplated and the offeror (or person acting in concert) acquires shares in the offeree in the three months prior to the offer, subsequent general offers must not be on less favourable terms without the consent of the Panel. If, while the offer is open, the offeror purchases shares at a higher price than the offer price, then the offer price must be increased to be not less than the highest price paid for the shares so acquired.
Immediate announcements may be required should the terms of the offer have to be amended under various rules. Another rule requires immediate disclosure relating to the number of shares acquired and the price paid, if practical, as soon as an acquisition at a price higher than the offer price has been agreed.
Any dealings by the parties to a takeover or their associates must be disclosed daily by 12 noon on the business day following the transaction to the Stock Exchange, and it will then be made available to the Panel and to the press. Additionally, disclosure (excluding the financial press) will be required where purchases or sales of relevant securities in the offeree or the offeror companies are made by associates for the account of non-discretionary clients, themselves not being associated. Intermediaries may be required to disclose the name(s) of their client(s).
(c) The Mandatory Offer and its Terms
Various Rules lay down the requirements and mechanics of a formal offer, providing time limits in respect of acceptances, counter-offers, etc. The various options available to both the offeror and the offeree are also laid down and reflect the percentage of shareholders accepting or rejecting the offer. Whilst you do not have to remember detailed prescriptions, you should remember that they exist and must be adhered to by all parties concerned.
(d) Conduct During an Offer
The Rules lay down the requirements of a code relating to the conduct of the parties to an offer while it is progressing. They are summarised below:
(i) All shareholders must have an equality of information.
(ii) Advertisements must be cleared by the Panel before their publication.
(iii) Details of all documents and announcements must be lodged with the Panel.
(iv) Generally, no actions are to be taken that would mislead shareholders or the markets, including taking any action by the offeree that may frustrate the offer prior to a bid being under way.
(v) Transfers by the offeree must be promptly registered.
(vi) Special care must be exercised with all documents, and the terms of the bid must be covered carefully, including conflicting views, and so forth. Offer documents should always be available and on display.
(vii) Specific rules govern the way profit forecasts are stated and assets valued.
(viii) The offer document should normally be posted within 28 days of the
announcement of a firm intention to make an offer. An offer must be open for at
least 21 days after it is posted, and this period of time may be extended by further notice.
(e) Substantial Acquisition of Shares
The Rules regulate the speed at which a person, or persons acting in concert (a concert party), may increase shareholdings between 15% and 30% of the voting rights of the company. They also invoke the accelerated disclosure of acquisitions of shares or rights over shares relating to such holdings.
Companies Act 1985
Section 151 prevents financial assistance being given by a company for the purchase of its own shares. This is done in order to prevent the manipulation of share prices and ownership in several scenarios including takeover and merger discussions.
Under Sections 428-430 a company holding more than 90% of the shares in another company may compulsorily purchase the remainder on the same terms. The minority shareholders can also insist that their shares are purchased on these terms.
You should also note that the legislation dealing with insider dealing may also be invoked when considering a merger or takeover bid – it being illegal to act on unpublished information regarding such a bid (especially if with a view to financial gain).
Competition Commission
The Competition Commission (CC) is one of the independent public bodies which help ensure healthy competition between companies in the UK for the benefit of companies, customers and the economy.
The CC replaced the Monopolies and Mergers Commission in 1999, following the
Competition Act 1998. The Enterprise Act 2002 introduced a new regime for the assessment of mergers and markets in the UK and under this, the CC's role is now clearly focused on competition issues, replacing a wider public interest test under the previous regime. The Enterprise Act also gave the CC remedial powers to direct companies to take certain actions to improve competition, whereas under the previous regime, its role was simply to make recommendations to Government.
Role and Work
It deals with issues in three broad areas:
In mergers – when larger companies will gain more than 25% market share and might prove anti-competitive.
In markets – when it appears that competition might be distorted or restricted in a particular market
In regulatory affairs – when the major regulated industries in the UK may not be operating fairly.
Its investigations are thorough and open. If an investigation concludes that the situation significantly damages or restricts competition in the UK, then it will work to determine and implement appropriate remedies. For example, the CC can stop a merger from going ahead, require a firm to sell off part of its business, or require it to behave in a way that safeguards competition.
Its inquiries are always initiated following a concern referred to it by another authority, usually the Office of Fair Trading. It also investigates issues referred by the sector regulators for communications, gas and electricity, water, rail, airports, postal services, or by the Secretary of State for Business, Enterprise and Regulatory Reform.
Membership and staff
The decision making body for each inquiry is a group of at least three independent experts, drawn from a wider panel of around 50 appointed members. Members are supported by a specialist staff team on each inquiry. Inquiry groups are usually led by the CC's Chairman or one of the Deputy Chairmen.
Members are appointed to the CC for eight years, following open competition. They are selected and appointed by the Government for their experience, ability and diversity of skills in competition economics, law, finance and industry. All except the Chairman work part-time for the CC.
The CC's staff includes economists, business advisers, lawyers, administrators, accountants and support staff (information services, finance, human resources). Two-thirds are direct employees, with the remainder on temporary contract to help meet the CC's workload at any particular time, or on loan from government departments.
European Union
A regulation introduced in 1990 gives the European Commission the power to block or authorise mergers with a world-wide turnover of over 5 billion ecu (approximately £3.5 billion). Mergers with EU-wide turnover of 250 million ecu (approximately £175 million) need to be agreed by the Commission. Reasons used to block mergers include incompatibility with the European Common Market.
The European Union's 13th Company Law Directive dealing with takeover bids and
procedures will have statutory power in EU member states when it is adopted. This will be a major change from the current UK approach of self-regulation.
You may find it interesting to note here that Britain has several more large industrial units resulting from past mergers than the rest of Europe.