Regulating Timetable and Disclosure

The Chapter considers Code regulation of the bid timetable as well as its regulation of the information provided to shareholders and stakeholders as part of the bid process. With regard to time regulation the Chapter details the Code’s bid timetable for contractual offers and schemes: from the commencement of the offer period, the competing bid timetables, to the payment of consideration. The Chapter explores and challenges the assumptions about investors and market practice on which this time regulation is premised. The Chapter then turns to disclosure. It explores and details the types of disclosure required in relation to the bid itself and of the bidder and target companies, and explores the techniques deployed by the Code to ensure the accuracy, and informativeness, of the disclosures. The Chapter argues that for mandatory takeover bid disclosures to be justified they must be additive, informative in practice and actually used. The Chapter raises questions about whether all Code disclosures comply with these criteria. Particular concerns are raised about predictive information relating to the commercial effects of the business combination as well as the effects on employment and business location. The Chapter submits that practical business considerations and concerns about ex-post reputational damage where reality departs from prediction (as well as concerns about ex-post enforcement action by the Panel, results in disclosures that are often uninformative, benefiting only those who are paid for producing them.

The Market for Corporate Control: Value, Stakeholders, and Governance

This Chapter introduces the market for corporate control and provides theoretical and empirical context about the functioning and effects of the market for corporate control. Ideally such context should inform the analysis and evaluation of the Takeover Code’s regulation of the UK market for corporate control. However, as the Chapter shows, neither our understanding of the likely effects of the market for corporate control on companies, boards, shareholders and stakeholders, nor the state of empirical evidence provide clear cut guidance on how to regulate the market for corporate control. The Chapter considers evidence on the value effects of takeovers and shows that evidence from the short term market response to announced takeovers supports claims that takeovers in aggregate generate value, but the longer term evidence is more mixed and inconclusive. It also considers the methodological limitations of both the short term and long term evidence. The Chapter then proceeds to consider the effect of the market for corporate control on stakeholders. It explores the commonly held view that takeovers are detrimental for employees but finds again that the empirical evidence is inconclusive, although the theoretical case that takeover activity may undermine employee investment in the business remains compelling. The Chapter then explores the role of the market for corporate control as a governance device. It is often assumed that the market for corporate control acts as a disciplinary device holding managers to account, but as the Chapter shows the disciplinary effects work differently and less precisely than regulators and the public debate commonly assume. The Chapter also shows that such indirect effects may also mould management and board behaviour in economically suboptimal ways, which the Chapter considers in the context of the debate about the possible short term orientation of UK boards.

Origins: The Creation of the Takeover Code

This Chapter explores the origins of the Takeover Code and Panel. It considers the historical drivers that led both to the Code’s predecessor - the Notes on the Amalgamation of British Business - in the late 1950s and to the Code and the Takeover Panel in the late 1960s, and the reasons why the self-regulation of the UK’s market for corporate control succeeded. The Chapter commences by providing regulatory context within which the actual takeover events which led to the Notes and the Code should be interpreted. The Chapter posits three key elements of this regulatory context: first, the prevalent British regulatory style in the mid-20th century which involved a conception of the state that contained a strong bias towards market solutions. A conception in relation to which terms such as laissez faire or deference do not do justice. The state deferred but was actively involved in facilitating market action through its channels of communication with market representatives, the threat and possibility of state action, and through the setting up of inquiries and Commissions. The second, connected, element was the self-understanding of the City of London, as almost a State within the State, like the Vatican with its capital market pope,the Governor of the Bank of England. A self-understanding that reinforced the British regulatory style and the City’s “right of self-regulation”. The third element is the evolution of corporate ownership from the middle of the 20th century involving the transformation from retail to institutional ownership. With this context, the Chapter analyses the key takeover events that created public, political, shareholder and corporate consternation in the mid- and late -1950s and the early and late 1960s. The Chapter interrogates the multifaceted reactions to these events and attempts to trace how these reactions are translated into regulatory action – the Notes, the Code and the Panel - and the substance of the Code rules. Through this analysis the Chapter shows how the merchant banking community took control of takeover regulation and argues that the formation and the substance of the Code, as well as its success, owes much to the realisation of the City’s merchant banking community that there was money to made in an active and open market for corporate control and hostile takeovers. In setting forth this account this Chapter challenges an important current view that the Code is the product of institutional shareholder co-ordination to protect their interests. The final part of the Chapter considers the success of the Code and Panel. It posits three key drivers of success: first, the fact that the merchant banking community is hard wired to both the substance and the practice of the Code; second that the Courts stayed clearly on the side-lines and took a highly deferential approach to judicial review of Panel decisions; and, third, that the substance of the Code itself demarcated the Panel’s regulatory success through two keystone rules: the non-frustration rule and the mandatory bid rule.

Announcement and the Offer Dance

This Chapter considers the Code’s regulation of the pre-offer period. It considers both the regulation of the provision of information to shareholders and to the market about the possibility that an offer may be made and the regulation of the courtship period prior to the offer where the bidder attempts to persuade the target board and the target shareholders to be receptive to the offer (the “pre-bid dance”). More precisely, it considers the disclosures that any shareholder must make when specified ownership thresholds are crossed and the circumstances in which the Code requires an announcement about the possibility of an offer. The Chapter critiques the Code’s strict approach to the suggested terms included in a possible offer announcement, questioning whether its restriction on amendment in the absence of reservations significantly reduces the unavoidable uncertainty surrounding a possible offer. The Chapter is also critical of the Panel’s approach to requests to amend terms when no reservations to suggested terms are included in the announcement. In this regard, it shows how the Hearings Committee’s reasoning supporting its very strict approach in the Kalahari Minerals case is unpersuasive. The Chapter then considers the regulation of the pre-bid dance including the put-up or shut up rule and the Panel’s post-Cadbury difficulties in regulating statements of future intention, which initially led to expansive and unthought-through regulation of intention statements and then to recent Code amendments providing for Post-Offer Undertakings and Post-Offer intention statements. This section concludes by arguing that although several of Code pre-bid rules and rulings are difficult to make sense of on their stated terms, they can be made sense of in terms of attempts to shift the structural pro-bidder power balance of the Code back towards the target board. They demonstrate that the Code does not, as it purports to do, take a neutral position between facilitating and impeding takeovers and that the structural power balance, generated most importantly by the non-frustration rule, distorts rule-making in other areas of the Code. Finally, the Chapter considers the firm offer announcement and its effects and the Codes share purchase disclosure regime during an offer.

The Mandatory Bid

This Chapter explores the nature, the origins and optimality of the mandatory bid rule. It first provides an account of “voluntary” nature of the mandatory bid rule as well as the evolution of the rule from on obligation imposed on selling target directors and major shareholders to an obligation placed upon shareholders following the crossing of ownership thresholds. The Chapter outlines the contemporary mandatory bid rules, including the trigger points, the Code’s policing of the trigger points, and the distinctive and more onerous terms of a mandatory bid. The final part of the Chapter considers the justifications for, and the effects and optimality of, the rule. It concludes that the traditional rationales given in support of the rule are weak and that the theoretical case that the rule is more likely to prevent efficient or inefficient transactions is inconclusive and there are is supportive empirical evidence on either side of the debate. It seems probable that the rule affects ownership structure by deterring the formation of control blocks but whether this is a net welfare gain or loss is unclear, particularly in the UK which benefits from strong minority protection rules. Given weak rationales and this uncertainty about the effects of the rule the Chapter argues that the rule should be retained in the Code and enforced by the Panel but it should be optional for companies. Whether it applies to any particular target company should depend on whether the company has opted out of the rule through its constitution.

Deal Structures

This Chapter considers the nature and characteristics of different deal structures: the different ways in which a control transaction can be effected. It commences with an analysis of asset deals, which - although we do not encounter in the context of the takeovers of publicly traded companies which are the subject of this book – assist in understanding the nature of other deal structures as well as understanding the ways in which deal risk can be managed and, to a limited but important extent, assist in understanding certain Code rules. The Chapter then considers direct share offers (otherwise known as contractual offers). It analyses their structure as well as the corporate, Listing Rule and third party approvals required to effect a share deal. It also considers the use of compulsory acquisition powers to acquire all the shares in the company following the contractual offer. The Chapter then considers the use of Schemes of Arrangements in control transactions. It details the different types of control schemes, namely transfer schemes and merger schemes, and considers their advantages and disadvantages as compared to contractual offers. It analyses the different stages of the scheme process and the role of the courts in each stage. The final part of the Chapter considers the operation of the UK’s cross border merger regime, introduced to implement the European Union’s Cross Border Mergers Directive.

Deal Risk: Bid Conditionality and Deal Protections

This Chapter considers the regulation of two mechanisms designed to manage bidder deal risk: bid conditionality and deal protections. The first part of the Chapter considers the function of deal conditionality and the justifications for interfering with the free contracting process between bidder and target shareholder. It argues that the case for interference is not strong in the takeover context, suggesting that the Code’s stringent regulation of conditionality may be performing an ancillary role unconnected to the direct interests of the parties: a role similar to the non-frustration rule as a keystone rule: it keeps courts out of the regulatory space. The Chapter then details the nature of Code conditionality regulation (both conditions to making the offer and conditions of the offer itself). The Chapter pays close attention to the regulation of competition authority conditions at UK and EU levels, and the regulation of financing conditions and material adverse change conditions. The Chapter then turns to the second element of deal risk addressed in this Chapter, namely, the risk and costs of non-completion. The Chapter outlines the range of costs associated with non-completion for the bidder and the various deal protection undertakings and inducement fee arrangements which can alleviate those risks. The Chapter then proceeds to detail the recent amendments to the Code introduced in the wake of Cadbury and Kraft that, in large part, prohibit the use of deal protection devices. The Chapter considers the Panel’s stated reasons for this reform and argues that although these reasons are somewhat persuasive they are not compelling enough to support the severe nature of the reforms, given that these drivers were not supported by any empirical evidence and clearly in some instances will hinder efficient deal making. The Chapter argues that these reforms provide an example of how the self/market controlled technique of regulation may result in poor rule-making. The Chapter argues that the Panel’s “status anxiety”, outlined in Chapter IV, may account for this over-reaction, as may the Panel’s immediate concern following Cadbury that the Code’s openness to takeovers, and the keystone non-frustration rule, had been placed in play. Finally, in regard to inducement fees and deal protections that the Code and the Panel may allow, the Chapter considers their legality in accordance with UK company law, considering in particular directors’ duties and the prohibition on the provision of financial assistance.

The Modern Takeover Code and Takeover Panel

This Chapter commences the book’s analysis of the Takeover Code and the Panel. The Chapter considers the structure and operation of the Panel and the structure and the scope of application of the Code. It commences with an analysis of the nature of the regulatory system, which before 2006 would have been described as self-regulation of the takeover market and today is more appositely described as market-controlled regulation. The Chapter considers the pros- and cons- of self/market regulation and argues that the standard advantages that are claimed for this form of regulation, as compared to state regulation, are not clearly established in the context of takeovers. Furthermore, the Chapter argues that here are several concerns about self-regulation that are raised by Takeover Panel regulation. In particular, recent events raise concerns about the regulatory outlook of the Panel and its reticence to consider the broader effects of its rules, and a concern that self-regulatory “status anxiety” may generate overreaction to certain events and distorted rule responses. Resulting in Code rules that are the product of a narrow understanding of their effects and status anxiety rather than a neutral policy assessment of the effects of the rules. The Chapter then details the legal foundations of the Takeover Panel’s power to regulate takeovers put in place to implement the Takeover Directive and considers the make-up and the roles of the different Panel bodies – the Code and Hearings Committees and the Panel Executive – and the role of the Takeover Appeal Board. Although the UK Government’s and the Panel’s objective in implementing the Directive was to maintain business as usual, the Chapter identifies operational changes that result from implementation. The Chapter then proceeds to consider the structure of the Code. It considers the Code’s General Principles and their relationship to Code rules and to a set of core underlying Code principles which the Chapter describes as the Code’s grund principles. The Chapter then considers the status of the Code rules as an autonomous “non-legal” set of rules and analyses the more complex relationship between the Code rules and company law generated by the Directive. The Chapter concludes with an analysis of the scope of application of the Code and the Directives conflict of laws’ rules for addressing EEA cross takeover regulation conflict.

Hostile Takeovers and the Non-Frustration Rule

This Chapter considers the keystone rule, the non-frustration rule and its operation and effect in the context of hostile takeovers. The Chapter first explores the scope of the rule to determine what steps target boards can and cannot take when faced with a hostile offer. It considers the general meeting approval of frustrating action and explains why in practice such approvals are never seen. The Chapter then proceeds to consider the optimality of the rule. It considers first the roots of both the Panel’s and more general public support for the rule, arguing that commitment to the rule is a function not of the policy balance between the advantages and disadvantages of the rule but rather a function of broader and deep structural understanding of the balance of power in a UK company. It is a commitment whose genesis is historically contingent which should, if possible, be discounted in the policy assessment of the advantages and disadvantages of allowing target boards to defend against unwanted takeovers. The Chapter then proceeds to consider this policy balance in a UK context which involves, inter alia, a consideration of: the extent to which defences can be used to entrench a board which is subject to pro-shareholder UK company law; the extent to which the market for corporate control acts a governance mechanism; and modern fund management behaviour influenced by relative performance metrics which supports a claim that defences can be justified in order to protect ultimate shareholders from their fund managers, a nuance on the standard justification that defences protect shareholders from themselves. The Chapter concludes that the policy case for prohibiting takeover defences is weak, and moves to consider the reform options in light of the post-Cadbury and Kraft debate on this issue. The Chapter considers and supports both reform of the non-frustration rule (by abolishing the rule) and a higher acceptance threshold (which effectively enables shareholders who are interested in long term fundamental value to make the decision). But the Chapter rejects disenfranchisement of short-term shareholders and enhanced public interest test. The Chapter concludes that it is now time for the Panel to engage with the broader consequences of the rule and reform options.

The Voluntary Offer

This Chapter commences the book’s analysis of the Code’s regulation of the terms of a voluntary offer. Most importantly, this Chapter explores the role of equality of treatment in structuring these rules. It considers first the Code requirement to make an offer for all classes of shares and convertibles: a comparable offer for different classes of share, and an appropriate offer for convertibles. This first part of the Chapter explores what is required by a comparable or appropriate offer as well as the Code’s understanding of when additional rights connected to shares render such shares a separate class of shares. This section also explores the justification for the requirement to make comparable offers and finds that equal treatment does not provide a persuasive rational for the rule rather the rule is supported by an idea of minority shareholder protection and the right to exit when faced with a new controller. The second part of the Chapter considers rules that provide for equality of treatment in relation to price, the form of consideration and in relation to other arrangements between the bidder and selected shareholders. As in relation to the requirement to make an offer for all classes of shares, this Chapter is concerned to interrogate intuitive “equal protection” accounts of why we have these rules. It shows that in relation to the highest price rule equality of treatment has some, but incomplete, traction. Particularly where a target company has an existing controller, equal treatment is unpersuasive as a rational for the highest price rule and we must look elsewhere to support the rule. The Chapter considers alternative rationales for the rule, in particular, market integrity and the early-years concerns of the Panel that the market was rigged in favour of institutions to the detriment of retail investors. Finally, given its centrality to these areas of regulation, the Chapter considers the definition of the term “acting in concert” and its effect on these rules.