Navigating UK Regulations: Assessing the Adequacy of the Takeover Code and Companies Act for Fair and Efficient Acquisitions
An acquisition, in practical terms, means a company buying another company for consideration within the contours of the law, typically into a new company (often done through a special purpose vehicle company). Acquisitions can be both friendly and hostile, depending on the intentions of the target company to be acquired. Companies undertake acquisitions for various strategic reasons such as diversification, speculation (selling a presently undervalued company later), or poor management (to extract efficiency).
The UK regulatory regime for public acquisitions is governed by the Companies Act 2006 and The Takeover Code. Schedule 1C of the Companies Act lays down the foundational/general principles of the UK regulatory regime for acquisitions. These principles include:
- All shareholders of the target company should be afforded the same treatment (in the same classes) – equal treatment.
- Proper information should be provided timely to the shareholders.
- The board of the target company must inform the consequences of the takeover regarding employment – transparency.
- The offeror must ensure that it is capable of fulfilling the consideration.
- False markets shouldn’t be created.
- Shareholders must be allowed to adjudicate on the merits of the takeover without pressure – shareholder sovereignty.
The Takeover Code, under Section 2(a), states that the reason behind its creation is to ensure that shareholders in the target company are treated fairly and have sovereignty in deciding whether a takeover bid is beneficial or detrimental to their interests. The code maintains a neutral ground as to facilitating or impeding takeover bids, which is highly appreciated since the decision to carry out such a transaction is a financial/commercial one that the Code isn’t capable of answering, as it is an issue to be discussed by the shareholders and board of the target company.
The code comprises six general principles which are broader, yet similar to the general principles in Schedule 1C of the Companies Act. The general principles are also accompanied by several rules (with notes). Both the rules and principles are written in non-technical language and in very broad terms to allow flexibility in ensuring the underlying rationale of the rule/principle can be successfully implemented.
The Takeover Code and takeovers (including schemes of arrangement) in general are regulated by the Takeover Panel, whose role is to administer the Takeover Code (Section 1 of the Code). The Takeover Panel derives the aforementioned authority from Section 942 of the Companies Act, which grants it wide powers to do anything necessary in connection with its functions. The panel is also granted rule-making power under Section 943 of the Act, in relation to M&A transactions and ancillary to it. The most important power of the panel lies in Section 945 of the Act, which allows it to give interpretations on rules which have a binding effect. Since the panel oversees takeovers and has the authority to create rules/interpretations, it allows the panel to make the takeover code a living organism which adapts constantly to the needs of the corporate world; and corrects any wrongdoing promptly.
The structure of the panel includes the panel itself (up to thirty-five members well versed in M&A Transactions), the code committee (which creates rules/consultation papers/response statements), the executive (overseeing takeover transactions, providing non-binding informal guidance on the code), the hearings committee (which hears breaches of the code brought up by the executive and publishes rulings), and the takeover appeal board (independent of the panel). This structure is in line with the committee-making authority mentioned in Section 942 of the Act. This, in my opinion, is the way to go, since work is delegated and efficiently managed, ensuring the timely disposal of matters and avoiding backlogs which are expensive to the parties.
The panel, under the virtue of Section 952 of the Act, can impose sanctions as it deems fit for breaches of the code. Section 11(b) of the Code mentions some of the sanctions the panel may impose, namely private/public censure, seizure of special status, and most severe being cold-shouldering, i.e., boycotting. The Act also specifies certain sanctions the panel may impose, namely Compensation to shareholders (S. 954), Criminal Sanction (S.953), and Section 955 (Enforcement by court). It is noted that the takeover code and Companies Act form a system, i.e., to regulate, to adapt, to enforce, to punish. To the extent that the courts don’t interfere while the bid is in process or rarely apply their own diligence against panels’ holdings. This system ensures stability and coherence in M&A Transactions, ensuring the efficiency and effectiveness of the system. The only downside I find in the system is the panel’s decision not to impose fines, which could serve as a powerful deterrent for companies breaching the code/act if introduced.
The key features of the Code can be realized through the six general principles encompassed in the code:
1. All holders of the securities of a class should be given similar treatment, and if a person acquires control of a company, the other security holders must be protected. This principle is embodied in Rule 9 of the code, wherein any person who has thirty or more percent voting rights in a company is required to make an offer to all the shareholders to exit at the highest price the person has paid for the same class of securities in the past twelve months. This allows equality between the shareholders who sold their shares prior to the person owning thirty or more percent and those who didn’t, allowing them to earn as much premium as the past shareholders did.
2. The holders of the securities must be given the time and information required to reach an informed decision. The board must also advise on the consequences of the bid relating to employment, its conditions, and the location of the business. The code has set an extensive offer timetable, which allows shareholders to reach an informed decision. However, the said timetable isn’t very long (sixty days) to prevent siege-like circumstances. This is very commendable since it equally weighs the benefits of allowing shareholders to reach an informed decision while protecting the business from siege-like situations. The code also ensures information such as the bidder’s intention and financing is extracted from the bidder and provided to the shareholders. Information such as profit forecasts post-takeover and the bidder’s valuation of the target’s assets must be done with the highest care, with confirmation from professionals, to ensure shareholders reach a well-informed decision.
3. The board of directors must act in the interests of the company and must not deny shareholders the right to decide on the merits of the bid. Rule 21 of the code prevents the board from taking any action that frustrates a bid (issuing shares, options, buyback) which is in the best interest of its shareholders without approval from the shareholders. This ensures shareholder protection from a unilateral decision taken by the board.
4. False markets must not be created in either of the companies or any other concerned company. Rule 2 of the code ensures secrecy before the announcement and safeguards in case the news is leaked. Rule 8 ensures the target informs the bidder relating to any dealings in the target. This is one of the core principles which ensures that the market is stable and the prices of shares are safe from unnecessary disturbances.
5. The bidder must ensure that it can fulfill the cash consideration or is able to secure any other type of consideration. Financial advisors are required to announce that the bidder has all the required resources to fulfill the transaction. This again ensures the prevention of false markets.
6. The target must not be hindered for a time longer than required. A 60-day rule is implemented.
Conclusion: The UK’s regulatory framework for acquisitions, comprising the Companies Act 2006 and The Takeover Code, presents a robust mechanism for ensuring fairness and efficiency in corporate takeovers. The Takeover Panel’s authoritative role and the detailed provisions of The Takeover Code reflect a commitment to protecting shareholder interests and maintaining market integrity. However, to remain effective in an evolving corporate landscape, periodic reviews and updates to the regulatory framework, including stronger enforcement mechanisms and broader stakeholder considerations, are essential. This will ensure that the UK continues to set a high standard for corporate governance and acquisition practices globally.
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