What Take-Overs will we be looking at?
We will look at:
(i) private companies - these are either share sales or asset sales; and
(ii) public companies - this is dealt with mainly by the City Code on Take-overs and Mergers, and Pt 28 of the CA 2006, which involves share sales.
The emphasis will be on general principles, concepts, institutions and structures, rather than a detailed study of the various rules and procedures.
What is a take-over?
Generally speaking, Co A (predator), in essence, offers to purchase all the shares in Co B (target) (it does not own).
NB a subsidiary cannot be member of its holding company: s 136 CA 2006.
How does a merger differ?
As to mergers: see Pts 26 and 27 of CA 2006.
Mergers differ in that they occur where two companies get together to form a larger company.
Who is the target?
the company which is the subject of a take-over bid by another company (the predator).
Who is the predator?
the company which is seeking to take-over another company (the target). Sometimes vendor and purchaser will be used where appropriate.
What is a hostile take-over?
where the target (acting via its directors) does not want to be taken-over by the predator, and rejects the predator’s bid; there may, of course, be more than one predator, and so there can be competing hostile bids. The directors are required to give an impartial view, to shareholders, on the proposed offer(s).
What is an agreed take-over?
where the target (acting via its directors) accepts the predator’s bid.
What is the take-over code on public companies?
The City Code on Takeovers and Mergers (‘the Takeover Code’), effectively, applies only to the take-over of public companies (but there are exceptions). The Takeover Code has recently been amended to implement the European Take-over Directive (see below). The latest edition of the Code is now the tenth edition, published 19th September, 2011. Hence, beware of books published before this, as they will be out of date, and will not take account of the changes from this edition, and the ninth edition (30th March, 2009) (, eg, the change in the ‘General Principles’ and the abolition of the ‘Rules Governing Substantial Acquisition of Shares’ (‘SARS’)), as well as rule changes. See further on the Code below.
The Takeover Code is supervised by the Takeover Panel, which is the ‘designated authority’ under Art 4.1 of the European Takeovers Directive (2004/25/EC): see s 942 CA 2006.
A copy of the Code can be found on the Takeover Panel’s website:
What is the European Takeover Directive and the City Code?
The European Takeovers Directive (2004/25/EC) was passed by the European Parliament and Council on 21st April, 2004: see OJ 2004 L142/12. It had to be implemented by Member States by 20th May, 2006.
The European Takeover Directives purposes, amongst other things, are to:
(i) ‘ … coordinate certain safeguards which, for the protection of the interests of members and others, Member States require of companies governed by the law of a Member State the securities [ie, shares] of which are admitted to trading on a regulated market in a Member State, with a view to making such safeguards equivalent throughout the Community’. (See Recital (1) of the European Takeover Directive).
(ii) ‘ … protect the interests of holders of the securities of companies governed by the law of a Member State when those companies are the subject of takeover bids or of changes of control and at least some of their securities are admitted to trading on a regulated market in a Member State.’ (See Recital (2) of the European Takeover Directive’.)
(iii) ‘ … create Community-wide clarity and transparency in respect of legal issues to be settled in the event of takeover bids and to prevent patterns of corporate restructuring within the Community from being distorted by arbitrary differences in governance and management cultures.’ (See Recital (3) of the European Takeover Directive’.)
In addition, Member States are required to nominate a supervisory body in relation to ‘those aspects of [takeover] bids’ which the European Takeover Directive governs, ‘and ensure that parties to takeover bids comply with the rules made’ under the European Takeover Directive’. (Recital (5) of the European Takeover Directive; see also Art 4 of the European Takeover Directive.) This is the Takeover Panel for the United Kingdom.
What are the UK Takeovers Directive Regulations?
The European Takeovers Directive has been implemented by Pt 28 of CA 2006. These provisions have been in force since April, 2007.
What are the benefits of take-overs?
- acquire a ‘niche company’
What are the detriments of take-overs?
- may not work out
- cost to defend
- use of management time
What are the methods of take-overs in private companies?
There are two methods:
(i) Share sale - here, one company (public or private) offers to purchase the shares in a private company.
(ii) Asset sale - here, the predator is simply wanting to purchase all, or some, of the assets of another company (the target company).
What are the main differences between share and asset sale?
Main Differences between share and asset sale:
(i) With a share sale, you are taking on the whole of a companies’ liabilities.
(ii) With an asset sale, can pick the assets and ‘liabilities’ you wish to purchase.
See on this: J Myers, The Acquisition of Business Assets (1993), p 5 (upon which the above is based).
The City Code on Take-overs and Mergers does not normally apply.
What are the next steps in a take-over?
This leads to: (i) ‘due diligence’; (ii) ‘warranties’; (iii) and ‘disclosure letters’.
What is due diligence?
involves an investigation of the target by the predator (and its professional advisers), prior to signing sale contract to look at ‘liabilities, as well as check that the shares or assets for sale exist and are owned by the seller.
What are warranties?
statements by the target about its assets and liabilities.
they serve two purposes:
(i) encourages disclosure of exceptions to general warranties; and
(ii) imposes liability if statements about assets and liabilities are wrong.
method of risk allocation.
What are disclosure letters?
set out the exceptions to the warranties.
See on all of the above: J Myers, The Acquisition of Business Assets (1993), pp 6, 58-61, 64-65.
How is the take-over of public companies dealt with?
This is predominantly dealt with by the City Code on Take-overs and Mergers (‘The Takeover Code’), which was recently amended to accord with the EC Take-overs Directive. See also Ch 28 of the CA 2006.
NB there are some relevant provisions of the CA 85, which remain in force: Part XV CA 85.
[NB here Part XIV CA 85 remains in force and relevant. CA 2006 also applies.]
What are ‘concert parties’?
When there is ‘an agreement’ about acquiring shares in a public company which imposes ‘obligations or restrictions’ as to the subsequent ‘use, retention or disposal’ of the shares, and a party in fact acquires an interest in shares, each party to the ‘agreement’ is treated as interested in the shares acquired by any other party. Parties must notify each other of such interests: ss 824 and 825 CA 2006.
What can an ‘interest’ be?
An ‘interest’ can include those of a ‘spouse’, ‘civil partner’, or ‘child’, or ‘step child’: s 822 CA 2006; or ‘corporate interests’: s 823 CA 2006.
What is the investigation of holdings concerned with?
A public company can demand, by ‘notice’, ‘information’ from A person it ‘knows, or has reasonable cause to believe’, is, or has been, interested in the shares going back three years: ss 793 and 794 CA 2006. Shareholders can require the company so to act (ss 803-806 CA 2006). A failure to provide such information means the public company can ask the courts to make an order avoiding a share transfer, prohibiting the exercising of voting rights, or prohibiting the issuing of shares or the payment of dividends: ss 794(1) and 797 CA 2006, and Part XIV CA 85 (esp s 454 CA 85).
The Secretary of State can grant an exemption: s 796 CA 2006.
Under s 795 CA 2006, failure to comply with a notice or giving deliberately false information is an offence, unless the request is ‘vexatious or frivolous’. This is punishable by either: (i) two years in jail and/or a fine (on indictment), or (ii) 6 months and/or a ‘fine’ not greater than ‘the statutory maximum’. See too s 455 CA 85.
Particulars of any compensation to directors for ‘loss of office’ must be approved by members: ss 215 and 219 CA 2006.
Who is the take-over panel?
The Takeover Panel came into existence in 1968 – well before the recent legislation giving it a statutory base. It was then a voluntary, but ‘independent’, organisation which City of London institutions signed up to. The emphasis has been on speed and informality. The Takeover Code was first issued, in a loose-leaf form, in April, 1985.
[See Takeover Panel’s website: www.thetakeoverpanel.org.uk - ‘The Code’, first page and Section A1]
What are the powers of the panel?
The Panel now supervises the Code: s 942 CA 2006.
The Panel also has power ‘to request documents or information’ (s 947 CA 2006). However, subject to exceptions, disclosures to the Panel are confidential, and it is a criminal offence, punishable by jail and/or a fine, to make such a disclosure (ss 948-949 CA 2006).
The Panel has ‘to co-operate with’ the FSA: see s 950 CA 2006, which may include the sharing of information, not subject to a prohibition.
Breach of Rules’ and ‘Compensation’ – the Panel has power to impose sanctions (s 952 CA 2006) and grant ‘compensation’ in its discretion (s 954 CA 2006). See too s 953 CA 2006 ‘failure to comply with rules about bid documentation’.
‘Cold shouldering’ (‘authorised persons’ not to deal with a person who has failed to abide by the Code and/or is likely to fail to do so) – the Myerson case: www.thetakeoverappealboard.org.uk/downloads/2010-01.pdf
‘Hearings and Appeals’ - a ruling of the Panel can be reviewed by the ‘Hearings Committee of the Panel’. That committee’s decision can be appealed to the Takeover Appeal Board (‘an independent tribunal’). (s 951 CA 2006).
Panel’s decisions, in the past, subject to judicial review
R v City Panel on Take-overs, ex p Datafin plc  QB 815; R v City Panel on Take-overs, ex p Guinness  1 QB 863. See too Bank of Scotland v Investment Management Regulating Organisation Ltd 1989 SC 112; 1989 SLT 432.
Is there a liability in damages for a breach of the take-over panel?
no ‘right of action for breach of statutory duty’ re the ‘rules’ or ‘disclosure’: see 956 CA 2006.
What does the ‘code’ govern?
Governs take-overs in the United Kingdom: see Pt 28 of the CA 2006.
Originally voluntary, but now has legal force, pursuant to Pt 28 of the CA 2006.
How is the code administered?
The Code is administered by the Takeover Panel (s 942 CA 2006), which has a ‘rule’ making powers (ss 943-944 CA 2006). The Panel can give ‘directions’ (s 946 CA 2006), and give ‘binding’ rulings regarding the rules’ ‘interpretation, application or effect’ (s 945 CA 2006).
What does the Code apply to?
The Code applies, amongst other things, to:
(i) all public companies - not just fully listed or quoted ones; and
(ii) private companies if public offer of shares made within 10 years.
(See Takeover Panel’s website: www.thetakeoverpanel.org.uk - ‘The Code’, Sections A2 and A 3)
The terms “offeree” and “offeror” are used in the Code to mean “target” and “bidder”, respectively.
The terms “securities” is used to mean “shares”.
What are the code’s general 6 principles?
Fleshed out by detailed ‘Rules’. There used to be 9 ‘General Principles’. This was changed in the 8th edn of the Code, on 20th May, 2006 (previous edition). The Code is now in its 10th edn Sept, 2011. Need to observe the principles’ ‘spirit’ as well as wording: see A2, para (b).
THESE PRINCIPLES SEEM TO BE SOMETHING WHICH COULD POTENTIALLY BE EXAMINED
GP 1 Every ‘holder of securities [ie, shares] 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.’
GP 2 ‘The holder of securities [ie, shares] in 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.’
GP 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.’
GP 4 ‘False markets must not be created in the securities of the offeree company, of the offeror company or 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.’.
GP 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.’.
GP 6 – ‘An offeree company must not hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities’ [ie, shares].
[See Takeover Panel’s website: www.thetakeoverpanel.org.uk - ‘The Code’, Section B1 – ‘General Principles’]
What is ‘squeeze out’ in relation to the Position of the Minority - Compulsory Acquisitions?
Essentially, where an offeror acquires 90% of shares (not held by him at the ‘date of the offer’), s/he/it can, within 6 months of ‘the date of the offer’, or 3 months ‘after the last day on which the offer can be accepted’, serve a notice on the minority shareholders (who have not accepted the offer) stating s/he/it desires to acquire their shares: ss 979 and 980 CA 2006.
Offeror is then ‘entitled and bound to acquire the shares … on the’ offer’s terms: s 981 CA 2006.
What is ‘sell out’ in relation to the position of the Minority - Compulsory Acquisitions?
If Offeror acquires 90% of shares of company prior to the cessation of the offer period, the holder may require him to acquire his shares on the terms of the offer: ss 983-986 CA 2006.
The court may make an order as to terms: s 986 CA 2006.
What are the Duties of Directors in a take-over?
Do the Directors owe any duties to current shareholders or to Company as ‘economic entity’: see GP 3 of the Takeover Code (formerly GP 9), and see, eg, Dawson International plc v Coats Paton plc 1988 SLT 854.
Directors still subject to duties under the CA 2006.
[THERE IS A PODCAST ON TAKE-OVERS AND THE TAKE-OVER CODE]
What are schemes of arrangement?
These are being used more now in relation to the takeovers of companies, particularly those with debts. A recent example was the Lloyds Bank Plc take-over of HBOS.
A scheme of arrangement can be described as follows:
‘A Scheme is a statutory procedure which permits a company to make an arrangement or compromise with its members or creditors (or any class of them) which, if approved by the requisite majority of such members or creditors and sanctioned by the court, will be binding on all of them, whether or not they vote in favour of it … One key feature of a Scheme is that it is not a formal insolvency process, a fact which makes their use more appealing to directors and sponsors wishing to avoid any perceived insolvency-related stigma.’
A scheme of arrangement is a procedure allowing an agreement to be reached with shareholders or creditors, which, if approved, binds them all, even if they did not vote for it. It should be noted that such a scheme is, technically, not an insolvency procedure, with the result that it is more attractive to company directors, as it avoids the stain of insolvency.
Jo Windsor, Banking Update, ‘An overview of creditor schemes of arrangement ‘, 26 January, 2010, Linklaters, Solicitors,
A Scheme has to be approved by ‘a majority in number representing 75% in value of creditors or class of creditors or members (as the case may be) present and voting either in person or by proxy … ‘: see s 899(1) CA 2006.