Turkish Law Blog

The Role of the Takeover Panel and Code in Facilitating or Impeding Takeovers

Alptekin Köksal Alptekin Köksal/ University of Exeter
29 April, 2019

I. Introduction

The City Code on Takeovers and Mergers[1] regulates takeovers in the UK along with company law. Company law has mechanisms which are quite important in regulating takeovers. For instance, these mechanisms include schemes of arrangement regulations and the law of directors’ duties.[2] However, company law’s influence is narrow because of the existence of the Takeover Code and Panel in the UK. UK company law and capital market regulations do not have a role in regulating what a bidder can and cannot do in a takeover process, or regulating timings during a bid, for example.[3] These important roles are given to the Takeover Code itself. The Takeover Code is an independent and autonomous body, and the Takeover Panel maintains and enforces it.[4]

The Takeover Code and Panel have three features which help distinguish their independent structure. First of all, the Code has its own regulatory principles and rules.[5] Secondly, the financial community in the City of London controls the Panel, and this community’s members constitute the largest part of the Panel.[6] Bearing in mind the scope of this paper, the idea of the City of London will not be discussed. However, it can be mentioned that the idea of the City of London refers to the desire of the participants of the City of London for a traditional self-regulation system.[7] Thirdly, the Panel was on its own in terms of enforcing the Code for a long period of time.[8] There was no legal support given to the Panel to use its powers and any means of regulatory sanctions. These features clearly state that the Takeover Code and Panel are self-regulatory, non-state bodies.

On 20th May 2004, the EU Takeover Directive[9] came into force. Within two years, the European Union Member States had to implement its rules. As a consequence, the UK government had to create a state supervisory authority, but they did not create a new separate body and gave the duty of regulating takeovers to the Panel. [10] After 2006, the Takeover Panel was regarded as a state body, and was recognized to be a supervisory authority.[11]  This led the Takeover Panel to sanction breaches of the Code with the power of the state, to which the Panel now had more clear access.[12] It is notable that the Panel is a state body only in name, and it continues as a self-regulatory (market controlled) body.[13]

It is noteworthy that the Takeover Code and Panel was a great sui generis success in takeover regulation. They are very quick to respond to any kind of requests from market actors, and it has been said that “the Panel is fast, clear and certain”.[14] However, since the creation of the Code and the Panel, several events have given rise to concerns about these autonomous regulatory bodies. Without having any exterior interference, it is expected that the Panel will behave more actively and not interpret situations on a case-by-case basis.[15] Instead, it should have a broader regulatory outlook.[16] In light of this suggestion, the purpose of this paper is to discuss whether the Panel should stay neutral in the facilitating or impeding of takeovers. Moreover, after discussing the stance of the Panel in facilitating takeovers, an answer will be given as to what should be its role in balancing the powers of the bidder and the target.

II. Facilitating or Impeding Takeovers

In the UK, the takeover regulation process was introduced due to several hostile takeover attempts. In the 1950s, hostile deals seemed to be very attractive for bidders due to the lack of any control mechanisms. After a short period of time, it was recognized that hostile takeovers are economically detrimental and politically undesirable.[17] The main governmental concern was to prevent hostile activity in the market for these reasons, not to protect target undertakings and their shareholders.[18] Actually, the Government and the Bank of England tried to stop hostile activities completely. In the very same decade, the first regulatory body, the Notes,[19] was created and agreed upon by participants in the City of London, including institutional shareholders and merchant banks.[20] The main rules were designed to prevent certain hostile activities, such as the non-frustration rule and the mandatory bid rule. After that, the Notes evolved several times, and finally, after the implementation of the Directive (EU), the modern Takeover Code and Panel took their final form.

The Panel explains itself as a “review of certain aspects of the regulation of takeover bids”, and it is an independent body endowed with the responsibility to protect and regulate takeovers while implementing the Code.[21] Additionally, it stresses that assessing the financial and commercial merits in a takeover attempt is not its duty at all, and this responsibility belongs to companies and shareholders.[22] Moreover, the Government, the European Commission, the Competition Commission and other state bodies (if relevant) are responsible for wider questions of public interest and any kind of antitrust policy.[23] From this expression, the end result is that the Panel is neutral in the facilitating or impeding of takeovers, and this is not the purpose of the Code either.

As mentioned in the previous chapter, the Code and the Panel were created as self-regulatory bodies. The Panel’s objective is to regulate the takeover process and protect the marketplace from the detrimental moves of market actors in the first instance.[24] In other words, it will prevent and control any kind of misconduct.[25] The idea behind it is to ensure the UK’s economic development and increase the level of welfare.[26] The Panel limits itself only to preventing misconduct and does not investigate further in events.[27] It avoids moving any further, as to take any such action would complicate things when trying to solve controversial issues. This can be seen in the Kraft-Cadbury takeover, and the AstraZeneca-Pfizer takeover attempt.

These two takeover attempts showed that the UK market is prone to overseas takeovers. In other words, companies in the UK are more exposed to foreign takeovers than non-UK companies.[28] Limiting the devices of a target board for defense, namely the non-frustration rule (which is one of the keystone rules of the Code), evokes bidders for hostile takeovers as a natural consequence. In other words, the Code itself is trying to ensure the protection of target shareholders, and thus bidders could benefit from this situation too. In the framework of the Code, the Kraft-Cadbury takeover was detrimental for the UK in some respects. Unfortunately, concerns that were raised after the takeover was made public were even worse than the real detriments. According to Kershaw, a state regulatory body should have investigated the consequences of the takeover and gathered information about the economic and social outcomes of the takeover.[29] On the other hand, the Panel resisted taking action and distanced itself from state governance.[30] Therefore, the Panel repeated that it was neutral, and it is not its responsibility to discuss broader issues or competition policy.[31]

According to Kershaw, avoiding the extensive effects of its own rules does not seem to be the correct decision.[32] A state-regulatory body (especially after the implementation of the Directive) must interfere in broader issues and even amend the Code if it is necessary.[33] The only explanation for the Panel’s conduct might be that the Panel wanted to preserve its keystones rules (the non-frustration rule in the first instance, and then the mandatory bid rule) in order to stay truly neutral. The unwillingness of the Panel to change the Code clashed with the pressure put on the Panel.[34] This pressure was very strong because the Panel is a state-body and has responsibilities in the eyes of the public and other bodies.[35] The Panel desperately tried to take a neutral position while implementing the Code in these takeover events. The Panel tries to implement the Code to create a balance because the Code seems to be a protector of shareholders in its form of regulation, which will be discussed in the next chapter.

III. Balance of Powers

Although the Panel has a process-based regulation, the Code limits broad interpretation on its own rules and has a principle-based form of regulation.[36] This means that the rules of the Code must be interpreted in conformity with its spirit.[37] In its introduction, Section 2(a) of the Code indicates that the Code tries to protect shareholders of a target company, to ensure that they are treated equally, and to ensure that they can decide on the merits of a takeover.[38] These objectives are the fundamentals of the principles of the Code. The Code explains itself as clearly as possible. In the introduction of the Code, Section 2(b) indicates that the basis of the Code contains several important principles, and substantially they reflect the fundamental standards of commercial behavior.[39] Additionally, it stresses that the principles are counterparts to their respective principles in the EU Takeover Directive Article 3, since it has to implement the Directive.[40]

There are six main principles in the Takeover Code. It would be comprehensible to separate these principles into three groups instead of explaining them one by one. Firstly, financial markets are protected through the prohibition of false markets.[41] Secondly, target companies are protected by limiting distractions or disturbances to the company.[42] Thirdly, and most importantly, target shareholders are protected. Target shareholders are protected from the bidder while the takeover process continues (equal treatment of shareholders), from the bidder after the takeover event (mainly protection of minority shareholders), and from the target company’s board, to ensure the freewill of shareholders (non-frustration rule).[43]

The structure of the Code shows that target shareholders are protected in every aspect. That creates an imbalance between the target board and the bidder. Therefore, the principles also try to balance this issue. To examine this in detail, it is clear that the Code strictly regulates the offer process in favor of the target board, and tries to balance the `natural advantage` of the bidders (which comes through the non-frustration rule) with the power of the target company to resist offers.[44] For instance, Rule 2.6 of the Code sets a very short time frame of 28 days for the bidder to announce whether an offer is being made or not.[45] It is called the ‘put up or shut up’ rule. This rule increases the power of target boards to resist bids and puts the bidders in a constrained position.[46] Although the Code and the Panel indicate that they are neutral in the facilitating or impeding of bids, this rule clearly shows that the Code intentionally raises the power of the target board, and this creates a new imbalance between the bidder and the target while trying to keep a balance.[47]

IV. Conclusion

The structure of the Takeover Code and Panel is unique to the UK. They are authorized to regulate takeover processes and are equipped with state power. The power to adjust anything in this specific regulatory area on its own gives lots of responsibilities to the regulator. Especially after the implementation of the Directive, concerns were raised about the stance of the Code and the Panel. Various commentators and members of the public have raised serious questions about the `neutrality` of these bodies. Although the Code states the opposite, there are considerations about how the Code impedes takeovers. Additionally, commentators have spoken out about how the time has come for the Panel to use its authority accurately. Acting only as a limited control mechanism is not accurate behavior. Therefore, stating that it is not the Panel’s duty to interfere in the results of takeovers also seems problematical. As a consequence, this would not help its own purposes and takeover events accordingly.

[1] The City Code on Takeovers and Mergers (The Code) http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf?v=12Sep2016 (last accessed on:13/03/2017).

[2] David Kershaw, Principles of Takeover Regulation (1st ed., Oxford University Press, Oxford 2016) 65.

[3] Ibid.

[4] Ibid.

[5] Kershaw (n 2), 66.

[6] Ibid.

[7] Kershaw (n 2), 70-71.

[8] Kershaw (n 2), 66.

[9] Directive 2004/25/EC of The European Parliament and of The Council Of 21 April 2004 on Takeover Bids (EU Takeover Directive).

[10] Kershaw (n 2), 66.

[11] David Kershaw, Corporate Law and Self-Regulation [2015] 5 LSE Law, Society and Economy Working Papers, 14.

[12] Ibid.

[13] Kershaw (n 2), 113.

[14] Kershaw (n 2), 114.

[15] Kershaw (n 2), 117.

[16] Ibid.

[17] Kershaw (n 2), 78.

[18] Kershaw (n 2), 79.

[19] Notes Amalgamations on of British Businesses [1959].

[20] Kershaw (n 2), 79.

[21] Takeover Panel, Review of Certain Aspects of the Regulation of Takeover Bids (PCP 2010/2), para. 1.5. http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PCP201002.pdf.

[22] Ibid, para. 1.7.

[23] Ibid, para. 1.7.

[24] Kershaw (n 2), 117.

[25] Ibid.

[26] Ibid.

[27] Ibid.

[28] Kershaw (n 2), 118.

[29] Ibid.

[30] Ibid.

[31] Ibid.

[32] Kershaw (n 2), 119.

[33] Ibid.

[34] Kershaw (n 2), 120.

[35] Ibid.

[36] Kershaw (n 2), 115.

[37] Kershaw (n 2), 137.

[38] The Code (n 1), Introduction, 2(a), [A1-A2].

[39] The Code (n 1), Introduction, 2(b), [A2].

[40] EU Takeover Directive (n 9), Article 3/1(a)(b)(c)(d)(e)(f).

[41] Kershaw (n 2), 141.

[42] Ibid.

[43] Ibid.

[44] Kershaw (n 2), 178.

[45] The Code (n 1), Section D, Rule 2.6 [D9].

[46] Kershaw (n 2), 177.

[47] Kershaw (n 2), 178.

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