The conduct of takeovers and mergers of UK public companies — and, in certain cases, private companies — is regulated by the City Code on Takeovers and Mergers (the ‘Takeover Code’).
Issued and administered by the Panel on Takeovers and Mergers (the ‘Panel’), the Takeover Code or City Code embodies the principles and rules in place to deal with the supervision and regulation of company takeovers and mergers in the UK. Below we provide an overview of the Code, from what this is and to whom it applies, and how clarification can be sought. We also set out the key principles and rules which form the body of the Takeover Code.
What is the UK Takeover Code?
The Takeover Code, also known as the City Code or the Blue Book, is a detailed and lengthy document reflecting the collective opinion of those professionally involved in takeovers in relation to appropriate business standards, and as to how both an orderly framework for takeovers ‘and’ fairness to shareholders in an offeree company (‘the target company’) can be achieved. Amended multiple times, the Code is on its thirteenth edition, dated 5 July 2021.
The Takeover Code is primarily to ensure that shareholders of a target company are treated fairly, and not denied the opportunity to decide on the merits of a takeover. In conjunction with other regulatory regimes, the Code is also designed to promote the integrity of financial markets, and to provide an orderly framework within which takeovers are conducted.
The Code is not concerned with the pros and cons of a takeover, where any financial or commercial benefits and drawbacks are matters for the target company and its shareholders. Equally, its purpose is not to facilitate or impede company takeovers, nor to concern itself with issues like competition policy, which are the responsibility of government and other bodies.
The Takeover Code is both issued and administered by the Panel, an independent body, whose main functions include supervising and regulating takeovers, and other matters to which the Code applies, in accordance with its rules. The Panel comprises various representatives of financial institutions and professional associations, whose statutory functions are set out under the Companies Act 2006 (Chapter 1 of Part 28).
The day-to-day business of the Panel, ie; of takeover supervision and regulation, is carried out by the Panel Executive. In carrying out these functions, the Executive aims to ensure that the spirit and not just the letter of the Code are followed, and operates independently of the Takeover Panel. The Executive is staffed by employees and secondees from accountancy firms, law firms, corporate brokers, investment banks and other organisations, and headed by the Director General, typically an investment banker on secondment and an officer of the Panel.
Which companies are subject to the Takeover Code?
The Code itself sets out the companies to which its principles and rules apply. In broad terms, it applies to all offers for companies with registered offices in the UK — or in the Channel Islands or the Isle of Man — where the company securities or shares are admitted to trading on a regulated market or multilateral trading facility in the UK, or on any stock exchange in either the Channel Islands or the Isle of Man. It also applies to offers made for unquoted public companies with registered offices in the UK, Channel Islands or Isle of Man considered to have their place of control and central management in any one of these jurisdictions.
The Takeover Code does not apply to private companies which have their registered offices in the UK — or in the Channel Islands or Isle of Man — unless there has been some public trading or marketing of their company shares in the previous ten years and their place of control and central management is in the UK, Channel Islands or Isle of Man.
The City Code does not, however, apply to offers for open-ended investment companies.
What are the key principles under the Takeover Code?
The Takeover Code is based upon six key general principles. Applicable to takeovers and other matters to which the Code applies, these principles are essentially statements of standards of commercial behaviour, and are set out under the 2006 Act (Part 1 of Schedule 1C).
These general principles underpin the Panel’s approach to all relevant issues, with the most fundamental principle being that all shareholders are treated equally. Essentially, the central objective of the Code is to ensure equality of treatment and opportunity for all shareholders in takeover bids. Expressed in broad general terms, the Takeover Code does not define the precise extent of, or the limitations on, the application of its general principles. Instead, they are applied in accordance with their spirit in order to achieve their underlying purpose.
The six general principles underpinning the Takeover Code are as follows:
All target company shareholders of the same class must be afforded equivalent treatment, and if a person acquires control of that company, the other holders of securities must be protected;
The target company shareholders must have sufficient time and information to enable them to reach a properly informed decision on the takeover bid, and where the target company’s board of directors advises the shareholders, it must give its views on the effects of implementation of the takeover bid as to employment and conditions of employment, as well as the locations of the company’s places of business;
The target company’s board of directors must act in the interests of the company as a whole, and they must not deny the shareholders the opportunity to decide on the merits of the takeover bid;
False markets must not be created in either the target company’s shares, or the shares of the offeror (‘the acquirer’) where the acquirer is a company, or any other company concerned with the takeover bid, where the rise or fall of the share prices becomes artificial and the normal functioning of the markets is distorted;
The acquirer must announce a takeover bid only having ensured that it can fully fulfil any cash consideration, if offered, and taken all reasonable measures to secure the implementation of any other consideration;
The target company must not be hindered in the conduct of its affairs for any longer than is reasonable by a share takeover bid.
What are the series of rules under the Takeover Code?
In addition to its six general principles, the Code also contains a series of rules. Most of these rules are expressed in even less general terms than the Code’s six principles. They are not framed in any form of technical language and, like the general principles, should be interpreted to achieve their underlying purpose. As such, their spirit must be observed as well as their letter. There are currently 38 rules under the Takeover Code, covering:
- the approach to a takeover bid
- announcements and independent advice
- restrictions on dealings
- the mandatory offer and its terms
- the voluntary offer and its terms
- provisions applicable to all offers
- conduct during the offer
- documents from the acquirer and the board of the target company
- profit forecasts and quantified financial benefits statements
- asset valuations
- distribution of documentation during an offer
- offer timetable and revision
- restrictions following offers
- partial offers
- redemption or purchase by a company of its own securities
- dealings by connected exempt principal traders.
In limited scenarios, the Takeover Panel may derogate or grant a waiver to a person from the application of a rule, provided that the general principles are still respected, in the circumstances set out in that particular rule. The Panel may also derogate or grant a waiver where it considers that the rule would either operate unduly harshly, or in an unnecessarily restrictive, burdensome or otherwise inappropriate manner.
Penalties for breaching the Takeover Code
It is the practice of the Takeover Panel, in discharging its functions under the Code, to focus on the specific consequences of any breaches or alleged breaches, with the primary aim of providing appropriate remedial or compensatory action in a timely manner. In some cases, however, disciplinary action may be appropriate in respect of certain breaches of the Code.
Importantly, a breach of the Takeover Code will not, of itself, render any transaction void or unenforceable. That said, where there is a reasonable likelihood that a requirement imposed by or under the rules will be contravened, or has been contravened, the Panel may seek enforcement by the courts to secure compliance with that requirement. Further, any failure to comply with a resulting court order may be treated as a contempt of court.
Additional sanctions or remedies for breach of the Code, following a ruling of the Executive or a finding by the Takeover Panel’s Hearing Committee, include publishing a statement indicating that the offender is someone who is not likely to comply with the Code. It also includes reporting the offender’s conduct to any relevant regulatory authority or professional body, such as the Financial Conduct Authority (FCA), for example, so that a decision can be made by the FCA as whether to take disciplinary or enforcement action. This could result, amongst other things, in the imposition of a significant financial penalty.
Can clarification be sought on how the Takeover Code is applied?
The Takeover Panel Executive gives guidance on the interpretation, application and effect of the Code. Various practice statements have been issued by the Executive to provide informal guidance as to how it normally interprets and applies the Code’s provisions in certain circumstances. However, these statements do not form any part of the Code, where these are not binding on either the Executive or the Panel, and are not to be treated as a substitute for consulting the Executive to establish how the Code applies in a particular case.
The Executive can be approached for specific guidance on the interpretation, application or effect of the Takeover Code and how it is usually applied in practice. The Executive can either be asked for guidance in relation to a specific issue on a ‘no names’ basis or it can be asked to provide a ruling on a ‘named’ basis. Absent a ruling provided by the Executive on a named basis, any guidance given will not be binding, and parties or their advisers cannot rely on such guidance as a basis for taking any action. The Executive is available for consultation and rulings before, during and, where appropriate, after takeovers or other relevant transactions.
When in any doubt as to whether a proposed course of conduct is in accordance with the general principles or rules of the Takeover Code, or whenever a waiver or derogation from the application of its provisions is sought, the Executive must be consulted in advance. In this way, a ruling can be obtained as to the basis on which those seeking guidance can properly proceed, minimising the risk of taking action which might amount to a breach of the Code.
Further information and guidance can be found on the TakeOver Panel website, where a full copy of the latest Code and most up-to-date practice statements can be viewed online. The site also contains public consultation papers and response statements, disclosure forms, and a link to all recently published statements and disclosures relating to regulated takeovers.
The conduct of takeovers and mergers of companies falling within the remit of the Takeover Code is subject to stringent and complex regulation. These rules include announcement obligations and the requirement for secrecy; offer structures and timetables; stakebuilding and mandatory offers; deal protection; and post-offer restrictions. Securing the advice and assistance of a financial expert is strongly advised in any takeover and merger scenario.
Takeover Code FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
