The regulation of public takeover bids in the UK has led a
charmed existence. The rules of engagement where a UK target is the
subject of a takeover bid are set out in the City Code on Takeovers
and Mergers (the Code). However, the Code does not have the force
of law. It is, rather, the framework accepted by market
participants as being appropriate for the regulation of takeovers
and attempted takeovers of UK companies.
The Code is issued, and kept under review, by the Panel on
Takeovers and Mergers (the Panel). Where uncertainties arise as to
the permissibility of any given course of action under the Code,
rulings are given by the Panel. Moreover, the Panel enforces its
rules with an armoury of sanctions which on one view are soft -
ranging from private censure to public censure to certain
cold-shouldering options obtained through the endorsement of the
Code by the Financial Services Authority.
So in practice the Code is observed. Views differ as to the
appropriateness of having a non-statutory body making and enforcing
rules that are suspiciously close to law, and some people think
that it would be preferable for the regulation of takeovers in the
UK to be put on a fully statutory footing. The counterview, which
carries a large body of support, is that the relative informality
and flexibility of the Code has facilitated an efficient and
responsive takeover regime in the UK that deserves to go
undisturbed.
Which brings us to the European Takeover Directive (the
Directive).
The Directive
The Directive came into force on May 20 2004 after almost 20
years of painful negotiation. It must be implemented in each member
state by May 20 2006. The European Commission's objective in
promoting the Directive was the laudable one of creating a level
playing field for takeover regulation across the European Union.
However, a series of political compromises considerably diluted the
Commission's original proposals. The playing field is, thus, a long
way from level.
The Directive is based upon, and recites, a number of general
principles (Directive General Principles) such as the need for the
equivalent treatment of shareholders and the safeguarding of the
rights of minorities, the need to avoid false markets and the
requirement for sufficient information to be made available to
target shareholders for them to make an informed decision. The
Directive also contains some more detailed rules setting the
minimum requirements for achieving implementation of those general
principles. The ability of member states to impose more stringent
measures is preserved. However, the level playing field purportedly
created by the minimum requirements is undermined by:
- the ability which each member state has to opt out of the
provisions relating to (i) a target's frustrating action; and
(ii) to multiple and restricted voting rights (the so-called
breakthrough rules) in respect of companies with registered
offices in that state; and
- the more general flexibility which member states have to
implement rules which are less stringent than the minimum
requirements in order to take account of circumstances
determined at national level - the only qualification to this
flexibility is that rules implemented must respect the
Directive General Principles.
The most important minimum requirements of the Directive relate
to the requirement for a person who acquires a controlling stake in
the target company to make an offer to all other shareholders at
the equitable price (mandatory bids), the requirement that offer
documents contain certain specified information, the length of the
offer period, certain minority squeeze-out provisions and
disclosure of poison pill provisions.
Each member state must designate a competent authority to
supervise takeovers. In terms of jurisdiction between member
states, the general position (although there are some difficult
jurisdictional issues) is that a target company will be subject to
regulation in the member state in which it has its registered
office. This marks a difference from the existing position under
the Code, which applies to a company incorporated in the UK only if
it also has its place of central management here.
Proposals for implementation of the Directive in the
UK
When UK practitioners first studied the Directive in April and
May 2004, it was clear that it would be key, in determining what
effect the Directive would have on the consensual Code regime, to
see what implementation proposals the UK government came forward
with. In January of this year the government published its
proposals for implementation in a consultative document, which was
accompanied by an explanatory paper from the Panel.
The thrust of the government's and the Panel's proposals is for
implementation to bring about minimum change to the existing UK
takeover regime. The proposals are, of course, subject to
consultation - and, in the case of the Panel, more detailed
consultation later in the year - but it is clear that the
government's view is that room for manoeuvre in key areas is
limited.
So, have the government and the Panel succeeded in their
objective?
Key elements of the implementation proposals
The main elements of the implementation proposals are:
- Primary legislation will provide for the Panel to act as
the competent authority to supervise bids. Separate Panel
committees will carry out the rulemaking and judicial functions
of the Panel and there are detailed provisions aimed at
bolstering the constitution and procedures of the Panel (which
had already been reviewed in light of the Human Rights
Act).
- The Panel, which will continue as an unincorporated body,
with most of its members appointed by a variety of stakeholder
organizations, will be given statutory power to make and amend
rules in relation to takeover regulation in the UK
(substantially based on the existing Code).
- To prevent an increase in tactical litigation, the
implementing legislation is not to undermine the "robustly
practical approach" established in the Datafin case in
1987.
- Rights of action between parties to a takeover, or against
the Panel for breach of statutory duty, will be expressly
excluded, and transactions should not be capable of being set
aside by reason of breach of the Code or failure to comply with
a Panel ruling. Again, these provisions are designed to
pre-empt the possibility of tactical litigation.
- The Panel will be granted a package of immunity provisions
and specific enforcement powers. This is expressed to be in
recognition of Article 4.5 of the Directive, which requires
that the supervisory authority be vested with all powers
necessary to ensure "that all parties to a bid comply with the
rules made or introduced pursuant to [the] Directive".
- The Panel will have the power to order restitution or
financial redress if certain rules are breached, and/or the
power to require parties to act in a certain way or restrain
them from taking a certain course of action in circumstances
where there would otherwise be a breach of the Code.
- In terms of sanctions, it has been decided not to give the
Panel a power to impose fines. Instead, the package of
sanctions envisaged (over and above the power to require
compliance and to make compensation orders referred to above)
largely mirrors the existing regime. It includes private
censure, public censure, the reporting of conduct to other
professional bodies and cold-shouldering.
In addition to the constitutional and structural points
mentioned above, the implementation proposals contemplate a number
of changes to the existing Code. The main ones are:
- the adoption of the Directive General Principles in place
of the existing Code General Principles;
- as the government wishes to "opt in" to the frustrating
action article of the Directive (Article 9), the existing
provisions of Rule 21 which address frustrating action will
continue to apply, although there will be some specific, and
potentially important, differences deriving from the Directive;
and
- the government has decided not to opt into the
breakthrough provisions of Article 11.
So, it seems that the Code will continue to exist in
substantially the same form as now. The main changes, to be
reflected in the introduction to the Code, will relate to
constitution and redress.
The crunch questions
Will the
Datafin
rules on judicial
review change with the new regime?
The Datafin case in 1987 was a landmark. The Court of
Appeal held that the Panel was susceptible to judicial review
because it performed a public duty. However, it made it quite clear
that the courts should be very reluctant to order interim relief
staying the implementation of a Panel ruling during the course of a
bid. As Sir John Donaldson said, "I should expect the Court to
allow contemporary decisions to take their course, considering the
complaint and intervening, if at all, later and in retrospect by
declaratory orders which would enable the panel not to repeat any
error and would relieve individuals of the disciplinary
consequences of any erroneous finding of breach of the rules".
As a result of Datafin there have only been two other
reported cases challenging the Panel's decisions and procedures
(one of which was R v Panel on Takeovers and Mergers, ex parte
Guiness plc [1989] 1 All ER 509). In both of these the
challenge was made after, rather than during, the relevant bid.
Under the new regime the function of the Panel will be
essentially the same, but it will have statutory backing. There is
reason to fear that this might precipitate a change of approach, as
the courts might be more willing to intervene and grant judicial
review of the operations of a body which has full statutory backing
than one which simply operates on a consensual approach (albeit in
a public area). There are comments in the Guinness case
which bolster this concern, as Woolf LJ referred to the "unique"
qualities of the Panel and seemed to find the absence of statutory
obligations important.
On balance, however, it seems less rather than more likely that
the courts will change their basic approach to a judicial review
application by a party to a bid. Even though the Panel will have
statutory backing, the language used in the judgment in the
Datafin case reveals the court's unwillingness to encourage
tactical litigation, and it is doubtful that the change in the
nature of the Panel's standing would alter that.
But there is a complication.
Might a claim be made that a particular rule is
ultra vires, or that a Panel ruling has been made as a
result of a misinterpretation of a rule?
The consultative document envisages that the Panel will be given
the statutory authority to make and amend rules in relation to
takeover activity. It is intended that the rulemaking power would
be relatively broadly drawn to ensure that the Panel would continue
to make rules on the range of matters presently regulated by the
Code. As mentioned above, the Code will remain largely
unchanged.
However, under the new regime, the Panel will be under a
statutory obligation to make rules in relation to the minimum
requirements envisaged by the Directive. These include such matters
as the protection of minority shareholders, mandatory bids and the
contents of takeover documentation. Each of the rules made by the
Panel must be consistent with the Directive General Principles.
So, if a rule were to be promulgated which was inconsistent with
those principles, or which failed fully to implement the Directive,
the Panel would be taken to be acting outside its prescribed powers
and as such the rule would be ultra vires. This will give
some scope to parties to challenge the Panel's rulemaking powers
under the new regime.
This could give rise to tactical litigation. Moreover, one could
envisage that that litigation could be launched not only by the
parties to a bid, but also by other parties who can demonstrate
"sufficient interest" in the matters so as to permit a judicial
review challenge. For example, if a party were to be considering a
bid, but was deterred by a rule which is considered to be ultra
vires, the court might entertain an application for judicial
review.
And the effect of the new enforcement and sanctions
regime?
Implementing legislation is envisaged which would confer on the
Panel power to:
- require persons to produce information in their possession
to the Panel if the information is "reasonably required" by the
Panel in the exercise of its activities;
- order financial redress for breach of the rules (although
not to impose fines);
- require a party to act, or refrain from acting, in a
particular way; and
- apply to the court for the summary enforcement of certain
Panel rulings, with failure to comply with any court order
being a contempt of court.
It is not clear from the consultative document what is envisaged
by an application for summary enforcement. The document does,
however, say that "it is not envisaged that the court asked to
enforce the ruling would normally need to reopen the substance" of
the Panel's ruling.
The Panel's Explanatory Paper points out that rulings requiring
a person to act in a certain way will only be made in particular
circumstances - for example, where there is a reasonable likelihood
that a person will breach the Code or a ruling of the Panel. The
Explanatory Paper also seems to suggest that compensation orders
will only be made in respect of breaches of certain rules, such as
Rule 16 (special or favourable deals) and Rule 9 (mandatory
bids).
Two issues arise. If the Panel seeks an order during the course
of a bid, will the court respond to the application
(notwithstanding Datafin)? The answer must be yes, because
presumably this will be required as part of the implementing
legislation. More fundamentally, will the court be willing simply
to rubber-stamp the Panel's ruling? Although there is some
authority (R v Stock Exchange ex parte Else Ltd [1993] BCLC
834) for the proposition that the court will not be keen to
second-guess responsible regulators, we must expect that, before it
summarily enforces a ruling, the court will want to satisfy itself
as to the merits of the Panel's position and to hear from the
affected party.
An example here would be WPP v Tempus. In that case, the
Panel decision was that WPP had to proceed with its bid for Tempus
notwithstanding September 11 2001 and the inclusion of material
adverse change conditions within the bid conditions. Under the new
regime, if WPP refused to proceed and the Panel sought an
enforcement order, would the court really refuse to hear arguments
from WPP on the substance of the Panel ruling before issuing an
order, breach of which would place WPP in contempt of court?
Aside from this legal risk to the uninterrupted running of a
bid, there is a more important practical point. Will a party to a
bid who is dissatisfied with a Panel ruling be tempted simply to
refuse to observe the ruling unless and until the Panel gets a
court order, rather than appealing the decision within the Panel
framework? If so, then the new regime will have moved us away from
the current consensual world to a world where the regulator has -
and may have to use - a legal enforcement right against a principal
involved in a bid. By removing the balance inherent in the
consensual environment, will the new regime mean that participants
are incentivized to dare the Panel to obtain a court order
as a tactic aimed at seeing its preferred outcome earlier in the
process?
No change or sea change?
When lawyers explain the current takeover regime in the UK to
overseas clients, the clients are frequently bemused. They see a
complex body of rules and regulations but are told that they do not
have the force of law. The new regime addresses this source of
bemusement, because the Code will have the force of law.
However, that brings with it its own confusion. Can all these
rules, and notes to rules, really amount to black-letter law? If
non-observance entails the risk of contempt of court and
compensation orders, ought there not to be more certainty, and will
the relatively informal approach of the notes (and the use of
long-standing practices and guidance not set out in the Code as a
basis for decision-making) be sustainable? Moreover, will this all
not give rise to a range of greater tactical opportunities for the
parties?
The government and the Panel have done their best in
circumstances where they have been dealt a difficult hand. However,
it may be that their earnest hope that there will be no substantive
change will not be fulfilled.
Author
biography
Christopher
Saul
Slaughter and May
Christopher Saul heads the firm's Corporate practice. He
specializes in general corporate work (including mergers and
acquisitions, joint ventures and commercial contracts) and private
equity. He also frequently advises financial institutions on
securities offerings.
Throughout his career at Slaughter and May he has been involved
in varying kinds of corporate transactions. His recent experience
in mergers and acquisitions include advising CEMEX on its
acquisition of RMC, representing GE Real Estate on its acquisitions
of Benchmark Group and Haslemere and working with the Royal
Caribbean team in relation to its attempted combination with
P&O Princess Cruises.
In the area of private equity he represented Blackstone and
Battery on their investment in LIFFE and on their subsequent sale
of the investment in LIFFE pursuant to the offer from Euronext and
Goldman Sachs Capital Partners in relation to various matters
including Debenhams. He also advises on securities offerings. Most
recently he represented the underwriters in the flotation of eircom
and the merger of F&C and ISIS.
He would like to acknowledge with many thanks the assistance of
Ewan Brown and Simon Nicholls, both of Slaughter and May, in the
writing of this article.
Christopher Saul
One Bunhill Row
London EC1Y 8YY
Tel: +44 20 7600 1200
Fax: +44 20 7090 5000
Web:
www.slaughterandmay.com