A revised UK Takeover Code ensuring the fair and equal treatment of shareholders and promoting market integrity takes effect on September 19, 2011. The Code, which is designed to comply with the EU Directive on Takeover Bids (2004/25/EC) contains a number of general principles and specific regulations. The general principles are the same as the general principles set out in Article 3 of the Takeover Directive. They apply to takeovers and other matters to which the Code applies. They are expressed in broad general terms and the Code does not define the precise extent of, or the limitations on, their application. They are applied in accordance with their spirit in order to achieve their underlying purpose.
Broadly, the Code is designed principally to ensure that target company shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders of the same class are afforded equivalent treatment by an offeror. The Code also provides an orderly framework within which takeovers are conducted. In addition, it is designed to promote the integrity of the financial markets.
The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the target company and its shareholders. In addition, the Code neither facilitates nor impedes takeovers. Nor is the Code concerned with those issues, such as competition policy, which are the responsibility of other bodies.
A significant general principle underlying many sections of the Code is that all target company shareholders of the same class must be afforded equivalent treatment and a person acquiring control of a company must protect the other shareholders. A corollary principle is that shareholders must have sufficient time and information to enable them to reach a properly informed decision on the takeover bid. In addition, a target company board must act in the interests of the company as a whole and must not deny the shareholders the opportunity to decide on the merits of the bid.
Another general principle is that a target company board advising its shareholders on the takeover bid must also 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.
The final three Code principles aim to assure orderly offers and market integrity. One principle is that an offeror must announce a bid only after ensuring it can deliver 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. Another principle holds that a target company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities.
In order to ensure financial market integrity, a Code principle commands that false markets must not be created in the securities of the target company, of the offeror company or, for that matter, of any other company concerned by the takeover 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.
In addition to the general principles, the Code contains a series of regulations. One important regulation is when a person or group acquires interests in shares carrying 30 percent or more of the voting rights of a company, they must make a cash offer to all other shareholders at the highest price paid in the 12 months before the offer was announced. The Code treats 30 percent of the voting rights of a company as the level at which effective control is obtained.
Moreover, when interests in shares carrying 10 percent or more of the voting rights of a class have been acquired by an offeror in the offer period and the previous 12 months, the offer must include a cash alternative for all shareholders of that class at the highest price paid by the offeror in that period. Further, if an offeror acquires for cash any interest in shares during the offering period, a cash alternative must be made available at that price at least. Under the Code, if the offeror acquires an interest in shares in a target company at a price higher than the value of the offer, the offer must be increased accordingly.
The Code requires the target company to appoint a competent independent adviser whose advice on the offer must be made known to all the shareholders, together with the opinion of the board. Favorable deals for selected shareholders are banned and all shareholders must be given the same information. The takeover circulars must include statements taking responsibility for the contents. Profit forecasts and asset valuations must be made to specified standards and must be reported on by professional advisers. Misleading, inaccurate or unsubstantiated statements made in documents or to the media must be publicly corrected immediately.
Actions during the course of an offer by the target company which might frustrate the offer are generally prohibited unless shareholders approve these plans. Stringent requirements are laid down for the disclosure of dealings in relevant securities during an offer. Employees of both the offeror and the offeree must be informed about an offer and the employee representatives of the offeree have the right to have a separate opinion on the effects of the offer on employment appended to the offeree board’s circular.
While a board of directors may delegate the day-to-day conduct of an offer to individual directors or a committee of directors, the board as a whole must ensure that proper arrangements are in place to enable it to monitor that conduct in order that each director fulfils his or her responsibilities under the Code.
These arrangements should ensure that the board is provided promptly with copies of all documents published by or on behalf of the company which bear on the offer; that the board receives promptly details of all dealings in relevant securities made by the company or any persons acting in concert with it and details of any agreements, understandings, guarantees, or obligations entered into or incurred by or on behalf of the company in the context of the offer which do not relate to routine administrative matters.
Also, the directors with day-to-day responsibility for the offer must be in a position to justify to the board all their actions and proposed courses of action; and the opinions of advisers must be available to the board where appropriate.