I. Introduction

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

The Takeover Code and Panel have three features which helps distinguishing 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 communities’ members constitute the largest part of the Panel.[6] Bearing the scope of the 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 to a traditional self-regulation system.[7] Thirdly, the Panel was on its own to enforce the Code for a long period of time.[8] There was not any legal support to the Panel to use its powers and any means of regulatory sanctions. These features clearly state that Takeover Code and Panel were self-regulatory, non-state bodies.

In 20 May 2004, EU Takeover Directive[9] came into force. Within the two years, European Union Member States must implement its rules. As a consequence, the UK government must 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 is regarded as a state body and is recognised to be a supervisory authority.[11]  This led the Takeover Panel to sanction breaches of the Code with the power of the state which the Panel has now have a more clear access.[12] It is notable that the Panel will be a state body only in name and it will continue as a self-regulatory (market controlled) body.[13]

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

          II. Facilitating or Impeding Takeovers

          In the UK, takeover regulation process was started due to a several hostile takeovers/attempts. In 1950s hostile deals seemed to be very attractive for bidders since the lack of any control mechanisms. After a short period of time, it is recognised that hostile takeovers are economically detrimental and politically undesirable.[17] Main governmental concern was to prevent that hostile activity in the market for these reasons, not to protect target undertakings and its 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 by participants of City of London, including institutional shareholders and merchant banks.[20] Main rules aimed to prevent that kind of hostile activity were 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 its final form.

The Panel explains itself in the `review of certain aspects of the regulation of takeover bids` that; it is an independent body endowed with the responsibility to protect and regulate takeovers while implementing the Code.[21] Additionally, it stresses that assessing 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 it is relevant, are responsible for wider questions of public interest and any kind of antitrust policy.[23] From this expression, the end result is, the Panel is neutral in the facilitating or impeding takeovers and this is not the purpose of the Code neither.

          As mentioned in the previous chapter, the Code and the Panel were created as a self-regulatory body. The Panel’s objective is to regulate takeover process and to protect the marketplace from detrimental moves of market actors at first place.[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 prevent misconduct and does not investigate further in events.[27] Avoiding to move further and to take an action will complicate to solve controversial issues. This can be seen in Kraft-Cadbury takeover and AstraZeneca-Pfizer takeover attempt.

          The 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 defence, namely 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 trying to ensure protection of target shareholders, and thus, bidders could benefit from this situation too. In the framework of the Code, Kraft-Cadbury takeover was detrimental for the UK in some aspects. Unfortunately, concerns that raised after the takeover in the public was even more than the real detriments. According to Kershaw, a state regulatory body have to investigate consequences of the takeover and gather information about economic and social outcomes of a takeover.[29] On the other hand, the Panel resisted to take an action and distanced itself from state governance.[30] Therefore, the Panel repeated that they are neutral, and it is not their responsibility to discuss broader issues or competition policy.[31]

According to Kershaw, avoiding extensive effects of its own rules does not seem to be a correct decision.[32] A state-regulatory body (especially after the implementation of the Directive) must interfere into broader issues and even amend the Code if it is necessary.[33] Only explanation for the Panel’s conduct might be that the Panel wanted to preserve its keystones rules (non-frustration rule at first place and then mandatory bid rule) to stay as a true neutral. Unwillingness of the Panel to change the Code clashed with the pressure on the Panel.[34] This pressure established really strong because the Panel is a state-body and has responsibilities in the eyes of public and other bodies.[35] The Panel desperately tried to get 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, rules of the Code must be interpreted in conformity with its spirit.[37] Introduction, Section 2(a) of the Code indicates that; the Code tries to protect shareholders of a target company, ensure that they are treated equally and ensure that they could decide on the merits of a takeover.[38] These objectives are fundamentals of the principles in the Code. The Code explains itself as clear as possible. Introduction part 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 behaviour.[39] Additionally, it stresses that the principles are counterparts of their respective principles in the EU Takeover Directive article 3 since they had 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 in the way that prohibition of false markets.[41] Secondly, target companies are protected by limiting distractions/disturbances on 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 to shareholders), from the bidder after the takeover event (mainly protection of the minority shareholders) and from the target company’s board to ensure the freewill of the shareholders (non-frustration rule).[43]

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

          IV. Conclusion

Structure of the Takeover Code and Panel is unique to the UK. They are authorised to regulate takeover processes and are equipped with the State power. Power of adjusting anything in this specific regulatory area on its own gives lots of responsibilities to the regulator in conclusion. Especially after the implementation of the Directive, concerns were raised about the stance of the Code and the Panel. Commentary and public have serious questions about the `neutrality` of them. Although the Code states the opposite, there are considerations about the Code impedes takeovers. Additionally, commentary speak out that time has come for the Panel to use its authority accurately. Acting only as a limited control mechanism is not an accurate behaviour. 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.

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[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 (1^st ed., Oxford University Press, Oxford 2016) p.65.

[3] Ibid.

[4] Ibid.

[5] Kershaw (n 2), p.66.

[6] Ibid.

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

[8] Kershaw (n 2), p.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), p.66.

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

[12] Ibid.

[13] Kershaw (n 2), p.113.

[14] Kershaw (n 2), p.114.

[15] Kershaw (n 2), p.117.

[16] Ibid.

[17] Kershaw (n 2), p.78.

[18] Kershaw (n 2), p.79.

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

[20] Kershaw (n 2), p.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 last accessed on: 13/03/2017.

[22] Ibid, para. 1.7.

[23] Ibid, para. 1.7.

[24] Kershaw (n 2), p.117.

[25] Ibid.

[26] Ibid.

[27] Ibid.

[28] Kershaw (n 2), p.118.

[29] Ibid.

[30] Ibid.

[31] Ibid.

[32] Kershaw (n 2), p.119.

[33] Ibid.

[34] Kershaw (n 2), p.120.

[35] Ibid.

[36] Kershaw (n 2), p.115.

[37] Kershaw (n 2), p.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), p.141.

[42] Ibid.

[43] Ibid.

[44] Kershaw (n 2), p.178.

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

[46] Kershaw (n 2), p.177.

[47] Kershaw (n 2), p.178.