Written evidence from the Takeover Panel (ISG 20)

1.              Introduction

1.1              This submission is made by the Takeover Panel (the “Panel”) to the inquiry by the Business, Innovation and Skills Committee (the “Committee”) into the Government’s industrial strategy.

1.2              The Panel notes that the matters under consideration by the Committee include a question relating to “How interventionist in the free market should Government be in implementing an industrial strategy, for example in preventing foreign takeovers of UK companies?”.

1.3              The purpose of this submission is to provide assistance to the Committee in its deliberations relating to this question by explaining the role fulfilled by the Panel in the regulation of takeovers of UK companies and also the manner in which it interacts with other authorities involved in the takeover process. 

2.              Status of the Panel

2.1              The Panel is an independent body whose main functions are to issue and administer the City Code on Takeovers and Mergers (the “Code”) and to supervise and regulate takeovers and other matters to which the Code applies in accordance with the rules set out in the Code. 

2.2              The Panel was established as a non-statutory body in 1968.  However, following the adoption of the Directive on Takeover Bids (2004/25/EC) (the “Directive”), on 20 May 2006 the Panel was designated as the supervisory authority in the UK to carry out certain regulatory functions in relation to takeovers as required by that Directive.  The Panel’s statutory functions and powers are set out in and under Chapter 1 of Part 28 of the Companies Act 2006.

2.3              The Directive was to a large extent modelled on the Code.

3.              Objectives of the Panel

3.1              The Code is designed principally to ensure that shareholders in an offeree company (i.e. the target company) are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders in the offeree company of the same class are afforded equivalent treatment by an offeror (i.e. the bidder).  In addition, it is designed to provide an orderly framework within which takeovers are conducted and to promote, in conjunction with other regulatory regimes, the integrity of the financial markets during takeovers. 

3.2              The Code states in Section 2(a) of its Introduction that it is not concerned with the financial or commercial advantages or disadvantages of a takeover.  This is because these are matters for the offeree company and its board of directors to consider and for the shareholders in the offeree company to decide through their decision as to whether to accept the offer.

3.3              It is also not the purpose of the Code either to facilitate or to impede takeovers and accordingly the Panel’s regulatory activities are carried out in an entirely impartial capacity.  It is not the Panel’s role to influence or determine transaction outcomes.

3.4              The Code is also not concerned with wider questions of public interest, such as the effect of a takeover on competition, which are the responsibility of government and other bodies[1].  As such, the Panel does not consider that it would be appropriate for it to advance views on the merits or otherwise of foreign takeovers. 

4.              Structure of the Panel

4.1              Members of the Panel are drawn principally from the corporate, investor and practitioner constituencies.

4.2              Each member of the Panel is designated on appointment to act as a member of either the Panel’s Hearings Committee or its Code Committee. 

4.3              The principal function of the Hearings Committee is to review rulings of the Executive (see paragraph 4.6 below).  The Chairman of the Panel, who is usually a senior lawyer who has either held, or who would qualify for holding, high judicial office, is also the Chairman of the Hearings Committee.

4.4              Decisions of the Hearings Committee may be appealed to the Takeover Appeal Board, which is an independent tribunal.  The Chairman and Deputy Chairman of the Takeover Appeal Board are appointed by the Master of the Rolls and will usually have held high judicial office.  The other members of the Takeover Appeal Board are appointed by the Chairman and have relevant knowledge and experience of takeovers and the Code.

4.5              The Code Committee carries out the rule-making functions of the Panel and is solely responsible for keeping the Code under review and for proposing, consulting on, making and issuing amendments to the substantive provisions of the Code.  No person who is or has been a member of the Code Committee may be a member of the Hearings Committee or of the Takeover Appeal Board. 

4.6              The day-to-day work of the supervision and regulation of takeovers is carried out by the Panel’s Executive which, in carrying out these functions, operates independently of the Panel and in an impartial capacity.  The Executive’s principal functions are to ensure that the Code is complied with and that disputes between parties are resolved in a fair and timely manner.  The Executive’s work also includes, either on its own initiative or at the instigation of third parties, conducting investigations, monitoring dealings in the shares of companies involved in takeovers, and giving rulings on the interpretation and application of the Code.  The Executive is headed by its Director General, who is usually an investment banker on a two year secondment.  The majority of the Executive’s staff are permanent.  They are joined by lawyers, accountants, corporate brokers, investment bankers and others, also on two year secondments.

5.              Companies subject to the Code

5.1              The Code applies, broadly speaking, in relation to takeovers of, or other transactions involving the passing of control of, the following companies:

(a)              companies which have their registered offices in the UK, the Channel Islands or the Isle of Man if any of their shares are admitted to trading on a regulated market (e.g. the Main Market of the London Stock Exchange) or a multilateral trading facility (e.g. AIM) in the UK or on any stock exchange in the Channel Islands or the Isle of Man; and

(b)              other public companies (and certain private companies) which have their registered offices in the UK, the Channel Islands or the Isle of Man and which are considered by the Panel to have their place of central management and control in one of these jurisdictions.

5.2              In addition, pursuant to the Directive, a takeover of:

(a)              a company which has its registered office in the UK and whose shares are admitted to trading on a regulated market in one or more member states of the EEA but not on a regulated market in the UK; or

(b)              a company which has its registered office in another member state of the EEA whose shares are admitted to trading on a regulated market in the UK and not on a regulated market in any other member state of the EEA,

is subject to the Code and to the takeover regulations of the other relevant member state of the EEA on a shared basis, as prescribed by the Directive.

5.3              In the light of the above, and save where the shared jurisdiction regime prescribed by the Directive applies, the Code does not apply, for example, to takeovers of:

(a)              public companies which have their registered office in the UK, the Channel Islands or the Isle of Man and which have their place of central management and control, and whose shares are admitted to trading, in a jurisdiction outside the UK, the Channel Islands and the Isle of Man.  (Therefore, for example, a UK public company whose place of central management and control is in the US and whose shares are admitted to trading only on the New York Stock Exchange is not subject to the Code.); or

(b)              companies which have their registered office in a jurisdiction outside the UK, the Channel Islands or the Isle of Man, even if the company’s shares are admitted to trading on a regulated market or a multilateral trading facility in the UK or on a stock exchange in the Channel Islands or the Isle of Man.  (Therefore, for example, a company which has its registered office in Bermuda and whose shares are admitted to trading on the Main Market of the London Stock Exchange is not subject to the Code.).  

5.4              Accordingly, it may well be that not all the companies to which the Government might wish to apply a public interest test for “foreign takeovers” would be subject to the Code.

6.              Approach taken by the Panel

6.1              The Code is based on six General Principles, which are derived from the Directive.  The Code also contains a series of rules which, like the General Principles, are interpreted to achieve their underlying purpose. Therefore, the Introduction to the Code makes clear that the spirit of the rules must be observed as well as their letter.  In addition, the Panel may derogate or grant a waiver from the application of a rule if, in the particular circumstances, it would operate unduly harshly or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner. 

6.2              The attributes of the Panel’s regulation of takeovers are recognised to be speed, certainty and flexibility:

(a)              speed – the Executive reaches decisions on the application of the Code on a real-time basis.  These decisions can be challenged quickly before the Hearings Committee and the Takeover Appeal Board, with a view to ensuring that disputes relating to the interpretation or application of the Code can be resolved expeditiously;

(b)              certainty – under the Code, parties to a takeover are encouraged, and in many cases required, to consult the Panel regarding its application, thereby enabling them to know where they stand under the Code; and

(c)              flexibility – on the basis that no two cases are ever quite the same, the Panel is able to apply the general principles and rules of Code so as to achieve their underlying purpose and, where appropriate, to derogate or grant a waiver from their application.

6.3              The Panel also seeks to ensure that disputes relating to the application of the Code are resolved through reviews and appeals to the Hearings Committee and to the Takeover Appeal Board, and not through the courts.  This is achieved through the Companies Act 2006 providing that:

(a)              rulings of the Panel have binding effect (section 945)[2]; and

(b)              only the Panel (and not third parties) can seek enforcement of the Code by the courts (section 955).

7.              Interaction with other regulatory authorities

7.1              It is common for the acquisition of companies subject to the Code to require the approval of certain regulatory and/or anti-trust authorities and accordingly for offers for such companies to be made subject to such approval being obtained.  In many cases, the proposed acquisition of a company subject to the Code requires the approval of the Competition and Markets Authority (the “CMA”) and in such cases the offer will be made subject to a condition to this effect.   Accordingly, the Panel is experienced in regulating transactions which require the separate approval of other regulatory and/or anti-trust authorities, including the CMA, and the Code includes a framework to enable such clearances to be obtained within the structure of the offer timetable.  This includes cases in which the Secretary of State may currently intervene under the Enterprise Act 2002 on account of public interest concerns, being issues of national security, media plurality and financial stability.

7.2              In the light of the above, if the Government’s existing powers to intervene in takeovers of UK companies were to be extended on public interest grounds, the Panel believes that the current framework in the Code under which offerors pursue regulatory and anti-trust clearances which they require in connection with an offer could be applied also in relation to a requirement for offerors also to seek the approval of whichever authority was designated to exercise such powers, be it the CMA or some other authority specifically designated and equipped for the purpose.

8.              Post-offer undertakings

8.1              At the beginning of 2015, following the possible offer by Pfizer Inc. for AstraZeneca plc, the Panel introduced amendments to the Code in relation to statements made by an offeror or the offeree company relating to action that the party voluntarily commits to take, or not take, after the end of an offer (known as “post-offer undertakings”).  These requirements are set out in Rule 19.5 of the Code.

8.2              Post-offer undertakings are distinct from post-offer intention statements which are statements made by an offeror or the offeree company relating to action which the party intends to take, or not take, after the end of an offer.  The requirements in relation to post-offer intention statements are set out in Rule 19.6 of the Code, which provides that such statements must be an accurate reflection of the party’s intention at the time that the statement is made and must be made on reasonable grounds.   However, by contrast to a post-offer undertaking, there is no requirement under the Code for a party to comply with the terms of a post-offer intention statement.  If, however, a party takes action which is different from its stated intentions, or does not take a course of action which it stated that it intended to take, in each case in the 12 months following the end of the offer period (or such other period as was specified in the statement), it must make an announcement explaining the position and disciplinary action may be taken by the Panel if it determines that the statement, when made, was not made to the standards required by Rule 19.6.

8.3              SoftBank Group Corp recently made certain post-offer undertakings in connection with its offer for ARM Holdings plc to:

(a)              double the number of UK ARM employees by and at the end of five years of the acquisition completing;

(b)              increase the number of non-UK ARM employees by and at the end of five years of the acquisition completing;

(c)              ensure that the relative proportion of “technical employees” to “non-technical employees” will be broadly in line with historical trends meaning that at least 70 per cent of each of the UK and non-UK ARM employees will be “technical employees” on the fifth anniversary of the acquisition becoming effective; and

(d)              maintain ARM’s global headquarters in Cambridge for five years following the acquisition completing.

This was the first occasion of a party to an offer choosing to make a post-offer undertaking in accordance with Rule 19.5 of the Code.

8.4              Post-offer undertakings are made voluntarily.  The Panel’s role is not to determine whether post-offer undertakings should be given in any particular case or, where they are given, as to the form that they should take (for example, for the protection of a particular public interest).  Rather, the Panel’s role is to ensure that the terms of any such commitments can be clearly understood such that their performance may be readily assessed and the Panel may, if necessary, exercise its powers to seek enforcement by the courts under section 955 of the Companies Act 2006[3]. 

8.5              Accordingly, Rule 19.5 imposes requirements that:

(a)              post-offer undertakings, and any qualifications or conditions to which they are subject, must be clear and precise, be readily understandable and capable of objective assessment, and must not be dependent on subjective judgements of the party to the offer or its directors;

(b)              a party to an offer which has made a post-offer undertaking must submit reports to the Panel regarding its compliance with the undertaking.  In addition, the Panel may require the appointment of a supervisor to monitor the party’s compliance with the undertaking; and

(c)              a party to an offer which has made a post-offer undertaking is excused compliance with the undertaking only if a qualification or condition to the undertaking applies, as determined by the Panel. 

26 September 2016