Takeovers, reconstructions and amalgamations
The term ‘takeover’ is generally used to describe the situation where one company acquires the shares of another company (target company). The acquiring or bidding company becomes the holding company of the acquired or target company, which therefore becomes a subsidiary. Takeovers may be accomplished by agreement or a takeover bid, which may be a ‘hostile’ bid.
A reconstruction is generally accomplished where the shareholders of the transferring company and the shareholders of the company to which the business has been transferred are the same. The people who are carrying on the reconstructed business are thus generally the same as those who carried it on before. Reconstructions may involve an external element such as where a particular company sells its business and assets to another company in exchange for shares in that company; alternatively reconstructions may be internal within a particular group where the capital structure within the group is altered.
The term ‘amalgamation’ is usually used where two companies are brought together. The two companies may become one new company, for example, X Plc and Y Plc becoming Z Plc, or alternatively X Plc may be subsumed by Y Plc or vice versa. Here, clearly, there is an overlap with the term ‘takeover’.
The United Kingdom was obliged to take action in relation to takeovers by virtue of the EU Takeovers Directive (2004/25/EC). This had to be implemented in the UK by 20 May 2006. In consequence the government made the Takeovers Directive (Interim Implementation) Regulations 2006 (SI 2006/1183). These regulations came into force on 20 May 2006. The provisions in the regulations have been replaced by the relevant provisions of the Companies Act 2006.
The key changes relate to new statutory rules that have been introduced and also to revisions in the City Code on Takeovers and Mergers.
The new statutory rules generally apply to companies whose shares are admitted to trading on an EEA regulated market, while the Code has been amended to bring its provisions into line with the Takeovers Directive for all companies and for all transactions that come within the Panel’s jurisdiction.
The new statutory rules include: a requirement for directors’ reports every year containing detailed information on the share and management structures of the company (s 992 CA 2006); a new offence for failure to comply with the Code’s rules on documentation in relation to takeover bids (s 953 CA 2006); changes relating to compulsory purchase of outstanding shares where there is a takeover offer (‘squeeze-out’ and ‘sell-out’) (Part 28 Chapter 3 of the 2006 Act), as well as provisions enabling companies to ‘opt in’ to the ‘breakthrough’ provisions which have the effect of removing pre-bid defences for opting-in companies (s 966 CA 2006).
Most of the new statutory rules only apply where there is a takeover bid within the Directive. It is important therefore to understand what takeover bids are captured by the Directive. The jurisdiction only relates to a public offer for the transferable securities of an EEA company where the securities carry voting rights and are admitted to trading on an EEA-regulated market provided that the bid’s object is control of the company or where control has already been acquired.
Voting rights are defined as votes in a general meeting, including rights that may only arise in certain circumstances.
The statutory rules require additional disclosure in directors’ reports if the company had securities carrying voting rights admitted to trading on a regulated market at the end of the financial year, whether or not the company is presently subject to a takeover bid. The aim is to ensure transparency in relation to the share and management structures of companies that may become subject to a bid within the terms of the Directive (s 992 CA 2006).
The Act introduces a new criminal offence for failure to comply with rules relating to the documentation on a takeover bid. This applies if there is a bid within the terms of the Directive to which the Code’s rules apply. If the document does not comply with the document rules then an offence is committed.
In relation to an offer document, the offence could be committed by a company or by a company’s directors, officers or shareholders. In relation to a response document responding to a bid, the offence could be committed by any of the target company’s directors or other officers, but not the target company itself.
Liability would only lie where the person knew of or was reckless as to the non-compliance of the relevant documents and where that person failed to take all reasonable steps to ensure that the documents did comply (s 953 CA 2006).
The offeror has to reach the relevant 90 per cent threshold before and cannot give a ‘squeeze-out’ notice after the end of the period of three months after the closure of the last date on which the offer can be accepted. It should be remembered that the purpose of the provisions is to ensure that where an offer is made to acquire all the shares or shares of a class that the offeror does not already hold, then if the offer is accepted by 90 per cent in value of shareholders, the offeror can give notice to acquire the other 10 per cent. Similarly there is reciprocity in that the remaining percentage of 10 per cent or less can serve notice to be acquired. These are the ‘squeeze-out’ and ‘sell-out’ principles in the Act and existed in the 1985 Act although they have now been amended (Part 28 Chapter 3 of the 2006 Act).
The Takeover Directive provides for the cancellation of companies’ pre-bid defences. The pre-bid defences are where minority shareholders can issue disproportionate voting rights and where they have restrictions on the transfer of shares in the company’s articles or in separate contractual agreements. The Act permits UK companies to ‘opt in’ to a regime, which has the effect of cancelling these pre-bid defences. A company may ‘opt in’ by passing a special resolution. It can ‘opt out’ again by passing similarly a further special resolution (s 966 CA 2006).
If a person suffers loss by reason of the rendering invalid of a pre-bid defence, that person is entitled to such just and equitable compensation as may be ordered by the court (s 968(6) CA 2006).
Section 942 CA 2006 provides the definition of the Panel, i.e. the Panel on Takeovers and Mergers, which has functions in relation to the supervision of takeovers and mergers within the Takeovers Directive and beyond.
The Panel is responsible for issuing Principles, Rules, Rulings and Directions. The Act makes provision for this in ss 943–946 CA 2006. Section 952 provides for sanctions in relation to breach of rules issues by the Panel.