Company takeovers in the UK

 

This is an in-depth look at the ins and outs of company takeovers. There is a great deal of information involved and they are very complicated, so if it is affecting you (either you want to go through with a takeover or your company is being taken over) then take a look.

However, this is not meant to replace legal advice from a professional – it is still essential to speak to a commercial solicitor about your situation.

Topics we cover:

1) What is a takeover?6) Takeover structures
2) Public companies7) Documentation
3) Why do takeovers happen?8) Due diligence
4) Regulation9) Final thoughts
5) Friendly and hostile takeovers 

 

What is a takeover?

A company takeover is when a company acquires all or most of the share capital of another company and therefore becomes the new owner of that company.

In the UK, ‘takeovers’ are generally thought to refer to public companies, not private ones. A takeover of a private company is more often called an acquisition, but the process is similar.

Public companies

Public companies are those that trade their shares on a public stock exchange, such as the Main Market of the London Stock Exchange or its Alternative Investment Market (AIM).

Shares traded on a public stock exchange can be brought by anyone including members of the public and other commercial entities. Private companies only sell their shares to buyers under private agreements.

Why do takeovers happen?

There are a number of reasons that a company may wish to acquire another but the driving factor behind most takeovers is growth.

Companies may wish to acquire their suppliers or distributers in order gain control of the whole process and the profits that were being lost by paying other companies to provide these services.

Other companies may take over another in order to gain a new customer base, to own a complementary product or service, or to take advantage of the expertise within the target company.

Company takeovers in the UK are governed by the law and are complex undertakings that require the assistance of financial advisers and commercial lawyers. Companies should seek legal advice if they are contemplating acquiring another or if they have become the subject of a takeover bid.

Here is a look at the process of company takeovers in the UK.

Regulation of takeovers

Company takeovers in the UK are regulated by the Panel on Takeovers and Mergers (the Panel). The Panel’s role is to administer the rules contained in the City Code on Takeovers and Mergers (the Code) and supervise takeovers. The Panel also looks after mergers.

The Panel ensures that all shareholders in takeover bids are treated fairly.

The Code contains six general principles and has 38 rules. It binds the parties to the takeover to certain obligations and operates to fulfil its three underlying principles. These are:

  • To ensure all shareholders of the same class of the target company are treated equally and are given the necessary information to make an informed decision about whether or not to sell their shares
  • To ensure that a false market is not created in the securities of the bidding company or the target company
  • To ensure that the management of the target company does not do anything to frustrate the bidder’s offer without the consent of the shareholders. This final principle is one of the reasons that the UK is considered to have a favourable takeover system

The Code is not applied by the Panel rigidly. It must be followed but the Panel will make allowances and bend the rules to suit different circumstances.

The Panel has an internal complaints procedure that the parties must use in order to prevent the takeover becoming held up in court litigation. If a party falls foul of the Panel, it can impose heavy sanctions.

In addition to the Code, company takeovers in the UK are also subject to UK company law, such as FSMA 2000 and the Companies Act 2006, UK competition law, and the competition rules of the EU.

Friendly and hostile takeovers

Company takeovers in the UK are described as being either ‘friendly’ or ‘hostile’.

Friendly takeovers, or recommended takeovers, are takeovers in which the target company’s management and board of directors approve of the offer and publicly support it, even if the shareholders have yet to give their support.

Once the company’s management supports the takeover, the shareholders usually follow suit, providing of course that the premium they are offered for their shares is above the current market price.

A hostile takeover is one in which the target’s management do not agree to the offer and want to prevent the takeover from occurring. The management will publicly advise the target’s shareholders not to accept the bidder’s offer.

There is only so much the target’s management can do to prevent a hostile takeover as they are subject to the rules in the Code. Under the Code, management is not able to ‘frustrate’ the takeover, save for their initial argument to persuade the members to reject the offer. They cannot agree to substantial acquisitions or disposals, issue shares or rights over shares, or enter into contracts that otherwise they would not do so.

Management is often only able to try and persuade the shareholders to keep hold of their shares.

Takeover structures

There are two main ways to structure a company takeover: contractual takeovers and schemes of arrangements.

  • Contractual takeovers occur when the bidder makes an offer to the target company’s shareholders

If the takeover is to go ahead, at least 50% of the shareholders must accept the bidder’s offer. Sometimes the bidder will raise the percentage of acceptance required for the takeover to go ahead to 90%.

This is because if 90% of the shareholders agree to the offer, the minority shareholders who did not agree to the takeover may, under certain circumstances, be compelled to sell their shares to the bidder anyway.

This means the bidder will hold all of the shares in the target company and will give them complete ownership.

  • A scheme of arrangement takeover differs from a contractual takeover by putting the control of the process in the hands of the target company

It also involves the court in addition to the Panel. In order for a scheme of arrangement takeover to be successful, 75% of the target company’s shareholders must agree to sell their shares to the bidder during a shareholder meeting.

In addition, the High Court must approve the action. Once the court and the majority of the shareholders have approved the takeover, any shareholders who did not want to sell their shares to the bidder will be bound to do so anyway.

Documentation required

In order for the Panel to ensure its three principles are upheld, the Code requires that a number of publications and documents must be made public by both the bidder and the target throughout the takeover process.

The documents that must be made public can include a formal ‘possible offer’.

A target will be required to release this document if news of a potential offer to buy its shares has leaked to the market. After a possible offer announcement, the bidder has 28 days to announce their firm intention to make on offer or they must withdraw their offer.

If the bidder confirms their intention to make an offer, it must release a ‘firm intention to bid announcement’. This must contain details of the offer, including the offer price.

If a bidder releases a firm intention to bid, they will only be able to withdraw the offer in limited circumstances.

By the time a bidder releases its firm intention to bid, it must have completed its due diligence of the target company.

Once this is completed, the bidder must prepare a full offer document. This must be posted to all the shareholders and be made available to the market usually within 28 days of the firm intention to bid.

The bidder’s legal team will go through a checklist of things required by the Code which must be included in the offer document. It must state the intentions of the bidder in regard to the business, its employees and any pension schemes.

It must also contain financial information on the bidder, the target company and the terms of the offer. In addition, the offer document will contain any conditions to which the offer is subject.

So, a bidder will place many conditions on their offer in order to protect themselves from being committed to the takeover if it does not go the way they want.

For example, one condition may be raising the percentage of shareholders who agree to sell their shares in order to ensure they have a greater percentage of control over the target company.

Due diligence

Due diligence is conducted by the bidder’s legal team and involves them thoroughly researching the target company to ensure there are no unwelcome surprises for the bidder once it has made its firm offer.

In order to properly conduct due diligence, the bidder’s commercial solicitors will need access to financial and other records of the target company.

In the UK, public companies are required by financial regulations to make public any information that could affect the price of their shares. However, the bidder’s commercial lawyers will also have access to non-public due diligence information about the target company.

Final thoughts

The time a takeover takes to complete will depend on whether it is a scheme of arrangement or contractual takeover and if there are any extensions granted by the Panel.

There is a timetable set out by the Code which the bidder’s legal team will ensure they follow. The Code is meant to create a predictable framework for takeovers and therefore make the process as smooth as possible for companies, thus making the UK a takeover-friendly country, both for British and foreign companies.

As you can see, there is a great deal of work and knowledge required to make a takeover (or an acquisition) a success. Have a talk to us if you’re in a situation like this, and we will be able to help you find the perfect solicitor to make everything run smoothly.

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