The City Code on Takeovers and Mergers

1. Introduction

The City Code on Takeovers and Mergers commonly known as the Takeover Code is a set of rules designed to ensure fair, transparent and orderly procedures when one company seeks to acquire control of another. Administered by the Panel on Takeovers and Mergers (the Panel), the Code applies to public companies whose securities are admitted to trading on a regulated market in the UK.

2. Core Objectives

• Protection of shareholders: All shareholders should receive sufficient information and an equal chance to decide on the merits of a bid.
• Equality of treatment: No shareholder should be disadvantaged by the timing or structure of a bid.
• Market integrity: The Code seeks to prevent market manipulation and insider trading surrounding takeover activity.
• Efficient resolution: The process should be swift, reducing uncertainty for both the target and the bidder.

3. Who is Covered?

The Code applies to:

• All public companies listed on a UK regulated market (e.g., London Stock Exchange Main Market, AIM).
• Companies whose securities are traded on an overseas market but whose shares are also admitted to a UK market.

Private companies, unlisted ventures and entities that are not public for the purposes of the Code are generally exempt, although certain transactions may still be subject to other UK legislation such as the Companies Act 2006.

4. Key Definitions

4.1 Control

Control is defined as holding, directly or indirectly, 30% or more of the voting rights in a company, or the ability to exercise influence over the companys affairs.

4.2 Offer and Bid

An offer (or bid) is a proposal to acquire control of a target company. Offers may be:

• Mandatory: Required under the Code when a shareholder, acting in concert, acquires 30% or more of voting rights.
• Voluntary: Initiated by a bidder without the trigger of a mandatory offer.
• Partial: Seeks to acquire a specified shareholding (e.g., 20%) without demanding full control.

4.3 Acting in Concert

Two or more parties are considered to be acting in concert when they cooperate or agree to influence the outcome of a takeover. Such parties must disclose their combined holding and are treated as a single entity for the purpose of the 30% threshold.

5. The Takeover Process

The process is structured around a series of mandatory steps, each with strict timing rules known as schedules. The most common schedule is the 30% rule schedule, which proceeds as follows:

During the offer period, the target company must provide a Statement of Reasons explaining why it recommends acceptance or rejection. The Panel monitors compliance with disclosure and timing rules throughout.

6. Disclosure Obligations

Both the bidder and the target have extensive disclosure duties, designed to keep the market fully informed:

• Bidder: Must disclose the offer price, form of consideration, financing arrangements, any material contracts, and any plans for the target after acquisition.
• Target: Must publish a Letter to Shareholders and a Document of the Target containing financial information, board statements, and any defensive measures.
• Shareholders acting in concert: Must announce their combined holdings when reaching 10% and again at 30%.

7. Defensive Measures

The Code permits targets to adopt certain defenses, but only if they are fair and reasonable. Common measures include:

• Poison pills (shareholder rights plans): Provisions that dilute the bidders shareholding if a threshold is crossed.
• Staggered board elections: Making it harder for a bidder to gain board control quickly.
• Targets own offer (whitewash): A counteroffer that must be approved by shareholders and the Panel.

Any defensive action must be disclosed to the Panel and the market, and shareholders must be given an opportunity to vote on its implementation.

8. Enforcement and Remedies

The Panel has the power to enforce the Code through:

• Issuing directions to rectify breaches (e.g., requiring additional disclosure).
• Imposing monetary penalties the maximum is currently 1million per breach.
• Refusing to register share transactions that contravene the Code.

In serious cases, the Panel may refer matters to the UK courts, where additional sanctions, including injunctions, can be sought.

9. Interaction with Other Legislation

While the Takeover Code is the primary regulator of takeover activity, it works alongside other statutes:

• Companies Act 2006: Governs general corporate governance, director duties and shareholder rights.
• EU Takeover Directive (as retained in UK law): Provides a baseline for fairness and transparency.
• Financial Services and Markets Act 2000 (FSMA): Gives the Financial Conduct Authority (FCA) powers over market abuse related to takeovers.

10. Recent Developments (20232024)

Key trends shaping the Code include:

• Increased scrutiny of dualclass share structures: The Panel has emphasized that such structures must not prejudice fairness to shareholders.
• ESG considerations: Bidders are now expected to disclose environmental, social and governance (ESG) impacts of the transaction.
• Technologydriven disclosures: The Panel encourages electronic filing and use of XBRL for faster data analysis.

11. Practical Guidance for Companies

11.1 For Bidders

1. Conduct thorough due diligence early to avoid postdeal surprises.
2. Prepare a clear, concise offer document that meets all Panel requirements.
3. Engage with the targets board early; a cooperative approach often speeds up approval.
4. Plan financing and disclose any contingent arrangements (e.g., bridge loans).

11.2 For Targets

1. Establish a dedicated takeover team (legal, financial, IR).
2. Maintain an uptodate Document of the Target to expedite the process.
3. Consider shareholder sentiment; transparent communication can mitigate activist pressure.
4. Review any defensive measures for compliance with the Code before implementation.

12. Where to Find More Information

The Panels website hosts the full text of the Takeover Code, guidance notes, and a searchable database of past rulings. Key resources include:

• The Takeover Panel Official Site
• Companies Act 2006
• Financial Conduct Authority