City Code on Takeovers and Mergers

The City Code on Takeovers and Mergers, often referred to simply as the “Takeover Code,” was first established in 1968. Over the years, it has undergone substantial modifications to adapt to the evolving business environment and regulatory landscape. The primary objective of the Code is to ensure fair and equitable treatment of all shareholders during takeovers and mergers, including minority shareholders.

The Code is administered by the Takeover Panel, which comprises representatives from major financial and business institutions. Effective under the Companies Act 2006, the Takeover Panel acquired the authority to enforce the Code legally. Before this, the Panel could only admonish offenders, refer them to their professional bodies for disciplinary actions, or request intervention from the Financial Conduct Authority (formerly the Financial Services Authority).

Key Principles

Equal Treatment: All shareholders must be treated equally and fairly.
Transparency: Shareholders should be properly informed of the terms of all bids and counterbids.
Fair Advice: Directors of the target company should provide shareholders with a fair and informed opinion on the likely outcomes of the bid.
Integrity: Directors are required to act in the best interests of shareholders and not in their own personal interests.
Open Negotiations: Ensures that takeover negotiations are open and honest.
Market Integrity: Prevents the emergence of manipulative practices in the trade of shares during takeovers and mergers.

Examples

Hostile Takeover: When company A makes an unwelcome bid to acquire company B, the Code ensures that company B’s shareholders are fairly informed about the terms and implications.
White Knight: When a friendly company (white knight) rescues a target company from a hostile takeover, the Code mandates that all shareholders are advised of this counterbid.

Frequently Asked Questions (FAQs)

Q1: What is the role of the Takeover Panel? A1: The Takeover Panel administers and enforces the City Code, ensuring fair practice in takeovers and mergers, and providing rulings and guidance on dealing with breaches.

Q2: How does the City Code protect minority shareholders? A2: The Code mandates equal treatment for all shareholders, ensures transparent information dissemination, and enforces that directors act in the best interest of all shareholders including minorities.

Q3: How is the City Code enforced under the Companies Act 2006? A3: The Companies Act 2006 grants legal authority to the Code, empowering the Takeover Panel to enforce adherence and impose sanctions for non-compliance.

Q4: What was the impact of incorporating the EU’s Takeover Directive 2005 into the City Code? A4: It harmonized UK takeover rules with European standards, enhancing cross-border transparency and shareholder protection.

Q5: What constitutes a breach of the City Code? A5: Failure to treat shareholders equally, lack of transparency in bid information, or directors acting in personal rather than shareholder interests can be considered breaches.

Takeover Bid: An offer made by one company to purchase the shares of another company to gain control.
Mergers: The combining of two companies into a single entity, often to enhance efficiency or market share.
Financial Conduct Authority (FCA): A regulatory authority overseeing the conduct of financial markets and ensuring consumer protection.

Online References

Suggested Books for Further Studies

Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide by Edwin L. Miller Jr.
Takeover Regulation: Enhancing Market Transparency and Protecting Shareholders by Du Du
Gower’s Principles of Modern Company Law by Paul Davies

Accounting Basics: “City Code on Takeovers and Mergers” Fundamentals Quiz

### What is the primary role of the Takeover Panel? - [ ] To manage corporate financial decline. - [x] To administer and enforce the City Code on Takeovers and Mergers. - [ ] To grant loans to acquiring companies. - [ ] To oversee daily trading activities in stock exchanges. > **Explanation:** The Takeover Panel administers and enforces the City Code on Takeovers and Mergers, ensuring fair practices during mergers and acquisitions. ### Under which Act did the City Code on Takeovers and Mergers acquire the force of law? - [ ] Companies Act 1985 - [x] Companies Act 2006 - [ ] Financial Services Act 2012 - [ ] European Union Regulations Act 2004 > **Explanation:** The City Code acquired the force of law under the Companies Act 2006, granting the Takeover Panel legal authority to enforce its provisions. ### What primary objective does the City Code strive to achieve? - [ ] To enhance company profitability. - [ ] To ensure rapid corporate expansion. - [x] To ensure fair and equitable treatment of all shareholders. - [ ] To facilitate foreign investments. > **Explanation:** The primary objective of the City Code is to ensure fair and equitable treatment of all shareholders during takeovers and mergers. ### What happens if a company director acts in their own interest instead of shareholders'? - [ ] They receive bonuses. - [x] It is a breach of the City Code. - [ ] It is considered good corporate practice. - [ ] They must resign immediately. > **Explanation:** Acting in personal interest rather than in shareholders’ interests is a breach of the City Code. ### When was the EU's Takeover Directive incorporated into the City Code? - [ ] 1999 - [ ] 2002 - [x] 2005 - [ ] 2010 > **Explanation:** The EU's Takeover Directive was incorporated into the City Code in 2005, enhancing regulatory harmony with European standards. ### How are shareholders advised under the City Code about bids and counterbids? - [ ] Privately by directors. - [x] Transparently with all terms disclosed. - [ ] Only if they hold a majority stake. - [ ] Via secret meetings. > **Explanation:** Shareholders must be kept advised of the terms of all bids and counterbids transparently. ### What authority could the Takeover Panel request to enforce decisions before the Companies Act 2006? - [ ] The central government. - [ ] Stock exchange authorities. - [x] The Financial Services Authority. - [ ] Commercial banks. > **Explanation:** Prior to the Companies Act 2006, the Takeover Panel could request the Financial Services Authority to enforce its decisions. ### What does the City Code prevent in terms of market behavior? - [ ] Increase in stock prices. - [ ] Mergers of large corporations. - [ ] Financial audits. - [x] Spurious market in shares. > **Explanation:** The City Code aims to prevent the emergence of a spurious market in the shares of companies involved in takeovers. ### Transparency in the takeover process is primarily aimed at protecting whom? - [ ] Company management. - [ ] Regulatory bodies. - [ ] Foreign investors. - [x] Shareholders. > **Explanation:** Transparency in the takeover process ensures that shareholders are properly informed and protected. ### How does the City Code ensure directors act in shareholders' interests? - [ ] By increasing their salaries. - [x] Through strict guidelines and enforcement. - [ ] By reducing their power. - [ ] Via mandatory resignations. > **Explanation:** The City Code establishes strict guidelines and enforcement to ensure directors act in the best interests of shareholders.

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City Code on Takeovers and Mergers