Takeover Code Research Articles

Withdrawal of Open Offer: Impact on Merger and Acquisition Transactions in India

Securities and Exchange Board of India (SEBI) and the Supreme Court of India have taken a tough stand to allow for a withdrawal of open offers under the Takeover Code, 2011. Analyzing the regulations, it is clear that withdrawal, which did not exist in the earlier takeover regulations, is now allowed under conditions that render the withdrawal of an open offer impossible to complete. SEBI is vested with wide discretionary power under Regulation 27(1)(d), which reads as “such circumstances” of the Takeover Code, 1997, and so carried forward as Regulation 23(d) in the Takeover Code, 2011. The authors analyze the interpretation of “such circumstances” through the various judgments, highlighting the authorities’ understanding of such withdrawal. The self-placed restriction on such discretionary power is analyzed for its impact on merger and acquisition transactions. The importance of circumstances like market situation, the financial situation of the acquirer, material adverse changes, and nonreceipt of lender approval, whether it deserves a place in the regulation, and if yes, the mechanism to misuse of such provision and the protection of investor becomes the center of the article. The prima facie shift from not allowing withdrawal to debating for more clauses for withdrawal to be allowed, the article provides suggestions as felt necessary.

THE NEED FOR DIRECT STATE REGULATION IN THE CONTEXT OF THE ‘TAKEOVER CODE’ FOR CORPORATE CONTROL IN THE UK

The Takeover Code and Panel are integral to the regulation of mergers and acquisitions (M&As) and have a substantial role in controlling mergers and acquisitions which involve publicly traded companies in the UK. They serve to safeguard the interests of shareholders, maintain the integrity of shareholders and promote transparency in takeover processes in the UK. Therefore, undertakings somehow involved in takeover processes and bids must adhere to the Takeover Codes’ rules. In line with the Takeover Code, the Takeover Panel plays a crucial role in overseeing and enforcing the rules of the Takeover Code. However, the success of the Takeover Code and Panel is argued a lot lately. This article critically evaluates whether the historical development, substantive rules and current practice of the Takeover Panel and Code demonstrate a failure of self-regulation (market regulation). As a result, the need for direct state regulation of the market for corporate control is found. Thus, the remedy to the problem arising from the nature of the Takeover Code is searched in line with the Panel decisions, statutes and academic commentary.

Scheme of Arrangement in the UK Takeover Market: Does it Make a Difference in Firms’ Survival to be Tendered?

Compared with tender offers, bidders can easily obtain target firms in the scheme of arrangements. This study investigates the impact of deal and target characteristics on 803 firms’ survival to be taken over by a scheme of arrangement or a tender offer in the UK takeover market, during the 1995 to 2018 period, through applying survival analysis, including continuous (PH Cox, Weibull) and discrete-time (complementary log-log) hazard models. The findings indicate that the explanatory variables of target and deal characteristics play a significant role in both the scheme of arrangement and tender offer deals. Firm size, financial crises, the takeover Code shock, and the termination fees paid by a target firm increase the probability of a takeover of the target firm to be implemented by way of a scheme. Acquirers who are publicly listed and own a large stake in the target firm before the takeover intend to reduce the target firm’s probability of being schemed.
 
 Received: 21 April 2022 / Accepted: 15 August 2022 / Published: 2 September 2022

‘Mandatory’ public takeover bids in Hong Kong: the case of China Oriental

This article examines Hong Kong’s rules and practice on public takeovers and mergers as applied in a dispute involving the rules on mandatory general offers that spanned nearly a decade. Relevant events resulted in three hearings at the Hong Kong Takeovers Panel, which only heard a total of 25 cases in the 18-year period from 2003 to 2020.1 On two occasions, the Takeovers Panel had to answer the following questions: The unusual fact pattern of the case has put the rules on mandatory general offers to the test. The case reflects the Hong Kong Takeovers Panel’s regulatory style which tends to prefer an intuitive understanding of the facts of a case over a strict interpretation of the text of the Takeovers Code. It also highlights several procedural aspects that prejudice minority shareholders. Above all, the case reminds market participants of the cautionary language in the Takeovers Code that it ‘should not be interpreted as if they are statutes’ and ‘represent[s] a consensus of opinion of those who participate in Hong Kong’s financial markets and the SFC’.

Investor protection: effects of takeover convergence

PurposeTakeovers play a critical role as an external corporate governance mechanism to ensure investor protection. There is a long-standing debate on whether the convergence of corporate governance to global standards can enable emerging economies to ensure investor protection. This paper aims to analyse the evolution of the takeover code, namely, Securities Exchange Board of India’s Substantial Acquisition of Shares and Takeovers (2011) in India from the lens of investor protection. It then compares the takeover provisions in India, the USA, the UK, Singapore and Australia to examine the extent of convergence and its implications for investor protection.Design/methodology/approachUsing a cross-national comparative analysis of takeover mechanisms in common law countries, the study analyses the extent and relevance of convergence in form. The focus of the comparison is on regulations governing offer size, offer price, creeping acquisition and initial trigger limit for the mandatory open offer.FindingsThe findings suggest that certain provisions such as the initial trigger threshold for the mandatory offer and the offer prices of the Indian takeover code are converging with the standards in common law countries. However, the offer price determination based on market prices may not reflect true market value in an inefficient market like India. Other provisions such as creeping acquisition and offer size are not only diverging from the international standards but are also inconsistent with the key objective of investor protections of the Indian regulator.Research limitations/implicationsIndian takeover regulation needs to converge to higher global standards to ensure adherence to improved investor protection. This needs to be done for the initial trigger limit for mandatory bid and offer prices, after accounting for the differences in institutional structure. The Indian regulators need to revisit provisions on the initial trigger, creeping acquisition to converge to the broader principle of investor protection.Originality/valueThis technical paper provides a comprehensive depiction of takeover mechanisms in an emerging economy context as a means of investor protection. Further using a comparative lens, it analyses the relevance of convergence of takeover laws. Thus, advances the theoretical knowledge of limited extant work on external corporate governance mechanism in an emerging economy context.

The impact of possible-offer announcements on the wealth effect of target firms

ABSTRACTThe stock market materially and positively responds to released information on possible offers, likely because such announcements signal the high probability that formal bids will be offered. If potential takeover discussions are revealed earlier, then target shareholders will gain significantly lower abnormal returns around the time of when formal offers are announced. Financial bidders are less likely to approach targets with earlier possible offers; however, if they do offer possible takeovers, they need to pay incrementally higher bid premiums in their formal offers. The reform inherent in the U.K. Takeover Code of 2011 weakens a bidder’s willingness to offer possible takeovers. The pre-reform effects of possible offers on the wealth effect of targets differ from those seen after the reform.

The regulation of takeover bids in the UK: An evaluation of provisions for employee involvement

This article evaluates the provisions for information disclosure to employees contained in the UK Takeover Code, following the implementation of the Directive on Takeover Bids (2004/25/EC) in 2006 and further amendments resulting from the Kraft/Cadbury takeover in 2010, among other developments. It contrasts information and consultation (I&C) provisions across other EU directives on employment relations and emphasizes that the Takeover Bids Directive restricts itself to information disclosure, allowing employees merely to append their opinion to the offeree board circular. Detailed analysis reveals that very few opinions have actually been given over the past 12 years (2006–2017 inclusive), and of these almost one-third complain about lack of information. These empirical findings highlight the weakness of the UK provisions, and the article concludes by proposing areas where further regulatory reform might strengthen I&C in the takeover process.

A Controversial Case of Ajay Singh – Spice Jet takeover

India's Security Market regulator.i.e., Securities Exchange Board of India (SEBI) thinks that the most important regulation of the Indian Securities Market that is the Take Over Code has been through a tough time and has been tested quite a few times due to numerous corporate takeover clashes and struggles in India. Securities Exchange Board of India (SEBI) having the main aim and purpose of protecting the rights of shareholders being affected due to the corporate takeovers is very strict regarding the application of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. However, the proper application of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 has been very ambiguous and the interpretation of the same depends upon case to case coming before the Board's ambit. Many loopholes have been found and are continuously under the scrutiny of SEBI. Reacting to the evolving times, Securities Exchange Board of India (SEBI) has actively taken part in making fundamental changes and amending Takeover Code from time to time to be at par with the changing society and international standards of takeover and merger regimes. SEBI has also provided us with many clarifications on the provisions of the Takeover Code. But one such instance where SEBI went easy on the party was during the takeover of the low-cost airline Spice jet. The takeover in 2015 was very unique because of two major reasons. They are: • It noticed the comeback of Mr. Ajay Singh, the co-founder of the carrier airline who had left the business a few years ago. • And it was also one of the first instances where the purchase price of the takeover was not mentioned and no mandatory open offer was made to the existing shareholders of the airline company. Besides all the controversy in place, SEBI decided that the entire takeover procedure was legitimate and the exemption for not making a mandatory open offer to the existing shareholders of the company was correct in place and was in accordance with the Regulations in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This paper will be giving the necessary details about the background of the deal, will analyse dynamics of the transaction and will also discuss about the controversy involved with this deal and what the Authorities decided.

A Comparison of the Law Relating to Schemes of Arrangement and Takeover Offers in New Zealand

This paper explores the increasing popularity of schemes of arrangement under the Companies Act 1993 as an alternative mechanism to effect corporate takeovers by comparing schemes with traditional takeover offers under the Takeovers Code. Parts I and II of this paper introduce and provide background on the rationale for the regulation of takeovers. Parts III and IV explain the law relating to takeover offers and schemes, including an explanation of the process for effecting a takeover under both mechanisms. Part V of this paper considers whether shareholders are adequately protected when a takeover occurs by way of a scheme in comparison to the Code’s paradigm of shareholder protection. Part V submits that shareholders are sufficiently protected as the result of several additional protections that form part the scheme process. Part VI of this paper discusses the advantages and disadvantages of a scheme when compared to a takeover offer to understand why a bidder may choose to structure a takeover as one over the other. As a result of this comparison, this paper submits that while there are arguable advantages and disadvantages to both mechanisms, on balance, both can produce a successful outcome for a bidder. Finally, this paper explores the potential to reform the Companies Act to make the scheme process more efficient.

Striking a Fair Balance in UK Takeover Law: Market Interests, Power of Regulation, and Enforcement

In this article, the author identifies the main characteristics of the UK takeover regulatory regime, which is unique compared to other models in advanced capital markets. The principal values of the Takeover Code, the functional constitution of the Takeover Panel, the expertise-based approach to enforcement, and the minimal intervention of the judiciary help strike a fair balance among various market interests. With this model, minority shareholder’s engagement, employee’s participation, and public interest in market integrity have been addressed within the principle-based investor primacy while not destabilising the UK market for corporate control because of incumbent shareholder litigation and other regulatory actions. Of many rules, the disclosure requirement is being used to target various areas prone to abuse such as stake-building, virtual bid, deal protection arrangement, and post-takeover behaviour. The UK market has faced many cross-border takeovers and is competing with other major financial markets for corporate listings, this model has so far proven to be a resilient best market standard for takeovers.

The Current Barriers to Corporate Takeovers in Japan: Do the UK Takeover Code and the EU Takeover Directive Offer a Solution?

There is a common perception that the Japanese takeover market excludes foreign companies. However, this is not because Japanese takeover law has been designed to protect target companies. Comparing Japanese takeover law with the UK Takeover Code and the European Takeover Directive, considered as competitive models, this thematic and content-based investigation reveals that Japan does not have overt anti-takeover legislation. There is no stake-building control to alert a target company; there is no provision against virtual bids; post-bid undertaking is not legally binding on the bidder; the equivalent of the mandatory bid under the UK Takeover Code and the EU Directive is set at a much higher level so making it less costly for a bidder to obtain corporate control; there is no price control to protect minority shareholders. Yet the traditional symbiotic relationship between management and shareholders through cross-shareholdings and shareholder perks remains a major obstacle to a successful unsolicited takeover. Measures under Abe’s economic reform of three arrows have been introduced to increase the success of unsolicited takeover bids by reducing cross-shareholdings through tax incentive measures and increasing board independence through a soft-law based governance code. These are unlikely to have a major impact on removing the existing obstacles. Adopting the UK Takeover Code or the EU Takeover Directive would not cure the problem and would more likely entrench the existing situation.

The Austrian Takeover Act as a Contemporary Legal Transplant

The concept of a 'legal transplant' assumes that legal norms may be transferred from one jurisdiction into another. The main thesis assessed in the paper is that such a transplantation of law can be useful, but its effectiveness in a particular case may depend on the surrounding circumstances and conditions, in particular legal principles, but also economic and political factors. The starting point of the analysis is that the Austrian Takeover Act was a deliberate borrowing from the UK Takeover Code. Significantly, there were some adjustments made at the outset to accommodate the transplant. The analysis then considers particular difficulties which arose during the following years, which led to further adjustments to the Takeover Act and the Austrian Takeover Commission, the regulatory body. These amendments offer an exceptional insight into the differing legal structures, with the United Kingdom, its Common Law system, an unwritten constitution and the informal separation of powers and Austria, with its Civil Law system, a written constitution and a formalised separation of powers. The conclusion of the paper shows that there was no full harmonisation as a result of the transplant. The main factors preventing such harmonisation include the structure of the capital markets, the political influences (in particular the Grand Coalition in Austria) and strongly differing legal principles (and the separation of powers in particular). The results of the analysis not only assist scholars with their research as regards legal transplants, but may also assist the EU legislator. Starkly diverging initial conditions of a legal or economic nature in the Member States may often be seen as the main reasons for fierce resistance against harmonisation measures.

Hostile Takeovers and the Non-Frustration Rule: Time for a Re-Evaluation

This Chapter critically evaluates the Takeover Code’s keystone rule, the non-frustration rule. It first explores the scope of the rule to determine what steps target boards can and cannot take when faced with a hostile offer, and then considers the general meeting’s power to approve of frustrating action and why in practice such approvals are never seen. The Chapter then proceeds to consider where the rule is optimal for UK companies and the UK economy. It considers in particular the roots of the broad support in the UK for the rule, arguing that the commitment to the rule is a function not of the policy balance between the advantages and disadvantages of the rule but rather it is a function of the regulatory biases and preferences generated by the structure of power relations in a UK company. The Chapter then proceeds to consider this policy balance in a UK context and concludes that the policy case for prohibiting takeover defences is weak. It then moves to consider the reform options in light of the post- Cadbury and Kraft debate on this issue. The Chapter considers and supports both reform of the non-frustration rule (by abolishing the rule) and a higher acceptance threshold (which effectively enables shareholders who are interested in long term fundamental value to make the decision). But the Chapter rejects disenfranchisement of short-term shareholders and an enhanced public interest test. It concludes that it is now time for the Panel to engage with the broader consequences of the rule and possible reform options.

The Transactional Scope of Takeover Law in Comparative Perspective

The core activity regulated by takeover codes is the voluntary offer by a bidder addressed to all the shareholders of a target company (other than the bidder) to acquire their shares in order to give the bidder control of the company. Around this core transaction, however, takeover codes regulate a range of other transactions. This paper explores four such transactions. Two of them are offers by persons already in control of the company: first, where the offer is made by the controller voluntarily (the ‘consolidating’ offer) and, second, where the offer is required by regulation (the mandatory bid rule). The third transaction is where shares move into the hands of an acquirer, not by reason of a contract between acquirer and shareholders, but by reason of powers conferred by statute. The clearest examples are statutory merger provisions and schemes of arrangement. The fourth transaction is a control shift produced by contract between company and shareholders or investors without any contracting between acquirer and existing shareholders. The example examined in detail is the share buy-back.The purpose of the analysis is to determine the rationale for applying rules formulated for general, voluntary offers to acquire control to these peripheral transactions – either in full or in part. The focus of the analysis is on the UK Takeover Code and the variants of it which have been adopted in various Far East jurisdictions. To some extent the drafters of the UK Code faced the same problems as those in the other jurisdictions and the resulting rules have a high degree of commonality across the codes. However, the dominant shareholder structure of public companies in the other jurisdictions is very different from the dispersed UK pattern. The drafters of the non-UK codes have thus faced difficult issues about how to shape relations between controlling and non-controlling shareholders which the UK code is able to ignore or downplay. Some reference is also made to the law of Delaware, which, whilst not a Code jurisdiction, has an innovative approach to protection of minorities against controlling shareholders.

Critical Exposition of Japanese Takeover Law in an International Context

There is a common perception that the Japanese takeover market excludes foreign companies. But this is not because Japanese takeover law is designed to protect target companies. Comparing Japanese takeover law with the UK Takeover Code and the European Takeover Directive, this thematic and content- based investigation reveals that Japan does not have overt anti-takeover legislation. There is no stake-building control to alert a target company; there is no provision against virtual bids; post-bid undertaking is not legally binding on the bidder; the equivalent of the mandatory bid under the UK Takeover Code and the EU Directive is set at a much higher level so making it less costly for a bidder to obtain corporate control; there is no price control to protect minority shareholders. Yet the traditional symbiotic relationship between management and shareholders through cross-shareholdings and shareholder perks remains a major obstacle to a successful unsolicited takeover. Measures have been introduced to increase the success of unsolicited takeover bids by reducing cross-shareholdings through tax incentive measures and increasing board independence through a soft-law based governance code. These are unlikely to have a major impact on removing the existing obstacles. Adopting the UK Takeover Code or the EU Takeover Directive would not cure the problem and would more likely entrench the existing situation.

Debunking Rule 21 of the Takeover Code 2013

Debunking Rule 21 of the Takeover Code 2013

Corporate Law and Self-Regulation

This paper explores the different ways in which market actors are “co-opted” as corporate law regulators. It considers the the preconditions for generating “endogenous self-regulation” through the lens of the formation and operation of the UK Takeover Code and Panel. The paper argues that its incontrovertible success as a command, control and surveillance regulator is in large part attributable to merchant (investment) banking control over the production of the original Code and the ways in which the Code generates direct and indirect income opportunities for investment bankers in takeover activity, referred to in the paper as “bribing the quarterback”. The paper also uses the Takeover Panel example to explore the unexpected regulatory biases that are generated by the survival and legitimacy concerns of the self-regulator itself. From endogenous self-regulation, the paper moves onto consider “market-controlled” regulation where the state directly co-opts market actors as regualators. Using the example of “comply or explain” corporate governance codes the paper explores the powerful market-based enforcement drivers and argues that these drivers interact with a “comply or explain” regulatory outlook that is likely to, and does, lead to sub-optimal regulation that overweights accountability concerns. Setting these regulatory effects alongside the regulatory biases identified in the analysis of the Takeover Code, the paper shows that the regulatory biases generated by self-regulation are more muli-faceted than, and often inconsistent with, the standard account that self-regulation is likely to generate rules that favour the regulated.

The Use of Schemes of Arrangement to Effect Takeovers: A Comparative Analysis

Schemes of arrangement originated in England but have since spread to a number of other common law jurisdictions. One of the most common uses of schemes is to effect a change of control transaction, as an alternative to a takeover offer. In some jurisdictions schemes have become the mechanism of choice for recommended bids. Jurisdictions differ in their response to this use of schemes. As regards English schemes, the legislative provisions, the courts and the regulatory authorities are neutral as to whether a change of control is effected by way of a scheme or a takeover offer. By contrast, some jurisdictions, such as Australia, have put in place legislative provisions that potentially constrain this use of schemes, and other jurisdictions make changes to the operation of schemes (such as increasing the approval threshold) which seem designed to respond to concerns regarding the operation of schemes in this context. This paper explores the use of schemes to effect change of control transactions, including their advantages and disadvantages compared to a takeover offer. The concerns raised regarding this use of schemes are discussed and analysed, and the approach regarding English schemes is compared with that of other jurisdictions where a different approach is taken. These include Australia, New Zealand and Hong Kong. The paper questions whether the English approach can be defended, and concludes that it can, as a result of the significant safeguards in place to prevent abuse, in particular the oversight of the court in the process and the fact that the UK Takeover Code covers change of control transactions effected via schemes as well as via takeover offers.

Cross-Border Tender Offer, Exchange Offer and Business Combinations: A Comparison between U.S. Takeover Law, the New German Takeover Code and the 13th European Directive

This article deals with the latest developments in the regulation of cross-border tender offers in the U.S., in Germany, and in the European Union. In the U.S. the SEC issued a new release concerning Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings. The new release aims to solve the problem of exclusion of U.S. investors in foreign tender offers. The reason for the exclusion is the extraterritoriality of the U.S. securities regulation. The article will therefore discuss the problem of extraterritoriality in the U.S. and will show some alternative academic proposals for the application of the U.S. tender offer law. In Germany the new Takeover Code will become effective at the beginning of the year 2002. It is the first binding regulation of Takeovers in Germany. It also deals with the applicability in the cross-border context. This article will therefore compare the different concepts of applicability in Germany and in the U.S. with a view to the conflict of laws rules. In the EU the 13th Directive concerning Takeover Bids break down this summer. This article will discuss the reasons for the breakdown and the effects on the European tender offer market. Furthermore the article will compare the new rules and concepts of the German Takeover Code with the tender offer regulation in the U.S. Especially the modified duty of neutrality in the new Code is of interest.

The New Takeover Code by the Securities and Exchange Board of India

Merger & Acquisition in India have been governed by the age-old takeover rules. It seems that now, the Securities and Exchange Board of India (SEBI) has realized that these rules need to be revamped to keep them in line with the ever-changing global scenario. On September 2011, the SEBI amended the new set of takeover rules i.e.; the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The main purpose is to prevent hostile takeovers and at the same time, provide some more opportunities of exit to innocent shareholders who do not wish to be associated with a particular acquirer. With these rules coming into force, both promoter and public shareholders of a listed company would now get the same price for their shares being purchased by an acquirer. In another shareholder-friendly move, SEBI has scrapped the noncompete fee or control premium, which were being paid to only the promoters earlier and could have been as much as 25% of the public offer price. The SEBI has successfully done one part of the reform process by preparing the new takeover code, the other part requires it successful implementation.