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Code Read: new rules on company takeovers

• FROM: May 2006 |
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• Code Read: new rules on company takeovers
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MELANIE WADSWORTH of Faegre & Benson LLP considers proposed changes to the rules regulating takeovers in the UK.

Following UK implementation of EU directives such as the Prospectus Directive and the Market Abuse Directive, the attempted harmonisation of legislation across Europe marches on with the coming into force of the Takeovers Directive (Interim Implementation) Regulations 2006 ("Regulations") to implement the European Directive on Takeover Bids.

Originally, the Department of Trade and Industry had planned to introduce the Takeovers Directive via the provisions of the proposed Company Law Reform Bill ("CLR Bill"), but it became clear that the CLR Bill would not have completed the parliamentary process by 20 May 2006, the date the Takeovers Directive must be implemented. Accordingly, it was decided to adopt the Regulations, as an interim measure, to meet the implementation deadline. The Regulations will cease to have effect as soon as the relevant provisions in the CLR Bill come into force, which looks unlikely to be before the second half of 2007.

Historically, fair and equal treatment of shareholders in UK public companies has been governed by The City Code on Takeovers and Mergers ("Code") issued on behalf of the Panel on Takeovers and Mergers ("Panel"). The Code has not had the force of law, but it has long been accepted that those who seek to take advantage of the facilities of the securities markets in the UK should conduct themselves in accordance with its standards. The stated aim of the Takeovers Directive, which is one of the measures adopted under the EU Financial Services Action Plan, is to strengthen the single market in financial services by facilitating cross-border restructuring and enhancing minority shareholder protection. So far, so laudable.

It is generally acknowledged that the Code has been effective in providing an orderly framework within which takeovers in the UK are conducted. The UK government has said that it wishes to preserve the many strengths of the existing system, including flexibility, autonomy and a principles-based approach. The measures implementing the Takeovers Directive provide statutory underpinning to the regulatory activities of the Panel while allowing the Panel scope to decide its internal structures and operational framework. The hope, therefore, is that little will change for the UK in this area, but it is worth noting the following points:-

1 The Regulations will affect only companies whose shares are traded on a "regulated market" which includes companies listed on the Official List of the London Stock Exchange, but not companies whose shares are traded on AIM. Accordingly, a twotier regime will be in effect in the UK until the CLR Bill comes into force. Official List companies will be regulated under the Regulations, whereas other companies currently subject to the Code, including AIM companies, will remain bound by the existing regime. When the CRL Bill becomes law, its provisions will apply to all companies currently subject to the Code.

2 In respect of Official List companies, the Panel will have power to order compensation in certain circumstances and to apply to the court to enforce its rulings and directions. The Panel will also be able to impose a range of sanctions upon persons who breach its rules and give formal directions to secure compliance with them.

3 Following consultation, it is expected that the Code will be amended prior to implementation of the Regulations to ensure that the rules meet the requirements of the Takeovers Directive. The Panel will continue to regulate takeovers of public companies, including AIM companies, whose shares are not traded on a regulated market in accordance with the rules of the Code, as revised. The Regulations will not, however, give statutory recognition to the Code in respect of such transactions and certain new powers of the Panel, such as the right to enforce its rulings by application to court, will not apply to them.

MELANIE WADSWORTH is a corporate lawyer at Faegre & Benson LLP, a firm which specialises in providing legal services to AIM companies. To find out more visit: www.faegre.co.uk

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