New edition of the Takeover Code

United Kingdom
On 1 May 2002 the Panel on Takeovers and Mergers published a new edition of the City Code on Takeovers and Mergers and the Rules Governing Substantial Acquisitions of Shares ("SARs"). Whilst the Code Committee of the Panel had previously announced several of the amendments, others seek to address items that have been announced by the Panel, for example in the Report by the Director General in the Panel's Annual Report. There is also some general tidying as well as updating to reflect a number of regulatory and legislative changes, such as the introduction of the Financial Services and Markets Act 2000 and the Financial Services Authority's new regime for the dissemination of regulatory information through approved Regulatory Information Services.

The following are some of the more important and/or interesting recent developments (the majority of which have been announced as Rule changes previously):-

  • an offeror must disclose in any announcement of a firm intention to make an offer (whether or not it is subject to any pre-condition(s)), details of any agreements or arrangements to which it is a party which relate to the circumstances in which it may or may not invoke, or seek to invoke, a pre-condition or condition and the consequences of so doing, including details of any break fee payable as a result. A similar disclosure needs to go in the offer document (see Rules 2.5(b)(vi) and 24.2(d)(vii));
  • it is open to an offeror to permit shareholders within CREST to accept an offer electronically without the need for an acceptance form (see in particular Note 4 on Rule 10). It should be noted that CRESTco has produced a pack containing specimen wording for inclusion in takeover documentation;
  • the new Rule 11.2 which, broadly, provides that where an offeror, or any concert party, has purchased, in exchange for securities, shares of any class of the offeree company carrying 10 per cent or more of the voting rights exercisable in that class in the three months prior to the start of, and during, the offer period, such securities will normally be required to be offered to all other holders of shares of that class. The securities to be offered must be offered on the basis of the same number of consideration shares received by the vendor, rather than on the basis of securities equivalent to the value of the securities received by the vendor at the time of the relevant purchase. Where there has been more than one relevant purchase, securities must be offered on the basis of the greater or greatest number of consideration securities received for each share in the offeree (see also the Notes on Rule 11.2);
  • Note 2 on Rule 20.2, which clarifies the conditions an offeree can impose when required to pass information to other actual or potential offerors i.e. confidentiality, reasonable restrictions on the ability to use the information to solicit customers or employees and requiring that the information must be used solely in connection with the offer or potential offer. The conditions imposed can be no more onerous than those imposed on any other offeror or potential offeror;
  • Rule 21.2 (relating to the payment of inducement fees) is relevant in the context of a "whitewash" transaction - the 1 per cent cap on the fee will normally be calculated by reference to the value of offeree company immediately prior to the announcement of the transaction;
  • the Panel has clarified its approach to ensuring an orderly process during the later stages of a competitive situation. Broadly, the Panel will require any revised offers to be published in accordance with an auction procedure.
Future Developments

The Code Committee has consulted on revisions to the Notes on Rule 9.1 and the SARs to: (a) address the potential for concerted practices between the trustees of an employee benefit trust and the board and/or a controlling shareholder; and (b) clarify the Panel's position on the regulation of collective action by shareholders seeking ongoing control of a company's board - the Panel's current position being that where joint voting action relates to a proposal aimed at achieving control of a company's board, there is a presumption that such shareholders and any proposed directors are acting in concert. The outcome of the consultation is awaited.

The Code Committee is currently seeking views on amendments to bring the establishment of dual listed company ("DLC") structures within the Code (see PCP 11). It is recommended that the Code should apply to DLCs from the start rather than only if and when there is a competing offer. It is also proposed that Rule 21.2 of the Code (which sets a limit on the level of inducement fees and other favourable arrangements between an offeror and offeree) should be amended to make it clear that such arrangements would include, for example, break fees or put and call options that may potentially benefit an offeror. The scope of Rule 21.2 would be extended to cover DLC transactions. This consultation resulted from recommendations from the Panel Executive in the light of its experience in regulating the offer by Carnival Corporation for P&O Princess plc in the face of a proposed DLC merger with Royal Caribbean Cruises Ltd. The consultation period ends on 28 June 2002.

The amended Code and all the consultation papers (PCPs) and published response statements can be found on the Panel's website at

For further information please contact:

Nick Callister Radcliffe
Corporate Partner
Phone: +44 (0)20 7367 2394
Email: [email protected]

Simon Howley
Phone: +44 (0)20 7367 3566
Email: [email protected]

Peter Bateman
Phone: +44 (0)20 7367 3145
Email: [email protected]