By Adam Lloyd
When a company announces a takeover approach or outright bid it is almost always at a premium to the prevailing share price and the shares will inevitably rise to a level close to the offer price.
Any one selling shares the day before such an announcement will be kicking themselves that they didn’t hold on for another day or, more pertinently, they will ask “why weren’t we told?”. The age-old question of when to release price sensitive information rears its head, but in these situations there is an ultimate arbiter whose word is, quite literally, law. With the rise in SPACs and depressed values in many industries following the pandemic there is every likelihood that takeover activity will increase and this question is going to be repeated time and again.
The UK stock market has a strong and justified reputation as a properly regulated and orderly market, especially when it comes to takeovers. The Panel on Takeovers and Mergers (the Panel) is a statutory body (the companies Act 2006) that exists to supervise and regulate the rules of the City Code on Takeovers and Mergers (the Code).
As any financial advisor will tell you, when it comes to takeover activity in the London markets the Panel is all powerful and, like all referees, their word is final. The Panel has also been in existence since 1968 and it faces the constant challenge of interpreting a rule book that can’t possibly cover all eventualities.
The Panel and the Code are both a recognition that rules must be underpinned by principles and it’s those principles that guide decision making when the rules don’t work and it’s also those principles that determine when the rules need to be updated and refined. The pressure on the Panel to look again at disclosure and the timing of announcements will only increase, so what happens next?
The Code’s purpose (all 481 pages of it) is to ensure that every shareholder is treated equally when deciding whether to accept or decline an offer for their company. The Code also ensures that takeovers are conducted in an orderly fashion by following the rules and guaranteeing full disclosure to all shareholders. Not only that, company directors are bound to prevent the creation of a false market in their shares by withholding relevant information. This gets to the heart of the issue about the timing of announcements.
When does an expression interest become a declarable approach requiring shareholder approval? There are a least two parties in a takeover situation; the bidder (offeror) and the target (offeree) and the Code is quite clear on when to announce an approach from the offeror’s perspective but is less clear about when the target company must tell all.
As soon as the bidding company can confirm it has the financial means to complete the deal it has to tell the market, but the target company can disclose an approach as soon as it gets one if it chooses. Investors will be familiar with wording like “We have received an approach which may or may not lead to an offer for the company.” For the target company such an announcement has two objectives: to get the share price up and flush out more buyers. Clearly the offeror will want to delay any announcement as long as possible because they don’t want a bidding war that drives up the price against them.
Why then would a target company delay announcing an approach when it only seems to serve the purpose of the bidding company?
For the Panel the issue of a false market must take both sides into account. Allowing the target company full discretion about whether it announces an approach or waits for the bidder to announce must be open to abuse and appears to go against a core principle of the Code.
So when does an initial approach become something more than just passing interest? Surely if both sides begin to discuss the possibility of a deal the shareholders need to know. If it is worth discussing at Board level it must be price sensitive.
The Code almost certainly needs to rethink its approach and give the target companies much clearer guidance on when they should inform their shareholders. There will always be the unfortunate seller who acted a day too early but the we can also keep moving towards better disclosure to reduce that risk.