C3. Regulatory framework and processes Flashcards
Takeover regulation
Takeover regulation in the UK (and the US) is based on a market-based or shareholder-based model and is designed to protect a wide and dispersed shareholder base. In the UK and the US companies normally have wide share ownership so the emphasis is on agency problems and the protection of the widely distributed shareholder base.
In Europe most large companies are not listed on a stock market and are often dominated by a single shareholder with more than 25% of the shares. Regulations in Europe have been developed to control the power of these powerful stakeholder groups, which is sometimes referred to as a stakeholder-based system. European regulations on takeovers have generally in the past relied on legal regulations that seek to protect a broader group of stakeholders, such as creditors, employees and the wider national interest.
UK regulation – the City Code.
UK regulation – the City Code. This is a voluntary code that aims to protect the interests of shareholders during the bid process. Although it is voluntary, any listed company not complying may have its membership of the London Stock Exchange suspended.
EU Takeover Directive.
EU Takeover Directive. The takeover Directive was introduced by the EU in 2006 in order to achieve harmonisation and convergence of the shareholder-based and stakeholder systems. In terms of approach, it has mainly led to convergence of the European system and the UK and US one, by adopting many of the elements of the City Guide.
Key points:
• The mandatory bid rule. The aim of this rule is to protect minority shareholders by providing them with the opportunity to exit the company at a fair price once the bidder has accumulated a certain percentage of the shares (30% in UK). So that a bidder once control obtained does not exploit its position at the expense of minority shareholders.
• The principal of equal treatment. Requires the bidder to offer minority shareholders the same terms as those offered to earlier shareholders from whom the controlling block was acquired.
• Squeeze out rights. Give the bidder who has acquired a specific percentage of the equity (90%) the right to force minority shareholders to sell their shares (so enables them to acquire 100% of equity).
Regulation of large takeovers.
It is likely that any acquisition that is likely to lead to a substantial lessening of competition will be investigated by a country’s competition authorities. A detailed investigation often takes six months to complete and may result in a block to the bid or a requirement that the acquiring company disposes of parts of acquired business.
In the UK the Competition and Markets Authority may intervene to prevent mergers that cause the creation of the company with a market share of above 25%, if it feels that there will be substantial lessening of competition.
Mergers fall within the exclusive jurisdiction of the European Commission where following the merger, the following 2 tests are met
• Worldwide revenue of more than 5 billion euros p.a.
• European Union revenue of more than 250 million p.a.
The European Commission will assess the merger in a similar way as the Competition and Markets Authority in the UK, by considering the effects on competition in the market. The merger will be blocked if the merged company results in such a dominant position in the market that consumer choice and price will be affected.
The regulation of takeovers requirements
The regulation of takeovers concentrates on controlling directors in order to ensure that all shareholders are treated fairly.
Typically, the rules will require the target company to:
• notify its shareholders of the identity of the bidder and the terms and conditions of the bid;
• seek independent advice;
• not issue new shares or purchase or dispose of major assets of the company, unless agreed prior to the bid, without the agreement of a general meeting;
• not influence or support the market price of its shares by providing finance or financial guarantees for the purchase of its own shares;
• the company may not provide information to some shareholders which is not made available to all shareholders;
• shareholders must be given sufficient information and time to reach a decision. No relevant information should be withheld;
• the directors of the company should not prevent a bid succeeding without giving shareholders the opportunity to decide on the merits of the bid themselves.
Will the bidding company’s shareholders approve of a takeover?
When a company is planning a takeover bid for another company, its board of directors should think about how its own shareholders might react to the bid. A company does not have to ask its shareholders for their approval of every takeover.
• When a large takeover is planned by a listed company involving the issue of a substantial number of new shares by the predator company (to pay for the takeover), Stock Exchange rules may require the company to obtain the formal approval of its shareholders to the takeover bid at a general meeting (probably an extraordinary general meeting, called specifically to approve the takeover bid).
• If shareholders, and the stock market in general, think the takeover is not a good one the market value of the company’s shares is likely to fall.
The company’s directors have a responsibility to protect their shareholders’ interests and are accountable to them at the annual general meeting of the company.
A takeover bid might seem unattractive to shareholders of the bidding company because:
- It might reduce the EPS of their company.
- The target company is in a risky industry or is in danger of going into liquidation.
- It might reduce the net asset backing per share of the company, because the target company will probably be bought at a price which is well in excess of its net asset value.
Will a takeover bid be resisted by the target company?
Resistance comes from the target company’s board of directors, who adopt defensive tactics, and ultimately the target company’s shareholders, who can refuse to sell their shares to the bidding company. Resistance can be overcome by offering a higher price.
• In cases where an unquoted company is the target company, if resistance to a takeover cannot be overcome, the takeover will not take place, and negotiations would simply break down.
• Where the target company is a quoted company, the situation is different. The target company will have many shareholders, some of whom will want to accept the offer for their shares, and some of whom will not. In addition, the target company’s board of directors might resist a takeover even though their shareholders might want to accept the offer.
Because there are likely to be major differences of opinion about whether to accept a takeover bid or not, companies in most jurisdictions are subject to formal rules for the conduct of takeover bids.
Contesting an offer.
The directors of a target company must act in the interests of their shareholders, employees and creditors. They may decide to contest an offer on several grounds:
• The offer may be unacceptable because the terms are poor.
• Rejection of the offer may lead to an improved bid.
• The merger or takeover may have no obvious advantage.
• Employees may be strongly opposed to the bid.
• The founder members of the business may oppose the bid, and appeal to the loyalty of other shareholders.
When a company receives a takeover bid which the board of directors considers unwelcome, the directors must act quickly to fight off the bid.
Defensive tactics.
Defensive tactics. Where a bid is not welcomed by the board of the target company, the bid becomes hostile bid. The defensive strategy will normally involve attacking the value created for shareholders by the bid and sometimes this will extend to attacking the track record of the bidder. It could also involve the following tactics:
• White knights. This would involve inviting a firm that would rescue the target from the unwanted bidder (counterbidder).
• Crown jewels. Valuable assets owned by the target are sold to make it less attractive. Funds raised can be used to grow the core business, enhancing value or returned to shareholders.
• Litigation or regulatory defence. Target company can challenge the acquisition by inviting an investigation by the regulatory authorities or through the courts
• Poison pills. This is an attempt to make company unattractive normally by giving the right to existing shareholders to buy shares at very low price.
• Golden parachutes. Large compensation payments made to top management of the target firm if their positions are eliminated due to hostile takeover.
• Pacman defence. This defence is carried out by mounting a counterbid for the attacker (only for public, and its more about who is in control).
• Management buy-out.
