Takeovers & Mergers Flashcards

Question 1

Q

MERGERS

AND

ACQUISTIONS

(M&A)

Answer

A

Buying, selling or combing different companies can aid, finance or help grow company without creating another business. Has to be careful decision based on fiancial criteria and market research.

MERGER

Two equal companies (or comparable: size, competitive position, profitability and market capitalisation) join powers.
Business and assets of two companies transferred to a third.
SH of target firm exchnage their shares for those of the acquiring firm.

^{Not common due to company egos. }

^{E.g. Carphone Warehouse and Dixon Retail. Successful takeover. Clear and strong share of the market came to together - ego aside - became biggest retailer in the UK. }

TAKEOVER

Bigger company takes over a smaller company (one takes initiative to buy out the other).

^{This is a process. ‘Takeover’ is not a legal term. }
^{Acquisition refers to public companies takeovers. Acquired company exists as a legally owned subsidiary.}
^{E.g. Lloyds takeover of Halifax - Bank of Scotalnd.}

^{HOW DO TAKEOVERS TAKE PLACE?}

Bidder talks to the shareholders and makes an offer
If accepted, bidder owns the public company.
Bidder recieves shares - appoints director and is the owner.

Question 2

Q

TAKEOVERS

- TYPES -

&

- REASONS -

Answer

A

^{Two types:}

Friendly takeover

Bidder informs Board before making an offer; that decides taking account SH interests and Co. Common in private companies. Public co have to be more careful, faster and diligent due to the stock market. If accepted, company taken over.

= peaceful, clear, straightforward and no conditions.

Hostile Takeover

Bidder bypasses Board or doesn’t inform them.Buys shares from the stock market until they have significant amount (25%) to take over the company by replacing the directors.

^{ (i) Offer higher than market price }

^{(ii) Proxy fight - persuade SH to replace managment with others who agree.}

^{(iii) Creeping tender offer - purchasing enough stock on open market to effect managment control}

^{Letter or public statement can be made that benefit for SH that bidder takeover (offer e.g. 10% more than the market price). Usually SH then replace directors e.g. Cadbury with Kraft.}

Legitimate but disliked as room for fraud. Unlikely banks will back hostile bids as co will give no help or information - not know if it is profitable - high risk.

REASONS FOR TAKEOVERS

Expansion/Int’l presence - less risk than est. different branches.
Improved efficiency
Knowledge sharing - expand different market or industry - buy ‘know how’ of another company in that sector.
Vertical/Horizontal intergration

E.g. veritical - oil company owns transportation, refinery and marketing business.

E.g. horizontal - Rupert Murdoch owned newspapers and Sky TV. Capture the market (careful of competition laws).

Investment

Question 3

Q

TAKEOVER

- PROCESS -

Procedure must be followed:

fairness, transparency and accountability.

- PANEL & TAKEOVER CODE -

Answer

A

Two tiers of regulation:

(1) Panel and Takeover Code

Self-regulatory body until implementation of Takeover Directive 2006. CA 2006 gives statutory authority to the Takeover Panel and City Code on Takeovers and Mergers.

(2) CA 2006 & Finance Services and Markets Act 2000.

^{THE PANEL}

^{Issue and administer the Code}
^{Supervise and regulate takeovers, mergers and other matters that Code applies}
^{FCA and UKLA regulate securities markets in general}

^{Code creates rule on takesovers to ensure a strong capital market. Panel of professional people with experience and expertise in business give an opinion (advisory role). If they say that the process is at fault and is not compliant with the right standards then the government will block this takeover. Example framework created by the government rather than imposing itself in company’s affairs.}

^{General principles and rules of the Code focus on the spirit to achieve the underlying purpose and not the letter. The rules are not framed in tehnical language.}

Question 4

Q

TAKEOVERS

- CODE -

GENERAL PRINCIPLES

Answer

A

(1) Equal treatment of shareholders

Between the same class
If control acquired, other holders must be protected

Offer involves money per share therefore even if you have one share you will recieve the same money. Important hostile takeover as bidder do anything to persaude the last 1%. Essential to ensure fairness.

^{All recieve the same information. Appointment of an independent adviser (appointed by target company) to ensure no one is lost in translation.}

^{Advice must be known to all SH with opinion of the board.}
Those issuing circulars must include statements taking responsibility for the content in order to avoid manipulation.
Profit forecasts and asset valuations must be made to specify standards and must be reported on by professional advisers.

Any misleading, inaccurate or unsubstantiated statements made in documents or to the media must be publicly corrected.

Actions during the coruse of an offer by the target company, which might frustrate the offer are generally prohibited unless SH approve these plans.

^{Employees of both sides must be informed about an offer.}

(2) Sufficent time and information to reach an informed decision on the bid.

Board must gives its view on the bid with the effect on employment, conditions of employment, and locations. It has to be fast but informed.

(3) Target board must act in the interests of the company and must not deny shareholders the opporunity to decide the merits of the bid.

S. 172 CA 2006 - director will be held accountable whether it is for the success of the company or not.

(4) No false markets

Takeover rumors will alter the market price. Only serious offers should be made otherwise it is a serious offence (insider dealing and market abusing).

(5) Bidder only announce a bid if avaliability of cash and other consideration is ensured

^{Person acquires interests in shares carrying 30% or more of the voting rights of the company, they must make a cash offer to all other shareholders at the highest price in the 12 months before the offer was anounced. Other SH have the option to leave.}

^{26% is control as no one can make a special resolution against your will.}

^{Interests in shares carrying 10% or more of the voting rights of a class have been acwuired by an offeror in the offer period and the previous 12 months, the offer must include a cash alternative for all shareholders of that class at the highest price paid by the offeror in that period.}

^{If offeror acuqires for cash any interest in shares during offer period, a cash alternative must be made avaliable at that price at least. If the offeror acquires an interest in shares in a target company at a price higher than the value of the offer, the offer must be increased accordingly.}

(6) Target company must not be hindered in the conduct of its affairs for longer than is reasonable.

Board is responsible for the negoitation. Duty to inform SH via normal resolution. Directors can do what they want but the SH will tell them if they are happy or not.

Question 5

Q

THE PANEL

- STATUS & STRUCTURE -

- ROLE -

- SANACTIONS -

Answer

A

^{Why the Panel?}

^{Flexibility, speed and certainty in decision-making}

^{People understand the essence of time and will have political or other motivations.}

^{Independence and regulatory autonomy}
^{Principles-based regulation}

Principles require the spirit of the law and not the letter.

Involvement of key city and business participants in developing takeover rules and regualtory framework
Professional expertises in regulatory activites, notably through Panel membership and secondments; and
Consenusal appraoch to regulation amongst those involved in the markets.

Decision is based on consent.

^{STATUS AND STRUCTURE }

Wide power to make rulings and give directions
Designated supervisory authority under Takeover Directive
Day-to-day work carried out by Executive

After Directive:

Provided statutory underpinning to its regulatory activites;
Left the Panel considerable scope to decide its internal structures and operational framework
Panel still an unincoporated body

^{ROLE- now that it is statutory there are other conditions}

Legislative
Interpretive (of the Code)
Monitoring
Enforcing the Code
Enforcement powers (S. 955 CA 2006).

^{SANCTIONS }

Claims to have wide ranging powers but I disagree. Most radical: s. 955 where they can take you to court but amount of time you will lose will impact SH and share price therefore it is better to come back when you are ready.

S. 952-956 CA 2006

^{Non-compliance with disclosure requirements and the Code’s rules on bid documentation may constitute criminal offences. Panel may apply to the court to secure compliance with the Code (s. 955). Breach of the Code does not amount to statutory breach of futy (s. 956). Parties’ only recourse is to the Panel and Appeal Board. Panel can report conduct to FCA (‘cold shouldering’) or UKLA (suspend shares).}

^{Doubtful system will be amended - fair monitoring system with recourse.}

JUDICIAL REVIEW

Q: Panel was regualtory then became statutory therefore is it subject to judical review?

Ex Parte Guinness - possible statutory review because it is a body of the state that performs governmental, legislative, supervisory and interpretative functions. Possible where there is injustice in a decision.

Court grants the Panel a great degree of deference

R (Datafin Plc) - decisions of a private body exercising public functions may be amenable to judical review.

Guinness - regarding power of the company to pay directors. Rules exist for payment in the company’s articles thus must be strictly observed.

DIRECTORS DUTIES & TAKEOVERS

General principle (3): s. 171-77 CA 2006

Directors must ensure that information is given in good faith.
Target companies must not enter into a contract otherwise than in the oridnary course of business unless approval of SH in general meeting.

Question 6

Q

BIDS

&

DEFENSIVE MEASURES

Anticipating Bid

Will not be in the exam.

Answer

A

^{Anticipating Impeding Bids}

Boards can demand to know identity of benefical owners (bidder) of any shares - s. 793-821 CA 2006.

You cannot accept an offer by someone you do not know. Ensure transparency.

FCA Disclosure Rules and Transparency Rules, holders (acting alone or in concert) of 3% of the voting rights in a listed PLC must notify the company and FCA. Target companies - each 1% threshold up or down has to be notified.

This aims to prevent ‘creeping bids’.

^{DEFENSIVE MEASURES - for the company that does not want to accept the bid. Code only applies where a Board has reasons to believe that an offer might be imminent (Rule 21). General company law applicable before that.}

(1) S. 171

Directors should act within their powers as they must run the company and also protect and bring success to the company. Accountable to shareholders. SH have to show: D took an action makes it difficult for bidder to takeover the company and action was improper. If it is commerical decision, difficult SH to prevail (Ctiterion Properties).

Poison pill requiring a new controller to pay out a sharehlder at a very high price may be breach of directors’ duty where it deters all potentional bidders*.
(2) S. 151

SH approve needed for decisions by directors of public companies to issue shares or grant rights to subscribe for or convert securities into shares. Prevent directors selling shares to those that have the same views as them. Prevents adoption of ‘poison pill’.

Poison pill -* defensive scheme e.g. a plan, SH will have right to buy more shares at a discount if someone buys a certain percentage of the company’s shares. Dilute a hostile buyer’s SH - this is improper.
Voting rights*- not apply where have different classes of shares with or without voting rights. Concentrate on SH oppose change and prevent them tendering shares.

^{(3) The ‘No Frustration Rule’ - Takeover Code - Rule 21.1(A)}

^{Board must not do anything that would undermine an immient offer (both companies have to play at a level playing field).}

Co cannot frustrate the offer i.e. do something that will deny the bidder the opportunity to make the offer.
Cannot play with the shares to dilute the power.
Cannot sell or dispose assets of the company.
Not allowed to enter into contracts.

= gross misconduct.

Defensive tactics

Convince SH not to accept an offer
Persuade competition authorities that the bid should not go through
Encourage a ‘white knight’ to come forward (another buyer that will buy off the ‘evil’ buyer)

UK - thought bid is between the bidder and the shareholders as the company is a SLP. No interference with rules are complied with.

USA - Board may block a hositle takeover (strong defensive measures). Authorities only intervene when reasonably necessary.

Question 7

Q

TARGETS PROMOTION OF AN OFFER

Answer

A

^{Directors need to promote the offer.}

^{Board has to decide if they support the bid. If spilt then must obtain indepdendent advice on any offer (Rule 3.1). Once decided, must circulate opinion to shareholders (Rule 25). No opinion given by directors with a direct conflict of interest.}

^{If SH want to go ahead dispite disapproval then s. 215-222 CA allows payment in advance to directors.}

^{Must have equality of information to competing offerors (Rule 20.2) & SH. Choice has to be in best interests of SH.}

^{Deal protection}

^{Deal must be communited to SH otherwise issues with s. 173 about exercising independent judgement. Directors can agree to recommend abidders bid to SH and not co-operate with other potentional bidders (area of uncertain).}

^{Rule 21.2 prohibts break-up/inducement fees (for directors to bring SH on their side), except with Panel consent.}

Equality of Treatment - Voluntary Bids

Rule 14

Where a company has more than one class of equity share capital, comparable offer must be made for each class whether such capital carries voting rights or not.
An offer for non-voting equity share capital should not be made conditional on any particular level of acceptances in repsect of that class, or on the approval of that class, unless the offer for the voting equity share capital is also conditional on the success of the offer for the non-voting equity share capital.
Proposal must be made to holders securitites convertible into equity shares (Rule 15).

Rule 32.2

If an offer is revised, all shareholders who accepted the original offer, must be entitled to revised consideration.

Rule 31.1 & 32.1

Initial offer has to be open for at least 21 days, revised offers for at least 14 days.

Rule 16

Except with Panel consent, offeror may not make any arrnagements with shareholders if there are favourable conditions attached which are not being extended to all shareholders.

Rule 6

Offeror purchases shares of a class in three months before offer period or during that period must either make or raise the level of the offer for that class to that paid outside it, if it is higher.

Rule 36

Offers for a proportion only of the shares or a class of shares possible if the Panel consents.

Mandatory Bids

Bidder must make an offer where it has already obtained de facto control of the company and might not wish to make a general offer to shareholders.

Rule 9.1

30% or more of the voting rights of a comapny
Not less than 30% but not more than 50%

then the person must set out comparable offers to holders of any class of equity share capital. Not required if control obtained via voluntary offer.

It must be a cash offer, or with a cash alternative. Must be highest price paid by the offeror or a member of the concert party within the past 12 months prior to the commencement of the offer (Rule 9.5).

Provision aims at protecting weaker SH that do not have enough leverage to negotiate (fairness).

Must not contain any conditions other than it being dependent on acceptances being such as to give the bidder 50% of the voting rights (Rule 9.3)
Mandatory offer may have major financial impact on companies forced to make an offer.

‘Concert party’

All shares of those “acting in concert” to be counted towards the 30% threshold
Every member of the concert party may be forced to make a bid (Rule 9.2)

E.g. Co in groups, Co and their directors, Co and their pension funds, Fund managers with companies managed by him, Advisers with clients.

If any of these or all together they hold 30% then the mandatory rules apply.

Question 8

Q

- BID PROCEDURE -

Answer

A

^{(1) Before the Offer}

^{Identify and possibly informally approach a target (a company that is available or one that you think you can buy somehow}
^{If target board is interested in a bid, provision of confidential information to the potential bidder – due diligence}
^{Offeror must first notify target board or its advisers of a firm intention to make an offer (Rule 1(a)). Allows prep.}
^{Requirement to keep bid secret and minimise the chances of any leak of information before a bid or possible bid is announced (Rule 2.1).}
^{Announcement required where the target is subject to rumour and speculation or bidder is taking its discussions about a bid beyond a restricted number of people (Rule 2.2).}

^{'Put up or shut up' rule (Rule 2.6)}

^{Announcement of a “possible offer” (Rule 2.4), released by the prospective bidder or target, triggers an automatic 28-day deadline.}
^{Bidder must either commit to a “firm intention to make an offer” announcement, or withdraw from the offer process.}
^{Withdrawal this prevents subsequent approach for a period of between 3 and 6 months. Only serious offers are acceptable.}
^{Panel may extend the 28-day deadline on request from the target company only in exceptional circumstances.}

^{(2) Announcement}

^{[This means that the company must consult internally to think about and to accept or reject the offer. Within the 28 days you must see the documents.]}

^{Announce when:}

^{Target’s board is informed of bidder’s firm intention}
^{Target shares are subject to rumour and speculation or there is an information leak (Rule 2.2)}
^{There was a ‘put up or shut up’ deadline}
^{Bidder crosses the threshold for mandatory offers}
^{After announcement, bidder normally becomes obliged to proceed with the offer}
^{Within 28 days of the announcement, the bidder has to send shareholders the formal offer documents (Rules 2.7 and 24.1)}

^{Sent 27th day = ask for exception or reject the offer for insufficent time.}

^{(3) The Offer}

^{Code provides long list of items that must be included in the offer (Rule 24), including:}

^{Name of the offeror and persons acting in concert}
^{Consideration offered for each class of security}
^Conditions
^{Intentions regarding the target company}
^{Financial and other information on the offeror}

^{Offer conditions - different types - shouldn’t be too restrictive as creates issues. Types (Rule 13):}

^{No conditions that depend on subjective judgments by offeror}
^{No conditions the fulfilment of which is in the offeror’s hands (condition is not necessary}

^{Offers for voting securities must be made conditional on acceptances of a sufficient level to give the bidder, together with securities already held, 50% of the voting rights in the target (Rule 10)}
^{Offers must contain a condition to deal with the fact that competition authority consent may be needed for the offer to be consummated (Rule 12). Both powerful have a share of the market.}

^{Timetable }

^{TBoard’s opinion on offer must be posted 14 days following publication of the offer (Rule 25.1).}
^{Offer must remain open for acceptances for least 21 days following its publication (first closing date; Rule 31.1)}
^{TBoard should not, except with the consent of the Panel, announce any material new information after day 39 following the publication of the initial offer document (Rule 31.9). Be unfair.}
^{Offer not be amended after day 46 following its publication, unless Panel granted approval for the offer to remain open beyond a period of 60 days. }
^{Offer may be extended beyond the first closing date. Without Panel consent offer cannot remain open for longer than 60 days after the publication of the offer (Rule 31.6).}
^{If offer received enough shareholder acceptances to satisfy its acceptance condition at the first closing date or a subsequent closing date, the offer may remain open beyond the 60-day period and until further notice}
^{If competing bid launched: 60-day rule measured by reference to the publication of the competing bid}
^{If offer extended beyond the first closing date but is not unconditional as to acceptance by day 42, SH accepted entitled to withdraw from the offer (Rule 34)}
^{Once offer unconditional to acceptances, must be additional extended offer period of at least 14 days (Rule 31.4).}

^{All conditions to offer must be satisfied within 21 days of either the latter of the first closing date or the date the offer became unconditional as to acceptances (Rule 31.7).}

^{Bidder must pay target shareholders the consideration for the shares within 14 days of the later of the first closing date or the date all the conditions to which the bid was subject are satisfied (Rule 31.8).}

^{Bidding again - Offeror may NOT in next 12 months:}

^{Make or announce another offer for the target - allows recovery.}
^{Acquire any shares of the target, which would require a mandatory bid.}
^{Be part of a concert party which acquires 30% or more of the voting rights in the offeree company.}
^{Make any statement which raises the possibility that an offer might be made for the target}
^{Take any preliminary steps in connection with an offer which might become know outside the immediate circle of the company’s top management and advisers}

^{Squeeze out -Bidder may buy out minority shareholders. Applicable where:}

^{The offer has been accepted by at least 90% in value of the shares bid for and}
^{If the shares are voting shares, those shares represent at least 90% of the voting rights carried by those shares (s.979)}

^{90% rule relates to the shares bid for, not the total number of shares of the class. Shares acquired after the date of the offer but outside the bid may only count toward 90% threshold if acquired at the same price or less than paid under the original offer (s.977). You have to make an offer to the remaining shareholders to buy their shares because most of the time they will not want to be in the company or you will want to have full control.}

^{Squeeze-out process triggered by giving notice to non-accepting shareholders}
^{Within three months of the last day on which the offer could be accepted (s.980).}

^{Sell out -Shareholders who did not accept an offer may still sell their shares to the new controller (s.983).}

^{90% threshold for sell-out right:}

^{Calculated in relation to shares, which the offeror has acquired as a result of acceptances of the offer together with other shares, which the offeror has acquired.}

^{Offeror must notify non-accepting shareholders of their sell-out rights within one month of the end of the offer period. Shareholders wishing to sell must give notice within three months of the end of the offer period or, if later, of the notice given by the offeror.They will get a fair price that reflects the market price of the rules.}

Question 9

Q

CASE

STUDIES

Answer

A

^{(1) Cadbury and Kraft}

^{Kraft was a global giant in the food and beverage business. Most known company Cadbury therefore wanted to make the offer. Wanted to buy their competitors to eliminate competition and expand in the European market. Not easy deal because Cadbury had revenue < $1 billion & SH not happy to let traditional English company to be taken over by an American company.}

^{Ownership of Cadbury 49% from the US, therefore already had part of the company.}
^{Initially Cadbury resisted the Kraft takeover.}
^{Offer: 745 pence-per-share.}
^{Deal: 840 pence per share plus a special 10 pence per share dividend.}

^{No monopoly or competition issues. Important for the acquiring company’s management and advisers to stay focused on the deal itself and the real decision markets – the shareholders of the target company.}

^Against

^{Nothing more British than Cadbury chocolate}
^{End of authentic, different British chocolate.}
^{Kraft is partly responsible for the processed crap food revolution in the USA}
^{Welcome to American management: Cutbacks. Outsourcing. Layoffs.}

^For

^{Complement each other; great deal in terms of business.}
^{Foreign interests will gobble more and more brands. The Chinese now owns America, soon Brits will be owned by next.}
^{If we said that everything that was originally foreigners must never own British, we’d be very poor compared to other more transparent countries.}

^{(2) Carphone Warhouse-Dixon}

^{Merger. Both companies had £10 billon of sale, more than 2,000 stores and more than 40,000 employees in 14 countries. CEOs of talking for two years about this takeover and for every obstacle that they could find there was a benefit that was more important than this disadvantage. No competition but a common will to come together.}

^{Even the most promising unions can be doomed by unanticipated culture problems with combining systems or tension at the top between executives who suddenly have to share responsibility for businesses they once headed outright”.}

^{(3) Olympic Air-Aegean Airlines - exceptional case.}

^{OA national airlineof Greece and AA (private airline). AA was profitable as it was working in accordance with international standards therefore it tried to take over the national airlines but the EC noticed that they would both have more than 90% of the market price in Greece and aboard (Greek ait transport market – quasi monopoly).}

^{Deal initially blocked by EU Commissioner for Competition.}
^{Impossible for a new airline to enter and keep a check on prices and the quality of services through competition.}

^{Two companies made a secret pact and spilt the destinations e.g. OA stopped coming to London. They did not make the takeover but in essence they did it. Commission therefore allowed it because if didn’t then both would be in liquidation. They used the Cyprus airlines, as a third company in the market to show that if a merger takes place it will not be a monopoly. This is an example of the authorities not sticking into the rules and taking into account other facts that can be very important.}

^{Air Lingus- Ryanair}

^{This takeover was not allowed although the market share was not as big (account for 83% of flights in and out ireland). OA and AA only 16%.}

Question 10

Q

TAKEOVER DIRECTIVE

Answer

A

^{Biggest change: system from regulatory to statutory. In terms of content, procedure and all the details the system has remained the same because the UK was refined on this issue. System works well and an example for developing countries.}

^{EU wants to create a level playing field across the internal market because companies taking over each other or merging at national level within the same country is a national issue (part of intergration). Have three basis goals:}

^{Protect those involved in a takeover (as well as protect all other parties from different perspectives);}
^{To give certainty, clarity and transparency}
^{Prevent people that want to take advantage of these different standards and want to make money by estopping the market.}

^{Directive: sets minimum standards and allows enough flexibility for the member states to do it their own way (a) because some countries with successful systems in place or (b) wanted countries to respect their own individual characteristics. Idea to strength the single market and ensure all member states have the right infrastructure in place.}

^{Two basic pillars are:}

^{Non-frustration rule: if the directors of the company do not agree with the takeover bid then they should not create additional obstacles.}
* ^{The breakthrough rule: you are not allowed to create new voting rights or to sell and buy shares when a reply to a takeover bid is still pending or just before a takeover bid.}

^{Whether Directive successful or not (something that was negotiated for 22 years) is questionable. Everyone was afraid that the member states would not welcome it but they did.}

Question 11

Q

INSIDER DEALING

- & -

MARKET ABUSE INTRO

Answer

A

^{These are two different offences, one is criminal and one is civil but both have to do with information (basis stock market operation). Choose one that can be proven: Financial Services and Market Act 2000 or CJA 1993.}

^{E.g. Cazebove Capital Management}

^{Partner at Cazebove now part JP Morgan convicted dealing < £100,000 profit trading ahead of three takeovers. Obtained confidential information & instructed friend to buy shares. Sharing of information is illegal. Once deals announced, share values soared and friend sold them at profit. Setenced 21 months and £60,000 fine.}

^{Key is to prevent a false market in listed company shares}
^{Now a criminal offence under Criminal Justice Act 1993 s.52.}

^{For an insider to be guilty, the jury must be convinced that:}

^{They were in possession of price-sensitive information e.g. information that will have an effect on the stock market.}
^{They knew it was inside information and}
^{They used that information to encourage an accomplice to deal (you can use yourself)}

^{It has to be an, ‘insider’ i.e. someone that had access to the information (director, shareholder, someone connected or if you have a relationship with someone inside the company) - S. 57.}

^{For the dealer to be convicted, the jury must be convinced that}

^{They were acting because of a specific tip and}
^{They knew the tip came from an inside source}

^{Section 52 CJA 1993}

^{An individual has information as an insider can commit offence by either:}

^{Dealing in price affected securities: s.52 (1)}
^{Encouraging others to do so: s.52 (2)(a)}
^{Disclosing info otherwise than in the proper performance of his functions: s.52 (2)(b}

^{NB. Offence only applies in respect of shares listed on a regulated market.}

^{S.54 definition of shares very wide (includes options and futures).}
^{S.56 (1)(d) if it were made public would be likely to have a significant effect on the price of any securities (price-sensitive information).}

^{Penalties: Max 7 years and or unlimited fine. Very few convictions: e.g. R v Collier (1987) - they used the information about the pending takeover bid in order to buy shares. Few convictions= threshold for criminal convictions. Have to prove insider & the mental element. This is reason why the government created a similar offence:}

^{S.397 FSMA (Misleading statements and practices) but s.52 CJA preferred by prosecutors because the penalties are higher. In practice, you need to check both civil and criminal (exam).}

^{ }

Question 12

Q

MARKET ABUSE

DETAILS

Answer

A

^{If you choose civil procedure then you have a strong tool because this section is very wide and very broad. It encapsulates all the questionable or illegal activities related to the market.}

^{S.118 FSMA}

^{Civil penalties for market abuse which run parallel to the criminal offences.}
^{Financial Conduct Authority (FCA) enforcement role for market abuse allows for a wider range of penalties to be imposed. (Financial penalty - public statement by FCA about the behaviour - apply for an injunction restraining market abuse - order for restitution).}

^{Seven different types of behaviour caught by the market abuse offence:}

^{Insider dealing}
^{Improper disclosure}
^{Misuse of information}
^{Manipulating transactions}
^{Manipulating devices}
^{Dissemination of information}
^{Distortion and misleading behaviour}

^{Examples:}

^{A false or misleading statement and engaging in a misleading course of conduct for the purpose of inducing another person to exercise or refrain from exercising rights in relation to investments or behaviour that may distort the market/ improper disclosure of info by an insider.}

^{Market Abuse Directive}

^{FMSA 2000 in line MAD. Example UK was ahead of the other member states. We have a directive because company’s can play with the shares and be involved in questionable activities even in different stock markets.}

^{Directive on insider dealing and market manipulation (market abuse)}
^{Aims fight cross-border market abuse by estbalish common appraoch amongst EU member States.}

Question 13

Q

CODE OF MARKET CONDUCT

Answer

A

^{Every company listed in the stock market has to adapt its conduct, behaviour and agents according to this code.}

^{Designed to ensure that company directors act in the best interests of shareholders and the company (when dealing with shares).}
^{Breach of the Code does NOT constitute a criminal offence, but may result in disciplinary action being taken by the FSA against an individual or company (‘name and shame’).}

^{Main provisions - designed to protect the market. The most important period to protect the market is when companies announce their results.}

^{Directors not dealing in shares without seeking approval from the chairman in advance, and recieving a date written acknowledgement.}
^{No trades undertaken in the ‘closed period’ prior to the release of reuslts because you do not have benefit of the doubt. If want to play the market has to be outside this period.}
^{Closed period is two months prior the announcement of the year-end or half-yearly results. One month prior to quartly results.}

Question 14

Q

NEED FOR REFORM?

Answer

A

Hector - market abuse in the UK’s financial services sector is at an ‘unacceptably high level’. UK system is too protectionist.

I think it is a balancing exercise. Have to protect the market as if we lose trust of investors then the stock market will not be attactive but undetrstandable that people are paid to use the system to make money. I do not think that being at higher levels than other countries is a bad thing. The stock market is something UK is proud of and a significant source of income.

Reform? no. Evidenced by CA in that was no change.

FSMA, s. 119 gives the right to have regular updates (of Code of Market Condct) depending on the chnage of circumstances. No other changes.
S. 120 aims to protect the talented people that want to make money without breaking the law (‘safe harbour’ provisions - disclosure or withholding of information does not amount to market abuse). Gov might play around with the rules but not chane the framework. Update and widen section only.

This all foreseeable unless there is a crisis in the stock market. Face UK is advanced means have to wait for developments and then reflect.

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