One of the fears that led the UK Government and the Panel on Takeovers and Mergers to oppose initially the European Commission’s proposals for a Takeover Directive – despite the obvious influence of the Takeover Code on the substantive provisions of the proposals – was that transferring the Panel from a self-regulatory basis to a statutory one would open up the road to endless litigation about the Code and the Panel’s decisions. The Delaware courts and US practitioners may have been able to make such a system work, but in the UK it was thought that access to the courts by the bid parties would undermine one of the central features of the Panel’s method of operation, ie its ability to give immediate, real-time, binding decisions as the offer process developed. Although the Court of Appeal had held in the Datafin case (R v Panel on Takeovers and Mergers, Ex parte Datafin PLC  QB 815) that the Panel was subject to judicial review, despite its self-regulatory status, nevertheless the courts developed a distinctly light-touch and deferential approach to review. Review would be available during the bid process only in rare cases; it would be “historical”, designed to guide the Panel in the future, not to upset the outcome of particular offers. Thus, the incentives for bid parties to seek review were slight.
As we know, Article 4 of the Directive went to considerable lengths to dispel these fears. In respect of the particular fear highlighted in the previous paragraph it provide that the Directive should operate neither to affect the power of a Member State “to regulate whether and under what circumstances parties to a bid are entitled to bring administrative or judicial proceedings” nor any “power which the courts have to decline to hear legal proceedings and to decide whether or not such proceedings affect the outcome of a bid.” Moreover, the shift to a statutory basis carried the advantage that the Panel’s own powers of enforcement could be considerably enhanced. Beforehand, its own powers were confined to censure; more constraining sanctions were in the hands of third parties – the Stock Exchange, trade associations in the City, government departments – and these sanctions were not comprehensive, not always appropriate to address the harm done by the breach of the Code, and did not follow automatically from the Panel’s decision that a breach of the Code had occurred. Now Part 28 of the Companies Act 2006 gives the Panel a full suite of remedies under its own control, including the power to award compensation for breach of the Code or a Panel Direction (s 952) and to seek an injunction from the court against a person who defies a requirement of the Code or a Panel direction or ruling (s 955). In fashioning these sanctions, the legislature made full use of the first provision of Article 4 quoted above: access to the courts under s 955 is restricted to the Panel and a breach of the Code or a Panel ruling or direction is not to give rise to a private action for breach of statutory duty (s 965).
To the author’s knowledge, there has been no evidence since the transposition of the Directive that the courts have changed their stance on review. This is not surprising, since the deferential policy was based, not so much on the Panel’s self-regulatory status, as on the value the courts attached to the Panel’s capacity to give real-time, binding rulings as the offer developed. However, the question remained whether the legislature had shot itself in the foot by providing for Panel access to the courts to enforce its decisions. Would this mean that the Panel would be faced with the alternatives of giving up the injunctive power or facing searching court scrutiny of its decision? Since draconian sanctions are attached to disobedience to a court injunction, there were reasons to think that the courts might regard the deferential attitude they had developed towards review inappropriate in an enforcement context.
We now have an answer to this question in the shape of the decision of the Inner House of the Court of Session in an enforcement action brought by the Panel against a Mr King, chair of the club, who had failed to comply with a Panel Direction to make an offer to buy the outstanding shares of Rangers F C after he and those acting in concert with him had exceeded the 30% threshold for a mandatory offer. In broad terms, the court followed the deferential approach developed in relation to review. Although, following the Panel’s unsuccessful submission to the contrary to the Outer House ( CSOH 156), the Inner House confirmed the view that the court had a discretion not to make any order at all under s. 955, nevertheless its overall approach to the interpretation of the section was helpful to the Panel. It saw the function of s 955 in this light: “The function of section 955 is to provide a mechanism for the enforcement of rulings by the Panel. It is not concerned with review of those rulings or with a system of appeal against the rulings.” . It followed that the situations in which the court would not enforce a ruling of the Panel would be “rare” and normally confined to situations where there had been a significant change of circumstances after the Panel machinery had finished with the case. “Otherwise, the Court’s function is to enforce the rulings of the Panel.”  In taking this approach, the Court placed considerable stress upon the two stage appeal procedure available within the Panel structure itself (Hearings Committee and Takeover Appeal Board), the independence of these appeal bodies from the Panel executive and quality of the legal expertise present on the Takeover Appeal Board. Given this internal appeal structure, the Court was comfortable in adopting an approach limited to enforcement.
At first sight, this was an easy case for the courts, because Mr King did not challenge formally the decision of the Panel bodies that he had been acting in concert with others. His arguments against enforcement were impecuniosity (no personal resources to make the mandatory offer) and futility (shares trading above the mandatory offer price). The court easily dismissed the latter argument, but the former was more difficult. The shares had been acquired in the name of an asset management company (“NOAL”), registered in the British Virgin Islands. NOAL was wholly owned by a company incorporated in Gibraltar, whose sole director was another Gibraltar company. The first Gibraltar company was trustee for a Guernsey trust, established for the benefit of Mr King and his family, on whose behalf it held the only share issued by NOAL. Mr King’s argument was that he did not have access to the resources of NOAL in order to make the mandatory bid in the absence of personal resources to do so. It will be clear, however, that the implication of the impecuniosity argument could be that Mr King had not been acting in concert with the other acquirers – whilst NOAL, presumably, could not be shown to have had knowledge of the activities of the other acquirers. So, the court had to look again at much of the same evidence as had convinced the Panel that Mr King had acted in concert.
Here again, the court’s approach to the impecuniosity issue was helpful to the Panel. First, following the “enforcement” analysis, the detailed findings made by the Hearings Committee and the Takeover Appeal Board on the acting in concert issue were “binding on the court”, at least in the absence of “serious errors on the face” of those decisions. Second, the court endorsed the Panel bodies’ approach to the interpretation of the facts as found. “In applying the Code, it is in our opinion important that the Panel, and likewise the Hearings Committee, the Takeover Appeal Board, and ultimately the court, should have regard to the reality and the substance of any takeover transaction.” . “If the Code is to be properly administered, it is in our view essential that the Panel should be able to pierce through the structures that are used to hold shares and to finance their purchase in order to discover the person or persons who are truly in control of an offer to acquire shares and to identify the true source of and control over the funds that are used in making the purchase.”  So, Mr King’s impecuniosity argument failed because the court took the view, as the Panel bodies had done, that he had de facto control over NOAL’s resources.
No doubt, the Panel returned pretty satisfied from its legal outing to Edinburgh. However, on another dimension, the King case was, and continues to be, frustrating for the Panel. The time-line says it all. The share acquisitions were completed by 2 January, 2015. Not until 7 June 2016 had the Panel found out about the acquisitions, investigated them and concluded that the acquirers were acting in concert. Mr King appealed to the Hearings Committee which upheld the executive in a decision of December 2016. Mr King appealed to the Takeover Appeal Board which upheld the executive in a decision of 30 March 2017. Mr King still did not comply with the direction to make an offer and so the Panel went to the courts. The Outer House rendered its decision on 22 December 2017 and the Inner House its decision on 28 February 2018, both deciding to enforce the Panel’s ruling. As of 27 April 2018 the BBC reported that no offer had yet been made, though Mr King had confirmed one would be forthcoming (https://www.bbc.co.uk/news/uk-scotland-glasgow-west-43926554). This episode shows the enforcement difficulties for the Panel where the person in question does not need access on a continuing basis to the facilities of the London market and so is insulated from the impact of the Financial Conduct Authority’s requirement that Code-breakers be cold-shouldered (see FCA’s Handbook, MAR 4).
This piece was first published here.
Paul L Davies QC (hon) is Emeritus Allen & Overy Professor of Corporate Law and a Senior Research Fellow at Harris Manchester College, Oxford.