Perhaps the most attractive aspect of the UK system is the ability of the Panel on Takeovers and Mergers (the Panel) to regulate the takeover landscape without interference from other public bodies. Amongst other things, the absence of interference means that the Panel is perceived to provide a superior degree of speed and certainty to a target’s shareholders, and market participants more broadly, in ‘live’ takeover transactions (as compared with, for example, judicial oversight of US takeover transactions through litigation). In its administration of the City Code on Takeovers and Mergers (the Code), the Panel prefers to establish close and collaborative channels of communication with bid parties, and, indeed, this is the expectation placed on the latter. In the event that the Code could be, or is, contravened, the Panel typically takes very swift and decisive action to maintain market stability (and safeguard its own legitimacy and reputation). This is well understood by the repeat players in the UK’s market for corporate control, and it is fair to say that the Panel enjoys a strong rate of overall compliance with the Code, especially in more modern times. This can be traced back to the largely self-regulatory nature of the takeover landscape – the Panel itself is staffed by industry insiders (rather than civil servants loyal to the state) and the City’s financial community has clear economic incentives to maintain the status quo.

However, the recent and bitter fight with Dave King has called the Panel’s ‘speed and certainty’ brand into question; the episode is a cautionary tale reflecting the limits of the Panel’s power in dealing with outsiders. Whilst the saga has (finally) ended in October 2019 with the Hearings Committee ‘cold shouldering’ King for a period of four years (which the Panel has only elected to do twice before–see Mr Morton and Mr Garner and Dundee Football Club), this was a Pyrrhic victory. We deal with other important aspects of the King case in a paper that is forthcoming in the European Business Organization Law Review, a draft of which is available on SSRN (other OBLB contributors have also provided useful commentary). Here, however, we draw particular attention to the timeline of events and suggest that cold shouldering, although a ‘nuclear option’-level deterrent that typically keeps insiders in check (in combination with Market Conduct Rule 4.3 of the FCA Handbook), is not necessarily the most appropriate or effective way to ensure Code compliance with respect to disciplining outsiders.

By ‘outsider’ we mean someone who does not operate in the UK market for corporate control on a regular basis and does not necessarily require continual access (if at all) to financial services and other associated market facilities in relation to engaging in takeover transactions. Such actors have no real incentives to observe the local customs and norms of the UK’s takeover landscape, and by extension potentially put the Panel’s control of the regulatory space in jeopardy. Armour and Skeel, for example, have argued that overseas activist investors engaging in the UK’s market for corporate control fit this description, given their access to foreign financial services that effectively nullifies the threat of cold shouldering. The same logic applies to King: he only engaged in a one-off takeover transaction and was self-funded.

King was able to wage a protracted war of attrition over roughly a four-year stretch before he finally made a Code compliant offer to purchase the shares in Rangers International Football Club (RFIC) that were not already owned or controlled by himself or by those with whom he acted in concert (ie a group of investor-supporters known colloquially as the Three Bears). In between the initial January 2015 trigger and the point at which the offer was posted in January 2019, King misdirected the Panel in a play for more time. King requested reviews of the Executive’s ruling before both the Hearings Committee and the Takeover Appeal Board, the decisions of which he ultimately ignored. This forced the commencement of proceedings in the Court of Session under Section 955 of the Companies Act 2006, which was an unprecedented step in the Panel’s history. On appeal, the Inner House confirmed that King was required to make a Rule 9 offer, but here, too, King stalled. He claimed that he was unable to access the requisite funds to make the offer due to South African exchange control regulations, and he also did not provide the cash confirmation statement. This created further delays and occasioned the Panel to instigate contempt of court proceedings against King. It was only after commencement of the contempt of court proceedings that King made the essential undertakings to satisfy the Court of Session. However, it is entirely possible that the sheer length of delay amounted to a chilling effect on the likelihood that the offer would achieve the 50 per cent uptake (which it did not; aggregately the offer only received 47.12 per cent acceptances and lapsed). Another issue is that much can take place over four years, such as a de-listing or a tactical share issuance that prejudices the general body of shareholders. On this occasion the Hearings Committee was of the view that neither of these outcomes had not taken place, but the point is that they could, if the conditions are right.

Leaving these concerns to one side, there must be a pivotal moment where the Panel’s priorities ought to shift from (i) ensuring formal Code compliance to (ii) preventing the erosion of its regulatory authority. Cold shouldering an outsider like King may not be the best way to achieve that outcome. How is it a punishment to cold shoulder a defaulting outsider who has neither the need for access to financial services nor the intention to engage in future takeover transactions? King implicitly (and tauntingly) posed the above question in a statement following the Hearings Committee’s decision to cold shoulder him: In terms of its practical impact, the ruling…does not impact upon my personal or business activities – including RFIC. It must be remembered that King invested solely for the love of the club, and he took a position to orchestrate a boardroom coup to remove directors that were in his view bent on destroying RFIC. On a particular reading of events, it is not outwith the realm of possibility to think that King was prepared to risk a protracted war with the Panel in which he would pay roughly £1 million in litigation costs, if there were a realistic chance that a delayed offer of £11 million would not garner sufficient acceptances (eg perhaps because of a chilling effect). In our view, it would be rational to interpret this as representing savings of £10 million and the gaining of boardroom control, with minimised financial and reputational consequences for King. Seen in this light, reasonable minds might wonder whether the Panel’s ceremonial ‘win’ – forcing King to make a Code compliant offer and cold shouldering him – was really tantamount to a crushing ‘defeat’.

In the circumstances – and bearing in mind that this may be a useful way forward in dealing with outsiders in future – we conclude by suggesting that a more fruitful disciplinary approach would require the Panel to think carefully about its ‘speed and certainty’ brand, the particular characteristics and motivations of defaulting parties and the range of sanctioning devices in its repertoire. It may be that the Panel ought to consider creating new sanctioning devices more specific to defaulting outsiders. For King, the intention was single-minded: wrestle control from an entrenched board and encourage engagement from a wider pool of like-minded investor-supporters concerned with the club’s rehabilitation. Armed with this knowledge, the threat of requiring King (and the Three Bears) to sell-down his holdings, and freezing his voting rights in the interim, was likely to yield the desired result in a far shorter period of time with less expense and less damaging publicity for the Panel (on this see Rule 9.7 and Bumi).

J S Liptrap is a PhD candidate at the Faculty of Law, University of Cambridge.

Anna L Christie is a Director of Studies in Law at Newnham College and a PhD candidate in Law at Trinity College, University of Cambridge.