Which transactions do takeover codes deal with? This may seem to be an easy question to answer since we have a pretty clear idea of what a takeover bid is. It is an offer by someone aiming to acquire control of a company, addressed to the shareholders of the target company (other than the bidder and its associates), to contract with them for the acquisition of their shares. Of course, this is the core transaction which takeover codes deal with. However, a cursory look at the UK Takeover Code and at the codes in other jurisdictions which have followed the UK pattern reveals that a number of transactions falling outside this core are covered by the codes.
The purpose of a recent paper I have published (The Transactional Scope of Takeover Law in Comparative Perspective, ECGI Law Working Paper 313/2016, available here) is to identify these other transactions and to suggest reasons why they have been brought within the takeover codes and to explain the extent to which this has occurred.
This paper explores four such transactions. The first two of them are offers to the outstanding shareholders by persons already in control of the company, so that these are not offers to acquire control. Of these two, the inclusion of the first within takeover codes is the easier to explain. This is the offer made by the controller voluntarily (the ‘consolidating’ or ‘going private’ offer), usually where the controller already holds a high percentage of the voting rights in the company. Even though the addressees of the offer are fewer in number than in an acquisition offer, the problems they face are potentially the same, that is, information asymmetry and pressure to tender. These are problems which takeover codes are well adapted to solve.
The second example of an offer by a controlling shareholder is where the offer is required by regulation, in other words, the mandatory bid rule (the MBR). The paper does not seek to reprise the well-established debate over the functionality of this rule. However, since the comparative stress of the paper is on takeover codes in Asian jurisdictions, where shareholdings are typically concentrated, the paper analyses the ways in which the MBR has been softened in its transition from the UK (a dispersed shareholding jurisdiction) to certain Asian jurisdictions and the consequences in others (notably Singapore and Hong Kong) of sticking to a strict version of the MBR.
The third transaction considered is where shares move into the hands of an acquirer, not by reason of a contract between acquirer and shareholders, but by reason of powers conferred by statute. The clearest examples are statutory merger provisions and, in jurisdictions following the UK model, schemes of arrangement. The analysis here suggests that the most obvious risks of bidder opportunism are handled within the statutory rules governing mergers and schemes. Yet, takeover codes increasingly bring mergers and schemes within their purview. It is suggested that this is a form of supplementary regulation, arising out of the fact that takeover codes have developed the regulation of contractual control shifts beyond what the rules governing the statutory mechanisms have achieved. Coupled with the potential for transaction designers to avoid this additional regulation by shifting into the statutory mechanisms, which can be used to produce economically equivalent results, a case for takeover codes to deal with statutory control shift mechanisms can be made out.
The fourth transaction is a control shift produced by contract between company and shareholders or investors without any contracting between acquirer and existing shareholders. The example examined in detail is the share buy-back. This has been extensively regulated by the Hong Kong codes, in part because the buy-back is a feasible mechanism for implementing a going private transaction in a concentrated shareholder jurisdiction.
The main focus of the paper is on a comparison between the UK Code, designed for a dispersed shareholding jurisdiction, and Asian Codes, where shareholdings are typically concentrated, and on identifying the distinct policy issues arising in the two cases. However, some reference is also made to the law of Delaware, which, whilst not a Code jurisdiction, has an innovative approach to protection of minorities against controlling shareholders.