No. 3]
Take-Over Bids –
The City Code on Take-Over
and Mergers
D. Prentice *
I DEFINITION OF TAKE-OVER …………………………………………………………….
II SCOPE OF TH E CODE ………………………………………………………………………….
III THE APPROACH AND EARLY STAGES ………………….
IV INFORMATION ACCOMPANYING THE OFFER DOCUMENT …….
V MECHANICS OF THE OFFER PROCEDURE …………………………………
VI MANDATORY TERMS OF THE FORMAL OFFER …………………………
VII ROLE OF THE OFFEREE BOARD OF DIRECTORS …………………….
VIII M ARKET PURCHASES ………………………………………………………………………..
IX THE ROLE OF THE PANEL ………………………………………………………………..
X CO N CLU SIO N ………………………………………………………………………………………….
388
397
397
398
400
402
407
409
412
416
With the increase in popularity of the take-over as a means of
acquiring control of public companies the City, during the 1960’s,
witnessed a number of not very edifying squabbles in contests for
control of public companies. The Metal Industries and Gallagher
affairs give a flavour of these goings on. In the first of these the
respective boards of directors of Metal Industries, Ltd., and Thorn
Electrical Industries wished to effect a merger. However, Aberdare
Holdings, which was desirous of acquiring control of Metal Indus-
tries, Ltd. had other thoughts on the matter. After a stealthy market
buying spree Aberdare Holdings succeeded in acquiring 53 per cent
of the outstanding shares of Metal Industries, Ltd.’ Not to be foiled
Of the Faculty of Laws, University College London, Visiting Associate
Professor, University of Western Ontario.
‘This was before the holders of 10 per cent of a company’s equity share
capital were made to disclose their interests. See now Companies Act, 1967,
(Imp.) 15-16 Eliz. 2, c. 81, ss. 33 and 34. These provisions were introduced
with the specific purpose of uncovering a “creeping take-over” through the
market. See Jenkins Cmt. Report, Cmnd., 1749 (1962), at paras. 141-147.
McGILL LAW JOURNAL
[Vol. 18
in their proposed merger plans the directors of Metal Industries,
Ltd., issued to Thorn Electrical Industries, the preferred suitor,
five million authorized but unissued shares in return for a sub-
sidiary of Thorn Electrical Industries. Thus at “a stroke of the
pen Aberdare’s 53 per cent of [Metal Industries Ltd.] capital had
shrunk to 32 per cent”.2 The Gallagher affair was slightly more
complicated but no less questionable.3 Imperial Tobacco had at-
tempted to dispose, by public distribution, of its sizeable holdings
in Gallagher. The floatation was unsuccessful leaving the under-
writers with a lot of unwanted Gallagher shares on their hands.
Subsequently two rival bidders, Phillip Morris and American To-
bacco, sought control of Gallagher. The second of these two com-
panies, which made a partial bid for half of the Gallagher shares,
was eventually successful. Its success was partially attributable to
the fact that the underwriters, who had been left with the Galla-
gher shares after the unsuccessful Imperial Tobacco floatation,
sold all their shares to American Tobacco at the bid price. This,
however, violated the terms of the then prevailing City Code re-
quiring parity of treatment of all offeree shareholders, in that the
other Gallagher shareholders were only able to tender half of their
holdings.4 The wrongdoers went unscathed.
It was incidents like these that brought home to the City r the
lesson that breeding and good manners were no protection against
greed. Although as far back as 1959 voluntary guidelines had been
laid down for the regulation of take-overs these, for various rea-
sons, had proven ineffective. This ineffectiveness led to hostile
criticism in the financial press and calls for a more resolute de-
termination to police take-overs. Coupled with this the government
entered the act. Veiled threats were made that if the City could,
or would not, refurbish and effectively enforce its own self regu-
2 Stamp and Marley, Accounting Principles and the City Code, (London,
1970), at p. 17.
3 See Fortune Vol. 78, (Oct. 1968), at p. 79.
4 Stamp and Marley, op. cit., n. 2, at p. 31: “The lucky institutions on the
network were quickly relieved of their entire holdings in Gallagher at 35s.
a share –
everybody else was being offered that price for only half their
shares, with the other half apparently worth no more than 25s. in the open
market at the time”.
r The word City is a universally accepted colloquialism used to describe the
major financial institutions
in England, (Accepting Houses Association,
Stock Exchange, Clearing Banks, Merchant Banks, etc.) which are pre-
dominantly located within the City of London, and the titular head of which
is the Governor of the Bank of England. See: Ferris, The City (Pelican, 1965).
No. 3]
TAKE-OVER BIDS
latory code of conduct then the government would have to take
the task in hand.0 These pressures led to the publication in 1968
to the City Code on Take-overs and Mergers which forms the basis
of the present Code.7 The City Code is issued by the ‘City Working
Party’, a body convened by the Governor of the Bank of England
and composed of the representatives of the major financial institu-
tions in the City.8 To guarantee observance of the Code’s provi-
sions and to censure, or otherwise deal with those who violate
the terms of the Code, the Panel on Take-overs and Mergers has
been created. Again the composition of this body reflects the vari-
ous commercial interests operating in the City. More will be said
on the Panel at a later point.
The Code, as will be seen in more detail later, is a voluntary
system of self regulation. It is voluntary, however, in the sense
that rules of professional organisations can be said to be volun-
tary. The organizations sponsoring the Code have incorporated its
provisions as part of their own norms of professional conduct so
that violation of the Code’s provisions could lead to severe, if non-
legal, consequences.
The 1968 Code was revised in 1969.9 Recently the 1969 Code has
also been revised to reflect the experience gained in its enforce-
ment. It is proposed here to look at the more salient features of
this new Code’ 0 in light of the problems which enforcement of
the 1969 Code gave rise to.
OParliamentary Debates, Vol. 772, Oct. 30, 1968, at pp. 89-90.
7For a readable history of the evolution of the City Code see Weinberg,
Take-overs and Mergers (3rd ed. 1971), at pp. 122-135.
8 These are:
The Accepting Houses Committee
The Association of Investment Trust Companies
The Association of Unit Trust Managers
The British Insurance Association
The Committee of London Clearing Bankers
The Confederation of British Industry
The Issuing Houses Association
The National Association of Pension Funds
The Stock Exchange, London
9 Hereinafter referred to as the 1969 Code. (See footnote 10 for address
where a copy of the Code can be obtained). The 1969 Code is conveniently re-
produced in Stamp and Marley, op. cit., n. 2, at pp. 188-202; Weinberg, op.
cit., n. 7, at pp. 437-466.
10 Hereinafter referred to as ‘the Code’ or ‘the 1972 Code’. The 1972 is
published by Panel and was issued in February 1972. Copies are obtainable
from the Issuing Houses Association, 20 Fenchurch St., London.
McGILL LAW JOURNAL
[Vol. 18
I. Definition of Take-Over
One of the more intractable problems in the regulation of take-
overs is to define what constitutes a take-over.” It is clear that
effective control of a company can be exercised with a share-
holding that confers less than de iure control.12 Accordingly, bids
which result in the offeror controlling a substantial but not a
majority holding of the total shares, would normally be sufficient
to transfer effective control of the offeree company. The point at
which it is determined that effective control does pass is im-
possible to determine with any degree of precision and will, of
necessity, involve an element of arbitrariness as it is dependent
on such variables as the dispersal of share holdings and the level
of shareholder involvement and interest in the affairs of their com-
pany. The Code overcomes these definitional problems by strongly
discouraging partial bids. Rule 27 of the Code states that “generally
speaking, offers for less than 100 per cent of the equity share
capital of an offeree company not already owned by the offeror
or any of the subsiriaries are undesirable”. 3 To make such an offer
the Panel’s consent must be sought in advance. Rule 27 goes on
to provide that it is only in “special circumstances” that a “partial
offer not conferring voting control” can be made, a prohibition
that is bolstered up by Rule 21 of the Code which forbids an offer
from being declared unconditional 14 unless the “offeror has ac-
quired or agreed to acquire.., by the close of the offer 50 per
cent of the voting rights attributable to the equity share capi-
“Report of the Attorney General’s Committee on Securities Legislations
in Ontario 1965, (Hereinafter referred to as the Kimber Cmt. Report) at
para. 3.09:
The most difficult single question considered by the Committee in its
study of take-over bids has been the formulation of a definition of that
type of transaction to which any recommended procedural or substantive
rules should apply.
12See generally Berle and Means, The Modern Corporation and Private
Property (1968 rev. ed.), at pp. 66-84.
13 Oddly the Rule does not also refer the holdings of ‘associates’ of the
offeror. Such holdings are relevant for other purposes, for example, with
respect to the obligation to disclose market purchases made during a bid.
See Rule 31, 1972 Code.
14The 1972 Code defines
‘unconditional’ as follows: “References
to an
offer becoming or being declared unconditional include cases in which the
offer has, as a result of the receipt of sufficient acceptances, been announced
to have become or been declared unconditional, subject to one or more
other previously stated conditions, including for example the creation of
additional capital, the grant of quotation etc. etc., being fulfilled.” (p. 7)
No. 3]
TAKE-OVER BIDS
tal”.’ 5 Nor can the offeror circumvent this prohibition on partial
bids by limiting his offer to the holders of a single class of shares,
for example, management shares,0 but at the same time extending
the offer to the whole of the class in question. This ploy is pro-
hibited by Rule 21 of the Code which provides that where “a com-
pany has more than one class of equity share capital, a comparable
offer must be made for each class”.
Thus the Code solves the definitional problems of what consti-
tutes a take-over bid by compelling an offeror to bid for the total
corporate capital of the offeree company. An obligation which
extends to non-voting as well as voting shares. This not only fore-
stalls the dangers inherent in an offeror obtaining control of assets
for which he has paid only a fraction of their market value, but
it also has a tendency to afford to all shareholders “an equal
opportunity to sell their shares” 18 where there has been a bid for
control of a company. This latter policy objective is more clearly
15 Rule 21 must be read in light of Rule 27 which states that ‘Where a
partial offer “not conferring control” is permitted to be made then the
offer “may not be declared unconditional unless acceptances for not less
than” the percentage of shares bid for have been received. It will be very
seldom that a partial bid for less than majority control will be permitted.
Illustrative of the situation where it would be allowed are the unique facts
in Re Allied Breweries, Ltd., Panel release, Dec. 15, 1971. In that case fifty
per cent of the shares of the offeree company, Trust Houses Forte, Ltd.,
were held by a trust which declared that it would not, and legally could not
without a court order, exercise any voting rights attached to its shares
with respect to a take-over offer. Thus because of this passive attitude
on the part of the trustees actual voting control of the company could be
obtained by acquiring half of the remaining fifty per cent of the share
capital of the offeree company. In this situation the prohibition on making
an offer unconditional unless it was accepted by 50 per cent of the offeree
shareholders was ruled by the Panel to be inapplicable.
[1965] Ch. 250; [1964] 3 All E.R. 628.
16 See, e.g., Rights and Issues Investment Trusts Ltd. v. Stylo Shoes Ltd.,
17Rule 21 goes on to provide that an “Offer for non-voting capital should
not be made conditional on any particular level of acceptance in respect
of that class unless the offer for the voting capital is also conditional on the
success of the offer for the non-voting capital”. This prevents the holders
of two different classes of securities from accepting the bid for one class
but, for some ulterior reason, rejecting the bid for the other to the prejudice
of the holders of that class. See: British American Nickel Corp. v. O’Brien,
[1927] A.C. 369; Re Holders Investment Trust Ltd., [1971] 2 All E.R. 289
for examples of economic conflict between differing classes of corporate
securities.
‘8 Andrews, The Stockholders Right of Equal Opportunity in the Sale of
Shares, (1964-65), 78 Harv. L. Rev. 505, at p. 515.
McGILL LAW JOURNAL
[Vol. 18
manifest in the manner in which the Code regulates the two other
possible means of acquiring corporate control, namely, (i) pur-
chasing by private treaty a block of shares conferring effective
control, and (ii) stock market purchases. The 1972 Code, like the
1969, regulates the first of these by providing that where “effective
control” is being transferred the selling shareholder “should not…
do so unless the buyer undertakes to extend unconditionally with-
in a reasonable period of time the same offer to the holders of
the same class and a comparable offer to the holders of any class
of equity share capital whether such capital carries voting rights
or not”.1″ The problems of regulating the sale of corporate control
have been discussed elsewhere, 0 but it is submitted that this is
the most satisfactory way of solving the problem. It is also the
most draconic from the point of view of the participants involved
in a sale of control transaction. In those American jurisdictions
that have regulated this problem the regulatory device has nor-
mally taken the form of depriving the vendor-shareholders of any
premium received for the control element attached to their shares 1
The Code, as was pointed out above, goes farther by requiring that
an offer, similar to that made to the controlling shareholders, be
made to all the shareholders in the target company.
The other method of acquiring control of a company, through
a programme of stock market purchases, has invariably been con-
sidered to be outside the purview of any controls regulating the
conduct of take-over bids. This exemption has been considered
self-evident in that “no special effort is made to force the offeree
shareholder to sell. He bases his decision on the market price of
the securities .. .,.2 Coupled with this either market movements
in the prices of the shares in the target company, or the require.
ment of periodic disclosure, provided it is sufficiently regular,
19Rule 10, 1972 Code. See also Rule 34 and Principle 9. When the detail
of these rules are examined it will be seen that Rule 10 applies to director-
shareholders transferring control whereas Rule 34 applies to a “purchaser
[of holdings] which confer effective control”. Both rules, however, appear
to produce the same end result.
20Andrews, op. cit., n. 18; Prentice, Take-over Bids: Part IX of the Ontario
Securities Act 1966, (1971), 19 Am. J. Comp. L. 325, at pp. 341-346.
21 Perlman v. Feldman, 219 F. 2d. 173 (2nd Circ., 1955). Cf. Great Basin
Metal Mines Ltd., Bulletin of the Ontario Securities Commission, Dec. 1966,
at p. 5.
22Report of the Committee of the Ontario Securities Commission on the
Problems of Disclosure Raised for Investors by Business Combinations and
Private Placements, (1970), at p. 92 (Hereinafter referred
to as Ontario
Securities Commission Report, Feb. 1970).
No. 3]
TAKE-OVER BIDS
should reveal whether or not some unknown is seeking control of
the company. However, the exemption of market purchases from
the regulatory controls placed on take-over bids is only evident if
it is accepted that the “principal purpose justifying the statutory
code regulating take-over bids is to ensure that the shareholders
of the offeree company are given adequate relevant information and
a reasonable period of time within which to assess such informa-
tion”.23 Once the purpose of such regulation is also seen as fur-
thering a policy of guaranteeing to all shareholders an opportunity
to participate in any transfer of corporate control and, at least, to
have an opportunity to evaluate the merits of all potential take-
over offers, then the exemption of stock market purchases is not
so self-evident. This is illustrated by the facts in Re Venesta In-
ternational Ltd.,24 a case which came before the Panel.
In that case Norcos made a take-over offer for Venesta, Ltd.,
which the directors of the offeree company endorsed. Consolidated,
a shareholder in Venesta, Ltd., considered that the terms offered
were inadequate. To defeat the bid Consolidated conducted a heavy
purchasing campaign in the market and was eventually successful
in frustrating the Norcos bid. Venesta, Ltd., thereupon referred
the matter to the Panel on the grounds that Consolidated had vio-
lated Rule 33 of the 1969 Code which required associates of an
offeror or an offeree to clear any dealings in the market with
the Panel as such dealings “may result in a bona fide offer being
frustrated or may affect the outcome of a bid”. The Panel found
that Rule 33 had not been transgressed as it was only “intended
to prevent the frustration of a bona fide offer by a third party
whose interests are not shared by the general body of shareholders
of the offeree company”;2 5 here the interests of Consolidated and
the other shareholders were synonymous. The complainants, how-
ever, raised an alternative and, in many ways, a more interesting
objection to the market purchases of Consolidated:
They [the complainants] also argued that irrespective of any ulterior
motive a purchaser of shares on the market who, whether in a bid
situation or not, had as his objective obtaining control of the company
whose shares he was buying must, if he did by such purchases obtain
control, make an offer for the remaining shares. This on the ground
that to stop at the purchase of 51 per cent must inevitably result in
the 49 per cent minority shareholders being left, so to speak, out in
the cold and would neglect the Code’s requirement that all shareholders
23 Kimber Cmt. Report, op. cit., n. 11, at para. 3:15.
24 Panel release, Jan. 6, 1972.
25 Ibid., at p. 6.
McGILL LAW JOURNAL
[Vol. 18
should be treated equally. They referred in particular to shareholders
who had accepted the bid of Norcos and who were therefore unable
to sell their shares in the market during the time when Consolidated
and its associates were buying shares.26
The Panel rejected this argument on the grounds that “the
present rules do not impose any obligation on an individual who
has acquired control by a series of purchases in the market to
endeavour to obtain the remaining shares. There have been many
cases in the past where control has been acquired in this way”.27
The Panel, however, was clearly unhappy28 about the preclusive
effect, in a bid situation, of stock market purchases of a substantial
block of shares in the offeree company and Rule 35 was inserted
in the 1972 Code to deal with the problem. The Rule provides that:
Any person who acquires, whether by a series of transactions over a
period of time or not, shares (together with shares of other persons acting
in concert with such person) carrying 40 per cent of the voting rights
(other than rights exercisable only in restricted circumstances) attributa-
ble to the share capital of the company must, except in a case specifically
approved by the Panel, extend within a reasonable period of time an
unconditional offer to the holders of the remaining equity share capital
of the offeree company.
The offer has to be in cash (or a cash alternative has to be offered)
at a price not less than the “highest price.., paid by such persons
for shares of that class within the preceding twelve months”. 29
The Panel has jurisdiction to agree to an adjusted price where
the “highest price” over the stipulated twelve month period is
for some reason unsuitable.
The overall effect of Rule 35 is
to compel any person who
obtains effective control of a company to make a cash offer for
the remainder of the shares in that company. The purpose of the
Rule is to guarantee to all shareholders in the target company an
equal opportunity to participate in any market purchasing pro-
57 p.
26 Ibid., at p. 4. The Norcos offer valued the shares of Venesta Ltd., at
52 p. Consolidated had purchased its shares in the market at prices ranging
from 50 p. –
27 Id.
28 Ibid., at pp. 6-7. The original reason for excluding stock market purchasers
from coverage by the Code was the assumption, falsified by events, “that
as a matter of practice it would be impossible
to acquire control of a
company except over a very extended period of time, during which share-
holders would be aware of what was happening and could take their own
decisions regarding their personal investments”. Panel release, San. 18, 1972.
29 Where an offer is to be made for a class of shares in respect of which
no acquisitions have been made then the Panel has to be consulted.
No. 3]
TAKE-OVER BIDS
gramme which results in the transfer of effective control of their
company and also, in part, to protect minority shareholders where
there has been a transfer of effective control. Certain theoretical
objections can be raised against Rule 35. It
is arguable that it
will deter persons from attempting to acquire control of moribund
companies and thus eliminate the advantages flowing from a free
market for the transfer of corporate controlY0 Now, those who
wish to acquire control of a company through the market, will
have to possess sufficient resources to make a cash offer for all
the shares in the offeree company. The extent to which this will
inhibit market acquisitions of control is unclear, and perhaps too
much should not be made of the argument. Professor Andrews
has persuasively demonstrated 3’ that the regulation of the sale
of corporate control so as to guarantee to all shareholders an equal
opportunity to participate in any offer for the sale of controlling
shares should not unduly inhibit such transactions. These argu-
ments have equal validity in the case of stock market acquisitions
of effective control. Even if bids are slightly reduced this is offset
by the greater degree of fairness with which offeree shareholders
will be treated.
The other policy objective of the Code referred to, to guarantee
all offeree shareholders an opportunity to at least assess the merits
of all potential bids, is clearly illustrated by the Code’s treat-
ment of “shut-out” bids. The “shut-out” bid and the problems
that it gives rise to are exemplified by the Panel’s ruling in Re
Grimshaw-Windsor & BlaskeyY2 Grimshaw-Windsor, Ltd., was in-
terested in acquiring control of Blaskey’s Ltd., a quoted company,
in which over fifty per cent of the share capital was controlled by
the Blaskey family interests. The parties reached a tentative agree-
ment on the sale of the shares and, because of unusual market
movements in the shares of Blaskey’s, Ltd., they issued a joint
statement that “agreement had- been reached on the terms for an
offer”. In actual fact no binding commitment on the part of the
holders of the Blaskey family shares has been made. After the
above announcement Leyland Paint and Wallpaper, Ltd., showed
an interest in Blaskey’s, Ltd., and eventually reached agreement
with the holders of the Blaskey family interest where by the latter
irrevocably accepted the offer of Leyland Paint and Wallpaper,
30 See generally Manne, Mergers and the Market for Corporate Control,
(1968), 78 J. Pol. Econ. 110.
31 Andrews, op. cit., n. 18.
32 Panel Release, Sept. 22, 1971.
McGILL LAW JOURNAL
[Vol. 18
Ltd., before any details of the transaction were made public. Al-
though the Panel considered that the shut-out bid of Leyland Paint
and Wallpapers, Ltd., had resulted in the minority shareholders
of Blaskey’s, Ltd., being “deprived of the opportunity of receiving
a higher price from Grimshaw-Windsor” there had been no viola-
tion of the terms of the 1969 Code.8 3 The Panel did, however, lay
down certain guidelines as to how shut out bids were to be con-
ducted in the future and these are now embodied in Rule 11 of
the 1972 Code. The rule states that:
Since
a) a transfer of effective control falling within the provisions Rule 10; and
b) an irrevocable commitment by the directors of an offeree company
and persons acting in concert with them to accept an offer
may exclude or reduce the possibility of a better offer from another
source, no such transfer shall be effected nor, before formal submission
of the offer to the general body of shareholders, shall any such irrevocable
commitment be entered into, without the prior consent of the Panel.
The effect of this Rule will be to create conditions favourable
for the development of an auction for the shares of any company
which is the subject of a take-over offer. However, it is obvious
that the rule will have little significant impact where controlling
shareholders are determined to transfer their holdings to a favoured
suitor irrespective of any more advantageous bid that might be
forthcoming. But even in this situation the controlling shareholders
who accept a lower offer will leave themselves open to adverse
criticism and to preying attentions of the Panel. Although, in this
context it should be emphasised that the Panel have ruled that
subject to the “paramount requirement of good faith” 8 4 the principle
of majority rule must prevail. In addition, where the majority
shareholders also happen to be the directors (which would normally
be the case) then they will have “to consider the interests of the
general body of the shareholders”‘ 35 and the board of directors
will have to justify its good faith if it should prefer “a lower offer”.30
33 The Panel have ruled that the directors of an offeree company are not
“under a duty of hawk their business around the market place in the
possibility that higher bids might be obtained” and that it was for “interested
parties to put forward such offers as they wished”. The latter will not be
always feasible unless “shut-out” bids are controlled. See: J. Coral Ltd.,
Panel release, June 18, 1971.
34 Ibid., at p. 5.
35 Ibid., at p. 4.
36 Rule 9, 1972 Code.
No. 3]
TAKE-OVER BIDS
The prohibition in Rule 11(b) on directors of an offeree com-
pany making an “irrevocable commitment” to an offeror before
the offer has been submitted to the general body of the offeree share-
holders is probably of greater significance than Rule 11(a). The
statistics indicate that an offeree board’s support will normally
ensure the success of a bid and, conversely, its opposition will
normally guarantee a bid’s failure. Thus in 1970-71 out of 177 agreed
bids only 5 were unsuccessful, while out of 47 bids which were
‘finally opposed’ only 8 ultimately proved successful.P 7 Accordingly,
a firm commitment by the directors of an offeree company would,
from a practical point of view, greatly dampen the ardour of
potential rivals who wanted to enter an opposing offer. Admittedly,
Rule 11(b) does not conclusively prohibit the directors of an
offeree company from eventually making an irrevocable commit-
ment in favour of a particular offeror. But by regulating the timing
of such a commitment, Rule 11(b) does make the lot of a rival
bidder that little bit easier. Also, once a rival bid has been made
then the board of directors of the offeree company will, as was
pointed out above, have to “justify its good faith” if it recommends
the lower of the bids and “in such circumstances competent outside
advice must be taken”.” Nor can the directors of an offeree com-
pany indirectly achieve the effect of a shut-out bid by discriminating
in favour of a preferred suitor with respect to the disclosure of
confidential information. Rule 12 of the 1972 Code provides that
“any information, including particulars of shareholders, given to a
preferred suitor should on request be furnished equally and as
promptly to a less welcome, but bona fide potential offeror”,39
37 The figures for 1969-70 were: a) out of 212 agreed bids 3 failed, and
b) out of 41 bids finally opposed only 3 succeeded. Annual Report of the
Panel on Take-overs and Mergers, (London, 1971), at p. 5. The statistics
for Ontario are less conclusive. See Ontario Securities Commission Report,
op. cit., n. 22, Table 7, at p. 194.
38 Rule 10, 1972 Code. Thus in Re J. Coral Ltd., the Panel stated that it
was “not inconceivable that whilst the duty of Directors might require
them to advise minority shareholders that some particular course would
appear to be in their interest, where the directors come as individuals to
exercise their own personal proprietary rights in their shares they might,
for their own part, act differently”. Panel release, June 18, 1971, at p. 4.
39Although this Rule is not free from difficulties, “it [i.e. the Panel]
has also had to adjudicate, given the bona fides, on whether an offeree
could reasonably withhold information from one bidder on the grounds
that there could be permanent damage to its commercial interests in the
extent of the bid failing and the bidder remaining a competitor”. Annual
Report of the Panel on Take-overs and Mergers, (London, 1969), at p. 8.
McGILL LAW JOURNAL
[Vol. 18
If the restrictions placed on the sale of corporate control by
the Code interfere with the free functioning of the market for
corporate control there can be no doubt that the preclusion of
shut-out bids will make such a market more effective by dismantling
a possible barrier to entry. Also, a little competition in this area
would not be a bad thing. In 1970-71 out of 292 bids monitored by
the Panel in only 36 instances were one or more rival bids made,
roughly 12 per cent.40 In addition, the encouragement of competitive
bids will tend to afford some protection to the offeree shareholders
in the situation where they are at their most vulnerable, that is,
where the offeree board of directors recommend acceptance of
the offer. The vulnerability of the offeree shareholders where the
terms of a bid are endorsed by the directors of their company
and no rival bids are made is clearly illustrated by the facts in
the recent decision of Gething v. Kilner.4
1 In that case the offeree
board agreed to a take-over and the offer document stated that the
offeree “directors have irrevocably undertaken to accept or obtain
acceptances of the offer”. At the time this document was circulated
the offeree board had been advised, by their merchant bankers
that the terms offered were inadequate. The offeree board did
not inform the offeree shareholders of this until ten days after
the offer document had been distributed, somewhat “belatedly” as
Brightman, J., observed. Even then the directors of the offeree board
disagreed with the view of their merchant bankers. In this situation
the most effective protection for the offeree shareholders is for a
rival bidder to enter the field; at the present there is no more
effective alternative for evaluating the merits of a bid. Particularly
is this so as the Panel repeatedly disclaimed any responsibility
for passing on the financial merits of a bid.42
40Annual Report of the Panel on Take-overs and Mergers, (London, 1971),
at p. 5.
41 [1972] 1 W.L.R. 337.
42″Neither the City Code or the Panel is concerned with the evaluation
or commercial advantages or disadvantages of a take-over or merger propo-
sition which may be decided by the company or its shareholders”. 1972 Code,
at p. 5. See also Re United Draperies Offer for Swears and Wells Ltd., Panel
release, February 17, 1970, at 2: “The Panel has consistently refused
to
value or pass judgment upon the merits of particular offers. Not only has
it not the machinery so to do but any such attempt would involve an
unjustifiable interference with the freedom of shareholders to decide for
themselves whether a particular offer is acceptable or not”.
No. 3]
TAKE-OVER BIDS
II. Scope of the Code
One of the immediate problems the Panel had to face in applying
the 1969 Code was to determine the scope of its application. In
Practice Note No. 143 it was provided that the Code would apply
in all cases where both parties were public companies, whether
quoted or not. It also regulated a bid a private company 44 for
a public company. Normally, however, the Code is not applicable
in the reverse situation except where “the relative sizes of the two
companies and other circumstances are such that the transaction
effectively constitutes a reverse take-over 45 and where change in
effective control of the public company would result”. Thus the
Code applies to all situations where the offeree shareholders are
in need of protection as it is not unreasonable to assume that the
shareholders in a private company should be able to look after
their own interests because of the cohesive manner in which the
shares in such companies are held.
III. The Approach and Early Stages
The provisions of the 1969 Code in this area have proven satis-
factory; their counterparts in the 1972 Code are briefly as follows.
The offeror, whose identity must be disclosed,46 must initially ap-
proach the offeree board 47 which is entitled to be satisfied as to
the bona fides of the offeror and “that the offeror is or will be
in a position to implement the offer in full”.48 An announcement
of the offer, preferably in the form of a joint statement 4 9 should
be made as soon as the parties “are agreed on the basic terms of
an offer and are reasonably confident of a successful outcome of
the negotiations”. 50 If there is any “untoward movement” in the
prices of the shares of the company, then an immediate announce-
ment of the offer must be made.51 The object of this is the obvious
43 Supp., 1972 Code.
44 For the definition of private company see: Companies Act, 1948 (Imp.),
11-12 Geo. 6, c. 38, s. 28.
op. cit., n. 7, at p. 62.
45For a description of the reverse take-over mechanism see: Weinberg,
46 Rules 2 and 8, 1972 Code.
47Ibid., Rule 1.
48Ibid., Rule 3.
4oIbid., Rule 6.
5oIbid., Rule 5.
51 Ibid., Rule 5. Principle 5 of the Code provides that “It must be the
object of all parties to a take-over or merger transaction to use every
endeavour to prevent the creation of a false market in the shares of an
offeror or offeree company”.
McGILL LAW JOURNAL
[Vol. 18
one of safeguarding the integrity of the stock market by curbing
speculative activity founded on rumour. Also, it partly protects
the offeree shareholders by enabling them to make an informed
decision with respect to the disposal of their shares. Once an
offer has been made public then the Panel must be consulted before
it can be withdrawn. In at least one reported case such permission
has been refused. 2
IV. Information Accompanying the Offer Document
The requirements of the 1969 Code with respect to the infor-
mation which must accompany all offer documents have, with
minor modifications, been reproduced in the 1972 Code. It is not
proposed to go into them in any great detail. Rule 15 of the
1972 Code requires generally that “shareholders must be put in
possession of all the facts necessary for the formation of an in-
formed judgment as to the merits or demerits of the offer”,3 and
any document addressed to the offeree shareholders must be
prepared “with the same standards of care as if it were a prospectus
within the meaning of the Companies Act, 1948″ . The more salient
items of information which the offer document must contain are: ”
(i)
the total holdings of the offeror, the offeror’s (directors,)
and those acting in concert with the offeror, in the shares of the
offeree company,56
(ii) the dealings of any of the above parties
in the shares of the offeree company during the twelve month
period preceding the bid, along with the dates and prices of such
trades,57 (iii) “information… about the offeror (including the
names of its Directors) and its intentions in regard to the future
52 Re Norbury Insulation, Panel release, April 2, 1971, at p. 3: “Subsequently
that afternoon, Mr. Dick was informed that the Panel would not consent
to the withdrawal of the Norbury Insulation offer”. For a situation where
a withdrawal was consented to see Re Pergamon Press Ltd., Panel release,
August 27, 1969.
53 See: Principle 3, 1972 Code.
54Ibid., Rule 14. Although, as has been pointed out by the Panel, “whereas
in a prospectus it is properly the practice to make a conservative estimate
of profits, in this type of circular it may be doing a disservice to shareholders
to err on the conservative side”. See: Practice Direction No. 6 para. 3,
supp., 1972 Code.
55 These requirements are elaborated on in more detail by the Stock
Exchange rules. These rules are produced in Palmer, Company Law (21st
ed.), at p. 1351.
56 Rule 17(a), 1972 Code.
57Ibid., Rule 17(d). Also, if “no such dealings have taken place” this fact
must be disclosed.
No. 3]
TAKE-OVER BIDS
of the offeree”, 8 and lastly,
(iv) in the case of a non-cash offer
whether the salaries of the offeror directors will be affected by
the acquisition of the offeree company, obviously reflecting the fact
that the offeree shareholders in this situation are being asked to
invest in the shares of the offeror company. 9
The Panel have applied a broad interpretation to the requirement
that the offeree shareholders be put in possession of the “necessary
information for an informed judgment”. In the Pergamon case
the Appeals Committee of the Panel considered that information
given at the time of the bid could not be completely divorced from
the information which the shareholders should have been given
before the bid was ever made. Accordingly, the Appeals Committee
upheld as correct a ruling of the Panel that the offeree shareholders
had not been given adequate information in that a director of the
offeree company had failed to disclose, over a period of time before
the bid, the complete details of his commercial relationship with
the offeree company.
A difficult problem, to which the requirement to make full
disclosure to the offeree shareholders has given rise, has been with
respect to the obligation to furnish the offeree shareholders with
any necessary profit forecasts. Whilst the Panel have recognised
that profit forecasts are not appropriate in all circumstances,
nevertheless
it considers that there may be “occasions where
directors would be witholding valuable essential information from
the shareholders if they were to abstain from giving a forecast
of the immediate future results”. 0 Indeed the Panel consider that
the “directors’ opinions on the immediate future profitability of
a company are the most important single element in the formation of
the decision to invest or disinvest in that company invest”. 61 In order
5 8 There are considerable arguments on the merits, and difficulties in
application, of the requirement that the offeror disclose its intentions with
respect to the future development of the offeree. See Burdney, A Note on
Chilling Tender Solicitations, (1967), 21 Rutgers L. Rev. 609, at pp. 625-628;
Prentice, op. cit., n. 20, at pp. 354-355; Electronic Specialty Co. v. International
Controls Corp., 409 F. 2d 937 (2d Circ., 1969); Susquehanna Corp. v. Pan
American Sulpher Co., 423 F. 2d 1075 (5th Circ., 1970).
50 Rule 19, 1972 Code. For the technical reasons why a share exchange
take-over is not considered a distribution of shares to the public requiring
a supporting prospectus see, Government Stock and Other Securities Invest-
ment Co. v. Christopher, [1956] 1 W.L.R. 237; [1956] 1 All E.R. 490.
60 Annual Report of the Panel on Take-overs and Mergers, (London, 1970),
at p. 6. See also Annual Report, (London, 1971), at p. 7: “In the Panel’s opinion
responsible profit forecasts are a vital element in a shareholder’s assessment
of the worth of equity investments”.
McGILL LAW JOURNAL
[Vol. 18
to minimise the incidence of over-forcasting and to improve the
overall intelligibility of profit forecasts the Code lays down extensive
directions as to their mode of compilation. Where profit forecasts
appear in any circular sent to shareholders then “the assumptions,
including the commercial assumptions, upon which the Directors
have based their profit forecasts must be stated in the document” 2
The Panel have issued two Practice Notes c3 on how these assump-
tions should be articulated, the latest of which provides that the
following general rules should apply in formulating such assump-
tions: (4
a) the reader should be able to understand their implications and so be
helped in forming a judgment as to the reasonableness of the forecast
and to the main uncertainties attached to it;
b) the assumption should be, whenever possible, specific rather than
general, definite rather than vague;
c) all embracing assumptions 65 and those relating to the general accuracy
of the assessment should be avoided; 60
d) the assumptions should relate only to matter which may have a
material bearing on the forecast.
To what extent these guidelines will improve the accuracy of profit
forecasts I am not in a position to judge. The Panel, however,
have made a serious attempt to monitor the accuracy of profit
forecasts,0 7 which should go part of the way in encouraging greater
caution and accuracy in their preparation. In addition, the Panel’s
involvement in this field should have the effect of making the
accountancy profession more self-critical and have an impact some-
what equivalent to that of the S.E.C. on accounting standards in
the United States.68
V. Mechanics of the Offer Procedure
As we have already seen the Code frowns on partial bids. Where
one is permitted, then the offeror must make provision for pro rata
6 Id.
62 Rule 16, 1972 Code.
3 Practice Notes No. 4 and No. 6, supp. 1972 Code.
6 4 Practice Note No. 6, para. 14, id.
65 This is designed to cover the “There will be no significant unforeseen
circumstances” type of statement.
06 See: Practice Note 6, para. No. 6, supp., 1972 Code.
07 Annual Report of the Panel on Take-overs and Mergers, (London, 1971),
at pp. 6-7.
08 See generally Loss, Securities Regulation, (2nd ed. 1961, supp. 1969),
Vol. 1, at pp. 331-335.
No. 3]
TAKE-OVER BIDS
acceptance of all shares tendered pursuant to the offer. 9 This not
only guarantees parity of treatment to all the offeree shareholders
but it also removes the pressure to tender hastily inherent in a first-
come, first-served arrangement. In addition the 1972 Code, in com-
mon with most statutory controls on take-over bids, contains time
for acceptance rules which are also designed to enable the offeree
shareholders to make a considered decision and to give the financial
press an opportunity to comment on the merits of the offer.70
Basically these Rules require that the offer be kept open for 21
days, and confer on an “acceptor”
the right to withdraw his
acceptance after this twenty-one day period has elapsed if the bid
has not been declared unconditional. 71 Some improvement could be
made in the protection afforded by these rules by affording tender-
ing shareholders an absolute right of withdrawal during the first
7 days immediately following the announcement of an offer so
that if public scrutiny reveals inadequacies in terms of the offer
a shareholder who precipitously tendered his shares could with-
draw.72 Once a bid has been declared unconditional it must remain
open for acceptance for “14 days after the date on which it would
otherwise have expired”. 73 The Stock Exchange must be informed
of this happening along with the details of the number of acceptances
held by the offeror.7 4 Where an “offer has elapsed, been extended,
or closed” then this also must be conveyed to the Stock Exchange.75
The Rules also prevent an offeror having an indefinite call on the
shares of the offeree shareholders who have tendered acceptances,
a bid cannot remain open for longer than 60 days and cannot be
declared unconditional after that date.76
609 Rule 27, 1972 Code.
70 See Prentice, op. cit., n. 20, at pp. 334-336.
71 Rule 22, 1972 Code. Where the terms of an offer are revised then the
offer must remain open for 14 days after the revision.
72 See, e.g., s. 16: 02(2) of the proposed Canada Corporations Act, Proposal
for a New Business Corporations Law for Canada, Vol. II (Ottawa, 1971);
Appropriate corresponding provision would have to be made where there
has been an alteration in the terms of the offer.
73 Rule 23, 1972 Code.
74Ibid., Rule 24(b). Non-compliance with this requirement gives those
shareholders who have tendered their shares a right of withdrawal, a right
which can be terminated by the offeror if he gives the required notice. [Rule
25(b)]. Also, the Stock Exchange may suspend dealings in the shares of
the offeree if there has been non-compliance with Rule 24.
75 Ibid., Rule 24(a).
76 Ibid., Rule 22. Where a competing offer has been made then the Panel
has jurisdiction to extend the offer period beyond the 60 day limit.
McGILL LAW JOURNAL
[Vol. 18
VI. Mandatory Terms of the Formal Offer
Undoubtedly the major overall theme of the 1972 Code is
that of guaranteeing protection to the offeree shareholders, this
“[G]eneral Principle runs through and covers the whole Code”.71
Some of the ways in which this objective is pursued have already
been noted –
the provision of adequate information, the removal
of pressures to make a hasty acceptance, and the preclusion of
shut-out bids. The Code goes further, however, and in certain
circumstances regulates the substantive terms on which bids can
be made by, in particular, requiring parity of treatment of the
offeree shareholders. Principle 8 of the 1972 Code provides generally
that “[A]ll shareholders of the same class of the offeree company
shall be treated similarly by an offeror”. Greater particularity is
given to this broad directive by Rule 10 of the Code which obliges
those who transfer control of a company to ensure that a “compa-
rable offer 78 [is made] to the holders of any other class of equity
share capital whether such capital carries voting rights of not”.
Nor can this requirement to treat the offeree shareholders equally
be circumvented by a preferential deal with a group of the offeree
shareholders prior to the making of the general offer. Principle 9
of the Code provides that,
If, after a take-over or merger transaction is reasonably in contemplation,
an offer has been made to one or more shareholders of an offeree com-
pany, any subsequent general offer made by, or on behalf of, the offeror
7
7 Re Adepton and William Hudson Ltd., Panel release, April 2, 1971,
at p. 6.
78 Measuring the comparability of the terms offered to differing classes
of shares will not prove easy. Nor have the Panel required the offeree
company, where different classes of shares are involved, to retain separate
advisors for each class of shares. Re United Drapers Offer for Swears and
Wells Ltd., Panel release, February 17, 1970. In that ruling the Panel, perhaps
too complacently, rejected the argument for separate advisors on the grounds
that “[M]erchant banks do indeed very frequently discharge with complete
impartiality and objectivity responsibilities in which there is an apparent
conflict of interest and this is characteristic of English arrangements in
many other fields”. Arrangements, however, which have not always withstood
judicial scrutiny. See North and South Trust v. Berkeley, [1971] 1 All ER.
980. Also, the Panel’s confidence would seem to be belied by the necessity
of having to introduce a Code on take-overs in the first place. Nor is it
completely satisfactory to dispose of any possible conflict of interest with
the observation, more hopeful than realsistic, that “the duty of Directors
is not to themselves but in the nature of trustees to the general body of
shareholders”. Formulating this duty is one thing, guaranteeing its observance
is quite another.
No. 3]
TAKE-OVER BIDS
or his associates to the shareholders of the same class shall not be on
less favourable terms.
Where a partial bid is allowed then the offeror must make arrange-
ments for acceptances to be taken up on a pro rata basis.79 An
obligation which, we shall see, cannot be circumvented by stock
market purchases during the bid.80 The application of the require-
ment that all offeree shareholders be treated equally has given
rise to difficulties in the context of purchases of offeree shares in
the market during the currency of a bid, something which the Code
does not prohibit. Take the facts in Re Adepton and Williams, Ltd.,8′
a hearing which was conducted before the Panel. In that case
Adepton, Ltd., made a bid for the shares of William Hudson, Ltd.,
the consideration offered being non-cash, convertible unsecured
loan stock of Adepton, Ltd. After the announcement of the bid
Adepton, Ltd., pursued an aggressive, but quite permissible, buying
campaign of William Hudson’s, Ltd., shares in the market. The
question which the Panel had to decide was whether or not these
market purchases ran counter to the Code’s requirement that all
offeree shareholders be treated equally. As the Panel pointed out
that while “[T]heoretically, all shareholders have a similar chance
to sell” in practice this “similarity may be more theoretical than
real”. 82 Normally it will be only the “knowledgeable shareholders
who are close to the market” 8 who will have the option of selling
in the market or tendering their shares pursuant to the offer. By
the time
the small shareholder has received his advice, the offeror may well have
withdrawn from the market and the market price of the shares will have
fallen accordingly. Moreover, the offeror’s technique will involve, as it
did in the present case, his acquiring of only what he regards as a con-
trolling interest in the company and although he is required to stand
in the market for several days, he will certainly not be anxious to pur-
chase further shares for cash once the controlling interest has been
obtained. 84
It was to provide a remedy for this situation that Rule 33 was
inserted into the Code. The Rule provides that where an offeror
79 Rule 27, 1972 Code.
80 Ibid., Rule 31.
81 Panel release, April 2nd 1971.
82 Ibid., at p. 7.
83fd.
841d.
McGILL LAW JOURNAL
[Vol. 18
(or any person acting in concert with it) ” purchases for cash”0
“in the market or otherwise”, within the twelve month period prior
to the offer, shares of the class which are under offer and such
purchases “exceeds 15 per cent of that class” then the other members
of the class shall be entitled to a cash offer .8 The price at which
this cash offer is to be made is the “highest price.., paid for shares
of that class acquired during the offer period and within twelve
months prior to its commencement”, although the Panel has a
discretion, in the proper circumstances, to agree to an “adjusted
price”.
Rule 33 will have a far reaching effect on the future form of
take-over bids. Its immediate effect will be to eliminate or, at
least, greatly curb the practice of warehousing, that is, the accumu-
lation, prior to the announcement of a bid, of shares in the offeree
company by an offeror or those working in concert with an offeror.
The only way in which the 1969 Code had any bearing on this
practice was to impose on an offeror the obligation to disclose
its holdings in the offeree company together with the holdings
of any person “acting in concert with the offeror”.8 The effect
of Rule 33 will be to eliminate such pre-bid acquisitions unless the
offeror is willing to make a cash offer, as even a modest market
purchasing programme could bring an offeror within the terms of
the Rule.
In a competitive bid situation Rule 33 could operate to tie the
hands of some offerors. Firstly, it will favour offerors who have
ready access to cash or who possess liquid reserves. Admitttedly,
an offeror offering exclusively non-cash consideration should be
able to obtain cash support for its bid if it is at all meritorious.
It is not uncommon in take-overs, where a non-cash consideration
is offered, for the offeror to arrange for a merchant bank to buy
from the offeree shareholders whatever offeror paper they do not
85 A very functional definition is given to the concept of those deemed to
be acting in concert with an offeror. This category will embrace those
“individuals who actively co-operate to attain a common objective in relation
to a take over or merger transaction”. See: 1972 Code, at p. 8.
86A “cash purchase” will be deemed to have taken place where the
consideration for shares is a “debt instrument maturing for payment in
less than three years”. Id.
87The Panel is also given discretion by Rule 33(b)
to order that cash
be offered to the offeree shareholders where this is necessary in order to
guarantee parity of treatment to the offeree shareholders even though the
15 per cent threshold has not been passed.
s8 See: now Rules 17(a) (iii), and, 18, 1972 Code.
No. 3]
TAKE-OVER BIDS
want to retain.”9 Nevertheless, the offeror who does not have ready
access to cash will be prejudiced by Rule 33, although perhaps
not unduly. Secondly, where some of the offeree shareholders are
opposed to the bid they can buy in the market without any risk
of having to make a general cash offer provided they avoid purchas-
ing shares carrying 40 per cent of the voting rights attributable
to the share capital of the offeree company. A holding of 40 per
cent, or even much less by persons hostile to an offer, could seriously
jeopardise the success of most take-overs. The only effective way
in which an offeror can counteract defensive market purchases
is to buy in the market itself, but if it does so it runs the risk
of having to make a cash offer to the offeree shareholders.
Although Rule 33 effects the above distortions to the free
market mechanism for transferring corporate control by way of a
take-over bid, its benefits outweigh its shortcomings. It does un-
doubtedly guarantee parity of treatment to the offeree shareholders
and it should also provide a measure of protection in circumstances
where it is impossible to value the paper offered. All that an offeror
who has passed the 15 per cent threshold level is obliged to do is
to offer a “cash alternative” at not less than the highest price
paid by it for the offeree shares either during the offer period
or in the twelve months proceding the bid. Normally this will
be less than the putative value of the paper offered and accordingly
the offeree shareholders will plump for the paper 0 However, the
offeree shareholders will be more reluctant to adopt this course
of action if the value of the offeror’s paper is speculative; for
example, where the offeror is smaller in size than the offeree 91
or where the paper being offered is novel or unseasoned. It is in
these situations of speculative valuation that the existence of a cash
alternative should afford much needed protection to the offeree
shareholders 2 Lastly, as was pointed out above, even where the
89 The mechanics of this are illustrated in Re Carlton Holdings, [1971]
2 All. E.R. 1082, noted Prentice, (1972), 35 Mod. L. Rev. 73.
DO Although as the Code permits parties involved in a take-over transaction
to purchase shares in the market during the offer period the market price
will have a tendency to creep up to the offer price.
91 This was the situation in Re Adepton and Williams Hudson Ltd. The
net assets value of the offeror group was 2,205,000 whereas the net tangible
assets of the offeree were stated by the offeror in its offer document to
be 98,814,000. Panel release, April 2nd, 1971.
92 It is interesting to note that Rule 32 of the Code provides, for the first
time, that “[I]f there is a restricted market in the securities of the offeror,
or if the amount of already quoted securities to be issued is large in relation
to the amount already quoted, the Panel may require justification of prices
used to determine the value of the offer”.
McGILL LAW JOURNAL
[Vol. 18
paper offered is speculative Rule 33 should not operate to curb
meritorious bids as an offeror should, in such a case, be able to
obtain suitable underwriting. 3
Where an offeror’s market purchases do not pass the 15 per
cent threshold then, of course, a cash alternative will not have to
be made available to the offeree shareholders. In this situation
it is possible that the offeree shareholders who sell in the market
will receive a higher consideration for their shares than the share-
holders who tender their shares pursuant to the bid. To guarantee
parity of treatment in this situation Rule 32 of the Code provides
that any offeror (or any person acting in concert with the offeror)
who purchases shares in the market during the offer period at above
the offer price shall “increase its offer to not less than the highest
price.., paid for the share so acquired”. The rigid application of
this provision could lead to some far-fetched results in a hotly
contested take-over bid situation. For example, in one bid a hectic
scramble for a few remaining shares of the offeree company listed
on the Birmingham Stock Exchange resulted in the shares being
driven up from 11 shillings, the original offer price, to 65 shillings. 4
To have compelled the offeror to pay this inflated price to all the
offeree shareholders would have been much too severe. Surprisingly
the Panel does not under Rule 32, as it does under Rule 33, have any
jurisdiction to set an adjusted price where for some reason the
market price is inappropriate.” It is submitted that the Panel should
be vested with such a jurisdiction.
The only other significant provision of the Code regulating the
substantive terms on which take-overs can be made is Rule 36
which provides that,
The offeror or persons acting in concert with the offeror may not enter
into arrangements to deal or make purchases or sales of shares of the
offeree company, either during the offer or when one is reasonably in con-
templation, if such arrangements to deal, purchase or sales have attached
93 “We merely add that if [the offeror] its advisers and brokers, are correct
in their confident assertion that their paper would be in great demand and
the offer likely to be accepted by most of the [offeree] shareholders under-
writing will not impose a severe burden”. Re Adepton and Williams Ltd.,
Panel release, April 2nd, 1971, at p. 10.
94 Stamp and Marley, op. cit., n. 2, at p. 15.
95There is, of course, a major distinction between
the Rules. Rule 33
requires the offeror to offer the “highest price” paid in the 12 months period
preceeding the bid, whereas Rule 32 only relates to prices during the offer
period which by Rule 22 cannot exceed 60 days. Because of the expanded
time span under Rule 33 there is obviously a greater need for some discretion
to be vested in the Panel to arrange for an “adjusted” price.
No. 3]
TAKE-OVER BIDS
thereto special favourable conditions which are not capable of being
extended to all shareholders.
An example of the type of provision covered by this Rule is an
arrangement by a purchaser to make good to a vendor any differ-
ence between the purchase price and the price of any successful
offer or increased offer. 6 The wording of the Rule could also
embrace collateral perks, such as severance payments to the mem-
bers of the offeree board of directors for the loss of their offices.
Although, where the details of these have been disclosed and there
has been compliance with section 193 of the Companies Act, 1948
then such payments would be quite permissible.917
VII. Role of the Offeree Board of Directors
At common law the directors of an offeree company probably
have no duty to comment on a take-over offer as it does not involve
any corporate interest but instead it affects the interests of the
offeree shareholders. 8 The Code, however, modifies this position
and stipulates that after an offer has been made public it is
“essential” that a “letter setting out the views of the Board of
the offeree company should be circulated as soon as possible”Y9
0O Weinberg, op. cit., n. 7, at p. 183, footnote 87. This example was given
with respect to Rule 32 of the 1969 Code which is equivalent to Rule 36. This,
of course, is a form of ‘shut-out’ which guarantees early commitments despite
any subsequent more attractive bids and will now, in some situations, be
also covered by Rule 11.
01 See generally Weinberg, op. cit., n. 7, chap. 25.
OS Kimber Cmt. Report, op. cit., n. 11, at para. 3:13; Broffe v. Horton, 172
F. 2d 489 (2nd Circ., 1949). Although directors owe no fiduciary duty to the
offeree shareholders it may be that some form of fiduciary duty comes
into effect if the offeree directors do decide to issue any circular advising
their shareholders with respect to a bid. In Gething v. Kilner, [1972] 1
W.L.R. 337, at p. 341 Brightman, J., was of the opinion that “the directors
of an offeree company have a duty towards their own shareholders, which
in my view clearly includes a duty to be honest and a duty not to mislead”.
This dictum was made in the context of a section 209 acquisition and
therefore the duty referred to by Brightman, J., may only be the correlative
right implied from that statutory provision. (See: Companies Act 1948,
(Imp.), 11-12 Geo. 6, c. 38, s. 209). Cf. Kardon v. National Gypsum Co., 69 F.
Supp. 512 (E.D. Pa 1946);
I. Case Co. v. Borak, 377 U.S. 426 (1964). If the
dictum of Brightman, I., is intended to signify a more far-reaching duty
then it is difficult to rationalise it with Percival v. Wright, [1902] 2 Ch. 421.
09Rule 13, 1972 Code. There can be no discrimination between the offeree
shareholders as to the quantity or quality of information
they receive.
Principle 10, 1972 Code. The effect of this rule will be to guarantee to all
offeree shareholders
the same quality of information as is received by
institutional shareholders.
McGILL LAW JOURNAL
[Vol. 18
While this could cause difficulties where an offeree board is divided
on the acceptability of a bid it has been argued elsewhere that the
mandatory requirement of a circular from the offeree directors is
preferable to the leaving of such a circular optional. 100 The Code
adjures the directors of an offeree company in giving advice to
“act only in their capacity as Directors and not have regard to
their personal or family shareholdings or their personal relation-
ships” 101 with the offeree company. Obviously, however, there will
be tension between the responsibilities of the directors qua directors
and their right to exercise their proprietary rights as shareholders;
the Code does little to resolve this conflict. The most satisfactory
solution, that the directors should appoint experts to advise the
holders of any class of shares not held by the directors, has un-
fortunately been rejected by the Panel as not being required by
the Code.10 2 All that the Code requires is that the directors seek
“competent outside advice” which does not entail the retention of
separate advisors for each distinct interest in the offeree company.
The directors of the offeree company must jointly and severally
accept responsibility for any circular they send out and they must
take all reasonable care to guarantee that the facts in the circular
are fair and accurate and that no “material factors or considerations
have been omitted”.0 3
More specifically the Code requires any circular from the
directors of an offeree company to contain the following information:
(i) the shareholdings of the offeree company in the offeror;
(ii) the shareholdings in the offeree company and the offeror in which
the Directors of the offeree company are interested;
(iii) the shareholdings in the offeree company which any person acting
in concert with the Directors of the offeree company owns or controls
(with the names of such persons acting in concert);
(iv) whether the Directors of the offeree company and any person acting
in concert with them intend, in respect of their own beneficial share-
holdings, to accept or reject the offer. 04
The volume and prices of the share dealings by any of the above
named persons in the shares of either the offeror of the offeree
company in the “12 months prior to the announcement of the
0o Prentice, op. cit., n. 20, at pp. 349-352.
10l Principle 11, 1972 Code.
1o2 Supra, n. 78.
103 Rule 14, 1972 Code.
104Ibid., Rule 17(b). Rule 17(c) goes on to provide that if in “any of the
then this fact should be
there are no shareholdings
above categories
stated”.
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TAKE-OVER BIDS
offer” must also be given. Lastly, details of the service contracts
of the directors of the offeree company must be disclosed, a pro-
vision obviously designed to expose those contracts entered into
as insurance against the consequences of a successful take-over
bid. 0 5
Perhaps the primary factor contributing to the introduction of
the City Code was the use, by the directors of offeree companies, of
what were considered improper defensive measures against take-
overs. This matter is now dealt with by Principle 4 and Rule 38 of
the Code. Principle 4 provides generally that the directors of an
offeree company, once a bona fide offer has been communicated,
should do nothing with respect to the affairs of the offeree company
without shareholder approval which would either frustrate the bid
or result in the shareholders of the offeree company being denied
an opportunity to decide on the bid’s merits. The type of conduct
specifically covered by this prohibition is the now familiar tactic
of issuing shares or options for shares to the offeree directors or
their allies, the acquiring or disposal of assets of a “material
amount”, or the entering into contracts “otherwise than in the
ordinary course of business”. 10 6 Little comment is needed on these
prohibitions as their desirability seems unarguable. The Code does
not, however, proscribe certain other classic defensive ploys. Thus
revaluations of assets are not only permitted, but almost positively
encouraged?”0 So also promises of bigger and more regular dividends
in the future. But these practices, although capable of manipulation
for purely defensive purposes, also fulfill the valid purpose of
informing the offeree shareholders of the value of their shares.
Coupled with this the Code attempts to curb their abuse by regulating
the basis on which they can be made.
VIIII. Market Purchases
The general principle of the Code is that it is undesirable “to
fetter the market” and the Code therefore permits, with one excep-
tion, unrestricted dealings in the market in the shares of either
105 See also, Practice Note No. 2, supp. 1972 Code. Even if directors are
removed under s. 184 of the Companies Act, 1948 (Imp.), 11-12 Geo. 6, c. 38
the section [184(6)] preserves any right of action they might have for
damages for breach of contract.
10 GRule 38,1972 Code.
107 Ibid., Rule 16. The significance of this is somewhat diminished in view
of the fact that directors, since 1967, are obliged, annually, to give their
shareholders an estimate of the market value of the company’s assets.
Companies Act, 1967 (Imp.), 15-16 Eliz. II, c. 81, s. 16(1)(a).
McGILL LAW JOURNAL
(Vol. 18
the offeror or offeree company during the currency of a bid.””
All dealings by the parties to a take-over and their associates, 1 9
in the shares of either the offeror or the offeree company, must be
disclosed to the Stock Exchange, the press and the Panel. In addition
dealings by associates “for account of investment clients” must be
reported to the Stock Exchange and the Panel.110 This obligation
of prompt reporting (it must be made within 24 hours) and more
importantly, dissemination of information,”‘ provides the offeree
shareholders with crucial information as to the possible outcome
of the bid and also provides a foundation for determining whether
or not other provisions of the Code become operative.
The take-over provides the participants with an ideal opportunity
to indulge in insider trading. The thinking of the Panel on this is
that where a potential offeror has not approached the offeree and,
is therefore not in possession of confidential information unavailable
to the rest of the market, then such an offeror should be treated
as any other market purchaser and should be free to trade in the
shares of the prospective target company. There can be little
objection to this as even the most extreme advocate of market
egalitarianism would not deprive investors of the rewards for
superior acumen and ability. Once, however, there has been some
contact between offeror and offeree then the Panel considers that
the participants are precluded from trading in the shares of the
offeree company until the bid has been made public or negotiations
discontinued. Unfortunately Rule 30, which deals with the topic of
insider trading, could have been drafted with greater clarity to
achieve this result. The Rule provides that:
No dealings of any kind (including option business) in the shares of the
offeree company by any person or company, not being the offeror, who
is privy to the preliminary take-over or merger discussions or an intention
to make an offer may take place between the time when there is reason
to suppose that an approach or an offer is contemplated and the announ-
cement of the approach or offer or the termination of the discussions.
The phrase “an approach or an offer is contemplated” is one of
indefinite purport and could easily be interpreted to prohibit an
offeror from trading in the shares of any potential offeree company
at a time when the decision to make an offer is purely tentative.
108 Rule 31, 1972 Code. See generally Lowenfels, Rule lob –
13, Rule lOb –
6 and Purchases of Target Company Securities During and Exchange Offer,
(1969), 69 Colum. L. Rev. 1392.
109 For the definition of “associate” see 1972 Code, at p. 7.
110 Rule 31, 1972 Code. Practice Note No. 6, supp., 1972 Code.
111 See: Robbins, The Securities Markets (1966), at pp. 52-53.
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TAKE-OVER BIDS
This was not intended. At the most Rule 30 was only designed
to prevent dealings once the intention to make an offer had firmly
crystallized and had been formulated with some definitness so that
all that remains is the formal approach to the offeree board.
Also, somewhat surprisingly, -Rule 30 excludes offerors from its
coverage. The corresponding Rule in 1969 Code did not exempt
offerors from its proscription of insider trading and their omission
from the 1972 Code does not reflect Panel thinking. Basically the
view of the Panel is that “it is axiomatic… that inside information
must never be used for personal gain”. 112 Normally an offeree
board will extract an undertaking from an offeror not to make
use of any confidential information disclosed in the course of
negotiations between the parties and the Panel considers that
even where no such undertaking has been given an implied obligation
of good faith 6xists.” 3 Non-compliance with either the express of
implied obligation of good faith would not be in keeping with the
“spirit” of the Code.
As has already been noted one of the fundamental purposes of
the Code 114 is to guarantee to all shareholders an equal opportunity
to participate in any bona fide offer for the transfer of control of
their company and afford them an opportunity to evaluate the merits
of any competing offers where it is proposed to effect such a
transfer of control. Policy objectives which explain, for example,
the Code’s prohibition of firm commitments, of allotments of shares
by the offeree company during the currency of a bid, and on the
restrictions surrounding the transfer of control by private agreement.
Rule 37 is also designed to bolster up the operation of these pro-
hibitions by proscribing certain types of market purchases which
could operate to frustrate a bid. The Rule states that as market
dealings by “an associate with a commercial interest in the out-
112 Statement by the City Panel On Stock Exchange Dealings In the Course
of a Take-Over Situation, Panel release, April 2nd, 1971, at p. 1. This statement
was made with respect to the 1969 Code but despite the altered wording
of Rule 30 it still reflects the Panel’s position. In the above ruling the
director of an offeror company who indulged in insider trading was severely
censured by the Panel and the Panel appears to have been able to extract
an undertaking from him to submit- the question of his continued suitability
to hold office to the shareholders in general meeting and not to vote the
shares which he controlled. Cf. the position at common law, Mason v. Harris
(1879), 11 Ch. D. 97; North West Transportation Co. v. Beatty, (1887), 12
App. Cas. 589.
113 This probably reflects the common law position. Seager v. Copydex Ltd.,
[1967] 2 All. E.R. 415; Coco v. A.N. Clark (Engineers) Ltd., (1969) R.P.C. 41.
“4 General Principle 1, 1972 Code.
McGILL LAW JOURNAL
[Vol. 18
come of an offer” might frustrate an offer then such associate
must consult the Panel in advance and “justify his proposed action
as not being prejudicial to the interests of the shareholders as
a whole”. The type of situation this is designed to cover is, for
example, purchases made to protect an “existing trading relation-
ship” rather than in the “hope of securing an increased offer or a
better competing offer”.115 In other words where an associate has
an interest different from that of the other shareholders then any
purchases in the market that he makes will be considered collateral
to the legitimate purpose of protecting his investment and therefore
violative of Rule 37.
The one situation in which market purchases are completely
forbidden is where a partial bid is made, a prohibition which
extends for 12 months after the closing of the offer period.”‘
To permit an offeror to purchase in the market where the bid is
a partial one could result in a reduction of the number of shares
which an offeror is obligated to take up pursuant to his general
offer. 1
7 This will create uncertainty in that offeree shareholders
.
who tender their shares will be unsure of at least the minimum
percentage of their shares which will be accepted if the bid proves
successful.1 8 It was to eliminate this uncertainty that the pro-
hibition on market purchases during the currency of the bid was
introduced.
IX. The Role of the Panel
Perhaps the most striking feature of the City Code is the role
played by the Panel in guaranteeing the observance and enforce-
ment of the Code’s provisions. Since 1969 the Panel has had a
permanent executive headed over by a director-general who, in
the City pecking order, has been vested with considerable authority.
The day to day affairs of the Panel are administered by this ex-
ecutive. Any party aggrieved by a ruling of the executive can
appeal the decision to a meeting of the full Panel whose decision,
on a question of the Code, is final. Where, however, the hearing
before the Panel is disciplinary in nature, that is, it relates to a
violation of the Code’s provisions, then a further appeal lies to
115Re Venesta International Ltd. Panel release, January 6, 1971.
116 Rule 31, 1972 Code.
11″This will depend on the terms of the offer. Normally where a partial
bid is made offerors will reduce the percentage of shares they are willing
to take up by the number of shares purchased in the market.
l’s See generally Ontario Securities Commission Report, op. cit., n. 22, at
p. 94.
No. 3]
TAKE-OVER BIDS
the Appeals Committee of the Panel.119 The right of appeal to the
Panel from a decision of the executive is not restricted to those
immediately affected by the decision, but “is also given to aggrieved
shareholders subject to certain safeguards designed to ward off
frivolous cases. 20 What these safeguards are is not exactly clear but
it appears that some reliance is placed in the fact that shareholder
appeals cannot be made in person but must be in writing.
There has been little need to summon full meetings of the Panel
or the Appeals Committee of the Panel to review complaints against
executive rulings. For example, the 1970 Annual Report of the
Panel states that rulings “given by the executive were accepted
during the year in all but four cases; in one case the matter was
resolved on further discussion, while the remaining three were
the subject of appeals”.’ 2′ Part of the explanation for this relative
infrequency of hearings before the Appeals Committee of the Panel
is that since 1969 there has been a high degree of compliance with
the Code’s provisions and therefore little need for disciplinary
proceedings. 22
The Panel at the outset had to face certain problems in formu-
lating the role it should perform in guaranteeing compliance with
the Code’s provisions. Basically the question posed was whether
or not it should, on its own initiative,interfere in the course of
a bid where it suspected non-observance of the Code’s provisions,
or whether it should “confine itself to enquiry after the event”. 2
The Panel, rightly it is submitted, adopted the former approach.
Because of the difficulties of unravelling a completed take-over,
intervention after a bid has been completed might prove no more
than an empty gesture. But this approach is not without its dangers.
As the Panel recognised, in a contested bid situation expeditious
intervention by the Panel is imperative if the intervention is to be
at all effective, but this requirement of speedy intervention could
easily result in the uninformed disruption of many take-overs.124
at p. 8.
119 An appeal to the Appeals Committee will also lie, with leave of the
Panel, where the matter, although not disciplinary, will impose serious
hardship on the person affected.
120 Annual Report of the Panel on Take-over and Mergers, (London, 1971),
12 At p. 5.
122 The Appeals Committee appears to have met only once in each of the
years 1970 and 1971. See: Annual Report of the Panel on Take-overs and
Mergers, (London, 1970), at p. 4 and 1971.
‘ 23 Annual Report of the Panel on Take-overs and Mergers, (London, 1969),
at p. 4.
1241Id.
McGILL LAW JOURNAL
[Vol. 18
Particularly is this so as there is no obligation on the parties to a
take-over bid to lodge their solicitation material with the Panel for
pre-publication screening.’ 25 The shortcomings of intervention at the
early stages of the bid have not, however, materialised in practice
due, no doubt, to the fact that the parties, although not obliged to
do so, have as a matter of practice consulted the Panel in advance.12
The Panel in carrying out its functions has rigorously eschewed
any responsibility for advising on the commercial merits of a bid.
It is to be doubted, however, if this position has been observed
completely in practice or whether it is theoretically compatible
with the Panel’s responsibility under the Code. Thus, for example,
the Panel would be intimately involved in assessing the commercial
merits of a bid if it is requested under Rule 33 to recommend an
“adjudsted price”. Also, in the past the Panel in some of its rulings
has come close to passing on the commercial merits of a bid. For
example, in one ruling 127 the Panel was of the opinion that the
market price of securities failed to give a true value of the
securities because of the peculiar market conditions prevailing at
the time. The above examples indicate that it will not be practical
for the Panel to invariably adopt an abstentionist policy on the
merits of bids; also, from a policy point of view, it is undesirable
for the Panel to disclaim all responsibility for assessing the merits
of a bid. On the whole, however, the major responsibility for
evaluating the commercial acceptability of a bid must remain with
the offeree shareholders.
The hall mark of the Panel’s procedure is flexibility and in-
formality. It is to be doubted if these could be duplicated if the work
of the Panel were to be transferred to some government department.
Government regulation has a tendency to rigidify and become
(Palmer, at p. 1353) which provide
125 Rule 12, 1972 Code. See, however, the Stock Exchange rules on The
Admission of Securities to Quotation reproduced in Palmer, Company Law
(21st ed.), Appendix 3, and 1970, supp. Paragraph 13 of the rules relating
to new acquisitions
that “Quoted
companies are required to submit to the Department [i.e. the quotations
department] drafts of all circulars to be issued by the company to its share-
holders. It is recommended that drafts of circulars proposed to be issued
to the shareholders of a quoted company by or on behalf of other organ-
isations should also be submitted to the Department for approval”.
126 Consultation was as high as 50 per cent in 1969. See Annual Report of
the Panel Take-overs and Mergers, (London, 1969), at pp. 7 and 9. See also
Annual Report, (London, 1970), at p. 5; Annual Report, (London, 1971), at p. 6.
127 Re Adepton and Williams Ltd. Panel release, 2nd April 1971. See Prentice,
(1972), 35 Mod. L. Rev. 73.
No. 3]
TAKE-OVER BIDS
bureaucratic. Also, if the Code were to become statutory in form,
the broad discretion that resides in the Panel over many matters
could not be easily vested in some government department. As
against these desirable features the system of self-regulation em-
bodied in the Code does possess one major shortcoming (more than
amply demonstrated by the early history of the Code) and that
is the difficulty of making the Panel’s decisions felt –
the problem
of sanctions. The relative inability of the Panel, during the initial
stages of the Code’s existence, to discipline those who violated the
Code was seen as the Code’s Achilles heel and because of this many
were cynical as to the viability of the whole system of self-regu-
lation.128 Since the introduction of the 1969 Code there has been
absolute compliance with the Panel’s rulings due, in a large measure,
to a realization that if self-regulation fails then the government
will be forced to take a hand. The Panel has also taken pains to
publicise the full range of sanctions at its disposal.12 These are,
a) disciplinary action by the professional organisations to which
the participants in a take-over bid belong to. This would embrace
most, if not all, of the important members of the financial com-
munity; b) suspension of the shares of any offending company by
the Stock Exchange; c) representations to the Board of Trade to
appoint an inspector under section 165 of the Companies Act,
1948,130 to investigate the affairs of any given company or to take
action under the Prevention of Fraud (Investments) Acts, 1958.131
Finally Rule 26 of the Code requires that the “rights of the offeree
shareholders under Rules 21-25 must be specifically incorporated
in the offer document”. Some of the above disciplinary measures
have already been invoked. Dealings in certain shares have been
suspended by the Stock Exchange 13 2 and the Board of Trade have,
at the Panel’s request, appointed an inspector to investigate the
affairs of Pergamon Press, Ltd., and have also initiated two pro-
secutions 133 under the Prevention of Fraud (Investments) Acts, 1958.
The effectiveness of the Code, however, will depend primarily on
its acceptance and observance by the financial community and
it is with respect to violations of the Code by members of this
group that the remedies of the Panel are somewhat lacking. They
128 See: Gower, Company Law (3rd ed.), at pp. 645-646.
120 See: Policy Statement, 28th April 1969.
130 Companies Act, 1948 (Imp.), 11-12 Geo. VI, c. 38.
131 Prevention of Fraud (Investments) Act, 1958 (Imp.), 6-7 Eliz. II, c. 45.
132 See, e.g., Panel release, 26th March 1971.
133 Annual Report of the Panel on Take-overs and Mergers, (London, 1971),
at p. 5.
McGILL LAW JOURNAL
[Vol. is
depriving a person of his livelihood –
or
are either too severe –
a reprimand. These responses lack the graduation
somewhat empty –
and subtlety of damages or injunctive relief. So far the Panel have
been able to do without them but it is in this area that the major
shortcomings of the Code might be revealed.
Finally some mention must be made of the ongoing supervisory
role played by the Panel. It has set up a programme to monitor the
eventual success or failure of profit forecasts; 134 it has been active
in seeking the assistance of the Stock Exchange in ferreting out
any insider trading during the course of take-overs; 135 and lastly,
it has assumed responsibility for updating the Code and for issuing
periodic practice directions on its interpretation.
X. Conclusion
Many of the provisions of the Code would be immediately familiar
to any lawyer having a passing acquaintance of the prevailing pattern
of statutory regulation of take-over bids. The requirements that
the offeree shareholders be treated equally, be relieved of the
pressures to make a hasty decision, and lastly, be given sufficient
information to make an informed assessment on the merits of a
bid, are stereotype provisions in most extant schemes for regulating
the conduct of the dramatis personae involved in a take-over bid.136
There are, however, certain ways in which the Code is unique.
Reflected in the Code is the general policy objective that all share-
holders should have an equal opportunity to participate in any
offer for shares in their company which carry effective control.
This explains the Rules restricting the right to transfer corporate
control” and imposing obligations on any person who acquires
control of a company through market acquisitions. It is this di-
mension to the regulatory philosophy of the Code which is relatively
novel.
The other unique feature of the Code is the role assigned to the
Panel. The weaknesses in the Panel’s position have already been
adumbrated. But it does possess certain strengths. It
is highly
questionable whether the traditional administrative-judicial ap-
paratus for enforcing securities legislation will suffice in the context
‘4 Ibid., at p. 6. See also the report on “The Use of Confidential Price –
Sensitive Information”, Annual Report, (London, 1970), at p. 10.
135 Ibid., at p. 8.
136 See generally, Aranow and Einhorn, State Securities Regulation of Tender
Offers, (1971), 46 N.Y.U.L.Rev. 767.
No. 3]
TAKE-OVER BIDS
417
of take-over bids. Arguably, it is too slow to police take-over bids
satisfactorily. What is needed is an organ which can expeditiously
make an informed decision whether or not to interfere in the course
of a bid without, necessarily, any prompting from outside. At the
same time the nature of the intervention must be such as not to
unduly impede the bid, as it is quite possible that the intervention
might be unjustified or the alleged defect might be easily rectified.
The Panel, on the whole, appears to fulfill these requirements.
