Ways of Effecting a Takeover

A Takeover occurs when one company purchases the shares of another company. This has been defined by the financial dictionary, as the transfer of control of a company from one group of shareholders to another group of shareholders. [1] The Takeover panel oversees the whole ‘Takeover’ process of both Public companies and other large organization. Before a ‘Takeover’ can be enforced, takeover bids comply with the city code on Takeovers and Mergers. [2] This is to ensure that the shareholders are treated fairly, and have all the necessary information to ensure they make the right decisions as to whether or not to accept the offer being presented to them by the buyer company. It is important to note that both companies continue to exist, even the company whose shares have been bought. The only change is that the buyer company can use its shares to control the bought company by voting. [3] This could give rise to a number of company reconstructions which are governed by rules which could be found in the statutes and other places such as the City Code on Takeovers and Mergers. [4]

There are different ways in which a Takeover could be effected such as the ‘Friendly Takeover’, where the buyer makes an offer to the target company, thereby informing the board of directors of that company of their intentions. If the board of directors feel this would be of great benefit to their shareholders, they present the offer to them and advise them to consent.

The ‘Reverse Takeover’ is another form of takeover a buyer company could use in obtaining the shares of the target company. Here a private company is acquired by a public company. The reason for this usually is for the private company to successfully float itself and avoid some of the expense and time involved in a conventional IPO. [5]

The final type of Takeover which will be the focus of this essay is the ‘Hostile Takeover’. A Takeover is seen to be hostile if the company which is being targeted rejects the offer that has been bought by the buyers; but the buyers remain persistent and continue to pursue it, till they get it. There have also been occasions where the buyers make the offer without first informing the board of directors of the company which they are targeting. The board of directors of such a company are usually hostile towards such takeover if they believe it would be of disadvantage of their shareholders and to the company as a whole.

The interest of every member of the company and shareholder must be taken into consideration before a Takeover is embarked on. The General Principle Rule 9 on the Mandatory bids applies the principle that all shareholders of an offeree company must be treated similarly by the offeror company. [6] The directors of both the offeror company and the offeree company must also ensure that every decision that is made is not done out of self interest, but always act in such a way as to benefit the company as a whole and most importantly to the advantage of the shareholders. The City Code on Takeovers and Mergers states that “Directors of an Offeror and the Offeree Company must always, in advising their shareholders, act only in their capacity as directors and not have regard to their personal or family shareholdings or to their personal relationships with the companies. It is the shareholders’ interests taken as a whole, together with those of employees and creditors, which should be considered when the directors are giving advice to shareholders”. [7] It is also the responsibility of the directors to ensure, so far as they are reasonably able, that the code is complied with in the conduct of an offer as stated in the City code on Takeovers and Mergers.

After a bid has been made by the offeror company, it then becomes the responsibility of the target company to advise the shareholders. The advice given by the directors of the target company to its shareholders is however very important as this advice is what is relied on by the shareholders in deciding whether or not to accept the proposal of the offeror company. It is important to note that there have been times when the directors have been found to have advised the shareholders wrongly with intentions to mislead them into making the wrong decision for their personal interest or to save their jobs. This is a breach of their duties as Directors and could be sued by the shareholders of that company as directors are meant to act in good faith and be protective of their shareholders.

There have also been cases where Directors have been found to have breached their fiduciary duties to their shareholders by being resistant to hostile a takeover, even when it has been found that they were not acting for their own personal benefit but just did not follow the right procedures in resisting such a takeover. This was the case in Hogg v Cramphorn, where the court held the directors of the target company had breached their duties by issuing shares to prevent hostile takeover even though they did this because they believed takeover would not have been beneficial to the company. [8] For this reason, Directors have been advised to follow the right procedure on the City code on Takeovers and Mergers when embarking on a takeover, as they are responsible for the proper application of the code, and are however responsible if the code is not properly followed and adhered to.

There are however certain Legal Principles that Directors who are resisting hostile takeover for the benefit of their company comply with, that if not demonstrated by any director, it could be said that they are acting to save their own job. Firstly According to General Principle 7, it is stated that the directors should not do anything that might deny the shareholders of a company the opportunity to decide for themselves whether or not to take an offer [9] . A director who refuses to give the shareholders a chance to decide on the proposal brought by the buyer company and takes decisions into his hands, doing everything within its power to resist such a hostile takeover because he feels it would not benefit the company, could be said to have been acting to save his own job, because if he was not, he would not have denied the shareholders the opportunity to decide for themselves.

It is not enough for the directors not to do anything that might deny the shareholders the opportunity to decide whether or not to take the offer in the case of a hostile takeover, Similarly Under Section 3 of the code, the directors must obtain independent advice on the bid, and then inform the shareholders of the advice so as to guide them in making the right decision. [10] This was the held of the court in the case of Dawson International plc v Coats Patons plc where they said that directors owe it to their shareholders to ensure any information given to them is not misleading. [11] So therefore it could be said that any director who does anything contrary to what is stated in section 3 of the code, misleading its shareholders, is in fact acting for his own personal benefit and not for the good for the good of the company as a whole. Such a director breaches his fiduciary duties to the shareholders.

Finally, it could also be said that a Director acting for the interest of his company, even in the case where he is of the belief that a takeover would not be beneficial to the company as a whole, would still carefully follow the right procedures on city code on takeovers and mergers and apply it correctly. A director who wrongly applies these procedures, which then misleads his shareholders, could be said not to have been acting to protect its company.

In conclusion therefore, only directors who carefully analyses the details of a hostile takeover, weighing its advantages and disadvantages, and carefully taking the time to inform the shareholders of the end result of their actions based on their final decision to whether take the offer or not, can be said to have been acting out of selflessness, putting the interest of their company first. Any director, who does contrary to this, is likely, in most cases acting only to save his job.