“In January 2021, Lord Lee requested that the Takeover Panel review its rules regarding the timing of when a company should disclose a takeover approach. The Panel responded in its Statement 2021/14 that it had decided against changing the rules”.
In this paper we discuss the necessity of this request for review considering current rules and regulations. We agree with the Panel’s assertion that regulation is appropriately balance in this specific area of the Code on these grounds, (i) one of the Panel’s overall roles is to promote the integrity of the financial markets and (ii) one of the core objectives here is to prevent false markets by ensuring timely release of announcements to allow equal informational dissemination to be available to all relevant stakeholders (including retail as well as institutional investors). This is entirely in line with the General Principle 1 of the Code, that professional institutional investors cannot be given informational advantage as compared to other non-professional or retail-based market participants and shareholders.
Firstly, we look at the role of takeovers and merges from generic market efficiency standpoint. Secondly, we discuss core roles and responsibilities of the Takeover Panel focusing on specific features related to timing and dive into the Rule 2 of the Code and, lastly, we discuss the Statement 2021/14 justification of the Panels’ decision. We conclude, for comparison, with a case study of non-UK based takeover event.
Role of Takeovers and Mergers
First let us define takeover. Takeover forms an integral part of the corporate governance landscape. Takeover can be either hostile or friendly subject to the opinion of the target board of directors being in favour or recommending this offer or being against the offer . The acquirer who takes over the target can effect the removal of the board members and/or senior management team and replace them with others as part of the corporate restructuring process. This step on its own can be a strong incentive for current target’s senior managers as well as the board members to perform to the utmost of their abilities and not to become takeover target. In case of hostile takeover bid the likelihood of them losing jobs and their positions in the current company is rather high. Hence, in line with the Company’s Act, the directors or board members are likely incentivised to perform (in addition to post takeover announcement as applied in Rule 3.1, Rule 21.2 and Rule 25 of the Code). Based on a seminal work by Jensen (2003), the evidence indicates that the market for corporate control, which takeovers are an integral part of, benefiting shareholders, society and the corporate form of organization, whereby the author concluded that “…the market for corporate control is creating large benefits for shareholders and for the economy as a whole by loosening control over vast amounts of resources and enabling them to move more quickly to their highest-valued use” .
More importantly, in our case we are concerned with timing of the takeover approach announcements and relevant news releases. As per Luo (2003), firms plan announcement strategically. An announcement before a definitive agreement allows for additional possibility of cancellation an ex-post bad deal, whereas announcement after this agreement shows higher level of trust and willingness to complete the deal . Interestingly, firms are more likely to postpone M&A announcements when the bidder has a stronger analyst following, when the competition for the target is higher or when the bidder firm is a high-growth company. In our context, this supports the notion to allow a timeframe for firms to maintain ongoing private and confidential discussion before going public with the takeover announcement (Rule 2.1 of the Code). Furthermore, based on Ahern and Sosyura (2014), firms do have an incentive to manage media coverage in effect their stock prices during corporate actions events . As the authors conclude the bidders in stock merger generate more news after the start of merger negotiations, but before the public announcement. This is causing short-run spike in bidder’s stock price during critical phase on non-announced merger deal where pricing is being considered, hence affecting the final takeover price. The findings support the notion that firm tend to use news strategically especially during takeover events. As a result, the role and function of the Panel and the Code in UK markets is rather justified.
Takeover Panel Rule 2. Secrecy before Announcements, the Timing and Contents of Announcements
UK City Code of Takeovers and Mergers is the supervisory authority that administer the law, the Code on Takeovers and Mergers in the UK and its enforcement. The Panel can show some real powers and may take disciplinary actions against those in breach of the Code and impose financial penalties (s.952 CA 2006). The core purpose of the Code is to ensure fair treatment of all shareholders and ensure market integrity and is guided by six core principles (i) equal treatment, (ii) time and information controls, (iii) no frustrating actions, (iv) no false markets, (v) full consideration of offer and (vi) offeree company is not to be hindered in its affairs. For our purposes we discuss the time and information controls and no false markets principles further below.
From a procedural perspective, there are your key rules regarding when an announcement must be made (Rule 2.2 of the Code). Rule 2.2(e) specifies if the negotiation spill to more than a very restricted number of persons, Rule 2.2(d) if there is rumour or speculation on the market effecting stock price of the target, Rule 2.2(c) if there is rumour or speculations on increased volatility in the stock price notwithstanding takeover offer and Rule 2.2(f) if 30% shareholding is positioned to sell. Up to this point, the target and the acquirer are allowed to maintain close, private, and confidential relationship and discussions regarding takeover approach without strict rules or restrictions. This is the contention discussed in our paper. We do argue that, as per Panel’s decision, there is no need to update or change these provisions. Moreover, “…from the day that the bidder makes an announcement of a possible offer for that particular target, he has 28 days to consider whether he wants to make an announcement of a firm intention to make an offer, or he has to withdraw from the offer process altogether. And if he does withdraw from the offer process, it means that he cannot, for a subsequent period of six months, make any other bid for the particular target company.” (Rule 2.4 and Rule 2.6 of the Code). In addition, a mandatory bid is triggered, known as “Rule 9 Offers”, where an investor crosses a 30% threshold in voting shares. In conclusion, it is the period of time before being either forced to announce takeover or voluntarily going public in this regard that should be kept secret and private and confidential. The Code imposes rather strict timeline at different stages of the pre-bid and post-bid all with the intention of guaranteeing all shareholders are allowed sufficient time to make proper and informed decisions and also that the target company can perform its functions unhindered during this period of time.
In response to a concern that some recent takeover approaches were kept confidential for an extended long period of time without any announcements being made, the Panel concluded that no further changes are recommended and being made to the current rules. In this section we aim to discuss the Panels justifications.
As per above section and Statement 2021/14, at present, Rule 2 of the Code outlines the steps and conditions in which takeover approach must be announced prior to the announcement of a firm offer as “an announcement is required if the offeree company is the subject of rumour and speculation in relation to a possible offer, if there is an untoward movement in its share price or if discussions relating to a possible offer are to be extended to more than a very restricted number of people.” In short, the Code does not prescribe or prevent or enforce explicitly an offeree firm from talking and considering takeover approach privately in confidence with an offeror where the board of directors deems this to be in the best interest of the shareholders. This pre-offer deliberation period is not explicitly being restricted and can well be protracted in nature assuming this is done in private and not running into the issues of market leaks causing undue speculation and subsequent price volatility. Practically speaking, this is not always possible due to information leaks or exposure to due diligence steps and speculations. As mentioned previously, the Panel is entrusted with maintaining the integrity of the financial markets and providing level playing field for all market participants.
Given the suggestion to reconsider these current rules and to offer full transparency to the markets by requiring immediate disclosure by an offeree firm to declare their intentions regarding takeover approach without any regard to market volatility or market speculations, the Panel decided not to amend the rules. One of the arguments put forward for a change was the fact that some of the shareholders would sell their holdings being not aware of the possible upcoming corporate actions event in a form of a takeover, that presumably would increase the market price of the current company and hence preclude this group of shareholders from benefiting from this corporate action. On the other side of the coin, hedge funds strategies driven by informational component of takeover announcements would force these short-term driven shareholders to bid up the price of the target company on any of these immediate and potentially not substantiated takeover approach-based news releases . As an example, one of the hedge fund strategies is listening to news by utilizing Natural Language Processing tools and the moment there is a potential target being identified trading strategy is placed and executed, usually in a form of going long target company by expectation of premium being offered by the acquirer and going short the acquirer in anticipation of decreased valuation as most of the acquisitions encounter “synergies” that will not be realized. Hence, full and immediate transparency in this context is likely going to increase share price volatility to the detriment of current as well as potentially to be future long-term shareholders.
Based on the Statement 2021/14, two core argument were put forward in support of not changing current rules by the Panel supported by extensive Industry Consultations. Firstly, from market perspective as indicated above re. hedge funds strategies, immediate full disclosure of takeover approaches can cause detrimental market volatility in the market price of both the target as well as the acquirer as in both instances in case the merger that is ultimately consumed and successful however more so in case the merger and additional discussion of takeover approach failure. Practically speaking, the price of the target is likely to move down in equivalence to the expected premium to be paid by the acquirer . Secondly, this immediate news release of potential impending corporate actions in a form of a takeover can strategically weaken negotiation capabilities of a board of directors of the target company. It can be argued that the board function becomes more of an advisory to the shareholders decision making capabilities, however strategically speaking, releasing immediate level of possible talks can effect potential other stakeholders of the company all the way down to their client and customers and supply chain effects. As a result, the board is going to be forced to present potentially lower offers to the shareholders for consideration.
It is based on the above reasoning that we support the Panel decision not to amend the rules related to timing of takeover approaches and to maintain current rules and regulations in place without any amendments. In short, allowing a period for private and confidential discussions between the two potential players, offeree, and offeror, within the confines of current rules as mentioned hereabove, the Panel did strike appropriate balance in line with the core principle of enhancing market integrity.
In non-UK context, whereby the Code is not applicable, we focus on a case study note provided by Baur (2015) . The reasons to extract our attention from UK based takeover regulatory framework is to indicate that takeover approach deliberations are global in nature and the UK rules can and potentially should be considered in other jurisdictions when dealing with complex takeover proposals. We look at this case study to support the notion of potential market disruptions due to continuous market moves and takeover announcements and a sudden disclosure of potential impending takeover move provided for with some layer of complex financial engineering. The effect on the price of both acquirer as well as the target was substantial due to the short squeeze. In this case, the Porsche was making strategic purchases of Volkswagen group for several years, keeping and maintaining full disclosure, up to a point. “…Its buying had driven up the price of VW's shares to above the level at which it would make any economic sense for Porsche to buy VW. Seeing this, hedge funds sold shares in VW that they did not own. One strategy was a bet that VW's share price would fall. Some also bought shares in Porsche, in a wager that shares of both would converge. Porsche’s announcement on October 26th, 2008, saying that it owned nearly 43% of VW's shares outright and had derivative contracts on nearly 32% more meant it had tied up almost all of the freely available shares. Hedge funds [considered to be professional institutional investors] concluded that they could be caught in an “infinite squeeze” in which they were forced to buy shares at any price.” This case study indicates potential extreme case of a drastic sensitivity of disclosure of takeover moves to the market and support our assertion that it is appropriate to allow the offeree and offeror to talk in private and confidential manners first.
 D. Kershaw, Principles of Takeover Regulation, 2016, Oxford University Press
 Jensen M.C., (2003), “Takeovers: Their Causes and Consequences”, Journal of Economic Perspectives, Winter 1988, Vol. 2, No. 1, pp. 21-48, Takeovers: Their Causes and Consequences by Michael C. Jensen :: SSRN
 Luo Y., (2001), ”Learning from the Market as a Motive for Disclosure: The Case of Takeover Announcement Timing,” LYZ Capital Advisors LLC Working Paper, Learning from the Market as a Motive for Disclosure: The Case of Takeover Announcement Timing by Yuanzhi Luo :: SSRN
 Ahern K.R., Sosyura D., (2014), “Who Writes the News? Corporate Press Releases During Merger Negotiations”, Journal of Finance, Vol. 69, No. 1, 2014, Who Writes the News? Corporate Press Releases During Merger Negotiations by Kenneth R. Ahern, Denis Sosyura :: SSRN
 Lambrecht B.M., (2001), “The Timing and Terms of Takeovers Under Uncertainty: A Real Options Approach”, JIMS Working Paper No. 3/2001, The Timing and Terms of Takeovers Under Uncertainty: A Real Options Approach by Bart M. Lambrecht :: SSRN
 Morellec E., Zhdanov A., (2004), “The Dynamics of Mergers and Acquisitions”, Working Paper, The Dynamics of Mergers and Acquisitions by Erwan Morellec, Alexei Zhdanov :: SSRN
 Baur D.G, (2015), “Porsche versus Volkswagen”, Kühne Logistics University (KLU), Case Study: Porsche versus Volkswagen by Dirk G. Baur :: SSRN
 The Takeover Panel, www.takeoverpanel.org.uk , “The Takeover Panel is an independent body whose main functions are to issue and administer the Takeover Code and to supervise and regulate takeovers and other matters to which the Code applies. Its principal purposes are to ensure fair treatment for all shareholders and an orderly framework for takeover bids.”  Statement 2021/14, 2021-14 (thetakeoverpanel.org.uk)  Reference: 343427_001_The-Take-Over_Bookmarked_13.07.22.pdf (thetakeoverpanel.org.uk)