Understanding the current rules and regulations around takeovers by overseas buyers
A takeover of a UK listed company is generally subject to the Takeover Code. EU member states have somewhat similar provisions in local law based upon the EU Takeover Directive (which was modelled on the UK Code and adopted in 2004). However, far from opening up the single market to takeovers, the implementation of the Directive actually enabled other EU countries to permit their listed companies to resist takeovers by choosing not to adopt the UK position on no frustrating action found in Rule 21 of our Code (or in EU speak, the Board Neutrality Rule) which prevents poison pill defences unless shareholders consent. This was achieved because some member states took advantage (in varying degrees) of an opt out from the Board Neutrality Rule (BNR) in Article 9 of the Directive. Consequently, boards of companies in these countries can in many instances take defensive action against a hostile bidder which would not be permissible in the UK. Of course that does not prevent shareholders of listed companies from selling their shares to a person buying in the market and triggering a mandatory bid so control can arise even if the target board seeks to prevent it.
However, any person looking to acquire significant influence, let alone control of a business with significant operations in the EU will need to navigate the EU's competition laws, specifically the European Union Merger Regulation (EUMR). In addition, in March 2019, the EU adopted a new regulation establishing a framework for the screening of foreign direct investments (FDI) into the EU to encourage and develop much greater co-ordination and monitoring of FDI (the Screening Regulation). Like the EU Takeover Directive, the Screening Regulation only provides a general framework leaving member states considerable freedom to adopt their own measures for screening FDI. While member states have some latitude to intervene on grounds of public policy or public security, the measures they adopt must be consistent with EU law, including the rules governing free movement of capital and freedom of establishment in the EU.
On 26 March 2020, the EU Commission published a Policy Paper urging member states to introduce fully fledged screening systems in respect of FDI where there are risks to critical inputs and in particular critical health infrastructure. Also, on 16 April 2020, Commissioner Hogan stated that the Commission would be seeking to establish informal co-operation in monitoring FDI in member states to prevent predatory takeovers (undefined) while also emphasising the autonomy of member states in that area.
In the UK, Section 42 of the Enterprise Act 2002 allows the Secretary of State to issue a public interest intervention notice where the transaction raises issues of (1) national security; (2) media quality, plurality and standards; and (3) financial stability (Prescribed Sectors). The UK Government is currently consulting on changes to the current law to introduce a new public interest power for the Government to intervene on grounds of national security (the National Security and Investment Bill) which would introduce a system similar to that adopted by the USA and Australia. Once this comes into effect, it is likely that a merger in other parts of the economy could be reviewed, such as health or food production rather than more obvious national security sectors such as energy, communications, defence and transport. However, until these changes are made, there is in fact very little that the UK Government can do to prevent takeovers of companies which do not operate in Prescribed Sectors other than rattle its sabre or put pressure on the board of the target company to extract concessions from the bidder as part of their recommendation to shareholders to accept the offer.
Whilst it would be a surprise if we did not see a more interventionist approach in the UK, we don't expect further changes to the Code (other than to clarify the position on what regulatory conditions to an offer will be permissible after the UK leaves the EU). However, we may see greater use of post offer undertakings (which were inserted into the Code in response to the takeover of Cadbury by Kraft) to ensure that bidders comply with commitments made concerning the operation of the target business post takeover. A high profile example of the use of such undertakings was on the takeover of ARM by Softbank just after the Brexit vote which effectively guaranteed that the corporate headquarters and tax base of ARM would remain in the UK and that the company would not be hollowed out by high technology and research and development jobs being relocated outside the UK. However, it did not stop corporate control passing to Softbank. Undertakings can also be required by the UK government as a condition of granting consent to a takeover where the company operates in a Prescribed Sector. After 31 December 2020, when EU law will cease to apply in the UK, there will potentially be much greater power for the UK to intervene on grounds which currently are more limited at least for mergers within the EUMR. However, it is likely that the UK will primarily leave it to listed companies to manage their own defence unless UK competition law or national security is in play.
Commentators clamouring for a quick fix on this subject in the UK are likely to be disappointed. Although the National Security and Investment Bill was announced in the December 2019 Queen’s Speech, the Bill has yet to be published and there is currently no date set for a Parliamentary debate. Any new rules in this area will probably have to wait until the UK has negotiated its future relationship with the EU and found a way out of the current Covid-19 enforced shut down. However, never underestimate the soft power of Government to dissuade unwelcome takeovers of national champions or iconic companies whether in the UK or within the EU member states especially given the recent statements by the EU Commission which will encourage all member states to take a firm position against mergers that they consider predatory. Any person considering a transaction involving FDI, especially in a sensitive sector should seek expert advice.