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City Code on Take-overs and Mergers

A code of conduct concerning takeover bids and merger agreements. It originated on the initiative of the government and the Bank of England as far back as 1959. In its present form it was compiled in 1968. Those compiling it were the City Working Party, that is, the Association of Investment Trust Companies, the British Insurance Association, the Issuing Houses Association, the Accepting Houses Committee, the London Clearing Bankers, the Stock Exchange, the Confederation of British Industry, the National Association of Pension Funds. As the code is not legally enforcable, a panel was appointed to supervise its implementation. This Panel, known as the Panel on Take-overs and Mergers, was made up from members of the City Working Party.

The Stock Exchange can theoretically withdraw permission to deal in the shares of a company breaking the rules but where big names are involved there may naturally he some reluctance to act.

The Panel is always available to give advice to parties involved, that is. to the offeror company or the offeree company. but not to individual shareholders as to whether they should sell their shares. The principles involved and the specific rules on the conduct of take-overs or mergers are contained in a booklet. City Code on TakeOvers and Mergers, available from the Secretary, The Issuing Houses Association. It is not possible to give these principles rules in detail here but one or two points of general interest are:

(1) A bid should be fair to all the shareholders of the offeree company. Minorities should be protected and no particular category of shareholders should obtain an advantage. For this reason directors are asked to put their personal interests aside, and if private dealings in shares are made after the announcement of a bid at terms more advantageous than the bid price, similar terms should be offered to all the other shareholders.

(2) When a bid is made it should be made to the board of the offeree company. This ompany should then communicate immediately with shareholders, initially by ten communication. Where no definite bid ten communication. Where no definite bid has been made but rumours are leading to speculation in shares, the board should make a statement so that the shareholders of the offeree company and possibly also of the offeror company should be fully aware of what is going on.

(3) There is a fairly general insistence that clandestine dealings in shares prior to a merger and even after the announcement of a prospective bid should be prevented;

(4) The importance of keeping shareholders informed is stressed. At the earliest possible opportunity after a bid a full statement, preferably a joint statement by both companies concerned, should be sent to the shareholders. Where this statement is followed by a further statement giving figures or reasons for accepting or rejecting the bid. the provisions of the Third Schedule of the Companies Act 1985 concerning prospectuses should be observed.

(5) When an offer has been made any dealings in the shares of either company by the companies themselves or any other interested parties should be reported to the Stock Exchange.

(6) It is very important to prevent a false market arising in the shares of either offeror or offeree company and both parties should take all possible steps to avoid this.

(7) It is most important that the directors. particularly of the offeree company, should act honestly and in the interests of all shareholders. They should therefore (a) take competent advice if necessary, (b) refrain from any action aimed at frustrating the bid without consulting the shareholders, (c) make no material changes in the business of the company while the bid is being considered, (d) make all necessary information available to shareholders without giving any one group a particular advantage, (e) where they themselves have a controlling interest. tread carefully, and if possible seek the vice of the Panel.

(8) After a bid is made the true identity of the bidder must be disclosed and also the number of shares already held.

(9) Bids for less than 100 per cent of the shares of a company are not considered desirable.

Reference: The Penguin Business Dictionary, 3rd edt.