This article is written by Rajeev Awasthi, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses ” How are Mergers and Acquisitions regulated in UK?”.
The mergers, acquisitions or takeovers of the publicly traded companies which are registered in the UK market and governed by the laws therein and the non-traded public companies, resident of UK are governed by the City Code of Takeovers and Mergers (the “Takeover Code”). In certain scenarios the transactions between the private dually listed companies also involves the Takeover Code. The takeover code is a composition of general principles and detailed rules which is continuously developed since 1968 for the free and fair treatment of the market participants and set out the regulatory framework within which the offeror and the target operate including but not limited to the timetable of the events, disclosure of information to the target’s shareholders and other stakeholders and the conduct of the parties pre and post-acquisition.
One of the basic principles the Takeover Code is the fair and equal treatment of the target’s shareholders (among holders of the same class of shares), including with respect to the information they are given and the price they are offered. There are strict guidelines defined within the codes about what offerors can and cannot do. The Panel on Takeovers & Mergers (the “Takeover Panel”) is responsible for the administration and enforcement of the Takeover Code. The Panel acts on a statutory basis as the government’s regulator of takeovers. The representatives of the Takeover Panel play a pivotal role in the takeover process. A case officer is assigned for every new transaction who maintains a frequent dialogue with the parties’ advisers throughout the takeover process.
Under the provisions in the Companies Act 2006 (the “Companies Act”), the core companies’ legislation in the UK. The Takeover Panel is rested with the power to apply to the courts for enforcing the rules of the Takeover Code. This includes compelling the provision of information and the payment of compensation. The Takeover panel relies on private and public censure as its primary means of sanction.
The UK’s M&A (takeover) framework applies equally to domestic and foreign offerors. Certain transactions, which include those in the financial services, energy and airline industries are subject to rules that apply specifically to foreign offerors.
One of the notable features of the UK takeover panel is the “put up or shut up” rule. The rule requires that within 28 days of offerors intentions becoming public (either by approaching the target’s board or via market rumours), the offeror must either make a formal offer for the target (“put up”) or announce that it doesn’t intend to make an offer (“shut up”). In the latter case, the offeror is mostly prohibited from making an offer to the target for six months period.
Litigations related to the takeover are rare in the UK. The main source of potential liability is the information provided to the shareholders of the target. In the event of any misrepresentation, the liability would lie with the directors of the offeror.
Regulatory Bodies & Principal Legislations
There are a plethora of authorities which derive powers from various sources that regulate the Takeovers in the UK. Alongside the contract law and Takeover Code, the principal legislation which governs private and public M&A and the bodies responsible for their enforcement and administration are:
The Takeover Panel
This body regulates takeovers of companies subject to the City Code.
The takeover may involve the Government departments and other regulatory bodies.
Some examples are the UK’s statutory financial regulators, the Prudential Regulation Authority (the “PRA”), responsible for the prudential regulation of banks and insurers, the Financial Conduct Authority (the “FCA”), which regulates the conducts of financial services firms. The administration of parts of companies legislation and financial services also falls under its purview; the Competition and Markets Authority (the “CMA”) (formerly the Office of Fair Trading (the “OFl'”) and the Competition Commission), that is responsible for the investigation of mergers which may give rise to competition concerns.
The exclusive jurisdiction to review competition issues arising via proposed takeovers rests with the European Commission. Despite the result of the EU referendum in June 2016, the UK still is a member of the European Union (the “EU”) until the time when the UK formally withdraws or is required to withdraw, from the EU. This may change once Brexit takes place in the near future.
Other Regulatory Consents
Consents from other regulatory bodies (including ministerial) may be required for particular takeovers: for example, takeovers involving companies in industries such as financial services, television, newspaper and radio.
Some of the principal legislation which governs the M&A transactions are hereunder:
1. The Companies Act: It is subject to the jurisdiction of the UK courts. The Act governs the “squeeze-out” process relevant to contractual offers.
2. The Financial Services and Markets Act 2000 (“FSMA”): The Financial Conduct Authority (“FCA”) regulates the issuers and financial markets under this Act. Takeovers of listed companies whose shares are admitted to trading in the stock exchange are subject to obligations under the FCA Handbook. The handbook contains the rules which govern offers for shares to the public (The offeror reaches out to the public to acquire shares of the target at a higher price than the actual trading price of the shares).
3. The Market Abuse Regulation EU No. 596/2014 (the “MAR”) is enforced by the FCA, and the Criminal Justice Act 1993. The regulation is subject to the jurisdiction of the courts, governing insider trading and market abuse.
4. The Enterprise Act 2002 which grants powers to the Competition and Markets Authority (“CMA”) as UK merger control authority.
5. The EU Merger Regulation (“EUMR”) which is overseen by the EU Commission and provides a ‘one-stop-shop’ for mergers. Presently, transactions which fall within the scope of the EUMR are not subject to a separate merger review in the UK. However, this may change if public interest issues arise like media plurality or national security.
6. The Companies (Cross-Border Mergers) Regulations 2007 which is overseen by the EU Commission provides for specific types of cross-border mergers. However, this is primarily for re-organizations and very rarely for takeovers.
Important features of the UK merger control regime
Filing is not mandatory in the UK. The merging parties are not obligated to notify the CMA of a merger. That said, it is up to CMA’s discretion to investigate any mergers falling within its jurisdiction. The CMA actively monitors the markets for any such transactions. The involved parties may complete a merger without filing the merger. However, the risk is that the merger can be “called in” by the CMA for review at any stage within four months after such transaction has been made public. If during such investigation by the CMA at any stage of the merger a ‘hold separate’ is invoked it could potentially lead to the merger being unwound.
If any of the below conditions are satisfied and the transaction amounts to a ‘relevant merger situation’, the CMA has jurisdiction to review such transactions:
1. In situations where two or more enterprises have stopped to be distinct. Acquisition of enterprises under common ownership or, via common control (legal control arising out of the acquisition of controlling interest) via the acquisition of de facto control of commercial policy or by the acquisition of material influence, which is the ability to influence or create a commercial policy.
2. The share of supply test: If the merger creates or promotes a share of supply of 25% or more of specific goods or services in the UK or in any part of it. Note: This is not a market share test. Also, the CMA owns discretion in defining the relevant goods or services.
3. The turnover test: If the turnover of the target for the previous financial year exceeds GBP 70 million, it may interest the CMA.
4. If more than four months have elapsed since the closing of the merger and the news becoming public in such scenarios the CMA cannot investigate. It is to be noted that the month starts from the time such transaction has been made public.
5. The involved parties notify about the merger via a formal merger notice. This requires a large amount of disclosures. There is a hefty filing fees involved which is between GBP 40,000 and GBP 160,000. The actual amount varies depending on the turnover of the target’s business.
6. CMA expects the parties should get involved in pre-notification discussions at least a couple of weeks before the proposed formal filing date. However, the more complex the dealings the longer such discussions take.
7. The CMA decides if the merger requires a full in-depth review within 40 working days after the formal filing is completed. If the CMA identifies during its review a potential substantial lessening of competition (“SLC”) during the Phase I. The CMA may either make a reference for a full ‘Phase ll’ review or, accept ‘undertakings in lieu’ of reference (“UIL”). This is conditional that the undertakings restore competitiveness to pre-merger levels which is proportionate. In case the CMA opens a full investigation, it is liable to publish its final report within a maximum of 6 months from the opening the Phase II investigation (this is extendable by up to eight weeks under special circumstances).
8. The CMA has the authority to impose interim enforcement in order to unwind or freeze integration and thus prevent pre-emptive action pending its final decision. This is most common where a merger has already been completed.
The lower UK merger control thresholds were introduced on June 11 2018, for transactions involving companies involved in sectors related to national security. These new rules allow the government to interfere in mergers on grounds of national security were the target:
1. Is actively interested in advanced technology (defined as intellectual property and is related to the operation of computer processing units or is involved in quantum technology) or, is involved in the production or development of items for military and civilian use or has interests in advanced technology
2. Has a turnover of GBP 1 million in the UK
3. has a share of supply of 25% or greater in any of the specified affected sectors in the UK (irrespective if the share of acquisition does not increase as a result of the merger process)
Features of the Tax Regime
To purchase shares in a UK company the stamp duty at 0.5% will generally be payable. This stamp duty is typically borne by the purchaser. However, in an international transaction which is influenced by the US market, this cost is now occasionally divided between the parties involved.
UK corporate sellers will often qualify for the “substantial shareholdings exemption” from tax on chargeable gains. A 10% stake in a trading group that has been held for at least 12 months (although it can also apply where assets used in a trade for 12 months are hived into a new subsidiary, prior to disposal) is the basic requirement for availing this exemption. In cases where this exemption is not available (e.g., for individuals), “rollover” treatment is a provision to defer gains. In such conditions, consideration is provided in the form of loan notes or shares in the purchaser entity. In such circumstances, a tax clearance is sometimes sought which may take up to 30 days. Management sellers can avail a reduced rate of capital tax gains called “entrepreneurs’ relief”, although the conditions have recently been tightened for this. This has had an impact, particularly on private equity transactions.
The purchasers typically expect a relatively high level of tax liability protection in private M&A transactions. The seller often provides a “tax covenant” in such cases. The claims under the tax covenant are commonly covered by warranty and indemnity insurance. There are certain types of exposures which remain difficult to cover through insurance even though the range of tax risks which can be insured is ever-expanding. A most recent innovation is a “synthetic tax covenant” offered by most insurers which are available to the purchaser and the insurer. However, its effectiveness in the long term is yet to be determined.
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