The key provisions controlling the content of pre-bid contracts are the fundamental rule as mentioned above, and also rule 20 which requires that an offer must be made on the same terms and provide the same consideration for all securities of the same class. The same rule has the effect also of preventing collateral arrangements which are intended to enhance the effective price received by a shareholder.

It has been suggested that a loophole exists because a party can obtain a number of pre-bid agreements and hence at the time the offer is made the bidder may be in a strong position to achieve a successful outcome. In addition of course, the bidder can acquire outright up to 20% of the voting rights of the target company before a bid is made.

The Code deals with this situation in a number of ways. First, the potential bidder may not actually acquire and control more than 20% of the voting rights in the target company. Second, rule 23 of the Code requires that the bid be conditional upon the bidder obtaining control over more than 50% of the voting rights in the target company. Third, as mentioned above, under rule 20 the offer must be made on the same terms and conditions to all holders of securities of the same class. Furthermore, it can be expected that parties to pre-bid agreements will want to achieve the best possible price for their shares.

If the bid proceeds and is successful the Code will have achieved the desired outcome. The process will be conducted in accordance with the provisions of the Code, including the obligation to provide independent advice, so that all shareholders will be fully informed. Pre-bid agreements may have contributed to the success of the bid, but is this a criticism?

In formulating the Code, the Panel was required by the terms of the Takeovers Act 1993 to consider a number of objectives. These objectives include:

• encouraging the efficient allocation of resources;
• encouraging competition for control of companies; and
• assisting in ensuring the fair treatment of shareholders.

Fair treatment of shareholders, which the Panel has equated with equal treatment of shareholders, is a fundamental objective of the Code.

Continued page 2
 

Takeovers Code permits lock-up agreements

Lock-up agreements are permitted by the Code and the policies that underpin it. These include lock-up agreements which occur before a bid is made (pre-bid lock-ups) and agreements made during the offer process (intra-bid lock-ups).

PRE-BID LOCK-UPS

A pre-bid lock-up agreement is an agreement between a shareholder and a potential bidder that if the bidder makes a takeover offer for the company on agreed terms then the shareholder will accept that bid.

There is no doubt that such an agreement is permitted by the Code. The fundamental rule contained in rule 6(1) deals with increases in the holding or controlling of voting rights in a code company. Consequently, if the pre-bid agreement does not have the effect that the potential bidder becomes the holder or controller of the voting rights attaching to the shares then no breach will occur.

Clause 8 of Schedule 1 of the Code recognises this position. Under this clause all that is required is that in the offer the bidder must give details of any party that has agreed conditionally or unconditionally to accept the offer and the material terms of the agreement.

Acceptance of the legality of pre-bid agreements is not an oversight in the Code but flows directly from the way the Code has been constructed.