shareholders, all other powers are allocated to directors of the board, which gives them more primacy and primary decision-making authority in hostile under the U.S. regime.
“1. issue any shares or transfer or sell, or agree to transfer or sell, any shares out of treasury or effect any redemption or purchase by the company of its own shares; 2. issue or grant options in respect of any unissued shares; 3. create or issue, or permit the creation or issue of, any securities carrying rights of conversion into or subscription for shares; 4. sell, dispose of or acquire, or agree to sell, dispose of or acquire, assets of a material amount; or 5. enter into contracts otherwise than in the ordinary course of business.”226 Except these direct bans on issuing new shares, the Companies Act of U.K. also requires the board to obtain approval from the shareholders before allotting(issuing) any shares.227 In share issuance situations, the shareholders are entitled to the Right of Pre-emption: “[A] company must not allot equity securities to a person on any terms unless it has made an offer to each person who holds ordinary shares in the company to allot to him on the same or more favorable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company, and the period during which any such offer may be accepted has expired or the company has received notice of the acceptance or refusal of every offer so made”228. Any attempt to circumvent the right of pre-emption is under the regulation of the Association of British Insurers and its Directors' power to allot shares and disapply shareholders' pre-emption rights.229
These rigorous rules directly forbid the management, or the board to take any defensive measures without the approval from the shareholders. Most importantly, “[t]he Panel must be consulted in advance if there is any doubt as to whether any proposed action may fall within this Rule (No Frustrating Action
226 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (12t h ed. 2016)，Part I18，Rule 21.1(b).
227 Companies Act,2006, Part 17, c.2, §549-551.
228 Companies Act, 2006, Part 17, c.3, §560(1).
229 Association of British Insurers, Directors' power to allot shares and disapply shareholders' pre-emption rights (1995 & Updated 2009)(U.K).
Principle).”
From the literal expression, the “No Frustrating Action Principle” only works “during the course of an offer, or even before the date of the offer”, is it possible for the target company to take some precautionary measures? For example, dual-ownership structure, staggered boards, severance agreements or anti-takeover provisions are all common proactive defenses in Anglo-American countries.
In fact, ex ante defenses appear much less frequent in the U.K. than in the U.S. Let us address the common ex ante defenses one by one. The U.K.
Companies Act did not directly ban the use of dual ownership structure, but such arrangements may disfavor the institutional investors in the first place, which directly give rise to depressing share price and difficulties of refinancing in the capital market. 230
As for the staggered board, the U.K. Companies Act entitles the shareholders’ assembly to remove directors even before his term due: “[A]
company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.” 231 Therefore, the staggered board provisions have no use at all in the U.K. under this context.
In addition, the directors of the board are under intense surveillance by the people for whom they are working. The directors of a company must prepare a directors’ report for each financial year of the company, this report must record in detail the director's principal activities of the year. Moreover, “[u]nless the company is subject to the small companies’ regime, the directors’ report must contain a business review...The purpose of the business review is to inform members of the company and help them assess how the directors have performed
230 See Armour, John, and David A. Skeel Jr. "Who writes the rules for hostile takeovers, and why-the peculiar divergence of US and U.K. takeover regulation." Geo. LJ 95 (2006): 1756-1765.
231 Companies Act,2006, Part 10, c.1, §168(1).
their duty under section 172 (duty to promote the success of the company).”232 The Large and Medium-sized Companies and Groups (Accountant Reports) (Amendment) Regulations 2013 replaced the old Directors' Remuneration Report Regulation, imposing an even stricter disclosure requirement on the directors’expenditure.233 The Combined Code on Corporate Governance of the Financial Service Authority (FSA) explicitly limit the directors’ term to one year, and the renewal of the term is one-year maximum as well. 234 Because of these stipulations, severance agreements like the golden parachutes are practically not applicable in the U.K.235
3. Principle of Equal Treatment of Shareholders
The nature and purpose of the City code is to “[e]nsure that shareholders in an offeree company are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders in the offeree company of the same class are afforded equivalent treatment by an offeror.”236 There are three substantial rules supporting this general principle. Section E11 Rule 6 sets the bottom price of an offer: “[a]n offeror or any person acting in concert with it acquires any interest in shares at above the offer price (being then current value of the offer), it shall increase its offer to not less than the highest price paid for the interest in shares so acquired.”237 Section H1 Rule 14 ensures that the same class of shares are to be treated the same:“[W]here a company has more than one class of equity share capital, a comparable offer must be made
232 Companies Act,2006, Part 15, c.5, §415, §417.
233 The Large and Medium-sized Companies and Groups (Accountant Reports) (Amendment) Regulations 2013.
234 Financial Reporting Council. The U.K. Corporate Governance Code. D1.5 (2012)
235 Armour, John, and David A. Skeel Jr. "Who writes the rules for hostile takeovers, and why-the peculiar divergence of US and U.K. takeover regulation." Geo. LJ 95 (2006): 1756-1765.
236 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (12t h ed. 2016), Introduction, 2(a).
237 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (12t h ed. 2016)，
Part E11，Rule 6.
for each class whether such capital carries voting rights or not; the Panel should be consulted in advance...In the case of offers involving two or more classes of equity share capital, prices for all of which are published in the Daily Official List, the ratio of the offer values should normally be equal to the average of the ratios of the middle market quotations taken from the Daily Official List over the course of the six months preceding the commencement of the offer period. ” 238 Section H3 Rule 16 forbids the acquirers to reach any superior agreements with any third party: “[E]cept with the consent of the Panel, an offeror or persons acting in concert with it may not make any arrangements with shareholders and may not deal or enter into arrangements to deal in shares of the offeree company, or enter into arrangements which involve acceptance of an offer, either during an offer or when one is reasonably in contemplation, if there are favorable conditions attached which are not being extended to all shareholders. ”239
The above-mentioned shareholders protection rules are quite similar to the Securities and Exchange Act of the U.S., but the U.K. went even further and introduced the Mandatory Bid Rule:“[a] ny person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a company, ” a mandatory offer is required. 240 Indeed, the Mandatory Bid Rule offers all shareholders with a fair opportunity to exit without any omissions, but it largely increases the cost for the acquirers, hence it hinders takeovers from happening.
238 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (12t h ed. 2016)，
Part H1，Rule 14.
239 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (12t h ed. 2016)，
Part H3，Rule 16.
240 The Panel on Takeovers and Mergers, The City Code on Takeovers and Mergers (12t h ed. 2016)，
Part F1，Rule 9.
To sum up, the U.K. hostile takeover regulatory framework leans largely to the shareholders’ side, which is very much the opposite to the U.S. practice. The shareholders have the primary power over takeover issues, and directors of the board must remain passive.