THE UK'S M & A REGULATORY MOSAIC: LAWS, CODES, AND AUTHORITIES

 

Authored By - Mohd Abdul Sabur Khan

 

 

ABSTRACT[1]

This research paper explores the regulatory framework governing mergers and acquisitions (M&A) in the United Kingdom, focusing on the public M&A sector, voluntary merger control, the National Security and Investment Act (NSI Act), and key governing bodies. At the heart of public M&A lies the City Code on Takeovers and Mergers, which ensures fair and equitable treatment of target company shareholders, promoting transparency and equal access to information. The Takeover Panel plays a critical role in enforcing the Code, providing guidance, and issuing formal rulings when needed. The UK's departure from the EU's "one-stop-shop" principle means that mergers may be subject to separate reviews by the CMA and the European Commission.

 

The NSI Act signifies a shift in assessing investments on national security grounds, introducing a comprehensive framework to safeguard national interests. The Act imposes both civil and criminal sanctions for non-compliance, emphasizing strict adherence to mandatory notification requirements to avoid severe penalties.

 

This paper also outlines the significant role played by various governing bodies, including the Takeover Panel, Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA), and Competition and Markets Authority (CMA). These bodies ensure financial stability, market integrity, and fair competition during takeover transactions. The UK's well-regulated M&A landscape inspires confidence among investors and stakeholders, promoting transparency and upholding principles of fairness, integrity, and competition. Adherence to these laws and engagement with relevant authorities are crucial for successful, ethical, and compliant transactions. As the business landscape evolves, the regulatory framework remains adaptable, continuously evolving to meet new challenges and maintain the UK's position as an attractive destination for M&A activities.

KEYWORDS: Investigation, Jurisdiction, Sanctions, MAR, FSA.

 

INTRODUCTION

Public M&A in the UK operates within a highly regulated framework, offering more stringent rules and guidelines compared to private M&A transactions, which grant greater flexibility to the parties involved. Frequently referred to as the "Takeover Code," which regulates takeovers in the UK, is the focal point of public M&A in the country. Additionally, it applies to certain transactions involving UK private companies. Developed and continuously refined from its inception in 1968, it encompasses two main aspects, that is principles, and regulations, supplemented by explanatory notes, to manage the entire takeover process[2]. This encompasses the timeline of events, the disclosure of information to shareholders, and the regulation of parties during and after the acquisition process. At the core of the Takeover Code lies a fundamental principle of ensuring transparent and equitable treatment of the merged or acquired company's shareholders, more so those owning shares of the same class. This involves equal access to information and receiving fair offers, which places limitations on offertory, including the prohibition of engaging in preferential arrangements with specific shareholders.

 

To oversee and enforce the Takeover Code, the UK Government has empowered the “Panel on Takeovers and Mergers”, commonly known as the "Takeover Panel," to act as the regulatory body for takeover transactions[3]. This panel is essential in the takeover process, with its representatives, known as the Panel Executive, actively engaging with the parties' advisors in the whole process. Each new process has its own officer, facilitating continuous communication and ensuring compliance with the Code's provisions. Due to the intricacies of takeover transactions and the ever-evolving nature of the business landscape, the Takeover Panel frequently faces the challenge of interpreting and applying the rules to unique circumstances. In such instances, formal rulings are issued, leading to potential updates and amendments of the code in order to enhance future rules further. The code is also periodically reviewed, updated with new developments taking into account consultation with all stakeholders and contemporary practices, and aligned with current market trends and requirements. The City Code on Takeovers and Mergers plays a pivotal role in regulating public M&A in the UK, providing a structured framework that upholds fairness, transparency, and equal treatment of shareholders[4]. The Panel's diligent management of the Code contributes to the stability and integrity of the M&A landscape, adapting to new challenges and fostering a level playing field for all parties involved in takeover transactions.

 

PRINCIPLE LAWS & REGULATIONS ON M&A IN THE U.K.

1. The Companies Act: The Companies Act is a fundamental piece of legislation that governs various aspects of company law in the UK. In the context of M&A, the Companies Act holds particular significance. It describes the contractual offers squeeze-out process, which under certain conditions permits the compulsory acquisition of shares. Additionally, the Companies Act outlines the procedure for schemes of arrangement, a mechanism used in M&A transactions to facilitate agreements between companies and their shareholders.
2. The Prospectus Regulation[5]: This is a set of regulations that governs the public offering of shares inside the European Union. Through the European Union (Withdrawal) Act of 2018, it became part of UK legislation. When shares are used as a form of payment for the purchase of shares in another company, this regulation becomes relevant. The Prospectus Regulation, in conjunction with particular provisions of the Financial Services and Markets Act, and the Financial Conduct Authority handbook, makes sure that public offers are carried out with the necessary disclosure of information to investors, promoting transparency and compliance with disclosure requirements.
3. The Market Abuse Regulation[6]: MAR is an EU regulation that has been adopted into UK law through the Withdrawal Act. Administered and enforced by the Financial Conduct Authority (FCA), MAR is responsible for overseeing and regulating activities related to insider dealing and market abuse. It establishes a set of rules and restrictions to prevent individuals from using confidential or insider information for trading purposes. The primary objective of MAR is to maintain the integrity of the financial markets and ensure investor confidence by preventing unfair advantages and manipulative practices.
4. FSMA[7]: The FCA is the regulatory agency in charge of regulating issuers and the financial markets in the UK under the FSMA. In the context of M&A, takeovers of companies with shares traded on relevant stock exchanges are subject to specific obligations set forth in the FCA Handbook. These obligations ensure compliance with market rules and promote transparency and fairness in the takeover process.
5. CJA[8]: The justice act serves as a crucial tool in the fight against financial misconduct and unethical behaviors in the financial markets. By providing a legal basis for holding wrongdoers accountable, the Criminal Justice Act plays a vital role in upholding market integrity and ensuring fair and transparent trading practices. it operates within the authority of the courts and collaborates with other relevant legislation and guidelines to address issues of insider dealing and market abuse. Its main purpose is to establish a legal framework for prosecuting individuals engaged in illegal trading practices.
6. The Enterprise Act 2000: CMA is responsible for overseeing mergers in the UK in accordance with the Enterprise Act. To ensure that mergers and acquisitions do not materially reduce competition in the UK market, the CMA evaluates them. Its function is essential for preserving a vibrant commercial environment and safeguarding the interests of customers.
7. NSA[9]: it’s a recent addition to the UK's legislative framework. It establishes a standalone review system focused on national security concerns arising from investments. The act defines specific processes and statutory deadlines for the review of transactions that may have implications for national security.

 

GOVERNING BODIES

1. Take Over Panels, is one of the central bodies overseeing takeovers in the UK[10]. The Takeover Panel ensures that the takeover process adheres to the principles and guidelines laid out in the Takeover Code, promoting transparency and fairness in the conduct of takeover activities.
2. The prudent regulation Authority: The PRA is a financial regulatory body in the United Kingdom, responsible for supervising and regulating banks, building societies, credit unions, insurers, and major investment firms. Its primary objective is to promote the safety and soundness of these financial institutions, ensuring they have sufficient capital buffers and risk management systems[11].
3. The Financial Conduct Authority: The FCA regulates the conduct of finance firms, administering parts of the company’s legislation and financial services. Both the PRA and the FCA contribute to maintaining the integrity and stability of the financial market during takeover transactions[12].
4. Competition and Markets Authority: When companies consider merging, the CMA steps in to investigate the potential effects of the merger on competition within the relevant market. The CMA assesses whether the consolidation of these businesses might lead to a significant reduction in competition, resulting in higher prices, reduced choice, or other negative consequences for consumers.

 

KEY FEATURES OF U.K.’s M&A LAWS AND REGULATIONS

The United Kingdom's merger control regime plays a vital role in regulating mergers and acquisitions to ensure fair competition and protect consumer interests. Unlike some jurisdictions, filing a merger in the UK with the CMA is voluntary, offering merging parties the freedom to decide whether to notify the authority or not. However, the CMA actively monitors the market and retains the power to review unnotified mergers if they meet certain criteria.

 

1. Voluntary Filing and "Call-In" Risk:

The UK's merger control system is characterized by its voluntary nature.
In simple terms, when two companies decide to merge, they can choose to inform the Competition and Markets Authority (CMA) about the merger voluntarily, but they are not required to do so. However, the CMA actively monitors the market for mergers through its merger intelligence function[13]. If the CMA becomes aware of a merger that could raise competition concerns, it has the authority to "call in" the merger for review within four months of its completion or when significant information about the merger becomes public. If the CMA notices potential competition issues in a merger that has already been completed, it may impose an "Initial Enforcement Order" (IEO). This order forces the merging companies to remain separate during the investigation to avoid further potential harm to competition in the market. In extreme cases where the CMA finds that a completed merger is problematic for competition, it can reverse the merger and undo the consolidation.

 

1. "One-Stop-Shop" Principle:

The "one-stop-shop" merger policy of the EU is no longer in effect in the UK as a result of its exit from the EU[14]. As a result, the UK will no longer be included in the merger review conducted by the European Commission. This suggests that merging parties may now be subject to separate examinations of their transactions by the UK's CMA and the European Commission for issues pertaining to the EU.

 

1. Jurisdictional Criteria:

When two or more companies are no longer regarded as separate legal entities, the CMA has the ability to evaluate a merger. Shared ownership or control brought on by the purchase of a controlling interest can cause this. It can also happen when business policy is under strong influence. A merger will also be scrutinized by the CMA if it results in a market share of a particular good or service in the UK of 25% or more, or a sizeable portion of it, as the CMA defines it. Alternatively, if the target company's UK turnover exceeded £70 million in the preceding fiscal year, the CMA may also examine a merger.

 

1. Time Limit for CMA Investigation:

One significant feature of the UK merger control regime is the time limit within which the CMA can investigate a merger[15]. Generally, the CMA cannot initiate an investigation if more than four months have passed since the completion of the merger. However, if completion has not been publicly disclosed, the four-month period begins from the date of public disclosure. This provision aims to strike a balance between allowing business activities to proceed and ensuring that potential competition concerns are promptly addressed. The time frame in which the CMA must investigate a merger is an important aspect of the UK merger control framework.

1. Filing Fees for CMA Investigation:

When the CMA analyses a merger, merging parties must pay filing fees, which is another crucial component of the UK merger control scheme. The filing fees range from £40,000 to £160,000 and are determined based on the turnover of the target business[16]. This system ensures that the cost burden of the investigation is proportionate to the size and significance of the transaction, encouraging a fair and efficient allocation of resources.

 

1. Pre-Notification Engagements:

The CMA encourages parties involved in a potential merger to engage in pre-notification discussions before the formal "Phase I" review commences[17]. These discussions serve as an essential preparatory step, allowing the CMA to gain a better understanding of the transaction and the potential competition concerns it may raise. Pre-notification discussions typically last between six weeks and three months on average, but in complex cases, they may extend up to six to nine months.

 

1. Written Submissions and Phase I Investigation:

During pre-notification, the parties' interaction with the CMA is primarily through written submissions. The parties are usually expected to submit a comprehensive merger notice containing significant amounts of information about the involved parties, the transaction itself, and the relevant markets. The official Phase I inquiry begins when the CMA receives the finished draught merger notification and lasts for 40 working days. The CMA has two options for action by the conclusion of this time[18]. They may choose to move through with a more thorough Phase II review, which digs further into the merger's possible effects, or they may elect to approve the transaction without any conditions, in which case the merger is approved.

 

1. Phase II Investigation and Undertakings in Lieu (UILs):

When the CMA decides that the merger requires more thorough examination, it might ask for a "duty to refer," meaning the merger is referred to the next stage of investigation. During this phase, the merging parties have the option to present "Undertakings in Lieu" (UILs) to the CMA. These UILs are essentially commitments made by the involved parties to tackle any competition concerns that the CMA has identified. If the CMA accepts the proposed UILs and believes they adequately address the issues, they may proceed with approving the merger, subject to the parties fulfilling their commitments. However, if no UILs are proposed or the CMA is not satisfied with the ones presented, they initiate a formal Phase II investigation. This phase lasts for 24 weeks, with a possibility of an extension of up to eight weeks under exceptional circumstances. During Phase II, the CMA conducts an even more in-depth analysis to determine if the merger could harm competition in the market or adversely affect consumers[19]. The Phase II investigation delves deeper into the potential anti-competitive effects of the merger and aims to reach a conclusive decision based on comprehensive analysis.

 

1. Initial Enforcement Order (IEO) Implementation:

The CMA can impose an Initial Enforcement Order (IEO) as per customary practice if it believes that a merger has been finalized without approval or while the inquiry is ongoing. While the CMA conducts its in-depth inquiry, an IEO's goal is to stop the merging companies from integrating their businesses. The CMA wants to keep things as they are during the examination period, therefore it has implemented an IEO. This precautionary procedure guarantees that any potential competition problems are fully evaluated without running the risk of the merger causing irreversible effects. The IEO aids in preserving the competitive environment and enables the CMA to decide with knowledge of the merger's actual effects on the market.

 

1. National Security Act:

UK's NSI Act represents a significant shift in how investments are assessed, introducing a dedicated and comprehensive framework to safeguard national security[20]. By mandating notifications for acquisitions in specific sectors and enabling scrutiny of transactions across the wider economy, the UK aims to proactively protect its national interests in an ever-evolving global landscape.

1. Non Compliance

In the UK, the NSI Act is focused on both creating a thorough system for screening investments for national security reasons and ensuring that its rules are strictly followed. The inclusion of both civil and criminal sanctions, along with fines, potential imprisonment for directors, voiding of non-compliant transactions, daily penalties for breach of orders, and sanctions for misleading information, collectively create a robust enforcement framework. This framework aims to instill a culture of adherence to the mandatory notification requirements and underscores the UK Government's unwavering commitment to protecting its national security interests. Businesses and individuals alike must be mindful of these consequences and take necessary precautions to ensure full compliance with the NSI Act to avoid severe penalties and legal repercussions.

 

1. Approval

The first stage of the review process, spanning 30 working days, serves as a preliminary evaluation of the transaction's potential national security implications. During this period, the government assesses the available information and determines whether the transaction raises any significant concerns warranting further scrutiny[21]. If the government is satisfied that the transaction does not pose any substantial national security risks, it may choose to clear the deal at this stage. However, if the government identifies potential national security concerns during the initial review, it may decide to "call in" the transaction for a more comprehensive assessment. This second stage entails a more detailed investigation, which allows the government to delve deeper into the transaction's potential implications for national security.

 

The comprehensive assessment stage, which can last as many as thirty working days and can be extended for an additional 45 working days in extraordinary cases, provides a comprehensive examination of the transaction[22]. During this phase, the UK Government collaborates with relevant authorities and experts to analyze all available information, assess potential risks, and consider any necessary mitigation measures.

 

1. Premium-listed companies

Companies that hold a premium listing on the Financial Conduct Authority's Official List, known as "premium listed companies," are subject to specific provisions under the FCA's Listing Rules. These requirements apply to various types of M&A transactions, including class 1 and class 2 transactions, reverse takeovers, and related party transactions, where the offeror is a premium listed company. premium listed companies in the UK are subject to stringent requirements under the FCA's Listing Rules when engaging in M&A transactions[23].

 

1. Disclosure of information:

The Market Abuse Regulation (MAR) plays a critical role in shaping the conduct of M&A activities for listed and publicly traded companies in the UK[24]. The obligation to disclose "inside information" as soon as possible promotes transparency and investor confidence, while the legitimate interest exception allows for confidential negotiations. Companies must remain vigilant of press speculation and market rumors, addressing them promptly to avoid misinformation.

 

CONCLUSION

The United Kingdom's M&A regulatory landscape represents a finely woven mosaic of laws, codes, and authorities, designed to ensure fairness, integrity, and transparency in the dynamic world of mergers and acquisitions. This research paper has delved into the key components of this intricate framework, shedding light on the core principles and entities that shape the M&A landscape in the UK. At the forefront of public M&A transactions stands the City Code on Takeovers and Mergers, a time-tested and continuously refined document that upholds the values of equitable treatment and access to information for all shareholders. Under the vigilant eye of the Takeover Panel, this code is enforced, guiding parties through the takeover process while issuing formal rulings to address unique circumstances. This dedication to transparency and fairness fosters investor confidence and maintains a level playing field for all stakeholders.

 

The UK's voluntary merger control system allows merging parties the freedom to decide whether to notify the Competition and Markets Authority (CMA). However, the CMA remains vigilant through its merger intelligence function, allowing it to "call in" unmodified mergers if they meet certain criteria. This vigilance ensures that potential competition concerns are promptly addressed, promoting a healthy and competitive business environment. With the UK's departure from the EU's "one-stop-shop" principle, the regulatory landscape has adapted to ensure the UK's autonomy in reviewing mergers. Merging parties may now find themselves subject to separate reviews by both the CMA and the European Commission. This new reality underscores the importance of understanding and navigating multiple regulatory frameworks in cross-border transactions. The National Security and Investment Act (NSI Act) introduces a comprehensive framework to safeguard national interests, addressing potential national security concerns arising from investments. By enforcing both civil and criminal sanctions for non-compliance, the UK government emphasizes the need for strict adherence to mandatory notification requirements, reinforcing its unwavering commitment to national security. Throughout this regulatory journey, various governing bodies play crucial roles in maintaining financial stability, market integrity, and fair competition. The Takeover Panel, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), and the Competition and Markets Authority (CMA) collectively ensure that the M&A landscape remains robust and aligned with the nation's best interests.

 

The United Kingdom's M&A regulatory mosaic is a carefully crafted masterpiece, ensuring that mergers and acquisitions are conducted with transparency, fairness, and respect for national security. It stands as a testament to the country's commitment to a thriving business environment and its unwavering dedication to safeguarding the interests of its citizens and investors alike. As global markets continue to evolve, the UK's regulatory framework will undoubtedly continue to evolve, adapting to new realities while upholding the values that have made it a leading destination for M&A transactions.

 

 

 

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[1] The Author is a student of ICFAI Law School, IFHE, Hyderabad. All views are personal.

[2] Reports and white papers, ‘structuring public takeovers in the UK’ (2022) Armstrong Teasdale < https://www.armstrongteasdale.com/thought-leadership/structuring-public-takeovers-in-the-u-k/. accessed 25 July 2023.

[3] y Federico Mor and Steve Browning, ‘Contested mergers and takeovers’ 5373 (2018): 8-9.

 

[4] Gibson Dunn, ‘The City Code on Takeovers and Mergers - An Introduction’ (2013) https://www.gibsondunn.com/wp-content/uploads/documents/publications/CityCodeOnTakeovers-AnUpdate-June2013.pdf. accessed 25 July 2023.

[5] EU no 2017/1129

[6] EU no 596/2014

[7] Financial Services and Markets Act 2000.

[8] Criminal Justice Act 1993.

[9] National Security and Investment Act 2021.

[10] The Takeover Panel, ‘The Takeover Panel’ (2008) < https://www.thetakeoverpanel.org.uk/#:~:text=The%20Takeover%20Panel%20is%20an,orderly%20framework%20for%20takeover%20bids.> accessed 25 July 2023.

[11] Bank of England, ‘The Prudential Regulation Authority’s approach to banking supervision’ (2018) < https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/approach/banking-approach-2016> accessed 25 July 2023.

[12] FCA, ‘Journey to the FCA’ FCA Publication (2013): 55.

[13] United Kingdom Govt, ‘Mergers: Guidance on the CMA’s jurisdiction and procedure’ (2022) Asset Publishing Service. Gov. UK < https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1044636/CMA2_guidance.pdf> accessed 26 July 2023.

[14] Lukas Schaupp, ‘Implications of the different merger regimes in the EU and the UK: so close yet so far?’ (2021) European Features < https://www.europeanfutures.ed.ac.uk/implications-of-the-different-merger-regimes-in-the-eu-and-the-uk-so-close-yet-so-far/> accessed 29 July 2023.

[15] Timothy McIver and Anne-Mette Heemsoth, ‘Merger Control in the United Kingdom: Overview’ (2021) Thomsun Reutor Practical Law < https://uk.practicallaw.thomsonreuters.com/0-500-7317?transitionType=Default&contextData=(sc.Default)> accessed 29 July 2023.

[16] Mark Zerdin, ‘Insight: competition law implications of M&A transactions in United Kingdom’ (2023) Lexology < https://www.lexology.com/library/detail.aspx?g=616474fb-22d3-48c2-82a7-b420dbb8f31c> accessed 29 July 2023.

[17] Ibid n15

[18] United Kindom Govt, ‘Mergers: Guidance on the CMA’s jurisdiction and procedure’ (2022) Asset Publishing Service. Gov. UK < https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1044636/CMA2_guidance.pdf> accessed 29 July 2023.

[19] United Kingdom’s Government, ‘A Quick Guide to UK Merger Assessment’ (2021) Asset Publishing Service .gov.uk < https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/970333/CMA18_2021version-.pdf> accessed July 2023.

[20] Gov of Uk, ‘National Security and Investment Act: details of the 17 types of notifiable acquisitions’ (2023) Govt Publication National Security < https://www.gov.uk/government/publications/national-security-and-investment-act-guidance-on-notifiable-acquisitions/national-security-and-investment-act-guidance-on-notifiable-acquisitions> accessed 29 July 2023. 

 

[21] Allen and Overy, ‘UK National Security and Investment Act: key takeaways from second annual report’ (2023) Allen & Ovey https://www.allenovery.com/en-gb/global/news-and-insights/publications/uk-national-security-and-investment-act-key-takeaways-from-second-annual-report  > accessed 29 July 2023.

[22] Ibid n21

[23] Michal Berkner, Keast-Butler, Russel Anderson, ‘ Mergers and acquisitions Laws and Regulation 2023|United Kingdom’ (2023) Global Legal Insights < https://www.globallegalinsights.com/practice-areas/mergers-and-acquisitions-laws-and-regulations/united-kingdom> accessed July 29 2023.

[24] Ibid n23.