A makeover for the takeover

On 15 April 1997, the Irish government introduced the first of what will be a series of statutory instruments required to bring into force the Irish Takeover Panel Act, 1997. The Act provides for the establishment of such a body, which will have responsibility for monitoring and supervising takeovers and substantial share acquisitions in Irish public companies.

Once the Irish Takeover Panel becomes operational, the London Takeover Panel will cease to have any involvement in takeovers of Irish public companies.

By establishing a takeover panel on a statutory basis and conferring on it statutory obligations and powers, it is expected that the Act will bring about a fundamental change in the conduct of takeovers of Irish public companies. It will also mean that the role of Irish lawyers in these takeovers will become more critical. Expertise in Irish constitutional law and litigation practice will become an additional essential element of any takeover team.

The Act has its origins in the contested bid for Irish Distillers in 1988. This takeover developed into an unusual and long-running saga, and gave rise to several difficult issues which occupied a lot of time and effort on the part of the London Takeover Panel. At the time, the panel made no secret of its reluctance to be involved in the supervision of takeovers of Irish public companies.

The Act will apply to takeovers of Irish incorporated companies whose securities (including bonds) are traded on the Irish Stock Exchange. This includes companies with full listing as well as those who have their securities traded on the new Developing Companies Market and the Exploration Market.

The legislation also applies to companies which no longer have securities traded on the Irish Stock Exchange, but which did have such trading facilities during the five years preceding the date of any offer. There is also provision in the legislation for the Minister for Enterprise and Employment to designate other public limited companies where he believes (following consultation with the Irish Panel) that it is necessary to secure more fully the protection of shareholders.

The Act requires the new panel to adopt a set of rules on the conduct of takeovers. For reasons of Irish constitutional law, the legislation must specify the principles in accordance with which the rules have to be adopted. These principles are set out in the Act's schedule, and are similar to the General Principles set out in City Code on Takeovers and Mergers.

The similarity between the principles in the Act and the General Principles ends there, however. While the General Principles are intended to be interpreted and applied in a purposive manner, the principles in the Act will be required to be interpreted and applied strictly. This probably represents the greatest challenge for the panel, since experience in other areas of Irish administrative law has shown that failure to do so could give grounds on which the rules and decisions of the panel can be challenged.

The Act is also likely to have consequences for the duties and responsibilities of directors of Irish companies involved in takeovers. This can be illustrated by one of the aspects of the Irish Distillers bid.

In one of its complaints to the London Panel, GC&C Brands argued that the board of Irish Distillers had voluntarily surrendered its freedom to recommend the best course to its shareholders. The company submitted, on the basis of advice from Irish senior counsel, that the agreement which had committed the board to doing this was therefore void as contrary to public policy, and constituted a breach of the fiduciary duties of the directors.

While the London Takeover Panel found that there had been no breach of the General Principles in this regard, it acknowledged that any issue of Irish law regarding breach of fiduciary duty to the company could only be decided by the Irish Courts.

The question of whether the directors of a company owe a duty of care to their shareholders in the course of a takeover offer and, if so, what is the nature of this duty has been a grey area for many years.

There are several conflicting authorities in the common law world. When the principles set out in the Act are reviewed, the number of times the word “duty” is used, particularly with regard to the those owed by directors to their shareholders, is significant. These principles are likely to be relied on by Irish company shareholders who wish to establish the extent of the duty of care owed to them by the directors of a company in respect of actions directors might take during a takeover offer.

In the US, where this has become a serious problem for directors, directors have found some protection in D&O liability insurance. In Ireland, the scope for this is limited by restrictions in the Irish Companies Acts on the giving of indemnities to directors.

The Act gives the panel extensive powers to enforce its rules. Where any of the panel's rulings or directions have not been complied with, or are unlikely to be complied with, it can apply to the High Court. The court can make an appropriate order to enforce the rulings or directions.

The High Court can require any party to a takeover to do or refrain from doing anything specified by the court. In addition, the High Court can annul any transaction which has been carried out other than in accordance with the panel's ruling or direction. This is a significant development, and will represent a serious risk for any bidder or target board that is proposing to adopt an aggressive strategy in the course of a bid.

When the panel makes a ruling or gives a direction, the Act specifically requires that it must have regard to the principles set out in the schedule to the Act.

Where a party is unhappy with a ruling or direction of the panel, the panel can expect its ruling or direction to be closely scrutinised by reference to the principles in the Act, and may be faced with judicial review if there are any discrepancies.

This is likely to present a particular difficulty for the panel in the exercise of the power conferred on it by the Act to grant derogations or waivers from any of its rules.

The principles in the Act will ordinarily require that the panel's rules be strictly complied with. So the panel will only very rarely form the view that there are exceptional circumstances which make it appropriate for a derogation or waiver to be granted.

The Act also gives the panel the power to conduct hearings and to compel documents to be produced, witness to attend and and their examination under oath. The Act gives the panel the same powers, immunities, rights and privileges as conferred on the High Court when conducting a hearing.

While this is no doubt a comfort to the panel, the converse of these provisions will mean that those appearing before it will be entitled to full legal representation and all the normal guarantees of a fair hearing and the right to protect their good name.

This will mean that hearings conducted by the panel will be much more complicated and expensive than those conducted by its London counterpart. The findings of the Irish panel will have to be supported by a relatively high evidential burden.

The panel is intended to be self-financing. The Act authorises it to levy charges on companies involved in takeovers, as well as those who deal in the shares of the companies concerned. In addition, charges can be levied on any person in respect of a document furnished by him to the panel in relation to a takeover. Before it can levy any charges, a schedule of these charges must be published and approved by the Minister for Enterprise and Employment.

Given the sums that are often involved in takeovers, it is likely that attempts will be made in the future to challenge some of the panel's actions. This will make some takeovers more complicated and drawn out, as bidders and target companies seek to explore all the legal avenues now available to them under the new Act.

Meanwhile, directors of Irish companies involved in takeovers are likely to become more conscious of their duties and responsibilities, as shareholders will rely on the Act to establish that there has been a breach of the duties owed to them.