TAKEOVER REGULATION: HISTORICAL AND THEORETICAL PERSPECTIVES ON THE CITY CODE

Abstract

The City Code on Takeovers and Mergers has generally been lauded as a system of self-regulation that offers the advantages of speed, flexibility and low cost administration by experts. Many of its provisions are uncontroversial and do indeed reflect a consensus view about the way in which takeovers should be carried out. However, the Code's prohibition on defensive measures by management in the event of a takeover is far more controversial. This article argues that the City Code – and the prohibition on defensive measures in particular - was introduced because the common law had demonstrated itself incapable of putting in place a system of takeover regulation that ensured the takeover remained a viable means of ensuring managerial accountability to shareholders. Its introduction in 1968 fundamentally transformed the UK's system of corporate governance. Through its prohibition on defensive measures once a takeover becomes imminent, the Code truncates the general management discretion that lies at the heart of company law and forces management to focus on the generation of short-term shareholder value. What is striking is that this fundamental reorientation of the way in which companies are controlled was brought about not by an Act of Parliament but by a self-regulatory measure put in place by financial institutions. Following the implementation of the Takeover Directive, which itself was heavily influenced by the City Code, the Companies Act 2006 now requires the Takeover Panel to maintain that prohibition.