502 17 Duties of the Board in the Context of Takeovers
Generally, the board of the target company must take competent independent advice on
the offer and communicate the substance of the advice received to the shareholders.^70
Rule 21 of the City Code seeks to ensure shareholder sovereignty by setting out restric-
tions on frustrating action. It sets out a general restriction which starts to apply during the
pre-bid period. Where the board of a company has reason to believe that a bona fide offer
might be imminent and during the course of the offer, the board must not, without the con-
sent of shareholders in general meeting, “take any action which may result in any offer or
bona fide possible offer being frustrated or in shareholders being denied the opportunity to
decide on its merits”.^71 In case of doubt, the Panel must be consulted in advance.
In addition to a general restriction, the City Code lists a number of particular forms of
frustrating action to which the restrictions apply.^72
There are particular rules on inducement fees.^73 First, the Takeover Panel should be con-
sulted at the earliest opportunity in all cases where an inducement fee or any similar ar-
rangement is proposed. Second, in all cases where an inducement fee is proposed, certain
safeguards must be observed. In particular, an inducement fee must be de minimis (nor-
mally no more than 1% of the value of the offeree company calculated by reference to the
offer price). Third, the target’s board and its financial adviser must confirm to the Panel in
writing that they each believe the fee fo be in the best interests of shareholders. There are
also rules on disclosure of inducement fees.
There are constraints on share purchases by the target. Rule 37.3 of the City Code re-
quires shareholder approval before the target redeems or purchases its own shares either
during the course of an offer or the pre-bid period when the board has reason to believe that
an offer is imminent.^74 There are also rules on disclosure.
Rule 20 of the City Code requires equality of information given to competing bidders.
Rule 20 prevents a target company from giving a preferred bidder an unfair advantage by
furnishing it with information, thereby making it more difficult for a less favoured suitor to
compete - with the result that target shareholders may be deprived of a better offer.^75
(^70) Rules 3(1) and 15(1) of the City Code on Takeovers and Mergers.
(^71) Rule 21.1 of the City Code on Takeovers and Mergers.
(^72) Rule 21.1 of the City Code on Takeovers and Mergers.
(^73) Rule 21.2 of the City Code on Takeovers and Mergers.
(^74) Rule 37.3(a) of the City Code on Takeovers and Mergers. See also Notes 1 and 5 on
Rule 21.1.
(^75) Rule 20.2 of the City Code on Takeovers and Mergers.