The Panel’s executive routinely checks takeover notices, takeover offer documents and target company statements for compliance with the Code.

From some recent examples it appears that companies and their legal advisers treat compliance with the Code as an option rather than a legal obligation. This is not the case and the Panel will take appropriate enforcement action if documents do not comply.

Some areas where compliance with the Code has raised difficult issues, mostly for target companies, are discussed below. This article does not discuss the ongoing issues relating to Oyster Bay.

Schedule 2 of the Code sets out the requirements of the target company statement, i.e. the statement that a target company must issue in response to a takeover offer. The target company must send to the offeror and to every offeree ... a statement containing, or accompanied by, the information specified in Schedule 2 ... (Rule 46)

The target company statement must include ... the identity of the independent adviser who has provided a report under rule 21 and a copy of the adviser’s full report or a summary of the full report prepared by the adviser. (Clause 19 of Schedule 2)

Clause 21 of Schedule 2 states that If any information provided in the target company statement refers to prospective financial information, the principal assumptions on which the prospective financial information is based.

The Panel interprets Schedule 2 as meaning that the independent adviser’s report on the merits of an offer (as required by Rule 21) is part of the target company statement for the purposes of clause 21 of Schedule 2.

Independent adviser reports often give prospective financial information, comprising financial forecasts of the target company for one or two years ahead. Invariably, given the short time which advisers have to prepare their merits reports, these forecasts will be based on information provided by the target company management.

If an incumbent board or management is resisting a hostile takeover there is an incentive to exaggerate the value of the target company to make the bid appear low. This may appear to be in the interests of shareholders if it pushes up the offer price, but it may not be in the company’s interests if it frustrates a much-needed change of control.

Where an incumbent management supports a takeover offer, possibly one made by an existing majority holder for the shares it does not already hold, there is less incentive for management to inflate the value of the company. In these circumstances information about the target company’s future prospects that is given to the adviser may be relatively conservative.

Partly because of these varying possibilities the Code requires the target company statement (including the independent adviser’s report) to state the principal assumptions on which any prospective financial information is based. It is expected that the assumptions will directly accompany the prospective financial information in the document.