The early announcements of a potential takeover bid: reflections on the ‘put up or shut up’ rule under Spanish law

In most markets, the process of any takeover bid usually starts with the formal announcement of the offer, when the bidder makes the firm decision to launch the bid public and becomes legally bound to proceed with it. But experience shows that it is not uncommon for the persons involved in a potential takeover bid to make other types of communications or public announcements to the market in relation to it, prior to the formal announcement. Sometimes it is the potential bidder who makes a public communication, generally after the appearance of rumors or leaks about the preparation of a possible operation, informing of its more or less formal intention to present a takeover bid or, on the contrary, denying any intention to do so. On other occasions it is the target company itself that informs the market, on its own initiative or in reaction also to the uncontrolled circulation of news or rumors, about the preparation and possible launch of a takeover bid by one or more third parties, following an approach by them or, where appropriate, due to the opening of a formal process for the sale of its shares by one or more significant shareholders. Although the practical reality is very broad and varied, the common element is that these preliminary announcements about a takeover bid precede the formal announcement of the bid initiating the procedure, and as such they do not correspond to the typical communications targeted by the regulatory framework.

Numerous European countries have opted to regiment certain issues raised by these early announcements, generally by means of different variants of the ‘put up or shut up’ rule imported from the UK Takeover Code. In essence, this rule requires any person who announces the possibility of making a takeover bid to specify its real intentions to proceed with the bid or, on the contrary, not to launch it, within a short period of time. This obligation of the potential bidder operates automatically in some jurisdictions, in others on instructions from the supervisory authority, and sometimes at the request of the offeree company. In Spanish law there is no equivalent rule, but the Comisión Nacional del Mercado de Valores (CNMV) applied a similar criterion under its general supervisory powers in a well-known precedent, in which it required a potential bidder who informed the market of the details of the possible bid it had proposed to the board of directors of the offeree company to specify its decision on whether or not to proceed with the bid within a short period of time.

In a recent paper, I analyse these preliminary communications from the perspective of the potential risks they pose and their appropriate legal treatment. The ‘put up or shut up’ rule is usually justified by the declared purpose of preventing the creation of ‘false markets’ for the shares of the target company, and at the same time avoiding a possible situation of ‘siege’ or ‘harassment’ of the latter, in view of the effects that the mere possibility of ending up receiving a takeover bid can have for the target company. The aim is also to avoid possible ‘virtual takeover bids’, whereby the bidder transfers the debate on the merits of a possible takeover bid to the market without actually being required to make it (a circumstance which, in the Spanish market, has guided the supervisory criteria established by the CNMV in many aspects of the regulation of takeover bids).

However, not all preliminary announcements should merit the same legal treatment. In particular, it is necessary to distinguish between announcements made by the offeree company, which should not generally give rise to particular concerns, and those made by the potential bidder, who could sometimes use these announcements instrumentally to put pressure on the directors of the offeree company and to obtain other strategic advantages. A distinction should also be made between announcements made in response to rumours and leaks in the market, which are the majority and are actually mandatory under the general market abuse disclosure regime, and voluntary announcements, which are those that in principle should give rise to greater caution and reserves.

Javier Garcia de Enterría is a Professor of Corporate and Commercial Law at CUNEF (Madrid), and a Consultant on Corporate Law and Equity Capital Markets at Clifford Chance, Madrid.

The author’s paper can be read here.