In June it emerged that Tottenham Hotspur may become the ninth English Premier League club to come under foreign ownership, after it was revealed that a Dubai-based Middle East syndicate was ready to pursue the club in a £250m-plus bid.
The media spotlight surrounding takeovers of English clubs has exposed a worrying aspect, in that the future financial stability of many of these clubs has been potentially jeopardised by the debts taken on in order to finance these takeovers. From a legal standpoint, this raises a rather interesting predicament for directors on the board of a target company, in the sense that they must decide, when approached with a takeover offer, what is in the best interests of the company.
In making this decision, the board must, where the company is a public limited company, heed the Takeover Code, as well as observe its duties under common law (as now enshrined in statute, as discussed below).
Rules 3.1 and 25.1 of the Takeover Code, when read jointly, effectively state that the board must obtain competent independent advice on any offer and the substance of this advice must be made known to its shareholders. Additionally, the company must circulate to the company's shareholders its own opinion on the offer. In light of these rules, the independent advisor and the company's board itself would need to think carefully before supporting a proposed takeover which is substantially financed by loaned capital, as this could well be regarded as being contrary in many respects to the best interests of the company. This position somewhat reflects the common law duty which a company's board is under irrespective of whether it is a public limited company. This duty requires the board to act in the best interests of the company by (when assessing the proposed offer) taking into account both existing and future shareholders, and therefore the short and long term interests of the company. Moreover, varying classes of the shareholders must be treated fairly, and the interests of creditors and employees must be considered.
Recently, Liverpool FC were taken over by American duo Tom Hicks and George Gillett. The £218.9m takeover was financed by approximately £185m in loans. This echoes the American Malcolm Glazer's 2005 £725m takeover of Manchester United PLC, which has left the club apparently owing £660m to the bank. It may appear to the outside observer that, in practice, the highest offering price prevails over the common law duty to act in the best interests of the company (as was discussed in the case of Heron International v Lord Grade [1983] BCLC 244). But of course the decision involves a balancing act and it could nevertheless be argued, in appropriate circumstances, that by accepting the best priced offer, a board of directors is in fact acting in the best interests of the company.
What is clear however is that the law has put directors in a quandary when deciding what is in the best interests of their company. It is hoped that section 172 of the Companies Act 2006, which came into effect in October 2007, and which covers a director's duty to promote the success of the company, will simplify this area of the law. Section 172 replaces the common law duty to act in good faith in the best interests of the company. A director is now required to act in the way he considers, in good faith, will be most likely to promote the success of the company for the benefit of its members as a whole. He must in doing so, have regard, amongst other things, to six factors, which for example include the likely consequences of any decision in the long term (e.g. the financial stability of a football club), the interests of the company's employees and the need to act fairly as between members of the company.
Section 172 is still in its infancy, so it is difficult to predict whether it will in practice clarify the law for directors in this position. However, if the worrying culture of highly leveraged takeovers of English Premiership clubs continues, the laws of economics suggest that English football is on a very slippery slope indeed.
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