The rules in the UK's Takeover Code relating to conditions to an offer and the offer timetable have been amended. The changes align the UK Takeover Panel's treatment of EU and UK merger control conditions with its approach to clearances in other jurisdictions; simplify the offer timetable; and make the timetable on a contractual offer more flexible.
The new rules apply to all announcements of a firm intention to make an offer (Rule 2.7 announcement) made on or after 5 July 2021.
The new rules came into force on 5 July 2021 and apply to all firm offers which are announced on or after that date. Offers announced prior to that date (or in competition with offers announced prior to that date) will continue to be governed by the previous rules.
The Response Statement (at 128 pages) covers a number of aspects, but can be summarised thematically in three points:
- Regulatory clearances – The historical, special status for EU merger clearance and UK Competition and Markets Authority (CMA) clearance has been removed, and the Panel’s existing and longstanding policy of allowing a bidder to invoke regulatory conditions only where sufficiently material has been restated with additional guidance on when a condition may be invoked (noting the very high standard applied by the UK Takeover Panel which resulted in a bidder for a retail business not being able to use a MAC in response to the outbreak of Covid-19 during a bid);
- Simplifying the timetable for contractual offers – All offers will run until the 60th day after publishing the offer document (unless a bidder chooses to implement a 21 day “bullet” offer or otherwise accelerate closing), reflecting the fact that the vast majority of offers run until the 60th day in practice and shareholders ordinarily expect them to; and
- Introducing the idea of a flexible contractual offer timetable – It will be easier to suspend the offer timetable on a contractual offer, to accommodate regulatory timetables running longer than 60 days and remove some disadvantages of the old fixed contractual offer timetable when compared to schemes of arrangement.
Deal-doers in Australia, or any jurisdiction for that matter, will already be familiar with the global increase in both the number of and degree of scrutiny under regulatory regimes that need to be navigated to get a deal to closing. This global trend has increased still further during Covid-19 pandemic as governments across the world sought to tighten up regulation and scrutiny of foreign direct investment, in response to a perceived risk of hostile buyers opportunistically buying nationally significant assets. In a private M&A deal, while this trend means there is added complexity and more work to do to get to closing, ultimately parties have a free hand to negotiate conditionality and risk allocation between them. In a public M&A deal, the rules relating to the conduct of the takeover itself – driven by policy determinations around market certainty and integrity of the financial markets – make the task of negotiating conditionality and risk allocation between the parties to the deal, all the more challenging.
In that context, it is interesting to see how in the UK, the UK's Takeover Panel has recently sought to change the rules of the Takeover Code, in order to make the contractual offer timetable – a feature of the regime for over 60 years – more flexible. In its words:
During [2020/2021], the Code Committee consulted upon and has now implemented a number of changes to the Code in relation to offer timetables and the application of regulatory conditions. These changes, which introduce significant additional flexibility to the timetable for [contractual] offers, more closely matching that for schemes, should allow offer participants more easily to marry the Code timetable with the increasingly complex requirements for regulatory approvals on a global basis. Their introduction should also smooth the impact, from an offer process perspective, of the National Security and Investment Act 2021, which is expected to come into effect later this year [a reference to the UK Government's new foreign direct investment regime which bears a number of similarities to Australia's FIRB system].1
It is important to understand the broader context of these changes to the rules applicable to takeovers of UK listed companies. The UK's Takeover Panel was established in 1968, since when its composition and powers have evolved as circumstances have changed. It performs statutory functions and has statutory powers as set out in the UK's Companies Act 2006 but, significantly, it is independent of and is not funded by the UK Government. The rules applicable to takeovers of UK listed companies, state clearly their purpose, which is to ensure that shareholders in a target company are: treated fairly; not denied an opportunity to decide on the merits of a takeover; and afforded equivalent treatment by a bidder. They go on to expressly state that they not concerned with wider questions of public interest, including competition policy and national security, which are the responsibility of government and other bodies, nor the financial or commercial advantages or disadvantages of a takeover, which the authors of the rules consider to be matters for the target company and its shareholders; it not being the purpose of the rules either to facilitate or to impede takeovers.
It has been a key feature of the UK's rules, prior to these recent changes, that contractual takeover offer must be conducted within a detailed and prescribed timetable, broadly: an announcement of a firm intention to make an offer (comprising binding and committed financing); publication of the offer document within 28 days of the announcement; obtaining the consent of shareholders by means of tendering a simple majority of the total outstanding and issued share capital within 60 days of the offer document; and a further 21 days to address any remaining regulatory approvals before closing.
It is also important to understand that in the UK, most public M&A deals are implemented by means of Court approved scheme of arrangement (much like an Australian scheme of arrangement). In the financial year ended 31 March 2021, 48 firm offers were announced, of which 14 were structured as a contractual offer and 34 as a scheme of arrangement at the time of announcement. In the financial year ended 31 March 2020, 65 firm offers were announced, of which 19 were structured as a contractual offer and 46 as a scheme of arrangement at the time of announcement. Significantly, in a UK scheme the parties to the takeover can seek and obtain shareholder approval in a shareholder meeting convened soon after the announcement of the takeover but then delay the final approval of the Court until after all other regulatory approvals have been obtained.
In that context, it is interesting to note that in October 2020, after a detailed round of pre-consultation early in 2020, this independent regulator consulted on and published a very detailed and lengthy response statement...which sought to "introduce significant additional flexibility to the timetable for [contractual] offers, more closely matching that for schemes,… [to allow] participants more easily to marry the Code timetable with the increasingly complex requirements for regulatory approvals on a global basis." In other words, not motivated by government policy and not motivated by commercial goals, the UK regulator has seen fit to make the contractual offer timetable – a feature of the regime for over 60 years – more flexible. The changes are summarised below.
1. Conditions relating to EU/UK merger control clearance
The UK's Takeover Code used to distinguish between conditions relating to merger control clearance in the UK and EU, and clearance elsewhere in the world. Prompted by Brexit and the end of the transition period on 31 December 2020, this distinction has now been removed. As a result:
- an offer no longer automatically lapses on a reference by the European Commission (EC) or Competition and Markets Authority (CMA) to the longer review period under "Phase 2";
- if a bidder wishes to invoke a condition relating to EC/CMA clearance, the material significance test will apply, in the same way as it does for other regulatory conditions (see section 2 below); and
- a bidder can include a condition relating to a Phase 2 reference by the EC/CMA, but it will not necessarily be permitted to invoke it.
2. Invoking a condition to an offer
The UK's Takeover Panel has issued updated guidance on invoking a condition to an offer. The rules now formally require a bidder to obtain Panel consent before invoking a condition and stipulate that consent will normally only be given if the circumstances which give rise to the right to invoke the condition or pre-condition are of "material" significance to the bidder in the context of the offer (Rule 13.5(a)).
General factors taken into account for all conditions
The UK's Takeover Panel will look at factors such as:
- whether the condition was the subject of negotiation with the target;
- whether the condition was expressly drawn to target shareholders’ attention in the offer document or firm offer announcement;
- whether the condition was included to take account of the particular circumstances of the target;
- whether the circumstances could not have reasonably been foreseen at the time of the firm offer announcement and, if they could, the likelihood of the circumstances occurring;
- the actions taken by the bidder since the firm offer announcement and, in particular, since the occurrence of the circumstances on which the bidder is seeking to rely in invoking the condition; and
- the views of the board of the target.
Official authorisations and regulatory clearances
In the case of conditions relating to official authorisations and regulatory clearances, the UK's Takeover Panel will consider:
- the significance of the authorisation or clearance to the bidder;
- what action, if any, the bidder would need to take in order to obtain the authorisation or clearance and the strategic consequences for the bidder if it were to take that action; and
- the consequences for the bidder and its directors if it were to complete the offer without obtaining the authorisation or clearance.
If the condition relates to there being no Phase 2 reference by the EC/CMA, the UK's Takeover Panel will look at whether the reference would be likely to result in a serious risk of material damage to the business of the bidder and/or target, and the utility of requiring the bidder and/or target to pursue the reference where the prospect of the clearance being obtained is low.
MAC (material adverse change) and other general protection conditions
If the condition is a MAC or other protective condition, the circumstances which are being relied on to invoke the condition must be of very considerable significance striking at the heart of the purpose of the transaction. Note the very high standard applied by the UK's Takeover Panel which resulted in a bidder for a retail business not being able to use a MAC in response to the outbreak of Covid-19 during a bid.2
3.Simplification of the contractual offer timetable
Single unconditional date
Offers no longer address shareholder approval before other regulatory approvals. Instead the acceptance condition (i.e. the number of shares tendered into the contractual offer for acceptance) can only be satisfied when all other conditions have been satisfied or waived.
The Code requires that all conditions to an offer be satisfied by the 60th day after publication of the offer document (although see section 4 below about the greater flexibility that has been introduced into the offer timetable to extend ). A bidder is able to specify an earlier unconditional date.
Bringing forward the unconditional date of an offer – acceleration statement
A bidder is able to bring forward the unconditional date on an offer from the 60th day after publication of the offer document by means of an "acceleration statement." If a bidder makes an acceleration statement, it must waive any conditions to its offer relating to an official authorisation or regulatory clearance.
Lapsing an offer early – acceptance condition invocation notice
If a bidder wishes to invoke the acceptance condition, it must give 14 days’ notice to target shareholders of its intention to do so, by issuing an “acceptance condition invocation notice” or ACIN. The bidder must specify in the ACIN the level of acceptances that must be received in order for the offer not to lapse.
At the end of the notice period:
- if the acceptance condition threshold is not met, the bidder will be required to lapse its offer;
- if the acceptance condition threshold is met, the acceptance condition will not be satisfied, and the bidder will be required to keep the offer open, unless all the other conditions have been satisfied or waived, as the acceptance condition must be the last condition to be satisfied.
4. Greater flexibility in the offer timetable
In recognition of the proliferation of regulatory clearances that may be required on a bid and that clearance may take longer than the offer timetable prescribed by the UK's rules, the UK's Takeover Panel has made it easier for a party to a bid to request a timetable suspension, which pauses the offer timetable while any necessary clearances are obtained. It has also introduced the concept of a long-stop date on an offer (a concept already used on all UK schemes, as being a condition expressed as a date entitling the bidder to walk away if the takeover has not closed by that specified date, which one would expect to be heavily negotiated by the board of the target).
Suspending the offer timetable
Parties to an offer will be able to request a timetable suspension if an official authorisation or regulatory clearance remains outstanding on the 37th day after publication of the offer document (for example if there is a Phase 2 reference by the EC/CMA).
The key points to note are:
- Both the bidder and the target can request that the offer timetable be suspended.
- If only one of them wants a suspension, the outstanding authorisation or regulatory clearance must be material.
- Once the final official authorisation/regulatory clearance is obtained, the offer timetable will resume at a notional 32nd day after publication of the offer document (i.e. will allow a further 28 days to satisfy any other remaining regulatory clearance and satisfy the acceptance condition).
Long-stop date on a contractual offer
A bidder is required to set a long-stop date for a contractual offer. If the offer timetable is suspended, the long-stop date will be the latest date by which the acceptance condition must be satisfied and all conditions relating to an official authorisation or regulatory clearance either satisfied or waived.
It must be a term of the offer that the offer will lapse on the long-stop date if the acceptance condition is not satisfied, or (with the consent of the Panel) if a condition relating to a material official authorisation or regulatory clearance has not been satisfied or waived.
However, in the case of the an outstanding authorisation or clearance, the Panel does not see this as an absolute walk right and retains the discretion to require a bidder to extend beyond the long-stop date if it:
- is not satisfied that the outstanding authorisation or clearance is material; or
- is satisfied that the outstanding authorisation or clearance is material, but believes that it is clear what remedial action is required to be taken in order to obtain the clearance, and that the remedial action does not satisfy the material significance requirement for the purposes of Rule 13.5(a).
The bidder and target are free to agree what the long-stop date should be. On a hostile offer, the bidder will have to consult the UK's Takeover Panel as to what the long-stop date should be, and it should be no earlier than the date by which the bidder reasonably expects the ‘slowest’ authorisation/clearance to be obtained.
In practice, we continue to expect schemes of arrangement to remain the most popular method of implementing takeovers in the UK, in particular in larger deals - due to the ability to achieve 100% in one transaction, most easily implement re-financings of the target and greatest flexibility to address long regulatory timetables.
We consider that these changes to the UK’s Takeover Code should not, or will not in practice, hamper or deter bidders/bids with substantive regulatory issues (EU, UK or elsewhere). Bidders would be well advised to address regulatory clearances as bespoke negotiated conditions, specifically highlighted in the narrative section of the announcement of the firm intention to make an offer and labelled as “material” to maximise the ability to obtain a timetable extension.
It remains possible for a bidder to set out a condition specifying it will not proceed to Phase 2 (of an EU, or CMA clearance process) while the UK's Takeover Panel has not gone as far as saying such a condition can be invoked as a matter of course there are some accommodating statements made in the Response Statement and the new Practice Statement No. 5 (see paragraphs 9.18 – 9.22) about taking into account advisory costs and the impact on the bidder’s business if it were to proceed with a Phase 2 reference.
We see the introduction of a long stop date in contractual offers (close to but not exactly the same as in a scheme) as being an important development, which we advocated for during the pre-consultation period, which will be of particular relevance to any bidder which considers their transaction to involve substantive regulatory issues and needs to limit the certain funds period required for a bid (providing an additional condition to seek to invoke, in addition to the actual regulatory condition).
Link to the full Response Statement can be found here: https://www.thetakeoverpanel.org.uk/wp-content/uploads/2021/03/RS-2020_1-FINAL-31-March-2021.pdf