Proposed Takeover Code Amendments – Key Changes
On 27 October 2020, the Takeover Panel (Panel) published a consultation paper titled: PCP 2020/1: Conditions to offers and the offer timetable (Consultation Paper).
The Consultation Paper has now been followed by a corresponding response paper: RS 2020/1 – published on 31 March 2021 (Response Paper). The Response Paper made certain modifications to the initial proposals set out in the Consultation Paper.
The Consultation Paper (as amended by the Response Paper) set out a number of proposed amendments to the Takeover Code rules (Code) relating to (a) the timetable for contractual offers (an offer); and (b) the treatment of regulatory approvals and conditions (together, the Proposals). The changes will apply from Monday 5 July 2021 and will be applicable to all firm offers that are announced (Rule 2.7 announcement) from that date. Those offers that are ongoing at 5 July 2021 will continue to be subject to the current Code.
We have put together a high-level review of a number of the major Proposals – examining (i) the current position under the Code; (ii) how the Proposals would alter this position; and (iii) the suspected rationale behind these changes. At their core, there seems to be a move to both simplify and shorten the contractual offer timetable.
Current Position: An offer must be conditional on the bidder receiving enough acceptances to give it a majority of voting rights in the target – i.e. more than 50%, though this figure is usually set at 90% to enable the compulsory squeeze-out provisions to operate (the Acceptance Condition). Currently, the Acceptance Condition must be satisfied by the 60th day following publication of the offer document (Day 60). All other conditions must be satisfied within 21 days following Day 60 – i.e. Day 81 (Standard Conditions).
What would change? Under the Proposals, there would be no distinction between the timeframes to obtain the Acceptance Conditions and the Standard Conditions and – as such – no distinction between offers being “unconditional as to acceptances” and “wholly unconditional”. A bidder would have to specify a date by which all offer conditions (i.e. the Acceptance Condition and the Standard Conditions) must be satisfied or waived (the Unconditional Date). The Unconditional Date can be no later than Day 60 – and will likely be Day 60.
Accordingly, all conditions would need to be satisfied by Day 60. If any condition is outstanding at Day 60, the offer would automatically lapse.
Rationale: This is reflective of a move generally by the Panel to treat all conditions similarly and shorten the timetable, by effectively removing Day 81.
What would change? As explained above, under the Proposals, the Unconditional Date can be no later than Day 60. However, the bidder will be able to bring forward such date by specifying an alternative Unconditional Date – via an acceleration statement (Accelerated Unconditional Date) (Acceleration Statement). If this mechanism is chosen, any Accelerated Unconditional Date must be at least 14 days after the issue of the Acceleration Statement. The bidder must also waive all outstanding Standard Conditions that have not been satisfied by the Accelerated Unconditional Date and therefore takes on the risk that the offer may close without having obtained all the normal authorisations and clearances. Notwithstanding the above, if the Acceptance Condition has not been satisfied by the Accelerated Unconditional Date - the offer will lapse.
Rationale: The introduction of Acceleration Statements allows bidders to force the offer timetable if they chose to do so, which will be particularly attractive if there is a possibility that a competitive situation may arise later. The bidder though does take the risk of (i) completing the offer without all the Standard Conditions satisfied; and (ii) not satisfying the Acceptance Condition in time – and thus risking the offer lapsing.
UK and EC Antitrust Conditions
Current Position: Presently, the bidder is unable to invoke any Standard Condition relating to official authorisations and regulatory clearances so as to cause an offer to lapse - unless the circumstances are of “material significance” to the bidder in relation to the offer (Materiality Test). However, a bidder can invoke a condition that no (i) UK Competition and Markets Authority (CMA) Phase 2 reference or (ii) European Commission (EC) Phase 2 proceedings will be initiated (together the Phase 2 Conditions) without having to satisfy the Materiality Test.
Further, if by Day 39 there has not been a decision as to whether a Phase 2 Condition will be initiated – the bidder can request that the timetable be suspended. Also, the offer must include a provision that states if a Phase 2 Condition is invoked before either Day 21 or the satisfaction of the Acceptance Condition (whichever comes earlier) – the offer must lapse (Phase 2 Provision).
What would change? The special treatment given to CMA and EC antitrust conditions (detailed above) will be removed. Under the new proposals, all conditions will be subject to the Materiality Test. The threshold for passing the Materiality Test is very high and is judged on the facts of each case. The factors that are considered include the (i) significance of the authorisation or clearance to the bidder, (ii) what action the bidder would need to take to obtain it, and (iii) the consequences for the bidder if it were to complete the offer without obtaining the relevant authorisation or clearance. The Proposals would also remove the requirement for the Phase 2 Provision.
Rationale: Given the international nature of many listed companies’ businesses, this particular Proposal is not surprising. It will simply remove an inconsistent treatment of antitrust regulations that is no longer justifiable. This change in position will remove the safety net afforded to bidders whereby, when launching an offer, they have the right to terminate such offer if they fear a lengthy and (potentially) costly CMA or EC referral. The Materiality Test is renowned as being particularly difficult to pass and its introduction to the CMA and EC antitrust conditions is a levelling of the playing field. The overarching aim of the Code is to protect a target and its shareholders, and the hope is that this will offer greater certainty to the target company and its shareholders that a bid, once announced, will likely proceed.
Current Position: Offers are required to specify a closing date and typically the first closing date will be 21 days after the publication of the offer document (Day 21) (First Closing Date). If the Acceptance Condition is not satisfied by the First Closing Date, the bidder may either (i) extend the offer further; or (ii) lapse the offer.
What would change? If the bidder wishes to lapse its offer, it must serve an “acceptance condition invocation notice” on the target’s shareholders providing such shareholders with at least 14 further days to decide whether to accept the offer (Invocation Notice). The Invocation Notice would need to specify the level of acceptances that need to be obtained (either more than 50% or 90% depending on the structure of the offer). If such level is not reached, the offer will lapse. However, if sufficient acceptances are obtained – the Acceptance Condition is not satisfied until all other conditions have been met (see above). Accordingly, the concept of “Closing Dates” will be effectively removed.
Rationale: By introducing the Invocation Notice, the Panel is attempting to remove a situation whereby a bidder would like to lapse an offer for commercial reasons – is unable to do so since such commercial reason fails the Materiality Test – and therefore resorts to invoking its Acceptance Condition to get out of the offer.
Longstop dates for Contractual Offers
Current Position: Offers are not currently required to include a “longstop date”.
What would change? Bidders will be required to set a “longstop date” in their Rule 2.7 announcement and the offer document. This is the date by which all Standard Conditions must be satisfied in the event that there are any suspensions/delays to the timetable. For recommended offers, the parties will mutually agree the “longstop date”. In the event of a hostile takeover, the bidder and the Panel will determine the “longstop date” based on which condition/ clearance is likely to take the longest to be satisfied.
Rationale: This Proposal will bring recommended offers in-line with the process used for scheme of arrangements. The aim is to remove the concept of a “never-ending” timetable, which can cause particular issues for the bidder if, for example, financing is only available for a specified period.
Current Position: A target shareholder that has initially accepted an offer is only able to withdraw their acceptance 21 days after the First Closing Date – i.e. Day 42.
What would change? Target shareholders would be permitted to withdraw their acceptance at any time from the outset of the offer until either the Acceptance Condition is satisfied or the offer lapses/ is withdrawn. Notwithstanding this, target shareholders would still be able to able to provide irrevocable undertakings to accept a bidder’s offer (but this would prevent them from exercising their new withdrawal rights).
Rationale: This amendment would align the Code with the U.S tender offer rules (US Rules). For reference, the US Rules apply to offers made under the Code where a certain number of shareholders are based in the US.
Announcement of Acceptance Levels
Current Position: A bidder is obligated to announce acceptance levels for its offer (i) on each “Closing Date” and (ii) when the offer becomes unconditional as to acceptances.
What would change? The Panel would require the bidder to announce acceptance levels on (i) the day after Day 21; (ii) on a weekly basis thereafter until the week of the Unconditional Date (Unconditional Week); and (iii) every day in the Unconditional Week.
Rationale: With the proposed introduction of Invocation Notices – the concept of “Closing Dates” would be phased out. Accordingly, a new mechanism for announcing acceptance levels would need to be introduced. This new Proposal would provide greater visibility as to the status and progression of an offer - due to the increased frequency of announcements.
Though mostly procedural changes, the Proposals do represent the most significant and wide-ranging to the Code since the 2011 amendments and will feed into the full suite of documentation involved in any contractual offer.
Having said this, in recent times the majority of recommended offers are implemented by way of scheme of arrangement, rather than contractual offer. As such, it remains to be seen how large the impact will be on the UK public takeover practice generally.