Proposed changes to the UK Takeover Code include simplifying and adding flexibility to the timetable applicable to contractual offers, as well as making offer conditions relating to antitrust clearances subject to the same materiality requirement which applies to other offer conditions.
Following an informal consultation process earlier this year, the UK Takeover Panel (Panel) has issued a formal consultation exercise on a number of proposed changes to the UK Takeover Code (Code). The changes are the most extensive amendments proposed by the Panel for a number of years, and are likely to change the way in which takeovers are conducted in the United Kingdom. In particular, the changes will impact takeovers being conducted by means of a contractual offer (as opposed to a scheme of arrangement).
There are two principal purposes behind the changes: (1) to address certain anomalies in the rules to provide greater certainty to the market and target shareholders that, once an offer has been announced, it will not lapse or be withdrawn without good reason; and (2) to update certain aspects of the Code to better reflect the issues which now arise on takeover offers. Given the previous informal consultation, we consider it very likely that these changes will be adopted.
The key proposed changes include the following:
The Panel proposes a number of changes to the timetable which will apply to contractual offers. Some of these arise as a result of the other changes proposed by the Panel, while others are designed to reflect developments in market practice and the more international nature of many offers.
The concept of an offer having closing dates, with the offeror then having the right to extend the offer, will be abolished, as will the distinction between an offer being “unconditional as to acceptances” and wholly unconditional. There will also no longer be a distinction between the date when the acceptance condition must be satisfied and the date when all other offer conditions must be satisfied.
Instead an offeror must specify a date (the unconditional date) by which all offer conditions must be satisfied or waived. The latest permissible date for the unconditional date will be Day 60 (i.e., the 60th day after the offer is made, subject to any suspension of the offer timetable—see below). An offeror has the right to specify an unconditional date earlier than Day 60 at the outset of the offer, in which case the rules relating to acceleration statements will apply (see below).
An offeror will be able to bring forward the unconditional date by making an “acceleration statement”, specifying an earlier unconditional date, which must be at least 14 days after the date of the acceleration statement. In order to accelerate the offer, the offeror will be required to waive all outstanding conditions relating to any official authorisation or regulatory clearance. If the acceptance condition has not been satisfied on the specified new unconditional date, there will be no ability to extend the offer, and so the offer will lapse.
As now, the Code will provide for deadlines by which parties to an offer can or must take certain steps, such as Day 39 (last day for target to publish material new information), Day 46 (last day an offeror can revise its offer), and Day 53 (last day for a potential competing offeror to clarify its intentions). These will be set by counting back from Day 60, and will be automatically reset if there is an extension to Day 60. However, Days 39 and 53 would not be brought forward if there were to be an acceleration of the unconditional date (and would effectively be disapplied).
Since the concept of closing dates will be abolished, an offeror will no longer be able to lapse its offer simply by not extending the offer after the first (or any subsequent) closing date if the acceptance condition has not been satisfied at that point. An offeror will have the right to invoke the acceptance condition to lapse its offer prior to the unconditional date, but it will be required to publish an “acceptance condition invocation notice” at least 14 days before the proposed date of lapsing, to give target shareholders time to accept the offer if they wish. Once served, an acceptance condition invocation notice would not be capable of being revoked. Similarly, the notice will need to specify the level of acceptances required to satisfy the acceptance condition, and, once the notice is served, the offeror would not then be permitted to change that level (e.g., by using any discretion built into the acceptance condition to reduce the required acceptance level) prior to the specified date.
The Code will continue to require that an offer be open for at least 21 days, so it will not be possible to accelerate the unconditional date to, or serve an acceptance condition invocation notice referring to, a date earlier than Day 21.
Once an offer has become or been declared wholly unconditional, it must remain open for a minimum of a further 14 days.
Given the increased likelihood of an offer timetable extending over a significant period, an offeror will be required to specify a long-stop date by which all conditions (including the acceptance condition) would be required to be satisfied or waived. If any condition is not satisfied or waived by this date, an offeror would be able to lapse its offer provided that it is able to satisfy the Panel that the relevant condition is material and that the remedial action required to satisfy the condition could be material. For recommended offers, the date would be agreed by the offeror and target. In the case of a hostile bid, the offeror would be required to consult the Panel to determine an appropriate long-stop date, based on the regulatory timetable applicable to the relevant offer condition(s). Similarly, any pre-conditional offer will also be required to include a long-stop date for the satisfaction or waiver of any pre-conditions.
The offer timetable will also be significantly impacted by the proposed new rules relating to the ability to suspend the timetable to deal with prolonged regulatory clearance processes. The new rules will apply to all conditions relating to regulatory authorisations and clearances, including those relating to UK or EU antitrust matters.
Under the revised Code, if one or more conditions relating to an official authorisation or regulatory clearance has not been satisfied or waived by Day 39, the Panel will be able to suspend the timetable either (1) at the joint request of the parties, or (2) where only one party makes the request, if the authorisation or clearance is “material”. Any timetable suspension request should be made by no later than the second day before Day 39, although the Panel may agree to a later suspension in certain circumstances (and normally only with the agreement of both the offeror and target).
In determining whether an authorisation or clearance is material, the Panel will need to be satisfied that failure to obtain such an authorisation or clearance could give rise to circumstances that are of material significance to the offeror in the context of the offer. However, the fact that the Panel determines that an official authorisation or regulatory clearance is "material" for the purposes of permitting a suspension of the timetable will not necessarily mean that subsequently, if the offeror fails to obtain the authorisation or clearance and seeks to invoke the relevant condition, the Panel will agree that the "material significance" requirement for invoking a condition has been satisfied.
A timetable suspension will end (1) when the last remaining regulatory condition is satisfied or waived (in which case the timetable would resume on a new Day 32); (b) by agreement between the offeror and target; or (c) when the offeror makes an "acceleration statement" (thereby waiving the relevant regulatory conditions). However, an acceleration statement made by an offeror in these circumstances will be permitted to be made subject to reservations (similar to the position that is currently the case for a "no extension” statement), specifying the circumstances in which the offeror may set aside that statement.
The other key change proposed to deal with anomalies under the Code between the treatment of UK and EU antitrust clearances and other regulatory clearances relates to the rules governing the invoking of conditions to lapse an offer. At present, the general rule under the Code is that, with the exception of the acceptance condition, an offeror is not permitted to invoke any offer condition or pre-condition so as to cause an offer to lapse, unless the circumstances triggering the right to invoke are of material significance to the offeror in the context of the offer. However, this rule does not currently apply to a condition or pre-condition that no Phase 2 reference is made by the UK Competition and Markets Authority (CMA) or that Phase 2 European Commission (EC) proceedings are not initiated.
Under the new proposals, these conditions will be treated in the same way as any other regulatory conditions, and therefore an offeror will now need to prove materiality before invoking such conditions. In addition, the current requirement to lapse an offer if a Phase 2 CMA reference is made or Phase 2 European Commission proceedings are initiated will be removed.
As a result of these changes, it is likely to be much more difficult for an offeror to lapse an offer by invoking a UK or EC antitrust condition. Similarly, it will no longer be possible for an offeror to use the mandatory lapsing of the offer subsequently to make a new offer at below the previous offer price once the relevant UK/EU antitrust clearance has been obtained.
In addition, the rules relating to pre-conditions will be changed, so that an offeror will be permitted to announce a pre-conditional offer that is subject to satisfying a pre-condition relating to an official authorisation or regulatory clearance, provided that either (1) the target consents or (2) the Panel is satisfied that the authorisation or clearance is material. This approach will apply equally to UK/EU antitrust clearances and other regulatory clearances, removing the current more favourable treatment granted to UK/EU antitrust conditions.
There are several other proposed changes to the rules governing acceptance conditions in contractual offers.
The acceptance condition cannot be satisfied unless and until all other offer conditions have been satisfied or waived. As a result, the distinction between an offer being “unconditional as to acceptances” and “wholly unconditional” will fall away. However, the Panel may permit the acceptance condition to be declared satisfied before "mechanical" conditions (e.g., a listing condition in relation to consideration securities under a securities exchange offer), which may not be capable of satisfaction until the transaction is sure to proceed.
It will still be possible for an offeror to "waive down" the level of acceptances required in order for the acceptance condition to be satisfied. However, if an offeror issues a statement making such an election, it will only be able to declare the acceptance condition to be satisfied if, at the same time, it declares all of the other outstanding conditions to the offer to be satisfied (or waived).
Accepting shareholders will be able to withdraw their acceptance of an offer at any time prior to the offer becoming or being declared wholly unconditional (currently, withdrawal rights only kick in 21 days after the first closing date if the offer is unconditional as to acceptances). However, an offeror will still be permitted to seek an undertaking from a target shareholder not to withdraw its acceptance (e.g., as part of an irrevocable undertaking to accept an offer).
The rules relating to announcements of acceptance levels will change. These announcements will now be required (1) on the day after Day 21; (2) on a weekly basis thereafter until the week of the unconditional date; (3) on a daily basis in the week running up to the unconditional date; (4) if an offer becomes or is declared unconditional or lapses; (5) on the expiry of an acceptance condition invocation notice; and/or (6) if acceptance levels cross certain other specified thresholds.
The consultation paper also proposes a number of other rule changes.
The Code will codify and reinforce the current requirement that Panel consent be obtained in order for an offeror to invoke a condition or pre-condition so as to cause the offer to lapse, and will then list a number of specific types of conditions where this requirement does not apply. These will include the acceptance condition, certain offeror and offeree shareholder approvals (where these are required by law or regulation), court approval of a scheme of arrangement, and any listing condition applicable on a securities exchange offer.
The consultation paper also provides some further guidance on factors that the Panel will take into account when deciding whether to give its consent. In addition to the materiality test, other relevant factors may include the foreseeability of the circumstances on which the offeror is seeking to rely, actions taken by the offeror, and the views of the target board. The consultation paper also provides some further guidance as to how the Panel may apply the materiality test to any proposal to invoke a regulatory condition, which will include factors such as the materiality of the clearance to the offeror, what steps (e.g., behavioural undertakings or disposals) the offeror might have to take to obtain the clearance, and the implications if the offeror were to proceed without the clearance, among others.
Where an offer proceeds by way of scheme of arrangement, the Code will require an offeror to take the necessary procedural steps (such as undertaking to the relevant court to be bound by the scheme) for the scheme to become effective once all relevant conditions have been satisfied or waived. This change is simply to give the Panel backup powers, since an offeror is normally bound to take such steps under the bid conduct agreement between offeror and target.
Currently, the Code states that any offer made pursuant to a mandatory takeover offer (MTO) obligation can only be subject to a 50% acceptance condition. However, in practice, the acquisition of shares under an MTO may also trigger a requirement for a regulatory clearance to be obtained. Recognising this reality, the revised Code will permit the MTO to be conditional on obtaining such authorisation or clearance. However, the Code will also require that any acquisition of shares which would trigger such an MTO obligation must also be conditional on the same authorisation or clearance being obtained. The changes will also remove the current exception permitting an MTO to be conditional on the approval by the offeror's shareholders of the issue of any new shares which would be required to finance the cash offer.
Where an offer consists of alternative offers (e.g., a cash offer with a share alternative), it will no longer be possible to close the alternative offer before the main offer, meaning that the alternative will need to be available for the full offer period.
In addition, the consultation proposes a number of lesser changes aimed at tidying up the rules or addressing how they apply in the context of modern takeover transactions.
The full extent of the proposed changes can be found on the Takeover Panel’s website in Public Consultation Paper 2020/1.
The consultation is open until January 15, 2021, with the changes then expected to be confirmed by the Panel in a response statement in spring 2021, and coming into effect three months thereafter.
If you have any questions or would like more information on the issues discussed in this LawFlash, or would like any assistance in formulating a response to the Panel in relation to any of the proposed changes, please contact the following Morgan Lewis lawyers:
London
Iain Wright
Tom Wozniak