The offeror for Moss Bros sought to rely on standard material adverse change conditions to lapse the offer, on the basis of the impact of the coronavirus (COVID-19) pandemic and related UK governmental measures on Moss Bros. The Panel Executive ruled that the impact on Moss Bros’ business was not sufficiently material to permit the lapsing of the offer.
The boards of Brigadier Acquisition Company Limited and Moss Bros Group PLC announced on March 12, 2020, that they had reached agreement on the terms of a recommended cash offer to be made by Brigadier for Moss Bros, to be implemented by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006. Moss Bros is in the retail clothing sector, focusing on the sale and hiring of men’s formal wear, and operates more than 100 retail stores in the United Kingdom. The formal offer was then made by Moss Bros’ publication of the scheme circular on April 7, 2020.
The offer was made subject to a number of conditions, including relatively standard conditions relating to there being no material adverse change in Moss Bros’ business, assets, financial or trading position or profits, operational performance, or prospects. As is typical of such conditions in UK takeover offers, these conditions had been drafted in very general terms, with the intention that they would have a very wide scope of potential application. There was no specific mention of COVID-19 in the conditions.
On April 22, 2020, it was announced that Brigadier was seeking a ruling from the UK Takeover Panel to permit Brigadier to lapse the offer. The application was made on the basis that Brigadier should be entitled to trigger certain of the standard material adverse change conditions set out in the scheme document on account of the impact on Moss Bros of the COVID-19 pandemic and related UK governmental measures.
Rule 13.5(a) of the City Code on Takeovers and Mergers provides that an offeror should not invoke a condition (other than the acceptance condition) to lapse an offer unless the circumstances which give rise to the right to invoke the condition are of material significance to the offeror in the context of the offer. As a result, in practice the Panel’s consent is required to invoke any such condition. The Panel received representations from both Brigadier and Moss Bros as to whether the requirements of Rule 13.5(a) were satisfied.
On May 19, 2020, the Panel Executive announced that it had ruled that Brigadier had not established that the circumstances were of material significance to it in the context of its offer as required by Rule 13.5(a) of the City Code and, therefore, Brigadier should not be permitted to invoke any of the relevant conditions at this time.
The Panel Executive’s announcement did not contain any significant detail on the Panel Executive’s reasoning for refusing the application, but instead specifically stated that Brigadier was being permitted to apply to the Hearings Committee of the Panel (the appellate body under the City Code) for a review of the decision. On May 21, 2020, the Panel announced that Brigadier was seeking such a review. However, the Panel announced on May 26 that Brigadier had withdrawn its application for a review, and that accordingly the Panel Executive’s decision would stand.
While little in the way of substantive reasoning for the Panel Executive’s decision has been published to date, it would seem to conform to precedent; in particular, the Panel’s decision in relation to WPP Group PLC’s offer for Tempus Group PLC in 2001, where WPP sought to rely on a material adverse change condition to lapse its offer following the events of September 11, 2001, and the resulting market downturn (see Panel Statement 2001/15).
In addition, in Practice Statement No. 5 (as amended), the Panel set out further guidance on the circumstances in which the requirements of Rule 13.5(a) would be satisfied (thereby enabling an offeror to lapse an offer), with particular focus on general conditions, specifically material adverse change conditions. The practice statement states that in the case of such a condition, satisfaction of the Rule 13.5(a) requirement will depend on the offeror demonstrating that the relevant circumstances are of very considerable significance “striking at the heart of the purpose of the transaction.” However, the Panel emphasised that, whilst the standard required to invoke such a condition is therefore a high one, the test does not require the offeror to demonstrate frustration of the offer in the legal sense. The practice statement also suggests that, in considering whether a particular matter should give rise to the right to invoke a condition, it is the Panel Executive’s practice to take into account all relevant factors, including
Given the above, we would note that, in the section setting out the background to and reasons for the Moss Bros board’s recommendation of the offer in the March 12 announcement (which was jointly issued by both Brigadier and Moss Bros), there is a specific reference to “the highly uncertain, but potentially significant, impact of COVID-19” on Moss Bros’ business and share price performance.
The inclusion of this statement, the lack of any specific reference to COVID-19 in the conditions, and the timing of the announcement of the Brigadier’s intention to make the offer (which was after a national lockdown began in Italy) are all likely to have been taken into account by the Panel Executive in reaching its decision. In addition, the Panel Executive may also have taken into consideration the fact that the impact of the COVID-19 pandemic and related measures taken by the UK government are not specific to Moss Bros and will also adversely affect significant parts of the UK economy, including other parts of the retail clothing sector.
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