Miscellaneous Takeover Code changes proposed

On 2 December 2021, the Code Committee of the Panel on Takeovers and Mergers (Panel) published proposed changes to the City Code on Takeovers and Mergers ("Code") (PCP 2021/1). The proposed amendments relate to various provisions of the Code, and there is no overarching theme.

The Panel also announced that, from 2 December 2021, offer documentation can only be sent to the Panel electronically and it can no longer be sent in hard copy (even though Rule 30.5 has not yet been amended to reflect this). That rule is expected to be amended in the first half of 2022 as it is one of the changes that the Panel is consulting on.

Proposed changes

Minimum consideration disclosures

The Code requires an offeror to offer a minimum level, or particular form, of consideration to target shareholders in certain circumstances set out in Rule 6, Rule 9, and Rule 11 and which are summarised in PCP2021/1. 

Disclosure by potential offeror at start of offer period: it is proposed that a potential offeror would have to disclose details of any obligation it would have under Rule 6 or Rule 11 to offer a minimum level or particular form of consideration if it made an offer as a result of the potential offeror (or any concert party) having acquired interests in target shares before the start of the offer period. This disclosure obligation would apply to any announcement which commences an offer period and any subsequent announcement which first identifies a potential offeror.

The Panel considers that this is material information for shareholders in the target company and other market participants (particularly anyone considering whether to sell shares in the target company). Accordingly, this information should be disclosed as soon as practicable after a potential offeror is publicly identified as such.

Disclosure during the offer period but before firm intention to make an offer: it is also proposed that a potential offeror would have to make an immediate announcement if it (or any concert party) acquires interests in target shares and as a result of which the potential offeror would be obliged to offer a minimum level or particular form of consideration to target shareholders under Rule 6 or Rule 11.

This widens the current disclosure obligation in Rule 7.1 to all potential offerors whose existence has been referred to in any announcement (whether publicly identified or not); or which is a participant in a formal sale process (regardless of whether it was a participant at the time at which the formal sale process was announced).

Mandatory offers

Several changes are proposed to the mandatory offer rules:

• offeror acquisition restrictions

  Rule 9.4 would be amended to restrict a mandatory offeror (and any concert party) from acquiring additional interests in target shares in the 14 days up to and including the unconditional date of a mandatory offer and in the 14 days up to and including the expiry of an acceptance condition invocation notice.

  This would allow target shareholders to make their acceptance decision, in this period, knowing the maximum percentage of target shares in which the mandatory offeror (and any concert party) would be interested if the offer lapsed. It would also make the process the same as for voluntary offers as a voluntary offeror is currently restricted from acquiring control of the target company by acquiring interests in shares through the 30% threshold (or increasing its interest in the 30% to 50% band) in the 14 days up to and including the unconditional date.

• "Look-back period" for price of mandatory offer

  A new Note 5 on Rule 9.5 would clarify the application of the 'look-back period' for determining the minimum price of a mandatory offer. A mandatory offer must be in cash (or accompanied by a cash alternative) at not less than the highest price paid by the offeror (or any concert party) for any interest in target shares in the 12 months before the announcement of the offer ("look-back period").

  The new note deals with situations where a mandatory offer has not been announced immediately following an acquisition that triggered the mandatory offer requirement. It clarifies that, in those circumstances, the look-back period will start on the date which is 12 months prior to the date on which such offer ought to have been announced in accordance with Rule 2.2(b) and will end on the date on which the offer is announced. This codifies Panel practice.

• The chain principle

  In some cases control (as defined in the Code) of a company to which the Code applies can pass indirectly, as a result of a person acquiring more than 50% of the voting rights of a company that has control of a company to which the Code applies, e.g. "Company A" acquires "Company B" which, in turn, controls "Company C" (to which the Code applies).

  Under the chain principle, Company A must make a mandatory offer to the other shareholders in Company C if either a significant interest or significant purpose test is satisfied.  These are:

  • whether the interest in shares which Company A has in Company B is significant in relation to Company A (in assessing this, the Panel will take into account a number of factors including, as appropriate, the assets, profits, and market values of the respective companies. Relative values of 50% or more are normally regarded as significant); or

  • whether securing control of Company C might reasonably be considered to be a significant purpose of acquiring control of Company B.

  The proposal is to:

  • delete the 'significant purpose' test as it has become largely redundant as in most cases the 'significant interest' test will be satisfied in any event and this would reduce the emphasis on subjective judgements of the Panel and bring more certainty to when the chain principle will be triggered; and

  • reduce the threshold at which relative values are considered 'significant' for the purposes of the 'significant interest' test from 50% to 30%.

Restrictions following lapse of an offer or no intention to bid statement

The Code imposes various restrictions on an offeror (and concert parties) for 12 months after an offer has been withdrawn or lapsed to avoid the target company boards being put under excessive 'siege' by an unwelcome offeror

Rule 35.1 - prohibits an offeror whose offer has been withdrawn or lapsed from taking certain actions, including making another offer within 12 months, other than with the Panel's consent.

The Panel will normally give consent if the target company board agrees but consent will not normally be given within three months of an offer lapsing or being withdrawn (the "freeze period") if the offeror made a 'no increase statement' or an 'acceleration statement' without reserving the right to set the statement aside in the event of an increased or improved offer being "recommended" by the target company board.

The proposed change would amend "recommended" to the "agreement" of the target company as there may be circumstances where the target company board "agrees" to the former offeror making a new offer even though the board does not intend to "recommend" that target company shareholders should accept the offer.

Further, the Notes on Rule 35.1 will also be amended to clarify that, in the situation where an offeror has made an unreserved no increase or acceleration statement and its offer has lapsed, whilst the Panel will normally give consent to a new offer within three months if the target company board agrees, it will only do so if the new offer is on the same, or worse, terms than those of the original offer. This is to ensure that an offeror which has made an unreserved no increase or acceleration statement cannot lapse its offer and then come back within three months with a higher offer with the agreement of the target company board since market participants expect that an unreserved "final" offer is indeed final.

To deal with competitive situations, the current fixed three month freeze period will also be amended so that it will run until the later of (a) three months from the date on which the earlier offer was withdrawn or lapsed; and (b) the end of the offer period, to allow enough time for any competing offer to have completed before the original offeror can make another offer.

Note 2 on Rule 2.5 and Note 2 on Rule 2.8 - provide that a potential offeror will be bound by a statement as to the terms of its possible offer for the target company (subject to any reservations not to be so bound): (a) for the duration of the offer period and for a period of three months thereafter; or (b) if the target company remains in an offer period after the potential offeror makes a "no intention to bid" statement under Rule 2.8, for three months following the date of that statement.

The second limb would be amended to the later of three months following the date of the "no intention to bid" statement and the end of the offer period, which would apply in a competitive bid situation.

Other minor amendments

Minor changes that are proposed include:

• Application of the definition of 'interests in securities' to custodians and depositories -  a new note to make clear that a bank acting as a custodian or depository in the normal course of its business will not be treated as having an interest in the securities it holds as a result of that activity. This codifies existing practice.

• Rule 9 waivers - replacing the term "whitewash" in Rule 9 with the term "Rule 9 waiver" and clarifying that a waiver circular should comply with Rule 25.2 (views of the target company board on the offer, including the offeror's plans for the company and its employees) as well as other specified rules. It will also delete some provisions in Note 1 of the Notes on Dispensations from Rule 9 which are duplicated in Appendix 1 and delete some redundant provisions in Appendix 1.

• Sending documents - removal of the requirement (in Rule 30.5 and Appendix 5) to send documents to the Panel and advisers in hard copy form so that documents would only need to be sent electronically. As noted above, documents can already only be sent to the Panel electronically.

• Default auction procedure under Appendix 8 - if a competitive bid situation continues to exist in the later stages of the offer period, the Panel will normally require revised offers to be announced in accordance with an auction procedure. If the parties to the offer do not agree to a "bespoke" auction procedure, the "default" procedure set out in Appendix 8 of the Code applies. A new section would be added to Appendix 8 clarifying that, if one competing offeror makes a no increase statement either on the day prior to Day 46 or on Day 46 (before 5.00 pm), the auction procedure would not commence but the other competing offeror can announce a revised offer on what would have been Auction Day 1.

Timing

Comments are due by 18 February 2022 and a Response Statement with final amendments is expected in Spring 2022. The amendments are expected to come into effect approximately one month after the publication of the Response Statement.