UK Takeover Code changes - effective 13 June 2022

On 5 May 2022, the Code Committee published Panel Statement 2022/9 together with its final amendments to the Takeover Code to remove the restriction on anonymous order book dealing (RS 2022/1) and to make miscellaneous amendments (RS 2021/1). These follow the consultations in PCP 2022/1 and PCP 2021/1 respectively.

These amendments take effect on 13 June 2022 and apply to any transactions which straddle that date unless the amendments would have retroactive effect.

On 13 June 2022, the Panel Executive published a new Practice Statement no.33 relating to purchases of shares in the offeree company by a bidder during an offer period. It also made amendments to Practice Statements Nos 19, 20, 24, 28 and 29 to reflect these Takeover Code changes.

Removal of restriction on anonymous order book dealing (RS 2022/1)

Rule 4.2(b) prohibits a bidder (and any concert party) from acquiring an interest in target securities through an anonymous order book system or any other means during the offer period unless it can be established that the seller, or counterparty to the transaction, is not an exempt principal trader connected with the bidder. The rule has been deleted because, as a result of regulatory oversight of anonymous order book systems, the Code Committee considers that there is now a low risk that a connected exempt principal trader would agree to place sell orders on an anonymous order book to enable a bidder to purchase target shares at or below the offer price where it had acquired those shares at above the offer price.

Consequential amendments have also been made to Rule 38.2 (which prohibits dealings between bidders and connected exempt principal traders during the offer period) and Rule 4.2(a).

PCP 2022/1 highlighted the continuing importance of: (i) the general prohibition in Rule 38.1 on an exempt principal trader connected with a bidder or target assisting a bidder or target, as the case may be; and (ii) the specific restriction in Rule 38.2 on an exempt principal trader connected with a bidder knowingly dealing with the bidder in target securities during the offer period, and that a failure to comply with these provisions would represent a serious breach of the Takeover Code.

Miscellaneous amendments (RS 2021/1)

Minimum consideration disclosures

The Code requires a bidder 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.

Potential bidder publicly identified: as originally proposed, the Code has been amended to provide that any potential bidder identified in an announcement of a possible offer under Rule 2.4(c) must disclose details of any minimum level or particular form of consideration that it would have to offer to offeree shareholders under Rule 6 or Rule 11, if it makes an offer, as a result of the potential bidder (or any concert party) having acquired interests in target shares before the start of the offer period. No negative statement is needed if there is no obligation.

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 bidder is publicly identified as such.

Clarifications have also been added (following comments on the proposals) so that:

• where it is not practicable for a potential bidder to make enquiries of all persons acting in concert with it before the announcement is made, to confirm whether any details need to be disclosed, that must be stated in the announcement and any relevant details must be announced as soon as practicable and in any event by no later than the deadline for the potential bidder’s Opening Position Disclosure; and
• details of any minimum level or particular form of consideration do not need to be included if the announcement is made by the offeree company without the agreement or approval of the potential bidder.

The announcement must also include details of any dealing arrangement of the kind referred to in Note 11 on the definition of acting in concert to which the offeree company or a potential bidder identified in the announcement is a party.

Disclosure during the offer period: new Rule 7.1(a) requires a potential bidder to make an immediate announcement if it (or any concert party) acquires an interest in target shares and, as a result, the potential bidder is 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 bidders 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 have been made to the mandatory offer rules:

Bidder acquisition restrictions

A new Rule 9.4(b) restricts a mandatory bidder (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 allows target shareholders to make their acceptance decision, in this period, knowing the maximum percentage of target shares in which the mandatory bidder (and any concert party) will be interested if the offer lapses. It also makes the process the same as for voluntary offers as a voluntary bidder is 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 clarifies 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 bidder (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 clarifies that, where a mandatory offer has not been announced immediately following an acquisition that triggered the mandatory offer requirement, the look-back period will start on the date which is 12 months before 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 existing 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, eg "Company A" acquires "Company B" which, in turn, controls "Company C" (to which the Code applies).

Under the chain principle in Note 8 on Rule 9.1, currently Company A must make a mandatory offer to the other shareholders in Company C if one of the following tests is satisfied:

• significant interest test: 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
• significant purpose test: securing control of Company C might reasonably be considered to be a significant purpose of Company A acquiring control of Company B.

The changes:

• delete the 'significant purpose' test so that the ‘significant interest' test is the only test for determining whether a ‘chain principle’ mandatory offer is required; 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

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

Rule 35.1 - prohibits a bidder 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 notes on Rule 35.1 have been amended so that the Panel will still normally give consent if the target company board agrees. But where the bidder has made a 'no increase statement' or an 'acceleration statement' without reserving the right to set the statement aside with the agreement of the target board, that consent will not normally be given where the target company agrees to any new offer on the same or more favourable terms than those of the original offer:

• during the ‘freeze period; - which has been changed to the later of (i) three months from the date on which the earlier offer was withdrawn or lapsed; and (ii) the end of the offer period; (the latter to allow enough time for any competing offer to have completed before the original bidder can make another offer); and
• this is to ensure that, where a bidder has made an unreserved no increase or acceleration statement, it 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.

Note 2 on Rule 2.5 and Note 2 on Rule 2.8 - provide that a potential bidder 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 bidder makes a "no intention to bid" statement under Rule 2.8, for three months following the date of that statement.

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

Other minor amendments

Other minor changes that have been made include:

Application of the definition of 'interests in securities' to custodians and depositories - a new note has been added to make clear that a custodian or depository acting 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 - the term "whitewash" in Rule 9 has been replaced by the term "Rule 9 waiver". The Code also now clarifies that a waiver circular should comply with Rule 25.2 (views of the target company board on the offer, including the bidder's plans for the company and its employees) as well as other specified rules. Some provisions in Note 1 of the Notes on Dispensations from Rule 9 have been deleted as they are duplicated in Appendix 1 and some redundant provisions in Appendix 1 have been deleted.

Publication of documents - minor amendments have been made to make it clear that offer documents, offeree board circulars, revised offer documents and offeree board circulars on a revised offer should be published on a website in accordance with Rule 26.1(a), rather than “promptly following its publication’. Amendments have also been made to Rules 32.1 and 32.6 to require documents to be made available to employees and pension trustees ‘promptly’ following their publication instead of ‘at the same time as’ publication of the document.

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 only need to be sent electronically. Since 2 December 2021, the Panel has only accepted offer documentation electronically in any event.

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 2(c) has been added to Appendix 8 clarifying that, if one competing bidder 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 bidder can announce a revised offer on what would have been Auction Day 1.