UK Takeover Code - changes to ‘acting in concert' presumptions

On 26 May 2022, the Code Committee of the Takeover Panel published its consultation on proposed changes to the presumptions of the definition of “acting in concert” in the Takeover Code (Code) (PCP 2022/2).

Overview

The key changes are to:

• raise the thresholds at which groups of companies are presumed to be acting in concert from 20% to 30% which should result in fewer cases having to be considered, although entities holding between 20% and 29% would still need to consider whether they are ‘actually’ acting in concert
• clarify that the presumption applies to interests in shares carrying voting rights (whether or not the shares are also equity share capital) and to equity share capital (whether or not the shares also carry voting rights), to codify existing practice and that there are two presumptions instead of one
• apply the presumptions to other entities that may control shares (for example individuals, limited partnerships, trusts and others), instead of just corporates, which codifies current practice.

Many of the other proposed changes simply codify existing Executive practice. Where the proposals expand the scope of the presumptions of the definition of “acting in concert”, the Code Committee considers that the benefits provided by the additional clarity and certainty will outweigh any impact of the expanded scope.

Acting in concert

The Code defines acting in concert as “……..persons who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control (as defined below) of a company or to frustrate the successful outcome of an offer for a company. A person and each of its affiliated persons will be deemed to be acting in concert with each other”.

The definition also has nine categories of persons who are deemed to have such a degree of common interest with one another that they should be presumed to be acting in concert in relation to any Code company (bidder or offeree as the case may be). Any of these presumptions can be rebutted by the persons concerned in consultation with the Panel.

Persons acting in concert (whether they are actually acting in concert or presumed to be) are, in effect, treated under the Code as a single person. This means that, if one of them deals in the shares in a Code company, that dealing could have consequences for that person and also potentially for the other persons who are acting in concert with it. Any person acting in concert with a bidder or the offeree company must disclose its interests and dealings in the securities of the offeree company and, in the case of a securities exchange offer, the bidder.

As a result, any bidder or offeree company will want to establish which persons are considered to be acting in concert with it so that (if appropriate) they can be asked not to deal in the relevant Code company’s shares. It is also relevant to any investor with a shareholding, or other interests in shares, approaching 30%, or in the 30% to 50% band, in a Code company.

Proposed changes

The main changes proposed are:

Groups of companies

Presumption (1) currently sets out the circumstances in which companies are presumed to be acting in concert with each other and would be amended as follows:

• Threshold: to raise the threshold at which there is a presumption of control from 20% to 30% to align it with the threshold for the existing definition of ‘control’ in the Code
• Interests in shares: to clarify that the presumption applies to interests in shares carrying voting rights (whether or not the shares are also equity share capital) and/or equity share capital (whether or not the shares also carry voting rights), to codify existing practice. The PCP includes diagrams setting out how companies would be treated under the new presumptions (but note that the Panel has now issued an updated version of Appendix E).
• Derivatives and options: interests in shares in the form of long derivative or option positions would count towards the thresholds which is not currently the case
• Two presumptions instead of one: current presumption (1) would be replaced with the following two new ones and entities can be presumed to be acting in concert under either or both of them:
  • a company (“X”) and any company which controls, is controlled by or is under the same control as X are all presumed to be acting in concert with each other. Control is where a person is interested in either: (a) shares carrying 30% or more of the voting rights in a company; or (b) a majority (i.e. more than 50%) of the equity share capital in a company (new Presumption (1)). Under this presumption ownership or control does not “dilute through” a chain of ownership
  • (a) a company (“Y”) and any other company (“Z”) where Y is interested, directly or indirectly, in 30% or more of the equity share capital in Z; and (b) any company presumed to be acting in concert with Y or Z under the new presumption (1) (new Presumption (2)). Under this presumption ownership or control does “dilute through” a chain of ownership
• Entities in new Presumptions (1) and (2): instead of just applying to groups of companies, the two new presumptions would include other entities that may control shares (for example individuals, limited partnerships, trusts and others), which codifies current practice. They would therefore also apply to investment entities such as investment funds – see below.
• Rebuttal of presumptions: the new presumptions will still be rebuttable but as the threshold percentage is higher the PCP notes that the evidence needed to rebut them is likely to be high. One example given is where a company (A) is interested in 30% of the voting rights of Company B but another company C holds more than 50% of the voting rights. In this scenario, Company A should be able to rebut the presumption because Company C in fact controls Company B.

Fund managers

Presumption (4), which currently presumes that a fund manager is acting in concert with a person whose funds the fund manager manages on a discretionary basis, in respect of the relevant investment accounts, would be deleted.

A new note 11 on the definition of “interests in securities” would instead clarify that where a fund is managed by a fund manager on a discretionary basis, the fund manager (but not the investors in the fund) would be interested in any securities held by the fund.

The investor would not be interested in the securities provided it has given the fund manager absolute discretion regarding dealing, voting and offer acceptance decisions. If the discretion is not absolute, the client would not normally be treated as having an interest provided that it does not exercise any retained powers to intervene in decisions.

A similar approach would be taken where one fund manager sub-contracts discretionary management of funds to another fund manager - i.e. the sub-contracted fund manager, and not the original fund manager, would be treated as having an interest in securities.

Limited partnerships and investment funds

Interests in limited partnerships and investment funds are not currently caught by the acting in concert presumptions.

The changes proposed are that, where a limited partnership or investment fund either (i) invests in a bid vehicle formed for the purpose of making an offer; or (ii) acquires an interest in a Code company, new presumptions (1) and/or (2) would be applied so that an investor (e.g. a limited partner) in the limited partnership or investment fund would be presumed to be acting in concert with:

• the bid vehicle (as well as the limited partnership or investment fund) (in the case of an offer); or
• the limited partnership or investment fund (outside of an offer),

if the investor’s interests in the limited partnership or investment fund would have met the thresholds in those presumptions if that fund were a company and the investor was interested in a corresponding percentage of that company’s equity share capital.

Investment managers

There would be a new Presumption (5) which provides that an investment manager of or investment adviser to:

• a bidder or an investor in a bidder consortium; or
• the offeree company,

together with any person controlling, controlled by or under the same control as that investment manager or adviser, is presumed to be acting in concert with the bidder or the offeree company respectively. This reflects how the Executive has applied the current Presumption (4).

A fund manager or principal trader which is under the same control as an investment manager or investment adviser that is presumed to be acting in concert under this new Presumption 5 will be treated as “connected with” that bidder or offeree company, as the case may be.

Offers made using a new bid vehicle

Investors in a consortium (for example, through a vehicle formed for the purpose of making an offer) are normally treated as acting in concert with the bidder. If the proposed amendments are adopted, where equity financing for an offer is provided by a fund managed on a discretionary basis by an investment manager or investment adviser the persons who may be considered to be acting in concert with the bidder are:

• the fund itself;
• the investment manager of or investment adviser to the fund; and
• an investor in the fund that is providing equity financing for the offer if the investor holds certain interests.

Where the investment manager, investment adviser or investor is part of a larger organisation, the other parts of that organisation will normally be presumed to be acting in concert with (i) the investment manager/investment adviser or the investor; and (ii) the bidder, under the new Presumptions (1) and/or (2).

The Panel can waive the presumption of acting in concert in relation to the other parts of the organisation if it is satisfied that those other parts are independent from the investment manager/investment adviser or the investor (as appropriate) and depending on the circumstances of the case, including the size of the investment in the bidder.

The changes would amend the three bands by which the Panel would normally waive the presumption for the other parts of the organisation as follows:

• 10% or less (no amendment proposed): the Panel would normally agree to waive the presumption;
• more than 10% but less than 30% (reduced from 50%): the Panel may agree to waive the presumption depending on the circumstances of the case; and
• 30% or more (reduced from 50% or more): the Panel would not normally agree to waive the presumption.

Connected fund managers and connected principal traders

Under Rule 7.2, the presumption that fund managers and principal traders who are “connected with” a bidder or the offeree company are acting in concert with that bidder or offeree company is disapplied until, broadly:

• an announcement is made identifying the bidder or offeree company; or
• the time when the connected fund manager or connected principal trader is made aware of the offer, whichever is the earlier.

This rule will be simplified and amended to codify existing practice that persons other than a connected fund manager/principal trader can ask for the same treatment.

Current Presumptions (2) and (3)

Presumption (2) relates to when directors are presumed to be acting in concert. The wording would be amended to clarify that you look at the directors’ interests (together with those of their close relatives and the related trusts) when determining whether they are acting in concert with a company instead of looking at the company’s interests.

Presumption (3) relates to when pension schemes are presumed to be acting in concert and a similar amendment would be made to clarify that it is necessary to look at the pension scheme(s)’ interests when determining whether they are acting in concert with a company.

Current Presumptions (5) to (8)

These would not be materially amended, but some would be re-ordered.

Current Presumption (9)

This presumes that shareholders in a private company who (a) sell their shares in that company in consideration for the issue of new shares in a Code company; or (b) in connection with an initial public offering or otherwise, become shareholders in a Code company are acting in concert.

This presumption would be amended so that it also applies to members of a partnership (including a limited liability partnership), codifying existing practice.

Dealings in offeree company securities by persons acting in concert with the offeree company

Rule 4.4 restricts the acquisition of interests in securities in the offeree company by a financial adviser or corporate broker to the offeree company, or by any person which “controls, is controlled by or is under the same control as” such an adviser or broker, other than an exempt fund manager or an exempt principal trader acting as such.

This rule would be amended so that the restrictions would also apply to any fund manager or principal trader which is connected with the offeree company and to any person which controls, is controlled by or is under the same control as the connected fund manager or principal trader.

Webinar and slides

The Panel's webinar and slides on this PCP are available on the Panel's website here.

Timing

Comments are due by 23 September 2022.

The Code Committee expects to publish a Response Statement setting out the final amendments to the Code in late 2022 and that those amendments would come into effect approximately two months after publication of the Response Statement.