The response statement also provides helpful further guidance on some of the changes and the Panel will be holding a webinar on the amendments ahead of the implementation date. This alert summarises the more significant elements of the proposed changes and of the additional guidance contained in the response statement.

Comment

The changes being made to the definition of "acting in concert" will not change the fact that, fundamentally, conducting the analysis to ascertain and agree with the Panel the extent of a concert party can be a lengthy and detailed exercise. The changes and the additional clarificatory guidance set out in the response statement should, however, be helpful in a number of respects.

The increase in the threshold for presumed 'associated company' concert party status from 20% to 30% is certainly welcome. Similarly, the alignment of the position of fund managers across the different provisions of the Code in clarifying that a discretionary fund manager (but not the investors in the fund) will, in general, be deemed to have an 'interest in securities' held by the fund is again useful.

The guidance set out in a number of areas is also helpful in clarifying the Panel's approach to various scenarios such as joint ventures, Government-owned entities and shareholders of private companies - even if the guidance is simply codifying existing practice, it is helpful to have it stated expressly. Challenges will remain, in particular for financial sponsors and funds, but the changes and accompanying guidance are overall a step in the right direction.

In depth

The key changes being proposed can be summarised as follows.

Overview: Importance of "acting in concert" definition and focus on presumptions

• The definition of "acting in concert" is a key component of the Code. The general approach taken under the Code is to treat a party to the offer (i.e., a bidder or a target) and anyone considered to be "acting in concert" with that party as effectively a single person. Accordingly, dealings in shares by anyone "acting in concert" with a party can have material consequences including setting a floor price for an offer and/or triggering a mandatory bid obligation.
• The definition of "acting in concert" addresses three categories of relationship which can result in persons being considered to be "acting in concert" with one another. The first is where persons actively co-operate with one another, pursuant to some form of agreement or understanding, in relation to the control of a company - this is often referred to as 'actually' acting in concert. The second is where the persons are "affiliated persons" (e.g., where one person has a majority of the voting rights in the other) - in this scenario, the persons are 'deemed' to be acting in concert. The third is where the persons are in one of a number of categories where the nature of their relationship gives rise to a rebuttable presumption that they are acting in concert- referred to as being 'presumed" to be acting in concert. The changes being introduced are focused only on this third category of persons being 'presumed' to be acting in concert.

Raising the threshold in presumption (1) and covering both voting shares and "equity share capital"

• Probably the most significant of the presumptions is the current presumption (1) under which a company is presumed to be acting in concert with its parent, subsidiaries and fellow subsidiaries and their associated companies, with the test of associated company status being "ownership or control of 20% or more of the equity share capital" of a company. The Panel is making some key changes to this presumption.  
• First, the 20% threshold is to be raised to 30%, to align with the threshold in the Code's definition of "control".
• Second, as a codification of existing practice, the presumption will clarify that it applies both to (1) shares carrying voting rights (whether or not they are also equity share capital) and (2) equity share capital (whether or not the shares also carry voting rights). The 30% threshold will then apply differently to each of these categories: voting control does not 'dilute' through a chain of ownership; whereas equity investment normally does 'dilute' through the chain of ownership, unless the equity investment is of more than 50% of the equity, in which case it does not.
• The presumption will be split into two new presumptions (presumptions (1) and (2) in the proposed new definition) and, as well as applying to companies, will apply to funds, partnerships, trusts and any other legal or natural person. There will also be a clarification that where a fund is managed by an independent discretionary fund manager, the fund manager (but not the investors in the fund) will, in general, be deemed to have an 'interest in securities' held by the fund.
• The responses to the consultation raised questions about various circumstances where parties may seek to rebut the presumptions in new limbs (1) and (2). Whilst additional clarificatory guidance was given in relation to certain specific scenarios (see below), the response statement made clear that, in general, the approach of the Panel would be that, "absent compelling evidence to the contrary, [the presumptions] should apply and, if a dealing takes place, the Panel can then decide whether to grant a derogation from the relevant Rule in the full knowledge of the facts".

Application to funds and limited partnerships:

• The current presumption (4) in the definition of "acting in concert", whereby a fund manager is presumed to be acting in concert with a person whose funds the fund manager manages on a discretionary basis, will be deleted.
• A new Note 7 on the definition of "acting in concert" clarifies that the Panel will apply the new presumptions (1) and (2) (as described above) to an investor in a limited partnership or investment fund as if the partnership or fund were a company and the investor were interested in a corresponding percentage of the company's equity share capital.
• In addition, a new presumption (5) provides that an investment manager of, or investment adviser to, a bidder, an investor in a bidder consortium, or a target, together with any person controlling, controlled by or under the same control as that investment manager or adviser, will be presumed to be acting in concert with the bidder or target (as applicable).  

Bidcos and consortium bids

• Currently, investors in a consortium (e.g., through a bidco) are normally treated as acting in concert with the bidder. The response statement confirms that, where equity financing for an offer is provided by a fund managed on a discretionary basis by an investment manager or adviser, the following persons may be considered as acting in concert with the bidder: (1) the fund itself; (2) the investment manager or adviser to the fund; and (3) any investor in the fund who either: (a) will have a 'see-through' interest in 30% or more of the bidder; or (b) owns more than 50% of the limited partnership interests in the fund.
• Where the investment manager or adviser, or the investor, is part of a larger organisation, the other parts of the organisation will usually be presumed to be acting in concert with that person and with the bidder. On a consortium bid, the Panel (under note 6 on the definition of "acting in concert") may be prepared to waive that presumption where the Panel is satisfied that those other parts are independent, depending on the circumstances of the case, including the size of the investment in the bidder.
• The current three bands that the Panel looks at when considering the size of the investment in the bidder will be tightened, as follows:
  • 10% or less (no change): the Panel would normally agree to waive the presumption
  • More than 10% but less than 30% (down from 50%): the Panel may agree to waive the presumption depending on the circumstances
  • 30% or more (down from 50% or more): the Panel would not normally agree to waive the presumption

Clarificatory guidance: Application to joint ventures, Government-owned entities and private equity bidders

• Helpful clarificatory guidance is provided in the response statement as to the application of the presumptions in the context of joint ventures within groups of companies. Broadly, the general position will be that, in relation to a bidder (or other concert party around whom the concert party analysis is focused):
  • When looking 'up the chain' of group companies, a joint venture company in which a major shareholder of the bidder holds a relevant stake will be presumed to be acting in concert, but the other joint venture partner(s) holding a stake in the joint venture company will not be presumed to be acting in concert; whilst
  • When looking 'down the chain' of group companies, a joint venture company in which a subsidiary of the bidder holds a relevant stake will be presumed to be acting in concert, whilst the other joint venture partner(s) holding a stake in the joint venture company will also be presumed to be acting in concert but the Panel would be likely to rebut the presumption in respect of the JV partner(s).
• A number of respondents to the consultation asked for guidance on the Panel's approach to Government-owned entities (GOEs). In the response statement, the Panel acknowledges that, subject to certain parameters and safeguards, GOEs can be treated slightly differently from groups of companies (on the basis that a government has a number of different functions and responsibilities, whereas the parent company of a group has as its sole function and responsibility the ownership and/or management of the other companies in the group). Factors that the Panel will take into account when making its determination will include whether the GOE is: (a) established as an independent legal entity with its own independent investment mandate and governance structure; (b) under separate management control from the government and from other GOEs; and (c) operationally separate from the government and from other GOEs.
• The Panel's current practice around rebutting the presumption of concertedness in respect of private equity portfolio companies where the private equity firm manages and/or owns 20% - 50% of the share capital is to be discontinued, with the Panel's position instead becoming that it will treat PE portfolio companies in the same way as companies within a corporate group. This is partly on the basis of the relevant threshold for the presumption being raised from 20% to 30% and partly as the Panel is not persuaded by the argument that PE portfolio companies should be treated differently (given, for example, the clarificatory guidance generally applicable to joint ventures, as set out above, which will apply equally within a PE portfolio). This will, in practice, mean even greater importance attaching to the "Rule 7.2 moment", being the point in time when the PE bidder is publicly named or, if earlier, the point in time when the relevant person is made aware of the potential offer. Prior to the Rule 7.2 moment, neither a portfolio company of a PE bidder nor a passive limited partner in a fund managed by a PE bidder will be treated as acting in concert with that PE bidder, but those entities will become concert parties with effect from the Rule 7.2 moment.
• In relation to funds and indirect investments generally, the response statement clarifies that outside of an offer scenario, an investor's indirect interests in a company or fund should only be taken into account when assessing whether new presumption (2) should apply where each link in the chain of interests is in respect of 30% or more of: (i) the relevant company’s equity share capital; or (ii) the relevant fund’s limited partnership interests.

Further clarificatory guidance: Directors of group companies and shareholders in private companies

• Confirmation is helpfully provided in the response statement (though it won't appear in the Code) that in the context of an offer, whilst the directors of a bidder would be presumed to be acting in concert with the bidder, there is no presumption that the directors of other companies within the bidder’s group (other than the ultimate holding company of a bidco) are acting in concert with the bidder.
• In respect of the presumption (currently presumption (9), becoming (10) once the amendments take effect) that shareholders in a private company who sell their shares in that company for the issue of shares in a Code company are acting in concert, the Panel has provided guidance on when it may be willing to rebut that presumption. Circumstances when the presumption may be rebutted include in relation to: (a) shareholders with de minimis holdings; (b) passive shareholders (including independent institutional shareholders and private equity firms) who have no involvement in day-to-day management; (c) non-founder managers and other employees who acquired their shareholdings by virtue of their employment; (d) shareholders whose relationship has broken down; and (e) employee benefit trusts (on the basis of the factors set out in Note 5 on Rule 9.1). However, shareholders in the following categories are unlikely to be able to rebut new presumption (10): (a) founder shareholders; (b) members of any core group which retains influence over the company; (c) shareholders who participated in a previous management buy-out for the company; and (d) shareholders who were previously joint offerors for the company. The Panel will take the same approach in respect of members of a partnership.

Explanatory webinar

• The changes set out in the consultation paper and the response statement are detailed and complex, with numerous detailed diagrams and case studies provided for illustration. Recognising the challenges that are inherent with fully digesting the changes, the Panel will be holding a webinar on the amendments ahead of the implementation date of Monday 20th February. To register your interest in attending the webinar, email supportgroup@thetakeoverpanel.org.uk. A recording of the webinar will also be made available on the Panel’s website in due course.