Advising clients on the extent of the application of the definition of "acting in concert" has long been one of the more challenging aspects of public M&A practice. The definition and its application are complex and fact dependent and establishing with the Panel the extent of a concert party can be a lengthy and detailed exercise. The Panel's proposals will have particular significance for financial sponsors, funds and financial services groups such as banks and insurers, but will affect the majority of bidders on public M&A deals. Helpfully, throughout the consultation paper there are several worked examples and diagrams to illustrate how various aspects of the proposed amended definition will operate. The Panel plans to hold a webinar on the proposals in late June or early July (this will also be recorded and the recording put onto the Panel's website).
In terms of the key proposed changes, 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. More debatable is whether other aspects of the proposals, such as the reduction in the size thresholds for what is deemed to be a significant investment in a consortium bidco, will be viewed by the market as being helpful (especially for large groups including entities that deal in securities in different capacities), and whether the proposals in the round are viewed as sufficient to reduce what can be a fairly onerous compliance burden in practice.
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" (eg 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 proposals in this consultation are focused 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 proposing to make 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 50% or more of the equity, in which case it does not. By way of illustration, if A holds 30% of the voting shares of B and B holds 60% of the (non-voting) equity share capital of C, each of A, B and C will be presumed to be in concert with both of the others. In contrast, if A holds 30% of the (non-voting) equity share capital of B and B holds 30% of the (non-voting) equity share capital of C, A will be presumed in concert with B, and B with C, but A and C will not be presumed to be in concert with one another as A's interest in C will be considered as a "diluted" interest of 9% of the equity share capital of C (30% of 30%).
- 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.
Application to funds and limited partnerships:
- There will 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 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, is to be deleted.
- A new Note 7 on the definition of "acting in concert" will clarify 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) will provide 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 (eg through a bidco) are normally treated as acting in concert with the bidder. It is proposed 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 Panel proposes to tighten the current three bands it looks at when considering the size of the investment in the bidder, 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; and
- 30% or more (down from 50% or more): the Panel would not normally agree to waive the presumption.
Impact of the changes
The Panel believes that the proposals should not have a huge impact as 1) in their view, to a large extent, the proposals represent a codification of existing practice and 2) to the extent that the proposals go beyond this and expand the scope of the presumptions, the benefits provided by the additional clarity and certainty will outweigh any adverse impact. It remains to be seen whether this view will be shared by market participants as they get to grips with the proposals.