The Takeover Panel has published a response statement (RS 2022/4) setting out miscellaneous amendments to the Code, as proposed in their consultation paper from October (PCP 2022/4). The amendments cover a range of topics, including in relation to flexibility regarding targets in financial difficulty, announcement requirements following a "clear public statement", an adjusted mandatory offer price, target board recommendations and directors' intentions, and the disclosure of irrevocable undertakings and letters of intent.
The amendments to the Code will come into effect on Monday 22nd May 2023. This alert summarises the more significant of the amendments.
These Code amendments, that are largely being implemented in line with the proposals made in the initial consultation paper, are essentially technical "housekeeping" points that will be unlikely to impact many offer situations in a material way. The Panel has addressed concerns raised by respondents on the potential difficulties that target boards may have with the requirement to express a view on all alternative offers where made by providing example alternative wording and recognising that the board may highlight that the choice of individual shareholders may depend on their particular circumstances (eg tax) and highlighting relevant factors to consider. Meanwhile, whether the reversal of the announcement presumption affects how potential bidders and their advisers consider the question of whether and when to build a stake in a target company is a question that will be worth keeping an eye on.
The key amendments coming into effect can be summarised as follows.
Flexibility regarding targets in financial difficulty:
- The Panel will increase its flexibility to grant a waiver from Code requirements in exceptional circumstances, citing the example of facilitating a rescue of a company in serious financial difficulty. The Panel's general ability to do so is currently constrained by a proviso that "the General Principles are respected". Meanwhile, the Panel's ability to waive the Rule 9 mandatory bid requirement in the context of a "rescue" of a company in serious financial difficulty is subject to either: (a) independent shareholder approval as soon as possible after the rescue is carried out; or (b) the provision of "some other protection for independent shareholders which the Panel considers satisfactory in the circumstances". If neither proviso is met, a mandatory bid will still be required.
- The Panel is concerned that there may be circumstances where, in the context of a "rescue" operation in respect of a company facing imminent insolvency, these provisos could not be met and, under the Code provisions as currently drafted, the Panel would feel unable to grant a dispensation and it would not be possible for the company to be rescued nor the shareholders accordingly to retain any economic value.
- The Panel therefore will have increased flexibility by: 1) inserting specific wording into the introduction to give the Panel discretion, in exceptional circumstances, to grant a waiver even where in doing so one or more of the General Principles may not be respected; and 2) deleting the provisos in Rule 9.3 and instead allowing the Panel to waive the mandatory bid requirement in a rescue scenario "subject to such conditions (if any) as the Panel considers appropriate".
Announcement requirements following a "clear public statement":
- Under Rule 2.2, the bidder must make an announcement if, after it has first actively considered a potential bid but before approaching the target board, there is rumour and speculation or an untoward movement in the target's share price and there are reasonable grounds for concluding that it is the potential bidder's actions that have led to the situation. Under Note 2 on Rule 2.2, this announcement obligation will not normally be triggered if the Panel is satisfied that the price movement, rumour or speculation results only from a "clear and unequivocal public statement" (eg a disclosure under the FCA handbook, such as of an acquisition of an interest in target securities). The Panel may potentially still require an announcement in these circumstances, for example if it is not satisfied that the bidder's active consideration of a bid remains confidential.
- Note 2 will be deleted and the presumption as to whether, in circumstances where there is a "clear and unequivocal statement", an announcement is required will be reversed, placing a potential bidder who has bought target shares in an equivalent position as one who has not. The Panel considers that doing so will remove the tactical advantage that it considers a potential bidder currently can gain through purchasing shares before approaching the target board, thereby deferring the imposition of the 28 day "put up or shut up" deadline that would otherwise apply by virtue of a possible offer announcement being made.
- The Panel confirmed in the response statement that: 1) the abolition of Note 2 will not result in an announcement being required where a purchaser of shares is not actively considering an offer; and 2) a purchaser of shares that was actively considering an offer but has ceased to do so following the rumour and speculation or untoward price movement can seek a dispensation from the announcement requirement under Note 4 (which will become Note 3) on Rule 2.2. This is, nevertheless, a notable change to the rules that may make a potential bidder think twice about purchasing target shares at an early stage of its bid planning.
An adjusted mandatory offer price:
- Under Rule 9.5, the Panel has the right to determine that the price payable on a mandatory bid (ordinarily the highest price paid in the preceding 12 months by the bidder or its concert parties) should be adjusted. Note 3 then specifies a number of circumstances that the Panel might take into account when considering a price adjustment, going on to say that the [adjusted] price "will be the price that is fair and reasonable taking into account [all relevant factors]".
- The Panel considers that the term "fair and reasonable" is potentially confusing in this context given that this term is more commonly encountered in the context of the target board's and its financial adviser's opinion on the financial terms of the offer. The term "fair and reasonable" in Note 3 will therefore be replaced with the term "appropriate".
Target board recommendations and directors' intentions:
- For any offer, the target board is required to set out in the offer document, defence circular or scheme document (as applicable): a) its opinion on the offer and reasons for that opinion; and b) whether or not the target directors intend to accept the offer and, where there are alternative offers, and if so required by the Panel, which alternative (if any) the directors intend to elect for. Similar requirements apply to a proposal to option holders under Rule 15.
- There have been several cases where the target board has sought to argue that these requirements should not extend to requiring them to provide a recommendation as to the course of action that shareholders (or, under Rule 15, option holders) should take, although in practice in most offers the target board does provide a recommendation of that nature.
- The amendments therefore make this requirement explicit, both for offers (under Rule 25) and for proposals to option holders (under Rule 15). A further requirement will be added for an explanation to be given if there is a divergence of views amongst the target directors or if the board's opinion is not consisted with the advice of its Rule 3 independent financial adviser. Meanwhile, where there are alternative offers, the proposal is to remove the general "if so required by the Panel" proviso so that the directors must always state which alternative (if any) the directors intend to elect for and, if so required by the Panel, also the reasons for making that election.
- The Panel has acknowledged that, where more than one alternative offer that is recommendable and the appropriate action for individual shareholders to take may depend on various factors and their particular circumstances, such as their tax position, it may not be possible for the target board to make a single recommendation to all shareholders as to the action that they should take. In such circumstances, the response statement provides that the board should be able to satisfy the requirement by explaining the key factors which it considers that shareholders should take into account in making their decision as to what action to take (recognising that any such list of key factors is unlikely to be exhaustive).
- Helpfully, the Panel has set out in Appendix C to the response statement examples of language that the target board could use in 4 scenarios:
- a single, recommended offer:
- a main offer and an alternative offer, both of which are recommendable;
- a main offer which is recommended and an alternative offer which is not recommendable; and
- a main offer which is recommended and an alternative offer on which the target board and the Rule 3 adviser are unable to form an opinion.
- The Panel also confirms in the response statement that an ability for shareholders to make a "mix and match" election is not regarded as an alternative offer for these purposes.
Disclosure of irrevocable undertakings and letters of intent:
- If an irrevocable undertaking or letter of intent is entered into prior to the announcement of a firm intention to make an offer, it must under the amendments be published on a website by the current deadline for announcing the details (rather than only following the announcement of a firm intention to make an offer).
- In most cases, this will be unlikely to be material in practice, but the advisers to the parties should be conscious of the tighter timeframe and, in the relatively rare circumstances where irrevocables are given more than a business day before the firm intention announcement, should be in a position to publish them on a website promptly.