In brief
The Takeover Panel has published its response (RS 2020/1) to the consultation launched in the autumn (PCP 2020/1) with proposals to make major changes to the way in which offer timetables and conditionality operate. As expected, the changes are to be made largely as set out in the consultation paper, but the response statement includes helpful additional clarity on some of the points raised by market participants in the responses to the consultation. This alert summarises the changes and the additional clarifications made. The new rules will come into effect for offers made on or after 5 July 2021.
Comment
It comes as no surprise that the changes to the Code are being implemented largely as set out in the consultation paper, given the extensive pre-consultation exercise the Panel undertook. The amendments will largely be welcomed in the market as aligning the Code with the common position where bids require multiple regulatory clearance processes that do not fit within the current Code timetable for contractual offers. The use of long stop dates will be important for bidders given the requirement for financing to be on a certain funds basis, though there is some limited scope for uncertainty where bidders and targets disagree on extending the long stop date where clearance processes remain outstanding. There will be keen interest in how the Panel will in practice operate the tests it has set out around materiality, both in this context and more generally.
In depth
Changes coming into effect:
- The amendments to the Code will take effect generally for offers in respect of which a Rule 2.7 announcement is made on or after Monday 5 July 2021.
- Any offers in respect of which a Rule 2.7 announcement has been made prior to that date but which remain ongoing will continue to be subject to the unamended version of the Code.
- The changes will also not apply to a competitive offer launched on or after 5 July where the Rule 2.7 announcement launching the original offer was made prior to that date.
Key changes to timetable confirmed:
- The acceptance condition can be satisfied only after satisfaction or waiver of all other conditions (with a limited exception for certain technical conditions e.g., admission of consideration shares to listing). Accordingly, the concept of "Day 81" and distinction between "unconditional as to acceptances" and "wholly unconditional" will disappear and a new concept of a single "unconditional date" will be introduced. There will be a formalised basis for extending the timetable to accommodate regulatory clearance procedures (see "Regulatory conditions: Extending the timetable and levelling the playing field" section below).
- An offer must remain open until the later of Day 21 and the unconditional date and (unless the offer is unconditional from the outset) must remain open for at least 14 days after the unconditional date.
- The concept of closing dates (other than Day 60) will disappear.
- The concept of a "no extension statement" will disappear and be replaced by an "acceleration statement". A bidder can make an acceleration statement to bring forward the unconditional date of its offer to a date no earlier than 14 days after the date of the statement. To make an acceleration statement, the bidder must waive all outstanding regulatory conditions, whilst following an acceleration statement (if made prior to Day 39) the usual deadlines of Day 39 for a target to publish new information and Day 53 for a potential competing bidder to clarify its position will both be disapplied. If, however, the acceleration statement is made after Day 39, the restriction on the target publishing new information will remain in place.
- There will be changes to when announcement of acceptance levels are required under Rule 7. Announcements will be required:
- on the day after Day 21 and every 7 days thereafter until the final week preceding the unconditional date (except that the requirement will be suspended if and for so long as the offer timetable is suspended);
- after each day in the week up to and including each of 1) the unconditional date and 2) (if relevant) the long stop date;
- after the day the offer is declared unconditional or lapses;
- after the expiry of any acceptance invocation notice; and
- after any day on which, as at 5pm, the acceptance level goes up and down through specified thresholds (usually 90%, 75% and 50%).
- All offers (as well as schemes of arrangement) will be required to have long stop dates. The bidder and target are free to agree what the long stop date should be. If there is no agreement (e.g., on a unilateral offer), the Panel should be consulted and will expect the long stop date to be no earlier than the date by which the bidder reasonably expects the "slowest" material regulatory condition to be satisfied.
- If by the long stop date the acceptance condition has not been satisfied, the offer will lapse. If the acceptance condition has been satisfied, either the offer should become unconditional or the Panel's permission sought to lapse the offer.
- If the Panel is satisfied that the regulatory condition that remains outstanding is material, it would normally allow the offer to lapse if either (1) it is not sufficiently clear what action would need to be taken in order to satisfy the condition or (2) the taking of the relevant action would give rise to circumstances which are of material significance to the bidder in the context of the offer.
- Any extension of the long stop date would usually have to be agreed by both bidder and target.
- If on the long stop date the acceptance condition has been satisfied, one or more regulatory conditions remain outstanding and the Panel is not prepared to allow the offer to lapse, the Panel will generally expect the bidder to waive the outstanding conditions and declare the offer unconditional. If, exceptionally, the bidder is unwilling to waive the conditions, the Panel will consider what action to take, with the bidder likely to be subject to an ongoing obligation to use all reasonable efforts to satisfy the conditions and declare the offer unconditional. In these circumstances, the long stop date will cease to be relevant and the timetable will effectively be suspended until the outstanding conditions are satisfied or waived, at which point the timetable would resume on day 32 - see below.
- The Panel has flagged that its final determination as to whether a bidder can lapse its bid on the long stop date is likely to be made shortly after the long stop date has passed (when acceptance levels are clear and, if necessary, evidence provided as to outstanding conditions) and advised bidders to take this into account for the "certain funds period" when arranging financing.
- Withdrawal rights will be available from the outset and throughout the offer, rather than only from Day 42 until Day 60 as is currently the case.
Regulatory conditions: Extending the timetable and levelling the playing field
- The Rule 12 requirement for a term that offer must lapse on a Phase 2 referral by the CMA or EC will be deleted.
- Bidders and targets will be able to request a suspension of the offer timetable if regulatory conditions remain outstanding. Such request would usually have to be made by Day 37. If the bidder and target agree on a suspension, no materiality test will be applied but if only one party wants the suspension, the Panel must be persuaded that at least one of the regulatory conditions is "material".
- A regulatory condition will be "material" if the Panel is satisfied that the failure to obtain the relevant clearance could give rise to circumstances which are of material significance to the bidder in the context of the offer. If the Panel deems a condition to be material for these purposes, that does not necessarily mean that the Panel would allow the condition to be invoked subsequently.
- The Panel has clarified that a relevant regulatory condition for the purposes of suspending the timetable will be "an authorisation or clearance which is obtained from a governmental or regulatory body and which relates to the question of whether the offeror is permitted to acquire the offeree company or one or more of its assets". This would include clearance from a sector or industry regulator (such as the FCA or PRA) but would not include a clearance from the Pensions Regulator as that would not relate to the permissibility of the bidder acquiring the target but to the question of what costs, if any, the bidder will be required to incur in doing so.
- Usually, a timetable suspension would take effect on Day 37 and the timetable should, following the satisfaction or waiver of the relevant regulatory condition(s), resume on a new Day 32 - this would allow the target a week to release new information before the day 39 deadline.
- The Panel has clarified that it does not expect to make any specific amendments to the Code as a result of the enactment and implementation of the NS&I bill in its current form.
Pre-conditional offers
- Where there is likely to be a lengthy timeframe to obtain a regulatory clearance, it will remain possible to make a pre-conditional offer rather than use the timetable extension mechanic.
- The inclusion of a regulatory pre-condition will be permitted if either the target agrees or the Panel accepts that it is "material" (the test being as set out above in the context of an extension).
- For a pre-conditional offer, a long stop date will again be required for the timeframe for satisfaction or waiver of the pre-condition. The threshold for invocation of a pre-condition will be the same as that for invocation of a regulatory condition.
Acceptance condition and invocation
- If a bidder seeks to invoke the acceptance condition before Day 60, it will be required to serve an "acceptance condition invocation notice" giving a minimum of 14 days' notice of an intention to invoke the condition if the acceptance level was not met. Once served this would be irrevocable and the bidder would be required then to invoke the acceptance condition and lapse the offer if by that deadline sufficient acceptances have not been received.
- If sufficient acceptances have been received, the acceptance condition would still not be satisfied if other conditions remain outstanding. This is because the acceptance condition must be the last condition to be satisfied and withdrawal rights will continue to be available.
- A bidder will be able to serve more than one acceptance condition invocation notice, but must not serve one whilst another is still running.
Additional guidance on conditions and materiality test for invocation generally
- The current guidance in Practice Statement 5 regarding invocation of conditions is effectively confirmed and expanded. In summary:
- there is no materiality threshold for invoking the acceptance condition or a condition driven by legal or regulatory requirements such as admission to trading of consideration shares or obtaining bidder shareholder approval;
- for regulatory conditions and bespoke conditions relating to the (non-)occurrence of a specific event or circumstances in relation to the target, the general "materiality" test for invocation of conditions will apply, namely whether the circumstances are of material significance to the bidder in the context of the offer; for other, MAC type conditions, whether the above test is satisfied will depend on the bidder demonstrating that the relevant circumstances are "of very considerable significance striking at the heart of the purpose of the transaction" - a high hurdle but one falling short of legal frustration.
- When assessing whether the test has been met to allow invocation, the Panel gives additional guidance on factors that it will consider, for example whether the relevant circumstances were reasonably foreseeable at the time of the offer, what subsequent action has been taken by the bidder and what the views of the target board are.
- In the context of potential invocation of a regulatory condition, the Panel will look at additional factors such as (1) what action, if any, the bidder would need to take to obtain the relevant clearance and the strategic consequences were the bidder to take that action and (2) the likely consequences for the bidder were it to complete the offer without obtaining the clearance.
- Where a bidder looks to invoke a condition on the basis of a Phase 2 referral or equivalent, the Panel will look in particular at (1) whether this would be likely to result in a serious risk of material damage to the business of the bidder or the target and (2) the utility of requiring the bidder to pursue the process where the prospect of obtaining the clearance is low.
- There is a new requirement for the 2.7 announcement and the offer document to state which conditions are subject to the materiality test for invocation and require Panel consent to be invoked.
Schemes of arrangement
- A new express requirement will be introduced for bidders, once all conditions are satisfied/waived, to take the procedural steps necessary for the scheme to become effective. The Panel has clarified that where the target seeks to accelerate the timing of the sanction hearing (by convening it, without the bidder's consent, for a date in advance of the latest date prior to the long stop date when one or more substantive conditions remain outstanding), it would normally consent to the bidder not taking the relevant procedural steps at that time.
Mandatory offers
- The restrictions on mandatory offers being subject to conditions other than the acceptance condition will be relaxed to allow them to be subject to a material regulatory condition provided that the underlying acquisition of interests in shares that triggers the mandatory offer obligation is itself subject to the same condition and that invocation of that condition is subject to Panel consent.
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