On 15 May 2023, the UK Takeover Panel published a public consultation on proposed changes to the Takeover Code's Rule 21.1 (which prevents a target under offer (or where an offer is imminent) from taking action that may lead to the frustration of a bid for it) ("PCP 2023/1"). The consultation also includes a draft of a new Practice Statement (No. 34) ("new PS") to provide guidance in relation to the revised frustrating action rule and proposes some noteworthy changes to the Code's Rule 21.3 (which requires a target to share information equally between competing bidders). Comments on the proposals are invited by 21 July 2023 and a response statement setting out finalised rule changes is promised in Autumn 2023 with the changes to the Code to take effect a month later.
The Panel is taking its first in depth look at the Code's General Principle 3 (requiring targets not to deny shareholders the opportunity to consider the merits of a bid) and Rule 21 itself. While no fundamental changes are proposed, the Panel is taking the opportunity to allow targets greater flexibility to continue to engage in transactional business during an offer period and is also redrafting Rules 21.1 and 21.3 to make it clearer what its expectations or requirements are with respect to target actions that might result in a bid being frustrated. What follows is a summary of the more notable of the changes proposed by the Panel in PCP 2023/1 (which puts forward a total of 27 questions for consideration).
What would change under a revised Rule 21.1
PCP 2023/1 sets out several detailed changes to Rule 21.1, the more noteworthy of which include the following.
When the Rule applies - the "relevant period"
One of the clarificatory changes proposed is to apply the Rule by reference to actions during the "relevant period". That would include (and would close with the end of) the offer period and would start on the earlier of an approach by the bidder to the target board or the start of the offer period (i.e., generally when an offer (firm or possible) is made). Where an approach is made and the target unequivocally rejects it, although an offer period may not have started, the Rule would apply from the approach until 5 pm on the seventh day following that rejection. Currently Rule 21.1 only applies until 5 pm on the second day following such rejection.
PCP 2023/1 proposes distinguishing between target share transactions (i.e., issuances, buybacks, redemptions and grants of convertibles and options) and asset or contract transactions, and applies - in addition to an "out of the ordinary course of business" test (see below) - a test of materiality (retained at an assets percentage ratio of 10%) in relation to asset and contract transactions but not in relation to share transactions. Only "material" asset and contract transactions (falling outside of the target's ordinary course of business) would count as potentially frustrating actions subject to the Rule 21.1 restrictions. The justification for this distinction is that share transactions have the potential to be material to the bidder - especially share capital increases that could impact its cash confirmation responsibility under the Code - when they may not be so material in relation to the target's share capital itself.
The Panel would be given greater flexibility to decide whether the materiality test threshold had been met beyond the existing consideration and target equity values and operating profit indicators, including by reference to the relevant industry or other circumstances of the target.
A revised note 3 to Rule 21.1 would set out the Panel's approach to determining whether an asset transaction meets the materiality threshold. The new PS would set out its approach to determining whether a contract to be entered into, amended or terminated meets the materiality threshold.
Ordinary course of target's business override
Existing Rule 21.1 excludes from the specifically listed potential frustrating actions, contracts entered into in the ordinary course of business. The revised Rule 21.1 would apply this exclusion to all the listed actions but, as mentioned below, will still require the target to consult with the Panel to determine whether its proposed action falls within or outside of that ordinary course of business qualification. PCP 2023/1 warns that transactions that might normally be regarded as falling within the ordinary course of the target's business may nevertheless fall outside of that because of they trigger materiality thresholds.
Employee incentive and retention arrangements and buybacks/redemptions
A new note to Rule 21.1 would clarify that the grant of options under share incentive schemes or buybacks/redemptions would normally be considered to be within the ordinary course of the target's business if awarded or made in accordance with its normal or pre-relevant period (see above) announced practice. New bid-related incentive arrangements covering periods prior to the end of the "relevant period" (see above) and not otherwise "ordinary course" would be treated as falling within the Rule 21.1 restrictions if significant in value - again, the new PS would provide guidance here - or they relate to directors or senior management.
Other new Rule 21.1 guidance - competing bids and reverse takeovers
PCP 2023/1 proposes new guidance in relation takeover schemes of arrangement, competing bids and reverse takeovers.
For schemes, as indicated in the Panel's Response Statement 2022/3 (paras. 2.13 and 2.14), except in "exceptional circumstances", the Panel would not stop a target under Rule 21.1 from proceeding to seek the court's sanction to a takeover scheme following its approval by shareholders where there was another outstanding competing bid. The new PS would state that merely proceeding with an application for a court sanction where the competing bid was higher or the competing bidder had limited time in which to confirm or increase its bid, would not be regarded as constituting "exceptional circumstances".
In addition, PCP 2023/1 proposes allowing a bidder in a competitive situation to extend the "mini-long-stop dates" set out in its scheme bid with just the Panel's agreement, so as to avoid it being forced either to have to lapse its bid or drop those dates because the target is refusing to agree an extension (and thereby threatening to frustrate that bid).
A further technical change is proposed for competitive bid situations to avoid a target that has obtained consent for a potentially frustrating course of action from one bidder, having to seek consent for the same action in relation to a later competing bid.
Finally, in a notable extension of Rule 21.1 which thus far has only applied to targets, the Panel is proposing applying it to potentially frustrating action taken by a bidder in the case of a reverse takeover.
The new PS
As already mentioned, this would provide important and useful Panel guidance on a number of issues that it may have to consider when reviewing the application of Rule 21.1 to potentially frustrating action taken in relation to a bid.
Changes to Rule 21.3 - Equality of information to competing bidders
Currently, Rule 21.3 of the Code requires a target to give to any competing bidder any information that it has provided to another bidder and which the competing bidder requests but also requires the competing bidder requesting that information to specify the particular information it wishes to receive. The competing bidder is not permitted simply to ask for all the information provided to the other bidder. The Panel proposes doing away with this "itemisation" requirement by providing that the target must, on request, provide to the competing bidder all the information it has provided to the other bidder plus any further information that it provides to that other bidder within the seven days following that request.
What wouldn't change under the revised Rule 21.1
Significant though some of the proposed revisions to Rule 21.1 are, a number of core principles in the Rule would remain. These include the following.
Consult with the Panel
Although the revised Rule would provide greater clarity on when action proposed to be taken by a target will likely be prohibited, the target will still have to consult in advance with the Panel if that action falls within the categories specifically restricted by the Rule or if it may result in frustrating a bid for the target. Although one of the significant revisions would be to provide an "within the ordinary course of the target's business" exclusion to the specifically restricted actions, the Panel will still have to be consulted on whether that exclusion is applicable in the particular circumstances of what is proposed by the target.
When the Panel will normally give its consent
Panel consent to the taking of potentially frustrating action is not required if the target's shareholders approve it and will normally be given if the action to be taken is conditional on the offer being withdrawn or lapsing, the bidder agrees or the action is taken pursuant to a contract entered into, or a decision implemented, before Rule 21.1 started to apply. Subject to the minor changes outlined above, this would remain the case under the revised Rule.
Restrictions can apply prior to an offer period starting
Rule 21.1 would continue to be relevant, not just once an offer period has started, but even before when an offer may be in the offing. PCP 2023/1 clarifies how early the Rule can apply before an offer period starts (see above).
The specific categories of potentially frustrating actions caught by the Rule would remain largely the same
Rule 21.1 lists certain categories of target actions that are viewed as capable of frustrating a bid as well as catching any other action that may have this effect. The specifically listed actions would remain essentially the same but with the "ordinary course of business" override already mentioned. An express "materiality" qualification would be added for contracts that the target enters into and the existing materiality qualification for asset disposals or acquisitions would remain but with some changes (see above).
While the proposed changes to Rule 21.1 will not reduce the need for targets to have to consult with the Panel about any potentially frustrating action they may wish to take during a bid (or potential bid) situation, they are to be welcomed in providing much greater clarity and guidance about the sorts of transactions that the Panel is likely to view as offending the Rule. They are also expected to assist targets by avoiding unnecessary potential restrictions on carrying out their ordinary course of business activities, as well as by reducing the need for the Panel to have to consult with potential bidders about a target's proposed or potential action.