On 8 January 2018, changes were made to the U.K. Takeover Code (the “Code”) which: (i) for the first time, expand the application of the Code to certain “asset” transactions taking place in “offer situations”, (ii) require greater disclosure by bidders of their future intentions with regard to the target and its operations, and (iii) unless the target agrees otherwise, require a bidder to delay by 14 days the posting of its offer document following the announcement of its firm intention to make an offer. A number of other less significant changes to the Code have also been made which are mentioned below.
In July and September 2017, the U.K. Takeover Panel launched two consultations on changes to the Code. The first (see PCP 2017/1) proposed changes to the way in which the Code should apply to situations where a target wishes to sell a major part of its assets either to a bidder who is restricted under the Code from making an offer for its shares or in competition with an offer for its shares. It also proposed a number of other unrelated changes referred to below.
The second (see PCP 2017/2) proposed that bidders should be required to give details earlier in the bid process about their future intentions with regard to the target and its business and that these intentions should be expanded so as to include certain additional matters relating to the target and its operations.
The other significant change proposed was in the offer timetable. To allow the target more time to prepare its defence document, it was proposed that, unless the target otherwise agreed, the bidder would have to wait until 14 days after announcing its firm intention to make a bid before posting its offer document.
Though not all commentators were happy with all of the details of these two sets of proposals (in particular with the proposed extension of the Code to certain “asset sales” situations), the Panel announced on 11 December 2017 (see RS 2017/1 and RS 2017/2) that it would be proceeding with the proposed changes with only a few relatively minor revisions to them. The changes would take effect on 8 January 2018.
Asset Sales and Takeover Offers
The Code is primarily concerned with regulating the process of acquiring control of U.K. public companies and so is not normally concerned with a change in the ownership of a company’s business or assets (i.e., asset disposals by a target). The changes to the Code made on 8 January 2018 do not alter that principle. What they do is:
To stop a bidder circumventing restrictions under the Code that would prevent it making or varying an offer, by instead purchasing “significant assets” of the target.
Where a target, in competition with a takeover offer for it, has agreed to the sale of all or substantially all of its non-cash assets:
The target will have to make greater disclosure about any statements it makes about the cash sum it would propose to return to shareholders as a result of the asset sale, and
Any purchaser of those assets will be restricted from acquiring interests in shares of the target:
Unless the target has made the required disclosure about the cash sum (expressed as per share) it would expect to return to its shareholders, and
At a price per share that does not exceed the cash sum per share stated by the target.
Where a target is proposing a transaction (e.g., a sale of assets of a “material amount”) that could amount to “frustrating action” under Rule 21 of the Code—this Rule stops targets from taking any action that might result in a bona fide offer for it being frustrated without seeking shareholder approval—greater disclosure about the financial terms (in particular) about the transaction will have to be made to its shareholders.
Prohibition on “Significant Asset” Sales
Under certain Rules of the Code, a bidder can be restricted from making a further bid, increasing its bid or extending the closing date of its bid, generally where its bid has lapsed or where it has stated that it will not increase or extend its bid and it has not specifically reserved the circumstances in which it might do otherwise. These restrictions include:
Rule 2.5, under which a bidder that states that any offer it may make will not be increased and does not expressly reserve the circumstances in which it may increase its offer, will be bound by that statement during the offer period and for a period of three months after confirming that it will definitely not make an offer.
Rule 2.8 (which has also been amended—see below), under which a bidder which makes a statement that it does not intend to make a bid except in certain circumstances, is generally precluded from going back on that statement and making a bid for a period of six months from the date of the statement. In certain circumstances the target may agree that this restriction should no longer apply.
Rule 12.2, under which a bidder whose bid has been referred to a Phase 2 Competition and Markets Authority reference or becomes subject to Phase 2 European Commission proceedings is not allowed to bid for the target during that reference or those proceedings.
Rule 31.5, under which a bidder that states it will not extend the closing date of its offer will be bound by that statement except where it expressly reserves the right to do so in specified circumstances (or in wholly exceptional circumstances).
Rule 32.2, under which a bidder that states that it will not increase its existing offer will not be allowed to revise its offer in any way, except where it expressly reserves the right to do so in specified circumstances (or in wholly exceptional circumstances).
Rule 35.1, under which a bidder whose offer has lapsed or been withdrawn is restricted from making a further offer for the target within the period of 12 months of the offer lapsing or being withdrawn. In certain circumstances the Panel may consent to a further offer being made, including with the agreement of the target, but this consent will not normally be given within three months of the offer lapsing, etc. where the bidder was subject to the “no increase” or “no extension” restrictions mentioned above.
The Code has been amended to deal with the situation where a bidder is subject to any of the restrictions mentioned above. The amended Code will now stop the bidder avoiding these restrictions by instead agreeing to buy assets that are significant in relation to the target, thereby leaving the target to return these proceeds to its shareholders with the same net effect as if the bidder had made a cash offer for the target’s shares.
Where relative values when applying an asset purchase price versus the target’s market capitalisation test (and, where appropriate, the assets purchased versus the total assets of the target and the operating profit attributable to the assets purchased versus the target’s profit tests) are more than 75%, the Panel will normally regard the asset purchase or sale as being “significant in relation to the target.” In its consultation, the Panel had proposed a relative values figure of more than 50% but decided to increase this threshold as a result of comments received that 50% was too low to equate with a takeover offer.
Asset Sales and Other Transactions Subject to Rule 21.1 (Restrictions on Frustrating Action)
Rule 21.1 of the Code restricts a target from engaging in a broad range of activities that might frustrate the outcome of a bid for it, including asset sales or purchases (of a material amount—i.e., normally at least 10% in terms of “relative values”), without shareholder approval of the target having been obtained for the relevant activity. The Code has been amended to introduce some increased requirements where shareholder approval for a potentially “frustrating action” is being sought, as well as to set out in Rule 21.1 all the circumstances in which the Panel will generally not require shareholder approval.
Shareholder approval will not be required in respect of the proposed transaction if:
the bidder consents to it, or
it is conditional on a bid being withdrawn or lapsing, or
the holders of more than 50% of the voting rights in the target approve it, or
it involves the payment of an inducement fee (or fees) capped (in the aggregate) at 1% of the value of the relevant transaction. Thus a target’s agreement to pay an inducement fee of this de minimis amount in connection with an asset sale (or any other transaction that could be caught by Rule 21.1) will not be regarded by the Panel as amounting to “frustrating action” by a target. Obviously, the asset sale itself could constitute “frustrating action” if it were of a “material amount” (as discussed above). The prohibition under Rule 21.2 on inducement fees and other “offer-related arrangements,” which since September 2011 has prevented a target from agreeing to pay break fees or provide various other forms of accommodation to a bidder in relation to a takeover offer, would not apply in the case of asset sales by a target since, as mentioned above, despite the “asset sales” changes discussed above, the Code still does not in general apply to asset, as opposed to share, transactions.
Where shareholder approval is required:
the target board must obtain competent independent advice on whether the financial terms of the proposed transaction are fair and reasonable,
the Panel must be consulted on the proposed date of the shareholder approval meeting, and
a circular, containing prescribed details about the transaction, must be sent to shareholders and posted on the target’s website. However, even if shareholder approval is not required because the proposed action is conditional on a bid lapsing, the target must publish an announcement giving the same prescribed details as would be required for a circular.
Sale of All or Substantially All of a Target’s Assets in Competition with a Takeover Offer
Where during an offer a bidder which is offering securities as consideration makes a statement quantifying financial benefits expected to accrue to the bidder’s group if the offer is successful, or a target makes a similar statement about the cost savings, etc. from which it expects to benefit if the offer fails, this “quantified financial benefits statement” must be reported on by reporting accountants and financial advisers. The Code has been amended to provide that where, in competition with an offer (or possible offer), a target announces that it is to sell all or substantially all of its assets and return the sale proceeds (and its cash balances) to its shareholders and quantifies the cash sum expected to be paid to shareholders (whether specifically or within a range), that will be treated as a quantified financial benefits statement under the Code.
In addition, where a target makes such an announcement, unless the announcement quantifies an amount (or range) per share, any purchaser (or potential purchaser) of some or all of the company’s assets will be prohibited from acquiring interests in shares in the target and any price paid by the purchaser for such shares must not exceed the price (or bottom range of the price) quantified by the target.
Equality of Information Sharing and Asset Sales
The Code has also been amended to reflect the practice of the Panel with regard to asset sales and Rule 21.3. This Rule requires a target that has provided due diligence information to one bidder (or potential bidder) to give the same information promptly on request to any other bidder (or bona fide potential bidder). This is only required if there has been a public announcement about the first bid (or the other bidder has been told authoritatively about the first bid (or potential bid)).
Now, if during the course of a takeover offer (or when the target has reason to believe that a bona fide offer might be imminent) a target starts discussions for the sale of all or substantially all of its assets, any information that is given to the potential asset purchaser must also, on request, be given to the bidder (or potential bidder). Where there has been no public announcement of the asset sale (or the bidder or potential bidder has not been told authoritatively that such asset sale discussions are ongoing) this requirement will not apply. It will also not apply where the asset sale discussions started prior to the takeover offer being made (or the target having reason to believe that such an offer might be imminent), including with respect to information shared after the takeover offer becomes known.
Other Changes to the Code
Statements of Future Intentions by Bidders
The Code already requires a bidder to state in its offer document what its future intentions are with regard to the target’s business and employees. This requirement has been extended in two ways:
Its ambit—bidders will now have to state their intentions (or that they do not have any intention to make changes) with respect to any research and development functions of the target, any post-bid changes in the balance of the skills and functions of the target’s employees and management and in the location of the target’s HQ and HQ functions.
Timing—bidders will now have to disclose their intentions (or that they do not have any intentions) in their Rule 2.7 announcement of a firm intention to make a bid, and not just when they later come to post their offer document. This will allow the target employee representatives and pension scheme trustees more time in which to develop their response and comment on the effects of the bid (which responses the Code requires the target to include in its bid circular).
Timing on Posting of the Bidder’s Offer Document
The Code requires bidders to post their offer document (under which a bid is legally made) within 28 days of the announcement of their firm intention to make an offer. The target then normally has 14 days following the posting of the offer document in which to post a circular to its shareholders giving its response to the bid. A bidder can, of course, (and often will) post its offer document as soon as it is able to after announcing a firm intention to make an offer. The Code has been amended to prevent the bidder, without the consent of the target, from posting its offer document until 14 days after its firm intention announcement.
This will allow the target extra time in which to formulate its response to the bid which, of course, will be of value in the case of a hostile bid. In the case of a recommended bid, the Panel has said that it would not be permissible for the target to agree in a bid conduct agreement with the bidder to provide its consent to the bidder posting its offer document earlier than the 14 day limit—Rule 21.2 prohibiting “offer-related arrangements” would apply here—but that it will be possible for the bidder and target to state in a joint firm offer announcement that the target has agreed to an earlier posting of the offer document.
Further Changes to the Code and a New Practice Statement
Other changes to the Code include:
Rule 2.8 statements (of no intention to make a bid)—previously, these did not need to state the circumstances in which they might be withdrawn or set aside by a bidder but now they will have to specify these circumstances.
Rule 9 (mandatory bids) – the Code allows the Panel to waive the requirement under Rule 9 for a mandatory offer to be made where a person obtains a “controlling” (30% or more in terms of voting rights) position in a target, if independent shareholders holding 50% or more of the target’s shares state in writing they will not accept any such mandatory bid. The mandatory bid requirement applies where the would-be bidder acquires existing shares in the target but it can also apply where it ends up in a controlling position as a result of a new shares issued by the target. The Panel’s practice in the case of such share issues has been to consider granting a waiver if independent shareholders holding more than 50% of the target’s voting rights state in writing that they approve the proposed waiver of the bid requirement and would vote in favour of any “whitewash” resolution to that effect at a shareholder meeting. The Code has been amended to refer specifically to the possibility of the Panel granting a waiver in these circumstances.
Permitting the use of social media for disseminating information about a party to a takeover offer but not about the offer itself and allowing its use for videos that have been approved by the Panel under Rule 20.3 (which allows certain videos that include information or opinions about the offer to be posted on websites subject to certain conditions).
Codifying existing discretionary practice of the Panel to require public disclosure by bidders of their compliance with post-offer undertakings made in connection with their bid and also to require public disclosure by bidders of whether action covered by a post-offer intention statement has or has not been taken.
The Panel has also issued a new Practice Statement (No. 32) in relation to Rule 21.1 (restrictions on frustrating actions by a target) dealing with the situation where an approach has been made which the target has unequivocally rejected but where the target does not know whether the potential bidder is still interested in making an offer and therefore whether an offer might be imminent for the purposes of the application of Rule 21.1 (which could otherwise restrict the target from taking certain actions).
The Practice Statement says that the Panel normally considers that Rule 21.1 will continue to apply so as to restrict the target until 5 pm on the second business day following the date on which the approach was unequivocally rejected, unless before that time the potential bidder has given the target board reason to believe that it continues to be interested in making an offer. The target should, however, still consult the Panel if it intends to take any Rule 21.1 action following the unequivocal rejection of an approach.
Practice Statements provide informal guidance as to how the Panel interprets and applies relevant provisions of the Code but are not binding on the Panel.
The changes to the Code in relation asset sales were prompted by the Panel noting that a number of issues were raised by two particular takeover offers in late 2016. These both involved a target that was in receipt of an offer deciding that better value could be delivered to its shareholders by selling all of its assets to a third party, returning the proceeds to shareholders and then being wound up.
These changes show the Code’s ability to continually evolve to meet developments in the market. They also show - with respect to the new 14 day delay on the bidder posting its offer document – a further shift in the balance of the Code towards supporting targets in their response to unwelcome bids. While the changes do not introduce any fundamental revision of the key principles of the Code (such as took place in September 2011 following the Kraft bid for Cadbury), they will nevertheless require bidders and targets to adapt some of their bid practices and strategies, including, for example, when contemplating an asset sale as an alternative to a takeover offer.