The Takeover Panel has published the response statement to its October 2020 consultation paper on conditions to offers and the offer timetable. The revised Takeover Code will take effect on Monday 5 July 2021 (the "implementation date"). The revised Code will apply to all offers announced in accordance with Rule 2.7 on or after the implementation date, except where this would give the amendments retroactive effect. The amendments outlined in the consultation paper are taking effect mainly as proposed.
New Takeover Code rules on conditions and the offer timetable in force from July
What is changing and why?
The new rules represent a significant shake-up of the contractual offer timetable and introduce important changes to the way in which offer conditions are treated. The key aim of the changes is to:
- simplify the overall contractual offer timetable;
- standardise the rules for all official authorisations and clearances; and
- clarify the circumstances in which conditions may be invoked in order to lapse an offer.
Whilst the changes relating to conditions will affect all takeover offers, the changes in relation to timetable will only be relevant for contractual offers. These changes will have most impact when the offer is hostile or there is a competitive situation.
Changes affecting offer conditions
Key drivers for the changes in relation to offer conditions are the increasing number of regulatory clearances to which takeover bids are now subject, and the vexed question of when a bidder can invoke a condition in order to walk away from a deal, an issue which arose in 2020 in the context of COVID-19 and Brigadier's takeover of Moss Bros (please see our Public M&A Trends publication for further analysis). Key amendments are as follows.
Equal treatment of all conditions: All conditions (with certain exceptions) will now be subject to the material significance test (see below), including conditions relating to Competition and Markets Authority ("CMA") and European Commission competition clearances.
Suspension of the offer timetable for official authorisations and regulatory clearances: Going forward, the bidder or target will be able to request that the offer timetable should be suspended in relation to a condition relating to any official authorisation or regulatory clearance, provided that (i) both parties agree; or (ii) if only one of the parties is in favour of the suspension, the condition relates to a material authorisation or clearance. There will no longer be a requirement for an offer to lapse if a Phase 2 CMA reference is made or Phase 2 European Commission proceedings are initiated. This change reflects the Panel's aim that the Code should apply consistent treatment to any official authorisation or regulatory clearance to which an offer is subject. It should be noted that the fact the Panel agrees to suspend the timetable in relation to an authorisation or clearance does not necessarily mean that failure to obtain the clearance will allow the bidder to lapse the bid. Bidders should be aware of this in negotiating financing arrangements.
Revised and clarified "material significance" requirement Rule 13.5 (Invoking conditions and pre-conditions) will be amended to clarify the application of the "material significance" requirement to the invocation of the conditions to an offer. It will provide a list of conditions which are not subject to Rule 13.5 (for example, the acceptance condition or a condition relating to the approval of a scheme of arrangement).
New factors to be taken into account on invocation of conditions: Alongside the rule changes, the response statement includes a revised version of Practice Statement No. 5 on Invocation of Conditions. The Panel has set out certain factors which will be taken into account when considering the invocation of conditions. Additional factors set out in the Practice Statement are:
- whether the circumstances giving rise to invocation of the condition could have reasonably been foreseen at the time of the firm offer announcement and, if they could, the likelihood of the circumstances occurring;
- the actions taken by the bidder since the firm offer announcement and, in particular, since the occurrence of the circumstances on which the bidder is seeking to rely in order to invoke the condition (the Panel gives the example of a bidder purchasing shares in the target, or making statements indicating an intention to continue to pursue the offer); and
- the views of the target board.
The Panel gives the example of a bidder increasing the likelihood of it being permitted to invoke a condition by clearly disclosing in the announcement of the offer and in the offer document its intention to seek to invoke the condition if specified circumstances occur. For example a bidder might disclose its intention to lapse the offer if a regulatory authority requires disposal of assets with a value above a particular threshold to be disposed of as a condition to its clearance of the offer. While a bidder may be unwilling to make a disclosure if it is reluctant to reveal to the relevant regulatory authority the value of the disposals that it is willing to make in order to secure the necessary clearance, the bidder will need to weigh this against the potential assistance that the making of such a disclosure might provide in the event that it seeks to invoke the relevant condition.
The Panel also lists additional factors to be taken into account when considering whether a condition relating to the obtaining of an official authorisation or regulatory clearance may be invoked:
- the significance of the authorisation or clearance to the bidder;
- what action the bidder would need to take to obtain the clearance and the strategic consequences of that action; and
- the consequences for the bidder and directors if it were to complete the offer without the authorisation or clearance.
As regards a condition relating to there being no Phase 2 CMA reference, the Panel will also look at whether the reference or process would be likely to result in a serious risk of material damage to the business of the bidder and/or target; and the utility of requiring the bidder and/or target to pursue the reference or process where the prospect of clearance being obtained is low.
Acceptance condition – new concept of "invocation notice": Under the proposed amendments, a bidder wishing to invoke the acceptance condition will need to serve an "invocation notice", giving target shareholders 14 days in which to accept the offer before it lapses.
The new Takeover Code introduces the following changes in relation to the timetable for contractual offers:
Single "unconditional date" for the satisfaction of all conditions: There will no longer be a distinction between the date by which the acceptance condition needs to be satisfied and the date by which other conditions to the offer need to be satisfied or waived. The Panel has abolished the distinction between the date upon which an offer is "unconditional as to acceptances" and the date by which it is "wholly unconditional". This is to avoid the issue of target shareholders being "locked in’ for a long period between these dates (currently Day 60 and Day 81). The unconditional date will generally be Day 60, although this may be shortened by the bidder.
New definitions of certain key dates in offer timetable: "Day 60" will be defined as the 60th day following the publication of the initial offer document or any later date set by the Panel pursuant to an extension of the offer timetable. Days 39, 46 and 53 will be set by counting back from Day 60, rather than counting forwards from Day 0, and will be automatically extended (or re-set) if Day 60 is extended.
Acceptance condition last to be satisfied: subject to certain exceptions, the acceptance condition will only be capable of being satisfied once all of the other conditions to the offer have been satisfied or waived.
Offer period: Any offer will be required to remain open until the later of Day 21 and the date on which the offer becomes or is declared conditional or lapses. Also, except where the offer is not subject to an acceptance condition, any offer will be required to remain open for acceptance for at least 14 days after the date on which it becomes or is declared unconditional.
Acceleration statement: Under the new rules, a bidder will be able to bring forward the unconditional date by issuing an "acceleration statement". This is a new concept replacing the current "no extension statement" pursuant to which a bidder can make a statement that the offer will not be extended beyond a specified date. The new unconditional date must be not less than 14 days from the date of that statement. If an acceleration statement is made, the bidder must at the same time waive any outstanding conditions relating to an official authorisation or regulatory clearance. In these circumstances, a potential competing offeror's obligation to clarify its position by no later than Day 53, which would otherwise apply to an offeree company, will be disapplied. If the acceleration statement is made prior to Day 39, the restriction on the date by which the target company can announce material new information will also be disapplied.
Acceptance condition invocation notice: Where the acceptance condition is not reached, the bidder has until now been able to choose to lapse or extend the bid. Under the new rules, a bidder that wishes to invoke the acceptance condition to in order to lapse its bid will need to publish an "acceptance condition invocation notice" giving target shareholders 14 days’ notice that it intends to lapse the offer if insufficient acceptances are received. Offers will therefore no longer have 'closing dates' on which the offeror can decide either to lapse the offer if it has received insufficient acceptances or to extend the offer.
Announcements of acceptance levels: There will be prescribed dates for announcement of acceptance levels.
Long-stop date: In light of the changes to timetable suspensions (see above), the Panel recognises potential concerns about the prospect of an open-ended timetable, particularly in situations where financing is available only for a specified period. Therefore, under the new rules, there is a requirement for the bidder to include a "long-stop date" on contractual offers, by which all conditions (including those regulatory conditions) must be fulfilled. This is similar to the long-stop date typically included in a scheme of arrangement. In a recommended offer situation, the bidder and target will agree to the long-stop date between themselves, whereas in a hostile offer the bidder will be required to consult the Panel to determine a suitable date and the long-stop date will be determined by the material official authorisation or regulatory clearance which is expected to take the longest.
Withdrawal rights: Shareholders will be able to withdraw their acceptance at any time prior to the satisfaction of the acceptance condition. Until now, shareholders have had to wait until Day 42 to withdraw.
New requirements for schemes of arrangement: Once a scheme is sanctioned, the Panel requires the bidder to confirm that all the conditions have been satisfied (or waived) and to undertake to be bound by the scheme. Co-operation agreements, or bid conduct agreements, usually include these obligations but the new rules mean that the Panel will be able to enforce them and prevent a bidder relaying on a long-stop date to lapse its offer where only an immaterial condition is outstanding.