These changes to the UK Takeover Code (the Code) are designed to:
- ensure that a person who has made certain statements cannot avoid the rules by purchasing significant assets in the target company instead of the shares in the company as shareholders in the target company and other market participants are likely to make investment decisions in reliance on those statements, and
- provide full information and other specific protections for target company shareholders where the target company board is proposing to sell all or substantially all of the target company’s assets and return to shareholders all or substantially all of the company’s cash balances as an alternative to an offer or possible offer.
The main changes:
- prevent an offeror from circumventing the Code by purchasing significant assets of a target
- require the target company board, where it seeks shareholder approval for a Rule 21.1 action, to obtain competent independent advice as to whether the financial terms of the proposed action are fair and reasonable and to send a circular to shareholders
- where, in competition with an offer, a target company announces that it has agreed terms on which it intends to sell all, or substantially all, of its assets, and that it intends to return to its shareholders all or substantially all of the company’s cash balances, then a statement quantifying the cash sum expected to be paid to shareholders (either as an aggregate amount, an amount for each share or a range) will be treated as a “quantified financial benefits statement”, and
- require the target company to provide equality of information to an offeror or bona fide potential offeror as that given to a potential purchaser in discussions about the sale of all or substantially all of the target company’s assets (excluding cash and cash equivalents), if the discussions started during an offer period or following the date on which the board has reason to believe that a bona fide offer might be imminent.
The changes took effect on 08 January 2018, including in respect of announcements or statements made after that date in relation to on-going transactions.
The changes are set out in Response Statement 2017/1 following the consultation in PCP 2017/1.
The main changes are summarised below.
Preventing an offeror from circumventing the Code by purchasing assets which are significant in relation to the target
Rules 2.8 (Statements of intention not to make an offer), 12.2 (Competition reference periods) and 35.1 (Delay of 12 months) have been amended to prevent a person subject to the restrictions in any of those rules from purchasing, agreeing to purchase, or making any statement which raises or confirms the possibility that it is interested in purchasing assets which are significant in relation to the target company. This prevents the person from avoiding the rules by purchasing ‘significant’ assets of the target company as an alternative to acquiring the shares by means of an offer subject to the Code.
In assessing whether assets are significant, the Panel will have regard to consideration, assets and profits tests similar to those set out in Note 2 on Rule 21.1 (Restrictions on frustrating action). Relative values of more than 75% (instead of 50% as originally proposed) will normally be regarded as significant for these purposes.
As a significant number of respondents appeared to understand that the proposed amendments to the Code would have a wider effect than is in fact the case, the Code Committee has set out in Appendix C of RS 2017/1 a summary of how these new restrictions will operate.
Asset sales and other transactions subject to Rule 21.1
Rule 21.1 circulars and general meetings - Rule 21.1 has been amended:
- to require that where shareholder approval is to be sought in general meeting for any proposed action under Rule 21.1(a) (and not only for asset sales):
- the target company board must obtain competent independent advice as to whether the financial terms of the proposed action are fair and reasonable
- the Panel must be consulted about the date of the meeting; and
- the target company must send a circular to shareholders containing the information in Note 1
- so that where the Panel has agreed to dis-apply Rule 21.1(a) because the proposed action is conditional on the offer being withdrawn or lapsing, the target company board must publish an announcement containing the details in Note 1, and
- to make explicit the circumstances in which the Panel will normally dispense with the requirement to hold a general meeting.
The circular or announcement and any contracts entered into in connection with the proposed action will have to be published by the target company on a website in accordance with Rule 26.1(a).
Inducement Fees - a new Note 8 on Rule 21.1 allows a target company to enter into an inducement fee arrangement with a counterparty to a Rule 21.1 transaction without shareholder approval (as a contract otherwise than in the ordinary course of business), provided that the aggregate value of the inducement fee(s) that may be payable by the target company:
- in relation to the same asset(s) is no more than 1% of the value of the transaction (or, if there are two or more transactions in respect of the same asset(s), the transaction with the highest value), and
- in respect of all transactions to which Rule 21.1 applies is no more than 1% of the value of the target company calculated by reference to the price of the offeror’s offer (or, if there are two or more offerors, the first offer) at the time of the Rule 2.7 announcement.
Sales of all or substantially all of the target company’s assets in competition with an offer
Definition of quantified financial benefits statement - where, in competition with an existing offer or possible offer, the target company board announces that it has agreed terms on which it intends to sell all or substantially all of the company’s assets (excluding cash and cash equivalents) and intends to return to shareholders all or substantially all of the company’s cash balances:
- a statement by the target company quantifying the cash sum expected to be paid to shareholders (either as an aggregate amount, an amount for each share or a range) will be treated as a “quantified financial benefits statement” (new Note to the definition of quantified financial benefits statement), and
- certain requirements of Rule 28 will apply to that statement.
These changes have been made as the economic outcomes of an offer and an asset sale for target company shareholders may be comparable and shareholders are therefore likely to measure the two transactions against each other when making their decision whether to accept the offer.
Acquisitions of interests in shares in the offeree company by the asset purchaser - where the target company board announces that it has agreed terms on which it intends to sell all or substantially all of the company’s assets (excluding cash and cash equivalents) and intends to return to shareholders all or substantially all of the company’s cash balances, a purchaser or potential purchaser of some or all of the target company’s assets must not:
- acquire interests in shares of the target company during the offer period unless the target company board has made a statement quantifying the amount expected to be paid to shareholders for each share, and
- then only to the extent that the price paid does not exceed the stated amount or the bottom of any range (new Rule 4.7).
This restriction also applies to anyone who would be treated as acting in concert with the asset purchaser if the purchaser were an offeror. It applies regardless of whether the announcement by the target company (that it has agreed terms on which it intends to sell all or substantially all of the company’s assets) is made before or after the offer or possible offer has been announced.
Application of Rule 21.3 (Equality of information to competing offerors) - a new Note 6 has been added to this rule to clarify how it applies to a purchaser of the target company’s assets.
If the target company commences discussions with a potential asset purchaser for the sale of all or substantially all of the target’s assets (excluding cash and cash equivalents) during an offer or following the date on which the target company’s board has reason to believe that a bona fide offer might be imminent, information given by the target company to that potential asset purchaser must, on request, be given to an offeror or bona fide potential offeror.
This will usually only apply when there has been a public announcement of those discussions or if the offeror or bona fide potential offeror requesting information has been informed authoritatively that the target company and the potential asset purchaser(s) are having such discussions.
There is no need to provide equivalent information to an offeror or bona fide potential offeror if the target company was in discussions with a potential asset purchaser before an offer was made or before the date on which the board had reason to believe that a bona fide offer might be imminent (and information given to that potential asset purchaser after the discussions began with an offeror or potential offeror would also not need to be provided).
Setting aside a Rule 2.8 statement
A new Note 2 on Rule 2.8 requires a person making a “no intention to bid” statement to specify in the statement the circumstances in which it reserves the right to set the statement aside and those circumstances can only be the ones set out in that note. Under the old rules the restrictions in Rule 2.8 automatically ceased to apply in those circumstances. The Panel still has the discretion to set aside an unreserved Rule 2.8 statement.
The Executive has prepared two examples of Rule 2.8 statements which are set in Appendix D to RS2017/1: one for where a third party has not announced a firm intention to make an offer at the time of the Rule 2.8 statement and the other where it has.
The Code Committee notes in RS2017/1 that a formal sale process cannot be a reservation to a Rule 2.8 statement made during an offer period but, with the consent of the Panel, can be included as a reservation to a statement made outside an offer period. But, where a potential offeror has included the agreement of the target company board as a reservation, the potential offeror may be able to rely on that reservation to set aside the Rule 2.8 statement if it participates in a formal sale process with the agreement of the target company board.
The final paragraph of the old Note 2, which provided that the Panel would normally regard a switch (or an announcement of a firm intention to switch) by a third party offeror from a scheme of arrangement to a contractual offer as a material change of circumstances, has been deleted as the Code Committee considers that this should be a matter which should be determined by the Panel on a case by case basis.
Rule 20.4 has been amended to:
- remove the restrictions on the use of social media for the publication of information about a party to an offer so that the restrictions in that rule now only apply to the use of social media for the publication of information relating to the offer itself, and
- allow the publication through social media of videos approved by the Panel in accordance with Rule 20.3.
Note 1 on Rule 19.1 (Financial advisers’ responsibility for publication of information) has been amended to clarify that financial advisers are responsible for guiding their clients on the publication of information through social media in the same way as for information published by other means.
The requirement (in Rule 20.3(b)) for an offeror or target company to publish an announcement through a RIS noting when a video is published on a website has been deleted.
Dispensation from the mandatory offer requirement
The Notes on Dispensations from Rule 9 have been amended to reflect current practice that the Panel will consider granting a waiver from the obligation to make a mandatory offer that would otherwise arise under Rule 9 as a result of an issue of new securities if independent shareholders, holding shares carrying more than 50% of the voting rights capable of being cast on a “whitewash” resolution, confirm in writing that they approve the proposed waiver and would vote in favour of any resolution to that effect at a general meeting.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.