On October 27, 2020, the UK Takeover Panel (Panel) published a consultation paper (the Consultation) setting out a number of far-reaching proposed changes to the UK Takeover Code (Code). The consultation period ends in January 2021 with the new rules expected to be in place by the summer of next year.
In this briefing we consider the key proposed changes in relation to use and invocation of conditions relating to official authorisations and regulatory clearances (Regulatory Conditions). These are, in summary, intended to introduce a more consistent approach (by ending the current difference in treatment of clearances and authorisations from UK/EU regulators compared to those from regulators in other jurisdictions) and to ensure that the offer timetable is more able to accommodate the potentially lengthy timeframes that may be required to satisfy Regulatory Conditions.
For a more detailed briefing on other changes proposed in the Consultation, please see our separate briefing here.
How are the rules on invoking Regulatory Conditions changing?
Under the revised rules, the Panel will apply the same test when considering whether to permit a bidder to invoke a condition or pre-condition relating to clearance from the UK Competition and Markets Authority (CMA) or European Commission as it currently applies to other conditions and pre-conditions – namely that the bidder will only be permitted to lapse its offer if the circumstances which give rise to the right to invoke are “of material significance” to the bidder in the context of the offer (the Invocation Test).
This is a significant shift in practice, as conditions and pre-conditions relating to Phase 2 CMA references/Phase 2 European Commission proceedings are not currently subject to the Invocation Test which means that at present they can be invoked by a bidder even in circumstances where a condition to clearance is required which is not of material significance.
Guidance is proposed on additional factors the Panel will take into account when considering whether the Invocation Test has been met in the context of Regulatory Conditions as well as further factors relevant to invoking Regulatory Conditions that relate to there being no Phase 2 CMA reference (or equivalent reference or process).
In related changes, the current requirement for offers to lapse in the event of Phase 2 UK/EU proceedings will be removed.
When can the offer timetable be suspended to accommodate Regulatory Conditions?
Under the current rules, if there has not been a decision by the CMA or European Commission on whether to clear or refer a transaction to Phase 2 by the 39th day following the posting of the offer document, either the bidder or target company can request that the Panel suspend (or “freeze”) the offer timetable.
Under the revised rules, it would still be possible for the timetable to be “frozen” to accommodate Regulatory Conditions that have not been satisfied or waived, however this would apply to all Regulatory Conditions – i.e. conditions relating to CMA or European Commission clearance would be treated in the same way as conditions relating to clearance from any other regulatory authority.
The Panel would be able to freeze the timetable at the joint request of the bidder and target company or, if at least one outstanding Regulatory Condition relates to a “material” authorisation or clearance, at the request of either party.
In summary, the Panel would consider an authorisation or clearance to be “material” for the purposes of freezing the timetable if failure to obtain it could potentially give rise to circumstances satisfying the Invocation Test.
Importantly, the fact that an authorisation or clearance has been determined to be “material” for the purposes of freezing the timetable would not necessarily mean the bidder would be able to invoke the relevant Regulatory Condition to lapse its offer if clearance/authorisation was not subsequently forthcoming. The Panel would assess (on the basis of the up-to-date facts at the time the bidder sought to invoke the condition) whether the Invocation Test had been met.
Where there are two or more competing bidders and the timetable is frozen following a request by one of the bidders or by the target company, the timetable would normally be suspended for each of the bidders – it would then normally be resumed for all bidders once the last bidder’s suspension had ended. However, the Consultation notes that, where the timetable is frozen in a competitive situation, a bidder that wants to complete its offer while the freeze is ongoing will still be permitted to force the timetable of its own bid by bringing forward the final date by which it must be unconditional – although to do this it would be required to waive any outstanding Regulatory Conditions to its offer.
More generally bidders will be able to maintain a degree of control over the timetable as a result of the proposed new requirement to specify a “long-stop date” by which (in the event of the timetable being frozen) the acceptance condition to the offer would need to be satisfied and any Regulatory Conditions would need to be satisfied or waived.
What impact would a suspension have on other elements of the offer timetable?
Under the revised rules, all conditions to an offer would need to be satisfied or waived by the 60th day after posting of the offer document (Day 60), although the bidder would be able to bring this date forward by means of an “acceleration notice”. Bidders will continue to be required to post their offer document to target company shareholders within 28 days of making their firm offer announcement (or, where the firm offer announcement includes pre-conditions, within 28 days of those pre-conditions being satisfied).
Where the timetable is frozen to accommodate satisfaction of Regulatory Conditions, Day 60 will be extended accordingly with the timetable being treated as re-starting on “Day 32” once the freeze ends. Where Day 60 has been extended, certain other associated dates in the offer timetable would move automatically to reflect the revised Day 60 – namely:
- “Day 39” – being the last date on which the target company can announce material new information.
- “Day 46” – being the last date on which the bidder can revise its offer.
For a more detailed discussion of the proposed changes to the offer timetable (including timing of satisfaction of the acceptance conditions), please see our separate briefing here.
Will pre-conditional offers still be permitted?
Yes – notwithstanding the additional flexibility around freezing the timetable, bidders will still be permitted to deal with Regulatory Clearances by announcing a pre-conditional offer. The rules on when a bidder will be able to include a pre-condition of this nature are also being clarified - essentially this will be permitted where either the target company agrees or the authorisation/clearance is considered to be “material”.
The distinction between the approach of the Code to the UK/EU regime and to the regimes of other significant international regulators has been a source of discussion in the market for some time, and the introduction of a more consistent approach had been signposted by the Panel as under consideration. Brexit has also meant that treating clearances from the European Commission differently from other regulators would be anomalous. The change in approach to freezing is a natural consequence of other overall timetable changes proposed in the Consultation. It would also result in contractual offers being put on a more equal footing with schemes of arrangement in terms of accommodating protracted regulatory clearance timetables, providing additional flexibility to bidders in their choice of structure.
The amendments proposed in the Consultation constitute the most wide-ranging amendments to the Code since 2011 and will have a significant impact on the takeover process and documentation – in particular for contractual offers.