On October 27, 2020, the Takeover Panel (Panel) published PCP 2020/1: Conditions to offers and the offer timetable (the Consultation) setting out some of the most far-reaching proposed changes to the Takeover Code (Code) since 2011, in particular in relation to bids structured as contractual offers. As is common in the context of significant changes, the Panel’s proposals were subject to pre-consultation with stakeholders and the Consultation reflects some modifications that take into account comments received as part of this process.
In summary, the proposed changes include (amongst other things):
- Changes intended to apply consistent treatment to any official authorisation or regulatory clearance to which an offer is subject – i.e. different treatment would no longer be applied to the CMA and European Commission as compared to other regulatory authorities from which authorisation or clearance is required.
- Clarifying the rules on invocation of conditions.
- Amendments intended to simplify the offer timetable and to accommodate the potentially lengthy timeframes required to satisfy conditions relating to official authorisations and regulatory clearances.
- Removing the current distinction between an offer being unconditional as to acceptances and being wholly unconditional by introducing a single date for satisfaction of all conditions.
In this briefing we consider some key issues arising from the proposed changes.
How are the rules on invoking regulatory conditions changing?
In summary, the Panel is proposing to treat all conditions relating to official authorisations or regulatory clearances (Regulatory Conditions) consistently, unlike the current rules which differentiate between conditions relating to CMA/European Commission clearances and those relating to clearances from other regulators.
The key proposed changes in this context are:
- Removing the current requirement that offers must include a term that they will lapse if a Phase 2 CMA reference is made or Phase 2 European Commission proceedings are initiated before a certain point in the timetable (commonly referred to as the Rule 12 term).
- Extending the application of the “material significance” test for invoking conditions/pre-conditions to firm offers (referred to in this briefing as the Invocation Test and discussed further in “Are the rules on invoking other types of conditions changing?” below) to conditions and pre-conditions relating to Phase 2 CMA references/Phase 2 European Commission proceedings. Unlike conditions/pre-conditions relating to other official authorisations/regulatory clearances, these are not currently subject to the Invocation Test (and, importantly, can therefore currently be invoked by a bidder if (for example) a condition to clearance is required which is not of material significance).
- Changing the rules on when a bidder can make its offer subject to a pre-condition in relation to an official authorisation or regulatory clearance. Essentially this will be permitted where either the target company agrees or the authorisation/clearance is considered to be “material”.1
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 – this is set out in a revised draft of Practice Statement 5 (PS5). The revised version of PS5 also includes further additional factors relevant to invoking Regulatory Conditions that relate to there being no Phase 2 CMA reference (or equivalent reference or process).
In addition, the approach to freezing the offer timetable to deal with Regulatory Conditions is being significantly overhauled as discussed further in “How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?” below.
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.
As the Panel observes in the Consultation, and reflecting, among other things the international nature of listed businesses and the internationalisation of antitrust regulation, a divergent approach was no longer readily justifiable. We suspect the market will generally consider this to be a sensible, and anticipated, development.
The provision of guidance on additional factors the Panel will take into account when applying the Invocation Test to Regulatory Conditions (for example, what action the bidder would need to take to obtain and/or the consequences of completing the offer without obtaining authorisation/clearance) is also helpful.
Are the rules on invoking other types of conditions changing?
The Code has long provided that a bidder may only invoke a condition to its offer (or a pre-condition to a firm offer) if the “material significance” requirement in Rule 13.5(a) is satisfied (the Invocation Test). There are certain conditions that are not subject to the Invocation Test (for example, the acceptance condition) and it is proposed that the Code should include a list of these. The revised rules would also require bidders to identify in their firm offer announcement and offer document those conditions (and pre-conditions) not subject to the Invocation Test.
While the Invocation Test is not changing, the Consultation does include further discussion and clarification of the factors that the Panel will take into account when determining whether it has been met and associated changes are also proposed in relation to the guidance contained in Practice Statement 5 (PS5).
The process for invoking acceptance conditions will also change (see “What rules will apply to invoking the acceptance condition?” below).
Additional guidance on the application of the Invocation Test is likely to be well received by the market. While most practitioners understood the significance of “foreseeability” in the application of the test (and that a bidder should not be able to rely on information it knew, or ought to have known, at the time of announcing an offer), it is helpful this will now be expressly set out in PS5. Similarly, the revised draft PS5 underlines that the actions a bidder may have taken since the occurrence of the event or circumstances giving rise to the attempt to invoke the condition can be important and will be a relevant consideration for the Panel in determining whether to allow an offer to lapse.
How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?2
The most significant changes in the Consultation relate to the timetable for contractual offers – they are primarily designed to better accommodate protracted regulatory clearances and, as with the revised rules on invoking Regulatory Conditions, to create a consistent approach that does not differentiate between the CMA/European Commission and other regulators.
New approach to the acceptance condition
Currently, a bidder has until the 60th day following the posting of its offer document (Day 60) to declare its offer unconditional as to acceptances. It then has 21 days following the offer becoming unconditional as to acceptances to declare its offer wholly unconditional (commonly referred to as Day 81).
Under the revised rules, this split approach would fall away and instead the Code would: (a) require all conditions to be satisfied by Day 60; and (b) not permit the acceptance condition to be declared satisfied until any other conditions to the offer have been satisfied or waived (essentially meaning that the acceptance condition would become the last condition to be satisfied).3 As such, the concept of an offer becoming unconditional as to acceptances (as opposed to being wholly unconditional) will essentially cease to exist.
Once an offer has been declared wholly unconditional, it must be kept open for a period of not less than 14 days, and a bidder must give at least 14 days’ notice if it intends to close an offer.
“Freezing” the timetable
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 (Day 39), 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 prior to Day 39, 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.4
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 bring forward its Unconditional Date by using an Acceleration Statement (see further below). Where the timetable has been frozen there will also be no obligation for a bidder to extend its long-stop date (see “How will long stop dates work?” below) to any later long-stop date set by a competing bidder.
Accelerating the timetable
Bidders would be allowed to specify a date earlier than Day 60 by which all of the conditions to their offer must be satisfied (Unconditional Date) by making a statement to this effect (an Acceleration Statement) either in their initial offer document5 or during the course of the offer. The Unconditional Date specified would need to be at least 14 days from the date of the Acceleration Statement. It is also worth noting that offers would still be required to be open for an initial period of at least 21 days, so it would follow that a bidder would not be permitted to specify an Unconditional Date earlier than the 21st day after posting of the offer document.
In order to make an Acceleration Statement, a bidder would be required to waive any outstanding Regulatory Conditions (whether specific or general). An Acceleration Statement would also result in: (a) the requirement for the target company to announce any material new information by Day 39 falling away; and (b) the requirement for publicly identified potential competing bidders to clarify their intentions by Day 53 being disapplied.
The change in approach to freezing is a natural consequence of the overall timetable changes and the requirement that all conditions need to be satisfied by Day 60. The changes would result in schemes (which have a more flexible timetable that is not so closely dictated by the Code) and contractual offers being put on a more equal footing as potential structures for deals likely to involve protracted regulatory clearances. This can be seen as a positive development in that it gives bidders more flexibility in their choice of structure compared to the current rules which can force a bidder that wants to use a contractual offer down the pre-conditional route.
In terms of the test for whether a clearance is sufficiently “material” to freeze the timetable, we are not surprised at the formulation of the test proposed or that the Panel is clear it will not (at the point the timetable is frozen) make a final determination as to whether the relevant Regulatory Condition can be invoked. This is consistent with the Panel’s general approach that it will not provide guidance on whether a condition can be invoked unless and until the bidder seeks to invoke it, in which case it will make a determination at that point in light of all relevant facts and circumstances.
An Acceleration Statement essentially replaces the concept of a “no extension” statement in the current rules and gives bidders the ability to force the offer timetable if they choose to do so. As with no extension statements, there will be situations where it may be an attractive option in order to push target shareholders to put in their acceptances prior to Day 60 – for example, where the bidder is concerned a competitive situation may arise. However, there are potential downsides to this approach – namely the requirement to waive any outstanding Regulatory Conditions at the time the statement is made and the fact that, if the bidder does not have sufficient acceptances on the new Unconditional Date, its offer must lapse. As noted below another mechanism for bidders to encourage acceptances could be to make a statement about their intention to waive outstanding conditions if the acceptance threshold is met on a specified future date (see “What rules will apply to invoking the acceptance condition: Our thoughts?”).
What rules will apply to invoking the acceptance condition?6
Currently offers will specify a closing date (typically the first closing date is 21 days after posting of the offer document). If the acceptance condition is not met on that closing date, or any subsequent closing date to which the offer is extended, the bidder will have the choice of either lapsing or extending its offer.
Under the proposed new rules, offers will no longer have a series of closing dates in this way. Instead, a bidder that wishes to invoke the acceptance condition prior to Day 60/the Unconditional Date will need to publish an acceptance condition invocation notice (Notice) to the effect that it intends to lapse its offer if sufficient acceptances are not been received by a specified date.
The Notice would need to be published at least 14 days prior to the date on which the bidder intended to lapse the offer and once published would be irrevocable. It would also need to specify the level of acceptances that must be received in order for the offer not to lapse – importantly, the bidder would not be able to waive this down to a lower level subsequently. So, for example, if the Notice specified an acceptance threshold of 90 per cent the bidder could not then choose to waive this down to a lower level – if the 90 per cent threshold was not satisfied on the date specified in the Notice then the offer would be required to lapse.
If, on the date specified in the Notice, sufficient acceptances have been received to satisfy the acceptance condition the offer would not lapse, however nor would the acceptance condition be treated as satisfied unless all other conditions had been satisfied or waived – this is because under the proposed new rules the acceptance condition is the last condition to be satisfied (see “How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?: New approach to the acceptance condition” above).
Where a bidder has not published a Notice it will be free to choose to waive down its acceptance condition in the normal way during the course of the offer or on Day 60 (or, if it has made an Acceleration Statement, on the Unconditional Date) although again the acceptance condition can only be declared satisfied once any other outstanding conditions have been satisfied or waived.
New rules will also apply to announcement of acceptance levels – these include requirements for periodic announcements and also announcements where acceptances move up or down through certain thresholds (including the acceptance threshold).
As noted in the Consultation, under the current rules a bidder is able (without giving prior notice to the market) to lapse its offer on a closing date for failure of the acceptance condition. The Panel’s concern that this is inconsistent with General Principle 2 (which requires that target shareholders must have sufficient time and information to reach a properly informed decision) is not surprising – in particular where (as noted in the Consultation) the true reason for the bidder invoking its acceptance condition at that point is a belief that it might not be able to rely on other conditions to its offer.
The process of requiring a bidder to serve a Notice where it wishes to invoke the acceptance condition deals with this concern and ensures that shareholders and the market are given a period of time to digest this information and decide how to act.
That said, it is not surprising that a number of respondents to the pre-consultation suggested that removal of closing dates from offer timetables could have the effect of reducing the incentive for target shareholders to accept prior to the Unconditional Date (in practice, even on non-competitive deals, most acceptances currently tend to be received only on or shortly before the closing date). In this context, it is helpful that the Panel has confirmed that a bidder wishing to create momentum would be permitted to make a (binding) announcement to the effect that it would, if sufficient acceptances had been received on a specified future date, waive any outstanding conditions and declare its offer wholly unconditional. And, as noted above, a bidder would also have the option of using an Acceleration Statement to force the timetable in a similar way to using a “no extension” statement under the current rules (see “How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?: Our thoughts”).
When will shareholders be permitted to withdraw their acceptances?7
Currently shareholders are not permitted to withdraw their acceptances once an offer has been declared unconditional as to acceptances. Even where an offer has not been declared unconditional as to acceptances, shareholders are not currently permitted to exercise withdrawal rights until the date which is 21 days after the first closing date (commonly referred to as Day 42).
Under the proposed new rules, shareholders would be able to withdraw their acceptances at any point during the offer period and would only be locked in once the offer is declared wholly unconditional (see also ““How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?: New approach to the acceptance condition” above).
It would still be permitted to include, in irrevocable undertakings, contractual commitments from shareholders not to exercise their withdrawal rights.
The changes to the rights of withdrawal are, to a degree, inevitable in light of the major changes being made to the overall timetable. Allowing withdrawal rights throughout the offer period is consistent with the Panel’s general approach of allowing shareholders rights of withdrawal where the overall timetable might be unclear. However, it does mean that the level of acceptances may fluctuate throughout the course of the offer – hence the new requirements around announcement of acceptance levels, including when these move through the acceptance threshold in either direction (see further “What rules will apply to invoking the acceptance condition?” above).
Will pre-conditional offers still be permitted?
Yes – notwithstanding the additional flexibility around freezing the timetable, bidders will still be permitted to deal with material Regulatory Clearances by announcing a pre-conditional offer.
People may ask whether we will continue to see pre-conditional offer structures given the additional flexibility provided by the new rules on freezing the offer timetable. However, there may still be reasons why a bidder would prefer a pre-conditional structure to an offer with a timetable freeze – for example to defer the time and expense involved in producing the full offer documentation until it has greater clarity as to whether the relevant Regulatory Conditions are likely to be satisfied or to avoid a situation where (if a prospectus is required) this has to be kept live for an extended period of time. The confirmation that pre-conditional structures will still be permitted is therefore helpful.
How will long stop dates work?
Contractual offers are not currently required to include a long-stop date. However, given the changes discussed above (and in order to avoid open-ended offer timetables) under the revised rules bidders will be required to specify a “long-stop date” by which (in the event of the timetable being frozen) the acceptance condition would need to be satisfied and any Regulatory Conditions would need to be satisfied or waived. On a recommended deal the bidder and target company would be free to agree the long-stop date between themselves. In the case of a unilateral offer, the Panel would need to be consulted and would expect the bidder to set the long-stop date no earlier than the date by which it reasonably expected the Regulatory Condition relating to the slowest material clearance to be satisfied.
If, on the long-stop date, the acceptance condition was not satisfied, a bidder would be required to either agree an extension to the long-stop date with the target or lapse its offer.
If, on the long-stop date, the acceptance condition was satisfied, the bidder would only be able to invoke a Regulatory Condition to lapse its offer with the Panel’s consent.
If the Panel did not consider the relevant clearance/authorisation to be “material”, it would require the bidder to waive the relevant Regulatory Condition and declare its offer wholly unconditional.9 The test for determining materiality for these purposes would be the same as that for determining whether an authorisation/clearance is “material” in the context of freezing the offer timetable (see “How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?: Freezing the timetable” above).
If the Panel considered that the clearance/authorisation was “material”, it would then consider what form of remedial action would need to be taken in order for it to be obtained (e.g. has the relevant authority indicated the conditions to which granting of clearance would be subject). If this was not sufficiently clear, the Panel would normally consent to the bid lapsing. However, if it the action required to be taken was sufficiently clear the Panel would normally only allow the offer to lapse if it considered the taking of the relevant action would satisfy the Invocation Test.
Schemes of arrangement
The Panel is not changing the current position which allows the bidder to lapse its offer automatically (i.e. without having to satisfy the Invocation Test) if the scheme has not become effective by the long-stop date.
However the revised rules include new provisions requiring the bidder to take certain procedural steps in connection with the Court sanction hearing.10 This is intended to avoid a bidder being able to prevent the scheme from being sanctioned by the Court in circumstances where it would not be permitted to invoke a condition to the offer.
The requirement for a longstop date on contractual offers is understandable and the proposals around the circumstances in which a bidder may be permitted to lapse on a long stop date reflect how we anticipate the Panel would approach that situation. Given that the new approach to freezing the offer timetable and the removal of the Rule 12 term could give rise to potentially protracted offer periods (during which “certain funds” financing would be required), and associated exposure to market conditions and changes in the target’s business, the ability to set a long-stop date will allow bidders to maintain a degree of control over the timetable and, as such, is likely to be welcomed.
In terms of the proposed provisions to require bidders to give certain confirmations to the Court on schemes of arrangement, this is not particularly controversial given it is existing market practice for target companies to require provisions to this effect be included in co-operation agreements.
Revised approach to ‘conditional’ mandatory offers?
Mandatory offers made under Rule 9 must be conditional only on the bidder acquiring over 50 per cent of the target company’s voting rights. Bidders are not permitted to acquire shares that would trigger a mandatory offer (a Triggering Acquisition) if the making or implementation of that offer would or might be dependent on bidder shareholder approval or any other conditions or consents.
The Code currently provides that the Panel will normally only consider a dispensation in exceptional circumstances such as when any official authorisation or regulatory clearance is required before the offer document is published or where the cash consideration under the offer is to be provided (wholly or in part) by an issue of new securities.
Under the proposals in the Consultation, the Code would be amended such that a dispensation permitting a Triggering Acquisition would only be available in connection with a “material” official authorisation/regulatory clearance (with the test for determining materiality being the same as that for determining whether an authorisation/clearance is “material” in the context of freezing the offer timetable – see “How is the offer timetable changing and when can it be “suspended” to accommodate Regulatory Conditions?: Freezing the timetable” above). In addition, a new requirement would be imposed that the Triggering Acquisition must be subject (only) to a condition in identical terms to the condition/pre-condition to the mandatory offer and that the invocation of that condition would be subject to the Invocation Test.
The reference to a dispensation potentially being granted where the consideration is to be financed by an issue of new securities is being deleted.
Clarity in this area is helpful and the revised approach will help to eliminate the uncertainty that could arise in the past where a mandatory offer had been triggered, and the market would assume an offer would be forthcoming, but it was not clear whether an offer would actually be made. In addition, the requirement for share purchase agreements in relation to a Triggering Acquisition to be conditional (such that it can only close if the relevant offer condition/pre-condition is satisfied) avoids issues that could otherwise potentially arise around subsequent divestments of shares.
When will any revisions will come into effect?
The Consultation closes on January 15, 2021 and the Panel has indicated that it intends to publish a response statement setting out the final amendments to the Code in Spring 2021.
It anticipates that, in order to give practitioners and others time to prepare, the amendments to the Code would come into effect approximately three months after publication of the response statement in relation to firm offers announced after that time (the Consultation also notes that the Panel would welcome respondents’ views on this issue).
Therefore the earliest any changes are likely to come into effect is Summer 2021.
As noted, 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. In that context, allowing a protracted period for consultation and implementation seems advisable as there will be a fair degree of market education required before the revised rules become effective.