MAC conditions in public takeovers - the death knell?

United Kingdom
It is common practice that a UK regulated takeover offer will be made subject to various conditions of a commercial nature, including there being no material adverse change in the business, financial position, profits or possibly prospects of the target group since a specified date, usually that of the last published accounts (a so called "mac" condition).

As a matter of contract law, if a mac condition is not satisfied the offeror can lapse the bid. However the written decision by the Panel on Takeovers and Mergers (the "Panel") in November 2001 on the attempt, following the events of September 11, by WPP Group PLC ("WPP") (the international communications group) to invoke a mac condition and pull out of its offer for Tempus Group plc ("Tempus") (the media buying agency) has shown how difficult it is for an offeror to rely on a mac condition (Panel Statement 2001/15). The Panel said that to meet the material significance test "requires an adverse change of very considerable significance striking at the very heart of the purpose of the transaction in question, analogous ...to something that would justify frustration of a legal contract."

Although the decision met with widespread approval from City institutions, there is a concern whether the decision could be interpreted as the Panel saying that there are almost no circumstances in which a bidder can use a mac condition to lapse an offer. The decision also does not make clear whether the Panel's reasoning only applies to a mac condition or offer conditions generally (with the exception of the acceptance and anti-trust conditions). Accordingly it would be sensible for offerors to consider what they can do to give them as much flexibility as possible to withdraw from a UK takeover offer.

The Tempus case

When in August 2001 WPP announced that it was making an offer (the "Offer") for Tempus, in competition with an existing offer from Havas Advertising, the events of 11 September 2001 were unimaginable. Havas Advertising lapsed its offer for Tempus on 24 September 2001 as a result of insufficient acceptances. By 2 October 2001 the Offer had become unconditional as to acceptances and the terrorist attacks in the USA had seemingly altered the political and economic landscape. It was unusual that the 90% acceptance level should have been achieved by WPP on the first closing date. This was probably the result of an exceptional combination of events, namely: the terrorist attacks, the uncertain economic outlook, the perception that the advertising industry in particular would be badly affected by events, the Havas Advertising offer being withdrawn and the subsequent recommendation of the Offer by the Tempus board which gave Tempus shareholders sufficient time to accept the Offer. A market purchase by WPP of 3% of the Tempus share capital on 17 September 2001 did not assist WPP in this regard.

By 10 October 2001, WPP’s belief that there had been a material adverse change in Tempus' prospects led it to seek the consent of the Panel to withdraw the Offer by the invocation of one of the conditions of the Offer, namely that there had been a material adverse change or deterioration in the business, assets, financial or trading position or profits or prospects of any member of the wider Tempus Group. Tempus disputed such claim. The matter was the subject of an appeal to the Panel.

The City Code on Takeovers & Mergers (the "Code" provides that an offeror should not invoke any condition so as to cause its offer to lapse unless the circumstances which give rise to the right to invoke the condition are of material significance to the offeror in the context of the offer (the "Code"). This test does not apply to the acceptance condition and the typical UK and EC antitrust conditions. There is little or no precedent in the UK of public takeover offers lapsing on a mac condition.

The Panel's decision

The Panel refused consent for WPP to invoke the mac condition. The Panel said that to meet the material significance test "requires an adverse change of very considerable significance striking at the heart of the purpose of the transaction in question, analogous … to something that would justify frustration of a legal contract".

Furthermore, the effect of adverse change must be long lasting. Any temporary effect on profitability was not deemed adequate to satisfy the "material significance test". This decision met with widespread approval from the City institutions but the concern is whether the decision swung too far against the bidder as it could be interpreted as saying that there are almost no circumstances in which a bidder can use a mac condition to lapse an offer.

Although the Panel decision does not make it clear whether its reasoning only applies to a mac condition concerned with general economic conditions or to offer conditions generally, it would be sensible for offerors to consider what they can do to give them as much flexibility as possible to withdraw from a UK takeover offer. Most frequently an offeror will invoke the acceptance condition to get out of an offer, regardless of whether other reasons are driving the decision not to proceed. But as WPP found out, that is not always possible.

Alternatives to MAC

Alternatives include:

  • setting the acceptance condition higher than 90% - market reaction may prevent this and the views of the Panel would need to be sought;
  • getting the target to agree at the outset what circumstances will entitle an offeror to lapse a bid. These arrangements would probably have to be disclosed. However, there is no guarantee the Panel would allow the offer to lapse unless its materiality thresholds are met;
  • offerors being more specific at the time of announcement about what is important - this may make it easier to demonstrate that any specifically mentioned issues are of material significance to the offeror in the context of the offer;
  • drafting more specific conditions and clearly defining what the offeror considers to be material. It may be advisable in such circumstances to clear the condition in advance with the Panel although it may still be necessary to persuade the Panel that the bid can lapse if the relevant circumstances actually arise;
  • seeking to ensure, in a recommended deal, that the target is obliged to provide the offeror with the necessary information to enable it to verify whether a condition is invokable (this is not common UK practice);
  • make the offer conditional on a vote of offeror shareholders (whether or not such a vote is strictly required). A vote held towards the end of the offer timetable would enable the offeror board to look again at the deal and tailor any recommendation accordingly. The market may react unfavourably to such “artificial” conditions and whilst such conditions should work as a matter of contract to enable an offer to lapse the Panel may still seek to invoke their material significant test.
A copy of Panel Statement 2001/15 is available on the Panel's website (www.thetakeoverpanel.org.uk).

For further information, please contact:

Nick Callister Radcliffe, corporate partner

Phone: +44 (0)20 7367 2394

Email: nick.callisterradcliffe@cms-cmck.com