Changes to the Takeover Code on 'market - related issues'

United Kingdom

Last summer the Panel published a consultation paper on 'Market-related issues' (PCP 2004/3), proposing various changes to the Code and SARs in relation to (amongst other things) exempt market makers (now known as principal traders) and fund managers; when parties are deemed to be acting in concert; irrevocable undertakings and letters of intent; disclosures under Rule 8; and stock borrowing and lending. On 16 March the Takeover Panel published its response (RS 2004/3), detailing the changes it has decided to make. These will take effect on 25 April.

In our LawNow article published on 1 July last year we summarised the key proposals. Most of these have been adopted by the Panel in their original form; but most of those relating to Rule 8 disclosures and stock borrowing and lending have been put aside for further consideration. In addition, the Panel has decided:

  1. to make slightly less sweeping the presumption that a company and its advisers are acting in concert, by splitting 'connected advisers' into different categories, and amending the Code so that some rules apply only to advisers in a particular category;
  2. to be more lenient in determining when consortium investors are deemed to be acting in concert with each other, by raising the percentage interest in the bid vehicle that is considered by the Panel to be 'material';
  3. that even if pension fund trustees retain discretion to over-ride decisions taken by an independent third party fund manager, the Panel may accept that the trustees are not acting in concert with their sponsoring company.

The changes largely codify the approach that the Panel has been taking to date, and will primarily be of interest to banks and financial groups, rather than bidder or target companies themselves.

The main changes to the Code are described below. Those that were not proposed in last year's consultation paper are highlighted in italics.

Principal traders and fund managers

  • No major changes are to be made to the current regime, under which principal traders and fund managers that can demonstrate independence from the corporate finance and broking operations of their group (where the latter are advising the bidder or target) are exempted from the presumption that they are acting in concert with the bidder or target. Exempt principal traders and fund managers are still "connected" to the bidder or target (as the case may be) and must comply with the restrictions on dealings in Rule 38.
  • The Code is updated to refer to principal traders, instead of market makers; to set out the consequences of being granted exempt status; and to specify when an overseas fund manager can apply for "special exempt manager" status, and when a trading entity can apply for ad hoc exempt principal trader status.
  • Rules 4.2 and 38 are amended to make clear that during an offer period a bidder and persons acting in concert with it must not use SETS or another anonymous order book system, or any other means, to purchase target shares from an exempt principal trader connected with the bidder. The new Rule will effectively require a purchaser to be able to demonstrate that it knew the identity of the seller and that the latter was not an exempt principal trader connected with the bidder.
  • Rule 38.3 is amended so that, as well as not assenting target shares to the offer before it is unconditional as to acceptances, an exempt principal trader connected with a bidder must not purchase target shares that have been assented by third parties (eg. in order to ensure that acceptances are not withdrawn). 
  • Certain Panel views about when a connected non-exempt principal trader or fund manager can deal in target shares are codified.
  • Under a new note 4(a) on Rule 7.2 the Panel may allow a discretionary fund manager connected to either the bidder or target to purchase target shares, in order to reduce any short position or to unwind a stock borrowing transaction, without the usual consequences of such purchases applying (eg. those under Rules 5, 6, 9 and 11). Such purchases will have to be made in accordance with a timetable agreed with the Panel.

Disclosure requirements and amendments to Rule 8 (Disclosure of dealings during the offer period)

  • So that a complete picture of dealings is disclosed, the Panel originally proposed to amend Rule 8 and Note 7 on Rule 8 so that a shareholder holding 1% or more of a physical class of relevant securities (in bidder or target) would be required to disclose all further dealings in both: (1) any class of relevant securities issued by the company concerned; and (2) all options in respect of, and derivatives referenced to, any class of relevant securities issued by that company. It also proposed to require disclosure of side agreements which allow a party to control voting rights in underlying shares, or actually to acquire them. However, the Panel has decided to consider these issues further in the light of responses to its consultation on dealings in derivatives and options (PCP 2005/1), which closed on 28 February.
  • A new note 5(a) on Rule 8 clarifies that where two or more separate but related dealings are executed at or around the same time ("linked transactions"), details of both must be disclosed. For example, where a party to a contract for differences (CFD) referenced to target shares actually acquires some of those shares in the market in order to hedge its exposure, if the party is subject to the disclosure requirements of Rule 8 (ie. because it is an associate of the bidder or target, or holds more than 1% of the target's shares) it will have to disclose both the acquisition of shares and the entry into the CFD.
  • A new Note 5(a) on Rule 8 requires a disclosure to be made if a bidder or its concert party deals in target company securities on a cum dividend basis at a time when the prevailing basis for the market quotation is ex dividend (or vice versa). The new Rule is designed to ensure that the market is not misled into believing that the bidder will (for example) have to increase its offer price.
  • Shares acquired by subscription, as well as purchase, will now have to be disclosed under Rule 8. Any right to subscribe for target shares will also have to be detailed in a Rule 2.5 announcement.
  • A futures contract or covered warrant which does not provide for the underlying shares to be delivered is treated as a derivative for Rule 8 purposes. But where exercise does include the possibility of delivery, the contract or covered warrant is treated as an option, and therefore will constitute "rights over shares" for the purposes of the Code and SARs.

Acting in concert and associate status

  • In deciding whether a party should be deemed to be acting in concert with another, the Panel will look at the particular facts and will apply the principles in Panel Statement 2004/12. (In that instance the Panel ruled that, on the particular facts, UBS was not acting in concert with British Land on a possible offer for Canary Wharf, and therefore UBS' market-makers were not connected to British Land for Rule 38 purposes.)
  • If an adviser 'stands down' (now, "is unable to act") because of a conflict of interest, this rebuts the presumption that the adviser is acting in concert with its client. But where the adviser is unable to act for any other reason, that is not of itself sufficient to rebut the presumption.
  • Generally, an adviser is presumed to be acting in concert with a bidder or target even if it is not acting in connection with the offer in question. But in the light of responses to the consultation, which pointed out that companies now often shop around for corporate finance advice on a deal-by-deal basis, rather than regarding themselves as wedded to a particular investment bank, various amendments are made to the definitions section of the Code to add a new definition of "connected advisers", who will normally comprise:

(a)      organisations which are advising the bidder or target in relation to the offer, and corporate brokers to the bidder or target (other than a broker who is unable to act because of a conflict of interest);

(b)      organisations which are advising persons who are acting in concert with the bidder or with the directors of the target in relation to the offer or a connected arrangement; and

(c)      organisations which are advising companies which are owned or controlled by the bidder or target.

While some provisions of the Code are to apply to all categories of connected advisers, others will be applicable only to certain categories. As a result, banks and other financial groups should be able more often to persuade the Panel that they (or certain of their operations) should not be treated as acting in concert with a bidder or target.

  • Where a consortium investor takes 10% or less interest in the bid vehicle, Note 5 on the definition of acting in concert is to make clear that the Panel will normally waive the presumption that fund managers and principal traders connected to the investor are acting in concert with the bidder (principally for the purposes of Rule 7.2) if the Panel is satisfied that the fund manager or principal trader is acting independently from the investor. If the interest is between 10 and 50%, a waiver may be given, depending on whether other factors indicate that the investment is material. These factors include whether the bid is hostile or contested; the adequacy of Chinese walls between the equity finance operation and the other operations; the total size of the investor's commitment, and what percentage of that commitment is represented by its own funds (rather than funds it controls); and what other role(s) any other parts of the investor's organisation have in the transaction. (Originally, the Panel proposed to set the basic threshold for materiality at 5%, and the 'discretion' thresholds at 10-20%.)
  • Note 6 on the definition of acting in concert is to state expressly that the presumption that a company is acting in concert with its pension fund (and the pension funds of other companies in the group) can be rebutted if the fund is managed under an agreement giving an independent third party absolute discretion on dealing, voting and offer acceptance. But the presumption can still be rebutted where the discretion is not absolute, as long as the pension fund trustees do not in practice exercise their powers to over-ride the third party's discretion.
  • An employee benefit trust is presumed to be an associate of the company which established it.

Irrevocable commitments and letters of intent

For the purposes of disclosure and putting documents on display, letters of intent (to accept or reject an offer, or to vote in a particular way) (LOIs) are to be treated as equivalent to irrevocable undertakings. But the new rules do not apply to statements of intention that are unsolicited. The Panel has acknowledged that the new disclosure requirements may make shareholders more reluctant to sign LOIs.

When an irrevocable or LOI is obtained during an offer period, its key terms and price will have to be disclosed by the following day. If an offer period is started by a Rule 2.4 announcement that talks are taking place, or a party is considering making an offer, the disclosure obligation will apply to any irrevocables signed up after that announcement is made. Provided that, as is normal, irrevocables are only signed up the night before the bidder's Rule 2.5 announcement of a firm intention to make an offer, disclosure can be made in that announcement. Similarly if, after posting its defence document, a target obtains an irrevocable or LOI not to accept an offer, this will be disclosable and the document must be put on display. If an irrevocable is breached, or the giver of an LOI changes its mind, or realises that it will not be able to comply, an announcement will also have to be made.

If a shareholder privately communicates to the bidder or target his intention to accept the offer, or to vote in favour of a scheme of arrangement etc, no announcement is required from the bidder or target. But under normal Code principles a shareholder who wishes to publicise 'on the record' his intention to accept (etc) should do so through an RIS announcement, rather than through the media.

  • Rule 4.4(iii) is clarified so that it does not prohibit advisers (including stockbrokers) to a target company from obtaining irrevocable commitments or letters of intent not to accept an offer.
  • Under Rule 24 an offer document must now include details of the shareholdings in the target company (and, if appropriate, the bidder) in respect of which an irrevocable or letter of intent has been given, rather than - as previously - all the holdings of such givers. Rule 25 (Target board circulars) is similarly amended.
  • In an announcement of acceptance levels under Rule 17, the bidder must now make clear the extent to which the level of acceptances includes shares which are the subject of an irrevocable or letter of intent.
  • A bidder or target may publicly state the level of support that it has received only to the extent that the shareholders concerned have confirmed their support in writing and the confirmation has been shown to the Panel (amended Note 2 on Rule 19.3).

Stock borrowing and lending

  • In its consultation paper, the Panel proposed not to treat as a "dealing" any stock borrowing or lending on normal market terms by a person who is not the bidder, target or an associate of either. Various other proposals included treating a lender of stock as controlling it even though title to the stock is normally transferred to the borrower (against an obligation to return it or equivalent stock at some point in the future). However, acknowledging that stock lending is "a complex area" on which players in the market have divergent views, the Panel has decided for the time being not to amend the Code. It understands that various market participants are currently reviewing their stock lending and borrowing policies, and intends to re-visit the proposals once these reviews have been completed.
  • During an offer period the bidder, target and their associates must not without the consent of the Panel enter into or unwind a stock borrowing or lending transaction in relation to "relevant securities" (defined in Note 2 on Rule 8 as, essentially, shares in the target or bidder shares that are offered as consideration).
  • The Code is now to reflect the Panel's 'prudent' approach to stock lending and borrowing: ie. a bidder cannot count towards the Rule 10 acceptance condition any stock that it has borrowed (because it has an obligation to return it) or lent (because there is a risk that it may not get the stock back). Conversely, borrowed and lent stock (which has not been on-lent or sold) does count towards the Rule 9 threshold. A party must consult with the Panel before borrowing or lending stock which could trigger a Rule 9 obligation.

Disclosure in target company circulars of dealings by the target and its directors

  • Rule 25.3 is amended so that disclosure is now confined to dealings by such persons, and those acting in concert, or associated, with them during the offer period, rather than (as at present) over the 12 months preceding the offer period.

Acquisitions from a single shareholder

  • A purchase of securities from a fund manager managing accounts on behalf of several underlying clients (whether or not on a discretionary basis) will not normally be treated as a purchase from a single shareholder for the purpose of Rule 5.2 or the SARs.

Both the Response Statement and the June 2004 Consultation Paper can be found on the Panel's website at:

For further information, please contact Charles Waddell at or on +44 (0)20 7367 3602 or Peter Bateman at or on +44 (0)20 7367 3145.