On 20 May important changes will be made to the UK takeovers regime. Principally these result from the implementation of the EU Takeovers Directive, but the Takeover Panel is also taking the opportunity to introduce various other unrelated changes on which it has been consulting.
- For takeovers that fall within the scope of the Directive, the Panel will have greater powers to enforce Code Rules and it will be a criminal offence for an offer document or defence circular not to contain all the information required by certain Code Rules. A different statutory squeeze-out procedure will also apply to such bids.
- There will be tighter restrictions on a target taking action to frustrate a bid.
- Where an offer involves a 'special deal' with favourable conditions for some shareholders (such as target management in an MBO), target shareholders will have to vote on the arrangements at an EGM or waive the right to do so.
- In certain circumstances target employees will be able to submit a written opinion on the implications of an offer, and the target board will have to circulate this opinion to their shareholders with the offer document or defence circular.
- For financial years beginning on or after 20th May 2006, UK companies with shares quoted on an EU regulated market (in the UK this means the Official List, but not AIM or Ofex) will have to include in their directors’ report information about their share structure, the rights attaching to shares, and any rules or arrangements which could affect the success of a takeover bid. In some circumstances, details may need to be given of agreements that contain ‘change of control’ provisions.
- The Substantial Acquisitions Rules (SARs) will be abolished, so that it will now be possible to carry out a market raid to acquire up to 29.9% of a company in one fell swoop.
- Broadly speaking, all dealings in long derivatives and options will be treated as dealings in the underlying shares. This will particularly be relevant for the purposes of Rules 5 (timing restrictions on acquisitions), 6 (purchases resulting in an obligation to offer a minimum level of consideration), 9 (mandatory offers) and 11 (nature of consideration to be offered).
The Directive applies to conventional takeovers of EU-incorporated companies whose shares are traded on an EU regulated market. For convenience, such takeovers are referred to in this article as “Directive-regulated Bids”. The Directive does not apply to takeovers effected by way of scheme of arrangement.
By requiring EU member states to introduce certain minimum rules, the Directive aims to create more of a level playing field for cross-border takeovers and to provide a more consistent level of protection for minority shareholders. Broadly speaking, the Directive’s rules are based on the UK model, so radical changes to the UK regime are not required, and the mechanics and timing of a Code-regulated offer will look very similar. But in certain areas the UK regime is being modified to bring it into line with the Directive. For more information on the Directive see the notes at the end of this article.
The deadline for member states to implement the Directive is 20 May 2006.
How the Directive will be implemented
Implementation will take effect:
- in respect of matters that are already governed by statute, or which need to be (such as the status and powers of the Panel, squeeze-out rights, disclosure of information in directors’ reports, and shareholder decisions to opt into or out of the “break-through” provisions of the Directive), permanently by means of the Company Law Reform Bill, when it becomes law, and in the interim by The Takeovers Directive (Interim Implementation) Regulations 2006 (Takeover Regulations); and
- in respect of matters governed by the Code, by changes set out in Response Statement 2005/5 published by the Panel on 21 April 2006.
Other changes unrelated to the Directive
Three other Response Statements also published on 21 April 2006 set out a large number of other unrelated changes to the Code that will also take effect on 20 May. A document showing all the changes effective on that date can be found on the Panel’s website (this will open in a new window). A new version of the Code is expected to be published shortly before that date.
Taken together, the changes are numerous and, in some areas, quite complex. Those that we consider are likely to have the greatest implications are summarised below.
Directive-regulated Bids and Directive Rules
Directive Rules and Panel’s powers
Because the Directive is substantially based on the UK model for takeover regulation, in many areas the Code already complies with the Directive. In other areas, Rules need to be amended to bring them into line with the Directive, and in a few cases completely new Rules are required.
Under the Takeover Regulations, those Code Rules that implement the operative Articles of the Directive, and those Rules “arising out of or related to obligations in those Articles” - whether they were introduced or amended on 20 May or existed beforehand - are effectively given special status and the Panel is given stronger powers to enforce them. For convenience these Rules are referred to in this article as “Directive Rules”.
Neither the Takeover Regulations nor the revised Code set out a complete list of which Code Rules are Directive Rules. Those Code Rules which deal expressly with matters that are covered by the Directive - such as disclosure of information to the market, mandatory offers, timing for acceptances, frustrating action, lapsing and revision of bids, competing offers, disclosure of results of bids and the conditions permitted – are very likely to be Directive Rules. Some other Code Rules – such as those relating to irrevocables, inducement fees, restrictions on dealing in bidder or target securities, some of the rules on timing, profit forecasts and partial offers – are unlikely to be Directive Rules. In some other cases it is difficult to say whether or not a particular Code Rule is a Directive Rule. However, the distinction is likely to be important only where the Panel proposes to use its new powers to impose sanctions on a party for breaching a Directive Rule: in cases of doubt, the offending party may be able to argue that the Panel does not have sufficient power because the relevant Rule is not a Directive Rule.
Paragraph 10 of the Introduction and Appendix 6 of the revised Code will, however, list those parts of Rules 24 and 25 (contents of offer document and defence circular) which are Directive Rules. This is because, under Regulation 10 of the Takeover Regulations, in a Directive-regulated Bid it will be a criminal offence for these documents not to contain all the information required by the Directive (see further below).
By virtue of the Takeover Regulations, all Directive Rules are put on a statutory footing and, in accordance with Article 17 of the Directive (sanctions), the Panel is given certain additional powers to enforce them. In particular:
- the Panel will be able to apply to Court to enforce any Directive Rule;
- the Panel will have power to compel any person to provide it with copies of any document or other information that relates to a Directive-regulated Bid;
- in a Directive-regulated Bid, it will be an offence for an offer document or defence document not to contain all the information required by a Directive Rule. The offence (punishable by a fine) may be committed by the bidder itself, its directors and any shareholder who caused the document to be published where (in each case) the person:
- knew that the document did not comply, or was reckless as to whether it did; and
- failed to take all reasonable steps to ensure that it did comply.
Similar liability will be imposed on the directors and other officers of the target in respect of any target response document. But a breach of a Directive Rule will not give rise to any action for breach of statutory duty, or make a transaction void or unenforceable. In practice, these changes are unlikely significantly to change the way in which bid-related documents are prepared and verified.
In a Directive-regulated Bid, the statutory squeeze-out and sell-out provisions in Part 13A Companies Act 1985 will not apply. Instead, rules set out in Schedule 2 of the Takeover Regulations have effect. These rules are similar to Part 13A, but various technical amendments have been made to bring them into line with the Directive, as well as certain ancillary changes. See the Notes at the end of this article for more details.
Other changes affecting companies quoted on an EU regulated market
Break-through provisions of the Directive
It is relatively common in certain continental countries for controlling shareholders or boards to put in place measures designed to ensure that control of the company remains in their hands even after it is listed. Such measures typically take the form of enhanced voting rights, powers to force the board to take frustrating action, and restrictions on share transfers. Since they are fundamentally ‘protectionist’ in nature, and by inhibiting takeovers they obstruct free movement of capital and deprive minority shareholders of the opportunity to accept a takeover offer, the European Commission would like to see them removed.
When the Directive was originally proposed, it contained an article (now Article 11) requiring member states to introduce in their national laws a mechanism to over-ride (or “break through”) such measures once a bid had been made public. However, the proposal proved to be extremely controversial, and in the end member states were given the right to opt out of Article 11 at a national level. Where a member state does opt out, however, individual companies incorporated in its jurisdiction must be allowed to opt back in to the break-through mechanism and then, if they wish, to opt back out again.
Because the Government wanted to allow shareholders the flexibility to create such protectionist measures if they wished (although in practice they are rare in British companies), the UK decided to opt out of Article 11. As a result, individual British companies must be given the opportunity voluntarily to opt back in, and then to opt out again, subject to certain safeguards.
Regulation 22 of the Takeover Regulations therefore provides a break-through mechanism by stating that where a takeover bid is made for a company that has opted in, any such defensive measures are invalid. A UK company can opt in by passing a special resolution provided (broadly) that: (i) the company has voting shares admitted to trading on a regulated market; (ii) the company’s articles do not contain any protectionist provisions that would apply in the event of a takeover; and (iii) no ‘golden share’ in the company is held by the Government.
A special resolution to opt out again can be passed at any time, but cannot take effect until at least a year later.
The passing of a resolution to opt in or out will have to be notified to the Panel and the market.
Information about voting rights etc to be disclosed in annual directors’ report
For financial years beginning on or after 20th May 2006, where a UK company has securities carrying voting rights admitted to trading on an EU regulated market at the end of that year, its directors’ report will have to include certain information about its share structure, the rights attaching to its shares, and any rules or arrangements which could affect the success of a takeover bid.
For example, details will have to be given of:
- the rights and obligations attaching to each class of shares, including any restrictions on voting rights;
- any restrictions on the transfer of securities;
- each person with a significant direct or indirect holding of securities in the company, including any person who holds securities carrying special voting rights in the company;
- any employees’ share scheme which controls voting rights in the company that are not exercisable directly by the employees;
- any ‘concert party’ agreements between shareholders that are known to the company;
- how directors can be appointed and replaced and how the company’s articles of association can be amended; and
- any significant agreements to which the company is a party that take effect, alter or terminate upon a change of control of the company following a takeover bid. However, there is a carve-out for agreements whose disclosure “would be seriously prejudicial to the company”.
Changes to the Code that reflect the Directive but which apply to all companies and bids
Companies and transactions subject to the Code
The Code will apply to all offers for companies and SEs which have their registered office in the UK, the Channel Islands or the Isle of Man with any securities admitted to trading on a regulated market in the UK or on a stock exchange in the Channel Islands or the Isle of Man. The residency test (determined by reference to the company's place of incorporation and central place of management) will no longer be applied to those companies. The Code will also apply, as at present, to public (and, in limited circumstances, private) companies with registered offices in the UK, CIX or IOM that are considered by the Panel to be resident in one of those jurisdictions - e.g. UK registered companies that are traded on AIM or OFEX and whose place of central management is in the UK, CIX or IOM. The criteria that apply to determine whether private companies are subject to the Code will not change. Offers for Open-Ended Investment Companies (OEICs) will continue to fall outside the Code.
Complex provisions in the Introduction to the Code will determine which national takeovers regulator has jurisdiction over an offer where the target company has its registered office in one Member State but has its securities admitted to trading on the regulated markets of one or more other Member States. In practice, detailed jurisdiction over a particular offer will be worked out through discussions between regulators.
There will be tighter restrictions on a target taking action to frustrate a bid. Specifically, the scope of Rule 21.1 will be widened so that, unless the Panel agrees otherwise, shareholder consent will be required for “any action which may result in any offer or bona fide possible offer being frustrated…”, even if the action is pursuant to a pre-existing contractual commitment or a decision taken before a possible offer had materialised. However, since such pre-existing commitments and decisions are rare, this change is unlikely to reduce significantly the number of times companies take frustrating action.
Where an offer involves a 'special deal' with favourable conditions for some shareholders (such as target management in an MBO), target shareholders will always have to vote on the arrangements at an EGM. At present, an EGM is normally only required under Note 4 on Rule 16 if the bidder and target management between them hold more than 5% of the target’s equity shares. Under the new rules, it may be possible to avoid an EGM by including a box on the form of acceptance seeking shareholder consent to dispense with a meeting, but the possibility of having to hold a meeting will need to be factored into the timetable for public to private transactions and other bids that involve special deals.
Where the bidder proposes any other arrangements to incentivise the target’s management, the target’s Rule 3 adviser will have to confirm publicly that, in its opinion, such arrangements are fair and reasonable.
Effect of the offer on target employees
Under a new Rule 30.1, both the bidder and target must make the offer document available to their respective employees as soon as it is posted.
In the offer document, the bidder will have to set out “its strategic intentions for the offeree company, and their likely repercussions on employment and the locations of the offeree company’s places of business” and its proposals to make “any material change in the conditions of employment” of target employees. This requirement goes further than current Rule 24, and is likely to mean that bidders will have to give more detailed consideration to staff issues before the offer document is posted. In some circumstances, target employees may need to be consulted under the Information and Consultation of Employees Regulations 2004. If the new Rule is interpreted broadly, bidders may also have to give more information in the offer document about how they propose to deal with employee option-holders.
Employee views on the offer
In certain circumstances target employees will be able to submit a written opinion on the implications of an offer, and the target board will have to circulate this opinion to their shareholders with the offer document or defence circular.
New Rule 30.2(b) of the Code provides, in compliance with Article 9.5 of the Directive:
“The board of the offeree company must append to the circular containing its opinion a separate opinion from the representatives of its employees on the effects of the offer on employment, provided such opinion is received in good time before publication of that circular.”
The Panel emphasises that neither the Code nor the Directive require the target to consult with its employees prior to a takeover. Instead, the Code requires the boards of both the offeror and the offeree company to inform their employee representatives or employees about the announcement of the offer and communicate the offer document to them; and the board of the offeree company to communicate its opinion on the offer to its employee representatives or employees.
Only if employee representatives provide a written opinion about the offer to the target board “in good time” before the offer document is posted will that opinion need to be appended to the offer document. In some circumstances, the target may have had to consult its employees pursuant to the Information and Consultation of Employees Regulations 2004; but if not, in a recommended offer where the Rule 2.5 announcement and the offer document happen to be published on the same day, there will be no time for the opinion of the employee representatives to be appended. In such circumstances the Code will not require the target board to circulate any employee opinion that is subsequently made known to it. The new Rule will not prevent the existing practice in recommended offers for the boards of the offeror and of the offeree to publish a joint document comprising both the offer document and the offeree board’s response.
Other changes to the Code unrelated to the Directive that affect all companies and bids
Substantial Acquisitions Rules (SARs)
The SARs will be abolished, so that it will now be possible to carry out a market raid to acquire up to 29.9% of a company in one fell swoop.
As a result, it will be more difficult for a target and other potential rival bidders to react before a raider has acquired a stake large enough effectively to block any competing offer. In the Panel’s view, shareholders will need to consider these consequences when deciding whether or not to sell their shares to the raider.
The rules relating to tender offers will be retained as a new Appendix 5 to the Code.
Dealings in long derivatives and options
Broadly speaking, all dealings in long derivatives and options will be treated as dealings in the underlying shares. This will particularly be relevant for the purposes of Rules 5 (timing restrictions on acquisitions), 6 (purchases resulting in an obligation to offer a minimum level of consideration), 9 (mandatory offers) and 11 (nature of consideration to be offered). Essentially, a person has a “long” position under a derivative or option if he will benefit if the price of the underlying security rises.
This approach is intended to recognise the commercial reality that the counterparty to a derivative transaction will almost invariably acquire actual shares to hedge its exposure under the contract and that, although there may be no formal or legally binding agreement to do so, the counterparty will usually deal with the hedging shares in a manner that is consistent with the commercial objectives of its client – giving the client at least a measure of de facto control over those shares.
Because any control a person has over shares held by the counterparty to a long position will not be diminished by that person entering into a short position with a different counterparty (even if doing so “flattens” the person’s economic exposure), for the purposes of the control provisions the Panel will not normally permit short positions to be offset against long positions.
As an exception to this general approach, derivatives and options will not count towards a bidder’s acceptance condition under Rule 10.
Impact on existing positions: triggering a mandatory offer
As Rule 9 will now refer to “interests in shares”, rather than “voting rights”, if a person (together with his concert parties) acquires shares carrying voting rights, call options and/or written put options in respect of shares carrying voting rights in a company, and/or long derivatives referenced to such shares, which in aggregate amount to 30% or more of a company’s voting rights, he will trigger an obligation to make a mandatory cash offer. Similarly, a person who, together with his concert parties, has an aggregate long position determined on this basis in respect of between 30% and 50% of a company’s voting rights will be required to make a mandatory cash offer if he increases that long position. In each case, a bid obligation will be triggered regardless of whether the derivative or option is cash or stock settled, of whether it is in or out of the money and of whether (or how) the counterparty hedges its position.
Investment banks and securities houses whose trading desks deal as principal for client-serving purposes will particularly need to review their positions prior to 20 May and ensure that dealings after that date do not trigger an obligation to make a mandatory bid. From that date, such institutions will be able to apply to the Panel for a new status of “recognised intermediary”, which would afford the desk a dispensation from the requirements of Rule 9.1 in relation to derivative and option positions which it holds in a client-serving capacity.
These changes in relation to derivatives and options follow those made in November last year, when Rule 8 was amended to require certain dealings in options and derivatives related to target shares to be disclosed to the market in the same way as dealings in actual shares. For more information about the background to all these changes see our Law-Now article (this will open in a new window) published on 14 November 2005.
Share purchases by givers of irrevocable undertakings
Any person who gives an irrevocable undertaking must consult the Panel before acquiring any further target shares, so that the Panel can determine whether or not they are acting in concert with the bidder. This will apply even where a director exercises outstanding options and where an institutional investor acquires further shares, regardless of whether it has committed to assent any such shares to the offer.
Takeovers Directive: main provisions
The Directive is a “minimum standards” Directive which requires member states to put in place certain basic rules in relation to takeovers but leaves them free to impose additional and more detailed rules.
Member states must ensure that national rules are in place to give effect to all the Articles of the Directive, including in particular:
Article 3 – general principles applicable to takeovers, including equal treatment of shareholders, shareholders to be given sufficient information to make an informed decision, and bids to be announced only when the bidder is certain it can pay the consideration offered.
Article 4 – a suitable authority must be designated to supervise takeovers.
Article 5 – a person gaining ‘control’ of a company (the threshold to be set by individual member states) must make a mandatory offer for the remaining shares.
Article 6 – an offer document must be published containing certain specified information.
Article 7 – minimum and maximum period for acceptances.
Article 8 – target shareholders and employee representatives to be given copies of the offer document.
Article 9 (frustrating action) – once an offer has been announced or become imminent, any measure that may frustrate a bid must first be approved by target shareholders. Member states are permitted to opt out of this Article, but as Rule 21.1 of the Code already imposes similar restrictions on frustrating action, the UK has not opted out. Instead, Rule 21.1 will be amended slightly to bring it into line with Article 9 (for details see above).
Article 10 - EU-incorporated companies whose shares are traded on an EU regulated market must publish certain information about their voting structures and other matters that could affect the success of a bid.
Article 11 (break through)– once a bid has been made public, any defensive measures enshrined in the target’s articles of association or in contractual arrangements with shareholders (such as restrictions on the transfer of shares, restrictions on voting, and multiple voting rights) do not apply to the bidder. “Equitable compensation” must be paid to any shareholders who suffer loss as a result. Member states are permitted to opt out of this Article, and the UK has chosen to do so. However, as required by Article 12, individual companies incorporated in the UK are allowed to opt back in (so that any such defensive measures will be over-ridden in the event of a takeover) and to opt back out again.
Article 12 – member states can opt out of Articles 9 and 11.
Article 13 – national rules must deal with the lapsing and revision of bids, competing offers, disclosure of results of bids and the conditions permitted.
Article 15 (squeeze-out) – a bidder that reaches the 90% threshold specified must be able to acquire compulsorily the shares held by the remaining shareholders at a fair price.
Article 16 (sell-out) – conversely, where a bidder reaches that threshold, the remaining minority must be able to ‘put’ their shares onto the bidder at a fair price.
Article 17 – member states must determine the kind of sanctions that should apply where a person breaches a national rule that implements a provision of the Directive.
Notes published by the DTI alongside the Takeover Regulations, which include a summary of the main provisions of the Directive and how they will be implemented, can be found here (this will open in a new window).
Squeeze-out procedure for Directive-regulated Bids
In a Directive-regulated Bid, the statutory squeeze-out and sell-out provisions in Part 13A Companies Act 1985 will not apply. Instead, rules set out in Schedule 2 of the Takeover Regulations have effect.
The three most important ways in which Schedule 2 differs from Part 13A are:
- The customary practice of extending an offer to overseas shareholders by placing an advert in the UK edition of the Financial Times (which was noted, but expressly not unconditionally approved in Winpar Holdings Ltd v Joseph Holt Group plc (The Times Law Reports, 24 May 2001, Court of Appeal)) has effectively been put onto a statutory footing. However, instead of an advert in the FT, the bidder will have to include a notice in the Gazette and ensure that the offer document is available for inspection at a place in an EEA state or on a website. This ‘Gazette route’ will be available in respect of shareholders who have no registered address in the UK who the bidder wishes to exclude in order not to contravene local laws.
- In order to exercise its rights to acquire the remaining shares compulsorily, the bidder must acquire both 90% of the shares to which the offer relates and 90% of the voting rights attached to those shares. In most cases this is unlikely to make any practical difference, as the shares will usually be ordinary shares with one vote each.
- Instead of having to serve a section 429 notice within two months of reaching the 90% threshold, the notice must be served within three months of “the last day on which the offer can be accepted”. Since under the Code a bidder is permitted to leave its offer open for many months, or even indefinitely, this wording in the Takeover Regulations appears to impose no real deadline for the squeeze-out procedure to be initiated. Usually, though, the bidder will be keen to acquire 100% of the target as soon as possible.
Implications for share scheme and other documents
Share scheme rules commonly provide that if any person becomes bound or entitled to acquire shares in the company under sections 428 to 430F (or Part 13A) Companies Act 1985, all outstanding options can be exercised immediately and usually for a period of about a month, following which they lapse.
Technically speaking, where scheme rules refer to such sections they probably cannot be taken automatically to refer to the alternative squeeze-out procedure under Schedule 2 of the Takeover Regulations which applies where the target is quoted on a regulated market. However, scheme rules usually give some discretion to the directors or the remuneration committee to make minor amendments to scheme rules without needing to obtain the consent of option-holders. So for practical purposes, where scheme rules include the type of provisions described in the previous paragraph, options should be taken to be exercisable once the bidder initiates the acquisition procedure under Schedule 2.
But other documents that refer to provisions in Part 13A may need to be formally amended.
The Takeover Regulations (this will open in a new window)
Panel Response Statements
relating to the implementation of the Directive and other unrelated matters (this will open in a new window)