Takeover Code overhaul: A new landscape for public M&A in the UK

Introduction

On March 31, 2021, the Takeover Panel (Panel) published response statement RS 2020/1 on conditions to offers and the offer timetable (Response Statement). This follows on from the previous consultation PCP 2020/1 published by the Panel in October 2020 (Consultation) and sets out the final form of the updated Takeover Code (Code) provisions.

The changes are being adopted largely in the form proposed in the Consultation with only limited adjustments. The revised rules represent some of the most far-reaching amendments to the Code since 2011.

The new rules will take effect on July 5, 2021 (Implementation Date) and will apply to firm offers announced under Rule 2.7 on or after that date. The current rules will continue to apply to any ongoing firm offers announced prior to the Implementation Date and also to any offers announced after the Implementation Date which are in competition with firm offers announced prior to the Implementation Date.

Similar to the overhaul of the rules in 2011, there will be no transition period. As a result, there will be a period of time during which it is possible that some offers will be proceeding under the current regime while others will be subject to the new rules.

Invoking regulatory conditions

What do the new rules say?

The key change is that all conditions¹ relating to official authorisations or regulatory clearances (Regulatory Clearances) will be treated consistently under the new rules. The previous special treatment of conditions relating to clearances from the CMA and European Commission has been removed. This means that invoking these types of conditions will be subject to the same “material significance” test under Rule 13.5(a) (Invocation Test) as any other offer conditions.

Practice Statement 5 (PS5) is also being updated to provide additional guidance on factors the Panel will take into account when deciding whether conditions relating to Regulatory Clearances (Regulatory Conditions) can be invoked.² 

What is a Regulatory Clearance?

The term “official authorisation or regulatory clearance” is not defined in the Code. However, in the Response Statement, the Panel has clarified that it covers clearances or authorisations from governmental or regulatory bodies which relate to the question of whether a bidder is permitted to acquire the target or its assets. Examples given of clearances that would be within the definition are those from competition regulators (such as the CMA), sector or industry regulators (such as the FCA or PRA), or government approvals in relation to national security (such as clearances under the proposed new UK national security regime – for further information on this see our separate briefing The UK’s new NSI regime: What do you need to know?). It is specifically confirmed that clearance from the Pensions Regulator would not be covered.

Our views

As discussed in our briefing on the Consultation, the current Code distinction between the UK/EU regime and other regimes has been a topic of discussion in the market for some time and it is no longer easy to justify a divergent approach. It is therefore not surprising that almost all respondents to the Consultation supported the move to consistent treatment.

The revisions to PS5 are helpful, as is the confirmation in the Response Statement that, as part of its assessment, the Panel will take into account whether it would be unlawful to close an offer without obtaining clearance.

Invoking other conditions

What do the new rules say?

The Invocation Test itself is not changing (although the revised PS5 does formalise additional factors the Panel will take into account when determining whether to allow an offer to lapse – these include foreseeability, actions taken by the bidder, and the views of the target board).

Certain conditions are not subject to the Invocation Test (and this is not changing), however these are now specifically listed in the Code³ and bidders will also have to identify any such conditions in the firm offer announcement (and offer or scheme document).

See also The acceptance condition below.

Our thoughts

While those regularly involved in takeovers will be aware of the Panel’s approach to the Invocation Test, and the additional factors that have now been formalised will be familiar to many practitioners, we expect the additional guidance on the application of the Invocation Test set out in the revised PS5 will be welcomed by the wider market.

Freezing the offer timetable

What do the new rules say?

In summary, the new rules allow the transaction timetable on a contractual offer to be frozen to accommodate Regulatory Conditions that have not been satisfied by Day 37. The timetable could be frozen at the joint request of the bidder and target or, if at least one outstanding condition relates to a “material” Regulatory Clearance, at the request of either party. 

A Regulatory Clearance would essentially be considered “material” for these purposes where failure to obtain it could potentially give rise to circumstances satisfying the Invocation Test. This is a lower hurdle than the Invocation Test itself, so the fact that a Regulatory Clearance is considered material for the purposes of freezing the timetable does not necessarily mean the bidder will be able to lapse its offer if clearance is not ultimately forthcoming.

There are specific provisions relating to how the rules on freezing the timetable will operate in the context of competitive bids.

Our thoughts

Historically, a scheme (where the timetable is more fluid) or a pre-conditional contractual offer structure have been the only practical ways to accommodate potentially protracted regulatory clearance timelines. The new rules on freezing the timetable put schemes and offers on a more equal footing, and this flexibility is likely to be welcomed by bidders (particularly in the light of the fact that any concern at the prospect of offer timetables being effectively open-ended as a result of these changes may be addressed to an extent by the new rules on long-stop dates for contractual offers – see below). That said, given the number of perceived benefits they bring (including speed and certainty of reaching 100 per cent control and simplifying securities laws issues on non-cash offers), we expect schemes will continue to be the structure of choice for most recommended deals.

We agree that the threshold for freezing the offer timetable should be lower than that for invoking a condition, and it is not surprising that the Panel will only make a determination as to whether failure to obtain the relevant Regulatory Clearance would meet the Invocation Test if and when the bidder seeks to invoke the associated condition. At that point, it will be able to make a determination in light of all of the relevant facts and circumstances in a way that would not be possible at the time a freeze is requested.

Long-stop dates

What do the new rules say?

Offers

It will now be a requirement for bidders using a contractual offer to include a long-stop date by which (if the timetable has been frozen) the acceptance condition must be satisfied and all Regulatory Conditions must be satisfied or waived. 

On a recommended deal, the long-stop date would be agreed between the parties. On a unilateral offer the bidder would need to agree it with the Panel, and the Panel would not expect it to be earlier than the date by which the bidder reasonably expected the “slowest” Regulatory Clearance to be received. In assessing this, the Panel would expect to be provided with an analysis of the likely timelines for the applicable regulatory regimes. The level of detail required would vary depending on the facts of the case, including the extent of the bidder’s access to information on the target, the nature of the relevant regimes, and the transparency (or otherwise) of the regulatory timetables. The Response Statement also helpfully confirms that where a bidder reasonably expects to obtain clearance in “phase 1” (and, accordingly, a “phase 2” reference is considered unlikely) or would not wish to pursue a phase 2 clearance, it will normally be permitted to set a long-stop date which accommodates only the phase 1 process.

Schemes

The requirement to specify a long-stop date on a scheme of arrangement already exists under the current rules, and is not changing. However, an additional rule has been introduced which requires the bidder to take certain procedural steps in connection with the Court hearing to sanction the scheme (essentially confirming, prior to the hearing, that all offer conditions have been satisfied or waived⁴ and undertaking to be bound by the scheme). 

The Panel has confirmed that it would not be likely to require a bidder to take these procedural steps if the target company had unilaterally sought to accelerate the timetable by convening the court sanction hearing (without the bidder’s consent) for a date earlier than the latest date on which the hearing could reasonably be held in order for the scheme to become effective by the long-stop date and at a time when any substantive condition to the offer remained outstanding. 

What happens if a Regulatory Condition is outstanding on the relevant date?

The mechanics vary depending on whether the transaction is structured as a contractual offer or a scheme, but essentially the possible outcomes are similar for both.

A bidder will be permitted to invoke a Regulatory Condition on the long-stop date of a contractual offer (and will not be required to take the procedural steps described above in relation to a scheme sanction hearing) where there is an outstanding material Regulatory Clearance and either: (a) it is not sufficiently clear what action would be required to be taken for the Regulatory Clearance to be obtained; or (b) if it is sufficiently clear, the taking of the action would give rise to circumstances meeting the Invocation Test. 

Where a question of whether the bidder is permitted to invoke a Regulatory Clearance remains outstanding on the long-stop date, the offer will not normally be permitted to lapse (or, in the case of a scheme, the parties will normally be required to extend the long-stop date) pending the Panel’s final determination. This is in order to prevent the transaction lapsing whilst a dispute over the status of a Regulatory Condition is resolved. The Response Statement notes bidders should take this into account when arranging their financing.

If the bidder is not able to invoke a condition on the long-stop date on a contractual offer (or is required to take the procedural steps in connection with the sanction hearing on a scheme) then it will typically be required to complete the transaction provided the acceptance condition is satisfied (or the scheme is sanctioned by the court).

However, the Panel recognises that there may be exceptional circumstances where a condition cannot be invoked but the bidder is not prepared to waive it and close the transaction immediately (for example, because remedial action is required before a clearance will be given and because of the consequences under the relevant regulatory regime of closing without clearance). The Panel will determine what action to take in those circumstances. If the Panel does not require the transaction to complete, then on a contractual offer this would involve the continuation of the offer past the long-stop date (with the timetable in effect being treated as “frozen” and the bidder remaining subject to an obligation to satisfy the outstanding conditions and close as soon as practicable thereafter). Likewise, if the Panel does not require the procedural steps to be taken on a scheme, the bidder will remain subject to a continuing obligation to satisfy the outstanding conditions and close as soon as practicable, and the Panel notes that the only alternative open to the bidder will be to agree to extend the long-stop date for so long as is needed in order for the condition to be satisfied, with the court sanction hearing being re-arranged accordingly (and the bidder being required to take the procedural steps in relation to the re-arranged hearing).

Our thoughts

While the concept of a long-stop date for contractual offers is a logical consequence of the new regime on freezing the timetable to avoid open ended offer periods, the operation of the long-stop date raised a number of questions in the market during the consultation process. Accordingly, it is not surprising the Panel has provided a clearer explanation in the Response Statement of how it envisages the new rules working (on both contractual offers and schemes). While this is helpful, it does raise certain issues given the ability for transactions to continue beyond the long-stop date in certain circumstances. In particular, what impact this will have on the approach to the certain funds period for cash confirmation exercises remains to be seen. Although the Panel has indicated bidders should take into account the possibility of a dispute over the ability to invoke a Regulatory Condition when putting its financing together, there is no indication how long that process might take. Bidders might well have to balance a conservative approach with the potential costs of obtaining extended financing, particularly on leveraged bids. While arguably this issue exists under the current regime in connection with schemes, it is now set out as a clear expectation by the Panel in the Response Statement.

The acceptance condition

What do the new rules say?

The new rules remove the current distinction between the acceptance condition being satisfied (referred to as the offer becoming unconditional as to acceptances) and all offer conditions being satisfied or waived (referred to as the offer becoming wholly unconditional). Under the current rules, an offer must become unconditional as to acceptances by Day 60 and all other conditions must be satisfied within 21 days thereafter (commonly referred to as Day 81).

Instead, under the new rules, a bidder will have until Day 60 (or any earlier “unconditional date” set by it) to satisfy all of the conditions to its offer and will only be able to treat the acceptance condition as satisfied once all other conditions have been satisfied or waived – meaning that, essentially, the acceptance condition will become the last condition to be satisfied.⁵ 

Shareholders will also have the right to withdraw their acceptances at any time before the offer is declared unconditional (unlike the current rules under which withdrawal rights only arise 21 days after an offer’s first closing date – commonly referred to as Day 42).

Will offers still have closing dates?

Currently offers will specify a closing date by which acceptances must be received (typically the first closing date is 21 days after posting of the offer document) – if the acceptance condition is not met on that date, the offer can lapse or the bidder can choose to extend its offer for a further period. 

The concept of closing dates will no longer apply under the new rules, and target company shareholders will have until Day 60 (or any earlier unconditional date) to submit their acceptances.

A bidder will, however, be able to make an “acceleration statement” giving not less than 14 days’ notice of its intention to effectively bring forward the “unconditional date” (i.e. the last date for the offer conditions, including the acceptance condition, to be satisfied). A bidder would need to waive any outstanding Regulatory Conditions (whether specific or general) at the time it makes the acceleration statement.

Can the bidder invoke the acceptance condition before Day 60/the unconditional date?

Yes. To do this, the bidder must publish an acceptance condition invocation notice (ACIN) to the effect that it intends to lapse its offer if sufficient acceptances are not received by a specific date. An ACIN is irrevocable, must be published at least 14 days prior to the date on which the bidder intended to test the acceptance condition and must specify the level of acceptances that would need to be received in order to satisfy the acceptance condition. Importantly, this level cannot be waived down while the ACIN is “live” (for example, if the bidder has a change of heart and wishes to avoid having to lapse its offer if insufficient acceptances are received to meet the minimum threshold set out in its ACIN). If insufficient acceptances have been received on the testing date, the offer must lapse.⁶ 

If sufficient acceptances have been received on the date specified in the ACIN, the offer will not lapse. If all other conditions are satisfied or waived, the acceptance condition will be treated as satisfied and the offer declared wholly unconditional. However, if other conditions remain outstanding the offer timetable will continue in the usual way (and the acceptance condition cannot be treated as satisfied because, as discussed above, this can only happen once the offer is otherwise unconditional).

Our thoughts

The requirement for a bidder to give notice of its intention to invoke the acceptance condition by serving an ACIN is intended to deal with a concern that, under the current rules, a bidder can lapse its offer on a closing date without giving the market prior notice of its intention to do so and that this is inconsistent with the Code principles around giving shareholders sufficient time and information to make a properly informed decision. 

It was noted in some responses to the Consultation that the removal of closing dates could reduce the incentive for target shareholders to accept an offer before Day 60/the unconditional date. Although we will have to wait to see how the market reacts to the new rules, there are other factors that will still motivate shareholders to accept promptly and the fact that the new rules mean shareholders will not be locked in and can withdraw at any time removes some of the downsides that may currently apply to making an early acceptance. Bidders can also use acceleration statements (in a similar way to no extension statements under the current rules)⁷ to force the timetable if they want to do so. The Panel has also confirmed that a bidder would be able 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 – this would be a potentially helpful tool for bidders seeking to create a sense of momentum but that did not want to issue a formal acceleration statement or ACIN.

Although the widening of withdrawal rights, and the change in approach to the acceptance condition generally, removes the bidder’s current ability to “lock in” acceptances, it is understandable that having shareholders unable to withdraw for protracted periods (in particular in the context of the new rules on timetable freezes) would be of concern to the Panel. The Panel acknowledges that the combination of withdrawal rights and the more frequent announcements of acceptance levels required under the revised rules could result in fluctuations of disclosed acceptance levels. However, it considers the increased transparency to be a positive development for target company shareholders and other market participants.

Conclusion

These changes represent the most far reaching amendments to the Takeover Code since 2011 and will have a considerable impact on market practice. Given the scope of the changes, the Panel pre-consulted ahead of the formal consultation and, for those who participated in that exercise, the changes have therefore been signposted for some time.

Likewise, it is not particularly surprising that the Panel has confirmed in the Response Statement that the changes will largely be adopted on the basis set out in the Consultation.
We do think that an element of “market education” will be needed as the current timetable for takeovers has been largely unchanged for decades. While the amendments are generally logical and to be welcomed (in particular, the consistent approach to Regulatory Conditions), there are some areas where it will be interesting to see how market practice develops to accommodate the new rules, in particular the use of acceleration statements and ACINs.

It is noteworthy that the consultation process has taken place concurrently with the passage of the UK National Security and Investment Bill through Parliament (which itself is capable of having a potentially significant impact on public M&A in the UK). In that context, we agree with the Panel that any clearances required on national security grounds should be capable of being accommodated in the new framework the Panel is putting in place.

Finally, a number of points were made/questions raised by respondents during the consultation process on which the Panel provided further clarity in the Response Statement, but where it did not feel any changes or additions were required to the relevant rules and associated guidance. In that context, it is therefore important for advisers to familiarise themselves with the additional information contained in the Response Statement to understand how various aspects of the revised rules will be administered by the Panel in practice.