UK Takeover Code: Proposed changes to “acting in concert” presumptions

Introduction

On May 26, 2022 the UK Takeover Panel (Panel) published consultation paper PCP 2022/2 (the Consultation) in relation to the definition of “acting in concert” under the Takeover Code (Code).

As the Panel notes in the Consultation, the concept of acting in concert is fundamental to the application of the Code. This is because where persons are (or are presumed to be) acting in concert they are in effect treated as a single person when applying certain Code rules – in particular in the context of share dealings.

In this briefing, we discuss some of the key themes behind the proposed changes. 

“Groups” of companies acting in concert

Current presumption one presumes a company to be acting in concert with its parent, subsidiaries, fellow subsidiaries and its or their “associated companies” (the threshold for associated company status being 20%¹).

Under the proposals in the Consultation this would be replaced with two new presumptions:

• New presumption one: A company (“X”) and any company which controls, is controlled by or is under the same control as X, all with each other (for these purposes “control” is by reference to an interest in shares carrying 30% or more of the voting rights or a majority of the equity share capital). When applying new presumption one, percentage interests do not dilute through a chain of ownership.
• New presumption two: A company (“Y”) and any other company (“Z”) where Y is interested, directly or indirectly, in 30% or more of the equity share capital in Z, together with any company presumed to be acting in concert with either Y or Z under new presumption one, all with each other. When applying new presumption two, percentage interests do dilute through a chain of ownership.

Key differences compared to the position under current presumption one are:

• The 30% threshold (which is higher than the current 20% test). 
• Clearer articulation of the difference of approach to voting rights and equity share capital and to dilution through chains of ownership. 
• Extension of the presumptions to take account of interests in the form of long derivative or option positions.

Although both new presumptions will need to be considered in tandem, typically interests in voting rights and equity share capital are aligned and it is therefore the 30% voting rights trigger in new presumption one that is likely to be most relevant in practical terms. However, the examples below illustrate (in simple form) how the position may differ where holdings do not carry voting rights. The Consultation also sets out a large number of illustrative examples showing how the new presumptions would apply in different scenarios.

Example one 

Bidder holds 30% of the voting rights in Company B; Company B holds 30% of the voting rights in Company C. 

Under new presumption one, Bidder will be presumed to be acting in concert with Companies B and C (as percentage interests do not dilute through a chain of ownership when applying new presumption one).

Example two

Bidder holds 30% of the equity share capital of (but not 30% of the voting rights in) Company B; Company B holds 30% of the equity share capital of (but not 30% of the voting rights in) Company C.

Under new presumption two, Bidder will be presumed to be acting in concert with Company B but not with Company C because (a) percentage interests dilute through a chain of ownership when applying new presumption two (so Bidder will be treated as interested in less than 30% of Company C’s equity share capital) and (b) although Companies B and C are presumed to be acting in concert with each other, this is under new presumption two rather than new presumption one. 

Example three

Bidder holds 30% of the equity share capital of (but not 30% of the voting rights in) Company B; Company B holds 30% of the voting rights in Company C. 

Under new presumption two Bidder will be presumed to be acting in concert with both Company B and Company C. This differs from example two because Companies B and C are presumed to be acting in concert with each other under new presumption one (not new presumption two). 

Application of new presumptions one and two to “funds”

Changes proposed in the Consultation are intended to clarify the Panel’s approach to limited partnerships or other investment funds (referred to generically as funds) when applying new presumptions one and two. These make it clear that:

• References to “companies” in new presumptions one and two include references to other types of undertakings and persons.
• Where a fund invests in a new vehicle formed for the purposes of making a bid or acquires an interest in shares in a Code company, the Panel will apply new presumptions one and two to investors in the fund as if the fund were a company and the investor’s interest in the fund was in a corresponding percentage of its equity share capital. 

The example below illustrates (in the context of a simple structure) how this could apply.

Example four

Investor A holds a 30% interest in Fund B; Fund B owns 100% of the voting rights in Company C (Bidco) and Company D. 

Under new presumption two Investor A and Fund B will both be treated as acting in concert with Bidco and Company D as (a) Fund B, Bidco and Company D will be acting in concert under new presumption one and (b) Investor A and Fund B will be acting in concert under new presumption two.

Fund managers – new presumption five

Under current presumption four a fund manager will, in a nutshell, be treated as acting in concert with persons whose investments it manages on a discretionary basis. 

This is proposed to be deleted and a new presumption (new presumption five) introduced to the effect that a fund manager of/investment adviser to (a) a bidder or an investor in a bid consortium or (b) the target company, will be treated as acting in concert with the bidder or target company (as applicable) and with any persons controlling, controlled by or under the same control as the investment manager/adviser. The Consultation notes that this reflects the way in which the Panel applies current presumption four in practice.

Separately, a new note on the definition of “interests in securities” is proposed which relates to securities managed on a discretionary basis and sets out who will (or will not) be treated as interested in such securities, including in circumstances where management is sub-contracted.

Conclusion

In our view the proposals in the Consultation are likely to be welcomed by the market – in particular the increased 30% threshold in new presumptions one and two. Making amendments to more closely reflect how particular provisions are applied in practice (for example in the context of funds) is also helpful and provides greater clarity to market participants. The detailed, worked examples included in the Consultation are also of real practical assistance in understanding how the revised rules would apply to specific scenarios and the Panel has also indicated that it intends to hold a webinar on the proposed amendments in late June or early July. 

The period for responding to the Consultation ends on September 23, 2022 with a Response Statement anticipated in late 2022 and amendments coming into effect approximately two months thereafter. Given that the Panel also conducted a pre-consultation exercise prior to publication of the Consultation we expect that the changes will be adopted largely in the form proposed, with feedback to the Consultation focusing primarily on particular points of drafting or clarification.