The most significant change in the 2021 Takeover Code amendments is that the Code will (finally) apply consistent treatment to all official authorisations and regulatory clearances to which an offer is subject (other than certain approvals which a foreign state owned enterprise may need).  

This change is long overdue as many transactions involve non-UK and non-EU clearances to complete.  Previously there was uncertainty over how the Panel would respond to requests to lapse an offer where overseas regulatory clearances or approvals have not been received.

Currently, conditions and pre-conditions relating to clearances required from the Competition and Markets Authority (the “CMA”) and the European Commission get special treatment relative to clearances from other regulatory authorities. Going forward, all such conditions may only be invoked where the circumstances in question are of ‘material significance to the offeror in the context of the offer’.  The Panel has also removed the requirement for an offer to include a term that it must lapse if a Phase 2 CMA reference is made or Phase 2 European Commission proceedings are initiated, in each case prior to a certain point in the offer timetable.

The Panel has made clear in the consultation that the Panel would be likely to treat a clearance from the Secretary of State under the proposed new UK FDI regime being proposed in the National Security and Investment Act 2021 as a “material official authorisation or regulatory clearance” for the purposes of the Code.

As such, to the extent that any “review period” or “assessment period” for official authorisations and regulatory clearances to which an offer is subject (including the new UK FDI regime) has not ended by Day 37 of a contractual offer, it will normally be possible for the offer timetable to be suspended under the new Rule 31.4 (Suspension of offer timetable if an official authorisation or regulatory clearance remains outstanding) pending the outcome of the review and/or assessment.

A timetable suspension will generally arise: (a) at the joint request of the bidder and the target; or (b) at the request of either the bidder or target, provided that at least one of the outstanding conditions relates to a material official authorisation or regulatory clearance.

Bidders should note that these Code changes do not affect the Panel’s current position on conditions relating to a material official authorisation or regulatory clearance by the bidder’s host government, e.g. where the bidder is state-owned.   

The Panel regards these types of conditions as being tantamount to a condition, the “fulfilment of which is in the hands of the directors” – which are not permitted under Rule 13.1.  The Panel takes this approach because it considers that a bidder which no longer wishes to proceed with the offer could engineer a situation where their host government withholds consent, e.g. due to a material adverse change which would not meet the Panel material significance test.  

Accordingly, a Chinese state-owned enterprise which wants to make a bid will either need to get Chinese outbound approvals (e.g. from MOFCOM, NDRC or SAFE) before it announces a firm offer under Rule 2.7 or get Panel consent to make a pre-conditional possible offer under Rule 2.5.   This effectively makes it impossible for a bidder needing such approvals to make a hostile offer and even where the offer is to be recommended, the bidder will still need Panel consent (and target support) to extend the PUSU period beyond 28 days if more time is needed for such consents.

The Panel has also introduced a requirement for an bidder to set a “long-stop date” for a contractual offer similar to the type of long-stop date that is customary in a takeover implemented by a scheme of arrangement. 

The way the Panel intends to interpret this long-stop date is potentially confusing where the acceptance condition has been satisfied but conditions relating to official authorisations and regulatory clearances remain outstanding.  

In these circumstances, the bidder would need Panel consent to lapse the offer.  If the outstanding clearance is not considered by the Panel to be ‘material’ the bidder will be expected to waive the condition and declare the offer unconditional.  If it meets the materiality threshold, then the offer could be lapsed.  If the clearance has been delayed due to the bidder not having agreed remedial action requested by the regulator, the Panel will consider the materiality of the requested remedial action and whether its potential materiality to the bidder has been flagged in the offer document (as anticipated by Practice Statement no. 5).

However, if the Panel is unable to reach a conclusion relating to the materiality of the outstanding condition and/or requested remedial action, the offer cannot be lapsed pending determination, even if the long stop date has been reached.  This could cause issues where the long stop date for financing the offer is coterminous with the offer long stop date.  In effect, a bidder will need to build long stop date flexibility into the financing arrangements in these (hopefully rare) circumstances. 

Parties will need to take particular care when setting the long stop date to ensure that it reflects the bidder’s reasonable expectations regarding when the last official authorisations or regulatory clearance will be obtained.  

The Code timetable has always been somewhat confusing due to its complexity and it is being simplified.  This simplification and flexibility may result in fewer schemes of arrangements and more takeover offers.

The Code timetable remains complex although there will now be no distinction between the latest date for the satisfaction of the acceptance condition (currently Day 60) and the latest date for the satisfaction of the other conditions to the offer (currently Day 81).  Instead there will now be a single date by which all of the conditions to an offer must be satisfied or waived, i.e. Day 60 – which can be extended in relevant circumstances, and Day 81 will be no more.   Days 39, 46 and 53 would be derived by counting backwards from Day 60 (whether extended or not).  This simplification is welcome.

The Panel has removed some bidder flexibility under the Code which allowed a bidder to lapse an offer on a closing date, e.g. first closing date (which was previously “Day 21”).   

Under the 2021 Takeover Code amendments a bidder can only close an offer earlier than Day 60 if it serves an “acceptance condition invocation notice” so as to cause its offer to lapse on any date on or after Day 21 but prior to the “unconditional date”.   This removes a previous loophole (not used much in practice) which enabled a bidder to lapse an offer on a closing date using the acceptance condition where the real reason for lapse might have been a material adverse event which the Panel would have been reluctant to allow on the grounds that it was not of material significance to the bidder in the context of the offer.

The Takeover Code has always applied a restrictive approach to the ability of bidders to lapse an offer, esp. due to a material adverse event arising.  

This approach remains largely unchanged from a substantive perspective.  The Panel will continue to reserve power unilaterally to determine whether circumstances are of material significance to the offeror in the context of the offer.

Mandatory bids cannot currently be subject to offer conditions in addition to the acceptance condition but this will change in future.  

The Code will enable dispensations where the:

• the condition relates to a material official authorisation or regulatory clearance;  and 
• the agreement between the bidder and the shareholder(s) disposing of the shares which would trigger the mandatory bid is identical.

In these circumstances, invocation of the condition in the SPA (and in the offer document) would be subject to Panel consent and the SPA would have to be drafted accordingly. The Panel would apply the material significance test in the normal way when deciding whether or not to allow the bidder to rely on the condition.  

Respondents to the consultation suggested that the SPA should be permitted to include conditions for the benefit of the selling shareholder but the Code Committee did not agree. The only permitted conditions will be those that relate to a material official authorisation or regulatory clearance.

There are other changes buried in the detail which may or not prove significant to bidders depending on the relevant facts and circumstances.  As is the case currently, the rules are complex where a competitive bid process arises or where alternative offers are proposed and specific advice should be sought in these circumstances.

Published – 30/04/21