Takeover Panel consultation on conditions to an offer and the offer timetable

The UK Takeover Panel has published a consultation PCP 2020/1 in which it is proposing to amend various provisions in the Takeover Code relating to invoking the conditions to an offer, particularly those relating to regulatory / merger control clearance, and to the offer timetable.

The consultation closes on 15 January 2021. The Panel says that it expects to publish a response statement in spring 2021 and that the rule changes will come into force three months later.

If implemented as consulted on, the key points to note are as follows:

Conditions relating to clearance by the European Commission and CMA

The Takeover Code currently affords a special regime to merger clearance by the European Commission (EC) and Competition and Markets Authority (CMA), meaning that on a Phase 2 reference an offer automatically lapses and a bidder can invoke an EC/CMA condition without having to meet a materiality threshold. Under the proposed changes:

• the Code will no longer distinguish between EC/CMA conditions and other merger control clearance conditions;
• a bidder will only be able to invoke a condition to an offer relating to merger control clearance in the EU and UK if the circumstances on which it is seeking to rely are material in the context of the offer (as is already the case for merger control conditions in jurisdictions outside the UK/EU); and
• an offer will no longer automatically lapse if there is a Phase 2 reference.

Guidance on when a condition can be invoked

Further guidance will be given on the factors that will be taken into account in deciding whether a bidder should be able to invoke a condition:

• General conditions – The Panel will consider whether the circumstances were foreseeable, the actions of the bidder and the views of the target board.
• Conditions relating to an official authorisation or regulatory clearance – The Panel will look at the significance of the authorisation or clearance to the bidder, what action would be required to obtain clearance, and the consequences of completing the offer without obtaining the clearance.
• Condition that there is no Phase 2 reference by the CMA – The Panel will look at whether the reference would be likely to result in a serious risk of material damage to the business of the bidder or target, and the utility of requiring the bidder and/or target to pursue the reference or process where the prospect of the clearance being obtained is low.

This is an area where the Panel Executive’s approach in practice will be key.

Offer timetable

There will be a number of changes to the offer timetable, including:

• Single unconditional date –  An offer will only be able to go unconditional as to acceptances when all other conditions have been satisfied or waived. The Panel is therefore proposing to get rid of the concept of Day 81, and require all conditions to an offer to be satisfied by Day 60.
• Suspending the timetable for official authorisations or regulatory clearances – Parties to an offer will be able to request that the offer timetable be suspended if any official authorisations or regulatory clearances are outstanding on Day 37 (rather than just where a decision as to whether there will be a Phase 2 reference by the EC/CMA is outstanding). If only one party wants to suspend the timetable, the condition must relate to a "material" authorisation or clearance.
• Long-stop date on a contractual offer – A bidder will be required to specify a long-stop date on a contractual offer (i.e. a date by which the offer must be unconditional). A bidder would be able to lapse an offer on the long-stop date if a material authorisation or clearance remained outstanding. What the long-stop date should be will be agreed between the bidder and the target (or, on a hostile offer, the bidder and the Panel).

Further information on the changes that the Panel is proposing to make is available here.

Reason for the changes

The Panel said that, when it consulted on changes to the Code required as a result of the UK’s departure from the EU (see our public M&A update for details of those changes, which will take effect at the end of the transitional period), several respondents questioned why the Code would continue to treat conditions relating to clearance by the EC differently to merger control conditions elsewhere in the world. The Panel has now concluded that it should not distinguish between EC / CMA clearance and other merger control conditions.

It is also keen to ensure that a bidder who does not want to proceed with an offer for commercial reasons is not able to lapse it by invoking a condition relating to an unimportant regulatory clearance. It sees this as undermining the requirement in Rule 2.7 of the Code that a bidder should only announce a firm intention to make an offer when it has “every reason to believe that it can and will continue to be able to implement the offer” and the requirement in Rule 13.5(b) that a bidder must use all reasonable efforts to ensure the satisfaction of any conditions or pre-conditions to which an offer is subject.

The Panel also recognises that the timeframes for getting the requisite clearances have been getting longer and it has therefore become harder for bidders to obtain the requisite clearances within the Code timetable for a contractual offer (a scheme has a more flexible timetable under the Code).

Impact of the changes in practice

In our view, the proposed changes are unlikely to have a significant impact on takeovers in practice and are, broadly speaking, logical.

The main impact will be for bidders who may face hurdles to regulatory clearance for a transaction. Well-advised bidders already look at the likelihood of regulatory intervention on an offer before announcing a deal and that exercise may require increased focus if these proposed changes are implemented.

However, regardless of the preparatory work undertaken by a bidder, regulators can be unpredictable – the CMA in particular has faced criticism in the past 12 months for taking what is seen as a more interventionist approach and a harder line than it has previously. Its increased workload in the face of Brexit is also likely to mean that its timetables are pushed to the limits, which potentially may result in more Phase 2 investigations. In addition, the UK is proposing to introduce a new regime with enhanced powers to intervene in transactions on the grounds of national security.

All of this means that a bidder will not necessarily be able to assess the likelihood or extent of regulatory intervention on an offer. The Panel’s approach to these situations in practice will be key to ensuring that certain companies do not effectively become bid-proof because of an uncertain regulatory environment.

Whilst the changes are intended to make the timetable for contractual offers more compatible with a complex regulatory situation, in practice it is likely that bidders will continue to use schemes, with the more flexible timetable they have, on bids which may face regulatory issues. In respect of hostile offers, it is harder for a bidder to assess the likelihood of regulatory risk if it does not have access to due diligence on the target. In these circumstances, and as a scheme is not suitable for a hostile offer, a bidder may continue to opt for a pre-conditional offer rather than risk facing a lengthy timetable freeze.

Invoking conditions post implementation

If implemented as consulted on, bidders will need to be aware of the following provisions, and restrictions, on their ability to invoke a condition to an offer:

• A bidder must only announce an offer after the most careful and responsible consideration and when it has every reason to believe that it can and will continue to be able to implement the offer.
• A bidder must use all reasonable efforts to ensure the satisfaction of any conditions or pre-conditions.
• Certain conditions can be invoked without having to meet a materiality threshold – for example the acceptance condition and conditions relating to bidder shareholder approval or listing of bidder shares. EC/CMA conditions will no longer fall into this category.
• Other conditions can only be invoked if the circumstances which give rise to the right to invoke the condition or pre-condition are of material significance to the bidder in the context of the offer. Materiality will only be judged at the time that the circumstances arise.
• In assessing materiality the Panel will consider whether:
  • the condition was the subject of negotiation with the target, expressly drawn to the attention of target shareholders and included to take account of the particular circumstances of the target;
  • whether the circumstances could have reasonably been foreseen (although this is not determinative);
  • the actions of the bidder, both since the announcement of the offer and since the occurrence of the circumstances on which the bidder is seeking to rely (for example whether the bidder has purchased shares in the target or indicated its intention to continue to pursue the offer); and
  • the views of the target board.
• In the case of conditions relating to official authorisations and regulatory clearances, factors which will be taken into account in considering whether a condition or pre-condition may be invoked will include:
  • the significance of the authorisation or clearance to the bidder;
  • what action, if any, the bidder would need to take in order to obtain the authorisation or clearance and the strategic consequences for the bidder if it were to take that action; and
  • the consequences for the bidder and its directors if it were to complete the offer without obtaining the authorisation or clearance.
• In the case of a condition or pre-condition relating to there being no Phase 2 CMA reference (or equivalent reference or process), the factors that will be taken into account will also include:
  • whether the reference or process would be likely to result in a serious risk of material damage to the business of the bidder or target; and
  • the utility of requiring the bidder and/or target to pursue the reference or process where the prospect of the clearance being obtained is low.
• In the case of a MAC, whether the material significance requirement is met will depend on the bidder demonstrating that the relevant circumstances are “of very considerable significance striking at the heart of the purpose of the transaction”.