The Panel finalises two further sets of Rule changes

On 4 April, 2023, the Takeover Panel published Response Statements in relation to two consultations on Code rule changes that it issued last year - RS 2023/3 on the offer timetable in a competitive situation and RS 2023/4 on six miscellaneous further amendments to the Code. 

Headline points

It will be proceeding with all the rule changes it proposed in its consultations (PCP 2022/3 (competitive offers timetable) and PCP 2022/4 (miscellaneous amendments)), with very largely the same wording it proposed. These rule changes will take effect on 22 May, 2023 and apply to all Code transactions, including all on-going offers.

The Panel has, however, slightly modified the text of the rule change proposed to deal with possible auction situations in competitive offers involving a scheme offer. It has also indicated that it will be looking at possible changes to two further Code provisions, partly, it seems, as a result of some of the feedback it received in relation to PCP 2022/3. These are discussed further below but specifically it will be:

• launching a further consultation later this year on the Code's "frustrating action" rule (Rule 21.1), and 
• giving further consideration to the Code rule that it sees as prohibiting it from agreeing to a scheme bidder requesting the flexibility to extend a "mini-long-stop" date set out in the target's scheme document, at least in competitive situations. 

Competitive offers involving a scheme offer - when should an auction process start?

The main clarification that the Panel is making in relation to the timetable for competitive offers involving at least one scheme offer, is to set out in greater detail in note 2 to Rule 32.5 of the Code how the date when any auction procedure required to resolve an outstanding competitive situation will be determined. Currently, the Code merely says that the parties must consult the Panel as to the applicable timetable. The Code will now provide that unless the parties wish to agree an earlier date, the date when final revisions to the offers must be announced (Day 46) and any auction process should start, will "normally" be deferred until the last condition relating to the relevant authorisation or clearance has been satisfied or waived by each of the bidders.  

This default date (absent the parties agreement on a different date) will be the "norm" but in exceptional cases it may be replaced by an earlier date. The Panel gives the example of it not being possible for regulatory reviews of both competing offers to be carried out in parallel, with the prospect therefore of an unacceptably protracted bid timetable.  

Note 2 will also set out the expected sequencing of key dates where a contractual offer is in competition with a scheme offer, to enable target shareholders to decide between the two offers once each of the bidders has made its final offer (whether that is by way of an auction procedure or otherwise). As proposed in PCP 2022/3, in these cases: 

• Day 39 - the last day in the offer timetable by which the target can announce any new material information - will normally be the seventh day prior to the last date on which final offers may be announced prior to the start of an auction process (i.e., Day 46)
• Day 60 (for the contractual offer) will normally be set for a date after the shareholder meetings have been held to approve the scheme offer and before the date for the court sanction hearing, giving shareholders time in which to decide whether to accept the contractual offer in the light of shareholder approval (or not) of the scheme offer. 

Competitive offers - impact of Rule 21.1 (frustrating action)

Rule 21.1 of the Code generally prohibits a target from taking any action that might frustrate an offer unless it obtains shareholder approval for the relevant action. In PCP 2022/3 the Panel said that where there were competing offers and the "faster" offeror was proceeding by way of a scheme and had obtained the required shareholder approval for its scheme, it should consult the Panel before proceeding to seek the court's sanction of the sanction, to see if any further shareholder vote should be obtained for this step under Rule 21.1 since, once sanctioned, the competing bid would effectively be frustrated. 

Two respondents to PCP 2022/3 questioned whether it was appropriate for the Panel to require this further shareholder approval of the scheme and whether seeking court sanction of the scheme should be seen as a case of the target taking frustrating action for the purposes of Rule 21.1.

The Panel seems to have been a little surprised by this reaction - two other respondents were silent on this - to a point on which it was not specifically consulting. In RS 2023/3 the Panel notes that it has only rarely received representations that Rule 21.1 should be applied in this scenario and that normally, where a competing bidder has approached a target which is the subject of a scheme offer, the scheme shareholder meetings will be postponed to give the competing bidder time to clarify its intentions and make an offer which the target shareholders can then take into account when asked to approve the alternative scheme offer. However, it also says that if a competing offer were to increase materially its offer after the scheme offer had been approved, arguably it would not be right to allow the target and scheme bidder to proceed to get the sanction of the court to their offer.

Acknowledging the arguments that have been made against its approach of potentially applying Rule 21.1 in these cases, the Panel says that it will include this approach in a more general review of Rule 21.1 that it intends to carry out later in the year. In the meantime the indications are that it is unlikely, depending on the specific facts, Rule 21.1 will prevent a target from seeking court sanction in these cases since the Panel says that it is likely to propose that either Rule 21.1 should not apply or if it does apply, the Panel should withhold its consent to the target seeking court sanction "only in exceptional circumstances".

Competitive offers - extending "mini-long-stop" dates under a scheme offer

Under a scheme offer the parties are allowed to include as conditions to the offer, the date when the shareholder meetings to approve the scheme must be held and the date when the court sanction hearing for the scheme must be held. (These are commonly referred to as "mini-long-stop" dates to distinguish them from the "final" long stop date specified in the scheme circular as the latest date by which the scheme must have become effective).  Unlike most offer conditions (other than the acceptance condition) these conditions are not subject to the Code's onerous restrictions on being invoked to cause the offer to lapse. Instead, they operate as "use it or lose it" conditions, i.e., if not invoked by the relevant date, they will cease to be conditions unless the bidder and target agree to an extension. 

One respondent to RS 2023/3 queried whether the Panel should apply the approach it is adopting to the auction process discussed above in competitive situations involving a scheme offer. For example, if a scheme bidder couldn't agree with the target on an extension of a mini-long-stop date where a competing bidder had emerged and the target had withdrawn its recommendation of an existing scheme bid, the scheme bidder would be forced either to invoke the mini-long-stop date or risk its bid remaining outstanding until the final long stop date. Could the Panel step in and permit the bidder to reset the relevant mini-long-stop date? 

The Panel notes that in order to to do this a further amendment to the Code would be required since currently an extension is only possible with the target's agreement. As this change was not included in the PCP 2022/3 consultation, the Panel has agreed to consider the point at a later date.

Further miscellaneous amendments - RS 2023/4

The Panel received broad support for the five amendments to the Code it proposed in PCP 2022/4. Worth mentioning are:

• giving the Panel greater flexibility to grant derogations and waivers from the Code's requirements, particularly in cases where the target was in serious financial difficulty
• removing the presumption that the Panel will not require a public announcement of a possible offer where there is speculation, rumour or an untoward share price movement resulting from a clear and unequivocal public statement (e.g., a DTR 5 shareholding disclosure) 
• rephrasing the adjusted offer price that may be required by the Panel in the case of mandatory bids from one that is "fair and reasonable" to one that is "appropriate".

There was, however, some concern raised about the proposed extension of the requirements under the Code for the target board recommendations in respect of the main offer (and any alternative offers) and offers for certain other securities of the target (i.e., convertible securities, options or subscription rights, required to be made under Rule 15).

Target board recommendations on action to be taken by shareholders

The Code already requires the target board to give its opinion on the offer (and any alternative offers), its reasons for that opinion and the substance of the advice given to it by its financial adviser. In addition, it must include in its offer circular response the substance of the advice it has received on any Rule 15 offer or proposal and its views on that offer or proposal.

PCP 2022/4 proposed that the board should also provide a recommendation as to the action that shareholders should take in respect of the main offer (and any alternative offers) and any Rule 15 offer or proposal.

Respondents were concerned about the ability of a target board to give these recommendations beyond that for the main offer and the possible liability to which this may expose directors. 

The Panel has gone some way towards addressing these concerns by providing in the Code that where there are alternative offers and more than one can be recommended but the action to be taken by individual shareholders will depend "on various factors and their particular circumstances", the board's recommendation of action to be taken can be satisfied by referencing the foregoing and explaining the key factors that it considers shareholders should take into account in making their decisions as to what action to take.

The Panel has also provided four simple example recommendations that targets may wish to use, as appropriate. These include main and alternative offers where the alternative may or may not be recommended and also where the board and its financial adviser are unable to form an opinion on the alternative offer.

Helpfully, the Panel has confirmed that  "mix and match" elections under a main offer will not be treated as an alternative offer requiring a board recommendation under the new requirements.

To address concerns about recommendations in relation to Rule 15 offers or proposals, the Code will include a similar provision to that mentioned above in relation to alternative offers. 

A digital Code

RS 2023/4 includes several "formatting" edits to the Code which the Panel isn't consulting on and which it is making in preparation for issuing a digital version of the Code which will presumably include cross-referencing and other hyperlinks (rather like the FCA Handbook does). Up until now, the Code has only been available in hard copy (for purchase) or as a freely downloadable pdf.

Takeaways

No substantive changes have been made to the amendments to the Code that the Panel proposed last year, most (if not all) of which received broad support from commentators and practitioners. 

Of particular note to Code targets and their advisers may be the greater diligence and analysis, followed by appropriately succinct disclosure as a "recommendation", that they will be required to carry out and give in their offer response documents. 

And of course it will be interesting to see what the Panel proposes in its consultation later this year on Rule 21.1  and frustrating action. At least the Panel has given us the heads up on the possibly limited impact that may have on the sanctioning of scheme offers in competitive situations.