Takeover Code amendments take effect

The Takeover Code (“Code”) applies to companies with registered offices in the UK, the Channel Islands or the Isle of Man admitted to trading on a UK regulated market such as the LSE Main Market, Aquis or AIM. One way a bidder can buy a public company is by way of a scheme of arrangement, a court-sanctioned process whereby the public company comes to a binding arrangement or compromise with its shareholders to approve the sale. The recent changes to the Code are centred around schemes of arrangement, particularly where there are competing bids from more than one bidder.

The key amendments to the Code are as follows:

Offer timetable in competitive bid situations

Offer timetable in a competitive situation in which at least one bidder is using a scheme of arrangement

The Code has been amended to outline the approach of the Panel to competitive bids involving at least one scheme of arrangement, especially in cases where official authorisations or regulatory clearances must be obtained. Note 2 on Rule 32.5 of the Code clarifies a framework for the resolution of a competitive situation involving a scheme and has been amended to shed light on the following:

• Where the parties cannot agree to an earlier date among themselves, the Panel generally will not introduce an auction procedure to conclude the competitive situation until the final condition relating to a relevant regulatory clearance or official authorisation has been waived or satisfied by each bidder; and
• How a framework for target shareholders will be set out by the Panel to facilitate a decision between competing transactions once a final offer has been submitted by each bidder.

Rule 21.1 – where a target board endeavours to sanction a scheme in a competitive bid situation

Where a target board strives to attain the court’s sanction of a scheme where there is a competing contractual bidder, it may be the case that a ‘faster’ bidder (i.e. the first bidder to obtain regulatory clearances or official authorisations) is proceeding by way of the scheme and target shareholder approval has already been obtained.

In this scenario, if the target board wishes to apply for the court’s sanction of the scheme prior to the competitive situation being resolved, the target should consult with the Panel as to whether this would, without an additional shareholder vote, be restricted by Rule 21.1, which prohibits ‘frustrating actions’, because the sanction would result in the competing ‘slower’ contractual offer being frustrated. The Code Committee has indicated that this point will be considered further and will be reviewed as part of a wider review of rules around frustrating actions to be carried out in the second half of 2023.

When a clear public statement triggers share price movement, rumour or speculation

Note 2 on Rule 2.2 Takeover Code has been deleted, which previously provided that the Panel Executive will not usually require an announcement under Rule 2.2(d) if it is satisfied that a price movement, rumour or speculation results from a clear and unequivocal public statement.

The Panel considers that the change removes the possible tactical advantage that a bidder could previously obtain by purchasing shares before approaching the target board, and the result of this deletion is an effective reversal of the presumption on whether an announcement is required in this situation.

Letters of intent and irrevocable undertakings

Changes to Rule 2.10 and Rule 26 of the Code shorten the amount of time by which a letter of intent or irrevocable undertaking that has been procured prior to a firm offer announcement must be published on a website:

• by 12 pm on the following business day if they are entered into during an offer period;
• by 12 pm on the business day after the commencement of an offer period; or
• by 12 pm after the announcement that first identifies a potential bidder (as relevant).

Note 3 on Rule 9.5 – adjusted mandatory bid price

In certain circumstances, shareholders may need to make a mandatory offer for all the shares in a company subject to the Code. Rule 9.5 of the Code states that it is mandatory for a bidder to offer target shareholders the highest price paid by the bidder, or any person acting in concert with the bidder, for target shares during the 12 months prior to the offer. Note 3 on Rule 9.5 has now been amended by the Panel to stipulate that the price payable by a bidder must be ‘appropriate’ rather than ‘fair and reasonable’. Note 3 has also been amended to clarify that a Panel decision to adjust the price of a mandatory bid must be ‘made public’ rather than published by the Panel itself, which reflects the current practice of explaining the decision in the firm offer announcement and the offer document.

Waivers and derogations from Code requirements where a company is in serious financial turmoil

The Introduction to the Code has been amended to clarify that the Panel can grant a waiver or derogation from Code requirements where a company is in serious financial turmoil, even if it might result in a General Principle not being respected. The amendment gives the Panel greater flexibility in the case of exceptional circumstances.

Additionally, Note 3 on Dispensations from Rule 9 Takeover Code has been amended to remove certain limitations on the Panel’s flexibility to waive the mandatory offer requirement under Rule 9 in the case of a rescue operation that is the only manner in which the company might be saved.

Recommendations of target board when there are alternative offers available to shareholders

A new rule, Rule 25.2(c) Takeover Code, contains an express requirement for a target board to make a recommendation to shareholders on any offer, including any alternative offers. While this usually already occurred in practice, target boards did not always provide a recommendation to shareholders when there was an alternative offer, and the Code Committee believes that target directors are best placed to evaluate the merits of an offer (including any alternative offers).

Under Rule 25.2(c), the target board may consider explaining to shareholders that more than one offer can be recommended and that the advisable course of action may depend upon the circumstances of each individual shareholder.

Application of amendments

Except where application of the amendments would have a retroactive effect, the amendments to the Code apply to all companies and transactions to which it relates, including any ongoing transactions which straddle 22 May 2023.

Our experience

Memery Crystal has advised a number of companies on takeovers by way of schemes of arrangement. Most recently, in March 2023 it advised Songtradr, Inc. on its takeover of 7digital, a UK-based music technology company, by way of a scheme of arrangement. Memery Crystal also acted for Tungsten Corporation PLC on its takeover by way of scheme of arrangement by Kofax in June 2022.

Authors

Should you have any questions, please contact Partner Robert-Bines Black or Associate David McClellan, the authors of this article, both in Memery Crystal’s Equity Capital Markets team.