On 23 February 2015, the Takeover Panel (the Panel) issued a public statement of censure of entrepreneur Mr Bob Morton for his failure to make an offer under Rule 9.1 of the Takeover Code (the Code), in connection with purchases of shares in Armour Group PLC (Armour), a tech invesment company on AIM, by Mr Morton’s four sons in June and August 2011 and associated breaches of Rule 5 and Rule 2 of the Code.

Background

In February 2011, as a result of a placing of new shares, Mr Morton and persons acting in concert with him (the “Morton Concert Party”) became interested in shares which carried approximately 39% of the voting rights in Armour. The issue of the new shares was approved by a vote of independent shareholders at a general meeting on 23 February 2011 and, as a result, the obligation for the Morton Concert Party to make a mandatory offer under Rule 9.1 of the Code was ‘whitewashed’. The associated ‘whitewash’ circular to shareholders gave details of the Morton Concert Party.

Later in 2011, Mr Morton was asked if he would like to purchase further shares in Armour from exiting investors. Mr Morton declined to do so, on the basis that it would trigger an obligation to make an offer for Armour under Rule 9 of the Code. However, Mr Morton wrongly believed that if his sons were to purchase the shares, they would be regarded as independent of the Morton Concert Party and thus not trigger the obligation to make an offer. Mr Morton transferred to each of his sons the required funds for the purchase of the shares and arranged for an aggregate of approximately 6.8 million shares in Armour to be purchased in the names of his four sons. In June 2011 one of Mr Morton’s sons purchased further shares in Armour. As a result of these transactions, Mr Morton’s sons collectively became interested in shares carrying 7.4% of the voting rights of Armour, in addition to the 39% already held by the Morton Concert Party.

Neither Mr Morton nor any of his sons consulted the Panel or sought advice in relation to these share purchases and the Panel was therefore not aware of the breaches of the Code until November 2014.

Relevant provisions and application of the Code

The definition of “acting in concert”

Under the Code, “acting in concert” means any persons who pursuant to an agreement or understanding, whether formal or informal, co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for the company. It is the long-standing practice of the Panel to treat a person’s close relatives as acting in concert with that person unless there is evidence of a breakdown in the relationship.

Trusts set up for the benefit of three of his four sons were part of the Morton Concert Party described in detail in the whitewash circular published a few months previously.

Rules 9.1(b) and 2.2(b) - The requirement for a mandatory offer

Rule 9.1(b) of the Code provides that, except with the consent of the Panel, when any person, together with persons acting in concert with him, is interested in shares which carry not less than 30% but not more than 50% of the voting rights of a company to which the Code applies and subsequently acquires an interest in further voting shares which increases this percentage, that person is required to make an offer for each class of the remaining equity share capital of the company. The grant of a waiver by the Panel from the Rule 9 obligation is subject to a resolution of independent shareholders approving the acquisition in question.

The prime responsibility for making an offer under Rule 9.1 normally attaches to the member of the concert party who makes the acquisition which triggers the requirement to make the offer. However, Rule 9.2 provides that, in addition, each of the principal members of the concert party may, depending on the circumstances, have an obligation to extend an offer.

Under Rule 2.2(b) of the Code, an announcement must be made immediately following the acquisition of any interest in shares which gives rise to an obligation to make an offer under Rule 9.1.

Immediately prior to the purchase of the shares by Mr Morton’s four sons, the Morton Concert Party held shares carrying approximately 39% of the voting rights of Armour. The purchases of the additional shares each triggered the obligation to make an offer under Rule 9.1(b) and also to make an immediate announcement under Rule 2.2(b). No offer was made and no announcement published.

Rules 5.1(b) and 5.2 - Restrictions on share purchases

Under Rule 5.1(b), an acquisition of an interest in shares triggering an obligation to make an offer under Rule 9.1(b) can only be made if one of the exceptions in Rule 5.2 applies. No exemption under Rule 5.2 applied to the purchases of shares by Mr Morton’s sons and Rule 5.1(b) was therefore also breached as a result.

Ruling on Rule 9 offer

In December 2014, the Panel ruled that an offer must be made for Armour in accordance with Rule 9 at 4.75p per share, being the highest price paid by any of Mr Morton’s sons for Armour shares in the period between June and August 2011 and in the 12 months previously (in accordance with Rile 9.5). Mr Morton was a principal member of the Morton Concert Party and he accepted that he was responsible for making this offer.

The offer, through Hawk Investment Holdings Limited (a company wholly-owned by Mr and Mrs Morton), closed on 20 February 2015 at which point the Morton Concert Party had received acceptances in respect of shares carrying 64.62% of the voting rights of Armour.

Public Censure

The Panel found that Mr Morton and his four sons were acting in concert and that the failure by Mr Morton to make an offer under Rule 9 of the Code in connection with the purchases of shares by his four sons in June and August 2011, in addition to associated breaches of Rule 5 and Rule 2, were serious breaches of the Code, particularly in view of the fact that:

  • Mr Morton has previously breached the Code on two separate occasions and received notification of these breaches from the Panel;
  • Mr Morton is an experienced investor and was aware that the trusts which he had set up for the benefit of three of his sons were regarded by the Panel as acting in concert with him; and
  • Mr Morton chose not to consult the Panel or his advisers in relation to the purchase of the shares, despite having the opportunity to do so.

The Panel therefore issued the public statement of censure. Public statements of censure from the Panel are rare and it is considered to be a serious disciplinary sanction. The Panel believes that Mr Morton’s actions showed a complete disregard for the Code and in light of his previous breaches, determined that a public censure was the appropriate disciplinary sanction.