At the end of October 2015 the Takeover Panel confirmed a number of amendments to the Takeover Code in three response statements to its public consultations undertaken in 2015.
On October 23 2015 the panel published:
- Response Statement 2015/1 to its May 2015 consultation on the treatment of dividends (PCP 2015/1);
- Response Statement 2015/2 to its July 2015 consultation on additional presumptions to the definition of 'acting in concert' (PCP 2015/2); and
- Response Statement 2015/3 to its July 2015 consultation on the use of restrictions and suspensions of voting rights to avoid the normal application of Rule 9 (PCP 2015/3).
The amendments to the code set out in these response statements came into effect on November 23 2015.
In RS 2015/1 the panel confirmed the adoption of the amendments proposed in PCP 2015/1, the purpose of which are to clarify the application of existing Takeover Code provisions and ensure greater alignment of the code with the panel's existing practice.
Right to reduce offer consideration if dividend paid
Rule 2.5(a) of the code provides that if a bidder makes a possible offer announcement which includes the terms on which an offer might be made for a target, the bidder is bound by those terms if a firm offer is subsequently made, unless it specifically reserves the right not to be bound in specific or exceptional circumstances. In particular, Rule 2.5(a)(i) provides that where a possible offer announcement includes any indication of offer price, any offer subsequently made by the bidder must be made on the same or better terms.
Following its May 2015 consultation, the panel concluded that the code should require a bidder to state in a Rule 2.5(a)(i) statement, firm offer announcement and offer document that it has the right to reduce the offer consideration by the amount of any dividend made by the target, except where it expressly chooses to confirm in the relevant document that target shareholders will be entitled to receive and retain any such dividend in addition to the offer consideration. In addition, the panel decided that it must be a term of the offer that if the bidder exercises the right to reduce the offer consideration by the amount of any such dividend that is unpaid, the target shareholders will be entitled to receive that dividend.
In relation to these amendments, the panel noted that:
- Dividends include final or interim dividends already announced or declared (or that may be announced or declared during the course of an offer), as well as dividends which are unpaid at completion of the offer, but remain payable to the target's shareholders.
- If a declared dividend is unapproved by the target's shareholders or cancelled by the target, the panel stated that the bidder should have the option, but not an obligation, to increase the offer consideration. However, if the bidder purchased shares cum dividend, upon the dividend being unapproved or cancelled, the bidder would be required to increase its offer to ensure that accepting shareholders received the same value as those investors who had already sold shares to the bidder.
- The amendments also apply to any other distributions made by a target company. The panel must be consulted where the offer consideration is to be reduced by the value of a non-cash distribution.
Effect of dividend where bidder has made a no increase statement
Rules 2.5(a)(ii) and 32.2 provide that if a bidder's possible offer announcement, firm offer announcement or any subsequent statement refers to the fact that the relevant terms of an offer will not be increased or are final, the bidder cannot subsequently make an offer on better terms unless it specifically reserves the right not to be bound by such final terms in specific or exceptional circumstances.
Historically, where a target paid a dividend (or other distribution) after such announcement had been made by a bidder, as a matter of practice the panel would have required the bidder to reduce the offer consideration by the relevant dividend amount so that the overall value receivable by the target's shareholders would remain the same in the absence of any specific reservations. The amendments to the code introduce new notes to Rules 2.5 and 32.2 to codify this practice. In addition, the panel noted that in this situation, such reduction must be announced as soon as practicable by the bidder via a regulatory information service and may require the bidder to send a copy of such announcement directly to the target shareholders.
Impact of dividends on minimum offer price established by share purchases
Generally, Rules 6, 9.5 and 11.1 provide that in certain circumstances, the offer price for a public takeover must be equal to or more than the highest price paid by the bidder for any shares in the target during the offer period and certain other specified periods (eg, for Rule 9 mandatory offers, during the 12 months before the announcement of the offer). The panel made certain clarificatory amendments to the existing notes to these rules to clarify the impact of dividends on any such minimum offer price.
RS 2015/2 sets out the panel's amendments to the code's definition of 'voting rights' in relation to restrictions and suspensions of voting rights and other related amendments. These changes codify the panel's existing practice in relation to the treatment of shares subject to such restrictions and eliminate the scope for a company to issue restricted shares as a means of avoiding the normal application of Rule 9 (including the requirement for a whitewash).
The term 'voting rights' was previously defined in the code as: "all the voting rights attributable to the share capital of a company which are currently exercisable at a general meeting." This definition was amended by the panel to provide that, other than treasury shares, shares which are subject to a restriction on the exercise of voting rights or to a suspension of voting rights should nonetheless be regarded for the purposes of the code as having voting rights which are currently exercisable at a general meeting. These amendments have no effect on the treatment under the code of share classes which do not carry voting rights in any circumstances.
The panel noted that there may be a small number of companies that have previously issued suspended voting shares, and that such companies should consult the panel to obtain a ruling regarding the application of the code.
Under the code, persons who are or are presumed to be acting in concert are treated as a single person such that, for example, their interests in shares must be aggregated when considering the application of the Rule 9.1 mandatory offer requirement. Similarly, dealings by persons who are acting in concert with the bidder or target company are treated under the code as equivalent to dealings by the bidder or target company (or its directors) and as such are relevant when considering the application of the code provisions that regulate securities dealings.
The panel noted that it has been established practice to presume certain persons are acting in concert with each other even though they are not covered by the existing presumptions in the code definition. RS 2015/3 codifies the panel's existing practice by introducing new presumptions to the definition of 'acting in concert' for the following categories of person:
- a person, the person's close relatives and related trusts;
- the close relatives of a founder of a company to which the code applies, their close relatives and related trusts; and
- private company shareholders who sell their shares for the issue of new shares in a company to which the code applies or who, following the re-registration of that company as a public company, become shareholders in a company to which the code applies.
In addition, the panel introduced a new definition of 'close relatives', which would normally (as a matter of presumption) include:
- the person's spouse, civil partner or co-habitant;
- the person's children, parents, siblings, grandchildren and grandparents and those of any person described in point one; and
- the spouse, civil partner or co-habitant of any person described in point two.
The panel noted that these presumptions can be rebutted in any particular case. In particular, in relation to the presumption relating to private company shareholders, the panel noted that this presumption may be rebutted where such shareholders have no common interest, or are acting independently of each other and will continue to do so. This would also be the case where such shareholders are independent institutional shareholders, as opposed to individuals who founded or otherwise became members of the private company.
For further information on this topic please contact Will Pearce, Simon Witty or William Tong at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell LLP website can be accessed at www.davispolk.com.
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