Proposed changes to guidance to clarify target boards’ scope to undertake frustrating actions are helpful and should help them targets manage their business when they are subject to a bid, actual or potential.
The Takeovers Panel released on 14 September 2016 a consultation paper on proposed changes to its Guidance Note 12 which deals with "frustrating actions".
A "frustrating action" is defined by the Panel as an action by a target, whether taken or proposed, in the context of a control transaction, by reason of which:
- a takeover bid may be withdrawn or lapse; or
- a potential takeover bid is not proceeded with.
The Guidance Note explains the Panel's policy on when a frustrating action will be unacceptable because it will interfere with the reasonable and equal opportunity of shareholders to participate in control transactions or inhibit the acquisition of control in an efficient, competitive and informed market.
As the Panel has explained previously, the policy is in simple terms about ensuring that actions by target boards do not prevent a control transaction from proceeding at a time when the decision about control should properly be taken by shareholders rather than directors.
However, the Panel does recognise that it is important to balance this policy objective, on the one hand, with permitting, on the other, the proper conduct of the target's business to continue.
Clearer guidance on when a frustrating action will not be unacceptable
The Panel states in the Consultation Paper that a number of market participants have said the existing Guidance Note does not provide clear guidance as to when a frustrating action is unlikely to be acceptable with the result that the policy has the potential effect of unduly restricting a target from carrying on its business during a bid.
In the existing Guidance Note, there are few circumstances in which the Panel clearly says that a target is likely to be able to proceed with a frustrating action, and the only one likely to be applicable in most cases, is offering shareholders a choice between the action and the bid, whether by seeking shareholder approval or otherwise.
The Panel has therefore proposed changes in the Revised Guidance Note to more clearly set out the circumstances in which the Panel considers unacceptable circumstances will not arise. Many of these circumstances were already referred to in the previous guidance as factors which the Panel would take into account in deciding whether unacceptable circumstances exist. The Panel now more clearly identifies those which it says "in general" are "unlikely to give rise to unacceptable circumstances".
At the same time, the Panel still clearly states that the circumstances which are listed are "non-exhaustive", so that it retains the flexibility to consider each new circumstance in its own context.
Introduction of new concept of "genuine opportunity to dispose of shares"
In restructuring the relevant factors, the Panel has introduced a new test, which is whether or not "the bid gives shareholders a genuine opportunity to dispose of their shares".
The Panel lists a range of circumstances in which it says the bid will not provide shareholders with a "genuine opportunity" and therefore a frustrating action will not give rise to unacceptable circumstances.
It says that a bid will not provide a "genuine opportunity" where:
- due to condition, or some other structural feature, the takeover bid cannot be implemented or completed – this factor picks up on guidance previously provided in the context of Mariner's takeover bid for Austock Group, where the Panel found that the bid could not be frustrated because it was not properly funded and therefore not capable of implementation;
- there are reasonable grounds to expect it will not be successful – the Panel emphasises that it will require strong evidence before reaching this conclusion such as very few acceptances being received after the bid has been open for a long time or there being a superior proposal which is likely to be implemented instead;
- the bid is dependent on target directors recommending it – the Panel states more strongly its previously stated position that the policy cannot apply to schemes of arrangement (but leaves the door open for potential scheme proposals that refer to an alternative takeover to be frustrated) and extends this policy by stating that, for the same reason, takeover bids which are conditional on a board recommendation cannot be frustrated.
The Panel goes on to say that a target would be required to afford the bidder a reasonable opportunity to waive an offending condition (or presumably also revise the terms of the offer if possible) to ensure the bid does provide a genuine opportunity before proceeding with the frustrating action.
"Otherwise unreasonable" for frustrating action to be unacceptable
The Panel explains that even where a bid provides a genuine opportunity, it may still be "otherwise unreasonable" for the frustrating action to be unacceptable.
These circumstances tend to focus on the nature of the target's position and the bid conditions. The particular circumstances listed by the Panel as being unlikely to be unacceptable are largely the same as those already referred to in the previous guidance as relevant considerations and include where:
- there is a legal imperative to undertake the action;
- the frustrating action is announced before the bid or potential bid;
- the frustrating action is required to avoid a materially adverse financial consequence such as insolvency;
- it is unreasonable to rely upon the triggered condition; and
- a bid condition has been triggered and the bidder has not disclosed whether it will waive within a reasonable time or otherwise varied the terms without waiving the breach.
No longer relevant that frustrating action may have materially positive impact on business
The previous Guidance Note stated that it would be relevant to consider "whether the frustrating action materially affects the financial or business position of the target".
The Panel now states it does not consider it relevant that the action may in the view of the target board produce a materially favourable result for shareholders. The previous references to this consideration have been deleted. However, the Panel has continued to say that a frustrating action will not be unacceptable in the more extreme case where it is "required to avoid a materially adverse financial consequence" such as insolvency.
We think that this is a sensible change as a target board would be expected to have already formed the view in any example of frustrating action that it will be materially positive for the target in order to comply with their directors' duties. To make this a relevant consideration would only lead to a comparison of the relative merits of the action and the bid in deciding whether the policy should apply which is exactly the sort of decision which the policy is intended to put in the hands of shareholder (rather than the Panel).
Bidder required to waive conditions where shareholder vote rejected
Finally, the Panel has clarified that, where the target seeks approval before implementing a frustrating action, and shareholders reject the frustrating action, the bidder should be required to waive the triggered condition and/or other conditions to ensure the bid remains a "viable option for shareholders".
We think this is sensible to the extent that the Panel is suggesting only that the conditions are waived in relation to the frustrating action and only to the extent that it does not proceed (as a result of the vote not being approved). The Panel may wish to clarify this in the Revised Guidance Note.
Overall, changes provide welcome clarity
As an overall comment, our view is that the changes to clarify the scope which target boards have to undertake frustrating actions are helpful and should assist targets manage their business during what can often be relatively extended periods for which they are subject to a bid (or potential bid). However, we think it is important that the Panel continues to have the flexibility to consider each case in the context of its individual circumstances as these will vary greatly and often be very difficult to predict.
The Panel is inviting submissions until 24 October 2016.
If you have any questions about the proposed changes, the frustrating actions policy in general, or would like assistance in making a submission, please let us know.