With effect from Monday 23 November 2015 the Takeover Code will be amended to make clearer which persons are presumed by the Panel to be acting in concert with each other, to require certain announcements to make clear whether the bidder will be able to reduce the offer consideration if a dividend is subsequently paid by the target company, and to stipulate that temporary restrictions on voting rights should be disregarded for the purposes of calculating a person’s holding in a Code company.

  • Persons acting in concert with each other: The Panel is codifying its existing practice of presuming that persons in each of the following categories are acting in concert with other persons in the same category:
    • a person, the person’s close relatives, and the related trusts of any of them, all with each other;
    • the close relatives of a founder of a company to which the Code applies, their close relatives, and the related trusts of any of them, all with each other;
    • shareholders in a private company who sell their shares in that company in consideration 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 in connection with an initial public offering or otherwise, become shareholders in a company to which the Code applies.
  • Dividends: In any announcement made under Rule 2.5(a)(i) (specifying the price a potential bidder may be prepared to offer), a firm offer announcement under Rule 2.7 and in the offer document itself the bidder will have to include a statement that it will have the right to reduce the offer consideration by the amount of any dividend (or other distribution) which is paid or becomes payable by the target company to target company shareholders, unless, and to the extent that, the bidder expressly states that target company shareholders will be entitled to receive all or part of a specified dividend in addition to the offer consideration.
  • Voting rights and Rule 9: The definition of “voting rights” is being amended to:
    • make clear that where a shareholder is, for any reason, currently restricted from exercising the voting rights attaching to shares, those (restricted) voting rights should nevertheless be taken into account in considering the application of the Code in relation to that person and to other shareholders in the company; and
    • eliminate the existing scope for a company to issue “suspended voting shares” as a means of avoiding the normal application of Rule 9 of the Code (mandatory offers), including the requirement for a company to obtain a whitewash.

Persons acting in concert with each other

Background

The term “acting in concert” is fundamental to the application of the Code. In effect, persons who are acting in concert are treated under the Code as a single person such that, for example, their interests in shares must be aggregated when determining whether a mandatory offer is required under Rule 9.1. Similarly, dealings by persons who are acting in concert with a bidder or the target company are treated under the Code as equivalent to dealings by the bidder or the target company (or its directors) and as such are relevant to rules of the Code that relate to dealings by a bidder or the target company in target shares: in particular, Rules 4.2, 4.4, 4.6, 5, 6, 8, 9 and 11.

(Rule 4 restricts the way in which the bidder, target and their respective concert parties can deal in target shares during an offer period. Rule 5 imposes restrictions on when and how a bidder and its concert parties can acquire target shares. Rules 6, 9 and 11 prescribe the minimum amount, and form, of offer consideration where the bidder or any of its concert parties has acquired interests in target shares during certain specified periods (see further below). Rule 8 broadly requires various persons, during an offer period, to make public (or in some circumstances, private) disclosures of their positions or dealings in shares in parties to an offer.)

The general definition of “acting in concert” provides:

Persons acting in concert comprise persons who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control [i.e. 30% or more of the voting rights] of a company or to frustrate the successful outcome of an offer for a company. A person and each of its affiliated persons will be deemed to be acting in concert all with each other.”

An “affiliated person” means, broadly, any entity that a person controls.

The definition also contains six categories of person who are presumed to be acting in concert with other persons in the same category. Such persons are presumed to have such a degree of common interest with one another that they should, in effect, be regarded as a single person in relation to the target company. However, in some circumstances the Panel may be prepared to accept that a presumption should be disregarded (“rebutted”), so that the persons concerned will not be treated as acting in concert with each other.

If persons are deemed to be acting in concert with each other, this does not in itself have any immediate consequences. However, if one of the persons then acquires an interest in shares, the acquisition could have consequences under the Code for that person and the other persons regarded as acting in concert with it: in particular, if one of the thresholds in Rule 9.1 is breached, they will prima facie have to make a mandatory offer to all the other shareholders in the target.

Codification of the Panel’s practice

For a number of years it has been the Panel’s practice normally to presume certain persons to be acting in concert with each other even though they are not covered by the existing presumptions in the definition. The Panel has now decided to codify this practice. As a result, the Code will now expressly state that persons in each of the following categories will be presumed to be acting in concert with other persons in the same category:

“(5) a person, the person’s close relatives, and the related trusts of any of them, all with each other;

(6) the close relatives of a founder of a company to which the Code applies, their close relatives, and the related trusts of any of them, all with each other;

(9) shareholders in a private company who sell their shares in that company in consideration 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 in connection with an initial public offering or otherwise, become shareholders in a company to which the Code applies.”

Related trusts

“Related trust” is not defined in the Code, but in practice the Panel presumes the trustee(s), the settlor and the beneficiaries of a person’s related trust to be acting in concert with that person. Where a “protector” is appointed by the settlor or trustees, in order to exercise certain powers in relation to the administration of the trust, the powers of the protector may include, for example, the power to appoint or remove trustees or the power to approve or withhold consent to certain actions by the trustees. In view of this, a trust in respect of which a person is a protector will be treated by the Panel as a related trust of his, and a person will be presumed to be acting in concert not only with the trustee(s), the settlor and the beneficiaries of a related trust but also with any protector of the trust.

Other fiduciary “vehicles”, such as foundations and limited partnerships, are likely to be treated by the Panel in the same way.

Founders

In relation to a person who founded a company and the descendants of the founder and the members of the descendants’ families, the category of persons who are presumed to be acting in concert with each other is wider than for a person and his close relatives and related trusts. This is because, in the Panel’s experience, the family members of a founder are likely to share a common loyalty to the company and each other and to seek to act in unison.

Vendors of a private company

The vendors of a private company are presumed to be acting in concert with each other when the company is sold to a company to which the Code applies and they receive, as consideration, new shares in the “Code company”. (Typically this occurs when some or all of the shareholders in a private company sell their shares to a UK-incorporated AIM company and receive as consideration shares in the AIM company that in aggregate represent a significant proportion of its total issued share capital.) This is because the vendors are likely to have co-operated together, first, in becoming shareholders in the private company and, secondly, in agreeing the sale of the private company to the Code company. It is also likely that the vendors will continue to co-operate together once they become shareholders in the Code company.

If the vendors will come to hold 30% or more of the shares carrying voting rights in the Code company following completion of the sale, and where the presumption has not been rebutted, the Code company can seek a waiver from the Panel of the obligation that would otherwise arise for the vendors to make a mandatory offer under Rule 9.1 (using the so-called “whitewash” procedure).

Rebutting the presumptions

As noted above, in some circumstances the Panel may be prepared to accept that a presumption should be disregarded (“rebutted”), so that the persons concerned will not be treated as acting in concert with each other. For example, the presumption that members of a family are acting in concert with each other (new presumption (5)) can be rebutted if there has been a breakdown in the relationship between certain family members, or if particular family members have become estranged for some other reason; and the presumption that the vendors of shares in a private company (new presumption (9)) can be rebutted if it can be demonstrated to the Panel’s satisfaction that the shareholders in the private company do not (any longer) have a common interest and that they are acting independently of each other and will continue to do so in the future.

Dividends

The payment of a dividend by a target company may affect the financial terms on which a bidder wishes to make or proceed with an offer. In particular, a bidder will usually wish to protect itself against value leakage from the target company caused by the payment of a dividend by reserving the right to reduce the offer consideration if a dividend is paid to target company shareholders. However, a bidder may be prepared to allow target company shareholders to receive a specific dividend in addition to receiving the offer consideration: for example, in Delphi Automotive’s recommended cash offer for HellermannTyton announced earlier this year target shareholders were entitled to receive an interim dividend of up to 2.2 pence per share in addition to the offer consideration of 480 pence.

The Panel has decided to clarify its approach to such situations. In particular, in any announcement made under Rule 2.5(a)(i) (i.e. specifying the price a potential bidder may be prepared to offer), a firm offer announcement under Rule 2.7 and in the offer document itself the bidder will have to include a statement that it will have the right to reduce the offer consideration by the amount of any dividend (or other distribution) which is paid or becomes payable by the target company to target company shareholders, unless, and to the extent that, the bidder expressly states that target company shareholders will be entitled to receive all or part of a specified dividend in addition to the offer consideration. Such a “specified dividend” could include not only a final or interim dividend which has already been announced or declared by the target company but also a dividend which may be announced or declared by the target company during the course of an offer.

The Panel has decided that it would not be appropriate for the bidder to have an automatic right always to reduce the offer consideration by the amount of any dividend subsequently paid by the target company. Rather, the bidder must make clear to target shareholders and other market participants whether the bidder will be able to reduce the offer consideration if a dividend is subsequently paid by the target company.

In addition, various amendments have been made to Rules 6, 9.5 and 11.1. Those Rules set out provisions relating to the minimum amount, and form, of offer consideration where the bidder (or any person acting in concert with it) has acquired interests in target company shares during certain specified periods. Broadly, the consideration offered must be at no less than the highest price paid by the bidder (or any person acting in concert with it) for an interest in the shares of the target company during the relevant period or during the offer period. The amendments clarify how those Rules apply where target shares are purchased “cum div” by the bidder or persons acting in concert with it.

Voting rights that are restricted or suspended

The definition of “voting rights” is particularly relevant to Rule 9 of the Code, in which the thresholds for triggering a mandatory offer are based on the percentage of voting rights that is controlled by a person and his concert parties. The Panel has decided to amend the definition of “voting rights” to:

  • Make clear that where a shareholder is, for any reason, currently restricted from exercising the voting rights attaching to shares, those (restricted) voting rights should nevertheless be taken into account in considering the application of the Code in relation to that person and to other shareholders in the company. Restrictions on exercising voting rights could be created voluntarily – e.g. if the holder agrees with the company or others that he will not exercise them – or could be imposed by the Panel or by the company itself – e.g. where a shareholder or other person fails to comply with a section 793 notice sent out by the company or, under the new regime coming into force next year relating to persons exercising significant control (PSCs), with a notice sent out by the company seeking information about who its ultimate controllers are.
  • Eliminate the existing scope for a company to issue “suspended voting shares” as a means of avoiding the normal application of Rule 9 of the Code, including the requirement for a company to obtain a whitewash. Suspended voting shares are shares which rank pari passu with the company’s voting ordinary share capital save that, under the company’s articles of association, the holder of the shares is not entitled to vote in respect of such shares at a general meeting of the company (except on certain matters). However, such shares typically convert automatically into voting ordinary shares on a one-for-one basis upon their transfer to another person (other than certain designated categories of person).

As a result of the amendments:

  • suspended voting shares will cease to be effective as a means of avoiding the normal application of Rule 9; and
  • a company will therefore be required to seek a whitewash if it proposes to issue suspended voting shares to a person such that their aggregate holding of voting rights (aggregating their existing holding with the suspended voting shares) will go through a percentage in Rule 9.1.

The amendment will have no impact on the treatment under the Code of a class of shares which does not carry voting rights in any circumstances (or in the hands of any person) - for example, a class of non-voting ordinary shares - even if those shares are convertible at any time on a one-for-one basis into voting ordinary shares upon service of a conversion notice by the shareholder. This is because the rights attaching to such shares do not include the right to vote prior to their conversion into voting ordinary shares. But if a person who already holds, say, 29.9% of the voting rights converts his non-voting shares into voting shares, a mandatory offer obligation will be triggered unless a whitewash was obtained at the time the convertible shares were issued.

Preference shares that carry a right to vote only in certain circumstances – e.g. where the preference dividend is in arrears – are treated as carrying voting rights as soon as those circumstances arise.

Source documents

Each of the following is available on the “Response Statements” page of the Panel’s website:

  • Panel Response Statement RS 2015/3 in relation to proposals in PCP 2015/3 to introduce three new presumptions to the definition of “acting in concert”.
  • Panel Response Statement RS 2015/2 in relation to proposals in PCP 2015/2 to amend the definition of voting rights.
  • Panel Response Statement RS 2015/1 in relation to proposals in PCP 2015/1 to amend various rules of the Code relating to the treatment of dividends paid by a target company.