On 8 January 2018 various changes will be made to the Takeover Code to address potential issues that could arise where a company that is or may be subject to a takeover offer for its shares proposes to sell some or all of its assets instead. The new rules will apply to announcements or statements made on or after that date in relation to ongoing offers, as well as to offers or possible offers that are announced after that date. The Panel is not, however, seeking to regulate generally sales of assets by a company to which the Code applies to a former bidder or former potential bidder.

Key changes are:

  • Where a company that is subject to a takeover offer proposes to sell some or all of its assets, it will need to provide shareholders with more information.
  • A bidder that has excluded itself from making an offer, or from amending an offer, will not be able to circumvent the restrictions in the Code by agreeing to buy assets from the target instead.

Many of the changes are in response to issues that arose on two transactions in late 2016 (the offers for SVG Capital PLC and for M.P. Evans Group PLC) in which the board of a company that was the subject of a unilateral offer decided that better value could be delivered to shareholders through the company selling all of its assets to a third party, returning the proceeds to shareholders and winding up the company.

Asset sale in competition to a takeover offer

Where a company that is the subject of a takeover offer enters into an alternative arrangement under which a third party agrees to purchase all or substantially all of the company’s assets, so that the company can then return the proceeds of sale and its other cash to shareholders, if the company makes a statement to its shareholders about the amount per share, or a range of amounts, that they can expect to receive from the sale and return of value, the statement will be treated as a “quantified financial benefits statement”. As a result, the company will need to obtain reports from its accountants and financial adviser that the statement has been properly compiled on the assumptions stated and with due care and consideration.

A party that agrees to purchase assets from a company that is the subject of a takeover offer will not be permitted to buy shares in the company during the offer period unless the company has stated the amount that the company’s shareholders can expect to receive from the sale and return of value, and then only if the purchase price per share is no more than the return of value amount.

Asset sales and other transactions subject to Rule 21.1

Under Rule 21.1 of the Code, if a company is subject to a takeover offer, or an offer is imminent, the company must not do anything to frustrate the offer unless it obtains prior approval from its shareholders in a general meeting. This includes issuing shares, paying a special dividend or entering into an agreement to sell assets of a material amount (which usually means 10% or more). Under the amended Rule:

  • A company will be permitted to enter into an agreement to take such action without shareholder approval provided it is conditional on the offer lapsing or being withdrawn.
  • If, unusually, the agreement is not conditional on the offer lapsing or being withdrawn, and the bidder has not agreed to it, so that shareholder approval is needed, the board will need to obtain an opinion from its Rule 3 adviser that the terms of the agreement are fair and reasonable. The substance of that advice must be included in the circular to shareholders convening the meeting. Other specified information must also be included. The company must consult the Panel about the date of the meeting. These new requirements reflect the fact that, if the company’s shareholders do approve the agreement, the bidder is quite likely to invoke a condition to lapse or withdraw its offer – so the company’s shareholders are effectively being asked to choose between alternative exit proposals.
  • The agreement must be published on the company’s website and remain there until the end of the offer period, even if the contents are commercially sensitive.
  • The company can agree to pay a break fee to a purchaser or purchasers of its assets provided that the aggregate amount of the break fee(s) is no more than 1% of the value of the assets involved.
  • If, after becoming aware that a takeover offer may be made, the company provides any information to a purchaser of its assets, it must on request provide the same information to any party that is making a takeover offer for the company or that has a bona fide intention to do so. (However, the asset purchaser is not entitled to be provided with any information that the company provides to a takeover offeror.)

Preventing a party from circumventing restrictions in the Code

Various other changes are designed to ensure that a party cannot circumvent restrictions under the Code by offering to purchase a significant proportion of the target’s assets instead. “Significant” for this purpose will usually mean 75% or more of the target’s assets, excluding cash and cash equivalents (not 50% as the Panel had originally proposed). The restrictions are:

  • Rule 35.1, under which a bidder whose offer has lapsed or been withdrawn must not make a further offer, or acquire shares in the target, for the next 12 months (the 12 month lock-out) unless the Panel consents.
  • Rule 2.8, under which a party that has made a statement to the effect that it does not intend to make an offer for a company (a “no offer statement”) must not announce an offer or possible offer, or acquire shares in the target, within the next six months, unless certain circumstances arise in which the party has expressly reserved the right to do so (see below).
  • Rule 12.2, under which a bidder whose offer has been referred to the UK or EU competition authorities for Phase 2 proceedings must not announce an offer or possible offer, or acquire shares in the target, during the competition reference period. This restriction cannot be disapplied with the agreement of the target’s board or in any other circumstances.
  • Rule 31.5, under which a bidder that has made a statement that it will not increase its offer price (a “no increase statement”) cannot then do so, unless certain circumstances arise in which the party has expressly reserved the right to do so.
  • Rule 32.2, under which a bidder that has made a statement that it will not extend the duration of its offer (a “no extension statement”) cannot then do so, unless certain circumstances arise in which the party has expressly reserved the right to do so.
  • Rule 2.5(a), which imposes certain restrictions on a possible offeror during the offer period and for three months afterwards, namely:

- Rule 2.5(a)(i), under which a possible offeror that has made a statement about the price at which it might make an offer must, if it does in fact make a bid, offer the same or better terms; and

- Rule 2.5(a)(ii), under which a possible offeror that has made a statement to the effect that any offer will not be at more than a specified price must, if it does in fact make a bid, not offer better terms,

unless, in either case, certain circumstances arise in which the party has expressly reserved the right to set the statement aside.

As is presently the case with a no increase statement and a no extension statement, a party that makes a no offer statement will have to include details of any circumstances in which it reserves the right to set the statement aside – i.e. circumstances in which it can make an offer or agree to purchase assets from the target – for example, if a competing offer is withdrawn, made or increased, or if the target’s board agrees. (Currently, a no offer statement automatically ceases to apply in certain circumstances.) Appendix D to the Panel’s Response Statement sets out examples of “no offer” statements which include a list of circumstances in which the maker of the statement reserves the right to set the statement aside.

Appendix C to the Response Statement summarises how the above restrictions work will work under the amended Code. In particular, the Panel highlights that:

  • The new rule preventing a bidder from circumventing the restrictions in Rules 31.5 and 32.2 by purchasing significant assets from the target will in practice apply only where the bidder has made a no increase statement or a no extension statement and has not reserved the right to set the statement aside with the agreement of the target’s board.
  • Similarly, the new rule preventing a party from circumventing the restrictions in Rule 2.5(a) by purchasing significant assets from the target will in practice apply only where the party has made a statement as to the minimum price or other terms on which any offer will be made, or that any offer will not be at more than a specified price, and has not reserved the right to set the statement aside with the agreement of the target’s board.

The changes to the Code are set out in Response Statement RS 2017/1, which was published on 11 December 2017.