Completing the transactionHostile transactions
What are the special considerations for unsolicited transactions for public companies?
In a hostile transaction, both the target and the bidder issue their own announcements and, following publication of the offer document, the target’s board sends a defence document to its shareholders explaining why it thinks the offer should be rejected. From a competition law perspective, the adversarial nature of a hostile bid means that the bidder will often be forced to make any merger control filings (including under the EUMR) unilaterally, without the benefit of information or assistance from the target.
A number of provisions in the Takeover Code (although technically applying to all offers) often need to be considered carefully in hostile transactions. The following are particularly noteworthy:
- the offer must first be notified to the board of the target company or its advisers (although in practice this could be done immediately prior to publication of the firm offer announcement);
- all target company shareholders (of the same class) should be treated equally;
- any information given to one bidder or potential bidder must, on request, be given equally and promptly to any other bidder or bona fide potential bidder;
- there are constraints on share purchases before or during an offer period, the offer price and the type of consideration that can be offered, and stake building can have consequences for the bidder (eg, setting the minimum consideration for the offer and, if the bidder acquires 30 per cent or more of the target’s voting rights, triggering a requirement to make mandatory general offer);
- there are restrictions on the board of the target company taking actions that might frustrate an offer or potential offer. The Takeover Code lists some particular actions that may not be carried out to frustrate a bid without shareholder approval, including issuing shares, issuing or granting options, and disposing of material assets; and
- advisers cannot be incentivised by the payment of a fee conditional upon the failure of a bid.
The Takeover Panel implemented several amendments to the Takeover Code that took effect in January 2018, which affect hostile takeover offers, including:
- the bidder being required to make more specific statements about intentions for the target’s business, including its R&D functions, the balance of the skills and functions of its employees and the likely repercussions of the bidder’s strategic plans on the location of the target’s HQ and HQ functions;
- restriction on publication of offer document until 14 days after firm bid announcement, except with the target’s consent. This rule is intended to give the target’s board more time to prepare and publish its defence document where there is a hostile takeover offer, and will result in the offer timetable being pushed back; and
- where a target company is required to obtain shareholder approval in relation to any proposed frustrating action, it must send a circular to shareholders and obtain independent advice as to whether the financial terms of the proposed action are fair and reasonable.
Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders?
The Takeover Code includes a general prohibition against certain deal protection measures for bidders. Break fees, exclusivity and non-solicitation agreements, matching arrangements, implementation agreements and similar bidder protections are not permitted, subject to certain limited exceptions. The Takeover Panel will permit a target company to enter into a break fee arrangement with a bidder if the target board seeks a ‘white knight’ in the context of a hostile takeover offer, or if the target has put itself up for sale by means of a formal process or is in serious financial distress. Such exceptional break fee arrangements are normally limited to 1 per cent of the value of the target company calculated by reference to the offer price.
Even in the very limited circumstances where a break fee is permitted under the Takeover Code, before agreeing to a break fee, the target board will need to conclude that the break fee is in the best interests of the shareholders of the target as a whole (eg, because, in the absence of the company agreeing to pay such a fee, the shareholders would be deprived of an offer that the board would otherwise recommend).
The Takeover Code does not prohibit the payment of a reverse break fee by a bidder to a target. However, if the bidder is subject to the UK Listing Rules, if the reverse break fee is greater than 1 per cent of the market cap of the listed company, then it will be deemed to be a ‘class 1 transaction’ and shareholder approval will be required. The Takeover Code also restricts the conditions that can be attached to a reverse break fee (eg, if they could deter potential competing bidders from making an offer).
Subject to limited exceptions, an English public company may not provide financial assistance directly or indirectly for the purpose of the acquisition of the shares in itself or its holding company. Financial assistance includes guarantees, security, indemnities, loans and any other financial assistance. Additionally, private companies are prohibited from giving financial assistance for the purpose of the acquisition of shares in a public parent company. These restrictions are relevant to bidders and finance providers who will often expect the target’s assets to be pledged as security for the acquisition debt once the offer is complete. This militates in favour of bidders setting a higher acceptance condition so that they acquire enough shares to reregister the target as a private company after the offer is complete.Government influence
Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security?
Public interest considerations
The EU and UK merger control regimes are described in question 2.
The relevant secretary of state is able to intervene only in exceptional cases involving public interest considerations. The Enterprise Act 2002 specifies the public interest considerations in relation to which the secretary of state may intervene, including mergers involving companies in the defence, newspaper and broadcast sectors.
The Enterprise Act 2002 also allows new grounds for intervention to be added by statutory instrument should the need arise.
Foreign investment and national security
In March 2018, the UK government announced its intention to introduce a first set of measures to increase government scrutiny of foreign investment in relation to national security, which will involve lowering the CMA turnover threshold referred to in question 2 from £70 million to £1 million, and removing the requirement for the merger to lead to an increased market share in the above-mentioned sectors. These measures came into effect on 11 June 2018.
In July 2018, the UK government published proposals for legislative reform that would give it significantly greater powers to intervene in transactions on national security grounds. The scope of ‘national security’ is explained in a draft statutory statement of policy intent; the term, however, has not been defined precisely. National security threats may include acts of terrorism or actions of hostile states related to cyber-warfare; supply chain disruption of certain goods or services; disruptive or destructive actions or sabotage of sensitive sites; and espionage or leverage.
The regime will not be limited to any particular sectors, nor will there be turnover or market-share thresholds to place certain transactions out of scope. However, the following aspects of the UK economy have been identified as likely to give rise to national security risks:
- core national infrastructure sectors such as the civil nuclear, communications, defence, energy and transport sectors;
- certain advanced technologies including computing, networking and data communication and quantum technologies;
- critical direct suppliers to the government and emergency services sectors; and
- military or dual-use technologies.
The proposals describe a ‘voluntary’ notification regime whereby parties to a transaction notify the government when a potential ‘trigger event’ is contemplated or in progress. The government would also have the power to ‘call in’ trigger events that have not been notified by the parties. Consultation on the proposals closed in October 2018 and greater clarity on the anticipated timeline for enactment of the new regime is expected in the coming months when the government publishes its response. The regime is unlikely to come into effect until 2020.Conditional offers
What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions?
As set out in questions 1 and 8, a takeover offer will be subject to an acceptance condition which will usually be between 50 per cent and 90 per cent.
A scheme must be conditional on the approval of a majority in number representing 75 per cent in value of a target company’s shareholders present and voting (either in person or by proxy), and needs to be sanctioned by the court.
Although it is common for bidders to include wide-ranging conditions in the terms of an offer, the practical effect of these is limited by the Takeover Code and the Takeover Panel’s approach to the application of the rules. Under the Takeover Code, an offer must not normally be subject to conditions that depend solely on subjective judgments by the directors of the bidder or the fulfilment of which is in their hands. With the exception of UK or EU competition conditions, a bidder should not invoke any condition so as to cause an offer to lapse, unless the circumstances that give rise to the right to invoke the condition are of material significance to the bidder in the context of the offer and the Takeover Panel has given its consent for that condition to be invoked. The availability of finance would not normally be permitted to be a condition to a cash offer. In addition, bids cannot be conditional on completion of due diligence.
A bidder may also announce its intention to make a takeover offer (by way of an offer or a scheme) on a preconditional basis. This involves the bidder stating in its firm offer announcement that the making of the offer (ie, the publication of the formal offer document or scheme document) is subject to one or more preconditions being satisfied before a long stop date. Preconditions can only be used if the Takeover Panel has been consulted in advance. Generally, preconditions are allowed when material official authorisations are needed or there are regulatory clearances required that relate to the offer and the Takeover Panel is satisfied that it is likely to prove impossible to obtain the authorisation or clearance within the offer timetable.
The Takeover Code requires that it must be a term of an offer that it will lapse if the proposed merger is referred to Phase II either by the CMA or the European Commission before the first closing date or the date when the offer becomes or is declared unconditional as to acceptances, whichever is later (for an offer), or before the date of the shareholder meetings (for a scheme). It is for this reason that mergers that are considered likely to go to Phase II in the UK or Europe are often structured on a preconditional basis.Financing
If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?
It is a key feature of UK public takeovers that the bidder has ‘certain funds’ at the time of the firm offer announcement in order to enable it to satisfy any cash element of the offer consideration in full. The firm offer announcement and the offer document must include a statement to this effect from an appropriate third party (usually the bidder’s lead financial adviser); this is the ‘cash confirmation statement’. The person giving the confirmation could be required to fund any shortfall if funds are not available to the bidder at the relevant time and the Panel concludes that the cash confirmer did not act responsibly and take all reasonable steps to assure themselves that the cash was available.
A description of how the offer is being financed and the source of finance (including the repayment terms and names of lenders, etc) must be included in the offer document.Minority squeeze-out
May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process?
In a takeover offer, a bidder that acquires not less than 90 per cent of the relevant shares to which the takeover offer relates and 90 per cent of the voting rights carried by those shares is entitled to compulsorily purchase the remainder of the shares using the statutory squeeze-out process under the Companies Act 2006. In order to do this, the bidder must give notice to the minority shareholders, provided that:
- notice is given before the expiry of a three-month period, beginning with the day after the last day on which the takeover offer can be accepted; and
- the other procedural requirements of the Companies Act 2006 are complied with.
In addition to a successful bidder’s squeeze-out rights, once the relevant 90 per cent thresholds are achieved, the remaining minority shareholders can exercise ‘sell-out’ rights requiring the successful bidder to purchase their shares.
Once a scheme becomes effective it binds all shareholders and a bidder will automatically acquire 100 per cent of the target’s shares.Waiting or notification periods
Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies?
Other than the minority squeeze-out provisions described above and particular requirements applicable to the businesses of specific industries, there are no waiting or notification periods generally applicable.
The Takeover Code, however, prescribes a fixed timetable relating to the timing of takeover offers as follows:
- an offer document must normally be sent to the target’s shareholders and other required recipients within 28 days of the firm announcement of an offer (and the bidder needs the target’s consent if it wants to publish within the first 14 days);
- an offer must be open for acceptance for at least 21 days after it is sent;
- the target’s directors must advise shareholders of their views on an offer within 14 days of the offer being made;
- any material new information to be published by the target must be published no later than 39 days after publication of the offer document;
- an offer may not normally be increased later than 46 days after it is made or less than 14 days from its final closing date;
- an offer must normally remain open for acceptance for an additional 14 days after it has become unconditional as to acceptances;
- an offer may not be extended beyond 60 days of it being made unless it has become unconditional as to acceptances at the time;
- all offer conditions must be fulfilled within 21 days of the first closing date for acceptances or, if later, when it becomes unconditional as to acceptances; and
- the consideration must be settled within 14 days of the first closing date for acceptances or, if later, when the offer becomes wholly unconditional.
The timetable for a scheme is largely determined by the court process. However, the Takeover Code does impose certain constraints on the timetable for the scheme, in particular:
- the scheme document must be sent to the target’s shareholders and other required recipients within 28 days of the firm offer announcement;
- the scheme circular must set out the expected timetable for the scheme;
- the shareholder meetings must normally be convened for a date no sooner than 21 days following the date of the scheme circular;
- revisions to the scheme should be made no later than 14 days before the relevant shareholder meetings or will require consent of the Takeover Panel; and
- consideration must be sent to the target’s shareholders within 14 days of the scheme becoming effective.