1. Public interest test – latest developments

State intervention in M&A is back on the agenda both in the UK and globally.

In the UK, an M&A transaction may be subject to the merger control regime in the EU Merger Regulation (EUMR) or the regime in the Enterprise Act 2002. Under those regimes, as well as competition authorities assessing whether the transaction will give rise to a substantial lessening of competition, the government has power to intervene in limited circumstances to protect its legitimate interests. Under the Enterprise Act, the Secretary of State can intervene on the grounds of national security; media quality, plurality and standards; and financial stability. Under the EUMR, the grounds permitting Member State intervention are public security, media plurality and prudential rules.

In line with global trends, this year has seen the UK government exercise its powers under the Enterprise Act on the bid for Sepura plc by Hytera Communications. The intervention was on the grounds of national security – Sepura provides the radio services used by the emergency services in the UK. In that case, the government accepted undertakings from the bidder to address the government’s concerns. On the 21st Century Fox bid for Sky, the Secretary of State has indicated that she is minded to refer the transaction for further investigation by the Competition and Markets Authority (CMA) on media plurality grounds.

The government indicated, in the context of the decision on Hinkley Point C, that it may extend the situations in which it can intervene in M&A transactions. Our competition, regulation and trade team published an e-bulletin looking at the statement by the Government in more detail which is available here. Proposals were included in the UK Conservative Party Manifesto on this and we published an M&A standpoint article on those proposals and other issues that could impact M&A. The article ‘Protectionism in UK M&A and the Conservative Manifesto – Raising the Drawbridge or Levelling The Playing Field?’ is available here.

Given that we are seeing similar moves in other countries (such as Germany) and even at an EU level, it seems likely that the issue will remain high on the agenda.


2. EU merger control – Facebook fined for providing misleading information and Altice faced with gun jumping charges

The European Commission has imposed a record fine of €110 million on Facebook for providing incorrect/misleading information to the Commission during its review of Facebook’s acquisition of WhatsApp under the EUMR. On the same day, the Commission issued a Statement of Objections to Altice alleging it had breached the EUMR’s standstill obligation by exercising control over PT Portugal before receiving clearance for the transaction (i.e. gun-jumping). The Commission has also subsequently announced further investigations into suspected procedural violations in relation to three other transactions: Canon/Toshiba Medical Systems Corporation (potential gun-jumping in relation to a ‘warehousing’ structure), and Merck/Sigma-Aldrich and General Electric/LM Wind (alleged provision of incorrect/misleading information).

These developments show the Commission is cracking down on violations of the EUMR rules and will not hesitate to issue heavy penalties on infringers. This comes against a backdrop of similar procedural toughness by merger control authorities worldwide. It is important for merging companies to understand and comply with the merger control rules, ensuring that all information submitted to merger control authorities is complete and accurate, and limiting pre-completion conduct and integration planning to that acceptable under the gun-jumping rules.

Our competition, regulation and trade team has published an ebulletin on the Facebook and Altice investigations which is available here.



3. Acting in concert – Takeover Appeal Board ruling requiring a mandatory offer to be made

The Takeover Appeal Board has ruled that a group were acting in concert when they acquired shares in Rangers International Football Club and that therefore the principal member of the group, Mr David King, must make a mandatory offer for the company.

Rule 9 of the Takeover Code provides that if any person acquires an interest in shares which, when taken together with the shares in which any person acting in concert with him is interested, carry 30% or more of the voting rights of the company, that person must make a mandatory offer for the company.

In December 2014, three individuals acquired shares representing 19.48% of Rangers from Laxey Partners. At the same time a company called New Oasis Asset Limited (NOAL), owned by Mr King’s family trust, acquired a 14.57% stake in the company. NOAL then requisitioned a general meeting of Rangers at which the four existing directors of Rangers were removed and Mr King’s nominees were appointed to the board. Mr King was elected Chairman of Rangers in May 2015.

In line with the conclusions reached by the Panel Executive and Hearings Committee, the Takeover Appeal Board concluded that the three individuals and Mr King were acting in concert when they acquired the shares.

Interesting points in the ruling include that:

  • It was irrelevant that shares were acquired through a family trust. The person behind the family trust, Mr King, was interested in those shares as he arranged for the trust to buy them. In any event the trust was acting in concert with him.

  • Evidence of earlier co-ordinated activity between the individuals (including a consortium funding proposal for Rangers, which was blocked by the Rangers board at the time, and discussion about the possibility of acquiring a blocking stake) was relevant in determining that the parties were acting in concert, even though they were different business propositions. There was no evidence that the agreement or understanding to co-operate ceased before their respective acquisitions of shares in Rangers.

  • The motive behind the acquisitions (to restore proper standards of corporate governance of Rangers) was irrelevant.

  • The Takeover Appeal Board said that Mr King’s arguments that the Rangers shares were now worth more than the price required to be offered under the Rule 9 offer were not relevant when deciding whether a mandatory offer should be made, nor was the question of whether shareholders or the company would benefit from an offer.

The Takeover Appeal Board Statement (2017/1) is available on the Takeover Appeal Board website.

Mr King was required to make the offer by 12 April 2017 (i.e. within 30 days of the decision). Mr King issued a statement that he did not agree with the ruling and that he was considering the best course of action. The Takeover Panel subsequently announced that, as no offer had been announced by the specified deadline, it had initiated legal proceedings under section 955 of the Companies Act 2006 seeking an order requiring Mr King to comply with these rulings. This is the first time the Panel has sought to use its powers under the Companies Act 2006 to obtain such an order. The Panel Statement (2017/8) is available on the Takeover Panel website.


4. Shareholder activism – Takeover Panel ruling on requisition to change the board of directors

The Takeover Panel has published a statement ruling that a group of shareholders who were proposing changes to a company’s board of directors were not seeking board control and so were not acting in concert for the purposes of Rule 9 of the Takeover Code.

Three shareholders put forward resolutions proposing the appointment of four new directors to the board of Petropavlovsk plc (and recommended that shareholders vote against the re-election of four existing directors). The Panel Executive was asked to determine whether these shareholders and the proposed new directors should be considered to be acting in concert and so whether a mandatory offer was required.

Note 2 on Rule 9.1 sets out the Panel’s views on collective shareholder action and says that the Panel will normally presume that shareholders who requisition board control-seeking resolutions are acting in concert with each other and the proposed directors.

In this case, the Panel ruled that three of the four proposed new directors were independent of the shareholders proposing their appointment (the fourth director was not considered to be independent, as he was employed by one of the shareholders seeking to change the board). As a result, the Panel concluded that the resolutions being proposed were not board control-seeking for the purposes of Note 2 on Rule 9.1 and, accordingly, that these shareholders, and the proposed new directors, were not acting in concert. There was therefore no requirement for a mandatory offer to be made under the Code.

The Panel Statement 2017/10 is available on the Takeover Panel’s website.


5. Panel Practice Statements – new Panel Practice statement on strategic reviews and formal sale processes and changes to Practice Statement 20

The Takeover Panel has published a new practice statement on strategic reviews and formal sale processes. It has also made minor changes to Practice Statement No 20 (Rule 2 – secrecy, possible offer announcements and pre-announcement responsibilities).

New Practice Statement on strategic reviews and formal sale processes

The Practice Statement on strategic reviews, formal sale processes and other circumstances in which a company is seeking potential offerors describes how the Panel Executive normally interprets and applies Rule 2 (Secrecy before announcements; the timing and contents of announcements), Rule 21.2 (Inducement fees and other offer-related arrangements) and Rule 21.3 (Equality of information to competing offerors) where a company announces a strategic review, a formal sale process or otherwise announces it wishes to seek one or more potential offerors.

The Practice Statement incorporates the relevant contents of Practice Statement No 3 (Controlled auctions) and No 6 (Strategic review announcements), so those Practice Statements have been withdrawn.

The Practice Statement No. 31 (Strategic reviews, formal sale processes and other circumstances in which a company is seeking potential offerors) is available on the Takeover Panel website.

Revisions to Practice Statement No. 20

This Practice Statement has been amended to clarify that the “Rule of 6” (which requires the Panel Executive to be consulted before more than a total of six parties is approached about an offer or possible offer) continues to apply during an offer period in relation to a possible offer by any potential offeror which has not been identified. There is also a new paragraph on the supervision of meetings with shareholders relating to a possible offer before an offer period begins.

Minor amendments were also made to the Practice Statement to reflect the new Practice Statement No. 31.

The revised Panel Practice Statement No. 20 is available on the Panel website.


6. Takeover Code – Panel consultation paper on asset sales and minor amendments to Code

The Takeover Panel has published a consultation paper on proposed changes to the Takeover Code where there is an asset sale in competition with an offer and various other miscellaneous amendments to the Takeover Code. It has also published a series of minor amendments to the Code.

Panel consultation paper on asset sales

The Panel is proposing to amend the Code to address the situation where there is an asset sale in competition with an offer. The proposals are intended to address issues raised on two transactions in 2016, where the board of a target received an offer and 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.

The proposed changes to the Code include:

  • No circumventing the Code by agreeing an asset purchase – The Panel is proposing to amend certain rules of the Code, such as Rule 2.8 (Statement of no intention to make an offer) and Rule 31.5 (No extension statements), to prevent bidders circumventing the Code by purchasing target assets.

  • Frustrating action – Rule 21.2 would be amended to make it clear that where shareholder approval is sought for frustrating action, the target board must obtain independent advice as to whether the financial terms are fair and reasonable. Shareholder approval is not required for frustrating action where the proposed action is conditional on the offer lapsing (although the target must still send a circular to its shareholders). A target would be permitted to agree a break fee for a transaction under Rule 21.1 (without obtaining shareholder approval), provided the fee is de minimis (the lower of 1% of the transaction value and 1% of the target value).

  • Sale of all or substantially all of the target’s assets in competition with an offer – If there is a proposed asset sale in competition with an offer, the Panel is proposing that any statement by the target board about the amount of cash it proposes to return to shareholders would be treated as a quantified financial benefits statement (and so Rule 28 would apply). A purchaser of some or all of the target’s assets would be subject to similar restrictions as a bidder as to the price they may pay when making share purchases, so they could not acquire shares at a price which is higher than the amount to be returned to shareholders. Rule 21.3 (Equality of information to competing offerors) would also apply to information given to persons interested in purchasing all or substantially all of the assets.

The Panel is also consulting on various other amendments to the Code including:

  • requiring a bidder to include in a “No intention to bid statement” under Rule 2.8 the circumstances in which it may set aside the statement; and

  • allowing information about a party to an offer to be published via social media (but the restrictions on the use of social media would still apply to information relating to the offer itself).

The consultation closes on 22 September 2017.

The Consultation Paper PCP 2017/1 is available on the Takeover Panel website.

Minor amendments made to the Code

Various minor amendments have been made to the Code. As the amendments were only minor, they were not consulted on by the Panel. The amendments include:

  • changes to the Introduction to the Code, largely to remove any overlap with the Rules of the Takeover Appeal Board, which were amended at the same time (see Instrument 2017/1);

  • clarification that, where a company’s securities are admitted to trading on a multilateral trading facility (MTF), the Code will only apply if the company has approved trading, or requested admission to trading, of its securities on the relevant MTF (see Instrument 2017/2); and

  • reflecting changes to the bodies who appoint individuals to the Panel (see Instrument 2017/3).



7. M&A engagement letters – prohibition on restrictive contractual clauses

The Financial Conduct Authority (FCA) will prohibit restrictive contractual clauses in investment bank engagement letters. This follows the FCA’s market study of Investment and Corporate Banking which found that medium-sized and small clients of investment banks may feel the need to “reward” a lending bank or corporate broker with subsequent transactional business.

The prohibition, which takes effect from 3 January 2018, bans investment banks from including clauses in their client engagement letters which gives them a right to provide future primary market (debt capital markets, equity capital markets and M&A) services to their client. The FCA’s intention is for the ban to leave the client free to decide which firms to do business with, avoiding situations where a client could not approach other firms or would be forced to accept a firm if that firm were to match a third party’s terms. ‘Right of first refusal’ clauses are therefore banned. The ban does not apply to future service restrictions in bridging loans – i.e. a loan that is provided in the expectation that the client will replace it with longer-term financing.

Provisions in an agreement that only give a firm the right or opportunity to: (a) pitch for future business; (b) be considered in good faith alongside other providers for future business; or (c) match quotations from other providers, but which do not prevent the client from selecting the other providers, are not prohibited as in these cases the client is not obliged to use the firm.

The FCA Policy Statement (PS17/13) is available on the FCA website.


8. Prospectus Regulation – impact on M&A

The EU Prospectus Regulation was published in the EU Official Journal in June 2017 and will replace the regime under the Prospectus Directive. Most of the provisions in the Regulation only apply 24 months after it comes into force, that is in July 2019. However one set of measures, relating to the exemptions from the requirement to publish a prospectus, applied as soon as the Prospectus Regulation came into force on 20 July 2017. Another set will apply in 12 months’ time. See our corporate update 2017/14 for more information on the Prospectus Regulation.

A number of provisions of the Prospectus Regulation may have an impact on M&A, although only one is in currently in force. The key changes relevant to M&A are:

  • Exemption for admission of securities representing less than 20% of securities already admitted (already in force) – Under Article 1(5)(a) of the Prospectus Regulation (and PR 1.2.3R(1) of the Prospectus Rules), there is an exemption from the requirement to publish a prospectus in connection with an admission to trading where the securities to be admitted represent less than 20% of securities of the same class already admitted to trading on the same regulated market. Previously the exemption was capped at 10% and applied only to shares rather than to all securities. The changes to this exemption are already in force. The increased threshold in this exemption may mean a listed bidder or purchaser issuing shares as consideration on an M&A transaction will not have to issue a prospectus where the shares to be issued represent less than 20% of its current market cap, but it will still have to consider whether there is an offer to the public which requires a prospectus.

  • Exemption for takeovers and mergers (in force from July 2019)– Currently there is an exemption from the requirement to produce a prospectus on a takeover or merger where an “equivalent document” is made available. In practice, an equivalent document must contain the same information as a prospectus so there are limited benefits in producing an equivalent document (rather than a prospectus, which can be passported into other EU Member States). When the Prospectus Regulation is fully in force in July 2019, the exemptions for takeovers and mergers will no longer require an equivalent document but instead will require a document containing information about the transaction and its impact on the issuer to be made available by electronic means (Article 1.4(f) and (g) and 1.5(e) and (f) of the Prospectus Regulation). Level 2 implementing measures will specify the minimum information requirements for that document so at this stage it is not clear what the document will have to contain and so to what extent it will be an attractive option for issuers.

The Prospectus Regulation (Regulation (EU) 2017/1129) is available on the Europa website.


9. LPDT Rules – proposed changes to class tests; DTR 2.5 amendments; new requirements for announcements of regulated information

The FCA is consulting on changes to the rules that apply when a premium listed company undertakes a transaction. It has also made changes to the Disclosure Guidance in DTR 2.5. Changes to DTR 6 on announcements of regulated information will come into force later this year.

Consultation on proposed changes to the Listing Rules on class tests and reverse takeovers

The FCA published a consultation paper (CP17/4) in February 2017 setting out proposed changes to the Listing Rules. The proposals include changes to the rules on class transactions and reverse takeovers.

The proposals in the FCA consultation paper include:

  • Relaxing the profits test in the class test rules in Listing Rule 10 – When a premium listed company is proposing to enter into a transaction (other than in the ordinary course of business), it has to classify the size of the transaction relative to the size of the listed company, using a series of “class tests”. The classification determines whether the company must make certain disclosures on the transaction (class 2) and whether it will have to seek shareholder approval (class 1). The classification also indicates whether the transaction is a reverse takeover. One of the class tests compares the profits the subject of the transaction with the profits of the listed company. The FCA says that this test often produces anomalous results. It is therefore proposing to allow a company to disregard the profits test, without having to consult the FCA, where the result of the profit test is 25% or more but all other class test results are under 5%. In that situation, the transaction would be treated as unclassified. Where the profits test result is 25% or more and is anomalous, a company may make adjustments to the profit figures for certain genuine one-off cost items without having to consult with the FCA. In each case, the company would have to consult its sponsor before relying on the relaxation.

  • Reverse takeovers – Under the current requirements in Listing Rule 5, when a proposed reverse takeover becomes public, the FCA will suspend the issuer’s listing if there is insufficient information about the proposed transaction for the market to properly assess it. The FCA is proposing to remove this “rebuttable presumption of suspension”, except for reverse takeovers by shell companies.

The consultation closed on 14 May 2017 and the FCA plans to publish its rule changes in the second half of 2017.

The FCA Consultation Paper Review of the Effectiveness of Financial Markets: Enhancements to the Listing Regime (CP17/4) is available on the FCA website.

Changes to DTR 2.5

In February 2017, the FCA amended DTR 2.5, which gives guidance on delaying the disclosure of inside information.

Article 17 of the Market Abuse Regulation (MAR) requires issuers to announce inside information as soon as possible. An issuer may only delay disclosure if the three conditions set out in Article 17(4) of MAR are met, that is if its legitimate interests are likely to be prejudiced by immediate disclosure, the delay in disclosure will not mislead the public and the information can be kept confidential. The European Securities and Markets Authority (ESMA) has published Guidelines on delaying disclosure of inside information (ESMA/2016/1478) which set out a non-exhaustive list of situations in which the legitimate interests of an issuer might be prejudiced by the disclosure of inside information and the situations in which the delay of disclosure of inside information is likely to mislead the public.

The FCA’s changes to DTR 2.5 are to ensure that the Disclosure Guidance is consistent with the ESMA Guidelines. The FCA has therefore deleted the former DTR 2.5.3 (legitimate interests for delaying disclosure), as it overlaps with the ESMA Guidelines, and replaced it with a signpost to the ESMA Guidelines. The FCA emphasised that the changes are not intended to extend an issuer’s ability to delay the disclosure of inside information.

The FCA Policy Paper (PS17/2), and Handbook Instrument 2017/7which sets out the rule changes, are available on the FCA website.

New requirements in DTR 6 relating to announcements of regulated information and LEIs

From 1 October 2017, announcements of regulated information, which will include announcements of inside information under the Market Abuse Regulation (MAR) and information required to be published under the Listing Rules, will have to include the issuer’s Legal Entity Identifier (LEI) and be classified according to specific categories.

The rule changes are to assist in the functionality of the European electronic access point (EEAP), which is required to be set up by ESMA under the Transparency Directive. The aim of the EEAP is to provide access to all regulated information published by issuers across the EU (see our corporate update 2016/25).

The FCA Handbook Notice No. 42 and the Disclosure Guidance and Transparency Rules Sourcebook (Miscellaneous Amendments) Instrument (FCA 2017/19), which shows the rule changes and the headline categories, are available on the FCA website.


10. Cross-border M&A – updated HSF guide to employee issues on business transfers

Employment law varies significantly from jurisdiction to jurisdiction and, when conducting cross-border M&A, employment law issues can give rise to significant, but avoidable, costs and delay if issues are not spotted in advance.

Our global employment, pensions and incentives team has updated its guide to employee issues on a multi-jurisdiction business transfer. The guide covers 51 jurisdictions and contains key practical steps that can be taken to address the risks and a top level summary of the main employee issues in each jurisdiction. Please click here to request a copy of the guide.