In recent months a number of consultations have been released by the Takeover Panel proposing various amendments to the Takeover Code (the "Code"), in particular, in relation to:
- the inclusion of additional presumptions to the definition of acting in concert;
- the treatment of dividends paid by an offeree company; and
- the definition of voting rights.
This article seeks to briefly set out and explain the proposed amendments, in particular the amendments proposed in the first two consultations referred to above.
ADDITIONAL PRESUMPTIONS TO THE DEFINITION OF ACTING IN CONCERT
Takeover Panel Consultation PCP 2015/3
On 14 July 2015, the Takeover Code Committee published a consultation (the "Presumptions Consultation") setting out proposals to introduce three new presumptions into the definition of acting in concert.
The definition of acting in concert is key to determining when a mandatory offer under Rule 9.1 of the Code is required to be made. When parties are acting in concert or presumed to be acting in concert, their interests in shares are aggregated in determining whether the thresholds under Rule 9.1 have been reached. In addition, where persons are acting in concert with a bidder or target, then dealings by such persons are considered to be dealings by the bidder or target, which impacts on a number of rules in the Code.
The proposed additional presumptions are:
- 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; and
- shareholders of 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 IPO or otherwise, become shareholders in a company to which the Code applies.
The Presumptions Consultation states that it has been the Panel Executive’s practice for a number of years to presume that the above persons are acting in concert, and therefore, all the Presumptions Consultation seeks to do is to codify this practice.
CLOSE RELATIVES AND RELATED TRUSTS
The Presumptions Consultation proposes inclusion of a new presumption 5 to the definition of acting in concert and a new definition of “close relatives”, whereby the following persons shall be presumed to be acting in concert: a person, the person’s close relatives, and the related trusts of any of them, all with each other. The current wording of the Code only addresses directors acting in concert with their close relatives and related trusts and does not make reference to persons other than directors.
For the purposes of new presumption 5, a person’s close relatives will normally include:
- the person’s spouse, civil partner or cohabitant;
- the person’s children, parents, brothers, sisters, grandchildren and grandparents, and those of any person described in the first bullet point; and
- the spouse, civil partner or cohabitant of any person described in the second bullet point.
However, this is not a definitive list and in appropriate case the Panel could consider other members of a person’s family to be acting in concert with the person.
Where the presumption is applicable, it may be rebutted in appropriate circumstances, for example where there is a family estrangement.
RELATIVES OF A FOUNDER AND RELATED TRUSTS
The Presumption Consultation also proposes inclusion of a new presumption 6 which presumes that 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, are all acting in concert with each other.
It has typically been the Executive’s practice to apply a wider presumption in relation to members of a founders’ family (i.e. to include their close relatives as well), as its experience suggests that such family members are likely to share a common loyalty to both the company and each other, and therefore, to seek to act in unison.
As noted in relation to new presumption 5 above, the presumption may be rebutted in appropriate circumstances, and the longer ago the company was formed, the more likely the Executive has been to accept such rebuttal.
SHAREHOLDERS IN A PRIVATE COMPANY
The Presumptions Consultation proposes the inclusion of a presumption that the sellers of a private company will be acting in concert when the private company is sold to a Code company, and they receive, as consideration, new shares in the Code company. Such share for share exchange transactions are a common step in pre-IPO restructurings. In addition, the Executive proposes to apply the same practice to shareholders in a private company who become shareholders in a Code company following the re-registration of a company as a public company, in connection with an IPO or otherwise.
If the proposals are adopted, any company seeking to undertake pre-IPO restructuring (whether via a share for share exchange or re-registration of a private company to a public company) will need to consult with the Panel and make appropriate representations in order to rebut the presumption. In order to successfully rebut such presumption, the company will need to demonstrate that the shareholders do not have a common interest and that they are acting independently of each other and will continue to do so in the future.
The above amendments will impact upon the controlling shareholder regime set out in the Listing Rules. With effect from 16 May 2014, premium listed companies have been required to have a relationship agreement in place if there it has a controlling shareholder. A controlling shareholder is a any person who, individually or together with any of their associates and concert parties, exercises or controls 30% or more of the shares capable of being voted at the company's general meeting. The term acting in concert is not defined in the Listing Rules. Whilst listed companies and their shareholders cannot presume that the Financial Conduct Authority will agree that a shareholder is, or is not, a controlling shareholder on the basis of the Code's definition, it will be an influencing factor and so both the need for a relationship agreement and those covered by the provisions will need to be re-considered.
Responses to the Presumptions Consultation are required by 11 September 2015.
TREATMENT OF DIVIDENDS PAID BY AN OFFEREE COMPANY
Takeover Panel Consultation PCP 2015/1
On 11 May 2015, the Takeover Code Committee published a consultation (the "Dividend Consultation") setting out proposed amendments to the Code in relation to the treatment of dividends paid by an offeree company to its shareholders.
The majority of the amendments reflect or seek to clarify the existing practice of the Panel Executive, and therefore, it is expected that these changes will be uncontroversial and welcomed by stakeholders.
The key proposed clarifications include:
- Reserving the right to reduce the offer consideration if a dividend is paid;
- The effect of a dividend where the offer or has made a "no increase statement"; and
- The impact of dividends on a minimum offer price by share purchases.
The Panel Executive has also released a draft Practice Statement setting out details of its practice in relation to the payment of dividends by an offeree company.
RESERVING THE RIGHT TO REDUCE THE OFFER CONSIDERATION IF A DIVIDEND IS PAID (RULE 2.5, 2.7 AND 24.3)
The Code Committee considers that the Code should expressly permit an offeror (in a Rule 2.5(a)(i) statement) to reserve the right to reduce the offer consideration by the amount of all or part of a dividend which is subsequently paid by the offeree company. The Code Committee further considers that if such a reservation is made, then the Code should also permit the same reservation to be included in any subsequent firm offer announcement or offer document. If the offeror does not reserve the right to reduce the offer consideration in this manner, then it will not normally be permitted to subsequently reduce the offer consideration if a dividend is in fact paid.
The Dividend Consultation therefore sets out new notes to Rule 2.5, Rule 2.7 and Rule 24.3, which reflect the above.
THE EFFECT OF A DIVIDEND WHERE THE OFFEROR HAS MADE A "NO INCREASE STATEMENT" (RULE 2.5 AND 32.2)
In accordance with Rule 2.5(a)(ii), where an offeror makes a statement that the terms of an offer will not be increased, a "no increase statement", they will not subsequently be able to make an offer which is in preferential terms, unless they have otherwise reserved the right to do so or exceptional circumstances arise. Rule 32.2 further restricts the ability for an offeror to amend the terms of an offer where they have made a "no increase statement", so that they may in fact make no subsequent amendments, again unless they have otherwise reserved the right to do so or exceptional circumstances arise.
Where dividends are paid by an offeree company after a "no increase statement" has been made, it has been the Panel Executive's practice to require the offeror to reduce the offer consideration by an amount equal to the dividend paid. This ensures that the value received by the offeree company shareholders is not in excess of the terms previously set out when the "no increase statement" was made - i.e. there can be no increase in the consideration by the back door. A reservation can be made in the terms of the potential offer, permitting the shareholders to receive both the specific dividend and the total amount of the offer consideration and, where such reservation is made, the Panel Executive will not require the offer consideration to be reduced.
The Dividend Consultation sets out new notes to Rule 2.5 and Rule 32.2 to clarify the above practice.
THE IMPACT OF DIVIDENDS ON A MINIMUM OFFER PRICE BY SHARE PURCHASES (RULE 6, 9.5 AND 11)
In accordance with Rule 6, 9.5 and 11, an offeror is bound to offer a minimum offer price and consideration of a particular nature where it has acquired shares in an offeree company within specified periods. In broad terms, these Rules require that the offer consideration must be no less than the highest price paid by the offeror during the relevant period.
The notes to these Rules currently only address situations where, under the terms of an offer, the offeree company shareholders are entitled to retain the dividend, in addition to the full offer consideration. They provide, inter alia, that when accepting shareholders are entitled to retain a dividend declared or forecast but not yet paid:
- an offeror may make purchases in the market or otherwise at prices up to the net cum dividend equivalent of the offer value without revising the offer; and
- the offeror, in establishing the level of the cash offer, is entitled to deduct the net dividend from the highest price paid.
These measures ensure that the shareholders are afforded equivalent treatment.
The Code Committee acknowledges that it's guidance in respect of such purchase could be clearer and therefore, the Dividend Consultation proposes the following:
- Clarification of the notes to Rule 6 to confirm that shares will be regarded as trading cum dividend from the time the dividend is announced by the offeree company until the ex dividend date;
- The term "cum dividend" shall be clarified to confirm that this means that the offeror may acquire shares at an amount equal to or less than the aggregate of the offer value and the amount of the dividend;
- Conforming of the notes to each of Rules 6, 9.5 and 11.1, to reflect the position when accepting shareholders are entitled to retain a dividend declared or forecast but not yet paid addressed above; and
- Clarification that if purchases are made in the market or otherwise by on offeror after the "ex dividend" date, they may only be made at prices up to the amount of the offer value without necessitating a revision of the offer.
The Code Committee also acknowledge that there may be circumstances where the offeree company shareholders are not entitled, under the terms of an offer, to retain the dividend in addition to the full consideration. The Dividend Consultation therefore seeks to provide separate guidance on how dividends are treated in such circumstances. Accordingly, the Dividend Consultation provides that when accepting shareholders are not entitled to retain a dividend declared or forecast but not yet paid in addition to the offer consideration:
- The offeror, in establishing the minimum level of the offer, is not entitled to deduct the amount of the dividend from the highest price paid by it during the relevant period; and
- Once an offer has been announced, purchases by the offeror in the market or otherwise during the cum dividend period, may be made at prices up to the offer value without necessitating a revision of the offer.
In addition, purchases by the offeror in the market or otherwise after the ex-dividend date may only be made at prices up to the offer value less the amount of the dividend without necessitating a revision of the offer.
Responses to the Dividend Consultation were required by 12 June. The Panel Executive proposes to publish the new Practice Statement at the same time as the Code changes come into effect, which, in accordance with recent practice, is expected to be in September 2015.
DEFINITION OF VOTING RIGHTS
Takeover Panel Consultation (PCP 2015/2)
On 14 July 2015, the Takeover Code Committee published a consultation (the "Voting Rights Consultation") setting out proposals to amend the definition of voting rights in the Code to make it clear that shares (other then shares which are held in treasury) which are subject to restrictions on, or suspension of, the exercise of voting rights should still be treated as having voting rights for the purposes of the Code. The amendments seek to codify current practice and to prevent companies from issuing suspended voting shares, so as to avoid the normal application of Rule 9 of the Code.
Responses to the Voting Rights Consultation are required by 11 September 2015.