For a public company with a premium listing in the United Kingdom, certain M&A transactions – including acquisitions and disposals of shares, businesses or assets – may be subject to Listing Rule 10 and ultimately require prior shareholder approval. In 2016 over 15 acquisitions or disposals where the consideration was £100 million or more were announced by premium listed companies and required shareholder approval under Listing Rule 10.
Certain transactions entered into by a premium listed company may be subject to Listing Rule 10. The de?nition of 'transaction' catches all agreements and amendments to agreements entered into by a premium listed company or its subsidiaries (Listing Rule 10.1.3R), with the exception of:
- agreements or amendments to agreements relating to transactions in the ordinary course of business (eg, ordinary course trading arrangements);
- agreements or amendments to agreements relating to the issue of securities or pure financing (eg, placing, underwriting and sponsors' agreements that may be entered into between a premium listed company and its shareholders, a new investor or investment banks relating to the issue of new shares or other securities); and
- intra-group agreements (eg, agreements entered into between a premium listed company and its wholly owned subsidiaries or between its wholly owned subsidiaries).
Any transaction in the ordinary course of business is also outside the scope of Listing Rule 10. Guidance is given in the Listing Rules in relation to the scope of the transactions that are caught by Listing Rule 10.1.3R and those transactions that are not considered to be ordinary course.
Transactions are classified by reference to the outcome of four class tests (gross assets, profits, consideration and gross capital), each giving a percentage, which compare the size of the assets that are the subject of the transaction relative to that of the premium listed company. The tests determine the size of – and consequently the requirements of the Listing Rules that apply to – the transaction in question.
Broadly, where the transaction involves a sale or acquisition of a company or assets amounting to more than 5% but less than 25% on any of the class tests, it will be classified as a Class 2 transaction and the premium listed company will be required to notify a regulatory information service without delay of the key terms of the transaction once agreed.
Where the transaction involves a sale or acquisition of a company or assets amounting to 25% or more on any of the class tests, it will be classified as a Class 1 transaction and the premium listed company will be required to notify a regulatory information service without delay of the key terms of the transaction once agreed; the premium listed company may enter into the transaction only with shareholder approval. Certain dispensations from the need to seek shareholder approval apply to disposals if the company is in financial difficulty.
A premium listed company must have systems and controls in place to identify potential transactions that may be subject to these requirements and must seek the guidance of an investment bank or other entity acting as sponsor (for the purposes of Listing Rule 8) if it is contemplating a Class 1 transaction. A premium listed company must appoint a sponsor if it proceeds to publish a Class 1 circular or seeks any dispensation for a disposal while in financial difficulty.
The Financial Conduct Authority (FCA) provides detailed guidance on the figures to be used for the purposes of the class test calculations and any adjustments that it will accept. A premium listed company and its sponsor should consult the FCA early in the process to agree appropriate calculations. The sponsor may need to prepare detailed reasons if it wishes to argue that the class tests are not appropriate (and be prepared to suggest alternative tests and indicators of size). In practice, the sponsor writes to the FCA in the early stages of a transaction with its suggestions and illustrative calculations to demonstrate which classi?cation should apply to the transaction. Notwithstanding this, the FCA will only sign off on the class tests as calculated immediately before announcement of the transaction.
When considering the calculations, a premium listed company must aggregate the impact of a transaction with any connected transactions completed in the preceding 12 months. Where the aggregation of a transaction with any connected transactions would result in a requirement for shareholder approval, approval is required only for the latest transaction. Specific rules also apply to the classification of the granting of options and the entry into and exit from joint ventures.
As noted above, the key requirement for a Class 2 transaction is that a premium listed company make an announcement through a regulatory information service as soon as possible after the terms of the transaction have been agreed (Listing Rule 10.4.1R(1)) including:
- details of the transaction, including the name of the other party;
- a description of the business carried on by, or using, the net assets that are the subject of the transaction;
- details of the consideration, how it is being satisfied and, where relevant, the terms of any arrangements for deferred consideration;
- details of the value of the gross assets that are the subject of the transaction and details of the profits attributable to the assets that are the subject of the transaction;
- details of the effect of the transaction on the premium listed company, including any benefits that are expected to accrue as a result of the transaction;
- details of key individuals who are important to the business or company that is the subject of the transactions; and
- details of any service contracts of proposed directors of the premium listed company.
Where the transaction involves a disposal, the announcement must also include the application of the sale proceeds and, if securities are to form part of the consideration received by the premium listed company, a statement on whether it intends to sell or retain such securities.
If, following publication of the announcement, a signi?cant change occurs that affects any matter in the announcement or a signi?cant new matter arises that would have been required to be disclosed in the original announcement, the premium listed company must make a supplementary announcement (Listing Rule 10.4.2R).
As soon as possible after the terms of a Class 1 transaction are agreed, a premium listed company must make an announcement through a regulatory information service of the key terms of the transaction (Listing Rule 10.5.1R(1)). The information required to be included in the announcement is the same as that for a Class 2 transaction as set out above.
Any agreement which gives effect to a Class 1 transaction must be conditional on the shareholders of the premium listed company giving their approval for the transaction in a general meeting (Listing Rule 10.5.1R(2)). Accordingly, having announced the transaction, the premium listed company must send a circular to its shareholders seeking their approval for the transaction (Listing Rule 10.5.1R(2)). The information required to be included in the circular is set out in detail in Annex 1 to Listing Rule 13 and, among other things, must include:
- the background to and reasons for the transaction;
- a description of the transaction and its key terms;
- detailed financial information on the company or assets being bought or sold;
- a description of the financial effects and key risks of the transaction;
- a recommendation from the directors to vote in favour of the resolution to approve the acquisition or disposal;
- a current trading statement and a statement of any signi?cant change;
- a working capital statement; and
- a responsibility statement.
The circular will also contain the notice of meeting at which the ordinary resolution (a simple majority of the votes cast) to approve the transaction will be put to shareholders.
The circular cannot be published until it has been approved by the FCA and the sponsor has delivered its application for approval of the circular and a sponsor's declaration for the production of a circular to the FCA (Listing Rules 13.2.1R and 13.2.4R). In practice, the circular can be drafted and submitted for confidential review by the FCA during negotiation of the transaction. This enables the circular to be approved and posted shortly after the conditional transaction documentation has been signed and the transaction announced. A number of supporting documents are generally required to be prepared, negotiated and agreed in connection with the publication of the circular and in connection with the declaration required to be given by the sponsor to the FCA.
If, after the premium listed company has published the circular but before the shareholder meeting has taken place, there is a material change which affects any matter disclosed in the circular or a material new matter arises which the premium listed company would have had to include in the circular if it had arisen before the circular was published, the company must publish a supplementary circular (Listing Rule 10.5.4R(1) and (2)). If, after obtaining shareholder approval but before completion of the transaction, there is a material change in the terms of the transaction, the premium listed company must issue a revised announcement, publish a further circular and seek shareholder approval for the revised transaction (Listing Rule 10.5.2R).
During the negotiation of a transaction, it is possible that one of the parties may ask the other to provide a break fee. While agreeing to such a provision may be commercially acceptable to a premium listed company, the directors need to consider whether they are restricted from doing so by the Listing Rules.
For a premium listed company, the provision of a break fee, if large enough, could itself constitute a Class 1 transaction. A 'break fee' is defined as a fee payable if certain speci?ed events occur which have the effect of materially impeding a transaction or causing the transaction to fail and there is no independent substantive commercial rationale for the arrangement (Listing Rule 10.2.6A). The term 'break fee' is not limited to fees payable only where a transaction is voted down; it can also catch inducement fees, exclusivity arrangements and fees payable on withdrawal of a board recommendation.
A break fee will be deemed to constitute a Class 1 transaction if the total value of the fee (or fees in aggregate) exceeds 1% of the market capitalisation of the premium listed company (or, where the premium listed company itself is being acquired, 1% of the value of the premium listed company calculated by reference to the offer price) (Listing Rule 10.2.7R(1)).
The application of Listing Rule 10 can have a material impact on the level of public disclosure relating to a transaction, the ability of a premium listed company to agree to a US-style transaction break fee (usually well in excess of 1% of a company's market capitalisation) and – as a consequence of the requirement to obtain shareholder approval (having published a detailed circular that has been approved by the FCA) – the conditions to closing and overall timetable of a transaction.
For further information on this topic please contact Will Pearce or Dan Hirschovits at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org or email@example.com). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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