On 6 January 2014, the Takeovers Panel released a consultation paper (Consultation Paper) seeking public comment in relation to proposed amendments to Guidance Note 12: Frustrating Action (GN12). The Consultation Paper proposes the addition of new matters that the Panel will have regard to in considering whether a target company has engaged in frustrating action that constitutes “unacceptable circumstances”.
The Panel has been prompted to propose these amendments to GN12 due to market participants expressing concerns that the current policy unduly restricts the activities of targets during a takeover bid. In particular, market participants have complained that where a bidder's right to rely upon a bid condition has been triggered and it is unclear whether the bidder will rely on it, the policy can be used to, for example, coerce the target into negotiations with a hostile bidder.
Recap on GN12
GN12 provides market participants with guidance on the Panel’s approach to “frustrating action”, which is action by a target, whether taken or proposed, by reason of which a bid may be withdrawn or lapse or a potential bid is not proceeded with. Examples of frustrating action by a target include significant issuing of shares, acquiring or disposing of a major asset, undertaking significant liabilities or declaring an abnormally large dividend or capital distribution.
An action by a target that triggers a defeating condition of a takeover bid or possible takeover bid is a frustrating action. However, the real question is whether that action then gives rise to “unacceptable circumstances”. The Panel considers this question in the light of the underlying policy rationale for the takeovers regulation, being that:
- acquisitions of control should take place in an efficient, competitive and informed market; and
- as far as practicable, all shareholders should have a reasonable and equal opportunity to participate in any benefits accruing to shareholders through any proposal for a person to acquire a substantial interest in the target.1
GN 12 lists a number of factors that will be considered by the Panel when determining whether any given frustrating action constitutes “unacceptable circumstances”, for example, how long the bid has been open and its likelihood of success, any clearly stated objectives of the bidder and whether the condition is commercially critical to the bid.
Proposed changes to GN12
The Consultation Paper proposes to amend GN12 by inserting the following additional factors that will be considered by the Panel in determining whether frustrating action by a target constitutes “unacceptable circumstances”, namely whether a condition has been triggered and the bidder has:
- not disclosed whether it will rely on it or waive it within a reasonable time; and
- varied the terms of the bid, such as increasing the bid price, but has not waived the condition (or waived the particular breach of the condition).
Furthermore, an amendment has been proposed to sub-paragraph 11(a) of GN12 which states that the time a bid has been open and whether shareholders appear to have rejected it is a factor the Panel will consider when determining whether a frustrating action is “unacceptable”. The proposed amendment clarifies that it may be “unacceptable” for a bidder to ‘hold open’ a triggered condition such that conclusion of the target shareholders’ rejection of a bid cannot be reached.
Whilst the addition of the above the factors for consideration by the Panel in GN12 provides better guidance to market participants of the approach the Panel will take in making its determinations, the outcome in any given matter will typically depend on the facts involved. However, these proposed changes will put pressure on bidders to publicly state their decision in a timely manner as to whether or not a triggered condition will be waived or relied on. Failure by the bidder to make such disclosure in a timely manner may prejudice, in any subsequent Panel proceedings, its claim that the frustrating action by the target which gave rise to the breach of the triggered condition constitutes “unacceptable circumstances”.
This guidance will also send a clear signal to bidders that the Panel will look unfavourably upon a bidder who holds a target to ransom by failing to state its decision in relation to a triggered condition, but nevertheless continues to engage in other conduct that indicates a clear intention to proceed with the bid. The Panel appears to be indicating that it will not endorse bidders using a triggered condition as a “get out of jail free card” for an indefinite period to be used when, and if, the bidder decides it does not wish to proceed with the bid.
Panel is seeking comments
Comments have been sought by the Panel on whether the policy should be adopted and whether there are any practical issues the Panel should address. Furthermore, the Panel is seeking comments as to whether a fixed timeframe (e.g. 90 or 120 days) should be adopted after which the frustrating action policy would no longer apply either in addition to or as an alternative to the proposed revisions.
The Panel has invited comments from interested persons on the proposed amendments to GN12, which need to be submitted by 14 February 2014.