A number of amendments to the Takeovers Code (the Code) came into force on 1 June 2013. Two of the more significant changes are discussed below.
The Takeovers Panel (the Panel) has sought to rebalance the interests of target companies and offerors relating to conditions of takeover offers by amending Rule 25 of the Code. Rule 25 regulates the conditions precedent to a Code offer and bans conditions precedent where the satisfaction of those conditions could be controlled or influenced by the offeror or an associate. Rule 38(1) prohibits the directors of a target company from frustrating an offer or denying the target company's shareholders the opportunity to decide on the merits of the offer (ie defensive tactics). The Panel was concerned that Rule 25 permitted conditions that a target company could breach merely by carrying on business in the ordinary course (for example entering into a contract with a customer). If such a condition was included in a Code offer, Rule 38(1) might have required the board of the target company to cause the company to depart from its ordinary course of business to avoid frustrating the offer.
To address this, the Panel has amended Rule 25 to include prohibitions on:
- An offeror relying on a condition that seeks to restrict the target company from undertaking activities in the ordinary course of business during the offer period
- An offeror acting in "unreasonable reliance" on a condition.
The Panel has actively warned against conditions that could be breached by target companies acting in the ordinary course of their business. In this respect the first amendment outlined above is unlikely to change market practice.
In contrast, the restriction on offerors "unreasonably" relying on conditions is novel. The Panel has already indicated that it would consider that an offeror's reliance on a minor or commercially insignificant event to invoke a condition would be "unreasonable". This "unreasonable reliance" prohibition could be prone to uncertainty and debate. Because the rule applies to reliance on the condition, rather than the terms of the condition itself, the test of "reasonable reliance" will be applied after the fact. Contrary to the intentions of the rule change, this might increase the uncertainty for both offerors and target company as to whether a condition is likely to be satisfied. It may have been preferable to focus on the terms of the condition itself, ie by requiring conditions to be expressed with sufficient precision to avoid uncertainty as to the circumstances in which they can be invoked.
The satisfaction or waiver of a "minimum acceptance" condition is a significant event in a takeover. The knowledge that an offer is no longer conditional is likely to influence the decisions of target company directors and shareholders. However, given the nature of such conditions, they are often only satisfied at the last minute. Prior to the latest amendments, target company shareholders could be left with very little time to respond (ie by selling into the offer) following satisfaction of a minimum acceptance condition.
To address this concern, the Code has been amended so that if a minimum acceptance condition is satisfied or waived within the last week of an offer period, the offer period is automatically extended by two weeks from the day. Offerors should bear this in mind when fixing the dates of the offer period.