On 18 July 2014, the Takeovers Panel released the fourth issue of Guidance Note 12: Frustrating Action (GN12). The amended GN12 adds a new matter that the Takeovers Panel will have regard to in considering whether a target company has engaged in frustrating action that constitutes “unacceptable circumstances”. The Takeovers Panel had previously released a consultation paper seeking public comment in relation to its proposed amendments to GN12 (Consultation Paper).

Purpose of Guidance Note 12

GN12 provides guidance on the Takeovers Panel’s approach to “frustrating action” by the target in a control transaction. A frustrating action is any action by a target which may cause an existing bid or offer to be withdrawn, lapse or otherwise frustrated. Examples of such an action by a target may include a dilutive issue of shares, the acquisition or disposal of significant assets, substantial increase in the company’s leverage, returning significant amounts of capital to shareholders through dividends or capital reducton and/or any other material transaction that would alter the target business or capital structure.

Where there is a control transaction, the Takeovers Panel can intervene to prevent a frustrating action where it considers that the action constitutes unacceptable circumstances. This approach helps to ensure that the success (or otherwise) of an offer is determined by the target’s shareholders and not stymied by the decisions of the target board (even where those decisions may otherwise be proper in the absence of the proposed control transaction).

This policy can, however, have a significant effect on a target company during the period of a bid or offer. Material transactions or corporate changes (including proper responses to market or trading conditions) are effectively prevented without obtaining shareholder approval.

Amendments to Guidance Note 12

In the Consultation Paper, the Takeovers Panel noted that some market participants had expressed views that the existing frustrating action policy was unduly restrictive on targets during a takeover bid. In particular, the Consultation Paper considered the situation where a bid condition has already been breached but the bidder has not disclosed whether it intends to rely on that breach to allow its bid to lapse – where the bidder effectively has a free option in respect of its bid. In these circumstances, it may be unreasonable for the bidder to be entitled to restrict the target’s ongoing strategic activities under the frustrating action policy.

The amended GN12 attempts to address this issue by noting that the Takeovers Panel will consider whether a bid condition has been triggered previously (whether the same one which is alleged to be triggered by an alleged frustrating action, or another) and, if so, whether the bidder has not within a reasonable time disclosed whether it will rely on or waive that trigger. In response to submissions received on the Consultation Paper, the Takeovers Panel also included an additional footnote clarifying that a “reasonable time” will depend on the prevailing circumstances.

This amendment is designed to acknowledge that it may not be appropriate for target companies to be restricted by the principles of frustrating action  where a bid condition has already been breached but the bidder has not within a reasonable time confirmed whether it will rely on the breach.