Since 20 May 2006, new provisions within the City Code on Takeovers & Mergers (the Takeover Code), implementing the European Takeovers Directive 2004/25/ EC (the Directive), have been in effect. Some of the most commonly asked questions in relation to those provisions relate to the need to post offer documents and announcements to shareholders in foreign jurisdictions, or to make them available to employees in such jurisdictions. Rule 30.3 of the Takeover Code states that documentation must be posted to all shareholders and made available to all employee representatives (or, where there are none, employees themselves) in all jurisdictions, even if such jurisdictions lie outside of the EEA. The obligation may be particularly wide-ranging in the case of employees since, as indicated in Public Consultation Paper 2005/5 and Response Statement 2005/5, the obligation would apply in relation to employees on a group-wide basis of both the offeror and the offeree.
The Note to Rule 30.3 indicates when dispensations may apply, avoiding the need to make documentation available in certain jurisdictions. Where documentation would otherwise have to be posted into a jurisdiction outside of the EEA, a two-stage test will apply. Firstly, one must ask whether there would be significant risk of civil, regulatory or criminal exposure for the offeror or offeree in making the documents available in that jurisdiction unless amendments (which are not minor) are made to such documentation.
Whilst, historically, lawyers acting for a bidder or target effectively assumed that certain jurisdictions were “toxic” without much further research, practitioners would now be wise to have researched with local lawyers those toxic jurisdictions again and be ready, were the question ever to arise with the Panel on Takeovers and Mergers (the Panel), to demonstrate the risks involved with posting into such jurisdictions. This may be particularly relevant in the case of hostile or competitive offers. Even in some jurisdictions previously considered problematic, little needs to be done in order to bring the documentation into compliance with local laws.
If there is no significant risk, the documents will need to be posted into the foreign jurisdiction in question. If there is a significant risk, one of two further hurdles must be cleared to avoid posting. If less than 3% of the shares of the offeree are held within the relevant jurisdiction, an automatic dispensation will apply under the Note, avoiding the need to post to such shareholders (the automatic dispensation). The Panel’s consent to utilise that exemption would not be needed. The Panel is concerned in such circumstances with the location of the registered shareholders and not of those who hold underlying beneficial interests. Similarly, if less than 3% of employees are located within a particular jurisdiction, there will be no need to post into that jurisdiction and an automatic dispensation will apply. A careful assessment by the offeror’s and/or offeree’s financial advisers or broker, up to the point of posting the offer document, of the shareholder register will be required to check whether 3% or more of the shares are allocated to any foreign jurisdiction. Since the rule also applies to subsequent documentation posted in respect of revised offers, this second test may need to be considered again at various intervals during the offer timetable.
If the register suggests that 3% or more of the shares are registered to shareholders in a foreign jurisdiction and the offeror and/or offeree still wishes to avoid having to post into such jurisdiction, the offeror and/or offeree will need to seek a specific dispensation from the Panel (the specific dispensation). In such circumstances, the offeror and/or offeree will need to convince the Panel that it would not be proportionate for it to be required to post into such jurisdiction. This may be determined by reference to, amongst other things, the costs involved in complying with local securities laws, the resulting delay on the transaction timetable, the number of shareholders in the jurisdiction and the number of shares they actually hold.
The Note to Rule 30.3 makes it clear that the above dispensations would not normally be available if parties are looking to avoid posting into a country within the EEA. In such cases, as indicated in Response Statement 2005/5, the Panel would not allow an automatic dispensation (ie even if less than 3% of shareholders or employees were located in a foreign jurisdiction) and would probably find it difficult to grant a specific dispensation, having regard to the increasingly harmonised nature of company law within the EEA and the objectives of the Directive. In contrast with the previous view sometimes held that a jurisdiction such as the Republic of Ireland was toxic, that assumption cannot now be relied on, bearing in mind that Ireland is within the EEA.
In relation to employees (or employee representatives), there is no requirement to send such employees a copy of offer documentation or announcements but merely to make such documentation and announcements “available” to them. The Response Statement 2005/5 makes it clear that a company can communicate such information in whatever manner it normally uses for communicating with its employees, eg by email; staff notice boards; intranet or website.
Compulsory acquisitions of shares
The Takeovers Directive (Interim Implementation) Regulations 2006 (the Regulations), brought in (alongside changes to the Takeover Code) to implement the Directive, also contain provisions relating to posting documentation into foreign jurisdictions. Until they are replaced by Part 28 of the Companies Act 2006, these provisions only apply to companies listed on regulated markets (for example, in the UK, companies listed on the Main Market and not the AIM Market of the London Stock Exchange). The provisions relate to the circumstances in which an offer can truly be considered an “offer” for the purposes of the compulsory sweep up provisions in the Regulations, allowing a bidder (whose offer is unconditional and subject to certain requirements in relation to the bidder’s resultant shareholding) to require that minority shareholders sell their shares to it
In relation to whether foreign shareholders must receive certain offer documentation in order that the bidder be able to use the compulsory sweep up powers, the previous law (sections 428 to 430F of the Companies Act 1985) kept the position ambiguous, although the leading case in this area, Winpar Holdings Ltd v Joseph Holt Group plc (The Times Law Reports, 24 May 2001, Court of Appeal), did try to clarify matters. In that case, an Australian shareholder, which had not received documentation in relation to a takeover offer for a UK company, had objected to the compulsory acquisition of its shares under the Companies Act 1985. The shareholder had suggested that the sweep up powers should not be available as the offer had not been made to it. In that case, and on the basis of the specific circumstances (including, for example, the fact that Winpar held an extremely small shareholding, that the consideration represented a substantial improvement on the market price immediately before the offer, that independent financial advisers had advised that the offer was fair and reasonable, and that the offer had been accepted by 98% of the shareholders), the court held that the offer had been extended to the shareholder, by being notified to the shareholder by means of a box advertisement placed in a UK national newspaper. In those circumstances, where local securities laws might make it difficult to post the offer document itself into Australia, the fact that the shareholder was not sent the offer document itself did not mean the offer was not made to such shareholder.
The Regulations formally clarify the position, as will Part 28 of the Companies Act 2006, which is due to come into effect on or around 6 April 2007, and will (in sections 941 to 958) make consistent the new approach in relation to compulsory sweep up, whether one is dealing with a target company listed on a regulated market (eg companies on the Main Market of the London Stock Exchange) or not (eg companies on the AIM Market, unlisted public companies and private companies). The Regulations (Schedule 2, paragraph 1(7) – this will be reflected in section 945(1) of the Companies Act 2006) indicate that, in order to utilise the provisions, documentation need not be sent to shareholders with registered addresses outside the UK, if the documentation is not being posted to avoid contravening local securities laws. The offer must be made in the Gazette (an official UK publication) or a notice must be placed in the Gazette, which indicates where in the EEA the offer document can be inspected or a copy obtained (or indicating the website address where a copy can be inspected or obtained). The Regulations also indicate that the compulsory sweep up powers might not automatically be unavailable simply because a bidder has not complied with the above provisions (Schedule 2, paragraph 1(9)(a) - this will be reflected in section 945(3)(a) of the Companies Act 2006). This suggests that there may be other situations in which it may be legitimate not to post documentation abroad although the Regulations do not tell us in what situations this may be acceptable.
Similar provisions apply as regards an offer being incapable of being accepted in certain foreign jurisdictions, whether or not documentation can be posted into such jurisdictions. Specifically, Schedule 2, paragraph 1(8) of the Regulations (this will be reflected in section 945(2) of the Companies Act 2006) states that the sweep up provisions may still be used where, because of the law of a foreign jurisdiction, an offer is impossible or more difficult to accept. In addition, the Regulations (at Schedule 2, paragraph 1(9)(b) – to be reflected in section 945(3)(b) of the Companies Act 2006) state that the sweep up provisions may still be capable of being used where an offer is impossible or more difficult to accept in a foreign jurisdiction for a reason other than because of the laws of such country.
The Regulations also allow (as will Part 28 of the Companies Act 2006) for bidders to offer different consideration to shareholders based in the United Kingdom compared to those based abroad, depending on the impact of local securities laws. This is the case where local securities laws/ authorities either prohibit the offering of certain forms of consideration or attach particularly onerous conditions to such consideration being offered. In such cases, consideration of a substantially equivalent value can be offered. In particular, this assists bidders making securities exchange offers into certain jurisdictions and reflects previous UK legislation.
There are a large number of factors to consider, in the context of a takeover offer, in relation to the proper treatment of shareholders in foreign jurisdictions. The above summary obviously does not even touch on the requirements of local securities laws themselves and it may be that bidders discover that the requirements of such laws are not always as onerous as they first appear. Furthermore, bidders may find that, whatever the requirements of local laws, it is unattractive to exclude shareholders (particularly significant shareholders) located in foreign jurisdictions from accepting an offer.