Consultation on Takeover Code changes: A clearer picture

Where stakebuilding takes place in advance of an offer, the price paid for shares in the three months preceding the offer period, or prior to the firm offer announcement, will act as a floor on the price available to shareholders taking up the offer (Rule 6). Acquisitions during the offer period may trigger an increase in the offer price. Where there is a mandatory offer, the Code applies a 12 month look-back period in setting the minimum offer price. Rule 11 requires that the offer must be made in cash where shares are acquired for cash ahead of or during an offer period.

However, the Code does not currently require such minimum level and form of consideration to be announced in all cases, making it more complex for shareholders to ascertain when the price or form of consideration may be affected.

The consultation paper proposes that, where an obligation in relation to the offer price or form of consideration is triggered:

• at the beginning of an offer period; or
  
  
• as a result of an acquisition of interests in shares made after the commencement of the offer period,

then the bidder must make an announcement stating the effect on the minimum price and/or form of consideration.

The Panel intends, by closing this gap in the information available to shareholders, to allow better informed decision-making by shareholders following a Rule 2.4 announcement and during the course of the offer period.

Acquisitions at the end of an offer period

Another proposal which aims to improve market information during a bid is the proposed ban on a mandatory bidder acquiring shares during the late stages of a bid. This Code amendment will reflect the current position on a voluntary bid, where a bidder may not acquire shares in the last 14 days of the offer if that acquisition would force it to revise its offer. The Panel considers that there is currently an illogical distinction, and that a mandatory bidder should not be able to consolidate control during this period.

Therefore it proposes that a mandatory bidder will not be able to acquire further interests in shares in the 14 days prior to the unconditional date or the expiry of an acceptance condition invocation notice.

This change is intended to give shareholders better visibility as to the bidder's potential stake in the target if the bid were to lapse. Again, this gives a clearer picture to a shareholder in making its acceptance decision.

Mandatory offer price: clarification of the look-back period

Also in relation to mandatory bids, the Panel intends to clarify the look-back period by which the price of a mandatory offer is set. The Panel considers that clarification is necessary as in some cases, particularly where the Rule 9 threshold is inadvertently breached, an announcement may be delayed until the point when there have been no dealings in the target shares within the 12 month look-back period.

A new Note 5 to Rule 9.5 is proposed, which would state that the reference point for the look-back period is the date on which an offer ought to have been announced if the bidder had complied with the Code. This reflects the Executive's practice where there has been a dispute as to the triggering of Rule 9, as stated by the Executive to the Panel's Hearings Committee during the hearings in relation to Mr David King's mandatory offer for Rangers.

The chain principle

The Panel proposes another clarificatory amendment, in respect of the chain principle. This principle was most recently invoked in relation to Disney's acquisition of 21 Century Fox which, the Panel ruled, triggered a chain principle offer in relation to Sky as the acquisition of Fox's controlling interest in Sky could be described as a significant purpose of acquiring Fox.

Currently where a bidder (A) makes an offer for a company (B) which would cause it to acquire or consolidate 'control' of another company (C) (where the Code would apply to a direct acquisition of C), the Panel may require a mandatory offer by A for C, if:

• (a) the interest in shares which B has in C is “significant” in relation to B (relative values of 50% will normally be regarded as significant); and
  
  
• (b) securing control of C “might reasonably be considered to be a significant purpose” of acquiring control of B.

The Panel aims to "reduce the emphasis on subjective judgements of the Panel and bring more certainty to the triggering of the chain principle" by removing limb (b), the "significant purpose" limb of the test, from the chain principle. It considers that the relatively low bar presented by limb (b) has resulted in it becoming the key test, rendering limb (a) redundant. In addition, limb (b) is too subjective to give sufficient certainty.

In order not to set the bar for the chain principle inappropriately high, the threshold for significance in limb (a) will be reduced from 50% to 30%.

The consultation paper proposes amendments giving greater clarity and consistency with regard to:

• the circumstances in which an offeror that made a “no increase statement” or an “acceleration statement” in relation to an offer which subsequently lapsed can proceed to make a new offer even though the offeror did not reserve the right to set that statement aside with the agreement of the offeree board;
  
  
• the period of time for which a potential offeror should be bound by a statement as to the terms on which a possible offer might be made; and
  
  
• the circumstances in which an offeror whose offer has lapsed can proceed to make a new offer if a third party announces a firm intention to make an offer for the offeree company.

These amendments include changes intended to ensure that in a competitive situation, where an offer or possible offer has been expressed as final with no reservations, market participants are able to trade on the basis that the offeror or potential offeror will not be able to make a new offer until a competing offer has been resolved.

The Panel has taken the opportunity to make other minor clarificatory and drafting improvements to the Code.