Law Societies respond to Panel's consultations on proposed amendments to the Takeover Code

PCP 2022/3

Frustrating action

In competitive bid situations it can sometimes be the case that (i) bidders have required regulatory clearances that could not be obtained within the standard 60-day timetable; and (ii) one bidder is proceeding by way of a scheme of arrangement and the other by way of contractual offer.

PCP 2022/3 suggested that if the 'faster' offeror (being the first to obtain its required regulatory clearances) is proceeding by way of a scheme of arrangement which has been approved by the target's shareholders and the target board and wishes to complete the scheme prior to the Panel introducing an auction procedure under Rule 32.5, that could be deemed to be frustrating action under Rule 21.1 on the basis that the sanction of the scheme would result in the competing 'slower' offer being frustrated. The Panel has indicated that in such circumstances the target's board should consult the Panel as to whether the sanction of the scheme would, without an additional shareholder vote, be deemed to be frustrating action under Rule 21.1.

The Law Societies do not support this proposal, asserting that shareholders of the target would have already necessarily approved the scheme (by way of a vote which would have required a higher majority than would be required for an approval of a frustrating action under Rule 21.1(a)) and authorised the board to take appropriate action to implement it. They argue that it should not matter whether the target's shareholders are aware of the final price and terms of any competing offer at the point in time at which they vote to approve the scheme, noting that it is not a requirement of any other scenario under Rule 21.1 for there to be finality of the offer terms before the target's shareholders can validly approve a frustrating action, and in circumstances where the target's shareholders are aware of the final terms of the competing offer at the time they vote to approve the scheme, the sanctioning of the scheme should not be considered frustrating action at all. The target's shareholders are also further protected by, among other things, the requirement for the target's directors to act in accordance with their fiduciary duties and the fact that the scheme must be sanctioned by the Court, who will have regard to any intervening developments including the fact of, and terms of, any competitive offer.

In case the Panel does not agree with the Law Societies' views, they have sought to solicit some additional practical guidance from the Panel. In particular, they have suggested that specific language may be included in the target shareholder resolutions and the scheme circular to clarify that shareholders are directing, rather than authorising, the target company directors to proceed with the sanction of the scheme notwithstanding the emergence of any alternative proposals and have asked the Panel to confirm that (i) including such language would not be prohibited and (ii) proceeding to sanction the scheme in those circumstances could not constitute a frustrating action under Rule 21.1.

Mini long-stop dates

In the context of a scheme of arrangement, mini long-stop dates are dates by which the shareholder meetings and court sanction hearing must be held, which may be included as separate conditions to the scheme.

The Law Societies asked the Panel to clarify how mini long-stop dates would operate in a competitive scenario in two specific circumstances:

• First, if the Panel resets the timetable as it proposes to do in revised Note 2 to Rule 32.5 and the re-set date for the sanction hearing is later than the mini long-stop date, the Law Societies have asked for confirmation that the bidder would be permitted to set a new mini long-stop date, without the need for agreement from the target company (or to otherwise invoke the condition).
   
• Secondly, if a new offer emerges after the first bidder's scheme document has been published, the Law Societies have asked for confirmation that the bidder would be permitted to set a new mini long-stop date (without the target company's approval) or to invoke the condition.

Holding an auction before the satisfaction/waiver of condition relating to a regulatory clearance

The Panel proposed that an offeror should not be required to participate in an auction procedure under Rule 32.5 if its offer remains subject to a condition (relating to regulatory clearances) which has not been satisfied or waived. In response, the Law Societies have highlighted their concern that this would lead to parallel regulatory reviews of the same transaction before the auction can be held.

While the Law Societies acknowledge that the Panel recognises that parties to the offer would be able to agree that the auction procedure should start earlier, they stressed two potential drawbacks if there is no such unanimous consent of the target and offerors:

• parallel regulatory reviews of the same transaction would place significant additional time/cost burdens on the target and increase deal uncertainty. While, in practice, there may be a low risk of failing to obtain material regulatory clearances, holding the auction before they have been obtained should not unduly prejudice the target or its shareholders; and
   
• certain regulators either cannot or will not review more than one filing for merger control or foreign investment/national security clearance in relation to the same transaction, whether that is due to resourcing at the regulator or because the relevant regulatory regime does not accommodate parallel reviews.

In view of these drawbacks, the Law Societies are of the opinion that it remains desirable to retain flexibility to hold the auction at an earlier stage without the unanimous consent of the target and bidders.

PCP 2022/4

The Law Societies agreed with all (including enhanced powers of the Panel to make derogations from the Code in certain circumstances and publishing irrevocables as soon as they are agreed in full, rather than a summary) but one of the proposed amendments.

The Panel proposed an express requirement for a target's board to make a recommendation to shareholders and holders of Rule 15 securities as to the action they should take in respect of an offer (including any alternative offer) or a Rule 15 offer or proposal. However, the Law Societies have queried why an amendment to the rules in this area is required.

In their response, they commented that they were not aware of any difficulties arising from current practice in this area and, specifically in relation to any recommendation relating to an alternative offer, queried the practical use of such a recommendation in any event. The Law Societies further noted that recommendations on the attractiveness of such proposals may depend on a range of factors (including an individual's personal tax position) and so a target's board would be required to opine on matters that it would not be well placed to assess.

The Law Societies have asked the Panel to clarify that this proposed requirement would not apply in the context of mix and match elections, as they are not regarded as alternative offers under Rule 33.2.

In relation to the following proposals made by the Panel in 2022/4, the Law Societies have sought further clarification:

• In respect of the proposal to amend Note 3 on Rule 9.5 to provide that where a mandatory bid price is adjusted by the Panel, it must be 'appropriate' (rather than 'fair and reasonable') the Law Societies have suggested that a Note to clarify the timing of the Panel publicising a decision to adjust would be helpful.
   
• In response to the proposal to amend Rule 25.4(a) to require a target's board to disclose which alternative the directors intend to elect for in respect of their own shares, and to specify that the Panel may require that the document states their reasons for doing so, the Law Societies have asked what the position would be if the directors have not made a decision as to which form of consideration to elect for at the time the circular is posted.
   
• On the proposal to delete Note 2 to Rule 2.2(d), the Law Societies have asked the Panel to confirm that a potential bidder who was not in active consideration would not be required to make an announcement and further that a potential bidder in active consideration would be able to seek a dispensation from the requirement for an announcement following rumour or speculation if the bidder has ceased to actively consider the bid (i.e. 'downed tools'). Rule 2.2(d) requires an announcement when a target is the subject of rumour and speculation or there is an untoward movement in its share at a point in time where a potential bidder is actively considering an offer but before an approach has been made and there are reasonable grounds for concluding that it is the actions of the potential offeror that have led to the situation. Note 2 to Rule 2.2(d) provides that the Panel will not normally require an announcement under Rule 2.2(d) if it is satisfied that the price movement, rumour or speculation results from a clear and unequivocal statement, for example a public disclosure required under the FCA Handbook or the announcement of a tender offer.

What next?

PCP 2022/3 and PCP 2022/4 are now closed for comment. The Panel expects to publish its Response Statements, which will set out the final amendments to the Code on these matters, in the Spring, with such amendments coming into effect one month thereafter.