On 27 October 2023, the Takeover Panel released an amended version of its Practice Statement 5 ("PS5") on invocation of conditions to takeover offers.

Practice Statement 5 now provides guidance on how bidders can both retain a "No Phase 2" condition, yet still have the protection of a materiality condition if the parties choose/are forced to proceed to a Phase 2 review.

Practice Statement 5: invocation of conditions

Competition referrals may cause uncertainty on takeover bids, which are traditionally subject to a condition allowing the bidder to walk away on a "Phase 2" referral by a competition regulator (a "No Phase 2 Condition"). Since 2021, a bid will not lapse automatically upon a "Phase 2" referral by a UK or EU regulator. Instead, there is a level playing field where, if the bidder sets a regulatory condition (for any jurisdiction), the Panel's consent, based on a test of materiality, is required to invoke it.

So what if, as was seen on UnitedHealth's recent bid for EMIS, the parties agree not to invoke a "No Phase 2" condition but to pursue the bid despite a Phase 2 referral? Although on that bid the broad conditions on competition approvals covered a Phase 2 process, the Panel notes that in the absence of a condition dealing with Phase 2 clearance (a "Phase 2 Clearance Condition"), a bidder waiving a No Phase 2 condition and entering a Phase 2 process would run the risk that the regulator could set remedy conditions which are material, yet the bidder would not be able to walk away.

The amended PS5 concludes it would be prudent for an offer to be made subject to a Phase 2 Clearance Condition – either with a specific condition or a broad enough "sweeper" condition. The Panel is clear that the inclusion of a Phase 2 Clearance Condition, or a long stop date which accommodates such a process, will not affect its decision on materiality if the bidder wishes to invoke an express No Phase 2 condition.

PS5 now gives further guidance on invoking conditions:

  • conditions are now broken down into six categories, and the Panel's approach to the different categories is explained;
  • when assessing the invocation of a No Phase 2 condition, the Panel will take into account the potential impact of the reference or process on the business of the bidder and/or the target company, including the management time, costs and other burdens involved in pursuing it, as well as the utility of pursuing the reference or process (previously the test was whether the reference or process would be likely to result in a serious risk of material damage to the business of the bidder and/or the target company, in addition to the utility of pursuing it);
  • the Executive will consent to the extension of a long-stop date without the agreement of the target company only in limited circumstances, such as to allow a bidder to align its long-stop date with that of a competing bidder; and
  • if a condition as to a material authorisation or regulatory clearance is not fulfilled by a long-stop date (whether on an offer or a scheme) then the bidder will usually be able to invoke a condition allowing it to lapse its bid unless the action required to fulfil the condition is clear and would not give rise to circumstances which satisfy the material significance requirement.

This new guidance will be welcomed as the Public M&A markets recover, especially considering the increasing appetite of competition authorities to intervene and scrutinise M&A deals more closely. Note also that, although a bidder might choose to set a long-stop date that encompasses a Phase 2 process at the outset, there is no requirement to do so. Given the cost/difficulty of lining up debt finance for such a long 'certain funds' period, we anticipate bidders will instead seek to set long-stop dates that cover the expected timetable – rather than an unexpected Phase 2 (or equivalent) timetable.

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