On 27 October 2023, the Takeover Panel published amendments to Rule 21 and the associated guidance that will take effect from 11 December 2023.

These amendments followed a consultation and are designed to improve targets' ability to operate in the ordinary course of business, while protecting bidders against unwarranted corporate actions. The amendments also provide for unilateral extension of a scheme mini-long stop date in a competitive situation, and simplification of due diligence access for competing bidders.

The Panel has responded to requests for clarification and further guidance on the "ordinary course" test during the consultation. In particular, we and other practitioners highlighted the need for greater clarity on common aspects of incentive scheme administration so that ordinary course arrangements would not be restricted. We are pleased to see that amendments to the Notes on Rule 21.1, and further assurances in the response statement, give some clarity on the application of the "ordinary course" test in such circumstances.

The principal changes are as follows:

Relevant period: the restrictions on frustrating action in Rule 21.1 will apply during the period from the earlier of: (i) the receipt of an approach by a potential bidder; and (ii) the beginning of the offer period, until the end of the offer period or, where no offer period has begun, 5.00 pm on the seventh day following the date on which the latest approach is unequivocally rejected. Where there is more than one bidder, the Panel will normally treat the Relevant Period for any new bidder or potential bidder as beginning upon its approach or, if earlier, when it is publicly identified in an announcement.

"Restricted action": the amended rule sets out a list of "restricted actions" which, unless they are in the ordinary course of business, may not be taken during a Relevant Period without shareholder approval or Panel consent.

These restricted actions are:

  • issuing, or transferring out of treasury, shares, or securities carrying rights of conversion into or subscription for shares, in the target company;

  • redeeming or purchasing shares, or securities carrying rights of conversion into or subscription for shares, in the target company;

  • granting options over or awards in respect of shares in the target company;

  • disposing of or acquiring (in one or more transactions) assets of a material amount; or

  • entering into, amending or terminating a material contract.

The above list closely mirrors the current list of restricted actions in Rule 21.1, with some small differences. For example, where the current list prohibits the "grant of options in respect of any unissued shares", the new list prohibits "granting options over or awards in respect of shares" – the word "unissued" has been removed. This brings the grant of options or awards over existing, market purchase, shares within the remit of Rule 21.

It is also important to remember that Rule 21 can apply both at the time of grant of an option or award as well as at the time of exercise or vesting of an option or award. In the latter case, Rule 21 will apply where the target has to issue shares or transfer shares out of treasury in order to satisfy the exercise of an option or vesting of an award during a Relevant Period.

Incentive arrangements: As explained in the introduction to this note, the amended Code sets out extended guidance in the Notes on Rule 21.1 as to when the Panel is 'likely to consider' that incentive awards are being made in the target's ordinary course of business. As is currently the case, options or awards granted under a target's existing incentive schemes will be considered to be in the ordinary course of business if the timing and level of the proposed grants are in accordance with the target's normal practice under such schemes. The Panel has now added that options or awards granted under a newly adopted scheme will also be considered to be in the ordinary course of business, if the timing and level of the proposed grants were publicly disclosed prior to the relevant period. In addition, proposed grants of options or awards made in connection with "genuine" promotions and new appointments are also likely to be considered in the ordinary course.

Whilst this extended guidance is very welcome, the Panel still expects to be consulted if there is any doubt as to whether an action falls within the ordinary course of business. As it is usually in the interest of both target and bidder to ensure the correct approach is taken, we expect Panel submissions on this topic will continue to be made.

Retention arrangements: The extended guidance includes a new section on offer-related retention arrangements if they relate to a period that is (in whole or in part) prior to the end of an offer period. Retention arrangements for these purposes include awards settled in cash, as well as options or awards in respect of shares in the target (including market purchase shares), other than "ordinary course" incentive arrangements described above. The guidance states that the Panel "may regard" offer-related retention arrangements that are significant in value, or relate to directors or management, as a restricted action. Management, for these purposes will have the same meaning as under Rule 16.2.

Acquisitions and disposals and material contracts: New Practice Statement 34 sets out guidance in relation to M&A, and in relation to entering into, terminating or amending contracts, in particular the Panel's approach to materiality and when these transactions will be considered "ordinary course". With regard to M&A, the Panel will consider whether a transaction falls within the target's established business model, whether the terms and basis of valuation are in line with market practice and whether it is in line with the target's ongoing strategy. For other contracts, materiality will be assessed by reference to size, applying a "low threshold". Whether a contract is in the ordinary course will be assessed by reference to factors including the frequency with which the target has entered into similar contracts, the size of the contract, the significance of the contract to the business, whether there are onerous or non-market terms, and the costs of termination or amendment.

Buybacks and equity issues for cash/assets: Buybacks within previously announced limits will be considered to be in the ordinary course. Equity issues for cash are unlikely to be considered ordinary course. Practice Statement 34 sets out the factors to be considered if shares are issued as consideration for assets, including the size of the transaction, the frequency with which the target has issued consideration shares in the past, whether the shares were to be issued at market value and whether the acquisition of assets would itself be considered to be in the ordinary course of business.

Reverse takeovers: The amended rules state that on a reverse takeover, Rule 21.1 will also apply during the relevant period to the board of the bidder as if the bidder were a target and vice versa.

Equality of diligence information to competing bidders: Amended Rule 21.3 removes the requirement for daily, specific requests by competing bidders for due diligence information provided to the original bidder. Instead the target must provide, on request, all information that it has provided, and that it provides in the seven days following the request, to another bidder. Rule 21.4 has also been amended to provide that on an MBO or similar transaction, the bidder must equally and promptly provide to the independent directors all information which has been, or is subsequently, provided to finance providers.

Application to sanction a scheme of arrangement in a competitive situation: A new note states that other than in exceptional circumstances, the Panel will consent to the restrictions in Rule 21.1(a) not being applied where the board of the offeree company seeks to sanction a scheme of arrangement in a competitive situation. Practice Statement 34 gives guidance on what will be considered "exceptional circumstances".

Separately from its amendments to Rule 21, the Panel has also amended Appendix 7 to the Code to provide that, in a competitive situation on a scheme of arrangement, a bidder may extend a "mini-long stop date" with the consent of the Panel, even if the Target does not agree.

These amendments contain welcome clarity which will allow targets to carry on business during an offer period, while restricting corporate actions which may affect the value of the target's shares. The amendments will come into force on 11 December 2023 and will apply to offer periods commencing on or after 11 December 2023 as well as offer periods that commenced before, but continue after, this date.

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