In December 2016, Twenty-First Century Fox Inc. (Fox) made a pre-conditional offer for the 61% of Sky plc (Sky) that it did not already own. The pre-conditions to Fox's offer were not satisfied until July 2018. In December 2017 The Walt Disney Company (Disney) and Fox announced a merger combination, the effect of which would be to pass control of Fox's 39% interest in Sky to Disney. At the end of February 2018, Comcast Corporation made a competing and higher pre-conditional offer for Sky and these pre-conditions were satisfied in June 2018.
The Disney/Fox merger and the two competing offers for Sky engaged the application of the U.K. Takeover Code (Code) in two important and novel (or unusual) areas – the application of the Code's so-called "chain principle" with respect to the Disney/Fox merger and the Code's "auction" procedure for resolving bids that remain competitive in their final stages.
Disney's Chain Principle Offer
The Code provides, in general terms, that where a party (e.g. Disney) acquires over 50% of the voting rights in another entity (e.g. Fox) that has a controlling (30% or more) interest in a company governed by the Code (e.g. Sky), the Panel will not normally require that party to make a mandatory bid for the underlying Code company unless either: (i) the other entity has a "significant" (i.e. 50%) interest in the Code company, or (ii) securing control of the Code company might reasonably be considered to be a significant purpose of the party acquiring control of the other entity.
There have only been five previous cases in which this principle and requirement to make a mandatory offer has been invoked and none of those cases resembled the Disney/Fox/Sky situation.
In April 2018, the Panel ruled that limb (ii) above of the chain principle rule applied and that Disney would have to make a chain principle offer for Sky at the same price as Fox's currently outstanding offer for Sky unless Fox had acquired 100% of Sky or any third party (e.g. Comcast) had acquired more than 50% of Sky. When Disney and Fox announced revised and increased terms for their merger and Fox increased its offer for Sky, the Panel had to revisit its determination of the price at which Disney would be required to make a chain principle offer. Minority shareholders in Sky argued that that offer price should be pitched at a significantly higher level than just the new Fox offer for Sky. However, the Panel fixed the new chain principle offer price at the same level as the new Fox offer.
These arguments—about the basis on which the Panel should properly determine the price at which a chain principle offer should be made—were eventually settled by a ruling of the Takeover Appeal Board (the TAB), upholding an earlier ruling of the Hearings Committee of the Panel and issued on 15 August 2018. In its reasoned ruling issued on 29 August 2018, the TAB upheld the Panel's ruling that the Disney chain principle offer should be made at the same level as the Fox offer for Sky.
The TAB held that the chain principle price did not have to be based on what might be thought to be the true or fair or reasonable value of Fox's interest in Sky. The Panel had adopted the correct approach by establishing the proportion of the consideration payable under Disney's acquisition of Fox represented by Fox's stake in Sky and then fixing a chain principle offer price based on the principle of equivalent treatment so that minority Sky shareholders would be offered the same level of consideration for their stakes in Sky as Fox was to be treated as receiving for its Sky stake.
A copy of the reasoned ruling of the TAB can be found here:
Auction Process
The other novel (but not unprecedented) feature of the Sky takeover arose because both Fox's and Comcast's bids remained in competition and capable of being increased on the last day in the U.K. Takeover Code timetable on which an increase would be permitted (the so-called "day 46"). In order to resolve such a competitive situation, the Code allows the Panel to require the competing bidders to announce final revised offers in accordance with an open auction process. The Code sets out one such procedure but the Panel may agree—as it did with Sky—to another auction process being followed.
In this case, the Panel announced that on day 46 for the two bids (i.e. 22 September 2018) an auction would be run under which the then lowest offeror (which was Fox) would be allowed to make an increased bid, followed by the other bidder (Comcast) and if the auction still remained open, both bidders would be allowed to make their final bids (which might end up being equal in price). At the end of the day, Fox ended up bidding £15.67 per Sky share and Comcast bid £17.28 per share.
Subsequently, Comcast acquired Sky shares in the market taking its holding over 30% and triggering a mandatory bid (at its £17.28 final offer price) and Fox announced that it would be accepting the Comcast bid in respect of its 39% stake in Sky.
A copy of the Panel's announcement about the auction process for the Sky bids can be found here:
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