Introduction
On 27 October 2023 the UK Takeover Panel (Panel) published Response Statement RS 2023/1 (Response Statement) setting out final changes to the UK Takeover Code (Code) rules on frustrating action and on equality of information as between competing bidders.1 This follows on from the Panel's previous consultation PCP 2023/1 (Consultation) published in May 2023 and adopts the rule changes as proposed in the Consultation, subject to certain minor modifications.
The new rules will come into effect on 11 December 2023 (Implementation Date) and will be applied from that date to all companies and transactions (including ongoing transactions that straddle the Implementation Date) except where to do so would give the changes retroactive effect. Where parties have any doubts as to the consequences of the rule changes, in particular their impact on any existing or contemplated transaction, they should consult the Panel prior to the Implementation Date to obtain a ruling or guidance.
This briefing sets out an overview of the key rule changes, together with our thoughts on these.
Scope of the frustrating action rules
The current position
Rule 21.1(a) currently prevents a target company from taking certain actions without shareholder approval, namely any action which (a) may result in an offer (or bona fide potential offer) being frustrated or in shareholders being denied the opportunity to decide on its merits or (b) is of a type specifically set out in the Rule. There are a number of circumstances in which the Panel will normally agree to disapply the frustrating action rules, but there is no general exception for "ordinary course" transactions.
The prohibition on frustrating action is currently expressed to apply from the point at which the target board "has reason to believe a bona fide offer might be imminent", although this threshold is normally treated as met on receipt of an approach (as discussed in Practice Statement 32 (PS32)). Although not specified in the Code, the restrictions will normally fall away once an offer period ends or, where no offer period has commenced, at 5pm on the second business day following an unequivocal rejection by the target board (see PS32 – this will be withdrawn on the Implementation Date in light of the new rules).
Overview of the new rules
The new rules recast the prohibition on frustrating action to prevent the target board taking any "restricted action" or any other action that may result in an offer or bona fide potential offer being frustrated.
Although the definition of "restricted action" covers broadly the same areas as those specified in current Rule 21.1(a) (in summary, making material acquisitions or disposals, entering into or amending/terminating material contracts, or issuing or redeeming/repurchasing shares or convertibles or granting options/awards)2 the key difference is that such action will not be restricted if it is in the ordinary course of the target company's business. As the Panel noted in the Consultation, preventing a target company from carrying on its normal activities is not the purpose of Rule 21.1 (action that is in the ordinary course of business, or is not material, is not normally likely to frustrate an offer or potential offer) and to do so would not be in the best interests of the target company, its shareholders and other stakeholders or a successful bidder.
The circumstances in which the Panel will normally agree to disapply the frustrating action rules (part implementation, bidder consent etc.) remain mostly unchanged.
Rule 21 has also been amended to more clearly articulate the period for which a target company will be subject to the frustrating action rules via the concept of the "relevant period" (being the period for which the frustrating action rules apply). This:
- Starts on the earlier of an approach being received (which essentially reflects the current application of Rule 21.1 as noted above) or the commencement of an offer period.
- Finishes at the end of the offer period or (if no offer period has begun) at 5pm on the seventh day following the date on which the latest approach is unequivocally rejected by the target board – an extension of the current two business day rule discussed above. The Panel notes that the relevant period would also end if the potential bidder informs the target board that it is no longer interested in making an offer (even if there has been no unequivocal rejection).
Specific rules apply to determining the relevant period in situations where there is more than one bidder or potential bidder,3 where a target company is seeking one or more potential bidders (whether through a formal sales process, private sales process or otherwise) or where a purchaser is being sought for shares carrying 30% or more of the voting rights of a company.
Application of the new rules to bidder on a Code reverse takeover
As proposed in the Consultation, the new rules mean that the frustrating action restrictions will also apply to the bidder in circumstances where the transaction is a reverse takeover under the Code.
In the Response Statement, the Panel confirms that (in such cases) the rules will be engaged for the bidder from the earlier of it making an approach to the target or being publicly identified in an announcement. It also notes that if the target company made the initial approach to the bidder in relation to a reverse takeover, the Panel would treat the relevant period for the bidder as beginning on approach.
Specific questions were raised by respondents in relation to dividend payments and share buybacks by reverse takeover bidders. In this context the Panel confirms in the Response Statement that:
- It would normally be willing to grant a limited dispensation from the Code restrictions on offer-related arrangements to allow a reverse takeover bidder to give a contractual commitment to the target company in relation to permitted dividend payments (as this is not regulated by the Code in the same way as dividends paid by the target company).
- Share buybacks would be considered in the same way as a share buyback by a target company to determine whether they should be treated as ordinary course (with specific additional considerations applying where the bidder has made a "no increase" statement).
Frustrating action: Ordinary course and materiality
The revised rules and new Practice Statement 34 (PS34) discuss these concepts in relation to a number of different types of action, as summarised below.
Share capital matters
Grants of options/awards in accordance with normal practice under an established share incentive scheme will (consistent with current Note 5 on Rule 21.1) usually be treated as ordinary course. In addition, it is clarified that grants/awards under a new scheme will normally be considered ordinary course provided they are consistent with the target company's proposed practice under the scheme as disclosed before the start of the relevant period (for example in a prospectus, circular or annual report) or with past practice under an existing scheme (even where the grant or award itself is made under the rules of a new or replacement scheme).4 The Panel has also confirmed that the frustrating action restrictions should not normally prevent a grant of options or awards in connection with a genuine promotion or new appointment or hire. The issue of shares to satisfy the exercise of options/vesting of awards under an incentive scheme would be ordinary course (consistent with current Note 5).
Share buybacks will normally be treated as ordinary course where they are made in accordance with a buyback programme operated within defined limits announced or established before the start of the relevant period. Where such a programme comes to an end during the relevant period, a new programme operated within similar defined limits would also normally be considered ordinary course. If the target company has historically operated an on-market share buyback programme but only on an irregular basis, the Panel would consider whether a new programme would be in the ordinary course of its business in light of all relevant circumstances.
PS34 specifically considers the approach to an issue of shares or convertible securities in consideration for the acquisition of assets and sets out a number of factors the Panel will consider when determining whether this is in the ordinary course. These include the frequency with which the target company has issued shares or convertibles as consideration for similar acquisitions historically, the size and terms of the issue, and whether the underlying acquisition itself would be in the ordinary course (see further below).
Acquisitions/disposals of assets
Changes have not generally been made to the guidance on when an acquisition or disposal will be considered "material", although under the new rules the Panel explicitly has the ability to consider other appropriate indicators of materiality in addition (or as an alternative) to the tests set out in the Notes – for example to take account of the particular circumstances of the target company or the nature of the relevant assets or where a particular indicator of materiality is appropriate in the context of the relevant industry. Aggregation rules continue to apply when determining materiality, but only in respect of transactions outside the ordinary course of business.
In terms of when an acquisition or disposal will be treated as ordinary course, PS34 provides additional guidance on the approach the Panel would take. Relevant factors include:
- Whether the transaction falls within the target company's established business model (taking into account frequency and size of similar transactions and how the target company describes its business strategy to its shareholders).
- Whether the transaction terms and basis of valuation are in line with normal practice by reference to either a broader market or previous transactions entered into by the target company or its peers.
- Whether the transaction is part of an ongoing strategy, rather than strategic change.
The Panel will also take into account the cumulative effect of disposals and acquisitions on the target company's assets and business as a whole – as such, even if individual transactions would be ordinary course and not material, the Panel may determine that the overall level of activity is such as to be outside the ordinary course.
Entering into (or terminating or amending) "material" contracts
Guidance in PS34 provides that the Panel will assess whether a contract is "material" primarily by reference to its size in comparison to other contracts entered into by the target company.
Specific rules apply (under the revised Notes on Rule 21.1) when determining whether an inducement fee would (of itself) be a material contract outside the ordinary course.
Frustrating action: Sanctioning a scheme in a competitive situation
The Panel previously indicated (in RS 2022/3, published in April 2023) that it would give further consideration to the extent to which the frustrating action rules should restrict, after shareholder approval has been obtained, a target board from seeking to sanction a scheme of arrangement in a competitive situation.
The revised rules do not go so far as to say Rule 21 should not apply to the taking of such action, but instead make it clear that the Panel will consent to the restrictions being disapplied other than in exceptional circumstances (for example, where it considers that the target board is acting in a clearly unreasonable manner in seeking to sanction the scheme). In the Response Statement, the Panel confirms that where it has consented to seeking sanction of a scheme in a competitive situation, the frustrating action restrictions will continue to apply to other actions proposed by the target company board.
Equality of information to competing bidders
Rule 21.3 provides that any information given to one bidder or potential bidder must, on request, be given to another bidder or potential bidder, even if they are less welcome.
Currently, the Code requires a bidder to ask specific questions rather than requesting, in general terms, all information supplied to other bidder(s). In practice, this means that where a bidder considers it might not receive equal information it will (a) include a long list of specific information requests (to ensure these would cover any information that any other bidder may have received) and (b) submit requests daily (as the rule currently only applies to information that has been provided to another bidder at the time of the request).
The rules have been amended to, essentially, permit a bidder to submit a weekly request that is phrased in general terms. This is achieved by removing the prohibition on requesting information in general terms and by requiring the target company to provide all information that it has provided to another bidder at the time of the request (regardless of whether the information was specifically requested) and any further information the target provides to another bidder in the seven days following the request.5
Minor changes have also been made to the conditions which may be applied to the passing of information under Rule 21.3 (clarifying that confidentiality restrictions may include a restriction on sharing the information with external providers, or potential providers, of finance without the target company's consent, such consent not to be unreasonably withheld) and to the Note relating to information provided to a purchaser of assets.6
Conclusion
As we noted at the time of the Consultation, a review of the scope of the frustrating action rules was welcome given the limited changes that have been made in this area over the years and the issues that frequently arise in practice. As such it is unsurprising that feedback to the Consultation was supportive and that the rule changes are being made broadly in the form proposed.
Offer timetables have become increasingly protracted resulting in the restrictions having a potentially greater impact than has historically been the case. As such, the introduction of "ordinary course" exemptions to the frustrating action rules will help to ensure that target companies (in particular those whose businesses involve the buying and selling of assets) are not unduly hindered from carrying on their normal activities. Whilst this means that a bidder's ability to object to the target taking certain action will be more limited, we agree that in most cases ordinary course activity would be unlikely to frustrate an offer and that restricting it would be disproportionate. More generally, the provision of guidance on "materiality" and "ordinary course" is helpful and provides greater certainty to both target companies and bidders and their advisers.
More specifically articulating in the Code itself when the frustrating action rules are engaged provides more clarity to offer parties and their advisers and (by specifically providing they apply from the time of approach) more directly reflects current Panel practice than the existing wording of Rule 21.1. On balance, we also agree that extending the duration of the period before which the restrictions fall away where an approach has been unequivocally rejected is appropriate. Whilst this means a target company will be restricted by Rule 21.1 for a longer period in certain circumstances, it should be kept in mind that this is against the backdrop of the wider changes that will provide greater latitude to take action that is in the ordinary course of business and the practicalities of the steps a potential bidder (having been rejected) would need to take before coming back with an improved proposal.
In addition, providing clarity on the Panel's approach to seeking sanction of a scheme in a competitive scenario is welcome given the debate generated by its previous consultation touching on this area.
In relation to the changes to Rule 21.3 and provision of information to competing bidders, in our view the revised rules are pragmatic and, in light of current market practice, should be helpful in reducing the administrative burden on bidder and target companies whilst not materially impacting the scope of information that is ultimately provided.
Footnotes
1. This briefing focuses specifically on the changes to Rule 21.1 Certain other changes are also being made, including to allow "mini long-stop dates" (i.e. dates by which the shareholder meetings and court sanction hearing are to be held on a scheme of arrangement) to be extended not only by the bidder with the consent of the target company, as is currently the case, but also in a competitive situation by the bidder with the consent of the Panel.
2. A new Note has also been included to the effect that the Panel may treat entering into offer-related retention arrangements (whether in cash or in the form of share options/awards) as a restricted action in certain circumstances - namely where these (a) relate to a period that is (in whole or in part) prior to the end of the offer period (and are not ordinary course incentivisation arrangements permitted under the rules in relation to share incentive schemes) and (b) are significant in value or relate to directors or management. PS34 sets out examples of factors the Panel may take into account when determining whether entering into the proposed arrangement should be regarded as restricted action.
3. The new rules in this area effectively give each competing bidder its own "relevant period". As an example of how these rules would apply, the Consultation discussed a situation where action has been partly implemented (with the consent of bidder one) before an approach from bidder two – in those circumstances the revised rules would enable the Panel to permit the action to be taken based on a combination of the bidder consent and part implementation exemptions.
4. The Response Statement also includes discussion of the Panel's approach to, amongst other things, divergence from past practice (for example where divergence is to comply with applicable law or to reflect changes in best practice) and situations where, prior to the frustrating action rules being engaged, a (non-ordinary course) grant of options has been approved by the target company board but no steps have been taken to implement the grant.
5. Although if a potential bidder that has made an information request subsequently chooses to inform the target board that it has actively ceased considering an offer, the Panel would consider the target company's obligation to share information to end immediately.
6. Changes are also being made to Rule 21.4 which (in the case of management buy-outs or similar transactions) requires the bidder, on request, to give the independent directors of the target company all information provided by the bidder to external providers (or potential providers) of finance for the buy-out. Essentially the revised rules will require the bidder to (equally and promptly) give the independent directors not only the information that had been provided at the time of the request, but also any further information that is subsequently provided, such that the independent directors would only be required to make a single Rule 21.4 request.
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