CMS Expert Guide to Public Takeovers in United Kingdom

Yes – the City Code on Takeovers and Mergers (“Code”) governs public takeovers of companies which have their registered offices in the UK, the Channel Islands or the Isle of Man whose shares are admitted to trading on a UK-regulated market, such as the Main Market of the London Stock Exchange plc (“Main Market”), or a UK multilateral trading facility, such as AIM (“AIM”), or on a stock exchange in the Channel Islands or the Isle of Man and certain unlisted public and private companies with registered offices in the UK, the Channel Islands or the Isle of Man and which are considered by the UK Panel on Takeovers and mergers (“Panel”) to have their place of central management and control in the UK, the Channel Islands or the Isle of Man.  The operation of the Code is overseen by the Panel.

The UK chapter addresses transactions relating to the acquisition of control of UK-incorporated companies listed and traded on the Main Market or AIM only.

• Takeover offers;
• Acquisitions which result in the acquirer and persons “acting in concert” with it holding 30% or more of the voting rights of the target company or an increase in an existing holding of shares carrying voting rights which is between 30% and 50%; and
• Partial offers.

Yes, both the offeror and the target company must engage financial advisers experienced in Code transactions.  As a minimum these advisers will need to:

• in the case of the target company, give the  board of the target company advice as to the financial merits of the offer; and
• in the case of the offeror, give a confirmation that the offeror has sufficient cash resources to satisfy the cash consideration payable under the offer.

In addition, the financial advisers should advise their client on the operation of the Code and liaise with the Panel in respect of the transaction.

A mandatory offer, which must be in cash or be accompanied by a cash alternative, must be made if any person (whether alone or together with persons acting in concert with that person) increases his percentage shareholding carrying voting rights (whether as a result of a purchase of shares or a corporate action such as a share buyback) in the target company:

• to 30% or more of the voting rights in the target company for the first time; or

• where the combined holding of shares carrying voting rights is between 30% and 50%, by any amount which increases the percentage of shares carrying voting rights in which the person is interested.

If a person holds more than 50% of the shares carrying voting rights in the target company, that person is then free to acquire further shares carrying voting rights in the target company (provided the holding remains always above 50% of the voting rights) at any time.

There are limited circumstances where the  Panel may grant a dispensation from the requirement to make a mandatory offer, in particular where the mandatory offer is triggered by a person subscribing for new shares (as opposed to buying existing shares). In addition, the waiver of the requirement must be approved by a majority vote of the independent shareholders at a shareholder meeting.

Tender offer for all shares: under this structure, an offeror must receive enough acceptances from shareholders so that if the offer becomes unconditional and completes, the offeror will hold more than 50% of the target company’s issued voting share capital (e.g., a minimum of 50% plus 1 share of the target company’s issued voting share capital). Where there are shareholders who do not accept the offer, the offeror will need to either allow them to continue as minority shareholders in the target company or seek to acquire those shares in the target company which it does not own under the compulsory acquisition procedures under the UK Companies Act 2006 (“CA 2006”).

Scheme of arrangement under CA 2006: under this structure, the offer must be approved (a) by a majority in number of the shareholders representing at least 75% in value of shareholders present and eligible to vote in person or by proxy at a meeting convened by the Court for the purpose; and (b) sanctioned by the Court. Under this structure, if sanctioned by the Court, the offer is binding on all shareholders whether or not they voted and the offeror automatically acquires 100% of the target company.

Within its own parties (advisers, funders etc), an offeror is required to maintain confidentiality. However, in the event of a leak (whether or not identifying the offeror) or an untoward movement in the price of the target company’s shares (which is indicative of a leak), an announcement identifying the potential offeror and stating its potential interest may be required.

Once the target company has been approached, the target company is free at any time to announce that it has received an approach from the potential offeror, naming the potential offeror (and starting the 28-day PUSU period referred to in Q7 below). A potential offeror is not able to prevent or restrict a target company from making such an announcement (though in practice, most target companies will also prefer to keep discussions as confidential as possible).

The parties must also comply with the disclosure obligations under the UK Market Abuse Regulation (“MAR”) and applicable listing rules (such as the Financial Conduct Authority’s Listing Rules or AIM Rules for Companies).

Once a target company is approached by a potential offeror, it can announce that fact to the market and trigger the start of a 28-day period during which the potential offeror must either announce a firm intention to make an offer or announce that it does not intend to make an offer (this period is known as a “put-up-or-shut up”, or “PUSU” period). This period can be extended with the consent of the target company and the Panel.

Alternatively, a potential offeror may announce that it is considering making an offer (and may specify conditions to the making of the offer). This will also trigger the 28-day PUSU period.

If a potential offeror does not withdraw, by the end of the PUSU period, it must announce  a firm intention to make an offer, following which it has 28 days to publish its formal (binding) offer documentation. Extensions to this period are only possible in exceptional circumstances and offerors are not entitled to withdraw after making an announcement of a firm intention to make an offer.

The target company must be approached by the potential offeror with a formal offer or firm intention to make an offer before an announcement is made.

An announcement of a potential offer must not normally be subject to conditions or pre-conditions which depend solely on the subjective judgements of the offeror (or indeed the target company) or its directors or the fulfilment of which is in their hands. The Panel must be consulted in advance of an announcement of any pre-condition to the making of an offer.

When the firm intention to make an offer is announced, and/or the formal offer documentation posted, the permissible conditions are generally restricted to:

• achieving a minimum acceptance level, if accepted in full, of shares carrying over 50% of the voting rights of the target company (e.g. 50% plus 1 share). Offerors may elect to set higher minimum acceptance conditions (typically 90% or 75%);
• receipt of necessary regulatory approvals; and
• material adverse change in the target company (though the threshold for invoking this condition is very high and almost impossible to satisfy).

Following the announcement of a firm intention to make an offer, an offeror must use all reasonable efforts to ensure satisfaction of any conditions or pre-conditions to the making of an offer.

From the time when the offeror makes an announcement of a firm intention to make an offer until the last possible date for the payment of the consideration if the offer is successful, the offeror must have fully committed and “certain” funds to satisfy the cash component of the consideration payable under  the offer. In general terms, any outstanding conditions to draw down of the facilities would need to be within the sole control of the offeror, as borrower, and not allow discretion to the lender. 

The offeror’s financial adviser is required to publicly confirm in the offer announcement that the offeror has cash resources available, which are sufficient to satisfy full acceptance of the offer.

One of the overriding principles of the Code is that all shareholders must be treated equally.

An offeror may not make an offer at less than the highest cash price it has paid over certain periods. These periods are determined by whether the offer is for cash consideration or whether the consideration is comprised of cash and/or securities and vary between 3 and 12 months. If the offer is a mandatory offer, the consideration must be in cash or be accompanied by a cash alternative at not less than the highest price paid by the offeror or persons acting in concert with it for shares in the target company during the 12-month period prior to the announcement of the offer.

No, although special rules apply to management team shareholders in a management buy-out and shareholders acting in concert with the offeror and as joint offerors. These rules allow for limited exceptions to the rule that all shareholders must be offered the same.

No, but once a target company discloses information to one potential offeror, it must disclose the same information to all potential bona fide offerors, which may emerge, if requested to do so.

Target companies are generally prohibited from agreeing any deal protection measures with an offeror.  Confidentiality agreements in respect of confidential information relating to the target company and/or offeror (but not the offer itself) and cooperation agreements in respect of how regulatory approvals may be sought are permitted. Inducement fees or break fees are only permitted where a “white knight” recommended offeror is solicited after a hostile approach or where a formal sale process has been conducted resulting in a single recommended offer.

Under the Code, the board of directors of a target company is under no obligation to engage with a potential offeror or facilitate its offer (such as by providing due diligence information). However, the target company directors remain subject to their general duties to promote the success of the company and therefore act in the company’s and shareholders’ best interests. The target company directors may therefore be in a position where those duties require them to engage to some extent.

The Code does however restrict the target company from taking any actions which may frustrate a potential offer or prevent it being put to shareholders. “Poison pills” such as issuing new shares, granting share options, giving executives large pay rises or pay-outs in the event of a hostile takeover offer succeeding are generally not permitted without Panel consent and the approval of target company shareholders in a general meeting.

Any purchase of target company shares by the potential offeror will be subject to MAR (as implemented in the UK), subject to the takeover offer safe harbour.

Any purchases by a potential offeror will set a floor on the minimum consideration which may be offered.

A potential offeror may not acquire target company shares, representing 30% or more of the target company’s voting share capital (unless it is the purchase which triggers a mandatory offer) and similarly may not increase an existing stake of between 30% and 50% of the target company’s voting share capital during the period of the offer.

A potential offeror is generally restricted from selling any shares in the target during the period of the offer.

A potential offeror needs to announce any acquisition of shares to the market within 24 hours of the acquisition.

Target company shareholders may give irrevocable commitments or statements of intent to accept an offer if made or once made. In the case of target company directors, these undertakings must be limited to acceptance of the offer as a target company shareholder and not commit them to take any action, as a director, to support the offer.

As noted above and subject to the limitations set out there, it is possible for potential offerors to buy shares in the target company during the offer process either on-market, by private agreement or through acquiring an option to do so from the shareholder. However, any shares acquired by the potential offeror outside of the offer will not count towards the thresholds for any mandatory acquisition of minority shares (squeeze-out) after the offer completes or for the majority required to implement a scheme of arrangement.

Rule 8 of the Code provides that, during an offer period, parties must make public disclosures to the stock market, or in certain cases private disclosures to the Panel, of their positions or dealings in relevant securities of the parties to the offer. This applies to parties to an offer, persons acting in concert with them, persons with interests in securities representing 1% or more of any class of relevant securities of the target company or any securities exchange offeror, and exempt principal traders and exempt fund managers.

In addition, the shareholder notification requirements under the Disclosure Guidance and Transparency Rules apply where a person has a holding of 3% and/or moves through a whole percentage point continue to apply in addition to the Code requirements.

Where the offer is implemented by way of a tender offer:

D – 28: Announcement of firm intention to make an offer

D: publication of formal offer documentation

D + 21: first possible closing date for acceptances (extendable by the offeror)

D + 42: first date on which shareholders can withdraw acceptances (if the offer is not unconditional as to acceptances)

D + 60: last date for the acceptance condition to be satisfied

D + 81: last date for all other conditions to be satisfied.  In the case of regulatory conditions, the Panel may suspend the timetable to allow the regulatory condition(s) to be satisfied.

Where the offer is implemented by way of a scheme of arrangement:

D – 28: Announcement of firm intention to make an offer

D – 1: Court approval to the convening of a Court Meeting to approve the scheme of arrangement

D: publication of the formal scheme documentation

D + 23: Court Meeting of relevant shareholders to approve the takeover by scheme of arrangement in principle and any necessary general meeting of shareholders to authorise implementation of the scheme

D + 35: Court hearing to approve the scheme

D + 36: registration of the scheme with the Registrar of Companies, the scheme becomes effective and the takeover completes

• Offer or scheme document which complies with the Code requirements
• Offeror prospectus (in the case of a share exchange offer) which complies with the Prospectus Regulation/UK Prospectus Rules
• Irrevocable undertakings to accept the offer
• Offeror financing documentation

The Panel will generally seek to align the timetables of competing offerors so that they all run on the timetable of the last offeror to announce a firm intention to make an offer. Where the timetable is approaching its last date for offerors to revise their offers, the Panel can implement an auction process between the competing offerors.

An offeror is only entitled to withdraw (or lapse) its offer if one of the conditions to its offer is not satisfied within the relevant time period.  In practice, it is extremely difficult to invoke any material adverse change condition in order to lapse an offer, so the only practical ways for an offeror to lapse its offer are to invoke the acceptance condition (where not enough acceptances have been received by a closing date) or if a condition regarding a regulatory clearance has not been satisfied.

Generally speaking, an offeror is not entitled to reduce its offer at any time. Offerors can increase their offer up to the 46^th day after the formal offer documentation is published.

Under CA 2006, if an offeror receives acceptances of the offer for at least 90% of the shares to which the offer relates (i.e., excluding any shares already held by the offeror and persons acting in concert with it), the offeror can give notice to the remaining target company shareholders to compulsorily acquire the remaining shares on the same terms as the offer. Note that this mechanism is only available for a short period after the completion of the offer.

If the offer is implemented by a scheme of arrangement, if the Court approves the scheme and the Court order is registered with the Registrar of Companies, the scheme becomes effective and the offeror acquires all of the issued target company shares automatically pursuant to the scheme.

If a potential offeror has been identified in an announcement but withdraws during the PUSU period before announcing a firm intention to make an offer, it will normally be prohibited from buying any shares in the target company or considering or making a fresh offer for a period of at least 6 months.

If a potential offeror launches its offer but the offer does not become or is not declared unconditional and is withdrawn or lapses, it will normally be prohibited from buying any shares in the target company or considering or making a fresh offer for a period of at least 12 months.

To delist a company from the Main Market, shareholders must pass a special resolution (requiring 75% majority vote in favour) approving the cancellation of the admission of the company’s shares to the Official List and to trading on the LSE’s market for listed securities. Additional procedural requirements in the Listing Rules must also be followed. A similar procedure applies to a company whose shares are admitted to trading on AIM.

Where more than 75% of a listed company’s shares are acquired pursuant to a takeover offer, delisting will not normally require a further shareholder vote and the company will simply notify the fact of the delisting in advance.