Changes to the UK takeover regime from 20 May 2006 Key issues for M&A practitioners

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1 Changes to the UK takeover regime from 20 May 2006 Key issues for M&A practitioners

2 Table of contents Overview of the changes 1 Companies and transactions to which the Code applies 3 Offer announcements and documentation 5 Other Directive-based changes 9 Abolition of the Substantial Acquisition Rules 12 Dealings in derivatives and options 13 Other miscellaneous amendments 15 Conclusion 16 Appendix: General Principles before and after 20 May A /1.0 May 06

3 Overview of the changes Wide-ranging changes to the UK takeover regime will become effective on 20 May. Rules throughout the entire Takeover Code will be affected. The Takeovers Directive (Interim Implementation) Regulations , which implement the EU Takeovers Directive, will also take effect on that day. All those engaged in, or advising on, takeover activity involving UK-registered and/or traded companies will need to ensure that they have an understanding of the key issues arising out of these changes. Despite the volume and detail of the changes, only a small number will impact significantly on M&A practice. This special report summarises the key issues of which M&A practitioners will need to be aware. In particular: the Panel s status will be underpinned by legislation, giving the Panel statutory authority over transactions to which the Takeovers Directive applies offeror and offeree company documentation will be subject to extended content requirements, particularly regarding the transaction s strategic effects and its implications for employees the high standards of care required in preparation of bid documentation are reinforced by a new criminal offence for failure to comply with the Code contents requirements. The offence may be committed by the person making the bid. Historically, in the UK this has been the offeror s financial adviser, as agent for the offeror. We therefore expect this practice to become consigned to history, unless it is clear that the financial adviser s agent status does not expose it to risk of committing the offence a number of new obligations will fall on both offeror and offeree company with regard to the publication and distribution of announcements and documentation new provisions will govern the thresholds and timing restrictions for squeeze-out and sell-out procedures following a takeover of a UK-registered company admitted to trading on a regulated market with the abolition of the SARs, restrictions on stakebuilding below the 30% level will no longer fall within the Panel s remit (although the acquisition of shares, and interests in shares, before or during an offer period will continue to set parameters for the nature and value of consideration to be offered) dealings in long derivatives and options will now be taken into account for the purposes of triggering a Rule 9 mandatory offer and the Rule 5 restrictions on acquisitions of interests in shares. Code amendments The amendments to the Code cover four main areas and are set out in four separate Panel Response Statements released on 21 April 2006: implementation of the EU Takeovers Directive 2 dealings in derivatives and options (control issues) 3 abolition of the Substantial Acquisitions Rules (SARs) 4 miscellaneous minor and updating changes to the Code (including, for example, amendments consequential on recent changes to the Listing Rules) 5 1 S.I. 2006/ Panel Response Statement RS 2005/5 3 Panel Response Statement RS 2005/3 4 Panel Response Statement RS 2005/4 5 Panel Response Statement RS 2006/1 1

4 The Panel has helpfully published a complete set of consolidated amendments arising from all four Response Statements which gives the complete picture of the revised Code from 20 May 6. A new edition of the Code, reflecting all the changes, will be published and despatched to Code subscribers shortly before 20 May. The revised Code will apply from 20 May to all companies and transactions to which it then relates, including those on-going transactions which straddle that date, except where to do so would give the amendments retroactive effect 7. The Panel stresses that where parties are in any doubt as to the consequences of any of the rule changes, in particular their impact on any transaction in existence or contemplation (including a transaction involving a company not currently subject to the Code, but which will be subject to the Code from 20 May), they should consult the Panel before 20 May to obtain a ruling or guidance. The Takeovers Directive (Interim Implementation) Regulations 2006, as their name implies, are a temporary measure, to be replaced in due course (probably towards the end of 2006) by Part 22 of the Company Law Reform Bill. The scope of the Regulations is limited by the Takeovers Directive, and matters such as the adoption of one squeeze-out/sell-out procedure for all UK-registered companies, and the vesting of all necessary rule-making powers in the Panel, can only be achieved by primary legislation. 6 Consolidated amendments to the Code, effective 20 May Panel Response Statement RS 2005/5, paragraph 2.2 2

5 Companies and transactions to which the Code applies When engaged on a takeover, the first question to address will be whether the offeree company, and the transaction in which it is involved, will be subject to the Code. Companies The Code currently applies to all UK 8 -incorporated public companies (whether listed or unlisted), provided that such companies are also resident in the UK 9. The Code also applies to certain UK resident private companies, provided that they satisfy the criteria stipulated in the Introduction to the Code. The Takeovers Directive applies to all companies which are registered in an EEA State 10 and which are admitted to trading on a regulated market 11. There is no residency test. Consequently, from 20 May, the Code will apply (to the exclusion of any other EU regulatory regime) to any company which is incorporated in the UK and admitted to the Official List, even if it is not resident in the UK or is admitted to trading on another EEA regulated market. This will bring a number of companies within the scope of the Code and the Panel s jurisdiction for the first time. Shared jurisdiction arrangements will apply to UK public companies listed in other EEA States (but not in the UK), and non-uk public companies listed in the UK, as explained below. For UK-registered offeree companies falling outside the scope of the Directive, including public companies admitted to trading on AIM or OFEX and private companies (subject to certain criteria), the Code will continue to apply, subject to the offeree company satisfying the residency test. Shared jurisdiction A new concept for takeover regulation following implementation of the Directive will be that of shared jurisdiction, whereby supervisory authorities in different EEA States will each regulate different aspects of the same transaction. The application of the shared jurisdiction rules to Codegoverned companies will be set out in the revised Introduction to the Code 12. Where an offeree company is incorporated in one EEA State but not admitted to trading in that EEA State (although admitted in another), it will be subject to the shared jurisdiction rules. Transactions with a UK element: do the shared jurisdiction rules apply? Where is offeree registered? UK EEA State (not UK) Where is offeree traded? Where is offeree traded? UK (and other EEA markets) EEA (non-uk) regulated market only UK only 2 or more regulated markets, including UK UK jurisdiction only Shared jurisdiction rules apply 8 For the purposes of the application of the Code, UK includes the Channel Islands and the Isle of Man. 9 UK residency means that a company s place of central management and control is in the UK. 10 The EEA States are the 25 EU Member States, Iceland, Norway and Liechtenstein. 11 The Official List is a regulated market. However, AIM and OFEX are not. 12 See Appendix A of Panel Response Statement RS 2005/5, paragraph 3(a)(iii) 3

6 Where jurisdiction is shared, the supervisory authority of the EEA State in which the offeree company is registered will regulate employee information and company law matters; the supervisory authority of the EEA State in which the offeree company is admitted to trading will regulate consideration and procedural matters. These terms are defined in the Code s revised Introduction. It will remain unclear as to how the shared jurisdiction rules will work in practice until the detail of their operation has been discussed between the relevant supervisory authorities in all EEA States. The Panel therefore emphasises that in any instance where the shared jurisdiction provisions are likely to be relevant, the parties should consult the Panel at the earliest opportunity so that guidance may be given on a case by case basis. This will be a particularly interesting conversation where the transaction involves an EEA State which has not yet implemented the Directive! Transactions The categories of transaction which fall within the scope of the Code will also change with effect from 20 May. The Code currently regulates takeover and merger transactions of relevant companies howsoever effected. So, although the Code primarily applies to takeover offers, it also applies to other types of transaction that involve obtaining or consolidating control, such as partial offers, schemes of arrangement and dual holding company transactions. This will continue to be the case if the offeree company is UK-registered and is either admitted to trading in the UK, or is a public or relevant private company resident in the UK. If the shared jurisdiction rules apply to a transaction, that transaction will only be subject to the Code if it is effected by means of a takeover offer. So, if a UK public company resident in the UK and admitted to trading in another EEA State is engaged in a takeover or merger transaction which does not constitute a takeover offer, the Panel will assume full jurisdiction. In the case of a non-uk public company admitted to trading in the UK, the Panel will only assume jurisdiction where this takeover/merger transaction constitutes a takeover offer. In implementing the provisions of the Takeover Directive, the Panel has therefore sought to limit the range of transactions in which it would otherwise share jurisdiction with the supervisory authority of another EEA State. 4

7 Offer announcements and documentation Publication and circulation From 20 May, there will be a number of changes in practice with regard to publication and circulation of announcements and public documents relating to an offer by both offeror and offeree company. Announcements An offeree company is currently required to circulate to its shareholders and lodge with the Panel any announcement which marks the commencement of an offer period. This may be a talks announcement under Rule 2.4(a) or a Rule 2.5 announcement of a firm intention to make an offer. Where a talks announcement has been made and triggers an offer period, there is no obligation to circulate to shareholders a subsequent firm intention announcement under Rule 2.5. From 20 May, an offeree company will now be required to circulate a firm intention Rule 2.5 announcement even where an offer period has been triggered by an earlier talks announcement. Both offerors and offeree companies will be under a new obligation to make a Rule 2.5 announcement, or a circular summarising its terms, readily available to their respective employee representatives or, where there are no such representatives, to the employees themselves 13. The Panel takes the view that this obligation may be satisfied by posting the text of the announcement on the offeror or offeree company s respective websites, and reflects this in a new Note on Rule 2.6. The Panel suggests that a company may inform employees and their representatives of the availability of announcements and documents by whatever means the company normally uses to communicate with its employees 14. Offer and defence documents Offerors and their advisers will need to be aware of a number of new requirements on publication of an offer document. The Directive requires that an offer document must be made public 15. An offeror will therefore be required to include its offer document in the documents made available for display pursuant to Rule 26. It must also make an announcement in accordance with Rule 2.9 (i.e. notification to a RIS) that the offer document has been posted, with details of where it can be inspected 16. These requirements largely reflect current market practice, but now become mandatory for all transactions subject to the Code. An offeror will be required to lodge a copy of the offer document with the Panel before it is made public 17. The Panel has confirmed that it will be acceptable to continue with the existing market practice of despatching documents under the direction of the financial adviser to the Panel at the same time as they are being posted to shareholders 18. The offeror will also be required to make the offer document (like a Rule 2.5 announcement) readily available to the offeror s (but not the offeree company s) employee representatives or employees. Although not expressly permitted (unlike Rules 2.5 and 2.6), it can be assumed that website publication will be sufficient to discharge this obligation. 13 Rule 2.6(a) 14 Panel Response Statement RS 2005/5, paragraph Article Rule 30.1(a) 17 Rule Panel Response Statement RS 2005/5, paragraph

8 Offeree companies will also be subject to new requirements. Offeree company documents must also be put on display, with details of posting and availability for inspection announced in accordance with Rule 2.9 (i.e. notification to a RIS) 19. All offer documents and offeree company documents must also be made readily available to the offeree company s employee representatives or employees. As explained above, website publication will be sufficient. In the context of a recommended offer, information required to be included in the offeree company document will normally be incorporated into the offer document and so the offeree company s publication requirements described above will apply to the offer document. A new Rule 30.3 provides (applying the equal treatment principle) that the requirements to make information and documents available to shareholders and employees or their representatives apply wherever those shareholders or employees are located, unless there is sufficient objective justification for their not applying. This cuts across existing market practice to refrain from sending offer documents to shareholders in countries where there may be expensive registration requirements and/or a greater risk of litigation. A Note on the Rule provides a derogation setting out the circumstances in which there would be sufficient objective justification for not applying the Rule. Those circumstances include where the laws of a non-eea State may result in a significant risk of civil, regulatory or criminal exposure for the offeror of offeree company if the information or document is sent into that jurisdiction without amendment and either (i) less than 3% of the shares of the offeree company are held by registered shareholders located there or (ii) circumstances are such that it would be proportionate for the Panel to grant a dispensation (having regard to factors such as the cost involved, number of shares involved and any delay to the timetable). Automatic exemption under (i) will be available in many cases where there are limited numbers of shareholders in troublesome countries. However, specific derogations may be required for other countries and one must hope the obtaining of such derogation does not become a time-consuming and bureaucratic procedure. Contents A number of new contents requirements are being introduced for both offer documents and offeree company documents 20. These generally address matters such as strategic plans, the parties intentions for the future and, in particular, likely repercussions of the offer for employees. An offeree company will also be required to append to its document an opinion from the representatives of its employees on the effect of the offer on employment, provided that such opinion is received in good time before publication 21. This new obligation derives from the Directive. Respondents to the Panel s consultation on implementation of the Directive expressed concern as to how this requirement would operate in practice, and whether a new obligation was being imposed on offeree companies to consult with employees or their representatives before publication of offeree company documents. This issue is of particular concern in the context of a recommended offer where the Rule 2.5 announcement and the offer document (comprising the offeree company document as well as the offer document) could be published on the same day. This would certainly not allow time to obtain the opinion of employee representatives. The Panel has clarified that neither the Directive nor the amended Code requires consultation with employees; the requirements relate only to provision of information. Consequently, the Panel has confirmed that there is no obligation to consult deriving from the Directive (although flags the 19 Rule 30.2(a) 20 Rules 24 and Rule 30.2(b) 6

9 relevant obligations under the Information and Consultation of Employees Regulations ) and there is no intention to change the existing practice of publishing a joint document in the case of a recommended offer. The Panel also confirms that, where the employee opinion is not available at the time of the publication of the offeree company document, there would be no requirement on the offeree company to circulate the opinion of its employee representatives subsequently. The Panel is applying a strict interpretation of the Directive in this context. It will be interesting to see if offeree companies, in practice, decide to consult with their employees, and circulate the employees opinion, even if received after the deadline. A practical issue to consider, for companies with separate businesses and/or large numbers of employees, is how a single opinion of the representatives of its employees can be ascertained and promoted by the offeree company. All companies should consider this issue so that they can implement a well thought out plan in the pressure of a bid situation. Two further changes to the contents requirements of offeree company documents are: An offeree company will no longer be able to satisfy the requirement to disclose directors remuneration with a statement of the aggregate remuneration payable. Instead, full details of each director s remuneration must be given 23. Rule 25 will contain an explicit requirement for offeree company directors to include a statement of all known material changes in the offeree company s financial or trading position since its last published audited accounts 24. The offeror was already required to include this information in relation to the offeree company as Rule 24.2(e) requires it to include the same information (including material changes) in relation to the offeree company as it does in respect of itself. In a combined document, this information will now be the responsibility of the offeree company board. (Note, however, that if the offeror is publishing a Class 1 circular, it will need to include details of any significant change in the offeree company s financial or trading position since the end of the last financial period for which audited or interim accounts have been published 25. The offeror will be required to take responsibility for such information in its Class 1 circular.) Criminal liability for non-compliant documents All parties involved in a takeover offer must be made aware of, and carefully consider, the new criminal offence for non-compliance with the contents requirements for offer documents and offeree company documents set out in Rules 24 to 27 of the Code. The offence is set out in Regulation 10 of the Interim Implementation Regulations. The DTI s view is that the offence is necessary to implement the Directive s requirement that EEA States should have in place sanctions which are effective, proportionate and dissuasive. The purpose of the offence is to ensure a high standard of care in the drafting of bid documentation, with a sanction for failure to meet those standards. However, the imposition of criminal liability is a somewhat draconian way of doing so, particularly as there is no requirement for any loss to be suffered. Representations to this effect to the DTI have so far fallen on deaf ears. The offence is punishable by fine and catches not only wilful non-compliance, but also noncompliance due to recklessness and failure to take all reasonable steps to ensure compliance. With regard to the offer document, the offence is committed by the person making the bid and also by any of such person s directors, officers or members who caused the document to be 22 S.I. 2004/ Note 1 on Rule Rule Listing Rules Chapter 13, Annex 1 7

10 published. It seems logical that directors, as persons responsible for the offer document under Rule 19, should be caught by this new offence but the term officer extends to both the company secretary and a manager - a term of notoriously imprecise scope. Directors and officers of the offeree company are also at risk of prosecution for the new offence, so far as offeree company documents are concerned. Members (i.e. shareholders) of the offeror are also at risk where they cause the offer document to be published - and the offence looks through to directors and officers of that member if it is a body corporate. This will be of particular concern in the case of take private bids where a newco is used, and in the case of takeover offers by wholly-owned subsidiaries. Although the drafting of the offence may be revisited by the DTI when the Company Law Reform Bill takes effect, the offence as drafted in the Interim Implementation Regulations is also of relevance to the offeror s financial adviser as the person making the bid. Historically, it has been common practice for the financial adviser to make the offer to offeree company shareholders on the offeror s behalf. We would advise investment banks to reconsider their internal policies as to whether they should continue with the practice of making offers on their clients behalf, in light of the potential criminal liability under this offence. Whilst it is arguable that it is the offeror, and not the financial adviser (as the offeror s agent), who should be regarded as the person making the bid, the legislation does not make this clear and this lack of clarity will encourage a cautious approach. 8

11 Other Directive-based changes Panel status With effect from 20 May, the Interim Implementation Regulations will designate the Panel as the supervisory authority with power to regulate takeovers to which the Takeovers Directive applies. The Panel will have increased powers to require parties to provide it with documents and information, to impose sanctions for breaches of the Code and to enforce rules derived from the Directive, including by application to the court. The General Principles The General Principles of the existing UK Code will be replaced with the General Principles of the Directive 26. Although they are very similar in overall substance and content, there are a number of differences of detail. Important requirements embodied in an existing Code General Principle, but not reflected in the Directive General Principles, will be incorporated elsewhere into the Rules of the Code. Derogations and waivers The Code does not currently contain many express statements about derogations. Historically, the Panel has normally relied on its general power to grant derogations in appropriate circumstances on a fairly regular basis. However, in order to reflect the terms of Directive, the Introduction to the Code will now include a new Rule prescribing the circumstances in which the Panel may derogate or grant a waiver from the application of a Rule in the Code. Those circumstances are: if the Rule expressly provides for a derogation or waiver or the Rule does not so provide, but circumstances are such that the Rule would operate unduly harshly or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner (which replicates the wording of the current Introduction). However, in the latter case, the Panel must give a reasoned decision for the derogation or waiver. A number of express derogations have therefore been written into the Rules to ensure that they will continue to be generally available and to preserve existing practice. Frustrating action The Directive imposes a general prohibition on an offeree company taking any action to frustrate a takeover offer, other than seeking alternative offers. Whilst this principle is optional for EEA States under the Directive, the UK has not surprisingly opted in to reflect existing practice. Existing General Principle 7 of the Code prohibits the offeree company board from taking frustrating action without the approval of its shareholders in general meeting, and this General Principle is reflected in Rule 21, which prohibits five specific types of frustrating action. However, General Principle 7 will fall away when the new Directive General Principles are introduced, and so Rule 21 is being widened to encompass the more general prohibition. Rule 21 will prohibit any actions by the offeree company board (in addition to the five activities already specified) which may result in frustration of an offer or deny offeree company shareholders the opportunity to decide on the merits of the offer (although taking action relating to mounting a defence, such as appointing advisers or lobbying competition authorities, would not in itself constitute frustrating action). 26 See the Appendix to this report for the existing Code General Principles and the new Code General Principles from the Directive which will apply from 20 May

12 There will no longer be a general carve-out from the prohibition for any action taken pursuant to an earlier contract. If a proposed action is pursuant to a contractual or other pre-existing obligation, the offeree company board must consult the Panel and obtain its consent before proceeding without shareholder approval. The implication is that consent will generally be forthcoming in such circumstances. This is also the case for fully or partially implemented decisions (e.g. by the board) and decisions not fully or partially implemented but carried out in the ordinary course of business. A new provision will give the Panel flexibility to waive the requirement for a general meeting of offeree company shareholders if shareholders carrying more than 50% of voting rights approve the proposed action of the board. Opting into the breakthrough provisions of the Directive The Interim Implementation Regulations give listed companies the power, exercisable by special resolution, to opt into the breakthrough provisions in Article 11 of the Directive. The breakthrough provisions invalidate certain restrictions on transfers of securities and exercise of voting rights, where these operate as a barrier to takeover. To be eligible to opt in, a company s articles of association must contain no restrictions on the transfer of its securities (or, if they do, the restrictions must not apply in circumstances when they would be disapplied by Article 11) and contain no other provisions which would be incompatible with Article 11. Eligible companies may wish to consider passing an opting in resolution. Once a company has opted in, contractual restrictions 27 on transfers of its shares or exercise of voting rights which exist outside the company s constitution will be invalid if the company is the subject of a bid. Companies which are not eligible by virtue of such restrictions in their constitutions may wish to consider eliminating them, to take advantage of the breakthrough power. It is unlikely that many UK companies will take this step as defensive structures of this nature are not common in the UK. However, companies may determine that the elimination of such restrictions is desirable - particularly those between third parties which it may not even know about. In addition, a company which is subject to the Directive s breakthrough provisions is not at risk of an opted in company for which it makes an offer taking frustrating action during the offer period, or invoking pre-bid defensive mechanisms, under the Directive s reciprocity provisions (where these have been adopted by the EEA State where the company is registered). 28 An opting in resolution may at any time be revoked by a further special resolution. Mandatory offers Currently, a mandatory offer under Rule 9 (where a person acquires interests in shares conferring 30% or more of a company s voting rights) must be made to the holders of any class of equity share capital, whether voting or non-voting, and to the holders of any class of voting non-equity share capital in which such person (or his concert parties) holds shares. From 20 May, a Rule 9 offer must be made to the holders of each class of equity share capital (whether voting or nonvoting) and (to satisfy a requirement of the Directive) to the holders of any other class of transferable securities carrying voting rights, whether or not the offeror (or any of its concert parties) holds any of such shares. The reference period for determining the consideration that must be offered in a Rule 9 offer will from 20 May be the 12 months prior to announcement of the offer (which may be shorter than the current time frame of the offer period and the 12 months prior to its commencement). 27 The breakthrough applies to any agreement to which the company is a party. In the case of agreements to which the company is not a party, those made prior to 21 April 2004 (the date of adoption of the Directive) are not invalidated by application of the breakthrough. 28 The UK has not adopted the reciprocity provisions, but several countries, including France and Germany, have done, or intend to do so. 10

13 A new dispensation will provide that no Rule 9 offer need be made if control of the offeree company has been acquired as a result of a voluntary offer. Existing dispensations will be modified where necessary to ensure that they afford adequate protection to holders of offeree company securities in accordance with the Directive. Squeeze-out and sell-out The Interim Implementation Regulations introduce amended squeeze-out and sell-out provisions for takeover offers made after 20 May for UK-registered companies admitted to trading on a regulated market. Thresholds In order to trigger squeeze-out in accordance with the Directive, a dual test will require an offeror to have acquired, by virtue of acceptances of the offer, both 90% of the shares (or class of shares) in the offeree company to which the offer relates and 90% of the voting rights attached to such shares (or class of shares). This differs from the current Companies Act threshold which merely requires an offeror to attain 90% in number of shares (or class of shares) to which the offer relates, regardless of the voting rights they carry. In practice, this will make little difference in the UK context as the percentage of share capital and the percentage of voting rights will normally be the same. The sell-out threshold similarly will comprise a dual test such that an offeror must have acquired, by virtue of acceptances of the offer, both 90% of the shares (or class of shares) carrying voting rights in the offeree company and 90% of the voting rights attached to such shares (or class of shares). This differs from the current threshold which is 90% in number of all shares in the offeree company (or class of shares), regardless of the voting rights they carry but this again will make little difference in practice. Timing of exercise The provisions regarding the period during which squeeze-out rights may be exercised will reflect the Directive requirements that they must be exercisable within the three months following the time allowed for acceptance of the bid. The existing Companies Act provisions provide that squeezeout provisions may be exercised within four months of the date of the offer and must be exercised within two months of reaching the 90% threshold. This change in fact increases flexibility as to timing of the squeeze-out as current practice is to leave the offer open for acceptance through the implementation of the squeeze-out process, to enable shareholders to receive their offer consideration quicker by accepting the offer. No change is required to be made to the existing provisions regarding timing of exercise of sellout rights, which accord with the Directive requirement that they must be exercisable within the three months following the time allowed for acceptance of the bid. 11

14 Abolition of the Substantial Acquisition Rules With effect from 20 May, the bulk of the Rules Governing Substantial Acquisitions of Shares (the SARs ) will be abolished. Following its consultation in November , the Code Committee has concluded that the Rules no longer fulfil a useful function and that it is no longer appropriate for the Panel to restrict the speed at which a person may acquire interests in shares, or the ability of shareholders to sell their shares, in circumstances where control of a company is not being acquired or consolidated, i.e. where the 30% threshold of voting rights, which the Code establishes as control, is not being breached. Abolition of the SARs reflects the Panel s permissive approach to share dealings, which focuses on the consequences which should flow from dealings rather than outright prohibition. The Code only prohibits dealings where overriding policy demands it. For example, Rule 5 generally restricts the ability of a person to acquire interests in shares which would take his aggregate interests through the 30% threshold. This is to ensure that the board has sufficient opportunity to make shareholders aware of all relevant matters before control of the company passes. The Code Committee does not believe that abolition of the SARs will see a return of the market raids of the late 1970s that they were introduced to combat. Investors are perhaps less eager to sell out in a raid as they risk losing out on any subsequent offer premium. SAR 4, which sets out procedures for tender offers, will be retained and set out in a new Appendix 5 to the Code. Panel consent will be required for any tender offer. This will normally be granted in the same circumstances as those in which tender offers are currently permitted. 29 Panel Consultation Paper PCP 2005/4 12

15 Dealings in derivatives and options The Code Committee has consulted extensively on the application of the Takeover Code to dealings in derivatives and options, both by parties to an offer and their concert parties and by market participants such as hedge funds and the proprietary trading desks of investment banks. Most recently, it consulted on proposals to deal with the control issues arising from dealings in derivatives and options by parties to an offer and persons whose interests, together with their concert parties, fall within the 30% to 50% band 30. The rule changes which will take effect on 20 May are substantially as proposed in that consultation. The overall broad approach is that dealings in long derivatives and options should be treated as equivalent to dealings in the underlying shares. This will mean that long derivatives and options will count in triggering an obligation to make a Rule 9 offer and will be subject to the Rule 5 restrictions on acquisitions. A number of points of detail should be noted. Acceptance conditions Although the obligation to make a mandatory offer will be capable of being triggered as a result of acquiring an interest in shares by virtue of derivatives and options, the Code Committee has decided to leave Rule 9.3 (which provides that Rule 9 offers can only be conditional on acceptances) and Rule 10 (the acceptance condition) unchanged, so that interests in shares by virtue of derivatives and options will not count towards satisfaction of an acceptance condition. The Code Committee considers that offers should only become or be declared unconditional as to acceptances in circumstances where statutory control has passed (i.e. more than 50% of the voting rights). Otherwise there would be the possibility of two successful bidders reaching the required acceptance level for an unconditional offer. However, a new paragraph will address changes in the nature of an interest following a lapsed mandatory offer 31. Where a mandatory offer lapses by virtue of the acceptance condition not having been satisfied (in circumstances where the shares assented to the offer, together with the shares in which the offeror and its concert parties were interested at the time the offer lapsed, amounted in aggregate to more than 50% of the offeree company s voting shares), an offeror will normally be required to make a further mandatory offer if: the original mandatory offer would have become unconditional if offeree company shares which had not been assented to the offer, and in which the offeror and its concert parties were interested by virtue of derivative and option positions at the time the offer lapsed, had in fact been assented to the offer the lapsed offeror, or any of its concert parties, subsequently acquire shares in the offeree company on closing out those derivative positions or exercising those options and following that acquisition, the lapsed offeror and its concert parties between them own or control shares carrying 30% or more of the voting rights. The price at which the further offer should be made will be the higher of (i) the offer price of the original offer and (ii) the price determined in accordance with the Notes on Rule 9.5. By introducing these new requirements following lapse of a mandatory offer, the Panel is seeking to ensure that shareholders are not denied an effective opportunity to exit the offeree company upon the passing of control. 30 Panel Consultation Paper PCP 2005/3 31 Note 2 on Rule

16 Derivatives, options and the offer price A number of amendments address the price at which an offer should be made in accordance with the new approach 32. These will include clarification of how the price which has been paid for the acquisition of an interest in shares should be calculated in relation to call options (exercised and unexercised), put options and derivatives 33. Corresponding amendments are also made to the relevant Notes on Rule 6 (market purchases determining the minimum offer price) and Rule 11 (requirement for cash offer). Recognised intermediary status The amendments to the Code will introduce a new status for trading desks in investment banks and securities houses whose business is the provision of dealing services to clients, to be known as recognised intermediaries. The rationale for the new status is that it would be inappropriate for a mandatory offer to be triggered by an acquisition of interests in shares by virtue of derivatives or options by a desk acting in a client-serving capacity. The Panel will be contacting investment banks and security houses with principal trading desks inviting them to apply for recognised intermediary status before 20 May. The Panel will be closely monitoring recognised intermediary status pending the Code Committee s review of the new derivatives and options regime next year. Disclosure requirements in Rule 8 and Rule 38 will be adjusted to clarify their application to dealings by recognised intermediaries. 32 Rules 6, 9.5 and Notes on Rule 9.5 and corresponding provisions in the Notes on Rule 6 and Rule 11 14

17 Other miscellaneous amendments In February 2006, the Code Committee consulted on a set of miscellaneous amendments to the Code 34. These amendments will take effect on 20 May substantially in the form proposed. Whilst these amendments affect approximately 30 Rules, in most cases they do not affect the substance of the Rules. In many cases, the changes relate to changes in the terminology used in other regulations to which the Code refers. These amendments cover the following matters. Post 1 July 2005 changes: A number of amendments are made to reflect changes to the listing regime arising from the implementation of the Prospectus Directive last year. Suspension of listing: Rule 2.3 (responsibilities of offerors and offeree companies in the context of announcements) and Rule 17.2(a) (consequences of failure to announce acceptance levels) contemplate circumstances in which the offeror s or offeree company s shares might be the subject of a suspension in the absence of the relevant announcement. The Code Committee believes a suspension is unlikely to be granted in these circumstances and has therefore amended these rules accordingly. Definition of dealings: The definition of dealings is amended to make it clear that the disposal of voting control or general control over securities constitutes a dealing and is therefore disclosable during an offer period under Rule 8.3(a). Mandatory offer acceptance conditions: Note 3 on Rule 9.3 sets out the circumstances in which the Panel may grant a dispensation from the requirement in Rule 9.3(a) that an offer under Rule 9 must be conditional only on a 50% acceptance condition. Note 3(a)(ii) limits the voting rights that may be exercised by the offeror (and persons acting in concert with it) if the offer lapses where a dispensation has been granted. Note 3 has been amended to require the offeror to consult the Panel on the exact percentage of shares to be disenfranchised. Partial offers: A number of provisions in Rules 36.1 to 36.8 are amended to the effect that the interests of persons acting in concert with the offeror are taken into account in the context of the possible outcome of a partial offer. Appendix 4 (Receiving Agent s Code of Practice) and borrowed shares: Before an offer may become or be declared unconditional as to acceptances, the offeror s receiving agent must have issued a certificate to the offeror or its financial adviser which states the number of acceptances which have been received 35. Except with the consent of the Panel, shares borrowed by an offeror may not be counted towards fulfilling an acceptance condition 36. Since a borrowing/lending transaction involves a transfer of title in borrowed/lent securities, the receiving agent will not be able to ascertain from the share register whether or not the shares have been borrowed and will have to rely on the offeror s confirmation that any offeree company shares certified as being held or purchased by the offeror have not been borrowed. Accordingly, Appendix 4 is amended to permit receiving agents to include a disclaimer in relation to borrowed shares in their certificates. 34 Panel Consultation Paper PCP 2006/1 35 Note 7 on Rule Note 8 on Rule 10 15

18 Conclusion The raft of amendments to the Code which take effect on 20 May are daunting in their volume and range. However, very few will prompt any material departure from existing M&A practice. In most instances, the changes impact only on detailed compliance with the Code. Linklaters May

19 Appendix: General Principles before and after 20 May 2006 (The new Principles are set out against the old Principles to which they most closely relate.) General Principles up to 20 May 2006 General Principles with effect from 20 May All shareholders of the same class of an offeree company must be treated similarly by an offeror. 2. During the course of an offer, or when an offer is in contemplation, neither an offeror, nor the offeree company, nor any of their respective advisers may furnish information to some shareholders which is not made available to all shareholders. This principle does not apply to the furnishing of information in confidence by the offeree company to a bona fide potential offeror or vice versa. 3. An offeror should only announce an offer after the most careful and responsible consideration. Such an announcement should be made only when the offeror has every reason to believe that it can and will continue to be able to implement the offer: responsibility in this connection also rests on the financial adviser to the offeror. 4. Shareholders must be given sufficient information and advice to enable them to reach a properly informed decision and must have sufficient time to do so. No relevant information should be withheld from them. 1. All holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected. 5. An offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration. 2. The holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its view on the effects of implementation of the bid on employment, conditions of employment and the locations of the company s places of business. 5. Any document or advertisement addressed to shareholders containing information or advice from an offeror or the board of the offeree company or their respective advisers must, as is the case with a prospectus, be prepared with the highest standards of care and accuracy. 6. All parties to an offer must use every endeavour to prevent the creation of a false market in the securities of an offeror or the offeree company. Parties involved in offers must take care that statements are not made which may mislead shareholders or the market. 4. False markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted. 7. At no time after a bona fide offer has been 3. The board of an offeree company must act 17

20 communicated to the board of the offeree company, or after the board of the offeree company has reason to believe that a bona fide offer might be imminent, may any action be taken by the board of the offeree company in relation to the affairs of the company, without the approval of the shareholders in general meeting, which could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits. in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid. 8. Rights of control must be exercised in good faith and the oppression of a minority is wholly unacceptable. 9. Directors of an offeror and the offeree company must always, in advising their shareholders, act only in their capacity as directors and not have regard to their personal or family shareholders or to their personal relationships with the companies. It is the shareholders interests taken as a whole, together with those of employees and creditors, which should be considered when the directors are giving advice to shareholders. Directors of the offeree company should give careful consideration before they enter into any commitment with an offeror (or anyone else) which would restrict their freedom to advise their shareholders in the future. Such commitments may give rise to conflicts of interest or result in a breach of the directors fiduciary duties. 10. Where control of a company is acquired by a person, or persons acting in concert, a general offer to all other shareholders is normally required; a similar obligation may arise if control is consolidated. Where an acquisition is contemplated as a result of which a person may incur such an obligation, he must, before making the acquisition, ensure that he can and will continue to be able to implement such an offer. 6. An offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities. 18

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