“You like to-may-to and I like to-mah-to…
Potato, potahto, tomayto, tomahto
Let’s call the whole thing off”
(“Let’s Call The Whole Thing Off” by George & Ira Gershwin, 1937)
Two nations divided by a common tongue. In M&A, as in so many spheres, common language and terminology often give rise to the assumption that the architecture is similarly homogenous. Although the US and the UK have a number of similarities in terms of capital markets and business practices, there are fundamental divergences in approach to public takeover practice and regulation.
Consistent with the title of this post, I have used the great American songbook as an entry point to this guide to the ten principal differences between takeover practice and regulation in the US and the UK.
First, I should outline some broader observations on the cultural and legal differences that make the UK bid process very distinct from the US model and inform most of the points made in this post.
- The UK is probably the most open and non-protectionist market in the world. This remains true even after the Kraft bid for Cadbury, which gave rise to a cauldron of discontent at the apparent ease with which UK companies could be taken over and the lack of influence that stakeholders other than shareholders had over the outcome. Takeovers in the UK are in broad terms decided by the Target’s shareholders, with the Target Board rarely having decisive influence—see below. Although offers may be blocked on anti-trust grounds, this is a bi-partisan and strictly apolitical process based solely on orthodox competition analysis. Although the UK does have an equivalent to CFIUS it is almost never activated. While there is sometimes significant political noise, it rarely affects the outcome of an offer.
- Unlike in the US, the Target Board is not the gatekeeper for offers. A Bidder may take its offer direct to shareholders and the Board has no power to block or delay an offer as it generally can in the US. As described later, poison pills, litigation against the Bidder and other defensive measures are not a feature of the UK bid landscape. The Board merely advises shareholders on whether or not to accept. Although Target Boards do control access to non-public Target due diligence material, this is not always a sine qua non for the Bidder and Boards will often come under considerable shareholder pressure to allow access even where they do not favour a bid.
- Although high profile bids may often generate significant interest and negative reaction from Target employees, politicians and the public in general (Kraft/Cadbury is a classic example), it follows from the points above that they have very limited impact on the outcome of the offer—as the Target Board has no power to intervene and there is in reality no political tool that is used to prevent deals proceeding. The outcome is almost always a verdict of the financial market.
The Takeover Code (the “Code”) reflects this environment and, although changes were made post-Cadbury to reflect the interests of non-shareholder stakeholders, it remains a body of rules embodying the pre-eminence of shareholders. Although many of its rules are regarded as being pro-Bidder or pro-Target, in reality the overall Code is pro-shareholder, and that is what most of the important rules reflect. Thus, the Code places high importance on certainty of delivery once an offer is made (see Section 10: “Let’s Call The Whole Thing Off”) while at the same time preventing defensive measures (see Section 8: “Miss Otis Regrets”), ensuring that offers remain on the table for the benefit of shareholders and that the decisive power is in the hands of shareholders rather than the Target Board.
The points made in this post generally apply to offers to which the Code applies wholly, i.e. broadly offers for UK public companies that are listed or traded in the UK.
1. How Long Has This Been Going On?
(George & Ira Gershwin, 1928)
In the US, because a potential Bidder can generally rely on a “no comment” statement, it can choose its moment to go public with its offer or proposal and, once it does, there is no particular timetable or deadline for it to make an offer or for the offer to succeed or lapse with, in some cases, hostile offers being fought for a number of years. In contrast, in the UK:
- a potential Bidder may be publicly “outed” before it is ready to announce its offer;
- once outed, a potential Bidder is required to either announce a firm offer or withdraw (“put up or shut up”) within a specified period; and
- once a firm offer is made, there is a time limit within which the offer must succeed or fail.
Outing a Potential Bidder
An important aim of the Code is to prevent the creation of false markets. As a result, the Code places an obligation on all parties to keep the details of any takeover transaction confidential and, if there is a failure to do so, the relevant party or parties is/are required to announce publicly the existence of the potential transaction, naming the potential Bidder(s). The Code also places an obligation on potential Bidders to consult the Takeover Panel in certain circumstances.
A potential Bidder falls into the potential disclosure regime (and is therefore at risk of being prematurely “outed”) once either:
- an offer is being “actively considered”; or
- an “approach” to the Target is made.
When is an offer being “actively considered”? The Panel look at a number of factors to assess whether an offer is being “actively considered”. Practically, this means that steps must have been taken beyond an initial internal assessment of the potential acquisition. Among the factors that are taken into account by the Panel in assessing whether an offer is being actively considered are:
- whether the possible offer has been considered by the Bidder Board or senior management (and specific consideration of the relevant Target is more likely to indicate “active consideration” than a more broad based review of a number of possible acquisition targets as part of an overall strategic review);
- whether work is being undertaken by external advisers; and
- whether external parties (such as Target shareholders, possible consortium members or lending banks) have been approached.
If any of these boxes are ticked, there is a likelihood that the Panel will consider that the potential Bidder is “actively considering” an offer.
What is an “approach”? The Panel sets a very low threshold as to what qualifies as an “approach”. The term is interpreted broadly and only requires the communication to a representative of (or adviser to) the Target that the possibility of an offer for the Target is being considered or any form of discussions between representatives of the Bidder and the Target regarding an offer/merger (regardless of who approached whom). An “approach” need only be preliminary and there are no formality requirements such as the approach being made in writing or the indication of an offer price. An exploratory discussion between representatives of the Bidder and the Target concerning a potential offer would be classed as an approach and could be made as part of a conversation on unrelated matters.
What triggers a requirement to consult the Panel? Importantly, the mere fact of actively considering an offer or making an approach does not of itself give rise to an announcement obligation or a requirement to approach the Panel. It is only once one of these thresholds has been crossed and there is either:
- a material (10% above the lowest price since the offer was first actively considered or date of approach) or abrupt (5% movement in a single day) Target price movement; or
- rumour or speculation about an offer for the Target,
that the potential Bidder/Target is required to consult the Panel regarding the need for an announcement. This is strictly construed and therefore the Panel should be consulted irrespective of whether the Bidder is named in the rumour or speculation, how specific it is or how it came to be disseminated. Similarly, the Panel should be consulted when there is an abrupt or material price movement, irrespective of the fact that the Bidder may believe that such price movement is due to other market factors (e.g. general sectoral improvement, positive new research on Target etc.) and is entirely unconnected to the Bidder. The Panel will not require an announcement to be made where it is satisfied that the price movement is genuinely caused by such market factors. The determination of whether an announcement is required is for the Panel and not the Bidder or the Target. The Panel has a well-deserved reputation for maintaining total confidentiality and should be regarded as being completely secure.
When is an announcement required? In broad terms, it is rare for an untoward price movement unaccompanied by rumour and speculation to give rise to an announcement obligation. Where, however, there is rumour and speculation with a significant degree of detail (as opposed to generic industry gossip), an announcement will often be required: a rumour (albeit well-founded) that X is considering a bid for Y (where X and Y are obvious merger bedfellows) would be far less likely to give rise to an announcement obligation than a story that “X is in discussions with Y for a bid at •p, with Megabank and Metrobank advising, with expected announcement early next week”. The threshold for triggering an announcement obligation in practice reduces significantly once an approach has been made and an announcement consequently becomes more likely after an approach.
Although there is an exception allowing a Bidder that is about to be outed to “down tools” (by withdrawing from the transaction for a period of time) and avoid the necessity for an immediate announcement, this requires the consent of the Panel and does not always guarantee that the potential Bidder retains its anonymity, particularly if rumour and speculation continue.
Whose responsibility is it to make the announcement? Before an approach to the Target is made, the responsibility for making any required leak announcement lies with the Bidder. Following an approach (assuming it is not rebuffed), it lies with the Target. Irrespective of who makes the announcement, the potential Bidder(s) will (subject to a very limited exception) be named.
What steps does the Bidder need to take? A potential Bidder should therefore:
- Before crossing the Rubicon of “actively considering” an offer (by, for example, engaging financial advisers or approaching lenders) or approaching the Target, do as much internal preparation as possible.
- Once it has commenced “actively considering” an offer:
- arrange monitoring of the Target share price and press coverage for any material or abrupt price movements or leaks. Financial advisers will generally be responsible for this;
- have a leak announcement ready, with pre- agreed alternative release mechanisms. If the Panel determines that a leak announcement must be made, the Panel will expect such an announcement to be made without delay. This means immediately, so within a matter of minutes. In practice, if the Bidder has not released the announcement within 90 minutes of being required to do so by the Panel (because for example an executive of the Bidder cannot be contacted to authorise release of the announcement), it is at risk of censure or other sanctions by the Panel.
Once an approach has been made and discussions initiated, responsibility for any announcement, and therefore for the monitoring and preparations above, moves to the Target.
- Organise workstreams so that activities (for example, those that involve widening the circle beyond deal team and advisers) that carry a greater risk of giving rise to a leak are initiated as late as possible.
“Put Up or Shut Up”
To protect companies from being under “siege” for an unreasonable time, the Code provides for an automatic “put up or shut up” period following the first announcement of the possible offer. The potential Bidder is required, within 28 days of the announcement, to clarify its position by either announcing a firm intention to make an offer (which in accordance with UK practice must be definitively funded—see Section 6: “It Don’t Mean A Thing If It Ain’t Got That Swing”—and effectively binds the Bidder to making the offer—see Section 10: “Let’s Call The Whole Thing Off”) or withdrawing (in which case it will, in broad terms, be unable to re-engage for at least six months).
There is the option to seek an extension to the 28-day deadline but the acquiescence of the Target Board is required for such an extension and, if the Target Board does agree, the Panel has said that it will “normally” grant an extension. The requirement for Target agreement effectively precludes hostile offers by Bidders that need a long preparation period involving multiple outsiders (such as financiers, consortium partners or shareholders) or approvals that can only be obtained once the potential transaction is public (other than the small number of approvals that may effectively be made the subject of conditions to the offer—as to which see Section 10: “Let’s Call The Whole Thing Off”).
The Fixed Offer Timetable
Once the announcement of a firm intention to make an offer has been made, the Code provides for a fixed timetable for the implementation of the offer, in contrast to the open-ended timetable that applies in the US. The offer document must be posted within 28 days of the announcement of a firm intention to make an offer and the remaining timetable flows from the date of posting (“Day 0”). In broad terms:
- the offer must be open for at least 21 days (and in practice if not then unconditional is extended in seven or 14 day increments up to Day 60);
- Day 39 is the last date for the Target to publish new information;
- Day 46 is the last date for revision of the offer; and
- Day 60 is the last date for the offer to be declared unconditional as to acceptances (effectively “judgment day” for hostile bids).
There are certain circumstances in which this timetable is extended, for example where a competing Bidder emerges, or UK or EC competition clearance has still not been received late in the timetable, but otherwise it is fixed. Thus, in normal circumstances, a hostile offer will usually be concluded no more than four months after the initial outing of the Bidder.
2. Between The Devil And The Deep Blue Sea
(Harold Arlen & Ted Koehler, 1932)
In the US, it is customary to combine a tender offer and a merger, so that once a Bidder has achieved more than 50% acceptances, it generally follows that it is guaranteed to be able to acquire 100% of the Target shares by effecting a merger with the Target, on which it is able to vote the 50% plus already held by it and therefore able to secure that the merger vote is passed. Under recent amendments to Delaware law, it is not even necessary to have a shareholder vote to effect the merger, so long as the Bidder has acquired more than 50% of the outstanding shares in the Target. In the UK, in contrast, you cannot combine the similar transaction structures and must either obtain 90% acceptances or proceed by way of the UK nearest equivalent to a merger.
Meaning of “merger” in the UK. There is no concept of statutory merger in the UK. Other than through a rarely used EC directive structure, it is not possible for a UK company to be merged into another company that becomes the surviving entity. “Merger” as broadly understood in the UK does not connote any specific legal structure but rather indicates a transaction where the parties are on roughly equal terms, with no one party being viewed as having “taken over” the other. Therefore, any acquisition of a UK public company takes place through the acquisition of shares in the Target by the Bidder. This is effected either by a tender offer (referred to in the UK simply as “an offer”) or by the nearest UK analogue of a US-style merger, a “scheme of arrangement”.
Scheme of arrangement. A scheme of arrangement is a court-approved corporate procedure of Target normally involving the cancellation of the existing share capital of Target and the issue of new shares to Bidder. It binds all shareholders and therefore there is no risk of an outstanding minority. The scheme needs to be approved at a shareholder meeting of Target at which a majority of those present and voting of 75% in value and over 50% in number is achieved and then be approved by the UK court.
Offer. The alternative structure of an offer must, under UK rules, have a minimum acceptance condition of 50% plus one share. Once the conditions are satisfied or waived, Bidder acquires the tendered shares. For a UK-incorporated company, the remaining minority shares can be compulsorily acquired, provided that Bidder has acquired under the offer (or, in certain circumstances, by market purchases) 90% of the shares for which the offer is made.
A Bidder is free to set its minimum acceptance condition at anywhere between 50% plus one share (the minimum level prescribed by the Code) and 90% and in practice 90% is the norm—but the Target will have a view on the deal optionality that this effectively affords the Bidder (see Section 10: “Let’s Call The Whole Thing Off”). This 90% condition may be waived down to not less than 50% plus one share during the course of the offer. In practice, it is often the case (because, for example, certain shareholders cannot accept an offer before it becomes unconditional as to acceptances) that a Bidder does not reach 90% before it has to make its decision whether to declare its offer unconditional. Therefore, in most cases, the Bidder has to make a leap of faith that it will ultimately achieve 90% acceptance and be able to squeeze out the minority, without the guarantee of being able to do so. While this is often unsettling to US bidders, in practice there have been only a very limited number of offers where the 90% level is not subsequently achieved (often in special circumstances such as where there is a vocal dissident shareholder). A critical threshold is 75%, where the Bidder can delist the Target (releasing it from compliance with rules requiring independent shareholder approval of transactions between the Bidder and its new subsidiary, the Target) and secure non-applicability of the UK financial assistance rules, which severely restrict the ability of a Target to make payments in connection with, or give security for, acquisition debt.
Cannot combine offer and scheme. As mentioned above and in contrast to the position in the US, a Bidder cannot combine the two alternative structures and effectively must choose between an offer or a scheme. This is because, unlike in the US, any shares acquired by the Bidder under the offer (or by other means) cannot be voted in favour of the scheme resolution and therefore following an offer with a scheme would be a pointless exercise as the electorate for the scheme vote would solely comprise the remaining independent shareholders.
Thus in practice a Bidder must choose between an offer, which has a lower minimum acceptance threshold but generally no certainty of achieving 100% ownership, and a scheme, which has certainty of total ownership but a higher approval threshold.
Statistically, a scheme has been the more popular deal structure for larger value recommended deals. The choice of offer or scheme is generally influenced by the following factors:
|» Required approval level 50% plus one share||» Required approval level 75% by value plus a majority in number of shareholders (in each case of those present and voting)|
|» Possibility of minority remaining (unless 90% of Target shares acquired)||» Certainty of no minority remaining once approved|
|» Possible whether hostile or recommended||» In practice only used where recommended|
|» Stamp duty cost of 0.5% of the aggregate offer value||» No stamp duty—a significant saving in bigger deals|
|» Market purchases can be used to increase the chances of success of the offer||» Market purchases are (at the very least) of no effect and can be counter-productive where there is an active dissentient minority (as they reduce the number of shares forming the scheme vote electorate and thus the number of shares required for a blocking stake)|
|» Overseas securities legislation may be applicable to offer made into certain “difficult” jurisdictions||» Generally gives rise to fewer securities law requirements where there are overseas shareholders, as it tends to be seen as a shareholder vote rather than as an individual investment decision by each Target shareholder|
|» Share consideration offer will be subject to full SEC exchange and tender offer rules and full registration of the shares offered (if no exceptions or relief available)||» Where share consideration, an exception is available (Securities Act of 1933 sec 3(a)(10)) so that no SEC review or registration statement is required|
3. I’ve Got My Eyes On You
(Cole Porter, 1939)
In the US, as a matter of regulation, a Target Board is generally free to decide what information, if any, it gives to different competing Bidders. The opposite is true in the UK where rules on equality of information require that any information or access to management provided by a Target to one Bidder or potential Bidder is made available on request to any other Bidder or bona fide potential Bidder, whether or not welcome.
Bona fide potential Bidder is widely construed by the Takeover Panel and may well include significant competitors of the Target and the Bidder. The fact, moreover, that the potential competing Bidder has significant constraints on effecting a transaction (e.g. overwhelming anti-trust problems, no financing) will not prevent it being deemed by the Panel to be a bona fide potential Bidder and therefore a potential recipient of the Target’s information.
Approach to due diligence. It follows from the equality of information requirement that information provided by a Target may become available to a range of other parties. Consequently, the board of the Target will often be cautious about providing non-public information to Bidder. Bidders should obviously also be sensitive to the risk of competitors of the Target acquiring information that may be damaging to the business it is seeking to acquire. UK practice has been to limit due diligence for a public offer to high level confirmatory due diligence (although more detailed information may be provided where private equity bidders are involved). It is often the case that the most commercially sensitive information is held back until close to announcement, when there is a high level of certainty that a transaction will proceed.
Site visits/management meetings. The equality of information requirement also applies to site visits and meetings with Target management, so that if one Bidder or potential Bidder has been afforded a site visit or granted access to management, an equivalent site visit or meeting with management must be made available to another Bidder or potential Bidder if it so requests.
Cannot attach conditions to provision of information. The provision of information to competing Bidders under this rule cannot be made subject to conditions other than those relating to confidentiality and use of the information and non- solicitation of customers and employees. Thus, even if the first Bidder/potential Bidder has, for example, agreed to a standstill or other restriction, this cannot be imposed on subsequent competing Bidders as a pre-requisite to provision of the information.
4. I Got Plenty O’ Nuttin’
(George & Ira Gershwin, 1934)
Break fees (payable by the Target to a Bidder in a variety of circumstances but most commonly when its bid does not succeed and/or is topped by a competing bid) are a standard part of the public M&A architecture in the US, with fees of up to 6% of the transaction size having been agreed (although most commonly in the 3-4% range). In the UK, break fees became common during the 90s and, although subject to a 1% limit under the UK rules, were a feature of the substantial majority of UK takeover bids. However, in 2011, the Panel introduced a general prohibition on break fees (along with various other deal protection measures) in UK takeovers as part of its response to the demands from some quarters (following the Kraft/Cadbury takeover) that the balance of negotiation power be shifted away from Bidders and in favour of Targets.
What does the general prohibition cover? The Code provides that, except with the consent of the Panel, neither the Target (nor any person acting in concert with it) may enter into any “offer-related arrangement” with the Bidder (or any person acting in concert with it) during an offer period or when an offer is reasonably contemplated. The definition of an “offer-related arrangement” is very wide and includes an inducement fee or break fee arrangement or other arrangements having a similar or comparable financial or economic effect. The general prohibition also applies to various other types of offer-related arrangement that impose obligations on the Target (see Section 5: “Don’t Fence Me In”). The breadth of the definition ensures that any type of break, termination, inducement, work or other fee payable by the Target to the Bidder in connection with the offer (however characterised) is prohibited. There are limited exceptions where a break fee of no more than 1% of the offer value may be paid (relating to formal auction processes, white knight situations and Target financial distress) but these are relatively strictly circumscribed and have only as yet been used to facilitate payment of break fees in a very small number of cases.
Reverse break fees. Reverse break fees (where the Bidder is required to pay a fixed amount to the Target if the transaction is terminated for one or more specified reasons, such as a required Bidder shareholder approval not being forthcoming) are not affected by this prohibition. The general prohibition on offer-related arrangements in the UK does not apply to arrangements that only impose obligations on the Bidder. As a result, reverse break fee arrangements between a Bidder and a Target to which the Code applies are permitted (although if the reverse break fee were being paid by a UK-listed company, it would be capped at 1%, unless shareholder approval were obtained). However, for the reasons discussed later in this post (see Section 6: “It Don’t Mean A Thing If It Ain’t Got That Swing”), reverse break fee arrangements are relatively rare in the UK.
5. Don’t Fence Me In
(Cole Porter & Robert Fletcher, 1934)
US practice is for a merger to be governed by a merger agreement setting out the rights and obligations of the merger parties. Similarly, as a historical matter, it was customary in the UK to enter into an “implementation agreement” when proceeding by way of a scheme of arrangement, in order to regulate the Target’s conduct of the scheme and bid/merger generally. However, since the Takeover Code changes introduced in September 2011, offer-related arrangements such as those previously included in implementation agreements are in general prohibited in all UK takeovers (whether implemented by offer or by scheme).
What does the offer-related arrangements prohibition cover? As well as prohibiting break fees (see Section 4: “I Got Plenty O’ Nuttin’”), these rules also prohibit the deal protection and other arrangements that had become commonplace in UK public M&A, including:
- “no shop” provisions: non-solicitation undertakings, intended to restrict the Target from soliciting competing bids;
- undertakings that require the Target to notify the original Bidder if it receives an unsolicited approach from a third party potential Bidder (a “notification undertaking”);
- “matching rights” that allow a Bidder the opportunity to match any competing bid in order to keep the benefit of the Target’s recommendation;
- any commitment given by the Target to a Bidder (or potential Bidder) not to identify the Bidder in any announcement made by the Target;
- “crown jewel” arrangements under which the Target proposes to sell certain assets to, or enter into a licence with, a Bidder; and
- “conduct of business” restrictions on the Target for the duration of the offer process.
The prohibition on offer-related arrangements is broadly expressed, covering any arrangements in connection with an offer (with certain limited exceptions—see below), so there is no scope for avoiding the rigours of the prohibitions.
Is this a problem? What may appear (at least to US eyes) as the rather unattractive option of seeking to implement a UK merger without a merger agreement is in reality not such a starkly difficult proposition. Although sometimes lengthy and detailed, UK implementation agreements did not in practice afford as much protection to a Bidder as may be expected, given that many of the most significant obligations of the Target (including the obligation to recommend the offer to shareholders) would be expressed to be subject to directors’ fiduciary duties and would in general therefore cease to bind if a competing proposal emerged (and therefore not bite in the most likely situation).
In addition, the Code deals with two of the key issues previously tackled by implementation agreements:
- Targets are now required to ensure that the scheme circular sent out to shareholders sets out the expected timetable of the scheme. Targets must in general implement the scheme in accordance with that timetable; and
- Targets are prevented from engaging in actions that may frustrate a bid or potential bid, and a number of other specified actions such as issuing shares, doing material or non-ordinary course transactions, paying non-normal course dividends, etc. This Code rule obviously reduces the necessity for “conduct of business” provisions.
Finally, it should be noted that Bidders are still able legitimately to request certain specific undertakings from Targets, for example in relation to confidentiality of information, non-solicitation of employees or customers, and provision of information required for regulatory approvals.
6. It Don’t Mean A Thing If It Ain’t Got That Swing
(Duke Ellington & Irving Mills, 1931)
In a US public deal, the Bidder is under no obligation to have committed funds at the time it makes its offer and it is often the case that the making of definitive financing arrangements is a condition of the offer. In the UK, the position is dramatically different, with financing conditions being prohibited (except in very limited circumstances) and the Bidder being required to have definitive and essentially unconditional financing in place (or unencumbered cash in hand) at the time the offer is announced.
This starkly different position arises out of the Code requirement that a Bidder should only announce an offer when it has every reason to believe that it can continue to be able to implement the offer. It is a matter of judgment how far a Bidder (and its financial advisers, who also take responsibility—see below) need go in reasonably satisfying itself that it can do this, but the judgment whether or not a Bidder and its financial advisers have acted reasonably will inevitably be made against the background of market practice. The predominant market practice in the UK is for the Bidder to have unconditional and definitive access to the cash required to satisfy the consideration at the time of announcement. In practice, there are a couple of different approaches to achieving this by either a certain funds facility or a deposit of funds in a blocked account.
Certain funds facility. Where debt facilities are being relied on, UK practice goes beyond a requirement for definitive funding agreements: whether specific acquisition financing is being arranged or, when existing facilities are being utilised, the standard UK practice is for the terms of these facilities to provide (or to be adjusted to provide) greater certainty of funding than would be the case outside a takeover situation, in what is called “certain funds facilities”.
A certain funds facility should, by the time of the announcement of a firm intention to make the offer, have no conditions precedent remaining to be satisfied, other than technical conditions precedent outstanding that are wholly within the control of the borrower (for example, delivery of copies of by-laws or other documents). In addition, there will be a “certain funds period” of, say, six months (which should be long enough for an offer to be completed and the minority squeezed out). During this certain funds period, ability to draw down should be completely unconditional (for example, there should be no operative events of default, no requirements for representations and warranties to remain true) and the loan should not be capable of acceleration during the certain funds period, come what may (although it is often the practice to concede to lenders an exemption for illegality and insolvency of the borrower).
Nearly all specific UK takeover facilities are on these terms. If an existing facility is being utilised, a tranche of that facility should be amended by agreement with lending banks to this certain funds basis. This is obviously a pretty startling proposition for a lending bank unaccustomed to the requirements of UK bid financing, but there are now a large number of banks in the UK who have financed on this basis. Obviously, if the lenders are to be non-UK banks or branches (as one might expect) they often have less experience of these requirements and it is important to deal with the certain funds requirement up front in the first discussions with potential lenders.
Blocked account. The alternative approach, where it has sufficient funds or existing facilities that it is able to use, is for the Bidder, before the release of the firm intention announcement, to deposit funds sufficient to cover the offer consideration into a blocked account, such that funds can only be withdrawn to pay the offer consideration. This can obviously be more expensive than a certain funds facility but is often favoured in periods of low interest rates because of its relative simplicity.
Currency risk. It is important also to note that, because the Bidder’s obligations under the offer are sterling obligations, if the Bidder’s facility or funds are not sterling, hedging should be arranged to provide the relevant amount of sterling. It may be that an unhedged non-sterling facility or funds may be adequate if the size of the facility or funds is such that the headroom over the requirement for sterling under the offer is large enough for the view to be taken by the Bidder that there is no reasonable prospect of exchange rate movements rendering the facility inadequate.
Financial adviser’s cash confirmation. The Bidder’s financial adviser will be required to confirm in the public announcement and subsequent offer document that it is satisfied that there are sufficient funds available to satisfy full acceptance of the bid. This is taken very seriously and the financial adviser will be required to produce the cash itself unless, in giving the cash confirmation, it acts responsibly and takes all reasonable steps to assure itself that the cash is available. This requirement means that financial advisers are heavily involved in the financing arrangements (and are often separately legally advised in this area) and it has in reality engendered the strict UK approach to certainty of funds.
7. Every Time We Say Goodbye
(Cole Porter, 1944)
US Bidders are not required to publish statements of their intentions for the Target’s business or employees in any offer documentation, save where commitments have been negotiated and require disclosure. In the UK, however, a Bidder is required to disclose its intentions as regards the future of the Target’s business and the impact its bid may have on the Target’s employees in its offer document. In addition, the Bidder must make equivalent disclosures in respect of its own future business, employees and places of business where these are affected by the offer.
As a result of the Kraft bid for Cadbury (where Kraft attracted significant criticism for its decision to close a UK site that its offer document and related management statements had indicated would continue to operate), that this area has been a focus for scrutiny; the Panel has signalled a tougher approach to enforcement in this area and has stated that it expects to investigate complaints from any interested person, which would include trade unions, employee representatives and political representatives. It is also worth noting that breaches of this section of the Code can attract criminal liability as well as the more usual range of Panel disciplinary measures.
High level of disclosure. The Code requires disclosure of all plans and intentions that the parties have regarding employees and places of business. Disclosure is therefore required of the likely effect of any synergy, cost-reduction or reorganisation planning undertaken by the Bidder that impact—whether on the Target or the Bidder side—on those areas regardless of whether the offer document itself includes a quantified synergy statement. In addition, any statements made by the Bidder relating to the Target’s employees are also subject to a high level of scrutiny from the employees’ representatives. The Code allows the representative body to provide its own independent opinion on the employment effects of the bid. It also allows pension trustees to express an opinion on the effects of the offer on the pension schemes.
Negative statement. If the Bidder does not intend to make any changes with respect to the Target’s business or employees, or if it considers that its strategic plans for the Target will have no repercussions on employment or the location of the Target’s places of business, it must make a negative statement to this effect. This requirement means that Bidders cannot avoid making unpopular statements by staying silent.
Statements must hold true for 12 months. The Panel expects the stated position to hold true for a year post-transaction (or any shorter period specifically stipulated by the parties). This requirement can be avoided only if there has been a “material adverse change in circumstances”. In reality, however, the level of change in circumstances required to be considered “material” is likely to be very high, and therefore difficult to meet.
Practical implications for Bidders. Bidders must be aware that exercises such as synergy, integration or post-combination business planning will need to be publicly disclosed if that output is best characterised as a “plan” or “intention”. This will be the case even where the planning exercise is preliminary and the conclusion is not definitive. Given the requirement for a full statement of intentions and plans to be made at the time of the offer, the Panel is also likely to take a sceptical “hindsight view” of any new plans that are formulated by the combined group post-completion. In that situation, it will be vital to be able to demonstrate robustly that the new plans had not been formulated, even provisionally, at the earlier stage.
Against this background, it is important that all workstreams that touch on this area—within both Bidder and Target individually as well as any joint work—are carefully designed, timed and implemented so that unwanted issues do not arise as a result of the disclosure requirement or the post-transaction period for which the disclosure is binding. This is an issue that should be focused on as early as possible in the planning of any transaction, as experience shows that even very preliminary transaction analysis papers may contain synergy benefit estimates and broad rationalisation plans.
However, a US bidder should understand the wider UK context within which the type of hard-edged disclosures that may be required would operate. Unlike in the US, there is almost no effective political interference with takeover bids: the UK equivalent to CFIUS (the Enterprise Act) is almost never activated and employee or political disquiet at the negative implications of an offer, while potentially having an impact on the relationship between the Bidder and the Target workforce, will have almost no impact on the outcome of the offer, which is decided solely by shareholders, who generally operate free from political or workforce influences. The paradigm example is the Kraft bid for Cadbury, which gave rise to a significant political outcry. This, however, did not have any effect on the outcome of the offer, with there being no political interference in the deal, merely some impetus for the changes in the rules that were subsequently implemented.
8. Miss Otis Regrets
(Cole Porter, 1934)
Perhaps the most striking difference between US and UK takeover regulation comes in the context of takeover defences. A combination of UK corporate law, the Code and UK institutional investor sentiment has prevented wholesale import of US-style bid defence tactics. UK Target Boards are effectively prohibited from taking any “frustrating action” once an offer is in the air. There are serious difficulties in implementing US- style rights plan poison pills and other defences (such as buying or selling stock to interfere with a bid or selling material assets) that would have the effect of impeding Target shareholders’ ability to decide on the merits of the bid are prohibited by the Code. The Target Board is thus not generally the gatekeeper to any offer, unlike in the US, and its influence broadly is limited to an advisory one and as the controller of access to information on the Target. In any event, entrenching the composition of the Board, in the same way as a US-style staggered board, is not possible in the UK.
Poison pills. The use of US-style rights plan poison pills is constrained by a number of factors in the UK. UK case law indicates that an issuance of shares (including pursuant to a rights plan) to impede an unwelcome offer would not be regarded as a proper use of corporate powers. In addition, UK institutional shareholders have traditionally been hostile to any device that is intended to (or has the effect of) impeding potential Bidders (or giving the Target Board power to do so). It may of course be the case that a UK company will have other types of “poison pills”, such as change-of-control clauses in key Target contracts (such as JV agreements or debt facilities) that may be lawful when viewed as part of the overall package agreed with the contract counterparty. All UK-listed companies are required to disclose annually any significant contracts that are affected by a change of control and a UK company would generally be very cautious before entering into a material change of control clause. In practice, the experience in the UK has been that these types of clause rarely provide an insurmountable obstacle to a hostile bid.
Staggered boards. Although staggered boards feature prominently among US public companies (albeit that they are under threat), UK company law and corporate governance guidelines effectively prevent their occurrence in the UK. Under the UK guidelines, all directors of FTSE 350 companies must be re-elected annually. Listed companies are obligated to comply with these guidelines, or explain their non-compliance. However, the vast majority of listed UK companies now comply with this particular requirement. In addition, UK company law allows shareholders to remove directors by ordinary resolution (a bare majority of votes) and thus shareholders representing more than 50% of the Target shares can always replace the whole Target Board, fatally undermining the staggered board concept for listed companies.
Prohibition on frustrating action. The Code generally prohibits various actions undertaken by a Target Board during the course of an offer on or before an offer if the Target Board has reason to think an offer may be imminent, unless those actions have been approved by shareholders. These actions include:
- any action that may result in an offer being frustrated or in shareholders being denied the opportunity to decide on its merits. Thus, for example, a Target will not be permitted to litigate against the Bidder in relation to the offer (although participation in a regulatory process, which can be quasi-litigious, is permitted). The absence of litigation in the course of UK bids is another striking difference from the US;
- issuing any shares or transferring, selling, or agreeing to transfer or sell, any shares out of treasury or issuing share options;
- selling, disposing of or acquiring assets of a material amount; and
- entering into or amending contracts (including directors’ service contracts) otherwise than in the ordinary course of business.
9. Anything Goes
(Cole Porter, 1934)
A hostile or competitive Bidder may wish to increase the likelihood of success of its bid by building a stake in the Target through purchases of Target shares. In the US, a Bidder is not permitted to purchase shares outside the offer once it has been made. By contrast in the UK, there is no blanket prohibition on a Bidder buying stock outside the offer and this is often done in hostile bids (with a significant number being won in the market) and sometimes in recommended bids immediately following an announcement to secure the deal and minimise interloper risk.
The UK rules do however put some limitations on timing of purchases and specify consequences of certain purchases, in particular:
- acquisition of 30% or more is limited in hostile bids to the later stages of the offer and in any offer gives rise to an obligation to convert the offer to a mandatory cash offer with almost no conditions at the highest price paid,
- where the offer is not all cash, market purchases during the offer period are in effect prohibited unless the Bidder is prepared to convert it to a cash offer;
- market purchases set a floor price for any offer;
- purchases may have implications for a Bidder’s ability to squeeze out the minority (on an offer) or achieve the required vote (on a scheme); and
- anti-trust rules will often limit significant market purchases ahead of regulatory clearance.
The 30% threshold. Unless it is making or has made a recommended bid, the Code prevents a Bidder (including anyone acting in concert with it) from acquiring an interest in shares carrying 30% or more of the voting rights in the Target, subject to some exceptions. The restriction generally applies up to the first closing date of the offer (generally the first 21 days). If a person does acquire 30% or more, then the mandatory offer requirements referred to below apply.
Mandatory offers. If a Bidder (including a concert party) acquires 30% or more of the Target share capital, the Bidder must then make a mandatory offer.
The terms under which a mandatory offer must be made are strictly prescribed:
- the consideration to be offered must be cash (or at least have a cash alternative) at no less than the highest price paid by the Bidder or any of its concert parties during the preceding 12 months; and
- the offer can only be conditional on the Bidder receiving acceptances to give it more than 50% of the target’s voting rights. The usual 90% acceptance condition cannot be included. No other conditions are permitted (although a term that the offer will lapse if it goes to second phase UK or EC anti-trust investigation is included).
A mandatory offer needs to be cash confirmed (see Section 6: “It Don’t Mean A Thing If It Ain’t Got That Swing”) at the time of announcement, which will be immediately after the purchase that takes the Bidder through 30%. Therefore, a Bidder should not buy through 30% unless it is immediately able to announce a mandatory offer with no conditions other than a 50% acceptance condition. A Bidder whose Hart-Scott-Rodino waiting period has not yet expired (and has not been cleared), or has any other mandatory conditions such as other regulatory clearances or shareholder approval, will not be able to buy through 30%. A Bidder will of course also have to take a view on its ability to squeeze out the minority (by reaching the 90% acceptance level) but it is generally the case that it has to take this view in most offers (see Section 2: “Between The Devil And The Deep Blue Sea”).
Other implications for offer consideration. The rules are complicated, but in summary:
- any purchase within the three months preceding the start of the offer period will set a floor price for the offer (but not necessarily require that the offer be in cash); and
- any purchase during the offer period or purchases of 10% or more in the 12 months preceding the start of the offer period will not only set a floor price for the offer but also require that it be in cash (or have a full cash alternative).
Anti-trust limitations. The purchase of Target shares (or purchases above certain thresholds) may be restricted by regulatory requirements. In some cases, these will be mandatory (for example, the EC), effectively prohibiting purchases above the threshold regarded by the relevant regulatory authority as giving significant influence/control (or similar test). In many cases, this will not be a bright line threshold but will depend on the individual circumstances of the case. Even where the regime is not mandatory (for example, the UK), the Bidder will be at risk of mandated divestments if it acquires above the threshold and the combination is subsequently outlawed by the regulatory authority. Thresholds will vary but can be as low as 15% of the Target shares.
In particular, if the combination would be subject to Hart-Scott-Rodino (by virtue of the Target’s US sales or assets being above the relevant thresholds), the maximum value of Target shares that a US Bidder may acquire before expiry of the waiting period or clearance is limited to US$70.9m.
Impact on ability to squeeze out minority or pass a scheme vote. An important consequence of purchasing Target shares before making an offer is that shares held by the Bidder at the time of the offer (i.e. at the time the offer document is sent to Target shareholders) will be excluded for the purposes of calculating the 90% threshold necessary to trigger a compulsory acquisition of any outstanding minority, thus making it more difficult for the Bidder to gain 100% ownership of the Target. For example, if a Bidder acquires 29.9% of the Target shares before posting its Offer Document, it will have to acquire 90% of the remaining 70.1% of Target shares in order to trigger squeeze-out (thus, effectively having to acquire 93% of the whole of the Target share capital).
Similarly, where a Bidder looks to implement its offer via a scheme, any Target shares acquired by the Bidder will be excluded from the class of shareholders voting on the scheme, making it easier for a dissentient minority to block the scheme.
10. Let’s Call The Whole Thing Off
(George & Ira Gershwin, 1937)
In the US, securities and other regulations do not impose any limitations or specifications on the conditions to which a Bidder may make his offer subject (beyond the terms required to comply with timetable requirements etc.), although in a negotiated transaction the Target will obviously seek to limit Bidder optionality by limiting conditions—and experience shows that negotiated MACs are very difficult to trigger in practice. A US Bidder reading precedent UK offer documents may derive false comfort from the pages of lovingly crafted offer conditions, believing that it can actually rely on them and withdraw from the deal if any are triggered. In reality, the scope for withdrawing from a UK offer in reliance on conditionality being triggered is very limited.
Limitations on conditions. The Panel places strict limitations on the type of conditions that may be included and severely limits a Bidder’s ability to trigger those that are included in all but the most extreme circumstances. In particular:
- Conditions cannot be subjective.
- Financing conditions are not acceptable, except in very limited circumstances (see Section 6: “It Don’t Mean A Thing If It Ain’t Got That Swing”).
- A Bidder may only invoke a condition if it is of material significance to the offer. This is in practice an extremely high threshold and (outside one anomalous example) has never been met in relation to a MAC or general conditions.
- The materiality requirement also applies to bespoke and specific conditions, which are thus similarly difficult to trigger.
This is, then, a regime designed to make it extremely difficult for a Bidder, once it has announced a firm intention to make an offer, to avoid proceeding with it.
MAC clauses and other general conditions. A normal (i.e. non-mandatory) offer under the Code may be subject to any condition that the Bidder sees fit to include, but only if such conditions are cast in objective terms. As in the US, the conditions in an offer are normally a combination of conditions relating to specific consents and approvals (e.g. Bidder shareholder approval and approval by specific anti-trust authorities) and more general conditions covering a wide range of specific adverse events occurring during the offer period, for example, litigation, Target actions, general regulatory or MAC.
Conditions may be waived by the Bidder rather than specifically fulfilled but the Bidder’s ability to trigger any condition is severely limited. The Code provides that a MAC or other general condition cannot be invoked to lapse the offer unless the circumstances that give rise to the right to invoke the condition are of material significance to the Bidder in the context of the offer. Critically, the Bidder will not satisfy this test unless it can demonstrate that circumstances have arisen affecting the Target that are of an entirely exceptional nature and that strike at the heart and purpose of the transaction. Successive Panel decisions have made it very clear that the materiality threshold applied to conditions is extremely high.
Specific and bespoke conditions. The same principle applies to specific and bespoke conditions but it is more likely that the Panel will allow a Bidder to trigger a specific condition than a general one. Panel guidance indicates that various factors may serve to increase the Bidder’s ability to invoke a condition to the offer. These include whether or not the condition in question was the result of negotiation between the Bidder and the Target, whether the condition was expressly drawn to the attention of Target shareholders in the offer document (along with an explanation of the circumstances that might give rise to the right to invoke it) or whether the condition was included to take account of the particular circumstances of the Target.
Possible exits: acceptance condition and anti-trust conditions. The very strict rules described above do not apply to two types of condition: the acceptance condition and the UK/EC anti-trust condition. The Bidder is therefore generally free to withdraw if any of these are not satisfied. However, a Target can be expected to seek to limit the Bidder’s ability to do so.
A Bidder is free to set its minimum acceptance condition at anywhere between 50% plus one share and 90% (being the level at which it can squeeze out any minority). In practice, a Bidder will seek to include a 90% condition, but preserve its right to waive this down to not less than 50% plus one share. As described in Section 2: “Between the Devil And The Deep Blue Sea”, it is often the case that a Bidder will need to make its decision on whether to declare the offer unconditional before it has reached 90% and this condition is generally included more in hope than expectation. It does, however, afford the Bidder the real possibility of exit and an optionality that is otherwise alien to the UK rules. A UK offer is generally initially open for 21 days (although can be extended to 60 days in total). Thus, if on the first closing date on Day 21, a Bidder does not control 90% of the Target, it is free to withdraw its offer. There have been a number of UK offers (most notably the 1996 hostile offer by Trafalgar House for Northern Electric), where adverse circumstances relating to the Target before a closing date prompted the Bidder to withdraw in reliance on an unsatisfied acceptance condition, even though it was unable to use its MAC or other general condition. On a negotiated deal, a Target should seek to restrict the Bidder’s ability to withdraw in this manner by agreeing a lower acceptance condition (75% being the next most common threshold) and contractually limiting the Bidder’s ability to trigger the condition before the final Day 60 closing date, although surprisingly this is not yet the norm. On the 2011 offer for Autonomy by Hewlett-Packard (on which we acted for Autonomy), Autonomy secured a 75% acceptance condition and an undertaking from HP not to lapse its offer before the final (Day 60) closing date. On the first (Day 21) closing date, HP had received just under 42% acceptances. Without the contractual undertaking, HP would have been free to lapse its offer, demonstrating the potential importance of the provision.
Conditions relating to UK and EC anti-trust clearance are explicitly excluded by the Code from the strict materiality requirements imposed by the Panel described above and therefore (absent contractual limitations entered into with the Target) a Bidder will be free to withdraw if it does not receive UK/EC anti- trust approval, without any scrutiny by the Panel of the materiality of the issue giving rise to the negative decision or the steps the Bidder has taken to avoid it. Although not explicit in the Code, the Panel effectively also takes this approach with HSR clearance and will not apply any materiality threshold to withdrawal by a Bidder on account of failure to achieve HSR approval. In relation to other anti-trust approvals, including mandatory regimes, the Panel will only allow a Bidder to withdraw if it can demonstrate materiality, applying the tests referred to above. In practice, therefore, if a potential Bidder does not want to be at risk of being forced to proceed without a non-UK/EC/US anti-trust approval, it will have to seek that approval before launching its offer (generally on the back of an “in principle” but not firm intention deal announcement (which will require the acquiescence of the Target).
Again, a Target will generally seek to impose “hell or high water” or other similar obligations on the Bidder, mandating a level of required remedies and limiting its ability to withdraw.