On 4 April 2023 (following receipt of responses to its Consultation Paper dated 19 October 2022 - PCP 2022/4), various amendments to the City Code on Takeovers and Mergers (the "Takeover Code") were published by the Takeover Panel - to take effect from 22 May 2023.
This article focuses on the new requirements under the amendments to the Takeover Code in relation to (i) a Target Board recommendation where there are alternative offers (i.e. alternative forms of consideration) under the takeover offer and (ii) disclosure of Target Directors' intentions in respect of their own shares in the Target where there are alternative offers.
1. Target Board recommendations
- Takeover Offer
Rule 25.2(a) of the Takeover Code already requires the Target Board to give its opinion on the takeover offer (and any alternative offers), its reasons for that opinion and the substance of the advice given to it by its financial adviser (under Rule 3 of the Takeover Code). In addition, it must include in its response circular the substance of the advice it has received on any Rule 15 offer or proposal and its views on that offer or proposal.
A new 25.2(c) to the Takeover Code (along with a new Note 3 on Rule 25.2 in relation to alternative offers) comes into effect on 22 May 2023 containing an express requirement for a Target Board to make a recommendation to shareholders on the takeover offer and on any alternative offer. Currently, whilst a Target Board will usually include a recommendation on the offer in bid documentation, it won't always provide a recommendation on the action that Target shareholders should take when there is an alternative offer.
In its Response Statement published on 4 April 2023 (RS 2022/4), the Takeover Panel's Code Committee stated that it considers that the Target Directors are the persons best placed to evaluate the merits and demerits of a takeover offer and the Target Board's recommendation will be an important information to Target shareholders in making their acceptance decision. The Code Committee stated that where Target shareholders are faced with alternative offers, the position in respect of each offer is no different from the position where there is a single offer – i.e. that the Target Board will need to consider and set out in the Target Board circular whether in its opinion each of the main takeover offer and the alternative offer(s) can be recommended to shareholders. In addition, the substance of the Target's Rule 3 adviser's advice as to the financial terms of each of the main takeover offer and the alternative offer(s) must be set out in the Target Board circular.
Faced with concerns expressed by respondents to its Consultation Paper about the ability of a Target Board to give a recommendation beyond that for the main takeover offer and the possible liability to which this may expose Target Directors, the Takeover Panel's Code Committee has attempted to factor these concerns into the Takeover Code amendments. Where there are alternative offers and (i) more than one of the offers can, in the Target Board's opinion, be recommended to Target shareholders; but (ii) the appropriate action for individual shareholders to take will depend on various factors and their particular circumstances, the obligation under new Rule 25.2(c) for the Target Board's recommendation of action to be taken to be set out can be satisfied by referencing these statements and giving an explanation of the key factors which it considers that Target shareholders should take into account in making their decision as to what action to take.
Appendix C in the Response Statement published on 4 April 2023 (RS 2022/4) includes four examples of language for recommendations that a Target Board may wish to use, as appropriate to comply with the new obligation under Rule 25.2(c) – although it should be noted that these have not been carried forward into the Takeover Code itself. These examples (which are stressed by the Code Committee to be neither definitive nor exhaustive) cover the following situations:
1) a single recommended offer;
2) a main offer and an alternative offer, both of which are recommendable;
3) a main offer which is recommended and an alternative offer that is not recommendable; and
4) a main offer which is recommended and an alternative offer on which the Target Board and the Rule 3 adviser are unable to form an opinion.
The Takeover Panel has expressly confirmed that 'mix and match' elections under a main takeover offer will not be treated as an alternative offer requiring a Target Board's recommendation under the new Rule 25.2(c).
Note 2 on Rule 25.2 has also been amended and split into two parts:
- If the Target Board is unable to reach a clear opinion on, or recommendation of, a takeover offer (including any alternative offer) – where this must be stated in the Target Board circular, including the key arguments for acceptance or rejection of the takeover offer (or any alternative offer) and emphasising the key factors; and
- If there is a divergence of views amongst the Target Directors – in which case the opinion and recommendation of the minority Target Directors should also be included in the Target Board circular (in addition to that of the majority) – and extended to any divergence of views between the Target Board and its Rule 3 adviser.
- Rule 15 proposals
In relation to Target Board recommendations in relation to Rule 15 offers or proposals, whilst again Rule 15.2 of the Takeover Code already requires the Target Board to give its views or opinion on the Rule 15 offer or proposal, the Takeover Code amendments (- a new Rule 15.2) include a similar provision to that mentioned above in relation to Rule 15 offers or proposals - i.e. that the Target Board should give a recommendation as to the action that holders of Rule 15 securities should take.
It should be noted also that what is now Rule 15.2(a) has also been amended to clarify the requirement of the Target Board to obtain competent independent advice (i.e. from its Rule 3 adviser on each offer or proposal under the Rule 15 arrangements).
A new Note 3 to Rule 15.2 sets out that where (i) more than one of the possible courses of action can, in the Target Board's opinion, be recommended to holders of Rule 15 securities; but (ii) the action which an individual holder should take will depend on various factors and their particular circumstances, the obligation under new Rule 15.2(b) for the Target Board's recommendation of action to be taken to be set out can be satisfied by referencing these statements and giving an explanation of the key factors which the Target Board considers that Target shareholders should take into account in making their decision [as to what action to take]. This is particularly relevant in relation to Target share options where various options may be made available to the holders, including (i) exercising the options and accepting the main takeover offer (or participating in the scheme of arrangement); (ii) rolling over into new options over the Offeror's securities; or (iii) accepting cash in return for the cancellation of their Target share options.
The Code Committee decided it was not necessary to introduce a Note to Rule 15 similar to the amended Note 2 on Rule 25.2 on the basis that it is not aware of any circumstances having arisen in the past where the Target Board has been unable to form a clear opinion of any Rule 15 offer or proposal or where there has been a divergence of views either amongst Target Directors or between the Target Board and its Rule 3 adviser.
2. Target Directors' intentions in respect of their own shares in the Target
As a follow on from the above, whilst Target Directors are currently required to state whether they intend to accept the takeover offer, amendments to Rule 25.4(a) of the Takeover Code also require Target Directors to state which alternative (if any alternative offer is made available) they intend to elect for and may be required to give reasons for doing so.
In the context of a recommended takeover offer, the Code Committee stated in its Response Statement that it would normally expect the Target Directors to have decided which of the alternative offers they intend to elect for by the time of publication of the Offer document (which will normally, in the case of a recommended takeover offer, incorporate the Target Board circular) or the Scheme circular. However, it was noted that there may be circumstances in which one or more of the Target Directors have not formed an intention by that time – but in such circumstances, the Code Committee considers that it would normally be appropriate for the Target Directors to explain that they have not yet formed an intention, to set out the factors that they are likely to take into account in making the decision and to make an announcement of their intention as and when such a decision is made.
The Code Committee in its Response Statement also noted that the Target Directors' intentions may change during the course of an offer and that therefore the Target Directors will not be bound by such statements. However, the Code Committee understands that the Takeover Panel's Executive would consider a subsequent change of intention to be a material change of information disclosed in the Target Board's circular and accordingly, the Target will be required to announce a subsequent change in intention.
Transitional arrangements
The above amendments to the Takeover Code will apply from 22 May 2023 to all companies and transactions to which it relates, including any ongoing transactions which straddle this date, except where to do so would give the amendments retroactive effect. Parties to a takeover offer should consult with the Takeover Panel if they have any doubt as to the consequences of the amendments.
If you have any questions about this article, please contact Jeffrey Elway.