Clifford Chance - UK Takeovers Guide

A Guide toTakeovers in the UK

Clifford Chance is a truly integrated global law firm which operatesas one organisation throughout the world. Our aim is to provide thehighest quality professional advice by combining technical expertisewith an appreciation of the commercial environment in which ourclients operate.

With 32 offices in 19 countries, the firm operates across all businesscultures and offers full service advice to clients in key financial andregulatory centres in Europe, the Americas and Asia.

Clifford Chance's lawyers advise internationally and domestically,under both common law and civil law systems. They are trained towork in firmwide teams providing multi-disciplinary, cross-borderadvice and essential transaction management skills to clientslocated throughout the world.

To find out more about Clifford Chance, visit our website atwww.cliffordchance.com.

Corporate Finance Practice

The Corporate Finance Practice advises companies, private equityhouses, investment banks and other participants on all aspects ofmergers and acquisitions, securities issues, public offerings, privateplacings and listing work. We also advise on management buy-outs,joint ventures, cross shareholdings, consortia and other corporatealliances, as well as privatisations, corporate restructurings,investment funds and regulatory matters.

For advice on UK takeovers, please call your usual Clifford Chancecontact or any of the following members of our Corporate FinancePractice in London:

Adam Signy (020) 7006 1210David Pearson (020) 7006 1429David Pudge (020) 7006 1537Guy Norman (020) 7006 1950Iain Hunter (020) 7006 1892Jonny Myers (020) 7006 4455Keith Hyman (020) 7006 1748Sarah Jones (020) 7006 1212

To email, please use [email protected].

10 Upper Bank Street, Canary Wharf, London E14 5JJ© Clifford Chance LLP, January 2004Clifford Chance is a Limited Liability Partnership organised and registered under the laws of the State of New York.

This guide does not purport to be comprehensive or to render legal advice. The position stated is as at 1 January 2004.

CLIFFORD CHANCE

This guide provides an overview of takeovers of public companies in the UK, including acquiring astake in a UK public company and launching (or defending) a formal takeover offer. It considers, fromboth a legal and regulatory perspective, the various stages of a takeover from planning an offer throughto achieving control of the offeree company. It offers clear explanations on key issues including pre-bidplanning (section 2), competition clearances (section 3) and stakebuilding before an offer (section 4).

The guide covers the making of an offer (section 6), defence tactics on a hostile bid (section 7) andevents following a successful offer and consequences of an unsuccessful offer (sections 8 and 9respectively). It does not, however, attempt to deal with the impact of securities laws of otherjurisdictions where the offeree company has shareholders resident overseas.

Definitions of words and expressions used in this Guide are contained in the Glossary in section 10.

FOREWORD

LIST OF TABLES

• Summary of the General Principles of the Code 4

• Implications of acting in concert with an offeror 12

• Application of The Rules Governing Substantial 22Acquisitions of Shares

• Summary of implications of holdings at various percentage levels 28

• Outline bid timetable 34

• Section 397 Financial Services and Markets Act 2000 35

• Comparative table of principal documents involved in 38recommended and hostile offers

• Offer document content requirements 39

• Defence document content requirements 46

cont

ents 01 Introduction 2

02 Pre-bid planning 603 Competition 1404 Acquiring a strategic stake before an offer 2005 Acquiring control 2606 Making an offer 3207 The defence 4408 Declaring the offer unconditional 5009 Consequences of an unsuccessful offer 5410 Glossary 56

INTRODUCTION

1.1 The City Code on Takeovers and Mergers

1.2 European Regulation of Takeovers

1.3 The Rules Governing Substantial Acquisitions of Shares

1.4 Statutory and other regulatory provisions affecting takeovers

1.5 Treasury shares

Introduction 1.1–1.1.6

A Guide to Takeovers in the UK, Clifford Chance LLP 3

1.1 The City Code on Takeovers and Mergers

1.1.1 Regulatory frameworkThe City Code on Takeovers and Mergers provides the mainregulatory framework for the conduct of takeovers in the UK. TheCode applies to all offers for public (not necessarily listed) companiesresident in the UK, the Channel Islands and the Isle of Man. TheCode also applies to offers for private companies having certainpublic company characteristics.

1.1.2 The PanelThe Code is issued and administered by the Panel on Takeoversand Mergers. The Panel’s membership is drawn from the variousregulatory and professional bodies involved in the field of takeovers,as well as representatives from British industry. The Code and thePanel operate principally to ensure the fair and equal treatment ofshareholders and the orderly conduct of takeovers. The Panel is notconcerned with the financial or commercial merits of a takeover orwith competition issues.

1.1.3 Panel ExecutiveThe day-to-day functions of the Panel are carried out by the PanelExecutive which comprises both permanent and seconded staff.This arrangement ensures both continuity of approach and up-to-date experience of current takeover practices. If a party isdissatisfied with a ruling of the Executive, it can appeal to the fullPanel. The appeal is usually heard in the presence of all parties.

1.1.4 Appeal CommitteeIn certain circumstances, for example where the Panel finds abreach of the Code and proposes to take disciplinary action, orwhere it is alleged that the Panel has acted outside its jurisdiction,there is a further right of appeal to the Appeal Committee.

In other cases, an appeal may be made to the Appeal Committee,but only with leave of the Panel.

1.1.5 General PrinciplesThe Code consists of 10 General Principles (summarised on page 4), which are essentially statements of good commercialpractice, and 38 Rules which amplify the General Principles andgovern specific aspects of takeover procedure. The fundamentalcornerstone of the Code is that all shareholders of the same classshould be treated similarly (General Principle 1).

1.1.6 Compliance with the CodeThe Code does not have the force of law. However, the regulatorybodies which administer the Code regard compliance as offundamental importance. Accordingly, anyone seeking to takeadvantage of the facilities of the securities markets in the UK isobliged to comply with the Code and the rulings of the Panel. ThePanel has powers of private reprimand and public censure.Additionally, the Code and the Rules Governing SubstantialAcquisitions of Shares have the endorsement of the FinancialServices Authority (FSA). The effect of this is that the FSA may, at therequest of the Panel, take enforcement action against a personauthorised under the Financial Services and Markets Act 2000 whocontravenes the Code or a Panel ruling. Responsibility for complyingwith the Code lies with the directors of both the offeror and theofferee company, as well as their professional advisers.

1 INTRODUCTION

1.1.7–1.2.1 Introduction

4 A Guide to Takeovers in the UK, Clifford Chance LLP

Summary of the General Principles of the Code

1 All offeree shareholders of the same class must be treated similarly.

2 During an offer (or when an offer is in contemplation), neither an offeror, nor the offeree company, nor any of their respective advisers may furnishinformation to some shareholders which is not made available to allshareholders.

3 An offeror should only announce an offer after the most careful andresponsible consideration and only when it has every reason to believe that it can and will continue to be able to implement the offer.

4 Shareholders must be given sufficient information, advice and time toenable them to reach a properly informed decision.

5 Any document or advertisement addressed to shareholders must beprepared with the highest standards of care and accuracy.

6 All parties must use every endeavour to prevent the creation of a falsemarket in the securities of the offeror or offeree company.

7 At no time after a bona fide offer has been communicated to the board ofthe offeree company (or after the board has reason to believe that a bonafide offer might be imminent) may any action be taken by the board whichcould effectively result in the offer being frustrated or in shareholdersbeing denied an opportunity to decide on its merits, unless such action isfirst approved at a shareholders’ meeting.

8 Rights of control must be exercised in good faith and the oppression of aminority is wholly unacceptable.

9 Directors of the offeror and the offeree company must always, in advisingtheir shareholders, act only in their capacity as directors and not haveregard to their personal or family shareholdings or to their personalrelationships with the companies. When giving advice to shareholders,offeree directors must consider shareholders’ interests taken as a whole,together with those of employees and creditors.

10 Where control of a company is acquired by a person, or persons acting inconcert, a general offer to all shareholders is normally required.

1.1.7 Spirit and letter of the CodeThe Code itself acknowledges that it is impracticable to devise rulesin sufficient detail to cover all the circumstances which can arise inoffers. Accordingly, the General Principles and Rules are interpretedby the Panel in accordance with their spirit, as well as their precisewording, to achieve their underlying purpose. The great advantageof the system is its flexibility, as the Rules can be (and frequently are)extended to cover situations not explicitly covered by the Code orcan be relaxed in appropriate circumstances. The Panel can alsoact swiftly to amend or add to the Rules in response to newdevelopments or changes in market practice.

1.1.8 Timely consultationThe efficiency of the system relies very much on timely consultationwith the Panel, both before and during a bid, to enable it to provideexpertise and to arbitrate informally. Parties are encouraged toconsult the Panel in the event of any doubt as to the interpretation orapplication of the Code, as only the Panel can give a definitive rulingon the Code. The Panel will also intervene in a bid on its owninitiative if it considers that shareholders’ interests require it to do soor that a breach of the Code may arise.

1.2 European Regulation of Takeovers

1.2.1 Approval of DirectiveAfter 14 years of negotiations and compromises, the ThirteenthCompany Law Directive on Takeovers was approved for adoption inDecember 2003. In order to reach agreement between MemberStates, two of the fundamental provisions of the Directive (prohibitionon the use of defensive tactics without shareholder approval and theuse of multiple voting rights) have been made optional. Thisapproach has been widely criticised for failing to create a levelplaying field across Europe in these two key areas of takeoverregulation.

Introduction 1.2.2–1.5.2


1.2.2 Impact on UK takeover regulationThe Directive is intended as a “minimum standards” directive. Thismeans that the UK can maintain higher regulatory standards thanthose specified in the Directive and accordingly it is not expectedthat the Directive will, in practice, have a significant impact on theconduct of takeovers in the UK.

1.3 The Rules Governing Substantial Acquisitions of Shares

1.3.1 BackgroundThe Rules Governing Substantial Acquisitions of Shares (SARs) are,like the Code, non-statutory and are also administered by the Panel.They regulate stakebuilding activities, whether carried out in isolationor before a takeover, and apply up to the time that any formaltakeover offer is announced. The SARs have a narrower applicationthan the Code. They apply to transactions in shares of companiesresident in the UK, the Channel Islands or the Isle of Man, but only iftheir shares are traded on the London Stock Exchange, dealt in onthe Alternative Investment Market or traded on OFEX.

1.3.2 PurposeThe SARs were introduced to restrict significant stakebuilding over ashort period of time. The aim is to ensure that small shareholders arenot excluded when substantial acquisitions are taking place and toenable the boards of potential offerees to react to stakebuildingactivities by possible predators.

1.3.3 Tender offersIf a person wishes to acquire a large stake (up to 29.9 per cent) morespeedily than ordinarily permitted under the SARs, they may invitetenders from shareholders wishing to sell their shares rather thanbuying them in the market. Special rules apply to tender offers,which are relatively rare in the UK.

The SARs are dealt with more fully in section 4.

1.4 Statutory and other regulatory provisions affectingtakeovers

The Code is not the only set of rules governing takeovers. Certainstatutory provisions also apply to the conduct of takeovers. Thispublication briefly covers these statutory provisions and theirinteraction with the Code. It also refers to the Listing Rules which willbe relevant, where either the offeror or the offeree is a listed company.

1.5 Treasury shares

1.5.1 Shares held in treasuryCompanies that buy back their own “qualifying shares” out ofdistributable profits can elect to hold the shares in treasury forsubsequent resale, instead of immediately cancelling them. “Qualifying shares” are broadly shares which are admitted to theOfficial List and traded on the London Stock Exchange or sharestraded on AIM or their equivalents in other EEA states. On a takeover,an offeror can (and presumably would) exclude treasury shares fromthe offer.

1.5.2 Impact on the Code and SARsThe Panel takes the view that for the purposes of the Code and theSARs, it is only shares held in issue outside treasury which arerelevant. Accordingly, in calculating percentage holdings of votingrights, share capital and relevant securities, shares held in treasuryare ignored.

PRE-BID PLANNING

2.1 Secrecy

2.2 Management team and professional advisers

2.3 Obtaining information on the offeree

2.4 Approaching the offeree board

2.5 Consideration and finance

2.6 Structure of the offer

2.7 Acting in concert

Pre-bid planning 2.1–2.3.1


2.1 Secrecy

2.1.1 Pre-bid secrecyThe need for secrecy and security before a takeover announcementcannot be over-emphasised. Not only is secrecy a matter of goodcommercial sense, it is also an important requirement of the Code(Rule 2.1). Before an announcement, the fundamental obligation isthat all persons with confidential information concerning an offer orcontemplated offer must treat that information as secret and mayonly pass it to another person on a “need to know” basis andprovided that they are made aware of the need for secrecy.

2.1.2 Consequences of rumour, speculation or an untowardshare price movementIf the offeree becomes the subject of rumour or speculation or thereis an untoward movement in its share price (a movement of 10 percent is generally regarded as “untoward” for these purposes), thePanel may decide that an announcement is required. This may meanthe possibility of a takeover becoming public earlier than planned.Such an announcement is only required where there is evidence of apossible leak and the Panel will take into account all possible factorsbehind a price rise before reaching its decision. Timely consultationwith the Panel is essential in these circumstances. Before a potentialofferor has approached the offeree, the obligation to consult and tomake any required announcement rests with the offeror, butfollowing an approach responsibility normally shifts to the offeree.There are a number of other events which may also require anannouncement to be made (see Rule 2.2). All of these are aimed atminimising the risks of a false market in the offeree’s shares.Members of the offeror and (where relevant) offeree boards shouldtherefore ensure that a limited number of parties are involved indiscussions both to comply with the secrecy requirement of theCode and to avoid the need for a premature announcement.

2.2 Management team and professional advisers

2.2.1 Appointment of board committeeIt is important, particularly in a hostile takeover, that all decisions aretaken promptly and that any issues are dealt with swiftly andefficiently. It is therefore advisable for the offeror and the offeree toappoint a board committee at the outset to deal with issues thatarise during the course of the bid.

2.2.2 Collective responsibility of the BoardWhilst the Code acknowledges that it is usual for boards ofdirectors to delegate day-to-day conduct of an offer to individualdirectors or a committee, the Code stresses the collectiveresponsibility of the board. The board as a whole is obliged toensure that proper arrangements are in place to enable it to monitorthe conduct of the offer.

2.2.3 Professional advisersProfessional advisers who are familiar with takeovers should beselected. A team should be assembled at an early stage, generallyconsisting of investment banks (or other financial advisers), brokers,lawyers, accountants and, often, a public relations adviser. Thefinancial adviser to the offeree company (the Rule 3 adviser) willadvise the offeree board in relation to the offer and the substance of its advice must be made known to offeree shareholders in theoffer documentation.

2.3 Obtaining information on the offeree

2.3.1 Supply of informationThe Code permits an offeree company to provide information inconfidence to a bona fide potential offeror and in recommended bidsa broad range of non-public information is commonly requested bythe offeror. However, offeree companies are sometimes reluctant tocomply fully with such requests due to Rule 20.2 which provides thatany information which has been supplied to a potential offeror must

2 PRE-BID PLANNING

2.3.1–2.4.4 Pre-bid planning


on request be provided to any other potential competing offeror,even if less welcome. The potential competing offeror is not allowedto request information in general terms but must specify theinformation required. This does not normally present an obstacle asexperienced advisers have widely drawn “shopping-lists” of specificitems which are likely to cover all the information that has alreadybeen supplied to the preferred suitor.

2.3.2 Confidentiality and standstill undertakingsIf it is proposed to supply information to a potential offeror, theofferee usually obtains a suitable confidentiality undertaking first. Theagreement entered into with the original potential offeror may containan undertaking not to buy shares or launch a hostile offer, but theofferee is not permitted to make the provision of information to otherless welcome bidders under Rule 20.2 conditional upon such astandstill undertaking.

2.3.3 Hostile bidTo ensure that its intentions remain confidential, an offeror who doesnot anticipate a recommendation from the offeree board usually hasto rely only on publicly available information on the offeree. If theofferee is a listed company, it will have published information aboutitself, principally in the form of its annual accounts and interimstatements. In accordance with the Listing Rules, it should also havemade announcements of any major new developments in its sphereof activity which may lead to substantial movement in the price of itslisted shares. A significant amount of information on a listed offereeshould therefore be publicly available, although this should not berelied upon as being comprehensive.

2.3.4 Dealings in offeree sharesThe Code prohibits persons (other than the offeror) who know aboutan offer or potential offer from dealing in offeree shares before theoffer or approach has been announced (Rule 4.1). Knowledge of itsown possible offer does not prevent the offeror from dealing in

offeree shares. However, it may be prevented from dealing by law ifany information it has received is price-sensitive inside information(see section 4.2). An offeror should therefore be aware that havinginformation about the offeree may limit pre-bid share purchases anddetailed advice should be sought before requesting any suchinformation.

2.4 Approaching the offeree board

2.4.1 Recommended or hostile?Receiving the recommendation of the offeree board greatlyincreases the likelihood of an offer succeeding in the absence of ahigher offer. If, however, a takeover is “hostile”, there is usually afierce battle with the outcome sometimes unknown until the final dayof the bid.

2.4.2 Timing of approachAlthough a recommendation is one of the most important factors insecuring a successful outcome, it may not always be appropriate toapproach the offeree board until shortly before the offeror is ready toannounce its offer. In such circumstances, if the offeree board decidesnot to recommend, the offeror can quickly launch a hostile offerwithout allowing time for the offeree board to marshall its defences.

2.4.3 Method of approachThe conversation constituting the pre-bid approach should either bemade by the offeror directly to the offeree board or by the offeror’sfinancial adviser to the offeree’s financial adviser. The offeror’sfinancial adviser will advise on how the approach should be madeand will ensure that any approach is realistic and credible in order tobe taken seriously.

2.4.4 Shareholders’ interestsIn considering its response, the offeree board must disregard its owninterests and instead consider the interests of the company,

Pre-bid planning 2.4.4–2.5.3


including the interests of its shareholders, employees and creditors(General Principle 9). After it has received an approach, the offereeboard is prohibited from taking any action which could frustrate anoffer without the consent of offeree shareholders in general meeting.It is a fundamental principle of the Code that it is for an offeree’sshareholders, not the board, to decide whether or not an offershould succeed (General Principle 7).

2.4.5 Subsequent recommendationAn offeree board which at first rejects an approach may agreesubsequently to recommend an offer to shareholders, particularly ifthe offer price is increased or an element of cash is introduced towhat was previously an all-share offer. The decision to recommendmay be reached either before the offer is launched or during thecourse of a hostile offer. Where a hostile offer becomes unconditional(ie succeeds) the board of the offeree company will invariably changeits advice to shareholders and recommend acceptance on the basisthat the alternative is to remain a minority shareholder, usually in adelisted company.

2.4.6 Break fees It is increasingly common in the UK for offeree companies to agreeto pay a “break fee” to a potential offeror to provide an inducementto the offeror to make its offer. The triggers for payment of such abreak fee vary, but they will often be payable by the offeree in theevent that any competitive bid for the offeree is successful or theofferee board withdraws its recommendation. A break fee must notexceed 1 per cent of the offeree’s value and must be confirmed bythe offeree’s financial adviser as being in the best interests of offereeshareholders. The offeree board should always seek detailed legaladvice before agreeing a break fee with an offeror to ensure fullcompliance with the Code and applicable legal and regulatoryrequirements.

2.5 Consideration and finance

2.5.1 Forms of considerationAn offer may consist of cash alone, shares in the offeror, some other securities of the offeror such as debentures or loan notes, or any combination of these. Cash has a number of obviousadvantages for a selling shareholder. Offeree shareholders subject to UK capital gains tax may, however, prefer to receive shares orother paper (eg loan notes), as they may be able to defer liability forcapital gains tax. If the offeror is offering securities, and particularlyshares, these would usually be listed on a recognised stockexchange and so have a reasonable degree of marketability. If thesecurities are not listed, as is normally the case with loan notes, theCode requires the offer document to contain an estimate of theirvalue by an appropriate adviser.

2.5.2 Cash or cash alternative offerIf cash is offered, it may come from the offeror’s own resources orthe offeror may finance its offer by an issue of shares. If it is offering acash alternative to a share offer, the offeror can arrange for itsinvestment bank or broker to underwrite the offer by agreeing toacquire the consideration shares at the fixed price which acceptingshareholders would be entitled to receive if they were to accept theoffer for cash. Alternatively, it may finance the cash element of itsoffer by a rights issue. A flexible form of rights issue for the financingof takeovers, known as a “trombone” rights issue, may sometimesbe used where the cash raised (or a proportion of the cash raised)depends upon the success of the offer.

2.5.3 Bank financeThe offer may also be financed by bank borrowings. If bank financeis required, the question of security for the borrowings may arise. It isunlawful for a UK company or its UK subsidiaries to give financialassistance (including by way of guarantee, security or indemnity) forthe purchase of the company’s own (or, in the case of subsidiaries,their holding company’s) shares or for the purpose of reducing or

2.5.3–2.6.2 Pre-bid planning


discharging any liability incurred in acquiring the shares (section 151Companies Act 1985). This complicates having recourse to theofferee’s assets for financing purposes, even after the conclusion ofa successful takeover. Pending successful conclusion of a takeoverand compliance with the “whitewash” procedure described below,security available to a lending bank is limited to a pledge of theofferor’s shares in the offeree (unless the offeror has other assets itcan charge).

2.5.4 Financial assistance – whitewashIn certain circumstances private companies are permitted to givefinancial assistance (such as granting security over their assets) inconnection with the purchase of their own shares, subject tocompliance with detailed statutory procedures. To be certain ofbeing able to re-register the offeree as a private company andauthorise the giving of the financial assistance, the offeror willgenerally wish to acquire 100 per cent of its issued share capital.This can be done either by a scheme of arrangement (see section2.6.2) or, if the offeror secures 90 per cent acceptances of an offer, by compulsory acquisition (see section 8). Detailed legal advice willbe required.

2.5.5 Cash confirmationIn a cash offer, the offeror’s financial adviser will want to be satisfiedthat the cash is in place before the offer is formally announced, as itmust confirm in the offer document that sufficient cash resources areavailable to finance the offer (Rule 24.7). The provision of financemust not be subject to conditions precedent or a material adversechange condition. The offer document must also describe how theoffer is to be financed and the source of the finance (Rule 24.2(f)).

2.6 Structure of the offer

Tax and accounting issues, as well as more general commercialconsiderations, will affect the structure of the offer.

2.6.1 OfferOffer document: The vast majority of offers in the UK are made byway of an offer document. The document, constituting an offer toacquire shares, is sent to offeree shareholders. Shareholders maythen accept the offer either by completing and returning a form ofacceptance or, if the offeror so provides in the terms of the offer, byelectronic acceptance through CREST. If a shareholder accepts, heis bound to transfer his shares to the offeror subject to satisfaction orwaiver of the conditions of the offer.

Advantages: This method is most frequently adopted in preferenceto a scheme of arrangement because it does not involve a courtapproval process and has certain other advantages over a scheme:

• in order for the offer to succeed (that is for the offeror to acquirecontrol of the offeree) the offeror needs to achieve any level over50 per cent of the voting share capital as compared to (broadly) a75 per cent threshold under a scheme;

• the timetable to achieve control can be much shorter than in thecase of a scheme and, in a recommended offer, control canfrequently be obtained within a month;

• it is less cumbersome and more flexible than a scheme andenables the offeror to adjust its terms or to react promptly to acompeting offer; and

• an offer, unlike a scheme, can be made without the co-operationof the offeree board.

2.6.2 Scheme of ArrangementStatutory procedure: A scheme of arrangement is a mechanismprovided by the Companies Act 1985 under which a takeover canbe effected by the passing of resolutions by the shareholders of thetarget company and with the approval of the court.

Main elements of a scheme: The main points to note about ascheme are as follows:

Pre-bid planning 2.6.2–2.7.3


• unlike an offer, a scheme may be structured so that no stamp duty(currently 0.5 per cent) is paid by the bidder on the acquisition ofthe target company’s shares;

• a scheme requires the approval of a majority in numberrepresenting 75 per cent in value of the target shareholders votingon the necessary resolutions; however, once approved, allshareholders are bound by the scheme;

• a scheme is less flexible than an offer – all documentation has tobe approved by the court and therefore all material changes alsoneed to be approved by the court; this makes it harder for a bidderto react quickly if a competing bid arises;

• whilst a scheme may be slower in terms of acquiring effectivecontrol (ie 50 per cent) it will generally be quicker in achieving 100per cent; this means that the target can be re-registered as aprivate company and authorise the giving of financial assistancemuch more quickly than under an offer and sometimes as part ofthe scheme itself; and

• a scheme is a process promoted and undertaken by the target,requiring the full co-operation of the target and cannot, therefore,be used in hostile situations.

2.6.3 “Newco” and dual holding company structures“Newco” structure: Occasionally a new company is formed whichmakes an offer to acquire both companies. This may be used wheretwo companies wish to achieve the nearest possible equivalentunder English law to a merger.

Dual holding company structure: A cross-border takeover may bestructured as a merger using a dual holding company structurewhich involves the retention of two holding companies in differentjurisdictions. By way of a series of contractual arrangements, thebusinesses of the two holding companies are held jointly whilstallowing the holding companies to retain their own separate legalidentities and separate stock exchange listings.

Panel jurisdiction: The Panel takes jurisdiction over transactionsusing both of these structures where one of the companies fallswithin the scope of the Code even though in both cases neitherparty acquires control over the other.

2.7 Acting in concert

2.7.1 DefinitionMany references will be found in the following sections to the offerorand its “concert parties”. These are persons who are deemed underthe Code to be “acting in concert” (ie acting together) with the offeror,that is “persons who, pursuant to an agreement or understanding(whether formal or informal), actively co-operate, through theacquisition by any of them of shares in a company, to obtain orconsolidate control of that company” (see the Definitions section of theCode). Although the definition appears relatively clear, in practice thePanel applies it very broadly and will always look at the facts of aparticular situation in order to establish whose actions should betreated as those of the offeror for the purposes of the Code.

2.7.2 Presumption of acting in concertCertain people are presumed by the Code to be acting in concertunless the contrary can be established (for example, a company withits parent and subsidiary companies and with any of its directors).Rebutting these presumptions is generally not easy.

2.7.3 Implications of acting in concertThe concept of acting in concert is perhaps most important in thecontext of Rule 9 which requires a person to make a general offer forall shares of a company when that person and its concert partieshave acquired 30 per cent or more of the voting rights of suchcompany (see section 5.2). The “concert party” concept also hasimplications for other Rules of the Code and these are summarisedon page 12. Owing to the significance of these, it is essential for anofferor (or other major shareholders in a Code company) to establishat an early stage who might be considered by the Panel to be itsconcert parties.

2.7.3 Pre-bid planning


Implications of acting in concert with an offeror

• Persons acting in concert with an offeror may not sell shares in the offereeduring the offer period without the Panel’s consent (Rule 4.2).

• When an offer is contemplated but prior to its announcement, personsacting in concert are prohibited from dealing in the offeree’s shares savewhere the dealing confers no benefit on the concert party (Note 3 on Rules4.1 and 4.2).

• Acquisitions by persons acting in concert are treated as acquisitions by theofferor for the purposes of Rules 5 (timing of acquisitions), 9 (mandatoryoffers) and 11 (nature of consideration).

• Purchases made in the 12 months prior to commencement of and/orduring the offer period (for Rules 9 and 11.1) and in the three months priorto and/or during the offer period (for Rules 6 and 11.2) by persons acting inconcert will have an impact on the minimum value of the offer and thenature of the consideration to be offered and, in the case of Rule 9, theconditions attached to the offer.

• Purchases by persons acting in concert above the offer price after the offerhas been announced will result in the offeror having to increase its offerprice (Rule 6.2).

• Purchases by persons acting in concert may result in the Panel refusingconsent for a partial offer or a waiver of Rule 9 (Rule 7.3).

• If a concert party is also deemed to be an “associate”, daily disclosure ofdealings is required during the offer period (Rule 8).

• Concert parties may not enter into deals with favourable conditions withany shareholders (Rule 16).

• Initial announcement and subsequent announcements of acceptancelevels must contain details of any shares in the offeree company held bypersons acting in concert with the offeror (Rules 2.5 and 17.1).

• Offer document must disclose shares held in both the offeror and theofferee companies by persons acting in concert and any dealings by themin the past 12 months (Rule 24.3).

• The restriction on acquisitions of shares for 12 months after an offer haslapsed or been withdrawn applies to persons who acted in concert duringthe original offer or who subsequently act in concert (Rule 35.1).

• Acquisitions of shares by persons acting in concert above the offer priceare prohibited within six months of the closure of the offer (Rule 35.3).

Note: Once the Panel has ruled that a group of persons is acting in concert, clearevidence will have to be produced to persuade it that this is no longer theposition.

COMPETITION

3.1 Impact of competition issues on a takeover

3.2 EC Merger Regulation

3.3 Reform of the ECMR

3.4 UK regime under Enterprise Act

3.5 Effect of competition regulations on offer timetable

Competition 3.1–3.1.5


3.1 Impact of competition issues on a takeover

3.1.1 Investigation by competition authoritiesThe EU and UK competition authorities have the power toinvestigate a takeover offer where certain thresholds are met. ThePanel itself has no involvement in deciding competition issues. If adetailed investigation is initiated, an offer will normally be required tolapse while it takes place. It is therefore vitally important at theoutset, in order to ensure that the offer goes through with theminimum cost, disruption and inconvenience, for both the offerorand the offeree to:

• consider the likely reaction of all relevant competition authorities;

• collate the information likely to be required to deal withcompetition issues; and

• consider possible divestments or other courses of action whichcould address the anticipated concerns of any relevantcompetition authority.

3.1.2 Offeree defence tacticIn the context of a hostile bid, as a defensive tactic, an offeree may lobby the competition authorities for an investigation. An offerlapsing will give an offeree valuable breathing space in which tostrengthen its defences and to prepare to ward off any renewedapproach. It may also lead to interest from other more welcomeofferors.

3.1.3 National or supra-national jurisdictionWhether a bid is welcome or otherwise, it will first be necessary todetermine which competition authority has jurisdiction to examinethe takeover. If certain turnover thresholds, which are discussedbelow, are met, the takeover will fall within the EC Merger Regulation(ECMR). Where the ECMR applies, the European Commission(Commission) has exclusive power to investigate (the so called “one-stop shop” principle). Where a takeover does not meet the ECMR

thresholds, it should be examined to see if it falls within thejurisdiction of the UK Office of Fair Trading (OFT), or possibly other EU national competition authorities. Depending on thecircumstances, other national competition authorities, both EU andnon-EU, may also have jurisdiction to investigate the offer. This canpotentially lead to multiple filings.

3.1.4 Competition clearance prior to completion of takeoverTakeovers falling within the ECMR require pre-notification to theCommission and cannot be completed pending clearance. Fortakeovers that are subject to the UK competition rules, there is nolegal requirement to notify the competition authorities, either pre- or post-completion. However, in cases where there might becompetition issues, clearance is usually sought to avoid the risk of a reference to the Competition Commission. The procedures underthe ECMR and the UK regime involve a preliminary evaluation,followed by a detailed investigation in cases where it is thought thatthere may be serious competition issues.

3.1.5 Disclosure of board and shareholder documents whenseeking merger clearanceIt is important to be aware that where submissions are made to competition authorities, the parties to the transaction are required to supply a large number of documents connected with the transaction. These documents are likely to include board andshareholder meeting minutes, presentations to the board andshareholders and reports and studies prepared for the board,including reports and any other documents prepared by any thirdparty, such as accountants, financial advisers and consultants.For this reason, care is needed in the preparation of all documentsrelating to the takeover. Whilst the inclusion of informationhighlighting the benefits of a transaction cannot be avoided, careshould be taken to ensure that documents do not contain materialwhich could prejudice the prospects of the transaction being clearedby the relevant competition authorities.

3 COMPETITION

3.2–3.2.5 Competition


3.2 EC Merger Regulation

3.2.1 ApplicationThe ECMR applies to “concentrations” having a “Communitydimension”. The definition of concentration is broad and catchescases where companies merge or one company acquires “decisiveinfluence” over another company. This may occur at shareholdinglevels as low as 15 per cent.

3.2.2 ThresholdsA “concentration” will have a “Community dimension” where:

• the combined aggregate worldwide turnover of all the partiesexceeds €5 billion (this is intended to exclude mergers betweensmall and medium-sized companies); and

• the aggregate Community-wide turnover of each of at least two ofthe parties is more than €250 million (this is intended to excluderelatively minor acquisitions by large companies or acquisitionswith only a minor European dimension); unless

• each of the parties achieves more than two-thirds of its aggregateCommunity-wide turnover within one and the same Member State(this is intended to exclude cases where the effects of the mergerare felt primarily within a single Member State where it is moreappropriate for the national competition authorities to deal with it).

In addition, a concentration that does not meet the above thresholdswill nevertheless have a “Community dimension” if:

• the combined aggregate worldwide turnover of all the partiesexceeds €2.5 billion; and

• the aggregate Community-wide turnover of at least two of theparties is more than €100 million; and

• in each of at least three Member States, the combined aggregateturnover of all the parties is more than €100 million; and

• in each of the three Member States included above, the aggregateturnover of each of at least two of the parties is more than €25million; unless

• each of the parties achieves more than two-thirds of its aggregateCommunity-wide turnover within one and the same MemberState.

3.2.3 Commission reference to national competition authoritiesand vice versaIt is also possible for the Commission to refer certain takeovers to thecompetition authorities of individual Member States for investigationeven though they are above the “Community dimension” thresholds.This is the case where the effect of the takeover will be felt most inthat Member State and it is best placed to examine that particulartransaction. The converse is also possible, allowing Member Statesto refer cases to the Commission where they do not meet the ECMRthresholds but where the transaction would affect trade betweenMember States. In practice these provisions have only been appliedto a relatively small number of cases.

3.2.4 Calculation of thresholdsThe threshold figures need to be calculated by reference to theparties’ most recent financial year and official exchange rates(obtained from the European Central Bank and/or the Commission)must be used to convert national currencies to euros.

3.2.5 Timing of notificationTakeovers caught by the ECMR must be notified to the Commissionwithin one week of whichever is the earliest of the conclusion of anagreement, the announcement of a public offer or the acquisition ofa controlling interest, although extensions are normally granted ifrequested. The notification must contain extensive information aboutthe parties and the affected market(s). The transaction may not beimplemented (subject to limited exceptions) prior to approval.

Competition 3.2.6–3.4.3


3.2.6 Lapse of offerThe Commission has one month for an initial evaluation of thetransaction at the end of which it must either approve it or, if itdecides that there are serious doubts as to a transaction’scompatibility with the competition rules, it has a further four monthsto complete a detailed investigation. If the takeover is subject to theCode and it falls within the ECMR, it must be a term of the offer thatit will lapse if a detailed four-month investigation is instigated prior tothe first closing date or the date when the offer becomes or isdeclared unconditional as to acceptances, whichever is the later(Rule 12).

3.2.7 SanctionsThe Commission has the power to block a transaction or to imposeconditions (including divestiture) and can impose significant fines inrespect of, for example, failing to notify the takeover or supplyingincorrect information.

3.3 Reform of the ECMR

3.3.1 BackgroundThe ECMR is currently undergoing reform and the changes are dueto come into effect in May 2004. The turnover thresholds referred toabove are not due to change. The Commission, however, wants toencourage more referrals from the Commission to nationalcompetition authorities and vice versa to ensure that the best placedauthority acts.

3.3.2 New measuresThe reform package introduces a number of other measuresdesigned to provide the parties concerned with more legal certaintyand more transparent decision-making. Parties will be able to notifya takeover before conclusion of a binding agreement and the formalrequirement to notify within one week of concluding an agreementwill be abolished. The time frames within which the Commission caninvestigate the takeover will be extended by one week for the initialevaluation and by three weeks for the detailed investigation.

3.4 UK regime under Enterprise Act

3.4.1 Application and thresholdsThe Enterprise Act 2002 (EA 2002) requires that a takeover fallingoutside the ECMR will be subject to UK competition rules if it is a“relevant merger situation” which will be the case where two or moreenterprises (one of which is carried on in the UK) cease to be distinctand if either:

• the value of the turnover in the UK of the company being takenover exceeds £70 million (previously the test was if the assetsexceeded £70 million); or

• it will create or enhance a 25 per cent share of the supply in theUK (or a substantial part of it) of any goods or services.

3.4.2 OFT procedureThe OFT will conduct an initial evaluation of the merger. It will thendecide (without reference to the Secretary of State for Trade andIndustry as was previously the case) whether to (i) refer it to theCompetition Commission for further investigation; (ii) acceptundertakings in lieu of a reference; or (iii) let the merger proceedwithout further investigation.

3.4.3 ClearanceThere is no obligation to pre- or post-notify qualifying mergers in theUK. However, seeking clearance avoids the risk of there being areference to the Competition Commission further down the line. Ifthe takeover is notified using a statutory Merger Notice, the OFT willhave up to 30 working days to consider whether to make areference to the Competition Commission, consisting of 20 workingdays for an initial evaluation period which may be extended by afurther 10 working days. There is also a non-statutory procedurewhich generally ensures a decision within 45 working days.

3.4.4–3.5 Competition


3.4.4 “Substantial lessening of competition” testIn evaluating the takeover, the OFT will examine whether thetransaction will result in, or could be expected to result in, asubstantial lessening of competition within any market or markets inthe UK for goods or services.

3.4.5 Reference to the Competition CommissionIf a reference is made, the Competition Commission must act withina fixed timetable. It will have 24 weeks (extendable by eight weeks in certain circumstances) to prepare a report. The CompetitionCommission will decide what action, if any, to take in respect of the merger.

3.4.6 Status of the OFT and Competition CommissionThe EA 2002 transforms the OFT and the Competition Commissionfrom essentially advisory bodies, whose previous function was toenable the Secretary of State to come to a decision, to independentbodies with decision-making powers who, in all but exceptionalcases, will be free from political interference.

3.4.7 Non-binding guidanceParties can approach the OFT for pre-notification confidentialguidance on whether the case is likely to be referred to theCompetition Commission, although the OFT will only be able to givenon-binding guidance.

3.4.8 Lapse of offer on referenceAn offer subject to the provisions of the Code must include a termthat the offer will lapse if there is a reference to the CompetitionCommission prior to the first closing date or the date when the offerbecomes or is declared unconditional as to acceptances, whicheveris the later (Rule 12).

3.5 Effect of competition regulations on offer timetable

In summary:If a takeover falls within the ECMR:

• the offeror must notify the Commission within one week ofannouncing the bid (requirement likely to be abolished from May 2004);

• the transaction may not be concluded prior to approval;

• the Commission has one month following notification in which toconduct an initial evaluation (to be extended by one week fromMay 2004);

• if the Commission decides that the case raises serious doubtsand decides to conduct a detailed investigation the offer willnormally lapse under the Code. The Commission must completethe investigation within four months (to be extended by threeweeks from May 2004).

The great majority of the agreements notified to the Commission todate have been cleared after one month and were not subjected tothe four-month procedure.

If a takeover is a “relevant merger situation” for the purposes of theUK legislation:

• there is no legal requirement to notify the OFT – the system isvoluntary;

• the OFT has up to 30 working days to evaluate the transaction if aMerger Notice is submitted;

• if the takeover is referred to the Competition Commission the offerwill normally lapse under the Code. The Competition Commissionwill be given 24 weeks (extendable by eight weeks in certaincircumstances) in which to report.

ACQUIRING A STRATEGIC STAKE BEFORE AN OFFER

4.1 Introduction

4.2 Restrictions on stakebuilding activities

4.3 Impact of stakebuilding activities on offer terms

4.4 Disclosure

4.5 Soliciting shareholder support

Acquiring a strategic stake before an offer 4.1–4.2.2


4.1 Introduction

4.1.1 Tactical advantagesThere are a number of advantages to acquiring a stake in the offereebefore announcing an offer. It increases the chances of securingultimate control of the offeree and may deter rivals by addingcredibility and momentum to an offer. It may also lower the overallcost of the bid as it may be possible to buy shares in the market at aprice below the eventual bid price. Also, if a rival does emerge and isultimately successful at a higher price than the initial bid, the firstofferor who acquired a stake will have the consolation of a dealingprofit to offset its aborted bid expenses.

4.1.2 Consequences of stakebuildingWhile there are tactical advantages to acquiring a strategic stake, itis worthwhile to note that:

• stakebuilding activities which come to the attention of the marketare likely to force the offeree share price up and to that extent maybe self-defeating;

• stakebuilding can lead to loss of secrecy and surprise and maytrigger an announcement obligation if bid speculation results;

• purchases before the offer period may establish a minimum offerprice or lead to a requirement to offer a specific form ofconsideration;

• purchases carry the potential for loss if the bid is unsuccessful andno competing offeror emerges; and

• although shares bought in advance of an offer will count towardsthe levels needed to secure control of the offeree, they can make itmore difficult for the offeror to take advantage of the provisionsallowing for compulsory purchase of the outstanding minority (seesection 8).

4.2 Restrictions on stakebuilding activities

Stakebuilding is closely regulated by company law, the SARs andthe Code. The SARs restrict the speed with which a sizeable stakecan be acquired. The Code provides that market purchases will havecertain consequential effects on any subsequent bid and alsoprohibits acquisitions through certain thresholds (Rule 5). However,the insider dealing and market manipulation legislation may makesuch share purchases illegal, even though they would otherwise bepermitted. The main restrictions to be aware of are set out below:

4.2.1 Criminal Justice Act 1993 – Insider dealingIt is a criminal offence for an individual who has inside information asan insider to deal in securities that are price-affected securities inrelation to that information, to encourage another to deal, or to passon the information. Knowledge of an impending but unannouncedoffer will be inside information for the purposes of the legislation.However, it should not prevent stakebuilding by the offeror or itsagents as there is a defence available to persons acting with a viewto facilitating an offer if the only inside information they have isinformation about the offer, the offer price or the parties involvedarising directly out of their involvement with the transaction. Thisdefence would not, however, cover any confidential non-publicprice-sensitive information given to the offeror by the offeree duringthe course of negotiations, the receipt of which will prevent an offerordealing in the offeree’s shares until that information becomes publicor a recommended offer is announced.

4.2.2 Financial Services and Markets Act 2000 – Market abuseAn offeror must not engage in behaviour which amounts to “marketabuse”. In relation to securities traded on a prescribed market in the UK,behaviour amounts to market abuse where, very broadly: it involves themisuse of relevant information not generally available to the market; it islikely to distort the market in the traded securities; or it is likely to give afalse or misleading impression as to the market or price or value of

4 ACQUIRING A STRATEGIC STAKE BEFORE AN OFFER

4.2.2–4.2.4 Acquiring a strategic stake before an offer


securities. Knowledge of an impending but unannounced bid by apotential offeror is likely to constitute relevant information which is notgenerally available. However, a safe harbour is available for offerors andany concert parties stakebuilding where the only knowledge available tothem is the offeror’s intention to make a bid. Like the insider dealinglegislation, this safe harbour would not be available where an offerordealt on the basis of confidential non-public price-sensitive informationobtained from the offeree during the course of negotiations.

4.2.3 SARsThe SARs do not apply to holdings of less than 15 per cent or toholdings of 30 per cent or more. A holding of up to 15 per cent can(if there are willing sellers) be acquired in the stock market through aso-called “dawn raid”. Once that level is reached, if an offeror wishesto acquire shares more speedily than the SARs otherwise allow, itmust make a tender offer to take its holding to a maximum of 29.9per cent (see section 1.3.3). Subject to certain exceptions, the SARsprohibit the acquisition of shares or rights over shares of the offereecarrying 10 per cent or more of the voting rights in any seven days, ifthe resulting holding represents between 15 per cent and 30 percent of the voting rights. Once a formal takeover offer is announced,the SARs no longer apply. A summary of the application of the SARsto the acquisition of shares or rights over shares in an offereecompany is set out in the diagram opposite.

4.2.4 Rule 5Rule 5 of the Code restricts a person (including people acting inconcert with them) who holds shares (including, for these purposes,rights over shares) carrying less than 30 per cent of the voting rightsof a company, from acquiring additional shares which would result ina holding of 30 per cent or more of the voting rights in the company.In addition, a person holding shares with between 30 per cent and50 per cent (inclusive) of the voting rights may not acquire any moreshares. There are various exceptions to the rule, such as where the

Is it the only acquisition bythe acquiror of targetshares (or rights over

shares) during that day andthe preceding six days?

Does the acquisition withthe acquiror's current

holding amount to 15 per cent or more of voting rights in the target?

Will the aggregatedholdings exceed 29.9 per cent of voting rights in the target?

Will the acquisition whenaggregated with

acquisitions on that day andthe preceding six days

exceed 9.9 per cent of voting rights in the target?

SARs will notapply

SARs will notapply but Rules 5and 9 of the Code

will apply

Is the acquisitionfrom a singleshareholder?

Permitted bySARs

Is the acquisitionof more than

9.9 per cent of voting rights

in the target?

Is the acquisition madeimmediately prior to a

tender offer or firmrecommended offer

announcement or withtarget board approval and

conditional on offerannouncement?

No

Yes

Yes Yes

Yes

Yes

Yes No

No

No

No

Not permitted bySARs

Permitted bySARs

No

Yes

No

Application of the SARs to the acquisition of shares or rights over sharesin the offeree company

Acquiring a strategic stake before an offer 4.2.4–4.4.1


purchase of shares is from a single shareholder and it is the onlypurchase in a seven-day period. Rule 5 of the Code does not applywhere the person has more than 50 per cent of the voting rights.

4.2.5 Listing RulesUnder the Listing Rules, a listed company cannot, without priorshareholder approval, acquire shares for a consideration equivalentto 25 per cent or more of its gross assets, net profits, turnover or itsmarket capitalisation.

4.3 Impact of stakebuilding activities on offer terms

4.3.1 Mandatory offersMarket purchases may have an impact on the terms of anysubsequent bid. Offerors should be particularly wary of Rule 9. Thisprovides that where a person acquires shares which, taken togetherwith shares held by concert parties, carry 30 per cent or more of thevoting rights of a company, that person must make a general cashoffer to shareholders. The disadvantages of a Rule 9 or mandatoryoffer are discussed in section 5.

4.3.2 Minimum offer price and nature of considerationIn addition, market purchases before a bid may establish a minimumoffer price as an offer must be on no less favourable terms than anyshare purchases made in the preceding three months (Rule 6.1). Inthe case of Rule 9 offers, the highest price paid for offeree shares inthe preceding 12 months determines the price at which the offermust be made (Rule 9.5). Depending on the number of sharesbought in the market, an offeror may find it has to make its offer incash or with a full cash alternative: if 10 per cent of the offeree’sshares are acquired for cash during and in the 12 months before theoffer period, all shareholders must be offered cash at the highestprice paid during that period (Rule 11.1(a)). The acquisition of even asingle share for cash during the offer period will give rise to anobligation to make the offer in cash or with a cash alternative (Rule

11.1(b)). In addition, if 10 per cent of the offeree’s shares areacquired for securities during and in the three months before theoffer period, the offeror will normally be required to offer suchsecurities on the same basis to all shareholders (Rule 11.2).

4.3.3 No special dealsIt is a general rule that an offeror cannot offer selected shareholdersspecial deals as an incentive to sell their shares unless these areextended to all shareholders (Rule 16). This Rule is considered inmore detail in section 6.5.

4.3.4 Compulsory acquisition of the minorityAn offeror must also bear in mind that it must acquire 90 per cent ofthe shares to which its offer relates to be able to acquire the minoritycompulsorily. Shares bought prior to posting of the offer documentwill not count towards this threshold. For more information onacquiring the minority, see section 8.3.

4.4 Disclosure

Non-Code requirementsBefore an offeror has announced its offer or become subject to theSARs, the principal requirements regarding disclosure of sharepurchases are contained in the Companies Act 1985 and (for listedcompanies) the Listing Rules.

4.4.1 Companies Act 1985 and Listing RulesThe Companies Act 1985 requires an acquisition of a shareholdingof 3 per cent or more to be disclosed to the company concernedwithin two business days. The Listing Rules then require a listedofferee to notify a Regulatory Information Service by the end of thenext business day. Further changes which take the holding througha whole percentage figure must also be notified, as must changes inparticulars previously notified. Special rules apply where there is anagreement for the acquisition of shares: the various parties’ holdings

4.4.1–4.4.6 Acquiring a strategic stake before an offer


are aggregated for the purposes of disclosure to preventsurreptitious warehousing of shares. Even an acquiror of a stake ofless than 3 per cent risks an investigation into its ownership.Shareholders of a public company can have their voting rights“frozen” if they fail to disclose information about the underlyingbeneficial ownership if requested to do so by the company.

4.4.2 Offeror notification under the Listing RulesA listed company is required to announce the details of anytransaction where the price paid exceeds 5 per cent of its grossassets, net profits, turnover or its market capitalisation. Separatepurchases of the offeree’s shares are aggregated for this purpose.The disclosure requirements set out in the Companies Act 1985 andthe Listing Rules continue to apply throughout an offer.

SARs and Code requirementsThe SARs and the Code impose accelerated disclosurerequirements to ensure there is no false market in the sharesconcerned and to prevent prices being manipulated by parties to theoffer or persons supporting them.

4.4.3 Disclosure under SARsThe SARs require disclosure the following day of an acquisition thattakes a purchaser and those acting in concert with it through 15 percent of the voting rights of the target or, if already at or above thislevel, of any movement through a whole percentage figure.

4.4.4 Code requirementsOnce an offer (or possible offer) has been announced in relation toan offeree company, the offeror or possible offeror (and certain otherparties connected with it) become subject to the stringent disclosurerequirements of the Code (see section 6.7.7). In addition, dealings by

any persons who own 1 per cent or more of any class of capital ofthe relevant company have to be disclosed the following day (Rule8.3). This will affect any stakebuilding activities by a potential rivalofferor if an offeree is already in an offer period. Where only thepossibility of an offer has been announced, the SARs will continue toapply alongside the Code rules.

4.4.5 Obligation to announce a possible offerNone of the Code’s disclosure rules requires the offeror to state itsintentions regarding a future offer. However, the Panel may requirethe offeror to do so if, for example, due to rumour and speculation itdeems it necessary to prevent a false market in the shares. Whensuch an obligation arises at a time when the acquiror iscontemplating making an offer but is not in a position to becommitted to making a firm offer, the offeror is normally permitted toannounce merely that it is considering making an offer for the offeree(Rule 2.4).

4.4.6 Clarification of intentions – “put up or shut up”Following an announcement of a possible offer, there is no fixeddeadline in the Code by which the offeror must clarify its intentions.Where the offeree is content for the uncertainty to continue, thePanel will not normally seek to intervene in the process. However, incertain circumstances, usually where the potential offeror isunwelcome, the offeree may request the Panel to intervene byimposing a deadline by which the offeror must clarify its intentions, ie it must “put up or shut up”. A “put up” is communicated by way ofa firm offer announcement pursuant to Rule 2.5 and a “shut up” byway of a no intention to bid statement (Rule 2.8). Statements ofintention not to make an offer will normally prevent an offer beingmade for six months.

Acquiring a strategic stake before an offer 4.5–4.5.2


4.5 Soliciting shareholder support

4.5.1 Irrevocable undertakingsAn alternative to buying shares in advance of an offer is to seekbinding commitments from substantial shareholders to accept theoffer once it is made. Such commitments, known as irrevocableundertakings, are often obtained from the offeree board inrecommended offers. Institutional shareholders may also beapproached on a confidential basis and, in potentially hostile offers,an offeror may be keen to obtain such undertakings to demonstratethe maximum possible support for its proposed bid. Compared witha shareholder selling in the market or directly to the bidder theadvantage of these commitments for shareholders is that theundertaking usually provides that they will obtain the benefit of anyincreased offer price. Often they provide that the undertaking willcease to apply in the event of a competing offer or a competing offer above a specified price.

4.5.2 Gathering of irrevocable commitmentsSuch undertakings, which count as rights over shares for thepurposes of the SARs and Rule 5, should be prepared by theofferor’s legal advisers to ensure, for example, that the mandatoryoffer provisions of the Code are not triggered. Contact withshareholders should be made through the offeror’s financial adviser.The Panel regulates the gathering of irrevocable undertakings fromindividuals and small corporate shareholders (Rule 4.3).

ACQUIRING CONTROL

5.1 Control

5.2 Mandatory (Rule 9) and voluntary offers

5.3 Partial offers

5.4 Whitewashes

Acquiring control 5.1–5.2.1


5.1 Control

5.1.1 Purchases up to but not including 30 per centSubject to certain timing restrictions, a potential offeror is permittedto acquire up to 29.9 per cent of the voting capital of the offereethrough purchases of shares without triggering an obligation tomake a general cash offer to all shareholders. A potential offeror maytherefore attempt to buy shares up to this level before attempting togain control of the offeree by means of its takeover offer.

5.1.2 Legal controlControl of a company is generally considered to be the ability todetermine the outcome of shareholders’ meetings and thecomposition of the offeree’s board. The percentage majority requiredfor most shareholders’ resolutions (including those for theappointment and removal of directors) is a simple majority (ie over 50per cent) although some require 75 per cent. Legal control istherefore achieved with any holding of greater than 50 per cent ofthe voting rights and, under the Code, an offer may not becomeunconditional unless the offeror achieves at least this level.

5.1.3 Absolute controlIn practice, it is unusual in the UK for a successful takeover offer toend with anything less than absolute control of the offeree, ie 100per cent of the voting rights. Once an offeror has acquired 90 percent of the shares to which its offer relates, it has the right to acquirethe minority compulsorily. The major advantage of owning the entireshare capital is flexibility in what can be done after the acquisitionhas been completed without concerns about actions for unfairprejudice being brought by the minority under the Companies Act. Inaddition, the offeror then receives all dividends paid by the offereewithout dividend “leakage” to minority shareholders.

On pages 28 and 29 there is a summary of the implications ofshareholdings at various percentage levels.

5.2 Mandatory (Rule 9) and voluntary offers

5.2.1 30 per cent threshold for effective control under the CodeAlthough legal control is achieved once 50 per cent of a company’svoting rights are acquired, a holder of less than 50 per cent can oftenin practice exert significant influence and control over the affairs of acompany. Accordingly, a holding of 30 per cent of a company’svoting rights is deemed under the Code to confer effective control.

5 ACQUIRING CONTROL

5.2.1 Acquiring control


Summary of implications of holdings at various percentage levels

Any amount• may be required to disclose upon request (section 212 Companies Act

1985);

• any dealing giving rise to rumour, speculation or an untoward movement inthe company’s share price (around 10 per cent) may mean anannouncement has to be made (Rule 2.2);

• offeror, offeree or associate required to disclose any dealings in relevantsecurities during an offer period (Rules 8.1 and 8.2);

• any dealing by a director must be notified within five business days (section324 Companies Act 1985) (listed company must also notify a RegulatoryInformation Service);

• any purchase made within the three months prior to the commencementof the offer period or during the period, if any, between the start of the offerperiod and an announcement of an offer will mean that the offer must beon no less favourable terms (Rule 6.1);

• any purchase for an amount in excess of the offer price after the offer isannounced and before the offer closes for acceptance will require revisionof the offer (Rule 6.2);

• any dealing for cash during the offer period may lead to a requirement for acash offer or cash alternative (Rule 11.1(b)).

1 per cent• 1 per cent shareholders must disclose any dealings made during an offer

period (Rule 8.3).

3 per cent• must disclose interest to the target (section 198 Companies Act 1985)

(listed target must also notify a Regulatory Information Service).Subsequent dealings must be disclosed if holding reduced below 3 percent or increased or reduced through a whole percentage point.

5 per cent• become an associate for the purposes of Rule 8 of the Code (disclosure of

dealings during the offer period).

10 per cent• disclosure level (rather than 3 per cent) for certain persons including

investment and unit trust managers (sections 198 and 199 Companies Act1985).

10 per cent or more• must not be built up within seven days if takes aggregate holding to 15 per

cent or more (Rule 1 SARs).

10 per cent in a year• possible requirement for cash offer or cash alternative (Rule 11.1).

10 per cent in 3 months prior to offer period• possible requirement for a securities exchange offer (Rule 11.2) (obligation

to make cash offer/cash alternative under Rule 11.1 unless sellerconsideration shares locked up).

Acquiring control 5.2.1


15 per cent• SARs apply to restrict timing of subsequent acquisitions (Rule 1 SARs);

• SARs disclosure threshold;

• subsequent dealings by a 15 per cent shareholder must be disclosed ifdealing takes shareholder through a whole percentage point (Rule 3SARs).

29.9 per cent• maximum limit for tender offer (Rule 4 SARs) and to avoid Rule 9 offer.

30 per cent• effective control acquired under the Code;

• possible requirement to bid for whole of target on achieving 30 per cent orincreasing any holding between 30 per cent and 50 per cent (Rule 9);

• may be prohibited from making further acquisitions (Rule 5);

• SARs cease to be applicable.

Any amount over 50 per cent• Companies Act 1985 subsidiary (and subsidiary undertaking) and legal

control; power to pass ordinary resolutions and thereby appoint/removedirectors, approve dividends, increase authorised capital, authorisedirector to allot shares, etc;

• offer capable of becoming unconditional as to acceptances (Rule 10) (a mandatory offer under Rule 9 must become unconditional at this level);

• Rule 5 and Rule 9 of the Code cease to be applicable.

75 per cent• power to pass special resolutions including resolution for re-registration as

a private company, resolution to approve financial assistance andliquidation;

• necessary vote to adopt a scheme of arrangement (section 425Companies Act 1985).

90 per cent• minorities may be entitled to require the offeror to buy their holdings

(section 430A Companies Act 1985).

90 per cent of shares subject to offer• power to compulsorily purchase minorities (section 428 Companies Act

1985).

95 per cent or more• minority shareholders have no specific power to prevent re-registration as

a private company.

5.2.2–5.2.6 Acquiring control


5.2.2 Mandatory offer triggerIt is a fundamental principle of the Code that where effective controlpasses, other shareholders should have the opportunity to sell theirshares at the same price to the new controller (General Principle 10).Rule 9 therefore requires that, except with the consent of the Panel,an offer must be made to all other shareholders by any person whoacquires, whether by a series of transactions over a period of time orotherwise, shares carrying 30 per cent or more of the voting rights ofa company. Such offers are referred to as “Rule 9” or “mandatory”offers. A similar obligation applies to a person who increases a stakeof between 30 per cent and 50 per cent. Acquisitions by personsacting in concert are taken into account for these purposes.

5.2.3 Terms of mandatory offerRule 9 offers must be in cash, or be accompanied by a full cashalternative, so that if offeree shareholders do not approve of thecontrolling shareholder they can exit completely rather than beingoffered only shares in the bidder. Such offers must be at a price notless than the highest price paid by the offeror or any of its concertparties in the preceding 12 months, in order that all shareholders canbenefit from the premium paid for control (Rule 9.5), and can only beconditional on acceptances for more than 50 per cent of the votingrights (Rule 9.3(a)). This may lead to the situation where an offerbecomes wholly unconditional but the offeror receives insufficientacceptances to acquire the minority compulsorily. The Code alsoprovides that acquisitions of shares should not be made whichwould trigger Rule 9 if the offer would be dependent on any otherconditions, for example, shareholder approval (Rule 9.3(b)).

5.2.4 Disadvantages of a mandatory offerThe obvious disadvantages of Rule 9 offers, being the requirementthat they are for cash and the restrictions on their conditionality,make them unpopular with offerors, who tend not to go through 30per cent before announcing their offer. Instead they choose to makea voluntary offer, having possibly acquired a lesser number of shares,in their own time and on the terms and conditions they deemappropriate.

5.2.5 Rule 9 applicable during voluntary offerSection 6 refers to the types of conditions to which offers aregenerally subject. One condition that must be included in all types ofoffer is the offeror acquiring over 50 per cent of the voting rights(Rule 10). This threshold can be set higher, but never lower. Anofferor can carry on buying shares in the market during the course ofits offer and these, as well as acceptances of the offer, will counttowards the 50 per cent level. However, Rule 9 continues to applyduring a voluntary offer (see section 6.7). For this reason, any marketpurchases made are often kept to a maximum aggregate holding(including concert parties) of 29.9 per cent. Acceptances of an offerare not counted for Rule 9 purposes.

5.2.6 Acceptance condition on voluntary offerA voluntary offer will usually be made conditional on the offerorreceiving acceptances in respect of at least 90 per cent of the sharesto which its offer relates. Only if this level of acceptances is achievedwill the offeror have the right to compulsorily acquire the shares ofnon-accepting shareholders and thereby obtain 100 per cent of theshare capital (see section 8).

Acquiring control 5.2.7–5.4


5.2.7 Waiving down the acceptance conditionIn practice, the offeror will reserve the ability to relax, and will in duecourse often relax, this 90 per cent condition by reducing thethreshold to such number of acceptances as will, when taken withshares the offeror already owns, exceed 50 per cent of the offeree’svoting share capital. The consent of any banks financing the offerwill, however, generally be required before the acceptance conditioncan be relaxed or “waived down” to below 90 per cent.

5.3 Partial offers

An offer is usually made for all shares of the offeree not owned by theofferor. Offers for less than 100 per cent are rare in the UK. Partialbids require special Panel consent (Rule 36.1). If a partial bid is madefor more than 30 per cent of the voting rights, it must be conditionalupon the approval of the offer by at least 50 per cent of the votingrights not held by the offeror (Rule 36.5). Shareholders who opposethe offer can vote against it, but will still be able to sell their shares atthe offer price if the bid succeeds.

5.4 Whitewashes

Major transactions may occasionally involve substantial issues ofnew shares by public companies. This may happen, for example,when shares are issued as consideration for an acquisition or newfunds are provided by way of a share subscription. Where such anarrangement would lead to a person (or a number of persons actingin concert) holding over 30 per cent of the voting shares of thecompany this would normally trigger a mandatory bid obligationunder Rule 9. However, there is a procedure under the Code

whereby such an obligation can be waived if there is an independentvote at a shareholders’ meeting and a majority (voting on a poll)approve the acquisition of the relevant stake by the incomingcontrolling shareholder.

This dispensation is known as “whitewash” and the detailedrequirements are set out in Appendix 1 to the Code. It is important tonote that a “whitewash” is only possible where the relevant person orpersons will exceed the 30 per cent threshold following an issue ofnew shares and not where a transfer of existing shares is involved.Full information and independent advice must be provided toshareholders so they can vote on a fully informed basis.

MAKING AN OFFER

6.1 Introduction

6.2 Announcing the offer

6.3 The offer document

6.4 Employee share schemes

6.5 Special deals

6.6 Documents for the offeror’s own shareholders

6.7 Share dealings during the course of the offer

Making an offer 6.1–6.1.5


6.1 Introduction

6.1.1 Formal offerA formal offer for shares of an offeree company is made by an offerdocument sent to the offeree’s shareholders. The formal offer willfollow an announcement of the offeror’s intention to make the offerwhich will include the offer’s conditions and principal terms. The offermust first be communicated to the board of the offeree or itsadvisers (Rule 1). Until an announcement is made, absolute secrecymust be observed (Rule 2.1).

6.1.2 Announcement to the marketThe Panel may require an immediate announcement to be made ifthere is rumour and speculation about a bid or a significantmovement in the offeree’s share price, irrespective of whether theofferor or offeree considers such an announcement to be premature.Responsibility for making such an announcement rests with theofferor until an approach has been made to the offeree, after whichthe offeree must generally assume responsibility. The Panel hasemphasised the need for the relevant company’s advisers to consultthe Panel in such circumstances and to have procedures in place tomonitor share prices and take steps, such as preparing draftannouncements and establishing arrangements for their immediaterelease, to ensure that that company is able to react swiftly, if so required.

6.1.3 Commencement of offer timetable Once the offeror has announced a firm intention to make an offer, theCode requires adherence to a strict timetable. The timetableattempts to strike a balance between giving shareholders sufficienttime to decide on the merits of a bid and preventing companies fromcoming under siege for an excessive period of time. The offerdocument must be posted within 28 days of an offer beingannounced, and the offeror must then receive sufficient acceptancesto be able to declare its offer unconditional as to acceptances by the

60th day after posting. Otherwise the offer must lapse (Rule 31.6)unless the parties agree a timetable extension. Generally the offerorcannot renew its offer for 12 months without offeree boardagreement (Rule 35). An outline bid timetable is set out on page 34.

6.1.4 Standards of care and responsibility statementsThe Panel regulates closely all documents issued to shareholders, alladvertisements published in connection with an offer and allstatements made during its course. The same standard of careapplies to documents and advertisements whether issued by thecompany itself or by an adviser on its behalf. They must be preparedwith the highest standards of care and accuracy, being up toprospectus standards (General Principle 5) and the information givenmust be adequately and fairly presented (Rule 19.1). Directors arerequired to take responsibility for all documents issued toshareholders and advertisements published in connection with anoffer. A responsibility statement to that effect must be included onthe face of the document or advertisement (Rule 19.2).

6.1.5 Profit forecasts and merger benefits statementsThe general requirement for absolute accuracy is reflected in specificrules of the Code relating to certain types of information contained inan offer document such as profit forecasts, asset valuations andmerger benefits (or synergy) statements. Where a profit forecast orasset valuation is included in an offer document, the Code providesthat such information must generally be independently reported on. Where a statement is made about the expected financial benefits ofa proposed takeover, the party making such a statement must incertain circumstances establish not only the basis for such a belief,but also must obtain and include in the offer document anindependent report from both its financial adviser and itsaccountants, confirming that such statement has been made afterdue care and consideration (Note 8 on Rule 19.1). Statementsrelating to improved earnings per share, or any earnings enhancingstatements, which are not intended to be profit forecasts, must

6 MAKING AN OFFER

6.1.5 Making an offer


Outline bid timetable

Announcement of firm intention Offeror commits to proceed with offer

Day 0 Offer document posted – must be within 28 days of announcement

Day 14 Last day for offeree board to advise shareholders of its views on offer (ie last date for posting first defence document if hostile offer) H

Day 21 First date offer can be closed (ie lapsed)

First business day after first closing date Announcement of acceptance levels and (if appropriate) extension of offer(and all subsequent closing dates)

Day 35 First date offer can close if offer declared unconditional as to acceptances on first closing date (assuming first closing date is Day 21)

Day 39 Last day for offeree board to release new information* H

Day 42 Last day for fulfilment of other conditions if offer declared unconditional as to acceptances on Day 21 Shareholders able to withdraw acceptances (assuming first closing date is Day 21) unless offer is unconditional as to acceptances H

Day 46 Last day offer can be revised if still conditional as to acceptances* HLast day for offeror to release new information if offer includes shares in offeror* H

Day 60 Last day for offer to become or be declared unconditional as to acceptances*

Day 81 Last day for fulfilment or waiver of other conditions if offer unconditional as to acceptances on Day 60, otherwise within 21 days of offer becoming unconditional as to acceptances*

Day 95 Last day for settlement of consideration if wholly unconditional on Day 81, otherwise within 14 days of offer becoming wholly unconditional

4 months from Day 0 Final date by which 90 per cent of shares to which the offer relates must have been acquired in order to commence procedure for compulsory purchase of minority offeree shareholders’ interests (compulsory purchase notice must be served within two months of satisfaction of 90 per cent level)

Key:* subject to extensions agreed by the PanelH normally only relevant in the context of a hostile or competitive bid situation

Making an offer 6.1.5–6.1.6


include prominent disclaimers to the effect that that statementshould not be interpreted as meaning that earnings will necessarilybe greater than those for a relevant preceding financial period. Theprincipal aim of the provisions regarding merger benefit andimproved earnings statements is to ensure that parties to offerscannot overstate their case for tactical reasons and to ensure thatstatements are properly understood by the market and do notconfuse shareholders (Rule 28.6).

6.1.6 Misrepresentation, directors’ duties and the Listing RulesThe importance of ensuring that takeover documentation meets thehighest standards of care and accuracy is not just a question of bestpractice and due compliance with the Code. Any misrepresentationmay lead to both civil and criminal liability. Criminal liability may ariseas a result of a breach of section 397 of the Financial Services andMarkets Act 2000 (FSMA) (see adjacent table). Liability may arise ifthe directors, whether knowingly or recklessly, make any misleading,false or deceptive statement or dishonestly conceal any material factin connection with such statement, or do any act which creates afalse or misleading impression as to the market in or the price orvalue of any investments, if that statement is made or that act isdone for the purpose of inducing somebody to acquire or dispose ofthose investments.

Directors of the offeror and offeree respectively must ensure highstandards of accuracy to avoid liability for negligent or fraudulentmisrepresentation. They must also keep in mind their duties asdirectors. Listed companies must comply with the standards ofaccuracy set out in the Listing Rules when issuing information to themarket.

Section 397 Financial Services and Markets Act 2000

Misleading statements and practices

(1) This subsection applies to a person who –

(a) makes a statement, promise or forecast which he knows to bemisleading, false or deceptive in a material particular;

(b) dishonestly conceals any material facts whether in connection with astatement, promise or forecast made by him or otherwise; or

(c) recklessly makes (dishonestly or otherwise) a statement, promise orforecast which is misleading, false or deceptive in a material particular.

(2) A person to whom subsection (1) applies is guilty of an offence if hemakes the statement, promise or forecast or conceals the facts for thepurpose of inducing, or is reckless as to whether it may induce, anotherperson (whether or not the person to whom the statement, promise orforecast is made) –

(a) to enter or offer to enter into, or to refrain from entering or offering toenter into, a relevant agreement; or

(b) to exercise, or refrain from exercising, any rights conferred by arelevant investment.

(3) Any person who does any act or engages in any course of conduct whichcreates a false or misleading impression as to the market in or the price orvalue of any relevant investments is guilty of an offence if he does so forthe purpose of creating that impression and of thereby inducing anotherperson to acquire, dispose of, subscribe for or underwrite thoseinvestments or to refrain from doing so or to exercise, or refrain fromexercising, any rights conferred by those investments.

6.1.7–6.2.2 Making an offer


6.1.7 Market abuse regimeLiability may arise under the market abuse regime if any misleadinginformation is published which is likely to give a regular user of themarket on which the offeror or offeree’s shares are traded a false ormisleading impression as to the price of such shares.

6.1.8 Financial promotion regimeDocuments prepared and issued in connection with a takeovershould not generally need to be issued and/or approved by anauthorised person (ie a financial adviser) under the financialpromotion regime set out in FSMA as they are likely to benefit froman exemption. However, it is likely that the scope of that exemptionwill, in the future, be narrowed such that certain documentsprepared and issued in connection with a takeover will need to beissued and/or approved by an authorised person.

6.1.9 Sufficient informationAs it is for the offeree’s shareholders to decide whether theircompany should be taken over or not, the Code requires them to beprovided with sufficient information in order to consider the merits ofthe bid (General Principle 4). The Code contains detailed contentsrequirements for the various documents which are also subject tothe general requirement that all relevant information should be madeavailable on a timely basis to all shareholders. The main aim is toensure shareholders receive information in sufficient time to maketheir decision.

6.1.10 AdvertisementsThe Panel takes a very restrictive approach to advertising (see Rule19.4) as it is concerned that shareholders be given full information ofa factual nature supplemented by reasoned argument. The Panel willnot tolerate takeover battles being waged through advertisements inthe media. Parties to an offer and their advisers are required to take

care not to issue statements which, whilst not factually incorrect,may mislead shareholders and the market.

6.1.11 Dissemination of informationWhilst the Code emphasises the importance of all relevantinformation being relayed to shareholders, offerors are not allowed torelease information to selected shareholders only, for example whenmeeting with institutional holders. Inherent in the principle of fair andequal treatment of all shareholders is that any material newinformation released must be relayed promptly to all shareholders.The Code also regulates press campaigns and circumstances wheresmall numbers of shareholders are contacted by telephone.

6.2 Announcing the offer

6.2.1 Pre-conditional announcementsThe Panel will generally allow “pre-conditional” offer announcementsto be made provided that the pre-conditions are clearly set out andnot misleading. Where a merger is likely to raise competition issues,it is common for offerors to make the posting of the offer subject tosatisfaction or waiver of a pre-condition relating to the obtaining ofregulatory clearances from the relevant competition authorities.Where the announcement states that an offer will be made once thepre-conditions are satisfied or waived, the offeror must in thosecircumstances proceed with an offer.

6.2.2 Consequences of making a Rule 2.5 announcementOnce an offeror has announced a firm intention to make an offerunder Rule 2.5, it must then proceed with the offer (Rule 2.7). Only inthe most exceptional circumstances will the Panel release an offerorfrom this obligation. An offeror should therefore only announce itsintention to make an offer once it has every reason to believe that itcan, and will continue to be able to, implement the offer in full



(General Principle 3 and Rule 2.5). If in order to fulfil the bid, theofferor needs, for example, to borrow funds, it must make sure thatthese are committed before the announcement. Conversely, aperson who states that he does not intend to make an offer will beprohibited from making an offer for six months (Rule 2.8). The Panelwill only permit a change of intention if there has been a materialchange of circumstances or the person expressly reserved the rightto make an offer in specified circumstances and thosecircumstances have arisen.

6.2.3 Disclosure in the Rule 2.5 announcementWhen a firm intention to make an offer is announced, the identity ofthe offeror and the terms of the offer must be disclosed, including allconditions to which the offer is subject. These can only be alteredsubsequently with the Panel’s consent. The announcement mustcontain, among other things, details of shareholdings in the offereeheld by the offeror and any concert parties or in respect of which ithas an option or has received an irrevocable undertaking (Rule2.5(b)).

6.2.4 Circulation to shareholdersThe offeree board is required to circulate promptly theannouncement (or a summary of its terms) to its own shareholders(Rule 2.6). However, where an announcement of a possible offer ismade before the announcement of a firm intention to make an offer,it will be the first of these which is sent to offeree shareholders as thepurpose is to put them on notice as soon as a bid is in the offing. Anofferor may also send a copy of the announcement to its ownshareholders for information purposes.

6.3 The offer document

6.3.1 PostingThe offer document containing details of the offer should normally beposted to the offeree’s shareholders within 28 days of theannouncement of a firm intention to make an offer (Rule 30.1). Oftenit will be posted considerably earlier, particularly in a hostile bidwhere the offeror will wish to minimise the time the offeree has tomarshall its defences. The offeror will also want the offer documentto be posted as soon as possible where an underwritten cashalternative or rights issue is involved. This is because theunderwriting commissions are based on the length of theunderwriting period, which begins when the offer is announced.

6.3.2 Principal documents on a takeover offerIf the offer is recommended, the offer document will generally be ajoint document issued by the two boards. If it is a hostile offer, it willbe issued by the offeror alone. A comparison of the principaldocuments required to be produced by the offeror and offeree, onboth hostile and recommended bids is set out on page 38. Theprincipal content requirements for the offer document as set out inRule 24 of the Code are summarised on page 39.

6.3.3 Contents of offer documentThe offer document will contain details about the offeror, its offer andthe types of consideration available and it will repeat the conditions ofthe offer which were set out in the press announcement. On arecommended offer, the offer document contains a letter from thechairman of the offeree recommending acceptance of the offer andexplaining the reasons behind the recommendation. If it is a hostile bid,the offer document will be of a more aggressive nature and will containarguments to persuade offeree shareholders to accept the offer.



6.3.4 Offeror shareholder consentIf the offeror is a listed company and the offer is of such a size as torequire the consent of its own shareholders under the Listing Rules,the obtaining of this consent will also be a condition of the offer.

6.3.5 Competition referenceIf an offer falls within the terms of reference of the CompetitionCommission or within the scope of the EC Merger Regulation then itmust also be a term of the offer that it will lapse should the offer bereferred to the Competition Commission or if the EuropeanCommission intervenes before the later of the first closing date or thedate when the offer becomes unconditional as to acceptances (seesection 3).

6.3.6 Additional conditionsBroadly, the offeror has a discretion to decide the conditions towhich the offer should be subject, unless the offer is a Rule 9 offer

(see section 5). The majority of the conditions will relate to the stateof the offeree’s business and will be similar to the warranties which apurchaser might expect to receive in a private company acquisition,such as:

• there having been no material adverse change in the offeree’scircumstances since its last published accounts; and

• there being no material contracts or arrangements to which theofferee is party which contain provisions enabling the other partyto terminate in the event of a change of control.

6.3.7 Mutual conditionsOn a recommended bid, where the offer is structured as a securitiesexchange offer, the board of the offeree may wish to ensure that theconsideration securities received by the offeree’s shareholders havea value which is not materially different from that contemplated bythe offeree board at the time that it gives its recommendation.

Recommended

• Press Announcement (offeror/offeree) (Rule 2.5)

• Offer Document (offeror/offeree) (Rules 24 and 25)

• Class 1 Circular to offeror shareholders if required (offeror)

• Listing particulars if securities exchange offer and securities to be listed(offeror)

Hostile

• Press Announcement (offeror) (Rule 2.5)

• Press Announcement rejecting Offer (offeree)

• Offer Document (offeror) (Rule 24)

• Class 1 Circular to offeror shareholders if required (offeror)

• Listing particulars if securities exchange offer and securitiesto be listed (offeror)

• Defence Document (offeree) (Rule 25)

• Response Document (offeror), Further Defence Document(s) (offeree) and Further Response Document(s) (offeror) (Rule 27)

• Revised Offer Document, where applicable (offeror) (Rule 27)

Note:This table assumes (where relevant) that the offeror is a company whosesecurities are listed on the Official List.

Comparative table of principal documents involved in recommended and hostile offers

Making an offer 6.3.7


Offer document content requirements

Rule 24 of the Code requires:

• details of the securities for which the offer is made, the basis on whichthey will be acquired, the total consideration offered and, in the case of asecurities exchange offer, the amount of shares of the offeror which theofferor has redeemed or purchased during the period commencing 12months prior to the offer period;

• particulars of procedures to be followed for acceptance of the offer;

• the middle market quotations for offeree’s securities and any securitiesoffered in exchange on the first dealing day of the preceding six months,on the day before the offer was announced and on the last practicable day before the offer document is posted;

• details of any offeror securities to be issued as consideration and theeffect of acceptance on the offeror’s capital and income position;

• details of the financing of the offer;

• a statement of the offeror’s intentions regarding the offeree and itsemployees;

• three-year financial statements of the offeror and offeree including auditedbalance sheets and any interim statements as well as any subsequentmaterial changes (less onerous requirements for listed cash offerors);

• the names of the directors of the offeror and offeree;

• the nature of the offeror’s business and its financial and trading prospects;

• a summary of the principal contents of each material contract entered intooutside the ordinary course of business by any member of the offerorgroup in the previous two years;

• details of shareholdings in the offeree and, in the case of a securitiesexchange offer, in the offeror held by the offeror, its directors, its concertparties and those persons who have given irrevocable undertakings toaccept the offer, together with details of any dealings in the shares of either company by any of the above in the preceding 12 months;

• in the case of a securities exchange offer, any effect of the offer on theemoluments of the offeror's directors;

• details of any special arrangements between the offeror or any of itsconcert parties and any of the existing or recent directors or shareholdersof the offeree relating to the offer;

• where the offer is for cash or includes an element of cash, confirmation by an appropriate third party that sufficient resources are available to theofferor to satisfy full acceptance of the offer;

• details of agreements relating to the invocation of conditions and details of any break fees payable as a result.

The offer document must also incorporate language reflecting all relevantrequirements of the Code as to the terms and conditions of the offer(including timing requirements).

Notes:Rule 25 sets out the information required to be provided by the offeree.This information would be found in the offer document on a recommendedbid and in the defence document on a hostile bid (see page 46 for asummary of the principal content requirements in Rule 25).Rule 27 requires subsequent documents sent to shareholders to containdetails of any material changes in previously published information.



Mutual conditions or offeree protection conditions are increasingly afeature on mergers where the offeror and offeree companies are of asimilar size.

6.3.8 Subjective conditionsSubjective conditions are not normally permitted (Rule 13). ThePanel may be prepared to accept an element of subjectivity incertain special circumstances where it is not practicable to specify allthe factors on which satisfaction of a particular condition maydepend, for example, in the context of competition conditions.

6.3.9 Policing bid withdrawalsThe Panel polices withdrawals from bids on the basis of non-satisfaction of conditions to ensure that any proposed withdrawal isgenuine and reasonable and that the circumstances are of materialsignificance to the offeror in the context of the offer. In practice, it isextremely difficult to obtain the Panel’s consent to invoke a condition(other than the acceptance condition) to withdraw from an offer, asthe Panel’s materiality threshold is very high.

6.3.10 Listing particularsIf the consideration for the offer includes securities of the offerorwhich are to be listed on the Official List and traded on the LondonStock Exchange, the offeror will usually send to offeree shareholderslisting particulars which will contain financial and other information onthe offeror and on the securities to be listed, as prescribed by the UKListing Authority.

6.3.11 Overseas resident shareholdersOfferee shareholders who are not resident in the UK can poseproblems for the offeror. Securities legislation of other countries mayrestrict the ability of the offeror to make the offer in a particularjurisdiction and/or the ability of overseas shareholders to acceptcertain types of consideration, without complying with securities

laws of that jurisdiction. The offer document will therefore oftenprovide that, although the offer is being made to all shareholders, it isnot being made into certain jurisdictions. Offers can be made underthe rules and procedures of two or more jurisdictions and such dualoffers are increasingly being made in the US and UK where there aresignificant offeree shareholdings in the US.

6.4 Employee share schemes

6.4.1 Share option schemesMost UK quoted public companies operate one or more employeeshare schemes which give employees the right to acquire shares inthe company. The most common type of scheme is the share optionscheme. There are two main categories – executive share optionschemes and savings-related share option schemes. Participation inexecutive share option schemes is normally limited to directors andsenior employees. By contrast, employees at all levels can take partin a savings-related share option scheme. Under such a scheme,employees are granted options provided that they agree to makeregular savings which can be used to buy the shares. Optionsgranted under either scheme cannot normally be exercised earlierthan three years after the grant of the options. The exercise ofexecutive options is also normally dependent on the companymeeting certain performance conditions.

6.4.2 Scheme rules applicable on a takeoverIn the event of a takeover, most option schemes allow optionholdersto exercise their options for a limited period after the offer has beendeclared wholly unconditional. Furthermore, performance conditionsattaching to the exercise of executive options may be waived, inwhole or part, in these circumstances. Once optionholders haveexercised their options, they are likely to accept the offer, assuming itremains open for acceptance, or sell their shares on the market.



6.4.3 Code treatment of option schemesIn addition, Rule 15 obliges the offeror to make an “appropriateproposal” to optionholders to ensure that their interests aresafeguarded. In many cases, the proposal is no more than advice tooptionholders that they should exercise their options and accept theoffer. The offeree board must obtain independent advice on theproposal and make known the substance of that advice tooptionholders, together with the board’s views on the proposal. As aresult of Rule 15, offeree optionholders are often given a number ofalternatives to exercising their options, which may include:

• the opportunity to surrender options in exchange for a cashpayment from the offeror. The payment would be equivalent to thegain that the optionholder would have made if they had exercisedtheir options, acquired shares in the offeree and then sold thoseshares on the terms of the offer;

• the opportunity to exchange options held over shares in the offereefor equivalent options over shares in the offeror. Exchangingoptions can preserve valuable tax benefits for optionholders in tax-approved executive and savings-related share option schemesand provide a continuing share incentive; and

• compensation for participants in savings-related share optionschemes. Holders of savings related share scheme options canonly exercise their options to the extent of savings made in theirsavings accounts. They will not therefore be able to exercise theiroptions in full if they have not completed their savings. As a result,it is common for an offeror to make a bonus payment tocompensate for the “lost” profit as a goodwill gesture. Thepayment is normally based on the additional profit that theoptionholders would have made if they had been able to save for alonger period (usually between two and six months) and use thoseadditional savings to buy further shares.

It is normal for a letter to be sent to the offeree’s optionholderssetting out the proposals together with a form enabling them tomake their choice(s).

6.4.4 Other employee share schemesIn addition to share option schemes, many UK companies haveshare schemes under which employees can buy shares, or underwhich shares are distributed to employees free of charge. The Codedoes not require the offeror to make any special proposals in relationto these types of scheme, although it would be normal for there tobe communications to participants explaining the impact of the offeron their share awards. The precise implications of an offer on thesetypes of scheme will depend on their rules and how the offer isstructured.

6.5 Special deals

6.5.1 General prohibitionAn offeror cannot offer selected shareholders special deals as anincentive to sell their shares unless these are extended to allshareholders (Rule 16). This reflects the general principle that allshareholders of the same class must be treated similarly.

6.5.2 Management buy-outs and other exceptionsOn a management buy-out, the management of the offeree may beoffered an equity interest in the offeror. Such an arrangement is likelyto offend the principle of equality of treatment of all shareholders, asit is not usually extended to every shareholder. The Panel may beprepared to consent to such an arrangement provided certainconditions are complied with; for example, an independent adviserto the offeree must confirm in the offer document that it considersthe arrangements to be fair and reasonable in the context of the offerso far as other offeree shareholders are concerned (Note 4 on Rule16). In circumstances where the management and the offeror holdmore than 5 per cent of the shares in the offeree, the Panel willnormally require the arrangements to be approved by a vote of the



independent shareholders at a general meeting of the offeree. Inother scenarios, the Panel may also consent to an arrangementwhich might be construed as a special deal, subject to similarsafeguards as referred to above.

6.6 Documents for the offeror’s own shareholders

6.6.1 Offer document and listing particularsThe offeror will usually send its own shareholders a copy of the offerdocument and listing particulars (if any) for information purposes.

6.6.2 CircularIf an offeror is a listed company, the consent of the offeror’s ownshareholders may be required, depending upon the size of theofferee in relation to the offeror or the number of new shares to beissued. In this case, a circular containing details of the offer and theofferee must be circulated to them, together with notice of theextraordinary general meeting at which the approval is sought. Thecontents of the circular are prescribed by the Listing Rules.

6.7 Share dealings during the course of the offer

6.7.1 Restrictions imposed on offeror share purchasesIt is in principle permitted for the offeror to continue buying shares inthe offeree during the course of the offer, but there are certainrestrictions imposed by the Code. The restrictions for the most partreflect the General Principles of the Code. The General Principleswhich are particularly relevant in this context are:

• shareholders of the same class must be treated similarly by theofferor (General Principle 1);

• all parties to an offer must use every endeavour to prevent thecreation of a false market in the securities of either the offeror orthe offeree (General Principle 6); and

• where control is acquired by a person or persons acting inconcert, a general offer to all shareholders is normally required(General Principle 10).

6.7.2 Mandatory offer can be triggered during offerBy extension of General Principle 10, Rule 9 (mandatory offers)continues to apply during the course of the offer. This means that ifthere is a purchase of shares which increases the aggregate holdingof the offeror and its concert parties (excluding acceptances of theoffer) to 30 per cent or more of the voting rights, the offeror will berequired to make a revised offer for the outstanding shares of theofferee at a price not less than the highest price paid for shares bythe offeror or its concert parties during the previous 12 months. Insuch a case, the revised offer can only be made conditional onacquiring over 50 per cent of the voting rights of the offeree. All otherconditions to which the offer was subject prior to triggering the Rule9 offer therefore have to be dropped.

6.7.3 Timing of share purchasesAnother rule of the Code, Rule 5, restricts the speed at which sharesor rights over shares can be acquired, if the aggregate resultingholding amounts to 30 per cent or more of the voting rights. Thisapplies both generally and during a bid. A number of exceptionsexist, but even if one is available Rule 9 may still apply.

6.7.4 Consequences of share dealing during offerThere are two other rules of the Code which do not prohibitpurchases of shares by the offeror as such but instead give rise tocertain consequences. If, during the offer period shares are boughtat above the offer price, the offer must be revised immediately toreflect the terms of such purchase if they are more favourable thanthe terms of the offer (Rule 6.2). If the offeror does not intend to offercash generally, it (and its concert parties) should not purchase anyshares at all for cash during the offer period. If it does, it will need to



make a revised offer in cash or accompanied by a cash alternative(Rule 11.1). Purchases of shares in exchange for securities duringthe offer period will normally require a cash offer at a price based onthe value of the securities at the time of purchase, unless therecipient of the consideration securities is subject to a lock-up untilafter the offer lapses or the consideration is posted (Note 5 on Rule11.1). If the offeror does not intend to make a securities exchangeoffer, it (and its concert parties) should restrict purchases of shares inexchange for securities to less than 10 per cent of the voting rights(Rule 11.2). If the offer is required to be amended by Rule 6, 9 or 11,an immediate announcement is required (Rule 7.1).

6.7.5 Prohibition on offeror disposal of offeree securitiesDuring the offer period, the offeror and its concert parties must notsell any securities in the offeree except with the prior consent of thePanel and after having given 24 hours’ public notice that such salesmight be made (Rule 4.2). The offeror and its concert parties arethen prohibited from making further purchases of offeree shares.

6.7.6 Insider dealing and market abuseThe constraints imposed by the statutory provisions on insiderdealing and market abuse, and by the Listing Rules continue toapply during the course of the offer (see section 4.2).

6.7.7 Disclosure requirements The provisions regarding disclosure of share purchases in theCompanies Act 1985 and the Listing Rules (see section 4.4)continue to apply. Rule 8 of the Code imposes additionalaccelerated disclosure requirements in relation to dealings in:

• any securities of the offeree for which an offer is being made, anyother voting securities, all securities carrying conversion orsubscription rights and any options or derivatives relating to any ofsuch securities; and

• on a securities exchange offer only, the equivalent securities,options and derivatives relating to the offeror.

During the offer period (which starts with the announcement of aproposed or possible offer), dealings by the offeror, the offeree or anyassociates for their own account or for discretionary fundmanagement clients have to be disclosed to a RegulatoryInformation Service by noon the next business day (Rule 8.1). Thesame rule applies to dealings by any person who holds 1 per cent ormore of the shares of the offeror or the offeree (Rule 8.3). Dealings bythe offeror, the offeree or any associate for non-discretionary fundmanagement clients must be privately disclosed (Rule 8.2).

6.7.8 Definition of “associate”“Associate” is defined very widely and includes any person whoowns or deals in the shares of the offeror or offeree and who has anadditional interest, whether commercial, financial or personal, in theoutcome of the offer. It encompasses, amongst others, members ofthe same group of companies as the offeror or offeree (including 20per cent associates), financial and professional advisers to bothsides (and persons in common control with such advisers), thedirectors of any members of the offeror’s or offeree’s group and theirpension funds (see Definitions section of the Code and Note 6 onRule 8).

6.7.9 Prohibition of share purchases by offeree’s financial adviserand brokerThe financial adviser and broker to an offeree are prohibited frompurchasing shares in the offeree during the offer period (Rule 4.4).This is to address the concern that, particularly in hostile offers, suchdealings might alter the final outcome of the bid and thereby frustratethe wishes of shareholders generally.

THE DEFENCE

7.1 Introduction

7.2 To recommend or to defend?

7.3 The defence document

7.4 Defensive measures

7.5 Defensive measures and directors’ duties to the company

7.6 The next moves

The defence 7.1–7.2.2


7.1 Introduction

7.1.1 Offeree response to bidA board which receives an approach is entitled to be satisfied thatthe offeror will be able to implement the offer in full (Rule 1). Theofferee board is required to obtain competent independent advice(generally from a financial adviser) on any offer and to make thesubstance of this advice known to its shareholders (Rule 3.1). Its firstdirect contact with shareholders will be when it sends them thepress announcement of the offer or possible offer (Rule 2.6). If theannouncement is of a firm intention to make an offer, and the offer isnot to be made on a recommended basis, the offeree board maydecide at this stage not to advise shareholders to accept or rejectthe offer but instead tell them to do nothing, to retain their sharesand await events.

7.1.2 Defensive tacticsOnce an offer has been made, or after the offeree board has reasonto believe that an offer may be imminent, the board is severelyrestricted in the defensive actions which it may take. In generalterms, it may not, without the approval of its shareholders in generalmeeting, take any action which could effectively result in the offerbeing frustrated or in shareholders being denied an opportunity todecide on its merits (General Principle 7). The limits on frustratingaction are discussed in section 7.4.

7.1.3 Standards of care in preparation of defence-relateddocumentsAll requirements regarding availability and quality of information forshareholders described in section 6.1 apply equally to defencedocuments prepared by the offeree board. In summary:

• all documents, advertisements and statements made relating tothe offer are strictly regulated by the Panel;

• adequate information must be made available to all shareholdersto enable them to decide on the merits of a bid. No relevantinformation should be withheld;

• documents must be prepared to the highest standards of careand accuracy. They must bear on their face a statement that thedirectors accept responsibility for the information included;

• civil and criminal liability may result from any false or misleadingstatements (negligent or fraudulent misrepresentation andsections 118 and 397 of FSMA);

• Listing Rules must be complied with by listed offerees;

• telephone campaigns and small meetings with shareholders areclosely regulated so as to ensure no new information is madeavailable only to a selected few; and

• the publication of advertisements is severely limited.

7.2 To recommend or to defend?

7.2.1 Offeree board deliberationsIf the offeree board thinks the offer undervalues the company, orsecurities are being offered as consideration and the offeree hasconcerns about the offeror itself, it may be justified in rejecting theoffer and advising shareholders to do the same. The offeree boardmust be guided in its deliberations by General Principle 9 of theCode: in advising shareholders, directors must act only in theircapacity as directors and not have regard to their personal or familyshareholdings or to their personal relationships with the offeree orofferor. They are required to take into account shareholders’ intereststaken as a whole, and the interests of employees and creditors.

7.2.2 Directors’ duties on agreeing to recommend offerOfferee directors are required by the Code to give carefulconsideration before entering into any commitment (in their capacityas directors) with an offeror (such as an undertaking to recommendits offer) which would restrict their freedom to advise shareholders inthe future. Such commitments may lead to conflicts of interest orresult in a breach of the directors’ duties to the company at commonlaw (see General Principle 9). Directors’ duties at common law arediscussed more fully in section 7.5.

7 THE DEFENCE

7.3–7.3.3 The defence


7.3 The defence document

7.3.1 Communication of rejection of offerA separate defence document will be prepared in the case of ahostile takeover in which the offeree board will set out its reasons fornot recommending the offer. The defence document must normallybe sent to offeree shareholders within 14 days of publication of theoffer document (Rule 30.2).

7.3.2 Contents of defence documentIn the defence document, the board is required to make known itsviews on the offer and the substance of the independent advice ithas received (Rule 25.1). If the board is split, the minority directorsmust also publicise their views. There is a general requirement for theofferee to comment on the offeror’s stated intentions for thecompany and its employees (Rule 25.2). The principal contentrequirements for the defence document as set out in Rule 25 of theCode are summarised opposite.

7.3.3 Formal defence wordingThe most difficult part of the document to prepare is the formaldefence, with the reasons why shareholders should reject the offer.This will be contained in a letter from the chairman of the offeree,which is included in the document. The defence may be framed asan attack on the terms of the offer and, where offeror securities arebeing offered as consideration, the offeror itself. It is not unusual forthe tone and content of documents on a hostile bid to becomeincreasingly aggressive as the offer proceeds.

Defence document content requirements

Rule 25 of the Code requires:

• the views of the offeree board (including minority views if the board isdivided in its opinion) on the offer (including any alternative offer) and thesubstance of the advice received from the independent advisers;

• the views of the offeree board on the offeror’s plans for the offeree and itsemployees;

• details of shareholdings in the offeror and the offeree held by:– the offeree – directors of the offeree– the offeree’s subsidiaries and pension funds– the offeree’s advisers and associates

together with details of any dealings in the shares of either company byany of the above in the preceding 12 months;

• a statement as to whether the offeree directors intend to accept or rejectthe offer in respect of their own beneficial shareholdings;

• particulars of all service contracts of any director or proposed director ofthe offeree or any of its subsidiaries, and details of any variations made inthe previous six months;

• details of any conflict of interest any offeree director may have;

• a summary of the principal contents of each material contract entered intooutside the ordinary course of business by any member of the offereegroup in the previous two years;

• details of the number of shares of the offeree which the offeree hasredeemed or purchased during the period commencing 12 months priorto the offer period.

Notes: On a recommended offer, the information required by Rule 25 is provided inthe offer document which is prepared jointly by the offeror and the offeree. Rule 27 requires subsequent documents sent to shareholders to containdetails of any material changes in previously published information.

The defence 7.3.4–7.5.1


7.3.4 Financial information on the offereeAs part of the defence, the offeree board may decide to provideshareholders with detailed information about the financial positionand prospects of the offeree so as to demonstrate that the offerprice is inadequate. This may involve the inclusion of a profit forecastor an asset valuation. A profit forecast must be reported on by theauditors or reporting accountants and by the offeree’s financialadviser and any asset valuation must be supported by anindependent valuer. Any profit forecast made before the offer periodmust be repeated and reported on in the defence document (Rule28). There are also certain timing restrictions on the provision of newinformation such as profit forecasts (see section 7.6).

7.4 Defensive measures

7.4.1 General prohibition on frustrating action withoutshareholder consentGeneral Principle 7, which prohibits frustrating action withoutshareholder consent in circumstances where an offeree board hasreceived an approach, or has reason to believe an offer might beimminent, is based on the premise that it is for shareholders alone todetermine the outcome of the bid.

7.4.2 Specific frustrating action prohibitedThis General Principle is reinforced by Rule 21 which prohibits thefollowing specific actions without shareholder approval, exceptpursuant to a contract previously entered into:

• issuing further share capital (or transferring/selling shares out oftreasury);

• issuing or granting options in respect of unissued shares;

• creating or issuing any securities bearing rights of conversion intoor subscription for shares;

• selling, disposing of or acquiring assets of a material amount oragreeing to do so; or

• entering into contracts otherwise than in the ordinary course ofbusiness.

Even before an offer has been announced, an offeree board maytherefore be severely restricted in the defensive actions which it may take.

7.4.3 Board changes and variations to directors’ servicecontracts and pension scheme arrangementsThe Panel will regard amending or entering into a service contractwith, or creating or varying the terms of employment of, a director asbeing outside the ordinary course of business for the purposes ofthe above rule if this results in an abnormal increase in theemoluments or a significant improvement in the terms of service.The Panel must be consulted in advance in these circumstancesand in the case of a promotion or new appointment. Changes to anofferee company’s pension scheme arrangements may fall within theabove rule and again the Panel should be consulted.

7.4.4 Other frustrating actionThe list of frustrating actions contained in Rule 21 is not exhaustiveand an action which is beyond the strict terms of this Rule may stillbe caught by the wider principle of General Principle 7. For example,the Panel has ruled that the obtaining of an injunction in a foreignjurisdiction to prevent an offer proceeding amounted to frustratingaction and required the approval of the offeree’s shareholders.

7.5 Defensive measures and directors’ duties to the company

7.5.1 Directors’ duties in generalLegal duties owed by directors to their company may also restrict thedefensive measures a board may take. Directors are required to acthonestly and in good faith in the best interests of the company and toexercise their powers for the purpose for which they were conferredand not for any collateral purpose. They also owe a general duty ofcare in managing the company’s affairs. It is permissible for directors

7.5.1–7.6.5 The defence


to use their powers in order to attempt to defeat a hostile takeover if,acting in good faith, they think such action is in the best interests ofthe company. However, as they are required to use the powersconferred upon them for their proper purpose, unless there is anindependent corporate benefit, “poison pill” actions to discourage anofferor may well be deemed to be for a collateral purpose andtherefore constitute a breach of the directors’ duties.

7.5.2 Offeree permitted to lobby competition authorities to secure a referenceOne legitimate defensive measure which is often employed islobbying the competition authorities to secure a reference. If an offeris referred, the offer lapses pending investigation by the relevantcompetition authority. This of course does not guarantee theofferee’s independence but secures it a valuable breathing space(see section 3). Alternatively an offeree may try to seek out apreferred suitor willing to offer better terms, commonly referred to asa “white knight”.

7.6 The next moves

7.6.1 Minimum period for offer to remain openAn offer must remain open for a minimum of 21 days from the datethe offer document is posted. Day 21 is therefore usually known asthe first closing date. An offer will usually be extended beyond thefirst closing date.

7.6.2 Offeror may increase offer priceIf the market is convinced by the defence document that the offer istoo low, the offeror may be forced to increase its offer. The earliestthis is likely to happen is the first closing date (Day 21) when anannouncement will be made of the acceptances received. It is,however, more usual for an offeror to wait until later in the offertimetable before increasing its offer. If a revised offer is made, allshareholders who have accepted the original offer will be entitled tothe revised consideration (Rule 32.3).

7.6.3 Continued defence by offereeIf the offeree continues to fight the bid, any revised offer documentsent to shareholders will be followed by a further defence document.The last day the offeror may revise its offer is Day 46 as any revisedoffer is required to be kept open for 14 days (Rule 32.1) and the offermust become or be declared unconditional as to acceptances byDay 60. If the offeror has announced its offer to be final it cannotsubsequently increase it (Rule 32.2). The exceptions to this are if acompetitive situation arises or the offeree board decides torecommend an offer, but only if the offeror has specifically reservedthe right to revise its offer in such circumstances.

7.6.4 Deadline for release of new information by offereeDay 39 is the last day on which the offeree may release material newinformation such as trading results or a profit forecast (Rule 31.9).The offeree may choose not to disclose such information until thisdate to give the offeror as little time as possible to revise its offer andsecure the necessary acceptances. Where the offeree is aware of amatter which might give rise to such an announcement being madeafter Day 39, the offeree must make every effort to bring theannouncement date forward. When this is not practicable or thematter arises after that date, the Panel will normally give its consentto a later announcement. If such an announcement is made afterDay 39, the Panel will normally be prepared to grant an extension toDay 46 (offer revision deadline) and Day 60 (deadline to satisfyacceptance condition).

7.6.5 Rights of withdrawal of acceptancesIn general, acceptances of an offer may not be withdrawn. However,if the offer has not become unconditional as to acceptances by 21days after the first closing date (usually 42 days after the offerdocument is posted) accepting shareholders are entitled to withdrawtheir acceptances (Rule 34).

DECLARING THE OFFER UNCONDITIONAL

8.1 Unconditional as to acceptances

8.2 Going wholly unconditional

8.3 Acquiring the minority

8.4 Removing the offeree board

8.5 Cancelling the offeree’s listing

Declaring the offer unconditional 8.1–8.3.1


8.1 Unconditional as to acceptances

8.1.1 Deadline for declaring offer unconditional as toacceptancesIt will normally be the offeror’s objective to declare its offerunconditional as to acceptances as quickly as possible. The Codedeadline is Day 60. If the offer has not become or been declaredunconditional as to acceptances by Day 60, it must lapse (Rule31.6). The Panel can agree to grant an extension on this date, butwill only do so if:

• a competing offer has been announced (both offerors are thenusually bound by the timetable established by the posting of thecompeting offer document);

• the offeree board consents to such an extension; or

• Day 39 has been extended to permit the offeree to publish newinformation at a later date (because, for example, the OFT has notyet decided whether to refer the offer).

8.1.2 Calculating the level of acceptancesOn Day 21, the usual first closing date, the offeror will aggregateacceptances received and shares already held or bought in themarket. There are strict rules for determining which acceptancesand purchases may be counted towards fulfilling the acceptancecondition (Notes 4, 5 and 6 on Rule 10). By 8.30 am on the followingbusiness day, the offeror must announce the acceptance levelachieved (Rule 17.1). If the appropriate level of acceptances hasbeen achieved, it may declare the offer to be unconditional as toacceptances. If insufficient acceptances have been received, it mayannounce an extension of the offer or a revised offer. In such cases,the next closing date must be announced. Alternatively, it mayabandon its offer.

8.1.3 Minimum 14-day period after going unconditional as to acceptancesWhen the offer is declared unconditional as to acceptances, it mustthen be left open for at least another 14 days. Generally it will be leftopen for longer or until further notice to achieve the greatest possiblenumber of acceptances.

8.2 Going wholly unconditional

8.2.1 Fulfilment of remaining conditionsThe offeror has 21 days after declaring its offer unconditional as toacceptances to ensure that all the other conditions of its offer arefulfilled (Rule 31.7). If they are not fulfilled or waived within thatperiod, the offer must lapse. For this reason, the offeror may delaydeclaring its offer unconditional as to acceptances if there is concernthat any outstanding condition (such as a competition authorityclearance) may not be satisfied within 21 days.

8.2.2 Posting of consideration to accepting shareholdersThe offeror must post the consideration to accepting shareholderswithin 14 days of the offer becoming wholly unconditional. To theextent acceptances are received subsequently, the considerationmust be posted within 14 days of their receipt (Rule 31.8).

8.3 Acquiring the minority

8.3.1 Untraced shareholdersAn offeror is unlikely to receive acceptances of its offer in respect of100 per cent of the shares in the offeree company. There will be, forexample, shareholders who cannot be traced or who are unable toaccept the offer due to local securities laws.

8 DECLARING THE OFFER UNCONDITIONAL

8.3.2–8.4.1 Declaring the offer unconditional


8.3.2 Statutory procedure for compulsory acquisition of minorityThe Companies Act 1985 contains a procedure allowing an offerorto force an outstanding minority to accept its offer and so acquire100 per cent of the offeree company.

8.3.3 Implementation of statutory procedureTo invoke this procedure, the offeror must acquire 90 per cent of theshares to which the offer relates within four months of the date of theoffer (section 429 Companies Act 1985). “Shares to which the offerrelates” excludes shares held by, or contracted to be acquired by,the offeror at the date of the offer. Shares purchased before the offerdocument is posted cannot therefore be counted, but any boughtduring the course of the offer can be included.

8.3.4 Procedural stepsAssuming the 90 per cent threshold is met in the prescribed time, theofferor will then issue a section 429 notice to non-acceptingshareholders enabling the compulsory acquisition of their shares.The shares must be acquired on the same terms and conditions asthe final offer, with all alternatives offered at the outset being available.

8.3.5 Right of minority shareholders to be bought outJust as the offeror can oblige the dissenting minority to sell, so thedissenting minority can oblige the offeror to buy their shares (section430A Companies Act 1985). The offeror is required to serve a noticeon dissenting shareholders within one month of acquiring nine-tenths in nominal value of the shares of the offeree, unless a section429 notice is sent instead (see above). The section 430A noticemust give non-accepting shareholders the right, for a minimumperiod of three months after the offer, to require the offeror topurchase their shares on the terms of the final offer or on such otherterms as may be agreed.

8.3.6 Compulsory acquisition not available if 90 per centacceptances not receivedIt is possible that the offeror will not achieve 90 per centacceptances and therefore will not have the benefit of thecompulsory acquisition provisions. It may be happy to be left with anoutstanding minority, or, if it has not already done so, it may refuse todeclare the offer unconditional as to acceptances and let it lapse. Itis, however, common for an offeror to waive down the requiredacceptance level to below 90 per cent on the basis that declaringthe offer unconditional as to acceptances will generally trigger afurther stream of acceptances, usually resulting in the required 90per cent threshold for compulsory acquisition being reached. Theofferor is not allowed to offer enhanced terms to the last fewshareholders for at least six months after the offer has closed as theCode demands equality of treatment for all shareholders.

8.3.7 Tactics on a hostile bid to trigger acceptancesIn a hostile bid, if the offeror decides to waive down the 90 per centacceptance condition (subject to any financing conditions of lendingbanks) and declare the offer wholly unconditional, the offeree boardis likely to recommend the offer (as the offeror at that point has legalcontrol of the offeree). Once the offer is recommended, sufficientacceptances are generally received to enable the offeror to invokethe compulsory acquisition procedure.

8.4 Removing the offeree board

8.4.1 Resignation of the boardIt is customary for the executive members of the offeree board toresign upon the offeror achieving control. The non-executivedirectors may stay on until the compulsory acquisition has beencompleted to protect the interests of the remaining minorityshareholders. Following a hostile offer, however, the offeror mayinsist on the whole board resigning as soon as it declares its offerwholly unconditional.

Declaring the offer unconditional 8.4.2–8.5


8.4.2 Forceful removal of directors on hostile bidIn the unusual (though not unknown) situation that the incumbentboard refuses to resign, a successful offeror will be able to removethe directors by using its shareholding to requisition a shareholders’meeting, although this may take up to three months. A resolution ofa simple majority of votes removing the directors would be passed atthe meeting.

8.4.3 Compensation for loss of officeWhether the incumbent directors go voluntarily or not, the executivedirectors will usually be entitled to compensation for their loss ofemployment.

8.5 Cancelling the offeree’s listing

Having obtained legal control of a listed offeree, an offeror will almostalways delist the offeree’s shares, subject to giving requisite noticeunder the Listing Rules. Delisting or threatening to delist the offeree’sshares is an effective weapon in hostile bids as it makes the offereeshares illiquid and is likely to compel shareholders to accept anotherwise unattractive offer. Those offeree shareholders who do notaccept the offer will be left with no market in the shares once theoffer closes. The London Stock Exchange introduced a rule requiringcompanies listed on AIM to obtain the consent of 75 per cent ofshareholders in general meeting prior to delisting. The UKLA isconsulting on similar proposals in respect of delisting from the OfficialList. Under the AIM rules (and the UKLA proposals) where an offerorhas received acceptances from at least 75 per cent of offereeshareholders, shareholder approval to delist is not required.

CONSEQUENCES OF AN UNSUCCESSFUL OFFER

9.1 Lapse of the offer

9.2 Resultant offeror stake in offeree

9.3 Disposal of offeree shares

9.4 Code restrictions preventing immediate launch of new offer

9.5 Expiry of Code restrictions on new offer

Consequences of an unsuccessful offer 9.1–9.5


9.1 Lapse of the offer

As explained in section 8, if an offeror does not achieve sufficientacceptances to be able to declare its offer unconditional as toacceptances by Day 60, the offer must lapse unless both partiesagree an extension of this deadline with the Panel. The offer mustalso lapse if any detailed investigation by the relevant competitionauthority takes place or if, having declared the offer unconditional asto acceptances, the other conditions are not satisfied within 21 days(Rule 31.7).

9.2 Resultant offeror stake in offeree

When an offer lapses, any tendered acceptances also lapse. Theofferor will therefore be left only with shares it has acquired throughpurchases (if any). Its stake will usually be less than 30 per cent ofthe offeree. However if, as a result of purchases, it was forced tomake a Rule 9 offer which failed, an offeror could be left with a stakeof 30 per cent or more.

9.3 Disposal of offeree shares

Once the offer has lapsed, the offeror is no longer subject to theCode restriction on disposing of offeree shares (Rule 4.2) and cantherefore sell them. If it decides to retain all or some of the shares,the degree of influence it can exert over the offeree will clearlydepend on the size of its stake.

9.4 Code restrictions preventing immediate launch of new offer

Whatever the size of the offeror’s stake in the offeree, its continuedpresence on the shareholder register will be a source of worry andpossible irritation to the offeree. The offeree will not know what theofferor’s intentions are. However, under the Rules of the Code, the

offeror cannot launch a new offer within 12 months of its original offerlapsing unless the new offer (a) is recommended; (b) follows anannouncement of a competing offer or (c) (in circumstances wherethe original offer lapsed by reason of a competition reference) followsthe giving of clearance by the relevant competition authority (Rule35.1 and Notes). In that same 12 months, it cannot buy furthershares if it would then become obliged by Rule 9 to make anotheroffer. Therefore, if it has less than 30 per cent, it cannot acquireshares taking it to 30 per cent. If it has between 30 and 50 per cent itcannot acquire any more shares at all. The intention of theserestrictions is to prevent the offeree board from being endlesslyunder siege by the failed offeror, a situation which could be harmfulto the interests of the offeree’s business and hence its shareholders.

9.5 Expiry of Code restrictions on new offer

Once 12 months have elapsed, an offeror is free to make anotheroffer. Rule 9 continues to apply and the offeror will be forced to makean offer if it takes its stake from below 30 per cent to 30 per cent ormore or if it has between 30 and 50 per cent and it increases itspercentage holding.

9 CONSEQUENCES OF AN UNSUCCESSFUL OFFER

GLOSSARY

Glossary


Acting in concert/concert parties – see section 2.7

AIM – Alternative Investment Market

Associate – see section 6.7.8

Code – The City Code on Takeovers and Mergers

Commencement of offer period – date of announcement of aproposed or possible offer (with or without terms)

Commission – European Commission

CREST – an electronic, paperless share settlement system

EA 2002 – the Enterprise Act 2002 described in section 3.4

ECMR – EC Merger Regulation described in section 3.2

EU – European Union

FSA – Financial Services Authority

FSMA – Financial Services and Markets Act 2000

Listing Rules – the Listing Rules published by the UKLA

Offer period – the period from the time an announcement is madeof a proposed or possible offer (with or without terms) until the firstclosing date or, if this is later, the date when the offer becomes or isdeclared unconditional as to acceptances or lapses

Offer unconditional as to acceptances – see section 8.1

Offer wholly unconditional – see section 8.2

Official List – the list maintained by the UKLA of securities which aretraded on the London Stock Exchange’s main market

OFT – the UK Office of Fair Trading

Regulatory Information Service – a regulatory information serviceauthorised by the FSA to receive and disseminate informationrequired to be disclosed by a listed company pursuant to the Listing Rules

Rule 2.5 announcement – offeror’s announcement of a firmintention to make an offer under Rule 2.5 of the Code

Rule 9 mandatory offer – see sections 4.3.1 and 5.2

SARs – The Rules Governing Substantial Acquisitions of Shares

UKLA – the UK Listing Authority (a division of the FSA) thecompetent authority for listing in the UK pursuant to FSMA

10 GLOSSARY

10 Upper Bank Street, Canary Wharf, London E14 5JJ© Clifford Chance LLP, January 2004Clifford Chance is a Limited Liability Partnership organised and registered under the laws of the State of New York.www.cliffordchance.com

Clifford Chance - UK Takeovers Guide

Documents

Transcript of Clifford Chance - UK Takeovers Guide