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An examination of this month’s changes to the regulation of takeovers in the UK. |
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The last year has seen a number of regulatory changes for public company takeovers prompted by the Takeovers Directive (EC Directive 2004/24). On 6 April 2007, the last set of changes came into force, namely the coming into force of Part 28 of the Companies Act 2006 and various changes to the City Code on Takeovers and Mergers. This article examines what this means for UK company takeovers. Background The Government had originally planned to implement the Directive through the Companies Act 2006. However, this was still going through parliament on the Directive’s implementation date (20 May 2006). The Government therefore decided to implement the Directive on an interim basis through secondary legislation (the Takeovers Directive (Interim Implementation) Regulations 2006 (SI 2006/1183)). These regulations only applied to takeovers within the scope of the Directive, which broadly speaking, were takeovers of companies listed on regulated markets (such as the Official List of the London Stock Exchange but not AIM). As a result, the UK takeover market was regulated by a two-speed system: takeovers within the scope of the Directive (Directive takeovers) were governed by the Code and the interim regulations; other public and private company takeovers within the scope of the Code (non-Directive takeovers) were governed by the Code alone. On 6 April 2007, the interim regulations were repealed and replaced by Part 28 of the Companies Act 2006 (the Companies Act 2006 (Commencement No. 2, Consequential Amendments, Transitional Provisions and Savings) Order 2007 (SI 2007/1093)). The provisions in the 2006 Act apply to both Directive and non-Directive takeovers. The changes essentially harmonise the two-speed system, returning the UK to a single approach to takeover regulation based on the provisions of the Directive. Changes with effect from 6 April 2007 This month saw three main types of change: » increased statutory powers for the Takeover Panel; » changes to the statutory squeeze-out and sell-out provisions; and » changes to the Code. Takeover Panel’s powers The Takeover Panel is now the statutory regulator for all public company takeover activity in the UK (s 942 CA 2006). This means that the extra powers which it had under the interim regulations in respect of Directive takeovers now also apply to non-Directive takeovers. These include the power: » to order the payment of compensation when particular Rules in the Code are breached (s 954 CA 2006; Intro para 10(c) City Code); » to apply to court for an injunction or enforcement order to secure compliance with the Code (s 955 CA 2006, Intro para 10(d) City Code). Note that such applications may only be made by the Panel, not by another party such as a rival bidder or the target. » to require the disclosure of documents and information (s 947 CA 2006; Intro Para 9(b) City Code), although this is subject to the privilege against self-incrimination (s 962 CA 2006) and there are restrictions on disclosures without the consent of the relevant individual or business (s 948 CA 2006). These powers apply to all transactions within the scope of the Code, even those which began before 6 April 2007 (Intro para 2(d) City Code). Squeeze-out and sell-out provisions New squeeze-out and sell-out provisions apply where the date of the offer is on or after 6 April 2007 (ss 974 - 991 CA 2006). These replace the provisions in the Companies Act 1985 (for non-Directive takeovers) and the interim regulations (for Directive takeovers). The provisions apply when the bidder’s takeover offer has succeeded but it has failed to acquire 100% of the target’s shares. The squeeze-out provisions allow the bidder to acquire the shares of the remaining minority shareholders. The sell-out provisions allow the remaining minority shareholders to require the bidder to buy their shares. The main changes from the old provisions are: » changes to the meaning of a takeover offer: » a new dual threshold test to determine whether squeeze-out or sell-out rights have been triggered; » a new exercise-period; » new forms; and » changes to the shareholder objection procedure. Meaning of takeover offer The squeeze-out and sell-out rights are only triggered if a takeover offer is made. The new rules contain the following subtle changes to the meaning of a takeover offer: » the offer may be one which some shareholders are unable to accept because of restrictions in the country in which they reside (s 978(2) CA 2006); » the offer may not be communicated to shareholders without a UK address in order to avoid contravening the law of another country (although the offer must be published instead) (s 978(1) CA 2006); » different consideration may be offered for shares which are sold cum or ex dividend (s 976(2) CA 2006); and » shares which the bidder has acquired under conditional as well as unconditional contracts will be treated as already held by the bidder and therefore outside of the takeover offer (s 975(1) CA 2006). New dual threshold test In order to trigger the squeeze-out or sell-out rules, the bidder must reach a particular threshold of acceptances. The new rules contain a dual threshold test: the bidder will have to acquire both 90% by value of the shares to which the offer relates and 90% of the voting rights carried by those shares (except where the shares are non-voting) (ss 979, 983 CA 2006). Conditional acceptances of the bidder’s offer will not count in determining whether the 90% threshold has been reached for squeeze-out rights, but they will for the purposes of sell-out rights. Exercise period In the case of a Directive takeover, the bidder will have to exercise its squeeze-out rights within 3 months after the last day on which the offer can be accepted (s 980(2)(a) CA 2006). In the case of a non-Directive takeover, the bidder will have 6 months from the date of the offer, if this period ends earlier than the 3-month period after the offer (s 980(2)(b) CA 2006). Sell-out rights will also have to be exercised within 3 months after the later of (s 984(2) CA 2006): » the last day on which the offer can be accepted; or » the date on which the bidder notifies the minority shareholders that the 90% threshold has been met. New forms New Companies House forms apply in respect of the squeeze-out and sell-out provisions (SI 2007/1093):
Shareholder’s objection When a shareholder exercises his sell-out rights, either the bidder or shareholder may apply to court if they cannot agree the terms of sale. Under the new rules: » a shareholder will have to promptly notify the bidder if it makes an application (s 986(6) CA 2006); » a bidder who makes an application or received notice of an application will have to notify any shareholder who is being squeezed out or who is exercising his sell-out rights (s 986(7), (8) CA 2006); and » the court will no longer be able to reduce the consideration below that offered in the bid (s 986(4) CA 2006). Changes to the Code In response to the coming into force of Part 28 of the Companies Act 2006, the Panel announced various changes to the Code. Many of these were a substitution of a reference to the Companies Act 2006 for the old reference, although there were some substantive changes regarding the Panel’s jurisdiction (see Update CLN07/01 item 58). What next? The changes this month are the culmination of almost a year of regulatory changes in this area, most of them fairly subtle in nature. However, any perceived uncertainty that these changes invoked has not dampened the takeover market which continues to be buoyant. This was perhaps to be expected given that the Directive was largely based on the UK regulatory model and so few substantive changes were required. Even the most fundamental change, that is putting the Panel and Code on a statutory footing, is unlikely to have a significant practical impact. The Panel is expected to continue with its peer-review approach to regulation where possible, rather than relying on its new statutory enforcement powers. However, further changes cannot be ruled out. The European Commission has recently reported that many member states have implemented the Directive in a protectionist way which could bring about new barriers in the EU takeover market, rather than eliminate existing ones (Commission Staff Working Document: Report on the implementation of the Directive on Takeover Bids (SEC(2007) 268) 21 February 2007). The Commission intends to closely monitor the way in which the Directive’s rules are applied and work in practice and may bring forward the revision of the Directive scheduled for 2011.
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TAKEOVERS |