Equality under the Takeover Code

New rules under the UK Takeover Code will apply to all firm offers announced from 5 July 2021. They represent significant changes to the current offer condition regime and the contractual offer timetable which deal doers need to be aware of. 

The aim is to introduce consistent treatment of all regulatory conditions (including those relating to EU/UK merger control clearances which under the current rules had a special status under the Code) and to ensure greater flexibility to accommodate the reality of longer timeframes required to satisfy them. And this will significantly impact how offers play out in practice. 

Any firm offer made before 5 July (or announced in competition with a firm offer announced prior to that date) will continue to operate under the current rules.

We have been working closely with the Takeover Panel in the development of the new rules. Here we focus on some of the key changes when considering regulatory conditions, in particular merger control and foreign investment clearances.

1. More guidance on invoking offer conditions and the “material significance” test 

Before a bidder can rely on an offer condition (including in relation to regulatory clearances) for its benefit, the Takeover Panel must be satisfied that it meets the “material significance” test; in other words, that the relevant circumstances upon which the bidder is seeking to rely are of material significance to it in the context of the offer. This is a very high bar. 

A revised Practice Statement No. 5 (which deals with the invocation of offer conditions) gives more express guidance on the relevant factors the Takeover Panel will take into account when considering whether a particular matter should give rise to the right to invoke a condition. These factors include:

• whether the condition was the subject of negotiation with the target board;
• whether the condition was expressly drawn to target shareholders’ attention in the offer document or firm offer announcement, with a clear explanation of the circumstances which might give rise to the right to invoke it;
• whether the condition was included to take account of the particular circumstances of the target;
• whether the circumstances could not have reasonably been foreseen at the time of the firm offer announcement and, if they could, the likelihood of the circumstances occurring;
• the actions taken by the bidder since the firm offer announcement and, in particular, since the occurrence of the circumstances on which the bidder is seeking to rely in order to invoke the condition; and
• the views of the target board.

The revised Practice Statement lists further factors when considering whether a condition relating to the obtaining of a regulatory clearance (or official authorisation) may be invoked:

• the significance of the clearance to the bidder;
• what action the bidder would need to take to obtain the clearance and the strategic consequences to it of that action; and
• the consequences for the bidder and directors if it were to complete the offer without the clearance (for example, whether completion will be unlawful in the relevant jurisdiction).

Finally, with regard to “no reference to Phase II” conditions (or equivalent reference or process), the Takeover Panel will also look at whether the reference would be likely to result in a serious risk of material damage to the target and/or bidder business (by reference to, for example, the bidders’ advisory and financing costs), and the utility of requiring the bidder and/or target to pursue the reference where the prospect of obtaining clearance is low.

2. All regulatory conditions will be treated equally

From 5 July 2021, all regulatory conditions must meet the “material significance” test (discussed above) to be successfully invoked by the bidder. This includes any conditions relating to UK and EU Phase II merger control clearances which – as an historical anomaly – were not subject to this test and so could be invoked by a bidder even where clearance was a condition but was – crucially – not of material significance. 

In the same vein, the requirement for an offer to automatically lapse if a Phase II CMA reference is made or Phase II European Commission proceedings are initiated before a certain date will no longer apply. This means of course that bidders will be taking on more antitrust risk as a result and the likelihood of greater negotiation between offerors and targets as to the inclusion of a no UK Phase II reference condition.

And the Takeover Panel has also confirmed that there will similarly be no special treatment for any clearance required under the new UK National Security and Investment Act.

3. Practical implications of equal treatment

90% of the ten largest UK offers in 2020 – and 100% of the same cohort so far in 2021 – were subject to specific regulatory conditions. And this is before we see the full effects of the European Commission’s new policy to encourage Article 22 referrals to enable it to review deals which do not technically trigger filings anywhere in the EU. The system is more extreme than regimes with call in powers like the US, with no limits to jurisdiction and no need to take the merging parties to court.

Given the increase in number and complexity of regulatory conditions globally to which UK offers are typically subject – with there being more than 120 merger control and 38 (and counting) foreign investment regimes in operation globally – a more consistent approach has been advocated for some time. Indeed the majority of respondents to the Takeover Panel’s consultation welcomed the change. 

While consistent treatment is more logical (particularly since the UK’s withdrawal from the EU makes treating EU clearances differently from other international regulatory conditions even harder to justify), bidders should be aware that in practical terms it will be harder walk away from an offer on account of regulatory issues because:

• They will no longer be able to rely on the automatic lapse of a bid should the EU or UK merger control process go to Phase II by certain dates in the offer timetable. Although this has happened very rarely in practice in a Code context to date (affecting only two offers in the last 20 years), the change occurs at a time when the CMA has become significantly more interventionist in relation to mergers: on average, the CMA currently refers 23% of cases for an in-depth Phase II review, which in turn results in prohibition, unwind or abandonment 67% of the time (see our Insights here).
• It will be harder to invoke UK and EU competition conditions, which – like other regulatory conditions – will need to be of “material significance” to the bidder in the context of the offer.

This may mean that the Takeover Panel will more frequently need to give rulings on whether regulatory conditions can be invoked and make potentially difficult decisions about materiality and the factors relevant thereto (as detailed in the revised Practice Statement No. 5 – see above).

Conversely, fewer opportunities for bids to lapse means greater certainty for targets and their shareholders that bids will actually proceed to completion following a firm offer announcement. 

As a practical point, bidders may want to consider whether, in addition to specific regulatory conditions covering Phase I merger clearances, they should include a specific regulatory condition relating to there being no Phase II reference (or equivalent reference or process). In addition, it will be important to consider the interaction between such a condition and the new requirement for a long-stop date (discussed further below): 

• If the parties agree a relatively short long-stop date (of say six months), this could be taken to indicate that the contractual offer timetable was not intended by either party to accommodate a Phase II process. This may make it more likely that the Takeover Panel will allow the offer simply to lapse upon the referral to Phase II rather than wait until the expiry of the long-stop date.
• Conversely, a relatively long long-stop date (of say 12 months) could be taken to indicate that a Phase II process was anticipated by the parties, and so it may be harder to demonstrate that a subsequent referral is material.
• There will clearly be scenarios falling in between these ranges which will require finer judgments, and the assessment is also likely to be different in a hostile scenario where the bidder has set the long-stop date unilaterally.

Another practical point is how bidders should deal with the recent, heightened risk of EU referral, due to a change in European Commission referral policy. In some cases this could mean an EU filing fairly late in the offer process, which would under the European Merger Regulation, legally prevent closing until clearance has been granted. The approach will largely depend on the likelihood of a referral: where it is a real possibility, bidders should consider including a specific condition (making it easier to suspend the offer timetable pending a resolution – see further below). Conversely, because of the relative importance of the EU regime, and the fact that it is suspensory, bidders in many situations should still be able to rely on the standard “catch all” regulatory condition requiring there be no legal impediment to closing in circumstances where the prospect of a referral is unforeseen or considered unlikely. 

4. Ability to suspend the contractual offer timetable for all regulatory clearances

Currently, it is only possible to suspend the contractual offer timetable to facilitate the offeror obtaining a decision relating to UK or EU Phase II proceedings. From 5 July 2021, there will be a greater ability to do this pending the satisfaction or waiver of any regulatory condition, including all competition (or foreign investment) clearances. 

This reflects the fact that regulatory processes are taking much longer than they used to. For UK offers with “material” global conditions, there is an average offer length of around 3-6 months. In 2020, Phase II reviews (or their equivalent) took an average of 22.9 months in the EU (vs. 10.2 months in 2011), 12.3 months in the UK (vs. 7.8 in 2011), 10.8 months in the US (vs. 7.1 months in 2011) and 12.4 in China (vs. 6.9 months in 2011) from the date of announcement to the date of decision.  

If both the bidder and target jointly request a suspension, it won’t be necessary for the Takeover Panel to determine whether the outstanding clearance is “material”. But if only one of them wants to suspend, they will have to establish with the Takeover Panel that the outstanding clearance is “material”. 

Bidders should be aware that obtaining the Takeover Panel’s agreement to suspend the timetable in relation to a clearance does not necessarily mean that subsequent failure to obtain that clearance will ultimately allow the bidder to lapse the offer. The Takeover Panel would still assess at the time the bidder seeks to invoke the condition whether the “material significance” test has been met. 

Greater scope for longer contractual offer timetables (notwithstanding the introduction of a long-stop date – see below) may also have implications for the costs associated with bids and should be factored into deal strategy at the outset. 

5. New “long-stop date” requirement for contractual offers

Similar to how schemes of arrangement are subject to a long-stop date, under the new rules bidders will have to include a long-stop date as a term in their contractual offers. This is the date on which they can seek the Takeover Panel’s consent to lapse an offer if there is an outstanding official authorisation or regulatory clearance. 

This change is intended to address bidders’ concerns about an unexpectedly long suspension of the offer timetable and will have most impact in a hostile scenario: 

• In a recommended offer, the bidder and target will simply agree the long-stop date between themselves – as we see already in offers done via scheme of arrangement.
• But in a hostile offer, the Takeover Panel must be consulted and will normally require the long-stop date to be no earlier than the date by which the last condition relating to a regulatory clearance is reasonably expected to be satisfied. This means that if the hostile bidder reasonably expects to obtain Phase I clearance, the bidder will normally be permitted to set a long-stop date which accommodates Phase I but not Phase II.

Requiring a long-stop date is intended to give more control and certainty to bidders and targets, providing a finite period in which all necessary regulatory clearances should be obtained and minimising the scope for unforeseen and commercially unacceptable delays to the offer timetable. 

6. Signposting the “material significance” of offer conditions  

To introduce more clarity, a firm offer announcement and offer/scheme document will have to make it explicit that:

• The Takeover Panel’s consent must be obtained in order for a bidder to invoke a regulatory condition to lapse an offer.
• The bidder may waive any condition/pre-condition subject to the “material significance” test.

A firm offer announcement and offer/scheme document will also be required to state which conditions/pre-conditions to the offer are not subject to the “material significance” test.

There is likely to be a renewed focus on drawing attention to shareholders which regulatory conditions are material, with a clear explanation of the circumstances which might give rise to the right to invoke them. And this is likely to have real practical implications for the smoothness of negotiations between bidders and target boards. 

Key takeaway: factor in changes to your deal strategy and preparation 

The Code changes have been a relatively long time coming. They reflect an understandable desire to simplify the process and treat regulatory conditions consistently, and acknowledge the current reality of cross-border public deals – where even deals which do not at first glance raise obvious concerns can be subject to several lengthy and complex regulatory review processes. 

This long standing reality is compounded by the increasing risk of authorities (most notably in the EU) using their powers of residual jurisdiction to “call in” deals which do not meet filing thresholds in a global regulatory environment which has become increasingly interventionist in recent times.

Bidders – including private equity funds doing P2Ps – will need to swiftly build the impact of the various changes into their deal strategy and preparation, given the potential prospect of protracted timetables on one hand, and reduced ability to walk away on the basis of antitrust and foreign investment conditions (where intervention rates have increased significantly in recent years) on the other. The outcome seems likely to be more conditionality (to avoid Phase II references in the EU and UK).