On 17 June 2004 the Code Committee issued a 167 page consultation paper (PCP 2004/3) seeking comments on its proposals to amend various rules of the Code and SARs. The proposed changes will primarily be of interest to banks and financial groups, rather than bidder or target companies themselves, as they address some questions of perennial difficulty on which the Panel has been asked to rule from time to time, such as:
- when the Panel will grant exempt status to market makers (properly, 'principal traders') and fund managers, and the rules governing dealings by such exempt entities;
- when parties (such as other parts of an adviser's group, pension funds, EBTs, and investors in a consortium bid vehicle) are deemed to be acting in concert with, or associates of, each other; and
- the Panel's approach to stock lending and borrowing for the purposes of, for example, counting shares towards the Rule 10 acceptance condition and towards the Rule 9 threshold.
As such, the proposed changes largely codify the approach that the Panel has been taking to date. In addition, there will be increased disclosure requirements relating to irrevocable undertakings and letters of intent, and further disclosures under Rule 8 of dealings during the offer period by the bidder, target, their associates and parties holding 1% or more of any class of shares issued by the target or bidder.
Key points include:
Principal traders and fund managers
- No major changes to the current regime, under which principal traders and fund managers that can demonstrate independence from the corporate finance and broking operations of their group (where the latter are advising the bidder or target) are exempted from the presumption that they are acting in concert with the bidder or target. Exempt principal traders and fund managers are still "connected" to the bidder or target (as the case may be) and must comply with the restrictions on dealings in Rule 38.
- Updating the Code to refer to principal traders, instead of market makers; to set out the consequences of being granted exempt status; and to specify when an overseas fund manager can apply for "special exempt manager" status, and when a trading entity can apply for ad hoc exempt principal trader status.
- Introducing a new Rule to prevent a bidder and persons acting in concert with it from using SETS or another anonymous order book system to get round the prohibition in Rule 38.1 on an exempt principal trader connected with a bidder or target carrying out any dealings designed to assist it. The new Rule will effectively require the purchaser to be able to demonstrate that it knew the identity of the seller and that the latter was not an exempt principal trader connected with the bidder.
- Amending Rule 38.3 (Assenting securities) in line with the Panel's existing approach so as to prohibit an exempt principal trader connected with a bidder purchasing assented securities (Eg. to prevent acceptances being withdrawn).
- Codifying certain Panel views about when a connected non-exempt principal trader or fund manager can deal in target shares.
Disclosure requirements and amendments to Rule 8 (Disclosure of dealings during the offer period)
- So that a complete picture of dealings is disclosed, amending Rule 8 and Note 7 on Rule 8 so that a shareholder holding 1% or more of a physical class of relevant securities (in bidder or target) is required to disclose all further dealings in both: (1) any class of relevant securities issued by the company concerned; and (2) all options in respect of, and derivatives referenced to, any class of relevant securities issued by that company. At present a shareholder need only disclose its holding in the class of relevant securities of which it holds 1% or more. Disclosures will have to include the holder's resultant position in all relevant securities. Any linked transactions (such as contracts for differences referenced to target shares) and side agreements which allow a party to control voting rights in underlying shares, or actually to acquire them, will also have to be disclosed.
- Adding a new Rule requiring a disclosure to be made if a bidder or its concert party deals in target company securities on a cum dividend basis at a time when the prevailing basis for the market quotation is ex dividend (or vice versa). The new Rule is designed to ensure that the market is not misled into believing that the bidder will (for example) have to increase its offer price.
- Including a new sentence in Note 2 on Rule 8 specifying that shares acquired by subscription, as well as purchase, have to be disclosed under the Rule. Any right to subscribe for target shares will also have to be detailed in a Rule 2.5 announcement.
Acting in concert and associate status
- Reiterating that, in deciding whether a party should be deemed to be acting in concert with another, the Panel will look at the particular facts and will apply the principles in Panel Statement 2004/12.
- Codifying the Panel's view that if an adviser 'stands down' because of a conflict of interest, this rebuts the presumption that the adviser is acting in concert with its client. But standing down for any other reason is not of itself sufficient to rebut the presumption. Also, an adviser will be presumed in concert even if it is not acting in connection with the offer in question.
- Clarifying that where a consortium investor takes 5% or less interest in the bid vehicle, the Panel normally waives the presumption that fund managers and principal traders connected to the investor are acting in concert with the bidder for the purposes of Rule 7.2 (ie. if it can be demonstrated that the fund manager or principal trader is acting independently, their dealings are not treated as those of the bidder). If the interest is between 5 and 20%, a waiver may be given.
- Stating expressly in the Code that the presumption that a company is acting in concert with its pension fund (and the pension funds of other companies in the group) can be rebutted if the fund is managed under an agreement giving an independent third party absolute discretion on dealing, voting and offer acceptance; and that an EBT is presumed to be an associate of the company which established it.
Irrevocable commitments and letters of intent
Amending the Code so that, for the purposes of disclosure and putting documents on display, letters of intent (to accept or reject an offer, or to vote in a particular way) (LOIs) will be treated as equivalent to irrevocable undertakings.
- Extending existing Rules so that when an irrevocable or LOI is obtained during an offer period, its key terms and price will have to be disclosed by the following day. If an offer period is started by a Rule 2.4 announcement that talks are taking place, or a party is considering making an offer, the disclosure obligation will apply to any irrevocables signed up after that announcement is made. Provided that, as is normal, irrevocables are only signed up the night before the bidder's Rule 2.5 announcement of a firm intention to make an offer, disclosure can be made in that announcement. Similarly if, after posting its defence document, a target obtains an irrevocable or LOI not to accept an offer, this will be disclosable and the document will have to be put on display. If an irrevocable is breached, or the giver of an LOI changes its mind, or realises that it will not be able to comply, an announcement will also have to be made.
- Clarifying that Rule 4.4(iii) does not prohibit advisers (including stockbrokers) to a target company from obtaining irrevocable commitments or letters of intent not to accept an offer.
- Amending Rule 24 so that an offer document will now only have to include details of the shareholdings in the target company (and, if appropriate, the bidder) in respect of which an irrevocable or letter of intent has been given (rather than, as at present, all the holdings of such givers). Similar amendments are proposed to Rule 25 (Target board circulars).
- Requiring that, in an announcement of acceptance levels under Rule 17, the bidder must make clear the extent to which the level of acceptances includes shares which are the subject of an irrevocable or letter of intent.
Stock borrowing and lending
- Setting out that the Panel does not normally treat as a "dealing" any stock borrowing or lending on normal market terms by a person who is not the bidder, target or an associate of either; and that the Panel treats a lender of stock as controlling it even though title to the stock is normally transferred to the borrower (against an obligation to return it or equivalent stock at some point in the future). But a 1% shareholder should consult with the Panel if it proposes to borrow stock for "a reason connected with an offer" (Eg. for the purpose of voting in favour of a Class 1 resolution or a scheme of arrangement) rather than, for example, to fill a short position or to on-lend.
- Codifying that the bidder, target and their associates may not carry out any stock borrowing or lending during an offer period without the consent of the Panel.
- Reflecting in the Code the Panel's 'prudent' approach to stock lending and borrowing: ie. that a bidder cannot count towards the Rule 10 acceptance condition any stock that it has borrowed (because it has an obligation to return it) or lent (because there is a risk that it may not get the stock back); and that, conversely, borrowed and lent stock does count towards the Rule 9 threshold. A new Rule will oblige a party to consult with the Panel before borrowing or lending stock which could trigger a Rule 9 obligation.
Disclosure in target company circulars of dealings by the target and its directors
- Changing Rule 25.3 so that disclosure will be confined to dealings by such persons, and those acting in concert, or associated, with them during the offer period, rather than (as at present) over the 12 months preceding the offer period.
Acquisitions from a single shareholder
- Codifying that a purchase of securities from a fund manager managing accounts on behalf of several underlying clients (whether or not on a discretionary basis) is not normally treated as a purchase from a single shareholder for the purpose of Rule 5.2 or the SARs.
The consultation closes on 1 October 2004. The consultation paper can be found on the Panel's website at http://www.thetakeoverpanel.org.uk/.
For further information, please contact Charles Waddell at [email protected] or on +44 (0)20 7367 3602 or Peter Bateman at [email protected] or on +44 (0)20 7367 3145.