Corporate Law Update

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• Takeover Panel requires Disney to make offer for Sky
• Government announces review of FRC’s powers
• FRC seeks participants for Investor Advisory Group

Takeover Panel requires Disney to make offer for Sky

It has now been widely reported that the Takeover Panel (the “Panel”) has ruled that Disney must make an offer to acquire all of the shares in Sky plc that are not already owned by Fox.

In December 2017, The Walt Disney Company (“Disney”) agreed to acquire Twenty-First Century Fox Inc. (“Fox”). Fox holds around 39% of the voting shares in Sky plc (“Sky”).

The Panel has ruled that the proposed acquisition will trigger the “chain principle” in Note 8 on Rule 9.1 of the Takeover Code (the “Code”).

What is the “chain principle”?

Broadly, the “chain principle” applies where a person acquires more than 50% of the voting rights in a company which itself holds a controlling block in another underlying company to which the Code applies. In this case, Disney has agreed to acquire more than 50% of the voting rights in Fox, and Fox in turn holds a controlling block in Sky.

Where the chain principle applies, the offeror is required to make a mandatory cash offer for the underlying company under Rule 9 of the Code.

It is rare for the chain principle to apply. The last time the Panel formally and publicly considered the principle was on the 1995 acquisition of Stanhope Properties plc by British Land, where it concluded that the principle did not require a mandatory offer for a joint venture.

In addition, in 2015, Stork Holdings Limited, a company controlled by the Qatar Investment Authority (QIA) and Brookfield Property Partners, acquired Songbird Estates plc, which held 69.4% of the shares in Canary Wharf Group plc (“CWG”). Stork subsequently made a “mandatory cash offer” for the remaining shares in CWG, which was described at the time as required under the chain principle.

What happened here?

The Panel decided that it is reasonable to consider that a significant purpose of Disney’s proposed acquisition of Fox might be to obtain control of Sky. It has therefore required Disney to make an offer for Sky.

What makes this ruling interesting is how the Panel arrived at the price per share that Disney must offer Sky shareholders. Normally, the price for a Rule 9 offer is the highest price that the bidder (or any of its concert parties) paid for target shares during the 12 months before it announced its offer.

However, Disney has not announced an offer for Sky. In addition, neither Disney (nor any of its concert parties) acquired any shares in Sky in the 12 months before Disney agreed to acquire Fox. This means there was no “natural” price at which to set Disney’s mandatory offer for Sky.

Instead, the Panel has based the offer price on Fox’s 2016 pre-conditional cash offer for Sky, which was set at £10.75 per share. In addition, Disney provided the Panel with internal valuation materials it had prepared in connection with its acquisition of Fox, which supported the price of £10.75 per share.

Fox’s offer for Sky is currently being scrutinised by the Competition and Markets Authority, which has concluded provisionally that Fox’s proposed acquisition of Sky would give rise to media plurality concerns, as it would compromise the independence of 24-hour news channel Sky News. The parties are currently working to address these concerns.

Disney must make the offer within 28 days of completing its acquisition of Fox, unless, before then:

• Fox acquires 100% of Sky’s ordinary shares; or
• Comcast Corporation or any other third party acquires more than 50% of Sky’s ordinary shares.

Notably, Disney must make the offer even if Fox’s proposed acquisition of Sky does not proceed.

Government announces review of FRC’s powers

The Government has launched an independent review into the “governance, impact and powers” of the Financial Reporting Council (FRC). The FRC is the UK’s independent regulator responsible for promoting high quality corporate governance, financial reporting and auditing.

The review will be led by Sir John Kingman, who chairs UK Research and Innovation (UKRI) and Legal and General plc and is a visiting fellow at Oxford University. He will be supported by an advisory group.

According to the Government’s announcement, the purpose of the review is to make the FRC “the best in class for corporate governance and transparency” and to help ensure it is “fit for the future”.

The review will submit its findings to the Department for Business, Energy and Industrial Strategy (“BEIS”) by the end of 2018. The review will incorporate a public consultation.

The review follows recent recommendations by both the FRC itself and the House of Commons BEIS Select Committee that the FRC’s powers of investigation and enforcement be expanded.

The terms of reference for the review state that the review will concentrate not only on the FRC’s powers, but also on (among other things) its culture, independence, accountability and resources.

The FRC has welcomed the review.

FRC seeks participants for Investor Advisory Group

The Financial Reporting Council (FRC) has announced that it is seeking participants for its new Investor Advisory Group (IAG).

The purpose of the IAG will be to provide a regular forum for the FRC to engage with representatives from across the investment chain on various matters, including corporate governance, stewardship, company reporting and audit matters. The IAG would meet four times a year at the FRC’s offices.

The FRC is seeking applications from a variety of participants, including predominantly asset managers and pension funds, but also sell-side analysts, ratings agencies, proxy advisers and sovereign wealth funds.

Interested parties should submit their nominations to the FRC by 18 May 2018.