Corporate Law Update

In this week’s update: A consultation on the AIFM regime, the Takeover Panel consults on the timetable for and conditions to offers under the Code, Companies House is to close CH Direct and WebCHeck, ESMA publishes the final report on amendments to MAR for SME growth market issuers, the TCFD publishes its 2020 status report and a note on managing climate change in supply chain contracts.

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

EU consults on AIFMD regime, including asset-stripping rules

The European Commission is seeking views on the EU Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).

AIFMD is an EU Directive designed to facilitate greater harmonisation and market integration of alternative investment funds (AIFs). AIFs include a number of types of investment fund, including private equity funds.

In particular, AIMFD aims to increase the transparency and accountability of funds that hold a substantial stake in a company incorporated in the European Economic Area (EEA) or the United Kingdom (UK). It does so by introducing a series of obligations on the manager of an AIF (an AIFM).

  • Substantial investments. An AIFM must notify the competent authority in its home state (which, in the UK, is the Financial Conduct Authority) if the proportion of voting rights in the portfolio company held by an AIF managed by the AIFM exceeds or falls below certain percentage thresholds. The lowest percentage threshold triggering a notification is 10%.
  • Controlling stakes. If the AIF acquires a controlling stake in the portfolio company, the AIFM must provide certain information to the competent authority, the portfolio company itself and the portfolio company’s shareholders.

In addition, AIFMD imposes so-called asset stripping rules on managers of AIFs that acquire a controlling stake in either an unlisted company or a publicly traded company. Broadly speaking, for a period of 24 months from acquiring the controlling stake, the AIFM must use its best endeavours to prevent certain types of return of value to the company’s shareholders. These include:

  • any distribution (such as a dividend), or any share redemption or buy-back, if the company’s net assets would be reduced below the level of its share capital and non-distributable reserves;
  • any distribution exceeding the company’s profits at the end of the last financial year plus any profits brought forward and sums drawn from reserves available for this purpose, less any losses brought forward and sums placed into reserve in accordance with the law or the statutes; and
  • any reduction of capital (with certain exceptions).

The consultation contains 102 questions, four of which (questions 86 to 89) focus on investments in unlisted companies. The Commission is seeking views on whether the rules described above are necessary, effective and proportionate, with a view to potential improvements.

The deadline for responding to the consultation is 29 January 2021.

For more information on the consultation, see our colleague Harriet Miller’s blog on the consultation.

A final word on Brexit. EU law is currently scheduled to cease to apply in the UK when the so-called “implementation” or “transition” period ends at 11:00 p.m. UK time on 31 December 2020 (midnight CET on 1 January 2021). As the law currently stands, the AIFM regime will continue to operate in the UK by virtue of the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019, but only in relation to companies incorporated within the UK, effectively replicating the AIFM regime domestically within the UK.

In this sense, the European Commission’s consultation will not have a direct bearing on the UK’s domestic AIFMD regime when the transition period ends. It may, however, influence any changes the UK decides to make to that regime, and it certainly has the potential to affect UK private equity funds that invest in portfolio companies incorporated within the EU.

Takeover Panel publishes major consultation on takeover timetable and conditions

The Takeover Panel has published a significant and substantial consultation on conditions to UK takeover offers and the offer timetable set out in the Takeover Code (the Code).

Consultation Paper PCP 2020/1 covers a range of matters relating to the well-established procedure for launching and prosecuting the takeover of a company in the UK. The consultation follows an informal pre-consultation in early 2020 with selected organisations and individuals.

Central to the proposals in the Panel’s consultation is the treatment of offer conditions. The Code currently distinguishes between conditions relating to clearance under the UK or EU merger control regime and other conditions, including clearances under other anti-trust regimes and other regulatory clearances (which we will call “regulatory conditions”).

The Panel’s view is that this distinction is a legacy of former times that is no longer appropriate and will be less appropriate still when the EU merger control regime ceases to apply within the UK from the end of the year. It is therefore proposing to eliminate the different treatment between these types of conditions and to reform the timetable for a contractual offer under the Code.

The proposals set out in the consultation are far-reaching and intricate. We have summarised them below, but, in doing so, we have pre-supposed a working knowledge of the Code and the typical structure and timetable for a takeover in the UK. If you require more advice on any of the matters covered below, please contact us.

Deadline for satisfying offer conditions

An offer must be conditional on the offeror obtaining enough acceptances to give it a majority of voting rights in the target (or, in the language of the Code, the “offeree company”). Currently, the deadline for satisfying this “acceptance condition” is 60 days after the offer document is published (Day 60).

However, the deadline for satisfying other conditions is 21 days after the acceptance condition is satisfied (so, at the latest, Day 81).

  • The Panel is proposing to remove this distinction, so that the deadline for satisfying all offer conditions would be Day 60. If any offer condition is not satisfied or waived before then, the offer would lapse automatically. This is designed to simplify the offer timetable and reflects the Panel’s desire to treat all offer conditions in a similar way.
  • However, the Panel is proposing to give an offeror the option (after consulting with the Panel) to set an earlier “unconditional date” by which all offer conditions must be satisfied. If any condition is not satisfied or waived before this date, the offer would lapse automatically.
  • If an offeror does this, it would be able to bring its unconditional date forward during the course of an offer by making an “acceleration statement”.
  • There would need to be a gap of at least 14 days between an acceleration statement and the new unconditional date to allow target shareholders to decide whether to accept the offer. So, an offeror could not bring its unconditional date forward to a date less than two weeks later, nor serve an acceleration notice after Day 46 (assuming that Day 60 is not extended (see below)).
  • Moreover, because an offer must remain open for 21 days after its initial publication (Day 21), an offeror would not be able to bring its unconditional date forward to earlier than Day 21.
  • In line with the proposal that all offer conditions be satisfied by the same date, when making an acceleration statement, an offeror would need to waive any outstanding regulatory conditions.
  • An offeror would need to publish any revised offer document at least 14 days before its new unconditional date. So, if it wanted to accelerate its unconditional date to the earliest possible date (14 days later), it would need to publish its acceleration statement and any revised offer document at the same time.
  • If an offeror were to accelerate its unconditional date, the deadlines for the target to announce new material information (Day 39) and for a competing offeror to clarify its intentions (Day 53) would no longer apply.

Effectively, the ability to specify an unconditional date and to bring that date forward through an acceleration statement would turn the existing mechanism, under which an offeror can specify a “closing date” and extend that closing date up to Day 60, on its head. The existing concept of “closing dates” will no longer be relevant to a contractual offer.

Long-stop date for regulatory conditions

Separately, for contractual offers the Panel is proposing to require an offeror to specify (in its firm offer announcement and its offer document) a long-stop date by which all regulatory conditions must be satisfied. Long-stop dates are already a normal feature on offers implemented by scheme of arrangement, and the Panel’s proposals do not affect this.

If the relevant regulatory conditions are not satisfied or waived by the long-stop date and the acceptance condition too is not satisfied, the offer would lapse automatically. Where a pre-conditional offer announcement is made, the offeror is required to specify a long-stop date for satisfying the pre-conditions and publishing the offer document.

If, however, the acceptance condition is satisfied by the long-stop date but one or more regulatory conditions have not been, the offeror would not be able to lapse (i.e. withdraw) its offer without the Panel’s consent. The consultation states that the Panel would be likely to give its consent only if the outstanding regulatory condition is “material”. It then sets out a suggested approach for assessing that materiality.

The same test of materiality would apply to any pre-conditions that are not satisfied by the long-stop date. If the Panel were not satisfied the outstanding pre-condition met this test, an offer document would need to be published.

Suspending the offer timetable

Currently, where an offer is subject to UK or EU merger control, the Panel can (and usually will) “suspend” the offer timetable if, by Day 39, the relevant authority (the CMA or the European Commission) has not initiated a phase 2 investigation. This is designed to give further time for the situation to resolve itself without requiring the offeror to make a new offer.

If the decision is not to initiate phase 2 proceedings, the timetable will restart two days after that decision is announced. If the phase 2 proceedings are initiated, however, the offer lapses automatically and the offeror will need to launch a new offer in due course (if it is permitted to do so).

In line with the Panel’s proposal to eliminate the distinction between UK and EU merger control clearances and other regulatory conditions, it is proposing the following changes.

  • The Panel would be able to suspend a timetable where any regulatory condition is outstanding on Day 39, and not merely a clearance under the UK or EU merger control regime.
  • It would do so only if both the offeror and target agree, or if one of them requests and at least one outstanding regulatory condition involves a “material” authorisation or clearance. Again, the consultation proposes an approach for assessing materiality.
  • If an offeror were to set its unconditional date at Day 60 and the Panel were to extend Day 60, the offeror would likewise be able to extend its unconditional date.
  • An offer would no longer lapse automatically if phase 2 proceedings are initiated.

If the offer timetable is suspended, the Panel notes that the suspension could be brought to an end in one of three ways:

  • The last remaining regulatory condition is satisfied or the offeror waives it.
  • The offeror makes an acceleration statement (see above), bringing its unconditional date forwards. This would (as noted above) also involve waiving all outstanding regulatory conditions.
  • The offeror and the target agree to resume the timetable.

In the first and third cases, the timetable would resume seven days after the relevant trigger, making the date of the trigger “Day 32” in the new timetable and effectively giving the target an extra five days to prepare for the announcement of any material new information on Day 39.

Extending Day 60 generally

As noted above, the Panel can “suspend” the offer timetable in certain cases, effectively “extending” Day 60. The Panel can also extend Day 60 in other circumstances, including if the target requests.

Currently, certain deadlines, including Day 39 and Day 53 (see above) are reckoned by reference to the date on which the offer document is published (Day 0). They are therefore not adjusted automatically if the Panel extends Day 60 (although the Panel will typically intervene to adjust them).

Under the Panel’s proposals, if it were to extend Day 60, these deadlines would be extended automatically. This would also apply to the deadline for an offeror to revise its offer (Day 46), which is currently referenced to Day 60 so is already extended automatically if Day 60 is postponed.

If the offeror were to set its own unconditional date at Day 60 and the Panel were subsequently to extend Day 60, the offeror would likewise be able to extend its own unconditional date.

Invoking conditions

Currently, an offeror may not invoke a condition or pre-condition to an offer, other than the acceptance condition, unless the circumstances allowing it to do so are of material significance to the offeror in the context of the offer, and a target may not invoke a condition unless the circumstances are of material significance to its shareholders in the context of the offer.

In light of the proposals enabling target shareholders to withdraw their acceptances where anything arises that is material to them, the Panel is proposing to remove the restriction on a target invoking a condition to an offer.

The Panel is proposing to retain the restriction on an offeror invoking a condition or pre-condition. However, it is proposing to clarify that an offeror cannot invoke an offer condition or pre-condition without the Panel’s consent, effectively codifying existing practice.

Finally, to reflect the changes above, the Panel is proposing to introduce an explicit list of conditions that an offeror can invoke freely, without satisfying the “material significance” test above. These include familiar conditions (such as shareholder approval and admission of any consideration securities to trading), as well as the proposed new long-stop date mechanism (see above).

The consultation also proposes changes to Practice Statement No. 5, which sets out how the Panel will approach a decision as to whether circumstances are of material significance, and in relation to conditions in the context of a mandatory offer. This follows the recent case of Moss Bros Group plc, where the Panel considered these issues.

Closing or voluntarily lapsing an offer

Under the Panel’s proposals, an offeror would not be able to declare its offer “unconditional as to acceptances” (i.e. that the acceptance condition is satisfied) until all other offer conditions are satisfied or waived, effectively bringing an end to the traditional distinction between an offer being declared “unconditional as to acceptances” and becoming “wholly unconditional”. The Panel would be able to grant dispensations on a case-by-case basis.

Separately, the Panel is proposing that, if an offeror wants to invoke its acceptance condition so as to lapse its offer before its specified unconditional date, it would need to notify target shareholders by serving an “acceptance condition invocation notice”.

This seems primarily driven by the fact that, at present, it is in theory possible for an offeror to lapse an offer by invoking its acceptance condition (i.e. claiming that insufficient acceptances have been received), when in fact it is trying to rely on a material adverse change (MAC) condition but is unable to demonstrate that the MAC is of “material significance”, given the traditionally high bar set by the Panel.

The proposed mechanism would be as follows:

  • The invocation notice would need to specify a lapse date which is at least 14 days after the date of the notice, giving target shareholders 14 days to decide whether to accept the offer.
  • The notice would specify the level of acceptances that need to be reached for the offeror not to lapse the offer. Given that most offerors structure their acceptance condition at 90% of the shares to which the offer relates, the Panel anticipates that most notices would adopt this level.
  • Once an offeror specifies an acceptance level in an invocation notice, it would not be able to change that level or revoke the notice.
  • If, on the lapse date, acceptances are below the level specified in the invocation notice, the offer would automatically lapse.
  • If, however, the acceptances on that date exceed (or, presumably, meet) the level in the invocation notice, the offer would not lapse, but neither would the acceptance condition be satisfied at that time. This is because, as noted above, an offeror would not be able to declare its acceptance condition satisfied until all other offer conditions have been satisfied.

Accepting the offer and withdrawing acceptance

As noted above, the Panel is proposing to retain the existing requirement for an offer to remain open for acceptance for at least 21 days after the offer document is published (albeit in amended form).

The Panel is also proposing to retain the requirement for an offer to remain open for at least 14 days after it is declared unconditional as to acceptances. However, it is proposing to do this by including a new requirement for an offeror to give at least 14 days’ notice before closing the offer.

Finally, the Panel is proposing to allow target shareholders to withdraw their acceptance to a contractual offer at any time from the outset of the offer until either the acceptance condition is satisfied or the offer lapses or is withdrawn, effectively bringing the Code into line with other takeover regimes around the world (most notably, the regime in the United States). This may result in acceptance levels fluctuating more during the course of an offer, particularly where the target changes its recommendation.

Other changes

Currently, an offeror must announce acceptance levels for its offer on the various closing dates and when the offer becomes unconditional as to acceptances. As the concept of “closing dates” would be removed, the Panel is proposing to require an offeror to announce acceptance levels at new, specified points in time. These include:

  • the day after Day 21 and every seven days afterwards until the final week preceding the unconditional date;
  • every day during the week leading up to the unconditional date;
  • the day after the offer is declared unconditional or lapses;
  • the day on which an acceptance condition invocation notice expires; and
  • whenever acceptances pass through the maximum and minimum acceptance condition thresholds or 75% of the target’s voting rights.

Where an offer is structured as a scheme of arrangement, the Panel is proposing to impose a new requirement on an offeror to confirm that all conditions to the offer have been satisfied or waived and to undertake to the court to be bound by the scheme. This is to prevent an offeror from effectively lapsing an offer by refusing to take procedural steps required for the court to sanction the scheme.

This proposal is unlikely to change existing practice, as offerors generally agree to give a contractual undertaking to this effect in a cooperation agreement with the target.

Finally, the consultation proposes various other, more minor amendments which we do not propose to cover in this update.

What does this mean for me?

Given the extent of pre-consultation that took place, and based on previous experience, we don’t expect many changes to these proposals. The Panel will consider any responses and publish a response statement. There will then be a three-month grace period before the new rules come into effect. Companies and market participants will therefore have plenty of time to consider the potential impact of these changes on takeover practice.

Bringing a uniform approach to regulatory conditions is welcome. Often the key regulator on a deal is either outside the UK and the EU or not even a competition authority. The changes should bring helpful clarity and consistency to the way offer conditions are satisfied or (with Panel consent) invoked.

Once UK and EU merger control conditions are treated in the same way as any regulatory conditions, it will no longer be possible to evade the “material significance” test by drafting a condition to require UK or EU merger control clearance “on terms satisfactory to the bidder in its absolute discretion”.

The proposed changes to the timetable for a contractual offer also make sense, especially the single date for satisfying all conditions and “counting backwards” from the (potentially moveable) Day 60. That said, the changes are unlikely to affect the majority of takeovers, which are recommended and implemented by scheme of arrangement (which has its own timetable).

However, the changes could be quite significant in hostile and contested takeovers where bidders (and counter-bidders) may act strategically to shorten the offer timetable or minimise conditionality so as to maximise their chances of success.

It is also possible that the ability to extend the offer timetable to deal with delays in regulatory clearances may mean that we see fewer major mergers implemented through schemes of arrangement. The choice of a scheme has often been forced on a bidder because the timetable for a contractual offer is currently inadequate for dealing with extended regulatory clearance timelines.

Offerors will continue to be able to announce an offer pre-conditional on the relevant clearances being received, which leaves open the possibility of an offeror seeking Panel consent to make its offer subject to a financing pre-condition as well.

The Panel has asked for comments by Friday, 15 January 2021.

Also this week…

  • Companies House to close legacy services in 2021. Companies House has confirmed that it will be closing its Companies House Direct (CHD) and WebCHeck services by February 2021. Both services will be replaced by Companies House’s free on-line source, Companies House Service (CHS), which is available to the general public.
  • ESMA publishes final report on SME amendments to MAR. The European Securities and Markets Authority (ESMA) has published its final report on proposed amendments to the EU Market Abuse Regulation for the promotion and use of SME growth markets. Among other things, the report sets out the proposed format of an insider list for an SME growth market issuer. Assuming that the changes will not become effective before the end of 2020, they will not take effect automatically in the UK, but they may inform the UK’s approach to SME growth market issuers.
  • TCFD publishes 2020 status report. The Task Force on Climate-related Financial Disclosures (TCFD) has published its 2020 status report. The report (the third status report to date) reviews the progress of disclosures since the TCFD developed its now well-known recommendations in 2017. The 2020 report notes that, since its previous status report in 2019, the TCFD has seen “significant momentum around adoption of and support for its recommendations”. The TCFD has also published new guidance on climate-related scenario analysis and on forward-looking climate metrics, both of which can be found in the publications section of the FSB’s website.
  • Managing climate change in supply chain contracts. Last month we reported that the Chancery Lane Project has published the third edition of its Climate Change Playbook. Our colleagues, Anne Todd and Giles Neoh, have published a more in-depth note on managing climate change in supply chain contracts, which explores this and other relevant issues.