Rescues of companies in serious financial difficulty and dispensations under the Takeover Code
An obvious example is where the company needs urgently to issue new shares for cash or to capitalise debt. Ordinarily, Rule 9 would prevent this from taking place if a shareholder or concert party might end up controlling more than 30% of the voting rights unless and until: (1) a whitewash circular has been published; and (2) independent shareholders have approved the transaction. However, there may not be time for this to take place where a company is in serious financial difficulty.
Similarly, there may be occasions where it is intended that a person will acquire existing shares as part of the rescue, following which the acquirer or concert party will end up controlling more than 30% of the voting rights. In such a situation Rule 9 would normally require a mandatory offer to be made in cash at the highest price paid in the previous 12 months. However, a full takeover offer may not be feasible given the dramatic falls we have seen recently in share prices.
Thankfully, the Code anticipates the potential need for relaxation of Rule 9 when a company is in such a serious financial position that the only way it can be saved is by an urgent rescue operation. Specifically, Dispensation Note 3 on Rule 9 states that the Panel may waive normal Rule 9 requirements provided that the approval is obtained later; or some other protections for independent shareholders are provided which satisfies the Panel (e.g. undertakings as to how votes would be exercised). However, the company may in any event need to issue a circular and pass shareholder resolutions if its existing shareholder authorities under the Companies Act 2006 (i.e. from the last AGM) are insufficient to issue the shares it needs for cash on a non-preemptive basis.
Rules 6, 9 and 11 can also present difficulties where the potential bidder has acquired shares at a higher price in the market than it is now prepared to offer in the rescue takeover. Under Rule 9.5, a mandatory offer must be made at the highest price paid by the bidder or its concert parties in the previous 12 months. Also, if the potential bidder or its concert parties has acquired more than 10% for cash or securities at any time in the previous 12 months, under Rule 11 any voluntary offer must be made on no less favourable terms. Rule 6 sets a floor price by reference to the highest price paid in the previous 3 months.
The Panel has discretion to agree an adjusted price under Note 3 on Rule 9.5, Note 1 on Rule 6 and Rule 11.3. For example, the Panel might take into account a material drop in the share price since the historic acquisitions were made. Also, the attitude of the target board towards the rescue is likely to be pivotal. However, acquisitions of shares after discussions began to take place concerning the rescue are likely to be problematic.
An exemplar of the Panel’s pragmatic approach is referenced in the Panel’s 2019 Annual Report:
…there has been an increase in the number of cases involving an interplay between the Code and the insolvency regime. In particular, in the Flybe Group plc case, the Executive was confronted with a choice between the strict application of the Code and allowing a transaction which would avert the company imminently entering administration. The ability of the Executive to make such a decision out of hours over the course of a night and to allow the company to be saved is a testament to the pragmatic and responsive regulatory system that the Panel espouses.
Sadly, Flybe Group plc later became insolvent anyway but this was not due to inflexibility at the Panel.
Any Code company experiencing serious financial difficulty is advised to consult the Panel as early as possible. Such companies will also need to be mindful of the Prospectus Regulation, the Market Abuse Regulation, the Listing Rules or AIM Rules, the Disclosure and Transparency Rules, Pre-emption Group Guidelines of the FRC and available shareholder authorities for the issue of shares.