This country-specific Q&A provides an overview to M&A laws and regulations that may occur in United Kingdom.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The Companies Act 2006 and the common law of contract provide the basis for the sale and purchase of companies and other corporate entities in the United Kingdom. For takeovers of public companies which have their registered offices in the UK, the Channel Islands or the Isle of Man and which are considered by the Panel on Takeovers and Mergers (the “Panel”) to have their central place of management and control in these jurisdictions, the City Code on Takeovers and Mergers (the “Code”) will apply. The Code will also apply to certain private companies in limited circumstances, for example where any securities of such company have been admitted to trading on a regulated market or a multilateral trading facility (for example, AIM) in the United Kingdom or on any stock exchange in the Channel Islands or the Isle of Man at any time during the previous ten years.
The Code consists of a set of statutory principles (which aim to ensure the fair and equal treatment of all shareholders of the target company) and rules (which seek to apply the principles). The predominant aim of the Code and the principles is to provide a set of good commercial practice in relation to takeovers of those companies to which the Code applies and the fair and equal treatment of all shareholders. The Code is sufficiently flexible in its application, it is the spirit of the Code which should be adhered to rather than its content, and this ensures its application in scenarios not expressly covered by the rules.
In addition, other UK legislation that is likely to be relevant for an M&A transaction is the Financial Services and Markets Act 2000 (which provides an overarching framework for financial services legislation and regulation in the UK and covers public offers of securities, listing and invitations to enter into securities transactions), the Criminal Justice Act 1993 (which, along with the Market Abuse Regulation, covers restrictions on insider dealing and provisions to prevent market abuse in relation to the securities of publicly traded companies) and the Financial Services Act 2012 (which covers misleading statements and market manipulation).
The Listing Rules and the Prospectus Rules could also be relevant where a listed bidder is seeking to offer its securities to the public in the UK or admit such securities to trading on a regulated market as consideration in an acquisition and will regulate the information that the bidder will need to prepare and provide in connection with an offer of those securities. In addition, depending on the size of the transaction in question, the Listing Rules may require certain approvals to be sought and provided from both the target company and the listed bidder (e.g. shareholder consent).
If the M&A transaction gives rise to a merger control or antitrust issue, the Enterprise Act 2002 could apply, as could the EU Merger Control regime or applicable merger control regimes in other relevant jurisdictions, with the Competition and Markets Authority (“CMA”) (or the equivalent national or European authority, as applicable) investigating such issues.
What is the current state of the market?
Notwithstanding the uncertainty generated by Brexit, 2018 proved to be another growth year for UK M&A in terms of deal volume, while deal value remained on par with 2017. Notably, deals involving a UK company valued at £1 billion or higher reached a new high for more than a decade. 2019 is starting on a similar pace, with Takeda’s £46 billion acquisition of Shire completing in January.
With private equity firms continuing to expand into new sectors (including public to private transactions), corporates face more competition in the market which in turn is creating a more “seller friendly” market.
Which market sectors have been particularly active recently?
The financial services, technology, media and telecoms (“TMT”) and retail sectors proved to be the most active in 2018, with 2018 largest UK deal being Comcast’s £37 billion offer for Sky. It’s expected that the TMT sector will continue to feature as a significant part of the M&A landscape in 2019.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
The three most significant factors, we believe, will be Brexit, global economic uncertainty and US/China tariffs.
Brexit continues to cause uncertainty with it being unknown whether the UK will leave with a deal, no deal or delayed for a period of time. Businesses have begun taking preparatory action in the event of a “no deal” scenario. Notwithstanding this, Brexit poses opportunities for overseas investors seeking to capitalise on cheaper UK assets.
Linked with Brexit is the wider chill of a potential economic downturn, with Germany, the EU’s largest economy, recently posting a flat increase in GDP growth and revising down its economic forecast for 2019. Emerging markets and Asia are also experiencing a decrease in output which could adversely affect the US and have wider consequences for the global economy and M&A activity.
The ongoing imposition of tariffs on US and Chinese exports continues to raise the costs of goods or cause supply issues and squeezing businesses. The intention behind such tariffs is, of course, to promote local production and purchases which might, in turn increase the cash balances of corporates, while those companies struggling as a result could become potential targets.
What are the key means of effecting the acquisition of a publicly traded company?
There are two main means of effecting the acquisition of a UK publicly traded company: by way of a takeover offer or by way of a court approved scheme of arrangement. Both of these are governed by the Code as well as certain provisions of the Companies Act 2006.
A takeover offer is a contractual offer to all the shareholders of a target company to acquire their shares. The Code governs the making of a takeover offer (including any conditions which the offer is subject to), when an announcement is required to be made by either the target company or the bidder, the timetable of such offer and A takeover offer can be used in both a recommended situation (where the target company’s directors recommend to the target shareholders that they accept an offer) and a hostile situation.
A scheme of arrangement (a “Scheme”) is a statutory procedure and requires the scheme to be approved by the court. The provisions of the Code apply to an offer by way of a Scheme (there is a specific Appendix (Appendix 7) to the Code that covers Schemes). A Scheme must be approved by (i) a majority in number of target shareholders who actually vote (whether in person or by proxy) at the court meeting, with such majority also representing at least 75% of the target company’s issued share capital and (ii) the High Court. Once approved, the Scheme will be binding on the target company and all of its shareholders. In contrast, an offer which is only binding on those shareholders who accept the offer and the bidder will only be able to compulsorily “squeeze out” the minority shareholders once it has acquired 90% of the shares to which the offer relates. The documentation provided to the target shareholders in a Scheme is effectively prepared by the target company as it is the target company’s scheme of arrangement and, therefore, a Scheme is usually used only in a recommended offer situation.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Companies registered in England, Wales and Scotland are required to file documents at Companies House which are publicly available. For private and public companies, this will include its constitutional documents (i.e. its memorandum of association and articles of association), key information on its directors, statutory accounts, information relating to its share capital and certain resolutions passed by the members of the company. This information will, by its very nature, be historic.
Additional information will also be available in respect of listed companies which are subject to certain continuing disclosure obligations to, among other things, notify changes to capital, its board, lock-ups and shareholder resolutions (other than ordinary business passed at an AGM) as well as periodic financial reports (both annual and half-yearly, although some companies voluntarily disclose quarterly reports as well). Listed companies are also required to include in their annual reports and accounts, statements concerning their compliance with the UK Corporate Governance Code and statements concerning board independence and their controlling shareholders.
There is no obligation for a target company to disclose diligence related information to a potential acquirer, however, it should be borne in mind that dishonestly concealing any material fact or if a person does so with the intention of inducing, or is reckless in doing so, to enter into an agreement amounts to a criminal offence. By disclosing information to a potential acquirer, subject to the terms of the agreement, this may limit the seller’s liability in respect of any breaches.
To what level of detail is due diligence customarily undertaken?
In private M&A transactions, it is common for a detailed diligence exercise to be undertaken (which can cover legal, financial, commercial and tax matters) where the selling shareholders, selling company or management of the target company will provide answers and information in response to a due diligence request list provided by the buyer and its advisors, with information and documents also included in a data room for the buyer and its advisors to review. In an auction situation, it is often the case that a due diligence report is provided by the seller(s) (which the successful bidder will get reliance on) as part of the auction process which contains information on the target company or business and which may be “topped up” by the buyer and its advisors. There may also be target company or business management presentation sessions that are organized by the seller.
In a public M&A transaction, the buyer will initially conduct due diligence based on publicly available information. The extent of any further due diligence will depend on whether the offer is recommended or hostile. In a hostile bid situation, it is unlikely that a bidder will receive any further materials or support or interaction with the target company’s management team. In a recommended offer, target company management are likely to be made available to the bidder team and there may be further information provided in addition to that which is publicly available. However, due to the Code’s requirement that any information given to one bidder must be made available to any other bona fide bidder (irrespective if such bidder is hostile), the engagement and level of disclosure of information is unlikely to be to the same level as in a private M&A transaction, even in a recommended bid situation to avoid commercially sensitive information being accessed by unscrupulous bidders.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
In both public and private M&A transactions, the board of directors of the target company is the key decision making body of a company and the directors must have regard to their fiduciary duties and act in the best interests of the company for the benefit of its shareholders as a whole. In public M&A transactions, the Code sets out a number of requirements in relation to the responsibilities and conduct of the target company’s directors. All directors, not just the executive directors, are responsible for the target company’s compliance with the Code and this extends to situations where powers are delegated to a committee. In addition, the Code requires that all target directors take responsibility for the documents published in connection with a takeover bid, except for any separate opinion of the employee representatives of the target company or the trustees of the target company’s pension scheme.
Shareholders in a public M&A transaction will be able to either approve the scheme of arrangement or accept a takeover offer in respect of their shares. Significant shareholders may also be consulted by the target board shortly before a deal is announced (provided the shareholders in question have agreed to become “insiders”) in the context of the board determining whether or not to recommend a bid.
Where the transaction in question is of a particular size (broadly speaking, if the deal is 25% or more of the size of the listed company), under the UK Listing Rules, the listed bidder will need to obtain the approval of its shareholders to any such transaction. Similarly, if the transaction is with a related party, the listed bidder will need to obtain the approval of its shareholders to the proposed transaction.
In a private M&A transaction, selling shareholders will ultimately decide whether to sell their shares or not. In terms of approval rights, there may be specific shareholder approval rights contained in a company’s articles of association and/or in a shareholders’ agreement which may be triggered by a particular transaction contemplated by a private UK company. Absent this, and if the transaction is not one that the UK legislation specifically requires shareholder approval (for example, the sale to or purchase from a director of the company of a substantial asset which does require shareholder approval), specific shareholder approval in a private M&A transaction is not typically required.
What are the duties of the directors and controlling shareholders of a target company?
The duties of directors of a UK target company were codified in the Companies Act 2006, however, regard must still be paid to the common law rules relating to directors’ duties.
There are seven general directors’ duties and, in the context of an M&A transaction, the following duties are likely to be the most relevant:
- duty to act within powers (section 171): a director must act in accordance with the company’s constitution and must only exercise his or her powers for their proper purpose;
- duty to promote the success of the company (section 172);
- duty to exercise independent judgment (section 173);
- duty to avoid conflicts (section 175); and
- duty to exercise reasonable care, skill and diligence.
The duties are owed to the company and not the shareholders and only the company can enforce the duties. There is case law, however, that supports the proposition that, in the context of a takeover, some duties are owed directly to shareholders, particularly with respect to the supplying of information to shareholders regarding a takeover offer and in expressing a view whether to accept the offer or not.
In the context of a public M&A transaction, and as highlighted in question 8 above, the Code sets out a number of requirements in relation to the target directors’ responsibilities and for the target directors to take responsibility for statements made in any documentation published in connection with an offer.
Shareholders do not owe fiduciary duties to other shareholders whether majority or controlling shareholders or otherwise. Whilst minority shareholders do not, per se, have any right to challenge the majority, there are exceptions to this general rule which are limited in nature. These include a claim for unfair prejudice where the affairs of the company have been, or are being or will be conducted in a way that is unfairly prejudicial to some of its shareholders (including the shareholder bringing the unfair prejudice action).
Do employees/other stakeholders have any specific approval, consultation or other rights?
Generally speaking, employees do not have approval or consultation rights in UK M&A transactions (but care should always be taken in the context of an acquisition of a target with operations in several jurisdictions). However, the treatment of employees in an acquisition of a business (as opposed to the acquisition of a company by way of a share acquisition) will give rise to certain considerations under the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”), including certain consultation and information provision obligations. Where TUPE applies, employees of the business being acquired automatically transfer to the purchaser unless they refuse to do so. In addition, in the context of a public M&A transaction, if an employee representative has been appointed or there are pension trustees, the Code provides that they have the right to receive certain documentation relating to the takeover bid and also the right to have their written opinion on the proposed takeover bid included in the information distributed to target shareholders.
In relation to employees, bidders should also investigate whether the target company operates a defined benefit pension plan and, in particular, whether it is in deficit. It may be necessary to agree a course of action with the UK’s statutory Pensions Regulator, which could include funding, or at least guaranteeing some or all of the deficit.
A further consideration in relation to a proposed M&A transaction, is whether there is a risk of triggering any merger control thresholds which would require the prior approval of the relevant authority.
To what degree is conditionality an accepted market feature on acquisitions?
Under the Code, a takeover bid may include (i) pre-conditions that need to be satisfied or waived before the offer documentation is sent to target shareholders (such pre-conditions must be discussed with the Panel prior to being included) and described in detail in the initial announcement of a firm intention to make a bid and/or (ii) conditions need to be met in order to conclude the transaction and which apply after the offer documentation has been sent to target shareholders.
Pre-conditions and conditions which are solely subjective are not usually permitted, although an element of subjectivity may be acceptable to the Panel. Except with the consent of the Panel, an offer must not be announced subject to a pre-condition unless the pre-condition relates to no reference or initiation of proceedings or referral to the CMA or the European Commission, or involves another material official authorization or regulatory clearance and the offer in question is either a recommended bid or the Panel is satisfied that the authorization or clearance cannot be obtained within the prescribed bid timetable as set out in the Code. Financing conditions or pre-conditions are not permitted except in very limited circumstances and the Panel must be consulted in advance. A “no material adverse change” condition is often included but for a bidder to rely on this condition and withdraw its offer it must demonstrate to the Panel that the material adverse change could not have been reasonably foreseen by the bidder and is of an exceptional nature, striking at the very heart of the purpose of the transaction; this is a very high bar to meet.
With the exception of the condition as to the level of acceptances to be received in respect of a takeover offer (which cannot be lower than a simple majority of the target company’s shares), a bidder can only rely on a condition or pre-condition where the circumstances in question are of material significance to the bidder in the context of the offer. The Code makes it clear that following the announcement of a firm intention to make an offer, a bidder should use all reasonable efforts to ensure that any conditions or pre-conditions are satisfied.
In private M&A transactions, conditions are a matter of negotiation between the parties and will be driven by the commercial requirements of both parties. It is typical for such conditions to be limited to mandatory regulatory or merger control consents, reflecting the seller friendly UK market.
What steps can an acquirer of a target company take to secure deal exclusivity?
In public M&A transactions, the Code prohibits a bidder (and any person acting in concert with it) and a target company entering into any “offer-related arrangement” including break fee arrangements (see the response to question 13 below). Examples of agreements, arrangements and commitments that are considered to be prohibited offer-related arrangements include the target company agreeing (i) not to engage in discussions with a competing bidder, (ii) not to provide information to competing bidders over and above the level of information required to be provided to competing bidders under the Code, (iii) to notify the bidder of receipt of a competing offer, and (iv) to provide the bidder with the opportunity to match the competing bid or increase its bid beyond the competing bid before the target board recommend the competing bid.
A target company may, however, provide assistance or cooperation in relation to the obtaining of regulatory approvals, maintain the confidentiality of information (provided it does not agree to any prohibited “offer-related arrangement”) and commit not to solicit a bidder’s employees, customers and suppliers. A bidder may also acquire irrevocably undertakings from the target company’s directors and/or shareholders in relation to their offer, however, these may (depending on their form) fall away in the event a competing offer is made. In a Scheme, a bidder may consider acquiring shares in the market (after the offer is announced) to seek to build a stake in excess of 25% of the target company’s shares in order to make a competing Scheme unlikely to succeed, although it wouldn’t prevent a competing takeover offer from being made.
In private M&A transactions, companies are broadly free to agree whatever deal protection measures they wish and it is not uncommon to see companies in these deals entering into exclusivity agreements and break fee arrangements.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Break fees are sometimes seen in UK cross border private M&A transactions but remain relatively uncommon. A break fee must be within the target company’s express or implied powers and not be ultra vires. The directors of the company agreeing to the break fee will need to consider their fiduciary duties and comply with such duties in determining whether to agree to the break fee arrangement or not. The common law on penalties should also be considered because if the break fee is considered to be penal it may be unenforceable.
For deals covered by the Code, there is a general prohibition on break fees and other deal protection measures as it is considered that they could have the effect of deterring potential competing bidders from making an offer, or of leading to a bidder making an offer on less favourable terms than they would otherwise have done. Under the Code, the target company (or any person acting in concert with it) may not enter into any offer-related arrangement with the bidder (or any person acting in concert with it), except with the consent of the Panel. Inducement fees arrangements (including break fees) would fall into this category.
There are two limited dispensations from the general prohibition (with the Panel’s consent) namely, (i) where a bidder has made a firm announcement to make an offer which has not been recommended, the target company can agree an inducement fee with one or more competing bidders; and (ii) where a target board launches a formal sale process, the target company will normally be allowed to enter into an inducement fee arrangement with one bidder at the end of the auction process when the preferred bidder makes its announcement of a firm intention to make an offer for the target company. The Panel will also normally consent to a target company entering into an inducement fee arrangement with a “white knight” bidder where the target is already the subject of a hostile bid from another bidder. In these circumstances, the value of the inducement fee must be no more than 1% of the value of the target company (where multiple break fees have been given, these must be aggregated) and be payable only if an offer becomes or is declared wholly unconditional. The legal position on financial assistance will also need to be considered (see question 19 below).
Reverse break fees (where a bidder agrees to pay a fee to a target if its offer fails to proceed for specified reasons, for example a failure to obtain bidder shareholder consent or where required regulatory approval is not delivered) are permitted as it is not a restriction upon the target company. However, it is not acceptable for a bidder to use the reverse break fee to include conditions that, in effect, impose restrictions on the target that amount to deal protection measures (such as a restriction to engage in discussions with other bidders, a restriction on providing confidential information to competing bidders and giving the bidder matching rights or rights of first refusal in respect of a competing offer).
Which forms of consideration are most commonly used?
In public M&A transactions consideration is commonly cash, shares in the bidder or a combination of the two. The Code stipulates that certain consideration must be used in certain circumstances.
The Code requires a bidder to offer cash (or include a cash alternative) where: (i) the bidder or any person acting in concert with it has acquired for cash an interest in shares in the target company (a) which carry 10% or more of the voting rights in the target company during the offer period or the 12 months prior to the commencement of the offer period or (b) during the offer period; or (ii) where the Panel views it as necessary to ensure that all target shareholders are afforded equal treatment. Except with the consent of the Panel, the cash price offered must, in respect of (i), be at a value not less than the highest price paid by the bidder (or the person acting in concert with it) during the relevant period. Great care should, therefore, be taken by a potential bidder when considering whether to acquire shares in a potential target company before or during the offer period.
The Code also requires a bidder to offer securities as consideration in an offer where the bidder (or any person acting in concert with it) purchases for securities: (i) during an offer period and within the three months prior to its commencement, an interest in shares which carry 10% or more of the voting rights in the target company; or (ii) more than three months prior to the offer period, an interest in shares which carry less than 10% of the voting rights of the target company but the Panel views it as necessary to ensure that all target shareholders are treated similarly.
In private M&A transactions, cash is the usual consideration offered by a buyer, however, shares or loan notes may also be offered.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Once a person holds more than 3% of the voting rights of a UK company whose shares are admitted to trading on a UK regulated market or a prescribed market (e.g. AIM) whether as a shareholder or through direct or indirect holding of financial instruments, that person is required under the Disclosure Guidance and Transparency Rules to disclose that interest. Disclosure is also required if the holding in question increases or decreases through each whole percentage point over 3%. The notification thresholds for a person holding an interest in a non-UK company (whose shares are admitted to trading on a regulated market and whose home state is the UK) are 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%. Notification must be made on the standard form which can be obtained from the website of the Financial Conduct Authority (the UK regulatory for these purposes) within two trading days in respect of UK companies and four trading days in respect of non-UK companies.
In the context of a public takeover, once an offer period has commenced interests and dealings in “relevant securities” need to be disclosed under the Code. Relevant securities include, among other things, target securities subject to the offer and carrying voting rights, target equity share capital and securities convertible into or having subscription rights into either of these. Options in respect of and derivatives referenced to these securities or shares are also relevant securities.
Persons subject to the Code's disclosure regime and persons with interests in 1% or more of any class of relevant securities of the target company are required to disclose details of their interests or short positions in, or rights to subscribe for, any relevant securities of the target company. The disclosure must be made no later than 12 noon on the tenth business day after the commencement of the offer period.
Disclosure of dealings in relevant securities of the target company must be made by the bidder no later than 12 noon on the business day following the date of the relevant dealing. The procurement of an irrevocable undertaking to vote in favour of an offer by the bidder and a shareholder will not amount to a dealing provided certain criteria are satisfied (although if an irrevocable undertaking is entered into prior to the commencement of the offer period this must be disclosed and is usually done so in the announcement of an firm intention to make an offer).
At what stage of negotiation is public disclosure required or customary?
In a public takeover situation, the Code makes it clear that, prior to an announcement of an offer or a possible offer, secrecy is paramount; information must only be shared on a “need to know” basis with recipients made aware of the need to maintain secrecy. In order to maintain secrecy, advisors to both the target company and the bidder will assist with maintaining such secrecy and put in place contingency plans in the event of a leak.
There are certain circumstances under the Code where an announcement is required:
- when a firm intention to make an offer has been notified to the target board by or on behalf of a bidder;
- when an acquisition of an interest in shares in a public target company gives rise to an obligation to make a mandatory bid (where the acquisition results in the bidder (or persons acting in concert with it) holding an interest carrying 30% or more of the voting rights, or if a bidder (together with its concert parties) holds not less than 30% but not more than 50% of the voting rights but increases its shareholding);
- when, following an approach by or on behalf of a bidder to the target board, the target has become subject to rumour and speculation or there is an untoward movement in its share price (see below);
- when, after a bidder first actively considers an offer but before an approach to the target board, the target is the subject of rumour and speculation or there is an untoward movement in the target share price and there are reasonable grounds for concluding that it is the activity of the potential bidder which has led to the situation (see below).
The announcement of a firm intention to make an offer must contain information specified in the Code and will be a detailed announcement setting out, among other things, the main terms of the offer and information about the bidder, all the conditions and pre-conditions the offer or the making of an offer is subject to, the bidder’s intentions with regard to the business, employees and pension scheme of the target company and the rationale for making the offer. Where statements of intentions are made, the bidder should take as to the contents of such statements as the Panel may require the bidder to adhere to such statements.
Where there has been rumour and speculation or an untoward movement in the share price of the target company, the Code requires an announcement be made. An untoward movement is described as a movement of 10% or more compared with the lowest price for the target company shares since the time of the approach to the target board or an abrupt increase of a smaller percentage (for example, 5% in a single day). The Panel monitor dealings in shares and movements in the target company’s share price closely and the target company’s financial adviser(s) will be in regular contact with the Panel where there are movements in the target company’s share price or if there is unusual trading activity.
Bidders may also make a statement of an intention not to make an offer. The Code requires these be as clear and unambiguous as possible and the consequence of making such an announcement is that the bidder (and any person acting in concert with it) will not be able to make another bid for the target company or acquire shares which could lead to a mandatory offer being made for the target company for six months. Failure to do so could lead to the extension of the six month period. A bidder may be able to make another bid for the target company within the prescribed period if certain circumstances have arisen (e.g. a third party has made a bid for the target company) provided that this was contemplated in the announcement of the bidder.
Is there any maximum time period for negotiations or due diligence?
In private M&A transactions, there are no time limits for negotiation or due diligence unless imposed by the parties themselves. In an auction situation the target company’s directors and shareholders may seek to impose certain timetable requirements as part of the auction process but these will be deal dependent.
For public M&A transactions, while there are not specific time periods specified for negotiations or due diligence per se, the Code does impose a strict timetable on the actual takeover process. The offer document must be sent within 28 days of the date of the announcement of a firm intention to make an offer but not earlier than 14 days after that announcement unless the target board consents otherwise. An offer must remain open for at least 21 days after the date the offer document is published. Assuming no competing offer is made, the last day an offer can become unconditional as to acceptances is the 60th day after the publication of the offer document and the remaining conditions to the offer must be satisfied by the 81st day after publication. Consideration must be posted to target shareholders by the 95th day after the publication of the offer document. An offer using the scheme of arrangement process will have a different timetable driven by the High Court process.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In a private M&A transaction, the consideration payable is a commercial matter for the parties.
In a public M&A transaction, there are certain circumstances where the Code imposes minimum levels of consideration that must be offered to the target company’s shareholders.
If acquisitions of interests in shares are made during the 3 month period prior to an offer period, or between the commencement of the offer period and the bidder’s announcement of a firm intention to make an offer (or earlier if the Panel requires), the offer must not be on less favourable terms. Such offer need not be in cash, however any cash alternative consideration must, at the date of the announcement of the offer, have a value equal to or higher than the highest relevant purchase price.
Is it possible for target companies to provide financial assistance?
Under the Companies Act 2006, it is prohibited (save for limited exceptions) for a UK public company (or for any of that company's subsidiaries) to provide financial assistance, directly or indirectly, to a person acquiring or seeking to acquire shares in that public company before or at the same time of the acquisition of such shares or after the acquisition of shares where the purpose is to reduce or discharge the liability incurred for such acquisition. These prohibitions also apply equally to a UK public company providing financial assistance for the acquisition of shares in its private holding company. The prohibition on financial assistance is not limited in time and it does not matter how long the time period is between the acquisition and the giving of financial assistance.
Financial assistance is not defined in the Companies Act 2006 but examples are gifts, loans, guarantees, security or indemnities (but not in respect of the indemnifier’s own default), release or waiver.
Private companies (other than private subsidiaries of public companies which would be prohibited from giving financial assistance for the acquisition of the public company) are generally not prohibited from giving financial assistance for the acquisition of its own shares whether directly or indirectly. However, directors of a private company contemplating giving financial assistance should consider whether the company has the power to do so in its constitutional documents and should be aware of and comply with their fiduciary duties as well as insolvency issues.
Public companies may re-register as a private company in order to provide financial assistance but the assistance must only be given after the re-registration has been completed.
Which governing law is customarily used on acquisitions?
The law customarily used on UK acquisitions is English law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
Where the takeover bid is being made by way of an offer to all target shareholders, the key documentation to be produced by a bidder will be:
- the various announcements that the Code requires (see question 16);
- the offer document, the contents of which are prescribed by the Code and which will normally contain (in addition to the specific requirements of the Code) a letter from the bidder setting out the offer and, if recommended, a letter from the Chairman of the target company as well as the long term commercial rationale for the offer and the bidder’s intention with respect to business, the employees and pension schemes of the target company;
- a form of acceptance to be used by target shareholders who hold their shares in certificated form to accept the offer; and
- if a listed bidder is offering shares as consideration, or is conducting a share issue in order to raise cash to fund the offer, then an FCA approved prospectus and/or bidder shareholder circular may also be required.
If the bidder is offering target shareholders cash or a cash alternative, the announcement of a firm intention to make an offer and the offer document itself must each contain, among other things, a statement from an appropriate third party (usually the bidder’s financial adviser) confirming that the bidder has sufficient cash to complete the transaction. If the bidder fails to honour its cash commitment, and it can be shown that the third party providing the confirmation has not acted responsibly and taken all responsible steps to assure itself that the cash is available, then the third party making the cash confirmation statement will be required to provide the cash necessary to complete the offer. Given this sanction, the cash confirmation exercise is a detailed exercise carried out by the appropriate third party prior to satisfying itself it can make the statement.
If the takeover offer is being made by way of a scheme of arrangement, a scheme circular will be produced for target shareholders. Although it is the target company‘s scheme of arrangement, the bidder will be heavily involved in the production of this document which, in effect, replaces the offer document. Its contents are prescribed by the Code.
All documents must be prepared with the highest standards of care and the information in them must be adequately and fairly presented and made equally available to all target shareholders. All such documents must contain a responsibility statement given by the directors accepting their responsibility and confirming that, to the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case), the information contained in the document is in accordance with the facts and that it does not omit anything likely to affect the import of the information.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
In a private M&A deal, the parties will enter into a sale and purchase agreement while in public M&A transactions the offer document and form of acceptance or the scheme of arrangement will be used. In both instances, transfers of title to shares in a company incorporated in England and Wales must be made using a stock transfer form unless the shares in question are held in uncertificated form through the electronic CREST system.
The stock transfer form used is usually the form prescribed by the Stock Transfer Act 1963 but a company's articles may permit the directors to approve any form of transfer. Where a transfer is effected through the electronic CREST system, this is achieved through a transfer instruction being submitted through the electronic CREST system.
A stock transfer form will need to be stamped by, and stamp duty paid to, HMRC before the transfer of shares can be registered in the books of the target company. Due to the requirement to submit stock transfer forms to HMRC for stamping, there will typically be a time gap between completion of the transaction and the date on which the buyer is registered as the legal owner of the shares acquired. Stamp duty applies on the transfer of certificated shares unless the consideration for the transfer is £1,000 or less, or another exemption applies (for example, companies whose shares are listed on a recognised growth market like AIM). Stamp duty is currently payable at the rate 0.5% of the consideration paid for the shares, rounded up to the nearest multiple of £5 and must be paid within 30 days of the stock transfer form being signed and dated.
Are hostile acquisitions a common feature?
Hostile acquisitions are not common in the UK market. Bids that start out hostile quite often end up becoming a recommended bid but there have been hostile bids that have continued as such.
Schemes of arrangement, because they require the cooperation of the target company are not commenced on a hostile basis.
What protections do directors of a target company have against a hostile approach?
Target directors need to act in compliance with their fiduciary and statutory duties, in particular to act in the best interests of the company for its shareholders as a whole (see question 9 above), while the Code prohibits a target board from taking action to frustrate an offer or which denies the target shareholders the opportunity to decide on the merits of an offer.
Accordingly, the Code restricts the frustrating actions the directors can take without shareholder approval during the course of an offer or prior to an offer if the directors have reason to believe a bona fide offer is imminent which would have the effect of reducing the value of the target company or attractiveness to a potential bidder. Such frustrating actions include issuing shares, granting options in respect of unissued shares, creating or issuing securities carrying rights of conversion or subscription for shares, selling or acquiring assets of a material amount, entering into contracts other than in the ordinary course of business or even (potentially) declaring or paying an interim dividend other than in the normal course of business.
In the event of a hostile approach, the directors can urge target shareholders to reject the offer on the offer undervalues the target company and its prospects. The directors will be able to publish a defence document within 14 days of the publication of the offer document setting out its reasons for rejecting the offer, while it may also disclose new information such as interim results, profit forecasts, asset valuations or details of any material acquisitions or disposals in an attempt to further demonstrate the offer undervalues the target company. However, such additional disclosures must not, save with the consent of the Panel, be announced after the 39th day after the offer document is published in order to allow the bidder sufficient time to take such information into account into its bid and, therefore, not depriving shareholders of having all information available to them to make an informed decision on the merits of the offer. Directors may also seek out a “white knight” and, subject to compliance with the requirements of the Code, may (with the consent of the Panel) offer an inducement fee to such white knight where the hostile bidder has announced a firm intention to make an offer.
One method common in the US is to adopt a “poison pill” in an attempt to make the target company unattractive, for example, by causing a material contract to automatically terminate on a change of control. In the UK, such poison pills are not common place and, where such poison pill arrangements seek to amend share rights, such amendments are likely to require shareholder approval which institutional investors are unlikely to vote in favour of.
The other protection afforded to target boards in a hostile takeover situation is the so called “put up or shut up” regime, whereby they identify the bidder in an announcement which then forces such bidder to, by no later than 5.00 pm on the 28th day following the date of the announcement in which it is first identified, either make an announcement of a firm intention to make an offer or announce that it will not make an offer. If the bidder makes the latter announcement it will be precluded from making an offer within six months of making the announcement (see question 16 above).
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
In a private M&A transaction there are no requirements to make a mandatory offer unless such an obligation is contained in the articles of association of the target company or a shareholders’ agreement, for example under a tag right.
In public M&A transactions, where a person (including persons acting in concert with it) acquires (whether in one or a series of transactions) interests in shares of a target company carrying voting rights in excess of 30%, or where a person (including persons acting in concert with it) who holds interests in shares of a target company carrying more than 30% but not more than 50% of the voting rights acquires an interest in any other shares of the target company that increases its percentage of the voting rights, that person must make an offer to acquire all of the shares of the target company.
The consideration for such an offer must be in cash (or accompanied by a full cash alternative) at the highest price paid for the shares by the mandatory bidder in the previous 12 months. The only permitted condition for such a mandatory offer is that the bidder receive acceptances to its offer from shareholders holding shares carrying more than 50% of the voting rights of the target company.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
The Companies Act 2006 and the common law provide a number of protections to minority shareholders. Under the Companies Act 2006, shareholders may petition the courts for relief where it believes it has been unfairly prejudiced. These actions are not common however as the court will take the view that (absent the terms of the offer being manifestly unfair or improper conduct) that a fair offer has been made to all shareholders.
In addition, minority shareholders holding a specified percentage may have certain negative control under the company’s constitutional documents, while a shareholder who holds in excess of 25% of the voting right has the ability to block the passing of special resolutions of the company.
Is a mechanism available to compulsorily acquire minority stakes?
In the context of an offer, where a bidder has acquired not less than 90% of the shares to which the offer relates and not less than 90% of the voting rights carried by such shares, the bidder can “squeeze out” the minority shareholders and acquire their shares provided that it does so within three months from the last day from which the offer can be accepted. Alternatively, if the bidders has holds not less than 90% of all shares in the company and which carry not less than 90% of the total voting rights in the company, minority shareholders can require the bidder to acquire their shares in the company within one month of that right arising.
Where the 90% thresholds under an offer are not met, a Scheme may be used instead, which requires the approval of (i) a majority in number representing at least 75% in value of the shareholders voting at the meeting and (ii) the High Court. Upon the court sanctioning the Scheme, it becomes binding on all shareholders.