UK Public M&A : MAC conditions and the latest Panel ruling

The UK Takeover Panel Executive (the Executive) announced on 20 May 2020 (Panel Statement 2020/4) that a bidder (Bidco) cannot invoke MAC (material adverse change) conditions. This is not surprising as the bar to invoke a MAC condition is a high one. Although Bidco had expressly drawn attention (in the scheme document) to the conditions it wanted to invoke, the conditions were general in nature and not specific to the target.

Bidco had asked for a review of the ruling but withdrew its request and, so, the Executive’s ruling stands (2020/6).

Background

The offer for Moss Bros Group (Moss Bros) was announced on 12 March 2020 and made minimal references to COVID-19 (Rule 2.7 announcement).

Moss Bros issued a trading statement on 23 March 2020 in which it confirmed that the disruption to its operations was expected to result in deterioration of Moss Bros' financial performance and position when compared to expectations that existed at the time of the Rule 2.7 announcement, and that at the current time it was not possible to quantify this deterioration.

In the scheme document published on April 7, Bidco made reference to COVID-19 and to four general conditions which might be relevant in particular. The scheme document also made it clear that the Panel’s permission would be required if Bidco wanted to invoke any of these conditions and Rule 13.5 (Invoking conditions and pre-conditions) would apply.

On 22 April Moss Bros announced Bidco was seeking to invoke a condition to the scheme and confirmed that Moss Bros “will take all necessary action to make its case that those requirements [to permit the condition to be invoked] have not been met and that the Offer should not therefore be permitted to lapse”.

On 23 April 2020, Moss Bros announced that the scheme timetable was unchanged. That announcement stated that “The Takeover Panel has informed Moss Bros that it will consider Bidco's request for a ruling and Moss Bros' rebuttal of the basis for any invocation of a Condition. However, the process to do so is unlikely to be concluded prior to the Court Meeting and General Meeting taking place.” The court and general meetings took place on 29 April and approved the scheme.

On 12 May 2020, Moss Bros published a trading statement in which it stated that the Board remained in dialogue with the Takeover Panel. The Board also stated that it “is now confident that the Group has sufficient cash resources to continue trading through the second half of FY21 and beyond. The Group remains debt free and retains cash in the bank.”

The Rule 13.5 hurdle

Rule 13.5 states that:

“An offeror should not invoke any condition … so as to cause the offer not to proceed, to lapse or to be withdrawn unless the circumstances which give rise to the right to invoke the condition …are of material significance to the offeror in the context of the offer.”

The test is a high one. To invoke it, the tests in Practice Statement No 5 must be satisfied. Practice Statement No 5 was issued following the WPP/Tempus ruling (Panel Statement 2001/15). In that case the bidder was not able to invoke a MAC condition notwithstanding significant market falls in the immediate aftermath of the 9/11 attack.

Practice Statement No 5 states:

“In applying Rule 13.5(a) in the light of the Panel’s decision set out in Panel Statement 2001/15, the Panel Executive’s practice is as follows:

• as set out in Rule 13.5(a), the appropriate test for the invocation
  of a condition is whether the relevant circumstances upon which the
  offeror is seeking to rely are of material significance to it in the
  context of the offer – which must be judged by reference to the facts
  of each case at the time the relevant circumstances arise;
• in the case of a MAC, or similar, condition, whether the above test
  is satisfied will depend on the offeror demonstrating that the
  relevant circumstances are of very considerable significance striking
  at the heart of the purpose of the transaction; and
• whilst the standard required to invoke such a condition is therefore
  a high one, the test does not require the offeror to demonstrate
  frustration in the legal sense.

In accordance with RS 2004/4, in considering whether a particular matter should give rise to the right to invoke a condition, it is the Executive’s practice to take into account all relevant factors, including whether:

• the condition was the subject of negotiation with the offeree
  company;
• the condition was expressly drawn to offeree company shareholders’
  attention in the offer document or announcement, with a clear
  explanation of the circumstances which might give rise to the right
  to invoke it; and
• the condition was included to take account of the particular
  circumstances of the offeree company.”

The Executive’s ruling

The Executive has ruled Bidco cannot invoke any of the MAC (material adverse change) conditions as Bidco has not established that the circumstances which give rise to its right to invoke the relevant conditions are of material significance to it in the context of its offer as required by Rule 13.5(a) of the Takeover Code.

As noted above, this is not surprising as the bar to invoke a MAC condition is a high one. Although Bidco had expressly drawn attention (in the scheme document) to the conditions it wanted to invoke, the conditions were general in nature and not specific to the target. Invoking conditions has always been hard to do in UK public offers. The Executive’s ruling may lead to the same question which followed the WPP/Tempus decision, namely what is the point of including MAC conditions if it is impossible to invoke them? The Executive issued Practice Statement No 5 to address this question and this latest ruling reflects that position.