Proposed changes to the UK Takeover Code Rules on frustrating action

The UK Takeover Panel (the Panel) has published a consultation paper (PCP 2023/1), proposing changes to Rule 21.1 of the Takeover Code which restricts a target board from taking certain actions without shareholder approval or the consent of a potential offeror on the basis that those actions could result in an offer or possible offer being frustrated. The consultation paper includes a draft practice statement explaining how it will apply Rule 21.1 if the changes proposed in PCP 2023/1 are adopted.

PCP 2023/1 also proposes certain other changes to Rule 21 relating to equality of information provided to competing offerors and information which should be provided to independent directors in a management buyout.

The deadline for comments on PCP 2023/1 is 21 July 2023. The Code Committee will publish a response statement in autumn 2023 and expects the changes to come into force one month after publication of the response document.

Restrictions on actions by the board of the offeree company

The Code Committee notes that, for the most part, Rule 21.1 operates satisfactorily and therefore no fundamental changes are proposed. However, the proposed amendments are aimed at providing “increased flexibility for offeree companies to carry on their ordinary course activities, including where these activities involve buying and selling assets, and to provide greater clarity as to the actions that will and will not be restricted”. Key changes are summarised below.

Actions in the ordinary course of business

It is proposed that Rule 21.1 is amended so that it will not, in general, restrict an offeree board from taking an action that is either not material or is in the ordinary course of business, on the basis that such an action is not likely to frustrate an offer or possible offer and it is inappropriate for the Code to prevent an offeree company from carrying on ordinary course business including where those ordinary course activities include buying and selling assets. Therefore, disposals or acquisitions of assets by an offeree board or entering into, terminating or amending a contract would only be restricted if outside of the company’s ordinary course of business and of a material amount.

Issuing shares

The approach where the proposed action relates to share capital will be different, however, on the basis that the Code Committee considers that such an action could have an impact on an offer or possible offer even where the action does not have a material effect on the offeree’s share capital. This is because any increase in a company’s share capital could have a direct impact on the cost or outcome of an offer. Any such actions in any amount will, therefore, be restricted actions unless in the ordinary course of the offeree’s business.

The notes on Rule 21.1 will be amended to state that grants of options over shares in accordance with the offeree’s normal practice under an established share option scheme and the issue of new shares by the offeree to satisfy the exercise of options under an established share option scheme will normally be considered by the Panel to be in the ordinary course of the offeree’s business. In addition, the redemption or purchase of own shares by an offeree in line with defined limits announced or established before the “relevant period” (see below) will normally be in the ordinary course of business.

Offer-related employee retention arrangements

It is proposed to add a new note on Rule 21.1 providing that the Panel may treat as a restricted action entering into offer-related employee retention arrangements that relate to a period prior to the end of the offer period and which are significant in value or relate to directors or senior management.

Timing of Application of restrictions

A new definition of “relevant period” will be included to provide that the restrictions in Rule 21.1 only apply during the period from the earlier of the offeree board receiving an approach regarding a possible offer and the beginning of the offer period until the end of the offer period, or where no offer period begins, 5pm on the 7th calendar day following the rejection of the latest approach.

Reverse Takeovers

In relation to reverse takeovers, it is proposed to introduce a new note to provide that where an offer is a reverse takeover offer, Rule 21.1 will apply to the board of the offeror as if the offeror was the offeree and vice versa.

Schemes of Arrangement

Where the board is seeking to sanction a scheme of arrangement in a competitive situation, it is proposed that the restrictions in Rule 21.1 should not apply, save in exceptional circumstances. This position resolves a question that was flagged as outstanding in the Code Committee’s response statement (RS2022/3) to PCP 2022/3.

Equality of information to competing offerors and in MBOs

It is proposed that Rule 21.3 is amended to provide that all information already provided to another bidder or in the 7 days subsequent to a request is provided promptly to another offeror on its general request. This would replace the current regime where competing offerors are required to make specific information requests to the offeree company which in practice means that offerees are subject to daily requests involving long lists of specific information which is an unnecessary administrative burden. In practice, the new rules would allow an offeror to make a single weekly generic request for information.

A similar change is proposed to Rule 21.4 so that in the case of a management buy-out the MBO team must provide on request to the independent directors any information it has provided to external finance providers. In this case, a request need not be updated every 7 days and the request can specify information which has been or is subsequently provided.

Comment

As noted in the PCP, the restriction on frustrating action is a longstanding general principle of the Code. Nevertheless, the protection it affords to a potential offeror can operate to restrict an offeree company from taking action which is in the ordinary course of its business or which is not material. This can be of particular concern in the early stages of offer discussions where there is considerable uncertainty as to whether an offer will be made or where an offer period becomes very protracted. Accordingly, there is a necessity to balance the protection given to a potential offeror against the need not unnecessarily to damage the commercial interests of the offeree. The recognition by the Code Committee of the need to achieve this balance is to be welcomed. Whilst the changes proposed do not in our view constitute a substantial amendment to the operation of Rule 21, the clarifications provided and proposed revisions to the Code, together with the proposed Practice Statement, are a helpful development.