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In brief

The Takeover Panel has published a revised version of Practice Statement 31 dealing with the application of various rules in the context of a private sale process (PSP) run by a target company or major shareholder (as well as in the context of a formal sale process or strategic review, as were previously covered). The Panel has recognised that there are circumstances where a target company is reluctant to pursue a formal sale process and that where it instead pursues a PSP, some of the dispensations applicable to a formal sales process should apply in a similar way. The amended practice statement is available on the Panel’s website and has immediate effect.


The Panel has also published PCP 2024/1, a consultation under which it proposes to narrow the scope of its jurisdiction, principally to restrict it to covering companies with their registered office in the UK, Channel Islands or Isle of Man and whose securities are admitted to trading in the UK, Channel Islands or Isle of Man (referred to as UK-listed companies) or which were UK-listed at any time in the last three years. The deadline for responses is 31 July 2024, with a response statement setting out the final new rules expected in the autumn of 2024 and those rules then coming into force one month after the publication of the response statement. This alert summarises the key points arising from both the revised practice statement and the consultation. 

Comment

The revisions to the practice statement are helpful in formalising a viable route for a private sale process for a Code company as well as giving more detail on the application of potential dispensations in the context of formal sale processes, strategic reviews and seeking potential bidders. Our experience is consistent with the Panel’s recognition that companies can be reluctant to pursue a formal sale process in the public domain, often preferring to explore a private sale process. The revised practice statement reflects how the Panel had in some instances already started operating when approached by companies and their advisers looking to explore this route, it is helpful that this has been codified and is clear to all. Companies looking to avail themselves of a PSP should be mindful of the need for their advisers to engage with the Panel in advance and to continue to liaise with them closely throughout the process given the potential leak risk. A carefully managed PSP is, though, a welcome additional option for companies to have available to them.

The proposed narrowing of the scope of the jurisdiction of the Code removes potential uncertainty and reduces the risk of companies being subject to the Code without being aware of this. In particular, a key drawback of the “residency test” that currently applies (whereby whether a company is considered by the Panel to have its place of central management and control in the UK, Channel Islands or Isle of Man and is therefore subject to the Code depends on where the directors of the company are resident) is that a company can fall into and out of the jurisdiction of the Code when the composition of its board changes. Similarly, a potential bidder seeking to assess whether a target company is subject to the Code may not always easily be able to ascertain the residence of all directors and therefore whether the residency test is met. The potential application to UK registered companies listed only overseas of both the Code and takeover regulation of the overseas place of listing can also create uncertainty and complexity, particularly following Brexit and the “shared jurisdiction” rules of the EU Takeover Directive ceasing to apply. Meanwhile, we have over the years seen more than one example of unlisted companies and their advisers failing to appreciate that the Code applies to them and this adversely affecting sale processes that had in some cases already begun. The reduction of the “run off” period after a company has been listed from ten years to three years and the narrowing of the scope of companies to which this applies should substantially reduce this risk.

The main negative consequence of the proposed narrowing will be that some companies that are UK registered but listed overseas and currently subject to the jurisdiction of the Code will no longer be subject to any takeover regime. This is mitigated to some extent by the transitional arrangements, however, and overall the benefits of certainty and clarity clearly outweigh this limited negative impact, such that the proposed changes are likely to be broadly welcomed in the market.

In depth

Revised Practice Statement 31

The key points from the revised practice statement can be summarised as follows.

Different categories of processes:

  • The practice statement distinguishes between the following categories of processes that may be run by target companies:
  1. A formal sale process (FSP), where the target company announces a formal sale process including an explanation of how it will be conducted and who interested potential bidders should contact if they wish to participate.
  2. A private sale process (PSP), where the target company initiates discussions on a private basis with more than one potential bidder and chooses not to announce those discussions.
  3. A strategic review or public search for potential bidders.
  4. Any of the above processes where the target company has a majority shareholder (i.e., a shareholder with shares carrying more than 50% of the voting rights).
  • The practice statement then focuses on the application of Code provisions to each of these processes and when and how dispensations may apply. The relevant provisions are primarily those within Rule 2 dealing with when an announcement is required (Rule 2.2), when announcements must identify the potential bidder(s) (Rule 2.4) and when the 28 day “put up or shut up” deadline will be imposed (Rule 2.6). The practice statement also covers qualified dispensations from the prohibition on break fees (Rule 21.2) and on restricting potential bidders from requesting information under Rule 21.3.
  • Practice Statement 31 previously addressed these issues in the context of FSPs, strategic reviews and public searches for potential bidders but did not cover PSPs. The Panel has now recognised that companies may be reluctant to undertake an FSP and may prefer a PSP and the key amendments to the practice statement set out a new practice that the Panel has adopted for PSPs.

Application of Rule 2 to PSPs:

  • Where a target company is genuinely undertaking a PSP and makes an announcement commencing an offer period, the Panel will normally grant a dispensation from the requirement in Rule 2.4 to name any potential bidder with which it is in talks or from which it has received an approach. If the announcement is made on a voluntary basis, it need not identify any potential bidder. If the announcement is required under Rule 2.2, it need only identify any potential bidder that has been specifically identified in rumour or speculation.
  • If the dispensation is granted, a target company will nevertheless be free to identify any potential bidders should it choose to do so, and potential bidders should not attempt to prevent it from doing so. Any identified potential bidder will then be subject to the 28 day “put up or shut up” deadline under Rule 2.6. Any potential bidders not identified will not be subject to such a deadline.
  • Once a PSP is announced, it will be treated as a public search for potential bidders. The target company will then be expected to update the market as to progress and, if it decides not to proceed, should announce that promptly. Meanwhile, during this period, if there is rumour or speculation specifically identifying a potential bidder, an announcement identifying that potential bidder will normally be required.
  • If a target company that has been undertaking a PSP (or is otherwise in private discussions with one or more potential bidders that have approached it) wishes to announce an FSP, either voluntarily or when an announcement is required, the Panel will generally agree to this where it believes that the FSP is a genuine attempt to sell the company through that process. The additional dispensations that could then apply include:
    • An ability to enter into a break fee arrangement with a potential bidder.
    • An ability to require potential bidders participating in the FSP to undertake not to request information from the target under Rule 21.3.

Additional points to note from Revised Practice Statement 31:

  • Where a company has a majority shareholder, the position will generally be the same whether the relevant sale process, strategic review or search is being undertaken by the target company or by the majority shareholder. However, at the request of a majority shareholder (other than a majority shareholder that is itself considering making an offer for the company), the Panel will normally grant a dispensation from the “put up or shut up” requirement in respect of any particular identified potential bidder.
  • The Panel makes clear in the practice statement that companies and their advisers are expected to consult the Panel before initiating any FSP, PSP, strategic review or public search for potential bidders. It is also worth noting that under Rule 2.2(f), when the board of a company is seeking one or more potential bidders and the number of potential bidders approached is about to be increased to include more than “a very restricted number of people”, an announcement obligation is normally triggered and the Panel should be consulted prior to more than one potential bidder being approached. In practice, this means that the number and timing of approached to potential bidders under a PSP will need to be pre-agreed with the Panel to avoid triggering this announcement obligation. 

PCP 2024/1 consultation on narrowing scope of Code jurisdiction

The key proposals set out in PCP 2024/1 can be summarised as follows.

Companies to which the Code would still apply:

  • Subject to the transitional arrangements described below, the Code would only apply to companies that are registered in the UK, Channel Islands or Isle of Man (“UK registered” companies) with securities admitted to trading (currently or within the last three years) on a:
    • UK regulated market (e.g., Main Market of the London Stock Exchange)
    • UK multilateral trading facility (e.g., AIM)
    • Stock exchange in the Channel Islands or the Isle of Man (e.g. International Stock Exchange)

All referred to as “UK listed” companies.

Companies which would stop being Code companies

  • The Code would cease to apply to companies that are not UK listed companies but that are UK registered companies and are considered by the Panel to have their place of central management and control in the UK, Channel Islands or Isle of Man. The test applied by the Panel in making this determination, known as the “residency test” and based on where a majority of the company’s directors are resident, would be abolished.
  • Similarly, UK registered companies that are private companies and have within the previous 10 years have either been UK listed companies or met other criteria relating to dealings in their securities or having filed a prospectus will cease to be subject to the Code unless they fall within the above definition of a “UK listed company” due to having had their securities admitted to trading on a relevant exchange within the previous three years.
  • It is particularly worth noting that UK registered companies whose securities are, or were previously, traded solely on an overseas market (such as NYSE or NASDAQ) would automatically fall outside the Code’s jurisdiction, subject to the transitional arrangements referred to below.

Transitional arrangements for companies which will stop being Code companies

  • Transitional arrangements would apply for a period of three years following the implementation date in relation to companies to which the Code applies immediately prior to that date, but which fall outside the scope of the new regime (a “transition company”). This will provide a transition company with the chance to make alternative arrangements e.g., amending its articles of association or enabling shareholders to exit their investments.
  • Note that companies which currently are outside the jurisdiction of the Code because they do not meet the “residency test” may still be transition companies, i.e., subject to these transitional arrangements. A company will fall within the jurisdiction of the Code for a particular transaction if it satisfies the residency test on the date when the transaction is announced. 

Growth companies – proposed arrangements

  • The Code would not apply to the following companies solely by virtue of the companies’ securities being traded on:
    • The proposed Private Intermittent Securities and Capital Exchange System (PISCES) (if it comes into being)
    • Private markets (e.g., TISE Private Markets)
    • Secondary/crowdfunding platforms (e.g., Seedrs)

This is on the basis that it would be disproportionate for the Code to apply to these categories of companies.

Companies with a sole beneficial owner

  • Where companies with a sole beneficial owner technically fall within the jurisdiction of the Code (for example a public company that is a wholly owned subsidiary), it has been the Panel’s longstanding practice not to seek to apply the Code to the company, on the basis that there are no minority shareholders to be protected. The Panel is frequently consulted on this issue and proposes to codify its practice in the introduction to the Code.
Author

Robert Adam is a partner in the Firm’s Corporate Group in London and is the Corporate Know How and Training Partner. He joined Baker McKenzie as a trainee in 1998 and became a partner in 2008. Robert was seconded to the Takeover Panel for two years and also spent seven months as a partner on secondment at British American Tobacco. Robert sits on the Law Society Company Law Committee and is listed in The Lawyer's Hot 100.

Author

Nick is a partner in Baker McKenzie's London office and a member of the M&A and Corporate Finance teams. Before joining Baker McKenzie, Nick was a partner in another international law firm for over 14 years and was the head of Middle East and based in Dubai from 2007 to 2010. Nick spent one year on secondment to a San Francisco law firm between 1999 and 2000.

Author

James is a Partner in the Corporate Finance Department. James joined Baker McKenzie as a Partner in January 2016 from another multinational law firm, having been predominantly based in the London office, but also having spent time in the New York and Singapore offices. He began his career in the Sydney office of a renowned law firm and has spent time as a consultant to Barclays' M&A Legal team. James is a member of TheCityUK's Capital Markets Group.
James is a public M&A practitioner, with deep blue-book experience, having acted for international bidders seeking control of Code-governed companies, for UK targets and also as cash confirmation counsel to financial advisers across the City. He has acted as international counsel for both bidders and targets involving companies listed in other European jurisdictions.
On the capital raisings side, James has been prolific over the years, acting for both issuers and underwriters on IPOs, rights issues, placings and open offers both in the UK and across EMEA. Issuers value his proactivity and commerciality and banks his depth of knowledge and practical experience of a multitude of forms of underwriting and transaction structures, as well as the UK sponsor regime. Beyond London, he has advised on equities transactions involving issuers listed in Amsterdam, Brussels, Copenhagen, Frankfurt, Johannesburg, Paris, Saudi Arabia, Stockholm, Tallinn and Warsaw.

Author

Melanie Howard is an M&A partner in Baker McKenzie’s office in London. She joined the Firm in 2017, having spent over a decade at a Magic Circle firm.

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