From the second half of 2021, there will be substantial changes to UK public company takeover practice and procedures.
As a result these will create, within the UK regime, a more uniform framework - less EU-centric in its treatment of regulatory authorisations and clearances, and designed to create a more transparent timetable within which to manage key conditions to takeovers and mergers than that currently set out in the UK Takeover Code.
Above all, the changes are designed to simplify the timetable and enable official authorisations and regulatory clearances (including those required by the UK’s National Security and Investment Bill) to be managed within the timetable for an offer.
Although some of the proposed changes will make some corporate transactions easier, the uncertainties associated with the impact, and the tactical deployment of some of the facets of the new regime (for instance, “acceleration statements” and “acceptance condition invocation notices”), could make the outcome of other transactions more difficult to predict.
Meanwhile, in tandem with the changes to takeover timetables, the introduction of UK’s National Security and Investment Bill (NS&I Bill) - likely to be made law in Autumn 2021 - will create an additional set of conditions to be satisfied for transactions in the sectors to which it applies.
Its introduction, enabling the UK Government to look back five years and potentially to declare a transaction void, is already having an impact on deals with overseas bidders where precautionary pre-notifications are being made. Although many developed countries around the world, such as Australia and the US, have adopted similar regimes protecting critical national infrastructure and sensitive sectors from external interests, it is the notification and investigatory requirements of the proposed new regime (and its potentially punitive impact) which will most immediately cause concerns for those advising on transactions.
Changes to the Takeover Code
The current Takeover Code creates a relatively flexible takeover regime that can be tailored to the needs of a transaction on consultation with the Takeover Panel. Although it used to provide special treatment to UK and EU Merger control regimes, the Takeover Code is less helpful where a transaction triggered overseas merger and antitrust and foreign direct investment notifications and filings and the resultant conditionality had to be factored into the UK timetable.
Consequently, the revisions to the Takeover Code (which have been widely consulted on before publication of the Takeover Panel’s consultation paper (PCP 2020/1)) aim to improve this, accommodating official authorisation and regulatory clearance requirements into a simplified, and more transparent, timetable for contractual offers enabling them to be suspended to enable clearance conditions to be satisfied. Allowing an offer timetable to be suspended within a clear framework to enable a national security reference such as that required under the NS&I Bill is helpful.
Should an official authorisation or regulatory filing be required for a transaction under the new regime, the takeover timetable will be suspended at Day 37 (if both parties agree). Once a clearance has been received (or the relevant condition waived), the timetable will restart at Day 32. If the parties do not agree to a suspension, the Takeover Panel will determine whether the official authorisation or regulatory filing is material in the context of the offer and then allow, or reject, the suspension. This will enable certainty of timetable alignment at the outset of every transaction, and therefore less chance a deal could fall through.
An offer must be open for acceptance until the later of ‘Day 21’ and the date on which the offer becomes, is declared unconditional or lapses. Once an offer becomes or is declared unconditional, it must remain open for not less than 14 days. Shareholders accepting the offer will now have withdrawal rights from the date of the announcement.
There is to be one single date for the satisfaction of all conditions for a takeover which the bidder will specify. Unless the Panel has consented otherwise, all offer conditions must either be satisfied, or waived, or the offer must lapse by midnight on Day 60.
The bidder may, by making an “acceleration statement”, bring forward the unconditional date. In this case, the bidder will be required to waive all of its regulatory conditions and the requirements which are normally imposed on ‘Day 39’ and ‘ Day 53’ will not be applied.
A bidder can seek to invoke the acceptance condition (typically set at 50%) and lapse its offer by serving an “acceptance condition invocation notice” although an offer must still be open to acceptances for a minimum of 21 days.
The NS&I Bill is due to be made law in Autumn 2021, further impacting deals with overseas bidders. Countries around the world, such as Australia and the US have adopted similar regimes protecting critical national infrastructure and sensitive sectors from external interests but such major changes tend to imbue mergers and acquisitions with a more cautious tenor until established practices emerge.
The NS&I Bill will protect against investment activities by overseas buyers in 17 key sectors, including civil nuclear, communications, energy, AI and data infrastructure where the Secretary of State reasonably suspects that there is, or could be, a risk to national security as a result of that acquisition of control. A broad range of asset types will be caught including land, moveable property and IP. There will also be a set of trigger events, which enable the Government to scrutinize a broad range of transactions, even at low levels of minority shareholding interest, to determine whether there is a national security risk in that acquisition.
The regime is mandatory for transactions occurring within the 17 key sectors and precautionary notification is encouraged for deals with national security elements; there are no minimum turnover or share of supply thresholds. Proposed acquirers of shares or voting rights in entities operating within any of the sensitive sectors must seek prior authorisation from the new Investment Security Unit within the BEIS. Once the Government has been notified of a transaction that falls within the 17 key sectors, or, an event triggering control, it has six weeks in which to issue a ‘call-in’ notice. The Government then has six weeks to undertake a detailed national security assessment, extendable by nine weeks.
For five years after completion of a deal, the Government has the ability to ‘call in’ a deal for review and to impose substantial sanctions for non-compliance. The Bill affects deals which completed on or after 12 November 2020 and we are already aware of transactions for which informal representations have had to be made because they fall within the regime’s broad scope.
Although the changes to the Takeover Code have been designed to simplify procedures and respond to the impact of more complex domestic and overseas regulatory regimes, companies and their advisers, and funders, have still to work through the commercial implications of the new timetable, and the risks of the NS&I Bill, and similar regimes, before launching new transactions.
To avoid deals falling through at the last moment, companies should identify the authorisations required and regulatory implications of a transaction with their lawyers, economists and financiers before announcing them. Meantime, they must also bring their funders with them through this process highlighting the impact of a suspension on a transaction. Funders, too, will need to price into their bid finance the risks of providing available financing for what could turn out to be a protracted period.
In short, the additional scrutiny of the NS&I Bill (and its overseas equivalents) will bring a more cautious approach to deal-making, as the ramifications of failing to make a notification (with potential fines, imprisonment and the unwinding of concluded transactions amongst a range of penalties) affect not only companies themselves but the availability of financing.
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