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When Do You Need to Make a Mandatory Offer Under the Takeover Code?

1 September 2021

What is the Takeover Code?

The Takeover Code is a binding set of rules that apply to UK public and certain UK private companies to ensure that shareholders are treated fairly and have the opportunity to decide on the commercial merits of a proposed takeover.

The Takeover Code comprises six general principles and 38 rules supplemented by notes, appendices and an extensive series of Takeover Panel statements, consultation papers and other forms of guidance.

The regime imposes procedures for the conduct of change-of-control transactions and ensuring the integrity of the equity markets during the period in which a bid is in contemplation.

From the point at which a bid is first “actively considered”, the Takeover Code requires secrecy to be maintained prior to announcement and, upon commencement of an offer period, regulates offer terms, timetable and dealings in the securities of the target and (when the offer consideration includes bidder securities) the bidder (whatever its jurisdiction), as well as documentation, public statements and associated disclosures.

What transactions are subject to the Takeover Code?

Under the Takeover Code, when a buyer acquires “control” of a target company it must make a cash offer to all shareholders offering to acquire their shares at the highest price paid in the last 12 months.

The Takeover Code deems “control” of a target to arise when a buyer acquires shares carrying 30% or more of the voting rights.

When does the obligation under to make a general offer to all the shareholders of a company arise?

Rule 9 of the Takeover Code requires a general offer to be made to the holders of any class of equity share capital and also to the holders of any other class of transferable securities carrying voting rights in a company which is subject to the Takeover Code (unless the Takover Panel consents otherwise) when:

  • Any person acquires an interest in shares which, together with shares in which persons acting in concert with that person are interested, carry 30% or more of the voting rights of the company; or
  • Any person, together with persons acting in concert with that person, is interested in shares which carry between 30% and 50% of the voting rights of such a company, and such person, or that person’s concert parties, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which that person is interested.

An offer under Rule 9 must be made in cash and at the highest price paid by the person required to make the offer, or any person acting in concert with that person, for any interest in shares of the company during the 12 months prior to the announcement of the offer.

Except with the consent of the Takeover Panel, a Rule 9 offer can only be conditional on the bidder receiving acceptances to give it, and persons acting in concert with it, more than 50% of the target’s voting rights.

Can the obligation to make a mandatory offer be waived?

There are a number of circumstances in which the Takeover Panel may grant a dispensation from the obligation under Rule 9.1 to make a general offer to all the shareholders of a company:

  • Where the formal whitewash procedure applies in certain circumstances as set out in the Notes on Dispensations from Rule 9 and Appendix 1. This requires a vote by independent shareholders.
  • The Takeover Panel may also grant a waiver of Rule 9 in certain other situations such as rescue operations where a company is in such a serious financial position that it can only be saved by an urgent issue of new shares or where shares or other securities are charged as security for a loan and, as a result of enforcement of the security, a lender would incur an obligation to make a general offer under Rule 9.1 and certain other limited circumstances.

What is the whitewash procedure?

The Takeover Panel may waive the obligation for a mandatory offer where more than 50% of the shareholders who are independent of the transaction pass an ordinary resolution on a poll at a general meeting (or by way of a written resolution) approving the waiver. This is known as the whitewash procedure.

By providing the whitewash procedure, the Takeover Code gives the independent shareholders of the company, subject to certain safeguards, the opportunity to assess the commercial merits of a transaction against the possibility of ceding control of the company.

In order to protect shareholders, the Takeover Panel normally grants the Rule 9 waiver only in respect of increases in the interests in shares of a person and its concert parties that result solely from the issue to them of the particular shares, for example consideration shares issued on an acquisition. If any member of the concert party acquires shares in the company other than those shares, and such acquisition takes that member through the 30% threshold or is between the 30% to 50% band, Rule 9 will apply and such member or the concert party would be obliged to make an offer for the company.

This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Lydia Mills or write to us using the contact form below.

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