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Developments in UK Public M&A

Developments in UK Public M&A

  • United Kingdom
  • Capital market law

11-09-2017

Practice Statement No. 31: Implications for formal sale processes

1. Introduction

On 7 July 2017, the UK Takeover Panel published Practice Statement No. 31, which sets out how the Panel Executive will apply certain aspects of Rules 2.4, 2.6, 21.2 and 21.3 of the Takeover Code (the “Code”) in the context of strategic reviews, formal sale processes (“FSPs”) and controlled auctions. Practice Statement No. 31 incorporates Practice Statement No. 3 (Controlled auctions) and Practice Statement No. 6 (Strategic review announcements), which have both now been withdrawn (and are not considered in detail in this briefing), with some minor amendments to their content and, more significantly, provides additional clarity in relation to FSP announcements and their content, the conduct of FSPs and guidance in relation to converting private discussions with a limited number of potential offerors into a FSP.

Overall, Practice Statement No. 31 codifies Panel practice in this area and provides a more structured framework for participants in these processes and their advisers.

2. Formal sale processes

Practice Statement No. 31 does not change the current position under either Note 2 on Rule 2.6 or Note 2 on Rule 21.2 that where, prior to an offeror having announced a firm intention to make an offer under Rule 2.7, the board of an offeree company announces that it is seeking one or more potential offerors for the company by means of a FSP, the Panel will normally grant a dispensation from:

  • the requirements of Rule 2.4(a) and (b) and Rule 2.6(a), such that any potential offeror which agrees with the offeree company to participate in that process will not be required to be publicly identified under Rule 2.4(a) or (b) and will not be subject to the 28 day “put up or shut up” (“PUSU”) deadline referred to in Rule 2.6(a) for announcing a firm intention to make an offer for so long as it is participating in that process; and
  • the prohibition in Rule 21.2 on the offeree company entering into offer-related arrangements, such that the offeree will be permitted to enter into an inducement fee arrangement with one offeror (which participated in the FSP) at the time of its announcement of a firm intention to make an offer under Rule 2.7, subject to the provisos in Note 1(a) and (b) on Rule 21.2 (i.e. that the value of the inducement fee must be de minimis and it must be capable of becoming payable only if an offer becomes, or is declared, wholly unconditional).

Practice Statement No. 31 states that the above dispensations will only be granted in situations where the offeree board “is genuinely putting a company up for sale”. This means that where a company is conducting a FSP as part of a strategic review, the Panel Executive will consider granting the dispensations referred to above only “if a sale of the company is genuinely being explored by the board as a possible outcome of a strategic review”. As such, a draft of an announcement initiating a FSP (or a strategic review which incorporates a FSP) has to be submitted to the Panel Executive for review and will also need to:

  • include the phrase “formal sale process” in the heading with the text of the announcement making it clear that a FSP is being commenced; and
  • explain how the FSP will be conducted, including:
    • who an interested party should contact if it wishes to participate;
    • what documentation an interested party will be required to enter into in order to participate;
    • an indicative timetable for the FSP (or a commitment by the offeree to make a further announcement in relation to the timetable for the FSP);
    • confirm whether the offeree is in discussions with, or is in receipt of an approach from, any potential offeror at the date of the announcement; and
    • explain that the Panel has granted a dispensation from Rules 2.4(a), 2.4(b) and 2.6(a) (as referred to above).

In practice, these requirements will likely not have a significant impact as the majority of announcements initiating formal sale processes or strategic reviews (incorporating formal sale processes) generally comply with the above requirements in any event. Practice Statement No. 31 therefore seeks to codify existing practice in this respect. It remains to be seen whether the Panel Executive will require any additional detail in respect of any of the above content requirements to be included than is currently the case.

Practice Statement No. 31 also states that the offeree company will need to announce updates on the progress of the FSP, as appropriate, and, if it decides not to proceed with the FSP, to announce that fact promptly.

In relation to offerees requiring potential FSP participants to enter into certain arrangements, e.g. “standstill” agreements (which prevent potential bidders from acquiring shares in the offeree company or taking certain other actions in respect of the offeree designed to obtain control) without the consent of the board of the offeree), as a condition of entry into the FSP, Practice Statement No. 31 confirms the current position that these continue to be permissible and that the offeree may enter into different arrangements with potential offerors. In addition, Practice Statement No. 31, again, confirms the Panel’s current practice of not allowing offerees to require potential offerors to agree to waive provisions of the Code as a condition to participating in a FSP except that offerees can require participants in a FSP to undertake not to request any information under Rule 21.3 (Equality of information to competing offerors), provided that the undertaking applies only until the earlier of: (i) the announcement by a third party of a firm intention to make an offer or (ii) the conclusion of the offer period (see paragraph 4 below).

3. Converting private discussions into formal sale processes

Practice Statement No. 31 also elaborates on Section 5 of Practice Statement No. 20 (which sets out the Panel Executive’s approach to the application of certain aspects of Rule 2 where a company wishes to engage in private discussions with one or more potential offerors outside of the FSP framework and chooses not to announce its intention to have those discussions).

Practice Statement No. 31 states that if a company which has been engaging in such discussions then wishes to convert them into a FSP, the Panel Executive will take into account all relevant factors in deciding whether to grant the dispensations to Rule 2.4(a) and (b) and Rule 2.6(a) (referred to above). These relevant factors may include “how far the discussions with potential offerors have progressed at the time of the proposed announcement of the formal sale process and how the company plans to include new potential offerors in the formal sale process”.

Practice Statement No. 31 goes on to say that if a company wishes to announce a FSP in circumstances in which an announcement is required to be made under Rule 2.2 (e.g. where it is the subject of rumour and speculation or there is an untoward movement in its share price), the Panel Executive will normally require all potential offerors in discussion with the company at that time, or from which the company is in receipt of an approach, to be identified pursuant to Rule 2.4(a). However, depending on the circumstances at the time, the Panel Executive may consent to a company announcing a FSP which otherwise benefits from the dispensations referred to above such that:

  • any potential offeror which subsequently agrees with the offeree to participate in the FSP following the date of the announcement will not be required to be identified under Rules 2.4(a) or (b); and
  • each of the potential offerors (whether identified or not) will not be subject to the PUSU deadline referred to in Rule 2.6(a),

provided that (and for so long as) it is participating in the FSP.

Whilst the Panel Executive must be consulted at the earliest opportunity in all cases when a company is in private discussions with potential offeror(s) and may subsequently wish to announce a FSP, Practice Statement No. 31 makes it clear that an announcement under Rule 2.2 should not be delayed in order to enable the company to seek the dispensations referred to above from Rule 2.4(a) and (b) and Rule 2.6(a).

4. Equality of information and Rule 21.3

In the context of Rule 21.3 (Equality of information to competing offerors), Practice Statement No. 31 sets out the Panel Executive’s position that the announcement of the commencement of a FSP will be treated as equivalent to the announcement of the existence of a potential offeror to which information has been given for the purposes of Rule 21.3.

Therefore, following the announcement of a FSP, any information passed to any potential offeror participating in the process must, on request (but subject to any undertakings or waivers agreed to by potential participants in the FSP, as discussed at paragraph 2 above), be passed to a bona fide potential competing offeror, even if that party is not participating in the FSP.

5. Eversheds Sutherland view

As stated at the beginning of this article, Practice Statement No. 31 does not implement any ground-breaking changes to current Panel Executive practice in the area of strategic reviews, formal sale processes and controlled auctions. However, what it does do is helpfully to combine existing Panel Practice Statements (Nos. 3 and 6) with a new, more detailed statement of Panel practice in relation to formal sale processes and their interaction with various aspects of Rules 2.4, 2.6, 21.2 and 21.3 (which has not existed previously) in a single Practice Statement which should make the relevant guidance more accessible for participants in these types of processes and their advisers.

6. Further reading

Further useful information can be accessed from the links below:

Panel Practice Statement No. 31.

The Takeover Code.

7. Eversheds Sutherland FSP experience

  • Formal sale process and recommended takeover of Synarbor plc by Star Bidco Limited, a company formed on behalf of Sovereign Capital IV Limited Partnersip, a fund managed by Sovereign Capital Partners LLP
  • Formal sale process and recommended takeover of Waterlogic plc by Poseidon Bidco Limited, a company formed by the Epic Funds, managed by Castik Capital S.à r.l.
  • Formal sale process and recommended takeover over Lochard Energy Group PLC by The Parkmead Group plc

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