UK Takeover Code consultation – is logic prevailing?

Whilst aimed at reducing uncertainty for offeree shareholders, the proposed changes to the Takeover Code may have a chilling effect on financial sponsor offerors, with longer term financing commitments and without the safety-net of being able to invoke a condition if a review goes to an unwelcome Phase 2.

The UK Takeover Panel is consulting on a number of changes to the Takeover Code rules governing the timetable for contractual offers and invoking certain offer conditions. The final amendments to the Code are expected to be published in Spring 2021.

The most relevant changes from a merger control perspective are those relating to mandatory lapsing of an offer and materiality thresholds. The Code currently affords special treatment to conditions relating to EU and UK merger clearances whereby on a Phase 2 EC or CMA reference, an offer automatically lapses and a bidder can invoke an EC/CMA condition without having to meet a materiality threshold. This is at odds with merger CPs relating to all other jurisdictions where a materiality threshold (which is set to an extremely high standard) applies in order for the condition to be invoked.

The singling out of the UK and EU regimes in this way is historical – back in the day, the majority of offerors for UK listed targets were UK companies, and merger control clearance by the CMA or EC was the principal regulatory condition offerors faced. However, the Panel considers that, post-Brexit, it is illogical to afford special treatment to the EU regime given that the EC no longer has jurisdiction over deals that would otherwise have fallen to the CMA. In addition, the Panel believes that consistent treatment should be applied to all regulatory conditions, in line with its overall objectives of minimising market uncertainty as a result of an offeror seeking to lapse its offer without, as the consultation document puts it, “good reason”.

Whilst it is true that a different approach to the CMA and EC conditions is perhaps no longer easy to justify (indeed, it is hard to argue these days that the EC is more important than, say, the US FTC/DOJ or China’s SAMR), for a PE investor who is likely to be investing in a company in order to make a swift gain, the reality of a Phase 2 review may be reason enough not want to go through with a deal. And although it can be argued that the change should not have much impact in practice because material concerns that may lead to an EC or CMA Phase 2 review should have been identified at the outset (and the offer structured appropriately as a result), the CMA in particular is increasingly unpredictable and interventionist, including when it comes to Phase 2 references that are not always foreseen (e.g. its recent review of Amazon/Deliveroo).

In fact, given the CMA’s recent track record of referring almost a quarter of deals to Phase 2 (a steady year-on-year increase from around 15% three years ago) and accepting Phase 1 remedies in numerous other cases, very few deals can be easily identified as no-issues CMA Phase 1 reviews from the outset. This, coupled with the fact that investors may need financing in place for a longer duration to afford for the possibility of a Phase 2 in absence of the offer lapsing provision, and may face additional regulatory hurdles with increased foreign investment scrutiny (including under the UK NSI Bill), is likely to be sufficient to deter financial sponsor investors from taking over UK listed companies.

Thus, whilst the view of the Panel and the market at large may be that it no longer makes sense to have the EU and UK regulatory regimes as an outlier, the proposed amendments may have the unintended effect of disincentivising offerors who have no desire to face the prospect of an arduous Phase 2 process nor wish to fork out for longer-term, more costly financing in anticipation of a potentially extended review.

Other themes in our series


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