Takeover Code: Response to amendments to Rule 21 (restrictions on frustrating action) | Fieldfisher
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Takeover Code: Response to amendments to Rule 21 (restrictions on frustrating action)


United Kingdom

The Takeover Panel's (the Panel) amendments relating to restrictions on frustrating actions, set out in Rule 21 of the Takeover Code (the Code), take effect from 11 December 2023. 

Restrictions on frustrating actions largely operate to further the General Principles of the Code.

However, such restrictions have been found to place undue limitations on the board of directors of offerees in certain instances. 

Amendments introduced by the Panel seek to ensure actions that are either immaterial in nature, or in the ordinary course of the offeree's business, are not restricted. 

These amendments provide welcome flexibility to offeree companies along with much needed clarity on the scope of such restrictions and, on this basis, are likely to be roundly welcomed.

Background – Rule 21

In accordance with General Principle 3 of the Code, Rule 21 seeks to restrict the board of an offeree from taking certain action without shareholder approval or the consent of the offeror (or potential offeror), where such action may result in an offer or potential offer being frustrated. 

The amendments introduced by the Panel seek to ensure that there is:

increased flexibility for offeree companies to carry on their ordinary course activities, including where these activities involve buying and selling assets, and to provide greater clarity as to the actions that will and will not be restricted”. 

The amendments also provide clarity as to the period during which such restrictions apply.

Key Changes

Materiality and Ordinary Course Qualifiers

Rule 21.1 has been amended so that it will not, in general, restrict an offeree board from taking an action that either is not material or is in the ordinary course of the offeree company’s business, on the basis that such action is not likely to frustrate the offer (or possible offer) and it is inappropriate for the Code to prevent an offeree company from carrying on ordinary course business.

These qualifiers now apply to:

(i) Proposed acquisitions and disposals contemplated by the offeree board; and

(ii) The entry into, amendment or termination of contracts by the offeree board (in each case during the "relevant period"). 

In determining whether an acquisition or disposal is deemed to be material, the financial tests set out in Note 2(a) continue to apply.

However, in determining whether a disposal or acquisition of assets is of a material amount, the Panel may now have regard to additional or alternative indicators of materiality that it considers appropriate, either in the context of the relevant industry, or to consider the particular circumstances of the offeree company. 

The Panel will also take in account the cumulative effect of disposals and acquisitions during the "relevant period" on the assets and business of the offeree as a whole.

The Panel further notes it will assess whether a contract is a material contract mainly by reference to its size in comparison to other contracts entered into by the offeree company, and that the Panel will apply a low threshold for determining when a contract is material.

Issuing Shares

A slightly different position has been taken by the Panel with regard to the issue of shares by an offeree company during the "relevant period", in that no materiality qualifier applies.

This is because the Panel considers that any proposed action that relates to the offeree company's share capital could have an impact on an offer (or possible offer), even where the action involves a "de minimis" number of shares. 

Any action which has the effect of changing the company's share capital that is outside the ordinary course of business of the offeree company will now be restricted, pursuant to the amended Rule 21.1(a), regardless of how material such action is considered to be by the offeree board.    

Some clarity has been provided as to when such action shall be deemed to be in the ordinary course. 

A transfer of shares out of treasury to an Employee Benefit Trust (EBT) during the "relevant period" is only likely to be in the ordinary course of the offeree company's business, where the board can show those shares are needed to satisfy the exercise of options or the vesting of awards that were granted before the beginning of the relevant period, or that are granted during the relevant period.

In relation to a grant by an offeree board of options over, or awards in respect of, shares in connection with the appointment of a new director or the hire of a new employee, the timing or level of which may not be in accordance with the offeree's normal practice under an established scheme, the Panel agreed that the Rule 21.1(a) restrictions should not normally prevent such a grant of options or awards.

Similarly, a redemption or purchase of own shares by an offeree under a programme with defined limits announced or established before the "relevant period" will normally be in the ordinary course of the offeree's business.

Offer-related employee retention arrangements

The Panel has introduced a new Note 1(c) to Rule 21.1 to provide that the Panel may treat as a "restricted action", the entering into offer-related employee retention arrangements (other than arrangements that are considered to be in the ordinary course) that relate to a period prior to the end of the offer period and which are significant in value or relate to directors or management. 

"Relevant Period" for the purposes of Rule 21

The restrictions in Rule 21.1(a) will apply during the “relevant period”. This is defined as the period from the earlier of the offeree board receiving an approach regarding a possible offer and the beginning of the offer period, until the end of the offer period.

Where an approach is unequivocally rejected by the offeree board, the relevant period will now end at 5:00 pm on the seventh day (increased from the second day as was previously the case) following the date on which the latest approach was rejected.

Reverse Takeovers and Rule 21

A new Note 8 to Rule 21.1 provides that where an offer or possible offer is a reverse takeover, Rule 21.1 will also apply to the board of the offeror as if the offeror were an offeree company and vice versa.

Schemes of Arrangement and Rule 21 

In relation to issues arising in the context of competitive bids involving a scheme, the Panel will consent to the restrictions in Rule 21.1(a) not being applied where the offeree board seeks to sanction a scheme in a competitive situation.

Where an offeror is proceeding by way of a scheme and has specified within the conditions the scheme dates by which the shareholder meetings or court sanction hearings must be held, those "mini-long-stop dates" should be capable of being extended with the consent of the parties to the offer (as is currently the case) and in a competitive situation, with the consent of the Panel (even if the extension is not agreed with the offeree board).

Equality of Information to competing offerors

The previous restriction on offerors making information requests to offeree companies in general terms has been removed, with a view to reducing the administrative burdens. 

Rule 21.3 has been amended to provide that all the information that has been provided to another offeror (or potential offeror) at the time of the request (regardless of whether the information was specifically requested) and any further information that it provides to another offeror (or potential offeror) in the seven days following the request, is provided promptly to another offeror on its general request.

This is an improvement from the previous requirement that offeror companies make specific requests of offeree companies which resulted in large volumes of detailed and specific information requests being made of offeree companies (often on a daily basis).

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