Rule 16.1 of the UK Takeover Code ("Code") relates to special deals. It flows from General Principle 1 of the Code, which aims to ensure that all shareholders of the same class in a target company must be "afforded equivalent treatment" by an offeror.
Under Rule 16.1, except with the consent of the Panel on Takeovers and Mergers ("Panel"), an offeror (and persons acting in concert with it) may not make any arrangements with shareholders, and may not deal or enter into arrangements to deal in shares in the target company, or enter into arrangements which involve acceptance of an offer (either during an offer period or when one is reasonably in contemplation), if there are favourable conditions attached which are not being extended to all shareholders. Further, by virtue of Rule 35.3, the prohibition contained in Rule 16.1 continues for a period of six months from the closing of the offer.
Note 2 to Rule 16.1 provides that the Panel may consent to certain transactions which might otherwise breach Rule 16.1 if there is a favourable "fair and reasonable" opinion by the target company's independent adviser, and independent shareholders approve the transaction by poll at a general meeting of shareholders.
The first section of this article explores two transactions where note 2 to Rule 16.1 became relevant; the second section explores whether Rule 16.1 might be breached by a genuine joint offeror who is already a shareholder in the target company (and what constitutes a genuine joint offeror); and the final section investigates the application of Rule 16.1 to debt syndication during offer periods. As will be seen, although Rule 16.1 appears relatively straightforward and seemingly of obvious application, its requirements can prove onerous and it can produce significant complexity capable of having a material impact on any offer.
The Panel should of course be consulted at an early stage to establish how Rule 16.1 might apply in any particular case.
B. Note 2 to Rule 16.1 – two transaction studies
Note 2 to Rule 16.1 of the Code provides as follows:
"In some cases, certain assets of the offeree company may be of no interest to the offeror. There is a possibility if a person interested in shares in the offeree company seeks to acquire the assets in question that the terms of the transaction will be such as to confer a special benefit on him; in any event, the arrangement is not capable of being extended to all shareholders. The Panel will normally consent to such a transaction, provided that the independent adviser to the offeree company publicly states that in his opinion the terms of the transaction are fair and reasonable and the transaction is approved at a general meeting of the offeree company's shareholders. At this meeting the vote must be a separate vote of independent shareholders and must be taken on a poll. Where a sale of assets takes place after the offer has become unconditional, the Panel will be concerned to see that there was no element of pre-arrangement in the transaction.
The Panel will consider allowing such a procedure in respect of other transactions where the issues are similar, eg a transaction with an offeree company shareholder involving offeror assets."
As can be seen, Note 2 to Rule 16.1 is designed primarily to address the situation where an offeror does not wish to keep certain target company assets and enters into an arrangement to dispose of those assets to an existing target company shareholder. However, the Panel may allow the independent financial adviser opinion/independent shareholder voting procedure set out in the Note in respect of other transactions that might possibly be in breach of Rule 16.1, where target shareholders are not being afforded equivalent treatment (which would also be a breach of Code General Principle 1).
Set out below are summaries of two interesting transactions, illustrating the potential complexities in relation to Rule 16.1 and Note 2, and the approach taken to them by the Panel.
Asia Coal Energy Ventures Limited's ("ACE") offer for Asia Resource Minerals plc ("ARMS")
A 2015 deal, in which Atanaskovic Hartnell acted for ARMS, demonstrates, in particular, the sometimes complex work which needs to be undertaken by a target company's financial adviser in coming to a view that the terms of a particular transaction are indeed fair and reasonable for the purposes of Note 2 to Rule 16.1.
ACE announced a possible offer for ARMS on 14 April 2015. This was an unsolicited offer and had the effect of disrupting a planned recapitalisation of ARMS which was backed by the ARMS board and Mr. Nathaniel Rothschild (who held approximately 17.2% of ARMS' shares). ACE itself held 4.65% of ARMS' shares and had a concert party which held another 23.75% of ARMS' shares, with the other significant shareholder at that time being Raiffeisen Bank International ("RBI"), which controlled 23.8% of ARMS shares. Winning over RBI was critical to the success or failure of ACE's offer.
ACE announced a firm cash offer for ARMS on 7 May 2015, and that it had entered into a loans acquisition agreement ("Agreement") with RBI to acquire certain loans ("Loans") made by RBI to certain companies ("Acquisition"), including the 23.8% shareholder in ARMS whom RBI controlled1, and that that shareholder had also entered into an irrevocable undertaking ("Undertaking") with ACE to, inter alia, accept the ACE offer in respect of its ARMS' shares (subject to certain conditions, including the passing of a resolution approving the Acquisition and the Agreement for the purposes of Rule 16.1).
The Agreement and the Undertaking constituted an arrangement with a person interested in ARMS' shares on terms which were not being extended to other shareholders. Accordingly, there was a risk that ACE was giving a collateral benefit to RBI for the shareholding in ARMS through the Agreement. As a result, the Panel paid very close attention to the terms of the Acquisition and Agreement, and considered that this was something falling within the ambit of Note 2 to Rule 16.1, such that the Acquisition and Agreement could not proceed without (a) Rothschild Group (ARMS' Rule 3 adviser) publicly stating that in its opinion the terms of the Acquisition and Agreement were fair and reasonable; and (b) the Acquisition and Agreement being approved by ordinary resolution of ARMS' independent shareholders on a poll. ACE's offer was therefore conditional, inter alia, on such approval being obtained.
The task of Rothschild Group in these circumstances was an unusual one, inasmuch as it was essentially being asked to ensure that the purchaser (ACE, the ARMS offeror) was not in effect paying an uneconomically high price for the assets to be acquired from the vendor (RBI, the controller of the target shareholder), and therefore in effect supplying a collateral benefit to RBI as an additional incentive for selling its shares in ARMS.
In order to come to the fair and reasonable opinion it ultimately reached, Rothschild Group not only had to look at the terms of the Agreement itself, but had to, inter alia, assess the value of the security relating to the Loans and review legal analysis as to the ability of RBI to enforce the security relating to the Loans. This entailed a complex and multi-jurisdictional exercise in Indonesia, Singapore, Malaysia, British Virgin Islands and the UK.
Although on this occasion there was no material impact on the offer timetable, the complexity and volume of the work, and the number of advisers involved, emphasises the need to consider potential Rule 16 issues, and if necessary to consult with the Panel, at the earliest possible stage.
Ultimately, ARMS' shareholders voted overwhelmingly to approve the Acquisition and Agreement, not least because by that stage ACE had increased its offer substantially. It seems likely that shareholders were minded to accept the revised offer in any event (as shareholders tend to do with any offer which is attractive to them and which they do not regard as being too unfairly good to any one of their number), without feeling the need to give much detailed consideration as to whether it was "fair and reasonable".
What if an independent shareholder vote cannot any longer take place?
This issue was considered by the Panel in Takeover Panel Statement 1987/23, dated 17 September 1987. The events leading up to that Statement (as summarised in that Statement) are as follows:
|16-Jul-87||British & Commonwealth Holdings plc (“B&C”) announced a recommended offer for Mercantile House Holdings plc (“Mercantile”)|
|28 July-6 August-87||Quadrex Holdings Inc (“Quadrex”) became a potential offeror for the whole of Mercantile and put proposals to the Mercantile board|
|07-Aug-87||B&C increased its offer and issued a revised offer document on 11 August|
|17-Aug-87||B&C announced an agreement with Quadrex to sell, for £280 million in cash, the wholesale broking business of Mercantile. The Panel executive (“Executive”) ruled then that, since Quadrex held some 7% of Mercantile, this agreement (“Quadrex Agreement”) was subject to the procedure set out in Note 2 to Rule 16, with both B&C and Quadrex, as interested parties, not voting|
|03-Sep-87||B&C declared its offer unconditional as to acceptances|
|04-Sep-87||The circular explaining the Quadrex Agreement and convening the Rule 16 shareholders’ meeting for 21 September was sent to Mercantile’s shareholders|
|16-Sep-87||Crownx Inc (“Crownx”) announced it had approached the Mercantile board with a proposal to buy the wholesale broking business of Mercantile, for the same cash price payable by Quadrex plus an extra 10p per share, to all Mercantile shareholders accepting the B&C offer|
Appropriate arrangements had been made to ensure that, notwithstanding that shareholders may have accepted the B&C offer, they would be able to exercise their voting rights at the Rule 16 shareholders' meeting should they wish to do so. This included Crownx, a 15% shareholder in Mercantile. Accordingly, at least until Crownx's announcement of 16 September 1987, it was possible for the normal procedure to be followed and the purpose of the Rule 16 shareholder resolution to be fulfilled.
Crownx argued that its own proposal proved that the Quadrex Agreement involved a special deal for Quadrex such that the equality of treatment principle set out in General Principle 1 of the Code had been breached. The Panel, however, rejected this argument.
The Panel considered that the Crownx proposal had introduced a factor that was likely to mean that Mercantile shareholders could not, in effect, be voting at the Rule 16 meeting on whether or not the Quadrex transaction involved favourable conditions to Quadrex as a shareholder of Mercantile. Rather, because the Crownx proposal was dependent on such Rule 16 resolution not being passed, Mercantile shareholders would be influenced by issues irrelevant to the purpose for which the Rule 16 resolution was designed, i.e. to fulfil the requirements of Rule 16.
The Panel ruled that there was no evidence to suggest that the Quadrex Agreement involved any special benefit to Quadrex such as could result in it effectively receiving a greater amount per Mercantile share than other shareholders of Mercantile. In this regard, it was important that the Quadrex Agreement had been independently assessed by Warburgs who had concluded that the transaction was fair and reasonable when it was entered into, and that Warburgs had made a statement to this effect publicly in the circular sent to Mercantile's shareholders on 4 September. The Panel therefore determined that "one of the important features of the requirements of Rule 16 in the circumstances of a sale of an asset to a shareholder had been satisfied. Since the Panel considered that it was now not possible for the second element of the Panel's normal requirements to be satisfied, that is a resolution of shareholders approving the transaction, within the purposes of the Rule, the Panel decided that it should, in these unusual circumstances, waive that second requirement."
Accordingly, it can be seen that, whilst an independent shareholder vote is generally required in the circumstances envisaged in Note 2 to Rule 16.1, the Panel can be prepared to waive that requirement in certain unusual circumstances.
C. What constitutes a genuine joint offeror?
This issue was considered in Panel Statement 2003/25, dated 21 November 2003, in relation to the possible acquisition by Silvestor Holdings Limited ("Silvestor") of Canary Wharf Group plc ("CW").
Silvestor was a consortium led by Morgan Stanley Real Estate Fund IV International LP and Mr. Simon Glick, Mr. Glick already holding a significant number of shares in CW. Under the consortium arrangements, Mr. Glick was given special shares with preferential rights to income and capital not given to other shareholders in CW.
Brascan Corporation ("Brascan"), a potential competing offeror for, and shareholder in, CW, argued that the consortium terms provided Mr. Glick with "disguised incremental consideration" in his capacity as an existing shareholder in CW, which was not available to other CW shareholders. Accordingly, Brascan alleged that this was in breach of Rule 16 and General Principle 1 of the Code, and not consistent with Mr. Glick being a joint offeror.
The Panel confirmed that the Executive takes the view that, where two or more persons come together to form a consortium on such terms and in such circumstances that each of them can properly be considered to be a joint offeror (as opposed to simply acting in concert with the offeror vehicle), Rule 16 is not contravened if one or more of them is already a shareholder in the target company. Whether a person is a joint offeror must be judged on the facts of the particular case and by the following factors or criteria developed by the Executive:
- what proportion of the equity share capital of the bid vehicle will the person own after completion of the acquisition? (A significant proportion, both in absolute terms and relative to other shareholders, is required.)
- will the person be able to exert a significant influence over the future management and direction of the bid vehicle?
- what contribution is the person making to the consortium?
- will the person be able to influence significantly the conduct of the bid?
- are there arrangements in place to enable the person to exit from his investment in the bid vehicle within a short time or at a time when other equity investors cannot?
The Panel dismissed Brascan's appeal for the following reasons:
- Mr. Glick's considerable history of involvement in CW, and his interest in protecting his investment and seeing it prosper in the future, suggested that the provisions in the consortium arrangements giving him significant influence over the future management and direction of the bid vehicle were not mere "window dressing";
- Mr. Glick's close personal involvement in the evolution of the consortium's business plan and formulation of its bid strategy, his very substantial financial contribution to the consortium (he would become the single largest shareholder in the bid vehicle), and his exposure to very substantial risks due to the additional debt burden generated by financing the acquisition;
- the special shares given to Mr. Glick as part of the consortium arrangements were not incompatible with his status as a joint offeror. Although such arrangements could undermine a person's status as a joint offeror, in light of the other provisions they did not in this instance constitute special treatment contrary to Rule 16, and, as a joint offeror, Mr. Glick could agree the terms of his participation in the bid vehicle as he saw fit;
- there was no provision for Mr. Glick's short-term exit from the consortium.
Accordingly, when a bid consortium comprising one or more existing target company shareholders is to be formed, it will be necessary to consider carefully whether those consortium members are genuine joint offerors and, if necessary, seek appropriate guidance from the Panel.
D. Debt Syndication During Offer Periods – Application of Rule 16.1
The final part of this article relates to Practice Statement 25, dated 17 June 2009 (and amended on 19 September 2011) ("PS"), which describes the way in which the Executive normally interprets and applies certain provisions of the Code in the context of the syndication of debt financing during offer periods, and which has a section specifically devoted to Rule 16.1, the essence of which is summarised below.
Might favourable debt terms be used as a means of providing additional value to a syndicatee in its capacity as a target company shareholder?
The PS provides that Rule 16.1 may be relevant if a syndicatee (i.e. a debt finance provider taking part in a debt syndication) holds shares in the target company, or acquires such shares during the offer period. The Executive's concern in this context is primarily based on the possibility that favourable debt terms might be used as a means of providing additional value to a syndicatee in its capacity as a target company shareholder. The PS gives an example of a syndicatee's equity department agreeing to accept a lower offer for its shares in the target company than would otherwise have been the case because the syndicatee's debt department was allocated a participation in the syndicate, possibly on attractive terms. The Executive is concerned to ensure that the decision of a syndicatee's equity department as to whether or not it should accept the offer should not otherwise be influenced by the participation of the syndicatee's debt department in the syndicate.
Effective information barriers between a syndicatee's equity and debt departments to prevent Rule 16.1 issues
The Executive normally takes the view that, if a syndicatee holds shares in the target company, or acquires shares during the offer period, then there will be no problems under Rule 16.1 provided effective information barriers are in place between its equity and debt departments. As regards what comprise effective information barriers, the PS provides that the Executive does not believe it is appropriate for it to specify detailed requirements, although it identifies the following minimum standards, without which it would not normally consider an information barrier to be effective:
- a syndicatee's equity and debt departments should comprise separate personnel, although the Executive will normally be prepared to disregard members of senior management and compliance staff for these purposes, provided that they do not participate in investment decisions relating to the proposed transaction and do not share non-public information about the transaction with persons who are involved in making those investment decisions;
- members of a syndicatee's equity and debt departments must be made aware that an information barrier exists between the two departments;
- members of a syndicatee's equity and debt departments should not share offices and, if possible, each department should be separated from, and should not be capable of being accessed by, the other department;
- members of a syndicatee's equity and debt departments must not be able to access non-public documents created, edited or received by the other department;
- computers and other electronic equipment used by a syndicatee's equity and debt departments must not be used by, or accessible to, the other department; and
- internal files, records and other non-public deal information prepared by a syndicatee's equity or debt department should not be shared with, or be capable of being accessed by, the other department.
Further, the Executive believes that an information barrier between a syndicatee's equity and debt departments would be more likely to be effective if established on a permanent rather than an ad hoc basis and, if an ad hoc information barrier is proposed, then the Executive should be consulted and will seek assurances that the minimum standards described above will be complied with.
What is required if effective information barriers have not been established?
If effective information barriers have not been established, then the Executive will normally require further information to be provided to it in relation to the terms of the debt being syndicated, including:
- whether the debt being syndicated is on "market terms";
- the identity of the syndicatees;
- the reasons why the syndicatees were invited to participate in the syndicate;
- the basis and terms on which the debt was allocated to syndicates; and
- the extent to which syndicatees hold shares in the target company.
Each syndicatee required to confirm it has established an effective information barrier
Confirmation should be obtained from each syndicatee, to the reasonable satisfaction of the mandated lead arranger ("MLA") and the offeror's financial adviser, that an effective information barrier has been established.
Where an MLA and/or an offeror's financial adviser considers that a syndicatee lacks experience in dealing with transactions which are subject to the Code, enquiries should be made to confirm that information barriers have been established which comply with the minimum standards outlined above, as a written confirmation alone will not necessarily suffice.
Conversely, if such confirmation has been provided by a syndicatee to the reasonable satisfaction of the MLA and the offeror's financial adviser, then the Executive will not expect further enquiries, beyond a written confirmation, to be undertaken on every occasion in relation to that syndicatee.
Rule 16.1 normally not an issue for debt syndicated on "market terms"
If an offeror can demonstrate to the Executive's satisfaction that the debt being syndicated is on "market terms", then the Executive will not consider there to be a problem under Rule 16.1. This is on the grounds that, if an offeror is able to prove that a syndicatee has been allocated "plain vanilla" debt with no special features, which is on similar terms to debt issued in comparable transactions, the Executive would consider the scope for a transfer of value to occur between the equity and debt components of the transaction, or for the decision of the syndicatee's equity department to be influenced, would be minimised.
However, if such syndicated debt is not on "market terms", then the Executive will normally require further information before determining whether there is an issue under Rule 16.1, including the information listed above as being required by the Executive if effective information barriers have not been established.
In common with many Code provisions, although the language of Rule 16.1 appears relatively straightforward, and seemingly of obvious application, it can be seen from the above that its ambit is much wider than might initially be realised, its requirements can prove onerous, and it is capable of throwing up significant complexities which are capable of having a material impact on any offer. All of which means offerors, target companies and their respective financial and legal advisers should consider its potential application, and impact, at a very early stage of any proposed or actual offer, liaising with the Panel as required.
1 For completeness, it should be noted that we understand that there are currently legal proceedings between RBI and ACE in relation to ACE’s failure to pay under the Agreement.