Bidders Beware …? Recent Developments in the UK Public Takeover Market

July 6, 2017

The last 12 months have seen various strides towards increased protectionism at a national level in the UK and other European member states and also at a European level. In the same period, we have also seen high-profile UK takeovers being derailed, others seemingly close to being derailed through the use of manipulative devices and onerous bidder "post-offer undertakings" being provided.

In this alert, we summarise some of these recent developments and get behind the headlines to distil the real implications for bidders considering launching a bid in the UK. In summary, whilst the political mood has been shifting towards shoring up the regulatory weaponry to defend "important" UK companies from foreign takeovers, through a combination of superior competing priorities for the incumbent government and the sheer complexity of this exercise, it is unlikely that we will be seeing any real change in the takeover landscape in the near future. The voluntary grant of "post-offer undertakings" by bidders looking to secure a UK takeover target very much remains the exception rather than the norm and is not a route that the Panel is pushing bidders towards. Finally, bidders looking to secure 100% control of a UK target company can take comfort from the robustness of the English judiciary – as seen from the Dee Valley case, the UK courts have demonstrated that they will, if necessary, deploy stretched jurisprudential analysis to ensure that the framework within which schemes of arrangement operates are not utilised manipulatively against the interests of the wider shareholder body.

UK Protectionism: Changing Gears – Which Way Is This Heading?

Defence against foreign takeovers: On 11 July 2016, in her campaign speech to become leader of the Conservative Party and Prime Minister of the United Kingdom, Theresa May set the stage for "radical" action to put "people back in control". With plentiful rhetoric and gusto, she outlined the basis for a new industrial strategy which would be capable of defending important sectors from foreign takeovers.

ARM Holdings Takeover Welcomed … with Qualifications: One week later, Japan’s Softbank Group Corp (Softbank) announced a $32bn bid for Cambridge-based tech company ARM Holdings plc (ARM). Ostensibly in a volte face move, May and her Chancellor Philip Hammond publicly welcomed the transaction describing it as a "vote of confidence in Britain" and the latter said that it would "turn this great British company into a global phenomenon". A Downing Street spokesperson however explained that future deals would be examined "on a case-by-case basis to ensure they are in the national interest". It was also stressed that the newly appointed PM had spoken personally to the head of Softbank who gave her certain assurances about its plans for the British chip designer (see Post Offer Undertakings below),  affirming the new interventionist approach. A few months later in mid-September, the newly recast Department for Business, Enterprise & Industrial Strategy stated that the government was looking to reform its approach to the ownership and control of critical infrastructure "in line with other major economies" and this initiative would include a review of the public interest regime under the UK’s Enterprise Act 2002.

Intervention Off the Agenda?: Two key opportunities to build upon this interventionist approach followed – first, at the Conservative Party conference in October 2016 and again in January 2017, when the Green Paper setting out May’s new Industrial Strategy[1] was published. Both opportunities were eerily silent on this policy. In her October 2016 party conference speech, when describing Britain after Brexit, May once again referenced the Japanese purchase of ARM as the "biggest-ever Asian investment in Britain". The Green Paper outlined various proposals to encourage trade and investment and to unblocking remaining barriers to trade. No reference was made to "public interest tests" or defending "important" sectors.

Election Manifesto Plans for Takeover Reform: For those who had breathed a sigh of relief at these developments at the end of last year and early this year, this proved to be a short reprieve. On 17 May 2017, the UK election campaign saw the publication of a Conservative party manifesto with various specific "promises" on takeover strategy and controls.

"We will update the rules that govern mergers and takeovers. This will require careful deliberation but we can state now that we will require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the government can require a bid to be paused to allow greater scrutiny.  ….. We shall also take action to protect our critical national infrastructure. We will ensure that foreign ownership of companies controlling important infrastructure does not undermine British security or essential services. We have already strengthened ministerial scrutiny and control in respect of civil nuclear power and will take a similarly robust approach across a limited range of other sectors, such as telecoms, defence and energy.[2]"

Analysis: The manifesto promises summarised above raise a number of questions and indeed resulted in a few raised eyebrows. UK takeover rules as set out in the Code on Takeovers and Mergers (Code) (which is promulgated by the Code Committee of the Panel on Takeovers and Mergers (Panel)) already requires bidders to disclose their intentions with regard to the business, employees, strategy and other target company related matters. It is not clear what further clarity from bidders is being sought.

With respect to enforcement of promises and undertakings, in 2015, the Panel introduced a dual regime to govern promises and commitments during a bid about post-bid matters, comprising "post-offer intention statements" and "post-offer undertakings", each with their own monitoring and enforcement regime. Again, it is not clear what further changes are proposed and indeed how the Government would seek to implement them given that the rules governing takeovers are set out in the Code as promulgated by the Panel under its statutory powers.

More worrying is the impact to the orderly conduct of a bid in line with the timetable set under the Code if a "pausing power" was introduced. One of the key characteristics of the UK system of takeovers is the certainty and speed of regulation enabling parties to know where they stand under the Code and the market to be able to evaluate and assess a bid (or possible bid).

Finally, the specific protectionist proposals with respect to critical infrastructure and new scrutiny and "controls" over certain new sectors, has raised further questions. Much of the anxiety around these proposals has abated following the election results. The Government’s ability to push through reform in this area is constrained and its focus/priorities have altered – a new interventionist policy does not seem to be top on the agenda … at least for now.

It is our expectation however, supported by the general wave of sentiment across Europe (see European Protectionism below) and expectations of deterioration in the UK economy following withdrawal from the EU, that the calls for intervention will in due course resurface and grow louder. By way of note, the UK’s Enterprise Act 2002 allows for intervention by the Secretary of State in mergers which give rise to specified public interest concerns – national security, media quality plurality and standards, and financial stability. In 2014, the then Business Secretary, Vince Cable called for the introduction of a new public interest test, the parameters around which have proved notoriously difficult to agree and define. The challenges with this approach have caused many to predict that the more likely development in the UK might be the establishment of the UK version of the US agency, CFIUS (Committee on Foreign Investment in the US) which within its national security remit, has taken jurisdiction over and scrutinised a broad range of international transactions from public health to  telecommunications and computers to lighting. The brief here is ‘watch and wait’.

European Protectionism – New Blocking Powers?

May is not alone amongst European leaders in pushing for greater powers to block foreign takeovers. Earlier this year, Germany, France and Italy called on the European Commission to review whether the bloc should be allowed to intervene in state-backed takeovers of companies in strategic sectors. It was proposed that the EU be given powers to scrutinise "investments in the EU of strategic importance both from an economic and security perspective". Germany had been pushing the protectionist agenda after a spate of Chinese takeovers and France’s president has also been a keen supporter of a new European mechanism to restrict bids on the grounds of national security or strategic importance. The challenge is however with defining the scope or parameters of any such right; other issues also arise including what if any residual powers would be left at national or member state level. Some member states, including The Netherlands (who recently proposed new rules on takeovers controls at a national level[3]), however were not supportive of the EU level proposals.

With the technical and political complexities involved in taking forward such a proposal, it was no real surprise that the European Commission’s recommendation in May in a paper on globalisation recommended only further discussion on the topic but no firm action. Most recently, in meetings of the Council of the European Union held in the last two weeks of June, the proposals did not feature on the agenda rather an affirmation of the bloc’s commitment to free trade was specifically called out. With this backdrop, we are unlikely to see any moves to introduce new protectionist powers at an EU level in the medium term.

Post-Offer Undertakings – The First … and More … of Its Kind?

Following the possible offer for AstraZeneca plc in summer 2014, the Code Committee of the Panel undertook a review of its rules on statements of intention and commitments made by bidders (and target companies) during the course of a bid and the effect of these, in particular whether parties would be held to such statements and related enforcement issues.

In January 2015, a new regime was introduced under the Code which draws the distinction between voluntary commitments made by parties to a bid and statements of intention made by such parties relating to actions which they may take or not take following an offer. Under the Code and as noted above, a bidder is required to disclose its intentions with respect to various aspects including but not limited to the target’s business, places of operation and employment matters. The Code does not however require a party to make any formal commitment or undertaking as to what actions it will take or not take following an offer. The new Code rules created a new framework to distinguish between "post-offer undertakings" (i.e. statements relating to any particular course of action that a party to an offer commits to take, or not take, after the end of the offer period and with which it will be required to comply for the period of time specified in the undertaking, unless a qualification or condition set out in the undertaking applies) and "post-offer intention statements" (i.e. statements relating to any particular course of action that a party to an offer intends to take, or not take, after the end of the offer period, which will be required to be accurate statements of the party’s intentions at the time that they are made and based on reasonable grounds). Due to the particularly onerous nature of a post-offer undertaking and the weight and seriousness with which some commitments will be treated by stakeholders and the market, the Panel requires parties wishing to make a "post-offer undertaking" to consult it in advance, to explicitly flag and disclose such commitment as a post-offer undertaking, to specify the time period for which the undertaking is to apply and to set out explicitly any qualifications or conditions to which the undertaking is subject (which in turn are limited under the Code).  In addition, the Panel will monitor compliance with the undertakings which may involve (at its discretion) the appointment of a supervisor (at the cost of the party providing the undertaking).

The first major takeover in which the regime has been put to the test has been in the case of Softbank’s bid for ARM  in 2016.  Softbank  made  five distinct post-offer undertakings relating to: (i) different employee groups in ARM[4] (stated to be fulfilled within five years); (ii) the location of the global headquarters of the combined group post-offer; and (iii)  a commitment to procure that the target, ARM also made unqualified post-offer undertakings with respect to employee groups in the same terms as made by Softbank. Do the Softbank undertakings mark the trail for other foreign bidders of UK target companies going forward?

We do not believe so. Given the onerous framework which post-offer undertakings would impose upon the giver of such voluntary commitments, the general expectation is that a party will only choose to make a post-offer undertaking in the most exceptional of cases; in most takeover situations parties would limit themselves to statements of intentions, a regime offering greater flexibility and accordingly bearing less onerous consequences in the event of a breach. The exceptional case might for example arise where the target or other party is in an extremely strong position from which to extract such a commitment and/or where other severe external pressures (e.g. political or governmental influence) might be brought to bear on a bidder. To date (almost 2 ½ years following introduction of the new regime), there has only been one major bid situation where a party has made a post-offer undertaking.

Share-splitting Devices Used to Derail Schemes of Arrangements

Popularity of Schemes of Arrangement & Key Requirements: Court approved schemes of arrangement continue to be the preferred route of effecting the takeover of a UK company[5], over and above the contractual takeover offer[6]. For a scheme of arrangement to be successful, it is first necessary for a majority in number representing at least 75% in value of the members of the company (or each relevant class of members) voting whether in person or by proxy, to vote in favour to approve the scheme at a special Court-convened meeting of shareholders of the Company. Once the two-fold voting thresholds have been achieved, in order to be finally effective, the Court is required to approve or sanction the scheme at a separate sanction hearing. Once these two limbs are satisfied, the bidder will obtain 100% control of the target company.[7]

Background Facts: Given the popularity of schemes, practitioners have scrutinised the implications of the recent scheme of arrangement case involving the takeover of Dee Valley Group plc (Dee Valley). In November 2016, Severn Trent Plc (Severn Trent) made a recommended cash offer for Dee Valley to be effected by way of a scheme of arrangement. Seven individuals who were shareholders in Dee Valley opposed the Severn Trent scheme, as a the competing bidder. One of these individuals, after Severn Trent had made the offer, bought more  shares in Dee Valley. He then gifted these to 443 separate individuals, each of whom became the owner of one ordinary share in Dee Valley on 3 and 4 January 2017 (the New Shareholders). The takeover offer was close to being derailed through the actions of  the New Shareholders, who voted against the scheme of arrangement at the relevant members meeting. Through a statutory tool of enquiry and investigation, the majority of the New Shareholders explained in written responses to Dee Valley, that they were voting to protect their own or family’s jobs within Dee Valley.

Issues Before the Court: On 12 January 2017, 466 out of the 828 shareholder members present (in person or by proxy) voted against the scheme. However, more than 75% in value supported the scheme. The Chairman of the meeting disallowed the votes of 434 shareholders opposing the scheme who were New Shareholders who had been gifted their shareholdings.  The case went before the High Court in the UK which was called upon to consider whether: (i) the votes of the New Shareholders were valid and what test should be applied to assess this validity; (ii) whether the Chairman was right to disallow the votes; and (iii) even if he was wrong, whether the Court nonetheless had the discretion to sanction the scheme. This is the first share-splitting case to have been heard by the UK courts.

Decision & Findings: It is widely considered that the judge in the Dee Valley case reached the right decision albeit arguably through stretched analysis in order to fit the facts and also with a view to pre-empting future attempts by shareholders to utilise the two-fold voting test in schemes to achieve an objectionable outcome.

The judge concluded that members voting at a class meeting directed by the court (which a members meeting to approve the scheme is) must exercise their power to vote for the purpose of benefiting the class as a whole, and not merely individual members only.

He also concluded that the Chairman of the 12th January meeting had sufficient evidence to conclude that the votes of the new Shareholders were not being cast for the purpose benefiting the class as whole. The judge made it clear however that this was NOT on the basis of the motives of the members as revealed in the written responses received by Dee Valley (because at the relevant time that the Chairman disallowed the votes, he did not know what the individual responses said) but through what the judge considered to be a reasonable or justifiable conclusion from the actions of the New Shareholders in accepting a gift of a single share being "that they could have given no consideration to the interests of the class of members which they had joined" and "the only possible explanation for the conduct … was to further a share manipulation strategy to defeat the scheme by use of the majority in number jurisdictional requirement".

Key Points & Implications: This case is a reminder that there are exceptions to the commonly held-perception that a vote in a general meeting of shareholders is an unconstrained right of property which allows the holder to vote free from motives of "what he considers his own individual interests". There are limitations on how members (or creditors) can vote where the meetings are court ordered or directed meetings and not the company’s own (general) meetings.  Whilst the judge was keen to point out that the evidence of motives from the written responses were not determinative in this case, it appears that it did weigh upon the approach taken. As the judge himself noted in his judgement – the "issues that this case raises are of some importance to schemes of arrangement in the future" and he was  keen to find "some mechanism by which the court could prevent legitimate schemes being defeated at the class meeting stage". 

The judgement was not appealed – it would have been interesting to see how the higher courts would have approached the issues before the High Court. The facts of this case were unusual (the likelihood of obtaining written evidence of improper motives, particularly from sophisticated shareholders and/or with different motivations, is remote).There is no certainty that share-splitting and/or share acquisitions in small but numerous tranches shortly before a scheme vote cannot be used as an effective device to topple a scheme of arrangement. 

Conclusion

So, have buyers been put off by the UK and European markets as a result of these developments? The numbers of UK public bids in H1 2017 was up by 30% compared to H1 2016[8]. The UK is still very much "open for business" and indeed is pushing for inward investment and earnestly looking to friends further afield than Europe.

According to data published by Thomson Reuters, the first six months of 2017 saw a 33% increase in European M&A, making Europe the second biggest destination globally, just behind the US but leaping past Asia-Pacific for the first time in three years. European deal-making volumes were in excess of $440bn – a surprise for many given the expectation of a sharp slowdown following Britain’s vote to leave Europe and uncertainties (now largely abided) of other political upheavals in the Eurozone. Notwithstanding the protectionist noises and other deal twists, the prospects for European M&A in H2 2017 are looking strong.


   [1]   https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/586626/building-our-industrial-strategy-green-paper.pdf

   [2]   https://s3.eu-west-2.amazonaws.com/manifesto2017/Manifesto2017.pdf

   [3]   NB: Under the proposed new rules, corporate boards would be given a one year grace period in which they could reject an unsolicited offer and be protected from attempts by shareholders to call meetings to change management or the board. The proposals were met with pushback by many global institutional shareholders and just two weeks ago, The Netherlands Economic Affairs Minister stated that the Ministry was looking again at the proposals

   [4]   NB: Softbank’s undertakings related to double the number of UK employees, increase the number non-UK employees and to maintain a specific proportion of technical employees to non-technical employees

   [5]   In 2016, over 60% of UK takeovers were effected by way of  a court-approved scheme of arrangement

   [6]   In a contractual takeover offer, the bidder directly extends an offer to all target shareholders to acquire their shareholding in the target company which, if accepted (and the minimum acceptance conditions are reached), results in a binding contractual transaction for the sale of the shares

   [7]   NB: By way of contrast, under a contractual takeover offer, whilst the minimum so-called acceptance condition is lower (i.e. 50% + 1 share), in order to obtain full or 100% control, a bidder will need to reach the much higher level of 90% acceptances in order to "squeeze-out" any remaining minorities and obtain full control.

   [8]   NB: 26 firms offers were announced during H1 2017 compared to 20 firm offers in H1 2016

 


If you require further information or guidance on these developments, please contact the author of this note, Selina Sagayam (ssagayam@gibsondunn.com), the Gibson Dunn lawyer with whom you normally work, or the following partners in the firm’s London office.  We would be pleased to assist you.    

Mergers and Acquisitions:
Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com)
Nigel Stacey (+44 (0)20 7071 4201, nstacey@gibsondunn.com)
Jonathan Earle (+44 (0)20 7071 4211, earle@gibsondunn.com)

Antitrust and Competition:
Ali Nikpay (+44 (0)20 7071 4273, anikpay@gibsondunn.com)


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