UK Public M&A Update - Q1 2018

Overview

13 firm offers were announced in Q1 2018 (compared to 9 in Q4 2017 and 10 in Q3 2017), with a combined offer value of £20.13 billion (a significant increase compared to £11.32 billion in Q4 2017 and £13.53 billion in Q3 2017). Of those 13 offers, nine were all cash, one was all shares and three were in cash and shares.

In the last quarter, Ashurst mandates have included advising: (i) Centerview Partners as financial adviser to Informa PLC in relation to its £3.9 billion recommended cash and shares offer for UBM plc; (ii) Rothschild as financial adviser to TT Electronics plc in relation to its £46 million recommended cash offer for Stadium Group plc; and (iii) Bank of America Merrill Lynch as financial adviser to RBS in relation to its £53 million recommended cash offer for FreeAgent Holdings plc.

A summary of the key features of each announced offer is set out in a table in the Appendix.

During Q1 2018, there were a number of regulatory developments, including an amendment to Practice Statement No 28, the publication of new Practice Statement No 32 and an update on the UK Government's proposals to introduce new rules to protect the UK's national security (in particular in the context of foreign investment). Further details of these developments are set out in the News Digest on pages 2 to 4 of this publication.

News digest

Amendments to the Code

During Q1 2018, The Takeover Panel (the Panel) made a number of amendments to the Takeover Code (the Code).

Practice Statement No 28

On 8 January, the Panel made changes to Practice Statement No 28 (Rules 2.8 and 35.1 – Entering into talks during a restricted period) to cater for the changes to Rules 2.8 and 35.1 that came into effect on 8 January. The key points to highlight are as follows: 

• the Panel Executive (the Executive) will normally consent to a relaxation of Rule 2.8(e) in order to enable a bidder to make a single confidential approach to the target board in the restricted period in circumstances where the bidder has made a "no intention to bid" statement which may be set aside with the agreement of the target board; 
• the Executive will not consent to the bidder making a single confidential approach during the restricted period under Rule 2.8 where the bidder is not permitted to rely on the agreement of the target board as a reason to set aside its "no intention to bid" statement; and 
• save in certain circumstances, the Panel will normally consent to setting aside the restrictions in Rule 35.1 if the target board so agrees, as opposed to previously where the normal practice was to set aside the restriction only where the target board recommended the new offer.

Practice Statement No 28 contains further detail on the above points and can be viewed in full at: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2018/01/PS28-only.pdf 

Practice Statement No 32

On 8 January, the Panel published Practice Statement No 32 (Rule 21.1 – Application following the unequivocal rejection of an approach).  Practice Statement No 32 provides that the Executive usually considers that a target board will have reason to believe that a bona fide offer may be imminent, and that, therefore, Rule 21.1(a) regarding frustrating action will apply after the target board has received an approach regarding a possible offer. Practice Statement 32 provides that: 

• in circumstances where the target board has received, and subsequently unequivocally rejected, an approach, the Executive normally considers that Rule 21.1(a) will continue to apply until 5.00 p.m. on the second business day following the date on which the approach was unequivocally rejected, unless the rejected potential bidder has given the target board reason to believe that it continues to be interested in making an offer before that time; and
• the Executive should be consulted if a target board intends to take any action set out in Rule 21.1(a) following the unequivocal rejection of an approach.

Practice Statement No 32 contains further detail on the above points and can be viewed in full at: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2018/01/PS32-only.pdf 

New and Updated Checklists

On 8 January, the Panel published a new checklist to be completed and submitted to the Executive by the financial adviser to an offeree company which publishes a circular or announcement under the new Rule 21.1(d)(iii) or Rule 21.1(e). The Panel has also updated certain of the other checklists.

The new checklists should be used with immediate effect from their date of publication. They can be downloaded from the Checklists page of the Panel's website at: http://www.thetakeoverpanel.org.uk/checklists 

The Panel's website also contains information on how to complete the checklists and submit them to the Panel, which can be found at: http://www.thetakeoverpanel.org.uk/checklists/how-to-complete

Other Panel News

On 18 January, the Panel announced the appointment of:

• Justin Dowley to succeed David Challen as a Deputy Chairman of the Panel;
• Lord Monks to be a member of the Panel designated to sit on its Hearings Committee; and
• Mark Armour, Tim Waddell and John Reizenstein to be members of the Panel designated to sit on its Code Committee.

Proposed UK Government Measures to Protect National Security in the Context of Foreign Investment

As we reported in our 2017 Review, on 17 October 2017, the UK Government announced proposals to introduce new rules to protect the UK's national security, in particular in the context of foreign investment.

On 15 March 2018, the Government confirmed that it intended to proceed with the first part of its proposals, involving amendments to the current UK merger control regime to lower the thresholds for review of mergers in the military and dual-use sector, and parts of the computing hardware and advanced technology sectors. 

The Government is still considering how it should proceed with the "long-term" proposals it announced in its October 2017 Green Paper.  The Government is expected to publish a White Paper setting out its position on the long-term proposals, together with draft legislation, later in 2018.

In the meantime, on 15 March, the Government published draft legislation to bring into effect some of the proposed short-term changes, together with a response to the consultation and draft guidance explaining the changes. 

The Government highlights that "advances in technology now mean that there are ubiquitous goods with the potential to be directed remotely should a hostile actor obtain access or control". The Government considers that such advances have often been driven by small businesses, with the result that mergers involving such businesses run a real risk of prejudicing national security. 

The Government therefore intends to lower the thresholds under the existing merger control regime contained in the Enterprise Act 2002 (EA02):

• in the military and dual use sector – covering the design and production of military items and dual-use items (i.e. products which have both military and civilian uses); and 
• for companies whose business involves certain activities relating to computer processing units (CPUs) or quantum-based technology. 

In these sectors, the Secretary of State would be able to intervene (and potentially prohibit the merger) on national security grounds if either:

• the UK turnover of the target exceeds £1m (reduced from the normal £70m); or
• the target has an existing UK share of supply of 25 per cent or more (this would remove the need for an increase in market share); or
• the transaction will create or enhance a UK share of supply of 25 per cent or more (i.e. the existing "share of supply test").

Pending any wider reforms under the long-term proposals, the existing thresholds will continue to apply in all other sectors.  

The draft legislation provides significantly greater clarity on the scope of activities covered by the expanded provisions. This includes:

a) businesses which develop or produce goods, software or information, the export of which is controlled under specified export control legislation. These provisions cover military and dual-use items;
b) owning, creating or supplying intellectual property relating to computer processing units, and designing, maintaining or providing support for the secure provisioning or management of "roots of trust" of CPUs. Roots of trust means hardware, firmware or software components that are inherently trusted to perform critical security functions, such as cryptographic key material that can identify a device or verify a digital signature; and
c) research into, developing or producing anything designed for use in, various forms of quantum technology, specifically quantum computing, simulation, imaging, sensing, timing, navigation and communications, and quantum resistant cryptography.  The draft guidance notes that quantum technology has the potential to break currently secure computer and telecommunications systems and could give military weapons substantial additional abilities.

If the Secretary of State intervenes under the expanded powers, the existing public interest process under EA02 would be followed. Thus, he or she would become the final decision-maker as to whether the deal should be cleared or prohibited, provided he or she continues to think the public interest consideration remains relevant.

An impact assessment published as part of the consultation response sets out that the Government estimates that it will issue an intervention notice on national security grounds in 1 to 6 cases per year as a result of the new regime. Given that the Government has only intervened on national security grounds in seven transactions in the last 15 years (0.5 interventions per year) under the existing provisions, this is perhaps a surprisingly large number. 

The way in which the Government has chosen to implement the changes means that the new regime would technically allow the Secretary of State to intervene on any of the currently specified public interest grounds in any deal where the target is active in a specified sector and the new, lower thresholds are met. However, the Government states that it cannot foresee any circumstances in which transactions involving firms in the specified sectors would give rise to media plurality or financial stability concerns. National security should be the only relevant consideration.

The reduced thresholds also apply to the Competition and Markets Authority's (CMA) power to conduct competition assessments under EA02. However, the CMA has published draft guidance on the new rules in which it states that it does not expect the changes to bring about a material change in its approach. 

The intended expanded regime is not premised on there being any foreign investment element: the powers would apply equally to UK acquirers. However, the Government indicates that in practice foreign investment is more likely to raise national security concerns.

The draft legislation published thus far does not cover the reduced turnover test. But this is expected to be published shortly. The Government intends that all the "short-term" changes will be introduced simultaneously and has stated that the new rules will not have retrospective application.