Takeover Talks: Should I Stay or Should I Go

Jade:

Hello and welcome to our third podcast on UK Public M&A. My name is Jade Jack and I'm an advisor on public company matters here at Ashurst. I'm delighted to be joined once again by our London partner and Takeover code specialist, Harry Thimont. We recently published our quarterly review of the UK public M&A market and in that, we looked at the state of the market, picked out some of the recent trends we are seeing and discussed the key legal and regulatory developments during the quarter. As before, this podcast is intended to sit alongside that, but in this one we're going to focus on specific market development, specifically the invocation of conditions in UK public takeovers.

Harry, when we're advising bidders on public takeovers in the UK, often one of the first things we say to them, particularly if they haven't done any UK public M&A work before, is that once you've announced a firm intention to make an offer under the UK Takeover code, you can't expect to be able to pull out on the deal on any conditions other than a few key ones, such as the Acceptance condition, for example. And we might also give the examples of WPP/Tempus, where the bidder sought to invoke a MAC condition following 9/11 and was not permitted to do so, or Moss Bros where I know you worked on that so we'll probably come back to that a little bit later in the podcast.

But where the bidder sought to invoke a MAC condition following the onset of COVID and once again was not permitted to do so. And the reason we give these examples is to flag the extremely high materiality threshold which the code imposes under rule 13.5 when a bidder is seeking to invoke a general condition. However, in this quarter we've seen a number of takeover bids lapsing, and the question I wanted to discuss with you today is do you think anything has changed? And if not, why does it seem like more bids are lapsing?

Harry:

Thanks Jade, and good to be joining you again. I think the short answer to your first question is no, I don't think there has been a change to the fundamental approach to invoking conditions. To answer the next question, why are we seeing more bids lapsing, I think we have to look at the deals themselves. If we look at the deals which have lapsed recently, most of them have done so without the need for the bidder to invoke one of those general conditions or to consider materiality under rule 13.5. I think on our last podcast, we talked about competitive situations. And a competitive situation is one scenario where an underbidder may be permitted to lapse his offer in certain circumstances.

And there were a couple of recent examples of this, Warehouse REIT and Spectris, where the under bidders in both transactions were released at the request of the target company from their obligation to proceed with their offer before those bidders had published either an offer document or a scheme document. And in both cases, the underbidder confirmed publicly that it would not proceed with its offer other than by way of a scheme of arrangement. And the target, whose corporation is required in order to implement a takeover by way of a scheme of arrangement, confirmed that it would not proceed with that under bidder's scheme of arrangement. So in practical terms, that meant that it would not be possible for either of those bidders in the transactions I've described, to proceed with the scheme, implement the transaction and therefore, they were permitted to lapse their bits.

But this is all provided for under the code and it didn't require the bidders in those situations to seek the panel's consent to invoke any particular condition to their offer. The next example that I think it's worth spending a bit of time on is Inspired. Now, in Inspired, the first and un-recommended bidder Regent was permitted to lapse its offer following the issuance of an acceptance condition invocation notice. Now, in that situation, Inspired received competing bids from two bidders, both of whom were proceeding by way of contractual offers, so not schemes as per the Warehouse REIT and Spectris situations. And in the Inspired case, the Regent announced its bid which was subsequently trumped by a counter bidder.

The overall deal timetable was set by that counter bidder's bids, so to speak. And once that higher offer had been made, Regent as the under bidder, wanted to walk away so it issued a acceptance condition invocation notice. Now, that is relatively new technology in the code and what it does is effectively allow a bidder to test whether its acceptance condition has been met at a specified time. And if it has not been met at that point, then it will be permitted to lapse its offer. In addition, Regent also confirmed its own attention that it would support the competing offer once its own one had lapsed.

And so for those reasons, Regent was able to lapse its offer on the acceptance condition not having been met at the relevant time and the competing bid subsequently went through. But as I said, all of this technology exists within the framework of the code, so it's not the case that a condition needed to be invoked, albeit it is interesting because it is the first time that the acceptance condition invocation notice technology has been used.

Jade:

So basically all interesting cases, but quite distinct from rule 13.5 and any analysis we might do on materiality for the purposes of invoking a condition. Perhaps then, before we get onto a couple of cases where I think we will require some of that analysis, perhaps it's worth looking at the rule in a bit more detail, rule 13.5. The rule states that a bidder may only invoke a condition so as to cause an offer not to proceed with the consent of the takeover panel. And it also states that the panel will normally only give its consent if the circumstances which give rise to the right to invoke the condition are of material significance to the bidder in the context of the offer. And certain conditions are exempt from that, those include the acceptance conditions.

So in your example of Inspired, the acceptance condition invocation notice, equivalent conditions for a scheme of arrangement and certain other conditions which might be required to give effect to a legal or regulatory requirement relating to you. For example, the issuance of consideration securities or relating to certain other bidder shareholder approvals. Long stop dates as well, which are the fallback dates for bidders to complete their offers are exempt and sometimes, but importantly only sometimes, certain other bespoke conditions may be exempt. And I think it's this latter category which is inevitably the most interesting.

And what the panel has done, this was at the back end of 2023 I think, was they updated practise statement five, which provides the market with some guidance on how to categorise certain conditions and the factors that the panel takes into consideration when they're looking at those conditions and whether it's possible for a bidder to invoke a condition. If we take the two examples we mentioned at the start, the WPP/Tempus and the Moss Bros cases, both of those are examples of where the bidder has challenged a general MAC condition. And what we mean by MAC, it's a material adverse change condition which gives the bidder a right to terminate a transaction if the target experiences a significant negative change prior to completion.

And that as the definition implies, that that change has to be material both as a MAC and under the code. The clause is general, it's not specific and therefore, it falls within this practise statement under the category of general protective conditions, and that the panel's analysis changes slightly because of that. So importantly, given the general nature of the condition, the panel actually applies a higher threshold here.

In order for the material significance requirement to be satisfied in the case of a MAC or indeed, a general protective condition, the bidder also needs to demonstrate that the relevant circumstances are of very considerable significance, striking at the heart of the purpose of the transaction. Those are the specific words that are set out in the practise statement. I think what we're saying here is that you have rule 13.5 and that applies a high materiality threshold to the invocation of any condition which are not otherwise exempt. But on top of that, for certain general conditions, the panel will apply an even higher threshold.

Harry:

Yeah. And I think that distinction is always worth remembering, Jade. I also think certain of the changes and clarifications that were made to practise statement five back in 2023, to a degree, reflect the outcome on the Moss Bros case. So perhaps turning to that now and going through a little bit of the background there, we cast our minds back by five or so years. The offer for Moss Bros was announced on the 12th of March, 2020. That was clearly at a time when there was an awful lot going on, so to speak, albeit it was prior to introduction of the government measures that effectively resulted in Moss Bros having to close its stores nationwide.

A few weeks later, Brigadier, which was the bidder, posted its scheme document. And then a couple of weeks after that, on the 22nd of April, Brigadier sought the permission of the panel to invoke certain of the conditions to its offer and thereby lapse the offer on account of the impact of the COVID-19 pandemic on Moss Bros and its business. There were a few conditions that they sought to invoke, but they were all variations on a theme, and that theme was effectively the MAC condition. Now, prior to Moss Bros, the leading case on MAC conditions certainly in UK public M&A was WPP/Tempus, which you mentioned at the outset.

Now, that case can be compared with the Brigadier Moss Bros one insofar as they are, although both attempts by bidders to invoke MAC conditions following very, very significant MAC events, resulting in circumstances which had a major impact on the target company's businesses. They therefore, both involved an assessment of materiality. However, I think the parallels to a degree, come to an end there and there is a fairly critical distinction between the two, which in my view is all to do with foreseeability. And I don't have an exact chronology to hand, but I'm pretty sure that before Brigadier announced its offer, certain major sporting events in the UK and I think throughout Europe had been cancelled. And I'm pretty sure that the World Health Organisation had also declared the situation a global pandemic.

Therefore, questions of foreseeability in addition to materiality were key to the arguments made by both parties in the Brigadier-Moss Bros situation. And after a few weeks of deliberations, submissions, et cetera, the panel executive ruled that Brigadier should not be permitted to invoke any of the conditions that it had sought to invoke and thereby, it was not permitted to lapse its offer. Specifically, the panel executive found that Brigadier had not established that the circumstances which would've given rise to its right to invoke the conditions were of material significance to Brigadier in the context of the offer.

Now, there was an initial appeal but that was subsequently withdrawn and the offer went ahead and completed. So on the Brigadier-Moss Bros situation, we absolutely did have the question of invoking a condition, and as I said in this case, there were a few general MAC conditions that Brigadier sought to invoke, without the target support I should add, and the executive found in favour of the target. Now, that's perhaps not a surprising outcome in hindsight, given the sequence of events that occurred and some of the points I made earlier around chronology and what had and hadn't happened at the time Brigadier announced its offer.

But if you were to draw a counterfactual and whether, if Brigadier had announced the same offer that months earlier before we had all started talking about COVID-19, coronavirus and pandemics, but that offer was proceeding perhaps on a relatively slow timetable due to regulatory conditions or whatever it might've been, whether the panel executive would've reached the same conclusion is another question. And look, it's obviously very hard to predict what the outcome would've been, but I'm certainly of the view that it would not necessarily have been the same outcome.

Jade:

That's really interesting. Thanks, Harry. That interplay between materiality and foreseeability was clearly very important there and will come up as well in our next couple of cases. Probably a very interesting case to work on, I'm sure. To come back to this quarter and return to one deal where we've got an example of the bidder seeking the panel's consent to lapse on a general condition and where they were permitted to do so, this example is the Argentex transaction. Just for a little bit of background, Argentex was subject of various competing possible offers and proposals, which ultimately concluded in IFX announcing a recommended cash offer back in April, alongside some bridge financing.

So at the time, it was clear that the company was in financial difficulty and IFX flagged this and the insolvency condition upfront in its documentation. On 18th of July, so a few months on, the target then confirmed it was appointing administrators, following which IFX sought to invoke the insolvency condition so as not to proceed with the offer. And after a relatively brief review, the panel permitted IFX to lapse under rule 13.5. So it is different but just maybe explain in a few words, how does this case differ from Moss Bros for you?

Harry:

Yeah, I think if we look at the factors, including those that are listed in the current practise statement five that the panel will consider when deciding whether to permit a bidder to invoke a condition and lapse its offer, there are absolutely some differences between Argentex and Moss Bross. In Argentex, when IFX announced its bid, they did include a specific bespoke condition to take account of the fact that Argentex was in financial difficulty. They made it very clear in the offer announcement that that condition had been the subject of negotiation with Argentex's board and they also expressly drew the attention of Argentex shareholders to that condition. And effectively saying that, "If we consider the circumstances to arise that would mean that this condition has been satisfied, then we will seek to lapse the offer."

And none of that can be said, or very little of that at least can be said of the Moss Bros situation. There wasn't the same level of attention given to the particular circumstances. Now clearly, on Argentex as arguably was the case in Moss Bros, the possibility of Argentex going into administration or some other form of insolvency was foreseeable when the bidder made its offer. And that is why the bidder sought to protect itself by including the condition that I've just talked about and including disclosure in the announcement along the lines that I've mentioned.

So the bidder did seek to protect itself using the framework that exists within practise statement five. I think it's also fair to say that the question of insolvency is one where if a company and a target company finds itself in that situation, I think in reality, it's very hard for the panel to force a bidder to continue to implement its bid. I think that's a slightly long way of saying effectively, insolvency trumps everything and a bidder is quite likely to be permitted to walk away in that situation.

Jade:

Interesting. And I agree with you on the point around administration, insolvency practically trumping a lot of this. But the foreseeability point, which was prejudicial to the bidder's argument on Moss Bros and obviously, there was foreseeability in the case of Argentex, the fact that the bidder was able to protect itself better in the documentation, I think was important. That brings us on to the final, probably the most interesting deal, which is Sidara's bid for John Wood Group, where we've seen the first blanket waiver of rule 13.5 for bespoke conditions. And those bespoke conditions include that John Wood's audited accounts are published prior to the 31st of October.

And this is interesting because it was previously a precondition to making the offer and the bidder actually states in its 2-7, its firm offer announcement, that it was a condition of the moving from possible offer to firm offer, that the panel confirmed this condition would not be subject to rule 13.5. And there were a number of other conditions as well, so the audit not being subject to any modified opinion in relation to the 24 balance sheet, the amendment and extension of existing facilities becoming effective and no termination or acceleration of certain of the amended debt facilities.

All of these conditions are bespoke, they're objective and they're all deemed to be outside of the target and bidder's control. Interestingly as well, none of them are capable of being waived. So to the extent that any one of them fails, the bid will automatically lapse, which again highlights the objectivity point. None link directly to insolvency, but it's clear I think, that financial distress is being taken account of here, but they are highly unusual. So why do you think the panel has agreed to this and do you think it will have any impact on the way we look at conditions for future offers?

Harry:

It is, as you say, a highly unusual situation and obviously one that is still ongoing, so we haven't yet seen how all of this will play out. But clearly, the fact that a high profile UK company is in financial difficulty will undoubtedly have played a role in the panel's decision to consider waiving rule 13.5 in these very unusual circumstances. I think one way to look at this is also not so much a case of rule 13.5 having been waived, but perhaps as the panel having accepted up front that the materiality threshold that exists within that rule has already been met. And that's really due to the complex set of circumstances that surround Wood Group and thus, the panel being satisfied that there's no further need to test rule 13.5 at a particular time when Sidara may or may not seek or may or may not have sought to invoke any general offer conditions.

And as we discussed, lapsing on a bespoke offer condition is incredibly rare. The practise statement does provide that the panel may agree a bespoke condition is not subject to rule 13.5 in particular circumstances. So again, there is a framework that exists already for the panel to permit what it has permitted here. Clearly, the announcement also contains statements from the target board that it acknowledges the unusual nature of the conditions, noting that the bid does not offer the usual level of certainty associated with a code transaction but, and primarily due to the financial situation that would find itself in, the board nonetheless considers the acquisition to be the best option available.

I do think that this is an exceptional case. I would be very surprised if we saw a similar situation, but I think it is one which has come about primarily because A, the target board is supportive of the approach being taken and I suspect that a lot of weight was given to that. And B, the company clearly is in financial difficulty and the outcome that has been reached is the best route possible for shareholders to realise some value in their investment where presumably there is an alternative where there is no value because the bid does not complete, no other sources of liquidity are available and ultimately, the company goes into administration or some form of insolvency. This is all designed to avoid that and to give shareholders something when there is a very real prospect I'd have thought, of there being nothing left on the table.

Jade:

I completely agree with you. I think it's a really interesting example, but I'm not anticipating a sudden rush of unusual bespoke conditions being pre-cleared by the panel, unfortunately, because that might be quite interesting. Well, thank you. I think that's probably our time up. Thanks very much to Harry for your time and to our listeners for joining us. We hope you found it interesting. For the full quarterly report and for more information on our public M&A group, please take a look at our website.

And of course, it goes without saying, but if you would like to discuss any of the points raised in the materials or have more general questions around UK public M&A, please do get in touch. You'll be able to find all of the team's details on the website. Thanks again for your time and please do share the podcast with interested colleagues. Bye for now and until next time.