Outbound China M&A and investment – UK

The Takeover Code applies:

(i) to offers (not included within paragraph (iii) below) for companies that have their registered offices in the UK, the Channel Islands or the Isle of Man, or if any of their securities are admitted to trading on a regulated market in the UK or on a stock exchange in the Channel Islands or the Isle of Man;

(ii) to offers (not within paragraph (i) above or paragraph (iii) below) for public (and in certain circumstances private) companies that have their registered offices in the UK, the Channel Islands or the Isle of Man and are considered by the Takeover Panel to have their central place of management and control in one of those jurisdictions; and

(iii) to offers for companies that have their registered office in a member state of the European Economic Area (EEA) and whose securities are admitted to trading on a regulated market in one or more EEA member states.

In the case of companies falling within paragraph (iii) above, jurisdiction will be shared with the supervisory authority in the company's state of incorporation, regulating matters related to company law, and the supervisory authority in the state where the company's securities are listed, regulating matters related to offer procedure. As cases arise, the Takeover Panel will discuss matters with authorities in other EU member states as to how these provisions for shared jurisdiction should work in practice. This is because the Takeovers Directive is not clear on the precise scope of what matters are 'company law' related and what matters are 'offer procedure' related.

The Takeover Code applies to takeover offers and merger transactions, however effected, and to any other transactions that are used to obtain or consolidate 'control' of a relevant company as well as to all partial offers. Save in very limited circumstances, the Takeover Code only applies to public and publicly traded companies. There is no equivalent body for M&A transactions relating to private companies. However, matters of competition policy and merger control still remain relevant to private companies (see below).

Methods of implementing M&A transactions

M&A transactions for private companies will occur through bilateral contracts, where all terms are determined through private negotiations between the parties. In general terms, the parties enjoy great flexibility to record in a private agreement the commercial terms they have agreed.

For a takeover of a public company, there are two principal mechanisms by which a transaction may be effected: (1) a contractual takeover offer; or (2) a scheme of arrangement.

Contractual takeover offer

A contractual takeover offer involves the submission of an offer document by the acquiring company (offeror) to each shareholder of the target company (offeree) pursuant to which the offeror offers to acquire the shares in the offeree company held by the offeree shareholders. Shareholders will also be sent a form of acceptance and given details of how they can accept such offer. Such an offer must be conditional on receiving acceptances over shares carrying more than 50% of the voting rights in the offeree (although this threshold is often set higher by an offeror) and various other conditions are usually stipulated. Upon acquiring 90% of the relevant shares, an offeror will have a statutory right to acquire compulsorily or 'squeeze out' the minority.

Scheme of arrangement

A scheme is an arrangement between the offeree and its shareholders, sanctioned by the court. A scheme of arrangement typically provides for existing shares in the offeree to be cancelled and new shares issued to the offeror in consideration of a payment by the offeror to offeree shareholders. As the scheme is an arrangement between the offeree and its shareholders, the offeror and the offeree will usually enter into an implementation agreement so as to give the offeror some contractual rights of control over the way in which the scheme is implemented. In order for a court to sanction a scheme, it must first be approved by shareholders constituting a majority in number representing 75% in value of the members present and voting in person or by proxy at a specially convened shareholder meeting. Once sanctioned by the court, a scheme will be binding upon all members whether or not they voted in favour.

The above mechanisms are equally available to both foreign and domestic investors.

A takeover may be implemented on either a 'recommended' or 'hostile' basis i.e. with or without a recommendation of the directors of the offeree to offeree shareholders that they accept the offer. The same rules of the Takeover Code will apply in either scenario though in a hostile situation there is likely to be much debate in public, often heated, and one role of the Takeover Panel is to regulate this debate.

Terms and conditions of takeover

In contrast to private M&A transactions, where the parties are able to negotiate and agree such terms as they wish provided they are generally lawful, the Takeover Code contains provisions regulating the terms and conditions of public takeovers. In particular:

• Rule 6 requires that, should an interest in shares of the offeree be acquired by the offeror within three months prior to the offer period and up to formal announcement of the offer, the offer must be on no less favourable terms. It also requires that, should an interest be acquired for more than the offer price once an offer has been announced, the offer price should be increased to match this.
• Rule 11 requires that if an offeror acquires an interest in shares during the offer period or an interest in shares carrying 10% or more of the voting rights in the offeree in the 12 months prior to an offer period, in either case for cash, then its offer should be in cash or with a cash alternative at not less than the highest price paid for the interest acquired.
• Rule 9 makes provision for a mandatory offer. Where an investor acquires an interest in shares carrying 30% or more of the voting rights in a company, it must make a cash offer at a price not less than the highest price paid in the 12 months prior to the announcement to acquire all of the remaining shares it does not already own. The only condition allowed to such an offer is that the bidder will acquire shares carrying 50% or more of the voting rights.

The Takeover Code also regulates the conditions to which a public takeover can be subject. All conditions must be objective, i.e. not within the subjective judgment of the directors of the offeror or where performance lies within their hands. Furthermore, in order to lapse or withdraw an offer, the matter giving rise to the right to invoke the condition must be of material significance to the offeror in the context of an offer. A particular consequence of this requirement is that while a material adverse change (MAC) condition can be incorporated, in public takeover transactions the condition will be difficult to invoke. This was demonstrated in the case of WPP v Tempus. WPP made an offer for Tempus at a certain price, but attempted to withdraw its offer after the events of September 11 2001 claiming these constituted a MAC. The Takeover Panel did not allow this and WPP was forced to complete the offer at the price originally announced on the grounds that the Takeover Panel was not satisfied that the market turmoil following 9/11 was of material significance to the offeror in the context of the offer.

An important provision of the Takeover Code is to require a 'cash confirmation' for public takeovers (whether implemented by way of contractual offer or scheme of arrangement). Where the offer is to include any cash element, public confirmation must be provided by a third party – usually the offeror's financial adviser – that there is sufficient funding in place to satisfy the consideration in full should the offer gain full acceptance.

Timetable and announcements

The Takeover Code also sets out detailed timetable and announcement requirements for a public takeover.

One of the key principles underlying the Takeover Code is that the management of an offeree company should not be put under unnecessary siege by an unwanted suitor. Therefore, once an offer is made it will be necessary to satisfy the acceptance condition by Day 60 after the offer document is posted (there is scope for an extension to this deadline in a recommended situation). Up to a further 21 days is then permitted for the satisfaction of all other conditions and shareholders must be paid the consideration due to them within 14 days of the offer being unconditional or of their acceptance of the offer, whichever is the later. The offer document itself must be posted within 28 days of the offeror's announcement of its formal offer.

As well as regulating the contents of offer related announcements, the Takeover Code also stipulates the timing of certain announcements. In particular, so as to prevent the creation of false markets, secrecy will be vital in advance of the announcement of an offer. The Takeover Panel imposes responsibility on the parties and their advisers for maintaining secrecy and monitoring any leaks. If the Takeover Panel concludes there has been a leak, on the basis of rumour and speculation or adverse share price movements, it can move to require the parties to make public holding announcements at very short notice.

Disclosure of offer terms

In terms of advance disclosure of offer terms, there are generally no prior notification or consent requirements unless there is a particular antitrust issue. The Takeover Panel does not pre-approve takeovers or takeover documents. The first public disclosure would therefore usually occur on the announcement of either a possible offer or a firm intention to make an offer, with both announcements regulated by the Takeover Code. The Takeover Code contains detailed provisions on disclosures required by offeror and offeree companies. As well as financial information and details of relevant directors and senior management, this will include details of the offeror's intentions for the offeree company. The directors of the parties (and sometimes parent companies depending on what vehicle is used to make an offer) will also need to take responsibility for such disclosures and public statements. There are no specific obligations in this regard placed on foreign investors over domestic investors.

Stakebuilding and disclosure of interests

In relation to the acquisition of interests in securities in public companies, there are disclosure requirements as set out in the DTRs and also during takeovers in accordance with Rule 8 of the Takeover Code. During an offer period, any dealing by the parties and by a person who is interested or will be interested in more than 1% of the offeree's securities must be disclosed. Disclosure of the opening positions of such parties at the commencement of the offer period is also required. Irrespective of whether the target is in an offer period, under the DTRs, where the target is a UK listed company, any dealing that results in a shareholder passing a threshold of 3% or any 1% threshold above this must be disclosed. If the target is on AIM (the London Stock Exchange's junior market) and is either a public company or has its principal place of business in the UK, then it must also comply with this same DTR. If the target is a non-UK issuer listed in the UK the thresholds are less stringent, being 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.

Restrictions

There are no general restrictions on investment in UK companies by overseas investors. Additionally, no restrictions exist on the repatriation of profits or exchange control rules for foreign companies. Certain industries have requirements for authorisation on a change of control but these are applicable to all new controlling entities irrespective of nationality. There are certain industries, particularly in the defence sector, where the companies will have a 'Golden Share' owned by the UK government, which gives the government a right of veto over foreign control.

Merger control

With regard to merger control, although notification of qualifying mergers to the Office of Fair Trading (OFT) is voluntary and parties to a merger do not need to obtain a clearance decision before completing, the OFT has the power to call in and review deals over which it has jurisdiction. The OFT will have jurisdiction to carry out such a review where either: (a) the value of the turnover in the UK of the target business exceeds £70 million (US$112 million); or (b) the merger creates or enhances a share of supply or purchase of goods or services in the UK (or a substantial part of the UK) of 25% or more. Jurisdiction under UK merger control will be excluded (subject to some limited exceptions) where the transaction also triggers the thresholds for notification to the European Commission (detailed below). The OFT can order the parties to a completed merger to hold the two businesses separate, effectively preventing post-merger integration from taking place. Where the OFT identifies serious competition concerns, it will refer the merger to the Competition Commission (CC). The CC has the power to impose remedies, including divestments and behavioural commitments (although the latter are unusual).

Notification to the European Commission is mandatory if the combined turnovers of the merging parties exceed certain thresholds. There are two alternative thresholds and each set is subject to a 'two-thirds' rule. The first set of thresholds is triggered when (a) the merging parties have a combined worldwide turnover that exceeds €5 billion (US$6.7 billion); and (b) at least two of the merging parties each have turnover in the EU in excess of €250 million. The second set of thresholds is reached when (a) the merging parties' combined turnover exceeds €2.5 billion worldwide; (b) at least two of the merging parties each have more than €100 million of turnover in the EU; (c) the merging parties have combined turnover of more than €100 million in at least three EU member states; and (d) at least two of the merging parties each have turnover of more than €25 million in the same three EU member states. If each of the merging parties involved generates more than two-thirds of its aggregate EU-wide turnover within one and the same member state, the transaction will not be notifiable to the European Commission but will be dealt with under national law.

The UK government has announced plans to merge the competition functions of the OFT and the CC, which is likely to lead to a number of changes and may trigger a reform of the current voluntary merger control system. The precise implications for M&A will remain unclear until these details are known.

Enforcement/penalties

The Takeover Panel can take disciplinary action against those contravening its rules including by way of private reprimand and public censure. Additionally, the Takeover Panel can publish a Panel Statement indicating that an offender is someone who is not likely to comply with the Takeover Code (known as 'cold-shouldering'). In July 2010, the Takeover Panel imposed its second 'cold-shouldering' order in more than 40 years. 'Cold-shouldering' is the Takeover Panel's most serious sanction and essentially prohibits any Financial Services Authority (FSA) authorised firms (i.e. financial advisers) from acting, or continuing to act, for the individuals, named as the offenders, in any transaction to which the Takeover Code applies. In light of the potential for such serious sanctions, companies involved in takeover offers and their advisers will want to ensure that the offer is conducted in compliance with the Takeover Code.

The Takeover Panel also has enforcement powers, such as powers to gather information and make rules restraining breaches of the Takeover Code or otherwise to secure compliance with the Takeover Code. The Takeover Panel can require parties in breach of provisions of the Takeover Code to pay compensation to holders, or former holders, of securities of the target in certain situations and can apply to the court to secure compliance with the Takeover Code or a Takeover Panel ruling. It has a duty to cooperate appropriately with the FSA and with any other overseas takeover or financial services regulator.

The FSA was given power to regulate the financial services industry through FSMA. It has enforcement powers in order to ensure compliance with FSMA and may impose unlimited penalties on those involved in market abuse.

In addition to the competition roles performed by the OFT and the CC, the sectoral regulators have parallel competition enforcement powers for the specific sectors over which they have jurisdiction – for example, Ofgem with respect to electricity and gas, Ofcom with respect to communications and Ofwat with respect to water and sewerage. Decisions made by the competition authorities may, in certain circumstances, be appealed to the Competition Appeal Tribunal.

Mark Curtis

Partner

Email: [email protected]

Mark Curtis is the head of the international corporate practice at Simmons & Simmons. He primarily advises investment banks, stockbrokers and companies on public and private mergers, equity offerings and related work. From 1998 to 2000, Mark was seconded as joint secretary to the UK Panel on Takeovers and Mergers and has subsequently acted as secretary to hearings of the appeal committee of the panel.