The U.K. Takeover Panel has issued its response statement on the consultation paper on Control Issues RS 2005/3, along with three other response papers. The control issues response statement broadly implements the changes proposed in the consultation paper (PCP 2005/3) with one or two amendments in response to feedback.
*Rule 9 'Mandatory Offer': The response statement confirms the so-called broad approach so that Rule 9.1 can now also be triggered by the acquisition of interests other than a physical or direct holding of shares. For example, by virtue of interests in shares arising through long derivative or option positions.
Example: If a 29% shareholder enters into a cash-settled option or a contract for difference over another 5% holding it would trigger a Rule 9 mandatory offer obligation.
Note however that in determining whether sufficient acceptances have been received to make the mandatory offer unconditional, synthetic interests will not count.
*Rule 5: This rule restricts the ability to acquire interests in shares if it would result in a person holding 30% or more or increasing its holdings at levels of over 30%. The response statement amends this to cover the acquisition of interests in shares through long derivative or option positions.
There are a number of exceptions to the restrictions imposed by Rule 5, including where the acquisition is made immediately preceding the announcement of a firm intention to make a recommended offer. In a reversal of its original position, however, the Panel has now decided that the single shareholder exemption should also apply to derivatives. An existing single shareholder will now be able to write a derivative in respect of shares held by it, after which the counterparty will have an interest in excess of 30%. The exemption will not apply where the single shareholder did not already own the shares and was obliged to acquire shares in order to hedge its exposure.
*Rules 6, 9 and 11 'Offer Price': As a result of the impact of acquisitions of interests in shares having the same effect as the acquisition of the underlying shares, the Panel has proposed new changes to the mechanism by which offer prices are to be calculated. These are set out in Rules 6, 9 and 11.
Essentially, the price paid will normally be treated as:
° In the case of an unexercised call option, the middle-market price of the shares which are the subject of the option at the time the option is entered into;
° In the case of an exercised call option, the amount paid on exercise plus any amount paid by the option holder on entering into the option;
° In the case of a written put option, exercised or not, the exercise price less any amount paid by the option holder on entering into the option; and
° In the case of a derivative, the initial reference price plus any fee paid. Where the reference price is calculated as the average price of a number of acquisitions of interests in underlying securities, the price paid will normally be held to be the highest price at which such acquisitions are made.
These price calculation changes could impact offers made on or after May 20, 2006 even where interests are acquired beforehand.
*Lapsed Mandatory Offers: In order to deal with an anomaly that would otherwise result from the Panel's position of not allowing synthetic interests to count toward the acceptance condition and of not treating a change in the nature of a person's interests in shares as an acquisition of interests, the Panel has decided that in narrow circumstances, a further mandatory offer will be required following a lapsed mandatory offer. Such an offer will be required if:
° the original mandatory offer would have become unconditional as to acceptances if offeree company shares which had not been assented to the offer, and in which the offeror and its concert parties were interested, had actually been so assented;
° the lapsed offeror and its concert parties acquired shares in the offeree company on closing out those derivative positions or exercising those options; and
° following that acquisition the lapsed offeror and its concert parties owns or controls shares carrying 30% or more of the voting rights.
* Recognized Intermediaries: The Panel has recognized that a number of firms provide client-dealing services and has introduced the concept of recognized intermediary status which can be granted to certain trading desks of investment banks and securities houses which trade as principal for client-serving purposes in order to fulfil client orders, respond to client requests to trade or to hedge positions arising out of these activities and which meet the Panel's criteria.
A desk with recongnized intermediary status which deals or holds interests in a client-serving capacity can exclude such interests--but not proprietary interests--in calculating whether it or its organisation is interested in 30% or more of a company's shares for the purposes of Rule 9 and will also not need to disclose such dealings.
It is important to note that the dispensation from Rule 9 applies to interests through derivatives and options and does not cover actual holdings of shares owned or controlled by a RI desk. Such holdings would need to be aggregated for the purpose of Rule 9.
RI status will mean that in certain circumstances, i.e. if the RI desk is neither an associate nor connected, no Rule 8.3(d) dealing disclosures will be required. RI status will be reviewed as part of the Panel's review of the operation of the dealings in derivatives and options regime in June 2007.
Other Response Statements
In one of the other response statements issued on April 21 (RS2005/4), with effect from May 20, 2006, the Panel abolished the Rules Governing Substantial Acquisitions of Shares which restrict the size and speed of stakebuilding in certain companies.
The other two response statements deal with various Miscellaneous Code Amendments (RS 2006/1) and The Implementation of the Takeovers Directive (RS 2005/5) and came into force May 20, when a revised version of the Code was published.
The above is a summary only of certain amendments to the Code. It is for general guidance only and concentrates on the control issues rather than other amendments to the Code, also being introduced on 20 May, to implement the E.U. Takeovers Directive.
This week's Learning Curve was written by Edward Baker, Selina Sagayamand Mark Curtis, partners at Simmons & Simmonsin London.
