Joint Working Party responds to the Takeover Panel’s proposed Rule 21 changes
One 1 September 2023, the City of London Law Society (“CLLS”) published a response submitted by a joint working party of the Company Law Committees of the CLLS and the Law Society (together, the "JWP") to changes proposed by the Takeover Panel (the "Panel”) to Rule 21 of the Takeover Code in their Public Consultation Paper 2023/1 (“PCP”). The JWP consists of senior corporate lawyers from the CLLS and Law Society who specialise in equity capital markets.
The Panel sought views on its proposed amendments to Rule 21, which restricts the boards of target companies from taking certain actions that could result in frustrating an offer or possible offer without shareholder approval. The Panel proposes a restructure and amendments to Rule 21.1 to both make it clearer those actions which will be restricted but also to give target companies increased flexibility in carrying on their ordinary activities (particularly those for whom ordinary course business involves the buying and selling of assets).
In summary, the JWP welcomes the Panel's review of Rule 21 and broadly supports the proposed amendments, and in particular its restructuring. The response does however request clarification in several areas.
Proposed changes and JWP responses
Within its Response, the JWP made the following points of note in respect of certain more material proposed amendments:
- Amendment of Rule 21.1(a) so that it will not, in general, restrict the board of a target company from taking an action that is either not material or is in the ordinary course of business, on the basis that such an action is not likely to frustrate an offer or possible offer
The JWP welcomes the proposal, noting that given increasingly protracted offer timetables, Rule 21.1 has had a greater potential to negatively impact target companies and inhibit their ability to conduct business as usual.
- Introduction of a newly defined “relevant period” during which Rule 21.1(a) will apply, being from the earlier of the target board receiving an approach regarding a possible offer and the beginning of the offer period and lasting until the end of the offer period, or where no offer period begins, 5pm on the 7th calendar day following the rejection of the latest approach
The JWP agrees that the restrictions in Rule 21.1(a) should apply during the relevant period but suggests that the proposed definition be drafted along lines similar to Practice Statement 32 (to afford greater flexibility to the Panel in circumstances requiring it).
- Proposal that where an offer is a reverse takeover offer, Rule 21.1 will apply to the board of the offeror as if the offeror was the offeree (and vice versa)
The JWP agrees with the principle but wants to understand whether the Panel would envisage the rules applying differently in relation to certain actions taken by the bidder in a reverse takeover scenario and what the Panel’s approach would be in relation to share buy-backs.
- Proposal that where a board is seeking to sanction a scheme of arrangement in a competitive situation, Rule 21.1 should not apply save in exceptional circumstances
The JWP agrees, but suggests it would be preferable to refer to “wholly exceptional circumstances”.
- Proposal that the Panel be consulted to determine whether the action of entering into an offer-related employment retention scheme in respect of a period prior to the end of the offer period, which is significant in value or relates to directors or senior management is to be treated as a restricted action
The JWP considers consultation with the Panel to be appropriate but points out that the new proposed Note 1(c) to the amended rule already provides that the Panel may treat arrangements as a restricted action where they relate to directors/senior management. The JWP queries whether it is correct to assume that, in practice, the Panel would be unlikely to treat arrangements involving directors/senior management as restricted actions if they were not significant in value terms (in particular where they involve cash). Further clarification from the Panel would also be helpful to understand the approach where arrangements relate to a period that is partially before and partially after the offer period, such as cases where retention arrangements are structured to pay out in 12 months’ time, irrespective of the offer completion date.
The JWP Response addresses the Panel's PCP and accompanying questions for stakeholders in detail and there is merit in reading the full publication, as it raises some interesting questions about how the Panel intends to interpret and apply the modified Rule 21 in certain circumstances should the proposed changes come into effect. All responses to the Panel's formal consultation can be found on the Panel’s website.
The Code Committee expects to publish a response statement with the final amendments in Autumn 2023, which will take effect around one month following its publication. If the changes are adopted, the Panel Executive plans to publish a new Practice Statement (a draft of which can be found at Appendix C of the PCP) setting out how the Panel normally interprets and applies Rule 21.1.