United Kingdom: consultation of the special group on takeovers on the definition of “acting in concert”
The Takeover Panel has published a consultation document (PCP 2022/2) setting out proposed changes to the definition of “acting in concert” in the Code. The changes, which are very complex and technical in nature, are in part a codification of existing Panel practice. There are, however, some important adjustments which, given the potentially significant consequences of being considered “acting in concert” (for example, setting a floor price for an offer and/or triggering an obligation to mandatory offer), it will be important for offer participants and their advisors to familiarize themselves with. Comments are expected no later than Friday, September 23, 2022. The Panel plans to issue a response statement setting out the final changes to the Code by “end of 2022,” with the changes taking effect approximately two months after the posting of this statement in answer. This alert summarizes the most significant elements of the proposed changes.
Advising clients on the scope of the definition of “acting in concert” has long been one of the most challenging aspects of public M&A practice. The definition and its application are complex and fact dependent and establishing with the Committee the scope of a concert can be a long and detailed exercise. The panel’s proposals will be of particular importance to financial sponsors, funds and financial services groups such as banks and insurers, but will affect the majority of bidders on public M&A deals. Fortunately, throughout the consultation document, there are several worked examples and diagrams to illustrate how various aspects of the proposed amended definition will work. The Panel plans to hold a webinar on the proposals in late June or early July (it will also be recorded and the recording will be posted on the Panel’s website).
Among the main changes proposed, the increase in the threshold for the presumed status of “associated enterprise” concert performer from 20% to 30% is certainly welcome. Similarly, the harmonization of the position of fund managers in the various provisions of the Code by specifying that a discretionary fund manager (but not the fund’s investors) will, in general, be deemed to have an “interest in securities” held by the fund is again useful. It is more debatable whether other aspects of the proposals, such as the reduction of size thresholds for what is considered a significant investment in a consortium bid, will be seen by the market as helpful (especially for large groups comprising entities that deal in securities in different capacities), and whether the Round’s proposals are considered sufficient to reduce what can be a fairly onerous compliance burden in practice.
The main proposed changes can be summarized as follows.
Overview: Importance of the “acting in concert” definition and focus on presumptions
- The definition of “acting in concert” is a key element of the Code. The general approach taken under the Code is to treat a bid party (ie a bidder or a target) and any person deemed to be “acting in concert” with that party as one person. As a result, equity transactions by anyone “acting in concert” with a party can have significant consequences, including setting a price floor for a bid and/or triggering a mandatory bid obligation.
- The definition of “acting in concert” covers three categories of relationships that can lead to people being considered to be “acting in concert” with each other. The first is where people actively cooperate with each other, under some form of agreement or understanding, regarding control of a business – this is often referred to as “in fact” acting in concert. The second is where the persons are “affiliated persons” (for example, where one person holds the majority of the voting rights of the other) – in this scenario the persons are “deemed” to be acting in concert. The third is when people fall into one of several categories where the nature of their relationship gives rise to a rebuttable presumption that they are acting in concert – called “presumed” to act in concert. The proposals in this consultation focus on this third category of persons “presumed” to be acting in concert.
Raising of the presumption threshold (1) and covering both shares with voting rights and “share capital”:
- Probably the most important of the presumptions is the current presumption (1) under which a corporation is presumed to act in concert with its parent, its subsidiaries and its subsidiaries and their associated companies, the criterion for associated status being “ownership or control of 20% or more of the share capital” of a company. The Panel proposes essential changes to this presumption.
- First, the 20% threshold should be raised to 30%, to align with the threshold in the Code’s definition of “control”.
- Second, as a codification of existing practice, the presumption will clarify that it applies both to (1) shares carrying voting rights (whether or not they are also shares) and (2) shares (whether or not the shares are also entitled to vote). The 30% threshold will then apply differently to each of these categories: voting control is not “diluted” through a chain of ownership; while equity investment normally “dilutes” through the ownership chain, unless the equity investment is 50% or more of equity, in which case it is not. By way of illustration, if A holds 30% of the voting shares of B and B holds 60% of the share capital (without voting rights) of C, each of A, B and C will be presumed to be in concert with both of the others. On the other hand, if A holds 30% of the share capital (without voting rights) of B and B holds 30% of the share capital (without voting rights) of C, A will be presumed to be in concert with B, and B with C, but A and C will not be presumed to be in concert since A’s interest in C will be considered a “diluted” interest of 9% of C’s share capital (30% of 30%).
- The presumption will be split into two new presumptions (presumptions (1) and (2) in the proposed new definition) and, in addition to applying to corporations, will apply to funds, partnerships, trusts and any other person moral or physical.
Application to funds and limited partnerships:
- There will be a clarification that where a fund is managed by an independent discretionary fund manager, the fund manager (but not investors in the fund) will, in general, be deemed to have an “interest in the securities” held by the funds.
- The current presumption (4) in the definition of ‘acting in concert’, that a fund manager is presumed to be acting in concert with a person whose funds it manages on a discretionary basis, should be removed.
- A new footnote 7 on the definition of “acting in concert” will clarify that the panel will apply the new presumptions (1) and (2) (as described above) to an investor in a limited partnership or a investment as if the limited partnership or fund were a company and the investor was interested in a corresponding percentage of the share capital of the company.
- In addition, a new presumption (5) will provide that an investment manager or an investment adviser of a bidder, of an investor in a consortium of bidders or of a target, as well as any person controlling, controlled by or under the same control as such manager or investment adviser, will be deemed to act in concert with the offeror or the target (as the case may be).
Bidcos and consortium offers
- Currently, investors in a consortium (eg through a bidco) are normally treated as acting in concert with the bidder. It is proposed that where the equity funding for an offer is provided by a fund managed on a discretionary basis by a manager or investment adviser, the following persons may be considered to be acting in concert with the offeror: (1 ) the fund itself; (2) the investment manager or adviser of the fund; and (3) any investor in the fund who: (a) will have a “transparent” interest in 30% or more of the offeror; or (b) owns more than 50% of the limited partnership interests in the fund.
- Where the investment manager or adviser, or the investor, is part of a larger organization, the other parts of the organization will generally be presumed to be acting in concert with that person and with the offeror. In the case of a consortium bid, the Panel (under note 6 on the definition of “acting in concert”) may be willing to waive this presumption where it is satisfied that such other parties are independent, depending on the circumstances of the case, including the size of the investment in the bidder.
- The Panel proposes to tighten the current three brackets it considers when considering the size of investment in the bidder, as follows:
- 10% or less (no change): the panel would normally agree to waive the presumption;
- more than 10% but less than 30% (instead of 50%): the Panel may agree to waive the presumption depending on the circumstances; and
- 30% or more (instead of 50% or more): the Panel would normally not agree to waive the presumption.
Impact of changes
The Group believes that the proposals are not expected to have a huge impact because 1) in its view, to a large extent the proposals represent a codification of existing practice and 2) to the extent that the proposals go beyond and expand the scope of the presumptions, the benefits of added clarity and certainty will outweigh any negative impact. It remains to be seen whether this view will be shared by market participants as they come to grips with the proposals.