Detail of changes made to the operation of provisions previously contained in Part 13A of the 1985 Act
1244.The rules laid down in the Directive in relation to squeeze-out and sell-out are broadly consistent with provisions of Part 13A (sections 428 to 430F) of the 1985 Act. The restated and amended provisions will apply equally to all companies and all bids within the ambit of Part 13A of the 1985 Act, regardless of whether or not the Directive is required to be applied to such companies and bids.
1245.The following changes are made in implementation of the Directive:
Calculation of Squeeze-out Threshold (section 979) – there is a dual test imposed: in order to acquire the minority shareholder’s shares, the bidder must have acquired both 90% of the shares to which the offer relates, and 90% of the voting rights carried by those shares. Where the offer relates to shares of different classes, then, in order to acquire the remaining shares in a class, the bidder must have acquired 90% of the shares of that class to which the offer relates, and 90% of the voting rights carried by those shares. Under section 429 of the 1985 Act, in each case only the first limb of that test applied.
Calculation of Sell-out Threshold (section 983) – mirroring the change to be made in relation to the squeeze-out threshold, a dual test is similarly imposed in relation to the sell-out threshold, so that a minority shareholder may force a bidder to acquire his shares (i) when the bidder holds 90% of the shares in the company, and 90% of the voting rights attached to those shares, or (ii) when the bidder holds 90% of the shares in the class to which the minority shareholder’s shares belong, and 90% of the voting rights attached to those shares. Under section 430A of the 1985 Act, the test was that the bidder should have acquired 90% of all shares in the company (or in the class concerned).
Revised Period during which Squeeze-Out and Sell-Out Rights may be Exercised (section 980(2)) – the Directive provides (Articles 15.4 and 16.3) that squeeze-out and sell-out rights must be exercisable within a three month period following the time allowed for acceptance of the bid. Section 429(3) of the 1985 Act provided that squeeze-out could be exercised within a period of four months beginning with the date of the offer and had to be exercised within two months of reaching the 90% threshold. Accordingly, the rule provided by the Directive is substituted for the rule in the 1985 Act. An exception to this rule is provided where takeover bids are not subject to the Directive, for instance takeovers of most private companies. In these cases, the squeeze-out notices must be given within six months of the date of the offer if this is earlier than the period ending three months after the end of the offer. This is intended to prevent offerors in such circumstances continually extending the offer period. A change is also made as regards the period during which sell-out may be exercisable so that this period is to be either three months from the end of the offer or, if later, three months from the notice given to the shareholder of his right to exercise sell-out rights (section 984(2)). An extended period during which the sell-out right can be exercised where notice of such a right is only given after the end of the offer period is consistent with provisions of the Directive allowing more stringent provisions to be put in place (in this case to ensure the proper protection of minority shareholders).
The court will no longer be able to reduce the consideration in relation to squeeze-out or sell-out following a takeover bid to below the consideration offered in the bid (which the Takeovers Directive presumes to be fair in all cases). Again utilising provisions of the Directive which allow more stringent provisions to be included to protect minority shareholders, minority shareholders will continue to be able to apply to the court to request that consideration higher than that offered in the bid be paid in exceptional circumstances (section 986(4)).
1246.In most instances, it is considered that the first and second changes above will make no practical difference as the percentage of total capital carrying voting rights in a company (or class of shares) and the percentage of voting rights will normally be the same. The provisions about voting rights will not apply where the shares being squeezed out or sold out are non-voting shares.
1247.The CLR also considered the issue of squeeze-out and sell-out and the scope for improving the provisions in the 1985 Act. Its Final Report (chapter 13, pages 282 – 300), made a number of recommendations in relation to the reform of the squeeze-out and sell-out regime. Some of these recommendations are closely related to implementation of the Takeovers Directive. For instance, the CLR questioned whether, in calculating the relevant squeeze-out and sell-out thresholds, only shares that had been unconditionally acquired should be taken into account or whether shares acquired subject to contract should also be included.
1248.In implementing the Takeovers Directive, the opportunity is being taken to adopt recommendations of the CLR, whether or not related to implementation of the Directive, except to the extent that they are not consistent with Articles 15 and 16 of the Directive or are no longer appropriate as a consequence of the Directive. The recommendations made by the CLR implemented by Chapter 3 of Part 28 are set out below:
Meaning of takeover offer and entitlement to dividends (sections 974 and 976)
1249.In order to be a takeover offer for the purposes of Part 13A of the 1985 Act, an offer to acquire shares had to be on terms which were the same in relation to all the shares to which the offer related. One problem with the 1985 legislation was how to treat any variations in value between shares of the same class that were attributable to the fact that some of the shares, because they were allotted later, do not yet carry a dividend. Section 976(2) rectifies this problem by providing that, even if the offeror offers to pay more for shares that carry a dividend than for those in the same class which do not, the offer will be treated as being made on the same terms in relation to those shares.
Meaning of a takeover offer and communication of that offer (sections 974 and 978)
1250.To deal with issues arising from an increasingly globalised market in shares and different legislative regimes outside the EEA, it is made clear that an offer is not prevented from being a takeover offer for the purposes of Chapter 3 of Part 28 merely because there are some offerees who will be unable to accept it (for instance, where the offeree cannot accept the offer because of restrictions on the cross-border transfer of cash or securities in the country in which the offeree resides). It is also provided that an offer can still be a takeover offer for the purposes of the squeeze-out and sell-out provisions if a shareholder has no registered address in the UK and the offer is not communicated to him to avoid contravening the law of another country as long as either the offer itself is published in the Gazette or a notice is published in the Gazette stating that a copy of the offer document can be obtained from a place in the EEA or on a website.
Shares that the offeror has “contracted to acquire” (section 975)
1251.Clarificatory amendments are made on this issue. Section 428(5) of the 1985 Act dealt with the offeror’s position at the start of the bid, for the purpose of determining which shares could not be counted towards the achievement of the 90% threshold (at which point shares may be compulsorily purchased). It was unclear as to whether the phrase “contracted to acquire” in section 428(5) covered conditional as well as unconditional contracts. It is, therefore, clarified that, in ascertaining the offeror’s position at the start of the bid, the shares he has conditionally contracted to acquire (other than those subject to irrevocable undertakings (see below), as under the 1985 Act) should be treated as being shares already held by the offeror. This means that only shares that the offeror has either acquired or unconditionally contracted to acquire will count towards the 90% total needed to exercise squeeze-out. Consequential changes are also made to the provisions on joint offers and associates of the offeror to bring these into line with the above.
1252.Under the 1985 Act, the registered holder of shares could give an irrevocable undertaking to accept a takeover bid, and if he did this for no consideration or only in exchange for a promise to make the bid, his shares were still treated for the purposes of squeeze-out as included within the offer. This is extended to include undertakings given for only negligible consideration and undertakings the effect of which is to require the registered holder to accept the offer (where the undertaking is given by a person who is not the registered holder of the shares but can contract to bind the registered holder, such as the manager of shares held by a bare nominee). (“Irrevocable undertakings” are contractual agreements entered into by a bidder usually with major shareholder(s) of a proposed target company. Such agreements aim to give the bidder certainty – he will know that support for the offer can be guaranteed from shareholders party to the contract – so that his bid has a greater prospect of success. Such undertakings would normally prevent the giver of the undertaking from selling their shares or exercising voting rights to prevent the takeover from becoming successful.)
Date of the offer (section 991(1))
1253.The “date of the offer” is defined to mean either the date of publication, or if the offer is not published or notice of the offer is sent out earlier, the date on which the offeror first sends notice of the offer to the offerees.
Right of offeror to buy out minority shareholders: treatment of options etc (section 979(5))
1254.Where an offeror makes an offer for all the target company’s allotted shares and all or any shares subsequently allotted, it is provided that (a) in deciding whether the offeror has reached the 90% threshold for the purposes of section 979, the offeror need only bring into the calculation shares which are actually in issue (i.e. allotted) at the relevant time; (b) if the offeror serves squeeze-out notices and more shares are subsequently allotted which take the percentage of acceptances then received below 90%, that will not invalidate squeeze-out notices already served; and (c) if the offeror wishes to serve further squeeze-out notices, he must have at least 90% acceptances of shares (or shares in a class) then in issue and subject to the offer at the time he sends the notices out.
Consideration not exclusively in cash (section 981(5))
1255.It is clarified that where an offer of shares, or a mixture of shares and cash, is made, and it is no longer possible when the offeror exercises his right of squeeze-out to give the consideration in shares, the offeror should pay the cash equivalent irrespective of whether the shareholders had previously been offered a choice (i.e. whether the offer was “mix and match” or not). Parallel changes are made as regards sell-out (section 985(5)).
Shares that the offeror has “contracted to acquire” (section 983)
1256.It is clarified that, in addition to shares acquired by the offeror, shares subject to both conditional and unconditional contracts of acquisition are included in calculating whether the sell-out threshold has been reached. As a result of this change, there might be circumstances where the 90% threshold required for sell-out to be exercised was reached only because of shares which the offeror had conditionally contracted to acquire. However, if the conditions of such contracts were not fulfilled, the offeror could in fact find that he was being required to buy a minority shareholder’s shares even though the offeror had not actually acquired 90% of the shares. So section 983 also provides that, if that is the case at the time when the minority shareholder exercises his right of sell-out, the offeror does not have to purchase the shares unless he has acquired or unconditionally contracted to acquire 90% or more of the shares by the time the period referred to in section 984(2) (the period within which shareholders can exercise sell-out rights) ends. (A corresponding change is made in section 979(6) and (7) to prevent minority shareholders in this situation who have to wait to see if they can exercise sell-out from being squeezed out in the meantime.)
Applications to the Court (section 986)
1257.This section provides that a shareholder receiving a squeeze-out notice may make an application to the court (within six weeks of receiving the notice) seeking to overturn an offeror’s intention to purchase his shares compulsorily (or the terms of that purchase). A requirement that the offeror be promptly notified of such an application is now included (this was not previously required by section 430C of the 1985 Act). As a consequence of this requirement, it is also required that the offeror is obliged, at the earliest opportunity, to notify shareholders who are being squeezed out or who are exercising their rights of sell-out, and are not party to a section 986 application, that proceedings have been initiated.
Chapter 4: Amendments to Part 7 of the Companies Act 1985
Section 992: Matters to be dealt with in directors’ report
1258.This section implements Article 10 of the Takeovers Directive. Article 10.1 and 10.2 require companies admitted to trading on a regulated market to provide in their annual reports detailed information relating to matters such as the control and share structures of the company. It is, therefore, provided by amendment to Part 7 of the 1985 Act that the information required by the Directive must be set out in the directors’ report.
1259.Additionally, Article 10.3 of the Directive requires boards of companies to present an explanatory report to shareholders on the issues referred to in Article 10.1 and 10.2 at the company’s annual general meeting. This section requires this additional explanatory material to be contained in the directors’ report submitted to the annual meeting of shareholders.
1260.Section 992(5) amends section 251 of the 1985 Act on summary financial statements. It provides for the explanatory material required by Article 10.3 of the Takeovers Directive either to be included in the summary financial statement or to accompany it.
1261.Failure to include either the information concerning control and share structures or explanatory material in the annual report will attract existing criminal sanctions under section 234(5) of the 1985 Act (directors responsible for the failure to comply with provisions related to the directors’ report are to be liable to a fine).
1262.Section 992(6) provides that these new provisions will apply in relation to directors’ reports for financial years beginning on or after 20 May 2006 (the date by which the Directive had to be implemented).
1263.These are general requirements designed to bring greater transparency to the market and apply to all relevant companies whether or not they are involved in a takeover. Accordingly, the requirements will apply to all companies registered in the UK which have voting shares traded on a regulated market, whether or not that includes an official listing on the London Stock Exchange.
Under Part 15 of the Act (section 416), the Secretary of State may in future make regulations as to the contents of the directors’ report and those regulations will be able to incorporate the provisions introduced by section 992(2) to (4). Regulations under sections 427 and 428 will be able to make provision for the additional explanatory material when a summary financial statement is sent out rather than the full accounts and report.