Structuring Public Takeovers in the U.K.
Acquisitions and mergers of U.K. public companies are governed by the City Code on Takeovers and Mergers (Code), which is administered by the Panel on Takeovers and Mergers (Panel). The Code consists of six general principles and 38 detailed rules. The general principles underpin the Panel's approach to all issues, with one of the most fundamental principles being that all shareholders must be treated equally.
Application of Takeover Code
The Code applies to takeovers of companies that have their registered office in the U.K., Channel Islands or Isle of Man, and have their securities admitted to a regulated market (for example, the Main Market for listed securities of the London Stock Exchange or AQSE Main Market), or a multilateral trading facility (including the AIM market of the London Stock Exchange or other AQSE markets such as the AQSE Growth Market) in those jurisdictions, as well as takeovers of certain private companies which have public company characteristics.
Different Methods of Acquiring Target
A potential bidder will need to consider the most appropriate method of acquiring the target company at the outset. There are two principal methods of acquiring a U.K. public company: a direct contractual offer and a court approved scheme of arrangement.
Traditionally a scheme has been the more popular deal structure, particularly in the case of larger value bids. This trend continued in 2021, with 45 of the firm offers made in 2021 being structured as a scheme, with the remaining 10 being contractual offers (with three of the 45 later switching to an offer deal structure).
What is a Scheme of Arrangement and what does it entail?
A scheme of arrangement (scheme) is a court-approved procedure governed by Part 26 of the Companies Act 2006 (CA 2006). A scheme works by a company making a compromise or arrangement with its members or its creditors, and the scope for using a scheme is wide.
As it must be approved by the court, a key element of the scheme is that it must be a genuine and effective compromise, meaning that the members/creditors of the company that participate in the scheme must get some advantage or compensation for the alteration of their rights under the proposed scheme. A scheme also requires the approval of both 75% in value and a majority in number of the target company’s shareholders who vote at the relevant shareholders’ meeting, to approve the scheme. In this regard, it is a dual test that needs to be satisfied.
Once the bidder has obtained shareholder approval and registered the court order to sanction the scheme with the Registrar of Companies, the scheme will be binding on the target and all of its shareholders, regardless of whether they voted in favour of it or not. As such, whilst a scheme may be slower in terms of acquiring effective control of the target company (i.e., more than 50%), it will generally be quicker achieving absolute control (i.e., 100%) as it is not necessary to invoke the public squeeze out procedure associated with a contractual offer.
Process and procedures
CA 2006 sets out the essential requirements for a scheme. In brief, the requirements and stages for a scheme are as follows:
- Announcing the bid. The first step is that the bidder will issue an announcement (this is usually jointly done with the target company) compliant with the Code, setting out its intention to make an offer for the target, which is to be implemented by way of a scheme.
- Application to the Court. This process begins with an application to court, for an order summoning a meeting/s of the relevant class/classes of member and/or creditors. There are a number of parties who can apply for an order.
- Company notifies attendees of the meeting and sends out scheme documents. Once the court application has been lodged at court, the scheme document including a notice to convene the court meeting needs to be sent out to all shareholders of the target company. This usually also contains a notice to convene a general meeting of the company’s shareholders which is usually held immediately after the court meeting has taken place.
- Attendees meet to consider proposed scheme. At the meeting/s members and/or creditors meeting to consider the proposed scheme and vote to either approve or reject the scheme.
- Company asks court to sanction/approve proposed scheme. If the scheme is approved in the meeting/s another court hearing is set down, wherein the court decides whether or not to sanction the approved scheme.
- Scheme becomes effective upon delivery of sanction order to Companies Registrar. If the Court then sanctions the scheme, the scheme will become effective upon the registration of the court’s order to sanction the scheme at the Registrar of Companies.
What is a contractual takeover offer and what does it entail?
The other method of structuring a public takeover is a direct offer, which comprises a contractual offer by a bidder for a target company and whereby a bidder must secure acceptances in respect of the shares of the target company representing at least 50% of the voting rights (although it can go after a higher threshold). The advantages of a contractual offer is that this gives the bidder more control over the transaction, completion of the acquisition can generally be achieved more quickly and this method provides greater flexibility to amend the terms of the offer. For this reason, a contractual offer is more suitable for a hostile takeover or to deal with competing offers.
The timetable for an offer is strictly regulated under the Code, with the aim to ensure that target shareholders are able to be given adequate information and advice to ensure they are properly informed to make a decision regarding the offer. This strict timetable also ensures that a target company does not have a big hang over its head indefinitely and that an offer also moves ahead expediently. The Code sets out the various deadlines for certain actions to be taken by both the bidder and the target. The process for an offer is as follows:
- Bid planning. A bidder must plan and consider different factors for the takeover including whether it is a recommended or hostile takeover, as well as various other factors including, but not limited to, the transaction timetable, the price range and source of finance. One key consideration is that the Code provides for automatic 28-day deadline from the initial approach of the target to making a decision to announce a firm intention to make an offer.
- Announcing the offer. Once it has been decided that an offer will be made, an announcement of that intention must be made within the 28-day deadline as stipulated above. The Code prescribes that the announcement must contain certain information as well particular standards for presentation of that announcement.
- Send offer document. After the offer has been announced, an offer document must be prepared and sent to the shareholders of the target company within 28 days of the announcement of a firm intention to make an offer. However, the offer document cannot be published within the first 14 days after the offer announcement. Alongside sending the offer document the bidder is required to publish the offer document on their website and announce the publishing.
- Offer must stay open. Once the offer is published as per the Takeover Code, it must stay open for a minimum 21 days from the date it is published. No later than 14 days after the date the offer is published, the target company board must also send a circular to their shareholders with their opinion of the offer. The Code contains further rules regarding offers staying open for longer periods of time as well as revoking them.
- Offeror must announce level of acceptance. After the 21 days, the offeror is required to make an announcement in relation to the levels of acceptance and every 7 days thereafter, until the final week preceding when the offer becomes unconditional. There are other various triggers for when an offeror must make an announcement, such as when the offer is revised, and these are detailed in the Code.
- Offer declared unconditional. Day 60 is the end of the offer period when an announcement can be made that an offer has been made unconditional, the offeree should then announce that the relevant threshold has been reached for the shares to be acquired and the shares will be delisted. If the offeror has reached the requisite thresholds, they can also start the compulsory acquisition procedure under the CA 2006.
- Completion of acquisition. Between day 60 and 100 (and depending on when the offer became unconditional) the offeror must make payment of consideration to accepting shareholders and complete the acquisition. The bidder will also look to invoke the statutory squeeze out procedures under CA 2006, in order to acquire the shares of those shareholders who have not accepted the offer, where the bidder has 90% or more of the shares of the target to which the offer relates. These are the final steps in the transaction process.
There are a multitude of different ways a transactions timeline as set out above could be affected, such as if there have been competing offers, if the company starts a compulsory acquisition procedure and various other issues that can arise across the course of a transaction. The above is based on a general 100-day timeline assuming no issues arise.
Armstrong Teasdale are well versed in assisting clients to navigate their way through a public takeover transaction.
It will be important to identify any issues at an early stage to ensure they do not create a hurdle or delay to completion. Part of the preliminary steps will involve some pre-planning and making a decision on the best transaction structure to adopt. Whether a company seeks to acquire a target through a scheme or offer, both options will require due diligence, verification of the contents of the offer or scheme document, and the drafting of the relevant suite of documents required for each option. Further, the key to both options involves strict compliance with the Code and all other relevant legislation when making announcements, drafting documents and publishing documents. We can assist you with this.
A summary of the key differences between a scheme of arrangement and contractual takeover offer are set out in the table overleaf.
 This includes; the company itself, any creditor of the company, any member of the company, if the company is being wound up, the liquidator and if the company is in administration, the administrator.
 As a practice note – most attendees will have already considered the scheme in advance of the meeting/s, as such the meeting/s are largely focussed on the vote.