Corporate M&A 2021

Last Updated April 20, 2021

UK

Law and Practice

Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm based in London and Dudley, dealing primarily with corporate and commercial work together with commercial property and litigation. Formed in 2005, its client base includes European and Anglo-US companies, individuals and a number of banks, as well as a large number of small and medium-sized enterprises. Hawkins Hatton provides a full range of company and commercial services and is known for private equity work for management teams, management buyouts, sales, mergers, acquisitions and disposals for shareholders of small and medium-sized enterprises, and a broad range of day-to-day corporate work. Employment specialists work closely with the corporate team to take care of all employment aspects of a transaction. This often includes consideration of TUPE, advice on terminations/dismissals and the preparation of appropriate service agreements for the period after the completion of a business sale or acquisition.

The pandemic has had a varied impact on different industry sectors within the M&A market. Whilst deal volumes inevitably dropped in certain sectors other sectors saw considerable growth and increase in deal values. M&A activity in 2020 was a story of two halves. The first half of 2020 was in the grip of COVID-19 causing many deals to be placed on hold. Unexpectedly, in the second half of 2020 the M&A sector witnessed a burst of activity.

Investment in technology and digital businesses. According to PWC in the final quarter of 2020 deal volumes and values were up by 2% and 18% respectively compared with the same quarter the prior year with technology and telecom subsectors seeing the highest growth in this period. The UK’s share of the M&A deals in the global technology industry was 30.4% according to Verdict. This comes as no surprise given that e-commerce and technology has been at the forefront of lockdown.

Foreign investment in the UK M&A market continued its decline and is at the lowest level since before the global crisis in 2008 due to the uncertainty of Brexit and now the pandemic. Foreign investors are also concerned by the increased tax changes and regulation for overseas investments and the expectation this will only continue as the UK government seeks to recoup the cost of the pandemic.

The IT and digital sectors have seen a surge in transaction as the lockdown restrictions placed the spotlight on the skills, resource and technological gaps businesses faced. The hospitality and leisure sector showed a considerable decline in deal activity during 2020.

Private

The acquisition of a private company is dependent on identifying a willing seller. Once you have a willing seller you can acquire a private company in the UK either by way of a share purchase or an asset purchase. Whilst either way will achieve broadly the same commercial objective there are important legal and tax differences between the two structures.

Asset purchase

This is the purchase of specific assets (and sometimes) liabilities which comprise the business. The parties will negotiate and agree which assets are being acquired and those which will remain in the selling company. In this way the buyer does not acquire the limited company itself, but instead it buys certain elements which make up the business (eg, business records, equipment, stock, goodwill, the business contracts, intellectual property). This has the advantage for the buyer in that it can be selective with what is included within the purchase and the buyer can exclude any assets/liabilities which it considers problematic.

Various consents and approvals may need to be sought in order to transfer the agreed assets. With an asset sale the funds will be paid directly to the limited company with limited involvement from the company’s shareholders as opposed to a share sale which involves direct payment to the shareholders.

The transfer of assets involves tax considerations such as VAT, transfers of going concern, Stamp Duty Land Tax, deductions of acquisitions cost and corporation tax. Asset purchases are also likely to fall under the scope of Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE), which provides for certain employee protections as part of the transfer of assets.

An asset purchase is usually effected by entering into a business purchase agreement which will cover:

  • provisions identifying which assets are included and excluded from the sale;
  • limited warranties;
  • apportionment of liabilities and obligations between the buyer and seller in relation to the assets being transferred; and
  • restrictive covenants.

Tangible assets are delivered to the buyer and intangible assets are formally assigned in a deed.

Share purchase

This is where the shares in the limited company are purchased such that ownership of the assets and business will remain within the limited company but the overall ownership of that company is transferred. As the trading entity does not change business continuity is preserved. The transfer is “warts and all” meaning that the buyer as the new shareholder of the company will take over all assets and liabilities. This presents a significant risk to any buyer making the due diligence process all the more important. 

A share purchase is effected by entering into a share purchase agreement with the following provisions:

  • warranties;
  • indemnities;
  • tax covenant; and
  • restrictive covenants.

On completion of the share purchase agreement a stock transfer form will be executed by the seller and new share certificates issued to the buyer.

Public

Public companies are acquired through the purchase of all or a substantial part of the shareholding. This can happen in two ways, namely; recommended (ie, with approval of the target board) or hostile where the management team has publicly advised the shareholders to reject the offer to prevent the takeover.

A takeover can be effected in two ways.

  • A contractual takeover offer whereby the bidder makes an offer to the target shareholders which is subsequently accepted by over 50% of the voting shares. If 90% of the voting shares accept the offer the buyer may be able to acquire the remaining shares from the minority. This method is more flexible than a scheme and can be implemented in a shorter period of time.
  • A scheme of arrangement whereby 75% of the voting shares agree to the take over which is also approved by the High Court. In these circumstances all of the shareholders will be bound. This method will generally be used to implement recommended bids and is a more efficient way of acquiring 100% control of the target company. 

UK City Code on Takeovers and Mergers

The EU Takeover directive was implemented in the UK under the terms of part 28 of the Companies Act 2006 and within the City Code on Takeovers and Mergers (the “Code”). The Code provides the framework for public company takeovers in the UK and its objectives include ensuring that target shareholders are treated fairly and not denied the opportunity to consider the merits of a bid, and that they are afforded equivalent treatment by a bidder.

The Code is administered by the Panel on Takeovers and Mergers (the "Panel") which has full jurisdiction to enforce the Code and place sanctions for non-compliance. The Panel regulates takeover bids and other merger transactions for companies with registered offices in the United Kingdom, the Channel Islands or the Isle of Man if any of their securities are admitted to trading on a regulated market or multilateral trading facility in the United Kingdom or on any stock exchange in the Channel Islands or the Isle of Man. The Panel comprises of 36 members, 12 of whom are appointed by large financial and business organisations.

Other Statutory Restrictions

Other statutory restrictions for takeovers include:

  • the Companies Act 2006 – Merger relief which prohibits unlawful financial assistance and provisions concerning a public company's right to investigate who has an interest in its shares;
  • the Criminal Justice Act 1993 – Prohibits insider dealing;
  • the Financial Services and Markets Act 2000; 
  • the Financial Services Act 2012;
  • the Market Abuse Regulation (see 4.3 Hurdles to Stakebuilding); and
  • the Enterprise Act 2002.

Other Relevant Regulatory Bodies

Regulatory bodies that have an impact on takeovers include:

  • the Financial Conduct Authority;
  • the Competition and Markets Authority (CMA);
  • the European Commission, which has exclusive jurisdiction where transactions concern the EU Merger Regulation (EUMR) which regulates M&A at EU level – see 3.2 Significant Changes to Takeover law;
  • ministerial departments, which may be involved when a transaction is of national interest; and
  • specific industries (such as banks) may have their own regulatory body.

Foreign companies are subject only to the same regulations which apply to UK based companies such as the UK merger control regime. Whilst the controls apply equally, intervention may be more likely in the case of foreign investors due to public or national interest. The UK government can intervene from a competition law perspective for public interest under the UK merger control regime as stipulated in the Enterprise Act 2002.  The UK government lowered the legislative thresholds (from GBP70 million to GBP1 million) for intervention to protect public interest for targets involved in activities connected with three areas of the economy namely; goods and services with military or dual use, computer hardware technologies and quantum technologies.

In June 2020 the UK government expanded its powers under the Enterprise Act 2002 such that it can intervene in the interest of the public on transactions which could impact the UK Pandemic response. This is not just confined to health response but could include food supply and internet services.

Reviewing Foreign Investment

The UK government is currently reviewing foreign investment in the UK through the introduction of the National Security and investment Bill. These changes will apply to any country and the focus will be on critical sectors with three broad areas of reform:

  • scope of investments subject to the regime;
  • thresholds; and
  • process,

See 2.6 National Security Review.

Section 13 of the UK Industry Act 1975 allows the Department for Business, Energy and Industrial Strategy to prohibit an acquisition by a foreign entity of an "important manufacturing undertaking" if there is a perceived risk that change of control would be contrary to the interests of the UK as a whole. These powers were used to consider the acquisition by Gardner Aerospace (a subsidiary of a Chinese aerospace and mining company) of Northern Aerospace in June 2018.

The Competition and Markets Authority (CMA) undertakes merger control and investigations of mergers based primarily on thresholds including turnover, asset values and market shares.  It derives most of its powers from the Enterprise Act 2002 and Competition Act 1998.

Transactions which qualify may be investigated by the CMA in an initial Phase 1 investigation. Where this initial phase determines that the merger could result in the substantial lessening of competition in a market in the UK, the CMA will refer the matter to a Phase 2 investigation. The Phase 2 investigation may result in a prohibition decision or a decision that the transaction should be allowed to proceed subject to commitments or clearance.

There is no requirement to notify the CMA of a merger prior to implementation, however, a company may want to apply for clearance prior to completion in order to manage any risks.

The secretary of state also has limited powers of intervention if a merger raises a “public interest consideration”. These powers relate to specific sectors such as newspaper and media outlets as with the investigation into the Sky – Fox merger. 

With an asset purchase of a private limited company a buyer must have regard to its obligations under TUPE. Where a relevant transfer is deemed to have taken place, anyone employed will be transferred to the buyer under their existing terms of employment.

Prior to completion of the purchase various steps must be taken in order to inform and consult with the employees in order to avoid any liability such as:

  • under TUPE, any changes in the employees' terms of employment are void if the sole or principal reason for the change is the transfer itself, unless the reason for the variation is permitted under the contract or for an economic, technical or organisational reason; and
  • dismissals will be automatically unfair if the sole or principal reason for the dismissal is the transfer, unless that reason is an economic, technical or organisational reason.

In respect of public takeovers, the Code sets out a number of obligations relating to employees. This includes providing the employees the following information:

  • any possible offer announcement that commences an offer period;
  • the offer announcement;
  • the offer document;
  • any circular sent to the shareholders containing the board’s opinion on the offer;
  • any post-offer undertaking made by a party to an offer; and
  • any announcement (or document which includes the contents of the announcement) which the Panel determines.

The employees must also be notified of the offeror’s intentions with regards to:

  • the future business and safeguarding of the jobs of employees and management;
  • any material changes in the conditions of employment; and
  • strategic plans for the two companies and the likely impact on:
    1. employment; and
    2. places of business.

The National Security and Investment Bill is aimed at strengthening the government’s existing powers to scrutinise and intervene in takeovers and mergers to protect national security. This followed a consultation carried out in 2018 and a white paper published by the Department for Business, Energy & Industrial Strategy, the key points in the paper being:

  • to encourage the notification of investments which may raise national security concerns similar to the US CFIUS process;
  • the expansion of the range of circumstances where the government has powers to address national security risks such as the acquisition of more than 25% of shares, gaining significant influence or control (trigger events). The objective is to prevent controls being circumvented by gaining control of an asset rather than acquiring the business itself; and 
  • that the government is expected to increase its resources to monitoring the market to identify any trigger events with potential national security implications.

Following a review of a trigger event, if it is assessed to be a national security risk then the government will have the power to impose conditions on the transaction to prevent or mitigate any risks or in more some circumstances to block or unwind a transaction. Consideration needs to be given to how the new regime would operate in conjunction with the UK merger control regime, and whether it will be necessary to change the role of the Competition and Markets Authority (CMA).

Significant legal developments related to M&A over the last three years include the following.

  • Rock Advertising v MWB Business Exchange Centres Ltd [2018] UKSC 24: the Supreme Court decided that a variation clause in a contract which required any subsequent variation to be in writing meant that an oral agreement to vary was void.
  • BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112: the Court of Appeal decided that a dividend can amount to a transaction at an undervalue under the insolvency rules for the purpose of placing assets out of creditors’ reach.
  • Chudley and others v Clydesdale Bank Plc [2019] EWCA Civ 344: the Court of Appeal confirmed the rebuttable presumption that there is a third-party right where a contractual term confers a benefit on a third party pursuant to the UK Contracts (Rights of Third Parties) Act 1999. 
  • Guest Services Worldwide v Shelmerdine [2020] EWCA Civ 85:the Court of Appeal decided a non-competition clause 12 months in duration imposed on employee/shareholders under a Shareholders Agreement was valid and enforceable.
  • Towergate Financial (Group) Ltd v Hopkinson [2020] EWHC 984: the High Court decided that a notice of a claim in a Share and Purchase Agreement imposed a dual condition precedent to bring an indemnity claim, requiring the claim to be notified "as soon as possible and in any event prior to…on or before the seventh anniversary of the date of this Agreement”. It was found the notice requirement had not been satisfied even where the claim had been notified before the seventh anniversary of the agreement. Failure to give notice “as soon as possible” meant that the notice was invalid.
  • Re System Building Services Group Lt (In Liquidation) [2020] EWHC 54 (Ch): the Insolvency and Companies Court considered the nature of a director’s duties to a company and whether those duties survive the company’s entry into an insolvency process. ICCJ Barber held that the “duties owed by a director to the company and its creditors survive the company’s entry into administration and voluntary liquidation.” The judgment demonstrates the continuing responsibility of directors to protect the interests of the company’s creditors even after an office holder has assumed control, the director’s duties remain in force and a director should consider the risks associated with subsequent transactions.
  • Fairford Water Ski Club Ltd v Cohoon [2020] EWHC 290 (Comm): The High Court decided that the director had breached their statutory duties by failing to disclose a personal interest which may conflict with the interests of the company.  This is a reminder the courts strictly interpret these duties.
  • Russell v Cartwright [2020] EWHC 41 (Ch): The High Court decided that the parties to a joint venture agreement did not owe each other a duty of good faith in the absence of an express term to this effect.

The UK has departed from the EU, and the transition period ended on 31 December 2020, this will be the most significant factor leading to changes to merger control regulation. The Code has been updated to reflect that EU law will no longer apply to the UK. The Takeovers (Amendment) (EU Exit) Regulations 2019 (SI 2019/217) makes the changes required to Part 28 of the Companies Act 2006 to enable the UK takeovers regime to operate outside the EU framework of the Takeovers Directive.

The UK will be outside the EU Merger Regulation (EMUR) and merging parties may need to seek clearance from the UK authorities. The concept of a “one-stop shop” will disappear in the UK in that mergers whether UK or foreign businesses that meet the UK and EU thresholds will face a parallel review under both systems. The CMA estimates that this will lead to an increase of 40/50% in its workload. UK turnover will no longer apply when assessing a merger which would fall under EUMR. As there are a large number of international businesses for whom a large part of their EU turnover is created in the UK, this will result in fewer mergers meeting the EMUR thresholds and instead of being reviewed by the European Commission being reliant on the relevant EU member states jurisdiction.

The full effect of Brexit on takeover law will take some time to assess.

In the UK, it is not usual for a bidder to build a stake in the target prior to an offer however it does happen. There are pros and cons associated with stake building, by way of example, stake building could be positive as it could offset shares which might be voted against. On the whole, stake building is regarded as a hard-hitting approach and not therefore favoured in the UK.

There is an ongoing disclosure requirement under Chapter 5 of the Financial Conduct Authority’s (FCA) Disclosure Guidance and Transparency Rules (DTR) which governs UK companies traded on either a regulated or prescribed market. This obligation is triggered by the percentages of voting rights held, whether directly or indirectly or whether through a financial instrument.

A disclosure must be made when a holding’s voting rights exceeds 3% of the total and then every time such voting rights increases or decreases by a whole 1% over 3%. The target must notify a Regulatory Information Service (RIS) as soon as possible and in any event by the end of the trading day following notification from the shareholder. The FCA can impose penalties for breach of the disclosure requirements which can result in penalties including the suspension of voting rights of the shares. 

The Code imposes certain restrictions on a bidder acquiring a stake holding which must be adhered to. There are also controls with regards to market abuse prohibited by the Market Abuse Regulations (MAR) which include insider dealing, where a bidder has information which could place the bidder at an unfair advantage. Insider dealing can give rise to civil and criminal sanctions (Criminal Justice Act 1993).

The FCA has the power to impose unlimited sanctions on any contravention of the MAR including Article 14 (prohibits insider dealing) and Article 15 (prohibits market manipulation). The market abuse regime cannot be diluted by any rules introduced by the company.

Following the UK’s withdrawal from the EU on 31 December 2020, it has introduced a new regime for all issuers with securities listed or traded on the UK markets namely the UK MAR, which is broadly along the same lines as the previous regime (aimed at discouraging insider trading, market manipulation and unlawful disclosure) with a few changes businesses will need to be aware of. 

The trading of derivatives is not fully prohibited, however, following the 2007/2008 financial crisis, dealing in derivatives is highly regulated. The Financial Services and Markets Act 2000 restricts the carrying on of a regulated activity and making financial promotions unless authorised by the FCA.

European Market Infrastructure Regulation (EMIR) has imposed reporting requirements to ensure transparency amongst derivatives markets, namely:

  • information on each derivative contract must be reported to trade repositories and sent to supervisory authorities; and
  • trade repositories are required to publish aggregate positions based on class of derivatives, for OTC and listed derivatives.

The European Union (Withdrawal) Act 2018 provides that EU EMIR, will form part of UK law so effectively post-Brexit there will be the original EU EMIR which will continue to apply to EU derivatives transactions and the UK version UK EMIR. The FCA has released guidance to explain the changes. Generally, it is expected as far as possible the EMIR legislation will not change after the UK has left the EU.

When the transition period ended on 31 December 2020, the European Securities & Markets authority (ESMA) switched off the FCA’s access to its Markets In Financial Instruments (MIFID) systems. The FCA has built equivalent FCA systems in the UK.

There is no requirement for a bidder to make known the purpose of its acquisition and its intention regarding control of the company.

An announcement must be made where:

  • there is a firm intention to make an offer notified to the target board, the Code governs the requirements for a firm offer announcement (Rule 2.7 of the Code); or
  • there is an acquisition of shares which results in an obligation to make a mandatory offer.

An announcement may have to be made subject to panel consultation where:

  • the target is subject to rumour and speculation; or
  • the is unusual movement in the targets share price.

Once a takeover period has commenced the disclosure requirement under Rule 8 of the Code applies. Rule 8 sets out the circumstances in which dealing disclosures and/or opening position disclosures are required to be made.  There must then be a disclosure of dealings by parties to the takeover in writing on a daily basis to a RIS.

After the opening position disclosure if a person is interested (directly or indirectly) in 1% or more of any class of relevant securities of an offeror or the target, then a dealing disclosure must be made. 

Market practice on timing for disclosure strictly follows the requirements of the Code. As non-compliance is considered seriously by the panel.

Generally, the due diligence (DD) conducted will fall into three main areas for a private limited company:

  • business – considering the boarder market issues such as competitors, business strengths and weaknesses, sales and marketing;
  • financial – identifying the financial risks and opportunities of the business; and
  • general/legal – identifying any areas of risk to the buyer as well as providing the buyer with a more comprehensive view of the company in its entirety.

In contrast on a public acquisition, all persons with confidential information on an offer must keep the information confidential until the offer is announced publicly, therefore, due diligence, in the first instance, is limited compared to private sales. The offeror is under a duty to only announce an offer when it knows it will implement the offer (Rule 2.7 of the Code).

It is now standard practice for due diligence on acquisitions to be undertaken remotely with the use of data rooms hence the impact of the pandemic on DD was confined to circumstances where it was necessary to engage in face to face meetings (in particular in relation to cross border transactions) and the restrictions prohibited that.

To protect target shareholder value, the Code generally prohibits the bidder and target from entering into exclusivity agreements. However, the target can seek safeguards from the bidder which are not prohibited by the Code; see 6.7 Types of Deal Security Measures.   

Tender offer terms and conditions are, generally, set out in the bidder’s formal offer or in the scheme document.

The timeline for completing a public takeover depends on whether by it is by way of an offer or scheme.

For a takeover offer the timelines are: 

  • completion within 28 days (and no earlier than 14 days without the target board’s consent), of an announcement of a firm offer, the offer documents must be sent the shareholders (offer date);
  • the offer can be closed 21 days from the offer date;
  • the offeror must announce the level of acceptances and will usually announce the next closing date 22 days after the offer date;
  • an offer will become unconditional as to acceptance 60 days after the offer;
  • on the basis the offer becomes unconditional as to acceptances on day 60, 81 days from the offer date is then last day for fulfilment of the other conditions; thereafter, 95 days after the offer date is the last date for consideration to be posted to the shareholders; and
  • the offeror can complete compulsory acquisition procedure 100 days after the offer date.

For a scheme of arrangement the timelines are:

  • completion within 28 days of the bidder and target announcing the scheme;
  • within 21 days of the scheme document, a meeting of the shareholders must approve it by special resolution;
  • within 40 days a court sanction hearing is to be held;
  • on day 41 the Court sanction must be submitted to Companies House and Scheme takes effect; and
  • day 55 is the last day for payment of consideration.

The pandemic’s impact on timetabling of deals has rested primarily with regards to regulatory requirements given the challenges faced by Regulators including the court system, Companies House and Financial Conduct Authority.

Rule 9 of the Code provides if a person acquires an interest in shares in the target which results in the person holding 30% or more of the voting shares of that company or person who already holds between 30% to 50% of the voting rights acquires an interest in any other voting shares, that person will be obliged to make an offer to acquire all of the equity and voting share capital of the target on the terms set out within Rule 9.

The offer is to be made in cash (or cash alternative) which is level with the highest price paid by the offeror for any interest in shares in the previous 12 months. The offeror is not entitled to attach any condition to the offer save that where it is refused on the grounds of competition. 

Cash remains more commonly used in the UK. We expect to see more earn out or deferred consideration based deals focussed on adjustments to account for the current valuation uncertainties. How a deal is structured and tax too can help reduce the gap between buyers and sellers and address risks caused by the uncertainty of whether a business can meet its financial projections in light of the pandemic. 

The Code permits an offeror to include conditions or indeed pre-conditions to an offer, however, there are constraints, primarily that such conditions must not be dependent on the subjective judgment of the offeror. Common conditions include:

  • where consideration shares are going to be issued and such class of shares are already listed as consideration then a condition will be included such that the offer becomes unconditional only once the consideration shares are admitted to listing and to trading;
  • that there will be no reference made to the Competition and Markets Authority or, where the takeover falls within the scope of EU merger control, the European Commission;
  • that all relevant authorisations/approvals for conducting the business are in full force and effect at completion;
  • there being no material ligation or other disputes ongoing or pending against the target; and
  • there being no material adverse changes in the target’s financial or trading position other than those which have been made known to the offeror; however, a change in economic, industrial or political circumstances will not normally justify the withdrawal of an offer according to the Panel.

Under Rule 10 of the Code, an offeror must have agreed to acquire 50% of the voting rights in the target for it to be able to declare the offer unconditional as to acceptance. An offeror will often include a conditional threshold so that 90% of the shares to which the offer relates must accept. This allows the offeror to rely on s976 of the Companies Act 2006 to acquire the remaining 10% of the shares. Without the 90% condition the offeror will be left to contend with minority shareholders remaining in the company who it will have no right to buyout.

Generally, an offer cannot be made conditional on obtaining finance; this is reflected within General Principle 5 and Rule 2.7 of the Code. Only in limited circumstances may the Panel permit obtaining finance as a pre-condition to the offer under Rule 13, for example, where it will take a substantial length of time to gain regulatory clearance or authorisation. A bidder must, therefore, ensure it has the funds to satisfy the consideration due in its offer.

Rule 24.3 (f) of the Code requires that offer documents set out how the offer is being financed including terms of finance and interest rates.

There is a general prohibition on "offer-related arrangements", between a bidder and target company on takeovers of UK companies to which the Code applies. Pursuant to Rule 21.2 of the Code, the target company may not enter into any "offer-related arrangement" with the bidder during an offer period or when an offer is reasonably in contemplation without the prior consent of the Panel.

This prohibition covers any agreement, arrangement or commitment in connection with an offer, including any inducement fee arrangement or break fees. Some break fees are permitted, however, where they do not exceed 1% of the offer value and the target’s financial adviser has confirmed it is in the best interest of the shareholders.

The following are examples of safeguards permitted under the Code:

  • confidentiality constraints;
  • non-solicitation of employees, customers or suppliers;
  • requirement for assistance for the purposes of obtaining any official authorisation or regulatory clearance;
  • employee incentive arrangements; and
  • agreement in relation to the future funding of any pension scheme.

If a bidder does not seek 100% ownership of a target, there is no real scope for the bidder to seek additional governance rights from the target.

Section 324(1) Companies Act 2006 sets out a statutory right of the members to appoint proxies to exercise all or any of the member’s rights to attend, speak and vote at general meetings. This will override any conflicting provision in the company’s articles, though the articles will usually prescribe how a proxy is to be appointed.

An offeror can rely on Section 979 of the Companies Act 2006 in order to force minority shareholders into the transaction. This provision is subject to there being a “Takeover Offer” for the purchase of all of the shares in the target company (less the shares already held by the offeree). The offeror must also have acquired or agreed to acquire 90% of the shares which are not currently held by the offeror.

If the above conditions are met, the offeror can give a squeeze out notice under s981 (Companies Act 2006) within three months of the expiry of the original offer to the shareholder who did not accept the original offer (“Minority Shareholders”). The notice will obligate the offeror to acquire the shares from the Minority Shareholders on the same terms of the main takeover offer. The Minority Shareholders can apply to Court to contest the compulsory acquisition, however, the Court is likely to find that the offer the majority shareholder have accepted is fair and reasonable.

Six weeks after serving the squeeze out notice the offeror must provide to the target company a copy of the entire squeeze out notices, a stock transfer form executed by a person nominated by the target in respect of the Minority Shareholder and the consideration for the shares.

Irrevocable commitments are widely used to improve the chances of success of a takeover offer. In advance of the announcement of an offer and with the consent of the Panel, shareholders will give an undertaking that they will accept the offer and will vote in favour of any resolutions in order to progress the offer.

There are two types of Irrevocable Commitments, hard irrevocables which are binding even if a higher offer is made or soft irrevocables which will fall away if a higher offer is made. Usually, the higher offer must be at least 10% higher.

If an offeror obtains an irrevocable commitment during the offer period, this must be disclosed in writing to a Regulatory Information Service (RIS) (Rule 2.10(a) of the Code).

Rule 2.7 of the Code sets out what needs to be included within an announcement, namely (not limited to) offer terms, identity of the offeror, details of any existing holding of shares, any conditions, details of any dealing arrangements, a list of documents which must be published on a website and, where there is a cash element involved in the offer, confirmation from the offerors financial adviser that there are sufficient resources to make the offer. Since January 2018, it is at this stage that an offeror must confirm its intentions with regards to the business, employees and pension scheme of target.

The announcement must be published via a Regulatory Information Service. If the announcement is submitted outside normal business hours, it must also be distributed to at least two national newspapers and two newswire services in the UK.

If a leak occurs, the announcement is governed by Rule 2.4.

It is unlawful for a public offer of transferable securities (including listed shares) to be made in the UK unless a prospectus approved by the FCA (or the competent authority of another EU state) has been issued beforehand, or an exemption applies. The prospectus regime was policed by the Prospectus Regulation (EU) 2017/1129, which sets out a number of exemptions from the requirements to produce a prospectus. However following UK’s exit from the EY, it will have its own distinct prospectus regime. This new UK prospectus regime largely follows the structure set by the EU Prospectus Regulation, but with some important differences to reflect the UK's withdrawal from the EU.

A bidder is required to produce audited accounts/financial statements for the previous two years of trading.

Alongside the main bid documents, a bidder must disclose to the public other material documents including irrevocable commitments, letters of intent, any offer related arrangements, funding details and any other material contracts related to the offer.

Directors owe statutory duties enshrined in the Companies Act 2006.

Duty to Act Within Powers (Section 171)

If a director is allotting shares with the intention of preventing a takeover bid this is deemed to be acting outside of the confines of the powers and was successfully challenged in Hogg v Cramphorn Ltd [1967] Ch 254.

Duty to Promote the Success of the Company (Section 172)

When considering whether to recommend an offer or in the case of competing bids, the directors will need to consider whether a bid is in the best interest of the company. This involves taking a long-term view of the interests of the company. The court is unlikely to disturb a decision unless no reasonable director could possibly have concluded that such action would promote the success of the company.

Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)

Generally a committee will be nominated to oversee the day-to-day responsibility of a takeover; the board are still under a duty to monitor the activities of the committee.

Duty to Avoid Conflicts of Interest and Conflicts of Duty (Section 175)

In a takeover, conflicts may arise where a director of the target also holds a position in the bidder company or vice versa or if a target director will have a continued role in the group following the transaction. Where a director does have an interest in an arrangement the director will be under a duty to disclose such interest (Section 177).

Directors owe their duties primarily to the company itself and therefore any action is taken by the company usually after a majority of shareholders have voted for action to be taken. Shareholders are unable to take action unless they can prove unfair prejudice or by bringing a derivative claim seeking relief on behalf of the company where the company has a cause of action against a director.

Usually, it is common for a committee to be appointed from the outset to deal with urgent issues relating to the takeover.

Where a company is subject to a management buyout or another connected party transaction which could result in a conflict, a special committee consisting of non-conflicting directors should be appointed in order to deal with the transaction).

Independent advisors should be consulted rather than using the company’s existing advisors, it is not sufficient to simply establish information barriers. 

Directors’ judgment is rarely challenged in the UK Courts and a Court is unlikely to disturb directors’ decisions unless no reasonable board could have reached that decision.

Rule 3 of the Code provides that the target must have an independent financial adviser. The target board must obtain competent independent advice as to whether the financial terms of any offer (including any alternative offers) are fair and reasonable.

The board will usually put together a team of advisors including investment banks (who will act as the financial advisors), brokers, lawyers, accountants and public relation advisors. This is to enable the board to deal with the offer, the substance of the board’s advice to the shareholders and how to deal with the offer process.

See 8.1 Principal Directors' Duties.

Hostile tender offers are permitted in the UK and account for around 12% to 18% of bids, annually.

The use of defensive measures is restricted by the Code. The Code will only apply once an approach has either been made or the board have reason to believe that a bona fide offer might be imminent.

In such circumstances, under Rule 21.1(a) of the Code, the board cannot, without shareholder approval, take any action which may result in any offer or bona fide possible offer being frustrated or in shareholders being denied the opportunity to decide on its merits. This includes: issuing shares, granting share options, disposing of any material assets and entering into agreements outside the ordinary course of business.

The directors are also prevented from taking any action in so far as it puts them in breach of their director’s duties owing to the target.

Urging shareholders to reject an offer is a commonly used defensive measure.

The Board will seek to persuade the shareholders that the price being offered is an undervaluation of the company and that by not engaging in the sale the shareholders will see a greater benefit in the long run. The Board will make this judgment based on financial information with regards to the performance of the company.

A board may also release new information such as business plans and forecasts to reinforce the idea that the long-term gain will outweigh the shareholders cashing out on the offer.

Where shares are being offered as consideration, the board may scrutinise the value of the offeror and will look to discredit its worth.

The board should ensure that where this tactic is employed any information given must be adequately and fairly presented (Rule 19.1). There has been noticeable reporting of a change in the use of defensive measures due to the pandemic.

There are two main duties which are key when employing defensive measures. The first is the duty to act in a way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (Section 172 Companies Act 2006). Success is determined based on the directors’ judgment, however, the act does provide several factors which must be considered including but not limited to:

  • the likely consequences of any decision in the long term; and
  • the interests of the company's employees.

The second is that the directors must act within their powers (Section 171 Companies Act 2006) which requires the director to act within the confines of the company’s constitution.

As detailed, in order for directors to comply with their statutory duties they cannot “just say no”. They must make a reasonable assessment based on requisite independent advice in order to determine what is in the company’s best interests long term. The Code generally allows for target shareholders to decide the outcome of an offer and, provided directors comply with their duties, they are allowed to express their opposition to a bid.

Litigation is not common in connection with M&A deals in the UK. Generally, commerciality plays a much larger role resulting in most issues being resolved on commercial terms rather than resorting to litigation. The panel whilst not strictly of judicial standing does play a key role in determination of issues arising during the course of the bid process. 

If litigation is brought (which is rare), there is no usual stage which is more likely to result in litigation.

The pandemic has seen a surge in disputes between buyers and sellers including between exchange and completion. Buyers are seeking to get out of a deal or stall the deal whilst the industry improves or force renegotiation on price. Conversely, sellers are seeking to get the deal over the line even if structured in a different way (such as earn outs or deferred consideration).

Deals may look completely different in a post-pandemic world compared to when heads of terms were negotiated hence why the gulf between the buyer and seller has lead to disputes. Sectors seeing the most disputes are travel, tourism, transport and retail.

Given the novelty of the current pandemic situation and the absence of decided cases the outcome of these disputes is more uncertain. However, if the global financial crash of 2008 is anything to go by, more litigation and strongly contested cases can be expected.

Mergers and acquisitions activity remains a key focus for activists.

Increasingly, activists make their demands public by way of open letters, white paper reports, shareholder proposals and proxy contests. The general aim being to focus on issues relating to corporate governance, such as replacing the management team, level of dividend pay-outs, new director appointment of directors and executive compensation. Activist shareholders have been fairly quiet during 2020 due to the uncertain impact of COVID-19 and volatile trading conditions.

Activists have developed a number of M&A-related strategies to interfere with completion. These strategies include pressuring companies into a merger or acquisition, or ruining deals that would otherwise have proceeded.

A further popular strategy involves campaigning for improved deal terms, commonly referred to as "bumpitrage". This involves the activist acquiring shares in a company that is subject to a takeover bid, and then persuading the other shareholders that the current bid is insufficient and should be renegotiated.

Often, the threat that shareholder approval may not be forthcoming is sufficient to encourage a target board to renegotiate the terms of the deal.

Hawkins Hatton Corporate Lawyers Ltd

Unit 3 Castle Court 2
Castlegate Way
Dudley
West Midlands
DY1 4RH

+44 01384 216840

+44 01384 216841

jcox@hawkinshatton.co.uk www.hawkinshatton.co.uk
Author Business Card

Trends and Developments


Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm based in London and Dudley, dealing primarily with corporate and commercial work together with commercial property and litigation. Formed in 2005, its client base includes European and Anglo-US companies, individuals and a number of banks, as well as a large number of small and medium-sized enterprises. Hawkins Hatton provides a full range of company and commercial services and is known for private equity work for management teams, management buyouts, sales, mergers, acquisitions and disposals for shareholders of small and medium-sized enterprises, and a broad range of day-to-day corporate work. Employment specialists work closely with the corporate team to take care of all employment aspects of a transaction. This often includes consideration of TUPE, advice on terminations/dismissals and the preparation of appropriate service agreements for the period after the completion of a business sale or acquisition.

Review of 2020

There is not a single business in a single sector which has not been impacted by the global pandemic during 2020. That impact has taken different forms from dealing with unexpected business closures (due to national lockdowns) to responding to increased business pressures as the landscape for the supply of products and operation of services changed. These varied impacts have dictated the nature of M&A activity in 2020.

The first half of 2020 was in the grip of COVID-19 causing many deals to be placed on hold some due simply to logistical and practical issues such as undertaking the relevant due diligence process. Somewhat unexpectedly, in the second half of 2020 the M&A sector witnessed a burst of activity. Refinitiv reported that the total deal value in the UK is down by only 5% compared to 2019, this demonstrates the recovery since July 2020, with an increase of 88% more deals. This was primarily due to an element of economic certainty achieved through factors such as the development of vaccines and the election of the US president.

Data from the Office for National Statistic (ONS) shows an 11-fold increase in the value of M&A deals for companies based in the UK between the second and third quarter of 2020. In short, M&A activity in 2020 was a story of two halves.

Impact by sector

The technology and digital sectors were the strongest sectors and leisure and hospitality showed the largest decline. According to PWC in the final quarter of 2020 deal volumes and values were up by 2% and 18% respectively compared with the same quarter the prior year with technology and telecom subsectors seeing the highest growth in this period. The UK’s share of M&A deals in the global technology industry was 30.4% according to Verdict. Verdict also reported that the UK had 84 deals in the technology sector in quarter two of 2020 with five top deals accounting for 99.3% of the overall value during this quarter, these deals included the merger of O2 Holding with Virgin Media for USD18.82 billion.

The logistics sector has also remained resilient due to high demands for distribution in response to the Pandemic.

Foreign investment

Consultancy UK reported that foreign investment in the UK M&A market continued its decline and is at the lowest level since before the global crisis in 2008. Prospective buyers appear reluctant to invest in UK companies possibly due to the uncertainty of Brexit which has been an underlying feature since 2016 and also the increased regulation of foreign investment. In June 2020 the UK government expanded its powers under the Enterprise Act 2002 such that it can intervene in the interest of the public on transactions which could impact the UK pandemic response.

This is not just confined to health response but could include food supply and internet services. The UK government is currently reviewing foreign investment in the UK through the introduction of the National Security and investment Bill. These changes will apply to any country and the focus will be on critical sectors with three broad areas of reform namely; scope of investments subject to the regime, thresholds and process.

UHY Hacker Young reported that 56% of M&A activity in 2020 comprised of the takeover of companies listed on Aim through private equity, which is a 10% rise from 2019. Private equity will remain a key feature driving deals in 2021. 2020 also saw buyers using their stock to acquire a company such as AstraZeneca’s USD39billion takeover of US biotech group Alexion. This trend is expected to continue in 2021.

Looking Ahead to 2021 and Beyond

COVID-19 aside the conditions for deal making are good as interest rates are low and equity investors are cash rich with an appetite for investing for growth. The M&A market in 2021 is expected to continue its significant bounce back. It is expected investors into the UK will first emerge from regions around the world that defeat the pandemic, such as Asia. Investors will seek out bargains in the form of distressed businesses with significant unspent accumulations of cash and securities. Interest rates also remain at record lows which will encourage deal making.

Resource and technology

Activity will also be dictated by the urgency within which some businesses need to fill skills, resource and technological gaps. Many businesses resistant to change recognised during the pandemic that they need to act fast to transform their digital capabilities and this will be a priority for 2021 with M&A the most rapid means to acquire those capabilities thus creating a competitive platform for deal making. Digital capability is the key focus for businesses as technology to support remote working, education, shopping and entertainment is in increased demand. This will inevitably increase competition and prices in these sectors.

The demand for digital and technology based assets is also likely to remain high which will increase deal values in these sectors during 2021 whereas as those sectors mots harshly hit by COVID will most likely see distressed sales at lower values. Begbies Traynor, insolvency practitioners have reported a rise in companies in “significant distress” across the food industry, hospitality and real estate. It is expected there will be a surge of insolvency as the UK government withdraws its support in the form of deferred VAT, rates, loan guarantees, paid furloughs, tax holidays etc.

Restructurings and returning and adapting industries

Restructuring activity is also expected to increase once governmental support ends. There is little doubt travel, hospitality and leisure sectors have been hit the hardest by the pandemic and repeated lock downs. However, what is also not in doubt is the high demand for these sectors. The UK population having been starved of its normal intake of travel, fine dining and leisure pursuits, is raring to go in 2021 and investors will quickly cease the opportunity to invest in restaurants, bars, hotels, holiday parks, outdoors activity centres, gyms etc to assist in their bounce back. Investors will see this investment as a safe bet knowing these sectors will have strong long-term growth in the future.

The Logistics sector is another key sector in which we expect to see increased M&A activity in 2021.

COVID-19 hastened global commitments to greener and carbon neutral fuels. It is expected M&A will be key to the sector’s transformation with alliances and investments in technologies.

Activists shareholders have been fairly quiet during 2020 due to the uncertain impact of COVID-19 and volatile trading conditions, no doubt this will change as we enter a period of recovery in 2021.

SPACs

Special purpose acquisition companies (SPACs) have seen a record breaking year in the US in 2020 and within a few months of 2021 Harvard Business Review reported SPACs had raised USD26 billion by the end of January 2021, which is equivalent to a third of the USD83 billion raised in 2020 by 248 SPACs. SPACs are gaining momentum and it is anticipated SPACs will spread to the UK where there was no SPAC listed on the London Stock Exchange in 2020 compared to 190 in the US.

Valuations

Valuations of businesses, however, will be more complex as past performance and closures during the pandemic will not reflect future price or targets with the added complication of the continuing uncertainties of the Pandemic. Buyers will therefore want more earn out or deferred consideration-based deals focussed on adjustments to account for the current uncertainties. How a deal is structured and taxed can help reduce the gap between buyers and sellers and address risks caused by the uncertainty of whether a business can meet its financial projections in light of the pandemic.

Anticipated uncertainties

2021 will still be marred with significant uncertainties which will influence M&A activity including the emergence of new COVID-19 variants, potential tax policy changes to accommodate the UK government’s unprecedented spending level and further lockdown/restrictions.

In relation to Brexit, the UK still has to see the economic implications of the free trade deal stuck with the EU on the premise of “zero tariff and quota”. The current EU trade deal favours goods as the UK has a deficit in goods with the EU but there is no mention of services even though the UK has a surplus.

If the UK can replicate the original “Big Bang” (the deregulation put in place by the Thatcher government) then it could steal a march on Europe with all its clunky rules. This will mean a divergence between the City and the EU. There is always going to be fall out to Paris, Frankfurt, etc, but in order for the City to remain the dominant force within Europe and the World there is no time to waste whilst the EU is in hiatus trying to consolidate its own position on financial services but not yet having the skill set to replicate London’s offering. The original Big Bang made the UK a rival for New York and Big Bang 2.0 needs to ensure that the UK stays the dominant force in Europe even if there is divergence rather than equivalence.

Conclusion

Aside from domestic factors, the pandemic being a world-wide issue will continue to have a global economic impact and there will be some commonality in the financial challenges faced by countries across the world as each country emerges in 2021 from the worst health crisis in a century.

Hawkins Hatton Corporate Lawyers Ltd

Unit 3 Castle Court 2
Castlegate Way
Dudley
West Midlands
DY1 4RH

+44 01384 216840

+44 01384 216841

jcox@hawkinshatton.co.uk www.hawkinshatton.co.uk
Author Business Card

Law and Practice

Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm based in London and Dudley, dealing primarily with corporate and commercial work together with commercial property and litigation. Formed in 2005, its client base includes European and Anglo-US companies, individuals and a number of banks, as well as a large number of small and medium-sized enterprises. Hawkins Hatton provides a full range of company and commercial services and is known for private equity work for management teams, management buyouts, sales, mergers, acquisitions and disposals for shareholders of small and medium-sized enterprises, and a broad range of day-to-day corporate work. Employment specialists work closely with the corporate team to take care of all employment aspects of a transaction. This often includes consideration of TUPE, advice on terminations/dismissals and the preparation of appropriate service agreements for the period after the completion of a business sale or acquisition.

Trends and Development

Authors



Hawkins Hatton Corporate Lawyers Ltd is a niche corporate law firm based in London and Dudley, dealing primarily with corporate and commercial work together with commercial property and litigation. Formed in 2005, its client base includes European and Anglo-US companies, individuals and a number of banks, as well as a large number of small and medium-sized enterprises. Hawkins Hatton provides a full range of company and commercial services and is known for private equity work for management teams, management buyouts, sales, mergers, acquisitions and disposals for shareholders of small and medium-sized enterprises, and a broad range of day-to-day corporate work. Employment specialists work closely with the corporate team to take care of all employment aspects of a transaction. This often includes consideration of TUPE, advice on terminations/dismissals and the preparation of appropriate service agreements for the period after the completion of a business sale or acquisition.

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