M&A activity in 2023 was significantly reduced, including in the private equity industry. The economic uncertainties of 2022 persisted through 2023, combined with the political uncertainties of Israel’s invasion of Gaza. Towards the end of 2023, M&A gained some momentum as confidence returned owing to easing inflation and increased stability in relation to interest rates. However, the market remains volatile; and with 50% of the world’s population due to vote on a change of government, there will be a real sense of uncertainty among businesses, with some likely postponing investment decisions until 2025. 2024 may be the year when the long-awaited impact of COVID-19 is felt.

Global factors such as the political unrest in Ukraine and Israel will directly affect deal making in 2024. Change of government policies (if the UK, and indeed half the world, undergoes a change of government in 2024) will also influence deal activity in a range of sectors – including the energy sector, especially regarding policies on climate and infrastructure for achieving world carbon emission targets. Digitalisation will continue to drive deals, though increased foreign direct investment scrutiny and merger control could dampen M&A activity. 

While technology slowed down compared to previous years, it has remained strong with AI and other emerging technologies continuing to create interest in the sector. Oil and gas, healthcare and insurance were also active sectors. Environmental, social and governance (ESG) factors are a constant feature in deal making.

Private

The acquisition of a private company is dependent on identifying a willing seller. Once a willing seller is obtained, a private company can be acquired in the UK either by way of a share purchase or an asset purchase. While either method 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 that comprise the business. The parties will negotiate and agree on which assets are being acquired and which will remain in the selling company. In this way, the buyer does not acquire the limited company itself, but instead buys certain elements that make up the business (eg, business records, equipment, stock, goodwill, the business contracts, intellectual property). This has an advantage for the buyer in that it can be selective regarding what is included in the purchase, and the buyer can exclude any assets/liabilities 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:

• value-added tax (VAT);
• transfers of going concern;
• stamp duty land tax;
• deductions of acquisition costs; and
• corporation tax.

Asset purchases would also likely fall within the scope of the 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 remains 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 covenants; 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:

• 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 (see below) and can be implemented in a shorter period of time.
• A scheme of arrangement, whereby 75% of the voting shares agree to the takeover, which is also approved by the High Court. In these circumstances, all the shareholders will be bound. This method is generally used to implement recommended bids, and is a more efficient way of acquiring 100% control of the target company.

The 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 in the City Code on Takeovers and Mergers (the “Code”). The Code provides the framework for public company takeovers in the UK. 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 to issue sanctions for non-compliance. The Panel regulates takeover bids and other merger transactions for companies with registered offices in the UK, 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 UK or on any stock exchange in the Channel Islands or the Isle of Man. The Panel comprises 36 members, 12 of whom are appointed by large financial and business organisations.

Other Statutory Restrictions for Takeovers

These include the following:

• the Companies Act 2006 – ie, 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);
• the Enterprise Act 2002 (EA02); and
• the National Security and Investment Act 2022.

The Draft Digital Markets, Competition and Consumers Bill

In April 2023, the UK government introduced the Digital Markets, Competition and Consumers Bill (the “DMCC Bill”) which, when passed into law, will amend the Competition and Markets Authority’s (CMA) jurisdiction to review mergers.

The turnover test will be raised from GBP70 million to GBP100 million (to account for inflation). There will be a new “combined test” under which a merger could be subject to scrutiny if one of the merging businesses has a supply share of at least 33% of a particular category of goods or services or more than GBP350 million of UK turnover. The de minimis exemption for a merger to fall outside the UK merger control regime will be UK turnover of less than GBP10 million.

The DMCC Bill will also require certain acquisitions in the UK’s digital markets to be notified in advance, including undertakings of significant market power with a global turnover of over GBP25 billion or UK turnover of more than GBP1 billion.

The Economic Crime and Corporate Transparency Act 2023

The Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024 (see 3.1 Significant Court Decisions or Legal Developments) were placed before Parliament in February 2024. These are expected to be passed in May 2024, and will permit the Registrar of Companies to impose a penalty on a person if it is satisfied beyond reasonable doubt that they have committed an offence pursuant to the Companies Act 2006.

Other Relevant Regulatory Bodies

These include the following.

• The Financial Conduct Authority (FCA).
• The CMA, which announced reforms in November 2023 to its Phase 2 review process, aimed at allowing merging parties to have more engagement with the decision-makers. The finalised guidance is expected in the first quarter of 2024.
• The European Commission has exclusive jurisdiction where transactions concern the EU Merger Regulation (EUMR), which regulates M&A at the EU level – see 3.2 Significant Changes to Takeover Law.
• Ministerial departments, which may be involved when a transaction is of national interest.
• Specific industries (such as banks) may have their own regulatory bodies.

Foreign companies are subject only to the same regulations that apply to UK-based companies, such as the UK merger control regime. While the controls apply equally, intervention may be more likely in the case of foreign investors due to public or national interest.

The National Security and Investment Act 2022 came into force on 4 January 2022 and introduced a new foreign direct investments regime, replacing the EA02 in relation to transactions involving national security concerns. There are 17 sectors which require mandatory notification and clearance prior to completion of a transaction involving a company carrying out activities in those sectors – including defence, energy, transport, technology and artificial intelligence (refer to the Notifiable Acquisitions Regulations 2021). The trigger events for mandatory notification are:

• the acquisition of more than 25%, more than 50%, or 75% or more of the votes or shares in a qualifying entity; and/or
• the acquisition of voting rights enabling or preventing the passage of any class of resolution governing the affairs of the qualifying entity.

The government has retroactive powers to call for review any qualifying transaction completed between 12 November 2020 and 4 January 2022. It is important to consider the new regime for all transactions completed from 12 November 2020. Notifications should be made to the new Investment Security Unit (ISU). The Secretary of State must reach an initial decision within 30 working days.

In respect of non-mandatory notifications (for those entities not in the 17 sectors), consideration would need to be given for a voluntary notification, the trigger for which would be the acquisition of “material influence” in a company; and the UK government has the power to call for review of transactions five years after completion.

The government introduced a Register of Overseas Entities (ROE) on 1 August 2022 as part of the Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”). The purpose of the Act, and subsequently the ROE, is to tackle economic crime through increased transparency regarding the ownership of overseas entities. The Act applies retrospectively to overseas entities that own property or land acquired after 1 January 1999. Such entities should have registered with Companies House by 1 January 2023.

The Economic Crime and Corporate Transparency Act 2023 makes two principal changes to the ROE that will come into effect in 2024 – namely, it expands the scope of registrable beneficial interest for the purpose of the ROE and expands the information that must be delivered to Companies House. The changes are aimed at addressing the criticism that the true beneficial owners of the foreign entity were not being identified.

See 2.6 National Security Review.

Competition Law

The UK government can intervene from a competition law perspective for public interest under the UK merger control regime, as stipulated in the EA02. The UK government has a threshold of GBP70 million for intervention to protect public interest regarding targets involved in activities connected with three areas of the economy:

• 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 EA02 such that it can intervene in the interest of the public in transactions which could affect the UK’s pandemic response. This is not just confined to health response but could also include food supply and internet services.

See under The Draft Digital Markets, Competition and Consumers Bill in 2.2 Primary Regulators. The timeframe for the changes discussed there is unknown.

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 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 EA02 and the Competition Act 1998.

Transactions that 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 in 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.

As previously mentioned, the CMA announced reforms in November 2023 to its Phase 2 review process, aimed at allowing merging parties to have more engagement with decision-makers. The finalised guidance is expected in the first quarter of 2024.

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 and to avoid any liability, including as follows:

• 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 with 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) that 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 employment and places of business.

The National Security and Investment Act 2022 came into force on 4 January 2022 and introduced a new foreign direct investments regime, which replaces the EA02 in relation to transactions involving national security concerns.

There is a significant increase in the types of transactions covered by this, to include not just M&A but also minority investments and acquisitions of assets (such as property and intellectual property (IP)). See 2.3 Restrictions on Foreign Investments. Failure to comply with the related obligations may result in significant sanctions, including turnover-based fines, criminal liability and transactions being void.

Legal Developments

The Economic Crime and Corporate Transparency Act became law on 26 October 2023. The Act will deliver significant reforms to Companies House to improve transparency regarding UK companies and other legal entities, and will enhance national security and help combat economic crime by ensuring the UK operates a more reliable companies register. 

The Act has brought in new powers for Companies House to improve its role in combating financial crime. New provisions in March 2024 include:

• identity verification checks for directors and people of significant control, to challenge filings where the information is suspicious, false or misleading;
• a new requirement to obtain a registered email address and to seek confirmation that the company has been formed for a lawful purpose; and
• Companies House having wider information-sharing powers to volunteer data to law enforcement agencies, regulators and public authorities, as well as wider powers to remove information from its register.

The Act also targets the misuse of limited liability partnerships by tightening control on registration requirements, including provisions with regards to identity and requiring LLPs to have a connection with the UK.

The M&A sector will need to keep a close eye on the significant overhaul of Companies House’s role, pursuant to the Economic Crime and Corporate Transparency Act and to the reforms taking place as a consequence of the Financial Services and Markets Act, which received Royal Assent on 29 June 2023. These will see a complete overhaul of the regulatory regime.

The provisions of the Foreign Subsidies Regulation began to apply from 12 July 2023, imposing new requirements for notification to the European Commission, as of 12 October 2023, if the acquired company or joint venture is based in the EU with a total turnover of at least EUR50 million and where the companies involved in the deal have received financial contribution from non-EU countries totalling EUR50 million in the last three years.

Significant Court Decisions

Okpabi and Others v Royal Dutch Shell Plc and Another (2021) UKSC 3

The Supreme Court overturned the Court of Appeal judgment, and found that there was the question of whether a UK holding company had breached a duty of care to third parties over activities of its subquery in Nigeria and was an arguable case for trial. The judgment reinforces that a parent should ensure that regulatory policies are implemented by its subsidiary’s operations.

Quantum Actuarial LLP v Quantum Advisory Limited (2021) EWCA Civ 227

The Court of Appeal upheld a High Court decision that the restraint of trade doctrine did not apply to covenants in a service agreement where that agreement formed part of a wider restructuring and joint venture. The decision highlights that the courts are more likely to enforce restrictive covenants in commercial agreements compared to employment contracts.

Dodika Ltd and Others v United Luck Group Holdings Ltd (2021) EWCA Civ 638

The Court of Appeal considered whether a buyer’s notice of a tax covenant claim under a share purchase agreement (SPA) was valid and compliant. Adding in the buyer’s favour, the Court of Appeal stated that, where a contract prescribes that certain information must be included in a notice of a claim, if a party fails to do so, the notice will be invalid. If the SPA implies requiring “reasonable details”, this would vary with the circumstances. The case is a reminder that the SPA should include prescriptive wording.

Re Cardiff City Football Club (Holdings) Ltd, Isaac v Tan (2022) EWHC 2023 (Ch)

The High Court revisited the question of unfair prejudice of a minority interest and the director’s “proper purpose” test. The question was not the validity of the share allotment but whether it was unfairly prejudicial. The High Court decided it was not unfairly prejudicial because, despite the director’s breach of duty giving rise to unfairness, there was no prejudice to the claimant as he would have made the same decision.

Zavarco plc v Sidhu (2022) EWCA Civ 1040

The Court of Appeal upheld an earlier High Court decision and found that it could not grant relief under Section 606 of the CA 2006 to a shareholder in respect of making a payment for shares on incorporation where it is just and equitable to do so, as this is not available to a subscriber in relation to their duty to pay cash for shares taken pursuant to their undertaking in the memorandum.

Barclay-Watt and Others v Alpha Panareti Public Ltd and Another (2022) EWCA Civ 1169

The Court of Appeal decided that a director was not an accessory to the company’s negligent corporate conduct in failing to warn customers of a currency risk. The judgment is useful in reinforcing when a director could be personally liable when acting on behalf of a company.

Re Compound Photonics Group Ltd, Faulkner v Vollin Holdings Ltd (2022) EWCA Civ 1371

The Court of Appeal allowed an appeal against an earlier High Court decision that exclusion of two minority founder shareholder-directors from management of a private company amounted to breach of a contractual good faith provision in a shareholders’ agreement (SHA) and unfairly prejudicial conduct.

Re DNANudge Limited (2023) EWHC 473 (Ch)

The High Court decided that a conversion of preferred shares into ordinary shares pursuant to the company’s articles of association was invalid, as the provision in the articles had to be read with the separate article on consent for variation of class of shares.

Re PA (GI) Ltd v Cigna Insurance Services (Europe) Limited (2023) EWHC 1360

The High Court found that an indemnity under a share purchase agreement transferred the risk of historical negligence, even though this was not expressly stated. 

Re Aston Risk Management Ltd v Jones (2023) EWHC 603 (Ch)

The High Court found that a director of a parent company is a “de facto” director of its subsidiary. 

Changes to the UK’s Takeover Code (the “Code”) came into effect in July 2021 and are the most significant changes to the Code in many years. The changes relate to the conditions for regulation and merger control clearance and offer timetables, including the following.

• A single date for satisfaction of all conditions.
• Acceptance condition can only be satisfied once all other conditions are satisfied or waived.
• A bidder is required to set a long stop date for the offer. The Code now states that all conditions to an offer must be satisfied by no later than day 60 from publication.
• Acceleration statement – a bidder can bring forward the unconditional date of an offer from day 60.
• Acceptance condition invocation notices – a bidder must give shareholders at least 14 days’ notice to invoke the acceptance condition to lapse its offer.
• An offer must remain open for 21 days. If a bidder wants to lapse an offer on or after day 21 before the unconditional date, it must give 14 days’ notice.
• Acceptance levels – must be announced on day 21 and every seven days after that.
• Withdrawal rights – shareholders who have accepted an offer can now withdraw their acceptance of an offer any time prior to the unconditional date.

The Code was also updated to reflect that EU law will no longer apply to the UK. The Takeovers (Amendment) (EU Exit) Regulations 2019 (SI 2019/217) made 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 EUMR, and merging parties may need to seek clearance from the UK authorities. Mergers, whether UK or foreign businesses that meet the UK and EU thresholds, will face a parallel review under both systems. UK turnover will no longer apply when assessing a merger which would fall under the EUMR. As a large number of international businesses had a significant part of their EU turnover created in the UK, this will result in fewer mergers meeting the EUMR thresholds and being reliant on the relevant EU member state jurisdictions, instead of being reviewed by the European Commission.

From 13 June 2022, more key changes were introduced to the Code, including the removal of the restriction on anonymous order book dealing (Rule 4.2(b)). Additionally, the Panel published a new Practice Statement 33, relating to purchases of shares in the offeree company by a bidder during an offer period. It also made amendments to Practice Statements 19, 20, 24, 28 and 29 to reflect these Takeover Code changes.

On 20 February 2023, further changes to the Code were effected, including the circumstances in which the Panel will presume that parties are “acting in concert” with each other.

The Code defines persons “acting in concert” as those who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for a company.

The Panel treats concert parties as a single person for the purposes of the Code. The Panel has not amended the definition of “acting in concert” itself, but instead changes have been made to the “presumptions” surrounding it.

The Panel replaced the current presumption in relation to a group of companies with two new rebuttable presumptions:

• where there will be a presumption of “acting in concert” with any other company which controls it or is under the same control (ie, 30% or more of the voting rights); or
• where one of the companies is interested, directly or indirectly, in 30% or more of the other company’s share capital.

In October 2023 the Panel proposed widespread changes to the Rule 21 restrictions, which came into effect on 11 December 2023.

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 has 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. Following the reforms implemented by the Panel on 11 December 2023, the difference now in Rule 21.1(a) is that action within the ordinary course of the target company’s business will not be restricted.

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 stakebuilding; by way of example, stakebuilding could be positive as it could offset shares which might be voted against. On the whole, stakebuilding is regarded as a hard-hitting approach and is not therefore favoured in the UK.

There is an ongoing disclosure requirement under Chapter 5 of the FCA’s 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 or not.

A disclosure must be made when a holding’s voting rights exceed 3% of the total and then every time such voting rights increase or decrease 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 regard to market abuse prohibited by the Market Abuse Regulation (MAR), which include insider dealing where a bidder has information that 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 (which prohibits insider dealing) and Article 15 (which 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 called 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 of which businesses will need to be aware. 

The SME Growth Markets Regulation ((EU) 2019/2115) made some amendments to the EU MAR, with effect from 1 January 2021. As these amendments took effect after the end of the Brexit transition period, they do not automatically apply to the UK. The UK only adopted some of these amendments to the UK MAR and, as a result, there is divergence in practice.

The changes below were made to the UK MAR from 29 June 2021:

• insider lists – issuers and any persons acting on their behalf must maintain an insider list; and
• persons discharging managerial responsibility (PDMR) transactions – issuers must make public any PDMR transactions within two working days of receiving notification of a transaction from the PDMR or person closely associated (PCA).

The trading of derivatives is not fully prohibited; however, following the 2007–08 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 of financial promotions unless authorised by the FCA.

The European Market Infrastructure Regulation (EMIR) imposed reporting requirements to ensure transparency among 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 ensured that the EU EMIR formed part of UK law. Effectively, post-Brexit the original EU EMIR continued to apply to EU derivatives transactions and to the UK version of EMIR. The FCA has released guidance to explain the changes. EMIR legislation has not changed since the UK left the EU.

When the transition period ended on 31 December 2020, the European Securities and Markets Authority (ESMA) switched off the FCA’s access to its Markets in Financial Instruments Directive (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); 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
• there is unusual movement in the target’s 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 an RIS.

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

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 broader 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.

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 that 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 following is subject to 3.2 Significant Changes to Takeover Law. The timeline for completing a public takeover depends on whether it is by way of an offer or scheme.

Takeover Offer

If the takeover occurs by way of takeover offer, the timeline is as follows:

• 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 to 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 that the offer becomes unconditional as to acceptances on day 60, 81 days from the offer date is the last date for fulfilment of the other conditions, and 95 days after the offer date is the last date for consideration to be posted to the shareholders; and
• the offeror can complete a compulsory acquisition procedure 100 days after the offer date.

Scheme of Arrangement

If the takeover occurs by way of a scheme, the timeline is as follows:

• within 28 days, bidder and target announce the scheme;
• within 21 days of the scheme document, there is a meeting of the shareholders to approve special resolution;
• within 40 days, the court will sanction a hearing;
• on day 41, the court sanction is submitted to Companies House and the scheme takes effect; and
• day 55 is the last day for payment of consideration.

The COVID-19 pandemic’s impact on timetabling of deals has primarily concerned regulatory requirements, given the challenges faced by regulators, including the court system, Companies House and the FCA.

Rule 9 of the Code provides that if a person acquires an interest in shares in the target resulting in the person holding 30% or more of the voting shares of that company, or if a 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) 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, except for where it is refused on the grounds of competition. 

Cash remains more commonly used in the UK. More earn-out or deferred consideration-based deals focusing on adjustments to account for the current valuation uncertainties are expected. How a deal is structured (as well as tax considerations) can help reduce the gap between buyers and sellers and help address risks caused by the uncertainty of whether a business can meet its financial projections in light of the COVID-19 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 judgement of the offeror. Common conditions include the following.

• Where consideration shares are going to be issued, and such classes of shares are already listed as consideration, 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, to 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.
• 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.

The amendment to the Code in July 2021 means that the acceptance condition can only be satisfied once all other conditions are satisfied or waived.

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 such that 90% of the shares to which the offer relates must accept. This allows the offeror to rely on Section 976 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, and will have no right to buy them out.

Generally, an offer cannot be made conditional on obtaining finance; this is reflected in 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 this 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 (minus the shares already held by the offeree). The offeror must also have acquired or agreed to acquire 90% of the shares that are not currently held by the offeror.

If the above conditions are met, the offeror can give a squeeze-out notice under Section 981 Companies Act 2006 within three months of the expiry of the original offer to the shareholders 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 shareholders 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 all the squeeze-out notices in entirety;
• a stock transfer form executed by a person nominated by the target in respect of the minority shareholders; 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 notice 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 in an announcement – namely (though 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 offeror’s 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 the target.

The announcement must be published via an RIS. 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 of the Code.

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 unless 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 the UK’s exit from the EU, the UK has 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 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 interests 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 is 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 advisers should be consulted rather than using the company’s existing advisers; it is not sufficient to simply establish information barriers. 

Directors’ judgement 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 advisers, including investment banks (who will act as the financial advisers), brokers, lawyers, accountants and public-relations advisers. This is to enable the board to deal with the offer, the substance of the board’s advice to the shareholders and 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 either once an approach has been made or the board has 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 owed 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 judgement 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 a reported change in the use of defensive measures due to the COVID-19 pandemic.

There are two main duties which are key when employing defensive measures.

The first is the duty to act in a way that 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’ judgement. However, the Act does provide several factors which must be considered, including:

• 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 of the Companies Act 2006), which requires the directors to act within the confines of the company’s constitution.

As previously 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 long-term interests. 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 through resorting to litigation. The Panel, while 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 more likely to result in litigation.

The COVID-19 pandemic has seen a surge in disputes between buyers and sellers, including between exchange and completion. These have included buyers seeking to get out of a deal or stall the deal while the industry improves, or forcing renegotiation on price. Sellers, on the other hand, have also been seeking to get a 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 the heads of terms were negotiated, and the resulting gulf between the buyer and seller has led 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 remains uncertain. However, if the global financial crash of 2008 is anything to go by, one can expect more litigation and strongly contested cases in the next 12 months as adjustments are made to a post-pandemic world.

M&A 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 is to focus on issues relating to corporate governance, such as replacement of the management team, levels of dividend pay-outs, appointment of new directors and executive compensation. Activist shareholders have been fairly quiet during the uncertain times of COVID-19 and volatile trading conditions; hence, there is an expectation that activists will make up for lost time in the year ahead.

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 activists 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.