Takeover Panel uses powers wisely to help firms - comment

The Takeover Panel (the Panel) has shown that it is willing to be flexible with the requirements of the UK Takeover Code (the Code) when a company in severe financial difficulties is exploring rescue options.

Companies should consult the Panel at a very early stage, says Stanier. Picture: contributed.

UK-listed companies have tapped investors for more than £5 billion in additional funds since the start of March, with a number of businesses rushing to raise capital to shore up their balance sheets as the Covid-19 pandemic continues.

In these unprecedented times, a number of companies subject to the Code will be conscious that the precise application of the Code’s requirements by the Panel may have the unintended consequence of constraining companies from executing plans to ward off the threat of insolvency.

Companies should consult the Panel at a very early stage, as it is willing to grant dispensations from the Code in the right circumstances, for example when a firm is exploring rescue operations or an existing investor is considering a rescue takeover.

The original rescue of the Flybe Group by the Connect consortium illustrates the flexible approach that the Panel seeks to adopt. The Panel was faced with a stark choice between the strict application of the Code and permitting a transaction that would prevent Flybe from entering administration. The Panel noted that the decision to permit the transaction is “a testament to the pragmatic and responsive regulatory system that the Panel espouses”, and it is hard to disagree in that particular case.

A clear example of the interplay between the Code and the insolvency regime is where there is a pressing requirement to capitalise existing debt or issue new shares by virtue of a rescue fundraising to shore up that company’s balance sheet. Indeed, a company’s financial difficulties may be so extensive that its existing shares are worth little, so that meaningful new capital would be likely to account for more than 30 per cent of the company’s share capital following fundraising.

Normally, the rules would prevent an investor or a connected party acquiring 30 per cent or more of the company’s shares until a “whitewash” circular has been issued, and independent shareholders have given their approval to the proposed transaction. Mattress retailer Eve Sleep’s proposed fundraising in 2019 is an example of where a company sought to use the whitewash procedure to secure more investment.

Waiver

Neil Woodford sought to increase his stake to more than 30 per cent as part of the proposed fundraising. The Panel agreed to a waiver of the obligations under the Code, subject to the whitewash resolution being approved at a general meeting of Eve Sleep’s independent shareholders. The resolution was passed.

Where a company or individual acquires shares as part of the rescue fundraising and, as a consequence of that investment, ends up holding 30 per cent or more of the voting rights, the rules ordinarily require the party making the investment to make a mandatory offer in cash at the highest price paid for the target’s shares in the preceding 12 months. However, given the recent deterioration in company share prices, a mandatory offer may be both undesirable and unfeasible.

The Code provides a helpful practical solution when a company is in such a serious financial position and the only way in which it can be saved is by an urgent rescue operation. The Panel may waive the requirement for a mandatory bid to be made on the proviso that independent shareholder approval for the rescue operation is obtained as soon as possible after it has happened, or the Panel is satisfied that other provision is made for the protection of independent shareholders.

If the Panel insists on a “rescue” bid being made, there is still a workaround to avoid making the bid at the highest price paid for the target’s shares in the preceding 12 months. The Panel can agree that a lower price may be payable, taking into account, for example, a large drop in the prevailing share price of the firm.

Julian Stanier, partner and corporate finance specialist at Pinsent Masons

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