Amendments to Practice Statement No. 5

In 2021, the UK Takeover Panel implemented certain changes to the UK Takeover Code. These changes reflected the Panel's approach to the interpretation and invocation of conditions to an offer (set out in PCP 2020/1 and RS 2020/1). Two years on, the Panel has released an amended Practice Statement No. 5 (Rule 13.5 – Invoking conditions and pre-conditions) ("PS 5"), which provides further guidance and takes effect immediately. 

The amendments broadly reflect, and in places clarify, commentary included in PCP 2020/1 and RS 2020/1. They are also consistent with our experience in relation to PS 5, including our role advising Moss Bros Group on the well-publicised Panel ruling that Brigadier could not invoke MAC conditions in relation to the COVID-19 pandemic.

So, what do you need to know?

Set out below are the key takeaways from the revised PS 5.

1. Categorisation

The Panel has included a revised breakdown of the different categories of conditions which may be included in an offer. This includes a separate category covering long-stop dates and splits out bespoke and generic conditions. The amended categories are as follows:

• Category 1: Conditions relating to the acceptance or approval of an offer by the target company's shareholders or, in the case of schemes of arrangement, the court.
• Category 2: Conditions giving effect to requirements of law or regulation.
• Category 3: Conditions relating to long-stop dates and so-called "mini long-stop dates".
• Category 4: Bespoke conditions relating to the (non-)occurrence of a specific event or circumstances in relation to the target company (including conditions relating to the approval of a Rule 16 resolution or the rejection of a Rule 21 resolution).
• Category 5: Specific or general conditions relating to the obtaining of an official authorisation or regulatory clearance (including conditions relating to there being no "phase 2" reference or similar process).
• Category 6: Other non-bespoke conditions, principally general protective conditions (including a "material adverse change" condition).

Category 1, 2 and 3 conditions will not be subject to the "material significance test" (although certain tests will still be applied if a bidder is proposing to lapse on its long-stop date). The Panel has indicated it may also exempt Rule 16 and Rule 21 resolutions from the material significance test.

2. Factors to be taken into account

All categories of condition… These are broadly the same as those set out in the previous PS 5, although the Panel now gives examples of actions which, if taken by a bidder, will not be supportive of invocation. Such actions include acquisitions of shares or statements indicating an intention to continue to pursue the offer, since the circumstances on which the bidder is seeking to rely arose. The Panel has also confirmed it will be more likely to consent to a request by a bidder to invoke a condition if the target company board agrees. This is in line with commentary in PCP 2020/1.

Phase 2 reference conditions … The Panel has clarified that its approach to "phase 2 CMA reference" conditions applies to similar "in depth" reviews by other antitrust or governmental or regulatory bodies. Broadly speaking that approach is to consider the significance of the authorisation or clearance to the bidder; the actions required to be taken in order to obtain the authorisation or clearance; the strategic consequences of taking such actions, and the consequences for the bidder and its directors if it were to complete the offer without obtaining the authorisation or clearance. In addition, the Panel has confirmed that it will take into account the potential impact of the reference or process on the business of the bidder and/or the target company, including the management time, costs and other burdens involved in pursuing it, as well as the "utility" of requiring the bidder and/or target company to pursue the reference or process. This is in line with the commentary included in RS 2020/1.

3. Sweeper conditions

The Panel has confirmed that "phase 2 clearance" or so-called "sweeper" conditions, whereby the bidder includes a condition in relation to a clearance being obtained at the conclusion of a phase 2 reference (which would only bite where a "phase 2 reference" condition has been waived), will not prejudice a bidder's ability to invoke the original "phase 2 reference" condition. Indeed bidders are encouraged to include such conditions going forward.

4. Suspension

The relevant provisions of the Code relating to the suspension of the offer timetable when one or more conditions relating to an official authorisation or regulatory clearance have not been satisfied or waived by Day 37 are summarised in a new Section 4 of PS 5. In this section, the Panel also re-confirms that the test for suspension is far lower than the material significance test.

5. Long-stop dates

A new Section 5 of PS 5 provides guidance on the Panel's approach to long-stop dates and where it might be possible to invoke conditions at the time of the long-stop. PS 5 explains that if, on the long-stop date, a review by a regulatory body in relation to a material official authorisation or regulatory clearance has not concluded, the bidder will normally be able to lapse its offer. This assumes that the action (if any) that needs to be taken to obtain the authorisation or clearance will not normally be sufficiently clear.