Using UK Takeover Code to rescue distressed companies

UK listed companies have tapped investors for over £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 which are subject to the UK Takeover Code (the Code) will be conscious that the precise application of the Code's requirements by the Takeover Panel (the Panel) may have the unintended consequence of constraining companies in financial distress from executing plans to ward off the threat of insolvency.

Companies in these circumstances should consult the Panel at a very early stage, as it is willing to be flexible and grant dispensations from the Code in the right circumstances, when a company is exploring rescue operations and an existing investor is considering a rescue takeover.

The original rescue, in early 2019, of the Flybe Group by the Connect consortium is a good illustration of the flexible approach that the Panel seeks to adopt. In this case, the Panel was faced with a stark choice between the strict application of the Code and permitting a transaction which would prevent Flybe from entering administration. In its annual report for 2019, the Panel noted that the Panel Executive's 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 with that sentiment 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 to investors 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 over 30% of the company's share capital following the conclusion of the fundraising.

In normal circumstances, the rules would prevent an investor or a connected ('concert') party acquiring 30% 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. Given the speed with which funds are required for companies that are experiencing major financial problems, there may not be sufficient time to allow this process to be concluded successfully to enable those companies to avert the threat of insolvency.

Eve Sleep's proposed fundraising in January 2019 is an example of where a company sought to use the whitewash procedure to secure additional investment. Woodford, who was a key shareholder in the online mattress retailer, sought to increase his shareholding to over 30% 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 on a poll at a general meeting of Eve Sleep's independent shareholders. The resolution was passed successfully, and this allowed Woodford to pass the 30% shareholding threshold without being obliged to make a general offer to the shareholders.

A company or individual may also acquire existing shares as part of the rescue fundraising and, as a consequence of that investment, end up holding 30% or more of the voting rights. Ordinarily the rules would 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. Clearly, however, given the deterioration in company share prices we have seen over the past two months, making and successfully executing a mandatory offer may be both undesirable and unfeasible. For some companies, time is of the essence when it comes to raising additional funding, with many using 'cash box' structures to achieve this in the current market rather than face the inevitable delay that comes with producing a prospectus for a rights issue or open offer.

From a timing perspective, 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 some other provision is made for the protection of independent shareholders.

The rationale for this dispensation is that the normal rights of shareholders not to see control passing without receiving an offer, or without obtaining their consent by way of a vote, may be overridden in a case where to insist on this would, or might be likely to, lead to the insolvency of the company and the likely loss of their entire investment. It is worth noting, however, that if a company's existing shareholder authorities under the Companies Act from its previous annual general meeting are not sufficient to enable it to issue the requisite shares for cash on a non pre-emptive basis, it will still need to produce a shareholder circular and pass the relevant shareholder resolutions to enable it to issue those shares. In these circumstances, the Panel will be reluctant to grant a dispensation.

Rescue takeovers

If no dispensation from the Panel is available, there is a potential workaround for a bidder. Although the Code states that a party making a bid should make a mandatory offer in cash at the highest price paid for the target's shares in the preceding 12 months, a potential bidder may be able to offer a lower price in the context of a rescue takeover.

The Panel has the discretion to agree that an adjusted price may be payable by a bidder in these circumstances. It may, for example, take into account a significant fall in the prevailing share price of the company since the relevant share acquisitions were made. The Code states that the price payable in these circumstances will be the price that is fair and reasonable, taking into account all the factors that are relevant in the circumstances.

If a potential bidder or its concert parties has acquired more than 10% of a company's shares for cash or securities at any time during the preceding 12 month period, any voluntary offer must be made to shareholders on terms which are no less favourable. Again, the Panel has the discretion to agree an adjusted price if the bidder approaches the Panel and indicates that it does not wish to pay the "highest" price.

When the Panel is considering an application for an adjusted price, the attitude of the target company's board is likely to be important. Other factors that the Panel will take into consideration include the size and timing of the relevant share acquisitions, the number of shares in which interests have been acquired during the preceding 12 month period and whether interests in shares have been acquired at high prices from directors or other persons closely connected with the target or potential bidder. The Panel may also take into account a substantial collapse in the offeree company's share price after the acquisitions were made as a result of new information about its business becoming publicly available where the relevant acquisition had been made before these events.

The Code also sets a 'floor' on the price at which any offer must be made by reference to the price paid by an investor in the preceding three month period. However, this is clearly problematic where a potential bidder is only prepared to pay a much lower price than it has paid historically in the context of a rescue takeover, following the collapse in the target's share price. The Panel will permit offers at a price which does not match one paid less than three months earlier "in exceptional circumstances". The factors that it will take into consideration in permitting an adjusted price to be payable by a bidder include changes in the market price of the company's shares since the relevant acquisition; whether the relevant acquisition was made on terms then prevailing in the market; the size and timing of the relevant acquisition; and the attitude of the target board.

The acquisition of Kalahari Minerals Plc (Kalahari) by China Guangdong Nuclear Power (CGNP) in 2012 is an interesting case when analysing the efforts of a bidder or potential bidder to reduce the offer price. On 7 March 2011, CGNP made a possible offer announcement for Kalahari, at a price of £2.90 for each share. Importantly, the price that was specified in the possible offer announcement contained no reservations to allow CGNP to reduce the price. CGNP's first proposed bid for Kalahari was not initially subject to the 28 day 'put up or shut up' (PUSU) deadline, as this regime was not introduced until September 2011 as part of wider amendments to the Code.

Following the major earthquake in Japan on 11 March 2011, and the subsequent accident at the Fukushima Daiichi nuclear power plant, CGNP agreed a lower price of £2.70 per share with Kalahari. Kalahari made submissions to the Panel where it was stated that CGNP had informed Kalahari that the receipt of "certain regulatory approvals" would not be forthcoming unless there was a reduction in the offer price payable.

Interestingly, despite Kalahari's agreement to the reduced price, the Panel ruled that CGNP must either announce a firm offer at the original price of £2.90 specified in the possible offer announcement or make a "no intention to bid" announcement. In its ruling, the Panel noted that Kalahari did not take into account CGNP's original request to include the customary reservation as to the proposed price in the possible offer announcement because the Kalahari board wanted to send a very clear message that it would not contemplate any further price reduction, notwithstanding the fact that the transaction had only reached the possible offer stage.

CGNP was therefore required to announce on 10 May 2011 that it was withdrawing its offer for Kalahari. Kalahari was ultimately acquired by CGNP in April 2012, at a significantly lower price per share of 243.55p.