UK TAKEOVERS

By Selina Sagayam

The UK system of public takeovers—both with regards to its rules (as set out in the Code on Takeovers and Mergers (the Code)) and rulings under the Code—can be challenging to parties and practitioners not familiar with the underlying UK and European regimes on takeovers.

The key features of the UK takeover system are its flexibility, certainty and speed, enabling parties to know where they stand under the Code in a timely fashion. Another key feature is that the UK takeover landscape is generally devoid of tactical litigation during the course of takeover bids and the rulings of the Executive of the UK Panel on Takeovers and Mergers (Panel) (see below for further background information) are rarely formally contested.

That is not however to say that challenges do not occur and indeed the past 18 months have seen a number of publicised challenges to rulings of the Executive and decisions of the Hearings Committee of the Panel. We have summarised three recently published cases below, summarising salient points from the different complex fact patterns and drawing out some points of note and learnings for parties and practitioners alike.

Some common themes are evident from these cases—First, the importance and benefit of consulting in advance with the Executive body of the Panel. The Code is not black letter law and working out the application of the rules without the benefit of an understanding of the spirit behind the rules can result in wrong conclusions. Secondly, having a full and open dialogue with the Executive will often produce solutions and options which may not be evident on the face of the rules (see e.g. the likely different outcome if Xchanging had presented its full case and reasoning to the Executive). Finally, providing full co-operation and assistance to the Panel is of paramount importance (see e.g. Morton & Garner in the Hubco Investments case—who were found ultimately not to have breached any Code rule but who nonetheless have had the most severe sanction available to the Panel imposed on them).

Background to Rulings and Challenges

Executive Hearings Committee Appeal Board: The day to day work of UK takeover supervision and regulation is carried out by the Executive. The Executive makes rulings at the requests of parties and may also on its own initiative give rulings on the interpretation, application or effect of the Code. Any ruling of the Executive may be referred for review to the Hearings Committee  of the Takeover Panel. These rulings of the Executive (including disciplinary action rulings and grants or refusals to grant waivers/derogations from Code provisions) are binding on those who are made aware of it unless and until overturned on review by the Hearings Committee. Any party to a hearing (or a person denied permission to be a party to a hearing) has the right to appeal against any ruling of the Hearings Committee to an independent tribunal, now known as the Takeover Appeal Board (Appeal Board).

Contested Rulings—Track Record: In any one year, the Executive will probably make hundreds of “rulings” on transactions and matters falling within the scope of the Code, in fulfilment of its supervisory and regulatory function. One of the most prominent features of UK takeover regulation is the very small number of decisions of the Executive which have been contested and reviewed by the Hearings Committee, the even smaller number which have been successfully contested and the handful only number of rulings of the Hearings Committee which have been appealed to the Appeal Board.

Factors Behind Track Record: This impressive track record is the product of: (i) the Executive’s availability and encouragement of prior consultation on the Code to minimise instances of breaches of the Code; (ii) the Panel’s preferred mode of ensuring compliance with the Code through a constructive and consensual approach with parties engaged in takeover activity; and (iii) the high-quality, rigorous approach that the Executive takes in arriving at its findings and making its rulings—sometimes at the expense of timeliness (which is in contrast to the nimble approach of the Executive on day-to-day regulation of takeovers). It is with this back-drop that this recent “wave” of contested rulings is of particular note.

Rangers International Football Club plc: Concert Parties, Breach of Rule 9 Mandatory Bid Requirement & Compliance Orders

One of the most common but often tricky areas on which the Executive is called to provide guidance relates to the existence of “concert parties” and whether a Rule 9 mandatory offer requirement has been triggered.

Rule 9 of the Code states that when “any person acquires … an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a [Code] company,” such persons shall be required to extend an offer to all the holders of equity shares in that company. This is the so-called “mandatory offer” or “Rule 9” offer.

By way of note: (i) Parties who “come together” and are treated as concert parties, whose aggregate holdings exceed 30% of the voting rights, do not by virtue of the mere “coming together” or collusiveness, trigger a Rule 9 bid. The obligation is only triggered when one of them acquires further voting rights and then, the acquisition of even one further share will trigger a Rule 9 obligation; (ii) There is nothing objectionable or wrong in acquiring further voting rights in such circumstances—it is simply that the person(s) then incurs an obligation to extend an offer to all other shareholders. This is generally a serious and weighty obligation, in particular as the Code imposes additional structural constraints on offers made under Rule 9.

Background Facts

History of Rangers F.C. and its Financial Difficulties: Rangers football club (one of the great institutions of Scottish football) has a long and colourful history. Until 2011, the club was majority-owned by the Murray Group. The club (Old Rangers) ran into financial difficulty, in February 2012 it entered into administration and in July 2012 in entered into liquidation. In December 2012, a new company, Rangers International Football Club plc (Rangers) was incorporated in Scotland and its shares were admitted to trading on the junior London market, AIM. There were various changes to the board in early 2013 but in autumn 2013, the company faced continued pressure from various football support groups to change the board. Further changes to the board were made in December 2013 and a strategic review announced in April 2014 which included proposals to issue additional equity to put towards the £20m-£30m fund-raising target set by the board. Notwithstanding these efforts, during 2014 when the events relating to this case unfolded, Rangers was in dire financial straits and the board remained unpopular with many of the fans who were concerned with a lack of investment in the club.

Background to the Concert Party Members: David Cunningham King (a long-standing supporter and investor in Rangers including in the Old Rangers (prior to the club trading on AIM) where he was a minority investor alongside the Murray Group and a non-executive director), had made various offers to invest in Rangers and to be appointed to the board. These offers had been rejected by the board even though King was perceived as an attractive figure to many shareholders fans by virtue of his reputation and longstanding support of the club. In August 2014, the club announced that it was considering a possible “open offer”. A prominent sports retailer (Mike Ashley) was rumoured to have been approached to underwrite the open offer. The Board also reached out to other parties to gain support for the offer, including a George Letham (another Rangers fan who had provided a loan facility to the club). Letham agreed to rally investor support in Rangers and was introduced by a friend to a possible investor, George Taylor (a businessman in Hong Kong where there is a Rangers Supporters Club). Letham was put in touch with Paul Murray (of the Murray family) and through Paul Murray, was put in contact with King. Letham and Murray were hoping between themselves and Douglas Park (a wealthy businessman whose coach company provided transport to Rangers teams and fans) to raise £8m for the Company. Various discussions and communications between these parties followed which are set out in detail in the Panel rulings.

Board Control Proposal: In October 2014, King emailed the CEO of Rangers to present a proposal in which he stated he was working with Murray and Letham on an “exclusive ‘consortium’ basis” and they would together inject £16 million into the club (on a 50/50 debt/equity basis) on certain terms including the right to certain board seats, which would have effectively given them board control. This proposal was rejected by the Rangers board.

Purchases in Breach of Rule 9: Shortly before this time, through a series of purchases in September and October 2014, Taylor acquired circa 3.16% of Rangers. On 31 December 2014, Letham, Taylor and Park (who had come to be known in the press as “The Three Bears”, indicative of their shared views of the Club in the public’s eyes) purchased in aggregate 16.32% of the shares of Rangers. On the same day, King instructed his brokers to purchase 14.75% of the shares of Rangers for New Oasis Asset Management (NOAL) (a BVI company owned by an entity which acted as the trustee of trusts settled by King on behalf of himself and his family) and this purchase was settled in January 2015. As a result of these purchases and taking into their existing holdings, the shares owned by King together with Letham, Taylor, Park amounted to 34.05% of Rangers.

Complaint to the Executive: In January 2015, the incumbent board of Rangers made a complaint to the Executive about the December/January purchases and a possible Rule 9 breach. The Executive promptly commenced an investigation into the matter. Letham admitted that in acquiring the shares in December 2015, he acted in concert with Messrs Taylor and Park. King however denied that he acted in concert with Messrs Letham, Taylor & Park.

Summary of Rulings & Appeals

Executive Ruling: Within six months, in July 2016, the Executive conveyed its “minded to rule” or preliminary findings to the parties. It took however almost another year following the indicative ruling and 18 months after the relevant purchases, for the Executive to formally rule (on 7 June 2016) that King had been acting in concert with Messrs Letham, Taylor & Park in respect of the purchases in December 2014 and January 2015, with a direction that King make a Rule 9 mandatory offer for all of the remaining Rangers shares.

Hearings Committee Ruling: On 2 August 2016, King indicated to the Executive that he contested its ruling and wished the Hearings Committee to review the Executive’s decision. The Hearings Committee heard the matter on 28 November 2016. Messrs Letham, Taylor and Park served written submissions but did not appear at the hearing. King declined to appear at the hearing on the grounds that he had not been a director of NOAL and had no legal capacity to represent it. NOAL did not make any submissions and neither King nor any NOAL representative were present at the hearing before the Hearings Committee. The Rangers board submitted to the Hearings Committee that there was no concert party and that a mandatory offer was not in the interests of Rangers shareholders or Rangers. The Hearings Committee ruled on 5 December 2016, upholding the decision of the Executive and directing that King make a mandatory offer within 30 days (i.e. by 4 January 2017).

Appeal Board Ruling: King contested the ruling of the Hearings Committee and his appeal was heard by the Appeal Board on 13 March 2017, who dismissed the appeal and affirmed the ruling of the Hearings Committee and directed that King announce a mandatory offer by 12 April 2017.

Compliance Order: King did not comply with the direction of the Appeal Board. In the first case of its kind, the Panel has initiated proceedings in the Court of Sessions, Edinburgh seeking an order requiring King to comply with the ruling of the Appeal Board.

Summary of Key Facts & Rules Relevant to Rulings

“Acting in concert”: The concept of acting in concert is a difficult concept as it captures a broad category of arrangements and understandings and does not lend itself to an exhaustive definition.

As noted by the Panel in 1989 in the case of Guinness plc/The Distillers Company, tacit understandings or “nods and winks” between persons co-operating to purchase shares in a company in order to obtain control of it, is enough to constitute concertedness. Establishing that persons are acting in concert involves a detailed assessment of facts—rarely is there any direct evidence of what has passed between those alleged to have acted in concert. In addition, the “facts relevant to acting in concert may be established by … reasonable inference from all the surrounding circumstances of the case”.

The subjective personal motives of persons co-operating to gain control of a company are not relevant to the assessment of “acting in concert” which is based upon objective fact. In this case, King denied that he was acting in concert with ‘The Three Bears’ and stressed that his reference to a “consortium” was in quotation marks and no formal arrangements existed. As noted by the Hearings Committee, whilst there may well have been “… no formal consortium [however], a loose group comprising individuals co-operating with one another for a common purpose may amount to “acting in concert”.

  • King also made the point that the group did not have any pre-agreement to vote collectively. The Hearings Committee pointed out that where a group of people with a broadly common object collaborates to purchase a block of shares, the group members may well constitute a concert party without there being a pre-agreement to vote collectively.
  • Presumptions/Deeming: The Panel applies certain (rebuttable) presumptions or deeming provisions which are generally set out in the Code to assist in establishing concert party relationships for the purposes of the Code.
  • In this case, the Panel was able to rely on its long-standing practice (now codified in the Code) that “a person, the person’s close relatives and the related trusts of any of them” are all presumed to be persons acting in concert with each other.
  • The Code also states that “a person and each of its affiliated persons will be deemed to be acting in concert with each other” and ‘affiliated persons’ are undertakings in in respect of which any person … has the power to exercise, or actually exercises, dominant influence or control”.
  • In the absence of any meaningful evidence to the contrary (save for basic denials by King and assertions of independence), it was not difficult for the Panel to conclude that King and NOAL were presumed or deemed to be acting in concert.
  • King was also deemed to be “interested” in the shares acquired by NOAL as he was able to exercise general control over them—this was evidenced by the fact that in January 2015, NOAL requisitioned a general meeting of Rangers with a proposal to remove the existing directors on the Rangers board and the appointment of King and others in . The fact that the relevant broker’s documentation for NOAL (through which the share acquisition was facilitated) described the purpose of the business as “to buy shares in Rangers International Football Club plc for Mr Dave King” further supported this conclusion.

Panel Investigations & Co-operation: Access to relevant emails between the parties (in particular certain emails between King and Letham) first in October 2014 which evidenced an investment understanding between Letham and King (together with Paul Murray) to co-operate in gaining control of Rangers through board control, and later in December 2014, which evidenced that the two of them were co-operating directly with a view to purchasing a block of shares which would effect a change of control, was critical in proving the case against King and others.

Key Takeaways for Companies and Practitioners

Presumptions: The Panel relies on various presumptions and deeming principles to support its analysis of concertedness in any particular case. Parties should note the non-exhaustive list of relationships and arrangements which could trip persons over the line into concertedness, unless they are able to produce satisfactory evidence to rebut such presumptions. In the case of any doubt, consultation with the Executive is advised.

Co-operation v (Testing) Panel Powers: In the majority of cases, the Panel relies on its codified exhortation to parties to co-operate with the Panel to facilitate the fulfilment of its regulatory duties. The Panel does however in addition, have statutory powers to require documents and information to be produced within a reasonable period. Parties are however advised to be open and co-operative in their dealings with the Panel—this will most likely result in a speedier resolution of the case and will be a relevant factor for consideration in connection with disciplinary rulings of the Panel. The Code states that the Panel expects any persons dealing with it do so in an open and co-operative way, to provide prompt co-operation and assistance and to take reasonable care not to provide incorrect, incomplete or misleading information (section 9(a) of the Introduction to the Code). Both the Hearings Committee and the Appeal Board noted the lack of co-operation by King in his dealings with the Executive in the course of their investigation. Whilst it took some time for the Executive formal ruling to be delivered, the Hearings Committee noted that “self-induced delay should not afford a basis for avoiding an obligation to make a Rule 9 offer” and were not inclined to impose a different remedy in this case for breach of Rule 9.

Who will be bound by rulings?: Generally, a ruling of the Executive is binding on any person made aware of it unless and until overturned by the Hearings Committee or Appeal Board. Similarly, rulings of the Hearings Committee are also binding on all parties unless and until overturned by the Appeal Board. In this case, the rulings delivered were unconditional rulings (all relevant parties were made aware of the hearings and given an opportunity to be heard). The fact that none of the concert party members (King, NOAL and Messrs Letham, Taylor and Park) attended the relevant hearings before Hearings Committee or Appeal Board was not a bar to the ultimate findings against them. Neither was the fact that NOAL was not a formal party to the hearings and had not provided written submissions of its position. The fact that NOAL had been invited to apply to be heard and provide written submissions was sufficient from a procedural perspective. Parties are advised to utilise the opportunity to present their case before the Panel as mere non-attendance will not present a bar to a finding against them.

Whose Views Count?: The Panel typically proactively seeks and takes into account the views of the (board of the) relevant Code company and its advisers when called upon to provide guidance or deliver rulings on the application and interpretation of the Code. The company and its advisers are generally considered to be in a good position to be able to represent and/or articulate the views and interests of the wider shareholder and stakeholder bodies.

  • In accordance with this usual practice, the views of the Rangers board were sought. The board in their written submissions stated that it was their view that there was no concert party. The board also stated that in their view a Rule 9 mandatory offer would not be in the interests of or fair to existing shareholders of Rangers; this was because the price at which King was required to make his mandatory offer (20 pence per share) is materially lower than the private matched bargain basis at which the shares have traded in the recent past (circa 27.5 pence per share).
  • In this case, however, the Panel and the Appeal Board did not share the views of the board noting that King “cannot avoid the obligation to make an offer by reliance on the argument that a mandatory offer would not be in the best interests of the other shareholders of Rangers” …; it is always open to the independent board of Rangers to recommend that shareholders do not accept the mandatory offer but “ultimately, whether an offer at 20p is accepted is a matter for the shareholders to whom the offer is directed, not for the Board of Rangers”.

What Next?

As noted above, this is the first time that the Panel has sought to rely on its powers to seek a court enforcement order to require compliance with a directional ruling. Practitioners are keenly following this case and no doubt the ruling of the Edinburgh Court of Sessions and any further or alternative disciplinary action (such as “cold-shouldering”—see the Hubco case below) that the Panel chooses to take in this case will be carefully scrutinised.

Hubco Investments plc: Breach of the Rules on Open & Co-Operative Dealings & the “Cold Shouldering” Sanction

Background Facts

The related family trusts and companies of Mr Bob Morton (Morton) (a successful Jersey-based businessman and investor) owned 28.32% of voting rights of Hubco Investments plc, a business technology group (Hubco) following the admission to trading of Hubco’s shares in 2011. On 17 July 2013, Groundlinks Limited (Groundlinks), a BVI company owned by Morton PTC Limited (Morton PTC) as trustee for the Andrew Trust (a trust for the benefit of one of Morton’s sons, Andrew) purchased shares representing circa 3.38% of Hubco. This purchase took the holdings of Groundlinks and the other Morton family entities to more than 30% of Hubco’s voting rights and thereby appeared to trigger the requirement to make a Rule 9 mandatory offer.

On questioning by the Executive, Morton alleged that the shares purchased by Groundlinks was on behalf of another Jersey resident and investor, Mr Garner (a friend of another one of Morton’s sons, Robert). Investec Wealth & Investments Limited (Investec) acted as broker for Morton and his family companies. There was no mention (as evidenced in file notes of conversations between Investec and Morton which took place shortly prior to the purchase by Groundlinks) to Investec nor reference in the minutes of the investment committee of Morton PTC, that the purchase by Groundlinks was on behalf of Mr Garner and/or that consent of the trustees to such third party purchase had been obtained.

On 23 February 2015, the Panel publicly censured Morton for a failure to make a Rule 9 offer following the acquisition of 39.1% of the voting rights of a different UK publicly listed company, Armour plc (Armour). In that case, Morton arranged for Armour shares to be purchased in the names of his four sons, taking the view they were not members of a concert party and using a “gift device” to effect the purchases. Prior to the statement of public censure, Morton had been twice privately censured by the Panel and in one such case the misconduct involved a breach of section 9(a) of the Introduction to the Code as mentioned above in the Rangers case.

The public censure of Morton in the Armour case caused Investec to undertake a review of previous transactions in which they had acted for Morton. On 25 February 2015, Investec called Morton to inform him of the purchase of Hubco shares which went through the 30% Rule 9 threshold and advising Morton to inform the Panel. This advice was not heeded and instead in the days and weeks immediately thereafter, certain documents (comprising self-serving emails and a promissory note between Garner and Groundlinks for the equivalent amount of the purchase price of the Hubco shares) and communications (with Investec) were sent and created by Morton and Garner, to support their claim that the Groundlinks acquired shares had been bought for Garner.

In April 2015, as Morton had not disclosed the purchases to the Panel, Investec reported the Groundlinks purchase of Hubco shares to the Executive. An investigation was initiated following which the Executive discovered that at the time of the Groundlinks purchase, Morton and his family companies already owned in aggregate more than 50% of the voting rights in Hubco. Under the Code, a person with more than 50% has “buying freedom”, that is, the ability to acquire further shares carrying voting rights without triggering a Rule 9 mandatory offer requirement.

Summary of Rulings

Executive Findings: In October 2015, the Executive conveyed their finding that there was no actual breach of Rule 9 to Morton and Garner but also relayed their real concern with the manner in which the two men had conducted themselves towards the Executive. Both Morton and Garner were asked again, separately, whether they still contended that Groundlinks had purchased the shares in July 2013 pursuant to a loan arrangement between Groundlinks and Garner—both confirmed their previous evidence that there had been such an arrangement.

Executive Initiates Proceedings: The Executive initiated proceedings against Morton and Garner for breach of section 9(a) of the Introduction to the Code on the grounds that they systematically provided information to the Executive which they knew to be false in the course of an investigation by the Executive into a potential breach by Morton of an obligation to announce a Rule 9 mandatory offer.

Hearings Committee Rulings: The Hearings Committee concluded in a hearing on 14 December 2016  that there was never any arrangement between Messrs Garner and Morton relating to the purchase of Hubco shares. The Hearings Committee also concluded that both men had “lied systematically about the date on which the Promissory Note was produced and signed and the circumstances in which came it to be created”.

The Hearings Committee noted that Morton’s conduct in systematically lying to the Executive and inventing an agreement “is no less serious because it later transpired that the whole matter could have been sorted out satisfactorily had he acted honestly and reported the facts to the Executive as he was advised to do so at the outset”. The Hearings Committee took the view that Garner’s “role in misleading the Executive was at least as prominent and sustained as that of Mr Morton”.

The Hearings Committee concluded that in their opinion “Morton is someone who is not likely to comply with the Code” and that accordingly, the most serious disciplinary power exercisable by the Panel to cold-shoulder an offender by declaring the offender to be a person who in the opinion of the Panel is not likely to comply with the Code, should be meted out in this case.

Morton was been cold-shouldered for a period of six years from the date of the ruling (26 December 2016) and Garner was cold-shouldered for a period of two years. Neither party appealed the rulings to the Appeal Board.

Summary of Key Facts & Rules Relevant to Rulings

Cold-Shouldering: Cold-shouldering has only ever been meted out in two previous cases. This is an exceptional sanction which is delivered by issue of a public statement indicating that the offender is someone who in the opinion of the Panel is not likely to comply with the Code and typically specifying a period when the sanction is to remain effective. The rules of the UK Financial Conduct Authority and certain UK professional bodies oblige their members in certain circumstances not to act for such persons in a transaction subject to the Code (including dealing in securities which may require disclosure under the Code).

No Underlying Breach of a Rule 9 Obligation: It is of particular note that although the Executive investigation revealed no underlying breach of a Rule 9 obligation and accordingly no damage to shareholders through the failure to make an offer, the Panel nonetheless considered the conduct of Morton and Garner deserving of the most severe of the Panel’s sanctions.

Matters Raised But Dismissed: Morton’s advisers said that he was not able to attend the hearing due to ill health and age. The Panel accepted that whilst Morton’s ill health was a good reason for non-attendance at the hearing, it did not provide an acceptable excuse for his conduct during the Executive’s investigation.

Relevant Factors: The Hearings Committee took into account the prior disciplinary actions taken against Morton—both the public censure and the two private censures. These facts were relevant in its conclusion about the likelihood of non-compliance by Morton with the Code. With respect to Garner, the Hearings Committee also took into account the numerous character references adduced in his favour and noted the early stage of his business career, but ultimately concluded that cold-shouldering was nonetheless an appropriate sanction but that a shorter period was justifiable.

Key Takeaways for Companies and Practitioners

Breach of the Code—Procedural/Conduct Breaches: Breaches of the Code include a breach of procedural/conduct rules according to which persons dealing with the Panel must provide information and assistance to the Panel.

Importance of Rule on Dealings with the Panel: This case is another pointed and stark reminder of the importance of open and co-operative dealings with the Panel and that breach of these conduct provisions of the Code (as opposed to any substantive takeover transaction rule breaches) can be met with the most serious of the disciplinary powers available to the Panel. This approach reinforces the Panel’s key objective of preserving the UK’s system of takeover regulation which is aimed at encouraging open and consultative dialogue with the regulator with a view to prompt preventative or remedial action being taken.

Relevant Factors in Disciplinary Action Cases: The past conduct and behaviour of parties is a relevant factor which the Panel takes into account. As in the Rangers case, the absence of a party and their representative or advisers at a hearing will not be a bar to a lawful and enforceable ruling being made against that party.

Xchanging plc: Competitive Offer Situations & Clarification by Competing Bidders

Background Facts

In 2015, Xchanging plc (Xchanging) was the subject of takeover offer interests and various competing offers which became the subject of rulings including an Appeal Board ruling as summarised below.

On 14 October, Capita plc (Capita) announced a firm intention to make a cash offer (by way of a contractual takeover offer) for Xchanging, which was recommended by the Xchanging board. The Capita offer document was posted on 17 October.

On 12 November, Xchanging announced it had received an approach from Computer Sciences Corporation (CSC) about a possible cash offer. On 16 November, Xchanging announced it had received an approach from Ebix, Inc. (Ebix) regarding a possible cash offer.

In accordance with Rule 2.6(d) of the Code, the Xchanging announcements of 12 and 16 November stated that each of CSC and Ebix were required by not later than 9 December (the 53rd day following the posting of Capita’s offer document) either to announce a firm intention to make an offer or to announce that it did not intend to make an offer for Xchanging.

On 9 December, CSC announced a firm intention to make an offer for Xchanging at a higher price than the Capita offer, which was recommended by the Xchanging board. The CSC announcement stated that “as result of [their] announcement, the previous deadline of 5.00 pm on 9 December for other bidders … will be replaced by a new deadline of 5.00pm on the 53rd day following the posting of the Offer Document”.

On 15 December, CSC published its offer document and posted it to Xchanging shareholders.

Summary of Issues Under Consideration & Rulings

Executive Ruling: On 9 December, the Executive ruled that pursuant to Rule 2.6(d), Ebix must by 5.00pm on the 53rd day following the publication of CSC’s offer document, either announce a firm intention to make an offer or announce that it did not intend to make an offer for Xchanging. Xchanging, Capita and Ebix accepted this ruling. CSC however requested that the ruling should be reviewed by the Hearings Committee.

Hearings Committee Rulings: On 18 December, the Hearings Committee rejected the request of CSC and upheld the ruling of the Executive, giving its written reasons on 23 December.

At the hearing before the Hearings Committee, Xchanging said it was supportive of Ebix being given some time to make a higher offer but suggested a new date of 7 days before the first closing date of the CSC offer (i.e. 8 January 2016). Xchanging had not in prior discussions with the Executive in conjunction with its 9 December ruling, put this position forward for consideration.

CSC’s position was that the plain meaning of Rule 2.6(d) required Ebix to confirm its position by the 53rd day following the publication of the offer document of Capita (being the first offeror); in particular the reference to the “first offeror” in this context was Capita (not CSC). Further, CSC took the position that its announcement on 9 December was not intended to refer to a new deadline for Ebix but one applicable to other bidders who had not yet even been publicly disclosed.

Accordingly, there were two issues for the Hearings Committee to consider: (i) Xchanging’s alternative proposal that the clarifaction date be set at 8 January 2016; and (ii) the interpretation of Rule 2.6(d) of the Code. The Hearings Committee acknowledged the attractions of the new submission of Xchanging as to a new date for clarification of intentions, but concluded that in the absence of any ruling of the Executive on the merits of this proposal the Hearings Committee did not have the jurisdiction to consider it. On Rule 2.6(d), the Hearings Committee upheld the position of the Executive.

Appeal Board Ruling: CSC appealed the decision of the Hearings Committee to the Appeal Board. The appeal was heard on 18 December, written reasons were delivered to the parties five days later and the ruling of the Appeal Board published on 15 January 2016. The Appeal Board also declined to rule on Xchanging’s proposal for an earlier deadline and dismissed CSC’s appeal against the ruling of the Hearings Committee.

Summary of Key Facts & Rules Relevant to Rulings

No Executive Ruling—No Jurisdiction to Review: The Code specifically envisages that the “Panel may derogate or grant a waiver to a person from the application of a rule (provided, in the case of a transaction and rule subject to the requirements of the Directive, that the General Principles are respected) either: (i) in circumstances set out in the rules; or (ii) in other circumstances where the Panel considers that the particular rule would operate unduly harshly or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner …” (section 2(c) Introduction to the Code)

Section 4(c) of the Introduction to the Code states that “the principal function of the Hearings Committee is to review rulings of the Executive”. This is also reflected in the Rules of Procedure of the Hearings Committee.

The Executive had the power to derogate under section 2(c) above and indeed the Executive has used its powers of derogation and waiver extensively in numerous cases. In this case however, Xchanging had not invited the Executive to rule on the proposal and therefore there was no ruling on point for the Hearings Committee to review.

Deadline for Clarification by Competing Bidder(s) under Rule 2.6(d): With respect to the interpretation and application of Rule 2.6(d), the Executive had in its submissions, explained the history and rationale behind Rule 2.6(d). In this case, the rationale was to remove uncertainty as to whether Ebix will announce a firm offer in the later stages of the offer timetable when Xchanging shareholders are being called upon to make an investment decision (i.e. to accept a formal offer as contained in a published offer document). The Executive also explained that the rule was drafted in anticipation of there being only one potential competing offer.

The question before the Appeal Board therefore was one of interpretation of a provision in circumstances which were not specifically addressed by those who formulated or drafted the Code provision. The Appeal Board accepted the Executive’s submission that where there are two or more bidders, the phrases “first offer” and the “first offeror’s initial offer document” should be construed as applying to the offeror whose offer document had established the offer timetable and not the offeror which first as a matter of history had published an offer document.

Key Takeaways for Companies and Practitioners

The Code is Not Black Letter Law: The Code should not be treated as black letter law. As the Appeal Board pointed out, whilst the Code rules have statutory underpinnings, they are not contractual in nature nor are they a form of legislation. This is a very important takeaway particularly for non-UK market participants and advisers who in the first instance often approach the Code rules as black letter law.

Importance of Understanding the Spirit Behind the Code: In the light of the above, when faced with what may appear to be ambiguous drafting and/or where a party is seeking a derogation or waiver from a rule, a keen understanding of the history and rationale behind Code rules are critical—this will help shape interpretation and presentation of reasoned arguments to the Panel. The Appeal Board specifically recognised the special role of the Executive in this regard and noted that it had no reason to doubt the Executive’s contention about the basis of the rule. Whilst formal responsibility for promulgation of Code rules rests upon the Code Committee of the Panel, the Executive is very closely involved in helping to shape the rules of the Code and hence are key in helping to guide parties through the Code.

Raise all relevant points and options with the Executive: This case also reflects the importance of considering and raising all reasoned proposals and options on substantive Code issues with the Executive. As noted above, the Executive is keen to engage with parties in a constructive manner. The substance of the alternative proposal of Xchanging was received sympathetically by all three ruling bodies however, as the Executive was not called upon to formally rule on it, there was no jurisdiction for either the Hearings Committee or Appeal Board to rule on it.

Relevant Factors and Principles Upheld by the Panel: This case also reveals some of the key principles and factors that that the Panel seeks to respect and uphold when called upon to apply the Code (or grant derogations or waivers). First is the impact on the market and the desire to ensure that an orderly market is maintained. The Hearings Committee focussed on the 9 December announcement of CSC and the fact that both Ebix and the market generally would have read that announcement as re-setting the deadline not just for other unannounced bidders but for Ebix specifically. Secondly, the Panel seeks to protect the interests of target company shareholders and accordingly is usually reluctant to rule in a manner which would result in shareholders being deprived of an offer (or higher offer), if an alternative reasoned ruling or approach is available. Third, the impact on the target generally and in particular whether application of a rule (or derogation or waiver from a rule) could result in a prolonged period of “siege” or uncertainty for the target company.  (i.e. whilst a potential offeror, in particular a hostile or unsolicited offeror, is considering whether or not to make a firm offer) is generally an outcome that the Panel will seek to mitigate. In this case, the extended period was already on the cards whether or not Ebix itself was granted a further period to clarify. Further, as noted by the Panel, the concept of undue siege is generally less of an issue in the case of a recommended offer (as was the case here with respect to CSC).

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