Guidance Note – Rule 30 of the Code and Changes to the Capital Structure of the Target Company during the Offer Period

Published 1 February 2011

In the circumstances where the capital structure of a target company changes during the offer period, compliance with the Code can appear to be complex. The Panel wishes to clarify the application of rule 30 of the Code, which relates to certain cases where the offeror wishes to vary the terms of the offer, where there have been changes to the capital structure of the target company during the offer period. 

A full takeover offer made under the Code must extend to each class of equity securities (if there is more than one) in the target company. In such cases, rule 8 of the Code provides: 

“… 

(3)   If there is more than 1 class of voting securities included in a full offer, the consideration and terms offered for each class of voting securities must be fair and reasonable as between the classes of voting securities. 

(4)   If non-voting securities are included in a full offer, the consideration and terms for non-voting securities must be fair and reasonable in comparison with the consideration and terms offered for voting securities and as between the classes of non-voting securities.” 

If there is more than one class of equity securities under offer, the offeror must obtain an independent adviser’s report that certifies the fairness and reasonableness of the consideration as between the different classes of securities (rule 22 of the Code). 

Rules 27 to 32 of the Code prescribe various requirements in respect of the variation of offers. Briefly, the offeror may vary the offer to either: increase components of the consideration; add a cash component to the consideration; add a cash alternative to the consideration; or extend the offer period. The offeror must issue a variation notice if it varies the offer. 

Rule 30 of the Code provides, in effect, that if the offeror varies the offer consideration, and the offer includes offers for more than one class of securities, the offeror must obtain a further report from an independent adviser certifying that the offer is (still) fair and reasonable as between the classes of securities included in the offer. The purpose of the further report is to ensure that offerees in one class of security are treated fairly vis-à-vis the offerees in another class of security, following the variation. 

There may be circumstances, however, where it would be redundant for the offeror to obtain a further report from an independent adviser. For example, consider a target company which, at the time that a takeover offer is made, has on issue two classes of securities: ordinary shares and convertible notes. These convertible notes are set to convert into ordinary shares on a date that falls during the takeover offer period. The offeror, in this example, would be required by rule 8(4) of the Code to make its offer for both the ordinary shares and the convertible notes issued by the target company. 

The terms of the offer would likely provide that any acceptances in respect of convertible notes that convert into shares become acceptances in respect of the resulting shares. The offeror would be required to obtain an independent adviser’s report that the consideration offered for each class of security was fair and reasonable as between the classes. 

During the offer period the convertible notes expire and convert into new ordinary shares in the target company. At some time following the conversion, the offeror elects to increase the consideration in its offer (which had commenced as an offer for two classes of securities). The offeror would be required to issue a variation notice in respect of the increased consideration. Rule 30 of the Code requires that when an “offer” to which rule 8(4) of the Code applies is varied by the offeror to increase the consideration, the offeror must obtain a further report from an independent adviser that the varied offer is fair and reasonable as between the classes of securities under offer. In this example, however, the report would be redundant because, at the time of the variation, only one class of security in the target company is extant. 

The Panel considers the offeror should not be required to obtain a further independent adviser’s report when to do so would be unnecessary. Rule 30 of the Code can be interpreted purposively in order achieve this outcome. The purpose of rule 30 of the Code – to ensure that the consideration remains fair and reasonable as between the classes following a variation – relates to an offer that has settled, or could ultimately settle, in respect of more than one class of security. 

…if a scheme’s promoter cannot convince the shareholders controlling a majority of the voting rights that the scheme would be beneficial to them, then the promoter should not have a mechanism (the current schemes regime) to compulsorily acquire all the shares in the absence of that support.