Conditional Acceptance Facilities can Provide Flexibility
Published 1 December 2007
Conditional acceptance facilities enable shareholders to conditionally accept an offer. However, offerors need to take care to meet all of the Code’s requirements, including rule 64.
Offering a conditional acceptance facility
A conditional acceptance facility can be included in the terms of a takeover offer made under the Takeovers Code. Under such a facility, conditional acceptances are generally held in ‘escrow’, that is, by a third party until certain conditions are met. Usually, the condition which has to be satisfied to trigger the actual acceptance, will be the offer reaching a particular acceptance threshold such as more than 50% (or a lesser percentage for a partial offer approved under rule 10) or 90% of the shares in the target company.
Offers that include a 90% minimum acceptance condition that cannot be waived can languish if shareholders are unwilling to commit their shares. This may be because of the risk of the shares being locked into the bid for a long time when there is no guarantee that the bid will succeed. Similarly, if an offer is contested, shareholders may be unwilling to accept either offer because of the risk that their shares are locked into the losing bid and they can’t then accept into the winner’s bid. These are situations where having a conditional acceptance facility can provide flexibility for shareholders and, as a result, the bid can be more attractive.
An offer that is languishing can cause inconvenience to many parties, including the bidder. The bidder may not be in a position to increase the offer price to encourage shareholders to take up the offer. However, once the offer has been made, the Code does not allow an offeror to simply change its mind and withdraw the offer. This provides certainty for the target company and its shareholders that the offer will run its course.
Rule 26 of the Code sets out a process for offers to be withdrawn with the consent of the Panel. However, the Panel is unlikely to consent to an offer being withdrawn in a contested takeover while all the competing offers are still capable of succeeding (i.e., while no offeror has yet received sufficient acceptances to meet the Code’s minimum acceptance threshold of more than 50%).
In a relatively recent case a takeover was contested but the second offeror was gaining few acceptances. Both offers had a minimum acceptance condition of more than 50% of the target company shares (as is required by the Code). The one that made it over the threshold first would win the ‘contest’, and the other offeror’s offer must fail.
Towards the end of the offer period, the second offeror applied to the Panel under rule 26 of the Code. The applicant wanted the Panel’s conditional consent to withdrawing the offer, if it became clear that the minimum level of acceptances needed for its offer to succeed would not be achieved.
The Panel declined the application. The first offeror had not at that time received sufficient acceptances to take it over the minimum acceptance condition threshold, so it was possible that either offer could still succeed.
If the Panel had given the conditional consent sought by the second offeror it would, in effect, be a variation of the offer. This is not permissible under rule 27 of the Code. Rule 27 allows an offer to be varied only:
- to change the consideration payable; or
- to extend the offer period and the date by which the offer is to become unconditional.
The Panel’s consent would have given the second offeror an advantage over the first offeror, by creating a non-permissible variation to the second offeror’s offer. The effect would have been similar to allowing the second offeror to vary its offer by including a conditional acceptance facility in its offer terms.
The Panel considers that the Code does not prevent conditional acceptance facilities being included in the offer terms when a takeover offer is made, if the facility is available to all shareholders and complies with rule 20. Rule 20 requires that an offer be made on the same terms and provide the same consideration for all securities in each class under offer.
If a conditional acceptance facility is included in the terms of an offer, details about how the facility would operate must be clearly explained in the offer document. Disclosures made during the offer period about the number of shares that have been accepted under the facility must be clear and accurate.
Rule 49A of the Code requires the offeror to give written notice to the Panel and the target company (and the Exchange if the offeror or the target is a listed company) in writing every time the level of acceptances received for each class of securities increases by 1% or more. Disclosures about the level of acceptances received under the offer should clearly state the percentage of acceptances that are irrevocable, and the percentage received under the conditional acceptance facility.
Accuracy is critical in the disclosure of the level of acceptances received under a conditional acceptance facility. A failure to accurately disclose the level of acceptances received under a conditional acceptance facility and the level received directly into the offer could be regarded as being misleading or deceptive conduct in breach of rule 64.