On 1 December 2016, the Takeovers Panel released its revised Guidance Note 12: Frustrating Action. Broadly, a ‘frustrating action’ is an action taken by a target board which results in a bid or potential bid being withdrawn, lapsing or not proceeding (eg. by breaching a condition to the bid). The revised Guidance Note follows commentary over the years that the policy, while helpful in ensuring that shareholders have their say on control transactions for their company, can also unduly restrict a target from getting on with its business when subject to a bid. The revised Guidance Note seeks to clarify the Panel’s approach on when a frustrating action is, or isn’t, unacceptable.
For the policy to apply, the bidder needs to demonstrate that its proposal provides a “genuine opportunity” for target shareholders to dispose of their shares. Bids which have had little traction over a long period or are otherwise incapable of implementation are unlikely to meet the test.
The policy is not intended to unduly restrict a target from continuing its business. There are various factors which the Panel will take into account in assessing whether it would be unreasonable to restrain the target in a certain way in the circumstances.
It may be appropriate to give the bidder an opportunity to address issues with its bid before undertaking a frustrating action, eg. fix a feature which makes it incapable of implementation, or confirm whether it is relying on a particular triggered condition.
What is a ‘frustrating action’?
A frustrating action is any action taken or proposed to be taken by a target which may cause a bid to be withdrawn or lapse, or a potential bid (that is, a genuine proposal to make a bid which has not yet formally commenced) to not proceed. The underlying policy is that decisions about control of a company should be taken by its shareholders, rather than its directors. Examples of potential frustrating actions include significant issues of securities, acquisitions / disposals of a major asset, undertaking significant liabilities or changing debt terms, declaring a special or abnormal dividend or any other material alteration to the target business or capital structure. Each of these matters will commonly breach a condition to a bid or a potential offer.
But is it unacceptable?
Not all frustrating actions will necessarily be unacceptable. A clear breach of a critical condition (eg. divesting a key asset) in the absence of strong mitigating factors will likely give rise to unacceptable circumstances and orders from the Panel. However, uncertainty will arise – and the position of target directors will become more difficult – as the conditions to a transaction become more complex and restrictive. In its consultation paper, the Panel acknowledged this, for example, in the context of bid conditions that seek to restrict the target’s business operations or require the target to take actions to assist the bidder. The revised Guidance Note (which largely comprises policy clarifications rather than policy shifts) seeks to clarify the considerations that the Panel takes into account in these more complex scenarios.
Provided below is a summary based on the revised Guidance Note of some of the factors which will be weighed by the Panel in considering whether a frustrating action is unacceptable. The impact each of these factors will have on a given transaction will vary, depending on the particular circumstances.
|Factors more likely to lead to unacceptable circumstances||Factors less likely to lead to unacceptable circumstances|
|The bid has been formally announced or commenced, or a genuine potential proposal has been communicated to the target board which is capable of implementation||
The bid does not provide a “genuine opportunity” for shareholders to dispose of their shares, eg. because it is:
|No mechanisms which allow shareholders a choice between the frustrating action and the bid||
Shareholders are effectively given a choice, eg. by the target company:
|The frustrating action was announced after becoming aware of the bid, or was not advanced in any meaningful way before the bid||
The frustrating action was announced before the bid, or the bidder is otherwise aware of the potential frustrating action before making a bid
|No clear commercial imperative for the frustrating action||
The frustrating action is a “business as usual” matter or is needed to avoid a material financial risk (eg. insolvency)
|The condition triggered is standard / critical to deal value (eg. a condition that key assets are not divested or other conditions consistent with the bidder’s clearly stated objectives)
It is unreasonable for a bidder to rely on the condition triggered (eg. that condition is overly restrictive on the target)
|No other conditions have been triggered (which have not been waived)||
A condition is triggered and the bidder does not disclose whether it will rely on the condition within a reasonable time, having been given a reasonable opportunity to address it
|No legal requirement to undertake the frustrating action||
Legal imperative for the frustrating action (eg. court order or legislative requirement)
Responding to a control transaction or proposed control transaction presents complex issues for target directors to consider in real time, in addition to the company’s ongoing management and other initiatives already being considered or progressed. The revised Guidance Note and its policy clarifications provide welcomed certainty for target boards in managing any potential disruption while ensuring target shareholders have their say on the proposal.