UK and overseas regulatory regimes continue to have an impact on deal execution and public M&A timetables. In particular, target boards and bidders need to be mindful of increased scrutiny under UK and EU merger regimes, the UK NSI Act and the EU Foreign Subsidies Regulation. In light of this, the target’s board and bidder (in a recommended situation) will typically agree that the offer will be subject to a specific regulatory condition when a filing is identified during due diligence as being necessary or desirable to close the transaction. The bidder may then seek, subject to Panel consent, to invoke the condition and lapse its offer if it isn’t or cannot be satisfied.
The rules
Under the Takeover Code:
- a firm offer must not normally be subject to a condition which depends solely on the subjective judgement of the bidder;
- the bidder must use all reasonable efforts to ensure the satisfaction of all conditions to an offer (consequently, the firm offer announcement is often known as the “point of no return” for the bidder);
- with limited exceptions (e.g. failure to close by the long stop date or failure to obtain sufficient acceptances from, or approval from the requisite majority of, target shareholders), the Panel must consent to a bidder invoking a condition so as to cause the offer to not proceed, lapse or be withdrawn;
- the Panel will normally only consent if the circumstances which give rise to the right to invoke the condition are of material significance to the bidder in the context of the offer; and
- since 2021, an offer does not automatically lapse if the transaction is referred by the CMA for a UK Phase 2 merger investigation (or Phase 2 equivalent in any other jurisdiction).
Offer for EMIS Group plc
When parties to an offer intend to submit a briefing paper or filing to a UK/EU regulator, it has become common practice for that offer to be subject to a “no Phase 2” condition, which the bidder might seek to invoke, with Panel consent, if the regulator refers the transaction to a Phase 2 merger investigation. However, it has not been common practice to include an express condition as to clearance at Phase 2, where the risk of a referral is considered low.
UnitedHealth Group Inc.’s offer for EMIS Group plc was subject to a “no Phase 2” UK merger condition but did not include an express Phase 2 condition. Following a Phase 2 referral of the transaction by the CMA, the parties elected to continue with the bid on the basis that the remaining general regulatory conditions in the offer would condition the Phase 2 process.
Practice Statement no. 5
Although on EMIS the broad conditions on competition approvals covered a Phase 2 CMA process, the Panel has noted in its amended Practice Statement no. 5 (Rule 13.5 – Invoking conditions and pre-conditions) that in the absence of an express Phase 2 condition, a bidder waiving a “no Phase 2” condition and entering a Phase 2 process would run the risk that the regulator could set remedy conditions which are material, yet the bidder would not be able to invoke a condition to terminate.
The Panel has therefore concluded that it would be prudent for an offer to be made subject to a Phase 2 condition (as a specific or sufficiently broad “sweeper” condition), but made it clear the Panel’s decision on materiality (if the bidder later wishes to invoke a “no Phase 2” condition) will not be affected by the inclusion of the Phase 2 condition or a long stop date which accommodates it.
Practice Statement no. 5 also includes welcome guidance on its approach to a bidder seeking to invoke different categories of conditions to an offer, including the factors to be taken into account when applying the material significance test (please refer to our Legal Briefing for further details).
We expect market practice to develop such that offers will customarily be subject to a Phase 2 sweeper condition for all antitrust and regulatory regimes, particularly when a filing is expected.
