Takeovers and in particular, public takeovers must at all times be conducted with certainty and transparency in that once an Offeror issues an announcement of intent to acquire a public or listed entity he is bound and cannot simply walk away from the deal based on what it considers unfavourable terms or circumstances that are purely one-sided or subjective.
The current economic crisis brought about by the COVID-19 pandemic has once again brought to the fore the possibility of Offerors seeking the ability to walk away from transactions material adverse changes affecting the target company and thereby impacting the Offeror’s decision to proceed with the transaction to acquire the target.
DISCUSSION OF THE UK TAKEOVER PANEL RULING OF OFFER BY BRIGADIER COMPANY LIMITED
The UK Takeover Panel (“Takeover Panel”) dealt with this issue very recently in the matter involving an offer by Brigadier Company Limited (“Brigadier”) to acquire Moss Bros Group Plc (“Target”) a fashion retail company through a scheme of arrangement to be proposed between the Target and its shareholders.
An offer document or circular detailing the terms of the transaction including Material Adverse Changes (MAC) provisions stating inter alia that Brigadier would be able to “walk away” from the transaction if certain events that included the following were to occur:
- That no member of the Target was unable to pay its debts and / or had suffered certain insolvency-related events.
- That there had been no material adverse change in the business, assets, financial or trading position or profits performance or prospects of the Target.
- That no contingent or other liability had arisen or increased other than on the ordinary course of business which was reasonably likely to adversely affect the business.
Following the publication of the circular, a shareholder meeting was held, and the transaction as duly recommended by the board of the Target was duly voted upon by the shareholders and now awaits sanctioning by the court.
It was at this time that Brigadier approached the Takeover Panel seeking to revoke the offer citing the effects of COVID19 on Target and invoking the reasons indicated above as a basis.
The executive of the Panel in a ruling issued on 19 May 2020 rejected this request and relied on its practice statement published under Rule 13 .5(a) to rule that “Brigadier has not established that the circumstances which give rise to its right to invoke the relevant conditions are of material significance to it not continuing with the offer” therefore it should not be allowed to invoke any of the conditions indicated in the offer document to revoke the offer.
Rule 13.5 provide that “conditions and pre-conditions other than the acceptance condition, may not be generally invoked except in circumstances which are of material significance to the offeror in the context of the offer”.
The Takeover Panel in making the ruling considered several factors relating to the transaction including the fact that the offer was announced a few days after the World Health Organisation (WHO) announced COVID-19 as a pandemic therefore Brigadier knew of the pandemic when it proceeded to announce the offer.
It is important to note that the decision of the Executive of the Panel has now been referred to the Hearings Committee, but the consensus is that it will remain unchanged.
IMPORTANCE OF THE DECISION
MAC provisions in public takeovers play an important role but their use is and should be closely monitored particularly in circumstances such as the one that the world is currently facing with the COVID 19 pandemic.
This does not mean that Offerors shouldn’t include MAC provisions in their offer documents but it is important that these clauses be drafted with a great level of objectivity and specificity as to what will constitute a material adverse condition enabling an Offeror to walk away from the transaction and equally it is important that such a clause be negotiated and agreed to with the board of the target prior to the offer document being finalised and presented to shareholders.
The ruling of the Takeover Panel re-emphasises the general principles of regulating takeovers to create and achieve certainty and transparency in the financial markets to the effect that an offeror – barring an unforeseen event that is beyond its control – should not be allowed to simply walk away from a transaction as doing so will create uncertainty and chaos.
SOUTH AFRICAN TAKEOVER LAW PROVISIONS
The South African takeover provisions do not have a similar provision or guideline like Rule 13.5 but the local Takeover Regulation Panel (“TRP”) has in the past always been firm on the importance of offer documents not being subject to any condition that this subjective and skewed in favour of the Offer or under its complete control whether it is fulfilled or not in accordance with Regulation 96 of the Takeover Regulation and it has relied on this Regulation 96 to insist on MAC clauses being drafted with sufficient specificity to remove any concerns of subjectivity.
One would anticipate that this remains the case which then makes it crucial for both Offerors and Targets to put some serious thoughts on drafting MAC on their offer documents considering the many unknowns surrounding COVD-19 and its effects on future M&A transactions that are a taking place in both the public and private space.
Basil Kgaugelo Mashabane LLB, LLM (Corp. Law) MSc (Finance and Financial Law)
Founder and Director of Mashabane and Associates Inc – A corporate law firm specialising in Takeover law based in both Johannesburg and Pretoria.